<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, 1998 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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
--- ---
The number of shares outstanding of each of the registrant's classes of common
stock on May 1, 1998 was as follows:
CLASS A COMMON STOCK (par value $0.01 per share) - 23,783,136 shares issued and
(Title of Class) outstanding
CLASS B COMMON STOCK (par value $0.01 per share) - 104,745,000 shares issued and
(Title of Class) outstanding
<PAGE> 2
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
<TABLE>
<CAPTION>
INDEX
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURE 28
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------ ------
<S> <C> <C>
REVENUES
Policy charges $159.0 $120.4
Life insurance premiums 53.2 55.4
Net investment income 365.8 341.4
Realized gains on investments 16.6 21.1
Other 19.7 14.5
------ ------
614.3 552.8
------ ------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 261.9 247.2
Other benefits and claims 46.3 49.2
Policyholder dividends on participating policies 10.8 10.6
Amortization of deferred policy acquisition costs 47.7 43.4
Interest expense on debt and capital securities of subsidiary trust 8.0 1.9
Other operating expenses 107.5 94.4
------ ------
482.2 446.7
------ ------
Income before federal income tax expense 132.1 106.1
Federal income tax expense 45.4 37.2
------ ------
Net income $ 86.7 $ 68.9
====== ======
NET INCOME PER COMMON SHARE
Basic $ 0.67 $ 0.63
Diluted $ 0.67 $ 0.63
Weighted average number of shares of common stock outstanding (in millions) 128.5 110.3
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
<CAPTION>
(UNAUDITED) DECEMBER 31,
MARCH 31, 1998 1997
-------------- ------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $12,918.0 in 1998; $12,732.9 in 1997) $13,362.1 $13,204.1
Equity securities (cost $75.7 in 1998; $67.8 in 1997) 90.8 80.4
Fixed maturity securities held-to-maturity, at amortized cost ($6.0 in 1997) -- 6.0
Mortgage loans on real estate, net 5,187.5 5,181.6
Real estate, net 286.9 311.4
Policy loans 426.1 415.3
Other long-term investments 23.9 25.2
Short-term investments 566.2 449.2
--------- ---------
19,943.5 19,673.2
--------- ---------
Cash 44.5 180.9
Accrued investment income 224.0 211.2
Deferred policy acquisition costs 1,756.7 1,665.4
Other assets 431.8 437.8
Assets held in Separate Accounts 43,327.4 37,724.4
--------- ---------
$65,727.9 $59,892.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $18,793.9 $18,702.8
Long-term debt 298.4 298.4
Other liabilities 1,015.9 943.1
Liabilities related to Separate Accounts 43,327.4 37,724.4
--------- ---------
63,435.6 57,668.7
--------- ---------
NFS-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of NFS 100.0 100.0
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 50.0 million shares; no shares
issued and outstanding -- --
Class A common stock, $.01 par value. Authorized 750.0 million shares,
23.8 million shares issued and outstanding 0.2 0.2
Class B common stock, $.01 par value. Authorized 750.0 million shares,
104.7 million shares issued and outstanding 1.0 1.0
Additional paid-in capital 629.2 629.2
Retained earnings 1,326.8 1,247.8
Unearned compensation (0.9) (1.1)
Accumulated other comprehensive income 236.0 247.1
--------- ---------
2,192.3 2,124.2
--------- ---------
$65,727.9 $59,892.9
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(in millions of dollars)
<CAPTION>
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME EQUITY
------- ------- ---------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
BALANCE, JANUARY 1, 1997 $-- $1.0 $ 551.4 $1,405.7 $-- $173.6 $2,131.7
Comprehensive income (loss):
Net income -- -- -- 68.9 -- -- 68.9
Other comprehensive income
(loss), net:
Unrealized losses on securities -- -- -- -- -- (89.4) (89.4)
Reclassification adjustment
for gains included in
net income -- -- -- -- -- (9.8) (9.8)
---- ---- ------- -------- ----- ------- --------
Other comprehensive income
(loss), net -- -- -- -- -- (99.2) (99.2)
---- ---- ------- -------- ----- ------- --------
Comprehensive income (loss) -- -- -- 68.9 -- (99.2) (30.3)
Issuance of Class A
common stock 0.2 -- 524.0 -- -- -- 524.2
Dividend to shareholder -- -- (450.0) (400.0) -- -- (850.0)
Other, net -- -- 3.7 -- (1.4) -- 2.3
---- ---- ------- -------- ----- ------ --------
BALANCE, MARCH 31, 1997 $0.2 $1.0 $ 629.1 $1,074.6 $(1.4) $ 74.4 $1,777.9
==== ==== ======= ======== ===== ====== ========
1998
BALANCE, JANUARY 1, 1998 $0.2 $1.0 $ 629.2 $1,247.8 $(1.1) $ 247.1 $2,124.2
Comprehensive income (loss):
Net income -- -- -- 86.7 -- -- 86.7
Other comprehensive income
(loss), net:
Unrealized losses on securities -- -- -- -- -- (9.2) (9.2)
Reclassification adjustment
for gains included in
net income -- -- -- -- -- (1.9) (1.9)
---- ---- ------- -------- ----- ------ --------
Other comprehensive income
(loss), net -- -- -- -- -- (11.1) (11.1)
---- ---- ------- -------- ----- ------ --------
Comprehensive income (loss) -- -- -- 86.7 -- (11.1) 75.6
Cash dividends declared -- -- -- (7.7) -- -- (7.7)
Other, net -- -- -- -- 0.2 -- 0.2
---- ---- ------- -------- ----- ------ --------
BALANCE, MARCH 31, 1998 $0.2 $1.0 $ 629.2 $1,326.8 $(0.9) $236.0 $2,192.3
==== ==== ======= ======== ===== ====== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 1998 and 1997
(in millions of dollars)
<CAPTION>
1998 1997
------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86.7 $ 68.9
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 261.9 247.2
Capitalization of deferred policy acquisition costs (131.2) (115.0)
Amortization of deferred policy acquisition costs 47.7 43.4
Amortization and depreciation (2.3) 2.1
Realized gains on investments, net (16.6) (21.1)
(Increase) decrease in accrued investment income (12.8) 5.5
Decrease in other assets 5.1 40.4
(Decrease) increase in policy liabilities (97.7) 1.3
Increase in other liabilities 78.6 167.5
Other, net (2.9) 5.9
------- ---------
Net cash provided by operating activities 216.5 446.1
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 442.1 214.2
Proceeds from sale of securities available-for-sale 224.4 195.5
Proceeds from maturity of securities held to maturity 6.0 --
Proceeds from repayments of mortgage loans on real estate 241.0 89.3
Proceeds from sale of real estate 30.3 20.9
Proceeds from repayments of policy loans and sale of other invested assets 10.0 12.9
Cost of securities available-for-sale acquired (852.1) (757.8)
Cost of mortgage loans on real estate acquired (241.7) (195.4)
Cost of real estate acquired (0.2) (20.6)
Policy loans issued and other invested assets acquired (14.9) (17.8)
Short-term investments, net (117.0) (760.2)
------- ---------
