<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, 2000 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 May 5, 2000 was as follows:
CLASS A COMMON STOCK (par value $0.01 per share) - 23,950,973 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
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 10
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURE 26
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,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUES
Policy charges $ 272.7 $ 206.2
Life insurance premiums 66.9 53.5
Net investment income 410.4 365.6
Net realized losses on investments (3.0) (5.4)
Other 48.8 37.2
--------- ---------
795.8 657.1
--------- ---------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 294.2 263.8
Other benefits and claims 67.3 50.5
Policyholder dividends on participating policies 12.0 10.1
Amortization of deferred policy acquisition costs 85.9 60.7
Interest expense on debt and capital and preferred
securities of subsidiary trusts 11.8 11.8
Other operating expenses 170.6 128.5
--------- ---------
641.8 525.4
--------- ---------
Income before federal income tax expense 154.0 131.7
Federal income tax expense 49.2 43.9
--------- ---------
Net income $ 104.8 $ 87.8
========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.82 $ 0.68
Diluted $ 0.82 $ 0.68
Weighted average common shares outstanding 128.6 128.5
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, 2000 1999
-------------- ------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $15,218.5 in 2000; $15,379.8 in 1999) $ 15,086.2 $ 15,296.5
Equity securities (cost $99.0 in 2000; $87.8 in 1999) 117.3 96.4
Mortgage loans on real estate, net 5,869.2 5,786.3
Real estate, net 266.2 254.8
Policy loans 534.2 519.6
Other long-term investments 74.5 73.8
Short-term investments 209.8 560.5
---------- ----------
22,157.4 22,587.9
---------- ----------
Cash 13.0 22.5
Accrued investment income 244.7 238.7
Deferred policy acquisition costs 2,680.4 2,555.8
Other assets 612.7 493.8
Assets held in separate accounts 71,667.0 67,155.3
---------- ----------
$ 97,375.2 $ 93,054.0
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $ 21,508.9 $ 21,868.3
Long-term debt 298.4 298.4
Other liabilities 1,027.1 944.9
Liabilities related to separate accounts 71,667.0 67,155.3
---------- ----------
94,501.4 90,266.9
---------- ----------
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,
24.0 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 640.3 634.9
Retained earnings 1,959.2 1,867.4
Accumulated other comprehensive income (22.3) (15.5)
Other (4.6) (0.9)
---------- ----------
2,573.8 2,487.1
---------- ----------
$ 97,375.2 $ 93,054.0
========== ==========
</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, 2000 and 1999
(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, 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
=====================================================================================================
BALANCE, JANUARY 1, 2000 $ 0.2 $ 1.0 $ 634.9 $ 1,867.4 $ (15.5) $ (0.9) $ 2,487.1
Comprehensive income:
Net income - - - 104.8 - - 104.8
Net unrealized
losses on
securities
available-for-sale
arising during
the period - - - - (6.8) - (6.8)
----------
Total comprehensive
income 98.0
----------
Cash dividends declared - - - (13.0) - - (13.0)
Other, net - - 5.4 - - (3.7) 1.7
-----------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 $ 0.2 $ 1.0 $ 640.3 $ 1,959.2 $ (22.3) $ (4.6) $ 2,573.8
=====================================================================================================
</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, 2000 and 1999
(in millions)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 104.8 $ 87.8
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 294.2 263.8
Capitalization of deferred policy acquisition costs (189.9) (152.4)
Amortization of deferred policy acquisition costs 85.9 60.7
Amortization and depreciation 0.2 2.6
Realized losses on investments 3.0 5.4
Increase in accrued investment income (6.0) (11.2)
Increase in other assets (58.9) (64.1)
Increase in policy liabilities 61.6 7.0
Increase in other liabilities 92.9 58.1
Other, net 0.9 3.5
----------- -----------
Net cash provided by operating activities 388.7 261.2
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 715.5 524.1
Proceeds from sale of securities available-for-sale 258.2 143.3
Proceeds from repayments of mortgage loans on real estate 125.1 89.4
Proceeds from sale of real estate 2.1 -
Proceeds from repayments of policy loans and sale of other invested assets 10.7 4.7
Cost of securities available-for-sale acquired (821.0) (677.3)
Cost of mortgage loans on real estate acquired (216.2) (125.3)
Cost of real estate acquired (1.5) (0.7)
Short-term investments, net 350.8 (4.9)
Other, net (89.8) (60.1)
----------- -----------
Net cash provided by (used in) investing activities 333.9 (106.8)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (13.0) (10.4)
Increase in investment product and universal life insurance product account balances 962.3 756.8
