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As filed with the Securities and Exchange Commission.
'33 Act File No. ________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
63
(Primary Standard Industrial Classification Code Number)
31-1000740
(IRS Employer Identification Number)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Principal Executive Offices of Registrant) (Zip Code)
PATRICIA R. HATLER, SECRETARY, ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
TELEPHONE: (614) 249-7111
(Name, address, zip code, telephone number of agent for service)
Approximate date of proposed sale to the public: November 1, 2000
----------------
If any securities registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [ X ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Proposed Maximum Proposed Maximum
securities to be Amount to be offering price per aggregate offering Amount of
registered registered unit price registration fee
<S> <C> <C> <C> <C>
Interests under
variable annuity
contracts * * $50,000,000 $13,200
</TABLE>
* The maximum aggregate offering price is estimated for the purpose of
determining a registration fee. The amount to be registered and the proposed
maximum offering price per unit are not applicable since these securities are
not issued in specified amounts or units.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
Cross Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
<TABLE>
<CAPTION>
Caption in
Form S-1 Item No. and Caption Prospectus
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus..........................................................Outside Front Cover
2. Inside Front and Outside Back Cover
Table of Contents ..........................................................................Inside Front Cover
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.........................................................Summary Information
(Not applicable with respect to
ratio of earnings to fixed charges)
4. Use of Proceeds ................................................................................Investments
5. Determination of Offering Price.................................................................Not Applicable
6. Dilution........................................................................................Not Applicable
7. Selling Security Holders .....................................................................Not Applicable
8. Plan of Distribution............................................................... Variable Annuity Contracts
and the Distribution of GTOs
9. Description of Securities to be Registered..........................Description of the Guaranteed Term Options
10. Interests of Named Experts and Counsel..........................................................Not Applicable
11. Information with Respect to Registrant..............................................................Nationwide
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..................................................Not Applicable
</TABLE>
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GUARANTEED TERM OPTIONS
Under Variable Annuity Contracts Issued by
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43215
Telephone: 1-800-238-3035
The date of this Prospectus is November 1, 2000.
THIS PROSPECTUS MUST BE READ ALONG WITH THE APPROPRIATE VARIABLE ANNUITY
PROSPECTUS AND THE PROSPECTUSES DESCRIBING THE UNDERLYING MUTUAL FUND INVESTMENT
OPTIONS. ALL OF THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND MAINTAINED FOR
FUTURE REFERENCE.
This prospectus describes investment options referred to as Guaranteed Term
Options ("GTOs"), offered by Nationwide Life and Annuity Insurance Company
("Nationwide"). The GTOs are available under certain variable annuity contracts
issued by Nationwide. Generally, the variable annuity contracts offered by
Nationwide provide an array of underlying mutual fund investment options, to
which the contract owner allocates his or her purchase payments. The GTOs are
separate, guaranteed interest investment options available under variable
annuity contracts.
GTOs provide for guaranteed interest rates to be credited over specified
durations (referred to as "Guaranteed Terms"). Three (3), five (5), seven (7)
and ten (10) year GTOs are available. The Specified Interest Rate is guaranteed
to be credited for the duration of the Guaranteed Term on a daily basis,
resulting in a guaranteed annual effective yield unless a withdrawal from the
GTO occurs for any reason prior to the expiration of the Guaranteed Term.
Different interest rates apply to each GTO and are determined and guaranteed by
Nationwide in its sole discretion.
GTOs will produce a guaranteed annual effective yield at the Specified Interest
Rate SO LONG AS AMOUNTS INVESTED ARE NEITHER WITHDRAWN NOR TRANSFERRED PRIOR TO
THE END OF THE GUARANTEED TERM. IN THE EVENT OF A TRANSFER FOR ANY REASON PRIOR
TO THE EXPIRATION OF THE GUARANTEED TERM, THE AMOUNT TRANSFERRED WILL BE SUBJECT
TO A MARKET VALUE ADJUSTMENT.
Variable annuity prospectuses in which the GTOs are offered describe certain
charges and deductions which may apply to the GTOs. A more detailed discussion
of these charges and deductions, as they relate to particular variable annuity
contracts, is contained in the variable annuity prospectuses.
The minimum amount that may be allocated to a GTO is $1,000.
Nationwide established the Nationwide Multiple Maturity Separate Account-A on
March 1, 1995, pursuant to Ohio law, to aid in reserving and accounting for GTO
obligations. However, all of the general assets of Nationwide are available for
the purpose of meeting the guarantees of the GTOs. Amounts allocated to the GTOs
are generally invested in fixed income investments purchased by Nationwide.
Variable annuity Contract Owners allocating amounts to a GTO have no claim
against any assets of Nationwide, including assets held in the Nationwide
Multiple Maturity Separate Account-A.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE GTOS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATE
JURISDICTIONS AND, ACCORDINGLY, REPRESENTATIONS MADE IN THIS PROSPECTUS DO NOT
CONSTITUTE AN OFFERING IN SUCH JURISDICTIONS.
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TABLE OF CONTENTS
GLOSSARY.............................................
INFORMATION ABOUT THE GTOS...........................
1. General.....................................
2. The Specified Interest Rate.................
3. The Investment Period.......................
4. Guarantee Terms.............................
5. GTOs at Maturity............................
6. The Market Value Adjustment ................
A. General Information Regarding the
Market Value Adjustment................
B. Constant Maturity Treasury Rates.......
C. The Market Value Adjustment
Formula..............................
7. Contract Charges............................
8. GTOs at Annuitization.......................
INVESTMENTS..........................................
CONTRACTS AND THE DISTRIBUTION
(MARKETING) OF THE GTOS..............................
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY........
1. Business....................................
A. Organization...........................
B. Description of the Business............
C. Business Segments......................
D. Ratings................................
E. Competition............................
F. Regulation.............................
G. Employees..............................
2. Properties..................................
3. Legal Proceedings...........................
4. Market for Nationwide Life Insurance
Company's Common Stock and
Related Shareholder Matters.................
5. Consolidated Financial Statements and
Supplementary Data..........................
6. Selected Financial Data.....................
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................
Introduction................................
A. Results of Operations...................
(i) Revenues.....................
(ii) Benefits and Expenses........
(iii) Sales Information............
B. Business Segments ......................
(i) Variable Annuities...........
(ii) Fixed Annuities..............
(iii) Life Insurance...............
(iv) Corporate and Other..........
C. Quantitative and Qualitative Disclosures
About Market Risk.....................
(i) Market Risk Sensitive
Financial Instruments........
(ii) Interest Rate Risk...........
(iii) Asset/Liability Management
Strategies to Manage Interest
Rate Risk....................
(iv) Characteristics of Interest
Rate Financial Instruments...
(v) Equity Market Risk...........
8. Directors and Executive Officers............
9. Executive Compensation......................
A. Compensation...........................
B. Executive Incentive Plans..............
C. Management Incentive Plan..............
D. Performance Incentive Plan.............
E. Deferred Compensation Program..........
F. Savings Plan...........................
G. Supplemental Defined Contribution Plan.
H. Long-Term Equity Compensation
Plan...................................
I. Stock Options and Stock Appreciation
Rights.................................
J. Options/SARs Exercises and
Holdings ..............................
K. Pension Plans..........................
(i) Retirement Plan..............
(ii) Excess and Supplemental
Plans..................
10. Compensation Committee Joint Report on
Executive Compensation......................
A. Introduction...........................
B. Compensation Philosophy and
Objectives.............................
C. Elements of 1999 Executive
Compensation...........................
D. Base Salaries..........................
E. Annual Incentive Compensation..........
F. Long-Term Incentive
Compensation...........................
(i) Long-Term Equity
Compensation Plan......
G. Compensation of the Chief Executive
Officer................................
H. Policy on Deductibility of
Compensation...........................
(i) Nationwide Financial Services
Corporation Committee........
(ii) Nationwide Life Insurance
Company Compensation.........
Committee....................
11. Exhibits, Financial Statements, Schedules
and Reports.................................
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GLOSSARY
CONSTANT MATURITY TREASURY RATE- The rate of interest used in the Market Value
Formula. Constant Maturity Treasury Rates for maturity durations of 1, 2, 3, 5,
7 and 10 years are declared regularly by the Federal Reserve Board.
GUARANTEED TERM OPTION ("GTO")- An investment option offered under the Contracts
which provides a Specified Interest Rate over Guaranteed Terms, so long as
certain conditions are met.
GUARANTEED TERM- The period corresponding to a 3, 5, 7 or 10 year GTO. Amounts
allocated to a GTO will be credited with a Specified Interest Rate over the
corresponding guaranteed term, so long as such amounts are not distributed from
the GTO prior to the Maturity Date. 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.
MARKET VALUE ADJUSTMENT- The upward or downward adjustment in value of amounts
allocated to a GTO which are withdrawn from the GTO for any reason prior to the
Maturity Period.
MATURITY DATE- The date on which a GTO matures. The date will be the last day of
the calendar quarter during the third, fifth, seventh or tenth anniversary on
which amounts are allocated to a 3, 5, 7 or 10 year GTO, respectively.
MATURITY PERIOD- The period during which the value of amounts allocated under a
GTO may be distributed without any Market Value Adjustment. The Maturity Period
will begin on the day following the Maturity Date and will end on the thirtieth
day after the Maturity Date.
SPECIFIED INTEREST RATE- The Specified Interest Rate is the interest rate
guaranteed to be credited to amounts allocated to a GTO so long as the
allocations are not distributed for any reason prior to the Maturity Period.
SPECIFIED VALUE- The amount of a GTO allocation, plus interest accrued at the
Specified Interest Rate minus surrenders, transfers and any other amounts
distributed. The Specified Value is subject to a Market Value Adjustment at all
times other than during the Maturity Period.
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INFORMATION ABOUT THE GTOs
1. GENERAL
GTOs are guaranteed interest rate investment options available under
certain variable annuity contracts issued by Nationwide. There are four
different GTOs available: a 3 year GTO; a 5 year GTO; a 7 year GTO; and a
10 year GTO. A GTO may be purchased through purchase payments made under
those variable annuity contracts which offer GTOs, or through transfers
from other investment options also available under such contracts. Not all
of the variable annuity contracts issued by Nationwide offer GTOs, nor are
GTOs available in every state jurisdiction. If GTOs are available under a
variable annuity, the prospectus for the variable annuity and this
prospectus must be read together.
The guarantees associated with the GTOs are borne exclusively by and are
legal obligations of Nationwide. A separate account, authorized and created
in accordance with of Ohio law, was established for the sole purpose of
reserving and accounting for assets associated with the GTOs. The assets of
the separate account are owned by Nationwide. Contract owners with GTOs
have no claim against the assets of the separate account, maintain no
interest in the separate account and do not participate in the investment
experience of the separate account.
GTOs provide for a guaranteed interest rate (the "Specified Interest
Rate"), to be credited as long as any amount allocated to the GTO is not
distributed for any reason prior to the Maturity Date of the GTO. Each GTO
has a Guarantee Term. Generally, a 3 year GTO offers guaranteed interest at
a Specified Interest Rate over 3 years, a 5 year GTO offers guaranteed
interest at a Specified Interest Rate over 5 years, and so on. Because
every GTO will mature on the last day of a calendar quarter, the Guaranteed
Term of a GTO may extend for up to 3 months beyond the 3, 5, 7 or 10 year
anniversary of allocations made to 3, 5, 7 or 10 year GTOs, respectively.
Amounts allocated to a GTO will be credited at the Specified Interest Rate
for the duration of the Guaranteed Term associated with the GTO. Specified
Interest Rates for each GTO are declared periodically at the sole
discretion of Nationwide. The Investment Period is the period of time
during which declared Specified Interest Rates will be effective for new
allocations. Investment Periods will typically last for one month, but may
be longer or shorter depending on interest rate fluctuations in financial
markets. During any particular Investment Period, any transfer allocation
or new purchase payment allocation to a GTO will earn the Specified
Interest Rate effective for that Investment Period for the duration of the
Guaranteed Term of the GTO (see "Specified Interest Rates and Guaranteed
Terms").
The Specified Interest Rate will be credited daily to amounts allocated to
a GTO, providing an annual effective yield. The Specified Interest Rate
will continue to be credited as long as allocations remain in the GTO until
the Maturity Date. However, any surrenders, transfers or withdrawals for
any reason prior to the Maturity Date will be subject to a Market Value
Adjustment.
The Market Value Adjustment is accomplished through the use of the Market
Value Adjustment Factor, derived by the Market Value Adjustment Formula,
which is multiplied by the part of the Specified Value being withdrawn or
transferred, resulting in either an increase or a decrease in the amount of
the withdrawal or transfer. The Market Value Adjustment formula reflects
the relationship between three factors:
(1) the Constant Maturity Treasury Rate for the period coinciding
with the Guaranteed Term of the GTO at investment;
(2) the Constant Maturity Treasury Rate for the number of years
remaining in a Guaranteed Term when the surrender, transfer or
other withdrawal from the GTO occurs; and
(3) the number of days remaining in the Guaranteed Term of the
GTO.
Generally, the Market Value Adjustment formula approximates the
relationship between prevailing interest rates at the time of the GTO
allocation, prevailing interest rates at time of transfer or surrender and
the amount of time remaining in a Guaranteed Term (see "The Market Value
Adjustment").
Variable annuity contract owners having GTOs with Maturity Dates coinciding
with the end of the calendar quarter will be notified of the
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impending expiration of the GTO at least 15 days and at most 30 days prior
to the end of each calendar quarter. Contract owners will then have the
option of directing the withdrawal or transfer of the GTO, during the
Maturity Period, without application of any Market Value Adjustment.
However, any transfers from the GTO during this period may be subject to a
contingent deferred sales charge, assessed by the variable annuity
contract.
If no direction is received by the thirtieth day following the Maturity
Date, amounts in the GTO will be automatically transferred (with no Market
Value Adjustment) to the available money market sub-account available in
the variable annuity. For the period commencing with the first day after
the Maturity Date and ending on the thirtieth day following the Maturity
Date, the GTO will be credited with the same Specified Interest Rate in
effect before the Maturity Date (see "GTOs at Maturity").
The minimum amount of any allocation to a GTO is $1,000.
Under certain rare circumstances, when volatility in financial markets
compromises the ability of Nationwide to process allocations to or from the
GTOs in an orderly manner, Nationwide may temporarily suspend the right to
make additional allocations to the GTOs and/or to effect transfers or
withdrawals from the GTOs. Nationwide anticipates invoking this suspension
only when acceptance of additional allocations or the processing of
withdrawals or transfers from GTOs may not be executed by Nationwide in a
manner consistent with its obligations to variable annuity contract holders
with existing or prospective interests in one or more GTOs. Under no
circumstances, however, will Nationwide limit a variable annuity contract
owner's right to make at least one allocation to a GTO, and one transfer or
withdrawal from a GTO, in any calendar year. All contract owners will be
promptly notified of Nationwide's determination to invoke any suspension in
the right to make allocations to, or to effect withdrawals or transfers
from, the GTOs. In addition, the variable annuity contracts which offer
GTOs may impose certain restrictions on the transferability of invested
assets within the variable annuity contract. The variable annuity
prospectus should be consulted with regard to specific transfer limitation
provisions.
2. THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by
Nationwide to be credited to allocations made to the GTOs for the
corresponding Guaranteed Term, so long as no portion of the allocation is
distributed for any reason prior to the Maturity Date. Different Specified
Interest Rates may be established for the 4 different GTOs.
Generally, Nationwide will declare new Specified Interest Rates monthly;
however, depending on interest rate fluctuations, declarations of new
Specified Interest Rates may occur more or less frequently. Nationwide
observes no specific method in establishing the Specified Interest Rates.
However, Nationwide will attempt to declare Specified Interest Rates which
are related to interest rates associated with fixed-income investments
available at the time and having durations and cash flow attributes
compatible with the Guaranteed Terms of the GTOs. In addition, the
establishment of Specified Interest Rates may be influenced by other
factors, including competitive considerations, administrative costs and
general economic trends. For contracts that have an Extra Value Option
available, contract owners that elect the Extra Value Option, allocations
made to the GTOs for the first seven contract years will be credited a
guaranteed interest rate of 0.40% less than the guaranteed interest rate
that applies to the GTOs if the Extra Value Option is not elected.
Nationwide has no way of predicting what Specified Interest Rates may be
declared in the future and there is no minimum Specified Interest Rate for
any of the GTOs.
3. THE INVESTMENT PERIOD
The Investment Period is the period of time during which a particular
Specified Interest Rate is in effect for new allocations to the various
GTOs. All allocations made to a GTO during an Investment Period are
credited with the Specified Interest Rate in effect at the time of
allocation. An Investment Period ends when a new Specified Interest Rate
relative to the applicable GTO is declared. Subsequent declarations of new
Specified Interest Rates have no effect on allocations made to GTOs during
prior Investment Periods. Prior allocations to the GTO will be credited
with the
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Specified Interest Rate in effect when the allocation was made.
The Specified Interest Rate is credited to allocations made to GTOs on a
daily basis, resulting in an annual effective yield, guaranteed by
Nationwide, unless amounts are withdrawn or transferred from the GTO for
any reason prior to the Maturity Date. The Specified Interest Rate will be
credited for the entire Guaranteed Term associated with the GTO. If amounts
are withdrawn or transferred from the GTO for any reason prior to the
Maturity Date, a Market Value Adjustment will be applied to the amount
withdrawn or transferred.
Information concerning the Specified Interest Rates in effect for the
various GTOs can be obtained by calling the following toll free phone
number: 1-800-238-3035.
4. GUARANTEED TERMS
The Guaranteed Term is the period of time corresponding with the selected
GTO for which the Specified Interest Rate is guaranteed to be in effect, so
long as the amounts allocated remain in the GTO until the Maturity Date. A
Guaranteed Term always expires on a Maturity Date which will be the last
day of a calendar quarter, which may last up to 3 months past the
anniversary date of the allocation to the GTO.
For example, if an allocation is made to a 10 year GTO on August 1, 1999,
the Specified Interest Rate for that GTO will be credited until September
30, 2009; the Guaranteed Term will begin on August 1, 1999 and end on
September 30, 2009.
Guaranteed Terms will be exactly 3, 5, 7 or 10 years only when an
allocation to a GTO occurs on the first day of a calendar quarter.
5. GTOs AT MATURITY
Nationwide will send notice to variable annuity contract owners of
impending Maturity Dates (always the last day of a calendar quarter) at
least fifteen days and at most thirty days prior to the end of a Guaranteed
Term. The notice will include the projected value of the GTO on the
Maturity Date and will also specify options that variable annuity contract
owners have with respect to the maturing GTO.
Once the GTO matures, variable annuity contract owners may:
(1) surrender the GTO, in part or in whole, without a Market Value
Adjustment during the thirty day period following the Maturity Date;
however, surrender charges under the variable annuity contract, if
applicable, will be assessed;
(2) wholly or partially transfer the GTO, without a Market Value
Adjustment, to any other investment option under the variable annuity
contract, including any of the mutual fund sub-accounts, or another
GTO of the same or different duration during the thirty day period
following the Maturity Date. A confirmation of any such transfer will
be sent immediately after the transfer is processed; or
(3) elect not to transfer or surrender all or a portion of the GTO, in
which case, the GTO will be automatically transferred to the available
money market sub-account of the variable annuity contract at the end
of the thirty day period following the Maturity Date. A confirmation
will be sent immediately after the automatic transfer is executed.
The GTO will continue to be credited with the Specified Interest Rate in
effect before the Maturity Date during the thirty day period following the
Maturity Date, and prior to any of the transactions set forth in (1), (2),
or (3) above.
6. THE MARKET VALUE ADJUSTMENT
A. GENERAL INFORMATION REGARDING THE MARKET VALUE ADJUSTMENT
GTOs which are surrendered, transferred or distributed for any reason
prior to the Maturity Date for the GTO, will be subject to a Market
Value Adjustment. The Market Value Adjustment is determined by the
multiplication of a Market Value Adjustment Factor (arrived at by
calculation of the Market Value Adjustment Formula) by the Specified
Value, or the portion of the Specified Value being withdrawn. The
Specified Value is the amount of the allocation to the GTO, plus
interest accrued at the Specified Interest Rate minus prior
distributions. The Market Value Adjustment may either increase or
decrease the amount of the distribution.
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The Market Value Adjustment is intended to approximate, without
duplicating, Nationwide's experience when it liquidates assets in order
to satisfy contractual obligations. Such obligations arise when
variable annuity contract owners make withdrawals or transfers, or when
the operation of the variable annuity contract requires a distribution,
such as a death benefit. When liquidating assets, Nationwide may
realize either a gain or a loss.
If prevailing interest rates are higher than the Specified Interest
Rate in effect at the time of the GTO allocation, Nationwide will
realize a loss when it liquidates assets in order to process a
surrender, death benefit or transfer; and therefore, application of the
Market Value Adjustment under such circumstances will decrease the
amount of the distribution.
Conversely, if prevailing interest rates are lower than the Specified
Interest Rate in effect at the time of the GTO allocation, Nationwide
will realize a gain when it liquidates assets in order to process a
surrender, death benefit or transfer; therefore, application of the
Market Value Adjustment under such circumstances will increase the
amount of the distribution.
Nationwide measures the relationship between prevailing interest rates
and the Specified Interest Rates it declares through the Market Value
Adjustment Formula, and relies upon Constant Maturity Treasury Rates to
represent both prevailing interest rates and Specified Interest Rates.
The Market Value Adjustment Formula and the Constant Maturity Treasury
Rates are described more fully below.