Net cash used in investing activities (272.1) (1,219.0)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Class A common stock -- 524.2
Net proceeds from issuance of NFS-obligated mandatorily redeemable
capital securities of subsidiary trust -- 98.3
Net proceeds from issuance of long-term debt -- 294.5
Cash dividends paid (7.7) --
Increase in investment product and universal life insurance product account balances 621.2 551.3
Decrease in investment product and universal life insurance product account balances (694.3) (667.1)
------- ---------
Net cash (used in) provided by financing activities (80.8) 801.2
------- ---------
Net (decrease) increase in cash (136.4) 28.3
Cash, beginning of period 180.9 43.2
------- ---------
Cash, end of period $ 44.5 $ 71.5
======= =========
</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, 1998
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Nationwide Financial Services, Inc. and subsidiaries (NFS or
collectively 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,
1997 included in the Company's 1997 Annual Report to Shareholders.
(2) Earnings per Share
------------------
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the
reporting period. Diluted earnings per share is the amount of earnings
for the period available to each share of common stock outstanding
during the reporting period adjusted for the potential issuance of
common shares for stock options.
The calculations of basic and diluted earnings per share for the three
months ended March 31, 1998 and 1997 are as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
(in millions, except per share amounts) 1998 1997
-------------------------------------------- ------ ------
Basic and diluted net income $ 86.7 $ 68.9
====== ======
Weighted average number of shares of common
stock outstanding 128.5 110.3
Dilutive effect of stock options 0.1 --
------ ------
Diluted average number of shares of common
stock outstanding 128.6 110.3
====== ======
Net income per common share:
Basic $ 0.67 $ 0.63
Diluted $ 0.67 $ 0.63
7
<PAGE> 8
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(3) Accounting Pronouncements
-------------------------
On January 1, 1998 the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 established standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income includes all changes in equity during
a period except those resulting from investments by shareholders and
distributions to shareholders and includes net income. Comprehensive
income for the three month periods ended March 31, 1998 and 1997 has
been presented in the accompanying unaudited consolidated statements of
shareholders' equity.
On January 1, 1998 the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." FAS 131 establishes
standards for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports. FAS
131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
FAS 131 did not affect results of operations or financial position, nor
did it affect the manner in which the Company defines its operating
segments. The segment information required for interim reports is
included in note 4.
In March 1998, The American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance intended to
standardize accounting practices for costs incurred to develop or
obtain computer software for internal use. Specifically, SOP 98-1
provides guidance for determining whether computer software is for
internal use and when costs incurred for internal-use software are to
be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998 with earlier application
encouraged. The adoption of SOP 98-1, planned for the first quarter of
1999, is not expected to have a material impact on the Company's
consolidated financial statements.
(4) Segment Disclosures
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
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 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 includes the fixed option under variable
annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
8
<PAGE> 9
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
In addition to the product segments, the Company reports corporate
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its distribution companies, revenues and
expenses of its investment advisor subsidiary (other than the portion
allocated to the Variable Annuities and Life Insurance segments),
revenues and expenses related to group annuity contracts sold to
Nationwide Insurance Enterprise employee and agent benefit plans,
interest expense on long-term debt and capital securities and all
realized gains and losses on investments in a Corporate and Other
segment.
The following table summarizes the financial results of the Company's
business segments for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
---------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $ 120.1 $ 289.3 $ 128.5 $ 59.8 $ 597.7
Benefits and expenses 70.8 244.3 107.3 59.8 482.2
--------- --------- -------- -------- ---------
Operating income before federal
income tax 49.3 45.0 21.2 -- 115.5
Realized gains on investments -- -- -- 16.6 16.6
--------- --------- -------- -------- ---------
Consolidated income before
federal income tax $ 49.3 $ 45.0 $ 21.2 $ 16.6 $ 132.1
========= ========= ======== ======== =========
Assets as of period end $40,742.8 $14,514.0 $4,228.6 $6,242.5 $65,727.9
========= ========= ======== ======== =========
1997
Operating revenue (1) $ 86.8 $ 284.8 $ 114.6 $ 45.5 $ 531.7
Benefits and expenses 57.4 247.2 97.6 44.5 446.7
--------- --------- -------- -------- ---------
Operating income before federal
income tax 29.4 37.6 17.0 1.0 85.0
Realized gains on investments -- -- -- 21.1 21.1
--------- --------- -------- -------- ---------
Consolidated income before
federal income tax $ 29.4 $ 37.6 $ 17.0 $ 22.1 $ 106.1
========= ========= ======== ======== =========
Assets as of period end $26,149.7 $13,858.9 $3,446.5 $5,210.4 $48,665.5
========= ========= ======== ======== =========
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
(5) Initial Public Offering and Pro Forma Results of Operations
-----------------------------------------------------------
In March 1997, NFS sold 23.6 million shares of its newly-issued Class A
common stock in an initial public offering (the IPO), receiving net
proceeds of $524.2 million. Concurrent with the IPO, NFS sold $300.0
million of senior notes and $100.0 million of capital securities of a
subsidiary trust in companion public offerings. In anticipation of the
IPO, NFS paid special dividends of $50.0 million in December 1996 and
$850.0 million in February 1997 to Nationwide Corporation (Nationwide
Corp.), the 100% owner of NFS prior to the IPO. Subsequent to the IPO,
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.
