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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 1-12785
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
31-1486870
(I.R.S. Employer Identification No.)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Address of principal executive offices)
(614) 249-7111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
(Title of Class)
NEW YORK STOCK EXCHANGE
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates on March
20, 1998 was $1,046,844,894.
The number of shares outstanding of each of the registrant's classes of
common stock on March 20, 1998 was as follows:
CLASS A COMMON STOCK (PAR VALUE $.01 PER SHARE) 23,783,136 shares issued
and outstanding
CLASS B COMMON STOCK (PAR VALUE $.01 PER SHARE) 104,745,000 shares issued
and outstanding
(Title of Class)
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of this Form 10-K incorporate by reference certain
information from the registrant's 1997 Annual Report to Shareholders. Part III
of this Form 10-K incorporates by reference certain information from the
registrant's definitive Proxy Statement for the 1998 Annual Shareholders'
Meeting.
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PART I
ITEM 1 BUSINESS
OVERVIEW
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. NFS is incorporated in Delaware and
maintains its principal executive offices in Columbus, Ohio.
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). In March 1997, NFS also sold, in companion public
offerings, $300.0 million of 8% Senior Notes (the Notes) and, through a wholly
owned subsidiary trust, $100.0 million of 7.899% Capital Securities (the Capital
Securities). 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.
Prior to the initial public offering, NFS was a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). Nationwide Corp. continues to own all
of the outstanding shares of Class B common stock, which represents
approximately 81% of the total number of common shares outstanding and
approximately 98% of the combined voting power of the stockholders of NFS.
During the first quarter of 1997, NFS's Board of Directors approved a 104,745
for one split of the Company's Class B common stock, which became effective
February 10, 1997. Share information for all periods presented has been restated
to reflect the split.
During 1996 and 1997, Nationwide Corp. and NFS completed transactions in
anticipation of the initial public offering that focused the business of NFS on
long-term savings and retirement products. On September 24, 1996, NLIC declared
a dividend payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or retirement products. In addition, during 1996,
NLIC entered into two reinsurance agreements whereby all of NLIC's accident and
health and group life insurance business was ceded to two affiliates effective
January 1, 1996. These subsidiaries and all accident and health and group life
insurance business have been accounted for as discontinued operations for all
periods presented. See notes 14 and 19 to the consolidated financial statements.
On January 27, 1997, Nationwide Corp. contributed the common stock of NLIC and
three marketing and distribution companies to NFS. Accordingly, the 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."
In addition to the transactions discussed previously, the Company paid
$900.0 million of dividends to Nationwide Corp., $50.0 million on December 31,
1996 and $850.0 million on February 24, 1997, as part of the restructuring.
The Company is a leading provider of long-term savings and retirement
products. The Company offers variable annuities, fixed annuities and life
insurance as well as mutual funds and pension products and administrative
services. By developing and offering a wide variety of products, the Company
believes that it has positioned itself to compete effectively in various stock
market and interest rate environments. The Company markets its products through
a broad spectrum of wholesale and retail distribution channels, including
financial planners, pension plan administrators, securities firms, banks and
Nationwide Insurance Enterprise insurance agents.
The Company has grown substantially in recent years as a result of its
long-term investments in developing the distribution channels necessary to reach
its target customers and the products required to meet the demands of these
customers. The Company believes its growth has been enhanced further by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such as
products offered by the Company, and the performance of the financial markets,
particularly the United States (U.S.) stock markets, in recent years. From 1993
to 1997, the Company's assets grew from $24.70 billion to $59.90 billion, a
compound annual growth rate of 24.8%. Asset growth during this period
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resulted from sales of the Company's products as well as market appreciation of
assets in the Company's separate accounts and in its general account investment
portfolio. The Company's sales of variable annuities grew from $2.41 billion in
1993 to $7.54 billion in 1997, a compound annual growth rate of 33.0%. The
Company's separate account assets, which are generated by the sale of variable
annuities and variable universal life insurance, grew from 36.5% of total assets
as of December 31, 1993 to 63.0% of total assets as of December 31, 1997. During
this period of substantial growth, the Company controlled its operating expenses
by taking advantage of economies of scale and by increasing productivity through
investments in technology. From 1993 to 1997, the Company's total assets
increased by 142% while operating expenses increased by only 68%.
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. In addition, the Company reports corporate revenues 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 benefit plans and interest
expense on debt in a Corporate and Other segment. All information set forth
below relating to the Company's Variable Annuities segment excludes the fixed
option under the Company's variable annuity contracts. Such information is
included in the Company's Fixed Annuities segment.
Variable Annuities
The Variable Annuities segment consists of annuity contracts that provide
the customer with the opportunity to invest in mutual funds managed by
independent investment managers and the Company, with investment returns
accumulating on a tax-deferred basis. Variable Annuity segment revenues,
operating income before federal income tax expense and policy reserves are
summarized in the following table.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues........................... $ 404.0 $ 284.6 $ 189.0
Operating income before federal income
tax expense............................ 150.9 90.3 50.8
Policy reserves as of year end........... $34,486.7 $24,278.1 $16,761.8
</TABLE>
The Company is one of the leaders in the development and sale of variable
annuities. For the year ended December 31, 1997, the Company was the third
largest writer of individual variable annuity contracts in the U.S. based on
sales, according to The Variable Annuity Research & Data Service. The Company
believes that demographic trends and shifts in attitudes toward retirement
savings will continue to support increased consumer demand for its products. The
Company believes that it possesses distinct competitive advantages in the market
for variable annuities. Some of the Company's most important advantages include
its innovative product offerings and strong relationships with independent,
well-known fund managers. Its principal annuity series, The BEST of AMERICA,
allows the customer to choose from up to 39 investment options managed by
premier mutual fund managers. In the aggregate, the Company's group variable
annuity products offer over 100 underlying investment options. A recent example
of product innovation was the Company's November 1997 launch of a new individual
variable annuity product, America's FUTURE Annuity, a breakthrough product that
combines the flexibility and dozens of investment choices of The BEST of AMERICA
brand products with insurance charges that are lower than comparable products
sold through the financial planning community.
The Company markets its variable annuity products through a broad spectrum
of distribution channels, including broker/dealers, financial planners, banks
and Nationwide Insurance Enterprise insurance agents. The Company seeks to
capture a growing share of variable annuity sales in these channels by working
closely with its investment managers and product distributors to adapt the
Company's products and services to changes in the retail and institutional
marketplace in order to enhance its leading position in the market for variable
annuities.
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The Company is following a strategy of extending The BEST of AMERICA brand name
to more of its products and distribution channels in an effort to build upon its
brand name recognition.
The Company believes that the variable annuity business is attractive
because it generates fee income. In addition, because the investment risk on
variable annuities is borne principally by the customer and not the Company, the
variable annuity business requires significantly less capital support than fixed
annuity and traditional life insurance products. The Company receives income
from variable annuity contracts primarily in the form of asset and
administration fees. In addition, most of the Company's variable annuity
products provide for a contingent deferred sales charge, also known as a
"surrender charge" or "back-end load," that is assessed against premium
withdrawals in excess of specified amounts made during a specified period,
usually the first seven years of the contract. Surrender charges are intended to
protect the Company from withdrawals early in the contract period, before the
Company has had the opportunity to recover its sales expenses. Generally,
surrender charges on individual variable annuity products are 7% of premiums
withdrawn during the first year, scaling ratably to 0% for the eighth year and
each year thereafter. For group annuity products, the surrender charge amounts
and periods can vary significantly, depending on the terms of each contract.
The Company's variable annuity products consist almost entirely of flexible
premium deferred variable annuity (FPVA) contracts. FPVA contracts are
distributed through broker/dealers, financial planners, banks, pension plan
administrators and Nationwide Insurance Enterprise insurance agents. Such
contracts are savings vehicles in which the customer makes a single deposit or
series of deposits. The customer has the flexibility to invest in mutual funds
managed by independent investment managers and the Company. Deposits may be at
regular or irregular intervals and in regular or irregular amounts. The value of
the annuity fluctuates in accordance with the investment experience of the
mutual funds chosen by the customer. The customer is permitted to withdraw all
or part of the accumulated value of the annuity, less any applicable surrender
charges. As specified in the FPVA contract, the customer generally can elect
from a number of payment options that provide either fixed or variable benefit
payments.
The Company offers individual variable annuities under The BEST of AMERICA
brand name. In addition to The BEST of AMERICA individual variable annuities,
the Company markets employer-sponsored variable annuities to both public sector
employees and teachers for use in connection with plans described under Sections
457 and 403(b) of the Internal Revenue Code (IRC), and to private sector
employees for use in connection with IRC Section 401(k) plans. These
employer-sponsored variable annuities are marketed under several brand names,
including Group BEST of AMERICA. The Company also markets variable annuities as
"private label" products. Such products are offered through banks and are also
offered to members of The National Education Association of the United States
(NEA) under The NEA Valuebuilder brand name.
The BEST of AMERICA. The Company's principal individual FPVA contracts are
sold under the brand names The BEST of AMERICA-America's Vision, The BEST of
AMERICA IV and The BEST of AMERICA-America's FUTURE Annuity. The BEST of AMERICA
brand name individual variable annuities accounted for $3.66 billion (or 49%) of
the Company's variable annuity sales in 1997, and $19.30 billion (or 56%) of the
Company's variable annuity policy reserves as of year end. The Company's The
BEST of AMERICA-America's Vision and The BEST of AMERICA-America's FUTURE
Annuity products are intended to appeal to distributors in the market for large
initial deposits. The contracts require initial minimum deposits of $15,000. The
Company's The BEST of AMERICA IV product is intended primarily for the
tax-qualified, payroll deduction market, where initial deposits are often
smaller. The BEST of AMERICA IV generally pays a lower up-front commission to
distributors but requires only $1,500 as an initial deposit. All three products
generate an annual asset fee and may also generate annual administration fees
for the Company.
Group BEST of AMERICA. These group variable annuity products accounted for
$1.99 billion (or 26%) of the Company's variable annuity sales in 1997, and
$6.40 billion (or 19%) of the Company's variable annuity policy reserves as of
year end. Group BEST of AMERICA products are typically offered only on a
tax-qualified basis. These products may be structured with a variety of features
which may be arranged in over 600 combinations of front-end loads, back-end
loads and asset-based fees.
Section 457 Contracts. These products accounted for $1.11 billion (or 15%)
of the Company's variable annuity sales in 1997, and $5.88 billion (or 17%) of
the Company's variable annuity policy reserves as of year
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end. The Company offers a variety of group variable annuity contracts that are
designed primarily for use in conjunction with plans described under IRC Section
457. Section 457 permits employees of state and local governments to defer a
certain portion of their yearly income and invest such income on a tax-deferred
basis. These contracts typically generate an annual asset fee and may also
generate annual administration fees for the Company.
Private Label Variable Annuities. These products accounted for $637.2
million (or 8%) of the Company's variable annuity sales in 1997, and $2.54
billion (or 7%) of the Company's variable annuity policy reserves as of year
end. The Company has developed several private label variable annuity products
in conjunction with other financial intermediaries. The products allow financial
intermediaries to market products with substantially the same features as the
Company's brand name products to their own customer bases under their own brand
names. The Company believes these private label products strengthen the
Company's ties to certain significant distributors of the Company's products.
These contracts generate an annual asset fee and may also generate annual
administration fees for the Company.
The NEA Valuebuilder. This product accounted for $135.9 million (or 2%) of
the Company's variable annuity sales in 1997, and $369.5 million (or 1%) of the
Company's variable annuity policy reserves as of year end. The Company offers
individual variable annuity contracts to the Teacher Market under Section 403(b)
of the IRC. Section 403(b) permits teachers and other employees of educational
organizations to defer a certain portion of their yearly income and invest such
income on a tax-deferred basis. These contracts generate an annual asset fee and
may also generate annual administration fees for the Company.
Fixed Annuities
The Company has sought to maintain its ability to grow profitably in a
variety of market environments. The Company believes that periods of rising
interest rates, that tend to cause lower sales growth in its Variable Annuities
segment, make its fixed annuity products more attractive to consumers. In
addition to providing balance to the Company's variable annuity business, its
fixed annuity business allows the Company to offer a comprehensive portfolio of
savings alternatives to its customers and distributors as the Company seeks to
capture a growing share of sales in all distribution channels. The Fixed
Annuities segment includes the fixed option under the Company's variable annuity
products. Customers who purchase variable annuities are able to designate some
or all of their deposits to fixed options which, like the Company's fixed
annuity contracts, offer a guarantee of principal and a guaranteed interest rate
for a specified period of time. The fixed option under the Company's variable
annuity products accounted for $1.67 billion (or 78%) of the Company's fixed
annuity sales in 1997, and $10.39 billion (73%) of the Company's fixed annuity
policy reserves as of year end.
Fixed Annuity segment revenues, operating income before federal income tax
expense and policy reserves are summarized in the following table.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues........................... $ 1,141.4 $ 1,092.6 $ 1,052.0
Operating income before federal income
tax expense............................ 169.5 135.4 137.0
Policy reserves as of year end........... $14,194.2 $13,511.8 $12,784.0
</TABLE>
Fixed annuity products are marketed to individuals who choose to allocate
long-term savings to products that provide a guarantee of principal, a stable
net asset value and a guarantee of the interest rate to be credited to the
principal amount for some period of time. The Company's fixed annuity products
are offered both to individuals and as group products to employers for use in
employee benefit programs. The Company's individual fixed annuity products are
distributed through its wholesale and retail channels and include single premium
deferred annuity contracts, flexible premium deferred annuity contracts and
single premium immediate annuity contracts. The Company's group fixed annuity
contracts are also distributed through its wholesale and retail channels. The
Company invests fixed annuity customer deposits in its general account
investment portfolio. Unlike variable annuity assets that are held in the
Company's separate account, the Company bears the
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investment risk on assets held in its general account. The Company attempts to
earn a spread by investing a customer's deposits for higher yields than the
interest rate it credits to the customer's fixed annuity contract.
During 1997, the average crediting rate on contracts (including the fixed
option under the Company's variable contracts) in the Fixed Annuities segment
was 6.12%. Substantially all of the Company's crediting rates its fixed annuity
contracts are guaranteed for a period not exceeding 15 months.
Fixed Option Under Variable Annuity Contracts. Fixed options are available
to customers who purchase certain of the Company's variable annuities by
designation of some or all of their deposits to such options. A fixed option
offers the customer a guarantee of principal and a guaranteed interest rate for
a specified period of time. Such contracts have no maturity date and remain in
force until the customer elects to take the proceeds of the annuity as a single
payment or as a specified income for life or for a fixed number of years. The
Company reports its fixed option business in its Fixed Annuities segment because
the characteristics of such business are similar to those of its fixed annuity
business. Although the customer may elect, subject to limitations for certain
products, to transfer balances from the fixed option to other investment
options, it is the Company's experience that historically few have made such
election.
Single Premium Deferred Annuity (SPDA) Contracts. SPDA contracts accounted
for $373.7 million (or 17%) of the Company's fixed annuity sales in 1997, and
$2.03 billion (or 14%) of the Company's fixed annuity policy reserves as of year
end. SPDA contracts are distributed through broker/dealers, financial planners,
banks and Nationwide Insurance Enterprise insurance agents. An SPDA contract is
a savings vehicle in which the customer makes a single deposit with the Company.
The Company guarantees the customer's principal and credits the customer's
account with earnings at an interest rate that is stated and fixed for an
initial period, typically at least one year. Thereafter, the Company resets,
typically annually, the interest rate credited to the contract based upon market
and other conditions. SPDA contracts have no maturity date and remain in force
until the customer elects to take the proceeds of the annuity as a single
payment or as a specified income for life or for a fixed number of years. No
front-end sales charges are imposed for the Company's SPDA contracts. All such
contracts, however, provide for the imposition of certain surrender charges,
which are assessed against premium withdrawals in excess of specified amounts
and which occur during the surrender charge period. The surrender charges are
typically set within the range of 7% and 0% and typically decline from year to
year, disappearing after seven contract years.
Flexible Premium Deferred Annuity (FPDA) Contracts. FPDA contracts
accounted for $33.9 million (or 2%) of the Company's fixed annuity sales in
1997, and $708.4 million (or 5%) of the Company's fixed annuity policy reserves
as of year end. FPDA contracts are distributed through broker/dealers, financial
planners, banks and Nationwide Insurance Enterprise insurance agents. FPDA
contracts are typically marketed to teachers and employees of tax-exempt
organizations as tax-qualified retirement programs. Under these contracts, the
Company accepts a single deposit or a series of deposits. Deposits may be paid
at intervals which are either regular or irregular. FPDA contracts contain
substantially the same guarantee of principal and interest rate terms included
in the Company's SPDA contracts. Surrender charges are typically set within the
range of 7% and 0% and typically decline from year to year, disappearing after
seven contract years.
Single Premium Immediate Annuity (SPIA) Contracts. SPIA contracts
accounted for $59.6 million (or 3%) of the Company's fixed annuity sales for
1997, and $1.06 billion (or 7%) of the Company's fixed annuity policy reserves
as of year end. The Company's SPIA contracts are offered through its retail and
wholesale distribution channels and are offered as either direct purchases or as
fixed annuity options under the Company's various individual and group annuity
contracts. An SPIA is an annuity that requires a one-time deposit in exchange
for guaranteed, periodic annuity benefit payments, often for the contract
holder's lifetime. SPIA contracts are often purchased by persons at or near
retirement age who desire a steady stream of future income.
Life Insurance
The Company's life insurance segment is composed of a wide range of
variable universal life insurance, whole life insurance, universal life
insurance, term life insurance and corporate-owned life insurance products. In
recent years, the Company has placed particular emphasis within this segment on
the sale of variable life insurance products that offer multiple investment
options. The Company distributes its variable universal life
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insurance products through its wholesale distribution channels as well as
through Nationwide Insurance Enterprise insurance agents. The Company's target
markets for its life insurance products include the holders of personal
automobile and homeowners' insurance policies issued by members of the
Nationwide Insurance Enterprise and select customers to whom the accumulation of
cash values is important.
Life Insurance segment revenues, operating income before federal income tax
expense, policy reserves and life insurance in force are summarized in the
following table.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues........................... $ 473.1 $ 435.6 $ 409.1
Operating income before federal income
tax expense............................ 70.9 67.2 67.6
Life insurance policy reserves as of year
end.................................... 3,487.0 2,938.9 2,660.5
Life insurance in force as of year end... $39,259.4 $36,274.6 $32,543.4
</TABLE>
Universal Life and Variable Universal Life Insurance Products. The Company
offers universal life insurance and variable universal life insurance products
including both flexible premium and single premium designs. These products
provide life insurance under which the benefits payable upon death or surrender
depend upon the policyholder's account value. Universal life insurance provides
whole life insurance with flexible premiums and adjustable death benefits. For
universal life insurance, the policyholder's account value is credited based on
an adjustable rate of return set by the Company relating to current interest
rates. For variable universal life insurance, the policyholder's account value
is credited with the investment experience of the mutual funds chosen by the
customer. The variable universal life insurance products also typically include
a general account guaranteed interest investment option. All of the Company's
variable universal life insurance products are marketed under the Company's The
BEST of AMERICA brand name and have the same wide range of investment options as
the Company's variable annuity products. These products are distributed on a
retail basis by Nationwide Insurance Enterprise insurance agents as well as
through wholesale distribution channels by broker/dealers, financial planners
and banks.
Traditional Life Insurance Products. The Company offers whole life and
term life insurance. Whole life insurance combines a death benefit with a
savings plan that increases gradually in amount over a period of years. The
customer pays a level premium over the customer's expected lifetime. The
customer may borrow against the savings and also has the option of surrendering
the policy and receiving the accumulated cash value rather than the death
benefit. Term life insurance provides only a death benefit without any savings
component. These traditional life insurance products are distributed on a retail
basis by Nationwide Insurance Enterprise insurance agents.
Corporate-owned Life Insurance Products: The Company offers
corporate-owned life insurance (COLI). Corporations purchase COLI to provide
protection against the death of selected employees and to fund non-qualified
benefit plans. Corporations may make a single premium payment or a series of
premium payments. Premium payments made are credited with a guaranteed interest
rate which is fixed for a specified period of time.
MARKETING AND DISTRIBUTION
The Company sells its products through a broad distribution network
comprised of wholesale and retail distribution channels. The Company defines
wholesale channels of distribution as channels in which an unaffiliated company,
such as a securities broker/dealer, pension plan administrator, bank or other
financial institution, sells the Company's products to its own customer base.
The Company defines retail channels as those in which the Company's
representatives, such as Nationwide Insurance Enterprise insurance agents and
representatives of the Company's sales subsidiaries market products directly to
a customer base identified by the Company. The Company provides, through both
its retail and wholesale channels, the means for employers sponsoring
tax-favored retirement plans (such as those described in IRC Sections 401(k),
403(b) and 457) to allow their employees to make contributions to such plans
through payroll deductions. Typically, the Company receives the right from an
employer to market products to employees and arrange to deduct periodic deposits
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from the employees' regular paychecks. The Company believes that the payroll
deduction market is characterized by more predictable levels of sales than other
markets because these customers are less likely, even in times of market
volatility, to stop making annuity deposits than customers in other markets. In
addition, the Company believes that payroll deduction access to customers
provides significant insulation from competition by providing the customer with
a convenient, planned method of periodic saving. In both the Pension Market,
where the Company's products are distributed primarily on a wholesale basis, and
in the Public Sector and Teachers Markets, where the Company's products are
distributed primarily on a retail basis, payroll deduction is the primary method
used for collecting premiums and deposits.
A table showing statutory premiums and deposits by distribution channel for
each of the last three years is presented in Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) on page 21 of
the Company's 1997 Annual Report to Shareholders.
Wholesale Channels
Investment Dealers. The Company sells individual and group variable
annuities, fixed annuities and variable life insurance through broker/dealers in
all 50 states and the District of Columbia. The Company has access to over 1,000
broker/dealers and over 30,000 registered representatives. The Company
historically has focused on distributing through mid-sized regional
broker/dealers and financial planning firms, but recently has added national
"wirehouse" firms to this channel. The Company believes that it has strong
broker/dealer relationships based on its diverse product mix, large selection of
fund options and administrative technology. In addition to such relationships,
the Company believes its financial strength and The BEST of AMERICA brand name
are competitive advantages in this distribution channel. The Company regularly
seeks to add new broker/ dealers to its distribution network.
Pension Market. The Company defines the Pension Market as defined
contribution plans pursuant to Section 401 of the IRC sponsored by employers as
part of employee retirement programs. The Company markets group variable
annuities, group fixed annuities and record-keeping services to these plan
sponsors primarily through over 250 regional pension plan administrators located
in 45 states. The Company has also linked pension plan administrators with the
financial planning community to sell group pension products. In 1997, over $1.2
billion in pension sales came from financial planners who use the Company's
pension plan administrators to perform back-office processing and record-keeping
functions. The Company targets employers having between 25 and 2,000 employees
because it believes that these plan sponsors tend to require more extensive
record-keeping services from pension plan administrators and therefore tend to
become long-term customers. The Company believes, based on industry survey data,
that it is the third largest administrator of 401(k) plans based on total number
of plans.
Financial Institutions. The Company markets individual variable and fixed
annuities (under its brand names and on a private-label basis), and variable
universal life insurance through financial institutions, consisting primarily of
banks and their subsidiaries. The Company currently distributes products through
over 180 financial institutions and is actively seeking to increase the number
of financial institutions with which it has distribution arrangements. The
Company believes that its expertise in training financial institution personnel
to sell annuities, its breadth of product offerings, its financial strength, the
Nationwide and The BEST of AMERICA brand names, and the ability to offer private
label products are competitive advantages in this distribution channel.
Retail Channels
Public Sector and Teacher Markets. The Company markets various products
and services on a retail basis through several subsidiary sales organizations to
both the Public Sector and Teachers Markets. With respect to the Public Sector
Market, the Company markets group variable annuities and fixed annuities to
state and local governments for use in their IRC Section 457 retirement
programs. The Company services the Public Sector market through a sales force of
more than 500 exclusive retail sales representatives. The Company believes that
its existing relationships with state and local government entities and the
Company's sponsorship by such entities as the National Association of Counties
(NACO) and The United States Conference of Mayors (USCM) provide it with
distinct competitive advantages in this market. NACO sponsorship, which began in
1980 and has been
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renewed three times, expires December 31, 2005, and USCM sponsorship, which
began in 1979 and has been renewed twice, expires on December 31, 2004.
With respect to the Teacher Market, the Company has an exclusive
contractual arrangement with the NEA to offer and sell certain products to its
2.2 million members. Under The NEA Valuebuilder brand name, the Company markets
both qualified and non-qualified (under IRC Section 403(b)) individual variable
annuity contracts. The Company also offers IRAs in this market. As of December
31,1997, the Company administers plans for over 1,800 school districts in 48
states. The NEA exclusive contractual arrangement, which began in 1990,
automatically renewed on July 26, 1995 for an additional 5-year period.
