<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 COMMISSION FILE NO. 1-12785
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 31-1486870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
------ ------
The number of shares outstanding of each of the registrant's classes of common
stock on May 1, 1999 was as follows:
CLASS A COMMON STOCK (par value $0.01 per share) - 23,775,516 shares
issued and outstanding (Title of Class)
CLASS B COMMON STOCK (par value $0.01 per share) - 104,745,000 shares
issued and outstanding (Title of Class)
<PAGE> 2
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
PART II OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURE 28
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES
Policy charges $ 206.2 $ 159.0
Life insurance premiums 53.5 53.2
Net investment income 365.6 365.8
Realized (losses) gains on investments (5.4) 16.6
Other 37.2 19.7
------- -------
657.1 614.3
------- -------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 263.8 261.9
Other benefits and claims 50.5 46.3
Policyholder dividends on participating policies 10.1 10.8
Amortization of deferred policy acquisition costs 60.7 47.7
Interest expense on debt and capital and preferred securities of subsidiary trusts 11.8 8.0
Other operating expenses 128.5 107.5
------- -------
525.4 482.2
------- -------
Income before federal income tax expense 131.7 132.1
Federal income tax expense 43.9 45.4
------- -------
Net income $ 87.8 $ 86.7
======= =======
NET INCOME PER COMMON SHARE
Basic $ 0.68 $ 0.67
Diluted $ 0.68 $ 0.67
Weighted average common shares outstanding 128.5 128.5
Weighted average diluted common shares outstanding 128.6 128.6
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in millions, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED) DECEMBER 31,
MARCH 31, 1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $13,728.6 in 1999; $13,724.1 in 1998) $14,101.2 $14,247.9
Equity securities (cost $113.7 in 1999; $116.9 in 1998) 133.1 134.0
Mortgage loans on real estate, net 5,364.6 5,328.4
Real estate, net 244.3 243.6
Policy loans 478.9 464.3
Other long-term investments 65.4 44.0
Short-term investments 483.2 478.3
--------- ---------
20,870.7 20,940.5
--------- ---------
Cash 33.1 24.5
Accrued investment income 229.9 218.7
Deferred policy acquisition costs 2,143.6 2,022.3
Other assets 615.5 529.4
Assets held in separate accounts 53,469.9 50,935.8
--------- ---------
$77,362.7 $74,671.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $19,908.3 $19,772.2
Long-term debt 298.4 298.4
Other liabilities 933.7 917.3
Liabilities related to separate accounts 53,469.9 50,935.8
--------- ---------
74,610.3 71,923.7
--------- ---------
NFS-obligated mandatorily redeemable capital and preferred securities
of subsidiary trusts holding solely junior subordinated debentures of NFS 300.0 300.0
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 50.0 million shares; no shares
issued and outstanding -- --
Class A common stock, $.01 par value. Authorized 750.0 million shares,
23.8 million shares issued and outstanding 0.2 0.2
Class B common stock, $.01 par value. Authorized 750.0 million shares,
104.7 million shares issued and outstanding 1.0 1.0
Additional paid-in capital 635.1 629.5
Retained earnings 1,618.9 1,541.5
Accumulated other comprehensive income 198.3 275.9
Other (1.1) (0.6)
--------- ---------
2,452.4 2,447.5
--------- ---------
$77,362.7 $74,671.2
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(in millions)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME OTHER EQUITY
------------ ---------- ---------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 0.2 $ 1.0 $ 629.2 $ 1,247.8 $ 247.1 $ (1.1) $ 2,124.2
Comprehensive income:
Net income -- -- -- 86.7 -- -- 86.7
Net unrealized losses on
securities available-for-sale
arising during the period -- -- -- -- (11.1) -- (11.1)
-----------
Total comprehensive income 75.6
-----------
Cash dividends declared -- -- -- (7.7) - -- (7.7)
Other, net -- -- -- -- - 0.2 0.2
------------ ---------- ---------- ------------- --------------- ------------ -----------
BALANCE, MARCH 31, 1998 $ 0.2 $ 1.0 $ 629.2 $ 1,326.8 $ 236.0 $ (0.9) $ 2,192.3
============ ========== ========== ============= =============== ============ ===========
BALANCE, JANUARY 1, 1999 $ 0.2 $ 1.0 $ 629.5 $ 1,541.5 $ 275.9 $ (0.6) $ 2,447.5
Comprehensive income:
Net income -- -- -- 87.8 -- -- 87.8
Net unrealized losses on
securities available-for-sale
arising during the period -- -- -- -- (77.6) -- (77.6)
-----------
Total comprehensive income 10.2
-----------
Cash dividends declared -- -- -- (10.4) -- -- (10.4)
Other, net -- -- 5.6 -- -- (0.5) 5.1
------------ --------- ----------- ------------- --------------- ------------ -----------
BALANCE, MARCH 31, 1999 $ 0.2 $ 1.0 $ 635.1 $ 1,618.9 $ 198.3 $ (1.1) $ 2,452.4
============ ========= =========== ============= =============== ============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 1999 and 1998
(in millions)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 87.8 $ 86.7
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 263.8 261.9
Capitalization of deferred policy acquisition costs (152.4) (131.2)
Amortization of deferred policy acquisition costs 60.7 47.7
Amortization and depreciation 2.6 (2.3)
Realized losses (gains) on investments 5.4 (16.6)
Increase in accrued investment income (11.2) (12.8)
(Increase) decrease in other assets (64.1) 5.1
Increase (decrease) in policy liabilities 7.0 (97.7)
Increase in other liabilities 58.1 78.6
Other, net 3.5 (2.9)
------- -------
Net cash provided by operating activities 261.2 216.5
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 524.1 442.1
Proceeds from sale of securities available-for-sale 143.3 224.4
Proceeds from maturity of securities held to maturity -- 6.0
Proceeds from repayments of mortgage loans on real estate 89.4 241.0
Proceeds from sale of real estate -- 30.3
Proceeds from repayments of policy loans and sale of other invested assets 4.7 10.0
Cost of securities available-for-sale acquired (677.3) (852.1)
Cost of mortgage loans on real estate acquired (125.3) (241.7)
Cost of real estate acquired (0.7) (0.2)
