<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 COMMISSION FILE NO. 1-12785
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1486870
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports)and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
------ ------
CLASS A COMMON STOCK - 23,783,136 SHARES ISSUED AND OUTSTANDING AS OF
(Title of Class) NOVEMBER 12, 1997
CLASS B COMMON STOCK - 104,745,000 SHARES ISSUED AND
(Title of Class) OUTSTANDING AS OF NOVEMBER 12, 1997
<PAGE> 2
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
Assets 1997 1996
------ ----------------- ----------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $12,313.6 in 1997; $11,970.9 in 1996) $12,738.7 12,304.6
Equity securities (cost $60.8 in 1997; $43.9 in 1996) 73.8 59.1
Fixed maturity securities held-to-maturity, at amortized cost (fair value $6.0
in 1997; $5.9 in 1996) 6.0 5.9
Mortgage loans on real estate, net 5,135.4 5,272.1
Real estate, net 305.1 265.8
Policy loans 403.9 371.8
Other long-term investments 23.0 28.7
Short-term investments 522.3 9.3
----------------- ----------------
19,208.2 18,317.3
----------------- ----------------
Cash 104.8 43.2
Accrued investment income 221.3 210.2
Deferred policy acquisition costs 1,570.0 1,366.5
Investment in subsidiaries classified as discontinued operations - 485.7
Other assets 415.8 420.6
Assets held in Separate Accounts 36,791.6 26,926.7
----------------- ----------------
$58,311.7 47,770.2
================= ================
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits and claims $17,817.8 17,179.1
Policyholders' dividend accumulations 369.4 361.4
Other policyholder funds 59.7 60.1
Accrued federal income tax:
Current 44.9 29.2
Deferred 203.9 158.9
----------------- ----------------
248.8 188.1
----------------- ----------------
Dividend payable 7.7 485.7
Long-term debt 298.4 -
Other liabilities 595.9 437.4
Liabilities related to Separate Accounts 36,791.6 26,926.7
----------------- ----------------
56,189.3 45,638.5
----------------- ----------------
NFS-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of NFS 100.0 -
----------------- ----------------
Shareholders' equity:
Class A common shares, $0.01 par value. Authorized 750.0 million shares,
23.8 million shares issued and outstanding 0.2 -
Class B common shares, $0.01 par value. Authorized 750.0 million shares,
104.7 million shares issued and outstanding 1.0 1.0
Additional paid-in capital 629.2 551.4
Retained earnings 1,179.8 1,405.7
Unearned compensation (1.2) -
Unrealized gains on securities available-for-sale, net 213.4 173.6
----------------- ----------------
2,022.4 2,131.7
----------------- ----------------
$58,311.7 47,770.2
================= ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Investment product and universal life insurance product
policy charges $143.3 102.3 393.4 288.8
Life insurance premiums 50.2 47.2 155.9 150.3
Net investment income 356.8 339.9 1,050.9 1,009.6
Realized gains (losses) on investments (4.8) (5.1) 4.3 4.3
Other income 16.4 13.0 49.6 52.7
------------- ------------- ------------- -------------
561.9 497.3 1,654.1 1,505.7
------------- ------------- ------------- -------------
Benefits and expenses:
Interest credited 256.0 245.6 756.9 732.9
Other benefits and claims 41.8 51.5 134.3 139.4
Provision for policyholders' dividends on participating policies 9.1 8.7 31.3 31.5
Amortization of deferred policy acquisition costs 43.7 25.7 126.7 96.8
Interest expense 8.0 - 18.0 -
Other operating expenses 103.0 82.2 295.6 252.2
------------- ------------- ------------- -------------
461.6 413.7 1,362.8 1,252.8
------------- ------------- ------------- -------------
Income from continuing operations before federal
income tax expense 100.3 83.6 291.3 252.9
------------- ------------- ------------- -------------
Federal income tax expense (benefit):
Current 25.5 39.5 78.5 98.1
Deferred 9.4 (10.0) 23.3 (9.4)
------------- ------------- ------------- -------------
34.9 29.5 101.8 88.7
------------- ------------- ------------- -------------
Income from continuing operations 65.4 54.1 189.5 164.2
Income from discontinued operations (less federal income
tax expense of $1.0 and $5.0 in 1996) - 2.3 - 9.6
------------- ------------- ------------- -------------
Net income $ 65.4 56.4 189.5 173.8
============= ============= ============= =============
Per common share:
Income from continuing operations $ 0.51 0.52 1.55 1.57
Net income $ 0.51 0.54 1.55 1.66
Cash dividends declared $ 0.06 - 0.12 -
Weighted average number of common shares
outstanding (in millions) 128.5 104.7 122.5 104.7
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
(in millions of dollars)
<TABLE>
<CAPTION>
Unrealized
gains
(losses)
Class A Class B Additional on securities Total
common common paid-in Retained Unearned available- shareholders'
shares shares capital earnings compensation for-sale, net equity
---------- ----------- ------------ ------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996:
Balance, January 1, 1996 $ - 1.0 680.7 1,550.7 - 384.3 2,616.7
Net income - - - 173.8 - - 173.8
Dividends to shareholder - - (79.3) (358.3) - (28.6) (466.2)
Unrealized losses on
securities available-for-
sale, net - - - - - (249.8) (249.8)
---------- ----------- ------------ ------------- ---------------- --------------- ---------------
Balance, September 30, 1996 $ - 1.0 601.4 1,366.2 - 105.9 2,074.5
========== =========== ============ ============= ================ =============== ===============
1997:
Balance, January 1, 1997 - 1.0 551.4 1,405.7 - 173.6 2,131.7
Issuance of Class A
common shares 0.2 - 524.0 - - - 524.2
Net income - - - 189.5 - - 189.5
Dividends to shareholders - - (450.0) (415.4) - - (865.4)
Class A common shares
issued for long-term
incentive plans - - 3.8 - (1.5) - 2.3
Amortization of unearned
compensation - - - - 0.3 - 0.3
Unrealized gains on
securities available-for-
sale, net - - - - 39.8 39.8
---------- ----------- ------------ ------------- ---------------- --------------- ---------------
Balance, September 30, 1997 $0.2 1.0 629.2 1,179.8 (1.2) 213.4 2,022.4
========== =========== ============ ============= ================ =============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
(in millions of dollars)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 189.5 173.8
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs (358.2) (313.7)
Amortization of deferred policy acquisition costs 126.7 96.8
Amortization and depreciation 0.4 6.2
Realized gains on investments, net (4.3) (4.3)
Deferred federal income tax 23.3 20.2
Increase in accrued investment income (11.1) (2.5)
Decrease (increase) in other assets 5.9 (33.5)
Increase in policyholder account balances 58.2 233.3
Increase in policyholders' dividend accumulations 8.0 10.0
Increase (decrease) in accrued federal income tax payable 15.7 (0.1)
Increase in other liabilities 158.5 177.1
Other, net 1.9 (31.4)
-------------- --------------
Net cash provided by operating activities 214.5 331.9
-------------- --------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 640.8 917.4
Proceeds from sale of securities available-for-sale 248.7 223.3
Proceeds from repayments of mortgage loans on real estate 296.1 191.1
Proceeds from sale of real estate 23.2 16.1
Proceeds from repayments of policy loans and sale of other invested assets 19.8 18.6
Cost of securities available-for-sale acquired (1,732.1) (1,047.9)
Cost of mortgage loans on real estate acquired (552.2) (721.7)
Cost of real estate acquired (24.3) (4.8)
Policy loans issued and other invested assets acquired (48.2) (43.1)
Short-term investments, net (514.1) (55.4)
-------------- --------------
Net cash used in investing activities (1,642.3) (506.4)
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of Class A common shares 524.2 -
Net proceeds from issuance of NFS-obligated mandatorily redeemable preferred
securities of subsidiary trust 98.3 -
Net proceeds from issuance of long-term debt 294.5 -
Cash dividends paid (7.7) (2.0)
Increase in investment product and universal life insurance product account balances 2,343.1 1,851.3
Decrease in investment product and universal life insurance product account balances (1,763.0) (1,597.0)
-------------- --------------
Net cash provided by financing activities 1,489.4 252.3
-------------- --------------
Net increase in cash 61.6 77.8
Cash, beginning of period 43.2 10.1
-------------- --------------
Cash, end of period $ 104.8 87.9
============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 1997
(1) Organization and Basis of Presentation
Nationwide Financial Services, Inc. (NFS) was formed in November 1996
as a holding company for Nationwide Life Insurance Company (NLIC) and
the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. Prior
to the initial public offering described in note 2, NFS was a wholly
owned subsidiary of Nationwide Corporation (Nationwide Corp.). On
January 27, 1997, Nationwide Corp. contributed the common stock of
NLIC and three marketing and distribution companies to NFS. The
unaudited consolidated financial statements include the results of
NLIC and its subsidiaries and the three marketing and distribution
companies as if they were consolidated with NFS for all periods
presented. NFS and its subsidiaries are collectively referred to as
"the Company."
