<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 MARCH 31, 1997 COMMISSION FILE NO. 1-12785
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 31-1486870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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 ___ NO _X_
CLASS A COMMON STOCK - 23,781,136 SHARES ISSUED AND OUTSTANDING AS OF
MAY 12, 1997
(Title of Class)
CLASS B COMMON STOCK - 104,745,000 SHARES ISSUED AND OUTSTANDING AS OF
MAY 12, 1997
(Title of Class)
<PAGE> 2
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
----------------- -----------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $11,477,682 in 1997; $11,970,878 in 1996) $11,593,856 12,304,639
Equity securities (cost $53,025 in 1997; $43,890 in 1996) 67,178 59,131
Fixed maturity securities held-to-maturity, at amortized cost (fair value $5,945
in 1997; $5,944 in 1996) 5,901 5,877
Mortgage loans on real estate, net 5,354,367 5,272,119
Real estate, net 293,229 265,759
Policy loans 380,457 371,816
Other long-term investments 23,205 28,668
Short-term investments 768,343 9,261
----------- ----------
18,486,536 18,317,270
----------- ----------
Cash 71,545 43,183
Accrued investment income 204,724 210,182
Deferred policy acquisition costs 1,504,257 1,366,509
Investment in subsidiaries classified as discontinued operations - 485,707
Other assets 382,116 420,685
Assets held in Separate Accounts 28,016,363 26,926,702
----------- ----------
$48,665,541 47,770,238
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $17,309,496 17,179,060
Policyholders' dividend accumulations 363,823 361,401
Other policyholder funds 59,913 60,073
Accrued federal income tax:
Current 53,466 29,201
Deferred 119,691 158,896
----------- ----------
173,157 188,097
----------- ----------
Dividend payable - 485,707
Long-term debt 298,366 -
Other liabilities 566,464 437,465
Liabilities related to Separate Accounts 28,016,363 26,926,702
----------- ----------
46,787,582 45,638,505
----------- ----------
NFS-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of NFS 100,000 -
----------- ----------
Shareholders' equity:
Class A common shares, $.01 par value. Authorized 750,000,000 shares,
23,780,136 shares issued and outstanding 238 -
Class B common shares, $.01 par value. Authorized 750,000,000 shares,
104,745,000 shares issued and outstanding 1,047 1,047
Additional paid-in capital 629,082 551,422
Retained earnings 1,074,620 1,405,672
Unearned compensation (1,451) -
Unrealized gains on securities available-for-sale, net 74,423 173,592
----------- ----------
1,777,959 2,131,733
----------- ----------
$48,665,541 47,770,238
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues:
Investment product and universal life insurance product policy charges $120,449 88,603
Traditional life insurance premiums 55,446 53,788
Net investment income 341,379 329,531
Realized gains on investments 21,042 3,568
Other income 14,452 18,297
-------- -------
552,768 493,787
-------- -------
Benefits and expenses:
Benefits and claims 296,370 289,996
Provision for policyholders' dividends on participating policies 10,646 10,780
Amortization of deferred policy acquisition costs 43,394 36,129
Interest expense 1,887 -
Other operating expenses 94,366 79,015
-------- -------
446,663 415,920
-------- -------
Income from continuing operations before federal income tax expense 106,105 77,867
-------- -------
Federal income tax expense:
Current 22,964 26,041
Deferred 14,193 543
-------- -------
37,157 26,584
-------- -------
Income from continuing operations 68,948 51,283
Income from discontinued operations (less federal income tax expense of $2,516
in 1996) - 4,195
-------- -------
Net income $ 68,948 55,478
======== =======
Per common share:
Income from continuing operations $ .63 .49
Net income $ .63 .53
Weighted average number of common shares outstanding (in thousands) 110,294 104,745
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Three Months Ended March 31, 1997 and 1996
(in thousands 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 $ - 1,047 680,690 1,550,689 - 384,304 2,616,730
Net income - - - 55,478 - - 55,478
Unrealized losses on
securities available-for-
sale, net - - - - - (194,161) (194,161)
---------- ---------- ----------- ------------- -------------- ------------- -------------
Balance, March 31, 1996 $ - 1,047 680,690 1,606,167 - 190,143 2,478,047
========== ========== =========== ============= ============== ============= =============
1997:
Balance, January 1, 1997 - 1,047 551,422 1,405,672 - 173,592 2,131,733
Issuance of Class A
common shares 236 - 523,922 - - - 524,158
Net income - - - 68,948 - - 68,948
Dividend to shareholder - - (450,000) (400,000) - - (850,000)
Class A common shares
issued for long-term
incentive plans 2 - 3,738 - (1,483) - 2,257
Amortization of unearned