B. CONSTANT MATURITY TREASURY RATES
The Market Value Adjustment Formula for deriving the Market Value
Adjustment Factor is based on Constant Maturity Treasury Rates which
are declared by the Federal Reserve Board on a regular basis.
Nationwide utilizes Constant Maturity Treasury Rates in its Market
Value Adjustment Formula because they represent a readily available and
consistently reliable interest rate benchmark in financial markets,
which can be relied upon to reflect the relationship between Specified
Interest Rates declared by Nationwide and the prospective interest rate
fluctuations.
Constant Maturity Treasury Rates for 1, 2, 3, 5, 7 and 10 years are
published by the Federal Reserve Board on a regular basis. To the
extent that the Market Value Adjustment formula shown below requires a
rate associated with a maturity not published (such as a 4, 6, 8 or 9
year maturity), Nationwide will calculate such rates based on the
relationship of the published rates. For example, if the published 3
year rate is 6% and the published 5 year rate is 6.50%, the 4 year rate
will be calculated as 6.25%.
C. THE MARKET VALUE ADJUSTMENT FORMULA
The Market Value Adjustment Formula is utilized when a distribution is
made from a GTO during the Guaranteed Term. The Market Value Adjustment
is a calculation expressing the relationship between three factors:
(1) the Constant Maturity Treasury Rate for the period of time
coinciding with the Guaranteed Term of the GTO;
(2) the Constant Maturity Treasury Rate for a period coinciding
with the time remaining in the Guaranteed Term of a GTO when
a distribution giving rise to a Market Value Adjustment
occurs; and
(3) the number of days remaining in the Guaranteed Term of the
GTO.
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The formula for determining the Market Value Adjustment Factor is
t
[(1 + a)]
[ ----------------- ]
[(1 + b + .0025)]
Where:
a = the Constant Maturity Treasury Rate for a period equivalent to
the Guaranteed Term at the time of deposit in the GTO;
b = the Constant Maturity Treasury Rate at the time of distribution
for a period of time equivalent to the time remaining in the
Guaranteed Term. In determining the number of years to maturity,
any partial year will be counted as a full year, unless it would
cause the number of years to exceed the Guaranteed Term; and
t = the number of days until the Maturity Date, divided by 365.25.
In the case of "a" above, the Constant Maturity Treasury Rate
utilized will be the Constant Maturity Treasury Rate declared on
Fridays by the Federal Reserve Board, and placed in effect by
Nationwide on the Wednesday immediately preceding the Investment
Period during which the allocation to the GTO was made.
In the case of "b" above, the Constant Maturity Treasury Rate
utilized will be the Constant Maturity Treasury Rate, declared on
Fridays by the Federal Reserve Board, and placed in effect by
Nationwide on the Wednesday immediately preceding the withdrawal,
transfer or other distribution giving rise to the Market Value
Adjustment.
The Market Value Adjustment Factor will be equal to 1 during the Investment
Period.
The Market Value Adjustment Formula shown above also accounts for some of
the administrative and processing expenses incurred when fixed-interest
investments are liquidated. This is represented in the addition of .0025 in
the Market Value Adjustment Formula.
The result of the Market Value Adjustment Formula shown above is the Market
Value Adjustment Factor. The Market Value Adjustment Factor is the market
value multiplied by the Specified Value, or that portion of the Specified
Value being distributed from a GTO in order to effect a Market Value
Adjustment. The Market Value Adjustment Factor will either be greater, less
than or equal to 1 and will be multiplied by the Specified Value or that
portion of the Specified Value being withdrawn, from the GTO for any
reason. If the result is greater than 1, a gain will be realized by the
variable annuity contract owner; if less than 1, a loss will be realized.
If the Market Value Adjustment Factor is exactly 1, no gain or loss will be
realized.
If the Federal Reserve Board halts publication of Constant Maturity
Treasury Rates, or if, for any other reason, Constant Maturity Treasury
Rates are not available, Nationwide will use appropriate rates based on
U.S. Treasury Bond yields.
Examples of how to calculate Market Value Adjustments are provided in the
Appendix.
7. CONTRACT CHARGES.
The variable annuity contracts under which GTOs are made available have
various fees and charges, some of which may be assessed against allocations
made to GTOs.
Contingent deferred sales charges, if applicable, will be assessed against
full or partial surrenders from the GTOs. If a surrender occurs prior to
the Maturity Date for a particular GTO, the amount surrendered is subject
to a Market Value Adjustment in addition to the contingent deferred sales
charges. The variable annuity prospectus fully describes the contingent
deferred sales charges. Please refer to the variable annuity prospectus for
complete details regarding the contingent deferred sales charges under the
variable annuity contracts.
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Mortality and expense risk charges, administrative charges and contract
maintenance charges which may be assessed under variable annuity contracts
are not assessed against any allocation to a GTO. Such charges apply only
to the underlying mutual fund options.
8. GTOs AT ANNUITIZATION
GTOs are not available as investment options if the variable annuity
contract is annuitized. If a variable annuity contract is annuitized while
a GTO is in effect, and prior to the Maturity Date of the GTO, a Market
Value Adjustment will apply to amounts transferred to other investment
options under the variable annuity contract which may be used during
annuitization.
INVESTMENTS
Nationwide intends to invest GTO allocations received in high quality, fixed
interest investments (investment grade bonds, mortgages, and collateralized
mortgage obligations) in the same manner as Nationwide invests its general
account assets. Nationwide takes into account the various maturity durations of
the GTOs (3, 5, 7 and 10 years) and anticipated cash-flow requirements when
making investments. Nationwide is not obligated to invest GTO allocations in
accordance with any particular investment objective, but will generally adhere
to the overall investing philosophy of Nationwide. The Specified Interest Rates
declared by Nationwide for the various GTOs will not necessarily correspond to
the performance of the nonunitized separate account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOs
The GTOs are available only as investment options under certain variable annuity
contracts issued by Nationwide. The appropriate variable annuity prospectus and
Statement of Additional Information should be consulted for information
regarding the distribution of the variable annuity contracts.
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
1. BUSINESS
A. ORGANIZATION
Nationwide Life and Annuity Insurance Company (formerly, Financial Horizons
Life Insurance Company), is a wholly owned subsidiary of Nationwide Life
Insurance Company. All of Nationwide's common stock is owned by Nationwide
Life Insurance Company, which 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 (95.24%) and
Nationwide Mutual Fire Insurance Company (4.76%), the ultimate controlling
persons of the Nationwide group of companies. The Nationwide group of
companies is one of America's largest insurance and financial services
family of companies, with combined assets of over $120 billion as of
December 31, 1999.
Prior to January 27, 1997, Nationwide was wholly-owned by Nationwide
Corporation. On that date, Nationwide Corporation contributed the
outstanding shares of Nationwide's common stock to Nationwide Financial
Services, Inc., a holding company formed by Nationwide Corporation in
November 1996 for Nationwide and other companies within the Nationwide
group that offer or distribute long-term savings and retirement products.
On March 11, 1997, Nationwide Financial Services completed an initial
public offering of its Class A common stock.
During 1996 and 1997, Nationwide Corporation and Nationwide Financial
Services completed certain transactions in anticipation of the initial
public offering that focused the business of Nationwide Financial Services
on long-term savings and retirement products. On September 24, 1996,
Nationwide declared a dividend payable to Nationwide Corporation on January
1, 1997 consisting of the outstanding shares of common stock of certain
subsidiaries that do not
9
<PAGE> 12
offer or distribute long-term savings and retirement products. In addition,
during 1996, Nationwide entered into two reinsurance agreements whereby all
of Nationwide's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. Additionally, Nationwide
paid $900.0 million of dividends, $50.0 million to Nationwide Corporation
on December 31, 1996 and $850.0 million to Nationwide Financial Services,
which then made an equivalent dividend to Nationwide Corporation, on
February 24, 1997.
Nationwide Financial Services contributed $836.8 million to the capital of
Nationwide during March 1997.
Wholly-owned subsidiaries of Nationwide as of December 31, 1998 include
Nationwide Life and Annuity Insurance Company, Nationwide Advisory
Services, Inc. and Nationwide Investment Services Corporation.
Nationwide is a member of the Nationwide group of companies, which consists
of Nationwide Mutual Insurance Company and all of its subsidiaries and
affiliates.
Nationwide offers universal life insurance, variable universal life
insurance, corporate-owned life insurance and individual annuity contracts
on a non-participating basis, and fixed and variable annuity products.
Nationwide Advisory Services, Inc. is a registered broker-dealer providing
investment management and administration services. Nationwide Investment
Services Corporation, is a registered broker-dealer doing business solely
in the deferred compensation market.
B. DESCRIPTION OF THE BUSINESS
Nationwide is a leading provider of long-term savings and retirement
products in the United States. Nationwide develops and sells a diverse
range of products including individual annuities, private and public
pension plans and life insurance. By developing and offering a wide variety
of products, Nationwide believes that it has positioned itself to compete
effectively in various stock market and interest rate environments.
Nationwide markets its products through a broad spectrum of distribution
channels, including independent broker/dealers, national and regional
brokerage firms, pension plan administrators, life insurance specialists,
financial institutions, Nationwide Retirement Solutions sales
representatives, and Nationwide agents.
Nationwide is one of the leaders in the development and sale of variable
annuities. As of December 31, 1999, Nationwide was the fifth largest writer
of individual variable annuity contracts in the United States based on
assets, according to The Variable Annuity Research & Data Service.
Nationwide has grown substantially in recent years as a result of its
long-term investment in developing the distribution channels necessary to
reach its target customers and the products required to meet the demands of
these customers. Nationwide believes its growth has been further enhanced
by favorable demographic trends, the growing tendency of Americans to
supplement traditional sources of retirement income with self-directed
investments, such as products offered by Nationwide, and the performance of
the financial markets, particularly the U.S. stock markets, in recent
years.
C. BUSINESS SEGMENTS
Nationwide has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. In addition, Nationwide reports corporate revenues and
expenses, investments and related investment income supporting capital not
specifically allocated to its product segments, revenues and expenses of
its investment adviser subsidiary and revenues and expenses related to
group annuity contracts sold to Nationwide Corporation employee benefits
plans in a Corporate and Other segment.
The Variable Annuities segment, which accounted for $290.3 million (or 47%)
of Nationwide's operating income before federal income tax expense for
1999, consists of annuity contracts that provide the customer with access
to a wide range of investment options, tax-deferred accumulation of
savings, asset protection in event of an untimely death, and flexible
payouts including a lump sum, systematic withdrawal or a stream of payments
for life.
The Fixed Annuities segment, which accounted for $177.2 million (or 29%) of
Nationwide's
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<PAGE> 13
operating income before federal income tax expense for 1999, consists of
annuity contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, tax-deferred accumulation of
savings and flexible pay out options including a lump sum, systematic
withdrawal or a stream of payments for life. Such contracts consist of
single premium deferred annuities, flexible premium deferred annuities and
single premium immediate annuities. The Fixed Annuities segment also
includes the fixed option under Nationwide's variable annuity contracts,
which accounted for 72% of Nationwide's fixed annuity sales in 1999 and
71% of Nationwide's fixed annuity policy reserves as of December 31,
1999. During 1999, the average crediting rates on contracts (including the
fixed option under Nationwide's variable annuity contracts) in the Fixed
Annuities segment was 5.59%. Approximately 87% of Nationwide's crediting
rates on its fixed annuity contracts are guaranteed for a period not
exceeding 15 months.
The Life Insurance segment, which accounted for $120.8 million (or 20%) of
Nationwide's operating income before federal income tax expense for 1999,
is composed of a wide range of variable universal life insurance, whole
life insurance, universal life insurance, term life insurance and
corporate-owned life insurance products that provide a death benefit and
may also allow the customer to build cash value on a tax-deferred basis.
The Corporate and Other segment accounted for $29.8 million (or 4%) of
Nationwide's operating income (which excludes realized gains and losses on
investments) before federal income tax expense for 1999.
D. RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive
position of insurance companies. Ratings are important to maintaining
public confidence in Nationwide and its ability to market its annuity and
life insurance products. Rating organizations continually review the
financial performance and condition of insurers, including Nationwide. Any
lowering of Nationwide's ratings could have a material adverse effect on
Nationwide's ability to market its products and could increase the
surrender of Nationwide's annuity products. Both of these consequences
could, depending upon the extent thereof, have a material adverse effect on
Nationwide's liquidity and, under certain circumstances, net income.
Nationwide is rated "A+" (Superior) by A.M. Best Company, Inc. and its
claims-paying ability/financial strength is rated "Aa2" (Excellent) by
Moody's Investor Services, Inc., "AA+" (Excellent) by Standard & Poor's
Corporation and "AA+" (Excellent) by Duff & Phelps Credit Rating Co.
The foregoing ratings reflect each rating agency's opinion of Nationwide's
financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed toward the
protection of investors. Such factors are of concern to policyholders,
agents and intermediaries.
E. COMPETITION
Nationwide competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers
and mutual funds, some of whom have greater financial resources, offer
alternative products and, with respect to other insurers, have higher
ratings than Nationwide. Nationwide believes that competition in the lines
of business is based on price, product features, commission structure,
perceived financial strength, claims-paying ratings, service and name
recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the Act), was signed into
law. The Act modernizes the regulatory framework for financial services in
the United States and allows bank, securities firms and insurance companies
to affiliate more directly than they have been permitted to do in the past.
At this time it is not possible to predict the effect the Act will have on
the financial services industry and Nationwide.
F. REGULATION
Nationwide, as with other insurance companies, are subject to extensive
regulation and supervision in the jurisdictions in which they do business.
Such regulations limit the amount of dividends and other payments that can
be paid by insurance companies without prior approval and impose
restrictions on the amount and type of investments insurance companies may
hold.
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<PAGE> 14
These regulations also affect many other aspects of insurance companies'
businesses, including licensing of insurers and their products and agents,
risk-based capital requirements and the type and amount of required asset
valuation reserve accounts. These regulations are primarily intended to
protect policyholders rather than shareholders. Nationwide can not predict
the effect that any proposed or future legislation may have on the
financial condition or results of operations of Nationwide.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states
in which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to
statutory accounting practices and compliance with insurance department
rules and regulations. Applicable state insurance laws, rather than federal
bankruptcy laws, apply to the liquidation or the restructuring of insurance
companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once
every three to four years) of the books, records and accounts of insurance
companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states
under guidelines promulgated by the National Association of Insurance
Commissioners. The most recently completed examination of Nationwide's
insurance subsidiaries was conducted by the Ohio and Delaware insurance
departments for the four-year period ended December 31, 1996. The final
reports of these examinations did not result in any significant issues or
adjustments.
The payment of dividends by Nationwide is subject to restrictions set forth
in the insurance laws and regulations of Ohio, its domiciliary state. The
Ohio insurance laws require Ohio-domiciled life insurance companies to seek
prior regulatory approval to pay a dividend or distribution of cash or
other property if the fair market value thereof, together with that of
other dividends or distributions made in the preceding 12 months, exceeds
the greater of:
(i) 10% of statutory-basis policyholders' surplus as of the prior
December 31; or
(ii) the statutory-basis net income of the insurer for the 12-month
period ending as of the prior December 31.
The Ohio insurance laws also require insurers to seek prior regulatory
approval for any dividend paid from other than earned surplus.
Earned surplus is defined under the Ohio insurance laws as the amount equal
to Nationwide's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. The payment
of dividends by Nationwide may also be subject to restrictions set forth in
the insurance laws of New York that limit the amount of statutory profits
on Nationwide's participating policies (measured before dividends to
policyholders) that can inure to the benefit of Nationwide and its
stockholders. Nationwide currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends
in the future.
G. EMPLOYEES
As of December 31, 1999, Nationwide had approximately 3,900 employees. None
of the employees of Nationwide are covered by a collective bargaining
agreement and Nationwide believes that its employee relations are
satisfactory.
1. PROPERTIES
Nationwide's principal executive offices are located in Columbus, Ohio.
Nationwide leases its home office complex, consisting of approximately
523,000 square feet, from Nationwide Mutual Insurance Company and its
subsidiaries at One Nationwide Plaza, Two Nationwide Plaza and Three
Nationwide Plaza, Columbus, Ohio. Nationwide believes that its present
facilities are adequate for the anticipated needs of Nationwide.
2. LEGAL PROCEEDINGS
Nationwide is a party to litigation and arbitration proceedings in the
ordinary course of its
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<PAGE> 15
business, none of which is expected to have a material adverse effect on
Nationwide.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits relating to life insurance and
annuity pricing and sales practices. A number of these lawsuits have
resulted in substantial jury awards or settlements.
In November 1997, two plaintiffs, one who was the owner of a variable life
insurance contract and the other who was the owner of a variable annuity
contract, commenced a lawsuit in a federal court in Texas against
Nationwide and the American Century group of defendants (Robert Young and
David D. Distad v. Nationwide Life Insurance Company et al.). In this
lawsuit, plaintiffs sought to represent a class of variable life insurance
contract owners and variable annuity contract owners whom they claim were
allegedly misled when purchasing these variable contracts into believing
that the performance of their underlying mutual fund option managed by
American Century, whose shares may only be purchased by insurance
companies, would track the performance of a mutual fund, also managed by
American Century, whose shares are publicly traded. The amended complaint
seeks unspecified compensatory and punitive damages. On April 27, 1998, the
District Court denied, in part, and granted, in part, motions to dismiss
the complaint filed by Nationwide and American Century. The remaining
claims against Nationwide allege securities fraud, common law fraud, civil
conspiracy, and breach of contract. The District Court, on December 2,
1998, issued an order denying plaintiffs' motion for class certification
and the appeals court declined to review the order denying class
certification upon interlocutory appeal. On June 11, 1999, the District
Court denied the plaintiffs' motion to amend their complaint and reconsider
class certification. In January 2000 Nationwide and American Century
settled this lawsuit now limited to the claims of the two named plaintiffs.
On February 9, 2000 the court dismissed this lawsuit with prejudice.
On October 29, 1998, Nationwide was named in a lawsuit filed in Ohio state
court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999,
the complaint was amended to, among other things, add Marcus Shore as a
second plaintiff. The amended complaint is brought as a class action on
behalf of all persons who purchased individual deferred annuity contracts
or participated in group annuity contracts sold by Nationwide and the other
named Nationwide affiliates which were used to fund certain tax-deferred
retirement plans. The amended complaint seeks unspecified compensatory and
punitive damages. No class has been certified. On June 11, 1999, Nationwide
and the other named defendants filed a motion to dismiss the amended
complaint. On March 8, 2000, the court denied a motion to dismiss the
amended complaint filed by Nationwide and other name defendants. Nationwide
intends to defend this lawsuit vigorously.
There can be no assurance that any litigation relating to pricing or sales
practices will not have a material adverse effect on Nationwide in the
future.
3. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote of
security holders through the solicitation of proxies or otherwise.
4. MARKET FOR NATIONWIDE'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for Nationwide's shares of
common stock. All of the 3,814,779 shares of Nationwide's common stock
issued and outstanding are owned by Nationwide Financial Services.
Nationwide declared $236.0 million in dividends to Nationwide Financial
Services during 1999. Nationwide paid cash dividends of $100.0 million to
Nationwide Financial Services during 1998 and no cash dividends were paid
during 1997.
On January 1, 1997, Nationwide paid a dividend valued at $485.7 million to
Nationwide Corporation consisting of the outstanding shares of common stock
of Employers Life Insurance Company of Wausau, National Casualty Company
and West Coast Life Insurance
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<PAGE> 16
Company. Also, on February 24, 1997, Nationwide paid a dividend to
Nationwide Financial Services, and Nationwide Financial Services paid an
equivalent dividend to Nationwide Corporation, consisting of securities
having an aggregate fair value of $850.0 million. The dividend payments
were approved by the Department of Insurance of the State of Ohio.
Nationwide currently does not have a formal dividend policy.
5. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Nationwide are included in a
separate section of this report which is indexed in Item 11 - Exhibits,
Financial Statement Schedules, and Reports.
Semi-annual and annual reports are sent to contract owners of the variable
annuity and life insurance contracts issued through registered separate
accounts of Nationwide.
The audited financial statements have been included herein in reliance upon
the report of KPMG LLP, independent certified public accountants, Two
Nationwide Plaza, Columbus, Ohio 43215, and upon the authority of said firm
as experts in accounting and auditing.
6. SELECTED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data.
The consolidated income statement data set forth below for the years ended
December 31, 1995 through 1999 and the consolidated balance sheet data as
of December 31, 1995 through 1999 are derived from the consolidated
financial statements of Nationwide. The summary consolidated financial data
set forth below should be read in conjunction with the consolidated
financial statements of Nationwide and notes thereto and the other
financial information, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, included elsewhere herein.
Selected Consolidated Financial Data (1)
($000's omitted)
<TABLE>
<CAPTION>
As of and for the year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total revenues 2,694,464 $2,475,703 $2,217,445 1,992,838 1,798,651
Total benefits and expenses 2,088,151 1,918,595 1,787,518 1,677,341 1,511,079
Income from continuing operations before federal 606,493 557,108 429,927 315,497 287,572
income tax expense and cumulative effect of
changes in accounting principles
Federal income tax expense (benefit) (136,738) 190,381 150,195 110,889 99,808
Income from continuing operations before other 405,117 336,727 279,732 204,608 187,764
items
Income from discontinued operations (less federal -- -- -- 11,324 24,714
income tax expense)
Cumulative effect of changes in accounting -- -- -- -- --
principles
Net income $405,117 $366,727 $279,732 215,932 212,478
Total assets $92,672,867 $74,342,070 $59,790,656 47,766,246 38,507,633
</TABLE>
(1) Consolidated financial data of Nationwide as of and for the years ended
December 31, 1995 and 1994 has been restated to reflect the discontinued
operations treatment of certain Nationwide's subsidiaries and lines of
business that were unrelated to the long-term savings and retirement
products business. See note 15 to the consolidated financial statements
herein for additional information regarding the discontinued operations
treatment.
