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NATIONWIDE LIFE INSURANCE COMPANY
Home Office
P.O. Box 182356
Columbus, Ohio 43218-2356, 1-800-243-6295
TDD 1-800-238-3035
MODIFIED SINGLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY NATIONWIDE LIFE INSURANCE COMPANY
THROUGH ITS NATIONWIDE VARIABLE ACCOUNT-9
The Contracts described in this prospectus are Modified Single Purchase Payment
Contracts and such Contracts may be issued as either individual or group
Contracts. In those states where Contracts are issued as group contracts,
references throughout this prospectus to "Contract(s)" will also mean
"Certificate(s)."
The Contracts are sold as: Non-Qualified Contracts; Investment-Only Contracts
issued to Qualified Pension, Profit-sharing or Stock Bonus Plans as defined by
Section 401(a) of the Internal Revenue Code of 1986, as amended ("Code"); IRAs
with contributions rolled-over or transferred from certain tax-qualified plans
such as Qualified Plans, Tax Sheltered Annuity plans or IRAs; Roth IRAs; or as
Tax Sheltered Annuities with contributions rolled over or transferred from other
Tax Sheltered Annuity plans. Annuity payments under the Contracts are deferred
until a selected later date.
Purchase Payments are allocated to the Nationwide Variable Account-9 ("Variable
Account"), a separate account of Nationwide Life Insurance Company (the
"Company"). The Underlying Mutual Funds are available as investment options in
variable life insurance policies or variable annuity contracts issued by life
insurance companies, or in some cases, through participation in certain
qualified pension or retirement plans. The Underlying Mutual Funds may be sold
directly to purchase shares at Net Asset Value in one or more of the following
Underlying Mutual Fund options:
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC., A MEMBER OF THE AMERICAN CENTURY(SM)
FAMILY OF INVESTMENTS
American Century VP Income & Growth American Century VP International
American Century VP Value
DREYFUS
The Dreyfus Socially Responsible Growth Fund, Inc.
Dreyfus Stock Index Fund, Inc.
Dreyfus Variable Investment Fund - Capital Appreciation Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Equity-Income Portfolio: Service Class VIP Growth Portfolio: Service Class
VIP High Income Portfolio: Service Class* VIP Overseas Portfolio: Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Contrafund Portfolio: Service Class
FIDELITY VARIABLE INSURANCE PRODUCT FUND III
VIP III Growth Opportunities Portfolio: Service Class
MORGAN STANLEY
Morgan Stanley Universal Funds, Inc. - Emerging Markets Debt Portfolio
Van Kampen Life Investment Trust - Morgan Stanley Real Estate Securities
Portfolio
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund Government Bond Fund
Money Market Fund Total Return Fund
Nationwide Balanced Fund
Nationwide Equity Income Fund
Nationwide Global Equity Fund
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Nationwide High Income Bond Fund*
Nationwide Multi Sector Bond Fund
Nationwide Select Advisers Mid Cap Fund
Nationwide Small Cap Value Fund
Nationwide Small Company Fund
Nationwide Strategic Growth Fund
Nationwide Strategic Value Fund
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
AMT Guardian Portfolio AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund
Oppenheimer Growth Fund Oppenheimer Growth & Income Fund
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Emerging Markets Fund Worldwide Hard Assets Fund
WARBURG PINCUS TRUST
Growth & Income Portfolio International Equity Portfolio
Post-Venture Capital Portfolio
*These Underlying Mutual Funds may invest in lower quality debt securities
commonly referred to as junk bonds.
This prospectus provides you with the basic information you should know about
the Contracts issued by the Variable Account before investing. You should read
it and keep it for future reference. A Statement of Additional Information dated
September 4, 1998 containing further information about the Contracts and the
Variable Account has been filed with the Securities and Exchange Commission
("SEC"). You can obtain a copy without charge from the Company by calling
1-800-243-6295, or by writing P.O. Box 182356, Columbus, Ohio 43218-2356.
Purchase Payments not allocated to the Variable Account may be allocated to
either the Fixed Account or to the Guaranteed Term Options ("GTOs"). GTOs are
available under the Contracts described in this prospectus and provide for the
crediting of a guaranteed interest rate over a selected period (three, five,
seven or ten years), so long as no Distributions occur prior to the end of the
period. Prospectuses for the GTOs, as well as for each of the Underlying Mutual
Fund options identified above, can be obtained without charge by calling
1-800-243-6295, TDD 1-800-238-3035, or by writing to P.O. Box 182356, Columbus,
Ohio, 43218-2356.
The Contracts offered in conjunction with this prospectus are made available to
the customers of various financial institutions and brokerage firms. Although
these financial institutions and brokerage firms may cooperate with the Company
in marketing the Contracts, SUCH COOPERATION IN NO WAY IMPLIES RESPONSIBILITY
FOR THE GUARANTEES UNDER THE CONTRACTS, WHICH ARE THE SOLE RESPONSIBILITY OF THE
COMPANY. THE CONTRACTS (INCLUDING THOSE MARKETED THROUGH FINANCIAL INSTITUTIONS)
ARE NOT OBLIGATIONS OF ANY FINANCIAL INSTITUTION, NOR ARE THEY GUARANTEED BY ANY
GOVERNMENTAL AGENCY SUCH AS THE FEDERAL DEPOSIT INSURANCE CORPORATION.
In the future, the Company may add to the Variable Account one or more
Underlying Mutual Fund options which are managed by the financial institution or
brokerage firm (or an affiliated investment manager) through which this
prospectus was obtained. These additional Underlying Mutual Fund options may be
made exclusively available to Contract purchasing customers of the particular
financial institution or brokerage firm. Similar arrangements with other
financial institutions or brokerage firms may be established by the Company.
PLEASE NOTE THAT GTOS AND OTHER BENEFITS DESCRIBED IN THIS PROSPECTUS MAY NOT BE
AVAILABLE IN EVERY JURISDICTION. PLEASE REFER TO YOUR CONTRACT FOR SPECIFIC
BENEFIT INFORMATION.
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INVESTMENTS IN THESE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND ARE NOT
GUARANTEED OR ENDORSED BY, ANY ADVISER OF THE UNDERLYING MUTUAL FUNDS IDENTIFIED
ABOVE, THE U.S. GOVERNMENT, OR ANY BANK OR BANK AFFILIATE. INVESTMENTS ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. ANY INVESTMENT IN THE CONTRACT
INVOLVES CERTAIN INVESTMENT RISKS WHICH MAY INCLUDE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SEC MAINTAINS A WEB SITE, WWW.SEC.GOV, THAT CONTAINS THE STATEMENT OF
ADDITIONAL INFORMATION AS WELL AS ANY MATERIAL INCORPORATED BY REFERENCE
RELATING TO THIS PROSPECTUS.
INFORMATION ABOUT THIS PRODUCT AND OTHER BEST OF AMERICA PRODUCTS CAN BE
OBTAINED ON THE WORLD-WIDE WEB AT WWW.BESTOFAMERICA.COM.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED SEPTEMBER 4, 1998, IS
INCORPORATED HEREIN BY REFERENCE. THE TABLE OF CONTENTS FOR THE STATEMENT OF
ADDITIONAL INFORMATION APPEARS ON PAGE 44 OF THE PROSPECTUS.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 4, 1998.
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GLOSSARY OF SPECIAL TERMS
ACCUMULATION UNIT- An accounting unit of measure used to calculate the Variable
Account Contract Value prior to the Annuitization Date.
ANNUITANT- The person designated to receive annuity payments at Annuitization
and upon whose continuation of life any annuity payments involving life
contingencies depends. This person must be age 85 or younger at the time of
Contract issuance unless the Company has approved a request for an Annuitant of
greater age. The Annuitant may be changed prior to the Annuitization Date with
the consent of the Company.
ANNUITIZATION- The period during which annuity payments are received.
ANNUITIZATION DATE- The date on which annuity payments commence.
ANNUITY COMMENCEMENT DATE- The date on which annuity payments are scheduled to
commence. The Annuity Commencement Date is shown on the Data Page of the
Contract. The Annuity Commencement Date may be changed by the Contract Owner
with the consent of the Company.
ANNUITY PAYMENT OPTION- The chosen form of annuity payments. Several options are
available under the Contract.
ANNUITY UNIT- An accounting unit of measure used to calculate the value of
Variable Payment Annuity payments.
BENEFICIARY- The person designated to receive certain benefits under the
Contract when the Annuitant dies prior to the Annuitization Date, unless there
is a surviving Joint Owner. The Beneficiary can be changed by the Contract Owner
as set forth in the Contract.
CODE- The Internal Revenue Code of 1986, as amended.
COMPANY- Nationwide Life Insurance Company.
CONTINGENT ANNUITANT- The person who may be the recipient of certain rights or
benefits under this Contract when the Annuitant dies before the Annuitization
Date. If a Contingent Annuitant is designated and the Annuitant dies before the
Annuitization Date, the Contingent Annuitant becomes the Annuitant. A Contingent
Annuitant may only be named for Non-Qualified Contracts.
CONTINGENT BENEFICIARY- The person designated to be the Beneficiary if the named
Beneficiary is not living at the time of the death of the Annuitant.
CONTINGENT OWNER- A Contingent Owner succeeds to the rights of the Contract
Owner upon the Contract Owner's death before Annuitization if there is no Joint
Owner. For Contracts issued in the State of New York, references throughout this
prospectus to "Contingent Owner" will mean "Owner's Beneficiary." A Contingent
Owner may only be named for Non-Qualified Contracts.
CONTRACT- The Modified Single Premium Deferred Variable Annuity Contract
described in this prospectus.
CONTRACT ANNIVERSARY- An anniversary of the Date of Issue of the Contract.
CONTRACT OWNER- The person or entity who possesses all rights under the
Contract, including the right to designate and change any designations of the
Contract Owner, Contingent Owner, Annuitant, Contingent Annuitant, Beneficiary,
Contingent Beneficiary, Annuity Payment Option, and the Annuity Commencement
Date. The Contract Owner is the person or entity named as Owner on the Data
Page, unless changed.
CONTRACT VALUE- The sum of the value of all Accumulation Units attributable to
the Contract, plus any amount held in the Fixed Account, plus any amount held
under GTOs, which may be subject to a Market Value Adjustment.
CONTRACT YEAR- Each year the Contract remains in force commencing with the Date
of Issue.
DATE OF ISSUE- The date shown as the Issue Date on the Data Page of the
Contract.
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DEATH BENEFIT- The benefit which is payable upon the death of the Annuitant or
the Contingent Annuitant, if applicable. This benefit does not apply upon the
death of the Contract Owner when the Contract Owner and Annuitant are not the
same person. If the Annuitant dies after the Annuitization Date, any benefit
that may be payable will be as specified in the Annuity Payment Option elected.
DISTRIBUTION- Any payment of part or all of the Contract Value.
ERISA- The Employee Retirement Income Security Act of 1974, as amended.
FIXED ACCOUNT- An investment option which is funded by the General Account of
the Company.
FIXED PAYMENT ANNUITY- An annuity providing for payments which are guaranteed by
the Company as to dollar amount during Annuitization.
GENERAL ACCOUNT- All assets of the Company other than those of the Variable
Account or in other separate accounts that have been or may be established by
the Company.
GUARANTEED TERM OPTION ("GTO")- An investment option offered under the Contract
which provides a guaranteed interest rate over certain maturity durations
(three, five, seven and ten years) so long as certain conditions are met.
Amounts allocated to a GTO may be subject to a Market Value Adjustment ("MVA")
if distributed for any reason prior to the end of the selected term, resulting
in an upward or downward adjustment in the Distribution proceeds. GTOs are not
part of the Variable Account (or the Fixed Account) and are not subject to
Variable Account charges but may be subject to CDSC if otherwise applicable.
GTOs are not available during the Annuitization phase of the Contracts and may
not be available in every jurisdiction. The minimum amount which may be
allocated to a GTO is $1,000.
HOME OFFICE- The main office of the Company located in Columbus, Ohio.
HOSPITAL- A state licensed facility which is operated as a Hospital according to
the laws of the jurisdiction in which it is located.
INDIVIDUAL RETIREMENT ACCOUNT- An account that qualifies for favorable tax
treatment under Section 408 of the Code, but does not include Roth Individual
Retirement Accounts which qualify for favorable tax treatment under Section 408A
of the Code.
INDIVIDUAL RETIREMENT ANNUITY ("IRA")- An annuity contract which qualifies for
favorable tax treatment under Section 408 of the Code, but does not include Roth
IRAs which qualify for favorable tax treatment under Section 408A of the Code.
INTEREST RATE GUARANTEE PERIOD- The interval of time during which an interest
rate credited to the Fixed Account is guaranteed to remain the same. For new
Purchase Payments allocated to the Fixed Account or transfers from the Variable
Account or a GTO, this period begins upon the date of deposit or transfer and
ends at the end of the calendar quarter at least one year (but not more than 15
months) from deposit or transfer. At the end of an Interest Rate Guarantee
Period, a new interest rate is declared with an Interest Rate Guarantee Period
starting at the end of the prior period and ending at the end of the calendar
quarter one year later. The Interest Rate Guarantee Period does not in any way
refer to interest rate crediting practices employed by the Company with respect
to GTOs.
INVESTMENT-ONLY CONTRACT- A contract purchased by a Qualified Pension,
Profit-Sharing, or Stock Bonus Plan as defined by Section 401(a) of the Code,
which does not, by its terms, comply with Section 401 or 403(a) of the Code. The
Qualified Plan purchasing the Investment-Only Contract may impose limitations or
restrictions on benefits discussed in this prospectus.
JOINT OWNER- The Joint Owner, if any, possesses an undivided interest in the
entire Contract in conjunction with the Contract Owner. If a Joint Owner is
named, references to "Contract Owner" or "Joint Owner" will apply to both the
Contract Owner and Joint Owner or either of them. Joint Owners must be spouses
at the time joint ownership is requested, unless otherwise required by state
law. Joint Ownership may be selected only for Non-Qualified Contracts.
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LONG TERM CARE FACILITY- A state licensed skilled nursing facility or
intermediate care facility.
MARKET VALUE ADJUSTMENT ("MVA")- The upward or downward adjustment in value of
amounts allocated to a GTO, which are distributed prior to maturity for any
reason.
NET ASSET VALUE- The value of one share of an Underlying Mutual Fund at the end
of a market day or at the close of the New York Stock Exchange. Net Asset Value
is computed by adding the value of all portfolio holdings plus other assets,
deducting liabilities and then dividing the result by the number of shares
outstanding.
NON-QUALIFIED CONTRACT- A contract which does not qualify for favorable tax
treatment under the provisions of Sections 401 and 403(a) (Qualified Plans), 408
(IRAs), 408A (Roth IRAs) or 403(b) (Tax Sheltered Annuities) of the Code.
PHYSICIAN- A person who is a state licensed Medical Doctor or Doctor of
Osteopathic Medicine providing medical care or treatment within the scope of
that license.
PURCHASE PAYMENT- A deposit of new value into the Contract. The term "Purchase
Payment" does not include transfers among the Variable Account, Fixed Account,
or GTO, or among the Sub-Accounts.
QUALIFIED PLANS- Retirement plans which receive favorable tax treatment under
Section 401 or 403(a) of the Code.
ROTH IRA- An annuity contract which qualifies for favorable tax treatment under
Section 408A of the Code.
STANDARD CONTRACTUAL DEATH BENEFIT- The Death Benefit provided under the
Contract when the 5% Enhanced Death Benefit Option is not chosen. The Standard
Contractual Death Benefit is the One-Year Step Up Death Benefit as defined in
the prospectus.
SUB-ACCOUNTS- Separate and distinct divisions of the Variable Account, to which
specific Underlying Mutual Fund shares are allocated and for which Accumulation
Units and Annuity Units are separately maintained.
TAX SHELTERED ANNUITY- An annuity which qualifies for favorable tax treatment
under Section 403(b) of the Code.
TERMINAL ILLNESS- An illness which is expected to result in a death within 12
months of diagnosis and which is diagnosed by a Physician. The diagnosis of
"Terminal Illness" must occur after the Contract has been issued.
UNDERLYING MUTUAL FUND- A registered open-end management investment company in
which the assets of the Sub-Accounts will be invested.
VALUATION DATE- Each day the New York Stock Exchange and the Home Office are
open for business or any other day during which there is a sufficient degree of
trading of the Variable Account's Underlying Mutual Fund shares that the current
Variable Account Contract Value might be materially affected.
VALUATION PERIOD- The period of time commencing at the close of a Valuation Date
and ending at the close of business for the next succeeding Valuation Date.
VARIABLE ACCOUNT- Nationwide Variable Account-9, a separate investment account
of the Company into which Variable Account Purchase Payments are allocated. The
Variable Account is divided into Sub-Accounts, each of which invests in the
shares of a separate Underlying Mutual Fund.
VARIABLE PAYMENT ANNUITY- An annuity providing for payments which are not
predetermined or guaranteed as to dollar amount and which vary in amount with
the investment experience of the Variable Account.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS.............................................................................................4
SUMMARY OF CONTRACT EXPENSES..........................................................................................9
UNDERLYING MUTUAL FUND ANNUAL EXPENSES...............................................................................10
EXAMPLE..............................................................................................................12
SYNOPSIS.............................................................................................................14
NATIONWIDE LIFE INSURANCE COMPANY....................................................................................14
NATIONWIDE ADVISORY SERVICES, INC....................................................................................15
THE VARIABLE ACCOUNT.................................................................................................15
Underlying Mutual Fund Options..............................................................................15
Voting Rights...............................................................................................16
Substitution of Securities..................................................................................16
GTO ALLOCATIONS......................................................................................................16
VARIABLE ACCOUNT CHARGES AND OTHER DEDUCTIONS........................................................................17
Variable Account Charges....................................................................................17
Mortality and Expense Risk Charges..........................................................................17
Optional Death Benefit Charge...............................................................................17
Contingent Deferred Sales Charge ("CDSC")...................................................................17
Waiver of CDSC..............................................................................................18
Long Term Care Facility Provisions..........................................................................18
Premium Taxes...............................................................................................19
OPERATION OF THE CONTRACT............................................................................................19
Investments of the Variable Account.........................................................................19
Allocation of Purchase Payments and Contract Value..........................................................19
Value of an Accumulation Unit...............................................................................19
Net Investment Factor.......................................................................................20
Determining the Contract Value..............................................................................20
Right to Revoke.............................................................................................20
Transfers...................................................................................................20
Contract Ownership..........................................................................................22
Joint Ownership.............................................................................................22
Contingent Ownership........................................................................................22
Beneficiary.................................................................................................22
Surrender (Redemption)......................................................................................23
Surrenders Under a Tax Sheltered Annuity Contract...........................................................23
Loan Privilege..............................................................................................24
Assignment..................................................................................................25
CONTRACT OWNER SERVICES..............................................................................................26
Asset Rebalancing...........................................................................................26
Dollar Cost Averaging.......................................................................................26
Systematic Withdrawals......................................................................................26
ANNUITY PAYMENT PERIOD, DEATH BENEFIT, AND OTHER DISTRIBUTIONS.......................................................27
Annuity Commencement Date...................................................................................27
Annuitization ..............................................................................................27
Fixed Payment Annuity- First and Subsequent Payments........................................................27
Variable Payment Annuity - First and Subsequent Payments....................................................27
Variable Payment Annuity - Assumed Investment Rate..........................................................28
Variable Payment Annuity - Value of an Annuity Unit.........................................................28
Variable Payment Annuity - Exchanges Among Underlying Mutual Fund Options...................................28
Frequency and Amount of Annuity Payments....................................................................28
Annuity Payment Options.....................................................................................28
</TABLE>
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<TABLE>
<S> <C>
Death of Contract Owner -Non-Qualified Contracts............................................................29
Death of Annuitant - Non-Qualified Contracts................................................................29
Death of Contract Owner/Annuitant...........................................................................29
Death Benefit Payment.......................................................................................29
One-Year Step Up Death Benefit (Standard Contractual Death Benefit).......................................29
5% Enhanced Death Benefit (Death Benefit Option)..........................................................30
Required Distributions for Non-Qualified Contracts..........................................................30
Required Distributions for Tax Sheltered Annuities..........................................................31
Required Distributions for IRAs.............................................................................32
Required Distributions for Roth IRAs........................................................................33
FEDERAL TAX CONSIDERATIONS...........................................................................................33
Federal Income Taxes........................................................................................33
Puerto Rico.................................................................................................34
Non-Qualified Contracts-Natural Persons as Contract Owners..................................................34
Non-Qualified Contracts-Non-Natural Persons as Contract Owners..............................................35
IRAs and Tax Sheltered Annuities............................................................................36
Roth IRAs...................................................................................................36
Withholding.................................................................................................36
Non-Resident Aliens.........................................................................................37
Federal Estate, Gift, and Generation Skipping Transfer Taxes................................................37
Charge for Tax..............................................................................................37
Diversification.............................................................................................38
Tax Changes.................................................................................................38
GENERAL INFORMATION..................................................................................................38
Contract Owner Inquiries....................................................................................38
Statements and Reports......................................................................................39
Advertising.................................................................................................39
YEAR 2000 COMPLIANCE ISSUES..........................................................................................43
LEGAL PROCEEDINGS....................................................................................................43
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.............................................................44
APPENDIX A...........................................................................................................45
APPENDIX B...........................................................................................................46
</TABLE>
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SUMMARY OF CONTRACT EXPENSES
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
<S> <C>
Maximum Contingent Deferred Sales Charge ("CDSC")
(as a percentage of the lesser of Purchase Payments or amount surrendered)......................7%(1)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
RANGE OF CDSC OVER TIME
Number of Completed Years from CDSC
Date of Purchase Payment Percentage
<C> <C>
0 7%
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 0%
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
VARIABLE ACCOUNT CHARGES(2)
<C> <C>
Mortality and Expense Risk Charges ..............................................................1.20%
Total Variable Account Charges.................................................................1.20%(3)
Optional 5% Enhanced Death Benefit...............................................................0.05%(4)
Total Variable Account Charges (including Enhanced Death Benefit option).......................1.25%
LOAN PROCESSING FEE..................................................................................$25(5)
</TABLE>
(1)Each Contract Year the Contract Owner may withdraw without a CDSC, the
greater of:
(a) an amount equal to 10% of the total of all Purchase Payments made to this
Contract; or
(b) any amount withdrawn in order for this Contract to meet minimum
distribution requirements under the Code.
Withdrawals may be restricted for Contracts issued pursuant to the terms of a
Tax Sheltered Annuity plan. This CDSC-free withdrawal privilege is
non-cumulative. Free amounts not taken during any given Contract Year cannot
be taken as free amounts in a subsequent Contract Year (see "Waiver of
CDSC").
(2)The Variable Account Charges set forth apply exclusively to allocations made
to the Sub-Account(s) and are taken on an annual basis. Such charges do not
apply to, and will not be assessed against, allocations made to the Fixed
Account or to the GTOs.
(3)The Variable Account Charges shown include the One-Year Step Up Death Benefit
("Standard Contractual Death Benefit")(see "Death Benefit Payment"
provision).
(4)At the time of application, the applicant may choose the 5% Enhanced Death
Benefit in lieu of receiving the Standard Contractual Death Benefit. Should
the applicant choose the 5% Enhanced Death Benefit, the Company will deduct
an additional charge equal to an annual rate of 0.05% of the daily net assets
of the Variable Account (see "Death Benefit Payment" provision).
(5)The Loan Processing Fee is assessed at the time each loan processed. Loans
are only available to Contracts issued as Tax Sheltered Annuities (see "Loan
Privilege").
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UNDERLYING MUTUAL FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF UNDERLYING MUTUAL FUND NET ASSETS, AFTER EXPENSE
REIMBURSEMENT)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Management Other 12b-1 Total Mutual
Fees Expenses Fees Fund Expenses
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Century Variable Portfolios, Inc. - 0.70% 0.00% 0.00% 0.70%
American Century VP Income & Growth
- --------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - 1.50% 0.00% 0.00% 1.50%
American Century VP International
- --------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - 1.00% 0.00% 0.00% 1.00%
American Century VP Value
- --------------------------------------------------------------------------------------------------------------------
The Dreyfus Socially Responsible Growth Fund, Inc. 0.75% 0.01% 0.00% 0.76%
- --------------------------------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund, Inc. 0.25% 0.03% 0.00% 0.28%
- --------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment Fund - Capital 0.75% 0.05% 0.00% 0.80%
Appreciation Portfolio
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio: Service 0.50% 0.05% 0.10% 0.65%
Class1
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio: Service Class(1) 0.60% 0.07% 0.10% 0.77%
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio: Service Class 0.59% 0.11% 0.10% 0.80%
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio: Service Class(1) 0.75% 0.16% 0.10% 1.01%
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio: Service 0.60% 0.08% 0.10% 0.78%
Class(1)
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio: 0.60% 0.13% 0.10% 0.83%
Service Class(1)
- --------------------------------------------------------------------------------------------------------------------
Morgan Stanley Universal Funds, Inc. - Emerging 0.04% 1.26% 0.00% 1.30%
Markets Debt Portfolio(1)
- --------------------------------------------------------------------------------------------------------------------
NSAT- Capital Appreciation Fund 0.60% 0.09% 0.00% 0.69%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Government Bond Fund 0.50% 0.08% 0.00% 0.58%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Money Market Fund 0.40% 0.08% 0.00% 0.48%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Total Return Fund 0.60% 0.07% 0.00% 0.67%
- --------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Balanced Fund(1) 0.75% 0.15% 0.00% 0.90%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Equity Income Fund(1) 0.80% 0.15% 0.00% 0.95%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Global Equity Fund(1) 1.00% 0.20% 0.00% 1.20%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide High Income Bond Fund(1) 0.80% 0.15% 0.00% 0.95%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Multi-Sector Bond Fund(1) 0.75% 0.15% 0.00% 0.90%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Select Advisers Mid Cap Fund(1) 1.05% 0.15% 0.00% 1.20%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Small Cap Value Fund(1) 0.90% 0.15% 0.00% 1.05%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Small Company Fund 1.00% 0.11% 0.00% 1.11%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Strategic Growth Fund(1) 0.90% 0.10% 0.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Strategic Value Fund(1) 0.90% 0.10% 0.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Guardian Portfolio 0.60% 0.40% 0.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Mid-Cap Growth Portfolio 0.60% 0.40% 0.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Partners Portfolio 0.80% 0.06% 0.00% 0.86%
- --------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer 0.71% 0.02% 0.00% 0.73%
Aggressive Growth Fund
- --------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer 0.73% 0.02% 0.00% 0.75%
Growth Fund
- --------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer 0.75% 0.08% 0.00% 0.83%
Growth & Income Fund
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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UNDERLYING MUTUAL FUND ANNUAL EXPENSES (CONT.)
(AS A PERCENTAGE OF UNDERLYING MUTUAL FUND NET ASSETS, AFTER EXPENSE
REIMBURSEMENT)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Management Other 12b-1 Total Mutual
Fees Expenses Fees Fund Expenses
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Eck Worldwide Insurance Trust - Worldwide 0.80% 0.00% 0.00% 0.80%
Emerging Markets Fund(1)
- --------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - Worldwide Hard 1.00% 0.17% 0.00% 1.17%
Assets Fund(1)
- --------------------------------------------------------------------------------------------------------------------
Van Kampen Life Investment Trust - Morgan Stanley 1.00% 0.07% 0.00% 1.07%
Real Estate Securities Portfolio
- --------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Growth & Income Portfolio(1) 0.65% 0.35% 0.00% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - International Equity 1.00% 0.35% 0.00% 1.35%
Portfolio(1)
- --------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Post-Venture Capital 1.07% 0.33% 0.00% 1.40%
Portfolio(1)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Mutual Fund expenses shown above are assessed at the Underlying Mutual
Fund level and are not direct charges against Variable Account assets or
reductions from Contract Values. These Underlying Mutual Fund expenses are
taken into consideration in computing each Underlying Mutual Fund's Net Asset
Value, which is the share price used to calculate the unit values of the
Variable Account. The management fees and other expenses are more fully
described in the prospectus for each Underlying Mutual Fund. The information
relating to the Underlying Mutual Fund expenses was provided by the
Underlying Mutual Fund and was not independently verified by the Company.
Except as otherwise noted below, the Management Fees and Other Expenses are
not currently subject to fee waivers or expense reimbursements.
(1) The investment advisers for the indicated Underlying Mutual Funds have
voluntarily agreed to reimburse a portion of the management fees and/or
other expenses resulting in a reduction of total expenses. Absent any
partial reimbursement, "Management Fees" and "Other Expenses" would have
been 0.50% and 0.08% for Fidelity VIP Equity-Income Portfolio, 0.60% and
0.09% for Fidelity VIP Growth Portfolio, 0.75% and 0.17% for Fidelity VIP
Overseas Portfolio, 0.60% and 0.11% for Fidelity VIP II Contrafund
Portfolio, 0.60% and 0.14% for Fidelity VIP III Growth Opportunities
Portfolio, 0.80% and 1.26% for Morgan Stanley Universal Funds, Inc.-
Emerging Markets Debt Portfolio, 0.75% and 4.15% for NSAT-Nationwide
Balanced Fund, 0.80% and 4.83% for NSAT- Nationwide Equity Income Fund,
1.00% and 1.84% for NSAT- Nationwide Global Equity Fund, 0.80% and 1.38%
for NSAT- Nationwide High Income Bond Fund, 0.75% and 3.66% for
NSAT-Nationwide Multi-Sector Bond Fund, 1.05% and 2.26% for
NSAT-Nationwide Select Advisers Mid Cap Fund, 0.90% and 5.41% for
NSAT-Nationwide Small Cap Value Fund, 0.90% and 5.43% for NSAT-
Nationwide Strategic Growth Fund, 0.90% and 4.64% for NSAT-Nationwide
Strategic Value Fund, 1.00% and 0.34% for Van Eck Worldwide Insurance
Trust- Worldwide Emerging Markets Fund, 1.00% and 0.18% for Van Eck
Worldwide Insurance Trust- Worldwide Hard Assets Fund, 0.75% and 0.45%
for Warburg Pincus Trust- Growth & Income Portfolio, 1.00% and 0.36% for
Warburg Pincus Trust- International Equity Portfolio, 1.25% and 0.33% for
Warburg Pincus Trust- Post-Venture Capital Portfolio.
11
<PAGE> 12
EXAMPLE
The following chart depicts the dollar amount of expenses that would be incurred
under this Contract assuming a $1000 investment and 5% annual return. These
dollar figures are illustrative only and should not be considered a
representation of past or future expenses. Actual expenses may be greater or
lesser than those shown below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
If you surrender your Contract If you do not surrender your If you annuitize your Contract
at the end of the applicable Contract at the end of the at the end of the applicable
time period applicable time period time period
- --------------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
American Century Variable 83 117 145 234 20 63 109 234 * 63 109 234
Portfolios, Inc. - American
Century VP Income & Growth
- --------------------------------------------------------------------------------------------------------------------------
American Century Variable 92 142 187 318 29 88 151 318 * 88 151 318
Portfolios, Inc. - American
Century VP International
- --------------------------------------------------------------------------------------------------------------------------
American Century Variable 87 127 161 266 24 73 125 266 * 73 125 266
Portfolios, Inc. - American
Century VP Value
- --------------------------------------------------------------------------------------------------------------------------
The Dreyfus Socially 84 119 148 241 21 65 112 241 * 65 112 241
Responsible Growth Fund, Inc.
- --------------------------------------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund, 79 104 122 188 16 50 86 188 * 50 86 188
Inc.
