<PAGE> 1
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 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)
31-4156830
(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: December 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 Amount to be Proposed Maximum Proposed Maximum Amount of registration
securities to be registered offering price per aggregate offering fee
registered unit price
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Flexible Purchase * * $250,000,000 $66,000
Payment Modified
Guaranteed Annuity
Contracts
-------------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE> 2
NATIONWIDE LIFE 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.................................................Distribution of Guaranteed Period Options
9. Description of Securities to be Registered........................Description of the Guaranteed Period Options
10. Interests of Named Experts and Counsel..........................................................Not Applicable
11. Information with Respect to Registrant.......................................Nationwide Life Insurance Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..................................................Not Applicable
</TABLE>
<PAGE> 3
FLEXIBLE PURCHASE PAYMENT MODIFIED GUARANTEED ANNUITY CONTRACTS
Supporting Guaranteed Period Options
Issued by
NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43215
Telephone: 1-800-848-6331
The date of this prospectus is December 1, 2000.
THIS PROSPECTUS SHOULD BE READ CAREFULLY AND MAINTAINED FOR FUTURE REFERENCE.
SUMMARY INFORMATION
This prospectus describes Flexible Purchase Payment Modified Guaranteed Annuity
Contracts supporting investment options referred to as Guaranteed Period
Options, offered by Nationwide Life Insurance Company ("Nationwide").
Guaranteed Period Options provide for guaranteed interest rates to be credited
over specified durations (referred to as "Guaranteed Periods"). Three (3), four
(4), five (5), six (6), seven (7), eight (8), nine (9), and ten (10) year
Guaranteed Period Options are available. The minimum amount that may be
allocated to a Guaranteed Period Option is $1,000. An interest rate determined
by Nationwide ("Specified Interest Rate") is guaranteed to be credited for the
duration of the Guaranteed Period on a daily basis, resulting in a guaranteed
annual effective yield. Different interest rates apply to each Guaranteed Period
Option and are determined and guaranteed by Nationwide in its sole discretion.
--------------------------------------------------------------------------------
GUARANTEED PERIOD OPTIONS 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 PERIOD. WITHDRAWALS OR
TRANSFERS FOR ANY REASON PRIOR TO THE EXPIRATION OF THE GUARANTEED PERIOD,
EXCEPT FOR PAYMENT OF THE DEATH BENEFIT, ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT AND MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE.
--------------------------------------------------------------------------------
Nationwide established the Nationwide Multiple Maturity Separate Account-2,
pursuant to Ohio law, to aid in reserving and accounting for Guaranteed Period
Option obligations. However, all of the general assets of Nationwide are
available for the purpose of meeting the guarantees of the Guaranteed Period
Options. Amounts allocated to the Guaranteed Period Options are generally
invested in fixed income investments purchased by Nationwide. Contract owners
allocating amounts either to a Guaranteed Period Option or the Transition
Account have no claim against any assets of Nationwide, including assets held in
the Nationwide Multiple Maturity Separate Account-2.
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 GUARANTEED PERIOD OPTIONS 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.
1
<PAGE> 4
TABLE OF CONTENTS
Glossary.............................................
Synopsis of the Contracts............................
Charges and Expenses............................
Annuity Payments................................
Taxation........................................
Ten Day Free Look...............................
Types of Contracts ..................................
Non-Qualified Annuity Contracts.................
Individual Retirement Annuities.................
Simplified Employee Pension IRAs................
Simple IRAs.....................................
Roth IRAs.......................................
Tax Sheltered Annuities.........................
Qualified Plans.................................
Investing in the Contract............................
Guaranteed Period Options.......................
The Specified Interest Rate.................
The Investment Period.......................
Guaranteed Periods..........................
Guaranteed Period Options at Maturity.......
Transition Account..............................
Contingent Deferred Sales Charge................
Market Value Adjustment.........................
General Information.........................
Interest Rate Swap..........................
The Market Value Adjustment
Rate formula...........................
Contract Ownership..............................
Joint Ownership.............................
Contingent Ownership........................
Contingent Annuitant........................
Beneficiary and.............................
Contingent Beneficiary.................
Premium Taxes...................................
Right to Revoke.................................
Transfers.......................................
Surrender (Redemption)..........................
Surrenders under ORPs.......................
Surrenders under TSAs.......................
Assignment
Annuitizing the Contract
Annuitization...............................
Annutization Date...........................
Annuity Commencement Date...................
Fixed Payment Annuity.......................
Frequency and Amounts of
Annuity Payments.......................
Annuity Payment Options.....................
Death Benefits..................................
Death of Contract Owner
Non-Qualified Contracts................
Death of Contract Owner/Annuitant
Death of Annuitant
Non-Qualified Contracts.....................
Death Benefit Payment...........................
Required Distributions
Required Distributions for
Non-Qualified Contracts.....................
Required Distributions for
Tax Sheltered Annuities.....................
Required Distributions for
IRAs, SEP IRAs, Simple IRAs.................
Required Distributions for
Roth IRAs...................................
Federal Tax Considerations
Federal Income Taxes............................
Withholding.....................................
Non-Resident Aliens.............................
Federal Estate, Gift, and Generation
Skipping Transfer Taxes.....................
Charge for Tax..................................
Tax Changes.....................................
Statements...........................................
Investments..........................................
Contracts and the Distribution (Marketing) of the
Guaranteed Period Options.......................
Nationwide Life Insurance Company....................
Business Organization...........................
Description of the Business.....................
Business Segments...............................
Ratings.........................................
Competition.....................................
Regulation......................................
Employees.......................................
Properties......................................
Legal Proceedings...............................
Submissions of Matters to a Vote of Security Holders
Market for Nationwide Life Insurance
Company's Common Stock and
Related Shareholder Matters.................
Consolidated Financial Statements and
Supplementary Data..........................
Selected Financial Data.........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................
Introduction................................
Results of Operations.......................
(i) Revenues
(ii) Benefits and Expenses..........
(iii) Sales Information..............
Business Segments ..........................
(i) Variable Annuities.............
(ii) Fixed Annuities................
2
<PAGE> 5
(iii) Life Insurance..............................
(iv) Corporate and Other.........................
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..........................
Directors and Executive Officers.............................
Executive Compensation.......................................
Compensation.............................................
Executive Incentive Plans................................
Management Incentive Plan................................
Performance Incentive Plan...............................
Deferred Compensation Program............................
Savings Plan.............................................
Supplemental Defined Contribution Plan...................
Long-Term Equity Compensation
Plan................................................
Stock Options and Stock Appreciation Rights..............
Options/SARs Exercises and
Holdings ...........................................
Pension Plans............................................
(i) Retirement Plan.............................
(ii) Excess and Supplemental
Plans.......................................
Compensation Committee Joint Report on
Executive Compensation...................................
Introduction.............................................
Compensation Philosophy
and Objectives......................................
Elements of 1999 Executive
Compensation........................................
Base Salaries............................................
Annual Incentive Compensation............................
Long-Term Incentive
Compensation...........................
(i) Long-Term Equity Compensation Plan..........
Compensation of the Chief Executive Officer..............
Policy on Deductibility of Compensation..................
(i) Nationwide Financial Services
Corporation Committee.......................
(ii) Nationwide Life Insurance
Company Compensation
Committee...................................
Exhibits, Financial Statements, Schedules and
Reports.............................................
3
<PAGE> 6
GLOSSARY
ACCUMULATION UNIT - An accounting unit of measure used to calculate the contract
value allocated to the variable account before the annuitization date.
ANNUITIZATION DATE - The date the annuity payments begin.
ANNUITY COMMENCEMENT DATE - The date on which annuity payments are scheduled to
begin. This date may be changed by the contract owner with Nationwide's consent.
ANNUITY UNIT - An accounting unit of measure used to calculate the variable
annuity payments.
CONTRACT VALUE - The sum of all amounts allocated to any of the Guaranteed
Period Options plus any amount allocated to the Transition Account.
CONTRACT YEAR - Each year the Contract remains in force beginning with the date
the Contract is issued.
GUARANTEED PERIOD - The period corresponding to a 3, 4, 5, 6, 7, 8, 9, or 10
year Guaranteed Period Option. Amounts allocated to a Guaranteed Period Option
will be credited with a Specified Interest Rate over the corresponding
guaranteed period, so long as such amounts are not distributed from the
Guaranteed Period Option prior to the Maturity Date. The Guaranteed Period may
last for up to 3 months beyond the 3, 4, 5, 6, 7, 8, 9, or 10 year anniversary
of the allocation to the Guaranteed Period Option due to every Guaranteed Period
ending on the final day of a calendar quarter.
GUARANTEED PERIOD OPTION YEAR - Each 12 month period beginning with the date a
new allocation is made to a Guaranteed Period Option. New allocations include
transfers from one Guaranteed Period Option to another, or new Purchase Payments
allocated to a Guaranteed Period Option.
INDIVIDUAL RETIREMENT ANNUITY (IRA) - An annuity contract that qualifies for
favorable tax treatment under Section 408(b) of the Internal Revenue Code , but
does not include Roth IRAs.
INTEREST RATE SWAPS - Interest rate quotations for 1, 2, 3, 4, 5, 7 and 10 years
published by the Federal Reserve Board on a regular basis. Nationwide uses
interest rate swaps in its Market Value Adjustment (MVA) formula because they
represent a readily available and consistently reliable interest rate benchmark
in financial markets.
INVESTMENT PERIOD - The period of time beginning with a declaration by the
Company of new Guaranteed Period Option interest rates (the different Specified
Interest Rates for each of the Guaranteed Period Options) and ending with the
subsequent declaration of new Specified Interest Rates.
INVESTMENT-ONLY CONTRACT - A contract purchased by a Qualified Pension,
Profit-Sharing or Stock Bonus Plan as defined by Section 401(a) of the Internal
Revenue Code.
MARKET VALUE ADJUSTMENT - The upward or downward adjustment in value of amounts
allocated to a Guaranteed Period Option which are withdrawn from the Guaranteed
Period Option for any reason, other than payment of the death benefit, prior to
the Maturity Date.
MATURITY DATE - The date on which a particular Guaranteed Period Option matures.
Such date will be the last day of a calendar quarter in which the third, fourth,
fifth, sixth, seventh, eighth, ninth or tenth anniversary of the date on which
amounts are allocated to a 3, 4, 5, 6, 7, 8, 9 or 10 year Guaranteed Period
Option, respectively.
NATIONWIDE - Nationwide Life Insurance Company.
NON-QUALIFIED ANNUITY CONTRACT - A contract which does not qualify for favorable
tax treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP
IRA, Simple IRA, or Tax Sheltered Annuity.
QUALIFIED PLAN - A retirement plan that receives favorable tax treatment under
the provisions of Section 401(a) and 403(a) of the Internal Revenue Code.
ROTH IRA - An individual retirement annuity which qualifies for favorable tax
treatment under Section 408A of the Internal Revenue Code.
SEP IRA - An annuity contract which qualifies for favorable tax treatment under
Section 408(k) of the Internal Revenue Code.
SIMPLE IRA - An annuity contract which qualifies for favorable tax treatment
under Section 408(p) of the Internal Revenue Code.
SPECIFIED INTEREST RATE - The interest rate guaranteed to be credited to amounts
allocated under a selected Guaranteed Period Option so long as such allocations
are not distributed for any reason from the Guaranteed Period Option prior to
the Guaranteed Period Option Maturity Date.
4
<PAGE> 7
SPECIFIED VALUE - The amount allocated to a Guaranteed Period Option minus
withdrawals and transfers out of the Guaranteed Period Option, plus interest
accrued at the Specified Interest Rate. The Specified Value is subject to a
Market Value Adjustment, except for payment of the death benefit, at all times
prior to the Maturity Date.
TAX SHELTERED ANNUITY - An annuity which qualifies for favorable tax treatment
under Section 403(b) of the Internal Revenue Code.
TRANSITION ACCOUNT - An account with interest rates that are set monthly by
Nationwide.
5
<PAGE> 8
SYNOPSIS OF THE CONTRACTS
The contracts described in this prospectus are flexible purchase payment
contracts. The contracts may be issued as either individual or group contracts.
In those states where contracts are issued as group contracts, references
throughout this prospectus to "contract(s)" will also mean "certificate(s)."
The contracts can be categorized as:
- Investment Only;
- Non-Qualified;
- Individual Retirement Annuities;
- Roth IRAs;
- Tax Sheltered Annuities;
- SEP IRAs; and
- Simple IRAs.
For more detailed information with regard to the differences in contract types,
please see "Types of Contracts" later in this prospectus. Minimum Initial and
Subsequent Purchase Payments:
MINIMUM
INITIAL MINIMUM
CONTRACT PURCHASE SUBSEQUENT
TYPE PAYMENT PAYMENTS
Investment-only $10,000 $1,000
Non-Qualified $10,000 $1,000
IRA $2,000 $1,000
Roth IRA $2,000 $1,000
Tax Sheltered $10,000 $1,000
Annuity
SEP IRA $2,000 $1,000
Simple IRA $2,000 $1,000
Each purchase payment may be allocated to any combination of Guarantee Period
Options or the Transition Account. However, a minimum of $1,000 must be
deposited into each Guarantee Period Option elected.
CHARGES AND EXPENSES
If a surrender occurs prior to the Maturity Date for a particular Guarantee
Period Option, the amount surrendered is subject to a Market Value Adjustment in
addition to any applicable contingent deferred sales charges ("CDSC").
Nationwide does not deduct a sales charge from purchase payments upon deposit
into the contract. However, Nationwide may deduct a CDSC if any amount is
withdrawn or transferred from a Guaranteed Period Option prior to the Maturity
Date. This CDSC reimburses Nationwide for sales expenses. The amount of the CDSC
will not exceed 5% of contract value surrendered.(1)
The CDSC for the 10 year Guaranteed Period Option applies as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
0 5%
1 5%
2 4%
3 4%
4 3%
5 3%
6 2%
7 2%
8 1%
9 1%
10 0%
For Guarantee Period Options less than 10 years, the CDSC is not assessed once
the Guarantee Period Option reaches the Maturity Date. For instance, if the 5
year Guarantee Period Option is elected, the CDSC schedule is as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
0 5%
1 5%
2 4%
3 4%
4 3%
5 0%
(1)Each contract year, the contract owner may withdraw without a CDSC the
greater of:
(1) 10% of the Contract Value; or
(2) any amount withdrawn to meet minimum distribution requirements under
the Internal Revenue Code.
A Market Value Adjustment will apply to any free amounts withdrawn prior to the
Maturity Date (see "Market Value Adjustment"). The free withdrawal privilege is
non-cumulative. Free amounts not taken during any given contract year cannot be
taken as free amounts in a subsequent contract year (see "Contingent Deferred
Sales Charge").
6
<PAGE> 9
Withdrawals may be restricted for contracts issued as Tax Sheltered Annuities
due to Internal Revenue Code restrictions.
ANNUITY PAYMENTS
Annuity payments begin on the annuitization date. The payments will be based on
the annuity payment option chosen at the time of application (see "Annuity
Payment Options").
TAXATION
How a contract is taxed depends on the type of contract issued and the purpose
for which the contract is purchased. Nationwide will charge against the contract
any premium taxes levied by any governmental authority (see "Federal Tax
Considerations" and "Premium Taxes").
TEN DAY FREE LOOK
Contract owners may return the contract for any reason within ten days of
receipt and Nationwide will refund the contract value, including any applicable
market value adjustment or other amounts required by law (see "Right to
Revoke").
TYPES OF CONTRACTS
The contracts described in this prospectus are classified according to the tax
treatment they are subject to under the Internal Revenue Code. The following is
a general description of the various types of contracts. Eligibility
requirements, tax benefits (if any), limitations, and other features of the
contracts will differ depending on the type of contract.
NON-QUALIFIED ANNUITY CONTRACTS
A Non-Qualified Annuity Contract is a contract that does not qualify for certain
tax benefits under the Internal Revenue Code, and which is not an IRA, a Roth
IRA, a SEP IRA, a Simple IRA, or a Tax Sheltered Annuity.
Upon the death of the owner of a Non-Qualified Annuity Contract, mandatory
distribution requirements are imposed to ensure distribution of the entire
balance in the contract within a required statutory period.
Non-Qualified Annuity Contracts that are owned by natural persons allow for the
deferral of taxation on the income earned in the contract until it is
distributed or deemed to be distributed.
INDIVIDUAL RETIREMENT ANNUITIES (IRAS)
Individual Retirement Annuities are contracts that are issued by insurance
companies and satisfy the following requirements:
- the contract is not transferable by the owner;
- the premiums are not fixed;
- the annual premium cannot exceed $2,000 (although rollovers of greater
amounts from qualified plans, tax-sheltered annuities and other IRAs
can be received);
- certain minimum distribution requirements must be satisfied after the
owner attains the age of 70 1/2;
- the entire interest of the owner in the contract is nonforfeitable;
and
- after the death of the owner, additional distribution requirements may
be imposed to ensure distribution of the entire balance in the
contract within the statutory period of time.
Depending on the circumstance of the owner, all or a portion of the
contributions made to the account may be deducted for federal income tax
purposes.
Failure to make the mandatory distributions can result in an additional penalty
tax of 50% of the excess of the amount required to be distributed over the
amount that was actually distributed.
IRAs may receive rollover contributions from other Individual Retirement
Accounts and Individual Retirement Annuities, from Tax Sheltered Annuities, and
from qualified retirement plans, including 401(k) plans. For further details
regarding IRAs, please refer to the disclosure statement provided when the IRA
was established.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP IRAS)
A SEP IRA is a written plan established by an employer for the benefit of
employees which permits the employer to make contributions to an IRA established
for the benefit of each employee. An employee may make deductible contributions
to a SEP IRA in the same way, and with the same restrictions and limitations, as
for an IRA. In addition, the employer may make contributions to the SEP IRA,
subject to dollar and percentage limitations imposed by both the Internal
Revenue Code and the written plan.
A SEP IRA plan established by an employer must satisfy certain requirements:
- minimum participation rules;
7
<PAGE> 10
- top-heavy contribution rules;
- nondiscriminatory allocation rules; and
- requirements regarding a written allocation formula.
In addition, the plan cannot restrict withdrawals of non-elective contributions,
and must restrict withdrawals of elective contributions before March 15th of the
following year.
SIMPLE IRAS
A Simple IRA is an individual retirement annuity which is funded exclusively by
a qualified salary reduction arrangement and satisfies the following:
- vesting requirements,
- participation requirements; and
- administrative requirements.
The funds contributed to a Simple IRA cannot be commingled with funds in IRAs or
SEP IRAs. A Simple IRA cannot receive rollover distributions except from another
Simple IRA.
ROTH IRAS
Roth IRA contracts are contracts that are issued by insurance companies and
satisfy the following requirements:
- the contract is not transferable by the owner;
- the premiums are not fixed;
- the annual premium cannot exceed $2,000 (although rollovers of greater
amounts from other Roth IRAs and IRAs can be received);
- the entire interest of the owner in the contract is nonforfeitable;
and
- after the death of the owner, certain distribution requirements may be
imposed to ensure distribution of the entire balance in the contract
within the statutory period of time.
A Roth IRA can receive a rollover from an IRA; however, the amount rolled over
from the IRA to the Roth IRA is required to be included in the owner's federal
gross income at the time of the rollover, and will be subject to federal income
tax.
There are income limitations on eligibility to participate in a Roth IRA and
additional income limitations for eligibility to roll over amounts from an IRA
to a Roth IRA. For further details regarding Roth IRAs, please refer to the
disclosure statement provided when the Roth IRA was established.
TAX SHELTERED ANNUITIES
Certain tax-exempt organizations (described in section 501(c)(3) of the Internal
Revenue Code) and public school systems may establish a plan under which annuity
contracts can be purchased for their employees. These annuity contracts are
often referred to as Tax Sheltered Annuities.
Purchase payments made to Tax Sheltered Annuities are excludible from the income
of the employee, up to statutory maximum amounts. These amounts should be set
forth in the plan adopted by the employer.
The owner's interest in the contract is nonforfeitable (except for failure to
pay premiums) and cannot be transferred. Certain minimum distribution
requirements must be satisfied after the owner attains the age of 70 1/2, and
after the death of the owner. Additional distribution requirements may be
imposed to ensure distribution of the entire balance in the contract within the
required period of time.