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<PAGE> 17
7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
Management's narrative analysis and results of operations of Nationwide and
subsidiaries for the three years ended December 31, 1999 follows. This
discussion should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this report.
Management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 with respect to the results of operations and businesses of
Nationwide. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated or projected, forecast, estimated or budgeted in
such forward-looking statements include, among others, the following
possibilities:
(i) the potential impact on Nationwide's reported net income that
could result from the adoption of certain accounting standards
issued by the FASB;
(ii) tax law changes impacting the tax treatment of life insurance and
investment products;
(iii) heightened competition, including specifically the intensification
of price competition, the entry of new competitors and the
development of new products by new and existing competitors;
(iv) adverse state and federal legislation and regulation, including
limitations on premium levels, increases in minimum capital and
reserves and other financial viability requirements;
(v) failure to expand distribution channels in order to obtain new
customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including, among
others, changes to certain products and acceptance of the revised
products in the market;
(vii) changes in interest rates and the capital markets causing a
reduction of investment income or asset fees, reduction in the
value of Nationwide's investment portfolio or a reduction in the
demand for Nationwide's products;
(viii) general economic and business conditions which are less favorable
than expected;
(ix) unanticipated changes in industry trends and ratings assigned by
nationally recognized statistical rating organizations or A.M.
Best Company, Inc.; and
(x) inaccuracies in assumptions regarding future persistency,
mortality, morbidity and interest rates used in calculating
reserve amounts.
A. RESULTS OF OPERATIONS
In addition to net income, Nationwide reports net operating income, which
excludes realized investment gains and losses. Net operating income is
commonly used in the insurance industry as a measure of on-going earnings
performance.
The following table reconciles Nationwide's reported net income to net operating
income for each of the last three years.
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
Net income $405.1 $366.7 $279.7
Realized gains on investments, net of tax 7.6 (18.5) (7.9)
Net operating income $412.7 $348.2 $271.8
</TABLE>
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<PAGE> 18
(i) Revenues
Total revenues for 1999, excluding realized gains and losses on investments,
increased to $2.70 billion compared to $2.45 billion for 1998 and $2.21 billion
for 1997. The growth in revenues over the past two years has primarily been
driven by increases in policy charges and net investment income. Policy charges
include asset fees, which are primarily earned from separate account assets
generated from sales of variable annuities and variable life insurance
products; cost of insurance charges earned on universal life insurance
products; administration fees, which include fees charged per contract on a
variety of Nationwide 's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of premiums
withdrawn during a specified period of annuity and certain life insurance
contracts. Policy charges for each of the last three years were as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
Asset fees $616.5 $494.7 $384.8
Cost of insurance charges 117.0 88.8 68.5
Administrative fees 102.4 73.8 59.5
Surrender fees 59.6 41.6 32.4
Total policy charges $895.5 $698.9 $545.2
</TABLE>
The growth in asset fees reflects increases in total separate account assets of
$16.20 billion, or 32%, in 1999 and $13.2 billion, or 35% in 1998. Record
variable annuity sales and strong equity market performance in each of the last
three years have resulted in separate account balances increasing 149% from
$26.93 billion at the beginning of 1997 to $67.14 billion at the end of 1999.
Cost of insurance charges are assessed as a percentage of the net amount at risk
on universal life insurance policies. The net amount at risk is equal to a
policy's death benefit minus the related policyholder account value. The
increase in cost of insurance charges is due primarily to growth in the net
amount at risk related to individual variable universal life insurance
reflecting expanded distribution and increased customer demand for variable life
products. The net amount at risk related to individual variable universal life
insurance grew to $19.76 billion at the end of 1999 compared to $14.95 billion
and $10.44 billion at the end of 1998 and 1997, respectively.
The growth in administrative fees is attributable to a significant increase in
premiums on individual variable life insurance policies and certain
Corporate-owned life policies where the company collects a premium load. Nearly
all of the increase in surrender charges over the past two years is attributable
to policyholder withdrawals in the Variable Annuities segment, and is driven by
an overall increase in variable annuity policy reserves and a heightened
competitive environment in the individual annuity marketplace.
Net investment income includes the gross investment income earned on investments
supporting fixed annuities and certain life insurance products as well as the
yield on Nationwide's general account invested assets which are not allocated to
product segments. Net investment income grew from $1.41 billion and $1.48
billion in 1997 and 1998, respectively, to $1.52 billion in 1999 primarily due
to increased invested assets to support growth in fixed annuity and life
insurance policy reserves. Fixed annuity policy reserves, which include the
fixed option of Nationwide's variable annuity products, increased $704.7 million
in 1998 and $1.69 billion in 1999 and were $16.59 billion as of year-end 1999.
The growth in life insurance reserves was led by corporate-owned life insurance
products, where fixed reserves increased $596.7 million in 1998 and $180.0
million in 1999. The increase in net investment income due to growth in invested
assets was partially offset by declining investment yields in 1999 and 1998 due
to lower market interest rates.
Nationwide does not consider realized gains or losses to be recurring components
of earnings. Nationwide makes decisions concerning the sale of invested assets
based on a variety of market, business, tax and other factors.
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<PAGE> 19
(ii) Benefits and Expenses
Interest credited to policyholder account balances totaled $1.10 billion in 1999
compared to $1.07 billion in 1998 and $1.02 billion in 1997 and principally
relates to fixed annuity and investment life insurance products. The growth in
interest credited reflects the increase in policy reserves previously discussed
partially offset by reduced average crediting rates. The average crediting rate
on fixed annuity policy reserves was 5.59% in 1999 compared to 5.95% and 6.12%
in 1998 and 1997, respectively.
Amortization of deferred policy acquisition costs (DAC) increased to $58.1
million in 1999 and $47.3 million in 1998 principally due to the Variable
Annuities segment, which accounted for $38.9 million and $36.1 million of the
increases as a result of growth in the number of policies and related policy
reserves in each of the last two years.
Operating expenses were $463.4 million in 1999, a 10% increase from 1998
operating expenses of $419.7 million. Operating expenses were $384.9 million in
1997. The increase reflects the growth in the number of annuity and life
insurance contracts in-force, particularly related to variable annuities and
variable universal life insurance, and the related increase in administrative
processing costs.
Federal income tax expense was $201.4 million representing an effective tax rate
of 33.2% for 1999. Federal income tax expense in 1998 and 1997 was $190.4
million and $150.2 million, respectively, representing effective rates of 34.2%
and 34.9%.
(iii) Sales Information
Sales, as measured by statutory premiums and deposits, by distribution channel
for each of the last three years are summarized as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
Independent broker/dealers $5,441.6 $5004.2 $4,976.6
National or regional brokerage firms(1) 919.3 615.3 -
Financial institutions 2,436.7 2,108.3 1,681.9
Pension plan administrators 1,169.7 1,015.8 916.7
Nationwide Retirement Solutions
sales representatives 2,549.0 2,470.1 1,937.0
Nationwide agents 965.6 959.7 630.2
Life insurance specialists 420.0 91.1 -
Total core premiums and deposits 13,901.9 12,264.5 10,142.4
Bank-owned life insurance (BOLI) 123.2 554.6 194.7
Institutional products 577.2 - -
Nationwide employee
and agent benefit plans 334.1 323.3 174.9
Total sales $14,936.4 $13,142.4 $10,512.0
</TABLE>
(1) Prior to 1998, national and regional brokerage firm sales were included in
independent broker/dealer sales.
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<PAGE> 20
The 1998 and 1997 statutory premiums and deposits have been restated to conform
to the to 1999 presentation which better reflects multi-product sales across all
distribution channels.
Total core premiums and deposits represent amounts that are recurring and are
the sales figures management uses to set and evaluate Nationwide's sales goals.
Sales of institutional products represent sales of funding agreements that
secure notes issued to foreign investors through a third party trust under
Nationwide's $2 billion medium-term note program. The program was launched in
July 1999 as a means to expand spread based product offerings. Nationwide
excludes institutional products and BOLI sales as well as deposits into
Nationwide employee and agent benefit plans from its targeted sales comparisons.
Although funding agreements and BOLI contribute to asset and earnings growth
they do not produce steady production flow that lends itself to meaningful
comparisons. Nationwide achieved annual core sales growth of 13%, 21%, and 19%
in 1999, 1998 and 1997, respectively.
Nationwide sells its products through a broad distribution network. Unaffiliated
entities that sell Nationwide's products to their own customer base include
independent broker/dealers, national and regional brokerage firms, pension plan
administrators, life insurance specialists and financial institutions.
Representatives of Nationwide or its affiliates who market products directly to
a customer base identified by Nationwide include Nationwide Retirement Solutions
sales representatives and Nationwide agents.
The competitive environment for individual annuity sales through the independent
broker/dealer channel has become very challenging; however, total sales through
this channel (including retirement plans and life insurance) were up 9% in 1999
reflecting the strength of Nationwide's multiple product strategy. Sales through
financial institutions grew 16% during 1999 and 25% during 1998 driven mainly by
proprietary individual annuity products sales.
The increase in sales through life insurance specialists reflects $409.2 million
of corporate owned life insurance (COLI) sales in 1999 compared to $91.1 million
in 1998. Nationwide Financial Services entered the COLI market in 1998 and has
quickly become a market leader through a focus on mid-sized cases.
Nationwide's flagship products are marketed under The BEST of AMERICA(R) brand,
and include individual and group variable annuities and variable life insurance.
The BEST of AMERICA(R) products allow customers to choose from among investment
options managed by premier mutual fund managers. Nationwide has also developed
private label variable and fixed annuity products in conjunction with other
financial services providers which allow those providers to sell products to
their own customer bases under their own brand name.
Nationwide also markets group deferred compensation retirement plans to
employees of state and local governments for use under Internal Revenue Code
Section 457. NationwideLife utilizes its sponsorship by the National Association
of Counties and The United States Conference of Mayors when marketing Internal
Revenue Code Section 457 products.
18
<PAGE> 21
Core statutory premiums and deposits by product for each of the last three years
are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
The Best of America(R) products: $4,665.3 $4,661.1 $4,267.3
Private label annuities 1,280.3 1093.3 981.9
The NEA Valuebuilder annuities 168.5 172.6 134.8
Other 880.8 727.2 307.8
Total individual annuities 6,994.9 6,654.2 5,691.8
The Best of America(R) group pension series 3,537.6 2,760.0 2,221.1
IRC Section 457 annuities 2,190.4 2,155.3 1,716.5
Other 83.1 41.8 44.3
Total group annuities 5,811.1 4,957.1 3,981.9
Traditional/Universal life insurance 260.8 246.1 248.3
The Best of America(R) variable life series 425.9 316.0 220.4
Corporate owned life insurance 409.2 91.1 -
Total life insurance 1,095.9 653.2 468.7
Total core premiums and deposits $13,901.9 $12,264.5 $10,142.4
</TABLE>
B. BUSINESS SEGMENTS
Nationwide has three product segments: Variable Annuities, Fixed Annuities and
Life Insurance. In addition, Nationwide reports certain other revenues and
expenses in a Corporate and Other segment. All information set forth below
relating to Nationwide's Variable Annuities segment excludes the fixed option
under Nationwide's variable annuity contracts. Such information is included in
Nationwide's Fixed Annuities segment.
The following table summarizes operating income before federal income tax
expense for Nationwide's business segments for each of the last three years:
<TABLE>
<CAPTION>
(millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
Operating income:
Variable annuity $290.3 $218.4 $150.9
Fixed annuity 177.2 175.3 169.5
Life insurance 120.8 88.8 66.7
Corporate and other 29.8 46.2 31.7
618.1 $528.7 $418.8
</TABLE>
19
<PAGE> 22
(i) Variable Annuities
The Variable Annuities segment consists of annuity contracts that provide the
customer with access to a wide range of investment options, tax-deferred
accumulation of savings, asset protection in the event of an untimely death, and
flexible payout options including a lump sum, systematic withdrawal or a stream
of payments for life.
Nationwide's variable annuity products consist almost entirely of flexible
premium deferred variable annuity contracts.
The following table summarizes certain selected financial data for Nationwide's
Variable Annuities segment for the years indicated:
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 626.7 $ 501.6 $ 387.1
Benefits and Expenses 336.4 283.2 236.2
Operating income before federal income tax expense
$ 290.3 $ 218.4 $ 150.9
OTHER DATA:
Statutory premiums and deposits(1) $ 9,916.0 $ 9,543.3 $ 7,535.8
Policy reserves as of year end $61,197.2 $46,420.8 $34,486.7
Pre-tax operating income to average policy reserves 0.55% 0.54% 0.51%
</TABLE>
(1) Statutory data, have been derived from the Annual Statements of
Nationwide's life insurance subsidiaries, as filed with insurance
regulatory authorities and prepared in accordance with statutory accounting
practices.
Pre-tax operating earnings reached a record $290.3 million in 1999, up 33%
compared to 1998. Improved Variable Annuity segment results are primarily due to
growth in asset fees partially offset by increased DAC amortization.
Asset fees were $596.6 million in 1999 up 25% from $479.1 million in 1998 and
totaled $370.2 million in 1997. Asset fees are charged as a percentage of policy
reserves which have increased substantially in the past three years as a result
of strong net cash flows and through market appreciation on investments
underlying reserves. Variable annuity policy reserves grew $14.78 billion during
1999 reaching $61.20 billion as of year end 1999 compared to growth in 1998 of
$11.93 billion and year end 1998 reserves of $46.42 billion. During 1997, policy
reserves increased $10.21 billion.
Sales in 1999 of $9.92 billion offset by withdrawals and surrenders totaling
$6.52 billion generated net cash flows of $3.40 billion. Although 1999 net cash
flows are down from the $5.28 billion and $4.85 billion achieved in 1998 and
1999, respectively, Nationwide has shown the ability to consistently generate
substantial positive cash flows and increase its base of asset fee generating
reserves in a very competitive environment. The increase in withdrawal and
surrender activity is attributable to an increase in competition in the
individual variable annuity market which has increased transfers to competitor's
products and the overall aging of Nationwide's book of individual annuity
business. Nationwide will introduce new products, new product features and new
retention strategies during 2000 in an effort to decrease the rate of
surrenders.
Although the equity markets have been more volatile in recent years, equity
market conditions over each of the past three years have contributed
significantly to the growth in variable annuity policy reserves. Variable
annuity policy reserves reflect market appreciation of $10.55 billion, $6.80
billion and $5.21 billion in 1999, 1998 and 1997, respectively.
Amortization of DAC increased 31% to $162.8 million in 1999 compared to $123.9
million and $87.8 million in 1998 and 1997, respectively. The growth in DAC
amortization is consistent with the overall growth in the variable annuity
business.
Efficiencies achieved through improved operating scale have enabled Nationwide
to improve operating margins to 55 basis point of average policy reserves, up
from 54 basis points in 1998 and 51 basis points in 1997.
20
<PAGE> 23
(ii) Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that generate a return
for the customer at a specified interest rate for a prescribed period,
tax-deferred accumulating of savings and flexible payout options including a
lump sum, systematic withdrawal or a stream of payments for life. Such contracts
consist of single premium deferred annuities, flexible premium deferred
annuities and single premium immediate annuities. The Fixed Annuities segment
includes the fixed option under Nationwide's variable annuity contracts.
The following table summarizes certain selected financial data for Nationwide's
Fixed Annuities segment for the years indicated:
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net investment income $1,134.5 $1,116.6 $1,098.2
Other 43.4 35.7 43.2
1,117.9 1,152.3 1,141.4
BENEFITS AND EXPENSES:
Interest credited to policyholder account
balances 837.5 828.6 823.4
Other benefits and expenses 163.2 148.4 148.5
1,000.7 977.0 971.9
Operating income before federal income tax expense $177.2 $175.3 $169.5
OTHER DATA:
Statutory premiums and deposits (1) $3,467.2 $2,068.0 $2,137.9
Policy reserves as of year end $16,591.9 $14,898.9 $14,194.2
Pre-tax operating income to average policy reserves 1.14% 1.21% 1.22%
</TABLE>
(1) Statutory data have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Fixed annuities segment results reflect an increase in interest spread income
attributable to growth in fixed annuity policy reserves offset by narrower
interest margins during 1999. Interest spread is the differential between net
investment income and interest credited to policyholder account balances.
Interest spreads vary depending on crediting rates offered by competitors,
performance of the investment portfolio, including the rate of prepayments
changes in market interest rates and other factors. The following table depicts
the interest margins on general account policy reserves in the Fixed Annuities
segment for each of the last three years.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net investment income 7.57% 8.02% 8.16%
Interest credited 5.59% 5.95% 6.12%
1.98% 2.07% 2.04%
</TABLE>
21
<PAGE> 24
During 1998 and the first half of 1999, Nationwide experienced an increase in
mortgage loan and bond prepayment fees and such income accounted for
approximately 9 basis points of the interest spread in 1999 compared to 16 basis
points and 8 basis points in 1998 and 1997, respectively. The recent increases
in interest rates have slowed prepayment activity and Nationwide expects
interest spreads to remain at 190 to 195 basis points, excluding the impact of
mortgage loan and bond prepayment income.
Nationwide is able to mitigate the effects of changes in investment yields by
periodically resetting the rates credited on fixed annuity contracts. As of
December 31, 1999, $7.28 billion, or 44% of fixed annuity policy reserves, were
in contracts where the guaranteed interest rate is reestablished each quarter.
Fixed annuity policy reserves of $5.89 billion are in contracts that adjust the
crediting rate on an annual basis with portions resetting in each calendar
quarter. Nationwide also has $1.39 billion of fixed annuity policy reserves that
call for the crediting rate to be reset annually on each January 1 and $1.45
billion of fixed annuity policy reserves are in payout status where Nationwide
has guaranteed periodic, typically monthly, payments. The remaining $574.5
million of fixed annuity policy reserves relate to funding agreements issued in
conjunction with Nationwide's medium-term note program where the crediting rate
is fixed for the term of the contract.
Fixed annuity policy reserves increased to $16.59 billion as of year-end
compared to $14.90 billion a year ago and $14.19 billion as of the end of 1997.
The 1999 growth reflects increased sales levels as well as the acquisition of
Employers Life of Wausau.
Fixed annuity sales during 1999 were $3.47 billion, compared to 1998 sales of
$2.07 billion. Sales in 1999 include $577.2 million of funding agreements issued
in conjunction with Nationwide's medium-term note program. Most of Nationwide's
fixed annuity sales are premiums allocated to the fixed option of variable
annuity contracts. Fixed annuity sales for 1999 include $2.49 billion in
premiums allocated to the fixed option under a variable annuity contract,
compared to $1.68 billion in 1998 and $1.67 billion in 1997. The increase in
1999 was driven by Nationwide's dollar cost averaging program that offers
customers a first year bonus interest rate and transfers the account balance
systematically to variable options over a six or twelve month period.
(iii) Life Insurance
The Life Insurance segment consists of insurance products, including variable
universal life insurance and corporate-owned life insurance products, that
provide a death benefit and also allow a customer to build cash value on a
tax-deferred basis.
The following table summarizes certain selected financial data for Nationwide's
Life Insurance segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $646.1 $544.1 $468.3
Benefits and expenses 525.3 455.3 401.6
Operating income before federal income tax expense $120.8 $88.8 $66.7
OTHER DATA
Statutory premiums(1):
Variable universal life insurance $426.0 $315.9 $220.3
Corporate-owned life insurance 532.3 645.8 194.7
Traditional & universal life insurance 260.8 246.1 248.4
Policy reserves as of year end:
Variable universal life insurance $1,832.3 $1,270.1 $895.6
Corporate-owned life insurance $1,498.6 $903.6 $221.9
Traditional and universal life insurance $2,582.9 $2,439.7 $2,369.5
</TABLE>
(1)Statutory data have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
22
<PAGE> 25
Life Insurance segment earnings in 1999 increased 36% to $120.8 million, up from
$88.8 million a year ago and $66.7 million in 1997. Continued strong sales and
reserve growth from both individual and corporate owned investment life
insurance products contributed to the sharp earnings increases.
Driven primarily by increased policy charges, revenues from investment life
products increased to $226.5 million in 1999 compared to $145.4 million in 1998
and $69.8 million 1997. The revenue growth reflects significantly increased
policy reserve levels as individual investment life reserves increased 44% in
1999 to $1.83 billion compared to $1.27 billion a year ago and $895.6 million at
the end of 1997. Corporate owned investment life reserves, which include both
BOLI and corporate-owned (COLI) products reached $1.50 billion, up from $903.6
million and $221.9 million at the end of 1998 and 1997, respectively.
Pre-tax earnings from investment life products reached $53.4 million 1999
compared to $29.6 million a year ago and $14.7 million in 1997. The strong
revenue growth discussed previously more than offset increased operating
expenses and slightly elevated mortality experience, which continues to remain
within pricing assumptions.
Traditional and universal life pre-tax earnings jumped 14% to $67.4 million in
1999 compared to $59.2 million in 1998 and were $52.0 million in 1997. The 1998
results reflect additional expenses related to the installation of a new policy
administration system.