- --------------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment 85 120 150 245 22 66 114 245 * 66 114 245
Fund - Capital Appreciation
Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income 83 117 144 232 20 63 108 232 * 63 108 232
Portfolio: Service Class
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth 84 120 149 244 21 66 113 244 * 66 113 244
Portfolio: Service Class
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income 85 121 150 246 22 67 114 246 * 67 114 246
Portfolio: Service Class
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas 87 127 162 268 24 73 126 268 * 73 126 268
Portfolio: Service Class
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund 85 121 150 246 22 67 114 246 * 67 114 246
Portfolio: Service Class
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth 85 122 152 249 22 68 116 249 * 68 116 249
Opportunities Portfolio:
Service Class
- --------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Universal 90 136 176 298 27 82 140 298 * 82 140 298
Funds, Inc. - Emerging
Markets Debt Portfolio
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Capital Appreciation 83 117 144 233 20 63 108 233 * 63 108 233
Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Government Bond Fund 82 113 138 221 19 59 102 221 * 59 102 221
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Money Market Fund 81 110 133 210 18 56 97 210 * 56 97 210
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Total Return Fund 83 116 143 231 20 62 107 231 * 62 107 231
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Balanced Fund 86 124 155 256 23 70 119 256 * 70 119 256
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Equity 86 125 158 261 23 71 122 261 * 71 122 261
Income Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Global 89 133 171 287 26 79 135 287 * 79 135 287
Equity Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide High Income 86 125 158 261 23 71 122 261 * 71 122 261
Bond Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Multi-Sector 86 124 155 256 23 70 119 256 * 70 119 256
Bond Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Select 89 133 171 287 26 79 135 287 * 79 135 287
Advisers Mid-Cap Fund
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
If you surrender your Contract If you do not surrender your If you annuitize your Contract
at the end of the applicable Contract at the end of the at the end of the applicable
time period applicable time period time period
- --------------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NSAT-Nationwide Small Cap 87 128 163 272 24 74 127 272 * 74 127 272
Value Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Small 88 130 166 278 25 76 130 278 * 76 130 278
Company Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Strategic 87 127 161 266 24 73 125 266 * 73 125 266
Growth Fund
- --------------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Strategic 87 127 161 266 24 73 125 266 * 73 125 266
Value Fund
- --------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT- 87 127 161 266 24 73 125 266 * 73 125 266
Guardian Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT- 87 127 161 266 24 73 125 266 * 73 125 266
Mid-Cap Growth Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT- 85 122 153 251 22 68 117 251 * 68 117 251
Partners Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account 84 118 146 237 21 64 110 237 * 64 110 237
Funds - Oppenheimer
Aggressive Growth Fund
- --------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account 84 119 147 240 21 65 111 240 * 65 111 240
Funds - Oppenheimer Growth
Fund
- --------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account 85 121 152 248 22 67 116 248 * 67 116 248
Funds - Oppenheimer Growth &
Income Fund
- --------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance 85 120 150 245 22 66 114 245 * 66 114 245
Trust - Worldwide Emerging
Markets Fund
- --------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance 88 132 169 284 25 78 133 284 * 78 133 284
Trust - Worldwide Hard
Assets Fund
- --------------------------------------------------------------------------------------------------------------------------
Van Kampen Life Investment 87 129 164 274 24 75 128 274 * 75 128 274
Trust - Morgan Stanley Real
Estate Securities Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - 87 127 161 266 24 73 125 266 * 73 125 266
Growth & Income Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - 90 138 179 303 27 84 143 303 * 84 143 303
International Equity
Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - 91 139 181 308 28 85 145 308 * 85 145 308
Post-Venture Capital
Portfolio
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Contracts sold under this prospectus do not permit Annuitization during
the first two Contract Years.
The Example takes into consideration the maximum amount which could be assessed
to a Contract (1.25%), for the election of the 5% Enhanced Death Benefit (see
"Optional Death Benefit Charges" and "Death Benefit Payment" provisions for
additional details on the charges assessed). For those Contracts under which the
5% Enhanced Death Benefit has not been elected, the expenses in the Example will
be reduced accordingly.
The purpose of the Summary of Contract Expenses and Example is to assist the
Contract Owner in understanding the various costs and expenses that will be
borne directly or indirectly when investing in the Contract. The expenses of the
Variable Account as well as those of the Underlying Mutual Fund options are
reflected in the Example. For more complete descriptions of the expenses of the
Variable Account, see "Variable Account Charges and Other Deductions." For more
complete information regarding expenses paid out of the assets of the Underlying
Mutual Fund options, see the prospectus for each Underlying Mutual Fund.
Deductions for premium taxes may also apply but are not reflected in the Example
shown above (see "Premium Taxes").
13
<PAGE> 14
SYNOPSIS
The Contracts can be categorized as follows: (1) Non-Qualified; (2)
Investment-Only; (3) IRAs, with contributions rolled-over or transferred from
certain tax-qualified plans such as Tax Sheltered Annuity plans, Qualified Plans
or IRAs; (4) Roth IRAs; and (5) Tax Sheltered Annuities, with contributions
rolled-over or transferred from other Tax Sheltered Annuity plans.
The initial first year Purchase Payment for Contracts issued as Non-Qualified
Contracts, IRAs, Roth IRAs or Tax-Sheltered Annuities must be at least $10,000
and subsequent Purchase Payments, if any, must be at least $1,000. In addition,
any amounts allocated to the GTO(s) must be at least $1,000. Please refer to the
prospectus for the GTO(s) for additional details regarding Purchase Payments
made to the GTO(s). For Investment-Only Contracts, the initial Purchase Payment
must be at least $100,000, and subsequent Purchase Payments, if any, at least
$15,000. Subsequent Purchase Payments are not permitted for Contracts issued in
the State of Oregon and may not be permitted in other states under certain
circumstances. The cumulative total of all purchase payments under contracts
issued by the Company on the life of any one Annuitant may not exceed $1,000,000
without the prior consent of the Company (see "Allocation of Purchase Payments
and Contract Value").
The Company does not deduct a sales charge from Purchase Payments made for these
Contracts. However, if any part of the Contract Value is surrendered, the
Company will, with certain exceptions, deduct from the Contract Value a CDSC.
The CDSC will not exceed the lesser of: (1) 7% of the amount surrendered; or (2)
7% of the total of all Purchase Payments made within 84 months prior to the date
of the surrender request. This charge, when applicable, is imposed to permit the
Company to recover sales expenses which have been advanced by the Company (see
"Contingent Deferred Sales Charge").
The Company deducts Mortality and Expense Risk Charges equal to an annual rate
of 1.20% of the daily net assets of the Variable Account for mortality risks
assumed by the Company and as compensation for the Company's risk in undertaking
not to increase administrative charges on the Contracts regardless of the actual
administrative costs (see "Mortality and Expense Risk Charges"). If the Contract
Owner has elected the 5% Enhanced Death Benefit option at the time of
application, the Company deducts an additional charge equal to an annual rate of
0.05% of the daily net assets of the Variable Account (see "Optional Death
Benefit Charge" and "Death Benefit Payment" for additional information).
Upon Annuitization, the selected Annuity Payment Option will begin (see "Annuity
Payment Option"). However, if the net amount to be applied to any Annuity
Payment Option on the Annuitization Date is less than $5,000, the Contract Value
may be distributed in lump sum in lieu of annuity payments. If any annuity
payment would be less than $50, the Company will have the right to change the
frequency of payments to such intervals as will result in payments of at least
$50. In no event, however, will annuity payments be made less frequently than
annually (see "Frequency and Amount of Annuity Payments").
Taxation of the Contracts will depend on the type of Contract issued (see
"FEDERAL TAX CONSIDERATIONS"). In addition, the Company will charge against the
Purchase Payments or the Contract Value the amount of any premium taxes levied
by a state or any other governmental entity (see "Premium Taxes").
The Contract Owner has a ten day free look to examine the Contract. Within ten
days of the date the Contract is received, it may be returned for any reason to
the Home Office at the address shown on page 1 of this prospectus. If the
Contract is returned to the Company in a timely manner, the Company will void
the Contract and refund the Contract Value in full unless otherwise required by
law. State and/or federal law may provide additional free look privileges. All
IRA and Roth IRA refunds will be return of Purchase Payments (see "Right to
Revoke").
NATIONWIDE LIFE INSURANCE COMPANY
The Company is a stock life insurance company organized under the laws of the
State of Ohio in March, 1929. The Company is a member of the "Nationwide
Insurance Enterprise" with its Home Office at One Nationwide Plaza, Columbus,
Ohio 43215. The Company is a provider of life insurance, annuities and
retirement products. It is admitted to do business in all states, the District
of Columbia and Puerto Rico.
14
<PAGE> 15
NATIONWIDE ADVISORY SERVICES, INC.
The Contracts are distributed by the General Distributor, Nationwide Advisory
Services, Inc. ("NAS"), Three Nationwide Plaza, Columbus, Ohio 43215. NAS is a
wholly owned subsidiary of Nationwide Life Insurance Company.
THE VARIABLE ACCOUNT
The Variable Account was established by the Company on May 22, 1997 pursuant to
Ohio law. The Company has caused the Variable Account to be registered with the
SEC as a unit investment trust pursuant to the Investment Company Act of 1940
("1940 Act"). Such registration does not involve supervision of the management
of the Variable Account or of the Company by the SEC.
The Variable Account is a separate investment account of the Company and as
such, is not chargeable with liabilities arising out of any other business the
Company may conduct. The Company does not guarantee the investment performance
of the Variable Account. Obligations under the Contracts, however, are
obligations of the Company. Income, gains and losses of the Variable Account,
whether or not realized, are credited to or charged against the Variable Account
without regard to other income, gains, or losses of the Company.
Purchase Payments are allocated among one or more Sub-Accounts corresponding to
one or more of the Underlying Mutual Funds designated by the Contract Owner.
There are two Sub-Accounts within the Variable Account for each of the
Underlying Mutual Fund options which may be designated by the Contract Owner.
One such Sub-Account contains the Underlying Mutual Fund shares attributable to
Accumulation Units under IRAs, Roth IRAs and Tax Sheltered Annuities and one
such Sub-Account contains the Underlying Mutual Fund shares attributable to
Accumulation Units under Non-Qualified Contracts.
UNDERLYING MUTUAL FUND OPTIONS
A Contract Owner may choose from among a number of different Underlying Mutual
Fund options. See Appendix B which contains a summary of investment objectives
for each Underlying Mutual Fund. More detailed information may be found in the
current prospectus for each Underlying Mutual Fund. Prospectuses for the
Underlying Mutual Funds should be read in conjunction with this prospectus. A
copy of each prospectus may be obtained without charge from the Company by
calling 1-800-243-6295, TDD 1-800-238-3035, or writing P.O. Box 182356,
Columbus, Ohio 43218-2356.
The Underlying Mutual Fund options are NOT available to the general public
directly. The Underlying Mutual Funds are available as investment options in
variable life insurance policies or variable annuity contracts issued by life
insurance companies or, in some cases, through participation in certain
qualified pension or retirement plans.
Some of the Underlying Mutual Funds have been established by investment advisers
which manage publicly traded mutual funds having similar names and investment
objectives. While some of the Underlying Mutual Funds may be similar to, and may
in fact be modeled after, publicly traded mutual funds, Contract purchasers
should understand that the Underlying Mutual Funds are not otherwise directly
related to any publicly traded mutual fund. Consequently, the investment
performance of publicly traded mutual funds and any corresponding Underlying
Mutual Funds may differ substantially.
The Underlying Mutual Funds may also be available to registered separate
accounts offering variable annuity and variable life products of other
participating insurance companies, as well as to the Variable Account and other
separate accounts of the Company. Although the Company does not anticipate
disadvantages to this, there is a possibility that a material conflict may arise
between the interests of the Variable Account and one or more of the other
separate accounts in which the Underlying Mutual Funds participate. A conflict
may occur due to a number of reasons including: a change in law affecting the
operations of variable life insurance policies and variable annuity contracts or
differences in the voting instructions of the Contract Owners and those of other
companies. In the event of conflict, the Company will take any steps necessary
to protect the Contract Owners and variable annuity payees, including withdrawal
of the Variable Account from participation in the Underlying Mutual Fund(s)
involved in the conflict.
15
<PAGE> 16
VOTING RIGHTS
Voting rights under the Contracts apply ONLY with respect to amounts allocated
to the Sub-Accounts.
In accordance with its view of applicable law, the Company will vote the shares
of the Underlying Mutual Funds at regular and special meetings of the
shareholders. These shares will be voted in accordance with instructions
received from Contract Owners. If the 1940 Act or any regulation thereunder
should be amended or if the present interpretation changes permitting the
Company to vote the shares of the Underlying Mutual Funds in its own right, it
may elect to do so.
The Contract Owner is the person who has the voting interest under the Contract.
The number of Underlying Mutual Fund shares attributable to each Contract Owner
is determined by dividing the Contract Owner's interest in each respective
Sub-Account by the Net Asset Value of the Underlying Mutual Fund corresponding
to the Sub-Account. The number of shares which may be voted will be determined
as of the date chosen by the Company not more than 90 days prior to the meeting
of the Underlying Mutual Fund. Each person having a voting interest will receive
periodic reports relating to the Underlying Mutual Fund, proxy material and a
form with which to give such voting instructions.
Voting instructions will be solicited by written communication at least 21 days
prior to such meeting. Underlying Mutual Fund shares to which no timely
instructions are received will be voted by the Company in the same proportion as
the voting instructions which are received with respect to all contracts
participating in the Variable Account.
SUBSTITUTION OF SECURITIES
If shares of the Underlying Mutual Fund options are no longer available for
investment by the Variable Account or if, in the judgment of the Company's
management, further investment in such Underlying Mutual Fund shares is
inappropriate, the Company may eliminate Sub-Accounts, combine two or more
Sub-Accounts, or substitute shares of another underlying mutual fund for
underlying mutual fund shares already purchased or to be purchased in the future
with Purchase Payments under the Contract. No substitution of securities in the
Variable Account may take place without prior approval of the SEC.
GTO ALLOCATIONS
GTOs are separate investment options under the Contract. GTOs provide a
guaranteed rate of interest over four different maturity durations of three (3),
five (5), seven (7) or ten (10) years. A guaranteed interest rate, determined
and declared by the Company for any maturity duration selected, will be credited
unless a Distribution from the GTO occurs for any reason. If a Distribution
occurs, the proceeds will be subject to a MVA, resulting in either an upward or
downward adjustment in the value of the distributed proceeds, depending on
interest rate fluctuations. No MVA will be applied if GTO allocations are held
to maturity. Because every guaranteed term will end on the final day of a
calendar quarter, the guaranteed term may last for up to 3 months beyond the 3,
5, 7 or 10 year anniversary of the allocation to the GTO.
The minimum amount of any allocation made to a GTO must be at least $1,000.
Allocations to the GTOs are not subject to Variable Account Charges.
Generally, the MVA will reduce the value of distributed proceeds when prevailing
interest rates are higher than the GTO rate in effect for the maturity duration
elected. Conversely, when prevailing rates are lower than the GTO rate in
effect, distribution proceeds will increase in value. The effect of a MVA should
be carefully considered prior to surrender or transfer from allocations to a
GTO.
GTOs are available only during the accumulation phase of a Contract and are not
available as investment options during the Annuitization phase of a Contract. In
addition, GTOs are not available for use in conjunction with Asset Rebalancing,
Dollar Cost Averaging or Systematic Withdrawals.
A prospectus describing the GTOs must be read with this prospectus in the same
manner that prospectuses for Underlying Mutual Fund options must be read with
this prospectus. A prospectus for the GTOs may be obtained without charge by
calling 1-800-243-6295, TDD 1-800-238-3035, or writing P.O. Box 182356,
Columbus, Ohio 43218-2356. GTOs MAY NOT BE AVAILABLE IN EVERY STATE
JURISDICTION.
16
<PAGE> 17
VARIABLE ACCOUNT CHARGES AND OTHER DEDUCTIONS
VARIABLE ACCOUNT CHARGES
The Variable Account is responsible for the following types of expenses: (1)
mortality and expense risk charges associated with guaranteeing the annuity
purchase rates at issue for the life of the Contracts and guaranteeing that the
Mortality and Expense Risk Charges described in this prospectus will not change
regardless of actual expenses; and (2) the Optional 5% Enhanced Death Benefit
charge, if applicable. If these charges are insufficient to cover these
expenses, the loss will be borne by the Company.
All of the charges described in this section apply to Variable Account
allocations. Allocations to the Fixed Account or to the GTOs are subject to CDSC
and premium tax deductions, if applicable, but are not subject to the Variable
Account Charges.
MORTALITY AND EXPENSE RISK CHARGES
The Company deducts Mortality and Expense Risk Charges from the Variable
Account. This amount is computed on a daily basis, and is equal to an annual
rate of 1.20% of the daily net assets of the Variable Account. By guaranteeing
the Contract's annuity rate, the Company assumes the mortality risk. These
guarantees cannot change regardless of the death rates of persons receiving
annuity payments or of the general population. The expense risk component
guarantees that the Company will not increase charges for administration of the
Contracts regardless of its actual expenses.
OPTIONAL DEATH BENEFIT CHARGE
If the Optional 5% Enhanced Death Benefit is chosen, the Company will deduct a
charge equal to an annual rate of 0.05% of the daily net assets of the Variable
Account (see "Death Benefit Payment"). This charge is designed to reimburse the
Company for increased expenses and mortality risks.
CONTINGENT DEFERRED SALES CHARGE ("CDSC")
No deduction for sales charges is made from the Purchase Payments for these
Contracts. However, if any part of the Contract Value is surrendered, the
Company will, with certain exceptions, deduct a CDSC (see "Waiver of CDSC"). The
CDSC will not exceed the lesser of: (1) 7% of the amount surrendered; or (2) 7%
of the total of all Purchase Payments made within 84 months prior to the date of
the surrender request. The CDSC, when it is applicable, will be used to cover
expenses relating to the sale of the Contracts, including commissions paid to
sales personnel, the costs of preparation of sales literature and other
promotional activity. The Company attempts to recover its distribution costs
relating to the sale of the Contracts from the CDSC. Any shortfall will be made
up from the General Account of the Company, which may indirectly include
portions of the Variable Account Charges, since the Company expects to generate
a profit from these charges. The maximum amount that may be paid to a selling
agent on the sale of these Contracts is 6.25% of Purchase Payments.
The CDSC is calculated by multiplying the applicable CDSC percentages noted
below by the lesser of the amount surrendered or the Purchase Payments made
within 84 months prior to the date of the surrender request. For purposes of
calculating the CDSC, surrenders are considered to come first from the oldest
Purchase Payment made to the Contract, then the next oldest Purchase Payment and
so forth. For tax purposes, a surrender is usually treated as a withdrawal of
earnings first.
The CDSC applies as follows:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED CDSC NUMBER OF COMPLETED CDSC
YEARS FROM DATE OF PERCENTAGE YEARS FROM DATE OF PERCENTAGE
PURCHASE PAYMENT PURCHASE PAYMENT
<S> <C> <C> <C>
0 7% 4 4%
1 7% 5 3%
2 6% 6 2%
3 5% 7 0%
</TABLE>
17
<PAGE> 18
WAIVER OF CDSC
Each Contract Year, the Contract Owner may withdraw without a CDSC the greater
of:
(a) an amount equal to 10% of the total of all Purchase Payments; or
(b) any amount withdrawn to meet minimum distribution requirements under
the Code.
This CDSC-free withdrawal privilege is non-cumulative. Free amounts not taken
during any given Contract Year cannot be taken as free amounts in a subsequent
Contract Year.
In addition, no CDSC will be deducted:
(1) upon the Annuitization of Contracts which have been in force for at
least two years;
(2) upon payment of a Death Benefit pursuant to the death of the Annuitant;
or
(3) from any values which have been held under a Contract for at least 84
months.
No CDSC applies upon the transfer of values among the Sub-Accounts or between or
among the GTOs, the Fixed Account or the Variable Account. When a Contract
described in this prospectus is exchanged for another contract issued by the
Company or any of its affiliated insurance companies, of the type and class
which the Company determines is eligible for such exchange, the Company may
waive the CDSC on the first Contract. A CDSC may apply to the contract received
in the exchange.
When a Contract is held by a Charitable Remainder Trust, the amount which may be
withdrawn from this Contract without application of a CDSC, will be the larger
of (a) or (b), where:
(a) is the amount which would otherwise be available for withdrawal without
application of a CDSC; and where
(b) is the difference between the total Purchase Payments made to the
Contract as of the date of the withdrawal (reduced by previous
withdrawals of such Purchase Payments) and the Contract Value at the
close of the day prior to the date of the withdrawal.
The Contract Owner may be subject to income tax on all or a portion of any such
withdrawals and to a tax penalty if the Contract Owner takes withdrawals prior
to age 59 1/2 (see "Non-Qualified Contracts - Natural Persons as Contract
Owners").
In no event will elimination of CDSC be permitted where such elimination will be
unfairly discriminatory to any person, or where it is prohibited by state law.
LONG TERM CARE FACILITY PROVISIONS
Beginning at the third Contract Anniversary, surrender charges on withdrawals
will not apply if a Contract Owner has been confined to a Long Term Care
Facility or Hospital for a continuous 90 day period which has commenced any time
after the Date of Issue. In addition, upon receipt of a Physician's letter at
the Home Office, no surrender charges will be deducted upon withdrawals if any
Contract Owner has been diagnosed by that Physician to have a Terminal Illness.
For those Contracts which have established a non-natural person as Contract
Owner for the benefit of a natural person, the Annuitant may exercise the rights
as Contract Owner for the purposes described in this provision. IF THE
NON-NATURAL CONTRACT OWNER HAS NOT BEEN ESTABLISHED FOR THE BENEFIT OF A PERSON
(E.G., THE CONTRACT OWNER IS A CORPORATION OR A TRUST FOR THE BENEFIT OF AN
ENTITY), THE ANNUITANT MAY NOT EXERCISE THE RIGHTS DESCRIBED IN THIS PROVISION.
The Contract Owner may be subject to income tax on all or a portion of any such
withdrawals and to a tax penalty if the Contract Owner takes withdrawals prior
to age 59 1/2 (see "Non-Qualified Contracts - Natural Persons as Contract
Owners").
18
<PAGE> 19
PREMIUM TAXES
The Company will charge against the Contract Value any premium taxes levied by a
state or any other government entity upon Purchase Payments received by the
Company. Premium tax rates currently range from 0% to 3.5%. This range is
subject to change. The method used to recoup premium tax will be determined by
the Company at its sole discretion in compliance with state law. The Company
currently deducts such charges from the Contract Value either at: (1) the time
the Contract is surrendered; (2) Annuitization; or (3) such earlier date as the
Company may become subject to such taxes.
OPERATION OF THE CONTRACT
INVESTMENTS OF THE VARIABLE ACCOUNT
The Contract Owner may have Purchase Payments allocated among one or more of the
Sub-Accounts. Shares of the Underlying Mutual Fund options specified by the
Contract Owner are purchased at Net Asset Value for the respective
Sub-Account(s) and converted into Accumulation Units. The Contract Owner may
change the allocation of Purchase Payments or may exchange amounts among the
Sub-Accounts. Such transactions may be subject to conditions imposed by the
Underlying Mutual Funds, as well those set forth in the Contract.
ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE
Purchase Payments are allocated to the Fixed Account, GTOs or to one or more
Sub-Accounts in accordance with the designation of the Underlying Mutual Funds
by the Contract Owner and converted into Accumulation Units.
The initial first year Purchase Payment for Contracts issued as Non-Qualified
Contracts, IRAs, Roth IRAs or Tax Sheltered Annuities must be at least $10,000
and subsequent Purchase Payments, if any, must be at least $1,000. In addition,
any amounts allocated to the GTO(s) must be at least $1,000. Please refer to the
prospectus for the GTO(s) for additional details regarding Purchase Payments
made to the GTO(s). For Investment-Only Contracts, the initial Purchase Payment
must be at least $100,000, and subsequent Purchase Payments, if any, at least
$15,000. Subsequent Purchase Payments are not permitted for Contracts issued in
the state of Oregon and may not be permitted in other states under certain
circumstances.
The cumulative total of all purchase payments under contracts issued by the
Company on the life of any Annuitant may not exceed $1,000,000 without prior
consent of the Company.
The initial Purchase Payment allocated to designated Sub-Accounts will be priced
no later than 2 business days after receipt of an order to purchase if the
application and all information necessary for processing the purchase order are
complete. The Company may, however, retain the Purchase Payment for up to 5
business days while attempting to complete an incomplete application. If the
application cannot be made complete within 5 business days, the prospective
purchaser will be informed of the reasons for the delay and the Purchase Payment
will be returned immediately unless the prospective purchaser specifically
consents to the Company retaining the Purchase Payment until the application is
complete. Thereafter, subsequent Purchase Payments will be priced on the basis
of the Accumulation Unit value next computed for the appropriate Sub-Account
after the additional Purchase Payment is received.
Purchase Payments will not be priced on the following nationally recognized
holidays: New Year's Day; Martin Luther King, Jr. Day; Presidents Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas.
VALUE OF AN ACCUMULATION UNIT
The Accumulation Unit value for any Valuation Period is determined by
multiplying the Accumulation Unit value for each Sub-Account for the immediately
preceding Valuation Period by the net investment factor for the Sub-Account
during the subsequent Valuation Period. Though the number of Accumulation Units
will not change as a result of investment experience, the value of an
Accumulation Unit may increase or decrease from Valuation Period to Valuation
Period.
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<PAGE> 20
NET INVESTMENT FACTOR
The net investment factor for any Valuation Period is determined by dividing (a)
by (b) and subtracting (c) from the result where:
(a) is the net of:
(1) the Net Asset Value per share of the Underlying Mutual Fund held
in the Sub-Account determined at the end of the current
Valuation Period; and
(2) the per share amount of any dividend or capital gain
distributions made by the Underlying Mutual Fund held in the
Sub-Account if the ex-dividend date occurs during the current
Valuation Period.
(b) is the Net Asset Value per share of the Underlying Mutual Fund held
in the Sub-Account determined at the end of the immediately preceding
Valuation Period.
(c) is a factor representing the daily Variable Account Charges. Such
factor is equal to an annual rate of 1.20% of the daily net assets of
the Variable Account (1.25% if the 5% Enhanced Death Benefit is
chosen).
The net investment factor may be greater or less than one; therefore, the value
of an Accumulation Unit may increase or decrease. It should be noted that
changes in the net investment factor may not be directly proportional to changes
in the Net Asset Value of Underlying Mutual Fund shares because of the deduction
for the Variable Account Charges, including, if applicable, the optional 5%
Enhanced Death Benefit charge.
DETERMINING THE CONTRACT VALUE
The Contract Value is the sum of the value of all Accumulation Units, amounts
allocated and credited to the Fixed Account, and amounts allocated and credited
to a GTO which may be subject to a Market Value Adjustment. The number of
Accumulation Units credited to each Sub-Account is determined by dividing the
net amount allocated to the Sub-Account by the Accumulation Unit value for the
Sub-Account for the Valuation Period during which the Purchase Payment is
received by the Company. If part or all of the Contract Value is surrendered or
charges or deductions are made against the Contract Value, an appropriate number
of Accumulation Units and an appropriate amount from the Fixed Account and GTOs
will be deducted in the same proportion that the Contract Owner's interest in
each of the Sub-Accounts, Fixed Account and GTOs bears to the total Contract
Value.
RIGHT TO REVOKE
The Contract Owner has a ten day free look to examine the Contract. Within ten
days of the date the Contract is received, it may be returned for any reason to
the Home Office at the address shown on page 1 of this prospectus. If the
Contract is returned to the Company in a timely manner, the Company will void
the Contract and refund the Contract Value in full, unless otherwise required by
law. State and/or federal law may provide additional free look privileges.
All IRA and Roth IRA refunds will be return of Purchase Payments.
The liability of the Variable Account under this provision is limited to the
Contract Value in each Sub-Account on the date of revocation. Any additional
amounts refunded to the Contract Owner will be paid by the Company.
TRANSFERS
The Contract Owner may request a transfer of up to 100% of the combined value of
any GTO allocation and the Variable Account value to the Fixed Account, without
penalty or adjustment. Transfers from a GTO prior to maturity are subject to a
Market Value Adjustment. The Company reserves the right to restrict transfers
from the Variable Account to the Fixed Account to 10% of the combined value of
any GTO allocation and the Variable Account Contract Value for any 12 month
period. All amounts transferred to the Fixed Account must remain on deposit in
the Fixed Account until the expiration of the current Interest Rate Guarantee
Period. In addition, transfers from the Fixed Account may not be made prior to
the end of the then current Interest Rate Guarantee Period. The Interest Rate
Guarantee Period for any amount allocated to the Fixed Account expires on the
final day of a calendar quarter during which the one year anniversary of the
allocation to the Fixed Account occurs. For all transfers involving the Variable
Account, the Contract Owner's value in each Sub-Account will be determined as of
the date the transfer request is received in the Home Office in good order. The
Company
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<PAGE> 21
reserves the right to refuse transfers or Purchase Payments into the Fixed
Account if the Fixed Account is greater than or equal to 30% of the total
Contract Value. Once the Contract has been Annuitized, transfers may only be
made on each anniversary of the Annuitization Date.
The Contract Owner may, at the maturity of an Interest Rate Guarantee Period,
transfer a portion of the value of the Fixed Account to the Variable Account or
to a GTO. The amount that may be transferred from the Fixed Account to the
Variable Account or to a GTO will be determined by the Company, at its sole
discretion, but will not be less than 10% of the total value of the portion of
the Fixed Account that is maturing. The amount that may be transferred from the
Fixed Account will be declared upon the expiration date of the then current
Interest Rate Guarantee Period. Transfers from the Fixed Account must be made
within 45 days after the expiration date of the guarantee period. Contract
Owners who have entered into a Dollar Cost Averaging agreement with the Company
(see "Dollar Cost Averaging") may transfer from the Fixed Account to the
Variable Account (but not to GTOs) under the terms of that agreement.
Transfers may be made either in writing or, in states allowing such transfers,
by telephone. This telephone exchange privilege is made available to Contract
Owners automatically without the Contract Owner's election. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Such procedures may include any or all of the following:
requesting identifying information, such as name, Contract number, Social
Security Number, and/or personal identification number; tape recording all
telephone transactions, and providing written confirmation thereof to both the
Contract Owner and any agent of record, at the last address of record; or such
other procedures as the Company may deem reasonable. Although the Company's
failure to follow reasonable procedures may result in the Company's liability
for losses due to unauthorized or fraudulent telephone transfers, the Company
will not be liable for following instructions communicated by telephone which it
reasonably believes to be genuine. Any losses incurred pursuant to actions taken
by the Company in reliance on telephone instructions reasonably believed to be
genuine will be borne by the Contract Owner.
Contracts described in this prospectus may be sold to individuals who
independently utilize the services of a firm or individual engaged in market
timing. Generally, such firms or individuals obtain authorization from multiple
Contract Owners to make transfers and exchanges among the Sub-Accounts on the
basis of perceived market trends. Because of the unusually large transfers of
funds associated with some of these transactions, the ability of the Company or
Underlying Mutual Funds to process such transactions may be compromised, and the
execution of such transactions may possibly disadvantage or work to the
detriment of other Contract Owners not utilizing market timing services.
Accordingly, the right to exchange Contract Values among the Sub-Accounts may be
subject to modification if such rights are exercised by a market timing firm or
any other third party authorized to initiate transfer or exchange transactions
on behalf of multiple Contract Owners. THE RIGHTS OF INDIVIDUAL CONTRACT OWNERS
TO EXCHANGE CONTRACT VALUES, WHEN INSTRUCTIONS ARE SUBMITTED DIRECTLY BY THE
CONTRACT OWNER, OR BY THE CONTRACT OWNER'S REPRESENTATIVE OF RECORD AS
AUTHORIZED BY THE EXECUTION OF A VALID NATIONWIDE LIMITED POWER OF ATTORNEY
FORM, WILL NOT BE MODIFIED IN ANY WAY. In modifying such rights, the Company
may, among other things, not accept:
(1) the transfer or exchange instructions of any agent acting under a power
of attorney on behalf of more than one Contract Owner; or
(2) the transfer or exchange instructions of individual Contract Owners who
have executed preauthorized transfer or exchange forms which are
submitted by market timing firms or other third parties on behalf of
more than one Contract Owner at the same time.
The Company will not impose any such restrictions or otherwise modify exchange
rights unless such action is reasonably intended to prevent the use of such
rights in a manner that will disadvantage or potentially impair the contract
rights of other Contract Owners.
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<PAGE> 22
CONTRACT OWNERSHIP
Unless the Contract otherwise provides, the Contract Owner has all rights under
the Contract. PURCHASERS NAMING SOMEONE OTHER THAN THEMSELVES AS OWNER WILL HAVE
NO RIGHTS UNDER THE CONTRACT. Prior to the Annuitization Date, the Contract
Owner may name a new Contract Owner in Non-Qualified Contracts. Such change may
be subject to state and federal gift taxes and may also result in federal income
taxation. Any change of Contract Owner designation will automatically revoke any
prior Contract Owner designation. Once proper notice of the change is recorded
by the Home Office, the change will become effective as of the date the written
request was signed. A change of Contract Owner will not apply and will not be
effective with respect to any payment made or action taken by the Company prior
to the time that the change was recorded by the Home Office.
Prior to the Annuitization Date, the Contract Owner may request a change in the
Annuitant, Contingent Annuitant, Contingent Owner, Beneficiary, or Contingent
Beneficiary. Such a request must be made in writing on a form acceptable to the
Company and must be signed by the Contract Owner. Such request must be received
at the Home Office prior to the Annuitization Date. Any such change is subject
to review and approval by the Company. If the Contract Owner is not a natural
person and there is a change of the Annuitant, Distributions will be made as if
the Contract Owner died at the time of such change.
On the Annuitization Date, the Annuitant will become the Contract Owner, unless
the Contract Owner is a Charitable Remainder Trust.
JOINT OWNERSHIP
Joint Owners must be spouses at the time joint ownership is requested, unless
otherwise required by law. If a Joint Owner is named, the Joint Owner will
possess an undivided interest in the Contract. If a Contract Owner who is also
the Annuitant dies before the Annuitization Date and there is a surviving Joint
Owner, all benefits under the Contract are payable to the surviving Joint Owner.
