As filed with the Securities and Exchange Commission.
'33 Act File No. 333-72984
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 1
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
63
(Primary Standard Industrial Classification Code Number)
31-4156830
(IRS Employer Identification Number)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Principal Executive Offices of Registrant) (Zip Code)
PATRICIA R. HATLER, SECRETARY, ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
TELEPHONE: (614) 249-7111
(Name, address, zip code, telephone number of agent for service)
Approximate date of proposed sale to the public: May 1, 2002
If any securities registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
NATIONWIDE LIFE INSURANCE COMPANY
Cross Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
Caption in
Form S-1 Item No. and Caption Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus.....................................................................Outside Front Cover
2. Inside Front and Outside Back Cover
Table of Contents .....................................................................................Inside Front Cover
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges....................................................................Summary Information
(Not applicable with respect to
ratio of earnings to fixed charges)
4. Use of Proceeds ...........................................................................................Investments
5. Determination of Offering Price............................................................................Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Variable Annuity Contracts
and the Distribution of GTOs
9. Description of Securities to be Registered.....................................Description of the Guaranteed Term Options
10. Interests of Named Experts and Counsel.....................................................................Not Applicable
11. Information with Respect to Registrant..................................................Nationwide Life Insurance Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.............................................................Not Applicable
GUARANTEED TERM OPTIONS
Under Variable Annuity Contracts Issued by
NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43215
Telephone: 1-800-848-6331
The date of this Prospectus is May 1, 2002.
THIS PROSPECTUS MUST BE READ ALONG WITH THE APPROPRIATE VARIABLE ANNUITY
PROSPECTUS AND THE PROSPECTUSES DESCRIBING THE UNDERLYING MUTUAL FUND INVESTMENT
OPTIONS. ALL OF THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND MAINTAINED FOR
FUTURE REFERENCE.
This prospectus describes investment options referred to as Guaranteed Term
Options ("GTOs"), offered by Nationwide Life Insurance Company (NLIC).
The GTOs are available under certain variable annuity contracts or variable life
insurance policies (collectively, "variable contracts") issued by NLIC.
Generally, the variable annuity contracts offered by NLIC provide an array
of underlying mutual fund investment options, to which the contract owner
allocates his or her purchase payments. The GTOs are separate, guaranteed
interest investment options available under variable contracts.
GTOs provide for guaranteed interest rates to be credited over specified
durations (referred to as "Guaranteed Terms"). Three (3), five (5), seven (7)
and ten (10) year GTOs are available. The Specified Interest Rate is guaranteed
to be credited for the duration of the Guaranteed Term on a daily basis,
resulting in a guaranteed annual effective yield unless a withdrawal from the
GTO occurs for any reason prior to the expiration of the Guaranteed Term.
Different interest rates apply to each GTO and are determined and guaranteed by
NLIC in its sole discretion.
GTOs will produce a guaranteed annual effective yield at the Specified Interest
Rate SO LONG AS AMOUNTS INVESTED ARE NEITHER WITHDRAWN NOR TRANSFERRED PRIOR TO
THE END OF THE GUARANTEED TERM. IN THE EVENT OF A TRANSFER FOR ANY REASON PRIOR
TO THE EXPIRATION OF THE GUARANTEED TERM, THE AMOUNT TRANSFERRED WILL BE SUBJECT
TO A MARKET VALUE ADJUSTMENT.
Variable product prospectuses in which the GTOs are offered describe certain
charges and deductions that may apply to the GTOs. A more detailed discussion of
these charges and deductions, as they relate to particular variable contracts,
is contained in the variable product prospectuses.
The minimum amount that may be allocated to a GTO is $1,000 per allocation.
NLIC established the Nationwide Multiple Maturity Separate Account,
pursuant to Ohio law, to aid in reserving and accounting for GTO obligations.
However, all of the general assets of NLIC are available for the purpose
of meeting the guarantees of the GTOs. Amounts allocated to the GTOs are
generally invested in fixed income investments purchased by NLIC. Variable
annuity contract owners allocating amounts to a GTO have no claim against any
assets of NLIC, including assets held in the Nationwide Multiple Maturity
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE GTOS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATE
JURISDICTIONS AND, ACCORDINGLY, REPRESENTATIONS MADE IN THIS PROSPECTUS DO NOT
CONSTITUTE AN OFFERING IN SUCH JURISDICTIONS.
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TABLE OF CONTENTS
GLOSSARY....................................................
INFORMATION ABOUT THE GTOS..................................
1. General...............................................
2. The Specified Interest Rate...........................
3. The Investment Period.................................
4. Guaranteed Terms......................................
5. GTOs at Maturity......................................
6. The Market Value Adjustment...........................
A. General Information Regarding the
Market Value Adjustment............................
B. Constant Maturity Treasury Rates...................
C. The Market Value Adjustment Formula................
7. Contract Charges......................................
8. GTOs at Annuitization.................................
INVESTMENTS.................................................
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOs......
NATIONWIDE LIFE INSURANCE COMPANY...........................
1.Business..............................................
A. Organization.......................................
B. Business Segments..................................
C. Ratings............................................
D. Competition........................................
E. Regulation.........................................
F. Employees..........................................
2.Properties............................................
3.Legal Proceedings.....................................
4.Submissions of Matters to a Vote of Security
Holders............................................
5.Market for the Registrant's Common Stock and
Related Shareholder Matters...........................
6.Selected Consolidated Financial Data..................
7.Management's Narrative Analysis of the Results
of Operations.........................................
A. Introduction.......................................
B. Critical Accounting Policies and Recently
Issued Accounting Pronouncements...................
(i) Impairment Losses on Investments.............
(ii) Valuation Allowances on Mortgage Loans
on Real Estate...............................
(iii) Deferred Policy Acquisitions Costs for
Investment Products and Universal Life
Insurance Products...........................
(iv) Federated Income Taxes.......................
C. Results of Operations
(i) Revenues
(ii) Benefits and Expensese
(iii) Other Data
(iv) Sales Information
D. Business Segments
(i) Individual Annuity
(ii) Institutional Products
(iii) Life Insurance
(iv) Corporate
E. Related Party Transactions
F. Off-Balanced Sheet Transactions
8.Quantitative and Qualitative Disclosures About
Market Risk........................................
A. Market Risk Sensitive Financial Instruments........
(i) Interest Rate Risk...........................
(ii) Asset/Liability Management Strategies to
Manage Interest Rate Risk..................
(iii) Use of Derivatives to Manage Interest Rate
Risk.........................................
(iv) Foreign Currency Risk Management.............
(v) Characteristics of Interest Rate
Sensitive Financial Instruments............
(vi) Equity Market Risk...........................
B. Inflation..........................................
9.Directors and Executive Officers.....................
10.Executive Compensation...............................
A. Compensation.......................................
B. Performance Incentive Plan.........................
C. Senior Executive Incentive Plan....................
D. Nationwide Economic Value
Incentive Plan....................................
E. Deferred Compensation Program......................
F. Savings Plan.......................................
G. Supplemental Defined Contribution Plan.............
H. Amended and Restated Nationwide Financial
Services, Inc. 1996 Long-Term Equity
Compensation Plan.................................
I. Equity Compensation Plan of NFS Information........
J. Option/SAR Grants in Last Fiscal Year for NFS......
K. Aggregated Option/SAR Exercises in Last Fiscal
Year and Fiscal Year-end Option/SAR Values
for NFS...........................................
L. Aggregated Option/SAR Exercises in Last Fiscal
Year and Fiscal Year-end Option/SAR Values
for GGI...........................................
M. Pension Plans......................................
(i) Retirement Plan..............................
(ii) Excess and Supplemental Plans................
11.Compensation Committee Joint Report on
Executive Compensation...............................
A. Introduction.......................................
B. Compensation Philosophy and Objectives.............
C. Elements of 2001 Executive Compensation............
(i) Base Salaries................................
(ii) Annual Incentive Compensation................
(iii) Long-Term Incentive Compensation.............
D. Compensation of the Chief Executive Officer........
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E. Policy on Deductibility of Compensation............
(i) Nationwide Financial Services Inc.'s
Compensation Committee......................
(ii) Nationwide Life Insurance Company
Compensation Committee......................
F. Security Ownership of Certain Beneficial
Owners and Management..............................
G. Certain Relationships and Other Transactions....
(i) Intercompany Agreement
(ii) License to Use Nationwide Name and
Service Marks...............................
(iii) Equity Purchase Rights......................
(iv) Registration Rights.........................
(v) Nationwide Mutual Agents....................
(vi) Federal Income Taxes........................
(vii) Savings Plan................................
(viii) Lease
(ix) Modified Coinsurance Agreements.............
(x) Cost Sharing Agreement......................
(xi) Marketing Allowance Agreements..............
(xii) Repurchase Agreement........................
(xiii) Group Annuity and Life Insurance
Contracts...................................
(xiv) Partial Sale of Limited Partnership.........
(xv) Transactions with Management and
Others......................................
12.Exhibits, Financial Statement Schedules and
Reports..............................................
Appendix................................................
3
GLOSSARY
CONSTANT MATURITY TREASURY RATE- The rate of interest used in the Market Value
Formula. Constant Maturity Treasury Rates for maturity durations of 1, 2, 3, 5,
7 and 10 years are declared regularly by the Federal Reserve Board.
GUARANTEED TERM OPTION ("GTO")- An investment option offered under variable
contracts which provides a Specified Interest Rate over Guaranteed Terms, so
long as certain conditions are met.
GUARANTEED TERM- The period corresponding to a 3, 5, 7 or 10 year GTO. Amounts
allocated to a GTO will be credited with a Specified Interest Rate over the
corresponding Guaranteed Term, so long as such amounts are not distributed from
the GTO prior to the Maturity Date. Because every Guaranteed Term will end on
the final day of a calendar quarter, the Guaranteed Term may last for up to 3
months beyond the 3, 5, 7 or 10 year anniversary of the allocation to the GTO.
MARKET VALUE ADJUSTMENT- The upward or downward adjustment in value of amounts
allocated to a GTO which are withdrawn from the GTO for any reason prior to the
Maturity Date.
MATURITY DATE- The date on which a GTO matures. The date will be the last day of
the calendar quarter during the third, fifth, seventh or tenth anniversary on
which amounts are allocated to a 3, 5, 7 or 10 year GTO, respectively.
MATURITY PERIOD- The period during which the value of amounts allocated under a
GTO may be distributed without any Market Value Adjustment. The Maturity Period
will begin on the day following the Maturity Date and will end on the thirtieth
day after the Maturity Date.
SPECIFIED INTEREST RATE- The interest rate guaranteed to be credited to amounts
allocated to a GTO so long as the allocations are not distributed for any reason
prior to the Maturity Date.
SPECIFIED VALUE- The amount of a GTO allocation, plus interest accrued at the
Specified Interest Rate, minus surrenders, transfers and any other amounts
distributed. The Specified Value is subject to a Market Value Adjustment at all
times other than during the Maturity Period.
4
INFORMATION ABOUT THE GTOS
1. GENERAL
GTOs are guaranteed interest rate investment options available under
certain variable contracts issued by NLIC. There are four different
GTOs available: a 3 year GTO; a 5 year GTO; a 7 year GTO; and a 10 year
GTO. A GTO may be purchased using purchase payments made to the contracts,
or by using funds transferred from other investment options available in
the variable contracts. Not all of the variable contracts issued by
NLIC offer GTOs, nor are GTOs available in every state. If GTOs are
available under a variable annuity contract or variable life insurance
policy, the prospectus for the variable product and this prospectus must be
read together.
The guarantees associated with the GTOs are borne exclusively by, and are
legal obligations of, NLIC. The Nationwide Multiple Maturity Separate
Account ("MMSA"), authorized and created in accordance with Ohio law, was
established for the sole purpose of reserving and accounting for assets
associated with the GTOs. The assets of the MMSA are owned by NLIC.
Contract owners with GTOs have no claim against the assets of the MMSA,
maintain no interest in the MMSA and do not participate in the investment
experience of the MMSA.
GTOs provide for a guaranteed interest rate (the "Specified Interest
Rate"), to be credited as long as any amount allocated to the GTO is not
distributed for any reason prior to the Maturity Date of the GTO. Each GTO
has a Guaranteed Term. Generally, a 3 year GTO offers guaranteed interest
at a Specified Interest Rate over 3 years, a 5 year GTO offers guaranteed
interest at a Specified Interest Rate over 5 years, and so on. Because
every GTO will mature on the last day of a calendar quarter, the Guaranteed
Term of a GTO may extend for up to 3 months beyond the 3, 5, 7 or 10 year
anniversary of allocations made to 3, 5, 7 or 10 year GTOs, respectively.
Amounts allocated to a GTO will be credited interest at the Specified
Interest Rate for the duration of the Guaranteed Term associated with the
GTO. Specified Interest Rates for each GTO are declared periodically at
NLIC'S sole discretion. The Investment Period is the period of time
during which declared Specified Interest Rates will be effective for new
allocations. Investment Periods will typically last for one month, but may
be longer or shorter depending on interest rate fluctuations in financial
markets. During any particular Investment Period, any transfer allocation
or new purchase payment allocation to a GTO will earn the Specified
Interest Rate effective for that Investment Period for the duration of the
Guaranteed Term of the GTO (see "Specified Interest Rates and Guaranteed
Terms").
Interest at the Specified Interest Rate will be credited daily to amounts
allocated to a GTO, providing an annual effective yield. Interest at the
Specified Interest Rate will continue to be credited as long as allocations
remain in the GTO until the Maturity Date. However, any surrenders,
transfers or withdrawals for any reason prior to the Maturity Date will be
subject to a Market Value Adjustment.
NLIC applies the Market Value Adjustment by using the Market Value
Adjustment Factor, which is derived from the Market Value Adjustment
Formula. The Market Value Adjustment Factor is multiplied by the part of
the Specified Value being withdrawn or transferred, resulting in either an
increase or decrease in the amount of the withdrawal or transfer. The
Market Value Adjustment Formula reflects the relationship between three
factors:
(1) the Constant Maturity Treasury Rate for the period coinciding with
the Guaranteed Term of the GTO at investment;
(2) the Constant Maturity Treasury Rate for the number of years
remaining in a Guaranteed Term when the surrender, transfer or other
withdrawal from the GTO occurs; and
(3) the number of days remaining in the Guaranteed Term of the GTO.
Generally, the Market Value Adjustment Formula approximates the
relationship between prevailing interest rates at the time of the GTO
allocation, prevailing interest rates at time of transfer or surrender and
the amount of time remaining in a Guaranteed Term (see "The Market Value
Adjustment").
Contract owners having GTOs with Maturity Dates coinciding with the end of
the calendar quarter will be notified of the impending expiration of the
GTO at least 15 days and at most 30 days prior to the end of each calendar
quarter. Contract owners will then have the option of directing the
withdrawal or transfer of the GTO, during the Maturity Period, without
application of any Market Value Adjustment. However, any transfers from the
GTO
5
during this period may be subject to a surrender charge, assessed by the
variable contract.
If no direction is received by the thirtieth day following the Maturity
Date, amounts in the GTO will be automatically transferred (with no Market
Value Adjustment) to the available money market sub-account available in
the variable contract. For the period commencing with the first day after
the Maturity Date and ending on the thirtieth day following the Maturity
Date, the GTO will be credited with the same Specified Interest Rate in
effect before the Maturity Date (see "GTOs at Maturity").
The minimum amount of any allocation to a GTO is $1,000.
Under certain rare circumstances, when volatility in financial markets
compromises the ability of NLIC to process allocations to or from the
GTOs in an orderly manner, NLIC may temporarily suspend the right to
make additional allocations to the GTOs and/or to effect transfers or
withdrawals from the GTOs. NLIC anticipates invoking this suspension
only when acceptance of additional allocations or the processing of
withdrawals or transfers from GTOs cannot be executed by NLIC in a
manner consistent with its obligations to contract owners with existing or
prospective interests in one or more GTOs. Under no circumstances, however,
will NLIC limit a contract owner's right to make at least one
allocation to a GTO, and one transfer or withdrawal from a GTO, in any
calendar year. All contract owners will be promptly notified of
NLIC's determination to invoke any suspension in the right to make
allocations to, or to effect withdrawals or transfers from, the GTOs.
In addition, the variable contracts that offer GTOs may impose certain
restrictions on the transferability of invested assets within the variable
contract. The variable product prospectus should be consulted with regard
to specific transfer limitation provisions.
2. THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by
NLIC to be credited to allocations made to the GTOs for the
corresponding Guaranteed Term, so long as no portion of the allocation is
distributed for any reason prior to the Maturity Date. Different Specified
Interest Rates may be established for the 4 different GTOs.
Generally, NLIC will declare new Specified Interest Rates monthly;
however, depending on interest rate fluctuations, NLIC may declare
new Specified Interest Rates more or less frequently.
NLIC observes no specific method in establishing the Specified
Interest Rates. However, NLIC will attempt to declare Specified
Interest Rates that are related to interest rates associated with
fixed-income investments available at the time and having durations and
cash flow attributes compatible with the Guaranteed Terms of the GTOs. In
addition, the establishment of Specified Interest Rates may be influenced
by other factors, including competitive considerations, administrative
costs and general economic trends. NLIC has no way of predicting what
Specified Interest Rates may be declared in the future and there is no
minimum Specified Interest Rate for any of the GTOs.
Some NLIC variable annuity contracts offer an Extra Value Option.
Under these contracts, where the contract owner has elected the Extra Value
Option, allocations made to the GTOs for the first 7 contract years will be
credited a guaranteed interest rate of 0.45% less than the guaranteed
interest rate that applies to the GTOs if the Extra Value Option is not
elected.
Some NLIC variable annuity contracts offer a Beneficiary Protector
option. Under these contracts, where the contract owner has elected the
Beneficiary Protector option, allocations made to the GTOs will be credited
a guaranteed interest rate of 0.40% less than the guaranteed interest rate
that applies to the GTOs if the Beneficiary Protector option is not
elected.
3. THE INVESTMENT PERIOD
The Investment Period is the period of time during which a particular
Specified Interest Rate is in effect for new allocations to the various
GTOs. All allocations made to a GTO during an Investment Period are
credited with the Specified Interest Rate in effect at the time of
allocation. An Investment Period ends when a new Specified Interest Rate
relative to the applicable GTO is declared. Subsequent declarations of new
Specified Interest Rates have no effect on allocations made to GTOs during
prior Investment Periods. Prior allocations to the GTO will be credited
with the Specified Interest Rate in effect when the allocation was made.
6
Interest at the Specified Interest Rate is credited to allocations made to
GTOs on a daily basis, resulting in an annual effective yield guaranteed by
NLIC, unless amounts are withdrawn or transferred from the GTO for
any reason prior to the Maturity Date. Interest at the Specified Interest
Rate will be credited for the entire Guaranteed Term associated with the
GTO. If amounts are withdrawn or transferred from the GTO for any reason
prior to the Maturity Date, a Market Value Adjustment will be applied to
the amount withdrawn or transferred.
Information concerning the Specified Interest Rates in effect for the
various GTOs can be obtained by calling the following toll free phone
number: 1-800-848-6331.
4. GUARANTEED TERMS
The Guaranteed Term is the period of time corresponding with the selected
GTO for which the Specified Interest Rate is guaranteed to be in effect, so
long as the amounts allocated remain in the GTO until the Maturity Date. A
Guaranteed Term always expires on a Maturity Date which will be the last
day of a calendar quarter. Consequently, a Guaranteed Term may last up to 3
months longer than the anniversary date of the allocation to the GTO.
For example, if an allocation is made to a 10 year GTO on August 1, 1999,
the Specified Interest Rate for that GTO will be credited until September
30, 2009; the Guaranteed Term will begin on August 1, 1999 and end on
September 30, 2009.
Guaranteed Terms will be exactly 3, 5, 7 or 10 years only when an
allocation to a GTO occurs on the first day of a calendar quarter.
5. GTOS AT MATURITY
NLIC will send notice to contract owners of impending Maturity Dates
(always the last day of a calendar quarter) at least 15 days and at most 30
days prior to the end of a Guaranteed Term. The notice will include the
projected value of the GTO on the Maturity Date and will also specify
options that contract owners have with respect to the maturing GTO.
Once the GTO matures, contract owners may:
(1) surrender the GTO, in part or in whole, without a Market Value
Adjustment during the Maturity Period; however, any surrender charges
that may be applicable under the variable contract will be assessed;
(2) transfer (all or part) of the GTO, without a Market Value Adjustment,
to any other investment option under the variable contract, including
any of the underlying mutual fund sub-accounts, or another GTO of the
same or different duration during the Maturity Period. A confirmation
of any such transfer will be sent immediately after the transfer is
processed; or
(3) elect not to transfer or surrender all or a portion of the GTO, in
which case the GTO will be automatically transferred to the available
money market sub-account of the contract at the end of the Maturity
Period. A confirmation will be sent immediately after the automatic
transfer is executed.
The GTO will continue to be credited with the Specified Interest Rate
in effect before the Maturity Date during the Maturity Period, and
prior to any of the transactions set forth in (1), (2), or (3) above.
6. THE MARKET VALUE ADJUSTMENT
A. GENERAL INFORMATION REGARDING THE MARKET VALUE ADJUSTMENT
GTOs that are surrendered, transferred or distributed for any reason
prior to the Maturity Date for the GTO will be subject to a Market
Value Adjustment. The Market Value Adjustment is determined by
multiplying a Market Value Adjustment Factor (arrived at by using the
Market Value Adjustment Formula) by the Specified Value, or the portion
of the Specified Value being withdrawn. The Specified Value is the
amount allocated to the GTO, plus interest accrued at the Specified
Interest Rate, minus prior distributions. The Market Value Adjustment
may either increase or decrease the amount of the distribution.
The Market Value Adjustment is intended to approximate, without
duplicating, NLIC's experience when it liquidates assets in order
to satisfy contractual obligations. Such obligations arise when
contract owners make withdrawals or transfers, or when the operation of
the variable annuity contract requires a distribution, such as a death
benefit. When liquidating assets, NLIC may realize either a gain
or a loss.
If prevailing interest rates are higher than the Specified Interest
Rate in effect at the time of the GTO allocation, NLIC will
realize a
7
loss when it liquidates assets in order to process a surrender,
death benefit or transfer; and therefore, application of the Market
Value Adjustment under such circumstances will decrease the amount of
the distribution.
Conversely, if prevailing interest rates are lower than the Specified
Interest Rate in effect at the time of the GTO allocation, NLIC
will realize a gain when it liquidates assets in order to process a
surrender, death benefit or transfer; therefore, application of the
Market Value Adjustment under such circumstances will increase the
amount of the distribution.
NLIC measures the relationship between prevailing interest rates
and the Specified Interest Rates through the Market Value Adjustment
Formula, and relies upon Constant Maturity Treasury Rates to represent
both prevailing interest rates and Specified Interest Rates. The
Market Value Adjustment Formula and the Constant Maturity Treasury
Rates are described more fully below.
B. CONSTANT MATURITY TREASURY RATES
The Market Value Adjustment Formula used to determine the Market Value
Adjustment Factor is based on Constant Maturity Treasury Rates which
are declared by the Federal Reserve Board on a regular basis.
NLIC uses Constant Maturity Treasury Rates in its Market Value
Adjustment Formula because they represent a readily available and
consistently reliable interest rate benchmark in financial markets,
which can be relied upon to reflect the relationship between Specified
Interest Rates declared by NLIC and the prospective interest rate
fluctuations.
Constant Maturity Treasury Rates for 1, 2, 3, 5, 7 and 10 years are
published by the Federal Reserve Board on a regular basis. To the
extent that the Market Value Adjustment Formula shown below requires a
rate associated with a maturity not published (such as a 4, 6, 8 or 9
year maturity), NLIC will calculate such rates based on the
relationship of the published rates. For example, if the published 3
year rate is 6% and the published 5 year rate is 6.50%, the 4 year rate
will be calculated as 6.25%.
C. THE MARKET VALUE ADJUSTMENT FORMULA
The Market Value Adjustment Formula is used when a distribution is made
from a GTO during the Guaranteed Term. The Market Value Adjustment is a
calculation expressing the relationship between three factors:
(1) the Constant Maturity Treasury Rate for the period of time
coinciding with the Guaranteed Term of the GTO;
(2) the Constant Maturity Treasury Rate for a period coinciding with
the time remaining in the Guaranteed Term of a GTO when a
distribution giving rise to a Market Value Adjustment occurs; and
(3) the number of days remaining in the Guaranteed Term of the GTO.
The formula for determining the Market Value Adjustment Factor is:
----------- ------------
1 + a
-----------------
1 + b + .0025
----------- ------------
Where:
a = the Constant Maturity Treasury Rate for a period equal to the
Guaranteed Term at the time of deposit in the GTO;
b = the Constant Maturity Treasury Rate at the time of distribution for
a period of time equal to the time remaining in the Guaranteed
Term. In determining the number of years to maturity, any partial
year will be counted as a full year, unless it would cause the
number of years to exceed the Guaranteed Term; and
t = the number of days until the Maturity Date, divided by 365.25.
In the case of "a" above, the Constant Maturity Treasury Rate used will
be the Constant Maturity Treasury Rate declared on Fridays by the
Federal Reserve Board, and placed in effect by NLIC on the
Wednesday immediately preceding the Investment Period during which the
allocation to the GTO was made.
In the case of "b" above, the Constant Maturity Treasury Rate used will
be the Constant Maturity Treasury Rate, declared on Fridays by the
Federal Reserve Board, and placed in effect by NLIC on the
Wednesday immediately preceding the withdrawal, transfer or other
distribution giving rise to the Market Value Adjustment.
8
The Market Value Adjustment Factor will be equal to 1 during the
Investment Period.
The Market Value Adjustment Formula shown above also accounts for some
of the administrative and processing expenses incurred when
fixed-interest investments are liquidated. This is represented in the
addition of .0025 in the Market Value Adjustment Formula.
The result of the Market Value Adjustment Formula shown above is the
Market Value Adjustment Factor. The Market Value Adjustment Factor is
the market value that is multiplied by the Specified Value, or that
portion of the Specified Value being distributed from a GTO, in order
to effect a Market Value Adjustment. The Market Value Adjustment Factor
will either be greater than, less than, or equal to 1 and will be
multiplied by the Specified Value (or a portion of the Specified Value)
being withdrawn from the GTO for any reason. If the Market Value
Adjustment Factor is greater than 1, a gain will be realized by the
contract owner; if the Market Value Adjustment Factor is less than 1, a
loss will be realized. If the Market Value Adjustment Factor is exactly
1, no gain or loss will be realized.
If the Federal Reserve Board halts publication of Constant Maturity
Treasury Rates, or if, for any other reason, Constant Maturity Treasury
Rates are not available, NLIC will use appropriate rates based on
U.S. Treasury Bond yields.
Examples of how to calculate Market Value Adjustments are provided in
the Appendix.
7. CONTRACT CHARGES
The variable contracts under which GTOs are made available have various
fees and charges, some of which may be assessed against allocations made to
GTOs.
Surrender charges, if applicable, will be assessed against full or partial
surrenders from the GTOs. If a surrender occurs prior to the Maturity Date
for a particular GTO, the amount surrendered is subject to a Market Value
Adjustment in addition to any surrender charge assessed pursuant to the
terms of the variable contract. The variable product prospectus fully
describes the surrender charges. Please refer to the variable product
prospectus for complete details regarding the surrender charges under the
variable contracts.
Mortality and expense risk charges, administrative charges and contract
maintenance charges that may be assessed under variable contracts are not
assessed against any allocation to a GTO. Such charges apply only to the
underlying mutual fund options available in the variable contracts.
8. GTOS AT ANNUITIZATION
GTOs are not available as investment options for variable annuity contracts
that are annuitized. If a variable annuity contract is annuitized while a
GTO is in effect, and prior to the Maturity Date of the GTO, a Market Value
Adjustment will apply to amounts transferred to other investment options
under the variable annuity contract that may be used during annuitization.
INVESTMENTS
NLIC intends to invest amounts allocated to GTOs in high quality, fixed
interest investments (investment grade bonds, mortgages, and collateralized
mortgage obligations) in the same manner as NLIC invests its general
account assets. NLIC takes into account the various maturity durations of
the GTOs (3, 5, 7 and 10 years) and anticipated cash-flow requirements when
making investments. NLIC is not obligated to invest GTO allocations in
accordance with any particular investment objective, but will generally adhere
to NLIC's overall investment philosophy. The Specified Interest Rates
declared by NLIC for the various GTOs will not necessarily correspond to
the performance of the nonunitized separate account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOS
The GTOs are available only as investment options under certain variable
contracts issued by NLIC. The appropriate variable product prospectus and,
if applicable, the Statement of Additional Information should be consulted for
information regarding the distribution of the variable contracts.
9
NATIONWIDE LIFE INSURANCE COMPANY
1. BUSINESS
A. ORGANIZATION
Nationwide Life Insurance Company (NLIC, or collectively with its
subsidiaries, the Company) was incorporated in 1929 and is an Ohio
stock legal reserve life insurance company. The Company offers a
variety of forms of individual annuities, private and public sector
pension plans and life insurance on a participating and a
non-participating basis.
Prior to January 27, 1997, NLIC was wholly owned by Nationwide
Corporation (Nationwide Corp.). On that date, Nationwide Corp.
contributed the outstanding shares of NLIC's common stock to Nationwide
Financial Services, Inc. (NFS), a holding company formed by Nationwide
Corp. in November 1996 for NLIC and other companies within the
Nationwide group of companies that offer or distribute long-term
savings and retirement products. On March 6, 1997, NFS completed an
initial public offering of its Class A common stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings and retirement products. In addition,
during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. Additionally, NLIC
paid $900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
In December 2001, NFS invested in a $300.0 million, 7.50% surplus note
issued by the Company, which is due on December 17, 2031.
Wholly owned subsidiaries of NLIC as of December 31, 2001 include
Nationwide Life and Annuity Insurance Company (NLAIC), Nationwide
Securities, Inc. (NS) formerly, Nationwide Advisory Services, Inc., and
Nationwide Investment Services Corporation (NISC).
The Company is a member of the Nationwide group of companies
(Nationwide), which consists of Nationwide Mutual Insurance Company
(NMIC) and all of its subsidiaries and affiliates.
NLAIC offers universal life insurance, variable universal life
insurance, corporate-owned life insurance and individual annuity
contracts on a non-participating basis. NS and NISC are registered
broker/dealers.
The Company is a leading provider of life insurance, long-term savings
and retirement products in the United States (U.S.). The Company
develops and sells a diverse range of products including individual
annuities, private and public sector pension plans, and life insurance.
By developing and offering a wide variety of products, the Company
believes that it has positioned itself to compete effectively in
various stock market and interest rate environments. The Company sells
its products through a diverse distribution network, including
independent broker/dealers, brokerage firms, pension plan
administrators, life insurance specialists, financial institutions,
Nationwide Retirement Solutions and Nationwide agents.
The Company is one of the leaders in the development and sale of
variable annuities. As of December 31, 2001, the Company was the 4th
largest writer of individual variable annuity contracts in the U.S.,
according to The Variable Annuity Research & Data Service (VARDS).
The Company has grown in recent years as a result of its long-term
investment in developing the distribution channels necessary to reach
its target customers and the products required to meet the demands of
these customers. The Company believes its growth has been enhanced
further by favorable demographic trends, the growing tendency of
Americans to supplement traditional sources of retirement income with
self-directed investments, such as products offered by the
10
Company, and the performance of the financial markets, particularly the
U.S. stock markets, in recent years.
B. 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 Individual Annuity segment, which accounted for $231.4 million
(36%) of the Company's operating income before federal income tax
expense for 2001, consists of individual The Best of AMERICA (R) and
private label deferred variable annuity products, deferred fixed
annuity products and income products. Individual deferred annuity
contracts provide the customer with tax-deferred accumulation of
savings and flexible payout options including lump sum, systematic
withdrawal or a stream of payments for life. In addition, 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 prescribed periods.
The Institutional Products segment, which accounted for $207.8 million
(32%) of the Company's operating income before federal income tax
expense for 2001, is comprised of the Company's private and public
sector group retirement plans and medium-term note program. The private
sector includes the 401(k) business generated through fixed and
variable annuities. The public sector includes the Internal Revenue
Code (IRC) Section 457 business in the form of fixed and variable
annuities.
The Life Insurance segment, which accounted for $184.7 million (28%) of
the Company's operating income before federal income tax expense for
2001, consists of investment life products, including both individual
variable life and corporate-owned life insurance (COLI) products,
traditional life insurance products and universal life insurance. Life
insurance products provide a death benefit and generally also allow the
customer to build cash value on a tax-advantaged basis.
The Corporate segment accounted for $26.6 million (4%) of the Company's
operating income (which excludes non-securitization related net
realized gains and losses on investments, hedging instruments and
hedged items) before federal income tax expense for 2001.
Additional information related to the Company's business segments is
included in note 16 to the consolidated financial statements and
Financial Statement Schedule III, which can be found later in this
prospectus.
C. RATINGS
Ratings with respect to claims-paying ability and financial strength
have become an increasingly important factor in establishing the
competitive position of insurance companies. Ratings are important to
maintaining public confidence in the Company and its ability to market
its annuity and life insurance products. Rating organizations
continually review the financial performance and condition of insurers,
including the Company. Any lowering of the Company's ratings could have
a material adverse effect on the Company's ability to market its
products and could increase the surrender of the Company's annuity
products. Both of these consequences could, depending upon the extent
thereof, have a material adverse effect on the Company's liquidity and,
under certain circumstances, net income. NLIC is rated "A+" (Superior)
by A.M. Best Company, Inc. (A.M. Best) and its claims-paying
ability/financial strength is rated "Aa3" (Excellent) by Moody's
Investor Services, Inc. (Moody's), and "AA" (Very Strong) by Standard &
Poor's, a Division of The McGraw-Hill Companies, Inc. ("S&P").