Total life insurance premiums and deposits for 1999 were $1.22 billion compared
to $1.21 billion during 1998 and $663.4 million in 1997. Excluding BOLI sales of
$123.2 million in 1999 and $554.7 million in 1998, life insurance sales
increased 68% in 1999 and 39% in 1998. Sales in 1999 include record levels of
production for individual variable life insurance and COLI, reflecting
Nationwide's efforts to sell variable life through multiple channels and growing
consumer and producer demand.
(iv) Corporate and Other
The following table summarizes certain selected financial data for Nationwide's
Corporate and Other segment for the years indicated:
<TABLE>
<CAPTION>
(in millions of dollars) 1999 1998 1997
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $252.5 $ 249.3 $ 209.5
Benefits and expenses 222.7 203.1 177.8
Operating income before federal income tax expense(1) $29.8 $ 46.2 $ 31.7
</TABLE>
(1)Excludes realized gains (losses) on investments.
Revenues in the Corporate and Other segment consist of net investment income on
invested assets not allocated to the three product segments, investment
management fees and other revenues earned from Nationwide mutual funds and net
investment income and policy charges from group annuity contracts issued to
Nationwide employee and agent benefit plans. During 1999, Nationwide assigned
its investment advisory and related agreements associated with Nationwide mutual
funds to an affiliate.
In addition to the operating revenue previously presented, Nationwide also
reports realized gains and losses on investments in the Corporate and Other
segment. Nationwide realized net investment (losses) gains of $(11.6) million,
$28.4 million and $11.1 million during 1999, 1998 and 1997, respectively.
C. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(i) Market Risk Sensitive Financial Instruments
Nationwide is subject to potential fluctuations in earnings and the fair
value of certain of its assets and liabilities, as well as variations in
expected cash flows due to changes in market interest rates and equity
prices. The following discussion focuses on specific exposures Nationwide
has to interest rate and equity price risk and describes strategies used to
manage
23
<PAGE> 26
these risks. The discussion is limited to financial instruments subject to
market risks and is not intended to be a complete discussion of all the
risks Nationwide is exposed to.
(ii) Interest Rate Risk
Fluctuations in interest rates can potentially impact Nationwide's
earnings and cash flows, and the fair value of its assets and liabilities.
Generally, in a declining interest rate environment, Nationwide may be
required to reinvest the proceeds from matured and prepaid investments at
rates lower than the overall yield of the portfolio, which could reduce
interest spread income. In addition, minimum guaranteed crediting rates
(typically 3% or 3.5%) on certain annuity contracts could result in a
reduction of Nationwide's interest spread income in the event of a
significant and prolonged decline in interest rates from market rates at
the end of 1999. The average crediting rate of annuity products during
1999 was 5.59%, well in excess of the guaranteed rates. Nationwide
mitigates this risk by investing in assets with maturities and durations
that match the expected characteristics of the liabilities and by
investing in mortgage backed securities with limited prepayment exposure.
Conversely, a rising interest rate environment could result in a reduction
of interest spread income or an increase in policyholder surrenders.
Investments supporting annuity liabilities generally have a weighted
average maturity of seven years when purchased and therefore, the change
in yield of the portfolio will lag changes in market interest rates. This
lag is increased if the rate of prepayments of mortgage-backed securities
slows. To the extent Nationwide sets renewal rates based on current market
value rates, this will result in reduced interest spreads. Alternatively,
if Nationwide sets renewal crediting rates while attempting to maintain a
desired spread from the portfolio yield, the rates offered by Nationwide
may be less than new money rates offered by competitors. This difference
could result in an increase in surrender activity by policyholders. If
Nationwide could not fund the surrenders with its cash flow from
operations, Nationwide may be required to sell investments, which likely
would have declined in value due to the increase in interest rates.
Nationwide mitigates this risk by offering products that assess surrender
charges or market value adjustments at the time of surrender, by investing
in assets with maturities and durations that match the expected
characteristics of the liabilities, and by investing in mortgage-backed
securities with limited prepayment exposure.
(iii) Asset/Liability Management Strategies to Manage Interest Rate Risk
Nationwide employs an asset/liability management approach tailored to the
specific requirements of each of its products. Nationwide's general
account investments are primarily managed in a number of pools that are
segregated by weighted average maturity of the assets acquired by the
pools. For fixed maturity securities and mortgages, the weighted average
maturity is based on repayments which are scheduled to occur under the
terms of the asset. For mortgage backed securities, repayments are
determined using the current rate of repayment of the underlying mortgages
and the terms of the securities. Each product line has an investment
strategy based on its specific characteristics. The strategy establishes
asset duration, quality and other guidelines. Nationwide determines the
amount of new investments needed for each line to arrive at the amount of
new investments needed for each pool by month. The investments acquired
for each pool are shared on a proportional basis by each of the lines
requesting investments in the pool based on their actual investment needs.
For all business having future benefits which cannot be changed at the
option of the policyholder, the underlying assets are managed in a
separate pool. The duration of assets and liabilities in this pool are
kept as close together as possible. For assets, the repayment cash flows,
plus anticipated coupon payments, are used in calculating asset duration.
Future benefits and expenses are used for liabilities. On December 31,
1999, the average duration of assets in this pool as 7.09 years and the
average duration of the liabilities was 7.41 years. Policy reserves on
this business were $1.5 billion as of December 31, 1999.
Because the timing of the payment of future benefits on the majority of
Nationwide's business can be changed by the policyholder, Nationwide
employs cash flow testing techniques in its asset/liability management
24
<PAGE> 27
process. In addition, each year Nationwide's annuity and insurance
business is analyzed to determine the adequacy of the reserves supporting
such business. This analysis is accomplished by projecting the anticipated
cash flows from such business and the assets required to support such
business under a number of possible future interest rate scenarios. The
first seven of these scenarios are required by state insurance regulation.
Projections are also made using 14 additional scenarios which involve more
extreme fluctuations in future interest rates. Finally, to get a
statistical analysis of possible results and to minimize any bias in the
21 predetermined scenarios, additional projections are made using 50
randomly generated interest rate scenarios. For Nationwide's 1999 cash
flow testing process, interest rates for 90-day treasury bills ranged from
0.73% to 11.98% under the 21 predetermined scenarios and 1.44% to 18.53%
under the 50 random scenarios. Interest rates for longer maturity treasury
securities had comparable ranges. The values produced by each projection
are used to determine future gains or losses from Nationwide's annuity and
insurance business, which, in turn, are used to quantify the adequacy of
Nationwide's reserves over the entire projection period. The results of
Nationwide's cash flow testing indicated that Nationwide's reserves were
adequate as of December 31, 1999.
25
<PAGE> 28
(iv) Characteristics of Interest Rate Sensitive Financial Instruments
The following table provides information about Nationwide's financial
instruments that are sensitive to changes in interest rates. Insurance
contracts that subject Nationwide to significant mortality risk, including
life insurance contracts and life-contingent immediate annuities, do not
meet the definition of a financial instrument and are not included in the
table.
<TABLE>
<CAPTION>
(in millions of dollars) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,088.8 $1,669.0 $1,674.3 $1,047.6 $971.6 $3,100.3 $9,551.6 $9,536.5
Average interest rate 7.5% 7.4% 7.1% 7.1% 7.2% 7.9%
Mortgage and other
asset-backed securities:
Principal $997.2 $920.5 $761.0 $551.8 $ 448.8 $1,606.6 $ 5,285.9 $ 5,196.9
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.4%
Other fixed maturity
securities:
Principal $76.4 $70.3 $107.7 $34.0 $43.9 $207.5 $539.8 $560.6
Average interest rate 6.4% 6.0% 7.0% 7.8% 6.5% 8.3%
Mortgage loans on real estate:
Principal $292.8 $270.9 $369.9 $391.2 $483.2 $4,024.5 $5,832.5 $5,745.5
Average interest rate 9.00% 8.3% 8.6% 7.8% 7.7% 7.8%
LIABILITIES
Deferred fixed annuities:
Principal $2,076.0 $1,646.0 $1,448.0 $1,286.0 $1,149.0 $9,626.8 $17,231.8 $16,674.6
Average credited rate 5.5% 5.4% 5.4% 5.4% 5.4% 5.5%
Immediate annuities:
Principal $27.0 $24.0 $21.0 $19.0 $17.0 $123.0 $231.0 $237.8
Average credited rate 7.2% 7.2% 7.2% 7.3% 7.3% 7.3%
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest rate swaps:
Pay fixed/receive
variable
Notional value - - $15.0 $16.0 $90.8 $240.9 $362.7 $4.8
Weighted average pay rate - - 2.7% 6.6% 6.8% 6.9%
Weighted average receive - - 7.5% 6.1% 6.1% 6.2%
rate
Pay variable/receive fixed
Notional value - - - - $320.4 $285.3 $605.7 $(25.3)
Weighted average pay rate - - - - 6.4% 6.5%
Weighted average receive - - - - 3.0% 5.4%
rate
Interest rate futures:
Short positions
Contract amount/notional $323.6 $256.0 $168.0 $22.0 $9.0 $3.0 $781.6 $1.3
Weighted average
settlement price $94.4 $93.4 $93.2 $93.0 $92.8 $92.6
</TABLE>
26
<PAGE> 29
The following table provides information about Nationwide's financial
instruments as of December 32, 1998 that are sensitive to charges in
interest rates.
<TABLE>
<CAPTION>
(in millions of dollars) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 1,092.7 $1,049.2 $1,667.6 $1,386.3 $882.7 $2,864.0 $8,942.5 $9,364.2
Average interest rate 8.0% 7.5% 7.3% 7.2% 7.0% 7.6%
Mortgage and other
asset-backed securities:
Principal $905.3 $964.3 $870.7 $588.9 $367.3 $718.3 $4,414.8 $4,499.4
Average interest rate 7.3% 7.4% 7.2% 7.4% 7.4% 7.0%
Other fixed maturity
securities:
Principal $7.8 $72.0 $54.6 $103.3 $60.6 $65.7 $364.0 $381.5
Average interest rate 8.5% 6.4% 7.0% 6.6% 6.9% 6.8%
Mortgage loans on real
estate:
Principal $185.9 $373.9 $313.1 $339.5 $408.8 $3,749.6 $5,370.8 $5,527.6
Average interest rate 9.2% 9.3% 7.0% 8.5% 7.6% 7.1%
LIABILITIES
Deferred fixed annuities:
Principal $1,639.6 $1,548.3 $1,733.7 $1,232.5 $1,169.6 $8,270.7 $15,594.4 $15,282.0
Average credited rate 5.2% 4.8% 4.5% 4.3% 4.1% 4.1%
Immediate annuities:
Principal $20.6 $20.7 $22.3 $25.2 $29.9 $53.1 $171.8 $201.6
Average credited rate 7.3% 7.3% 7.3% 7.3% 7.4% 7.4%
</TABLE>
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the table
above are as follows:
Mortgage and other asset-backed securities (MBSs): The maturity year is
determined based on the terms of the securities and the current rate of
prepayment of the underlying pools of mortgages. Nationwide limits its
exposure to prepayments by purchasing less volatile types of MBSs.
Other Fixed Maturity Securities and Mortgage Loans on Real Estate: The
maturity year is determined based on the maturity date of the security or
loan.
Deferred Fixed Annuities: the maturity year is based on the expected date
of policyholder withdrawal, taking into account actual experience, current
interest rates, and contract terms. Included are group annuity contracts
($9.70 billion) which are generally subject to market value adjustment upon
surrender and may also be subject to surrender charges. Of the total group
annuity liabilities, $7.28 billion was in contracts where the crediting
rate is reset quarterly. For the remaining $2.42 billion of group annuity
reserves, the crediting rate is reset annually on January 1. Also included
are $5.89 billion of individual annuity liabilities where the crediting
rate is reset annually, with portions resetting in each calendar quarter.
Such individual annuity contracts are also subject to surrender charges
calculated as a percentage of the lesser of deposits made or the amount
surrendered and assessed at declining rates during the first seven years
after a deposit is made. The average crediting rate is calculated as the
difference between the projected yield of the assets backing the
liabilities and a targeted interest spread. However, for certain individual
annuities the credited rate is also adjusted to partially reflect current
new money rates.
Immediate Annuities: Included are non-life contingent contracts in payout
status where Nationwide has guaranteed periodic, typically monthly,
payments. The maturity year is based on the terms of the contract.
27
<PAGE> 30
(iv.) Equity Market Risk
Asset fees calculated as a percentage of the separate account assets are a
significant source of revenue to Nationwide. At December 31, 1999, 88% of
separate account assets were invested in equity mutual funds. Gains and
losses in the equity markets will result in corresponding increases and
decreases in Nationwide's separate account assets and the reported asset
fee revenue. In addition, a decrease in separate account assets may
decrease Nationwide's expectations of future profit margins which may
require Nationwide to accelerate the amortization of deferred policy
acquisition costs.
8. DIRECTORS AND EXECUTIVE OFFICERS
Nationwide's Board of Directors currently consists of the following sixteen
Directors:
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
<S> <C> <C> <C>
Lewis J. Alphin 51 1993 2015
A. I. Bell 54 1998 2013
Nancy C. Breit 65 1986 2001
Yvonne M. Curl 45 1998 2022
Kenneth D. Davis 46 1999 2002
Keith W. Eckel 53 1996 2014
Willard J. Engel 60 1994 2006
Fred C. Finney 53 1992 2013
Joseph J. Gasper 56 1996 2008
William G. Jurgensen 49 2000 2003
Dimon R. McFerson 63 1981 2002
David O. Miller 61 1996 2006
Ralph M. Paige 57 1999 2002
James F. Patterson 58 1989 2007
Arden L. Shisler 58 1984 2008
Robert L. Stewart 63 1992 2004
</TABLE>
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<PAGE> 31
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NATIONWIDE
<S> <C>
Dimon R. McFerson 63 Chairman
William G. Jurgensen 49 Chief Executive Officer
Joseph J. Gasper 56 President and Chief Operating Officer
Richard D. Headley 51 Executive Vice President - Chief Information Technology
Officer
Robert A. Oakley 53 Executive Vice President - Chief Financial Officer
Robert J. Woodward, Jr. 58 Executive Vice President - Chief Investment Officer
John R. Cook, Jr. 57 Senior Vice President - Chief Communications Officer
David A. Diamond 44 Senior Vice President - Corporate Controller
Philip C. Gath 52 Senior Vice President - Chief Actuary
Patricia R. Hatler 45 Senior Vice President, General Counsel and Secretary
Donna A. James 42 Senior Vice President - Chief Human Resources Officer
Richard A. Karas 57 Senior Vice President - Sales - Financial Services
Gregory S. Lashutka 56 Senior Vice President - Corporate Relations
Mark R. Thresher 43 Senior Vice President - Finance - Nationwide Financial
Susan A. Wolken 49 Senior Vice President - Product Management and Nationwide
Financial Marketing
Rhodes B. Baker 53 Vice President - Life Company Operations
Dennis W. Click 61 Vice President - Secretary
R. Dennis Noice 53 Vice President - Systems
</TABLE>
Biographical information for each of the individuals listed in the above table
is set forth below.
WILLIAM G. JURGENSEN
To be added by pre-effective amendment
DIMON R. MCFERSON has been a Director since April 1988 and Chairman since April
1996. He was elected Chief Executive Officer in December 1992, and President and
Chief Executive Officer in December 1993. He was President and General Manager
of Nationwide Mutual Insurance Company from April 1988 to April 1991; President
and Chief Operating Officer of Nationwide Mutual Insurance Company from April
1991 to December 1992; and President and Chief Executive Officer of Nationwide
Mutual Insurance Company from December 1992 to April 1996. Mr. McFerson has been
with Nationwide for 20 years.
JOSEPH J. GASPER has been President and Chief Operating Officer and Director of
Nationwide since April 1996. Previously, he was Executive Vice President -
Property/Casualty Operations of Nationwide Mutual Insurance Company from April
1995 to April 1996. He was Senior Vice President - Property/Casualty Operations
of Nationwide Mutual Insurance Company from September 1993 to April 1995. Prior
to that time, Mr. Gasper held numerous positions within Nationwide. Mr. Gasper
has been with Nationwide for 33 years.
LEWIS J. ALPHIN has been a Director of Nationwide since 1993. Mr. Alphin owns
and operates an 800-acre farm in Mt. Olive, NC. He taught agriculture business
at James Sprunt Community Collegy in Kenansville, NC for more than 22 years
before retiring in 1994. He is the former board chairman of the Cape Fear Farm
Credit Association, a member and former vice president, secretary/treasurer, and
director of the Duplin County Agribusiness Council, and a former board member of
the Southern States Cooperative (1986 to 1993). Mr. Alphin is a member of the
Duplin County Farm Bureau, the North Carolina Farm Bureau, ad the Farm Credit
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<PAGE> 32
Council. He is a member and former director of the Oak Wolfe Fire Department.
A. I. BELL has been a Director of Nationwide since April, 1998. Mr. Bell has
served as a state trustee of the Ohio Farm Bureau Federation from 1991 to 1998
and as president that last four years. He oversees the Bell family farm in
Zanesville, Ohio. The farm is the hub of a multi-family swine network, in
addition to grain and beef operations. Mr. Bell has represented the Ohio Farm
Bureau at state and national level activities, and has traveled internationally
representing Ohio agriculture. In 1995, he was introduced into The Ohio State
University Department of Animal Sciences Hall of Fame.
NANCY C. BREIT has been a Director of Nationwide since 1986. Mrs. Thomas is a
board member of Farm Credit Services' 4th District and serves on the advisory
board of Walsh University in North Canton, OH. She is a past president and
former director of the Ohio Agricultural Marketing Association and served on the
boards of the Ohio Farm Bureau Federation and Landmark, Inc., a farm supply
cooperative which is now part of Indianapolis-based Countrymark, and as the
Midwest regional representative on the American Farm Bureau women's committee.
YVONNE M. CURL has been a Director of Nationwide since April, 1998. Ms.
Montgomery is senior vice president/general manager - Public Sector
Worldwide/Document Solutions Group for Xerox Corporation. A resident of
Washington, DC, Ms. Montgomery is in charge of providing an integrated,
industry-focused portfolio of document solutions and services to the public
sector worldwide. Ms. Montgomery joined Xerox in 1976 as a sales representative
and progressed through management positions, including vice president-field
operations and executive assistant to the chairman and CEO.
KENNETH D. DAVIS has been a Director of Nationwide since April 1999. Mr. Davis
is the immediate past president of the Ohio Farm Bureau Federation. He served as
a member of the Ohio Farm Bureau Federation's board of trustees from 1989 until
1999. He served as first vice president of the board from 1994 until 1998. Mr.
Davis serves on the board of directors of his local rural electric cooperatives
and is a member of many agriculture organizations including the Ohio Corn
Growers, Ohio Cattlemen's and Ohio Soybean associations.
KEITH W. ECKEL has been a Director of Nationwide since April 1996. Mr. Eckel is
a partner of Fred W. Eckel Sons and president of Eckel Farms, Inc. in northeast
Pennsylvania. He received the Master Farmer award from Penn State University in
1982. Mr. Eckel is a member of the Pennsylvania Agricultural Land Preservation
Board. He is a former president of the Pennsylvania Farm Bureau, a position he
held for 15 years, and the Lackawanna County Cooperative Extension Association.
He has served as a board member and executive committee member of the American
Farm Bureau Federation. He is a former vice president of the Pennsylvania
Council of Cooperative Extension Associations and former board member of the
Pennsylvania Vegetable Growers Association.
WILLARD J. ENGEL has been a Director of Nationwide since 1994. Mr. Engel served
as general manager of Lyon County Co-Operative Oil Co. in Marshall, MN from 1975
to 1997, and occasionally serves on a consulting basis. He previously was a
division manager of the Truman Farmers Elevator. He is a former director of the
Western Co-op Transport in Montevideo, MN, a former director and legislative
committee chairman of the Northwest Petroleum Association in St. Paul, and a
former director of Farmland Industries in Kansas City.
FRED C. FINNEY has been a Director of Nationwide since 1992. Mr. Finney is the
owner and operator of the Moreland Fruit Farm and operator of Melrose Orchard in
Wooster, OH. He is past president of the Ohio Farm Bureau Federation, the Ohio
Fruit Growers Society, Wayne County Farm Bureau, and the Westwood Ruritan Club.
He is a member of the American Berry Cooperative.
DAVID O. MILLER has been a Director of Nationwide since November 1996. Mr.
Miller has been Chairman of the Board since 1998. Mr. Miller is president of
Owen Potato Farm, Inc. and a partner of M&M Enterprises in Licking County, OH.
He is a director and board chairman of the National Cooperative Business
Association, director of Cooperative Business International and the
International Cooperative Alliance, and serves on the educational executive
committee of the National Council of Farmer Cooperatives. He was president of
the Ohio Farm Bureau Federation from 1981 to 1985 and was vice president for six
years. Mr. Miller served a two year term on the board of the American Farm
Bureau Association. He is past president of the Ohio Vegetable and Potato
Growers Association, and was a director of Landmark, Inc., a
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<PAGE> 33
farm supply cooperative which is now part of Indianapolis-based Countrymark.
RALPH M. PAIGE has been a Director of Nationwide since April 1999. Mr. Paige has
been the Executive Director of the Federation of Southern Cooperatives/Land
Assistance Fund since 1969. Mr. Paige also served as the National Field
Director/Georgia State Director from 1981 to 1984.
JAMES F. PATTERSON has been a Director of Nationwide since April 1989. Mr.