Short-term investments, net (4.9) (117.0)
Other, net (60.1) (14.9)
------- -------
Net cash used in investing activities (106.8) (272.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (10.4) (7.7)
Increase in investment product and universal life insurance product account balances 756.8 621.2
Decrease in investment product and universal life insurance product account balances (891.5) (694.3)
Other, net (0.7) --
------- -------
Net cash used in financing activities (145.8) (80.8)
------- -------
Net increase (decrease) in cash 8.6 (136.4)
Cash, beginning of period 24.5 180.9
------- -------
Cash, end of period $ 33.1 $ 44.5
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 1999
(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,
1998 included in the Company's 1998 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
MARCH 31,
---------------------------
(in millions, except per share amounts) 1999 1998
---------------------------------------------------- ------------- -------------
<S> <C> <C>
Basic and diluted net income $ 87.8 $ 86.7
======= =======
Weighted average common shares outstanding 128.5 128.5
Dilutive effect of stock options 0.1 0.1
------- -------
Weighted average diluted common shares outstanding 128.6 128.6
======= =======
Net income per common share:
Basic $ 0.68 $ 0.67
Diluted $ 0.68 $ 0.67
</TABLE>
7
<PAGE> 8
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(3) 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
(in millions) MARCH 31,
---------------------------------------------------- ------------------------------
1999 1998
---- ----
<S> <C> <C>
Unrealized losses on securities available-for-
sale arising during the period:
Gross $ (154.4) $ (22.9)
Adjustment to deferred policy acquisition costs 29.6 7.8
Related federal tax benefit 41.7 5.9
-------- -------
Net (83.1) (9.2)
-------- -------
Reclassification adjustment for net losses (gains)
on securities available-for-sale realized during
the period:
Gross 8.5 (2.9)
Related federal tax (benefit) expense (3.0) 1.0
-------- -------
Net 5.5 (1.9)
-------- -------
Total Other Comprehensive Income $ (77.6) $ (11.1)
======== =======
</TABLE>
(4) Accounting Pronouncements
-------------------------
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." The SOP, which has been adopted
prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining
internal use software. Prior to the adoption of SOP 98-1, the Company
expensed internal use software related costs as incurred. The effect of
adopting the SOP was to increase net income for the quarter ended March
31, 1999 by $1.6 million or $0.01 per share.
In June 1998, the Financial Accounting Standards Board (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 fiscal years beginning after
June 15, 1999. It may be implemented earlier provided adoption occurs
as of the beginning of any fiscal quarter after issuance. The Company
plans to adopt this Statement in first quarter 2000 and is currently
evaluating the impact on results of operations and financial condition.
8
<PAGE> 9
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(5) Segment Disclosures
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports four product segments:
Variable Annuities, Fixed Annuities, Life Insurance and Assets Managed
and Administered.
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.
Beginning first quarter 1999 the Company began reporting a new product
segment, Assets Managed and Administered. The Assets Managed and
Administered segment includes the revenues and expenses of the
Company's investment advisor subsidiaries and the operations of
businesses from which the Company receives asset-based fees for
administrative services only. Previously, the results of these
operations were included in the Corporate and Other segment.
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,
certain revenues and expenses related to the sales activities of its
distribution companies, 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 and
preferred securities and all realized gains and losses on investments
in a Corporate and Other segment.
During first quarter 1999 the Company revised the allocation of net
investment income among its Life Insurance and Corporate and Other
segments. Also, certain amounts previously reported as other income
were reclassified to operating expense. Amounts reported for prior
periods have been restated to reflect these changes as well as the new
product segment previously discussed.
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 March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Assets
Variable Fixed Life Managed and Corporate
(in millions) Annuities Annuities Insurance Administered and Other Total
------------------------------- --------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999
Operating revenue (1) $ 143.6 $ 287.6 $ 151.1 $ 34.3 $ 45.9 $ 662.5
Benefits and expenses 78.0 244.9 122.0 28.2 52.3 525.4
--------- --------- -------- --------- -------- ---------
Operating income (loss)
before federal income tax 65.6 42.7 29.1 6.1 (6.4) 137.1
Realized losses on investments -- -- -- -- (5.4) (5.4)
--------- --------- -------- --------- -------- ---------
Consolidated income (loss) before
federal income tax $ 65.6 $ 42.7 $ 29.1 $ 6.1 (11.8) $ 131.7
========= ========= ======== ========= ======== =========
Assets as of period end $50,139.8 $15,396.4 $5,527.9 $ 192.7 $6,105.9 $77,362.7
========= ========= ======== ========= ======== =========
1998
Operating revenue (1) $ 114.3 $ 289.3 $ 127.2 $ 17.1 $ 49.8 $ 597.7
Benefits and expenses 65.0 244.3 107.1 13.8 52.0 482.2
--------- --------- -------- --------- -------- ---------
Operating income (loss)
before federal income tax 49.3 45.0 20.1 3.3 (2.2) 115.5
Realized gains on investments -- -- -- -- 16.6 16.6
--------- --------- -------- --------- -------- ---------
Consolidated income before
federal income tax $ 49.3 $ 45.0 $ 20.1 $ 3.3 $ 14.4 $ 132.1
--------- --------- -------- --------- -------- ---------
Assets as of period end $40,742.8 $14,514.0 $4,228.6 $ 30.3 $6,212.2 $65,727.9
========= ========= ======== ========= ======== =========
</TABLE>
(1) Excludes realized gains and losses on investments.
