<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
----- -----
ALL VOTING STOCK WAS HELD BY AFFILIATES OF THE REGISTRANT ON AUGUST 12, 1997.
COMMON STOCK - 3,814,779 SHARES ISSUED AND OUTSTANDING AS OF AUGUST 12, 1997
(Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Narrative Analysis of the
Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
Assets 1997 1996
------ ----------- ----------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $12,049,864 in 1997; $11,970,878 in 1996) $12,319,848 12,304,639
Equity securities (cost $55,813 in 1997; $43,890 in 1996) 66,497 59,131
Mortgage loans on real estate, net 5,141,839 5,272,119
Real estate, net 292,935 265,759
Policy loans 391,432 371,816
Other long-term investments 23,336 28,668
Short-term investments 286,354 4,789
----------- ----------
18,522,241 18,306,921
----------- ----------
Cash 86,387 43,784
Accrued investment income 209,037 210,182
Deferred policy acquisition costs 1,537,814 1,366,509
Investment in subsidiaries classified as discontinued operations -- 485,707
Other assets 404,319 426,441
Assets held in Separate Accounts 32,866,145 26,926,702
----------- ----------
$53,625,943 47,766,246
=========== ==========
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $17,536,264 17,179,060
Policyholders' dividend accumulations 366,681 361,401
Other policyholder funds 59,153 60,073
Accrued federal income tax:
Current 44,323 30,170
Deferred 158,769 162,212
----------- ----------
203,092 192,382
----------- ----------
Dividend payable -- 485,707
Other liabilities 375,206 423,047
Liabilities related to Separate Accounts 32,866,145 26,926,702
----------- ----------
51,406,541 45,628,372
----------- ----------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5,000,000 shares, issued and
outstanding 3,814,779 shares 3,815 3,815
Additional paid-in capital 914,654 527,874
Retained earnings 1,159,696 1,432,593
Unrealized gains on securities available-for-sale, net 141,237 173,592
----------- ----------
2,219,402 2,137,874
----------- ----------
$53,625,943 47,766,246
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Revenues:
Investment product and universal life insurance product
policy charges $ 129,658 97,955 250,107 186,558
Traditional life insurance premiums 50,295 49,224 105,741 103,012
Net investment income 351,346 340,266 692,296 669,797
Realized gains (losses) on investments (11,929) 5,806 9,113 9,374
Other income 15,908 6,010 25,742 12,219
--------- --------- --------- -------
535,278 499,261 1,082,999 980,960
--------- --------- --------- -------
Benefits and expenses:
Benefits and claims 297,049 285,276 593,419 575,272
Provision for policyholders' dividends on participating
policies 11,542 11,907 22,188 22,687
Amortization of deferred policy acquisition costs 39,594 34,865 82,988 70,994
Other operating expenses 94,231 76,108 188,092 141,788
--------- --------- --------- -------
442,416 408,156 886,687 810,741
--------- --------- --------- -------
Income from continuing operations before federal income
tax expense 92,862 91,105 196,312 170,219
--------- --------- --------- -------
Federal income tax expense:
Current 32,477 32,592 55,231 58,617
Deferred 10 154 13,978 640
--------- --------- --------- -------
32,487 32,746 69,209 59,257
--------- --------- --------- -------
Income from continuing operations 60,375 58,359 127,103 110,962
Income from discontinued operations (less federal income tax
expense of $1,470 and $3,986 in 1996) -- 3,100 -- 7,295
--------- --------- --------- -------
Net income $ 60,375 61,459 127,103 118,257
========= ========= ========= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
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, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Unrealized
gains (losses)
Additional on securities Total
Capital paid-in Retained available-for- shareholder's
shares capital earnings sale, net equity
------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1996:
Balance, January 1, 1996 $3,815 657,118 1,583,275 384,304 2,628,512
Capital of contributed subsidiary -- 30 -- -- 30
Net income -- -- 118,257 -- 118,257
Unrealized losses on securities
available-for-sale, net -- -- -- (275,185) (275,185)
------ -------- ---------- -------- ----------
Balance, June 30, 1996 $3,815 657,148 1,701,532 109,119 2,471,614
====== ======== ========== ======== ==========
1997:
Balance, January 1, 1997 3,815 527,874 1,432,593 173,592 2,137,874
Capital contributions -- 836,780 -- -- 836,780
Dividends to shareholder -- (450,000) (400,000) -- (850,000)
Net income -- -- 127,103 -- 127,103
Unrealized losses on securities
available-for-sale, net -- -- -- (32,355) (32,355)
------ -------- ---------- -------- ----------
Balance, June 30, 1997 $3,815 914,654 1,159,696 141,237 2,219,402
====== ======== ========== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
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, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 127,103 118,257
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Capitalization of deferred policy acquisition costs (235,735) (214,486)
Amortization of deferred policy acquisition costs 82,988 70,994
Amortization and depreciation 1,964 8,613
Realized gains on investments, net (9,113) (9,374)
Deferred federal income tax 13,978 23,864
Decrease (increase) in accrued investment income 1,145 (814)
Decrease (increase) in other assets 21,708 (81,888)
Increase (decrease) in policyholder account balances 55,237 (63,997)
Increase in policyholders' dividend accumulations 5,280 7,113
Increase in accrued federal income tax payable 14,153 8,579
(Decrease) increase in other liabilities (47,841) 63,206
Other, net (2,317) (2,344)
----------- ----------
Net cash provided by (used in) operating activities 28,550 (72,277)
----------- ----------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 437,694 685,247
Proceeds from sale of securities available-for-sale 225,855 194,207
Proceeds from repayments of mortgage loans on real estate 164,699 123,064
Proceeds from sale of real estate 23,214 8,163
Proceeds from repayments of policy loans and sale of other invested assets 21,908 27,108
Cost of securities available-for-sale acquired (1,236,560) (769,786)
Cost of mortgage loans on real estate acquired (418,593) (486,706)
Cost of real estate acquired (21,506) (2,893)
Policy loans issued and other invested assets acquired (37,785) (42,936)
Short-term investments, net (282,700) 26,109
----------- ----------
Net cash used in investing activities (1,123,774) (238,423)
----------- ----------
Cash flows from financing activities:
Proceeds from capital contributions 836,780 --
Increase in investment product and universal life insurance product
account balances 1,511,167 1,284,221
Decrease in investment product and universal life insurance product
account balances (1,210,120) (918,291)
----------- ----------
Net cash provided by financing activities 1,137,827 365,930
----------- ----------
Net increase in cash 42,603 55,230
Cash, beginning of period 43,784 9,455
----------- ----------
Cash, end of period $ 86,387 64,685
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
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, 1997
(1) Organization and Basis of Presentation
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was a
wholly owned subsidiary of Nationwide Corporation (Nationwide Corp.). On
January 27, 1997, Nationwide Corp. contributed the common stock of NLIC to
Nationwide Financial Services, Inc. (NFS). NFS was formed by Nationwide
Corp. in November 1996 as a holding company for members of the Nationwide
Insurance Enterprise that offer or distribute long-term savings and
retirement products. NLIC and its subsidiaries are collectively referred
to as "the Company."
The accompanying unaudited consolidated financial statements of 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, 1996 included in the Company's annual report on Form 10-K.
(2) Dividends and Capital Contributions
On September 24, 1996, NLIC's Board of Directors declared a dividend to
Nationwide Corp. consisting of the common stock of certain subsidiaries
classified as discontinued operations. As of and during the year ended
December 31, 1996, these previously wholly owned subsidiaries of NLIC were
classified as discontinued operations since they do not offer or
distribute long-term savings and retirement products. The dividend was
paid by NLIC on January 1, 1997.
On February 24, 1997, NLIC paid a dividend to NFS, which made an
equivalent dividend to Nationwide Corp., consisting of securities having
an aggregate market value of $850.0 million. NLIC recognized a gain of
$14.4 million on the transfer of securities.
On March 10, 1997 and March 11, 1997, NFS made cash capital contributions
to NLIC totaling $836.8 million.