Patterson is president of Patterson Farms, Inc. and has operated Patterson Fruit
Farm in Chesterland, OH since 1964. Mr. Patterson is on the boards of The Ohio
State University Hospitals Health System in Cleveland, Geauga Hospital, Inc. and
the National Cooperative Business Association. He is past president of the Ohio
Farm Bureau Federation and former member of Cleveland Foundation's Lake and
Geauga Advisory Committees.
ARDEN L. SHISLER has been a Director of Nationwide since 1984. Mr. Shisler is
president and chief executive officer of K&B Transport, Inc., a trucking firm in
Dalton, OH. He is a director of the National Cooperative Business Association in
Washington, DC. He is a former board member and vice president of the Ohio Farm
Bureau Federation and past president of the Ohio Agricultural Marketing
Association, an Ohio Farm Bureau Federation subsidiary. He is a member of the
Ohio Trucking Association, the Ohio Trucking Safety Council, the Wayne County
Farm Bureau, Cornerstone Community Church, the Advisory Committee of The Ohio
State University Agriculture Technical Institute and a board member of the
Wilderness Center.
ROBERT L. STEWART has been a Director of Nationwide since 1989. Mr. Stewart is
the owner and operator of Sunnydale Farms and Mining in Jewett, OH. He served on
the board of the Ohio Farm Bureau Federation and as president of the Ohio
Holstein Association board. Mr. Stewart was a director of the Ohio Agricultural
Stabilization and Conservation Service board and Landmark, Inc. a farm supply
cooperative which is now part of Indianapolis-based Countrymark.
RICHARD D. HEADLEY has been Executive Vice President - Chief Information
Technology Officer since May 1999. He was Senior Vice President - Chief
Information Technology Officer from October 1997 to May 1999. Previously, Mr.
Headley was Chairman and Chief Executive Officer of Banc One Services
Corporation from 1992 to October 1997. From January 1975 until 1992 Mr. Headley
held several positions with Banc One Corporation. Mr. Headly has been with
Nationwide for 2 years.
ROBERT A. OAKLEY has been Executive Vice President - Chief Financial Officer
since April 1995. Previously, he was Senior Vice President - Chief Financial
Officer from October 1993 to April 1995. Prior to that time, Mr. Oakley held
several positions within Nationwide. Mr. Oakley has been with Nationwide for 24
years.
ROBERT J. WOODWARD, JR. has been Executive Vice President - Chief Investment
Officer since August 1995. Previously, he was Senior Vice President - Fixed
Income Investments from March 1991 to August 1995. Prior to that time, Mr.
Woodward held several positions within Nationwide. Mr. Woodward has been with
Nationwide for 35 years.
JOHN R. COOK, JR. has been Senior Vice President - Chief Communications Officer
since May 1997. Previously, Mr. Cook was Senior Vice President - Chief
Communications Officer of USAA from July 1989 to May 1997. Mr. Cook has been
with Nationwide for 2 years.
DAVID A. DIAMOND has been Senior Vice President - Corporate Controller since
August 1999. He was Vice President-Controller from August 1996 to August 1999.
Previously, he was Vice President - Controller from October 1993 to August 1996.
Prior to that time, Mr. Diamond held several positions within Nationwide. Mr.
Diamond has been with Nationwide for 11 years.
PHILIP C. GATH - has been Senior Vice President - Chief Actuary - Nationwide
Financial since May 1998. Previously, Mr. Gath was Vice President - Product
Manager - Individual Variable Annuity from July 1997 to May 1998. Mr. Gath was
Vice President - Individual Life Actuary from August 1989 to July 1997. Prior to
that time, Mr. Gath held several positions within Nationwide. Mr. Gath has been
with Nationwide for 31 years.
PATRICIA R. HATLER has been Senior Vice President, General Counsel and Secretary
since April 2000. Previously, she was Senior Vice President and General Counsel
from July 1999 to April 2000. Prior to that time, she was General Counsel and
Corporate Secretary of Independence Blue Cross from 1983 to July 1999.
31
<PAGE> 34
DONNA A. JAMES has been Senior Vice President - Chief Human Resources Officer
since May 1999. She was Senior Vice President - Human Resources from December
1997 to May 1999. Previously she was Vice President - Human Resources from July
1996 to December 1997. Prior to that time, Ms. James was Vice President -
Assistant to the CEO of Nationwide from March 1996 to July 1996. From May 1994
to March 1996 she was Associate Vice President - Assistant to the CEO for
Nationwide. Previously Ms. James held several positions within Nationwide. Ms.
James has been with Nationwide for 18 years.
RICHARD A. KARAS has been Senior Vice President - Sales - Financial Services
since March 1993. Previously, he was Vice President - Sales - Financial Services
from February 1989 to March 1993. Prior to that time, Mr. Karas held several
positions within Nationwide. Mr. Karas has been with Nationwide for 35 years.
GREGORY S. LASHUTKA has been Senior Vice President - Corporate Relations since
January 2000. Previously, he was the Mayor of the City of Columbus (Ohio) from
January 1992 to December 1999. From January 1986 to December 1991, Mr. Lashutka
was a Partner with Squire, Sanders & Dempsey. From January 1978 to December
1985, he was City Attorney for the City of Columbus (Ohio).
MARK R. THRESHER has been Senior Vice President - Finance - Nationwide Financial
since May 1999. He was Vice President - Controller from August 1996 to May 1999.
He was Vice President and Treasurer from November 1996 to February 1997.
Previously, he was Vice President and Treasurer from June 1996 to November 1996.
Prior to joining Nationwide, Mr. Thresher served as a partner with KPMG LLP from
July 1988 to June 1996.
SUSAN A. WOLKEN has been Senior Vice President - Product Management and
Nationwide Financial Marketing since May 1999. Previously, Ms. Wolken was Senior
Vice President - Life Company Operations from June 1997 to May 1999. She was
Senior Vice President - Enterprise Administration from July 1996 to June 1997.
Prior to that time, she was Senior Vice President - Human Resources from April
1995 to July 1996. From September 1993 to April 1995, Ms. Wolken was Vice
President - Human Resources. From October 1989 to September 1993 she was Vice
President - Individual Life and Health Operations. Ms. Wolken has been with
Nationwide for 25 years.
RHODES B. BAKER has been Vice President - Life Company Operations since May
1999. Previously, he was Vice President - Individual Annuities from May 1998 to
May 1999. Prior to that time, he held several positions within Nationwide. Mr.
Baker has been with Nationwide for 22 years.
DENNIS W. CLICK has been Vice President - Secretary since December 1997.
Previously, he was Vice President - Assistant Secretary from December 1996 to
December 1997. Mr. Click was Vice President - Assistant Secretary from August
1994 to December 1997. Mr. Click was Associate Vice President and Assistant
Secretary from August 1989 to August 1994. Prior to that time, he held several
positions within Nationwide. Mr. Click has been with Nationwide for 39 years.
R. DENNIS NOICE has been Vice President - Systems - Nationwide Financial since
April 1999. He was Vice President - Systems - Nationwide Financial Services from
April 1998 to April 1999. Previously, he was Vice President - Retail Operations
from March 1997 to April 1998. Prior to that time, Mr. Noice was Vice President
Individual Investment Products from October 1989 to March 1997. Prior to that
time, Mr. Noice held several positions within Nationwide. Mr. Noice has been
with Nationwide for 28 years.
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<PAGE> 35
9. EXECUTIVE COMPENSATION
A. COMPENSATION
Pursuant to a Cost Sharing Agreement, the salaries and benefits of certain
officers and employees of Nationwide and its subsidiaries, including Named
Executive Officers, will be paid by Nationwide Mutual Insurance Company and
reimbursed in accordance with the terms of the Cost Sharing Agreement.
The following table provides certain information concerning compensation
received by Nationwide's Chief Executive Officer and the four remaining
most highly paid executive officers (the "Named Executive Officers") as of
the last fiscal year, for the last three fiscal years ended December 31,
1999, 1998 and 1997 solely for services rendered to Nationwide and its
subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------
Annual Compensation Awards
-------------------------------------- -------------------------------
Restricted Securities Long Term
Other Annual Stock Award(s) Underlying Incentive
Name and Salary Bonus Compensation $ Options/SARs # Plan All Other
Principal Position Year $ $ $ Payouts Compensation
------------------------- ------ ---------- ------------ ------------ --------------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dimon R. McFerson: 1999 446,900 1,008,504(2) _____ 109,700 _____ 22,785(11)
Chairman and Chief 1998 430,970 392,982(3) (5) _____ 60,000 204,351(9) 23,278(12)
Executive Officer - 1997 381,717 111,780(4) (5) 907,147(7) 40,000 207,000(10) 21,751(13)
Nationwide Financial
Services, Inc.(1) (5)
Joseph J. Gasper: 1999 512,308 952,282(2) (5) _____ 78,000(8) _____ 21,492(11)
President and Chief 1998 461,308 330,647(3) (5) _____ 40,000 143,520(9) 21,491(12)
Operating Officer 1997 358,066 97,250(4) (5) 396,563(7) 30,000 155,600(10) 18,155(13)
Richard A. Karas: 1999 307,308 330,021(2) (5) _____ 34,400(8) _____ 13,177(11)
Senior Vice President - 1998 283,847 212,503(3) (5) _____ 20,000 90,000(9) 13,174(12)
Sales - Financial 1997 246,058 72,900(4) (5) 167,508(7) 10,000 81,000(10) 13,020(13)
Services
Robert J. Woodward: 1999 280,293 503,928(2) (5) _____ 21,800 _____ 11,406(11)
Executive Vice 1998 236,599 209,607(3) (5) _____ 12,000 80,694(9) 10,883(12)
President - Chief 1997 223,803 53,694(4) (5) 182,877(7) 10,000 73,219(10) 11,453(13)
Investment Officer(1)
Susan A. Wolken: 1999 239,962 259,979(2) (5) 71,969(6) 16,715(8) _____ 10,343(11)
Senior Vice President 1998 228,654 156,978(3) (5) _____ 12,000 68,700(9) 7,778(12)
Product Management 1997 199,443 57,240(4) (5) 17,625(7) 2,000 58,869(10) 8,316(13)
and Marketing
</TABLE>
(1) Figures in the table, other than Restricted Stock, Securities Underlying
Options/Stock Appreciation Rights and All Other Compensation, represent
compensation received by Mr. McFerson and Mr. Woodward for their service
rendered to Nationwide Financial Services and its subsidiaries as allocated
pursuant to the Cost Sharing Agreement.
(2) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan (hereinafter defined) in 2000 for the 1999 award
year.
(3) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan in 1999 for the 1998 award year.
(4) Represents the amount received by the Named Executive Officers under the
Management Incentive Plan (hereinafter defined) in 1998 for the 1997 award
year.
(5) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(6) The following is the number of shares and value of restricted stock at the
end of the last fiscal year for Ms. Wolken - 1,750 shares at a value of
$48,891.
(7) The following are the number of shares and value of the restricted stock at
the end of the last fiscal year for: Mr. McFerson - 15,000 shares at a
value of $419,063; Mr. Gasper - 10,000 shares at a value of $279,375;
33
<PAGE> 36
Mr. Karas - 4,000 shares at a value of $111,750; Mr. Woodward - 3,500
shares at a value of $97,781 and Ms. Wolken - 750 shares at a value of
20,953.
(8) Mr. Gasper's options include 2,500 Villanova Capital, Inc. ("VCI") (a
subsidiary of Nationwide Financial Services, Inc.) options; Mr. Karas'
options include 2,000 VCI options; and Ms. Wolkens options include 1,500
VCI options.
(9) Represents the amount received by the Named Executive Officers under the
Executive Incentive Plan (hereinafter defined) in 1999 for the award period
1996 - 1998.
(10) Represents the amount received by the Named Executive Officers under the
Executive Incentive Plan in 1998 for the award period 1995 to 1997.
(11) Represents contributions made or credited by Nationwide Financial Services
for 1999 under the Savings Plan and the DC Supplemental Plan (hereinafter
defined). The following are the amounts for the Savings Plan and the DC
Supplemental Plan: McFerson - $2,241 for the Savings Plan and $20,544 for
the DC Supplemental Plan; Mr. Gasper - $4,800 for the Savings Plan and
$16,692 for the DC Supplemental Plan; Mr. Karas - $4,800 for the Savings
Plan and $8,377 for the DC Supplemental Plan; Mr. Woodward - $3,665 for the
Savings Plan and $7,741 for the DC Supplemental Plan; and Ms. Wolken -
$4,800 for the Savings Plan and $5,543 for the DC Supplemental Plan.
(12) Represents contributions made or credited by Nationwide Financial Services,
Inc. for 1998 under the Savings Plan and the DC Supplemental Plan. The
following are the amounts for the Savings Plan and the DC Supplemental
Plan, and in the case of Mr. McFerson, above-market interest on deferred
compensation: Mr. McFerson - $2,206 for the Savings Plan and $20,224 for
the DC Supplemental Plan and $848 for the above-market interest on deferred
compensation; Mr. Gasper - $4,800 for the Savings Plan and $16,691 for the
DC Supplemental Plan; Mr. Karas - $4,800 for the Savings Plan and $8,374
for the DC Supplemental Plan; Mr. Woodward - $3,497 for the Savings Plan
and $7,386 for the DC Supplemental Plan; and Ms. Wolken - $4,800 for the
Savings Plan and $2,978 for the DC Supplemental Plan.
(13) Represents contributions made or credited by Nationwide Financial Services,
Inc. for 1997 under the Savings Plan and the DC Supplemental Plan. The
following are the amounts for the Savings Plan and the DC Supplemental
Plan: Mr. McFerson - $2,142 for the Savings Plan and $19,609 for the DC
Supplemental Plan; Mr. Gasper - $4,760 for the Savings Plan and $13,395 for
the DC Supplemental Plan; Mr. Karas - $4,760 for the Savings Plan and
$8,260 for the DC Supplemental Plan; Mr. Woodward - $3,468 for the Saving
Plan and $7,985 for the DC Supplemental Plan; and Ms. Wolken - $4,760 for
the Savings Plan and $3,556 for the DC Supplemental Plan.
B. EXECUTIVE INCENTIVE PLAN
Pror to May 1, 1999, Nationwide Mutual Insurance Company and certain of its
subsidiaries and affiliates, including Nationwide, maintained the Executive
Incentive Plan (EIP). Under the EIP, annual payments were made to the Named
Executive Officers and certain other officers of the participating
companies based on the achievement of measures tied to the performance of
the Nationwide Mutual Insurance Company and its subsidiaries and affiliates
(the "Nationwide Group") and the relevant operating company over the
preceding three years. Performance measures were based on profitability and
growth objectives that were established in advance by the Board of
Directors of the participating company. Under the EIP, the participant was
granted a target incentive amount that represented a percentage (from 10%
to 30% depending on the participant's position within the participating
company) of the participant's base salary. The actual amount received by
the participant ranged from zero to twice the target incentive amount,
depending solely on the achievement of the performance measures. Nationwide
and the participating subsidiaries and affiliates terminated the EIP in May
1999. As of May 1999, the Named Executive Officers no longer participate in
the EIP, but rather participated in the Performance Incentive Plan, which
is later defined.
C. MANAGEMENT INCENTIVE PLAN
Prior to 1999, Nationwide Mutual Insurance Company and certain of its
subsidiaries and affiliates, including Nationwide, maintain the Management
Incentive Plan (MIP). Under the MIP prior to 1998, annual payments were
made to the Named Executive Officers and certain other management employees
of the participating companies based on the achievement of measures
34
<PAGE> 37
tied to the performance of Nationwide and the relevant operating company,
the relevant business unit and the individual participant over the
preceding year. Performance measures were based on profitability, growth,
expense management and key strategic objectives, which were established in
advance. Under the MIP, the participant was granted a target incentive
amount that represented a percentage (from 5% to 15% depending on the
participant's position within the participating company) of the
participant's base salary. The actual amount received by the participant
under the MIP ranged from zero to twice the base incentive amount,
depending solely on the achievement of the performance measures.
Nationwide and the participating subsidiaries and affiliates terminated the
Management Incentive Plan, with respect to these officers, at the close of
calendar year 1997, and, for all other participants at the close of
calendar year 1998. Beginning in 1998, the Named Executive Officers and
certain other officers of the participating companies no longer participate
in the MIP, but rather participate in the Performance Incentive Plan.
D. PERFORMANCE INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Performance Incentive Plan
(PIP), first implemented in 1998. Under the PIP, annual payments are made
to Named Executive Officers and certain other management employees of the
participating companies based on the achievement of measures tied to the
performance of the Nationwide, the relevant operating company, the relevant
business unit and the individual participant over the preceding year.
Performance measures are based on a broad series of key financial results,
financial and operational comparison to external peer comparators, the
extent of accomplishment of strategic initiatives, and other factors and
results impacting organization performance, and further based upon
individual employee performance. Under the PIP, the participant will be
granted a target incentive amount that represents a percentage (from 5% to
50% depending on the participant's position within the participating
company) of the participant's base salary. The actual amount received by
the participant under the PIP will range from zero to no maximum factor of
the participant's base salary, depending solely on the achievement of the
performance measures.
E. DEFERRED COMPENSATION PROGRAM
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain a deferred compensation program
(the "Officers' Deferred Compensation Program") pursuant to which officers
of participating companies may elect to defer payment of amounts otherwise
payable to them. An eligible officer is permitted to enter into a deferral
agreement pursuant to which such officer may annually elect to defer a
portion of his or her salary or incentive compensation earned during the
following year. Any such election is effective prospectively. Amounts
deferred under the Officer's Deferred Compensation Program will generally
be payable in annual installments beginning in January of the calendar year
following the calendar year in which the officer terminates employment or
after the expiration and the deferral period elected by the participant.
Amounts deferred under the Officers' Deferred Compensation Program are
credited with interest. The interest rate is based on the fixed rate option
in the Savings Plan.
F. SAVINGS PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Nationwide Savings Plan (the
"Savings Plan"), a qualified profit-sharing plan including a qualified cash
or deferred arrangement covering eligible employees of participating
companies. Under the Savings Plan, participants who are not residents of
Puerto Rico may elect to contribute between 1% and 22% of their
compensation to accounts established on their behalf under the Savings Plan
in the form of voluntary salary reductions on a pretax basis and
participants who are residents of Puerto Rico may make contributions on an
after-tax basis. The participating companies are obligated to make matching
employer contributions, for the benefit of their participating employees,
at the rate of 70% of the first 2% of compensation deferred or contributed
to the Savings Plan by each employee, and 40% of the next 4% of
compensation deferred or contributed by each employee to the Savings Plan.
All amounts contributed to the Savings Plan are held in a separate account
for each participant and are
35
<PAGE> 38
invested in one or more funds made available under the Savings Plan and
selected by the participant. Normally, a participant receives the value of
his or her account upon termination of employment, although a participant
may withdraw all or a part of the amounts credited to his or her accounts
during employment under certain circumstances including attainment of age
59 1/2, or receive a loan of a portion of his or her account balance. Under
the Savings Plan, a participant is immediately vested in all amounts
credited to his or her account as a result of salary deferrals (and
earnings on those deferrals) or after-tax contributions (and earnings on
those contributions), as applicable. A participant is vested in amounts
attributable to employer matching contributions (and earnings on those
contributions) over a period of five years.
G. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain an unfunded, nonqualified
defined contribution supplemental benefit plan, the Nationwide Supplemental
Defined Contribution Plan (the "DC Supplemental Plan"), which provides
benefits, equal to employer matching contributions that would have been
made under the Savings Plan for the participants, in the absence of the IRC
Section 401(a)(17) limitation on compensation that can be considered and
the IRC Section 402(g) limitation on amounts that can be deferred under the
Savings Plan reduced by actual employer matching contributions made to the
Savings Plan. Participants are limited to those officers earning in excess
of $170,000 annually. Benefits under the DC Supplemental Plan vest at the
same time as employer matching contributions vest under the Savings Plan.
H. NATIONWIDE FINANCIAL SERVICES, INC. 1996 LONG-TERM EQUITY COMPENSATION PLAN
The purpose of the Long Term Equity Compensation Plan (LTEP) is to benefit
the stockholders of Nationwide Financial Services by encouraging high
levels of performance by selected officers, directors and employees of
Nationwide Financial Services and certain of its affiliates, attracting and
retaining the services of such individuals and aligning the interests of
such individuals with those of the stockholders.
The LTEP provides for the grant of any or all of the following, types of
awards:
(i) stock options, including incentive stock options and non-qualified
stock options, for shares of Class A Common Stock;
(ii) stock appreciation rights, either in tandem with stock options or
freestanding;
(iii) restricted stock; and
(iv) performance awards.
Any stock option granted in the form of an incentive stock option must
satisfy the applicable requirements of Section 422 of the Internal Revenue
Code. Awards may be made to the same person on more than one occasion and
may be granted singularly, in combination or in tandem as determined by
Nationwide Financial Services Compensation Committee.
The LTEP grants the Nationwide Financial Services Compensation Committee,
which administers the LTEP, flexibility in creating the terms and
restrictions deemed appropriate for particular awards as facts and
circumstances warrant. The LTEP is intended to constitute a non-qualified,
unfunded, unsecured plan for incentive and deferred compensation and is not
intended to be subject to any requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Awards under the LTEP
which are performance-based are intended to qualify as "performance-based
compensation" for purposes of Section 162(m) of the Internal Revenue Code
of 1986, as amended.