(6) Contingencies
-------------
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
The plaintiff in such lawsuit seeks to represent a national class of
the Company's customers and seeks unspecified compensatory and punitive
damages. The Company is currently evaluating this lawsuit, which has
not been certified as a class. The Company intends to defend this
lawsuit vigorously.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations and financial condition of the Company should be read
in conjunction with the unaudited consolidated financial
statements and related notes included elsewhere herein.
NFS is the holding company for Nationwide Life Insurance Company
(NLIC) and other companies that comprise the retirement savings
operations of the Nationwide Insurance Enterprise. The Company is
a leading provider of long-term savings and retirement products in
the United States. The Company develops and sells a diverse range
of products including variable annuities, fixed annuities and life
insurance as well as investment management services, pension
products and administrative services. The Company markets its
products through a broad network of wholesale and retail
distribution channels, including independent investment dealers,
national and regional brokerage firms, financial institutions,
pension plan administrators, exclusive retail sales
representatives, and Nationwide Insurance Enterprise insurance
agents.
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 capital 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, Inc.; (xii) inaccuracies in assumptions regarding
future persistency, mortality, morbidity and interest rates used
in calculating reserve amounts and (xiii) failure of the Company
or its significant business partners and vendors to identify and
correct all non-Year 2000 compliant systems or to develop and
execute adequate contingency plans.
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.
11
<PAGE> 12
The following table reconciles the Company's reported net income
to net operating income for the first quarter of 1999 and 1998.
All earnings per share amounts are presented on a diluted basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
(in millions, except per share amounts) 1999 1998
---------------------------------------------------- ------ ------
<S> <C> <C>
Net income $ 87.8 $ 86.7
Realized losses (gains) on investments, net of tax 3.5 (10.8)
------ ------
Net operating income $ 91.3 $ 75.9
====== ======
Net operating income per share $ 0.71 $ 0.59
====== ======
</TABLE>
Revenues
Total revenues for first quarter 1999, excluding realized gains
and losses on investments, increased to $662.5 million compared to
$597.7 million for the same period in 1998. Increases in policy
charges and other income contributed to revenue growth, while net
investment income and life insurance premiums were relatively
unchanged.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of variable annuities
and variable life insurance products; cost of insurance charges
earned on universal life insurance products; administration fees,
which include fees charged per contract on a variety of the
Company's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of
premiums withdrawn during a specified period of annuity and
certain life insurance contracts. Policy charges for the first
quarter of 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
(in millions) 1999 1998
------------------------------------------------------ ------------- -------------
<S> <C> <C>
Asset fees $ 140.4 $ 113.2
Cost of insurance charges 25.9 19.3
Administrative fees 25.8 16.9
Surrender fees 14.1 9.6
------- -------
Total policy charges $ 206.2 $ 159.0
======= =======
</TABLE>
The growth in asset fees reflects a 23% increase in total separate
account assets which reached $53.47 billion as of March 31, 1999
compared to $43.33 billion a year ago. Steady growth in sales of
variable annuity and variable life insurance products as well as
market appreciation have contributed significantly to the increase
in separate account assets.
Cost of insurance charges are assessed as a percentage of the net
amount at risk on universal life insurance policies. The net
amount at risk is equal to a policy's death benefit minus the
related policyholder account value. The increase in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual variable universal life insurance
reflecting expanded distribution and increased customer demand for
variable life insurance products. The net amount at risk related
to individual variable universal life insurance grew to $15.99
billion as March 31, 1999 compared to $11.38 billion a year ago.
The growth in administrative fees is attributable to a significant
increase in premiums on individual variable life policies and
certain corporate-owned life policies where the Company collects a
premium load. Nearly all of the increase in surrender charges is
attributable to policyholder withdrawals in the Variable Annuities
segment, and reflects the overall increase in variable annuity
policy reserves.
12
<PAGE> 13
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
(losses) gains on investments were $(5.4) million and $16.6
million for the first quarter of 1999 and 1998, respectively. The
first quarter 1999 net realized losses on investments include a
$9.2 million loss on a single fixed maturity security.
Other income includes fees earned by the Company's investment
management subsidiaries as well as commissions and other income
earned by other subsidiaries of the Company that provide
marketing, distribution and administration services. During 1998,
NFS acquired three companies in an effort to expand the Company's
investment management and large case pension plan administration
services. All three acquisitions were closed after March 31, 1998
and were accounted for using the purchase method. Accordingly, the
revenues and expenses of these companies were only included in the
Company's 1998 consolidated results after the date of acquisition.
