<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NO. 1-12785
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1486870
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
----- -----
The number of shares outstanding of each of the registrant's classes of common
stock on August 1, 1998 was as follows:
CLASS A COMMON STOCK (par value $0.01 per share) - 23,788,702 shares issued
(Title of Class) and outstanding
CLASS B COMMON STOCK (par value $0.01 per share) - 104,745,000 shares
(Title of Class) issued and outstanding
<PAGE> 2
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 2 Changes in Securities 29
Item 3 Defaults Upon Senior Securities 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 5 Other Information 30
Item 6 Exhibits and Reports on Form 8-K 30
SIGNATURE 31
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $ 175.0 $ 129.7 $ 334.0 $ 250.1
Life insurance premiums 52.0 50.3 105.2 105.7
Net investment income 367.8 352.7 733.6 694.1
Realized gains (losses) on investments 5.0 (11.9) 21.6 9.2
Other 25.6 18.7 45.3 33.2
--------- ----------- ----------- -----------
625.4 539.5 1,239.7 1,092.3
--------- ----------- ----------- -----------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 264.7 253.7 526.6 500.9
Other benefits and claims 40.6 43.3 86.9 92.5
Policyholder dividends on participating policies 11.5 11.6 22.3 22.2
Amortization of deferred policy acquisition costs 54.1 39.6 101.8 83.0
Interest expense on debt and capital securities of
subsidiary trust 8.0 8.1 16.0 10.0
Other operating expenses 120.0 98.3 227.5 192.7
--------- ----------- ----------- -----------
498.9 454.6 981.1 901.3
--------- ----------- ----------- -----------
Income before federal tax expense 126.5 84.9 258.6 191.0
Federal tax expense 43.5 29.7 88.9 66.9
--------- ----------- ----------- -----------
Net income $ 83.0 $ 55.2 $ 169.7 $ 124.1
========= =========== =========== ===========
NET INCOME PER COMMON SHARE
Basic $ 0.65 $ 0.43 $ 1.32 $ 1.04
Diluted $ 0.65 $ 0.43 $ 1.32 $ 1.04
Weighted average number of common shares
outstanding (in millions) 128.5 128.5 128.5 119.5
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED) DECEMBER 31,
JUNE 30, 1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $13,140.3 in 1998; $12,732.9 in 1997) $ 13,611.2 $ 13,204.1
Equity securities (cost $82.5 in 1998; $67.8 in 1997) 99.1 80.4
Fixed maturity securities held-to-maturity, at amortized cost (fair value
$6.0 in 1997) - 6.0
Mortgage loans on real estate, net 5,241.5 5,181.6
Real estate, net 274.8 311.4
Policy loans 441.6 415.3
Other long-term investments 22.7 25.2
Short-term investments 286.7 449.2
----------- -----------
19,977.6 19,673.2
----------- -----------
Cash 11.5 180.9
Accrued investment income 213.8 211.2
Deferred policy acquisition costs 1,859.1 1,665.4
Other assets 475.0 437.8
Assets held in Separate Accounts 45,974.9 37,724.4
----------- -----------
$ 68,511.9 $ 59,892.9
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $ 18,982.9 $ 18,702.8
Long-term debt 298.4 298.4
Other liabilities 876.6 943.1
Liabilities related to Separate Accounts 45,974.9 37,724.4
----------- -----------
66,132.8 57,668.7
----------- -----------
NFS-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of NFS 100.0 100.0
----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 50.0 million shares; no shares
issued and outstanding - -
Class A common stock, $0.01 par value. Authorized 750.0 million shares,
23.8 million shares issued and outstanding 0.2 0.2
Class B common stock, $0.01 par value. Authorized 750.0 million shares,
104.7 million shares issued and outstanding 1.0 1.0
Additional paid-in capital 629.4 629.2
Retained earnings 1,399.4 1,247.8
Unearned compensation (0.9) (1.1)
Accumulated other comprehensive income 250.0 247.1
----------- -----------
2,279.1 2,124.2
----------- -----------
$ 68,511.9 $ 59,892.9
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
</TABLE>
<PAGE> 5
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Six Months Ended June 30, 1998 and 1997
(in millions of dollars)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME EQUITY
----- ----- ------- -------- ------------ ------ ------
1997
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ - $ 1.0 $ 551.4 $ 1,405.7 $ - $ 173.6 $ 2,131.7
Comprehensive income:
Net income - - - 124.1 - - 124.1
Unrealized net losses on
securities available-for-sale
arising during the period - - - - - (32.4) (32.4)
----------
Total comprehensive income 91.7
----------
Issuance of Class A common stock 0.2 - 524.0 - - - 524.2
Dividends to shareholders - - (450.0) (407.7) - - (857.7)
Other, net - - 3.8 - (1.3) - 2.5
--------- --------- --------- ---------- --------- --------- ----------
BALANCE, JUNE 30, 1997 $ 0.2 $ 1.0 $ 629.2 $ 1,122.1 $ (1.3) $ 141.2 $ 1,892.4
========= ========= ========= ========== ========= ========= ==========
1998
BALANCE, JANUARY 1, 1998 $ 0.2 $ 1.0 $ 629.2 $ 1,247.8 $ (1.1) $ 247.1 $ 2,124.2
Comprehensive income:
Net income - - - 169.7 - - 169.7
Unrealized net gains on
securities available-for-sale
arising during the period - - - - - 2.9 2.9
----------
Total comprehensive income 172.6
----------
Cash dividends declared - - - (18.1) - - (18.1)
Other, net - - 0.2 - 0.2 - 0.4
--------- --------- --------- ---------- --------- --------- ----------
BALANCE, JUNE 30, 1998 $ 0.2 $ 1.0 $ 629.4 $ 1,399.4 $ (0.9) $ 250.0 $ 2,279.1
========= ========= ========= ========== ========= ========= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Six Months Ended June 30, 1998 and 1997
(in millions of dollars)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 169.7 $ 124.1
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 526.6 500.9
Capitalization of deferred policy acquisition costs (294.6) (235.7)
Amortization of deferred policy acquisition costs 101.8 83.0
Amortization and depreciation (3.4) 2.5
Realized gains on investments, net (21.6) (9.2)
(Increase) decrease in accrued investment income (2.6) 0.9
Increase in other assets (38.7) (9.8)
(Decrease) increase in policy liabilities (2.3) 60.5
(Decrease) increase in other liabilities (70.8) 26.2
Other, net (6.3) 3.3
---------- ----------
Net cash provided by operating activities 357.8 546.7
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 761.6 437.7
Proceeds from sale of securities available-for-sale 464.4 225.9
Proceeds from maturity of securities held to maturity 6.0 -
Proceeds from repayments of mortgage loans on real estate 337.5 164.7
Proceeds from sale of real estate 58.7 23.2
Proceeds from repayments of policy loans and sale of other invested assets 14.1 21.9
Cost of securities available-for-sale acquired (1,637.1) (1,236.6)
Cost of mortgage loans on real estate acquired (401.1) (418.6)
Cost of real estate acquired (0.3) (21.5)
Policy loans issued and other invested assets acquired (33.9) (37.8)
Short-term investments, net 162.5 (377.3)
---------- ----------
Net cash used in investing activities (267.6) (1,218.4)
---------- ----------
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) -
Increase in investment product and universal life insurance product account balances 1,278.5 1,010.3
Decrease in investment product and universal life insurance product account balances (1,522.7) (1,210.1)
---------- ----------
Net cash (used in) provided by financing activities (259.6) 717.2
---------- ----------
Net (decrease) increase in cash (169.4) 45.5
Cash, beginning of period 180.9 43.2
---------- ----------
Cash, end of period $ 11.5 $ 88.7
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 1998
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Nationwide Financial Services, Inc. and subsidiaries (NFS or
collectively the Company) have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities,
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein reflects all adjustments (all of which are normal and
recurring in nature) which are, in the opinion of management, necessary
for a fair presentation of financial position and results of
operations. Operating results for all periods presented are not
necessarily indicative of the results that may be expected for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
1997 included in the Company's 1997 Annual Report to Shareholders.