If a Contract Owner who is not also the Annuitant dies before the Annuitization
Date, the surviving Joint Owner shall become the Contract Owner. The exercise of
any ownership right in the Contract will require a written request signed by
both Joint Owners. The Company will not be liable for any loss, liability, cost,
or expense for acting in accordance with the instructions of either Joint Owner.
CONTINGENT OWNERSHIP
The Contingent Owner is the person who may receive certain benefits under the
Contract if a Contract Owner, who is not the Annuitant, dies prior to the
Annuitization Date and there is no surviving Joint Owner. If no Contingent Owner
survives a Contract Owner and there is no surviving Joint Owner, all rights and
interest of the Contingent Owner will vest in the Contract Owner's estate. If a
Contract Owner, who is also the Annuitant, dies before the Annuitization Date,
the Contingent Owner will not have any rights in the Contract, unless the
Contingent Owner is also the named Beneficiary.
Subject to the terms of any existing assignment, the Contract Owner may change
the Contingent Owner prior to the Annuitization Date by written notice to the
Company. Once proper notice of the change is recorded by the Home Office, the
change will become effective as of the date the written request was signed,
whether or not the Contract Owner is living at the time of recording, but
without further liability as to any payment or settlement made by the Company
before receipt of such change.
BENEFICIARY
The Beneficiary is the person(s) who may receive certain benefits under the
Contract in the event the Annuitant dies prior to the Annuitization Date and
there is no Joint Owner. However, if a Contract Owner who is also the Annuitant
dies before the Annuitization Date and there is a surviving Joint Owner, all
benefits under the Contract are payable to the surviving Joint Owner. If more
than one Beneficiary survives the Annuitant, each will share equally unless
otherwise specified in the Beneficiary designation. If no Beneficiary survives
the Annuitant, all rights and interest of the Beneficiary will vest in the
Contingent Beneficiary. If more than one Contingent Beneficiary survives, each
will share equally unless otherwise specified in the Contingent Beneficiary
designation. If no Contingent Beneficiaries survive the Annuitant, all rights
and interest of the Contingent Beneficiary will vest with the Contract Owner or
the estate of the last surviving Contract Owner.
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<PAGE> 23
Subject to the terms of any existing assignment, the Contract Owner may change
the Beneficiary or Contingent Beneficiary during the lifetime of the Annuitant
by written notice to the Company. Once proper notice of the change is recorded
by the Home Office, the change will become effective as of the date the written
request was signed, whether or not the Annuitant is living at the time of
recording, but without further liability as to any payment or settlement made by
the Company before receipt of such change.
SURRENDER (REDEMPTION)
Prior to the earlier of the Annuitization Date or the death of the Annuitant,
the Company will allow the Contract Owner to surrender a portion or all of the
Contract Value. The request for surrender must be made in writing and must
include the Contract when surrendering the Contract in full. In some cases, the
Company will require additional documentation. The Company may require that the
signature(s) be guaranteed by a member firm of a major stock exchange or other
depository institution qualified to give such a guaranty.
The Company will, upon receipt of any such written request, surrender a number
of Accumulation Units from the Variable Account and an amount from the Fixed
Account and GTOs to equal the gross dollar amount requested, less any applicable
CDSC (see "Contingent Deferred Sales Charge"). In the event of a partial
surrender, the Company will, unless instructed to the contrary, surrender
Accumulation Units from all Sub-Accounts in which the Contract Owner has an
interest, and from the Fixed Account and GTOs. The number of Accumulation Units
surrendered from each Sub-Account and the amount surrendered from the Fixed
Account and GTOs will be in the same proportion that the Contract Owner's
interest in the Sub-Accounts, Fixed Account and GTOs bears to the total Contract
Value.
The Company will pay any amounts surrendered from the Sub-Accounts within 7
days. However, the Company reserves the right to suspend or postpone the date of
any payment for any Valuation Period when:
(1) the New York Stock Exchange ("Exchange") is closed;
(2) trading on the Exchange is restricted;
(3) an emergency exists as a result of which disposal of securities held in
the Variable Account is not reasonably practicable or it is not
reasonably practicable to determine the value of the Variable Account
net assets; or
(4) the SEC, by order, permits such suspension or postponement for the
protection of security holders.
The applicable rules and regulations of the SEC will govern as to whether the
conditions prescribed in (2) and (3) exist.
The Contract Value on surrender may be more or less than the total of Purchase
Payments made by a Contract Owner, depending on the market value of the
Underlying Mutual Fund shares and Variable Account Charges.
SURRENDERS UNDER A TAX SHELTERED ANNUITY CONTRACT
Except as provided below, the Contract Owner may surrender part or all of the
Contract Value at any time this Contract is in force prior to the earlier of the
Annuitization Date or the death of the Annuitant:
A. The surrender of Contract Value attributable to contributions made
pursuant to a qualified cash or deferred arrangement (within the
meaning of Code Section 402(g)(3)(A)), a salary reduction agreement
(within the meaning of Code Section 402(g)(3)(C)), or transfers from
a Custodial Account (described in Section 403(b)(7) of the Code),
may be executed only:
1. when the Contract Owner attains age 59 1/2, separates from
service, dies, or becomes disabled (within the meaning of Code
Section 72(m)(7)); or
2. in the case of hardship (as defined for purposes of Code Section
401(k)), provided that any surrender of Contract Value in the
case of hardship may not include any income attributable to
salary reduction contributions.
B. The surrender limitations described in Section A above also apply to:
1. salary reduction contributions to Tax Sheltered Annuities made
for plan years beginning after December 31, 1988;
2. earnings credited to such contracts after the last plan year
beginning before January 1, 1989, on amounts attributable to
salary reduction contributions; and
<PAGE> 24
3. all amounts transferred from 403(b)(7) Custodial Accounts
(except that earnings and employer contributions as of December
31, 1988 in such Custodial Accounts may be withdrawn in the case
of hardship).
C. Any Distribution other than the above, including exercise of a
contractual ten day free look provision (when available) may result
in the immediate application of taxes and penalties and/or
retroactive disqualification of a Qualified Contract or Tax
Sheltered Annuity.
A premature Distribution may not be eligible for rollover treatment. To assist
in preventing disqualification of a Tax Sheltered Annuity in the event of a ten
day free look, the Company will agree to transfer the proceeds to another
contract which meets the requirements of Section 403(b) of the Code, upon proper
direction by the Contract Owner. The foregoing is the Company's understanding of
the withdrawal restrictions which are currently applicable under Code Section
401(k)(2)(B), Code Section 403(b)(11) and Revenue Ruling 90-24. Such
restrictions are subject to legislative change and/or reinterpretation.
Distributions pursuant to Qualified Domestic Relations Orders will not be
considered to be a violation of the restrictions stated in this provision.
LOAN PRIVILEGE
Prior to the Annuitization Date, the Contract Owner of a Tax Sheltered Annuity
may receive a loan from the Contract Value subject to the terms of the Contract,
the plan, and the Code, which may impose restrictions on loans. The Company
assesses a $25 Loan Processing Fee at the time each loan is processed. The Loan
Processing Fee is taken from the Variable Account, Fixed Account and GTOs in the
same proportion that the Contract Owners interest in the Variable Account, Fixed
Account and GTOs bears to the total Contract Value.
Loans from Tax Sheltered Annuities are available beginning 30 days after the
Date of Issue. The Contract Owner may borrow a minimum of $1,000, unless a lower
minimum amount is mandated by state law. In non-ERISA plans, for Contract Values
up to $20,000, the maximum loan balance which may be outstanding at any time is
80% of the Contract Value, but not more than $10,000. If the Contract Value is
$20,000 or more, the maximum loan balance which may be outstanding at any time
is 50% of the Contract Value, but not more than $50,000. For ERISA plans, the
maximum loan balance which may be outstanding at any time is 50% of the Contract
Value, but not more than $50,000. The $50,000 limits will be reduced by the
highest loan balances owed during the prior one-year period. Additional loans
are subject to the Contract minimum amount. The aggregate of all loans may not
exceed the Contract Value limitations stated in this provision. For salary
reduction Tax Sheltered Annuities, loans may only be secured by the Contract
Value.
All loans are made from the collateral fixed account. An amount equal to the
principal amount of the loan will be transferred to the collateral fixed
account. The Company will transfer to the collateral fixed account the
Accumulation Units in proportion to the assets in each option until the required
balance is reached or all such Accumulation Units are exhausted. Any additional
requested collateral will next be transferred from the Fixed Account. Any
remaining required collateral will be transferred from the GTO which may be
subject to a Market Value Adjustment. No withdrawal charges are deducted at the
time of the loan or on any transfers to the collateral fixed account.
Until the loan has been repaid in full, that portion of the collateral fixed
account equal to the outstanding loan balance will be credited with interest at
a rate 2.25% less than the loan interest rate fixed by the Company for the term
of the loan. However, the interest rate credited to the collateral fixed account
will never be less than 3.0%. Specific loan terms are disclosed at the time of
loan application or loan issuance.
Loans must be repaid in substantially level payments, not less frequently than
quarterly, within five years. Loans used to purchase the principal residence of
the Contract Owner must be repaid within 15 years. During the loan term, the
outstanding balance of the loan will continue to earn interest at an annual rate
as specified in the loan agreement. Loan repayments will consist of principal
and interest in amounts set forth in the loan agreement. Loan repayments will be
allocated among the Sub-Accounts in accordance with the Contract, unless the
Contract Owner and the Company agree to amend the Contract at a later date on a
case by case basis. No loan repayments less than $1,000 are permitted into the
GTOs. If the proportional share of the loan repayment to the GTOs is less than
$1,000, that portion of the loan repayment will be allocated to the NSAT Money
Market Fund, unless the Contract Owner directs the loan repayments to be
directed to the Fixed Account or another available investment option under the
Variable Account.
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<PAGE> 25
Amounts distributed will be reduced by the amount of the loan outstanding, plus
accrued interest if:
(1) the Contract is surrendered;
(2) the Contract Owner/Annuitant dies; or
(3) the Contract Owner who is not the Annuitant dies prior to
Annuitization.
In addition, the Contract Value will be reduced by the amount of any outstanding
loans plus accrued interest if annuity payments begin while the loan is
outstanding. Until the loan is repaid, the Company reserves the right to
restrict any transfer of the Contract which would otherwise qualify as a
transfer as permitted in the Code.
If a loan payment is not made when due, interest will continue to accrue. A
grace period may be available under the terms of the loan agreement. If a loan
payment is not made when due, or by the end of the applicable grace period, the
entire loan will be treated as a deemed distribution, will be taxable to the
borrower, and may be subject to the early withdrawal tax penalty. Interest will
continue to accrue on the loan after default. Any defaulted amounts, plus
accrued interest, will be deducted from the Contract Value when the participant
becomes eligible for a Distribution of at least that amount. Additional loans
may not be available while a previous loan remains in default.
Loans may also be subject to additional limitations or restrictions under the
terms of a Tax Sheltered Annuity plan. Loans permitted under this Contract may
still be taxable in whole or part if the participant has additional loans from
other plans or contracts. The Company will calculate the maximum nontaxable loan
based on the information provided by the participant or the employer.
Loan repayments must be identified as such or else they will be treated as
Purchase Payments and will not be used to reduce the outstanding loan principal
or interest due. The Company reserves the right to modify the loan's terms or
procedures if there is a change in applicable law. The Company also reserves the
right to assess a loan processing fee.
IRAs, Roth IRAs and Non-Qualified Contracts are not eligible for loans.
ASSIGNMENT
The Contract Owner of a Non-Qualified Contract may assign some or all rights
under the Contract at any time during the lifetime of the Annuitant prior to the
Annuitization Date. Once proper notice of assignment is recorded by the Home
Office, the assignment will become effective as of the date the written request
was signed. The Company is not responsible for the validity or tax consequences
of any assignment. The Company will not be liable for any payment or other
settlement made by the Company before recording of the assignment. Where
necessary for the proper administration of the terms of the Contract, an
assignment will not be recorded until the Company has received sufficient
direction from the Contract Owner and assignee as to the proper allocation of
Contract rights under the assignment.
Any portion of the Contract Value, which is pledged or assigned will be treated
as a Distribution and will be included in gross income to the extent that the
cash value exceeds the investment in the Contract for the taxable year in which
it was pledged or assigned. In addition, any Contract Value assigned may be
subject to a tax penalty equal to 10% of the amount which is included in gross
income. All rights in the Contract are personal to the Contract Owner and may
not be assigned without written consent of the Company. Assignment of the entire
Contract Value may cause the portion of the Contract Value exceeding the total
investment in the Contract and previously taxed amounts to be included in gross
income for federal income tax purposes each year that the assignment is in
effect.
IRAs, Roth IRAs, and Tax Sheltered Annuities may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed by law.
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<PAGE> 26
CONTRACT OWNER SERVICES
ASSET REBALANCING- The Contract Owner may direct the automatic reallocation of
Contract Values to the Sub-Accounts on a predetermined percentage basis. Asset
Rebalancing will occur every three months or on another frequency authorized by
the Company. If the last day of the three month period falls on a Saturday,
Sunday, recognized holiday, or any other day when the New York Stock Exchange is
closed, the Asset Rebalancing reallocation will occur on the first business day
after that day. Asset Rebalancing requests must be in writing on a form provided
by the Company. The Contract Owner may want to contact a financial adviser to
discuss the use of Asset Rebalancing.
Asset Rebalancing may be subject to employer imposed limitations or restrictions
for Contracts issued to a Tax Sheltered Annuity plan.
Asset Rebalancing is not available for assets held in the GTOs. Amounts
transferred from the GTO prior to the expiration of the specified term are
subject to a Market Value Adjustment.
The Company reserves the right to discontinue establishing new Asset Rebalancing
programs. The Company also reserves the right to assess a processing fee for
this service.
DOLLAR COST AVERAGING- If the Contract Value is $15,000, the Contract Owner may
direct the Company to automatically transfer a specified amount from the
Fidelity VIP High Income Portfolio, NSAT-Government Bond Fund, NSAT-Nationwide
High Income Bond Fund, NSAT-Money Market Fund or the Fixed Account to any other
Sub-Account. Dollar Cost Averaging will occur on a monthly basis or on another
frequency permitted by the Company. Dollar Cost Averaging is a long-term
investment program which provides for regular, level investments over time.
There is no guarantee that Dollar Cost Averaging will result in a profit or
protect against loss. The minimum monthly transfer is $100. Monthly transfers
from the Fixed Account must be equal to or less than 1/30th of the Fixed Account
value when this program is requested. Transfers will be processed until either
the value in the originating Sub-Account(s) or the Fixed Account is exhausted or
the Contract Owner instructs the Home Office to cancel the transfers.
Dollar Cost Averaging transfers may not be directed to GTOs.
The Company reserves the right to discontinue establishing new Dollar Cost
Averaging programs. The Company also reserves the right to assess a processing
fee for this service.
SYSTEMATIC WITHDRAWALS- A Contract Owner may elect in writing to begin receiving
withdrawals of a specified dollar amount (of at least $100) on a monthly,
quarterly, semi-annual, or annual basis. Unless otherwise instructed, the
withdrawals will be taken from the Sub-Accounts and the Fixed Account on a
prorated basis. Systematic Withdrawals are not available from the GTOs. A CDSC
may apply (see "Contingent Deferred Sales Charge"). Unless directed otherwise by
the Contract Owner, the Company will withhold federal income taxes. In addition,
a 10% penalty tax may be assessed by the IRS if the Contract Owner is under age
59 1/2, unless the Contract Owner has made an irrevocable election of
Distributions of substantially equal payments. Withdrawals may be discontinued
at any time by notifying the Home Office in writing.
If the Contract Owner withdraws amounts pursuant to a Systematic Withdrawal
program, then the Contract Owner may withdraw each Contract Year without a CDSC
an amount up to the greatest of: (1) 10% of the total sum of all Purchase
Payments made to the Contract at the time of withdrawal; (2) an amount withdrawn
in order to meet minimum distribution requirements; or (3) the specified
percentage of the Contract Value based on the Contract Owner's age, as shown in
the following table:
<TABLE>
<CAPTION>
Contract Owner's Percentage of
Age Contract Value
- ------------------ --------------------------------
<S> <C>
Under Age 59 1/2 5%
Age 59 1/2 through 7%
Age 61
Age 62 through 8%
Age 64
Age 65 through 10%
Age 74
Age 75 and Over 13%
</TABLE>
26
<PAGE> 27
If the total amounts withdrawn in any Contract Year exceed the CDSC-free amount
as calculated under the Systematic Withdrawal method described above, then such
total withdrawn amounts will be eligible only for the 10% of Purchase Payment
CDSC-free withdrawal privilege described in the "Contingent Deferred Sales
Charge" section, and the total amount of CDSC charged during the Contract Year
will be determined in accordance with that provision.
The Contract Value and the Contract Owner's age for purposes of applying the
CDSC-free withdrawal percentage described in this provision are determined as of
the date the request for a Systematic Withdrawal program is received and
recorded by the Home Office. (In the case of Joint Owners, the older Joint
Owner's age will be used.) Furthermore, this CDSC-free withdrawal privilege for
Systematic Withdrawals is non-cumulative. Free amounts not taken during any
given Contract Year cannot be taken as free amounts in a subsequent Contract
Year.
The Company reserves the right to discontinue establishing new Systematic
Withdrawal programs. The Company also reserves the right to assess a processing
fee for this service. Systematic Withdrawals are not available prior to the
expiration of the ten day free look provision of the Contract (see "Right to
Revoke").
ANNUITY PAYMENT PERIOD, DEATH BENEFIT AND OTHER DISTRIBUTIONS
ANNUITY COMMENCEMENT DATE
An Annuity Commencement Date will be selected. Such date will be the first day
of a calendar month unless otherwise agreed upon. The date must be at least 2
years after the Date of Issue. In the event the Contract is issued subject to
the terms of a Qualified Plan or Tax Sheltered Annuity plan, Annuitization may
occur during the first 2 years subject to approval by the Company.
The Annuity Commencement Date may be changed by the Contract Owner in writing
subject to approval by the Company.
ANNUITIZATION
Annuitization is irrevocable once payments have begun. When making an
Annuitization election, the Annuitant must choose:
(1) an Annuity Payment Option; and
(2) either a Fixed Payment Annuity, Variable Payment Annuity or an
available combination.
Payments under a Fixed Payment Annuity are guaranteed by the Company as to the
dollar amount during the annuity payment period. The dollar amount of each
payment under a Variable Payment Annuity will vary depending on the performance
of the selected Underlying Mutual Fund options. The dollar amount of each
variable payment could be higher or lower than a previous payment.
FIXED PAYMENT ANNUITY - FIRST AND SUBSEQUENT PAYMENTS
The first payment under a Fixed Payment Annuity will be determined by applying
the portion of the total Contract Value specified by the Contract Owner to the
Fixed Payment Annuity table then in effect for the Annuity Payment Option
elected, after deducting any applicable premium taxes from the total Contract
Value. This will be done at the Annuitization Date on an age last birthday
basis. Subsequent payments will remain level unless the Annuity Payment Option
elected provides otherwise. The Company does not credit discretionary interest
paid by the Company to payments during the annuity payment period.
VARIABLE PAYMENT ANNUITY - FIRST AND SUBSEQUENT PAYMENTS
The first payment under a Variable Payment Annuity will be determined by
applying the portion of the total Contract Value specified by the Contract Owner
to the Variable Payment Annuity table then in effect for the Annuity Payment
Option elected, after deducting any applicable premium taxes from the total
Contract Value. This will be done at the Annuitization Date on an age last
birthday basis. The dollar amount of the first payment is divided by the value
of an Annuity Unit as of the Annuitization Date to establish the number of
Annuity Units representing each monthly annuity payment. This number of Annuity
Units remains fixed during the annuity payment period. The dollar amount of the
second and subsequent payments is not predetermined and may change from month to
month. The dollar amount of each subsequent payment is determined by multiplying
the fixed number of Annuity Units by the Annuity Unit value for the Valuation
Period in which the payment is due.
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The Company guarantees that the dollar amount of each payment after the first
will not be affected by variations in mortality experience from mortality
assumptions used to determine the first payment.
VARIABLE PAYMENT ANNUITY - ASSUMED INVESTMENT RATE
A 3.5% assumed investment rate is built into the Variable Payment Annuity
purchase rate basis in the Contracts. A higher assumption would mean a higher
initial payment but more slowly rising or more rapidly falling subsequent
payments. A lower assumption would have the opposite effect. If the actual net
investment rate is at the annual rate of 3.5%, the annuity payments will be
level.
VARIABLE PAYMENT ANNUITY - VALUE OF AN ANNUITY UNIT
The value of an Annuity Unit for a Sub-Account for any subsequent Valuation
Period is determined by multiplying the Annuity Unit value from the immediately
preceding Valuation Period by the net investment factor for the Valuation Period
for which the Annuity Unit value is being calculated, and multiplying the result
by an interest factor to neutralize the assumed investment rate of 3.5% per
annum built into the Variable Payment Annuity purchase rate basis in the
Contracts (see "Net Investment Factor").
VARIABLE PAYMENT ANNUITY - EXCHANGES AMONG UNDERLYING MUTUAL FUND OPTIONS
During the annuity payment period, exchanges among the Underlying Mutual Fund
options must be made in writing and the exchange will take place on the
anniversary of the Annuitization Date.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Payments will be made based on the Annuity Payment Option selected. However, if
the net amount available under any Annuity Payment Option is less than $5,000,
the Company will have the right to pay such amount in one lump sum in lieu of
periodic annuity payments. In addition, if the payments to be provided would be
or become less than $50, the Company will have the right to change the frequency
of payments to such intervals as will result in payments of at least $50. In no
event will the Company make payments under an Annuity Payment Option less
frequently than annually.
ANNUITY PAYMENT OPTIONS
The Contract Owner may, upon prior written notice to the Company, at any time
prior to the Annuitization Date, elect one of the following Annuity Payment
Options:
(1) Life Annuity - An annuity payable periodically, but at least
annually, during the lifetime of the Annuitant, ending with the last
payment due prior to the death of the Annuitant. FOR EXAMPLE, IF THE
ANNUITANT DIES BEFORE THE SECOND ANNUITY PAYMENT DATE, THE ANNUITANT WILL
RECEIVE ONLY ONE ANNUITY PAYMENT. THE ANNUITANT WILL ONLY RECEIVE TWO
ANNUITY PAYMENTS IF HE OR SHE DIES BEFORE THE THIRD ANNUITY PAYMENT DATE
AND SO ON.
(2) Joint and Last Survivor Annuity - An annuity payable periodically,
but at least annually, during the joint lifetimes of the Annuitant and
designated second individual and continuing thereafter during the
lifetime of the survivor. AS IS THE CASE UNDER OPTION 1 ABOVE, THERE IS
NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER THIS OPTION. PAYMENTS
CEASE UPON THE DEATH OF THE LAST SURVIVING ANNUITANT REGARDLESS OF THE
NUMBER OF PAYMENTS RECEIVED.
(3) Life Annuity With 120 or 240 Monthly Payments Guaranteed - An annuity
payable monthly during the lifetime of the Annuitant. If the Annuitant
dies before all of the guaranteed payments have been made, payments will
continue to be made for the remainder of the selected guaranteed period
to a designee chosen by the Annuitant at the time the Annuity Payment
Option was elected.
Alternatively, the designee may elect to receive the present value of any
remaining guaranteed payments in a lump sum. The present value will be
computed as of the date on which the Company receives the notice of the
Annuitant's death.
Some of the stated Annuity Payment Options may not be available in all states.
The Contract Owner may request an alternative option prior to the Annuitization
Date subject to approval by the Company.
For Non-Qualified Contracts, no Distribution will be made until an Annuity
Payment Option has been elected. IRAs and Tax Sheltered Annuities are subject to
the "minimum distribution" requirements set forth in the plan, Contract, or
Code.
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DEATH OF CONTRACT OWNER - NON-QUALIFIED CONTRACTS
For Non-Qualified Contracts, if the Contract Owner and the Annuitant are not the
same, and a Contract Owner dies prior to the Annuitization Date, then the Joint
Owner, if any, becomes the new Contract Owner. If there is no surviving Joint
Owner, the Contingent Owner becomes the new Contract Owner. If there is no
surviving Contingent Owner, the last surviving Contract Owner's estate becomes
the Contract Owner. The entire interest in the Contract Value, less any
applicable deductions (which may include a CDSC), must be distributed in
accordance with the provisions of "Required Distributions for Non-Qualified
Contracts".
DEATH OF THE ANNUITANT - NON-QUALIFIED CONTRACTS
If the Contract Owner and Annuitant are not the same, and the Annuitant dies
prior to the Annuitization Date, a Death Benefit will be payable to the
Beneficiary, the Contingent Beneficiary, the Contract Owner, or the last
surviving Contract Owner's estate, as specified in the "Beneficiary" provision,
unless there is a surviving Contingent Annuitant. In such case, the Contingent
Annuitant becomes the Annuitant and no Death Benefit is payable.
The Beneficiary may elect to receive the Death Benefit:
(1) in a lump sum Distribution;
(2) as an annuity payout; or
(3) in any Distribution permitted by law and approved by the Company.
An election must be received by the Company within 60 days of the Annuitant's
death. If the Annuitant dies after the Annuitization Date, any benefit that may
be payable will be paid according to the selected Annuity Payment Option.
DEATH OF CONTRACT OWNER/ANNUITANT
If any Contract Owner and Annuitant are the same person, and the Annuitant dies
before the Annuitization Date, a Death Benefit will be payable to the surviving
Joint Owner, the Beneficiary, the Contingent Beneficiary, the Contract Owner, or
the last surviving Contract Owner's estate, as specified in the "Beneficiary"
provision and in accordance with the appropriate "Required Distributions"
provisions.
If the Annuitant dies after the Annuitization Date, any benefit that may be
payable will be paid according to the selected Annuity Payment Option.
DEATH BENEFIT PAYMENT
At the time of application, Contract Owners may select one of two death benefits
available under the Contract as listed below (not all Death Benefit options may
be available in all states at the time of application). If no selection is made
at the time of application, the Death Benefit will be the One-Year Step Up Death
Benefit (Standard Contractual Death Benefit).
The Death Benefit value is determined as of the Valuation Date at or next
following the date the Home Office receives:
(1) proper proof of the Annuitant's death;
(2) an election specifying the Distribution method and
(3) any state required form(s).
ONE-YEAR STEP UP DEATH BENEFIT (STANDARD CONTRACTUAL DEATH BENEFIT)
If the Annuitant dies at any time prior to the Annuitization Date, the
dollar amount of the Death Benefit will be the greatest of:
(1) the Contract Value;
(2) the total of all Purchase Payments, less an adjustment
for amounts surrendered; or
(3) the highest Contract Value on any Contract Anniversary before
the Annuitant's 86th birthday, less an adjustment for amounts
subsequently surrendered, plus Purchase Payments received after
that Contract Anniversary.
The adjustment for amounts surrendered will reduce items (2) and (3)
above in the same proportion that the Contract Value was reduced on the
date(s) of the partial surrender(s).
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No additional charge will be assessed to the Contract Owner for the
election of the Standard Contractual Death Benefit.
5% ENHANCED DEATH BENEFIT (DEATH BENEFIT OPTION)
If the Annuitant dies at any time prior to Annuitization Date, the dollar
amount of the Death Benefit will be the greater of:
(1) the Contract Value; or
(2) the total of all Purchase Payments, less any amounts
surrendered, accumulated at 5% simple interest from the
date of each Purchase Payment or surrender to the most
recent Contract Anniversary prior to the Annuitant's
86th birthday, less an adjustment for amounts
subsequently surrendered, plus Purchase Payments
received since that Contract Anniversary.
The total accumulated amount will not exceed 200% of the net of Purchase
Payments and amounts surrendered. The adjustment for amounts subsequently
surrendered after the most recent Contract Anniversary will reduce the 5%
interest anniversary value in the same proportion that the Contract Value
was reduced on the date(s) of the partial surrender(s).
For this Death Benefit option, the Company deducts a charge at an annual
rate of 0.05% of the daily net assets of the Variable Account. This
charge is designed only to reimburse the Company for increases in the
mortality and expense risks, and consequently, the Company may lower this
charge at any time without prior notice to the Contract Owner. However,
the Company may generate a profit from this charge.
IF THE ANNUITANT DIES AFTER THE ANNUITIZATION DATE, ANY DEATH BENEFIT PAYMENT
THAT MAY BE PAYABLE WILL BE DETERMINED ACCORDING TO THE SELECTED ANNUITY PAYMENT
OPTION.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS
Upon the death of any Contract Owner or Joint Owner (including an Annuitant who
becomes the Contract Owner on the Annuitization Date), certain distributions for
Non-Qualified Contracts are required by Section 72(s) of the Code.
Notwithstanding any provision of the Contract to the contrary, the following
Distributions will be made in accordance with such requirements:
1. If any Contract Owner dies on or after the Annuitization Date and
before the entire interest under the Contract has been distributed,
then the remaining interest will be distributed at least as rapidly
as under the method of distribution in effect as of the date of the
Contract Owner's death.
2. If any Contract Owner dies prior to the Annuitization Date, then the
entire interest in the Contract (consisting of either the Death
Benefit or the Contract Value reduced by certain charges as set forth
elsewhere in the Contract) will be distributed within 5 years of the
death of the Contract Owner, provided however:
(a) any interest payable to or for the benefit of a natural person
(referred to herein as a "designated beneficiary"), may be
distributed over the life of the designated beneficiary or over
a period not extending beyond the life expectancy of the
designated beneficiary. Payments must begin within one year of
the date of the Contract Owner's death unless otherwise
permitted by federal income tax regulations; and
(b) if the designated beneficiary is the surviving spouse of the
deceased Contract Owner, the spouse may elect to become the
Contract Owner in lieu of receiving a Death Benefit, and any
Distributions required under these distribution rules will be
made upon the death of the spouse.
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In the event that this Contract is owned by a person that is not a natural
person (e.g., a trust or corporation), then, for purposes of these distribution
provisions:
(a) the death of the Annuitant will be treated as the death of any
Contract Owner;
(b) any change of the Annuitant will be treated as the death of any
Contract Owner; and
(c) in either case, the appropriate Distribution required under these
distribution rules will be made upon the death or change, as the
case may be. The Annuitant is the primary annuitant as defined in
Section 72(s)(6)(B) of the Code.
These distribution provisions will not be applicable to any Contract that is not
required to be subject to the provisions of Section 72(s) of the Code by reason
of Section 72(s)(5) or any other law or rule.
Upon the death of a Contract Owner, the designated Beneficiary must elect a
method of distribution which complies with the above distribution provisions and
which is acceptable to the Company. Such election must be received by the
Company within 60 days of the Contract Owner's death.
REQUIRED DISTRIBUTIONS FOR TAX SHELTERED ANNUITIES
Amounts in a Tax Sheltered Annuity will be distributed in a manner consistent
with the Minimum Distribution and Incidental Benefit (MDIB) provisions of
Section 401(a)(9) of the Code and applicable regulations. Amounts will be paid,
notwithstanding anything else contained herein, to the Annuitant under the
Annuity Payment Option selected, over a period not exceeding:
(a) the life of the Annuitant or the joint lives of the Annuitant and
the Annuitant's designated beneficiary under the selected Annuity
Payment Option; or
(b) a period not extending beyond the life expectancy of the Annuitant
or the joint life expectancies of the Annuitant and the
Annuitant's designated beneficiary under the selected Annuity
Payment Option.
No Distributions will be required from this Contract if Distributions otherwise
required from this Contract are being withdrawn from another Tax Sheltered
Annuity of the Annuitant.
If the Annuitant's entire interest in a Tax Sheltered Annuity is to be
distributed in equal or substantially equal payments over a period described in
(a) or (b) above, such payments will commence on the required beginning date,
which is the later of:
(a) the first day of April following the calendar year in which the
Annuitant attains age 70 1/2; or
(b) when the Annuitant retires.
However, provision (b) does not apply to any employee who is a 5% Owner (as
defined in Section 416 of the Code) with respect to the plan year ending in the
calendar year in which the employee attains the age of 70 1/2.
If the Annuitant dies prior to the commencement of his or her Distribution, the
interest in the Tax Sheltered Annuity must be distributed by December 31 of the
calendar year in which the fifth anniversary of his or her death occurs unless:
(a) the Annuitant names his or her surviving spouse as the Beneficiary
and the spouse elects to receive distribution of the Contract in
substantially equal payments over his or her life (or a period not
exceeding his or her life expectancy) and commencing not later
than December 31 of the year in which the Annuitant would have
attained age 70 1/2; or
(b) the Annuitant names a Beneficiary other than his or her surviving
spouse and the Beneficiary elects to receive distribution of the
Contract in substantially equal payments over his or her life (or
a period not exceeding his or her life expectancy) commencing not
later than December 31 of the year following the year in which the
Annuitant dies.
If the Annuitant dies after Distribution has commenced, the Distribution must
continue at least as rapidly as under the schedule being used prior to his or
her death.