Other income included in the Company's first quarter 1999 results
earned by the companies that were acquired in 1998 totaled $9.3
million. The remaining $8.2 million increase in other income
during 1999 is primarily attributable to growth in the Company's
mutual fund operations that were in place during both periods
presented.
Benefits and Expenses
Total benefits and expenses were $525.4 million in first quarter
1999, a 9% increase over first quarter 1998. The increase is due
mainly to growth in amortization of deferred acquisition costs
(DAC) and other operating expenses. Interest credited and other
policyholder benefits were relatively flat compared to the year
ago first quarter.
The growth in amortization of DAC which totaled $60.7 million and
$47.7 million in the first quarter of 1999 and 1998, respectively,
is principally due to the Variable Annuities segment and is
consistent with the growth in revenues.
Operating expenses increased 20% to $128.5 million in the first
quarter of 1999 compared to $107.5 million in the first quarter of
1998. The increase reflects growth in the number of annuity and
life insurance contracts in force and the related increase in
administrative processing costs as well as the effect of
acquisitions and start-up companies. In addition to the three
acquisitions discussed previously, two subsidiaries, Nationwide
Trust Company, F.S.B. and Nationwide Financial Services (Bermuda),
Ltd., began operations in 1998. Excluding the effects of the 1998
acquisitions and start-up companies, operating expenses increased
10% in first quarter 1999 compared to the same period in 1998.
The increase in interest expense on senior notes and capital and
preferred securities of subsidiary trusts reflects the additional
interest expense on $200.0 million of preferred securities issued
through a subsidiary trust in October 1998.
Federal income tax expense was $43.9 million and $45.4 million for
the first quarter of 1999 and 1998, respectively. These amounts
represent effective tax rates of 33.3% for the first quarter of
1999 and 34.4% in 1998.
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.
13
<PAGE> 14
The Company has completed an inventory and assessment of all
computer systems and has implemented a plan to renovate or replace
all applications that were identified as not Year 2000 compliant.
The Company has renovated all applications that required
renovation. Testing of the renovated programs included running
each application in a Year 2000 environment and was completed as
planned during 1998. For applications being replaced, the Company
had all replacement systems in place and functioning as planned by
year-end 1998. The shareholder services system that supports
mutual fund products was fully deployed during the first quarter,
1999. Conversions of existing traditional life policies to the new
compliant system will continue through second quarter 1999.
The Company has completed an inventory and assessment of all
vendor products and has tested and certified that each vendor
product is Year 2000 compliant. Any vendor products that could not
be certified as Year 2000 compliant were replaced or eliminated in
1998.
The Company's facilities in Columbus, Ohio have been inventoried,
assessed, and tested as being Year 2000 compliant. Systems
supporting the Company's infrastructure such as
telecommunications, voice and networks were renovated and will be
brought into compliance before the end of the second quarter 1999.
The Company has also addressed issues associated with the exchange
of electronic data with external organizations. The Company has
completed an inventory and assessment of all business partners
utilizing electronic interfaces with the Company and processes
have been put in place to allow the Company to accept data
regardless of the format.
In addition to resolving internal Year 2000 readiness issues, the
Company is surveying significant external organizations (business
partners) to assess if they will be Year 2000 compliant and be in
a position to do business in the Year 2000 and beyond.
Specifically, the Company has contacted mutual fund organizations
that provide funds for the Company's variable annuity and life
products and wholesale producers to determine when they will be
Year 2000 compliant. The results are currently being gathered and
analyzed.
In addition to the contingency plans developed for electronic
interfaces between the Company and its business partners,
contingency plans were also developed for wholesale producers who
may not become compliant before the end of 1999. Additional
contingency plans will be developed for mutual fund organizations
during the second quarter 1999. The Company has identified
external risk scenarios, prioritized those risks and is now in the
process of developing contingency plans to minimize the impact to
the Company, customers and producers. Contingency plan efforts are
expected to be completed by the end of the third quarter 1999.
The preceding Year 2000 discussion excludes the three companies
acquired in 1998. The Company has reviewed the acquired companies'
systems, applications, and business partner relationships. The
results of effort to-date indicate the Company will achieve its
plan for these companies to become compliant before July, 1999.
Operating expenses in 1998 and 1997 include approximately $44.7
million and $45.4 million, respectively, for technology projects,
including costs related to Year 2000. The Company anticipates
spending less than $5 million on Year 2000 activities in 1999, and
spent $2.4 million during first quarter 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.
14
<PAGE> 15
Recently Issued Accounting Standards
See note 4 to the unaudited consolidated financial statements
for a discussion of recently issued accounting standards.
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 brokerage firms,
pension plan administrators and financial institutions. Retail
distributors are representatives of the Company who market
products directly to a customer base identified by the Company and
include exclusive sales representatives and Nationwide Insurance
Enterprise insurance agents.