The foregoing ratings reflect each rating agency's opinion of NLIC's
financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed toward
the protection of investors. Such factors are of concern to
policyholders, agents and intermediaries.
The Company's financial strength is also reflected in the ratings of
commercial paper. The commercial paper is rated "AMB-1" by A.M Best,
"A-1+" by S&P and "P-1" by Moody's.
D. COMPETITION
The Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks,
broker/dealers and mutual funds, some of whom
11
have greater financial resources, offer alternative products and, with
respect to other insurers, have higher ratings than the Company. The
Company believes that competition in the Company's lines of business is
based on price, product features, commission structure, perceived
financial strength, claims-paying ratings, service and name
recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the Act), was signed
into law. The Act modernizes the regulatory framework for financial
services in the U. S., which allows banks, securities firms and
insurance companies to affiliate more directly than they have been
permitted to do in the past. While the Act facilitates these
affiliations, to date no significant competitors of the Company have
acquired, or have been acquired by, a banking entity under authority of
the Act. Nevertheless, it is not possible to anticipate whether such
affiliations might occur in the future.
E. REGULATION
NLIC and NLAIC, as with other insurance companies, are subject to
extensive regulation and supervision in the jurisdictions in which they
do business. Such regulations limit the amount of dividends and other
payments that can be paid by insurance companies without prior approval
and impose restrictions on the amount and type of investments insurance
companies may hold. These regulations also affect many other aspects of
insurance companies' businesses, including licensing of insurers and
their products and agents, risk-based capital requirements and the type
and amount of required asset valuation reserve accounts. These
regulations are primarily intended to protect policyholders rather than
shareholders. The Company cannot predict the effect that any proposed
or future legislation may have on the financial condition or results of
operations of the Company.
Insurance companies are required to file detailed annual and quarterly
statutory financial statements with state insurance regulators in each
of the states in which they do business, and their business and
accounts are subject to examination by such agencies at any time. In
addition, insurance regulators periodically examine an insurer's
financial condition, adherence to statutory accounting practices and
compliance with insurance department rules and regulations. Applicable
state insurance laws, rather than federal bankruptcy laws, apply to the
liquidation or the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically of the books,
records and accounts of insurance companies domiciled in their states.
Such examinations are generally conducted in cooperation with the
insurance departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners
(NAIC). The most recently completed examination of NLIC and NLAIC was
conducted by the Ohio and Delaware insurance departments for the
four-year period ended December 31, 1996. The final reports of these
examinations did not result in any significant issues or adjustments.
The Ohio Department of Insurance recently started the examination of
NLIC and NLAIC for the five-year period ended December 31, 2001. No
reports have been issued as of the date of this filing.
The payment of dividends by NLIC is subject to restrictions set forth
in the insurance laws and regulations of the State of Ohio, its
domiciliary state. The State of Ohio insurance laws require
Ohio-domiciled life insurance companies to seek prior regulatory
approval to pay a dividend or distribution of cash or other property if
the fair market value thereof, together with that of other dividends or
distributions made in the preceding 12 months, exceeds the greater of:
(i) 10% of statutory-basis policyholders' surplus as of the prior
December 31; or
(ii) the statutory-basis net income of the insurer for the 12-month
period ending as of the prior December 31.
As of December 31, 2001, $141.0 million in dividends could be paid by
NLIC without prior approval. The State of Ohio insurance laws also
require insurers to seek prior regulatory approval for any dividend
paid from other than earned surplus. Earned surplus is defined under
the State of Ohio insurance laws as the amount equal to the Company 's
unassigned funds as set forth in its most recent statutory financial
statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an
12
insurer's policyholder surplus must be reasonable in relation to the
insurer's outstanding liabilities and adequate for its financial needs.
The payment of dividends by NLIC may also be subject to restrictions
set forth in the insurance laws of the State of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its stockholders. The Company currently does not expect
such regulatory requirements to impair its ability to pay operating
expenses and dividends in the future.
F. EMPLOYEES
As of December 31, 2001, the Company had approximately 3,000 employees.
None of the employees of the Company are covered by a collective
bargaining agreement and the Company believes that its employee
relations are satisfactory.
2. PROPERTIES
Pursuant to an arrangement between NMIC and certain of its subsidiaries,
during 2001 the Company leased on average approximately 806,000 square feet
of office space primarily in the four building home office complex in
Columbus, Ohio. The Company believes that its present facilities are
adequate for the anticipated needs of the Company.
3. LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a
material adverse effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits relating to life insurance and
annuity pricing and sales practices. A number of these lawsuits have
resulted in substantial jury awards or settlements.
On October 29, 1998, 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 the other
named defendants. On January 25, 2002, the plaintiffs filed a motion for
leave to amend their complaint to add three new named plaintiffs. On
February 9, 2002, the plaintiffs filed a motion for class certification.
The class has not been certified. The Company intends to defend this
lawsuit vigorously.
On August 15, 2001, the Company was named in a lawsuit filed in Connecticut
federal court titled Lou Haddock, as trustee of the Flyte Tool & Die,
Incorporated Deferred Compensation Plan, et al v. Nationwide Financial
Services, Inc. and Nationwide Life Insurance Company. On September 5, 2001,
the plaintiffs amended their complaint to include class action allegations.
The plaintiffs seek to represent a class of plan trustees who purchased
variable annuities to fund qualified ERISA retirement plans. The amended
complaint alleges that the retirement plans purchased variable annuity
contracts from the Company which invested in mutual funds that were offered
by separate mutual fund companies; that the Company was a fiduciary under
ERISA and that the Company breached its fiduciary duty when it accepted
certain fees from the mutual fund companies that purportedly were never
disclosed by the Company; and that the Company violated ERISA by replacing
many of the mutual funds originally included in the plaintiffs' annuities
with "inferior" funds because the new funds purportedly paid more in
revenue sharing. The amended complaint seeks disgourgement of fees by the
Company and other unspecified compensatory damages. On November 15, 2001,
the Company filed a motion to dismiss the amended complaint, which has not
been decided. On December 3, 2001, the plaintiffs filed a motion for class
certification. On January 15, 2002, the plaintiffs filed a response to the
Company's motion to dismiss the amended complaint. On February 22, 2002,
the Company filed a reply in support of its motion to
13
dismiss. The class has not been certified. The Company intends to defend
this lawsuit vigorously.
There can be no assurance that any such litigation will not have a material
adverse effect on the Company in the future.
4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matters were submitted to a vote of
security holders through the solicitation of proxies or otherwise.
5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for NLIC's shares of common
stock. All of the 3,814,779 shares of Nationwide's common stock issued and
outstanding are owned by NFS.
Nationwide declared $35.0 million and $50.0 million in dividends to NFS
during 2001 and 2000, respectively. In addition, NLIC sought and obtained
prior regulatory approval from the Ohio Department of Insurance to return
$120.0 million of capital to NFS during 2000.
NLIC currently does not have a formal dividend policy.
Reference is made to note 12 of the consolidated financial statements for
information regarding dividend restrictions, which is included later in
this prospectus.
14
6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
FIVE-YEAR SUMMARY
(in millions, except per share amounts)
RESULTS OF OPERATIONS(2) Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Policy charges $ 1,019.1 $ 1,092.2 $ 895.6 $ 698.9 $ 545.2
Life insurance premiums 251.1 240.0 220.8 200.0 205.4
Net investment income 1,739.2 1,668.4 1,530.5 1,486.8 1,413.9
Net realized (losses) gains on investments, hedging
instruments and hedged items:
Unrelated parties (70.3) (24.9) (11.0) 17.9 11.1
Related party 44.4 - - - -
Other 195.5 194.6 167.4 108.1 62.8
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 3,179.0 3,170.3 2,803.3 2,511.7 2,238.4
- ---------------------------------------------------------------------------------------------------------------------------
Interest credited and other benefits 1,570.3 1,470.0 1,349.2 1,284.4 1,235.4
Interest expense on debt and trust securities 54.9 48.5 47.2 35.1 26.1
Other operating expenses 991.1 1,027.9 834.1 686.7 569.9
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,616.3 2,546.4 2,230.5 2,006.2 1,831.4
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before federal
income tax expense and cumulative effect of adoption
of accounting principles 562.7 623.9 572.8 505.5 407.0
Federal income tax expense 142.8 189.0 191.5 173.1 141.8
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of adoption of accounting principles 419.9 434.9 381.3 332.4 265.2
Cumulative effect of adoption of accounting principles,
net of tax (7.1) - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 412.8 $ 434.9 $ 381.3 $ 332.4 $ 265.2
===========================================================================================================================
Basic and diluted net income per common share $ 3.20 $ 3.38 $ 2.96 $ 2.58 $ 2.14
Cash dividends declared $ 0.48 $ 0.46 $ 0.38 $ 0.30 $ 0.18
Weighted average common shares outstanding
Basic 128.9 128.7 128.5 128.5 124.0
Diluted 129.2 128.9 128.6 128.6 124.1
OTHER DATA
RECONCILIATION OF NET INCOME TO
NET OPERATING INCOME(2)
Net income $ 412.8 $ 434.9 $ 381.3 $ 332.4 $ 265.2
Realized losses (gains) on investments, hedging
instruments and hedged items, excluding
securitizations, net of tax 18.0 16.1 7.0 (11.7) (7.9)
Cumulative effect of adoption of accounting
principles, net of tax 7.1 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net operating income 437.9 451.0 388.3 320.7 257.3
Pro forma adjustments - - - - (2.9)
- ---------------------------------------------------------------------------------------------------------------------------
Pro forma net operating income $ 437.9 $ 451.0 $ 388.3 $ 320.7 $ 254.4
===========================================================================================================================
Net operating return on average equity(3) 14.2% 16.7% 16.6% 15.8% 14.5%
===========================================================================================================================
(1) Selected consolidated financial data of NFS. NLIC is a wholly-owned
subsidiary of NFS.
(2) Comparisons between 2001, 2000, 1999 and 1998 results of operations and
those of 1997 are affected by the Company's initial public offering in
March 1997 and companion offerings of senior notes and capital securities
as well as the $900.0 million of dividends paid prior to the initial public
offering. Pro forma amounts adjust for these transactions.
15
(3) Based on net operating income and excluding accumulated other comprehensive
income.
(4) See "Sales Information" included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional disclosure
on sales.
(in millions, except per share amounts)
SUMMARY OF FINANCIAL POSITION(2) As of December 31,
- ------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Total invested assets $ 27,814.4 $ 23,359.2 $ 22,587.9 $ 20,940.5 $ 19,673.2
Deferred policy acquisition costs 3,213.7 2,872.7 2,555.8 2,022.3 1,665.4
Other assets 1,286.1 977.9 755.0 772.6 829.9
Separate account assets 59,646.7 65,968.8 67,155.3 50,935.8 37,724.4
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 91,960.9 $ 93,178.6 $ 93,054.0 $ 74,671.2 $ 59,892.9
========================================================================================================================
Policy reserves $ 25,491.6 $ 22,243.3 $ 21,868.3 $ 19,772.2 $ 18,702.8
Other liabilities 2,482.3 1,370.6 944.9 917.3 943.1
Long-term debt 597.0 298.4 298.4 298.4 298.4
Separate account liabilities 59,646.7 65,968.8 67,155.3 50,935.8 37,724.4
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 88,217.6 89,881.1 90,266.9 71,923.7 57,668.7
- ------------------------------------------------------------------------------------------------------------------------
NFS-obligated mandatorily redeemable capital
and preferred securities of subsidiary trusts 300.0 300.0 300.0 300.0 100.0
Shareholders' equity 3,443.3 2,997.5 2,487.1 2,447.5 2,124.2
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 91,960.9 $ 93,178.6 $ 93,054.0 $ 74,671.2 $ 59,892.9
========================================================================================================================
Book value per common share $ 26.71 $ 23.29 $ 19.35 $ 19.04 $ 16.53
========================================================================================================================
CUSTOMER FUNDS MANAGED AND ADMINISTERED
Individual annuity $ 42,186.7 $ 43,694.9 $ 44,023.7 $ 35,315.2 $ 28,156.4
Institutional products 50,417.3 47,154.0 48,321.7 38,582.0 25,812.4
Life insurance 8,099.2 7,225.5 5,913.8 4,613.4 3,487.0
Asset management:
Gross 24,347.5 22,953.4 22,866.7 19,825.5 7,840.0
Intercompany eliminations (11,911.8) (10,031.7) (9,978.5) (8,154.7) (5,285.0)
- ------------------------------------------------------------------------------------------------------------------------
Asset management, net 12,435.7 12,921.7 12,888.2 11,670.8 2,555.0
- ------------------------------------------------------------------------------------------------------------------------
$ 113,138.9 $ 110,996.1 $ 111,147.4 $ 90,181.4 $ 60,010.8
========================================================================================================================
16
Years ended December 31,
- -------------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------
OPERATING INCOME BEFORE FEDERAL INCOME
TAX EXPENSE BY BUSINESS SEGMENT(2)
Individual annuity $ 227.2 $ 276.3 $ 254.4 $ 230.2 $ 186.9
Institutional products 205.7 224.6 201.5 164.8 126.2
Life insurance 189.7 161.1 122.7 88.8 66.7
Asset management 12.7 4.5 22.9 14.0 11.7
Corporate (44.8) (17.7) (17.7) (10.2) 4.4
- -------------------------------------------------------------------------------------------------
$ 590.5 $ 648.8 $ 583.8 $ 487.6 $ 395.9
=================================================================================================
SALES BY BUSINESS SEGMENT(4)
Individual annuity $7,625.6 $7,338.7 $6,392.3 $6,140.2 $5,636.1
Institutional products 6,985.7 7,392.2 6,645.6 5,461.8 3,981.9
Life insurance 1,540.6 1,530.2 1,095.9 653.2 468.7
17
7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
A. INTRODUCTION
Management's narrative analysis of the results of operations of NLIC and
subsidiaries for the three years ended December 31, 2001 follows. This
discussion should be read in conjunction with the Company's consolidated
financial statements and related notes included later in this prospectus.
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:
(a) 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;
(b) tax law changes impacting the tax treatment of life insurance and
investment products;
(c) the repeal of federal estate tax;
(d) 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;
(e) adverse state and federal legislation and regulation, including
limitations on premium levels, increases in minimum capital and
reserves and other financial viability requirements;
(f) failure to expand distribution channels in order to obtain new
customers or failure to retain existing customers;
(g) 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;
(h) 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;
(i) general economic and business conditions which are less favorable than
expected;
(j) competitive, regulatory or tax changes that affect the cost of, or
demand for the Company's products;
(k) unanticipated changes in industry trends and ratings assigned by
nationally recognized rating organizations; and
(l) inaccuracies in assumptions regarding future persistency, mortality,
morbidity and interest rates used in calculating reserve amounts.
B. CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses for the reporting period. Actual
results could differ significantly from those estimates.
The most critical estimates include those used in determining impairment
losses on investments, valuation allowances for mortgage loans on real
estate, deferred policy acquisition costs for investment products and
universal life insurance products and federal income taxes.
See note 2 to the consolidated financial statements, included later in this
prospectus, for a discussion of the Company's significant accounting
policies, including recently issued accounting pronouncements.
(i) Impairment Losses on Investments
Management regularly reviews its fixed maturity and equity securities
portfolio to evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments. A number of
criteria are considered during this process including, but not limited to,
the current fair value as compared to amortized cost or cost, as
appropriate, of the security, the length of time the security's fair value
has been below amortized cost/cost, and by how much, specific credit issues
related to the issuer and current economic conditions. Impairment losses
18
result in a reduction of the cost basis of the underlying investment.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount.
Significant changes in the factors the Company considers when evaluating
investments for impairment losses could result in a significant change in
impairment losses reported in the consolidated financial statements.
(ii) Valuation Allowances on Mortgage Loans on Real Estate
The Company provides valuation allowances for impairments of mortgage loans
on real estate based on a review by portfolio managers. Mortgage loans on
real estate are considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When
the Company determines that a loan is impaired, a provision for loss is
established equal to the difference between the carrying value and the
estimated value of the mortgage loan. Estimated value is based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral, if the loan
is collateral dependent. Loans in foreclosure and loans considered impaired
are placed on non-accrual status. Interest received on non-accrual status
mortgage loans on real estate is included in net investment income in the
period received.
The valuation allowance account for mortgage loans on real estate is
maintained at a level believed adequate by the Company to absorb estimated
probable credit losses. The Company's periodic evaluation of the adequacy
of the allowance for losses is based on past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of the underlying
collateral, composition of the loan portfolio, current economic conditions
and other relevant factors. Significant changes in the factors the Company
considers in determining the valuation allowance on mortgage loans on real
estate could result in a significant change in the provision for valuation
allowance reported in the consolidated financial statements.
(iii) Deferred Policy Acquisition Costs for Investment Products and
Universal Life Insurance Products
The costs of acquiring new business, principally commissions, certain
expenses of the policy issue and underwriting department and certain
variable sales expenses that relate to and vary with the production of new
or renewal business have been deferred. Deferred policy acquisition costs
are subject to recoverability testing at the time of policy issuance and
loss recognition testing at the end of each accounting period.
For investment products and universal life insurance products, deferred
policy acquisition costs are being amortized with interest over the lives
of the policies in relation to the present value of estimated future gross
profits from projected interest spreads, asset fees, cost of insurance,
policy administration and surrender charges. For years in which gross
profits are negative, deferred policy acquisition costs are amortized based
on the present value of gross revenues. The Company regularly reviews the
estimated future gross profits and revises such estimates when appropriate.
The cumulative change in amortization as a result of changes in estimates
to reflect current best estimates is recorded as a charge or credit to
amortization expense. The most significant assumptions that are involved in
the estimation of future gross profits include future market performance
and surrender/lapse rates. In the event actual experience differs
significantly from assumptions or assumptions are significantly revised,
the Company may be required to record a significant charge or credit to
amortization expense. Deferred policy acquisition costs are adjusted to
reflect the impact of unrealized gains and losses on fixed maturity
securities available-for-sale as described in note 2(b) of the consolidated
financial statements included later in this prospectus.
(iv) Federal Income Taxes
The Company provides for federal income taxes based on amounts the Company
believes it will ultimately owe. Inherent in the provision for federal
income taxes are estimates regarding the deductibility of certain expenses
and the realization of certain tax credits. In the event the ultimate
deductibility of certain expenses or the realization of certain tax credits
differ from estimates, the Company may be required to significantly change
the provision for federal income taxes recorded in the consolidated
financial statements.
19
C. RESULTS OF OPERATIONS
(i) Revenues
Total operating revenues, which include net realized gains and losses from
mortgage loan securitizations and exclude all other net realized gains and
losses on investments, hedging instruments and hedged items, increased to
$3.01 billion in 2001 compared to $3.00 billion for 2000 and $2.70 billion
for 1999. The growth in operating revenues over the past two years has
primarily been driven by an increase in net investment income due to growth
in interest spread-based businesses, offset by lower policy charges in 2001
as a result of depressed equity markets.
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
each of the last three years were as follows:
(in millions) 2001 2000 1999
------------------------------------------------------------------------
Asset fees $ 614.2 $ 714.6 $ 616.5
Cost of insurance charges 201.9 156.5 117.0
Administrative fees 128.5 134.2 102.4
Surrender fees 72.7 86.1 59.6
------------------------------------------------------------------------
Total policy charges $ 1,017.3 $ 1,091.4 $ 895.5
========================================================================
The decline in asset fees in 2001 reflects a decrease in total average
separate account assets of $9.13 billion, or 13%, while asset fees
increased in 2000 due to an increase in total average separate account
assets of $11.99 billion or 21%. Market depreciation on investment options
underlying variable annuity and investment life insurance products as a
result of the sharp declines in the equity markets throughout 2001,
partially offset by net flows into these products, resulted in the decrease
in average separate account assets in 2001. Net flows into variable annuity
and investment life insurance products, as well as market appreciation on
underlying investment options, resulted in the increase in average separate
account assets in 2000.
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 as a result of new sales of corporate and
individual investment life insurance products and favorable persistency of
in-force business. The net amount at risk related to corporate and
individual investment life insurance grew to $32.93 billion at the end of
2001 compared to $28.28 billion and $22.35 billion at the end of 2000 and
1999, respectively.
The decline in administrative fees in 2001 compared to 2000 is primarily
attributable to case terminations in the Institutional Products segment
that generated additional administrative fees in 2000, slightly offset by
higher premium loads and per-policy administrative fees in 2001. The growth
in administrative fees in 2000 compared to 1999 is attributable to
administrative fees on case terminations and an increase in premium loads
on corporate-owned and individual investment life products from greater
sales.
Lower surrender charges in 2001 were the result of the successful
implementation of customer retention programs in the individual variable
annuity business during the year. These programs were created as the
heightened competitive environment in 2000 led to increased surrender
activity and related fees.
Net investment income includes the investment income earned on investments
supporting fixed annuities and certain life insurance products as well as
invested assets which are not allocated to product segments, net of related
investment expenses. Net investment income totaled $1.73 billion in 2001
compared to $1.65 billion and $1.52 billion in 2000 and 1999, respectively.
The increase in net investment income was primarily due to increased
20
invested assets to support growth in individual fixed annuity,
institutional products and life insurance policy reserves, partially offset
by lower yields in 2001. General account assets supporting insurance
products are closely correlated to the underlying reserves on these
products. General account reserves supporting these products grew by $3.03
billion and $322.0 million in 2001 and 2000, respectively, and were $25.22
billion as of December 31, 2001. The growth in general account reserves
reflects increased customer preference for fixed products in light of
declining and volatile equity markets in the second half of 2000 and 2001.
In addition, the growth reflects the Company's commitment to strengthen its
distribution and service capabilities for fixed products. The change in net
investment income was also impacted by average yields on investments, which
decreased by 52 basis points in 2001 and increased by 24 basis points in
2000 following market interest rate trends.
Realized gains and losses on investments, hedging instruments and hedged
items, other than those related to securitizations, 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 charges related to other-than-temporary impairments of
available-for-sale securities and other investments and valuation
allowances on mortgage loans on real estate. Also included are changes in
the fair value of derivatives qualifying as fair value hedges and the
change in the fair value of the hedged items, the ineffective portion of
cash flow hedges and changes in the fair value of free-standing
derivatives, all of which are considered non-recurring components of
earnings.
Net realized losses on investments, hedging instruments and hedged items
totaled $18.3 million for 2001. During 2001, the Company entered into a
transaction with NMIC, the Company's ultimate parent, whereby it sold a
portion of its interest in a limited partnership that resulted in a $44.4
million realized gain (see note 13 to the consolidated financial statements
included later in this prospectus). Also during 2001, the Company
recorded realized losses related to other-than-temporary impairments on
securities available-for-sale of $79.9 million, including $25.9 million on
fixed maturity securities issued by Enron and affiliated entities.
Other income includes fees earned by the Company's broker/dealers and in
1999, fees for investment management services, as well as commissions and
other income for administration, marketing and distribution services.
(ii) Benefits and Expenses
Interest credited to policyholder account balances totaled $1.24 billion in
2001 compared to $1.18 billion in 2000 and $1.10 billion in 1999 and
principally relates to fixed annuities, both individual and institutional,
funding agreements backing the Company's medium-term note program and
certain life insurance products. The growth in interest credited reflects
the overall increase in policy reserves for these products, partially
offset by lower crediting rates in the Institutional Products segment.
Crediting rates in the Individual Annuity segment have remained flat
despite declining market interest rates in 2001, reflecting the current
competitive market conditions.
Other benefits and claims include policyholder benefits in excess of
policyholder account balances for universal life and individual deferred
annuities and net claims and provisions for future policy benefits for
traditional life insurance products and immediate annuities. The growth in
other benefits and claims in both 2001 and 2000 reflects additional life
insurance claims primarily as a result of growth in life insurance
in-force.
Amortization of deferred policy acquisition costs (DAC) decreased $4.2
million to $347.9 million in 2001. In 2000, amortization expense of $352.1
million was up $79.5 million from 1999. The majority of the Company's DAC
is related to variable and universal life products and deferred annuities
where DAC is amortized in proportion to gross profits. The decline in
amortization expense in 2001 is attributable to lower estimated gross
profits from variable annuities, which were adversely impacted by lower
equity markets throughout 2001. Lower amortization from variable annuities
was partially offset by additional amortization from growth in life
insurance products. Growth in amortization in 2000 compared to 1999 is
attributable to higher gross profits from variable annuities due to growth
in average account balances during the year coupled with a decrease in
estimated future gross profits due to increased surrender activity during
2000.
Operating expenses were $444.1 million in 2001, a 7% decrease from 2000
operating expenses of $479.0 million. Operating expenses were $463.4
million in 1999. The decrease in 2001 reflects the Company's commitment to
aggressive expense management in
21
response to declining revenues and lower sales as a result of declining and
volatile equity markets and a slowing economy throughout the year. The
increase in 2000 reflected the growth in the number of annuity and life
insurance contracts in-force and the related increase in administrative
processing costs. The 1999 amount includes costs associated with investment
management activities which were assigned to an affiliate in mid-1999.
Federal income tax expense was $161.4 million representing an effective tax
rate of 25.6% for 2001. Federal income tax expense in 2000 and 1999 was
$207.7 million and $201.4 million, respectively, representing effective
rates of 30.4% and 33.2%. An increase in tax-exempt income and tax credits,
including credits from affordable housing partnership investments, resulted
in the decrease in effective rates in both years.
(iii) Other Data
The Company analyzes operating performance using a measure not defined in
accounting principles generally accepted in the United States of America
(GAAP), which the Company refers to as net operating income. The Company
calculates net operating income by adjusting net income to exclude all net
realized gains and losses on investments, hedging instruments and hedged
items, net of tax (except for net realized gains and losses related to
securitizations), and cumulative effect of adoption of accounting
principles, net of tax. Net operating income or similar measures are
commonly used in the insurance industry as a measure of ongoing earnings
performance.
The excluded items are important in understanding the Company's overall
results of operations. Net operating income should not be viewed as a
substitute for net income determined in accordance with GAAP, and it should
be noted that the Company's definition of net operating income may differ
from that used by other companies. However, the Company believes that the
presentation of net operating income as it is measured for management
purposes enhances the understanding of the Company's results of operations
by highlighting the results from ongoing operations and the underlying
profitability factors of the Company's business. The Company excludes
non-securitization related net realized gains and losses on investments,
hedging instruments and hedged items, net of tax, from net operating income
because such items are often the result of a single non-recurring event
which may or may not be at the Company's discretion. Including the
fluctuating effects of these transactions could distort trends in the
underlying profitability of the Company's business. The Company includes
securitization-related net realized gains and losses in net operating
income because the Company believes such activities are part of its core
asset management capabilities and expects securitization-related income to
be a recurring component of earnings in the future. The Company also
excludes the cumulative effect of adoption of accounting principles, net of
tax, from net operating income as such adjustments are not reflective of
the underlying operations of the Company's business.
The following table reconciles the Company's reported net income to net
operating income for each of the last three years.
22
(in millions) 2001 2000 1999
----------------------------------------------------------------------------------------------------------
Net income $ 461.8 $ 475.3 $ 405.1
Net realized losses on investments, hedging instruments
and hedged items, net of tax (excluding net realized
gains and losses related to securitizations) 13.1 12.6 7.6
Cumulative effect of adoption of accounting principles,
net of tax 7.1 - -
----------------------------------------------------------------------------------------------------------
Net operating income $ 482.0 $ 487.9 $ 412.7
==========================================================================================================
(iv) Sales Information
The Company regularly monitors and reports a non-GAAP measure titled sales.
Sales or similar measures are commonly used in the insurance industry as a
measure of business generated in the period.
Sales should not be viewed as a substitute for revenues determined in
accordance with GAAP, and the Company's definition of sales might differ
from that used by other companies. Sales generate customer funds managed
and administered, which ultimately drive revenues. Sales are comprised of
statutory premiums and deposits on individual and group annuities and life
insurance products sold to a diverse customer base. Statutory premiums and
deposits are calculated in accordance with accounting practices prescribed
or permitted by regulatory authorities and then adjusted to arrive at
sales.
Sales are stated net of internal replacements, which in the Company's
opinion provides a more meaningful disclosure of sales. In addition, sales
exclude: mutual fund net flows; funding agreements issued under the
Company's medium-term note program; large case bank-owned life insurance
(BOLI); large case pension plan acquisitions; and deposits into Nationwide
employee and agent benefit plans. Although these products contribute to
asset and earnings growth, they do not produce steady production flow that
lends itself to meaningful comparisons and are therefore excluded from
sales.
The Company believes that the presentation of sales as measured for
management purposes enhances the understanding of the Company's business
and helps depict trends that may not be apparent in the results of
operations due to differences between the timing of sales and revenue
recognition.
The Company's flagship products are marketed under The BEST of AMERICA
brand, and include individual variable and group 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 that 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 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.
23
Sales by product and segment for each of the last three years are as follows:
(in millions) 2001 2000 1999
==========================================================================================================
The BEST of AMERICA products $ 3,927.2 $ 5,475.4 $ 4,639.2
Private label annuities 1,398.3 998.7 947.8
Other 2.8 90.9 382.5
----------------------------------------------------------------------------------------------------------
Total individual variable annuity sales 5,328.3 6,565.0 5,969.5
----------------------------------------------------------------------------------------------------------
Deferred fixed annuities 1,874.4 534.8 332.5
Immediate fixed annuities 127.8 127.7 64.2
----------------------------------------------------------------------------------------------------------
Total individual fixed annuity sales 2,002.2 662.5 396.7
----------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 7,330.5 $ 7,227.5 $ 6,366.2
==========================================================================================================
The BEST of AMERICA products $ 3,067.6 $ 3,931.4 $ 3,537.7
Other 56.9 47.3 83.1
----------------------------------------------------------------------------------------------------------
Total private sector pension plan sales 3,124.5 3,978.7 3,620.8
----------------------------------------------------------------------------------------------------------
Total public sector pension plan sales -
IRC Section 457 annuities 1,521.2 2,148.8 2,190.3
----------------------------------------------------------------------------------------------------------
Total institutional products sales $ 4,645.7 $ 6,127.5 $ 5,811.1
==========================================================================================================
The BEST of AMERICA variable life series $ 552.4 $ 573.4 $ 425.9
Corporate-owned life insurance 742.3 711.4 409.2
Traditional/Universal life insurance 245.9 245.4 260.8
----------------------------------------------------------------------------------------------------------
Total life insurance sales $ 1,540.6 $ 1,530.2 $ 1,095.9
==========================================================================================================
The Company sells its products through a diverse 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 and life insurance
specialists. Representatives of an affiliate who market products directly
to a customer base include Nationwide Retirement Solutions. The Company
also distributes retirement savings products through the agency
distribution force of its ultimate parent company, NMIC.
Sales by distribution channel for each of the last three years are summarized as
follows:
(in millions) 2001 2000 1999
===========================================================================
Independent broker/dealers $ 4,185.9 $ 5,933.4 $ 5,097.8
Brokerage firms 2,123.5 1,183.8 900.2
Financial institutions 3,202.9 2,868.0 2,431.2
Pension plan administrators 959.7 1,044.2 1,165.7
Life insurance specialists 742.4 711.4 420.0
Nationwide Retirement Solutions 1,591.7 2,328.6 2,470.3
Nationwide agents 710.6 815.8 787.9
---------------------------------------------------------------------------
The 29% decrease in sales in the independent broker/dealer channel in 2001
reflects primarily lower demand for variable annuities due to declining and
volatile equity markets. Also contributing to the decline in 2001 were
lower private sector group pension sales due to decreases in the average
takeover case size reflecting the depressed equity markets and number of
new plans sold in light of the economic slowdown. Total sales through this
channel were up 16% in 2000 reflecting the strength of the Company's
multiple product strategy, appointment of new
24
distributors, introduction of new products and features and a diverse
distribution network.
Sales through brokerage firms increased 79% in 2001 compared to 2000,
principally due to the addition of Waddell & Reed Financial, Inc. as a
distributor. Sales through this new relationship totaled $1.04 billion for
2001.
Sales through financial institutions grew 12% and 18% during 2001 and 2000,
respectively, driven mainly by the appointment of new distributors in the
bank channel who sell fixed annuity products and a shift in customer
preference in 2001 to fixed annuity products in light of the declining and
volatile equity markets.
The increase in sales through life insurance specialists reflects $742.3
million of COLI sales in 2001 compared to $711.4 million in 2000 and $409.2
million in 1999. The Company entered the COLI market in 1998 and quickly
became a market leader through a focus on mid-sized cases. Sales for 2001
reflect continued growth in renewal premiums, offset by a sharp decline in
first year premiums, as the depressed economic conditions have reduced
demand for new executive benefit plans.
D. 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 each of the last three
years.
(in millions) 2001 2000 1999
==========================================================================================================
Individual Annuity $ 231.4 $ 281.7 $ 259.2
Institutional Products 207.8 230.7 217.8
Life Insurance 184.7 152.9 120.8
Corporate 26.6 37.1 20.3
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 650.5 $ 702.4 $ 618.1
==========================================================================================================
(i) Individual Annuity
The Individual Annuity segment consists of individual The BEST of AMERICA
and private label deferred variable annuity products, deferred fixed
annuity products and income products. Individual deferred annuity contracts
provide the customer with tax-deferred accumulation of savings and flexible
payout options including lump sum, systematic withdrawal or a stream of
payments for life. In addition, 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
prescribed periods.
25
The following table summarizes certain selected financial data for the
Company's Individual Annuity segment for the years indicated.