No awards may be granted under the LTEP after December 11, 2006, and the
LTEP may be terminated by the Board of Directors of Nationwide Financial
Services prior to such date. In the event of expiration or earlier
termination of the LTEP, the LTEP will remain in effect until such time as
all awards granted thereunder have been satisfied or have expired.
I. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table shows, as to Named Executive Officers in the Summary
Compensation Table, certain information concerning stock options granted
during the 1999 fiscal year under the Long Term Equity Compensation Plan.
36
<PAGE> 39
OPTION/STOCK APPRECIATION RIGHTS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE OR BASE GRANT DATE
OPTIONS GRANTED FISCAL YEAR PRICE $/SH PRESENT VALUE
NAME (1) EXPIRATION DATE (2)
<S> <C> <C> <C> <C> <C>
Dimon R. McFerson 75,000 7.2% $48.125 February 9, 2009 $1,508,250
34,700 3.4% $38.250 November 9, 2009 545,137
Joseph J. Gasper 50,000 4.8% $48.125 February 9, 2009 1,005,500
25,500 2.5% $38.250 November 9, 2009 400,605
Robert J. Woodward, Jr. 15,000 1.4% $48.125 February 9, 2009 301,650
6,800 0.7% $38.250 November 9, 2009 106,828
Richard A. Karas 25,000 2.4% $48.125 February 9, 2009 502,750
7,400 0.7% $38.250 November 9, 2009 116,254
Susan A. Wolken 9,215 0.9% $48.125 February 9, 2009 185,314
6,000 0.6% $38.250 November 9, 2009 94,260
</TABLE>
(1) One-third of the options granted become exercisable each year on the
anniversary of the grant date. Options may be accelerated upon a change of
control or certain other events of termination of employment.
(2) The estimated grant date present value dollar amounts in this column are
the result of calculations made using the Black-Scholes model, a
theoretical method for estimating the present value of stock options based
on a complex set of assumptions. The material assumptions and adjustments
incorporated in the Black-Scholes model used to estimate the value of
these options include the following:
- An exercise price on the options equal to the fair market
value of the underlying stock on the date of the grant, as
listed in the table.
- The rate available at the time the grant was made on
zero-coupon U.S. Government issues with a remaining term equal
to the expected life. The risk-free rate was 4.91% for the
February 9, 1999 grants and 5.97% for the November 9, 1999
grant.
- Dividends at a rate of $0.30 per share for the February 9,
1999 grant and $0.40 for the November 9, 1999 grant,
representing the annualized dividends paid on shares of common
stock at the date of grant.
- An option term before exercise of 5 years, which represents
the typical period that options are held prior to exercise.
- Volatility of the stock price of 42.02% for the February 9,
1999 grant, reflecting the daily stock price volatility for
the one-year period prior to the grant date, and 41.23% for
the November 9, 1999 grant, reflecting the daily stock price
volatility for the one-year period prior to the grant date.
- No adjustments were made for vesting requirements,
non-transferability, or risk of forfeiture.
J. OPTIONS/STOCK APPRECIATION RIGHTS EXERCISES AND HOLDINGS
The following table provides information, with respect to Named Executive
Officers, concerning the exercise of options and/or Stock Appreciation
Rights during 1999 and unexercised options and Stock Appreciation Rights
held as of fiscal year-end December 31, 1999, under the Long-Term Executive
Compensation Plan.
AGGREGATED OPTION/S STOCK APPRECIATION RIGHTS EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/STOCK APPRECIATION RIGHTS VALUES
<TABLE>
<CAPTION>
NAME SHARES VALUE REALIZED NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE MONEY
ACQUIRED ON UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR-END ($)
EXERCISE YEAR-END EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Dimon R. McFerson 2,500 $31,250 44,167/163,033 107,241/59,165
Joseph J. Gasper _____ _____ 33,333/112,167 88,750/44,375
Richard A Karas _____ _____ 10,667/33,133 29,585/14,790
Robert J. Woodward, Jr _____ _____ 13,333/49,067 29,585/14,790
Susan A. Wolken _____ _____ 5,333/23,792 5,915/2,960
</TABLE>
37
<PAGE> 40
K. PENSION PLANS
(i) Retirement Plan
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain a qualified defined-benefit
plan, the Nationwide Retirement Plan (the "Retirement Plan"). In general, a
participant's annual retirement benefit under the Retirement Plan will be
equal to the sum of:
(i) 1.25% of the participant's Final Average Compensation times
years of service (to a maximum of 35 years); and
(ii) 0.50% of the participant's Final Average Compensation in
excess of Social Security Covered Compensation times years of
service (to a maximum of 35 years).
Final Average Compensation, for the portion of the participant's benefit
which is attributable to service on or after January 1, 1996, is the average
of the highest five consecutive covered compensation amounts of the
participant in the participant's last 10 years of service. For the portion
of a participant's benefit attributable to service prior to January 1, 1996,
Final Average Compensation is the average of the highest three consecutive
covered compensation amounts of the participant in the participant's last 10
years of service. Covered compensation, for purposes of determining Final
Average Compensation under either method, is calculated on a calendar-year
basis and includes compensation from any member company of Nationwide. With
respect to Messrs. Gasper and Karas and Ms. Wolken, because each such
officer's compensation is allocated solely to Nationwide Financial Services
and its subsidiaries, covered compensation includes the compensation listed
under the headings Salary, Bonus and Long-Term Incentive Plan Payouts shown
in the Summary Compensation Table. Covered compensation for Messrs. McFerson
and Woodward includes the amount set forth under the headings Salary, Bonus
and Long-Term Incentive Plan shown in the Summary Compensation Table and
additional compensation amounts received for services rendered to other
companies of Nationwide. Social Security Covered Compensation means the
average of the Social Security wage bases in effect during the 35-year
period ending with the last day of the year the participant attains Social
Security retirement age. The portion of a participant's benefit attributable
to years of service credited prior to 1996 is also subject to
post-retirement increases following the commencement of benefits or the
participant's attainment of age 65, whichever is later.
A participant becomes fully vested after the completion of five years of
vesting service. The Retirement Plan generally provides for payments to or
on behalf of each vested participant upon such participant's retirement on
his or her normal retirement date or later, although provision is made for
payment of early retirement benefits on a reduced basis commencing at age
55 for those participants with 15 or more years of vesting service or at
age 62 for those with 5 or more years of vesting service. The normal
retirement date under the Retirement Plan is the later of the date the
participant attains age 65 or completes five years of vesting service.
Death benefits are payable to a participant's spouse or, under certain
circumstances, the named beneficiary, of a participant who dies with a
vested benefit under the Retirement Plan or while an employee. The
Retirement Plan also provides for the funding of retiree medical benefits
under Section 401(h) of the Internal Revenue Code.
(ii) Excess and Supplemental Plans
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain an unfunded, nonqualified
defined-benefit excess benefit plan, the Nationwide Excess Benefit Plan
(the "Excess Plan") and an unfunded, nonqualified defined-benefit
supplemental benefit plan pursuant to which certain participants may
receive a supplemental retirement benefit, the Nationwide Supplemental
Retirement Plan (the "Supplemental Plan"). Any participant whose benefits
are limited under the Retirement Plan by reason of limitations under
Section 415 of the Internal Revenue Group on the maximum benefit that may
be paid under the Retirement Plan will receive, under the Excess Plan, that
portion of the benefit that he or she would have been entitled to receive
under the Retirement Plan in the absence of such limitations. Officers who
earn in excess of $170,000 annually, have at least 5 years of vesting
service and whose benefits under the Retirement Plan are limited
38
<PAGE> 41
by reason of certain other limitations under the Internal Revenue Group,
may receive benefits under the Supplemental Plan. Benefits under the
Supplemental Plan will be the sum of:
(i) 1.25% of the participant's Final Average Compensation times
years of service (up to a maximum of 40 years); and
(ii) 0.75% of the participant's Final Average Compensation in
excess of Social Security Covered Compensation times years of
service (up to a maximum of 40 years) reduced by benefits
accrued under the Retirement Plan and the Excess Plan.
The benefits under the Supplemental Plan, for individuals participating in
that plan on January 1, 2000, and the Excess Plan vest at the same time as
benefits vest under the Retirement Plan. Benefits for all other
participants in the Supplemental Plan vest over a period of 5 years of
participation in that plan.
The chart below indicates the estimated maximum annual retirement benefits
that a hypothetical participant would be entitled to receive under the
Retirement Plan including payments made under the Excess and Supplemental
Plans as a result of limitations imposed by the Internal Revenue Code,
computed on a straight-life annuity basis, if retirement occurred at age 65
and the number of credited years of service and Final Average Compensation
equaled the amounts indicated. For purposes of the chart, it is assumed
that the Final Average Compensation is the same whether measured over the
three-year averaging period that applies to service accumulated prior to
1996 or the five-year period that applies to service accumulated after
1995. In actual operation, the total benefit received under the Retirement
Plan (including payments made under the Excess and Supplemental Plans)
would be the total of the benefit determined based on years of service
earned under each method.
YEARS OF SERVICE
<TABLE>
<CAPTION>
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000 $30,342 $40,456 $50,570 $60,684 $70,798
$150,000 36,905 49,206 61,508 73,809 86,111
$175,000 48,794 65,059 81,324 97,589 113,853
$200,000 56,294 75,059 94,824 112,589 131,353
$225,000 63,794 85,059 106,324 127,589 148,853
$250,000 71,294 95,059 118,824 142,589 166,353
$300,000 86,294 115,059 143,824 172,589 201,353
$350,000 101,294 135,059 168,824 202,589 236,353
$400,000 116,294 155,059 193,824 232,589 271,353
$450,000 131,294 175,059 218,824 262,589 306,353
$500,000 146,294 195,059 243,824 292,589 341,353
$600,000 176,294 235,059 293,824 352,589 411,353
$700,000 206,294 275,059 343,824 412,589 481,353
$800,000 236,294 315,059 393,824 472,589 551,353
$900,000 266,294 355,059 443,824 532,589 621,353
1,000,000 296,294 395,059 493,824 592,589 691,353
1,100,000 326,294 435,059 543,824 652,589 761,353
1,200,000 356,294 475,059 593,824 712,589 831,353
</TABLE>
39
<PAGE> 42
All Named Executive Officers have a portion of their benefit calculated
based on the post-1995 definition of Final Average Compensation. As of
December 31, 1995, the number of credited years of service under the
Retirement Plan for Messrs. McFerson, Gasper, Karas, Woodward and Ms.
Wolken was 23 years, 29.5 years, 31.5 years, 31.67 years and 21.17 years,
respectively. Mr. McFerson's credited years of service include, pursuant to
an agreement with Nationwide Mutual Insurance Company, 8.17 years in excess
of those actually earned through employment by the Nationwide. The benefit
attributable to those additional years will be paid by Nationwide Mutual
Insurance Company (not the Retirement Plan) and is reduced by the benefit
payable under the retirement plan of Mr. McFerson's previous employer. Each
of the Named Executive Officers earned additional years of service in 1996,
1997, 1998 and 1999 and their benefit for such years and all future years
will be calculated under the new definition of Final Average Compensation.
Covered compensation paid by Nationwide Financial Services for the fiscal
year ended December 31, 1999, for Messrs. McFerson, Gasper, Karas,
Woodward, and Ms. Wolken was $1,074,758, $988,802, $611,209, $525,070 and
$465,640, respectively.
10. COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
A. INTRODUCTION
Approximately 20% of the shares of Nationwide Financial Services is
publicly traded. Nationwide Mutual Insurance Company through a wholly-owned
subsidiary, owns approximately 80% of the outstanding shares of Nationwide
Financial Services. Because Nationwide is the principal operating
subsidiary of Nationwide Financial Services, the Nationwide Life Insurance
Company Compensation Committee (the "Nationwide Life Compensation
Committee") established all components of 1999 compensation for Nationwide
Financial Services' executive officers, with the exception of stock-based
incentive grants made by the Nationwide Financial Services Compensation
Committee under the Long-Term Equity Compensation Plan.
Dimon R. McFerson, Nationwide Financial Services' Chairman and Chief
Executive Officer, serves also in the same capacity for Nationwide. Robert
J. Woodward Jr., Nationwide Financial Services' Executive Vice President -
Chief Investment Officer serves also in the same capacity for Nationwide.
Pursuant to a Cost Sharing Agreement, compensation for Mr. McFerson and Mr.
Woodward is allocated among the companies in the Nationwide Group for whom
services are performed. The amounts are paid by Nationwide Mutual Insurance
Company and reimbursed by the other companies in accordance with the terms
of the Cost Sharing Agreement. The 1999 compensation for Mr. McFerson and
Mr. Woodward reported in the compensation tables and discussed in this
report is the amount allocated to Nationwide Financial Services and its
subsidiaries under the Cost Sharing Agreement and is solely for services
rendered to Nationwide Financial Services and its subsidiaries.
Compensation for the other executives named in the compensation tables was
not allocated and is their aggregate 1999 compensation for services
rendered to Nationwide Financial Services and its subsidiaries.
The Nationwide Life Compensation Committee and the Nationwide Financial
Services Compensation Committee are both comprised solely of non-employee
directors.
B. COMPENSATION PHILOSOPHY AND OBJECTIVES
The Nationwide Life Compensation Committee and the Nationwide Financial
Services Compensation Committee (collectively referred to herein as the
"Compensation Committees") believe that the compensation program for
Nationwide Financial Services' executive officers should support Nationwide
Financial Services and Nationwide's vision and business strategies. In
addition, compensation should be determined within a competitive framework
based on overall financial results, business unit results, teamwork, and
individual contributions that help build value for Nationwide Financial
Services' stockholders.
40
<PAGE> 43
The primary objectives of the compensation program are to:
- provide a direct link between pay and performance;
- allocate a larger percentage of executive compensation to pay that
is at-risk in order to positively influence behavior and support
accountability;
- attract, retain and motivate top-caliber employees required for new
business directions;
- offer total compensation opportunities that are fully competitive
with the appropriate external markets in design and pay level; and
- emphasize the need to focus on stockholder value, in addition to
providing-competitive value to customers.
As part of the overall compensation philosophy, the Compensation Committees
have determined that total compensation and each of the elements that
comprise total compensation (base salary, annual incentives, long term
incentives) should be targeted at the 50th percentile of the market. The
Compensation Committees believe that differences in individual performance
should result in significantly different levels of compensation. Therefore,
individual pay delivered may be higher or lower than the 50th percentile of
the market, depending on individual performance.
Competitive market data is provided to the Compensation Committees by
independent compensation consultants. This data compares Nationwide
Financial Services' and the Nationwide's compensation practices to various
groups of comparable companies. These comparable companies compete with
Nationwide Financial Services for customers, capital and employees, and are
comparable to Nationwide Financial Services in size, scope and business
focus. This group includes both multi-line insurers and diversified
financial organizations.
The companies chosen for the comparable compensation group are not
necessarily the same companies that would be considered a peer group of
Nationwide Financial Services. The comparable compensation group includes
more companies than those in the peer group because it gives the
Compensation Committees a broader data base for comparison purposes.
C. ELEMENTS OF 1999 EXECUTIVE COMPENSATION
The key elements of Nationwide Financial Services' executive compensation
program are base salary, annual incentives and long-term compensation. The
following discussion relates to Nationwide Financial Services' executive
officers other than Mr. McFerson whose compensation is discussed separately
in the Compensation of the Chief Executive Officer.
D. BASE SALARIES
Base salaries offer security to executives and allow Nationwide Financial
Services to attract competent executive talent and maintain a stable
management team. They also allow executives to be rewarded for individual
performance, and encourage the development of executives. Pay for
individual performance rewards executives for achieving goals that may not
be immediately evident in common financial measurements.
Base salaries for executive officers are initially determined by evaluating
executives' level of responsibility, prior experience, breadth of
knowledge, internal equity, and external pay practices.
In determining increases to base salaries for 1999, the Nationwide Life
Compensation Committee considered relevant external market data, as
described above in Compensation Philosophy and Objectives. However,
increases to base salaries were driven primarily by individual performance
that was evaluated based on levels of individual contribution to Nationwide
Financial Services and Nationwide. When evaluating individual performance,
the Nationwide Life Compensation Committee considered, among other things,
the executive's efforts in promoting the values of Nationwide Financial
Services and Nationwide; continuing educational and management training;
improving product quality; developing relationships with customers,
suppliers, and employees; and demonstrating leadership abilities among
co-workers. No specific formula was used in evaluating individual
performance, and the weighting given to each factor with respect to each
executive officer was within the individual discretion and judgment of
41
<PAGE> 44
each member of the Nationwide Life Compensation Committee. Base salaries
for the executive officers, including promotion and market
competitive-driven increases, were increased in 1999 by an average of
13.5%, a rate comparable to the base salary increases provided at
comparable companies. Executive officer salaries were established at a
level that is consistent with the goals stated in Compensation Philosophy
and Objectives.
E. ANNUAL INCENTIVE COMPENSATION
The Performance Incentive Plan promotes the pay-for-performance philosophy
of the Compensation Committees by providing executives with direct
financial rewards in the form of annual cash incentives. Awards for 1999
were based on return on equity earnings and premium growth, other key
financial measures, financial and operational comparison to external peer
competitors, to the extent of accomplishment of strategic initiatives, and
other factors and results impacting performance for both Nationwide
Financial Services and return on equity, revenue growth and expense
management of Nationwide, and further based upon individual employee
performance.
Each year, the Nationwide Life Compensation Committee establishes many
specific performance measures used for the Performance Incentive Plan.
Participants are provided a target incentive opportunity that represents a
percentage of their base salary. In 1999, individual targets ranged from
20% to 85% of base salary. Individual payouts under the Performance
Incentive Plan may range from zero to no maximum factor of the individual's
target incentive amount, depending on the achievement of the performance
measures. For 1999, the excellent results achieved for the return on
equity, the earnings and premium growth, and other financial and strategic
performance measures of Nationwide Financial Services and of Nationwide
resulted in a payout of 175% of target for Mr. Gasper; and an average of
192% of target for Mr. Karas, Mr. Woodward and Ms. Wolken. These amounts
are reflected in the Bonus column in the Summary Compensation Table.
F. LONG-TERM INCENTIVE COMPENSATION
In keeping with the philosophy of the Compensation Committees to provide a
total compensation package that favors at-risk components of pay, long-term
incentives comprise a significant portion of an executive's total
compensation package. When determining long-term incentive award sizes, the
Compensation Committees consider the executives' levels of responsibility,
position within Nationwide Financial Services, prior experience, historical
award data, various performance criteria, and compensation practices at
comparable companies.
The Compensation Committees utilize the long-term incentive plan described
below. This plan is designed to achieve a balance between market pay
orientation and alignment of executive interests with that of stockholders.
(i) Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan
The Long-Term Equity Compensation Plan authorizes grants of stock options,
stock appreciation rights, restricted stock, and performance awards. The
objectives of the Long-Term Equity Compensation Plan are to encourage high
levels of performance by selected officers, directors and employees of
Nationwide Financial Services and certain of its affiliates, to attract and
retain the services of such individuals, and to align the interests of such
individuals with those of the stockholders.
During February 1999 and November 1999, the Nationwide Financial Services
Compensation Committee made grants to executive officers and others under
the Long-Term Equity Compensation Plan. Award sizes were determined based
on competitive equity grant practices using the median practices at
comparator companies and the individual's impact on Nationwide Financial
Services' performance and were determined consistent with the goals stated
in Compensation Philosophy and Objectives. The grant was awarded in
non-qualified stock options that have an exercise price equal to the fair
market value of the Common Stock on the date of the option grant. Such
options become exercisable in equal installments over a three-year term,
and expire ten years after the date of grant.
42
<PAGE> 45
G. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Dimon R. McFerson serves as Nationwide Financial Services' Chairman and
Chief Executive Officer, as well as in the same capacity for Nationwide.
Except for grants made under the Long-Term Incentive Plan in February and
November 1999 by the Nationwide Financial Services Compensation Committee,
all components of Mr. McFerson's compensation for 1999 were established by
the Nationwide Life Compensation Committee.
As discussed above in the Introduction, a portion of Mr. McFerson's annual
compensation is allocated to Nationwide Financial Services for services
rendered to Nationwide Financial Services, based on the time Mr. McFerson
devotes to his responsibilities with Nationwide Financial Services. The
compensation reported for Mr. McFerson in the compensation tables and
discussed in this prospectus represents amounts paid for Mr. McFerson's
services as Chairman and Chief Executive Officer of and Nationwide
Financial Services and its subsidiaries.
Mr. McFerson's 1999 compensation was determined pursuant to the same
philosophy and objectives described earlier in this prospectus and used for
all executive officers. In determining the compensation of Mr. McFerson for
1999, the Nationwide Life Compensation Committee reviewed the strong
financial results of Nationwide Financial Services for 1998, Mr. McFerson's
superior leadership of the Nationwide Group since 1992, his extensive
experience in the industry, and his successful efforts in Nationwide
Financial Services. The portion of Mr. McFerson's base salary compensation
allocated to Nationwide Financial Services totaled $466,900 in 1999, an
increase of 8.3% percent over 1998. This increase reflects both an
adjustment in Mr. McFerson's annual base salary rate, and an increase in
the cost allocation. In 1999, Mr. McFerson's annual base salary rate was
increased by 5.3%. This increase positioned Mr. McFerson's base salary
compensation at approximately the 50th percentile of the comparable
companies.
The portion of Mr. McFerson's annual incentive award allocated to
Nationwide Financial Services earned in 1999 under the Performance
Incentive Plan was $1,008,504. This award was 216% of his allocated base
salary compensation, and reflected 180% of his target incentive. This
payment was determined by the level of achievement of specified financial,
operational and strategic goals as assessed by Nationwide's Board of
Directors in their annual performance evaluation of Mr. McFerson.
