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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 1-12785
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 31-1486870
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215 (614) 249-7111
(Address of principal executive offices) (Registrant's telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK (par value $.01 per NEW YORK STOCK EXCHANGE
share)
(Title of Class) (Name of each exchange on which registered)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to the
filing requirements for at least the past 90 days.
YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates on March
20, 2000 was $599,243,318.
The number of shares outstanding of each of the registrant's classes of
common stock on March 20, 2000 was as follows:
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<S> <C>
CLASS A COMMON STOCK (par value $.01 per 23,791,298 shares issued and outstanding
share)
CLASS B COMMON STOCK (par value $.01 per 104,745,000 shares issued and outstanding
share)
(Title of Class)
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of this Form 10-K incorporate by reference certain
information from the registrant's 1999 Annual Report to Shareholders. Part III
of this Form 10-K incorporates by reference certain information from the
registrant's definitive Proxy Statement for the 2000 Annual Shareholders'
Meeting.
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PART I
ITEM 1 BUSINESS
OVERVIEW
Nationwide Financial Services, Inc. (NFS) was formed in November 1996 as a
holding company for Nationwide Life Insurance Company (NLIC) and other companies
that comprise the retirement savings operations of the Nationwide group of
companies (Nationwide). NFS is incorporated in Delaware and maintains its
principal executive offices in Columbus, Ohio.
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 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.
The Company believes its unique combination of product innovation and strong
distributor relationships positions it to compete effectively in the rapidly
growing retirement savings market under various economic conditions.
The Company has grown substantially in recent years as a result of its
long-term investments in developing the distribution channels necessary to reach
its target customers and the products required to meet the demands of these
customers. The Company believes its growth has been enhanced further by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such as
products offered by the Company, and the performance of the financial markets,
particularly the United States (U.S.) stock markets, in recent years. From 1994
to 1999, the Company's assets grew from $29.24 billion to $93.05 billion, a
compound annual growth rate of 26%. Asset growth during this period resulted
from sales of the Company's products as well as market appreciation of assets in
the Company's separate accounts and in its general account investment portfolio.
The Company's sales of variable annuities grew from $4.40 billion in 1995 to
$9.94 billion in 1999, a compound annual growth rate of 23%. The Company's
separate account assets, which are generated by the sale of variable annuities
and variable universal life insurance, grew from 41% of total assets as of
December 31, 1994 to 72% of total assets as of December 31, 1999. During this
period of substantial growth, the Company controlled its operating expenses by
taking advantage of economies of scale and by increasing productivity through
investments in technology.
INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On March 11, 1997, NFS sold, in an initial public offering, 23.6 million
shares of its newly-issued Class A common stock for net proceeds of $524.2
million (the Equity Offering). In March 1997, NFS also sold, in companion public
offerings, $300.0 million of 8% Senior Notes (the Notes) and, through a wholly
owned subsidiary trust, $100.0 million of 7.899% Capital Securities (the Capital
Securities). Aggregate net proceeds from the Equity Offering, the offering of
the Notes and the sale of the Capital Securities totaled $917.0 million. NFS
contributed $836.8 million of the proceeds to the capital of NLIC and retained
$80.2 million of the proceeds for general corporate purposes.
Prior to the initial public offering, NFS was a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). Nationwide Corp. continues to own all
of the outstanding shares of Class B common stock, which represents
approximately 81% of the total number of common shares outstanding and
approximately 98% of the combined voting power of the stockholders of NFS.
During the first quarter of 1997, NFS's Board of Directors approved a 104,745
for one split of the Company's Class B common stock, which became effective
February 10, 1997.
During 1996 and 1997, Nationwide Corp. and NFS completed transactions in
anticipation of the initial public offering that focused the business of NFS on
long-term savings and retirement products. On September 24, 1996, NLIC declared
a dividend payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or retirement
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products. On January 27, 1997, Nationwide Corp. contributed the common stock of
NLIC and three marketing and distribution companies to NFS. Accordingly, the
consolidated financial statements include the results of NLIC and its
subsidiaries and the three marketing and distribution companies as if they were
consolidated with NFS for all periods presented. NFS and its subsidiaries are
collectively referred to as "the Company."
In addition to the transactions discussed previously, the Company paid
$900.0 million of dividends to Nationwide Corp., $50.0 million on December 31,
1996 and $850.0 million on February 24, 1997, as part of the restructuring.
BUSINESS SEGMENTS
The Company has historically reported three product segments: Variable
Annuities, Fixed Annuities and Life Insurance. In addition, the Company reports
certain other revenues and expenses in a Corporate and Other segment. Beginning
in 1999 the Company began reporting a new product segment, Assets Managed and
Administered. Amounts reported for prior periods have been restated to reflect
this and certain other changes. All information set forth below relating to the
Company's Variable Annuities segment excludes the fixed option under the
Company's variable annuity contracts. Such information is included in the
Company's Fixed Annuities segment.
Variable Annuities
The Variable Annuities segment consists of annuity contracts that provide
the customer with 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 a lump sum, systematic withdrawal or a stream
of payments for life. Variable Annuity segment revenues, operating income before
federal income tax expense and policy reserves are summarized in the following
table.
<TABLE>
<CAPTION>
1999 1998 1997
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(IN MILLIONS)
<S> <C> <C> <C>
Total revenues............................. $ 626.9 $ 501.6 $ 387.1
Operating income before federal income tax
expense.................................. 285.5 218.4 150.9
Policy reserves as of year end............. 61,224.0 46,420.8 34,486.7
</TABLE>
The Company is one of the leaders in the development and sale of variable
annuities. As of December 31, 1999, the Company was the fifth largest writer of
individual variable annuity contracts in the U.S. based on assets, according to
The Variable Annuity Research & Data Service. The Company believes that
demographic trends and shifts in attitudes toward retirement savings will
continue to support increased consumer demand for its products. The Company
believes that it possesses distinct competitive advantages in the market for
variable annuities. Some of the Company's most important advantages include its
innovative product offerings and strong relationships with independent,
well-known fund managers. Its principal annuity series, The BEST of AMERICA(R),
allows the customer to choose from up to 40 investment options managed by
premier mutual fund managers. In the aggregate, the Company's group variable
annuity products offer over 100 underlying investment options.
The Company markets its variable annuity products through a broad spectrum
of distribution channels, including independent broker/dealers, national and
regional brokerage firms, financial institutions, pension plan administrators,
Nationwide Retirement Solutions sales representatives and Nationwide agents. The
Company seeks to capture a growing share of variable annuity sales in these
channels by working closely with its investment managers and product
distributors to adapt the Company's products and services to changes in the
retail and institutional marketplace in order to enhance its leading position in
the market for variable annuities. The Company is following a strategy of
extending The BEST of AMERICA(R) brand name to more of its products and
distribution channels in an effort to build upon its brand name recognition.
The Company believes that the variable annuity business is attractive
because it generates fee income. In addition, because the investment risk on
variable annuities is borne principally by the customer and not the
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Company, the variable annuity business requires significantly less capital
support than fixed annuity and traditional life insurance products. The Company
receives income from variable annuity contracts primarily in the form of asset
and administration fees. In addition, most of the Company's variable annuity
products provide for a contingent deferred sales charge, also known as a
"surrender charge" or "back-end load," that is assessed against premium
withdrawals in excess of specified amounts made during a specified period,
usually the first seven years of the contract. Surrender charges are intended to
protect the Company from withdrawals early in the contract period, before the
Company has had the opportunity to recover its sales expenses. Generally,
surrender charges on individual variable annuity products are 7% of premiums
withdrawn during the first year, scaling ratably to 0% for the eighth year and
each year thereafter. For group annuity products, the surrender charge amounts
and periods can vary significantly, depending on the terms of each contract.
The Company's variable annuity products consist almost entirely of flexible
premium deferred variable annuity (FPVA) contracts. Such contracts are savings
vehicles in which the customer makes a single deposit or series of deposits. The
customer has the flexibility to invest in mutual funds managed by independent
investment managers and the Company. Deposits may be at regular or irregular
intervals and in regular or irregular amounts. The value of the annuity
fluctuates in accordance with the investment experience of the mutual funds
chosen by the customer. The customer is permitted to withdraw all or part of the
accumulated value of the annuity, less any applicable surrender charges. As
specified in the FPVA contract, the customer generally can elect from a number
of payment options that provide either fixed or variable benefit payments.
The Company offers individual variable annuities under The BEST of
AMERICA(R) brand name. In addition to The BEST of AMERICA(R) individual variable
annuities, the Company markets employer-sponsored variable annuities to both
public sector employees and teachers for use in connection with plans described
under Sections 457 and 403(b) of the Internal Revenue Code (IRC), and to private
sector employees for use in connection with IRC Section 401(k) plans. These
private sector employer-sponsored variable annuities are marketed under several
brand names, including BEST of AMERICA(R) Group Pension Series. The Company also
markets variable annuities as "private label" products.
The BEST of AMERICA(R). The Company's principal individual FPVA contracts
are sold under the brand names The BEST of AMERICA-America's Vision(R), The BEST
of AMERICA IV(R) and The BEST of AMERICA-America's FUTURE Annuity. The BEST of
AMERICA(R) brand name individual variable annuities accounted for $3.88 billion
(or 39%) of the Company's variable annuity sales in 1999, and $31.52 billion (or
51%) of the Company's variable annuity policy reserves as of year end. The
Company's The BEST of AMERICA-America's Vision(R) and The BEST of
AMERICA-America's FUTURE Annuity products are intended to appeal to distributors
in the market for large initial deposits. The contracts require initial minimum
deposits of $15,000. The Company's The BEST of AMERICA IV(R) product is intended
primarily for the tax-qualified, payroll deduction market, where initial
deposits are often smaller. The BEST of AMERICA IV(R) generally pays a lower
up-front commission to distributors but requires only $1,500 as an initial
deposit. All three products generate an annual asset fee and may also generate
annual administration fees for the Company.
BEST of AMERICA(R) Group Pension Series. These group variable annuity
products accounted for $3.37 billion (or 34%) of the Company's variable annuity
sales in 1999, and $12.52 billion (or 20%) of the Company's variable annuity
policy reserves as of year end. Group BEST of AMERICA(R) products are typically
offered only on a tax-qualified basis. These products may be structured with a
variety of features which may be arranged in over 600 combinations of front-end
loads, back-end loads and asset-based fees.
Section 457 Contracts. These products accounted for $1.80 billion (or 18%)
of the Company's variable annuity sales in 1999, and $11.66 billion (or 19%) of
the Company's variable annuity policy reserves as of year end. The Company
offers a variety of group variable annuity contracts that are designed primarily
for use in conjunction with plans described under IRC Section 457. Section 457
permits employees of state and local governments to defer a certain portion of
their yearly income and invest such income on a tax-deferred basis. These
contracts typically generate an annual asset fee and may also generate annual
administration fees for the Company.
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Private Label Variable Annuities. These products accounted for $676.8
million (or 7%) of the Company's variable annuity sales in 1999, and $4.77
billion (or 8%) of the Company's variable annuity policy reserves as of year
end. The Company has developed several private label variable annuity products
in conjunction with other financial intermediaries. The products allow financial
intermediaries to market products with substantially the same features as the
Company's brand name products to their own customer bases under their own brand
names. The Company believes these private label products strengthen the
Company's ties to certain significant distributors of the Company's products.
These contracts generate an annual asset fee and may also generate annual
administration fees for the Company.
The NEA Valuebuilder. This product accounted for $168.5 million (or 2%) of
the Company's variable annuity sales in 1999, and $748.2 million (or 1%) of the
Company's variable annuity policy reserves as of year end. The Company offers
individual variable annuity contracts to the Teacher Market under Section 403(b)
of the IRC. Section 403(b) permits teachers and other employees of educational
organizations to defer a certain portion of their yearly income and invest such
income on a tax-deferred basis. These contracts generate an annual asset fee and
may also generate annual administration fees for the Company. In January 2000,
the Company announced that it will exit the Teacher Market.
Fixed Annuities
The Company has sought to maintain its ability to grow profitably in a
variety of market environments. The Company believes that periods of rising
interest rates, that tend to cause lower sales growth in its Variable Annuities
segment, make its fixed annuity products more attractive to consumers. In
addition to providing balance to the Company's variable annuity business, its
fixed annuity business allows the Company to offer a comprehensive portfolio of
savings alternatives to its customers and distributors as the Company seeks to
capture a growing share of sales in all distribution channels. The Fixed
Annuities segment includes the fixed option under the Company's variable annuity
products. Customers who purchase variable annuities are able to designate some
or all of their deposits to fixed options which, like the Company's fixed
annuity contracts, offer a guarantee of principal and a guaranteed interest rate
for a specified period of time. The fixed option under the Company's variable
annuity products accounted for $2.49 billion (or 72%) of the Company's fixed
annuity sales in 1999, and $11.79 billion (or 71%) of the Company's fixed
annuity policy reserves as of year end.
Fixed Annuity segment revenues, operating income before federal income tax
expense and policy reserves are summarized in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
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(IN MILLIONS)
<S> <C> <C> <C>
Total revenues............................. $ 1,177.9 $ 1,152.3 $ 1,141.4
Operating income before federal income tax
expense.................................. 177.2 175.3 169.5
Policy reserves as of year end............. 16,591.9 14,898.9 14,194.2
</TABLE>
Fixed annuity products are marketed to individuals who choose to allocate
long-term savings to products that provide a guarantee of principal, a stable
net asset value and a guarantee of the interest rate to be credited to the
principal amount for some period of time. The Company's fixed annuity products
are offered both to individuals and as group products to employers for use in
employee benefit programs. The Company's individual fixed annuity products are
distributed through its unaffiliated and affiliated channels and include single
premium deferred annuity contracts, flexible premium deferred annuity contracts
and single premium immediate annuity contracts. The Company's group fixed
annuity contracts are also distributed through its unaffiliated and affiliated
channels. The Company invests fixed annuity customer deposits in its general
account investment portfolio. Unlike variable annuity assets that are held in
the Company's separate account, the Company bears the investment risk on assets
held in its general account. The Company attempts to earn a spread by investing
a customer's deposits for higher yields than the interest rate it credits to the
customer's fixed annuity contract.
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During 1999, the average crediting rate on contracts (including the fixed
option under the Company's variable contracts) in the Fixed Annuities segment
was 5.59%. Approximately 87% of the Company's crediting rates on its fixed
annuity contracts are guaranteed for a period not exceeding 15 months.
Fixed Option Under Variable Annuity Contracts. Fixed options are available
to customers who purchase certain of the Company's variable annuities by
designation of some or all of their deposits to such options. A fixed option
offers the customer a guarantee of principal and a guaranteed interest rate for
a specified period of time. Such contracts have no maturity date and remain in
force until the customer elects to take the proceeds of the annuity as a single
payment or as a specified income for life or for a fixed number of years. The
Company reports its fixed option business in its Fixed Annuities segment because
the characteristics of such business are similar to those of its fixed annuity
business. Although the customer may elect, subject to limitations for certain
products, to transfer balances from the fixed option to other investment
options, it is the Company's experience that historically such transfers have
not been significant.
Single Premium Deferred Annuity (SPDA) Contracts. SPDA contracts accounted
for $314.8 million (or 9%) of the Company's fixed annuity sales in 1999, and
$2.21 billion (or 13%) of the Company's fixed annuity policy reserves as of year
end. SPDA contracts are distributed through broker/dealers, financial planners,
banks and Nationwide agents. An SPDA contract is a savings vehicle in which the
customer makes a single deposit with the Company. The Company guarantees the
customer's principal and credits the customer's account with earnings at an
interest rate that is stated and fixed for an initial period, typically at least
one year. Thereafter, the Company resets, typically annually, the interest rate
credited to the contract based upon market and other conditions. SPDA contracts
have no maturity date and remain in force until the customer elects to take the
proceeds of the annuity as a single payment or as a specified income for life or
for a fixed number of years. No front-end sales charges are imposed for the
Company's SPDA contracts. All such contracts, however, provide for the
imposition of certain surrender charges, which are assessed against premium
withdrawals in excess of specified amounts and which occur during the surrender
charge period. The surrender charges are typically set within the range of 7%
and 0% and typically decline from year to year, disappearing after seven
contract years.
Flexible Premium Deferred Annuity (FPDA) Contracts. FPDA contracts
accounted for $17.7 million (or 1%) of the Company's fixed annuity sales in
1999, and $565.4 million (or 3%) of the Company's fixed annuity policy reserves
as of year end. FPDA contracts are distributed through broker/dealers, financial
planners, banks and Nationwide agents. FPDA contracts are typically marketed to
teachers and employees of tax-exempt organizations as tax-qualified retirement
programs. Under these contracts, the Company accepts a single deposit or a
series of deposits. Deposits may be paid at intervals which are either regular
or irregular. FPDA contracts contain substantially the same guarantee of
principal and interest rate terms included in the Company's SPDA contracts.
Surrender charges are typically set within the range of 7% and 0% and typically
decline from year to year, disappearing after seven contract years.
Single Premium Immediate Annuity (SPIA) Contracts. SPIA contracts accounted
for $44.0 million (or 1%) of the Company's fixed annuity sales for 1999, and
$1.45 billion (or 9%) of the Company's fixed annuity policy reserves as of year
end. The Company's SPIA contracts are offered through its affiliated and
unaffiliated distribution channels and are offered as either direct purchases or
as fixed annuity options under the Company's various individual and group
annuity contracts. A SPIA is an annuity that requires a one-time deposit in
exchange for guaranteed, periodic annuity benefit payments, often for the
contract holder's lifetime. SPIA contracts are often purchased by persons at or
near retirement age who desire a steady stream of future income.
Institutional Products. Institutional products accounted for $577.2 million
(or 17%) of the Company's fixed annuity sales in 1999, and $574.5 million (or
3%) of the Company's fixed annuity policy reserves as of year end. Sales of
institutional products represent 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. This program was launched in July 1999 as a
means to expand spread-based product offerings.
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Life Insurance
The Company's Life Insurance segment is composed of a wide range of
variable universal life insurance, whole life insurance, universal life
insurance, term life insurance and corporate-owned life insurance products. In
recent years, the Company has placed particular emphasis within this segment on
the sale of variable life insurance products that offer multiple investment
options. The Company distributes its variable universal life insurance products
through its unaffiliated distribution channels as well as through Nationwide
agents. The Company's target markets for its life insurance products include the
holders of personal automobile and homeowners' insurance policies issued by
members of Nationwide and select customers to whom the accumulation of cash
values is important.
Life Insurance segment revenues, operating income before federal income tax
expense, policy reserves and life insurance in force are summarized in the
following table.
<TABLE>
<CAPTION>
1999 1998 1997
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(IN MILLIONS)
<S> <C> <C> <C>
Total revenues............................. $ 646.1 $ 544.1 $ 468.3
Operating income before federal income tax
expense.................................. 120.8 88.8 66.7
Life insurance policy reserves as of year
end...................................... 5,913.8 4,613.4 3,487.0
Life insurance in force as of year end..... 58,563.7 45,830.5 39,259.4
</TABLE>
Universal Life and Variable Universal Life Insurance Products. The Company
offers universal life insurance and variable universal life insurance products
including both flexible premium and single premium designs. These products
provide life insurance under which the benefits payable upon death or surrender
depend upon the policyholder's account value. Universal life insurance provides
whole life insurance with flexible premiums and adjustable death benefits. For
universal life insurance, the policyholder's account value is credited based on
an adjustable rate of return set by the Company relating to current interest
rates. For variable universal life insurance, the policyholder's account value
is credited with the investment experience of the mutual funds chosen by the
customer. The variable universal life insurance products also typically include
a general account guaranteed interest investment option. All of the Company's
variable universal life insurance products are marketed under the Company's The
BEST of AMERICA(R) brand name and have the same wide range of investment options
as the Company's variable annuity products. These products are distributed on an
affiliated basis by Nationwide agents as well as through unaffiliated
distribution channels by independent broker/dealers, national and regional
brokerage firms and financial institutions.
Traditional Life Insurance Products. The Company offers whole life and term
life insurance. Whole life insurance combines a death benefit with a savings
plan that increases gradually in amount over a period of years. The customer
pays a level premium over the customer's expected lifetime. The customer may
borrow against the savings and also has the option of surrendering the policy
and receiving the accumulated cash value rather than the death benefit. Term
life insurance provides only a death benefit without any savings component.
These traditional life insurance products are distributed on an affiliated basis
by Nationwide agents.
Corporate-owned Life Insurance Products. The Company offers corporate-owned
life insurance (COLI). Corporations purchase COLI to provide protection against
the death of selected employees and to fund non-qualified benefit plans.
Corporations may make a single premium payment or a series of premium payments.
Premium payments made are credited with a guaranteed interest rate which is
fixed for a specified period of time. For variable corporate-owned life
insurance products, the contractholder's account value is credited with the
investment experience of the mutual funds selected by the contractholder.
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.
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Assets Managed and Administered segment revenues, operating income before
federal income tax expense, assets under management and assets administered are
summarized in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
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(IN MILLIONS)
<S> <C> <C> <C>
Total revenues.............................. $ 157.9 $ 99.4 $ 60.0
Operating income before federal income tax
expense................................... 25.6 14.1 13.2
Assets under management as of year end...... 22,866.7 19,825.5 7,840.0
Assets administered as of year end.......... 15,784.8 9,746.9 2,753.0
</TABLE>
Assets Managed. The Company manages mutual funds that are offered as
investment options for the Company's variable annuities and variable universal
life insurance products. Mutual funds are also distributed on a retail basis. In
addition to mutual funds, the Company offers stable value funds sold primarily
to pension and other retirement plans.
Assets Administered. The Company offers administration services, including
participant record keeping, to private sector and public sector
employer-sponsored retirement plans.
MARKETING AND DISTRIBUTION
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, financial institutions and life insurance
specialists. Representatives, or affiliated entities, of the Company who market
products directly to a customer base identified by the Company include
Nationwide Retirement Solutions sales representatives and Nationwide agents. The
Company provides, through both its affiliated and unaffiliated channels, the
means for employers sponsoring tax-favored retirement plans (such as those
described in IRC Sections 401(k), 403(b) and 457) to allow their employees to
make contributions to such plans through payroll deductions. Typically, the
Company receives the right from an employer to market products to employees and
arrange to deduct periodic deposits from the employees' regular paychecks. The
Company believes that the payroll deduction market is characterized by more
predictable levels of sales than other markets because these customers are less
likely, even in times of market volatility, to stop making annuity deposits than
customers in other markets. In addition, the Company believes that payroll
deduction access to customers provides significant insulation from competition
by providing the customer with a convenient, planned method of periodic saving.
In both the Pension Market, where the Company's products are distributed
primarily through unaffiliated entities, and in the Public Sector and Teachers
Markets, where the Company's products are distributed primarily by affiliated
entities, payroll deduction is the primary method used for collecting premiums
and deposits.
A table showing core sales by distribution channel for each of the last
three years is presented in Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) on page 26 of the Company's 1999
Annual Report to Shareholders.
Unaffiliated Entities
Independent Broker/Dealer and National and Regional Brokerage Firms. The
Company sells individual and group variable annuities, fixed annuities and
variable life insurance through independent broker/dealers in all 50 states and
the District of Columbia. The Company historically has focused on distributing
through mid-sized regional broker/dealers and financial planning firms, but
recently has added national brokerage firms to this channel. The Company
believes that it has strong broker/dealer relationships based on its diverse
product mix, large selection of fund options and administrative technology. In
addition to such relationships, the Company believes its financial strength and
The BEST of AMERICA(R) brand name are competitive advantages in this
distribution channel. The Company regularly seeks to add new broker/dealers to
its distribution network.
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Pension Plan Administrators. The Company markets group variable annuities,
group fixed annuities and record-keeping services to plans organized pursuant to
Section 401 of the IRC sponsored by employers as part of employee retirement
programs primarily through regional pension plan administrators. The Company has
also linked pension plan administrators with the financial planning community to
sell group pension products. The Company targets employers having between 25 and
2,000 employees because it believes that these plan sponsors tend to require
more extensive record-keeping services from pension plan administrators and
therefore tend to become long-term customers.
Financial Institutions. The Company markets individual variable and fixed
annuities (under its brand names and on a private-label basis), and variable
universal life insurance through financial institutions, consisting primarily of
banks and their subsidiaries. The Company believes that its expertise in
training financial institution personnel to sell annuities, its breadth of
product offerings, its financial strength, the Nationwide and The BEST of
AMERICA(R) brand names, and the ability to offer private label products are
competitive advantages in this distribution channel.
Life Insurance Specialists. The Company markets corporate-owned life
insurance through life specialists, which are firms that specialize in the
design, implementation and administration of executive benefit plans.
Affiliated Entities
Nationwide Retirement Solutions Sales Representatives. The Company markets
various products and services on a retail basis through several subsidiary sales
organizations to both the Public Sector and Teachers Markets. With respect to
the Public Sector Market, the Company markets group variable annuities and fixed
annuities to state and local governments for use in their IRC Section 457
retirement programs. The Company believes that its existing relationships with
state and local government entities and the Company's sponsorship by such
entities as the National Association of Counties (NACO) and The United States
Conference of Mayors (USCM) provide it with distinct competitive advantages in
this market. NACO sponsorship, which began in 1980 and has been renewed three
times, expires December 31, 2005, and USCM sponsorship, which began in 1979 and
has been renewed twice, expires on December 31, 2004.
With respect to the Teacher Market, the Company has an exclusive
contractual arrangement with the NEA to offer and sell certain products to its
members. Under The NEA Valuebuilder brand name, the Company markets both
qualified and non-qualified (under IRC Section 403(b)) individual variable
annuity contracts. The Company also offers IRAs in this market. The NEA
exclusive contractual arrangement, which began in 1990, automatically renewed on
July 26, 1995 for an additional 5-year period. In January 2000, the Company
announced that it will exit the Teacher Market.
Nationwide Agents. The Company sells traditional life insurance, universal
life insurance and variable universal life insurance products and individual
annuities through licensed Nationwide agents who primarily target the holders of
personal automobile and homeowners' insurance policies issued by Nationwide. The
Nationwide agents sell exclusively Nationwide products and may not offer
products which compete with those of the Company.
CORPORATE AND OTHER SEGMENT
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.
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<PAGE> 10
Corporate and Other segment operating revenues and operating loss before
federal income tax expense (which excludes realized gains and losses on
investments) are summarized in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Total operating revenues........................... $205.5 $196.4 $170.5
Operating loss before federal income tax expense... (25.3) (9.0) (4.3)
</TABLE>
REINSURANCE
The Company follows the customary industry practice of reinsuring a portion
of its life insurance and annuity risks with other companies in order to reduce
net liability on individual risks, to provide protection against large losses
and to obtain greater diversification of risks. The maximum amount of individual
ordinary life insurance retained by the Company on any one life is $1.0 million.
The Company cedes insurance primarily on an automatic basis, under which risks
are ceded to a reinsurer on specific blocks of business where the underlying
risks meet certain predetermined criteria, and on a facultative basis, under
which the reinsurer's prior approval is required for each risk reinsured. The
Company also cedes insurance on a case-by-case basis particularly where the
Company may be writing new risks or is unwilling to retain the full costs
associated with new lines of business. The ceding of risk does not discharge the
original insurer from its primary obligation to the policyholder. The Company
has entered into a reinsurance contract to cede a portion of its general account
individual annuity reserves to Franklin Life Insurance Company (Franklin). Total
recoveries due from Franklin were $143.6 million and $187.9 million as of
December 31, 1999 and 1998, respectively. Under the terms of the contract,
Franklin has established a trust as collateral for the recoveries. The trust
assets are invested in investment grade securities, the market value of which
must at all times be greater than or equal to 102% of the reinsured reserves.
The Company has no other material reinsurance arrangements with unaffiliated
reinsurers. The only material reinsurance agreements the Company has with
affiliates are the modified coinsurance agreements pursuant to which NLIC
reinsured all of its accident and health and group life insurance business to
other members of Nationwide as described in note 15 to the Company's
consolidated financial statements.
RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive position
of insurance companies. Ratings are important to maintaining public confidence
in the Company and its ability to market its annuity and life insurance
products. Rating organizations continually review the financial performance and
condition of insurers, including the Company. Any lowering of the Company's
ratings could have a material adverse effect on the Company's ability to market
its products and could increase the surrender of the Company's annuity products.
Both of these consequences could, depending upon the extent thereof, have a
material adverse effect on the Company's liquidity and, under certain
circumstances, net income. NLIC is rated "A+" (Superior) by A.M. Best Company,
Inc. and its claims-paying ability/financial strength is rated "Aa2" (Excellent)
by Moody's Investor Services, Inc. (Moody's), "AA+" (Excellent) by Standard &
Poor's Corporation (S&P) and "AA+" (Excellent) by Duff & Phelps Credit Rating
Co.
The foregoing ratings reflect each rating agency's opinion of NLIC's
financial strength, operating performance and ability to meet its obligations to
policyholders and are not evaluations directed toward the protection of
investors. Such factors are of concern to policyholders, agents and
intermediaries.
The Company's financial strength is also reflected in the ratings of the
senior notes and capital and preferred securities of subsidiary trusts. The
senior notes are rated "A+" by S&P and "A1" by Moody's. The capital and
preferred securities issued by subsidiary trusts are rated "A-" by S&P and "a1"
by Moody's.
COMPETITION
The Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer
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<PAGE> 11
alternative products and, with respect to other insurers, have higher ratings
than the Company. The Company believes that competition in the Company's lines
of business is based on price, product features, commission structure, perceived
financial strength, claims-paying ratings, service and name recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the Act), was signed into
law. The Act modernizes the regulatory framework for financial services in the
United States and allows bank, securities firms and insurance companies to
affiliate more directly than they have been permitted to do in the past. At this
time it is not possible to predict the effect the Act will have on the financial
services industry and the Company.
REGULATION
General Regulation at State Level
As an insurance holding company, the Company is subject to regulation by
the states in which its insurance subsidiaries are domiciled and/or transact
business. Most states have enacted legislation that requires each insurance
holding company and each insurance company in an insurance holding company
system to register with the insurance regulatory authority of the insurance
company's state of domicile and, annually, to furnish financial and other
information concerning the operations of companies within the holding company
system that materially affect the operations, management or financial condition
of the insurers within such system. The Company is subject to the insurance
holding company laws in Ohio. Under such laws, all transactions within an
insurance holding company system affecting insurers must be fair and equitable
and each insurer's policyholder surplus following any such transaction must be
both reasonable in relation to its outstanding liabilities and adequate for its
needs. The Ohio insurance holding company laws also require prior notice or
regulatory approval of the change of control of an insurer or its holding
company and of material intercorporate transfers of assets within the holding
company structure. Generally, under such laws, a state insurance authority must
approve in advance the direct or indirect acquisition of 10% or more of the
voting securities of an insurance company domiciled in its state.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to approve policy forms, grant and revoke
licenses to transact business, regulate trade practices, license agents, require
statutory financial statements and prescribe the type and amount of investments
permitted. In recent years, a number of life and annuity insurers have been the
subject of regulatory proceedings and litigation relating to alleged improper
life insurance pricing and sales practices. Some of these insurers have incurred
or paid substantial amounts in connection with the resolution of such matters.
In addition, state insurance regulatory authorities regularly make inquiries,
hold investigations and administer market conduct examinations with respect to
insurers' compliance with applicable insurance laws and regulations. None of the
Company's insurance subsidiaries is the subject of any such investigation by any
regulatory authority or any such market conduct examination in any state at this
time. The Company's subsidiaries continuously monitor sales, marketing and
advertising practices and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance with
applicable insurance laws and regulations. There can be no assurance that any
non-compliance with such applicable laws and regulations would not have a
material adverse effect on the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three to four years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners (NAIC). The
most recently completed examination of the Company's insurance subsidiaries was
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<PAGE> 12
conducted by the Ohio and Delaware insurance departments for the four-year
period ended December 31, 1996. The final reports of these examinations did not
result in any significant issues or adjustments.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
As an insurance holding company, the Company's ability to meet debt service
obligations and pay operating expenses and dividends depends primarily on the
receipt of sufficient funds from its primary operating subsidiary, NLIC. The
inability of NLIC to pay dividends to the Company in an amount sufficient to
meet debt service obligations and pay operating expenses and dividends would
have a material adverse effect on the Company. The payment of dividends by NLIC
is subject to restrictions set forth in the insurance laws and regulations of
Ohio, its domiciliary state. The Ohio insurance laws require Ohio-domiciled life
insurance companies to seek prior regulatory approval to pay a dividend or
distribution of cash or other property if the fair market value thereof,
together with that of other dividends or distributions made in the preceding 12
months, exceeds the greater of (i) 10% of statutory-basis policyholders' surplus
as of the prior December 31 or (ii) the statutory-basis net income of the
insurer for the 12-month period ending as of the prior December 31. The Ohio
insurance laws also require insurers to seek prior regulatory approval for any
dividend paid from other than earned surplus. Earned surplus is defined under
the Ohio insurance laws as the amount equal to the Company's unassigned funds as
set forth in its most recent statutory financial statements, including net
unrealized capital gains and losses or revaluation of assets. Additionally,
following any dividend, an insurer's policyholder surplus must be reasonable in
relation to the insurer's outstanding liabilities and adequate for its financial
needs. The payment of dividends by NLIC may also be subject to restrictions set
forth in the insurance laws of New York that limit the amount of statutory
profits on NLIC's participating policies (measured before dividends to
policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory requirements
to impair its ability to pay operating expenses and dividends in the future.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a model law to implement risk-based capital (RBC) requirements for life
insurance companies. The requirements are designed to monitor capital adequacy
and to raise the level of protection that statutory surplus provides for
policyholders. The model law measures four major areas of risk facing life
insurers: (i) the risk of loss from asset defaults and asset value fluctuation;
(ii) the risk of loss from adverse mortality and morbidity experience; (iii) the
risk of loss from mismatching of asset and liability cash flow due to changing
interest rates and (iv) business risks. Insurers having less statutory surplus
than required by the RBC model formula will be subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
Based on the formula adopted by the NAIC, NLIC's adjusted capital exceeded
the level at which the Company would be required to take corrective action by a
substantial amount as of December 31, 1999.