compensation - - - - 32 - 32
Unrealized losses on
securities available-for-
sale, net - - - - - (99,169) (99,169)
---------- ---------- ----------- ------------- -------------- ------------- -------------
Balance, March 31, 1997 $ 238 1,047 629,082 1,074,620 (1,451) 74,423 1,777,959
========== ========== =========== ============= ============== ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 68,948 55,478
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs (115,033) (106,334)
Amortization of deferred policy acquisition costs 43,394 36,130
Amortization and depreciation 2,143 9,057
Realized gains on investments, net (21,042) (3,568)
Deferred federal income tax liability 14,193 17,875
Decrease (increase) in accrued investment income 5,458 (11,143)
Decrease (increase) in other assets 40,422 (18,018)
(Decrease) increase in policyholder account balances (1,126) 28,354
Increase in policyholders' dividend accumulations 2,422 3,676
Increase in accrued federal income tax payable 24,265 24,970
Increase in other liabilities 128,999 69,358
Other, net 5,870 (20,449)
----------- -----------
Net cash provided by operating activities 198,913 85,386
----------- -----------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 214,193 335,167
Proceeds from sale of securities available-for-sale 195,526 92,520
Proceeds from repayments of mortgage loans on real estate 89,325 73,494
Proceeds from sale of real estate 20,865 1,433
Proceeds from repayments of policy loans and sale of other invested assets 12,930 13,666
Cost of securities available-for-sale acquired (757,822) (478,307)
Cost of mortgage loans on real estate acquired (195,377) (173,242)
Cost of real estate acquired (20,570) (1,628)
Policy loans issued and other invested assets acquired (17,833) (19,501)
Short-term investments, net (760,217) (3,428)
----------- -----------
Net cash used in investing activities (1,218,980) (159,826)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of Class A common shares 524,158 -
Net proceeds from issuance of company obligated, mandatorily redeemable
preferred securities of subsidiary trust 98,347 -
Net proceeds from issuance of long-term debt 294,522 -
Increase in investment product and universal life insurance product
account balances 798,468 664,799
Decrease in investment product and universal life insurance product
account balances (667,066) (552,957)
----------- -----------
Net cash provided by financing activities 1,048,429 111,842
----------- -----------
Net increase in cash 28,362 37,402
Cash, beginning of period 43,183 10,055
----------- -----------
Cash, end of period $ 71,545 47,457
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 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 Company had no
unexercised stock options or other securities convertible into common
shares which would be dilutive to earnings per share during any of the
periods presented.
(2) Initial Public Offerings
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 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' 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.
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.
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.
7
<PAGE> 8
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
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 market value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
(4) Pro Forma Results of Operations
The following unaudited pro forma information presents the
results of operations of the Company for the three months ended March
31, 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, the $50.0 million dividend paid to Nationwide
Corp. by the Company on December 31, 1996, as if each had been
consummated at the beginning of the period 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
March 31,
--------------------------
(in millions of dollars, except per share amounts) 1997 1996
-------- -------
<S> <C> <C>
Revenues $ 554.5 490.8
Benefits and expenses 452.8 423.9
-------- -------
Income from continuing operations before federal income tax expense 101.7 66.9
Federal income tax expense 35.6 22.7
-------- -------
Income from continuing operations 66.1 44.2
Income from discontinued operations, net of federal income tax expense - 4.2
-------- -------
Net income $ 66.1 48.4
======== =======
Per common share:
Income from continuing operations $ .51 .35
Net income $ .51 .38
Weighted average number of common shares outstanding (in millions) 128.4 128.4
</TABLE>
8
<PAGE> 9
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 Nationwide Financial
Services, Inc. (NFS) and its wholly owned subsidiaries
(collectively referred to as "the Company") should be read in
conjunction with the unaudited consolidated financial statements
and related notes included elsewhere herein.