Decrease in investment product and universal life insurance product account balances (1,677.5) (891.5)
Other, net (3.9) (0.7)
----------- -----------
Net cash used in financing activities (732.1) (145.8)
----------- -----------
Net (decrease) increase in cash (9.5) 8.6
Cash, beginning of period 22.5 24.5
----------- -----------
Cash, end of period $ 13.0 $ 33.1
=========== ===========
</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, 2000
(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, 1999 included
in the Company's 1999 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) 2000 1999
- --------------------------------------- ------------ -----------
<S> <C> <C>
Basic and diluted net income $ 104.8 $ 87.8
============ ===========
Weighted average common shares outstanding 128.6 128.5
Dilutive effect of stock options - 0.1
------------ -----------
Weighted average diluted common shares outstanding 128.6 128.6
============ ===========
Net income per common share:
Basic $ 0.82 $ 0.68
Diluted $ 0.82 $ 0.68
</TABLE>
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. The
Statement also addresses contracts that contain embedded derivatives, such
as certain insurance contracts. 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 No. 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.
7
<PAGE> 8
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, Continued
(4) 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,
---------------------------------------------------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Unrealized losses on securities available-for-
sale arising during the period:
Gross $ (31.8) $ (154.4)
Adjustment to deferred policy
acquisition costs 20.6 29.6
Related federal tax benefit 3.9 41.7
---------- -----------
Net (7.3) (83.1)
---------- -----------
Reclassification adjustment for net losses
on securities available-for-sale realized
during the period:
Gross 0.7 8.5
Related federal tax benefit (0.2) (3.0)
---------- -----------
Net 0.5 5.5
---------- -----------
Total Other Comprehensive Income $ (6.8) $ (77.6)
========== ===========
</TABLE>
(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 access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
untimely death and flexible payment options including lump-sum, systematic
withdrawal or a stream of payments for life. 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, tax-deferred accumulation of savings and flexible payout options
including lump-sum, systematic withdrawal or a stream of payments for life.
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, which provide a death benefit and may also allow the customer to
build cash value on a tax-deferred basis.
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 fees for
administrative services only.
8
<PAGE> 9
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements Continued
In addition to the product segments, the Company reports corporate revenue
and expenses, investments and related investment income supporting capital
not specifically allocated to its product segments, certain revenues and
expenses related to the sales activities of its distribution companies,
revenues and expenses related to group annuity contracts sold to Nationwide
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.
The following table summarizes the financial results of the Company's
business segments for the three months ended March 31, 2000 and 1999.
<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>
2000
Operating revenue (1) $ 189.4 $ 327.1 $ 179.6 $ 46.2 $ 56.5 $ 798.8
Benefits and expenses 106.7 281.7 146.3 42.3 64.8 641.8
---------- ---------- ------------ ------------ ------------- -----------
Operating income (loss) before
federal income tax expense 82.7 45.4 33.3 3.9 (8.3) 157.0
Net realized losses on investments - - - - (3.0) (3.0)
---------- ---------- ------------ ------------ ------------- -----------
Consolidated income (loss) before
federal income tax expense $ 82.7 $ 45.4 $ 33.3 $ 3.9 $ (11.3) $ 154.0
========== ========== ============ ============ ============= ===========
Assets as of period end $ 66,734.1 $ 16,749.1 $ 7,069.8 $ 278.5 $ 6,543.7 $ 97,375.2
========== ========== ============ ============ ============= ===========
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 expense 65.6 42.7 29.1 6.1 (6.4) 137.1
Net realized losses on investments - - - - (5.4) (5.4)
---------- ---------- ------------ ------------ ------------- -----------
Consolidated income before
federal income tax expense $ 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
========== ========== ============ ============ ============= ===========
</TABLE>
- ------------
(1) Excludes net 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. No class has been certified. On June 11, 1999, the
Company and the other named defendants filed a motion to dismiss the
amended complaint. On March 8, 2000, the court denied the motion to dismiss
the amended complaint filed by the Company and other named defendants. The
Company intends to defend this lawsuit vigorously.