Nationwide Insurance Enterprise Insurance Agents. The Company sells
traditional life insurance, universal life insurance and variable universal life
insurance products and individual annuities through approximately 4,300 licensed
Nationwide Insurance Enterprise insurance agents who primarily target the
holders of personal automobile and homeowners' insurance policies issued by the
Nationwide Insurance Enterprise. The Nationwide Insurance Enterprise insurance
agents sell exclusively Nationwide Insurance Enterprise products and may not
offer products which compete with those of the Company.
CORPORATE AND OTHER SEGMENT
The Corporate and Other segment includes corporate revenue and expenses,
investments and related investment income supporting capital not specifically
allocated to the three product segments, revenues and expenses of the
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 benefit plans and interest
expense on debt. Realized gains and losses on investments are also reported in
the Corporate and Other segment.
Corporate and Other segment revenues, operating income before federal
income tax expense (which excludes realized gains and losses on investments and
results of discontinued operations) and policy reserves are summarized in the
following table.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues.............................. $ 219.9 $ 203.8 $ 186.9
Operating income before federal income tax
expense................................... 4.6 35.4 27.5
Policy reserves as of year end.............. $3,791.9 $3,302.5 $2,644.3
</TABLE>
The decrease in operating income in 1997 primarily relates to interest
expense on the senior notes and capital securities issued in March 1997.
REINSURANCE
The Company follows the customary industry practice of reinsuring a portion
of its life insurance and annuity risks with other companies in order to reduce
net liability on individual risks, to provide protection against large losses
and to obtain greater diversification of risks. The maximum amount of individual
ordinary life insurance retained by the Company on any one life is $1.0 million.
The Company cedes insurance primarily on an automatic basis, under which risks
are ceded to a reinsurer on specific blocks of business where the underlying
risks meet certain predetermined criteria, and on a facultative basis, under
which the reinsurer's prior approval is required for each risk reinsured. The
Company also cedes insurance on a case-by-case basis particularly where the
Company may be writing new risks or is unwilling to retain the full costs
associated with new lines of business. The ceding of risk does not discharge the
original insurer from its primary obligation to the policyholder. The Company
has entered into a reinsurance contract to cede a portion of its general account
individual annuity reserves to Franklin Life Insurance Company (Franklin). Total
recoveries due from Franklin were $220.2 million and $240.5 million as of
December 31, 1997 and 1996, respectively. Under the terms of the contract,
Franklin has established a trust as collateral for the recoveries. The trust
assets are invested in investment grade securities, the market value of which
must at all times be greater than or equal to 102% of the
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<PAGE> 10
reinsured reserves. The Company has no other material reinsurance arrangements
with unaffiliated reinsurers. The only material reinsurance agreements the
Company has with affiliates are the modified coinsurance agreements pursuant to
which NLIC reinsured all of its accident and health and group life insurance
business to other members of the Nationwide Insurance Enterprise as described in
note 14 to the Company's consolidated financial statements.
RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive position
of insurance companies. Ratings are important to maintaining public confidence
in the Company and its ability to market its annuity and life insurance
products. Rating organizations continually review the financial performance and
condition of insurers, including the Company. Any lowering of the Company's
ratings could have a material adverse effect on the Company's ability to market
its products and could increase the surrender of the Company's annuity products.
Both of these consequences could, depending upon the extent thereof, have a
material adverse effect on the Company's liquidity and, under certain
circumstances, net income. NLIC is rated "A+" (Superior) by A.M. Best Company,
Inc. and its claims-paying ability is rated "Aa2" (Excellent) by Moody's
Investor Services, Inc. (Moody's) and "AA+" (Excellent) by Standard & Poor's
Corporation (S&P).
The foregoing ratings reflect each rating agency's opinion of NLIC's
financial strength, operating performance and ability to meet its obligations to
policyholders and are not evaluations directed toward the protection of
investors. Such factors are of concern to policyholders, agents and
intermediaries.
The Company's financial strength is also reflected in the ratings of the
senior notes and capital securities of subsidiary trust. The senior notes are
rated "A+" by S&P and "A1" by Moody's. The capital securities of subsidiary
trust are rated "A" by S&P and "a1" by Moody's.
COMPETITION
The Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer alternative
products and, with respect to other insurers, have higher ratings than the
Company. The Company believes that competition in the Company's lines of
business is based on price, product features, commission structure, perceived
financial strength, claims-paying ratings, service and name recognition.
National banks, with their preexisting customer bases for financial services
products, may pose increasing competition in the future to insurers who sell
annuities, including the Company, as a result of the U.S. Supreme Court's 1994
decision in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company, which permits national banks to sell annuity products of life insurance
companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made by
members of Congress and the Clinton Administration. Currently, the Bank Holding
Company Act restricts banks from being affiliated with insurance companies. None
of these proposals has yet been enacted, and it is not possible to predict
whether any of these proposals will be enacted, or if enacted, their potential
effect on the Company.
REGULATION
General Regulation at State Level
As an insurance holding company, the Company is subject to regulation by
the states in which its insurance subsidiaries are domiciled and/or transact
business. Most states have enacted legislation that requires each insurance
holding company and each insurance company in an insurance holding company
system to register with the insurance regulatory authority of the insurance
company's state of domicile and, annually, to furnish financial and other
information concerning the operations of companies within the holding company
system that materially affect the operations, management or financial condition
of the insurers within such system. The Company is subject to the insurance
holding company laws in Ohio. Under such laws, all transactions within an
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<PAGE> 11
insurance holding company system affecting insurers must be fair and equitable
and each insurer's policyholder surplus following any such transaction must be
both reasonable in relation to its outstanding liabilities and adequate for its
needs. The Ohio insurance holding company laws also require prior notice or
regulatory approval of the change of control of an insurer or its holding
company and of material intercorporate transfers of assets within the holding
company structure. Generally, under such laws, a state insurance authority must
approve in advance the direct or indirect acquisition of 10% or more of the
voting securities of an insurance company domiciled in its state.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to approve policy forms, grant and revoke
licenses to transact business, regulate trade practices, license agents, require
statutory financial statements and prescribe the type and amount of investments
permitted. In recent years, a number of life and annuity insurers have been the
subject of regulatory proceedings and litigation relating to alleged improper
life insurance pricing and sales practices. Some of these insurers have incurred
or paid substantial amounts in connection with the resolution of such matters.
In addition, state insurance regulatory authorities regularly make inquiries,
hold investigations and administer market conduct examinations with respect to
insurers' compliance with applicable insurance laws and regulations. None of the
Company's insurance subsidiaries is the subject of any such investigation by any
regulatory authority or any such market conduct examination in any state at this
time. The Company's subsidiaries continuously monitor sales, marketing and
advertising practices and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance with
applicable insurance laws and regulations. There can be no assurance that any
non-compliance with such applicable laws and regulations would not have a
material adverse effect on the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three to four years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners (NAIC). The
insurance subsidiaries are currently under examination by the Ohio and Delaware
insurance departments for the four-year period ended December 31, 1996. While
final reports of these examinations have not yet been issued, management does
not expect such reports to raise any significant issues or adjustments.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
As an insurance holding company, the Company's ability to meet debt service
obligations and pay operating expenses and dividends depends primarily on the
receipt of sufficient funds from its primary operating subsidiary, NLIC. The
inability of NLIC to pay dividends to the Company in an amount sufficient to
meet debt service obligations and pay operating expenses and dividends would
have a material adverse effect on the Company. The payment of dividends by NLIC
is subject to restrictions set forth in the insurance laws and regulations of
Ohio, its domiciliary state. The Ohio insurance laws require Ohio-domiciled life
insurance companies to seek prior regulatory approval to pay a dividend or
distribution of cash or other property if the fair market value thereof,
together with that of other dividends or distributions made in the preceding 12
months, exceeds the greater of (i) 10% of statutory-basis policyholders' surplus
as of the prior December 31 or (ii) the statutory-basis net income of the
insurer for the 12-month period ending as of the prior December 31. The Ohio
insurance laws also require insurers to seek prior regulatory approval for any
dividend paid from other than earned surplus. Earned surplus is defined under
the Ohio insurance laws as the amount equal to the Company's unassigned funds as
set forth in its most recent statutory financial statements, including net
unrealized capital gains and losses or revaluation of assets. Additionally,
following any dividend, an insurer's policyholder surplus must be reasonable in
relation to
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<PAGE> 12
the insurer's outstanding liabilities and adequate for its financial needs. As a
result of the $850.0 million dividend paid on February 24, 1997, any dividend
paid by NLIC during the 12-month period immediately following the dividend would
be an extraordinary dividend under Ohio insurance laws. Accordingly, no such
dividend could be paid without prior regulatory 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 the Company and its stockholders. The Company currently
does not expect such regulatory requirements to impair its ability to pay
operating expenses and dividends in the future.
NAIC IRIS Ratios
In the 1970's, the NAIC developed a set of relationships or "tests" known
as the Insurance Regulatory Information System (IRIS) that was designed for
early identification of companies which may require special attention by
insurance regulatory authorities. There are separate but similar tests for
property/casualty companies and life and health companies. Insurance companies
submit data annually to the NAIC, which in turn analyzes the data by utilizing,
in the case of life insurance companies, 13 ratios, each with defined "usual
ranges." An insurance company may fall out of the usual range for one or more
ratios because of specific transactions that are in themselves immaterial or
eliminated at the consolidated level. Generally, an insurance company will
become subject to regulatory scrutiny if it falls outside the usual ranges of
four or more of the ratios, and regulators may then act, if the company has
insufficient capital, to constrain the company's underwriting capacity. At
December 31, 1997, NLIC reported three ratios and Nationwide Life and Annuity
Insurance Company reported one ratio that fell outside the usual range.
Management does not believe the ratios that fell outside the usual range will
have any adverse impact on the Company's underwriting capacity.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a model law to implement risk-based capital (RBC) requirements for life
insurance companies. The requirements are designed to monitor capital adequacy
and to raise the level of protection that statutory surplus provides for
policyholders. The model law measures four major areas of risk facing life
insurers: (i) the risk of loss from asset defaults and asset value fluctuation;
(ii) the risk of loss from adverse mortality and morbidity experience; (iii) the
risk of loss from mismatching of asset and liability cash flow due to changing
interest rates and (iv) business risks. Insurers having less statutory surplus
than required by the RBC model formula will be subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
Based on the formula adopted by the NAIC, NLIC's adjusted capital exceeded
the level at which the Company would be required to take corrective action by a
substantial amount as of December 31, 1997.
Assessments Against Insurers
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these jurisdictions
can be assessed for policyholder losses incurred by insolvent insurance
companies. The amount and timing of any future assessment on the Company's
insurance subsidiaries under these laws cannot be reasonably estimated and are
beyond the control of the Company and its insurance subsidiaries. A large part
of the assessments paid by the Company's insurance subsidiaries pursuant to
these laws may be used as credits for a portion of the Company's insurance
subsidiaries' premium taxes. For the years ended December 31, 1997, 1996 and
1995, the Company paid $7.2 million, $4.5 million and $7.5 million,
respectively, in assessments pursuant to state insurance guaranty association
laws.
General Regulation at Federal Level
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures that may significantly
affect the insurance business include limitations on antitrust immunity, minimum
solvency
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<PAGE> 13
requirements and the removal of barriers restricting banks from engaging in the
insurance and mutual fund business.
Securities Laws
Certain of the Company's insurance subsidiaries and certain policies and
contracts offered by them are subject to regulation under the federal securities
laws administered by the Securities and Exchange Commission (the Commission) and
under certain state securities laws. Certain separate accounts of the Company's
insurance subsidiaries are registered as investment companies under the
Investment Company Act of 1940, as amended (Investment Company Act). Separate
account interests under certain variable annuity contracts and variable
insurance policies issued by the Company's insurance subsidiaries are also
registered under the Securities Act of 1933, as amended. Certain other
subsidiaries of the Company are registered as broker/dealers under the
Securities Exchange Act of 1934, as amended and are members of, and subject to
regulation by, the National Association of Securities Dealers.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisors Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are qualified
for sale in certain states in the U.S. and the District of Columbia. A
subsidiary of the Company is registered with the Commission as a transfer agent.
Certain subsidiaries of the Company are also subject to the Commission's net
capital rules.
All aspects of the Company's subsidiaries' investment advisory activities
are subject to various federal and state laws and regulations in jurisdictions
in which they conduct business. These laws and regulations are primarily
intended to benefit investment advisory clients and investment company
shareholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include the suspension of individual employees,
limitations on the activities in which the investment advisor may engage,
suspension or revocation of the investment advisor's registration as an advisor,
censure and fines.
ERISA Considerations
On December 31, 1993, the United States Supreme Court issued its opinion in
John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank
holding that certain assets in excess of amounts necessary to satisfy guaranteed
obligations held by John Hancock in its general account under a participating
group annuity contact are "plan assets" and therefore subject to certain
fiduciary obligations under the Employee Retirement Income Security Act of 1974,
as amended (ERISA), which specify that fiduciaries must perform their duties
solely in the interest of ERISA plan participants and beneficiaries. The Court
limited the imposition of ERISA fiduciary obligations in these instances to
assets in the insurer's general account that were not reserved to pay benefits
of guaranteed benefit policies (i.e. benefits whose value would not fluctuate in
accordance with the insurer's investment experience). The Secretary of Labor
issued proposed regulations in December 1997, providing guidance for the purpose
of determining, in cases where an insurer issues one or more policies backed by
the insurer's general account to or for the benefit of an employee benefit plan,
which assets of the insurer constitute plan assets for purposes of ERISA and the
IRC. The regulations, once final, will apply only with respect to a policy
issued by an insurer on or before December 31, 1998. In the case of such a
policy, the regulations will take effect at the end of the 18-month period
following the date such regulations become final, or perhaps sooner in some
cases if necessary to prevent avoidance of the regulations. Generally, no person
will be liable under ERISA or the IRC for conduct occurring prior to the end of
such 18-month period, where the basis of a claim is that insurance company
general account assets constitute plan assets. New policies issued after
December 31, 1998, which are not guaranteed benefit policies will be subject to
the fiduciary obligations under ERISA.
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Potential Tax Legislation
Congress has, from time to time, considered possible legislation that would
eliminate many of the tax benefits currently afforded to annuity products. A
discussion on proposed tax legislation is included in MD&A on page 33 of the
Company's 1997 Annual Report to Shareholders.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,460 employees.
None of the employees of the Company are covered by a collective bargaining
agreement and the Company believes that its employee relations are satisfactory.
ITEM 2 PROPERTIES
The Company's principal executive offices are located in Columbus, Ohio.
The Company leases its home office complex, consisting of approximately 468,000
square feet, from Nationwide Mutual Insurance Company (NMIC) and its
subsidiaries at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide
Plaza, Columbus, Ohio. The Company believes that its present facilities are
adequate for the anticipated needs of the Company.
ITEM 3 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements.
In October 1996, a policyholder of NLIC filed a complaint in Alabama state
court against NLIC and an agent of NLIC (Wayne M. King v. Nationwide Life
Insurance Company and Danny Nix) related to the sale of a whole life policy on a
"vanishing premium" basis and seeking unspecified compensatory and punitive
damages. The King case was dismissed with prejudice on June 25, 1997 pursuant to
an agreement between the parties.
In February 1997, NLIC was named as a defendant in a lawsuit filed in New
York Supreme Court 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 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 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 some portion of their premiums were invested in a publicly
traded mutual fund when, in fact, the premium monies were invested in a mutual
fund whose shares may only be purchased by insurance companies. The complaint
seeks unspecified compensatory, treble and punitive damages. In January 1998,
both NLIC and American Century filed motions to dismiss the entire complaint.
Plaintiffs' counsel have opposed these motions and the federal court in Texas
will hear arguments on the motions to dismiss on April 1, 1998. 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 and sales
practices will not have a material adverse effect on the Company in the future.
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ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997 no matters were submitted to a vote of
security holders, through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dimon Richard McFerson............. 61 Chairman and Chief Executive Officer--Nationwide Insurance
Enterprise
Joseph J. Gasper................... 54 President and Chief Operating Officer
Galen R. Barnes.................... 50 Executive Vice President
Richard D. Crabtree................ 57 Executive Vice President
Robert A. Oakley................... 51 Executive Vice President--Chief Financial Officer
Robert J. Woodward, Jr............. 56 Executive Vice President--Chief Investment Officer
James E. Brock..................... 50 Senior Vice President--Corporate Development
John R. Cook....................... 54 Senior Vice President--Chief Communications Officer
W. Sidney Druen.................... 55 Senior Vice President and General Counsel
Harvey S. Galloway, Jr............. 64 Senior Vice President--Chief Actuary
Richard D. Headley................. 49 Senior Vice President--Chief Information Technology Officer
Donna A. James..................... 40 Senior Vice President--Human Resources
Richard A. Karas................... 55 Senior Vice President--Sales--Financial Services
Susan A. Wolken.................... 47 Senior Vice President--Operations
Bruce C. Barnes.................... 50 Vice President--Information Systems
Dennis W. Click.................... 59 Vice President and Secretary
David A. Diamond................... 42 Vice President--Controller
Matthew S. Easley.................. 41 Vice President--Marketing and Administrative Services
Joseph P. Rath..................... 48 Vice President--Chief Compliance Officer
Mark R. Thresher................... 41 Vice President--Finance and Treasurer
</TABLE>
Business experience for each of the individuals listed in the above table
is set forth below.
DIMON RICHARD MCFERSON has been Chief Executive Officer of the Nationwide
Insurance Enterprise since December 1992. He has been Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise of the Company since December
1996 and a director of the Company since November 1996. Mr. McFerson has been a
director of NLIC and NMIC since April 1988 and Chairman and Chief Executive
Officer--Nationwide Insurance Enterprise of NLIC and NMIC since April 1996.
Previously he was elected Chief Executive Officer of NLIC in December 1992, and
President and Chief Executive Officer -Nationwide Insurance Enterprise of NLIC
in December 1993. He was President and General Manager of NMIC from April 1988
to April 1991; President and Chief Operating Officer of NMIC from April 1991 to
December 1992; and President and Chief Executive Officer of NMIC from December
1992 to April 1996. Mr. McFerson has been with the Nationwide Insurance
Enterprise for 18 years.
JOSEPH J. GASPER has been President and Chief Operating Officer of the
Company since December 1996 and a director of the Company since November 1996.
Mr. Gasper has been President and Chief Operating Officer of NLIC and director
since April 1996. Previously, he was Executive Vice President--Property/Casualty
Operations of NMIC from April 1995 to April 1996. He was Senior Vice
President--Property/Casualty Operations of NMIC from September 1993 to April
1995. Prior to that time, Mr. Gasper held numerous positions within the
Nationwide Insurance Enterprise. Mr. Gasper has been with the Nationwide
Insurance Enterprise for 31 years.
GALEN R. BARNES has been Executive Vice President of the Company since
December 1996. Mr. Barnes has been President of the Nationwide Insurance
Enterprise since April 1996. Previously, he was President and Chief Operating
Officer of the Wausau Insurance Companies, members of the Nationwide Insurance
Enterprise, from May 1993 to September 1996 and was Senior Vice President of the
Nationwide Insurance Enterprise from
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<PAGE> 16
May 1993 to April 1996. Prior to that time, Mr. Barnes held several positions
within the Nationwide Insurance Enterprise. Mr. Barnes has been with the
Nationwide Insurance Enterprise for 22 years.
RICHARD D. CRABTREE has been Executive Vice President of the Company since
December 1996. Mr. Crabtree has been a director and President and Chief
Operating Officer of NMIC, Nationwide Mutual Fire Insurance Company and
Nationwide Property and Casualty Insurance Company since April 1996. Previously,
he was Executive Vice President--Property/Casualty Operations of the Nationwide
Insurance Enterprise from April 1995 to April 1996. Prior to that time, Mr.
Crabtree held various positions within the Nationwide Insurance Enterprise. Mr.
Crabtree has been with the Nationwide Insurance Enterprise for 32 years.
ROBERT A. OAKLEY has been Executive Vice President--Chief Financial Officer
of the Company since December 1996. Mr. Oakley has been Executive Vice
President--Chief Financial Officer of the Nationwide Insurance Enterprise since
April 1995. Previously, he was Senior Vice President--Chief Financial Officer of
the Nationwide Insurance Enterprise from October 1993 to April 1995. Prior to
that time, Mr. Oakley held several positions within the Nationwide Insurance
Enterprise. Mr. Oakley has been with the Nationwide Insurance Enterprise for 22
years.
ROBERT J. WOODWARD, JR. has been Executive Vice President--Chief Investment
Officer of the Company since December 1996. Mr. Woodward has been Executive Vice
President--Chief Investment Officer of the Nationwide Insurance Enterprise since
August 1995. Previously, he was Senior Vice President--Fixed Income Investments
of the Nationwide Insurance Enterprise from March 1991 to August 1995. Prior to
that time, Mr. Woodward held several positions within the Nationwide Insurance
Enterprise. Mr. Woodward has been with the Nationwide Insurance Enterprise for
33 years.
JAMES E. BROCK has been Senior Vice President--Corporate Development of the
Company since July 1997. Mr. Brock has been Senior Vice President--Corporate
Development of the Nationwide Insurance Enterprise since July 1997. Previously,
he was Senior Vice President--Company Operations from December 1996 to July 1997
and was also Senior Vice President--Life Company Operations of NLIC from April
1996 to July 1997. Mr. Brock was Senior Vice President--Investment Product
Operations of NLIC from November 1990 to April 1996. Prior to that time, Mr.
Brock held several positions within the Nationwide Insurance Enterprise. Mr.
Brock has been with the Nationwide Insurance Enterprise for 28 years.
JOHN R. COOK has been Senior Vice President--Chief Communications Officer
of the Company since October 1997. Mr. Cook has been Senior Vice
President--Chief Communications Officer of the Nationwide Insurance Enterprise
since May 1997. Previously, Mr. Cook was Senior Vice President--Chief
Communications Officer of USAA from July 1989 to May 1997.
W. SIDNEY DRUEN has been Senior Vice President and General Counsel of the
Company since December 1996. Mr. Druen has been Senior Vice President and
General Counsel and Assistant Secretary of the Nationwide Insurance Enterprise
since September 1994. Previously, he was Vice President, Deputy General Counsel
and Assistant Secretary of the Nationwide Insurance Enterprise from October 1989
to September 1994. Prior to that time, Mr. Druen held several positions within
the Nationwide Insurance Enterprise. Mr. Druen has been with the Nationwide
Insurance Enterprise for 28 years.
HARVEY S. GALLOWAY, JR. has been Senior Vice President--Chief Actuary of
the Company since December 1996. Mr. Galloway has been Senior Vice
President--Chief Actuary--Life, Health and Annuities of the Nationwide Insurance
Enterprise since April 1993. Previously, he was Senior Vice President and Chief
Actuary of the Nationwide Insurance Enterprise from January 1993 to April 1993.
Prior to that time, Mr. Galloway held several positions within the Nationwide
Insurance Enterprise. Mr. Galloway has been with the Nationwide Insurance
Enterprise for 28 years.
RICHARD D. HEADLEY has been Senior Vice President--Chief Information
Technology Officer of the Company since October 1997. Mr. Headley has been
Senior Vice President--Chief Information Technology Officer of the Nationwide
Insurance Enterprise since October 1997. Previously, Mr. Headley was Chairman
and Chief Executive Officer of Banc One Services Corporation from 1992 to
October 1997. From January 1975 until 1992 Mr. Headley held several positions
with Banc One Corporation.
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DONNA A. JAMES has been Senior Vice President--Human Resources of the
Company since December 1997. Ms. James has been Senior Vice President--Human
Resources of the Nationwide Insurance Enterprise since December 1997.
Previously, she was Vice President--Human Resources of the Nationwide Insurance
Enterprise from July 1996 to December 1997. Prior to that time Ms. James was
Vice President--Assistant to the CEO of the Nationwide Insurance Enterprise from
March 1996 to July 1996. From May 1994 to March 1996 she was Associate Vice
President--Assistant to the CEO for the Nationwide Insurance Enterprise. Prior
to that time Ms. James held several positions within the Nationwide Insurance
Enterprise. Ms. James has been with the Nationwide Insurance Enterprise for 16
years.
RICHARD A. KARAS has been Senior Vice President--Sales--Financial Services
of the Company since December 1996. Mr. Karas has been Senior Vice
President--Sales--Financial Services of the Nationwide Insurance Enterprise
since March 1993. Previously, he was Vice President--Sales--Financial Services
of the Nationwide Insurance Enterprise from February 1989 to March 1993. Prior
to that time, Mr. Karas held several positions within the Nationwide Insurance
Enterprise. Mr. Karas has been with the Nationwide Insurance Enterprise for 33
years.