QUALIFIED PLANS
Contracts that are owned by Qualified Plans are not intended to confer tax
benefits on the beneficiaries of the plan; they are used as investment vehicles
for the plan. The income tax consequences to the beneficiary of a Qualified Plan
are controlled by the operation of the plan, not by operation of the assets in
which the plan invests.
Beneficiaries of Qualified Plans should contact their employer and/or trustee of
the plan to obtain and review the plan, trust, summary plan description and
other documents for the tax and other consequences of being a participant in a
qualified plan.
8
<PAGE> 11
INVESTING IN THE CONTRACT
There are eight different Guaranteed Period Options available: a 3 year
Guaranteed Period Option, a 4 year Guaranteed Period Option; a 5 year Guaranteed
Period Option; a 6 year Guaranteed Period Option; a 7 year Guaranteed Period
Option; an 8 year Guaranteed Period Option; a 9 year Guaranteed Period Option;
and a 10 year Guaranteed Period Option. Contract owners may elect to have
Purchase Payments allocated among the Guaranteed Period Options and the
Transition Account. The minimum amount of any allocation to a Guaranteed Period
Option is $1,000. If a contract owner does not specify how the Purchase Payment
is to be allocated, the entire Purchase Payment will be allocated to the
Transition Account.
The guarantees associated with the Guaranteed Period Options are borne
exclusively by, and are legal obligations of, Nationwide. A separate account,
authorized and created in accordance with Ohio law, was established for the sole
purpose of reserving and accounting for assets associated with the Guaranteed
Period Options. The assets of the separate account are owned by Nationwide.
Contract owners 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.
The cumulative total of all purchase payments under contracts issued by
Nationwide on the life of any one annuitant cannot exceed $1,500,000 without
Nationwide's prior consent.
GUARANTEED PERIOD OPTIONS
Guaranteed Period Options provide for a guaranteed interest rate (the "Specified
Interest Rate"), to be credited as long as any amount allocated to the
Guaranteed Period Option is not distributed for any reason, prior to the
Maturity Date of the Guaranteed Period Option. Each Guaranteed Period Option has
a Guarantee Period. Generally, a 3 year Guaranteed Period Option offers
guaranteed interest at a Specified Interest Rate over 3 years, a 4 year
Guaranteed Period Option offers guaranteed interest at a Specified Interest Rate
over 4 years, and so on. Because every Guaranteed Period Option will mature on
the last day of a calendar quarter, the Guaranteed Period of a Guaranteed Period
Option may extend for up to 3 months beyond the 3, 4, 5, 6, 7, 8, 9, or 10 year
anniversary of allocations made to 3, 4, 5 , 6, 7, 8, 9, or 10 year Guaranteed
Period Option, respectively.
Amounts allocated to a Guaranteed Period Option will be credited at the
Specified Interest Rate for the duration of the Guaranteed Period associated
with the Guaranteed Period Option. Specified Interest Rates for each Guaranteed
Period Option 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 two weeks, 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 Guaranteed
Period Option will earn the Specified Interest Rate effective for that
Investment Period for the duration of the Guaranteed Period of the Guaranteed
Period Option (see "Specified Interest Rates and Guaranteed Periods").
The Specified Interest Rate will be credited daily to amounts allocated to a
Guaranteed Period Option, providing an annual effective yield. The Specified
Interest Rate will continue to be credited as long as allocations receiving that
rate remain in the Guaranteed Period Option until the Maturity Date. However,
any surrenders, transfers or withdrawals for any reason, except to pay the death
benefit, prior to the Maturity Date will be subject to a Market Value Adjustment
(see "Market Value Adjustment").
THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by
Nationwide to be credited to allocations made to the Guaranteed Period
Options for the corresponding Guaranteed Period, 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 8 different
Guaranteed Period Options.
Generally, Nationwide will declare new Specified Interest Rates bi-weekly;
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
9
<PAGE> 12
and having durations and cash flow attributes compatible with the
Guaranteed Periods of the Guaranteed Period Options. In addition, the
establishment of Specified Interest Rates may be influenced by other
factors, including competitive considerations, administrative costs and
general economic trends. 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 Guaranteed Period Options.
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
Guaranteed Period Options. All allocations made to a Guaranteed Period
Option 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 Guaranteed Period
Option is declared. Subsequent declarations of new Specified Interest Rates
have no effect on allocations made to Guaranteed Period Options during
prior Investment Periods. Prior allocations to the Guaranteed Period Option
will be credited with the Specified Interest Rate in effect when the
allocation was made.
The Specified Interest Rate is credited to allocations made to Guaranteed
Period Options on a daily basis, resulting in an annual effective yield,
guaranteed by Nationwide, unless amounts are withdrawn or transferred from
the Guaranteed Period Option for any reason prior to the Maturity Date. The
Specified Interest Rate will be credited for the entire Guaranteed Period
associated with the Guaranteed Period Option. If amounts are withdrawn or
transferred from the Guaranteed Period Option for any reason, except
payment of the death benefit, 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 Guaranteed Period Options can be obtained by calling the following
toll free phone number: 1-800-848-6331.
GUARANTEED PERIODS
The Guaranteed Period is the period of time corresponding with the selected
Guaranteed Period Option for which the Specified Interest Rate is
guaranteed to be in effect, so long as the amounts allocated remain in the
Guaranteed Period Option until the Maturity Date. A Guaranteed Period
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 Guaranteed Period Option.
For example, if an allocation is made to a 10 year Guaranteed Period Option
on February 1, 2001, the Specified Interest Rate for that Guaranteed Period
Option will be credited until March 31, 2011; the Guaranteed Period will
begin on February 1, 2001 and end on March 31, 2011.
Guaranteed Periods will be exactly 3, 4, 5, 6, 7, 8, 9, or 10 years only
when an allocation to a Guaranteed Period Option occurs on the last day of
a calendar quarter.
GUARANTEED PERIOD OPTIONS AT MATURITY
Nationwide will send notice to contract owners of impending Maturity Dates
(always the last day of a calendar quarter) at least 90 days prior to the
end of a Guaranteed Period. The notice will include the projected value of
the Guaranteed Period Option on the Maturity Date.
Once the Guaranteed Period Option matures, contract owners may:
(1) surrender the Guaranteed Period Option, in part or in whole, without a
Market Value Adjustment and a contingent deferred sales charge;
(2) wholly transfer the Guaranteed Period Option to another Guaranteed
Period Option of the same or different duration without a Market Value
Adjustment or a contingent deferred sales charge. A confirmation of
any such transfer will be sent immediately after the transfer is
processed; or
(3) partially transfer amounts of the Guaranteed Period Option to various
Guaranteed Period Options of different durations without a Market
Value Adjustment or a contingent deferred sales
10
<PAGE> 13
charge. A confirmation of any such transfer will be sent immediately
after the transfer is processed; or
(4) elect not to transfer or surrender all or a portion of the Guaranteed
Period Option, in which case, the remaining portion of the Guaranteed
Period Option will be automatically transferred to the Transition
Account following the Maturity Date. A confirmation will be sent
immediately after the automatic transfer is executed.
If no direction is received by Nationwide prior to the Maturity Date of a
Guaranteed Period Option all amounts in that Guaranteed Period Option will
automatically be transferred to the Transition Account.
TRANSITION ACCOUNT
Amounts not allocated to a Guaranteed Period Option are held in the Transition
Account. The Transition Account is a short-term liquid investment account. THE
TRANSITION ACCOUNT IS NOT DESIGNED FOR LONG TERM INVESTING.
Nationwide will declare a new interest rate each month for the Transition
Account.
Transfers or surrenders from the Transition Account may be made at any time
without application of a Market Value Adjustment or contingent deferred sales
charge.
CONTINGENT DEFERRED SALES CHARGES
No sales charge deduction is made from the purchase payments when amounts are
deposited into the contracts. However, if any amount is surrendered from a
Guaranteed Period Option prior to its Maturity Date, Nationwide will deduct a
contingent deferred sales charge ("CDSC"). The CDSC will not exceed 5% of
contract value surrendered.
The CDSC is calculated by multiplying the applicable CDSC percentage (noted
below) by the amount surrendered.
For purposes of calculating the CDSC surrenders are considered to come first
from the Transition Account until it is exhausted and then from each Guaranteed
Period Option in proportion to the total remaining contract value, unless the
contract owner specifies otherwise. (For tax purposes, a surrender is usually
treated as a withdrawal of earnings first.)
The CDSC for the 10 year Guaranteed Period Option applies as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
0 5%
1 5%
2 4%
3 4%
4 3%
5 3%
6 2%
7 2%
8 1%
9 1%
10 0%
For Guaranteed Period Options less than 10 years, the CDSC is not assessed once
the Guaranteed Period Option reaches the Maturity Date. For instance, if the 5
year Guaranteed Period Option is elected, the CDSC schedule is as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
0 5%
1 5%
2 4%
3 4%
4 3%
5 0%
The CDSC is used to cover sales expenses, including commissions (maximum of 5%
of contract value), production of sales material, and other promotional
expenses. If expenses are greater than the CDSC, the shortfall will be made up
from Nationwide's general assets.
All or a portion of any withdrawal may be subject to federal income taxes.
Contract owners taking withdrawals before age 59 1/2 may be subject to a 10%
penalty tax.
Waiver of Contingent Deferred Sales Charge
Each contract year, the contract owner may withdraw without a CDSC the greater
of:
(a) 10% of the Contract Value; or
(b) any amount withdrawn to meet minimum distribution requirements under
the Internal Revenue Code.
11
<PAGE> 14
A Market Value Adjustment will apply to any free amounts withdrawn prior to the
Maturity Date. The CDSC-free privilege is non-cumulative. Free amounts not taken
during any given contract year cannot be taken as free amounts in a subsequent
contract year.
In addition, no CDSC will be deducted:
(1) upon the annuitization of contracts which have been in force for at
least two years;
(2) for amounts withdrawn from the Transition Account or transferred
from the Transition Account to any Guaranteed Period Option;
(3) upon payment of the death benefit payment prior to the
Annuitization Date;
(4) from any values which have been held under a Guarantee Period
Option for the applicable Guaranteed Period.
Further, a CDSC will not apply if the contract owner is confined to a Long Term
Care Facility or Hospital for a continuous 180 day period commencing while the
Contract is in-force. In the case of joint ownership, the waiver will apply if
either joint owner is confined. Request for waiver must be received by
Nationwide during the period of confinement or no later than 90 days after the
confinement period ends. If the withdrawal request is received later than 90
days after the confinement period ends, the surrender charge, if applicable,
will be assessed. Written notice and proof of confinement must be received in a
form satisfactory to Nationwide and be recorded at Nationwide's home office
prior to the waiver of surrender charges.
Nationwide may waive the CDSC if a contract described in this prospectus is
exchanged for another Nationwide contract (or a contract of any of its
affiliated insurance companies). A Market Value Adjustment may apply if the
contract is exchanged. A CDSC may apply to the contract received in the
exchange.
The CDSC will not be eliminated if to do so would be unfairly discriminatory or
prohibited by state law.
MARKET VALUE ADJUSTMENT
GENERAL INFORMATION REGARDING THE MARKET VALUE ADJUSTMENT
Guaranteed Period Options which are surrendered, transferred or distributed for
any reason, except to pay the death benefit, prior to the Maturity Date for the
Guaranteed Period Option 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 Guaranteed
Period Option, 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.
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 contract owners make
withdrawals or transfers, or when the operation of the 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 Guaranteed Period Option allocation, Nationwide is
likely to realize a loss when it liquidates assets in order to process a
surrender 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 Guaranteed Period Option allocation,
Nationwide is likely to realize a gain when it liquidates assets in order to
process a surrender or transfer; therefore, application of the Market Value
Adjustment under such circumstances will likely 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 on the interest rate swap yields to represent both
prevailing interest rates and specified interest rates. The Market Value
Adjustment formula and the interest rate swap are described more fully below.
INTEREST RATE SWAP
The Market Value Adjustment formula for deriving the Market Value Adjustment
factor is based on interest rate swaps which are published by the Federal
Reserve Board on a regular basis. Nationwide utilizes interest rate swaps in its
Market
12
<PAGE> 15
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.
Interest rate swap quotations for 1, 2, 3, 4, 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 6, 8 or 9 year maturity), Nationwide will calculate
such rates based on the relationship of the published rates. For example, if the
published 5 year rate is 6% and the published 7 year rate is 6.50%, the 6 year
rate will be calculated as 6.25%.
THE MARKET VALUE ADJUSTMENT FORMULA
The Market Value Adjustment formula is utilized when a distribution is made from
a Guaranteed Period Option during the Guaranteed Period. The Market Value
Adjustment is a calculation expressing the relationship between three factors:
(1) the interest rate swap yield for the period of time coinciding with the
Guaranteed Period of the Guaranteed Period Option;
(2) the interest rate swap yield for a period coinciding with the time remaining
in the Guaranteed Period of a Guaranteed Period Option when a distribution
giving rise to a Market Value Adjustment occurs; and
(3) the number of days remaining in the Guaranteed Period of the
Guaranteed Period Option.
13
<PAGE> 16
The formula for determining the Market Value Adjustment factor is
[ (1 + a) ]
[ =================== ] to the power t
[ (1 + b + .0025) ]
Where:
a = the Interest Rate Swap for a period equivalent to the Guaranteed
Period at the time of deposit in the Guaranteed Period Option;
b = the Interest Rate Swap at the time of distribution for a period
of time equivalent to the time remaining in the Guaranteed Period.
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 Period; and
t = the number of days until the Maturity Date, divided by 365.25.
In the case of "a" above, the Interest Rate Swap utilized will be
the rate published by the Federal Reserve Board on the day prior to
the date of an allocation to the Guaranteed Period Option was made.
If no rate is published one day prior to the date of an allocation
to the Guaranteed Period Option, then the most recent published rate
available will be utilized.
In the case of "b" above, the Interest Rate Swap utilized will be
the rate published by the Federal Reserve Board on the day prior to
the date of withdrawal, transfer or distribution. If no rate is
published one day prior to the date of withdrawal, transfer or
distribution, then the most recent published rate available will be
utilized.
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 Guaranteed Period Option 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
Guaranteed Period Option for any reason except payment of the death
benefit. If the result is greater than 1, a gain will be realized by the
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 interest rate swaps, or
if, for any other reason, interest rate swaps 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.
14
<PAGE> 17
CONTRACT OWNERSHIP
The contract owner has all rights under the contract. Purchasers who name
someone other than themselves as the contract owner will have no rights under
the contract.
Contract owners of Non-Qualified Contracts may name a new contract owner at any
time before the annuitization date. Any change of contract owner automatically
revokes any prior contract owner designation. Changes in contract ownership may
result in federal income taxation and may be subject to state and federal gift
taxes.
A change in contract ownership must be submitted in writing and recorded at
Nationwide's home office. Once recorded, the change will be effective as of the
date signed. However, the change will not affect any payments made or actions
taken by Nationwide before it was recorded.
The contract owner may also request a change in the annuitant, contingent
annuitant, contingent owner, beneficiary, or contingent beneficiary before the
annuitization date. These changes must be:
- on a Nationwide form;
- signed by the contract owner; and
- received at Nationwide's home office before the annuitization date.
Nationwide must review and approve any change requests. For Non-Qualified
Contracts, if any contract owner is not a natural person, the change of the
annuitant will be treated as the death of the contract owner and will result in
a distribution, regardless of whether a contingent annuitant is also named. Such
distribution will be made as if the contract owner died at the date of such
change.
On the annuitization date, the annuitant will become the contract owner.
JOINT OWNERSHIP
Joint owners each own an undivided interest in the contract.
Contract owners can name a joint owner at any time before annuitization subject
to the following conditions:
- joint owners can only be named for Non-Qualified Contracts;
- joint owners must be spouses at the time joint ownership is requested,
unless state law requires Nationwide to allow non-spousal joint
owners;
- the exercise of any ownership right in the contract will generally
require a written request signed by both joint owners;
- an election in writing signed by both contract owners must be made to
authorize Nationwide to allow the exercise of ownership rights
independently by either joint owner; and
- Nationwide will not be liable for any loss, liability, cost, or
expense for acting in accordance with the instructions of either joint
owner.
CONTINGENT OWNERSHIP
The contingent owner is entitled to certain benefits under the contract if a
contract owner who is NOT the annuitant dies before the annuitization date, and
there is no surviving joint owner.
The contract owner may name or change a contingent owner at any time before the
annuitization date. To change the contingent owner, a written request must be
submitted to Nationwide. Once Nationwide has recorded the change, it will be
effective as of the date it was signed, whether or not the contract owner was
living at the time it was recorded. The change will not affect any action taken
by Nationwide before the change was recorded.
ANNUITANT
The annuitant is the person who will receive annuity payments and upon whose
continuation of life any annuity payment involving life contingencies depends.
This person must be age 85 or younger at the time of contract issuance, unless
Nationwide approves a request for an annuitant of greater age. The annuitant may
be changed before the annuitization date with Nationwide's consent.
CONTINGENT ANNUITANT
If the annuitant dies before the annuitization date, the contingent annuitant
becomes the annuitant. The contingent annuitant must be age 85 or younger at the
time of contract issuance unless Nationwide has approved a request for an
annuitant of greater age. All provisions of the contract which are based on the
death of the annuitant prior to the annuitization date will be based on the
death of the last survivor of the annuitant and contingent annuitant.
15
<PAGE> 18
A Contingent Annuitant may be selected only for a Contract issued as a
Non-Qualified Contract.
BENEFICIARY AND CONTINGENT BENEFICIARY
The beneficiary is the person who is entitled to the death benefit if the
annuitant dies before the annuitization date and there is no joint owner. The
contract owner can name more than one beneficiary. Multiple beneficiaries will
share the death benefit equally, unless otherwise specified.
The contract owner may change the beneficiary or contingent beneficiary during
the annuitant's lifetime by submitting a written request to Nationwide. Once
recorded by Nationwide, the change will be effective as of the date it was
signed, whether or not the annuitant was living at the time it was recorded. The
change will not affect any action taken by Nationwide before the change was
recorded.
PREMIUM TAXES
Nationwide will charge against the contract value any premium taxes levied by a
state or other government entity. Premium tax rates currently range from 0% to
5.0%. This range is subject to change. The method used to assess premium tax
will be determined by Nationwide at its sole discretion in compliance with state
law.
If applicable, Nationwide will deduct premium taxes from the contract either at:
(1) the time the contract is surrendered;
(2) annuitization; or
(3) such earlier date as Nationwide becomes subject to premium taxes.
Premium taxes may be deducted from death benefit proceeds.
RIGHT TO REVOKE
Contract owners have a ten day "free look" to examine the contract. The contract
may be returned to Nationwide's home office for any reason within ten days of
receipt and Nationwide will refund the contract value or another amount required
by law. The refunded contract value will reflect the deduction of any contract
charges, including any applicable market value adjustment, unless otherwise
required by law. All Individual Retirement Annuity, SEP IRA, Simple IRA and Roth
IRA refunds will be a return of purchase payments. State and/or federal law may
provide additional free look privileges.
TRANSFERS
Transfers among the Guaranteed Period Options and the Transition Account must be
made prior to the annuitization date. Transfers from a Guaranteed Period Option
prior to its Maturity Date are subject to a contingent deferred sales charges
and a Market Value Adjustment. Transfers from the Transition Account may be made
at anytime without the assessment of a contingent deferred sales charge or a
Market Value Adjustment.
The minimum amount that may be transferred either from or to any Guaranteed
Period Option is $1,000.
SURRENDER (REDEMPTION)
Contract owners may surrender some or all of their contract value before the
earlier of the annuitization date or the annuitant's death. Surrender requests
must be in writing and Nationwide may require additional information. When
taking a full surrender, the contract must accompany the written request.
Nationwide may require a signature guarantee.
Nationwide will surrender any amount from any Guaranteed Period Option(s) and
any amount from the Transition Account needed to equal: (a) the dollar amount
requested; less (b) any contingent deferred sales charges, premium taxes and
Market Value Adjustment that may apply.