9
<PAGE> 10
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
Nationwide. The Company is a leading provider of long-term savings and
retirement products and sells a diverse range of products including
individual annuities, private and public pension plans, life insurance
and mutual funds as well as investment management and administrative
services. The Company markets its products through a broad distribution
network, including independent broker/dealers, national and regional
brokerage firms, financial institutions, pension plan administrators,
life insurance specialists, Nationwide Retirement Solutions sales
representatives and Nationwide 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.; and (xii) inaccuracies in assumptions regarding future
persistency, mortality, morbidity and interest rates used in calculating
reserve amounts.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating income,
which excludes net realized investment gains and losses. Net operating
income is commonly used in the insurance industry as a measure of
on-going earnings performance.
10
<PAGE> 11
The following table reconciles the Company's reported net income to net
operating income for the first quarter of 2000 and 1999. All earnings
per share amounts are presented on a diluted basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions, except per share amounts) 2000 1999
------------------------------------------------ --------------- --------------
<S> <C> <C>
Net income $ 104.8 $ 87.8
Net realized losses on investments, net of tax 2.0 3.5
--------------- --------------
Net operating income $ 106.8 $ 91.3
=============== ==============
Net operating income per share $ 0.83 $ 0.71
=============== ==============
</TABLE>
Revenues
Total revenues for first quarter 2000, excluding net realized gains and
losses on investments, increased to $798.8 million compared to $662.5
million for the same period in 1999. All components of revenue
contributed to the 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 first quarter of 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions) 2000 1999
------------------------------------------------ --------------- --------------
<S> <C> <C>
Asset fees $ 176.0 $ 140.4
Cost of insurance charges 35.1 25.9
Administrative fees 36.7 25.8
Surrender fees 24.9 14.1
--------------- ---------------
Total policy charges $ 272.7 $ 206.2
=============== ===============
</TABLE>
The growth in asset fees reflects a 34% increase in total separate
account assets, which reached $71.67 billion as of March 31, 2000,
compared to $53.47 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
$21.10 billion as March 31, 2000 compared to $15.99 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 and an increase
in surrender rates in first quarter 2000.
11
<PAGE> 12
Net investment income includes the gross investment income earned on
investments supporting fixed annuities and certain life insurance
products as well as the yield on the Company's general account invested
assets which are not allocated to product segments. Net investment
income grew from $365.6 million in the first quarter of 1999 to $410.4
million in the first quarter of 2000 primarily due to increased invested
assets to support growth in fixed annuity policy reserves coupled with
an increase in average yield on the investment portfolio. Fixed annuity
policy reserves, which include the fixed option of variable annuity
contracts, increased $1.13 billion to $16.20 billion as of the end of
first quarter 2000 compared to $15.07 billion a year ago.
The Company does not consider realized gains and losses on investments
to be recurring components of earnings. The Company makes decisions
concerning the sale of invested assets based on a variety of market,
business, tax and other factors. Net realized losses on investments were
$3.0 million and $5.4 million for the first quarter of 2000 and 1999,
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. The increase is primarily attributable to
growth in investment advisory fees due to growth in assets under
management and changes in the fee structure for certain funds.
Benefits and Expenses
Total benefits and expenses were $641.8 million in first quarter 2000, a
22% increase over first quarter 1999. All significant components of
benefits and expenses experienced increases in the first quarter 2000.
Interest credited to policyholder account balances totaled $294.2
million in first quarter 2000 compared to $263.8 million in first
quarter 1999 and principally relates to fixed annuity and investment
life insurance products. The growth in interest credited reflects the
increase in policy reserves previously discussed and increased average
crediting rates. The average crediting rate on fixed annuity policy
reserves was 5.73% in first quarter 2000 compared to 5.60% in first
quarter 1999.
Other benefits and claims increased to $67.3 million in first quarter
2000 from $50.5 million a year ago reflecting increases in benefits and
claims related to life-contingent immediate annuities and life
insurance.
The growth in amortization of DAC which totaled $85.9 million and $60.7
million in the first quarter of 2000 and 1999, respectively, is
principally due to the Variable Annuities segment and is attributable to
growth in revenues and an increase in surrender activity in first
quarter 2000.