9
<PAGE> 10
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
The following table compares actual first quarter 1998 results with
unaudited pro forma results for the first quarter of 1997. The 1997
information includes pro forma adjustments to net investment income and
interest expense giving effect to (i) the IPO and companion offerings
of senior notes and capital securities of subsidiary trust and (ii) the
$850.0 million dividend paid by the Company in February 1997, as if
each had been consummated on January 1, 1997. This pro forma
information is not necessarily indicative of what the Company's results
would have been had the above transactions actually occurred on the
date indicated, or of future results of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
(in millions of dollars, except per share amounts) (ACTUAL) (PRO FORMA)
--------------------------------------------------- -------- -----------
<S> <C> <C>
Revenues $614.3 $554.4
Benefits and expenses 482.2 452.8
------ ------
Income before federal income tax expense 132.1 101.6
Federal income tax expense 45.4 35.6
------ ------
Net income $ 86.7 $ 66.0
====== ======
Net income per common share:
Basic $ 0.67 $ 0.51
Diluted $ 0.67 $ 0.51
Weighted average number of shares of common stock
outstanding (in millions) 128.5 128.4
</TABLE>
(6) Acquisitions
------------
In April 1998, NFS entered into an agreement to acquire all of the
outstanding shares of Morley Financial Services, Inc., an investment
management company, for $32.1 million in a transaction to be accounted
for as a purchase. The transaction is expected to be completed in the
second quarter of 1998.
10
<PAGE> 11
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.
NFS is 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. In March
1997, NFS sold 23.6 million shares of its newly-issued Class A common
stock in an initial public offering (the IPO), receiving net proceeds
of $524.2 million. Concurrent with the IPO, NFS sold $300.0 million of
senior notes and $100.0 million of capital securities of a subsidiary
trust in companion public offerings. In addition to actual results, the
Company presents pro forma results for 1997 adjusted for the public
offerings and for the $850.0 million dividend paid in February 1997 in
anticipation of the IPO as if they had occurred at the beginning of
1997.
Management's discussion and analysis 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. Forward-looking statements include, but
are not limited to statements which represent the Company's beliefs
concerning future levels of sales and redemptions of the Company's
products, investment yields and interest spread, or the earnings or
profitability of the Company's activities. 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. Readers are directed to consider these
and the other risks and uncertainties described in more detail
elsewhere in documents filed by the Company with the Securities and
Exchange Commission. The Company undertakes no obligation to update or
revise any forward-looking information, whether as a result of new
information, future events, or otherwise.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating income,
which excludes realized investment gains and losses. Net operating
income is commonly used in the insurance industry as a measure of
on-going earnings performance.
The following table reconciles the Company's reported net income to net
operating income for the first quarter of 1998 and 1997. In addition,
net operating income reflecting pro forma adjustments for the IPO,
companion offerings of senior notes and capital securities, and the
$850.0 million dividend as discussed previously is also presented for
1997. This pro forma information is not necessarily indicative of what
the Company's results would have been had the above transactions
actually occurred at the beginning of 1997, or of future results of the
Company. All earnings per share amounts are presented on a diluted
basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
(in millions of dollars, except per share amounts) 1998 1997
---------------------------------------------------- ------ ------
<S> <C> <C>
Net income $ 86.7 $ 68.9
Realized gains on investments, net of tax (10.8) (13.8)
------ ------
Net operating income 75.9 55.1
Pro forma adjustments, net of tax - (2.9)
------ ------
Pro forma net operating income $ 75.9 $ 52.2
====== ======
Net operating income per share (pro forma for 1997) $ 0.59 $ 0.41
====== ======
</TABLE>
11
<PAGE> 12
Revenues
Total revenues for the first quarter of 1998, excluding realized gains
on investments, increased to $597.7 million compared to $531.7 million
for the same period in 1997. Increases in policy charges and net
investment income were the key drivers to revenue growth.
Policy charges include asset fees, which are primarily earned on
variable annuity policy reserves; 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 premiums withdrawn during a
specified period of annuity and certain life insurance contracts; and
cost of insurance charges earned on universal life insurance products.
Policy charges for the first quarter of 1998 and 1997 were as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
(in millions of dollars) 1998 1997
----------------------------- ------ ------
Asset fees $113.2 $ 81.9
Administrative fees 16.9 14.4
Surrender fees 9.6 8.2
Cost of insurance charges 19.3 15.9
------ ------
Total policy charges $159.0 $120.4
====== ======
The growth in asset fees reflects a 55% increase in total separate
account assets which reached $43.33 billion as of March 31, 1998
compared to $28.02 billion a year ago. Steady growth in premiums and
market appreciation have contributed significantly to the increase in
separate account assets.
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 grew from $341.4 million in the first quarter of 1997 to $365.8
million in the first quarter of 1998 primarily due to increased
invested assets to support growth in fixed annuity policy reserves.
Fixed annuity policy reserves, which include the fixed option of
variable annuity contracts, increased to $14.23 billion as of the end
of the first quarter of 1998 compared to $14.19 billion as of year end
1997 and $13.61 billion a year ago.
The Company does not consider realized gains and losses on investments
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. Net realized gains on investments were
$16.6 million and $21.1 million for the first quarter of 1998 and 1997,
respectively.