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Payments commencing on the required beginning date will not be less than the
lesser of the quotient obtained by dividing the entire interest of the Annuitant
by the life expectancy of the Annuitant, or the joint life expectancies of the
Annuitant and the Annuitant's designated beneficiary (if the Annuitant dies
prior to the required beginning date) or the beneficiary under the selected
Annuity Payment Option (if the Annuitant dies after the required beginning date)
whichever is applicable under the applicable minimum distribution or MDIB
provisions. Life expectancy and joint life expectancies are computed by the use
of return multiples contained in Section 1.72-9 of the Treasury Regulations.
If amounts distributed to the Annuitant are less than those mentioned above, a
penalty tax of 50% is levied on the excess of the amount that should have been
distributed for that year over the amount that actually was distributed for that
year.
REQUIRED DISTRIBUTIONS FOR IRAS
Distributions from an IRA must begin no later than April 1 of the calendar year
following the calendar year in which the Contract Owner attains age 70 1/2.
Distribution may be payable in a lump sum or in substantially equal payments
over:
(a) the Contract Owner's life or the lives of the Contract Owner
and his or her spouse or designated beneficiary; or
(b) a period not extending beyond the life expectancy of the Contract
Owner or the joint life expectancy of the Contract Owner and the
Contract Owner's designated beneficiary.
If the Contract Owner dies prior to the commencement of his or her Distribution,
the interest in the IRA must be distributed by December 31 of the calendar year
in which the fifth anniversary of his or her death occurs, unless:
(a) the Contract Owner names his or her surviving spouse as the
Beneficiary and such spouse elects to:
(i) treat the annuity as an IRA established for his or her
benefit; or
(ii) receive Distribution of the Contract in substantially equal
payments over his or her life (or a period not exceeding his
or her life expectancy) and commencing not later than
December 31 of the year in which the Contract Owner would
have attained age 70 1/2; or
(b) the Contract Owner names a Beneficiary other than his or her
surviving spouse and such Beneficiary elects to receive a
Distribution of the Contract in substantially equal payments over
his or her life (or a period not exceeding his or her life
expectancy) commencing not later than December 31 of the year
following the year in which the Contract Owner dies.
No Distribution will be required from this Contract if Distributions otherwise
required from this Contract are being withdrawn from another Individual
Retirement Annuity or IRA of the Contract Owner.
If the Contract Owner dies after Distribution has commenced, Distribution must
continue at least as rapidly as under the schedule being used prior to his or
her death, except that a surviving spouse who is the beneficiary under the
Annuity Payment Option, may treat the Contract as his or her own, in the same
manner as is described in section (a)(i) of this provision.
If the amounts distributed to the Contract Owner are less than those mentioned
above, a penalty tax of 50% is levied on the excess of the amount that should
have been distributed for that year over the amount that actually was
distributed for that year.
A pro-rata portion of all Distributions will be included in the gross income of
the person receiving the Distribution and taxed at ordinary income tax rates.
The portion of the Distribution which is taxable is based on the ratio between
the amount by which non-deductible Purchase Payments exceed prior non-taxable
Distributions and total account balances at the time of the Distribution. The
owner of an IRA must annually report the amount of non-deductible Purchase
Payments, the amount of any Distribution, the amount by which non-deductible
Purchase Payments for all years exceed non-taxable Distributions for all years,
and the total balance of all IRAs.
IRA Distributions will not receive the benefit of the tax treatment of a lump
sum Distribution from a Qualified Plan. If the Contract Owner dies prior to the
time Distribution of his or her interest in the annuity is completed, the
balance will also be included in his or her gross estate.
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REQUIRED DISTRIBUTIONS FOR ROTH IRAS
Distributions from a Roth IRA, unlike other IRAs, are not required to commence
during the lifetime of the Contract Owner.
Upon the death of the Contract Owner, the Contract Owner's interest in the Roth
IRA must be distributed by December 31 of the calendar year in which the fifth
anniversary of his or her death occurs, unless:
(a) the Contract Owner names his or her surviving spouse as the
Beneficiary and such spouse elects to:
(i) treat the annuity as a Roth IRA established for his or her
benefit; or
(ii) receive distribution of the account in substantially payments
over his or her life (or a period not exceeding his or her
life expectancy) and commencing not later than December 31
of the year following the year in which the Contract Owner
would have attained age 70 1/2; or
(b) the Contract Owner names a Beneficiary other than his or her
surviving spouse and such Beneficiary elects to receive
distribution of the Contract in substantially equal payments over
his or her life (or a period not exceeding his or her life
expectancy) commencing not later than December 31 of the following
year in which the Contract Owner dies.
Distributions from Roth IRAs may be either taxable or nontaxable, depending upon
whether they are "qualified distributions" or "nonqualified distributions" (see
"Federal Income Taxes").
FEDERAL TAX CONSIDERATIONS
FEDERAL INCOME TAXES
The Company does not make any guarantee regarding the tax status for any
Contract or any transaction involving the Contracts. Contract Owners should
consult a financial consultant, legal counsel or tax advisor to discuss in
detail the taxation and the use of the Contracts.
Section 72 of the Code governs federal income taxation of annuities in general.
That section sets forth different rules for: (1) IRAs; (2) Roth IRAs; (3) Tax
Sheltered Annuities; and (4) Non-Qualified Contracts. Each type of annuity is
discussed below.
Distributions to participants from Tax Sheltered Annuities are generally taxed
when received. A portion of each Distribution is excludable from income based on
a formula required by the Code. The formula required by the Code excludes from
income an amount equal to the investment in the Contract divided by the number
of anticipated payments, as determined pursuant to Section 72(d) of the Code,
until the full investment in the Contract is recovered; thereafter, all
Distributions are fully taxable.
Distributions from IRAs and Contracts owned by Individual Retirement Accounts
are generally taxed when received. The portion of each such payment which is
excludable is based on the ratio between the amount by which nondeductible
Purchase Payments to all the Contracts exceeds prior non-taxable Distributions
from such Contracts, and the total account balances in such Contracts at the
time of the Distribution. The owner of such IRAs or the Annuitant under
Contracts held by Individual Retirement Accounts must annually report to the IRS
the amount of nondeductible Purchase Payments, the amount of any Distribution,
the amount by which nondeductible Purchase Payments for all years exceed
non-taxable Distributions for all years, and the total balance in all IRAs and
Individual Retirement Accounts.
Distributions of earnings from Roth IRAs are taxable or nontaxable, depending
upon whether they are "qualified distributions" or "nonqualified distributions."
A "qualified distribution" is one that satisfies the five year rule and meets
one of the following four requirements: (i) it is made on or after the date on
which the Contract Owner attains the age of 59 1/2; (ii) it is made to a
Beneficiary (or the Contract Owner's estate) on or after the death of the
Contract Owner; (iii) it is attributable to the Contract Owner's disability; or
(iv) it is a qualified first-time homebuyer distribution (as defined in Section
72(t)(2)(F) of the Code). If the Roth IRA does not have any qualified rollover
contributions from a retirement plan other than a Roth IRA (or income allocable
thereto), the five year rule is satisfied if the Distribution is not made within
the five year period beginning with the first contribution to the Roth IRA. If
the Roth IRA has any qualified rollover contributions from a retirement plan
other than a Roth IRA (or income allocable thereto), the five year rule is
satisfied if the Distribution is not made within the five taxable year period
commencing with the taxable year in which the qualified rollover contribution
was made.
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A nonqualified distribution is any Distribution that is not a qualified
distribution.
A qualified distribution is not included in gross income for federal income tax
purposes. A nonqualified distribution is not includible in gross income to the
extent that such Distribution, when added to all previous Distributions, does
not exceed that aggregate amount of contributions made to the Roth IRA. Any
nonqualified distribution in excess of the aggregate amount of contributions
will be included in the Contract Owner's gross income in the year that is
distributed to the Contract Owner.
Taxable Distributions will not receive the benefit of the tax treatment of a
lump sum Distribution from a Qualified Plan. If the Contract Owner dies prior to
the complete Distribution of the Contract, the balance will also be included in
the Contract Owner's gross estate for tax purposes.
A change of the Annuitant or Contingent Annuitant may be treated by the IRS as a
taxable transaction.
PUERTO RICO
Under the Puerto Rico tax code, Distributions from a Non-Qualified Contract
prior to Annuitization are treated as nontaxable return of principal until the
principal is fully recovered; thereafter, all Distributions are fully taxable.
Distributions after Annuitization are treated as part taxable income and part
nontaxable return of principal. The amount excluded from gross income after
Annuitization is equal to the amount of the Distribution in excess of 3% of the
total Purchase Payments paid, until an amount equal to the total Purchase
Payments paid has been excluded; thereafter, the entire Distribution is included
in gross income. Puerto Rico does not impose an early withdrawal penalty tax.
Generally, Puerto Rico does not require income tax to be withheld from
Distributions of income. A personal adviser should be consulted.
NON-QUALIFIED CONTRACTS - NATURAL PERSONS AS CONTRACT OWNERS
The rules applicable to Non-Qualified Contracts provide that a portion of each
annuity payment received is excludable from taxable income based on the ratio
between the Contract Owner's investment in the Contract and the expected return
on the Contract until the investment has been recovered; thereafter the entire
amount is includible in income. The maximum amount excludable from income is the
investment in the Contract. If the Annuitant dies prior to excluding from income
the entire investment in the Contract, the Annuitant's final tax return may
reflect a deduction for the balance of the investment in the Contract.
Distributions made from the Contract prior to the Annuitization Date are taxable
to the Contract Owner to the extent that the cash value of the Contract exceeds
the Contract Owner's investment at the time of the Distribution. Distributions,
for this purpose, include partial surrenders, dividends, loans, or any portion
of the Contract which is assigned or pledged; or for Contracts issued after
April 22, 1987, any portion of the Contract transferred by gift. For these
purposes, a transfer by gift may occur upon Annuitization if the Contract Owner
and the Annuitant are not the same individual. In determining the taxable amount
of a Distribution, all annuity contracts issued after October 21, 1988 by the
same company to the same contract owner during any 12 month period will be
treated as one annuity contract. Additional limitations on the use of multiple
contracts may be imposed by Treasury Regulations. Distributions prior to the
Annuitization Date with respect to that portion of the Contract invested prior
to August 14, 1982, are treated first as a recovery of the investment in the
Contract as of that date. A Distribution in excess of the amount of the
investment in the Contract as of August 14, 1982, will be treated as taxable
income.
The Tax Reform Act of 1986 has changed the tax treatment of certain
Non-Qualified Contracts held by entities other than individuals. Such entities
are taxed currently on the earnings on the Contract which are attributable to
contributions made to the Contract after February 28, 1986. There are exceptions
for immediate annuities and certain Contracts owned for the benefit of an
individual. An immediate annuity, for purposes of this discussion, is a single
premium contract on which payments begin within one year of purchase. If this
Contract is issued as the result of an exchange described in Section 1035 of the
Code, for purposes of determining whether the Contract is an immediate annuity,
it will generally be considered to have been purchased on the purchase date of
the contract given up in the exchange.
Code Section 72 also provides for a penalty tax, equal to 10% of the portion of
any Distribution that is includible in gross income, if such Distribution is
made prior to attaining age 59 1/2. The penalty tax does not apply if the
Distribution is attributable to the Contract Owner's death, disability, or one
of a series of substantially equal periodic payments made over the life or life
expectancy of the Contract Owner (or the joint lives or joint life
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expectancies of the Contract Owner and the beneficiary selected by the Contract
Owner to receive payment under the Annuity Payment Option selected by the
Contract Owner), for the purchase of an immediate annuity, or is allocable to an
investment in the Contract before August 14, 1982. A Contract Owner wishing to
begin taking Distributions to which the 10% tax penalty does not apply should
forward a written request to the Company. Upon receipt of a written request from
the Contract Owner, the Company will inform the Contract Owner of the procedures
pursuant to Company policy and subject to limitations of the Contract including
but not limited to first year withdrawals. Such election shall be irrevocable
and may not be amended or changed.
In order to qualify as an annuity contract under Section 72 of the Code, the
Contract must provide for distribution of the entire contract to be made upon
the death of a Contract Owner. If a Contract Owner dies prior to the
Annuitization Date, then the Joint Owner, the Contingent Owner or other named
recipient must receive the Distribution within 5 years of the Contract Owner's
death. However, the recipient may elect for payments to be made over his or her
life or life expectancy provided that such payments begin within one year from
the death of the Contract Owner. If the Joint Owner, Contingent Owner or other
named recipient is the surviving spouse, the spouse may be treated as the
Contract Owner and the Contract may be continued throughout the life of the
surviving spouse. In the event the Contract Owner dies on or after the
Annuitization Date and before the entire interest has been distributed, the
remaining portion must be distributed at least as rapidly as under the method of
Distribution being used on the date of the Contract Owner's death (see "Required
Distributions for Qualified Plans and Tax Sheltered Annuities"). If the Contract
Owner is not a natural person, the death of the Annuitant (or a change in the
Annuitant) will result in a Distribution pursuant to these rules, regardless of
whether a Contingent Annuitant is named.
The Code requires that any election to receive an annuity in lieu of a lump sum
payment must be made within 60 days after the lump sum becomes payable
(generally, the election must be made within 60 days after the death of a
Contract Owner or the Annuitant). If the election is made more than 60 days
after the lump sum first becomes payable, the election will be ignored for tax
purposes, and the entire amount of the lump sum will be subject to immediate
tax. If the election is made within the 60 day period, each Distribution will be
taxable when it is paid.
NON-QUALIFIED CONTRACTS - NON-NATURAL PERSONS AS CONTRACT OWNERS
The foregoing discussion of the taxation of Non-Qualified Contracts applies to
Contracts owned (or, pursuant to Section 72(u) of the Code, deemed to be owned)
by individuals.
As a general rule, contracts owned by corporations, partnerships, trusts, and
similar entities ("non-natural persons"), rather than by one or more
individuals, are not treated as annuity contracts for most purposes under the
Code; in particular, they are not treated as annuity contracts for purposes of
Section 72. Therefore, the taxation rules for Distributions, as described above,
do not apply to Non-Qualified Contracts owned by non-natural persons. Rather the
income earned under a Non-Qualified Contract that is owned by a non-natural
person is taxed as ordinary income during the taxable year that it is earned,
and is not deferred, even if the income is not distributed out of the Contract
to the Contract Owner.
The foregoing non-natural person rule does not apply to all entity-owned
contracts. A Contract that is owned by a non-natural person as an agent for an
individual is treated as owned by the individual. This exception does not apply,
however, to a non-natural person who is an employer that holds the Contract
under a non-qualified deferred compensation arrangement for one or more
employees.
The non-natural person rules also do not apply to a Contract that is:
(a) acquired by the estate of a decedent by reason of the death of the
decedent;
(b) issued in connection with certain qualified retirement plans and
individual retirement plans;
(c) used in connection with certain structured settlements;
(d) purchased by an employer upon the termination of certain qualified
retirement plans; or
(e) an immediate annuity.
35
<PAGE> 36
IRAS AND TAX SHELTERED ANNUITIES
Contract Owners seeking information regarding eligibility, limitations on
permissible amounts of Purchase Payments, and the tax consequences of
Distributions from IRAs and Tax Sheltered Annuities should seek competent
advice; the terms of such plans may limit the rights available under the
Contracts.
Pursuant to Section 403(b)(1)(E) of the Code, a Contract that is issued as a Tax
Sheltered Annuity is required to limit the amount of Purchase Payments for any
year to an amount that does not exceed the limit set forth in Section 402(g) of
the Code, as it is from time to time increased to reflect increases in the cost
of living. This limit may be reduced by any deposits, contributions or payments
made to any other Tax Sheltered Annuity or other plan, contract or arrangement
by or on behalf of the Contract Owner.
The Code permits the rollover of most Distributions from Qualified Plans to
IRAs. Most Distributions from Tax Sheltered Annuities may be rolled into another
Tax Sheltered Annuity, IRA, or an Individual Retirement Account. Distributions
that may not be rolled over are those which are:
(a) one of a series of substantially equal annual (or more frequent)
payments made:
(i) over the life (or life expectancy) of the Contract Owner;
(ii) over the joint lives (or joint life expectancies) of the
Contract Owner and the Contract Owner's designated
Beneficiary;
(iii) for a specified period of ten years or more; or
(b) a required minimum distribution.
Any Distribution eligible for rollover will be subject to federal tax
withholding at a rate of twenty percent (20%) unless the Distribution is
transferred directly to an appropriate plan as described above.
Individual Retirement Accounts and IRAs may not provide life insurance benefits.
If the Death Benefit exceeds the greater of the cash value of the Contract or
the sum of all Purchase Payments (less any surrenders), it is possible the IRS
could determine that the Individual Retirement Account or IRA did not qualify
for the desired tax treatment.
ROTH IRAS
The Contract may be purchased as a Roth IRA. The Contract Owner should seek
competent advice as to the tax consequences associated with the use of a
Contract as a Roth IRA, for information regarding eligibility to invest in a
Roth IRA, for limitations on permissible amounts of Purchase Payments that may
be made to a Roth IRA, and as to the tax consequences of Distributions from Roth
IRAs.
The Code permits the rollover of most Distributions from Individual Retirement
Accounts or IRAs to Roth IRAs. The rollovers are subject to federal income tax
as Distributions from the Individual Retirement Account or IRA. For rollovers
that take place in 1998, the Contract Owner may elect to include the income from
rollovers in income ratably over the four year period commencing in 1998, or
include the entire amount in income in 1998. For rollovers in subsequent years,
the entire amount of income from the rollover will be required to be included in
income in the year of the rollover Distribution from the Individual Retirement
Account or IRA.
A Distribution from a Roth IRA that received the proceeds of a rollover from an
Individual Retirement Account or IRA within the previous five years could be
subject to a 10% penalty even if the Distribution is not taxable. In addition,
if the rollover from the Individual Retirement Account or IRA was made in 1998
and the income from that rollover was included in income ratably over a four
year period, a Distribution from the Roth IRA within four years of the rollover
may result in the loss of the four year spread, subject to the amount deferred
under the four year election to be taxed immediately.
WITHHOLDING
The Company is required to withhold tax from certain Distributions to the extent
that such Distribution would constitute income to the Contract Owner or other
payee. The Contract Owner or other payee is entitled to elect not to have
federal income tax withheld from certain types of Distributions, but may be
subject to penalties in the event insufficient federal income tax is withheld
during a calendar year. However, if the IRS notifies the Company that the
Contract Owner or other payee has furnished an incorrect taxpayer identification
number, or if the Contract Owner or other payee fails to provide a taxpayer
identification number, the Distributions may be
36
<PAGE> 37
subject to back-up withholding at the statutory rate which is presently 31% and
which cannot be waived by the Contract Owner or other payee.
NON-RESIDENT ALIENS
Distributions to nonresident aliens (NRAs) are generally subject to federal
income tax and tax withholding at a statutory rate of thirty percent (30%) of
the amount of income that is distributed. The Company may be required to
withhold such amount from the Distribution and remit it to the IRS.
Distributions to certain NRAs may be subject to lower, or in certain instances,
zero tax and withholding rates if the United States has entered into an
applicable treaty. However, in order to obtain the benefits of such treaty
provisions, the NRA must give the Company sufficient proof of his or her
residency and citizenship in the form and manner prescribed by the IRS. For
Distribution the NRA must obtain an individual taxpayer identification number
from the IRS, and furnish that number to the Company prior to the Distribution.
If the Company does not have the proper proof of citizenship or residency and a
proper individual taxpayer identification number prior to any Distribution, the
Company will be required to withhold 30% of the income, regardless of any treaty
provision.
A payment may not be subject to withholding where the recipient sufficiently
establishes to the Company that such payment is effectively connected to the
recipient's conduct of a trade or business in the United States and that such
payment is includable in the recipient's gross income for United States federal
income tax purposes. Any such Distributions will be subject to the rules set
forth in the section entitled "Withholding."
FEDERAL ESTATE, GIFT, AND GENERATION SKIPPING TRANSFER TAXES
A transfer of the Contract from one Contract Owner to another, or the payment of
a Distribution under the Contract to someone other than a Contract Owner, may
constitute a gift for federal gift tax purposes. Upon the death of the Contract
Owner, the value of the Contract may be included in his or her gross estate for
federal estate tax purposes, even if all or a portion of the value is also
subject to federal income taxes.
The Company may be required to determine whether the Death Benefit or any other
payment or Distribution constitutes a "direct skip" as defined in Section 2612
of the Code, and the amount of the generation skipping transfer tax, if any,
resulting from such direct skip. A direct skip may occur when property is
transferred to, or a Death Benefit or other Distribution is made to:
(a) an individual who is two or more generations younger than the
Contract Owner; or
(b) certain trusts, as described in Section 2613 of the Code (generally,
trusts that have no beneficiaries who are not 2 or more generations
younger than the Contract Owner).
If the Contract Owner is not an individual, then for this purpose only,
"Contract Owner" refers to any person who would be required to include the
Contract, Death Benefit, Distribution, or other payment in his or her federal
gross estate at his or her death, or who is required to report the transfer of
the Contract, Death Benefit, Distribution, or other payment for federal gift tax
purposes.
If the Company determines that a generation-skipping transfer tax is required to
be paid by reason of a direct skip, the Company is required by Section 2603 of
the Code to reduce the amount of such Death Benefit, Distribution, or other
payment by such tax liability, and pay the tax liability directly to the IRS.
Federal estate, gift and generation-skipping transfer tax consequences, and
state and local estate, inheritance, succession, generation-skipping transfer,
and other tax consequences of owning or transferring a Contract, and of
receiving a Distribution, Death Benefit, or other payment, depend on the
circumstances of the person owning or transferring the Contract, or person
receiving a Distribution, Death Benefit, or other payment.
CHARGE FOR TAX
The Company is no longer required to maintain a capital gain reserve liability
on Non-Qualified Contracts since capital gains attributable to assets held in
Sub-Accounts for such Contracts are not taxable to the Company. However, the
Company reserves the right to implement and adjust the tax charge in the future
if the tax laws change.
37
<PAGE> 38
DIVERSIFICATION
The IRS has promulgated regulations under Section 817(h) of the Code relating to
diversification standards for the investments underlying a variable annuity
contract. The regulations provide that a variable annuity contract which does
not satisfy the diversification standards will not be treated as an annuity
contract, unless the failure to satisfy the regulations was inadvertent, the
failure is corrected, and the contract owner or the company pays an amount to
the IRS. The amount will be based on the tax that would have been paid by the
contract owner if the income, for the period the contract was not diversified,
had been received by the contract owner. If the failure to diversify is not
corrected in this manner, the contract owner will be deemed the owner of the
underlying securities and will be taxed on the earnings of his or her account.
The Company believes, under its interpretation of the Code and regulations
thereunder, that the investments underlying this Contract meet these
diversification standards.
Representatives of the IRS have suggested, from time to time, that the number of
underlying mutual funds available or the number of transfer opportunities
available under a variable product may be relevant in determining whether the
product qualifies for the desired tax treatment. No formal guidance has been
issued in this area. Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of underlying mutual funds, transfers between
underlying mutual funds, exchanges of underlying mutual funds or changes in
investment objectives of underlying mutual funds such that the Contract would no
longer qualify as an annuity under Section 72 of the Code, the Company will take
whatever steps are available to remain in compliance.
TAX CHANGES
The Code has been subjected to numerous amendments and changes and it is
reasonable to believe that it will continue to be revised. The United States
Congress has considered numerous legislative proposals that, if enacted, could
change the tax treatment of the Contracts. It is reasonable to believe that such
proposals may be enacted into law. In addition, the Treasury Department may
amend existing regulations, issue new regulations, or adopt new interpretations
of existing law that may be in variance with its current positions on these
matters. In addition, state law (which is not discussed herein) may affect the
tax consequences of the Contract.
The foregoing discussion, which is based on the Company's understanding of
federal tax laws as they are currently interpreted by the IRS, is general and is
not intended as tax advice. Statutes, regulations, and rulings are subject to
interpretation by the courts. The courts may determine that a different
interpretation than the currently favored interpretation is appropriate, thereby
changing the operation of the rules that are applicable to annuity contracts.
Any of the foregoing may change from time to time without any notice, and the
tax consequences arising out of a Contract may be changed retroactively. There
is no way of predicting whether, when, and to what extent any such change may
take place. No representation is made as to the likelihood of the continuation
of these current laws, interpretations and policies.
THE FOREGOING IS A GENERAL EXPLANATION AS TO CERTAIN TAX MATTERS PERTAINING TO
ANNUITY CONTRACTS. IT IS NOT INTENDED TO BE LEGAL OR TAX ADVICE, AND SHOULD NOT
TAKE THE PLACE OF YOUR INDEPENDENT LEGAL, TAX AND/OR FINANCIAL ADVISOR.
GENERAL INFORMATION
CONTRACT OWNER INQUIRIES
Contract Owner inquiries may be directed to the Company by writing P.O. Box
182356, Columbus, Ohio 43218-2356, or calling 1-800-243-6295, TDD
1-800-238-3035.
38
<PAGE> 39
STATEMENTS AND REPORTS
The Company will mail to Contract Owners, at their last known address, any
statements and reports required by law. Contract Owners should promptly notify
the Company of any address change. Statements are mailed detailing the
Contract's quarterly activity. The Company will also send a confirmation
statement to Contract Owners each time a transaction is made affecting the
Contract Value. However, instead of receiving an immediate confirmation of
transactions made pursuant to some types of recurring payment plans (such as a
Dollar Cost Averaging program or salary reduction arrangement), the Contract
Owner may receive confirmation of such transactions in their quarterly
statements. The Contract Owner should review the information in these statements
carefully. All errors or corrections must be reported to the Company immediately
to assure proper crediting to the Contract. The Company will assume all
transactions are accurately reported on quarterly statements or confirmation
statements unless the Contract Owner notifies the Home Office within 30 days
after receipt of the statement. The Company will also send to Contract Owners a
semi-annual report as of June 30 and an annual report as of December 31,
containing financial statements for the Variable Account.
ADVERTISING
A "yield" and "effective yield" may be advertised for the NSAT-Money Market
Fund. "Yield" is a measure of the net dividend and interest income earned over a
specific seven-day period (which period will be stated in the advertisement)
expressed as a percentage of the offering price of the NSAT-Money Market Fund's
units. Yield is an annualized figure, which means that it is assumed that the
NSAT-Money Market Fund generates the same level of net income over a 52-week
period. The "effective yield" is calculated similarly but includes the effect of
assumed compounding, calculated under rules prescribed by the SEC. The effective
yield will be slightly higher than yield due to this compounding effect.
The Company may also from time to time advertise the performance of a
Sub-Account relative to the performance of other variable annuity sub-accounts
or underlying mutual fund options with similar or different objectives, or the
investment industry as a whole. Other investments to which the Sub-Accounts may
be compared include, but are not limited to: precious metals; real estate;
stocks and bonds; closed-end funds; CDs; bank money market deposit accounts and
passbook savings; and the Consumer Price Index.
The Sub-Accounts may also be compared to certain market indexes, which may
include, but are not limited to: S&P 500; Shearson/Lehman Intermediate
Government/Corporate Bond Index; Shearson/Lehman Long-Term Government/Corporate
Bond Index; Donoghue Money Fund Average; U.S. Treasury Note Index; Bank Rate
Monitor National Index of 2 1/2 Year CD Rates; and Dow Jones Industrial Average.
Normally, these rankings and ratings are published by independent tracking
services and publications of general interest including, but not limited to:
Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar, Donoghue's,
magazines such as Money, Forbes, Kiplinger's Personal Finance Magazine,
Financial World, Consumer Reports, Business Week, Time, Newsweek, National
Underwriter, U.S. News and World Report; rating services such as LIMRA, Value,
Best's Agent Guide, Western Annuity Guide, Comparative Annuity Reports; and
other publications such as the Wall Street Journal, Barron's, Investor's Daily,
and Standard & Poor's Outlook. In addition, Variable Annuity Research & Data
Service (The VARDS Report) is an independent rating service that ranks over 500
variable annuity funds based upon total return performance. These rating
services and publications rank the performance of the Underlying Mutual Fund
options against all underlying mutual funds over specified periods and against
underlying mutual funds in specified categories. The rankings may or may not
include the effects of sales charges or other fees.
The Company is also ranked and rated by independent financial rating services,
among which are Moody's, Standard & Poor's and A.M. Best Company. The purpose of
these ratings is to reflect the financial strength or claims-paying ability of
the Company. The ratings are not intended to reflect the investment experience
or financial strength of the Variable Account. The Company may advertise these
ratings from time to time. In addition, the Company may include in certain
advertisements, endorsements in the form of a list of organizations, individuals
or other parties which recommend the Company or the Contracts. Furthermore, the
Company may occasionally include in advertisements comparisons of currently
taxable and tax deferred investment programs, based on selected tax brackets, or
discussions of alternative investment vehicles and general economic conditions.
39
<PAGE> 40
The Company may, from time to time, advertise several types of historical
performance of the Sub-Accounts. The Company may advertise for the Sub-Account's
standardized "average annual total return," calculated in a manner prescribed by
the SEC, and nonstandardized "total return." "Average annual total return"
illustrates the percentage rate of return of a hypothetical initial investment
of $1,000 for the most recent one, five and ten year periods, or for a period
covering the time the Underlying Mutual Fund has been available in the Variable
Account if the Underlying Mutual Fund option has not been available for the
prescribed periods. THIS CALCULATION REFLECTS THE DEDUCTION OF ALL APPLICABLE
CHARGES MADE TO THE CONTRACTS EXCEPT FOR PREMIUM TAXES, WHICH MAY BE IMPOSED BY
CERTAIN STATES.
Nonstandardized "total return," calculated similar to standardized "average
annual total return," illustrates the percentage rate of return of a
hypothetical initial investment of $10,000 for the most recent one, five and ten
year periods, or for a period covering the time the Underlying Mutual Fund
option has been in existence. For those Underlying Mutual Fund options which
have not been held as Sub-Accounts for one of the prescribed periods, the
nonstandardized total return illustrations will show the investment performance
such Underlying Mutual Fund options would have achieved (reduced by the same
charges except the CDSC) had such Underlying Mutual Fund options been available
in the Variable Account for the periods quoted. THE CDSC IS NOT REFLECTED
BECAUSE THE CONTRACTS ARE DESIGNED FOR LONG TERM INVESTMENT. THE CDSC, IF
REFLECTED, WOULD DECREASE THE LEVEL OF PERFORMANCE SHOWN. AN INITIAL INVESTMENT
OF $10,000 IS ASSUMED BECAUSE THAT AMOUNT MORE CLOSELY APPROXIMATES THE SIZE OF
A TYPICAL CONTRACT THAN DOES THE $1,000 ASSUMPTION USED IN CALCULATING THE
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS.
The standardized average annual total return and nonstandardized total return
quotations are calculated as described in this section using Underlying Mutual
Fund performance for the periods ended December 31, 1997. However, the Company
generally provides performance quotations on a more frequent basis, the result
of which could reflect better or worse results than shown below. The quotations
and other comparative material advertised by the Company are based upon
historical earnings and are not intended to represent or guarantee future
results. Contract Value at redemption may be more or less than the original
cost.