SUSAN A. WOLKEN has been Senior Vice President--Life Company Operations of
the Company since July 1997. Ms. Wolken has been Senior Vice President--Life
Company Operations of the Nationwide Insurance Enterprise since June 1997.
Previously, she was Senior Vice President--Enterprise Administration of the
Nationwide Insurance Enterprise from July 1996 to June 1997. Prior to that time,
she was Senior Vice President--Human Resources of the Nationwide Insurance
Enterprise from April 1995 to July 1996. From September 1993 to April 1995 Ms.
Wolken was Vice President--Human Resources of the Nationwide Insurance
Enterprise. From October 1989 to September 1993 she was Vice
President--Individual Life and Health Operations of the Nationwide Insurance
Enterprise. Ms. Wolken has been with the Nationwide Insurance Enterprise for 23
years.
BRUCE C. BARNES has been Vice President--Information Systems of the Company
since February 1997. Mr. Barnes has been Vice President--Life Systems of the
Nationwide Insurance Enterprise since May 1996. Previously, he was Vice
President--Investment Product Systems of Nationwide Insurance Enterprise from
April 1995 to May 1996. Prior to that time, Mr. Barnes was Vice
President--Individual Investment Products/ Common Systems of the Nationwide
Insurance Enterprise from May 1994 to April 1995 and Associate Vice
President--Individual Investment Products/Common Systems of NLIC from May 1992
to May 1994. Mr. Barnes was Vice President--Information Services of PHP Benefits
Systems, Inc. from January 1987 to January 1992. Mr. Barnes has been with the
Nationwide Insurance Enterprise for 6 years.
DENNIS W. CLICK has been Vice President--Secretary of the Company since
December 1997. Mr. Click has been Vice President--Secretary of the Nationwide
Insurance Enterprise since December 1997. Previously, he was Vice
President--Assistant Secretary of the Company from December 1996 to December
1997. Mr. Click was Vice President--Assistant Secretary of the Nationwide
Insurance Enterprise from August 1994 to December 1997. Mr. Click was Associate
Vice President and Assistant Secretary of the Nationwide Insurance Enterprise
from August 1989 to August 1994. Prior to that time, he held several positions
within the Nationwide Insurance Enterprise. Mr. Click has been with the
Nationwide Insurance Enterprise for 37 years.
DAVID A. DIAMOND has been Vice President--Controller of the Company since
December 1996. Mr. Diamond has been Vice President--Enterprise Controller of
Nationwide Insurance Enterprise since August 1996. Previously, he was Vice
President--Controller of NLIC from October 1993 to August 1996. Prior to that
time, Mr. Diamond held several positions within the Nationwide Insurance
Enterprise. Mr. Diamond has been with the Nationwide Insurance Enterprise for 9
years.
MATTHEW S. EASLEY has been Vice President--Marketing and Administrative
Services of the Company since December 1996. Mr. Easley has been Vice
President--Life Marketing and Administrative Services of the Nationwide
Insurance Enterprise since May 1996. Mr. Easley was Vice President--Annuity and
Pension Actuarial of the Nationwide Insurance Enterprise from August 1989 to May
1996. Prior to that time, Mr. Easley held several positions within the
Nationwide Insurance Enterprise. Mr. Easley has been with the Nationwide
Insurance Enterprise for 15 years.
17
<PAGE> 18
JOSEPH P. RATH has been Vice President--Chief Compliance Officer of the
Company since April 1997. Mr. Rath has been Vice President--Compliance for
Nationwide Advisory Services, Inc. and Nationwide Investment Services Corp.
since April 1997. He has also been Vice President--Product and Market Compliance
for the Nationwide Insurance Enterprise since April 1997. Previously, he was
Vice President--Associate General Counsel of the Nationwide Insurance Enterprise
from October 1988 to April 1997. Prior to that time, Mr. Rath held several
positions within the Nationwide Insurance Enterprise. Mr. Rath has been with the
Nationwide Insurance Enterprise for 21 years.
MARK R. THRESHER has been Vice President--Finance and Treasurer of the
Company since February 1997. Mr. Thresher has been Vice President--Controller of
NLIC since August 1996. He was Vice President and Treasurer of the Company from
November 1996 to February 1997. Previously, he was Vice President and Treasurer
of the Nationwide Insurance Enterprise from June 1996 to August 1996. Prior to
joining the Nationwide Insurance Enterprise, Mr. Thresher served as a partner
with KPMG Peat Marwick LLP since July 1988.
18
<PAGE> 19
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Class A Common Stock of NFS is traded on the New York Stock Exchange
under the symbol "NFS". As of March 1, 1998, NFS had 827 registered shareholders
of Class A Common Stock.
There is no established public trading market for the Company's Class B
Common Stock. All 104,745,000 shares of Class B Common Stock are owned by
Nationwide Corp.
Information regarding the high and low sales prices of NFS Class A Common
Stock and cash dividends declared on such shares, as required by this item, is
set forth in the following table:
<TABLE>
<CAPTION>
QUARTER
QUARTER ENDED HIGH LOW CLOSE DIVIDENDS
- --------------------------------------- ------ ------ ------- ---------
<S> <C> <C> <C> <C>
March 31, 1997......................... $28.50 $25.75 $25.75 --
June 30, 1997.......................... $29.75 $23.38 $26.75 $0.06
September 30, 1997..................... $31.94 $25.75 $27.88 $0.06
December 31, 1997...................... $38.25 $27.00 $36.16 $0.06
</TABLE>
Information regarding restrictions on the ability of NFS's insurance
subsidiaries to pay dividends to NFS, as required by this item, is set forth
under "Item 1: Business-Regulation-Regulation of Dividends and Other Payments
from Insurance Subsidiaries" above and in note 13 of the consolidated financial
statements on page 53 of the 1997 Annual Report to Shareholders, and is
incorporated herein by reference.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this item is set forth in the table titled "Five
Year Summary" on pages 34 and 35 of the Company's 1997 Annual Report to
Shareholders, and is incorporated herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this item is set forth on pages 19 through 33 of
the Company's 1997 Annual Report to Shareholders, and is incorporated herein by
reference.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth on pages 36 through 57
(consolidated financial statements) and page 58 (independent auditors' report)
of the Company's 1997 Annual Report to Shareholders, and is incorporated herein
by reference. Reference is made to the index to consolidated financial
statements included in Item 14.
Financial statement schedules are included on pages 25 through 33 herein.
Reference is made to the index to financial statement schedules included on page
24 herein.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
19
<PAGE> 20
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" on
pages 3 through 6 of the Company's 1998 Proxy Statement is incorporated herein
by reference. Refer to Part I of the Form 10-K for information as to the
executive officers of NFS.
ITEM 11 EXECUTIVE COMPENSATION
Information required by this item is set forth from the heading "Executive
Compensation and Other Information" on pages 7 through 18 of the Company's 1998
Proxy Statement, and is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the caption
"Beneficial Ownership of Common Stock" on pages 2 and 3 of the Company's 1998
Proxy Statement, and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the caption "CERTAIN
TRANSACTIONS" on pages 19 through 22 of the Company's 1998 Proxy Statement, and
is incorporated herein by reference.
20
<PAGE> 21
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
ANNUAL
REPORT
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995....................... 36
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... 37
Consolidated Statements of Shareholder's Equity for the
years ended December 31, 1997, 1996 and 1995........... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996
and 1995............................................... 39
Notes to Consolidated Financial Statements................ 40-57
Independent Auditors' Report.............................. 58
</TABLE>
<TABLE>
<CAPTION>
FORM
10-K
PAGE
----
<S> <C>
INDEX TO FINANCIAL STATEMENT SCHEDULES...................... 24
EXHIBIT INDEX............................................... 34-35
</TABLE>
REPORTS ON FORM 8-K:
On October 8, 1997, the Company filed a Current Report on Form 8-K
concerning the announcement of the planned introduction of a new individual
variable annuity product.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ DIMON R. MCFERSON
------------------------------------
Dimon R. McFerson
Chairman and Chief Executive
Officer--
Nationwide Insurance Enterprise
Date: March 4, 1998
22
<PAGE> 23
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
/s/ DIMON R. MCFERSON March 4, 1998 /s/ JOSEPH J. GASPER March 4, 1998
- --------------------------------- Date --------------------------------- Date
Dimon R. McFerson Chairman and Joseph J. Gasper, President and
Chief Executive Chief Operating Officer and
Officer--Nationwide Insurance Director
Enterprise
/s/ JAMES G. BROCKSMITH, JR. March 10, 1998 /s/ CHARLES L. FUELLGRAF, JR. March 4, 1998
- --------------------------------- Date --------------------------------- Date
James G. Brocksmith, Jr., Charles L. Fuellgraf, Jr.,
Director Director
/s/ HENRY S. HOLLOWAY March 4, 1998 /s/ LYDIA MICHEAUX MARSHALL March 9, 1998
- --------------------------------- Date --------------------------------- Date
Henry S. Holloway, Director Lydia Micheaux Marshall, Director
/s/ DONALD L. MCWHORTER March 10, 1998 /s/ DAVID O. MILLER March 4, 1998
- --------------------------------- Date --------------------------------- Date
Donald L. McWhorter, Director David O. Miller, Director
/s/ JAMES F. PATTERSON March 4, 1998 /s/ GERALD D. PROTHRO March 17, 1998
- --------------------------------- Date --------------------------------- Date
James F. Patterson, Director Gerald D. Prothro, Director
/s/ ARDEN L. SHISLER March 4, 1998 /s/ ROBERT A. OAKLEY March 4, 1998
- --------------------------------- Date --------------------------------- Date
Arden L. Shisler, Director Robert A. Oakley, Executive Vice
President--Chief Financial
Officer
/s/ MARK R. THRESHER March 4,1998
- --------------------------------- Date
Mark R. Thresher,
Vice President--Finance and
Treasurer
(Chief Accounting Officer)
</TABLE>
23
<PAGE> 24
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Independent Auditors' Report on Financial Statement Schedules................... 25
Schedule I Consolidated Summary of Investments--Other Than Investments
in Related Parties as of December 31, 1997................ 26
Schedule II Condensed Financial Information of Registrant............... 30
Schedule III Supplementary Insurance Information as of December 31, 1997,
1996 and 1995 and for each of the years then ended........ 31
Schedule IV Reinsurance as of December 31, 1997, 1996 and 1995 and for
each of the years then ended.............................. 32
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995.......................... 33
</TABLE>
All other schedules are omitted because they are not applicable or not
required, or because the required information has been included in the audited
consolidated financial statements or notes thereto.
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Nationwide Financial Services, Inc.:
Under date of January 30, 1998, we reported on the consolidated balance
sheets of Nationwide Financial Services, Inc. and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, as contained in the 1997 annual report to
shareholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1997.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedules as listed
in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
25
<PAGE> 26
SCHEDULE I
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN MILLIONS OF DOLLARS)
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------- --------- --------- --------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ----------------------------------------------------------- --------- --------- --------------
AMOUNT AT
WHICH SHOWN
IN THE
MARKET CONSOLIDATED
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ----------------------------------------------------------- --------- --------- --------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and
authorities......................................... $ 3,859.7 $ 3,981.7 $ 3,981.7
States, municipalities and political subdivisions..... 1.6 1.6 1.6
Foreign governments................................... 93.3 95.8 95.8
Public utilities...................................... 1,555.3 1,609.8 1,609.8
All other corporate................................... 7,223.0 7,515.2 7,515.2
--------- --------- ---------
Total fixed maturity securities
available-for-sale............................... 12,732.9 13,204.1 13,204.1
--------- --------- ---------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other............... 67.8 78.0 78.0
Non-redeemable preferred stock........................... -- 2.4 2.4
--------- --------- ---------
Total equity securities available-for-sale.......... 67.8 80.4 80.4
--------- --------- ---------
Fixed maturity securities held-to-maturity:
Bonds
U.S. Government and government agencies and
authorities......................................... 6.0 6.0 6.0
--------- --------- ---------
Total fixed maturity securities held-to-maturity.... 6.0 6.0 6.0
--------- --------- ---------
Mortgage loans on real estate, net......................... 5,228.1 5,181.6(1)
Real estate, net:
Investment properties.................................... 254.9 235.7(1)
Acquired in satisfaction of debt......................... 82.6 75.7(1)
Policy loans............................................... 415.3 415.3
Other long-term investments................................ 27.9 25.2(2)
Short-term investments..................................... 449.2 449.2
--------- ---------
Total investments................................... $19,264.7 $19,673.2
========= =========
</TABLE>
- ------------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate. See
note 3 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains (losses) of
investments in limited partnerships.
See accompanying independent auditors' report.
26
<PAGE> 27
SCHEDULE II
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Investment in subsidiaries.................................. $2,474,386 $ --
Short-term investments...................................... 67,534 --
Cash........................................................ -- 1
Accrued investment income................................... 762 --
Other assets................................................ 8,704 803
---------- ----
$2,551,386 $804
========== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.............................................. $ 401,469 $ --
Other liabilities........................................... 25,754 803
---------- ----
427,223 803
---------- ----
Shareholders' equity........................................ 2,124,163 1
---------- ----
$2,551,386 $804
========== ====
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenues:
Dividends received from subsidiaries...................... $ 850,000
Investment income......................................... 3,965
---------
853,965
---------
Expenses:
Interest expense on long-term debt........................ 26,111
Other operating expenses.................................. 510
---------
26,621
---------
Income before federal income tax benefit............... 827,344
Federal income tax benefit.................................. 7,930
---------
Income before equity in net income of subsidiaries..... 835,274
Equity in net income of subsidiaries........................ (570,093)
---------
Net income............................................. $ 265,181
=========
</TABLE>
See accompanying notes to condensed financial statements and independent
auditors' report.
27
<PAGE> 28
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
(IN THOUSANDS OF DOLLARS)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 265,181 $--
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income of subsidiaries................... (279,907) --
Other, net............................................. 17,502 --
--------- ---
Net cash provided by operating activities............ 2,776 --
--------- ---
Cash flows from investing activities:
Contributions of capital paid to subsidiaries............. (839,873) --
Short-term investments, net............................... (67,534) --
--------- ---
Net cash used in investing activities................ (907,407) --
--------- ---
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 524,191 1
Net proceeds from issuance of long-term debt.............. 395,862 --
Cash dividends paid....................................... (15,423) --
--------- ---
Net cash provided by financing activities............ 904,630 --
--------- ---
Net decrease in cash........................................ (1) --
Cash, beginning of year..................................... 1 --
--------- ---
Cash, end of year........................................... $ -- $ 1
========= ===
</TABLE>
See accompanying notes to condensed financial statements and independent
auditors' report.
28
<PAGE> 29
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) ORGANIZATION AND 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. 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 $524,191 (the Equity
Offering). In March 1997, NFS also sold, in companion public offerings,
$300,000 of 8% Senior Notes (the Notes) and, Nationwide Financial Services
Capital Trust (NFSCT), a wholly owned subsidiary of NFS, issued $100,000 of
7.899% Capital Securities (the Capital Securities). Concurrent with the
sale of the Capital Securities by NFSCT, NFS sold to NFSCT $103,093 in
principal amount of its 7.899% Junior Subordinated Deferrable Interest
Debentures (Junior Subordinated Debentures). Aggregate net proceeds from
the Equity Offering, the offering of the Notes and the sale of the Junior
Subordinated Debentures totaled $920,053. NFS contributed $836,780 and
$3,093 of the proceeds to the capital of NLIC and NFSCT, respectively, and
retained $80,180 of the proceeds for general corporate purposes.
Prior to the initial public offering , NFS was a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). 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 shareholders of NFS.
During the first quarter of 1997, NFS's Board of Directors approved a
104,745 for one split of the NFS Class B common stock, which became
effective February 10, 1997.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that focused
the business of NFS on long-term savings and retirement products. On
September 24, 1996, NLIC declared a dividend payable to Nationwide Corp. on
January 1, 1997 consisting of the outstanding shares of common stock of
certain subsidiaries that do not offer or distribute long-term savings or
retirement products. In addition, during 1996, NLIC entered into two
reinsurance agreements whereby all of NLIC's accident and health and group
life insurance business was ceded to two affiliates effective January 1,
1996. On January 27, 1997, Nationwide Corp. contributed the common stock of
NLIC and three marketing and distribution companies to NFS. Additionally,
NFS received a dividend from NLIC on February 24, 1997 and immediately
thereafter paid a dividend to Nationwide Corp. consisting of securities
with a fair value of $850,000.
NFS conducted no operations during 1996, except for the deferral of certain
costs associated with the public offerings, and accordingly, has not
presented a condensed statement of income for the year ended December 31,
1996.
See accompanying independent auditors' report.
29
<PAGE> 30
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(2) LONG-TERM DEBT AND GUARANTEES
Long-term debt outstanding as of December 31, 1997 consists of the
following:
<TABLE>
<S> <C>
8% Senior Notes due March 1, 2027 (net of unamortized
discount of $1,624)....................................... $298,376
7.899% Junior Subordinated Deferrable Interest Debentures
due March 1, 2037......................................... 103,093
--------
$401,469
========
</TABLE>
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. The terms of the Notes contain various restrictive
covenants including limitations on the disposition of subsidiaries. As of
December 31, 1997, NFS was in compliance with all such covenants. NFS made
interest payments on the Notes in 1997 of $11,400.
The Junior Subordinated Debentures 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 Junior Subordinated Debentures will mature or be called
simultaneously with the Capital Securities. 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. NFS made
interest payments on the Junior Subordinated Debentures in 1997 of $3,845.
See accompanying independent auditors' report.
30
<PAGE> 31
SCHEDULE III
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS OF DOLLARS)
As of December 31, 1997, 1996 and 1995 and for each of the years then ended
<TABLE>
<CAPTION>
- ----------------------- --------------- -------------------- ------------------ ------------------- ----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------- --------------- -------------------- ------------------ ------------------- ----------
DEFERRED FUTURE POLICY OTHER POLICY
POLICY BENEFITS, LOSSES, CLAIMS AND
ACQUISITION CLAIMS AND UNEARNED BENEFITS PAYABLE PREMIUM
SEGMENT COSTS LOSS EXPENSES PREMIUMS (1) (1) REVENUE
- ----------------------- --------------- -------------------- ------------------ ------------------- ----------
<S> <C> <C> <C> <C> <C>
1997: Variable
Annuities $1,018.4 $ -- $ --
Fixed Annuities 277.9 14,103.1 27.3
Life Insurance 472.9 2,683.4 178.1
Corporate and
Other (103.8) 1,916.3 --
-------- --------- ------
Total $1,665.4 $18,702.8 $205.4
======== ========= ======
1996: Variable
Annuities $ 792.1 $ -- $ --
Fixed Annuities 242.0 13,388.9 24.0
Life Insurance 414.4 2,391.5 174.6
Corporate and
Other (82.0) 1,820.2 --
-------- --------- ------
Total $1,366.5 $17,600.6 $198.6
======== ========= ======
1995: Variable
Annuities $ 569.8 $ -- $ --
Fixed Annuities 220.7 12,759.3 32.8
Life Insurance 366.9 2,282.6 166.3
Corporate and
Other (136.9) 1,730.0 --
-------- --------- ------
Total $1,020.5 $16,771.9 $199.1
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------- --------------- -------------------- ------------------ ------------------- ----------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ----------------------- --------------- -------------------- ------------------ ------------------- ----------
NET INVESTMENT BENEFITS, CLAIMS, AMORTIZATION OTHER
INCOME LOSSES AND OF DEFERRED POLICY OPERATING EXPENSES PREMIUMS
SEGMENT (2) SETTLEMENT EXPENSES ACQUISITION COSTS (2) WRITTEN
- ----------------------- --------------- -------------------- ------------------ ------------------- ----------
<S> <C> <C> <C> <C> <C>
1997: Variable
Annuities $ (26.8) $ 5.9 $ 87.8 $159.4
Fixed Annuities 1,098.2 846.7 39.8 85.4
Life Insurance 189.1 227.5 39.6 94.5
Corporate and
Other 153.4 114.7 -- 63.4
-------- --------- ------ ------
Total $1,413.9 $ 1,194.8 $167.2 $402.7
======== ========= ====== ======
1996: Variable
Annuities $ (21.4) $ 4.6 $ 57.4 $132.3
Fixed Annuities 1,050.6 838.5 38.6 79.7
Life Insurance 174.0 211.4 37.4 79.0
Corporate and
Other 154.6 106.1 -- 62.5
-------- --------- ------ ------
Total $1,357.8 $ 1,160.6 $133.4 $353.5
======== ========= ====== ======
1995: Variable
Annuities $ (17.6) $ 2.9 $ 26.3 $109.1
Fixed Annuities 1,002.7 805.0 29.5 80.3
Life Insurance 171.2 202.0 31.0 68.8
Corporate and
Other 137.7 105.6 (4.1) 59.5
-------- --------- ------ ------
Total $1,294.0 $ 1,115.5 $ 82.7 $317.7
======== ========= ====== ======
</TABLE>
- ------------
(1) Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
See accompanying independent auditors' report.
31
<PAGE> 32
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
31.1
<PAGE> 33
SCHEDULE IV
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
REINSURANCE
(IN MILLIONS OF DOLLARS)
AS OF DECEMBER 31, 1997, 1996 AND 1995 AND FOR EACH OF THE YEARS THEN ENDED
<TABLE>
<CAPTION>
- ----------------------------------------- --------- --------- ---------- --------- ----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------- --------- --------- ---------- --------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
1997:
Life insurance in force................ $52,648.4 $13,678.7 $289.7 $39,259.4 0.7%
========= ========= ====== ========= ===
Premiums:
Life insurance...................... $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1%
Accident and health insurance....... 261.2 272.6 11.4 -- N/A
--------- --------- ------ --------- ---
Total............................. $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6%
========= ========= ====== ========= ===
1996:
Life insurance in force................ $47,150.6 $11,164.6 $288.6 $36,274.6 0.8%
========= ========= ====== ========= ===
Premiums:
Life insurance...................... $ 225.6 $ 29.3 $ 2.3 $ 198.6 1.2%
Accident and health insurance....... 291.9 305.8 13.9 -- N/A
--------- --------- ------ --------- ---
Total............................. $ 517.5 $ 335.1 $ 16.2 $ 198.6 8.2%
========= ========= ====== ========= ===
1995:
Life Insurance in force................ $41,087.9 $ 8,935.7 $391.2 $32,543.4 1.2%
========= ========= ====== ========= ===
Premiums:
Life insurance...................... $ 221.3 $ 24.4 $ 2.2 $ 199.1 1.1%
Accident and health insurance....... 298.0 313.0 15.0 -- N/A
--------- --------- ------ --------- ---
Total............................. $ 519.3 $ 337.4 $ 17.2 $ 199.1 8.6%
========= ========= ====== ========= ===
</TABLE>
- ------------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
32
<PAGE> 34
SCHEDULE V
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- ----------------------------------------- ----------- ----------------------- ---------- ----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ----------- ----------------------- ---------- ----------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) PERIOD
- ----------------------------------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1997:
Valuation allowances - fixed maturity
securities.......................... $ -- $ 16.2 $ -- $ 16.2 $ --
Valuation allowances - mortgage loans
on real estate...................... 51.0 (1.2) -- 7.3 42.5
Valuation allowances - real estate..... 15.2 (4.1) -- -- 11.1
--------- -------- ----- -------- -----
Total............................. $ 66.2 $ 10.9 $ -- $ 23.5 $53.6
========= ======== ===== ======== =====
1996:
Valuation allowances - mortgage loans
on real estate...................... $ 49.1 $ 4.5 $ -- $ 2.6 $51.0
Valuation allowances - real estate..... 25.8 (10.6) -- -- 15.2
--------- -------- ----- -------- -----
Total............................. $ 74.9 $ (6.1) $ -- $ 2.6 $66.2
========= ======== ===== ======== =====
1995:
Valuation allowances - fixed maturity
securities.......................... $ -- $ 8.9 $ -- $ 8.9 $ --
Valuation allowances - mortgage loans
on real estate...................... 46.4 7.4 -- 4.7 49.1
Valuation allowances - real estate..... 27.3 (1.5) -- -- 25.8
--------- -------- ----- -------- -----
Total............................. $ 73.7 $ 14.8 $ -- $ 13.6 $74.9
========= ======== ===== ======== =====
</TABLE>
- ------------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
See accompanying independent auditors' report.
