<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, 1999 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 of (I.R.S. Employer Identification No.)
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, 1999 was as follows:
CLASS A COMMON STOCK (par value $0.01 per share) - 23,777,791 shares issued and
(Title of Class) outstanding
CLASS B COMMON STOCK (par value $0.01 per share) - 104,745,000 shares issued and
(Title of Class) outstanding
<PAGE> 2
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
<CAPTION>
INDEX
<S> <C> <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 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 27
PART II OTHER INFORMATION
Item 1 Legal Proceedings 28
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 29
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 29
Item 6 Exhibits and Reports on Form 8-K 29
SIGNATURE 30
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in millions, except per share amounts)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------------
1999 1998 1999 1998
------ ------ -------- --------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $218.2 $175.0 $ 424.4 $ 334.0
Life insurance premiums 48.9 52.0 102.4 105.2
Net investment income 374.5 367.8 740.1 733.6
Realized gains (losses) on investments (7.9) 5.0 (13.3) 21.6
Other 38.8 25.6 76.0 45.3
------ ------ -------- --------
672.5 625.4 1,329.6 1,239.7
------ ------ -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder account
balances 267.4 264.7 531.2 526.6
Other benefits and claims 44.3 40.6 94.8 86.9
Policyholder dividends on participating
policies 11.7 11.5 21.8 22.3
Amortization of deferred policy
acquisition costs 66.9 54.1 127.6 101.8
Interest expense on debt and capital and
preferred securities of subsidiary trusts 11.8 8.0 23.6 16.0
Other operating expenses 133.3 120.0 261.8 227.5
------ ------ -------- --------
535.4 498.9 1,060.8 981.1
------ ------ -------- --------
Income before federal income tax expense 137.1 126.5 268.8 258.6
Federal income tax expense 45.7 43.5 89.6 88.9
------ ------ -------- --------
Net income $ 91.4 $ 83.0 $ 179.2 $ 169.7
====== ====== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 0.71 $ 0.65 $ 1.39 $ 1.32
Diluted $ 0.71 $ 0.65 $ 1.39 $ 1.32
Weighted average common shares
outstanding 128.5 128.5 128.5 128.5
Weighted average diluted common shares
outstanding 128.6 128.7 128.6 128.7
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in millions, except per share amounts)
<CAPTION>
(UNAUDITED) DECEMBER 31,
JUNE 30, 1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $14,009.5 in 1999;
$13,724.1 in 1998) $14,140.5 $14,247.9
Equity securities (cost $109.6 in 1999; $116.9 in
1998) 132.7 134.0
Mortgage loans on real estate, net 5,395.2 5,328.4
Real estate, net 241.4 243.6
Policy loans 492.4 464.3
Other long-term investments 66.8 44.0
Short-term investments 380.9 478.3
--------- ---------
20,849.9 20,940.5
--------- ---------
Cash 10.5 24.5
Accrued investment income 224.3 218.7
Deferred policy acquisition costs 2,311.0 2,022.3
Other assets 626.6 529.4
Assets held in separate accounts 58,147.0 50,935.8
--------- ---------
$82,169.3 $74,671.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $20,106.0 $19,772.2
Long-term debt 298.4 298.4
Other liabilities 900.1 917.3
Liabilities related to separate accounts 58,147.0 50,935.8
--------- ---------
79,451.5 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 635.2 629.5
Retained earnings 1,697.5 1,541.5
Accumulated other comprehensive income 85.0 275.9
Other (1.1) (0.6)
--------- ---------
2,417.8 2,447.5
--------- ---------
$82,169.3 $74,671.2
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Six Months Ended June 30, 1999 and 1998
(in millions)
<CAPTION>
ACCUMULATED
CLASS A CLASS B ADDITIONAL 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 -- -- -- 169.7 -- -- 169.7
Net unrealized 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 $ 250.0 $(0.9) $2,279.1
==== ==== ====== ======== ======= ===== ========
BALANCE, JANUARY 1, 1999 $0.2 $1.0 $629.5 $1,541.5 $ 275.9 $(0.6) $2,447.5
Comprehensive income:
Net income -- -- -- 179.2 -- -- 179.2
Net unrealized losses on
securities available-for-sale
arising during the period -- -- -- -- (190.9) -- (190.9)
--------
Total comprehensive loss (11.7)
--------
Cash dividends declared -- -- -- (23.2) -- -- (23.2)
Other, net -- -- 5.7 -- -- (0.5) 5.2
---- ---- ------ -------- ------- ----- --------
BALANCE, JUNE 30, 1999 $0.2 $1.0 $635.2 $1,697.5 $ 85.0 $(1.1) $2,417.8
==== ==== ====== ======== ======= ===== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
<TABLE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 1999 and 1998
(in millions)
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 179.2 $ 169.7
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to policyholder account balances 531.2 526.6
Capitalization of deferred policy acquisition costs (322.7) (294.6)
Amortization of deferred policy acquisition costs 127.6 101.8
Amortization and depreciation 6.8 (3.4)