(2) Earnings per Share
------------------
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the
reporting period. Diluted earnings per share is the amount of earnings
for the period available to each share of common stock outstanding
during the reporting period adjusted for the potential issuance of
common shares for stock options.
The calculations of basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic and diluted net income $ 83.0 $ 55.2 $ 169.7 $ 124.1
========== ========== ========== ==========
Weighted average number of shares of common
stock outstanding 128.5 128.5 128.5 119.5
Dilutive effect of stock options 0.2 0.1 0.2 -
---------- ---------- ---------- ----------
Diluted average number of shares of common
stock outstanding 128.7 128.6 128.7 119.5
========== ========== ========== ==========
Net income per common share:
Basic $ 0.65 $ 0.43 $ 1.32 $ 1.04
Diluted $ 0.65 $ 0.43 $ 1.32 $ 1.04
</TABLE>
7
<PAGE> 8
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(3) Comprehensive Income
--------------------
Pursuant to the Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income", the Consolidated Statements
of Shareholders' Equity include a new measure called "Comprehensive
Income". Comprehensive Income includes net income as well as certain
items that are reported directly within a separate component of
shareholders' equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(in millions of dollars) JUNE 30, JUNE 30,
- --------------------------------------------------------------- ---------------------- --------------------
1998 1997 1998 1997
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $ 28.9 $ 139.3 $ 7.1 $ (62.5)
Adjustment to deferred policy acquisition (6.9) (47.6) 0.9 18.6
costs
Related federal tax (expense) benefit (7.6) (32.1) (2.8) 15.3
------- -------- ------ -------
Net 14.4 59.6 5.2 (28.6)
------- -------- ------ -------
Reclassification adjustment for net (gains) losses on securities
available-for-sale realized during the period:
Gross (0.6) 11.1 (3.5) (5.9)
Related federal tax expense (benefit) 0.2 (3.9) 1.2 2.1
------- -------- ------ -------
Net (0.4) 7.2 (2.3) (3.8)
------- -------- ------ -------
Total Other Comprehensive Income (Loss) $ 14.0 $ 66.8 $ 2.9 $ (32.4)
======= ======== ====== =======
</TABLE>
(4) Accounting Pronouncements
-------------------------
On January 1, 1998 the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." FAS 131 establishes
standards for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports. FAS
131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
FAS 131 did not affect results of operations or financial position, nor
did it affect the manner in which the Company defines its operating
segments. The segment information required for interim periods is
included in note 5.
In March 1998, The American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance intended to
standardize accounting practices for costs incurred to develop or
obtain computer software for internal use. Specifically, SOP 98-1
provides guidance for determining whether computer software is for
internal use and when costs incurred for internal use software are to
be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998 with earlier application
encouraged. The adoption of SOP 98-1, planned for the first quarter of
1999, is not expected to have a material impact on the Company's
consolidated financial statements.
8
<PAGE> 9
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Contracts that contain embedded
derivatives, such as certain insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 with earlier application permitted. The
Company is currently evaluating the impact of this Statement on results
of operations and financial condition.
(5) Segment Disclosures
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds
managed by independent investment managers and the Company, with
investment returns accumulating on a tax-deferred basis. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred basis.
Such contracts consist of single premium deferred annuities, flexible
premium deferred annuities and single premium immediate annuities. The
Fixed Annuities segment includes the fixed option under variable
annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its distribution companies, revenues and
expenses of its investment advisor subsidiaries (other than the portion
allocated to the Variable Annuities and Life Insurance segments),
revenues and expenses related to group annuity contracts sold to
Nationwide Insurance Enterprise employee and agent benefit plans,
interest expense on long-term debt and capital securities and all
realized gains and losses on investments in a Corporate and Other
segment.
9
<PAGE> 10
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the three months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- ----------------------------------- --------------- --------------- --------------- ------------------------------
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $ 135.7 $ 286.2 $ 135.5 $ 63.0 $ 620.4
Benefits and expenses 80.0 243.1 113.0 62.8 498.9
--------- --------- --------- --------- ---------
Operating income before federal
income tax 55.7 43.1 22.5 0.2 121.5
Realized gains on investments - - - 5.0 5.0
--------- --------- --------- --------- ---------
Consolidated income before
federal tax expense $ 55.7 $ 43.1 $ 22.5 $ 5.2 $ 126.5
========= ========= ========= ========= =========
1997
Operating revenue (1) $ 94.0 $ 282.2 $ 116.0 $ 59.2 $ 551.4
Benefits and expenses 59.2 238.1 102.3 55.0 454.6
--------- --------- --------- --------- ---------
Operating income before federal
income tax 34.8 44.1 13.7 4.2 96.8
Realized losses on investments - - - (11.9) (11.9)
--------- --------- --------- --------- ---------
Consolidated income before
federal tax expense $ 34.8 $ 44.1 $ 13.7 $ (7.7) $ 84.9
========= ========= ========= ========= =========
</TABLE>
- --------------------
(1) Excludes realized gains and losses on investments.
10
<PAGE> 11
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- ------------------------ --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $ 255.8 $ 575.5 $ 264.0 $ 122.8 $ 1,218.1
Benefits and expenses 150.8 487.4 220.3 122.6 981.1
----------- ----------- ---------- ---------- -----------
Operating income before federal
income tax 105.0 88.1 43.7 0.2 237.0
Realized gains on investments - - - 21.6 21.6
----------- ----------- ---------- ---------- -----------
Consolidated income before
federal tax expense $ 105.0 $ 88.1 $ 43.7 $ 21.8 $ 258.6
=========== =========== ========== ========== ===========
Assets as of period end $ 43,113.0 $ 14,549.5 $ 4,706.0 $ 6,143.4 $ 68,511.9
=========== =========== ========== ========== ===========
1997
Operating revenue (1) $ 180.8 $ 567.0 $ 230.6 $ 104.7 $ 1,083.1
Benefits and expenses 116.6 485.3 199.9 99.5 901.3
----------- ----------- ---------- ---------- -----------
Operating income before federal
income tax 64.2 81.7 30.7 5.2 181.8
Realized gains on investments - - - 9.2 9.2
----------- ----------- ---------- ---------- -----------
Consolidated income before
federal tax expense $ 64.2 $ 81.7 $ 30.7 $ 14.4 $ 191.0
=========== =========== ========== ========== ===========
Assets as of period end $ 30,791.9 $ 13,974.5 $ 3,604.0 $ 5,390.6 $ 53,761.0
=========== =========== ========== ========== ===========
</TABLE>
- ---------------
(1) Excludes realized gains and losses on investments.
(6) Initial Public Offering and Pro Forma Results of Operations
-----------------------------------------------------------
In March 1997, NFS sold 23.6 million shares of its newly-issued Class A
common stock in an initial public offering (the IPO), receiving net
proceeds of $524.2 million. Concurrent with the IPO, NFS sold $300.0
million of senior notes and a subsidiary trust sold $100.0 million of
capital securities in companion public offerings. In anticipation of
the IPO, NFS paid special dividends of $50.0 million in December 1996
and $850.0 million in February 1997 to Nationwide Corporation
(Nationwide Corp.), the 100% owner of NFS prior to the IPO. Subsequent
to the IPO, Nationwide Corp. continues to own all of the outstanding
shares of Class B common stock, which represents approximately 98% of
the combined voting power of the stockholders of NFS.
11
<PAGE> 12
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
The following table compares actual results for the first six months of
1998 with unaudited pro forma results for the first six months of 1997.