Assessments Against Insurers
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these jurisdictions
can be assessed for policyholder losses incurred by insolvent insurance
companies. The amount and timing of any future assessment on the Company's
insurance subsidiaries under these laws cannot be reasonably estimated and are
beyond the control of the Company and its insurance subsidiaries. A large part
of the assessments paid by the Company's insurance subsidiaries pursuant to
these laws may be used as credits for a portion of the Company's insurance
subsidiaries' premium taxes. For the years ended December 31, 1999, 1998 and
1997, the Company paid $1.0 million, $2.4 million and $7.2 million,
respectively, in assessments pursuant to state insurance guaranty association
laws.
Securities Laws
Certain of the Company's insurance subsidiaries and certain policies and
contracts offered by them are subject to regulation under the federal securities
laws administered by the Securities and Exchange Commission (the Commission) and
under certain state securities laws. Certain separate accounts of the Company's
insurance
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<PAGE> 13
subsidiaries are registered as investment companies under the Investment Company
Act of 1940, as amended (Investment Company Act). Separate account interests
under certain variable annuity contracts and variable insurance policies issued
by the Company's insurance subsidiaries are also registered under the Securities
Act of 1933, as amended. Certain other subsidiaries of the Company are
registered as broker/dealers under the Securities Exchange Act of 1934, as
amended and are members of, and subject to regulation by, the National
Association of Securities Dealers.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisors Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are qualified
for sale in certain states in the U.S. and the District of Columbia. A
subsidiary of the Company is registered with the Commission as a transfer agent.
Certain subsidiaries of the Company are also subject to the Commission's net
capital rules.
All aspects of the Company's subsidiaries' investment advisory activities
are subject to various federal and state laws and regulations in jurisdictions
in which they conduct business. These laws and regulations are primarily
intended to benefit investment advisory clients and investment company
shareholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include the suspension of individual employees,
limitations on the activities in which the investment advisor may engage,
suspension or revocation of the investment advisor's registration as an advisor,
censure and fines.
ERISA Considerations
On December 13, 1993, the United States Supreme Court issued its opinion in
John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank
holding that certain assets in excess of amounts necessary to satisfy guaranteed
obligations held by John Hancock in its general account under a participating
group annuity contract are "plan assets" and therefore subject to certain
fiduciary obligations under the Employee Retirement Income Security Act of 1974,
as amended (ERISA). ERISA requires that fiduciaries perform their duties solely
in the interest of ERISA plan participants and beneficiaries, and with the care,
skill, prudence, and diligence that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims. The Court imposed ERISA fiduciary obligations
to the extent that the insurer's general account is not reserved to pay benefits
under guaranteed benefit policies (i.e. benefits whose value would not fluctuate
in accordance with the insurer's investment experience).
The Secretary of Labor issued final regulations on January 5, 2000,
providing guidance for the purpose of determining, in cases where an insurer
issues one or more policies backed by the insurer's general account to or for
the benefit of an employee benefit plan, which assets of the insurer constitute
plan assets for purposes of ERISA and the IRC. The regulations apply only with
respect to a policy issued by an insurer to an ERISA plan on or before December
31, 1998. In the case of such a policy, most provisions of the regulations are
applicable on July 5, 2001. Generally, where the basis of a claim is that
insurance company general account assets constitute plan assets, no person will
be liable under ERISA or the IRC for conduct occurring prior to July 5, 2001.
However, certain provisions under the final regulations are applicable as
follows: (1) certain contract termination features become applicable on January
5, 2000 if the insurer engages in certain unilateral actions; and (2) the
initial and separate account disclosure provisions become applicable July 5,
2000. New policies issued after December 31, 1998, which are not guaranteed
benefit policies will subject the issuer to ERISA fiduciary obligations.
Potential Tax Legislation
Congress has, from time to time, considered possible legislation that would
eliminate many of the tax benefits currently afforded to annuity products.
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<PAGE> 14
EMPLOYEES
As of December 31, 1999, the Company had approximately 4,736 employees.
None of the employees of the Company are covered by a collective bargaining
agreement and the Company believes that its employee relations are satisfactory.
ITEM 2 PROPERTIES
The Company's principal executive offices are located in Columbus, Ohio.
The Company leases its home office complex, consisting of approximately 544,000
square feet, from Nationwide Mutual Insurance Company (NMIC) and its
subsidiaries at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide
Plaza, Columbus, Ohio. The Company believes that its present facilities are
adequate for the anticipated needs of the Company.
ITEM 3 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits relating to life insurance 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. 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.
In January 2000 Nationwide Life and American Century 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.
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<PAGE> 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999 no matters were submitted to a vote of
security holders, through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dimon Richard McFerson... 63 Chairman and Chief Executive Officer
Joseph J. Gasper......... 56 President and Chief Operating Officer
Galen R. Barnes.......... 53 Executive Vice President
Richard D. Headley....... 51 Executive Vice President -- Chief Information Technology
Officer
Robert A. Oakley......... 53 Executive Vice President -- Chief Financial Officer
Robert J. Woodward,
Jr..................... 58 Executive Vice President -- Chief Investment Officer
John R. Cook, Jr......... 56 Senior Vice President -- Chief Communications Officer
David A. Diamond......... 44 Senior Vice President -- Controller
Philip C. Gath........... 52 Senior Vice President -- Chief Actuary
Patricia R. Hatler....... 45 Senior Vice President and General Counsel
Donna A. James........... 42 Senior Vice President -- Chief Human Resources Officer
Richard A. Karas......... 57 Senior Vice President -- Sales -- Financial Services
Gregory S. Lashutka...... 56 Senior Vice President -- Corporate Relations
Mark R. Thresher......... 43 Senior Vice President -- Finance
Susan A. Wolken.......... 49 Senior Vice President -- Product Management and Nationwide
Financial Marketing
Rhodes B. Baker.......... 53 Vice President -- Life Company Operations
Dennis W. Click.......... 61 Vice President and Secretary
R. Dennis Noice.......... 53 Vice President -- Systems -- Nationwide Financial
Joseph P. Rath........... 50 Vice President -- Chief Compliance Officer
</TABLE>
Business experience for each of the individuals listed in the above table
is set forth below.
DIMON R. MCFERSON has been Chief Executive Officer of the Company since
December 1992. He has been Chairman and Chief Executive Officer of the Company
since December 1996 and a Director of the Company since November 1996. Mr.
McFerson has been a Director of Nationwide Life Insurance Company and Nationwide
Mutual Insurance Company since April 1988 and Chairman and Chief Executive
Officer of Nationwide Life Insurance Company and Nationwide Mutual Insurance
Company since April 1996. He was elected Chief Executive Officer of Nationwide
Life Insurance Company in December 1992, and President and Chief Executive
Officer of Nationwide Life Insurance Company in December 1993. He was President
and General Manager of Nationwide Mutual Insurance Company from April 1988 to
April 1991; President and Chief Operating Officer of Nationwide Mutual Insurance
Company from April 1991 to December 1992; and President and Chief Executive
Officer of Nationwide Mutual Insurance Company from December 1992 to April 1996.
Mr. McFerson has been with Nationwide for 20 years. Mr. McFerson is also
currently the Chairman of United Way of America.
JOSEPH J. GASPER has been President and Chief Operating Officer of the
Company since December 1996 and a Director of the company since November 1996.
Mr. Gasper has been President and Chief Operating Officer and Director of
Nationwide Life Insurance Company since April 1996. Previously, he was Executive
Vice President-Property and Casualty Operations of Nationwide Mutual Insurance
Company and Nationwide Life Insurance Company from April 1995 to April 1996. He
was Senior Vice President-Property and Casualty Operations of Nationwide Mutual
Insurance Company and Nationwide Life Insurance Company from Septem-
15
<PAGE> 16
ber 1993 to April 1995. Prior to that time, Mr. Gasper held numerous positions
with Nationwide. Mr. Gasper has been with Nationwide for 33 years.
GALEN R. BARNES has been Executive Vice President of the Company since
December 1996. Mr. Barnes has been Director and President and Chief Operating
Officer of Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance
Company, Nationwide Property and Casualty Insurance Company and Nationwide
General Insurance Company since April 1999. He served as President of Nationwide
Insurance Enterprise from April 1996 to April 1999. He was Director and Vice
Chairman of the Wausau Insurance Companies, a Nationwide affiliate, from
September 1996 to December 1998; and Director, President and Chief Operating
Officer from May 1993 to September 1996. Mr. Barnes was Senior Vice President of
Nationwide from May 1993 to April 1996. Prior to that time, Mr. Barnes held
several positions within Nationwide. Mr. Barnes has been with Nationwide for 24
years.
RICHARD D. HEADLEY has been Executive Vice President-Chief Information
Technology Officer of the Company since August 1999. He was Senior Vice
President-Chief Information Technology Officer of the Company from October 1997
to August 1999. Mr. Headley has been Executive Vice President-Chief Information
Technology Officer of Nationwide since May 1999. He was Senior Vice
President-Chief Information Technology Officer of Nationwide from October 1997,
to May 1999. Previously, Mr. Headley was Chairman and Chief Executive Officer of
Banc One Services Corporation from 1992 to October 1997. From January 1975 until
1992 Mr. Headley held several positions with Banc One Corporation. Mr. Headley
has been with Nationwide for 2 years.
ROBERT A. OAKLEY has been Executive Vice President-Chief Financial Officer
of the Company since December 1996. Mr. Oakley has been Executive Vice
President-Chief Financial Officer of Nationwide since April 1995. Previously, he
was Senior Vice President-Chief Financial Officer of Nationwide from October
1993 to April 1995. Prior, Mr. Oakley held several positions within Nationwide.
Mr. Oakley has been with Nationwide for 24 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President-Chief Investment
Officer of the Company since December 1996. Mr. Woodward has been Executive Vice
President-Chief Investment Officer of Nationwide since August 1995. Previously,
he was Senior Vice-President-Fixed Income Investments of Nationwide from March
1991 to August 1995. Prior to that time, Mr. Woodward held several positions
within Nationwide. Mr. Woodward has been with Nationwide for 35 years.
JOHN R. COOK, JR. has been Senior Vice President-Chief Communications
Officer of the Company since October 1997. Mr. Cook has been Senior Vice
President-Chief Communications Officer of Nationwide since May 1997. Previously,
Mr. Cook was Senior Vice President-Chief Communications Officer of USAA from
July 1989 to May 1997. Mr. Cook has been with Nationwide for 2 years.
DAVID A. DIAMOND has been Senior Vice President-Corporate Controller of the
Company since August 1999. He was Vice President-Controller of the Company from
December 1996 to August 1999. Mr. Diamond has been Senior Vice
President-Corporate Controller of Nationwide since August 1999. He was Vice
President-Controller of Nationwide from August 1996 to August 1999. Previously,
he was Vice President-Controller of Nationwide Life Insurance Company from
October 1993 to August 1996. Prior to that time, Mr. Diamond held several
positions within Nationwide. Mr. Diamond has been with Nationwide for 11 years.
PHILIP C. GATH has been Senior Vice President-Chief Actuary of the Company
since June 1998. Mr. Gath has been Senior Vice President-Chief
Actuary-Nationwide Financial Services of Nationwide since May 1998. Previously,
Mr. Gath was Vice President-Product Manager-Individual Variable Annuity of the
Company from July 1997 to May 1998. Mr. Gath was Vice President-Individual Life
Actuary from August 1989 to July 1997. Prior to that time, Mr. Gath held several
positions within Nationwide. Mr. Gath has been with Nationwide for 31 years.
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<PAGE> 17
PATRICIA R. HATLER has been Senior Vice President and General Counsel of
the Company since July 1999. She has been Senior Vice President and General
Counsel of Nationwide since July 1999. Prior to that time, she was General
Counsel and Corporate Secretary of Independence Blue Cross from 1983 to July
1999.
DONNA A. JAMES has been Senior Vice President-Chief Human Resources of the
Company since August 1999. She was Senior Vice President-Human Resources of the
Company from December 1997 to August 1999. Ms. James has been Senior Vice
President-Chief Human Resources of Nationwide since May 1999. She was Senior
Vice President-Human Resources of Nationwide from December 1997 to May 1999.
Previously she was Vice President-Human Resources of Nationwide from July 1996
to December 1997. Prior to that time Ms. James was Vice President-Assistant to
the CEO of Nationwide from March 1996 to July 1996. From May 1994 to March 1996
she was Associate Vice President-Assistant to the CEO for Nationwide. Previously
Ms. James held several positions within Nationwide. Ms. James has been with
Nationwide for 18 years.
RICHARD A. KARAS has been Senior Vice President-Sales-Financial Services of
the Company since December 1996. Mr. Karas has been Senior Vice
President-Sales-Financial Services of Nationwide since March 1993. Previously,
he was Vice President-Sales-Financial Services of Nationwide from February 1989
to March 1993. Prior to that time, Mr. Karas held several positions within
Nationwide. Mr. Karas has been with Nationwide for 35 years.
GREGORY S. LASHUTKA has been Senior Vice President-Corporate Relations of
the Company since January 2000. Mr. Lashutka has been Senior Vice
President-Corporate Relations of Nationwide since January 2000. Previously, he
was Mayor of the City of Columbus (Ohio) from January 1992 to December 1999.
From January 1986 to December 1991 Mr. Lashutka was a Partner with Squire,
Sanders & Dempsey. From January 1978 to December 1985, he was City Attorney for
the City of Columbus (Ohio).
MARK R. THRESHER has been Senior Vice President-Finance of the Company
since May 1999. He was Vice President-Finance and Treasurer of the Company from
February 1997 to May 1999. Mr. Thresher has been Senior Vice President-Finance
and Nationwide Financial of Nationwide Life Insurance Company since May 1999. He
was Vice President-Controller of Nationwide Life Insurance Company from August
1996 to May 1999. He was Vice President and Treasurer of the Company from
December 1996 to February 1997. Previously, he was Vice President and Treasurer
of Nationwide from June 1996 to August 1996. Prior to joining Nationwide, Mr.
Thresher served as a partner with KPMG LLP since July 1988.
SUSAN A. WOLKEN has been Senior Vice President-Product Management and
Nationwide Financial Marketing of the Company since May 1999. She was Senior
Vice President-Life Company Operations of the Company from June 1997 to May
1999. Ms. Wolken has been Senior Vice President-Product Management and
Nationwide Financial Marketing of Nationwide since May 1999. Previously, she was
Senior Vice President-Life Company Operations of Nationwide from June 1997 to
May 1999. She was Senior Vice President-Enterprise Administration of Nationwide
from July 1996 to June 1997. Prior to that time, she was Senior Vice President-
Human Resources of Nationwide from April 1995 to July 1996. From September 1993
to April 1995 Ms. Wolken was Vice President-Human Resources of Nationwide. From
October 1989 to September 1993 she was Vice President-Individual Life and Health
Operations of Nationwide. Ms. Wolken has been with Nationwide for 25 years.
RHODES B. BAKER has been Vice President-Life Company Operations of the
Company since May 1999. He has been Vice President-Life Company Operations of
Nationwide since May 1999. Previously, he was Vice President-Individual
Annuities of Nationwide from May 1998 to May 1999. Prior to that time, he held
several positions within Nationwide. Mr. Baker has been with Nationwide for 22
years.
DENNIS W. CLICK has been Vice President-Secretary of the Company since
December 1997. He was Vice President-Assistant Secretary of the Company from
December 1996 to December 1997. Mr. Click has been Vice President-Secretary of
Nationwide since December 1997. He was Vice President-Assistant Secretary of
Nationwide from August 1994 to December 1997. Mr. Click was Associate Vice
President and Assistant
17
<PAGE> 18
Secretary of Nationwide from August 1989 to August 1994. Prior to that time, he
held several positions within Nationwide. Mr. Click has been with Nationwide for
39 years.
R. DENNIS NOICE has been Vice President-Systems-Nationwide Financial of the
Company since May 1999. He was Vice President-Systems of the Company from April
1998 to May 1999. Mr. Noice has been Vice President-Systems-Nationwide Financial
of Nationwide since April 1999. He was Vice President-Systems-Nationwide
Financial Services of Nationwide from April 1998 to April 1999. Previously, he
was Vice President-Retail Operations of Nationwide from March 1997 to April
1998. Prior to that time, Mr. Noice was Vice President-Individual Investment
Products of Nationwide from October 1989 to March 1997. Mr. Noice has held
several positions within Nationwide. Mr. Noice has been with Nationwide for 28
years.
JOSEPH P. RATH has been Vice President-Chief Compliance Officer of the
Company since April 1997. He has been Vice President-Product and Market
Compliance for Nationwide since April 1997. Previously, he was Vice
President-Associate General Counsel of Nationwide from October 1988 to April
1997. Prior to that time, Mr. Rath held several positions within Nationwide. Mr.
Rath has been with Nationwide for 23 years.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Class A Common Stock of NFS is traded on the New York Stock Exchange
under the symbol "NFS". As of March 1, 2000, NFS had approximately 2,582
registered shareholders of Class A Common Stock.
There is no established public trading market for the Company's Class B
Common Stock. All 104,745,000 shares of Class B Common Stock are owned by
Nationwide Corp.
Information regarding the high and low sales prices of NFS Class A Common
Stock and cash dividends declared on such shares, as required by this item, is
set forth in the following table:
<TABLE>
<CAPTION>
QUARTER
QUARTER ENDED HIGH LOW CLOSE DIVIDENDS
------------- ------ ------ ------- ---------
<S> <C> <C> <C> <C>
March 31, 1999.......................... $54.13 $39.94 $42.00 $0.08
June 30, 1999........................... $49.38 $39.75 $45.25 $0.10
September 30, 1999...................... $46.75 $34.56 $35.38 $0.10
December 31, 1999....................... $42.00 $26.75 $27.94 $0.10
March 31, 1998.......................... $45.75 $34.19 $43.48 $0.06
June 30, 1998........................... $51.38 $42.19 $51.00 $0.08
September 30, 1998...................... $55.84 $41.13 $45.44 $0.08
December 31, 1998....................... $51.69 $28.25 $51.69 $0.08
</TABLE>
Information regarding restrictions on the ability of NFS's insurance
subsidiaries to pay dividends to NFS, as required by this item, is set forth
under "Item 1: Business-Regulation-Regulation of Dividends and Other Payments
from Insurance Subsidiaries" above and in note 14 of the consolidated financial
statements on page 64 of the 1999 Annual Report to Shareholders, and is
incorporated herein by reference.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this item is set forth in the table titled "Five
Year Summary" on pages 42 and 43 of the Company's 1999 Annual Report to
Shareholders, and is incorporated herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this item is set forth on pages 21 through 41 of
the Company's 1999 Annual Report to Shareholders, and is incorporated herein by
reference.
18
<PAGE> 19
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is set forth on pages 37 through 41 of
the Company's 1999 Annual Report to Shareholders, and is incorporated herein by
reference.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth on pages 44 through 71 of
the Company's 1999 Annual Report to Shareholders, and is incorporated herein by
reference. Reference is made to the index to consolidated financial statements
included in Item 14.
Financial statement schedules are included on pages 25 through 32 herein.
Reference is made to the index to financial statement schedules included on page
20 herein.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" on
pages 4 through 6 of the Company's 1999 Proxy Statement is incorporated herein
by reference. Refer to Part I of the Form 10-K for information as to the
executive officers of NFS.
ITEM 11 EXECUTIVE COMPENSATION
Information required by this item is set forth from the heading "Executive
Compensation and Other Information" on pages 7 through 20 of the Company's 1999
Proxy Statement, and is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the caption
"Beneficial Ownership of Common Stock" on pages 2 and 3 of the Company's 1999
Proxy Statement, and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the caption "CERTAIN
TRANSACTIONS" on pages 22 through 25 of the Company's 1999 Proxy Statement, and
is incorporated herein by reference.
19
<PAGE> 20
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE
-------------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Income for the years ended 44
December 31, 1999, 1998 and 1997.......................
Consolidated Balance Sheets as of December 31, 1999 and 45
1998...................................................
Consolidated Statements of Shareholders' Equity for the 46
years ended December 31, 1999, 1998 and 1997...........
Consolidated Statements of Cash Flows for the years ended 47
December 31, 1999, 1998 and 1997.......................
Notes to Consolidated Financial Statements................ 48-70
Independent Auditors' Report.............................. 71
</TABLE>
<TABLE>
<CAPTION>
FORM 10-K
PAGE
-------------
<S> <C>
INDEX TO FINANCIAL STATEMENT SCHEDULES...................... 23
EXHIBIT INDEX............................................... 33
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.
</TABLE>
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONWIDE FINANCIAL SERVICES, INC.
(Registrant)
By /s/ DIMON R. MCFERSON
------------------------------------
Dimon R. McFerson, Chairman and
Chief Executive
Officer -- Nationwide
Date: March 1, 2000
21
<PAGE> 22
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ DIMON R. MCFERSON March 15, 2000
- ---------------------------------- --------------
Dimon R. McFerson, Chairman and Date
Chief Executive
Officer -- Nationwide and Director
/s/ JAMES G. BROCKSMITH, JR. March 20, 2000
- ---------------------------------- --------------
James G. Brocksmith, Jr., Director Date
/s/ HENRY S. HOLLOWAY March 20, 2000
- ---------------------------------- --------------
Henry S. Holloway, Director Date
/s/ DONALD L. MCWHORTER March 20, 2000
- ---------------------------------- --------------
Donald L. McWhorter, Director Date
/s/ JAMES F. PATTERSON March 1, 2000
- ---------------------------------- --------------
James F. Patterson, Director Date
/s/ ARDEN L. SHISLER March 1, 2000
- ---------------------------------- --------------
Arden L. Shisler, Director Date
/s/ MARK R. THRESHER March 1, 2000
- ---------------------------------- --------------
Mark R. Thresher, Senior Vice Date
President -- Finance
(Chief Accounting Officer)
/s/ JOSEPH J. GASPER March 15, 2000
- ---------------------------------- --------------
Joseph J. Gasper, President and Date
Chief Operating Officer and
Director
/s/ CHARLES L. FUELLGRAF, JR. March 20, 2000
- ---------------------------------- --------------
Charles L. Fuellgraf, Jr., Date
Director
/s/ LYDIA MICHEAUX MARSHALL March 28, 2000
- ---------------------------------- --------------
Lydia Micheaux Marshall, Director Date
/s/ DAVID O. MILLER March 1, 2000
- ---------------------------------- --------------
David O. Miller, Director Date
/s/ GERALD D. PROTHRO March 28, 2000
- ---------------------------------- --------------
Gerald D. Prothro, Director Date
/s/ ROBERT A. OAKLEY March 1, 2000
- ---------------------------------- --------------
Robert A. Oakley, Executive Vice Date
President -- Chief Financial
Officer
</TABLE>
22
<PAGE> 23
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Independent Auditors' Report on Financial Statement Schedules............ 24
Schedule I Consolidated Summary of Investments -- Other Than 25
Investments in Related Parties as of December 31, 1999....
Schedule II Condensed Financial Information of Registrant............... 26-29
Schedule Supplementary Insurance Information as of December 31, 1999, 30
III 1998 and 1997 and for each of the years then ended........
Schedule IV Reinsurance as of December 31, 1999, 1998 and 1997 and for 31
each of the years then ended..............................
Schedule V Valuation and Qualifying Accounts for the years ended 32
December 31, 1999, 1998 and 1997..........................
</TABLE>
All other schedules are omitted because they are not applicable or not
required, or because the required information has been included in the audited
consolidated financial statements or notes thereto.
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Nationwide Financial Services, Inc.:
Under date of January 28, 2000, we reported on the consolidated balance
sheets of Nationwide Financial Services, Inc. and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, as contained in the 1999 annual report to
shareholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1999.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedules as listed
in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Columbus, Ohio
January 28, 2000
24
<PAGE> 25
SCHEDULE I
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN MILLIONS)
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------ --------- --------- -------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------ --------- --------- -------------
AMOUNT AT
WHICH SHOWN
IN THE
MARKET CONSOLIDATED
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ --------- --------- -------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and
authorities.................................... $ 3,853.7 $ 3,870.3 $ 3,870.3
States, municipalities and political
subdivisions................................... 0.8 0.8 0.8
Foreign governments.............................. 110.6 110.4 110.4
Public utilities................................. 1,309.4 1,309.5 1,309.5
All other corporate.............................. 10,105.3 10,005.5 10,005.5
--------- --------- ---------
Total fixed maturity securities
available-for-sale.......................... 15,379.8 15,296.5 15,296.5
--------- --------- ---------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other.......... 87.8 96.4 96.4
Non-redeemable preferred stock...................... -- -- --
--------- --------- ---------
Total equity securities available-for-sale..... 87.8 96.4 96.4
--------- --------- ---------
Mortgage loans on real estate, net.................... 5,831.5 5,786.3(1)
Real estate, net:
Investment properties............................... 219.3 224.9(1)
Acquired in satisfaction of debt.................... 31.6 29.9(1)
Policy loans.......................................... 519.6 519.6
Other long-term investments........................... 73.5 73.8(2)
Short-term investments................................ 560.5 560.5
--------- ---------
Total investments.............................. $22,703.6 $22,587.9
========= =========
</TABLE>
- ---------------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate. See
note 3 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains (losses) of
investments in limited partnerships.
See accompanying independent auditors' report.
25
<PAGE> 26
SCHEDULE II
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Investment in subsidiaries.................................. $2,958,751 $2,867,887
Short-term investments...................................... 34,287 172,231
Cash........................................................ 1,368 846
Accrued investment income................................... 105 1,268
Other assets................................................ 132,865 40,410
---------- ----------
$3,127,376 $3,082,642
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.............................................. $ 607,685 $ 607,670
Other liabilities........................................... 32,548 27,443
---------- ----------
640,233 635,113
---------- ----------
Shareholders' equity........................................ 2,487,143 2,447,529
---------- ----------
$3,127,376 $3,082,642
========== ==========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Dividends received from subsidiaries...................... $243,500 $103,000 $850,000
Investment income......................................... 5,062 4,467 3,965
Realized losses on investments............................ -- (10,589) --
Other..................................................... -- 79 --
-------- -------- --------
248,562 96,957 853,965
-------- -------- --------
Expenses:
Interest expense on long-term debt........................ 47,900 35,587 26,111
Other operating expenses.................................. 3,515 3,175 510
-------- -------- --------
51,415 38,762 26,621
-------- -------- --------
Income before federal income tax benefit............... 197,147 58,195 827,344
Federal income tax benefit.................................. 16,951 15,459 7,930
-------- -------- --------
Income before equity in net income of subsidiaries..... 214,098 73,654 835,274
Equity in undistributed net income of subsidiaries.......... 167,197 258,716 (570,093)
-------- -------- --------
Net income............................................. $381,295 $332,370 $265,181
======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements and independent
auditors' report
26
<PAGE> 27
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
(IN THOUSANDS)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $381,295 $332,370 $265,181
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income of subsidiaries................... (167,197) (258,716) (279,907)
Amortization........................................... 2,737 1,281 --
Realized losses on investments......................... -- 10,589 --
Other, net............................................. (59,188) (27,349) 17,502
-------- -------- --------
Net cash provided by operating activities............ 157,647 58,175 2,776
-------- -------- --------
Cash flows from investing activities:
Cash paid to acquire companies and capital contributed to
subsidiaries........................................... (221,607) (105,970) (839,873)
Other, net................................................ 111,259 (115,286) (67,534)
-------- -------- --------
Net cash used in investing activities................ (110,348) (221,256) (907,407)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ -- -- 524,191
Net proceeds from issuance of long-term debt.............. -- 199,901 395,862
Cash dividends paid....................................... (46,269) (35,990) (15,423)
Other..................................................... (508) 16 --
-------- -------- --------
Net cash (used in) provided by financing
activities........................................ (46,777) 163,927 904,630
-------- -------- --------
Net increase in cash........................................ 522 846 (1)
Cash, beginning of year..................................... 846 -- 1
-------- -------- --------
Cash, end of year........................................... $ 1,368 $ 846 $ --
======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements and independent
auditors' report.
27
<PAGE> 28
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
(IN THOUSANDS)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) ORGANIZATION AND PRESENTATION
Nationwide Financial Services, Inc. (NFS) is the holding company for
Nationwide Life Insurance Company (NLIC) and other companies that comprise the
retirement savings operations of the Nationwide Group of Companies. On March 11,
1997, NFS sold, in an initial public offering, 23.6 million shares of its
newly-issued Class A common stock for net proceeds of $524,191 (the Equity
Offering). In March 1997, NFS also sold, in companion public offerings, $300,000
of 8% Senior Notes (the Notes) and, Nationwide Financial Services Capital Trust
(NFSCT), a wholly owned subsidiary of NFS, issued $100,000 of 7.899% Capital
Securities (the Capital Securities). Concurrent with the sale of the Capital
Securities by NFSCT, NFS sold to NFSCT $103,093 in principal amount of its
7.899% Junior Subordinated Deferrable Interest Debentures (Junior Subordinated
Debentures). Aggregate net proceeds from the Equity Offering, the offering of
the Notes and the sale of the 7.899% Junior Subordinated Debentures totaled
$920,053. NFS contributed $836,780 and $3,093 of the proceeds to the capital of
NLIC and NFSCT, respectively, and retained $80,180 of the proceeds for general
corporate purposes.
Prior to the initial public offering, NFS was a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). Nationwide Corp. continues to own all
of the outstanding shares of Class B common stock, which represents
approximately 98% of the combined voting power of the shareholders of NFS.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that focused the
business of NFS on long-term savings and retirement products. On September 24,
1996, NLIC declared a dividend payable to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of certain subsidiaries
that do not offer or distribute long-term savings or retirement products. In
addition, during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was ceded to two
affiliates effective January 1, 1996. On January 27, 1997, Nationwide Corp.
contributed the common stock of NLIC and three marketing and distribution
companies to NFS. Additionally, NFS received a dividend from NLIC on February
24, 1997 and immediately thereafter paid a dividend to Nationwide Corp.
consisting of securities with a fair value of $850,000.
(2) LONG-TERM DEBT AND GUARANTEES
Long-term debt outstanding as of December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
8% Senior Notes due March 1, 2027 (net of unamortized
discount of $1,594 in 1999 and $1,609 in 1998)............ $298,406 $298,391
7.899% Junior Subordinated Deferrable Interest Debentures
due March 1, 2037......................................... 103,093 103,093
7.10% Junior Subordinated Deferrable Interest Debentures due
October 31, 2028.......................................... 206,186 206,186
-------- --------
$607,685 $607,670
======== ========
</TABLE>
The Notes are redeemable in whole or in part, at the option of NFS, at any
time on or after March 1, 2007 at scheduled redemption premiums through March 1,
2016, and thereafter, at 100% of the principal amount thereof plus, in each
case, accrued and unpaid interest. The Notes are not subject to any sinking fund
payments. The terms of the Notes contain various restrictive covenants including
limitations on the disposition of subsidiaries.
See accompanying independent auditors' report.
28
<PAGE> 29
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
(IN THOUSANDS)
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
As of December 31, 1999, NFS was in compliance with all such covenants. NFS made
interest payments on the Notes of $24,000 in 1999 and 1998, and $11,400 in 1997.
The 7.899% Junior Subordinated Debentures are redeemable by NFS in whole at
any time or in part from time to time at par plus an applicable make-whole
premium. The 7.899% Junior Subordinated Debentures will mature or be called
simultaneously with the Capital Securities. The Capital Securities, through
obligations of NFS under the 7.899% Junior Subordinated Debentures, the Capital
Securities Guarantee Agreement and the related Declaration of Trust and
Indenture, are fully and unconditionally guaranteed by NFS. NFS made interest
payments on the 7.899% Junior Subordinated Debentures of $8,143 in 1999 and
1998, and $3,845 in 1997.
On October 19, 1998, Nationwide Financial Services Capital Trust II
(NFSCTII) sold, in a public offering, $200,000 of 7.10% Trust Preferred
Securities representing preferred undivided beneficial interests in the assets
of NFSCTII generating net proceeds of $193,700. Concurrent with the sale of the
Preferred Securities, NFS sold to NFSCTII $206,186 of 7.10% Junior Subordinated
Debentures due October 31, 2028. The 7.10% Junior Subordinated Debentures are
the sole assets of NFSCTII and are redeemable, in whole or in part, on or after
October 19, 2003 at a redemption price equal to the principal amount to be
redeemed plus any accrued and unpaid interest. The Preferred Securities have a
liquidation amount of $25 per security and must be redeemed by NFSCTII when the
7.10% Junior Subordinated Debentures mature or are redeemed by NFS.
The Preferred Securities, through obligations of NFS under the 7.10% Junior
Subordinated Debentures, the Preferred Securities Guarantee Agreement and the
related Amended and Restated Declaration of Trust, are fully and unconditionally
guaranteed by NFS. Distributions on the Preferred Securities are cumulative and
payable quarterly beginning January 31, 1999. NFS made interest payments on the
7.10% Junior Subordinated Debentures of $14,639 in 1999.
See accompanying independent auditors' report.
