'33 Act File No. 333-72984
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 3
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 63 31-4156830
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
PATRICIA R. HATLER, ESQ.
SECRETARY
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
TELEPHONE: (614) 249-7111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
JOHN S. (SCOTT) KREIGHBAUM, ESQ.
ONE NATIONWIDE PLAZA, 1-09-V3
COLUMBUS, OHIO 43215
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practical after the effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, 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, 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, check the following box [ ]
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 January 13, 2003
_______________________________________________________________________________
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"). One (1), three (3), five (5),
seven (7) and ten (10) year Guaranteed Terms 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 contract 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 contract prospectuses. The variable contract
prospectuses also state what Guaranteed Terms are available. That GTOs are
available under a variable contract does not mean all Guaranteed Terms are
available. Please refer to the variable contract prospectus for the specific
information.
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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR 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.
TABLE OF CONTENTS
GLOSSARY......................................................................1
INFORMATION ABOUT THE GTOS....................................................2
GENERAL...................................................................2
THE SPECIFIED INTEREST RATE...............................................3
THE INVESTMENT PERIOD.....................................................3
GUARANTEED TERMS..........................................................3
GTOS AT MATURITY..........................................................4
The Market Value Adjustment...........................................4
General...............................................................4
MVA Interest Rates....................................................4
The Market Value Adjustment Formula...................................5
CONTRACT CHARGES..........................................................6
GTOS AT ANNUITIZATION.....................................................6
INVESTMENTS...................................................................6
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOS........................6
SELECTED CONSOLIDATED FINANCIAL DATA..........................................7
BUSINESS OF NATIONWIDE LIFE...................................................9
ORGANIZATION..............................................................9
BUSINESS SEGMENTS........................................................10
RELATED PARTY TRANSACTIONS...............................................10
RATINGS..................................................................11
COMPETITION..............................................................12
REGULATION...............................................................12
LITIGATION...............................................................13
CAPITALIZATION OF NATIONWIDE LIFE............................................14
SELECTED U.S. GAAP CONSOLIDATED FINANCIAL INFORMATION OF NATIONWIDE LIFE.....15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF NATIONWIDE LIFE.................................16
INTRODUCTION.............................................................16
CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS...........................................................17
Impairment Losses on Investments.....................................17
Valuation Allowances on Mortgage Loans on Real Estate................17
Deferred Policy Acquisition Costs for Investment Products and
Universal Life Insurance Products.................................17
Federal Income Taxes.................................................19
Recently Issued Accounting Pronouncements............................19
Reclassification.....................................................19
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2001 RESULTS OF OPERATIONS.......................19
Revenues.............................................................19
Benefits and Expenses................................................20
Discontinued Operations..............................................21
Other Data...........................................................21
Sales Information....................................................22
Business Segments....................................................24
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
AND YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED
DECEMBER 31, 1999....................................................29
Revenues.............................................................29
Benefits and Expenses................................................31
Other Data...........................................................31
Sales Information....................................................32
Business Segments....................................................34
Investments..........................................................40
Liquidity and Capital Resources......................................42
MARKET RISK SENSITIVE FINANCIAL INSTRUMENTS..............................44
Interest Rate Risk...................................................44
Asset/Liability Management Strategies to Manage Interest Rate Risk...44
Use of Derivatives to Manage Interest Rate Risk......................45
Foreign Currency Risk Management.....................................45
Characteristics of Interest Rate Sensitive Financial Instruments.....46
EQUITY MARKET RISK.......................................................47
INFLATION................................................................48
EXECUTIVE OFFICERS AND DIRECTORS.........................................48
EXECUTIVE COMPENSATION...................................................52
Compensation.........................................................52
Performance Incentive Plan...........................................53
Senior Executive Incentive Plan......................................53
Nationwide Economic Value Incentive Plan.............................54
Deferred Compensation Program........................................54
Savings Plan.........................................................54
Supplemental Defined Contribution Plan...............................55
Pension Plans........................................................56
Compensation Committee Joint Report on Executive Compensation........58
Compensation of the Chief Executive Officer..........................61
Security Ownership...................................................62
EMPLOYEES................................................................62
PROPERTIES...............................................................62
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES..............62
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AVAILABLE INFORMATION
Nationwide Life Insurance Company files reports with the Securities and Exchange
Commission on Forms 10-Q, 10-K and 8-K.
The public may read and copy these reports at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers, like Nationwide Life
Insurance Company, that file electronically with the SEC (http://www.sec.gov).
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GLOSSARY
MVA INTEREST RATE- The rate of interest used in the Market Value formula.
Depending on the variable contracts under which the GTO is offered, the interest
rate will be the Constant Maturity Treasury (CMT) rates, or interest rate swaps,
for maturity durations of 1, 3, 5, 7 and 10 years, as 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 1, 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 1, 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 or within 30 days after the first, third, fifth,
seventh or tenth anniversary on which amounts are allocated to a 1, 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.
1
INFORMATION ABOUT THE GTOS
GENERAL
GTOs are guaranteed interest rate investment options available under
certain variable contracts issued by NLIC. There are five different Guaranteed
Terms available: 1 year; 3 years; 5 years; 7 years; and 10 years. 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
contract 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,
authorized and created in accordance with Ohio law, was established for the sole
purpose of reserving and accounting for assets associated with the GTOs. Its
assets are owned by NLIC. Contract owners with GTOs have no claim against, and
maintain no interest in, the assets. Also, contract owners do not participate in
the investment experience.
GTOs provide for a Specified Interest Rate to be credited as long as any
amount allocated to a Guaranteed Term is not distributed for any reason prior to
the Maturity Date. Note, however, that the Maturity Date may extend for up to 3
months beyond the 1, 3, 5, 7 or 10 year term since every GTO will end on the
final day of a calendar quarter.
Amounts allocated to a GTO will be credited interest at the Specified
Interest Rate for the duration of the Guaranteed Term. Specified Interest Rates
are declared periodically at NLIC's sole discretion and available for new
allocations typically for one month, but they may be available for longer or
shorter periods depending on interest rate fluctuations in financial markets.
During this time, 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 (see "Specified Interest Rates and
Guaranteed Terms").
The Specified Interest Rate will be credited daily to amounts allocated to
a GTO to provide an annual effective yield. The Specified Interest Rate will
continue to be credited as long as allocations remain in the GTO until the
Maturity Date. 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 MVA Interest Rate for the period coinciding with the Guaranteed Term
of the GTO at investment;
(2) the MVA Interest 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 the 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
Guaranteed Term 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 any amount in the GTO during the Maturity Period,
without any Market Value Adjustment. However, any transfers from the GTO during
this period may be subject to a surrender charge, assessed by the variable
contract and as further explained in the variable contract prospectus.
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.
2
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.
THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by NLIC to
be credited to amounts allocated to the GTOs for the 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 5 available
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.
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 available 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.
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. 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 that amount.
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.
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
3
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 1, 3, 5, 7 or 10 years only when an
allocation to a GTO occurs on the first day of a calendar quarter.
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.
The Market Value Adjustment
General
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 contract
requires a distribution, such as a death benefit. When liquidating assets, NLIC
may realize either a gain or a loss.
MVA Interest Rates
The Market Value Adjustment formula used to determine the Market Value
Adjustment factor is based on either CMT rates, or interest rate swaps,
depending on the variable contracts under which the GTO is offered, which are
declared by the Federal Reserve Board on a regular basis. NLIC either uses CMT
rates or interest rate swaps 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.
CMT rates and interest rate swaps for 1, 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
4
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%.
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 MVA Interest Rate for the period of time coinciding with the
Guaranteed Term of the GTO;
(2) the MVA Interest Rate for a period coinciding with the time remaining in
the Guaranteed Term of a GTO when a distribution giving rise to a Market
Value Adjustment occurs; and
(3) the number of days remaining in the Guaranteed Term of the GTO.
The formula for determining the Market Value Adjustment factor is:
t
1 + a
--------------------
1 + b + .0025
Where:
a = the MVA Interest Rate for a period equal to the Guaranteed Term at the time
of deposit in the GTO;
b = the MVA Interest 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 MVA Interest Rate used will either be the
CMT rate or interest rate swap, depending on the variable contract, 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 MVA Interest Rate used will either be the
CMT rate or interest rate swap, depending on the variable contract, 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.
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 CMT rates or interest
rate swaps, or if, for any other reason, they are not available, NLIC will use
appropriate rates based on U.S. Treasury Bond yields.
Examples of how to calculate Market Value Adjustments based on CMT rates
are provided in the Appendix.
5
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. The variable contract prospectus fully describes the fees and charges.
Please refer to the variable contract prospectus for complete details.
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.
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.
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 (1,
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.
6
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY
(in millions)
RESULTS OF OPERATIONS Years ended December 31,
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2001 2000 1999 1998 1997
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Policy charges $ 1,017.3 $ 1,091.4 $ 895.5 $ 698.9 $ 545.2
Life insurance premiums 251.1 240.0 220.8 200.0 205.4
Net investment income 1,724.7 1,653.9 1,520.4 1,480.2 1,409.2
Net realized (losses) gains on investments, hedging
instruments and hedged items:
Unrelated parties (62.7) (19.4) (11.6) 28.4 11.1
Related party 44.4 - - - -
Other 8.2 11.1 5.3 1.3 0.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues 2,983.0 2,977.0 2,630.4 2,408.8 2,171.7
- ----------------------------------------------------------------------------------------------------------------------------------
Interest credited and other benefits 1,560.7 1,468.5 1,349.1 1,284.4 1,235.4
Interest expense on debt and trust securities 6.2 1.3 - - -
Other operating expenses 787.2 824.1 678.4 580.9 518.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,354.1 2,293.9 2,027.5 1,865.3 1,753.6
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
federal income tax expense and cumulative effect of
adoption of accounting principles 628.9 683.1 602.9 543.5 418.1
Federal income tax expense 161.2 207.3 200.1 185.8 146.0
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of adoption of accounting principles 467.7 475.8 402.8 357.7 272.1
Income (loss) from discontinued operations, net of tax 1.2 (0.5) 2.3 9.0 7.6
Cumulative effect of adoption of accounting principles,
net of tax (7.1) - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 461.8 $ 475.3 $ 405.1 $ 366.7 $ 279.7
==================================================================================================================================
OTHER DATA
RECONCILIATION OF NET INCOME TO
NET OPERATING INCOME
Net income $ 461.8 $ 475.3 $ 405.1 $ 366.7 $ 279.7
Realized losses (gains) on investments, hedging
instruments and hedged items, excluding
securitizations, net of tax 13.1 12.6 7.6 (18.5) (7.9)
Discontinued operations, net of tax (1.2) 0.5 (2.3) (9.0) (7.6)
Cumulative effect of adoption of accounting
principles, net of tax 7.1 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net operating income $ 480.8 $ 488.4 $ 410.4 $ 339.2 $ 264.2
==================================================================================================================================
7
(in millions)
SUMMARY OF FINANCIAL POSITION As of December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Total invested assets $ 27,477.3 $ 23,138.0 $ 22,437.4 $20,741.7 $19,576.4
Deferred policy acquisition costs 3,189.0 2,865.6 2,554.1 2,022.2 1,665.4
Other assets 975.3 666.5 549.3 642.4 824.5
Separate account assets 59,513.0 65,897.2 67,135.1 50,935.8 37,724.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 91,154.6 $ 92,567.3 $ 92,675.9 $74,342.1 $59,790.7
==================================================================================================================================
Policy reserves $ 25,216.0 $ 22,183.6 $ 21,861.6 $19,767.1 $18,702.8
Other liabilities 2,407.9 1,283.6 914.2 866.1 885.6
Long-term debt 300.0 - - - -
Separate account liabilities 59,513.0 65,897.2 67,135.1 50,935.8 37,724.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 87,436.9 89,364.4 89,910.9 71,569.0 57,312.8
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholder's equity 3,717.7 3,202.9 2,765.0 2,773.1 2,477.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 91,154.6 $ 92,567.3 $ 92,675.9 $74,342.1 $59,790.7
==================================================================================================================================
CUSTOMER FUNDS MANAGED AND ADMINISTERED
Individual annuity $ 41,777.5 $ 43,563.7 $ 43,996.9 $35,310.1 $28,156.4
Institutional products 33,822.4 36,923.6 38,769.9 30,370.2 24,316.4
Life insurance 8,099.2 7,225.5 5,913.8 4,613.4 3,487.0
- ----------------------------------------------------------------------------------------------------------------------------------
$ 83,699.1 $ 87,712.8 $ 88,680.6 $70,293.7 $55,959.8
==================================================================================================================================
Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME BEFORE FEDERAL INCOME
TAX EXPENSE BY BUSINESS SEGMENT
Individual annuity $ 231.4 $ 281.7 $ 259.2 $ 231.5 $ 186.9
Institutional products 207.8 230.7 217.8 180.4 148.8
Life insurance 184.7 152.9 120.8 88.8 66.7
Corporate 25.2 37.2 16.7 14.4 4.6
- ----------------------------------------------------------------------------------------------------------------------------------
$ 649.1 $ 702.5 $ 614.5 $ 515.1 $ 407.0
==================================================================================================================================
SALES BY BUSINESS SEGMENT 1
Individual annuity $ 7,330.5 $ 7,227.5 $ 6,366.2 $ 6,135.2 $ 5,636.1
Institutional products 4,645.7 6,127.5 5,811.1 4,944.8 3,981.9
Life insurance 1,540.6 1,530.2 1,095.9 653.2 468.7
- ----------------------
(1) See "Sales Information" included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional disclosure on
sales.
8
BUSINESS OF NATIONWIDE LIFE
This section, "Business of Nationwide Life," describes the business of
Nationwide Life (or the "Company") whether conducted directly by Nationwide Life
or indirectly through its subsidiaries. As a result, the operating earnings
quoted for each business segment reflect the relevant activities, by segment, of
Nationwide Life and its subsidiaries on a consolidated basis determined in
accordance with U.S. GAAP.
ORGANIZATION
Nationwide Life 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. The Company is a member of the
Nationwide group of companies ("NATIONWIDE"), which consists of Nationwide
Mutual and all of its subsidiaries and affiliates.
Prior to January 27, 1997, Nationwide Life was wholly owned by Nationwide
Corporation ("NATIONWIDE CORP."). On that date, Nationwide Corp. contributed the
outstanding shares of Nationwide Life's common stock to NFS, a holding company
formed by Nationwide Corp. in November 1996 for Nationwide Life and other
companies within Nationwide that offer or distribute long-term savings and
retirement products. On March 6, 1997, NFS completed an initial public offering
of its Class A common stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that focused the
business of NFS on long-term savings and retirement products. On September 24,
1996, Nationwide Life declared a dividend payable to Nationwide Corp. on January
1, 1997 consisting of the outstanding shares of common stock of certain
subsidiaries that do not offer or distribute long-term savings and retirement
products. In addition, during 1996, Nationwide Life entered into two reinsurance
agreements whereby all of Nationwide Life's accident and health and group life
insurance business was ceded to two affiliates effective January 1, 1996.
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. In addition, the
Company issued $300.0 million of 8.15% notes in June 2002 which mature June 27,
2032. Principal and semi-annual interest payments on these notes are subject to
prior approval by the Superintendent of Insurance of the State of Ohio.
The Company is a leading provider of long-term savings and retirement
products in the United States. The Company develops and sells a diverse range of
products including individual annuities, private and public sector pension plans
and life insurance. 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, wirehouse and
regional firms, financial institutions, pension plan administrators, and life
insurance specialists. Representatives of Nationwide Retirement Solutions, Inc.,
a subsidiary of NFS, market the Company's products directly to their customer
base. The Company also distributes its retirement savings products through the
agency distribution forces of Nationwide Mutual and Nationwide Provident. The
Company believes its unique combination of product innovation and strong
distributor relationships positions it to compete effectively, under various
economic conditions, in the rapidly growing retirement savings market.
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 United States based on sales,
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 further enhanced by favorable demographic
trends, the growing tendency of Americans to supplement traditional sources of
retirement income with self-directed investments, such as products offered by
the Company, and the performance of the financial markets, particularly in the
late 1990's.
Wholly owned subsidiaries of Nationwide Life as of the date of this
Prospectus include Nationwide Life and Annuity Insurance Company ("NLAIC") and
Nationwide Investment Services Corporation ("NISC").
NLAIC offers universal life insurance, variable universal life insurance,
corporate-owned life insurance ("COLI") and individual annuity contracts on a
non-participating basis. NISC is a registered broker/dealer doing business
solely in the deferred compensation market.
On October 1, 2002, NFS completed the sponsored demutualization and
subsequent merger of Provident Mutual Life Insurance Company ("PROVIDENT") as a
result of which NFS acquired Provident which was renamed
9
Nationwide Life Insurance Company of America and is referred to as Nationwide
Provident. Nationwide Provident has become a direct wholly owned subsidiary of
NFS and an affiliate of Nationwide Life. Nationwide Provident is headquartered
in Berwyn, Pennsylvania and offers a broad range of life insurance, annuity
products and related financial services products.
BUSINESS SEGMENTS
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. In addition, the Company
reports certain other revenues and expenses in a Corporate segment. During the
second quarter of 2002, the Company paid a dividend to NFS that resulted in the
disposal of a portion of the business that had been reported in the Corporate
segment. As a result, this business is reported as discontinued operations
beginning in 2002. Effective in the second quarter of 2002, structured products
transactions previously reported in the Corporate segment are reported in the
Institutional Products segment. Amounts reported for prior periods have been
revised to reflect these changes.
The Individual Annuity segment accounted for ($171.4) million (unaudited)
and $231.4 million ((164)% (unaudited) and 36%) of the Company's operating
income before federal income tax expense for the nine months ended September 30,
2002 and the year ended December 31, 2001, respectively. The Individual Annuity
segment consists of 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 specified interest rates
fixed for prescribed periods.
The Institutional Products segment accounted for $144.3 million
(unaudited) and $211.3 million (138% (unaudited) and 33%) of the Company's
operating income before federal income tax expense for the nine months ended
September 30, 2002 and the year ended December 31, 2001, respectively. The
Institutional Products segment is comprised of the Company's private and public
sector group retirement plans and the medium-term note programs. The private
sector includes the 401(k) business generated through fixed and variable
annuities. The public sector includes Code Section 457 business in the form of
fixed and variable annuities. Additionally, structured products transactions are
reported in the Institutional Products segment.
The Life Insurance segment accounted for $127.2 million (unaudited) and
$189.7 million (122% (unaudited) and 29%) of the Company's operating income
before federal income tax expense for the nine months ended September 30, 2002
and the year ended December 31, 2001, respectively. 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.
The Corporate segment accounted for $4.6 million (unaudited) and $16.7
million (2% (unaudited) and 4%) of the Company's operating income (which
excludes net realized gains and losses on investments, hedging instruments and
hedged items) before federal income tax expense for the nine months ended
September 30, 2002 and the year ended December 31, 2001, respectively.
RELATED PARTY TRANSACTIONS
During the third quarter of 2001, the Company entered into a transaction
with Nationwide Mutual, whereby it sold 78% of its interest in a limited
partnership (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. During the
third quarter of 2002, the Company entered into transactions with Nationwide
Mutual and Nationwide Indemnity Company ("NIC"), whereby it sold 100% of its
remaining interest in the limited partnership (representing 15.11% of the
limited partnership) to Nationwide Mutual and NIC for a total of $54.5 million.
As a result of this sale, the Company recorded a realized gain of $23.2 million
and related tax expense of $8.1 million. The sales prices for each transaction,
which were paid in cash, represented the fair value of the portions of limited
partnership interests that were sold and were based on valuations of the limited
partnership and its underlying investments as of the effective dates of the
transactions. The valuations were 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, through their respective
Finance Committees, and
10
approved the process and methodology of the valuations prior to the execution of
these transactions. The Company no longer holds an economic or voting interest
in the limited partnership.
The Company has entered into significant, recurring transactions and
agreements with Nationwide Mutual and other affiliates as a part of its ongoing
operations. The nature of the transactions and agreements includes: annuity and
life insurance contracts, a tax sharing agreement, reinsurance agreements, cost
sharing agreements, administration services, marketing agreements, office space
leases, intercompany repurchase agreements and cash management services. The
transactions and agreements are described more fully in note 13 to the audited
consolidated financial statements included in this Prospectus. During 2002,
there have been no material changes to the nature and terms of these
transactions and agreements, except that effective October 1, 2002, the Company
and its subsidiaries no longer participate in the tax sharing agreement, as
discussed in note 6 to the unaudited consolidated financial statements included
in the Company's Form 10-Q for the quarter ended September 30, 2002,
incorporated by reference in this Prospectus.