The 1997 information includes pro forma adjustments to net investment
income and interest expense giving effect to (i) the IPO and companion
offerings of senior notes and capital securities of subsidiary trust
and (ii) the $850.0 million dividend paid by the Company in February
1997, as if each had been consummated on January 1, 1997. Pro forma
results for the three month period ended June 30, 1997 are not
presented as they would not differ from actual results. This pro forma
information is not necessarily indicative of what the Company's results
would have been had the above transactions actually occurred on the
date indicated, or of future results of the Company.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
(in millions of dollars, except per share amounts) (ACTUAL) (PRO FORMA)
- -------------------------------------------------- -------- -----------
<S> <C> <C>
Revenues $ 1,239.7 $ 1,093.9
Benefits and expenses 981.1 907.4
----------- -----------
Income before federal tax expense 258.6 186.5
Federal tax expense 88.9 65.3
----------- -----------
Net income $ 169.7 $ 121.2
=========== ===========
Net income per common share:
Basic $ 1.32 $ 0.94
Diluted $ 1.32 $ 0.94
Weighted average number of shares of common stock
outstanding (in millions) 128.5 128.5
</TABLE>
(7) Acquisitions
------------
In April 1998, NFS entered into an agreement to acquire all of the
outstanding shares of Morley Financial Services, Inc., an investment
management company, for $32.1 million in a transaction to be accounted
for as a purchase. The transaction was completed in May 1998.
On July 14, 1998, NFS formed a strategic alliance with National
Deferred Compensation, Inc. (NDC), an administrator of deferred
compensation programs for public employees. The alliance included an
option for NFS to acquire NDC. NFS exercised its option to purchase NDC
on July 31, 1998 with a total purchase price of approximately $24.0
million. The transaction will be accounted for as a purchase.
12
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of operations
and financial condition of the Company should be read in conjunction
with the unaudited consolidated financial statements and related notes
included elsewhere herein.
NFS is a holding company for Nationwide Life Insurance Company (NLIC)
and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. In March
1997, NFS sold 23.6 million shares of its newly-issued Class A common
stock in an initial public offering (the IPO), receiving net proceeds
of $524.2 million. Concurrent with the IPO, NFS sold $300.0 million of
senior notes and a subsidiary trust sold $100.0 million of capital
securities in companion public offerings. In addition to actual
results, the Company presents pro forma results for 1997 adjusted for
the public offerings and for the $850.0 million dividend paid in
February 1997 in anticipation of the IPO as if they had occurred at the
beginning of 1997.
Management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995 with respect to the results of operations and
businesses of the Company. These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results
to differ materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include, among
others, the following possibilities: (i) Nationwide Corporation's
control of the Company through its beneficial ownership of
approximately 97.8% of the combined voting power of all the outstanding
common stock and approximately 81.5% of the economic interest in the
Company; (ii) the Company's primary reliance, as a holding company, on
dividends from its subsidiaries to meet debt payment obligations and
the applicable regulatory restrictions on the ability of the Company's
subsidiaries to pay such dividends; (iii) the potential impact on the
Company's reported net income that could result from the adoption of
certain accounting standards issued by the FASB; (iv) tax law changes
impacting the tax treatment of life insurance and investment products;
(v) heightened competition, including specifically the intensification
of price competition, the entry of new competitors and the development
of new products by new and existing competitors; (vi) adverse state and
federal legislation and regulation, including limitations on premium
levels, increases in minimum capital and reserves, and other financial
viability requirements; (vii) failure to expand distribution channels
in order to obtain new customers or failure to retain existing
customers; (viii) inability to carry out marketing and sales plans,
including, among others, changes to certain products and acceptance of
the revised products in the market; (ix) changes in interest rates and
the stock markets causing a reduction of investment income or asset
fees, reduction in the value of the Company's investment portfolio or a
reduction in the demand for the Company's products; (x) general
economic and business conditions which are less favorable than
expected; (xi) unanticipated changes in industry trends and ratings
assigned by nationally recognized statistical rating organizations or
A.M. Best Company; and (xii) inaccuracies in assumptions regarding
future persistency, mortality, morbidity and interest rates used in
calculating reserve amounts.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating income,
which excludes realized investment gains and losses. Net operating
income is commonly used in the insurance industry as a measure of
on-going earnings performance.
13
<PAGE> 14
The following table reconciles the Company's reported net income to net
operating income for the three and six month periods ended June 30,
1998 and 1997. In addition, net operating income reflecting pro forma
adjustments for the IPO, companion offerings of senior notes and
capital securities, and the $850.0 million dividend as discussed
previously is also presented for 1997. This pro forma information is
not necessarily indicative of what the Company's results would have
been had the above transactions actually occurred at the beginning of
1997, or of future results of the Company. All earnings per share
amounts are presented on a diluted basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
<S> <C> <C> <C> <C>
(in millions of dollars, except per share amounts) 1998 1997 1998 1997
-------------------------------------------------- ---- ---- ---- ----
Net income $ 83.0 $ 55.2 $ 169.7 $ 124.1
Realized (gains) losses on investments, net of tax (3.3) 7.6 (14.1) (6.2)
------ ------ ------- -------
Net operating income 79.7 62.8 155.6 117.9
Pro forma adjustments, net of tax - - - (2.9)
------ ------ ------- -------
Pro forma net operating income $ 79.7 $ 62.8 $ 155.6 $ 115.0
====== ====== ======= =======
Net operating income per share (pro forma for 1997) $ 0.62 $ 0.49 $ 1.21 $ 0.90
====== ====== ======= =======
</TABLE>
Revenues
Total revenues for second quarter 1998, excluding realized gains and
losses on investments, increased to $620.4 million compared to $551.4
million for the same period in 1997. For the first six months of 1998
and 1997, total revenues excluding realized gains and losses on
investments were $1.22 billion and $1.08 billion, respectively.
Increases in policy charges and net investment income were the key
drivers to revenue growth.
Policy charges include asset fees, which are primarily earned on
variable annuity policy reserves; administration fees, which include
fees charged per contract on a variety of the Company's products and
premium loads on universal life insurance products; surrender fees,
which are charged as a percentage of premiums withdrawn during a
specified period of annuity and certain life insurance contracts; and
cost of insurance charges earned on universal life insurance products.
Policy charges for the comparable periods of 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
(in millions of dollars) 1998 1997 1998 1997
------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Asset fees $ 126.0 $ 89.1 $ 239.2 $ 171.0
Administrative fees 17.1 15.9 34.0 30.3
Surrender fees 10.2 7.8 19.8 16.0
Cost of insurance charges 21.7 16.9 41.0 32.8
------- -------- ------- -------
Total policy charges $ 175.0 $ 129.7 $ 334.0 $ 250.1
======= ======== ======= =======
</TABLE>
The growth in asset fees reflects a 40% increase in total separate
account assets which reached $45.97 billion as of June 30, 1998
compared to $32.87 billion a year ago. Steady growth in premiums and
market appreciation have contributed significantly to the increase in
separate account assets.
Net investment income includes the 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 $352.7 million and $694.1 million in the second
quarter and first half of 1997, respectively, to $367.8 million and
$733.6 million in the comparable periods of 1998 primarily due to
increased invested assets to support growth in fixed annuity and life
insurance policy reserves. Fixed annuity policy reserves, which include
the fixed option of variable annuity contracts, increased to $14.26
billion as of June 30, 1998 compared to $14.19 billion as of December
31, 1997 and $13.72 billion a year ago.
14
<PAGE> 15
The Company does not consider realized gains and losses on investments
to be recurring components of earnings. The Company makes decisions
concerning the sale of invested assets based on a variety of market,
business, tax and other factors. Net realized gains (losses) on
investments were $5.0 million and ($11.9) million for second quarter
1998 and 1997, respectively. For the first six months of 1998, the
Company reported realized gains on investments of $21.6 million
compared to $9.2 million of realized gains for the first six months of
1997.
Benefits and Expenses
Interest credited to policyholder account balances principally relates
to fixed annuity products. For the second quarter and first six months
of 1998 interest credited totaled $264.7 million and $526.6 million,
respectively, compared to $253.7 million and $500.9 million in the same
periods of 1997. The growth in interest credited reflects the increase
in fixed annuity and life insurance policy reserves previously
discussed, partially offset by reduced average crediting rates. The
average crediting rate on fixed annuity policy reserves was 5.96% and
5.95% during the second quarter and first six months of 1998 compared
to 6.21% and 6.14% in the comparable periods of 1997.
