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As filed with the Securities and Exchange Commission.
'33 Act File No. 33-58997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 2
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 43216-6609
(Principal Executive Offices of Registrant) (Zip Code)
Gordon E. McCutchan, Secretary, One Nationwide Plaza, Columbus, Ohio 43216-6609
Telephone: (614) 249-7111
(Name, address, zip code, telephone number of agent for service)
Approximate date of proposed sale to the public: May 1, 1997
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 to
the following box [X]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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NATIONWIDE LIFE 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
Pages of Prospectus Table of Contents
(Inside Front Cover)
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges ......................................Summary Information
(Not applicable with respect to
ratio of earnings to fixed charges)
4. Use of Proceeds ..................................................................Investments
5. Determination of Offering Price Not Applicable
6. Dilution .........................................................................Not Applicable
7. Selling Security Holders .......................................................Not Applicable
8. Plan of Distribution .................................................Variable Annuity Contracts
and the Distribution of GTOs
9. Description of Securities to be Registered ................................Description of the
Guaranteed Term Options
10. Interests of Named Experts and Counsel .....................................Not Applicable
11. Information with Respect to Registrant ...........................................The Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ...................................Not Applicable
</TABLE>
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GUARANTEED TERM OPTIONS
Under Variable Annuity Contracts Issued by
NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43216-6609
Telephone: 1-800-238-3035
The Date of this Prospectus is May 1, 1997
This prospectus describes investment options referred to as Guaranteed Term
Options ("GTOs"), offered by Nationwide Life Insurance Company ("Company") under
certain variable annuity contracts issued by the Company. Generally, the
variable annuity contracts offered by the Company provide an array of underlying
mutual fund investment options, to which the Contract Owner allocates his or her
purchase payments. The GTOs are separate, guaranteed interest investment options
available under the variable annuity Contracts.
This prospectus must be read along with the appropriate variable annuity
prospectus and the prospectuses describing the underlying mutual fund investment
options. All of these prospectuses should be read carefully and maintained for
future reference.
GTOs provide for guaranteed interest to be credited over specified maturity
durations (referred to as "Guaranteed Terms"). Three (3), five (5), seven (7)
and ten (10) year GTOs are available. Unless a withdrawal or distribution from
the GTO occurs for any reason prior to the expiration of the Guaranteed Term,
the interest rate (the "Specified Interest Rate") is guaranteed to be credited
for the duration of the Guaranteed Term on a daily basis, resulting in a
guaranteed annual effective yield. Different rates apply to each GTO and are
determined by the Company from time to time in its sole discretion.
GTOs elected under a variable annuity Contract issued by the Company will
produce a guaranteed annual effective yield (at the Specified Interest Rate) SO
LONG AS AMOUNTS INVESTED ARE NEITHER WITHDRAWN NOR TRANSFERRED PRIOR TO THE END
OF THE GUARANTEED TERM CORRESPONDING WITH THE ELECTED GTO. IN THE EVENT OF A
TRANSFER FROM A GTO TO ANOTHER GTO OR ANOTHER INVESTMENT OPTION UNDER THE
VARIABLE ANNUITY CONTRACT PRIOR TO THE EXPIRATION OF THE GUARANTEED TERM, THE
AMOUNT TRANSFERRED WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT ("MVA").
LIKEWISE, IN THE EVENT OF A WITHDRAWAL FOR ANY OTHER REASON PRIOR TO THE
EXPIRATION OF THE GUARANTEED TERM, INCLUDING THE DEATH OF THE CONTRACT OWNER OR
ANNUITANT, THE AMOUNT WITHDRAWN MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT
("MVA").
The variable annuity prospectuses describe certain charges and deductions which
may apply to the GTOs. A discussion of these charges is included in this
prospectus insofar as such charges and deductions relate to GTOs. A more
detailed discussion of these charges and deductions, as they relate to
particular variable annuity contracts, is contained in the variable annuity
prospectuses.
Certain minimum purchase payments may be required in connection with the
purchase of variable annuity contracts issued by the Company. As investment
options under the variable annuity contracts, the GTOs are subject to these
minimum contractual amounts. In addition, the minimum amount that may be
allocated to a GTO, regardless of whether the source of the allocation is a new
purchase payment or transfer from some other investment option under the
variable annuity contract, is $1,000.
The Company has established the Nationwide Multiple Maturity Separate Account, a
separate account created under Ohio law, to aid in reserving and accounting for
GTO obligations. Notwithstanding the separate account, all of the general assets
of the Company are available for the purpose of meeting the guarantees of the
GTOs. Amounts allocated to the GTOs will generally be invested in fixed income
investments purchased by the Company. Variable annuity Contract Owners having
allocated amounts to a GTO, however, shall have no claim against any particular
assets of the Company, including assets held in the Nationwide Multiple Maturity
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE GTOs DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATE
JURISDICTIONS AND, ACCORDINGLY, REPRESENTATIONS MADE IN THIS PROSPECTUS DO NOT
CONSTITUTE AN OFFERING IN SUCH JURISDICTIONS.
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TABLE OF CONTENTS
GLOSSARY.......................................................................4
SUMMARY INFORMATION............................................................6
DESCRIPTION OF THE GUARANTEED TERM OPTIONS ("GTOs")............................7
1. General...............................................................7
2. Allocations to the GTOs...............................................7
3. The Specified Interest Rate and Guaranteed Terms......................8
A. Specified Interest Rates...........................................8
B. Guaranteed Terms...................................................8
4. GTOs at Maturity......................................................9
5. The Market Value Adjustment ("MVA")...................................9
A. General Information Regarding the MVA..............................9
B. Constant Maturity Treasury Rates ("CMT Rates").....................9
C. The MVA Formula...................................................10
6. Variable Annuity Contract Charges....................................10
7. GTOs at Annuitization................................................11
INVESTMENTS...................................................................11
VARIABLE ANNUITY CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOS.......11
THE COMPANY...................................................................11
1. Business.............................................................11
A. Organization......................................................11
B. Description of Business...........................................12
C. Product Segments..................................................13
D. Regulation........................................................13
E. Competition.......................................................13
F. Employees.........................................................14
2. Properties...........................................................14
3. Legal Proceedings....................................................14
4. Submission of Matters to a Vote of Security Holders..................14
5. Market for Nationwide Life Insurance Company's Common Equity
and Related Shareholder Matters......................................15
6. Consolidated Financial Statements and Supplementary Data.............15
7. Selected Financial Data..............................................15
8. Management's Discussion and Analysis of Financial Condition
and Consolidated Results of Operations...............................16
A. Results of Operations............................................16
(i) Policy Charges.............................................16
(ii) Life Insurance Premiums....................................17
(iii) Net Investment Income......................................17
(iv) Realized Gains/(Losses) on Investments.....................17
(v) Other Income...............................................17
(vi) Benefits and Claims........................................17
(vii) Policyholder Dividends.....................................17
(viii) Amoritization of DAC.......................................18
(ix) Operating Expenses.........................................18
(x) Federal Income Tax Expense.................................18
(xi) Net Operating Income.......................................18
(xii) Discontinued Operations....................................18
B. Effect of Dividend and Capital Contributions.....................18
C. Results of Operations by Product Segment.........................18
(i) Variable Annuities.........................................20
(a) Revenues..............................................20
(b) Income from Continuing Operations Before Federal
Income Tax Expense....................................20
(c) Policy Reserves.......................................20
(ii) Fixed Annuities............................................20
(a) Revenues..............................................20
(b) Interest Credited.....................................20
(c) Income from Continuing Operations Before Federal
Income Tax Expense....................................21
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(d) Policy Reserves.......................................21
(iii) Life Insurance.............................................21
(a) Revenues..............................................21
(b) Income from Continuing Operations Before Federal
Income Tax Expense....................................21
(c) Life Insurance In-Force...............................21
(iv) Corporate and Other.........................................21
(a) Revenues..............................................21
(b) Income from Continuing Operations Before Federal
Income Tax Expense....................................22
D. Intercompany Agreements..........................................22
E. Reinsurance......................................................22
F. Liquidity and Capital Resources..................................23
G. Investments......................................................26
(i) General.....................................................26
(ii) Fixed Maturity..............................................26
(iii) Mortgage Loans..............................................28
H. Inflation........................................................29
9. Directors and Executive Officers.....................................30
10. Executive Compensation...............................................34
A. Compensation....................................................34
B. Incentive Plans.................................................35
(i) Sustained Performance Incentive Plan......................35
(ii) Executive Incentive Plan..................................35
(iii) Management Incentive Plan.................................35
C. Pension Plans...................................................36
(i) Nationwide Insurance Enterprise Retirement Plan...........36
(ii) Nationwide Insurance Enterprise Excess Benefit
and Supplemental Retirement Plans.........................36
D. Savings Plans...................................................37
(i) Nationwide Insurance Enterprise Savings Plan..............37
(ii) Nationwide Insurance Enterprise Supplemental Defined......37
Contribution Plan.........................................38
E. Deferred Compensation Program...................................38
F. Nationwide Salaried Employees Severance Pay Plan................38
G. Director Compensation...........................................38
(i) Total Compensation.........................................38
(ii) Directors' Deferred Compensation Program..................39
11. Security Ownership of Certain Beneficiary
Owners and Management................................................39
12. Certain Relationships and Related Transactions.......................39
A. Existing Arrangements with the Nationwide Insurance Enterprise..39
(i) Organization of the Company..............................39
(ii) Federal Income Taxes.....................................40
(iii) Legal Services...........................................40
(iv) Lease....................................................40
(v) Modified Coinsurance Agreements..........................40
(vi) Cost Sharing Agreement...................................40
(vii) Cash Management Agreements...............................41
(viii) Benefit Plans............................................41
(ix) Repurchase Agreement.....................................41
B. Future Transactions with the Nationwide Insurance Enterprise....41
13. Exhibits, Financial Statements, Schedules and Reports................42
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GLOSSARY
Company- The Company is Nationwide Life Insurance Company.
Constant Maturity Treasury Rate(s) or CMT Rate(s)- The CMT Rate(s) is/are the
rate(s) of interest used in the Market Value Formula. CMT Rates for maturity
durations of 1, 2, 3, 5, 7 and 10 years are declared regularly by the Federal
Reserve Board.
Contract(s)- A variable annuity Contract issued by the Company, the terms of
which include provision for Guaranteed Term Options (GTOs) as separate
investment options.
Contract Owner(s)- The owner(s) of variable annuity Contracts (which offer GTOs)
issued by the Company.
Contract Value- The Contract Value is the sum of the value of all underlying
mutual fund investment options within the Contract, plus any amount held in a
Fixed Account under the Contract, plus any amount held in the Contract under a
Guaranteed Term Option (GTO) which may be subject to a Market Value Adjustment
(MVA).
Guaranteed Term- A Guaranteed Term is the 3, 5, 7 or 10 year period
corresponding respectively to a 3, 5, 7 or 10 year Guaranteed Term Option (GTO).
Amounts allocated to a GTO shall be credited with a Specified Interest Rate over
the corresponding Guaranteed Term, so long as such amounts are not distributed
from the GTO prior to the Maturity Date. Because every Guaranteed Term will end
on the final day of a calendar quarter, the Guaranteed Term may last for up to 3
months beyond the 3, 5, 7 or 10 year anniversary of the allocation to the GTO.
Guaranteed Term Option ("GTO")- A GTO is an investment option offered under the
Contracts which provides a guaranteed interest rate (the Specified Interest
Rate), paid over certain maturity durations (the Guaranteed Terms), so long as
certain conditions are met. Three (3), five (5), seven (7) and ten (10) year
GTOs are offered. If amounts allocated to a GTO are not distributed from the GTO
for the duration of its Guaranteed Term, the value of the amounts allocated
under the GTO will reflect the amount of the allocation plus interest accrued at
the Specified Interest Rate, and will be available for distribution with no
Market Value Adjustment during the Maturity Period. Prior to the Maturity Period
for the GTO selected, amounts allocated to a GTO will be subject, upon
distribution, to fluctuations in value in accordance with a Market Value
Adjustment.
Investment Period- The period of time beginning with a declaration by the
Company of new GTO interest rates (the different Specified Interest Rates for
each of the GTOs) and ending with the subsequent declaration of new Specified
Interest Rates by the Company. The interest rates in effect during any
particular Investment Period will be guaranteed for GTO allocations (made during
the Investment Period) for the duration of the Guaranteed Term associated with
the GTO.
Market Value Adjustment (or MVA)- A Market Value Adjustment is the upward or
downward adjustment in value of amounts allocated to a GTO which prior to the
Maturity Period for the GTO are: 1) distributed pursuant to a surrender; 2)
reallocated to another investment option available under the Contract; or 3)
distributed pursuant to the death of the Owner or Annuitant. A Market Value
Adjustment generally reflects the relationship between the prevailing interest
rates at the time of investment, prevailing interest rates at the time of
distribution, and the amount of time remaining in the Guaranteed Term of the GTO
selected. Generally, if the Specified Interest Rate is lower than prevailing
interest rates, application of the Market Value Adjustment will result in a
downward adjustment of amounts allocated to a GTO. If the Specified Interest
Rate is higher than prevailing interest rates, application of the Market Value
Adjustment will result in an upward adjustment of amounts allocated to a GTO.
The Market Value Adjustment is applied only when amounts allocated to a GTO are
distributed from the GTO prior to a Maturity Period.
MVA Factor- The MVA Factor is the value multiplied by the Specified Value, or
that portion of the Specified Value being distributed from a GTO in order to
effect a Market Value Adjustment. The MVA Factor will either be less than 1 (in
which case the amount distributed will be decreased) or greater than 1 (in which
case the amount distributed will be increased). If the MVA Factor is exactly 1,
the amount distributed will neither be increased nor decreased. The MVA Factor
is derived from the MVA Formula.
MVA Formula- The MVA Formula is utilized when a distribution is made from a GTO
during the Guaranteed Term which is subject to a Market Value Adjustment. The
MVA Formula is a calculation expressing the relationship between three factors:
(1) the CMT Rate for the period of time coinciding with the Guaranteed Term of
the GTO; (2) the CMT Rate for a period coinciding with the time remaining in the
Guaranteed Term of a GTO when a distribution giving rise to a Market Value
Adjustment occurs; and (3) the number of days remaining in the Guaranteed Term
of the GTO. The result of the MVA Formula is the MVA Factor.
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Maturity Date- The Maturity Date is the date on which a particular GTO matures.
Such date will be the last day of the calendar quarter during which the third,
fifth, seventh or tenth anniversary of the date on which amounts are allocated
to a 3, 5, 7 or 10 year GTO, respectively.
Maturity Period- The Maturity Period is the period of time during which the
value of amounts allocated under a GTO may be distributed without any Market
Value Adjustment. The Maturity Period shall begin on the day following the
Maturity Date and will end on the thirtieth day after the Maturity Date.
Multiple Maturity Account- The Multiple Maturity Account is a separate account
of the Company established for the exclusive purpose of facilitating accounting
and investment processes associated with the offering of GTOs under the
Contracts. The Company, not the Multiple Maturity Account, is responsible for
the issuance of, and the guarantees associated with, the GTOs under the
Contracts.
Specified Interest Rate- The Specified Interest Rate is the interest rate
guaranteed to be credited to amounts allocated under a selected GTO so long as
such allocations are not distributed from the GTO prior to the GTO Maturity
Period or Maturity Date for any reason. Each GTO in the same Investment Period
has its own Specified Interest Rate for the Guaranteed Term relating to the
selected GTO. The Company, however, reserves the right to change the Specified
Interest Rate at any time for prospective allocations to GTOs.
Specified Value- The Specified Value is the amount of a GTO allocation, plus
interest accrued at the Specified Interest Rate minus surrenders, transfers and
any other amounts distributed. The Specified Value is subject to a MVA at all
times other than during the Maturity Period.
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SUMMARY INFORMATION
The GTOs are guaranteed investment options available under variable annuity
Contracts issued by the Company. This prospectus describes the GTOs, and must be
read along with the appropriate variable annuity prospectus in the same manner
that prospectuses for other variable annuity funding options (underlying mutual
funds) must be read with the variable annuity prospectus. Variable annuity
prospectuses, underlying mutual fund prospectuses and this prospectus may be
obtained without charge from the Company by calling 1-800-238-3035 or writing
P.O. Box 16609, Columbus, Ohio 43216-6609.
There are 4 different GTOs available continuously: a 3 year GTO, a 5 year GTO, a
7 year GTO and a 10 year GTO. A GTO may be purchased through allocations made as
initial or additional purchase payments made under variable annuity Contracts
issued by the Company which offer GTOs, or through transfers from other
investment options under the variable annuity Contract. The minimum allocation
to a GTO, whether by transfer from other investment options in the contract or
through new purchase payments, is $1,000. (See "Allocations to the GTOs.")
Each GTO has a Guaranteed Term. The Guaranteed Term for any particular GTO will
end on the last day of a calendar quarter (the "Maturity Date") during which the
third, fifth, seventh or tenth anniversary of the allocation to the GTO (as
applicable) occurs. This means that the Guaranteed Term for a 3, 5, 7 or 10 year
GTO may be up to 3 months longer than 3, 5, 7 or 10 years, respectively. For
amounts which are allocated to GTOs on the first day of a calendar quarter,
however, the Guaranteed Term will be exactly 3, 5, 7 or 10 years, depending on
the GTO selected. (See "Specified Interest Rates and Guaranteed Terms.")
Amounts allocated to a GTO will be credited with the Specified Interest Rate for
the duration of the Guaranteed Term associated with the GTO, unless an
intervening withdrawal, transfer or other distribution occurs prior to the end
of the Guaranteed Term. Specified Interest Rates for each GTO are declared
periodically in the sole discretion of the Company. The Investment Period is the
period of time during which declared Specified Interest Rates will be effective
for new allocations. Investment Periods will typically last for one month, but
may be longer or shorter depending on interest rate fluctuations in financial
markets. During any particular Investment Period, any transfer allocation or new
purchase payment allocation to a GTO will earn the Specified Interest Rate
effective for that Investment Period for the duration of the Guaranteed Term of
the GTO. (See "Specified Interest Rates and Guaranteed Terms.")
The Specified Interest Rate will be credited to amounts allocated to a GTO, so
long as such allocations are neither withdrawn nor transferred prior to the
Maturity Date for the GTO. The Specified Interest Rate is credited daily,
providing an annual effective yield. (See "Specified Interest Rates and
Guaranteed Terms.")
Amounts that are surrendered, transferred or otherwise distributed from a GTO
prior to the Maturity Date for the GTO, will be subject to a Market Value
Adjustment ("MVA"). The MVA is accomplished through the use of a factor (the MVA
Factor), derived by formula (the MVA Formula), which is multiplied by that part
of the Specified Value being withdrawn or transferred, resulting in either an
increase or a decrease in the amount of the withdrawal or transfer. The MVA
formula reflects the relationship between three factors: (1) the Constant
Maturity Treasury ("CMT") Rate for the period coinciding with the Guaranteed
Term of the GTO at investment, (2) the CMT Rate for the number of years
remaining in a Guaranteed Term when the surrender, transfer or other withdrawal
from the GTO occurs, and (3) the number of days remaining in the Guaranteed Term
of the GTO. Generally, the MVA formula approximates the relationship between
prevailing interest rates at the time of the GTO allocation, prevailing interest
rates at time of transfer or surrender and the amount of time remaining in a
Guaranteed Term. (See "The Market Value Adjustment.")
At least 15 days and at most 30 days prior to the end of each calendar quarter,
variable annuity Contract Owners having GTOs with Maturity Dates coinciding with
the end of the calendar quarter will be notified of the impending expiration of
the GTO. Contract Owners will then have the option of directing the withdrawal
or transfer of the GTO (during the Maturity Period) without application of any
MVA. Withdrawals or transfers during the Maturity Period, beginning the day
after the Maturity Date and ending thirty days after the Maturity Date, will not
be subject to an MVA. Direction can be made to (1) transfer the maturing GTO to
another GTO of the same or different duration, or (2) transfer the maturing GTO
to another investment option under the variable annuity Contract. GTOs
surrendered during the Maturity Period are not subject to an MVA, but may be
subject to contingent deferred sales charges under the variable annuity
Contract. (See "GTOs at Maturity.")
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If no direction is received by the thirtieth day following the Maturity Date,
amounts in the GTO will be automatically transferred (with no MVA) to the Money
Market sub-account of the variable annuity. For the period commencing with the
first day after the Maturity Date and ending on the thirtieth day following the
Maturity Date, the GTO will be credited with the same Specified Interest Rate in
effect before the Maturity Date. (See "GTOs at Maturity.")
DESCRIPTION OF THE GUARANTEED TERM OPTIONS ("GTOs")
1. General
The GTOs are guaranteed interest investment options available under certain
variable annuity Contracts issued by the Company. Not all of the variable
annuity Contracts issued by the Company offer GTOs, nor are GTOs available
in every state jurisdiction. The variable annuity prospectuses describing
variable annuity Contracts which offer GTOs clearly disclose whether GTOs
are offered as investment options. If GTOs are available under a variable
annuity issued by the Company, the prospectus for the variable annuity and
this prospectus must be read carefully together in the same manner that
prospectuses for underlying mutual funds must be read with the variable
annuity prospectus.