SUB-ACCOUNT PERFORMANCE SUMMARY
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
10 Years
or Date Fund
Available in
the Variable Date Fund
1 Year 5 Years Account Available in the
Sub-Account Option to 12/31/97 to 12/31/97 to 12/31/97 Variable Account
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Century Variable Portfolios, Inc. - N/A N/A 21.39% 11/03/97
American Century VP Income & Growth
- -------------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - N/A N/A -1.54% 11/03/97
American Century VP International
- -------------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - N/A N/A 12.87% 11/03/97
American Century VP Value
- ------------------------------------------------------------------------------------------------------------------------
The Dreyfus Socially Responsible Growth Fund, Inc. N/A N/A 3.94% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund, Inc. N/A N/A 16.34% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment Fund - Capital N/A N/A 9.47% 11/03/97
Appreciation Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio: Service Class N/A N/A 15.95% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio: Service Class N/A N/A -5.35% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio: Service Class N/A N/A 0.92% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio: Service Class N/A N/A -12.84% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio: Service Class N/A N/A -9.88% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio: N/A N/A 20.67% 11/03/97
Service Class
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
10 Years
or Date Fund
Available in
the Variable Date Fund
1 Year 5 Years Account Available in the
Sub-Account Option to 12/31/97 to 12/31/97 to 12/31/97 Variable Account
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morgan Stanley Universal Funds, Inc. - Emerging N/A N/A 22.61% 11/03/97
Markets Debt Portfolio
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Capital Appreciation Fund N/A N/A 19.52% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Government Bond Fund N/A N/A 2.03% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Money Market Fund N/A N/A -2.77% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Total Return Fund N/A N/A 8.97% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Balanced Fund N/A N/A 1.19% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Equity Income Fund N/A N/A 3.29% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Global Equity Fund N/A N/A -0.71% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide High Income Bond Fund N/A N/A 8.81% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Multi-Sector Bond Fund N/A N/A -1.60% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Select Advisers Mid Cap Fund N/A N/A -10.21% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Small Cap Value Fund N/A N/A -17.10% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Small Company Fund N/A N/A -27.68% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Strategic Growth Fund N/A N/A 6.23% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Strategic Value Fund N/A N/A 2.32% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Guardian Portfolio N/A N/A 28.89% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Mid-Cap Growth Portfolio N/A N/A 161.31% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Partners Portfolio N/A N/A 1.31% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer N/A N/A -31.38% 11/03/97
Aggressive Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer N/A N/A -16.91% 11/03/97
Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer N/A N/A 10.15% 11/03/97
Growth & Income Fund
- -------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - Worldwide N/A N/A -58.11% 11/03/97
Emerging Markets Fund
- -------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - Worldwide Hard N/A N/A -52.93% 11/03/97
Assets Fund
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen Life Investment Trust - Morgan Stanley N/A N/A 15.96% 11/03/97
Real Estate Securities Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Growth & Income Portfolio N/A N/A 18.60% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - International Equity N/A N/A -34.85% 11/03/97
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Post-Venture Capital N/A N/A -15.55% 11/03/97
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
10 Years
1 Year 5 Years to 12/31/97 Date Fund
Sub-Account Option to 12/31/97 to 12/31/97 or Life of Fund Effective
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Century Variable Portfolios, Inc. - N/A N/A 7.57% 10/30/97
American Century VP Income & Growth
- -------------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - 17.15% N/A 9.22% 05/02/94
American Century VP International
- -------------------------------------------------------------------------------------------------------------------------
American Century Variable Portfolios, Inc. - 24.51% N/A 21.65% 05/01/96
American Century VP Value
- -------------------------------------------------------------------------------------------------------------------------
The Dreyfus Socially Responsible Growth Fund, Inc. 26.83% N/A 20.00% 10/06/93
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
10 Years
1 Year 5 Years to 12/31/97 Date Fund
Sub-Account Option to 12/31/97 to 12/31/97 or Life of Fund Effective
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dreyfus Stock Index Fund, Inc. 31.30% 16.21% 14.41% 09/29/89
- -------------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment Fund - Capital 26.48% N/A 18.40% 04/05/93
Appreciation Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio: Service Class 26.46% 18.63% 15.29% 10/09/86
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio: Service Class 21.91% 16.52% 15.73% 10/09/86
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio: Service Class 16.11% 12.50% 11.47% 09/19/85
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio: Service Class 10.16% 12.67% 8.25% 01/28/87
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio: Service Class 22.53% N/A 26.58% 01/03/95
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio: 28.33% N/A 25.25% 01/03/95
Service Class
- -------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Universal Funds, Inc. - Emerging N/A N/A 0.09% 06/16/97
Markets Debt Portfolio
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Capital Appreciation Fund 32.81% 17.49% 16.11% 04/15/92
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Government Bond Fund 8.30% 6.05% 7.89% 11/08/82
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Money Market Fund 3.96% 3.24% 4.32% 11/10/81
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Total Return Fund 27.81% 16.47% 14.19% 11/08/82
- -------------------------------------------------------------------------------------------------------------------------
NSAT-Nationwide Balanced Fund N/A N/A 1.25% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Equity Income Fund N/A N/A 1.56% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Global Equity Fund N/A N/A 0.96% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide High Income Bond Fund N/A N/A 2.07% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Multi-Sector Bond Fund N/A N/A 0.83% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Select Advisers Mid Cap Fund N/A N/A -0.57% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Small Cap Value Fund N/A N/A -1.82% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Small Company Fund 15.88% N/A 24.07% 10/23/95
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Strategic Growth Fund N/A N/A 1.98% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
NSAT- Nationwide Strategic Value Fund N/A N/A 1.42% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Guardian Portfolio N/A N/A 4.99% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Mid-Cap Growth Portfolio N/A N/A 16.97% 11/03/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Partners Portfolio 29.61% N/A 22.64% 03/22/94
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer 10.30% 14.49% 14.79% 08/15/86
Aggressive Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer 25.13% 17.14% 15.23% 04/03/85
Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds - Oppenheimer 30.85% N/A 35.52% 07/05/95
Growth & Income Fund
- -------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - Worldwide -12.71% N/A 3.97% 12/21/95
Emerging Markets Fund
- -------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Insurance Trust - Worldwide Hard -2.91% 13.58% 5.67% 09/01/89
Assets Fund
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen Life Investment Trust - Morgan Stanley 19.96% N/A 26.33% 07/03/95
Real Estate Securities Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Growth & Income Portfolio N/A N/A 3.68% 10/31/97
- -------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - International Equity -3.48% N/A 4.54% 06/30/95
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Post-Venture Capital 11.92% N/A 7.04% 09/30/96
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
YEAR 2000 COMPLIANCE ISSUES
The Company has developed and implemented a plan to address issues related to
the Year 2000. The problem relates to many existing computer systems using only
two digits to identify a year in a date field. These systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer systems could fail or create erroneous results
when processing information dated after December 31, 1999. Like many
organizations, the Company is required to renovate or replace many computer
systems so that the systems will function properly after December 31, 1999. The
Company has completed an inventory and assessment of all computer systems and
has developed a plan to renovate or replace all applications that were
identified as not Year 2000 compliant. As of the end of July 1998, the Company
has renovated 97% of all applications that required renovation. Testing of the
renovated programs is in process, including running each application with the
date moved forward to Year 2000. The Company expects to complete the testing of
all renovated applications by the end of 1998. For applications being replaced,
the Company anticipates all replacement systems to be in place and functioning
by the end of 1998. Contingency plans are substantially completed which identify
actions to be taken should the Company's renovation and replacement strategies
fall behind schedule.
The Company is also completing an inventory and assessment of all vendor
products. As of the end of July 1998, 83% of products had been assessed and 69%
were Year 2000 compliant. The Company is certifying that each vendor product is
Year 2000 compliant. At the end of July 1998, 24% of vendor products that were
identified as Year 2000 compliant had been certified. The Company anticipates
having all vendor products assessed and certified by the end of 1998. Any vendor
products that can not be certified as Year 2000 compliant will be replaced or
eliminated.
In addition to resolving internal Year 2000 readiness issues, the Company is
working with all external organizations (business partners) to assess Year 2000
issues associated with the exchange of electronic data. The Company has
completed an inventory and assessment of all interfaces with business partners
and is in the process of testing those interfaces. The Company has also
initiated plans to survey producer business partners to ascertain their Year
2000 readiness.
Operating expenses in 1997 and in the first six months of 1998 include
approximately $45 million and $22.6 million, respectively, for technology
projects, including costs related to Year 2000. In the second half of 1998, the
Company anticipates spending an amount comparable to expense for the first half
of 1998. At this time, no significant Year 2000 costs are anticipated in 1999.
Management does not anticipate that the completion of Year 2000 renovation and
replacement activities will result in a reduction in operating expenses. Rather,
personnel and resources currently allocated to Year 2000 issues will be assigned
to other technology-related projects. These expenses do not have an effect on
the assets of the Variable Account and are not charged through to the Contract
Owner.
LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the ordinary
course of its business, none of which is expected to have a material adverse
effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, relating to life insurance and
annuity pricing and sales practices. A number of these lawsuits have resulted in
substantial jury awards or settlements.
In February 1997, Nationwide Life Insurance Company was named as a defendant in
a lawsuit filed in New York Supreme Court related to the sale of whole life
policies on a "vanishing premium" basis (John H. Snyder v. Nationwide Life
Insurance Co.). The plaintiff in such lawsuit seeks to represent a national
class of Nationwide Life's policyholders and claims unspecified compensatory and
punitive damages. On August 20, 1998, the Court in the Snyder case signed an
order preliminarily approving a class for settlement purposes and scheduled a
fairness hearing for December 17, 1998. The proposed settlement, if ultimately
approved, is not expected to have a material adverse effect on the financial
condition of Nationwide Life Insurance Company.
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<PAGE> 44
In April 1998, Nationwide Life Insurance Company was named as a defendant in a
lawsuit filed in Ohio State Court similar to the Snyder lawsuit (David Mishler
v. Nationwide Life Insurance Co.). The plaintiffs in such lawsuit seek to
represent a similar class, make similar allegations and seek unspecified
compensatory and punitive damages.
In November 1997, two plaintiffs, one who was the owner of a variable life
insurance contract and the other who was the owner of a variable annuity
contract, commenced an action in a federal court in Texas against Nationwide
Life Insurance Company and the American Century Group as defendants (Robert
Young and David D. Distad v. Nationwide Life Insurance Company et al.). In this
action, plaintiffs seek to represent a class of variable life insurance contract
owners and variable annuity contract owners whom they claim were allegedly
misled when purchasing these variable contracts into believing that the
performance of their 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 Court denied, in part, and granted, in
part, motions to dismiss the complaint filed by Nationwide Life Insurance
Company and American Century. The parties are presently engaged in discovery on
the issue of whether the lawsuit should be certified as a class action.
Plaintiffs filed their motion in support of class certification and Nationwide
Life Insurance Company intends to file a response opposing class certification.
Nationwide Life Insurance Company intends to defend this case vigorously.
There can be no assurance that any litigation relating to pricing or sales
practices will not have a material adverse effect on the Company in the future.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
General Information and History.......................................................................................1
Services..............................................................................................................1
Purchase of Securities Being Offered..................................................................................2
Underwriters..........................................................................................................2
Calculations of Performance...........................................................................................2
Annuity Payments......................................................................................................3
Financial Statements..................................................................................................4
</TABLE>
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APPENDIX A
FIXED ACCOUNT
Purchase Payments under the Fixed Account of the Contract and transfers to the
Fixed Account become part of the general account of the Company, which support
insurance and annuity obligations. Because of exemptive and exclusionary
provisions, interests in the general account have not been registered under the
"1933 Act" nor is the general account registered as an investment company under
the "1940 Act." Accordingly, neither the general account nor any interest
therein are subject to the provisions of the 1933 or 1940 Acts, and we have been
advised that the staff of the SEC has not reviewed the disclosures in this
prospectus which relate to the Fixed Account. Disclosures regarding the Fixed
Account and the general account may be subject to certain provisions of the
federal securities law relating to the accuracy and completeness of statements
made in prospectuses.
FIXED ACCOUNT ALLOCATIONS
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company, other
than those in the Variable Account and any other segregated asset account.
Purchase Payments will be allocated to the Fixed Account by election of the
Contract Owner.
The Company will invest the assets of the Fixed Account in those assets chosen
by the Company and allowed by applicable law. Investment income from such assets
will be allocated by the Company between itself and the Contracts participating
in the Fixed Account.
Investment income from the Fixed Account includes compensation for mortality and
expense risks borne by the Company in connection with Fixed Account Contracts.
The amount of such investment income allocated to the contracts will vary from
at the sole discretion of the Company at such rate(s) as the Company
prospectively declares. The guaranteed rate for any Purchase Payment will remain
in effect for a period not less than twelve months. However, the Company
guarantees that it will credit interest at not less than 3.0% per year. ANY
INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 3.0%
PER YEAR WILL BE DETERMINED AT THE SOLE DISCRETION OF THE COMPANY. THE CONTRACT
OWNER ASSUMES THE RISK THAT INTEREST CREDITED TO FIXED ACCOUNT ALLOCATIONS MAY
NOT EXCEED THE MINIMUM GUARANTEE OF 3.0% FOR ANY GIVEN YEAR. New Purchase
Payments deposited to the Contract which are allocated to the Fixed Account may
receive a different rate of interest than money transferred from the
Sub-Accounts to the Fixed Account and amounts maturing in the Fixed Account at
the expiration of an Interest Rate Guarantee Period.
The Company guarantees that the Fixed Account Contract Value will not be less
than the amount of the Purchase Payments allocated to the Fixed Account, plus
interest credited as described above, less any applicable charges including
CDSC.
TRANSFERS
For transfers from the Fixed Account to the Variable Account, refer to the
"Transfers" provision of the prospectus.
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<PAGE> 46
APPENDIX B
OBJECTIVES FOR PARTICIPATING UNDERLYING MUTUAL FUNDS
THE UNDERLYING MUTUAL FUNDS LISTED BELOW ARE DESIGNED PRIMARILY AS INVESTMENT
VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE INSURANCE POLICIES
ISSUED BY INSURANCE COMPANIES. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT
OBJECTIVES WILL BE ACHIEVED.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC., MEMBER OF THE AMERICAN CENTURY(SM)
FAMILY OF INVESTMENTS.
American Century Variable Portfolios, Inc. was organized as a Maryland
corporation in 1987. It is a diversified, open-end investment management company
which offers its shares only as investment vehicles for variable annuity and
variable life insurance products of insurance companies. American Century
Variable Portfolios, Inc. is managed by American Century Investment Management,
Inc.
-AMERICAN CENTURY VP INCOME & GROWTH
Investment Objective: Dividend growth, current income and capital
appreciation. The Fund seeks to achieve its investment objective by
investing in common stocks. The investment manager constructs the
portfolio to match the risk characteristics of the S&P 500 Stock Index
and then optimizes each portfolio to achieve the desired balance of risk
and return potential. This includes targeting a dividend yield that
exceeds that of the S&P 500. Such a management technique known as
"portfolio optimization" may cause the Fund to be more heavily invested
in some industries than in others. However, the Fund may not invest more
than 25% of its total assets in companies whose principal business
activities are in the same industry.
-AMERICAN CENTURY VP INTERNATIONAL
Investment Objective: To seek capital growth. The Fund will seek to
achieve its investment objective by investing primarily in securities of
foreign companies that meet certain fundamental and technical standards
of selection and, in the opinion of the investment manager, have
potential for appreciation. Under normal conditions, the Fund will invest
at least 65% of its assets in common stocks or other equity securities of
issuers from at least three countries outside the United States. While
securities of United States issuers may be included in the portfolio from
time to time, it is the primary intent of the manager to diversify
investments across a broad range of foreign issuers. Although the primary
investment of the Fund will be common stocks (defined to include
depository receipts for common stock and other equity equivalents), the
Fund may also invest in other types of securities consistent with the
Fund's objective. When the manager believes that the total capital growth
potential of other securities equals or exceeds the potential return of
common stocks, the Fund may invest up to 35% of its assets in such other
securities. There can be no assurance that the Fund will achieve its
objectives.
-AMERICAN CENTURY VP VALUE
Investment Objective: The investment objective of the Fund is long-term
capital growth; income is a secondary objective. The equity securities in
which the Fund will invest will be primarily securities of
well-established companies with intermediate-to-large market
capitalizations that are believed by management to be undervalued at the
time of purchase. Under normal market conditions, the Fund expects to
invest at least 80% of the value of its total asset in equity securities,
including common and preferred stock, convertible preferred stock and
convertible debt obligations.
46
<PAGE> 47
DREYFUS STOCK INDEX FUND, INC.
The Dreyfus Stock Index Fund, Inc. ("Fund") is an open-end, non-diversified,
management investment company incorporated under Maryland law on January 24,
1989 and commenced operations on September 29, 1989. The Fund offers its shares
only as investment vehicles for variable annuity and variable life insurance
products of insurance companies. The Dreyfus Corporation ("Dreyfus") serves as
the Fund's manager, while Mellon Equity Associates, an affiliate of Dreyfus,
serves as the Fund's index manager. Dreyfus is a wholly-owned subsidiary of
Mellon Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank
Corporation.
Investment Objective: To provide investment results that correspond to
the price and yield performance of publicly traded common stocks in the
aggregate, as represented by the Standard & Poor's 500 Composite Stock
Price Index. The Fund is neither sponsored by nor affiliated with
Standard & Poor's Corporation.
DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund ("Fund") is an open-end, management investment
company. It was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts on October 29, 1986 and commenced operations
on August 31, 1990. The Fund offers its shares only as investment vehicles for
variable annuity and variable life insurance products of insurance companies.
Dreyfus serves as the Fund's manager. Fayez Sarofim & Company serves as the
sub-adviser and provides day-to-day management of the Portfolio.
-CAPITAL APPRECIATION PORTFOLIO
Investment Objective: The Portfolio's primary investment objective is to
provide long-term capital growth consistent with the preservation of
capital; current income is a secondary investment objective. This
Portfolio invests primarily in the common stocks of domestic and foreign
issuers.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Dreyfus Socially Responsible Growth Fund, Inc. is an open-end, diversified,
management investment company incorporated under Maryland law on July 20, 1992
and commenced operations on October 7, 1993. The Fund offers its share only as
investment vehicles for variable annuity and variable life insurance products of
insurance companies. Dreyfus serves as the Fund's investment adviser. NCM
Capital Management Group, Inc. serves as the Fund's sub-investment adviser and
provides day-to-day management of the Fund's portfolio.
Investment Objective: Capital growth through equity investment in
companies that, in the opinion of the Fund's advisers, not only meet
traditional investment standards, but which also show evidence that they
conduct their business in a manner that contributes to the enhancement
of the quality of life in America. Current income is secondary to the
primary goal.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fidelity Variable Insurance Products Fund (VIP) is an open-end, diversified,
management investment company organized as a Massachusetts business trust on
November 13, 1981. Shares of VIP are purchased by insurance companies to fund
benefits under variable life insurance policies and variable annuity contracts.
Fidelity Management & Research Company ("FMR") is the manager for VIP and its
portfolios.
-VIP EQUITY-INCOME PORTFOLIO: SERVICE CLASS
Investment Objective: Reasonable income by investing primarily in
income-producing equity securities. In choosing these securities FMR also
will consider the potential for capital appreciation. The Portfolio's
goal is to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's 500 Composite Stock Price
Index.
-VIP GROWTH PORTFOLIO: SERVICE CLASS
Investment Objective: Capital appreciation. This Portfolio will invest in
the securities of both well-known and established companies, and smaller,
less well-known companies which may have a narrow product line or whose
securities are thinly traded. These latter securities will often involve
greater risk than may be found in the ordinary investment security. FMR's
analysis and expertise plays an integral role in the selection of
securities and, therefore, the performance of the Portfolio. Many
securities which FMR
47
<PAGE> 48
believes would have the greatest potential may be regarded as
speculative, and investment in the Portfolio may involve greater risk
than is inherent in other underlying mutual funds. It is also important
to point out that this Portfolio makes sense for you if you can afford to
ride out changes in the stock market because it invests primarily in
common stocks. FMR can also make temporary investments in securities such
as investment-grade bonds, high-quality preferred stocks and short-term
notes, for defensive purposes when it believes market conditions warrant.
-VIP HIGH INCOME PORTFOLIO: SERVICE CLASS
Investment Objective: High level of current income by investing primarily
in high-risk, lower-rated, high-yielding, fixed-income securities, while
also considering growth of capital. FMR will seek high current income
normally by investing the Portfolio's assets as follows:
o at least 65% in income-producing debt securities and preferred
stocks, including convertible securities
o up to 20% in common stocks and other equity securities when
consistent with the Portfolio's primary objective or acquired as part
of a unit combining fixed-income and equity securities
Higher yields are usually available on securities that are lower-rated or
that are unrated. Lower-rated securities are usually defined as Ba or
lower by Moody's Investor Service, Inc. ("Moody's"); BB or lower by
Standard & Poor's and may be deemed to be of a speculative nature. The
Portfolio may also purchase lower-quality bonds such as those rated Ca3
by Moody's or C- by Standard & Poor's which provide poor protection for
payment of principal and interest (commonly referred to as "junk bonds").
For a further discussion of lower-rated securities, please see the "Risks
of Lower-Rated Debt Securities" section of the Portfolio's prospectus.
-VIP OVERSEAS PORTFOLIO: SERVICE CLASS
Investment Objective: Long-term capital growth primarily through
investments in foreign securities. This Portfolio provides a means for
investors to diversify their own portfolios by participating in companies
and economies outside the United States.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Fidelity Variable Insurance Products Fund II (VIP II) is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on March 21, 1988. VIP II's shares are purchased by insurance companies to
fund benefits under variable life insurance policies and variable annuity
contracts. FMR is the manager of VIP II and its portfolios.
-VIP II CONTRAFUND PORTFOLIO: SERVICE CLASS
Investment Objective: To seek capital appreciation by investing primarily
in companies that FMR believes to be undervalued due to an overly
pessimistic appraisal by the public. This strategy can lead to
investments in domestic or foreign companies, small and large, many of
which may not be well known. The Portfolio primarily invests in common
stock and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
The Fidelity Variable Insurance Products Fund III (VIP III) is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on July 14, 1994. VIP III's shares are purchased by insurance companies to
fund benefits under variable life insurance policies and variable annuity
contracts. FMR is the manager of VIP III and it's portfolios.
-VIP III GROWTH OPPORTUNITIES PORTFOLIO: SERVICE CLASS
Investment Objective: Capital growth by investing primarily in common
stocks and securities convertible into common stocks. The Portfolio,
under normal conditions, will invest at least 65% of its total assets in
securities of companies that FMR believes have long-term growth
potential. Although the Portfolio invests primarily in common stock and
securities convertible into common stock, it has the ability to purchase
other securities, such as preferred stock and bonds, that may produce
capital growth. The Portfolio may invest in foreign securities without
limitation.
48
<PAGE> 49
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Morgan Stanley Universal Funds, Inc. is a mutual fund designed to provide
investment vehicles for variable annuity contracts and variable life insurance
policies and for certain tax-qualified investors. Its Emerging Markets Debt
Portfolio is managed by Morgan Stanley Asset Management, Inc.
-EMERGING MARKETS DEBT PORTFOLIO
Investment Objective: High total return by investing primarily in dollar
and non-dollar denominated fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which
the issuer is located.
NATIONWIDE SEPARATE ACCOUNT TRUST
Nationwide Separate Account Trust ("NSAT") is a diversified open-end management
investment company created under the laws of Massachusetts. NSAT offers shares
in the mutual funds listed below, each with its own investment objectives.
Shares of NSAT will be sold primarily to separate accounts to fund the benefits
under variable life insurance policies and variable annuity contracts issued by
life insurance companies. The assets of NSAT are managed by Nationwide Advisory
Services, Inc. ("NAS"), a wholly-owned subsidiary of Nationwide Life Insurance
Company.
-CAPITAL APPRECIATION FUND
Investment Objective: Long-term growth by primarily investing in a
diversified portfolio of the common stock of companies which NAS
determines have a better-than-average potential for sustained capital
growth over the long term.
-GOVERNMENT BOND FUND
Investment Objective: As high a level of income as is consistent with the
preservation of capital by investing in a diversified portfolio of
securities issued or backed by the U.S. Government, its agencies or
instrumentalities.
-MONEY MARKET FUND
Investment Objective: As high a level of current income as is considered
consistent with the preservation of capital and liquidity by investing
primarily in money market instruments.
-TOTAL RETURN FUND
Investment Objective: Capital growth by investing in common stocks of
companies that NAS believes will have above-average earnings or otherwise
provide investors with above-average potential for capital appreciation.
To maximize this potential, NAS may also utilize from time to time,
securities convertible into common stock, warrants and options to
purchase such stocks.
SUBADVISED NATIONWIDE FUNDS
-NATIONWIDE BALANCED FUND
Subadviser: Salomon Brothers Asset Management, Inc.
Investment Objective: Primarily seeks above-average income compared to a
portfolio entirely invested in equity securities. The Fund's secondary
objective is to take advantage of opportunities for growth of capital and
income. The Fund seeks its objective primarily through investments in a
broad variety of securities, including equity securities, fixed-income
securities and short term obligations. Under normal market conditions, it
is anticipated that the Fund will invest at least 40% of the Fund's total
assets in equity securities and at least 25% in fixed-income senior
securities. The Fund's subadviser, Salomon Brothers Asset Management,
Inc., will have discretion to invest in the full range of maturities of
fixed-income securities. Generally, most of the Fund's long-term debt
investments will consist of "investment grade" securities, but the Fund
may invest up to 20% of its net assets in non-convertible fixed-income
securities rated below investment grade or determined by the subadviser
to be of comparable quality. These
49
<PAGE> 50
securities are commonly known as junk bonds. In addition, the Fund may
invest an unlimited amount in convertible securities rated below
investment grade.
-NATIONWIDE EQUITY INCOME FUND
Subadviser: Federated Investment Counseling
Investment Objective: Seeks above average income and capital appreciation
by investing at least 65% of its assets in income-producing equity
securities. Such equity securities include common stocks, preferred
stocks, and securities (including debt securities) that are convertible
into common stocks. The portion of the Fund's total assets invested in
each type of equity security will vary according to the Fund's
subadviser's assessment of market, economic conditions and outlook.
-NATIONWIDE GLOBAL EQUITY FUND
Subadviser: J. P. Morgan Investment Management Inc.
Investment Objective: To provide high total return from a globally
diversified portfolio of equity securities. Total return will consist of
income plus realized and unrealized capital gains and losses. The Fund
seeks its investment objective through country allocation, stock
selection and management of currency exposure. Under normal market
conditions, J.P. Morgan Investment Management Inc., intends to keep the
Fund essentially fully invested with at least 65% of the value of its
total assets in equity securities consisting of common stocks and other
securities with equity characteristics such as preferred stocks,
warrants, rights, convertible securities, trust certificates, limited
partnership interests and equity participations. The Fund's primary
equity instruments are the common stock of companies based in the
developed countries around the world. The assets of the Fund will
ordinarily be invested in the securities of at least five different
countries.
-NATIONWIDE HIGH INCOME BOND FUND
Subadviser: Federated Investment Counseling
Investment Objective: Seeks to provide high current income by investing
primarily in a professionally managed, diversified portfolio of fixed
income securities. To meet its objective, the Fund intends to invest at
least 65% of its assets in lower-rated fixed income securities such as
preferred stocks, bonds, debentures, notes, equipment lease certificates
and equipment trust certificates which are rated BBB or lower by Standard
& Poor's or Fitch Investors Service or Baa or lower by Moody's (or if not
rated, are determined by the Fund's subadviser to be of a comparable
quality). Such investments are commonly referred to as "junk bonds." For
a further discussion of lower-rated securities, please see the "High
Yield Securities" section of the Fund's prospectus.
-NATIONWIDE MULTI SECTOR BOND FUND
Subadviser: Salomon Brothers Asset Management, Inc. with Salomon Brothers
Asset Management Limited
Investment Objective: Primarily seeks a high level of current income.
Capital appreciation is a secondary objective. The Fund seeks to achieve
its objectives by investing in a globally diverse portfolio of
fixed-income investments and by giving the subadviser, Salomon Brothers
Asset Management, Inc. broad discretion to deploy the Fund's assets among
certain segments of the fixed-income market that the subadviser believes
will best contribute to achievement of the Fund's investment objectives.
The Fund reserves the right to invest predominantly in securities rated
in medium or lower categories, or as determined by the subadviser to be
of comparable quality, commonly referred to as "junk bonds." Although the
subadviser has the ability to invest up to 100% of the Fund's assets in
lower-rated securities, the subadviser does not anticipate investing in
excess of 75% of the Fund's assets in such securities. The Subadviser has
entered into a subadvisory agreement with its London based affiliate,
Salomon Brothers Asset Management Limited, pursuant to which the
subadviser has delegated to Salomon Brothers Asset Management Limited
responsibility for management of the Fund's investments in non-dollar
denominated debt securities and currency transactions.
50
<PAGE> 51
-NATIONWIDE SELECT ADVISERS MID CAP FUND
Subadvisers: First Pacific Advisors, Inc., Pilgrim Baxter & Associates,
Ltd., and Rice, Hall, James & Associates
Investment Objective: Capital appreciation by investing primarily in
equity securities of medium-sized companies (market capitalization
between $500 million and $7 billion). Under normal market conditions, the
Fund will invest in equity securities consisting of common stock,
preferred stock and securities convertible into common stocks, including
convertible preferred stock and convertible bonds. NAS has chosen the
Fund's subadvisers because they utilize a number of different investment
styles. In utilizing these different styles, NAS hopes to increase
prospects for investment return and to reduce market risk and volatility.
-NATIONWIDE SMALL CAP VALUE FUND
Subadviser: The Dreyfus Corporation
Investment Objective: Capital appreciation through investment in a
diversified portfolio of equity securities of companies with a median
market capitalization of approximately $1 billion. Under normal market
conditions, at least 75% of the Fund's total assets will be invested in
equity securities of companies with market capitalizations at the time of
purchase of between $200 million and $2.5 billion. The Fund will invest
in equity securities of domestic and foreign issuers characterized as
"value" companies according to criteria established by The Dreyfus
Corporation, the Fund's subadviser.
-NATIONWIDE SMALL COMPANY FUND
Subadvisers: The Dreyfus Corporation, Neuberger & Berman, L.P., Pictet
International Management Limited with Van Eck Associates Corporation,
Strong Capital Management, Inc. and Warburg Pincus Asset Management, Inc.
Effective October 1, 1998, Lazard Asset Management will replace Pictet
International Management Limited and Van Eck Associates Corporation as a
subadviser for the Nationwide Small Company Fund.
Investment Objective: Long-term growth of capital by investing primarily
in equity securities of domestic and foreign companies with market
capitalizations of less than $1 billion at the time of purchase. The
subadvisers were chosen because they utilize a number of different
investment styles when investing in small company stocks. By utilizing
different investment styles, NAS hopes to increase prospects for
investment return and to reduce market risk and volatility.
-NATIONWIDE STRATEGIC GROWTH FUND
Subadviser: Strong Capital Management Inc.
Investment Objective: Capital growth by investing primarily in equity
securities that the Fund's subadviser believes have above-average growth
prospects. The Fund will generally invest in companies whose earnings are
believed to be in a relatively strong growth trend, and to a lesser
extent, in companies in which significant further growth is not
anticipated but whose market value is thought to be undervalued. Under
normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities, including common stocks, preferred stocks,
and securities convertible into common or preferred stocks, such as
warrants and convertible bonds. The Fund may invest up to 35% of its
total assets in debt obligations, including intermediate- to long-term
corporate or U.S. Government debt securities.
-NATIONWIDE STRATEGIC VALUE FUND
Subadviser: Strong Capital Management Inc./Schafer Capital Management
Inc.
Investment Objective: Primarily long-term capital appreciation; current
income is a secondary objective. The Fund seeks to meet its objectives by
investing in securities which are believed to offer the possibility of
increase in value, primarily common stocks of established companies
having a strong financial position and a low stock market valuation at
the time of purchase in relation to investment value. Other than
considered appropriate for cash reserves, the Fund will generally
maintain a fully invested position in common stocks of publicly held
companies, primarily in stocks of companies listed on a national
securities exchange or other equity securities (common stock or
securities convertible into common stock). Investments may also be made
in debt securities which are convertible into common stocks and in
warrants or other rights to purchase common stock, which in such case are
considered equity securities
51
<PAGE> 52
by the Fund. Strong Capital Management, Inc. has subcontracted with
Schafer Capital Management, Inc. to subadvise the Fund.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Neuberger & Berman Advisers Management Trust ("N&B AMT") is an open-end,
diversified management investment company consisting of several series. Shares
of the series of N&B AMT are offered in connection with certain variable annuity
contracts and variable life insurance policies issued through life insurance
company separate accounts and are also offered directly to qualified pension and
retirement plans outside of the separate account context.
The Guardian, Partners and Mid-Cap Growth Portfolios of N&B AMT invest all of
their investable assets in a corresponding series of Advisers Managers Trust
managed by Neuberger & Berman Management Incorporated ("N&B Management"). Each
series then invests in securities in accordance with an investment objective,
policies and limitations identical to those of the Portfolio. This
"master/feeder fund" structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of securities.
(For more information regarding "master/feeder fund" structure, see "Special
Information Regarding Organization, Capitalization, and Other Matters" in the
underlying mutual fund prospectus.) The investment advisor is N&B Management.
-AMT GUARDIAN PORTFOLIO
Investment Objective: Capital appreciation and secondarily, current
income. The Portfolio and its corresponding series seek to achieve these
objectives by investing in common stocks of long-established,
high-quality companies. N&B Management uses a value-oriented investment
approach in selecting securities, looking for low price-to-earnings
ratios, strong balance sheets, solid management, and consistent earnings.
-AMT MID-CAP GROWTH PORTFOLIO
Investment Objective: Capital appreciation by investing in equity
securities of medium-sized companies that N&B Management believes have
the potential for long-term, above-average capital appreciation.
Medium-sized companies have market capitalizations form $300 million to
$10 billion at the time of investment. The Portfolio and its
corresponding series may invest up to 10% of its net assets, measured at
the time of investment, in corporate debt securities that are below
investment grade or, if unrated, deemed by N&B Management to be of
comparable quality. Securities that are below investment grade, as well
as unrated securities, are often considered to be speculative and usually
entail greater risk. As a part of the Portfolio's investment strategy,
the Portfolio may invest up to 20% of its net assets in securities of
issuers organized and doing business principally outside the United
States. This limitation does not apply with respect to foreign securities
that are denominated in U.S. dollars.