The significant growth in the Variable Annuities segment business is
the primary reason for the increase in amortization of deferred policy
acquisition costs (DAC) which totaled $54.1 million and $39.6 million
in second quarter of 1998 and 1997, respectively. On a year to date
basis, DAC totaled $101.8 million in 1998 compared to $83.0 million in
1997.
Operating expenses increased 22% to $120.0 million in second quarter
1998 compared to $98.3 million in second quarter 1997. For the first
half of 1998, operating expenses were $227.5 million, up 18% from
$192.7 million for the first half of 1997. The increases reflect growth
in the number of annuity and life insurance contracts in force and the
related increase in administrative processing costs. Operating expenses
also include costs of certain technology initiatives including projects
related to the Year 2000.
Federal tax expense was $43.5 million and $29.7 million, representing
effective tax rates of 34.4% and 35.0% for second quarter 1998 and
1997, respectively. For the first six months of 1998 and 1997 federal
tax expense was $88.9 million and $66.9 million, representing effective
tax rates of 34.4% and 35.0%, respectively.
Year 2000
The Company has developed and implemented a plan to address issues
related to the Year 2000. The problem relates to many existing computer
systems using only two digits to identify a year in a date field. These
systems were designed and developed without considering the impact of
the upcoming change in the century. If not corrected, many computer
systems could fail or create erroneous results when processing
information dated after December 31, 1999. Like many organizations, the
Company is required to renovate or replace many computer systems so
that the systems will function properly after December 31, 1999. The
Company has completed an inventory and assessment of all computer
systems and has developed a plan to renovate or replace all
applications that were identified as not Year 2000 compliant. As of the
end of July 1998, the Company has renovated 97% of all applications
that required renovation. Testing of the renovated programs is in
process, including running each application with the date moved forward
to Year 2000. The Company expects to complete the testing of all
renovated applications by the end of 1998. For applications being
replaced, the Company anticipates all replacement systems to be in
place and functioning by the end of 1998. Contingency plans are
substantially completed which identify actions to be taken should the
Company's renovation and replacement strategies fall behind schedule.
The Company is also completing an inventory and assessment of all
vendor products. As of the end of July 1998, 83% of products had been
assessed and 69% were Year 2000 compliant. The Company is certifying
that each vendor product is Year 2000 compliant. At the end of July
1998, 24% of vendor products that were identified as Year 2000
compliant had been certified. The Company anticipates having all vendor
products assessed and certified by the end of 1998. Any vendor products
that can not be certified as Year 2000 compliant will be replaced or
eliminated.
15
<PAGE> 16
In addition to resolving internal Year 2000 readiness issues, the
Company is working with all external organizations (business partners)
to assess Year 2000 issues associated with the exchange of electronic
data. The Company has completed an inventory and assessment of all
interfaces with business partners and is in process of testing those
interfaces. The Company has also initiated plans to survey producer
business partners to ascertain their Year 2000 readiness.
Operating expenses in the first six months of 1998 and 1997 include
approximately $22.6 million and $22.5 million, respectively, for
technology projects, including costs related to Year 2000. In the
second half of 1998, the Company anticipates spending an amount
comparable to expense for the first half of 1998. At this time, no
significant Year 2000 costs are anticipated in 1999. Management does
not anticipate that the completion of Year 2000 renovation and
replacement activities will result in a reduction in operating
expenses. Rather, personnel and resources currently allocated to Year
2000 issues will be assigned to other technology-related projects.
Statutory Premiums and Deposits
The Company sells its products through a broad distribution network
comprised of wholesale and retail distribution channels. Wholesale
distributors are unaffiliated entities that sell the Company's products
to their own customer base and include independent broker/dealers,
national and regional wirehouses, financial institutions, pension plan
administrators and life specialists. The Company has access to over
1,100 independent broker/dealers and over 30,000 registered
representatives who sell individual and group variable annuities, fixed
annuities and variable life insurance in all 50 states and the District
of Columbia. The Company currently has relationships with 185 financial
institutions selling individual variable and fixed annuities (under the
Company's brand name and on a private-label basis), variable universal
life insurance and group pension products. Over 250 regional pension
plan administrators market the Company's group variable and fixed
annuities to employers sponsoring employee retirement programs.
Retail distributors are representatives of the Company who market
products directly to a customer base identified by the Company and
include exclusive retail sales representatives of the Company's
distribution subsidiaries and Nationwide Insurance Enterprise insurance
agents. The Company markets products on a retail basis to state and
local governments and to teachers through its subsidiary distribution
organizations. Approximately 4,300 Nationwide Insurance Enterprise
insurance agents are licensed to 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 are summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30, JUNE 30,
----------------------- -----------------------
(in millions of dollars) 1998 1997 1998 1997
-------------------------------------------- ---- ---- ---- ----
WHOLESALE CHANNELS
<S> <C> <C> <C> <C>
Independent broker/dealers $ 1,050.5 $ 971.2 $ 1,925.9 $ 1,827.1
National and regional wirehouses (1) 88.5 - 174.5 -
Financial institutions 642.7 378.1 1,092.0 719.4
Pension plan administrators 696.6 530.9 1,430.7 1,138.8
Life specialists 364.6 15.0 454.5 45.0
--------- ---------- --------- ---------
Total wholesale channels 2,842.9 1,895.2 5,077.6 3,730.3
--------- ---------- --------- ---------
RETAIL CHANNELS
Exclusive retail sales representatives 543.0 429.1 1,129.0 978.8
Nationwide agents 303.5 152.7 486.6 294.6
--------- ---------- --------- ---------
Total retail channels 846.5 581.8 1,615.6 1,273.4
--------- ---------- --------- ---------
Total external premiums and deposits 3,689.4 2,477.0 6,693.2 5,003.7
========= ========== ========= =========
Nationwide Insurance Enterprise employee
and agent benefit plans 55.7 19.1 115.5 70.6
--------- ---------- --------- ---------
Total statutory premiums and deposits $ 3,745.1 $ 2,496.1 $ 6,808.7 $ 5,074.3
========= ========== ========= =========
</TABLE>
----------
(1) Prior to 1998, national and regional wirehouse sales were
included in independent broker/dealer sales.
16
<PAGE> 17
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved sales growth of 49% in the second quarter of 1998
compared to the second quarter of 1997. On a year to date basis, sales
have increased 34% in 1998 compared to 1997. The Company believes it is
well positioned to achieve its goal of 20% annual growth in external
sales in 1998.
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand, and include individual and group variable annuities
and variable life insurance. The BEST of AMERICA(R) products allow
customers to choose from among investment options managed by premier
mutual fund managers. The Company has also developed private label
variable and fixed annuity products in conjunction with other financial
services providers which allow those providers to sell individual
variable and fixed annuities with substantially the same features as
the Company's brand name products to their own customer bases under
their own brand name.
The Company also markets group deferred compensation retirement plans
to employees of state and local governments for use under Internal
Revenue Code (IRC) Section 457. The Company utilizes its sponsorship by
the National Association of Counties and The United States Conference
of Mayors when marketing IRC Section 457 products. In addition, the
Company utilizes an exclusive arrangement with the National Education
Association (NEA) to market tax-qualified annuities under IRC 403(b) to
NEA members. Variable annuities developed for the NEA members are sold
under the NEA Valuebuilder brand.
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.