Statutory premiums and deposits by distribution channel for the
first quarter of 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
(in millions) AMOUNT % AMOUNT %
--------------------------------------------- --------------------------- --------------- -----------
<S> <C> <C> <C> <C>
WHOLESALE CHANNELS
Independent broker/dealers $ 862.9 25.3% $ 875.4 29.1%
National and regional brokerage firms 111.4 3.2 86.0 2.9
Financial institutions 522.5 15.3 449.3 15.0
Pension plan administrators 927.3 27.2 734.1 24.4
Life specialists 186.8 5.5 89.9 3.0
-------- ----- -------- -----
Total wholesale channels 2,610.9 76.5 2,234.7 74.4
-------- ----- -------- -----
RETAIL CHANNELS
Exclusive retail sales representatives 592.3 17.3 586.0 19.5
Nationwide agents 211.5 6.2 183.1 6.1
-------- ----- -------- -----
Total retail channels 803.8 23.5 769.1 25.6
-------- ----- -------- -----
Total external premiums and deposits 3,414.7 100.0% 3,003.8 100.0%
======== ===== ======== =====
Nationwide Insurance Enterprise employee
and agent benefit plans 66.4 59.8
-------- --------
Total statutory premiums and deposits $3,481.1 $3,063.6
======== ========
</TABLE>
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved sales growth of 14% in the first quarter of 1999
compared to the first quarter of 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 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.
15
<PAGE> 16
External statutory premiums and deposits by product for the first
quarter of 1999 and 1998 are summarized as follows.
<TABLE>
<CAPTION>
(in millions) 1999 1998
--------------------------------------------- ----------------------------------
<S> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $ 1,136.8 $ 1,120.0
Group variable annuities 901.8 702.1
Variable universal life insurance 90.5 67.5
Private label annuities 304.4 235.2
IRC Section 457 annuities 530.9 548.7
The NEA Valuebuilder annuities 37.0 37.3
Traditional/Universal life insurance 60.0 59.3
Bank-owned life insurance 86.6 75.2
Corporate-owned life insurance 100.1 14.7
Other 166.6 143.8
---------- ---------
$ 3,414.7 $ 3,003.8
========== =========
</TABLE>
BUSINESS SEGMENTS
The Company has four product segments: Variable Annuities, Fixed
Annuities, Life Insurance and Assets Managed and Administered. In
addition, the Company reports certain other revenues and expenses
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 (loss) before
federal income tax expense for the Company's business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions) 1999 1998
--------------------------------------------- -------------- ----------------
<S> <C> <C>
Variable Annuities $ 65.6 $ 49.3
Fixed Annuities 42.7 45.0
Life Insurance 29.1 20.1
Assets Managed and Administered 6.1 3.3
Corporate and Other (6.4) (2.2)
------- -------
$ 137.1 $ 115.5
======= =======
</TABLE>
16
<PAGE> 17
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 Variable Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 1999 1998
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 143.6 $ 114.3
Benefits and expenses 78.0 65.0
----------- ----------
Operating income before federal income tax $ 65.6 $ 49.3
=========== ==========
OTHER DATA
Statutory premiums and deposits (1) $ 2,460.1 $ 2,289.0
Policy reserves as of period end $ 48,848.3 $ 39,666.7
Pre-tax operating income to average policy reserves 0.55% 0.54%
</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.
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
$135.6 million in the first quarter of 1999, up 24% from $109.5
million in the same period a year ago. The increase in asset fees
is due to continued growth in variable annuity policy reserve
levels resulting from increased variable annuity sales and market
appreciation on investments underlying reserves.
Variable annuity policy reserves grew $2.43 billion during first
quarter 1999 reaching $48.85 billion as of March 31, 1999 and have
increased 23% compared to a year ago. Variable annuity sales
increased 7% for the first quarter 1999, reaching $2.46 billion
compared to $2.29 billion in the year ago quarter. Compared to
fourth quarter 1998, variable annuity sales increased 20%. Sales
of 401(k) plans and private label variable annuities led sales
growth in first quarter 1999, posting increases of 28% and 29%,
respectively, compared to first quarter 1998.
Favorable equity market conditions during first quarter 1999 also
contributed significantly to the growth in variable annuity policy
reserves. Variable annuity policy reserves reflect market
appreciation of $1.28 billion during the first three months of
1999. Over the past twelve months, variable annuity policy
reserves have increased $4.27 billion as a result of market
appreciation.
Amortization of DAC increased 34% to $35.4 million in first
quarter 1999 compared to $26.4 million in first quarter 1998.
Operating expenses were $42.2 million in first quarter 1999, an
increase of 13% over first quarter 1998. The growth in DAC
amortization and operating expenses reflect the overall growth in
the variable annuity business.
17
<PAGE> 18
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that
generate a return for the customer at a specified interest rate,
fixed for a prescribed period, with returns accumulating on a
tax-deferred basis. Such contracts consist of single premium
deferred annuities, flexible premium deferred annuities and single
premium immediate annuities. The Fixed Annuities segment includes
the fixed option under variable annuity contracts.
The following table summarizes certain selected financial data for
the Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 1999 1998
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 275.3 $ 277.2
Other 12.3 12.1
----------- ----------
287.6 289.3
----------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 202.2 205.9
Other benefits and expenses 42.7 38.4
----------- ----------
244.9 244.3
----------- ----------
Operating income before federal income tax $ 42.7 $ 45.0
=========== ==========
OTHER DATA
Statutory premiums and deposits (1) $ 617.4 $ 498.1
Policy reserves as of period end $ 15,065.2 $ 14,229.1
Pre-tax operating income to average policy reserves 1.14% 1.27%
</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.
Fixed annuity segment results reflect a slight increase in
interest spread income attributable to growth in fixed annuity
policy reserves offset by lower 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 spreads on
general account policy reserves in the Fixed Annuities segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Net investment income 7.62% 8.01%
Interest credited 5.60 5.95
---- ----
2.02% 2.06%
==== ====
</TABLE>
The Company experienced an increase in mortgage loan and bond
prepayment fees in the first quarter of 1999 and such income
accounted for approximately 15 basis points of the interest spread
compared to 9 basis points in first quarter 1998. The Company
anticipates interest spreads over the next several quarters to be
190 to 195 basis points, excluding the impact of mortgage loan and
bond prepayment income.