7
<PAGE> 8
ITEM 2 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 narrative analysis of the results of operations contains
forward-looking statements that are intended to enhance the reader's
ability to assess the future financial performance of the Company. Because
these statements are subject to numerous assumptions, risks, and
uncertainties, actual results could be materially different. The following
factors, among others, may have such an impact: changes in economic
conditions; movements in interest rates and the stock markets; competitive
pressures on product pricing and services; success and timing of business
strategies; and the nature and extent of legislation and regulatory
actions and reforms.
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports corporate
income and expenses and investments and related investment income
supporting capital not specifically allocated to its product segments in a
Corporate and Other segment.
RESULTS OF OPERATIONS
Policy Charges. Policy charges include asset fees, which are
primarily earned from separate account assets generated from sales
of variable annuities; administration fees, which include fees
charged per contract on a variety of the Company's products and
premium loads on universal life insurance products; surrender fees,
which are charged as a percentage of assets withdrawn during a
specified period (usually the first seven years) of annuity and
certain life insurance contracts; and cost of insurance charges
earned on universal life insurance products. For second quarter
1997, policy charges were $129.7 million, a 32% increase from $97.9
million in second quarter 1996. For the first half of 1997, policy
charges were $250.1 million, a 34% increase from $186.5 million for
the first six months of 1996. The increase in policy charges is due
primarily to increases in separate account assets and the resulting
higher levels of asset fees. Total separate account assets have
increased 44% from $22.84 billion as of June 30, 1996 to $32.87
billion as of June 30, 1997.
Life Insurance Premiums. Life insurance premiums are earned
primarily from traditional life insurance in the Life Insurance
segment, but are also earned from the sale of life-contingent
immediate annuities in the Fixed Annuities segment. Life insurance
premiums were $50.3 million during the three months ended June 30,
1997, representing a 2% increase from $49.3 million during the
corresponding period of 1996. For the six months ended June 30,
1997, life insurance premiums were up 3% to $105.7 million compared
to $103.1 million for the first half of 1996. The increase is
primarily attributable to an increase in traditional life insurance
in-force.
Net Investment Income. 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 was $351.3 million and
$692.3 million, respectively, for the three and six months ended
June 30, 1997 compared to $340.3 million and $669.8 million for the
corresponding periods in 1996. Net investment income has increased
primarily as a result of growth in the Fixed Annuities segment.
8
<PAGE> 9
Realized Gains (Losses) on Investments. Realized gains and losses
on investments are not considered by the Company to be recurring
components of earnings. The Company makes decisions concerning the
sale of invested assets based on a variety of market, business,
tax and other factors. All realized gains and losses are reported
in the Corporate and Other segment. Net realized losses on
investments were $11.9 million in second quarter 1997 compared to
realized gains of $5.8 million in second quarter 1996. On a
year-to date basis, realized gains were $9.1 million through June
1997 compared to $9.4 million through June 1996. Realized gains in
1997 include $14.4 million recognized when securities of $850.0
million were paid to Nationwide Corp. as a dividend on February
24, 1997. See note 2 to the unaudited consolidated financial
statements. The majority of the second quarter 1997 realized loss
relates to an $11.0 million write-down of a single corporate bond
investment due to deterioration in the credit quality of the
issuer.
Other Income. Other income consists of investment management fees
earned by the Company from the management of Nationwide mutual
funds. Net investment management fees earned on Nationwide mutual
fund assets selected as investment options for variable annuity
products and variable life insurance products are reported in the
Variable Annuities segment and Life Insurance segment,
respectively. The Company also sells its mutual fund products
separately, and investment management fees from these assets are
included in the Corporate and Other segment. Other income was
$15.9 million in second quarter 1997, up from $6.0 million in
second quarter 1996. For the six months ended June 30, 1997 and
1996 other income was $25.7 million and $12.2 million,
respectively.
Benefits and Claims. Benefits and claims consist primarily of
interest credited on fixed annuity products and life insurance
benefits in the Life Insurance segment. Benefits and claims
increased 4% to $297.0 million in second quarter 1997 from $285.2
million in second quarter 1996. On a year-to-date basis, benefits
and claims increased 3% to $593.4 million through June 1997 from
$575.2 million through June 1996. The increases reflect increases
in both interest credited on fixed annuities and life insurance
benefits.