External statutory premiums and deposits by product are summarized as
follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
(in millions of dollars) 1998 1997 1998 1997
---------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $ 1,378.6 $ 1,079.2 $ 2,498.6 $ 2,021.1
Group variable annuities 672.1 508.1 1,374.2 1,080.9
Variable universal life insurance 74.9 51.3 142.4 97.9
Private label annuities 339.7 265.3 574.9 495.5
IRC Section 457 annuities 499.4 394.7 1,048.1 916.9
The NEA Valuebuilder annuities 43.6 34.4 80.9 61.9
Corporate-owned life insurance 364.6 15.0 454.5 45.0
Traditional/Universal life insurance 62.1 62.5 121.4 123.3
Other 254.4 66.5 398.2 161.2
--------- --------- --------- ---------
$ 3,689.4 $ 2,477.0 $ 6,693.2 $ 5,003.7
========= ========= ========= =========
</TABLE>
17
<PAGE> 18
BUSINESS SEGMENTS
The Company reports three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate revenue and expenses, investments and related investment
income supporting capital not specifically allocated to its product
segments, revenues and expenses of its distribution companies, revenues
and expenses of its investment advisor subsidiaries (other than the
portion allocated to the Variable Annuities and Life Insurance
segments), revenues and expenses related to group annuity contracts
sold to Nationwide Insurance Enterprise employee and agent benefit
plans and interest expense on long-term debt and capital securities in
a Corporate and Other segment. All information set forth below relating
to the Variable Annuities segment excludes the fixed option under
variable annuity contracts. Such information is included in the Fixed
Annuities segment.
The following table summarizes operating income before federal tax
expense for the Company's business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
(in millions of dollars) 1998 1997 1998 1997
------------------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Variable Annuities $ 55.7 $ 34.8 $ 105.0 $ 64.2
Fixed Annuities 43.1 44.1 88.1 81.7
Life Insurance 22.5 13.7 43.7 30.7
Corporate and Other 0.2 4.2 0.2 5.2
------- -------- ------- -------
$ 121.5 $ 96.8 $ 237.0 $ 181.8
======= ======== ======= =======
</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.
18
<PAGE> 19
The following table summarizes certain selected financial data for the Variable
Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------
(in millions of dollars) 1998 1997 1998 1997
- ---------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Asset fees $ 122.2 $ 85.0 $ 231.7 $ 163.8
Administrative fees 5.9 6.4 12.0 11.5
Surrender fees 7.2 5.3 13.7 10.9
--------- --------- --------- ---------
Total policy charges 135.3 96.7 257.4 186.2
Net investment income and other (2) 0.4 (2.7) (1.6) (5.4)
--------- --------- --------- ---------
135.7 94.0 255.8 180.8
Benefits and expenses:
Benefits and claims 0.9 1.5 2.0 2.7
Amortization of DAC 30.5 20.0 56.9 39.5
Other operating expenses 48.6 37.7 91.9 74.4
--------- --------- --------- ---------
80.0 59.2 150.8 116.6
--------- --------- --------- ---------
Operating income before federal tax expense $ 55.7 $ 34.8 $ 105.0 $ 64.2
========= ========= ========= =========
OTHER DATA (1)
Statutory premiums and deposits (3) $ 2,726.5 $ 1,938.4 $ 5,015.5 $ 3,767.3
Withdrawals $ 1,210.6 $ 637.4 $ 2,135.5 $ 1,307.3
Policy reserves as of period end $41,962.1 $29,878.8 $41,962.1 $29,878.8
Ratio of policy charges to average policy reserves 1.33% 1.40% 1.33% 1.41%
Pre-tax operating income to average policy reserves 0.55% 0.51% 0.54% 0.48%
</TABLE>
- ----------
(1) Excludes the fixed option under the variable annuity contracts which is
reported in the Fixed Annuities segment.
(2) The Company's method of allocating net investment income results in a charge
(negative net investment income) to this segment which is recognized in the
Corporate and Other segment. The charge relates to non-invested assets which
support this segment on a statutory basis.
(3) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
Variable annuity segment results reflect substantially increased asset fee
revenue partially offset by increases in DAC amortization and other operating
expenses. Asset fees increased to $122.2 million in the second quarter of 1998,
up 44% from $85.0 million in the same period a year ago. For the first half of
1998, asset fees totaled $231.7 million up 41% from the first half of 1997. The
increase in asset fees is due to continued growth in variable annuity policy
reserve levels resulting from strong variable annuity sales and market
appreciation on investments underlying reserves.
Variable annuity policy reserves grew $2.30 billion during the second quarter of
1998 reaching $41.96 billion as of June 30, 1998 and have increased 40% compared
to a year ago. Variable annuity policy reserves have grown $7.48 billion during
the first six months of 1998. The Company continues to sustain high sales growth
through deeper penetration of existing distribution channels and expansion into
new sales outlets. Second quarter 1998 premiums grew across all distribution
channels reaching $2.73 billion, 41% above year-ago second quarter sales of
$1.94 billion. During the first half of 1998, variable annuity sales reached
$5.02 billion up 33% from the first half of 1997. Included in 1998 sales are
$700 million for second quarter and $1.1 billion year-to-date for America's
FUTURE Annuity(R), the Company's lower-fee individual annuity introduced in
November 1997.
Favorable equity market conditions during the first half of 1998 also
contributed significantly to the growth in variable annuity policy reserves.
Variable annuity policy reserves reflect market appreciation of $4.56 billion
during the first six months of 1998.
19
<PAGE> 20
The growth in amortization of DAC and other operating expenses reflects the
overall growth in the variable annuity business.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that generate a return
for the customer at a specified interest rate, fixed for a prescribed period,
with returns accumulating on a tax-deferred basis. Such contracts consist of
single premium deferred annuities, flexible premium deferred annuities and
single premium immediate annuities. The Fixed Annuities segment includes the
fixed option under variable annuity contracts. The following table summarizes
certain selected financial data for the Fixed Annuities segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Policy charges $ 2.9 $ 4.2 $ 6.2 $ 8.7
Life insurance premiums 6.7 5.2 15.5 16.0
Net investment income 276.6 272.8 553.8 542.3
--------- --------- --------- ---------
286.2 282.2 575.5 567.0
--------- --------- --------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 206.3 205.9 412.2 406.8
Other benefits and claims 6.3 2.5 13.6 13.7
Amortization of DAC 10.8 9.1 21.7 21.2
Other operating expenses 19.7 20.6 39.9 43.6
--------- --------- --------- ---------
243.1 238.1 487.4 485.3
--------- --------- --------- ---------
Operating income before federal tax expense $ 43.1 $ 44.1 $ 88.1 $ 81.7
========= ========= ========= =========
OTHER DATA (1)
Statutory premiums and deposits (2) $ 461.2 $ 409.8 $ 959.3 $ 970.2
Withdrawals and benefits $ 464.7 $ 390.4 $ 1,010.5 $ 933.7
Policy reserves as of period end $14,256.1 $13,724.5 $14,256.1 $13,724.5
Net interest spread on general account
policy reserves 2.03% 2.02% 2.05% 2.05%
Pre-tax operating income to average policy reserves 1.21% 1.29% 1.24% 1.20%
</TABLE>
- ----------
(1) Includes the fixed option under the variable annuity contracts.
(2) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
20
<PAGE> 21
Fixed annuity segment results reflect an increase in interest spread income
attributable to growth in fixed annuity policy reserves. Interest spread is the
difference between net investment income and interest credited to policyholder
account balances. Interest spreads vary and are influenced by various factors
including crediting rates offered by competitors, performance of the investment
portfolio, changes in market interest rates and other factors. The following
table depicts the interest spreads on general account policy reserves in the
Fixed Annuities segment for the second quarter and first six months of 1998 and
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net investment income 7.99% 8.23% 8.00% 8.19%
Interest credited 5.96 6.21 5.95 6.14
---- ---- ---- ----
2.03% 2.02% 2.05% 2.05%
==== ==== ==== ====
</TABLE>
Mortgage loan and bond prepayment fees in the first half of 1998 accounted for
approximately 6 basis points and 7 basis points of the interest spread in the
second quarter and first six months of 1998, respectively. The Company
anticipates interest spreads over the next several quarters to be comparable to
second quarter 1998, excluding the impact of mortgage loan and bond prepayment
income.
Fixed annuity policy reserves increased to $14.26 billion as of June 30, 1998
compared to $14.19 billion as of the end of 1997 and $13.72 billion a year ago.