(in millions) 2001 2000 1999
==========================================================================================================
INCOME STATEMENT DATA
Revenues:
Policy charges $ 495.1 $ 573.2 $ 484.6
Net investment income 534.7 483.2 458.9
Premiums on immediate annuities 60.9 52.7 26.8
----------------------------------------------------------------------------------------------------------
1,090.7 1,109.1 970.3
----------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 433.2 396.4 384.9
Other benefits 68.7 54.0 23.8
Amortization of deferred policy acquisition costs 220.0 238.7 170.9
Other operating expenses 137.4 138.3 131.5
----------------------------------------------------------------------------------------------------------
859.3 827.4 711.1
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 231.4 $ 281.7 $ 259.2
==========================================================================================================
OTHER DATA
Sales:
Individual variable annuities $ 5,328.3 $ 6,565.0 $ 5,969.5
Individual fixed annuities 2,002.2 662.5 396.7
----------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 7,330.5 $ 7,227.5 $ 6,366.2
==========================================================================================================
Average account balances:
Separate account $ 33,419.0 $ 37,934.0 $ 31,929.2
General account 7,619.7 6,942.9 6,712.5
----------------------------------------------------------------------------------------------------------
Total average account balances $ 41,038.7 $ 44,876.9 $ 38,641.7
==========================================================================================================
Account balances as of year end:
Individual variable annuities $ 36,020.9 $ 39,621.9 $ 40,274.7
Individual fixed annuities 5,756.6 3,941.8 3,722.2
----------------------------------------------------------------------------------------------------------
Total account balances $ 41,777.5 $ 43,563.7 $ 43,996.9
==========================================================================================================
Return on average allocated capital 13.4% 20.4% 19.7%
Pre-tax operating income to average account balances 0.56% 0.63% 0.67%
----------------------------------------------------------------------------------------------------------
Pre-tax operating earnings reached $231.4 million in 2001, down 18%
compared to 2000 pre-tax operating earnings of $281.7 million, which were
up 9% from 1999. The decline in the equity markets during 2001 pushed
average separate account balances lower, reducing policy charges and
earnings for the year. Growth in average separate account balances in 2000
from market appreciation and net flows lead to higher policy charges in
2000 which were partially offset by higher amortization of DAC due to
higher gross profits and additional surrender activity.
Asset fees were $420.8 million in 2001 down 12% from $478.5 million in 2000
and totaled $415.0 million in 1999. Asset fees are calculated daily and
charged as a percentage of separate account assets. The fluctuations in
asset fees are primarily due to changes in the market value of the
investment options underlying the account balances, which have followed the
general trends of the equity markets. Average separate account assets
decreased 12% in 2001 to $33.42 billion following a 19% increase in 2000.
Surrender fees decreased by $19.7 million to $55.7 million in 2001 compared
to $75.4 million in 2000 and $52.4 million in 1999. Lower surrender fees in
2001 were the result of the successful implementation of customer retention
programs in the individual variable annuity business during the year. These
programs were created as the heightened competitive environment in 2000 led
to increased surrender activity and related fees.
26
Interest spread is net investment income less interest credited to
policyholder account balances. Interest spreads vary depending on crediting
rates offered by the Company, performance of the investment portfolio,
including the rate of prepayments, changes in market interest rates, the
competitive environment and other factors.
The following table depicts the interest spread on average general account
reserves in the Individual Annuity segment for each of the last three
years.
2001 2000 1999
=================================================================
Net investment income 7.58% 7.88% 7.58%
Interest credited 5.69 5.64 5.72
-----------------------------------------------------------------
Interest spread 1.89% 2.24% 1.86%
=================================================================
Interest spreads narrowed in 2001 compared to the prior year. A combination
of a competitive environment, a sharp decline in interest rates and a
by-product of the Company's investment strategy all contributed to the
reduction in spreads. As a strategic move to maintain market share, the
Company did not lower crediting rates in the third quarter of 2001 as
quickly as earned rates declined. In addition, throughout 2001, the Company
had a significant increase in cash flows in the general account due to
strong fixed annuity sales. As a result, at certain times throughout the
year, cash positions were greater than targeted as the Company acquired
appropriate long-term investments, putting pressure on spreads, especially
given a declining interest rate environment. Declining interest rates in
2001 resulted in a significant increase in mortgage loan and bond
prepayment income, which added 8 basis points to the 2001 interest spread,
compared to 4 basis points and 7 basis points, in 2000 and 1999,
respectively. Interest spreads in 2000 benefited from a declining interest
rate environment that allowed the Company to earn additional spread while
still offering competitive crediting rates.
The Company is able to mitigate the effects of changes in investment yields
by periodically resetting the rates credited on fixed features of
individual annuity contracts. As of December 31, 2001, individual fixed
annuity policy reserves and fixed option of variable annuity reserves of
$2.62 billion and $2.96 billion, respectively, are in contracts that adjust
the crediting rate periodically with portions resetting in each calendar
quarter. Individual fixed annuity policy reserves of $1.55 billion are in
contracts that adjust the crediting rate every five years. The Company also
has $373.0 million of fixed option of variable annuity policy reserves
related to private label annuities that call for the crediting rate to be
reset annually and $1.59 billion of individual fixed annuity policy
reserves that are in payout status where the Company has guaranteed
periodic, typically monthly, payments.
Account balances ended 2001 at $41.78 billion, down $1.79 billion from the
end of 2000 of $43.56 billion, which was down slightly from the end of
1999. Net flows, which consists of deposits less withdrawals, of $3.09
billion and $2.40 billion in 2001 and 2000, respectively, were offset by
market depreciation of variable annuities of $4.51 billion and $1.45
billion in 2001 and 2000, respectively. Sales of fixed annuities were $2.00
billion in 2001, up 202% from 2000. The decline in the equity markets
fueled interest in fixed annuity sales across the industry. The Company has
been able to generate sales growth in excess of industry rates due to a
focus, beginning in the second half of 2000, on expanding the number of
banks that sell the Company's fixed products. Sales of variable annuities
were $5.33 billion in 2001, down 19% from 2000. Variable annuity sales in
2000 were up 10% over 1999. Declining equity markets have reduced consumer
demand for variable annuities. Sales of a proprietary variable annuity by
Waddell & Reed Financial, Inc. of nearly $1.00 billion in 2001 provided
growth in the brokerage channel, partially offsetting declines in the
independent broker/dealer and financial institutions channels. According to
VARDS, the Company was ranked 4th in total variable annuity sales in 2001
and 2000.
The decrease in return on average allocated capital in 2001 is primarily a
result of lower earnings on individual variable annuities due to depressed
equity markets and additional allocated capital to support growth in fixed
annuities during 2001.
The decrease in pre-tax operating income to average account balances in
2001 and 2000 is primarily a result of lower interest spreads on average
general account reserves and the Company not being able to
27
reduce its operating expenses as quickly and in proportion to the decrease
in policy charges due to declining equity markets in 2001. In 2000,
additional DAC amortization as a result of increased surrender activity
decreased pre-tax operating income to average account balances.
(ii) Institutional Products
The Institutional Products segment is comprised of the Company's private
and public sector group retirement plans and medium-term note program. The
private sector includes the 401(k) business generated through fixed and
variable annuities. The public sector includes the IRC Section 457 business
in the form of fixed and variable annuities. Sales results do not include
business generated through the Company's medium-term note program, large
case pension plan acquisitions and Nationwide employee and agent benefit
plans, however the income statement data does reflect this business.
28
The following table summarizes certain selected financial data for the Company's
Institutional Products segment for the years indicated.
(in millions) 2001 2000 1999
==========================================================================================================
INCOME STATEMENT DATA
Revenues:
Policy charges $ 205.9 $ 251.6 $ 211.9
Net investment income 847.5 771.2
827.4
----------------------------------------------------------------------------------------------------------
1,053.4 1,079.0 983.1
----------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 627.8 628.8 580.9
Other operating expenses 217.8 219.5 184.4
----------------------------------------------------------------------------------------------------------
845.6 848.3 765.3
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 207.8 $ 230.7 $ 217.8
==========================================================================================================
OTHER DATA
Sales:
Private sector pension plans $ 3,124.5 $ 3,978.7 $ 3,620.8
Public sector pension plans 1,521.2 2,148.8 2,190.3
----------------------------------------------------------------------------------------------------------
Total institutional products sales $ 4,645.7 $ 6,127.5 $ 5,811.1
==========================================================================================================
Average account balances:
Separate account $ 23,149.9 $ 27,806.7 $ 22,350.3
General account 11,528.3 10,521.2 10,147.7
----------------------------------------------------------------------------------------------------------
Total average account balances $ 34,678.2 $ 38,327.9 $ 32,498.0
==========================================================================================================
Account balances as of year end:
Private sector pension plans $ 16,405.5 $ 18,001.4 $ 19,246.2
Public sector pension plans 14,288.8 17,294.5 18,949.2
Funding agreements backing medium-term notes 3,128.1 1,627.7 574.5
----------------------------------------------------------------------------------------------------------
Total account balances $ 33,822.4 $ 36,923.6 $ 38,769.9
==========================================================================================================
Return on average allocated capital 22.6% 24.2% 24.5%
Pre-tax operating income to average account balances 0.60% 0.59% 0.65%
----------------------------------------------------------------------------------------------------------
29
Pre-tax operating income totaled $207.8 million in 2001, down 10% compared
to 2000 pre-tax operating income of $230.7 million, which was up 6% from
1999. Declining equity markets throughout 2001 drove average separate
account balances, policy charges and earnings lower. In addition, an
intensively competitive environment in the public sector market have
reduced revenues and earnings. Growth in the medium-term note program
partially offset the declines in the pension businesses. Results for 2000
benefited from growth in average account balances due to net flows and
market appreciation.
Asset fees declined 20% to $176.7 million in 2001 compared to $220.2
million in 2000. The decline was driven by a 17% decrease in average
separate account assets in 2001 compared to a 24% increase in 2000. Other
policy charges are down in 2001 as a result of additional administration
fees in 2000 from case terminations.
Institutional Products segment results reflect an increase in interest
spread income attributable to growth in average general account balances
from the Company's medium-term note program. Interest spread is net
investment income less interest credited to policyholder account balances.
Interest spreads vary depending on crediting rates offered by the Company,
performance of the investment portfolio, including the rate of prepayments,
changes in market interest rates, the competitive environment and other
factors.
The following table depicts the interest spread on average general account
reserves in the Institutional Products segment for each of the last three
years.
2001 2000 1999
==================================================================
Net investment income 7.35% 7.86% 7.60%
Interest credited 5.44 5.98 5.72
------------------------------------------------------------------
Interest spread 1.91% 1.88% 1.88%
==================================================================
Interest spread on average general account reserves remained flat in 2001
compared to 2000 and 1999. Declining interest rates in 2001 resulted in a
significant increase in mortgage loan and bond prepayment income, which
added 13 basis points to the 2001 interest spread, compared to 4 basis
points and 8 basis points, in 2000 and 1999, respectively. The additional
prepayment income offset the impact on spreads of higher than anticipated
cash balances at times throughout 2001 and yields declining on new
investments more quickly than crediting rates could be adjusted.
The Company is able to mitigate the effects of changes in investment yields
by periodically resetting the rates credited on fixed features sold through
group annuity contracts. Fixed annuity policy reserves in the Institutional
Products segment as of December 31, 2001, included $6.56 billion in
contracts where the guaranteed interest rate is reestablished each quarter
and $922.2 million in contracts that adjust the crediting rate periodically
with portions resetting in each calendar quarter. In this segment, the
Company also has $1.50 billion of fixed option of variable annuity policy
reserves that call for the crediting rate to be reset annually on January
1. The remaining $3.13 billion of fixed annuity policy reserves relate to
funding agreements issued in conjunction with the Company's medium-term
note program where the crediting rate is either fixed for the term of the
contract or variable, based on an underlying index.
Other operating expenses in 2001 decreased 1% compared to a 19% increase in
2000. The decrease in 2001 reflects the Company's commitment to
aggressively manage expenses in response to declining revenues and lower
sales as a result of declining and volatile equity markets and a slowing
economy throughout the year. Higher operating expenses in 2000 reflect the
significant technology investments made as part of the new business model
in the public sector business.
Account balances ended 2001 at $33.82 billion, down $3.10 billion from
$36.92 billion at the end of 2000, and compared to $38.77 billion at the
end of 1999. The decrease in 2001 is due to market depreciation on
30
variable assets and large case terminations on fixed and variable annuity
cases in both 2000 and 1999. The Company's medium-term note program posted
a record year with $1.48 billion in new issues and ended 2001 with $3.13
billion in account balances. Private sector sales were down in 2001
reflecting lower sales due to decreases in the average takeover case size
reflecting the depressed equity markets and an 11% decline in the number of
new plans sold in light of the economic slow down. Sales of public sector
pension plans in 2001 decreased 29% compared to 2000 reflecting the impact
of earlier case terminations. Declines in sales in both private sector and
public sector also reflect increased interest of plan sponsors to use
investment vehicles other than group annuity contracts.
The decrease in return on average allocated capital in 2001 is primarily a
result of lower earnings on variable annuities due to depressed equity
markets and additional allocated capital to support growth in the
medium-term note program.
Pre-tax operating income to average account balances of 0.60% in 2001
remained relatively flat compared to 0.59% in 2000 and decreased from 0.65%
in 1999. The decrease in 2000 was primarily driven by a change in the mix
of products, including new products with reduced policy charges and the
growth in separate account products.
(iii) Life Insurance
The Life Insurance segment consists of investment life products, including
both individual variable life and COLI products, traditional life insurance
products and universal life insurance. Life insurance products provide a
death benefit and generally also allow the customer to build cash value on
a tax-advantaged basis.
31
The following table summarizes certain selected financial data for the
Company's Life Insurance segment for the years indicated.
(in millions) 2001 2000 1999
==========================================================================================================
INCOME STATEMENT DATA
Revenues:
Policy charges $ 316.3 $ 266.6 $ 199.0
Net investment income 323.3 289.2 253.1
Other 190.2 187.3 194.0
----------------------------------------------------------------------------------------------------------
829.8 743.1 646.1
----------------------------------------------------------------------------------------------------------
Benefits 431.1 389.3 359.5
Operating expenses 214.0 200.9 165.8
----------------------------------------------------------------------------------------------------------
645.1 590.2 525.3
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 184.7 $ 152.9 $ 120.8
==========================================================================================================
OTHER DATA
Sales:
The BEST of AMERICA variable life series $ 552.4 $ 573.4 $ 425.9
Corporate-owned life insurance 742.3 711.4 409.2
Traditional/Universal life insurance 245.9 245.4 260.8
----------------------------------------------------------------------------------------------------------
Total life insurance sales $ 1,540.6 $ 1,530.2 $ 1,095.9
==========================================================================================================
Policy reserves as of year end:
Individual investment life insurance $ 2,203.7 $ 2,092.0 $ 1,832.3
Corporate investment life insurance 3,236.8 2,552.3 1,498.6
Traditional life insurance 1,873.4 1,813.0 1,787.0
Universal life insurance 785.3 768.2 795.9
----------------------------------------------------------------------------------------------------------
Total policy reserves $ 8,099.2 $ 7,225.5 $ 5,913.8
==========================================================================================================
Life insurance in-force as of year end:
Individual investment life insurance $30,641.0 $ 26,781.5 $ 21,596.1
Corporate investment life insurance 7,727.6 6,143.9 4,088.4
Traditional life insurance 24,276.7 23,441.5 24,419.1
Universal life insurance 7,806.3 8,023.1 8,460.1
----------------------------------------------------------------------------------------------------------
Total insurance in-force $70,451.6 $64,390.0 $ 58,563.7
==========================================================================================================
Return on average allocated capital 12.1% 11.5% 11.0%
----------------------------------------------------------------------------------------------------------
32
Life Insurance segment results reflect increased revenues driven by growth
in investment life insurance in- force. Life Insurance segment earnings in
2001 increased 21% to $184.7 million, up from $152.9 million a year ago and
$120.8 million in 1999. The increase in Life Insurance segment earnings is
attributable to revenue growth generated from new sales and high
persistency of both individual and corporate investment life insurance
products.
Policy charges increased 19% to $316.3 million in 2001, following a 34%
increase to $266.6 million in 2000. Cost of insurance charges, which are
assessed on the amount of insurance in-force in excess of the related
policyholder account value, increased 29% and 34% in 2001 and 2000,
respectively, and reflect growth in insurance in-force and policy reserves
from high persistency of in-force contracts and new sales. Administrative
fees were flat in 2001 compared to 2000, after increasing 35% in 2000, and
reflect lower first year sales growth in 2001.
Net investment income increased in both 2001 and 2000 as a result of growth
in general account corporate-owned life insurance in-force.
While 2001 mortality experience was higher than 2000, the Company's
mortality experience continues to be favorable relative to pricing
assumptions. The favorable experience has allowed the Company to
renegotiate and lower certain reinsurance premiums.
Operating expenses were $214.0 million in 2001, up 7% from 2000. Operating
expenses for 2000 were $200.9 million, a 21% increase over 1999. Although
expenses did increase marginally in 2001 compared to 2000, the increase was
significantly less than the increase in segment revenues, reflecting the
operational efficiencies and scale advantage being developed in the
investment life operation. Technology and process improvement investments
intended to streamline and improve the underwriting and policy-issue
process made in 2000 are helping to develop these efficiencies.
Total life insurance sales in 2001 of $1.54 billion were essentially flat
compared to $1.53 billion during 2000 and were $1.10 billion in 1999.
Individual variable universal life sales have been adversely impacted by
the phase out of the estate tax, uncertainty surrounding the taxation of
split dollar plans, and the volatile stock market. Sales of new COLI cases
were down given the depressed economic conditions where corporations are
not forming new executive benefit plans and existing plans are being funded
at lower levels. According to the Tillinghast-Towers Perrin Value Variable
Life Survey, the Company ranked 6th in variable life sales in 2001, up from
7th in 2000.
(iv) Corporate
The following table summarizes certain selected financial data for the Company's
Corporate segment for the years indicated.
(in millions) 2001 2000 1999
===========================================================================================================
INCOME STATEMENT DATA
Operating revenues $ 35.5 $ 72.1 $ 103.7
Operating expenses 8.9 35.0 83.4
-----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense (1) $ 26.6 $ 37.1 $ 20.3
===========================================================================================================
----------
(1) Excludes net realized gains and losses on investments,
hedging instruments and hedged items.
33
The Corporate segment consists of net investment income not allocated to
the three product segments, unallocated expenses, interest expense on debt
and beginning in 2001, results from the Company's structured products
initiatives.
The decline in revenues reflects a decrease in net investment income on
real estate investments, passive losses from affordable housing partnership
investments, lower investment yields from declining interest rates and
fewer investments retained in the Corporate segment as more capital and the
related investment earnings are allocated to the product segments to
support growth. Operating expenses include interest expense on debt, which
totaled $6.2 million, $1.3 million and none in 2001, 2000 and 1999,
respectively.
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 gains of $61.6 million, including $44.4 million from the related
party transaction discussed below, from the sale of investments and net
losses on other-than-temporary impairments on securities available-for-sale
of $79.9 million, including $25.9 million on fixed maturity securities
issued by Enron and affiliated entities, during 2001. This compares to
realized net investment losses of $8.9 million from the sale of investments
and net losses on other-than-temporary impairments on securities
available-for-sale of $10.5 million during 2000 and realized net investment
losses of $19.1 million from the sale of investments and net gains on
other-than-temporary impairments on securities available-for-sale of $7.5
million during 1999. During 2001, the Company entered into a transaction
with 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, the Company recorded a realized gain of $44.4
million.
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 million related to the adoption of EITF 99-20 in second quarter 2001.
In an effort to continue to leverage investment expertise, the Company's
structured products group structured and executed two transactions in 2001.
In the first quarter, the Company structured and launched a $315 million
collateralized bond obligation (CBO), generating $1.6 million of operating
income for 2001. In the fourth quarter, the Company structured and launched
its first commercial mortgage loan securitization, adding $1.9 million of
operating income in 2001.
E. RELATED PARTY TRANSACTIONS
During 2001, the Company entered into a transaction with 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,
the Company 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 interest 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 the
Company and NMIC separately reviewed and approved the valuation prior to
the execution of this transaction. The Company continues to hold an
economic and voting interest in the limited partnership of approximately
14%, with NMIC holding the remaining interests.
NLIC has issued group annuity and life insurance contracts and performs
administrative services for various employee benefit plans sponsored by
NMIC or its affiliates. Total account values of these contracts were $4.68
billion and $4.80 billion as of December 31, 2001 and 2000, respectively.
Total revenues from these contracts were $150.7 million, $156.8 million and
$149.7 million for the years ended December 31, 2001, 2000 and 1999,
respectively, and include policy charges, net investment income from
investments backing the contracts and administrative fees. Total interest
credited to the account balances were $118.4 million, $131.9 million and
$112.0 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The terms of these contracts are consistent in all material
respects with what the Company offers to unaffiliated parties.
The Company files a consolidated federal tax return with NMIC, as described
in note 2(i). Total payments (from) to NMIC were $(45.4) million, $74.6
million and $29.8 million for the years ended December 31, 2001, 2000 and
1999, respectively.
During second quarter 1999, the Company entered into a modified coinsurance
arrangement to reinsure
34
the 1999 operating results of an affiliated company, Employers Life
Insurance Company of Wausau (ELOW) retroactive to January 1, 1999. In
September 1999, NFS acquired ELOW for $120.8 million and immediately merged
ELOW into NLIC terminating the modified coinsurance arrangement. Because
ELOW was an affiliate, the Company accounted for the merger similar to
poolings-of-interests; however, prior period financial statements were not
restated due to immateriality. The reinsurance and merger combined
contributed $1.46 million to net income in 1999.
The Company has a reinsurance agreement with NMIC whereby all of the
Company's accident and health business is ceded to NMIC on a modified
coinsurance basis. The agreement covers individual accident and health
business for all periods presented and group and franchise accident and
health business since July 1, 1999. Either party may terminate the
agreement on January 1 of any year with prior notice. Prior to July 1, 1999
group and franchise accident and health business and a block of group life
insurance policies were ceded to ELOW under a modified coinsurance
agreement. Under a modified coinsurance agreement, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment risk
associated with changes in interest rates is borne by the reinsurer. Risk
of asset default is retained by the Company, although a fee is paid to the
Company for the retention of such risk. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. The Company believes that the terms of the modified
coinsurance agreements are consistent in all material respects with what
the Company could have obtained with unaffiliated parties. Revenues ceded
to NMIC and ELOW for the years ended December 31, 2001, 2000 and 1999 were
$200.7 million, $170.1 million, and $193.0 million, respectively, while
benefits, claims and expenses ceded were $208.5 million, $168.0 million and
$197.3 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its direct
and indirect subsidiaries, including the Company, NMIC provides certain
operational and administrative services, such as investment management,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to allocation
among NMIC and such subsidiaries. Measures used to allocate expenses among
companies include individual employee estimates of time spent, special cost
studies, salary expense, commission expense and other methods agreed to by
the participating companies that are within industry guidelines and
practices. In addition, Nationwide Services Company, a subsidiary of NMIC,
provides computer, telephone, mail, employee benefits administration, and
other services to NMIC and certain of its direct and indirect subsidiaries,
including the Company, based on specified rates for units of service
consumed. For the years ended December 31, 2001, 2000 and 1999, the Company
made payments to NMIC and Nationwide Services Company totaling $139.8
million, $150.3 million, and $124.1 million, respectively. The Company does
not believe that expenses recognized under these agreements are materially
different than expenses that would have been recognized had the Company
operated on a stand-alone basis.
Under a marketing agreement with NMIC, NLIC makes payments to cover a
portion of the agent marketing allowance that is paid to Nationwide agents.
These costs cover product development and promotion, sales literature, rent
and similar items. Payments under this agreement totaled $26.4 million,
$31.4 million and $34.5 million for the years ended December 31, 2001, 2000
and 1999, respectively.
The Company leases office space from NMIC and certain of its subsidiaries.
For the years ended December 31, 2001, 2000 and 1999, the Company made
lease payments to NMIC and its subsidiaries of $18.7 million, $14.1 million
and $9.9 million, respectively.
The Company also participates in intercompany repurchase agreements with
affiliates whereby the seller will transfer securities to the buyer at a
stated value. Upon demand or after a stated period, the seller will
repurchase the securities at the original sales price plus a price
differential. During 2001, the most the Company had outstanding at any
given time was $368.5 million and the Company incurred interest expense on
intercompany repurchase agreements of $0.2 million for 2001. Transactions
under the agreements during 2000 and 1999 were not material. The Company
believes that the terms of the repurchase agreements are materially
consistent with what the Company could have obtained with unaffiliated
parties.
The Company and various affiliates entered into agreements with Nationwide
Cash Management Company (NCMC), an affiliate, under which NCMC
35
acts as a common agent in handling the purchase and sale of short-term
securities for the respective accounts of the participants. Amounts on
deposit with NCMC were $54.8 million and $321.1 million as of December 31,
2001 and 2000, respectively, and are included in short-term investments on
the accompanying consolidated balance sheets.
Certain annuity products are sold through affiliated companies, which are
also subsidiaries of NFS. Total commissions and fees paid to these
affiliates for the three years ended December 31, 2001 were $52.9 million,
$65.0 million and $79.7 million, respectively.
The Company makes seed investments in Gartmore Global Investments, Inc., an
affiliate, to capitalize new mutual fund offerings. As of December 31, 2001
and 2000, the fair value of these investments totaled $54.5 million and
$49.9 million, respectively.
On December 19, 2001, the Company sold a 7.50%, $300.0 million surplus note
to NFS, maturing on December 17, 2031. The fair value of the surplus note
as of December 31, 2001 was $300.0 million. Principal and interest payments
are subject to prior approval by the superintendent of insurance of the
State of Ohio. The Company is scheduled to pay interest semi-annually on
June 17 and December 17 of each year commencing June 17, 2002.
F. OFF-BALANCE SHEET TRANSACTIONS
Under the medium-term note program, the Company issues funding agreements,
which are insurance obligations, to an unrelated third party trust to
secure notes issued to investors by the trust. The funding agreements are
recorded as a component of future policy benefits and claims on the
Company's consolidated balance sheets. Because the Company has no ownership
interest in, or control over, the third party trust that issues the notes,
the Company does not include the trust in its consolidated financial
statements and therefore, such notes are not reflected in the consolidated
financial statements of the Company. As the notes issued by the trust have
a secured interest in the funding agreement issued by the Company, Moody's
and S&P assign the same ratings to the notes as the insurance financial
strength of the Company.
8. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A. MARKET RISK SENSITIVE FINANCIAL INSTRUMENTS
The Company is subject to potential fluctuations in earnings and the
fair value of certain of its assets and liabilities, as well as
variations in expected cash flows due to changes in market interest
rates and equity prices. The following discussion focuses on specific
exposures the Company has to interest rate and equity price risk and
describes strategies used to manage these risks. The discussion is
limited to financial instruments subject to market risks and is not
intended to be a complete discussion of all of the risks the Company is
exposed to.
(i) Interest Rate Risk
Fluctuations in interest rates can potentially impact the Company's
earnings, cash flows, and the fair value of its assets and liabilities.
Generally, in a declining interest rate environment, the Company may be
required to reinvest the proceeds from matured and prepaid investments
at rates lower than the overall yield of the portfolio, which could
reduce interest spread income. In addition, minimum guaranteed
crediting rates (typically 3.0% or 3.5%) on certain annuity contracts
could result in a reduction of the Company's interest spread income in
the event of a significant and prolonged decline in interest rates from
market rates at the end of 2001. The average crediting rate of fixed
annuity products during 2001 was 5.69% and 5.44% for the Individual
Annuity and Institutional Products segments, respectively, well in
excess of the guaranteed rates. The Company mitigates this risk by
investing in assets with maturities and durations that match the
expected characteristics of the liabilities and by investing in
mortgage- and asset-backed securities with limited prepayment exposure.
Conversely, a rising interest rate environment could result in a
reduction of interest spread income or an increase in policyholder
surrenders. Existing general account investments supporting annuity
liabilities have a weighted average maturity of approximately 5.37
years as of December 31, 2001 and therefore, the change in yield of the
portfolio will lag changes in market interest rates. This lag is
increased if the rate of prepayments of securities slows. To the extent
the Company sets renewal rates based on current market rates, this will
result in reduced interest spreads. Alternatively, if the Company sets
renewal crediting rates while attempting to maintain a desired spread
from the portfolio
36
yield, the rates offered by the Company may be less than new money
rates offered by competitors. This difference could result in an
increase in surrender activity by policyholders. If the Company could
not fund the surrenders with its cash flow from operations, the Company
may be required to sell investments, which likely would have declined
in value due to the increase in interest rates. The Company mitigates
this risk by offering products that assess surrender charges or market
value adjustments at the time of surrender, by investing in assets with
maturities and durations that match the expected characteristics of the
liabilities, and by investing in mortgage- and asset-backed securities
with limited prepayment exposure.
(ii) Asset/Liability Management Strategies to Manage Interest Rate Risk
The Company employs an asset/liability management approach tailored to
the specific requirements of each of its products. Each product line
has an investment strategy based on its specific characteristics. The
strategy establishes asset maturity and duration, quality and other
guidelines. For fixed maturity securities and mortgages, the weighted
average maturity is based on repayments, which are scheduled to occur
under the terms of the asset. For mortgage- and asset-backed
securities, repayments are determined using the current rate of
repayment of the underlying mortgages or assets and the terms of the
securities.
For individual immediate annuities having future benefits which cannot
be changed at the option of the policyholder, the underlying assets are
managed in a separate pool. The duration of assets and liabilities in
this pool are kept as close together as possible. For assets, the
repayment cash flows, plus anticipated coupon payments, are used in
calculating asset duration. Future benefits and expenses are used for
liabilities. As of December 31, 2001, the average duration of assets in
this pool was 7.56 years and the average duration of the liabilities
was 7.50 years. Individual immediate annuity policy reserves on this
business were $1.59 billion as of December 31, 2001.
Because the timing of the payment of future benefits on the majority of
the Company's business can be changed by the policyholder, the Company
employs cash flow testing techniques in its asset/liability management
process. In addition, each year the Company's annuity and insurance
business is analyzed to determine the adequacy of the reserves
supporting such business. This analysis is accomplished by projecting
the anticipated cash flows from such business and the assets required
to support such business under a number of possible future interest
rate scenarios. The first seven of these scenarios are required by
state insurance regulation. Projections are also made using 11
additional scenarios, which involve more extreme fluctuations in future
interest rates and equity markets. Finally, to get a statistical
analysis of possible results and to minimize any bias in the 18
predetermined scenarios, additional projections are made using 50
randomly generated interest rate scenarios. For the Company's 2001 cash
flow testing process, interest rates for 90-day treasury bills ranged
from 1.18% to 10.90% under the 18 predetermined scenarios and 0.78% to
21.03% under the 50 random scenarios. Interest rates for longer
maturity treasury securities had comparable ranges. The values produced
by each projection are used to determine future gains or losses from
the Company's annuity and insurance business, which, in turn, are used
to quantify the adequacy of the Company's reserves over the entire
projection period. The results of the Company's cash flow testing
indicated that the Company's reserves were adequate as of December 31,
2001.
(iii) Use of Derivatives to Manage Interest Rate Risk
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
37
(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.
(iv) Foreign Currency Risk Management
In conjunction with the Company's medium-term note program, 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 U.S. 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 U.S. 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
U.S. 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 U.S. 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 U.S. dollar rate, generally 3-month
libor.
Cross-currency interest rate swaps in place against each foreign
currency obligation or investment hedge the Company against adverse
currency movements with respect to both period interest payments and
principal repayment.
(v) Characteristics of Interest Rate Sensitive Financial Instruments
The following table provides information about the Company's financial
instruments as of December 31, 2001 that are sensitive to changes in
interest rates. Insurance contracts that subject the Company to
significant mortality risk, including life insurance contracts and
life-contingent immediate annuities, do not meet the definition of a
financial instrument and are not included in the table.