Operating expenses increased 33% to $170.6 million in the first quarter
of 2000 compared to $128.5 million in the first quarter of 1999. The
increase reflects growth in the number of annuity and life insurance
contracts in force and the related increase in administrative processing
costs. In addition, an increase in non-deferrable commissions and costs
associated with expanding asset management product offerings and
distribution capabilities contributed to the increase.
Federal income tax expense was $49.2 million and $43.9 million for the
first quarter of 2000 and 1999, respectively. These amounts represent
effective tax rates of 31.9% for the first quarter of 2000 and 33.3% in
1999. The lower rate in 2000 is attributable to an increase in dividends
received deduction and tax credits.
Recently Issued Accounting Standards
See note 3 to the unaudited consolidated financial statements for a
discussion of recently issued accounting standards.
12
<PAGE> 13
Sales Information
The following table summarizes total Company sales, excluding internal
replacements, by business segment for the first quarter of 2000 and
1999.
<TABLE>
<CAPTION>
(in millions) 2000 1999
---------------------------------------------- ----------------- ----------------
<S> <C> <C>
Variable annuities $ 3,290.4 $ 2,460.1
Fixed annuities 742.2 617.4
Life insurance 410.7 250.5
----------------- ----------------
Total core premiums and deposits 4,443.3 3,328.0
Internal replacements (376.9) (97.4)
----------------- ----------------
Net core premiums and deposits 4,066.4 3,230.6
----------------- ----------------
Asset management account deposits 36.0 172.1
Asset administration account deposits 222.5 220.5
----------------- ----------------
Total non-insurance sales 258.5 392.6
----------------- ----------------
Total core sales 4,324.9 3,623.2
Bank-owned life insurance (BOLI) 19.0 86.7
Institutional products 161.7 -
Nationwide employee and agent benefit plans 58.3 66.4
----------------- ----------------
Total sales $ 4,563.9 $ 3,776.3
================= ================
</TABLE>
Total core sales represent amounts that are recurring and are the sales
figures management uses to set and evaluate the Company's sales goals.
In addition to statutory premiums and deposits related to life insurance
and annuity products, the Company also reports mutual fund deposits and
deposits into administered asset products as core sales. Sales of
institutional products represents sales of funding agreements that
secure notes issued to foreign investors through a third party trust
under the Company's $2 billion medium-term note program. The program was
launched in July 1999 as a means to expand spread based product
offerings. The Company excludes institutional products and BOLI sales as
well as deposits into Nationwide employee and agent benefit plans from
its targeted core sales comparisons. Although funding agreements and
BOLI contribute to asset and earnings growth they do not produce steady
production flow that lends itself to meaningful comparisons. The Company
also excludes internal replacements from its targeted core sales
comparisons.
Total core sales reached $4.32 billion in the first quarter of 2000, an
increase of 19% over 1999. Total annuity sales, net of internal
replacements, contributed $3.66 billion and $2.98 billion in the first
quarter of 2000 and 1999, respectively. Core life insurance sales for
first quarter 2000 were up 64% to $410.7 million. Non-insurance sales
fell 34% to $258.5 million as increased market volatility, a market
shift to technology oriented funds and lagging fund performance reduced
flows into our largest retail mutual fund offerings.
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, life insurance specialists
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
agents.
13
<PAGE> 14
Core sales by distribution channel for the first quarter of 2000 and
1999, are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------- -------------------------
(in millions) AMOUNT % AMOUNT %
------------------------------------------ ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Independent broker/dealers $ 1,551.0 35.9% $ 1,260.5 34.8%
National and regional brokerage firms 308.0 7.1 211.3 5.8
Financial institutions 659.2 15.2 532.2 14.7
Pension plan administrators 332.1 7.7 337.5 9.3
Nationwide Retirement Solutions sales
representatives 774.8 17.9 601.7 16.6
Nationwide agents 211.3 4.9 187.3 5.2
Life insurance specialists 230.0 5.3 100.1 2.8
Total non-insurance sales 258.5 6.0 392.6 10.8
---------- ----- ---------- ------
Total core sales $ 4,324.9 100.0% $ 3,623.2 100.0%
========== ===== ========== ======
</TABLE>
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 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. Beginning in April 2000, the Company
discontinued active marketing of new sales to NEA members.
Core sales by product for the first quarter of 2000 and 1999, are
summarized as follows.