Benefits and Expenses
Interest credited to policyholder account balances totaled $261.9
million in the first quarter of 1998 compared to $247.2 million in the
same period of 1997 and principally relates to fixed annuity products.
The growth in interest credited reflects the increase in fixed annuity
policy reserves previously discussed, partially offset by reduced
average crediting rates. The average crediting rate on fixed annuity
policy reserves was 5.95% during the first quarter of 1998 compared to
6.09% in the first quarter of 1997.
The significant growth in the Variable Annuities segment business is
the primary reason for the increase in amortization of deferred policy
acquisition costs (DAC) which totaled $47.7 million and $43.4 million
in the first quarter of 1998 and 1997, respectively.
12
<PAGE> 13
Operating expenses increased 14% to $107.5 million in the first quarter
of 1998 compared to $94.4 million in the first quarter of 1997
reflecting growth in the number of annuity and life insurance contracts
in force and the related increase in administrative processing costs.
Operating expenses also include costs of certain technology initiatives
including projects related to the Year 2000. Planned activities to
achieve Year 2000 compliance including system changes and replacements
remain on schedule for completion by the end of 1998. Compliance
testing will be completed in the first quarter of 1999.
Operating expenses include costs related to Year 2000 and the
development of a new policy administration system for traditional life
insurance products and other system enhancements. The Company incurred
costs of approximately $45 million on technology projects including
Year 2000 for full year 1997 and anticipates spending a comparable
amount in 1998.
Interest expense on senior notes and capital securities of subsidiary
trust totaled $8.0 million in the first quarter of 1998 compared to
$1.9 million in the year ago first quarter. The 1997 amount reflects
interest expense from the date of issuance in March 1997.
Federal income tax expense was $45.4 million and $37.2 million for the
first quarter of 1998 and 1997, respectively. These amounts represent
effective tax rates of 34.4% for the first quarter of 1998 and 35.1% in
1997.
Statutory Premiums and Deposits
The Company sells its products through a broad distribution network
comprised of wholesale and retail distribution channels. Wholesale
distributors are unaffiliated entities that sell the Company's products
to their own customer base and include independent broker/dealers,
national and regional wirehouses, financial institutions, pension plan
administrators and life specialists. The Company has access to over
1,000 independent broker/dealers and over 30,000 registered
representatives who sell individual and group variable annuities, fixed
annuities and variable life insurance in all 50 states and the District
of Columbia. The Company currently has relationships with over 180
financial institutions selling individual variable and fixed annuities
(under the Company's brand name and on a private-label basis), variable
universal life insurance and group pension products. Over 250 regional
pension plan administrators market the Company's group variable and
fixed annuities to employers sponsoring employee retirement programs.
Retail distributors are representatives of the Company who market
products directly to a customer base identified by the Company and
include exclusive retail sales representatives of the Company's
distribution subsidiaries and Nationwide Insurance Enterprise insurance
agents. The Company markets products on a retail basis to state and
local governments and to teachers through its subsidiary distribution
organizations. Approximately 4,300 licensed Nationwide Insurance
Enterprise insurance agents sell life insurance and individual
annuities primarily targeting holders of personal automobile and
homeowners' insurance policies issued by the Nationwide Insurance
Enterprise.
13
<PAGE> 14
Statutory premiums and deposits by distribution channel for the first
quarter of 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
(in millions of dollars) AMOUNT % AMOUNT %
--------------------------------------------- -------- ---- -------- ----
<S> <C> <C> <C> <C>
WHOLESALE CHANNELS
Independent broker/dealers $ 875.4 29.1% $ 855.9 33.9%
National and regional wirehouses (1) 86.0 2.9 -- --
Financial institutions 449.3 15.0 341.3 13.5
Pension plan administrators 734.1 24.4 607.9 24.0
Life specialists 89.9 3.0 30.0 1.2
-------- ----- -------- -----
Total wholesale channels 2,234.7 74.4 1,835.1 72.6
-------- ----- -------- -----
RETAIL CHANNELS
Exclusive retail sales representatives 586.0 19.5 549.7 21.8
Nationwide agents 183.1 6.1 141.9 5.6
-------- ----- -------- -----
Total retail channels 769.1 25.6 691.6 27.4
-------- ----- -------- -----
Total external premiums and deposits 3,003.8 100.0% 2,526.7 100.0%
======== ===== ======== =====
Nationwide Insurance Enterprise employee
and agent benefit plans 59.8 51.5
-------- --------
Total statutory premiums and deposits $3,063.6 $2,578.2
======== ========
</TABLE>
----------
(1) Prior to 1998, national and regional wirehouse sales were
included in independent broker/dealer sales.
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved sales growth of 19% in the first quarter of 1998
compared to the first quarter of 1997. The Company believes it is well
positioned to achieve its goal of 20% annual growth in external sales
in 1998.
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand, and include individual and group variable annuities
and variable life insurance. The BEST of AMERICA(R) products allow
customers to choose from among investment options managed by premier
mutual fund managers. The Company has also developed private label
variable and fixed annuity products in conjunction with other financial
services providers which allow those providers to sell individual
variable and fixed annuities with substantially the same features as
the Company's brand name products to their own customer bases under
their own brand name.
The Company also markets group deferred compensation retirement plans
to employees of state and local governments for use under Internal
Revenue Code (IRC) Section 457. The Company utilizes its sponsorship by
the National Association of Counties and The United States Conference
of Mayors when marketing IRC Section 457 products. In addition, the
Company utilizes an exclusive arrangement with the National Education
Association (NEA) to market tax-qualified annuities under IRC 403(b) to
NEA members. Variable annuities developed for the NEA members are sold
under the NEA Valuebuilder brand.
14
<PAGE> 15
External statutory premiums and deposits by product for the first
quarter of 1998 and 1997 are summarized as follows.