Realized losses (gains) on investments, net 13.3 (21.6)
Increase in accrued investment income (5.6) (2.6)
Increase in other assets (73.3) (38.7)
Decrease in policy liabilities (2.9) (2.3)
Increase (decrease) in other liabilities 83.0 (70.8)
Other, net 2.3 (6.3)
--------- ---------
Net cash provided by operating activities 538.9 357.8
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 1,172.8 761.6
Proceeds from sale of securities available-for-sale 247.7 464.4
Proceeds from maturity of securities held to maturity -- 6.0
Proceeds from repayments of mortgage loans on real estate 227.8 337.5
Proceeds from sale of real estate 5.2 58.7
Proceeds from repayments of policy loans and sale of
other invested assets 10.0 14.1
Cost of securities available-for-sale acquired (1,714.7) (1,637.1)
Cost of mortgage loans on real estate acquired (295.1) (401.1)
Cost of real estate acquired (1.9) (0.3)
Short-term investments, net 97.4 162.5
Other, net (86.1) (33.9)
--------- ---------
Net cash used in investing activities (336.9) (267.6)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (20.8) (15.4)
Increase in investment product and universal life
insurance product account balances 1,559.7 1,278.5
Decrease in investment product and universal life
insurance product account balances (1,754.2) (1,522.7)
Other, net (0.7) --
--------- ---------
Net cash used in financing activities (216.0) (259.6)
--------- ---------
Net decrease in cash (14.0) (169.4)
Cash, beginning of period 24.5 180.9
--------- ---------
Cash, end of period $ 10.5 $ 11.5
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(in millions, except per share amounts) 1999 1998 1999 1998
--------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic and diluted net income $ 91.4 $ 83.0 $179.2 $169.7
====== ====== ====== ======
Weighted average shares of
common stock outstanding 128.5 128.5 128.5 128.5
Dilutive effect of stock options 0.1 0.2 0.1 0.2
------ ------ ------ ------
Weighted average diluted shares
of common stock outstanding 128.6 128.7 128.6 128.7
====== ====== ====== ======
Net income per common share:
Basic $ 0.71 $ 0.65 $ 1.39 $ 1.32
Diluted $ 0.71 $ 0.65 $ 1.39 $ 1.32
</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 (Loss) is unrealized gains (losses) on
securities available-for-sale. The related before and after federal
income tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(in millions) JUNE 30, JUNE 30,
--------------------------------------------- -------------------- --------------------
1999 1998 1999 1998
------- ----- ------- -----
<S> <C> <C> <C> <C>
Unrealized (losses) gains on securities
available-for-sale arising
during the period:
Gross $(242.2) $28.9 $(396.6) $ 7.1
Adjustment to deferred policy
acquisition costs 63.8 (6.9) 93.4 0.9
Related federal tax benefit (expense) 60.9 (7.6) 102.6 (2.8)
------- ----- ------- -----
Net (117.5) 14.4 (200.6) 5.2
------- ----- ------- -----
Reclassification adjustment for
net losses (gains) on securities
available-for-sale realized during
the period:
Gross 6.5 (0.6) 15.0 (3.5)
Related federal tax (benefit) expense (2.3) 0.2 (5.3) 1.2
------- ----- ------- -----
Net 4.2 (0.4) 9.7 (2.3)
------- ----- ------- -----
Total Other Comprehensive (Loss) Income $(113.3) $14.0 $(190.9) $ 2.9
======= ===== ======= =====
</TABLE>
(4) Recently Issued Accounting Standards
------------------------------------
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
June 30, 1999 by $2.8 million or $0.02 per share. For the first half
of 1999 the effect of adopting the SOP was to increase net income by
$4.4 million or $0.03 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. In July 1999 the FASB issued Statement 137 which delayed
the effective date of FAS 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt this Statement in first quarter 2001
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 adviser 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 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 June 30, 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) $155.0 $286.3 $153.3 $37.2 $ 48.6 $680.4
Benefits and expenses 85.4 240.2 124.1 30.6 55.1 535.4
------ ------ ------ ----- ------ ------
Operating income (loss) before
federal income tax 69.6 46.1 29.2 6.6 (6.5) 145.0
Realized losses on investments -- -- -- -- (7.9) (7.9)
------ ------ ------ ----- ------ ------
Consolidated income (loss) before
federal income tax $ 69.6 $ 46.1 $ 29.2 $ 6.6 $(14.4) $137.1
====== ====== ====== ===== ====== ======
1998
Operating revenue (1) $128.0 $286.2 $134.2 $23.7 $ 48.3 $620.4
Benefits and expenses 72.3 243.1 112.7 21.1 49.7 498.9
------ ------ ------ ----- ------ ------
Operating income (loss) before
federal income tax 55.7 43.1 21.5 2.6 (1.4) 121.5
Realized gains on investments -- -- -- -- 5.0 5.0
------ ------ ------ ----- ------ ------
Consolidated income before
federal income tax $ 55.7 $ 43.1 $ 21.5 $ 2.6 $ 3.6 $126.5
====== ====== ====== ===== ====== ======
</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, 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) $ 298.6 $ 573.9 $ 304.4 $ 71.5 $ 94.5 $ 1,342.9