Second quarter fixed annuity sales increased to $461.2 million in 1998 compared
to $409.8 million in 1997; however, sales for the first six months of 1998 of
$959.3 million were down slightly compared to $970.2 million in 1997 reflecting
consumer preference for equity-linked variable products. Most of the Company's
fixed annuity sales are premiums allocated to the fixed option of variable
annuity contracts. Second quarter 1998 fixed annuity sales include $356.4
million in premiums allocated to the fixed option under a variable annuity
contract, compared to $292.6 million in first quarter 1997.
The increase in other benefits and claims in second quarter 1998 compared to a
year ago is attributable to favorable mortality experience in the year ago
second quarter.
Life Insurance
The Life Insurance segment consists of insurance products, including variable
universal life insurance and corporate-owned life insurance products, that
provide a death benefit and may also allow the customer to build cash value on a
tax-deferred basis.
21
<PAGE> 22
The following table summarizes certain selected financial data for the Life
Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Cost of insurance charges $ 21.7 $ 16.9 $ 41.0 $ 32.8
Other policy charges 12.2 9.0 23.7 17.4
----------- ----------- ----------- -----------
Total policy charges 33.9 25.9 64.7 50.2
Life insurance premiums 45.3 45.1 89.7 89.7
Net investment income 56.0 44.9 109.1 90.5
Other 0.3 0.1 0.5 0.2
----------- ----------- ----------- -----------
135.5 116.0 264.0 230.6
----------- ----------- ----------- -----------
Benefits and expenses:
Interest credited to policyholder account balances 27.5 19.3 52.3 37.0
Other benefits and claims 33.4 39.3 71.3 76.1
Policyholder dividends 11.5 11.6 22.3 22.2
Amortization of DAC 12.8 10.5 23.2 22.3
Other operating expenses 27.8 21.6 51.2 42.3
----------- ----------- ----------- -----------
113.0 102.3 220.3 199.9
----------- ----------- ----------- -----------
Operating income before federal tax expense $ 22.5 $ 13.7 $ 43.7 $ 30.7
=========== =========== =========== ===========
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 62.2 $ 62.5 $ 121.5 $ 123.3
Individual investment life insurance $ 74.9 $ 51.3 $ 142.4 $ 97.9
Corporate investment life insurance $ 364.6 $ 15.0 $ 454.5 $ 45.0
Policy reserves as of period end:
Traditional and universal life insurance $ 2,404.5 $ 2,333.7 $ 2,404.5 $ 2,333.7
Individual investment life insurance $ 1,096.4 $ 763.9 $ 1,096.4 $ 763.9
Corporate investment life insurance $ 687.4 $ 68.3 $ 687.4 $ 68.3
Life insurance in force:
Traditional and universal life insurance $ 27,190.6 $ 27,938.5 $ 27,190.6 $ 27,938.5
Individual investment life insurance $ 13,385.4 $ 9,697.1 $ 13,385.4 $ 9,697.1
Corporate investment life insurance $ 1,451.4 $ 204.4 $ 1,451.4 $ 204.4
</TABLE>
- ---------
(1) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
Life Insurance segment results reflect increased revenues driven by growth in
investment life insurance in force and policy reserves coupled with favorable
mortality experience. These trends were partially offset by higher expense
levels.
22
<PAGE> 23
Investment life insurance (which includes individual variable universal life
insurance and corporate-owned life insurance products) policy charges were $21.8
million in the second quarter of 1998, a 59% increase compared to $13.7 million
for the second quarter of 1997. The growth in investment life insurance policy
charges is attributable to growth in individual investment life insurance policy
reserves which reached $1.10 billion as of the end of the second quarter 1998 up
$332.5 million from a year ago. Policy reserve growth continues to be driven by
strong sales from both independent broker/dealers and Nationwide Insurance
Enterprise insurance agents. Investment life insurance sales to individuals
during the second quarter of 1998 reached $74.9 million compared to $51.3
million in the second quarter of 1997. The Company anticipates continued sales
growth in 1998 for investment life insurance products.
During the first half of 1998, the Company continued its entry into the
corporate-owned life insurance market recording $454.5 million in
corporate-owned life insurance premiums compared to $45.0 million in the first
half of 1997. As of June 30, 1998 the company had $687.4 million in
corporate-owned life insurance policy reserves.
The increase in operating expenses is due to the increase in policies in force
and continued spending on a new policy administration system for traditional
life insurance policies.
Corporate and Other
The following table summarizes certain selected financial data for the Corporate
and Other segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues (1):
Net investment income $ 42.5 $ 41.9 $ 85.8 $ 74.4
Other 20.5 17.3 37.0 30.3
---------- ---------- ---------- ----------
63.0 59.2 122.8 104.7
---------- ---------- ---------- ----------
Benefits and expenses:
Interest credited to policy reserves 30.9 28.5 62.1 57.1
Interest expense on debt and capital securities 8.0 8.1 16.0 10.0
Other operating expenses 23.9 18.4 44.5 32.3
---------- ---------- ---------- ----------
62.8 55.0 122.6 99.4
---------- ---------- ---------- ----------
Operating income before federal tax expense (1) $ 0.2 $ 4.2 $ 0.2 $ 5.3
========== ========== ========== ==========
OTHER DATA
Statutory premiums and deposits (2) $ 55.7 $ 19.1 $ 115.5 $ 70.6
Withdrawals and benefits $ 52.0 $ 30.1 $ 106.3 $ 106.1
Policy reserves as of period end $ 4,118.1 $ 3,571.8 $ 4,118.1 $ 3,571.8
Nationwide retail mutual fund assets (3) $ 3,015.6 $ 2,405.0 $ 3,015.6 $ 2,405.0
</TABLE>
- ---------------------
(1) Excludes realized gains and losses on investments.
(2) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
(3) Excludes mutual funds selected as investment options under the Company's
variable annuity and variable universal life insurance contracts and mutual
funds selected as investment options under Nationwide Insurance Enterprise
employee and agent benefit plans.
23
<PAGE> 24
Revenues in the Corporate and Other segment consist of net investment income on
invested assets not allocated to the three product segments, investment
management fees and other revenues earned from Nationwide mutual funds other
than the portion allocated to the Variable Annuities and Life Insurance
segments, commissions and other income earned by the marketing and distribution
subsidiaries of the Company and net investment income and policy charges from
group annuity contracts issued to Nationwide Insurance Enterprise employee and
agent benefit plans.
Growth in interest spread income and other income was driven by increased policy
reserves related to Nationwide Insurance Enterprise employee and agent benefit
plans and strong first half 1998 sales from the Company's investment advisor
subsidiary, respectively.
The 1997 Corporate and Other segment results do not reflect a full first quarter
of interest expense on the senior notes and capital securities of subsidiary
trust which were issued in March 1997. Stated on a pro forma basis to reflect
interest expense for a full first quarter and to adjust for the impact on net
investment income related to the special dividends paid in anticipation of the
IPO, first half 1997 Corporate and Other segment operating income before federal
tax expense was $0.9 million.
In addition to the operating revenues previously presented, the Company also
reports realized gains and losses on investments in the Corporate and Other
segment. The Company realized net investment gains of $5.0 million and realized
net investment losses of $11.9 million during the second quarter of 1998 and
1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources demonstrate the overall financial strength of
the Company and its ability to generate strong cash flows from its operations
and borrow funds at competitive rates to meet operating and growth needs. The
Company's capital structure consists of long-term debt, capital securities of
subsidiary trust and equity, summarized in the following table.
<TABLE>
<CAPTION>
AS OF
--------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(in millions of dollars) 1998 1997 1997
- ------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Long-term debt $ 298.4 $ 298.4 $ 298.4
Capital securities of subsidiary trust 100.0 100.0 100.0
---------- ---------- ----------
Total long-term debt and capital securities 398.4 398.4 398.4
---------- ---------- ----------
Shareholders' equity, excluding accumulated other
comprehensive income 2,029.1 1,877.1 1,751.2
Accumulated other comprehensive income 250.0 247.1 141.2
---------- ---------- ----------
Total shareholders' equity 2,279.1 2,124.2 1,892.4
---------- ---------- ----------
Total capital $ 2,677.5 $ 2,522.6 $ 2,290.8
========== ========== ==========
Total capital excluding accumulated other
comprehensive income $ 2,427.5 $ 2,275.5 $ 2,149.6
========== ========== ==========
Long-term debt and capital securities to total capital 14.9% 15.8% 17.4%
Long-term debt and capital securities to total capital
excluding accumulated other comprehensive income 16.4% 17.5% 18.5%
</TABLE>
The Company's long-term debt bears interest at 8% per annum and matures March 1,
2027. The capital securities of subsidiary trust are due March 1, 2037 and pay a
distribution rate of 7.899%. There are no sinking fund requirements related to
the debt or capital securities.