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997
------------------------------------- -------- --------
<S> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $1,120.0 $ 941.9
Group variable annuities 702.1 572.8
Variable universal life insurance 67.5 46.6
Private label annuities 235.2 230.2
IRC Section 457 annuities 548.7 522.2
The NEA Valuebuilder annuities 37.3 27.5
Traditional/Universal life insurance 59.3 60.8
Corporate-owned life insurance 89.9 30.0
Other 143.8 94.7
-------- --------
$3,003.8 $2,526.7
======== ========
</TABLE>
BUSINESS SEGMENTS
The Company reports three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate revenue and expenses, investments and related investment
income supporting capital not specifically allocated to its product
segments, revenues and expenses of its distribution companies, revenues
and expenses of its investment advisor subsidiary (other than the
portion allocated to the Variable Annuities and Life Insurance
segments), revenues and expenses related to group annuity contracts
sold to Nationwide Insurance Enterprise employee and agent benefit
plans and interest expense on long-term debt and capital securities in
a Corporate and Other segment. All information set forth below relating
to the Variable Annuities segment excludes the fixed option under
variable annuity contracts. Such information is included in the Fixed
Annuities segment.
The following table summarizes operating income before federal income
tax expense for the Company's business segments for the first quarter
of 1998 and 1997.
THREE MONTHS ENDED
MARCH 31,
----------------------
(in millions of dollars) 1998 1997
------------------------------- ------ -----
Variable Annuities $ 49.3 $29.4
Fixed Annuities 45.0 37.6
Life Insurance 21.2 17.0
Corporate and Other -- 1.0
------ -----
$115.5 $85.0
====== =====
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.
15
<PAGE> 16
The following table summarizes certain selected financial data for the
Variable Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
(in millions of dollars) 1998 1997
--------------------------------------------------- --------- ---------
<S> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Asset fees $ 109.5 $ 78.8
Administrative fees 6.1 5.1
Surrender fees 6.5 5.6
--------- ---------
Total policy charges 122.1 89.5
Net investment income and other (2) (2.0) (2.7)
--------- ---------
120.1 86.8
Benefits and expenses:
Benefits and claims 1.1 1.2
Amortization of DAC 26.4 19.5
Other operating expenses 43.3 36.7
--------- ---------
70.8 57.4
--------- ---------
Operating income before federal income tax $ 49.3 $ 29.4
========= =========
OTHER DATA (1)
Statutory premiums and deposits (3) $ 2,289.0 $ 1,828.9
Withdrawals $ 924.9 $ 669.9
Policy reserves as of period end $39,666.7 $25,300.6
Ratio of policy charges to average policy reserves 1.33% 1.44%
Pre-tax operating income to average policy reserves 0.54% 0.47%
</TABLE>
----------
(1) Excludes the fixed option under the variable annuity contracts
which is reported in the 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.
(3) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Variable annuity segment results reflect substantially increased asset
fee revenue partially offset by increases in DAC amortization and other
operating expenses. Asset fees increased to $109.5 million in the first
quarter of 1998, up 39% from $78.8 million in the same period a year
ago. The increase in asset fees is due to continued growth in variable
annuity policy reserve levels resulting from strong variable annuity
sales and market appreciation on investments underlying reserves.
Variable annuity policy reserves grew $5.18 billion during the first
quarter of 1998 reaching $39.67 billion as of March 31, 1998 and have
increased 57% compared to a year ago. The Company continues to sustain
high sales growth through deeper penetration of existing distribution
channels and expansion into new sales outlets. First quarter 1998
premiums grew across all distribution channels reaching $2.29 billion,
25% above year-ago first quarter sales of $1.83 billion and up 22% from
fourth quarter 1997 premiums of $1.87 billion.
16
<PAGE> 17
Favorable equity market conditions during the first quarter of 1998
also contributed significantly to the growth in variable annuity policy
reserves. Variable annuity policy reserves reflect market appreciation
of $3.82 billion during the first three months of 1998. Over the past
twelve months, variable annuity policy reserves have increased $9.19
billion as a result of market appreciation.
The growth in amortization of DAC and other operating expenses reflects
the overall growth in the variable annuity business.
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 includes the fixed option under variable
annuity contracts.
The following table summarizes certain selected financial data for the
Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
(in millions of dollars) 1998 1997
------------------------------------------------------- --------- ---------
<S> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Policy charges $ 3.3 $ 4.5
Life insurance premiums 8.8 10.8
Net investment income 277.2 269.5
--------- ---------
289.3 284.8
--------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 205.9 200.9
Other benefits and claims 7.3 11.2
Amortization of DAC 10.9 12.1
Other operating expenses 20.2 23.0
--------- ---------
244.3 247.2
--------- ---------
Operating income before federal income tax $ 45.0 $ 37.6
========= =========
OTHER DATA (1)
Statutory premiums and deposits (2) $ 498.1 $ 560.4
Withdrawals and benefits $ 545.8 $ 543.3
Policy reserves as of period end $14,229.1 $13,613.9
Net interest spread on general account policy reserves 2.06% 2.08%
Pre-tax operating income to average policy reserves 1.27% 1.11%
</TABLE>
----------
(1) Includes the fixed option under the variable annuity contracts.
(2) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
17
<PAGE> 18
Fixed annuity segment results reflect an increase in interest spread
income attributable to growth in fixed annuity policy reserves.
Interest spread is the differential between net investment income and
interest credited to policyholder account balances. Interest spreads
vary depending on market condition for crediting rates offered by
competitors, performance of the investment portfolio, changes in market
interest rates and other factors. The following table depicts the
interest spreads on general account policy reserves in the Fixed
Annuities segment for the first quarter of 1998 and 1997.
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---- ----
Net investment income 8.01% 8.17%
Interest credited 5.95 6.09
---- ---
2.06% 2.08%
==== ====
The Company experienced an increase in mortgage loan and bond
prepayment fees in the first quarter of 1998 and such income accounted
for approximately 9 basis points of the interest spread. The Company
anticipates interest spreads over the next several quarters to be
comparable to first quarter 1998, excluding the impact of mortgage loan
and bond prepayment income.