Amounts on deposit with a related party in cash management were $0.1
million and $54.8 million as of September 30, 2002 and December 31, 2001,
respectively.
The Company 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. As of
September 30, 2002 and December 31, 2001, the Company had borrowed $66.7 million
and none, respectively, from affiliated entities under such agreements. The
Company believes that the terms of the repurchase agreements are materially
consistent with what the Company could have obtained with unaffiliated parties.
As of September 30, 2002, the Company had $100.0 million of 1.95%
short-term debt payable to NFS that matured on November 23, 2002.
Funds of Gartmore Global Investments, Inc. ("GGI"), an affiliate, are
offered as investment options in certain of the Company's products. As of
September 30, 2002, total GGI funds in the Company's products were $12.13
billion. For the three months ended September 30, 2002, GGI paid the Company
$9.9 million for the distribution and servicing of these funds.
During the first nine months of 2002, Nationwide Life paid a dividend of
$35.0 million and dividends in the form of return of capital of $475.0 million
to NFS.
In addition, in June 2002, Nationwide Life paid a dividend to NFS in the
form of all of the shares of common stock of Nationwide Securities, Inc.
("NSI"), a wholly owned broker/dealer subsidiary. Therefore, the results of the
operations of NSI have been reflected as discontinued operations for all periods
presented. This was a transaction between related parties and therefore was
recorded at carrying value, $10.0 million, of the underlying components of the
transaction rather than fair value. Such amount represents a non-cash
transaction that is not reflected in the Consolidated Statement of Cash Flows
included in the Company's Form 10-Q for the quarter ended September 30, 2002,
incorporated by reference in this Prospectus.
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. Nationwide Life is rated "A+" (Superior) by A.M. Best
and its claims-paying ability/financial strength is rated "Aa3" (Excellent) by
Moody's, and "AA-" (Very Strong) by S&P.
On October 18, 2002, A.M. Best announced a change in the outlook on the
debt and financial strength ratings of Nationwide Life and NLAIC from "stable"
to "negative". The lowering of these outlooks reflects A.M. Best's view that
Nationwide Life and NLAIC have weakened their risk-based capital positions as a
result of recent years robust growth and more efficient capital management
practices. In addition, A.M. Best cited concerns over the highly competitive
market in several of the companies' core products, the prolonged equity market
downturn, the low interest rate environment and overall U.S. economic weakness,
among other factors.
11
The Company's financial strength is also reflected in the ratings of
commercial paper. The commercial paper of Nationwide Life is rated "AMB-1" by A.
M Best, "A-1+" (Strong) by S&P and "P-1" by Moody's.
The foregoing ratings reflect each rating agency's opinion of Nationwide
Life's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed toward the
protection of investors. Such ratings are of concern to policyholders, agents
and intermediaries.
In the future, Nationwide Life may potentially face a downgrade from any
rating agency if its ultimate parent, Nationwide Mutual, is downgraded. The
current S&P rating disparity of one notch between Nationwide Life and Nationwide
Mutual has previously been as wide as two notches, which is as wide as ratings
spreads have generally been between related entities in their rated universe.
Regarding Moody's and A.M. Best, no ratings disparity currently exists and
de-linkage is a topic that is more likely in the future as Nationwide Mutual's
ownership percentage of total outstanding NFS shares has recently fallen below
80% as a result of recent capital transactions.
COMPETITION
The Company competes with a large number of insurers as well as
non-insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of which have greater financial resources, offer alternative
products and, with respect to 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.
In the fall of 1999, United States federal legislation was enacted called
the Gramm-Leach-Bliley Act of 1999 (the "GLB ACT"). The GLB Act eliminates many
federal and state law barriers to affiliation among banks and securities firms,
insurers and other financial services providers and permits such entities to
combine into "financial holding companies" which provide all forms of financial
services. Pursuant to the GLB Act, regulation of sales and marketing practices
by bank-affiliated insurers will, in some cases, be shifted to federal bank
regulators, while solvency and most other aspects of insurance regulation will
remain with state regulatory authorities even for bank-affiliated insurers. The
GLB Act may substantially affect the number and increase the strength of
potential competitors of Nationwide Life.
REGULATION
Nationwide Life 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 investors. The Company cannot predict the effect that
any proposed or future legislation may have on the financial condition or
results of operations of the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
Nationwide Life submits on a quarterly basis to the Ohio Department of
Insurance certain reports regarding its statutory financial condition (each, a
"STATUTORY-BASIS FINANCIAL STATEMENT" and, collectively, the "STATUTORY-BASIS
FINANCIAL STATEMENTS"). Each Statutory-Basis Financial Statement consists of
statutory basis financial statements and other supporting schedules as of the
end of and for the period to which such Statutory-Basis Financial Statement
relates. The Statutory-Basis Financial Statements are prepared in conformity
with accounting practices prescribed or permitted by the Ohio Department of
Insurance. Statutory accounting practices ("SAP") vary in certain significant
respects from U.S. GAAP. The financial statements of Nationwide Life and (except
where expressly stated otherwise) all other financial information relating to
Nationwide Life included in this Prospectus have been prepared in accordance
with U.S. GAAP.
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 departments of two or three other
states under
12
guidelines promulgated by the NAIC. The most recently completed examination of
Nationwide Life and NLAIC was conducted by the Ohio, Arizona, California, Iowa,
Kansas, Texas and Wisconsin insurance departments for the five-year period ended
December 31, 2001. The final reports of these examinations did not result in any
significant issues or adjustments.
During the last decade, the insurance regulatory framework relating to
insurance companies doing business in the United States has been placed under
increased scrutiny by various states, the United States federal government and
the NAIC. Various states have considered or enacted legislation that changes,
and in many cases increases, the states' authority to regulate insurance
companies. Legislation has been introduced from time to time in the United
States Congress that could result in the United States federal government
assuming some role in the regulation of insurance companies. In recent years,
the NAIC has approved and recommended to the states for adoption and
implementation several regulatory initiatives designed to reduce the risks of
insurance company insolvencies. These initiatives include new investment reserve
requirements, risk-based capital standards and restrictions on an insurance
company's ability to pay dividends to its stockholders.
In addition, state and federal laws and regulations affect the taxation of
life insurance and annuity products and insurance companies. Congress has from
time to time considered proposals that, if enacted, could have had an adverse
impact on the federal income tax treatment of some insurance products offered by
Nationwide Life or could have imposed a greater tax burden on Nationwide Life.
Such proposals have included legislation relating to the deferral of taxation on
the accretion of value within certain annuities and life insurance products. If
such proposals were to be adopted in the future, they could have a material
adverse effect on the financial position of Nationwide Life or the ability of
Nationwide Life to sell its products and could result in the surrender of some
existing contracts and policies.
LITIGATION
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. 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. On February 9, 2002, Marcus Shore withdrew as a named plaintiff
in the lawsuit. On April 16, 2002, the Company filed a motion for summary
judgment on the individual claims of plaintiff Mercedes Castillo. On May 28,
2002, the Court denied plaintiffs' motion to add new persons as named
plaintiffs, so the action is now proceeding with Mercedes Castillo as the only
named plaintiff. On November 4, 2002, the Court issued a decision granting the
Company's motion for summary judgment on all plaintiff Mercedes Castillo's
individual claims, and ruling that plaintiff's motion for class certification is
moot. Judgment for the Company was entered on November 15, 2002. Plaintiff
Mercedes Castillo has 30 days in which to appeal. On December 16, 2002,
plaintiff Mercedes Castillo filed a notice of appeal from the Court's orders (a)
granting the Company's motion for summary judgment; and (b) denying Castillo's
motion for leave to amend the complaint to add three new named plaintiffs. 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 6, 2001, the
plaintiffs amended their complaint to include class action allegations. The
plaintiffs seek to represent a class of retirement plans that purchased variable
annuities from Nationwide Life Insurance Company to fund qualified ERISA
retirement plans. The amended complaint alleges that the retirement plans
purchased variable annuity contracts from the Company
13
that allowed plan participants to invest in 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 funds originally
included in the plaintiffs' annuities with "inferior" funds because the new
funds purportedly paid higher fees to the Company. The amended complaint seeks
disgorgement of the fees allegedly received by the Company and other unspecified
compensatory damages, declaratory and injunctive relief and attorney's fees. On
December 3, 2001, the plaintiffs filed a motion for class certification. The
Company is opposing that motion. The Company's motion to dismiss was denied on
September 11, 2002. 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.
CAPITALIZATION OF NATIONWIDE LIFE
The following table sets forth the long-term debt and shareholder's equity
of Nationwide Life as of September 30, 2002 and December 31, 2001 under U.S.
GAAP.
SEPTEMBER 30, DECEMBER 31,
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
Long-term debt(1) ................................................... $ 600.0 $ 300.0
Shareholder's equity:
Capital stock (authorized 5,000,000 common shares, 3,814,779
issued and outstanding common shares, at U.S.$1.00 par value) .. 3.8 3.8
Additional paid-in capital ........................................ 171.1 646.1
Retained earnings ................................................. 2,883.4 2,863.1
Accumulated other comprehensive income ............................ 461.1 204.7
-------- --------
Total Long-term debt and shareholder's equity(2) ............. $4,119.4 $4,017.7
======== ========
(1) Long-term debt of Nationwide Life does not include short-term borrowings
from NFS, which totaled $100.0 million as of September 30, 2002, or any
amounts outstanding under its $500.0 million commercial paper program.
Borrowings under the commercial paper program are unsecured and are
issued for terms of 364 days or less. As of September 30, 2002 and
December 31, 2001 Nationwide Life had $60.0 million and $100.0 million,
respectively, of commercial paper outstanding.
(2) Nationwide Life has confirmed that, since September 30, 2002, there has
been no material change in the capitalization of Nationwide Life
excluding unrealized gains/losses.
14
SELECTED U.S. GAAP CONSOLIDATED FINANCIAL INFORMATION OF NATIONWIDE LIFE
The selected financial information of Nationwide Life set forth below has
been compiled on a consolidated basis in accordance with U.S. GAAP. The selected
U.S. GAAP consolidated financial information of Nationwide Life as of December
31, 2001 and 2000 and for each of the years in the three-year period ended
December 31, 2001 included herein has been derived from the consolidated U.S.
GAAP financial statements of Nationwide Life for these periods. Such
consolidated financial statements, which are included elsewhere in this
Prospectus, have been audited by Nationwide Life's independent auditors, and
prepared in accordance with U.S. GAAP. The selected U.S. GAAP consolidated
financial information for each of the nine months ended and as of September 30,
2002 and 2001 has been derived from the unaudited consolidated financial
statements of Nationwide Life prepared in accordance with U.S. GAAP and filed
with the Commission on the Company's Form 10-Q for the quarterly period ended
September 30, 2002. Nationwide Life believes that such unaudited financial
information fairly reflects the consolidated results of operations and the
consolidated financial condition of Nationwide Life for such periods. The
results of past accounting periods are not necessarily indicative of the results
to be expected for any future accounting period, nor are results for any interim
period necessarily indicative of the results to be expected for a full year. The
information presented below should be read in connection with and is qualified
in its entirety by reference to the consolidated U.S. GAAP financial statements
of Nationwide Life, including the notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Nationwide
Life" and other information included elsewhere in this Prospectus or
incorporated by reference herein.
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
(IN U.S.$ MILLIONS) 2002 2001 2001 2000
---- ---- ---- ----
(UNAUDITED)
CONDENSED GAAP BALANCE SHEET:
ASSETS
Invested assets ........................................... $32,572.4 $26,146.8 $27,477.3 $23,138.0
Deferred policy acquisition costs ......................... 2,909.5 3,035.1 3,189.0 2,865.6
Other assets .............................................. 1,405.8 1,086.0 975.3 666.5
Assets held in separate accounts .......................... 46,399.7 54,526.6 59,513.0 65,897.2
--------- -------- --------- ---------
$83,287.4 $84,794.5 $91,154.6 $92,567.3
========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims ......................... $29,481.3 $24,764.0 $25,216.0 $22,183.6
Short-term borrowings, including $100 million payable to
NFS in 2002 ............................................ 160.0 25.0 100.0 118.7
Long-term debt, payable to NFS ............................ 600.0 -- 300.0 --
Other liabilities ......................................... 3,127.0 1,743.5 2,307.9 1,164.9
Liabilities related to separate accounts .................. 46,399.7 54,526.6 59,513.0 65,897.2
--------- --------- --------- ---------
79,768.0 81,059.1 87,436.9 89,364.4
Shareholder's equity....................................... 3,519.4 3,735.4 3,717.7 3,202.9
--------- --------- --------- ---------
$83,287.4 $84,794.5 $91,154.6 $92,567.3
========= ========= ========= =========
15
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ -------------------------
(IN U.S.$ MILLIONS) 2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(UNAUDITED)
CONDENSED U.S. GAAP INCOME STATEMENT:
REVENUES
Policy charges ..................................... $ 746.0 $768.0 $1,017.3 $1,091.4 $895.5
Life insurance premiums ............................ 189.2 189.8 251.1 240.0 220.8
Net investment income .............................. 1,351.4 1,286.6 1,724.7 1,653.9 1,520.4
Net realized (losses) gains on investments(1) ...... (63.4) 34.9 (18.3) (19.4) (11.6)
Other .............................................. 4.5 7.8 8.2 11.1 5.3
------- ------- ------- ------- -------
2,227.7 2,287.1 2,983.0 2,977.0 2,630.4
------- ------- ------- ------- -------
BENEFITS AND EXPENSES
Interest credited to policyholder account values ... 917.1 923.9 1,238.7 1,182.4 1,096.3
Other benefits and claims .......................... 228.2 209.0 280.3 241.6 210.4
Policyholder dividends on participating policies ... 33.5 31.1 41.7 44.5 42.4
Amortization of deferred policy acquisition costs 598.2 265.2 347.9 352.1 272.6
Interest expense on short-term debt, primarily with
a related party ................................. 23.7 4.7 6.2 1.3 --
Other operating expenses ........................... 385.7 323.5 439.3 472.0 405.8
------- ------- ------- ------- -------
2,186.4 1,757.4 2,354.1 2,293.9 2,027.5
------- ------- ------- ------- -------
Income before federal income tax (benefit) expense,
discontinued operations and cumulative effect of
adoption of accounting principles ............... 41.3 529.7 628.9 683.1 602.9
Federal income tax (benefit) expense ............... (23.3) 142.0 161.2 207.3 200.1
------- ------- ------- ------- -------
Income before discontinued operations and cumulative
effect of adoption of accounting principles ..... 64.6 387.7 467.7 475.8 402.8
Income (loss) from discontinued operations, net of
tax ............................................. 0.7 1.1 1.2 (0.5) 2.3
Cumulative effect of adoption of accounting
principles, net of tax .......................... -- (7.1) (7.1) -- --
------- ------- ------- ------- -------
Net income .................................... $ 65.3 $ 381.7 $461.8 $475.3 $405.1
======= ======= ======= ======= =======
(1) Beginning in 2001, net realized gains (losses) on investments include
hedging instruments and hedged items.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF NATIONWIDE LIFE
INTRODUCTION
The following analysis of unaudited and audited consolidated results of
operations of the Company should be read in conjunction with the unaudited and
audited consolidated financial statements and related notes included or
incorporated by reference herein.
Management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 with respect to the results of operations and businesses of the Company.
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include, among others, the following possibilities: (i) the
potential impact on the Company's reported net income that could result from the
adoption of certain accounting standards issued by the FASB or other
standard-setting bodies; (ii) tax law changes impacting the tax treatment of
life insurance and investment products; (iii) repeal of the federal estate tax;
(iv) 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; (v) adverse state and federal legislation and
regulation, including limitations on premium levels, increases in minimum
capital and reserves, and other financial viability requirements; (vi) failure
to expand distribution channels in order to obtain new customers or failure to
retain existing customers; (vii) 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; (viii) changes in interest rates and the stock markets causing a
reduction of investment income and/or asset fees, an acceleration of the
amortization of deferred policy acquisition costs, reduction in the value of the
Company's investment portfolio or separate account assets or a reduction in the
demand for the Company's products; (ix) general economic and business conditions
which are less favorable than
16
expected; (x) competitive, regulatory or tax changes that affect the cost of, or
demand for the Company's products; (xi) unanticipated changes in industry trends
and ratings assigned by nationally recognized rating organizations; (xii)
inaccuracies in assumptions regarding future persistency, mortality, morbidity
and interest rates used in calculating reserve amounts; and (xiii) adverse
litigation results or resolution of litigation and arbitration.
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 ("DAC") for investment products and universal
life insurance products and federal income taxes.
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, (i)
the current fair value as compared to amortized cost or cost, as appropriate, of
the security, (ii) the length of time the security's fair value has been below
amortized cost/cost, and by how much, (iii) specific credit issues related to
the issuer and (iv) current economic conditions. Other-than-temporary impairment
losses 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 audited and/or unaudited consolidated
financial statements.
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 underlying 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
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
unaudited consolidated financial statements.
Deferred Policy Acquisition Costs for Investment Products and
Universal Life Insurance Products
The costs of acquiring 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 and renewal business
have been deferred. DAC is subject to recoverability testing at the time of
policy issuance and loss recognition testing at the end of each reporting
period.
For investment products (principally individual and group annuities) and
universal life insurance products, DAC is 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
17
charges, less policy benefits and policy maintenance expenses. The DAC asset
related to investment products and universal life insurance products is adjusted
to reflect the impact of unrealized gains and losses on fixed maturity
securities available-for-sale as described in note 2(b) to the audited
consolidated financial statements included in this Prospectus.
The most significant assumptions that are involved in the estimation of
future gross profits include future net separate account performance,
surrender/lapse rates, interest margins and mortality. The Company's long-term
assumption for net separate account performance is 8 percent. If actual net
separate account performance varies from the 8 percent assumption, the Company
assumes different performance levels over the next three years, such that the
mean return equals the long-term assumption. This process is referred to as a
reversion to the mean. The assumed net separate account return assumptions used
in the DAC models are intended to reflect what is anticipated. However, based on
historical returns of the S&P 500 Index, the Company's policy regarding the
reversion to the mean process does not permit such returns to be below zero
percent or in excess of fifteen percent during the three-year reversion period.
Changes in assumptions can have a significant impact on the calculation of
DAC on investment products and universal life insurance products and their
related amortization patterns. In the event actual experience differs from
assumptions or assumptions are revised, the Company is required to record an
increase or decrease in DAC amortization expense (DAC unlocking), which could be
significant. In general, increases in the estimated general and separate account
returns result in increased expected future profitability and may lower the rate
of DAC amortization, while increases in lapse/surrender and mortality
assumptions reduce the expected future profitability of the underlying business
and may increase the rate of DAC amortization.
Due to the magnitude of DAC balance related to the individual variable
annuity business, the sensitivity of the calculation to minor changes in the
underlying assumptions and the related volatility that could result in the
reported DAC balance without meaningful improvement in its reasonableness, the
Company evaluates the appropriateness of the individual variable annuity DAC
balance within pre-set parameters. Should the recorded balance of individual
variable annuity DAC fall outside of these parameters for a prescribed period of
time, or should the recorded balance fall outside of these parameters and the
Company determines it is not reasonably possible to get back within this period
of time, assumptions are required to be unlocked and the DAC is recalculated
using revised best estimate assumptions. Otherwise, DAC is not unlocked to
reflect updated assumptions. In the event DAC assumptions are unlocked and
revised, the Company will continue to use the reversion to the mean process.
For other investment products and universal life insurance products, DAC
is unlocked each quarter to reflect revised best estimate assumptions, including
the use of a reversion to the mean methodology over the next three years as it
relates to net separate account performance. Any resulting DAC unlocking
adjustments are reflected currently in the unaudited consolidated financial
statements.