24
<PAGE> 25
NFS is a holding company whose principal asset is the common stock of NLIC. The
principal sources of funds for NFS to pay interest, dividends and operating
expenses are existing cash and investments, and dividends from NLIC and other
subsidiaries.
State insurance laws generally restrict the ability of insurance companies to
pay cash dividends in excess of certain prescribed limitations without prior
approval. The ability of NLIC to pay dividends is subject to restrictions set
forth in the insurance laws and regulations of Ohio, its domiciliary state. The
Ohio insurance laws require life insurance companies to seek prior regulatory
approval to pay a dividend if the fair market value of the dividend, together
with that of other dividends made within the preceding 12 months, exceeds the
greater of (i) 10% of statutory-basis policyholders' surplus as of the prior
December 31 or (ii) the statutory-basis net income of the insurer for the prior
year. NLIC's statutory-basis policyholders' surplus as of December 31, 1997 was
$1.13 billion and statutory-basis net income for 1997 was $111.7 million. Total
dividends paid in the 12 months preceding June 30, 1998 were $100.0 million. The
Ohio insurance laws also require insurers to seek prior regulatory approval for
any dividend paid from other than earned surplus. The payment of dividends by
NLIC may also be subject to restrictions set forth in the insurance laws of New
York that limit the amount of statutory profits on NLIC's participating policies
(measured before dividends to policyholders) that can inure to the benefit of
NFS and its stockholders. NFS currently does not expect such regulatory
requirements to impair its ability to pay interest, dividends, operating
expenses, and principal in the future.
The Company's principal sources of funds are premiums and other considerations
paid, contract charges earned, net investment income received and proceeds from
investments called, redeemed or sold. The principal uses of these funds are the
payment of benefits on annuity contracts and life insurance policies, operating
expenses and the purchase of investments. Net cash provided by operating
activities (reflecting principally (i) premiums and contract charges collected,
less (ii) benefits paid on life insurance products, plus (iii) income collected
on invested assets, less (iv) commissions and other general expenses paid) was
$357.8 million and $546.7 million for the first six months of 1998 and 1997,
respectively. Net cash used in investing activities (principally reflecting
investments purchased less investments called, redeemed or sold) was $267.6
million and $1.22 billion in the first six months of 1998 and 1997,
respectively. Net cash (used in) provided by financing activities (principally
reflecting net proceeds from the IPO and the companion offerings of senior notes
and capital securities of subsidiary trust in 1997 only and deposits to
investment product and universal life insurance product account balances less
withdrawals from such account balances) was ($259.6) million and $717.2 million
for the first six months of 1998 and 1997, respectively.
Also available as a source of funds to the Company is a $600.0 million revolving
credit facility entered into by NLIC and Nationwide Mutual Insurance Company in
August 1996 with a five year term with a group of national financial
institutions. In September 1997, the credit agreement was amended to include NFS
as a party to and borrower under the agreement. The facility provides for
several and not joint liability with respect to any amount drawn by any party.
To date, no amounts have been drawn down on the facility. The facility provides
covenants, including, but not limited to, requirements that the Company maintain
consolidated tangible net worth, as defined, in excess of $1.23 billion and NLIC
maintain statutory surplus in excess of $875 million.
On April 24, 1998 NFS purchased a 32% interest in The 401(k) Companies, Inc. for
$6.5 million. The 401(k) Companies, Inc. focuses on sales and services to the
large case market and will allow NFS to better penetrate that market.
On April 29, 1998 NFS agreed to purchase Morley Financial Services, Inc., an
investment management company, for $32.1 million. Morley Financial Services,
Inc. specializes in stable-value products for qualified retirement plans. The
transaction was closed in the second quarter of 1998.
On July 31, 1998 NFS acquired National Deferred Compensation, Inc. (NDC) for
approximately $24.0 million. NDC is an administrator of deferred compensation
programs for public employees.
25
<PAGE> 26
INVESTMENTS
General
The Company's assets are divided between separate account and general account
assets. As of June 30, 1998, $45.97 billion (or 67%) of the Company's total
assets were held in separate accounts and $22.54 billion (or 33%) were held in
the Company's general account, including $19.98 billion of general account
investments.
Separate account assets consist primarily of deposits from the Company's
variable annuity business. Most separate account assets are invested in various
mutual funds. All of the investment risk in the Company's separate account
assets is borne by the Company's customers, with the exception of $651.5 million
of policy reserves as of June 30, 1998 ($365.5 million as of December 31, 1997)
for which the Company bears all or a portion of the investment risk.
Fixed Maturity Securities
The following table summarizes the composition of the Company's general account
fixed maturity securities by category.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
--------------------- -----------------------
CARRYING % OF CARRYING % OF
(in millions of dollars) VALUE TOTAL VALUE TOTAL
- ---------------------------------- ----------- ------ ----------- -----
<S> <C> <C> <C> <C>
U.S. government/agencies $ 256.4 1.9% $ 319.7 2.4%
Foreign governments 99.0 0.7 95.8 0.7
State and political subdivisions 0.9 - 1.6 -
Mortgage-backed securities:
U.S. government/agencies 3,635.9 26.7 3,750.3 28.4
Non-government/agencies - - -
Corporate:
Public 4,861.6 35.7 4,597.3 34.8
Private 4,757.4 35.0 4,445.4 33.7
----------- ----- ----------- -----
$ 13,611.2 100.0% $ 13,210.1 100.0%
=========== ===== =========== =====
</TABLE>
The National Association of Insurance Commissioners (NAIC) assigns securities
quality ratings and uniform valuations called "NAIC Designations" which are used
by insurers when preparing their annual statements. The NAIC assigns
designations to publicly traded as well as privately placed securities. The
designations assigned by the NAIC range from class 1 to class 6, with a
designation in class 1 being of the highest quality. Of the Company's general
account fixed maturity securities, 97% by the carrying value were in the highest
two NAIC Designations as of June 30, 1998.
26
<PAGE> 27
The following table sets forth an analysis of credit quality, as determined by
NAIC Designation, of the Company's general account fixed maturity securities
portfolio as of June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997
------------------- -----------------------
NAIC RATING AGENCY CARRYING % OF CARRYING % OF
DESIGNATION (1) EQUIVALENT DESIGNATION (2) VALUE TOTAL VALUE TOTAL
- --------------- -------------------------- --------- -------- ----------- ------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 9,015.6 66.2% $ 8,815.3 66.7%
2 Baa 4,239.1 31.2 4,116.6 31.2
3 Ba 310.8 2.3 220.9 1.7
4 B 45.7 0.3 53.7 0.4
5 Caa and lower - - 3.6 -
6 In or near default - - - -
--------- ----- ----------- -----
$13,611.2 100.0% $ 13,210.1 100.0%
========= ===== =========== =====
</TABLE>
- ----------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown have been assigned to securities not yet
assigned an NAIC Designation in a manner approximating equivalent public
rating categories.
(2) Comparison's between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has assigned
internal ratings corresponding to the public rating.
The Company's general account mortgage-backed security (MBS) investments include
residential MBSs and multi-family mortgage pass-through certificates. As of June
30, 1998, MBSs were $3.64 billion (or 27%) 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 June
30, 1998, $2.54 billion (or 70%) of the carrying value of the general account
MBS portfolio was invested in planned amortization class CMOs/REMICs (PACs).
PACs are securities whose cash flows are designed to remain constant over a
variety of mortgage prepayment environments. Other classes in the CMO/REMIC
security are structured to accept the volatility of mortgage prepayment changes,
thereby insulating the PAC class.