Benefits and expenses 163.4 485.1 246.1 58.8 107.4 1,060.8
--------- --------- -------- ------ -------- ---------
Operating income (loss) before
federal income tax 135.2 88.8 58.3 12.7 (12.9) 282.1
Realized losses on investments -- -- -- -- (13.3) (13.3)
--------- --------- -------- ------ -------- ---------
Consolidated income (loss) before
federal income tax $ 135.2 $ 88.8 $ 58.3 $ 12.7 $ (26.2) $ 268.8
========= ========= ======== ====== ======== =========
Assets as of period end $54,609.8 $15,642.4 $5,790.1 $206.8 $5,920.2 $82,169.3
========= ========= ======== ====== ======== =========
1998
Operating revenue (1) $ 242.3 $ 575.5 $ 261.4 $ 40.8 $ 98.1 1,218.1
Benefits and expenses 137.3 487.4 219.8 34.9 101.7 981.1
--------- --------- -------- ------ -------- ---------
Operating income (loss) before
federal income tax 105.0 88.1 41.6 5.9 (3.6) 237.0
Realized gains on investments -- -- -- -- 21.6 21.6
--------- --------- -------- ------ -------- ---------
Consolidated income before
federal income tax $ 105.0 $ 88.1 $ 41.6 $ 5.9 $ 18.0 $ 258.6
========= ========= ======== ====== ======== =========
Assets as of period end $43,113.0 $14,549.5 $4,706.0 $ 43.9 $6,099.5 $68,511.9
========= ========= ======== ====== ======== =========
</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).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought
as a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. On June
11, 1999, the Company and the other named defendants filed a motion to
dismiss the amended complaint. The Company intends to defend this
lawsuit vigorously.
(7) Transactions with Affiliates
----------------------------
During second quarter 1999, NFS' wholly-owned subsidiary, Nationwide
Life Insurance Company (NLIC), entered into a modified coinsurance
arrangement to reinsure the 1999 operating results of an affiliated
company, Employers Life Insurance Company of Wausau (ELOW). The
agreement is retroactive to January 1, 1999 and contributed $0.01 to
second quarter 1999 net income per share.
On August 11, 1999, NLIC's Board of Directors declared a dividend of
$175 million to NFS. NFS anticipates using approximately $125 million
of the proceeds to purchase ELOW and plans to immediately merge ELOW
into NLIC. The purchase and merger are expected to be completed in
third quarter 1999.
11
<PAGE> 12
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 NLIC and other companies that comprise
the retirement savings operations of Nationwide Insurance. 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 distribution channels, including independent
broker/dealers, national and regional brokerage firms, financial
institutions, pension plan administrators, Nationwide Retirement
Solutions sales representatives, and Nationwide 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) change in 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.
12
<PAGE> 13
The following table reconciles the Company's reported net income to
net operating income. All earnings per share amounts are presented on
a diluted basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
(in millions, except per share amounts) 1999 1998 1999 1998
-------------------------------------------------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
Net income $91.4 $83.0 $179.2 $169.7
Realized losses (gains) on investments, net of tax 5.0 (3.3) 8.5 (14.1)
----- ----- ------ ------
Net operating income $96.4 $79.7 $187.7 $155.6
===== ===== ====== ======
Net operating income per share $0.75 $0.62 $ 1.46 $ 1.21
===== ===== ====== ======
</TABLE>
Revenues
Total operating revenues, which exclude realized gains and losses on
investments, for second quarter 1999 increased to $680.4 million
compared to $620.4 million for the same period in 1998. For the first
six months of 1999 and 1998, total operating revenues were $1.34
billion and $1.22 billion, respectively. Increases in policy charges
and other income were the key drivers to revenue growth.
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 comparable periods of 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(in millions) 1999 1998 1999 1998
---------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Asset fees $152.3 $126.0 $292.7 $239.2
Cost of insurance charges 28.4 21.7 54.3 41.0
Administrative fees 22.0 17.1 47.8 34.0
Surrender fees 15.5 10.2 29.6 19.8
------ ------ ------ ------
Total policy charges $218.2 $175.0 $424.4 $334.0
====== ====== ====== ======
</TABLE>
The growth in asset fees reflects a 27% increase in total separate
account assets which reached $58.15 billion as of June 30, 1999
compared to $45.97 billion a year ago. Continued strong 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 $17.10 billion as of June 30, 1999
compared to $12.29 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. The increase in surrender charges is primarily attributable to
policyholder withdrawals in the Variable Annuities segment, and
reflects the overall increase in variable annuity policy reserves.