33
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
3.1 Form of Restated Certificate of Incorporation of Nationwide
Financial Services, Inc. (previously filed as Exhibit 3.1 to
Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
3.2 Form of Restated Bylaws of Nationwide Financial Services,
Inc. (previously filed as Exhibit 3.2 to Form S-1,
Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
4.1 Form of Indenture relating to the Notes, including the form
of Global Note and the form of Definitive Note (previously
filed as Exhibit 4.1 to Form S-1, Registration Number
333-18527, filed March 5, 1997, and incorporated herein by
reference)
4.2 Form of Indenture relating to the Junior Subordinated
Deferrable Interest Debentures due 2037 of Nationwide
Financial Services, Inc. (previously filed as Exhibit 4.1 to
Form S-1, Registration Number 333-18533, filed March 5,
1997, and incorporated herein by reference)
10.1 Form of Intercompany Agreement among Nationwide Mutual
Insurance Company, Nationwide Corporation and Nationwide
Financial Services, Inc. (previously filed as Exhibit 10.1
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.2 Form of Tax Sharing Agreement among Nationwide Mutual
Insurance Company and any corporation that may hereafter be
a subsidiary of Nationwide Mutual Insurance Company
(previously filed as Exhibit 10.2 to Form S-1, Registration
Number 333-18527, filed March 5, 1997,and incorporated
herein by reference)
10.2.1 First Amendment to the Tax Sharing Agreement among
Nationwide Mutual Insurance Company and any corporation that
may hereafter be a subsidiary of Nationwide Mutual Insurance
Company
10.3 Form of First Amendment to Cost Sharing Agreement among
parties named therein (previously filed as Exhibit 10.3 to
Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.4 Modified Coinsurance Agreement between Nationwide Life
Insurance Company and Nationwide Mutual Insurance Company
(previously filed as Exhibit 10.4 to Form S-1, Registration
Number 333-18527, filed March 5, 1997, and incorporated
herein by reference)
10.5 Modified Coinsurance Agreement between Employers Life
Insurance Company of Wausau and Nationwide Life Insurance
Company (previously filed as Exhibit 10.5 to Form S-1,
Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.6 Credit Facility, dated August 12, 1996, among Nationwide
Life Insurance Company, Nationwide Mutual Insurance Company,
the banks named therein and Morgan Guaranty Trust Company of
New York, the administrative agent (previously filed as
Exhibit 10.6 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
10.6.1 Amendment dated as of September 8, 1997 to the Credit
Agreement dated as of August 12, 1996 among Nationwide
Mutual Insurance Company, Nationwide Life Insurance Company,
the Banks party thereto and Morgan Guaranty Trust Company of
New York, as administrative agent (previously filed as
Exhibit 10(a) to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997, and incorporated
herein by reference)
10.7 Form of Lease Agreement between Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, Nationwide Life
and Annuity Insurance Company and Nationwide Financial
Services, Inc. (previously filed as Exhibit 10.7 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.8 Form of Nationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan (previously filed as Exhibit 10.8
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
10.9 General Description of Nationwide Insurance Enterprise
Executive Incentive Plan (previously filed as Exhibit 10.9
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.10 General Description of Nationwide Insurance Enterprise
Management Incentive Plan (previously filed as Exhibit 10.10
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.11 Nationwide Insurance Enterprise Excess Benefit Plan
effective as of December 31, 1996 (previously filed as
Exhibit 10.11 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
10.12 Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of December 31, 1996 (previously filed as
Exhibit 10.12 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
10.13 Nationwide Salaried Employees Severance Pay Plan (previously
filed as Exhibit 10.13 to Form S-1, Registration Number
333-18527, filed March 5, 1997, and incorporated herein by
reference)
10.14 Nationwide Insurance Enterprise Supplemental Defined
Contribution Plan effective as of January 1, 1996
(previously filed as Exhibit 10.14 to Form S-1, Registration
Number 333-18527, filed March 5, 1997, and incorporated
herein by reference)
10.15 General Description of Nationwide Insurance Enterprise
Individual Deferred Compensation Program (previously filed
as Exhibit 10.15 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
10.16 General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program (previously filed as
Exhibit 10.16 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
10.17 Deferred Compensation Agreement, dated as of September 3,
1979, between Nationwide Mutual Insurance Company and D.
Richard McFerson (previously filed as Exhibit 10.17 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.18 Nationwide Financial Services, Inc. Stock Retainer Plan for
Non-Employee Directors (previously filed as Exhibit 10.18 to
Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
11 Statement Regarding Computation of Earnings Per Share
13 Pages 19-58 of the Company's 1997 Annual Report to
Shareholders
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------
All other exhibits referenced by Item 601 of Regulation S-K are not required
under the related instructions or are inapplicable and therefore have been
omitted.
35
<PAGE> 1
Exhibit 10.2.1
FIRST AMENDMENT TO THE
TAX SHARING AGREEMENT
The First Amendment of the Tax Sharing Agreement dated March 4, 1997 (the
"Agreement") is entered into by and between Nationwide Mutual Insurance Company,
an Ohio mutual company ("Nationwide") and any corporation that is, or may
hereafter be, a subsidiary of Nationwide and become a party hereto as
contemplated by Section 8 of the Agreement (collectively, the "Subsidiaries").
WHEREAS, Nationwide and the Subsidiaries did enter into the Agreement on March
4, 1997, with the intent to define the method for allocating the tax liability
of the Group, as that term is defined in the Agreement; and
WHEREAS, Nationwide and the Subsidiaries wish to amend the Agreement to more
accurately and clearly reflect their intent, effective as of the effective date
of the Agreement;
NOW, THEREFORE, the Agreement is amended as follows:
1. The last paragraph of Section 1 of the Agreement is hereby
amended and restated to read:
In addition, for purposes of this Agreement, the "federal
income tax liability" or "federal income tax refund" for any
Tax Year shall be an amount equal to the decrease or increase,
respectively, in the earnings and profits of Nationwide or any
Subsidiary, as calculated under Section 1552(a)(2) and
Regulation 1.1502-33(d)(3) (the Percentage Method, using
100%), but without regard to the provisions of Section 55 of
the Code.
2. Section 6 is amended and restated to read:
Section 6. Refunds. If, on the basis of the computation made
by Nationwide in accordance with Section 4 hereof, any
Subsidiary is entitled to a federal income tax refund taking
into account all facts in existence at the time of such
determination, but excluding any tax attributes of the
Subsidiary which have been utilized by the Group and for which
the Subsidiary has been previously compensated, Nationwide
shall pay such Subsidiary the amount of the federal income tax
refund.
In all other respects, the Agreement is hereby ratified and affirmed by the
parties hereto. This Amendment may be executed in any number of counterparts all
of which shall be considered one original.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Tax Sharing Agreement to
be duly executed and delivered as of December 15, 1997.
<TABLE>
<CAPTION>
NATIONWIDE MUTUAL INSURANCE COMPANY AFFILIATE AGENCY, INC.
<S> <C>
By: /s/ ROBERT A. OAKLEY By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
Robert A. Oakley W. Sidney Druen
Executive Vice President-Chief Financial Officer Senior Vice President and General Counsel
AFFILIATE AGENCY OF OHIO, INC. BEAK AND WIRE CORPORATION (THE).
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
COLONIAL INSURANCE COMPANY
CALIFORNIA CASH MANAGEMENT COMPANY OF WISCONSIN
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
FINANCIAL HORIZONS DISTRIBUTORS AGENCY FINANCIAL HORIZONS DISTRIBUTORS AGENCY
OF ALABAMA, INC. OF OHIO, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
FINANCIAL HORIZONS DISTRIBUTORS AGENCY FINANCIAL HORIZONS DISTRIBUTORS AGENCY
OF OKLAHOMA, INC. OF TEXAS, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
FINANCIAL HORIZONS SECURITIES CORP. GATES, MCDONALD & COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY Druen
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
GATES, MCDONALD & COMPANY OF NEW
GATES, MCDONALD & COMPANY OF NEVADA YORK, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
GATESMCDONALD HEALTH PLUS, INC. INSURANCE INTERMEDIARIES, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ R. LEE AYOTTE
------------------------------------------------ -----------------------------------------
W. Sidney Druen R. Lee Ayotte
Senior Vice President and General Counsel President
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
LANDMARK FINANCIAL SERVICES OF
NEW YORK, INC. LONE STAR GENERAL AGENCY, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
MRM INVESTMENTS, INC. NEW, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NATIONAL PREMIUM & BENEFIT
NATIONAL CASUALTY COMPANY ADMINISTRATION COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ GORDON E. MCCUTCHAN
------------------------------------------------ -----------------------------------------
W. Sidney Druen Gordon E. McCutchan
Senior Vice President and General Counsel Executive Vice President-Law and Corporate
Services and Secretary
NATIONWIDE ADVISORY SERVICES, INC. NATIONWIDE AGENCY, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ GORDON E. MCCUTCHAN
------------------------------------------------ -----------------------------------------
W. Sidney Druen Gordon E. McCutchan
Senior Vice President and General Counsel Secretary
NATIONWIDE AGRIBUSINESS INSURANCE
COMPANY NATIONWIDE CASH MANAGEMENT COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NATIONWIDE COMMUNITY URBAN
NATIONWIDE COMMUNICATIONS INC. REDEVELOPMENT CORPORATION
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NATIONWIDE FINANCIAL INSTITUTIONS
NATIONWIDE CORPORATION DISTRIBUTORS AGENCY, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NATIONWIDE FINANCIAL SERVICES, INC. NATIONWIDE GENERAL INSURANCE COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
NATIONWIDE HMO, INC. NATIONWIDE INDEMNITY COMPANY
By: /s/ GORDON E. MCCUTCHAN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
Gordon E. McCutchan W. Sidney Druen
Secretary Senior Vice President and General Counsel
NATIONWIDE INVESTMENT SERVICES
CORPORATION NATIONWIDE INVESTORS SERVICES, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NATIONWIDE LIFE AND ANNUITY INSURANCE
NATIONWIDE LIFE INSURANCE COMPANY COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NATIONWIDE PROPERTY AND CASUALTY
NATIONWIDE MANAGEMENT SYSTEMS, INC. INSURANCE COMPANY
By: /s/ GORDON E. MCCUTCHAN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
Gordon E. McCutchan W. Sidney Druen
Secretary Senior Vice President and General Counsel
NEA VALUEBUILDER INVESTOR SERVICES OF
NEA VALUEBUILDER INVESTOR SERVICES, INC. ALABAMA, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NEA VALUEBUILDER INVESTOR SERVICES OF NEA VALUEBUILDER INVESTOR SERVICES OF
ARIZONA, INC. MONTANA, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NEA VALUEBUILDER INVESTOR SERVICES OF NEA VALUEBUILDER INVESTOR SERVICES OF
NEVADAA, INC. OHIO, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
NEA VALUEBUILDER INVESTOR SERVICES OF NEA VALUEBUILDER INVESTOR SERVICES OF
OKLAHOMA, INC. TEXAS, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ ROBERT W. WENDEL
------------------------------------------------ -----------------------------------------
W. Sidney Druen Robert W. Wendel
Senior Vice President and General Counsel President
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
NEA VALUEBUILDER INVESTOR SERVICES OF NEA VALUEBUILDER SERVICES INSURANCE
WYOMING, INC. AGENCY, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
PEBSCO OF MASSACHUSSETTS INSURANCE
AGENCY, INC. PEBSCO OF TEXAS, INC.
By: /s/ W. SIDNEY DRUEN By: /s/ ROBERT W. WENDEL
------------------------------------------------ -----------------------------------------
W. Sidney Druen Robert W. Wendel
Senior Vice President and General Counsel President
PUBLIC EMPLOYEES BENEFIT SERVICES PUBLIC EMPLOYEES BENEFIT SERVICES
CORPORATION CORPORATION OF ALABAMA
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
PUBLIC EMPLOYEES BENEFIT SERVICES PUBLIC EMPLOYEES BENEFIT SERVICES
CORPORATION OF ARKANSAS CORPORATION OF MONTANA
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
PUBLIC EMPLOYEES BENEFIT SERVICES
CORPORATION OF NEW MEXICO SCOTTSDALE INDEMNITY COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
SCOTTSDALE INSURANCE COMPANY TIG COUNTRYWIDE INSURANCE COMPANY
By: /s/ W. SIDNEY DRUEN By: /s/ W. SIDNEY DRUEN
------------------------------------------------ -----------------------------------------
W. Sidney Druen W. Sidney Druen
Senior Vice President and General Counsel Senior Vice President and General Counsel
</TABLE>
<PAGE> 1
Exhibit 11
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
Years Ended December 31, 1997, 1996 and 1995
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 265.2 $ 223.6 $ 209.6
============ ============ ============
Diluted net income $ 265.2 $ 223.6 $ 209.6
============ ============ ============
Weighted average common shares outstanding 124,031,688 104,745,000 104,745,000
Dilutive effect of stock options 34,550 -- --
------------ ------------ ------------
Diluted common shares outstanding 124,066,238 104,745,000 104,745,000
============ ============ ============
Earnings per common share:
Basic $ 2.14
Diluted $ 2.14
</TABLE>
<PAGE> 1
Exhibit 13
Nationwide Financial Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations of Nationwide Financial Services, Inc. and subsidiaries (NFS or
collectively the Company) for the three years ended December 31, 1997 follows.
This discussion should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this report.
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 subsidiary trust in companion public offerings. In
addition to actual results, the Company presents pro forma results adjusted for
the public offerings and for special dividends paid in anticipation of the IPO
as if they had occurred at the beginning of each year presented. See note 1 to
the consolidated financial statements for additional information regarding the
public offerings and special dividends.
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 and results of discontinued
operations. 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 each of the last three years. In addition, net operating
income reflecting pro forma adjustments for the IPO, companion senior notes and
capital securities public offerings and special dividends as discussed
previously is also presented. 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 each year presented, or of
future results of the Company.
<TABLE>
<CAPTION>
(in millions of dollars,
except per share amounts) 1997 1996 1995
=======================================================
<S> <C> <C> <C>
Net income $265.2 $223.6 $209.6
Realized gains on
investments, net of tax (7.9) (1.0) (0.1)
Income from discontinued
operations, net of tax -- (11.3) (24.7)
- -------------------------------------------------------
Net operating income 257.3 211.3 184.8
Pro forma adjustments, net of
tax (2.9) (26.2) (26.2)
- -------------------------------------------------------
Pro forma net operating
income $254.4 $185.1 $158.6
=======================================================
Basic and diluted pro forma
net operating income per
share $ 1.98 $ 1.44 $ 1.24
=======================================================
</TABLE>
Earnings per share amounts reflect the Company's adoption of Statement
of Financial Accounting Standards No. 128 -- Earnings Per Share during 1997. The
earnings per share amounts presented represent both basic and diluted earnings
per share as the dilutive effects of stock options do
19
<PAGE> 2
- --------------------------------------------------------------------------------
not result in dilutive amounts different from basic earnings per share.
Revenues
Total revenues for 1997, excluding realized gains and losses on investments,
increased to $2.23 billion compared to $2.02 billion for 1996 and $1.84 billion
for 1995. Increases in policy charges and net investment income accounted for
most of the growth.
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 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 each of the last three years were as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
========================================================
<S> <C> <C> <C>
Asset fees $384.8 $275.5 $184.8
Administrative fees 59.5 50.1 40.7
Surrender fees 32.4 22.1 17.3
Cost of insurance charges 68.5 53.2 43.8
- --------------------------------------------------------
Total policy charges $545.2 $400.9 $286.6
========================================================
</TABLE>
The growth in asset fees reflects increases in total separate account
assets of 40% in 1997 and 45% in 1996. As of year end, total separate account
assets were $37.72 billion.
Separate Account Assets
(in billions)
1993 $ 9.0
1994 $12.1
1995 $18.6
1996 $26.9
1997 $37.7
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 $1.29 billion and
$1.36 billion in 1995 and 1996, respectively, to $1.41 billion in 1997 primarily
due to increased invested assets to support growth in fixed annuity policy
reserves. Fixed annuity policy reserves, which include the fixed option of the
Company's variable annuity products, increased $727.8 million in 1996 and $682.4
million in 1997 and were $14.19 billion as of year end 1997. The increase in net
investment income due to growth in invested assets was partially offset by
declining investment yields in 1997 and 1996 due to lower market interest rates.
Realized gains and losses on investments are not considered by the
Company to be recurring components of earnings and are reported in the Corporate
and Other segment. 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 $11.1 million in 1997 compared to realized
losses of $0.2 million and $1.7 million in 1996 and 1995, respectively. Realized
gains in 1997 include $14.4 million recognized when securities of $850.0 million
were paid to Nationwide Corporation (Nationwide Corp.), the 100% owner of NFS
prior to the IPO, as a dividend on February 24, 1997 as a part of certain
transactions that were completed in anticipation of the IPO. Also, during 1997,
the Company recorded a realized loss of $16.2 million related to the sale of a
single corporate bond investment that had deteriorated due to the credit quality
of the issuer.
Benefits and Expenses
Interest credited to policyholder account balances totaled $1.02 billion in 1997
compared to $982.3 million in 1996 and $950.3 million in 1995 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 6.12% in 1997 compared to 6.30% and 6.58% in 1996 and 1995,
respectively.
Amortization of deferred policy acquisition costs (DAC) increased to
$167.2 million in 1997 compared to $133.4 million in 1996 and $82.7 million in
1995. The increase is principally related to increased business in the Variable
Annuities segment. Operating expenses were $402.7 million in 1997, a 14%
increase from 1996 operating expenses of $353.5 million. Operating expenses were
$317.7 million in 1995. The increase reflects the growth in the number of
annuity and life insurance contracts in-force and the related increase in
administrative processing costs. Increased operating expenses in 1997 also
reflect the cost of certain technology initiatives.
The Company has developed a plan to address issues related to the Year
2000. The problem relates to many existing computer programs using only two
digits to identify a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. The Company has been evaluating its exposure to
the Year 2000 issue through a review of all of its operating systems as well as
dependencies on the systems of others
20
<PAGE> 3
- --------------------------------------------------------------------------------
since 1996. The Company expects all system changes and replacements needed to
achieve Year 2000 compliance to be completed by the end of 1998. Compliance
testing will be completed in the first quarter of 1999. The Company charges to
expense all costs associated with these system changes as the costs are
incurred.
Operating expenses in 1997 include approximately $45 million on
technology projects, which includes 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 anticipates spending a
comparable amount in 1998 on technology projects, including Year 2000
initiatives.
The Company recorded interest expense of $26.1 million in 1997 on the
senior notes and the capital securities issued in March 1997 concurrent with the
Company's IPO.
Federal income tax expense was $141.8 million representing an effective
tax rate of 34.8% for 1997. Federal income tax expense in 1996 and 1995 was
$115.8 million and $96.3 million, respectively, representing effective rates of
35.3% and 34.3%.
Discontinued Operations
Discontinued operations include the results of (i) the three NLIC subsidiaries
whose outstanding common stock, on September 24, 1996, was declared as a
dividend payable to Nationwide Corp. on January 1, 1997 and (ii) NLIC's accident
and health and group life insurance business which was ceded to affiliates
effective January 1, 1996. The Company entered into these transactions in 1996
in order to focus its business on long-term savings and retirement products. The
transactions are described in note 19 of the consolidated financial statements.
The Company 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 $11.3 million in
1996 and $24.7 million in 1995. There was no income from discontinued operations
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 investment broker/dealers, pension plan administrators and
financial institutions. The Company has access to over 1,000 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. Over 250 regional pension plan administrators market the
Company's group variable and fixed annuities to employers sponsoring employee
retirement programs. The Company currently has relationships with over 180 banks
selling individual variable annuities (under the Company's brand name and on a
private-label basis), individual fixed annuities, variable universal life
insurance and group pension products.
Retail distributors are representatives of the Company who market
products directly to a customer base identified by the Company and include
employees of the Company's sales 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 sales
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.
Statutory premiums and deposits by distribution channel for each of the
last three years are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- -----------------
(in millions of dollars) AMOUNT % Amount % Amount %
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
WHOLESALE CHANNELS
Investment dealers $ 3,894.1 37.7% $3,627.8 42.5% $2,835.4 42.8%
Pension market 2,325.0 22.5 1,911.6 22.4 1,573.7 23.8
Financial institutions 1,653.2 16.0 947.2 11.1 515.4 7.8
- ------------------------------------------------------------------------------------------------------------
Total wholesale channels 7,872.3 76.2 6,486.6 76.0 4,924.5 74.4
- ------------------------------------------------------------------------------------------------------------
RETAIL CHANNELS
Public sector and teachers market 1,862.1 18.0 1,528.0 17.9 1,244.9 18.8
Nationwide agents 602.7 5.8 525.5 6.1 446.5 6.8
- ------------------------------------------------------------------------------------------------------------
Total retail channels 2,464.8 23.8 2,053.5 24.0 1,691.4 25.6
- ------------------------------------------------------------------------------------------------------------
Total external premiums and deposits 10,337.1 100.0% 8,540.1 100.0% 6,615.9 100.0%
============================================================================================================
Nationwide Insurance Enterprise employee and
agent benefit plans 174.9 502.5 182.1
- ------------------------------------------------------------------------------------------------------------
Total statutory premiums and deposits $10,512.0 $9,042.6 $6,798.0
============================================================================================================
</TABLE>
21
<PAGE> 4
- --------------------------------------------------------------------------------
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved annual sales growth of 21%, 29%, and 21% in 1997, 1996 and
1995, respectively. The Company's goal is 20% annual growth in external sales
and management believes the Company is well positioned to achieve that goal in
1998.
The Company's flagship products are marketed under The BEST of AMERICA
brand, and include individual and group variable annuities and variable life
insurance. The BEST of AMERICA 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.
External statutory premiums and deposits by product are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
===============================================================
<S> <C> <C> <C>
The BEST of AMERICA products:
Individual variable
annuities $ 4,269.7 $3,801.5 $2,740.6
Group variable annuities 2,220.5 1,807.1 1,457.6
Variable universal life 220.3 165.4 101.3
Private label annuities 1,006.3 625.9 389.7
IRC Section 457 annuities 1,715.7 1,425.8 1,191.1
The NEA Valuebuilder annuities 145.5 102.2 53.8
Other 759.1 612.2 681.8
- ---------------------------------------------------------------
$10,337.1 $8,540.1 $6,615.9
===============================================================
</TABLE>
Business Segments
The Company has three product segments: Variable Annuities, Fixed Annuities and
Life Insurance. In addition, the Company reports corporate income and expenses,
investments and related investment income supporting capital not specifically
allocated to its product segments, revenues and expenses of its distribution
companies, revenues and expenses of its investment advisor subsidiary, revenues
and expenses related to group annuity contracts sold to Nationwide Insurance
Enterprise employee 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 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 following table summarizes operating income before federal income
tax expense for the Company's business segments for each of the last three
years.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
========================================================
<S> <C> <C> <C>
Variable annuity $150.9 $ 90.3 $ 50.8
Fixed annuity 169.5 135.4 137.0
Life insurance 70.9 67.2 67.6
Corporate and other 4.6 35.4 27.5
- --------------------------------------------------------
$395.9 $328.3 $282.9
========================================================
</TABLE>
Variable Annuities
The Variable Annuities segment consists of annuity contracts that provide the
customer with the opportunity to invest in mutual funds managed by independent
investment managers and the Company, with investment returns accumulating on a
tax-deferred basis. The Company's variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts.
The following table summarizes certain selected financial data for the
Company's Variable Annuities segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
===========================================================
<S> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Asset fees $ 370.2 $ 261.8 $ 172.8
Administrative fees 21.8 18.1 14.0
Surrender fees 21.9 13.6 10.0
- -----------------------------------------------------------
Total policy charges 413.9 293.5 196.8
Net investment income
and other (2) (9.9) (8.9) (7.8)
- -----------------------------------------------------------
404.0 284.6 189.0
- -----------------------------------------------------------
Benefits and expenses:
Benefits and claims 5.9 4.6 2.9
Amortization of DAC 87.8 57.4 26.3
Other operating
expenses 159.4 132.3 109.0
- -----------------------------------------------------------
253.1 194.3 138.2
- -----------------------------------------------------------
Operating income before
federal income tax
expense $ 150.9 $ 90.3 $ 50.8
===========================================================
</TABLE>
22
<PAGE> 5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
===========================================================
<S> <C> <C> <C>
OTHER DATA (1)
Statutory premiums and
deposits (3) $ 7,535.8 $ 6,500.3 $ 4,399.3
Withdrawals 2,683.3 1,697.4 1,071.6
Policy reserves as of
year end $34,486.7 $24,278.1 $16,761.8
Ratio of policy charges
to average policy
reserves 1.41% 1.43% 1.44%
Pre-tax operating income
to average policy
reserves 0.51% 0.44% 0.37%
===========================================================
</TABLE>
(1) Excludes the fixed option under the Company's variable annuity contracts
which is reported in the Company's Fixed Annuities segment.