Fixed annuity policy reserves increased to $15.07 billion as of
March 31, 1999 compared to $14.90 billion as of the end of 1998
and $14.23 billion a year ago.
18
<PAGE> 19
First quarter fixed annuity sales grew to $617.4 million in 1999
compared to $498.1 million in 1998. Most of the Company's fixed
annuity sales are premiums allocated to the fixed option of
variable annuity contracts. First quarter 1999 fixed annuity sales
include $521.7 million in premiums allocated to the fixed option
under a variable annuity contract, compared to $402.4 million in
first quarter 1998. The increase is attributable to a first-year
bonus interest rate program in effect during the first quarter of
1999.
The increase in other benefits and expenses in first quarter 1999
compared to a year ago is attributable to growth in business.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, that provide a death benefit and may also
allow the customer to build cash value on a tax-deferred basis.
The following table summarizes certain selected financial data
for the Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 1999 1998
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 151.1 $ 127.2
Benefits and expenses 122.0 107.1
--------- ---------
Operating income before federal income tax $ 29.1 $ 20.1
========= =========
OTHER DATA
Statutory premiums (1):
Traditional and universal life $ 60.0 $ 59.3
Variable universal life $ 90.5 $ 67.5
Corporate-owned life $ 186.7 $ 89.9
Policy reserves as of period end:
Traditional and universal life $ 2,459.4 $ 2,389.2
Variable universal life $ 1,363.3 $ 1,031.1
Corporate-owned life $ 1,097.3 $ 316.6
</TABLE>
----------
(1) Statutory data have been derived from the Quarterly
Statements of the Company's life insurance subsidiaries, as
filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices.
Life Insurance segment results reflect increased policy charge
revenue driven by growth in investment life insurance in force and
policy reserves, partially offset by higher benefits and expense
levels.
The increase in Life Insurance segment earnings is attributable to
strong growth in investment life insurance products, which include
individual variable universal life insurance and corporate-owned
life insurance, where the Company has aggressively expanded its
distribution capabilities. Investment life premiums and deposits
increased from $157.4 million in first quarter 1998 to $277.2
million in first quarter 1999. As a result of the sales growth and
high persistency, revenues from investment life products increased
to $51.8 million in first quarter 1999 from $27.2 million in first
quarter 1998. The Company believes there are growth opportunities
for investment life products and in 1999 will be introducing new
products and expanding distribution to new outlets to further
penetrate these markets.
Interest credited to policyholders increased $5.8 million in first
quarter 1999 reaching $30.6 million compared to $24.8 million in
the year ago first quarter. Increased corporate-owned life
insurance business accounted for most of the increases. Corporate
investment fixed life insurance reserves tripled to $920.0 million
as of March 31, 1999 compared to $304.2 million a year ago.
19
<PAGE> 20
Traditional and universal life insurance benefits increased $4.9
million to $38.4 million in first quarter 1999 compared to the
same period a year ago. Operating expenses remained relatively
unchanged during first quarters 1999 and 1998.
Assets Managed and Administered
The following table summarizes certain selected financial data for
the Assets Managed and Administered segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(in millions) 1999 1998
---------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 34.3 $ 17.1
Operating expenses 28.2 13.8
---------- ----------
Operating income before federal income tax $ 6.1 $ 3.3
========== ==========
OTHER DATA (1)
Assets under management $ 20,601.9 $ 8,950.6
Assets administered $ 10,189.8 $ 2,878.1
</TABLE>
---------
(1) Represents the notional amount of assets managed and
administered. These assets are not reflected on the
Company's consolidated balance sheet, unless part of an
annuity or life insurance contract issued by the Company.
Assets Managed and Administered segment revenue and expense growth
was mainly due to acquisitions that occurred in the second half of
1998. During 1998, NFS acquired three companies in an effort to
expand the Company's investment management and large case pension
plan administration services. The acquired companies contributed
$9.3 million to revenues and $9.6 million to operating expenses in
first quarter 1999. The $9.6 million of operating expenses
attributable to the acquisitions which were not in place in first
quarter 1998 includes $1.0 million of goodwill amortization. The
remaining revenues and operating expenses are attributable to
growth in the Company's mutual fund operations that were in place
during both periods presented, but which reported a $2.86 billion
increase in assets under management from March 31, 1998 to March
31, 1999.
Most of the growth in the assets managed and administered is due
to the acquisitions previously discussed.
Assets under management include $8.64 billion and $6.05 billion of
Company managed investment options that support the Company's
variable annuity and variable life insurance products as of March
31, 1999 and 1998, respectively. These assets are also included in
the related variable annuity and variable life insurance policy
reserves.
20
<PAGE> 21
Corporate and Other
The following table summarizes certain selected financial data
for the Corporate and Other segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(in millions) 1999 1998
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 45.9 $ 49.8
Benefits and expenses 52.3 52.0
------- ------
Operating income (loss) before federal income tax (1) $ (6.4) $ (2.2)
======= ======
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the four
product 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 decrease in revenues reflects a decrease in
group annuity account balances related to Nationwide Insurance
Enterprise employee benefit plans and lower income from real
estate investments.