13
<PAGE> 14
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 $(7.9) million and $5.0 million for second quarter
1999 and 1998, respectively. For the first six months of 1999, the
Company reported realized losses on investments of $(13.3) million
compared to $21.6 million of realized gains for the first six months
of 1998. During the first half of 1999 the Company recognized a total
of $19.9 million of realized losses on two fixed maturity security
holdings.
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. Two of
these acquisitions were closed during second quarter 1998 and the last
was closed in third quarter 1998. All three acquisitions 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 second quarter 1999 results earned by the
companies that were acquired in 1998 totaled $9.8 million compared to
$4.0 million in second quarter 1998. The remaining $7.4 million
increase in other income during second quarter 1999 is primarily
attributable to growth in the Company's mutual fund operations that
were in place during both periods presented. On a year to date basis
other income increased $30.7 million, of which $15.1 million is
attributable to acquisitions and the remainder to growth in mutual
fund operations.
Benefits and Expenses
Total benefits and expenses were $535.4 million in second quarter
1999, a 7% increase over second quarter 1998, while year to date 1999
benefits and expenses were $1.06 billion compared to $981.1 million a
year ago. 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 up slightly
compared to the year ago second quarter and six month periods.
The significant growth in the Variable Annuities segment business is
the primary reason for the increase in amortization of DAC which
totaled $66.9 million and $54.1 million in second quarter of 1999 and
1998, respectively. On a year to date basis, DAC amortization totaled
$127.6 million in 1999 compared to $101.8 million in 1998.
Operating expenses increased 11% to $133.3 million in second quarter
1999 compared to $120.0 million in second quarter 1998. For the first
half of 1999, operating expenses were $261.8 million, up 15% from
$227.5 million for the first half of 1998. The increases reflect
growth in the number of annuity and life insurance contracts in force
and the related increase in administrative processing costs as well as
the effects of acquisitions.
The three acquisitions previously discussed contributed $5.9 million
and $15.2 million to the increases in operating expenses on a
quarterly and year to date comparison basis, respectively. In addition
to the acquisitions, two subsidiaries, Nationwide Trust Company,
F.S.B. and Nationwide Financial Services (Bermuda), Ltd., began
operations during 1998. Excluding the effects of the 1998 acquisitions
and start-up companies, operating expenses increased only 5% in second
quarter 1999 compared to the 1998 second quarter, and increased 7% on
a year to date basis.
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 $45.7 million and $43.5 million,
representing effective tax rates of 33.3% and 34.4% for second quarter
1999 and 1998, respectively. For the first six months of 1999 and 1998
federal income tax expense was $89.6 million and $88.9 million, also
representing effective tax rates of 33.3% and 34.4%, respectively.
14
<PAGE> 15
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 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. Conversion of existing traditional life
policies to the new compliant system was completed by July 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. Mission-critical
systems supporting the Company's infrastructure such as
telecommunications, voice and networks were renovated and brought into
compliance as planned during the second quarter.
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.
During third quarter 1999, contingency plans will be finalized for
other interfaces with our critical business partners.
In addition to resolving internal Year 2000 readiness issues, the
Company is conducting a due diligence effort with significant external
organizations, including mutual fund organizations, financial
institutions and wholesale producers, to assess if they will be Year
2000 compliant. This involves communication and follow-up with
critical business partners to determine if they will be in a position
to continue doing business in the Year 2000 and beyond. The results
are currently being gathered and analyzed and these efforts will
continue until compliance is assured or until regulatory rulings
indicate actions to be taken related to non-compliant firms.
Contingency plans have been developed for mutual fund organizations,
financial institutions and wholesale producers who may not become
compliant prior to the end of 1999.
As part of its risk management strategy, the Company has identified
risk scenarios including the identification of external risk factors
that could cause business interruptions from Year 2000 related events.
These risk scenarios include increased customer service volume,
increased producer service volume, utility failures, technology
failures and disruptions in business operations, finance and cash
flow. The Company is in the process of developing mitigation and
contingency plans to address these risks that would, except for
complete utility failure, permit uninterrupted service to customers
and producers. Contingency and mitigation plan efforts are expected to
be completed during the third quarter of 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. These
companies achieved their plans by June 1999 and are now compliant.
15
<PAGE> 16
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
approximately $5 million on Year 2000 activities in 1999 and
expenditures for the first six months of 1999 totaled $4.2 million.
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.
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.
Unaffiliated entities that sell the Company's products to their own
customer base include independent broker/dealers, national and
regional brokerage firms, pension plan administrators and financial
institutions. Representatives of the Company who market products
directly to a customer base identified by the Company include
Nationwide Retirement Solutions sales representatives and Nationwide
Insurance agents.