As part of the regular quarterly analysis of DAC, at the end of the third
quarter of 2002, the Company determined that using actual experience to date and
assumptions consistent with those used in the second quarter of 2002, its
individual variable annuity DAC balance would be outside a pre-set parameter of
acceptable results. The Company also determined that it was not reasonably
possible that the DAC would return to an amount within the acceptable parameter
within an established period of time. Accordingly, the Company unlocked its DAC
assumptions for individual variable annuities and reduced the DAC asset to the
amount calculated using the revised assumptions. Because the Company unlocked
the net separate account growth rate assumption for individual variable
annuities within the three-year reversion period, the Company unlocked that
assumption for all investment products and variable universal life insurance
products to be consistent across product lines.
In the third quarter of 2002, the Company recorded an acceleration of DAC
amortization totaling $347.1 million before tax, or $225.6 million, net of
$121.5 million of federal income tax benefit, which has been reported in the
following segments in the amounts indicated, net of tax: Individual
Annuity--$213.4 million, Institutional Products--$7.8 million and Life
Insurance--$4.4 million. The acceleration of DAC amortization was the result of
unlocking certain assumptions underlying the calculation of DAC for investment
products and variable universal life insurance products. The most significant
assumption changes were the resetting of the Company's assumption for net
separate account growth to 8 percent during the three-year reversion period for
all investment products and variable life insurance products and increases in
future lapses and costs related to guaranteed minimum death benefits ("GMDB") on
individual variable annuity contracts. These adjustments were primarily driven
by the sustained downturn in the equity markets.
18
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 unaudited consolidated financial
statements.
Recently Issued Accounting Pronouncements
See note 3 to the unaudited consolidated financial statements included in
the Company's Form 10-Q for the quarter ended September 30, 2002, incorporated
by reference in this Prospectus, for a discussion of recently issued accounting
pronouncements.
Reclassification
Certain items in the 2001 unaudited consolidated financial statements and
related footnotes have been reclassified to conform to the 2002 presentation.
CONSOLIDATED REVIEW
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001 RESULTS OF OPERATIONS
Revenues
Total operating revenues, which exclude net realized gains and losses on
investments not related to securitizations, hedging instruments and hedged items
for the first nine months of 2002 and 2001 were $2.29 billion and $2.25 billion,
respectively.
Policy charges include asset fees, which are primarily earned from
separate account values generated from sales of individual and group variable
annuities and investment life insurance products; cost of insurance charges
earned on universal life insurance products; administrative fees, which include
fees charged per contract on a variety of the Company's products and premium
loads on universal life insurance products; and surrender fees, which are
charged as a percentage of premiums withdrawn during a specified period of
annuity and certain life insurance contracts.
Policy charges for the comparable periods of 2002 and 2001 were as
follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
Asset fees......................................... $416.4 $466.6
Cost of insurance charges ......................... 174.3 147.7
Administrative fees ............................... 95.4 98.8
Surrender fees .................................... 59.9 54.9
------ ------
Total policy charges ........................ $746.0 $768.0
====== ======
The decline in asset fees reflects a decrease in total average separate
account values of $5.39 billion (9%) for the first nine months of 2002 compared
to a year ago. The decrease in average separate account values was fueled by
market depreciation on investment options underlying variable annuity and
investment life insurance products as a result of the sharp declines in the
equity markets.
Cost of insurance charges are assessed on the net amount at risk on
universal life insurance policies. The net amount at risk is equal to a policy's
death benefit minus the related policyholder account value. The amount charged
is based on the insured's age and other underwriting factors. The increase in
cost of insurance charges is due primarily to growth in the net amount at risk
related to corporate and individual investment life insurance reflecting new
sales combined with equity market declines and favorable persistency of policies
sold in prior periods. The net amount at risk related to corporate and
individual investment life insurance grew to $35.93 billion as of September 30,
2002 compared to $32.01 billion a year ago.
Surrender fees increased in the nine months ended September 30, 2002
compared to the same period a year ago primarily due to higher lapse activity in
individual variable annuities as a result of the sustained decline in the equity
markets and the competitive environment in the marketplace.
19
Net investment income includes the investment income earned on investments
supporting fixed annuities, the medium-term note programs and certain life
insurance products as well as invested assets not allocated to product segments,
net of related investment expenses. Net investment income grew from $1.29
billion in the first nine months of 2001 to $1.35 billion in the first nine
months of 2002. The increase was primarily due to increased invested assets to
support growth in individual fixed annuity and the medium-term note programs,
partially offset by lower yields due to declining market interest rates. General
account assets supporting insurance products are closely correlated to the
underlying reserves on these products. General account reserves supporting these
products increased $4.72 billion to $29.48 billion as of September 30, 2002
compared to $24.76 billion as of September 30, 2001.
Realized gains and losses on investments not related to securitizations,
hedging instruments and hedged items 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, charges related to other-than-temporary impairments of
available-for-sale securities and other investments and valuation allowances on
mortgage loans on real estate are included in this caption. 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.
For the first nine months of 2002, non-impairment related net realized
gains on investments, hedging instruments and hedged items totaled $13.2 million
compared to $54.0 million of net gains for the first nine months of 2001. These
amounts include gains of $23.2 million and $44.4 million recorded in the third
quarter of 2002 and 2001, respectively, related to the two-step sale of a real
estate partnership to related parties. Year-to-date 2002 realized losses related
to other-than-temporary impairments on securities available-for-sale totaled
$76.6 million compared to $19.1 million of losses for the same period a year
ago. For the first nine months of 2002, the Company recorded net realized losses
on investments of $22.5 million, pre-tax, related to WorldCom, Inc.
Benefits and Expenses
Interest credited to policyholder account values totaled $917.1 million
for the nine months ended September 30, 2002 compared to $923.9 million for the
nine months ended September 30, 2001 and principally relates to fixed annuities,
both individual and institutional, funding agreements backing the Company's
medium-term note programs, and certain life insurance products. The decline in
interest credited reflects lower crediting rates in response to lower market
interest rates.
An increase in other benefits and claims in 2002 compared to a year ago
reflects higher levels of GMDB claims from individual variable annuity products
and additional life insurance benefits reflecting growth in life insurance
in-force.
The substantial increase in DAC amortization in the first nine months of
2002 compared to the same period a year ago reflects an acceleration of DAC
amortization recorded in the third quarter of 2002. As part of the regular
quarterly analysis of DAC, at the end of the third quarter of 2002, the Company
determined that using actual experience to date and assumptions consistent with
those used in the second quarter of 2002, its individual variable annuity DAC
balance would be outside a pre-set parameter of acceptable results. The Company
also determined that it was not reasonably possible that the DAC would return to
an amount within the acceptable parameter within an established period of time.
Accordingly, the Company unlocked its DAC assumptions for individual variable
annuities and reduced the DAC asset to the amount calculated using the revised
assumptions.
Because the Company unlocked the net separate account growth rate
assumption for individual variable annuities within the three-year reversion
period, the Company unlocked that assumption for all investment products and
variable universal life insurance products to be consistent across product
lines.
In the first nine months of 2002, the Company recorded an acceleration of
DAC amortization totaling $347.1 million before tax, or $225.6 million, net of
$121.5 million of tax benefit, which has been reported in the following segments
in the amounts indicated, net of tax: Individual Annuity--$213.4 million,
Institutional Products--$7.8 million and Life Insurance--$4.4 million. The
acceleration of DAC amortization was the result of unlocking certain assumptions
underlying the calculation of DAC. The most significant assumption changes were
the resetting of the Company's long-term assumption for net separate account
growth to 8 percent during the three-year reversion period for all investment
products and variable life insurance products and increases in future lapses and
costs related to guaranteed minimum death benefits on variable annuity
contracts. These adjustments were primarily driven by the sustained downturn in
the equity markets.
20
For the first nine months of 2002, operating expenses were $385.7 million,
up 19% from $323.5 million for the first nine months of 2001. The increase
reflects a growing customer base, an increase in employee benefit costs and
spending on projects focused on improving producer and customer service and
increasing sales.
For the first nine months of 2002 and 2001, federal income tax (benefit)
expense totaled $(23.3) million and $142.0 million, respectively. The tax
benefit of $121.5 million associated with the $347.1 million of accelerated DAC
amortization in third quarter 2002 was calculated at the U.S. federal corporate
income tax rate of 35%, which causes a distortion in what would normally be
expected to be reported as effective tax rates. Excluding the accelerated DAC
amortization and related tax benefit, the effective tax rate for the first nine
months of 2002 was 25.3%, which is lower than 2001 due to an increase in tax
credits from affordable housing partnership investments, partially offset by
lower tax exempt income.
Discontinued Operations
On June 27, 2002, Nationwide Life paid a dividend to NFS consisting of its
shares of common stock of NSI, a wholly owned broker/dealer subsidiary. This is
a transaction between related parties and therefore was recorded at carrying
value, $10.0 million, of the underlying components of the transaction rather
than fair value.
As a result of this transaction, the Company is no longer engaged in asset
management operations and the underlying results of NSI have been reported as
discontinued operations. Also, effective in second quarter 2002, the structured
products transactions, previously reported in the Corporate segment, are
reported in the Institutional Products segment. All periods presented have been
revised to reflect these changes.
For the first nine months of 2002 and 2001, income from discontinued
operations, net of tax, was $0.7 million and $1.1 million, respectively.
Other Data
The Company analyzes operating performance using a non-U.S. GAAP measure
called net operating income. The Company calculates net operating income by
adjusting net income to exclude net realized gains and losses on investments not
related to securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption of accounting principles, all 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 U.S. 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 net realized gains and losses on
investments not related to securitizations, 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 also excludes discontinued operations and the cumulative effect of
adoption of accounting principles, both net of tax, from net operating income as
such adjustments are not reflective of the ongoing operations of the Company's
business.
21
The following table reconciles the Company's reported net income to net
operating income for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
Net income ........................................................................ $ 65.3 $381.7
Net realized losses (gains) on investments, hedging instruments and hedged items,
net of tax(1) .................................................................. 41.2 (22.7)
Discontinued operations, net of tax ............................................... (0.7) (1.1)
Cumulative effect of adoption of accounting principles, net of tax ................ -- 7.1
------ ------
Net operating income ........................................................ $105.8 $365.0
====== ======
- -----------------
(1) Excludes net realized gains and losses related to securitizations.
Sales Information
The Company regularly monitors and reports a non-U.S. 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 U.S. 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 primarily 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: funding agreements backing the Company's medium-term note programs;
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 Code Section 457. The
Company utilizes its sponsorship by the National Association of Counties and The
United States Conference of Mayors when marketing Code Section 457 products.
Sales by product and segment for the comparable nine-month periods of 2002
and 2001 are summarized as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
The BEST of AMERICA annuity products ........................... $2,476.0 $2,948.3
Private label annuities ........................................ 609.3 1,116.7
Other .......................................................... -- 2.8
-------- --------
Total individual variable annuity sales .................. 3,085.3 4,067.8
-------- --------
Deferred fixed annuities ....................................... 2,036.5 1,296.9
Income products ................................................ 94.9 102.5
-------- --------
Total individual fixed annuity sales ..................... 2,131.4 1,399.4
-------- --------
22
Total individual annuity sales ..................... $5,216.7 $5,467.2
======== ========
The BEST of AMERICA annuity products ........................... $2,095.4 $2,425.0
Other .......................................................... 39.3 43.9
-------- --------
Total private sector pension plan sales .................. 2,134.7 2,468.9
-------- --------
Total public sector pension plan sales -
Code Section 457 annuities .................................. 1,041.3 1,156.9
-------- --------
Total institutional products sales ................. $3,176.0 $3,625.8
======== ========
The BEST of AMERICA variable life series ....................... $ 394.5 $ 409.9
COLI ........................................................... 577.7 593.7
Traditional/Universal life insurance ........................... 181.6 178.9
-------- --------
Total life insurance sales ............................... $1,153.8 $1,182.5
======== ========
The Company sells its products through a diverse distribution network.
Unaffiliated entities that sell the Company's products to their own customer
base include independent broker/dealers, wirehouse and regional firms, financial
institutions, pension plan administrators, life insurance specialists and
Nationwide Provident agents. Representatives of Nationwide Retirement Solutions,
an affiliate, market products directly to a customer base. The Company also
distributes retirement savings products through the agency distribution force of
its ultimate parent, Nationwide Mutual.
Sales by distribution channel are summarized as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
Financial institutions ........................................ $2,597.4 $2,361.8
Independent broker/dealers .................................... 2,515.8 3,043.1
Wirehouse and regional firms .................................. 1,568.4 1,753.8
Nationwide Retirement Solutions ............................... 1,081.8 1,221.5
Pension plan administrators ................................... 581.4 767.8
Life insurance specialists .................................... 577.7 593.8
Nationwide agents ............................................. 558.6 533.7
Provident agents .............................................. 65.4 --
-------- ---------
Total ................................................... $9,546.5 $10,275.5
======== =========
Year-to-date 2002, sales through financial institutions increased 10%
compared to the same period a year ago, driven mainly by strong sales of
deferred fixed annuities, offset by lower variables annuities.
Sales through independent broker/dealers declined for the first nine
months of 2002 compared to one year ago, reflecting lower demand for variable
annuities in light of depressed equity markets.
For the first nine months of 2002, sales through wirehouse and regional
firms were flat compared to 2001, reflecting lower sales from the Waddell & Reed
Financial, Inc. ("WADDELL & REED") relationship offset by growth from other
firms.
Sales through Nationwide Retirement Solutions declined 11% in the first
nine months of 2002 compared to the same period for 2001, reflecting a growing
trend where plan sponsors want administration-only services and not group
annuity contracts.
Sales through pension plan administrators dropped 24% in the first nine
months of 2002 compared to the same period a year ago. As the Company's Private
Sector pension business model continues to evolve, direct production through
this channel is not expected to grow, with more new business opportunities being
created in conjunction or partnership with the independent broker/dealer,
wirehouse and financial institutions relationships.
Sales from life insurance specialists benefited from the sale of a single
$54.0 million case in the first nine months of 2002.
23
Business Segments
------------------
The Company reports three product segments: Individual Annuity,
Institutional Products and Life Insurance. In addition, the Company reports
certain other revenues and expenses in a Corporate segment.
The following table summarizes operating income before federal income
taxes for the Company's business segments for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
Individual Annuity ................................................ $(171.4) $ 177.1
Institutional Products ............................................ 144.3 156.6
Life Insurance .................................................... 127.2 141.0
Corporate(1) ...................................................... 4.6 20.1
------- -------
Operating income before federal income taxes(1) ............. $ 104.7 $ 494.8
======= =======
- ----------------
(1) Excludes net realized gains and losses on investments not related to
securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption of accounting principles.
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
specified interest rates fixed for prescribed periods.
The following table summarizes certain selected financial data for the
Company's Individual Annuity segment for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
INCOME STATEMENT DATA
Revenues:
Policy charges ...................................................... $ 351.9 $ 374.9
Net investment income ............................................... 483.0 387.3
Premiums on immediate annuities ..................................... 46.6 47.9
--------- ---------
881.5 809.8
Benefits and expenses:
Interest credited to policyholder account values .................... 369.0 316.4
Other benefits ...................................................... 60.8 52.0
Amortization of DAC ................................................. 483.5 164.2
Other operating expenses ............................................ 139.6 100.4
1,052.9 632.7
--------- ---------
Operating (loss) income before federal income taxes ............ $ (171.4) $ 177.1
========= =========
OTHER DATA
Sales:
Individual variable annuities ....................................... $ 3,085.3 $ 4,067.8
Individual fixed annuities .......................................... 2,131.4 1,399.4
--------- ---------
Total individual annuity sales ................................. $ 5,216.7 $ 5,467.2
========= =========
Average account values:
General account ..................................................... $9,711.4 $7,407.5
Separate account .................................................... 30,523.1 33,377.2
--------- ---------
Total average account values ................................... $40,234.5 $40,784.7
========= =========
24
Account values as of period end:
Individual variable annuities ....................................... $29,051.6 $32,758.2
Individual fixed annuities .......................................... 7,650.4 5,164.1
--------- ---------
Total account values ........................................... $36,702.0 $37,922.3
--------- ---------
GMDB--Net amount at risk, net of reinsurance ............................... $ 3,708.3 $ 1,243.4
Return on average allocated capital ....................................... (7.4)% 13.9%
Pre-tax operating (loss) income to average account values ................. (0.57)% 0.58%
--------- ---------
For the first nine months of 2002, pre-tax operating losses were $171.4
million compared to $177.1 million of income for the first nine months of 2001.
The loss was due to the acceleration of DAC amortization recorded in third
quarter 2002, which totaled $328.3 million, as described in "--Benefits and
Expenses" above. Excluding the accelerated DAC amortization, pre-tax operating
income decreased 11% in the nine months of 2002 compared to one year ago.
Asset fees decreased to $86.9 million in the third quarter of 2002, down
16% from $103.1 million in the same period a year ago. Asset fees for the first
nine months of 2002 decreased 9% to $288.8 million compared to $318.8 million in
the same period a year ago. Asset fees are calculated daily and charged as a
percentage of separate account values. The fluctuations in asset fees were
primarily due to decreases in the market value of the investment options
underlying the account values, which have followed the general trends of the
equity markets. Average separate account values decreased 9% to $30.52 billion
for the nine months ended September 30, 2002 compared to $33.38 billion in the
same period a year ago.
Interest spread income is net investment income less interest credited to
policyholder account values. Interest spread income can 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
values in the Individual Annuity segment for the periods indicated.
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2002 2001
---- ----
(UNAUDITED)
Net investment income .......................................................... 7.01% 7.57%
Interest credited .............................................................. 5.07 5.70
---- ----
Interest spread on average general account values ........................ 1.94% 1.87%
==== ====
Interest spread improved in the first nine months of 2002 compared to 2001
as the Company was able to lower crediting rates more quickly than the decrease
in investment portfolio rates, which decreased due to lower market interest
rates.
Other benefits increased primarily due to higher levels of GMDB claims.
GMDB exposure, as measured by the difference between the aggregate account value
and death benefit due to the contract holder net of any reinsurance coverage,
increased to $3.71 billion as of September 30, 2002. As of September 30, 2002,
the Company's reserve for GMDB claims was $7.0 million.
During the first nine months of 2002, operating expenses totaled $139.6
million, an increase of 39% over the first nine months of 2001 total of $100.1
million. The increase reflects growth in the number of contracts in-force, an
increase in benefit costs and projects focused on improving producer and
customer support.
Individual Annuity sales, which exclude internal replacements, during the
first nine months of 2002 were $5.22 billion compared to $5.47 billion for the
first nine months of 2001. The decline in sales is driven by sustained weakness
in the equity markets, which had a negative impact on variable annuity demand.
Partially offsetting a decline in variable annuity sales was the strong appeal
of fixed products to consumers, as fixed annuities sales reached a record $2.13
billion for the first nine months of 2002 compared to $1.40 billion for the
first nine months of 2001.
Year-to-date 2002 Individual Annuity segment deposits totaled $5.48
billion offset by withdrawals and surrenders totaling $3.97 billion, generating
net flows of $1.51 billion compared to $2.35 billion achieved in the
25
same period a year ago. The decrease in net flows is attributable to the decline
in sales combined with an increase in variable annuity surrenders due to
continued losses in the equity markets.
Institutional Products
The Institutional Products segment is comprised of the Company's Private
and Public Sector group retirement plans, the medium-term note programs and
structured products initiatives. The Private Sector includes the 401(k) business
generated through fixed and variable annuities. The Public Sector includes the
Code Section 457 business in the form of fixed and variable annuities.
Sales results do not include business generated through the medium-term
note programs, large case pension plan acquisitions and Nationwide employee and
agent benefit plans, however the income statement data does reflect this
business.