29
<PAGE> 30
SCHEDULE III
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
AS OF DECEMBER 31, 1999, 1998 AND 1997 AND FOR EACH OF THE YEARS THEN ENDED
<TABLE>
<CAPTION>
- -------------------------------------------- ----------- ----------------- -------- ---------------- --------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------- ----------- ----------------- -------- ---------------- --------
DEFERRED FUTURE POLICY OTHER POLICY
POLICY BENEFITS, LOSSES, UNEARNED CLAIMS AND
ACQUISITION CLAIMS AND PREMIUMS BENEFITS PAYABLE PREMIUM
SEGMENT COSTS LOSS EXPENSES (1) (1) REVENUE
------- ----------- ----------------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
1999: Variable Annuities.................... $1,404.8 $ -- $ --
Fixed Annuities........................... 397.2 16,084.0 26.8
Life Insurance............................ 702.9 3,519.9 194.0
Assets Managed and Administered........... -- -- --
Corporate and Other....................... 50.9 2,264.4 --
-------- --------- ------
Total.............................. $2,555.8 $21,868.3 $220.8
======== ========= ======
1998: Variable Annuities.................... $1,247.9 $ -- $ --
Fixed Annuities........................... 316.8 14,597.4 23.1
Life Insurance............................ 574.2 3,173.9 176.9
Assets Managed and Administered........... -- -- --
Corporate and Other....................... (116.6) 2,000.9 --
-------- --------- ------
Total.............................. $2,022.3 $19,772.2 $200.0
======== ========= ======
1997: Variable Annuities.................... $1,018.4 $ -- $ --
Fixed Annuities........................... 277.9 14,103.1 27.3
Life Insurance............................ 472.9 2,683.4 178.1
Assets Managed and Administered........... -- -- --
Corporate and Other....................... (103.8) 1,916.3 --
-------- --------- ------
Total.............................. $1,665.4 $18,702.8 $205.4
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------- -------------- ------------------- ------------------ ------------------ --------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ---------------------------------- -------------- ------------------- ------------------ ------------------ --------
NET INVESTMENT BENEFITS, CLAIMS, AMORTIZATION OTHER
INCOME LOSSES AND OF DEFERRED POLICY OPERATING EXPENSES PREMIUMS
SEGMENT (2) SETTLEMENT EXPENSES ACQUISITION COSTS (2) WRITTEN
------- -------------- ------------------- ------------------ ------------------ --------
<S> <C> <C> <C> <C> <C>
1999: Variable Annuities.......... $ (41.4) $ 2.2 $162.9 $176.3
Fixed Annuities................. 1,134.5 859.2 49.7 91.8
Life Insurance.................. 253.1 317.1 60.1 105.7
Assets Managed and
Administered.................. 5.1 -- -- 132.3
Corporate and Other............. 179.2 128.3 -- 55.3
-------- -------- ------ ------
Total.................... $1,530.5 $1,306.8 $272.7 $561.4
======== ======== ====== ======
1998: Variable Annuities.......... $ (31.3) $ 3.5 $123.9 $155.8
Fixed Annuities................. 1,116.6 847.6 44.2 85.2
Life Insurance.................. 225.6 268.7 46.5 100.6
Assets Managed and
Administered.................. 1.6 -- -- 85.3
Corporate and Other............. 174.3 125.0 -- 45.2
-------- -------- ------ ------
Total.................... $1,486.8 $1,244.8 $214.6 $472.1
======== ======== ====== ======
1997: Variable Annuities.......... $ (26.8) $ 5.9 $ 87.8 $142.5
Fixed Annuities................. 1,098.2 846.7 39.8 85.4
Life Insurance.................. 184.9 227.5 39.6 93.9
Assets Managed and
Administered.................. 1.1 -- -- 46.8
Corporate and Other............. 156.5 114.7 -- 34.1
-------- -------- ------ ------
Total.................... $1,413.9 $1,194.8 $167.2 $402.7
======== ======== ====== ======
</TABLE>
- ---------------
(1) Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
30
<PAGE> 31
SCHEDULE IV
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
REINSURANCE
(IN MILLIONS)
AS OF DECEMBER 31, 1999, 1998 AND 1997 AND FOR EACH OF THE YEARS THEN ENDED
<TABLE>
<CAPTION>
- ----------------------------------- --------- --------- ---------- --------- ----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------- --------- --------- ---------- --------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
1999:
Life insurance in force.......... $84,845.3 $26,296.5 $ 14.9 $58,563.7 0.0%
========= ========= ====== ========= ===
Premiums:
Life insurance................ $ 242.2 $ 22.6 $ 1.2 $ 220.8 0.6%
Accident and health
insurance................... 134.9 142.8 7.9 -- N/A
--------- --------- ------ --------- ---
Total.................... $ 377.1 $ 165.4 $ 9.1 $ 220.8 4.2%
========= ========= ====== ========= ===
1998:
Life insurance in force.......... $63,215.9 $17,413.4 $ 28.0 $45,830.5 0.1%
========= ========= ====== ========= ===
Premiums:
Life insurance................ $ 225.4 $ 27.4 $ 2.0 $ 200.0 1.0%
Accident and health
insurance................... 169.7 179.4 9.7 -- N/A
--------- --------- ------ --------- ---
Total.................... $ 395.1 $ 206.8 $ 11.7 $ 200.0 5.8%
========= ========= ====== ========= ===
1997:
Life insurance in force.......... $52,648.4 $13,678.7 $289.7 $39,259.4 0.7%
========= ========= ====== ========= ===
Premiums:
Life insurance................ $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1%
Accident and health
insurance................... 261.2 272.6 11.4 -- N/A
--------- --------- ------ --------- ---
Total.................... $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6%
========= ========= ====== ========= ===
</TABLE>
- ---------------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
31
<PAGE> 32
SCHEDULE V
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------- ---------- --------------------- ---------- ----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- ---------- --------------------- ---------- ----------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1999:
Valuation allowances -- fixed maturity
securities......................... $ 7.5 $ -- $ -- $ 7.5 $ --
Valuation allowances -- mortgage loans
on real estate..................... 42.4 0.7 1.3(2) -- 44.4
Valuation allowances -- real estate... 5.4 0.9 -- 0.8 5.5
----- ----- ----- ----- -----
Total.............................. $55.3 $ 1.6 $ 1.3 $ 8.3 $49.9
===== ===== ===== ===== =====
1998:
Valuation allowances -- fixed maturity
securities......................... $ -- $ 7.5 $ -- $ -- $ 7.5
Valuation allowances -- mortgage loans
on real estate..................... 42.5 (0.1) -- -- 42.4
Valuation allowances -- real estate... 11.1 (5.7) -- -- 5.4
----- ----- ----- ----- -----
Total.............................. $53.6 $ 1.7 $ -- $ -- $55.3
===== ===== ===== ===== =====
1997:
Valuation allowances -- fixed maturity
securities......................... $ -- $16.2 $ -- $16.2 $ --
Valuation allowances -- mortgage loans
on real estate..................... 51.0 (1.2) -- 7.3 42.5
Valuation allowances -- real estate... 15.2 (4.1) -- -- 11.1
----- ----- ----- ----- -----
Total.............................. $66.2 $10.9 $ -- $23.5 $53.6
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
(2) Allowance on acquired mortgage loans.
See accompanying independent auditors' report.
32
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
3.1 Form of Restated Certificate of Incorporation of Nationwide
Financial Services, Inc. (previously filed as Exhibit 3.1 to
Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
3.2 Form of Restated Bylaws of Nationwide Financial Services,
Inc. (previously filed as Exhibit 3.2 to Form S-1,
Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
4.1 Form of Indenture relating to the Notes, including the form
of Global Note and the form of Definitive Note (previously
filed as Exhibit 4.1 to Form S-1, Registration Number
333-18527, filed March 5, 1997, and incorporated herein by
reference)
4.2 Form of Indenture relating to the Junior Subordinated
Deferrable Interest Debentures due 2037 of Nationwide
Financial Services, Inc. (previously filed as Exhibit 4.1 to
Form S-1, Registration Number 333-18533, filed March 5,
1997, and incorporated herein by reference)
4.3 Subordinated Indenture relating to the Junior Subordinated
Debentures due 2028 of Nationwide Financial Services, Inc.
(previously filed as Exhibit 4.2 to Form 8-K, Commission
File No. 1-12785, filed October 23, 1998, and incorporated
herein by reference)
4.4 First Supplemental Indenture relating to the Junior
Subordinated Debentures due 2028 of Nationwide Financial
Services, Inc. (previously filed as Exhibit 4.3 to Form 8-K,
Commission File No. 1-12785, filed October 23, 1998, and
incorporated herein by reference)
10.1 Form of Intercompany Agreement among Nationwide Mutual
Insurance Company, Nationwide Corporation and Nationwide
Financial Services, Inc. (previously filed as Exhibit 10.1
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.2 Form of Tax Sharing Agreement among Nationwide Mutual
Insurance Company and any corporation that may hereafter be
a subsidiary of Nationwide Mutual Insurance Company
(previously filed as Exhibit 10.2 to Form S-1, Registration
Number 333-18527, filed March 5, 1997, and incorporated
herein by reference)
10.2.1 First Amendment to the Tax Sharing Agreement among
Nationwide Mutual Insurance Company and any corporation that
may hereafter be a subsidiary of Nationwide Mutual Insurance
Company (previously filed as Exhibit 10.2 to Form 10-K,
Commission File No. 1-12785, filed March 31, 1998, and
incorporated herein by reference)
10.3 Form of First Amendment to Cost Sharing Agreement among
parties named therein (previously filed as Exhibit 10.3 to
Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.4 Modified Coinsurance Agreement between Nationwide Life
Insurance Company and Nationwide Mutual Insurance Company
(previously filed as Exhibit 10.4 to Form S-1, Registration
Number 333-18527, filed March 5, 1997, and incorporated
herein by reference)
10.5 Modified Coinsurance Agreement between Employers Life
Insurance Company of Wausau and Nationwide Life Insurance
Company (previously filed as Exhibit 10.5 to Form S-1,
Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.6 Credit Facility, dated August 12, 1996, among Nationwide
Life Insurance Company, Nationwide Mutual Insurance Company,
the banks named therein and Morgan Guaranty Trust Company of
New York, the administrative agent (previously filed as
Exhibit 10.6 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
10.6.1 Amendment dated as of September 8, 1997 to the Credit
Agreement dated as of August 12, 1996 among Nationwide
Mutual Insurance Company, Nationwide Life Insurance Company,
the Banks party thereto and Morgan Guaranty Trust Company of
New York, as administrative agent (previously filed as
Exhibit 10(a) to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997, and incorporated
herein by reference)
10.7 Form of Lease Agreement between Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, Nationwide Life
and Annuity Insurance Company and Nationwide Financial
Services, Inc. (previously filed as Exhibit 10.7 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.8 Form of Nationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan (previously filed as Exhibit 10.8
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.9 General Description of Nationwide Insurance Executive
Incentive Plan (previously filed as Exhibit 10.9 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.10 General Description of Nationwide Insurance Management
Incentive Plan (previously filed as Exhibit 10.10 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.11 Nationwide Insurance Excess Benefit Plan effective as of
December 31, 1996 (previously filed as Exhibit 10.11 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.12 Nationwide Insurance Supplemental Retirement Plan effective
as of December 31, 1996 (previously filed as Exhibit 10.12
to Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.13 Nationwide Salaried Employees Severance Pay Plan (previously
filed as Exhibit 10.13 to Form S-1, Registration Number
333-18527, filed March 5, 1997, and incorporated herein by
reference)
10.14 Nationwide Insurance Supplemental Defined Contribution Plan
effective as of January 1, 1996 (previously filed as Exhibit
10.14 to Form S-1, Registration Number 333-18527, filed
March 5, 1997, and incorporated herein by reference)
10.15 General Description of Nationwide Insurance Individual
Deferred Compensation Program (previously filed as Exhibit
10.15 to Form S-1, Registration Number 333-18527, filed
March 5, 1997, and incorporated herein by reference)
10.16 General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program (previously filed as
Exhibit 10.16 to Form S-1, Registration Number 333-18527,
filed March 5, 1997, and incorporated herein by reference)
10.17 Deferred Compensation Agreement, dated as of September 3,
1979, between Nationwide Mutual Insurance Company and D.
Richard McFerson (previously filed as Exhibit 10.17 to Form
S-1, Registration Number 333-18527, filed March 5, 1997, and
incorporated herein by reference)
10.18 Nationwide Financial Services, Inc. Stock Retainer Plan for
Non-Employee Directors (previously filed as Exhibit 10.18 to
Form S-1, Registration Number 333-18527, filed March 5,
1997, and incorporated herein by reference)
10.19 Investment Agency Agreement between Nationwide Cash
Management Company and Nationwide Financial Services, Inc.
and certain subsidiaries of Nationwide Financial Services,
Inc.
10.20 Master Repurchase Agreement between Nationwide Life
Insurance Company, Nationwide Life and Annuity Insurance
Company, and Nationwide Mutual Insurance Company and certain
of its subsidiaries and affiliates
10.21 Stock Purchase and Sale Agreement between Nationwide
Corporation and Nationwide Financial Services, Inc.
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
10.22 Stock Purchase and Sale Agreement between Nationwide
Financial Services, Inc. and Nationwide Mutual Insurance
Company
12 Computation of Ratio of Earnings to Fixed Charges
13 Pages 21-71 of the Company's 1999 Annual Report to
Shareholders
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP, Independent Auditors
27 Financial Data Schedule (electronic filing only)
</TABLE>
- ---------------
All other exhibits referenced by Item 601 of Regulation S-K are not required
under the related instructions or are inapplicable and therefore have been
omitted.
35
<PAGE> 1
Exhibit 10.19
INVESTMENT AGENCY AGREEMENT
(DATE)
--------------
This is an INVESTMENT AGENCY AGREEMENT dated as of the date first
written above, by and between ___________________(the "Principal"), a (STATE)
corporation, and Nationwide Cash Management Company (the "Agent"), an Ohio
corporation.
BACKGROUND
The Agent is a subsidiary of Nationwide Mutual Insurance Company and
Nationwide Advisory Services, Inc. (the "Parent Companies") and was formed for
the purpose of making, holding and administering short-term investments
(maturing in one year or less) for and on behalf of the Parent Companies and
other companies affiliated with or related to the Parent Companies.
The purpose of this Agreement is to provide for the terms and
conditions under which the Agent will make, hold and administer certain
investments for and on behalf of the Principal.
STATEMENT OF AGREEMENT
In consideration of their mutual promises, the Principal and the Agent
hereby agree as follows.
1. INVESTMENT ACCOUNT. The Agent shall maintain in an investment
account (the "Account") for and on behalf of the Principal all
money, securities, evidences of indebtedness, certificates of
deposit and other property (collectively "Investments")
deposited in or purchased or otherwise acquired for and on
behalf of the Principal from time to time pursuant to the
terms and upon the conditions of this Agreement.
2. AUTHORITY OF AGENT. The Principal hereby authorizes the Agent,
upon the terms and subject to the conditions of this
Agreement, to engage in any of the following activities for
and on behalf of the Principal:
(a) Upon the written instructions or oral instructions
confirmed in writing of the Principal or any
authorized representative of the Principal, to sell,
purchase, hypothecate, transfer or otherwise acquire
or dispose of, whether through brokerage transactions
or otherwise, Investments for the Account of the
Principal;
(b) To collect and credit to the Account of the Principal
all dividends, interest and other income on the
Investments held for the Account of the Principal;
1
<PAGE> 2
(c) To collect and credit to the Account of the Principal
all proceeds from the sale, redemption or other
disposition of the Investments held for and on behalf
of the Principal; and
(d) To hold all funds deposited with the Agent and
Investments purchased with such funds on behalf of
Principal at the Agent's designated banks. These
funds and/or Investments will be held by such banks
in the Agent's account on behalf of the Principal.
3. DUTIES OF THE AGENT. Upon the terms and subject to the
conditions of this Agreement, the Agent shall perform the
following duties:
(a) At all times hold all funds and other Investments in
the Account of the Principal subject to the written
instructions with respect thereto as the Principal or
its representative designated in writing to the Agent
shall direct from time to time; and
(b) Furnish to the Principal statements of receipts,
disbursements and investment income earned of and for
the Account for such periods and in such reasonable
detail as the Principal may from time to time
request.
(c) Upon termination of this Agreement, the Agent shall
immediately withdraw from the Account all funds held
therein by Agent on behalf of the Principal and
deliver and pay over the same to the Principal.
4. AUTHORITY TO COMMINGLE INVESTMENTS. The Principal understands
and agrees that the Agent may from time to time act as agent
solely for the Parent Companies and other companies or
entities which are affiliated with or related to the Parent
Companies (collectively with the Parent Companies, the
"Related Principals") under the terms and subject to the
conditions of Investment Agency Agreements which are
substantially identical to this Agreement. The Principal
expressly authorizes the Agent to intermingle or commingle the
Investments held for the Account of the Principal with the
Investments held for the several Accounts of one or more
Related Principals and to jointly hold or jointly purchase,
sell, hypothecate, transfer or otherwise acquire or dispose of
Investments for the several Accounts of the Principal and one
or more Related Principals.
5. OWNERSHIP OF INVESTMENT. All Investments held or acquired for
the Account of the Principal whether or not commingled,
intermingled or jointly acquired for the several Accounts of
the Principal and one or more Related Principals, shall for
all purposes continue to be the property of the Principal,
either in its individual capacity of as joint or common tenant
or owner with such other Related Principal or Related
Principals.
2
<PAGE> 3
6. LIMITED AUTHORITY. The Agent shall have only such authority
and duties to make, hold and administer Investments for the
Account of the Principal as specifically provided for in this
Agreement. Specifically, and without limitation of the
foregoing sentence, the Agent shall not have (i) the
discretionary authority to purchase, sell, hypothecate,
transfer or otherwise acquire or dispose of any Investments
for the Account of the Principal, nor (ii) the duty to advise
the Principal or its representatives as to the value of any
Investment or to provide analysis of any Investment to the
Principal or its representatives.
7. RELATIONSHIP TO THIRD PARTIES. In order that the negotiability
or transferability of the Investments shall not be limited and
notwithstanding the provisions of Section 6 of this Agreement,
the Principal acknowledges that every person or entity dealing
with the Agent shall be justified and protected in relying
upon the authority of the Agent to act for and on behalf of
the Principal in the purchase, sale, hypothecation, transfer
or other acquisition or disposition of Investments and shall
not be required to ascertain whether the approval or direction
of the Principal or its representatives has been obtained.
8. INSURANCE DEPARTMENT EXAMINATION. The Principal and Agent
understand and agree that the Ohio Department of Insurance, or
such other insurance departments of those states in which the
Principal is admitted, if any, shall be entitled to examine
the records of the Agent as they pertain to the Principal's
Investments in the Account.
9. INSOLVENCY. In the event of the insolvency of the Principal,
all funds of the Principal deposited with the Agent shall be
payable directly to the liquidator, receiver, or statutory
successor of the Principal, without diminution of the
insolvency of the Principal.
10. COMPENSATION AND REIMBURSEMENT OF AGENT. The Agent shall be
entitled to reasonable compensation for its services hereunder
as the Principal and Agent shall from time to time agree.
11. INDEMNIFICATION OF AGENT. The Principal shall indemnify the
Agent and hold the Agent harmless from and against all
actions, claims, demands, liabilities, losses, damages or
expenses of whatever kind, including without limitation,
attorneys' fees, sustained or incurred by the Agent in
carrying out its authority or duties under this Agreement,
unless resulting from its own negligence or willful misconduct
which shall be deemed to exist unless the Agent can prove that
it was not negligent or did not act with willful misconduct.
Notwithstanding the above, however, the Agent shall be liable
to Principal for all losses of or to the Investments due to
fire, robbery, burglary, theft or mysterious disappearance
while in the possession of the Agent.
12. TERMINATION OF AGREEMENT. This Agreement may be terminated at
the end of each
3
<PAGE> 4
business day by the Principal upon written notice to the Agent
and at any time by the Agent upon 30 days' written notice to
the Principal.
13. NO PARTNERSHIP CREATED. Nothing herein contained shall
constitute the Principal as a partner of the Agent or as a
partner of the Related Principals.
14. GOVERNING LAW. This Agreement will be deemed to have been
entered into and shall be construed and enforced in accordance
with the laws of Ohio.
15. COMPLETE AGREEMENT WAIVERS, AMENDMENTS, ETC. This Agreement
constitutes the complete agreement of the Principal and Agent
with respect to the subject matter hereof. No waiver of any
rights under this Agreement shall be deemed effective unless
contained in a writing signed by the party charged with such
waiver, and no waiver of any right arising from any breach or
failure to perform will be deemed to be a waiver of any future
such right or of any other right arising under this Agreement.
16. HEADINGS. Section headings contained in this Agreement are
included for convenience only and form no part of the
Agreement between the parties.
17. NOTICE. Notices required or permitted hereunder will be in
writing and shall be sent to the addresses given below or to
such other addresses as the parties may hereafter specify, and
will be deemed given:
(a) When delivered to an authorized officer of either
party; or
(b) Three days after mailing by prepaid first class to an
authorized officer of either party.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be an original and all of
which will constitute together but one and the same document.
4
<PAGE> 5
This Agreement was executed in duplicate originals by the Principal and
the Agent as of the date first written above.
NATIONWIDE CASH MANAGEMENT COMPANY
(Principal) (Agent)
One Nationwide Plaza
Columbus, Ohio 43215
By: _____________________________ By: _____________________________
Title: Title:
5
<PAGE> 1
Exhibit 10.20
MASTER REPURCHASE AGREEMENT
Dated as of Enter the date of the Master Repurchase Agreement
Between:
COMPANY NAME 1 (CAPS)
and
COMPANY NAME 2 (CAPS)
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in
which one party ("Seller") agrees to transfer to the other ("Buyer") securities
or financial instruments ("Securities") against the transfer of funds by Buyer,
with a simultaneous agreement by Buyer to transfer to Seller such Securities at
a date certain or on demand, against the transfer of funds by Seller. Each such
transaction shall be referred to herein as a "Transaction" and shall be governed
by this Agreement.
2. DEFINITIONS
(a) "Act of Insolvency", with respect to any party, (i) the
commencement by such party as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law,
or such party seeking the appointment of a receiver, trustee, custodian or
similar official for such party or any substantial part of its property, or (ii)
the commencement of any such case or proceeding against such party, or another
seeking such an appointment, or the filing against a party of an application for
a protective decree under the provisions of the Securities Investor Protection
Act of 1970, which (A) is consented to or not timely contested by such party,
(B) results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a similar
effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a
general assignment for the benefit of creditors, or (iv) the admission in
writing by a party of such party's inability to pay such party's debts as they
become due;
(b) "Additional Purchased Securities", Securities provided by Seller
to Buyer pursuant to Paragraph 4(a) hereof;
(c) "Buyer's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Seller's Margin Amount under
subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date. The parties agree that the percentage to be applied to the
Repurchase Price for purposes of determining Buyer's Margin Amount shall be
102%;
(d) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(e) "Income", with respect to any Security at any time, any principal
thereof then payable and all interest, dividends or other distributions thereon;
(f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(h) "Market Value", with respect to any Securities as of any date, the
price for such Securities on such date obtained from a generally recognized
source agreed to by the parties or the most recent closing bid quotation from
such a source, plus accrued Income to the extent not included therein (other
than any Income credited or transferred to, or applied to the obligations of,
Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities). The parties agree that the most recent
quotation in The Wall Street Journal shall constitute a generally recognized
source;
<PAGE> 2
(i) "Price Differential", with respect to any Transaction hereunder as
of any date, the aggregate amount obtained by daily application of the Pricing
Rate for such Transaction to the Purchase Price for such Transaction on a 360
day per year basis for the actual number of days during the period commencing on
(and including) the Purchase Date for such Transaction and ending on (but
excluding) the date of determination (reduced by any amount of such Price
Differential previously paid by, Seller to Buyer with respect to such
Transaction);
(j) "Pricing Rate", the per annum percentage rate for determination of
the Price Differential;
(k) "Prime Rate", the prime rate of U.S. money center commercial
banks as published in The Wall Street Journal;
(1) "Purchase Date", the date on which Purchased Securities are
transferred by Seller to Buyer;
(m) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter,
such price increased by the amount of any cash transferred by Buyer to Seller
pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash
transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to
reduce Seller's obligations under clause (ii) of Paragraph 5 hereof;
(n) "Purchased Securities", the Securities transferred by Seller to
Buyer in a Transaction hereunder, and any Securities substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect
to any Transaction at any time also shall include Additional Purchased
Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities
returned pursuant to Paragraph 4(b);
(o) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Securities from Buyer, including any date determined by application of
the provisions of Paragraphs 3(c) or 11 hereof;
(p) "Repurchase Price", the price at which Purchased Securities are to
be transferred from Buyer to Seller upon termination of a Transaction, which
will be determined in each case (including Transactions terminable upon demand)
as the sum of the Purchase Price and the Price Differential as of the date of
such determination, increased by any amount determined by the application of the
provisions of Paragraph 10 hereof;
(q) "Seller's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Buyer's Margin Amount under subparagraph
(c) of this Paragraph), agreed to by Buyer and Seller prior to entering into the
Transaction, to the Repurchase Price for such Transaction as of such date. The
parties agree that the percentage to be applied to the Repurchase Price for
purposes of determining Seller's Margin Amount shall be 102%.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in
writing at the initiation of either Buyer or Seller. On the Purchase Date for
the Transaction, the Purchased Securities shall be transferred to Buyer or its
agent against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or
Seller (or both), as shall be agreed, shall promptly deliver to the other party
a written confirmation of each Transaction (a "Confirmation"). The Confirmation
shall describe the Purchased Securities (including CUSIP number, if any),
identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase
Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on
demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction,
and (v) any additional terms or conditions of the Transaction not inconsistent
with this Agreement. The Confirmation, together with this Agreement, shall
constitute conclusive evidence of the terms agreed between Buyer and Seller with
respect to the Transaction to which the Confirmation relates, unless with
respect to the Confirmation specific objection is made promptly after receipt
thereof. In the event of any conflict between the terms of such Confirmation and
this Agreement, this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand
shall be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
business day on which such termination will be effective. On the date specified
in such demand, or on
<PAGE> 3
the date fixed for termination in the case of Transactions having a fixed term,
termination of the Transaction will be effected by transfer to Seller or its
agent of the Purchased Securities and any Income in respect thereof received by
Buyer (and not previously credited or transferred to, or applied to the
obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of
the Repurchase Price to an account of Buyer.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Buyer is less than the aggregate Buyer's Margin Amount for all such
Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require
Seller in such Transactions, at Seller's option, to transfer to Buyer cash or
additional Securities reasonably acceptable to Buyer ("Additional Purchased
Securities"), so that the cash and aggregate Market Value of the Purchased
Securities, including any such Additional Purchased Securities, will thereupon
equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of
any Margin Deficit as of such date arising from any Transactions in which such
Buyer is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Seller exceeds the aggregate Seller's Margin Amount for all such
Transactions, then Seller may by notice to Buyer require Buyer in such
Transactions at such time (a "Margin Excess"), at Buyer's option, to transfer
cash or Purchased Securities to Seller, so that the aggregate Market Value of
the Purchased Securities, after deduction of any such cash or any Purchased
Securities so transferred, will thereupon not exceed such aggregate Seller's
Margin Amount (increased by the amount of any Margin Excess as of such date
arising from any Transactions in which such Seller is acting as Buyer).
(c) Any cash transferred pursuant to this Paragraph shall be attributed
to such Transactions as shall be agreed upon by Buyer and Seller.
(d) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer or Seller (or both) under
subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin
Deficit or Margin Excess exceeds a specified dollar amount or a specified
percentage of the Repurchase Prices for such Transactions (which amount or
percentage shall be agreed to by Buyer and Seller prior to entering into any
such Transactions).
(e) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer and Seller under subparagraphs
(a) and (b) of this Paragraph to require the elimination of a Margin Deficit or
a Margin Excess, as the case may be, may be exercised whenever such a Margin
Deficit or Margin Excess exists with respect to any single Transaction hereunder
(calculated without regard to any other Transaction outstanding under this
Agreement).
5. INCOME PAYMENTS
Where a particular Transaction's term extends over an Income payment
date on the Securities subject to that Transaction, Buyer shall, as the parties
may agree with respect to such Transaction (or, in the absence of any agreement,
as Buyer shall reasonably determine in its discretion), on the date such Income
is payable either (i) transfer to or credit to the account of Seller an amount
equal to such Income payment or payments with respect to any Purchased
Securities subject to such Transaction or (ii) apply the Income payment or
payments to reduce the amount to be transferred to Buyer by Seller upon
termination of the Transaction. Buyer shall not be obligated to take any action
pursuant to the preceding sentence to the extent that such action would result
in the creation of a Margin Deficit, unless prior thereto or simultaneously
therewith Seller transfers to Buyer cash or Additional Purchased Securities
sufficient to eliminate such Margin Deficit.
<PAGE> 4
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales
and purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Securities with respect to all Transactions hereunder and all proceeds thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder
shall be in immediately available funds. All Securities transferred by one party
hereto to the other party (i) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (ii) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (iii) shall be transferred by any other method mutually acceptable to
Seller and Buyer.
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in
the possession of Seller shall be segregated from other securities in its
possession and shall be identified as subject to this Agreement. Segregation may
be accomplished by appropriate identification on the books and records of the
holder, including a financial intermediary or a clearing corporation. Title to
all Purchased Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging
in repurchase transactions with the Purchased Securities or otherwise pledging
or hypothecating the Purchased Securities, but no such transaction shall relieve
Buyer of its obligations to transfer Purchased Securities to Seller pursuant to
Paragraphs 3, 4 or 10 hereof, or of Buyer's obligation to credit or pay Income
to, or apply Income to the obligations of, Seller pursuant to Paragraph 5
hereof.
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer,
substitute other Securities for any Purchased Securities. Such substitution
shall be made by transfer to Buyer of such other Securities and transfer to
Seller of such Purchased Securities. After substitution, the substituted
Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which the Seller retains custody of Purchased
Securities, the parties expressly agree that Buyer shall be deemed, for purposes
of subparagraph (a) of this Paragraph, to have agreed to and accepted in this
Agreement substitution by Seller of other Securities for Purchased Securities;
provided, however, that such other Securities shall have a Market Value at least
equal to the Market Value of the Purchased Securities for which they are
substituted.
<PAGE> 5
10. EVENTS OF DEFAULT
In the event that (i) Seller fails to repurchase or Buyer fails to
transfer Purchased Securities upon the applicable Repurchase Date, (ii) Seller
or Buyer fails, after one business day's notice, to comply with Paragraph 4
hereof, (iii) Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of
Insolvency occurs with respect to Seller or Buyer, or (v) Seller or Buyer shall
admit to the other its inability to, or its intention not to, perform any of its
obligations hereunder (each an "Event of Default"):
(a) At the option of the nondefaulting party, exercised by written
notice to the defaulting party (which option shall be deemed to have been
exercised, even if no notice is given, immediately upon the occurrence of an Act
of Insolvency), the Repurchase Date for each Transaction hereunder shall be
deemed immediately to occur.
(b) In all Transactions in which the defaulting party is acting as
Seller, if the nondefaulting party exercises or is deemed to have exercised the
option referred to in subparagraph (a) of this Paragraph, (i) the defaulting
party's obligations hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable, (ii) to the
extent permitted by applicable law, the Repurchase Price with respect to each
such Transaction shall be increased by the aggregate amount obtained by daily
application of (x) the greater of the Pricing Rate for such Transaction or the
Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase
Date as determined pursuant to subparagraph (a) of this Paragraph (decreased as
of any day by (A) any amounts retained by the nondefaulting party with respect
to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any
proceeds from the sale of Purchased Securities pursuant to subparagraph (d) (i)
of this Paragraph, and (C) any amounts credited to the account of the defaulting
party pursuant to subparagraph (e) of this Paragraph) on a 360 day per year
basis for the actual number of days during the period from and including the
date of the Event of Default giving-rise to such option to but excluding the
date of payment of the Repurchase Price as so increased, (iii) all Income paid
after such exercise or deemed exercise shall be retained by the nondefaulting
party and applied to the aggregate unpaid Repurchase Prices owed by the
defaulting party, and (iv) the defaulting party shall immediately deliver to the
nondefaulting party any Purchased Securities subject to such Transactions then
in the defaulting party's possession.
(c) In all Transactions in which the defaulting party is acting as
Buyer, upon tender by the nondefaulting party of payment of the aggregate
Repurchase Prices for all such Transactions, the defaulting party's right, title
and interest in all Purchased Securities subject to such Transactions shall be
deemed transferred to the nondefaulting party, and the defaulting party shall
deliver all such Purchased Securities to the nondefaulting party.
(d) After one business day's notice to the defaulting party (which
notice need not be given if an Act of Insolvency shall have occurred, and which
may be the notice given under subparagraph (a) of this Paragraph or the notice
referred to in clause (ii) of the first sentence of this Paragraph), the
nondefaulting party may:
<PAGE> 6
(i) as to Transactions in which the defaulting party is acting
as Seller, (A) immediately sell, in a recognized market at such price or prices
as the nondefaulting party may reasonably deem satisfactory, any or all
Purchased Securities subject to such Transactions and apply the proceeds thereof
to the aggregate unpaid Repurchase Prices and any other amounts owing by the
defaulting party hereunder or (B) in its sole discretion elect, in lieu of
selling all or a portion of such Purchased Securities, to give the defaulting
party credit for such Purchased Securities in an amount equal to the price
therefor on such date, obtained from a generally recognized source or the most
recent closing bid quotation from such a source, against the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party hereunder;
and
(ii) as to Transactions in which the defaulting party is
acting as Buyer, (A) purchase securities ("Replacement Securities") of the same
class and amount as any Purchased Securities that are not delivered by the
defaulting party to the nondefaulting party as required hereunder or (B) in its
sole discretion elect, in lieu of purchasing Replacement Securities, to be
deemed to have purchased Replacement Securities at the price therefor on such
date, obtained from a generally recognized source or the most recent closing bid
quotation from such a source.