The guarantees associated with the GTOs are borne exclusively by the
Company. A non-unitized separate account, authorized and created in
accordance with applicable provisions of Ohio law, has been established for
the sole purpose of aiding the Company in reserving and accounting for
assets associated with the GTOs. The assets of the separate account are
owned by the Company. Contract Owners with GTOs have no claim against the
assets of the separate account, maintain no interest in the separate
account and do not participate in the investment experience of the separate
account. The guarantees associated with GTOs are legal obligations of the
Company.
GTOs provide for a guaranteed interest rate (the Specified Interest Rate),
to be credited as long as any amount allocated to the GTO is not
distributed for any reason prior to the Maturity Date of the GTO.
Generally, a 3 year GTO offers guaranteed interest at a Specified Interest
Rate over 3 years, a 5 year GTO offers guaranteed interest at a Specified
Interest Rate over 5 years, and so on. Because every GTO will mature on the
last day of a calendar quarter, the Guaranteed Term of a GTO may extend for
up to 3 months beyond the 3, 5, 7 or 10 year anniversary of allocations
made to 3, 5, 7 or 10 year GTOs, respectively.
Although the Specified Interest Rate will continue to be credited as long
as allocations remain in the GTO prior to the Maturity Date, surrenders,
transfers or withdrawals for any other reason will be subject to a Market
Value Adjustment, as described below.
2. Allocations to the GTOs
There are three sources from which allocations to a GTO may be made:
(1) an initial purchase payment made under a variable annuity Contract
offering GTOs may be wholly or partially allocated to one or more GTOs;
(2) a subsequent or additional purchase payment made under a variable
annuity Contract offering GTOs may be partially or wholly allocated to
one or more GTOs; and
(3) amounts transferred from other investment options available under the
variable annuity Contract offering GTOs may be wholly or partially
allocated to one or more GTOs.
The minimum amount of any allocation to a GTO is $1,000. Although the
minimum amount that may be allocated to a GTO is $1,000 (whether by
transfer from other investment options in the Contract or through new
purchase payments), certain variable annuity Contract minimums for initial
purchase payments may preclude purchase amounts allocated to a GTO which
are greater than $1,000. In this regard, the variable annuity prospectus
should be consulted.
Under certain rare circumstances, when volatility in financial markets
compromises the ability of the Company to process allocations to or from
the GTOs in an orderly manner, the Company may temporarily suspend the
right to make additional allocations to the GTOs and/or to effect transfers
or withdrawals from the GTOs. The Company anticipates invoking this
suspension only when acceptance of additional allocations or the processing
of withdrawals or transfers from GTOs may not be executed by the Company in
a manner consistent with its obligations to variable annuity contract
holders with existing or prospective interests in one or more GTOs. Under
no circumstances, however, will the Company limit a Contract Owner's right
to make at least one allocation to a GTO, and one transfer or withdrawal
from a GTO, in any calendar year. All Contract Owners will be promptly
notified of the Company's determination to invoke any suspension in the
right to make allocations to, or to effect withdrawals or transfers from,
the GTOs.
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In addition, the variable annuity contracts under which GTOs are offered
may impose certain restrictions on the transferability of invested assets
within the contract. In the variable annuity contracts and prospectuses,
such restrictions refer to limitations affecting transfers between the
"Variable Account" (underlying mutual funds) and the "Fixed Account" (a one
year guaranteed investment option under the Contracts, separate and
distinct from the GTOs). Although the specific transfer restrictions may
vary slightly from contract to contract, the Company generally imposes, or
reserves the right to impose, limitations on the percentage of assets that
may be transferred to the Variable Account from the Fixed Account, and from
the Variable Account to the Fixed Account. For the sole purpose of these
transfer restrictions, and calculating these percentage limitations, the
term "Variable Account" will be defined to include GTO allocations. The
variable annuity prospectus should be consulted with regard to specific
transfer limitation provisions.
3. The Specified Interest Rate and Guaranteed Terms
A. Specified Interest Rates
The Specified Interest Rate, at any given time, is the rate of interest
guaranteed by the Company to be credited to allocations made to the
GTOs for the corresponding Guaranteed Term, so long as no portion of
the allocation is distributed for any reason prior to the Maturity
Date. Different Specified Interest Rates may be established for the 4
different GTOs which are continuously available: 3, 5, 7 and 10 year
GTOs.
The Company declares Specified Interest Rates for each of the GTOs from
time to time. Normally, new Specified Interest Rates will be declared
monthly; however, depending on interest rate fluctuations, declarations
of new Specified Interest Rates may occur more or less frequently. The
Company observes no specific method in the establishment of the
Specified Interest Rates, but generally will attempt to declare
Specified Interest Rates which are related to interest rates associated
with fixed-income investments available at the time and having
durations and cash flow attributes compatible with the Guaranteed Terms
of the GTOs. In addition, the establishment of Specified Interest Rates
may be influenced by other factors, including competitive
considerations, administrative costs and general economic trends. The
Company has no way of predicting what future Specified Interest Rates
may be declared and there is no minimum Specified Interest Rate for any
of the GTOs.
The period of time during which a particular Specified Interest Rate is
in effect for new allocations to the various GTOs is referred to as the
Investment Period. All allocations made to a GTO during an Investment
Period are credited with the Specified Interest Rate in effect. An
Investment Period ends only when a new Specified Interest Rate relative
to the GTO in question is declared. Subsequent declarations of new
Specified Interest Rates have no effect on allocations made to GTOs
during prior Investment Periods. All such prior allocations will be
credited with the Specified Interest Rate in effect when the allocation
was made for the duration of the Guaranteed Term associated with the
GTO selected.
Information concerning the Specified Interest Rates in effect for the
various GTOs can be obtained by calling the following toll free phone
number: 1-800-238-3035.
The Specified Interest Rate is credited to allocations made to GTOs on
a daily basis, resulting in an annual effective yield which is
guaranteed by the Company unless amounts are withdrawn or transferred
from the GTO for any reason prior to the Maturity Date. The Specified
Interest Rate will be credited for the entire Guaranteed Term
associated with the GTO. If amounts are withdrawn or transferred from
the GTO for any reason prior to the Maturity Date, an MVA will be
applied to the amount withdrawn or transferred.
B. Guaranteed Terms
For each GTO, there is a Guaranteed Term during which the Specified
Interest Rate in effect at the time of the allocation to the GTO is
guaranteed. A Guaranteed Term always expires on a Maturity Date which
will be the last day of a calendar quarter; therefore, the Specified
Interest Rate may be credited for up to 3 months past the anniversary
date of the allocation to the GTO.
For example, if an allocation is made to a 10 year GTO on August 1,
1996, the Specified Interest Rate for that GTO will be credited until
September 30, 2006; the Guaranteed Term will begin on August 1, 1996
and end on September 30, 2006.
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<PAGE> 11
All Guaranteed Terms for the 3, 5, 7 and 10 year GTOs, respectively,
will be determined in a manner consistent with the foregoing example.
Guaranteed Terms will be exactly 3, 5, 7 or 10 years only when an
allocation to a GTO occurs on the first day of a calendar quarter.
4. GTOs at Maturity
At least fifteen days and at most thirty days prior to the end of a
Guaranteed Term, the Company will send notice to the Contract Owner of the
impending Maturity Date (always the last day of a calendar quarter). The
notice will include the projected value of the GTO on the Maturity Date and
specify the various options Contract Owners may exercise with respect to
the maturing GTO:
(1) During the thirty day period following the Maturity Date, the Contract
Owner may wholly or partially surrender the GTO without an MVA;
however, surrender charges under the variable annuity Contract, if
applicable, will be assessed.
(2) During the thirty day period following the Maturity Date, the Contract
Owner may wholly or partially transfer the GTO, without an MVA, to any
other investment option under the variable annuity contract, including
any of the mutual fund sub-accounts, or another GTO of the same or
different duration. A confirmation of any such transfer will be sent
immediately after the transfer is processed.
(3) The Contract Owner may elect not to transfer or surrender all or a
portion of the GTO, in which case, the GTO will be automatically
transferred to the Money Market sub-account of the variable annuity
Contract at the end of the thirty day period following the Maturity
Date. A confirmation will be sent immediately after the automatic
transfer is executed.
During the thirty day period following the Maturity Date, and prior to any
of the transactions set forth in (1), (2), or (3) above, the GTO will
continue to be credited with the Specified Interest Rate in effect before
the Maturity Date.
5. The Market Value Adjustment ("MVA")
A. General Information Regarding the MVA
GTOs which are surrendered, transferred or distributed for any reason
prior to the Maturity Date for the GTO, will be subject to an MVA. The
MVA is determined by the multiplication of an MVA Factor (arrived at by
calculation of the MVA Formula) by the Specified Value, or the portion
of the Specified Value being surrendered, transferred or distributed.
The Specified Value is the amount of the allocation to the GTO, plus
interest accrued at the Specified Interest Rate minus prior
distributions. The MVA may either increase or decrease the amount of
the distribution.
The MVA is intended to approximate, without duplicating, the experience
of the Company 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 variable
annuity Contract requires a distribution, such as a death benefit. When
liquidating assets, the Company may realize either a gain or a loss.
If prevailing interest rates are higher than the Specified Interest
Rate in effect at the time of the GTO allocation, the Company will
realize a loss when it liquidates assets in order to process a
surrender, death benefit or transfer; therefore, application of the MVA
under such circumstances will decrease the amount of the distribution.
Conversely, if prevailing interest rates are lower than the Specified
Interest Rate in effect at the time of the GTO allocation, the Company
will realize a gain when it liquidates assets in order to process a
surrender, death benefit or transfer; therefore, application of the MVA
under such circumstances will increase the amount of the distribution.
The Company measures the relationship between prevailing interest rates
and the Specified Interest Rates it declares through the MVA Formula,
and relies upon Constant Maturity Treasury Rates to represent both
prevailing interest rates and Specified Interest Rates. The MVA Formula
and the Constant Maturity Treasury Rates are described more fully
below.
B. Constant Maturity Treasury Rates ("CMT Rates")
The formula (the "MVA Formula") for deriving the MVA Factor is based on
Constant Maturity Treasury ("CMT") Rates which are declared by the
Federal Reserve Board on a regular basis. The Company utilizes CMT
Rates in its MVA Formula because they represent a readily available and
consistently reliable interest
9
<PAGE> 12
rate benchmark in financial markets which can be relied upon to reflect
the relationship between Specified Interest Rates declared by the
Company and the prospective interest rate fluctuations. CMT Rates for
1, 2, 3, 5, 7 and 10 years are published by the Federal Reserve Board
on a regular basis. To the extent that the MVA formula shown below
requires a rate associated with a maturity not published (a 4, 6, 8 or
9 year maturity), the Company will calculate such rates based on the
relationship of the published rates. For example, if the published 3
year rate is 6% and the published 5 year rate is 6.50%, the 4 year rate
will be 6.25%.
C. The MVA Formula
The formula for determining the MVA Factor is
[ (1 + a) ]
----------------------- to the power of t
[ (1 + b + .0025) ]
Where:
a = the CMT Rate for a period equivalent to the Guaranteed Term at the
time of deposit in the GTO;
b = the CMT Rate at the time of distribution for a period of time
equivalent to the time remaining in the Guaranteed Term;
t = the number of days until the Maturity Date, divided by 365.25.
In the case of a above, the CMT Rate utilized will be the Friday CMT
Rate declared by the Federal Reserve Board, and placed in effect by
the Company on the Wednesday immediately preceding the Investment
Period during which the allocation to the GTO was made.
In the case of b above, the CMT Rate utilized will be the Friday CMT
Rate, declared by the Federal Reserve Board, and placed in effect by
the Company on the Wednesday immediately preceding the withdrawal,
transfer or other distribution giving rise to the MVA.
The MVA Factor will be equal to 1 during the Investment Period. That
is, for the period of time following a GTO allocation during which the
Specified Interest Rate for GTOs of the same duration is not changed,
the MVA Factor will be equal to 1.
The MVA 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 MVA Formula.
The result of the MVA Formula shown above is the MVA Factor. The MVA
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, transferred or distributed for any other reason.
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 MVA
Factor is exactly 1, no gain or loss will be realized.
If the Federal Reserve Board halts publication of CMT Rates, or if, for
any other reason, CMT Rates are not available to be relied upon, the
Company will use appropriate rates based on treasury bond yields.
Examples of how to calculate MVAs are provided in the Appendix of this
prospectus.
6. Variable Annuity Contract Charges.
The variable annuity Contracts under which GTOs are made available have
various fees and charges, some of which may be assessed against allocations
made to GTOs.
Contingent deferred sales charges, if applicable, will be assessed against
full or partial surrenders from the GTOs. If any such surrender occurs
prior to the Maturity Date for any particular GTO, the amount surrendered
will be subject to an MVA in addition to contingent deferred sales charges.
The variable annuity prospectus fully describes the contingent deferred
sales charges. Please refer to the variable annuity prospectus for complete
details regarding the contingent deferred sales charges under the
Contracts.
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<PAGE> 13
Mortality and expense risk charges, administrative charges and Contract
Maintenance Charges which may be assessed under variable annuity Contracts
will not be assessed against any allocation to a GTO. Such charges apply
only to the variable account investment (underlying mutual fund) options.
7. GTOs at Annuitization
GTOs are not available as investment options if the Contract is annuitized.
If a variable annuity Contract is annuitized while a GTO is in effect, and
prior to the Maturity Date of the GTO, an MVA will apply to amounts
transferred to other investment options under the Contract which may be
used during annuitization.
INVESTMENTS
Amounts allocated to GTOs under the variable annuity contracts will be
deposited, and accounted for, in a nonunitized separate account established in
accordance with Ohio law and designated the Nationwide Multiple Maturity
Separate Account. Contract Owners have no participatory right in the investment
experience of the separate account, nor do Contract Owners have any claim
against the assets of the separate account. The assets of the separate account
are owned exclusively by the Company and gains or losses experienced by the
Company in maintaining the separate account are borne exclusively by the
Company.
The Company intends to invest assets received pursuant to GTO allocations in
high quality, fixed interest investments (investment grade bonds, mortgages, and
collateralized mortgage obligations) in substantially the same manner as the
Company invests its general account assets, taking into account the various
maturity durations of the GTOs (3, 5, 7 and 10 years) and anticipated cash-flow
requirements. The Company is not obligated to invest assets attributable to GTO
allocations in accordance with any particular investment objective or in any
other particular manner, but will generally adhere to the overall investing
philosophy of the Company (please see section 7.E., under "The Company" for a
more detailed discussion of the investment portfolio and philosophy of the
Company). The Specified Interest Rates declared by the Company for the various
GTOs will not necessarily correspond to the performance of the nonunitized
separate account.
VARIABLE ANNUITY CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOs
The GTOs are available only as investment options under certain variable annuity
contracts issued by the Company. The appropriate variable annuity prospectus and
statement of additional information should be consulted for information
regarding the distribution of the variable annuity contracts.
THE COMPANY
1. Business
A. Organization
Nationwide Life Insurance Company (NLIC) was incorporated in 1929 and is an
Ohio stock legal reserve life insurance company. NLIC offers a variety of
forms of variable annuities, fixed annuities, ordinary life insurance,
universal life insurance, variable universal life insurance and term and
endowment coverage on a participating and a non-participating basis. During
1996, NLIC discontinued its individual and group accident and health insurance
and group life insurance business and in connection therewith, has entered
into reinsurance agreements to cede all existing and any future writings to
other affiliated companies and is implementing a plan to cease writing any new
business prior to December 31, 1997.
As of December 31, 1996, NLIC was wholly owned by Nationwide Corporation
(Nationwide Corp.). Wholly owned subsidiaries of NLIC as of December 31, 1996
include Nationwide Life and Annuity Insurance Company (NLAIC), Employers Life
Insurance Company of Wausau (ELICW), National Casualty Company (NCC), West
Coast Life Insurance Company (WCLIC), Nationwide Advisory Services, Inc.
(NAS), Nationwide Investment Services Corporation (NISC) and NWE, Inc. (NWE).
NLIC and its subsidiaries are collectively referred to as "the Company."
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<PAGE> 14
The Company is a member of the Nationwide Insurance Enterprise (Enterprise),
which consists of Nationwide Mutual Insurance Company (NMIC) and all of its
subsidiaries and affiliates.
In November 1996, Nationwide Corp. formed Nationwide Financial Services, Inc.
(NFS) as a holding company for NLIC and the other companies of the Enterprise
that offer or distribute long-term savings and retirement products. On January
27, 1997, Nationwide Corp. contributed to NFS the common stock of the Company
and three marketing and distribution companies.
In anticipation of the restructuring described above, on September 24, 1996,
NLIC's Board of Directors declared a dividend payable January 1, 1997 to
Nationwide Corp. consisting of the outstanding shares of common stock of
certain subsidiaries (ELICW, NCC and WCLIC) that do not offer or distribute
long-term savings and retirement products. In addition, during 1996, NLIC
entered into two reinsurance agreements whereby all of NLIC's accident and
health and group life insurance business was ceded to ELICW and NMIC effective
January 1, 1996.
NLAIC offers universal life insurance, variable universal life insurance and
individual annuity contracts on a non-participating basis. ELICW, purchased on
December 31, 1994, writes group accident and health insurance and group life
insurance business. On December 31, 1993, Nationwide Corp. contributed all of
the outstanding shares of common stock of NCC, WCLIC and NAS to the Company.
NCC is a property casualty company that serves as a fronting company for a
property casualty subsidiary of NMIC. WCLIC principally writes high dollar
term life insurance business. NAS is a registered broker-dealer providing
investment management and administration services. NISC, contributed by
Nationwide Corp. on April 5, 1996, is a registered broker-dealer doing
business solely in the deferred compensation market. NWE was formed by NLIC on
January 18, 1994 to hold special investments.
B. Description of Business
The Company is a leading provider of long-term savings and retirement products
to retail and institutional customers throughout the United States (U.S.). The
Company offers variable annuities, fixed annuities and life insurance as well
as mutual funds and pension products and administrative services. By
developing and offering a wide variety of products, the Company believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. The Company markets its products through a broad
spectrum of wholesale and retail distribution channels, including financial
planners, pension plan administrators, securities firms, banks and Enterprise
insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the year ended December 31, 1996, the Company was the fourth
largest U.S. writer of individual variable annuity contracts based on sales,
according to The Variable Annuity Research & Data Service. Its principal
variable annuity series, The Best of America, allows the customer to choose
from 36 investment options, including mutual funds managed by such well-known
firms as American Century, Dreyfus, Fidelity, Janus, Neuberger & Berman,
Oppenheimer, T. Rowe Price, Templeton, Vanguard and Warburg Pincus, as well as
mutual funds managed by the Company.
In the mid-1970's, to capitalize on anticipated opportunities in the growing
market for long-term savings and retirement products, the Company embarked on
a specific strategy of broadening its distribution channels and product
offerings beyond selling traditional life insurance. Over a 20-year period,
the Company added financial planners, pension plan administrators, securities
firms and banks as new distribution channels. Such distribution channels in
the aggregate accounted for approximately 93.8% of the Company's sales in
1996. Currently, the Company administers approximately 15,000 pension plans
and has distribution arrangements with 151 banks and other financial
institutions, over 1,000 broker/dealers and over 30,000 registered
representatives. The Company has payroll deduction variable annuity enrollee
customers in approximately 6,000 state and local government entities and 1,800
school districts, which have been obtained principally through sponsorship
relationships with the National Association of Counties and The United States
Conference of Mayors and an exclusive contractual arrangement with The
National Education Association of the United States.
The Company 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. The Company believes its growth has been further enhanced by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the financial
markets, particularly the U.S. stock markets, in recent years.
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<PAGE> 15
The Company believes that demographic trends and shifts in attitudes toward
retirement savings will continue to support increased consumer demand for its
products. According to U.S. Census Bureau projections, the number of Americans
between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1
million in 2005, making this "preretirement" age group the fastest growing
segment of the U.S. population. The Company believes that Americans
increasingly are supplementing traditional sources of retirement income, such
as employer-provided defined benefit plans and Social Security, with
self-directed investments.
C. Product Segments
During 1996, the Company changed its reporting segments to better reflect the
way the businesses are managed. Prior periods have been restated to reflect
these changes. Operating segment data is presented in note 16 to the
consolidated financial statements and in Financial Statement Schedule III.
The Company has three primary operating segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment, which accounted
for $90.2 million (or 28.7%) of the Company's operating income (which excludes
realized gains and losses on investments and discontinued operations) before
federal income tax expense for 1996, consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds managed by
independent investment managers and the Company, with investment returns
accumulating on a tax-deferred basis. The Fixed Annuities segment, which
accounted for $135.4 million (or 43.0%) of the Company's operating income
before federal income tax expense for 1996, consists of annuity contracts that
generate a return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred basis. 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 the Company's variable annuity
contracts, which accounted for 70.5% of the Company's fixed annuity policy
reserves as of December 31, 1996. For the year ended December 31, 1996, the
average crediting rates on contracts (including the fixed option under the
Company's variable annuity contracts) in the Fixed Annuities segment was 6.3%.