The following table summarizes certain selected financial data for the
Company's Institutional Products segment for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
INCOME STATEMENT DATA
Revenues:
Policy charges ..................................................... $ 132.5 $ 158.4
Net investment income .............................................. 593.7 635.3
Other .............................................................. 4.0 1.5
--------- ---------
730.2 795.2
--------- ---------
Benefits and expenses:
Interest credited to policyholder account values ................... 409.0 476.0
Other operating expenses ........................................... 176.9 162.6
585.9 638.6
--------- ---------
Operating income before federal income taxes ................. $ 144.3 $ 156.6
========= =======
OTHER DATA
Sales:
Private sector pension plans ....................................... $ 2,134.7 $ 2,468.9
Public sector pension plans ........................................ 1,041.3 1,156.9
--------- ---------
Total institutional products sales ........................... $ 3,176.0 $ 3,625.8
========= ========
Average account values:
General account .................................................... $12,482.9 $11,485.8
Separate account ................................................... 19,881.4 23,310.5
--------- ---------
Total average account values ................................. $32,364.3 $34,796.3
========= =========
Account values as of period end:
Private sector pension plans ....................................... $13,427.2 $15,334.0
Public sector pension plans ........................................ 11,768.1 14,600.5
Funding agreements backing medium-term notes ....................... 4,305.1 2,880.5
--------- ---------
Total account values ......................................... $29,500.4 $32,815.0
========= =========
Return on average allocated capital ...................................... 21.2% 21.8%
Pre-tax operating income to average account values ....................... 0.59% 0.59%
--------- ---------
Pre-tax operating income decreased 8% to $144.3 million in the first nine
months of 2002 compared to the same period a year ago. Year-to-date 2002 results
included $12.0 million of accelerated DAC amortization, as described in
"--Benefits and Expenses" above. Excluding the accelerated DAC amortization,
pre-tax operating income was flat for the first nine months of 2002 compared to
a year ago.
Asset fees totaled $114.2 million for the first nine months of 2002
compared to $135.4 million in the first nine months of 2001. The decline was
driven by a 15% decrease in average separate account values in the first nine
months of 2002 compared to the same period a year ago, principally attributable
to market depreciation on assets and Public Sector pension case terminations.
26
Despite growth in average general account values in 2002, net investment
income has decreased compared to 2001, reflecting lower market interest rates in
2002 and the floating rate nature of many of the investments in this segment.
Interest spread income is net investment income less interest credited to
policyholder account values. Interest spread income can 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. Interest spread income was $25.4
million higher on a year-to-date basis driven by both higher average general
account values and improved interest spread. The increase in average general
account values was led by growth in the medium-term note programs, where the
Company issued $1.18 billion of notes during the first nine months of 2002.
The following table depicts the interest spread on average general account
values in the Institutional Products segment for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
(UNAUDITED)
Net investment income .......................................................... 6.34% 7.37%
Interest credited .............................................................. 4.37 5.53
---- ----
Interest spread on average general account values ........................ 1.97% 1.84%
==== ====
Interest spread improved in the first nine months of 2002 compared to 2001
as the Company was able to lower crediting rates more quickly than the decrease
in investment portfolio rates, which decreased due to lower market interest
rates.
Other operating expenses were essentially flat in the first nine months of
2002, compared to the same period a year ago, excluding the accelerated DAC
amortization of $12.0 million in the first nine months of 2002, reflecting a
shift in business from annuity contracts to administration-only services and
trust products offered by affiliates of the Company.
Institutional Product sales reached $3.18 billion in the first nine months
of 2002 compared to sales of $3.63 billion for the same period a year ago.
Private Sector pension plan sales of group annuities have decreased, as an
increasing percentage of pension sales are sold as trust products offered by an
affiliate, Nationwide Trust Company, FSB. Sales in the Public Sector declined
from a year ago reflecting the impact of case terminations in 2001 and 2002 on
recurring deposits. In addition, an increasing number of new plan sales are
administration-only products offered by Nationwide Retirement Solutions, an
affiliate of the Company, rather than annuities offered by the Company.
Year-to-date 2002 Institutional Products segment deposits of $3.30
billion, offset by participant withdrawals and surrenders totaling $3.51 billion
generated net flows from participant activity of $(217.0) million compared to
year-to-date 2001 net flows of $426.5 million. In the Private Sector, the
decrease in sales, a shift to trust products and increased competition
contributed to the decline. In the Public Sector, the decrease reflects the
shift in business to administration-only services and participants taking
advantage of the new portability provisions created as part of the tax reforms
enacted a year ago and the decrease in sales.
Life Insurance
The Life Insurance segment consists of investment life products, including
both individual variable life and COLI products, traditional life insurance
products and universal life insurance. Life insurance products provide a death
benefit and generally also allow the customer to build cash value on a
tax-advantaged basis.
The following table summarizes certain selected financial data for the
Company's Life Insurance segment for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
INCOME STATEMENT DATA
Revenues:
Total policy charges ................................................ $ 261.6 $ 234.5
Net investment income ............................................... 244.3 241.8
27
Other ............................................................... 142.7 147.1
648.6 623.4
Benefits .................................................................. 340.0 319.5
Operating expenses ........................................................ 181.4 162.9
521.4 482.4
--------- ---------
Operating income before federal income taxes .................. $ 127.2 $ 141.0
========= =========
OTHER DATA
Sales:
The BEST of AMERICA variable life series ............................ $ 394.5 $ 409.9
COLI ................................................................ 577.7 593.7
Traditional/Universal life insurance ................................ 181.6 178.9
--------- ---------
Total life insurance sales .................................... $ 1,153.8 $ 1,182.5
========= =========
Policy reserves as of period end:
Individual investment life insurance ................................ $ 1,978.8 $ 1,944.7
Corporate investment life insurance ................................. 3,545.9 2,981.6
Traditional life insurance .......................................... 1,916.6 1,853.2
Universal life insurance ............................................ 819.7 779.4
--------- ---------
Total policy reserves ......................................... $ 8,261.0 $ 7,558.9
========= =========
Life insurance in-force as of period end:
Individual investment life insurance ................................ $32,878.2 $29,492.7
Corporate investment life insurance ................................. 8,578.7 7,445.6
Traditional life insurance .......................................... 24,263.8 24,455.3
Universal life insurance ............................................ 7,759.9 7,838.3
--------- ---------
Total insurance in-force ...................................... $73,480.6 $69,231.9
========= =========
Return on average allocated capital ....................................... 11.7% 12.3%
--------- --------
Life Insurance segment earnings declined 10% to $127.2 million for the
first nine months of 2002 compared to a year ago. Year-to-date results include
$6.8 million of accelerated DAC amortization as described in "--Benefits and
Expenses" above. Excluding the accelerated DAC amortization, pre-tax operating
income decreased 5% the first nine months of 2002 compared to a year ago. An
increase in policy charges from a growing block of insurance in-force was offset
by an increase in operating expenses.
Driven by increased policy charges, year-to-date revenues from investment
life products increased to $322.5 for 2002 compared to $301.9 million for 2001.
The increase in policy charges is attributable to a growing block of investment
life business, as insurance in-force increased 12% to $41.46 billion at
September 30, 2002, compared to $36.94 billion at September 30, 2001.
Pre-tax operating earnings excluding the accelerated DAC amortization from
investment life products reached $78.7 million in the first nine months of 2002
compared to $82.5 million a year ago, a 5% decline. The decline was due to an
increase in general operating expenses and adverse mortality in first quarter
2002, partially offset by increased policy charges.
For the first nine months of 2002, pre-tax earnings decreased 5% to $55.4
million compared to $58.5 million for the first nine months of 2001. Increases
in policy benefit costs and operating expenses, partially offset by modest
premium growth, contributed to the decline.
For the first nine months of 2002, total Life Insurance segment sales,
excluding all BOLI and Nationwide employee and agent benefit plan sales,
decreased $28.7 million compared to 2001 and totaled $1.15 billion. While the
Company has experienced growth in renewal premiums, first year premiums for
individual variable life insurance continued to be impacted by volatility in the
equity markets and concern over the potential for adverse tax legislation. COLI
sales benefited in the first nine months of 2002 from the sale of a single $54.0
million case.
Corporate
The Corporate segment consists of net investment income not allocated to
the three product segments, unallocated expenses and interest expense on debt.
The following table summarizes certain selected financial data for the
Company's Corporate segment for the periods indicated.
28
NINE MONTHS ENDED
SEPTEMBER 30,
--------------
2002 2001
---- ----
(IN U.S.$ MILLIONS) (UNAUDITED)
INCOME STATEMENT DATA
Operating revenues(1) .......................................................... $ 30.8 $23.8
Interest expense on debt, primarily with NFS ................................... (23.7) (4.7)
Other operating expenses ....................................................... (2.5) 1.0
----- -----
Operating income before federal income taxes(1) .......................... $ 4.6 $20.1
===== =====
- ------------------
(1) Excludes net realized gains and losses on investments not related to
securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption of accounting principles.
The increase in revenues reflects an increase in net investment income
primarily attributable to income earned on the proceeds from the surplus note
offerings completed in December 2001 and June 2002, less the impact of lower
investment income as a result of dividends paid to NFS. The additional interest
expense in the first nine months of 2002 reflects the surplus note offerings
mentioned above, offset by lower utilization of commercial paper borrowings.
In addition to these operating revenues and expenses, the Company also
reports net realized gains and losses on investments not related to
securitizations, hedging instruments and hedged items in the Corporate segment.
For the first nine months of 2002, the Company recorded net realized losses on
investments of $22.5 million, pre-tax, related to WorldCom, Inc. The Company
also reported gains of $23.2 million and $44.4 million in the first nine months
of 2002 and 2001, respectively, related to the two-step sale of a real estate
partnership to related parties. An analysis of net realized (losses) gains on
investments, hedging instruments and hedged items, by source and investment type
follows for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
---------------
(IN U.S.$ MILLIONS) 2002 2001
---- ----
(UNAUDITED)
Unrelated parties:
Realized gains (losses) on sale of securities available-for-sale:
Fixed maturity securities .............................................. $ 2.4 $ 2.2
Equity securities ...................................................... -- --
Other-than-temporary impairments of securities available-for-sale:
Fixed maturity securities .............................................. (76.6) (13.9)
Equity securities ...................................................... -- --
Real estate .................................................................. 3.6 --
Mortgage loans on real estate ................................................ (3.0) 0.6
Derivatives .................................................................. (12.1) 1.9
Other ........................................................................ (0.9) (0.3)
------ ------
Total--unrelated parties .......................................... (86.6) (9.5)
Related parties--gain on sale of limited partnership .......................... 23.2 44.4
------ ------
Net realized (losses) gains on investments, hedging
instruments and hedged items ........................................ $(63.4) $ 34.9
====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 AND
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
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, totaled $3.00
29
billion in 2001 compared to $3.00 billion for 2000 and $2.64 billion for 1999.
The growth in operating revenues over the past two years has primarily been
driven by an increase in net investment income due to growth in interest
spread-based businesses, offset by lower policy charges in 2001 as a result of
depressed equity markets.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of individual and group variable
annuities and investment life insurance products; cost of insurance charges
earned on universal life insurance products; administration fees, which include
fees charged per contract on a variety of the Company's products and premium
loads on universal life insurance products; and surrender fees, which are
charged as a percentage of premiums withdrawn during a specified period of
annuity and certain life insurance contracts.
Policy charges for each of the last three years were as follows:
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ 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 $1.72 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 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 throughout 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.
30
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 Nationwide Mutual, 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 audited consolidated financial
statements included in this Prospectus for further information regarding this
transaction). 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.
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 programs, 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 at 5.69% 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 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 $439.3 million in 2001, a 7% decrease from 2000
operating expenses of $472.0 million. Operating expenses were $405.8 million in
1999. The decrease in 2001 reflects the Company's commitment to aggressive
expense management in 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 $161.2 million representing an effective
tax rate of 25.6% for 2001. Federal income tax expense in 2000 and 1999 was
$207.3 million and $200.1 million, respectively, representing effective rates of
30.3% and 33.2%, respectively. 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.
Other Data
The Company analyzes operating performance using a non-U.S. GAAP measure
called net operating income. The Company calculates net operating income by
adjusting net income to exclude all net realized gains and losses on
31
investments not related to securitizations, hedging instruments and hedged
items, discontinued operations and cumulative effect of adoption of accounting
principles, all 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 U.S. 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
discontinued operations and 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.
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ 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
Discontinued operations, net of tax ...................................... (1.2) 0.5 (2.3)
Cumulative effect of adoption of accounting principles, net of tax ....... 7.1 -- --
------ ------ ------
Net operating income ............................................... $480.8 $488.4 $410.4
====== ====== ======
Sales Information
The Company regularly monitors and reports a non-U.S. 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 backing the Company's
medium-term note programs; large case BOLI; large case pension plan
acquisitions; and deposits into Nationwide 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.
32
The Company also markets group deferred compensation retirement plans to
employees of state and local governments for use under Code Section 457. The
Company utilizes its sponsorship by the National Association of Counties and The
United States Conference of Mayors when marketing Code Section 457 products.
Sales by product and segment for each of the last three years are as
follows:
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ 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 - Code 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
COLI ............................................................. 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 $1,095.9
======== ======== ========
The Company sells its products through a diverse distribution network.
Unaffiliated entities that sell the Company's products to their own customer
base include independent broker/dealers, brokerage firms, financial
institutions, pension plan administrators and life insurance specialists.
Representatives of an affiliate who market products directly to a customer base
include Nationwide Retirement Solutions. The Company also distributes retirement
savings products through the agency distribution force of its ultimate parent
company, Nationwide Mutual.
Sales by distribution channel for each of the last three years are
summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ 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 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 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.
33
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 $409.2
million in 1999. The Company entered the COLI market in 1998 and quickly became
a market leader through a focus on mid-sized cases. Sales for 2001 reflect
continued growth in renewal premiums, offset by a sharp decline in first-year
premiums, as the depressed economic conditions have reduced demand for new
executive benefit plans.
Business Segments
The Company reports three product segments: Individual Annuity,
Institutional Products and Life Insurance. In addition, the Company reports
certain other revenues and expenses in a Corporate segment.
The following table summarizes operating income before federal income tax
expense for the Company's business segments for each of the last three years.
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ MILLIONS) 2001 2000 1999
---- ---- ----
Individual Annuity .................................................. $231.4 $280.7 $259.2
Institutional Products .............................................. 211.3 220.0 217.8
Life Insurance ...................................................... 189.7 161.1 122.7
Corporate ........................................................... 16.7 40.7 14.8
------ ------ ------
Operating income before federal income tax expense ............ $649.1 $702.5 $614.5
====== ====== ======
Individual Annuity
The Individual Annuity segment consists of individual The BEST of AMERICA
and private label deferred variable annuity products, deferred fixed annuity
products and income products. Individual deferred annuity contracts provide the
customer with tax-deferred accumulation of savings and flexible payout options
including lump sum, systematic withdrawal or a stream of payments for life. In
addition, variable annuity contracts provide the customer with access to a wide
range of investment options and asset protection in the event of an untimely
death, while fixed annuity contracts generate a return for the customer at a
specified interest rate fixed for prescribed periods.
The following table summarizes certain selected financial data for the
Company's Individual Annuity segment for the years indicated.
YEARS ENDED DECEMBER 31,
-----------------------
(IN U.S.$ MILLIONS) 2001 2000 1999
---- ---- ----
INCOME STATEMENT DATA
Revenues:
Policy charges .............................................. $ 495.1 $ 573.2 $ 484.6
Net investment income ....................................... 534.7 482.0 458.9
Premiums on immediate annuities ............................. 60.9 52.7 26.8
--------- --------- ---------
1,090.7 1,107.9 970.3
--------- --------- ---------
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 DAC ......................................... 220.0 238.7 170.9
Other operating expenses ................................... 137.4 138.1 131.5
--------- --------- ---------
859.3 827.2 711.1
--------- --------- ---------
Operating income before federal income tax expense .... $ 231.4 $ 280.7 $ 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:
34
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 $280.7 million, which were up 8%
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.
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.
YEARS ENDED DECEMBER 31,
------------------------
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 the year, 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 2001, 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 approximately 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
35
$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 of
nearly $1.00 billion in 2001 provided growth in the brokerage channel, partially
offsetting declines in the independent broker/dealer and financial institutions
channels. According to VARDS, the Company was ranked 4th in total variable
annuity sales in 2001 and 2000.
The decrease in return on average allocated capital in 2001 is primarily
a result of lower earnings on individual variable annuities due to depressed
equity markets and additional allocated capital to support growth in fixed
annuities during 2001.
The decrease in pre-tax operating income to average account balances in
2001 and 2000 is primarily a result of lower interest spreads on average general
account reserves and the Company not being able to reduce its operating expenses
as quickly and in proportion to the decrease in policy charges due to declining
equity markets in 2001. In 2000, additional DAC amortization as a result of
increased surrender activity decreased pre-tax operating income to average
account balances.
Institutional Products
The Institutional Products segment is comprised of the Company's private
and public sector group retirement plans and the medium-term note programs. The
private sector includes the 401(k) business generated through fixed and variable
annuities. The public sector includes the Code Section 457 business in the form
of fixed and variable annuities. Sales results do not include business generated
through the medium-term note programs, large case pension plan acquisitions and
Nationwide employee and agent benefit plans, however the income statement data
does reflect this business.
The following table summarizes certain selected financial data for the
Company's Institutional Products segment for the years indicated.
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ MILLIONS) 2001 2000 1999
---- ---- ----
INCOME STATEMENT DATA
Revenues:
Policy charges ............................................ $ 205.9 $ 251.6 $ 211.9
Net investment income ..................................... 847.5 827.4 771.2
Other...................................................... 3.5 -- --
--- -- --
--------- --------- ----------
1,056.9 1,079.0 983.1
--------- - --------- ---------
Benefits and expenses:
Interest credited to policyholder account balances ........ 627.8 628.8 580.9
Other operating expenses .................................. 217.8 230.2 184.4
--------- --------- ---------
845.6 859.0 765.3
--------- --------- ---------
Operating income before federal income tax expense ... $ 211.3 $ 220.0 $ 217.8
========= ========= =========
OTHER DATA
Sales:
Private sector pension plans .............................. $ 3,124.5 $ 3,978.7 $3,620.8
Public sector pension plans ............................... 2,148.8
---------
1,521.2 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%
36
Pre-tax operating income to average account balances ............ 0.61% 0.57% 0.65%
-------- -------- ---------
Pre-tax operating income totaled $211.3 million in 2001, down 4% compared
to 2000 pre-tax operating income of $220.0 million, which was up 1% 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 programs 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 medium-term note programs. 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.
YEARS ENDED DECEMBER 31,
------------------------
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 at 1.91%
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
approximately 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 backing
the Company's medium-term note programs, 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 5% compared to a 25% 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 variable assets and
large case terminations on fixed and variable annuity cases in both 2000 and
1999. The medium-term note programs 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.
37
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
programs.
Pre-tax operating income to average account balances of 0.61% in 2001
remained relatively flat compared to 0.57% 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.
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 $1.9 million of operating
income in 2001.
Life Insurance
The Life Insurance segment consists of investment life products, including
both individual variable life and COLI products, traditional life insurance
products and universal life insurance. Life insurance products provide a death
benefit and generally also allow the customer to build cash value on a
tax-advantaged basis.
The following table summarizes certain selected financial data for the
Company's Life Insurance segment for the years indicated.
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ MILLIONS) 2001 2000 1999
---- ---- ----
INCOME STATEMENT DATA
Revenues:
Policy charges ................................................ $ 316.2 $ 266.6 $ 199.0
Net investment income ......................................... 323.3 289.2 253.1
Other ......................................................... 195.3 195.5 195.9
--------- --------- ---------
834.8 751.3 648.0
--------- --------- ---------
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 ...... $ 189.7 $ 161.1 $ 122.7
========= ========= =========
OTHER DATA
Sales:
The BEST of AMERICA variable life series ...................... $ 552.4 $573.4 $ 425.9
COLI .......................................................... 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 ................................. 11.6% 12.1% 11.1%
--------- --------- ---------
Life Insurance segment results reflect increased revenues driven by growth
in investment life insurance in-force. Life Insurance segment earnings in 2001
increased 18% to $189.7 million, up from $161.1 million a year ago and $122.7
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.
38
Policy charges increased 19% to $316.2 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, 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 COLI 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 $1.10 billion in 1999. Individual
variable universal life sales have been adversely impacted by the phase out of
the estate tax, uncertainty surrounding the taxation of split dollar plans, and
the volatile stock market. Sales of new COLI cases were down given the depressed
economic conditions where corporations are not forming new executive benefit
plans and existing plans are being funded at lower levels. According to the
Tillinghast-Towers Perrin Value Variable Life Survey, the Company ranked 6th in
variable life sales in 2001, up from 7th in 2000.
Corporate
The following table summarizes certain selected financial data for the
Company's Corporate segment for the years indicated.