(2) The Company's method of allocating net investment income results in a charge
(negative net investment income) to this segment which is recognized in the
Corporate and Other segment. The charge relates to non-invested assets which
support this segment on a statutory basis.
(3) Statutory data have been derived from the Annual 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 a sharp increase in policy
charge revenues partially offset by increases in amortization of DAC and other
operating expenses. The increase in policy charge revenues is attributable to
growth in asset fees. Asset fees were $370.2 million in 1997 up 41% from $261.8
million in 1996 and totaled $172.8 million in 1995. The increase in assets fees
reflects substantial growth in policy reserve levels as a result of steady
premium growth and through market appreciation on investments underlying
reserves.
Variable Annuity Policy Reserves
(in billions)
1993 $ 7.9
1994 $10.8
1995 $16.8
1996 $24.3
1997 $34.5
Variable annuity policy reserves grew $10.21 billion during 1997
reaching $34.49 billion as of year end 1997 compared to growth in 1996 of $7.52
billion and year end 1996 reserves of $24.28 billion. Total policy charges as a
percentage of policy reserves remained relatively stable between 141 and 144
basis points during the last three years presented, reflecting no or minimal
changes in the levels of policy charges for most variable annuity products.
The Company has sustained high sales growth over the recent three year
period through deeper penetration of existing distribution channels and the
addition of new sales outlets. In addition, variable annuity sales reflect
growing consumer demand for equity-based retirement savings investments, coupled
with a robust stock market and lower interest rates. Significant increases in
production through financial institutions, pension plan administrators and
public sector markets have contributed strongly to the growth in variable
annuity sales in 1997, when sales increased 16% to a record $7.54 billion
compared to $6.50 billion in 1996. Variable annuity sales in 1996 represented a
48% increase over 1995 sales of $4.40 billion.
Favorable equity market conditions over the past three years have also
contributed significantly to the growth in variable annuity policy reserves.
Variable annuity policy reserves reflect market appreciation of $5.21 billion,
$2.72 billion and $2.93 billion in 1997, 1996 and 1995, respectively.
The increase in amortization of DAC in 1997 compared to 1996 and 1995
is due to overall growth in the variable annuity business.
The growth in operating expenses also reflects the overall growth in
the variable annuity business. Operating expenses were 54 basis points of
average variable annuity policy reserves for 1997 comparing favorably to 64
basis points and 80 basis points for 1996 and 1995, respectively. The Company
has controlled operating expense growth by increasing productivity through
investments in technology and economies of scale.
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 the Company's variable annuity contracts.
23
<PAGE> 6
- --------------------------------------------------------------------------------
The following table summarizes certain selected financial data for the
Company's Fixed Annuities segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
===========================================================
<S> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Policy charges $ 15.9 $ 18.0 $ 16.4
Life insurance
premiums 27.3 24.0 32.8
Net investment income 1,098.2 1,050.6 1,002.8
- -----------------------------------------------------------
1,141.4 1,092.6 1,052.0
- -----------------------------------------------------------
Benefits and expenses:
Interest credited to
policyholder account
balances 823.4 805.0 775.7
Other benefits and
claims 23.3 33.8 29.5
Amortization of DAC 39.8 38.6 29.5
Other operating
expenses 85.4 79.8 80.3
- -----------------------------------------------------------
971.9 957.2 915.0
- -----------------------------------------------------------
Operating income before
federal income tax
expense $ 169.5 $ 135.4 $ 137.0
===========================================================
OTHER DATA (1)
Statutory premiums and
deposits (2) $ 2,137.9 $ 1,600.5 $ 1,864.2
Withdrawals and benefits 1,710.0 1,375.5 1,151.6
Policy reserves as of
year end $14,194.2 $13,511.8 $12,784.0
Net interest margin on
general account policy
reserves 2.04% 1.92% 1.92%
Pre-tax operating income
to average policy
reserves 1.22% 1.03% 1.14%
===========================================================
</TABLE>
(1) Includes the fixed option under the Company's variable annuity contracts.
(2) Statutory data have been derived from the Annual Statements of the Company's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Fixed annuity segment results reflect an increase in interest spread
income attributable to growth in fixed annuity policy reserves and wider
interest margins. Interest spread is the differential between net investment
income and interest credited to policyholder account balances. Interest spreads
vary depending on crediting rates offered by competitors, performance of the
investment portfolio, changes in market interest rates and other factors. The
following table depicts the interest margins on general account policy reserves
in the Fixed Annuities segment for each of the last three years.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------
<S> <C> <C> <C>
Net investment income 8.16% 8.22% 8.50%
Interest credited 6.12 6.30 6.58
- -------------------------------------------------------
2.04% 1.92% 1.92%
=======================================================
</TABLE>
The Company expects interest margins to compress during 1998 reflecting
the lower interest rate environment available for new invested assets. The
Company is able to mitigate the effects of lower investment yields by
periodically resetting the rates credited on fixed annuity contracts. As of
December 31, 1997, $6.85 billion, or 48% of fixed annuity policy reserves, were
in contracts where the guaranteed interest rate is reestablished each quarter.
Fixed annuity policy reserves of $4.88 billion are in contracts that adjust the
crediting rate on an annual basis with portions resetting in each calendar
quarter. The Company also has $1.40 billion of fixed annuity policy reserves
that call for the crediting rate to be reset annually on each January 1. The
remaining $1.06 billion of fixed annuity policy reserves are in payout status
where the Company has guaranteed periodic, typically monthly, payments.
Fixed annuity policy reserves increased to $14.19 billion as of
year-end compared to $13.51 billion a year ago and $12.78 billion as of the end
of 1995.
The growth reflects increased fixed annuity sales in 1997 through the
financial institutions and investment dealer channels. Sales for 1997 were up
34% to $2.14 billion compared to $1.60 billion in 1996. Sales in 1995 totaled
$1.86 billion. Most of the Company's fixed annuity sales are premiums allocated
to the guaranteed fixed option of variable annuity contracts. Fixed annuity
sales for 1997 include $1.67 billion in premiums allocated to the fixed option
under a variable annuity contract, compared to $1.24 billion in 1996. Sales
growth in 1997 reflects the success of proprietary fixed product sales through
financial institutions, as well as the impact of a 1.00% first-year bonus
crediting rate offered on The BEST of AMERICA-America's Vision product during
the second half of 1997.
Fixed Annuity Policy Reserves
(in billions)
1993 $10.2
1994 $11.2
1995 $12.8
1996 $13.5
1997 $14.2
The decrease in other benefits and claims reflects a $13.0 million
charge in 1996 related to reserve strengthening in the immediate annuity line
due to changes in estimated profitability based on revised assumptions for
mortality and
24
<PAGE> 7
- --------------------------------------------------------------------------------
reinvestment rates. Amortization of DAC reflects a reduction in 1996 of $6.0
million due to changes in estimates of expected future profits as a result of
favorable investment spread and persistency experience.
Life Insurance
The Life Insurance segment consists of insurance products, including variable
universal life insurance and corporate-owned 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
Company's Life Insurance segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Cost of insurance
charges $ 68.5 $ 53.2 $ 43.8
Other policy charges 36.8 33.4 27.5
- -----------------------------------------------------------
Total policy charges 105.3 86.6 71.3
Life insurance
premiums 178.1 174.6 166.3
Net investment income 189.1 174.0 171.3
Other 0.6 0.4 0.2
- -----------------------------------------------------------
473.1 435.6 409.1
- -----------------------------------------------------------
Benefits and expenses:
Interest credited to
policyholder account
balances 78.5 70.2 69.0
Other benefits and
claims 149.0 141.2 133.0
Policyholder dividends 40.6 40.7 39.7
Amortization of DAC 39.6 37.4 31.0
Other operating
expenses 94.5 78.9 68.8
- -----------------------------------------------------------
402.2 368.4 341.5
- -----------------------------------------------------------
Operating income before
federal income tax
expense $ 70.9 $ 67.2 $ 67.6
===========================================================
OTHER DATA
Statutory premiums(1):
Traditional and
universal life $ 248.4 $ 253.9 $ 248.3
Variable universal
life 220.0 165.4 104.1
Corporate-owned life 195.0 20.0 --
Policy reserves as of
year end:
Traditional and
universal life 2,369.5 2,295.5 2,213.7
Variable universal
life 892.1 622.6 446.8
Corporate-owned life 225.4 20.8 --
Life insurance in force:
Traditional and
universal life 27,495.7 28,107.0 27,616.9
Variable universal
life 11,337.4 8,094.6 4,926.5
Corporate-owned life $ 426.3 $ 73.0 $ --
===========================================================
</TABLE>
(1) Statutory data have been derived from the Annual 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 revenue growth in the variable
universal life insurance line driven by a steady increase in insurance in-force
and policy reserves partially offset by higher operating expenses associated
with technology-related costs in the traditional life insurance lines.
Life Insurance Policy Reserves
(in billions)
1993 $2.3
1994 $2.4
1995 $2.7
1996 $2.9
1997 $3.5
Variable universal life insurance policy charges were $57.1 million in
1997, an increase of $18.5 million, or 48%, compared to $38.6 million in 1996.
For 1995, variable universal life insurance policy charges were $26.7 million.
The growth in variable universal life policy charges is attributable to the
growth in insurance in-force and policy reserves, which increased 40% and 43%,
respectively, in 1997. During 1996, variable universal life insurance in-force
and policy reserves increased 64% and 39%, respectively. Growth in insurance
in-force and policy reserves is due to strong sales from both investment dealers
and Nationwide Insurance Enterprise insurance agents, combined with high
persistency. In February, 1998, the Company introduced a new variable universal
life insurance product called Next Generation, which offers an innovative,
tiered-pricing structure that maximizes cash value. The Company anticipates
continued sales growth in 1998 for variable universal life insurance as well as
its recent entry into corporate-owned insurance products.
The growth in operating expenses is due to technology-related costs
combined with the increase in variable life insurance policies in-force.
Technology-related expenses in 1997 were $16.5 million, compared to $3.2 million
in 1996. The majority of the expenses are for a new policy administration system
to support traditional life insurance products and for activities to make
systems Year 2000 compliant.
25
<PAGE> 8
- --------------------------------------------------------------------------------
Corporate and Other
The following table summarizes certain selected financial data for the Company's
Corporate and Other segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
===========================================================
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 153.5 $ 154.7 $ 137.6
Other 55.3 49.3 51.0
- -----------------------------------------------------------
208.8 204.0 188.6
- -----------------------------------------------------------
Benefits and expenses:
Interest credited to
policy reserves 114.7 106.1 105.6
Interest expense on debt
and capital securities
of subsidiary trust 26.1 -- --
Other operating expenses 63.4 62.5 55.5
- -----------------------------------------------------------
204.2 168.6 161.1
- -----------------------------------------------------------
Operating income before
federal income tax
expense(1) $ 4.6 $ 35.4 $ 27.5
===========================================================
OTHER DATA
Statutory premiums and
deposits(2) $ 174.9 $ 502.6 $ 182.1
Withdrawals and benefits 205.4 140.3 144.4
Policy reserves as of year
end 3,791.9 3,302.5 2,644.3
Nationwide retail mutual
fund assets(3) $2,555.0 $2,136.2 $2,113.9
===========================================================
</TABLE>
(1) Excludes realized gains (losses) on investments and discontinued operations.
(2) Statutory data have been derived from the Annual 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.
Revenues in the Corporate and Other segment consist of net investment
income on invested assets not allocated to the three product segments,
investment management fees and other revenues earned from Nationwide mutual
funds other than the portion allocated to the Variable Annuities and Life
Insurance segments, commissions and other income earned by the marketing and
distribution subsidiaries of the Company and net investment income and policy
charges from group annuity contracts issued to Nationwide Insurance Enterprise
employee and agent benefit plans.
The decreases in operating income for the period to period comparisons
primarily relate to interest expense on the senior notes and capital securities
issued in March 1997 concurrent with the IPO and the impact on net investment
income related to the special dividends paid in anticipation of the IPO. On a
pro forma basis, net operating income (loss) before federal income tax expense
was $0.2 million, $(4.9) million and $(12.8) million for 1997, 1996 and 1995,
respectively.
In addition to the operating revenues previously presented, the Company
also reports realized gains and losses on investments in the Corporate and Other
segment. Net realized gains on investments were $11.1 million in 1997 compared
to realized losses of $0.2 million and $1.7 million in 1996 and 1995,
respectively. Realized gains in 1997 include $14.4 million recognized when
securities of $850.0 million were paid to Nationwide Corp. as a dividend on
February 24, 1997. Also, during 1997, the Company recorded realized losses of
$16.2 million related to the sale of a single corporate bond investment due to
deterioration in the credit quality of the issuer.
===============================================================================
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 debt, capital securities of subsidiary
trust and equity, summarized in the following table.
26
<PAGE> 9
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996
(in millions of dollars) 1997 Pro forma(1) 1996
=============================================================
<S> <C> <C> <C>
Long-term debt $ 298.4 $ 298.4 $ --
Capital securities of
subsidiary trust 100.0 100.0 --
- -------------------------------------------------------------
Total long-term debt and
capital securities 398.4 398.4 --
- -------------------------------------------------------------
Shareholders' equity,
excluding unrealized
gains on securities
available-for-sale, net 1,877.1 1,632.3 1,958.1
Unrealized gains on
securities
available-for-sale, net 247.1 173.6 173.6
- -------------------------------------------------------------
Total shareholders'
equity 2,124.2 1,805.9 2,131.7
- -------------------------------------------------------------
Total capital $2,522.6 $2,204.3 $2,131.7
=============================================================
Total capital excluding
unrealized gains on
securities
available-for-sale,
net $2,275.5 $2,030.7 $1,958.1
=============================================================
Long-term debt and capital
securities to total
capital 15.8% 18.1% --
Long-term debt and capital
securities to total
capital excluding
unrealized gains on
securities
available-for-sale, net 17.5% 19.6% --
=============================================================
</TABLE>
(1) Adjusts 1996 shareholders' equity for the net proceeds of the IPO and for
the special dividends paid in anticipation of the IPO.
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.
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 policyholders' surplus as of the prior
December 31 or (ii) the 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.
As a result of the $850.0 million dividend paid on February 24, 1997,
any dividend paid by NLIC during the twelve-month period immediately following
the $850.0 million dividend would be an extraordinary dividend under Ohio
insurance laws. Accordingly, no such dividend could be paid without prior
regulatory approval.
The Company's principal sources of funds are premiums and deposits
paid, contract charges earned, net investment income received and proceeds from
investments called, redeemed or sold. The principal uses of these funds are the
payment of benefits on annuity contracts and life insurance policies, operating
expenses, commissions, and the purchase of investments. Net cash provided by
operating activities (reflecting principally (i) premiums and contract charges
collected, less (ii) benefits paid on life insurance products, plus (iii) income
collected on invested assets, less (iv) commissions and other operating expenses
paid) was $1.17 billion, $853.7 million and $1.12 billion in 1997, 1996 and
1995, respectively. Net cash used in investing activities (principally
reflecting investments purchased less investments called, redeemed or sold) was
$2.05 billion, $765.9 million and $1.73 billion in 1997, 1996 and 1995,
respectively. Net cash provided by (used in) financing activities (principally
reflecting net proceeds from the IPO and the companion offerings in 1997 only
and deposits to investment product and universal life insurance product account
balances less withdrawals from such account balances, and dividends to
shareholders) was $1.01 billion, $(54.7) million and $616.5 million in, 1997,
1996 and 1995, 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 tangi-
27
<PAGE> 10
- --------------------------------------------------------------------------------
ble net worth, as defined, in excess of $1.23 billion and NLIC maintain
statutory surplus in excess of $875 million.
A primary liquidity concern with respect to annuity and life insurance
products is the risk of early policyholder withdrawal. The Company mitigates
this risk by offering variable products where the investment risk is transferred
to the policyholder, charging surrender fees at the time of withdrawal for
certain products, applying a market value adjustment to withdrawals for certain
products in the Company's general account, and monitoring and matching
anticipated cash inflows and outflows.
For individual annuity products ($27.1 billion of reserves as of
December 31, 1997) the surrender charge is calculated as a percentage of the
lesser of deposits made or the amount surrendered and is assessed at declining
rates during the first seven years after a deposit is made.
For group annuity products ($20.5 billion of reserves as of December
31, 1997), the surrender charge amounts and periods can vary significantly,
depending on the terms of each contract and the compensation structure for the
producer. Generally, surrender charge percentages for group products are less
than individual products because the Company incurs lower expenses at contract
origination for group products.
Life insurance policies are also subject to withdrawal. However, they
are less susceptible to withdrawal than are annuity products because
policyholders generally must undergo a new underwriting process and may incur a
surrender fee in order to obtain a new insurance policy.
The short-term and long-term liquidity requirements of the Company are
monitored regularly to match cash inflows with cash requirements. The Company
periodically reviews its short-term and long-term projected sources and uses of
funds and the asset/liability, investment and cash flow assumptions underlying
these projections. Adjustments are made periodically with respect to the
Company's investment policies to reflect changes in the Company's short-term and
long-term cash needs and changing business and economic conditions.
The Company employs an asset/liability management approach tailored to
the specific requirements of each of its products. The Company's general account
investments are primarily managed in a number of pools that are segregated by
weighted average maturity of the assets required by the pools. On fixed maturity
securities and mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms of the asset. For mortgage backed
securities, repayments are determined using the current rate of repayment of the
underlying pool of mortgages and the terms of the securities. Each product line
has an investment strategy based on the specific characteristics of such product
line. The strategy establishes asset duration, quality and other guidelines. The
Company's actuaries determine the amount of new investments needed for each line
to arrive at the amount of new investments needed for each pool by month. The
investments acquired for each pool are shared on a proportional basis by each of
the lines requesting investments in the pool based on their actual investment
needs.
For all business having future benefits which cannot be changed at the
option of the policyholder, the underlying assets are managed in a separate
pool. The duration of assets and liabilities in this pool are kept as close
together as possible. For assets, the repayment cash flows, plus anticipated
coupon payments, are used in calculating asset duration. Future benefits and
expenses are used for liabilities. On December 31, 1997, the average duration of
assets in this pool was 7.39 years and the average duration of the liabilities
was 7.90 years. Policy reserves on this business were $1.06 billion as of
December 31, 1997.
Because the timing of the payment of future benefits on the majority of
the Company's business can be changed by the policyholder, the Company employs
cash flow testing techniques in its asset/liability management process.
Annually, the Company's annuity and insurance business is analyzed to determine
the adequacy of the reserves supporting such business. This analysis is
accomplished by projecting under a number of possible future interest rate
scenarios the anticipated cash flows from such business and the assets required
to support such business. The first seven of these scenarios are required by the
state insurance laws. Projections are also made using 13 additional scenarios
which involve more extreme fluctuations in future interest rates. Finally, to
get a statistical analysis of possible results and to minimize any bias in the
20 predetermined scenarios, additional projections are made using 200 randomly
generated interest rate scenarios. For the Company's 1997 cash flow testing
process, interest rates for 90-day treasury bills ranged from 0.5% to 12.4%
under the 20 predetermined scenarios and 0.9% to 29.4% under the 200 random
scenarios. Interest rates for longer maturity treasury securities had comparable
ranges. The values produced by each projection are used to determine future
gains or losses from the Company's annuity and insurance business, which, in
turn, are used to quantify the adequacy of the Company's reserves over the
entire projection period. The results of the Company's cash flow testing for
year end 1997 indicated that the Company's reserves were adequate as of December
31, 1997.
The Company manages its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the market value of the
Company's fixed maturity portfolio increases or decreases in inverse
relationship with fluctuations in interest rates. For example, if interest rates
rise, the Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by interest
rate changes. If interest rates decline, net investment income will decrease if
high-yielding fixed maturity investments mature or are sold and the
28
<PAGE> 11
- --------------------------------------------------------------------------------
proceeds therefrom are reinvested in securities yielding a lower rate.
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 December 31, 1997, $37.72 billion (or 63%) of the Company's total
assets were held in separate accounts and $22.18 billion (or 37%) were held in
the Company's general account, including $19.67 billion of general account
investments.
IP graph here
1997 Investment Portfolio
19.7 Billion
Fixed Maturity $13.2
Mortgage $ 5.2
Real Estate, Policy
Loans Equites and other $ 1.3
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 $365.5
million of policy reserves as of December 31, 1997 ($280.2 million as of
December 31, 1996) for which the Company bears the investment risk. In addition
to the information presented herein, see note 3 to the consolidated financial
statements for information regarding the Company's investments.
The following table summarizes the Company's consolidated general
account invested assets by asset category.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------ ------------------
(in millions CARRYING % OF Carrying % of
of dollars) VALUE TOTAL Value Total
===============================================================
<S> <C> <C> <C> <C>
Fixed maturity
securities $13,210.1 67.2% $12,310.5 67.2%
Mortgage loans, net 5,181.6 26.3 5,272.1 28.8
Real estate, net 311.4 1.6 265.8 1.5
Policy loans 415.3 2.1 371.8 2.0
Equity securities 80.4 0.4 59.1 0.3
Other long-term
investments 25.2 0.1 28.7 0.2
Short-term
investments 449.2 2.3 9.3 --
- ---------------------------------------------------------------
Total $19,673.2 100.0% $18,317.3 100.0%
===============================================================
</TABLE>
Fixed Maturity Securities
The following table summarizes the composition of the Company's general account
fixed maturity securities by category.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------ ------------------
(in millions CARRYING % OF Carrying % of
of dollars) VALUE TOTAL Value Total
===============================================================
<S> <C> <C> <C> <C>
U.S. government/
agencies $ 319.7 2.4% $ 285.1 2.3%
Foreign governments 95.8 0.7 101.9 0.9
State and political
subdivisions 1.6 -- 6.7 --
Mortgage-backed
securities:
U.S. government/
agencies 3,750.3 28.4 3,665.3 29.8
Corporate:
Public 4,597.3 34.8 4,339.7 35.3
Private 4,445.4 33.7 3,911.8 31.7
- ---------------------------------------------------------------
Total $13,210.1 100.0% $12,310.5 100.0%
===============================================================
</TABLE>
The average duration and average maturity of the Company's general
account fixed maturity securities as of December 31, 1997 were approximately
3.44 and 7.77 years, respectively. As a result, the market value of the
Company's general account investments may fluctuate significantly in response to
changes in interest rates. In addition, the Company may also be likely to
experience investment losses to the extent its liquidity needs require the
disposition of general account fixed maturity securities in unfavorable interest
rate environments.
The National Association of Insurance Commissioners (NAIC) assigns
securities quality ratings and uniform
29
<PAGE> 12
- --------------------------------------------------------------------------------
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% were in
the highest two NAIC Designations as of December 31, 1997.
The following table sets forth an analysis of credit quality, as
determined by NAIC Designation, of the Company's general account fixed maturity
securities portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
NAIC RATING AGENCY ---------------------------- ----------------------------
DESIGNATION(1) EQUIVALENT DESIGNATION(2) CARRYING VALUE % OF TOTAL Carrying Value % of Total
=====================================================================================================================
<CAPTION>
(in millions of dollars)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A $ 8,815.3 66.7% $ 8,453.4 68.7%
2 Baa 4,116.6 31.2 3,629.9 29.5
3 Ba 220.9 1.7 166.6 1.3
4 B 53.7 0.4 49.7 0.4
5 Caa and lower 3.6 -- 10.9 0.1
6 In or near default -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
$ 13,210.1 100.0% $ 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's general account mortgage-backed security (MBS)
investments include residential MBSs and multi-family mortgage pass-through
certificates. As of December 31, 1997, MBSs were $3.75 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 December 31, 1997, $2.65 billion (or 71%) of the carrying value of the
general account MBS portfolio was invested in planned amortization class
CMOs/REMICs (PACs). PACs are securities whose cash flows are designed to remain
constant over a variety of mortgage prepayment environments. Other classes in
the CMO/REMIC security are structured to accept the volatility of mortgage
prepayment changes, thereby insulating the PAC class.
The following table sets forth the distribution by investment type of
the Company's general account MBS portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1997 1996
----------------- -----------------
(in millions CARRYING % OF Carrying % of
of dollars) VALUE TOTAL Value Total
=============================================================
<S> <C> <C> <C> <C>
Accrual $ 48.5 1.3% $ 41.4 1.1%
Planned Amortization
Class 2,645.3 70.5 2,970.6 81.0
Sequential 19.8 0.5 2.5 0.1
Scheduled 160.6 4.3 167.2 4.6
Targeted Amortization
Class 90.8 2.4 87.7 2.4
Very Accurately
Defined Maturity 550.1 14.7 395.9 10.8
Multi-family Mortgage
Pass-through
Certificates 235.2 6.3 -- --
- -------------------------------------------------------------
$3,750.3 100.0% $3,665.3 100.0%
=============================================================
</TABLE>
The Company invests in private fixed maturity securities because of the
(i) generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business cove-
30
<PAGE> 13
- --------------------------------------------------------------------------------
nants available in private fixed maturity security loan agreements and (iii)
stronger prepayment protection. Although private fixed maturity securities are
not registered with the Securities and Exchange Commission and generally are
less liquid than public fixed maturity securities, restrictive financial and
business covenants included in private fixed maturity security loan agreements
generally are designed to compensate for the impact of increased liquidity risk.