Policyholder Dividends. Policyholder dividends are paid on certain
participating life insurance policies. Policyholder dividends were
$11.6 million and $22.2 million in second quarter and for the
first half of 1997, respectively, representing 3% decreases from
the corresponding periods of 1996.
Amortization of Deferred Policy Acquisition Costs (DAC).
Amortization of DAC increased 13% from $34.9 million in second
quarter 1996 to $39.6 million in second quarter 1997. For the
first six months of 1997 amortization of DAC was $83.0 million, up
17% from $71.1 million in the first half of 1996. The increases
are primarily attributable to an increase in variable annuity
policy reserves.
Operating Expenses. Operating expenses were $94.2 million in
second quarter 1997, a 24% increase from second quarter 1996
operating expenses of $76.1 million. Operating expenses were up
33% to $188.1 million for the first half of 1997 from $141.2
million for the first half of 1996. The increase is primarily due
to an increase in the number of annuity and life insurance
contracts in-force and the related increase in administrative
processing costs. In addition, operating expenses in 1997 include
approximately $20 million on technology projects related to year
2000 and the development of a new policy administration system for
the traditional life insurance line.
Federal Income Tax Expense. Federal income tax expense was $32.5
million and $32.7 million, representing effective tax rates of
35.0% and 35.9% for second quarter 1997 and 1996, respectively.
For the first six months of 1997 and 1996 federal income tax
expense was $69.2 million and $59.3 million, representing
effective tax rates of 35.3% and 34.8%, respectively.
9
<PAGE> 10
Net Operating Income. Net operating income is net income,
excluding realized gains and losses on investments (net of related
federal income tax) and discontinued operations. Net operating
income for second quarter 1997 was $67.9 million, a 24% increase
from second quarter 1996's $54.6 million. Net operating income was
$120.8 million through June 1997, up 16% from $103.8 million
through June 1996.
Discontinued Operations. Discontinued operations include the
results of (i) the three NLIC subsidiaries whose outstanding
common stock, on September 24, 1996, was declared as a dividend to
Nationwide Corp. and (ii) 100% of NLIC's accident and health and
group life business which was ceded to affiliates during the third
quarter of 1996. NLIC did not recognize any gain or loss on the
disposal of these subsidiaries or discontinuance of the accident
and health and group life insurance business. Income from
discontinued operations was $3.1 million and $7.3 million during
the second quarter and for the first half of 1996, respectively.
There was no income from discontinued operations in 1997 as a
result of the transfer by the Company of the ownership of the
three subsidiaries to Nationwide Corp. on January 1, 1997 and the
reinsurance agreements.
EFFECT OF SPECIAL DIVIDENDS AND CASH CAPITAL CONTRIBUTIONS
On December 31, 1996, NLIC paid a $50.0 million dividend (the $50
Million Dividend) to Nationwide Corp. On February 24, 1997, NLIC
paid a dividend to NFS, which subsequently made a dividend payment
to Nationwide Corp., consisting of securities having an aggregate
fair value of $850.0 million (the $850 Million Dividend). The $50
Million Dividend and the $850 Million Dividend are collectively
referred to as the "Special Dividends".
On March 10, 1997, and March 11, 1997, NFS made cash capital
contributions to NLIC totaling $836.8 million.
Because (i) the Special Dividends preceded the cash capital
contributions, and (ii) the cash capital contributions were
invested at lower yields than the yield on the investments used to
fund the $850 Million Dividend, the aggregate effect of the
Special Dividends and the cash capital contributions was
approximately a $3.6 million reduction in net investment income
for second quarter 1997 and a $8.1 million reduction in net
investment income for the first six months of 1997.
RESULTS OF OPERATIONS BY SEGMENT
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate income and expenses and investments and related
investment income supporting capital not specifically allocated to
its product segments 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.