If a partial surrender is requested, amounts will first be surrendered from the
Transition Account (if any), unless otherwise instructed by the Contract Owner.
Amounts surrendered in excess of amounts in the Transition Account will be
surrendered from each of the Guaranteed Period Options. The amounts surrendered
from each Guaranteed Period Option will be in the same proportion that the
contract owner's interest in each Guaranteed Period Option bears to the total
remaining contract value.
Payment from the Guaranteed Period Options will be made within seven days of
receipt of both proper written application and proof of interest satisfactory to
Nationwide. However, Nationwide may be required, pursuant to state law, to
reserve the right to postpone any payments up to 6 months.
A CDSC may apply. The contract owner may take the CDSC from either:
(a) the amount requested; or
16
<PAGE> 19
(b) the contract value remaining after the contract owner has received
the amount requested.
If the contract owner does not make a specific election, any applicable CDSC
will be taken from the contract value remaining after the contract owner has
received the amount requested.
The CDSC deducted is a percentage of the amount requested by the contract owner.
Amounts deducted for CDSC are not subject to subsequent CDSC.
SURRENDERS UNDER A TEXAS OPTIONAL RETIREMENT PROGRAM OR A LOUISIANA OPTIONAL
RETIREMENT PLAN
Redemption restrictions apply to contracts issued under the Texas Optional
Retirement Program or the Louisiana Optional Retirement Plan.
The Texas Attorney General has ruled that participants in contracts issued under
the Texas Optional Retirement Program may only take withdrawals if:
- the participant dies;
- the participant retires;
- the participant terminates employment due to total disability; or
- the participant that works in a Texas public institution of higher
education terminates employment.
A participant under a contract issued under the Louisiana Optional Retirement
Plan may only take distributions from the contract upon retirement or
termination of employment. All retirement benefits under this type of plan must
be paid as lifetime income; lump sum cash payments are not permitted, except for
death benefits.
Due to the restrictions described above, a participant under either of these
plans will not be able to withdraw cash values from the contract unless one of
the applicable conditions is met. However, contract value may be transferred to
other carriers, subject to any CDSC.
Nationwide issues this contract to participants in the Texas Optional Retirement
Program in reliance upon and in compliance with Rule 6c-7 of the Investment
Company Act of 1940. Nationwide issues this contract to participants in the
Louisiana Optional Retirement Plan in reliance upon and in compliance with an
exemptive order that Nationwide received from the SEC on August 22, 1990.
SURRENDERS UNDER A TAX SHELTERED ANNUITY
Contract owners of a Tax Sheltered Annuity may surrender part or all of their
contract value before the earlier of the annuitization date or the annuitant's
death, except as provided below:
A. Contract value attributable to contributions made under a qualified cash or
deferred arrangement (within the meaning of Internal Revenue Code Section
402(g)(3)(A)), a salary reduction agreement (within the meaning of Internal
Revenue Code Section 402(g)(3)(C)), or transfers from a Custodial Account
(described in Section 403(b)(7) of the Internal Revenue Code), may be
surrendered only:
1. when the contract owner reaches age 59 1/2, separates from service,
dies, or becomes disabled (within the meaning of Internal Revenue Code
Section 72(m)(7)); or
2. in the case of hardship (as defined for purposes of Internal Revenue
Code Section 401(k)), provided that any such hardship surrender may
NOT include any income earned on salary reduction contributions.
B. The surrender limitations described in Section A also apply to:
1. salary reduction contributions to Tax Sheltered Annuities made for
plan years beginning after December 31, 1988;
2. earnings credited to such contracts after the last plan year beginning
before January 1, 1989, on amounts attributable to salary reduction
contributions; and
3. all amounts transferred from 403(b)(7) Custodial Accounts (except that
earnings and employer contributions as of December 31, 1988 in such
Custodial Accounts may be withdrawn in the case of hardship).
C. Any distribution other than the above, including a ten day free look
cancellation of the contract (when available) may result in taxes,
penalties, and/or retroactive disqualification of a Tax Sheltered Annuity.
In order to prevent disqualification of a Tax Sheltered Annuity after a ten day
free look cancellation, Nationwide will transfer the proceeds to another Tax
Sheltered Annuity upon proper direction by the contract owner.
These provisions explain Nationwide's understanding of current withdrawal
restrictions. These restrictions may change.
17
<PAGE> 20
Distributions pursuant to Qualified Domestic Relations Orders will not violate
the restrictions stated above.
ASSIGNMENT
Contract rights are personal to the contract owner(s) and may not be assigned
without Nationwide's consent.
Investment-only Contracts, Individual Retirement Annuities, Roth IRAs, SEP IRAs,
Simple IRAs, and Tax Sheltered Annuities may not be assigned, pledged or
otherwise transferred except where allowed by law.
A Non-Qualified Contract owner may assign some or all rights under the contract.
An assignment must occur before annuitization while the annuitant is alive. The
assignment will become effective once it is recorded by Nationwide at its home
office. The assignment will not be recorded until Nationwide has received
sufficient direction from the contract owner and assignee as to the proper
allocation of contract rights under the assignment.
Nationwide is not responsible for the validity or tax consequences of any
assignment. Nationwide is not liable for any payment or settlement made before
the assignment is recorded. Assignments will not be recorded until Nationwide
receives sufficient direction from the contract owner and the assignee regarding
the proper allocation of contract rights.
Amounts pledged or assigned will be treated as distributions and will be
included in gross income to the extent that the cash value exceeds the
investment in the contract for the taxable year in which it was pledged or
assigned. Amounts assigned may be subject to a tax penalty equal to 10% of the
amount included in gross income.
Assignment of the entire contract value may cause the portion of the contract
value exceeding the total investment in the contract and previously taxed
amounts to be included in gross income for federal income tax purposes each year
that the assignment is in effect.
ANNUITIZING THE CONTRACT
ANNUITIZATION
Annuitization is the period during which annuity payments are received. It is
irrevocable once payments have begun. Amounts allocated to a Guaranteed Period
Option that are annuitized prior to the Maturity Date are subject to a Market
Value Adjustment. Upon arrival of the annuitization date, the annuitant must
choose:
(1) an annuity payment option; and
(2) either a fixed payment annuity, variable payment annuity, or an
available combination.
Nationwide guarantees that each payment under a fixed payment annuity will be
the same throughout annuitization. Under a variable payment annuity, the amount
of each payment will vary with the performance of the underlying mutual funds
chosen by the contract owner.
ANNUITIZATION DATE
The annuitization date is the date that annuity payments begin. It will be the
first day of a calendar month unless otherwise agreed, and must be at least 2
years after the contract is issued. If the contract is issued to fund a Tax
Sheltered Annuity, annuitization may occur during the first 2 years subject to
Nationwide's approval.
ANNUITY COMMENCEMENT DATE
The annuity commencement date is the date on which annuity payments are
scheduled to begin. If a contract owner does not choose an annuity commencement
date, a date will be established for the contract by Nationwide. For Qualified
Plans, Individual Retirement Annuities and Tax Sheltered Annuities, if the
contract owner does not choose the annuity commencement date then the annuity
commencement date established on the date of contract issuance will be the date
on which the contract owner reaches 70 1/2. For Non-Qualified contracts, if the
contract owner does not choose the annuity commencement date then the annuity
commencement date established on the date of contract issuance will be the date
on which the contract owner reaches 90. The contract owner may change the
annuity commencement date before annuitization. This change must be in writing
and approved by Nationwide.
FIXED PAYMENT ANNUITY
A fixed payment annuity is an annuity where the amount of the annuity payments
remains level.
The first payment under a fixed payment annuity is determined on the
annuitization date on an "age last birthday" basis by:
(1) deducting applicable premium taxes from the total contract value; then
18
<PAGE> 21
(2) applying the contract value amount specified by the contract owner to
the fixed payment annuity table for the annuity payment option
elected.
Subsequent payments will remain level unless the annuity payment option elected
provides otherwise. Nationwide does not credit discretionary interest during
annuitization.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Payments are made based on the annuity payment option selected, unless:
- the amount to be distributed is less than $5,000, in which case Nationwide
may make one lump sum payment of the contract value; or
- an annuity payment would be less than $50, in which case Nationwide can
change the frequency of payments to intervals that will result in payments
of at least $50. Payments will be made at least annually.
ANNUITY PAYMENT OPTIONS
Contract owners must elect an annuity payment option before the annuitization
date. The annuity payment options are:
(1) LIFE ANNUITY - An annuity payable periodically, but at least annually, for
the lifetime of the annuitant. Payments will end upon the annuitant's
death. For example, if the annuitant dies before the second annuity payment
date, the annuitant will receive only one annuity payment. The annuitant
will only receive two annuity payments if he or she dies before the third
annuity payment date, and so on.
(2) JOINT AND LAST SURVIVOR ANNUITY - An annuity payable periodically, but at
least annually, during the joint lifetimes of the annuitant and a
designated second individual. If one of these parties dies, payments will
continue for the lifetime of the survivor. As is the case under option 1,
there is no guaranteed number of payments. Payments end upon the death of
the last surviving party, regardless of the number of payments received.
(3) LIFE ANNUITY WITH 120 OR 240 MONTHLY PAYMENTS GUARANTEED - An annuity
payable monthly during the lifetime of the annuitant. If the annuitant dies
before all of the guaranteed payments have been made, payments will
continue to the end of the guaranteed period and will be paid to a designee
chosen by the annuitant at the time the annuity payment option was elected.
The designee may elect to receive the present value of the remaining
guaranteed payments in a lump sum. The present value will be computed as of
the date Nationwide receives the notice of the annuitant's death.
Not all of the annuity payment options may be available in all states. Contract
owners may request other options before the annuitization date. These options
are subject to Nationwide's approval.
If an annuity payment option is not elected by the contract owner prior to the
annuity commencement date then a life annuity with a guarantee period of 240
months will be the automatic form of payment. Contracts issued under Qualified
Plans, Individual Retirement Annuities and Tax Sheltered Annuities are subject
to the "minimum distribution" requirements set forth in the plan, contract, and
the Internal Revenue Code.
DEATH BENEFITS
DEATH OF CONTRACT OWNER - NON-QUALIFIED CONTRACTS
If the contract owner who is not the annuitant dies before the annuitization
date, the joint owner becomes the contract owner. If no joint owner is named,
the contingent owner becomes the contract owner. If no contingent owner is
named, the last surviving contract owner's estate becomes the contract owner.
If the contract owner and annuitant are the same, and the contract
owner/annuitant dies before the annuitization date, the contingent owner will
not have any rights in the contract unless the contingent owner is also the
beneficiary and there is no joint owner.
Distributions under Non-Qualified Contracts will be made pursuant to the
"Required Distributions for Non-Qualified Contracts" provision.
DEATH OF CONTRACT OWNER/ANNUITANT
If a contract owner who is also the annuitant dies before the annuitization
date, a death benefit is payable according to the "Death of the Annuitant -
Non-Qualified Contracts" provision.
A joint owner will receive a death benefit if a contract owner/annuitant dies
before the annuitization date.
19
<PAGE> 22
If the contract owner/annuitant dies after the annuitization date, any benefit
that may be payable will be paid according to the selected annuity payment
option.
DEATH OF ANNUITANT - NON-QUALIFIED CONTRACTS
If the annuitant who is not a contract owner dies before the annuitization date,
a death benefit is payable to the beneficiary unless a contingent annuitant is
named. If a contingent annuitant is named, the contingent annuitant becomes the
annuitant and no death benefit is payable.
The beneficiary may elect to receive the death benefit:
(1) in a lump sum;
(2) as an annuity; or
(3) in any other manner permitted by law and approved by Nationwide.
The beneficiary must notify Nationwide of this election within 60 days of the
annuitant's death.
If no beneficiary survives the annuitant, the contingent beneficiary receives
the death benefit. Contingent beneficiaries will share the death benefit
equally, unless otherwise specified.
If no beneficiaries or contingent beneficiaries survive the annuitant, the
contract owner or the last surviving contract owner's estate will receive the
death benefit.
If the annuitant dies after the annuitization date, any benefit that may be
payable will be paid according to the selected annuity payment option.
DEATH BENEFIT PAYMENT
The death benefit is equal to the contract value but is not subject to a Market
Value Adjustment or contingent deferred sales charge. The value of the death
benefit will be determined as of the date Nationwide receives in writing at its
home office the following three items: (1) proper proof of the annuitant's
death; (2) an election specifying distribution method; and (3) any applicable
state required form(s).
Proof of death is either:
(1) a copy of a certified death certificate;
(2) a copy of a certified decree of a court of competent jurisdiction as to the
finding of death;
(3) a written statement by a medical doctor who attended the deceased; or
(4) any other proof satisfactory to Nationwide.
The beneficiary must elect a method of distribution which complies with the
"Distribution Provisions" of this contract. The beneficiary may elect to receive
such death benefits in the form of: (1) a lump sum distribution; (2) an annuity
payout; or (3) any distribution that is permitted under state and federal
regulations and is acceptable by Nationwide. If such election is not received by
the Nationwide within 60 days of the annuitant's death, the beneficiary will be
deemed to have elected a cash payment as of the last day of the 60 day period.
Payment of the death benefit will be made or will commence within 30 days after
receipt of proof of death and notification of the election.
REQUIRED DISTRIBUTIONS
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS
Internal Revenue Code Section 72(s) requires Nationwide to make certain
distributions when a contract owner dies. The following distributions will be
made according to those requirements:
(1) If any contract owner dies on or after the annuitization date and
before the entire interest in the contract has been distributed, then
the remaining interest must be distributed at least as rapidly as the
distribution method in effect on the contract owner's death.
(2) If any contract owner dies before the annuitization date, then the
entire interest in the contract (consisting of either the death
benefit or the contract value reduced by charges set forth elsewhere
in the contract) will be distributed within 5 years of the contract
owner's death, provided however:
(a) any interest payable to or for the benefit of a natural person
(referred to herein as a "designated beneficiary"), may be
distributed over the life of the designated beneficiary or over a
period not longer than the life expectancy of the designated
beneficiary. Payments must begin within one year of the contract
owner's death unless otherwise permitted by federal income tax
regulations;
(b) if the designated beneficiary is the surviving spouse of the
deceased contract owner, the spouse can choose to become the
contract owner instead of receiving a
20
<PAGE> 23
death benefit. Any distributions required under these
distribution rules will be made upon that spouse's death.
In the event that the contract owner is not a natural person (e.g., a trust or
corporation), then, for purposes of these distribution provisions:
(a) the death of the annuitant will be treated as the death of a contract
owner;
(b) any change of annuitant will be treated as the death of a contract
owner; and
(c) in either case, the appropriate distribution will be made upon the
death or change, as the case may be.
These distribution provisions do not apply to any contract exempt from Section
72(s) of the Internal Revenue Code by reason of Section 72(s)(5) or any other
law or rule.
The designated beneficiary must elect a method of distribution and notify
Nationwide of this election within 60 days of the contract owner's death.
REQUIRED DISTRIBUTIONS FOR TAX SHELTERED ANNUITIES
Distributions from Tax Sheltered Annuities will be made according to the Minimum
Distribution and Incidental Benefit ("MDIB") provisions of Section 401(a)(9) of
the Internal Revenue Code. Distributions will be made to the annuitant according
to the selected annuity payment option over a period not longer than:
(a) the life of the annuitant or the joint lives of the annuitant and the
annuitant's designated beneficiary; or
(b) a period not longer than the life expectancy of the annuitant or the
joint life expectancies of the annuitant and the annuitant's
designated beneficiary.
Required distributions do not have to be withdrawn from this contract if they
are being withdrawn from another Tax Sheltered Annuity of the annuitant.
If the annuitant's entire interest in a Tax Sheltered Annuity will be
distributed in equal or substantially equal payments over a period described in
a) or b), the payments will begin on the required beginning date. The required
beginning date is the later of:
(a) April 1 of the calendar year following the calendar year in which the
annuitant reaches age 70 1/2; or
(b) the annuitant's retirement date.
Provision (b) does not apply to any employee who is a 5% owner (as defined in
Section 416 of the Internal Revenue Code) with respect to the plan year ending
in the calendar year when the employee attains the age of 70 1/2.
Distribution commencing on the required distribution date must satisfy minimum
distribution and incidental benefit provisions set forth in the Internal Revenue
Code. Those provisions require that distributions cannot be less than the amount
determined by dividing the annuitant's interest in the Tax Sheltered Annuity
determined by the end of the previous calendar year by:
(a) the annuitant's life expectancy; or if applicable,
(b) the joint and survivor life expectancy of the annuitant and the
annuitant's beneficiary.
The life expectancies and joint life expectancies are determined by reference to
Treasury Regulation 1.72-9.
If the annuitant dies before distributions begin, the interest in the Tax
Sheltered Annuity must be distributed by December 31 of the calendar year in
which the fifth anniversary of the annuitant's death occurs unless:
(a) the annuitant names his or her surviving spouse as the beneficiary and
the spouse chooses to receive distribution of the contract in
substantially equal payments over his or her life (or a period not
longer than his or her life expectancy) and beginning no later than
December 31 of the year in which the annuitant would have attained age
70 1/2; or
(b) the annuitant names a beneficiary other than his or her surviving
spouse and the beneficiary elects to receive distribution of the
contract in substantially equal payments over his or her life (or a
period not longer than his or her life expectancy) beginning no later
than December 31 of the year following the year in which the annuitant
dies.
If the annuitant dies after distributions have begun, distributions must
continue at least as rapidly as under the schedule used before the annuitant's
death.
If distribution requirements are not met, a penalty tax of 50% is levied on the
difference between the amount that should have been distributed for that
21
<PAGE> 24
year and the amount that actually was distributed for that year.
REQUIRED DISTRIBUTIONS FOR INDIVIDUAL RETIREMENT ANNUITIES, SEP IRAS AND SIMPLE
IRAS
Distributions from an Individual Retirement Annuity, SEP IRA or Simple IRA must
begin no later than April 1 of the calendar year following the calendar year in
which the contract owner reaches age 70 1/2. Distribution may be paid in a lump
sum or in substantially equal payments over:
(a) the contract owner's life or the lives of the contract owner and his
or her spouse or designated beneficiary; or
(b) a period not longer than the life expectancy of the contract owner or
the joint life expectancy of the contract owner and the contract
owner's designated beneficiary.
If the contract owner dies before distributions begin, the interest in the
Individual Retirement Annuity, SEP IRA or Simple IRA must be distributed by
December 31 of the calendar year in which the fifth anniversary of the contract
owner's death occurs, unless:
(a) the contract owner names his or her surviving spouse as the
beneficiary and such spouse chooses to:
(1) treat the contract as an Individual Retirement Annuity, SEP IRA
or Simple IRA established for his or her benefit; or
(2) receive distribution of the contract in substantially equal
payments over his or her life (or a period not longer than his or
her life expectancy) and beginning no later than December 31 of
the year in which the contract owner would have reached age 70
1/2; or
(b) the contract owner names a beneficiary other than his or her surviving
spouse and such beneficiary elects to receive a distribution of the
contract in substantially equal payments over his or her life (or a
period not longer than his or her life expectancy) beginning no later
than December 31 of the year following the year of the contract
owner's death.
Required distributions do not have to be withdrawn from this contract if they
are being withdrawn from another Individual Retirement Annuity, SEP IRA or
Simple IRA of the contract owner.
If the contract owner dies after distributions have begun, distributions must
continue at least as rapidly as under the schedule being used before the
contract owner's death. However, a surviving spouse who is the beneficiary under
the annuity payment option may treat the contract as his or her own, in the same
manner as is described in section (a)(1) of this provision.
If distribution requirements are not met, a penalty tax of 50% is levied on the
difference between the amount that should have been distributed for that year
and the amount that actually was distributed for that year.
A portion of each distribution will be included in the recipient's gross income
and taxed at ordinary income tax rates. The portion of a distribution which is
taxable is based on the ratio between the amount by which non-deductible
purchase payments exceed prior non taxable distributions and total account
balances at the time of the distribution. The owner of an Individual Retirement
Annuity, SEP IRA or Simple IRA must annually report the amount of non-deductible
purchase payments, the amount of any distribution, the amount by which non
deductible purchase payments for all years exceed non taxable distributions for
all years, and the total balance of all Individual Retirement Annuities, SEP IRA
or Simple IRA.