(e) As to Transactions in which the defaulting party is acting as
Buyer, the defaulting party shall be liable to the nondefaulting party (i) with
respect to Purchased Securities (other than Additional Purchased Securities),
for any excess of the price paid (or deemed paid) by the nondefaulting party for
Replacement Securities therefor over the Repurchase Price for such Purchased
Securities and (ii) with respect to Additional Purchased Securities, for the
price paid (or deemed paid) by the nondefaulting party for the Replacement
Securities therefor. In addition, the defaulting party shall be liable to the
nondefaulting party for interest on such remaining liability with respect to
each such purchase (or deemed purchase) of Replacement Securities from the date
of such purchase (or deemed purchase) until paid in full by Buyer. Such interest
shall be at a rate equal to the greater of the Pricing Rate for such Transaction
or the Prime Rate.
(f) For purposes of this Paragraph 10, the Repurchase Price for each
Transaction hereunder in respect of which the defaulting party is acting as
Buyer shall not increase above the amount of such Repurchase Price for such
Transaction determined as of the date of the exercise or deemed exercise by the
nondefaulting party of its option under subparagraph (a) of this Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party for
the amount of all reasonable legal or other expenses incurred by the
nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of the
Pricing Rate for the-relevant Transaction or the Prime Rate.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement or
applicable law.
11. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereunto and will
enter into each Transaction hereunder in consideration of and in reliance upon
the fact that, all Transactions hereunder constitute a single business and
contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions hereunder and
(iii) that payments, deliveries and other transfers made by either of them in
respect of any Transaction shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments, deliveries and other
transfers may be applied against each other and netted.
12. NOTICES AND OTHER COMMUNICATIONS
All notices or communications between the parties shall be in writing
or confirmed in writing.
<PAGE> 7
13. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the
parties containing general terms and conditions for repurchase transactions.
Each provision and agreement herein shall be treated as separate and independent
from any other provision or agreement herein and shall be enforceable
notwithstanding the unenforceability of any such other provision or agreement.
14. NON-ASSIGNABILITY; TERMINATION
The rights and obligations of the parties under this Agreement and
under any Transaction shall not be assigned by either party without the prior
written consent of the other party. Subject to the foregoing, this Agreement and
any Transactions shall be binding upon and shall inure to the benefit of the
parties and their respective successors and assigns. This Agreement may be
cancelled by either party upon giving written notice to the other, except that
this Agreement shall, notwithstanding such notice, remain applicable to any
Transactions then outstanding.
15. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Ohio
without giving effect to the conflict of law principles thereof.
16. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party
shall constitute a waiver of any other Event of Default and no exercise of any
remedy hereunder by any party shall constitute a waiver of its right to exercise
any other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a
waiver of any right to do so at a later date.
<PAGE> 8
Insert Aggregate Limit Clause
Be sure to bold the words "17. Aggregate Limit"
Re-enter company name #1 in CAPS Re-enter company name #2 in CAPS
By: By:
----------------------------------------- -----------------------------
Edwin P. McCausland, Jr. Robert J. Woodward.
Senior Vice President-Fixed Income Executive Vice President-
Securities Chief Investment Officer
<PAGE> 9
ANNEX I
Supplemental Terms and Conditions
<PAGE> 10
CONFIRMATION
------------
Buyer:--------------------------------------------------------------------------
Seller:-------------------------------------------------------------------------
Date:---------------------------------------------------------------------------
DESCRIPTION OF TRANSACTION
- --------------------------------------------------------------------------------
1. Purchased Securities -
--------------------
a) Issuer name---------------------------------------------------
b) Rate/coupon---------------------------------------------------
c) Amount--------------------------------------------------------
d) Maturity------------------------------------------------------
e) CUSIP---------------------------------------------------------
2. Purchase Date - -----------------------------------------------------
-------------
3. Purchase Price - ----------------------------------------------------
--------------
4. Repurchase Date - ----------------------------------------------------
---------------
[insert a specific date or "demand"]
5. Pricing Rate or Repurchase Price -
-------------------------------- ------------------------------------
[Pricing Rate applies where transaction is terminable on demand;
Repurchase Price may-be calculated where there is a specific Repurchase
Date]
6. Additional Terms -
----------------
<PAGE> 1
Exhibit 10.21
STOCK PURCHASE AND SALE AGREEMENT
This STOCK PURCHASE AND SALE AGREEMENT (the "Agreement") made and
entered into as of this 8th day of July, 1999, by and between NATIONWIDE
CORPORATION, an Ohio corporation (the "Seller"), and NATIONWIDE FINANCIAL
SERVICES, INC., a Delaware corporation (the "Purchaser").
WITNESSETH:
----------
WHEREAS, Seller owns all of the issued and outstanding shares of
capital stock of Employers Life Insurance Company of Wausau ("ELOW"); and
WHEREAS, Purchaser desires to purchase and Seller desires to sell all
of the outstanding shares of capital stock of ELOW on the terms and subject to
the conditions contained in the Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in the Agreement, the parties, intending to
be legally bound, do hereby represent, warrant, covenant and agree as follows:
Section 1. PURCHASE AND SALE. At the closing (the "Closing"),
(hereinafter defined) Seller shall sell, transfer, assign, convey and deliver to
Purchaser and Purchaser shall purchase, accept and acquire from Seller Two
Hundred Fifty Thousand (250,000) shares of common stock of ELOW, par value of
$10.00 (the "Shares"), which Shares constitute all of the issued and outstanding
capital stock of ELOW.
Section 2. CLOSING. The Closing of the purchase of the Shares shall
take place at the offices of Purchaser, Columbus, Ohio, on or as of September 1,
1999 ("Closing Date"), subject to regulatory approval, or such earlier or later
date as the parties may mutually agree.
Section 3. PURCHASE PRICE.
(a) PURCHASE PRICE. The purchase price for the Shares shall be
calculated prior to Closing, but in no event shall such amount exceed One
Hundred Fifty Million Dollars ($150,000,000)(the "Purchase Price").
(b) METHOD OF PAYMENT. The amount of the Purchase Price payable at
Closing shall be by bank wire transfer in immediately available funds to Seller
at accounts designated in writing by Seller to Purchaser prior to the Closing
Date.
Section 4. ACTIONS AT THE CLOSING: FURTHER ASSURANCES.
(a) ACTIONS BY SELLER. At the Closing, Seller shall deliver to
Purchaser:
(1) One (1) or more stock certificate(s) representing all
Shares, duly endorsed in blank or accompanied by duly executed stock powers;
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<PAGE> 2
(2) A certificate of an officer of Seller (A) attesting that
Seller has caused a reasonable examination to be made into all matters affecting
the warranties and representations of Seller set forth herein, (B) attesting to
the best of his knowledge that, as of the Closing Date, each of the
representations and warranties of Seller contained herein is true and (C)
attesting that Seller has performed all of the obligations to be performed by it
under this Agreement, from the date hereof through the Closing Date;
(3) A certified copy of the resolution of Seller by which the
Board of Directors of Seller authorized execution of this Agreement and the sale
of the Shares;
(4) Resignations dated as of the Closing of certain officers
and directors of Seller, and;
(5) Such other documents as may be necessary or appropriate,
in the reasonable opinion of Purchaser or its counsel, to evidence the
authorization of, and to effect the sale and purchase of the Shares as
contemplated by this Agreement.
(b) ACTIONS BY PURCHASER. At the Closing, Purchaser shall:
(1) Wire transfer the Purchase Price to an account of Seller,
as designated in writing by Seller prior to the Closing;
(2) Deliver a certificate of an officer of Purchaser (A)
attesting that Purchaser has caused a reasonable examination to be made into all
matters affecting the warranties and representations of Purchaser set forth
herein, (B) attesting to the best of his knowledge that, as of the Closing Date,
each of the representations and warranties of Purchaser contained herein is true
and (C) attesting that Purchaser has performed all of the Obligations to be
performed by it under this Agreement, from the date hereof through the Closing
Date;
(3) Deliver a certified copy of the resolution of Purchaser by
which the Board of Directors of Purchaser authorized execution of this Agreement
and the purchase of the Shares; and
(4) Deliver such other documents as may be necessary or
appropriate, in the reasonable opinion of Seller or its counsel, to evidence the
authorization of, and to effect the sale and purchase of the Shares as
contemplated by this Agreement.
Section 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby
represents, warrants and agrees that the following statements are true and
correct as of the date hereof and will be true and correct on the Closing Date:
(a) ORGANIZATION; CAPITALIZATION; THE SHARES.
(1) Seller is a corporation duly organized and validly
existing under the laws of the State of Ohio and has the corporate power to own,
operate and sell its properties and to carry on its business as it is now being
conducted. Seller owns all of the issued and outstanding Shares of ELOW.
2
<PAGE> 3
(2) ELOW is a corporation duly organized, validly existing and
in good standing as a life insurance company under the laws of the State of
Wisconsin and has all requisite power and authority, corporate and otherwise, to
own, operate and lease its properties and to carry on its business as it is now
being conducted. ELOW holds valid and duly issued licenses, all of which are in
good standing, to carry on the types of insurance business and in the states
listed on SCHEDULE 5(a) attached hereto.
(3) The authorized capital stock of ELOW consists solely of
five hundred thousand (500,000) shares of common stock, with a par value of Ten
Dollars ($10.00) each. The issued and outstanding capital stock of ELOW consists
solely of the Shares, all of which are validly issued, fully paid, nonassessable
and owned by Seller, free and clear of any lien, pledge, charge, adverse claim,
option, voting trust, proxy or encumbrance. There are no outstanding options,
contracts, calls, commitments, preemptive rights or commitments of any nature
relating to the authorized but unissued Shares. Seller has the full legal right,
power and authority to sell, assign, transfer and deliver the Shares to
Purchaser, free and clear of any lien, Pledge, charge, adverse claim, option,
voting trust, proxy or encumbrance. Upon delivery to Purchaser, on the Closing
Date, of the certificate(s) provided for in Section 4(a)(l) hereof, Purchaser
will acquire good title to all of the outstanding Shares of capital stock of
ELOW, free and clear of any lien, pledge, charge, adverse claim, option, voting
trust, proxy or encumbrance, other than those created by or through Purchaser,
or as a result of Purchaser's application for acquisition of control of ELOW.
The sale, assignment, transfer and delivery of the Shares to Purchaser hereunder
will not violate, nor constitute a default under, the terms of any agreement,
judgment, order, writ or decree under which Seller is or may be bound.
(4) The articles of incorporation, bylaws, minute books and
stock certificate books of ELOW are complete, correct and contain all amendments
thereto to date (in the case of the articles and bylaws), a record of all stock
issuances and transfers (in the case of the stock certificate books), and, to
the best knowledge and belief of Seller, a record of all corporate proceedings
of ELOW (in the case of the minute books).
(b) AUTHORITY FOR AGREEMENT. Seller has, or shall have at the time of
Closing, all requisite corporate power and authority to execute and deliver this
Agreement and to carry out its obligations hereunder. The execution and delivery
of this Agreement, and the consummation of the transactions contemplated hereby,
shall have been duly authorized by all necessary corporate action on the part of
Seller, and receipt of all appropriate regulatory approval prior to the Closing
Date and this Agreement, as executed and delivered by Seller acting through its
duly authorized officers, shall constitute the valid and legally binding
obligation of Seller enforceable against it in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, rehabilitation, or similar laws affecting the
enforcement of creditors' rights generally.
(c) THIRD PARTY AUTHORIZATION. No consent, license, approval, order or
authorization of, or registration, declaration or filing with, any governmental
authority, bureau, agency or commission, or any third party, is required to be
obtained or made by Seller in connection with the execution, delivery,
performance, validity and enforceability of this Agreement or in connection with
its sale of the Shares except the approval of the Insurance Commissioner of the
State of Wisconsin and the Insurance Commissioner of the State of California
("Seller's Required Consents").
3
<PAGE> 4
(d) FINANCIAL STATEMENTS. Seller has provided to Purchaser correct and
complete copies of the 1997 and 1998 Annual Statements of ELOW, and will provide
the unaudited balance sheet and income statement of ELOW as of each quarter
during 1999 through the Closing Date, if available. The annual statements
referred to in the foregoing sentence are referred to hereinafter as the
"Statements." The Statements have been prepared in a manner permitted, to the
best knowledge of Seller, under statutory authority of the State of Wisconsin
Department of Insurance, on a consistent basis, during the periods covered by
each such Statement, except as disclosed in the auditor's report and notes to
such Statements. The Statements have been prepared in accordance with statutory
accounting rules and regulations and are true, correct and complete and fairly
present the financial position and results of operations of ELOW as of the dates
and for the periods covered by such Statements.
(e) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1998 (or
such date as is otherwise indicated in the following subparagraphs), other than
those items described in SCHEDULE 5(E), there has not occurred or been:
(1) Any material, adverse change in the operations, business,
properties or assets of ELOW, to the best knowledge and belief of Seller, nor is
there currently any other condition, of any character, materially and adversely
affecting the operations, business, properties or assets of ELOW which, with the
passage of time, is likely to have such effect;
(2) Any borrowing or loan obligating ELOW; or
(3) Any transaction by ELOW that was not in the ordinary
course of business conducted on a basis consistent with past practice which, to
the best knowledge and belief of Seller, was not reflected in the corporate
records of ELOW.
(f) INSURANCE REGULATORY MATTERS. Except as disclosed in SCHEDULE 5(F),
there is not now pending any proceeding with respect to ELOW that involves the
insurance regulatory body of any state.
(g) EMPLOYMENT MATTERS. ELOW is not subject to any collective
bargaining agreements. ELOW is not an employer participating in, an employer
obligated to contribute to, or a sponsor of, any "employee benefit plans" (as
such term is defined in section 3(3) of ERISA), "welfare benefit funds" as such
term is defined in section 419 of the Internal Revenue Code of 1986, as amended
(the "Code"), deferred compensation, incentive or bonus plans or trusts exempt
from tax under section 501(c)(9) or section 501(c)(20) of the Code, covering the
employees, directors, agents, brokers, representatives or other personnel of
ELOW (such Plans, funds or trusts being referred to herein as the "Employee
Benefit Plans"). ELOW will, on or before the Closing Date, terminate its
participation in any such Employee Benefit Plans. ELOW is not, and has not been,
a party to a "multi-employer plan" (as such term is defined in section 3(37) of
ERISA). No filing, application or matter with respect to any proposed Employee
Benefit Plan is pending with the Internal Revenue Service, Pension Benefit
Guaranty Corporation, United States Department of Labor or other federal, state
or foreign governmental agency.
(h) PROPERTIES. ELOW has good and marketable title to all properties,
interests in properties, and assets, real and personal, except for dispositions
in the ordinary course of business or for adequate consideration, free and clear
of all mortgages, liens, pledges, charges, or
4
<PAGE> 5
encumbrances of any nature whatsoever, except liens for current taxes not yet
due and payable, mechanic's and materialmen's liens for current construction
work, and such imperfections of title, liens, easements, and encumbrances, if
any, as are not substantial in character, amount, or extent and do not detract
from the value or interfere with the present or proposed use of the property
subject thereto or affected thereby or otherwise impair business operations. All
leases pursuant to which ELOW leases any material real or personal property are
in good standing, valid and effective in accordance with their respective terms.
All material property and assets currently used by ELOW or in which it has an
interest are in good operating condition and repair, ordinary wear and tear
excepted.
(i) FORMS OF POLICY. Each form of insurance policy, policy endorsement
or amendment, reinsurance treaties and contracts, certificate of insurance,
application form, and sales material used by ELOW in any jurisdiction has, where
required, been approved by the appropriate insurance or other regulatory
authorities of such jurisdiction.
(j) ACTIONS AND PROCEEDINGS. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against or involving ELOW. There are no actions,
suits or claims or legal, administrative or arbitral proceedings or
investigations (whether or not the defense thereof or liabilities in respect
thereof are covered by insurance) pending, or to the knowledge of ELOW or the
Seller, threatened, against or involving ELOW or any of its properties or assets
which, individually or in the aggregate, could have a material adverse effect
upon the condition of ELOW. To the knowledge of ELOW or the Seller, there is no
fact, event or circumstance that may give rise to any suit, action, claim,
investigation or proceeding that would be required to be set forth on a schedule
attached hereto if currently pending or threatened.
(k) COMPLIANCE WITH LAW. Except as set forth on SCHEDULE 5(K), to
Seller's best knowledge and belief, ELOW is in substantial compliance, and has
substantially complied in every material respect, with all laws, regulations,
rules and decrees of all governmental authorities whatsoever relating to the
conduct of its business and ownership of its assets.
(m) PATENTS; COPYRIGHTS; TRADE SECRETS; AND INTELLECTUAL PROPERTY. ELOW
does not own any patents, copyrights, trademarks, trade names, service marks,
trade secrets, computer application software or other intellectual property. To
the best knowledge and belief of Seller, the conduct of ELOW's business as
heretofore carried on is free from infringement by each of patents, trademarks,
tradename rights, copyrights or publication rights of others and no notice of
any such infringement has been received by Seller or ELOW.
(n) DISCLOSURE. No representation or warranty by Seller contained in
this Agreement or in any schedule, statement, exhibit, list, document,
certificate or other written item of information furnished, or to be furnished,
by, or on behalf of, Seller, pursuant to this Agreement or in connection with
actions contemplated hereby, contains, or shall contain, any untrue statement of
a material fact, or, to Seller's best knowledge and belief, omits, or shall
omit, to state a material fact, necessary to make the statements made, in the
light of the circumstances under which they are or were made, not misleading.
(o) NO BREACH. Except as set forth on SCHEDULE 5(O), the execution,
delivery, and performance of this Agreement and the consummation of the
transactions contemplated hereby will
5
<PAGE> 6
not: (i) violate any provision of the articles of incorporation or by-laws of
ELOW; (ii) require any consent, approval, or notice under or result in a
violation or breach of, or conflict with, or constitute (with or without notice
or lapse of time or both) a default (or give rise to any right of termination,
cancellation, or acceleration) under any of the terms, conditions, or provisions
of any note, bond, mortgage, indenture, license, or contract or other agreement
to which the Seller or ELOW or any of their respective properties may be bound;
(iii) result in the creation or attachment of any lien or other encumbrance on
any property or right of ELOW; (iv) violate any order, judgment, injunction,
award or decree of any court, arbitrator, or governmental or regulatory body
applicable to the Seller or ELOW or any of their respective properties; (v) to
the best knowledge of the Seller or ELOW, violate any statute, law, or
regulation of any jurisdiction; or (vi) violate or result in the revocation,
restriction, suspension, cancellation, or modification of any license.
Section 6. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
hereby represents, warrants and agrees that the following statements are true
and correct as of the date hereof and will be true and correct on the Closing
Date:
(a) ORGANIZATION. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(b) AUTHORITY FOR AGREEMENT. Purchaser has, or shall have at the time
of Closing, all requisite corporate power and authority to execute and deliver
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Purchaser and this Agreement has been duly executed and delivered by
Purchaser, acting through its duly authorized officers, and constitutes the
valid and legally binding obligation of Purchaser, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, rehabilitation, or similar
laws affecting the enforcement of creditors' rights generally.
(c) THIRD PARTY AUTHORIZATION. No consent, license, approval, order or
authorization of, or registration, declaration or filing with, any governmental
authority, bureau, agency, commission or any third party is required to be
obtained or made by Purchaser in connection with the execution, delivery,
performance, validity and enforceability of this Agreement, in connection with
its purchase of the Shares, except the approval of the Insurance Commissioners
of the states of Ohio, Wisconsin and California ("Purchaser's Required
Consents").
(d) COMPLIANCE WITH LAW. This Agreement and the transactions
contemplated hereby will not conflict with, nor result in the material breach or
violation of, any laws, statutes, local ordinances, regulations, court order,
administrative order, ruling or agreements with governmental or regulatory
authorities to which Purchaser or any of its subsidiaries or affiliates is a
party.
(e) DISCLOSURE. No representation or warranty by Purchaser contained in
this Agreement or in any schedule, statement, exhibit, list, document,
certificate or other written item of information furnished, or to be furnished,
by, or on behalf of, Purchaser, pursuant to this Agreement or in connection with
actions contemplated hereby, contains, or shall contain, any untrue statement of
a material fact, or, to Purchaser's best knowledge and belief, omits, or shall
omit, to state a material fact, necessary to make the statements made, in the
light of the circumstances under which they are or were made, not misleading.
6
<PAGE> 7
(f) Accuracy of Information. Any information provided, or to be
provided, in writing, by Purchaser, for presentation to any governmental or
regulatory body, in connection with the transactions contemplated herein, or for
inclusion in any filing with any governmental or regulatory body, to the best
knowledge and belief of Purchaser, does not, and will not, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein, or necessary to make the information not misleading.
Section 7. TAX MATTERS.
(a) Except as set forth on SCHEDULE 7(a) hereto, and to the best
knowledge of Seller: (i) ELOW has timely filed all Tax returns, reports,
information returns or other documents (including documentation relating to the
assessment and collection of Taxes) filed or required to be filed in any
jurisdiction by or on behalf of ELOW ("Tax Returns") that have become due to be
filed and has paid all taxes, assessments, fees, interest, penalties, if any,
and other accrued governmental charges (collectively, "Tax" or "Taxes") payable
for all periods covered by such Tax Returns and (ii) there are no audits or
investigations relating to, and no claims, demands or assessments of, Taxes
pending or threatened against ELOW. Except as set forth on SCHEDULE 7(a), the
amounts accrued on the books and financial statements of ELOW for Taxes, whether
or not due and payable, imposed on or with respect to the operations or assets
of ELOW for all periods (or portions thereof) ending on or before the date
hereof are sufficient for payment of all Taxes payable for such periods.
(b) Except to the extent accrued on the books or financial statements
of ELOW on the Closing Date, Seller shall pay and be responsible for any and all
Taxes imposed on or with respect to the operations or assets of ELOW for all
periods (or portions thereof) ending on or prior to the Closing Date (including
any and all Taxes attributable to or resulting from ELOW having been affiliated
with Seller). Seller shall hold Purchaser harmless from loss in respect of any
liability for the aforementioned Taxes incurred by Purchaser and its affiliates
in connection therewith (determined without regard to any deduction, credit or
exclusion of Purchaser and its affiliates other than such items of ELOW).
Notwithstanding anything else contained in this Section 7, Seller shall be
entitled to receive and retain any refunds of Taxes attributable to operations
of ELOW for periods ending on or prior to the Closing Date or arising from the
carryback of any deduction or credit attributable to operations after the
Closing Date."
Section 8. COVENANTS OF SELLER PENDING THE CLOSING. Seller hereby
covenants that, prior to the Closing, and except as otherwise consented to in
writing by an executive officer of Purchaser or otherwise agreed to in writing
by the parties:
(a) ACCESS TO INFORMATION. Seller shall give to Purchaser and to
Purchaser's accountants, actuaries, counsel and other representatives
(hereinafter "Purchaser's Representatives") access, during normal business
hours, throughout the period prior to the Closing, to all of ELOW's properties,
books, contracts, commitments and records. During such period, Seller shall
furnish to Purchaser all such information concerning the affairs of ELOW as
Purchaser may reasonably request.
(b) CONDUCT OF BUSINESS; ASSETS AND PROPERTIES. The business of ELOW
shall be conducted only in the ordinary course and in a manner consistent with
their respective operations
7
<PAGE> 8
since January 1, 1999 and Seller will use its best efforts to maintain and
preserve all of ELOW's assets and properties.
(c) CHANGES IN ARTICLES OF INCORPORATION AND BYLAWS. No change shall be
made in the articles of incorporation or bylaws of ELOW.
(d) CAPITALIZATION. No change shall be made in the authorized, issued
or outstanding capital stock or other securities of ELOW, nor shall any option,
warrant, right to purchase, commitment or arrangement be granted or made
relating to any of such authorized, issued or outstanding capital stock or any
other securities of ELOW.
(e) BORROWING. No borrowing or agreement for borrowing shall be made by
ELOW.
(f) INSURANCE. Seller shall maintain in effect, until the Closing Date,
insurance coverage against loss of, or damage to, the properties of ELOW, and
against the liabilities and risks of the business of ELOW, including directors
and officers liability insurance, in amounts and kinds not less favorable than
those currently in effect.
(g) BOOKS OF ACCOUNT. Seller shall cause ELOW to maintain, and continue
to keep, its books, accounts and records in a manner that is consistent with
prior practice.
(h) COMPLIANCE WITH LAW. Seller shall cause ELOW to comply in all
material respects with all laws, rules, regulations, orders and decrees of any
governmental authority applicable to ELOW.
(i) ENCUMBRANCES. Seller shall not permit ELOW to make, grant or incur
any mortgage, easement, lien, restriction, encumbrance or security interest of
any kind on any of its properties or assets, other than liens for taxes not yet
due and payable.
(k) CONTINUED DISCLOSURE. If any event or state of facts occurs or
arises between the earlier of the date hereof or the date as of which disclosure
has been made with respect to such type of event or state of facts, and the
Closing Date, that, had it occurred or arisen prior to or on such date, would
have been required by the terms hereof to be disclosed herein, Seller shall give
immediate notice thereof in writing to Purchaser.
Section 9. ACTIONS OF THE PARTIES PRIOR TO THE CLOSING DATE. Prior to
the Closing Date, the parties shall take, or, in the case of Seller, cause ELOW
to take, as appropriate, the following actions:
(a) APPROVALS. Purchaser and Seller shall use their respective best
efforts to obtain the approval of any Purchaser's Required Consents or Seller's
Required Consents, respectively, for the sale and purchase of the Shares as
promptly as possible after the execution of this Agreement.
(b) ADVERSE RULINGS. Purchaser shall promptly notify Seller of any
final, adverse regulatory ruling that, in the good faith judgment of Purchaser
or its counsel, would prevent the sale and purchase of the Shares.
8
<PAGE> 9
Section 10. CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of
Seller hereunder are, at the option of Seller, subject to the conditions that,
at the Closing Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Purchaser herein shall be true and correct in all material
respects, on the Closing Date, and shall be confirmed, in writing, at the
Closing, by Purchaser.
(b) PERFORMANCE BY PURCHASER. All of the terms and conditions of this
Agreement to be complied with and performed by Purchaser, on or before the
Closing Date, shall have been complied with and performed in all material
respects, including, without limitation, the delivery of each of the items to be
delivered under Section 4(b) hereof.
(c) LEGAL CHALLENGE. No suit, action or other proceeding shall be
pending before any court or governmental agency and no claims shall have been
asserted in which it is, or will be, sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement or the sale and
purchase of the Shares.
(d) APPROVALS. All necessary Seller's Required Consents and Purchaser's
Required Consents shall have been obtained for the sale and purchase of the
Shares.
(e) MERGER AGREEMENT. Purchaser shall cause NLIC to enter into a Plan
and Agreement of Merger wherein immediately upon the Closing of the transactions
contemplated in this Agreement, ELOW shall be merged with and into NLIC, and
NLIC shall be the surviving entity.
Section 11. CONDITIONS TO OBLIGATIONS OF PURCHASER. The Obligations of
Purchaser hereunder are, at the option of Purchaser, subject to the conditions
that, at the Closing Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Seller herein shall be true and correct in all material
respects, on the Closing Date, and shall be confirmed, in writing, at the
Closing, by Seller.
(b) PERFORMANCE BY SELLER. All of the terms and conditions of this
Agreement to be complied with and performed by Seller, on or before the Closing
Date, shall have been complied with and performed in all material respects,
including, without limitation, the delivery of each of the items to be delivered
under Section 4(a) hereof.
(c) APPROVALS. All Purchaser's Required Consents and Seller's Required
Consents shall have been obtained for the sale and purchase of the Shares.
(d) LEGAL CHALLENGE. No suit, action or other proceeding shall be
pending before any court or governmental agency and no claims shall have been
asserted in which it is, or will be, sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement or the sale and
purchase of the Shares.
(e) MERGER AGREEMENT. Seller shall cause ELOW to enter into a Plan and
Agreement of Merger wherein immediately upon the Closing of the transactions
contemplated in this Agreement, ELOW shall be merged with and into NLIC, and
NLIC shall be the surviving entity.
9
<PAGE> 10
Section 12. EVENTS OF TERMINATION.
(a) If, after exercise of Seller's and Purchaser's best efforts, one or
more of the Purchaser's Required Consents or Seller's Required Consents required
by this Agreement shall have been formally denied and disapproval received, then
Seller or Purchaser may, by written notice to the other, terminate this
Agreement.
(b) If the Closing has not taken place prior to or on December 31,
1999, the Agreement shall terminate, unless it is extended by agreement of the
Seller and Purchaser.
(c) This Agreement may be terminated at any time by mutual consent of
Seller and Purchaser in writing.
Section 13. INDEMNIFICATION.
(a) SELLER'S INDEMNIFICATION. Seller, its successors and assigns, shall
defend, indemnify and hold Purchaser, and its directors, officers and employees,
wholly harmless from and against any and all liability, loss, cost and expense
whatsoever (including reasonable fees of legal counsel and related
disbursements) incurred by Purchaser as a result of (1) the breach of, or any
inaccuracy in, any of the representations, warranties, covenants and agreements
of Seller contained in this Agreement, in any certificate(s) delivered pursuant
hereto or in any schedule attached hereto, or (2) Seller's negligent or wrongful
performance or non-performance of its obligations pursuant to this Agreement.
(b) PURCHASER'S INDEMNIFICATION. Purchaser, its successors and assigns,
shall defend, indemnify and hold Seller, its directors, officers and employees,
wholly harmless from and against any and all liability, loss, cost and expense
whatsoever including reasonable fees of legal counsel and related disbursements)
incurred by Seller as a result of (1) the breach or any inaccuracy in, any of
the representations, warranties, covenants and agreements of Purchaser contained
in this Agreement, or in any certificate(s) delivered pursuant hereto or in any
schedule attached hereto, or (2) Purchaser's negligent or wrongful performance
or non-performance of its obligations pursuant to this Agreement.
Section 14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained herein shall survive
Closing hereunder and be enforceable for a period of twenty-four (24) months
after the Closing Date.
Section 15. EXPENSES. Except as they may otherwise agree hereafter,
each of the parties shall pay its own expenses incurred in connection with this
Agreement and the consummation of the transactions contemplated hereby.
Section 16. COOPERATION CLAUSE. Each party agrees to execute and
deliver, or cause to be executed and delivered, at or after the Closing, such
additional or further transfers, assignments, resolutions, endorsements, powers
of attorney and other instruments or documents as may reasonably be requested by
the other for the purpose of carrying out the intentions of the parties hereto.
After the Closing, any reasonable out-of-pocket expenses associated with
preparing or
10
<PAGE> 11
obtaining the requested material shall be borne by the requesting party. Each
party agrees to cooperate with the other in effecting the sale and purchase of
the Shares.
Section 17. WAIVER OF COVENANTS AND CONDITIONS. At any time, prior to
the Closing Date or at the Closing, any party hereto may waive, in writing,
compliance with any covenant or condition by, or breach of any representation or
warranty by, any other party hereto.
Section 18. NOTICES. All notices, requests and other communications
hereunder shall be in writing and shall be deemed to have been duly given at the
time delivered or mailed, certified mail, return receipt requested:
If to Seller, to:
Nationwide Corporation
One Nationwide Plaza
Columbus, OH 43215
Attn: David A. Diamond, Treasurer
If to Purchaser, to:
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43215
Attn: Mark R. Thresher, Senior Vice President- Finance and Treasurer
or to any such other address or individuals as designated in writing by the
appropriate party.
Section 19. ASSIGNMENT. None of the rights or obligations of any party
hereto may be assigned or delegated, in whole or in part, without the consent,
in writing, of the other party.
Section 20. MISCELLANEOUS. This Agreement embodies the entire agreement
and understanding between Seller and Purchaser with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter. The headings in this Agreement are for convenience or
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof. This Agreement may be executed in several counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument. This Agreement may be amended only by a writing signed
by all parties hereto. Time shall be of the essence of the Agreement. No
representation, warranty, condition, understanding or agreement of any kind
shall be binding on the parties unless incorporated herein.
Section 21. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Ohio and shall be binding
upon and shall inure to the benefit of the parties hereto and their successors
and permitted assigns.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto, pursuant to authority given by
their respective Boards of Directors, have caused this Agreement to be duly
entered into and executed under seal, as of the date first above written.
NATIONWIDE CORPORATION
- ---------------------------
David A. Diamond
Treasurer
NATIONWIDE FINANCIAL SERVICES, INC.
- ---------------------------
Mark R. Thresher
Senior Vice President- Finance and Treasurer
12
<PAGE> 13
SCHEDULE 5(a)
LICENSES OF ELOW
ELOW is licensed to conduct business in the following states:
Alabama Montana
Alaska Nebraska
Arizona Nevada
Arkansas New Hampshire
California New Jersey
Colorado New Mexico
Connecticut North Carolina
Delaware North Dakota
District of Columbia Ohio
Florida Oklahoma
Georgia Oregon
Hawaii Pennsylvania
Idaho Rhode Island
Illinois South Carolina
Indiana South Dakota
Iowa Tennessee
Kansas Texas
Kentucky Utah
Louisiana Vermont
Maine Virginia
Maryland Washington
Massachusetts West Virginia
Michigan Wisconsin
Minnesota Wyoming
Mississippi
Missouri
13
<PAGE> 14
SCHEDULE 5(e)
ABSENCE OF CHANGES
On June 29, 1999 ELOW ceded to and Nationwide Life Insurance Company ("NLIC")
assumed on a modified coinsurance basis, 100% of ELOW's: 1) group pension
annuity contracts including any agreements which provide periodic or deferred
annuity payments pursuant to such contracts; and 2) all other individual group
or immediate annuity contracts which provide for periodic annuity payments. The
ceding commission to be paid by NLIC to ELOW is $4.7 million pretax net gain
with a corresponding net loss to NLIC. There will be no reserve transfer between
the companies and no pretax financial impact to the ultimate controlling persons
of the two companies.