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with generally accepted
accounting principles, 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 generally accepted accounting
principles 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, 1996 included in the Company's Form S-1 registration
statement, which was declared effective on March 5, 1997 (Registration
No. 333-18527).
Net income per common share is based on the weighted average number of
common shares outstanding during the period. The dilutive effects of
common stock equivalents were not significant for any period
presented.
Statement of Financial Accounting Standards No. 128 - Earnings Per
Share was issued in February 1997 and is effective for financial
periods ending after December 15, 1997. Earlier application is not
permitted. The statement requires dual presentation of basic and
diluted earnings per share on the face of the income statement with
all prior periods restated to conform to the new method. Management
believes that earnings per share amounts computed under the new
standard will not be materially different from the amounts reported
herein.
Certain items in the prior period consolidated financial statements
have been reclassified to conform to the current period presentation.
(2) Initial Public Offerings
On March 10, 1997, NFS sold, in a public offering, $300.0 million of
8% Senior Notes (the Notes) maturing March 1, 2027 with net proceeds
of $294.5 million. The Notes are redeemable in whole or in part, at
the option of NFS, at any time on or after March 1, 2007 at scheduled
redemption premiums through March 1, 2016, and, thereafter, at 100% of
the principal amount thereof plus, in each case, accrued and unpaid
interest. The Notes are not subject to any sinking fund payments.
On March 11, 1997, NFS sold, in an initial public offering, 23.6
million shares of its newly-issued Class A common stock for net
proceeds of $524.2 million (the Equity Offering). Nationwide Corp.
continues to own all of the outstanding shares of Class B common
stock, which represents approximately 98% of the combined voting power
of the stockholders of NFS. During the first quarter of 1997, NFS's
Board of Directors approved a 104,745 for one split of the Company's
Class B common stock, which became effective February 10, 1997. Share
information for all periods presented has been restated to reflect the
split.
7
<PAGE> 8
In addition, on March 11, 1997, Nationwide Financial Services Capital
Trust (the Trust), a wholly owned subsidiary of NFS, sold, in a public
offering, $100.0 million of 7.899% Capital Securities (the Capital
Securities), representing preferred undivided beneficial interests in
the assets of the Trust. Net proceeds from the sale of the Capital
Securities were $98.3 million. Concurrent with the sale of the Trust's
Capital Securities, NFS sold to the Trust $103.1 million in principal
amount of its 7.899% Junior Subordinated Deferrable Interest
Debentures (the Junior Subordinated Debentures) due March 1, 2037. The
Junior Subordinated Debentures are the sole assets of the Trust and
are redeemable by NFS in whole at any time or in part from time to
time at par plus an applicable make-whole premium. The Capital
Securities will mature or be called simultaneously with the Junior
Subordinated Debentures and have a liquidation value of $1,000 per
Capital Security.
The Capital Securities, through obligations of NFS under the Junior
Subordinated Debentures, the Capital Securities Guarantee Agreement
and the related Declaration of Trust and Indenture, are fully and
unconditionally guaranteed by NFS. Distributions on the Capital
Securities are cumulative and payable semi-annually in arrears.
Distributions on the Capital Securities have been classified as
interest expense in the unaudited consolidated statements of income.
Aggregate net proceeds from the Equity Offering, the offering of the
Notes and the sale of the Capital Securities totaled $917.0 million.
NFS contributed $836.8 million of the proceeds to the capital of NLIC
and retained $80.2 million of the proceeds for general corporate
purposes.
(3) Dividends
On September 24, 1996, NLIC's Board of Directors declared a dividend
to Nationwide Corp. consisting of the common stock of certain
subsidiaries classified as discontinued operations. As of and during
the year ended December 31, 1996, these previously wholly owned
subsidiaries of NLIC were classified as discontinued operations since
they do not offer or distribute long-term savings and retirement
products. The dividend was paid by NLIC on January 1, 1997.
On February 24, 1997, NLIC paid a dividend to NFS, and NFS paid an
equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
On August 13, 1997 NFS declared a dividend of $0.06 per common share
with a record date of October 1, 1997. The dividend, totaling $7.7
million, was paid October 15, 1997. NFS also made a dividend payment
totaling $7.7 million on July 15, 1997.
8
<PAGE> 9
(4) Pro Forma Results of Operations
The following unaudited pro forma information presents the results of
operations of the Company for the three and nine month periods ended
September 30, 1997 and 1996, with pro forma adjustments to net
investment income and interest expense giving effect to (i) the Equity
Offering and companion offerings of the Notes and the Capital
Securities, (ii) the $850.0 million dividend paid by the Company on
February 24, 1997 and (iii) for 1996 only, a $50.0 million dividend
paid by the Company to Nationwide Corp. on December 31, 1996, as if
each had been consummated at the beginning of the year indicated. This
pro forma information is not necessarily indicative of what would have
occurred had the above transactions been made on the dates indicated,
or of future results of the Company.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
(in millions of dollars, except per share amounts) 1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $561.9 495.8 1,655.9 1,499.0
Benefits and expenses 461.6 421.7 1,369.0 1,276.9
------------- ------------- ------------- --------------
Income from continuing operations before federal
income tax expense 100.3 74.1 286.9 222.1
Federal income tax expense 34.9 26.2 100.3 77.9
------------- ------------- ------------- --------------
Income from continuing operations 65.4 47.9 186.6 144.2
Income from discontinued operations, net of federal
income tax expense - 2.3 - 9.6
------------- ------------- ------------- --------------
Net income $ 65.4 50.2 186.6 153.8
============= ============= ============= ==============
Per common share:
Income from continuing operations $ 0.51 0.37 1.45 1.12
Net income $ 0.51 0.39 1.45 1.20
Weighted average number of common shares
outstanding (in millions) 128.5 128.4 128.5 128.4
</TABLE>
The impact on the above per common share amounts of realized
gains (losses) on investments was $(.02) and $(.03) for the three
months ended September 30, 1997 and 1996, respectively. On a
year-to-date basis, realized gains on investments contributed
$.02 and $.03 to the above per common share amounts in 1997 and
1996, respectively.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations and financial condition of the Company should be read
in conjunction with the unaudited consolidated financial
statements and related notes included elsewhere herein.
Management's discussion and analysis of financial condition and
results of operations contains forward-looking statements that
are intended to enhance the reader's ability to assess the future
financial performance of the Company. These forward-looking
statements are not based on historical information and are being
made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Because these
statements are subject to numerous assumptions, risks, and
uncertainties, actual results could be materially different. The
following factors, among others, may have such an impact: changes
in economic conditions; movements in interest rates and the stock
markets; competitive pressures on product pricing and services;
success and timing of business strategies; and the nature and
extent of legislation and regulatory actions and reforms.
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate income and expenses, investments and related investment
income supporting capital not specifically allocated to its
product segments and interest expense on debt in a Corporate and
Other segment.
RESULTS OF OPERATIONS
The Company reported net income of $65.4 million, or $0.51 per
share, for third quarter 1997 compared with $56.4 million, or
$0.54 per share, for the same period last year. For the first
nine months of the year, net income was $189.5 million, or $1.55
per share, versus $173.8 million, or $1.66 per share, in the
corresponding period of 1996.
Net operating income, which excludes the effects of realized
gains and losses on investments (net of related federal income
taxes) and income from discontinued operations, was $68.3
million, or $0.53 per share, for third quarter 1997. Stated on a
pro forma basis to include the effects of transactions related to
the Company's initial public offering in March 1997 as described
in note 4 to the accompanying unaudited consolidated financial
statements, net operating income was $183.3 million, or $1.43 per
share, for the first nine months of 1997. These amounts compare
to pro forma net operating income of $51.2 million, or $0.40 per
share, and $140.3 million, or $1.09 per share, for third quarter
and the first nine months of 1996, respectively.