YEARS ENDED DECEMBER 31,
------------------------
(IN U.S.$ MILLIONS) 2001 2000 1999
---- ---- ----
INCOME STATEMENT DATA
Operating revenues ..................................................... $20.8 $58.2 $40.6
Operating expenses ..................................................... 4.1 17.5 25.8
----- ----- -----
Operating income before federal income tax expense(1) ............ $16.7 $40.7 $14.8
===== ===== =====
--------------------
(1) Excludes net realized gains (losses) on investments, hedging
instruments and hedged items.
The Corporate segment consists of net investment income not allocated to
the three product segments, unallocated expenses and interest expense on debt.
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 a related party transaction with
Nationwide Mutual in 2001 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 Nationwide Mutual, whereby it sold 78%
of its interest in a limited partnership (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.
39
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 the second quarter of
2001.
Investments
General
The Company's assets are divided between separate account and general
account assets. As of September 30, 2002, $46.40 billion (56%) of the Company's
total assets were held in separate accounts and $36.89 billion (44%) were held
in the Company's general account, including $32.57 billion of general account
investments. Separate account assets consist primarily of deposits from the
Company's variable annuity business. Most separate account assets are invested
in various mutual funds. All of the investment risk in the Company's separate
account assets is borne by the Company's customers, with the exception of $1.76
billion of policy reserves as of September 30, 2002 ($1.39 billion as of
December 31, 2001) for which the Company bears the investment risk. In addition
to the information presented herein, see note 3 to the consolidated financial
statements, which are included herein, for further information regarding the
Company's investments.
The following table summarizes the Company's consolidated general account
investments by asset category.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
CARRYING % OF CARRYING % OF
(IN U.S.$ MILLIONS) VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
Fixed maturity securities ................................ $22,686.8 69.7 $18,370.8 66.9
Mortgage loans on real estate, net ....................... 7,691.7 23.6 7,113.1 25.9
Policy loans ............................................. 628.5 1.9 591.1 2.1
Real estate, net ......................................... 112.5 0.3 172.0 0.6
Equity securities ........................................ 83.5 0.3 94.0 0.3
Other long-term investments .............................. 138.2 0.4 125.0 0.5
Short-term investments ................................... 1,231.2 3.8 1,011.3 3.7
--------- ----- --------- -----
Total .............................................. $32,572.4 100.0 $27,477.3 100.0
========= ===== ========= =====
Fixed Maturity Securities
The following table summarizes the composition of the Company's general
account fixed maturity securities by category.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
CARRYING % OF CARRYING % OF
(IN U.S.$ MILLIONS) VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
U.S. government/agencies ................................... $ 647.7 2.9 $ 285.8 1.6
Foreign governments ........................................ 47.4 0.2 44.4 0.3
State and political subdivisions ........................... 9.7 -- 7.9 --
Corporate:
Public ............................................... 7,495.9 33.0 6,030.5 32.8
Private .............................................. 6,469.5 28.5 6,033.4 32.8
Mortgage-backed securities--U.S. Government backed .......... 4,388.8 19.4 2,076.4 11.3
Asset-backed securities .................................... 3,627.8 16.0 3,892.4 21.2
--------- ----- --------- -----
Total .......................................... $22,686.8 100.0 $18,370.8 100.0
========= ===== ========= =====
The average duration and average maturity of the Company's general account
fixed maturity securities as of September 30, 2002 were approximately 4.36 and
5.57 years, respectively. The market value of the Company's general account
investments may fluctuate significantly in response to changes in interest
rates. In addition, the Company may also be likely to experience investment
losses to the extent its liquidity needs require the disposition of general
account fixed maturity securities in unfavorable interest rate environments.
NAIC assigns securities quality ratings and uniform valuations called
"NAIC Designations" which are used by insurers when preparing their annual
statements. The NAIC assigns designations to publicly traded as well as
privately placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a designation
40
in class 1 being of the highest quality. Of the Company's general account fixed
maturity securities, 95% and 95% were in the highest two NAIC Designations as of
September 30, 2002 and December 31, 2001, respectively.
The following table sets forth an analysis of credit quality, as
determined by NAIC Designation, of the Company's general account fixed maturity
securities portfolio.
(IN U.S.$ MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
NAIC CARRYING % OF CARRYING % OF
DESIGNATION(1) RATING AGENCY EQUIVALENT DESIGNATION(2) VALUE TOTAL VALUE TOTAL
- -------------- --------------------------------------- ----- ----- ----- -----
1 Aaa/Aa/A ........................................... $13,742.5 60.6 $10,938.2 59.5
2 Baa ................................................ 7,743.8 34.1 6,553.2 35.7
3 Ba ................................................. 798.4 3.5 659.1 3.6
4 B .................................................. 263.9 1.2 127.3 0.7
5 Caa and lower ...................................... 89.3 0.4 33.8 0.2
6 In or near default ................................. 48.9 0.2 59.2 0.3
--------- ----- --------- -----
Total ........................................ $22,686.8 100.0 $18,370.8 100.0
========= ===== ========= =====
- ------------------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown have been assigned to securities not yet
assigned an NAIC Designation in a manner approximating equivalent public
rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has assigned
internal ratings corresponding to the public rating.
The Company's general account MBS investments include residential MBSs and
multi-family mortgage pass-through certificates. As of December 31, 2001, MBSs
were $2.08 billion (11%) of the carrying value of the general account fixed
maturity securities available-for-sale, all of which were guaranteed by the U.S.
Government or an agency of the U.S. Government. During 2002, the Company has
increased its allocation of new investment purchases to MBS investments as the
supply of commercial mortgage loans has decreased and to diversify away from the
credit risk of corporate fixed income securities.
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to its general
account fixed maturity securities portfolio. The objective of the Company's
general account MBS investments is to provide reasonable cash flow stability and
increased yield. General account MBS investments include CMOs, Real Estate
Mortgage Investment Conduits ("REMICS") and mortgage-backed pass-through
securities. The Company's general account MBS investments do not include
interest-only securities or principal-only securities or other MBSs, which may
exhibit extreme market volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the degree
of prepayment risk is particular to the type of MBS held. The Company limits its
exposure to prepayments by purchasing less volatile types of MBSs. As of
December 31, 2001, $795.2 million (38%) of the carrying value of the general
account MBS portfolio was invested in planned amortization class CMOs/REMICs
("PACS"). PACs are securities whose cash flows are designed to remain constant
over a variety of mortgage prepayment environments. Other classes in the
CMO/REMIC security are structured to accept the volatility of mortgage
prepayment changes, thereby insulating the PAC class.
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio as of the dates indicated.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ ------------------
(UNAUDITED)
CARRYING % OF CARRYING % OF
(IN U.S.$ MILLIONS) VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
Planned Amortization Class ......................................... $2,385.9 54.4 $ 795.2 38.3
Very Accurately Defined Maturity ................................... 678.4 15.5 360.2 17.4
Sequential ......................................................... 236.6 5.4 135.9 6.5
Targeted Amortization Class ........................................ 79.3 1.8 117.0 5.6
Accrual ............................................................ 318.1 7.2 115.5 5.6
Scheduled .......................................................... 66.4 1.5 94.0 4.5
Multi-family Mortgage Pass-through Certificates .................... 104.4 2.4 63.4 3.1
Non-Accelerating Security Class .................................... 269.0 6.1 54.6 2.6
Other .............................................................. 250.7 5.7 340.6 16.4
-------- ----- -------- -----
Total ........................................................ $4,388.8 100.0 $2,076.4 100.0
======== ===== ======== =====
41
The Company's general account asset-backed security ("ABS") investments
include home equity/ improvement ABSs, credit tenant/card backed ABSs and
CBO/CLO ABSs, among others. As of December 31, 2001, ABSs were $3.89 billion
(21%) of the carrying value of the general account fixed maturity securities
available-for-sale.
The Company believes that general account ABS investments add
diversification, liquidity, credit quality and additional yield to its general
account fixed maturity securities portfolio. The objective of the Company's
general account ABS investments is to provide reasonable cash flow stability and
increased yield. The Company's general account ABS investments do not include
interest-only securities or principal-only securities or other ABSs, which may
exhibit extreme market volatility.
The following table sets forth the distribution by investment type of the
Company's general account ABS portfolio.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
CARRYING % OF CARRYING % OF
(IN U.S.$ MILLIONS) VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
Home Equity/Improvement ............................................. $1,080.8 29.8 $1,314.2 33.8
CBO/CLO ............................................................. 459.7 12.7 619.7 15.9
Credit Tenant/Card Backed ........................................... 602.1 16.6 358.8 9.2
Manufactured Housing Backed ......................................... 112.3 3.1 247.6 6.4
Equity Trust Certificates/Enhanced Equity Trust Certificates ........ 183.9 5.1 202.7 5.2
Auto Loan Backed .................................................... 143.1 3.9 186.2 4.8
Pass Through Certificate ............................................ 193.0 5.3 181.6 4.7
Franchise/Business Loan ............................................. 140.1 3.9 160.0 4.1
Miscellaneous Asset Backed .......................................... 176.6 4.9 149.5 3.8
Equipment Leases .................................................... 96.1 2.6 136.1 3.5
All Other ........................................................... 440.1 12.1 336.0 8.6
-------- ----- ------- -----
Total ......................................................... $3,627.8 100.0 $3,892.4 100.0
======== ===== ======== =====
The Company invests in private fixed maturity securities because of the
(i) generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business
covenants available in private fixed maturity security loan agreements and (iii)
stronger prepayment protection. Although private fixed maturity securities are
not registered with the Commission and generally are less liquid than public
fixed maturity securities, restrictive financial and business covenants included
in private fixed maturity security loan agreements generally are designed to
compensate for the impact of increased liquidity risk. A significant majority of
the private fixed maturity securities that the Company holds are participations
in issues that are also owned by other investors. In addition, some of the
private fixed maturity securities are rated by nationally recognized rating
agencies and substantially all have been assigned a rating designation by the
NAIC.
Mortgage Loans
As of September 30, 2002 and December 31, 2001, general account mortgage
loans were $7.69 billion (24%) and $7.11 billion (26%), respectively, of the
carrying value of consolidated general account invested assets. As of such
dates, commercial mortgage loans constituted substantially all of total general
account mortgage loans. Commitments to fund mortgage loans of $448.3 million
were outstanding as of September 30, 2002.
As of September 30, 2002, the Company's largest exposure to any single
borrowing group was $91.0 million (1.2%) of the Company's general account
mortgage loan portfolio.
As of September 30, 2002, 0.02% of the Company's mortgage loans were
classified as delinquent, including loans in foreclosure, compared to none as of
September 31, 2001 and 0.42% as of December 31, 2001. Foreclosed and
restructured loans totaled only 0.14% and 0.33% as of September 30, 2002
compared to 0.08% and 0.26%, respectively, as of September 30, 2001 and 0.07%
and 0.29%, respectively, as of December 31, 2001.
Liquidity and Capital Resources
Liquidity and capital resources demonstrate the overall financial strength
of the Company and its ability to generate strong cash flows from its operations
and borrow funds at competitive rates to meet operating and growth
42
needs. The Company's capital structure is comprised of long-term debt and equity
as summarized in the following table.
SEPTEMBER 30, DECEMBER 31,
------------- ------------
(UNAUDITED)
(IN U.S.$ MILLIONS) 2002 2001 2001 2000
---- ---- ---- ----
Long-term debt .................................................. $ 600.0 $ -- $ 300.0 $ --
-------- -------- -------- -------
Shareholder's equity, excluding accumulated other
comprehensive income ......................................... 3,058.3 3,432.9 3,513.0 3,086.2
Accumulated other comprehensive income .......................... 461.1 302.5 204.7 116.7
-------- -------- -------- --------
Total shareholder's equity ................................ 3,519.4 3,735.4 3,717.7 3,202.9
-------- -------- -------- --------
Total capital ............................................. $4,119.4 $3,735.4 $4,017.7 $3,202.9
======== ======== ======== ========
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of certain prescribed limitations without prior
approval. The ability of Nationwide Life to pay dividends is subject to
restrictions set forth in the insurance laws and regulations of the State of
Ohio, its domiciliary state. The Ohio insurance laws require life insurance
companies to seek prior regulatory approval to pay a dividend if the fair market
value of the dividend, together with that of other dividends made within 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 prior year. Nationwide Life's statutory-basis
policyholders' surplus as of December 31, 2001 was $1.76 billion and
statutory-basis net income for 2001 was $83.1 million. Total dividends declared
in the twelve months preceding September 30, 2002 were $35.0 million. In
addition, $475.0 million of capital was returned by Nationwide Life. The total
dividends and returns of capital exceeded the statutory limits and Nationwide
Life obtained the appropriate approvals from the Ohio Department of Insurance
prior to making such payments. The payment of dividends by Nationwide Life 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 Nationwide Life's
participating policies (measured before dividends to policyholders) that can
inure to the benefit of NFS and its stockholders. NFS currently does not expect
such regulatory requirements to impair its ability to pay interest, dividends,
operating expenses, and principal in the future.
NFS, Nationwide Life and Nationwide Mutual are parties to a $1 billion
revolving credit facility that provides an additional source of funds to the
Company. The credit facility is comprised of a $700 million facility under a
five-year agreement and a $300 million facility under a 364-day agreement with a
group of national financial institutions. The credit facility provides for
several and not joint liability with respect to any amount drawn by any party.
To date, no amounts have been drawn down on the facility. The facility provides
covenants, including, but not limited to, requirements that NFS maintain
consolidated tangible net worth, as defined, in excess of $1.685 billion and
Nationwide Life maintain statutory surplus in excess of $935 million. The
Company had no amounts outstanding under this agreement as of September 30,
2002.
Additionally, Nationwide Life has a $500 million commercial paper program
that is 50% backed by the credit facility described above. Therefore, borrowing
capacity under this facility is reduced by one-half of any amounts outstanding
under the commercial paper program, which totaled $60.0 million as of September
30, 2002.
A primary liquidity concern with respect to annuity and life insurance
products is the risk of early policyholder withdrawal. The Company mitigates
this risk by offering variable products where the investment risk is transferred
to the policyholder, charging surrender fees at the time of withdrawal for
certain products, applying a market value adjustment to withdrawals for certain
products in the Company's general account, and monitoring and matching
anticipated cash inflows and outflows.
For individual annuity products ($35.08 billion of reserves as of
September 30, 2002) the surrender charge is calculated as a percentage of the
lesser of deposits made or the amount surrendered and is assessed at declining
rates during the first seven years after a deposit is made.
For group annuity products ($21.42 billion of reserves as of September 30,
2002), the surrender charge amounts and periods can vary significantly,
depending on the terms of each contract and the compensation structure for the
producer. Generally, surrender charge percentages for group products are less
than individual products because the Company incurs lower expenses at contract
origination for group products. In addition, over ninety percent of the general
account group annuity reserves are subject to a market value adjustment at
withdrawal.
43
Life insurance policies are also subject to withdrawal. However, they are
less susceptible to withdrawal than are annuity products because policyholders
generally must undergo a new underwriting process and may incur a surrender fee
in order to obtain a new insurance policy.
The short-term and long-term liquidity requirements of the Company are
monitored regularly to match cash inflows with cash requirements. The Company
periodically reviews its short-term and long-term projected sources and uses of
funds and the asset/liability, investment and cash flow assumptions underlying
these projections. Adjustments are made periodically with respect to the
Company's investment policies to reflect changes in the Company's short-term and
long-term cash needs and changing business and economic conditions.
Given the Company's historic cash flow and current financial results,
management of the Company believes that the cash flow from the operating
activities of the Company over the next year will provide sufficient liquidity
for the operations of the Company, as well as provide sufficient funds to enable
the Company to make dividend and interest payments.
Nationwide Life issued $300 million of 7.5% surplus notes to NFS on
December 17, 2001, which mature in 2031. Nationwide Life also issued $300
million of 8.15% surplus notes to NFS on June 27, 2002, which mature in 2032. In
addition, Nationwide Life paid a $35 million dividend to NFS on January 15, 2002
and returned capital to NFS in the amounts of $75 million on March 4, 2002, $100
million on May 10, 2002 and $300 million on June 26, 2002.
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
to which the Company is exposed.
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 September 2002. The average
crediting rate of fixed annuity products during the first nine months of 2002
was 5.07% and 4.37% 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 MBSs
and ABSs 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 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 MBSs and ABSs
with limited prepayment exposure.
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
44
MBSs and ABSs, 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.
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
(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 medium-term note programs, from time to time, the
Company issues both fixed and variable rate liabilities denominated in foreign
currencies. As a result, the Company is exposed to changes in fair
45
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.
Characteristics of Interest Rate Sensitive Financial Instruments
The following table provides information about the Company's financial
instruments 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.
2001 FAIR 2002 FAIR
(IN U.S.$ MILLIONS) 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE VALUE
---- ---- ---- ---- ---- ---------- ----- ----- -----
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 $12,109.0 $12,063.9 $ 9,858.2
Average interest rate 7.4% 6.9% 6.8% 7.2% 7.5% 7.7% 7.4%
Mortgage and other asset-backed
securities:
Principal
$1,088.4 $ 838.5 $ 837.7 $ 705.9 $ 635.6 $1,961.9 $ 6,068.0 $ 5,968.8 $ 5,169.7
Average interest rate 7.4% 7.4% 6.9% 6.7% 6.6% 6.8% 7.0%
Other fixed maturity
securities:
Principal $ 20.3 $ 43.5 $ 50.0 $ 15.9 $ 29.9 $ 240.0 $ 399.6 $ 338.1 $ 415.1
Average interest rate 18.2% 7.6% 7.7% 6.1% 6.4% 7.6% 8.0%
Mortgage loans on real estate:
Principal
$ 382.0 $ 459.8 $ 515.9 $ 905.8 $ 751.0 $4,111.1 $ 7,125.6 $ 7,293.3 $ 6,327.8
Average interest rate 8.5% 7.5% 7.3% 6.9% 7.1% 7.6% 7.5%
LIABILITIES
Deferred fixed annuities:
Principal $2,328.0 $2,121.0 $1,819.0 $1,585.0 $1,493.0 $9,807.5 $19,153.5 $18,113.0 $15,697.8
Average credited rate 5.2% 5.1% 4.9% 4.8% 4.6% 4.5% 4.7%
Immediate annuities:
Principal $ 48.0 $ 43.0 $ 38.0 $ 33.0 $ 29.0 $ 205.0 $ 396.0 $ 308.0 $ 282.0
Average credited rate 7.1% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%
Short-term borrowings:
Principal $ 100.0 $ -- $ -- $ -- $ -- $ -- $ 100.0 $ 100.0 $ 118.7
Average interest rate 1.9% -- -- -- -- -- 1.9%
Long-term debt:
Principal
$ -- $ -- $ -- $ -- $ -- $ 300.0 $ 300.0 $ 300.0 $ --
Average interest rate -- -- -- -- -- 7.5% 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 $ 1,975.9 $ (45.0) $ (21.3)
Weighted average pay rate 3.5% 6.0% 5.7% 6.1% 5.9% 6.0% 5.9%
Weighted average receive
rate 2.6% 2.0% 2.2% 2.3% 2.1% 2.3% 2.2%
Pay variable/receive fixed
Notional value $ 5.0 $ 28.1 $ 529.5 $ 426.7 $ 5 70.7 $ 835.9 $ 2,395.9 $ (32.1) $ (32.1)
Weighted average pay rate 2.4% 2.2% 2.5% 2.6% 2.5% 2.5% 2.5%
Weighted average receive
rate 7.0% 4.1% 4.0% 3.7% 4.3% 5.7% 4.6%
Pay variable/receive variable
Notional value
$ 7.5 $ 375.9 $ 98.1 $ 424.1 $ 102.6 $ -- $ 1,008.2 $ (20.4) $ 5.2
Weighted average pay rate 5.0% 2.3% 2.6% 2.2% 2.4% -- 2.3%
Weighted average receive
rate 3.6% 3.5% 3.9% 2.6% 3.9% -- 3.2%
Convertible asset swap
Notional value $ -- $ 65.9 $ 148.7 $ 19.8 $ 64.4 $ -- $ 298.8 $ 27.6 $ 1.9
46
Weighted average receive
rate -- 3.4% 3.7% 4.2% 3.2% -- 3.6%
Credit default swap
Notional value
$ -- $ 10.0 $ 25.0 $ 48.0 $ 131.0 $ -- $ 214.0 $ (0.7) $ --
Weighted average receive
rate -- 1.3% 2.1% 1.8% 1.1% -- 1.4%
Interest rate futures:
Long positions
Contract amount/notional $ 34.0 $ 6.0 $ 4.0 $ 1.0 $ -- $ -- $ 45.0 $ 0.4 $ 0.3
Weighted average settlement
price 92.8 92.5 92.3 92.3 -- -- 92.7
Short positions
Contract amount/notional $2,026.4 $1,363.0 $1,021.0 $ 663.0 $ 392.0 $509.0 $5,974.4$ $(33.4) $ (16.3)
Weighted average settlement
price 95.8 93.5 93.3 93.3 93.1 92.9 94.2
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the table above are
as follows:
Mortgage-Backed Securities and Asset-Backed Securities: 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 programs, 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.