Substantially all of the Company's crediting rates on its fixed annuity
contracts are guaranteed for a period not exceeding 15 months. The Life
Insurance segment, which accounted for $67.2 million (or 21.4%) of the
Company's operating income before federal income tax expense for 1996,
consists of insurance products, including variable 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, the Company reports corporate
income and expenses not specifically allocated to its product segments in a
Corporate and Other segment, which accounted for $21.8 million (or 6.9%) of
the Company's operating income before federal income tax expense for 1996.
D. Regulation
NLIC and its insurance company subsidiaries, 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 stockholders. The Company can
not predict the effect that any proposed or future legislation may have on the
financial condition or results of operations of the Company.
E. Competition
The Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer alternative
products and, with respect to other insurers, have higher ratings than the
Company. The Company believes that competition in the Company's lines of
business is based on price, product features, commission structure, perceived
financial strength, claims-paying ratings, service and name recognition.
National banks, with their preexisting customer bases for financial services
products, may pose increasing competition in the future to insurers who sell
annuities, including the Company, as a result of the U.S. Supreme Court's 1994
decision in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company, which permits national banks to sell annuity products of life
insurance companies in certain circumstances.
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<PAGE> 16
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made
by members of Congress and the Clinton Administration. Currently, the Bank
Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not
possible to predict whether any of these proposals will be enacted, or, if
enacted, their potential effect on the Company.
F. Employees
As of December 31, 1996, the Company had approximately 3,200 employees. None
of the employees of the Company are covered by a collective bargaining
agreement and the Company believes that its employee relations are
satisfactory.
2. Properties
The Company's principal executive offices are located in Columbus, Ohio. The
Company leases its home office complex, consisting of approximately 465,000
square feet, from NMIC and its subsidiaries at One Nationwide Plaza, Two
Nationwide Plaza and Three Nationwide Plaza, Columbus, Ohio.
The Company believes that its present facilities are adequate for the
anticipated needs of the Company.
3. Legal Proceedings
From time to time 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 defendents 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. 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 policyholders and claims unspecified compensatory and
punitive damages. This lawsuit is in the early stage and has not been certified
as a class action. NLIC intends to defend these cases vigorously. There can be
no assurance that any future litigation relating to pricing and sales practices
will not have a material effect on the Company.
4. Submission of Matters to a Vote of Security Holders
On April 3, 1996, a special meeting of the sole shareholder of NLIC was held.
The purpose of this meeting was to vote on a proposal to amend and restate the
Code of Regulations of Nationwide Life Insurance Company to update the titles
and duties of certain officers and consider revisions in the indemnification
provisions. The Proxy Committee cast all 3,814,779 shares in favor of the
resolution, none against. No shares were withheld from the vote.
On April 4, 1996, NLIC held its annual shareholder meeting. At the annual
meeting, the shareholder elected as Directors the six nominees of the Board of
Directors by the following vote of the Proxy Committee:
Nominee Shares For Shares Withheld
One-Year Term:
Joseph J. Gasper 3,814,779 -0-
Three-Year Term:
Keith W. Eckel 3,814,779 -0-
Charles L. Fuellgraf, Jr. 3,814,779 -0-
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<PAGE> 17
Dimon Richard McFerson 3,814,779 -0-
Arden L. Shisler 3,814,779 -0-
Harold W. Weihl 3,814,779 -0-
The term of office of the Directors, Lewis J. Alphin, Willard J. Engel, Fred C.
Finney, Henry S. Holloway, David O. Miller, C. Ray Noecker, James F. Patterson,
Robert L. Stewart and Nancy C. Thomas, continued after the meeting.
5. Market for Nationwide Life Insurance Company's Common Equity and Related
Shareholder Matters
There is no established public trading market for the NLIC's shares of common
stock. As of December 31, 1996, none of the 3,814,779 shares of NLIC's common
stock issued and outstanding was held by public shareholders. Nationwide Corp.
was the sole shareholder of NLIC's common stock until January 27, 1997, when it
contributed all of the outstanding shares of NLIC's common stock to NFS.
NLIC paid cash dividends of $50,000,000 and $7,450,000 to Nationwide Corp.
during 1996 and 1995, respectively. On September 24, 1996, NLIC's Board of
Directors declared a dividend payable January 1, 1997 to Nationwide Corp.,
consisting of the outstanding shares of common stock of ELICW, NCC and WCLIC,
amounting to $485,707,298.
On February 6, 1997 NLIC's Board of Directors declared an $850,000,000 dividend
which was paid on February 24, 1997 to NFS, which then made an equivalent
distribution to Nationwide Corp. This dividend payment was approved by the
Department of Insurance of the State of Ohio.
NLIC currently does not have a formal dividend policy. Management of NLIC
currently does not anticipate making further dividend payments during 1997.
Reference is made to Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and note 12 to the consolidated financial
statements for information regarding dividend restrictions.
6. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of Nationwide Life Insurance Company and
Subsidiaries are included in a separate section of this report which is indexed
in Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Semi-annual and annual reports are sent to contract owners of the variable
annuity and life insurance contracts issued through registered Separate Accounts
of the Company.
7. 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, 1992 through 1996 and the consolidated balance sheet data as of December 31,
1992 through 1996 are derived from the consolidated financial statements of the
Company. The summary consolidated financial data set forth below should be read
in conjunction with the consolidated financial statements of the Company and
notes thereto and the other financial information, including Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere herein.
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<PAGE> 18
Selected Consolidated Financial Data (1)
($000's omitted)
<TABLE>
<CAPTION>
As of and for the year ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 1,992,838 1,798,651 1,599,499 1,597,993 1,368,429
Total benefits and expenses 1,677,341 1,511,079 1,357,641 1,319,985 1,239,877
----------- ---------- ---------- ----------- ----------
Income from continuing operations
before federal income tax expense
and cumulative effect of changes
in accounting principles 315,497 287,572 241,858 278,008 128,552
Federal income tax expense 110,889 99,808 78,589 94,905 33,804
----------- ---------- ---------- ----------- ----------
Income from continuing operations
before other items 204,608 187,764 163,269 183,103 94,748
Income from discontinued
operations (less federal income
tax expense) 11,324 24,714 20,459 28,637 2,067
Cumulative effect of changes in
accounting principles -- -- -- (231) --
----------- ---------- ---------- ----------- ----------
Net income $ 215,932 212,478 183,728 211,509 96,815
=========== ========== ========== =========== ==========
Total assets $47,766,246 38,507,633 29,246,024 24,700,213 20,763,028
=========== ========== ========== =========== ==========
</TABLE>
- ----------
(1) Consolidated financial data of the Company as of and for the years ended
December 31, 1995, 1994, 1993 and 1992 has been restated to reflect the
discontinued operations treatment of certain NLIC subsidiaries and lines
of business that were unrelated to the long-term savings and retirement
products business. See note 2 to the consolidated financial statements
herein for additional information regarding the discontinued operations
treatment.
8. Management's Discussion and Analysis of Financial Condition and Consolidated
Results of Operations Introduction
The following analysis of consolidated results of operations and financial
condition of the Company should be read in conjunction with Item 6 - Selected
Consolidated Financial Data and the consolidated financial statements and
related notes included elsewhere herein.
A. Results of Operations
(i) 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
1996, policy charges were $400.9 million, a 39.9% increase from $286.5 million
in 1995. Policy charges increased 32.0% in 1995 from $217.2 million in 1994.
Increases in policy charges have resulted primarily from increases in separate
account assets and the resulting higher levels of asset fees, as well as a
moderate increase in all of the fees discussed above due to the growth in
customer accounts.
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<PAGE> 19
(ii) 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 from
traditional life insurance policies are recognized as revenue when due from the
policyholder. For life-contingent immediate annuities, net premium (i.e., the
portion of the premium which covers benefits and expenses) is recognized as
revenue when received. Any premium received in excess of the net premium is
deferred and recognized as revenue over the expected benefit period. Traditional
life insurance products accounted for 87.9%, 83.5% and 88.6% of the total life
insurance premiums in 1996, 1995 and 1994, respectively. Life insurance premiums
were $198.6 million for 1996, a 0.3% decrease from $199.1 million for 1995. The
slight decrease in 1996 was due to an $8.7 million decrease in sales of
life-contingent immediate annuities offset by an $8.3 million increase in
traditional life insurance premiums. Life insurance premiums increased 12.7% in
1995 from $176.7 million in 1994. The 1995 increase in life insurance premiums
resulted from an increase in traditional life insurance in-force in the Life
Insurance segment and growth in the Fixed Annuities segment.
(iii) 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 $1.36 billion in 1996, $1.29
billion in 1995 and $1.21 billion in 1994. Net investment income has increased
as a result of growth in the Company's general account invested assets. General
account invested assets were $18.31 billion, $17.78 billion and $15.18 billion
as of December 31, 1996, 1995 and 1994, respectively.
(iv) Realized Gains/(Losses) on Investments
Realized gains (losses) on investments are not considered by the Company to be a
recurring source of earnings (operations). 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 $0.3
million in 1996, $1.7 million in 1995 and $16.5 million in 1994.
(v) Other Income
Other income consists of investment management fees earned by a subsidiary of
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 $35.9 million in 1996, $20.7 million in 1995 and
$11.3 million in 1994. The increase in other income in 1996 and 1995 resulted
primarily from an increase in asset management fees earned on mutual fund
assets.
(vi) 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 4.0% to $1.16 billion in 1996 from 1995. Benefits and claims
increased 12.4% to $1.12 billion in 1995 from $992.7 million in 1994. The
changes in benefits and claims from year to year are primarily attributable to
the changes in interest credited which are discussed in the Fixed Annuities
segment results below. Life insurance benefits have remained consistent over the
periods.
(vii) Policyholder Dividends
Policyholder dividends are paid on certain participating policies, primarily in
the Life Insurance segment. Policyholder dividends were $41.0 million in 1996, a
2.8% increase over 1995. Policyholder dividends increased 2.8% to $39.9 million
in 1995 from $38.8 million in 1994.
17
<PAGE> 20
(viii) Amortization of DAC
Amortization of deferred policy acquisition costs (DAC) results from the
capitalization of commissions and other costs of acquiring new contracts and the
amortization of these costs over the estimated life of the contract.
Amortization of DAC was $133.4 million in 1996, a 61.3% increase over 1995.
Amortization of DAC decreased 3.4% to $82.7 million in 1995 from $85.6 million
in 1994. The increase in 1996 was primarily attributable to growth in all
product segments while the decrease in 1995 resulted from a decrease in the
amortization rate for variable and fixed individual annuities due to lower than
anticipated lapse rates and strong separate account asset performance.
(ix) Operating Expenses
Operating expenses were $342.4 million in 1996, an 25.4% increase from 1995.
Operating expenses increased 13.4% to $273.0 million in 1995 from $240.7 million
in 1994. These increases were primarily due to the increasing number of
individual and group annuity contracts in-force and the related increase in
administrative processing costs. The Company has controlled its operating
expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology. As a result, the ratio of
operating expenses to total assets declined to 0.72% in 1996 and 0.71% in 1995
from 0.82% in 1994.
(x) Federal Income Tax Expense
Federal income tax expense was $110.9 million, $99.8 million and $78.6 million,
representing effective tax rates of 35.2%, 34.7% and 32.5% for 1996, 1995 and
1994, respectively. The increase in the 1996 effective tax rate is the result of
greater benefits in 1995 and 1994 from charitable donations of appreciated
securities.
(xi) 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 1996 was $203.7 million, an 8.5% increase from 1995. The
Company's net operating income increased 8.2% to $187.7 million in 1995 from
$173.5 million in 1994.
(xii) Discontinued Operations
Discontinued operations include the results of (i) the three NLIC subsidiaries
whose outstanding capital stock, on September 24, 1996, was declared as a
dividend to Nationwide Corp. and (ii) all of NLIC's accident and health and
group life business which was ceded to affiliates effective January 1, 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 $11.3 million in 1996, a 54.3% decrease
from $24.7 million in 1995. The decrease is attributable to losses incurred on
group accident and health business, which are due to increases in the volume of
claims and medical costs. Income from discontinued operations was $24.7 million
in 1995, a 20.5% increase from $20.5 million in 1994. The increase is
attributable to the income reported by ELICW, which NLIC acquired effective
December 31, 1994.
B. Effect of Dividend and Capital Contributions
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. On March 10, 1997 and March 11, 1997,
NFS made cash capital contributions to NLIC totaling $836.8 million. These
transactions resulted in a net decrease in invested assets of NLIC of $13.2
million, which is expected to result in a decrease in net investment income in
the future.
C. Results of Operations by Product 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
18
<PAGE> 21
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 table below presents summary financial data for the Company by segment.
<TABLE>
<CAPTION>
As of and for the Year Ended
December 31,
--------------------------------
1996 1995 1994
--------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Variable Annuities (1) $ 284.6 189.0 132.7
Fixed Annuities (1) 1,092.6 1,052.0 939.9
Life Insurance 435.6 409.1 383.1
Corporate and Other 180.3 150.3 160.3
--------- -------- --------
Total operating revenues 1,993.1 1,800.4 1,616.0
Realized losses on investments (0.3) (1.7) (16.5)
--------- -------- --------
Total revenues $ 1,992.8 1,798.7 1,599.5
========= ======== ========
Income from Continuing Operations Before Federal
Income Tax Expense:
Variable Annuities $ 90.3 50.8 24.6
Fixed Annuities 135.4 137.0 139.0
Life Insurance 67.2 67.6 53.0
Corporate and Other 22.9 33.9 41.8
--------- -------- --------
Total operating income 315.8 289.3 258.4
Realized losses on investments (0.3) (1.7) (16.5)
--------- -------- --------
Total income from continuing operations before federal
income tax expense $ 315.5 287.6 241.9
========= ======== ========
Policy Reserves:
Variable Annuities (2) $24,278.1 16,761.8 10,751.1
Fixed Annuities (2) 13,511.8 12,784.0 11,247.0
Life Insurance 2,938.9 2,660.5 2,425.2
Corporate and Other 3,302.5 2,644.3 2,252.7
--------- -------- --------
Total policy reserves (3) $44,031.3 34,850.6 26,676.0
========= ======== ========
</TABLE>
- ----------
(1) Revenues related to the fixed option under the Company's variable annuity
contracts are included in Fixed Annuities.
(2) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of December 31, 1996, 1995
and 1994, such policy reserves represented $9.52 billion, $8.83 billion and
$7.27 billion, respectively.
(3) Total policy reserves as presented here differ from the amounts set forth in
the Company's financial statements because the presented amounts exclude (i)
accident and health and group life insurance business ceded to other members of
the Enterprise and (ii) the fixed annuity policy reserves ceded to Franklin Life
Insurance Company (Franklin Life). See Item 13 - Certain Relationships and
Related Transactions.
19
<PAGE> 22
(i) Variable Annuities
(a) 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 NLIC.
Revenues were $284.6 million in 1996, a 50.6% increase from 1995. Revenues
increased 42.4% to $189.0 million in 1995 from $132.7 million in 1994. Revenues
have increased primarily as a result of growth in separate account assets
related to this segment and the corresponding growth in asset fees, which were
$261.8 million, $172.8 million and $120.4 million in 1996, 1995 and 1994,
respectively. Asset fees as a percentage of variable annuity separate account
assets have remained relatively stable during the periods presented, reflecting
minimal changes in the levels of asset fees charged on most variable annuity
products.
(b) Income from Continuing Operations Before Federal Income Tax Expense
Income from continuing operations before federal income tax expense was $90.3
million in 1996, a 77.8% increase from 1995. Income from continuing operations
before federal income tax expense increased 106.5% to $50.8 million in 1995 from
$24.6 million in 1994. Increases have primarily resulted from growth in variable
annuity separate account assets and the corresponding increases in asset fees
combined with expense levels which have decreased as a percentage of revenues.
Total expenses were $189.7 million, $135.4 million and $105.8 million, or 66.7%,
71.6% and 79.7% of total revenues, for 1996, 1995 and 1994, respectively. During
the period, the Company has controlled its operating expenses by taking
advantage of economies of scale and by increasing productivity through
investments in technology.
(c) Policy Reserves
Variable annuity policy reserves increased 44.9% from $16.76 billion as of
December 31, 1995 to $24.28 billion as of December 31, 1996. Of this increase,
$2.72 billion was due to market appreciation of separate account assets, while
$6.50 billion of statutory premiums and deposits offset by $1.70 billion of
withdrawals and policy charges resulted in the remainder of the increase.
Variable annuity policy reserves increased 55.9% to $16.76 billion as of
December 31, 1995 from $10.75 billion as of December 31, 1994, which was a 36.8%
increase from $7.86 billion as of December 31, 1993. Market appreciation
accounted for $2.93 billion of the increase in 1995 while market depreciation
accounted for an $84.0 million decrease in 1994. Statutory premiums and deposits
were $4.40 billion and $3.82 billion, while withdrawals and policy charges were
$1.32 billion and $840.0 million, in 1995 and 1994, respectively.
(ii) Fixed Annuities
(a) 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 shareholders' equity allocated to such segment. Total revenues were
$1.09 billion, $1.05 billion and $939.9 million in 1996, 1995 and 1994,
respectively. Net investment income was $1.05 billion, $1.00 billion and $903.7
million, representing average pre-tax yields on the assets supporting this
segment of 8.22%, 8.50% and 8.59%, in 1996, 1995 and 1994, respectively. The
increase in net investment income for each period presented is the result of the
increases in policy reserves discussed below and the corresponding increase in
invested assets.
(b) Interest Credited
Interest credited on account balances was $805.0 million, $775.7 million and
$680.9 million, representing crediting rates of 6.30%, 6.58% and 6.47%, for
1996, 1995 and 1994, respectively. The differential between net
20
<PAGE> 23
investment income and interest credited on account balances resulted in spreads
of $245.6 million, $227.1 million and $222.8 million, or 1.92%, 1.92% and 2.12%,
in 1996, 1995 and 1994, respectively. Spreads vary depending on crediting rates
offered by competitors, performance of the investment portfolio and other
factors. The higher spread in 1994 is primarily the result of declining interest
rates in late 1993 and early 1994 which resulted in lower crediting rates.
(c) Income from Continuing Operations Before Federal Income Tax Expense
Income from continuing operations before federal income tax expense was $135.4
million in 1996, a 1.2% decrease from 1995. Income from continuing operations
before federal income tax expense decreased 1.4% to $137.0 million in 1995 from
$139.0 million in 1994. Narrowing spreads, offset by asset growth, caused 1996
and 1995 earnings to decline from 1994.
(d) Policy Reserves
Fixed annuity policy reserves increased 5.7% to $13.51 billion as of December
31, 1996, from $12.78 billion as of December 31, 1995. Statutory premiums and
deposits of $1.60 billion and interest credited of $805.0 million were offset by
$1.68 billion of withdrawals, annuity benefits and policy charges. Policy
reserves increased 13.6% to $12.78 billion as of December 31, 1995 from $11.25
billion as of December 31, 1994. Statutory premiums and deposits were $1.86
billion and $1.31 billion, while interest credited was $775.7 million and $680.9
million in 1995 and 1994, respectively. Withdrawals and policy charges were
$1.10 billion and $895.0 million in 1995 and 1994, respectively.
(iii) Life Insurance
(a) Revenues
Revenues in the Life Insurance segment consist of the life insurance premiums
and policy charges, as well as net investment income. Total revenues were $435.6
million, $409.1 million and $383.1 million for 1996, 1995 and 1994,
respectively. The increases are attributed to increases in life insurance
in-force with the majority of the growth coming from the variable universal life
product.
(b) Income from Continuing Operations Before Federal Income Tax Expense
Income from continuing operations before federal income tax expense was $67.2
million in 1996, a 0.6% decrease from $67.6 million for 1995. The decrease is
attributable to the increased amount of amortization of DAC due to increased
volume and higher general expenses due to increased sales offset by an increase
in revenues from the variable universal product. Income from continuing
operations before federal income tax expense increased 27.5% to $67.6 million in
1995 from $53.0 million in 1994. The increase is due to growth in insurance
in-force, particularly variable universal life, combined with only minimal
increases in expenses.
(c) Life Insurance In-Force
Life insurance in-force was $37.72 billion, $33.41 billion and $30.13 billion as
of December 31, 1996, 1995 and 1994, respectively. Nearly two-thirds of the
growth of life insurance in-force is in variable universal life and term
insurance policies.
(iv) Corporate and Other
(a) 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 Enterprise employee and
agent benefit plans. Total revenues excluding realized gains and losses were
$180.3 million for 1996, a 20.0% increase from 1995. The increase in 1996 is the
result of an increase in investment income and investment management fees
earned. Total revenues excluding realized gains and losses were $150.3 million
and $160.3 million in 1995 and 1994, respectively. The decrease is a result
21
<PAGE> 24
of a reduction of $155.0 million of invested assets. Effective December 31,
1994, the Company transferred $155.0 million of invested assets from the
Corporate and Other segment for the purchase of ELICW. Realized losses on
investments were $0.3 million, $1.7 million and $16.5 million in 1996, 1995 and
1994, respectively.