If the contract owner dies before the entire interest in the contract has been
distributed, the balance will also be included in his or her gross estate.
REQUIRED DISTRIBUTIONS FOR ROTH IRAS
The rules for Roth IRAs do not require distributions to begin during the
contract owner's lifetime.
When the contract owner dies, the interest in the Roth IRA must be distributed
by December 31 of the calendar year in which the fifth anniversary of his or her
death occurs, unless:
(a) the contract owner names his or her surviving spouse as the
beneficiary and the spouse chooses to:
(1) treat the contract as a Roth IRA established for his or her
benefit; or
(2) receive distribution of the contract in substantially equal
payments over his or her life (or a period not longer than his or
her life expectancy) and beginning no later than December 31 of
the year following
22
<PAGE> 25
the year in which the contract owner would have reached age 70
1/2; or
(b) the contract owner names a beneficiary other than his or her surviving
spouse and the beneficiary chooses to receive distribution of the
contract in substantially equal payments over his or her life (or a
period not longer than his or her life expectancy) beginning no later
than December 31 of the year following the year in which the contract
owner dies.
Distributions from Roth IRAs may be either taxable or nontaxable, depending upon
whether they are "qualified distributions" or "non-qualified distributions" (see
"Federal Tax Considerations").
FEDERAL TAX CONSIDERATIONS
FEDERAL INCOME TAXES
The tax consequences of purchasing a contract described in this prospectus will
depend on:
- the type of contract purchased;
- the purposes for which the contract is purchased; and
- the personal circumstances of individual investors having interests in the
contracts.
See "Synopsis of the Contracts" for a brief description of the various types of
contracts and the different purposes for which the contracts may be purchased.
Existing tax rules are subject to change, and may affect individuals differently
depending on their situation. Nationwide does not guarantee the tax status of
any contracts or any transactions involving the contracts.
If the contract is purchased as an investment of certain retirement plans (such
as qualified retirement plans, Individual Retirement Accounts, and custodial
accounts as described in Sections 401, 408(a), and 403(b)(7) of the Internal
Revenue Code), tax advantages enjoyed by the contract owner and/or annuitant may
relate to participation in the plan rather than ownership of the annuity
contract. Such plans are permitted to purchase investments other than annuities
and retain tax-deferred status.
The following is a brief summary of some of the federal income tax
considerations related to the contracts. In addition to the federal income tax,
distributions from annuity contracts may be subject to state and local income
taxes. The tax rules across all states and localities are not uniform and
therefore will not be discussed in this prospectus. Tax rules that may apply to
contracts issued in U.S. territories such as Puerto Rico and Guam are also not
discussed. Nothing in this prospectus should be considered to be tax advice.
Contract owners and prospective contract owners are encouraged to consult a
financial consultant, tax advisor or legal counsel to discuss the taxation and
use of the contracts.
The Internal Revenue Code sets forth different income tax rules for the
following types of annuity contracts:
- Individual Retirement Annuities;
- SEP IRAs;
- Simple IRAs;
- Roth IRAs;
- Tax Sheltered Annuities; and
- "Non-Qualified Annuities."
Individual Retirement Annuities, SEP IRAs and Simple IRAs
Distributions from Individual Retirement Annuities, SEP IRAs and Simple IRAs are
generally taxed when received. If any of the amount contributed to the IRA was
nondeductible for federal income tax purposes, then a portion of each
distribution is excludable from income.
If distributions of income from an IRA are made prior to the date that the owner
attains the age of 59 1/2 years, the income is subject to both the regular
income tax and an additional penalty tax of 10%. (For Simple IRAs, the 10%
penalty is increased to 25% if the distribution is made during the 2 year period
beginning on the date that the individual first participated in the Simple IRA.)
The penalty tax can be avoided if the distribution is:
- made to a beneficiary on or after the death of the owner;
- attributable to the owner becoming disabled (as defined in the Internal
Revenue Code);
- part of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of the
owner, or the joint lives (or joint life expectancies) of the owner and his
or her designated beneficiary;
- used for qualified higher education expenses; or
23
<PAGE> 26
- used for expenses attributable to the purchase of a home for a qualified
first-time buyer.
Roth IRAs
Distributions of earnings from Roth IRAs are taxable or non-taxable depending
upon whether they are "qualified distributions" or "nonqualified distributions."
A "qualified distribution" is one that satisfies the five-year rule and meets
one of the following requirements:
- it is made on or after the date on which the contract owner attains age 59
1/2;
- it is made to a beneficiary (or the contract owner's estate) on or after
the death of the contract owner;
- it is attributable to the contract owner's disability; or
- it is used for expenses attributable to the purchase of a home for a
qualified first-time buyer.
The five year rule generally is satisfied if the distribution is not made within
the five taxable year period beginning with the first taxable year in which a
contribution is made to any Roth IRA established for the owner.
A qualified distribution is not included in gross income for federal income tax
purposes.
A non-qualified distribution is not includible in gross income to the extent
that the distribution, when added to all previous distributions, does not exceed
that total amount of contributions made to the Roth IRA. Any non-qualified
distribution in excess of the aggregate amount of contributions will be included
in the contract owner's gross income in the year that is distributed to the
contract owner.
Special rules apply for Roth IRAs that have proceeds received from an IRA prior
to January 1, 1999 if the owner elected the special 4-year income averaging
provisions that were in effect for 1998.
If non-qualified distributions of income from a Roth IRA are made prior to the
date that the owner attains the age of 59 1/2 years, the income is subject to
both the regular income tax and an additional penalty tax of 10%. The penalty
tax can be avoided if the distribution is:
- made to a beneficiary on or after the death of the owner;
- attributable to the owner becoming disabled as defined in the Internal
Revenue Code;
- part of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of the
owner, or the joint lives (or joint life expectancies) of the owner and his
or her designated beneficiary;
- for qualified higher education expenses; or
- used for expenses attributable to the purchase of a home for a qualified
first-time buyer.
If the contract owner dies before the contract is completely distributed, the
balance may be included in the contract owner's gross estate for tax purposes.
Tax Sheltered Annuities
Distributions from Tax Sheltered Annuities are generally taxed when received. A
portion of each distribution is excludable from income based on a formula
established pursuant to the Internal Revenue Code. The formula excludes from
income the amount invested in the contract divided by the number of anticipated
payments until the full investment in the contract is recovered. Thereafter all
distributions are fully taxable.
If a distribution of income is made from a Tax Sheltered Annuity prior to the
date that the owner attains the age of 59 1/2 years, the income is subject to
both the regular income tax and an additional penalty tax of 10%. The penalty
tax can be avoided if the distribution is:
- made to a beneficiary on or after the death of the owner;
- attributable to the owner becoming disabled as defined in the Internal
Revenue Code;
- part of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of the
owner, or the joint lives (or joint life expectancies) of the owner and his
or her designated beneficiary;
- for qualified higher education expenses;
- used for expenses attributable to the purchase of a home for a qualified
first-time buyer; or
- made to the owner after separation from service with his or her employer
after age 55.
24
<PAGE> 27
Non-Qualified Contracts - Natural Persons as Contract Owners
Generally, the income earned inside a Non-Qualified Annuity Contract that is
owned by a natural person is not taxable until it is distributed from the
contract.
Distributions before the annuitization date are taxable to the contract owner to
the extent that the cash value of the contract exceeds the contract owner's
investment at the time of the distribution. Distributions, for this purpose,
include partial surrenders, any portion of the contract that is assigned or
pledged; or any portion of the contract that is transferred by gift. For these
purposes, a transfer by gift may occur upon annuitization if the contract owner
and the annuitant are not the same individual.
With respect to annuity distributions on or after the annuitization date, a
portion of each annuity payment is excludable from taxable income. The amount
excludable is based on the ratio between the contract owner's investment in the
contract and the expected return on the contract. Once the entire investment in
the contract is recovered, all distributions are fully includable in income. The
maximum amount excludable from income is the investment in the contract. If the
annuitant dies before the entire investment in the contract has been excluded
from income, and as a result of the annuitant's death no more payments are due
under the contract, then the unrecovered investment in the contract may be
deducted on his or her final tax return.
In determining the taxable amount of a distribution, all annuity contracts
issued after October 21, 1988 by the same company to the same contract owner
during the same calendar year will be treated as one annuity contract.
A special rule applies to distributions from contracts that have investments
that were made prior to August 14, 1982. For those contracts, distributions that
are made prior to the annuitization date are treated first as a recovery of the
investment in the contract as of that date. A distribution in excess of the
amount of the investment in the contract as of August 14, 1982, will be treated
as taxable income.
The Internal Revenue Code imposes a penalty tax if a distribution is made before
the contract owner reaches age 59 1/2. The amount of the penalty is 10% of the
portion of any distribution that is includible in gross income. The penalty tax
does not apply if the distribution is:
- the result of a contract owner's death;
- the result of a contract owner's disability, as defined in the Internal
Revenue Code;
- one of a series of substantially equal periodic payments made over the life
(or life expectancy) of the contract owner or the joint lives (or joint
life expectancies) of the contract owner and the beneficiary selected by
the contract owner to receive payment under the annuity payment option
selected by the contract owner; or
- is allocable to an investment in the contract before August 14, 1982.
Non-Qualified Contracts - Non-Natural Persons as Contract Owners
The previous discussion related to the taxation of Non-Qualified Contracts owned
by individuals. Different rules (the so-called "non-natural persons" rules)
apply if the contract owner is not a natural person.
Generally, contracts owned by corporations, partnerships, trusts, and similar
entities are not treated as annuity contracts under the Internal Revenue Code.
Therefore, income earned under a Non-Qualified Contract that is owned by a
non-natural person is taxed as ordinary income during the taxable year that it
is earned. Taxation is not deferred, even if the income is not distributed out
of the contract. The income is taxable as ordinary income, not capital gain.
The non-natural persons rules do not apply to all entity-owned contracts. A
contract that is owned by a non-natural person as an agent of an individual is
treated as owned by the individual. This would cause the contract to be treated
as an annuity under the Internal Revenue Code, allowing tax deferral. However,
this exception does not apply when the non-natural person is an employer that
holds the contract under a non-qualified deferred compensation arrangement for
one or more employees.
The non-natural persons rules also do not apply to contracts that are:
- acquired by the estate of a decedent by reason of the death of the
decedent;
- issued in connection with certain qualified retirement plans and individual
retirement plans;
- purchased by an employer upon the termination of certain qualified
retirement plans.
25
<PAGE> 28
WITHHOLDING
Pre-death distributions from the contracts are subject to federal income tax.
Nationwide will withhold the tax from the distributions unless the contract
owner requests otherwise. If the distribution is from a Tax Sheltered Annuity,
it will be subject to mandatory 20% withholding that cannot be waived, unless:
- the distribution is made directly to another Tax Sheltered Annuity or IRA;
or
- the distribution satisfies the minimum distribution requirements imposed by
the Internal Revenue Code.
In addition, contract owners may not waive withholding if the distribution is
subject to mandatory back-up withholding (if no taxpayer identification number
is given or if the Internal Revenue Service notifies Nationwide that mandatory
back-up withholding is required). Mandatory back-up withholding rates are 31% of
income that is distributed.
NON-RESIDENT ALIENS
Generally, a pre-death distribution from a contract to a non-resident alien is
subject to federal income tax at a rate of 30% of the amount of income that is
distributed. Nationwide is required to withhold this amount and send it to the
Internal Revenue Service. Some distributions to non-resident aliens may be
subject to a lower (or no) tax if a treaty applies. In order to obtain the
benefits of such a treaty, the non-resident alien must:
(1) provide Nationwide with proof of residency and citizenship (in
accordance with Internal Revenue Service requirements); and
(2) provide Nationwide with an individual taxpayer identification number.
If the non-resident alien does not meet the above conditions, Nationwide will
withhold 30% of income from the distribution.
Another way to avoid the 30% withholding is for the non-resident alien to
provide Nationwide with sufficient evidence that:
(1) the distribution is connected to the non-resident alien's conduct of
business in the United States; and
(2) the distribution is includible in the non-resident alien's gross
income for United States federal income tax purposes.
Note that these distributions may be subject to back-up withholding, currently
31%, if a correct taxpayer identification number is not provided.
FEDERAL ESTATE, GIFT, AND GENERATION SKIPPING TRANSFER TAXES
The following transfers may be considered a gift for federal gift tax purposes:
- a transfer of the contract from one contract owner to another; or
- a distribution to someone other than a contract owner.
Upon the contract owner's death, the value of the contract may subject to estate
taxes, even if all or a portion of the value is also subject to federal income
taxes.
Section 2612 of the Internal Revenue Code may require Nationwide to determine
whether a death benefit or other distribution is a "direct skip" and the amount
of the resulting generation skipping transfer tax, if any. A direct skip is when
property is transferred to, or a death benefit or other distribution is made to:
(a) an individual who is two or more generations younger than the contract
owner; or
(b) certain trusts, as described in Section 2613 of the Internal Revenue
Code (generally, trusts that have no beneficiaries who are not 2 or
more generations younger than the contract owner).
If the contract owner is not an individual, then for this purpose ONLY,
"contract owner" refers to any person:
- who would be required to include the contract, death benefit, distribution,
or other payment in his or her federal gross estate at his or her death; or
- who is required to report the transfer of the contract, death benefit,
distribution, or other payment for federal gift tax purposes.
If a transfer is a direct skip, Nationwide will deduct the amount of the
transfer tax from the death benefit, distribution or other payment, and remit it
directly to the Internal Revenue Service.
CHARGE FOR TAX
Nationwide is not required to maintain a capital gain reserve liability on
Non-Qualified Contracts. If tax
26
<PAGE> 29
laws change requiring a reserve, Nationwide may implement and adjust a tax
charge.
TAX CHANGES
The foregoing tax information is based on Nationwide's understanding of federal
tax laws. It is NOT intended as tax advice. All information is subject to change
without notice. For more details, contact your personal tax and/or financial
advisor.
STATEMENTS
Nationwide will mail contract owners statements and reports. Therefore, contract
owners should promptly notify Nationwide of any address change.
These mailings will contain:
- statements showing the contract's quarterly activity;
- confirmation statements showing transactions that affect the
contract's value. Confirmation statements will not be sent for
recurring transactions. Instead, confirmation of recurring
transactions will appear in the contract's quarterly statements;
Contract owners should review statements and confirmations carefully. All errors
or corrections must be reported to Nationwide immediately to assure proper
crediting to the contract. Unless Nationwide is notified within 30 days of
receipt of the statement, Nationwide will assume statements and confirmation
statements are correct.
INVESTMENTS
Nationwide intends to invest Guaranteed Period Option allocations received in
fixed interest investments (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
Guaranteed Period Options (3, 4, 5, 6, 7, 8, 9, and 10 years) and anticipated
cash-flow requirements when making investments. Nationwide is not obligated to
invest Guaranteed Period Option 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 Guaranteed Period Options will not necessarily correspond to the
performance of the nonunitized separate account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GUARANTEED PERIOD OPTIONS
Nationwide Investment Services Corporation ("NISC"), acts as the principal
underwriter and national distributor of the contracts sold through this
prospectus. NISC is registered as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the National Association of Securities Dealers,
Inc. NISC's address is Two Nationwide Plaza, Columbus, Ohio 43215. NISC is a
wholly-owned subsidiary of Nationwide.
Contracts sold through this prospectus can be purchased through registered
representatives, appointed by Nationwide, of NASD broker-dealer firms.
Nationwide pays broker-dealers compensation for promoting, marketing and selling
the variable life and variable annuity contracts it sponsors. In turn, the
broker-dealers pay a portion of the compensation to their registered
representatives, under their own arrangements. Nationwide does not expect the
compensation paid to such broker-dealers (including NISC) to exceed 5.0% of
premium payments (on a present value basis) for sales of the contracts described
in this prospectus. For limited periods of time, Nationwide may pay additional
compensation to broker-dealers as part of special sales promotions. Nationwide
offers these contracts on a continuous basis, however no broker dealer is
obligated to sell any particular amount of contracts.
27
<PAGE> 30
NATIONWIDE LIFE INSURANCE COMPANY
BUSINESS ORGANIZATION
Nationwide Life Insurance Company ("Nationwide") is an Ohio stock legal
reserve life insurance company incorporated in 1929. Nationwide offers a
variety of variable and fixed annuities, and life insurance products.
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 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 Life and Annuity Company 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.
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
28
<PAGE> 31
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.
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 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.
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
29
<PAGE> 32
investors. Such factors are of concern to policyholders, agents and
intermediaries.
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
Nationwide's lines of business is based on price, product features,
commission structure, perceived financial strength, claims-paying ratings,
service and name recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the Act), was signed into
law. The Act modernizes the regulatory framework for financial services in
the United States and allows bank, securities firms and insurance companies
to affiliate more directly than they have been permitted to do in the past.
At this time it is not possible to predict the effect the Act will have on
the financial services industry and Nationwide.
REGULATION
Nationwide and Nationwide Life and Annuity Insurance Company, 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. 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
30
<PAGE> 33
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.
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.
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.
LEGAL PROCEEDINGS
Nationwide is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a
material adverse effect on 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
31
<PAGE> 34
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.
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.
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 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.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Nationwide and its subsidiaries
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.
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.
32
<PAGE> 35
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.
33
<PAGE> 36
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.;
(x) inaccuracies in assumptions regarding future persistency,
mortality, morbidity and interest rates used in calculating
reserve amounts; and
(xi) failure of Nationwide's or its significant business partners and
vendors to identify and correct all non-Year 2000 compliant
systems or to develop and execute adequate contingency plans.
RESULTS OF OPERATIONS
In addition to net income, 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.
34
<PAGE> 37
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>
(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
35
<PAGE> 38
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.
(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) Year 2000
Nationwide developed and implemented a plan to address issues related to the
Year 2000. The problem relates to many existing computer systems using only two
digits to identify a year in a date field. These systems were designed and
developed without considering the impact of the change in the century. If not
corrected, many computer systems could fail or create erroneous results when
processing information dated after December 31, 1999. Like many organizations,
Nationwide was required to renovate or replace many computer systems so that the
systems would function properly after December 31, 1999.
Nationwide completed an inventory and assessment of all computer systems.
Nationwide renovated or replaced all applications that were not compliant.
Testing of all systems included running each application in a Year 2000
environment and was completed as planned during 1998. For applications being
replaced, Nationwide had all replacement systems in place and functioning as
planned by year-end 1998.
Nationwide completed an inventory and assessment of all vendor products and
tested and certified each as Year 2000 compliant. Any vendor products that could
not be certified as Year 2000 compliant were replaced or eliminated in 1998.
Nationwide's facilities in Columbus, Ohio were inventoried, assessed and tested
as being Year 2000 compliant. Mission critical systems supporting Nationwide's
infrastructure such as telecommunications, voice and networks were renovated and
brought into compliance as planned during the second quarter of 1999.
Nationwide also addressed issues associated with the exchange of electronic data
with external organizations. Nationwide completed an inventory and assessment of
all business partners utilizing electronic interfaces with Nationwide and
processes were put in place to allow Nationwide to accept data regardless of the
format. Contingency plans were completed that allow Nationwide to continue to
send or receive data in the event of failures related to electronic
transmissions.
In addition to resolving internal Year 2000 readiness issues, Nationwide
conducted a due diligence effort with external organizations, including mutual
fund organizations, financial institutions and wholesale producers. This
involved communication and
36
<PAGE> 39
follow-up with critical business partners to determine if they will be in a
position to continue doing business in the Year 2000 and beyond. All of our
critical business partners have reported that they are compliant.
As part of its risk management strategy, Nationwide identified risk scenarios
including the identification of external risk factors that could cause business
interruptions from Year 2000 related events. These risk scenarios included
increased customer service volume, increased producer service volume, utility
failures, technology failures and disruptions in business operations, finance
and cash flow. Nationwide completed its mitigation and contingency plans to
address these risks that would, except for complete utility failure, permit
uninterrupted service to customer and producers.