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 DAC.
47
INFLATION
The rate of inflation did not have a material effect on the revenues or
operating results of the Company during the first nine months of 2002 or for any
of the years ended December 31, 2001, 2000 or 1999.
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists Nationwide Life's executive officers and
directors, their ages and their positions as of January 1, 2003, and the
accompanying paragraphs state the terms of their directorships, where
appropriate, and describe their business experience.
NAME AGE POSITION
---- --- --------
W. G. Jurgensen ............... 51 Chief Executive Officer and Director
Joseph J. Gasper .............. 59 President and Chief Operating Officer and Director
Richard D. Headley ............ 54 Executive Vice President
Michael S. Helfer ............. 57 Executive Vice President--Corporate Strategy
Donna A. James ................ 45 Executive Vice President--Chief Administrative Officer
Michael C. Keller ............. 43 Executive Vice President--Chief Information Officer
Robert A. Oakley .............. 56 Executive Vice President
Robert A. Rosholt ............. 52 Executive Vice President--Finance and Investments
John R. Cook, Jr. ............. 59 Senior Vice President--Chief Communications Officer
David A. Diamond .............. 47 Senior Vice President--Corporate Strategy
Philip C. Gath ................ 55 Senior Vice President--Chief Actuary-Nationwide Financial
Patricia R. Hatler ............ 48 Senior Vice President, General Counsel and Secretary
David K. Hollingsworth ........ 49 Senior Vice President--President--Nationwide Insurance Sales
David R. Jahn ................. 53 Senior Vice President--Product Management
Richard A. Karas .............. 60 Senior Vice President--Sales-Financial Services
Gregory S. Lashutka ........... 58 Senior Vice President--Corporate Relations
Edwin R. McCausland, Jr. ...... 57 Senior Vice President--Fixed Income Securities
Robert H. McNaghten ........... 62 Senior Vice President--Chief Investment Officer-Real Estate Investments
Michael D. Miller ............. 49 Senior Vice President--NI Finance
Brian W. Nocco ................ 50 Senior Vice President and Treasurer
Mark D. Phelan ................ 48 Senior Vice President--Technology and Operations
Kathleen D. Ricord ............ 52 Senior Vice President--Marketing and Strategy
Douglas C. Robinette .......... 48 Senior Vice President--Claims
John S. Skubik ................ 56 Senior Vice President--Strategic Initiatives
Mark R. Thresher .............. 46 Senior Vice President--Chief Financial Officer
Richard M. Waggoner ........... 54 Senior Vice President--Operations
Susan A. Wolken ............... 52 Senior Vice President--Product Management and Nationwide Financial
Marketing
Joseph A. Alutto .............. 61 Director
James G. Brocksmith, Jr. ...... 61 Director
Henry S. Holloway ............. 70 Director
Donald L. McWhorter ........... 67 Director
Lydia M. Marshall ............. 53 Director
David O. Miller ............... 64 Director
James F. Patterson ............ 60 Director
Gerald D. Prothro ............. 60 Director
Arden L. Shisler .............. 61 Director
Alex Shumate .................. 52 Director
48
For further information on Nationwide Life please see the related
financial statements included or incorporated by reference herein.
The business address of the directors and officers listed below is One
Nationwide Plaza, Columbus, Ohio 43215.
W. G. JURGENSEN has been Chairman of the Board of Nationwide Life since May
2002, Chief Executive Officer since August 2000, Chief Executive Officer-Elect
from May to August 2000, and a Director of Nationwide Life since May 2000. In
addition, Mr. Jurgensen has been a Director of Nationwide Financial Services,
Inc. since May 2000, and Chairman of the Board since January 2001. 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 3 years.
JOSEPH J. GASPER has been President and Chief Operating Officer and a Director
of Nationwide Life since April 1996. In addition, Mr. Gasper has been a director
of Nationwide Financial Services, Inc. since November 1996. Previously, he was
Executive Vice President-Property and Casualty Operations of Nationwide Life
from April 1995 to April 1996. He was Senior Vice President-Property and
Casualty Operations 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 36 years.
RICHARD D. HEADLEY has been Executive Vice President of Nationwide Life since
July 2000. Previously, he was Executive Vice President-Chief Information
Technology Officer from August 1999 to August 2000, and Senior Vice
President-Chief Information Technology Officer 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 5 years.
MICHAEL S. HELFER has been Executive Vice President-Corporate Strategy of
Nationwide Life since August 2000. He was a Director of Nationwide Life from May
2001 to May 2002. 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 Life since July 2000 and a Director of Nationwide Life from May 2001
to May 2002. Ms. James was Senior Vice President-Chief Human Resources Officer
from May 1999 to July 2000 and Senior Vice President-Human Resources from
December 1997 to May 1999. Previously, she was Vice President-Human Resources
from July 1996 to December 1997. Previously, Ms. James was Vice
President-Assistant to the CEO 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 21 years.
MICHAEL C. KELLER has been Executive Vice President-Chief Information Officer of
Nationwide Life 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 2 years.
ROBERT A. OAKLEY has been Executive Vice President-Chief Financial Officer of
Nationwide Life since April 1995 and was a Director of Nationwide Life from May
2001 to May 2002. Previously, he was Senior Vice President-Chief Financial
Officer of Nationwide Life from October 1993 to April 1995. Prior to that time,
Mr. Oakley held several positions within Nationwide. Mr. Oakley has been with
Nationwide for 27 years.
ROBERT A. ROSHOLT has been Executive Vice President-Finance and Investments of
Nationwide Life since October 2002. Prior to joining Nationwide, Mr. Rosholt was
Executive Vice President and Head of Operations of AON Corporation from
September 2000 to September 2002. Prior to that time he was Executive Vice
President-Chief Financial Officer of Bank One Corporation.
JOHN R. COOK, JR. has been Senior Vice President-Chief Communications Officer of
Nationwide Life 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 of Nationwide
Life since December 2000. Previously, he was Senior Vice President-Corporate
Controller from August 1999 to December 2000. He was Vice President-Controller
from October 1993 to August 1996. Prior to that time, Mr. Diamond held several
positions within Nationwide. Mr. Diamond has been with Nationwide for 14 years.
49
PHILIP C. GATH has been Senior Vice President-Chief Actuary-Nationwide Financial
of Nationwide Life 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 34 years.
PATRICIA R. HATLER has been Senior Vice President, General Counsel and Secretary
of Nationwide Life 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 of Nationwide Life since August 2001. Mr. Hollingsworth has been
with Nationwide for 12 years.
DAVID R. JAHN has been Senior Vice President-Product Management of Nationwide
Life 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 Life since March 1993. Previously, he was Vice
President-Sales-Financial Services from February 1989 to March 1993. Prior to
that time, Mr. Karas held several positions within Nationwide. Mr. Karas has
been with Nationwide for 37 years.
GREGORY S. LASHUTKA has been Senior Vice President-Corporate Relations of
Nationwide Life 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 3 years.
EDWIN P. MCCAUSLAND, JR. has been Senior Vice President-Chief Investment Officer
of Nationwide Life since September 2002. Previously, he was Senior Vice
President-Fixed Income Securities from April 1998 to September 2002. 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 of
Nationwide Life 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 of Nationwide Life
since May 2001. Previously, he was Vice President-Finance from March 2000 to May
2001. Prior to joining Nationwide in 1985 he was P/C Accounting Manager with
Celina Group. Mr. Miller has been with Nationwide for 18 years.
BRIAN W. NOCCO has been Senior Vice President and Treasurer of Nationwide Life
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 Life 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 4 years.
KATHLEEN D. RICORD has been Senior Vice President-Marketing and Strategy of
Nationwide Life since April 2002. Prior to that time, she was Vice
President-Assistant to the Chief Executive Officer and Enterprise Strategic
Planning from April 1999 to August 1999. Ms. Ricord has been with Nationwide for
16 years.
DOUGLAS C. ROBINETTE has been Senior Vice President-Claims of Nationwide Life
since November 2000. Prior to joining Nationwide, he was a CPA with KPMG LLP.
Mr. Robinette has been with Nationwide for 16 years.
JOHN S. SKUBIK has been Senior Vice President-Strategic Initiatives of
Nationwide Life since November 2001. Prior to joining Nationwide, Mr. Skubik was
an Executive Vice President with Bank One.
MARK R. THRESHER has been Senior Vice President-Chief Financial Officer of
Nationwide Life since November 2002. Previously, he was Senior Vice
President-Finance-Nationwide Financial from May 1999 to November 2002. He was
Vice President-Controller of Nationwide Life from August 1996 to May 1999, and
was Vice President and Treasurer 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.
50
RICHARD M. WAGGONER has been Senior Vice President-Operations of Nationwide Life
since August 1999. Previously, he was Senior Vice President-Shared Services from
April 1997 to 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 of Nationwide Life since May 1999. Previously, she was
Senior Vice President-Life Company Operations from June 1997 to May 1999. She
was Senior Vice President-Enterprise Administration from July 1996 to June 1997.
Prior to that time, she was Senior Vice President-Human Resources from April
1995 to July 1996, 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.
JOSEPH A. ALUTTO has been a Director of Nationwide Life and Nationwide Financial
Services, Inc. since May 2002. He is also Executive Dean for the Professional
Colleges at The Ohio State University since 1998, and Dean of the Fisher College
since 1991. Prior to that time, he was Professor of Management with the State
University of New York from September 1989 to March 1991. He is also a Director
of United Retail Group, Inc., and Barristers Global Service Networks, Inc.
JAMES G. BROCKSMITH, JR. has been a Director of Nationwide Life since May 2002,
and a Director of Nationwide Financial Services, Inc. since April 1997. Mr.
Brocksmith retired from KPMG LLP in January 1997, where he was Deputy Chairman
and Chief Operating Officer. Mr. Brocksmith was employed at KPMG LLP for 32
years. He was also a director of Vistana, Inc., a vacation resort developer,
from April 1998 to October 1999, and a director of CIBER, Inc., an information
technology service company, from July 1998 to February 2002. He has been a
director of AAR Corporation, a supplier to the aviation/aerospace industry,
since January 2001; and a director of Sempra Energy, a designer and implementer
of energy solutions for businesses, governments and institutions, since October
2001. Mr.Brocksmith is also a director of the Alberto-Culver Company, Inc. since
October 2002.
HENRY S. HOLLOWAY has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services, Inc. since November 1996. Mr.
Holloway has been a farm owner and operator in Darlington, Maryland, since 1959.
He served as Chairman of the Board of Nationwide Life, Nationwide Life and
Annuity Insurance Company and Nationwide Corporation, and served on the board of
directors of several of the Nationwide companies until his retirement from those
positions in April 1998. He is a director of the Forest Hill State Bank.
DONALD L. MCWHORTER has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services since February 1997. Mr. McWhorter
retired from Banc One Corporation in April 1995 after serving as President and
Chief Operating Officer since April 1992. Previously he was Chairman and Chief
Executive Officer of Banc One Ohio Corporation from July 1989 to April 1992.
Prior to that time, Mr. McWhorter held other positions with Banc One.
LYDIA M. MARSHALL has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services, Inc. since February 1997. Ms.
Marshall has been Chair and Chief Executive Officer of Versura Inc., an Internet
based service provider to financial institutions, colleges and universities,
since October 1999. Previously, she was Managing Director of Rockport Capital
Incorporated from 1997 to 1999, and Executive Vice President-Marketing of the
Student Loan Marketing Association ("Sallie Mae") from 1993 to 1997. Prior to
that time, Ms. Marshall held several positions with Sallie Mae and Citicorp. Ms.
Marshall has been a director of Nationwide Mutual, Nationwide Mutual Fire
Insurance Company and Nationwide Corporation since October 2001, and also serves
as a director of Scottsdale Insurance Company, a subsidiary of Nationwide
Mutual.
DAVID O. MILLER has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services, Inc. since November 1996. Mr. Miller
has been a director of Nationwide Mutual, Nationwide Mutual Fire Insurance
Company and Nationwide Corporation since April 1992, and also serves as a
Director and Chairman of the Board of Scottsdale Insurance Company, a subsidiary
of Nationwide Mutual. He served as Chairman of the Board of Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company from April
1998 to May 2001, and of Nationwide Corporation from April 1998 to April 2001.
Mr. Miller has been a land and apartment developer since 1962. He is the
President of Owen Potato Farm, Inc. and is a partner of Newark Properties LTD.
Previously, Mr. Miller was a partner of M&M Enterprises in Licking County, Ohio
from 1974 to 2001.
JAMES F. PATTERSON has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services, Inc. since November 1996. Mr.
Patterson has been a Director since April 1989 and Vice Chairman since October
2001 of Nationwide Mutual, Nationwide Mutual Fire Insurance Company and
Nationwide Corporation. He also serves as a Director of Allied Group, Inc. a
subsidiary of Nationwide Mutual. Mr. Patterson has operated the Patterson Fruit
Farm in Chesterland, Ohio, since 1964. He has been the President of Patterson
Farms, Inc. since
51
December 1991 and currently serves as Chairman of the Board of Trustees of The
Ohio State University. He formerly served as Chairman of the Board of Nationwide
Mutual Fire Insurance Company.
GERALD D. PROTHRO has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services since February 1997. Mr. Prothro has
been Managing Director of IKT Investments, Ltd since December 2000. Mr. Prothro
was Senior Vice President and Chief Technology Officer at BroadStream
Communications Corporation from May 1999 to December 2000. Previously, he was
Managing Director of IKT, Inc. from July 1998 to May 1999. He retired from
International Business Machines ("IBM") Corporation after nearly 30 years of
service. Mr. Prothro held executive positions with IBM including Vice President
for Corporate Strategy, Vice President and IBM Chief Information Officer, and
IBM Director and Secretary of the Corporate Management Committee.
ARDEN L. SHISLER has been a Director of Nationwide Life since May 2002, and a
Director of Nationwide Financial Services, Inc. since November 1996. Mr. Shisler
has been a director of Nationwide Mutual and Nationwide Mutual Fire Insurance
Company since April 1984, and Chairman of the Board since April 1992. He was a
Director of Nationwide Corporation from April 1988 to January 2000, and is a
Director and Chairman of the Board since April 2001. Mr. Shisler has been
President and Chief Executive Officer of K & B Transport, Inc., a trucking firm
in Dalton, Ohio, since January 1992. Previously, he was Chief Operating Officer
of K & B Transport, Inc. from April 1986 to January 1992.
ALEX SHUMATE has been a Director of Nationwide Life and Nationwide Financial
Services, Inc. since May 2002. He is also Managing Partner of Squire, Sanders &
Dempsey since 1991, and a Director of the Wm. Wrigley, Jr. Company and The
Limited, Inc. Previously he was Chief Counsel and Deputy Chief of Staff of the
Governor's Office from 1985 to 1988.
EXECUTIVE COMPENSATION
Compensation
Pursuant to cost sharing agreements, 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
ANNUAL COMPENSATION
------------------------------------
OTHER
NAME AND ANNUAL ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION COMPENSATION
POSITION YEAR $ $ $ $
- -------------- ----- ------- ----------- ------------ ------------
W. G. Jurgensen: 2001 277,682 -- (2) (5) 27,186(6)
Chairman of the 2000 230,290 951,660(3) (5) 7,235
Board and Chief -- -- -- -- --
Executive Officer(1)
Joseph J. Gasper: 2001 718,269 246,500(2) (5) 58,310(6)
President and Chief 2000 634,499 1,132,145(3) (5) 45,876
Operating Officer 1999 512,308 952,282(4) (5) 21,491
Richard A. Karas: 2001 386,539 140,700(2) (5) 21,129(6)
Senior Vice 2000 339,231 317,791(3) (5) 23,108
President-- Sales 1999 307,308 330,021(4) (5) 13,177
--Financial Services
Mark D. Phelan: 2001 297,154 134,000(2) (5) 7,072(6)
Senior Vice President-- 2000 -- -- -- --
52
Technology & Operations 1999 -- -- -- --
Mark R. Thresher: 2001 293,269 134,000(2) (5) 17,030(6)
Senior Vice President-- 2000 262,622 274,142(3) (5) 15,806
Finance 1999 219,846 244,609(4) (5) 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.
(5) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(6) 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.
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.
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 limited to, return on equity,
53
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.
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.
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.
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
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
54
pro rata in amounts attributable to employer matching contributions (and
earnings on those contributions) over a period of five years.
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.
55
Pension Plans
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 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.
56
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 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
57
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.
Compensation Committee Joint Report on Executive Compensation
The Compensation Committee of Nationwide Financial Services, Inc.
(referred to herein as the "Company") and the Human Resources Committee of
Nationwide Mutual Insurance Company prepared this report, which applies to
Nationwide Life, as appropriate.
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.
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:
- - 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
58
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.
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.
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;
- - 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.
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
59
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.
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 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
60
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.
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 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.
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
61
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.
Nationwide Financial Services, Inc.'s Compensation Committee
David O. Miller, Chairman
James G. Brocksmith, Jr.
Charles L. Fuellgraf, Jr.
Donald L. McWhorter
Nationwide Mutual Insurance Company Human Resources Committee
Willard J. Engel, Chairman
Timothy J. Corcoran
Yvonne M. Curl
Ralph M. Paige
Arden L. Shisler
Robert L. Stewart
Security Ownership
The following tables set forth certain information regarding the ownership
of the Company's common stock:
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
TITLE BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------- -------------------------------------------------------------- ------------------ --------
Common Stock Nationwide Financial Services Inc............................. 3,814,779 100%
One Nationwide Plaza
Columbus, Ohio 43215
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.
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.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Condensed consolidated balance sheets as of September 30, 2002 (Unaudited)
Unaudited condensed consolidated income statements for the three- and nine-month
periods ended September 30, 2002 and 2001
Unaudited Consolidated Statements of Operation for the three and nine months ended September 30, 2002 F-1
Unaudited Consolidated Balance Sheets as of September 30, 2002 F-2
Unaudited Consolidated Statements of Shareholder's Equity for the nine months
ended September 30, 2002 and 2001 F-3
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 F-4
Notes to Unaudited Consolidated Financial Statements F-5
Independent Auditors' Report F-15
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-16
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 F-17
Consolidated Statements of Shareholder's Equity for the years ended December 31, 2001, 2000 and 1999 F-18
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-19
Notes to Consolidated Financial Statements F-20
Financial Statement Schedules:
Schedule I
Consolidated Summary of Investments--Other than Investments in Related Parties as of December 31,
2001 F-48
62
Schedule III
Supplementary Insurance Information as of December 31, 2001, 2000 and 1999 and for each of the years
then ended F-49
Schedule IV
Reinsurance as of December 31, 2001, 2000 and 1999 and for each of the years then ended F-50
Schedule V
Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999 F-51
All other schedules are omitted because they are not applicable or not
required, or because the required information has been included in the audited
consolidated financial statements or notes thereto.