38
There-
(in millions) 2002 2003 2004 2005 2006 after
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 1,592.8 $ 1,254.7 $ 1,338.2 $ 1,656.5 $ 1,788.9 $ 4,477.9
Average interest rate 7.4% 6.9% 6.8% 7.2% 7.5% 7.7%
Mortgage and other asset-
backed securities:
Principal $ 1,088.4 $ 838.5 $ 837.7 $ 705.9 $ 635.6 $ 1,961.9
Average interest rate 7.4% 7.4% 6.9% 6.7% 6.6% 6.8%
Other fixed maturity securities:
Principal $ 20.3 $ 43.5 $ 50.0 $ 15.9 $ 29.9 $ 240.0
Average interest rate 18.2% 7.6% 7.7% 6.1% 6.4% 7.6%
Mortgage loans on real estate:
Principal $ 382.0 $ 459.8 $ 515.9 $ 905.8 $ 751.0 $ 4,111.1
Average interest rate 8.5% 7.5% 7.3% 6.9% 7.1% 7.6%
LIABILITIES
Deferred fixed annuities:
Principal $ 2,328.0 $ 2,121.0 $ 1,819.0 $ 1,585.0 $ 1,493.0 $ 9,807.5
Average credited rate 5.2% 5.1% 4.9% 4.8% 4.6% 4.5%
Immediate annuities:
Principal $ 48.0 $ 43.0 $ 38.0 $ 33.0 $ 29.0 $ 205.0
Average credited rate 7.1% 7.2% 7.2% 7.2% 7.2% 7.2%
Short-term borrowings:
Principal $ 100.0 $ -- $ -- $ -- $ -- $ --
Average interest rate 1.9% -- -- -- -- --
Long-term debt:
Principal $ -- $ -- $ -- $ -- $ -- $ 300.0
Average interest rate -- -- -- -- -- 7.5%
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value $ 20.0 $ 91.8 $ 260.6 $ 364.1 $ 368.4 $ 871.0
Weighted average pay rate 3.5% 6.0% 5.7% 6.1% 5.9% 6.0%
Weighted average receive 2.6% 2.0% 2.2% 2.3% 2.1% 2.3%
rate
Pay variable/receive fixed
Notional value $ 5.0 $ 28.1 $ 529.5 $ 426.7 $ 570.7 $ 835.9
Weighted average pay rate 2.4% 2.2% 2.5% 2.6% 2.5% 2.5%
Weighted average receive rate 7.0% 4.1% 4.0% 3.7% 4.3% 5.7%
Pay variable/receive variable
Notional value $ 7.5 $ 375.9 $ 98.1 $ 424.1 $ 102.6 $ --
Weighted average pay rate 5.0% 2.3% 2.6% 2.2% 2.4% --
Weighted average receive rate 3.6% 3.5% 3.9% 2.6% 3.9% --
Convertible asset swap
Notional value $ -- $ 65.9 $ 148.7 $ 19.8 $ 64.4 $ --
Weighted average receive rate -- 3.4% 3.7% 4.2% 3.2% --
Credit default swap
Notional value $ -- $ 10.0 $ 25.0 $ 48.0 $ 131.0 $ --
Weighted average receive -- 1.3% 2.1% 1.8% 1.1% --
rate
Interest rate futures:
Long positions
Contract amount/notional $ 34.0 $ 6.0 $ 4.0 $ 1.0 $ -- $ --
Weighted average settlement 92.8 92.5 92.3 92.3 -- --
price
Short positions
Contract amount/notional $ 2,026.4 $ 1,363.0 $ 1,021.0 $ 663.0 $ 392.0 $ 509.0
Weighted average settlement 95.8 93.5 93.3 93.3 93.1 92.9
price
2001 2000
Fair Fair
(in millions) Total Value Value
- -------------------------------------------------------------------------------------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 12,109.0 $ 12,063.9 $ 9,858.2
Average interest rate 7.4%
Mortgage and other asset-
backed securities:
Principal $ 6,068.0 $ 5,968.8 $ 5,169.7
Average interest rate 7.0%
Other fixed maturity securities:
Principal $ 399.6 $ 338.1 $ 415.1
Average interest rate 8.0%
Mortgage loans on real estate:
Principal $ 7,125.6 $ 7,293.3 $ 6,327.8
Average interest rate 7.5%
LIABILITIES
Deferred fixed annuities:
Principal $ 19,153.5 $ 18,113.0 $ 15,697.8
Average credited rate 4.7%
Immediate annuities:
Principal $ 396.0 $ 308.0 $ 282.0
Average credited rate 7.2%
Short-term borrowings:
Principal $ 100.0 $ 100.0 $ 118.7
Average interest rate 1.9%
Long-term debt:
Principal $ 300.0 $ 300.0 $ --
Average interest rate 7.5%
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value $ 1,975.9 $ (45.0) $ (21.3)
Weighted average pay rate 5.9%
Weighted average receive 2.2%
rate
Pay variable/receive fixed
Notional value $ 2,395.9 $ (32.1) $ (32.1)
Weighted average pay rate 2.5%
Weighted average receive rate 4.6%
Pay variable/receive variable
Notional value $ 1,008.2 $ (20.4) $ 5.2
Weighted average pay rate 2.3%
Weighted average receive rate 3.2%
Convertible asset swap
Notional value $ 298.8 $ 27.6 $ 1.9
Weighted average receive rate 3.6%
Credit default swap
Notional value $ 214.0 $ (0.7) $ --
Weighted average receive 1.4%
rate
Interest rate futures:
Long positions
Contract amount/notional $ 45.0 $ 0.4 $ 0.3
Weighted average settlement 92.7
price
Short positions
Contract amount/notional $ 5,974.4 $ (33.4) $ (16.3)
Weighted average settlement 94.2
price
39
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the
table above are as follows:
Mortgage- and asset-backed securities (MBSs and ABSs): The
maturity year is determined based on the terms of the securities
and the current rate of prepayment of the underlying pools of
mortgages or assets. The Company limits its exposure to
prepayments by purchasing less volatile types of MBSs and ABSs.
Other fixed maturity securities and mortgage loans on real estate:
The maturity year is determined based on the maturity date of the
security or loan.
Deferred fixed annuities: The maturity year is based on the
expected date of policyholder withdrawal, taking into account
actual experience, current interest rates, and contract terms.
Included are group annuity contracts representing $8.98 billion of
general account liabilities as of December 31, 2001, which are
generally subject to market value adjustment upon surrender and
which may also be subject to surrender charges. Of the total group
annuity liabilities, $6.56 billion were in contracts where the
crediting rate is reset quarterly, $922.2 million were in
contracts that adjust the crediting rate on an annual basis with
portions resetting in each calendar quarter and $1.50 billion were
in contracts where the crediting rate is reset annually on January
1. Fixed annuity policy reserves of $3.13 billion relate to
funding agreements issued in conjunction with the Company's
medium-term note program where the crediting rate is either fixed
for the term of the contract or variable, based on an underlying
index. Also included in deferred fixed annuities are certain
individual annuity contracts, which are also subject to surrender
charges calculated as a percentage of the deposits made and
assessed at declining rates during the first seven years after a
deposit is made. As of December 31, 2001, individual annuity
general account liabilities totaling $5.58 billion were in
contracts where the crediting rate is reset periodically, with
portions resetting in each calendar quarter and $373.0 million
that reset annually. Individual fixed annuity policy reserves of
$1.55 billion are in contracts that adjust the crediting rate
every five years. The average crediting rate is calculated as the
difference between the projected yield of the assets backing the
liabilities and a targeted interest spread. However, for certain
individual annuities the credited rate is also adjusted to
partially reflect current new money rates.
Immediate annuities: Included are non-life contingent contracts
in payout status where the Company has guaranteed periodic,
typically monthly, payments. The maturity year is based on the
terms of the contract.
Short-term borrowings and long-term debt: The maturity year is the
stated maturity date of the obligation.
Derivative financial instruments: The maturity year is based on
the terms of the related contracts. Interest rate swaps include
cross-currency interest rate swaps that eliminate all foreign
currency exposure the Company has with existing assets and
liabilities. Cross-currency interest rate swaps in place against
each foreign currency obligation hedge the Company against adverse
currency movements with respect to both period interest payments
and principal repayment. Underlying details by currency have
therefore been omitted. Variable swap rates and settlement prices
reflect rates and prices in effect as of December 31, 2001.
(vi) Equity Market Risk
Asset fees calculated as a percentage of the separate account assets
are a significant source of revenue to the Company. At December 31,
2001, 82% of separate account assets were invested in equity mutual
funds. Gains and losses in the equity markets will result in
corresponding increases and decreases in the Company's separate account
assets and the reported asset fee revenue. In addition, a decrease in
separate account assets may decrease the Company's expectations of
future profit margins, which may require the Company to accelerate the
amortization of deferred policy acquisition costs.
40
B. INFLATION
The rate of inflation did not have a material effect on the revenues or
operating results of the Company during 2001, 2000 or 1999.
9. DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of the following seven
Directors:
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
Joseph J. Gasper 58 1996 2002
W. G. Jurgensen 50 2000 2002
Galen R. Barnes 55 2001 2002
Michael S. Helfer 56 2001 2002
Donna A. James 44 2001 2002
Robert A. Oakley 55 2001 2002
Robert J. Woodward 60 2001 2002
The Company's Executive Officers currently consist of the following
twenty-six Officers:
NAME AGE POSITION WITH NATIONWIDE
John R. Cook, Jr. 58 Senior Vice President - Chief Communications Officer
David A. Diamond 47 Senior Vice President - Corporate Strategy
Joseph J. Gasper 58 President and Chief Operating Officer
Philip C. Gath 54 Senior Vice President - Chief Actuary - Nationwide Financial
Patricia R. Hatler 47 Senior Vice President, General Counsel and Secretary
Richard D. Headley 53 Executive Vice President
Michael S. Helfer 56 Executive Vice President - Corporate Strategy
David K. Hollingsworth 48 Senior Vice President -President - Nationwide Insurance Sales
David R. Jahn 53 Senior Vice President - Product Management
Donna A. James 44 Executive Vice President - Chief Administrative Officer
W.G. Jurgensen 50 Chairman of the Board and Chief Executive Officer
Richard A. Karas 59 Senior Vice President - Sales - Financial Services
Gregory S. Lashutka 58 Senior Vice President - Corporate Relations
Edwin P. McCausland, Jr. 57 Senior Vice President - Fixed Income Securities
Robert H. McNaughten 61 Senior Vice President - Real Estate Investments
Michael D. Miller 49 Senior Vice President - NI Finance
Brian W. Nocco 50 Senior Vice President and Treasurer
Robert A. Oakley 55 Executive Vice President - Chief Financial Officer
Mark D. Phelan 47 Senior Vice President - Technology and Operations
Douglas C. Robinette 47 Senior Vice President - Claims
John S. Skubik 55 Senior Vice President - Strategic Initiatives
Mark R. Thresher 45 Senior Vice President - Finance - Nationwide Financial
Richard M. Waggoner 54 Senior Vice President - Operations
Susan A. Wolken 51 Senior Vice President - Product Management and Nationwide
Financial Marketing
Robert J. Woodward, Jr. 60 Executive Vice President - Chief Investment Officer
41
Each of the directors and officers listed below is a director or officer
respectively of at least one or more of the other major insurance affiliates of
the Nationwide group of companies. The business address of the directors and
officers listed below is One Nationwide Plaza, Columbus, Ohio 43215.
W. G. JURGENSEN has been Chief Executive Officer of Nationwide since August
2000, Chief Executive Officer-Elect from May to August 2000 and a Director of
Nationwide since May 2000. Previously, he was Executive Vice President of Bank
One Corporation from 1998 to 2000. Mr. Jurgensen was Executive Vice President of
First Chicago NBD Corporation and Chairman of FCC National Bank from 1996 to
1998. Mr. Jurgensen has been with Nationwide for 2 years.
JOSEPH J. GASPER has been President and Chief Operating Officer and a Director
of Nationwide since April 1996. Previously, he was Executive Vice
President-Property and Casualty Operations of Nationwide from April 1995 to
April 1996. He was Senior Vice President-Property and Casualty Operations of
Nationwide from September 1993 to April 1995. Prior to that time, Mr. Gasper
held various management positions with the Nationwide companies. Mr. Gasper has
been with Nationwide for 35 years.
GALEN R. BARNES has been a Director of Nationwide since May 2001. He served as
President of Nationwide Insurance Enterprise from April 1996 to April 1999. He
was Director and Vice Chairman of the Wausau Insurance Companies, a Nationwide
affiliate, from September 1996 to December 1998; and Director, President and
Chief Operating Officer from May 1993 to September 1996. Mr. Barnes was Senior
Vice President of Nationwide from May 1993 to April 1996. Prior to that time,
Mr. Barnes held several positions within Nationwide. Mr. Barnes has been with
Nationwide for 25 years.
RICHARD D. HEADLEY has been Executive Vice President of Nationwide since July
2000. Previously, he was Executive Vice President-Chief Information Technology
Officer of Nationwide from August 1999 to August 2000, and Senior Vice
President-Chief Information Technology Officer of Nationwide from October 1997
to May 1999. Prior to that time, Mr. Headley was Chairman and Chief Executive
Officer of Banc One Services Corporation from 1992 to October 1997. Mr. Headley
has been with Nationwide for 4 years.
MICHAEL S. HELFER has been Executive Vice President-Corporate Strategy of
Nationwide since August 2000. He has been a Director of Nationwide since May
2001. Prior to that time, Mr. Helfer was a partner with Wilmer, Cutler and
Pickering from 1978 to October 2000. Mr. Helfer has been with Nationwide for 2
years.
DONNA A. JAMES has been Executive Vice President-Chief Administrative Officer of
Nationwide since July 2000 and a Director of Nationwide since May 2001. Ms.
James was Senior Vice President-Chief Human Resources Officer from May 1999 to
July 2000 and Senior Vice President-Human Resources of Nationwide from December
1997 to May 1999. Previously, she was Vice President-Human Resources of
Nationwide from July 1996 to December 1997. Previously, Ms. James was Vice
President-Assistant to the CEO of Nationwide from March 1996 to July 1996 and
Associate Vice President-Assistant to the CEO from May 1994 to March 1996. Prior
to that time, Ms. James held several positions within Nationwide. Ms. James has
been with Nationwide for 20 years.
MICHAEL C. KELLER has been Executive Vice President-Chief Information Officer of
Nationwide since June 2001. Prior to that time, Mr. Keller was Senior Vice
President of Bank One from January 1998 to June 2001, and held various
management positions with IBM from July 1982 to December 1997. Mr. Keller has
been with Nationwide for 1 year.
ROBERT A. OAKLEY has been Executive Vice President-Chief Financial Officer of
Nationwide since April 1995 and a Director of Nationwide since May 2001.
Previously, he was Senior Vice President-Chief Financial Officer of Nationwide
from October 1993 to April 1995. Prior to that time, Mr. Oakley held several
positions within Nationwide. Mr. Oakley has been with Nationwide for 26 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President-Chief Investment
Officer of Nationwide since August 1995 and a Director of Nationwide since May
2001. Previously, he was Senior Vice President-Fixed Income Investments of
Nationwide from March 1991 to August 1995. Prior to that time, Mr. Woodward held
several positions within Nationwide. Mr. Woodward has been with Nationwide for
37 years.
JOHN R. COOK, JR. has been Senior Vice President-Chief Communications Officer of
Nationwide since May 1997. Previously, Mr. Cook was Senior Vice President-Chief
Communications Officer of USAA from July 1989 to May 1997. Mr. Cook has been
with Nationwide for 5 years.
DAVID A. DIAMOND has been Senior Vice President-Corporate Strategy since
December 2000. Previously, he was Senior Vice President-Corporate Controller of
Nationwide from August 1999 to December 2000. He
42
was Vice President-Controller of Nationwide from October 1993 to August 1996.
Prior to that time, Mr. Diamond held several positions within Nationwide. Mr.
Diamond has been with Nationwide for 13 years.
PHILIP C. GATH has been Senior Vice President-Chief Actuary-Nationwide Financial
since May 1998. Previously, Mr. Gath was Vice President-Product
Manager-Individual Variable Annuity from July 1997 to May 1998, and Vice
President-Individual Life Actuary from August 1989 to July 1997. Prior to that
time, Mr. Gath held several positions within Nationwide. Mr. Gath has been with
Nationwide for 33 years.
PATRICIA R. HATLER has been Senior Vice President, General Counsel and Secretary
of Nationwide since April 2000, and was Senior Vice President and General
Counsel from July 1999 to April 2000. Prior to that time, she was General
Counsel and Corporate Secretary of Independence Blue Cross from 1983 to July
1999. Ms. Hatler has been with Nationwide for 3 years.
DAVID K. HOLLINGSWORTH has been Senior Vice President-President Nationwide
Insurance Sales since August 2001. Mr. Hollingsworth has been with Nationwide
for 12 years.
DAVID R. JAHN has been Senior Vice President-Product Management since November
2000. Mr. Jahn has been with Nationwide for 30 years.
RICHARD A. KARAS has been Senior Vice President-Sales-Financial Services of
Nationwide since March 1993. Previously, he was Vice President-Sales-Financial
Services of Nationwide from February 1989 to March 1993. Prior to that time, Mr.
Karas held several positions within Nationwide. Mr. Karas has been with
Nationwide for 37 years.
GREGORY S. LASHUTKA has been Senior Vice President-Corporate Relations of
Nationwide since January 2000. Prior to that time, he was Mayor of the City of
Columbus (Ohio) from January 1992 to December 1999. Mr. Lashutka has been with
Nationwide for 2 years.
EDWIN P. MCCAUSLAND, JR. has been Senior Vice President-Fixed Income Securities
since April 1998. Prior to joining Nationwide, he was Vice President-Managing
Director of Massachusetts Life Insurance Company. Mr. McCausland has been with
Nationwide for 5 years.
ROBERT H. MCNAGHTEN has been Senior Vice President-Real Estate Investments since
November 2001. Prior to joining Nationwide in 1987 he was Executive Vice
President with Buckeye Federal Savings & Loan. Mr. McNaghten has been with
Nationwide for 15 years.
MICHAEL D. MILLER has been Senior Vice President-NI Finance since May 2001.
Prior to joining Nationwide in 1985 he was P/C Accounting Manager with Celina
Group. Mr. Miller has been with Nationwide for 17 years.
BRIAN W. NOCCO has been Senior Vice President and Treasurer of Nationwide since
April 2001. Prior to that time, he was Executive Vice President of Imperial Bank
and subsidiaries from May 1998 to June 2001. He was Senior Vice President-Chief
Compliance Officer with The Chubb Corporation from 1994 to 1998 and Treasurer
and Vice President-Finance of Continental Bank Corporation from 1986 to 1994.
From 1974 to 1986 he held management positions in several companies. Mr. Nocco
has been with Nationwide for 1 year.
MARK D. PHELAN has been Senior Vice President-Technology and Operations of
Nationwide since December 2000. Prior to that time, he was Executive Vice
President of Check Free Corporation from October 1992 to November 1997, Sales
Vice President of AT&T Corporation from February 1982 to November 1992, and
Operations Manager with IBM Corporation from April 1977 to February 1982. Mr.
Phelan has been with Nationwide for 2 years.
DOUGLAS C. ROBINETTE has been Senior Vice President-Claims since November 2000.
Prior to joining Nationwide, he was a CPA with KPMG LLP. Mr. Robinette has been
with Nationwide for 15 years.
JOHN S. SKUBIK has been Senior Vice President-Strategic Initiatives since
November 2001. Prior to joining Nationwide in 2001, Mr. Skubik was an Executive
Vice President with Bank One.
MARK R. THRESHER has been Senior Vice President-Finance-Nationwide Financial
since May 1999. Previously, he was Vice President-Controller of Nationwide from
August 1996 to May 1999. He was Vice President and Treasurer of Nationwide from
June 1996 to August 1996. Prior to that time, Mr. Thresher served as a partner
with KPMG LLP from July 1988 to May 1996. Mr. Thresher has been with Nationwide
for 6 years.
RICHARD M. WAGGONER has been Senior Vice President-Operations since August 1999.
Mr. Waggoner has been with Nationwide for 18 years.
SUSAN A. WOLKEN has been Senior Vice President-Product Management and Nationwide
Financial Marketing since May 1999. Previously, she was Senior Vice
President-Life Company Operations of Nationwide from June 1997 to May 1999. She
was Senior Vice President-Enterprise Administration of Nationwide from
43
July 1996 to June 1997. Prior to that time, she was Senior Vice President-Human
Resources of Nationwide from April 1995 to July 1996, Vice President-Human
Resources of Nationwide from September 1993 to April 1995, and Vice
President-Individual Life and Health Operations from September 1993 to April
1995. Ms. Wolken has been with Nationwide for 27 years.
44
EXECUTIVE COMPENSATION
A. COMPENSATION
In accordance with the Cost Sharing Agreement, the salaries and
benefits of certain officers and employees of Nationwide Financial
Services, Inc. and its subsidiaries (hereafter the "Company" or NFS),
including some of the executive officers named in the table below, will
be paid by Nationwide Mutual Insurance Company and reimbursed in
accordance with the terms of the Cost Sharing Agreement.
The following table provides certain information concerning
compensation received by the Company's Chairman of the Board and Chief
Executive Officer and the four other most highly paid executive
officers for the fiscal years ended December 31, 2001, 2000 and 1999
for services rendered to the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
------------------------------------
PAYOUTS
ANNUAL COMPENSATION AWARD $
----------------------------------------- -------------------------- -------
NAME AND SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) SARS LTIP COMPENSATION
POSITION YEAR $ $ $ $ (#) PAYOUTS $
- ----------------- ------- ---------- ------------ -------------- ------------ ------------ ---------- -------------
W. G. Jurgensen: 2001 277,682 -- (2) 5 -- (6) 187,119(7) -- 27,186(9)
Chairman of the 2000 230,290 951,660(3) 5 700,000 210,000 -- 7,235
Board and Chief -- -- -- -- -- -- -- --
Executive Officer(1)
Joseph J. Gasper: 2001 718,269 246,500(2) 5 2,282,837(6) 77,643(7) -- 58,310(9)
President and Chief 2000 634,499 1,132,145(3) 5 1,077,500 76,100 -- 45,876
Operating Officer 1999 512,308 952,282(4) 5 -- 78,000(8) -- 21,491
Richard A. Karas: 2001 386,539 140,700(2) 5 399,656(6) 12,325(7) -- 21,1299(9)
Senior Vice 2000 339,231 317,791(3) 5 202,031 15,000 -- 23,108
President-- Sales--Financial 1999 307,308 330,021(4) 5 -- 34,4008 -- 13,177
Services
Mark D. Phelan: 2001 297,154 134,000(2) 5 -- 30,785(7) -- 7,072(9)
Senior Vice President-- 2000 -- -- -- -- 10,400 -- --
Technology & Operations 1999 -- -- -- -- 5,000 -- --
Mark R. Thresher: 2001 293,269 134,000(2) 5 399,656(6) 12,035(7) -- 17,030(9)
Senior Vice President-- 2000 262,622 274,142(3) 5 140,075 11,400 -- 15,806
Finance 1999 219,846 244,609(4) 5 61,695 19,250(8) -- 12,099
- --------------
(1) Figures in the Summary Compensation Table, other than under Restricted
Stock Awards, Securities Underlying Options/SARs and All Other
Compensation, represent compensation received by Mr. Jurgensen for his
services rendered to the Company and its subsidiaries as allocated pursuant
to the Cost Sharing Agreement. See "Certain Transactions."
(2) Represents the amount paid to executive officers named in the table above
under the SEIP in 2002 for the 2001 award year.
(3) Represents the amount paid to executive officers named in the table above
under the Performance Incentive Plan in 2001 for the 2000 award year.
(4) Represents the amount paid to executive officers named in the table above
under the Performance Incentive Plan in 2000 for the 1999 award year.
45
(5) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(6) Valued at fair market value on the date of grant. Restricted stock granted
in 2001 will vest on February 6, 2004. Annual grants under the NFS LTEP in
2001 were given to all named executive officers in the table above. Such
awards were made in the form of restricted stock and/or stock options and
the combination varied by individual. The following is the aggregate number
and value of restricted stock held at the end of the 2001 fiscal year for:
Mr. Jurgensen--25,000 shares at a value of $1,036,500; Mr. Gasper--93,550
shares at a value of $3,878,583; Mr. Karas--16,875 shares at a value of
$699,638; Mr. Thresher--14,575 shares at a value of $604,280.
(7) Totals include options received in 2002 in lieu of all or a portion of the
SEIP cash award for the 2001 award year. The Compensation Committee chose
to deliver a portion of the short term cash awards as long term awards of
stock options that are reported in this column. These options were
exercisable on the date of grant. The amount delivered was as follows: Mr.
Jurgensen -- 48,719 stock options, Mr. Gasper -- 41,943 stock options, Mr.
Karas -- 6,075 stock options, Mr. Phelan -- 5,785 stock options and Mr.
Thresher -- 5,785 stock options.
(8) Mr. Gasper's options include 2,500 Gartmore Global Investments, Inc. ("GGI"
(f/k/a Villanova Capital, Inc., a subsidiary of the Company)), options; Mr.
Karas' options include 2,000 GGI options; and Mr. Thresher's options
include 2,000 GGI options.
(9) Represents contributions made or credited by the Company for 2001 under the
Nationwide Savings Plan and the Nationwide Supplemental Defined
Contribution Plan. The following are the amounts for the Nationwide Savings
Plan and the Nationwide Supplemental Defined Contribution Plan: Mr.
Jurgensen-- $1,571 for the Nationwide Savings Plan and $25,615 for the
Nationwide Supplemental Defined Contribution Plan; Mr. Gasper-- $5,100 for
the Nationwide Savings Plan and $53,210 for the Nationwide Supplemental
Defined Contribution Plan; Mr. Karas-- $5,100 for the Nationwide Savings
Plan and $16,029 for the Nationwide Supplemental Defined Contribution Plan;
Mr. Phelan $2,414 for the Nationwide Savings Plan and $4,658 for the
Nationwide Supplemental Defined Contribution Plan; and Mr. Thresher--
$5,100 for the Nationwide Savings Plan and $11,930 for the Nationwide
Supplemental Defined Contribution Plan.
B. PERFORMANCE INCENTIVE PLAN
Nationwide maintains the Performance Incentive Plan ("PIP"), first
implemented in 1998. Under the PIP, annual payments are made to the
executive officers of the Company named in the Summary Compensation
Table. Beginning in 2001, the executive officers named in the Summary
Compensation Table no longer participated in PIP as it relates to
services rendered to the Company. The Company's performance measures are
based on a broad series of key financial results, financial and
operational comparison to external peer comparators, the extent of
accomplishment of strategic initiatives, and other factors and results
impacting organizational performance, and further based upon individual
employee performance. Under the PIP, the participant is granted a target
incentive amount that represents a percentage (from 4.5% to 150%
depending on the participant's position within the participating
company) of the participant's base salary. The actual amount received by
the participant under the PIP will range from zero to no maximum factor
of the participant's base salary, depending solely on the achievement of
the performance measures.
C. SENIOR EXECUTIVE INCENTIVE PLAN
The SEIP, established in 2001, is maintained by the Company for the
benefit of its senior officers. Pursuant to the SEIP, annual incentive
compensation awards may be granted to the executive officers of the
Company named in the Summary Compensation Table. Senior officers include
the Chairman, Chief Executive Officer ("CEO"), President, Executive Vice
Presidents and Senior Vice Presidents of the Company. Participants are
selected annually by the Compensation Committee of the Company's Board
of Directors, which will at all times be comprised of at least 2
directors who are "outside directors" for purposes of IRC Section
162(m). Awards under the SEIP are based on the level of achievement with
respect to performance goals established by the Compensation Committee
during the first quarter of each calendar year, and may be based on
criteria including, but not
46
limited to, return on equity, operating earnings per share, stock
performance, revenue and/or sales and expense levels. The Compensation
Committee will establish minimum, target and maximum levels of
performance. No payments will be made with respect to performance goals
if the minimum level of performance is not achieved and maximum
performance will result in payment at 250% of the target level payment
established for the award. The maximum possible payment to any
participant who is a covered employee under the SEIP in any year is $5
million.
D. NATIONWIDE ECONOMIC VALUE INCENTIVE PLAN
Nationwide established the Nationwide Economic Value Incentive Plan (the
"NEV Plan") in 2001 to encourage the senior officers of Nationwide and
the Company to increase their focus on financial and growth strategies
that enhance the overall economic value of the enterprise and transcend
specific business/staff units. Under the NEV Plan, which is administered
by the Nationwide Mutual Human Resources Committee and the CEO, the
executive officers of the Company named in the Summary Compensation
Table are eligible to receive annual awards based on the sustained
achievement of measures tied to the overall economic value of the
enterprise and the performance of the participant. Under the NEV Plan,
the participants are granted a target incentive amount at the beginning
of each year that represents a percentage of the participant's base
salary range midpoint or a specific dollar amount. At the end of each
year, the actual Nationwide Economic Value ("NEV"), determined based on
the criteria established in advance, is compared to the target NEV level
established for the year, and an initial annual award level is
determined for each participant. One key component in determining NEV
and awards granted under the NEV Plan is the total market capitalization
of NFS' stock. The CEO may then adjust 25% of each participant's initial
annual award level based on his evaluation of the participant's
performance. The result is the participant's final annual award amount,
which has no minimum or maximum value and can be positive or negative.
Annual award amounts for each participant, whether positive or negative,
will be credited to each participant's account ("NEV Plan Account").
Following the determination of a participant's annual award amount and
its credit to the NEV Plan Account, one third of any positive balance
maintained in the participant's NEV Plan Account will be credited to a
deferred compensation account maintained for the participant. The
participant is eligible to receive distributions from the deferred
compensation account upon termination of employment. The remaining
two-thirds of any positive balance in a participant's NEV Plan Account,
or the entire negative balance, is retained as the initial balance in
that account for the following year. NEV Plan Account balances are
subject to increases or decreases depending on future annual award
amounts.
E. DEFERRED COMPENSATION PROGRAM
Nationwide maintains a deferred compensation program called the
Nationwide Individual Deferred Compensation Plan under which eligible
elected officers of participating Nationwide companies, including the
Company, may elect to defer payment of compensation otherwise payable to
them. Eligible officers of the Company may enter into deferral
agreements in which they may annually elect to defer a portion of their
salary or incentive compensation earned during the following year or
performance cycle. Elections are effective prospectively. Amounts
deferred under the Nationwide Individual Deferred Compensation Plan are
generally payable in annual installments beginning in January of the
calendar year following the calendar year in which the officer
terminates employment or after the expiration of the deferral period
elected by the participant. Accounts under the Nationwide Individual
Deferred Compensation Plan are credited with deferrals and earnings
based on the net investment return on the participants' choice of
investment measures offered under the Nationwide Individual Deferred
Compensation Plan.
F. SAVINGS PLAN
Nationwide maintains the Nationwide Savings Plan, a qualified
profit-sharing plan including a qualified cash or deferred arrangement
covering eligible employees of participating companies. Under the
Nationwide Savings Plan, executive officers of the Company named in the
Summary Compensation Table and other participants who are not residents
of Puerto Rico may elect to
47
contribute between 1% to 22% of their compensation to accounts
established on their behalf under the Nationwide Savings Plan.
Participant contributions are in the form of voluntary, pre-tax salary
reductions. Participants who are residents of Puerto Rico may make
contributions on an after-tax basis. The participating Nationwide
companies are obligated to make matching employer contributions, for the
benefit of their participating employees, at the rate of 70% of the
first 2% of compensation deferred or contributed to the Nationwide
Savings Plan by each employee, and 40% of the next 4% of compensation
deferred or contributed by each employee to the Nationwide Savings Plan.
All amounts contributed to the Nationwide Savings Plan are held in a
separate account for each participant and are invested in one or more
funds made available under the Nationwide Savings Plan, as selected by
the participant. Normally, a participant receives the value of his or
her account upon termination of employment, although a participant may
withdraw all or a part of the amounts credited to his or her account
prior to termination, such as upon attainment of age 59 1/2. Under the
Nationwide Savings Plan, a participant is immediately vested in all
amounts credited to his or her account as a result of salary deferrals
(and earnings on those deferrals) or after-tax contributions (and
earnings on those contributions), as applicable. A participant is vested
pro rata in amounts attributable to employer matching contributions (and
earnings on those contributions) over a period of five years.
G. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
Nationwide maintains an unfunded, nonqualified defined contribution
supplemental benefit plan, the Nationwide Supplemental Defined
Contribution Plan, which provides benefits equal to employer matching
contributions that would have been made under the Savings Plan for the
participants in the absence of the limitation on compensation that can
be considered, found in Section 401(a)(17) of the IRC, and IRC Section
402(g) limitation on amounts that can be deferred under the Savings
Plan, reduced by actual employer matching contributions made to the
Savings Plan. Only elected officers of Nationwide, including officers of
the Company, earning in excess of the limit set forth in IRC Section
401(a)(17) annually are eligible to participate in the Nationwide
Supplemental Defined Contribution Plan. Benefits under the Nationwide
Supplemental Defined Contribution Plan vest pro rata over a period of
five years of participation in the plan.
H. AMENDED AND RESTATED NATIONWIDE FINANCIAL SERVICES, INC. 1996
LONG-TERM EQUITY COMPENSATION PLAN
The purposes of the NFS LTEP is to benefit the shareholders of the
Company by encouraging high levels of performance by selected officers,
directors and employees of the Company and certain of its affiliated
companies, attracting and retaining the services of such individuals and
aligning the interests of such individuals with those of the
shareholders.
The NFS LTEP provides for the grant of any or all of the following,
types of awards:
(i) stock options, including incentive stock options and nonqualified
stock options, for shares of Class A Common Stock;
(ii) stock appreciation rights ("SARs"), either in tandem with stock
options or freestanding;
(iii) restricted stock; and
(iv) performance shares and awards.
Any stock option granted in the form of an incentive stock option must
satisfy the applicable requirements of Section 422 of the IRC. Awards
may be made to the same person on more than one occasion and may be
granted singularly, in combination or in tandem as determined by the
Compensation Committee.
The NFS LTEP provides the Compensation Committee, which administers the
NFS LTEP, flexibility in creating the terms and restrictions deemed
appropriate for particular awards as facts and circumstances warrant.
The LTEP is intended to constitute a nonqualified, unfunded, unsecured
plan for incentive and deferred compensation and is not intended to be
subject to any requirements of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). Certain awards under the NFS LTEP are
intended to qualify as "performance-based compensation" for purposes of
Section 162(m) of the IRC.
48
I. EQUITY COMPENSATION PLAN OF NFS INFORMATION(1)
(c)
(a) NUMBER OF CLASS A COMMON
NUMBER OF CLASS A COMMON (b) SHARES REMAINING AVAILABLE
SHARES TO BE ISSUED UPON WEIGHTED-AVERAGE FOR FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS AND OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
- --------------- ---------------------------- ------------------------- -----------------------------
Equity compensation plans approved by 3,810,859 $37.32 1,760,588(2 and 3)
shareholders......................
Equity compensation plans not
approved by shareholders.......... -- -- --
Total........................... 3,810,859 $37.32 1,760,588
- --------------
(1) Reported data is as of December 31, 2001.
(2) Securities remaining for issuance under the NFS LTEP, including 101,683
share grants that have been cancelled and are available for reissuance.