The Company has three product segments: Variable Annuities,
Fixed Annuities and Life Insurance. In addition, the Company
reports corporate income and expenses and investments and related
investment income supporting capital not specifically allocated to
its product segments in a Corporate and Other segment.
RESULTS OF OPERATIONS
Policy Charges. 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 first quarter 1997, policy charges were $120.4 million, a 36%
increase from $88.6 million in first quarter 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 35% from $20.81
billion as of March 31, 1996 to $28.02 billion as of March 31,
1997.
Life Insurance Premiums. Life insurance premiums are earned
primarily from traditional life insurance in the Life Insurance
segment, but are also earned from the sale of life-contingent
immediate annuities in the Fixed Annuities segment. Life
insurance premiums were $55.4 million in the first quarter of
1997, a 3% increase from $53.8 million in the first quarter of
1996. The increase is attributable to an increase in traditional
life insurance in-force.
Net Investment Income. 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
$341.4 million in first quarter 1997 compared to $329.5 million
in first quarter 1996. Net investment income has increased as a
result of growth in the Fixed Annuities segment.
Realized Gains on Investments. Realized gains on investments are
not considered by the Company to be a recurring source 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 gains on investments
were $21.0 million in the first quarter of 1997 compared to $3.6
million in first quarter 1996. Realized gains in 1997 include
$14.4 million recognized when securities of $850.0 million were
paid to Nationwide Corporation (Nationwide Corp.) as a dividend
on February 24, 1997. See note 3 to the unaudited consolidated
financial statements.
Other Income. Other income consists of investment management fees
earned by the Company from the management of Nationwide mutual
funds, as well as commission and other income earned by the
Company's marketing and distribution subsidiaries. Net investment
management fees earned on Nationwide mutual fund assets selected
as investment options for variable annuity products and variable
life insurance products are reported in the Variable Annuities
segment and Life Insurance segment, respectively. The Company
also sells its mutual fund products separately, and investment
management fees from these assets are included in the Corporate
and Other segment. Other income was $14.5 million in the first
quarter of 1997, down from $18.3 million in the first quarter of
1996. The decrease in other income resulted from a decrease in
commission income.
9
<PAGE> 10
Benefits and Claims. Benefits and claims consist primarily of
interest credited on fixed annuity products and life insurance
benefits in the Life Insurance segment. Benefits and claims
increased 2% to $296.4 million in first quarter 1997 from $290.0
million in first quarter 1996, reflecting increases in both
interest credited on fixed annuities and life insurance benefits.
Policyholder Dividends. Policyholder dividends are paid on
certain participating life insurance policies. Policyholder
dividends were $10.6 million in the first quarter of 1997, a 2%
decrease from first quarter 1996.
Amortization of Deferred Policy Acquisition Costs (DAC).
Amortization of DAC increased 20% from $36.1 million in the first
quarter of 1996 to $43.4 million in first quarter 1997. The
increase is primarily attributable to an increase in variable
annuity policy reserves and gross profit margins.
Interest Expense. Interest expense of $1.9 million reported in
the first quarter of 1997 represents interest on the Notes and
Capital Securities accrued from the date of closing. See note 2
to the unaudited consolidated financial statements.
Operating Expenses. Operating expenses were $94.4 million in
first quarter 1997, a 19% increase from first quarter 1996
operating expenses of $79.0 million. 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 the Life
Insurance segment have increased due to investments in
information technology discussed below.