<TABLE>
<CAPTION>
(in millions) 2000 1999
------------------------------------------- --------------- ----------------
<S> <C> <C>
BEST of AMERICA(R) products $ 1,319.1 $ 1,136.8
Private label annuities 273.9 304.4
The NEA Valuebuilder annuities 34.8 37.0
Other 121.6 58.2
------------ ------------
Total individual annuities 1,749.4 1,536.4
------------ ------------
BEST of AMERICA(R) group pension series 1,198.6 901.8
IRC Section 457 annuities 691.6 530.9
Other 16.1 11.0
------------ ------------
Total group annuities 1,906.3 1,443.7
------------ ------------
Traditional/Universal life insurance 56.9 60.0
BEST of AMERICA(R) variable life series 125.3 90.4
Corporate-owned life insurance 228.5 100.1
------------ ------------
Total life insurance 410.7 250.5
------------ ------------
Total non-insurance sales 258.5 392.6
------------ ------------
Total core sales $ 4,324.9 $ 3,623.2
============ ============
</TABLE>
14
<PAGE> 15
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 for the first
quarter of 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions) 2000 1999
------------------------------------------------- -------------- -----------------
<S> <C> <C>
Variable Annuities $ 82.7 $ 65.6
Fixed Annuities 45.4 42.7
Life Insurance 33.3 29.1
Assets Managed and Administered 3.9 6.1
Corporate and Other (8.3) (6.4)
-------------- -----------------
$ 157.0 $ 137.1
============== =================
</TABLE>
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
an untimely death and flexible payout options including lump-sum,
systematic withdrawal or a stream of payments for life. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The following table summarizes certain selected financial data for the
Company's Variable Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions) 2000 1999
------------------------------------------------- -------------- -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 189.4 $ 143.6
Benefits and expenses 106.7 78.0
-------------- --------------
Operating income before federal income tax expense $ 82.7 $ 65.6
-------------- --------------
OTHER DATA
Statutory premiums and deposits (1) $ 3,290.4 $ 2,460.1
Policy reserves as of period end:
Individual $ 39,175.6 $ 30,162.5
Group 26,107.4 18,685.8
-------------- --------------
Total $ 65,283.0 $ 48,848.3
============== ==============
Pre-tax operating income to average policy reserves 0.54% 0.55%
</TABLE>
----------
(1) Statutory data has 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.
15
<PAGE> 16
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 $170.7 million in the first
quarter of 2000, up 26% from $135.6 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 $4.06 billion during first quarter
2000 reaching $65.28 billion as of March 31, 2000 and have increased 34%
compared to a year ago.
Variable annuity deposits increased 34% for the first quarter 2000,
reaching $3.29 billion compared to $2.46 billion in the year ago
quarter. Compared to fourth quarter 1999, variable annuity deposits
increased 39%. Deposits generated by brokerage firms and independent
broker/dealers led the deposit growth in first quarter 2000, posting
increases of 55% and 42%, respectively, over first quarter 1999.
Favorable equity market conditions during first quarter 2000 also
contributed significantly to the growth in variable annuity policy
reserves. Variable annuity policy reserves reflect market appreciation
of $3.04 billion during the first three months of 2000. Over the past
twelve months, variable annuity policy reserves have increased $12.30
billion as a result of market appreciation.
Offsetting the growth in policy reserves attributable to an increase in
deposits and market appreciation was an increase in policyholder
surrender activity. Surrenders as a percentage of average reserves were
18%, annualized, in first quarter 2000, compared to 12% in first quarter
1999. The increase in surrender activity is attributable to an increase
in competition in the individual variable annuity market which has
increased transfers to competitor products and the overall aging of the
Company's book of business. The Company introduced new products, new
product features and new retention strategies during first quarter 2000
in an effort to decrease the rate of surrenders.
Amortization of DAC increased 58% to $56.0 million in first quarter 2000
compared to $35.4 million in first quarter 1999. Operating expenses were
$50.1 million in first quarter 2000, an increase of 19% over first
quarter 1999. The growth in DAC amortization and operating expenses
reflect the overall growth in the variable annuity business. The
increase in DAC amortization also reflects the increase in policyholder
surrenders.
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, tax-deferred accumulation of savings and flexible
payout options including lump-sum, systematic withdrawal or a stream of
payments for life. Such contracts consist of single premium deferred
annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment includes the fixed
option under the Company's variable annuity contracts.