10
<PAGE> 11
The following tables present summary financial data for the Company by segment.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
(in millions of dollars) 1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Variable Annuities $ 94.0 68.6 180.8 130.5
Fixed Annuities 282.2 273.9 567.0 544.8
Life Insurance 116.0 110.1 230.6 215.5
Corporate and Other 55.0 40.9 95.5 80.8
------- ------- ------- -------
Total operating revenues 547.2 493.5 1,073.9 971.6
Realized gains (losses) on investments (11.9) 5.8 9.1 9.4
------- ------- ------- -------
Total revenues $ 535.3 499.3 1,083.0 981.0
======= ======= ======= =======
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAX EXPENSE:
Variable Annuities $ 34.8 18.9 64.2 37.1
Fixed Annuities 44.1 39.4 81.7 73.0
Life Insurance 13.7 15.1 30.7 29.7
Corporate and Other 12.1 11.9 10.6 21.0
------- ------- ------- -------
Total operating income 104.7 85.3 187.2 160.8
Realized gains (losses) on investments (11.9) 5.8 9.1 9.4
------- ------- ------- -------
Total income from continuing operations before
federal income tax expense $ 92.8 91.1 196.3 170.2
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(in millions of dollars) As of June 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
POLICY RESERVES:
Variable Annuities (1) $29,878.8 20,717.2
Fixed Annuities (1) 13,724.5 13,055.8
Life Insurance 3,165.9 2,778.3
Corporate and Other 3,571.8 2,860.6
--------- ---------
Total policy reserves (2) $50,341.0 39,411.9
========= =========
</TABLE>
- ----------
(1) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of June 30, 1997 and
1996, such policy reserves totaled $9.80 billion and $8.94 billion,
respectively.
(2) Total policy reserves as presented here are net of reinsurance and
therefore differ from the amounts set forth in the Company's unaudited
consolidated financial statements.
Variable Annuities
Revenues. Revenues in the Variable Annuities segment consist of policy charges
and other income. Policy charges consist of asset fees, which are generally a
percentage of separate account assets deposited for the purchase of variable
annuities; administration fees, which are generally a specific dollar amount per
contract; and surrender fees, which are charged against assets withdrawn during
a specified period (generally the first seven years) of variable annuity
contracts. The separate account assets generated by the Variable Annuities
segment do not contribute to net investment income of the Company because the
customer receives the investment benefit and bears the investment risk of these
assets. Other income includes net investment management fees earned on separate
account assets held in mutual funds managed by a subsidiary of the Company.
11
<PAGE> 12
Variable annuity revenues grew to $94.0 million during the second quarter and
$180.8 million for the first six months of 1997, representing 37% and 39%
increases, respectively, from the same periods of 1996. Revenues have increased
as a result of growth in policyholder account balances (policy reserves) due to
an increase in deposits and strong stock market performance, particularly during
the second quarter of 1997. The growth in policy reserves has resulted in growth
in asset fees, which were $85.0 million and $163.8 million in second quarter and
for the first half of 1997, respectively, compared to $62.8 million and $119.6
million for the same periods in 1996. Total policy charges, which include asset
fees, as a percentage of variable annuity policy reserves have remained
relatively stable during the periods presented, reflecting no or minimal changes
in the levels of policy charges for most variable annuity products.
Income from Continuing Operations Before Federal Income Tax Expense. Income from
continuing operations before federal income tax expense was $34.8 million in
second quarter 1997, an 84% increase from second quarter 1996. Through the first
half of the current year, variable annuity earnings increased 73% to $64.2
million compared to the first six months of 1996. The increase is due to growth
in variable annuity policy reserves and the corresponding increase in policy
charges, combined with expense levels which have decreased as a percentage of
revenues. Operating expenses were $37.7 million and $33.8 million, or 55 basis
points and 68 basis points of average variable annuity policy reserves, for
second quarter 1997 and 1996, respectively. On a year-to-date basis, operating
expenses were $74.4 million and $62.2 million, or 55 basis points and 66 basis
points of average variable annuity policy reserves, for 1997 and 1996,
respectively. During 1997, the Company has controlled its operating expenses by
taking advantage of economies of scale and by increasing productivity through
investments in technology.
Policy Reserves. During second quarter 1997, variable annuity policy reserves
increased $4.58 billion to $29.88 billion as of June 30, 1997 for a year-to-date
increase of $5.60 billion in 1997 from $24.28 billion as of December 31, 1996.