Federal Income Tax Expense. Federal income tax expense was $37.2
million and $26.6 million, representing effective tax rates of
35.0% and 34.1% for first quarter 1997 and 1996, respectively.
The lower effective tax rate in 1996 is the result of a greater
benefit from charitable donations of appreciated securities.
Net Operating Income. Net operating income is net income,
excluding realized gains and losses on investments (net of
related federal income tax) and discontinued operations. Net
operating income for the first quarter of 1997 was $55.1 million,
a 15% increase from first quarter 1996 of $47.9 million.
Discontinued Operations. Discontinued operations include the
results of (i) the three Nationwide Life Insurance Company (NLIC)
subsidiaries whose outstanding common stock, on September 24,
1996, was declared as a dividend to Nationwide Corp. and (ii)
100% of 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 $4.2 million in first quarter 1996. There was no
income from discontinued operations in first quarter 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.
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".
10
<PAGE> 11
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). 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 (the
Notes 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 was retained by NFS and is available 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 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 effect of the
Special Dividends, the Equity Offering and the Fixed Income
Offerings was approximately a $4.2 million reduction in net
investment income for first quarter 1997. In addition, the
Company reported interest expense on the Notes and Capital
Securities of $1.9 million in the first quarter of 1997.
The following pro forma information presents the results of
operations of the Company for the three months ended March 31,
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 period 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
March 31,
--------------------------
(in millions of dollars, except per share amounts) 1997 1996
-------- ------
<S> <C> <C>
Revenues $ 554.5 490.8
Benefits and expenses 452.8 423.9
-------- ------
Income from continuing operations before federal income tax expense 101.7 66.9
Federal income tax expense 35.6 22.7
-------- ------
Income from continuing operations 66.1 44.2
Income from discontinued operations, net of federal income tax expense - 4.2
-------- ------
Net income $ 66.1 48.4
======== ======
Per common share:
Income from continuing operations $ .51 .35
Net income $ .51 .38
Weighted average number of common shares outstanding (in millions) 128.4 128.4
</TABLE>
Realized gains on investments contributed $.10 and $.03 to
the above per common share amounts for the three months ended
March 31, 1997 and 1996, respectively.
11
<PAGE> 12
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 and investments and related
investment income supporting capital not specifically allocated
to its product segments 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.
The table below presents summary financial data for the Company
by segment.
<TABLE>
<CAPTION>
As of and for the
three months ended
March 31
--------------------------
(in millions of dollars) 1997 1996
--------- --------
<S> <C> <C>
REVENUES:
Variable Annuities $ 86.8 61.9
Fixed Annuities 284.8 270.9
Life Insurance 114.6 105.4
Corporate and Other 45.5 52.0
--------- --------
Total operating revenues 531.7 490.2
Realized gains on investments 21.0 3.6
--------- --------
Total revenues $ 552.7 493.8
========= ========
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
INCOME TAX EXPENSE:
Variable Annuities $ 29.4 18.2
Fixed Annuities 37.6 33.6
Life Insurance 17.0 14.6
Corporate and Other 1.1 7.9
--------- --------
Total operating income 85.1 74.3
Realized gains on investments 21.0 3.6
--------- --------
Total income from continuing operations before federal
income tax expense $ 106.1 77.9
========= ========
POLICY RESERVES:
Variable Annuities (1) $25,300.6 18,770.2
Fixed Annuities (1) 13,613.9 12,920.6
Life Insurance 3,020.5 2,720.4
Corporate and Other 3,325.9 2,806.0
--------- --------
Total policy reserves (2) $45,260.9 37,217.2
========= ========
</TABLE>
----------
(1) Policy reserves related to the fixed option under the
Company's variable annuity contracts are included in Fixed
Annuities. As of March 31, 1997 and 1996, such policy
reserves totaled $9.41 billion and $8.76 billion,
respectively.
(2) Total policy reserves as presented here are net of
reinsurance and therefore differ from the amounts set forth
in the Company's unaudited consolidated financial statements.