16
<PAGE> 17
The following table summarizes certain selected financial data for the
Company's Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 2000 1999
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 304.2 $ 275.3
Other 22.9 12.3
-------------- --------------
327.1 287.6
-------------- --------------
Benefits and expenses:
Interest credited to policyholder account balances 225.4 202.2
Other benefits and expenses 56.3 42.7
-------------- --------------
281.7 244.9
-------------- --------------
Operating income before federal income tax expense $ 45.4 $ 42.7
============== ==============
OTHER DATA
Statutory premiums and deposits (1) $ 903.9 $ 617.4
Policy reserves as of period end:
Individual $ 7,617.8 $ 7,047.4
Group 7,877.9 8,017.8
Institutional 704.0 -
-------------- --------------
Total $ 16,199.7 $ 15,065.2
============== ==============
Pre-tax operating income to average policy reserves 1.11% 1.14%
</TABLE>
--------------
(1) Statutory data has 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
partially offset by lower interest margins in first quarter 2000
compared to first quarter 1999. 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,
including the rate of prepayments, 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,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Net investment income 7.73% 7.62%
Interest credited 5.73 5.60
--------- --------
2.00% 2.02%
========= ========
</TABLE>
Recent increases in interest rates have slowed mortgage loan and bond
prepayment activity and the Company anticipates interest spreads over
the next several quarters to range between 190 and 195 basis points,
excluding the impact of mortgage loan and bond prepayment income.
Fixed annuity policy reserves totaled $16.20 billion as of March 31,
2000 compared to $16.59 billion as of the end of 1999 and $15.07 billion
a year ago.
17
<PAGE> 18
First quarter fixed annuity premiums and deposits grew to $903.9 million
in 2000 compared to $617.4 million in 1999. Most of the Company's fixed
annuity premiums and deposits are amounts allocated to the fixed option
of variable annuity contracts. First quarter 2000 fixed annuity premiums
and deposits include $618.0 million in premiums allocated to the fixed
option under variable annuity contracts, compared to $521.7 million in
first quarter 1999. The increase is primarily attributable to $161.7
million of funding agreements issued in connection with the Company's
medium-term note program coupled with a $96.3 million increase in the
fixed option of variable annuity contract deposits in the first quarter
of 2000 as compared to the first quarter of 1999. The later increase was
driven by the Company's enhanced dollar cost averaging (DCA) program
that offers customers a first year bonus interest rate and transfers the
account balance systematically to variable options over a six or twelve
month period.
The increase in other benefits and expenses in first quarter 2000
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, which provide a death benefit and may also allow the customer
to build cash value on a tax-advantaged basis.
The following table summarizes certain selected financial data for the
Company's Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 2000 1999
------------------------------------------------- --------------- -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 179.6 $ 151.1
Benefits and expenses 146.3 122.0
-------------- --------------
Operating income before federal income tax expense $ 33.3 $ 29.1
============== ==============
OTHER DATA
Statutory premiums (1):
Traditional and universal life $ 56.9 $ 60.0
Variable universal life 125.3 90.5
Corporate-owned life 247.5 186.7
-------------- --------------
Total $ 429.7 $ 337.2
============== ==============
Policy reserves as of period end:
Traditional and universal life $ 2,560.6 $ 2,459.4
Variable universal life 2,000.1 1,363.3
Corporate-owned life 1,767.0 1,097.3
-------------- --------------
Total $ 6,327.7 $ 4,920.0
============== ==============
</TABLE>
--------------
(1) Statutory data has 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.
18
<PAGE> 19
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
$277.2 million in first quarter 1999 to $372.8 million in first quarter
2000. As a result of the sales growth and high persistency, revenues
from investment life products increased to $72.1 million in first
quarter 2000 from $51.8 million in first quarter 1999.
Interest credited to policyholders increased $2.8 million in first
quarter 2000 reaching $33.4 million compared to $30.6 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 increased $113.9 million to $1,033.9 million as
of March 31, 2000 compared to $920.0 million a year ago.
Traditional and universal life insurance benefits increased $4.1 million
to $42.5 million in first quarter 2000 compared to the same period a
year ago due to an increase in claims. Operating expenses increased by
$3.5 million during first quarter 2000 as compared to first quarter 1999
primarily as a result of increased DAC amortization.
Assets Managed and Administered
The Assets Managed and Administered segment consists of the Company's
investment adviser subsidiaries and the operations of businesses from
which the Company receives fees for administrative services only.