Under the Long-Term Equity Compensation Plan, the Nationwide Financial
Services Compensation Committee granted Mr. McFerson 109,700 stock option
shares. This number of stock option shares is slightly in excess of the
maximum shares permitted to be granted per person per year under the Long
Term Equity Compensation Plan prior to its amendment. The number of shares
in excess of the limit, 9,700, cannot be considered as performance-based
compensation at the time of their exercise under Section 162(m) of the
Internal Revenue Code. In making this grant, the Nationwide Financial
Services Compensation Committee took into account competitive levels of
long-term compensation for Chief Executive Officers of major diversified
insurance and financial services organizations with similar size and scope,
as well as Mr. McFerson's role in the continued strategic positioning of
the Nationwide Financial Services. In addition, the Nationwide Financial
Services Compensation Committee reflected the Nationwide Financial
Services' desire to have top officers build significant personal level of
stock ownership in Nationwide Financial Services, so as to better align
their interests with those of other stockholders.
H. POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code provides that executive
compensation in excess of $1 million will not be deductible for purposes of
corporate income taxes unless it is performance-based compensation and is
paid pursuant to a plan meeting certain requirements of the Internal
Revenue Code. The Compensation Committees intend to continue increased
reliance on performance-based compensation programs. Such programs will be
designed to fulfill, in the best possible manner, future corporate business
objectives. To the extent consistent with this goal, the Compensation
Committees currently anticipate that such programs will also be designed to
satisfy the requirements of Section 162(m) of the
43
<PAGE> 46
IRC with respect to the deductibility of compensation paid. However, the
Compensation Committees may award compensation that is not fully deductible
if the Compensation Committees determine that such award is consistent with
their philosophy and in the best interests of Nationwide Financial Services
and its stockholders.
(i) Nationwide Financial Services Compensation Committee
David O. Miller, Chariman
James G. Brocksmith, Jr.
Charles L. Fuellgraf, Jr.
Donald L. McWhorter(1)
(1)Mr. McWhorter serves as a director for Nationwide Financial Services,
Inc.
(ii) Nationwide Life Insurance Company Compensation Committee
Willard J. Engel, Chairman
Fred C. Finney
Robert L. Stewart
Nancy C. Thomas
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<PAGE> 47
11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31,
1999
Schedule III Supplementary Insurance Information as of December
31, 1999, 1998 and 1997 and for each of the years
then ended
Schedule IV Reinsurance as of December 31, 1999, 1998 and 1997
and for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years
ended December 31, 1999, 1998 and 1997
All other schedules are omitted because they are not applicable or
required or because the required information has been included in
the audited consolidated financial statements or notes thereto.
45
<PAGE> 48
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life and Annuity Insurance Company:
We have audited the accompanying balance sheets of Nationwide Life and Annuity
Insurance Company, a wholly owned subsidiary of Nationwide Life Insurance
Company, as of December 31, 1999 and 1998, and the related statements of income,
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Nationwide Life and Annuity
Insurance Company as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Columbus, Ohio
January 28, 2000
<PAGE> 2
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Balance Sheets
($000's omitted, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------------
Assets 1999 1998
------ --------------- ---------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $ 1,051,556 $ 904,946
Equity securities 5,659 20,853
Mortgage loans on real estate, net 330,068 268,894
Real estate, net 2,200 2,250
Policy loans 465 332
Short-term investments 706 2,277
--------------- ---------------
1,390,654 1,199,552
--------------- ---------------
Cash 4,280 2
Accrued investment income 13,906 11,645
Deferred policy acquisition costs 92,025 53,007
Reinsurance receivable from affiliate 91,667 -
Other assets 42,851 41,542
Assets held in separate accounts 2,127,080 1,533,690
--------------- ---------------
$ 3,762,463 $ 2,839,438
=============== ===============
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $ 1,480,807 $ 1,163,829
Other liabilities 41,308 25,933
Liabilities related to separate accounts 2,127,080 1,533,690
--------------- ---------------
3,649,195 2,723,452
--------------- ---------------
Commitments and contingencies (notes 8 and 12)
Shareholder's equity:
Common stock, $40 par value. Authorized, issued and outstanding 66,000 shares 2,640 2,640
Additional paid-in capital 52,960 52,960
Retained earnings 59,536 50,331
Accumulated other comprehensive income (1,868) 10,055
--------------- ---------------
113,268 115,986
--------------- ---------------
$ 3,762,463 $ 2,839,438
=============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Income
($000's omitted)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Policy charges $44,793 $28,549 $11,244
Life insurance premiums 292 63 363
Net investment income 13,959 11,314 11,577
Realized gains (losses) on investments 5,208 696 (246)
Other income 1,059 1,165 1,057
------------- ------------- --------------
65,311 41,787 23,995
------------- ------------- --------------
Benefits and expenses:
Interest credited to policyholder account balances 8,548 4,881 3,948
Other benefits and claims 5,210 1,586 433
Amortization of deferred policy acquisition costs 13,592 4,348 1,402
Other operating expenses 24,185 8,952 1,860
------------- ------------- --------------
51,535 19,767 7,643
------------- ------------- --------------
Income before federal income tax expense 13,776 22,020 16,352
Federal income tax expense 4,571 7,501 5,749
------------- ------------- --------------
Net income $ 9,205 $14,519 $10,603
============= ============= ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Shareholder's Equity
Years ended December 31, 1999, 1998 and 1997
($000's omitted)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income equity
------------ -------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 $2,640 $52,960 $25,209 $ 3,228 $ 84,037
Comprehensive income:
Net income - - 10,603 - 10,603
Net unrealized gains on securities
available-for-sale arising during the year - - - 3,940 3,940
---------------
Total comprehensive income 14,543
------------ -------------- -------------- ----------------- ---------------
December 31, 1997 2,640 52,960 35,812 7,168 98,580
Comprehensive income:
Net income - - 14,519 - 14,519
Net unrealized gains on securities
available-for-sale arising during the year - - - 2,887 2,887
---------------
Total comprehensive income 17,406
------------ -------------- -------------- ----------------- ---------------
December 31, 1998 2,640 52,960 50,331 10,055 115,986
Comprehensive income:
Net income - - 9,205 - 9,205
Net unrealized losses on securities
available-for-sale arising during the year - - - (11,923) (11,923)
---------------
Total comprehensive income (2,718)
------------ -------------- -------------- ----------------- ---------------
December 31, 1999 $2,640 $52,960 $59,536 $(1,868) $113,268
============ ============== ============== ================= ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Cash Flows
($000's omitted)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1999 1998 1997
------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,205 $ 14,519 $ 10,603
Adjustments to reconcile net income to net cash provided by
operating activities:
Interest credited to policyholder account balances 8,548 4,881 3,948
Capitalization of deferred policy acquisition costs (33,965) (29,216) (20,099)
Amortization of deferred policy acquisition costs 13,592 4,348 1,402
Amortization and depreciation 1,351 (479) 250
Realized (gains) losses on invested assets, net (5,208) (696) 246
Increase in accrued investment income (2,261) (867) (1,589)
Increase in policy liabilities and funds withheld
on coinsurance agreement with affiliate 160,246 139,991 228,898
Other, net 20,486 (29,802) 14,370
------------- ---------------- ---------------
Net cash provided by operating activities 171,994 102,679 238,029
------------- ---------------- ---------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 137,210 117,228 95,366
Proceeds from sale of securities available-for-sale 73,864 17,403 30,431
Proceeds from repayments of mortgage loans on real estate 32,397 28,180 15,199
Proceeds from sale of real estate - 707 -
Proceeds from repayments of policy loans 109 99 67
Cost of securities available-for-sale acquired (375,642) (242,516) (267,899)
Cost of mortgage loans on real estate acquired (93,500) (78,180) (84,736)
Cost of real estate acquired - (3) (13)
Policy loans issued (242) (216) (155)
Short-term investments, net 1,571 16,691 (18,476)
------------- ---------------- ---------------
Net cash used in investing activities (224,233) (140,607) (230,216)
------------- ---------------- ---------------
Cash flows from financing activities:
Increase in investment product and universal life insurance
product account balances 192,893 74,828 6,952
Decrease in investment product and universal life insurance
product account balances (136,376) (42,061) (13,898)
------------- ---------------- ---------------
Net cash provided by (used in) financing activities 56,517 32,767 (6,946)
------------- ---------------- ---------------
Net increase (decrease) in cash 4,278 (5,161) 867
Cash, beginning of year 2 5,163 4,296
Cash, end of year $ 4,280 $ 2 $ 5,163
============= ================ ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
($000's omitted)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Nationwide Life and Annuity Insurance Company (the Company) is a wholly
owned subsidiary of Nationwide Life Insurance Company (NLIC).
The Company provides long-term savings and retirement products,
including variable annuities, fixed annuities and life insurance.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities.
An Annual Statement, filed with the Department of Insurance of the
State of Ohio (the Department), is 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.
In preparing the 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 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) VALUATION OF INVESTMENTS AND RELATED GAINS AND LOSSES
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of accumulated other comprehensive income in
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, 1999 or 1998.
<PAGE> 7
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
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. 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.
(b) REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual variable and
fixed deferred annuities. Universal life insurance products
include universal life insurance, variable universal life
insurance, corporate owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of 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.
(c) 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(a).
(d) SEPARATE ACCOUNTS
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. 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
statements of income and cash flows except for the fees the
Company receives.
<PAGE> 8
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(e) FUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges. The average interest rate credited on investment product
policy reserves was 4.5%, 5.1% and 5.1% for the years ended
December 31, 1999, 1998 and 1997, respectively.
(f) FEDERAL INCOME TAX
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC). The members of the
consolidated tax return group have a tax sharing agreement 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.
(g) REINSURANCE CEDED
Reinsurance revenues ceded and reinsurance recoveries on benefits
and expenses incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(h) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, The American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The
SOP, which has been adopted prospectively as of January 1, 1999,
requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software.
Prior to the adoption of SOP 98-1, the Company expensed internal
use software related costs as incurred. The effect of adopting the
SOP was to increase net income for 1999 by $431.
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities. Contracts that contain embedded derivatives, such as
certain investment and insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
July 1999 the FASB issued Statement No. 137 which delayed the
effective date of FAS 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt this Statement in first quarter
2001 and is currently evaluating the impact on results of
operations and financial condition.
(i) RECLASSIFICATION
Certain items in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
<PAGE> 9
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to 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, 1999 and
1998 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
December 31, 1999:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 36,717 $ 2 $ (1,198) $ 35,521
Obligations of states and political subdivisions 302 - (7) 295
Debt securities issued by foreign governments 2,256 2 (22) 2,236
Corporate securities 773,869 2,208 (13,367) 762,710
Mortgage-backed securities 252,668 1,001 (2,875) 250,794
--------------- ------------- ------------- ---------------
Total fixed maturity securities 1,065,812 3,213 (17,469) 1,051,556
Equity securities 1,990 3,669 - 5,659
--------------- ------------- ------------- ---------------
$1,067,802 $6,882 $(17,469) $1,057,215
===========================================================
December 31, 1998:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 15,577 $ 232 $ (11) $ 15,798
Obligations of states and political subdivisions 332 1 - 333
Debt securities issued by foreign governments 4,015 23 - 4,038
Corporate securities 602,925 15,446 (358) 618,013
Mortgage-backed securities 261,225 5,605 (66) 266,764
--------------- ------------- ------------- ---------------
Total fixed maturity securities 884,074 21,307 (435) 904,946
Equity securities 15,323 5,530 - 20,853
--------------- ------------- ------------- ---------------
$899,397 $26,837 $(435) $925,799
=============== ============= ============= ===============
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1999, by expected
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
------------ ---------------
<S> <C> <C>
Fixed maturity securities available-for-sale:
Due in one year or less $ 50,029 $ 49,799
Due after one year through five years 399,476 393,204
Due after five years through ten years 331,022 326,616
Due after ten years 285,285 281,937
------------ ---------------
$1,065,812 $1,051,556
============ ===============
</TABLE>
<PAGE> 10
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
The components of unrealized gains (losses) on securities
available-for-sale, net, were as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Gross unrealized gains (losses) $(10,587) $26,402
Adjustment to deferred policy acquisition costs 7,714 (10,933)
Deferred federal income tax 1,006 (5,414)
------------- --------------
$ (1,868) $10,055
============= ==============
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ (35,128) $ 3,922 $ 9,177
Equity securities (1,861) 2,467 1,663
------------- ------------- -------------
$ (36,989) $ 6,389 $10,840
============= ============= =============
</TABLE>
Proceeds from the sale of securities available-for-sale during 1999,
1998 and 1997 were $73,864, $17,403 and $30,431, respectively. During
1999, gross gains of $297 ($509 and $825 in 1998 and 1997,
respectively) and gross losses of $37 (none and $1,124 in 1998 and
1997, respectively) were realized on those sales. See note 10.
The Company has no investments which were non-income producing for the
twelve month periods preceding December 31, 1999 and 1998.
Real estate is presented at cost less accumulated depreciation of $155
as of December 31, 1999 ($105 as of December 31, 1998). There was no
valuation allowance as of December 31, 1999 or 1998.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1999 was $881 ($890 as of December 31,
1998). No valuation allowance has been recorded for these loans as of
December 31, 1999 or 1998. During 1999, the average recorded investment
in impaired mortgage loans on real estate was approximately $885 ($178
in 1998) and there was no interest income recognized on those loans.
Interest income recognized on impaired loans was $15 in 1998, which is
equal to interest income recognized using a cash-basis method of income
recognition.
The valuation allowance account for mortgage loans on real estate was
$750 for the year ended December 31, 1999 and remains unchanged from
the previous two years.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $66,160 $56,398 $53,491
Equity securities - - 375
Mortgage loans on real estate 23,475 21,124 14,862
Real estate 413 379 318
Short-term investments 1,580 1,361 899
Other 334 178 90
------------ ----------- -----------
Total investment income 91,962 79,440 70,035
Less:
Investment expenses 2,040 1,773 1,386
Net investment income ceded (note 11) 75,963 66,353 57,072
------------ ----------- -----------
Net investment income $13,959 $11,314 $11,577
============ =========== ===========
</TABLE>
<PAGE> 11
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $ 260 $ 509 $(299)
Mortgage loans on real estate 7 - 53
Real estate and other 4,941 187 -
------------ ----------- ------------
$ 5,208 $ 696 $(246)
============ =========== ============
</TABLE>
Fixed maturity securities with an amortized cost of $3,540 and $3,562
as of December 31, 1999 and 1998, respectively, were on deposit with
various regulatory agencies as required by law.
(4) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, principally interest
rate swaps, interest rate futures contracts and foreign currency swaps,
to manage market risk exposures associated with changes in interest
rates and foreign currency exchange rates. Provided they meet specific
criteria, interest rate swaps and futures are considered hedges and are
accounted for under the accrual method and deferral method,
respectively. The Company has no significant derivative positions that
are not considered hedges.
Interest rate swaps are primarily used to convert specific investment
securities from a fixed-rate to a floating-rate basis. Amounts
receivable or payable under these agreements are recognized as an
adjustment to net investment income consistent with the nature of the
hedged item. The changes in fair value of the interest rate swap
agreements are not recognized on the balance sheet, except for interest
rate swaps designated as hedges of fixed maturity securities
available-for-sale, for which changes in fair values are reported in
accumulated other comprehensive income.
Interest rate futures contracts are primarily used to hedge the risk of
adverse interest rate changes related to the Company's mortgage loan
commitments and anticipated purchases of fixed rate investments. Gains
and losses are deferred and, at the time of closing, reflected as an
adjustment to the carrying value of the related mortgage loans or
investments. The carrying value adjustments are amortized into net
investment income over the life of the related mortgage loans or
investments.
Foreign currency swaps are used to convert cash flows from specific
investments denominated in foreign currencies into U.S. dollars at
specified exchange rates. Gains and losses on foreign currency swaps
are recorded in earnings based on the related spot foreign exchange
rate at the end of the reporting period. Gains and losses on these
contracts offset those recorded as a result of translating the hedged
foreign currency denominated investments to U.S. dollars.
The following table summarizes the notional amount of derivative
financial instruments classified as hedges outstanding as of December
31, 1999. Prior to 1999 the Company's activities in derivatives were
not significant.
<TABLE>
<CAPTION>
Interest rate swaps
<S> <C>
Pay fixed/receive variable rate swaps hedging investments $ 1,585
Foreign currency swaps
Hedging foreign currency denominated investments $ 1,420
Interest rate futures contracts $ 2,483
</TABLE>
<PAGE> 12
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(5) FEDERAL INCOME TAX
The tax effects of temporary differences that give rise to significant
components of the net deferred tax asset as of December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $ 17,454 $ 16,670
Liabilities in separate accounts 15,603 12,477
Fixed maturity securities 3,905 -
Mortgage loans on real estate and real estate 266 263
------------ ------------
Total gross deferred tax assets 37,228 29,410
------------ ------------
Deferred tax liabilities:
Fixed maturity securities - 8,669
Deferred policy acquisition costs 15,624 8,103
Equity securities 1,284 1,935
Other 13,799 10,422
------------ ------------
Total gross deferred tax liabilities 30,707 29,129
------------ ------------
Net deferred tax asset $ 6,521 $ 281
============ ============
</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. All future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. The
Company has determined that valuation allowances are not necessary as
of December 31, 1999, 1998 and 1997 based on its analysis of future
deductible amounts.
The Company's current federal income tax liability was $1,860 and
$1,522 as of December 31, 1999 and 1998, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Currently payable $ 4,391 $10,014 $2,458
Deferred tax expense (benefit) 180 (2,513) 3,291
------------ ----------- ------------
$ 4,571 $ 7,501 $5,749
============ =========== ============
</TABLE>
Total federal income tax expense for the years ended December 31, 1999,
1998 and 1997 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Amount % Amount % Amount %
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $4,822 35.0 $7,707 35.0 $5,723 35.0
Tax exempt interest and dividends
received deduction (255) (1.8) (223) (1.0) - -
Other, net 4 - 17 0.1 26 (0.2)
----------- -------- ----------- -------- ----------- --------
Total (effective rate of each year) $4,571 33.2 $7,501 34.1 $5,749 35.2
=========== ======== =========== ======== =========== ========
</TABLE>
Total federal income tax paid was $4,053, $9,298 and $9,566 during the
years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE> 13
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(6) COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within separate components of shareholder's
equity that bypass net income. Currently, the Company's only component
of Other Comprehensive Income is unrealized gains (losses) on
securities available-for-sale. The related before and after federal tax
amounts are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities available-for-sale
arising during the period:
Gross $ (36,729) $ 6,898 $10,541
Adjustment to deferred policy acquisition costs 18,645 (1,947) (4,778)
Related federal income tax (expense) benefit 6,330 (1,733) (2,017)
------------- ------------- --------------
Net (11,754) 3,218 3,746
------------- ------------- --------------
Reclassification adjustment for net (gains) losses on
securities available-for-sale realized during the
period:
Gross (260) (509) 299
Related federal income tax expense (benefit) 91 178 (105)
------------- ------------- --------------
Net (169) (331) 194
------------- ------------- --------------
Total Other Comprehensive Income $ (11,923) $ 2,887 $ 3,940
============= ============= ==============
</TABLE>
(7) 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 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.
<PAGE> 14
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
FIXED MATURITY AND EQUITY SECURITIES: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for fixed
maturity and equity securities exclude the fair value of
derivatives contracts designated as hedges of fixed maturity and
equity securities.
MORTGAGE LOANS ON REAL ESTATE: 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 mortgages in default is the estimated fair value of
the underlying collateral.
POLICY LOANS, SHORT-TERM INVESTMENTS AND CASH: The carrying amount
reported in the balance sheets for these instruments approximates
their fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
INVESTMENT CONTRACTS: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
POLICY RESERVES ON LIFE INSURANCE CONTRACTS: 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 8.
FUTURES CONTRACTS: The fair value for futures contracts is based
on quoted market prices.
INTEREST RATE AND FOREIGN CURRENCY SWAPS: The fair value for
interest rate and foreign currency swaps are calculated with
pricing models using current rate assumptions.
<PAGE> 15
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $ 1,051,556 $ 1,051,556 $ 904,946 $ 904,946
Equity securities 5,659 5,659 20,853 20,853
Mortgage loans on real estate, net 330,068 324,610 268,894 276,387
Policy loans 465 465 332 332
Short-term investments 706 706 2,277 2,277
Cash 4,280 4,280 2 2
Assets held in separate accounts 2,127,080 2,127,080 1,533,690 1,533,690
Liabilities:
Investment contracts (1,335,787) (1,283,459) (1,153,930) (1,113,584)
Policy reserves on life insurance contracts (145,020) (145,370) (9,899) (10,517)
Liabilities related to separate accounts (2,127,080) (2,082,541) (1,533,690) (1,501,255)
Derivative financial instruments:
Interest rate swaps hedging assets 109 109 - -
Foreign currency swaps (18) (18) - -
Futures contracts 21 21 - -
</TABLE>
(8) RISK DISCLOSURES
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
CREDIT RISK: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties which owe the Company money, will
not pay. The Company minimizes this risk by adhering to a conservative
investment strategy, by maintaining credit and collection policies and
by providing for any amounts deemed uncollectible.