Operating expenses in 1998 and 1997 include approximately $44.7 million and
$45.4 million, respectively, for technology projects, including costs related to
Year 2000. Year 2000 activities totaled $6.4 million during 1999. The cost
associated with the completion of Year 2000 renovation and replacement and
efforts will not result in a reduction in operation expenses. Rather, personnel
and resources that were allocated to the Year 2000 issues have been reassigned
to other technology-related projects.
(iv) 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.
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.
37
<PAGE> 40
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. Nationwide utilizes its sponsorship by the National Association of
Counties and The United States Conference of Mayors when marketing Internal
Revenue Code Section 457 products.
38
<PAGE> 41
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>
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>
39
<PAGE> 42
(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.
40
<PAGE> 43
(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 837.5 828.6 823.4
balances
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>
41
<PAGE> 44
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.
42
<PAGE> 45
(ii) Life Insurance
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.
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:
43
<PAGE> 46
<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.
44
<PAGE> 47
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 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
45
<PAGE> 48
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
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.
46
<PAGE> 49
(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>
47
<PAGE> 50
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.
48
<PAGE> 51
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.
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>
49
<PAGE> 52
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NATIONWIDE
<S> <C> <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.
W. G. "JERRY" JURGENSEN has been Chief Executive Officer of Nationwide since
August 2000 and a director since May 2000. Previously, he was Executive Vice
President of Bank One Corporation from 1998 to 2000. Mr. Jurgensen was Executive
Vice President of First Chicago NBD Corporation and Chairman of FCC National
Bank from 1996 to 1998; he also held other positions from 1990 to 1996. Mr.
Jurgensen was Executive Vice President of Norwest Corporation from 1987 to 1990.
Prior to 1987, Mr. Jurgensen held numerous positions with Norwest Corporation
from 1973 to 1990.
DIMON R. MCFERSON has been a Director since April 1988 and Chairman since April
1996. He served as Chief Executive Officer from April 1996 to August 2000. 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.
50
<PAGE> 53
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 College 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
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.
51
<PAGE> 54
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 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. Headley 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.
52
<PAGE> 55
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.
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.
53
<PAGE> 56
EXECUTIVE COMPENSATION
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; Mr.
54
<PAGE> 57
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. Wolken's 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.
EXECUTIVE INCENTIVE PLAN
Prior 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.
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
55
<PAGE> 58
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.
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.
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.
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
56
<PAGE> 59
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.
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.
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.
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.
57
<PAGE> 60
OPTION/STOCK APPRECIATION RIGHTS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
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 $0.40 for the November 9, 1999 grant, representing the
annualized dividends paid on shares of common stock at the date of
grant.
- An option term before exercise of 5 years, which represents the
typical period that options are held prior to exercise.
- Volatility of the stock price of 42.02% for the February 9, 1999
grant, reflecting the daily stock price volatility for the one-year
period prior to the grant date, and 41.23% for the November 9, 1999
grant, reflecting the daily stock price volatility for the one-year
period prior to the grant date.
- No adjustments were made for vesting requirements,
non-transferability, or risk of forfeiture.
OPTIONS/STOCK APPRECIATION RIGHTS EXERCISES AND HOLDINGS
The following table provides information, with respect to Named Executive
Officers, concerning the exercise of options and/or Stock Appreciation
Rights during 1999 and unexercised options and Stock Appreciation Rights
held as of fiscal year-end December 31, 1999, under the Long-Term Executive
Compensation Plan.
AGGREGATED OPTION/S STOCK APPRECIATION RIGHTS EXERCISES IN LAST FISCAL YEAR AND
YEAR-END OPTION/STOCK APPRECIATION RIGHTS VALUES
<TABLE>
<CAPTION>
NAME SHARES VALUE REALIZED NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE MONEY
ACQUIRED ON UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR -END ($)
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>
58
<PAGE> 61
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
59
<PAGE> 62
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.
60
<PAGE> 63
<TABLE>
<CAPTION>
YEARS OF SERVICE
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>
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.
COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
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
61
<PAGE> 64
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.
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. 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.
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.
BASE SALARIES
Base salaries offer security to executives and allow Nationwide Financial
Services to attract competent executive talent and maintain a stable
62
<PAGE> 65
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 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.
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.
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.
63
<PAGE> 66
(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.
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
64
<PAGE> 67
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.
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 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, Chairman
James G. Brocksmith, Jr.
Charles L. Fuellgraf, Jr.
Donald L. McWhorter(1)
(ii) Nationwide Life Insurance Company Compensation Committee
Willard J. Engel, Chairman
Fred C. Finney
Robert L. Stewart
Nancy C. Thomas
(1)Mr. McWhorter serves as a director for Nationwide Financial Services,
Inc.
65
<PAGE> 68
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Unaudited Consolidated Financial Statements
Consolidated Statements of Income for six months ended June 30, 2000
and 1999 Consolidated Balance Sheets as of six months ended June 30,
2000 and 1999
Consolidated Statements of Shareholder's Equity for six months ended
June 30, 2000 and 1999
Consolidated Statements of Cash Flows for six months ended June 30,
2000 and 1999
Notes to Unaudited Consolidated Financial Statements
Management's Narrative Analysis of Results of Operations
Other Information
(2) 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
(3) 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.
66
<PAGE> 69
INTERIM FINANCIAL INFORMATION
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $ 266.1 $ 218.1 $ 538.7 $ 424.3
Life insurance premiums 62.1 48.9 129.0 102.4
Net investment income 409.4 372.1 817.0 735.4
Net realized losses on investments (10.7) (8.3) (13.8) (13.7)
Other 4.0 20.4 9.2 39.9
---------- ---------- ---------- ----------
730.9 651.2 1,480.1 1,288.3
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 290.3 267.4 584.5 531.2
Other benefits and claims 61.7 44.3 129.0 94.8
Policyholder dividends on participating policies 11.5 11.7 23.5 21.8
Amortization of deferred policy acquisition costs 86.2 66.8 172.1 127.5
Other operating expenses 118.4 109.0 240.5 213.3
---------- ---------- ---------- ----------
568.1 499.2 1,149.6 988.6
---------- ---------- ---------- ----------
Income before federal income tax expense 162.8 152.0 330.5 299.7
Federal income tax expense 51.9 51.9 106.3 100.4
---------- ---------- ---------- ----------
Net income $ 110.9 $ 100.1 $ 224.2 $ 199.3
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
67
<PAGE> 70
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
--------------- ---------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $14,708.3 in 2000; $15,377.3 in 1999) $ 14,599.5 $ 15,294.0
Equity securities (cost $103.3 in 2000; $84.9 in 1999) 119.5 92.9
Mortgage loans on real estate, net 5,923.5 5,786.3
Real estate, net 281.2 254.8
Policy loans 553.5 519.6
Other long-term investments 78.8 73.8
Short-term investments 406.9 416.0
--------------- ---------------
21,962.9 22,437.4
--------------- ---------------
Cash 23.6 4.8
Accrued investment income 232.4 238.6
Deferred policy acquisition costs 2,791.6 2,554.1
Other assets 420.5 305.9
Assets held in separate accounts 70,569.1 67,135.1
--------------- ---------------
$ 96,000.1 $ 92,675.9
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 21,566.1 $ 21,861.6
Other liabilities 971.0 914.2
Liabilities related to separate accounts 70,569.1 67,135.1
--------------- ---------------
93,106.2 89,910.9
--------------- ---------------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5.0 million shares, issued and
outstanding 3.8 million shares 3.8 3.8
Additional paid-in capital 766.1 766.1
Retained earnings 2,145.2 2,011.0
Accumulated other comprehensive loss (21.2) (15.9)
--------------- ---------------
2,893.9 2,765.0
--------------- ---------------
$ 96,000.1 $ 92,675.9
=============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
68
<PAGE> 71
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Six Months Ended June 30, 2000 and 1999
(in millions)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
--------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 $ 3.8 $ 914.7 $ 1,579.0 $ 275.6 $ 2,773.1
Comprehensive income:
Net income - - 199.3 - 199.3
Net unrealized losses on securities
available-for-sale arising during the - - - (190.6) (190.6)
period -------------
Total comprehensive income 8.7
-------------
Dividends to shareholder - - (11.0) - (11.0)
--------- ---------- ------------ ------------- -------------
BALANCE, JUNE 30, 1999 $ 3.8 $ 914.7 $ 1,767.3 $ 85.0 $ 2,770.8
========= ========== ============ ============= =============
BALANCE, JANUARY 1, 2000 $ 3.8 $ 766.1 $ 2,011.0 $ (15.9) $ 2,765.0
Comprehensive income:
Net income - - 224.2 - 224.2
Net unrealized losses on securities
available-for-sale arising during the - - - (5.3) (5.3)
period -------------
Total comprehensive income 218.9
-------------
Dividends to shareholder - - (90.0) - (90.0)
--------- ---------- ------------ ------------- -------------
BALANCE, JUNE 30, 2000 $ 3.8 $ 766.1 $ 2,145.2 $ (21.2) $ 2,893.9
========= ========== ============ ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
69
<PAGE> 72
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 2000 and 1999
(in millions)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 224.2 $ 199.3
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 584.5 531.2
Capitalization of deferred policy acquisition costs (400.5) (322.6)
Amortization of deferred policy acquisition costs 172.1 127.5
Amortization and depreciation (3.3) 3.8
Realized losses on investments, net 13.8 13.7
Decrease (increase) in accrued investment income 6.2 (5.3)
Increase in other assets (114.6) (40.2)
Increase (decrease) in policy liabilities 44.2 (2.9)
Increase in other liabilities 69.7 49.2
Other, net (8.1) (2.9)
------------ ------------
Net cash provided by operating activities 588.2 550.8
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 1,912.9 1,172.5
Proceeds from sale of securities available-for-sale 67.5 247.7
Proceeds from repayments of mortgage loans on real estate 325.0 227.8
Proceeds from sale of real estate 2.6 5.2
Proceeds from repayments of policy loans and sale of other invested assets 12.8 10.0
Cost of securities available-for-sale acquired (1,315.5) (1,714.2)
Cost of mortgage loans on real estate acquired (474.4) (295.1)
Cost of real estate acquired (2.9) (1.9)
Short-term investments, net 9.1 61.3
Other, net (82.3) (56.9)
------------ ------------
Net cash provided by (used in) investing activities 454.8 (343.6)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (100.0) (13.5)
Increase in investment product and universal life insurance product account balances 2,305.2 1,559.7
Decrease in investment product and universal life insurance product account balances (3,229.4) (1,755.8)
------------ ------------
Net cash used in financing activities (1,024.2) (209.6)
------------ ------------
Net increase (decrease) in cash 18.8 (2.4)
Cash, beginning of period 4.8 3.4
------------ ------------
Cash, end of period $ 23.6 $ 1.0
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
70
<PAGE> 73
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2000
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Nationwide Life Insurance Company and subsidiaries (NLIC or
collectively, the Company) have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities,
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein reflects all adjustments (all of which are normal and
recurring in nature) which are, in the opinion of management, necessary
for a fair presentation of financial position and results of
operations. Operating results for all periods presented are not
necessarily indicative of the results that may be expected for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
1999 included in the Company's annual report on Form 10-K.
(2) Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). FAS 133, as amended by Statement Nos. 137 and
138, is effective for fiscal years beginning after June 15, 2000 and
establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Statement also addresses
contracts that contain embedded derivatives, such as certain insurance
contracts. FAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company plans to adopt
this Statement in first quarter 2001 and is currently evaluating the
impact on results of operations and financial condition.
(3) Comprehensive Income
--------------------
Comprehensive Income (Loss) includes net income as well as certain
items that are reported directly within a separate component of
shareholder's equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income (Loss) is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal income tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(in millions) JUNE 30, JUNE 30,
------------------------------------------------------------- --------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $ 3.4 $ (241.9) $ (29.4) $ (396.3)
Adjustment to deferred policy acquisition costs (11.5) 63.8 9.1 93.4
Related federal income tax benefit 2.8 60.9 7.1 102.6
----------- ----------- ----------- -----------
Net (5.3) (117.2) (13.2) (200.3)
----------- ----------- ----------- -----------
Reclassification adjustment for net losses on securities
available-for-sale realized during the period:
Gross 11.2 6.5 12.1 15.0
Related federal income tax benefit (3.9) (2.3) (4.2) (5.3)
----------- ----------- ----------- -----------
Net 7.3 4.2 7.9 9.7
----------- ----------- ----------- -----------
Total Other Comprehensive Income (Loss) $ 2.0 $ (113.0) $ (5.3) $ (190.6)
=========== =========== =========== ===========
</TABLE>
71
<PAGE> 74
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(4) Segment Disclosures
-------------------
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 lump-sum,
systematic withdrawal or a stream of payments for life. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate fixed for a
prescribed period, tax-deferred accumulation of savings and flexible
payout options including lump-sum, systematic withdrawal or a stream of
payments for life. Such contracts consist of single premium deferred
annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment includes the fixed
option under variable annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, which provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenues and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
certain revenues and expenses of its investment advisor and
broker/dealer subsidiary, revenues and expenses related to group
annuity contracts sold to Nationwide employee and agent benefit plans
and all realized gains and losses on investments in a Corporate and
Other segment.
The following table summarizes the financial results of the Company's
business segments for the three months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
-------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
2000
Operating revenue (1) $ 186.3 $ 322.7 $ 182.6 $ 50.0 $ 741.6
Benefits and expenses 101.1 275.7 146.1 45.2 568.1
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 85.2 47.0 36.5 4.8 173.5
Net realized losses on investments - - - (10.7) (10.7)
------------ ------------ ------------ ------------ ------------
Consolidated income (loss) before
federal income tax expense $ 85.2 $ 47.0 $ 36.5 $ (5.9) $ 162.8
============ ============ ============ ============ ============
1999
Operating revenue (1) $ 154.8 $ 286.3 $ 153.3 $ 65.1 $ 659.5
Benefits and expenses 83.8 240.3 124.1 51.0 499.2
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 71.0 46.0 29.2 14.1 160.3
Net realized losses on investments - - - (8.3) (8.3)
------------ ------------ ------------ ------------ ------------
Consolidated income before
federal income tax expense $ 71.0 $ 46.0 $ 29.2 $ 5.8 $ 152.0
============ ============ ============ ============ ============
</TABLE>
----------
(1) Excludes net realized gains and losses on investments.
72
<PAGE> 75
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the allocation of assets to and the
financial results of the Company's business segments as of and for the
six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
-------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
2000
Operating revenue (1) $ 375.5 $ 649.8 $ 362.2 $ 106.4 $ 1,493.9
Benefits and expenses 206.0 557.4 292.4 93.8 1,149.6
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 169.5 92.4 69.8 12.6 344.3
Net realized losses on investments - - - (13.8) (13.8)
------------ ------------ ------------ ------------ ------------
Consolidated income (loss) before
federal income tax expense $ 169.5 $ 92.4 $ 69.8 $ (1.2) $ 330.5
============ ============ ============ ============ ============
Assets as of period end $ 65,514.0 $ 16,898.9 $ 7,555.3 $ 6,031.9 $ 96,000.1
============ ============ ============ ============ ============
1999
Operating revenue (1) $ 298.3 $ 573.9 $ 304.4 $ 125.4 $ 1,302.0
Benefits and expenses 161.1 485.1 246.1 96.3 988.6
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 137.2 88.8 58.3 29.1 313.4
Net realized losses on investments - - - (13.7) (13.7)
------------ ------------ ------------ ------------ ------------
Consolidated income before
federal income tax expense $ 137.2 $ 88.8 $ 58.3 $ 15.4 $ 299.7
============ ============ ============ ============ ============
Assets as of period end $ 54,603.7 $ 15,641.8 $ 5,790.1 $ 5,794.2 $ 81,829.8
============ ============ ============ ============ ============
</TABLE>
----------
(1) Excludes net realized gains and losses on investments.
(5) 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.
73
<PAGE> 76
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes
included elsewhere herein.
Management's discussion and analysis contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of the Company. These
forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) the potential
impact on the Company'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 the Company's investment
portfolio or a reduction in the demand for the Company'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.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes net realized investment gains and losses.
Net operating income is commonly used in the insurance industry as
a measure of on-going earnings performance.
The following table reconciles the Company's reported net income
to net operating income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
(in millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 110.9 $ 100.1 $ 224.2 $ 199.3
Net realized losses on investments, net of tax 7.0 5.4 9.0 8.9
---------- ---------- ---------- ----------
Net operating income $ 117.9 $ 105.5 $ 233.2 $ 208.2
========== ========== ========== ==========
</TABLE>
Revenues
Total operating revenues, which exclude net realized gains and
losses on investments, for second quarter 2000 increased to $741.6
million compared to $659.5 million for the same period in 1999.
For the first six months of 2000 and 1999, total operating
revenues were $1.49 billion and $1.30 billion, respectively.
Increases in policy charges and net investment income were the key
drivers to revenue growth.
74
<PAGE> 77
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of variable annuities
and variable life insurance products; cost of insurance charges
earned on universal life insurance products; administration fees,
which include fees charged per contract on a variety of the
Company's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of
premiums withdrawn during a specified period of annuity and
certain life insurance contracts. Policy charges for the
comparable periods of 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
----------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Asset fees $ 180.0 $ 152.2 $ 355.9 $ 292.6
Cost of insurance charges 37.0 28.4 72.1 54.3
Administrative fees 27.2 22.0 63.9 47.8
Surrender fees 21.9 15.5 46.8 29.6
---------- ---------- ---------- ----------
Total policy charges $ 266.1 $ 218.1 $ 538.7 $ 424.3
========== ========== ========== ==========
</TABLE>
The growth in asset fees reflects a 21% increase in total separate
account assets which reached $70.57 billion as of June 30, 2000
compared to $58.15 billion a year ago. Continued strong sales of
variable annuity and variable life insurance products as well as
market appreciation have contributed significantly to the increase
in separate account assets.
Cost of insurance charges are assessed as a percentage of the net
amount at risk on universal life insurance policies. The net
amount at risk is equal to a policy's death benefit minus the
related policyholder account value. The increase in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual investment life insurance reflecting
expanded distribution and increased customer demand for variable
life insurance products. The net amount at risk related to
individual investment life insurance grew to $21.61 billion as of
June 30, 2000 compared to $17.10 billion a year ago.
The growth in administrative fees is attributable to a significant
increase in premiums on individual variable life policies and
certain corporate-owned life policies where the Company collects a
premium load. The increase in surrender charges is primarily
attributable to policyholder withdrawals in the Variable Annuities
segment, and reflects the overall increase in variable annuity
policy reserves and an increase in surrender rates in the first
half of 2000.
Net investment income includes the gross investment income earned
on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general
account invested assets which are not allocated to product
segments. Net investment income grew from $372.1 million in the
second quarter of 1999 to $409.4 million in the second quarter of
2000 and from $735.4 million in the first half of 1999 to $817.0
million in the first half of 2000. The increases were primarily
due to increased invested assets to support growth in fixed
annuity policy reserves coupled with an increase in average yield
on the investment portfolio. Fixed annuity policy reserves, which
include the fixed option of variable annuity contracts, increased
$1.23 billion to $16.34 billion as of the end of second quarter
2000 compared to $15.11 billion a year ago.
Other income totaled $4.0 million in second quarter 2000, a
decrease of $16.4 million from second quarter 1999. For the first
half of 2000, other income totaled $9.2 million compared to $39.9
million in the first half of 1999. The decrease is due to the
assignment of the Company's investment advisory and related
agreements associated with Nationwide mutual funds to an
affiliate.
75
<PAGE> 78
The Company does not consider realized gains and losses on
investments to be recurring components of earnings. The Company
makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. Net realized
losses on investments were $10.7 million and $8.3 million for
second quarter 2000 and 1999, respectively. For the first six
months of 2000, the Company reported net realized losses on
investments of $13.8 million compared to $13.7 million of net
realized losses for the first six months of 1999. During the first
half of 2000 the Company recognized a total of $10.5 million of
realized losses on two fixed maturity security holdings compared
to a total of $19.9 million of realized losses on two fixed
maturity security holdings for the same period in 1999.