27
<PAGE> 28
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio as of June 30, 1998 and December 31,
1997.
<TABLE>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997
------------------- ----------------------
CARRYING % OF CARRYING % OF
(in millions of dollars) VALUE TOTAL VALUE TOTAL
- ------------------------------------ ---------- ------ ---------- ----
<S> <C> <C> <C> <C>
Planned Amortization Class $ 2,541.6 69.9% $ 2,645.3 70.5%
Very Accurately Defined Maturity 526.7 14.5 550.1 14.7
Multi-family Mortgage Pass-through
Certificates 234.4 6.4 235.2 6.3
Scheduled 152.4 4.2 160.6 4.3
Targeted Amortization Class 91.6 2.5 90.8 2.4
Accrual 42.4 1.2 48.5 1.3
Sequential 27.9 0.8 19.8 0.5
Other 18.9 0.5 - -
---------- ----- ---------- -----
$ 3,635.9 100.0% $ 3,750.3 100.0%
========== ===== ========== =====
</TABLE>
The Company has not invested in derivative securities other than MBSs.
Mortgage Loans
As of June 30, 1998, general account mortgage loans were $5.24 billion (or 26%)
of the carrying value of consolidated general account invested assets.
The following table sets forth the delinquency, foreclosure and restructured
commercial mortgage loan experience for the Company and for the life insurers
reporting to the American Council of Life Insurance (ACLI) for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997 DECEMBER 31, 1997
------------------- ------------------- -----------------
COMPANY ACLI (1) COMPANY ACLI (2) COMPANY ACLI (2)
------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Delinquent (3) 0.00% -% 0.28% 1.56% 0.19% 0.90%
In foreclosure (4) 0.00 - 0.28 0.90 0.19 0.58
Restructured (5) 0.68 - 1.18 6.04 0.77 4.61
---- -- ---- ---- ---- ----
Subtotal 0.68 - 1.46 7.60 0.96 5.51
Foreclosed - year to date 0.17 - 0.61 0.53 1.07 0.84
---- -- ---- ---- ---- ----
Total 0.85% -% 2.07% 8.13% 2.03% 6.35%
==== == ==== ==== ==== ====
</TABLE>
- ----------
(1) ACLI data for the three months ended June 30, 1998 are not yet available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," numbers 1384 and 1399, dated
September 8, 1997 and March 9, 1998, respectively.
(3) Commercial mortgage loans are classified by the Company and the ACLI as
delinquent when they are 60 days or more past due.
(4) Delinquent includes loans in foreclosure; therefore, subtotal and total
lines exclude "In foreclosure" amounts.
(5) Commercial mortgage loans are classified by the Company and the ACLI as
restructured when they are in good standing, but the basic terms have been
modified as a result of an actual or anticipated delinquency.
28
<PAGE> 29
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity pricing and sales practices. A
number of these lawsuits have resulted in substantial jury awards
or settlements.
In February 1997, NLIC was named as a defendant in a lawsuit filed
in New York Supreme Court related to the sale of whole life
policies on a "vanishing premium" basis (John H. Snyder v.
Nationwide Life Insurance Co.). The plaintiff in such lawsuit
seeks to represent a national class of NLIC's policyholders and
claims unspecified compensatory and punitive damages. This lawsuit
has not been certified as a class action. On April 22, 1997, a
motion to dismiss the Snyder complaint in its entirety was filed
by the defendants, and the plaintiff has opposed such motion.
In April 1998, NLIC was named as a defendant in a lawsuit filed in
Ohio State Court similar to the Snyder lawsuit (David Mishler v.
Nationwide Life Insurance Co.). The plaintiff in such lawsuit
seeks to represent a similar class, makes similar allegations and
seeks unspecified compensatory and punitive damages. On June 26,
1998, a motion to dismiss the Mishler complaint in its entirety
was filed by the defendants, and the plaintiffs have 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 in a federal
court in Texas against NLIC and the American Century group of
defendants (Robert Young and David D. Distad v. Nationwide Life
Insurance Company et al.). In this action, plaintiffs seek to
represent a class of variable life insurance contract owners and
variable annuity contract owners whom they claim were allegedly
misled when purchasing these variable contracts into believing
that the performance of their subaccount mutual fund managed by
American Century, whose shares may only be purchased by insurance
companies, would track the performance of a mutual fund, also
managed by American Century, whose shares are publicly traded. The
amended complaint seeks unspecified compensatory and punitive
damages. On April 27, 1998, the Court denied, in part, and
granted, in part, motions to dismiss the complaint filed by NLIC
and American Century. The parties are presently engaged in
discovery on the issue of whether the lawsuit should be certified
as a class action. NLIC intends to defend this case vigorously.
There can be no assurance that any litigation relating to pricing
or sales practices will not have a material adverse effect on the
Company in the future.
ITEM 2 CHANGES IN SECURITIES
NFS reacquired 437, 421 and 402 shares of its Class A Common
Stock, par value $0.01 per share in brokerage transactions on the
last business day of April, May and June, respectively, for an
aggregate purchase price of $18,763.17, $18,762.69 and $18,797.52,
respectively. All amounts include brokers' commissions. Pursuant
to the Stock Retainer Plan for Non-Employee Directors, 437, 421
and 402 shares of Class A Common Stock were subsequently reissued
by NFS on the last business day of April, May and June,
respectively, at a price of $43.06, $44.44 and $47.00 per share,
respectively, to NFS' directors as partial payment of the $50,000
annual retainer paid by NFS to the directors in consideration of
serving as directors of the Company. The issuance of such shares
is exempt from registration under the Securities and Exchange Act
of 1933, as amended, pursuant to Rule 506 promulgated thereunder.
29
<PAGE> 30
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NFS held its Annual Meeting of stockholders on May 13, 1998. At
that meeting, stockholders approved the following management
proposal:
<TABLE>
<CAPTION>
For Withheld
------------- ---------
Election of directors to serve as Class I Directors until the
year 2001 Annual Meeting of stockholders as follows:
<S> <C> <C>
James G. Brocksmith, Jr. 1,066,229,596 48,744
Henry S. Holloway 1,066,228,746 49,594
James F. Patterson 1,066,228,846 49,494
Gerald D. Prothro 1,066,229,846 48,494
</TABLE>
The terms of office of the Directors, Charles L. Fuellgraf, Jr.,
Joseph J. Gasper, Lydia Micheaux Marshall, Dimon R. McFerson,
Donald L. McWhorter, David O. Miller and Arden L. Shisler,
continued after the meeting.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
On April 29, 1998, NFS filed a Current Report on Form 8-K
concerning the announcement of NFS's agreement to purchase
all of the outstanding shares of Morley Financial
Services, Inc.
On July 14, 1998, NFS filed a Current Report on Form 8-K
concerning the announcement of NFS's formation of a
strategic alliance with National Deferred Compensation,
Inc.
30
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE FINANCIAL SERVICES, INC.
-----------------------------------
(Registrant)
Date: August 11, 1998 /s/ MARK R. THRESHER
-------------------------------------------
Mark R. Thresher, Vice President - Finance
and Treasurer
(Chief Accounting Officer)
31
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONWIDE
FINANCIAL SERVICES INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO SUCH UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 13,611
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 99
<MORTGAGE> 5,242
<REAL-ESTATE> 275
<TOTAL-INVEST> 19,978
<CASH> 12
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,859
<TOTAL-ASSETS> 68,512
<POLICY-LOSSES> 18,983
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
100
0
<COMMON> 1
<OTHER-SE> 2,278
<TOTAL-LIABILITY-AND-EQUITY> 68,512
105
<INVESTMENT-INCOME> 734
<INVESTMENT-GAINS> 22
<OTHER-INCOME> 45
<BENEFITS> 614
<UNDERWRITING-AMORTIZATION> 102
<UNDERWRITING-OTHER> 228
<INCOME-PRETAX> 259
<INCOME-TAX> 89
<INCOME-CONTINUING> 170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