14
<PAGE> 15
SCHEDULE 5(f)
INSURANCE REGULATORY MATTERS
There is not pending any proceeding with respect to ELOW that involves the
regulatory body of any state. To the Knowledge of Seller, there is no state of
facts currently existing that makes it likely that any such proceeding might
occur in the future.
15
<PAGE> 16
SCHEDULE 5(k)
COMPLIANCE WITH LAWS AND REGULATIONS
NONE
16
<PAGE> 17
SCHEDULE 5(o)
NO BREACH
NONE
17
<PAGE> 18
SCHEDULE 7(a)
TAX MATTERS
NONE
18
<PAGE> 1
Exhibit 10.22
STOCK PURCHASE AND SALE AGREEMENT
---------------------------------
This Stock Purchase and Sale Agreement (the "Agreement"), is made and
entered into September 29, 1999, by and between Nationwide Financial Services,
Inc. a corporation organized under the laws of the State of Delaware
("Purchaser"), and Nationwide Mutual Insurance Company, an Ohio mutual insurance
company ("Seller").
WITNESSETH:
----------
WHEREAS, Seller owns all of the issued and outstanding shares of
capital stock of Pension Associates, Inc., a corporation organized under the
laws of the State of Wisconsin ("Associates"); and
WHEREAS, on the terms and subject to the conditions contained in this
Agreement, Purchaser desires to purchase from Seller and Seller desires to sell
to Purchaser all of the issued and outstanding shares of capital stock of
Associates.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in this Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties, intending to be legally bound, do hereby represent,
warrant, covenant and agree as follows:
SECTION 1. PURCHASE AND SALE. On the terms and subject to the
conditions set forth in this Agreement, at the Closing (as such term is defined
below), Seller shall sell, transfer, assign, convey and deliver to Purchaser,
and Purchaser shall purchase, accept and acquire from Seller, One Thousand
(1,000) shares of common stock, no par value, of Associates (the "Shares"),
which Shares shall constitute all of the issued and outstanding capital stock of
Associates.
SECTION 2. THE CLOSING. Subject to the following, the closing of the
sale and purchase of the Shares (the "Closing") shall take place at a time
mutually agreeable to the Purchaser and Seller, at the offices of Nationwide
Mutual Insurance Company, Columbus, Ohio, or at such other date, time or place
as the parties may mutually agree (the "Closing Date"). The Closing Date shall
be effective as of 11:59 p.m. EST on the Closing Date.
1
<PAGE> 2
SECTION 3. PURCHASE PRICE. The purchase price for the Shares shall be
calculated prior to Closing, but in no event shall such amount exceed Five
Million Dollars ($5,000,000) (the "Purchase Price").
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER. The Seller hereby
represents, warrants and agrees as follows:
(a) CAPITAL STRUCTURE OF ASSOCIATES; TITLE TO SHARES. The
authorized capital stock of Associates consists of the Shares. The Shares are
duly authorized, validly issued, fully paid, non-assessable and free of
preemptive rights. As of the date hereof, the Shares are outstanding and issued
to Seller, and are free and clear of any lien, charge, proxy or encumbrance.
Seller has good and valid title to the Shares.
(b) AUTHORITY OF SELLER; NO CONFLICT. Seller has all requisite
corporate power and authority to execute and deliver this Agreement and to carry
out its obligations hereunder. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Seller and this
Agreement has been duly executed and delivered by Seller, acting through its
authorized officers, and constitutes the valid and legally binding obligation of
Seller, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, rehabilitation or similar laws affecting the
enforcement of creditors' rights generally or by insurance regulatory
authorities.
(c) NON-CONTRAVENTION. The execution, delivery and performance
by Seller of this Agreement does not and will not (i) violate the charter or
bylaws of Seller or Associates, (ii) give rise to any right of termination under
any material agreement to which Seller or Associates is a party, or (iii) result
in the creation of any lien on the Shares or any material lien on any material
asset of Associates.
(d) OPTIONS OR OTHER RIGHTS. There is no outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
agreement of any kind to purchase or otherwise to receive from Associates any of
the outstanding, authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of Associates and there is no outstanding
security of any kind convertible for or exchangeable into any such capital
stock.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
hereby represents, warrants, and agrees as follows:
2
<PAGE> 3
(a) AUTHORITY; NO CONFLICT. Purchaser has all requisite
corporate power and authority to execute and deliver this Agreement and to carry
out its obligations hereunder. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Purchaser and this
Agreement has been duly executed and delivered by Purchaser, acting through its
authorized officers, and constitutes the valid and legally binding obligation of
Purchaser, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, rehabilitation or similar laws affecting the
enforcement of creditors' rights generally or by insurance regulatory
authorities.
SECTION 6. EVENTS OF TERMINATION.
(a) If the Closing has not taken place prior to December 31,
1999, this Agreement shall terminate, unless it is extended by agreement between
Seller and Purchaser, which shall not be unreasonably withheld provided such
delay is due solely to regulatory delay which is not the result of action or
inaction of either Seller or Purchaser.
(b) This Agreement may be terminated at any time by mutual
agreement of Seller and Purchaser in writing.
SECTION 7. ASSIGNMENT AND AMENDMENT. None of the rights or obligations
of any party hereto may be assigned or delegated in whole or in part without the
consent in writing of the other party hereto. This Agreement may be amended only
by a writing signed by all parties hereto.
SECTION 8. SURVIVAL. The respective representations, warranties,
obligations, covenants, and agreements of Seller and Purchaser contained herein
shall not survive this Agreement, except with respect to Sections 4(a) and (d)
which shall survive.
SECTION 9. MISCELLANEOUS. This Agreement embodies the entire agreement
and understanding between Seller and Purchaser with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
3
<PAGE> 4
SECTION 10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio and shall be binding
upon and shall inure to the benefit of the parties hereto and their successors
and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly entered into as of the date first above written.
PURCHASER:
NATIONWIDE FINANCIAL SERVICES, INC.
By: ___________________________________
Mark R. Thresher
Senior Vice President-Finance and
Treasurer
SELLER:
NATIONWIDE MUTUAL INSURANCE COMPANY
By: ___________________________________
Douglas C. Robinette
Senior Vice President-Claims and
Financial Services
4
<PAGE> 1
EXHIBIT 12
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income from continuing
operations before federal
income tax expense $ 572.8 $ 505.5 $ 407.0 $ 328.1 $ 281.2
Fixed charges 1,143.6 1,104.1 1,042.7 982.3 950.3
----------- ------------ --------------- ------------- -------------
$ 1,716.4 $ 1,609.6 $ 1,449.7 $ 1,310.4 $ 1,231.5
=========== ============ =============== ============= =============
Fixed charges:
Interest credited to policyholder
account balances $ 1,096.4 $ 1,069.0 $ 1,016.6 $ 982.3 $ 950.3
Interest expense on debt and
capital and preferred securities
of subsidiary trusts 47.2 35.1 26.1 - -
----------- ------------ --------------- ------------- -------------
$ 1,143.6 $ 1,104.1 $ 1,042.7 $ 982.3 $ 950.3
=========== ============ =============== ============= =============
Ratio of earnings to fixed charges 1.5x 1.5x 1.4x 1.3x 1.3x
=========== ============ =============== ============= =============
Ratio of earnings to fixed charges,
excluding interest credited to
policyholder account balances 13.1x 15.4x 16.6x N/A N/A
=========== ============ =============== ============= =============
</TABLE>
<PAGE> 1
Exhibit 13
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Please see pages 21-71 of the Company's 1999 Annual Report to Shareholders.
<PAGE> 2
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NFS
INTRODUCTION
- -----------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations of Nationwide Financial Services, Inc. and its subsidiaries (NFS or
collectively the Company) for the three years ended December 31, 1999 follows.
This discussion should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this report.
NFS is the holding company for Nationwide Life Insurance Company (NLIC) and
other companies that comprise the retirement savings operations of the
Nationwide group of companies (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.
As a result of its initial public offering (IPO) in March 1997, NFS is 18.5%
publicly owned. The remaining 81.5% of NFS's common stock is owned by
Nationwide.
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'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.
The following table reconciles the Company's reported net income to net
operating income for each of the last three years. In addition, net operating
income reflecting pro forma adjustments for the IPO, companion senior notes and
capital securities public offerings and special dividends is also presented for
1997.
<PAGE> 3
22
NFS
This pro forma information is not necessarily indicative of what the Company's
results would have been had the above transactions actually occurred at the
beginning of 1997, or of future results of the Company.
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net income $381.3 $332.4 $265.2
Realized (gains) losses on investments,
net of tax 7.0 (11.7) (7.9)
Pro forma adjustments, net of tax -- -- (2.9)
- -------------------------------------------------------------------
Net operating income (pro forma for
1997) $388.3 $320.7 $254.4
- -------------------------------------------------------------------
Basic and diluted net operating income
per share (pro forma for 1997) $ 3.02 $ 2.49 $ 1.98
- -------------------------------------------------------------------
</TABLE>
REVENUES
Total operating revenues, which exclude realized gains and losses on
investments, increased $320.5 million, or 13%, to $2.81 billion in 1999 compared
to $2.49 billion in 1998. Operating revenues in 1998 were up 12% from $2.23
billion reported in 1997. The growth in operating revenues over the past two
years has primarily been driven by increases in policy charges, net investment
income and other income.
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; administrative 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 each of the last three years were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Asset fees $616.6 $494.7 $384.8
Cost of insurance charges 117.0 88.8 68.5
Administrative fees 102.4 73.8 59.5
Surrender fees 59.6 41.6 32.4
- ------------------------------------------------------
Total policy charges $895.6 $698.9 $545.2
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
95 18.6
96 26.90
97 37.70
98 50.90
99 67.20
</TABLE>
The growth in asset fees reflects increases in total separate account assets
of $16.22 billion, or 32%, in 1999 and $13.21 billion, or
35%, in 1998. Strong net cash flows into variable annuity
and variable life insurance products as well as market
appreciation in each of the last three years have resulted
in separate account balances increasing from $26.93
billion at the beginning of 1997 to $67.16 billion at the
end of 1999 representing a compound annual growth rate of
36% over the three year period.
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 $19.76 billion at the end of 1999 compared to
$14.95 billion and $10.44 billion at the end of 1998 and 1997, respectively.
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 over the past two years is attributable to
policyholder withdrawals in the Variable Annuities segment, and is driven by an
overall
<PAGE> 4
23
NFS
increase in variable annuity policy reserves and a heightened competitive
environment in the individual annuity marketplace.
Net investment income includes the gross investment income earned on
investments supporting fixed annuities and certain life insurance products as
well as the yield on the Company's general account invested assets which are not
allocated to product segments. Net investment income grew from $1.41 billion and
$1.49 billion in 1997 and 1998, respectively, to $1.53 billion in 1999 primarily
due to increased invested assets to support growth in fixed annuity and life
insurance policy reserves. Fixed annuity policy reserves, which include the
fixed option of the Company's variable annuity products and funding agreements
issued in conjunction with the Company's medium-term note program, increased
$704.7 million in 1998 and $1.69 billion in 1999 and were $16.59 billion as of
year end 1999. The growth in life insurance reserves was led by investment life
insurance products, where fixed reserves increased $624.2 million in 1998 and
$217.3 million in 1999. The increase in net investment income due to growth in
invested assets was partially offset by declining investment yields in 1999 and
1998 due to lower average market interest rates.
Realized gains and losses on investments are not considered by the Company 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.
Other income includes fees earned by the Company's investment management
subsidiaries as well as commissions and other income earned by other
subsidiaries of the Company that provide marketing, distribution and
administration services. During 1998, NFS acquired three companies in an effort
to expand the Company's investment management and large case pension plan
administration services. All three acquisitions were accounted for using the
purchase method, and the related revenues and expenses have only been included
in the Company's consolidated results since the date of acquisition, affecting
the year-to-year comparisons. Other income included in the Company's current
year results earned by companies that were acquired in 1998 totaled $39.3
million compared to $20.5 million in 1998. The remaining $40.5 million and $24.8
million increases in other income during 1999 and 1998, respectively, are
primarily attributable to growth in the Company's mutual fund operations that
were in place during all the years presented.
BENEFITS AND EXPENSES
Interest credited to policyholder account balances totaled $1.10 billion in
1999 compared to $1.07 billion in 1998 and $1.02 billion in 1997 and principally
relates to fixed annuity and investment life insurance products. The growth in
interest credited reflects the increase in policy reserves previously discussed
partially offset by reduced average crediting rates. The average crediting rate
on fixed annuity policy reserves was 5.59% in 1999 compared to 5.95% and 6.12%
in 1998 and 1997, respectively.
Amortization of deferred policy acquisition costs (DAC) increased $58.1
million in 1999 and $47.4 million in 1998 principally due to the Variable
Annuities segment, which accounted for $39.0 million and $36.1 million of the
increases as a result of growth in the number of policies and related policy
reserves in each of the last two years.
Operating expenses were $561.4 million in 1999, a 19% increase from 1998
operating expenses of $472.1 million. Operating expenses were $402.7 million in
1997. The increase reflects the growth in the number of annuity and life
insurance contracts in force, particularly related to variable annuities and
variable universal life insurance, and the related increase in administrative
processing costs. The recent year increase also reflects investments in the
Company's asset management operations.
The operating expense comparisons are affected by the acquisitions completed
in 1998 as well as the start up of Nationwide Trust Company, F.S.B. and
Nationwide Financial Services (Bermuda), Ltd., which began operations in 1998.
In addition, the 1999 to 1998 comparison is affected by the September 1999
acquisitions of Employers Life Insurance Company of Wausau (ELOW) and Pension
Associates both of which were affiliates of
<PAGE> 5
24
NFS
NFS prior to the purchase. Excluding the effects of the 1999 and 1998
acquisitions and start up companies, operating expenses increased only 13% and
11% during 1999 and 1998, respectively.
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 $191.5 million representing an effective tax
rate of 33.4% for 1999. Federal income tax expense in 1998 and 1997 was $173.1
million and $141.8 million, respectively, representing effective rates of 34.2%
and 34.8%.
YEAR 2000
The Company 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 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 was required to renovate or replace many computer systems so that
the systems would function properly after December 31, 1999.
The Company completed an inventory and assessment of all computer systems.
The Company renovated or replaced all applications that were not compliant.
Testing of all systems included running each application in a Year 2000
environment 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 Company completed an inventory and assessment of all vendor products and
tested and certified each as 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 were 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 of
1999.
The Company also addressed issues associated with the exchange of electronic
data with external organizations. The Company completed an inventory and
assessment of all business partners utilizing electronic interfaces with the
Company and processes were put in place to allow the Company to accept data
regardless of the format. Contingency plans were completed that allow the
Company to continue to send or receive data in the event of failures related to
electronic transmissions.
In addition to resolving internal Year 2000 readiness issues, the Company
conducted a due diligence effort with external organizations, including mutual
fund organizations, financial institutions and wholesale producers. This
involved 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. All of our critical business partners have reported that they
are compliant.
As part of its risk management strategy, the Company identified risk
scenarios including the identification of external risk factors that could cause
business interruptions from Year 2000 related events. These risk scenarios
included increased customer service volume, increased producer service volume,
utility failures, technology failures and disruptions in business operations,
finance and cash flow. The Company completed its mitigation and contingency
plans to address these risks that would, except for complete utility failure,
permit uninterrupted service to customers and producers.
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 compliant.
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. Year 2000 activi-
<PAGE> 6
25
NFS
ties totaled $6.4 million during 1999. The cost associated with the completion
of Year 2000 renovation and replacement efforts will not result in a reduction
in operating expenses. Rather, personnel and resources that were allocated to
the Year 2000 issues have been reassigned to other technology-related projects.
RECENTLY ISSUED ACCOUNTING STANDARDS
See note 2(j) to the consolidated financial statements for a discussion of
recently issued accounting standards.
SALES INFORMATION
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. The following table summarizes
total Company sales by business segment.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Variable annuities $ 9,942.1 $ 9,543.3 $ 7,535.8
Fixed annuities 2,890.0 2,068.0 2,137.9
Life insurance 1,095.9 653.2 468.7
- ---------------------------------------------------------
Total core premiums
and deposits 13,928.0 12,264.5 10,142.4
- ---------------------------------------------------------
Asset management
account deposits 657.7 516.9 154.0
Asset administration
account deposits 1,829.1 394.9 243.9
- ---------------------------------------------------------
Total non-insurance
sales 2,486.8 911.8 397.9
- ---------------------------------------------------------
Total core sales 16,414.8 13,176.3 10,540.3
- ---------------------------------------------------------
Bank-owned life
insurance (BOLI) 123.2 554.6 194.7
Institutional products 577.2 -- --
Nationwide employee
and agent benefit
plans 334.1 323.3 174.9
- ---------------------------------------------------------
Total sales $17,449.3 $14,054.2 $10,909.9
- ---------------------------------------------------------
</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. Sales of
institutional products represent 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 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.
Total core sales reached $16.41 billion during 1999 representing a 24%
increase over 1998. Total annuity sales contributed $12.83 billion and $11.61
billion to 1999 and 1998 core sales, respectively. Core life insurance sales in
1999 were $1.10 billion, up 68% from 1998. Non-insurance sales, which include
assets managed and administered account deposits, increased more than two and a
half times from 1998 reaching $2.49 billion in 1999. The non-insurance sales
comparisons are affected by the three acquisitions the Company completed during
1998, because the 1998 amounts only include sales subsequent to the respective
dates of acquisition. The acquired companies contributed $2.04 billion and
$559.3 million to 1999 and 1998 non-insurance sales, respectively.
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.
<PAGE> 7
26
NFS
Core sales by distribution channel for each of the last three years are
summarized as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Independent
broker/dealers $ 5,442.2 $ 5,004.2 $ 4,976.6
National and regional
brokerage firms (1) 919.3 615.3 --
Financial institutions 2,462.2 2,108.3 1,681.9
Pension plan
administrators 1,169.7 1,015.8 916.7
Nationwide Retirement
Solutions sales
representatives 2,549.0 2,470.1 1,937.0
Nationwide agents 965.6 959.7 630.2
Life insurance
specialists 420.0 91.1 --
- ----------------------------------------------------------
Total core premiums
and deposits 13,928.0 12,264.5 10,142.4
- ----------------------------------------------------------
Total non-insurance
sales 2,486.8 911.8 397.9
- ----------------------------------------------------------
Total core sales $16,414.8 $13,176.3 $10,540.3
- ----------------------------------------------------------
</TABLE>
(1) Prior to 1998, national and regional brokerage firm sales were included in
independent broker/dealer sales.
The 1998 and 1997 statutory premiums and deposits have been restated to
conform to the 1999 presentation which better reflects multi-product sales
across all distribution channels.
The competitive environment for individual annuity sales through the
independent broker/dealer channel has become very challenging; however, total
sales through this channel (including retirement plans and life insurance) were
up 9% in 1999 reflecting the strength of the Company's multiple product
strategy. Sales through financial institutions grew 14% during 1999 and 23%
during 1998 driven mainly by proprietary individual annuity products sales.
The increase in sales through life specialists reflects $409.2 million of
corporate owned life insurance (COLI) sales in 1999 compared to $91.1 million in
1998. NFS entered the COLI market in 1998 and has quickly become a market leader
though a focus on mid-sized cases.
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.
Core sales by product for each of the last three years are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Best of America(R)
products $ 4,665.3 $ 4,661.1 $ 4,267.3
Private label annuities 1,280.3 1,093.3 981.9
The NEA Valuebuilder
annuities 168.5 172.6 134.8
Other 906.9 727.2 307.8
- ----------------------------------------------------------
Total individual
annuities 7,021.0 6,654.2 5,691.8
- ----------------------------------------------------------
Best of America(R)
group pension series 3,537.6 2,760.0 2,221.1
IRC Section 457
annuities 2,190.4 2,155.3 1,716.5
Other 83.1 41.8 44.3
- ----------------------------------------------------------
Total group annuities 5,811.1 4,957.1 3,981.9
- ----------------------------------------------------------
Traditional/Universal
life insurance 260.8 246.1 248.3
Best of America(R)
variable life series 425.9 316.0 220.4
Corporate owned life
insurance 409.2 91.1 --
- ----------------------------------------------------------
Total life insurance 1,095.9 653.2 468.7
- ----------------------------------------------------------
Total non-insurance
sales 2,486.8 911.8 397.9
- ----------------------------------------------------------
Total core sales $16,414.8 $13,176.3 $10,540.3
- ----------------------------------------------------------
</TABLE>
BUSINESS SEGMENTS
- -----------------------------------------------------------
The Company has historically reported three product segments: Variable
Annuities, Fixed Annuities and Life Insurance. In
<PAGE> 8
27
NFS
addition, the Company reports certain other revenues and expenses in a Corporate
and Other segment. Beginning in 1999 the Company began reporting a new product
segment, Assets Managed and Administered. See note 18 of the Company's
consolidated financial statements for a description of this change as well as
other changes to the Company's segment reporting. Amounts reported for prior
periods have been restated to reflect these changes. 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 each of the last three
years.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Variable annuities $285.5 $218.4 $150.9
Fixed annuities 177.2 175.3 169.5
Life insurance 120.8 88.8 66.7
Assets managed and administered 25.6 14.1 13.2
Corporate and other (25.3) (9.0) (4.4)
- ---------------------------------------------------------
$583.8 $487.6 $395.9
- ---------------------------------------------------------
</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 a 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 years indicated.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 626.9 $ 501.6 $ 387.1
Benefits and expenses 341.4 283.2 236.2
- ---------------------------------------------------------
Operating income
before federal
income tax expense $ 285.5 $ 218.4 $ 150.9
- ---------------------------------------------------------
OTHER DATA
Statutory premiums and
deposits (1) $ 9,942.1 $ 9,543.3 $ 7,535.8
Policy reserves:
Individual $37,039.3 $28,940.4 $22,210.9
Group $24,184.7 $17,480.4 $12,275.8
- ---------------------------------------------------------
Total $61,224.0 $46,420.8 $34,486.7
Pre-tax operating
income to average
policy reserves 0.55% 0.54% 0.51%
- ---------------------------------------------------------
</TABLE>
(1) Statutory data have been derived from the Annual Statements of the Company's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Pre-tax operating earnings reached a record $285.5 million in 1999, up 31%
compared to 1998 earnings of $218.4 million, which were up 45% from 1997.
Improved Variable Annuity segment results are primarily due to growth in asset
fees partially offset by increased DAC amortization.
Asset fees were $596.7 million in 1999 up 25% from $479.1 million in 1998 and
totaled $370.2 million in 1997. Asset fees are charged as a percentage of policy
reserves which have increased substantially in the past three years as a result
of strong net cash flows and through market appreciation on investments
underlying reserves. Variable annuity policy reserves grew $14.80 billion during
1999 reaching $61.22 billion as of year end 1999 compared to growth in 1998 of
$11.93 billion and year end 1998 reserves of $46.42 billion. During 1997, policy
reserves increased $10.21 billion.
<PAGE> 9
28
NFS
<TABLE>
<CAPTION>
<S> <C>
95 16.8
96 24.30
97 34.50
98 46.40
99 61.20
</TABLE>
Sales in 1999 of $9.94 billion offset by withdrawals and surrenders totaling
$6.52 billion generated net cash flows of $3.42 billion.
Although 1999 net cash flows are down from the $5.28
billion and $4.85 billion achieved in 1998 and 1999,
respectively, the Company has shown the ability to
consistently generate substantial positive cash flows and
increase its base of asset fee generating reserves in a
very competitive environment. The increase in withdrawal
and surrender activity is attributable to an increase in competition in the
individual variable annuity market which has increased transfers to competitors'
products and the overall aging of the Company's book of individual annuity
business. The Company will introduce new products, new product features and new
retention strategies during 2000 in an effort to decrease the rate of
surrenders.
Although the equity markets have been volatile in recent years, equity market
conditions over each of the past three years have contributed significantly to
the growth in variable annuity policy reserves. Variable annuity policy reserves
reflect market appreciation of $10.55 billion, $6.80 billion and $5.21 billion
in 1999, 1998 and 1997, respectively.
Amortization of DAC increased 31% in 1999 reaching $162.9 million compared to
$123.9 million and $87.8 million in 1998 and 1997, respectively. The growth in
DAC amortization is consistent with the overall growth in the variable annuity
business.
Changes in the Company's products and mix of business have slightly decreased
policy charges as a percentage of reserves from 1.28% in 1999 compared to 1.32%
and 1.41% in 1998 and 1997, respectively. Product changes include the
introduction of new individual products with reduced policy charges. The mix of
business has changed as group products have become a higher percentage of total
reserves in each of the last three years driven by sales of private pension
plans that have lower policy charge rates than individual products. In spite of
this trend, efficiencies achieved through improved operating scale have enabled
the Company to improve operating margins to 55 basis points of average policy
reserves up from 54 basis points in 1998 and 51 basis points in 1997.
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 a 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. The following table summarizes certain selected financial data for
the Company's Fixed Annuities segment for the years indicated.
<PAGE> 10
29
NFS
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 1,134.5 $ 1,116.6 $ 1,098.2
Other 43.4 35.7 43.2
- ---------------------------------------------------------
1,177.9 1,152.3 1,141.4
- ---------------------------------------------------------
Benefits and expenses:
Interest credited to
policyholder
account balances 837.5 828.6 823.4
Other benefits and
expenses 163.2 148.4 148.5
- ---------------------------------------------------------
1,000.7 977.0 971.9
- ---------------------------------------------------------
Operating income
before federal
income tax expense $ 177.2 $ 175.3 $ 169.5
- ---------------------------------------------------------
OTHER DATA
Statutory premiums and
deposits (1) $ 3,467.2 $ 2,068.0 $ 2,137.9
Policy reserves:
Individual $ 7,874.2 $ 6,818.3 $ 6,420.2
Group $ 8,143.2 8,080.6 $ 7,774.0
Institutional $ 574.5 -- --
- ---------------------------------------------------------
Total $16,591.9 $14,898.9 $14,194.2
Pre-tax operating
income to average
policy reserves 1.14% 1.21% 1.22%
- ---------------------------------------------------------
</TABLE>
(1) Statutory data have been derived from the Annual Statements of the Company's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices. The 1999
amount includes premiums from funding agreements securing medium term-notes.
Fixed Annuities segment results reflect an increase in interest spread income
attributable to growth in fixed annuity policy reserves offset by narrower
interest margins during 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 margins on general account policy reserves in the Fixed Annuities
segment for each of the last three years.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Net investment income 7.57% 8.02% 8.16%
Interest credited 5.59 5.95 6.12
- ------------------------------------------------------
1.98% 2.07% 2.04%
- ------------------------------------------------------
</TABLE>
During 1998 and the first half of 1999 the Company experienced an increase in
mortgage loan and bond prepayment fees and such income accounted for
approximately 9 basis points of the interest spread in 1999 compared to 16 basis
points and 8 basis points in 1998 and 1997, respectively. The recent increases
in interest rates have slowed prepayment activity and the Company expects
interest spreads to remain at 190 to 195 basis points, excluding the impact of
mortgage loan and bond prepayment income.
The Company is able to mitigate the effects of changes in investment yields
by periodically resetting the rates credited on fixed annuity contracts. As of
December 31, 1999, $7.28 billion, or 44% of fixed annuity policy reserves, were
in contracts where the guaranteed interest rate is reestablished each quarter.
Fixed annuity policy reserves of $5.89 billion are in contracts that adjust the
crediting rate on an annual basis with portions resetting in each calendar
quarter. The Company also has $1.39 billion of fixed annuity policy reserves
that call for the crediting rate to be reset annually on each January 1 and
$1.45 billion of fixed annuity policy reserves that are in payout status where
the Company has guaranteed periodic, typically monthly, payments. The remaining
$574.5 million of fixed annuity policy reserves relate to funding agreements
issued in conjunction with the Company's medium-term note program where the
crediting rate is fixed for the term of the contract.
<PAGE> 11
30
NFS
<TABLE>
<CAPTION>
<S> <C>
95 12.8
96 13.50
97 14.20
98 14.90
99 16.60
</TABLE>
Fixed annuity policy reserves increased to $16.59 billion as of year-end
compared to $14.90 billion a year ago and $14.19 billion
as of the end of 1997. The 1999 growth reflects increased
sales levels as well as the acquisition of ELOW.
Fixed annuity sales during 1999 were $3.47 billion
compared to 1998 sales of $2.07 billion. Sales in 1997
were $2.14 billion. Sales in 1999 include $577.2 million
of funding agreements issued in conjunction with the
Company's medium-term note program. Most of the Company's fixed annuity sales
are premiums allocated to the fixed option of variable annuity contracts. Fixed
annuity sales for 1999 include $2.49 billion in premiums allocated to the fixed
option under a variable annuity contract, compared to $1.68 billion in 1998 and
$1.67 billion in 1997. The increase in 1999 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.
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 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 years indicated.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 646.1 $ 544.1 $ 468.3
Benefits and expenses 525.3 455.3 401.6
- ----------------------------------------------------------
Operating income before
federal income tax
expense $ 120.8 $ 88.8 $ 66.7
- ----------------------------------------------------------
OTHER DATA
Statutory premiums (1):
Individual variable
universal life
insurance $ 426.0 $ 315.9 $ 220.3
Corporate-owned life
insurance $ 532.3 $ 645.8 $ 194.7
Traditional and
universal life
insurance $ 260.8 $ 246.1 $ 248.4
- ----------------------------------------------------------
Total $1,219.1 $1,207.8 $ 663.4
Policy reserves as of year
end:
Individual variable
universal life
insurance $1,832.3 $1,270.1 $ 895.6
Corporate-owned life
insurance $1,498.6 $ 903.6 $ 221.9
Traditional and
universal life
insurance $2,582.9 $2,439.7 $2,369.5
- ----------------------------------------------------------
Total $5,913.8 $4,613.4 $3,487.0
- ----------------------------------------------------------
</TABLE>
(1) Statutory data have been derived from the Annual Statements of the Company's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Life Insurance segment earnings in 1999 increased 36% to $120.8 million, up
from $88.8 million a year ago and $66.7 million in 1997. Continued strong sales
and reserve growth from both individual and corporate owned investment life
insurance products contributed to the sharp earnings increases.
<PAGE> 12
31
NFS
Driven primarily by increased policy charges, revenues from investment life
products increased to $226.5 million in 1999 compared to $145.4 million in 1998
and $69.8 million in 1997. The revenue growth reflects significantly increased
policy reserve levels as individual investment life reserves increased 44% in
1999 to $1.83 billion compared to $1.27 billion a year ago and $895.6 million at
the end of 1997. Corporate owned investment life reserves, which include both
BOLI and corporate-owned (COLI) products reached $1.50 billion, up from $903.6
million and $221.9 million at the end of 1998 and 1997, respectively.
Pre-tax earnings from investment life products reached $53.4 million in 1999
compared to $29.6 million a year ago and $14.7 million in 1997. The strong
revenue growth discussed previously more than offset increased operating
expenses and slightly elevated mortality experience, which continues to remain
within pricing assumptions.
<TABLE>
<CAPTION>
<S> <C>
95 2.7
96 2.90
97 3.50
98 4.60
99 5.90
</TABLE>
Traditional and universal life pre-tax earnings jumped 14% to $67.4 million
in 1999 compared to $59.2 million in 1998 and were $52.0
million in 1997. The 1998 results reflect additional
expenses related to the installation of a new policy
administration system.
Total life insurance premiums and deposits for 1999
were $1.22 billion compared to $1.21 billion during 1998
and $663.4 million in 1997. Excluding BOLI sales of $123.2
million in 1999 and $554.7 million in 1998, life insurance sales increased 68%
in 1999 and 39% in 1998. Sales in 1999 include record levels of production for
individual variable life insurance and COLI, reflecting the Company's efforts to
sell variable life through multiple channels and growing consumer and producer
demand.
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 Assets
Managed and Administered segment for the years indicated.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 157.9 $ 99.4 $ 60.0
Operating expenses 132.3 85.3 46.8
- ----------------------------------------------------------
Operating income before
federal income tax
expense $ 25.6 $ 14.1 $ 13.2
- ----------------------------------------------------------
OTHER DATA
Account deposits:
Assets under
management $ 657.7 $ 516.9 $ 154.0
Assets administered $ 1,829.1 $ 394.9 $ 243.9
Account assets (1):
Assets under
management $22,866.7 $19,825.5 $7,840.0
Assets administered $15,784.8 $ 9,746.9 $2,753.0
- ----------------------------------------------------------
</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.
Pre-tax earnings for the Assets Managed and Administered segment increased
82% to $25.6 million during 1999 compared to $14.1 million in 1998. Earnings
have continued to grow even as the Company commits investment dollars toward
staffing and infrastructure to expand this segment.
The earnings comparisons are affected by acquisitions the Company completed
during 1998 when 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 $39.8 million to revenues and $38.8
million to operating expenses during 1999. The $38.8 million of operating
expenses attributable to the acquisitions includes $3.5 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
<PAGE> 13
32
NFS
place during all years presented, coupled with a mid-year 1999
increase in fees charged on certain products.