Compared to one year ago, variable annuity policy reserves are up 44% or $9.16
billion as of June 30,1997. Deposits were $1.94 billion and $1.75 billion in
second quarter 1997 and 1996, respectively. Through June 1997, deposits were
$3.77 billion compared to $3.44 billion through June 1996. During second quarter
and for the first six months of 1997, variable annuity policy reserves reflect
market appreciation of $3.26 billion and $3.10 billion compared to market
appreciation of $524.6 million and $1.13 billion in the same periods of 1996.
Withdrawals, surrenders, net transfers and policy charges resulted in a decrease
in variable annuity policy reserves of $619.5 million and $329.0 million during
second quarter 1997 and 1996, respectively, and on a year-to-date basis resulted
in a decrease in variable annuity policy reserves of $1.27 billion and $614.1
million in 1997 and 1996, respectively.
Statutory Premiums and Deposits. For second quarter 1997, statutory premiums and
deposits were $1.94 billion, an increase of 11% from $1.75 billion in second
quarter 1996. Tax qualified statutory premiums and deposits were 70% of total
second quarter 1997 sales compared to 67% for second quarter 1996. Second
quarter 1997 deposits through the financial institutions channel accounted for
an increase of $88.1 million or 51% over second quarter 1996 due to growth in
sales of bank proprietary annuities and the addition of new bank relationships.
For the first half of 1997, statutory premiums and deposits were $3.77 billion,
an increase of 10% from $3.44 billion in the first half of 1996. Tax-qualified
statutory premiums and deposits were 71% of total sales for the first six months
of 1997 compared to 67% for the same period of 1996. In the investment dealer
channel, a 75 basis point commission enhancement introduced midway through first
quarter was continued through June 1997. The commission enhancement has helped
to build sales momentum in this channel which management believes should
continue into the third and fourth quarters of 1997.
12
<PAGE> 13
Fixed Annuities
Revenues. Revenues in the Fixed Annuities segment consist mainly of net
investment income, which is earned on invested assets allocated to support fixed
annuity policy reserves and shareholder's equity allocated to such segment.
Total revenues were $282.2 million and $273.9 million in second quarter 1997 and
1996, respectively. Net investment income was $272.8 million and $264.1 million,
representing average pre-tax yields on the assets supporting this segment of
8.23% and 8.36%, in second quarter 1997 and 1996, respectively. For the first
half of 1997 total revenues were $567.0 million compared to $544.8 million for
the first half of 1996. Through the first six months of 1997, net investment
income was $542.3 million representing an average pre-tax yield of 8.19%
compared to net investment income of $520.2 and an average pre-tax yield of
8.24% for the first six months of 1996.
Interest Credited. Interest credited on account balances was $205.9 million and
$199.1 million, representing crediting rates of 6.21% and 6.31%, for second
quarter 1997 and 1996, respectively. The differential between net investment
income and interest credited on account balances resulted in interest spreads of
$66.9 million and $65.0 million, or 2.02% and 2.05%, for second quarter 1997 and
1996, respectively. Interest credited on account balances was $406.8 million and
$398.8 million, representing crediting rates of 6.14% and 6.32% for the first
half of 1997 and 1996, respectively. Interest spread increased to $135.5
million, or 2.05%, for the first six months of 1997 compared to $121.4 million,
or 1.92%, through six months of 1996. Interest spreads vary depending on
crediting rates offered by competitors, performance of the investment portfolio,
changes in market interest rates and other factors. Interest spread in the third
quarter is expected to remain comparable or widen modestly from first and second
quarter levels as third quarter crediting rates for a majority of the fixed
annuity products were lowered in response to declining interest rates. Beginning
July 1, the Company introduced a 100 basis point first year bonus crediting rate
on new sales for the individual BEST OF AMERICA annuity in the investment dealer
channel.
Income from Continuing Operations Before Federal Income Tax Expense. Income from
continuing operations before federal income tax expense was $44.1 million and
$81.7 million during second quarter and for the first six months of 1997,
respectively, representing increases of 12% from the same periods of 1996. The
change reflects the increase in interest spread discussed above, as well as a
decrease in amortization of DAC as a result of changes in assumed future
interest spreads related to the in-force individual fixed annuity business. The
higher interest spreads and lower DAC amortization were partially offset by
higher operating expenses associated with growth in policies in-force.