A significant majority of the private fixed maturity securities that the Company
holds are participations in issues that are also owned by other investors. In
addition, some of the private fixed maturity securities are rated by nationally
recognized rating agencies and substantially all have been assigned a rating
designation by the NAIC.
The Company has not invested in derivative securities other than MBSs.
Mortgage Loans
As of December 31, 1997, general account mortgage loans were $5.18 billion (or
26%) of the carrying value of consolidated general account invested assets. As
of such date, commercial mortgage loans constituted substantially all (99.9%) of
total general account mortgage loans. Commitments to fund mortgage loans of
$341.4 million extending into 1998 were outstanding as of December 31, 1997.
In June 1997, the Company exchanged $359.7 million of multi-family
mortgage loans with the Federal Home Loan Mortgage Corporation (FHLMC) for FHLMC
multi-family mortgage pass-through certificates supported by the exchanged
loans. The transaction resulted in the reclassification of the exchanged amount
from mortgage loans on real estate to fixed maturity securities
available-for-sale on the consolidated balance sheet. No gain or loss was
recognized as a result of the exchange.
The summary below depicts loans by remaining principal balance as of
December 31, 1997:
<TABLE>
<CAPTION>
(in millions APARTMENT
of dollars) OFFICE WAREHOUSE RETAIL & OTHER TOTAL
==========================================================================
<S> <C> <C> <C> <C> <C>
East North Central $131.7 $135.3 $ 627.7 $154.3 $1,049.0
East South Central 33.9 25.4 155.4 72.9 287.6
Mountain 25.6 28.5 110.4 103.6 268.1
Middle Atlantic 120.6 93.7 166.0 15.3 395.6
New England 53.7 42.6 145.3 -- 241.6
Pacific 216.6 338.1 426.2 89.7 1,070.6
South Atlantic 113.3 145.5 491.0 317.9 1,067.7
West North Central 134.0 8.7 73.2 52.9 268.8
West South Central 116.6 114.1 188.2 162.4 581.3
- --------------------------------------------------------------------------
$946.0 $931.9 $2,383.4 $969.0 5,230.3
===============================================================
Less valuation allowances and unamortized discount 48.7
- --------------------------------------------------------------------------
Total mortgage loans on real estate, net $5,181.6
==========================================================================
</TABLE>
As of December 31, 1997, the Company's largest exposure to any single
borrowing group was $98.5 million, or 2% of the Company's general account
mortgage portfolio.
The following table sets forth the maturity and principal repayment
schedule for the Company's general account mortgage loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1997 1996
---------------------- ----------------------
AGGREGATE Aggregate
PRINCIPAL Principal
BALANCE OF % OF Balance of % of
MORTGAGE TOTAL Mortgage Total
LOANS PRINCIPAL Loans Principal
MATURING BALANCE Maturing Balance
======================================================================
<S> <C> <C> <C> <C>
1997 $ -- 0.0% $ 162.0 3.0%
1998 197.8 3.8 210.2 3.9
1999 294.8 5.6 349.3 6.6
2000 451.5 8.6 519.5 9.7
2001 267.2 5.1 357.1 6.7
2002 362.4 6.9 429.8 8.1
Thereafter 3,656.6 70.0 3,302.6 62.0
- ----------------------------------------------------------------------
$5,230.3 100.0% $5,330.5 100.0%
======================================================================
</TABLE>
31
<PAGE> 14
- --------------------------------------------------------------------------------
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
years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
COMPANY ACLI(1) COMPANY ACLI(2) COMPANY ACLI(2)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Delinquent(3) 0.19% --% 0.79% 1.79% 0.63% 2.35%
In foreclosure(4) 0.19 -- 0.79 1.10 0.63 1.45
Restructured(5) 0.77 -- 1.11 6.81 1.48 8.27
------- ------- ------- ------- ------- -------
Subtotal 0.96 -- 1.90 8.60 2.11 10.62
Foreclosed -- year to date 1.07 -- 0.35 1.01 0.74 1.75
- -----------------------------------------------------------------------------------------------------------------
Total 2.03% --% 2.25% 9.61% 2.85% 12.37%
=================================================================================================================
</TABLE>
(1) ACLI data for the year ended December 31, 1997 are not yet available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," numbers 1367 and 1289, dated March 6,
1997 and February 28, 1996, 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.
32
<PAGE> 15
- --------------------------------------------------------------------------------
INFLATION
Many of the Company's assets and liabilities are monetary in nature and
sensitive to the interest rate environment which can be affected by inflation.
The Company is exposed to the risk of a reduction in interest spread or profit
margins when interest rates fluctuate. Bond calls, mortgage prepayments,
contract surrenders and withdrawals of annuity contracts and life insurance
policies, and sales of contracts are influenced by the interest rate
environment. In general, the fair value of the Company's fixed maturity
securities portfolio increases or decreases inversely with fluctuations in
interest rates. For example, if interest rates rise, the Company's fixed
maturity investments will generally decrease in value. Additionally, the
Company's net investment income may be affected by the interest rate changes. If
interest rates decline, net investment income will decrease if high-yielding
fixed maturity investments mature or are sold and the proceeds therefrom are
reinvested in securities yielding a lower rate. Management attempts to mitigate
the negative impact of interest rate changes through asset/liability management,
product design, management of crediting rates, surrender charges and market
value adjustments at withdrawal for certain products and management of mortality
charges and dividend scales with respect to its in-force life insurance
policies.
================================================================================
PROPOSED LEGISLATION
The Clinton Administration's 1999 budget proposal contains provisions which, if
enacted, would eliminate many tax benefits currently afforded to annuity
products and certain life insurance products. These provisions appear to be
inconsistent with what the Company believes to be the Administration's desire to
encourage private sector long-term savings.
Currently, policyholders are permitted to exchange life insurance,
endowment or annuity contracts for similar contracts without being required to
pay tax on the accretion of value within the contracts being transferred in the
exchange. In addition, policyholders who hold variable annuity or life insurance
contracts are currently permitted to transfer funds between various investment
options offered under such contracts on a tax-free basis. The 1999 budget
proposal, if enacted in its current form, would make all exchanges involving
insurance contracts immediately taxable. In addition, under the budget proposal
each investment option offered under a single variable contract would be treated
as a separate variable contract, and thus transfers of funds between different
investment options would cause the amounts transferred to be subject to tax, to
the extent there has been accretion in value. The budget proposal would also
reduce policyholders' tax basis in annuity and life insurance contracts by the
mortality and expense charges paid, increasing future taxable gains. Most of the
tax benefits of corporate-owned life insurance products would also be eliminated
by the budget proposal.
The Company supports social policy that encourages private sector
savings, and believes that the provisions contained in the budget proposal
clearly run counter to that goal. Annuity products are specifically designed for
long-term and retirement savings and play an important role in millions of
individuals' financial protection plans. However, there can be no assurance as
to whether legislation will be enacted which would contain provisions with
possible adverse effects on the Company's ability to sell its annuity and life
insurance products.
33
<PAGE> 16
- --------------------------------------------------------------------------------
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
(in millions of dollars, except per share amounts) 1997 1996 1995 1994 1993
=============================================================================================================
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1)
Total policy charges $ 545.2 $ 400.9 $ 286.6 $ 217.2 $ 165.5
Traditional life insurance premiums 205.4 198.6 199.1 176.7 188.3
Net investment income 1,413.9 1,357.8 1,294.0 1,210.8 1,131.3
Realized gains (losses) on investments 11.1 (0.2) (1.7) (16.5) 106.2
Other 62.8 59.5 59.0 45.9 48.0
- -------------------------------------------------------------------------------------------------------------
Total revenues 2,238.4 2,016.6 1,837.0 1,634.1 1,639.3
- -------------------------------------------------------------------------------------------------------------
Interest credited and other benefits 1,235.4 1,201.6 1,155.4 1,031.5 1,025.2
Interest expense on debt and capital securities 26.1 -- -- -- --
Other operating expenses 569.9 486.9 400.4 362.2 338.3
- -------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,831.4 1,688.5 1,555.8 1,393.7 1,363.5
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before federal
income tax expense and cumulative effect of
changes in accounting principles 407.0 328.1 281.2 240.4 275.8
Federal income tax expense 141.8 115.8 96.3 82.5 96.7
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of changes in accounting
principles $ 265.2 $ 212.3 $ 184.9 $ 157.9 $ 179.1
=============================================================================================================
Net income $ 265.2 $ 223.6 $ 209.6 $ 178.4 $ 207.6
=============================================================================================================
Basic and diluted earnings per common share
amounts: (2)
Income from continuing operations $ 2.14
Net income $ 2.14
Cash dividends declared $ 0.18
RECONCILIATION OF NET OPERATING INCOME (1)
Net income $ 265.2 $ 223.6 $ 209.6 $ 178.4 $ 207.6
Less: Realized (gains) losses on investments, net
of tax (7.9) (1.0) (0.1) 10.3 (69.3)
Less: Income from discontinued operations, net of
tax -- (11.3) (24.7) (20.5) (28.6)
- -------------------------------------------------------------------------------------------------------------
Net operating income 257.3 211.3 184.8 $ 168.2 $ 109.7
========= =========
Pro forma adjustments (2.9) (26.2) (26.2)
--------- --------- ---------
Pro forma net operating income $ 254.4 $ 185.1 $ 158.6
=====================================================================================
Pro forma net operating income per common share $ 1.98 $ 1.44 $ 1.24
=====================================================================================
</TABLE>
(1) Comparisons between 1997 results of operations and those of prior years are
affected by the Company's initial public offering in March 1997 and
companion offerings of senior notes and capital securities as well as the
payment of certain special dividends. Pro forma amounts adjust for these
transactions. See note 1 to the consolidated financial statements for
further description of these transactions and the related pro forma
adjustments.
(2) Actual earnings per common share amounts have not been presented for periods
prior to 1997, because such amounts are not meaningful due to the effects of
the initial public offering and the $900.0 million of dividends paid prior
to the initial public offering as described in note 1 to the consolidated
financial statements.
34
<PAGE> 17
- --------------------------------------------------------------------------------
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------
(in millions of dollars) 1997 1996 1995 1994 1993
=============================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL POSITION (1)
Total investments $19,673.2 $18,317.3 $17,837.0 $15,239.1 $14,237.7
Deferred policy acquisition costs 1,665.4 1,366.5 1,020.4 995.6 763.8
Separate account assets 37,724.4 26,926.7 18,591.1 12,087.1 9,006.4
Other assets 829.9 1,159.7 1,057.6 921.5 696.0
- -------------------------------------------------------------------------------------------------------------
Total assets $59,892.9 $47,770.2 $38,506.1 $29,243.3 $24,703.9
=============================================================================================================
Policy reserves $18,702.8 $17,600.6 $16,771.9 $15,072.7 $13,803.7
Separate account liabilities 37,724.4 26,926.7 18,591.1 12,087.1 9,006.4
Other liabilities 943.1 1,111.2 526.4 222.9 284.2
Long-term debt 298.4 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total liabilities 57,668.7 45,638.5 35,889.4 27,382.7 23,094.3
NFS-obligated mandatorily redeemable capital
securities of subsidiary trust 100.0 -- -- -- --
Shareholders' equity 2,124.2 2,131.7 2,616.7 1,860.6 1,609.6
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $59,892.9 $47,770.2 $38,506.1 $29,243.3 $24,703.9
=============================================================================================================
POLICY RESERVES BY BUSINESS SEGMENT
Variable annuity $34,486.7 $24,278.1 $16,761.8 $10,751.1 $ 7,854.7
Fixed annuity 14,194.2 13,511.8 12,784.0 11,247.0 10,154.1
Life insurance 3,487.0 2,938.9 2,660.5 2,425.2 2,254.9
Corporate and other 3,791.9 3,302.5 2,644.3 2,252.7 2,103.9
Reserves ceded 467.4 496.0 512.4 483.8 442.5
- -------------------------------------------------------------------------------------------------------------
$56,427.2 $44,527.3 $35,363.0 $27,159.8 $22,810.1
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
(in millions of dollars, except per share amounts) 1997 1996 1995 1994 1993
=============================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING INCOME BEFORE FEDERAL INCOME TAX EXPENSE
BY BUSINESS SEGMENT (1)
Variable annuity $ 150.9 $ 90.3 $ 50.8 $ 24.6 $ 10.4
Fixed annuity 169.5 135.4 137.0 139.0 105.9
Life insurance 70.9 67.2 67.6 53.0 49.7
Corporate and other 4.6 35.4 27.5 40.3 3.6
- -------------------------------------------------------------------------------------------------------------
$ 395.9 $ 328.3 $ 282.9 $ 256.9 $ 169.6
=============================================================================================================
EXTERNAL SALES BY BUSINESS SEGMENT
Variable annuity $ 7,535.8 $ 6,500.3 $ 4,399.3 $ 3,821.2 $ 2,414.2
Fixed annuity 2,137.9 1,600.5 1,864.2 1,308.6 1,300.9
Life insurance 663.4 439.3 352.4 320.8 279.4
- -------------------------------------------------------------------------------------------------------------
$10,337.1 $ 8,540.1 $ 6,615.9 $ 5,450.6 $ 3,994.5
=============================================================================================================
</TABLE>
35
<PAGE> 18
Nationwide Financial Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
========================================================================================================
<S> <C> <C> <C>
REVENUES
Investment product and universal life insurance product
policy charges $ 545.2 $ 400.9 $ 286.6
Traditional life insurance premiums 205.4 198.6 199.1
Net investment income 1,413.9 1,357.8 1,294.0
Realized gains (losses) on investments 11.1 (0.2) (1.7)
Other 62.8 59.5 59.0
- --------------------------------------------------------------------------------------------------------
2,238.4 2,016.6 1,837.0
- --------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Other benefits and claims 178.2 178.3 165.2
Policyholder dividends on participating policies 40.6 41.0 39.9
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Interest expense on debt and capital securities of
subsidiary trust 26.1 -- --
Other operating expenses 402.7 353.5 317.7
- --------------------------------------------------------------------------------------------------------
1,831.4 1,688.5 1,555.8
- --------------------------------------------------------------------------------------------------------
Income from continuing operations before federal income
tax expense 407.0 328.1 281.2
Federal income tax expense 141.8 115.8 96.3
- --------------------------------------------------------------------------------------------------------
Income from continuing operations 265.2 212.3 184.9
Income from discontinued operations (less federal income tax
expense of $4.5 and $7.4 in 1996 and 1995, respectively) -- 11.3 24.7
- --------------------------------------------------------------------------------------------------------
Net income $ 265.2 $ 223.6 $ 209.6
========================================================================================================
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 2.14
Net income $ 2.14
Weighted average number of shares of common stock
outstanding (in millions) 124.0
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 19
Nationwide Financial Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
December 31, 1997 1996
=========================================================================================
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $13,204.1 $12,304.6
Equity securities 80.4 59.1
Fixed maturity securities held-to-maturity, at amortized
cost (fair value $6.0 in 1997; $5.9 in 1996) 6.0 5.9
Mortgage loans on real estate, net 5,181.6 5,272.1
Real estate, net 311.4 265.8
Policy loans 415.3 371.8
Other long-term investments 25.2 28.7
Short-term investments 449.2 9.3
- -----------------------------------------------------------------------------------------
19,673.2 18,317.3
- -----------------------------------------------------------------------------------------
Cash 180.9 43.2
Accrued investment income 211.2 210.2
Deferred policy acquisition costs 1,665.4 1,366.5
Investment in subsidiaries classified as discontinued
operations -- 485.7
Other assets 437.8 420.6
Assets held in Separate Accounts 37,724.4 26,926.7
- -----------------------------------------------------------------------------------------
$59,892.9 $47,770.2
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $18,702.8 $17,600.6
Long-term debt 298.4 --
Other liabilities 943.1 1,111.2
Liabilities related to Separate Accounts 37,724.4 26,926.7
- -----------------------------------------------------------------------------------------
57,668.7 45,638.5
- -----------------------------------------------------------------------------------------
Commitments and contingencies (notes 9 and 16)
NFS-obligated mandatorily redeemable capital securities of
subsidiary trust holding solely junior subordinated
debentures of NFS 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 in 1997 (none in 1996) 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 629.2 551.4
Retained earnings 1,247.8 1,405.7
Unearned compensation (1.1) --
Unrealized gains on securities available-for-sale, net 247.1 173.6
- -----------------------------------------------------------------------------------------
2,124.2 2,131.7
- -----------------------------------------------------------------------------------------
$59,892.9 $47,770.2
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 20
Nationwide Financial Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions of dollars)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
CLASS A CLASS B ADDITIONAL ON SECURITIES TOTAL
COMMON COMMON PAID-IN RETAINED UNEARNED AVAILABLE- SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS COMPENSATION FOR-SALE, NET EQUITY
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994 $ -- $ 1.0 $ 629.7 $ 1,349.6 $ -- $ (119.7) $1,860.6
Capital contribution -- -- 51.0 -- -- (4.1) 46.9
Net income -- -- -- 209.6 -- -- 209.6
Dividends to shareholder -- -- -- (8.5) -- -- (8.5)
Unrealized gains on
securities
available-for-sale, net -- -- -- -- -- 508.1 508.1
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 -- 1.0 680.7 1,550.7 -- 384.3 2,616.7
Net income -- -- -- 223.6 -- -- 223.6
Dividends to shareholder -- -- (129.3) (368.6) -- (39.8) (537.7)
Unrealized losses on
securities
available-for-sale, net -- -- -- -- -- (170.9) (170.9)
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 -- 1.0 551.4 1,405.7 -- 173.6 2,131.7
Issuance of Class A
common stock 0.2 -- 524.0 -- -- -- 524.2
Net income -- -- -- 265.2 -- -- 265.2
Dividends to shareholders -- -- (450.0) (423.1) -- -- (873.1)
Unrealized gains on
securities
available-for-sale, net -- -- -- -- -- 73.5 73.5
Other, net -- -- 3.8 -- (1.1) -- 2.7
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 $ 0.2 $ 1.0 $ 629.2 $ 1,247.8 $ (1.1) $ 247.1 $2,124.2
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 21
Nationwide Financial Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
===========================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 265.2 $ 223.6 $ 209.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Capitalization of deferred policy acquisition costs (487.9) (422.6) (321.3)
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Amortization and depreciation (0.6) 7.3 13.2
Realized (gains) losses on invested assets, net (11.1) (0.6) 3.3
(Increase) decrease in accrued investment income (1.0) 2.8 (16.9)
(Increase) decrease in other assets (16.5) (93.6) 25.8
(Decrease) increase in policy liabilities (23.1) (151.0) 123.9
Increase in other liabilities 270.3 177.4 69.9
Other, net (5.7) (5.3) (22.0)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,173.4 853.7 1,118.5
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 993.4 1,162.8 634.6
Proceeds from sale of securities available-for-sale 574.5 299.6 150.5
Proceeds from maturity of fixed maturity securities
held-to-maturity -- -- 564.4
Proceeds from repayments of mortgage loans on real estate 437.3 309.0 207.8
Proceeds from sale of real estate 34.8 18.5 48.3
Proceeds from repayments of policy loans and sale of other
invested assets 22.7 22.8 53.6
Cost of securities available-for-sale acquired (2,828.1) (1,573.6) (1,998.2)
Cost of fixed maturity securities held-to-maturity
acquired -- -- (599.4)
Cost of mortgage loans on real estate acquired (752.2) (972.8) (796.0)
Cost of real estate acquired (24.9) (7.9) (10.9)
Policy loans issued and other invested assets acquired (62.5) (57.7) (75.9)
Short-term investments, net (441.0) 33.4 91.7
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,046.0) (765.9) (1,729.5)
- -----------------------------------------------------------------------------------------------------------
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 (15.4) (52.0) (8.5)
Increase in investment product and universal life
insurance product account balances 2,488.5 1,781.8 1,883.7
Decrease in investment product and universal life
insurance product account balances (2,379.8) (1,784.5) (1,258.7)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,010.3 (54.7) 616.5
- -----------------------------------------------------------------------------------------------------------
Net increase in cash 137.7 33.1 5.5
Cash, beginning of year 43.2 10.1 4.6
- -----------------------------------------------------------------------------------------------------------
Cash, end of year $ 180.9 $ 43.2 $ 10.1
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 22
Nationwide Financial Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
================================================================================
1 ORGANIZATION AND DESCRIPTION OF BUSINESS
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. NFS and its subsidiaries are
collectively referred to as "the Company." 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). In March 1997,
NFS also sold, in companion public offerings, $300.0 million of 8% Senior Notes
(the Notes) and, through a wholly owned subsidiary trust, $100.0 million of
7.899% Capital Securities (the Capital Securities). 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.
Prior to the initial public offering , NFS was a wholly owned
subsidiary of Nationwide Corporation (Nationwide Corp.). 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 shareholders of
NFS. During the first quarter of 1997, NFS's Board of Directors approved a
104,745 for one split of the NFS Class B common stock, which became effective
February 10, 1997. Share information for all periods presented has been restated
to reflect the split.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that focused the
business of NFS on long-term savings and retirement products. On September 24,
1996, NLIC declared a dividend payable to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of certain subsidiaries
that do not offer or distribute long-term savings or retirement products. In
addition, during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was ceded to two
affiliates effective January 1, 1996. These subsidiaries, through December 31,
1996, and all accident and health and group life insurance business have been
accounted for as discontinued operations for all periods presented. See notes 14
and 19. On January 27, 1997, Nationwide Corp. contributed the common stock of
NLIC and three marketing and distribution companies to NFS. Accordingly, the
1996 and 1995 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. Additionally, the Company
paid $900.0 million of dividends to Nationwide Corp., $50.0 million on December
31, 1996 and $850.0 million on February 24, 1997.
The Company is a leading provider of long-term savings and retirement
products. The Company is subject to regulation by the Insurance Departments of
states in which it is licensed, and undergoes periodic examinations by those
departments.
The following unaudited pro forma information presents the results of
operations of the Company for the years ended December 31, 1997, 1996 and 1995,
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 and 1995 only, the $50.0 million dividend
paid by the Company on December 31, 1996, as if each had been consummated at the
beginning of the year indicated. This pro forma information is not necessarily
indicative of what would have occurred had the above transactions been made on
the dates indicated, or of future results of the Company.
40
<PAGE> 23
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
- -----------------------------------------------------------
(in millions of dollars,
except per share amounts) 1997 1996 1995
===========================================================
<S> <C> <C> <C>
Revenues $2,240.1 $2,008.4 $1,828.8
Benefits and expenses 1,837.5 1,720.6 1,587.9
- -----------------------------------------------------------
Income from continuing
operations before
federal
income tax expense 402.6 287.8 240.9
Federal income tax
expense 140.3 101.7 82.2
- -----------------------------------------------------------
Income from continuing
operations 262.3 186.1 158.7
Income from discontinued
operations, net of
federal income tax
expense -- 11.3 24.7
- -----------------------------------------------------------
Net income $ 262.3 $ 197.4 $ 183.4
===========================================================
Basic and diluted
earnings per common
share:
Income from continuing
operations $ 2.04 $ 1.45 $ 1.24
Net income $ 2.04 $ 1.54 $ 1.43
Weighted average number
of shares of common
stock outstanding (in
millions) 128.5 128.4 128.4
===========================================================
</TABLE>
The impact on the above per common share amounts of realized gains on
investments, net of tax, was $0.06 in 1997, $0.01 in 1996 and none in 1995.