12
<PAGE> 13
Variable Annuities
Revenues. Revenues in the Variable Annuities segment consist of
policy charges and other income. Policy charges consist of asset
fees, which are generally a percentage of separate account assets
deposited for the purchase of variable annuities; administration
fees, which are generally a specific dollar amount per contract;
and surrender fees, which are charged against assets withdrawn
during a specified period (generally the first seven years) of
variable annuity contracts. The separate account assets generated
by the Variable Annuities segment do not contribute to net
investment income of the Company because the customer receives
the investment benefit and bears the investment risk of these
assets. Other income includes net investment management fees
earned on separate account assets held in mutual funds managed by
a subsidiary of the Company.
Revenues were $86.8 million in the first quarter of 1997, a 40%
increase from the first quarter of 1996. Revenues have increased
as a result of growth in policyholder account balances (policy
reserves) related to this segment and the corresponding growth in
asset fees, which were $78.8 million and $56.8 million in the
first quarter of 1997 and 1996, respectively. Total policy
charges, which include asset fees, as a percentage of variable
annuity policy reserves have remained stable during the periods
presented, reflecting no or minimal changes in the levels of
policy charges for most variable annuity products.
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense was $29.4 million in the first quarter of 1997, a 62%
increase from the first quarter of 1996. The increase is due to
growth in variable annuity policy reserves and the corresponding
increase in policy charges, combined with expense levels which
have decreased as a percentage of revenues. Total expenses were
$56.2 million and $42.5 million, or 59 basis points and 64 basis
points of average variable annuity policy reserves, for the first
quarter of 1997 and 1996, respectively. During the period, the
Company has controlled its operating expenses by taking advantage
of economies of scale and by increasing productivity through
investments in technology.
Policy Reserves. During the first quarter of 1997, variable
annuity policy reserves increased $1.02 billion to $25.30
billion, while during the first quarter of 1996, variable annuity
policy reserves increased $2.01 billion to $18.77 billion.
Deposits were $1.83 billion and $1.69 billion in the first
quarter of 1997 and 1996, respectively. During the first quarter
of 1997, variable annuity policy reserves reflect market
depreciation of $160.5 million compared to market appreciation of
$608.5 million in the first quarter of 1996. Withdrawals,
surrenders, net transfers and policy charges resulted in a
decrease in policy reserves of $645.9 million and $285.1 million
in the first quarter of 1997 and 1996, respectively. Management
does not believe the increase in withdrawals and surrenders is
the start of a trend towards higher withdrawal and surrender
rates.
Statutory Premiums and Deposits. For first quarter 1997,
statutory premiums and deposits were $1.83 billion, an increase
of 9% from $1.69 billion in first quarter 1996. Tax-qualified
premiums and deposits were $1.31 billion for first quarter 1997
compared to $1.12 billion for first quarter 1996. Growth in
premiums and deposits was strongest in the public sector and
pensions markets, which are tax-qualified. Premiums and deposits
through the investment dealer channel were down 12%. Management
believes volatile market conditions during the first quarter of
1997 contributed to the decrease in deposits. Midway through
first quarter 1997, the Company introduced a 75 basis point
commission enhancement for the investment dealer channel.
Management has extended the enhancement through June 1997.
13
<PAGE> 14
Fixed Annuities
Revenues. Revenues in the Fixed Annuities segment consist mainly
of net investment income, which is earned on invested assets
allocated to support fixed annuity policy reserves and
shareholders' equity allocated to such segment. Total revenues
were $284.8 million and $270.9 million in the first quarter of
1997 and 1996, respectively. Net investment income was $269.5
million and $256.1 million, representing average pre-tax yields
on the assets supporting this segment of 8.17% and 8.15%, in the
first quarter of 1997 and 1996, respectively.