Policy Reserves. During second quarter 1997, fixed annuity policy reserves
increased $110.6 million to $13.72 billion as of June 30, 1997 for a
year-to-date increase of $212.7 million in 1997 from $13.51 billion as of
December 31, 1996. Compared to a year ago, fixed annuity policy reserves are up
5% or $668.7 million as of June 30, 1997. Deposits were $409.8 million and
$366.3 million in second quarter 1997 and 1996, respectively. Through June 1997,
deposits were $970.2 million compared to $808.1 million through June 1996.
Withdrawals, surrenders, benefits and net transfers reduced policy reserves by
$505.1 million and $430.2 million for the second quarter of 1997 and 1996,
respectively, and $1.16 billion and $935.1 million on a year-to-date basis for
1997 and 1996, respectively. The increase in withdrawals for the first half of
1997 is primarily attributable to a single public sector group annuity contract
with reserves of $105.9 million.
Statutory Premiums and Deposits. For second quarter 1997, statutory premiums and
deposits were $409.8 million, an increase of 12% from $366.3 million in second
quarter 1996. Second quarter 1997 deposits from the financial institutions
channel increased $58.3 million as a result of new bank relationships added late
in 1996 and in 1997. Through mid-year 1997, statutory premiums and deposits were
up 20% to $970.2 million compared to mid-year 1996 deposits of $808.1 million.
Year-to-date 1997 deposits include a first quarter deposit through the public
sector channel of $106.5 million from the transfer of assets from Cook County,
Illinois.
13
<PAGE> 14
Life Insurance
Revenues. Revenues in the Life Insurance segment consist of life insurance
premiums and policy charges, as well as net investment income. Total revenues
were $116.0 million and $110.1 million for second quarter 1997 and 1996,
respectively. For the six months ended June 30, 1997, total revenues were $230.6
million compared to $215.5 million for the first half of 1996. The increase is
attributed to increases in life insurance in-force with the majority of the
growth coming from the variable universal life insurance product.
Income from Continuing Operations Before Federal Income Tax Expense. Income from
continuing operations before federal income tax expense was $13.7 million in
second quarter 1997, a 9% decrease from $15.1 million in second quarter 1996.
The decrease is primarily attributable to adverse mortality experience in the
variable universal life insurance line and higher technology related expenses.
For the first half of the year, life segment earnings were up slightly to $30.7
million in 1997 compared to $29.7 million in 1996. Overall improved earnings in
the variable universal life insurance line was offset by higher expenses
associated with technology-related costs in the traditional life insurance lines
associated with the development of a new policy administration system.
Life Insurance In-Force. Life insurance in-force was $39.74 billion and $34.79
billion as of June 30, 1997 and 1996, respectively. Of the growth in in-force
from June 30, 1996 to June 30, 1997, $3.72 billion is attributable to variable
universal life insurance which comprises 25% of total life insurance in-force as
of June 30, 1997.
Statutory Premiums. For second quarter 1997, statutory premiums were $128.8
million, an increase of 29% from $99.9 million in second quarter 1996. For the
first half of 1997, statutory premiums increased 35% to $266.2 million compared
to $197.1 million for the first half of 1996. Variable life insurance premiums
accounted for $66.2 million and $142.9 million of the total life insurance
premiums for the second quarter and first half of 1997, respectively, compared
to $35.3 million and $70.4 million for the same periods of 1996. Premiums from
the investment dealer channel more than doubled to $112.3 million in the first
half of 1997, led by sales of bank-owned life insurance and flexible premium
variable universal life insurance products.