-AMT PARTNERS PORTFOLIO
Investment Objective: Capital growth by investing primarily in the common
stock of established companies. Its investment program seeks securities
believed to be undervalued based on fundamentals such as low
price-to-earnings ratios, consistent cash flows, and the company's track
record through all parts of the market cycle.
OPPENHEIMER VARIABLE ACCOUNT FUNDS
The Oppenheimer Variable Account Funds are an open-end, diversified management
investment company organized as a Massachusetts business trust in 1984. Shares
of the Funds are sold to provide benefits under variable life insurance policies
and variable annuity contracts. OppenheimerFunds, Inc. is the investment
adviser.
-OPPENHEIMER AGGRESSIVE GROWTH FUND (FORMERLY "OPPENHEIMER CAPITAL
APPRECIATION FUND")
Investment Objective: Capital appreciation by investing in "growth type"
companies. Such companies are believed to have relatively favorable
long-term prospects for increasing demand for their goods or services, or
to be developing new products, services or markets and normally retain a
relatively larger portion of their earnings for research, development and
investment in capital assets. The Fund may also
52
<PAGE> 53
invest in cyclical industries in "special situations" that
OppenheimerFunds, Inc. believes present opportunities for capital growth.
-OPPENHEIMER GROWTH FUND
Investment Objective: Capital appreciation by investing in securities of
well-known established companies. Such securities generally have a
history of earnings and dividends and are issued by seasoned companies
(companies which have an operating history of at least five years
including predecessors). Current income is a secondary consideration in
the selection of the Fund's portfolio securities.
-OPPENHEIMER GROWTH & INCOME FUND
Investment Objective: High total return, which stocks, preferred stocks,
convertible securities and warrants. Debt investments will include bonds,
participation includes growth in the value of its shares as well as
current income from quality and debt securities. In seeking its
investment objectives, the Fund may invest in equity and debt securities.
Equity investments will include common interests, asset-backed
securities, private-label mortgage-backed securities and CMOs, zero
coupon securities and U.S. debt obligations, and cash and cash
equivalents. From time to time, the Fund may focus on small to medium
capitalization issuers, the securities of which may be subject to greater
price volatility than those of larger capitalized issuers.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust ("Van Eck Trust") is an open-end management
investment company organized as a business trust under the laws of the
Commonwealth of Massachusetts on January 7, 1987. Shares of Van Eck Trust are
offered only to separate accounts of insurance companies to fund the benefits of
variable life insurance policies and variable annuity contracts. The investment
advisor and manager is Van Eck Associates Corporation.
-WORLDWIDE EMERGING MARKETS FUND
Investment Objective: Seeks long-term capital appreciation by investing
primarily in equity securities in emerging markets around the world. The
Fund emphasizes investment in countries that, compared to the world's
major economies, exhibit relatively low gross national product per
capita, as well as the potential for rapid economic growth.
-WORLDWIDE HARD ASSETS FUND
Investment Objective: Long-term capital appreciation by investing
primarily in "Hard Asset Securities." For the Fund's purpose, "Hard
Assets" are real estate, energy, timber, and industrial and precious
metals. Income is a secondary consideration.
VAN KAMPEN LIFE INVESTMENT TRUST
Van Kampen Life Investment Trust is an open-end diversified management
investment company organized as a Delaware business trust. Shares are offered in
separate portfolios which are sold only to insurance companies to provide
funding for variable life insurance policies and variable annuity contracts. Van
Kampen Asset Management Inc. serves as the Fund's investment adviser.
- MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
Investment Objective: Long-term capital growth by investing principally
in a diversified portfolio of securities of companies operating in the
real estate industry ("Real Estate Securities"). Current income is a
secondary consideration. Real Estate Securities include equity
securities, including common stocks and convertible securities, as well
as non-convertible preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is a company that
derives at least 50% of its assets (marked to market), gross income or
net profits from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in
Real Estate Securities, primarily equity securities of real estate
investment trusts. The Portfolio may invest up to 25% of its total assets
in securities issued by foreign issuers, some or all of which may also be
Real Estate Securities.
53
<PAGE> 54
WARBURG PINCUS TRUST
The Warburg Pincus Trust is an open-end management investment company organized
in March 1995 as a business trust under the laws of The Commonwealth of
Massachusetts. The Trust offers its shares to insurance companies for allocation
to separate accounts for the purpose of funding variable annuity and variable
life contracts. Portfolios are managed by Warburg Pincus Asset Management, Inc.
("Warburg").
-GROWTH & INCOME PORTFOLIO
Investment Objective: Long-term growth of capital and income by investing
primarily in dividend-paying equity securities. Under normal market
conditions, the Portfolio will invest substantially all of its asset in
equity securities that Warburg considers to be relatively undervalued
based upon research and analysis, taking into account factors such as
price/book ratio, price/cash flow ratio, earnings growth, debt/capital
ratio and multiples of earnings of comparable securities. Although the
Portfolio may hold securities of any size, it currently expects to focus
on companies with market capitalizations of $1 billion or greater at the
time of initial purchase.
-INTERNATIONAL EQUITY PORTFOLIO
Investment Objective: Long-term capital appreciation by investing
primarily in a broadly diversified portfolio of equity securities of
companies, wherever organized, that in the judgment of Warburg have their
principal business activities and interests outside the United States.
The Portfolio will ordinarily invest substantially all of its assets, but
no less than 65% of its total assets, in common stocks, warrants and
securities convertible into or exchangeable for common stocks. The
Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing
international economies and markets through increased earning power and
improved utilization or recognition of assets.
-POST-VENTURE CAPITAL PORTFOLIO
Investment Objective: Long-term growth of capital by investing primarily
in equity securities of issuers in their post-venture capital stage of
development and pursues an aggressive investment strategy. Under normal
market conditions, the Portfolio will invest at least 65% of its total
assets in equity securities of "post-venture capital companies." A
post-venture capital company is one that has received venture capital
financing either: (a) during the early stages of the company's existence
or the early stages of the development of a new product or service; or
(b) as part of a restructuring or recapitalization of the company. The
Portfolio may invest up to 10% of its assets in venture capital and other
investment funds.
54
<PAGE> 55
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 4, 1998
MODIFIED SINGLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACTS ISSUED BY
NATIONWIDE LIFE INSURANCE COMPANY
THROUGH ITS NATIONWIDE VARIABLE ACCOUNT-9
This Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than set forth in the prospectus
and should be read in conjunction with the prospectus dated September 4, 1998.
The prospectus may be obtained from Nationwide Life Insurance Company by writing
P.O. Box 182356, Columbus, Ohio 43218-2356, or calling 1-800-243-6295, TDD
1-800-238-3035.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
General Information and History.......................................................................................1
Services..............................................................................................................1
Purchase of Securities Being Offered..................................................................................2
Underwriters..........................................................................................................2
Calculations of Performance...........................................................................................2
Annuity Payments......................................................................................................3
Financial Statements..................................................................................................4
</TABLE>
GENERAL INFORMATION AND HISTORY
The Nationwide Variable Account-9 is a separate investment account of Nationwide
Life Insurance Company ("Company"). The Company is a member of the Nationwide
Insurance Enterprise. All of the Company's common stock is owned by Nationwide
Financial Services, Inc. ("NFS"), a holding company. NFS has two classes of
common stock outstanding with different voting rights enabling Nationwide
Corporation (the holder of all of the outstanding Class B Common Stock) to
control NFS. Nationwide Corporation is a holding company, as well. All of its
common stock is held by Nationwide Mutual Insurance Company (95.3%) and
Nationwide Mutual Fire Insurance Company (4.7%), the ultimate controlling
persons of Nationwide Insurance Enterprise. The Nationwide Insurance Enterprise
is one of America's largest insurance and financial services family of
companies, with combined assets of over $83.2 billion as of December 31, 1997.
SERVICES
The Company, which has responsibility for administration of the Contracts and
the Variable Account, maintains records of the name, address, taxpayer
identification number, and other pertinent information for each Contract Owner
and the number and type of Contract issued to each such Contract Owner and
records with respect to the Contract Value of each Contract.
The Custodian of the assets of the Variable Account is the Company. The Company
will maintain a record of all purchases and redemptions of shares of the
Underlying Mutual Funds. The Company, or affiliates of the Company may have
entered into agreements with either the investment adviser or distributor for
several of the Underlying Mutual Funds. The agreements relate to administrative
services furnished by the Company or an affiliate of the Company and provide for
an annual fee based on the average aggregate net assets of the Variable Account
(and other separate accounts of the Company or life insurance company
subsidiaries of the Company) invested in particular Underlying Mutual Funds.
These fees in no way affect the net asset value of the Underlying Mutual Funds
or fees paid by the Contract Owner.
The audited financial statements have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants, Two
Nationwide Plaza, Columbus, Ohio 43215, and upon the authority of said firm as
experts in accounting and auditing.
1
<PAGE> 56
PURCHASE OF SECURITIES BEING OFFERED
The Contracts will be sold by licensed insurance agents in the states where the
Contracts may be lawfully sold. Such agents will be registered representatives
of broker-dealers registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers, Inc. ("NASD").
When a Contract described in the prospectus is exchanged for another contract
issued by the Company or any of its affiliated insurance companies of the type
and class which the Company determines is eligible for such an exchange, the
Company may waive any remaining Contingent Deferred Sales Charges on the first
Contract. A Contingent Deferred Sales Charge may apply to the contract received
in the exchange.
UNDERWRITERS
The Contracts, which are offered continuously, are distributed by Nationwide
Advisory Services, Inc. ("NAS"), Three Nationwide Plaza, Columbus, Ohio 43215, a
wholly owned subsidiary of the Company. During the fiscal years ended December
31, 1997, 1996 and 1995, no underwriting commissions were paid by the Company to
NAS.
CALCULATIONS OF PERFORMANCE
Any current yield quotations of the NSAT-Money Market Fund, subject to Rule 482
of the Securities Act of 1933, will consist of a seven calendar day historical
yield, carried at least to the nearest hundredth of a percent. The yield will be
calculated by determining the net change, exclusive of capital changes, in the
value of hypothetical pre-existing account having a balance of one Accumulation
Unit at the beginning of the base period, subtracting a hypothetical charge
reflecting deductions from Contract Owner accounts, and dividing the net change
in account value by the value of the account at the beginning of the period to
obtain a base period return, and multiplying the base period return by (365/7)
or (366/7) in a leap year. The NSAT- Money Market Fund's effective yield is
computed similarly, but includes the effect of assumed compounding on an
annualized basis of the current unit value yield quotations of the NSAT- Money
Market Fund.
The NSAT- Money Market Fund's yield and effective yield will fluctuate daily.
Actual yields will depend on factors such as the type of instruments in the
fund's portfolio, portfolio quality and average maturity, changes in interest
rates, and the fund's expenses. Although the NSAT- Money Market Fund determines
its yield on the basis of a seven day period, it may use a different time period
on occasion. The yield quotes may reflect the expense limitation described
"Investment Manager and Other Services" in the NSAT- Money Market Fund's
Statement of Additional Information. There is no assurance that the yields
quoted on any given occasion will remain in effect for any period of time and
there is no guarantee that the Net Asset Values will remain constant. It should
be noted that a Contract Owner's investment in the NSAT- Money Market Fund is
not guaranteed or insured. Yield of other money market funds may not be
comparable if a different base period or another method of calculation is used.
All performance advertising will include quotations of standardized average
annual total return, calculated in accordance with a standard method prescribed
by rules of the SEC. Standardized average annual total return is found by taking
a hypothetical $1,000 investment in each of the Sub-Accounts' units on the first
day of the period at the offering price, which is the Accumulation Unit value
per unit ("initial investment") and computing the ending redeemable value
("redeemable value") of that investment at the end of the period. The redeemable
value is then divided by the initial investment and this quotient is taken to
the Nth root (N represents the number of years in the period) and 1 is
subtracted from the result which is then expressed as a percentage, carried to
at least the nearest hundredth of a percent. Standardized average annual total
return reflects the deduction of a 1.20% Variable Account Charge and 0.05%
deduction for the 5% Enhanced Death Benefit option. No deduction is made for
premium taxes which may be assessed by certain states. Nonstandardized total
return may also be advertised, and is calculated in a manner similar to
standardized average annual total return except the nonstandardized total return
is based on a hypothetical initial investment of $10,000. An assumed initial
investment of $10,000 will be used because that figure more closely approximates
the size of a typical Contract than does the $1,000 figure used in calculating
the standardized average annual total return quotations.
2
<PAGE> 57
The standardized average annual total return and nonstandardized average annual
total return quotations will be current to the last day of the calendar quarter
preceding the date on which an advertisement is submitted for publication. The
standardized average annual return will be based on rolling calendar quarters
and will cover periods of one, five, and ten years, or a period covering the
time the Underlying Mutual Fund has been available in the Variable Account if
the Underlying Mutual Fund has not been available for one of the prescribed
periods. Nonstandardized average annual total return will based on rolling
calendar quarters and will cover periods of one, five and ten years, or a period
covering the time the Underlying Mutual Fund has been in existence.
Quotations of average annual total return and total return are based upon
historical earnings and will fluctuate. Any quotation of performance, is not a
guarantee of future performance. Factors affecting a Sub-Account's performance
include general market conditions, operating expenses and investment management.
A Contract Owner's account when redeemed may be more or less than original cost.
ANNUITY PAYMENTS
See "Frequency and Amount of Annuity Payments" located in the prospectus.
3
<PAGE> 58
<PAGE> 1
Independent Auditors' Report
The Board of Directors of Nationwide Life Insurance Company and
Contract Owners of Nationwide Variable Account-9:
We have audited the accompanying statement of assets, liabilities and
contract owners' equity of Nationwide Variable Account-9 as of December 31,
1997, and the related statement of operations and changes in contract owners'
equity for the period November 3, 1997 (commencement of operations) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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. Our procedures included
confirmation of securities owned as of December 31, 1997, by correspondence with
the transfer agents of the underlying mutual funds. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nationwide Variable
Account-9 as of December 31, 1997, and the results of its operations and its
changes in contract owners' equity for the period November 3, 1997 (commencement
of operations) through December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 6, 1998
<PAGE> 2
NATIONWIDE VARIABLE ACCOUNT-9
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
American Century VP - American Century VP Income & Growth (ACVPIncGr)
84,893 shares (cost $450,578) ................................................ $ 457,574
American Century VP - American Century VP International (ACVPInt)
80,394 shares (cost $542,059) ................................................ 549,894
American Century VP - American Century VP Value (ACVPValue)
196,160 shares (cost $1,338,005) ............................................. 1,359,390
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
34,310 shares (cost $860,435) ................................................ 856,728
Dreyfus Stock Index Fund (DryStkIx)
237,689 shares (cost $6,131,037) ............................................. 6,120,488
Dreyfus VIF - Capital Appreciation Portfolio (DryCapAp)
33,406 shares (cost $933,581) ................................................ 932,024
Fidelity VIP - Equity-Income Portfolio - Service Class (FidVIPEI)
219,066 shares (cost $5,236,886) ............................................. 5,316,739
Fidelity VIP - Growth Portfolio - Service Class (FidVIPGr)
54,069 shares (cost $1,982,184) .............................................. 2,005,421
Fidelity VIP - High Income Portfolio - Service Class (FidVIPHI)
214,286 shares (cost $2,891,778) ............................................. 2,907,867
Fidelity VIP - Overseas Portfolio - Service Class (FidVIPOv)
47,969 shares (cost $915,194) ................................................ 921,008
Fidelity VIP-II - Contrafund Portfolio - Service Class (FidVIPCon)
186,227 shares (cost $3,654,849) ............................................. 3,711,501
Fidelity VIP-III - Growth Opportunities Portfolio - Service Class (FidVIPGrOp)
133,797 shares (cost $2,533,275) ............................................. 2,578,274
Morgan Stanley - Emerging Markets Debt Portfolio (MSEmMkt)
20,291 shares (cost $198,057) ................................................ 196,210
Nationwide SAT - Balanced Fund (NSATBal)
88,368 shares (cost $887,470) ................................................ 892,518
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
125,479 shares (cost $2,670,893) ............................................. 2,661,401
Nationwide SAT - Equity Income Fund (NSATEqInc)
58,341 shares (cost $583,644) ................................................ 592,744
Nationwide SAT - Global Equities Fund (NSATGlobEq)
50,842 shares (cost $510,241) ................................................ 513,508
Nationwide SAT - Government Bond Fund (NSATGvtBd)
278,560 shares (cost $3,197,266) ............................................. 3,170,007
Nationwide SAT - High Income Bond Fund (NSATHIncBd)
90,314 shares (cost $915,644) ................................................ 913,981
Nationwide SAT - Money Market Fund (NSATMyMkt)
13,547,449 shares (cost $13,547,449) ......................................... 13,547,449
</TABLE>
(Continued)
<PAGE> 3
<TABLE>
<S> <C>
Nationwide SAT - Multi Sector Bond Fund (NSATMSecBd)
103,611 shares (cost $1,041,445) ............................................. 1,041,294
Nationwide SAT - Select Advisers Mid Cap Fund (NSATMidCap)
23,045 shares (cost $223,629) ................................................ 229,068
Nationwide SAT - Small Cap Value Fund (NSATSmCapV)
118,195 shares (cost $1,152,448) ............................................. 1,157,126
Nationwide SAT - Small Company Fund (NSATSmCo)
98,316 shares (cost $1,579,198) .............................................. 1,558,309
Nationwide SAT - Strategic Growth Fund (NSATStrGro)
31,934 shares (cost $317,603) ................................................ 326,042
Nationwide SAT - Strategic Value Fund (NSATStrVal)
47,632 shares (cost $479,420) ................................................ 483,462
Nationwide SAT - Total Return Fund (NSATTotRe)
369,863 shares (cost $6,138,365) ............................................. 6,058,352
Neuberger & Berman AMT - Guardian Portfolio (NBAMTGuard)
43,903 shares (cost $450,063) ................................................ 461,856
Neuberger & Berman AMT - Mid-Cap Growth Portfolio (NBAMTMCGr)
134,925 shares (cost $1,507,668) ............................................. 1,581,319
Neuberger & Berman AMT - Partners Portfolio (NBAMTPart)
648,620 shares (cost $13,284,917) ............................................ 13,361,565
Oppenheimer VAF - Capital Appreciation Fund (OppCapAp)
17,589 shares (cost $715,409) ................................................ 720,432
Oppenheimer VAF - Growth Fund (OppGro)
29,292 shares (cost $940,476) ................................................ 950,219
Oppenheimer VAF - Growth & Income Fund (OppGrInc)
52,688 shares (cost $1,059,047) .............................................. 1,084,321
Van Eck WIT - Worldwide Emerging Markets Fund (VEWrldEMkt)
59,776 shares (cost $653,391) ................................................ 657,534
Van Eck WIT - Worldwide Hard Assets Fund (VEWrldHAs)
14,006 shares (cost $216,855) ................................................ 220,174
Van Kampen American Capital LIT -
Morgan Stanley Real Estate Securities Portfolio (MSRESec)
66,892 shares (cost $1,120,342) .............................................. 1,060,238
Warburg Pincus Trust - Growth & Income Portfolio (WPGrInc)
42,112 shares (cost $428,967) ................................................ 435,022
Warburg Pincus Trust - International Equity Portfolio (WPIntEq)
77,526 shares (cost $857,239) ................................................ 813,248
Warburg Pincus Trust - Post Venture Capital Portfolio (WPPVenCap)
12,882 shares (cost $140,450) ................................................ 142,473
---------
Total investments ......................................................... 82,546,780
Accounts receivable ................................................................ 3,013
---------
Total assets .............................................................. 82,549,793
ACCOUNTS PAYABLE ...................................................................... 364,121
---------
CONTRACT OWNERS' EQUITY (NOTE 4) $ 82,185,672
=========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
NATIONWIDE VARIABLE ACCOUNT - 9
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL ACVPINCGR ACVPINT ACVPVALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends........................... $ 184,101 -- -- --
Mortality and expense risk charges (note 2).... (44,505) (231) (247) (638)
----------- ----------- ----------- -----------
Net investment activity........................ 139,596 (231) (247) (638)
----------- ----------- ----------- -----------
Proceeds from mutual fund shares sold............ 1,928,035 3,255 -- --
Cost of mutual fund shares sold.................. (1,932,025) (3,092) -- --
----------- ----------- ----------- -----------
Realized gain (loss) on investments............ (3,990) 163 -- --
Change in unrealized gain (loss) on investments.. 259,323 6,996 7,835 21,385
----------- ----------- ----------- -----------
Net gain (loss) on investments................. 255,333 7,159 7,835 21,385
----------- ----------- ----------- -----------
Reinvested capital gains......................... 478,503 -- -- --
----------- ----------- ----------- -----------
Net increase (decrease) in contract owners'
equity resulting from operations........... 873,432 6,928 7,588 20,747
----------- ----------- ----------- -----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners.............................. 81,649,336 389,541 451,373 929,382
Transfers between funds....................... -- 61,740 90,951 410,117
Redemptions................................... (339,129) (635) (18) (856)
Contingent deferred sales charges (note 2).... (409) -- -- --
Adjustments to maintain reserves.............. 2,442 5 4 8
----------- ----------- ----------- -----------
Net equity transactions..................... 81,312,240 450,651 542,310 1,338,651
----------- ----------- ----------- -----------
NET CHANGE IN CONTRACT OWNERS' EQUITY........... 82,185,672 457,579 549,898 1,359,398
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD..... -- -- -- --
----------- ----------- ----------- -----------
CONTRACT OWNERS' EQUITY END OF PERIOD........... $82,185,672 457,579 549,898 1,359,398
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DRYSRGRO DRYSTKIX DRYCAPAP FIDVIPEI
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends........................... 2,537 19,230 4,948 --
Mortality and expense risk charges (note 2).... (432) (2,973) (430) (2,576)
----------- ----------- ----------- -----------
Net investment activity........................ 2,105 16,257 4,518 (2,576)
----------- ----------- ----------- -----------
Proceeds from mutual fund shares sold............ -- 53,202 -- 72,868
Cost of mutual fund shares sold.................. -- (55,328) -- (74,460)
----------- ----------- ----------- -----------
Realized gain (loss) on investments............ -- (2,126) -- (1,592)
Change in unrealized gain (loss) on investments.. (3,707) (10,549) (1,557) 79,853
----------- ----------- ----------- -----------
Net gain (loss) on investments................. (3,707) (12,675) (1,557) 78,261
----------- ----------- ----------- -----------
Reinvested capital gains......................... 20,741 83,330 414 --
----------- ----------- ----------- -----------
Net increase (decrease) in contract owners'..
equity resulting from operations........... 19,139 86,912 3,375 75,685
----------- ----------- ----------- -----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners.............................. 806,446 5,885,293 894,637 4,978,409
Transfers between funds....................... 32,713 151,175 34,011 268,956
Redemptions................................... (1,570) (3,783) -- (7,395)
Contingent deferred sales charges (note 2).... -- -- -- --
Adjustments to maintain reserves.............. (4) 1,038 (1) 1,150
----------- ----------- ----------- -----------
Net equity transactions..................... 837,585 6,033,723 928,647 5,241,120
----------- ----------- ----------- -----------
NET CHANGE IN CONTRACT OWNERS' EQUITY........... 856,724 6,120,635 932,022 5,316,805
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD..... -- -- -- --
----------- ----------- ----------- -----------
CONTRACT OWNERS' EQUITY END OF PERIOD........... 856,724 6,120,635 932,022 5,316,805
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
NATIONWIDE VARIABLE ACCOUNT - 9
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDVIPGR FIDVIPHI FIDVIPOV FIDVIPCON
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends........................... $ - - - -
Mortality and expense risk charges (note 2).... (956) (1,568) (438) (2,331)
-------------- ----------- -------- ----------
Net investment activity........................ (956) (1,568) (438) (2,331)
-------------- ----------- -------- ----------
Proceeds from mutual fund shares sold............ 24,231 - 5,931 -
Cost of mutual fund shares sold.................. (24,000) - (5,843) -
-------------- ----------- -------- ----------
Realized gain (loss) on investments............ 231 - 88 -
Change in unrealized gain (loss) on investments.. 23,237 16,089 5,814 56,652
-------------- ----------- -------- ----------
Net gain (loss) on investments................. 23,468 16,089 5,902 56,652
-------------- ----------- -------- ----------
Reinvested capital gains......................... - - - -
-------------- ----------- -------- ----------
Net increase (decrease) in contract owners'
equity resulting from operations........... 22,512 14,521 5,464 54,321
-------------- ----------- -------- ----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners.............................. 1,981,907 2,761,595 757,896 3,573,555
Transfers between funds....................... 1,697 132,705 157,648 83,693
Redemptions................................... (577) (954) - (70)
Contingent deferred sales charges (note 2).... - - - -
Adjustments to maintain reserves.............. (111) (1) (2) 7
-------------- ----------- -------- ----------
Net equity transactions..................... 1,982,916 2,893,345 915,542 3,657,185
-------------- ----------- -------- ----------
NET CHANGE IN CONTRACT OWNERS' EQUITY........... 2,005,428 2,907,866 921,006 3,711,506
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD..... $ - - - -
-------------- ----------- -------- ----------
CONTRACT OWNERS' EQUITY END OF PERIOD........... 2,005,428 2,907,866 921,006 3,711,506
============== =========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
FIDVIPGROP MSEMMKT NSATBAL NSATCAPAP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends........................... - 3,740 3,951 5,462
Mortality and expense risk charges (note 2).... (1,137) (110) (459) (1,430)
---------- ------ --------- ---------
Net investment activity........................ (1,137) 3,630 3,492 4,032
---------- ------ --------- ---------
Proceeds from mutual fund shares sold............ 3 810 - -
Cost of mutual fund shares sold.................. (3) (823) - -
---------- ------ --------- ---------
Realized gain (loss) on investments............ - - - -
Change in unrealized gain (loss) on investments.. 44,999 (1,847) 5,048 (9,492)
---------- ------ --------- ---------
Net gain (loss) on investments................. 44,999 (1,860) 5,048 (9,492)
---------- ------ --------- ---------
Reinvested capital gains......................... - 1,623 - 52,894
---------- ------ --------- ---------
Net increase (decrease) in contract owners'
equity resulting from operations........... 43,862 3,393 8,540 47,434
---------- ------ --------- ---------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners.............................. 2,201,875 185,958 818,465 2,528,751
Transfers between funds....................... 332,841 6,858 65,644 88,972
Redemptions................................... (304) - (90) (3,756)
Contingent deferred sales charges (note 2).... - - - -
Adjustments to maintain reserves.............. (4) (1) (26) 4
---------- ------ --------- ---------
Net equity transactions..................... 2,534,408 192,815 883,993 2,613,971
---------- ------ --------- ---------
NET CHANGE IN CONTRACT OWNERS' EQUITY........... 2,578,270 196,208 892,533 2,661,405
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD..... - - - -
---------- ------- ------- ---------
CONTRACT OWNERS' EQUITY END OF PERIOD........... 2,578,270 196,208 892,533 2,661,405
========== ======= ======== =========
</TABLE>
<PAGE> 6
NATIONWIDE VARIABLE ACCOUNT - 9
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
NSATEqInc NSATGlobEq NSATGvtBd NSATHIncBd
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends $ 989 871 46,514 9,587
Mortality and expense risk charges note 2) (411) (326) (1,730) (637)
--------- --------- ---------- ---------
Net investment activity 578 545 44,784 8,950
--------- --------- ---------- ---------
Proceeds from mutual fund shares sold 2 - 24,775 663
Cost of mutual fund shares sold (3) - (24,775) (653)
--------- --------- ---------- ---------
Realized gain (loss) on investments (1) - - 10
Change in unrealized gain (loss) on investments 9,100 3,267 (27,259) (1,663)
--------- --------- ---------- ---------
Net gain (loss) on investments 9,099 3,267 (27,259) (1,653)
--------- --------- ---------- ---------
Reinvested capital gains - - - -
--------- --------- ---------- ---------
Net increase (decrease) in contract owners'
equity resulting from operations 9,677 3,812 17,525 7,297
--------- --------- ---------- ---------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners 524,315 505,387 3,147,571 762,946
Transfers between funds 58,870 4,389 4,912 144,381
Redemptions (135) - - (643)
Contingent deferred sales charges (note 2) - - - -
Adjustments to maintain reserves 14 (105) 1 -
--------- --------- ---------- ---------
Net equity transactions 583,064 509,671 3,152,484 906,684
--------- --------- ---------- ---------
NET CHANGE IN CONTRACT OWNERS' EQUITY 592,741 513,483 3,170,009 913,981
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD - - - -
CONTRACT OWNERS' EQUITY END OF PERIOD --------- --------- ---------- ---------
$ 592,741 513,483 3,170,009 913,981
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
NSATMyMkt NSATMSecBd NSATMidCap NSATSmCapV
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends 35,527 5,220 535 590
Mortality and expense risk charges note 2) (7,038) (610) (121) (603)
------------ ---------- ---------- -----------
Net investment activity 28,489 4,610 414 (13)
------------ ---------- ---------- -----------
Proceeds from mutual fund shares sold 772,983 3 - -
Cost of mutual fund shares sold (772,983) (3) - -
------------ ---------- ---------- -----------
Realized gain (loss) on investments - - - -
Change in unrealized gain (loss) on investments - (151) 5,439 4,678
------------ ---------- ---------- -----------
Net gain (loss) on investments - (151) 5,439 4,678
------------ ---------- ---------- -----------
Reinvested capital gains - - - 4,611
------------ ---------- ---------- -----------
Net increase (decrease) in contract owners'
equity resulting from operations 28,489 4,459 5,853 9,276
------------ ---------- ---------- -----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners 16,698,066 862,594 205,427 1,082,589
Transfers between funds (3,252,991) 174,229 20,348 65,401
Redemptions (289,851) - - -
Contingent deferred sales charges (note 2) (409) - - -
Adjustments to maintain reserves 2,636 14 (7) (112)
------------ ---------- ---------- -----------
Net equity transactions 13,157,451 1,036,837 223,209 1,147,878
------------ ---------- ---------- -----------
NET CHANGE IN CONTRACT OWNERS' EQUITY 13,185,940 1,041,296 229,062 1,157,154
Contract owners' equity beginning of period - - - -
Contract owners' equity end of period ------------ ---------- ---------- -----------
13,185,940 1,041,296 229,062 1,157,154
============ ========== ========== ===========
</TABLE>
(Continued)
<PAGE> 7
NATIONWIDE VARIABLE ACCOUNT - 9
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
NSATSmCo NSATStrGro NSATStrVal NSATTotRe
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends $ -- 301 542 15,396
Mortality and expense risk charges (note 2) (936) (150) (222) (3,422)
----------- ----------- ----------- -----------
Net investment activity (936) 151 320 11,974
----------- ----------- ----------- -----------
Proceeds from mutual fund shares sold -- 1 -- --
Cost of mutual fund shares sold -- (1) -- --
----------- ----------- ----------- -----------
Realized gain (loss) on investments -- -- -- --
Change in unrealized gain (loss) on investments (20,889) 8,439 4,042 (80,013)
----------- ----------- ----------- -----------
Net gain (loss) on investments (20,889) 8,439 4,042 (80,013)
----------- ----------- ----------- -----------
Reinvested capital gains 39,296 -- -- 175,028
----------- ----------- ----------- -----------
Net increase (decrease) in contract owners'
equity resulting from operations 17,471 8,590 4,362 106,989
----------- ----------- ----------- -----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners 1,396,707 310,341 364,129 5,708,934
Transfers between funds 144,223 7,111 114,972 247,938
Redemptions (19) -- -- (5,049)
Contingent deferred sales charges (note 2) -- -- -- --
Adjustments to maintain reserves (67) -- -- (666)
----------- ----------- ----------- -----------
Net equity transactions 1,540,844 317,452 479,101 5,951,157
----------- ----------- ----------- -----------
NET CHANGE IN CONTRACT OWNERS' EQUITY 1,558,315 326,042 483,463 6,058,146
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD -- -- -- --
CONTRACT OWNERS' EQUITY END OF PERIOD $1,558,315 326,042 483,463 6,058,146
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NBAMTGuard NBAMTMCGr NBAMTPart OppCapAp
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends -- -- -- --
Mortality and expense risk charges (note 2) (322) (702) (7,474) (478)
----------- ----------- ----------- -----------
Net investment activity (322) (702) (7,474) (478)
----------- ----------- ----------- -----------
Proceeds from mutual fund shares sold 34 2 9,558 1,574
Cost of mutual fund shares sold (32) (2) (8,600) (1,616)
----------- ----------- ----------- -----------
Realized gain (loss) on investments 2 -- (43) (52)
Change in unrealized gain (loss) on investments 11,793 73,651 76,648 5,023
----------- ----------- ----------- -----------
Net gain (loss) on investments 11,795 73,651 76,605 4,971
----------- ----------- ----------- -----------
Reinvested capital gains -- -- -- --
----------- ----------- ----------- -----------
Net increase (decrease) in contract owners'
equity resulting from operations 11,473 72,949 69,131 4,493
----------- ----------- ----------- -----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners 399,649 1,023,027 12,820,732 690,779
Transfers between funds 51,821 488,359 483,875 25,316
Redemptions -- (3,016) (12,173) (192)
Contingent deferred sales charges (note 2) -- -- -- --
Adjustments to maintain reserves (876) 3 21 45
----------- ----------- ----------- -----------
Net equity transactions 450,594 1,508,373 13,292,455 715,948
----------- ----------- ----------- -----------
NET CHANGE IN CONTRACT OWNERS' EQUITY 462,067 1,581,322 13,361,586 720,441
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD -- -- -- --
CONTRACT OWNERS' EQUITY END OF PERIOD 462,067 1,581,322 13,361,586 720,441
=========== =========== =========== ===========
</TABLE>
<PAGE> 8
NATIONWIDE VARIABLE ACCOUNT - 9
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
OPPGRO OPPGRINC VEWRLDMKT VEWRLDHAS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends $ -- 1,975 -- --
Mortality and expense risk charges (note 2) (469) (674) (590) (111)
---------- ---------- ---------- ----------
Net investment activity (469) 1,301 (590) (111)
---------- ---------- ---------- ----------
Proceeds from mutual fund shares sold -- 8 505,309 --
Cost of mutual fund shares sold -- (8) (492,562) --
---------- ---------- ---------- ----------
Realized gain (loss) on investments -- -- 12,747 --
Change in unrealized gain (loss) on investments 9,743 25,274 4,143 3,319
---------- ---------- ---------- ----------
Net gain (loss) on investments 9,743 25,274 16,890 3,319
---------- ---------- ---------- ----------
Reinvested capital gains -- -- -- --
---------- ---------- ---------- ----------
Net increase (decrease) in contract owners'
equity resulting from operations 9,274 26,575 16,300 3,208
---------- ---------- ---------- ----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners 933,456 953,722 1,193,031 178,412
Transfers between funds 7,668 104,635 (549,841) 38,553
Redemptions (27) (199) (1,956) --
Contingent deferred sales charges (note 2) -- -- -- --
---------- ---------- ---------- ----------
Adjustments to maintain reserves (138) (358) 2 6
---------- ---------- ---------- ----------
Net equity transactions 940,959 1,057,800 641,236 216,971
---------- ---------- ---------- ----------
NET CHANGE IN CONTRACT OWNERS' EQUITY 950,233 1,084,375 657,536 220,179
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD -- -- -- --
$ ---------- ---------- ---------- ----------
CONTRACT OWNERS' EQUITY END OF PERIOD 950,233 1,084,375 657,536 220,179
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MSRESEC WPGRINC WPINTEQ WPPVENCAP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends 19,701 1,508 4,961 16
Mortality and expense risk charges note 2) (545) (219) (469) (290)
---------- ---------- ---------- ----------
Net investment activity 19,156 1,289 4,492 (274)
---------- ---------- ---------- ----------
Proceeds from mutual fund shares sold -- -- 5,961 447,873
Cost of mutual fund shares sold -- -- (6,534) (460,704)
---------- ---------- ---------- ----------
Realized gain (loss) on investments -- -- (573) (12,831)
Change in unrealized gain (loss) on investments (60,104) 6,055 (43,991) 2,023
---------- ---------- ---------- ----------
Net gain (loss) on investments (60,104) 6,055 (44,564) (10,808)
---------- ---------- ---------- ----------
Reinvested capital gains 66,235 -- 34,331 --
---------- ---------- ---------- ----------
Net increase (decrease) in contract owners'
equity resulting from operations 25,287 7,344 (5,741) (11,082)
---------- ---------- ---------- ----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners 917,137 402,032 838,600 584,670
Transfers between funds 117,890 25,646 (19,613) (427,813)
Redemptions -- -- -- (3,302)
Contingent deferred sales charges (note 2) -- -- -- --
---------- ---------- ---------- ----------
Adjustments to maintain reserves (46) (2) 11 --
---------- ---------- ---------- ----------
Net equity transactions 1,034,981 427,676 818,998 153,555
---------- ---------- ---------- ----------
NET CHANGE IN CONTRACT OWNERS' EQUITY 1,060,268 435,020 813,257 142,473
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD -- -- -- --
---------- ---------- ---------- ----------
CONTRACT OWNERS' EQUITY END OF PERIOD 1,060,268 435,020 813,257 142,473
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 9
NATIONWIDE VARIABLE ACCOUNT-9
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
The Nationwide Variable Account-9 (the Account) was established
pursuant to a resolution of the Board of Directors of Nationwide Life
Insurance Company (the Company) on May 22, 1997. The Account has been
registered as a unit investment trust under the Investment Company Act
of 1940.