Assets under management include $10.04 billion and $8.15 billion of Company
managed investment options that support the Company's variable annuity and
variable life insurance products as of December 31, 1999 and 1998, respectively.
These assets are also included in the related variable annuity and variable life
insurance policy reserves.
CORPORATE AND OTHER
The following table summarizes certain selected financial data for the
Company's Corporate and Other segment for the years indicated.
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $205.5 $196.4 $170.5
Benefits and expenses 230.8 205.4 174.8
- ------------------------------------------------------
Operating income before
federal income tax expense
(1) $(25.3) $ (9.0) $ (4.3)
- ------------------------------------------------------
</TABLE>
(1) Excludes realized gains (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 operating income in 1999 and 1998 compared to 1997 primarily
relates to interest expense on the notes and capital securities issued in March
1997 concurrent with the IPO and on the preferred securities issued in October
1998. Interest expense totaled $47.2 million, $35.1 million and $26.1 million in
1999, 1998 and 1997, respectively.
In addition to the operating revenues previously presented, the Company also
reports realized gains and losses on investments in the Corporate and Other
segment. The Company realized net investment (losses) gains of $(11.0) million,
$17.9 million and $11.1 million during 1999, 1998 and 1997, respectively.
INVESTMENTS
- -----------------------------------------------------------
GENERAL
The Company's assets are divided between separate account and general account
assets. As of December 31, 1999, $67.16 billion (or 72%) of the Company's total
assets were held in separate accounts and $25.89 billion (or 28%) were held in
the Company's general account, including $22.59 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 $915.4
million of policy reserves as of December 31, 1999 ($743.9 million as of
December 31, 1998) for which the Company bears the investment risk. In addition
to the information presented herein, see note 3 to the consolidated financial
statements for further information regarding the Company's investments.
The following tables summarize the Company's consolidated general account
invested assets by asset category.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
(in millions) Carrying Value % of Total
- ---------------------------------------------------------
<S> <C> <C>
Fixed maturity securities $15,296.5 67.7%
Mortgage loans, net 5,786.3 25.6
Real estate, net 254.8 1.1
Policy loans 519.6 2.3
Equity securities 96.4 0.5
Other long-term investments 73.8 0.3
Short-term investments 560.5 2.5
- ---------------------------------------------------------
Total $22,587.9 100.0%
- ---------------------------------------------------------
</TABLE>
<PAGE> 14
33
NFS
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
(in millions) Carrying Value % of Total
- ---------------------------------------------------------
<S> <C> <C>
Fixed maturity securities $14,247.9 68.0%
Mortgage loans, net 5,328.4 25.5
Real estate, net 243.6 1.2
Policy loans 464.3 2.2
Equity securities 134.0 0.6
Other long-term investments 44.0 0.2
Short-term investments 478.3 2.3
- ---------------------------------------------------------
Total $20,940.5 100.0%
- ---------------------------------------------------------
</TABLE>
FIXED MATURITY SECURITIES
The following tables summarize the composition of the Company's general
account fixed maturity securities by category.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
(in millions) Carrying Value % of Total
- ----------------------------------------------------------
<S> <C> <C>
U.S. government/agencies $ 449.4 2.9%
Foreign governments 110.4 0.7
State and political
subdivisions 0.8 --
Mortgage-backed securities:
U.S. government/agencies 3,420.9 22.4
Non-government/agencies -- --
Corporate:
Public 5,950.5 38.9
Private 5,364.5 35.1
- ----------------------------------------------------------
Total $15,296.5 100.0%
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
(in millions) Carrying Value % of Total
- ----------------------------------------------------------
<S> <C> <C>
U.S. government/agencies $ 269.0 1.9%
Foreign governments 111.0 0.8
State and political
subdivisions 1.6 --
Mortgage-backed securities:
U.S. government/agencies 3,562.2 25.0
Non-government/agencies -- --
Corporate:
Public 5,194.3 36.4
Private 5,109.8 35.9
- ----------------------------------------------------------
Total $14,247.9 100.0%
- ----------------------------------------------------------
</TABLE>
The average duration and average maturity of the Company's general account
fixed maturity securities as of December 31, 1999 were approximately 3.25 and
7.78 years, respectively. The market value of the Company's general account
investments may fluctuate significantly in response to changes in interest
rates. In addition, the Company may also be likely to experience investment
losses to the extent its liquidity needs require the disposition of general
account fixed maturity securities in unfavorable interest rate environments.
The National Association of Insurance Commissioners (NAIC) assigns securities
quality ratings and uniform 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 December 31, 1999.
The following tables set forth an analysis of credit quality, as determined
by NAIC Designation, of the Company's general account fixed maturity securities
portfolio.
<TABLE>
<CAPTION>
Rating
(in millions) Agency
NAIC Equivalent December 31, 1999
Designation Designation ---------------------------
(1) (2) Carrying Value % of Total
- ---------------------------------------------------------------
<C> <S> <C> <C>
1 Aaa/Aa/A $ 9,802.7 64.1%
2 Baa 4,990.1 32.6
3 Ba 408.6 2.7
4 B 87.0 0.6
5 Caa and lower 8.1 --
6 In or near default -- --
- ---------------------------------------------------------------
$15,296.5 100.0%
- ---------------------------------------------------------------
</TABLE>
<PAGE> 15
34
NFS
<TABLE>
<CAPTION>
Rating
(in millions) Agency
NAIC Equivalent December 31, 1998
Designation Designation ---------------------------
(1) (2) Carrying Value % of Total
- ---------------------------------------------------------------
<C> <S> <C> <C>
1 Aaa/Aa/A $ 9,166.1 64.3%
2 Baa 4,715.1 33.1
3 Ba 347.2 2.5
4 B 5.6 --
5 Caa and lower 13.9 0.1
6 In or near default -- --
- ---------------------------------------------------------------
$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 December 31, 1999, MBSs were $3.42 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.
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to its general
account fixed maturity securities portfolio. The objective of the Company's
general account MBS investments is to provide reasonable cash flow stability and
increased yield. General account MBS investments include collateralized mortgage
obligations (CMOs), Real Estate Mortgage Investment Conduits (REMICs) and
mortgage-backed pass-through securities. The Company's general account MBS
investments do not include interest-only securities or principal-only securities
or other MBSs which may exhibit extreme market volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the degree of
prepayment risk is particular to the type of MBS held. The Company limits its
exposure to prepayments by purchasing less volatile types of MBSs. As of
December 31, 1999, $2.01 billion (or 59%) 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 tables set forth the distribution by investment type of the
Company's general account MBS portfolio.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
(in millions) Carrying Value % of Total
- ----------------------------------------------------------
<S> <C> <C>
Accrual $ 75.7 2.2%
Planned Amortization Class 2,010.1 58.8
Sequential 93.5 2.7
Scheduled 120.7 3.5
Targeted Amortization Class 110.1 3.2
Very Accurately Defined
Maturity 477.9 14.0
Multi-family Mortgage Pass-
through Certificates 367.6 10.8
Other 165.3 4.8
- ----------------------------------------------------------
$3,420.9 100.0%
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
(in millions) Carrying Value % of Total
- ----------------------------------------------------------
<S> <C> <C>
Accrual $ 77.3 2.2%
Planned Amortization Class 2,433.4 68.3
Sequential 45.6 1.3
Scheduled 143.8 4.0
Targeted Amortization Class 92.0 2.6
Very Accurately Defined
Maturity 477.8 13.4
Multi-family Mortgage Pass-
through Certificates 251.0 7.0
Other 41.3 1.2
- ----------------------------------------------------------
$3,562.2 100.0%
- ----------------------------------------------------------
</TABLE>
The Company invests in private fixed maturity securities because of the (i)
generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business
covenants available in
<PAGE> 16
35
NFS
private fixed maturity security loan agreements and (iii) stronger prepayment
protection. Although private fixed maturity securities are not registered with
the Securities and Exchange Commission and generally are less liquid than public
fixed maturity securities, restrictive financial and business covenants included
in private fixed maturity security loan agreements generally are designed to
compensate for the impact of increased liquidity risk. A significant majority of
the private fixed maturity securities that the Company holds are participations
in issues that are also owned by other investors. In addition, some of the
private fixed maturity securities are rated by nationally recognized rating
agencies and substantially all have been assigned a rating designation by the
NAIC.
MORTGAGE LOANS
As of December 31, 1999, general account mortgage loans were $5.79 billion
(or 26%) of the carrying value of consolidated general account invested assets.
As of such date, commercial mortgage loans constituted substantially all of
total general account mortgage loans. Commitments to fund mortgage loans of
$216.2 million extending into 2000 were outstanding as of December 31, 1999.
The summary below depicts loans by remaining principal balance as of December
31, 1999:
<TABLE>
<CAPTION>
Apartment
(in millions) Office Warehouse Retail & other Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
East North Central $ 107.5 $ 159.8 $ 569.3 $ 231.5 $1,068.1
East South Central 37.2 40.7 128.1 90.0 296.0
Mountain 56.5 31.9 81.9 170.4 340.7
Middle Atlantic 177.2 107.5 195.8 94.0 574.5
New England 83.1 13.9 133.7 5.0 235.7
Pacific 211.0 391.5 465.2 133.6 1,201.3
South Atlantic 146.1 167.8 511.2 493.9 1,319.0
West North Central 109.8 8.2 58.0 77.0 253.0
West South Central 115.5 112.2 135.6 180.9 544.2
- ------------------------------------------------------------------------------------------------------------------
$1,043.9 $1,033.5 $2,278.8 $1,476.3 5,832.5
- ------------------------------------------------------------------------------------------------------
Less valuation allowances and unamortized discount 46.2
--------
Total mortgage loans on real estate, net $5,786.3
--------
</TABLE>
As of December 31, 1999, the Company's largest exposure to any single
borrowing group was $101.0 million, or 2% of the Company's general account
mortgage loan portfolio.
As of December 31, 1999 0.09% of the Company's mortgage loans were classified
as delinquent compared to none a year ago. Foreclosed and restructured loans
totaled only 0.33% and 0.64% of the Company's mortgage loans as of December 31,
1999 and 1998, 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
<PAGE> 17
36
NFS
structure consists of debt, capital and preferred securities of subsidiary
trusts and equity, summarized in the following table.
<TABLE>
<CAPTION>
December 31,
------------------------------
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------
<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 2,502.6 2,171.6 1,877.1
Accumulated other
comprehensive income (15.5) 275.9 247.1
- ----------------------------------------------------------
Total shareholders'
equity 2,487.1 2,447.5 2,124.2
- ----------------------------------------------------------
Total capital $3,085.5 $3,045.9 $2,522.6
- ----------------------------------------------------------
</TABLE>
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 declared in the twelve months preceding December 31, 1999 were $236.0
million. 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.
NFS, NLIC and Nationwide Mutual Insurance Company are parties to a $600.0
million revolving credit facility that provides an additional source of funds to
the Company. The credit facility provides for a $600 million loan over a five
year term on a fully revolving basis with a group of national financial
institutions. The credit facility provides for several and not joint liability
with respect to any amount drawn by 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 December 31, 1999.
A primary liquidity concern with respect to annuity and life insurance
products is the risk of early policyholder withdrawal. The Company mitigates
this risk by offering variable products where the investment risk is transferred
to the policyholder, charging surrender fees at the time of withdrawal for
certain products, applying a market value adjustment to withdrawals for certain
products in the Company's general account, and monitoring and matching
anticipated cash inflows and outflows.
For individual annuity products ($42.6 billion of reserves as of December 31,
1999) the surrender charge is calculated as a percentage of the lesser of
deposits made or the amount surrendered and is assessed at declining rates
during the first seven years after a deposit is made.
For group annuity products ($33.1 billion of reserves as of December 31,
1999), the surrender charge amounts and periods can vary significantly,
depending on the terms of each contract and the compensation structure for the
producer. Generally, surrender charge percentages for group products are less
than individual products because the Company incurs lower expenses at contract
origination for group products. In addition, over
<PAGE> 18
37
NFS
ninety percent of the general account group annuity reserves are subject to a
market value adjustment at withdrawal.
Life insurance policies are also subject to withdrawal. However, they are
less susceptible to withdrawal than are annuity products because policyholders
generally must undergo a new underwriting process and may incur a surrender fee
in order to obtain a new insurance policy.
The short-term and long-term liquidity requirements of the Company are
monitored regularly to match cash inflows with cash requirements. The Company
periodically reviews its short-term and long-term projected sources and uses of
funds and the asset/liability, investment and cash flow assumptions underlying
these projections. Adjustments are made periodically with respect to the
Company's investment policies to reflect changes in the Company's short-term and
long-term cash needs and changing business and economic conditions.
Given the Company's historic cash flow and current financial results,
management of the Company believes that the cash flow from the operating
activities of the Company over the next year will provide sufficient liquidity
for the operations of the Company, as well as provide sufficient funds to enable
the Company to make dividend and interest payments.
MARKET RISK SENSITIVE FINANCIAL INSTRUMENTS
- -----------------------------------------------------------
The Company is subject to potential fluctuations in earnings and the fair
value of certain of its assets and liabilities, as well as variations in
expected cash flows due to changes in market interest rates and equity prices.
The following discussion focuses on specific exposures the Company has to
interest rate and equity price risk and describes strategies used to manage
these risks. The discussion is limited to financial instruments subject to
market risks and is not intended to be a complete discussion of all of the risks
the Company is exposed to.
INTEREST RATE RISK
- -----------------------------------------------------------
Fluctuations in interest rates can potentially impact the Company's earnings
and cash flows, and the fair value of its assets and liabilities. Generally, in
a declining interest rate environment, the Company may be required to reinvest
the proceeds from matured and prepaid investments at rates lower than the
overall yield of the portfolio, which could reduce interest spread income. In
addition, minimum guaranteed crediting rates (typically 3% or 3.5%) on certain
annuity contracts could result in a reduction of the Company's interest spread
income in the event of a significant and prolonged decline in interest rates
from market rates at the end of 1999. The average crediting rate of annuity
products during 1999 was 5.59%, well in excess of the guaranteed rates. The
Company mitigates this risk by investing in assets with maturities and durations
that match the expected characteristics of the liabilities and by investing in
mortgage backed securities with limited prepayment exposure.
Conversely, a rising interest rate environment could result in a reduction of
interest spread income or an increase in policyholder surrenders. Investments
supporting annuity liabilities generally have a weighted average maturity of
seven years when purchased and therefore, the change in yield of the portfolio
will lag changes in market interest rates. This lag is increased if the rate of
prepayments of mortgage-backed securities slows. To the extent the Company sets
renewal rates based on current market rates, this will result in reduced
interest spreads. Alternatively, if the Company sets renewal crediting rates
while attempting to maintain a desired spread from the portfolio yield, the
rates offered by the Company may be less than new money rates offered by
competitors. This difference could result in an increase in surrender activity
by policyholders. If the Company could not fund the surrenders with its cash
flow from operations, the Company may be required to sell investments, which
likely would have declined in value due to the increase in interest rates. The
Company mitigates this risk by offering products that assess surrender charges
or market value adjustments at the time of surrender, by investing in assets
with maturities and durations that match the expected characteristics of the
liabilities, and by investing in mortgage backed securities with limited
prepayment exposure.
<PAGE> 19
38
NFS
ASSET/LIABILITY MANAGEMENT STRATEGIES TO MANAGE INTEREST RATE RISK
- -----------------------------------------------------------
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its products. The Company's general account
investments are primarily managed in a number of pools that are segregated by
weighted average maturity of the assets acquired by the pools. For fixed
maturity securities and mortgages, the weighted average maturity is based on
repayments which are scheduled to occur under the terms of the asset. For
mortgage backed securities, repayments are determined using the current rate of
repayment of the underlying mortgages and the terms of the securities. Each
product line has an investment strategy based on its specific characteristics.
The strategy establishes asset duration, quality and other guidelines. The
Company determines the amount of new investments needed for each line to arrive
at the amount of new investments needed for each pool by month. The investments
acquired for each pool are shared on a proportional basis by each of the lines
requesting investments in the pool based on their actual investment needs.
For all business having future benefits which cannot be changed at the option
of the policyholder, the underlying assets are managed in a separate pool. The
duration of assets and liabilities in this pool are kept as close together as
possible. For assets, the repayment cash flows, plus anticipated coupon
payments, are used in calculating asset duration. Future benefits and expenses
are used for liabilities. On December 31, 1999, the average duration of assets
in this pool was 7.09 years and the average duration of the liabilities was 7.41
years. Policy reserves on this business were $1.5 billion as of December 31,
1999.
Because the timing of the payment of future benefits on the majority of the
Company's business can be changed by the policyholder, the Company employs cash
flow testing techniques in its asset/liability management process. In addition,
each year the Company's annuity and insurance business is analyzed to determine
the adequacy of the reserves supporting such business. This analysis is
accomplished by projecting the anticipated cash flows from such business and the
assets required to support such business under a number of possible future
interest rate scenarios. The first seven of these scenarios are required by
state insurance regulation. Projections are also made using 14 additional
scenarios which involve more extreme fluctuations in future interest rates and
equity markets. Finally, to get a statistical analysis of possible results and
to minimize any bias in the 21 predetermined scenarios, additional projections
are made using 50 randomly generated interest rate scenarios. For the Company's
1999 cash flow testing process, interest rates for 90-day treasury bills ranged
from 0.73% to 11.98% under the 21 predetermined scenarios and 1.44% to 18.53%
under the 50 random scenarios. Interest rates for longer maturity treasury
securities had comparable ranges. The values produced by each projection are
used to determine future gains or losses from the Company's annuity and
insurance business, which, in turn, are used to quantify the adequacy of the
Company's reserves over the entire projection period. The results of the
Company's cash flow testing indicated that the Company's reserves were adequate
as of December 31, 1999.
<PAGE> 20
39
NFS
CHARACTERISTICS OF INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following table provides information about the Company's financial
instruments as of December 31, 1999 that are sensitive to changes in interest
rates. Insurance contracts that subject the Company to significant mortality
risk, including life insurance contracts and life-contingent immediate
annuities, do not meet the definition of a financial instrument and are not
included in the table.
<TABLE>
<CAPTION>
Fair
(in millions) 2000 2001 2002 2003 2004 Thereafter Total Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,088.8 $1,669.0 $1,674.3 $1,047.6 $ 971.6 $3,102.8 $ 9,554.1 $ 9,539.0
Average interest rate 7.5% 7.4% 7.1% 7.1% 7.2% 7.9%
Mortgage and other asset-
backed securities:
Principal $ 997.2 $ 920.5 $ 761.0 $ 551.8 $ 448.8 $1,606.6 $ 5,285.9 $ 5,196.9
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.4%
Other fixed maturity
securities:
Principal $ 76.4 $ 70.3 $ 107.7 $ 34.0 $ 43.9 $ 207.5 $ 539.8 $ 560.6
Average interest rate 6.4% 6.0% 7.0% 7.8% 6.5% 8.3%
Mortgage loans on real
estate:
Principal $ 292.8 $ 270.9 $ 369.9 $ 391.2 $ 483.2 $4,024.5 $ 5,832.5 $ 5,745.5
Average interest rate 9.0% 8.3% 8.6% 7.8% 7.7% 7.8%
LIABILITIES
Deferred fixed annuities:
Principal $2,076.0 $1,646.0 $1,448.0 $1,286.0 $1,149.0 $9,626.8 $17,231.8 $16,674.6
Average credited rate 5.5% 5.4% 5.4% 5.4% 5.4% 5.5%
Immediate annuities:
Principal $ 27.0 $ 24.0 $ 21.0 $ 19.0 $ 17.0 $ 123.0 $ 231.0 $ 237.8
Average credited rate 7.2% 7.2% 7.2% 7.3% 7.3% 7.3%
Long-term debt:
Principal -- -- -- -- -- $ 300.0 $ 300.0 $ 290.5
Average interest rate -- -- -- -- -- 8.0%
Capital and preferred
securities of subsidiary
trusts:
Principal -- -- -- -- -- $ 300.0 $ 300.0 $ 280.0
Average interest rate -- -- -- -- -- 7.6%
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value -- -- $ 15.0 $ 16.0 $ 90.8 $ 240.9 $ 362.7 $ 4.8
Weighted average pay rate -- -- 2.7% 6.6% 6.8% 6.9%
Weighted average receive
rate -- -- 7.5% 6.1% 6.1% 6.2%
Pay variable/receive fixed
Notional value -- -- -- -- $ 320.4 $ 285.3 $ 605.7 $ (25.3)
Weighted average pay rate -- -- -- -- 6.4% 6.5%
Weighted average receive
rate -- -- -- -- 3.0% 5.4%
Interest rate futures:
Short positions
Contract amount/notional $ 323.6 $ 256.0 $ 168.0 $ 22.0 $ 9.0 $ 3.0 $ 781.6 $ 1.3
Weighted average
settlement price $ 94.4 $ 93.4 $ 93.2 $ 93.0 $ 92.8 $ 92.6
</TABLE>
<PAGE> 21
40
NFS
The following table provides information about the Company's financial
instruments as of December 31, 1998 that are sensitive to changes in interest
rates.
<TABLE>
<CAPTION>
Fair
(in millions) 1999 2000 2001 2002 2003 Thereafter Total Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,092.7 $1,049.2 $1,667.6 $1,386.3 $ 882.7 $2,866.7 $ 8,945.2 $ 9,366.9
Average interest rate 8.0% 7.5% 7.3% 7.2% 7.0% 7.6%
Mortgage and other asset-
backed securities:
Principal $ 905.3 $ 964.3 $ 870.7 $ 588.9 $ 367.3 $ 718.3 $ 4,414.8 $ 4,499.4
Average interest rate 7.3% 7.4% 7.2% 7.4% 7.4% 7.0%
Other fixed maturity
securities:
Principal $ 7.8 $ 72.0 $ 54.6 $ 103.3 $ 60.6 $ 65.8 $ 364.1 $ 381.6
Average interest rate 8.5% 6.4% 7.0% 6.6% 6.9% 6.8%
Mortgage loans on real
estate:
Principal $ 185.9 $ 373.9 $ 313.1 $ 339.5 $ 408.8 $3,751.2 $ 5,372.4 $ 5,527.6
Average interest rate 9.2% 9.3% 7.0% 8.5% 7.6% 7.1%
LIABILITIES
Deferred fixed annuities:
Principal $1,639.6 $1,548.3 $1,733.7 $1,232.5 $1,169.6 $8,270.7 $15,594.4 $15,282.0
Average credited rate 5.2% 4.8% 4.5% 4.3% 4.1% 4.1%
Immediate annuities:
Principal $ 20.6 $ 20.7 $ 22.3 $ 25.2 $ 29.9 $ 53.1 $ 171.8 $ 201.6
Average credited rate 7.3% 7.3% 7.3% 7.3% 7.4% 7.4%
Long-term debt:
Principal -- -- -- -- -- $ 300.0 $ 300.0 $ 339.9
Average interest rate -- -- -- -- -- 8.0%
Capital and preferred
securities of subsidiary
trusts:
Principal -- -- -- -- -- $ 300.0 $ 300.0 $ 314.5
Average interest rate -- -- -- -- -- 7.6%
</TABLE>
Additional information about the characteristics of the financial instruments
and assumptions underlying the data presented in the table above are as follows:
Mortgage and other asset-backed securities (MBSs): The maturity year is
determined based on the terms of the securities and the current rate of
prepayment of the underlying pools of mortgages. The Company limits its exposure
to prepayments by purchasing less volatile types of MBSs (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Investments -- Fixed Maturity Securities").
Other Fixed Maturity Securities and Mortgage Loans on Real Estate: The
maturity year is determined based on the maturity date of the security or loan.
Deferred Fixed Annuities: The maturity year is based on the expected date of
policyholder withdrawal, taking into account actual experience, current interest
rates, and contract terms. Included are group annuity contracts ($9.70 billion)
which are generally subject to market value adjustment upon surrender and may
also be subject to surrender charges. Of the total group annuity liabilities,
$7.28 billion was in contracts where the crediting rate is reset quarterly. For
the remaining $2.42 billion of group annuity reserves, the crediting rate is
reset annually on
<PAGE> 22
41
NFS
January 1. Also included are $5.89 billion of individual annuity liabilities
where the crediting rate is reset annually, with portions resetting in each
calendar quarter. Such individual annuity contracts are also subject to
surrender charges calculated as a percentage of the lesser of deposits made or
the amount surrendered and assessed at declining rates during the first seven
years after a deposit is made. The average crediting rate is calculated as the
difference between the projected yield of the assets backing the liabilities and
a targeted interest spread. However, for certain individual annuities the
credited rate is also adjusted to partially reflect current new money rates.
Immediate Annuities: Included are non-life contingent contracts in payout
status where the Company has guaranteed periodic, typically monthly, payments.
The maturity year is based on the terms of the contract.
Long-term Debt and Capital and Preferred Securities of Subsidiary Trusts: The
maturity year is the stated maturity date of the obligation. While each
obligation is callable, either at a premium or with a make-whole provision, the
Company currently has no plans to call the obligations prior to the stated
maturity date.
Interest rate swaps and futures: The maturity year is based on the terms of
the related contract. Variable swap rates and settlement prices reflect those in
effect at December 31, 1999.
EQUITY MARKET RISK
- -----------------------------------------------------------
Asset fees calculated as a percentage of the separate account assets are a
significant source of revenue to the Company. At December 31, 1999, 88% of
separate account assets were invested in equity mutual funds. Gains and losses
in the equity markets will result in corresponding increases and decreases in
the Company's separate account assets and the reported asset fee revenue. In
addition, a decrease in separate account assets may decrease the Company's
expectations of future profit margins which may require the Company to
accelerate the amortization of deferred policy acquisition costs.
INFLATION
- -----------------------------------------------------------
The rate of inflation did not have a material effect on the revenues or
operating results of the Company during 1999, 1998 or 1997.
<PAGE> 23
42
FIVE-YEAR SUMMARY
- --------------------------------------------------------------------------------
NFS
<TABLE>
<CAPTION>
(in millions, except per share amounts)
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1)
Policy charges $ 895.6 $ 698.9 $ 545.2 $ 400.9 $ 286.6
Life insurance premiums 220.8 200.0 205.4 198.6 199.1
Net investment income 1,530.5 1,486.8 1,413.9 1,357.8 1,294.0
Realized gains (losses) on investments (11.0) 17.9 11.1 (0.2) (1.7)
Other 167.4 108.1 62.8 59.5 59.0
- ------------------------------------------------------------------------------------------------------------------
Total revenues 2,803.3 2,511.7 2,238.4 2,016.6 1,837.0
- ------------------------------------------------------------------------------------------------------------------
Interest credited and other benefits 1,096.4 1,284.4 1,235.4 1,201.6 1,155.4
Interest expense on debt and capital and preferred
securities 47.2 35.1 26.1 -- --
Other operating expenses 814.2 686.7 569.9 486.9 400.4
- ------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,230.5 2,006.2 1,831.4 1,688.5 1,555.8
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations before federal income
tax expense 572.8 505.5 407.0 328.1 281.2
Federal income tax expense 191.5 173.1 141.8 115.8 96.3
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 381.3 $ 332.4 $ 265.2 $ 212.3 $ 184.9
- ------------------------------------------------------------------------------------------------------------------
Net income $ 381.3 $ 332.4 $ 265.2 $ 223.6 $ 209.6
- ------------------------------------------------------------------------------------------------------------------
Basic and diluted net income per common share (2) $ 2.96 $ 2.58 $ 2.14
Cash dividends declared $ 0.38 $ 0.30 $ 0.18
Diluted average shares outstanding 128.6 128.6 124.1
RECONCILIATION OF NET INCOME TO NET OPERATING INCOME (1)
Net income $ 381.3 $ 332.4 $ 265.2 $ 223.6 $ 209.6
Less: Realized (gains) losses on investments, net of tax 7.0 (11.7) (7.9) (1.0) (0.1)
Less: Income from discontinued operations, net of tax -- -- -- (11.3) (24.7)
- ------------------------------------------------------------------------------------------------------------------
Net operating income 388.3 320.7 257.3 211.3 184.8
Pro forma adjustments -- -- (2.9) (26.2) (26.2)
- ------------------------------------------------------------------------------------------------------------------
Pro forma net operating income $ 388.3 $ 320.7 $ 254.4 $ 185.1 $ 158.6
- ------------------------------------------------------------------------------------------------------------------
Pro forma net operating income per common share $ 3.02 $ 2.49 $ 1.98 $ 1.44 $ 1.24
- ------------------------------------------------------------------------------------------------------------------
Net operating return on average realized equity (4) 16.6% 15.8% 14.5%
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Comparisons between 1999 and 1998 results of operations and those of prior
years are affected by the Company's initial public offering in March 1997
and companion offerings of senior notes and capital securities as well as
the payment of certain special dividends. Pro forma amounts adjust for these
transactions.
(2) Actual earnings and book value per common share amounts have not been
presented for periods prior to 1997, because such amounts are not meaningful
due to the effects of the initial public offering and the $900.0 million of
dividends paid prior to the initial public offering.
(3) During 1999, NFS began reporting a new product segment, Assets Managed and
Administered, and made certain other changes to amounts reported by segment.
See note 18 to the consolidated financial statements for further description
of theses changes.
(4) Based on net operating income and excluding accumulated other comprehensive
income.