INTEREST RATE RISK: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by operating throughout the
United States, thus reducing its exposure to any single jurisdiction,
and also by employing underwriting practices which identify and
minimize the adverse impact of this risk.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans and derivative financial instruments. These
instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the balance sheets.
<PAGE> 16
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
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 $10,039 extending into
2000 were outstanding as of December 31, 1999.
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 30% (33% in 1998) in any geographic area and no more than 5% (6%
in 1998) with any one borrower as of December 31, 1999. As of December
31, 1999 22% (36% in 1998) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed apartment
building properties.
(9) PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. The Company funds pension costs accrued for direct
employees plus an allocation of pension costs accrued for employees of
affiliates whose work efforts benefit the Company. Assets of the
Retirement Plan are invested in group annuity contracts of NLIC.
Pension costs charged to operations by the Company during the years
ended December 31, 1999, 1998 and 1997 were $127, $235 and $257,
respectively.
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,
1999 and 1998 was $1,040 and $1,008, respectively, and the net periodic
postretirement benefit cost (NPPBC) for 1999, 1998 and 1997 was $177,
$130 and $94, respectively.
<PAGE> 17
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Information regarding the funded status of the pension plan as a whole
and the postretirement life and health care benefit plan as a whole as
of December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $2,185,000 $ 2,033,800 $ 270,100 $ 237,900
Service cost 80,000 87,600 14,200 9,800
Interest cost 109,900 123,400 17,600 15,400
Actuarial (gain) loss (95,000) 123,200 (64,400) 15,600
Plan settlement in 1999/curtailment in 1998 (396,100) (107,200) - -
Benefits paid (72,400) (75,800) (11,000) (8,600)
Acquired companies - - 13,300 -
------------- ------------- ------------- -------------
Benefit obligation at end of year 1,811,400 2,185,000 239,800 270,100
------------- ------------- ------------- -------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,541,900 2,212,900 77,900 69,200
Actual return on plan assets 161,800 300,700 3,500 5,000
Employer contribution 12,400 104,100 20,900 12,100
Plan settlement (396,100) - - -
Benefits paid (72,400) (75,800) (11,000) (8,400)
------------- ------------- ------------- -------------
Fair value of plan assets at end of year 2,247,600 2,541,900 91,300 77,900
------------- ------------- ------------- -------------
Funded status 436,200 356,900 (148,500) (192,200)
Unrecognized prior service cost 28,200 31,500 - -
Unrecognized net (gains) losses (402,000) (345,700) (46,700) 16,000
Unrecognized net (asset) obligation at transition (7,700) (11,000) 1,100 1,300
------------- ------------- ------------- -------------
Prepaid (accrued) benefit cost $ 54,700 $ 31,700 $ (194,100) $ (174,900)
============= ============= ============= =============
</TABLE>
Basis for measurements, funded status of the pension plan and
postretirement life and health care benefit plan:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average discount rate 7.00% 5.50% 7.80% 6.65%
Rate of increase in future compensation levels 5.25% 3.75% - -
Assumed health care cost trend rate:
Initial rate - - 15.00% 15.00%
Ultimate rate - - 5.50% 8.00%
Uniform declining period - - 5 Years 15 Years
</TABLE>
The net periodic pension cost for the pension plan as a whole for the
years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- --------------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 80,000 $ 87,600 $ 77,300
Interest cost on projected benefit obligation 109,900 123,400 118,600
Expected return on plan assets (160,300) (159,000) (139,000)
Recognized gains (9,100) (3,800) -
Amortization of prior service cost 3,200 3,200 3,200
Amortization of unrecognized transition obligation (asset) (1,400) 4,200 4,200
------------- -------------- --------------
$ 22,300 $ 55,600 $ 64,300
============= ============== ==============
</TABLE>
<PAGE> 18
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide Insurance and employees of WSC ended
participation in the plan. A curtailment gain of $67,100 resulted
(consisting of a $107,200 reduction in the projected benefit
obligation, net of the write-off of the $40,100 remaining unamortized
transition obligation related to WSC). During 1999, the plan
transferred assets to settle its obligation related to WSC employees. A
settlement gain of $32.9 million was recognized.
Basis for measurements, net periodic pension cost for the pension plan:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate 6.08% 6.00% 6.50%
Rate of increase in future compensation levels 4.33% 4.25% 4.75%
Expected long-term rate of return on plan assets 7.33% 7.25% 7.25%
</TABLE>
The amount of NPPBC for the postretirement benefit plan as a whole for
the years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Service cost (benefits attributed to employee service
during the year) $14,200 $ 9,800 $ 7,000
Interest cost on accumulated postretirement benefit obligation 17,600 15,400 14,000
Actual return on plan assets (3,500) (5,000) (3,600)
Amortization of unrecognized transition obligation of affiliates 600 200 200
Net amortization and deferral (1,800) 1,200 (500)
------------- -------------- -------------
$27,100 $21,600 $17,100
============= ============== =============
</TABLE>
Actuarial assumptions used for the measurement of the accumulated
postretirement benefit obligation (APBO) and the NPPBC for the
postretirement benefit plan for 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NPPBC:
Discount rate 6.65% 6.70% 7.25%
Long term rate of return on plan
assets, net of tax 7.15% 5.83% 5.89%
Assumed health care cost trend rate:
Initial rate 15.00% 12.00% 11.00%
Ultimate rate 5.50% 6.00% 6.00%
Uniform declining period 5 Years 12 Years 12 Years
</TABLE>
For the postretirement benefit plan as a whole, a one percentage point
increase or decrease in the assumed health care cost trend rate would
have no impact on the APBO as of December 31, 1999 and have no impact
on the NPPBC for the year ended December 31, 1999.
(10) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, the Company's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. The Company exceeds the
minimum risk-based capital requirements.
<PAGE> 19
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
The statutory capital and surplus of the Company as reported to
regulatory authorities as of December 31, 1999, 1998 and 1997 was
$63,275, $70,135 and $74,820, respectively. The statutory net (loss)
income of the Company as reported to regulatory authorities for the
years ended December 31, 1999, 1998 and 1997 was $(305), $(3,371) and
$7,446, respectively.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 1999,
the maximum amount available for dividend payment from the Company to
its shareholder without prior approval of the Department was $6,328.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and stockholder dividends
in the future.
(11) TRANSACTIONS WITH AFFILIATES
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1999, 1998 and 1997, the
Company made lease payments to NMIC and its subsidiaries of $660, $430
and $703, 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. Measures used
to allocate expenses among companies include individual employee
estimates of time spent, special cost studies, salary expense,
commission expense and other methods agreed to by the participating
companies that are within industry guidelines and practices. In
addition, beginning in 1999 Nationwide Services Company, a subsidiary
of NMIC, provides computer, telephone, mail, employee benefits
administration, and other services to NMIC and certain of its direct
and indirect subsidiaries, including the Company, based on specified
rates for units of service consumed. For the years ended December 31,
1999, 1998 and 1997, the Company made payments to NMIC and Nationwide
Services Company totaling $5,150, $2,933, and $2,564, respectively. In
addition, the Company does not believe that expenses recognized under
these agreements are materially different than expenses that would have
been recognized had the Company operated on a stand-alone basis.
Effective December 31, 1996, the Company entered into an intercompany
reinsurance agreement with NLIC whereby certain inforce and
subsequently issued fixed individual deferred annuity contracts are
ceded on a 100% coinsurance with funds withheld basis. On December 31,
1997, the agreement was amended to a modified coinsurance basis. Under
modified coinsurance agreements, invested assets and liabilities for
future policy benefits are retained by the ceding company and net
investment earnings on the invested assets are paid to the assuming
company. Under terms of the Company's agreement, the investment risk
associated with changes in interest rates is borne by NLIC. Risk of
asset default is retained by the Company, although a fee is paid by
NLIC to the Company for the Company's retention of such risk. The
agreement will remain inforce until all contract obligations are
settled. Amounts ceded to NLIC in 1999 are included in NLIC's results
of operations for 1999 and include premiums of $258,468 ($241,503 and
$300,617 in 1998 and 1997, respectively), net investment income of
$75,963 ($66,353 and $57,072 in 1998 and 1997, respectively) and
benefits, claims and other expenses of $319,240 ($296,659 and $343,426
in 1998 and 1997, respectively). In consideration for the initial
inforce business reinsured, NLIC paid the Company $26,473 in commission
and expense allowances which were applied to the Company's deferred
policy acquisition costs as of December 31, 1996. No significant gain
or loss was recognized as a result of the agreement.
During 1999, the Company entered into an intercompany reinsurance
agreement with NLIC wherby certain life insurance contracts are ceded
on a 100% coinsurance basis. Amounts ceded to NLIC include premiums of
$87,696 and expenses of $3,150 during 1999 and policy reserves of
$91,667 as of December 31, 1999.
The ceding of risk does not discharge the original insurer from its
primary obligation to the contractholder. The Company believes that the
terms of the reinsurance agreements with affiliates are consistent in
all material respects with what the Company could have obtained with
unaffiliated parties.
<PAGE> 20
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
During 1997, the Company sold fixed maturity securities
available-for-sale at fair value of $27,253 to NLIC. The Company
recognized a $693 gain on the transactions.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as 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 $706 and $2,277 as of December 31,
1999 and 1998, respectively, and are included in short-term investments
on the accompanying balance sheets.
(12) CONTINGENCIES
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint
filed by the Company and other named defendants. The Company intends to
defend this lawsuit vigorously.
(13) SEGMENT INFORMATION
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
an untimely death, and flexible payout options including a lump sum,
systematic withdrawal or a stream of payments for life. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate fixed for a
prescribed period, tax-deferred accumulation of savings, and flexible
payout options including a lump sum, systematic withdrawal or a stream
of payments for life. Such contracts consist of single premium deferred
annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment includes the fixed
option under variable annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
and all realized gains and losses on investments in a Corporate and
Other segment.
<PAGE> 21
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
The following table summarizes the financial results of the Company's
business segments for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Variable Fixed Life Corporate
Annuities Annuities Insurance and Other Total
--------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
1999:
Net investment income (1) $ (2,304) $ 8,550 $ 1,596 $ 6,117 $ 13,959
Other operating revenue 26,187 3,310 16,647 -- 46,144
----------- ----------- ----------- ----------- -----------
Total operating revenue (2) 23,883 11,860 18,243 6,117 60,103
----------- ----------- ----------- ----------- -----------
Interest credited to policyholder
account balances -- 6,561 1,987 -- 8,548
Amortization of deferred policy
acquisition costs 7,686 963 4,943 -- 13,592
Other benefits and expenses 13,593 7,378 8,424 -- 29,395
----------- ----------- ----------- ----------- -----------
Total expenses 21,279 14,902 15,354 -- 51,535
----------- ----------- ----------- ----------- -----------
Operating income (loss) before
federal income tax 2,604 (3,042) 2,889 6,117 8,568
Realized gains on investments -- -- -- 5,208 5,208
----------- ----------- ----------- ----------- -----------
Consolidated income (loss) before
federal tax expense $ 2,604 $ (3,042) $ 2,889 $ 11,325 $ 13,776
=========== =========== =========== =========== ===========
Assets as of year end $ 1,957,486 $ 1,352,324 $ 382,388 $ 70,265 $ 3,762,463
=========== =========== =========== =========== ===========
1998:
Net investment income (1) $ (1,417) $ 6,792 $ 408 $ 5,531 $ 11,314
Other operating revenue 18,209 3,182 8,386 -- 29,777
----------- ----------- ----------- ----------- -----------
Total operating revenue (2) 16,792 9,974 8,794 5,531 41,091
----------- ----------- ----------- ----------- -----------
Interest credited to policyholder
account balances -- 4,660 221 -- 4,881
Amortization of deferred policy
acquisition costs 3,466 508 374 -- 4,348
Other benefits and expenses 4,442 2,087 4,009 -- 10,538
----------- ----------- ----------- ----------- -----------
Total expenses -- 7,908 7,255 4,604 19,767
----------- ----------- ----------- ----------- -----------
Operating income before federal
income tax 8,884 2,719 4,190 5,531 21,324
Realized gains on investments -- -- -- 696 696
----------- ----------- ----------- ----------- -----------
Consolidated income before
federal tax expense $ 8,884 $ 2,719 $ 4,190 $ 6,227 $ 22,020
=========== =========== =========== =========== ===========
Assets as of year end $ 1,502,829 $ 1,162,040 $ 92,482 $ 82,087 $ 2,839,438
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 22
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
Variable Fixed Life Corporate
Annuities Annuities Insurance and Other Total
--------------- --------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
1997:
Net investment income (1) $ (873) $ 5,927 $ 166 $ 6,357 $ 11,577
Other operating revenue 10,823 1,825 16 - 12,664
--------------- --------------- --------------- ---------------- -------------
Total operating revenue (2) 9,950 7,752 182 6,357 24,241
--------------- --------------- --------------- ---------------- -------------
Interest credited to policyholder
account balances - 3,856 92 - 3,948
Amortization of deferred policy
acquisition costs 1,035 347 20 - 1,402
Other benefits and expenses 1,648 347 298 - 2,293
--------------- --------------- --------------- ---------------- -------------
Total expenses 2,683 4,550 410 - 7,643
--------------- --------------- --------------- ---------------- -------------
Operating income (loss) before
federal income tax 7,267 3,202 (228) 6,357 16,598
Realized losses on investments - - - (246) (246)
--------------- --------------- --------------- ---------------- -------------
Consolidated income (loss) before
federal tax expense $ 7,267 $ 3,202 $ (228) $ 6,111 $ 16,352
=============== =============== =============== ================ =============
Assets as of year end $ 925,021 $ 989,116 $ 2,228 $ 88,933 $2,005,298
=============== =============== =============== ================ =============
</TABLE>
----------
(1) The Company's method of allocating net investment income results in a
charge (negative net investment income) to the Variable Annuities segment
which is recognized in the Corporate and Other segment. The charge relates
to non-invested assets which support this segment on a statutory basis.
(2) Excludes realized gains and losses on investments.
The Company has no significant revenue from customers located outside of
the United States nor does the Company have any significant long-lived
assets located outside the United States.
<PAGE> 49
APPENDIX
Example A
Assume that a variable annuity contract owner made a $10,000 allocation on the
first day of a calendar quarter into a 5-year Guaranteed Term Option. The
Specified Interest Rate at the time is 8% and the 5-year Constant Maturity
Treasury Rate in effect for the Specified Interest Rate is 8%. The variable
annuity contract owner decides to surrender the GTO 985 days from maturity. The
Specified Value of the GTO is $11,937.69. At this time, the 3-year Constant
Maturity Treasury Rate is 7%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
MVA FACTOR = [-----------------------] [--------------]
1 + b + 0.0025 365.25
1 + 0.08 985
MVA FACTOR = [-----------------------] [--------------]
1 + 0.07 + 0.0025 365.25
MVA FACTOR = 1.01897
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 1.01897
*SURRENDER VALUE = $12,164.15
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the Investment Period during which the allocation
to the GTO was made.
b = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the withdrawal, transfer or other distribution
giving rise to the Market Value Adjustment.
d = The number of days remaining in the Guaranteed Term.
Example B
Assume variable annuity contract owner made a $10,000 allocation on the first
day of a calendar quarter into a 5-year Guaranteed Term Option. The Specified
Interest Rate at the time is 8% and the 5-year Constant Maturity Treasury Rate
in effect for the Specified Interest Rate is 8%. The variable annuity contract
owner decides to surrender his money 985 days from maturity. The Specified Value
of the GTO is $11,937.69. At this time, the 3 year Constant Maturity Treasury
Rate is 9%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
MVA FACTOR = [-----------------------] [---------------]
1 + b + 0.0025 365.25
1 + 0.08 985
MVA FACTOR = [----------------------------] [--------------]
1 + 0.09 + 0.0025 365.25
77
<PAGE> 50
MVA FACTOR = 0.96944
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 0.96944
*SURRENDER VALUE = $11,572.87
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the Investment Period during which the allocation
to the GTO was made.
b = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the withdrawal, transfer or other distribution
giving rise to the Market Value Adjustment.
d = The number of days remaining in the Guaranteed Term.
78
<PAGE> 51
The table set forth below illustrates the impact of a Market Value Adjustment
applied upon a full surrender of a 10 year GTO allocation, at various stages of
the corresponding Guaranteed Term. These figures are based on CMT Rate of 8% (a
in the Market Value Adjustment Formula) and varying current yield CMT Rates
shown in the first column (b in the Market Value Adjustment Formula).
<TABLE>
<CAPTION>
TIME REMAINING TO THE
END OF THE GUARANTEED SPECIFIED VALUE MARKET VALUE MARKET
CURRENT YIELD TERM ADJUSTMENT VALUE
------------ --------------------- --------------- ------------- ----------
<S> <C> <C> <C> <C>
12.00% 9 Years $10,800 -29.35% $7,630
7 Years $12,597 -23.68% $9,614
5 Years $14,693 -17.55% $12,114
2 Years $18,509 -7.43% $17,134
180 Days $20,785 -1.88% $20,394
10.00% 9 Years $10,800 -16.94% $8,970
7 Years $12,597 -13.44% $10,904
5 Years $14,693 -9.80% $13,253
2 Years $18,509 -4.04% $17,761
180 Days $20,785 -1.01% $20,575
9.00% 9 Years $10,800 -9.84% $9,731
7 Years $12,597 -7.74% $11,622
5 Years $14,693 -5.59% $13,872
2 Years $18,509 -2.28% $18,067
180 Days $20,785 -0.57% $20,667
8.00% 9 Years $10,800 -2.06% $10,578
7 Years $12,597 -1.61% $12,394
5 Years $14,693 -1.15% $14,524
2 Years $18,509 -0.46% $18,424
180 Days $20,785 -0.11% $20,762
7.00% 9 Years $10,800 6.47% $11,499
7 Years $12,597 5.00% $13,227
5 Years $14,693 3.55% $15,215
2 Years $18,509 1.40% $18,768
180 Days $20,785 0.34% $20,856
6.00% 9 Years $10,800 15.84% $12,511
7 Years $12,597 12.11% $14,122
5 Years $14,693 8.51% $15,943
2 Years $18,509 3.32% $19,123
180 Days $20,785 0.81% $20,953
4.00% 9 Years $10,800 37.45% $14,845
7 Years $12,597 28.07% $16,133
5 Years $14,693 19.33% $17,533
2 Years $18,509 7.32% $19,864
180 Days $20,785 1.76% $21,151
</TABLE>
79
<PAGE> 52
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
To be filed by pre-effective amendment.
80
<PAGE> 53
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
<TABLE>
<CAPTION>
(a)
Exhibit Index Page
<S> <C>
(3)(i) Certificate of Incorporation (Exhibit A)*
(3)(ii) Code of Regulations (Exhibit B)*
(4) Annuity Endorsement to Contracts (Exhibit C)* E
(5) Opinion Regarding Legality (Exhibit D)* E
(21) Subsidiaries of the Registrant (Not Applicable)
(23) Consent of Experts and Counsel (Exhibit E)* E
(24) Power of Attorney (Exhibit F) - Copy attached hereto
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1999, 1998 and 1997 Consolidated Statements of
Cash Flows for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b)(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other than Investments in Related Parties as
of December 31, 1999
Schedule III Supplementary Insurance Information as of December 31, 1999, 1998 and 1997 and for
each of the years then ended
Schedule IV Reinsurance as of December 31, 1999, 1998 and 1997 and for each of the years then
ended
Schedule V Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and
1997
All other schedules to the consolidated financial statements
referenced by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and have therefore
been omitted.
* To be filed by pre-effective amendment.
</TABLE>
81
<PAGE> 54
Item 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the determining of any liability under the
Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
82
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio,
on the 29th of September, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
-----------------------------------------------------------------------
(Registrant)
By: /s/ STEVEN SAVINI, ESQ.
-----------------------------------------------------------------------
Steven Savini, Esq.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following
persons on the 29th of September, 2000 in the capacities indicated.
SIGNATURE TITLE
LEWIS J. ALPHIN Director
----------------------------------------
Lewis J. Alphin
A. I. BELL Director
----------------------------------------
A. I. Bell
NANCY C. BREIT Director
----------------------------------------
Nancy C. Breit
YVONNE M. CURL Director
----------------------------------------
Yvonne M. Curl
KENNETH D. DAVIS Director
----------------------------------------
Kenneth D. Davis
KEITH W. ECKEL Director
----------------------------------------
Keith W. Eckel
WILLARD J. ENGEL Director
----------------------------------------
Willard J. Engel
FRED C. FINNEY Director
----------------------------------------
Fred C. Finney
JOSEPH J. GASPER President and Chief Operating
---------------------------------------- Officer and Director
Joseph J. Gasper
WilliAM G. JURGENSEN Chief Executive Officer-Elect and
---------------------------------------- Director
William G. Jurgensen
DIMON R. MCFERSON Chairman and Chief Executive
---------------------------------------- Officer and Director
Dimon R. McFerson
DAVID O. MILLER Chairman of the Board and
---------------------------------------- Director
David O. Miller
ROBERT A. OAKLEY Executive Vice President and Chief
---------------------------------------- Financial Officer
Robert A. Oakley
RALPH M. PAIGE Director
----------------------------------------
Ralph M. Paige
JAMES F. PATTERSON Director
----------------------------------------
James F. Patterson
ARDEN L. SHISLER Director By : /s/ STEVEN SAVINI
---------------------------------------- --------------------------------------
Arden L. Shisler Steven Savini
Attorney-in-Fact
ROBERT L. STEWART Director
----------------------------------------
Robert L. Stewart
</TABLE>
84