Total revenues for third quarter 1997, excluding realized gains
and losses on investments, increased 13% to $566.7 million
compared to $502.4 million for third quarter 1996. Year-to-date,
revenues increased 10% to $1.65 billion compared to $1.50 billion
a year ago. The increases in revenues were primarily driven by
increases in policy charges and net investment income.
Policy charges include asset fees, which are primarily earned
from separate account assets generated from sales of variable
annuities; administration fees, which include fees charged per
contract on a variety of the Company's products and premium loads
on universal life insurance products; surrender fees, which are
charged as a percentage of assets withdrawn during a specified
period (usually the first seven years) of annuity and certain
life insurance contracts; and cost of insurance charges earned on
universal life insurance products. For third quarter 1997, policy
charges were $143.3 million, a 40% increase from $102.3 million
in third quarter 1996. Through nine months of 1997, policy
charges were $393.4 million, a 36% increase from $288.8 million
for the first nine months of 1996. The increase in policy charges
is due primarily to increases in separate account assets and the
resulting higher levels of asset fees. Total separate account
assets have increased 49% from $24.67 billion as of September 30,
1996 to $36.79 billion as of September 30, 1997.
10
<PAGE> 11
Net investment income includes the gross investment income earned
on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general
account invested assets which are not allocated to product
segments. Net investment income was $356.8 million and $1.05
billion, respectively, for the three and nine month periods ended
September 30, 1997 compared to $339.9 million and $1.01 billion
for the corresponding periods in 1996. Net investment income has
increased primarily as a result of the increase in invested
assets to support growth in fixed annuity policy reserves.
Realized gains and losses on investments are not considered by
the Company to be recurring components of earnings. The Company
makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. All realized
gains and losses are reported in the Corporate and Other segment.
Net realized losses on investments were $4.8 million in third
quarter 1997 compared to realized losses of $5.1 million in third
quarter 1996. On a year-to-date basis, the Company reported net
realized gains of $4.3 million in both 1997 and 1996. Realized
gains in 1997 include $14.4 million recognized when securities of
$850.0 million were paid to Nationwide Corp. as a dividend on
February 24, 1997. See note 3 to the unaudited consolidated
financial statements. Also, during 1997, the Company recorded
realized losses of $5.2 million and $11.0 million during the
third and second quarter, respectively, related to the write-down
of a single corporate bond investment due to deterioration in the
credit quality of the issuer.
Total benefits and expenses were $461.6 million and $1.36
billion, respectively, for the three and nine months ended
September 30, 1997, compared with $413.7 million and $1.25
billion for the corresponding periods in 1996. The increases in
expenses were attributable to increases in amortization of
deferred policy acquisition costs (DAC) and other operating
expenses. Also, interest expense of $8.0 million and $18.0
million, respectively, for third quarter and year-to-date periods
has been recorded in 1997 on the Notes and Capital Securities
issued in March 1997 as described in note 2 to the unaudited
consolidated financial statements.
Amortization of DAC increased 70% from $25.7 million in third
quarter 1996 to $43.7 million in third quarter 1997. Amortization
of DAC in third quarter 1996 was reduced $14.8 million due to
changes in estimates of expected future profits as a result of
favorable investment and persistency experience. For the first
nine months of 1997, amortization of DAC was $126.7 million, up
31% from $96.8 million in the first nine months of 1996. In
addition to the $14.8 million reduction in 1996, the increase is
principally related to increased business in the Variable
Annuities segment.
Operating expenses were $103.0 million in third quarter 1997, a
25% increase from third quarter 1996 operating expenses of $82.2
million. Operating expenses were up 17% to $295.6 million for the
nine months ended September 30, 1997 from $252.2 million for the
same period of 1996. The increase is primarily due to an increase
in the number of annuity and life insurance contracts in-force
and the related increase in administrative processing costs. In
addition, operating expenses in third quarter 1997 include
approximately $10 million on technology projects related to year
2000 and the development of a new policy administration system
for the traditional life insurance line bringing year to date
expenses on these projects to approximately $30 million.
Federal income tax expense was $34.9 million and $29.5 million,
representing effective tax rates of 34.8% and 35.3% for third
quarter 1997 and 1996, respectively. For the first nine months of
1997 and 1996 federal income tax expense was $101.8 million and
$88.7 million, representing effective tax rates of 34.9% and
35.1%, respectively.
Discontinued operations include the results of (i) the three NLIC
subsidiaries whose outstanding common stock, on September 24,
1996, was declared as a dividend to Nationwide Corp. and (ii)
NLIC's accident and health and group life business which was
ceded to affiliates during the third quarter of 1996. NLIC did
not recognize any gain or loss on the disposal of these
subsidiaries or discontinuance of the accident and health and
group life insurance business. Income from discontinued
operations was $2.3 million and $9.6 million during the third
quarter and for the first nine months of 1996, respectively.
There was no income from discontinued operations in 1997 as a
result of the transfer by the Company of the ownership of the
three subsidiaries to Nationwide Corp. on January 1, 1997 and the
reinsurance agreements.
11
<PAGE> 12
EFFECT OF SPECIAL DIVIDENDS, EQUITY OFFERING AND FIXED INCOME
OFFERINGS
On December 31, 1996, NLIC paid a $50.0 million dividend (the $50
Million Dividend) to Nationwide Corp. On February 24, 1997, NLIC
paid a dividend to NFS, which subsequently made a dividend
payment to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million (the $850 Million
Dividend). The $50 Million Dividend and the $850 Million Dividend
are collectively referred to as the "Special Dividends".
On March 10, 1997, NFS sold, in a public offering, $300.0 million
of 8% Senior Notes maturing March 1, 2027 with net proceeds of
$294.5 million (the Notes Offering). On March 11, 1997 NFS sold,
in an initial public offering, 23.6 million shares of
newly-issued Class A common stock for net proceeds of $524.2
million (the Equity Offering). In addition, on March 11, 1997,
Nationwide Financial Services Capital Trust (the Trust), a wholly
owned subsidiary of NFS, sold, in a public offering, $100.0
million of 7.899% Capital Securities (the Capital Securities
Offering). The proceeds from the Capital Securities Offering were
used by the Trust to purchase 7.899% Junior Subordinated
Deferrable Interest Debentures due March 1, 2037 of NFS. The
Notes Offering and the Capital Securities Offering are
collectively referred to as "the Fixed Income Offerings." Of the
aggregate net proceeds from the Equity Offering and Fixed Income
Offerings of $917.0 million, NFS contributed $836.8 million to
NLIC as additional paid-in capital. The remaining $80.2 million
was retained by NFS to pay operating expenses and shareholder
dividends.
Because (i) the Special Dividends preceded the Equity Offering
and the Fixed Income Offerings, and (ii) the net proceeds of
$917.0 million from the Equity Offering and Fixed Income
Offerings were invested at lower yields than the yield on the
investments used to fund the $850 Million Dividend, the aggregate
effects of the Special Dividends, the Equity Offering and the
Fixed Income Offerings were approximately a $1.4 million
reduction in net investment income for third quarter 1997 and an
$8.1 million reduction in net investment income for the first
nine months of 1997. In addition, the Company reported interest
expense on the Notes and Capital Securities of $8.0 million in
the third quarter and $18.0 million through September 30, 1997,
respectively.
The following unaudited pro forma information presents net
operating income of the Company by segment for the three and nine
month periods ended September 30, 1997 and 1996 with pro forma
adjustments to net investment income and interest expense giving
effect to (i) the Equity Offering, (ii) the Fixed Income
Offerings, (iii) the $850 Million Dividend, and (iv) for 1996
only, the $50 Million Dividend, as if each had been consummated
at the beginning of the year indicated. Net operating income is
net income excluding realized gains and losses on investments
(net of related federal income tax where applicable) and
discontinued operations. This pro forma information is not
necessarily indicative of what would have occurred had the above
transactions been made on the dates indicated, or of future
results of the Company.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
(in millions of dollars) 1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pre-tax operating results:
Variable Annuity $ 40.0 29.9 104.2 67.0
Fixed Annuity 44.8 31.7 126.5 104.7
Life Insurance 20.9 16.4 51.6 46.1
Corporate and Other (0.6) 1.2 0.3 -
Federal income taxes on pro forma operating income (36.8) (28.0) (99.3) (77.5)
------------- ------------- ------------- -------------
Pro forma net operating income $ 68.3 51.2 183.3 140.3
============= ============= ============= =============
</TABLE>
Unaudited pro forma consolidated results of operations of the
Company for the three and nine month periods ended September 30,
1997 and 1996 are presented in note 4 to the accompanying
unaudited consolidated financial statements.