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) 1999 1998 1999 1998
------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Independent broker/dealers $1,430.5 $1,358.5 $2,733.5 $2,554.5
National and regional brokerage firms 245.1 144.8 458.4 304.4
Financial institutions 675.7 656.1 1,216.1 1,121.3
Pension plan administrators 335.7 277.9 673.2 557.3
Nationwide Retirement Solutions sales
representatives 617.5 575.8 1,231.3 1,197.1
Nationwide Insurance agents 235.0 311.7 454.9 504.1
Life specialists 40.4 364.6 227.2 454.5
-------- -------- -------- --------
Total external premiums and deposits 3,579.9 3,689.4 6,994.6 6,693.2
======== ======== ======== ========
Nationwide Insurance employee
and agent benefit plans 123.7 55.7 190.1 115.5
-------- -------- -------- --------
Total statutory premiums and deposits $3,703.6 $3,745.1 $7,184.7 $6,808.7
======== ======== ======== ========
</TABLE>
The 1998 statutory premiums and deposits have been restated to conform
to the 1999 presentation which better reflects multi-product sales
across all distribution channels.
16
<PAGE> 17
Excluding Nationwide Insurance benefit plan sales, total Company sales
declined slightly in the second quarter of 1999 compared to the second
quarter of 1998; however, sales increased 5% from first quarter 1999.
On a year to date basis, sales increased 5% in 1999 compared to 1998.
Second quarter 1998 sales included $349.9 million in single premium
bank-owned life insurance (BOLI). Excluding these premiums, sales in
second quarter 1999 were up 7% compared to 1998 second quarter sales,
and up 10% on a year to date basis.
Total annuity sales were $3.38 billion for second quarter 1999, up 6%
from a year ago. Through six months total annuity sales were $6.46
billion, up 8%. The growth was attributable to group annuities, with
each channel reporting increased sales from a year ago.
Life insurance sales, excluding BOLI, were $201.9 million for second
quarter 1999, up 33% from a year ago. On a comparable basis, six month
sales increased 54% to $452.4 million.
The Company believes it is on track to achieve its 20 percent growth
objective for 1999, with sales including external statutory premiums
and deposits, pension sales through Nationwide Trust Company, F.S.B.
during the second half of the year, and excluding BOLI.
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.
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) 1999 1998 1999 1998
----------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $1,295.9 $1,378.6 $2,432.7 $2,498.6
Group variable annuities 887.5 672.1 1,789.3 1,374.2
Variable universal life insurance 99.7 74.9 190.2 142.4
Private label annuities 360.8 339.7 665.2 574.9
IRC Section 457 annuities 521.6 499.4 1,052.5 1,048.1
The NEA Valuebuilder annuities 48.8 43.6 85.8 80.9
Bank-owned life insurance -- 349.9 86.7 425.1
Corporate-owned life insurance 40.4 14.7 140.5 29.4
Traditional/Universal life insurance 61.8 62.1 121.8 121.4
Other 263.4 254.4 429.9 398.2
-------- -------- -------- --------
$3,579.9 $3,689.4 $6,994.6 $6,693.2
======== ======== ======== ========
</TABLE>
17
<PAGE> 18
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
(in millions) 1999 1998 1999 1998
------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Variable Annuities $ 69.6 $ 55.7 $135.2 $105.0
Fixed Annuities 46.1 43.1 88.8 88.1
Life Insurance 29.2 21.5 58.3 41.6
Assets Managed and Administered 6.6 2.6 12.7 5.9
Corporate and Other (6.5) (1.4) (12.9) (3.6)
------ ------ ------ ------
$145.0 $121.5 $282.1 $237.0
====== ====== ====== ======
</TABLE>
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds
managed by independent investment managers and the Company, with
investment returns accumulating on a tax-deferred basis. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The following table summarizes certain selected financial data for the
Variable Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
(in millions) 1999 1998 1999 1998
------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 155.0 $ 128.0 $ 298.6 $ 242.3
Benefits and expenses 85.4 72.3 163.4 137.3
--------- --------- --------- ---------
Operating income before federal
income tax expense $ 69.6 $ 55.7 $ 135.2 $ 105.0
========= ========= ========= =========
OTHER DATA
Statutory premiums and deposits (1) $ 2,628.5 $ 2,726.5 $ 5,088.6 $ 5,015.5
Policy reserves as of period end $53,269.4 $41,962.1 $53,269.4 $41,962.1
Pre-tax operating income to average
policy reserves 0.55% 0.55% 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 $146.6 million in
the second quarter of 1999, up 20% from $122.2 million in the same
period a year ago. For the first half of 1999, asset fees totaled
$282.2 million up 22% from the first half of 1998. 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.
18
<PAGE> 19
Variable annuity policy reserves grew $4.42 billion during the second
quarter of 1999 reaching $53.27 billion as of June 30, 1999. During
the first six months of 1999 reserves have increased $6.85 billion and
are up 27% compared to a year ago. Variable annuity sales were flat
compared to 1999 both on a quarterly and year to date basis; however,
second quarter 1999 sales grew 7% compared to first quarter 1999,
reaching $2.63 billion.
Favorable equity market conditions during the first half of 1999 also
contributed significantly to the growth in variable annuity policy
reserves. Variable annuity policy reserves reflect market appreciation
of $4.37 billion during the first six months of 1999. Over the past
twelve months, variable annuity policy reserves have increased $6.62
billion as a result of market appreciation.