===============================================================================
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles which differ from statutory accounting practices
prescribed or permitted by regulatory authorities. Annual Statements for the
Company's insurance subsidiaries, filed with the department of insurance of each
insurance company's state of domicile, are prepared on the basis of accounting
practices prescribed or permitted by each department. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company's
insurance subsidiaries have no material permitted statutory accounting
practices.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
as of the date of the consolidated financial statements and the reported amounts
of revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage loans on
real estate and real estate investments and the liability for future policy
benefits and claims. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
a. Consolidation Policy
The consolidated financial statements include the accounts of NFS and its wholly
owned subsidiaries. Subsidiaries that are classified and reported as
discontinued operations are not consolidated but rather are reported as
"Investment in subsidiaries classified as discontinued operations" in the
accompanying consolidated balance sheets and "Income from discontinued
operations" in the accompanying consolidated statements of income. All
significant intercompany balances and transactions have been eliminated.
b. Valuation of Investments and Related Gains and Losses
The Company is required to classify its fixed maturity securities and equity
securities as either held-to-maturity, available-for-sale or trading. Fixed
maturity securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity and are stated at
amortized cost. Fixed maturity securities not classified as held-to-maturity and
all equity securities are classified as available-for-sale and are stated at
fair value, with the unrealized gains and losses, net of adjustments to deferred
policy acquisition costs and deferred federal income tax, reported as a separate
component of shareholders' equity. The adjustment to deferred policy acquisition
costs represents the change in amortization of deferred policy acquisition costs
that would have been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed maturity securities
classified as trading as of December 31, 1997 or 1996.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation allowances for
impairments of mortgage loans on real estate based on a review by portfolio
managers. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the fair value of the collateral, if the loan is
collateral dependent. Loans in foreclosure and loans considered to be impaired
are placed on non-accrual status. Interest received
41
<PAGE> 24
- --------------------------------------------------------------------------------
on non-accrual status mortgage loans on real estate is included in interest
income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on the equity
basis, adjusted for valuation allowances. Impairment losses are recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
Realized gains and losses on the sale of investments are determined on
the basis of specific security identification. Estimates for valuation
allowances and other than temporary declines are included in realized gains and
losses on investments.
c. Revenues and Benefits
Investment Products and Universal Life Insurance Products: Investment products
consist primarily of individual and group variable and fixed annuities.
Universal life insurance products include universal life insurance, variable
universal life insurance and other interest-sensitive life insurance policies.
Revenues for investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy administration
and surrender charges that have been earned and assessed against policy account
balances during the period. Policy benefits and claims that are charged to
expense include interest credited to policy account balances and benefits and
claims incurred in the period in excess of related policy account balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums and benefits
and consist primarily of whole life insurance, limited-payment life insurance,
term life insurance and certain annuities with life contingencies. Premiums for
traditional life insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result in recognition
of profits over the life of the contract. This association is accomplished by
the provision for future policy benefits and the deferral and amortization of
policy acquisition costs.
d. Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions, certain expenses
of the policy issue and underwriting department and certain variable sales
expenses have been deferred. For investment products and universal life
insurance products, deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present value of
estimated future gross profits from projected interest margins, asset fees, cost
of insurance, policy administration and surrender charges. For years in which
gross profits are negative, deferred policy acquisition costs are amortized
based on the present value of gross revenues. For traditional life insurance
products, these deferred policy acquisition costs are predominantly being
amortized with interest over the premium paying period of the related policies
in proportion to the ratio of actual annual premium revenue to the anticipated
total premium revenue. Such anticipated premium revenue was estimated using the
same assumptions as were used for computing liabilities for future policy
benefits. Deferred policy acquisition costs are adjusted to reflect the impact
of unrealized gains and losses on fixed maturity securities available-for-sale
as described in note 2(b).
e. Separate Accounts
Separate Account assets and liabilities represent contractholders' funds which
have been segregated into accounts with specific investment objectives. For all
but $365.5 million of separate account assets, the investment income and gains
or losses of these accounts accrue directly to the contractholders. The activity
of the Separate Accounts is not reflected in the consolidated statements of
income and cash flows except for the fees the Company receives.
f. Future Policy Benefits
Future policy benefits for investment products in the accumulation phase,
universal life insurance and variable universal life insurance policies have
been calculated based on participants' contributions plus interest credited less
applicable contract charges.
Future policy benefits for traditional life insurance policies have
been calculated using a net level premium method based on estimates of
mortality, morbidity, investment yields and withdrawals which were used or which
were being experienced at the time the policies were issued, rather than the
assumptions prescribed by state regulatory authorities. See note 4.
g. Participating Business
Participating business represents approximately 50% in 1997 (52% in 1996 and 54%
in 1995) of the Company's life insurance in force, 77% in 1997 (78% in 1996 and
79% in 1995) of the number of life insurance policies in force, and 27% in 1997
(40% in 1996 and 47% in 1995) of life insurance statutory premiums. The
provision for policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the accompanying consolidated
balance sheets.
42
<PAGE> 25
- --------------------------------------------------------------------------------
h. Federal Income Tax
The Company files a consolidated federal income tax return with Nationwide
Mutual Insurance Company (NMIC), the majority shareholder of Nationwide Corp.
The members of the consolidated tax return group have a tax sharing arrangement
which provides, in effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting for
income tax. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under this method, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce the deferred tax assets to
the amounts expected to be realized.
i. Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits and claims
incurred are deducted from the respective income and expense accounts. Assets
and liabilities related to reinsurance ceded are reported on a gross basis. All
of the Company's accident and health and group life insurance business is ceded
to affiliates and is accounted for as discontinued operations. See notes 14 and
19.
j. Earnings Per Common Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128 -- Earnings Per Share during the fourth quarter of 1997. The statement
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. The effects of common stock equivalents do not result
in diluted earnings per share different from basic earnings per share. Earnings
per common share amounts are adjusted for the stock split described in note 1.
Actual earnings per common share amounts have not been presented for periods
prior to 1997, because such amounts are not meaningful due to the effects of the
initial public offering and the $900 million of dividends paid prior to the
initial public offering as described in note 1.
k. Recently Issued Accounting Pronouncements
SFAS No. 130 -- Reporting Comprehensive Income was issued in June 1997 and is
effective for fiscal years beginning after December 15, 1997. The statement
establishes 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 would be reported in addition to earnings amounts currently
presented. The Company will adopt the statement and begin reporting
comprehensive income in the first quarter of 1998.
l. Reclassification
Certain items in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
43
<PAGE> 26
- --------------------------------------------------------------------------------
3 INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated fair value
of securities available-for-sale as of December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
(in millions of dollars) COST GAINS LOSSES FAIR VALUE
==============================================================================================================
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ -- $ 313.7
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
==============================================================================================================
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
- --------------------------------------------------------------------------------------------------------------
$12,800.7 $498.3 $(14.5) $13,284.5
==============================================================================================================
DECEMBER 31, 1996
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 0.5 -- 6.7
Debt securities issued by foreign governments 100.7 2.1 (0.9) 101.9
Corporate securities 7,999.3 285.9 (33.7) 8,251.5
Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3
- --------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 11,970.9 384.7 (51.0) 12,304.6
Equity securities 43.9 15.6 (0.4) 59.1
- --------------------------------------------------------------------------------------------------------------
$12,014.8 $400.3 $(51.4) $12,363.7
==============================================================================================================
</TABLE>
The amortized cost and estimated fair value of the U.S. Treasury
security classified as held-to-maturity were $6.0 million as of December 31,
1997 and were $5.9 million as of December 31, 1996. The security has a
contractual maturity date of March 31, 1998.
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1997, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
(in millions of dollars) COST FAIR VALUE
==========================================================
<S> <C> <C>
Fixed maturity securities
available for sale:
Due in one year or less $ 419.2 $ 422.1
Due after one year through
five years 4,573.5 4,708.4
Due after five years through
ten years 2,772.6 2,879.7
Due after ten years 1,333.4 1,443.6
- ----------------------------------------------------------
9,098.7 9,453.8
Mortgage-backed securities 3,634.2 3,750.3
- ----------------------------------------------------------
$12,732.9 $13,204.1
==========================================================
</TABLE>
44
<PAGE> 27
- --------------------------------------------------------------------------------
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
========================================================
<S> <C> <C>
Gross unrealized gains $ 483.8 $349.0
Adjustment to deferred policy
acquisition costs (103.7) (81.9)
Deferred federal income tax (133.0) (93.5)
- --------------------------------------------------------
$ 247.1 $173.6
========================================================
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities held-to-maturity
follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
========================================================
<S> <C> <C> <C>
Securities
available-for-sale:
Fixed maturity securities $137.5 $(289.2) $876.3
Equity securities (2.7) 8.9 --
Fixed maturity securities
held-to-maturity -- (0.2) 75.9
- --------------------------------------------------------
$134.8 $(280.5) $952.2
========================================================
</TABLE>
Proceeds from the sale of securities available-for-sale during 1997,
1996 and 1995 were $574.5 million, $299.6 million and $150.5 million,
respectively. During 1997, gross gains of $9.9 million ($6.4 million and $4.8
million in 1996 and 1995, respectively) and gross losses of $18.0 million ($13.7
million and $2.1 million in 1996 and 1995, respectively) were realized on those
sales. In addition, gross gains of $15.1 million and gross losses of $0.7
million were realized in 1997 when the Company paid a dividend to Nationwide
Corp. consisting of securities having an aggregate fair value of $850.0 million.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25.4 million to
available-for-sale securities due to evidence of a significant deterioration in
the issuer's creditworthiness. The transfer of those fixed maturity securities
resulted in a gross unrealized loss of $3.5 million.
As permitted by the Financial Accounting Standards Board's Special
Report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, issued in November 1995, the Company
transferred nearly all of its fixed maturity securities previously classified as
held-to-maturity to available-for-sale. As of December 14, 1995, the date of
transfer, the fixed maturity securities had amortized cost of $3.32 billion,
resulting in a gross unrealized gain of $155.9 million.
Investments that were non-income producing for the twelve month period
preceding December 31, 1997 amounted to $19.4 million ($26.8 million for 1996)
and consisted of $3.0 million ($0.2 million in 1996) in securities
available-for-sale, $16.4 million ($20.6 million in 1996) in real estate and
none ($5.9 million in 1996) in other long-term investments.
Real estate is presented at cost less accumulated depreciation of $45.1
million as of December 31, 1997 ($30.3 million as of December 31, 1996) and
valuation allowances of $11.1 million as of December 31, 1997 ($15.2 million as
of December 31, 1996).
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million ($51.8 million as of
December 31, 1996), which includes $3.9 million ($41.7 million as of December
31, 1996) of impaired mortgage loans on real estate for which the related
valuation allowance was $0.1 million ($8.5 million as of December 31, 1996) and
$16.0 million ($10.1 million as of December 31, 1996) of impaired mortgage loans
on real estate for which there was no valuation allowance. During 1997, the
average recorded investment in impaired mortgage loans on real estate was
approximately $31.8 million ($39.7 million in 1996) and interest income
recognized on those loans was $1.0 million ($2.1 million in 1996), which is
equal to interest income recognized using a cash-basis method of income
recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
=======================================================
<S> <C> <C>
Allowance, beginning of year $51.0 $49.1
(Reductions) additions charged to
operations (1.2) 4.5
Direct write-downs charged against
the allowance (7.3) (2.6)
- -------------------------------------------------------
Allowance, end of year $42.5 $51.0
=======================================================
</TABLE>
45
<PAGE> 28
- --------------------------------------------------------------------------------
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
==========================================================
<S> <C> <C> <C>
Gross investment income:
Securities
available-for-sale:
Fixed maturity
securities $ 911.6 $ 917.1 $ 685.8
Equity securities 0.8 1.3 1.3
Fixed maturity
securities
held-to-maturity 0.4 0.4 201.8
Mortgage loans on real
estate 457.7 432.8 395.5
Real estate 42.9 44.3 38.3
Short-term investments 26.9 4.2 10.6
Other 21.1 3.6 7.2
- ----------------------------------------------------------
Total investment
income 1,461.4 1,403.7 1,340.5
Less investment expenses 47.5 45.9 46.5
- ----------------------------------------------------------
Net investment
income $1,413.9 $1,357.8 $1,294.0
==========================================================
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
========================================================
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ 3.6 $(3.5) $ 4.2
Equity securities 2.7 3.2 3.4
Mortgage loans on real estate 1.6 (4.1) (7.1)
Real estate and other 3.2 4.2 (2.2)
- --------------------------------------------------------
$11.1 $(0.2) $(1.7)
========================================================
</TABLE>
Fixed maturity securities with an amortized cost of $6.2 million as of
December 31, 1997 and 1996 were on deposit with various regulatory agencies as
required by law.
===============================================================================
4 FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts represents
approximately 86% and 87% of the total liability for future policy benefits as
of December 31, 1997 and 1996, respectively. The average interest rate credited
on investment product policies was approximately 6.1%, 6.3% and 6.6% for the
years ended December 31, 1997, 1996 and 1995, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
Interest rates: Interest rates vary by issue year and were 6.9% and 6.6%
in 1997 and 1996, respectively. Interest rates have generally ranged from
6.0% to 10.5% for previous issue years.
Withdrawals: Rates, which vary by issue age, type of coverage and policy
duration, are based on Company experience.
Mortality: Mortality and morbidity rates are based on published tables,
modified for the Company's actual experience.
The Company has entered into a reinsurance contract to cede a portion
of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin). Total recoveries due from Franklin were $220.2
million and $240.5 million as of December 31, 1997 and 1996, respectively. The
contract is immaterial to the Company's results of operations. The ceding of
risk does not discharge the original insurer from its primary obligation to the
policyholder. Under the terms of the contract, Franklin has established a trust
as collateral for the recoveries. The trust assets are invested in investment
grade securities, the market value of which must at all times be greater than or
equal to 102% of the reinsured reserves.
The Company has reinsurance agreements with certain affiliates as
described in note 14. All other reinsurance agreements are not material to
either premiums or reinsurance recoverable.
===============================================================
5 LONG-TERM DEBT
On March 10, 1997, NFS sold the Notes in a public offering generating net
proceeds of $294.5 million. The Notes bear interest at the rate of 8% per annum
and mature on March 1, 2027. 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. The terms of the Notes contain various
restrictive covenants including limitations on the disposition of subsidiaries.
As of December 31, 1997, NFS was in compliance with all such covenants. The
Company made interest payments on the Notes in 1997 of $11.4 million.
46
<PAGE> 29
- --------------------------------------------------------------------------------
6 MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST
Nationwide Financial Services Capital Trust (the Trust), a wholly owned
subsidiary of NFS, was formed under the laws of the state of Delaware. The Trust
exists for the exclusive purposes of (i) issuing Capital Securities representing
undivided beneficial interests in the assets of the Trust; (ii) investing the
gross proceeds from the sale of the Capital Securities in Junior Subordinated
Deferrable Interest Debentures (Junior Subordinated Debentures) of NFS; and
(iii) engaging in only those activities necessary or incidental thereto. These
Junior Subordinated Debentures and the related income effects are eliminated in
the consolidated financial statements.
On March 11, 1997, the Trust sold, in a public offering, $100.0 million
of 7.899% Capital Securities, representing preferred undivided beneficial
interests in the assets of the Trust generating net proceeds of $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
Debentures due March 1, 2037. The Junior Subordinated Debentures are the sole
assets of the Trust and are redeemable by NFS in whole at any time or in part
from time to time at par plus an applicable make-whole premium. The Capital
Securities will mature or be called simultaneously with the Junior Subordinated
Debentures and have a liquidation value of $1,000 per Capital Security.
The Capital Securities, through obligations of NFS under the Junior
Subordinated Debentures, the Capital Securities Guarantee Agreement and the
related Declaration of Trust and Indenture, are fully and unconditionally
guaranteed by NFS. Distributions on the Capital Securities are cumulative and
payable semi-annually in arrears. Distributions on the Capital Securities have
been classified as interest expense in the consolidated statements of income.
The Company made distributions on the Capital Securities in 1997 of $3.8
million.
7 FEDERAL INCOME TAX
The Company's current federal income tax liability was $59.4 million and $29.2
million as of December 31, 1997 and 1996, respectively.
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
=======================================================
<S> <C> <C>
DEFERRED TAX ASSETS
Future policy benefits $200.1 $183.0
Liabilities in Separate Accounts 242.0 188.4
Mortgage loans on real estate and
real estate 19.0 23.4
Other assets and other liabilities 63.1 57.8
- -------------------------------------------------------
Total gross deferred tax assets 524.2 452.6
Less valuation allowance (7.0) (7.8)
- -------------------------------------------------------
Net deferred tax assets 517.2 444.8
- -------------------------------------------------------
DEFERRED TAX LIABILITIES
Deferred policy acquisition costs 480.5 399.3
Fixed maturity securities 193.3 133.2
Deferred tax on realized
investment gains 40.1 37.6
Equity securities and other
long-term investments 7.5 8.2
Other 22.2 25.4
- -------------------------------------------------------
Total gross deferred tax
liabilities 743.6 603.7
- -------------------------------------------------------
Net deferred tax liability $226.4 $158.9
=======================================================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the total
gross deferred tax assets will not be realized. Nearly all future deductible
amounts can be offset by future taxable amounts or recovery of federal income
tax paid within the statutory carryback period. The valuation allowance
decreased $0.8 million for the year ended December 31, 1997 (no change during
1996 and decreased $0.8 million during 1995).
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
========================================================
<S> <C> <C> <C>
Currently payable $114.4 $116.0 $89.4
Deferred tax expense
(benefit) 27.4 (0.2) 6.9
- --------------------------------------------------------
$141.8 $115.8 $96.3
========================================================
</TABLE>
47
<PAGE> 30
- --------------------------------------------------------------------------------
Total federal income tax expense for the years ended December 31, 1997,
1996 and 1995 differs from the amount computed by applying the U.S. federal
income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in millions ------------- ------------- -------------
of dollars) AMOUNT % Amount % Amount %
====================================================================
<S> <C> <C> <C> <C> <C> <C>
Computed (expected)
tax expense $142.5 35.0 $114.8 35.0 $98.4 35.0
Tax exempt interest
and dividends
received deduction -- 0.0 (0.2) (0.1) -- 0.0
Other, net (0.7) (0.2) 1.2 0.4 (2.1) (0.7)
- --------------------------------------------------------------------
Total (effective
rate of each
year) $141.8 34.8 $115.8 35.3 $96.3 34.3
====================================================================
</TABLE>
Total federal income tax paid was $84.2 million, $117.3 million and
$58.1 million during the years ended December 31, 1997, 1996 and 1995,
respectively.
===============================================================
8 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures summarize the carrying amount and estimated fair value
of the Company's financial instruments. Certain assets and liabilities are
specifically excluded from the disclosure requirements of financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current transaction
between willing parties. In cases where quoted market prices are not available,
fair value is to be based on estimates using present value or other valuation
techniques. Many of the Company's assets and liabilities subject to the
disclosure requirements are not actively traded, requiring fair values to be
estimated by management using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are appropriate,
changes in assumptions could cause these estimates to vary materially. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in the
immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted from the
disclosure requirements, estimated fair value of policy reserves on life
insurance contracts is provided to make the fair value disclosures more
meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed maturity
securities is based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair value is estimated using values obtained
from independent pricing services or, in the case of private placements, is
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. The
fair value for equity securities is based on quoted market prices.
Mortgage loans on real estate, net: The fair value for mortgage loans
on real estate is estimated using discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of the
calculations. Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the consolidated balance sheets for these instruments approximates
their fair value.
Separate Account assets and liabilities: The fair value of assets held
in Separate Accounts is based on quoted market prices. The fair value of
liabilities related to Separate Accounts is the amount payable on demand, which
includes certain surrender charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods. For investment
contracts without defined maturities, fair value is the amount payable on
demand. For investment contracts with known or determined maturities, fair value
is estimated using discounted cash flow analysis. Interest rates used are
similar to currently offered contracts with maturities consistent with those
remaining for the contracts being valued.
Policy reserves on life insurance contracts: Included are disclosures
for individual life insurance, universal life insurance and supplementary
contracts with life contingencies for which the estimated fair value is the
amount payable on demand. Also included are disclosures for the Company's
limited payment policies, which the Company has used discounted cash flow
analyses similar to those used for investment contracts with known maturities to
estimate fair value.
Long-term Debt: The fair value for long-term debt is based on quoted
market prices.
48
<PAGE> 31
- --------------------------------------------------------------------------------
Capital securities of subsidiary trust: The fair value for capital
securities of subsidiary trust is based on quoted market prices.
Commitments to extend credit: Commitments to extend credit have nominal
fair value because of the short-term nature of such commitments. See note 9.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life insurance
contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
CARRYING ESTIMATED Carrying Estimated
(in millions of dollars) AMOUNT FAIR VALUE amount fair value
==================================================================================================================
<S> <C> <C> <C> <C>
ASSETS
Investments:
Securities available-for-sale:
Fixed maturity securities $13,204.1 $13,204.1 $12,304.6 $12,304.6
Equity securities 80.4 80.4 59.1 59.1
Fixed maturity securities held-to-maturity 6.0 6.0 5.9 5.9
Mortgage loans on real estate, net 5,181.6 5,509.7 5,272.1 5,397.9
Policy loans 415.3 415.3 371.8 371.8
Short-term investments 449.2 449.2 9.3 9.3
Cash 180.9 180.9 43.2 43.2
Assets held in Separate Accounts 37,724.4 37,724.4 26,926.7 26,926.7
LIABILITIES
Investment contracts 14,708.2 14,322.1 13,914.4 13,484.5
Policy reserves on life insurance contracts 3,345.4 3,182.4 3,392.8 3,197.5
Long-term debt 298.4 327.0 -- --
Liabilities related to Separate Accounts 37,724.4 36,747.0 26,926.7 26,164.2
Capital securities of subsidiary trust 100.0 109.4 -- --
==================================================================================================================
</TABLE>
================================================================================
9 RISK DISCLOSURES
The following is a description of the most significant risks facing life
insurers and how the Company mitigates those risks:
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased competition,
reduce demand for a company's products, or create additional expenses not
anticipated by the insurer in pricing its products. The Company mitigates this
risk by offering a wide range of products and by operating throughout the United
States, thus reducing its exposure to any single product or jurisdiction, and
also by employing underwriting practices which identify and minimize the adverse
impact of this risk.
Credit Risk: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company will default
or that other parties, including reinsurers, which owe the Company money, will
not pay. The Company minimizes this risk by adhering to a conservative
investment strategy, by maintaining reinsurance and credit and collection
policies and by providing for any amounts deemed uncollectible.
Interest Rate Risk: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
non-conformance with certain policy provisions, by offering products that
transfer this risk to the purchaser, and/or by attempting to match the maturity
schedule of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an insurer
would have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a
party to financial instruments with off-balance-sheet risk in the normal course
of business through management of its investment portfolio. These financial
instruments include commitments to extend credit in the form of loans. These
instruments involve, to varying degrees, elements of credit risk in excess of
amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a deposit. Commitments extended
by the Company are based on management's case-by-case credit evaluation of the
borrower and the borrower's loan collateral. The underlying mortgage
49
<PAGE> 32
- --------------------------------------------------------------------------------
property represents the collateral if the commitment is funded. The Company's
policy for new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's exposure to
credit loss in the event of nonperformance by the borrower is represented by the
contractual amounts of these commitments less the net realizable value of the
collateral. The contractual amounts also represent the cash requirements for all
unfunded commitments. Commitments on mortgage loans on real estate of $341.4
million extending into 1998 were outstanding as of December 31, 1997. The
Company also had $63.9 million of commitments to purchase fixed maturity
securities outstanding as of December 31, 1997.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the United
States. The Company has a diversified portfolio with no more than 20% (21% in
1996) in any geographic area and no more than 2% (2% in 1996) with any one
borrower as of December 31, 1997. As of December 31, 1997, 46% (44% in 1996) of
the remaining principal balance of the Company's commercial mortgage loan
portfolio financed retail properties.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1997 and 1996. See note 4.
===============================================================================
10 PENSION PLAN
The Company is a participant, together with other affiliated companies, in a
pension plan covering all employees who have completed at least one year of
service. Benefits are based upon the highest average annual salary of a
specified number of consecutive years of the last ten years of service. The
Company funds pension costs accrued for direct employees plus an allocation of
pension costs accrued for employees of affiliates whose work efforts benefit the
Company.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and elected
early retirement no later than March 15, 1995. The entire cost of the enhanced
benefit was borne by NMIC and certain of its property and casualty insurance
company affiliates.
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual Insurance Company
Employees' Retirement Plan and the Wausau Insurance Companies Pension Plan to
form the Nationwide Insurance Enterprise Retirement Plan (the Retirement Plan).
Immediately prior to the merger, the plans were amended to provide consistent
benefits for service after January 1, 1996. These amendments had no significant
impact on the accumulated benefit obligation or projected benefit obligation as
of December 31, 1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1997, 1996 and 1995 were $8.3 million, $8.2 million and $11.4
million, respectively.
The Company's net accrued pension expense as of December 31, 1997 and
1996 was $0.2 million and $1.2 million, respectively.