Fixed annuity policy reserves increased to $14.23 billion as of March
31, 1998 compared to $14.19 billion as of the end of 1997 and $13.61
billion a year ago.
First quarter fixed annuity sales fell to $498.1 million in 1998
compared to $560.4 million in 1997, reflecting consumer preference for
equity-linked variable products. Most of the Company's fixed annuity
sales are premiums allocated to the fixed option of variable annuity
contracts. First quarter 1998 fixed annuity sales include $402.4
million in premiums allocated to the fixed option under a variable
annuity contract, compared to $412.6 million in first quarter 1997.
The decrease in other benefits and claims in first quarter 1998
compared to a year ago is consistent with reduced premium levels.
18
<PAGE> 19
Life Insurance
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned 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 certain selected financial data for the
Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
(in millions of dollars) 1998 1997
----------------------------------------------------- --------- ---------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues:
Cost of insurance charges $ 19.3 $ 15.9
Other policy charges 11.5 8.4
--------- ---------
Total policy charges 30.8 24.3
Life insurance premiums 44.4 44.6
Net investment income 53.1 45.6
Other 0.2 0.1
--------- ---------
128.5 114.6
--------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 24.8 17.7
Other benefits and claims 37.9 36.8
Policyholder dividends 10.8 10.6
Amortization of DAC 10.4 11.8
Other operating expenses 23.4 20.7
--------- ---------
107.3 97.6
--------- ---------
Operating income before federal income tax $ 21.2 $ 17.0
========= =========
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 59.3 $ 60.8
Individual investment life insurance $ 67.5 $ 46.6
Corporate investment life insurance $ 89.9 $ 30.0
Policy reserves as of period end:
Traditional and universal life insurance $ 2,389.2 $ 2,313.6
Individual investment life insurance $ 1,031.1 $ 655.8
Corporate investment life insurance $ 316.6 $ 51.1
Life insurance in force:
Traditional and universal life insurance $27,326.7 $28,323.6
Individual investment life insurance $12,411.4 $ 8,732.3
Corporate investment life insurance $ 475.4 $ 74.1
</TABLE>
---------
(1) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Life Insurance segment results reflect increased policy charge revenue
driven by growth in investment life insurance in force and policy
reserves partially offset by higher expense levels.
19
<PAGE> 20
Investment life insurance (which includes individual variable universal
life insurance and corporate-owned life insurance products) policy
charges were $18.7 million in the first quarter of 1998, a 52% increase
compared to $12.3 million for the first quarter of 1997. The growth in
investment life insurance policy charges is attributable to growth in
individual investment variable life insurance policy reserves which
reached $932.6 million as of the end of the first quarter 1998 up
$355.5 million from a year ago. Policy reserve growth continues to be
driven by strong sales from both independent broker/dealers and
Nationwide Insurance Enterprise insurance agents. Investment life
insurance sales to individuals during the first quarter of 1998 reached
$67.5 million compared to $46.6 million in the first quarter of 1997.
The Company anticipates continued sales growth in 1998 for investment
life insurance products.
During the first quarter of 1998, the Company continued its entry into
the corporate-owned life insurance market recording $89.9 million in
corporate-owned life insurance premiums compared to $30.0 million in
the year ago first quarter. In addition, at the end of April 1998, the
Company had approximately $270 million of corporate-owned life
insurance premiums in process which will be issued during the second
and third quarters. As of March 31, 1998 the company had $316.6 in
corporate-owned life insurance policy reserves.
The increase in operating expenses is due to the increase in policies
in force and continued spending on a new policy administration system
for traditional life insurance policies.
Corporate and Other
The following table summarizes certain selected financial data for the
Corporate and Other segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
(in millions of dollars) 1998 1997
----------------------------------------------------- -------- --------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 43.3 $ 32.5
Other 16.5 13.0
-------- --------
59.8 45.5
-------- --------
Benefits and expenses:
Interest credited to policy reserves 31.2 28.6
Interest expense on debt and capital securities 8.0 1.9
Other operating expenses 20.6 14.0
-------- --------
59.8 44.5
-------- --------
Operating income before federal income tax (1) $ -- $ 1.0
======== ========
OTHER DATA
Statutory premiums and deposits (2) $ 59.8 $ 51.5
Withdrawals and benefits $ 54.3 $ 76.0
Policy reserves as of period end $4,034.0 $3,325.9
Nationwide retail mutual fund assets (3) $2,905.2 $2,163.9
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
(2) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
(3) Excludes mutual funds selected as investment options under the
Company's variable annuity and variable universal life
insurance contracts and mutual funds selected as investment
options under Nationwide Insurance Enterprise employee and
agent benefit plans.
20
<PAGE> 21
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.
Growth in interest spread income and other income was driven by
increased policy reserves related to Nationwide Insurance Enterprise
employee and agent benefit plans and strong first quarter 1998 sales
from the Company's investment advisor subsidiary, respectively.
The 1997 Corporate and Other segment results do not reflect a full
quarter of interest expense on the senior notes and capital securities
of subsidiary trust which were issued in March 1997. Stated on a pro
forma basis to reflect interest expense for a full quarter and to
adjust for the impact on net investment income related to the special
dividends paid in anticipation of the IPO, first quarter 1997 Corporate
and Other segment operating loss before federal income tax expense was
$3.4 million.
In addition to the operating revenues previously presented, the Company
also reports realized gains and losses on investments in the Corporate
and Other segment. The Company realized net investment gains of $16.6
million and $21.1 million during the first quarter of 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources demonstrate the overall financial
strength of the Company and its ability to generate strong cash flows
from its operations and borrow funds at competitive rates to meet
operating and growth needs. The Company's capital structure consists of
long-term debt, capital securities of subsidiary trust and equity,
summarized in the following table.