Included in benefits and expenses is $11.8 million and $8.0
million of interest expense on long-term debt and capital and
preferred securities of subsidiary trusts for first quarter 1999
and 1998, respectively. The increase reflects $200.0 million of
preferred securities issued through a subsidiary trust in October
1998.
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 (losses) gains of $(5.4) million and $16.6 million
during the first quarter of 1999 and 1998, respectively.
21
<PAGE> 22
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 and preferred securities of
subsidiary trusts and equity, summarized in the following table.
<TABLE>
<CAPTION>
AS OF
---------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
(in millions) 1999 1998 1998
------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Long-term debt $ 298.4 $ 298.4 $ 298.4
Capital and preferred securities of subsidiary trusts 300.0 300.0 100.0
----------- --------- ----------
Total long-term debt and capital and preferred
securities 598.4 598.4 398.4
----------- --------- ----------
Shareholders' equity, excluding accumulated other
comprehensive income 2,254.1 2,171.6 1,956.3
Accumulated other comprehensive income 198.3 275.9 236.0
----------- --------- ----------
Total shareholders' equity 2,452.4 2,447.5 2,192.3
----------- --------- ----------
Total capital $ 3,050.8 $ 3,045.9 $ 2,590.7
=========== ========= ==========
</TABLE>
The Company's long-term debt bears interest at 8.0% per annum and
matures March 1, 2027. The capital and preferred securities of
subsidiary trusts include $100.0 million of capital securities
that are due March 1, 2037 and pay a distribution rate of 7.899%
and $200.0 million of preferred securities that are due October
31, 2028 and pay a distribution rate of 7.10%. There are no
sinking fund requirements related to the debt or capital and
preferred 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
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, 1998 was $1.32 billion and statutory-basis net income
for 1998 was $171.0 million. Total dividends paid in the preceding
twelve months were $110.9 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.
22
<PAGE> 23
Also available as a source of funds to the Company is a $600.0
million revolving credit facility entered into by NFS, NLIC and
Nationwide Mutual Insurance Company with a group of national
financial institutions. 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. The Company had no
amounts outstanding under this agreement as of March 31, 1999.
INVESTMENTS
General
The Company's assets are divided between separate account and
general account assets. As of March 31, 1999, $53.47 billion (or
69%) of the Company's total assets were held in separate accounts
and $23.89 billion (or 31%) were held in the Company's general
account, including $20.87 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 $814.4 million of policy reserves
as of March 31, 1999 ($743.9 million as of December 31, 1998) for
which the Company bears the investment risk.
Fixed Maturity Securities
The following table summarizes the composition of the Company's
general account fixed maturity securities by category.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
CARRYING % OF CARRYING % OF
(in millions) VALUE TOTAL VALUE TOTAL
----------------------------------------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
U.S. government/agencies $ 304.0 2.2% $ 269.0 1.9%
Foreign governments 106.5 0.7 111.0 0.8
State and political subdivisions 0.8 -- 1.6 --
Mortgage-backed securities:
U.S. government/agencies 3,454.8 24.5 3,562.2 25.0
Non-government/agencies -- -- -- --
Corporate:
Public 5,160.5 36.6 5,194.3 36.4
Private 5,074.6 36.0 5,109.8 35.9
---------- ----- ---------- -----
$ 14,101.2 100.0% $ 14,247.9 100.0%
========== ===== ========== =====
</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% were in
the highest two NAIC Designations as of March 31, 1999.
23
<PAGE> 24
The following table sets forth an analysis of credit quality, as
determined by NAIC Designation, of the Company's general account
fixed maturity securities portfolio.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998
--------------------------- ----------------------------
NAIC RATING AGENCY CARRYING % OF CARRYING % OF
DESIGNATION (1) EQUIVALENT DESIGNATION (2) VALUE TOTAL VALUE TOTAL
------------------ ----------------------------- --------------------------- --------------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 8,931.4 63.3% $ 9,166.1 64.3%
2 Baa 4,803.2 34.1 4,715.1 33.1
3 Ba 346.8 2.5 347.2 2.5
4 B 15.6 0.1 5.6 --
5 Caa and lower 4.2 -- 13.9 0.1
6 In or near default -- -- -- --
--------- ----- --------- -----
$14,101.2 100.0% $14,247.9 100.0%
========= ===== ========= =====
</TABLE>
----------
(1) NAIC Designations are assigned no less frequently than
annually. Some designations for securities shown have been
assigned to securities not yet assigned an NAIC Designation
in a manner approximating equivalent public rating
categories.
(2) Comparison's between NAIC and Moody's designations are
published by the NAIC. In the event no Moody's rating is
available, the Company has assigned internal ratings
corresponding to the public rating.
The Company's general account mortgage-backed security (MBS)
investments include residential MBSs and multi-family mortgage
pass-through certificates. As of March 31, 1999, MBSs were $3.45
billion (or 25%) of the carrying value of the general account
fixed maturity securities available-for-sale, all of which were
guaranteed by the U.S. government or an agency of the U.S.
government.
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to
its general account fixed maturity securities portfolio. The
objective of the Company's general account MBS investments is to
provide reasonable cash flow stability and increased yield.
General account MBS investments include collateralized mortgage
obligations (CMOs), Real Estate Mortgage Investment Conduits
(REMICs) and mortgage-backed pass-through securities. The
Company's general account MBS investments do not include
interest-only securities or principal-only securities or other
MBSs which may exhibit extreme market volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the
degree of prepayment risk is particular to the type of MBS held.