Benefits and Expenses
Total benefits and expenses were $568.1 million in second quarter
2000, a 14% increase over second quarter 1999, while year-to-date
2000 benefits and expenses were $1.15 billion compared to $988.6
million a year ago. The increase is due mainly to growth in
amortization of deferred acquisition costs (DAC) and interest
credited. Additionally, other policyholder benefits and other
operating expenses were up approximately 17% compared to the year
ago second quarter and up 20% compared to the six-month period a
year ago.
The significant growth in the Variable Annuities segment business
is the primary reason for the increase in amortization of DAC
which totaled $86.2 million and $66.8 million in second quarter of
2000 and 1999, respectively. On a year-to-date basis, DAC
amortization totaled $172.1 million in 2000 compared to $127.5
million in 1999.
Consistent with the growth in fixed annuity business and higher
crediting rates, interest credited increased to $290.3 million for
the second quarter of 2000 compared to $267.4 million a year ago.
For the first half of 2000, interest credited increased $53.3
million to $584.5 million as compared to 1999.
Federal income tax expense was $51.9 million in both second
quarters, representing effective tax rates of 31.9% and 34.1% for
second quarter 2000 and 1999, respectively. For the first six
months of 2000 and 1999, federal income tax expense was $106.3
million and $100.4 million, representing effective tax rates of
32.2% and 33.5%, respectively. An increase in tax exempt income
and investment tax credits resulted in the decrease in effective
rates.
Recently Issued Accounting Standards
See note 2 to the unaudited consolidated financial statements for
a discussion of recently issued accounting standards.
Sales Information
The following table summarizes total Company sales, excluding
internal replacements, by business segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
--------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Variable annuity deposits $ 3,281.3 $ 2,624.5 $ 6,556.5 $ 5,082.3
Fixed annuity deposits 844.1 748.9 1,586.3 1,366.3
Life insurance premiums 296.6 201.9 707.3 452.4
---------- ---------- ---------- ----------
Total core premiums and deposits 4,422.0 3,575.3 8,850.1 6,901.0
Internal replacements (516.6) (158.2) (893.5) (255.6)
---------- ---------- ---------- ----------
Total core sales 3,905.4 3,417.1 7,956.6 6,645.4
---------- ---------- ---------- ----------
Bank-owned life insurance (BOLI) 309.7 - 328.7 86.7
Institutional products 162.8 - 324.5 -
Nationwide employee and agent benefit plans 77.6 123.7 135.9 190.1
---------- ---------- ---------- ----------
Total sales $ 4,455.5 $ 3,540.8 $ 8,745.7 $ 6,922.2
========== ========== ========== ==========
</TABLE>
76
<PAGE> 79
Total core sales represent amounts that are recurring and are the
sales figures management uses to set and evaluate the Company's
sales goals. The Company reports statutory premiums and deposits
related to life insurance and annuity products as core sales.
Sales of institutional products represent sales of funding
agreements that secure notes issued to foreign investors through a
third party trust under the Company's $2 billion medium-term note
program.
The program was launched in July 1999 as a means to expand spread
based product offerings. The Company excludes institutional
products and BOLI sales as well as deposits into Nationwide
employee and agent benefit plans from its targeted core sales.
Although funding agreements and BOLI contribute to asset and
earnings growth, they do not produce steady production flow that
lends itself to meaningful comparisons. BOLI sales in the second
quarter 2000 include $300.0 million from an affiliate. The Company
also excludes internal replacements from its targeted core sales.
Total core sales reached $3.91 billion in the second quarter of
2000, an increase of 14% over 1999, while year-to-date core sales
increased 20% over 1999. Total annuity sales, net of internal
replacements, contributed $3.61 billion and $3.22 billion in the
second quarter of 2000 and 1999, respectively. Core life insurance
sales for second quarter 2000 were up 47% to $296.6 million with
individual variable universal life and corporate-owned life
products leading the growth.
The Company sells its products through a broad distribution
network. Unaffiliated entities that sell the Company's products to
their own customer base include independent broker/dealers,
brokerage firms, pension plan administrators, life insurance
specialists and financial institutions. Representatives of the
Company or its affiliates who market products directly to a
customer base identified by the Company include Nationwide
Retirement Solutions sales representatives and Nationwide agents.
Core sales by distribution channel are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
---------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Independent broker/dealers $ 1,593.4 $ 1,360.5 $ 3,144.0 $ 2,621.0
Brokerage firms 300.3 237.1 608.3 448.4
Financial institutions 760.0 641.0 1,404.4 1,170.9
Pension plan administrators 258.8 335.7 590.9 673.2
Nationwide Retirement Solutions sales
representatives 671.7 606.2 1,446.5 1,207.9
Nationwide agents 223.6 196.2 434.9 383.5
Life insurance specialists 97.6 40.4 327.6 140.5
---------- ---------- ---------- ----------
Total core sales $ 3,905.4 $ 3,417.1 $ 7,956.6 $ 6,645.4
========== ========== ========== ==========
</TABLE>
Sales through independent broker/dealers increased 17% and 20% for
the three months and six months ended June 30, 2000, respectively.
The hiring of additional wholesalers and certain product
enhancements have contributed to the growth. Sales through
financial institutions increased as we continue to add banks which
sell our products.
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand and include individual and group variable
annuities and variable life insurance. The BEST of AMERICA(R)
products allow customers to choose from investment options managed
by premier mutual fund managers. The Company has also developed
private label variable and fixed annuity products in conjunction
with other financial services providers which allow those
providers to sell products to their own customer bases under their
own brand name.
The Company also markets group deferred compensation retirement
plans to employees of state and local governments for use under
Internal Revenue Code (IRC) Section 457. The Company utilizes its
sponsorship by the National Association of Counties and The United
States Conference of Mayors when marketing IRC Section 457
products.
77
<PAGE> 80
Core sales by product are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(in millions) 2000 1999 2000 1999
----------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BEST of AMERICA(R) products $ 1,622.5 $ 1,295.9 $ 2,941.6 $ 2,432.7
Private label annuities 274.8 360.8 548.7 665.2
Other 137.1 101.7 278.3 194.6
----------- ----------- ----------- -----------
Total individual annuities 2,034.4 1,758.4 3,768.6 3,292.5
----------- ----------- ----------- -----------
BEST of AMERICA(R) group pension series 950.5 887.5 2,149.1 1,789.3
IRC Section 457 annuities 613.7 521.6 1,305.3 1,052.5
Other 10.2 47.7 26.3 58.7
----------- ----------- ----------- -----------
Total group annuities 1,574.4 1,456.8 3,480.7 2,900.5
----------- ----------- ----------- -----------
Traditional/Universal life insurance 63.7 61.8 120.6 121.8
BEST of AMERICA(R) variable life series 138.1 99.7 263.4 190.2
Corporate-owned life insurance 94.8 40.4 323.3 140.5
----------- ----------- ----------- -----------
Total life insurance 296.6 201.9 707.3 452.4
----------- ----------- ----------- -----------
Total core sales $ 3,905.4 $ 3,417.1 $ 7,956.6 $ 6,645.4
=========== =========== =========== ===========
</TABLE>
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
certain other revenue and expenses in a Corporate and Other
segment. All information set forth below relating to the Company's
Variable Annuities segment excludes the fixed option under the
Company's variable annuity contracts. Such information is included
in the Company's Fixed Annuities segment.
The following table summarizes operating income before federal
income tax expense for the Company's business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
---------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Variable Annuities $ 85.2 $ 71.0 $ 169.5 $ 137.2
Fixed Annuities 47.0 46.0 92.4 88.8
Life Insurance 36.5 29.2 69.8 58.3
Corporate and Other 4.8 14.1 12.6 29.1
---------- ---------- ---------- ----------
$ 173.5 $ 160.3 $ 344.3 $ 313.4
========== ========== ========== ==========
</TABLE>
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment
options, tax-deferred accumulation of savings, asset protection in
the event of an untimely death and flexible payout options
including lump-sum, systematic withdrawal or a stream of payments
for life. The Company's variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts.
78
<PAGE> 81
The following table summarizes certain selected financial data for
the Company's Variable Annuities segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
(in millions) 2000 1999 2000 1999
-------------------------------------------------------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 186.3 $ 154.8 $ 375.5 $ 298.3
Benefits and expenses 101.1 83.8 206.0 161.1
------------ ------------ ------------ -----------
Operating income before federal income tax expense $ 85.2 $ 71.0 $ 169.5 $ 137.2
============ ============ ============ ===========
OTHER DATA
Statutory premiums and deposits (1) $ 3,281.3 $ 2,624.5 $ 6,556.5 $ 5,082.3
Policy reserves as of period end:
Individual $ 38,911.2 $ 32,884.4
Group 25,115.1 20,378.9
------------ ------------
Total $ 64,026.3 $ 53,263.3
============ ============
Pre-tax operating income to average policy reserves 0.54% 0.56% 0.54% 0.56%
</TABLE>
----------
(1) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices, which differ from
Generally Accepted Accounting Principles.
Variable annuity segment results reflect substantially increased
asset fee revenue partially offset by increases in DAC
amortization and other operating expenses. Asset fees increased to
$174.7 million in the second quarter of 2000, up 19% from $146.5
million in the same period a year ago. For the first half of 2000,
asset fees totaled $345.3 million up 22% from the first half of
1999. The increase in asset fees is due to continued growth in
variable annuity policy reserve levels resulting from increased
variable annuity sales and market appreciation on investments
underlying reserves. Variable annuity policy reserves declined
$1.21 billion during second quarter 2000 and totaled $64.03
billion as of June 30, 2000. During the first six months of 2000
reserves have increased $2.83 billion and are up 20% compared to a
year ago
Variable annuity deposits increased 25% for the second quarter
2000, reaching $3.28 billion compared to $2.62 billion in the year
ago quarter. Compared to first quarter 2000, variable annuity
deposits were flat. Variable annuity deposits grew 29% in 2000
compared to the first half of 1999, reaching $6.56 billion. Nearly
all channels contributed to the growth in 2000.
Less favorable equity market conditions during the first half of
2000 has slowed the growth in variable annuity policy reserves.
Variable annuity policy reserves reflect market appreciation of
$634.8 billion during the first six months of 2000. Over the past
twelve months, variable annuity policy reserves have increased
$6.81 billion as a result of market appreciation, due mainly to
$8.70 billion of market appreciation in the fourth quarter of
1999.
Offsetting the growth in policy reserves attributable to an
increase in deposits and market appreciation was an increase in
policyholder surrender activity. Excluding the impact of internal
replacements and transfers to the assets managed and administered
segment, surrenders as a percentage of average reserves were 13%,
annualized, in second quarter 2000, compared to 10% in second
quarter 1999. The surrender rate in the first half of 2000 was
14%, annualized, as compared to 11% for the first half of 1999.
The increase in surrender activity is attributable to an increase
in competition in the individual variable annuity market which has
increased transfers to competitor products and the overall aging
of the Company's book of business. The Company introduced new
products, new product features and new retention strategies during
first quarter 2000 in an effort to decrease the rate of
surrenders. The rate of surrenders in second quarter 2000 declined
200 basis points to an annualized rate of 13% from the first
quarter 2000 rate of 15%.
79
<PAGE> 82
Amortization of DAC increased 44% to $56.0 million in second
quarter 2000 compared to $38.8 million in second quarter 1999. DAC
amortization for the first half of 2000 increased to $112.0
million compared to $74.2 million for the first half of 1999.
Operating expenses of $44.0 million in second quarter 2000 were
flat compared to second quarter 1999, while year-to-date 2000
operating expenses were $92.3 million compared to $85.8 million in
1999. The growth in DAC amortization and operating expenses
reflect the overall growth in the variable annuity business. The
increase in DAC amortization also reflects the increase in
policyholder surrenders.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that
generate a return for the customer at a specified interest rate
fixed for a prescribed period, tax-deferred accumulation of
savings and flexible payout options including lump-sum, systematic
withdrawal or a stream of payments for life. Such contracts
consist of single premium deferred annuities, flexible premium
deferred annuities and single premium immediate annuities. The
Fixed Annuities segment includes the fixed option under the
Company's variable annuity contracts.
The following table summarizes certain selected financial data for
the Company's Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 304.2 $ 278.1 $ 608.4 $ 553.4
Other 18.5 8.2 41.4 20.5
------------ ------------ ------------ -----------
322.7 286.3 649.8 573.9
------------ ------------ ------------ -----------
Benefits and expenses:
Interest credited to policyholder account balances 222.2 202.5 447.6 404.7
Other benefits and expenses 53.5 37.8 109.8 80.4
------------ ------------ ------------ -----------
275.7 240.3 557.4 485.1
------------ ------------ ------------ -----------
Operating income before federal income tax expense $ 47.0 $ 46.0 $ 92.4 $ 88.8
============ ============ ============ ===========
OTHER DATA
Statutory premiums and deposits (1) $ 1,006.9 $ 748.9 $ 1,910.8 $ 1,366.3
Policy reserves as of period end:
Individual $ 7,608.2 $ 7,115.5
Group 7,855.0 7,998.8
Institutional 873.6 -
------------ ------------
Total $ 16,336.8 $ 15,114.3
============ ============
Pre-tax operating income to average policy reserves 1.15% 1.22% 1.13% 1.18%
</TABLE>
----------
(1) Statutory data have been derived from the Quarterly
Statements of the Company's life insurance subsidiaries, as
filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices, which differ
from Generally Accepted Accounting Principles.
Fixed annuity segment results reflect an increase in interest
spread income attributable to growth in fixed annuity policy
reserves. 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.
80
<PAGE> 83
The following table depicts the interest spreads on general
account policy reserves in the Fixed Annuities segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net investment income 7.82% 7.64% 7.76% 7.64%
Interest credited 5.72 5.57 5.71 5.59
--------- --------- -------- --------
2.10% 2.07% 2.05% 2.05%
========= ========= ======== ========
</TABLE>
Recent increases in interest rates have slowed mortgage loan and
bond prepayment activity and the Company anticipates interest
spreads over the next several quarters to range between 195 and
200 basis points, excluding the impact of mortgage loan and bond
prepayment income.
Fixed annuity policy reserves increased to $16.34 billion as of
June 30, 2000 compared to $16.59 billion as of the end of 1999 and
$15.11 billion a year ago.
Second quarter fixed annuity premiums and deposits increased to
$1.01 billion in 2000 compared to $748.9 million in 1999 while
sales for the first six months of 2000 increased to $1.91 billion
from $1.37 billion in 1999. Sales of institutional products were
$162.8 million and $324.5 million during second quarter 2000 and
the first six months of 2000, respectively, compared to no sales
in the first six months of 1999. Most of the Company's fixed
annuity sales are premiums and deposits allocated to the fixed
option of variable annuity contracts. Second quarter 2000 fixed
annuity sales include $707.2 million in premiums allocated to the
fixed option under a variable annuity contract, compared to $658.2
million in second quarter 1999. The increase in fixed annuity
premiums and deposits is primarily attributable to sales of
institutional products in the form of funding agreements issued in
connection with the Company's medium-term note program coupled
with a $49.0 million increase in the fixed option of variable
annuity contract deposits in the second quarter of 2000 as
compared to the second quarter of 1999. The later increase was
driven by the Company's enhanced dollar cost averaging (DCA)
program that offers customers a first year bonus interest rate and
transfers the account balance systematically to variable options
over a six or twelve month period.
Other benefits and expenses increased 42% to $53.5 million in
second quarter 2000 compared to a year ago. For the first half of
2000, other benefits and expenses totaled $109.8 million, up 37%
from the first half of 1999. The increase primarily reflects an
increase in immediate annuity benefits due to growth in contracts
in force.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, which provide a death benefit and may
also allow the customer to build cash value on a tax-advantaged
basis.
81
<PAGE> 84
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
(in millions) 2000 1999 2000 1999
-------------------------------------------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 182.6 $ 153.3 $ 362.2 $ 304.4
Benefits and expenses 146.1 124.1 292.4 246.1
----------- ----------- ---------- ----------
Operating income before federal income tax expense $ 36.5 $ 29.2 $ 69.8 $ 58.3
=========== =========== ========== ==========
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 63.7 $ 61.8 $ 120.6 $ 121.8
Individual investment life insurance 138.1 99.7 263.4 190.2
Corporate investment life insurance 404.5 40.4 652.0 227.1
----------- ----------- ---------- ----------
Total $ 606.3 $ 201.9 $ 1,036.0 $ 539.1
=========== =========== ========== ==========
Policy reserves as of period end:
Traditional and universal life insurance $ 2,568.9 $ 2,476.8
Individual investment life insurance 2,044.2 1,517.8
Corporate investment life insurance 2,153.1 1,156.9
---------- ----------
Total $ 6,766.2 $ 5,151.5
========== ==========
</TABLE>
----------
(1) Statutory data have been derived from the Quarterly
Statements of the Company's life insurance subsidiaries, as
filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices, which differ
from Generally Accepted Accounting Principles.
Life Insurance segment results reflect increased revenues driven
by growth in investment life insurance in force and policy
reserves, partially offset by higher benefits and expense levels.
The increase in Life Insurance segment earnings is attributable to
strong growth in investment life insurance products, which include
individual variable universal life insurance and corporate
investment life insurance, where the Company has aggressively
expanded its distribution capabilities. Revenues from investment
life products increased to $76.9 million in second quarter 2000
from $51.9 million in second quarter 1999 as a result of the sales
growth and high persistency. On a year-to-date basis, investment
life product revenues increased to $149.0 million in 2000 from
$103.7 million in 1999.
Individual investment life insurance statutory premiums increased
39% during second quarter 2000 reaching $138.1 million compared to
$99.7 million in 1999. Excluding the $309.7 million in 2000 single
premium BOLI sales, which includes $300.0 million sold to an
affiliate, corporate investment life insurance statutory premiums
more than doubled reaching $94.8 million in second quarter 2000
compared to $40.4 million in second quarter 1999. Total investment
life insurance in force reached $28.86 billion at June 30, 2000
representing 47% of all life insurance in force compared to $21.48
billion and 43% a year ago.
Interest credited to policyholders increased $7.6 million in
second quarter 2000 reaching $41.2 million compared to $33.6
million in the year ago second quarter. For the first six months
of 2000, interest credited to policyholders increased $10.4
million over 1999. Increased corporate investment life insurance
business accounted for most of the increases. Corporate investment
fixed life insurance reserves increased 45% to $1.35 billion as of
June 30, 2000 compared to $931.5 million a year ago.
Other policy benefits increased $5.0 million and $14.2 million in
the three and six months, respectively, ended June 30, 2000 over
comparable periods in 1999, reflecting growth in insurance in
force and an increase in claims.
82
<PAGE> 85
Corporate and Other
The following table summarizes certain selected financial data for
the Company's Corporate and Other segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
--------------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 50.0 $ 65.1 $ 106.4 $ 125.4
Benefits and expenses 45.2 51.0 93.8 96.3
---------- ---------- ---------- ----------
Operating income before federal income tax expense (1) $ 4.8 $ 14.1 $ 12.6 $ 29.1
========== ========== ========== ==========
</TABLE>
----------
(1) Excludes net realized gains and losses on investments.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, certain revenues and expenses of the Company's
investment advisory and broker/dealer subsidiary, and net
investment income and policy charges from group annuity contracts
issued to Nationwide employee and agent benefit plans. During the
third quarter 1999, the Company assigned its investment advisory
and related agreements associated with Nationwide mutual funds to
an affiliate. The decrease in revenues reflects an increase in net
investment income offset by a decrease in investment advisory and
related fees.
In addition to the operating revenues previously presented, the
Company also reports realized gains and losses on investments in
the Corporate and Other segment. The Company realized net
investment losses of $10.7 million and $8.3 million during the
second quarter of 2000 and 1999, respectively.
83
<PAGE> 86
OTHER INFORMATION
On May 22, 2000, the Board of Directors of NLIC held a Special
Meeting (the "Special Meeting"). At the Special Meeting, the Board
of Directors recommended to the sole shareholder of NLIC to adopt
amendments and restate the Amended and Restated Code of
Regulations in order to change the references from "Chairman and
Chief Executive Officer" to "Chairman or Chief Executive Officer"
and to make certain changes to the Officer and Officer Duties
Articles of the Amended and Restated Code of Regulations to
facilitate the election of a Chief Executive Officer.