Please see above for a more complete description of the plan.
(3) The Company uses treasury stock to compensate non-employee directors
pursuant to the Nationwide Financial Services, Inc. Amended and Restated
Stock Retainer Plan for Non-Employee Directors (the "Plan"). The Plan
provides for the payment of one-half of each non-employee director's annual
retainer in the form of NFS Class A Common Stock. The Plan does not provide
for a maximum number of shares to be granted.
49
J. OPTION/SAR GRANTS IN THE LAST FICSAL YEAR FOR NFS
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE PRICE GRANT DATE
GRANTED EMPLOYEES PER SHARE EXPIRATION PRESENT VALUE(3)
NAME # IN FISCAL YEAR $ DATE $
- ------ -------------- ---------------- ------------- ---------------------- ----------------
W. G. Jurgensen....................... 138,400(1) 11.6% 42.63 February 6, 2011 2,487,048
48,719(2) 4.1% 43.55 March 8, 2012 869,147
Joseph J. Gasper...................... 35,700(1) 3.0% 42.63 February 6, 2011 641,529
41,943(2) 3.5% 40.84 February 26, 2012 694,157
Richard A. Karas...................... 6,250(1) 0.5% 42.63 February 6, 2011 112,313
6,075(2) 0.5% 40.84 February 26, 2012 100,541
Mark D. Phelan........................ 25,000(1) 2.1% 42.63 February 6, 2011 449,250
5,785(2) 0.5% 40.84 February 26, 2012 95,742
Mark R. Thresher...................... 6,250(1) 0.5% 42.63 February 6, 2011 112,313
5,785(2) 0.5% 40.84 February 26, 2012 95,742
- --------------
(1) One-third of the options granted become exercisable on each of the first
three anniversary dates of the grant. Options may be accelerated upon a
change of control or certain other events of termination of employment.
(2) Represents option grants awarded in 2002 in lieu of all or a portion of the
SEIP cash awards for the 2001 award year. These options were exercisable on
the date of grant.
(3) The estimated grant date present value dollar amounts in this column are the
result of calculations made using the Black-Scholes model, a theoretical
method for estimating the present value of stock options based on a complex
set of assumptions. The material assumptions and adjustments incorporated in
the Black-Scholes model used to estimate the value of these options include
the following:
- An exercise price on the options equal to the fair market value of the
underlying stock on the date of the grant, as listed in the table.
- The rate available at the time the grant was made on zero-coupon U.S.
Government issues with a remaining term equal to the expected life. The
risk-free rate used for the February 6, 2001 grant was 4.89%, 4.30% for
the February 26, 2002 grant and 4.43% for the March 8, 2002 grant.
- Dividends at a rate of $0.48 per share for the February 6, 2001,
February 26, 2002 and March 8, 2002 grants, representing the
annualized dividends paid on shares of common stock at the date of
grant.
- An option term before exercise of five years, which represents the
typical period that options are held prior to exercise.
- Volatility of the stock price of 45.33% for the February 6, 2001
grant, 44.48% for the February 26, 2002 grant and 44.44% for the March
8, 2002 grant, reflecting the average daily stock price volatility
since the Company's initial public offering on March 6, 1997.
- No adjustments were made for vesting requirements, non-transferability
or risk of forfeiture.
50
K. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES FOR NFS(1)
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED VALUE OPTIONS/SARS AT FY-END EXERCISABLE/
ON EXERCISE REALIZED FY-END (#) UNEXERCISABLE
NAME # $ EXERCISABLE/UNEXERCISABLE $
- -------- ------------ ------------ ------------------------- ---------------------
W. G. Jurgensen.................................. -- -- 62,000/286,400 834,520/1,992,080
Joseph J. Gasper................................. -- -- 145,700/111,600 1,045,162/764,055
Richard A. Karas................................. -- -- 56,600/27,050 2,147,974/153,144
Mark D. Phelan................................... -- -- 9,300/33,600 53,531/100,684
Mark R. Thresher................................. 3,000 68,040 25,300/19,600 89,876/116,791
(1) Totals do not include options received in 2002 in lieu of all or a portion
of the SEIP cash awards for 2001 award year.
L. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES FOR GGI(1)
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED VALUE OPTIONS AT FY-END EXERCISABLE/
ON EXERCISE REALIZED FY-END (#) UNEXERCISABLE
NAME # $ EXERCISABLE/UNEXERCISABLE $
- -------- ------------ ------------ ------------------------- ---------------------
W. G. Jurgensen.................................. -- -- -- /-- -- /--
Joseph J. Gasper................................. -- -- 500/2,000 12,500/50,000
Richard A. Karas................................. -- -- 400/1,600 10,000/40,000
Mark D. Phelan................................... -- -- -- /-- -- /--
Mark R. Thresher................................. -- -- 400/1,600 10,000/40,000
- --------------
(1) GGI is a subsidiary of the Company.
M. PENSION PLANS
(i) Retirement Plan
Nationwide maintains a qualified defined-benefit plan called the
Nationwide Retirement Plan. In general, the executive officers named
in the Summary Compensation Table and other participants of NFS will
receive an annual retirement benefit under the Nationwide Retirement
Plan equal to the sum of:
- 1.25% of the participant's Final Average Compensation (defined
below) times years of service (to a maximum of 35 years); and
- 0.50% of the participant's Final Average Compensation (defined
below) in excess of Social Security Covered Compensation (defined
below) times years of service (to a maximum of 35 years).
The definition of Final Average Compensation changed on January 1,
1996. For service earned prior to that date, Final Average
Compensation is the average of the highest three consecutive covered
compensation amounts of the participant in the participant's last 10
years of service. For service earned since 1995, Final Average
Compensation is the average of the highest five consecutive covered
compensation amounts of the participant in the participant's last 10
years of service. Covered compensation, for purposes of determining
Final Average Compensation under either method, is calculated on a
calendar-year basis and includes compensation from any Nationwide
company. Social Security
51
Covered Compensation means the average of the Social Security wage
bases in effect during the 35-year period ending with the last day of
the year the participant attains Social Security retirement age. The
portion of a participant's benefit attributable to years of service
with certain Nationwide companies credited prior to 1996 is also
subject to post-retirement increases following the commencement of
benefits or the participant's attainment of age 65, whichever is
later.
With respect to Messrs. Karas, Gasper, Phelan and Thresher, because
their compensation is allocated solely to the Company and its
subsidiaries, covered compensation includes the compensation listed
under the headings Salary and Bonus shown in the Summary Compensation
Table. Covered compensation for Mr. Jurgensen includes the amount set
forth under the headings Salary and Bonus shown in the Summary
Compensation Table and additional compensation amounts received for
services rendered to other Nationwide companies.
A participant becomes fully vested after the completion of five years
of vesting service. The Nationwide Retirement Plan generally provides
for payments to or on behalf of each vested participant upon such
participant's retirement on his or her normal retirement date or
later. However, the Nationwide Retirement Plan does provide for
payment of early retirement benefits on a reduced basis commencing at
age 55 for those participants with 15 or more years of vesting service
or at age 62 for those with five or more years of vesting service. The
normal retirement date under the Retirement Plan is the later of the
date the participant attains age 65 or completes five years of vesting
service. Death benefits are payable to:
- a participant's spouse; or
- under certain circumstances, the named beneficiary of a
participant who dies while an employee or with a vested benefit
under the Nationwide Retirement Plan.
The Nationwide Retirement Plan also provides for the funding of
retiree medical benefits under Section 401(h) of the IRC.
(ii) Excess and Supplemental Plans
Nationwide maintains an unfunded, nonqualified defined-benefit
excess benefit plan called the Nationwide Excess Benefit Plan.
Nationwide also maintains an unfunded, nonqualified
defined-benefit supplemental benefit plan called the Nationwide
Supplemental Retirement Plan. Any participant of Nationwide or
the Company, whose benefits are limited under the Retirement Plan
by reason of limitations under IRC Section 415 on the maximum
benefit that may be paid under the Retirement Plan will receive,
under the Nationwide Excess Benefit Plan, that portion of the
benefit that he or she would have been entitled to receive under
the Retirement Plan in the absence of such limitations. Officers
who earn in excess of the limit on compensation set forth in IRC
Section 401(a)(17) annually, have at least five years of vesting
service, and whose benefits under the Retirement Plan are limited
by reason of certain other limitations under the IRC, may receive
benefits under the Nationwide Supplemental Retirement Plan.
Benefits under the Nationwide Supplemental Retirement Plan will
be:
- 1.25% of the participant's Final Average Compensation (as
defined previously) times years of service (up to a maximum
of 40 years); plus
- 0.75% of the participant's Final Average Compensation (as
defined previously) in excess of Social Security Covered
Compensation (as defined previously) times years of service
(up to a maximum of 40 years); less
- benefits accrued under the Nationwide Retirement Plan and
the Nationwide Excess Benefit Plan.
For individuals participating in the Nationwide Supplemental
Retirement Plan on January 1, 1999, benefits vest at the same
time as benefits vest under the Nationwide Retirement Plan.
Benefits under the Nationwide Excess Benefit Plan vest at the
same time as benefits vest under the Nationwide Retirement Plan.
Benefits for all other participants in the Nationwide
Supplemental Retirement Plan vest over a
52
period of five years of participation in that plan.
The chart below indicates the estimated maximum annual retirement
benefits that a hypothetical participant would be entitled to
receive under the Nationwide Retirement Plan, including payments
made under the Nationwide Excess Benefit Plan and Nationwide
Supplemental Retirement Plan, computed on a straight-life annuity
basis, if retirement occurred at age 65 and the number of
credited years of service and Final Average Compensation (as
defined previously) equaled the amounts indicated. For purposes
of the chart, it is assumed that the Final Average Compensation
is the same whether measured over the three-year averaging period
that applies to service accumulated prior to 1996 or the
five-year period that applies to service accumulated after 1995.
In actual operation, the total benefit received under the
Nationwide Retirement Plan (including payments made under the
Nationwide Excess Benefit Plan and Nationwide Supplemental
Retirement Plan) would be the total of the benefit determined
based on years of service earned under each method.
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------------------------------------------------
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
----------------- --------------- --------------- -------------- ----------------- ---------------
$ 125,000 $30,021 $40,029 $50,036 $ 60,043 $ 70,050
150,000 36,584 48,779 60,973 73,168 85,363
175,000 48,313 64,418 80,522 96,627 112,731
200,000 55,813 74,418 93,022 111,627 130,231
225,000 63,313 84,418 105,522 126,627 147,731
250,000 70,813 94,418 118,022 141,627 165,231
300,000 85,813 114,418 143,022 171,627 200,231
350,000 100,813 134,418 168,022 201,627 235,231
400,000 115,813 154,418 193,022 231,627 270,231
450,000 130,813 174,418 218,022 261,627 305,231
500,000 145,813 194,418 243,022 291,627 340,231
700,000 205,813 274,418 343,022 411,627 480,231
900,000 265,813 354,418 443,022 531,627 620,231
1,100,000 325,813 434,418 543,022 651,627 760,231
1,700,000 505,813 674,418 843,022 1,011,627 1,180,231
1,900,000 565,813 754,418 943,022 1,131,627 1,320,231
2,000,000 595,813 794,418 993,022 1,191,627 1,390,231
53
All executive officers named in the Summary Compensation Table have a
portion or all of their benefits calculated based on the post-1995
definition of Final Average Compensation. As of December 31, 1995, the
number of credited years of service under the Nationwide Retirement
Plan for Messrs. Gasper and Karas was 29.5 years and 31.5 years,
respectively. Messrs. Jurgensen, Phelan and Thresher had no credited
service under the Retirement Plan at that time. Messrs. Gasper and
Karas earned years of service in the years 1996 through 2001. Messrs.
Phelan and Thresher began participation in the Retirement Plan in 1999
and 1997, respectively. Mr. Jurgensen became eligible to participate in
the Retirement Plan in 2001, but is entitled, pursuant to an agreement
with Nationwide Mutual, to a retirement benefit of 4% of his highest
5-year average compensation for each full or partial year of service
with Nationwide, to a maximum of 16.25 years, if he completes at least
five years of service or becomes entitled to severance benefits under
the agreement. For purposes of such agreement, Mr. Jurgensen's highest
5-year average compensation is the average of his salary and annual
incentive compensation over the five-year period, or the period of his
employment by Nationwide, if shorter, that produces the highest
average. This benefit is reduced by the benefits received under the
Nationwide Retirement Plan, Nationwide Excess Benefit Plan and
Nationwide Supplemental Retirement Plan, as well as any benefit
received under any defined benefit pension plans maintained by Mr.
Jurgensen's prior employers, and will be paid by Nationwide Mutual (not
the Nationwide Retirement Plan). The benefit of each executive officer
named in the Summary Compensation Table for the years since 1995 and
all future years will be calculated under the 5-year definition of
Final Average Compensation. Covered compensation paid by the Company
for the fiscal year ended December 31, 2001, for Messrs. Jurgensen,
Gasper, Karas, Phelan and Thresher was $906,212; $1,943,683; $704,330;
$498,040; and $567,685, respectively.
11. COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
A. INTRODUCTION
The Company is 18.7% publicly owned. Nationwide Corporation, a
majority owned subsidiary of Nationwide Mutual, owns 81.3% of the
outstanding shares of the Company. Because Nationwide Mutual
establishes compensation practices throughout the Nationwide
organization, the Nationwide Mutual Human Resources Committee
established the base salary and NEV Plan components of 2001
compensation for the Company's executive officers. The Compensation
Committee made stock-based incentive grants under the NFS LTEP and
annual incentive grants and awards under the SEIP for the Company's
executive officers in 2001.
W. G. Jurgensen is the Company's Chairman of the Board and CEO as well
as CEO of Nationwide Mutual. Under the Cost Sharing Agreement,
compensation for Mr. Jurgensen is allocated among the companies in the
Nationwide organization for whom he provides services. The amounts are
paid by Nationwide Mutual and reimbursed by the other companies in
accordance with the terms of the Cost Sharing Agreement. The 2001
compensation for Mr. Jurgensen reported in the compensation tables in
this Proxy Statement and discussed in this report is the amount
allocated to the Company and its subsidiaries under the Cost Sharing
Agreement and is solely for services performed for the Company and its
subsidiaries. Compensation for Mr. Gasper is allocated entirely to the
Company for services performed for the Company and its subsidiaries.
Compensation for Messrs. Karas, Phelan and Thresher, as shown in the
Summary Compensation Table, was not allocated and is their aggregate
2001 compensation for services rendered to the Company and its
subsidiaries.
The Nationwide Mutual Human Resources Committee and the Compensation
Committee (collectively referred to herein as the "Committees") are
both comprised solely of non-employee directors.
B. COMPENSATION PHILOSOPHY AND OBJECTIVES
The Committees believe that the compensation program for the Company's
executive officers should support the Company's vision and business
strategies. In addition, compensation should be determined within a
competitive framework based on the overall financial results of NFS,
business unit results, teamwork, and individual contributions that help
build value for the Company's shareholders. The primary objectives of
the compensation program are to:
54
- Provide a direct link between pay and performance;
- Allocate a larger percentage of executive compensation to pay
that is conditional or contingent in order to positively
influence behavior and support accountability;
- Attract, retain and motivate top-caliber employees required for
new business directions;
- Offer total compensation opportunities that are fully competitive
with the appropriate external markets in design and pay level;
and
- Emphasize the need to focus on shareholder value, in addition to
providing competitive value to customers.
As part of the overall compensation philosophy, the Committees have
determined that total compensation and each of the elements that
comprise total compensation (base salary, annual incentives, long-term
incentives) should be targeted at the 50th percentile of the
competitive market. The introduction of the NEV Plan in 2001 provides
additional long-term incentive target opportunity up to the 60th
percentile of the competitive market when enterprise-wide efforts
positively influence overall financial and growth strategies. The
Committees believe that differences in individual performance should
result in significantly different levels of compensation. Therefore,
the pay that an individual receives may be higher or lower than an
individual's targeted pay opportunities, depending on individual
performance. The Compensation Committee may exercise discretion to
adjust incentive compensation pay; however, SEIP awards are only
subject to downward adjustment based on the Compensation Committee's
exercise of discretion.
Competitive market data is provided to the Committees by independent
compensation consultants. This data compares the Company's and
Nationwide's compensation practices to various groups of comparable
companies. These companies compete with the Company for customers,
capital and employees, and are comparable to the Company in size, scope
and business focus. This group includes both multi-line insurers and
diversified financial organizations.
The companies chosen for the compensation comparison group are not
necessarily the same companies that comprise the peer group in the
Performance Graph included in this Proxy Statement. The compensation
comparison group includes more companies than those in the peer group
because it provides the Committees a broader database for comparison
purposes.
C. ELEMENTS OF 2001 EXECUTIVE COMPENSATION
The key elements of the Company's executive compensation program are
base salary, annual incentives and long-term incentives. The following
discussion relates to the Company's executive officers other than Mr.
Jurgensen, whose compensation is discussed separately in the section
below titled Compensation of the Chief Executive Officer.
(i) Base Salaries
Base salaries offer security to executives and allow the Company to
attract competent executive talent and maintain a stable management
team. They also allow executives to be rewarded for individual
performance and encourage the development of executives. Pay for
individual performance rewards executives for achieving goals that may
not be immediately evident in common financial measurements.
The Nationwide Mutual Human Resources Committee initially determines
base salaries for executive officers by evaluating the executives'
levels of responsibility, prior experience, breadth of knowledge,
internal equity and external pay practices.
In determining increases to base salaries for 2001, the Nationwide
Mutual Human Resources Committee considered relevant external market
data, as described above in Compensation Philosophy and Objectives.
However, increases to base salaries are driven primarily by individual
performance that is evaluated based on levels of individual
contribution to the Company and Nationwide. When evaluating individual
performance, the Nationwide Mutual Human Resources Committee
considered, among other things, the executive's:
- contribution towards financial results and strategic initiatives;
- efforts in promoting the values of the Company and Nationwide;
55
- continuing educational and management training;
- product innovation;
- ability to develop relationships with customers, distributors and
employees; and
- leadership abilities.
No specific formula is used in evaluating individual performance, and
the weighting given to each factor with respect to each executive
officer is within the individual discretion and judgment of each member
of the Nationwide Mutual Human Resources Committee. Base salaries for
the executive officers, including promotional increases and increases
influenced by the activity of competing companies, increased by an
average of 8.3% in 2001. This rate of increase enables the Company to
maintain market competitive salaries. Executive officer salaries were
established at a level that is consistent with the goals stated in the
section titled Compensation Philosophy and Objectives.
(ii) Annual Incentive Compensation
The SEIP promotes the pay-for-performance philosophy of the
Compensation Committee by providing NFS executives with direct
financial rewards in the form of annual cash incentives. Awards for
2001 were based on return on equity, earnings and revenue growth and
other key financial measures, comparing the Company's financial and
operational performance to that of external peer competitors, and other
factors and results impacting performance for the Company, including
individual employee performance.
Each year, the Compensation Committee establishes specific NFS
performance measures used for the annual incentive compensation plan.
Participants are provided a target incentive award opportunity that
represents a percentage of their base salary. For 2001, aggregate
individual targets for the executive officers named in the Summary
Compensation Table other than the Chief Executive Officer ranged from
65% to 120% of base salary. Individual payouts under the SEIP annual
incentive plan may range from zero to 2.5 times the individual's target
incentive award opportunity. For 2001, moderate achievement of NFS
financial and peer performance measures of the Company resulted in a
cash payout of 28.6% of target for Mr. Gasper and an average of 65.2%
of target for Messrs. Karas, Phelan and Thresher. In addition, the
Committee awarded each executive officer a stock option grant in lieu
of a portion of their cash incentive award under the SEIP for 2001.
These amounts are reflected in the Bonus and Securities Underlying
Options/SARs columns in the Summary Compensation Table.
(iii) Long-Term Incentive Compensation
In keeping with the philosophy of the Committees to provide a total
compensation package that favors conditional or contingent components
of pay, long-term incentives comprise a significant portion of an
executive's total compensation package. When determining long-term
incentive award sizes, the Committees consider the executives' level of
responsibility, position within the Company, prior experience,
historical award data, various performance criteria, and compensation
practices at comparable companies.
The Committees utilize the NFS LTEP and the NEV Plan, both described
below. These plans are designed to achieve a balance between market pay
orientation and alignment of NFS executives' interests with those of
shareholders.
Amended and Restated Nationwide Financial Services, Inc. 1996
Long-Term Equity Compensation Plan
The NFS LTEP authorizes grants of stock options, stock appreciation
rights, restricted stock, performance stock and performance awards. The
objectives of the NFS LTEP are to encourage high levels of performance
by selected officers, directors, and employees of the Company and
certain of its affiliates to attract and retain the services of such
individuals, and to align the interests of such individuals with those
of the shareholders.
During February 2001, the Compensation Committee made grants to NFS'
executive officers and others under the NFS LTEP. Award sizes were
determined based on competitive equity grant practices using the median
practices at comparable companies and the individual's impact on the
Company's performance and were determined consistent with the goals
stated in Compensation Philosophy and Objectives. The grants were
awarded in the form of nonqualified stock options that have an exercise
price equal to the fair market value of the Company's Class A Common
Stock on the date of the option grant, as well as restricted stock
grants. The options
56
become exercisable in equal installments over a three-year term, and
expire ten years after the date of grant, and the restricted stock
vests at the end of a three-year period.
As referred to above in the section titled Annual Incentive
Compensation, during February and March 2002, the Compensation
Committee granted stock options to executive officers under the NFS
LTEP in lieu of a portion of their cash award earned under the SEIP for
2001. The stock options have an exercise price equal to the fair market
value of the Company's Class A Common Stock on the date of the grant.
The options become exercisable immediately upon grant, and expire ten
years after the date of grant.
Nationwide Economic Value Incentive Plan
The NEV Plan, which was implemented in 2001, authorizes grants of
target incentive award opportunities to encourage the growth of NEV for
the benefit of Nationwide as an organization. The objectives of the NEV
Plan are to reward execution of broad, enterprise-wide efforts at
increasing NEV by selected officers and directors of the Company and
certain of its affiliates, and to attract and retain the services of
key officers and directors. One key component in determining NEV and
awards granted under the NEV Plan is the total market capitalization of
NFS' stock.
During February 2001, the Nationwide Mutual Human Resources Committee
made grants to executive officers of NFS under the NEV Plan. Grant
sizes were determined based on competitive grant practices using the
60th percentile long-term incentive practices at comparable companies
and the individual's impact on the Company's performance. Determination
of grant size is consistent with the goals stated in Compensation
Philosophy and Objectives. Final awards are determined as a percent of
salary grade midpoint value, 2001 NEV Plan performance and the
discretionary evaluation by the CEO of an individual's performance
(applied to 25% of the initial award value determined by NEV Plan
performance). Final awards for a calendar year can be positive or
negative, and each participant's award will be added to his or her NEV
Plan Account balance from the previous year. Following the annual award
determination process, one third of any positive NEV Plan Account
balance for a participant will be credited to a deferred compensation
account until that participant's termination of employment. The
remaining two thirds, if a positive balance, or the entire NEV Plan
Account balance, if negative, will be subject to future NEV Plan
performance and the CEO's discretionary assessment of individual
performance.
For 2001, negative growth in NEV, linked partially to the decline in
the NFS stock value, resulted in negative final awards for executive
officers. These negative awards will create the initial NEV Plan
Account balance (since the plan was new for 2001) for each participant
to carry forward into 2002. Since NEV Plan Account balances are
negative, no deferred compensation account credits will occur for 2001,
and positive NEV Plan earnings in future years will need to first
offset the negative account balances.
D. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
W. G. Jurgensen served as the Company's Chairman of the Board and CEO,
as well as in the capacity of CEO for Nationwide Mutual. Except for
grants and awards made under the NFS LTEP and SEIP by the Compensation
Committee, the Nationwide Mutual Human Resources Committee established
all components of Mr. Jurgensen's compensation for 2001.
As discussed above in the Introduction, a portion of Mr. Jurgensen's
annual compensation is allocated to the Company for services rendered
to the Company, based on the time Mr. Jurgensen devotes to his
responsibilities with the Company. The compensation reported for Mr.
Jurgensen in the compensation tables and discussed in this report
represents amounts paid for Mr. Jurgensen's services as Chairman of the
Board and CEO of the Company and its subsidiaries during 2001.
Mr. Jurgensen's 2001 compensation was determined pursuant to the same
philosophy and objectives described earlier in this prospectus and used
for all executive officers. In determining the base salary compensation
of Mr. Jurgensen for 2001, the Nationwide Mutual Human Resources
Committee reviewed the strong financial results of the Company for
2000, Mr. Jurgensen's superior leadership of the Nationwide companies
during his tenure, his extensive experience in the industry, and his
successful efforts in the Company. The portion of Mr. Jurgensen's base
salary compensation allocated to the Company
57
totaled $277,682 in 2001, an increase of 20.6% over 2000, primarily
related to Mr. Jurgensen's full year of employment in 2001 as compared
to partial-year employment in 2000. This increase also reflects a 34%
decrease in the cost allocation, to more accurately reflect the portion
of Mr. Jurgensen's time spent on Company matters in 2001. In 2001, Mr.
Jurgensen's annual base salary rate was increased 8.2%. This salary
positioned Mr. Jurgensen's base salary compensation at approximately
the 50th percentile of the comparable companies.
The portion of Mr. Jurgensen's annual incentive award allocated to the
Company and paid as cash in 2001 under the SEIP was $0. However, the
Compensation Committee awarded Mr. Jurgensen a stock option grant in
lieu of the value of his cash incentive award under the SEIP for 2001.
This amount is reflected in the Securities Underlying Options/SARs
columns in the Summary Compensation Table. In determining the annual
incentive award of Mr. Jurgensen for 2001, the Compensation Committee
reviewed the moderate financial results of the Company for 2001, as
well as the goal of increased executive officer stock ownership. The
financial results were reviewed based on the level of achievement of
specified NFS financial and operational goals as assessed by the
Compensation Committee and Board in their annual incentive performance
evaluation of Mr. Jurgensen.
During February 2001, pursuant to the NFS LTEP, the Compensation
Committee granted Mr. Jurgensen options to purchase 138,400 shares of
the Company's Class A Common Stock. The Compensation Committee took
into account Mr. Jurgensen's role in the continued strategic
positioning of NFS. In addition, this grant reflects the competitive
level of long-term compensation for chief executive officers of major
diversified insurance and financial services organizations of similar
size and scope to that of the Company. The award of the Compensation
Committee reflected the Company's desire to have top officers build a
significant personal level of stock ownership in the Company, so as to
better align their interests with those of other shareholders.
E. POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the IRC provides that executive compensation in
excess of $1 million paid to a "covered employee," as that term is
defined in that section, in any calendar year is not deductible for
purposes of corporate income taxes unless it is performance-based
compensation and is paid pursuant to a plan meeting certain
requirements of the IRC. The Committees will continue to rely on
performance-based compensation programs. Programs will be designed to
meet, in the best possible manner, future corporate business
objectives. Certain awards under both the SEIP and NFS LTEP are
intended to qualify as "performance-based compensation" for the
purposes of Section 162(m). However, the Committees may award
compensation that is not fully deductible if the Committees determine
that such an award is consistent with their philosophy and in the best
interests of the Company and its shareholders.
(i) Nationwide Financial Services, Inc.'s Compensation Committee
David O. Miller, Chairman
James G. Brocksmith, Jr.
Charles L. Fuellgraf, Jr.
Donald L. McWhorter
(ii) Nationwide Life Insurance Company Compensation Committee
Willard J. Engel, Chairman
Timothy J. Corcoran
Yvonne M. Curl
Ralph M. Paige
Arden L. Shisler
Robert L. Stewart
58
F. NFS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of:
(i) each person who is known by the Company to be the beneficial
owner of more than five percent of either class of common
stock,
(ii) each director and nominee for director,
(iii) each of the executive officers named in the Summary
Compensation Table, and
(iv) all of the directors and executive officers of the Company as
a group.
The Class B Common Stock is convertible into Class A Common Stock at
any time by the holder on the basis of one share of Class A Common
Stock for each share of Class B Common Stock converted.
CLASS A COMMON STOCK
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ---------------------- -------------------- ----------
Neuberger Berman, Inc.(1).................... 2,062,300 8.54%
605 Third Avenue
New York, NY 10158
INVESCO Funds Group, Inc.(2)................. 1,758,700 7.28%
4350 South Monaco Street
Denver, CO 80237
Goldman Sachs Asset Management(3)............ 1,418,340 5.87%
32 Old Slip
New York, NY 10005
- --------------
(1) Based on a Schedule 13G dated February 11, 2002, Neuberger Berman, Inc.
reported shared voting power with respect to 1,572,500 shares and
shared dispositive power with respect to 2,062,300 shares.
(2) Based on a Schedule 13G dated January 31, 2002, INVESCO Funds Group,
Inc. reported sole voting power and sole dispositive power with respect
to 1,758,700 shares.
(3) Based on a Schedule 13G dated February 14, 2002, Goldman Sachs Asset
Management reported sole voting power with respect to 1,354,440 shares
and sole dispositive power with respect to 1,418,340 shares.
59
The table below sets forth the number of shares of stock of the Company owned
beneficially as of March 11, 2002, by the directors, each nominee for director,
each executive officer listed in the Summary Compensation Table herein and all
directors and executive officers of the Company as a group.
SECURITY OWNERSHIP
AMOUNT AND OPTIONS
NATURE OF XERCISABLE
NAME OF BENEFICIAL WITHIN 60
BENEFICIAL OWNER OWNERSHIP (1 AND 2) DAYS
- ----------------- ------------------- -----------
Joseph A. Alutto5................................................................... -- --
James G. Brocksmith, Jr............................................................. 6,672 2,333
Charles L. Fuellgraf, Jr............................................................ 20,796(3) 4,333
Joseph J. Gasper.................................................................... 353,099(4) 241,576
Henry S. Holloway................................................................... 10,751(4) 4,333
W. G. Jurgensen..................................................................... 181,852 156,852
Richard A. Karas.................................................................... 105,070 78,091
Lydia M. Marshall................................................................... 8,426 2,333
Donald L. McWhorter................................................................. 7,751 2,333
David O. Miller..................................................................... 9,735 4,333
James F. Patterson.................................................................. 9,544(4) 4,333
Mark D. Phelan...................................................................... 28,551 28,551
Gerald D. Prothro................................................................... 6,751 2,333
Arden L. Shisler.................................................................... 10,751 4,333
Alex Shumate5....................................................................... -- --
Mark R. Thresher.................................................................... 63,752(4) 40,718
Directors and Executive Officers as a group (Total of 31)........................... 1,648,695 1,247,613
- --------------
(1) The shares of the Company's Class A Common Stock beneficially owned by
each person named above do not exceed one percent of the outstanding
shares of Class A Common Stock as of March 11, 2002, except the shares
beneficially owned by Mr. Gasper and the group of directors and
executive officers as a whole which represents 1.3% and 6.8%,
respectively.
(2) Total includes options exercisable within 60 days of March 11, 2002.
(3) Total includes 2,000 shares held by spouse and 2,000 shares held in a
limited partnership.
(4) Total includes shares jointly owned with spouse for the following
persons: Mr. Gasper-- 17,972 shares; Mr. Holloway-- 2,000 shares; Mr.
Patterson-- 1,000 shares; and Mr. Thresher-- 8,450 shares.
(5) A new nominee seeking a first term on the Board of Directors.
CLASS B COMMON STOCK
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
----------------------------------
Nationwide Corporation....................................................................... 104,745,000 100 %
One Nationwide Plaza
Columbus, Ohio 43215
The Class B Common Stock is convertible into Class A Common Stock at any time by
the holder on the basis of one share of Class A Common Stock for each share of
Class B Common Stock converted.
60
G. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
(i) Intercompany Agreement
The Company, Nationwide Mutual and Nationwide Corporation entered
into an Intercompany Agreement, certain provisions of which are
summarized below (the "Intercompany Agreement"). As used herein,
"Nationwide Mutual" means Nationwide Mutual collectively with its
subsidiaries and affiliates (other than the Company and its
subsidiaries).
Nationwide Mutual Consent to Certain Events. Under the
Intercompany Agreement, until Nationwide Mutual ceases to control
at least 50% of the combined voting power of the outstanding
voting stock of the Company, the Company must obtain the prior
written consent of Nationwide Mutual for:
(a) any consolidation or merger of the Company or any of its
subsidiaries with any person (other than with a
wholly-owned subsidiary);
(b) any sale, lease, exchange or other disposition or
acquisition of assets by the Company or any of its
subsidiaries (other than transactions to which the
Company and its subsidiaries are the only parties), or
any series of related dispositions or acquisitions
involving consideration in excess of $250 million;
(c) any change in the authorized capital stock of the
Company or the creation of any additional class or
series of capital stock of the Company;
(d) any issuance by the Company or any subsidiary of the
Company of any equity securities or rights, warrants or
options to purchase such equity securities, except
- shares of Class A Common Stock pursuant to
employee and director stock option,
profit-sharing and other benefit plans of
the Company and its subsidiaries and any
options exercisable for such stock,
- shares of Class A Common Stock issued upon
the conversion of any Class B Common Stock,
- the issuance of shares of capital stock of a
wholly-owned subsidiary of the Company to
the Company or another wholly-owned
subsidiary of the Company and
- in the public offering of Class A Common
Stock in March 1997;
(e) the dissolution, liquidation or winding up of the
Company;
(f) the amendment of the Amended and Restated Certificate of
Incorporation and certain provisions of the Restated
Bylaws affecting corporate governance;
(g) the election, removal or filling of a vacancy in the
office of the Chairman, Chief Executive Officer or
President of the Company;
(h) the declaration of dividends on any class or series of
capital stock of the Company, except dividends not in
excess of the most recent regular cash dividend or any
dividend per share not in excess of 15% of the then
current per share market price of the Class A Common
Stock;
(i) capital expenditures or series of related capital
expenditures of the Company or any of its subsidiaries
in excess of $250 million during any period of 12
consecutive months;
(j) the creation, incurrence or guaranty by the Company or
any of its subsidiaries of indebtedness for borrowed
money in excess of $100 million, except in connection
with the Capital Securities and the Senior Notes; and
(k) any change in the number of directors on the Board of
Directors of the Company, the determination of members
of the Board of Directors or any committee thereof and
the filling of newly created memberships and vacancies
on the Board of Directors or any committee of the Board
of Directors.