Interest Credited. Interest credited on account balances was
$200.9 million and $199.7 million, representing crediting rates
of 6.09% and 6.35%, for the first quarter of 1997 and 1996,
respectively. The differential between net investment income and
interest credited on account balances resulted in spreads of
$68.6 million and $56.4 million, or 2.08% and 1.80%, in the first
quarter of 1997 and 1996, respectively. Spreads vary depending on
crediting rates offered by competitors, performance of the
investment portfolio, changes in market interest rates and other
factors. The higher spread in the first quarter of 1997 is
primarily the result of an increase in interest rates during the
quarter after crediting rates had been set for the quarter in
December 1996. The Company does not expect to sustain this level
of spread in future periods.
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense was $37.6 million in the first quarter of 1997, a 12%
increase from the first quarter of 1996. The increase is due to
the increase in interest spread discussed above, offset by an
increase in expenses, including an increase in amortization of
deferred policy acquisition costs as a result of the increase in
interest spread for the quarter.
Policy Reserves. During the first quarter of 1997, fixed annuity
policy reserves increased $102.1 million to $13.61 billion as of
March 31, 1997, while during the first quarter of 1996, policy
reserves increased $136.6 million to $12.92 billion as of March
31, 1996. Statutory premiums and deposits were $560.4 million and
$441.8 million in the first quarter of 1997 and 1996,
respectively, while interest credited to policyholder account
balances was $200.9 million and $199.7 million, respectively.
Withdrawals, surrenders, benefits and net transfers reduced
policy reserves by $659.2 million and $504.9 million for the
first quarter of 1997 and 1996, respectively. The increase in
withdrawals is primarily attributable to a single, public sector
group annuity contract with reserves of $105.9 million. The loss
of a single large contract can impact the withdrawal rate for any
one period, and management does not expect the withdrawal rate to
continue at the same rate as the first quarter of 1997.
Statutory Premiums and Deposits. For first quarter 1997, statutory
premiums and deposits were $560.4 million, an increase of 27% from
$441.8 million in the first quarter of 1996. Tax-qualified
premiums and deposits increased 20% from $354.9 million in the
first quarter of 1996 to $424.9 million in the first quarter of
1997. Deposits through the financial institutions and public
sector/teachers channels accounted for increases of $69.5 million
and $84.5 million, respectively. The public sector channel
includes a deposit of $106.5 million from the transfer of assets
from Cook County, Illinois. The increase in deposits through the
financial institutions channel is a result of new bank
relationships added late in 1996.
Life Insurance
Revenues. Revenues in the Life Insurance segment consist of life
insurance premiums and policy charges, as well as net investment
income. Total revenues were $114.6 million and $105.4 million for
the first quarter of 1997 and 1996, respectively. The increase
is attributed to increases in life insurance in-force with the
majority of the growth coming from the variable universal life
product.
14
<PAGE> 15
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense was $17.0 million in the first quarter of 1997, a 16%
increase from $14.6 million in the first quarter of 1996. The
increase is primarily attributable to the increase in variable
universal life insurance and improved mortality experience. Total
revenues from variable universal life increased from $9.5 million
in the first quarter of 1996 to $14.7 million in the first
quarter of 1997. Partially offsetting the increased revenues and
lower benefits was an increase in expenses due to higher selling
related expenses and investments in technology to improve policy
administration.
Life Insurance In-Force. Life insurance in-force was $38.46
billion and $33.67 billion as of March 31, 1997 and 1996,
respectively. Of the growth in in-force from March 31, 1996 to
March 31, 1997, $3.34 billion is attributable to variable
universal life which comprises 23% of total in-force as of March
31, 1997.
Statutory Premiums. For first quarter 1997, statutory premiums
were $137.4 million, an increase of 41% from $97.2 million in the
first quarter of 1996. Premiums from the investment dealer
channel more than doubled to $62.9 million in the first quarter
of 1997, led by sales of bank-owned life insurance and flexible
premium variable universal life insurance products.