63
FINANCIAL INFORMATION
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Operations
(Unaudited)
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES
Policy charges $ 234.7 $ 243.9 $ 746.0 $ 768.0
Life insurance premiums 64.5 59.4 189.2 189.8
Net investment income 465.2 434.9 1,351.4 1,286.6
Net realized (losses) gains on investments, hedging
instruments and hedged items:
Unrelated parties (41.1) (7.7) (86.6) (9.5)
Related parties 23.2 44.4 23.2 44.4
Other 0.5 1.9 4.5 7.8
---------- ---------- ---------- ----------
747.0 776.8 2,227.7 2,287.1
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Interest credited to policyholder account values 321.3 314.8 917.1 923.9
Other benefits and claims 77.6 66.8 228.2 209.0
Policyholder dividends on participating policies 11.6 9.5 33.5 31.1
Amortization of deferred policy acquisition costs 430.4 85.2 598.2 265.2
Interest expense on debt, primarily with a related party 12.0 0.8 23.7 4.7
Other operating expenses 120.6 108.6 385.7 323.5
---------- ---------- ---------- ----------
973.5 585.7 2,186.4 1,757.4
---------- ---------- ---------- ----------
(Loss) income from continuing operations before
federal income tax (benefit) expense and cumulative
effect of adoption of accounting principles (226.5) 191.1 41.3 529.7
Federal income tax (benefit) expense (91.3) 53.1 (23.3) 142.0
---------- ---------- ---------- ----------
(Loss) income from continuing operations before
cumulative effect of adoption of accounting principles (135.2) 138.0 64.6 387.7
Income from discontinued operations, net of tax -- 0.6 0.7 1.1
Cumulative effect of adoption of accounting principles, net of tax -- -- -- (7.1)
---------- ---------- ---------- ----------
Net (loss) income $ (135.2) $ 138.6 $ 65.3 $ 381.7
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements, including
note 10 which describes related party transactions.
F-1
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $21,706.3 in 2002; $17,961.6 in 2001) $ 22,686.8 $ 18,370.8
Equity securities (cost $87.5 in 2002; $83.0 in 2001) 83.5 94.0
Mortgage loans on real estate, net 7,691.7 7,113.1
Real estate, net 112.5 172.0
Policy loans 628.5 591.1
Other long-term investments 138.2 125.0
Short-term investments, including amounts managed by a related party 1,231.2 1,011.3
------------ ------------
32,572.4 27,477.3
------------ ------------
Cash 73.0 22.6
Accrued investment income 339.3 306.7
Deferred policy acquisition costs 2,909.5 3,189.0
Other assets 993.5 646.0
Assets held in separate accounts 46,399.7 59,513.0
------------ ------------
$ 83,287.4 $ 91,154.6
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 29,481.3 $ 25,216.0
Short-term debt, including $100.0 million payable to Nationwide Financial
Services, Inc. in 2002 160.0 100.0
Long-term debt, payable to Nationwide Financial Services, Inc. 600.0 300.0
Other liabilities 3,127.0 2,307.9
Liabilities related to separate accounts 46,399.7 59,513.0
------------ ------------
79,768.0 87,436.9
------------ ------------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5.0 million shares; 3.8 million
shares issued and outstanding 3.8 3.8
Additional paid-in capital 171.1 646.1
Retained earnings 2,883.4 2,863.1
Accumulated other comprehensive income 461.1 204.7
------------ ------------
3,519.4 3,717.7
------------ ------------
$ 83,287.4 $ 91,154.6
============ ============
See accompanying notes to unaudited consolidated financial statements, including
note 10 which describes related party transactions.
F-2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Nine Months Ended September 30, 2002 and 2001
(In Millions)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
------ ---------- ---------- ------------- -------------
Balance as of January 1, 2001 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9
Comprehensive income:
Net income -- -- 381.7 -- 381.7
Net unrealized gains on securities
available-for-sale arising during the
period, net of tax -- -- -- 183.4 183.4
Cumulative effect of adoption of
accounting principles, net of tax -- -- -- (1.4) (1.4)
Accumulated net gains on cash flow
hedges, net of tax -- -- -- 3.8 3.8
-----------
Total comprehensive income 567.5
-----------
Dividends to shareholder -- -- (35.0) -- (35.0)
------ ---------- ---------- --------- -----------
Balance as of September 30, 2001 $ 3.8 $ 646.1 $ 2,783.0 $ 302.5 $ 3,735.4
======== ========== ========== ========= ===========
BALANCE AS OF JANUARY 1, 2002 $ 3.8 $ 646.1 $ 2,863.1 $ 204.7 $ 3,717.7
Comprehensive income:
Net income -- -- 65.3 -- 65.3
Net unrealized gains on securities
available-for-sale arising during the
period, net of tax -- -- -- 245.5 245.5
Accumulated net gains on cash flow
hedges, net of tax -- -- -- 10.9 10.9
-----------
Total comprehensive income 321.7
-----------
Returns of capital to shareholder -- (475.0) -- -- (475.0)
Dividends to shareholder -- -- (45.0) -- (45.0)
-------- ---------- ---------- --------- -----------
BALANCE AS OF SEPTEMBER 30, 2002 $ 3.8 $ 171.1 $ 2,883.4 $ 461.1 $ 3,519.4
======== ========== ========== ========= ===========
See accompanying notes to unaudited consolidated financial statements, including
note 10 which describes related party transactions.
F-3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 2002 and 2001
(in millions)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 65.3 $ 381.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Income from discontinued operations (0.7) (1.1)
Interest credited to policyholder account values 917.1 923.9
Capitalization of deferred policy acquisition costs (497.4) (556.9)
Amortization of deferred policy acquisition costs 598.2 265.2
Amortization and depreciation (4.1) (23.4)
Realized losses (gains) on investments,
hedging instruments and hedged items:
Unrelated parties 86.6 9.5
Related parties (23.2) (44.4)
Cumulative effect of adoption of accounting principles -- 10.9
Increase in accrued investment income (32.6) (56.6)
Increase in other assets (364.3) (186.9)
Increase in policy liabilities 22.0 21.1
Increase in other liabilities 444.9 249.3
Other, net 33.8 2.4
---------- ----------
Net cash provided by continuing operations 1,245.6 994.7
Net cash provided by discontinued operations 0.7 0.5
---------- ----------
Net cash provided by operating activities 1,246.3 995.2
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 3,005.6 3,076.6
Proceeds from sale of securities available-for-sale 1,380.0 246.9
Proceeds from repayments of mortgage loans on real estate 626.1 639.8
Proceeds from sale of real estate 94.8 168.5
Proceeds from repayments of policy loans and sale of other invested assets 43.8 57.3
Cost of securities available-for-sale acquired (8,031.6) (4,958.7)
Cost of mortgage loans on real estate acquired (1,188.3) (1,246.8)
Cost of real estate acquired (1.0) (0.3)
Short-term investments, net (220.0) (328.6)
Disposal of subsidiary, net of cash (20.0) --
Collateral - securities lending, net 248.9 --
Other, net (310.4) (150.9)
---------- ----------
Net cash used in continuing operations (4,372.1) (2,496.2)
Net cash provided by discontinued operations -- 0.8
---------- ----------
Net cash used in investing activities (4,372.1) (2,495.4)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt 60.0 (93.7)
Net proceeds from issuance of long-term debt to
Nationwide Financial Services, Inc. 300.0 --
Capital returned to shareholder (475.0) --
Cash dividends paid to shareholder (35.0) (35.0)
Increase in investment and universal life insurance product account values 4,982.7 4,517.3
Decrease in investment and universal life insurance product account values (1,656.5) (2,881.9)
---------- ----------
Net cash provided by financing activities 3,176.2 1,506.7
---------- ----------
Net increase in cash 50.4 6.5
Cash, beginning of period 22.6 18.4
---------- ----------
Cash, end of period $ 73.0 $ 24.9
========== ==========
See accompanying notes to unaudited consolidated financial statements, including
note 10 which describes related party transactions.
F-4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary OF Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2002
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Nationwide
Life Insurance Company and subsidiaries (NLIC or collectively, the
Company) have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP), which differ
from statutory accounting practices prescribed or permitted by regulatory
authorities, for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all information and footnotes required by GAAP for complete
financial statements. The financial information included herein reflects
all adjustments (all of which are normal and recurring in nature) which
are, in the opinion of management, necessary for a fair presentation of
financial position and results of operations. Operating results for all
periods presented are not necessarily indicative of the results that may
be expected for the full year. All significant intercompany balances and
transactions have been eliminated. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes for the year ended
December 31, 2001 included in the Company's annual report on Form 10-K.
(2) SIGNIFICANT ACCOUNTING POLICY
Deferred Policy Acquisition Costs
The costs of acquiring 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 and renewal
business have been deferred. Deferred policy acquisition costs (DAC) are
subject to recoverability testing at the time of policy issuance and loss
recognition testing at the end of each reporting period.
For investment products (principally individual and group annuities) and
universal life insurance products, DAC is 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, less
policy benefits and policy maintenance expenses. The DAC asset related to
investment products and universal life insurance products is adjusted to
reflect the impact of unrealized gains and losses on fixed maturity
securities available-for-sale as described in note 2(b) to the audited
consolidated financial statements included in the Company's 2001 Form
10-K.
The most significant assumptions that are involved in the estimation of
future gross profits include future net separate account performance,
surrender/lapse rates, interest margins and mortality. The Company's
long-term assumption for net separate account performance is 8 percent. If
actual net separate account performance varies from the 8 percent
assumption, the Company assumes different performance levels over the next
three years, such that the mean return equals the long-term assumption.
This process is referred to as a reversion to the mean. The assumed net
separate account return assumptions used in the DAC models are intended to
reflect what is anticipated. However, based on historical returns of the
S&P 500 Index, the Company's policy regarding the reversion to the mean
process does not permit such returns to be below zero percent or in excess
of 15 percent during the three-year reversion period.
Changes in assumptions can have a significant impact on the calculation of
DAC on investment products and universal life insurance products and their
related amortization patterns. In the event actual experience differs from
assumptions or assumptions are revised, the Company is required to record
an increase or decrease in DAC amortization expense (DAC unlocking), which
could be significant. In general, increases in the estimated general and
separate account returns result in increased expected future profitability
and may lower the rate of DAC amortization, while increases in
lapse/surrender and mortality assumptions reduce the expected future
profitability of the underlying business and may increase the rate of DAC
amortization.
F-5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
Due to the magnitude of DAC balance related to the individual variable
annuity business, the sensitivity of the calculation to minor changes in
the underlying assumptions and the related volatility that could result in
the reported DAC balance without meaningful improvement in its
reasonableness, the Company evaluates the appropriateness of the
individual variable annuity DAC balance within pre-set parameters. Should
the recorded balance of individual variable annuity DAC fall outside of
these parameters for a prescribed period of time, or should the recorded
balance fall outside of these parameters and the Company determines it is
not reasonably possible to get back within this period of time,
assumptions are required to be unlocked and the DAC is recalculated using
revised best estimate assumptions. Otherwise, DAC is not unlocked to
reflect updated assumptions. In the event DAC assumptions are unlocked and
revised, the Company will continue to use the reversion to the mean
process.
For other investment products and universal life insurance products, DAC
is unlocked each quarter to reflect revised best estimate assumptions,
including the use of a reversion to the mean methodology over the next
three years as it relates to net separate account performance. Any
resulting DAC unlocking adjustments are reflected currently in the
consolidated financial statements.
For traditional life insurance products, the DAC asset is 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 is estimated using the same assumptions as those used for
computing liabilities for future policy benefits at issuance. Under
existing accounting guidance, the concept of DAC unlocking does not apply
to traditional life insurance products, although evaluations of DAC for
recoverability at the time of policy issuance and loss recognition testing
at each reporting period are required.
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142). 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 (APB 17) and carries forward provisions in APB 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 Company adopted SFAS 142 on January 1, 2002. The amortization of
goodwill from past business combinations ceased upon adoption of this
statement. At the time of adoption, the Company had no unamortized
goodwill.
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
(APB 30). SFAS 144 was adopted by the Company on January 1, 2002 and
carries forward many of the provisions of SFAS 121 and APB 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. The adoption
of SFAS 144 did not have a material impact on the results of operations or
financial position of the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections (SFAS 145). The adoption of
SFAS 145 did not have any impact on the financial position or results of
operations of the Company.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit of Disposal Activities
(SFAS 146). Adoption of SFAS 146 is not expected to have any impact on the
financial position or results of operations of the Company.
F-6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(4) DEFERRED POLICY ACQUISITION COSTS
As part of the regular quarterly analysis of DAC, at the end of the third
quarter of 2002, the Company determined that using actual experience to
date and assumptions consistent with those used in the second quarter of
2002, its individual variable annuity DAC balance would be outside a
pre-set parameter of acceptable results. The Company also determined that
it was not reasonably possible that the DAC would return to an amount
within the acceptable parameter within a prescribed period of time.
Accordingly, the Company unlocked its DAC assumptions for individual
variable annuities and reduced the DAC asset to the amount calculated
using the revised assumptions. Because the Company unlocked the net
separate account growth rate assumption for individual variable annuities
for the three-year reversion period, the Company unlocked that assumption
for all investment products and variable universal life insurance products
to be consistent across product lines.
In the third quarter of 2002, the Company recorded an acceleration of DAC
amortization totaling $347.1 million, before tax, or $225.6 million, net
of $121.5 million of federal income tax benefit, which has been reported
in the following segments in the amounts indicated, net of tax: Individual
Annuity - $213.4 million, Institutional Products - $7.8 million and Life
Insurance - $4.4 million. The acceleration of DAC amortization was the
result of unlocking certain assumptions underlying the calculation of DAC
for investment products and variable universal life insurance products.
The most significant assumption changes were the resetting of the
Company's assumption for net separate account growth to 8 percent during
the three-year reversion period for all investment products and variable
life insurance products and increases in future lapses and costs related
to guaranteed minimum death benefits on individual variable annuity
contracts. These adjustments were primarily driven by the sustained
downturn in the equity markets.
(5) SECURITIZATION TRANSACTION
During the first quarter of 2002, the Company sold a credit enhanced
equity interest in a Low Income Housing Tax Credit Fund to an unrelated
third party for $55.3 million. The Company recognized $3.1 million of
structuring fee income related to this transaction. Additionally, $1.6
million of net proceeds were used to establish a stabilization reserve for
certain properties that are not currently generating the underlying tax
credits. This amount is evaluated regularly and is reduced and recognized
in income if and when the properties begin generating tax credits and the
related cash flow projections no longer require such reserves. There was
no change in the stabilization. As part of this transaction, the Company
has provided a cumulative guaranteed 5.25% return to the third party
investor as it relates to the tax credit flows over the life of the
transaction. The Company does not anticipate making any payments related
to the guarantee provision provided by this transaction.
(6) FEDERAL INCOME TAXES
The Company provides for federal income taxes based on the projected
effective tax rate for the year. The customary relationship between
federal income tax (benefit) expense and pre-tax (loss) income from
continuing operations before cumulative effect of adoption of accounting
principles does not exist in 2002. This is a result of the Company
recording accelerated DAC amortization (see note 4) in third quarter 2002
that generated $121.5 million of federal income tax benefit calculated at
the U.S. federal corporate income tax rate of 35% which differs from the
Company's effective tax rate.
Effective October 1, 2002, Nationwide Corporation's ownership in
Nationwide Financial Services, Inc. (NFS) decreased from 80% to 63% and as
a result, NFS and its subsidiaries, including the Company, will no longer
qualify to be included in the Nationwide Mutual Insurance Company (NMIC)
consolidated federal income tax return. As a result, previously deferred
intercompany gains will be recognized for tax purposes and will result in
the Company making a tax payment of $56.0 million to NMIC.
F-7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(7) COMPREHENSIVE INCOME
Comprehensive income includes net income (loss) as well as certain items
that are reported directly within a separate component of shareholder's
equity that bypass net income (loss). Other comprehensive income is
comprised of unrealized gains (losses) on securities available-for-sale
and accumulated net gains on cash flow hedges. The related before and
after federal income tax amounts are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
(IN MILLIONS) 2002 2001 2002 2001
- ----------------------------------------------------------- -------- -------- -------- --------
Unrealized gains on securities available-for-sale
arising during the period:
Gross $ 354.0 $ 229.3 $ 500.5 $ 392.7
Adjustment to deferred policy acquisition costs (114.7) (78.1) (178.7) (122.2)
Related federal income tax expense (83.7) (52.9) (112.6) (94.7)
-------- -------- -------- --------
Net 155.6 98.3 209.2 175.8
-------- -------- -------- --------
Reclassification adjustment for net losses on securities
available-for-sale realized during the period:
Gross 13.6 6.4 55.8 11.7
Related federal income tax benefit (4.7) (2.2) (19.5) (4.1)
-------- -------- -------- --------
Net 8.9 4.2 36.3 7.6
-------- -------- -------- --------
Other comprehensive income on securities available-for-sale 164.5 102.5 245.5 183.4
-------- -------- -------- --------
Accumulated net gain on cash flow hedges:
Gross 2.1 5.0 16.8 5.8
Related federal income tax expense (0.8) (1.8) (5.9) (2.0)
-------- -------- -------- --------
Other comprehensive income on cash flow hedges 1.3 3.2 10.9 3.8
-------- -------- -------- --------
Accumulated net gain (loss) on transition adjustments:
Transition adjustment - FAS 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 $ 165.8 $ 105.7 $ 256.4 $ 185.8
======== ======== ======== ========
Reclassification adjustments for net realized gains and losses on the
ineffective portion of cash flow hedges were immaterial during the three and
nine months ended September 30, 2002 and 2001 and, therefore, are not reflected
in the table above.
F-8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(8) SEGMENT DISCLOSURES
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Individual Annuity, Institutional Products and Life Insurance. During the
second quarter of 2002, the Company paid a dividend to NFS that resulted
in the disposal of a portion of the business that had been reported in the
Corporate segment (see note 10). As a result, this business has been
reported as discontinued operations. Effective in the second quarter of
2002, structured products transactions previously reported in the
Corporate segment are reported in the Institutional Products segment.
Amounts reported for prior periods have been revised to reflect these
changes.
The Individual Annuity segment 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 specified interest rates
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 Internal Revenue Code
(IRC) Section 457 business in the form of fixed and variable annuities.
Additionally, structured products transactions are reported in the
Institutional Products segment.
The Life Insurance segment 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.
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, 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 not
related to securitizations, hedging instruments and hedged items in the
Corporate segment, but does not consider them part of operating income.
F-9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the three months ended September 30, 2002 and 2001.
INDIVIDUAL INSTITUTIONAL LIFE
(IN MILLIONS) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL
- ------------------------------------------------- ---------- ------------- ---------- ---------- ----------
2002
Net investment income $ 170.9 $ 199.4 $ 82.4 $ 12.5 $ 465.2
Other operating revenue 127.1 38.1 134.3 0.2 299.7
---------- ----------- ---------- ---------- ----------
Total operating revenue(1) 298.0 237.5 216.7 12.7 764.9
---------- ----------- ---------- ---------- ----------
Interest credited to policyholder account values 131.9 141.4 48.0 -- 321.3
Amortization of deferred policy acquisition costs 377.2 22.7 30.5 -- 430.4
Interest expense on debt -- -- -- 12.0 12.0
Other benefits and expenses 68.8 39.7 100.9 0.4 209.8
---------- ----------- ---------- ---------- ----------
Total benefits and expenses 577.9 203.8 179.4 12.4 973.5
---------- ----------- ---------- ---------- ----------
Operating (loss) income before
federal income taxes(1) (279.9) 33.7 37.3 0.3 (208.6)
Net realized losses on investments,
hedging instruments and hedged items -- -- -- (17.9) (17.9)
---------- ----------- ---------- ---------- ----------
(Loss) income from continuing operations
before federal income taxes and cumulative
effect of adoption of accounting principles $ (279.9) $ 33.7 $ 37.3 $ (17.6) $ (226.5)
========== =========== ========== ========== ==========
2001
Net investment income $ 135.7 $ 211.8 $ 80.7 $ 6.7 $ 434.9
Other operating revenue 134.4 47.4 122.9 0.5 305.2
---------- ----------- ---------- ---------- ----------
Total operating revenue(1) 270.1 259.2 203.6 7.2 740.1
---------- ----------- ---------- ---------- ----------
Interest credited to policyholder account values 111.0 159.2 44.6 -- 314.8
Amortization of deferred policy acquisition costs 53.0 10.4 21.8 -- 85.2
Interest expense on debt -- -- -- 0.8 0.8
Other benefits and expenses 52.7 40.5 92.4 (0.7) 184.9
---------- ----------- ---------- ---------- ----------
Total benefits and expenses 216.7 210.1 158.8 0.1 585.7
---------- ----------- ---------- ---------- ----------
Operating income before federal income taxes(1) 53.4 49.1 44.8 7.1 154.4
Net realized gains on investments, hedging
instruments and hedged items -- -- -- 36.7 36.7
---------- ----------- ---------- ---------- ----------
Income from continuing operations before
federal income taxes and cumulative
effect of adoption of accounting principles $ 53.4 $ 49.1 $ 44.8 $ 43.8 $ 191.1
========== =========== ========== ========== ==========
- ----------
(1) Excludes net realized gains and losses on investments not related to
securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption of accounting principles.