Amortization of DAC increased 28% to $38.9 million in second quarter
1999 compared to $30.5 million in second quarter 1998. DAC
amortization for the first half of 1999 increased to $74.3 million
compared to $56.9 million for the first half of 1998. Operating
expenses were $45.7 million in second quarter 1999, an increase of 12%
over second quarter 1998, while year to date 1999 operating expenses
were $87.9 million compared to $78.4 million in 1998. The growth in
DAC amortization and operating expenses reflect 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) 1999 1998 1999 1998
--------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 278.1 $ 276.6 $ 553.4 $ 553.8
Other 8.2 9.6 20.5 21.7
--------- --------- --------- ---------
286.3 286.2 573.9 575.5
--------- --------- --------- ---------
Benefits and expenses:
Interest credited to policyholder
account balances 202.5 206.3 404.7 412.2
Other benefits and expenses 37.7 36.8 80.4 75.2
--------- --------- --------- ---------
240.2 243.1 485.1 487.4
--------- --------- --------- ---------
Operating income before federal
income tax expense $ 46.1 $ 43.1 $ 88.8 $ 88.1
========= ========= ========= =========
OTHER DATA
Statutory premiums and deposits (1) $ 749.5 $ 461.2 $ 1,366.9 $ 959.3
Policy reserves as of period end $15,114.9 $14,256.1 $15,114.9 $14,256.1
Pre-tax operating income to
average policy reserves 1.22% 1.21% 1.18% 1.24%
</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.
19
<PAGE> 20
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net investment income 7.65% 7.99% 7.64% 8.00%
Interest credited 5.57 5.96 5.59 5.95
---- ---- ---- ----
2.08% 2.03% 2.05% 2.05%
==== ==== ==== ====
</TABLE>
The Company has experienced an increase in mortgage loan and bond
prepayment fees in the first half of 1999 and such income accounted
for approximately 11 basis points and 13 basis points of the interest
spread in the second quarter and first six months of 1999,
respectively. Comparatively, prepayment fees contributed 6 basis
points and 7 basis points of the interest spread during the second
quarter and first half of 1998, respectively. The Company anticipates
that recent increases in interest rates will slow prepayment activity
and expects interest spreads to remain at 190 to 195 basis points,
excluding the impact of mortgage loan and bond prepayment income, and
closer to 200 basis points assuming a normal level of prepayment
activity.
Fixed annuity policy reserves increased to $15.11 billion as of June
30, 1999 compared to $14.90 billion as of the end of 1998 and $14.26
billion a year ago.
Second quarter fixed annuity sales increased to $749.5 million in 1999
compared to $461.2 million in 1998 while sales for the first six
months of 1999 increased to $1.37 billion from $959.3 million in 1998.
Most of the Company's fixed annuity sales are premiums allocated to
the fixed option of variable annuity contracts. Second quarter 1999
fixed annuity sales include $658.2 million in premiums allocated to
the fixed option under a variable annuity contract, compared to $356.4
million in second quarter 1998.
Much of the recent growth in fixed annuity reserves and fixed option
sales is attributable to a sales promotion initiated in first quarter
1999 that offers customers a first year bonus interest rate and
transfers the account balance systematically to variable options over
a twelve month period. At June 30, 1999 nearly $550 million of fixed
reserves relate to this program.
Other benefits and expenses remained relatively flat in second quarter
1999 compared to a year ago.
As a means to expand spread-based product offerings, on July 13, 1999,
the Company launched a $2 billion European Medium Term Note program.
Notes issued under the program will be secured by funding agreements
issued by NLIC. The first series of notes issued under the program are
500 million Swiss Franc-denominated (USD $317 million), five-year
notes, and are expected to close August 16, 1999.
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.
20
<PAGE> 21
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) 1999 1998 1999 1998
--------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 153.3 $ 134.2 $ 304.4 $ 261.4
Benefits and expenses 124.1 112.7 246.1 219.8
-------- -------- -------- --------
Operating income before federal
income tax expense $ 29.2 $ 21.5 $ 58.3 $ 41.6
======== ======== ======== ========
OTHER DATA
Statutory premiums (1):
Traditional and universal life
insurance $ 61.8 $ 62.1 $ 121.8 $ 121.4
Variable universal life insurance $ 99.7 $ 74.9 $ 190.2 $ 142.4
Corporate-owned life insurance $ 40.4 $ 364.6 $ 227.1 $ 454.5
Policy reserves as of period end:
Traditional and universal life
insurance $2,476.8 $2,404.5 $2,476.8 $2,404.5
Variable universal life insurance $1,517.8 $1,096.4 $1,517.8 $1,096.4
Corporate-owned life insurance $1,156.9 $ 687.4 $1,156.9 $ 687.4
</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,
partially offset by higher policy benefit costs.