The Company offers tax qualified and non-tax qualified Modified Single
Premium Deferred Variable Annuity Contracts through the Account. The
primary distribution for the contracts is through the brokerage
community; however, other distributors are utilized.
(b) The Contracts
Only contracts without a front-end sales charge, but with a contingent
deferred sales charge and certain other fees are offered for purchase.
See note 2 for a discussion of contract expenses.
With certain exceptions, contract owners in either the accumulation or
the payout phase may invest in the following:
Portfolios of the American Century Variable Portfolios, Inc.
(American Century VP);
American Century VP - American Century VP Income & Growth
(ACVPIncGr)
American Century VP - American Century VP International
(ACVPInt)
American Century VP - American Century VP Value (ACVPValue)
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
Dreyfus Stock Index Fund (DryStkIx)
Portfolio of the Dreyfus Variable Investment Fund (Dreyfus VIF);
Dreyfus VIF - Capital Appreciation Portfolio (DryCapAp)
Portfolios of the Fidelity Variable Insurance Products Fund
(Fidelity VIP);
Fidelity VIP - Equity-Income Portfolio - Service Class
(FidVIPEI)
Fidelity VIP - Growth Portfolio - Service Class (FidVIPGr)
Fidelity VIP - High Income Portfolio - Service Class (FidVIPHI)
Fidelity VIP - Overseas Portfolio - Service Class (FidVIPOv)
Portfolio of the Fidelity Variable Insurance Products Fund II
(Fidelity VIP-II);
Fidelity VIP-II - Contrafund Portfolio - Service Class
(FidVIPCon)
Portfolio of the Fidelity Variable Insurance Products Fund III
(Fidelity VIP-III);
Fidelity VIP-III - Growth Opportunities Portfolio - Service
Class (FidVIPGrOp)
Portfolio of the Morgan Stanley Universal Funds, Inc.
(Morgan Stanley); Morgan Stanley - Emerging Markets
Debt Portfolio (MSEmMkt)
<PAGE> 10
Funds of the Nationwide Separate Account Trust (Nationwide SAT)
(managed for a fee by an affiliated investment advisor);
Nationwide SAT - Balanced Fund (NSATBal)
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
Nationwide SAT - Equity Income Fund (NSATEqInc)
Nationwide SAT - Global Equity Fund (NSATGlobEq)
Nationwide SAT - Government Bond Fund (NSATGvtBd)
Nationwide SAT - High Income Bond Fund (NSATHIncBd)
Nationwide SAT - Money Market Fund (NSATMyMkt)
Nationwide SAT - Multi Sector Bond Fund (NSATMSecBd)
Nationwide SAT - Select Advisers Mid Cap Fund (NSATMidCap)
Nationwide SAT - Small Cap Value Fund (NSATSmCapV)
Nationwide SAT - Small Company Fund (NSATSmCo)
Nationwide SAT - Strategic Growth Fund (NSATStrGro)
Nationwide SAT - Strategic Value Fund (NSATStrVal)
Nationwide SAT - Total Return Fund (NSATTotRe)
Portfolios of the Neuberger & Berman Advisers Management Trust
(Neuberger & Berman AMT);
Neuberger & Berman AMT - Guardian Portfolio (NBAMTGuard)
Neuberger & Berman AMT - Mid-Cap Growth Portfolio (NBAMTMCGr)
Neuberger & Berman AMT - Partners Portfolio (NBAMTPart)
Funds of the Oppenheimer Variable Account Funds (Oppenheimer VAF);
Oppenheimer VAF - Capital Appreciation Fund (OppCapAp)
Oppenheimer VAF - Growth Fund (OppGro)
Oppenheimer VAF - Growth & Income Fund (OppGrInc)
Funds of the Van Eck Worldwide Insurance Trust (Van Eck WIT);
Van Eck WIT - Worldwide Emerging Markets Fund (VEWrldEMkt)
Van Eck WIT - Worldwide Hard Assets Fund (VEWrldHAs)
Portfolio of the Van Kampen American Capital Life Investment Trust
(Van Kampen American Capital LIT);
Van Kampen American Capital LIT - Morgan Stanley Real Estate
Securities Portfolio (MSRESec)
Portfolios of the Warburg Pincus Trust;
Warburg Pincus Trust - Growth & Income Portfolio (WPGrInc)
Warburg Pincus Trust - International Equity Portfolio (WPIntEq)
Warburg Pincus Trust - Post Venture Capital Portfolio
(WPPVenCap)
At December 31, 1997, contract owners have invested in all of the above
funds. The contract owners' equity is affected by the investment results
of each fund, equity transactions by contract owners and certain contract
expenses (see note 2).
The accompanying financial statements include only contract owners'
purchase payments pertaining to the variable portions of their contracts
and exclude any purchase payments for fixed dollar benefits, the latter
being included in the accounts of the Company.
(c) Security Valuation, Transactions and Related Investment Income
The market value of the underlying mutual funds is based on the closing
net asset value per share at December 31, 1997. The cost of investments
sold is determined on the specific identification basis. Investment
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date.
(d) Federal Income Taxes
Operations of the Account form a part of, and are taxed with, operations
of the Company which is taxed as a life insurance company under the
Internal Revenue Code.
The Company does not provide for income taxes within the Account. Taxes
are the responsibility of the contract owner upon termination or
withdrawal.
<PAGE> 11
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles may require management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities,
if any, at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(2) EXPENSES
The Company does not deduct a sales charge from purchase payments received
from the contract owners. However, if any part of the contract value of
such contracts is surrendered the Company will, with certain exceptions,
deduct from a contract owner's contract value a contingent deferred sales
charge not to exceed 7% of the lesser of purchase payments or the amount
surrendered, such charge declining 1% per year, to 0%, after the purchase
payment has been held in the contract for 84 months. No sales charges are
deducted on redemptions used to purchase units in the fixed investment
options of the Company.
The Company deducts a mortality and expense risk charge assessed through
the daily unit value calculation equal to an annual rate of 0.95% (Base).
Optional long term care facility with a one-year stepped up death benefit
rider is offered at an additional annual rate of 0.05% (Rider Option 1).
Optional long term care facility with a 5% enhanced death benefit rider is
offered at an additional annual rate of 0.10% (Rider Option 2).
The following table provides mortality, expense and administration charges
by contract type for the period ended December 31, 1997:
<TABLE>
<CAPTION>
TOTAL ACVPINCGR ACVPINT ACVPVALUE DRYSRGRO
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BOA Future (Base)............... $ 26,321 119 169 235 245
BOA Future (Rider Option 1)..... 13,431 83 58 348 157
BOA Future (Rider Option 2)..... 4,753 29 20 55 30
------------ ------------ ------------ ------------ ------------
Total....................... $ 44,505 231 247 638 432
============ ============ ============ ============ ============
DRYSTKIX DRYCAPAP FIDVIPEI FIDVIPGR FIDVIPHI
------------ ------------ ------------ ------------ ------------
BOA Future (Base)............... $ 1,875 267 1,422 572 1,047
BOA Future (Rider Option 1)..... 946 133 815 312 382
BOA Future (Rider Option 2)..... 152 30 339 72 139
------------ ------------ ------------ ------------ ------------
Total....................... $ 2,973 430 2,576 956 1,568
============ ============ ============ ============ ============
FIDVIPOV FIDVIPCON FIDVIPGROP MSEMMKT NSATBAL
------------ ------------ ------------ ------------ ------------
BOA Future (Base)............... $ 303 1,607 596 54 195
BOA Future (Rider Option 1)..... 95 564 418 40 154
BOA Future (Rider Option 2)..... 40 160 123 16 110
------------ ------------ ------------ ------------ ------------
Total....................... $ 438 2,331 1,137 110 459
============ ============ ============ ============ ============
NSATCAPAP NSATEQINC NSATGLOBEQ NSATGVTBD NSATHINCBD
------------ ------------ ------------ ------------ ------------
BOA Future (Base)............... $ 739 265 165 1,060 359
BOA Future (Rider Option 1)..... 447 116 116 369 153
BOA Future (Rider Option 2)..... 244 30 45 301 125
------------ ------------ ------------ ------------ ------------
Total....................... $ 1,430 411 326 1,730 637
============ ============ ============ ============ ============
NSATMYMKT NSATMSECBD NSATMIDCAP NSATSMCAPV NSATSMCO
------------ ------------ ------------ ------------ ------------
BOA Future (Base)............... $ 4,055 353 37 376 473
BOA Future (Rider Option 1)..... 1,841 186 62 190 380
BOA Future (Rider Option 2)..... 1,142 71 22 37 83
------------ ------------ ------------ ------------ ------------
Total....................... $ 7,038 610 121 603 936
============ ============ ============ ============ ============
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
NSATStrGro NSATStrVal NSATTotRe NBAMTGuard NBAMTMCGr
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BOA Future (Base)............... $ 83 125 2,108 110 183
BOA Future (Rider Option 1)..... 44 66 945 158 427
BOA Future (Rider Option 2)..... 23 31 369 54 92
------------ ------------ ------------ ------------ ------------
Total....................... $ 150 222 3,422 322 702
============ ============ ============ ============ ============
NBAMTPart OppCapAp OppGro OppGrInc VEWrldEMkt
------------ ------------ ------------ ------------ ------------
BOA Future (Base)............... $ 5,247 275 182 341 204
BOA Future (Rider Option 1)..... 1,929 120 193 204 380
BOA Future (Rider Option 2)..... 298 83 94 129 6
------------ ------------ ------------ ------------ ------------
Total....................... $ 7,474 478 469 674 590
============ ============ ============ ============ ============
VEWrldHAs MSRESec WPGrInc WPIntEq WPPVenCap
------------ ------------ ------------ ------------ ------------
BOA Future (Base)............... $ 79 302 61 325 108
BOA Future (Rider Option 1)..... 15 166 130 112 177
BOA Future (Rider Option 2)..... 17 77 28 32 5
------------ ------------ ------------ ------------ ------------
Total....................... $ 111 545 219 469 290
============ ============ ============ ============ ============
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company performs various services on behalf of the Mutual Fund
Companies in which the Account invests and may receive fees for the
services performed. These services include, among other things,
shareholder communications, preparation, postage, fund transfer agency and
various other record keeping and customer service functions. These fees
are paid to an affiliate of the Company.
<PAGE> 13
(4) COMPONENTS OF CONTRACT OWNERS' EQUITY
The following is a summary of contract owners' equity at December 31,
1997, for each series, in both the accumulation and payout phases.
<TABLE>
<CAPTION>
PERIOD
Contract owners' equity represented by: UNITS UNIT VALUE RETURN
--------- ----------- -------
<S> <C> <C> <C> <C>
Contracts in accumulation phase:
The BEST of AMERICA(R)
America's FUTURE Annuity(SM) (Base):
American Century VP -
American Century VP Income & Growth:
Tax qualified 5,919 $ 10.409767 $ 61,615 4%
Non-tax qualified 14,727 10.409767 153,305 4%
American Century VP -
American Century VP International:
Tax qualified 11,451 10.088106 115,519 1%
Non-tax qualified 27,628 10.088106 278,714 1%
American Century VP -
American Century VP Value:
Tax qualified 32,890 10.296896 338,665 3%
Non-tax qualified 24,450 10.296896 251,759 3%
The Dreyfus Socially Responsible
Growth Fund, Inc.:
Tax qualified 13,265 10.171132 134,920 2%
Non-tax qualified 28,338 10.171132 288,230 2%
Dreyfus Stock Index Fund:
Tax qualified 167,229 10.343734 1,729,772 3%
Non-tax qualified 220,208 10.343734 2,277,773 3%
Dreyfus VIF -
Capital Appreciation Portfolio:
Tax qualified 23,139 10.249990 237,175 2%
Non-tax qualified 36,467 10.249990 373,786 2%
Fidelity VIP -
Equity-Income Portfolio - Service Class:
Tax qualified 124,825 10.338433 1,290,495 3%
Non-tax qualified 152,449 10.338433 1,576,084 3%
Fidelity VIP -
Growth Portfolio - Service Class:
Tax qualified 51,944 10.030842 521,042 0%
Non-tax qualified 64,880 10.030842 650,801 0%
Fidelity VIP -
High Income Portfolio - Service Class:
Tax qualified 90,815 10.126638 919,651 1%
Non-tax qualified 114,247 10.126638 1,156,938 1%
Fidelity VIP -
Overseas Portfolio - Service Class:
Tax qualified 29,834 9.902344 295,427 (1)%
Non-tax qualified 32,688 9.902344 323,688 (1)%
Fidelity VIP-II -
Contrafund Portfolio - Service Class:
Tax qualified 94,143 9.954885 937,183 0%
Non-tax qualified 137,715 9.954885 1,370,937 0%
</TABLE>
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C>
Fidelity VIP-III - Growth Opportunities
Portfolio - Service Class:
Tax qualified 65,917 10.400464 685,567 4%
Non-tax qualified 74,836 10.400464 778,329 4%
Morgan Stanley -
Emerging Markets Debt Portfolio:
Tax qualified 3,325 10.425451 34,665 4%
Non-tax qualified 5,093 10.425451 53,097 4%
Nationwide SAT - Balanced Fund:
Tax qualified 20,941 10.130674 212,146 1%
Non-tax qualified 23,584 10.130674 238,922 1%
Nationwide SAT -
Capital Appreciation Fund:
Tax qualified 76,048 10.385596 789,804 4%
Non-tax qualified 74,609 10.385596 774,859 4%
Nationwide SAT - Equity Income Fund:
Tax qualified 10,838 10.161693 110,132 2%
Non-tax qualified 27,331 10.161693 277,729 2%
Nationwide SAT - Global Equity Fund:
Tax qualified 15,788 10.102208 159,494 1%
Non-tax qualified 12,998 10.102208 131,308 1%
Nationwide SAT - Government Bond Fund:
Tax qualified 67,127 10.143182 680,881 1%
Non-tax qualified 138,589 10.143182 1,405,733 1%
Nationwide SAT - High Income Bond Fund:
Tax qualified 15,004 10.212505 153,228 2%
Non-tax qualified 33,703 10.212505 344,192 2%
Nationwide SAT - Money Market Fund:
Tax qualified 155,902 10.074129 1,570,577 1%
Non-tax qualified 581,682 10.074129 5,859,940 1%
Nationwide SAT - Multi Sector Bond Fund:
Tax qualified 13,658 10.088793 137,793 1%
Non-tax qualified 41,385 10.088793 417,525 1%
Nationwide SAT -
Select Advisers Mid Cap Fund:
Tax qualified 3,322 9.949100 33,051 (1)%
Non-tax qualified 5,540 9.949100 55,118 (1)%
Nationwide SAT - Small Cap Value Fund:
Tax qualified 29,661 9.823904 291,387 (2)%
Non-tax qualified 42,125 9.823904 413,832 (2)%
Nationwide SAT - Small Company Fund:
Tax qualified 26,226 9.613184 252,115 (4)%
Non-tax qualified 60,510 9.613184 581,694 (4)%
Nationwide SAT - Strategic Growth Fund:
Tax qualified 7,333 10.204129 74,827 2%
Non-tax qualified 14,559 10.204129 148,562 2%
Nationwide SAT - Strategic Value Fund:
Tax qualified 12,123 10.147459 123,018 1%
Non-tax qualified 13,612 10.147459 138,127 1%
</TABLE>
(Continued)
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C>
Nationwide SAT - Total Return Fund:
Tax qualified 182,146 10.242940 1,865,711 2%
Non-tax qualified 197,787 10.242940 2,025,920 2%
Neuberger & Berman AMT -
Guardian Portfolio:
Tax qualified 5,387 10.504106 56,586 5%
Non-tax qualified 9,331 10.504106 98,014 5%
Neuberger & Berman AMT -
Mid-Cap Growth Portfolio:
Tax qualified 24,058 11.702355 281,535 17%
Non-tax qualified 27,997 11.702355 327,631 17%
Neuberger & Berman AMT -
Partners Portfolio:
Tax qualified 123,308 10.132434 1,249,410 1%
Non-tax qualified 816,409 10.132434 8,272,210 1%
Oppenheimer VAF -
Capital Appreciation Fund:
Tax qualified 17,204 9.533314 164,011 (5)%
Non-tax qualified 22,088 9.533314 210,572 (5)%
Oppenheimer VAF - Growth Fund:
Tax qualified 32,359 9.827325 318,002 (2)%
Non-tax qualified 11,808 9.827325 116,041 (2)%
Oppenheimer VAF -
Growth & Income Fund:
Tax qualified 18,417 10.259486 188,949 3%
Non-tax qualified 39,986 10.259486 410,236 3%
Van Eck WIT -
Worldwide Emerging Markets Fund:
Tax qualified 9,145 8.814851 80,612 (12)%
Non-tax qualified 18,343 8.814851 161,691 (12)%
Van Eck WIT -
Worldwide Hard Assets Fund:
Tax qualified 10,008 8.979477 89,867 (10)%
Non-tax qualified 7,257 8.979477 65,164 (10)%
Van Kampen American Capital LIT -
Morgan Stanley Real Estate
Securities Portfolio:
Tax qualified 32,778 10.338661 338,881 3%
Non-tax qualified 27,341 10.338661 282,669 3%
Warburg Pincus Trust -
Growth & Income Portfolio:
Tax qualified 11,884 10.373620 123,280 4%
Non-tax qualified 1,514 10.373620 15,706 4%
Warburg Pincus Trust -
International Equity Portfolio:
Tax qualified 23,146 9.454794 218,841 (5)%
Non-tax qualified 35,372 9.454794 334,435 (5)%
Warburg Pincus Trust -
Post Venture Capital Portfolio:
Tax qualified 1,213 9.852750 11,951 (1)%
Non-tax qualified 7,662 9.852750 75,492 (1)%
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C>
The BEST of AMERICA(R)
America's FUTURE Annuity(SM) (Rider Option 1):
American Century VP -
American Century VP Income & Growth:
Tax qualified 11,674 10.408936 121,514 4%
Non-tax qualified 5,571 10.408936 57,988 4%
American Century VP -
American Century VP International:
Tax qualified 3,170 10.087297 31,977 1%
Non-tax qualified 9,299 10.087297 93,802 1%
American Century VP -
American Century VP Value:
Tax qualified 42,338 10.296077 435,915 3%
Non-tax qualified 22,796 10.296077 234,709 3%
The Dreyfus Socially Responsible
Growth Fund, Inc.:
Tax qualified 21,267 10.170317 216,292 2%
Non-tax qualified 13,946 10.170317 141,835 2%
Dreyfus Stock Index Fund:
Tax qualified 79,005 10.342909 817,142 3%
Non-tax qualified 103,007 10.342909 1,065,392 3%
Dreyfus VIF -
Capital Appreciation Portfolio:
Tax qualified 16,809 10.249171 172,278 2%
Non-tax qualified 10,034 10.249171 102,840 2%
Fidelity VIP -
Equity-Income Portfolio - Service Class:
Tax qualified 80,230 10.337608 829,386 3%
Non-tax qualified 101,670 10.337608 1,051,025 3%
Fidelity VIP -
Growth Portfolio - Service Class:
Tax qualified 26,495 10.030041 265,746 0%
Non-tax qualified 42,184 10.030041 423,107 0%
Fidelity VIP -
High Income Portfolio - Service Class:
Tax qualified 28,809 10.125825 291,715 1%
Non-tax qualified 38,172 10.125825 386,523 1%
Fidelity VIP -
Overseas Portfolio - Service Class:
Tax qualified 6,886 9.901549 68,182 (1)%
Non-tax qualified 13,646 9.901549 135,117 (1)%
Fidelity VIP-II -
Contrafund Portfolio - Service Class:
Tax qualified 52,859 9.954090 526,163 0%
Non-tax qualified 61,145 9.954090 608,643 0%
Fidelity VIP-III - Growth Opportunities
Portfolio - Service Class:
Tax qualified 50,299 10.399630 523,091 4%
Non-tax qualified 34,840 10.399630 362,323 4%
</TABLE>
(Continued)
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C>
Morgan Stanley -
Emerging Markets Debt Portfolio:
Tax qualified 4,517 10.424614 47,088 4%
Non-tax qualified 4,151 10.424614 43,273 4%
Nationwide SAT - Balanced Fund:
Tax qualified 18,660 10.129864 189,023 1%
Non-tax qualified 7,268 10.129864 73,624 1%
Nationwide SAT -
Capital Appreciation Fund:
Tax qualified 42,993 10.384765 446,472 4%
Non-tax qualified 34,299 10.384765 356,187 4%
Nationwide SAT - Equity Income Fund:
Tax qualified 10,109 10.160882 102,716 2%
Non-tax qualified 4,986 10.160882 50,662 2%
Nationwide SAT - Global Equity Fund:
Tax qualified 10,785 10.101401 108,944 1%
Non-tax qualified 5,708 10.101401 57,659 1%
Nationwide SAT - Government Bond Fund:
Tax qualified 35,843 10.142367 363,533 1%
Non-tax qualified 31,348 10.142367 317,943 1%
Nationwide SAT - High Income Bond Fund:
Tax qualified 15,211 10.211688 155,330 2%
Non-tax qualified 7,868 10.211688 80,346 2%
Nationwide SAT - Money Market Fund:
Tax qualified 172,291 10.073279 1,735,535 1%
Non-tax qualified 228,200 10.073279 2,298,722 1%
Nationwide SAT - Multi Sector Bond Fund:
Tax qualified 22,440 10.087985 226,374 1%
Non-tax qualified 12,227 10.087985 123,346 1%
Nationwide SAT -
Select Advisers Mid Cap Fund:
Tax qualified 5,466 9.948304 54,377 (1)%
Non-tax qualified 4,072 9.948304 40,509 (1)%
Nationwide SAT - Small Cap Value Fund:
Tax qualified 16,510 9.823118 162,180 (2)%
Non-tax qualified 20,577 9.823118 202,130 (2)%
Nationwide SAT - Small Company Fund:
Tax qualified 30,320 9.612411 291,448 (4)%
Non-tax qualified 32,541 9.612411 312,797 (4)%
Nationwide SAT - Strategic Growth Fund:
Tax qualified 3,708 10.203313 37,834 2%
Non-tax qualified 2,921 10.203313 29,804 2%
Nationwide SAT - Strategic Value Fund:
Tax qualified 3,022 10.146650 30,663 1%
Non-tax qualified 13,153 10.146650 133,459 1%
Nationwide SAT - Total Return Fund:
Tax qualified 84,236 10.242118 862,755 2%
Non-tax qualified 76,652 10.242118 785,079 2%
</TABLE>
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C>
Neuberger & Berman AMT -
Guardian Portfolio:
Tax qualified 8,001 10.503269 84,037 5%
Non-tax qualified 14,929 10.503269 156,803 5%
Neuberger & Berman AMT -
Mid-Cap Growth Portfolio:
Tax qualified 56,145 11.701424 656,976 17%
Non-tax qualified 16,768 11.701424 196,209 17%
Neuberger & Berman AMT -
Partners Portfolio:
Tax qualified 195,515 10.131623 1,980,884 1%
Non-tax qualified 133,165 10.131623 1,349,178 1%
Oppenheimer VAF -
Capital Appreciation Fund:
Tax qualified 11,021 9.532548 105,058 (5)%
Non-tax qualified 10,675 9.532548 101,760 (5)%
Oppenheimer VAF - Growth Fund:
Tax qualified 26,012 9.826536 255,608 (2)%
Non-tax qualified 16,143 9.826536 158,630 (2)%
Oppenheimer VAF -
Growth & Income Fund:
Tax qualified 15,547 10.258664 159,491 3%
Non-tax qualified 15,661 10.258664 160,661 3%
Van Eck WIT -
Worldwide Emerging Markets Fund:
Tax qualified 30,479 8.814146 268,646 (12)%
Non-tax qualified 15,119 8.814146 133,261 (12)%
Van Eck WIT -
Worldwide Hard Assets Fund:
Tax qualified 765 8.978753 6,869 (10)%
Non-tax qualified 4,496 8.978753 40,368 (10)%
Van Kampen American Capital LIT -
Morgan Stanley Real Estate
Securities Portfolio:
Tax qualified 8,443 10.337835 87,282 3%
Non-tax qualified 23,459 10.337835 242,515 3%
Warburg Pincus Trust -
Growth & Income Portfolio:
Tax qualified 10,462 10.372788 108,520 4%
Non-tax qualified 11,043 10.372788 114,547 4%
Warburg Pincus Trust -
International Equity Portfolio:
Tax qualified 9,501 9.454036 89,823 (5)%
Non-tax qualified 11,346 9.454036 107,265 (5)%
Warburg Pincus Trust -
Post Venture Capital Portfolio:
Tax qualified 1,263 9.851960 12,443 (1)%
Non-tax qualified 1,127 9.851960 11,103 (1)%
</TABLE>
(Continued)
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C>
The BEST of AMERICA(R)
America's FUTURE Annuity(SM) (Rider Option 2):
American Century VP -
American Century VP Income & Growth:
Tax qualified 832 10.408098 8,660 4%
Non-tax qualified 5,236 10.408098 54,497 4%
American Century VP -
American Century VP International:
Tax qualified 698 10.086493 7,040 1%
Non-tax qualified 2,265 10.086493 22,846 1%
American Century VP -
American Century VP Value:
Tax qualified 1,336 10.295249 13,754 3%
Non-tax qualified 8,217 10.295249 84,596 3%
The Dreyfus Socially Responsible
Growth Fund, Inc.:
Tax qualified 4,821 10.169503 49,027 2%
Non-tax qualified 2,598 10.169503 26,420 2%
Dreyfus Stock Index Fund:
Tax qualified 9,203 10.342079 95,178 3%
Non-tax qualified 13,090 10.342079 135,378 3%
Dreyfus VIF -
Capital Appreciation Portfolio:
Tax qualified 3,777 10.248351 38,708 2%
Non-tax qualified 706 10.248351 7,235 2%
Fidelity VIP -
Equity-Income Portfolio - Service Class:
Tax qualified 18,611 10.336779 192,378 3%
Non-tax qualified 36,514 10.336779 377,437 3%
Fidelity VIP -
Growth Portfolio - Service Class:
Tax qualified 4,718 10.029235 47,318 0%
Non-tax qualified 9,713 10.029235 97,414 0%
Fidelity VIP -
High Income Portfolio - Service Class:
Tax qualified 2,418 10.125013 24,482 1%
Non-tax qualified 12,697 10.125013 128,557 1%
Fidelity VIP -
Overseas Portfolio - Service Class:
Tax qualified 887 9.900760 8,782 (1)%
Non-tax qualified 9,071 9.900760 89,810 (1)%
Fidelity VIP-II -
Contrafund Portfolio - Service Class:
Tax qualified 12,678 9.953285 126,188 0%
Non-tax qualified 14,306 9.953285 142,392 0%
Fidelity VIP-III - Growth Opportunities
Portfolio - Service Class:
Tax qualified 8,419 10.398800 87,547 4%
Non-tax qualified 13,599 10.398800 141,413 4%
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C>
Morgan Stanley -
Emerging Markets Debt Portfolio:
Tax qualified 204 10.423780 2,126 4%
Non-tax qualified 1,531 10.423780 15,959 4%
Nationwide SAT - Balanced Fund:
Tax qualified 4,261 10.129053 43,160 1%
Non-tax qualified 13,393 10.129053 135,658 1%
Nationwide SAT -
Capital Appreciation Fund:
Tax qualified 4,967 10.383931 51,577 4%
Non-tax qualified 23,354 10.383931 242,506 4%
Nationwide SAT - Equity Income Fund:
Tax qualified 2,466 10.160070 25,055 2%
Non-tax qualified 2,603 10.160070 26,447 2%
Nationwide SAT - Global Equity Fund:
Tax qualified 1,682 10.100588 16,989 1%
Non-tax qualified 3,870 10.100588 39,089 1%
Nationwide SAT - Government Bond Fund:
Tax qualified 17,678 10.141552 179,282 1%
Non-tax qualified 21,953 10.141552 222,637 1%
Nationwide SAT - High Income Bond Fund:
Tax qualified 2,543 10.210867 25,966 2%
Non-tax qualified 15,172 10.210867 154,919 2%
Nationwide SAT - Money Market Fund:
Tax qualified 109,198 10.072429 1,099,889 1%
Non-tax qualified 61,681 10.072429 621,277 1%
Nationwide SAT - Multi Sector Bond Fund:
Tax qualified 2,097 10.087176 21,153 1%
Non-tax qualified 11,411 10.087176 115,105 1%
Nationwide SAT -
Select Advisers Mid Cap Fund:
Tax qualified 2,671 9.947507 26,570 (1)%
Non-tax qualified 1,954 9.947507 19,437 (1)%
Nationwide SAT - Small Cap Value Fund:
Tax qualified 3,373 9.822329 33,131 (2)%
Non-tax qualified 5,548 9.822329 54,494 (2)%
Nationwide SAT - Small Company Fund:
Tax qualified 453 9.611642 4,354 (4)%
Non-tax qualified 12,059 9.611642 115,907 (4)%
Nationwide SAT - Strategic Growth Fund:
Tax qualified 201 10.202497 2,051 2%
Non-tax qualified 3,231 10.202497 32,964 2%
Nationwide SAT - Strategic Value Fund:
Tax qualified 227 10.145838 2,303 1%
Non-tax qualified 5,509 10.145838 55,893 1%
Nationwide SAT - Total Return Fund:
Tax qualified 13,269 10.241300 135,892 2%
Non-tax qualified 37,377 10.241300 382,789 2%
</TABLE>
(Continued)
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C>
Neuberger & Berman AMT -
Guardian Portfolio:
Tax qualified 590 10.502434 6,196 5%
Non-tax qualified 5,754 10.502434 60,431 5%
Neuberger & Berman AMT -
Mid-Cap Growth Portfolio:
Tax qualified 3,696 11.700489 43,245 17%
Non-tax qualified 6,472 11.700489 75,726 17%
Neuberger & Berman AMT -
Partners Portfolio:
Tax qualified 9,975 10.130813 101,055 1%
Non-tax qualified 40,357 10.130813 408,849 1%
Oppenheimer VAF -
Capital Appreciation Fund:
Tax qualified 3,437 9.531780 32,761 (5)%
Non-tax qualified 11,150 9.531780 106,279 (5)%
Oppenheimer VAF - Growth Fund:
Tax qualified 2,404 9.825746 23,621 (2)%
Non-tax qualified 7,972 9.825746 78,331 (2)%
Oppenheimer VAF -
Growth & Income Fund:
Tax qualified 1,064 10.257840 10,914 3%
Non-tax qualified 15,025 10.257840 154,124 3%
Van Eck WIT -
Worldwide Emerging Markets Fund:
Tax qualified 733 8.813437 6,460 (12)%
Non-tax qualified 779 8.813437 6,866 (12)%
Van Eck WIT -
Worldwide Hard Assets Fund:
Tax qualified 206 8.978030 1,849 (10)%
Non-tax qualified 1,789 8.978030 16,062 (10)%
Van Kampen American Capital LIT -
Morgan Stanley Real Estate
Securities Portfolio:
Tax qualified 416 10.337004 4,300 3%
Non-tax qualified 10,121 10.337004 104,621 3%
Warburg Pincus Trust -
Growth & Income Portfolio:
Tax qualified 2,908 10.371958 30,162 4%
Non-tax qualified 4,127 10.371958 42,805 4%
Warburg Pincus Trust -
International Equity Portfolio:
Tax qualified 866 9.453278 8,187 (5)%
Non-tax qualified 5,787 9.453278 54,706 (5)%
Warburg Pincus Trust -
Post Venture Capital Portfolio:
Tax qualified 830 9.851173 8,176 (1)%
Non-tax qualified 2,366 9.851173 23,308 (1)%
======== ========= -----------
$82,185,672
===========
</TABLE>
<PAGE> 59
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life
Insurance Company and subsidiaries (collectively the Company), a wholly owned
subsidiary of Nationwide Financial Services, Inc., as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1997. 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 Life
Insurance Company and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1997 1996
------
----------------- ---------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $13,204.1 $12,304.6
Equity securities 80.4 59.1
Mortgage loans on real estate, net 5,181.6 5,272.1
Real estate, net 311.4 265.8
Policy loans 415.3 371.8
Other long-term investments 25.2 28.7
Short-term investments 358.4 4.8
---------- ---------
19,576.4 18,306.9
---------- ---------
Cash 175.6 43.8
Accrued investment income 210.5 210.2
Deferred policy acquisition costs 1,665.4 1,366.5
Investment in subsidiaries classified as discontinued operations - 485.7
Other assets 438.4 426.5
Assets held in Separate Accounts 37,724.4 26,926.7
---------- ---------
$59,790.7 $47,766.3
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Future policy benefits and claims $18,702.8 $17,600.6
Other liabilities 885.6 1,101.1
Liabilities related to Separate Accounts 37,724.4 26,926.7
---------- ---------
57,312.8 45,628.4
---------- ---------
Commitments and contingencies (notes 7 and 13)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 914.7 527.9
Retained earnings 1,312.3 1,432.6
Unrealized gains on securities available-for-sale, net 247.1 173.6
---------- ---------
2,477.9 2,137.9
---------- ---------
$59,790.7 $47,766.3
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Investment product and universal life insurance product policy charges $ 545.2 $ 400.9 $ 286.6
Traditional life insurance premiums 205.4 198.6 199.1
Net investment income 1,409.2 1,357.8 1,294.0
Realized gains (losses) on investments 11.1 (0.3) (1.7)
Other 46.5 35.9 20.7
---------- ---------- ----------
2,217.4 1,992.9 1,798.7
---------- ---------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Other benefits and claims 178.2 178.3 165.2
Policyholder dividends on participating policies 40.6 41.0 39.9
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Other operating expenses 384.9 342.4 273.0
---------- ---------- ----------
1,787.5 1,677.4 1,511.1
---------- ---------- ----------
Income from continuing operations before federal income tax expense 429.9 315.5 287.6
Federal income tax expense 150.2 110.9 99.8
---------- ---------- ----------
Income from continuing operations 279.7 204.6 187.8
Income from discontinued operations (less federal income tax expense
of $4.5 and $7.4 in 1996 and 1995, respectively) - 11.3 24.7
---------- ---------- ----------
Net income $ 279.7 $ 215.9 $ 212.5
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(in millions of dollars)
<TABLE>
<CAPTION>
Unrealized
gains
(losses)
Additional on securities Total
Common paid-in Retained available- shareholder's
stock capital earnings for-sale, net equity
----------- ------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 $3.8 $ 606.2 $1,378.2 $(119.7) $1,868.5
Capital contribution - 51.0 - (4.1) 46.9
Net income - - 212.5 - 212.5
Dividends to shareholder - - (7.5) - (7.5)
Unrealized gains on securities available-
for-sale, net - - - 508.1 508.1
-------- -------- -------- -------- ---------
December 31, 1995 3.8 657.2 1,583.2 384.3 2628.5
Net income - - 215.9 - 215.9
Dividends to shareholder - (129.3) (366.5) (39.8) (535.6)
Unrealized losses on securities available-
for-sale, net - - - (170.9) (170.9)
-------- -------- -------- -------- ---------
December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9
Capital contribution - 836.8 - - 836.8
Net income - - 279.7 - 279.7
Dividends to shareholder - (450.0) (400.0) - (850.0)
Unrealized gains on securities available-
for-sale, net - - - 73.5 73.5
-------- -------- -------- -------- ---------
December 31, 1997 $3.8 $ 914.7 $1,312.3 $ 247.1 $2,477.9
======== ======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1997 1996 1995
------------------------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 279.7 $ 215.9 $ 212.5
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Capitalization of deferred policy acquisition costs (487.9) (422.6) (321.3)
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Amortization and depreciation (2.0) 7.0 10.2
Realized (gains) losses on invested assets, net (11.1) (0.3) 3.3
(Increase) decrease in accrued investment income (0.3) 2.8 (16.9)
(Increase) decrease in other assets (12.7) (38.9) 39.9
(Decrease) increase in policy liabilities (23.1) (151.0) 123.9
Increase in other liabilities 230.6 191.4 27.0
Other, net (10.9) (61.7) 1.8
----------- --------- --------
Net cash provided by operating activities 1,146.1 858.3 1,113.4
----------- --------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 993.4 1,162.8 634.6
Proceeds from sale of securities available-for-sale 574.5 299.6 107.3
Proceeds from maturity of fixed maturity securities held-to-maturity - - 564.4
Proceeds from repayments of mortgage loans on real estate 437.3 309.0 207.8
Proceeds from sale of real estate 34.8 18.5 48.3
Proceeds from repayments of policy loans and sale of other invested assets 22.7 22.8 53.6
Cost of securities available-for-sale acquired (2,828.1) (1,573.6) (1,942.4)
Cost of fixed maturity securities held-to-maturity acquired - - (593.6)
Cost of mortgage loans on real estate acquired (752.2) (972.8) (796.0)
Cost of real estate acquired (24.9) (7.9) (10.9)
Policy loans issued and other invested assets acquired (62.5) (57.7) (75.9)
Short-term investments, net (354.8) 28.0 77.8
----------- --------- --------
Net cash used in investing activities (1,959.8) (771.3) (1,725.0)
----------- --------- --------
Cash flows from financing activities:
Proceeds from capital contributions 836.8 - -
Cash dividends paid - (50.0) (7.5)
Increase in investment product and universal life insurance
product account balances 2,488.5 1,781.8 1,883.7
Decrease in investment product and universal life insurance
product account balances (2,379.8) (1,784.5) (1,258.7)
----------- --------- --------
Net cash provided by (used in) financing activities 945.5 (52.7) 617.5
----------- --------- --------
Net increase in cash 131.8 34.3 5.9
Cash, beginning of year 43.8 9.5 3.6
----------- --------- --------
Cash, end of year $ 175.6 $ 43.8 $ 9.5
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
wholly owned by Nationwide Corporation (Nationwide Corp.). On that
date, Nationwide Corp. contributed the outstanding shares of NLIC's
common stock to Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corp. in November 1996 for NLIC and the
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. On March 11
1997, NFS completed an initial public offering of its Class A common
stock.