12
<PAGE> 13
RESULTS OF OPERATIONS BY SEGMENT
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate income and expenses, investments and related investment
income supporting capital not specifically allocated to its
product segments, and interest expense on debt in a Corporate and
Other segment. All information set forth below relating to the
Company's Variable Annuities segment excludes the fixed option
under the Company's variable annuity contracts. Such information
is included in the Company's Fixed Annuities segment.
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual
funds managed by independent investment managers and the Company,
with investment returns accumulating on a tax-deferred basis. The
Company's variable annuity products consist almost entirely of
flexible premium deferred variable annuity contracts.
The following table summarizes selected unaudited income
statement data for the Company's Variable Annuities segment for
the periods indicated.
VARIABLE ANNUITIES SELECTED INCOME STATEMENT DATA (1)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
----------- ------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policy charges $110.9 $75.8 46% $297.1 $210.7 41%
Net investment income and
other income (2) (2.3) (2.6) 12 (7.7) (7.0) (10)
----------- ------------ --------- ----------- ------------ ---------
108.6 73.2 48 289.4 203.7 42
----------- ------------ --------- ----------- ------------ ---------
Benefits and expenses:
Benefits and claims 1.6 1.0 60 4.3 3.5 23
Amortization of deferred policy
acquisition costs 25.1 10.2 146 64.6 38.9 66
Other operating expenses 41.9 32.1 31 116.3 94.3 23
----------- ------------ --------- ----------- ------------ ---------
68.6 43.3 58 185.2 136.7 35
----------- ------------ --------- ----------- ------------ ---------
Operating income before federal
income tax expense $ 40.0 $29.9 34% $104.2 $ 67.0 56%
=========== ============ ========= =========== ============ =========
</TABLE>
----------
(1) Excludes the fixed option under the Company's variable annuity
contracts which is reported in the Company's Fixed Annuities
segment.
(2) The Company's method of allocating net investment income
results in a charge (negative net investment income) to this
segment which is recognized in the Corporate and Other
segment. The charge relates to non-invested assets which
support this segment on a statutory basis.
Variable annuity segment results reflect a sharp increase in
policy charge revenues partially offset by increases in
amortization of DAC and other operating expenses. The increase in
policy charge revenues is attributable to growth in asset fees.
Asset fees were $101.1 million in third quarter 1997 up 48% from
$68.3 million in third quarter 1996. Year-to-date, assets fees
were up 41% to $264.9 million compared to $187.9 million for the
first nine months of 1996. The increase in assets fees reflects
substantial growth in policy reserve levels. Total policy charges
as a percentage of policy reserves remained relatively stable
around 140 basis points during the periods presented, reflecting
no or minimal changes in the levels of policy charges for most
variable annuity products.
13
<PAGE> 14
During third quarter 1997, variable annuity policy reserves
increased $3.71 billion to $33.59 billion as of September 30,
1997. Variable annuity policy reserves have grown $9.31 billion
since December 31, 1996. Compared to one year ago, policy
reserves are up 51% or $11.33 billion. Variable annuity policy
reserve growth is primarily the result of increased sales
production through financial institutions, pension plan
administrators and public sector markets and strong equity market
conditions.
During third quarter and for the first nine months of 1997,
variable annuity policy reserves reflect market appreciation of
$2.47 billion and $5.57 billion compared to market appreciation
of $581.8 million and $1.71 billion in the same periods of 1996.
Variable annuity sales increased 25% to $1.90 billion in third
quarter 1997 compared to $1.52 billion in third quarter 1996. For
the first nine months of 1997, variable annuity sales were $5.67
billion compared to $4.96 billion a year ago representing an
increase of 14%.
Sales comparisons for fourth quarter 1997 are expected to be
favorable to the prior year for both variable annuities and fixed
annuities and the Company anticipates total annuity sales for
1997 to approach $10 billion.
The increase in DAC amortization in 1997 compared to a year ago
is due to overall growth in the variable annuity business coupled
with an $8.8 million reduction in third quarter 1996 DAC
amortization due to changes in estimates of expected future
profits as a result of favorable investment and persistency
experience.
The growth in operating expenses also reflects the overall growth
in the variable annuity business. Operating expenses were 53
basis points and 60 basis points of average variable annuity
policy reserves for third quarter 1997 and 1996, respectively. On
a year-to-date basis, operating expenses were 54 basis points in
1997 compared to 64 basis points in 1996. During 1997, the
Company has controlled operating expense growth while increasing
productivity through investments in technology.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that
generate a return for the customer at a specified interest rate,
fixed for a prescribed period, with returns accumulating on a
tax-deferred basis. Such contracts consist of single premium
deferred annuities, flexible premium deferred annuities and
single premium immediate annuities. The Fixed Annuities segment
also includes the fixed option under the Company's variable
annuity contracts.
14
<PAGE> 15
The following table summarizes selected unaudited income
statement data for the Company's Fixed Annuities segment for the
periods indicated.
<TABLE>
<CAPTION>
FIXED ANNUITIES SELECTED INCOME STATEMENT DATA (1)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
---------- ----------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policy charges $ 2.4 $ 4.2 (43)% $ 11.1 $ 13.3 (17)%
Life insurance premiums 7.1 5.0 42 23.1 20.5 13
Net investment income 276.9 263.6 5 819.2 783.8 5
---------- ----------- --------- ----------- ------------ ---------
286.4 272.8 5 853.4 817.6 4
---------- ----------- --------- ----------- ------------ ---------
Benefits and expenses:
Interest credited 206.1 201.0 3 612.9 599.8 2
Other benefits and claims 5.5 17.5 (69) 19.2 31.5 (39)
Amortization of deferred policy
acquisition costs 8.6 3.9 121 29.8 25.7 16
Other operating expenses 21.4 18.7 14 65.0 55.9 16
---------- ----------- --------- ----------- ------------ ---------
241.6 241.1 - 726.9 712.9 2
---------- ----------- --------- ----------- ------------ ---------
Operating income before federal
income tax expense $ 44.8 $ 31.7 41% $126.5 $104.7 21%
========== =========== ========= =========== ============ =========
</TABLE>
----------
(1) Includes the fixed option under the Company's variable
annuity contracts.
Fixed annuity segment results reflect an increase in interest
spread income attributable to growth in fixed annuity policy
reserves and wider interest margins. Interest spread is the
differential between net investment income and interest credited
on policyholder account balances. Interest spreads vary depending
on crediting rates offered by competitors, performance of the
investment portfolio, changes in market interest rates and other
factors. The following table depicts the interest margins in the
Fixed Annuities segment for the three and nine month periods
ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- ------------- ------------- --------------
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net investment income (average pre-tax yield) 8.20% 8.22% 8.18% 8.23%
Interest credited (average crediting rates) 6.10 6.27 6.12 6.30
------------- ------------- ------------- --------------
2.10% 1.95% 2.06% 1.93%
============= ============= ============= ==============
</TABLE>
For fourth quarter 1997 and into 1998, interest margins on
individual annuities, which comprise 45% of fixed annuity policy
reserves, are expected to narrow. This margin compression
reflects the impact of first year bonus crediting rate programs
and the maturity of certain investments yielding above current
market rates. Interest margins on group annuities, which comprise
55% of fixed annuity policy reserves are expected to remain near
1997 levels.
Fixed annuity policy reserves increased to $13.97 billion as of
September 30, 1997 compared to $13.22 billion a year ago. The
growth reflects increased fixed annuity sales in the financial
institutions and public sector channels. Third quarter 1997 sales
were up 74% to $570.1 million compared to $326.7 million in third
quarter 1996. Year-to-date, fixed annuity sales were $1.54
billion in 1997 compared to $1.13 billion in 1996.