(b) Income from Continuing Operations Before Federal Income Tax Expense
Income from continuing operations before federal income tax expense excluding
realized gains and losses was $22.9 million, $33.9 million and $41.8 million in
1996, 1995 and 1994, respectively. The decrease in 1996 from 1995 is due to a
decrease in net investment income and higher operating expenses. The change from
1994 to 1995 is primarily attributed to the change in revenues discussed above.
D. Intercompany Agreements
The Company has existing arrangements with NMIC and other affiliates that
address the sharing of federal income taxes, the leasing of office space and the
sharing of certain operational and administrative services. These arrangements
have been in effect for all periods for which financial data is presented
herein. See Item 13 - Certain Relationships and Related Transactions-Existing
Arrangements with the Enterprise. The Company does not believe that expenses
recognized under the intercompany arrangements are materially different from
expenses that would have been recognized had the Company operated on a
stand-alone basis.
NMIC and its U.S. subsidiaries, including the Company, file a consolidated
federal income tax return. The members of the consolidated group currently have
a tax sharing arrangement which provides for each member to bear essentially the
same federal income tax liability as if separate tax returns were filed. For the
years ended December 31, 1996, 1995 and 1994, the Company made federal income
tax payments under the tax sharing arrangement of $115.8 million, $51.8 million
and $83.2 million, respectively. See Item 13 - Certain Relationships and Related
Transactions-Existing Arrangements with the Enterprise-Federal Income Taxes.
The Company leases approximately 465,000 square feet of office space at a
current market rate of $19.53 per square foot, with limited exceptions, from
NMIC and certain of its subsidiaries. For the years ended December 31, 1996,
1995 and 1994, the Company made lease payments to NMIC and its subsidiaries of
$9.1 million, $9.0 million and $8.1 million, respectively. See Item 13 - Certain
Relationships and Related Transactions-Existing Arrangements with the
Enterprise-Lease.
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. Amounts
allocated to the Company were $101.6 million, $107.1 million and $100.6 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Under the
cost sharing agreement, expenses are allocated in accordance with NAIC
guidelines and are based on standard allocation techniques and procedures
acceptable under general cost accounting practices. Measures used to allocate
expenses include individual employee estimates of time spent, special cost
studies, salary expense, commissions expense and other measures that are agreed
to by the participating companies and are within regulatory and industry
guidelines and practices. The cost sharing agreement will remain in effect until
terminated upon the consent of both NMIC and the Company. See Item 13 - Certain
Relationships and Related Transactions-Existing Arrangements with the
Enterprise-Cost Sharing Agreement.
E. Reinsurance
The Company follows the customary industry practice of reinsuring (ceding) a
portion of its life insurance and annuity risks with other companies in order to
reduce net liability on individual risks, to provide protection against large
losses and to obtain greater diversification of risks. The ceding of risk does
not discharge the original insurer from its primary obligation to the
policyholder. The Company has entered into a reinsurance contract to cede a
portion of its general account individual annuity reserves to Franklin Life.
Total recoveries due from Franklin Life were $240.5 million and $245.3 million
as of December 31, 1996 and 1995, respectively. Under the terms of the contract,
Franklin Life 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
22
<PAGE> 25
102% of the reinsured reserves. The Company has no other material reinsurance
arrangements with unaffiliated reinsurers.
The only material reinsurance agreements which the Company has with affiliates
are the modified coinsurance agreements pursuant to which NLIC reinsured all of
its accident and health and group life insurance business to ELICW and NMIC. See
Item 13 - Certain Relationships and Related Transactions-Existing Arrangements
with the Enterprise-Modified Coinsurance Agreements. NLIC entered into these
reinsurance agreements because its accident and health and group life insurance
business was unrelated to NLIC's long-term savings and retirement products.
Accordingly, all accident and health and group life insurance business is
accounted for as discontinued operations. Under the modified coinsurance
agreements, invested assets are retained by the ceding company and investment
earnings are paid to the reinsurer. Under the terms of such agreements, the
investment risk associated with changes in interest rates is borne by ELICW or
NMIC, as the case may be. Risk of asset default is retained by the Company,
although a fee is paid by ELICW or NMIC, as the case may be, to NLIC for NLIC's
retention of such risk. The contracts will remain in force until all policy
obligations are settled. However, with respect to the agreement between NLIC and
NMIC, either party may terminate the contract on January 1 of any year with
prior notice. NLIC believes that the terms of such modified coinsurance
agreements are consistent in all material respects with what NLIC could have
obtained with unaffiliated parties.
Total premiums ceded under the intercompany reinsurance agreements were $321.6
million during 1996. The effect of the reinsurance agreements was an increase in
NLIC's income from discontinued operations before federal income tax expense of
$4.5 million during 1996. NLIC does not expect the intercompany reinsurance
agreements to have any material adverse effect on NLIC's future operations.
F. Liquidity and Capital Resources
State insurance laws generally restrict the ability of insurance companies to
pay cash dividends in excess of certain prescribed limitations without prior
approval. The ability of NLIC to pay dividends is subject to restrictions set
forth in the insurance laws and regulations of Ohio, its domiciliary state. The
Ohio insurance laws require life insurance companies to seek prior regulatory
approval to pay a dividend 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
policyholders' surplus as of the prior December 31 or (ii) the 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. 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
NLIC and its stockholder. NLIC currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends in
the future. However, NLIC can give no assurance that dividends will be declared
or paid.
As a result of the $850.0 million dividend paid on February 24, 1997 and the
dividend by NLIC of the stock of certain subsidiaries that do not operate in the
long-term savings and retirement market, any dividend paid by NLIC during the
12-month period immediately following the $850.0 million dividend would be an
extraordinary dividend under Ohio insurance laws. Accordingly, no such dividend
could be paid without prior regulatory approval. NLIC has no reason to believe
that any reasonably foreseeable dividend to be paid by NLIC would not receive
the required approval.
NLIC's statutory capital and surplus was $1.00 billion as of December 31, 1996.
NLIC paid a dividend of $850.0 million on February 24, 1997. NFS contributed
amounts totaling $836.8 million to NLIC on March 10, 1997 and March 11, 1997.
NLIC believes that after such dividend and such contribution from NFS, NLIC has
adequate statutory capital and surplus to satisfy all regulatory requirements
and to support its growth over the following year.
NLIC paid the dividend by transferring primarily fixed maturity investments with
an aggregate market value on February 24, 1997 of $850.0 million from the
Corporate and Other segment. NLIC recognized a gain of $14.4 million on the
transfer of the securities. The related tax impact of the gain will be
recognized but will not be paid as long as the securities are held by NMIC and
NLIC remains within the consolidated federal tax return of NMIC.
23
<PAGE> 26
NLIC's principal sources of funds are premiums another considerations paid,
contract charges earned, net investment income received and proceeds from
investments called, redeemed or sold. The principal uses of these funds are the
payment of benefits on annuity contracts and life insurance policies, operating
expenses and the purchase of investments. Net cash provided by operating
activities (reflecting principally (i) premiums and contract charges collected,
less (ii) benefits paid on life insurance products, plus (iii) income collected
on invested assets, less (iv) commissions and other general expenses paid) was
$346.2 million, $187.6 million and $39.9 million for the years ended December
31, 1996, 1995 and 1994, respectively. Net cash used by investing activities
(principally reflecting investments purchased less investments called, redeemed
or sold) was $771.3 million, $1.72 billion and $1.39 billion in the years ended
December 31, 1996, 1995 and 1994, respectively. Net cash provided by financing
activities (principally reflecting deposits to investment product and universal
life insurance product account balances less withdrawals from such account
balances and capital contributions less dividends paid) was $459.5 million,
$1.54 billion and $1.34 billion for the years ended December 31, 1996, 1995 and
1994, respectively.
A primary liquidity concern with respect to life insurance and annuity products
is the risk of early policyholder and contractholder withdrawal. The Company
closely evaluates and manages this risk. The following table summarizes the
Company's annuity policy reserves as of December 31, 1996 and 1995 by the
contractholder's ability to withdraw funds.
<TABLE>
<CAPTION>
As of As of
December 31, 1996 December 31, 1995
------------------- -------------------
Policy Policy
Reserves % Reserves %
--------- ----- --------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Not subject to discretionary withdrawal $ 1,139.5 2.8% $ 1,087.2 3.4%
Subject to discretionary withdrawal with adjustment:
With market value adjustment 35,463.2 86.3% 27,312.1 84.8%
At contract value, less surrender charge of 5% or more 1,046.6 2.5% 992.1 3.1%
--------- ----- --------- -----
37,649.3 91.6% 29,391.4 91.3%
Subject to discretionary withdrawal at contract value
with no surrender charge or surrender charge less 3,443.2 8.4% 2,798.7 8.7%
than 5%
--------- ----- --------- -----
Total annuity policy reserves $41,092.5 100.0% $32,190.1 100.0%
========= ===== ========= =====
</TABLE>
Life insurance policies are also subject to withdrawal. However, they are less
susceptible to withdrawal than are annuity contracts because policyholders may
incur surrender charges and undergo a new underwriting process in order to
obtain a new insurance policy.
NLIC's principal sources of liquidity to meet unexpected cash outflows are its
portfolio of liquid assets and its net operating cash flow.
The short- and long-term liquidity requirements of the Company are monitored
regularly to match cash inflows with cash requirements. The Company periodically
reviews its short- and long-term projected sources and uses of funds and the
asset/liability, investment and cash flow assumptions underlying these
projections. Adjustments are made periodically with respect to the Company's
investment policies to reflect changes in the Company's short- and long-term
cash needs and changing business and economic conditions.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its product lines. The Company's general
account invested assets are primarily managed in a number of pools that are
separated by weighted average maturity of the assets acquired by the pools. On
bonds 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 pool of mortgages and the terms of the securities. Each product line
has an investment strategy based on the specific characteristics of such product
line. The strategy establishes asset duration, quality and other guidelines. The
Company's actuaries determine the amount of new investments needed for each line
to
24
<PAGE> 27
arrive at the amount of new investments needed for each pool by month. The
investments acquired for each pool are shared on a proportional basis by each of
the lines requesting investments in the pool based on their actual investment
needs.
For all business having future benefits which cannot be changed at the option of
the policyholder, the underlying assets are managed in a separate pool. The
duration of assets and liabilities in this pool are kept as close together as
possible. For assets, the repayment cash flows, plus anticipated coupon
payments, are used in calculating asset duration. Future benefits and expenses
are used for liabilities. On December 31, 1996, the average duration of assets
in this pool was 6.80 years and the average duration of the liabilities was 7.44
years. Policy reserves on this business were $1.11 billion as of December 31,
1996.
Because the timing of the payment of future benefits on the majority of the
Company's business can be changed by the policyholder, the Company employs cash
flow testing techniques as a final step in its asset/liability management
process. Annually, the Company's annuity and insurance business is analyzed to
determine the adequacy of the reserves supporting such business. This analysis
is accomplished by projecting under a number of possible future interest rate
scenarios the anticipated cash flows from such business and the assets required
to support such business. The first seven of these scenarios are required by
state insurance laws. Projections are also made using 13 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
20 predetermined scenarios, additional projections are made using 200 randomly
generated interest rate scenarios. For the Company's 1996 cash flow testing
process, interest rates for 90-day treasury bills ranged from 0.4% to 11.5%
under the 20 predetermined scenarios and 0.8% to 25.3% under the 200 random
scenarios. Interest rates for longer maturity treasury securities had comparable
ranges. The values produced by each projection are used to determine future
gains or losses from the Company's annuity and insurance business, which, in
turn, are used to quantify the adequacy of the Company's reserves over the
entire projection period. The results of the Company's cash flow testing for
year end 1996 indicated that the Company's reserves were adequate as of December
31, 1996.
The Company manages its investment portfolio in part to reduce its exposure to
interest rate fluctuations. In general, the fair value of the Company's fixed
maturity portfolio increases or decreases in inverse relationship with
fluctuations in interest rates. For example, if interest rates rise, the
Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by interest
rate changes. If interest rates decline, net investment income will decrease if
high-yielding fixed maturity investments mature or are sold and the proceeds
therefrom are reinvested in securities yielding a lower rate.
On August 12, 1996, NLIC and NMIC entered into a Credit Facility (Credit
Facility) which provides for a $600.0 million loan over a five-year term on a
fully revolving basis with a group of banks led by Morgan Guaranty Trust Company
of New York. The Credit Facility provides for several and not joint liability
with respect to any amount drawn by either NLIC or NMIC. To date, neither NLIC
nor NMIC has drawn down any amount under the Credit Facility. The Credit
Facility provides for several borrowing options including interest at a spread
over LIBOR, money market auction, CD or base rate. The Credit Facility also
provides covenants, including, but not limited to, restrictions on decreases in
the statutory surplus of NMIC below $2.75 billion, mergers and sales of assets
if a default has occurred and is continuing, transactions with affiliates (which
must be on an arm's-length basis on terms at least as favorable to NLIC or NMIC
as could have been obtained from a third party who was not affiliated with NLIC
or NMIC) and restrictions on the creation, assumption or suffering to exist of
liens. In addition, the Credit Facility provides for customary representations,
warranties and events of default. Pursuant to the terms of the Credit Facility,
NLIC may not declare or pay a dividend if it is, or if the payment thereof would
cause it to be, in default under such facility. Events of default under the
Credit Facility include, among others, the failure of NMIC and its affiliates to
maintain beneficial ownership of more than 50% of the combined voting power of
NLIC's outstanding voting stock and the failure of NLIC to maintain statutory
surplus in excess of $875.0 million. Amounts borrowed under the Credit Facility
may be used for, among other things, general corporate purposes.
Given the Company's historic cash flow and current financial results, management
of the Company believes that the cash flow from the operating activities of the
Company over the next year will provide sufficient liquidity for the operations
of the Company, as well as provide sufficient funds to enable the Company to
make dividend payments.
25
<PAGE> 28
G. Investments
(i) General
The Company's assets are divided between separate account and general account
assets. As of December 31, 1996, $26.9 billion (or 56.3%) of the Company's total
assets were held in separate accounts and $20.9 billion (or 43.7%) were held in
the Company's general account, including $18.3 billion of general account
investments. Separate account assets consist primarily of deposits from the
Company's variable annuity business. Most separate account assets are invested
in various mutual fund options available within the variable annuity products
sold by the Company. All of the investment risk in the Company's separate
account assets is borne by the Company's customers, with the exception of $280.2
million of policy reserves as of December 31, 1996 ($205.7 million as of
December 31, 1995) for which the Company bears the investment risk. General
account assets consist mainly of investments generated by premiums on life
insurance products and deposits in the Company's Fixed Annuities segment. The
Company generates profits on these products in part, based on the spread between
the yield on general account invested assets and crediting rates on these
products.
The Company's general account investment policies emphasize high quality,
diversification across asset classes and individual risks, and a buy and hold
strategy. The Company's general account assets are invested primarily in fixed
maturity securities and commercial mortgage loans. The Company has a general
policy of diversifying investments within asset categories. Additionally, the
Company's investment policy provides that fixed maturity investments are limited
to purchases of investment grade securities or unrated securities which, in the
opinion of the Company, should qualify for such rating. The Company monitors its
exposure to individual borrowers, credit risks, industries or property types and
geographic locations. The Company's investments are subject to suitability and
diversification requirements under applicable insurance laws. The Investment
Committee of the Board of Directors of the Company, which is comprised of the
Chairman and five outside directors, meets ten times a year. Such committee
approves investment policy and strategy, approves all mortgage loans and large
private placements and reviews and ratifies all other investments. In relation
to the life insurers reporting to the American Council of Life Insurance (ACLI),
the Company's general account investment portfolio has achieved (i) higher net
investment yields, (ii) lower bond default rates and (iii) lower mortgage
delinquency rates, in each case in each of the five years ended December 31,
1995 (with ACLI data not yet available for the year ended December 31, 1996).
(ii) Fixed Maturity
As of December 31, 1996, general account fixed maturity securities were $12.3
billion (or 67.2%) of the carrying value of consolidated general account
invested assets. As of such date, public and private fixed maturity securities
constituted $8.4 billion (or 68.3%) and $3.9 billion (or 31.7%), respectively,
of total general account fixed maturity securities. The Company's general
account fixed maturity securities portfolio consists primarily of investment
grade corporate fixed maturity securities, high-quality mortgage-backed
securities and U.S. government and agency obligations.
Below investment grade fixed maturity securities in the Company's general
account as of December 31, 1996 included the securities of 23 issuers
representing approximately 1.8% of the carrying value of total fixed maturity
securities. The Company's investment policy provides that fixed maturity
investments are limited to purchases of investment grade securities or unrated
securities which, in the opinion of the Company, should qualify for such rating.
All of the below grade fixed maturity securities held in the Company's general
account as of December 31, 1996 were investment grade securities when purchased
by the Company.
The National Association of Insurance Commissioners (NAIC) assigns securities
quality ratings and uniform valuations called "NAIC Designations" which are used
by insurers when preparing their annual statements. The NAIC assigns
designations to publicly traded as well as privately placed securities. The
designations assigned by the NAIC range from class 1 to class 6, with a
designation in class 1 being of the highest quality. Of the Company's general
account fixed maturity securities, 98.2% by the carrying value were in the
highest two NAIC Designations as of December 31, 1996.
26
<PAGE> 29
The following table sets forth an analysis of credit quality, as determined by
NAIC Designation, of the Company's general account fixed maturity securities
portfolio as of December 31, 1996 and 1995.
General Account Fixed Maturity Securities - Credit Quality
<TABLE>
<CAPTION>
As of December 31, 1996 As of December 31, 1995
-------------------------- --------------------------
NAIC Rating Agency Carrying % of Carrying % of
Designation (1) Equivalent Designation (2) Value Total Value Total
- ---------------- ----------------------------- -------------- ----------- --------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 8,447.5 68.7% $ 8,643.9 69.2%
2 Baa 3,629.9 29.5% 3,562.9 28.5%
3 Ba 166.6 1.3% 224.1 1.8%
4 B 49.7 0.4% 44.9 0.4%
5 Caa and lower 10.9 0.1% 2.8 -
6 In or near default - - 7.0 0.1%
--------- ----- --------- -----
$12,304.6 100.0% $12,485.6 100.0%
========= ===== ========= =====
</TABLE>
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of December 31, 1996 have been assigned to
securities not yet assigned an NAIC Designation in a manner approximating
equivalent public rating categories.
(2) Comparison's between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has assigned
internal ratings corresponding to the public rating.
The Company maintains significant general account investments in mortgage-backed
securities (MBSs). The Company's general account MBS investments include
residential MBSs and commercial MBSs. As of December 31, 1996, MBSs were $3.67
billion (or 29.8%) of the carrying value of the general account fixed maturity
securities, all of which were guaranteed by the U.S. government or an agency of
the U.S. government.
The Company believes that general account MBS investments add diversification,
liquidity, credit quality and additional yield to its general account fixed
maturity securities portfolio. The objective of the Company's general account
MBS investments is to provide reasonable cash flow stability and increased
yield. General account MBS investments include collateralized mortgage
obligations (CMOs) and mortgage-backed pass-through securities. The Company's
general account MBS investments do not include interest-only securities or
principal-only securities or other MBSs which may exhibit extreme market
volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the degree of
prepayment risk is particular to the type of MBS held. The Company limits its
exposure to prepayments by purchasing less volatile types of MBSs. As of
December 31, 1996, $2.97 billion (or 81.0% of the carrying value of the general
account MBS portfolio was invested in planned amortization class CMOs (PACs).
PACs are securities whose cash flows are designed to remain constant over a
variety of mortgage prepayment environments. Other classes in the CMO security
are structured to accept the volatility of mortgage prepayment changes, thereby
insulating the PAC class. Of the remaining general account MBS portfolio, $2.5
million (or 0.1%) was invested in mortgage-backed pass-through or sequential
CMOs. Pass-throughs are securities in which the monthly cash flows of principal
and interest (both scheduled and prepayments) generated by the underlying
mortgages are distributed on a pro rata basis to the holders of the securities.
A sequential MBS is structured to divide the CMO security into sequentially
ordered classes. Receipt of principal payments are made currently on all
classes. While these securities are more sensitive to prepayment risk than PACs,
the Company does not consider them highly volatile securities.
27
<PAGE> 30
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio as of December 31, 1996.
General Account Mortgage-Backed Securities - Investment Type (1)
As of December 31, 1996
-------------------------
Carrying % of
Value Total
--------- ------
(Dollars in millions)
Accrual $ 41.4 1.1%
Planned Amortization Class 2,970.6 81.0%
Sequential 2.5 0.1%
Scheduled 167.2 4.6%
Targeted Amortization Class 87.7 2.4%
Very Accurately Defined Maturity 395.9 10.8%
-------- -----
$3,665.3 100.0%
======== =====
- ----------
(1) All general account mortgage-backed securities are agency-backed.
Pursuant to the Company's investment policies, the Company does not invest in
derivative securities other than MBSs.