(ii) License to Use Nationwide Name and Service Marks
Pursuant to the Intercompany Agreement, Nationwide Mutual granted to the
Company and certain of its subsidiaries a non-exclusive, nonassignable,
revocable license to use the "Nationwide" trade name
61
and certain other service marks specifically identified in the Intercompany
Agreement (collectively, the "Service Marks") solely for the purpose of
identifying and advertising the Company's long-term savings and retirement
business and activities related to such business.
(iii) Equity Purchase Rights
The Company has agreed that, to the extent permitted by the New York Stock
Exchange and so long as Nationwide Mutual controls at least 50% of the
combined voting power of the outstanding voting stock of the Company,
Nationwide Corporation may purchase its pro rata share (based on its then
current percentage voting interest in the Company) of any voting equity
securities to be issued by the Company (excluding any such securities
offered pursuant to employee stock options or other benefit plans, dividend
reinvestment plans and other offerings other than for cash).
(iv) Registration Rights
The Company has granted to Nationwide Corporation certain demand and
"piggyback" registration rights with respect to shares of Common Stock
owned by it. Nationwide Corporation has the right to request up to two
demand registrations in each calendar year, but not more than four in any
five-year period. Nationwide Corporation will also have the right, which it
may exercise at any time and from time to time, to include the shares of
Common Stock held by it in any registration of common equity securities of
the Company, initiated by the Company on its own behalf or on behalf of any
other stockholders of the Company. These rights are subject to certain
"blackout" provisions. Such registration rights are transferable by
Nationwide Corporation.
(v) Nationwide Mutual Agents
In the Intercompany Agreement, Nationwide Mutual has agreed to allow the
Company to distribute its variable annuity, fixed annuity and individual
universal, variable and traditional life insurance products through
Nationwide Mutual agents. Such right is exclusive to the Company, subject
to the limited right of certain companies of Nationwide to sell such
products through the agency force, for at least five years following the
equity offerings.
(vi) Federal Income Taxes
The Company is a party to a Tax Sharing Agreement with Nationwide Mutual
and the other Nationwide companies included in the consolidated returns of
Nationwide Mutual. The Tax Sharing Agreement defines how the tax liability
for each company included in Nationwide Mutual's consolidated tax return is
determined for 1996 and subsequent years. The Company's tax liability is
determined pursuant to the Tax Sharing Agreement for each year it is
included in Nationwide Mutual's consolidated federal income tax return. The
Tax Sharing Agreement also applies for any year in which the Company is
included in a Nationwide Mutual consolidated or combined state or local tax
return. Under the Tax Sharing Agreement, the Company pays to Nationwide
Mutual amounts equal to the taxes the Company would pay if the Company
filed a separate federal income, or a separate state or local income or
franchise tax return, including any amounts that are later determined to be
due as a result of any audit or other recomputation of its liability. The
Company will be responsible for all taxes, including assessments, if any,
for prior years with respect to all other taxes payable by the Company or
any of its subsidiaries, and for all other federal, state and local taxes
that may be imposed upon the Company and that are not addressed in the Tax
Sharing Agreement.
Nationwide Mutual effectively controls all of the Company's tax decisions
by virtue of its control of the Company and the terms of the Tax Sharing
Agreement. Under the Tax Sharing Agreement, Nationwide Mutual will have
sole authority to respond to and conduct all tax proceedings (including tax
audits) relating to the Company, to file all returns on behalf of the
Company and to determine the amount of the Company's liability to (or
entitlement to payment from) Nationwide Mutual under the Tax Sharing
Agreement.
This arrangement may result in conflicts of interest between the Company
and Nationwide Mutual. For example, under the Tax Sharing Agreement,
Nationwide Mutual may choose to consent, compromise or settle any
adjustment or deficiency proposed by the relevant tax authority in a manner
that may be beneficial to Nationwide Mutual and detrimental to the Company.
Under the Tax Sharing Agreement, however, Nationwide Mutual is obligated to
act in good faith with regard to all persons included in the applicable
returns.
The Tax Sharing Agreement may not be amended without the prior written
consent of the Company.
62
(vii) Savings Plan
The Savings Plan is administered by The 401(k) Company, Inc., a subsidiary
of the Company, which earned fees of $2.1 million, $2 million and $1.7
million in 2001, 2000 and the last seven months of 1999 (time period when
The 401(k) Company, Inc. first assumed the administrative duties for the
Savings Plan), respectively.
(viii) Lease
Under an arrangement between Nationwide Mutual and certain of its
subsidiaries, during 2001 the Company leased on average approximately
721,717 square feet of office space primarily in the four building home
office complex in Columbus, Ohio. This office space was leased at current
market rates ranging from $20.06 to $22.06 per square foot plus an
occupancy charge of $1.84 per square foot per year. Under the arrangement,
the Company determines the amount of office space necessary to conduct its
operations and leases such space from Nationwide Mutual, subject to
availability. For the years ending December 31, 2001, 2000 and 1999, the
Company made payments to Nationwide Mutual and its subsidiaries totaling
$18.7 million, $14.3 million and $11.4 million, respectively, under such
arrangement. The Company also leased approximately 245,898 square feet of
office space in suburban Columbus, Ohio, from Duke Realty, Inc. This office
space was leased at current market rates ranging from $19.54 to $20.50 per
square foot plus an occupancy charge of $0.48 to $1.74 per square foot per
year. For the year ending December 31, 2001, Nationwide Mutual, on behalf
of the Company, made lease payments totaling $5.2 million.
(ix) Modified Coinsurance Agreements
Effective as of January 1, 1996, Nationwide Life entered into a 100%
modified coinsurance agreement with Employers Life Insurance Company of
Wausau ("ELOW"). Under the agreement, Nationwide Life ceded to ELOW and
ELOW assumed Nationwide Life's non-variable group and wholesale life
insurance business and group and franchise health insurance business and
any ceded or assumed reinsurance applicable to such group business. During
the second quarter of 1999, Nationwide Life entered into a modified
coinsurance arrangement to reinsure the 1999 operating results of ELOW
retroactive to January 1, 1999. In September 1999, the Company acquired
ELOW for $120.8 million and immediately merged ELOW into Nationwide Life
terminating the modified coinsurance arrangement, effective July 1, 1999.
During September 1999, NFS also acquired Pension Associates ("PA"), an
affiliated pension plan administrator for $3.4 million. Revenues ceded to
ELOW for the year ended December 31, 1999 was $35.8 million, while
benefits, claims and expenses ceded was $46.2 million.
Nationwide Life has a reinsurance agreement with Nationwide Mutual whereby
all of Nationwide Life's accident and health business is ceded to
Nationwide Mutual on a modified coinsurance basis. The agreement covers
individual accident and health business for all periods presented and group
and franchise accident and health business since July 1, 1999. Either party
may terminate the agreement on January 1 of any year with prior notice.
Prior to July 1, 1999 group and franchise accident and health business and
a block of group life insurance policies were ceded to ELOW under a
modified coinsurance agreement. Under a modified coinsurance agreement,
invested assets are retained by the ceding company and investment earnings
are paid to the reinsurer. Under the terms of Nationwide Life's agreements,
the investment risk associated with changes in interest rates is borne by
the reinsurer. Risk of asset default is retained by Nationwide Life,
although a fee is paid to Nationwide Life for the retention of such risk.
The ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. The Company believes that the terms of the
modified coinsurance agreements are consistent in all material respects
with what the Company could have obtained with unaffiliated parties.
Revenues ceded to Nationwide Mutual and ELOW for the years ended December
31, 2001, 2000 and 1999 were $200.7 million, $170.1 million and $193.0
million, respectively, while benefits, claims and expenses ceded were
$208.5 million, $168.0 million and $197.3 million, respectively.
(x) Cost Sharing Agreement
Pursuant to a cost sharing agreement among Nationwide Mutual and certain of
its direct and indirect subsidiaries, including the Company, Nationwide
Mutual provides certain operational and administrative services, such as
investment management, advertising, personnel and general management
services, to those subsidiaries. Expenses covered by such agreement are
subject to allocation among Nationwide Mutual and such subsidiaries.
Measures used to allocate expenses among companies include individual
employee estimates of time spent, special cost studies, salary expense,
commission
63
expense and other methods agreed to by the participating companies that are
within industry guidelines and practices. In addition, Nationwide Services
Company, a subsidiary of Nationwide Mutual, provides computer, telephone,
mail, employee benefits administration, and other services to Nationwide
Mutual and certain of its direct and indirect subsidiaries, including the
Company, based on specified rates for units of service consumed. For the
years ended December 31, 2001, 2000 and 1999, the Company made payments to
Nationwide Mutual and Nationwide Services Company totaling $145.6 million,
$156.6 million and $132.3 million, respectively. The Company does not
believe that expenses recognized under these agreements are materially
different than expenses that would have been recognized had the Company
operated on a stand-alone basis.
(xi) Marketing Allowance Agreement
Under a marketing agreement with Nationwide Mutual, Nationwide Life makes
payments to cover a portion of the agent marketing allowance that is paid
to Nationwide agents. These costs cover product development and promotion,
sales literature, rent and similar items. Payments under this agreement
totaled $26.4 million; $31.4 million and $34.5 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
(xii) Cash Management Agreement
Nationwide Mutual entered into an Investment Agency Agreement with
Nationwide Cash Management Company ("NCMC"), an affiliate of the Company.
NCMC makes, holds and administers short-term investments (those maturing in
one year or less) for Nationwide Mutual and certain of its affiliates,
including Nationwide Life and certain of the Company's other subsidiaries.
Under the agreement, expenses of NCMC are allocated pro rata among the
participants based upon the participant's ownership percentage of total
assets held by NCMC. For the years ending December 31, 2001, 2000 and 1999
the Company paid NCMC fees and expenses totaling $0.4 million, $0.4 million
and $0.3 million, respectively, under this agreement. Amounts on deposit
with NCMC were $85.6 million and $436.5 million as of December 31, 2001 and
2000, respectively.
(xiii) Repurchase Agreement
The Company also participates in intercompany repurchase agreements with
affiliates whereby the seller will transfer securities to the buyer at a
stated value. Upon demand or after a stated period, the seller will
repurchase the securities at the original sales price plus a price
differential. During 2001, the most the Company had outstanding at any
given time was $368.5 million and the Company incurred interest expense on
intercompany repurchase agreements of $0.2 million for 2001. Transactions
under the agreements during 2000 and 1999 were not material. The Company
believes that the terms of the repurchase agreements are materially
consistent with what the Company could have obtained with unaffiliated
parties.
(xiv) Group Annuity and Life Insurance Contracts
The Company has issued group annuity and life insurance contracts and
performs administrative services for various employee benefit plans
sponsored by Nationwide Mutual or its affiliates. Total account values of
these contracts were $4.96 billion and $5.15 billion as of December 31,
2001 and 2000, respectively. Total revenues from these contracts were
$154.0 million, $160.2 million, and $150.9 million for the years ended
December 31, 2001, 2000 and 1999, respectively, and include policy charges,
net investment income from investments backing the contracts and
administrative fees. Total interest credited to the account balances were
$118.4 million, $131.9 million, and $112.0 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The terms of these
contracts are consistent in all material respects with what the Company
offers to unaffiliated parties.
(xv) Partial Sale of Limited Partnership
During 2001, the Company entered into a transaction with Nationwide Mutual,
whereby it sold 78% of its interest in the limited partnership called
Nationwide Realty Investors, Ltd. (representing 49% of the limited
partnership) to Nationwide Mutual for $158.9 million. As a result of this
sale, the Company 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 interest 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 the
Company and Nationwide Mutual separately reviewed and
64
approved the valuation prior to the execution of this transaction. The
Company continues to hold an economic and voting interest in the limited
partnership of approximately 14%, with Nationwide Mutual holding the
remaining interests.
(xvi) Transactions with Management and Others
Joseph J. Gasper, President and Chief Operating Officer and Director of the
Company and Richard A. Karas, Senior Vice President--Sales--Financial
Services of the Company are limited partners in Country Club Properties,
L.P., which holds a 25% interest in NRI-CCP I, LLC, a Delaware limited
liability company, 75% of which is owned by Nationwide Realty Investors,
Ltd. Nationwide Life, a wholly owned subsidiary of the Company, currently
owns approximately 14% of Nationwide Realty Investors, Ltd. and Nationwide
Mutual owns the remainder.
The general partner of Country Club Properties, L.P. is Desert Management
Group, LLC. NRI-CCP I, LLC was formed for the purpose of acquiring 960
acres of land in La Quinta, California, for the development of residential
lots and three golf courses. The land was acquired by NRI-CCP I, LLC on
June 15, 2000.
Mr. Gasper and Mr. Karas each purchased their Limited Partnership Interests
in Country Club Properties L.P. (the "Limited Partnership Interest") on
March 11, 1999, at a cost of $125,000. Each of Mr. Gasper's and Mr. Karas'
Limited Partnership Interest represents less than one percent of the
partnership. Mr. Gasper and Mr. Karas are entitled to a share of
partnership distributions and a lifetime membership in several golf courses
to be developed. The golf membership is transferable upon death.
65
12. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31, 2001
Schedule III Supplementary Insurance Information as of December 31,
2001, 2000 and 1999 and for each of the years then
ended
Schedule IV Reinsurance as of December 31, 2001, 2000 and 1999 and
for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000 and 1999
All other schedules are omitted because they are not applicable or
required or because the required information has been included in
the audited consolidated financial statements or notes thereto.
66
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life
Insurance Company and subsidiaries (collectively the "Company") as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in note 2 to the consolidated financial statements, the Company
changed its methods of accounting for derivative instruments and hedging
activities, and for purchased or retained interests in securitized financial
assets in 2001.
KPMG LLP
Columbus, Ohio
January 29, 2002
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
December 31,
------------------------------
2001 2000
========= =========
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $17,961.6 in 2001; $15,245.8 in 2000) $18,370.8 $15,443.0
Equity securities (cost $83.0 in 2001; $103.5 in 2000) 94.0 109.0
Mortgage loans on real estate, net 7,113.1 6,168.3
Real estate, net 172.0 310.7
Policy loans 591.1 562.6
Other long-term investments 125.0 101.8
Short-term investments, including amounts managed by a related party 1,011.3 442.6
--------- ---------
27,477.3 23,138.0
--------- ---------
Cash 22.6 18.4
Accrued investment income 306.7 251.4
Deferred policy acquisition costs 3,189.0 2,865.6
Other assets 646.0 396.7
Assets held in separate accounts 59,513.0 65,897.2
--------- ---------
$91,154.6 $92,567.3
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $25,216.0 $22,183.6
Short-term debt 100.0 118.7
Long-term debt, payable to NFS 300.0 --
Other liabilities 2,307.9 1,164.9
Liabilities related to separate accounts 59,513.0 65,897.2
--------- ---------
87,436.9 89,364.4
--------- ---------
Commitments and contingencies (notes 10 and 15)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 646.1 646.1
Retained earnings 2,863.1 2,436.3
Accumulated other comprehensive income 204.7 116.7
--------- ---------
3,717.7 3,202.9
--------- ---------
$91,154.6 $92,567.3
========= =========
See accompanying notes to consolidated financial statements, including note 13
which describes related party transactions.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions)
Years ended December 31,
------------------------------------------
2001 2000 1999
======== ======== ========
Revenues:
Policy charges $1,017.3 $1,091.4 $ 895.5
Life insurance premiums 251.1 240.0 220.8
Net investment income 1,725.0 1,654.9 1,520.8
Net realized (losses) gains on investments, hedging instruments and hedged
items:
Unrelated parties (62.7) (19.4) (11.6)
Related party 44.4 -- --
Other 14.1 17.0 66.1
-------- -------- --------
2,989.2 2,983.9 2,691.6
-------- -------- --------
Benefits and expenses:
Interest credited to policyholder account balances 1,238.7 1,182.4 1,096.3
Other benefits and claims 280.3 241.6 210.4
Policyholder dividends on participating policies 41.7 44.5 42.4
Amortization of deferred policy acquisition costs 347.9 352.1 272.6
Interest expense on debt 6.2 1.3 --
Other operating expenses 444.1 479.0 463.4
-------- -------- --------
2,358.9 2,300.9 2,085.1
-------- -------- --------
Income before federal income tax expense and cumulative effect of
adoption of accounting principles 630.3 683.0 606.5
Federal income tax expense 161.4 207.7 201.4
-------- -------- --------
Income before cumulative effect of adoption of accounting principles 468.9 475.3 405.1
Cumulative effect of adoption of accounting principles, net of tax (7.1) -- --
-------- -------- --------
Net income $ 461.8 $ 475.3 $ 405.1
======== ======== ========
See accompanying notes to consolidated financial statements, including note 13
which describes related party transactions.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 2001, 2000 and 1999
(in millions)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income (loss) equity
======== ========== ======== ============= =============
Balance as of December 31, 1998 3.8 914.7 1,579.0 275.6 2,773.1
Comprehensive income:
Net income -- -- 405.1 -- 405.1
Net unrealized losses on securities
available-for-sale arising during
the year, net of tax -- -- -- (315.0) (315.0)
--------
Total comprehensive income 90.1
--------
Capital contribution -- 26.4 87.9 23.5 137.8
Return of capital to shareholder -- (175.0) -- -- (175.0)
Dividends to shareholder -- -- (61.0) -- (61.0)
-------- -------- -------- -------- --------
Balance as of December 31, 1999 3.8 766.1 2,011.0 (15.9) 2,765.0
======== ======== ======== ======== ========
Comprehensive income:
Net income -- -- 475.3 -- 475.3
Net unrealized gains on securities
available-for-sale arising during
the year, net of tax -- -- -- 132.6 132.6
--------
Total comprehensive income 607.9
--------
Return of capital to shareholder -- (120.0) -- -- (120.0)
Dividends to shareholder -- -- (50.0) -- (50.0)
-------- -------- -------- -------- --------
Balance as of December 31, 2000 $ 3.8 $ 646.1 $2,436.3 $ 116.7 $3,202.9
======== ======== ======== ======== ========
Comprehensive income:
Net income -- -- 461.8 -- 461.8
Net unrealized gains on securities
available-for-sale arising during
the year, net of tax -- -- -- 98.2 98.2
Cumulative effect of adoption of
accounting principles, net of tax -- -- -- (1.4) (1.4)
Accumulated net losses on cash flow
hedges, net of tax -- -- -- (8.8) (8.8)
--------
Total comprehensive income 549.8
--------
Dividends to shareholder -- -- (35.0) -- (35.0)
-------- -------- -------- -------- --------
Balance as of December 31, 2001 $ 3.8 $ 646.1 $2,863.1 $ 204.7 $3,717.7
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements, including note 13
which describes related party transactions.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
Years ended December 31,
------------------------------------------
2001 2000 1999
======== ======== ========
Cash flows from operating activities:
Net income $ 461.8 $ 475.3 $ 405.1
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,238.7 1,182.4 1,096.3
Capitalization of deferred policy acquisition costs (743.0) (778.9) (637.0)
Amortization of deferred policy acquisition costs 347.9 352.1 272.6
Amortization and depreciation (31.5) (12.7) 2.4
Realized losses (gains) on investments, hedging instruments and hedged
items:
Unrelated parties 62.7 19.4 11.6
Related parties (44.4) -- --
Cumulative effect of adoption of accounting principles 10.9 -- --
Increase in accrued investment income (55.3) (12.8) (7.9)
(Increase) decrease in other assets (272.5) (92.0) 122.9
Increase (decrease) in policy liabilities 33.0 (0.3) (20.9)
Increase in other liabilities 304.0 229.3 149.7
Other, net 8.3 22.3 (8.6)
-------- -------- --------
Net cash provided by operating activities 1,320.6 1,384.1 1,386.2
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 3,933.9 2,988.7 2,307.9
Proceeds from sale of securities available-for-sale 497.8 602.0 513.1
Proceeds from repayments of mortgage loans on real estate 1,204.4 911.7 696.7
Proceeds from sale of real estate 29.1 18.7 5.7
Proceeds from sale of limited partnership to related party 158.9 -- --
Proceeds from repayments of policy loans and sale of other invested assets 68.9 79.3 40.9
Cost of securities available-for-sale acquired (7,123.6) (3,475.5) (3,724.9)
Cost of mortgage loans on real estate acquired (2,123.1) (1,318.0) (971.4)
Cost of real estate acquired (0.4) (7.1) (14.2)
Short-term investments, net (568.7) (26.6) (27.5)
Collateral received - securities lending, net 791.6 -- --
Other, net (192.2) (182.3) (110.9)
-------- -------- --------
Net cash used in investing activities (3,323.4) (409.1) (1,284.6)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt to NFS 300.0 -- --
Capital returned to shareholder -- (120.0) (175.0)
Net change in short-term debt (18.7) 118.7 --
Cash dividends paid (35.0) (100.0) (13.5)
Increase in investment and universal life insurance product account balances 5,976.7 4,517.0 3,799.4
Decrease in investment and universal life insurance product account balances (4,216.0) (5,377.1) (3,711.1)
-------- -------- --------
Net cash provided by (used in) financing activities 2,007.0 (961.4) (100.2)
-------- -------- --------
Net increase in cash 4.2 13.6 1.4
Cash, beginning of year 18.4 4.8 3.4
-------- -------- --------
Cash, end of year $ 22.6 $ 18.4 $ 4.8
======== ======== ========
See accompanying notes to consolidated financial statements, including note 13
which describes related party transactions.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Organization and Description of Business
Nationwide Life Insurance Company (NLIC, or collectively with its
subsidiaries, the Company) is a leading provider of long-term savings and
retirement products in the United States of America and is a wholly owned
subsidiary of Nationwide Financial Services, Inc. (NFS). The Company
develops and sells a diverse range of products including individual
annuities, private and public sector pension plans and other investment
products sold to institutions and life insurance. NLIC sells its products
through a diverse network of distribution channels, including independent
broker/dealers, brokerage firms, financial institutions, pension plan
administrators, life insurance specialists, Nationwide Retirement
Solutions and Nationwide agents.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Securities, Inc., and Nationwide
Investment Services Corporation.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America (GAAP) which differ from statutory accounting practices.
The statutory financial statements of NLIC and NLAIC are presented on the
basis of accounting practices prescribed or permitted by the Ohio
Department of Insurance (the Department). The State of Ohio has adopted
the National Association of Insurance Commissioners (NAIC) statutory
accounting practices (NAIC SAP) as the basis of its statutory accounting
practices. NLIC and NLAIC have no statutory accounting practices that
differ from NAIC SAP. See also note 12.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements and
the reported amounts of revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs for investment products and universal life
insurance products, valuation allowances for mortgage loans on real
estate, impairment losses on other investments and federal income taxes.
Although some variability is inherent in these estimates, management
believes the amounts provided are appropriate.
(a) Consolidation Policy
The consolidated financial statements include the accounts of NLIC
and companies in which NLIC directly or indirectly has a controlling
interest. All significant intercompany balances and transactions
have been eliminated.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(b) Valuation of Investments, Investment Income and Related Gains and
Losses
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity, available-for-sale
or trading. The Company classifies fixed maturity and equity
securities as available-for-sale. Available-for-sale securities are
stated at fair value, with the unrealized gains and losses, net of
adjustments to deferred policy acquisition costs and deferred
federal income tax, reported as a separate component of accumulated
other comprehensive income (AOCI) in shareholders' equity. The
adjustment to deferred policy acquisition costs represents the
change in amortization of deferred policy acquisition costs that
would have been required as a charge or credit to operations had
such unrealized amounts been realized. Management regularly reviews
its fixed maturity and equity securities portfolio to evaluate the
necessity of recording impairment losses for other-than-temporary
declines in the fair value of investments. A number of criteria are
considered during this process including, but not limited to, the
current fair value as compared to amortized cost or cost, as
appropriate, of the security, the length of time the security's fair
value has been below amortized cost/cost, and by how much, and
specific credit issues related to the issuer. Impairment losses
result in a reduction of the cost basis of the underlying
investment.
For mortgage-backed securities, the Company recognizes income using
a constant effective yield method based on prepayment assumptions
and the estimated economic life of the securities. When estimated
prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date
and anticipated future payments, and any resulting adjustment is
included in net investment income. All other investment income is
recorded on the accrual basis.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based on
a review by portfolio managers. Mortgage loans on real estate are
considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan
agreement. When the Company determines that a loan is impaired, a
provision for loss is established equal to the difference between
the carrying value and the estimated value of the mortgage loan.
Estimated value is based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the
fair value of the collateral, if the loan is collateral dependent.
Loans in foreclosure and loans considered impaired are placed on
non-accrual status. Interest received on non-accrual status mortgage
loans on real estate is included in net investment income in the
period received.
The valuation allowance account for mortgage loans on real estate is
maintained at a level believed adequate by the Company to absorb
estimated probable credit losses. The Company's periodic evaluation
of the adequacy of the allowance for losses is based on past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the
estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant
factors.
Real estate is carried at cost less accumulated depreciation. Real
estate designated as held for disposal is carried at the lower of
the carrying value at the time of such designation or fair value
less cost to sell. Other long-term investments are carried on the
equity method of accounting. Impairment losses are recorded on
long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Realized gains and losses on the sale of investments are determined
on the basis of specific security identification. Changes in
valuation allowances and impairment losses for other-than-temporary
declines in fair values are included in realized gains and losses on
investments, hedging instruments and hedged items.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) Derivative Instruments
Derivatives are carried at fair value. On the date the derivative
contract is entered into, the Company designates the derivative as
either a hedge of the fair value of a recognized asset or liability
or of an unrecognized firm commitment (fair value hedge), a hedge of
a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability (cash
flow hedge), or a foreign currency fair value or cash flow hedge
(foreign currency hedge) or a non-hedge transaction. The Company
formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy
for entering into various hedge transactions. This process includes
linking all derivatives that are designated as fair value, cash flow
or foreign currency hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives
that are used for hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the
Company discontinues hedge accounting prospectively.
The Company enters into interest rate swaps, cross-currency swaps or
Eurodollar Futures to hedge the fair value of existing fixed rate
assets and liabilities. In addition, the Company uses short treasury
future positions to hedge the fair value of bond and mortgage loan
commitments. Typically, the Company is hedging the risk of changes
in fair value attributable to changes in benchmark interest rates.
Derivative instruments classified as fair value hedges are carried
at fair value, with changes in fair value recorded in realized gains
and losses on investments, hedging instruments and hedged items.
Changes in the fair value of the hedged item, attributable to the
risk being hedged, are also recorded in realized gains and losses on
investments, hedging instruments and hedged items. The adjustment of
the carrying amount of hedged assets using Eurodollar Futures and
firm commitments using Treasury Futures are accounted for in the
same manner as other components of the carrying amount of that
asset. The adjustment of the carrying amount is amortized to
investment income over the life of the asset.
The Company may enter into receive fixed/pay variable interest rate
swaps to hedge existing floating rate assets or to hedge cash flows
from the anticipated purchase of investments. These derivative
instruments are classified as cash flow hedges and are carried at
fair value, with the offset recorded in AOCI to the extent the
hedging relationship is effective. The ineffective portion of the
hedging relationship is recorded in realized gains and losses on
investments, hedging instruments and hedged items. Gains and losses
on cash flow derivative instruments are reclassified out of AOCI and
recognized in earnings over the same period(s) that the hedged item
affects earnings.
Amounts receivable or payable under interest rate and foreign
currency 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.
From time to time, the Company may enter into a derivative
transaction that will not qualify for hedge accounting. These
include basis swaps (receive one variable rate, pay another variable
rate) to hedge variable rate assets or foreign-denominated
liabilities. These instruments are carried at fair value, with
changes in fair value recorded in realized gains and losses on
investments, hedging instruments and hedged items.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item, the
derivative expires, or is sold, terminated or exercised, the
derivative is dedesignated as a hedging instrument, because it is
unlikely that a forecasted transaction will occur, a hedged firm
commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a
hedging instrument is no longer appropriate.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair value hedge,
the Company continues to carry the derivative on the consolidated
balance sheet at its fair value, and no longer adjusts the hedged
item for changes in fair value. The adjustment of the carrying
amount of the hedged item is accounted for in the same manner as
other components of the carrying amount of that item. When hedge
accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the Company continues to carry
the derivative on the consolidated balance sheet at its fair value,
removes any asset or liability that was recorded pursuant to
recognition of the firm commitment from the consolidated balance
sheet and recognizes any gain or loss in net realized gains and
losses on investments, hedging instruments and hedged items. When
hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the Company continues to
carry the derivative on the consolidated balance sheet at fair value
and gains and losses that were accumulated in AOCI are recognized
immediately in realized gains and losses on investments, hedging
instruments and hedged items. In all other situations in which hedge
accounting is discontinued, the Company continues to carry the
derivative at its fair value on the consolidated balance sheet, and
recognizes any changes in fair value in net realized gains and
losses on investments, hedging instruments and hedged items.
Prior to the adoption of SFAS 133, defined in note 2 (k), provided
they met specific criteria, interest rate and foreign currency swaps
and futures were considered hedges and accounted for under the
accrual and deferral method, respectively. Amounts receivable or
payable under interest rate and foreign currency swaps were
recognized as an adjustment to net investment income or interest
credited to policyholder account balances consistent with the nature
of the hedged item. Changes in the fair value of interest rate swaps
were not recognized on the consolidated balance sheet, except for
interest rate swaps designated as hedges of fixed maturity
securities available-for-sale, for which changes in fair values were
reported in AOCI. Gains and losses on foreign currency swaps were
recorded in earnings based on the related spot foreign exchange rate
at the end of the reporting period. Gains and losses on these
contracts offset those recorded as a result of translating the
hedged foreign currency denominated liabilities and investments to
U.S. dollars.
(d) Revenues and Benefits
Investment Products and Universal Life Insurance Products:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate-owned life insurance and other
interest-sensitive life insurance policies. Revenues for investment
products and universal life insurance products consist of net
investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. The
timing of revenue recognition as it relates to fees assessed on
investment contracts and universal life contracts is determined
based on the nature of such fees. Asset fees, cost of insurance and
policy administration charges are assessed on a daily or monthly
basis and recognized as revenue when assessed and earned. Certain
amounts assessed that represent compensation for services to be
provided in future periods are reported as unearned revenue and
recognized in income over the periods benefited. Surrender charges
are recognized upon surrender of a contract in accordance with
contractual terms. Policy benefits and claims that are charged to
expense include interest credited to policy account balances and
benefits and claims incurred in the period in excess of related
policy account balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits and
expenses are associated with earned premiums so as to result in
recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(e) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department and
certain variable sales expenses that relate to and vary with the
production of new or renewal business have been deferred. Deferred
policy acquisition costs are subject to recoverability testing at
the time of policy issuance and loss recognition testing at the end
of each accounting period.
For investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with interest
over the lives of the policies in relation to the present value of
estimated future gross profits from projected interest margins,
asset fees, cost of insurance, policy administration and surrender
charges. For years in which gross profits are negative, deferred
policy acquisition costs are amortized based on the present value of
gross revenues. The Company regularly reviews the estimated future
gross profits and revises such estimates when appropriate. The
cumulative change in amortization as a result of changes in
estimates to reflect current best estimates is recorded as a charge
or credit to amortization expense. The most significant assumptions
that are involved in the estimation of future gross profits include
future market performance and surrender/lapse rates. In the event
actual expense differs significantly from assumptions or assumptions
are significantly revised, the Company may be required to record a
significant charge or credit to amortization expense. Deferred
policy acquisition costs are adjusted to reflect the impact of
unrealized gains and losses on fixed maturity securities
available-for-sale as described in note 2(b).
For traditional life insurance products, these deferred policy
acquisition costs are predominantly being amortized with interest
over the premium paying period of the related policies in proportion
to the ratio of actual annual premium revenue to the anticipated
total premium revenue. Such anticipated premium revenue was
estimated using the same assumptions as were used for computing
liabilities for future policy benefits.
(f) Separate Accounts
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. Separate account assets are recorded at
market value except for separate account contracts with guaranteed
investment returns. For all but $1.39 billion and $1.12 billion of
separate account assets as of December 31, 2001 and 2000,
respectively, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of the
separate accounts is not reflected in the consolidated statements of
income and cash flows except for the fees the Company receives. Such
fees are assessed on a daily or monthly basis and recognized as
revenue when assessed and earned.
(g) Future Policy Benefits
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
Future policy benefits for traditional life insurance policies have
been calculated by the net level premium method using interest rates
varying from 6.0% to 10.5% and estimates of mortality, morbidity,
investment yields and withdrawals which were used or which were
being experienced at the time the policies were issued.
(h) Participating Business
Participating business represented approximately 17% in 2001 (21% in
2000 and 29% in 1999) of the Company's life insurance in force, 63%
in 2001 (66% in 2000 and 69% in 1999) of the number of life
insurance policies in force, and 9% in 2001 (8% in 2000 and 13% in
1999) of life insurance statutory premiums. The provision for
policyholder dividends was based on then current dividend scales and
has been included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(i) Federal Income Tax
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the ultimate majority
shareholder of NFS. The members of the consolidated tax return group
have a tax sharing arrangement which provides, in effect, for each
member to bear essentially the same federal income tax liability as
if separate tax returns were filed.