15
<PAGE> 16
Third quarter 1997 sales included $453.5 million in variable
annuity contract premiums allocated to the fixed option, compared
to $217.4 million for the third quarter of 1996. This increase
reflects the impact of a 1.00% first-year bonus crediting rate on
the BEST OF AMERICA - America's Vision product. This bonus rate
was introduced in July 1997 and is planned to continue through
November 1997. Through nine months of 1997, sales included $1.16
billion of premiums allocated to the fixed option under a
variable contract, compared to $883.8 million in 1996.
The decrease in other benefits and claims reflects a $13.0
million charge in the third quarter of 1996 related to reserve
strengthening in the immediate annuity line due to changes in
estimated profitability based on revised assumptions for
mortality and reinvestment rates. Amortization of DAC reflects a
reduction in third quarter 1996 of $6.0 million due to changes in
estimates of expected future profits as a result of favorable
investment spread and persistency experience. Higher operating
expenses reflect growth in policies in-force.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance products, that
provide a death benefit and may also allow the customer to build
cash value on a tax-deferred basis. The following table
summarizes selected unaudited income statement data for the
Company's Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
LIFE INSURANCE SELECTED INCOME STATEMENT DATA
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policy charges $ 26.9 $ 21.6 25% $ 77.1 $ 62.7 23%
Life insurance premiums 43.1 42.2 2 132.8 129.8 2
Net investment income 48.4 43.4 12 138.9 130.0 7
Other income 0.2 0.1 100 0.4 0.3 33
---------- ----------- --------- ---------- ----------- ---------
118.6 107.3 11 349.2 322.8 8
---------- ----------- --------- ---------- ----------- ---------
Benefits and expenses:
Interest credited 19.5 17.7 10 56.5 52.4 8
Other benefits and claims 34.7 33.1 5 110.8 105.6 5
Policyholder dividends 9.1 8.6 6 31.3 31.3 -
Amortization of deferred policy
acquisition costs 10.0 11.6 (14) 32.3 32.2 -
Other operating expenses 24.4 19.9 23 66.7 55.2 21
---------- ----------- --------- ---------- ----------- ---------
97.7 90.9 7 297.6 276.7 8
---------- ----------- --------- ---------- ----------- ---------
Operating income before federal
income tax expense $ 20.9 $ 16.4 27% $ 51.6 $ 46.1 12%
========== =========== ========= ========== =========== =========
</TABLE>
Life Insurance segment results reflect revenue growth in the
variable universal life insurance line driven by a steady
increase in policy reserves partially offset by higher operating
expenses associated with technology-related costs in the
traditional life insurance lines. Variable universal life
insurance policy charges were $14.8 million in third quarter
1997, an increase of $5.3 million compared to $9.5 million in
third quarter 1996. For the nine months ended September 30, 1997
variable universal life insurance policy charges were $40.7
million compared to $26.6 million for the same period last year
reflecting an increase of $14.1 million.
16
<PAGE> 17
Total Life Insurance segment policy reserves increased 15% to
$3.28 billion at September 30, 1997 compared to $2.84 billion a
year ago. Reserves underlying variable universal life insurance
products represent $926.9 million, or 28% of total reserves as of
September 30, 1997 compared to $562.6 million, or 20% of total
reserves as of September 30, 1996. Total Life Insurance segment
sales were $118.2 million and $384.4 million for the three and
nine month periods ended September 30, 1997 compared to $99.2
million and $296.3 million for the same periods a year ago. Sales
of variable universal life insurance products totaled $204.2
million or 53% of year-to-date 1997 sales compared to $111.8
million or 38% of sales during the first nine months of 1996
demonstrating the Company's focus on variable products. Included
in year-to-date 1997 variable universal life insurance sales of
$204.2 million were $50.0 million of bank-owned life insurance
sales. As of September 30, 1997, $96.0 million of bank-owned life
insurance premium was pending. The related policies are expected
to be issued during fourth quarter 1997.
Corporate and Other
The following table summarizes selected unaudited income
statement data for the Company's Corporate and Other segment for
the periods indicated.
<TABLE>
<CAPTION>
CORPORATE AND OTHER SELECTED INCOME STATEMENT DATA
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
---------- ----------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net investment income $38.2 $38.6 (1)% $112.6 $111.8 1%
Other income 14.9 10.5 42 45.2 45.5 (1)
---------- ----------- --------- ---------- ------------ ---------
53.1 49.1 8 157.8 157.3 -
---------- ----------- --------- ---------- ------------ ---------
Benefits and expenses:
Interest credited 30.4 26.9 13 87.5 80.7 8
Other benefits and claims - - - - (1.0) NM
Interest expense 8.0 - 100 18.0 - 100
Other operating expenses 15.3 11.5 33 47.6 46.8 2
---------- ----------- --------- ---------- ------------ ---------
53.7 38.4 40 153.1 126.5 21
---------- ----------- --------- ---------- ------------ ---------
Operating income before federal
income tax expense $(0.6) $10.7 NM $ 4.7 $ 30.8 (85)%
========== =========== ========= ========== ============ =========
</TABLE>
----------
NM - Not meaningful.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, investment management fees and other revenues
earned from Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments,
commissions and other income earned by the marketing and
distribution subsidiaries of the Company and net investment
income and policy charges from group annuity contracts issued to
Nationwide Insurance Enterprise employee and agent benefit plans.
The decreases in operating income for the period to period
comparisons primarily relate to interest expense on the Notes and
Capital Securities issued in March 1997 and the impact on net
investment income related to the Special Dividends. On a pro
forma basis (See "Effects of Special Dividends, Equity Offerings
and Fixed Income Offerings" for a discussion of pro forma
adjustments), operating income before federal income tax expense
was $0.3 million for the first nine months of 1997 compared to
break-even for the first nine months of 1996.
17
<PAGE> 18
In addition to the operating revenues presented in the table
above, the Company also reports realized gains and losses on
investments in the Corporate and Other segment. Net realized
losses on investments were $4.8 million in third quarter 1997
compared to realized losses of $5.1 million in third quarter
1996. On a year-to date basis, the Company reported net realized
gains of $4.3 million in both 1997 and 1996. Realized gains in
1997 include $14.4 million recognized when securities of $850.0
million were paid to Nationwide Corp. as a dividend on February
24, 1997. See note 3 to the unaudited consolidated financial
statements. Also, during 1997, the Company recorded realized
losses of $5.2 million and $11.0 million during the third and
second quarter, respectively, related to the write-down of a
single corporate bond investment due to deterioration in the
credit quality of the issuer.
LIQUIDITY AND CAPITAL RESOURCES
NFS is an insurance holding company whose principal asset is the
common stock of NLIC. The principal sources of funds for NFS to
pay principal, interest, dividends, and operating expenses are
existing cash and investments, and dividends from NLIC and other
subsidiaries. State insurance laws generally restrict the ability
of insurance companies to pay cash dividends in excess of certain
prescribed limitations without prior approval. The payment of
dividends by NLIC may also be subject to restrictions set forth
in the insurance laws 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 NFS and its stockholders. NFS currently does not expect such
regulatory requirements to impair its ability to pay operating
expenses and dividends in the future.
As a result of the $850 Million Dividend paid on February 24,
1997 and the dividend by NLIC of the stock of certain
subsidiaries that do not operate in the long-term savings and
retirement market, any dividend paid by NLIC during the
twelve-month period immediately following the $850 Million
Dividend would be an extraordinary dividend under Ohio insurance
laws. Accordingly, no such dividend could be paid without prior
regulatory approval. The Company has no reason to believe that
any reasonably foreseeable dividend to be paid by NLIC would not
receive the required approval.
The Company's principal sources of funds are premiums and other
considerations paid, contract charges earned, net investment
income received and proceeds from investments called, redeemed or
sold. The principal uses of these funds are the payment of
benefits on annuity contracts and life insurance policies,
operating expenses, commissions, and the purchase of investments.
Net cash provided by operating activities (reflecting principally
(i) premiums and contract charges collected, less (ii) benefits
paid on life insurance products, plus (iii) income collected on
invested assets, less (iv) commissions and other general expenses
paid) was $214.5 million and $331.9 million through September 30,
1997 and 1996, respectively. Net cash used in investing
activities (principally reflecting investments purchased less
investments called, redeemed or sold) was $1.64 billion and
$506.4 million through September 30, 1997 and 1996, respectively.