<TABLE>
<CAPTION>
AS OF
---------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
(in millions of dollars) 1998 1997 1997
------------------------------------------------------- --------- ------------ ---------
<S> <C> <C> <C>
Long-term debt $ 298.4 $ 298.4 $ 298.4
Capital securities of subsidiary trust 100.0 100.0 100.0
-------- -------- --------
Total long-term debt and capital securities 398.4 398.4 398.4
-------- -------- --------
Shareholders' equity, excluding accumulated other
comprehensive income 1,956.3 1,877.1 1,703.5
Accumulated other comprehensive income 236.0 247.1 74.4
-------- -------- --------
Total shareholders' equity 2,192.3 2,124.2 1,777.9
-------- -------- --------
Total capital $2,590.7 $2,522.6 $2,176.3
======== ======== ========
Total capital excluding accumulated other
comprehensive income $2,354.7 $2,275.5 $2,101.9
======== ======== ========
Long-term debt and capital securities to total capital 15.4% 15.8% 18.3%
Long-term debt and capital securities to total capital
excluding accumulated other comprehensive income 16.9% 17.5% 19.0%
</TABLE>
The Company's long-term debt bears interest at 8% per annum and matures
March 1, 2027. The capital securities of subsidiary trust are due March
1, 2037. There are no sinking fund requirements related to the debt or
capital securities.
21
<PAGE> 22
NFS is a holding company whose principal asset is the common stock of
NLIC. The principal sources of funds for NFS to pay 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 ability of NLIC to pay
dividends is subject to restrictions set forth in the insurance laws
and regulations of Ohio, its domiciliary state. The Ohio insurance laws
require life insurance companies to seek prior regulatory approval to
pay a dividend if the fair market value of the dividend, together with
that of other dividends made within the preceding 12 months, exceeds
the greater of (i) 10% of statutory-basis policyholders' surplus as of
the prior December 31 or (ii) the statutory-basis net income of the
insurer for the prior year. NLIC's statutory-basis policyholders'
surplus as of December 31, 1997 was $1.13 billion and statutory-basis
net income for 1997 was $111.7 million. The Ohio insurance laws also
require insurers to seek prior regulatory approval for any dividend
paid from other than earned surplus. 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 interest, dividends, operating expenses, and principal
in the future.
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 $216.5 million and $446.1 million for the first
quarter of 1998 and 1997, respectively. Net cash used in investing
activities (principally reflecting investments purchased less
investments called, redeemed or sold) was $272.1 billion and $1.22
billion in the first quarter of 1998 and 1997, respectively. Net cash
(used in) provided by financing activities (principally reflecting net
proceeds from the IPO and the companion offerings of senior notes and
capital securities of subsidiary trust in 1997 only and deposits to
investment product and universal life insurance product account
balances less withdrawals from such account balances) was ($80.8)
million and $801.2 million for the first quarter of 1998 and 1997,
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. The facility provides for several and not joint
liability with respect to any amount drawn by any party. To date, no
amounts have been drawn down on the facility. The facility provides
covenants, including, but not limited to, requirements that the Company
maintain consolidated tangible net worth, as defined, in excess of
$1.23 billion and NLIC maintain statutory surplus in excess of $875
million.
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 April 24, 1998 NFS purchased a 32% interest in The 401(k) Companies,
Inc. for $6.5 million. The 401(k) Companies, Inc. focuses on sales and
services to the large case market and will allow NFS to better
penetrate that market.
On April 29, 1998 NFS agreed to purchase Morley Financial Services,
Inc., an investment management company, for $32.1 million. Morley
Financial Services, Inc. specializes in stable-value products for
qualified retirement plans and currently manages $9.4 billion in
assets. The transaction is expected to close in the second quarter of
1998.
22
<PAGE> 23
INVESTMENTS
General
The Company's assets are divided between separate account and general
account assets. As of March 31, 1998, $43.33 billion (or 66%) of the
Company's total assets were held in separate accounts and $22.40
billion (or 34%) were held in the Company's general account, including
$19.94 billion of general account investments.
Separate account assets consist primarily of deposits from the
Company's variable annuity business. Most separate account assets are
invested in various mutual funds. All of the investment risk in the
Company's separate account assets is borne by the Company's customers,
with the exception of $414.7 million of policy reserves as of March 31,
1998 ($365.5 million as of December 31, 1997) for which the Company
bears all or a portion of the investment risk.
Fixed Maturity Securities
The following table summarizes the composition of the Company's general
account fixed maturity securities by category.
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------------- ----------------------
CARRYING % OF CARRYING % OF
(in millions of dollars) VALUE TOTAL VALUE TOTAL
----------------------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
U.S. government/agencies $ 370.1 2.8% $ 319.7 2.4%
Foreign governments 93.6 0.7 95.8 0.7
State and political subdivisions 0.9 -- 1.6 --
Mortgage-backed securities:
U.S. government/agencies 3,700.5 27.7 3,750.3 28.4
Non-government/agencies -- -- -- --
Corporate:
Public 4,759.8 35.6 4,597.3 34.8
Private 4,437.2 33.2 4,445.4 33.7
--------- ----- --------- -----
$13,362.1 100.0% $13,210.1 100.0%
========= ===== ========= =====
</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, 97% by the carrying value were in the highest two NAIC
Designations as of March 31, 1998.
23
<PAGE> 24
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, 1998 and December 31,
1997.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31, 1997
-------------------- -----------------------
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> <C>
1 Aaa/Aa/A $ 9,001.2 67.4% $ 8,815.3 66.7%
2 Baa 4,011.3 30.0 4,116.6 31.2
3 Ba 306.7 2.3 220.9 1.7
4 B 39.6 0.3 53.7 0.4
5 Caa and lower 3.3 -- 3.6 --
6 In or near default -- -- -- --
--------- ----- --------- -----
$13,362.1 100.0% $13,210.1 100.0%
========= ====== ========= =====
</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's general account mortgage-backed security (MBS)
investments include residential MBSs and multi-family mortgage
pass-through certificates. As of March 31, 1998, MBSs were $3.70
billion (or 28%) 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 March 31, 1998, $2.60 billion (or 70%) 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.