The Company provides for federal income taxes based on amounts the
Company believes it will ultimately owe. Inherent in the provision
for federal income taxes are estimates regarding the deductibility
of certain expenses and the realization of certain tax credits. In
the event the ultimate deductibility of certain expenses or the
realization of certain tax credits differ from estimates, the
Company may be required to significantly change the provision for
federal income taxes recorded in the consolidated financial
statements.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established
when necessary to reduce the deferred tax assets to the amounts
expected to be realized.
(j) Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(k) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133, as amended by SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, was adopted
by the Company effective January 1, 2001. Upon adoption, the
provisions of SFAS 133 were applied prospectively.
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 AOCI 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.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The adoption of SFAS 133 may 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.
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 AOCI.
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 ceased upon adoption of this statement,
which was January 1, 2002 for the Company. Companies are 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 cumulative 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 for recognition and
measurement of the impairment of long-lived assets to be held and
used, and measurement of long-lived assets to be disposed of by
sale. 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.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In 2001, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement
of Position 01-5, Amendments to Specific AICPA Pronouncements for
Changes Related to the NAIC Codification (SOP 01-5). In doing so,
AICPA SOP 94-5, Disclosures of Certain Matters in the Financial
Statements of Insurance Enterprises, was amended to reflect the
results of the completion of the NAIC codification of statutory
accounting practices for certain insurance enterprises
(Codification). The adoption of SOP 01-5 did not have an impact on
the results of operations or financial position of the Company.
(l) Reclassification
Certain items in the 2000 and 1999 consolidated financial statements
and related footnotes have been reclassified to conform to the 2001
presentation.
(3) Investments
The amortized cost, gross unrealized gains and losses and estimated fair
value of securities available-for-sale as of December 31, 2001 and 2000
were:
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
========= ========== ========== ==========
December 31, 2001
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 263.2 $ 23.1 $ 0.5 $ 285.8
Obligations of states and political subdivisions 7.6 0.3 -- 7.9
Debt securities issued by foreign governments 41.8 2.6 -- 44.4
Corporate securities 11,769.8 470.6 176.5 12,063.9
Mortgage-backed securities - U.S. Government backed 2,012.3 67.8 3.7 2,076.4
Asset-backed securities 3,866.9 76.7 51.2 3,892.4
--------- --------- --------- ---------
Total fixed maturity securities 17,961.6 641.1 231.9 18,370.8
Equity securities 83.0 11.0 -- 94.0
--------- --------- --------- ---------
$18,044.6 $ 652.1 $ 231.9 $18,464.8
========= ========= ========= =========
December 31, 2000
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 277.5 $ 33.4 $ 0.1 $ 310.8
Obligations of states and political subdivisions 8.6 0.2 -- 8.8
Debt securities issued by foreign governments 94.1 1.5 0.1 95.5
Corporate securities 9,758.3 235.0 135.1 9,858.2
Mortgage-backed securities - U.S. Government backed 2,719.1 46.1 3.8 2,761.4
Asset-backed securities 2,388.2 36.3 16.2 2,408.3
--------- --------- --------- ---------
Total fixed maturity securities 15,245.8 352.5 155.3 15,443.0
Equity securities 103.5 9.5 4.0 109.0
--------- --------- --------- ---------
$15,349.3 $ 362.0 $ 159.3 $15,552.0
========= ========= ========= =========
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale as of December 31, 2001, by expected maturity, are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
(in millions) cost fair value
========= ==========
Fixed maturity securities available for sale:
Due in one year or less $ 1,125.4 $ 1,141.7
Due after one year through five years 5,154.4 5,295.6
Due after five years through ten years 4,073.6 4,188.8
Due after ten years 1,729.0 1,775.9
--------- ---------
12,082.4 12,402.0
Mortgage-backed securities - U.S. Government backed 2,012.3 2,076.4
Asset-backed securities 3,866.9 3,892.4
--------- ---------
$17,961.6 $18,370.8
========= =========
The components of unrealized gains on securities available-for-sale, net,
were as follows as of December 31:
(in millions) 2001 2000
========= =========
Gross unrealized gains $ 420.2 $ 202.7
Adjustment to deferred policy acquisition costs (94.9) (23.2)
Deferred federal income tax (113.9) (62.8)
--------- ---------
$ 211.4 $ 116.7
========= =========
An analysis of the change in gross unrealized gains (losses) on securities
available-for-sale for the years ended December 31:
(in millions) 2001 2000 1999
====== ====== =======
Securities available-for-sale:
Fixed maturity securities $212.0 $280.5 $(607.1)
Equity securities 5.5 (2.5) (8.8)
------ ------ -------
$217.5 $278.0 $(615.9)
====== ====== =======
Proceeds from the sale of securities available-for-sale during 2001, 2000
and 1999 were $497.8 million, $602.0 million and $513.1 million,
respectively. During 2001, gross gains of $31.3 million ($12.1 million and
$10.4 million in 2000 and 1999, respectively) and gross losses of $10.1
million ($15.1 million and $35.5 million in 2000 and 1999, respectively)
were realized on those sales.
The Company had $25.2 million and $13.0 million of real estate investments
as of December 31, 2001 and 2000, respectively, that were non-income
producing the preceding twelve months.
Real estate is presented at cost less accumulated depreciation of $22.0
million as of December 31, 2001 ($25.7 million as of December 31, 2000).
The carrying value of real estate held for disposal totaled $33.4 million
and $8.5 million as of December 31, 2001 and 2000, respectively.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The recorded investment of mortgage loans on real estate considered to be
impaired was $29.9 million as of December 31, 2001 ($9.8 million as of
December 31, 2000), which includes $5.3 million ($5.3 million as of
December 31, 2000) of impaired mortgage loans on real estate for which the
related valuation allowance was $1.0 million ($1.6 million as of December
31, 2000) and $24.6 million ($4.5 million as of December 31, 2000) of
impaired mortgage loans on real estate for which there was no valuation
allowance. Impaired mortgage loans with no valuation allowance are a
result of collateral dependent loans where the fair value of the
collateral is greater than the recorded investment of the loan. During
2001, the average recorded investment in impaired mortgage loans on real
estate was $7.9 million ($7.7 million in 2000) and interest income
recognized on those loans totaled $0.4 million in 2001 ($0.4 million in
2000) which is equal to interest income recognized using a cash-basis
method of income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate for the years ended December 31 was as follows:
(in millions) 2001 2000 1999
======== ======== ========
Allowance, beginning of year $ 45.3 $ 44.4 $ 42.4
Additions (reductions) charged (credited) to operations (1.2) 4.1 0.7
Direct write-downs charged against the allowance (1.2) (3.2) --
Allowance on acquired mortgage loans -- -- 1.3
-------- -------- --------
Allowance, end of year $ 42.9 $ 45.3 $ 44.4
======== ======== ========
An analysis of investment income (loss) by investment type follows for the
years ended December 31:
(in millions) 2001 2000 1999
======== ======== ========
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $1,181.1 $1,095.5 $1,031.3
Equity securities 1.8 2.6 2.5
Mortgage loans on real estate 527.9 494.5 460.4
Real estate 33.1 32.2 28.8
Short-term investments 28.3 27.0 18.6
Derivatives (19.7) 3.9 (1.0)
Other 20.9 49.3 27.5
-------- -------- --------
Total investment income 1,773.4 1,705.0 1,568.1
Less investment expenses 48.4 50.1 47.3
-------- -------- --------
Net investment income $1,725.0 $1,654.9 $1,520.8
======== ======== ========
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
An analysis of net realized (losses) gains on investments, hedging
instruments and hedged items, by investment type follows for the years
ended December 31:
(in millions) 2001 2000 1999
====== ====== ======
Unrelated parties:
Realized gains (losses) on sale of securities available-for-sale:
Fixed maturity securities $ 20.8 $ (7.7) $(32.5)
Equity securities 0.4 4.7 7.4
Other-than-temporary impairments of securities available-for-sale:
Fixed maturity securities (66.1) (10.5) 7.5
Equity securities (13.8) -- --
Real estate 1.9 (0.5) 0.9
Mortgage loans on real estate(1) 0.6 (4.2) (0.6)
Derivatives -- (2.7) (1.6)
Other (6.5) 1.5 7.3
------ ------ ------
(62.7) (19.4) (11.6)
Related party - gain on sale of limited partnership 44.4 -- --
------ ------ ------
Net realized losses on investments, hedging instruments and
hedged items $(18.3) $(19.4) $(11.6)
====== ====== ======
- ----------
(1) The 2001 amount is comprised of $9.9 million of net realized gains
on the sale of mortgage loans on real estate, including those
related to a securitization transaction, and $9.3 million of
realized losses on derivatives hedging the sale of mortgage loans on
real estate.
Fixed maturity securities with an amortized cost of $6.6 million as of
December 31, 2001 and $6.5 million as of December 31, 2000 were on deposit
with various regulatory agencies as required by law. In addition, fixed
maturity securities with an amortized cost of $6.3 million as of December
31, 2000 were placed in escrow under a contractual obligation and none as
of December 31, 2001.
As of December 31, 2001 the Company had pledged fixed maturity securities
with a fair value of $112.3 million as collateral to various derivative
counterparties.
As of December 31, 2001 the Company held collateral of $18.0 million on
derivative transactions. This amount is included in short-term investments
with a corresponding liability recorded in other liabilities.
As of December 31, 2001, the Company had loaned securities with a fair
value of $775.5 million. As of December 31, 2001 the Company held
collateral of $791.6 million. This amount is included in short-term
investments with a corresponding liability recorded in other liabilities.
(4) Short-term Debt
NLIC has established a $300 million commercial paper program under which,
borrowings are unsecured and are issued for terms of 364 days or less. As
of December 31, 2001 and 2000 the Company had $100.0 million and $118.7
million, respectively, of commercial paper outstanding at an average
effective rate of 1.90% and 6.53%, respectively. See also note 14.
(5) Long-term Debt, payable to NFS
On December 19, 2001 the Company sold a 7.50%, $300.0 million surplus note
to NFS, maturing on December 17, 2031. The fair value of the surplus note
as of December 31, 2001 was $300.0 million. Principal and interest
payments are subject to prior approval by the superintendent of insurance
of the State of Ohio. The Company is scheduled to pay interest
semi-annually on June 17 and December 17 of each year commencing June 17,
2002.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(6) Derivative Financial Instruments
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 program, 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 U.S. 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 U.S. 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 U.S.
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
U.S. dollar rate instruments.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Cross-currency interest rate swaps on assets are structured to pay a fixed
rate, in the foreign currency, and receive a variable U.S. dollar rate,
generally 3-month libor.
Non-Hedging Derivatives
From time-to-time, the Company enters 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 is not able to match the
receive-side terms of the derivative to a specific liability; therefore,
basis swaps do not receive hedge accounting treatment.
QUANTITATIVE DISCLOSURE
Fair Value Hedges
During the year ended December 31, 2001, gains of $2.1 million were
recognized in net realized losses on investments, hedging instruments and
hedged items. This represents the ineffective portion of the fair value
hedging relationships. There were no gains or losses attributable to the
portion of the derivative instruments' change in fair 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
For the year ended December 31, 2001, the ineffective portion of cash flow
hedges was immaterial. There were no gains or losses attributable to the
portion of the derivative instruments' change in fair value excluded from
the assessment of hedge effectiveness.
The Company anticipates reclassifying less than $0.1 million in losses out
of AOCI over the next 12-month period.
As of December 31, 2001, the maximum length of time over which the Company
is hedging its exposure to the variability in future cash flows associated
with forecasted transactions is twelve months. The Company did not
discontinue any cash flow hedges because the original forecasted
transaction was no longer probable.
Other Derivative Instruments, Including Embedded Derivatives
Net realized gains and losses on investments, hedging instruments and
hedged items for the year ended December 31, 2001 include a loss of $1.6
million related to other derivative instruments, including embedded
derivatives. For the year ended December 31, 2001 a $27.7 million loss was
recorded in net realized losses on investments, hedging instruments and
hedged items reflecting the change in fair value of cross-currency
interest rate swaps hedging variable rate medium-term notes denominated in
foreign currencies. An offsetting gain of $26.3 million was recorded in
net realized losses on investments, hedging instruments and hedged items
to reflect the change in spot rates of these foreign currency denominated
obligations during the year ended December 31, 2001.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The notional amount of derivative financial instruments outstanding as of
December 31, 2001 and 2000 were as follows:
(in millions ) 2001 2000
======== ========
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $1,952.3 $ 934.8
Pay variable/receive fixed rate swaps hedging investments 698.4 98.8
Pay variable/receive variable rate swaps hedging investments 197.8 184.0
Other contracts hedging investments 523.0 20.4
Cross currency interest rate swaps
Hedging foreign currency denominated investments 56.1 30.5
Hedging foreign currency denominated liabilities 2,500.4 1,512.2
Interest rate futures contracts 6,019.4 5,659.8
-------- --------
(7) Federal Income Tax
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 2001 and
2000 were as follows:
(in millions) 2001 2000
======== ========
Deferred tax assets:
Equity securities $ 6.5 $ --
Future policy benefits 8.2 34.7
Liabilities in separate accounts 482.5 462.7
Mortgage loans on real estate and real estate 7.5 18.8
Derivatives 93.0 --
Other assets and other liabilities 81.8 40.3
-------- --------
Total gross deferred tax assets 679.5 556.5
Less valuation allowance (7.0) (7.0)
-------- --------
Net deferred tax assets 672.5 549.5
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs 861.3 783.7
Derivatives 91.5 --
Fixed maturity securities 173.0 98.8
Deferred tax on realized investment gains 26.1 29.0
Equity securities and other long-term investments 31.7 6.4
Other 68.8 38.1
-------- --------
Total gross deferred tax liabilities 1,252.4 956.0
-------- --------
Net deferred tax liability $ 579.9 $ 406.5
======== ========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Future taxable
amounts or recovery of federal income tax paid within the statutory
carryback period can offset nearly all future deductible amounts. The
valuation allowance was unchanged for the years ended December 31, 2001,
2000 and 1999.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company's current federal income tax liability was $186.2 million and
$108.9 million as of December 31, 2001 and 2000, respectively.
Federal income tax expense attributable to income before cumulative effect
of adoption of accounting principles for the years ended December 31 was
as follows:
(in millions) 2001 2000 1999
====== ====== ======
Currently payable $ 32.5 $ 78.0 $ 53.6
Deferred tax expense 128.9 129.7 147.8
------ ------ ------
$161.4 $207.7 $201.4
====== ====== ======
Total federal income tax expense for the years ended December 31, 2001,
2000 and 1999 differs from the amount computed by applying the U.S.
federal income tax rate to income before federal income tax expense and
cumulative effect of adoption of accounting principles as follows:
2001 2000 1999
------------------- ------------------- -------------------
(in millions) Amount % Amount % Amount %
====== ====== ====== ====== ====== ======
Computed (expected) tax expense $220.6 35.0 $239.1 35.0 $212.3 35.0
Tax exempt interest and dividends
received deduction (48.8) (7.7) (24.7) (3.6) (7.3) (1.2)
Income tax credits (11.5) (1.8) (8.0) (1.2) (4.3) (0.7)
Other, net 1.1 0.1 1.3 0.2 0.7 0.1
------ ------ ------ ------ ------ ------
Total (effective rate of each year) $161.4 25.6 $207.7 30.4 $201.4 33.2
====== ====== ====== ====== ====== ======
Total federal income tax (refunded) paid was $(45.4) million, $74.6
million and $29.8 million during the years ended December 31, 2001, 2000
and 1999, respectively.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(8) Comprehensive Income (Loss)
Comprehensive income (loss) includes net income as well as certain items
that are reported directly within separate components 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 losses on cash flow hedges. The related before and
after federal income tax amounts for the years ended December 31, 2001,
2000 and 1999 were as follows:
(in millions) 2001 2000 1999
====== ====== =======
Unrealized gains (losses) on securities available-for-sale arising
during the period:
Gross $164.0 $264.5 $(665.3)
Adjustment to deferred policy acquisition costs (71.7) (74.0) 167.5
Related federal income tax (expense) benefit (32.3) (66.7) 171.4
------ ------ -------
Net 60.0 123.8 (326.4)
------ ------ -------
Reclassification adjustment for net losses on securities
available-for-sale realized during the period:
Gross 58.7 13.5 17.6
Related federal income tax benefit (20.5) (4.7) (6.2)
------ ------ -------
Net 38.2 8.8 11.4
------ ------ -------
Other comprehensive income (loss) on securities
available-for-sale 98.2 132.6 (315.0)
------ ------ -------
Accumulated net loss on cash flow hedges:
Gross (13.5) -- --
Related federal income tax benefit 4.7 -- --
------ ------ -------
Other comprehensive loss on cash flow hedges (8.8) -- --
------ ------ -------
Accumulated net loss on transition adjustments:
Transition adjustment - SFAS 133 (5.6) -- --
Transition adjustment - EITF 99-20 3.5 -- --
Related federal income tax benefit 0.7 -- --
------ ------ -------
Other comprehensive loss on transition adjustments (1.4) -- --
------ ------ -------
Total other comprehensive income (loss) $ 88.0 $132.6 $(315.0)
====== ====== =======
Reclassification adjustments for net realized gains and losses on the
ineffective portion of cash flow hedges were immaterial during 2001 and,
therefore, are not reflected in the table above.
(9) Fair Value of Financial Instruments
The following disclosures summarize the carrying amount and estimated fair
value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements of
financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The fair value of a financial instrument is defined as the amount at which
the financial instrument could be exchanged in a current transaction
between willing parties. In cases where quoted market prices are not
available, fair value is to be based on estimates using present value or
other valuation techniques. Many of the Company's assets and liabilities
subject to the disclosure requirements are not actively traded, requiring
fair values to be estimated by management using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Although fair value estimates are calculated using assumptions that
management believes are appropriate, changes in assumptions could cause
these estimates to vary materially. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in the immediate settlement of
the instruments.
Although insurance contracts, other than policies such as annuities that
are classified as investment contracts, are specifically exempted from the
disclosure requirements, estimated fair value of policy reserves on life
insurance contracts is provided to make the fair value disclosures more
meaningful.
The tax ramifications of the related unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered
in the estimates.
In estimating its fair value disclosures, the Company used the following
methods and assumptions:
Fixed maturity and equity securities: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on quoted
market prices. The carrying amount and fair value for fixed maturity
and equity securities exclude the fair value of derivatives
contracts designated as hedges of fixed maturity and equity
securities.
Mortgage loans on real estate, net: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for impaired mortgage loans is the estimated fair value
of the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Separate account assets and liabilities: The fair value of assets
held in separate accounts is based on quoted market prices. The fair
value of liabilities related to separate accounts is the amount
payable on demand, which is net of certain surrender charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is based on one of two methods. For
investment contracts without defined maturities, fair value is the
amount payable on demand. For investment contracts with known or
determined maturities, fair value is estimated using discounted cash
flow analysis. Interest rates used are similar to currently offered
contracts with maturities consistent with those remaining for the
contracts being valued.
Policy reserves on life insurance contracts: Included are
disclosures for individual and corporate-owned life insurance,
universal life insurance and supplementary contracts with life
contingencies for which the estimated fair value is the amount
payable on demand. Also included are disclosures for the Company's
limited payment policies, which the Company has used discounted cash
flow analyses similar to those used for investment contracts with
known maturities to estimate fair value.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Collateral received - securities lending and derivatives: The
carrying amount reported in the consolidated balance sheets for
these instruments approximates their fair value.
Short-term debt: The carrying amount reported in the consolidated
balance sheets for these instruments approximates their fair value.
Long-term debt, payable to NFS: The fair value for long-term debt is
based on quoted market prices.
Commitments to extend credit: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 10.
Futures contracts: The fair value for futures contracts is based on
quoted market prices.
Interest rate and foreign currency swaps: The fair value for
interest rate and foreign currency swaps are calculated with pricing
models using current rate assumptions.
Carrying amount and estimated fair value of financial instruments subject
to disclosure requirements and policy reserves on life insurance contracts
were as follows as of December 31:
2001 2000
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
(in millions) amount fair value amount fair value
========== ========== ========== ==========
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $ 18,370.8 $ 18,370.8 $ 15,451.3 $ 15,451.3
Equity securities 94.0 94.0 109.0 109.0
Mortgage loans on real estate, net 7,113.1 7,293.3 6,168.3 6,327.8
Policy loans 591.1 591.1 562.6 562.6
Short-term investments 1,011.3 1,011.3 442.6 442.6
Cash 22.6 22.6 18.4 18.4
Assets held in separate accounts 59,513.0 59,513.0 65,897.2 65,897.2
Liabilities:
Investment contracts (19,549.5) (18,421.0) (16,815.3) (15,979.8)
Policy reserves on life insurance contracts (5,666.5) (5,524.4) (5,368.4) (5,128.5)
Collateral received - securities lending and
derivatives (809.6) (809.6) -- --
Short-term debt (100.0) (100.0) (118.7) (118.7)
Long-term debt, payable to NFS (300.0) (300.0) -- --
Liabilities related to separate accounts (59,513.0) (58,387.3) (65,897.2) (64,237.6)
Derivative financial instruments:
Interest rate swaps hedging assets (5.6) (5.6) (8.3) (8.3)
Cross currency interest rate swaps (66.0) (66.0) (24.3) (24.3)
Futures contracts (33.0) (33.0) (16.0) (16.0)
---------- ---------- ---------- ----------
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(10) Risk Disclosures
The following is a description of the most significant risks facing life
insurers and how the Company mitigates those risks:
Credit Risk: The risk that issuers of securities owned by the Company or
mortgagors on mortgage loans on real estate owned by the Company will
default or that other parties, including reinsurers, which owe the Company
money, will not pay. The Company minimizes this risk by adhering to a
conservative investment strategy, by maintaining reinsurance and credit
and collection policies and by providing for any amounts deemed
uncollectible.
Interest Rate Risk: The risk that interest rates will change and cause a
decrease in the value of an insurer's investments. This change in rates
may cause certain interest-sensitive products to become uncompetitive or
may cause disintermediation. The Company mitigates this risk by charging
fees for non-conformance with certain policy provisions, by offering
products that transfer this risk to the purchaser and/or by attempting to
match the maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly than
assets mature, an insurer could potentially have to borrow funds or sell
assets prior to maturity and potentially recognize a gain or loss.
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create additional
expenses not anticipated by the insurer in pricing its products. The
Company mitigates this risk by offering a wide range of products and by
operating throughout the U. S., thus reducing its exposure to any single
product or jurisdiction and also by employing underwriting practices which
identify and minimize the adverse impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a party
to financial instruments with off-balance-sheet risk in the normal course
of business through management of its investment portfolio. These
financial instruments include commitments to extend credit in the form of
loans and derivative financial instruments. These instruments involve, to
varying degrees, elements of credit risk in excess of amounts recognized
on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower and are subject to conditions established
in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a deposit.
Commitments extended by the Company are based on management's case-by-case
credit evaluation of the borrower and the borrower's loan collateral. The
underlying mortgage property represents the collateral if the commitment
is funded. The Company's policy for new mortgage loans on real estate is
to generally lend no more than 80% of collateral value. Should the
commitment be funded, the Company's exposure to credit loss in the event
of nonperformance by the borrower is represented by the contractual
amounts of these commitments less the net realizable value of the
collateral. The contractual amounts also represent the cash requirements
for all unfunded commitments. Commitments on mortgage loans on real estate
of $344.0 million extending into 2002 were outstanding as of December 31,
2001. The Company also had $81.5 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 2001.
Notional amounts of derivative financial instruments, primarily interest
rate swaps, interest rate futures contracts and foreign currency swaps,
significantly exceed the credit risk associated with these instruments and
represent contractual balances on which calculations of amounts to be
exchanged are based. Credit exposure is limited to the sum of the
aggregate fair value of positions that have become favorable to NLIC,
including accrued interest receivable due from counterparties. Potential
credit losses are minimized through careful evaluation of counterparty
credit standing, selection of counterparties from a limited group of high
quality institutions, collateral agreements and other contract provisions.
As of December 31, 2001, NLIC's credit risk from these derivative
financial instruments was $1.5 million net of $18.0 million of cash
colleteral.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Equity Market Risk: Asset fees calculated as a percentage of the separate
account assets are a significant source of revenue to the Company. As of
December 31, 2001, 82% of separate account assets were invested in equity
mutual funds. Gains and losses in the equity markets will result in
corresponding increases and decreases in the Company's separate account
assets and the reported asset fee revenue. In addition, a decrease in
separate account assets may decrease the Company's expectations of future
profit margins, which may require the Company to accelerate the
amortization of deferred policy acquisition costs.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the U. S.
The Company has a diversified portfolio with no more than 20% (22% in
2000) in any geographic area and no more than 2% (1% in 2000) with any one
borrower as of December 31, 2001. As of December 31, 2001, 34% (36% in
2000) of the carrying value of the Company's commercial mortgage loan
portfolio financed retail properties.
Significant Business Concentrations: As of December 31, 2001, the Company
did not have a material concentration of financial instruments in a single
investee, industry or geographic location. Also, the Company did not have
a concentration of business transactions with a particular customer,
lender or distribution source, a market or geographic area in which
business is conducted that makes it vulnerable to an event which could
cause a severe impact to the Company's financial position.
Reinsurance: The Company has entered into reinsurance contracts to cede a
portion of its general account individual annuity business. Total
recoveries due from these contracts were $161.2 million and $143.1 million
as of December 31, 2001 and 2000, respectively. The contracts are
immaterial to the Company's results of operations. The ceding of risk does
not discharge the original insurer from its primary obligation to the
policyholder. Under the terms of the contracts, trusts have been
established as collateral for the recoveries. The trust assets are
invested in investment grade securities, the fair value of which must at
all times be greater than or equal to 100% or 102% of the reinsured
reserves, as outlined in the underlying contract.
Collateral - Derivatives: The Company enters into agreements with various
counterparties to execute over-the-counter derivative transactions. The
Company's policy is to include a Credit Support Annex with each agreement
to protect the Company for any exposure above the approved credit
threshold. This also protects the counterparty against exposure to the
Company. The Company generally posts securities as collateral and receives
cash as collateral from counterparties. The Company maintains ownership of
the securities at all times and is entitled to receive from the borrower
any payments for interest or dividends received during the loan term.
Collateral - Securities Lending: The Company, through its agent, lends
certain portfolio holdings and in turn receives cash collateral. The cash
collateral is invested in high-quality short-term investments. The
Company's policy requires a minimum of 102% of the fair value of the
securities loaned be maintained as collateral. Net returns on the
investments, after payment of a rebate to the borrower, are shared between
the Company and its agent. Both the borrower and the Company can request
or return the loaned securities at any time. The Company maintains
ownership of the securities at all times and is entitled to receive from
the borrower any payments for interest or dividends received during the
loan term.
(11) Pension Plan, Postretirement Benefits Other than Pensions and Retirement
Savings Plan
The Company is a participant, together with other affiliated companies, in
a pension plan covering all employees who have completed at least one year
of service and who have met certain age requirements. Plan contributions
are invested in a group annuity contract of NLIC. Benefits are based upon
the highest average annual salary of a specified number of consecutive
years of the last ten years of service. The Company funds pension costs
accrued for direct employees plus an allocation of pension costs accrued
for employees of affiliates whose work efforts benefit the Company.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Pension costs (benefits) charged to operations by the Company during the
years ended December 31, 2001, 2000 and 1999 were $5.0 million, $1.9
million and $(8.3) million, respectively. The Company has recorded a
prepaid pension asset of $9.4 million and $13.6 million as of December 31,
2001 and 2000, respectively.
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full time
employees who have attained age 55 and have accumulated 15 years of
service with the Company after reaching age 40. Postretirement health care
benefit contributions are adjusted annually and contain cost-sharing
features such as deductibles and coinsurance. In addition, there are caps
on the Company's portion of the per-participant cost of the postretirement
health care benefits. These caps can increase annually, but not more than
three percent. The Company's policy is to fund the cost of health care
benefits in amounts determined at the discretion of management. Plan
assets are invested primarily in group annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
2001 and 2000 was $53.8 million and $51.0 million, respectively and the
net periodic postretirement benefit cost (NPPBC) for 2001, 2000 and 1999
was $2.9 million, $3.8 million and $4.9 million, respectively.
Information regarding the funded status of the pension plan as a whole and
the postretirement life and health care benefit plan as a whole as of
December 31, 2001 and 2000 follows:
Pension Benefits Postretirement Benefits
------------------------- -----------------------
(in millions) 2001 2000 2001 2000
======== ======== ======== ========
Change in benefit obligation
Benefit obligation at beginning of year $1,981.7 $1,811.4 $ 276.4 $ 239.8
Service cost 89.3 81.4 12.6 12.2
Interest cost 129.1 125.3 21.4 18.7
Participant contributions -- -- 3.3 2.9
Plan amendment 27.7 -- 0.2 --
Actuarial (gain) loss (5.8) 34.8 20.2 16.1
Benefits paid (89.8) (71.2) (20.1) (13.3)
-------- -------- -------- --------
Benefit obligation at end of year 2,132.2 1,981.7 314.0 276.4
======== ======== ======== ========
Change in plan assets
Fair value of plan assets at beginning of year 2,337.1 2,247.6 119.4 91.3
Actual return (loss) on plan assets (46.6) 140.9 (0.2) 12.2
Employer contribution -- -- 17.3 26.3
Participant contributions -- -- 3.3 2.9
Plan curtailment -- 19.8 -- --
Benefits paid (89.8) (71.2) (20.1) (13.3)
-------- -------- -------- --------
Fair value of plan assets at end of year 2,200.7 2,337.1 119.7 119.4
-------- -------- -------- --------
Funded status 68.5 355.4 (194.3) (157.0)
Unrecognized prior service cost 49.5 25.0 0.2 --
Unrecognized net gains (79.3) (311.7) (4.0) (34.1)
Unrecognized net (asset) obligation at transition (5.1) (6.4) 0.8 1.0
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 33.6 $ 62.3 $ (197.3) $ (190.1)
======== ======== ======== ========
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Assumptions used in calculating the funded status of the pension plan and
postretirement life and health care benefit plan were as follows:
Pension Benefits Postretirement Benefits
----------------------- ------------------------
2001 2000 2001 2000
======================= ========================
Weighted average discount rate 6.50% 6.75% 7.25% 7.50%
Rate of increase in future compensation levels 4.75% 5.00% -- --
Assumed health care cost trend rate:
Initial rate -- -- 11.00% 11.00%
Ultimate rate -- -- 5.50% 5.50%
Declining period -- -- 4 Years 4 Years
----- ----- ----- -----
The components of net periodic pension cost for the pension plan as a
whole for the years ended December 31, 2001, 2000 and 1999 were as
follows:
(in millions) 2001 2000 1999
=======================================================================================================================
Service cost (benefits earned during the period) $ 89.3 $ 81.4 $ 80.0
Interest cost on projected benefit obligation 129.1 125.3 109.9
Expected return on plan assets (183.8) (184.5) (160.3)
Recognized gains (7.8) (11.8) (9.1)
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition asset (1.3) (1.3) (1.4)
------ ------ ------
$ 28.7 $ 12.3 $ 22.3
====== ====== ======
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide and employees of WSC ended participation in
the pension plan resulting in a curtailment gain of $67.1 million. During
1999, the pension plan transferred assets to settle its obligation related
to WSC employees, resulting in a gain of $32.9 million. The spin-off of
liabilities and assets was completed in the year 2000, resulting in an
adjustment to the curtailment gain of $19.8 million.
Assumptions used in calculating the net periodic pension cost for the
pension plan were as follows:
2001 2000 1999
==== ==== ====
Weighted average discount rate 6.75% 7.00% 6.08%
Rate of increase in future compensation levels 5.00% 5.25% 4.33%
Expected long-term rate of return on plan assets 8.00% 8.25% 7.33%
---- ---- ----
The components of NPPBC for the postretirement benefit plan as a whole for
the years ended December 31, 2001, 2000 and 1999 were as follows:
(in millions) 2001 2000 1999
===== ===== =====
Service cost (benefits attributed to employee service during the year) $12.6 $12.2 $14.2
Interest cost on accumulated postretirement benefit obligation 21.4 18.7 17.6
Expected return on plan assets (9.6) (7.9) (4.8)
Amortization of unrecognized transition obligation of affiliates 0.6 0.6 0.6
Net amortization and deferral (0.4) (1.3) (0.5)
----- ----- -----
$24.6 $22.3 $27.1
===== ===== =====
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 2001, 2000 and 1999 were as follows:
2001 2000 1999
======= ======= =======
Discount rate 7.50% 7.80% 6.65%
Long-term rate of return on plan assets, net of tax in 1999 8.00% 8.30% 7.15%
Assumed health care cost trend rate:
Initial rate 11.00% 13.00% 15.00%
Ultimate rate 5.50% 5.50% 5.50%
Declining period 4 Years 5 Years 6 Years
------- ------- -------
Because current plan costs are very close to the employer dollar caps, the
health care cost trend has an immaterial effect on plan obligations for
the postretirement benefit plan as a whole. For this reason, the effect of
a one percentage point increase or decrease in the assumed health care
cost trend rate on the APBO as of December 31, 2001 and on the NPPBC for
the year ended December 31, 2001 was not calculated.