On May 22, 2000, the Board of Directors elected William G. "Jerry"
Jurgensen as a Director of NLIC and as a member of the Executive
and Investment Committees. At that time, Mr. Jurgensen was also
elected as Chief Executive Officer - Elect of NLIC.
On July 26, 2000, the sole shareholder of NLIC held a Special
Meeting of the Shareholder and approved the recommended amendments
and restatement of the Amended and Restated Code of Regulations.
Effective on August 1, 2000, Mr. Jurgensen's title was changed to
Chief Executive Officer. Also effective on August 1, 2000, the
Board of Directors changed the title of Dimon R. McFerson from
Chairman and Chief Executive Officer to Chairman. Mr. McFerson's
retirement as a Director of NLIC, as a member and Chairman of the
Investment Committee, as a member of the Executive Committee and
as Chairman of NLIC will be effective on or before December 31,
2000.
84
<PAGE> 87
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life
Insurance Company and subsidiaries (collectively the Company), a wholly owned
subsidiary of Nationwide Financial Services, Inc., as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Columbus, Ohio
January 28, 2000
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, 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 $15,294.0 $14,245.1
Equity securities 92.9 127.2
Mortgage loans on real estate, net 5,786.3 5,328.4
Real estate, net 254.8 243.6
Policy loans 519.6 464.3
Other long-term investments 73.8 44.0
Short-term investments 416.0 289.1
--------- ---------
22,437.4 20,741.7
--------- ---------
Cash 4.8 3.4
Accrued investment income 238.6 218.7
Deferred policy acquisition costs 2,554.1 2,022.2
Other assets 305.9 420.3
Assets held in separate accounts 67,135.1 50,935.8
--------- ---------
$92,675.9 $74,342.1
========= =========
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $21,861.6 $19,767.1
Other liabilities 914.2 866.1
Liabilities related to separate accounts 67,135.1 50,935.8
--------- ---------
89,910.9 71,569.0
--------- ---------
Commitments and contingencies (notes 8 and 13)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 766.1 914.7
Retained earnings 2,011.0 1,579.0
Accumulated other comprehensive income (15.9) 275.6
--------- ---------
2,765.0 2,773.1
--------- ---------
$92,675.9 $74,342.1
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Policy charges $ 895.5 $ 698.9 $ 545.2
Life insurance premiums 220.8 200.0 205.4
Net investment income 1,520.8 1,481.6 1,409.2
Realized (losses) gains on investments (11.6) 28.4 11.1
Other 66.1 66.8 46.5
-------- -------- --------
2,691.6 2,475.7 2,217.4
-------- -------- --------
Benefits and expenses:
Interest credited to policyholder account balances 1,096.3 1,069.0 1,016.6
Other benefits and claims 210.4 175.8 178.2
Policyholder dividends on participating policies 42.4 39.6 40.6
Amortization of deferred policy acquisition costs 272.6 214.5 167.2
Other operating expenses 463.4 419.7 384.9
-------- -------- --------
2,085.1 1,918.6 1,787.5
-------- -------- --------
Income before federal income tax expense 606.5 557.1 429.9
Federal income tax expense 201.4 190.4 150.2
-------- -------- --------
Net income $ 405.1 $ 366.7 $ 279.7
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1999, 1998 and 1997
(in millions)
<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 $ 3.8 $ 527.9 $1,432.6 $173.6 $2,137.9
Comprehensive income:
Net income -- -- 279.7 -- 279.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 73.5 73.5
--------
Total comprehensive income 353.2
--------
Capital contribution -- 836.8 -- -- 836.8
--------
Dividend to shareholder -- (450.0) (400.0) -- (850.0)
------ -------- -------- ------ --------
December 31, 1997 3.8 914.7 1,312.3 247.1 2,477.9
Comprehensive income:
Net income -- -- 366.7 -- 366.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 28.5 28.5
--------
Total comprehensive income 395.2
--------
Dividend to shareholder -- -- (100.0) -- (100.0)
------ -------- -------- ------ --------
December 31, 1998 3.8 914.7 1,579.0 275.6 2,773.1
Comprehensive income:
Net income -- -- 405.1 -- 405.1
Net unrealized losses on securities
available-for-sale arising during
the year -- -- -- (315.0) (315.0)
--------
Total comprehensive income 90.1
--------
Capital contribution -- 26.4 87.9 23.5 137.8
--------
Dividends to shareholder -- (175.0) (61.0) -- (236.0)
------ -------- -------- ------ --------
December 31, 1999 $ 3.8 $ 766.1 $2,011.0 $(15.9) $2,765.0
====== ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 405.1 $ 366.7 $ 279.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,096.3 1,069.0 1,016.6
Capitalization of deferred policy acquisition costs (637.0) (584.2) (487.9)
Amortization of deferred policy acquisition costs 272.6 214.5 167.2
Amortization and depreciation 2.4 (8.5) (2.0)
Realized (gains) losses on invested assets, net 11.6 (28.4) (11.1)
Increase in accrued investment income (7.9) (8.2) (0.3)
Decrease (increase) in other assets 122.9 16.4 (12.7)
Decrease in policy liabilities (20.9) (8.3) (23.1)
Increase (decrease) in other liabilities 149.7 (34.8) 230.6
Other, net (8.6) (11.3) (10.9)
--------- --------- ---------
Net cash provided by operating activities 1,386.2 982.9 1,146.1
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 2,307.9 1,557.0 993.4
Proceeds from sale of securities available-for-sale 513.1 610.5 574.5
Proceeds from repayments of mortgage loans on real estate 696.7 678.2 437.3
Proceeds from sale of real estate 5.7 103.8 34.8
Proceeds from repayments of policy loans and sale of other invested assets 40.9 23.6 22.7
Cost of securities available-for-sale acquired (3,724.9) (3,182.8) (2,828.1)
Cost of mortgage loans on real estate acquired (971.4) (829.1) (752.2)
Cost of real estate acquired (14.2) (0.8) (24.9)
Short-term investments, net (27.5) 69.3 (354.8)
Other, net (110.9) (88.4) (62.5)
--------- --------- ---------
Net cash used in investing activities (1,284.6) (1,058.7) (1,959.8)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from capital contributions -- -- 836.8
Cash dividends paid (188.5) (100.0) --
Increase in investment product and universal life insurance
product account balances 3,799.4 2,682.1 2,488.5
Decrease in investment product and universal life insurance
product account balances (3,711.1) (2,678.5) (2,379.8)
--------- --------- ---------
Net cash used in financing activities (100.2) (96.4) 945.5
--------- --------- ---------
Net increase (decrease) in cash 1.4 (172.2) 131.8
Cash, beginning of year 3.4 175.6 43.8
--------- --------- ---------
Cash, end of year $ 4.8 $ 3.4 $ 175.6
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Organization and Description of Business
Nationwide Life Insurance Company (NLIC) is a leading provider of
long-term savings and retirement products in the United States and is a
wholly owned subsidiary of Nationwide Financial Services, Inc. (NFS).
The Company develops and sells a diverse range of products including
variable annuities, fixed annuities and life insurance as well as
investment management and administrative services. NLIC markets its
products through a broad network of distribution channels, including
independent broker/dealers, national and regional brokerage firms,
financial institutions, pension plan administrators, life insurance
specialists, Nationwide Retirement Solutions sales representatives, and
Nationwide agents.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc., and
Nationwide Investment Services Corporation. NLIC and its subsidiaries
are collectively referred to as "the Company."
(2) Summary of Significant Accounting Policies
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) Consolidation Policy
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(b) Valuation of Investments and Related Gains and Losses
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of accumulated other comprehensive income in
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.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
(c) Revenues and Benefits
Investment Products and Universal Life Insurance Products:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(d) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) Separate Accounts
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $915.4 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy Benefits
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges. The average interest rate credited on investment product
policy reserves was 5.6%, 6.0% and 6.1% for the years ended
December 31, 1999, 1998 and 1997, respectively.
Future policy benefits for traditional life insurance policies
have been calculated by the net level premium method using
interest rates varying from 6.0% to 10.5% and estimates of
mortality, morbidity, investment yields and withdrawals which were
used or which were being experienced at the time the policies were
issued, rather than the assumptions prescribed by state regulatory
authorities.
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) Participating Business
Participating business represents approximately 29% in 1999 (40%
in 1998 and 50% in 1997) of the Company's life insurance in force,
69% in 1999 (74% in 1998 and 77% in 1997) of the number of life
insurance policies in force, and 13% in 1999 (14% in 1998 and 27%
in 1997) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) Federal Income Tax
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(j) Recently Issued Accounting Pronouncements
In March 1998, The American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The
SOP, which 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 $8.3 million.
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities. Contracts that contain embedded derivatives, such as
certain investment and insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
July 1999 the FASB issued Statement No. 137 which delayed the
effective date of FAS 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt this Statement in first quarter
2001 and is currently evaluating the impact on results of
operations and financial condition.
(k) Reclassification
Certain items in the 1998 and 1997 consolidated financial
statements have been reclassified to conform to the 1999
presentation.
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) Investments
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1999 and
1998 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
--------- ------ ------- ---------
<S> <C> <C> <C> <C>
December 31, 1999:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 428.4 $ 23.4 $ (2.4) $ 449.4
Obligations of states and political subdivisions 0.8 -- -- 0.8
Debt securities issued by foreign governments 110.6 0.6 (0.8) 110.4
Corporate securities 11,414.7 118.9 (218.6) 11,315.0
Mortgage-backed securities 3,422.8 25.8 (30.2) 3,418.4
--------- ------ ------- ---------
Total fixed maturity securities 15,377.3 168.7 (252.0) 15,294.0
Equity securities 84.9 12.4 (4.4) 92.9
--------- ------ ------- ---------
$15,462.2 $181.1 $(256.4) $15,386.9
========= ====== ======= =========
December 31, 1998:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 255.9 $ 13.0 $ -- $ 268.9
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 106.5 4.5 -- 111.0
Corporate securities 9,899.6 423.2 (18.7) 10,304.1
Mortgage-backed securities 3,457.7 104.2 (2.4) 3,559.5
--------- ------ ------- ---------
Total fixed maturity securities 13,721.3 544.9 (21.1) 14,245.1
Equity securities 110.4 18.3 (1.5) 127.2
--------- ------ ------- ---------
$13,831.7 $563.2 $ (22.6) $14,372.3
========= ====== ======= =========
</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
(in millions) cost fair value
--------- ---------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 847.0 $ 847.0
Due after one year through five years 5,240.5 5,205.7
Due after five years through ten years 5,046.9 5,005.2
Due after ten years 4,242.9 4,236.1
--------- ---------
$15,377.3 $15,294.0
========= =========
</TABLE>
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized (losses) gains on securities
available-for-sale, net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions) 1999 1998
------ -------
<S> <C> <C>
Gross unrealized (losses) gains $(75.3) $ 540.6
Adjustment to deferred policy acquisition costs 50.9 (116.6)
Deferred federal income tax 8.5 (148.4)
------ -------
$(15.9) $ 275.6
====== =======
</TABLE>
An analysis of the change in gross unrealized (losses) gains on
securities available-for-sale for the years ended December 31:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
------- ----- ------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $(607.1) $52.6 $137.5
Equity securities (8.8) 4.2 (2.7)
------- ----- ------
$(615.9) $56.8 $134.8
======= ===== ======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1999,
1998 and 1997 were $513.1 million, $610.5 million and $574.5 million,
respectively. During 1999, gross gains of $10.4 million ($9.0 million
and $9.9 million in 1998 and 1997, respectively) and gross losses of
$28.0 million ($7.6 million and $18.0 million in 1998 and 1997,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
The Company had $15.6 million of real estate investments at December
31, 1999 that were non-income producing the preceding twelve months.
During 1998 the Company had investments of $42.4 million that were
non-income producing, which consisted of $32.7 million of securities
available-for-sale and $9.7 million of real estate.
Real estate is presented at cost less accumulated depreciation of $24.8
million as of December 31, 1999 ($21.5 million as of December 31, 1998)
and valuation allowances of $5.5 million as of December 31, 1999 ($5.4
million as of December 31, 1998).
The recorded investment of mortgage loans on real estate considered to
be impaired was $3.7 million as of both December 31, 1999 and 1998. No
valuation allowance has been recorded for these loans as of December
31, 1999 or 1998. During 1999, the average recorded investment in
impaired mortgage loans on real estate was approximately $3.7 million
($9.1 million in 1998) and there was no interest income recognized on
those loans. Interest income recognized on impaired loans was $0.3
million in 1998 which is equal to interest income recognized using a
cash-basis method of income recognition.
<PAGE> 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Allowance, beginning of year $42.4 $42.5 $51.0
Additions (reductions) charged to operations 0.7 (0.1) (1.2)
Direct write-downs charged against the allowance -- -- (7.3)
Allowance on acquired mortgage loans 1.3 -- --
----- ----- -----
Allowance, end of year $44.4 $42.4 $42.5
===== ===== =====
</TABLE>
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $1,031.3 $ 982.5 $ 911.6
Equity securities 2.5 0.8 0.8
Mortgage loans on real estate 460.4 458.9 457.7
Real estate 28.8 40.4 42.9
Short-term investments 18.6 17.8 22.7
Other 26.5 30.7 21.0
-------- -------- --------
Total investment income 1,568.1 1,531.1 1,456.7
Less investment expenses 47.3 49.5 47.5
-------- -------- --------
Net investment income $1,520.8 $1,481.6 $1,409.2
======== ======== ========
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $(25.0) $(0.7) $ 3.6
Equity securities 7.4 2.1 2.7
Mortgage loans on real estate (0.6) 3.9 1.6
Real estate and other 6.6 23.1 3.2
------ ----- -----
$(11.6) $28.4 $11.1
====== ===== =====
</TABLE>
Fixed maturity securities with an amortized cost of $9.1 million as of
December 31, 1999 and $6.5 million as of December 31, 1998 were on
deposit with various regulatory agencies as required by law.
(4) 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.
<PAGE> 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Interest rate swaps are primarily used to convert specific investment
securities and interest bearing policy liabilities from a fixed-rate to
a floating-rate basis. Amounts receivable or payable under these
agreements are recognized as an adjustment to net investment income or
interest credited to policyholder account balances consistent with the
nature of the hedged item. The changes in fair value of the interest
rate swap agreements are not recognized on the balance sheet, except
for interest rate swaps designated as hedges of fixed maturity
securities available-for-sale, for which changes in fair values are
reported in accumulated other comprehensive income.
Interest rate futures contracts are primarily used to hedge the risk of
adverse interest rate changes related to 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
policy liabilities and 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 liabilities and
investments to U.S. dollars.
The following table summarizes the notional amount of derivative
financial instruments classified as hedges outstanding as of December
31, 1999. Prior to 1999 the Company's activities in derivatives were
not significant.
<TABLE>
<CAPTION>
(in millions)
-------------
<S> <C>
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $362.7
Pay variable/receive fixed rate swaps hedging investments $ 28.5
Other contracts hedging investments $ 19.1
Pay variable/receive fixed rate swaps hedging liabilities $577.2
Foreign currency swaps
Hedging foreign currency denominated investments $ 14.8
Hedging foreign currency denominated liabilities $577.2
Interest rate futures contracts $781.6
</TABLE>
<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(5) Federal Income Tax
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Fixed maturity securities $ 5.3 $ --
Future policy benefits 149.5 207.7
Liabilities in separate accounts 373.6 319.9
Mortgage loans on real estate and real estate 18.5 17.5
Other assets and other liabilities 51.1 58.9
----- ------
Total gross deferred tax assets 598.0 604.0
Less valuation allowance (7.0) (7.0)
----- ------
Net deferred tax assets 591.0 597.0
----- ------
Deferred tax liabilities:
Deferred policy acquisition costs 724.4 568.7
Fixed maturity securities -- 212.2
Deferred tax on realized investment gains 34.7 34.8
Equity securities and other long-term investments 10.8 9.6
Other 26.5 21.6
------ ------
Total gross deferred tax liabilities 796.4 846.9
------ ------
Net deferred tax liability $205.4 $249.9
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. There
has been no change in the valuation allowance for the years ended
December 31, 1999, 1998 and 1997.
The Company's current federal income tax liability was $104.7 million
and $72.8 million as of December 31, 1999 and 1998, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
(in millions) 1999 1998 1997
------ ------ ------
Currently payable $ 53.6 $186.1 $121.7
Deferred tax expense 147.8 4.3 28.5
------ ------ ------
$201.4 $190.4 $150.2
====== ====== ======
<PAGE> 15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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
---------------- ---------------- ----------------
(in millions) Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $212.3 35.0 $195.0 35.0 $150.5 35.0
Tax exempt interest and dividends
received deduction (7.3) (1.2) (4.9) (0.9) -- --
Income tax credits (4.3) (0.7) -- -- -- --
Other, net 0.7 0.1 0.3 0.1 (0.3) (0.1)
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $201.4 33.2 $190.4 34.2 $150.2 34.9
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $29.8 million, $173.4 million and
$91.8 million during the years ended December 31, 1999, 1998 and 1997,
respectively.
(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>
(in millions) 1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Unrealized gains (losses) on securities available-for-sale
arising during the period:
Gross $(665.3) $ 58.2 $141.1
Adjustment to deferred policy acquisition costs 167.5 (12.9) (21.8)
Related federal income tax (expense) benefit 171.4 (15.9) (41.7)
------- ------ ------
Net (326.4) 29.4 77.6
------- ------ ------
Reclassification adjustment for net (gains) losses on
securities available-for-sale realized during the
period:
Gross 17.6 (1.4) (6.3)
Related federal income tax expense (benefit) (6.2) 0.5 2.2
------- ------ ------
Net 11.4 (0.9) (4.1)
------- ------ ------
Total Other Comprehensive Income $(315.0) $ 28.5 $ 73.5
======= ====== ======
</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.
<PAGE> 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for fixed
maturity and equity securities exclude the fair value of
derivatives contracts designated as hedges of fixed maturity and
equity securities.
Mortgage loans on real estate, net: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Separate account assets and liabilities: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
<PAGE> 17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Policy reserves on life insurance contracts: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
Commitments to extend credit: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 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.
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
(in millions) amount fair value amount fair value
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $15,294.0 $15,294.0 $14,245.1 $14,245.1
Equity securities 92.9 92.9 128.5 128.5
Mortgage loans on real estate, net 5,786.3 5,745.5 5,328.4 5,527.6
Policy loans 519.6 519.6 464.3 464.3
Short-term investments 416.0 416.0 289.1 289.1
Cash 4.8 4.8 3.4 3.4
Assets held in separate accounts 67,135.1 67,135.1 50,935.8 50,935.8
Liabilities:
Investment contracts (16,977.7) (16,428.6) (15,468.7) (15,158.6)
Policy reserves on life insurance contracts (4,883.9) (4,607.9) (3,914.0) (3,768.9)
Liabilities related to separate accounts (67,135.1) (66,318.7) (50,935.8) (49,926.5)
Derivative financial instruments:
Interest rate swaps hedging assets 4.3 4.3 - -
Interest rate swaps hedging liabilities - (24.2) - -
Foreign currency swaps (11.8) (11.8) - -
Futures contracts 1.3 1.3 (1.3) (1.3)
</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, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Interest Rate Risk: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans and derivative financial instruments. These
instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
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 $216.2 million
extending into 2000 were outstanding as of December 31, 1999. The
Company also had $28.0 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1999.
Notional amounts of derivative financial instruments, primarily
interest rate swaps, interest rate futures contracts and foreign
currency swaps, significantly exceed the credit risk associated with
these instruments and represent contractual balances on which
calculations of amounts to be exchanged are based. Credit exposure is
limited to the sum of the aggregate fair value of positions that have
become favorable to NLIC, including accrued interest receivable due
from counterparties. Potential credit losses are minimized through
careful evaluation of counterparty credit standing, selection of
counterparties from a limited group of high quality institutions,
collateral agreements and other contract provisions. At December 31,
1999, NLIC's credit risk from these derivative financial instruments
was $6.1 million.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 23% (22% in 1998) in any geographic area and no more than 2% (2%
in 1998) with any one borrower as of December 31, 1999. As of December
31, 1999, 39% (42% in 1998) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
<PAGE> 19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Reinsurance: The Company has entered into a reinsurance contract to
cede a portion of its general account individual annuity business to
The Franklin Life Insurance Company (Franklin). Total recoveries due
from Franklin were $143.6 million and $187.9 million as of December 31,
1999 and 1998, respectively. The contract is immaterial to the
Company's results of operations. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder.