The following table summarizes certain selected financial data for the
Company's Assets Managed and Administered segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions) 2000 1999
--------------------------------------------------- ---------------- ---------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 46.2 $ 34.3
Operating expenses 42.3 28.2
-------------- --------------
Operating income before federal income tax expense $ 3.9 $ 6.1
============== ==============
OTHER DATA (1)
Assets under management $ 22,418.2 $ 20,601.9
Assets administered $ 16,593.8 $ 10,189.8
</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 growth was mainly due to
increased investment advisory fees and other income as a result of
growth in assets under management and changes in the fee structure for
certain funds. Increased operating expenses are primarily the result of
staffing and infrastructure related to the Company's commitment to
expanding this segment.
Assets under management include $9.74 billion and $8.64 billion of
Company managed investment options that support the Company's variable
annuity and variable life insurance products as of March 31, 2000 and
1999, respectively. These assets are also included in the related
variable annuity and variable life insurance policy reserves.
19
<PAGE> 20
Corporate and Other
The following table summarizes certain selected financial data for the
Company's Corporate and Other segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
(in millions) 2000 1999
----------------------------------------------------- ---------------- --------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 56.5 $ 45.9
Benefits and expenses 64.8 52.3
--------------- --------------
Operating loss before federal income tax expense (1) $ (8.3) $ (6.4)
=============== ===============
</TABLE>
-------------
(1) Excludes net 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 employee and agent
benefit plans. The increase in revenues reflects an increase in net
investment income, while the increase in benefits and expenses is the
result of increased interest credited and general expenses.
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 of $3.0
million and $5.4 million during the first quarter of 2000 and 1999,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources demonstrate the overall financial
strength of the Company and its ability to generate strong cash flows
from its operations and borrow funds at competitive rates to meet
operating and growth needs. The Company's capital structure consists of
long-term debt, capital 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) 2000 1999 1999
------------------------------------------------------ ---------------- ----------------- ----------------
<S> <C> <C> <C>
Long-term debt $ 298.4 $ 298.4 $ 298.4
Capital and preferred securities of subsidiary trusts 300.0 300.0 300.0
------------- ------------- -------------
Total long-term debt and capital and preferred
securities 598.4 598.4 598.4
------------- ------------- -------------
Shareholders' equity, excluding accumulated other
comprehensive income 2,596.1 2,502.6 2,254.1
Accumulated other comprehensive income (22.3) (15.5) 198.3
------------- ------------- -------------
Total shareholders' equity 2,573.8 2,487.1 2,452.4
------------- ------------- -------------
Total capital $ 3,172.2 $ 3,085.5 $ 3,050.8
============= ============= =============
</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.
20
<PAGE> 21
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, 1999 was $1.35 billion and statutory-basis net income for
1999 was $276.2 million. Total dividends paid in the preceding twelve
months were $275.2 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.
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,
2000.
INVESTMENTS
General
The Company's assets are divided between separate account and general
account assets. As of March 31, 2000, $71.67 billion (or 74%) of the
Company's total assets were held in separate accounts and $25.71 billion
(or 26%) were held in the Company's general account, including $22.16
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 $940.3 million of policy reserves as of March 31, 2000
($915.4 million as of December 31, 1999) for which the Company bears the
investment risk.
21
<PAGE> 22
Fixed Maturity Securities
The following table summarizes the composition of the Company's general
account fixed maturity securities by category.
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------------------- ---------------------------
CARRYING % OF CARRYING % OF
(in millions) VALUE TOTAL VALUE TOTAL
----------------------------------------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
U.S. government/agencies $ 260.9 1.7% $ 449.4 2.9%
Foreign governments 109.9 0.7 110.4 0.7
State and political subdivisions 0.9 - 0.8 -
Mortgage-backed securities:
U.S. government/agencies 3,269.4 21.7 3,420.9 22.4
Non-government/agencies - - - -
Corporate:
Public 6,006.5 39.8 5,950.5 38.9
Private 5,438.6 36.1 5,364.5 35.1
----------- --------- ----------- ---------
$ 15,086.2 100.0% $ 15,296.5 100.0%
=========== ========= =========== =========
</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, 2000.