24
<PAGE> 25
The following table sets forth the distribution by investment type of
the Company's general account MBS portfolio as of March 31, 1998 and
December 31, 1997.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31, 1997
--------------------- -----------------------
CARRYING % OF CARRYING % OF
(in millions of dollars) VALUE TOTAL VALUE TOTAL
------------------------------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Planned Amortization Class $2,602.2 70.3% $2,645.3 70.5%
Very Accurately Defined Maturity 536.3 14.5 550.1 14.7
Multi-family Mortgage Pass-through
Certificates 234.4 6.3 235.2 6.3
Scheduled 156.7 4.2 160.6 4.3
Targeted Amortization Class 90.9 2.5 90.8 2.4
Accrual 46.0 1.3 48.5 1.3
Sequential 29.0 0.8 19.8 0.5
Other 5.0 0.1 -- --
-------- ----- -------- -----
$3,700.5 100.0% $3,750.3 100.0%
======== ===== ======== =====
</TABLE>
The Company has not invested in derivative securities other than MBSs.
Mortgage Loans
As of March 31, 1998, general account mortgage loans were $5.19 billion
(or 26%) 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>
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 DECEMBER 31, 1997
------------------ ------------------ -----------------
COMPANY ACLI (1) COMPANY ACLI (2) COMPANY ACLI (2)
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Delinquent (3) 0.19% --% 0.24% 1.63% 0.19% 0.90%
In foreclosure (4) 0.19 -- 0.24 1.03 0.19 0.58
Restructured (5) 0.69 -- 1.09 6.48 0.77 4.61
---- --- ---- ---- ---- ----
Subtotal 0.88 -- 1.33 8.11 0.96 5.51
Foreclosed - year to date 0.00 -- 0.58 0.28 1.07 0.84
---- --- ---- ---- ---- ----
Total 0.88% --% 1.91% 8.39% 2.03% 6.35%
==== === ==== ==== ==== ====
</TABLE>
----------
(1) ACLI data for the three months ended March 31, 1998 are not yet
available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey
of Mortgage Loan Delinquencies and Foreclosures," numbers
1376 and 1399, dated June 5, 1997 and March 9, 1998,
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.
25
<PAGE> 26
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 and annuity pricing and sales practices. A number of these
lawsuits have resulted in substantial jury awards or settlements.
In February 1997, NLIC was named as a defendant in a lawsuit filed in
New York Supreme Court related to the sale of whole life policies on a
"vanishing premium" basis (John H. Snyder v. 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 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.
In April 1998, NLIC was named as a defendant in a lawsuit filed in Ohio
State Court similar to the Snyder lawsuit (David Mishler v. Nationwide
Life Insurance Co.). The plaintiff in such lawsuit seeks to represent a
similar class, makes similar allegations and seeks unspecified
compensatory and punitive damages. NLIC has until June 9, 1998 to
answer or make a motion with respect to this complaint.
In November 1997, two plaintiffs, one who was the owner of a variable
life insurance contract and the other who was the owner of a variable
annuity contract, commenced an action in a federal court in Texas
against NLIC and the American Century group of defendants (Robert Young
and David D. Distad v. Nationwide Life Insurance Company et al.). In
this action, plaintiffs seek to represent a class of variable life
insurance contract owners and variable annuity contract owners whom
they claim were allegedly misled when purchasing these variable
contracts into believing that the performance of their subaccount
mutual fund managed by American Century, whose shares may only be
purchased by insurance companies, would track the performance of a
mutual fund, also managed by American Century, whose shares are
publicly traded. The amended complaint seeks unspecified compensatory
and punitive damages. On April 27, 1998, the Court denied, in part, and
granted, in part, motions to dismiss the complaint filed by NLIC and
American Century. This lawsuit is in an early stage and has not been
certified as a class action. NLIC intends to defend this case
vigorously.
There can be no assurance that any litigation relating to pricing or
sales practices will not have a material adverse effect on the Company
in the future.
ITEM 2 CHANGES IN SECURITIES
NFS reacquired 518, 429 and 433 shares of its Class A Common Stock, par
value $0.01 per share in brokerage transactions on the last business
day of January, February and March, respectively, for an aggregate
purchase price of $18,879.81, $18,762.05 and $18,763.05, respectively.
All amounts include brokers' commissions. Pursuant to the Stock
Retainer Plan for Non-Employee Directors, 518, 429 and 433 shares of
Class A Common Stock were subsequently reissued by NFS on the last
business day of January, February and March, respectively, at a price
of $36.19, $43.69 and $43.31 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.
26
<PAGE> 27
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:
On April 29, 1998, NFS filed a Current Report on Form 8-K
concerning the announcement of NFS's agreement to purchase
all of the outstanding shares of Morley Financial
Services, Inc.
27
<PAGE> 28
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: May 15, 1998 /s/ Mark R. Thresher
------------------------------------------
Mark R. Thresher, Vice President - Finance
and Treasurer (Chief
Accounting Officer)
28
<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, 1998, and is qualified in its entirety by reference to such unaudited
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 13,362
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 91
<MORTGAGE> 5,188
<REAL-ESTATE> 287
<TOTAL-INVEST> 19,944
<CASH> 45
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,757
<TOTAL-ASSETS> 65,728
<POLICY-LOSSES> 18,794
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
100
0
<COMMON> 1
<OTHER-SE> 2,191
<TOTAL-LIABILITY-AND-EQUITY> 65,728
53
<INVESTMENT-INCOME> 366
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 20
<BENEFITS> 308
<UNDERWRITING-AMORTIZATION> 48
<UNDERWRITING-OTHER> 108
<INCOME-PRETAX> 132
<INCOME-TAX> 45
<INCOME-CONTINUING> 87
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