Under the terms of the contract, Franklin has established a trust as
collateral for the recoveries. The trust assets are invested in
investment grade securities, the market value of which must at all
times be greater than or equal to 102% of the reinsured reserves.
(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 cost (benefit) charged to operations by the Company during the
years ended December 31, 1999, 1998 and 1997 were $(8.3) million, $2.0
million and $7.5 million, respectively. The Company has recorded a
prepaid pension asset of $13.3 million and $5.0 million as of December
31, 1999 and 1998, 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 $49.6 million and $40.1 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1999, 1998 and
1997 was $4.9 million, $4.1 million and $3.0 million, respectively.
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated 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
------------------ -----------------------
(in millions) 1999 1998 1999 1998
--------------------------------------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $2,185.0 $2,033.8 $ 270.1 $ 237.9
Service cost 80.0 87.6 14.2 9.8
Interest cost 109.9 123.4 17.6 15.4
Actuarial (gain) loss (95.0) 123.2 (64.4) 15.6
Plan settlement in 1999/curtailment in 1998 (396.1) (107.2) -- --
Benefits paid (72.4) (75.8) (11.0) (8.6)
Acquired companies -- -- 13.3 --
-------- -------- ------- -------
Benefit obligation at end of year 1,811.4 2,185.0 239.8 270.1
-------- -------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,541.9 2,212.9 77.9 69.2
Actual return on plan assets 161.8 300.7 3.5 5.0
Employer contribution 12.4 104.1 20.9 12.1
Plan settlement (396.1) -- -- --
Benefits paid (72.4) (75.8) (11.0) (8.4)
-------- -------- ------- -------
Fair value of plan assets at end of year 2,247.6 2,541.9 91.3 77.9
-------- -------- ------- -------
Funded status 436.2 356.9 (148.5) (192.2)
Unrecognized prior service cost 28.2 31.5 -- --
Unrecognized net (gains) losses (402.0) (345.7) (46.7) 16.0
Unrecognized net (asset) obligation at transition (7.7) (11.0) 1.1 1.3
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ 54.7 $ 31.7 $(194.1) $(174.9)
======== ======== ======= =======
</TABLE>
<PAGE> 21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of the pension plan and
postretirement life and health care benefit plan:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------- -----------------------
1999 1998 1999 1998
---- ---- ------- ------
<S> <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>
(in millions) 1999 1998 1997
-------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 80.0 $ 87.6 $ 77.3
Interest cost on projected benefit obligation 109.9 123.4 118.6
Expected return on plan assets (160.3) (159.0) (139.0)
Recognized gains (9.1) (3.8) --
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation (asset) (1.4) 4.2 4.2
------- ------- --------
$ 22.3 $ 55.6 $ 64.3
======= ======= ========
</TABLE>
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide Insurance and employees of WSC ended
participation in the plan. A curtailment gain of $67.1 million resulted
(consisting of a $107.2 million reduction in the projected benefit
obligation, net of the write-off of the $40.1 million remaining
unamortized transition obligation related to WSC). During 1999, the
plan transferred assets to settle its obligation related to WSC
employees . A settlement gain of $32.9 million was recognized.
Basis for measurements, net periodic pension cost for the pension plan:
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Weighted average discount rate 6.08% 6.00% 6.50%
Rate of increase in future compensation levels 4.33% 4.25% 4.75%
Expected long-term rate of return on plan assets 7.33% 7.25% 7.25%
</TABLE>
<PAGE> 22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the postretirement benefit plan as a whole for
the years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
------- ----------- -----------
<S> <C> <C> <C>
Service cost (benefits attributed to employee service during the year) $14.2 $ 9.8 $ 7.0
Interest cost on accumulated postretirement benefit obligation 17.6 15.4 14.0
Actual return on plan assets (3.5) (5.0) (3.6)
Amortization of unrecognized transition obligation of affiliates 0.6 0.2 0.2
Net amortization and deferral (1.8) 1.2 (0.5)
----- ----- -----
$27.1 $21.6 $17.1
===== ===== =====
</TABLE>
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Discount rate 6.65% 6.70% 7.25%
Long term rate of return on plan
assets, net of tax 7.15% 5.83% 5.89%
Assumed health care cost trend rate:
Initial rate 15.00% 12.00% 11.00%
Ultimate rate 5.50% 6.00% 6.00%
Uniform declining period 5 Years 12 Years 12 Years
</TABLE>
For the postretirement benefit plan as a whole, a one percentage point
increase or decrease in the assumed health care cost trend rate would
have no impact on the APBO as of December 31, 1999 and have no impact
on the NPPBC for the year ended December 31, 1999.
(10) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
and Dividend Restrictions
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 1999, 1998
and 1997 was $1.35 billion, $1.32 billion and $1.13 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1999, 1998 and 1997 was $276.2 million, $171.0 million and
$111.7 million, 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
$40.2 million of dividends could be paid by NLIC without prior
approval.
<PAGE> 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) Transactions With Affiliates
During second quarter 1999 the Company entered into a modified
coinsurance arrangement to reinsure the 1999 operating results of an
affiliated company, Employers Life Insurance Company of Wausau (ELOW)
retroactive to January 1, 1999. In September 1999, NFS acquired ELOW
for $120.8 million and immediately merged ELOW into NLIC terminating
the modified coinsurance arrangement. Because ELOW was an affiliate,
the Company accounted for the merger similar to poolings-of-interests;
however, prior period financial statements were not restated due to
immateriality. The reinsurance and merger combined contributed $1.46
million to year to date net income.
The Company has a reinsurance agreement with NMIC whereby all of the
Company's accident and health business is ceded to NMIC on a modified
coinsurance basis. The agreement covers individual accident and health
business for all periods presented and group and franchise accident and
health business since July 1, 1999. Either party may terminate the
agreement on January 1 of any year with prior notice. Prior to July 1,
1999 group and franchise accident and health business and a block of
group life insurance policies were ceded to ELOW under a modified
coinsurance agreement. Under a modified coinsurance agreement, invested
assets are retained by the ceding company and investment earnings are
paid to the reinsurer. Under the terms of the Company's agreements, the
investment risk associated with changes in interest rates is borne by
the reinsurer. Risk of asset default is retained by the Company,
although a fee is paid to the Company for the retention of such risk.
The ceding of risk does not discharge the original insurer from its
primary obligation to the policyholder. The Company believes that the
terms of the modified coinsurance agreements are consistent in all
material respects with what the Company could have obtained with
unaffiliated parties. Revenues ceded to NMIC and ELOW for the years
ended December 31, 1999, 1998 and 1997 were $193.0 million, $216.9
million, and $315.3 million, respectively, while benefits, claims and
expenses ceded were $216.9 million, $259.3 million, and $326.6 million,
respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to
allocation among NMIC and such subsidiaries. Measures used to allocate
expenses among companies include individual employee estimates of time
spent, special cost studies, salary expense, commission expense and
other methods agreed to by the participating companies that are within
industry guidelines and practices. In addition, beginning in 1999
Nationwide Services Company, a subsidiary of NMIC, provides computer,
telephone, mail, employee benefits administration, and other services
to NMIC and certain of its direct and indirect subsidiaries, including
the Company, based on specified rates for units of service consumed.
For the years ended December 31, 1999, 1998 and 1997, the Company made
payments to NMIC and Nationwide Services Company totaling $124.1
million, $95.0 million, and $85.8 million, respectively. In addition,
the Company does not believe that expenses recognized under these
agreements are materially different than expenses that would have been
recognized had the Company operated on a stand-alone basis.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1999, 1998 and 1997, the
Company made lease payments to NMIC and its subsidiaries of $9.9
million, $8.0 million and $8.4 million, respectively.
<PAGE> 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1999 and
1998 were not material. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $411.7 million and $248.4 million as
of December 31, 1999 and 1998, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
As part of certain restructuring activities that occurred prior to the
March 1997 IPO, the Company paid a dividend valued at $485.7 million to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of ELOW, National Casualty Company (NCC) and
West Coast Life Insurance Company (WCLIC). Also, on February 24, 1997,
the Company paid a dividend to NFS, and NFS paid an equivalent dividend
to Nationwide Corp., consisting of securities having an aggregate fair
value of $850.0 million. The Company recognized a gain of $14.4 million
on the transfer of securities.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1999 were $56.0
million, $60.0 million and $66.1 million, respectively.
(12) Bank Lines of Credit
NFS, NLIC and NMIC are parties to a $600.0 million revolving credit
facility which provides for a $600.0 million loan over a five year term
on a fully revolving basis with a group of national financial
institutions. The credit facility provides for several and not joint
liability with respect to any amount drawn by any party. NFS, NLIC and
NMIC pay facility and usage fees to the financial institutions to
maintain the revolving credit facility. As of December 31, 1999 the
Company had no amounts outstanding under the agreement.
(13) 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.
(14) 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.
<PAGE> 25
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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,
revenues and expenses of its investment advisor subsidiary, revenues
and expenses related to group annuity contracts sold to Nationwide
Insurance employee and agent benefit plans and all realized gains and
losses on investments in a Corporate and Other segment.
During 1999 the Company revised the allocation of net investment income
among its Life Insurance and Corporate and Other segments. Also,
certain amounts previously reported as other income were reclassified
to operating expense. Amounts reported for prior periods have been
restated to reflect these changes.
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
(in millions) Annuities Annuities Insurance and Other Total
------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999:
Net investment income (1) $ (41.5) $ 1,134.5 $ 253.1 $ 174.7 $ 1,520.8
Other operating revenue 668.2 43.4 393.0 77.8 1,182.4
--------- --------- -------- -------- ---------
Total operating revenue (2) 626.7 1,177.9 646.1 252.5 2,703.2
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 837.5 130.5 128.3 1,096.3
Amortization of deferred policy
acquisition costs 162.8 49.7 60.1 -- 272.6
Other benefits and expenses 173.6 113.5 334.7 94.4 716.2
--------- --------- -------- -------- ---------
Total expenses 336.4 1,000.7 525.3 222.7 2,085.1
--------- --------- -------- -------- ---------
Operating income before
federal income tax 290.3 177.2 120.8 29.8 618.1
Realized losses on investments -- -- -- (11.6) (11.6)
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 290.3 $ 177.2 $ 120.8 $ 18.2 $ 606.5
========= ========= ======== ======== =========
Assets as of year end $62,599.7 $17,134.8 $6,616.7 $6,324.7 $92,675.9
========= ========= ======== ======== =========
</TABLE>
<PAGE> 26
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Variable Fixed Life Corporate
(in millions) Annuities Annuities Insurance and Other Total
------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998:
Net investment income (1) $ (31.3) $ 1,116.6 $ 225.6 $ 170.7 $ 1,481.6
Other operating revenue 532.9 35.7 318.5 78.6 965.7
--------- --------- -------- -------- ---------
Total operating revenue (2) 501.6 1,152.3 544.1 249.3 2,447.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 828.6 115.4 125.0 1,069.0
Amortization of deferred policy
acquisition costs 123.9 44.2 46.4 -- 214.5
Other benefits and expenses 159.3 104.2 293.5 78.1 635.1
--------- --------- -------- -------- ---------
Total expenses 283.2 977.0 455.3 203.1 1,918.6
--------- --------- -------- -------- ---------
Operating income before federal
income tax 218.4 175.3 88.8 46.2 528.7
Realized gains on investments -- -- -- 28.4 28.4
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 218.4 $ 175.3 $ 88.8 $ 74.6 $ 557.1
========= ========= ======== ======== =========
Assets as of year end $47,668.7 $15,215.7 $5,187.6 $6,270.1 $74,342.1
========= ========= ======== ======== =========
1997:
Net investment income (1) $ (26.8) $ 1,098.2 $ 184.9 $ 152.9 $ 1,409.2
Other operating revenue 413.9 43.2 283.4 56.6 797.1
--------- --------- -------- -------- ---------
Total operating revenue (2) 387.1 1,141.4 468.3 209.5 2,206.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 823.4 78.5 114.7 1,016.6
Amortization of deferred policy
acquisition costs 87.8 39.8 39.6 -- 167.2
Benefits and expenses 148.4 108.7 283.5 63.1 603.7
--------- --------- -------- -------- ---------
Total expenses 236.2 971.9 401.6 177.8 1,787.5
--------- --------- -------- -------- ---------
Operating income before federal
income tax 150.9 169.5 66.7 31.7 418.8
Realized gains on investments -- -- -- 11.1 11.1
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 150.9 $ 169.5 $ 66.7 $ 42.8 $ 429.9
========= ========= ======== ======== =========
Assets as of year end $35,278.7 $14,436.3 $3,901.4 $6,174.3 $59,790.7
========= ========= ======== ======== =========
</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> 88
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 Period Option. The
Specified Interest Rate at the time is 8% and the 5-year interest rate swap in
effect for the specified interest rate is 8%. The contract owner decides to
surrender the Guaranteed Period Option 985 days from maturity. The specified
value of the Guaranteed Period Option is $11,937.69. At this time, the 3-year
interest rate swap 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 = $12,164.16
*Assumes no contingent deferred sales charges are applicable.
Specified Value (for purposes of the Example) = the amount of the Guaranteed
Period Option allocation ($10,000), plus interest accrued at the Specified
Interest Rate (8%).
a = the Interest Rate Swap for a period equivalent to the Guaranteed Period
at the time of deposit in the Guaranteed Period Option;
b = the Interest Rate Swap at the time of distribution for a period of time
equivalent to the time remaining in the Guaranteed Period. 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 Period; and
d = The number of days remaining in the Guaranteed Period.
<PAGE> 89
Example B
Assume contract owner made a $10,000 allocation on the first day of a calendar
quarter into a 5-year Guaranteed Period Option. The specified interest rate at
the time is 8% and the 5-year interest rate swap 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 Guaranteed Period
Option is $11,937.69. At this time, the 3 year interest rate swap 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
MVA FACTOR = 0.96944
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 0.96944
*SURRENDER VALUE = $11,572.91
*Assumes contingent deferred sales charges are applicable.
Specified value (for purposes of the Example) = the amount of the Guaranteed
Period Option allocation ($10,000), plus interest accrued at the Specified
Interest Rate (8%).
a = the Interest Rate Swap for a period equivalent to the Guaranteed Period
at the time of deposit in the Guaranteed Period Option;
b = the Interest Rate Swap at the time of distribution for a period of time
equivalent to the time remaining in the Guaranteed Period. 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 Period; and
d = The number of days remaining in the Guaranteed Period.
<PAGE> 90
The table set forth below illustrates the impact of a Market Value Adjustment
applied upon a full surrender of a 10 year Guaranteed Period Option allocation,
at various stages of the corresponding Guaranteed Period. These figures are
based on Interest Rate Swap of 8% (a in the Market Value Adjustment formula) and
varying current yield Interest Rate Swap 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 PERIOD ADJUSTMENT VALUE
<S> <C> <C> <C> <C>
12% 9 $ 10,800.00 -29.35% $7,631
7 $ 12,597.00 -23.68% $9,615
5 $ 14,693.00 -17.55% $12,114
2 $ 18,509.00 -7.43% $17,134
180 $ 20,785.00 -1.88% $20,393
10% 9 $ 10,800.00 -16.94% $8,971
7 $ 12,597.00 -13.44% $10,904
5 $ 14,693.00 -9.80% $13,254
2 $ 18,509.00 -4.04% $17,761
180 $ 20,785.00 -1.01% $20,575
9% 9 $ 10,800.00 -9.84% $9,737
7 $ 12,597.00 -7.74% $11,622
5 $ 14,693.00 -5.59% $13,871
2 $ 18,509.00 -2.28% $18,088
180 $ 20,785.00 -0.57% $20,667
8% 9 $ 10,800.00 -2.06% $10,578
7 $ 12,597.00 -1.61% $12,395
5 $ 14,693.00 -1.15% $14,524
2 $ 18,509.00 -0.46% $18,424
180 $ 20,785.00 -0.11% $20,761
7% 9 $ 10,800.00 6.47% $11,499
7 $ 12,597.00 5.00% $13,227
5 $ 14,693.00 3.55% $15,214
2 $ 18,509.00 1.40% $18,769
180 $ 20,785.00 0.34% $20,857
6% 9 $ 10,800.00 15.84% $12,511
7 $ 12,597.00 12.11% $14,123
5 $ 14,693.00 8.51% $15,944
2 $ 18,509.00 3.32% $19,124
180 $ 20,785.00 0.81% $20,953
4% 9 $ 10,800.00 37.45% $14,844
7 $ 12,597.00 28.07% $16,132
5 $ 14,693.00 19.33% $17,533
2 $ 18,509.00 7.32% $19,865
180 $ 20,785.00 1.76% $21,150
</TABLE>
<PAGE> 91
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
Article VII of the Amended Code of Regulations of Nationwide
provides as follows:
Section 1. Indemnification of Directors, Officers and Employees.
Nationwide will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is
or was a director, officer or employee of Nationwide, or is or was
serving at the request of Nationwide as a director, trustee,
officer, member, or employee of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture,
trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action,
suit or proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the State of Ohio.
Such indemnification (unless ordered by a court) will be made as
authorized in a specific case upon a determination that
indemnification of the director, trustee, officer or employee is
proper in the circumstances because he has met the applicable
standards of conduct set forth in the General Corporation Law of
the State of Ohio. Such determination will be made (1) by the
Board of Directors by a majority vote of a quorum consisting of
directors who were not, and are not, parties to or threatened with
any such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal
counsel meeting the requirements of independence prescribed by the
General Corporation Law of Ohio, or (3) by the shareholders, or
(4) by the Court of Common Pleas or the court in which such
action, suit or proceeding was brought.
Section 2. Other Rights. The foregoing right of indemnification
will not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under the Articles of
Incorporation, these Regulations, any agreement, vote of
shareholders or disinterested directors or otherwise, and will
continue as to a person who has ceased to be a director, trustee,
officer or employee and will inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. Nationwide may pay
expenses, including attorneys' fees, incurred in defending any
action, suit or proceeding referred to in Section 1 of this
Article VII, in advance of the final disposition of such action,
suit or proceeding as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the
director, trustee, officer or employee to repay such amount,
unless it will ultimately be determined that he is entitled to be
indemnified by Nationwide as authorized in this Article VII.
Section 4. Insurance. Nationwide may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, member, or employee of Nationwide, or is or was serving
at the request of Nationwide as a director, trustee, officer or
employee of another corporation, domestic or foreign, non-profit
or for profit, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not Nationwide would have the power to indemnify him
against such liability under this Article VII.
<PAGE> 92
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Nationwide, through various separate accounts -- the Nationwide
Government Plans Variable Account ("GPVA"), Nationwide Qualified
Plans Variable Account ("QPVA"), Nationwide Ohio DC Variable
Account ("Ohio DC Variable Account") and Nationwide Life Insurance
Company Separate Account-1 ("Separate Account-1") -- offers
contracts to qualified pension plans and certain government plans
in reliance on Section 3(a)(2) of the Securities Act of 1933 and
in certain cases, Rule 144A thereunder. Data relating to the
amount of securities sold are:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
GPVA $610,638,932 $507,939,747
QPVA $2,564,861,472 $1,994,897,334
Ohio DC Variable Account $173,209,797 $111,516,201
Separate Account-1 $897,853 $1,254,595
</TABLE>
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
(a)
Exhibit Index Page
(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 (Exhibit D)*
(23) Consent of Experts and Counsel (Exhibit E)* E
(24) Power of Attorney - Copy attached hereto
* To be filed by Pre-Effective Amendment
(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
<PAGE> 93
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.
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.
<PAGE> 94
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 1st of November, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------------------------------------
(Registrant)
By : /s/ STEVEN SAVINI
---------------------------------------------------------------
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 1st of November, 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 and
---------------------------------- Director
William G. Jurgensen
DIMON R. MCFERSON Chairman 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
ROBERT L. STEWART Director Attorney-in-Fact
----------------------------------
Robert L. Stewart
</TABLE>