Net cash provided by financing activities (principally reflecting
net proceeds from the Equity Offering and the Fixed Income
Offerings in 1997 only and deposits to investment product and
universal life insurance product account balances less
withdrawals from such account balances) was $1.49 billion and
$252.3 million through September 30, 1997 and 1996, respectively.
Also available as a source of funds to the Company is a $600.0
million revolving credit facility entered into by NLIC and
Nationwide Mutual Insurance Company in August 1996 with a five
year term with a group of national financial institutions. In
September 1997, the credit agreement was amended to include NFS
as a party to and borrower under the agreement.
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 payments.
On August 13, 1997 NFS declared a dividend of $0.06 per common
share with a record date of October 1, 1997. The dividend,
totaling $7.7 million, was paid October 15, 1997. NFS also made a
dividend payment totaling $7.7 million on July 15, 1997.
18
<PAGE> 19
INVESTMENTS
General
The Company's assets are divided between separate account and
general account assets. As of September 30, 1997, $36.79 billion
(or 63%) of the Company's total assets were held in separate
accounts and $21.52 billion (or 37%) were held in the Company's
general account, including $19.21 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 fund
options available within the variable annuity products sold by
the Company. All of the investment risk in the Company's separate
account assets is borne by the Company's customers, with the
exception of $322.7 million of policy reserves as of September
30, 1997 ($280.2 million as of December 31, 1996) for which the
Company bears the investment risk.
Fixed Maturity Securities
As of September 30, 1997, general account fixed maturity
securities available-for-sale were $12.74 billion (or 66%) of the
carrying value of consolidated general account invested assets.
As of such date, public and private fixed maturity securities
available-for-sale constituted $8.47 billion (or 66%) and $4.27
billion (or 34%), respectively, of total general account fixed
maturity securities available-for-sale.
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale were as follows as of September 30,
1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S. government
corporations and agencies $ 328.8 6.4 - 335.2
Obligations of states and political
subdivisions 0.3 - - 0.3
Debt securities issued by foreign
governments 89.6 2.3 (0.6) 91.3
Corporate securities 8,095.7 321.7 (12.5) 8,404.9
Mortgage-backed securities 3,799.2 112.3 (4.5) 3,907.0
------------- ------------- ------------- -------------
$12,313.6 442.7 (17.6) 12,738.7
============= ============= ============= =============
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale were as follows as of December 31,
1996:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S. government
corporations and agencies $ 275.7 4.8 (1.3) 279.2
Obligations of states and political
subdivisions 6.2 0.5 - 6.7
Debt securities issued by foreign
governments 100.7 2.1 (0.9) 101.9
Corporate securities 7,999.3 285.9 (33.7) 8,251.5
Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3
------------- ------------- ------------- -------------
$11,970.9 384.7 (51.0) 12,304.6
============= ============= ============= =============
</TABLE>
19
<PAGE> 20
The National Association of Insurance Commissioners (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 in class 1 being of the highest quality. Of
the Company's general account fixed maturity securities, 97% were
in the highest two NAIC Designations as of September 30, 1997.
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 as of September 30, 1997 and
December 31, 1996.
<TABLE>
<CAPTION>
As of September 30, 1997 As of December 31, 1996
--------------------------- ---------------------------
NAIC Rating Agency Carrying % of Carrying % of
Designation (1) Equivalent Designation (2) Value Total Value Total
---------------- ----------------------------- --------------- ----------- --------------- -----------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 8,657.3 67.9% $ 8,453.4 68.7%
2 Baa 3,747.5 29.4 3,629.9 29.5
3 Ba 276.9 2.2 166.6 1.3
4 B 47.6 0.4 49.7 0.4
5 Caa and lower 4.1 - 10.9 0.1
6 In or near default 11.3 0.1 - -
--------------- ----------- --------------- -----------
$12,744.7 100.0% $12,310.5 100.0%
=============== =========== =============== ===========
</TABLE>
----------
(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) Comparison's 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.
During the third and second quarters of 1997, the Company
recorded write-downs related to a single corporate bond
investment due to deterioration in the credit quality of the
issuer. Prior to the write-down the bond had an amortized cost of
$27.5 million. The write-down resulted in realized losses of $5.2
million and $11.0 million in the third and second quarter of
1997, respectively.
The Company maintains significant general account investments in
mortgage-backed securities (MBSs). The Company's general account
MBS investments include residential MBSs and multi-family
mortgage pass-through certificates. As of September 30, 1997,
MBSs were $3.91 billion (or 31%) 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.
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 collateralized mortgage
obligations (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 September 30, 1997, $2.66 billion
(or 68%) 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.
20
<PAGE> 21
The following table sets forth the distribution by investment type
of the Company's general account MBS portfolio as of September 30,
1997 and December 31, 1996.
<TABLE>
<CAPTION>
As of September 30, 1997 As of December 31, 1996
----------------------------- -----------------------------
Carrying % of Carrying % of
(in millions of dollars) Value Total Value Total
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Accrual $ 50.8 1.3% $ 41.4 1.1%
Planned Amortization Class 2,662.3 68.1 2,970.6 81.0
Sequential 11.6 0.3 2.5 0.1
Scheduled 163.2 4.2 167.2 4.6
Targeted Amortization Class 90.1 2.3 87.7 2.4
Very Accurately Defined Maturity 563.3 14.4 395.9 10.8
Multi-family Mortgage Pass-through Certificates 365.7 9.4 - -
--------------- ----------- --------------- -----------
$3,907.0 100.0% $3,665.3 100.0%
=============== =========== =============== ===========
</TABLE>
Pursuant to the Company's investment policies, the Company does
not invest in derivative securities other than MBSs.
Mortgage Loans
As of September 30, 1997, general account mortgage loans were
$5.14 billion (or 27%) of the carrying value of consolidated
general account invested assets.
In June 1997, the Company exchanged $359.7 million of multi-family
mortgage loans with the Federal Home Loan Mortgage Corporation
(FHLMC) for FHLMC multi-family mortgage pass-through certificates
supported by the exchanged loans. The transaction resulted in the
reclassification of the exchanged amount from mortgage loans on
real estate to fixed maturity securities available-for-sale on
the Company's consolidated balance sheet. No gain or loss was
recognized as a result of the exchange.
The following table sets forth the delinquency, foreclosure and
restructured commercial mortgage loan experience for the Company
and for the life insurers reporting to the American Council of
Life Insurance (ACLI) for the periods indicated.
<TABLE>
<CAPTION>
For the For the For the
nine months ended nine months ended year ended
September 30, 1997 September 30, 1996 December 31, 1996
------------------------ ----------------------- ------------------------
Company ACLI (1) Company ACLI (2) Company ACLI (2)
------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Delinquent (3) 0.48% - % 0.59% 2.51% 0.79% 1.79%
In foreclosure (4) 0.48 - 0.59 1.59 0.79 1.10
Restructured (5) 1.17 - 1.14 7.54 1.11 6.81
------------ ----------- ----------- ----------- ----------- ------------
Subtotal 1.65 - 1.73 10.05 1.90 8.60
Foreclosed - year to date 0.80 - 0.36 0.91 0.35 1.01
------------ ----------- ----------- ----------- ----------- ------------
Total 2.45% - % 2.09% 10.96% 2.25% 9.61%
============ =========== =========== =========== =========== ============
</TABLE>
----------
(1) ACLI data for the nine months ended September 30, 1997 are
not yet available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey
of Mortgage Loan Delinquencies and Foreclosures," numbers
1359 and 1367, dated November 25, 1996 and March 6, 1997,
respectively.
(3) Commercial mortgage loans are classified by the Company
and the ACLI as delinquent when they are 60 days or more
past due.
(4) Delinquent includes loans in foreclosure; therefore,
subtotal and total lines exclude "In foreclosure" amounts.
(5) Commercial mortgage loans are classified by the Company and
the ACLI as restructured when they are in good standing,
but the basic terms have been modified as a result of an
actual or anticipated delinquency.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance pricing and sales practices. A number of these
lawsuits have resulted in substantial jury awards or settlements.