Corporate and Other
Revenues. Revenues in the Corporate and Other segment consist of
net investment income on invested assets not allocated to the
three product segments, all realized investment gains and losses,
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. Total
revenues excluding realized gains were $45.5 million for the
first quarter of 1997 compared to $52.0 million in the first
quarter of 1996. The decrease is attributable to lower commission
income and a reduction in net investment income as a result of
the Special Dividends. Realized gains on investments were $21.0
million and $3.6 million in the first quarter of 1997 and 1996,
respectively. Realized gains in 1997 include gains of $14.4
million from the transfer of securities to fund the $850 Million
Dividend.
Interest Expense. Interest expense of $1.9 million reported in
the first quarter of 1997 represents interest on the Notes and
Capital Securities accrued from the date of closing. See note 2
to the unaudited consolidated financial statements.
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense excluding realized gains and losses was $1.1 million
and $7.9 million for the first quarter of 1997 and 1996,
respectively. On a pro forma basis (See "Effects of Special
Dividends, Equity Offerings and Fixed Income Offerings" for a
discussion of pro forma adjustments), loss from continuing
operations before federal income tax expense excluding realized
gains and losses was $3.4 million and $3.0 million for the
first quarter of 1997 and 1996, respectively.
15
<PAGE> 16
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, dividends from NLIC and other
subsidiaries and payments from NLIC under a tax sharing
agreement. 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. However, NFS can give no
assurance that dividends will be declared or paid by NFS.
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 12-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 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 $198.9 million and $85.4 million for the first quarter
of 1997 and 1996, respectively. Net cash used in investing
activities (principally reflecting investments purchased less
investments called, redeemed or sold) was $1.22 billion and
$159.8 million in the first quarter of 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 $1.05
billion and $111.8 million for the first quarter of 1997 and
1996, respectively.
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.
INVESTMENTS
General
The Company's assets are divided between separate account and
general account assets. As of March 31, 1997, $28.02 billion (or
58%) of the Company's total assets were held in separate accounts
and $20.65 billion (or 42%) were held in the Company's general
account, including $18.49 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 $299.4 million
of policy reserves as of March 31, 1997 ($280.2 million as of
December 31, 1996) for which the Company bears the investment
risk.
16
<PAGE> 17
Fixed Maturity Securities
As of March 31, 1997, general account fixed maturity securities
available-for-sale were $11.59 billion (or 63%) of the carrying
value of consolidated general account invested assets. As of such
date, public and private fixed maturity securities
available-for-sale constituted $7.60 billion (or 66%) and $3.99
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 March 31,
1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities
and obligations of U.S. government
corporations and agencies $ 286.3 1.9 (3.9) 284.3
Obligations of states and political
subdivisions .3 - - .3
Debt securities issued by foreign
governments 87.9 1.0 (1.5) 87.4
Corporate securities 7,816.1 179.8 (84.5) 7,911.4
Mortgage-backed securities 3,287.1 55.1 (31.7) 3,310.5
--------- ----- ------ --------
$11,477.7 237.8 (121.6) 11,593.9
========= ===== ====== ========
</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>
Fixed maturity securities:
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 .5 - 6.7
Debt securities issued by foreign
governments 100.7 2.1 (.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>
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, 98% by
the carrying value were in the highest two NAIC Designations as
of March 31, 1997.
17
<PAGE> 18
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 March 31, 1997 and
December 31, 1996.
General Account Fixed Maturity Securities - Credit Quality
<TABLE>
<CAPTION>
As of March 31, 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 $ 7,870.3 67.8% $ 8,453.4 68.7%
2 Baa 3,546.4 30.6 3,629.9 29.5
3 Ba 145.2 1.3 166.6 1.3
4 B 29.1 0.2 49.7 0.4
5 Caa and lower 8.8 0.1 10.9 0.1
6 In or near default - - - -
--------- ----- --------- -----
$11,599.8 100.0% $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.