(iii) Mortgage Loans
As of December 31, 1996, general account mortgage loans were $5.27 billion (or
28.8%) of the carrying value of consolidated general account invested assets. As
of such date, commercial mortgage loans constituted substantially all (99.9%) of
total general account mortgage loans with the remainder being 76 residual
residential loans originated prior to 1981 with a principal balance of $2.7
million. These mortgages, substantially all of which are made on a non-recourse
basis, consist primarily of fixed rate mortgages on existing income-producing
properties. As of December 31, 1996, there were two second mortgages totaling
$2.6 million and no construction loans, participating or convertible mortgages
or land development loans. Commitments to fund mortgage loans of $327.5 million
extending into 1997 were outstanding as of December 31, 1996.
See notes 5 and 9 to the consolidated financial statements for an analysis of
activity in the valuation allowance account for mortgage loans and a summary of
mortgage loans by region and property type.
The Company aggressively seeks to manage and resolve its troubled commercial
mortgage loans. Commercial mortgage loans are placed into default immediately
following the Company failing to receive payment when due. With respect to a
delinquent mortgage loan, the Company seeks to enforce the assignment of rents
clause in order to gain control of the rental income from the property shortly
following the default in payment. The foreclosure process with respect to a
delinquent mortgage loan is generally initiated by the Company prior to the
second mortgage payment becoming delinquent. Over the last five years, the
Company has recovered approximately 74% of the unpaid principal of all of its
mortgage loans in default.
28
<PAGE> 31
The following table sets forth the delinquency, foreclosure and restructured
commercial mortgage loan experience for the Company and for the life insurers
reporting to the ACLI for the periods indicated.
The Company and Life Insurance Industry
Problem Loan Comparison
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
-------------------- ------------------- -------------------
Company ACLI (1) Company ACLI (1) Company ACLI (1)
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Delinquent (2) 0.79% 1.79% 0.63% 2.35% 0.48% 3.38%
In foreclosure (3) 0.79 1.10 0.63 1.45 0.48 1.80
Restructured (4) 1.11 6.81 1.48 8.27 1.95 9.58
---- ---- ---- ----- ---- -----
Subtotal 1.90 8.60 2.11 10.62 2.43 12.96
Foreclosed - year to date 0.35 1.01 0.74 1.75 1.18 2.52
---- ---- ---- ----- ---- -----
Total 2.25% 9.61% 2.85% 12.37% 3.61% 15.48%
==== ==== ==== ===== ==== =====
</TABLE>
- ----------
(1) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," numbers 1367, 1326 and 1289, dated March
6, 1997, February 28, 1996 and March 9, 1995, respectively.
(2) Commercial mortgage loans are classified by the Company and the ACLI as
delinquent when they are 60 days or more past due.
(3) Delinquent includes loans in foreclosure; therefore, subtotal and total
lines exclude "In foreclosure" amounts.
(4) Commercial mortgage loans are classified by the Company and the ACLI as
restructured when they are in good standing, but the basic terms have been
modified as a result of an actual or anticipated delinquency.
H. Inflation
Many of the Company's assets and liabilities are monetary in nature and
sensitive to the interest rate environment which can be affected by inflation.
The Company is exposed to the risk of a reduction in interest spread or profit
margins when interest rates fluctuate. Bond calls, mortgage prepayments,
contract surrenders and withdrawals of annuities and life insurance policies are
influenced by the interest rate environment. In general, the fair value of the
Company's fixed maturities portfolio increases or decreases inversely with
fluctuations in interest rates. For example, if interest rates rise, the
Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by the
interest rate changes. If interest rates decline, net investment income will
decrease if high-yielding fixed maturity investments mature or are sold and the
proceeds therefrom are reinvested in securities yielding a lower rate.
Management attempts to mitigate the negative impact if interest rate changes
through asset/liability management, product design, management of crediting
rates, relatively high surrender charges and management of mortality charges and
dividend scales with respect to its in-force life insurance policies, but there
can be no assurance that such attempts will be completely successful. Extreme
changes in the interest rate environment could cause net interest margins to
fluctuate from historical levels.
29
<PAGE> 32
9. Directors and Executive Officers
The following table provides information regarding the executive officers and
directors of the Company. Executive officers perform duties for the Company and
other members of the Enterprise.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---------------------------- ------ -------------------------------------------------------------------
<S> <C> <C>
Dimon Richard McFerson (1) 59 Chairman and Chief Executive Officer - Nationwide
Insurance Enterprise and Director
Joseph J. Gasper 53 President and Chief Operating Officer and Director
Gordon E. McCutchan 61 Executive Vice President - Law and Corporate Services and
Secretary
Robert A. Oakley 50 Executive Vice President - Chief Financial Officer
Robert J. Woodward, Jr. 55 Executive Vice President - Chief Investment Officer
James E. Brock 49 Senior Vice President - Life Company Operations
Thomas L. Crumrine 54 Senior Vice President - Property and Casualty Insurance
W. Sidney Druen 54 Senior Vice President and General Counsel and Assistant Secretary
Mark E. Fiebrink 45 Senior Vice President - Chief Actuary - Property and Casualty
Danny M. Fullerton 48 Senior Vice President - Property and Casualty Marketing
Harvey S. Galloway, Jr. 62 Senior Vice President - Chief Actuary - Life, Health and Annuities
Richard A. Karas 54 Senior Vice President - Sales-Financial Services
James A. Taylor 52 Senior Vice President - Property and Casualty Insurance
Susan A. Wolken 46 Senior Vice President - Enterprise Administration
Duane M. Campbell 61 Vice President and Treasurer
Lewis J. Alphin (3) 48 Director
Keith W. Eckel (3) 50 Director
Willard J. Engel (2)(3) 57 Director
Fred C. Finney (2) 50 Director
Charles L. Fuellgraf, Jr. 65 Director
(1)(2)
Henry S. Holloway (1)(2) 64 Director
David O. Miller (1)(2) 58 Director
C. Ray Noecker (3) 50 Director
James F. Patterson (3) 54 Director
Arden L. Shisler (1) 55 Director
Robert L. Stewart (3) 60 Director
Nancy C. Thomas (1)(2) 62 Director
Harold W. Weihl 64 Director
</TABLE>
- ----------
(1) Member of the Executive Committee.
(2) Member of the Salary and Compensation Committee.
(3) Member of the Audit Committee.
Biographical information for each of the individuals listed in the above table
is set forth below.
Dimon Richard McFerson has been Chief Executive Officer of the Enterprise since
December 1992. He has been Chairman and Chief Executive Officer-Enterprise of
the Company since April 1996 and a director of the Company since April 1988.
Previously, he was elected President and Chief Executive Officer-Enterprise of
NLIC and NLAIC in December 1993. He was President and General Manager from April
1988 to April 1991; President and Chief Operating Officer from April 1991 to
December 1992; and President and Chief Executive Officer from December 1992 to
April 1996 of NMIC, Nationwide Mutual Fire Insurance Company and Nationwide
Property and Casualty Insurance Company. Mr. McFerson has been with the
Enterprise for 17 years.
30
<PAGE> 33
Joseph J. Gasper has been President and Chief Operating Officer and a director
of the Company since April 1996. Previously, he was Executive Vice
President-Property/Casualty Operations of the Enterprise from April 1995 to
April 1996 and Senior Vice President Property/Casualty Operations of the
Enterprise from September 1993 to April 1995. Prior to that time, Mr. Gasper
held numerous positions within the Enterprise. Mr. Gasper has been with the
Enterprise for 30 years.
Gordon E. McCutchan has been Executive Vice President-Law and Corporate Services
and Secretary of the Company since September 1994. Previously, he was Executive
Vice President, General Counsel and Secretary of the Enterprise from November
1989 to September 1994. Prior to that time, Mr. McCutchan held several positions
within the Enterprise. Mr. McCutchan has been with the Enterprise for 33 years.
Robert A. Oakley has been Executive Vice President-Chief Financial Officer of
the Company since April 1995. Previously, he was Senior Vice President-Chief
Financial Officer of the Enterprise from October 1993 to April 1995. Prior to
that time, Mr. Oakley held several positions within the Enterprise. Mr. Oakley
has been with the Enterprise for 21 years.
Robert J. Woodward, Jr. has been Executive Vice President-Chief Investment
Officer of the Company since August 1995. Previously, he was Senior Vice
President-Fixed Income Investments of the Enterprise from March 1991 to August
1995. Prior to that time, Mr. Woodward held several positions within the
Enterprise. Mr. Woodward has been with the Enterprise for 32 years.
James E. Brock has been Senior Vice President-Life Company Operations of the
Company since April 1996. Previously, he was Senior Vice President-Investment
Product Operations of the Enterprise from November 1990 to April 1996. Prior to
that time, Mr. Brock held several positions within the Enterprise. Mr. Brock has
been with the Enterprise for 27 years.
Thomas L. Crumrine has been Senior Vice President-Property and Casualty
Insurance of the Company since March 1996. Previously, he was Senior Vice
President-Claims of the Enterprise from April 1995 to March 1996. Prior to that
time, Mr. Crumrine held several positions within the Enterprise. Mr. Crumrine
has been with the Enterprise for 30 years.
W. Sidney Druen has been Senior Vice President and General Counsel and Assistant
Secretary of the Company since September 1994. Previously, he was Vice
President, Deputy General Counsel and Assistant Secretary of the Enterprise from
October 1989 to September 1994. Prior to that time, Mr. Druen held several
positions within the Enterprise. Mr. Druen has been with the Enterprise for 27
years.
Mark E. Fiebrink has been Senior Vice President-Chief Actuary-Property and
Casualty of the Company since May 1993. Previously, he was Senior Vice
President-Finance of Employers Insurance of Wausau A Mutual Company and Wausau
Service Corporation from May 1992 to May 1993. Prior to that time, Mr. Fiebrink
held several positions with the Wausau Insurance Companies. Mr. Fiebrink has
been with the Enterprise for 11 years.
Danny M. Fullerton has been Senior Vice President-Property and Casualty
Marketing of the Company since November 1996. Previously, he was Vice
President-Agency Operations of the Enterprise from July 1994 to November 1996.
Prior to that time, Mr. Fullerton held several positions within the Enterprise.
Mr. Fullerton has been with the Enterprise for 12 years.
Harvey S. Galloway, Jr. has been Senior Vice President-Chief Actuary-Life,
Health and Annuities of the Company since April 1993. Previously, he was Senior
Vice President and Chief Actuary of the Enterprise from January 1983 to April
1993. Prior to that time, Mr. Galloway held several positions within the
Enterprise. Mr. Galloway has been with the Enterprise for 27 years.
Richard A. Karas has been Senior Vice President-Sales-Financial Services of the
Company since March 1993. Previously, he was Vice President-Sales-Financial
Services of the Enterprise from February 1989 to March 1993. Prior to that time,
Mr. Karas held several positions within the Enterprise. Mr. Karas has been with
the Enterprise for 32 years.
31
<PAGE> 34
James A. Taylor has been Senior Vice President-Property and Casualty Insurance
of the Company since March 1996. Previously, he was Vice President-North
Carolina/Alabama/Georgia of the Enterprise from January 1996 to March 1996.
Prior to that time, Mr. Taylor held several positions within the Enterprise. Mr.
Taylor has been with the Enterprise for 30 years.
Susan A. Wolken has been Senior Vice President-Enterprise Administration of the
Company since July 1996. Previously, she was Senior Vice President-Human
Resources of the Enterprise from April 1995 to July 1996. Prior to that time,
she held several positions within the Enterprise. Ms. Wolken has been with the
Enterprise for 22 years.
Duane M. Campbell has been Vice President and Treasurer of the Company since
August 1996. Previously, he was Assistant Treasurer of the Enterprise from
January 1987 to August 1996. Prior to that time, Mr. Campbell held several
positions within the Enterprise. Mr. Campbell has been with the Enterprise for
33 years.
Lewis J. Alphin has been a director of the Company since April 1993. Mr. Alphin
has been a farm owner and operator in Mt. Olive, North Carolina, since 1971. Mr.
Alphin serves on the board of directors of several members of the Enterprise.
Keith W. Eckel has been a director of the Company since April 1996. Mr. Eckel
has been Partner of Fred W. Eckel Sons and President of Eckel Farms, Inc. since
May 1968. Mr. Eckel serves on the board of directors of several members of the
Enterprise. He is also an advisory board member of Penn Security Bank and Trust
Company.
Willard J. Engel has been a director of the Company since April 1994. Mr. Engel
has been General Manager of Lyon County Co-operative Oil Co. since March 1975.
Mr. Engel serves on the board of directors of several members of the Enterprise.
Fred C. Finney has been a director of the Company since April 1992. Mr. Finney
has been owner and operator of Moreland Fruit Farm and operator of Melrose
Orchard since January 1985. Mr. Finney serves on the board of directors of
several members of the Enterprise.
Charles L. Fuellgraf, Jr. has been a director of the Company since April 1969.
Mr. Fuellgraf has been Chief Executive Officer of Fuellgraf Electric Company, an
electrical contractor, of Butler, Pennsylvania, and Nashville, Tennessee, since
1986. He is Chairman of the Board of Nationwide Communications Inc. and serves
on the board of directors of several members of the Enterprise.
Henry S. Holloway has been a director of the Company since April 1986. Mr.
Holloway has been a farm owner and operator in Darlington, Maryland, since 1959.
He is Chairman of the Board of the Nationwide Life Insurance Company, Nationwide
Life and Annuity Insurance Company and Nationwide Corp. and serves on the board
of directors of several members of the Enterprise. He is also a director of the
National Cooperative Business Association and the Forest Hill State Bank.
David O. Miller has been a director of the Company since April 1985. Mr. Miller
has been a farm owner and land developer since 1962. He is the President of the
Owen Potato Farm Inc., the owner of The Berry Barn and is a partner of M&M
Enterprises in Licking County, Ohio. He is Chairman of the Board of the Wausau
Insurance Companies and serves on the board of directors of several members of
the Enterprise. He is also a director of the National Cooperative Business
Association.
C. Ray Noecker has been a director of the Company since April 1994. Mr. Noecker
has been owner and manager of Noecker Farms since March 1969. Mr. Noecker serves
on the board of directors of several members of the Enterprise.
32
<PAGE> 35
James F. Patterson has been a director of the Company since April 1989. Mr.
Patterson has operated the Patterson Fruit Farm in Chesterland, Ohio, since 1964
and has been the President of Patterson Farms, Inc. since December 1991. He is
Chairman of the Board of Nationwide Mutual Fire Insurance Company and serves on
the board of directors of several members of the Enterprise. He is also a
trustee of The Ohio State University and serves on the board of directors of the
University Hospitals Health System in Cleveland, Ohio, and Geauga Hospital, Inc.
in Chardon, Ohio.
Arden L. Shisler has been a director of the Company since April 1984. Mr.
Shisler has been President and Chief Executive Officer of K & B Transport, Inc.,
a trucking firm in Dalton, Ohio, since January 1992. Previously, he was Chief
Operating Officer of K & B Transport, Inc. from April 1986 to January 1992.
Prior to that time, Mr. Shisler held several positions with K & B Transport,
Inc. He is Chairman of the Board of Nationwide Mutual Insurance Company and
serves on the board of directors of several members of the Enterprise. He is
also a director of the National Cooperative Business Association.
Robert L. Stewart has been a director of the Company since April 1989. Mr.
Stewart has been owner/operator of Sunnydale Farms since 1960 and owner/operator
of Sunnydale Mining since 1989. He is Chairman of the Board of Farmland
Insurance Companies and serves on the board of directors of several members of
the Enterprise.
Nancy C. Thomas has been a director of the Company since April 1986. Mrs. Thomas
has been a farm owner/operator of Da-Ma-Lor Farms since November 1958. She is
Chairman of the Board of Nationwide Property and Casualty Insurance Company and
serves on the board of directors of several members of the Enterprise. She is
also a director of Farm Credit Services (4th District).
Harold W. Weihl has been a director of the Company since April 1990 Mr. Weihl
has been owner and operator of Weihl Farms since April 1950. He is Chairman of
the Board of Nationwide General Insurance Company and serves on the board of
directors of several members of the Enterprise.
The Company's Board of Directors currently consists of fifteen directors,
divided into three classes. The term of the first class will expire at the
annual meeting of the sole shareholder to be held in 1997, the term of the
second class will expire at the annual meeting of the sole shareholder in 1998
and the term of the third class will expire at the annual meeting of the sole
shareholder in 1999. Messrs. Alphin, Engel, Gasper, Miller and Noecker are
members of the first class; Messrs. Finney, Holloway, Patterson and Stewart and
Mrs. Thomas are members of the second class; and Messrs. Eckel, Fuellgraf,
McFerson, Shisler and Weihl are members of the third class. At each annual
meeting of the sole shareholder, directors will be elected for a three-year term
to succeed the directors whose terms are then to expire. Officers of the Company
are elected annually and serve until their retirement, resignation or removal.
The Board of Directors has an Audit Committee currently consisting of six
directors, none of whom is an officer or employee of the Company. Messrs.
Alphin, Eckel, Engel, Noecker, Patterson and Stewart are the members of such
committee. The Audit Committee recommends to the Board of Directors the
selection of independent certified public accountants to audit annually the
books and records of the Company, reviews the activities and the reports of the
independent certified public accountants and reports the results of such review
to the Board of Directors. The Audit Committee also considers the adequacy of
the Company's internal controls and internal auditing methods and procedures.
The Board of Directors has a Salary and Compensation Committee currently
consisting of six directors, none of whom is an officer or employee of the
Company, which, as authorized by the Board of Directors, makes determinations
with respect to non-cash compensation to officers, directors and employees of
the Company. Messrs. Engel, Finney, Fuellgraf, Holloway and Miller and Mrs.
Thomas are the members of such committee.
The Board of Directors has an Executive Committee currently consisting of six
directors, which, to the extent authorized by the Board of Directors, exercises
all the powers and authority of the Board of Directors in the management of the
business and affairs of the Company. Messrs. Fuellgraf, Holloway, McFerson,
Miller and Shisler and Mrs. Thomas are the members of such committee.
33
<PAGE> 36
10. Executive Compensation
A. Compensation
The following summary compensation table sets forth information regarding the
compensation of the Chief Executive Officer and each of the four most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ended December 31, 1996 solely for
services rendered to NLIC and its subsidiaries. Pursuant to a cost sharing
agreement, the salaries and benefits of certain of the officers and employees of
the Company, including the Named Executive Officers, will be paid by NMIC and
reimbursed in accordance with the terms of such agreement. See Item 12 - Certain
Relationships and Related Transactions for a complete description of the cost
sharing agreement.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-term
Annual Compensation Compensation
--------------------------------------- -------------
Other Annual LTIP All Other
Name and Bonus Compensation Payouts Compensation
principal position Year Salary (1) (2) (3) (4)
- ---------------------------- ------ --------- ------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dimon Richard McFerson 1996 $324,790 80,058 - 149,803 13,363
Chairman and Chief 1995 122,072 34,208 - 133,272 7,360
Executive Officer - 1994 127,568 41,244 - 70,427 6,891
Nationwide Insurance
Enterprise
Harvey S. Galloway, Jr. (5) 1996 239,531 67,645 - 71,708 11,587
Senior Vice President and 1995 - - - - -
Chief Actuary - Life, 1994 - - - - -
Health and Annuities
Robert J. Woodward, Jr. 1996 222,784 59,399 - 64,698 10,610
Executive Vice President - 1995 174,717 48,059 - 99,319 9,873
Chief Investment Officer 1994 172,172 57,559 - 43,981 8,486
Joseph J. Gasper (6) 1996 232,959 - - - 10,650
President and Chief 1995 - - - - -
Operating Officer 1994 - - - - -
James E. Brock 1996 158,420 43,421 - 47,412 7,641
Senior Vice President - 1995 150,982 40,819 - 44,790 7,303
Life Company Operations 1994 140,478 40,060 - 41,513 6,868
</TABLE>
(1) Represents the amount received by the Named Executive Officer under the
Management Incentive Plan. See description of the plan following this table.
(2) Aggregate perquisites and other personal benefits are less than the lower of
$50,000 or 10% of combined salary and bonus.
(3) Represents the amount received by the Named Executive Officer under the
Executive Incentive Plan and under the Sustained Performance Incentive Plan in
1995. No payouts were made in 1996 or 1994 under the Sustained Performance
Incentive Plan. See description of each plan following this table.
(4) Represents contributions made or credited to the Named Executive Officer by
the Company under the Nationwide Insurance Enterprise Savings Plan and the
Nationwide Insurance Enterprise Supplemental Defined Contribution Plan. See
description of each plan following this table.
(5) Represents compensation received by Mr. Galloway solely for his services
rendered to the Company in 1996 as allocated pursuant to a cost sharing
agreement. During 1995 and 1994, compensation received by Mr.
34
<PAGE> 37
Galloway was allocated to Nationwide Corp. pursuant to the cost sharing
agreement. Such compensation is not reflected in the table.