F-10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the nine months ended September 30, 2002 and 2001.
INDIVIDUAL INSTITUTIONAL LIFE
(IN MILLIONS) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL
- ------------------------------------------------- ---------- ------------- ---------- ---------- ----------
2002
Net investment income $ 483.0 $ 593.7 $ 244.3 $ 30.4 $ 1,351.4
Other operating revenue 398.5 136.5 404.3 0.4 939.7
---------- ----------- ---------- ---------- ----------
Total operating revenue(1) 881.5 730.2 648.6 30.8 2,291.1
---------- ----------- ---------- ---------- ----------
Interest credited to policyholder account values 369.0 409.0 139.1 -- 917.1
Amortization of deferred policy acquisition costs 483.5 44.2 70.5 -- 598.2
Interest expense on debt -- -- -- 23.7 23.7
Other benefits and expenses 200.4 132.7 311.8 2.5 647.4
---------- ----------- ---------- ---------- ----------
Total benefits and expenses 1,052.9 585.9 521.4 26.2 2,186.4
---------- ----------- ---------- ---------- ----------
Operating (losses) income before
federal income taxes(1) (171.4) 144.3 127.2 4.6 104.7
Net realized losses on investments,
hedging instruments and hedged items -- -- -- (63.4) (63.4)
---------- ----------- ---------- ---------- ----------
(Loss) income from continuing operations
before federal income taxes and cumulative
effect of adoption of accounting principles $ (171.4) $ 144.3 $ 127.2 $ (58.8) $ 41.3
========== =========== ========== ========== ==========
Assets as of period end $ 38,734.1 $ 29,800.8 $ 9,370.1 $ 5,382.4 $ 83,287.4
========== =========== ========== ========== ==========
2001
Net investment income $ 387.0 $ 635.3 $ 241.8 $ 22.5 $ 1,286.6
Other operating revenue 422.8 159.9 381.6 1.3 965.6
---------- ----------- ---------- ---------- ----------
Total operating revenue(1) 809.8 795.2 623.4 23.8 2,252.2
---------- ----------- ---------- ---------- ----------
Interest credited to policyholder account values 316.4 476.0 131.5 -- 923.9
Amortization of deferred policy acquisition costs 164.2 36.2 64.8 -- 265.2
Interest expense on debt -- -- -- 4.7 4.7
Other benefits and expenses 152.1 126.4 286.1 (1.0) 563.6
---------- ----------- ---------- ---------- ----------
Total benefits and expenses 632.7 638.6 482.4 3.7 1,757.4
---------- ----------- ---------- ---------- ----------
Operating income before federal income taxes(1) 177.1 156.6 141.0 20.1 494.8
Net realized gains on investments, hedging
instruments and hedged items -- -- -- 34.9 34.9
---------- ----------- ---------- ---------- ----------
Income from continuing operations before
federal income taxes and cumulative effect
of adoption of accounting principles $ 177.1 $ 156.6 $ 141.0 $ 55.0 $ 529.7
========== =========== ========== ========== ==========
Assets as of period end $ 39,944.9 $ 33,120.7 $ 8,548.1 $ 3,180.8 $ 84,794.5
========== =========== ========== ========== ==========
- ----------
(1) Excludes net realized gains and losses on investments not related to
securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption of accounting principles.
F-11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(9) 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. On February 9, 2002, Marcus Shore
withdrew as a named plaintiff in the lawsuit. On April 16, 2002, the
Company filed a motion for summary judgment on the individual claims of
plaintiff Mercedes Castillo. On May 28, 2002, the Court denied plaintiffs'
motion to add new persons as named plaintiffs, so the action is now
proceeding with Mercedes Castillo as the only named plaintiff. On November
4, 2002, the Court issued a decision granting the Company's motion for
summary judgment on all plaintiff Mercedes Castillo's individual claims,
and ruling that plaintiff's motion for class certification is moot.
Judgment for the Company has not yet been entered.
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 6, 2001, the plaintiffs amended their complaint to include class
action allegations. The plaintiffs seek to represent a class of retirement
plans that purchased variable annuities from Nationwide Life Insurance
Company to fund qualified ERISA retirement plans. The amended complaint
alleges that the retirement plans purchased variable annuity contracts
from the Company that allowed plan participants to invest in 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 funds originally included in the
plaintiffs' annuities with "inferior" funds because the new funds
purportedly paid higher fees to the Company. The amended complaint seeks
disgorgement of the fees allegedly received by the Company and other
unspecified compensatory damages, declaratory and injunctive relief and
attorney's fees. On December 3, 2001, the plaintiffs filed a motion for
class certification. The Company is opposing that motion. The Company's
Motion to Dismiss was denied on September 11, 2002. 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.
F-12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(10) RELATED PARTY TRANSACTIONS
During the third quarter of 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. During the third
quarter of 2002, the Company entered into transactions with NMIC and
Nationwide Indemnity Company (NIC), whereby it sold 100% of its remaining
interest in the limited partnership (representing 15.11% of the limited
partnership) to NMIC and NIC for a total of $54.5 million. As a result of
this sale, the Company recorded a realized gain of $23.2 million and
related tax expense of $8.1 million. The sales prices for each
transaction, which were paid in cash, represented the fair value of the
portions of limited partnership interests that were sold and were based on
valuations of the limited partnership and its underlying investments as of
the effective dates of the transactions. The valuations were 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, through
their respective Finance Committees, and approved the process and
methodology of the valuations prior to the execution of these
transactions. The Company no longer holds an economic or voting interest
in the limited partnership.
The Company has entered into significant, recurring transactions and
agreements with NMIC and other affiliates as a part of its ongoing
operations. The nature of the transactions and agreements includes:
annuity and life insurance contracts, a tax sharing agreement, reinsurance
agreements, cost sharing agreements, administration services, marketing
agreements, office space leases, intercompany repurchase agreements and
cash management services. The transactions and agreements are described
more fully in note 13 to the consolidated financial statements included in
the Company's 2001 Annual Report on Form 10-K. During 2002, there have
been no material changes to the nature and terms of these transactions and
agreements, except that effective October 1, 2002, the Company and its
subsidiaries no longer participate in the tax sharing agreement, as
discussed in note 6.
Amounts on deposit with a related party in cash management were $0.1
million and $54.8 million as of September 30, 2002 and December 31, 2001,
respectively.
The Company 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. As of September 30, 2002 and December 31, 2001, the Company
had borrowed $66.7 million and none, respectively, from affiliated
entities under such agreements. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
As of September 30, 2002, the Company had $100.0 million of 1.95%
short-term debt payable to NFS that matures November 23, 2002.
Funds of Gartmore Global Investments, Inc. (GGI), an affiliate, are
offered as investment options in certain of the Company's products. As of
September 30, 2002, total GGI funds in the Company's products were $12.13
billion. For the three months ended September 30, 2002, GGI paid the
Company $9.9 million for the distribution and servicing of these funds.
During the first nine months of 2002, NLIC paid a dividend of $35.0
million and dividends in the form of return of capital of $475.0 million
to NFS.
In addition, in June 2002, NLIC paid a dividend to NFS in the form of all
of the shares of common stock of Nationwide Securities, Inc. (NSI), a
wholly owned broker/dealer subsidiary. Therefore, the results of the
operations of NSI have been reflected as discontinued operations for all
periods presented. This was a transaction between related parties and
therefore was recorded at carrying value, $10.0 million, of the underlying
components of the transaction rather than fair value. Such amount
represents a non-cash transaction that is not reflected in the
Consolidated Statement of Cash Flows.
F-13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(11) LONG-TERM DEBT, PAYABLE TO NATIONWIDE FINANCIAL SERVICES, INC.
The Company has issued $600 million of surplus notes to NFS. Of the total,
$300 million of 7.50% notes were issued in December 2001 and mature
December 17, 2031. In addition, $300 million of 8.15% notes were issued in
June 2002 and mature June 27, 2032. Principal and semi-annual interest
payments are subject to prior approval by the superintendent of insurance
of the State of Ohio.
(12) RECLASSIFICATION
Certain items in the 2001 unaudited consolidated financial statements and
related footnotes have been reclassified to conform to the 2002
presentation.
F-14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated balance sheets of Nationwide Life Insurance
Company and subsidiaries (collectively the "Company"), a wholly owned subsidiary
of Nationwide Financial Services, Inc., as of December 31, 2001 and 2000, and
the related consolidated statements of income, shareholder's equity and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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.
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
except for notes 16 and 17, as to
which the date is December 20, 2002
F-15
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.
F-16
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 1,724.7 1,653.9 1,520.4
Net realized (losses) gains on investments, hedging instruments and hedged
items:
Unrelated parties (62.7) (19.4) (11.6)
Related party 44.4 -- --
Other 8.2 11.1 5.3
-------- -------- --------
2,983.0 2,977.0 2,630.4
-------- -------- --------
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 439.3 472.0 405.8
-------- -------- --------
2,354.1 2,293.9 2,027.5
-------- -------- --------
Income from continuing operations before federal income tax expense
and cumulative effect of adoption of accounting principles 628.9 683.1 602.9
Federal income tax expense 161.2 207.3 200.1
-------- -------- --------
Income from continuing operations before cumulative effect of adoption
of accounting principles 467.7 475.8 402.8
Income (loss) from discontinued operations, net of tax 1.2 (0.5) 2.3
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.
F-17
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.
F-18
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:
(Income) loss from discontinued operations (1.2) 0.5 (2.3)
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 (271.8) (95.7) 120.6
Increase (decrease) in policy liabilities 33.0 (0.3) (20.9)
Increase in other liabilities 302.8 234.2 136.0
Other, net 8.3 22.3 (8.6)
-------- -------- --------
Net cash provided by continuing operations 1,318.9 1,385.8 1,367.9
Net cash provided by (used in) discontinued operations 1.7 (1.7) 18.3
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 497.2 582.1 513.1
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) (3,714.6)
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) (26.5) (27.6)
Collateral received - securities lending, net 791.6 -- --
Other, net (192.2) (182.3) (110.9)
-------- -------- --------
Net cash used in continuing operations (3,324.0) (428.9) 1,274.4
Net cash provided by (used in) discontinued operations 0.6 19.8 (10.2)
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.
F-19
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. As described more fully in note 17, NLIC
paid a dividend to NFS in the form of all of the shares of common stock of
Nationwide Securities, Inc. (NSI), a wholly owned broker/dealer subsidiary
engaged in the asset management business. The accompanying consolidated
financial statements and related notes reflect this business as
discontinued operations.
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.
F-20
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.
F-21
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.
F-22
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.
F-23
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.
F-24
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.
F-25
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.
F-26
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
========= ========= ========= =========
F-27
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.
F-28
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) from continuing operations 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 28.0 26.0 18.2
Derivatives (19.7) 3.9 (1.0)
Other 20.9 49.3 27.5
-------- -------- --------
Total investment income 1,773.1 1,704.0 1,567.7
Less investment expenses 48.4 50.1 47.3
-------- -------- --------
Net investment income $1,724.7 $1,653.9 $1,520.4
======== ======== ========
F-29
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 from continuing operations, 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.
F-30
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.
F-31
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.
F-32
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.
The Company's current federal income tax liability was $186.2 million and
$108.9 million as of December 31, 2001 and 2000, respectively.
F-33
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Federal income tax expense attributable to income from continuing
operations before federal income tax expense and cumulative effect
of adoption of accounting principles for the years ended December 31
was as follows:
(in millions) 2001 2000 1999
====== ====== ======
Currently payable $ 32.2 $ 77.6 $ 52.3
Deferred tax expense 129.0 129.7 147.8
------ ------ ------
$161.2 $207.3 $200.1
====== ====== ======
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 from continuing operations 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 $220.1 35.0 $239.1 35.0 $211.0 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 1.4 0.1 0.9 0.1 0.7 0.1
------ ------ ------ ------ ------ ------
Total (effective rate of each year) $161.2 25.6 $207.3 30.3 $200.1 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.
F-34
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.
F-35
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.
F-36
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)
---------- ---------- ---------- ----------
F-37
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
collateral.
F-38
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.
F-39
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)
======== ======== ======== ========
F-40
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
===== ===== =====
F-41
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.
F-42
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.
F-43
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.
See note 17 regarding the reporting of discontinued operations as a result
of a related party transaction.
F-44
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 discouragement 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. As
discussed more fully in note 17, the Company paid a dividend to NFS during
the second quarter of 2002, which resulted in the disposal of a portion of
the business that had been reported in the Corporate segment. As a result,
this business is now reported as discontinued operations. In addition,
certain other reclassifications have been made in order to present the
information below on a basis consistent with the Company's current
practice. Amounts for all periods presented have been revised to reflect
these changes.
F-45
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 $ 19.2 $ 1,724.7
Other operating revenue 556.0 209.4 511.5 1.6 1,278.5
--------- --------- --------- --------- ---------
Total operating revenue (1) 1,090.7 1,056.9 834.8 20.8 3,003.2
--------- --------- --------- --------- ---------
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 (2.1) 761.3
--------- --------- --------- --------- ---------
Total benefits and expenses 859.3 845.6 645.1 4.1 2,354.1
--------- --------- --------- --------- ---------
Operating income before
federal income tax expense (1) 231.4 211.3 189.7 16.7 649.1
Net realized losses on investments,
hedging instruments and hedged
items -- -- -- (20.2) (20.2)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 231.4 $ 211.3 $ 189.7 $ (3.5) $ 628.9
========= ========= ========= ========= =========
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 not related to
securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption principles.
F-46
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 $ 482.0 $ 827.4 $ 289.2 $ 55.3 $ 1,653.9
Other operating revenue 625.9 251.6 462.1 2.9 1,342.5
--------- --------- --------- --------- ---------
Total operating revenue(1) 1,107.9 1,079.0 751.3 58.2 2,996.4
--------- --------- --------- --------- ---------
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 192.1 181.0 368.8 16.2 758.1
--------- --------- --------- --------- ---------
Total benefits and expenses 827.2 859.0 590.2 17.5 2,293.9
--------- --------- --------- --------- ---------
Operating income before
federal income tax expense(1) 280.7 220.0 161.1 40.7 702.5
Net realized losses on investments,
hedging instruments and hedged
items -- -- -- (19.4) (19.4)
--------- --------- --------- --------- ---------
Income from continuing operations
before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 280.7 $ 220.0 $ 161.1 $ 21.3 $ 683.1
========= ========= ========= ========= =========
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 $ 37.2 $ 1,520.4
Other operating revenue 511.4 211.9 394.9 3.4 1,121.6
--------- --------- --------- --------- ---------
Total operating revenue (1) 970.3 983.1 648.0 40.6 2,642.0
--------- --------- --------- --------- ---------
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 25.8 658.6
--------- --------- --------- --------- ---------
Total benefits and expenses 711.1 765.3 525.3 25.8 2,027.5
--------- --------- --------- --------- ---------
Operating income before
federal income tax expense (1) 259.2 217.8 122.7 14.8 614.5
Net realized losses on investments,
hedging instruments and hedged
items -- -- -- (11.6) (11.6)
--------- --------- --------- --------- ---------
Income from continuing operations
before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 259.2 $ 217.8 $ 122.7 $ 3.2 $ 602.9
========= ========= ========= ========= =========
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 not related to
securitizations, hedging instruments and hedged items, discontinued
operations and cumulative effect of adoption of accounting principles.
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.
(17) SUBSEQUENT EVENT
In June 2002, NLIC paid a dividend to NFS in the form of all of the shares
of common stock of NSI. As a result, the Company is no longer engaged in
broker/dealer services related to the asset management business. Therefore, the
results of the operations of NSI have been reflected as discontinued operations
for all periods presented. This was a non-cash transaction between related
parties and therefore will be recorded in the 2002 consolidated financial
statements at carrying value, $10.0 million, of the underlying components of the
transaction rather than fair value. The consolidated statements of income and
cash flows and all affected footnote disclosures have been revised to reflect
NSI as discontinued operations.
In addition, certain other reclassifications have been made to the segment
information provided in note 16 in order to reflect the presentation on a basis
consistent with the Company's current practice.
F-47
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.
F-48
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 19.2 -- -- (2.1)
---------- ----------- ------- -------
Total $ 1,724.7 $ 1,519.0 $ 347.9 $ 439.3
========== =========== ======= =======
2000: Individual Annuity $ 482.0 $ 450.4 $ 238.7 $ 138.1
Institutional Products 827.4 628.8 49.2 181.0
Life Insurance 289.2 344.8 64.2 136.7
Corporate 55.3 - - 16.2
---------- ----------- ------- -------
Total $ 1,653.9 $ 1,424.0 $ 352.1 $ 472.0
========== =========== ======= =======
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 37.2 - - 25.8
---------- ----------- ------- -------
Total $ 1,520.4 $ 1,306.7 $ 272.6 $ 405.8
========== =========== ======= =======
- ----------
(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.
F-49
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.
F-50
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.
F-51
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.
A-1
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.
A-2
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 SPECIFIED MARKET VALUE MARKET
CURRENT YIELD GUARANTEED TERM VALUE 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
A-3
DEALER PROSPECTUS DELIVER OBLIGATION
All dealers that effect transactions in these securities may be required to
deliver a prospectus.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Pursuant to, and as set forth more completely in, the Amended Code of
Regulations of Nationwide, Nationwide will indemnify a director, officer or
employee from a suit or proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the state of Ohio.
In so far as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
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.
II-1
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
Number Description
------------------------------------------------------------------
3(i) Certificate of Incorporation *
3(ii) Code of Regulations *
4 Annuity Endorsement to Contracts *
5 Opinion Regarding Legality Filed herewith
21 Subsidiaries of the Registrant Filed herewith
23a Consent of Counsel Filed herewith
(as part of Exhibit 5)
23b Consent of Experts Filed herewith
24 Power of Attorney Filed herewith
*Filed with the original submission of this registration statement (SEC File No.
33-58997) on May 2, 1995.
(b)(1) Consolidated Financial Statements:
Unaudited Consolidated Statements of Operation for the three and nine
month periods ended September 30, 2002
Unaudited Consolidated Balance Sheets as of September 30, 2002
Unaudited Consolidated Statements of Shareholder's Equity for the nine
months ended September 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements
Independent Auditors' Report
Condensed Consolidated Balance Sheets as of December 31, 2001 and 2000
Condensed Consolidated Income Statements for the years ended December
31, 2001, 2000 and 1999
Condensed Consolidated Statements of Shareholder's Equity for the years
ended December 31, 2001, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
Notes to the Condensed 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
II-2
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.
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.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment 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 13th of January, 2003.
NATIONWIDE LIFE INSURANCE COMPANY
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(Registrant)
By: /s/ STEVEN SAVINI
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Steven Savini, Esq.
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE
/s/ W. G. JURGENSEN Director and Chief Executive Officer
- ----------------------------------------
W. G. Jurgensen
/s/ JOSEPH J. GASPER Director and President and
- ---------------------------------------- Chief Operating Officer
Joseph J. Gasper
/s/ JOSEPH A. ALUTTO Director
- ----------------------------------------
Joseph A. Alutto
/s/ JAMES G. BROCKSMITH, JR. Director
- ----------------------------------------
James G. Brocksmith, Jr.
/s/ HENRY S. HOLLOWAY Director
- ----------------------------------------
Henry S. Holloway
/s/ LYDIA M. MARSHALL Director
- ----------------------------------------
Lydia M. Marshall
/s/ DONALD L. MCWHORTER Director
- ----------------------------------------
Donald L. McWhorter
/s/ DAVID O. MILLER Director
- ----------------------------------------
David O. Miller
/s/ JAMES F. PATTERSON Director
- ----------------------------------------
James F. Patterson
/s/ GERALD D. PROTHRO Director
- ----------------------------------------
Gerald D. Prothro
/s/ ARDEN L. SHISLER Director
- ----------------------------------------
Arden L. Shisler
/s/ALEX SHUMATE Director
- ----------------------------------------
Alex Shumate
By /s/ STEVEN SAVINI
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Steven Savini
Attorney-in-Fact