The Company maintains significant general account investments in
mortgage-backed securities (MBSs). The Company's general account
MBS investments include residential MBSs and commercial MBSs. As
of March 31, 1997, MBSs were $3.31 billion (or 29%) 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) 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 March 31, 1997, $2.60 billion (or
79%) of the carrying value of the general account MBS portfolio
was invested in planned amortization class CMOs (PACs). PACs are
securities whose cash flows are designed to remain constant over
a variety of mortgage prepayment environments. Other classes in
the CMO security are structured to accept the volatility of
mortgage prepayment changes, thereby insulating the PAC class.
18
<PAGE> 19
The following table sets forth the distribution by investment
type of the Company's general account MBS portfolio as of March
31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
General Account Mortgage-Backed Securities - Investment Type
As of March 31, 1997 As of December 31, 1996
----------------------------- -----------------------------
Carrying % of Carrying % of
(in millions of dollars) Value Total Value Total
--------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Accrual $ 42.0 1.3% $ 41.4 1.1%
Planned Amortization Class 2,603.3 78.6 2,970.6 81.0
Sequential 2.2 0.1 2.5 0.1
Scheduled 162.4 4.9 167.2 4.6
Targeted Amortization Class 85.9 2.6 87.7 2.4
Very Accurately Defined Maturity 414.7 12.5 395.9 10.8
-------- ----- -------- -----
$3,310.5 100.0% $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 March 31, 1997, general account mortgage loans were $5.35
billion (or 29%) of the carrying value of consolidated general
account invested assets.
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>
The Company and Life Insurance Industry Problem Loan Comparison
For the Three Months For the Three Months For the Year Ended
Ended March 31, 1997 Ended March 31, 1996 December 31, 1996
---------------------- --------------------- ---------------------
Company ACLI (1) Company ACLI (2) Company ACLI (2)
------------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Delinquent (3) 0.24% - % 0.54% 2.35% 0.79% 1.79%
In foreclosure (4) 0.24 - 0.54 1.32 0.79 1.10
Restructured (5) 1.09 - 1.33 7.99 1.11 6.81
---- --- ---- ----- ---- ----
Subtotal 1.33 - 1.87 10.34 1.90 8.60
Foreclosed - year to date 0.58 - 0.19 0.44 0.35 1.01
---- --- ---- ----- ---- ----
Total 1.91% - % 2.06% 10.78% 2.25% 9.61%
==== === ==== ===== ==== ====
</TABLE>
__________
(1) ACLI data for the three months ended March 31, 1997 are not
yet available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey
of Mortgage Loan Delinquencies and Foreclosures," numbers
1337 and 1367, dated June 4, 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.
19
<PAGE> 20
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. 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. 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 629 shares of its Class A Common Stock, par value
$.01 per share in a brokerage transaction on March 31, 1997, for
an aggregate purchase price of $16,764.60 (including
commissions). Pursuant to the Stock Retainer Plan for
Non-Employee Directors, 629 shares of Class A Common Stock were
subsequently reissued 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, on March
31, 1997, at a price of $26.50 per share. 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.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month
period ended March 31, 1997.
20
<PAGE> 21
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: March 15, 1997 /s/ Mark R. Thresher
--------------------------------------------------------
Mark R. Thresher, Vice President - Finance and Treasurer
(Chief Accounting Officer)
21
<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
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 11,593,856
<DEBT-CARRYING-VALUE> 5,901
<DEBT-MARKET-VALUE> 5,945
<EQUITIES> 67,178
<MORTGAGE> 5,354,367
<REAL-ESTATE> 293,229
<TOTAL-INVEST> 18,486,536
<CASH> 71,545
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,504,257
<TOTAL-ASSETS> 48,665,541
<POLICY-LOSSES> 17,309,496
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 363,823
<POLICY-HOLDER-FUNDS> 59,913
<NOTES-PAYABLE> 298,366
100,000
0
<COMMON> 1,285
<OTHER-SE> 1,776,674
<TOTAL-LIABILITY-AND-EQUITY> 48,665,541
55,446
<INVESTMENT-INCOME> 341,379
<INVESTMENT-GAINS> 21,042
<OTHER-INCOME> 14,452
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<EPS-PRIMARY> 0.63
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</TABLE>