(6) Represents compensation received by Mr. Gasper solely for his services
rendered to the Company in 1996 as allocated pursuant to a cost sharing
agreement. Prior to April 1996, Mr. Gasper was Executive Vice President
- -Property/Casualty Operations of NMIC and received compensation from NMIC and
its property/casualty insurance subsidiaries for services rendered to such
companies. Such compensation is not reflected in the table.
B. Incentive Plans
(i) Sustained Performance Incentive Plan
Prior to 1997, NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintained the Sustained Performance Incentive Plan (SPIP). Under the
SPIP, payments were made to the Named Executive Officers and other senior
officers of the participating companies in each odd numbered calendar year based
on the achievement of measures tied to the performance of the Enterprise over
the preceding four years. Performance measures were based on profitability,
growth and strategic objectives for the Enterprise which were established in
advance by the Boards of Directors of the participating companies. Under the
SPIP, participants were granted target incentive amounts that represented a
percentage (10% to 20% depending on the participant's position within the
participating company) of the sum of the participant's base salary for the last
two years of the performance cycle. 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.
NMIC and the participating subsidiaries and affiliates terminated the SPIP at
the close of calendar year 1996. If a payment under the SPIP is made in 1997,
covering performance measured for the period from 1993 to 1996, such payment
will be made in cash as provided in the SPIP. To facilitate the termination of
the SPIP, the performance measurement period for 1995 to 1998 was closed at the
end of calendar 1996. Payments made in 1997 for such performance measurement
period will be made in shares of restricted stock of NFS.
(ii) Executive Incentive Plan
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain
the Executive Incentive Plan (EIP). Under the EIP, annual payments are 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
Enterprise and the relevant operating company over the preceding three years.
Performance measures are based on profitability and growth objectives which are
established in advance by the Board of Directors of the participating company.
Under the EIP, the participant will be granted a target incentive amount that
represents a percentage (from 5% to 25% depending on the participant's position
within the participating company) of the participant's base salary. The actual
amount received by the participant will range from zero to twice the target
incentive amount, depending solely on the achievement of the performance
measures.
(iii) Management Incentive Plan
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain
the Management Incentive Plan (MIP). Under the MIP, annual payments are made to
the Named Executive Officers and certain other management employees of the
participating companies based on the achievement of measures tied to the
performance of the Enterprise, the relevant operating company, the relevant
business unit and the individual participant over the preceding year.
Performance measures are based on profitability, growth, expense management and
key strategic objectives which are established in advance. Under the MIP, the
participant will be granted a target incentive amount that represents 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 will range from zero to twice the
target incentive amount, depending solely on the achievement of the performance
measures.
35
<PAGE> 38
C. Pension Plans
(i) Nationwide Insurance Enterprise Retirement Plan
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain a
qualified defined benefit plan, the Nationwide Insurance Enterprise Retirement
Plan (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 3 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 of the Enterprise. Covered
compensation for all of the Named Executive Officers includes the amounts set
forth under the headings Salary, Bonus and LTIP Payouts and a portion of the
compensation that is included under the heading Other Annual Compensation in the
Summary Compensation Table and additional compensation amounts received for
services rendered to other members of the Enterprise. 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 (IRC).
(ii) Nationwide Insurance Enterprise Excess Benefit and Supplemental Retirement
Plans
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain an
unfunded, nonqualified defined benefit excess benefit plan, the Nationwide
Insurance Enterprise Excess Benefit Plan (Excess Plan) and an unfunded,
nonqualified defined benefit supplemental benefit plan pursuant to which certain
participants may receive a supplemental retirement benefit, the Nationwide
Insurance Enterprise Supplemental Retirement Plan (Supplemental Plan). Any
participant whose benefits are limited under the Retirement Plan by reason of
limitations under Section 415 of the IRC 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 $160,000 annually, have at least 5 years of vesting service and whose
benefits under the Retirement Plan are limited by reason of other certain
limitations under the IRC, 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 Excess and Supplemental Plans vest at
the same time as benefits vest under the Retirement 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 IRC) 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
36
<PAGE> 39
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.
Pension Plan Table
Years of Service
Final Average ----------------------------------------------------------------
Compensation 15 20 25 30 35
- --------------------------------------------------------------------------------
$125,000 30,744 40,992 51,241 61,489 71,737
150,000 41,898 55,864 69,830 83,795 97,761
175,000 49,398 65,864 82,330 98,795 115,261
200,000 56,898 75,864 94,830 113,795 132,761
225,000 64,398 85,864 107,330 128,795 150,261
250,000 71,898 95,864 119,830 143,795 167,761
300,000 86,898 115,864 144,830 173,795 202,761
400,000 116,898 155,864 194,830 233,795 272,761
450,000 131,898 175,864 219,830 263,795 307,761
500,000 146,898 195,864 244,830 293,795 342,761
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, Galloway, Woodward, Gasper and Brock was 23 years, 26.5 years, 32.7
years, 29.5 years and 26.5 years, respectively. Mr. McFerson's credited years of
service include, pursuant to an agreement with NMIC, 8.17 years in excess of
those actually earned through employment by the Enterprise. The benefit
attributable to those additional years will be paid by NMIC (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 an additional year of service in
1996 and their benefit for such year and all future years will be calculated
under the new definition of Final Average Compensation. Covered compensation
paid by the Company for the fiscal year ended December 31, 1996 for Messrs.
McFerson, Galloway, Woodward, Gasper and Brock was $444,217, $392,313, $348,003,
$349,412 and $343,167, respectively.
D. Savings Plans
(i) Nationwide Insurance Enterprise Savings Plan
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain
the Nationwide Insurance Enterprise Savings Plan (Savings Plan), a qualified
profit sharing plan including a qualified cash or deferred arrangement covering
eligible employees of participating companies within the Enterprise. Under the
Savings Plan, participants who are not residents of Puerto Rico may elect to
contribute between 1% and 16% of their compensation to accounts established on
their behalf under the Savings Plan in the form of voluntary salary reductions
on a pre-tax 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 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.
37
<PAGE> 40
(ii) Nationwide Insurance Enterprise Supplemental Defined Contribution Plan
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain an
unfunded, nonqualified defined contribution supplemental benefit plan, the
Nationwide Insurance Enterprise Supplemental Defined Contribution Plan (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 limitations on compensation that can be
considered and amounts that can be deferred under the Savings Plan less actual
matching contributions to the Savings Plan in the absence of the limitations
under IRC Sections 401(a)(17) and 402(g), reduced by actual employer
contributions made to the Savings Plan. Participants are limited to those
officers earning in excess of $160,000 annually. Benefits under the DC
Supplemental Plan vest at the same time as employer matching contributions vest
under the Savings Plan.
E. Deferred Compensation Program
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain a
deferred compensation program (Officers' Deferred Compensation Program) pursuant
to which officers of participating companies may elect to defer payment of
amounts otherwise payable to them. In addition, participants receive credit for
employer matching contributions which were not made under the Savings Plan or DC
Supplemental Plan and any reduction in benefits under the Retirement Plan,
Supplemental Plan or Excess Plan as a result of salary or other deferrals under
the Deferred Compensation Program. 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 his or her incentive compensation earned
under the Management Incentive Plan or Executive Incentive Plan during the
following year. Any such election is effective prospectively. Amounts deferred
under the Officers' 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. Amounts deferred under
the Officers' Deferred Compensation Program are credited with interest. The
interest rate is based on the fixed rate option in the Savings Plan.
F. Nationwide Salaried Employees Severance Pay Plan
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain
the Nationwide Salaried Employees Severance Pay Plan (Severance Plan), an
unfunded plan which provides severance benefits to employees whose employment is
involuntarily terminated due to unsatisfactory job performance or job
elimination without an offer of replacement employment within the Enterprise or
with a successor employer. Employees will not be entitled to benefits if their
employment is terminated as a result of theft, absenteeism, insubordination and
other similar problems. The benefit provided is a lump sum payment determined on
the basis of years of service completed (a minimum of 6 months of service is
required) and salary, with a maximum benefit of 8 weeks of salary plus an
additional week of salary for each full or partial year of service in excess of
11 years.
G. Director Compensation
(ii) Total Compensation
Directors of the Company also serve as a director on the boards of various other
Enterprise companies. Compensation for services as a director consists of a base
annual rate for each director plus varying amounts for fringe benefits and
reimbursement of out-of-pocket expenses. Directors who are also officers are
excluded from this arrangement. The following table represents total
compensation payments made to the directors, who are not also officers, from the
Company for the fiscal year ended December 31, 1996.
Director Compensation
------------------------- ------------
Lewis J. Alphin $10,344
Keith W. Eckel 7,222
Willard J. Engel 10,188
Fred C. Finney 11,648
Charles L. Fuellgraf, Jr. 8,820
Henry S. Holloway 14,059
David O. Miller 13,783
C. Ray Noecker 10,847
38
<PAGE> 41
James F. Patterson 10,949
Arden L. Shisler 13,621
Robert L. Stewart 12,039
Nancy C. Thomas 10,072
Harold W. Weihl 9,856
(ii) Directors' Deferred Compensation Program
NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain a
deferred compensation program applicable to nonemployee members of their Board
of Directors (Directors' Deferred Compensation Program). Each director who has
been elected to the board of directors at least twice and has served for at
least 3 years on the Board of Directors of a participating company is entitled
to monthly payments, following termination of his or her service on the board of
directors, of a monthly amount equal to the monthly director's fee being
received by that director at the time of his or her retirement from the Board of
Directors. The number of monthly payments will equal the number of months the
individual served on the Board of Directors (other than months in which he or
she was also a salaried officer of the participating company).
11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners as of February 28, 1997.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Title of Class Name and Address of Beneficial Owner Beneficial Ownership of Class
- -------------- ------------------------------------ -------------------- --------
<S> <C> <C> <C>
Common Stock Nationwide Financial Services, Inc. 3,814,779 Shares of 100%
One Nationwide Plaza record and
Columbus, Ohio 43215 beneficially
(1)
</TABLE>
- ----------
(1) Sole voting and investment power
12. Certain Relationships and Related Transactions
A. Existing Arrangements with the Enterprise
(i) Organization of the Company
The Company is member of the Enterprise and offers and distributes long-term
savings and retirement products. On September 24, 1996, NLIC's Board of
Director's declared a dividend payable January 1, 1997 to Nationwide Corp.
consisting of the outstanding common stock of those subsidiaries of NLIC that do
not operate in the long-term savings and retirement market. On January 27, 1997,
Nationwide Corp. contributed to NFS all of the outstanding common stock of NLIC
and the other companies within the Enterprise that offer or distribute long-term
savings and retirement products.
On December 31, 1996, NLIC paid a $50,000 cash dividend to Nationwide Corp. In
addition, on February 24, 1997, NLIC made a dividend to NFS consisting of
securities having an aggregate market value of $850,000.
On March 10, 1997 and March 11, 1997, NFS made cash capital contributions to
NLIC totaling $295,740 and $541,040, respectively.
Effective January 1, 1996, NLIC entered into a 100% modified coinsurance
agreement with ELICW pursuant to which all of NLIC's group accident and health
and group life insurance business was reinsured by ELICW. NLIC also entered into
a 100% modified coinsurance agreement with NMIC effective January 1, 1996,
pursuant to which all of NLIC's individual accident and health insurance
business was reinsured by NMIC. See Modified Coinsurance Agreements.
39
<PAGE> 42
(ii) Federal Income Taxes
NMIC and its U.S. subsidiaries, including the NLIC and its subsidiaries, file a
consolidated federal income tax return. The members of the consolidated group
currently 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. For the year ended December 31, 1996, the Company made
federal income tax payments under the tax sharing arrangement of $115,839.
(iii) Legal Services
The attorneys in the Office of General Counsel of NMIC also operate as the law
firm of Druen, Rath & Dietrich. Pursuant to a partnership agreement, the firm
limits its representation to the members of the Enterprise. The partnership was
formed to assure compliance with Ohio law that prohibits corporations from
practicing law. Through a retainer arrangement, an annual retainer fee is paid
by each member of the Enterprise based upon an estimate of time spent by each
attorney working on legal matters related to the respective member during the
previous year. W. Sidney Druen, Senior Vice President and General Counsel of the
Company, is the senior partner in such firm, and all attorneys and other
employees of the firm are salaried employees of NMIC. The firm applies all of
its retainer fees toward office overhead under a rental and office expense
agreement with NMIC. For the year ended December 31, 1996, the Company paid the
firm $1,580 for legal services rendered to the Company which amounts were
immediately remitted to NMIC.
(iv) Lease
Pursuant to an arrangement between NMIC and certain of its subsidiaries, the
Company leases approximately 465,000 square feet of office space at One
Nationwide Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus,
Ohio, at a current market rate of $19.53 per square foot, with limited
exceptions. Under the arrangement, the Company determines the amount of office
space necessary to conduct its operations and leases such space from NMIC,
subject to availability. For the year ended December 31, 1996, the Company made
payments to NMIC and its subsidiaries totaling $9,065 under such arrangement.
(v) Modified Coinsurance Agreements
Effective January 1, 1996, NLIC entered into a 100% modified coinsurance
agreement with ELICW. Under the agreement, NLIC cedes to ELICW, and ELICW
assumes, NLIC's group accident and health and group life insurance business and
any ceded or assumed reinsurance applicable to such group business. For the year
ended December 31, 1996, NLIC ceded $224,224 of premium to ELICW.
Effective January 1, 1996, NLIC also entered into a 100% modified coinsurance
agreement with NMIC. Under the agreement, NLIC cedes to NMIC, and NMIC assumes,
NLIC's individual accident and health insurance business and any ceded or
assumed reinsurance applicable to such business. For the year ended December 31,
1996, NLIC ceded $97,331 of premium to NMIC.
NLIC entered into these reinsurance agreements because the accident and health
and group life insurance business was unrelated to NLIC's long-term savings and
retirement products. Under the modified coinsurance agreements, invested assets
are retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of such agreements, the investment risk associated
with changes in interest rates is borne by ELICW or NMIC, as the case may be.
Risk of asset default is retained by NLIC, although a fee is paid by ELICW or
NMIC, as the case may be, to NLIC for the NLIC's retention of such risk. The
contracts will remain in force until all policy obligations are settled.
However, with respect to the agreement between NLIC and NMIC, either party may
terminate the contract on January 1 of any year with prior notice. NLIC believes
that the terms of such modified coinsurance contracts are consistent in all
material respects with what NLIC could have obtained with unaffiliated parties.
(vi) Cost Sharing Agreement
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
40
<PAGE> 43
subject to allocation among NMIC and such subsidiaries. Under such agreement,
for the year ended December 31, 1996, the Company made payments to NMIC totaling
$101,584. Under the cost sharing agreement, expenses are allocated in accordance
with National Association of Insurance Commissioner's guidelines and are based
on standard allocation techniques and procedures acceptable under general cost
accounting practices. Measures used to allocate expenses include individual
employee estimates of time spent, special cost studies, salary expense,
commissions expense and other measures that are agreed to by the participating
companies and are within regulatory and industry guidelines and practices.
(vii) Cash Management Agreements
NMIC has entered into separate Investment Agency Agreements with Nationwide Cash
Management Company (NCMC) and California Cash Management Company (CCMC), each an
affiliate of the Company. Pursuant to the terms of such agreements, NCMC and
CCMC make, hold and administer short-term investments (those maturing in one
year or less) for NMIC and certain of its affiliates, including NLIC and it's
subsidiaries. Under each agreement, expenses of NCMC or CCMC, as the case may
be, are allocated pro rata among the participants based upon the participant's
ownership percentage of total assets held by NCMC or CCMC. For the year ended
December 31, 1996, the Company paid NCMC and CCMC fees and expenses totaling $41
under such agreements.
(viii) Benefit Plans
The Company participates in the common employee benefit programs with NMIC and
its subsidiaries. Included in these programs are accident and health benefits,
disability income benefits and life insurance benefits. The Company ultimately
pays for all benefits provided to its employees under the benefit program plus
an administrative processing fee, reduced by employee contributions. The
administrative processing fee paid by the Company was approximately $1,000 for
the year ended December 31, 1996.
The Company also participates, along with NMIC and its subsidiaries and
affiliates, in life insurance and health care benefit plans for qualifying
retirees. Such plans are funded in amounts determined at the discretion of
management of NMIC based on current and anticipated future costs. Contributions
to the plan by the participating companies are primarily invested in group
annuity contracts of NLIC. Contributions by the Company approximated $1,495 for
the year ended December 31, 1996.
(ix) Repurchase Agreement
NLIC and certain of it's subsidiaries are party to a master repurchase agreement
pursuant to which securities or other financial instruments are transferred
between parties against the transfer of funds by the transferee for a period of
time ending on a specific date or upon the demand of the transferor.
B. Future Transactions with the Enterprise
In the future, the Company may enter into agreements with members of the
Enterprise that will not be the result of arm's length negotiations between
independent parties. Conflicts of interests could arise in the future with
respect to transactions involving members of the Enterprise, on the one hand,
and the Company, on the other hand. In addition, under the Ohio insurance laws,
arrangements and agreements between the Company and other members of the
Enterprise must be fair and equitable and may be subject to the approval of the
Superintendent of Insurance of the State of Ohio. The Credit Facility requires
that any transaction between NLIC and any of its affiliates be on an
arm's-length basis on terms at least as favorable to NLIC as could have been
obtained from a third party which is not an affiliate.
Reference is made to note 13 to the consolidated financial statements herein for
additional information regarding transactions with affiliates.
41
<PAGE> 44
13. Exhibits, Financial Statement Schedules and Reports
(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31, 1996
Schedule III Supplementary Insurance Information as of December 31,
1996, 1995 and 1994 and for each of the years then ended
Schedule IV Reinsurance as of December 31, 1996, 1995 and 1994 and
for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994
All other schedules are omitted becuase they are not required or
because the required information has been included in the
consolidated financial statements or notes thereto.