The net periodic pension cost for the Retirement Plan as a whole for
the years ended December 31, 1997 and 1996 and for the Nationwide Insurance
Companies and Affiliates Retirement Plan as a whole for the year ended December
31, 1995 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
==========================================================
<S> <C> <C> <C>
Service cost (benefits
earned during the period) $ 77.3 $ 75.5 $ 64.5
Interest cost on projected
benefit obligation 118.6 105.5 95.3
Actual return on plan
assets (328.0) (210.6) (249.3)
Net amortization and
deferral 196.4 101.8 143.4
- ----------------------------------------------------------
$ 64.3 $ 72.2 $ 53.9
==========================================================
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
=======================================================
<S> <C> <C> <C>
Weighted average discount rate 6.50% 6.00% 7.50%
Rate of increase in future
compensation levels 4.75% 4.25% 6.25%
Expected long-term rate of
return on plan assets 7.25% 6.75% 8.75%
=======================================================
</TABLE>
50
<PAGE> 33
- --------------------------------------------------------------------------------
Information regarding the funded status of the Retirement Plan as a
whole as of December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
======================================================
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,547.5 $1,338.6
Nonvested 13.5 11.1
- ------------------------------------------------------
$1,561.0 $1,349.7
======================================================
Net accrued pension expense:
Projected benefit obligation
for services rendered to
date $2,033.8 $1,847.8
Plan assets at fair value 2,212.9 1,947.9
- ------------------------------------------------------
Plan assets in excess of
projected benefit
obligation 179.1 100.1
Unrecognized prior service
cost 34.7 37.9
Unrecognized net gains (330.7) (202.0)
Unrecognized net asset at
transition 33.3 37.2
- ------------------------------------------------------
$ (83.6) $ (26.8)
======================================================
</TABLE>
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1997 1996
======================================================
<S> <C> <C>
Weighted average discount rate 6.00% 6.50%
Rate of increase in future
compensation levels 4.25% 4.75%
======================================================
</TABLE>
Assets of the Retirement Plan are invested in group annuity contracts
of NLIC and Employers Life Insurance Company of Wausau (ELICW).
=============================================================================
11 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the defined benefit pension plan, the Company, together with
other affiliated companies, participates in life and health care defined benefit
plans for qualifying retirees. Postretirement life and health care benefits are
contributory and generally available to full time employees who have attained
age 55 and have accumulated 15 years of service with the Company after reaching
age 40. Postretirement health care benefit contributions are adjusted annually
and contain cost-sharing features such as deductibles and coinsurance. In
addition, there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase annually, but
not more than three percent. The Company's policy is to fund the cost of health
care benefits in amounts determined at the discretion of management. Plan assets
are invested primarily in group annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated companies
elected to amortize their initial transition obligation over periods ranging
from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1997 and 1996 was $36.5 million and $34.9 million, respectively, and the net
periodic postretirement benefit cost (NPPBC) for 1997, 1996 and 1995 was $3.0
million, $3.4 million and $3.2 million, respectively.
Information regarding the funded status of the plan as a whole as of
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
========================================================
<S> <C> <C>
Accrued postretirement benefit
expense:
Retirees $ 93.3 $ 93.0
Fully eligible, active plan
participants 31.6 23.7
Other active plan participants 113.0 84.0
- --------------------------------------------------------
Accumulated postretirement
benefit obligation 237.9 200.7
Plan assets at fair value 69.2 63.0
- --------------------------------------------------------
Plan assets less than
accumulated postretirement
benefit obligation (168.7) (137.7)
Unrecognized transition
obligation of affiliates 1.5 1.7
Unrecognized net losses (gains) 1.6 (23.2)
- --------------------------------------------------------
$(165.6) $(159.2)
========================================================
</TABLE>
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
========================================================
<S> <C> <C> <C>
Service cost (benefits
attributed to employee
service during the year) $ 7.0 $ 6.5 $ 6.2
Interest cost on accumulated
postretirement benefit
obligation 14.0 13.7 14.2
Actual return on plan assets (3.6) (4.3) (2.7)
Amortization of unrecognized
transition obligation of
affiliates 0.2 0.2 3.0
Net amortization and deferral (0.5) 1.8 (1.6)
- --------------------------------------------------------
$17.1 $17.9 $19.1
========================================================
</TABLE>
51
<PAGE> 34
- --------------------------------------------------------------------------------
Actuarial assumptions used for the measurement of the APBO and the
NPPBC for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
========================================================
<S> <C> <C> <C>
APBO:
Discount rate 6.70% 7.25% 6.75%
Assumed health care
cost trend rate:
Initial rate 12.13% 11.00% 11.00%
Ultimate rate 6.12% 6.00% 6.00%
Uniform declining
period 12 YEARS 12 Years 12 Years
NPPBC:
Discount rate 7.25% 6.65% 8.00%
Long term rate of
return on plan
assets, net of tax 5.89% 4.80% 8.00%
Assumed health care
cost trend rate:
Initial rate 11.00% 11.00% 10.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining
period 12 YEARS 12 Years 12 Years
========================================================
</TABLE>
For the plan as a whole, a one percentage point increase in the assumed
health care cost trend rate would increase the APBO as of December 31, 1997 by
$0.4 million and have no impact on the NPPBC for the year ended December 31,
1997.
==============================================================================
12 STOCK COMPENSATION
The Company sponsors the Nationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan (LTEP) covering selected officers, directors and
employees of the Company and certain of its affiliates. The LTEP provides for
the grant of any or all of the following types of awards: (i) stock options for
shares of Class A common stock; (ii) stock appreciation rights (SARs); (iii)
restricted stock; and (iv) performance awards. The LTEP was effective December
11, 1996 and no awards may be granted under the LTEP after December 11, 2006.
The number of shares of Class A common stock which may be issued under the LTEP,
or as to which SARs or other awards may be granted, may not exceed 2.6 million.
The Company has elected to continue to follow Accounting Principles
Board Opinion No. 25 -- Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock options as
permitted by SFAS No. 123 -- Accounting for Stock-Based Compensation (SFAS 123).
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Pro forma disclosures as if the Company
adopted the expense recognition provisions of SFAS 123, which require the fair
value of the options granted to be recorded as expense over the vesting period,
are required and are presented below.
Stock options granted under the LTEP in 1997 have ten year terms. One
third of the options vest and become fully exercisable at the end of each of
three years of continued employment, or upon retirement. No stock options were
granted in years prior to 1997.
The Company's stock option activity and related information is
summarized for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Options on Weighted
Class A average
common exercise
stock price
=========================================================
<S> <C> <C>
Outstanding, beginning of period -- --
Granted 242,500 $23.72
Exercised -- --
Forfeited/Expired -- --
- ---------------------------------------------------------
Outstanding, end of period 242,500 $23.72
- ---------------------------------------------------------
Exercisable, end of period 2,500 $23.50
=========================================================
</TABLE>
The weighted average fair value at date of grant for options granted
during 1997 was $9.79 per option. Fair value was estimated using a Black-Scholes
option pricing model with the following assumptions:
<TABLE>
<S> <C>
========================================================
Risk free interest rate 6.00%
Dividend yield 0.80%
Volatility factor 0.347
Weighted average expected option life 6 Years
========================================================
</TABLE>
Had the compensation cost for the employee stock options been
determined in accordance with the fair value based accounting method provided by
SFAS 123, net income and net income per common share for the year ended December
31, 1997 would have been as follows:
<TABLE>
<CAPTION>
As
Pro forma presented
=========================================================
<S> <C> <C>
Net income $264.1 $265.2
Basic and diluted earnings per
common share $ 2.13 $ 2.14
=========================================================
</TABLE>
Pro forma information has not been presented for the years ended
December 31, 1996 and 1995 as no stock awards were made prior to 1997.
52
<PAGE> 35
- --------------------------------------------------------------------------------
13 SHAREHOLDERS' EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS AND
DIVIDEND RESTRICTIONS
The Board of Directors of the Company has the authority to issue 50.0 million
shares of preferred stock without further action of the shareholders. Preferred
stock may be issued in one or more classes with full, special, limited or no
voting powers, and designations, preferences and relative, participating,
optional or other special rights, and qualifications and limitations or
restrictions as stated in any resolution adopted by the Board of Directors of
the Company issuing any class of preferred stock. No shares of preferred stock
have been issued or are outstanding.
The holders of Class A common stock are entitled to one vote per share.
The holders of Class B common stock are entitled to ten votes per share. Class A
common stock has no conversion rights. Class B common stock is convertible into
Class A common stock, in whole or in part, at any time and from time to time at
the option of the holder, on the basis of one share of Class A common stock for
each share of Class B common stock converted. If at any time after the initial
issuance of shares of Class A common stock the number of outstanding shares of
Class B common stock falls below 5% of the aggregate number of issued and
outstanding shares of common stock, then each outstanding share of Class B
common stock shall automatically convert into one share of Class A common stock.
In the event of any sale or transfer of shares of Class B common stock to any
person or persons other than NMIC or its affiliates, such shares of Class B
common stock so transferred shall be automatically converted into an equal
number of shares of Class A common stock. Cash dividends of $0.18 per common
share were declared during 1997.
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio of
the company's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level risk-based capital, as defined by the NAIC. Companies
below specific trigger points or ratios are classified within certain levels,
each of which requires specified corrective action. NLIC and each of its
insurance company subsidiaries exceed the minimum risk-based capital
requirements.
The statutory capital and surplus of NLIC as of December 31, 1997, 1996
and 1995 was $1.13 billion, $1.00 billion and $1.36 billion, respectively. The
statutory net income of NLIC for the years ended December 31, 1997, 1996 and
1995 was $111.7 million, $73.2 million and $86.5 million, respectively.
As a result of the $850.0 million dividend paid on February 24, 1997,
any dividend paid by NLIC during the twelve-month period immediately following
the $850.0 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.
In addition, 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 the Company and its
shareholders.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends in the
future.
==============================================================================
14 TRANSACTIONS WITH AFFILIATES
As part of the restructuring described in note 1, NLIC paid a dividend valued at
$485.7 million to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of ELICW, National Casualty Company (NCC) and
West Coast Life Insurance Company (WCLIC). Also, on February 24, 1997, NLIC paid
a dividend to NFS, and NFS paid an equivalent dividend to Nationwide Corp.,
consisting of securities having an aggregate fair value of $850.0 million. The
Company recognized a gain of $14.4 million on the transfer of securities.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the Company
made lease payments to NMIC and its subsidiaries of $9.1 million, $10.0 million
and $9.9 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides certain
operational and administrative services, such as sales support, advertising,
personnel and general management services, to those subsidiaries. Expenses
covered by this agreement are subject to allocation among NMIC, the Company and
other affiliates. Amounts allocated to the Company were $85.8 million, $101.6
million and $107.1 million in 1997, 1996 and 1995, respectively. The allocations
are based on techniques and procedures in accordance with insurance regulatory
guidelines. Measures used to allocate expenses among companies include
individual employee estimates of time spent, special cost studies,
53
<PAGE> 36
- --------------------------------------------------------------------------------
salary expense, commissions expense and other methods agreed to by the
participating companies that are within industry guidelines and practices. The
Company believes these allocation methods are reasonable. In addition, the
Company does not believe that expenses recognized under the inter-company
agreements are materially different than expenses that would have been
recognized had the Company operated on a stand alone basis. Amounts payable to
NMIC from the Company under the cost sharing agreement were $20.5 million and
$15.1 million as of December 31, 1997 and 1996, respectively.
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the buyer at a
stated value. Upon demand or a stated period, the securities will be repurchased
by the seller at the original sales price plus a price differential.
Transactions under the agreements during 1997 and 1996 were not material. The
Company believes that the terms of the repurchase agreements are materially
consistent with what the Company could have obtained with unaffiliated parties.
Intercompany reinsurance agreements exist between NLIC and,
respectively, NMIC and ELICW whereby all of NLIC's accident and health and group
life insurance business is ceded on a modified coinsurance basis. NLIC entered
into the reinsurance agreements during 1996 because the accident and health and
group life insurance business was unrelated to the Company's long-term savings
and retirement products. Accordingly, the accident and health and group life
insurance business has been accounted for as discontinued operations for all
periods presented. Under modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment risk
associated with changes in interest rates is borne by ELICW or NMIC, as the case
may be. Risk of asset default is retained by the Company, although a fee is paid
by ELICW or NMIC, as the case may be, to the Company for the Company's retention
of such risk. The agreements will remain in force until all policy obligations
are settled. However, with respect to the agreement between NLIC and NMIC,
either party may terminate the contract on January 1 of any year with prior
notice. The ceding of risk does not discharge the original insurer from its
primary obligation to the policyholder. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material respects with
what the Company could have obtained with unaffiliated parties. Amounts ceded to
NMIC and ELICW for the years ended December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
(in millions of dollars) NMIC ELICW NMIC ELICW
===========================================================
<S> <C> <C> <C> <C>
Premiums $ 91.4 $199.8 $ 97.3 $224.2
Net investment income
and other revenue $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and
other expenses $100.7 $225.9 $100.5 $246.6
===========================================================
</TABLE>
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which NCMC acts
as a common agent in handling the purchase and sale of short-term securities for
the respective accounts of the participants. Amounts on deposit with NCMC were
$286 million and $9.3 million as of December 31, 1997 and 1996, respectively,
and are included in short-term investments on the accompanying consolidated
balance sheets.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding
shares of common stock of Farmland Life Insurance Company (Farmland) to NLIC.
Farmland merged into WCLIC effective June 30, 1995. The contribution resulted in
a direct increase to consolidated shareholder's equity of $46.9 million. As
discussed in note 19, WCLIC is accounted for as discontinued operations.
===============================================================
15 BANK LINES OF CREDIT
In August 1996, NLIC, along with NMIC, entered into a $600.0 million revolving
credit facility which provides for a $600.0 million loan over a five year term
on a fully revolving basis with a group of national financial institutions. The
credit facility provides for several and not joint liability with respect to any
amount drawn by either NLIC or NMIC. NLIC and NMIC pay facility and usage fees
to the financial institutions to maintain the revolving credit facility. All
previously existing line of credit agreements were canceled. In September 1997,
the credit agreement was amended to include NFS as a party to and borrower under
the agreement.
54
<PAGE> 37
- --------------------------------------------------------------------------------
16 CONTINGENCIES
The Company is a defendant in various lawsuits. In the opinion of management,
the effects, if any, of such lawsuits are not expected to be material to the
Company's financial position or results of operations.
==============================================================================
17 SEGMENT INFORMATION
The Company has 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 the Company and independent investment managers, with the investment returns
accumulating on a tax-deferred basis. 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. The Fixed Annuities segment also includes the fixed option
under the Company's variable annuity contracts. The Life Insurance segment
consists of insurance products that provide a death benefit and may also allow
the customer to build cash value on a tax-deferred basis. In addition, the
Company reports corporate expenses and investments, and the related investment
income supporting capital not specifically allocated to its product segments in
a Corporate and Other segment. In addition, all realized gains and losses,
investment management fees and other revenue earned from mutual funds other than
the portion allocated to the variable annuities and life insurance segments, and
income and expenses of the marketing and distribution companies are reported in
the Corporate and Other segment.
The following table summarizes revenues and income from continuing
operations before federal income tax expense for the years ended December 31,
1997, 1996 and 1995 and assets as of December 31, 1997, 1996 and 1995, by
segment.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
=============================================================
<S> <C> <C> <C>
REVENUES
Variable Annuities $ 404.0 $ 284.6 $ 189.1
Fixed Annuities 1,141.4 1,092.6 1,052.0
Life Insurance 473.1 435.6 409.1
Corporate and Other 219.9 203.8 186.8
- -------------------------------------------------------------
$ 2,238.4 $ 2,016.6 $ 1,837.0
=============================================================
INCOME FROM CONTINUING
OPERATIONS BEFORE
FEDERAL INCOME TAX
EXPENSE
Variable Annuities $ 150.9 $ 90.3 $ 50.8
Fixed Annuities 169.5 135.4 137.0
Life Insurance 70.9 67.2 67.6
Corporate and Other 15.7 35.2 25.8
- -------------------------------------------------------------
$ 407.0 $ 328.1 $ 281.2
=============================================================
ASSETS
Variable Annuities $35,278.7 $25,069.7 $17,333.0
Fixed Annuities 14,436.3 13,994.7 13,250.4
Life Insurance 3,901.4 3,353.3 3,027.4
Corporate and Other 6,276.5 5,352.5 4,895.3
- -------------------------------------------------------------
$59,892.9 $47,770.2 $38,506.1
=============================================================
</TABLE>
55
<PAGE> 38
- --------------------------------------------------------------------------------
18 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(in millions of dollars) 1Q 2Q 3Q 4Q
===========================================================
<S> <C> <C> <C> <C>
1997
Revenues other than
investment gains
(losses) $531.7 $551.4 $566.7 $577.5
Realized gains
(losses) on
investments 21.1 (11.9) (4.8) 6.7
- -----------------------------------------------------------
Total revenues 552.8 539.5 561.9 584.2
Benefits and expenses 446.7 454.6 461.6 468.5
- -----------------------------------------------------------
Income before federal
income tax expense 106.1 84.9 100.3 115.7
Federal income tax
expense 37.2 29.7 34.9 40.0
- -----------------------------------------------------------
Net income $ 68.9 $ 55.2 $ 65.4 $ 75.7
===========================================================
Basic and diluted
earnings per common
share:
Net income $ 0.63 $ 0.43 $ 0.51 $ 0.59
===========================================================
1996
Revenues other than
investment gains
(losses) $490.2 $508.8 $502.4 $515.4
Realized gains
(losses) on
investments 3.6 5.8 (5.1) (4.5)
- -----------------------------------------------------------
Total revenues 493.8 514.6 497.3 510.9
Benefits and expenses 415.9 423.2 413.7 435.7
- -----------------------------------------------------------
Income from continuing
operations before
federal income tax
expense 77.9 91.4 83.6 75.2
Federal income tax
expense 26.6 32.6 29.5 27.1
- -----------------------------------------------------------
Income from continuing
operations 51.3 58.8 54.1 48.1
Income from
discontinued
operations, net of
federal income tax
expense 4.2 3.1 2.3 1.7
- -----------------------------------------------------------
Net income $ 55.5 $ 61.9 $ 56.4 $ 49.8
===========================================================
</TABLE>
19 DISCONTINUED OPERATIONS
As discussed in note 1, NFS is a holding company for NLIC and certain other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. Prior to the contribution by
Nationwide Corp. to NFS of the outstanding common stock of NLIC and other
companies, NLIC effected certain transactions with respect to certain
subsidiaries and lines of business that were unrelated to long-term savings and
retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend
payable to Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of three subsidiaries: ELICW, NCC and WCLIC. ELICW writes
group accident and health and group life insurance business and maintains it
offices in Wausau, Wisconsin. NCC is a property and casualty company with
offices in Scottsdale, Arizona that serves as a fronting company for a property
and casualty subsidiary of NMIC. WCLIC writes high dollar term life insurance
policies and is located in San Francisco, California. ELICW, NCC and WCLIC have
been accounted for as discontinued operations in the accompanying consolidated
financial statements through December 31, 1996. The Company did not recognize
any gain or loss on the disposal of these subsidiaries.
Also, during 1996, NLIC entered into two reinsurance agreements whereby
all of NLIC's accident and health and group life insurance business was ceded to
ELICW and NMIC, effective January 1, 1996. See note 14 for a complete discussion
of the reinsurance agreements. The Company has discontinued its accident and
health and group life insurance business and in connection therewith has entered
into reinsurance agreements to cede all existing and any future writings to
other affiliated companies. NLIC's accident and health and group life insurance
business is accounted for as discontinued operations for all periods presented.
The Company did not recognize any gain or loss on the disposal of the accident
and health and group life insurance business. The assets, liabilities, results
of operations and activities of discontinued operations are distinguished
physically, operationally and for financial reporting purposes from the
remaining assets, liabilities, results of operations and activities of the
Company.
56
<PAGE> 39
- --------------------------------------------------------------------------------
A summary of the results of operations of discontinued operations for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars, except per
share amounts) 1997 1996 1995
===============================================================
<S> <C> <C> <C>
Revenues $ -- $668.9 $776.9
Net income $ -- $ 11.3 $ 24.7
Contribution to basic and diluted
earnings per common share $ -- $ 0.10 $ 0.24
===============================================================
</TABLE>
A summary of the assets and liabilities of discontinued operations as
of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
=========================================================
<S> <C> <C> <C>
Assets, consisting
primarily of investments $247.3 $3,288.5 $3,206.7
Liabilities, consisting
primarily of policy
benefits and claims $247.3 $2,802.8 $2,700.0
=========================================================
</TABLE>
57
<PAGE> 40
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Nationwide
Financial Services, Inc. and subsidiaries (collectively the Company) as of
December 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nationwide
Financial Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company was formed in November 1996 as a holding company for Nationwide Life
Insurance Company and the other companies within the Nationwide Insurance
Enterprise that offer or distribute long-term savings and retirement products.
The consolidated financial statements are presented as if these companies were
consolidated for all periods presented.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Columbus, Ohio
January 30, 1998
58
<PAGE> 1
Exhibit 21
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
As of December 31, 1997
The following are wholly owned (unless otherwise noted) subsidiaries of
Nationwide Financial Services, Inc. and their state of incorporation:
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
<S> <C>
Nationwide Life Insurance Company Ohio
Nationwide Financial Services Capital Trust Delaware
Public Employees Benefit Services Corporation Ohio
NEA Valuebuilder Investor Services, Inc. Ohio
Nationwide Financial Institution Distributors Agency, Inc. Ohio
Irvin L. Schwartz & Associates, Inc. (60% owned) Ohio
</TABLE>
The following are wholly owned subsidiaries of Nationwide Life Insurance Company
and their state of incorporation:
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
<S> <C>
Nationwide Life and Annuity Insurance Company Ohio
Nationwide Advisory Services, Inc. Ohio
Nationwide Investment Services Corporation. Ohio
NWE, Inc. Ohio
</TABLE>
The following are wholly owned subsidiaries of Public Employees Benefit Services
Corporation and their state of incorporation:
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
<S> <C>
Public Employees Benefit Services Corporation of Alabama Alabama
Public Employees Benefit Services Corporation of Arkansas Arkansas
PEBSCO of Massachusetts Insurance Agency, Inc. Massachussetts
Public Employees Benefit Services Corporation of Montana Montana
Public Employees Benefit Services Corporation of New Mexico New Mexico
</TABLE>
<PAGE> 2
The following are wholly owned subsidiaries of NEA Valuebuilder Investor
Services, Inc. and their state of incorporation:
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
<S> <C>
NEA Valuebuilder Investor Services of Alabama, Inc. Alabama
NEA Valuebuilder Investor Services of Arizona, Inc Arizona
NEA Valuebuilder Investor Services of Montana, Inc. Montana
NEA Valuebuilder Investor Services of Nevada, Inc. Nevada
NEA Valuebuilder Investor Services of Ohio, Inc. Ohio
NEA Valuebuilder Investor Services of Oklahoma, Inc. Oklahoma
NEA Valuebuilder Investor Services of Wyoming, Inc. Wyoming
NEA Valuebuilder Investor Services of Texas, Inc. Texas
NEA Valuebuilder Investor Services of Agency, Inc. Ohio
</TABLE>
The following are wholly owned subsidiaries of Nationwide Financial Institution
Distributors Agency, Inc. and their state of incorporation:
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
<S> <C>
Affiliate Agency, Inc. Ohio
Financial Horizons Distributors Agency of Alabama, Inc. Alabama
Landmark Financial Services of New York, Inc. New York
Financial Horizons Securities Corp. Ohio
</TABLE>
The following is a wholly owned subsidiary of Nationwide Advisory Services, Inc.
and its state of incorporation:
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
<S> <C>
Nationwide Investor Services, Inc. Ohio
</TABLE>
All business operations of Nationwide Financial Services, Inc. and all of its
subsidiaries are conducted using each company's legally registered name.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Nationwide Financial Services, Inc.:
We consent to the incorporation by reference in this Annual Report on Form 10-K
of Nationwide Financial Services, Inc. of our report dated January 30, 1998,
relating to the consolidated balance sheets of Nationwide Financial Services,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the 1997 Annual Report to Shareholders of Nationwide Financial
Services, Inc.
/s/ KPMG Peat Marwick LLP
Columbus, Ohio
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Nationwide
Financial Services Inc.'s Annual Report on Form 10-K for the Year ended December
31, 1997, and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 13,204
<DEBT-CARRYING-VALUE> 6
<DEBT-MARKET-VALUE> 6
<EQUITIES> 80
<MORTGAGE> 5,182
<REAL-ESTATE> 311
<TOTAL-INVEST> 19,673
<CASH> 181
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,665
<TOTAL-ASSETS> 59,893
<POLICY-LOSSES> 18,703
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
100
0
<COMMON> 1
<OTHER-SE> 2,123
<TOTAL-LIABILITY-AND-EQUITY> 59,893
205
<INVESTMENT-INCOME> 1,414
<INVESTMENT-GAINS> 11
<OTHER-INCOME> 63
<BENEFITS> 1,195
<UNDERWRITING-AMORTIZATION> 167
<UNDERWRITING-OTHER> 403
<INCOME-PRETAX> 407
<INCOME-TAX> 142
<INCOME-CONTINUING> 265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 265
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