In October 1996, a policyholder of NLIC filed a complaint in
Alabama state court against NLIC and an agent of NLIC (Wayne M.
King v. Nationwide Life Insurance Company and Danny Nix) related
to the sale of a whole life policy on a "vanishing premium" basis
and seeking unspecified compensatory and punitive damages. The
King case was dismissed with prejudice on June 25, 1997 pursuant
to an agreement between the parties. In February 1997, NLIC was
named as a defendant in a lawsuit filed in New York Supreme Court
also related to the sale of whole life policies on a "vanishing
premium" basis (John H. Snyder v. Nationwide Mutual Insurance
Company, Nationwide Mutual Insurance Co. and Nationwide Life
Insurance Co.). The plaintiff in such lawsuit seeks to represent
a national class of NLIC's policyholders and claims unspecified
compensatory and punitive damages. This lawsuit is in the early
stage and has not been certified as a class action. On April 22,
1997, a motion to dismiss the Snyder complaint in its entirety
was filed by the defendants, and the plaintiff has opposed such
motion. There can be no assurance that any litigation relating to
pricing and sales practices will not have a material adverse
effect on the Company in the future.
ITEM 2 CHANGES IN SECURITIES
NFS reacquired 615, 658 and 644 shares of its Class A Common
Stock, par value $0.01 per share in brokerage transactions on the
last business day of July, August and September, respectively,
for an aggregate purchase price of $18,860.04, $18,769.80 and
$19,060.93, respectively. All amounts include brokers'
commissions. Pursuant to the Stock Retainer Plan for Non-Employee
Directors, 615, 658 and 644 shares of Class A Common Stock were
subsequently reissued by NFS on the last business day of July,
August and September, respectively, at a price of $30.50, $28.50
and $29.125 per share, respectively, to NFS' directors as partial
payment of the $50,000 annual retainer paid by NFS to the
directors in consideration of serving as directors of the
Company. The issuance of such shares is exempt from registration
under the Securities and Exchange Act of 1933, as amended,
pursuant to Rule 506 promulgated thereunder.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
22
<PAGE> 23
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) Exhibits:
10 Material Contracts:
(a) Amendment dated as of September 8, 1997 to the Credit
Agreement dated as of August 12, 1996 among Nationwide
Mutual Insurance Company, Nationwide Life Insurance
Company, the Banks party thereto and Morgan Guaranty
Trust Company of New York, as Administrative Agent. 25
11 Computation of Earnings Per Share 30
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
On October 8, 1997, the Company filed a Current Report on
Form 8-K concerning the announcement of the planned
introduction of a new individual variable annuity
product.
</TABLE>
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE FINANCIAL SERVICES, INC.
-----------------------------------
(Registrant)
Date: November 13, 1997 /s/ Mark R. Thresher
------------------------------------------
Mark R. Thresher, Vice President - Finance
and Treasurer (Chief Accounting Officer)
24
<PAGE> 1
Exhibit 10(a)
CONFORMED COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of September 8, 1997 to the Credit Agreement dated
as of August 12, 1996 (the "Credit Agreement") among NATIONWIDE MUTUAL
INSURANCE COMPANY, NATIONWIDE LIFE INSURANCE COMPANY, the BANKS party thereto
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent.
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the Credit Agreement to
enable Nationwide Financial Services, Inc. ("NFS") to become a party to the
Credit Agreement and a Borrower thereunder;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference
to "hereof", "hereunder", "herein" and "hereby" and each other similar
reference and each reference to "this Agreement" and each other similar
reference contained in the Credit Agreement shall, after this Amendment becomes
effective, refer to the Credit Agreement as amended hereby.
SECTION 2. Addition of Borrower. On and after the Amendment Effective
Date (as defined in Section 7 hereof), NFS shall be a party to the Credit
Agreement and, subject to the terms and conditions thereof as amended hereby,
shall have all the rights and obligations of a Borrower thereunder.
SECTION 3. Particular Amendments. The Credit Agreement is hereby
amended as follows:
(a) The definition of Availability Percentage is amended to
read in its entirety as follows:
"Availability Percentage" means, with respect to any
Borrower, 33-1/3%; provided that if the Commitments are
terminated with respect to one or more but not all Borrowers
pursuant to Section 6.1, the Availability Percentage of the
Borrower or Borrowers with respect to which the Commitments
are terminated shall be zero and the Availability Percentage
of the other Borrower or Borrowers shall be the quotient of
100% divided by the number of such other Borrowers.
(b) The first sentence of the definition of Borrower is
amended to read as follows:
"Borrower" means any of Nationwide Mutual,
Nationwide Life or NFS.
25
<PAGE> 2
(c) The following definition is added to Section 1.1 in its
appropriate alphabetical position:
"Consolidated Tangible Net Worth" means at any date
the consolidated shareholders' equity of NFS and its
consolidated subsidiaries plus any unrealized losses or less
any unrealized gains (in each case to the extent reflected in
the determination of such consolidated shareholders' equity)
related, directly or indirectly, to securities
available-for-sale, as determined in accordance with
Statement of Financial Accounting Standards No. 115 (or any
successor statements or amendments thereto) (in each case as
affected by any subsequent relevant pronouncements of the
Financial Accounting Standards Board or, if, and to the
extent applicable, the Securities and Exchange Commission)
and less Intangible Assets, all determined as of such date.
For purposes of this definition, the term "Intangible Assets"
means the amount (to the extent reflected in determining such
consolidated shareholders' equity) of (i) all write-ups
(other than write-ups resulting from foreign currency
translations and write-ups of assets of a going concern
business made within twelve months after the acquisition of
such business) subsequent to December 31, 1996 in the book
value of any asset owned by NFS or a consolidated subsidiary
and (ii) all unamortized debt discount and expense,
unamortized deferred charges, goodwill, patents, trademarks,
service marks, trade names, anticipated future benefit of tax
loss carry-forwards, copyrights, organization or
developmental expenses and other intangible assets; provided
however that deferred policy acquisition costs shall not be
considered Intangible Assets for purposes of this definition.
(d) The definition of Material Affiliate is amended by adding
the phrase "or NFS" immediately following the reference to Nationwide
Life in clause (ii) thereof.
(e) The definition of Material Subsidiary is amended by
adding the phrase "or NFS" immediately following the reference to
Nationwide Life in clause (ii) thereof.
(f) The following definition is added to Section 1.1 in its
appropriate alphabetical position:
"NFS" means Nationwide Financial Services, Inc., a
Delaware corporation, and its successors.
(g) The definition of Statutory Surplus is amended by
changing the phrase "either Borrower" to "either Nationwide Mutual or
Nationwide Life".
(h) Section 1.2 is amended (i) by redesignating the existing
text thereof as subsection (a) and adding the following language at
the commencement of the first sentence thereof: "In the case of
Nationwide Mutual and Nationwide Life," and (ii) by adding the
following new subsection (b):
(b) In the case of NFS, unless otherwise specified
herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be
made, and all financial statements required to be delivered
hereunder shall be prepared in accordance with generally
accepted accounting principles as in effect from time to
time, applied on a basis consistent (except for changes
concurred in by such Borrower's independent public
accountants) with the most recent audited consolidated
financial statements of such Borrower and its consolidated
subsidiaries delivered to the Banks, provided that, if such
Borrower notifies the Administrative Agent that such Borrower
wishes to amend any covenant in Article 5 to eliminate the
effect of any change in generally accepted accounting
principles on the operation of such covenant (or if the
Administrative Agent notifies such Borrower that the Required
Banks wish to amend Article 5 for such purpose), then such
Borrower's compliance with such covenant shall be determined
on the basis of generally accepted accounting principles in
effect immediately before the relevant change in generally
accepted accounting principles became effective, until either
such notice is withdrawn or such covenant is amended in a
manner satisfactory to the Borrowers and the Required Banks.
(i) The word "Adjusted" in clause (ii) of Section 2.7(d) is
deleted.
26
<PAGE> 3
(j) The following new subsection (c) of Section 4.1 is added:
(c) In the case of NFS, such Borrower is a
corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its
incorporation, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
(k) Section 4.4(b) is amended by the addition of the phrase
"(or, in the case of NFS, prior to September 1, 1997)" immediately
following the phrase "prior to the date hereof".
(l) Section 5.1(a)(i) is amended by changing the phrase "each
Borrower" to "each of Nationwide Mutual and Nationwide Life".