Corporate and Other
Revenues. Revenues in the Corporate and Other segment consist of net investment
income on invested assets not allocated to the three product segments, all
realized investment gains and losses, investment management fees and other
revenues earned from Nationwide mutual funds other than the portion allocated to
the Variable Annuities and Life Insurance segments and net investment income and
policy charges from group annuity contracts issued to Nationwide Insurance
Enterprise employee and agent benefit plans. Total revenues excluding realized
gains and losses were $55.0 million for second quarter 1997 compared to $40.9
million in second quarter 1996. The increase primarily reflects an increase in
real estate and limited partnership investment income, as well as earnings
growth from fee based investment management operations which have benefited from
an increase in funds managed and from market appreciation. Year-to-date revenues
excluding realized gains and losses were $95.5 million, up from $80.8 million a
year ago. Investment losses of $11.9 million were realized in second quarter
1997 compared to realized gains of $5.8 million in second quarter 1996.
Year-to-date, realized investment gains were $9.1 million in 1997 compared to
$9.4 million in 1996. Realized gains in 1997 include a first quarter gain of
$14.4 million from the transfer of securities to fund the $850 Million Dividend
offset by a second quarter $11.0 million write-down of a single corporate bond
investment due to deterioration in the credit quality of the issuer.
Income from Continuing Operations Before Federal Income Tax Expense. Income from
continuing operations before federal income tax expense excluding realized gains
and losses was $12.1 million and $11.9 million for second quarter 1997 and 1996,
respectively, and $10.6 million and $21.0 million on year-to-date basis for 1997
and 1996, respectively. The year-to-date decrease is due to a reduction in net
investment income due to the Special Dividends and lower yields on investments.
See "Effect of Special Dividends and Cash Capital Contributions."
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a
material adverse effect on the Company.
In recent years, life insurance companies have been named as defendants
in lawsuits, including class action lawsuits, relating to life insurance
pricing and sales practices. A number of these lawsuits have resulted in
substantial jury awards or settlements. In October 1996, a policyholder
of NLIC filed a complaint in Alabama state court against NLIC and an
agent of NLIC (Wayne M. King v. Nationwide Life Insurance Company and
Danny Nix) related to the sale of a whole life policy on a "vanishing
premium" basis and seeking unspecified compensatory and punitive
damages. The King case was dismissed with prejudice on June 25, 1997
pursuant to an agreement between the parties. In February 1997, NLIC was
named as a defendant in a lawsuit filed in New York Supreme Court also
related to the sale of whole life policies on a "vanishing premium"
basis (John H. Snyder v. Nationwide Mutual Insurance Company, Nationwide
Mutual Insurance Co. and Nationwide Life Insurance Co.). The plaintiff
in such lawsuit seeks to represent a national class of NLIC's
policyholders and claims unspecified compensatory and punitive damages.
This lawsuit is in the early stage and has not been certified as a class
action. On April 22, 1997, a motion to dismiss the Snyder complaint in
its entirety was filed by the defendants, and the plaintiff has opposed
such motion. There can be no assurance that any litigation relating to
pricing and sales practices will not have a material adverse effect on
the Company in the future.
ITEM 2 CHANGES IN SECURITIES
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month period
ended June 30, 1997.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
(Registrant)
Date: August 14, 1997 /s/Mark R. Thresher
---------------------------------------------
Mark R. Thresher, Vice President - Controller
(Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Nationwide
Life Insurance Company's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1997, and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<CIK> 0000205695
<NAME> NATIONWIDE INSURANCE
<MULTIPLIER> 1,000
<CURRENCY> U.S. CURRENCY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 12,319,848
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 66,497
<MORTGAGE> 5,141,839
<REAL-ESTATE> 292,935
<TOTAL-INVEST> 18,522,241
<CASH> 86,387
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,537,814
<TOTAL-ASSETS> 53,625,943
<POLICY-LOSSES> 17,536,264
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 366,681
<POLICY-HOLDER-FUNDS> 59,153
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,815
<OTHER-SE> 2,215,587
<TOTAL-LIABILITY-AND-EQUITY> 53,625,943
105,741
<INVESTMENT-INCOME> 692,296
<INVESTMENT-GAINS> 9,113
<OTHER-INCOME> 25,742
<BENEFITS> 593,419
<UNDERWRITING-AMORTIZATION> 82,988
<UNDERWRITING-OTHER> 188,092
<INCOME-PRETAX> 196,312
<INCOME-TAX> 68,209
<INCOME-CONTINUING> 127,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,103
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