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. These subsidiaries,
through December 31, 1996, and all accident and health and group life
insurance business have been accounted for as discontinued operations
for all periods presented. See notes 11 and 15. Additionally, NLIC paid
$900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc.,
Nationwide Investment Services Corporation and NWE, Inc. NLIC and its
subsidiaries are collectively referred to as "the Company."
The Company is a leading provider of long-term savings and retirement
products. The Company is subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
(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 NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the 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 has
no material permitted statutory accounting practices.
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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 NLIC
and its wholly owned subsidiaries. Subsidiaries that are
classified and reported as discontinued operations are not
consolidated but rather are reported as "Investment in
subsidiaries classified as discontinued operations" in the
accompanying consolidated balance sheets and "Income from
discontinued operations" in the accompanying consolidated
statements of income. 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 shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy 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, 1997 or 1996.
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, at 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.
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual and group
variable and fixed annuities. Universal life insurance products
include universal life insurance, variable universal 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.
(e) SEPARATE ACCOUNTS
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $365.5 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.
Future policy benefits for traditional life insurance policies
have been calculated using a net level premium method based on
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. See note 4.
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) PARTICIPATING BUSINESS
Participating business represents approximately 50% in 1997 (52%
in 1996 and 54% in 1995) of the Company's life insurance in force,
77% in 1997 (78% in 1996 and 79% in 1995) of the number of life
insurance policies in force, and 27% in 1997 (40% in 1996 and 47%
in 1995) 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. All of the Company's accident
and health and group life insurance business is ceded to
affiliates and is accounted for as discontinued operations. See
notes 11 and 15.
(j) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 - REPORTING
COMPREHENSIVE INCOME was issued in June 1997 and is effective for
fiscal years beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a
period except those resulting from investments by shareholders and
distributions to shareholders and includes net income.
Comprehensive income would be reported in addition to earnings
amounts currently presented. The Company will adopt the statement
and begin reporting comprehensive income in the first quarter of
1998.
(k) RECLASSIFICATION
Certain items in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1997 and
1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ - $ 313.7
Obligations of states and political subdivisions 1.6 - - 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
------------ --------- --------- -----------
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
------------ --------- --------- -----------
$ 12,800.7 $ 498.3 $ (14.5) $ 13,284.5
============ ========= ========= ===========
December 31, 1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 275.7 $ 4.8 $ (1.3) $ 279.2
Obligations of states and political subdivisions 6.2 0.5 - 6.7
Debt securities issued by foreign governments 100.7 2.1 (0.9) 101.9
Corporate securities 7,999.3 285.9 (33.7) 8,251.5
Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3
------------ --------- --------- -----------
Total fixed maturity securities 11,970.9 384.7 (51.0) 12,304.6
Equity securities 43.9 15.6 (0.4) 59.1
------------ --------- --------- -----------
$ 12,014.8 $ 400.3 $ (51.4) $ 12,363.7
============ ========= ========= ===========
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1997, by contractual
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 of dollars) cost fair value
-------------- ----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 419.2 $ 422.1
Due after one year through five years 4,573.5 4,708.4
Due after five years through ten years 2,772.6 2,879.7
Due after ten years 1,333.4 1,443.6
----------- -----------
9,098.7 9,453.8
Mortgage-backed securities 3,634.2 3,750.3
----------- -----------
$ 12,732.9 $ 13,204.1
=========== ===========
</TABLE>
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- ----------
<S> <C> <C>
Gross unrealized gains $ 483.8 $349.0
Adjustment to deferred policy acquisition costs (103.7) (81.9)
Deferred federal income tax (133.0) (93.5)
-------- -------
$ 247.1 $173.6
======== =======
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $137.5 $(289.2) $876.3
Equity securities (2.7) 8.9 -
Fixed maturity securities held-to-maturity - - 75.6
------- ------- -------
$134.8 $(280.3) $ 951.9
======= ======= =======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1997,
1996 and 1995 were $574.5 million, $299.6 million and $107.3 million,
respectively. During 1997, gross gains of $9.9 million ($6.6 million
and $4.8 million in 1996 and 1995, respectively) and gross losses of
$18.0 million ($6.9 million and $2.1 million in 1996 and 1995,
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 NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25.4 million to
available-for-sale securities due to evidence of a significant
deterioration in the issuer's creditworthiness. The transfer of those
fixed maturity securities resulted in a gross unrealized loss of $3.5
million.
As permitted by the Financial Accounting Standards Board's Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued in November
1995, the Company transferred nearly all of its fixed maturity
securities previously classified as held-to-maturity to
available-for-sale. As of December 14, 1995, the date of transfer, the
fixed maturity securities had amortized cost of $3.32 billion,
resulting in a gross unrealized gain of $155.9 million.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million ($51.8 million as
of December 31, 1996), which includes $3.9 million ($41.7 million as of
December 31, 1996) of impaired mortgage loans on real estate for which
the related valuation allowance was $0.1 million ($8.5 million as of
December 31, 1996) and $16.0 million ($10.1 million as of December 31,
1996) of impaired mortgage loans on real estate for which there was no
valuation allowance. During 1997, the average recorded investment in
impaired mortgage loans on real estate was approximately $31.8 million
($39.7 million in 1996) and interest income recognized on those loans
was $1.0 million ($2.1 million in 1996), which is equal to interest
income recognized using a cash-basis method of income recognition.
<PAGE> 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
------------- -------------
<S> <C> <C>
Allowance, beginning of year $51.0 $49.1
(Reductions) additions charged to operations (1.2) 4.5
Direct write-downs charged against the allowance (7.3) (2.6)
------ ------
Allowance, end of year $42.5 $51.0
====== ======
</TABLE>
Real estate is presented at cost less accumulated depreciation of $45.1
million as of December 31, 1997 ($30.3 million as of December 31, 1996)
and valuation allowances of $11.1 million as of December 31, 1997
($15.2 million as of December 31, 1996).
Investments that were non-income producing for the twelve month period
preceding December 31, 1997 amounted to $19.4 million ($26.8 million
for 1996) and consisted of $3.0 million ($0.2 million in 1996) in
securities available-for-sale, $16.4 million ($20.6 million in 1996) in
real estate and none ($5.9 million in 1996) in other long-term
investments.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 911.6 $ 917.1 $ 685.8
Equity securities 0.8 1.3 1.3
Fixed maturity securities held-to-maturity - - 201.8
Mortgage loans on real estate 457.7 432.8 395.5
Real estate 42.9 44.3 38.3
Short-term investments 22.7 4.2 10.6
Other 21.0 4.0 7.2
-------- -------- --------
Total investment income 1,456.7 1,403.7 1,340.5
Less investment expenses 47.5 45.9 46.5
-------- -------- --------
Net investment income $1,409.2 $1,357.8 $1,294.0
======== ======== ========
</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 of dollars) 1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ 3.6 $(3.5) $ 4.2
Equity securities 2.7 3.2 3.4
Mortgage loans on real estate 1.6 (4.1) (7.1)
Real estate and other 3.2 4.1 (2.2)
------ ------ ------
$11.1 $(0.3) $(1.7)
====== ====== ======
</TABLE>
Fixed maturity securities with an amortized cost of $6.2 million as
of December 31, 1997 and 1996 were on deposit with various
regulatory agencies as required by law.
<PAGE> 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts
represents approximately 86% and 87% of the total liability for future
policy benefits as of December 31, 1997 and 1996, respectively. The
average interest rate credited on investment product policies was
approximately 6.1%, 6.3% and 6.6% for the years ended December 31,
1997, 1996 and 1995, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
INTEREST RATES: Interest rates vary by issue year and were 6.9%
and 6.6% in 1997 and 1996, respectively. Interest rates have
generally ranged from 6.0% to 10.5% for previous issue years.
WITHDRAWALS: Rates, which vary by issue age, type of coverage and
policy duration, are based on Company experience.
MORTALITY: Mortality and morbidity rates are based on published
tables, modified for the Company's actual experience.
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
$220.2 million and $240.5 million as of December 31, 1997 and 1996,
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.
The Company has reinsurance agreements with certain affiliates as
described in note 11. All other reinsurance agreements are not material
to either premiums or reinsurance recoverables.
(5) FEDERAL INCOME TAX
The Company's current federal income tax liability was $60.1 million
and $30.2 million as of December 31, 1997 and 1996, respectively.
<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $200.1 $183.0
Liabilities in Separate Accounts 242.0 188.4
Mortgage loans on real estate and real estate 19.0 23.4
Other assets and other liabilities 59.2 53.7
------- ------
Total gross deferred tax assets 520.3 448.5
Less valuation allowance (7.0) (7.0)
------- ------
Net deferred tax assets 513.3 441.5
------- ------
Deferred tax liabilities:
Deferred policy acquisition costs 480.5 399.3
Fixed maturity securities 193.3 133.2
Deferred tax on realized investment gains 40.1 37.6
Equity securities and other long-term investments 7.5 8.2
Other 22.2 25.4
------- ------
Total gross deferred tax liabilities 743.6 603.7
------- ------
Net deferred tax liability $230.3 $162.2
======= ======
</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. There
has been no change in the valuation allowance for the years ended
December 31, 1997, 1996 and 1995.
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable $121.7 $116.5 $88.7
Deferred tax expense (benefit) 28.5 (5.6) 11.1
------ ------ ------
$150.2 $110.9 $99.8
====== ====== ======
</TABLE>
Total federal income tax expense for the years ended December 31, 1997,
1996 and 1995 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
(in millions of dollars) Amount % Amount % Amount %
---------------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $150.5 35.0 $110.4 35.0 $100.6 35.0
Tax exempt interest and dividends
received deduction - 0.0 (0.2) (0.1) - 0.0
Other, net (0.3) (0.1) 0.7 0.3 (0.8) (0.3)
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $150.2 34.9 $110.9 35.2 $ 99.8 34.7
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $91.8 million, $115.8 million and
$51.8 million during the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE> 15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(6) 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.
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.
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 includes 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.
<PAGE> 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 13.
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>
1997 1996
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
(in millions of dollars) amount fair value amount fair value
------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $13,204.1 $13,204.1 $12,304.6 $12,304.6
Equity securities 80.4 80.4 59.1 59.1
Mortgage loans on real estate, net 5,181.6 5,509.7 5,272.1 5,397.9
Policy loans 415.3 415.3 371.8 371.8
Short-term investments 358.4 358.4 4.8 4.8
Cash 175.6 175.6 43.8 43.8
Assets held in Separate Accounts 37,724.4 37,724.4 26,926.7 26,926.7
Liabilities:
Investment contracts 14,708.2 14,322.1 13,914.4 13,484.5
Policy reserves on life insurance contracts 3,345.4 3,182.4 3,392.8 3,197.5
Liabilities related to Separate Accounts 37,724.4 36,747.0 26,926.7 26,164.2
</TABLE>
(7) RISK DISCLOSURES
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduce 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.
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.
<PAGE> 17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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.
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. 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
exposure 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 $341.4 million
extending into 1998 were outstanding as of December 31, 1997. The
Company also had $63.9 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1997.
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 20% (21% in 1996) in any geographic area and no more than 2% (2%
in 1996) with any one borrower as of December 31, 1997. As of December
31, 1997, 46% (44% in 1996) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1997 and 1996. See note 4.
(8) PENSION PLAN
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. Benefits are based upon the highest average annual
salary of a specified number of consecutive years of the last ten years
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.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and
elected early retirement no later than March 15, 1995. The entire cost
of the enhanced benefit was borne by NMIC and certain of its property
and casualty insurance company affiliates.
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual
Insurance Company Employees' Retirement Plan and the Wausau Insurance
Companies Pension Plan to form the Nationwide Insurance Enterprise
Retirement Plan (the Retirement Plan). Immediately prior to the merger,
the plans were amended to provide consistent benefits for service after
January 1, 1996. These amendments had no significant impact on the
accumulated benefit obligation or projected benefit obligation as of
December 31, 1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1997, 1996 and 1995 were $7.5 million, $7.4
million and $10.5 million, respectively.
The Company had no net accrued pension expense as of December 31, 1997
($1.1 million as of December 31, 1996).
The net periodic pension cost for the Retirement Plan as a whole for
the years ended December 31, 1997 and 1996 and for the Nationwide
Insurance Companies and Affiliates Retirement Plan as a whole for the
year ended December 31, 1995 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 77.3 $ 75.5 $ 64.5
Interest cost on projected benefit obligation 118.6 105.5 95.3
Actual return on plan assets (328.0) (210.6) (249.3)
Net amortization and deferral 196.4 101.8 143.4
-------- -------- --------
$ 64.3 $ 72.2 $ 53.9
======== ======== ========
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate 6.50% 6.00% 7.50%
Rate of increase in future compensation levels 4.75% 4.25% 6.25%
Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
</TABLE>
Information regarding the funded status of the Retirement Plan as a
whole as of December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,547.5 $1,338.6
Nonvested 13.5 11.1
-------- ---------
$1,561.0 $1,349.7
======== =========
Net accrued pension expense:
Projected benefit obligation for services rendered to date $2,033.8 $1,847.8
Plan assets at fair value 2,212.9 1,947.9
--------- ---------
Plan assets in excess of projected benefit obligation 179.1 100.1
Unrecognized prior service cost 34.7 37.9
Unrecognized net gains (330.7) (202.0)
Unrecognized net asset at transition 33.3 37.2
--------- ---------
$ (83.6) $ (26.8)
========= =========
</TABLE>
<PAGE> 19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted average discount rate 6.00% 6.50%
Rate of increase in future compensation levels 4.25% 4.75%
</TABLE>
Assets of the Retirement Plan are invested in group annuity contracts
of NLIC and Employers Life Insurance Company of Wausau (ELICW).
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
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, 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,
1997 and 1996 was $36.5 million and $34.9 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1997, 1996 and
1995 was $3.0 million, $3.3 million and $3.1 million, respectively.
Information regarding the funded status of the plan as a whole as of
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees $ 93.3 $ 93.0
Fully eligible, active plan participants 31.6 23.7
Other active plan participants 113.0 84.0
-------- --------
Accumulated postretirement benefit obligation 237.9 200.7
Plan assets at fair value 69.2 63.0
-------- --------
Plan assets less than accumulated postretirement benefit obligation (168.7) (137.7)
Unrecognized transition obligation of affiliates 1.5 1.7
Unrecognized net losses (gains) 1.6 (23.2)
-------- --------
$(165.6) $(159.2)
======== ========
</TABLE>
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year) $ 7.0 $ 6.5 $ 6.2
Interest cost on accumulated postretirement
benefit obligation 14.0 13.7 14.2
Actual return on plan assets (3.6) (4.3) (2.7)
Amortization of unrecognized transition
obligation of affiliates 0.2 0.2 3.0
Net amortization and deferral (0.5) 1.8 (1.6)
------- ------ ------
$17.1 $17.9 $19.1
======= ====== ======
</TABLE>
Actuarial assumptions used for the measurement of the APBO and the
NPPBC for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
APBO:
Discount rate 6.70% 7.25% 6.75%
Assumed health care cost trend rate:
Initial rate 12.13% 11.00% 11.00%
Ultimate rate 6.12% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
NPPBC:
Discount rate 7.25% 6.65% 8.00%
Long term rate of return on plan
assets, net of tax 5.89% 4.80% 8.00%
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 10.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
</TABLE>
For the plan as a whole, a one percentage point increase in the assumed
health care cost trend rate would increase the APBO as of December 31,
1997 by $0.4 million and have no impact on the NPPBC for the year ended
December 31, 1997.
(10) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, NLIC's and NLAIC'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 NLAIC each exceed
the minimum risk-based capital requirements.
<PAGE> 21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The statutory capital and surplus of NLIC as of December 31, 1997, 1996
and 1995 was $1.13 billion, $1.00 billion and $1.36 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1997, 1996 and 1995 was $111.7 million, $73.2 million and
$86.5 million, respectively.
As a result of the $850.0 million dividend paid on February 24, 1997,
any dividend paid by NLIC during the twelve-month period immediately
following the $850.0 million dividend would be an extraordinary
dividend under Ohio insurance laws. Accordingly, no such dividend could
be paid without prior regulatory approval. The Company has no reason to
believe that any reasonably foreseeable dividend to be paid by NLIC
would not receive the required 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 shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) TRANSACTIONS WITH AFFILIATES
As part of the restructuring described in note 1, 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.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the
Company made lease payments to NMIC and its subsidiaries of $8.4
million, $9.1 million and $9.0 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 this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $85.8 million, $101.6 million and $107.1
million in 1997, 1996 and 1995, respectively. The allocations are based
on techniques and procedures in accordance with insurance regulatory
guidelines. Measures used to allocate expenses among companies include
individual employee estimates of time spent, special cost studies,
salary expense, commissions expense and other methods agreed to by the
participating companies that are within industry guidelines and
practices. The Company believes these allocation methods are
reasonable. In addition, the Company does not believe that expenses
recognized under the inter-company agreements are materially different
than expenses that would have been recognized had the Company operated
on a stand alone basis. Amounts payable to NMIC from the Company under
the cost sharing agreement were $20.5 million and $15.1 million as of
December 31, 1997 and 1996, 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 1997 and
1996 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.
<PAGE> 22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance agreements exist between NLIC and,
respectively, NMIC and ELICW whereby all of NLIC's accident and health
and group life insurance business is ceded on a modified coinsurance
basis. NLIC entered into the reinsurance agreements during 1996 because
the accident and health and group life insurance business was unrelated
to the Company's long-term savings and retirement products.
Accordingly, the accident and health and group life insurance business
has been accounted for as discontinued operations for all periods
presented. Under modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment
risk associated with changes in interest rates is borne by ELICW or
NMIC, as the case may be. Risk of asset default is retained by the
Company, although a fee is paid by ELICW or NMIC, as the case may be,
to the Company for the Company's retention of such risk. The agreements
will remain in force until all policy obligations are settled. However,
with respect to the agreement between NLIC and NMIC, either party may
terminate the contract on January 1 of any year with prior notice. 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. Amounts ceded to NMIC and ELICW for the years ended December
31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
(in millions of dollars) NMIC ELICW NMIC ELICW
-------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
Premiums $ 91.4 $199.8 $ 97.3 $224.2
Net investment income and other revenue $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and other expenses $100.7 $225.9 $100.5 $246.6
</TABLE>
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 $211.0 million and $4.8 million as of
December 31, 1997 and 1996, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding
shares of common stock of Farmland Life Insurance Company (Farmland) to
NLIC. Farmland merged into WCLIC effective June 30, 1995. The
contribution resulted in a direct increase to consolidated
shareholder's equity of $46.9 million. As discussed in note 15, WCLIC
is accounted for as discontinued operations.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1997 were $66.1
million, $76.9 million and $57.3 million, respectively.
(12) BANK LINES OF CREDIT
In August 1996, NLIC, along with NMIC, entered into 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 either NLIC or
NMIC. NLIC and NMIC pay facility and usage fees to the financial
institutions to maintain the revolving credit facility. All previously
existing line of credit agreements were canceled. In September 1997,
the credit agreement was amended to include NFS as a party to and
borrower under the agreement.
<PAGE> 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) CONTINGENCIES
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to
be material to the Company's financial position or results of
operations.
(14) SEGMENT INFORMATION
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment consists
of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by the Company and independent
investment managers, with the investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment consists of annuity
contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, with returns accumulating
on a tax-deferred basis. The Fixed Annuities segment also includes the
fixed option under the Company's variable annuity contracts. The Life
Insurance segment consists of insurance products that provide a death
benefit and may also allow the customer to build cash value on a
tax-deferred basis. In addition, the Company reports corporate expenses
and investments, and the related investment income supporting capital
not specifically allocated to its product segments in a Corporate and
Other segment. In addition, all realized gains and losses and
investment management fees and other revenue earned from mutual funds,
other than the portion allocated to the variable annuities and life
insurance segments, are reported in the Corporate and Other segment.
The following table summarizes revenues and income from continuing
operations before federal income tax expense for the years ended
December 31, 1997, 1996 and 1995 and assets as of December 31, 1997,
1996 and 1995, by segment.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Variable Annuities $ 404.0 $ 284.6 $ 189.1
Fixed Annuities 1,141.4 1,092.6 1,052.0
Life Insurance 473.1 435.6 409.1
Corporate and Other 198.9 180.1 148.5
----------- ---------- ----------
$ 2,217.4 $ 1,992.9 $ 1,798.7
=========== ========== ==========
Income from continuing operations before federal income tax
expense:
Variable Annuities $ 150.9 $ 90.3 $ 50.8
Fixed Annuities 169.5 135.4 137.0
Life Insurance 70.9 67.2 67.6
Corporate and Other 38.6 22.6 32.2
----------- ---------- ----------
$ 429.9 $ 315.5 $ 287.6
=========== ========== ==========
Assets:
Variable Annuities $ 35,278.7 $ 25,069.7 $ 17,333.0
Fixed Annuities 14,436.3 13,994.7 13,250.4
Life Insurance 3,901.4 3,353.3 3,027.4
Corporate and Other 6,174.3 5,348.6 4,896.8
----------- ---------- ----------
$ 59,790.7 $ 47,766.3 $ 38,507.6
=========== ========== ==========
</TABLE>
<PAGE> 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(15) DISCONTINUED OPERATIONS
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. Prior to the
contribution by Nationwide Corp. of the outstanding common stock of
NLIC to NFS, NLIC effected certain transactions with respect to certain
subsidiaries and lines of business that were unrelated to long-term
savings and retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend
payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of three subsidiaries: ELICW, NCC
and WCLIC. ELICW writes group accident and health and group life
insurance business and maintains it offices in Wausau, Wisconsin. NCC
is a property and casualty company with offices in Scottsdale, Arizona
that serves as a fronting company for a property and casualty
subsidiary of NMIC. WCLIC writes high dollar term life insurance
policies and is located in San Francisco, California. ELICW, NCC and
WCLIC have been accounted for as discontinued operations in the
accompanying consolidated financial statements through December 31,
1996. The Company did not recognize any gain or loss on the disposal of
these subsidiaries.
Also, during 1996, NLIC entered into two reinsurance agreements whereby
all of NLIC's accident and health and group life insurance business was
ceded to ELICW and NMIC, effective January 1, 1996. See note 11 for a
complete discussion of the reinsurance agreements. The Company has
discontinued its accident and health and group life insurance business
and in connection therewith has entered into reinsurance agreements to
cede all existing and any future writings to other affiliated
companies. NLIC's accident and health and group life insurance business
is accounted for as discontinued operations for all periods presented.
The Company did not recognize any gain or loss on the disposal of the
accident and health and group life insurance business. The assets,
liabilities, results of operations and activities of discontinued
operations are distinguished physically, operationally and for
financial reporting purposes from the remaining assets, liabilities,
results of operations and activities of the Company.
A summary of the results of operations of discontinued operations for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ - $ 668.9 $ 776.9
Net income $ - $ 11.3 $ 24.7
</TABLE>
A summary of the assets and liabilities of discontinued operations as
of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Assets, consisting primarily of investments $247.3 $3,288.5 $3,206.7
Liabilities, consisting primarily of policy benefits and claims $247.3 $2,802.8 $2,700.0
</TABLE>