<PAGE> 24
43
NFS
FIVE-YEAR SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in millions, except per share amounts)
AS OF DECEMBER 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL POSITION (1)
Total investments $ 22,587.9 $20,940.5 $19,673.2 $18,317.3 $17,837.0
Deferred policy acquisition costs 2,555.8 2,022.3 1,665.4 1,366.5 1,020.4
Separate account assets 67,155.3 50,935.8 37,724.4 26,926.7 18,591.1
Other assets 755.0 772.6 829.9 1,159.7 1,057.6
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 93,054.0 $74,671.2 $59,892.9 $47,770.2 $38,506.1
- -----------------------------------------------------------------------------------------------------------------
Policy reserves $ 21,868.3 $19,772.2 $18,702.8 $17,600.6 $16,771.9
Separate account liabilities 67,155.3 50,935.8 37,724.4 26,926.7 18,591.1
Other liabilities 944.9 917.3 943.1 1,111.2 526.4
Long-term debt 298.4 298.4 298.4 -- --
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 90,266.9 71,923.7 57,668.7 45,638.5 35,889.4
- -----------------------------------------------------------------------------------------------------------------
NFS-obligated mandatorily redeemable capital and
preferred securities of subsidiary trusts 300.0 300.0 100.0 -- --
Shareholders' equity 2,487.1 2,447.5 2,124.2 2,131.7 2,616.7
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 93,054.0 $74,671.2 $59,892.9 $47,770.2 $38,506.1
- -----------------------------------------------------------------------------------------------------------------
Book value per common share (2) $ 19.35 $ 19.04 $ 16.53
- ---------------------------------------------------------------------------------------
CUSTOMER FUNDS MANAGED AND ADMINISTERED
Variable annuities $ 61,224.0 $46,420.8 $34,486.7 $24,278.1 $16,761.8
Fixed annuities 16,591.9 14,898.9 14,194.2 13,511.8 12,784.0
Life insurance 5,913.8 4,613.4 3,487.0 2,938.9 2,660.5
Corporate and other 4,977.7 4,365.5 3,791.9 3,302.5 2,644.3
- -----------------------------------------------------------------------------------------------------------------
Total policy reserves 88,707.4 70,298.6 55,959.8 44,031.3 34,850.6
- -----------------------------------------------------------------------------------------------------------------
Retail mutual funds 3,346.0 3,121.0 2,555.0 2,136.2 2,113.9
Stable value funds 9,484.0 8,549.8 -- -- --
Assets administered, net 9,610.0 9,262.5 2,753.0 1,079.4 664.6
- -----------------------------------------------------------------------------------------------------------------
$111,147.4 $91,231.9 $61,267.8 $47,246.9 $37,629.1
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(in millions)
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME BEFORE FEDERAL INCOME TAX EXPENSE
BY BUSINESS SEGMENT (1)(3)
Variable annuities $ 285.5 $ 218.4 $ 150.9 $ 90.3 $ 50.8
Fixed annuities 177.2 175.3 169.5 135.4 137.0
Life insurance 120.8 88.8 66.7 67.2 67.6
Assets managed and administered 25.6 14.1 13.2 -- --
Corporate and other (25.3) (9.0) (4.4) 35.4 27.5
- ------------------------------------------------------------------------------------------------------------------
$ 583.8 $ 487.6 $ 395.9 $ 328.3 $ 282.9
- ------------------------------------------------------------------------------------------------------------------
CORE SALES BY BUSINESS SEGMENT (3)
Variable annuities $ 9,942.1 $ 9,543.3 $ 7,535.8 $ 6,500.3 $ 4,399.3
Fixed annuities 2,890.0 2,068.0 2,137.9 1,600.5 1,864.2
Life insurance 1,095.9 653.2 468.7 419.3 352.4
Assets managed and administered 2,486.8 911.8 397.9 407.5 154.4
- ------------------------------------------------------------------------------------------------------------------
$16,414.8 $13,176.3 $10,540.3 $ 8,927.6 $ 6,770.3
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 25
44
NFS
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in millions, except per share amounts)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Policy charges $ 895.6 $ 698.9 $ 545.2
Life insurance premiums 220.8 200.0 205.4
Net investment income 1,530.5 1,486.8 1,413.9
Realized gains (losses) on investments (11.0) 17.9 11.1
Other 167.4 108.1 62.8
- ----------------------------------------------------------------------------------------------
2,803.3 2,511.7 2,238.4
- ----------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 1,096.4 1,069.0 1,016.6
Other benefits and claims 210.4 175.8 178.2
Policyholder dividends on participating policies 42.4 39.6 40.6
Amortization of deferred policy acquisition costs 272.7 214.6 167.2
Interest expense on debt and capital and preferred
securities of subsidiary trusts 47.2 35.1 26.1
Other operating expenses 561.4 472.1 402.7
- ----------------------------------------------------------------------------------------------
2,230.5 2,006.2 1,831.4
- ----------------------------------------------------------------------------------------------
Income before federal income tax expense 572.8 505.5 407.0
Federal income tax expense 191.5 173.1 141.8
- ----------------------------------------------------------------------------------------------
Net income $ 381.3 $ 332.4 $ 265.2
- ----------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 2.96 $ 2.58 $ 2.14
Diluted $ 2.96 $ 2.58 $ 2.14
Weighted average common shares outstanding 128.5 128.5 124.0
Weighted average diluted common shares outstanding 128.6 128.6 124.1
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
45
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
NFS
<TABLE>
<CAPTION>
(in millions, except per share amounts)
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $15,296.5 $14,247.9
Equity securities 96.4 134.0
Mortgage loans on real estate, net 5,786.3 5,328.4
Real estate, net 254.8 243.6
Policy loans 519.6 464.3
Other long-term investments 73.8 44.0
Short-term investments 560.5 478.3
- --------------------------------------------------------------------------------------------
22,587.9 20,940.5
- --------------------------------------------------------------------------------------------
Cash 22.5 24.5
Accrued investment income 238.7 218.7
Deferred policy acquisition costs 2,555.8 2,022.3
Other assets 493.8 529.4
Assets held in separate accounts 67,155.3 50,935.8
- --------------------------------------------------------------------------------------------
$93,054.0 $74,671.2
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Future policy benefits and claims $21,868.3 $19,772.2
Long-term debt 298.4 298.4
Other liabilities 944.9 917.3
Liabilities related to separate accounts 67,155.3 50,935.8
- --------------------------------------------------------------------------------------------
90,266.9 71,923.7
- --------------------------------------------------------------------------------------------
Commitments and contingencies (notes 11 and 17)
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 634.9 629.5
Retained earnings 1,867.4 1,541.5
Accumulated other comprehensive income (15.5) 275.9
Other (0.9) (0.6)
- --------------------------------------------------------------------------------------------
2,487.1 2,447.5
- --------------------------------------------------------------------------------------------
$93,054.0 $74,671.2
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
46
NFS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Class A Class B Additional other Total
common common paid-in Retained comprehensive shareholders'
(in millions) stock stock capital earnings income Other equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 $ -- $ 1.0 $ 551.4 $1,405.7 $ 173.6 $ -- $2,131.7
Comprehensive income:
Net income -- -- -- 265.2 -- -- 265.2
Net unrealized gains on securities
available-for-sale arising during the
year -- -- -- -- 73.5 -- 73.5
----------
Total comprehensive income 338.7
----------
Issuance of Class A common stock 0.2 -- 524.0 -- -- -- 524.2
Dividends to shareholders -- -- (450.0) (423.1) -- -- (873.1)
Other, net -- -- 3.8 -- -- (1.1) 2.7
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 0.2 1.0 629.2 1,247.8 247.1 (1.1) 2,124.2
Comprehensive income:
Net income -- -- -- 332.4 -- -- 332.4
Net unrealized gains on securities
available-for-sale arising during the
year -- -- -- -- 28.8 -- 28.8
----------
Total comprehensive income 361.2
----------
Cash dividends declared -- -- -- (38.7) -- -- (38.7)
Other, net -- -- 0.3 -- -- 0.5 0.8
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 0.2 1.0 629.5 1,541.5 275.9 (0.6) 2,447.5
Comprehensive income:
Net income -- -- -- 381.3 -- -- 381.3
Net unrealized losses on securities
available-for-sale arising during the
year -- -- -- -- (314.9) -- (314.9)
----------
Total comprehensive income 66.4
----------
Cash dividends declared -- -- -- (48.9) -- -- (48.9)
Other, net -- -- 5.4 (6.5) 23.5 (0.3) 22.1
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 $ 0.2 $ 1.0 $ 634.9 $1,867.4 $ (15.5) $(0.9) $2,487.1
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 28
47
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
NFS
<TABLE>
<CAPTION>
(in millions)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 381.3 $ 332.4 $ 265.2
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to policyholder account balances 1,096.4 1,069.0 1,016.6
Capitalization of deferred policy acquisition costs (638.7) (584.2) (487.9)
Amortization of deferred policy acquisition costs 272.7 214.6 167.2
Amortization and depreciation 8.9 (6.6) (0.6)
Realized (gains) losses on invested assets, net 11.0 (17.9) (11.1)
Increase in accrued investment income (8.0) (7.5) (1.0)
Decrease (increase) in other assets 64.7 (94.5) (16.5)
Decrease in policy liabilities (20.9) (8.3) (23.1)
Increase (decrease) in other liabilities 174.4 (54.5) 270.3
Other, net (3.2) (4.6) (5.7)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,338.6 837.9 1,173.4
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 2,307.9 1,557.0 993.4
Proceeds from sale of securities available-for-sale 513.1 610.5 574.5
Proceeds from maturity of fixed maturity securities
held-to-maturity -- 6.0 --
Proceeds from repayments of mortgage loans on real estate 696.7 678.2 437.3
Proceeds from sale of real estate 5.7 103.8 34.8
Proceeds from repayments of policy loans and sale of other
invested assets 40.9 23.6 22.7
Cost of securities available-for-sale acquired (3,720.6) (3,192.5) (2,828.1)
Cost of mortgage loans on real estate acquired (971.4) (829.1) (752.2)
Cost of real estate acquired (14.2) (0.8) (24.9)
Short-term investments, net 17.2 (29.1) (441.0)
Net cash paid for purchase of subsidiaries (125.2) -- --
Other, net (133.3) (88.4) (62.5)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,383.2) (1,160.8) (2,046.0)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Class A common stock -- -- 524.2
Net proceeds from issuance of NFS-obligated mandatorily
redeemable capital and preferred securities of
subsidiary trusts -- 193.7 98.3
Net proceeds from issuance of long-term debt -- -- 294.5
Cash dividends paid (46.4) (36.0) (15.4)
Increase in investment product and universal life
insurance product account balances 3,799.4 2,682.1 2,488.5
Decrease in investment product and universal life
insurance product account balances (3,709.6) (2,673.3) (2,379.8)
Other, net (0.8) -- --
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42.6 166.5 1,010.3
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (2.0) (156.4) 137.7
Cash, beginning of year 24.5 180.9 43.2
- -------------------------------------------------------------------------------------------------
Cash, end of year $ 22.5 $ 24.5 $ 180.9
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 29
48
NFS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
- -----------------------------------------------------------
Nationwide Financial Services, Inc. (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 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 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, life insurance specialists, Nationwide Retirement Solutions
sales representatives, and Nationwide agents.
The 23.8 million outstanding shares of Class A common stock are publicly held
and were primarily issued through NFS's initial public offering (IPO) completed
in March 1997. The Class A shares represent 18.5% of the equity ownership in NFS
and 2% of the combined voting power of NFS's Class A and Class B common stock.
Nationwide Corporation (Nationwide Corp.), owns all of the outstanding shares of
Class B common stock, which represents the remaining 81.5% equity ownership and
98% of the combined voting power of the shareholders of NFS.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------
The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles which differ from statutory accounting practices
prescribed or permitted by regulatory authorities. Annual Statements for the
Company's insurance subsidiaries, filed with the department of insurance of each
insurance company's state of domicile, are prepared on the basis of accounting
practices prescribed or permitted by each department. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company's
insurance subsidiaries have no material permitted statutory accounting
practices.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements and the reported amounts of
revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs, valuation allowances for mortgage loans on real estate
and real estate investments and the liability for future policy benefits and
claims. Although some variability is inherent in these estimates, management
believes the amounts provided are adequate.
(A) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of NFS and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(B) VALUATION OF INVESTMENTS AND RELATED GAINS AND LOSSES
The Company is required to classify its fixed maturity securities and equity
securities as either held-to-maturity, available-for-sale or trading. Fixed
maturity securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity and are stated at
amortized cost. Fixed maturity securities not classified as held-to-maturity and
all equity securities are classified as available-for-sale and are stated at
fair value, with the unrealized gains and losses, net of adjustments to deferred
policy acquisition costs and deferred federal income tax, reported as a separate
component of accumulated other comprehensive income in shareholders' equity. The
adjustment to deferred policy acquisition costs represents the change in
amortization of deferred policy
<PAGE> 30
49
NFS
acquisition costs that would have been required as a charge or credit to
operations had such unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as of December 31,
1999 or 1998.
Mortgage loans on real estate are carried at the unpaid principal balance
less valuation allowances. The Company provides valuation allowances for
impairments of mortgage loans on real estate based on a review by portfolio
managers. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, the fair value of the collateral, if the loan is
collateral dependent. Loans in foreclosure and loans considered to be impaired
are placed on non-accrual status. Interest received on non-accrual status
mortgage loans on real estate is included in interest income in the period
received.
Real estate is carried at cost less accumulated depreciation and valuation
allowances. Other long-term investments are carried on the equity basis,
adjusted for valuation allowances. Impairment losses are recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.
Realized gains and losses on the sale of investments are determined on the
basis of specific security identification. Estimates for valuation allowances
and other than temporary declines are included in realized gains and losses on
investments.
(C) REVENUES AND BENEFITS
Investment Products and Universal Life Insurance Products: Investment
products consist primarily of individual and group variable and fixed deferred
annuities. Universal life insurance products include universal life insurance,
variable universal life insurance, corporate owned life insurance and other
interest-sensitive life insurance policies. Revenues for investment products and
universal life insurance products consist of net investment income, asset fees,
cost of insurance, policy administration and surrender charges that have been
earned and assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest credited to
policy account balances and benefits and claims incurred in the period in excess
of related policy account balances.
Traditional Life Insurance Products: Traditional life insurance products
include those products with fixed and guaranteed premiums and benefits and
consist primarily of whole life insurance, limited-payment life insurance, term
life insurance and certain annuities with life contingencies. Premiums for
traditional life insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result in recognition
of profits over the life of the contract. This association is accomplished by
the provision for future policy benefits and the deferral and amortization of
policy acquisition costs.
(D) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions, certain
expenses of the policy issue and underwriting department and certain variable
sales expenses have been deferred. For investment products and universal life
insurance products, deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present value of
estimated future gross profits from projected interest margins, asset fees, cost
of insurance, policy administration and surrender charges. For years in which
gross profits are negative, deferred policy acquisition costs are amortized
based on the present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses on fixed
maturity securities available-for-sale as described in note 2(b). For
traditional life insurance products, these deferred policy acquisition costs are
predominantly being amortized with interest over the premium paying period of
the related policies in proportion to the ratio of actual annual premium revenue
to the anticipated total premium revenue. Such anticipated premium revenue was
estimated using the same assumptions as were used for computing liabilities for
future policy benefits.
<PAGE> 31
50
NFS
(E) SEPARATE ACCOUNTS
Separate account assets and liabilities represent contractholders' funds
which have been segregated into accounts with specific investment objectives.
For all but $915.4 million of separate account assets, the investment income and
gains or losses of these accounts accrue directly to the contractholders. The
activity of the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the Company receives.
(F) FUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation phase,
universal life insurance and variable universal life insurance policies have
been calculated based on participants' contributions plus interest credited less
applicable contract charges. The average interest rate credited on investment
product policy reserves was 5.6%, 6.0% and 6.1% for the years ended December 31,
1999, 1998 and 1997, respectively.
Future policy benefits for traditional life insurance policies have been
calculated by the net level premium method using interest rates varying from
6.0% to 10.5% and estimates of mortality, morbidity, investment yields and
withdrawals which were used or which were being experienced at the time the
policies were issued, rather than the assumptions prescribed by state regulatory
authorities.
(G) PARTICIPATING BUSINESS
Participating business represents approximately 29% in 1999 (40% in 1998 and
50% in 1997) of the Company's life insurance in force, 69% in 1999 (74% in 1998
and 77% in 1997) of the number of life insurance policies in force, and 13% in
1999 (14% in 1998 and 27% in 1997) of life insurance statutory premiums. The
provision for policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the accompanying consolidated
balance sheets.
(H) FEDERAL INCOME TAX
The Company files a consolidated federal income tax return with Nationwide
Mutual Insurance Company (NMIC), the majority shareholder of Nationwide Corp.
The members of the consolidated tax return group have a tax sharing arrangement
which provides, in effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting for income
tax. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce the deferred tax assets to the amounts
expected to be realized.
(I) REINSURANCE CEDED
Reinsurance premiums ceded and reinsurance recoveries on benefits and claims
incurred are deducted from the respective income and expense accounts. Assets
and liabilities related to reinsurance ceded are reported on a gross basis.
(J) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP, which was 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
<PAGE> 32
51
NFS
related costs as incurred. The effect of adopting the SOP was to increase net
income for 1999 by $9.8 million or $0.08 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 investment and 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 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.
(K) RECLASSIFICATION
Certain items in the 1998 and 1997 consolidated financial statements have
been reclassified to conform to the 1999 presentation.
- --------------------------------------------------------------------------------
(3) INVESTMENTS
- --------------------------------------------------------------------------------
The amortized cost, gross unrealized gains and losses and estimated fair value
of securities available-for-sale as of December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 428.4 $ 23.4 $ (2.4) $ 449.4
Obligations of states and political subdivisions 0.8 -- -- 0.8
Debt securities issued by foreign governments 110.6 0.6 (0.8) 110.4
Corporate securities 11,414.7 118.9 (218.6) 11,315.0
Mortgage-backed securities 3,425.3 25.8 (30.2) 3,420.9
- -----------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 15,379.8 168.7 (252.0) 15,296.5
Equity securities 87.8 12.4 (3.8) 96.4
- -----------------------------------------------------------------------------------------------------------------
$15,467.6 $181.1 $(255.8) $15,392.9
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 256.0 $ 13.0 $ -- $ 269.0
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 106.5 4.5 -- 111.0
Corporate securities 9,899.6 423.2 (18.7) 10,304.1
Mortgage-backed securities 3,460.4 104.2 (2.4) 3,562.2
- -----------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 13,724.1 544.9 (21.1) 14,247.9
Equity securities 116.9 18.6 (1.5) 134.0
- -----------------------------------------------------------------------------------------------------------------
$13,841.0 $563.5 $ (22.6) $14,381.9
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
52
NFS
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale as of December 31, 1999, by expected maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
(in millions) cost fair value
- -------------------------------------------------------
<S> <C> <C>
Fixed maturity securities
available for sale:
Due in one year or less $ 847.0 $ 847.0
Due after one year through
five years 5,243.1 5,208.2
Due after five years
through ten years 5,046.8 5,005.2
Due after ten years 4,242.9 4,236.1
- -------------------------------------------------------
$15,379.8 $15,296.5
- -------------------------------------------------------
</TABLE>
The components of unrealized (losses) gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998
- ------------------------------------------------------
<S> <C> <C>
Gross unrealized (losses) gains $(74.7) $ 540.9
Adjustment to deferred policy
acquisition costs 50.9 (116.6)
Deferred federal income tax 8.3 (148.4)
- ------------------------------------------------------
$(15.5) $ 275.9
- ------------------------------------------------------
</TABLE>
An analysis of the change in gross unrealized (losses) gains on securities
available-for-sale follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Securities
available-for-sale:
Fixed maturity
securities $(607.1) $52.6 $137.5
Equity securities (8.5) 4.5 (2.7)
- ------------------------------------------------------
$(615.6) $57.1 $134.8
- ------------------------------------------------------
</TABLE>
Proceeds from the sale of securities available-for-sale during 1999, 1998 and
1997 were $513.1 million, $610.5 million and $574.5 million, respectively.
During 1999, gross gains of $11.0 million ($9.0 million and $9.9 million in 1998
and 1997, respectively) and gross losses of $28.0 million ($7.6 million and
$18.0 million in 1998 and 1997, respectively) were realized on those sales. In
addition, gross gains of $15.1 million and gross losses of $0.7 million were
realized in 1997 when the Company paid a dividend to Nationwide Corp. consisting
of securities having an aggregate fair value of $850.0 million.
NFS had $15.6 million of real estate investments at December 31, 1999 that
were non-income producing the preceding twelve months. During 1998 NFS had
investments of $42.4 million that were non-income producing, which consisted of
$32.7 million of securities available-for-sale and $9.7 million in 1998 of real
estate.
Real estate is presented at cost less accumulated depreciation of $24.8
million as of December 31, 1999 ($21.5 million as of December 31, 1998) and
valuation allowances of $5.5 million as of December 31, 1999 ($5.4 million as of
December 31, 1998).
The recorded investment of mortgage loans on real estate considered to be
impaired was $3.7 million both as of December 31, 1999 and 1998. No valuation
allowance has been recorded for these loans as of December 31, 1999 or 1998.
During 1999, the average recorded investment in impaired mortgage loans on real
estate was $3.7 million ($9.1 million in 1998) and there was no interest income
recognized on those loans. Interest income recognized on impaired loans totaled
$0.3 million in 1998 which is equal to interest income recognized using a
cash-basis method of income recognition.
<PAGE> 34
53
NFS
Activity in the valuation allowance account for mortgage loans on real estate
is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Allowance, beginning of year $42.4 $42.5 $51.0
Additions (reductions)
charged to operations 0.7 (0.1) (1.2)
Direct write-downs charged
against the allowance -- -- (7.3)
Allowance on acquired
mortgage loans 1.3 -- --
- ------------------------------------------------------
Allowance, end of year $44.4 $42.4 $42.5
- ------------------------------------------------------
</TABLE>
An analysis of investment income by investment type follows for the years
ended December 31:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity
securities $1,031.5 $ 982.5 $ 911.6
Equity securities 2.5 0.8 0.8
Fixed maturity
securities
held-to-maturity -- -- 0.4
Mortgage loans on real
estate 460.4 458.9 457.7
Real estate 28.8 40.4 42.9
Short-term investments 28.8 23.1 26.9
Other 25.8 30.6 21.1
- ---------------------------------------------------------
Total investment
income 1,577.8 1,536.3 1,461.4
Less investment expenses 47.3 49.5 47.5
- ---------------------------------------------------------
Net investment income $1,530.5 $1,486.8 $1,413.9
- ---------------------------------------------------------
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Securities
available-for-sale:
Fixed maturity securities $(25.0) $(0.7) $ 3.6
Equity securities 8.0 2.1 2.7
Mortgage loans on real
estate (0.6) 3.9 1.6
Real estate and other 6.6 12.6 3.2
- ------------------------------------------------------
$(11.0) $17.9 $11.1
- ------------------------------------------------------
</TABLE>
Fixed maturity securities with an amortized cost of $9.1 million as of
December 31, 1999 and $6.5 million as of December 31, 1998 were on deposit with
various regulatory agencies as required by law.
(4) LONG-TERM DEBT
- -----------------------------------------------------------
On March 10, 1997, NFS sold $300 million of Senior Notes (the Notes) in a
public offering generating net proceeds of $294.5 million. The Notes bear
interest at the rate of 8% per annum and mature on March 1, 2027. The Notes are
redeemable in whole or in part, at the option of NFS, at any time on or after
March 1, 2007 at scheduled redemption premiums through March 1, 2016, and,
thereafter, at 100% of the principal amount thereof plus, in each case, accrued
and unpaid interest. The Notes are not subject to any sinking fund payments. The
terms of the Notes contain various restrictive covenants including limitations
on the disposition of subsidiaries. As of December 31, 1999, NFS was in
compliance with all such covenants. The Company made interest payments on the
Notes of $24.0 million in 1999 and 1998 and $11.4 million in 1997.
(5) MANDATORILY REDEEMABLE CAPITAL AND
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
- -----------------------------------------------------------
Nationwide Financial Services Capital Trust (Trust I) and Nationwide
Financial Services Capital Trust II (Trust II, or collectively, the Trusts),
wholly owned subsidiaries of NFS, were formed under the laws of the state of
Delaware. The Trusts exist for the exclusive purposes of (i) issuing Capital and
Preferred Securities representing undivided beneficial interests in the assets
of the Trusts; (ii) investing the gross proceeds from the sale of the Capital
and Preferred Securities in Junior Subordinated Debentures of NFS; and (iii)
engaging in only those activities necessary or incidental thereto. These Junior
Subordinated Debentures and the related income effects are eliminated in the
consolidated financial statements.
On March 11, 1997, Trust I sold, in a public offering, $100.0 million of
7.899% Capital Securities, representing preferred undivided beneficial interests
in the assets of Trust I
<PAGE> 35
54
NFS
generating net proceeds of $98.3 million. Concurrent with the sale of the
Capital Securities, NFS sold to Trust I $103.1 million in principal amount of
its 7.899% Junior Subordinated Debentures due March 1, 2037. The Junior
Subordinated Debentures are the sole assets of Trust I and are redeemable by NFS
in whole at any time or in part from time to time at par plus an applicable
make-whole premium. The Capital Securities will mature or be called
simultaneously with the Junior Subordinated Debentures and have a liquidation
value of $1,000 per Capital Security.
The Capital Securities, through obligations of NFS under the Junior
Subordinated Debentures, the Capital Securities Guarantee Agreement and the
related Declaration of Trust and Indenture, are fully and unconditionally
guaranteed by NFS. Distributions on the Capital Securities are cumulative and
payable semi-annually in arrears.
On October 19, 1998, Trust II sold, in a public offering, $200 million of
7.10% Trust Preferred Securities representing preferred undivided beneficial
interests in the assets of Trust II generating net proceeds of $193.7 million.
Concurrent with the sale of the Preferred Securities, NFS sold to Trust II
$206.2 million of Junior Subordinated Debentures due October 31, 2028. The
Junior Subordinated Debentures are the sole assets of Trust II and are
redeemable, in whole or in part, on or after October 19, 2003 at a redemption
price equal to the principal amount to be redeemed plus any accrued and unpaid
interest. The Preferred Securities have a liquidation amount of $25 per security
and must be redeemed by Trust II when the Junior Subordinated Debentures mature
or are redeemed by NFS.
The Preferred Securities, through obligations of NFS under the Junior
Subordinated Debentures, the Preferred Securities Guarantee Agreement and the
related Amended and Restated Declaration of Trust, are fully and unconditionally
guaranteed by NFS. Distributions on the Preferred Securities are cumulative and
payable quarterly beginning January 31, 1999. Including amortization of issue
costs and amortization of a deferred loss on hedging transactions the effective
interest rate on the Preferred Securities is 7.41%.
Distributions on the Capital and Preferred Securities have been classified as
interest expense in the consolidated statements of income. The Company made
distributions on the Capital and Preferred Securities in 1999, 1998 and 1997 of
$22.6 million, $7.9 million and $3.8 million, respectively.
(6) DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------------------------
NFS uses derivative financial instruments, principally interest rate swaps,
interest rate futures contracts and foreign currency swaps, to manage market
risk exposures associated with changes in interest rates and foreign currency
exchange rates. Provided they meet specific criteria, interest rate swaps and
futures are considered hedges and are accounted for under the accrual method and
deferral method, respectively. NFS has no significant derivative positions that
are not considered hedges.
Interest rate swaps are primarily used to convert specific investment
securities and interest bearing policy liabilities from a fixed-rate to a
floating-rate basis. Amounts receivable or payable under these agreements are
recognized as an adjustment to net investment income or interest credited to
policyholder account balances consistent with the nature of the hedged item. The
changes in fair value of the interest rate swap agreements are not recognized on
the balance sheet, except for interest rate swaps designated as hedges of fixed
maturity securities available-for-sale, for which changes in fair values are
reported in accumulated other comprehensive income.
Interest rate futures contracts are primarily used to hedge the risk of
adverse interest rate changes related to NFS's mortgage loan commitments and
anticipated purchases of fixed rate investments. Gains and losses are deferred
and, at the time of closing, reflected as an adjustment to the carrying value of
the related mortgage loans or investments. The carrying value adjustments are
amortized into net investment income over the life of the related mortgage loans
or investments.
Foreign currency swaps are used to convert cash flows from specific policy
liabilities and investments denominated in foreign currencies into U.S. dollars
at specified exchange rates. Gains and
<PAGE> 36
55
NFS
losses on foreign currency swaps are recorded in earnings based on the related
spot foreign exchange rate at the end of the reporting period. Gains and losses
on these contracts offset those recorded as a result of translating the hedged
foreign currency denominated liabilities and investments to U.S. dollars.
The following table summarizes the notional amount of derivative financial
instruments classified as hedges outstanding as of December 31, 1999. Prior to
1999 NFS's activities in derivatives were not significant.
<TABLE>
<CAPTION>
(in millions)
- ------------------------------------------------------
<S> <C>
INTEREST RATE SWAPS
Pay fixed/receive variable rate swaps
hedging investments $362.7
Pay variable/receive fixed rate swaps
hedging investments $ 28.5
Other contracts hedging investments $ 19.1
Pay variable/receive fixed rate swaps
hedging liabilities $577.2
FOREIGN CURRENCY SWAPS
Hedging foreign currency denominated
investments $ 14.8
Hedging foreign currency denominated
liabilities $577.2
INTEREST RATE FUTURES CONTRACTS $781.6
- ------------------------------------------------------
</TABLE>
(7) FEDERAL INCOME TAX
- -----------------------------------------------------------
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998
- -----------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Fixed maturity securities $ 5.3 $ --
Future policy benefits 149.5 207.7
Liabilities in separate accounts 373.6 319.9
Mortgage loans on real estate and
real estate 18.5 17.5
Other assets and other
liabilities 51.1 63.1
- -----------------------------------------------------
Total gross deferred tax assets 598.0 608.2
Less valuation allowance (7.0) (7.0)
- -----------------------------------------------------
Net deferred tax assets 591.0 601.2
- -----------------------------------------------------
DEFERRED TAX LIABILITIES
Deferred policy acquisition costs 724.4 568.7
Fixed maturity securities -- 212.2
Deferred tax on realized
investment gains 34.7 34.8
Equity securities and other
long-term investments 10.8 9.6
Other 23.5 21.6
- -----------------------------------------------------
Total gross deferred tax
liabilities 793.4 846.9
- -----------------------------------------------------
Net deferred tax liability $202.4 $245.7
- -----------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the total gross deferred
tax assets will not be realized. Nearly all future deductible amounts can be
offset by future taxable amounts or recovery of federal income tax paid within
the statutory carryback period. The valuation allowance was unchanged for the
year ended December 31, 1999 (no change during 1998 and decreased $0.8 million
during 1997).
The Company's current federal income tax liability was $107.3 million and
$65.8 million as of December 31, 1999 and 1998, respectively.
<PAGE> 37
56
NFS
Federal income tax expense attributable to income from continuing operations
for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Currently payable $ 43.3 $168.9 $114.4
Deferred tax expense 148.2 4.2 27.4
- ------------------------------------------------------
$191.5 $173.1 $141.8
- ------------------------------------------------------
</TABLE>
Total federal income tax expense for the years ended December 31, 1999, 1998
and 1997 differs from the amount computed by applying the U.S. federal income
tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1999
--------------
(in millions) Amount %
- ----------------------------------------------------
<S> <C> <C>
Computed (expected) tax expense $200.5 35.0
Tax exempt interest and dividends
received deduction (7.3) (1.3)
Income tax credits (4.3) (0.7)
Other, net 2.6 0.4
- ----------------------------------------------------
Total (effective rate of each
year) $191.5 33.4
- ----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998
--------------
(in millions) Amount %
- ----------------------------------------------------
<S> <C> <C>
Computed (expected) tax expense $176.9 35.0
Tax exempt interest and dividends
received deduction (4.9) (1.0)
Other, net 1.1 0.2
- ----------------------------------------------------
Total (effective rate of each
year) $173.1 34.2
- ----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
--------------
(in millions) Amount %
- ----------------------------------------------------
<S> <C> <C>
Computed (expected) tax expense $142.5 35.0
Other, net (0.7) (0.2)
- ----------------------------------------------------
Total (effective rate of each
year) $141.8 34.8
- ----------------------------------------------------
</TABLE>
Total federal income tax paid was $2.3 million, $160.0 million and $84.2
million during the years ended December 31, 1999, 1998 and 1997, respectively.
(8) 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 calculation of basic and diluted earnings per share for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted net income $381.3 $332.4 $265.2
- -----------------------------------------------------------------
Weighted average common shares
outstanding 128.5 128.5 124.0
Dilutive effect of stock options 0.1 0.1 0.1
- -----------------------------------------------------------------
Weighted average diluted common shares
outstanding 128.6 128.6 124.1
- -----------------------------------------------------------------
Net income per common share:
Basic $ 2.96 $ 2.58 $ 2.14
Diluted $ 2.96 $ 2.58 $ 2.14
- -----------------------------------------------------------------
</TABLE>
(9) COMPREHENSIVE INCOME
- -----------------------------------------------------------
Comprehensive Income includes net income as well as certain items that are
reported directly within separate components of shareholders' equity that bypass
net income. Currently, the Company's only component of Other Comprehensive
Income is unreal-
<PAGE> 38
57
NFS
ized gains (losses) on securities available-for-sale. The related before and
after federal tax amounts are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses)
on securities
available-for-sale
arising during the
period:
Gross $(665.0) $ 58.5 $141.1
Adjustment to deferred
policy acquisition
costs 167.5 (12.9) (21.8)
Related federal income
tax (expense) benefit 171.8 (15.9) (41.7)
- ------------------------------------------------------
Net (325.7) 29.7 77.6
- ------------------------------------------------------
Reclassification adjustment
for net (gains) losses on
securities
available-for-sale
realized during the
period:
Gross 17.0 (1.4) (6.3)
Related federal income
tax expense (benefit) (6.2) 0.5 2.2
- ------------------------------------------------------
Net 10.8 (0.9) (4.1)
- ------------------------------------------------------
Total Other Comprehensive
Income $(314.9) $ 28.8 $ 73.5
- ------------------------------------------------------
</TABLE>
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------------------------------
The following disclosures summarize the carrying amount and estimated fair
value of the Company's financial instruments. Certain assets and liabilities are
specifically excluded from the disclosure requirements of financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The fair value of a financial instrument is defined as the amount at which
the financial instrument could be exchanged in a current transaction between
willing parties. In cases where quoted market prices are not available, fair
value is to be based on estimates using present value or other valuation
techniques. Many of the Company's assets and liabilities subject to the
disclosure requirements are not actively traded, requiring fair values to be
estimated by management using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are appropriate,
changes in assumptions could cause these estimates to vary materially. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in the
immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities that are
classified as investment contracts, are specifically exempted from the
disclosure requirements, estimated fair value of policy reserves on life
insurance contracts is provided to make the fair value disclosures more
meaningful.
The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed maturity
securities is based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair value is estimated using values obtained
from independent pricing services or, in the case of private placements, is
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. The
fair value for equity securities is based on quoted market prices. The carrying
amount and fair value for fixed maturity and equity securities exclude the fair
value of derivatives contracts designated as hedges of fixed maturity and equity
securities.
Mortgage loans on real estate, net: The fair value for mortgage loans on real
estate is estimated using discounted cash flow analyses, using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of the
calculations. Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
<PAGE> 39
58
NFS
Policy loans, short-term investments and cash: The carrying amount reported
in the consolidated balance sheets for these instruments approximates their fair
value.
Separate account assets and liabilities: The fair value of assets held in
separate accounts is based on quoted market prices. The fair value of
liabilities related to separate accounts is the amount payable on demand, which
is net of certain surrender charges.
Investment contracts: The fair value for the Company's liabilities under
investment type contracts is disclosed using two methods. For investment
contracts without defined maturities, fair value is the amount payable on
demand. For investment contracts with known or determined maturities, fair value
is estimated using discounted cash flow analysis. Interest rates used are
similar to currently offered contracts with maturities consistent with those
remaining for the contracts being valued.
Policy reserves on life insurance contracts: Included are disclosures for
individual life insurance, universal life insurance and supplementary contracts
with life contingencies for which the estimated fair value is the amount payable
on demand. Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses similar to
those used for investment contracts with known maturities to estimate fair
value.
Long-term Debt: The fair value for long-term debt is based on quoted market
prices.
Capital and preferred securities of subsidiary trusts: The fair value for
capital and preferred securities of subsidiary trusts is based on quoted market
prices.
Commitments to extend credit: Commitments to extend credit have nominal fair
value because of the short-term nature of such commitments. See note 11.
Futures contracts: The fair value for futures contracts is based on quoted
market prices.
Interest rate and foreign currency swaps: The fair value for interest rate
and foreign currency swaps are calculated with pricing models using current rate
assumptions.