42
<PAGE> 45
<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) as of December 31,
1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
In 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
KPMG Peat Marwick LLP
Columbus, Ohio
January 31, 1997
<PAGE> 2
<TABLE>
<CAPTION>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
($000's omitted)
Assets 1996 1995
------ ----------------- ----------------
<S> <C> <C>
Investments (notes 5, 8 and 9):
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $11,970,878 in 1996; $11,862,556 in 1995) $12,304,639 12,485,564
Equity securities (cost $43,890 in 1996; $23,617 in 1995) 59,131 29,953
Mortgage loans on real estate, net 5,272,119 4,602,764
Real estate, net 265,759 229,442
Policy loans 371,816 336,356
Other long-term investments 28,668 61,989
Short-term investments (note 13) 4,789 32,792
----------------- ----------------
18,306,921 17,778,860
----------------- ----------------
Cash 43,784 9,455
Accrued investment income 210,182 212,963
Deferred policy acquisition costs 1,366,509 1,020,356
Investment in subsidiaries classified as discontinued operations (notes 1 and 2) 485,707 506,677
Other assets (note 6) 426,441 388,214
Assets held in Separate Accounts (note 8) 26,926,702 18,591,108
----------------- ----------------
$47,766,246 38,507,633
================= ================
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims (notes 6 and 8) $17,179,060 16,358,614
Policyholders' dividend accumulations 361,401 348,027
Other policyholder funds 60,073 65,297
Accrued federal income tax (note 7):
Current 30,170 35,301
Deferred 162,212 246,627
----------------- ----------------
192,382 281,928
----------------- ----------------
Dividend payable to shareholder (notes 1 and 2) 485,707 -
Other liabilities 423,047 234,147
Liabilities related to Separate Accounts (note 8) 26,926,702 18,591,108
----------------- ----------------
45,628,372 35,879,121
----------------- ----------------
Commitments and contingencies (notes 6, 9 and 15)
Shareholder's equity (notes 3, 4, 5, 12 and 13):
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 527,874 657,118
Retained earnings 1,432,593 1,583,275
Unrealized gains on securities available-for-sale, net 173,592 384,304
----------------- ----------------
2,137,874 2,628,512
----------------- ----------------
$47,766,246 38,507,633
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
<TABLE>
<CAPTION>
1996 1995 1994
--------------- -------------- -------------
<S> <C> <C> <C>
Revenues (note 16):
Investment product and universal life insurance product policy charges $ 400,902 286,534 217,245
Traditional life insurance premiums 198,642 199,106 176,658
Net investment income (note 5) 1,357,759 1,294,033 1,210,811
Realized losses on investments (note 5) (326) (1,724) (16,527)
Other income 35,861 20,702 11,312
--------------- -------------- -------------
1,992,838 1,798,651 1,599,499
--------------- -------------- -------------
Benefits and expenses:
Benefits and claims 1,160,580 1,115,493 992,667
Provision for policyholders' dividends on participating policies (note 12) 40,973 39,937 38,754
Amortization of deferred policy acquisition costs 133,394 82,695 85,568
Other operating expenses (note 13) 342,394 272,954 240,652
--------------- -------------- -------------
1,677,341 1,511,079 1,357,641
--------------- -------------- -------------
Income from continuing operations before federal income tax expense 315,497 287,572 241,858
--------------- -------------- -------------
Federal income tax expense (benefit) (note 7):
Current 116,512 88,700 73,559
Deferred (5,623) 11,108 5,030
--------------- -------------- -------------
110,889 99,808 78,589
--------------- -------------- -------------
Income from continuing operations 204,608 187,764 163,269
Income from discontinued operations (less federal income tax expense of
$4,453, $7,446 and $10,915 in 1996, 1995 and 1994, respectively) (note 2) 11,324 24,714 20,459
--------------- -------------- -------------
Net income $ 215,932 212,478 183,728
=============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
<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>
1994:
Balance, beginning of year $3,815 406,089 1,194,519 6,745 1,611,168
Capital contribution - 200,000 - - 200,000
Net income - - 183,728 - 183,728
Adjustment for change in accounting for
certain investments in debt and equity
securities, net (note 4) - - - 212,553 212,553
Unrealized losses on securities available-
for-sale, net - - - (338,971) (338,971)
----------- ------------- --------------- ----------------- ---------------
Balance, end of year $3,815 606,089 1,378,247 (119,673) 1,868,478
=========== ============= =============== ================= ===============
1995:
Balance, beginning of year 3,815 606,089 1,378,247 (119,673) 1,868,478
Capital contribution (note 13) - 51,029 - (4,111) 46,918
Dividends to shareholder - - (7,450) - (7,450)
Net income - - 212,478 - 212,478
Unrealized gains on securities available-
for-sale, net - - - 508,088 508,088
----------- ------------- --------------- ----------------- ---------------
Balance, end of year $3,815 657,118 1,583,275 384,304 2,628,512
=========== ============= =============== ================= ===============
1996:
Balance, beginning of year 3,815 657,118 1,583,275 384,304 2,628,512
Capital contribution (note 13) - 25 5 - 30
Dividends to shareholder - (129,269) (366,619) (39,819) (535,707)
Net income - - 215,932 - 215,932
Unrealized losses on securities available-
for-sale, net - - - (170,893) (170,893)
----------- ------------- --------------- ----------------- ---------------
Balance, end of year $3,815 527,874 1,432,593 173,592 2,137,874
=========== ============= =============== ================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
<TABLE>
<CAPTION>
1996 1995 1994
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 215,932 212,478 183,728
Adjustments to reconcile net income to net cash provided by operating
activities:
Capitalization of deferred policy acquisition costs (422,572) (321,327) (242,431)
Amortization of deferred policy acquisition costs 133,394 82,695 85,568
Amortization and depreciation 6,962 10,234 3,603
Realized (gains) losses on invested assets, net (284) 3,250 16,094
Deferred federal income tax expense (benefit) 7,603 (30,673) 9,946
Decrease (increase) in accrued investment income 2,781 (16,999) (12,808)
(Increase) decrease in other assets (38,876) 39,880 (102,676)
Increase in policy liabilities 305,755 135,937 118,361
Increase in policyholders' dividend accumulations 13,374 12,639 15,298
(Decrease) increase in accrued federal income tax payable (5,131) 30,836 (5,714)
Increase in other liabilities 188,900 26,851 506
Other, net (61,679) 1,832 (29,595)
--------------- --------------- ---------------
Net cash provided by operating activities 346,159 187,633 39,880
---------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 1,162,766 634,553 544,843
Proceeds from sale of securities available-for-sale 299,558 107,345 228,308
Proceeds from maturity of fixed maturity securities held-to-maturity - 564,450 491,862
Proceeds from repayments of mortgage loans on real estate 309,050 207,832 190,574
Proceeds from sale of real estate 18,519 48,331 46,713
Proceeds from repayments of policy loans and sale of other invested assets 22,795 53,587 120,506
Cost of securities available-for-sale acquired (1,573,640) (1,942,413) (1,816,370)
Cost of fixed maturity securities held-to-maturity acquired - (593,636) (410,379)
Cost of mortgage loans on real estate acquired (972,776) (796,026) (471,570)
Cost of real estate acquired (7,862) (10,928) (6,385)
Policy loans issued and other invested assets acquired (57,740) (75,910) (65,302)
Short-term investments, net 28,003 77,837 (89,376)
Purchase of affiliate (note 13) - - (155,000)
---------------- --------------- ---------------
Net cash used in investing activities (771,327) (1,724,978) (1,391,576)
---------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from capital contributions 30 - 200,000
Dividends paid to shareholder (50,000) (7,450) -
Increase in investment product and universal life insurance
product account balances 2,293,933 2,809,385 3,547,976
Decrease in investment product and universal life insurance
product account balances (1,784,466) (1,258,758) (2,412,595)
---------------- --------------- --------------
Net cash provided by financing activities 459,497 1,543,177 1,335,381
---------------- --------------- --------------
Net increase (decrease) in cash 34,329 5,832 (16,315)
---------------- --------------- ---------------
Cash, beginning of year 9,455 3,623 19,938
---------------- --------------- ---------------
Cash, end of year $ 43,784 9,455 3,623
================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
($000's omitted)
(1) Organization and Description of Business
----------------------------------------
Nationwide Life Insurance Company (NLIC) is a wholly owned subsidiary
of Nationwide Corporation (Nationwide Corp.). Wholly owned subsidiaries
of NLIC include Nationwide Life and Annuity Insurance Company (NLAIC),
Employers Life Insurance Company of Wausau and subsidiaries (ELICW),
National Casualty Company (NCC), West Coast Life Insurance Company
(WCLIC), Nationwide Advisory Services, Inc. (formerly Nationwide
Financial Services, Inc.), Nationwide Investment Services Corporation
(formerly PEBSCO Securities Corporation) (NISC) and NWE, Inc. NLIC and
its subsidiaries are collectively referred to as "the Company."
Nationwide Corp. formed Nationwide Financial Services, Inc. (NFS) in
November 1996 as a holding company for NLIC and the other companies of
the Nationwide Insurance Enterprise that offer or distribute long-term
savings and retirement products. On January 27, 1997, Nationwide Corp.
contributed to NFS the common stock of NLIC and three marketing and
distribution companies. NFS is planning an initial public offering of
its Class A common stock during the first quarter of 1997.
In anticipation of the restructuring described above, on September 24,
1996, NLIC's Board of Directors declared a dividend payable January 1,
1997 to Nationwide Corp. consisting of the outstanding shares of common
stock of certain subsidiaries (ELICW, NCC and WCLIC) that do not offer
or distribute long-term savings and retirement products. In addition,
during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to ELICW and another affiliate effective January 1, 1996. These
subsidiaries and all accident and health and group life insurance
business have been accounted for as discontinued operations for all
periods presented. See notes 2 and 13.
In addition, as part of the restructuring described above, NLIC intends
to make an $850,000 distribution to NFS which will then make an
equivalent distribution to Nationwide Corp.
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers and is subject to
competition from other financial services providers throughout the
United States. The Company is subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives, new legal theories or
insurance company insolvencies through guaranty fund assessments
may create costs for the insurer beyond those currently recorded
in the consolidated financial statements. The Company mitigates
this risk by offering a wide range of products and by operating
throughout the United States, thus reducing its exposure to any
single product or jurisdiction, and also by employing underwriting
practices which identify and minimize the adverse impact of this
risk.
CREDIT RISK is 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> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INTEREST RATE RISK is 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.
(2) Discontinued Operations
-----------------------
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies that offer or distribute long-term savings and
retirement products. Prior to the contribution by Nationwide Corp. to
NFS of the outstanding common stock of NLIC and other companies, NLIC
effected certain transactions with respect to certain subsidiaries and
lines of business that were unrelated to long-term savings and
retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend to
Nationwide Corp. consisting of the outstanding shares of common stock
of three subsidiaries: ELICW, NCC and WCLIC. ELICW writes group
accident and health and group life insurance business and maintains it
offices in Wausau, Wisconsin. NCC is a property and casualty company
that serves as a fronting company for a property and casualty
subsidiary of Nationwide Mutual Insurance Company (NMIC), an affiliate.
NCC maintains its offices in Scottsdale, Arizona. WCLIC writes high
dollar term life insurance policies and is located in San Francisco,
California. ELICW, NCC and WCLIC have been accounted for as
discontinued operations for all periods presented. NLIC did not
recognize any gain or loss on the disposal of these subsidiaries.
A summary of the combined results of operations, including the results
of the accident and health and group life insurance business ELICW
assumed from NLIC in 1996, and assets and liabilities of ELICW, NCC and
WCLIC as of and for the years ended December 31, 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 668,870 422,149 84,226
Net income 11,324 26,456 11,753
Assets, consisting primarily of investments 3,029,293 2,967,326 2,537,692
Liabilities, consisting primarily of policy benefits and claims 2,543,586 2,460,649 2,179,263
</TABLE>
During 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to ELICW and NMIC, effective January 1, 1996. See note 13 for a
complete discussion of the reinsurance agreements. NLIC has
discontinued its accident and health and group life insurance business
and in connection therewith has entered into reinsurance agreements to
cede all existing and any future writings to other affiliated companies
and will cease writing any new business prior to December 31, 1997.
NLIC's accident and health and group life insurance business is
accounted for as discontinued operations for all periods presented.
NLIC did not recognize any gain or loss on the disposal of the accident
and health and group life insurance business. The assets, liabilities,
results of operations and activities of discontinued operations are
distinguished physically, operationally and for financial reporting
purposes from the remaining assets, liabilities, results of operations
and activities of NLIC.
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of the results of operations, net of amounts ceded to ELICW
and NMIC in 1996, and assets and liabilities of NLIC's accident and
health and group life insurance business as of and for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ - 354,788 362,476
Net income (loss) - (1,742) 8,706
Assets, consisting primarily of investments 259,185 239,426 234,082
Liabilities, consisting primarily of policy benefits and claims 259,185 239,426 234,082
</TABLE>
(3) 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 (GAAP) which
differ from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and its insurance
subsidiaries, filed with the department of insurance of each insurance
company's state of domicile, are prepared on the basis of accounting
practices prescribed or permitted by each department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as
state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
so prescribed. The Company 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. Subsidiaries that are
classified and reported as discontinued operations are not
consolidated but rather are reported as "Investment in
Subsidiaries Classified as Discontinued Operations" in the
accompanying consolidated balance sheets and "Income for
Discontinued Operations" in the accompanying consolidated
statements of income. All significant intercompany balances and
transactions have been eliminated.
(b) Valuation of Investments and Related Gains and Losses
-----------------------------------------------------
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy acquisition costs that would have
been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as
of December 31, 1996 or 1995.
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate are 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 annuities, annuities without life contingencies
and guaranteed investment contracts. Universal life insurance
products include universal life insurance, variable universal life
insurance and other interest-sensitive life insurance policies.
Revenues for investment products and universal life insurance
products consist of net investment income, asset fees, cost of
insurance, policy administration and surrender charges that have
been earned and assessed against policy account balances during
the period. Policy benefits and claims that are charged to expense
include interest credited to policy account balances and benefits
and claims incurred in the period in excess of related policy
account balances.
TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
ACCIDENT AND HEALTH INSURANCE PRODUCTS: Accident and health
insurance premiums are recognized as revenue over the terms of the
policies. Policy claims are charged to expense in the period that
the claims are incurred. All accident and health insurance
business is accounted for as discontinued operations. See note 2.
(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 agency 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. For traditional life 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. 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 3(b).
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) Separate Accounts
-----------------
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. The investment income and gains or losses
of these accounts accrue directly to the contractholders. The
activity of the Separate Accounts is not reflected in the
consolidated statements of income and cash flows except for the
fees the Company receives.
(f) Future Policy Benefits
----------------------
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
Future policy benefits for traditional life insurance policies
have been calculated using a net level premium method based on
estimates of mortality, morbidity, investment yields and
withdrawals which were used or which were being experienced at the
time the policies were issued, rather than the assumptions
prescribed by state regulatory authorities. See note 6.
Future policy benefits and claims for collectively renewable
long-term disability policies and group long-term disability
policies are the present value of amounts not yet due on reported
claims and an estimate of amounts to be paid on incurred but
unreported claims. The impact of reserve discounting is not
material. Future policy benefits and claims on other group health
insurance policies are not discounted. All health insurance
business is accounted for as discontinued operations. See note 2.
(g) Participating Business
----------------------
Participating business represents approximately 52% in 1996 (54%
in 1995 and 55% in 1994) of the Company's life insurance in force,
78% in 1996 (79% in 1995 and 79% in 1994) of the number of life
insurance policies in force, and 40% in 1996 (47% in 1995 and 51%
in 1994) of life insurance premiums. The provision for
policyholder dividends is based on current dividend scales. Future
dividends are provided for ratably in future policy benefits based
on dividend scales in effect at the time the policies were issued.
(h) Federal Income Tax
------------------
The Company, with the exception of ELICW, files a consolidated
federal income tax return with 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. Through 1994, ELICW filed a
consolidated federal income tax return with Employers Insurance of
Wausau A Mutual Company, an affiliate. Beginning in 1995, ELICW
files a separate federal income tax return.
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.
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(i) Reinsurance Ceded
-----------------
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis. All of the Company's accident
and health and group life insurance business is ceded to
affiliates and is accounted for as discontinued operations. See
notes 2 and 13.
(j) Reclassification
----------------
Certain items in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996
presentation.
(4) Change in Accounting Principle
------------------------------
Effective January 1, 1994, the Company changed its method of accounting
for certain investments in debt and equity securities in connection
with the issuance of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS)
NO. 115 - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. As of January 1, 1994, the Company classified fixed
maturity securities with amortized cost and fair value of $6,299,665
and $6,721,714, respectively, as available-for-sale and recorded the
securities at fair value. Previously, these securities were recorded at
amortized cost. The effect as of January 1, 1994 has been recorded as a
direct credit to shareholder's equity as follows:
<TABLE>
<CAPTION>
<S> <C>
Excess of fair value over amortized cost of fixed maturity
securities available-for-sale $ 422,049
Adjustment to deferred policy acquisition costs (95,044)
Deferred federal income tax (114,452)
--------------
$ 212,553
==============
</TABLE>
(5) Investments
-----------
The amortized cost and estimated fair value of securities
available-for-sale were as follows as of December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 275,696 4,795 (1,340) 279,151
Obligations of states and political subdivisions 6,242 450 (2) 6,690
Debt securities issued by foreign governments 100,656 2,141 (857) 101,940
Corporate securities 7,999,310 285,946 (33,686) 8,251,570
Mortgage-backed securities 3,588,974 91,438 (15,124) 3,665,288
------------ ---------- ------------ ------------
Total fixed maturity securities 11,970,878 384,770 (51,009) 12,304,639
Equity securities 43,890 15,571 (330) 59,131
------------ ---------- ------------ ------------
$12,014,768 400,341 (51,339) 12,363,770
============ ========== ============ ============
</TABLE>
<PAGE> 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of securities
available-for-sale were as follows as of December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C>
1995:
Fixed maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 310,186 12,764 (1) 322,949
Obligations of states and political subdivisions 8,655 1,205 (1) 9,859
Debt securities issued by foreign governments 101,414 4,387 (66) 105,735
Corporate securities 7,888,440 473,681 (25,742) 8,336,379
Mortgage-backed securities 3,553,861 165,169 (8,388) 3,710,642
------------ ---------- ----------- ---------------
Total fixed maturity securities 11,862,556 657,206 (34,198) 12,485,564
Equity securities 23,617 6,382 (46) 29,953
------------ ---------- ----------- ---------------
$11,886,173 663,588 (34,244) 12,515,517
============ ========== =========== ===============
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1996, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
--------------- --------------
<S> <C> <C>
Fixed maturity securities available-for-sale:
Due in one year or less $ 440,235 444,214
Due after one year through five years 3,937,010 4,053,152
Due after five years through ten years 2,809,813 2,871,806
Due after ten years 1,194,846 1,270,179
--------------- --------------
8,381,904 8,639,351
Mortgage-backed securities 3,588,974 3,665,288
--------------- --------------
$11,970,878 12,304,639
=============== ==============
</TABLE>
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C>
Gross unrealized gains $349,002 629,344
Adjustment to deferred policy acquisition costs (81,939) (138,914)
Deferred federal income tax (93,471) (171,649)
--------------- --------------
173,592 318,781
Unrealized gains on securities available-for-sale, net, of
subsidiaries classified as discontinued operations (note 2) - 65,523
--------------- --------------
$173,592 384,304
=============== ==============
</TABLE>
<PAGE> 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------- --------------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $(289,247) 876,332 (675,373)
Equity securities 8,905 (26) (1,927)
Fixed maturity securities held-to-maturity - 75,626 (398,183)
--------------- ------------- --------------
$(280,342) 951,932 (1,075,483)
=============== ============= ==============
</TABLE>
Proceeds from the sale of securities available-for-sale during 1996,
1995 and 1994 were $299,558, $107,345 and $228,308, respectively.
During 1996, gross gains of $6,606 ($4,838 and $3,045 in 1995 and 1994,
respectively) and gross losses of $6,925 ($2,147 and $21,280 in 1995
and 1994, respectively) were realized on those sales.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25,429 to
available-for-sale securities due to evidence of a significant
deterioration in the issuer's creditworthiness. The transfer of those
fixed maturity securities resulted in a gross unrealized loss of
$3,535.
As permitted by the Financial Accounting Standards Board's Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued in November
1995 the Company transferred all of its fixed maturity securities
previously classified as held-to-maturity to available-for-sale. As of
December 14, 1995, the date of transfer, the fixed maturity securities
had amortized cost of $3,320,093, resulting in a gross unrealized gain
of $155,940.
Investments that were non-income producing for the twelve month period
preceding December 31, 1996 amounted to $26,805 ($27,712 in 1995) and
consisted of $248 ($6,982 in 1995) in fixed maturity securities,
$20,633 ($14,740 in 1995) in real estate and $5,924 ($5,990 in 1995) in
other long-term investments.
Real estate is presented at cost less accumulated depreciation of
$30,338 as of December 31, 1996 ($30,482 as of December 31, 1995) and
valuation allowances of $15,219 as of December 31, 1996 ($25,819 as of
December 31, 1995).
The recorded investment of mortgage loans on real estate considered to
be impaired (under SFAS NO. 114 - ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN as amended by SFAS NO. 118 - ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURE)
as of December 31, 1996 was $51,765 ($44,409 as of December 31, 1995),
which includes $41,663 ($23,975 as of December 31, 1995) of impaired
mortgage loans on real estate for which the related valuation allowance
was $8,485 ($5,276 as of December 31, 1995) and $10,102 ($20,434 as of
December 31, 1995) of impaired mortgage loans on real estate for which
there was no valuation allowance. During 1996, the average recorded
investment in impaired mortgage loans on real estate was approximately
$39,674 ($22,181 in 1995) and interest income recognized on those loans
was $2,103 ($387 in 1995), which is equal to interest income recognized
using a cash-basis method of income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Allowance, beginning of year $49,128 46,381
Additions charged to operations 4,497 7,433
Direct write-downs charged against the allowance (2,587) (4,686)
------------- -------------
Allowance, end of year $51,038 49,128
============= ==============
</TABLE>
<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------- ------------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 917,135 685,787 647,927
Equity securities 1,291 1,330 509
Fixed maturity securities held-to-maturity - 201,808 185,938
Mortgage loans on real estate 432,815 395,478 372,734
Real estate 44,332 38,344 40,170
Short-term investments 4,155 10,576 6,141
Other 3,998 7,239 2,121
--------------- ------------- --------------
Total investment income 1,403,726 1,340,562 1,255,540
Less investment expenses 45,967 46,529 44,729
--------------- ------------- ---------------
Net investment income $1,357,759 1,294,033 1,210,811
=============== ============= ==============
</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>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $(3,462) 4,213 (7,296)
Equity securities 3,143 3,386 1,422
Mortgage loans on real estate (4,115) (7,091) (20,446)
Real estate and other 4,108 (2,232) 9,793
------------ ------------ ------------
$ (326) (1,724) (16,527)
============ ============ ============
</TABLE>
Fixed maturity securities with an amortized cost of $6,161 and $5,592
as of December 31, 1996 and 1995, respectively, were on deposit with
various regulatory agencies as required by law.
(6) Future Policy Benefits and Claims
---------------------------------
The liability for future policy benefits for investment contracts
represents approximately 87% and 87% of the total liability for future
policy benefits as of December 31, 1996 and 1995, respectively. The
average interest rate credited on investment product policies was
approximately 6.3%, 6.6% and 6.5% for the years ended December 31,
1996, 1995 and 1994, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
Interest rates: Interest rates vary as follows:
--------------
<TABLE>
<CAPTION>
Year of issue Interest rates
----------------- ----------------------------------------
<S> <C>
1996 6.6%, not graded
1984-1995 6.0% to 10.5%, not graded
1966-1983 6.0% to 8.1%, graded over 20 years to 4.0% to 6.6%
1965 and prior generally lower than post 1965 issues
</TABLE>
<PAGE> 15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
WITHDRAWALS: Rates, which vary by issue age, type of coverage
and policy duration, are based on Company experience.
MORTALITY: Mortality and morbidity rates are based on
published tables, modified for the Company's actual
experience.