The Company, together with other affiliated companies, sponsors a defined
contribution retirement savings plan covering substantially all employees
of the Company. Employees may make salary deferral contributions of up to
22%. Salary deferrals of up to 6% are subject to a 50% Company match. The
Company match is funded on a bi-weekly basis and the expense of such
contributions are allocated to the Company based on employee
contributions. The Company's expense for contributions to this plan
totaled $5.6 million, $4.4 million and $3.3 million for 2001, 2000 and
1999, respectively. Individuals are subject to a dollar limit on salary
deferrals per Internal Revenue Service (IRS) Section 402(g) and other
limits also apply. The Company has no legal obligation for benefits under
this plan.
(12) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings and
Dividend Restrictions
The State of Ohio, where NLIC and NLAIC are domiciled, imposes minimum
risk-based capital requirements that were developed by the NAIC. The
formulas for determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or various levels
of activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the Company's insurance regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed the
minimum risk-based capital requirements for all periods presented herein.
The statutory capital and surplus of NLIC as of December 31, 2001, 2000
and 1999 was $1.76 billion, $1.28 billion and $1.35 billion, respectively.
The statutory net income of NLIC for the years ended December 31, 2001,
2000 and 1999 was $83.1 million, $158.7 million and $276.2 million,
respectively.
The NAIC completed a project to codify statutory accounting principles
(Codification), which became effective January 1, 2001 for NLIC and NLAIC.
The resulting change to NLIC's January 1, 2001 surplus was an increase of
approximately $80.0 million. The significant change for NLIC, as a result
of Codification, was the recording of deferred taxes, which were not
recorded prior to the adoption of Codification.
The Company is limited in the amount of shareholder dividends it may pay
without prior approval by the Department. As of December 31, 2001 $141.0
million in dividends could be paid by NLIC without prior approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of the State of New York that
limit the amount of statutory profits on NLIC's participating policies
(measured before dividends to policyholders) that can inure to the benefit
of the Company and its shareholders.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses, interest and shareholder
dividends in the future.
(13) Related Party Transactions
During 2001, the Company entered into a transaction with 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,
the Company 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 interest 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 the
Company and NMIC separately reviewed and approved the valuation prior to
the execution of this transaction. The Company continues to hold an
economic and voting interest in the limited partnership of approximately
14%, with NMIC holding the remaining interests.
NLIC has issued group annuity and life insurance contracts and performs
administrative services for various employee benefit plans sponsored by
NMIC or its affiliates. Total account values of these contracts were $4.68
billion and $4.80 billion as of December 31, 2001 and 2000, respectively.
Total revenues from these contracts were $150.7 million, $156.8 million,
and $149.7 million for the years ended December 31, 2001, 2000, and 1999,
respectively, and include policy charges, net investment income from
investments backing the contracts and administrative fees. Total interest
credited to the account balances were $118.4 million, $131.9 million, and
$112.0 million for the years ended December 31, 2001, 2000, and 1999,
respectively. The terms of these contracts are consistent in all material
respects with what the Company offers to unaffiliated parties.
The Company files a consolidated federal tax return with NMIC, as
described in Note 2(i). Total payments (from) to NMIC were $(45.4)
million, $74.6 million, and $29.8 million for the years ended December 31,
2001, 2000, and 1999, respectively.
During second quarter 1999, the Company entered into a modified
coinsurance arrangement to reinsure the 1999 operating results of an
affiliated company, Employers Life Insurance Company of Wausau (ELOW)
retroactive to January 1, 1999. In September 1999, NFS acquired ELOW for
$120.8 million and immediately merged ELOW into NLIC terminating the
modified coinsurance arrangement. Because ELOW was an affiliate, the
Company accounted for the merger similar to poolings-of-interests;
however, prior period financial statements were not restated due to
immateriality. The reinsurance and merger combined contributed $1.46
million to net income in 1999.
The Company has a reinsurance agreement with NMIC whereby all of the
Company's accident and health business is ceded to NMIC on a modified
coinsurance basis. The agreement covers individual accident and health
business for all periods presented and group and franchise accident and
health business since July 1, 1999. Either party may terminate the
agreement on January 1 of any year with prior notice. Prior to July 1,
1999 group and franchise accident and health business and a block of group
life insurance policies were ceded to ELOW under a modified coinsurance
agreement. Under a modified coinsurance agreement, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment
risk associated with changes in interest rates is borne by the reinsurer.
Risk of asset default is retained by the Company, although a fee is paid
to the Company for the retention of such risk. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. The Company believes that the terms of the modified
coinsurance agreements are consistent in all material respects with what
the Company could have obtained with unaffiliated parties. Revenues ceded
to NMIC and ELOW for the years ended December 31, 2001, 2000 and 1999 were
$200.7 million, $170.1 million, and $193.0 million, respectively, while
benefits, claims and expenses ceded were $208.5 million, $168.0 million
and $197.3 million, respectively.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Pursuant to a cost sharing agreement among NMIC and certain of its direct
and indirect subsidiaries, including the Company, NMIC provides certain
operational and administrative services, such as investment management,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to allocation
among NMIC and such subsidiaries. Measures used to allocate expenses among
companies include individual employee estimates of time spent, special
cost studies, salary expense, commission expense and other methods agreed
to by the participating companies that are within industry guidelines and
practices. In addition, Nationwide Services Company, a subsidiary of NMIC,
provides computer, telephone, mail, employee benefits administration, and
other services to NMIC and certain of its direct and indirect
subsidiaries, including the Company, based on specified rates for units of
service consumed. For the years ended December 31, 2001, 2000 and 1999,
the Company made payments to NMIC and Nationwide Services Company totaling
$139.8 million, $150.3 million, and $124.1 million, respectively. The
Company does not believe that expenses recognized under these agreements
are materially different than expenses that would have been recognized had
the Company operated on a stand-alone basis.
Under a marketing agreement with NMIC, NLIC makes payments to cover a
portion of the agent marketing allowance that is paid to Nationwide
agents. These costs cover product development and promotion, sales
literature, rent and similar items. Payments under this agreement totaled
$26.4 million, $31.4 million and $34.5 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company leases office space from NMIC and certain of its subsidiaries.
For the years ended December 31, 2001, 2000 and 1999, the Company made
lease payments to NMIC and its subsidiaries of $18.7 million, $14.1
million and $9.9 million, respectively.
The Company also participates in intercompany repurchase agreements with
affiliates whereby the seller will transfer securities to the buyer at a
stated value. Upon demand or after a stated period, the seller will
repurchase the securities at the original sales price plus a price
differential. During 2001, the most the Company had outstanding at any
given time was $368.5 million and the Company incurred interest expense on
intercompany repurchase agreements of $0.2 million for 2001. Transactions
under the agreements during 2000 and 1999 were not material. The Company
believes that the terms of the repurchase agreements are materially
consistent with what the Company could have obtained with unaffiliated
parties.
The Company and various affiliates entered into agreements with Nationwide
Cash Management Company (NCMC), an affiliate, under which NCMC acts as a
common agent in handling the purchase and sale of short-term securities
for the respective accounts of the participants. Amounts on deposit with
NCMC were $54.8 million and $321.1 million as of December 31, 2001 and
2000, respectively, and are included in short-term investments on the
accompanying consolidated balance sheets.
Certain annuity products are sold through affiliated companies, which are
also subsidiaries of NFS. Total commissions and fees paid to these
affiliates for the three years ended December 31, 2001 were $52.9 million,
$65.0 million and $79.7 million, respectively.
On December 19, 2001 the Company sold a 7.50%, $300.0 million surplus note
to NFS, maturing on December 17, 2031. The fair value of the surplus note
as of December 31, 2001 was $300.0 million. Principal and interest
payments are subject to prior approval by the superintendent of insurance
of the State of Ohio. The Company is scheduled to pay interest
semi-annually on June 17 and December 17 of each year commencing June 17,
2002.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(14) Bank Lines of Credit
The Company has available as a source of funds a $1 billion revolving
credit facility entered into by NFS, NLIC and NMIC. The facility is
comprised of a five year $700 million agreement and a 364 day $300 million
agreement with a group of national financial institutions. The facility
provides for several and not joint liability with respect to any amount
drawn by any party. The facility provides covenants, including, but not
limited to, requirements that the Company maintain consolidated tangible
net worth, as defined, in excess of $1.69 billion and NLIC maintain
statutory surplus in excess of $935 million. The Company had no amounts
outstanding under this agreement as of December 31, 2001. Of the total
facility, $300 million is designated to back NLIC's commercial paper
program. Therefore, borrowing capacity under this facility is reduced by
any amounts outstanding under the commercial paper program, which totaled
$100.0 million as of December 31, 2001.
(15) 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. 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 the other named defendants. On January
25, 2002, the plaintiffs filed a motion for leave to amend their complaint
to add three new named plaintiffs. On February 9, 2002, the plaintiffs
filed a motion for class certification. The class has not been certified.
The Company intends to defend this lawsuit vigorously.
On August 15, 2001, the Company was named in a lawsuit filed in
Connecticut federal court titled Lou Haddock, as trustee of the Flyte Tool
& Die, Incorporated Deferred Compensation Plan, et al v. Nationwide
Financial Services, Inc. and Nationwide Life Insurance Company. On
September 5, 2001, the plaintiffs amended their complaint to include class
action allegations. The plaintiffs seek to represent a class of plan
trustees who purchased variable annuities to fund qualified ERISA
retirement plans. The amended complaint alleges that the retirement plans
purchased variable annuity contracts from the Company which invested in
mutual funds that were offered by separate mutual fund companies; that the
Company was a fiduciary under ERISA and that the Company breached its
fiduciary duty when it accepted certain fees from the mutual fund
companies that purportedly were never disclosed by the Company; and that
the Company violated ERISA by replacing many of the mutual funds
originally included in the plaintiffs' annuities with "inferior" funds
because the new funds purportedly paid more in revenue sharing. The
amended complaint seeks disgourgement of fees by the Company and other
unspecified compensatory damages. On November 15, 2001, the Company filed
a motion to dismiss the amended complaint, which has not been decided. On
December 3, 2001, the plaintiffs filed a motion for class certification.
On January 15, 2002, the plaintiffs filed a response to the Company's
motion to dismiss the amended complaint. On February 22, 2002, the Company
filed a reply in support of its motion to dismiss. The class has not been
certified. The Company intends to defend this lawsuit vigorously.
There can be no assurance that any such litigation will not have a
material adverse effect on the Company in the future.
(16) Segment Information
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.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Individual Annuity segment consists of individual The BEST of AMERICA
and private label deferred variable annuity products, deferred fixed
annuity products and income products. Individual deferred annuity
contracts provide the customer with tax-deferred accumulation of savings
and flexible payout options including lump sum, systematic withdrawal or a
stream of payments for life. In addition, 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 prescribed periods.
The Institutional Products segment is comprised of the Company's private
and public sector group retirement plans and medium-term note program. The
private sector includes the 401(k) business generated through fixed and
variable annuities. The public sector includes the IRC Section 457
business in the form of fixed and variable annuities.
The Life Insurance segment consists of investment life products, including
both individual variable life and COLI products, traditional life
insurance products and universal life insurance. Life insurance products
provide a death benefit and generally 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 debt. 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 tables summarize the financial results of the Company's
business segments for the years ended December 31, 2001, 2000 and 1999.
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
========== ============ ========== ========= =========
2001:
Net investment income $ 534.7 $ 847.5 $ 323.3 $ 19.5 $ 1,725.0
Other operating revenue 556.0 205.9 506.5 16.0 1,284.4
--------- --------- --------- --------- ---------
Total operating revenue (1) 1,090.7 1,053.4 829.8 35.5 3,009.4
--------- --------- --------- --------- ---------
Interest credited to policyholder
account balances 433.2 627.8 177.7 -- 1,238.7
Amortization of deferred policy
acquisition costs 220.0 47.6 80.3 -- 347.9
Interest expense on debt -- -- -- 6.2 6.2
Other benefits and expenses 206.1 170.2 387.1 2.7 766.1
--------- --------- --------- --------- ---------
Total benefits and expenses 859.3 845.6 645.1 8.9 2,358.9
--------- --------- --------- --------- ---------
Operating income before
federal income tax expense (1) 231.4 207.8 184.7 26.6 650.5
Net realized losses on investments,
hedging instruments and hedged
items (2) -- -- -- (20.2) (20.2)
--------- --------- --------- --------- ---------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 231.4 $ 207.8 $ 184.7 $ 6.4 $ 630.3
========= ========= ========= ========= =========
Assets as of year end $43,885.4 $34,130.1 $ 9,129.0 $ 4,010.1 $91,154.6
========= ========= ========= ========= =========
- ----------
(1) Excludes net realized gains and losses on investments, hedging instruments
and hedged items.
(2) Realized gains related to securitization transactions are included in
operating income.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
========= ============ ========= ========= =========
2000:
Net investment income $ 483.2 $ 827.4 $ 289.2 $ 55.1 $ 1,654.9
Other operating revenue 625.9 251.6 453.9 17.0 1,348.4
--------- --------- --------- --------- ---------
Total operating revenue(1) 1,109.1 1,079.0 743.1 72.1 3,003.3
--------- --------- --------- --------- ---------
Interest credited to policyholder
account balances 396.4 628.8 157.2 -- 1,182.4
Amortization of deferred policy
acquisition costs 238.7 49.2 64.2 -- 352.1
Interest expense on debt -- -- -- 1.3 1.3
Other benefits and expenses 192.3 170.3 368.8 33.7 765.1
--------- --------- --------- --------- ---------
Total benefits and expenses 827.4 848.3 590.2 35.0 2,300.9
--------- --------- --------- --------- ---------
Operating income before
federal income tax expense(1) 281.7 230.7 152.9 37.1 702.4
Net realized losses on investments,
hedging instruments and hedged
items -- -- -- (19.4) (19.4)
--------- --------- --------- --------- ---------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 281.7 $ 230.7 $ 152.9 $ 17.7 $ 683.0
========= ========= ========= ========= =========
Assets as of year end $45,422.5 $37,217.3 $ 8,103.3 $ 1,824.2 $92,567.3
========= ========= ========= ========= =========
1999:
Net investment income $ 458.9 $ 771.2 $ 253.1 $ 37.6 $ 1,520.8
Other operating revenue 511.4 211.9 393.0 66.1 1,182.4
--------- --------- --------- --------- ---------
Total operating revenue (1) 970.3 983.1 646.1 103.7 2,703.2
--------- --------- --------- --------- ---------
Interest credited to policyholder
account balances 384.9 580.9 130.5 -- 1,096.3
Amortization of deferred policy
acquisition costs 170.9 41.6 60.1 -- 272.6
Other benefits and expenses 155.3 142.8 334.7 83.4 716.2
--------- --------- --------- --------- ---------
Total benefits and expenses 711.1 765.3 525.3 83.4 2,085.1
--------- --------- --------- --------- ---------
Operating income before
federal income tax expense (1) 259.2 217.8 120.8 20.3 618.1
Net realized losses on investments,
hedging instruments and hedged
items -- -- -- (11.6) (11.6)
--------- --------- --------- --------- ---------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 259.2 $ 217.8 $ 120.8 $ 8.7 $ 606.5
========= ========= ========= ========= =========
Assets as of year end $45,667.8 $39,045.1 $ 6,616.7 $ 1,346.3 $92,675.9
========= ========= ========= ========= =========
- ----------
(1) Excludes net realized gains and losses on investments, hedging instruments
and hedged items.
The Company has no significant revenue from customers located outside of
the United States nor does the Company have any significant long-lived
assets located outside the United States.
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions)
As of December 31, 2001
Column A Column B Column C Column D
- --------------------------------------------------------------------- --------------- --------------- ------------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- --------------------------------------------------------------------- --------------- --------------- ------------------
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 2,275.5 $ 2,362.2 $ 2,362.2
States, municipalities and political subdivisions 7.6 7.9 7.9
Foreign governments 41.8 44.4 44.4
Public utilities 1,205.2 1,219.3 1,219.3
All other corporate 14,431.5 14,737.0 14,737.0
------------ ------------ -----------
Total fixed maturity securities available-for-sale 17,961.6 18,370.8 18,370.8
------------ ------------ -----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 83.0 94.0 94.0
Non-redeemable preferred stock -- -- --
------------ ------------ -----------
Total equity securities available-for-sale 83.0 94.0 94.0
------------ ------------ -----------
Mortgage loans on real estate, net 7,131.0 7,113.1 (1)
Real estate, net:
Investment properties 138.0 116.7 (2), (4)
Acquired in satisfaction of debt 23.7 22.3 (2)
Policy loans 591.1 591.1
Other long-term investments 90.6 86.7 (3), (5)
Short-term investments, including amounts managed by a related party 1,011.3 1,011.3
------------ -----------
Total investments $ 27,030.3 $ 27,406.0
============ ===========
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate (see note 3 to the
consolidated financial statements), hedges and commitment hedges on
mortgage loans on real estate.
(2) Difference from Column B primarily results from adjustments for
accumulated depreciation.
(3) Difference from Column B is primarily due to operating gains and/or losses
of investments in limited partnerships.
(4) Amount shown does not agree to the consolidated balance sheet due to an
unconsolidated related party limited partnership investment in the amount
of $33.0 million.
(5) Amount shown does not agree to the consolidated balance sheet due to
unconsolidated related party investments in the amount of $38.3 million.
See accompanying independent auditors' report.
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
As of December 31, 2001, 2000 and 1999 and for each of the years then ended
Column A Column B Column C Column D Column E Column F
- ----------------------------- ---------------- --------------------- -------------------- -------------- -----------
Deferred Future policy
policy benefits, losses, Other policy
acquisition claims and Unearned claims and Premium
Segment costs loss expenses premiums(1) benefits payable(1) revenue
- ----------------------------- ---------------- --------------------- -------------------- ------------------- -----------
2001: Individual Annuity $ 1,946.8 $ 8,857.2 $ 60.9
Institutional Products 307.7 11,872.7 --
Life Insurance 1,025.2 4,252.3 190.2
Corporate (90.7) 233.8 --
---------- ----------- --------
Total $ 3,189.0 $ 25,216.0 $ 251.1
========== =========== ========
2000: Individual Annuity $ 1,711.6 $ 7,008.8 $ 52.7
Institutional Products 293.7 10,944.0 --
Life Insurance 877.8 3,995.6 187.3
Corporate (17.5) 235.2 --
---------- ----------- --------
Total $ 2,865.6 $ 22,183.6 $ 240.0
========== =========== ========
1999: Individual Annuity $ 1,525.1 $ 7,337.8 $ 26.8
Institutional Products 275.2 10,833.4 --
Life Insurance 702.9 3,519.9 194.0
Corporate 50.9 170.5 --
---------- ----------- --------
Total $ 2,554.1 $ 21,861.6 $ 220.8
========== =========== ========
Column A Column G Column H Column I Column J Column K
- ----------------------------- ---------------- --------------------- -------------------- -------------- -----------
Benefits, claims, Amortization Other
Net investment losses and of deferred policy operating Premiums
Segment income(2) settlement expenses acquisition costs expenses(2) written
- ----------------------------- ---------------- --------------------- -------------------- -------------- -----------
2001: Individual Annuity $ 534.7 $ 501.8 $ 220.0 $ 137.5
Institutional Products 847.5 627.8 47.6 170.2
Life Insurance 323.3 389.4 80.3 133.7
Corporate 19.5 -- -- 2.7
---------- ----------- ------- -------
Total $ 1,725.0 $ 1,519.0 $ 347.9 $ 444.1
========== =========== ======= =======
2000: Individual Annuity $ 483.2 $ 450.4 $ 238.7 $ 138.3
Institutional Products 827.4 628.8 49.2 170.3
Life Insurance 289.2 344.8 64.2 136.7
Corporate 55.1 - - 33.7
---------- ----------- ------- -------
Total $ 1,654.9 $ 1,424.0 $ 352.1 $ 479.0
========== =========== ======= =======
1999: Individual Annuity $ 458.9 $ 408.7 $ 170.9 $ 131.5
Institutional Products 771.2 580.9 41.6 142.8
Life Insurance 253.1 317.1 60.1 105.7
Corporate 37.6 - - 83.4
---------- ----------- ------- -------
Total $ 1,520.8 $ 1,306.7 $ 272.6 $ 463.4
========== =========== ======= =======
- ----------
(1) Unearned premiums and other policy claims and benefits payable are
included in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions)
As of December 31, 2001, 2000 and 1999 and for each of the years then ended
Column A Column B Column C Column D Column E Column F
- ----------------------------------- -------------- ------------ ---------- ------------ ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
-------------- ------------ ---------- ------------ ------------
2001:
Life insurance in force $ 107,765.8 $ 37,331.3 $ 17.1 $ 70,451.6 0.0%
============== ============ ======= ============ =====
Premiums:
Life insurance(1) $ 264.9 $ 14.0 $ 0.2 $ 251.1 0.1%
Accident and health insurance 176.4 182.2 5.8 -- N/A
-------------- ------------ ------- ------------ -----
Total $ 441.3 $ 196.2 $ 6.0 $ 251.1 2.4%
============== ============ ======= ============ =====
2000:
Life insurance in force $ 95,475.2 $ 31,101.6 $ 16.4 $ 64,390.0 0.0%
============== ============ ======= ============ =====
Premiums:
Life insurance(1) $ 254.6 $ 14.8 $ 0.2 $ 240.0 0.1%
Accident and health insurance 150.8 156.8 6.0 -- N/A
-------------- ------------ ------- ------------ -----
Total $ 405.4 $ 171.6 $ 6.2 $ 240.0 2.6%
============== ============ ======= ============ =====
1999:
Life insurance in force $ 84,845.3 $ 26,296.5 $ 14.9 $ 58,563.7 0.0%
============== ============ ======= ============ =====
Premiums:
Life insurance(1) $ 242.2 $ 22.6 $ 1.2 $ 220.8 0.6%
Accident and health insurance 134.9 142.8 7.9 -- N/A
-------------- ------------ ------- ------------ -----
Total $ 377.1 $ 165.4 $ 9.1 $ 220.8 4.2%
============== ============ ======= ============ =====
- ----------
(1) The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Years ended December 31, 2001, 2000 and 1999
Column A Column B Column C Column D Column E
- ------------------------------------------------------ ------------ ---------------------------- -----------------------------
Charged
Balance at (credited) to Charged to Balance at
Description beginning costs and other end of
of period expenses accounts Deductions(1) period
- ------------------------------------------------------ ------------ -------------- ------------ -------------- ------------
2001:
Valuation allowances - mortgage loans on real estate $ 45.3 $ (1.2) $ -- $ 1.2 $ 42.9
Valuation allowances - real estate 5.2 -- -- 5.2 -
--------- ------ ----- -------- -------
Total $ 50.5 $ (1.2) $ -- $ 6.4 $ 42.9
========= ====== ===== ======== =======
2000:
Valuation allowances - mortgage loans on real estate $ 44.4 $ 4.1 $ -- $ 3.2 $ 45.3
Valuation allowances - real estate 5.5 0.4 -- 0.7 5.2
--------- ------ ----- -------- -------
Total $ 49.9 $ 4.5 $ -- $ 3.9 $ 50.5
========= ====== ===== ======== =======
1999:
Valuation allowances - fixed maturity securities $ 7.5 $ -- $ -- $ 7.5 $ --
Valuation allowances - mortgage loans on real estate 42.4 0.7 1.3 (2) -- 44.4
Valuation allowances - real estate 5.4 0.9 -- 0.8 5.5
--------- ------ ----- -------- -------
Total $ 55.3 $ 1.6 $ 1.3 $ 8.3 $ 49.9
========= ====== ===== ======== =======
- ----------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
(2) Allowance on acquired mortgage loans.
See accompanying independent auditors' report.
APPENDIX
Example A
Assume that a variable annuity contract owner made a $10,000 allocation on the
first day of a calendar quarter into a 5-year Guaranteed Term Option. The
Specified Interest Rate at the time is 8% and the 5-year Constant Maturity
Treasury Rate in effect for the Specified Interest Rate is 8%. The variable
annuity contract owner decides to surrender the GTO 985 days from maturity. The
Specified Value of the GTO is $11,937.69. At this time, the 3-year Constant
Maturity Treasury Rate is 7%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
------------------------ --------------
MVA FACTOR = 1 + b + 0.0025 365.25
1 + 0.08 985
----------------------- --------------
MVA FACTOR = 1 + 0.07 + 0.0025 365.25
MVA FACTOR = 1.01897
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 1.01897
*SURRENDER VALUE = $12,164.15
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a= The Constant Maturity Treasury Rate declared by the Federal Reserve Board
on Friday, and placed in effect by Nationwide on the Wednesday immediately
preceding the Investment Period during which the allocation to the GTO was
made.
b= The Constant Maturity Treasury Rate declared by the Federal Reserve Board
on Friday, and placed in effect by Nationwide on the Wednesday immediately
preceding the withdrawal, transfer or other distribution giving rise to the
Market Value Adjustment.
d= The number of days remaining in the Guaranteed Term.
97
Example B
Assume variable annuity contract owner made a $10,000 allocation on the first
day of a calendar quarter into a 5-year Guaranteed Term Option. The Specified
Interest Rate at the time is 8% and the 5-year Constant Maturity Treasury Rate
in effect for the Specified Interest Rate is 8%. The variable annuity contract
owner decides to surrender his money 985 days from maturity. The Specified Value
of the GTO is $11,937.69. At this time, the 3 year Constant Maturity Treasury
Rate is 9%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
----------------------- --------------
MVA FACTOR = 1 + b + 0.0025 365.25
1 + 0.08 985
---------------------------- --------------
MVA FACTOR = 1 + 0.09 + 0.0025 365.25
MVA FACTOR = 0.96944
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 0.96944
*SURRENDER VALUE = $11,572.87
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a= The Constant Maturity Treasury Rate declared by the Federal Reserve Board
on Friday, and placed in effect by Nationwide on the Wednesday immediately
preceding the Investment Period during which the allocation to the GTO was
made.
b= The Constant Maturity Treasury Rate declared by the Federal Reserve Board
on Friday, and placed in effect by Nationwide on the Wednesday immediately
preceding the withdrawal, transfer or other distribution giving rise to the
Market Value Adjustment.
d= The number of days remaining in the Guaranteed Term.
98
The table set forth below illustrates the impact of a Market Value Adjustment
applied upon a full surrender of a 10 year GTO allocation, at various stages of
the corresponding Guaranteed Term. These figures are based on CMT Rate of 8% (a
in the Market Value Adjustment Formula) and varying current yield CMT Rates
shown in the first column (b in the Market Value Adjustment Formula).
TIME REMAINING TO THE
END OF THE GUARANTEED SPECIFIED VALUE MARKET VALUE MARKET
CURRENT YIELD TERM ADJUSTMENT VALUE
- ----------------------------------------------------------------------------------------------
12.00% 9 Years $10,800 -29.35% $7,630
7 Years $12,597 -23.68% $9,614
5 Years $14,693 -17.55% $12,114
2 Years $18,509 -7.43% $17,134
180 Days $20,785 -1.88% $20,394
10.00% 9 Years $10,800 -16.94% $8,970
7 Years $12,597 -13.44% $10,904
5 Years $14,693 -9.80% $13,253
2 Years $18,509 -4.04% $17,761
180 Days $20,785 -1.01% $20,575
9.00% 9 Years $10,800 -9.84% $9,731
7 Years $12,597 -7.74% $11,622
5 Years $14,693 -5.59% $13,872
2 Years $18,509 -2.28% $18,067
180 Days $20,785 -0.57% $20,667
8.00% 9 Years $10,800 -2.06% $10,578
7 Years $12,597 -1.61% $12,394
5 Years $14,693 -1.15% $14,524
2 Years $18,509 -0.46% $18,424
180 Days $20,785 -0.11% $20,762
7.00% 9 Years $10,800 6.47% $11,499
7 Years $12,597 5.00% $13,227
5 Years $14,693 3.55% $15,215
2 Years $18,509 1.40% $18,768
180 Days $20,785 0.34% $20,856
6.00% 9 Years $10,800 15.84% $12,511
7 Years $12,597 12.11% $14,122
5 Years $14,693 8.51% $15,943
2 Years $18,509 3.32% $19,123
180 Days $20,785 0.81% $20,953
4.00% 9 Years $10,800 37.45% $14,845
7 Years $12,597 28.07% $16,133
5 Years $14,693 19.33% $17,533
2 Years $18,509 7.32% $19,864
180 Days $20,785 1.76% $21,151
99
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII of the Amended Code of Regulations of Nationwide
provides as follows:
Section 1. Indemnification of Directors, Officers and Employees.
Nationwide will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is
or was a director, officer or employee of Nationwide, or is or was
serving at the request of Nationwide as a director, trustee,
officer, member, or employee of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture,
trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action,
suit or proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the State of Ohio.
Such indemnification (unless ordered by a court) will be made as
authorized in a specific case upon a determination that
indemnification of the director, trustee, officer or employee is
proper in the circumstances because he has met the applicable
standards of conduct set forth in the General Corporation Law of
the State of Ohio. Such determination will be made (1) by the
Board of Directors by a majority vote of a quorum consisting of
directors who were not, and are not, parties to or threatened with
any such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal
counsel meeting the requirements of independence prescribed by the
General Corporation Law of Ohio, or (3) by the shareholders, or
(4) by the Court of Common Pleas or the court in which such
action, suit or proceeding was brought.
Section 2. Other Rights. The foregoing right of indemnification
will not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under the Articles of
Incorporation, these Regulations, any agreement, vote of
shareholders or disinterested directors or otherwise, and will
continue as to a person who has ceased to be a director, trustee,
officer or employee and will inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. Nationwide may pay
expenses, including attorneys' fees, incurred in defending any
action, suit or proceeding referred to in Section 1 of this
Article VII, in advance of the final disposition of such action,
suit or proceeding as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the
director, trustee, officer or employee to repay such amount,
unless it will ultimately be determined that he is entitled to be
indemnified by Nationwide as authorized in this Article VII.
Section 4. Insurance. Nationwide may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, member, or employee of Nationwide, or is or was serving
at the request of Nationwide as a director, trustee, officer or
employee of another corporation, domestic or foreign, non-profit
or for profit, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not Nationwide would have the power to indemnify him
against such liability under this Article VII.
100
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Nationwide, through various separate accounts -- the Nationwide
Government Plans Variable Account ("GPVA"), Nationwide Government
Plans Variable Account-II ("GPVA-II"), and Nationwide Ohio DC
Variable Account ("Ohio DC Variable Account") -- offers contracts
to qualified pension plans and certain government plans in
reliance on Section 3(a)(2) of the Securities Act of 1933 and in
certain cases, Rule 144A thereunder, the proceeds from which are
allocated to underlying mutual fund options at the contract
holder's discretion. Data relating to the amount of securities
sold are:
2001 2000 1999
DCVA 4,023,721,006* N/A N/A
GPVA 1,468,339,703 $1,913,296,237 $1,971,560,639
GPVA-II 754,642 $665,653 $64,525,352
NACo 3,736,880,504* N/A N/A
Ohio DC Variable Account 94,299 $952,601,135 $759,458,067
*Nationwide applied for, and effective May 1, 2001 was granted, an
order by the Securities Exchange Commission to deregister this
separate account.
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
(a)
Exhibit Index Page
(3)(i) Certificate of Incorporation (Exhibit A)*
(3)(ii) Code of Regulations (Exhibit B)*
(4) Annuity Endorsement to Contracts (Exhibit C)* E
(5) Opinion Regarding Legality (Exhibit D) E
(21) Subsidiaries of the Registrant (Exhibit D)*
(23) Consent of Experts and Counsel (Exhibit E) E
(24) Power of Attorney (Exhibit F)* - Copy attached hereto
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the years ended December 31, 2001,
2000 and 1999
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(b)(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other than
Investments in Related Parties as of December 31, 2001
Schedule III Supplementary Insurance Information as of December 31,
2001, 2000 and 1999 and for each of the years then ended
Schedule IV Reinsurance as of December 31, 2001, 2000 and 1999 and
for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000 and 1999
All other schedules to the consolidated financial statements
referenced by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and have therefore
been omitted.
* Filed with the original submission of this registration statement (SEC File
No. 33-58997) on May 2, 1995.
101
Item 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the determining of any liability under the
Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
102
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Nationwide Life Insurance Company:
We consent to the use of our report for Nationwide Life Insurance Company and
subsidiaries dated January 29, 2002 included herein. (File No. 333-72984). Our
report for Nationwide Life Insurance Company and subsidiaries refers to a
change to the method of accounting for derivative instruments and hedging
activities, and for purchased or retained interests in securitized financial
assets.
KPMG LLP
Columbus, OH
April 29, 2002
103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Columbus, State of Ohio, on the 30th of April, 2002.
NATIONWIDE LIFE INSURANCE COMPANY
------------------------------------------
(Registrant)
By: /s/STEVEN SAVINI
------------------------------------------
Steven Savini, Esq.
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed by the following
persons on the 30th of April, 2002 in the capacities indicated.
SIGNATURE TITLE
W. G. JURGENSEN Director and Chief Executive Officer
- ----------------------------------------
W. G. Jurgensen
JOSEPH J. GASPER Director and President and
- ---------------------------------------- Chief Operating Officer
Joseph J. Gasper
MICHAEL S. HELFER Director and Executive
- ---------------------------------------- Vice President-Corporate Strategy
Michael S. Helfer
DONNA A. JAMES Director and Executive Vice
- ---------------------------------------- President-Chief Administrative Officer
Donna A. James
ROBERT A. OAKLEY Director and Executive Vice
- ---------------------------------------- President-Chief Financial Officer
Robert A. Oakley
ROBERT A. WOODWARD, JR Director and Executive Vice
- ---------------------------------------- President-Chief Investment Officer
Robert A. Woodward, Jr.
Galen R. Barnes Director
- ----------------------------------------
Galen R. Barnes
By /s/ STEVEN SAVINI
----------------------------------
Steven Savini
Attorney-in-Fact
104