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. Revenues from investment life products
increased to $51.9 million in second quarter 1999 from $34.6 million
in second quarter 1998. On a year to date basis, investment life
product revenues increased to $103.7 million in 1999 from $61.8
million in 1998.
Sales of individual investment life insurance increased 33% during
second quarter 1999 reaching $99.7 million compared to $74.9 million
in 1998. Excluding the $349.9 million in 1998 single premium BOLI
sales, corporate investment life insurance sales more than doubled
reaching $40.4 million in second quarter 1999 compared to $14.7
million in second quarter 1998. Total investment life insurance in
force reached $21.48 billion at June 30, 1999 representing 43% of all
life insurance in force compared to $14.84 billion and 35% a year ago.
Interest credited to policyholders increased $6.1 million in second
quarter 1999 reaching $33.6 million compared to $27.5 million in the
year ago second quarter. For the first six months of 1999, interest
credited to policyholders increased $11.9 million over 1998. Increased
corporate-owned life insurance business accounted for most of the
increases. Corporate investment fixed life insurance reserves
increased 41% to $931.5 million as of June 30, 1999 compared to $662.0
million a year ago.
Other policy benefits increased $8.2 million and $12.8 million in the
three months and six months, respectively, ended June 30, 1999 over
comparable periods in 1998, reflecting growth in insurance inforce and
favorable mortality experience in the first half of 1998.
21
<PAGE> 22
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in millions) 1999 1998 1999 1998
-------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 37.2 $ 23.7 $ 71.5 $ 40.8
Operating expenses 30.6 21.1 58.8 34.9
--------- --------- --------- ---------
Operating income before
federal income tax $ 6.6 $ 2.6 $ 12.7 $ 5.9
========= ========= ========= =========
OTHER DATA (1)
Assets under management $21,604.2 $17,999.9 $21,604.2 $17,999.9
Assets administered $12,788.2 $ 4,535.9 $12,788.2 $ 4,535.9
</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 earnings growth was partially
attributable to acquisitions that occurred in 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 $10.1 million to revenues
and $9.7 million to operating expenses in second quarter 1999, and
$19.4 million to revenues and $19.3 million to operating expenses for
the first six months of 1999. The $9.7 million of operating expenses
attributable to the acquisitions includes $1.0 million of goodwill
amortization. The remaining increases in revenues and operating
expenses are attributable to growth in the Company's mutual fund
operations that were in place during both periods presented, and which
reported a $2.79 billion increase in assets under management from June
30, 1998 to June 30, 1999.
Most of the growth in the assets administered is due to the
acquisitions previously discussed.
Assets under management include $9.26 billion and $6.82 billion of
Company managed investment options that support the Company's variable
annuity and variable life insurance products as of June 30, 1999 and
1998, respectively. These assets are also included in the related
variable annuity and variable life insurance policy reserves.
22
<PAGE> 23
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) 1999 1998 1999 1998
---------------------------------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $48.6 $48.3 $ 94.5 $ 98.1
Benefits and expenses 55.1 49.7 107.4 101.7
----- ----- ------ ------
Operating loss before federal
income tax expense (1) $(6.5) $(1.4) $(12.9) $ (3.6)
===== ===== ====== ======
</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
employee and agent benefit plans. The decrease in revenues reflects a
decrease in group annuity account balances related to Nationwide
Insurance 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 second quarter 1999 and 1998,
respectively. Interest expense for the six month periods totaled $23.6
million and $16.0 million in 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 $(7.9) million and $5.0 million during the second
quarter of 1999 and 1998, respectively.
23
<PAGE> 24
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
----------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(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 2,332.8 2,171.6 2,029.1
Accumulated other comprehensive income 85.0 275.9 250.0
-------- -------- --------
Total shareholders' equity 2,417.8 2,447.5 2,279.1
-------- -------- --------
Total capital $3,016.2 $3,045.9 $2,677.5
======== ======== ========
</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 12 months preceding June 30, 1999
were $11.0 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.
24
<PAGE> 25
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 June 30, 1999.
INVESTMENTS
General
The Company's assets are divided between separate account and general
account assets. As of June 30, 1999, $58.15 billion (or 71%) of the
Company's total assets were held in separate accounts and $24.02
billion (or 29%) were held in the Company's general account, including
$20.85 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 $814.9 million of policy reserves as of June 30,
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>
JUNE 30, 1999 DECEMBER 31, 1998
----------------------- -----------------------
CARRYING % OF CARRYING % OF
(in millions) VALUE TOTAL VALUE TOTAL
-------------------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
U.S. government/agencies $ 301.2 2.1% $ 269.0 1.9%
Foreign governments 113.4 0.8 111.0 0.8
State and political subdivisions 0.8 -- 1.6 --
Mortgage-backed securities:
U.S. government/agencies 3,492.1 24.7 3,562.2 25.0
Non-government/agencies -- -- -- --
Corporate:
Public 5,235.2 37.0 5,194.3 36.4
Private 4,997.8 35.4 5,109.8 35.9
--------- ----- --------- -----
$14,140.5 100.0% $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, 98% were in the highest two NAIC Designations as of June
30, 1999.