The Company limits its exposure to prepayments by purchasing less
volatile types of MBSs. As of March 31, 1999, $2.30 billion (or
67%) of the carrying value of the general account MBS portfolio
was invested in planned amortization class CMOs/REMICs (PACs).
PACs are securities whose cash flows are designed to remain
constant over a variety of mortgage prepayment environments. Other
classes in the CMO/REMIC security are structured to accept the
volatility of mortgage prepayment changes, thereby insulating the
PAC class.
24
<PAGE> 25
The following table sets forth the distribution by investment type
of the Company's general account MBS portfolio as of March 31,
1999 and December 31, 1998.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998
----------------------------- -----------------------------
CARRYING % OF CARRYING % OF
(in millions) VALUE TOTAL VALUE TOTAL
------------------------------------------- --------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Planned Amortization Class $ 2,303.2 66.7% $ 2,433.4 68.3%
Very Accurately Defined Maturity 449.6 13.0 477.8 13.4
Multi-family Mortgage Pass-through
Certificates 249.8 7.2 251.0 7.0
Scheduled 138.0 4.0 143.8 4.0
Targeted Amortization Class 84.0 2.4 92.0 2.6
Accrual 70.2 2.0 77.3 2.2
Sequential 44.4 1.3 45.6 1.3
Other 115.6 3.4 41.3 1.2
--------- ----- --------- -----
$ 3,454.8 100.0% $ 3,562.2 100.0%
========= ===== ========= ======
</TABLE>
Mortgage Loans
As of March 31, 1999, general account mortgage loans were $5.36
billion (or 26%) of the carrying value of consolidated general
account invested assets.
As of March 31, 1999 none of the Company's mortgage loans were
classified as delinquent compared to 0.19% a year ago and none at
December 31, 1998. Foreclosed and restructured loans totaled only
0.00% and 0.46% of the Company's mortgage loans as of March 31,
1999, respectively, compared to 0.69% and 0.00% as of March 31,
1998, respectively.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that
affect the quantitative and qualitative disclosures presented in
NFS's Annual Report on Form 10-K for the year ended December 31,
1998.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity pricing and sales practices. A
number of these lawsuits have resulted in substantial jury awards
or settlements.
In 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 a lawsuit in a federal
court in Texas against Nationwide Life and the American Century
group of defendants (Robert Young and David D. Distad v.
Nationwide Life Insurance Company et al.). In this lawsuit,
plaintiffs sought 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 underlying
mutual fund option 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 district court denied, in part, and granted, in part, motions
to dismiss the complaint filed by Nationwide Life and American
Century. The remaining claims against Nationwide Life allege
securities fraud, common law fraud, civil conspiracy, and breach
of contract. On December 2, 1998, the district court issued an
order denying plaintiffs' motion for class certification. On
December 10, 1998, the district court stayed the lawsuit pending
plaintiffs' petition to the federal appeals court for
interlocutory review of the order denying class certification. On
March 26, 1999, the appeals court denied plaintiffs' petition for
interlocutory review of the order. On April 28, 1999, the court
denied plaintiffs' motion for reconsideration of the denial of
interlocutory review. Nationwide Life intends to defend the case
vigorously.
On October 29, 1998, the Company was named in a lawsuit filed in
Ohio state court related to the sale of deferred annuity products
for use as investments in tax-deferred contributory retirement
plans (Mercedes Castillo v. Nationwide Financial Services, Inc.,
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance Company). The plaintiff in such lawsuit seeks to
represent a national class of the Company's customers and seeks
unspecified compensatory and punitive damages. The Company is
currently evaluating this lawsuit, which has not been certified as
a class. The Company intends to defend this lawsuit 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
Pursuant to the Stock Retainer Plan for Non-Employee Directors,
1,288 shares of Class A Common Stock were issued by NFS during the
first quarter of 1999, at an average price of $43.755 per share 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 Act of 1933, as amended,
pursuant to section 4(2) promulgated thereunder.
26
<PAGE> 27
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
On February 10, 1999, NFS filed a Current Report on Form
8-K announcing the expansion of its $20 billion investment
management business by establishing an investment
management company that will be led by Paul Hondros, an
industry leader.
27
<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE FINANCIAL SERVICES, INC.
-----------------------------------
(Registrant)
Date: May 14, 1999 /s/Mark R. Thresher
---------------------------------------------------------
Mark R. Thresher, Vice President - Finance and Treasurer
(Chief Accounting Officer)
28
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONWIDE
FINANCIAL SERVICES, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 14,101
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 133
<MORTGAGE> 5,365
<REAL-ESTATE> 244
<TOTAL-INVEST> 20,871
<CASH> 33
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,144
<TOTAL-ASSETS> 77,363
<POLICY-LOSSES> 19,908
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
300
0
<COMMON> 1
<OTHER-SE> 2,451
<TOTAL-LIABILITY-AND-EQUITY> 77,363
54
<INVESTMENT-INCOME> 366
<INVESTMENT-GAINS> (5)
<OTHER-INCOME> 37
<BENEFITS> 314
<UNDERWRITING-AMORTIZATION> 61
<UNDERWRITING-OTHER> 129
<INCOME-PRETAX> 132
<INCOME-TAX> 44
<INCOME-CONTINUING> 88
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