(m) Section 5.1(a)(ii) is amended (i) by adding the phrase
"and NFS" immediately following the first reference to Nationwide
Life, (ii) by substituting the phrase "such Borrower" for the second
reference to Nationwide Life and (iii) by adding the phrase "(if any")
immediately following the phrase "previous fiscal year".
(n) Section 5.1(b) is amended (i) by adding the phrase "(i)
in the case of Nationwide Mutual and Nationwide Life," immediately
preceding the phrase "the quarterly statement of such Borrower" and
(ii) by adding the following clause (ii) thereto:
and (ii) in the case of NFS, the consolidated financial
statements of NFS as of the end of such fiscal quarter,
setting forth in each case in comparative form the figures
for the corresponding quarter of the previous fiscal year (if
any), all certified (subject to normal year-end adjustments)
as to fairness of presentation, generally accepted accounting
principles and consistency by the chief financial officer or
the chief accounting officer of NFS;
(o) Section 5.1(e) is amended by adding the phrase "IS OR"
immediately preceding the word "becomes".
(p) Section 5.8(a) is amended by substituting the term
"$10,000,000" for clauses (i) and (ii) thereof.
(q) Section 5.8(j) is amended by adding the phrase "(i) in
the case of Nationwide Mutual or Nationwide Life," immediately
preceding the phrase Statutory Surplus and by adding the phrase "and
(ii) in the case of NFS, Consolidated Tangible Net Worth" immediately
following the phrase Statutory Surplus.
(r) The following new Section 5.10 is added to Article 5:
SECTION 5.10. Additional Covenants of NFS. (a)
NFS agrees that Consolidated Tangible Net Worth will at no
time be less than $1,225,000,000.
(b) NFS agrees that it will at all times maintain
ownership, free and clear of any Lien, of 100% of the
outstanding capital stock of Nationwide Life.
(s) Section 6.1(l) is amended by adding the phrase "(i) in
the case of Nationwide Mutual or Nationwide Life," immediately
preceding the phrase Statutory Surplus and by adding the phrase "and
(ii) in the case of NFS, Consolidated Tangible Net Worth" immediately
following the phrase Statutory Surplus.
(t) Section 6.1(m) is amended by adding the phrase "or NFS"
immediately following the reference to Nationwide Life.
(u) Each reference in the Agreement to "either Borrower" or
"both Borrowers", if not amended pursuant to the preceding subsections
of this Section 3, is changed to "any Borrower" or "all Borrowers",
respectively.
27
<PAGE> 4
SECTION 4. Representations of Borrowers. Each Borrower represents and
warrants that (i) the representations and warranties of such Borrower set forth
in Article 4 of the Credit Agreement will be true on and as of the Amendment
Effective Date and (ii) no Default with respect to such Borrower will have
occurred and be continuing on such date.
SECTION 5. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
SECTION 7. Effectiveness. This Amendment shall become effective on
the date when the following conditions are met (the "Amendment Effective
Date"):
(a) the Administrative Agent shall have received from each of the
Borrowers and the Banks a counterpart hereof signed by such party or facsimile
or other written confirmation (in form satisfactory to the Administrative
Agent) that such party has signed a counterpart hereof;
(b) the Administrative Agent shall have received a duly executed Note
of NFS for the account of each Bank, dated on or before the Amendment Effective
Date and complying with the provisions of Section 2.5 of the Agreement;
(c) the Administrative Agent shall have received an opinion of Druen,
Dietrich, Reynolds & Koogler, counsel for the Borrowers, substantially to the
effect of Exhibit E to the Agreement with reference to this Amendment and the
Agreement as amended hereby; and
(d) the Administrative Agent shall have received all documents it may
reasonably request relating to the existence of the Borrowers, the corporate
authority for and the validity of this Amendment, the Agreement and the Notes,
and any other matters relevant hereto, all in form and substance satisfactory
to the Administrative Agent.
The Administrative Agent shall promptly notify the Borrowers and the Banks of
the Amendment Effective Date, and such notice shall be conclusive and binding
upon all parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
NATIONWIDE MUTUAL INSURANCE COMPANY
By /s/DUANE M. CAMPBELL
---------------------------
Title: Vice President and
Treasurer
NATIONWIDE LIFE INSURANCE COMPANY
By /s/DUANE M. CAMPBELL
---------------------------
Title: Vice President and
Treasurer
NATIONWIDE FINANCIAL SERVICES, INC.
By /s/MARK R. THRESHER
-------------------------------
Title: Vice President Finance &
Treasurer
Address: One Nationwide Plaza
Columbus, OH 43251
Facsimile: (614) 249-2739
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/JERRY J. FALL
-------------------------
Title: Vice President
THE BANK OF NEW YORK
By /s/MELANIE SHOROFSKY
---------------------------
Title: Vice President
28
<PAGE> 5
BANK ONE, COLUMBUS, NA
By /s/DOUGLAS H. KLAMFOTH
--------------------------------------------
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By /s/CYNTHIA W. PRIEST
--------------------------------------------
Title: Vice President
MELLON BANK, N.A.
By /s/JOANNA PATTERSON
--------------------------------------------
Title: Officer
THE CHASE MANHATTAN BANK
By /s/PETER PLATTEN
--------------------------------------------
Title: Vice President
FLEET NATIONAL BANK
By /s/MICHAEL M. SINISGALLI
--------------------------------------------
Title: Vice President
THE HUNTINGTON NATIONAL BANK
By /s/CINDY L. KEITCH
--------------------------------------------
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By /s/SHARON F. WEINSTEIN
--------------------------------------------
Title: Vice President
NATIONAL CITY BANK OF COLUMBUS
By /s/TERESA HALSELL
--------------------------------------------
Title: Assistant Vice President
THE NORTHERN TRUST COMPANY
By /s/LISA M. TAYLOR
--------------------------------------------
Title: Officer
ROYAL BANK OF CANADA
By /s/Y.J. BERNARD
--------------------------------------------
Title: Manager
STATE STREET BANK AND TRUST COMPANY
By /s/EDWARD M. ANDERSON
--------------------------------------------
Title: Vice President
WELLS FARGO BANK, N.A.
By /s/GARRETT BAKER
--------------------------------------------
Title: Vice President
29
<PAGE> 1
EXHIBIT 11
Nationwide Financial Services, Inc.
Computation of Earnings Per Share
For Periods Ended September 30, 1997, and 1996
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 65.4 56.4 189.5 173.8
=============== =============== =============== ===============
Average common shares outstanding 128,528,136 104,745,000 122,516,402 104,745,000
Dilutive effect of stock options 65,161 - 34,978 -
--------------- --------------- --------------- ---------------
Average common shares and common
share equivalents 128,593,297 104,745,000 122,551,380 104,745,000
Additional dilutive effect of stock options - - 244 -
--------------- --------------- --------------- ---------------
Fully diluted shares 128,593,297 104,745,000 122,551,624 104,745,000
=============== =============== =============== ===============
Net income per common share outstanding $ 0.51 0.54 1.55 1.66
=============== =============== =============== ===============
Primary earnings per share $ 0.51 0.54 1.55 1.66
=============== =============== =============== ===============
Fully diluted earnings per share $ 0.51 0.54 1.55 1.66
=============== =============== =============== ===============
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Nationwide
Financial Services Inc.'s Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1997, and is qualified in its entirety by reference to such
unaudited consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 12,739
<DEBT-CARRYING-VALUE> 6
<DEBT-MARKET-VALUE> 6
<EQUITIES> 74
<MORTGAGE> 5,135
<REAL-ESTATE> 305
<TOTAL-INVEST> 19,208
<CASH> 105
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,570
<TOTAL-ASSETS> 58,312
<POLICY-LOSSES> 17,818
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 369
<POLICY-HOLDER-FUNDS> 60
<NOTES-PAYABLE> 298
100
0
<COMMON> 1
<OTHER-SE> 2,021
<TOTAL-LIABILITY-AND-EQUITY> 58,312
156
<INVESTMENT-INCOME> 1,051
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 50
<BENEFITS> 891
<UNDERWRITING-AMORTIZATION> 127
<UNDERWRITING-OTHER> 296
<INCOME-PRETAX> 291
<INCOME-TAX> 102
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