25
<PAGE> 26
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 JUNE 30, 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> <C>
1 Aaa/Aa/A $ 9,077.4 64.2% $ 9,166.1 64.3%
2 Baa 4,712.3 33.3 4,715.1 33.1
3 Ba 332.1 2.4 347.2 2.5
4 B 18.6 0.1 5.6 --
5 Caa and lower 0.1 -- 13.9 0.1
6 In or near-default -- -- -- --
--------- ----- --------- -----
$14,140.5 100.0% $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 June 30, 1999, MBSs were $3.49
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 June 30, 1999, $2.27 billion (or 65%) 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.
26
<PAGE> 27
The following table sets forth the distribution by investment type of
the Company's general account MBS portfolio.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 AS OF DECEMBER 31, 1998
---------------------- -----------------------
CARRYING % OF CARRYING % OF
(in millions) VALUE TOTAL VALUE TOTAL
------------------------------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Planned Amortization Class $2,266.7 64.9% $2,433.4 68.3%
Very Accurately Defined Maturity 447.3 12.8 477.8 13.4
Multi-family Mortgage Pass-through
Certificates 262.5 7.5 251.0 7.0
Scheduled 131.5 3.8 143.8 4.0
Targeted Amortization Class 77.1 2.2 92.0 2.6
Accrual 63.6 1.8 77.3 2.2
Sequential 47.3 1.4 45.6 1.3
Other 196.1 5.6 41.3 1.2
-------- ----- -------- -----
$3,492.1 100.0% $3,562.2 100.0%
======== ===== ======== =====
</TABLE>
Mortgage Loans
As of June 30, 1999, general account mortgage loans were $5.40 billion
(or 26%) of the carrying value of consolidated general account
invested assets.
As of June 30, 1999 0.01% of the Company's mortgage loans were
classified as delinquent compared to none 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 June 30, 1999,
respectively, compared to 0.17% and 0.68% as of June 30, 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.
27
<PAGE> 28
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 NLIC and American Century. The remaining claims
against NLIC allege securities fraud, common law fraud, civil
conspiracy, and breach of contract. The District Court, on December 2,
1998, issued an order denying plaintiffs' motion for class
certification and the appeals court declined to review the order
denying class certification upon interlocutory appeal. On June 11,
1999, the District Court denied the plaintiffs' motion to amend their
complaint and reconsider class certification. NLIC intends to defend
this lawsuit (now limited to the claims of the two named plaintiffs)
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).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought
as a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. On June
11, 1999, the Company and the other named defendants filed a motion to
dismiss the amended complaint. 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, 1,275
shares of Class A Common Stock were issued by NFS during the second
quarter of 1999, at an average price of $44.146 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.
28
<PAGE> 29
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 11, 1999. At that
meeting, stockholders approved the following management proposal:
<TABLE>
<CAPTION>
For Withheld
------------- --------
<S> <C> <C> <C>
Election of directors to serve as
Class II Directors until the year
2002 Annual Meeting of stockholders
as follows:
Charles L. Fuellgraf, Jr. 1,067,893,065 32,844
Dimon R. McFerson 1,067,888,863 37,046
Donald L. McWhorter 1,067,894,393 31,516
Arden L. Shisler 1,067,894,075 31,834
</TABLE>
The terms of office of the Directors, James G. Brocksmith, Jr., Joseph
J. Gasper, Henry S. Holloway, Lydia Micheaux Marshall, David O.
Miller, James F. Patterson and Gerald D. Prothro, 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 June 11, 1999, NFS filed a Current Report on Form 8-K
announcing plans to create a $2 billion European
medium-term note program, secured by institutional
funding agreements, in the third quarter of 1999.
29
<PAGE> 30
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 16, 1999 /s/ Mark R. Thresher
-------------------------------------------------
Mark R. Thresher, Senior Vice President - Finance
(Chief Accounting Officer)
30
<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, 1999, and is qualified in its entirety by reference to such unaudited
consolidated financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 14,141
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 133
<MORTGAGE> 5,395
<REAL-ESTATE> 241
<TOTAL-INVEST> 20,850
<CASH> 11
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,311
<TOTAL-ASSETS> 82,169
<POLICY-LOSSES> 20,106
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
300
0
<COMMON> 1
<OTHER-SE> 2,417
<TOTAL-LIABILITY-AND-EQUITY> 82,169
102
<INVESTMENT-INCOME> 740
<INVESTMENT-GAINS> (13)
<OTHER-INCOME> 76
<BENEFITS> 626
<UNDERWRITING-AMORTIZATION> 128
<UNDERWRITING-OTHER> 262
<INCOME-PRETAX> 269
<INCOME-TAX> 90
<INCOME-CONTINUING> 179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179
<EPS-BASIC> 1.39
<EPS-DILUTED> 1.39
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