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, 2000 AS OF DECEMBER 31, 1999
--------------------------- ----------------------------
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 $ 9,389.3 62.2% $ 9,802.7 64.1%
2 Baa 5,215.1 34.6 4,990.1 32.6
3 Ba 362.2 2.4 408.6 2.7
4 B 107.0 0.7 87.0 0.6
5 Caa and lower 12.6 0.1 8.1 -
6 In or near default - - - -
------------- ------ ------------- ------
$ 15,086.2 100.0% $ 15,296.5 100.0%
============= ====== ============= ======
</TABLE>
--------------
(1) NAIC Designations are assigned no less frequently than annually.
Some designations for securities shown have been assigned to
securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparison's between NAIC and Moody's designations are published
by the NAIC. In the event no Moody's rating is available, the
Company has assigned internal ratings corresponding to the
public rating.
The Company's general account mortgage-backed security (MBS) investments
include residential MBSs and multi-family mortgage pass-through
certificates. As of March 31, 2000, MBSs were $3.27 billion (or 22%) 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.
22
<PAGE> 23
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, 2000, $1.90 billion (or 58%) of the carrying value
of the general account MBS portfolio was invested in planned
amortization class CMOs/REMICs (PACs). PACs are securities whose cash
flows are designed to remain constant over a variety of mortgage
prepayment environments. Other classes in the CMO/REMIC security are
structured to accept the volatility of mortgage prepayment changes,
thereby insulating the PAC class.
The following table sets forth the distribution by investment type of
the Company's general account MBS portfolio as of March 31, 2000 and
December 31, 1999.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 AS OF DECEMBER 31, 1999
----------------------------- -----------------------------
CARRYING % OF CARRYING % OF
(in millions) VALUE TOTAL VALUE TOTAL
------------------------------------------- --------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Planned Amortization Class $ 1,897.4 58.0% $ 2,010.1 58.8%
Very Accurately Defined Maturity 450.6 13.8 477.9 14.0
Multi-family Mortgage Pass-through
Certificates 340.4 10.4 367.6 10.8
Scheduled 115.8 3.6 120.7 3.5
Targeted Amortization Class 107.3 3.3 110.1 3.2
Accrual 73.5 2.2 75.7 2.2
Sequential 116.6 3.6 93.5 2.7
Other 167.8 5.1 165.3 4.8
--------------- ------------ --------------- -----------
$ 3,269.4 100.0% $ 3,420.9 100.0%
=============== ============ =============== ===========
</TABLE>
Mortgage Loans
As of March 31, 2000, general account mortgage loans were $5.87 billion
(or 27%) of the carrying value of consolidated general account invested
assets.
As of March 31, 2000, 0.13% of the Company's mortgage loans were
classified as delinquent compared to none a year ago and at December 31,
1999. Foreclosed and restructured loans totaled 0.12% and 0.33% of the
Company's mortgage loans as of March 31, 2000, respectively, compared to
none and 0.46% as of March 31, 1999, 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, 1999.
23
<PAGE> 24
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 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. In January 2000, the parties to this litigation settled
this lawsuit now limited to the claims of the two named plaintiffs. On
February 9, 2000 the court dismissed this lawsuit with prejudice.
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. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint filed
by the Company and other named defendants. 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, 2,244
shares of Class A Common Stock were issued by NFS during the first
quarter of 2000, at an average price of $25.558 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.
24
<PAGE> 25
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 January 20, 2000, NFS filed a Current Report on Form 8-K
announcing plans to launch a direct marketing and support model
at its Nationwide Retirement Solutions subsidiary.
25
<PAGE> 26
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 12, 2000 /s/Mark R. Thresher
----------------------------------------------
Mark R. Thresher, Senior Vice President - Finance
(Chief Accounting Officer)
26
<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, 2000, 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 15,086
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 117
<MORTGAGE> 5,869
<REAL-ESTATE> 266
<TOTAL-INVEST> 22,157
<CASH> 13
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,680
<TOTAL-ASSETS> 97,375
<POLICY-LOSSES> 21,509
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
300
0
<COMMON> 1
<OTHER-SE> 2,573
<TOTAL-LIABILITY-AND-EQUITY> 97,375
67
<INVESTMENT-INCOME> 410
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 49
<BENEFITS> 362
<UNDERWRITING-AMORTIZATION> 86
<UNDERWRITING-OTHER> 171
<INCOME-PRETAX> 154
<INCOME-TAX> 49
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