Carrying amount and estimated fair value of financial instruments subject to
disclosure requirements and policy reserves on life insurance contracts were as
follows as of December 31:
<TABLE>
<CAPTION>
1999
-----------------------
Carrying Estimated
(in millions) amount fair value
- ------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Securities
available-for-sale:
Fixed maturity securities $ 15,292.2 $ 15,292.2
Equity securities 96.4 96.4
Mortgage loans on real
estate, net 5,786.3 5,745.5
Policy loans 519.6 519.6
Short-term investments 560.5 560.5
Cash 22.5 22.5
Assets held in separate
accounts 67,155.3 67,155.3
LIABILITIES
Investment contracts (16,984.4) (16,435.2)
Policy reserves on life
insurance contracts (4,883.9) (4,607.9)
Long-term debt (298.4) (290.5)
Liabilities related to
separate accounts (67,155.3) (66,338.9)
Capital and preferred
securities of subsidiary
trusts (300.0) (280.0)
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest rate swaps hedging
assets 4.3 4.3
Interest rate swaps hedging
liabilities -- (24.2)
Foreign currency swaps (11.8) (11.8)
Futures contracts 1.3 1.3
- ------------------------------------------------------
</TABLE>
<PAGE> 40
59
NFS
<TABLE>
<CAPTION>
1998
-----------------------
Carrying Estimated
(in millions) amount fair value
- ------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Securities
available-for-sale:
Fixed maturity securities $ 14,247.9 $ 14,247.9
Equity securities 135.3 135.3
Mortgage loans on real
estate, net 5,328.4 5,527.6
Policy loans 464.3 464.3
Short-term investments 478.3 478.3
Cash 24.5 24.5
Assets held in separate
accounts 50,935.8 50,935.8
LIABILITIES
Investment contracts (15,473.8) (15,163.8)
Policy reserves on life
insurance contracts (4,298.4) (4,153.3)
Long-term debt (298.4) (339.9)
Liabilities related to
separate accounts (50,935.8) (49,926.5)
Capital and preferred
securities of subsidiary
trusts (300.0) (314.5)
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest rate swaps hedging
assets -- --
Interest rate swaps hedging
liabilities -- --
Foreign currency swaps -- --
Futures contracts (1.3) (1.3)
- ------------------------------------------------------
</TABLE>
(11) RISK DISCLOSURES
- -----------------------------------------------------------
The following is a description of the most significant risks facing life
insurers and how the Company mitigates those risks:
Credit Risk: The risk that issuers of securities owned by the Company or
mortgagors on mortgage loans on real estate owned by the Company will default or
that other parties, including reinsurers, which owe the Company money, will not
pay. The Company minimizes this risk by adhering to a conservative investment
strategy, by maintaining reinsurance and credit and collection policies and by
providing for any amounts deemed uncollectible.
Interest Rate Risk: The risk that interest rates will change and cause a
decrease in the value of an insurer's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
non-conformance with certain policy provisions, by offering products that
transfer this risk to the purchaser, and/or by attempting to match the maturity
schedule of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an insurer
would have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased competition,
reduced demand for a company's products, or create additional expenses not
anticipated by the insurer in pricing its products. The Company mitigates this
risk by offering a wide range of products and by operating throughout the United
States, thus reducing its exposure to any single product or jurisdiction, and
also by employing underwriting practices which identify and minimize the adverse
impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of
business through management of its investment portfolio. These financial
instruments include commitments to extend credit in the form of loans and
derivative financial instruments. These instruments involve, to varying degrees,
elements of credit risk in excess of amounts recognized on the consolidated
balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are agreements
to lend to a borrower and are subject to conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a deposit. Commitments extended by the Company are
based on management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents the
collateral if the commitment is funded. The Company's policy for new mortgage
loans on real estate is to lend no more than 75% of collateral value. Should the
commitment be funded, the Company's expo-
<PAGE> 41
60
NFS
sure to credit loss in the event of nonperformance by the borrower is
represented by the contractual amounts of these commitments less the net
realizable value of the collateral. The contractual amounts also represent the
cash requirements for all unfunded commitments. Commitments on mortgage loans on
real estate of $216.2 million extending into 2000 were outstanding as of
December 31, 1999. The Company also had $32.0 million of commitments to purchase
fixed maturity securities outstanding as of December 31, 1999.
Notional amounts of derivative financial instruments, primarily interest rate
swaps, interest rate futures contracts and foreign currency swaps, significantly
exceed the credit risk associated with these instruments and represent
contractual balances on which calculations of amounts to be exchanged are based.
Credit exposure is limited to the sum of the aggregate fair value of positions
that have become favorable to NFS, including accrued interest receivable due
from counterparties. Potential credit losses are minimized through careful
evaluation of counterparty credit standing, selection of counterparties from a
limited group of high quality institutions, collateral agreements and other
contract provisions. At December 31, 1999, NFS's credit risk from these
derivative financial instruments was $6.1 million.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the United
States. The Company has a diversified portfolio with no more than 23% (22% in
1998) in any geographic area and no more than 2% (2% in 1998) with any one
borrower as of December 31, 1999. As of December 31, 1999, 39% (42% in 1998) of
the remaining principal balance of the Company's commercial mortgage loan
portfolio financed retail properties.
Reinsurance: The Company has entered into a reinsurance contract to cede a
portion of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin). Total recoveries due from Franklin were $143.6
million and $187.9 million as of December 31, 1999 and 1998, respectively. The
contract is immaterial to the Company's results of operations. The ceding of
risk does not discharge the original insurer from its primary obligation to the
policyholder. Under the terms of the contract, Franklin has established a trust
as collateral for the recoveries. The trust assets are invested in investment
grade securities, the market value of which must at all times be greater than or
equal to 102% of the reinsured reserves.
(12) PENSION PLAN AND POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS
- -----------------------------------------------------------
The Company is a participant, together with other affiliated companies, in a
pension plan covering all employees who have completed at least one year of
service. The Company funds pension costs accrued for direct employees plus an
allocation of pension costs accrued for employees of affiliates whose work
efforts benefit the Company. Assets of the Retirement Plan are invested in group
annuity contracts of NLIC.
Pension cost (benefit) charged to operations by the Company during the years
ended December 31, 1999, 1998 and 1997 were $(0.2) million, $3.0 million and
$8.3 million, respectively. The Company has recorded a prepaid pension asset of
$16.7 million and $5.0 million as of December 31, 1999 and 1998.
In addition to the defined benefit pension plan, the Company, together with
other affiliated companies, participates in life and health care defined benefit
plans for qualifying retirees. Postretirement life and health care benefits are
contributory and generally available to full time employees who have attained
age 55 and have accumulated 15 years of service with the Company after reaching
age 40. Postretirement health care benefit contributions are adjusted annually
and contain cost-sharing features such as deductibles and coinsurance. In
addition, there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase annually, but
not more than three percent. The Company's policy is to fund the cost of health
care benefits in amounts determined at the discretion of management. Plan assets
are invested primarily in group annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however,
<PAGE> 42
61
NFS
certain affiliated companies elected to amortize their initial transition
obligation over periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31, 1999
and 1998 was $49.6 million and $40.1 million, respectively, and the net periodic
postretirement benefit cost (NPPBC) for 1999, 1998 and 1997 was $4.9 million,
$4.1 million and $3.0 million, respectively.
Information regarding the funded status of the pension plan as a whole and
the postretirement life and health care benefit plan as a whole as of December
31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Pension Benefits
--------------------
(IN MILLIONS) 1999 1998
- ------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning
of year $2,185.0 $2,033.8
Service cost 80.0 87.6
Interest cost 109.9 123.4
Actuarial (gain) loss (95.0) 123.2
Plan settlement in 1999/
curtailment in 1998 (396.1) (107.2)
Benefits paid (72.4) (75.8)
- ------------------------------------------------------
Benefit obligation at end of
year 1,811.4 2,185.0
- ------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 2,541.9 2,212.9
Actual return on plan assets 161.8 300.7
Employer contribution 12.4 104.1
Plan settlement (396.1) --
Benefits paid (72.4) (75.8)
- ------------------------------------------------------
Fair value of plan assets at end
of year 2,247.6 2,541.9
- ------------------------------------------------------
Funded status 436.2 356.9
Unrecognized prior service cost 28.2 31.5
Unrecognized net (gains) losses (402.0) (345.7)
Unrecognized net (asset)
obligation at transition (7.7) (11.0)
- ------------------------------------------------------
Prepaid (accrued) benefit cost $ 54.7 $ 31.7
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Postretirement Benefits
------------------------
(IN MILLIONS) 1999 1998
- ----------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning
of year $ 270.1 $ 237.9
Service cost 14.2 9.8
Interest cost 17.6 15.4
Actuarial (gain) loss (64.4) 15.6
Benefits paid (11.0) (8.6)
Acquired companies 13.3 --
- ----------------------------------------------------------
Benefit obligation at end of
year 239.8 270.1
- ----------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 77.9 69.2
Actual return on plan assets 3.5 5.0
Employer contribution 20.9 12.1
Benefits paid (11.0) (8.4)
- ----------------------------------------------------------
Fair value of plan assets at end
of year 91.3 77.9
- ----------------------------------------------------------
Funded status (148.5) (192.2)
Unrecognized net (gains) losses (46.7) 16.0
Unrecognized net (asset)
obligation at transition 1.1 1.3
- ----------------------------------------------------------
Prepaid (accrued) benefit cost $ (194.1) $ (174.9)
- ----------------------------------------------------------
</TABLE>
Basis for measurements, funded status of the pension plan and postretirement
life and health care benefit plan:
<TABLE>
<CAPTION>
Pension Benefits
-----------------
1999 1998
- ------------------------------------------------------
<S> <C> <C>
Weighted average discount rate 7.00% 5.50%
Rate of increase in future
compensation levels 5.25% 3.75%
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Postretirement
Benefits
-----------------
1999 1998
- ------------------------------------------------------
<S> <C> <C>
Weighted average discount rate 7.80% 6.65%
Assumed health care cost trend
rate:
Initial rate 15.00% 15.00%
Ultimate rate 5.50% 8.00%
5
Uniform declining period YEARS 15 Years
- ------------------------------------------------------
</TABLE>
<PAGE> 43
62
NFS
The net periodic pension cost for the pension plan as a whole for the years
ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Service cost (benefits
earned during the
period) $ 80.0 $ 87.6 $ 77.3
Interest cost on
projected benefit
obligation 109.9 123.4 118.6
Expected return on plan
assets (160.3) (159.0) (139.0)
Recognized gains (9.1) (3.8) --
Amortization of prior
service cost 3.2 3.2 3.2
Amortization of
unrecognized transition
obligation (1.4) 4.2 4.2
- ------------------------------------------------------
$ 22.3 $ 55.6 $ 64.3
- ------------------------------------------------------
</TABLE>
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide Insurance and employees of WSC ended participation
in the plan. A curtailment gain of $67.1 million resulted (consisting of a
$107.2 million reduction in the projected benefit obligation, net of the
write-off of the $40.1 million remaining unamortized transition obligation
related to WSC). During 1999, the Plan transferred assets to settle its
obligation related to WSC employees. A settlement gain of $32.9 million was
recognized.
Basis for measurements, net periodic pension cost for the pension plan:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------
<S> <C> <C> <C>
Weighted average discount
rate 6.08% 6.00% 6.50%
Rate of increase in future
compensation levels 4.33% 4.25% 4.75%
Expected long-term rate of
return on plan assets 7.33% 7.25% 7.25%
- ----------------------------------------------------
</TABLE>
The amount of NPPBC for the postretirement benefit plan as a whole for the
years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Service cost (benefits
attributed to employee
service during the year) $14.2 $ 9.8 $ 7.0
Interest cost on accumulated
postretirement benefit
obligation 17.6 15.4 14.0
Actual return on plan assets (3.5) (5.0) (3.6)
Amortization of unrecognized
transition obligation of
affiliates 0.6 0.2 0.2
Net amortization and deferral (1.8) 1.2 (0.5)
- ------------------------------------------------------
$27.1 $21.6 $17.1
- ------------------------------------------------------
</TABLE>
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.65% 6.70% 7.25%
Long term rate of
return on plan
assets, net of tax 7.15% 5.83% 5.89%
Assumed health care
cost trend rate:
Initial rate 15.00% 12.00% 11.00%
Ultimate rate 5.50% 6.00% 6.00%
Uniform declining
period 5 YEARS 12 Years 12 Years
- --------------------------------------------------------
</TABLE>
For the postretirement benefit plan as a whole, a one percentage point
increase or decrease in the assumed health care cost trend rate would have no
impact on the APBO as of December 31, 1999 and have no impact on the NPPBC for
the year ended December 31, 1999.
(13) STOCK COMPENSATION
- -----------------------------------------------------------
The Company sponsors the Nationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan (LTEP) covering selected officers, directors and
employees of the Company and certain of its affiliates. The LTEP provides for
the grant of any or all of the following types of awards: (i) stock options for
shares of Class A common stock; (ii) stock appreciation rights (SARs); (iii)
restricted stock; and (iv) performance awards. The LTEP was
<PAGE> 44
63
NFS
effective December 11, 1996 and no awards may be granted under the LTEP after
December 11, 2006. The number of shares of Class A common stock which may be
issued under the LTEP, or as to which SARs or other awards may be granted,
currently may not exceed 2.6 million.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 -- Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options as permitted by
SFAS No. 123 -- Accounting for Stock-Based Compensation (SFAS 123). Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. Pro forma disclosures as if the Company adopted the
expense recognition provisions of SFAS 123, which require the fair value of the
options granted to be recorded as expense over the vesting period, are required
and are presented below.
Stock options granted under the LTEP in 1999, 1998 and 1997 have ten year
terms. One third of the options vest and become fully exercisable at the end of
each of three years of continued employment, or upon retirement. The Company's
stock option activity and related information for the three years ended December
31, is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Options on Weighted Options on Weighted Options on Weighted
Class A average Class A average Class A average
common exercise common exercise common exercise
stock price stock price stock price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 562,134 $32.68 242,500 $23.72 -- --
Granted 1,076,475 $44.29 321,300 $39.51 242,500 $23.72
Exercised (5,555) $23.50 (1,666) $23.50 -- --
Cancelled (9,525) $48.08 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,623,529 $40.34 562,134 $32.68 242,500 $23.72
- -----------------------------------------------------------------------------------------------------------------
Exercisable, end of period 321,897 $31.84 88,610 $23.70 2,500 $23.50
- -----------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $18.44 $15.79 $ 9.79
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about employee options outstanding
and exercisable at December 31, 1999.
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
-----------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Lives Price Number Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$23.50-$31.19 235,279 7.19 $23.72 166,464 $23.63
$38.25-$48.13 1,388,250 9.10 $43.16 155,433 $40.63
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 45
64
NFS
The fair values of the stock options are estimated on the dates of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.36% 5.50% 6.00%
Dividend yield 0.80% 0.80% 0.80%
Volatility factor 0.414 0.342 0.347
Weighted average expected
option life 5 YEARS 6 Years 6 Years
- --------------------------------------------------------
</TABLE>
Had the compensation cost for the employee stock options been determined in
accordance with the fair value based accounting method provided by SFAS 123, net
income and net income per common share for the years ended December 31 would
have been as follows:
<TABLE>
<CAPTION>
(in millions) Pro forma As presented
- -------------------------------------------------------
<S> <C> <C>
1999
Net income $375.2 $381.3
Basic and diluted earnings
per common share $ 2.92 $ 2.96
1998
Net income $330.1 $332.4
Basic and diluted earnings
per common share $ 2.57 $ 2.58
1997
Net income $264.1 $265.2
Basic and diluted earnings
per common share $ 2.13 $ 2.14
- -------------------------------------------------------
</TABLE>
(14) SHAREHOLDERS' EQUITY, REGULATORY
RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
- -----------------------------------------------------------
The Board of Directors of the Company has the authority to issue 50.0 million
shares of preferred stock without further action of the shareholders. Preferred
stock may be issued in one or more classes with full, special, limited or no
voting powers, and designations, preferences and relative, participating,
optional or other special rights, and qualifications and limitations or
restrictions as stated in any resolution adopted by the Board of Directors of
the Company issuing any class of preferred stock. No shares of preferred stock
have been issued or are outstanding.
The holders of Class A common stock are entitled to one vote per share. The
holders of Class B common stock are entitled to ten votes per share. Class A
common stock has no conversion rights. Class B common stock is convertible into
Class A common stock, in whole or in part, at any time and from time to time at
the option of the holder, on the basis of one share of Class A common stock for
each share of Class B common stock converted. If at any time after the initial
issuance of shares of Class A common stock the number of outstanding shares of
Class B common stock falls below 5% of the aggregate number of issued and
outstanding shares of common stock, then each outstanding share of Class B
common stock shall automatically convert into one share of Class A common stock.
In the event of any sale or transfer of shares of Class B common stock to any
person or persons other than NMIC or its affiliates, such shares of Class B
common stock so transferred shall be automatically converted into an equal
number of shares of Class A common stock. Cash dividends of $0.38, $0.30 and
$0.18 per common share were declared during 1999, 1998 and 1997, respectively.
Each insurance company's state of domicile imposes minimum risk-based capital
requirements that were developed by the NAIC. The formulas for determining the
amount of risk-based capital specify various weighting factors that are applied
to financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by a ratio of the company's
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level risk-based capital, as defined by the NAIC. Companies below
specific trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and each of its insurance
company subsidiaries exceed the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 1999, 1998 and
1997 was $1.35 billion, $1.32 billion and $1.13 billion, respectively. The
statutory net income of NLIC for
<PAGE> 46
65
NFS
the years ended December 31, 1999, 1998 and 1997 was $276.2 million, $171.0
million and $111.7 million, respectively.
Ohio insurance laws limit the payment of dividends in excess of specified
amounts without prior regulatory approval. At December 31, 1999 $40.2 million of
dividends could be paid by NLIC without prior approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the amount
of statutory profits on NLIC's participating policies (measured before dividends
to policyholders) that can inure to the benefit of the Company and its
shareholders.
The Company currently does not expect such regulatory requirements to impair
its ability to pay operating expenses, interest and shareholder dividends in the
future.
(15) 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) retroactive to January 1, 1999. In September
1999, NFS acquired ELOW for $120.8 million and immediately merged ELOW into NLIC
terminating the modified coinsurance arrangement. During September NFS also
acquired Pension Associates (PA), an affiliated pension plan administrator for
$3.4 million. Because ELOW and PA were affiliates, the Company accounted for the
purchases similar to poolings-of-interests; however, prior period financial
statements were not restated due to immateriality. The combined net assets of
the acquired companies exceeded the purchase price by $17.0 million and is
reflected as a direct credit to shareholders' equity. These transactions
contributed $0.01 to 1999 net income per share.
NLIC has a reinsurance agreement with NMIC whereby all of NLIC's accident and
health business is ceded to NMIC on a modified coinsurance basis. The agreement
covers individual accident and health business for all periods presented and
group and franchise accident and health business since July 1, 1999. Either
party may terminate the agreement on January 1 of any year with prior notice.
Prior to July 1, 1999 group and franchise accident and health business and a
block of group life insurance policies were ceded to ELICW under a modified
coinsurance agreement. Under a modified coinsurance agreement, invested assets
are retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of NLIC's agreements, the investment risk associated
with changes in interest rates is borne by the reinsurer. Risk of asset default
is retained by NLIC, although a fee is paid to NLIC for the retention of such
risk. The ceding of risk does not discharge the original insurer from its
primary obligation to the policyholder. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material respects with
what the Company could have obtained with unaffiliated parties. Revenues ceded
to NMIC and ELICW for the years ended December 31, 1999, 1998 and 1997 were
$193.0 million, $216.9 million, and $315.3 million, respectively, while
benefits, claims and expenses ceded were $216.9 million, $259.3 million, and
$326.6 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its direct and
indirect subsidiaries, including the Company, NMIC provides certain operational
and administrative services, such as sales support, advertising, personnel and
general management services, to those subsidiaries. Expenses covered by such
agreement are subject to allocation among NMIC and such subsidiaries. Measures
used to allocate expenses among companies include individual employee estimates
of time spent, special cost studies, salary expense, commission expense and
other methods agreed to by the participating companies that are within industry
guidelines and practices. In addition, beginning in 1999 Nationwide Services
Company, a subsidiary of NMIC, provides computer, telephone, mail, employee
benefits administration, and other services to NMIC and certain of its direct
and indirect subsidiaries, including the Company, based on specified rates for
units of service consumed. For the years ended December 31, 1999, 1998 and 1997,
the Company made payments to NMIC and Nationwide Services Company totaling
$132.3 million, $95.0 million, and
<PAGE> 47
66
NFS
$85.8 million, respectively. In addition, the Company does not believe that
expenses recognized under these agreements are materially different than
expenses that would have been recognized had the Company operated on a
stand-alone basis.
The Company leases office space from NMIC and certain of its subsidiaries.
For the years ended December 31, 1999, 1998 and 1997, the Company made lease
payments to NMIC and its subsidiaries of $10.3 million, $8.7 million and $9.1
million, respectively.
The Company also participates in intercompany repurchase agreements with
affiliates whereby the seller will transfer securities to the buyer at a stated
value. Upon demand or a stated period, the securities will be repurchased by the
seller at the original sales price plus a price differential. Transactions under
the agreements during 1999 and 1998 were not material. The Company believes that
the terms of the repurchase agreements are materially consistent with what the
Company could have obtained with unaffiliated parties.
The Company and various affiliates entered into agreements with Nationwide
Cash Management Company (NCMC), an affiliate, under which NCMC acts as a common
agent in handling the purchase and sale of short-term securities for the
respective accounts of the participants. Amounts on deposit with NCMC were
$560.5 million and $441.1 million as of December 31, 1999 and 1998,
respectively, and are included in short-term investments on the accompanying
consolidated balance sheets.
As part of certain restructuring activities that occurred prior to the March
1997 IPO, NLIC paid a dividend valued at $485.7 million to Nationwide Corp. on
January 1, 1997 consisting of the outstanding shares of common stock of ELICW,
National Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC).
Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid an
equivalent dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million. The Company recognized a gain of $14.4
million on the transfer of securities.
(16) BANK LINES OF CREDIT
- -----------------------------------------------------------
NFS, NLIC and NMIC are parties to a $600.0 million revolving credit facility
which provides for a $600.0 million loan over a five year term on a fully
revolving basis with a group of national financial institutions. The credit
facility provides for several and not joint liability with respect to any amount
drawn by any party. NFS, NLIC and NMIC pay facility and usage fees to the
financial institutions to maintain the revolving credit facility. As of December
31, 1999 the Company had no amounts outstanding under the agreement.
(17) 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. The Company intends to defend this lawsuit
vigorously.
(18) SEGMENT INFORMATION
- -----------------------------------------------------------
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 invest-
<PAGE> 48
67
NFS
ment options, tax-deferred accumulation of savings, asset protection in the
event of an untimely death, and flexible payout options including a 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 a 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, that
provide a death benefit and may also allow the customer to build cash value on a
tax-deferred basis.
Beginning in 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 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 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 years have been restated to reflect these changes as
well as the new product segment previously discussed.
<PAGE> 49
68
NFS
The following table summarizes the financial results of the Company's
business segments for the years ended December 31, 1999, 1998 and 1997.
<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
Net investment income (1) $ (41.4) $ 1,134.5 $ 253.1 $ 5.1 $ 179.2 $ 1,530.5
Other operating revenue 668.3 43.4 393.0 152.8 26.3 1,283.8
- ---------------------------------------------------------------------------------------------------------------
Total operating revenue (2) 626.9 1,177.9 646.1 157.9 205.5 2,814.3
- ---------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances -- 837.5 130.5 -- 128.4 1,096.4
Interest expense on debt and capital
and preferred securities of
subsidiary trusts -- -- -- -- 47.2 47.2
Amortization of deferred policy
acquisition costs 162.9 49.7 60.1 -- -- 272.7
Other benefits and expenses 178.5 113.5 334.7 132.3 55.2 814.2
- ---------------------------------------------------------------------------------------------------------------
Total expenses 341.4 1,000.7 525.3 132.3 230.8 2,230.5
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) before
federal income tax 285.5 177.2 120.8 25.6 (25.3) 583.8
Realized losses on investments -- -- -- -- (11.0) (11.0)
- ---------------------------------------------------------------------------------------------------------------
Consolidated income before federal
tax expense $ 285.5 $ 177.2 $ 120.8 $ 25.6 $ (36.3) $ 572.8
- ---------------------------------------------------------------------------------------------------------------
Assets as of year end $62,628.8 $17,134.8 $6,616.7 $229.9 $6,443.8 $93,054.0
- ---------------------------------------------------------------------------------------------------------------
1998
Net investment income (1) $ (31.3) $ 1,116.6 $ 225.6 $ 1.6 $ 174.3 $ 1,486.8
Other operating revenue 532.9 35.7 318.5 97.8 22.1 1,007.0
- ---------------------------------------------------------------------------------------------------------------
Total operating revenue (2) 501.6 1,152.3 544.1 99.4 196.4 2,493.8
- ---------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances -- 828.6 115.4 -- 125.0 1,069.0
Interest expense on debt and capital
and preferred securities of
subsidiary trusts -- -- -- -- 35.1 35.1
Amortization of deferred policy
acquisition costs 123.9 44.2 46.5 -- -- 214.6
Other benefits and expenses 159.3 104.2 293.4 85.3 45.3 687.5
- ---------------------------------------------------------------------------------------------------------------
Total expenses 283.2 977.0 455.3 85.3 205.4 2,006.2
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) before
federal income tax 218.4 175.3 88.8 14.1 (9.0) 487.6
Realized gains on investments -- -- -- -- 17.9 17.9
- ---------------------------------------------------------------------------------------------------------------
Consolidated income before federal
tax expense $ 218.4 $ 175.3 $ 88.8 $ 14.1 $ 8.9 $ 505.5
- ---------------------------------------------------------------------------------------------------------------
Assets as of year end $47,668.7 $15,215.7 $5,187.6 $ 97.6 $6,501.6 $74,671.2
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 50
69
NFS
<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>
1997
Net investment income (1) $ (26.8) $ 1,098.2 $ 184.9 $ 1.1 $ 156.5 $ 1,413.9
Other operating revenue 413.9 43.2 283.4 58.9 14.0 813.4
- ---------------------------------------------------------------------------------------------------------------
Total operating revenue (2) 387.1 1,141.4 468.3 60.0 170.5 2,227.3
- ---------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances -- 823.4 78.5 -- 114.7 1,016.6
Interest expense on debt and capital
and preferred securities of
subsidiary trusts -- -- -- -- 26.1 26.1
Amortization of deferred policy
acquisition costs 87.8 39.8 39.6 -- -- 167.2
Other benefits and expenses 148.4 108.7 283.5 46.8 34.1 621.5
- ---------------------------------------------------------------------------------------------------------------
Total expenses 236.2 971.9 401.6 46.8 174.9 1,831.4
- ---------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax 150.9 169.5 66.7 13.2 (4.4) 395.9
Realized gains on investments -- -- -- -- 11.1 11.1
- ---------------------------------------------------------------------------------------------------------------
Consolidated income before federal
tax expense $ 150.9 $ 169.5 $ 66.7 $ 13.2 $ 6.7 $ 407.0
- ---------------------------------------------------------------------------------------------------------------
Assets as of year end $35,278.7 $14,436.3 $3,901.4 $ 19.1 $6,257.4 $59,892.9
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's method of allocating net investment income results in a charge
(negative net investment income) to the Variable Annuities Segment which is
recognized in the Corporate and Other segment. The charge relates to
non-invested assets which support this segment on a statutory basis.
(2) Excludes realized gains and losses on investments.
The Company has no significant revenue from customers located outside of the
United States nor does the Company have any significant long-lived assets
located outside the United States.
<PAGE> 51
70
NFS
(19) QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
- -----------------------------------------------------------
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
First Second Third Fourth
(in millions, except per share amounts) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenues other than investment gains (losses) $662.5 $680.4 $710.2 $761.2
Realized gains (losses) on investments (5.4) (7.9) 6.2 (3.9)
- ------------------------------------------------------------------------------------------------------
Total revenues 657.1 672.5 716.4 757.3
Benefits and expenses 525.4 535.4 560.9 608.8
- ------------------------------------------------------------------------------------------------------
Income before federal income tax expense 131.7 137.1 155.5 148.5
Federal income tax expense 43.9 45.7 52.2 49.7
- ------------------------------------------------------------------------------------------------------
Net income $ 87.8 $ 91.4 $103.3 $ 98.8
- ------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.68 $ 0.71 $ 0.80 $ 0.77
- ------------------------------------------------------------------------------------------------------
1998
Revenues other than investment gains (losses) $597.7 $620.4 $634.9 $640.8
Realized gains (losses) on investments 16.6 5.0 (5.0) 1.3
- ------------------------------------------------------------------------------------------------------
Total revenues 614.3 625.4 629.9 642.1
Benefits and expenses 482.2 498.9 511.3 513.8
- ------------------------------------------------------------------------------------------------------
Income before federal income tax expense 132.1 126.5 118.6 128.3
Federal income tax expense 45.4 43.5 40.7 43.5
- ------------------------------------------------------------------------------------------------------
Net income $ 86.7 $ 83.0 $ 77.9 $ 84.8
- ------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.67 $ 0.65 $ 0.61 $ 0.66
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 52
71
NFS
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS
NATIONWIDE FINANCIAL SERVICES, INC.
- -----------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Nationwide
Financial Services, Inc. and subsidiaries (collectively the Company) as of
December 31, 1999 and 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nationwide
Financial Services, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
January 28, 2000
<PAGE> 1
Exhibit 21
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
As of December 31, 1999
The following are wholly owned (unless otherwise noted) subsidiaries of
Nationwide Financial Services, Inc. and their state of incorporation:
<TABLE>
<CAPTION>
<S> <C> <C>
State of
Subsidiary Incorporation
------------------------------------------------------------------ --------------------------
Nationwide Life Insurance Company Ohio
Nationwide Financial Services Capital Trust Delaware
Villanova Capital, Inc. (96% owned) Delaware
The 401(k) Companies, Inc. (60% owned) Texas
Nationwide Financial Services (Bermuda), Inc. Bermuda
Nationwide Trust Company, FSB Federal Incorporation
Nationwide Financial Services Capital Trust II Delaware
NFS Distributors, Inc. Ohio
Irvin L. Schwartz & Associates, Inc. (60% owned) Ohio
Pension Associates, Inc. Wisconsin
The following are wholly owned subsidiaries of Nationwide Life Insurance Company and their state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Nationwide Life and Annuity Insurance Company Ohio
Nationwide Advisory Services, Inc. Ohio
Nationwide Investment Services Corporation Oklahoma
Nationwide Financial Assignment Company Ohio
The following are wholly owned subsidiaries of Villanova Capital, Inc. and their state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Morley Financial Services, Inc. Oregon
Villanova S. A. Capital Trust Delaware
Villanova Mutual Fund Capital Trust Delaware
The following are wholly owned subsidiaries of The 401(k) Companies, Inc. and their state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
401(k) Investment Services, Inc. Texas
401(k) Investment Advisors, Inc. Texas
401(k) Company Texas
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
The following are wholly owned subsidiaries of NFS Distributors, Inc. and their state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Nationwide Retirement Solutions, Inc. Delaware
Nationwide Financial Institution Distributors Agency, Inc. Delaware
National Deferred Compensation, Inc. Ohio
The following are wholly owned subsidiaries of Nationwide Retirement Solutions, Inc. and their state of
incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Nationwide Retirement Solutions, Inc. of Alabama Alabama
Nationwide Retirement Solutions, Inc. of Arizona Arizona
Nationwide Retirement Solutions, Inc. of Arkansas Arkansas
Nationwide Retirement Solutions Insurance Agency, Inc. Massachusetts
Nationwide Retirement Solutions, Inc. of Montana Montana
Nationwide Retirement Solutions, Inc. of Nevada Nevada
Nationwide Retirement Solutions, Inc. of New Mexico New Mexico
Nationwide Retirement Solutions, Inc. of South Dakota South Dakota
Nationwide Retirement Solutions, Inc. of Wyoming Wyoming
The following are wholly owned subsidiaries of Nationwide Financial Institution Distributors Agency, Inc. and
their state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Affiliate Agency, Inc. Delaware
Financial Horizons Distributors Agency of Alabama, Inc. Alabama
Landmark Financial Services of New York, Inc. New York
Financial Horizons Securities Corporation Oklahoma
Nationwide Financial Institution Distributors Insurance Agency,
Inc. of Massachusetts Massachusetts
Nationwide Financial Institution Distributors Insurance Agency,
Inc, of New Mexico New Mexico
The following are wholly owned subsidiaries of Morley Financial Services, Inc. and their state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Morley & Associates, Inc. Oregon
Morley Capital Management Oregon
Union Bond & Trust Company Oregon
Portland Investment Services, Inc. Oregon
Excaliber Funding Corporation Delaware
Caliber Funding Corporation Delaware
Morley Research Associates, Ltd. Delaware
The following is a wholly owned subsidiary of Villanova S. A. Capital Trust and its state of incorporation:
State of
Subsidiary Incorporation
------------------------------------------------------------------ -----------------
Nationwide Investor Services, Inc. Ohio
</TABLE>
All business operations of Nationwide Financial Services, Inc. and all of its
subsidiaries are conducted using each company's legally registered name.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Nationwide Financial Services, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-52813) on Form S-3 of Nationwide Financial Services, Inc. of our reports
dated January 28, 2000, relating to the consolidated balance sheets of
Nationwide Financial Services, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and cash flows and the related financial statement schedules for each of the
years in the three-year period ended December 31, 1999, which reports appear or
are incorporated by reference in the December 31, 1999 Annual Report on Form
10-K of Nationwide Financial Services, Inc.
/s/ KPMG LLP
Columbus, Ohio
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONWIDE
FINANCIAL SERVICES, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 15,297
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 96
<MORTGAGE> 5,786
<REAL-ESTATE> 255
<TOTAL-INVEST> 22,588
<CASH> 23
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,556
<TOTAL-ASSETS> 93,054
<POLICY-LOSSES> 21,868
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 298
300
0
<COMMON> 1
<OTHER-SE> 2,486
<TOTAL-LIABILITY-AND-EQUITY> 93,054
221
<INVESTMENT-INCOME> 1,531
<INVESTMENT-GAINS> (11)
<OTHER-INCOME> 167
<BENEFITS> 1,307
<UNDERWRITING-AMORTIZATION> 273
<UNDERWRITING-OTHER> 561
<INCOME-PRETAX> 573
<INCOME-TAX> 192
<INCOME-CONTINUING> 381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 381
<EPS-BASIC> 2.96
<EPS-DILUTED> 2.96
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