The Company has entered into a reinsurance contract to cede a portion
of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin). Total recoveries due from Franklin were
$240,451 and $245,255 as of December 31, 1996 and 1995, respectively.
The contract is immaterial to the Company's results of operations. The
ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. Under the terms of the contract,
Franklin has established a trust as collateral for the recoveries. The
trust assets are invested in investment grade securities, the market
value of which must at all times be greater than or equal to 102% of
the reinsured reserves.
The Company has reinsurance agreements with certain affiliates as
described in note 13. All other reinsurance agreements are not material
to either premiums or reinsurance recoverables.
(7) Federal Income Tax
-------------------
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- ---------------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $175,571 149,192
Liabilities in Separate Accounts 188,426 129,120
Mortgage loans on real estate and real estate 23,366 25,165
Other policyholder funds 7,407 7,424
Other assets and other liabilities 53,757 41,847
----------------- ---------------
Total gross deferred tax assets 448,527 352,748
Less valuation allowances (7,000) (7,000)
----------------- ---------------
Net deferred tax assets 441,527 345,748
================= ===============
Deferred tax liabilities:
Deferred policy acquisition costs 399,345 299,579
Fixed maturity securities 133,210 227,345
Deferred tax on realized investment gains 37,597 40,634
Equity securities and other long-term investments 8,210 3,780
Other 25,377 21,037
----------------- ---------------
Total gross deferred tax liabilities 603,739 592,375
----------------- ---------------
$162,212 246,627
================= ===============
</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, 1996, 1995 and 1994.
<PAGE> 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Total federal income tax expense for the years ended December 31, 1996,
1995 and 1994 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $110,424 35.0 $100,650 35.0 $84,650 35.0
Tax exempt interest and dividends
received deduction (212) (0.1) (18) (0.0) (130) (0.1)
Other, net 677 0.3 (824) (0.3) (5,931) (2.5)
------------ -------- ------------- -------- ------------- --------
Total (effective rate of each year) $110,889 35.2 $ 99,808 34.7 $78,589 32.5
============ ======== ============= ======== ============= ========
</TABLE>
Total federal income tax paid was $115,839, $51,840 and $83,239
during the years ended December 31, 1996, 1995 and 1994,
respectively.
(8) Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
SFAS NO. 107 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(SFAS 107) requires disclosure of fair value information about existing
on and off-balance sheet financial instruments. SFAS 107 defines the
fair value of a financial instrument as the amount at which the
financial instrument could be exchanged in a current transaction
between willing parties. In cases where quoted market prices are not
available, fair value is based on estimates using present value or
other valuation techniques.
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. SFAS 107 excludes certain assets and
liabilities from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from SFAS 107 disclosures, 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:
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
FIXED MATURITY AND EQUITY SECURITIES: 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.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in Separate Accounts is based on quoted market prices. The
fair value of liabilities related to Separate Accounts is the
amount payable on demand, which includes certain surrender
charges.
<PAGE> 17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
MORTGAGE LOANS ON REAL ESTATE: The fair value for mortgage loans
on real estate is estimated using discounted cash flow analyses,
using interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgages in default is the estimated fair value of
the underlying collateral.
INVESTMENT CONTRACTS: 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 analyses. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
POLICY RESERVES ON LIFE INSURANCE CONTRACTS: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
POLICYHOLDERS' DIVIDEND ACCUMULATIONS AND OTHER POLICYHOLDER
FUNDS: The carrying amount reported in the consolidated balance
sheets for these instruments approximates their 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 9.
Carrying amount and estimated fair value of financial instruments
subject to SFAS 107 and policy reserves on life insurance contracts
were as follows as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Assets
------
Investments:
Securities available-for-sale:
Fixed maturity securities $12,304,639 12,304,639 12,485,564 12,485,564
Equity securities 59,131 59,131 29,953 29,953
Mortgage loans on real estate, net 5,272,119 5,397,865 4,602,764 4,961,655
Policy loans 371,816 371,816 336,356 336,356
Short-term investments 4,789 4,789 32,792 32,792
Cash 43,784 43,784 9,455 9,455
Assets held in Separate Accounts 26,926,702 26,926,702 18,591,108 18,591,108
Liabilities
-----------
Investment contracts 13,914,441 13,484,526 13,229,360 12,876,798
Policy reserves on life insurance contracts 2,971,337 2,775,991 2,836,323 2,733,486
Policyholders' dividend accumulations 361,401 361,401 348,027 348,027
Other policyholder funds 60,073 60,073 65,297 65,297
Liabilities related to Separate Accounts 26,926,702 26,164,213 18,591,108 18,052,362
</TABLE>
(9) Additional Financial Instruments Disclosures
--------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
consolidated balance sheets.
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $327,456 extending into
1997 were outstanding as of December 31, 1996.
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 21% (20% in 1995) in any geographic area and no more than 2% (2%
in 1995) with any one borrower as of December 31, 1996.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1996 and 1995. See note 6.
The summary below depicts loans by remaining principal balance as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Apartment
Office Warehouse Retail & other Total
------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1996:
East North Central $139,518 119,069 549,064 215,038 1,022,689
East South Central 33,267 22,252 172,968 90,623 319,110
Mountain 17,972 43,027 113,292 73,390 247,681
Middle Atlantic 129,077 54,046 160,833 18,498 362,454
New England 33,348 43,581 161,960 - 238,889
Pacific 202,562 325,046 424,295 110,108 1,062,011
South Atlantic 103,889 134,492 482,934 385,185 1,106,500
West North Central 126,467 2,441 75,180 40,529 244,617
West South Central 104,877 120,314 197,090 304,256 726,537
------------- ------------- ------------- -------------- ------------
$890,977 864,268 2,337,616 1,237,627 5,330,488
============ ============= ============= =============
Less valuation allowances and unamortized discount 58,369
--------------
Total mortgage loans on real estate, net $5,272,119
==============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1995:
East North Central $138,965 101,925 514,995 175,213 931,098
East South Central 21,329 13,053 180,858 82,383 297,623
Mountain - 17,219 138,220 45,274 200,713
Middle Atlantic 116,187 64,813 158,252 10,793 350,045
New England 9,559 39,525 148,449 1 197,534
Pacific 183,206 233,186 374,915 105,419 896,726
South Atlantic 106,246 73,541 446,800 278,265 904,852
West North Central 133,899 14,205 78,065 36,651 262,820
West South Central 69,140 92,594 190,299 267,268 619,301
------------ ------------ ------------- ------------- --------------
$778,531 650,061 2,230,853 1,001,267 4,660,712
============ ============= ============= =============
Less valuation allowances and unamortized discount 57,948
--------------
Total mortgage loans on real estate, net $4,602,764
==============
</TABLE>
<PAGE> 19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Pension Plan
------------
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one thousand hours of service within a twelve-month period and who have
met certain age requirements. Benefits are based upon the highest
average annual salary of a specified number of consecutive years of the
last ten years of service. The Company funds pension costs accrued for
direct employees plus an allocation of pension costs accrued for
employees of affiliates whose work efforts benefit the Company.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and
elected early retirement no later than March 15, 1995. The entire cost
of the enhanced benefit was borne by NMIC and certain of its property
and casualty insurance company affiliates.
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual
Insurance Company Employees' Retirement Plan and the Wausau Insurance
Companies Pension Plan to form the Nationwide Insurance Enterprise
Retirement Plan. Immediately prior to the merger, the plans were
amended to provide consistent benefits for service after January 1,
1996. These amendments had no significant impact on the accumulated
benefit obligation or projected benefit obligation as of December 31,
1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1996, 1995 and 1994 were $7,381, $10,478 and
$10,063, respectively.
The Company's net accrued pension expense as of December 31, 1996 and
1995 was $1,075 and $1,392, respectively.
The net periodic pension cost for the Nationwide Insurance Enterprise
Retirement Plan as a whole for the year ended December 31, 1996 and for
the Nationwide Insurance Companies and Affiliates Retirement Plan as a
whole for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 75,466 64,524 64,740
Interest cost on projected benefit obligation 105,511 95,283 73,951
Actual return on plan assets (210,583) (249,294) (21,495)
Net amortization and deferral 101,795 143,353 (62,150)
--------------- --------------- ---------------
$ 72,189 53,866 55,046
=============== =============== ===============
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Weighted average discount rate 6.00% 7.50% 5.75%
Rate of increase in future compensation levels 4.25% 6.25% 4.50%
Expected long-term rate of return on plan assets 6.75% 8.75% 7.00%
</TABLE>
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Information regarding the funded status of the Nationwide Insurance
Enterprise Retirement Plan as a whole as of December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,338,554 1,236,730
Nonvested 11,149 26,503
--------------- ---------------
$1,349,703 1,263,233
=============== ===============
Net accrued pension expense:
Projected benefit obligation for services rendered to
date $1,847,828 1,780,616
Plan assets at fair value 1,947,933 1,738,004
--------------- ---------------
Plan assets in excess of (less than) projected benefit
obligation 100,105 (42,612)
Unrecognized prior service cost 37,870 42,845
Unrecognized net gains (201,952) (63,130)
Unrecognized net asset at transition 37,158 41,305
--------------- ---------------
$ (26,819) (21,592)
=============== ===============
</TABLE>
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Weighted average discount rate 6.50% 6.00%
Rate of increase in future compensation levels 4.75% 4.25%
</TABLE>
Assets of the Nationwide Insurance Enterprise Retirement Plan are
invested in group annuity contracts of NLIC and ELICW.
(11) Postretirement Benefits Other Than Pensions
-------------------------------------------
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation; 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,
1996 and 1995 was $34,884 and $33,537, respectively, and the net
periodic postretirement benefit cost (NPPBC) for 1996, 1995 and 1994
was $3,286, $3,132 and $4,284, respectively.
<PAGE> 21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Service cost (benefits attributed to employee service during the year) $ 6,541 6,235 8,586
Interest cost on accumulated postretirement benefit obligation 13,679 14,151 14,011
Actual return on plan assets (4,348) (2,657) (1,622)
Amortization of unrecognized transition obligation of affiliates 173 2,966 568
Net amortization and deferral 1,830 (1,619) 1,622
----------- ----------- -----------
$17,875 19,076 23,165
=========== =========== ===========
</TABLE>
Information regarding the funded status of the plan as a whole as of
December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees $ 92,954 88,680
Fully eligible, active plan participants 23,749 28,793
Other active plan participants 83,986 90,375
--------------- ---------------
Accumulated postretirement benefit obligation (APBO) 200,689 207,848
Plan assets at fair value 63,044 54,325
--------------- ---------------
Plan assets less than accumulated postretirement benefit obligation (137,645) (153,523)
Unrecognized transition obligation of affiliates 1,654 1,827
Unrecognized net gains (23,225) (1,038)
--------------- ---------------
$(159,216) (152,734)
=============== ===============
</TABLE>
Actuarial assumptions used for the measurement of the APBO as of
December 31, 1996 and 1995 and the NPPBC for 1996, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
1996 1996 1995 1995 1994
APBO NPPBC APBO NPPBC NPPBC
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Discount rate 7.25% 6.65% 6.75% 8.00% 7.00%
Long-term rate of return on plan
assets, net of tax - 4.80% - 8.00% N/A
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 11.00% 10.00% 12.00%
Ultimate rate 6.00% 6.00% 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years 12 Years 12 Years
</TABLE>
The health care cost trend rate assumption has an effect on the amounts
reported. For the plan as a whole, a one percentage point increase in
the assumed health care cost trend rate would increase the APBO as of
December 31, 1996 by $701 and the NPPBC for the year ended December 31,
1996 by $83.
(12) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
and Dividend Restrictions
---------------------------------------------------------------------
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and each of its
insurance company subsidiaries exceed the minimum risk-based capital
requirements.
<PAGE> 22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The statutory capital shares and surplus of NLIC as of December 31,
1996, 1995 and 1994 was $1,000,647, $1,363,031 and $1,262,861,
respectively. The statutory net income of NLIC for the years ended
December 31, 1996, 1995 and 1994 was $73,218, $86,529 and $76,532,
respectively.
NLIC is limited in the amount of shareholder dividends it may pay
without prior approval by the Department of Insurance of the State of
Ohio (the Department). NLIC's dividend of the outstanding shares of
common stock of certain companies which was declared on September 24,
1996 and the anticipated $850,000 dividend (as discussed in note 1) are
deemed extraordinary under Ohio insurance laws. As a result of such
dividends, any dividend paid by NLIC during the 12-month period
immediately following the $850,000 dividend would also be an
extraordinary dividend under Ohio insurance laws. Accordingly, no such
dividend could be paid without prior regulatory approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its stockholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and stockholder dividends
in the future.
(13) Transactions With Affiliates
----------------------------
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1996, 1995 and 1994, the
Company made lease payments to NMIC and its subsidiaries of $9,065,
$8,986 and $8,133, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $101,584, $107,112, and $100,601 in 1996,
1995 and 1994, respectively. The allocations are based on techniques
and procedures in accordance with insurance regulatory guidelines.
Measures used to allocate expenses among companies include individual
employee estimates of time spent, special cost studies, salary expense,
commissions expense and other methods agreed to by the participating
companies that are within industry guidelines and practices. The
Company believes these allocation methods are reasonable. In addition,
the Company does not believe that expenses recognized under the
intercompany agreements are materially different than expenses that
would have been recognized had the Company operated on a stand alone
basis. Amounts payable to NMIC from the Company under the cost sharing
agreement were $15,111 and $1,186 as of December 31, 1996 and 1995,
respectively.
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1996 and
1995 were not material. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
<PAGE> 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance contracts exist between NLIC and, respectively
NMIC and ELICW whereby all of NLIC's accident and health and group life
insurance business is ceded on a modified coinsurance basis. NLIC
entered into the reinsurance agreements during 1996 because the
accident and health and group life insurance business was unrelated to
NLIC's long-term savings and retirement products. Accordingly, the
accident and health and group life insurance business has been
accounted for as discontinued operations for all periods presented.
Under modified coinsurance agreements, invested assets are retained by
the ceding company and investment earnings are paid to the reinsurer.
Under the terms of NLIC's agreements, the investment risk associated
with changes in interest rates is borne by NMIC or ELICW, as the case
may be. Risk of asset default is retained by NLIC, although a fee is
paid by NMIC or ELICW, as the case may be, to NLIC for the NLIC's
retention of such risk. The agreements will remain in force until all
policy obligations are settled. However, with respect to the agreement
between NLIC and NMIC, either party may terminate the contract on
January 1 of any year with prior notice. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. NLIC believes that the terms of the modified coinsurance
agreements are consistent in all material respects with what NLIC could
have obtained with unaffiliated parties.
Amounts ceded to ELICW in 1996 are included in ELICW's results of
operations for 1996 which, combined with the results of WCLIC and NCC,
are summarized in note 2. Amounts ceded to ELICW in 1996 include
premiums of $224,224, net investment income and other revenue of
$14,833, and benefits, claims and other expenses of $246,641. Amounts
ceded to NMIC in 1996 include premiums of $97,331, net investment
income of $10,890, and benefits, claims and other expenses of $100,476.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC) and California Cash
Management Company (CCMC), both affiliates, under which NCMC and CCMC
act as common agents in handling the purchase and sale of short-term
securities for the respective accounts of the participants. Amounts on
deposit with NCMC and CCMC were $4,789 and $9,654 as of December 31,
1996 and 1995, respectively, and are included in short-term investments
on the accompanying consolidated balance sheets.
On April, 5 1996, Nationwide Corp. contributed all of the outstanding
shares, with shareholder equity value of $30, of NISC to NLIC. NLIC
contributed an additional $500 to NISC on August 30, 1996.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding
shares of common stock of Farmland Life Insurance Company (Farmland) to
NLIC. Farmland merged into WCLIC effective June 30, 1995. The
contribution resulted in a direct increase to consolidated
shareholder's equity of $46,918. As discussed in note 2, WCLIC is
accounted for as discontinued operations.
Effective December 31, 1994, NLIC purchased all of the outstanding
shares of common stock of ELICW from Wausau Service Corporation (WSC)
for $155,000. NLIC transferred fixed maturity securities and cash with
a fair value of $155,000 to WSC on December 28, 1994, which resulted in
a realized loss of $19,239 on the disposition of the securities. The
purchase price approximated both the historical cost basis and fair
value of net assets of ELICW. ELICW has and will continue to share home
office, other facilities, equipment and common management and
administrative services with WSC. As discussed in note 2, ELICW is
accounted for as discontinued operations.
Certain annuity products are sold through three affiliated companies
which are also subsidiaries of Nationwide Corp. Total commissions and
fees paid to these affiliates for the years ended December 31, 1996,
1995 and 1994 were $76,922, $57,280 and $50,168, respectively.
(14) Bank Lines of Credit
--------------------
In August 1996, NLIC, along with NMIC, established a $600,000 revolving
credit facility which provides for a $600,000 loan over a five year
term on a fully revolving basis with a group of national financial
institutions. The credit facility provides for several and not joint
liability with respect to any amount drawn by either NLIC or NMIC. NLIC
and NMIC pay facility and usage fees to the financial institutions to
maintain the revolving credit facility. All previously existing line of
credit agreements were canceled.
<PAGE> 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Contingencies
-------------
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to
be material to the Company's financial position or results of
operations.
(16) Segment Information
-------------------
The Company has three primary segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment consists
of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by the Company and independent
investment managers, with the investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment consists of annuity
contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, with returns accumulating
on a tax-deferred basis. The Life Insurance segment consists of
insurance products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis. In addition, the
Company reports corporate expenses and investments, and the related
investment income supporting capital not specifically allocated to its
product segments in a Corporate and Other segment. In addition, all
realized gains and losses, investment management fees and other revenue
earned from mutual funds, other than the portion allocated to the
variable annuities and life insurance segments, are reported in the
Corporate and Other segment.
During 1996, the Company changed its reporting segments to better
reflect the way the businesses are managed. Prior periods have been
restated to reflect these changes.
The following table summarizes the revenues and income from continuing
operations before federal income tax expense for the years ended
December 31, 1996, 1995 and 1994 and assets as of December 31, 1996,
1995 and 1994, by business segment.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Variable Annuities $ 284,638 189,071 132,687
Fixed Annuities 1,092,566 1,051,970 939,868
Life Insurance 435,657 409,135 383,150
Corporate and Other 179,977 148,475 143,794
----------------- --------------- ---------------
$ 1,992,838 1,798,651 1,599,499
================= =============== ===============
Income from continuing operations before federal income tax
expense:
Variable Annuities 90,244 50,837 24,574
Fixed Annuities 135,405 137,000 138,950
Life Insurance 67,242 67,590 53,046
Corporate and Other 22,606 32,145 25,288
----------------- --------------- ---------------
$ 315,497 287,572 241,858
================= =============== ===============
Assets:
Variable Annuities 25,069,725 17,333,039 11,146,465
Fixed Annuities 13,994,715 13,250,359 11,668,973
Life Insurance 3,353,286 3,027,420 2,752,283
Corporate and Other 5,348,520 4,896,815 3,678,303
----------------- --------------- ---------------
$47,766,246 38,507,633 29,246,024
================= =============== ===============
</TABLE>
<PAGE> 25
<TABLE>
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Summary of Investments -
Other Than Investments in Related Parties
As of December 31, 1996
($000's omitted)
<CAPTION>
- --------------------------------------------------------------- --------------- -------------- -----------------
Column A Column B Column C Column D
- --------------------------------------------------------------- --------------- -------------- -----------------
Amount at which
shown in the
consolidated
Type of Investment Cost Market value balance sheet
- --------------------------------------------------------------- --------------- -------------- -----------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 3,757,887 3,834,762 3,834,762
States, municipalities and political subdivisions 6,242 6,690 6,690
Foreign governments 100,656 101,940 101,940
Public utilities 1,798,736 1,843,938 1,843,938
All other corporate 6,307,357 6,517,309 6,517,309
--------------- -------------- -----------------
Total fixed maturity securities available-for-sale 11,970,878 12,304,639 12,304,639
--------------- -------------- -----------------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 43,501 50,405 50,405
Non-redeemable preferred stock 389 8,726 8,726
--------------- -------------- -----------------
Total equity securities available-for-sale 43,890 59,131 59,131
--------------- -------------- -----------------
Mortgage loans on real estate, net 5,327,317 5,272,119 (1)
Real estate, net:
Investment properties 253,383 217,611 (1)
Acquired in satisfaction of debt 57,933 48,148 (1)
Policy loans 371,816 371,816
Other long-term investments 27,370 28,668 (2)
Short-term investments 4,789 4,789
--------------- ----------------
Total investments $18,057,376 18,306,921
=============== ================
<FN>
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 5 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains of investments
in limited partnerships.
</TABLE>
See accompanying independent auditors' report.
<PAGE> 26
<TABLE>
<CAPTION>
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Supplemental Insurance Information
As of December 31, 1996, 1995 and 1994
and for each of the years then ended
($000's omitted)
- ----------------------------------- -------------- ------------------ ----------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------- -------------- ------------------ ----------------- ----------------- ---------------
Deferred Future policy Other policy
policy benefits, losses, claims and
acquisition claims and Unearned premiums benefits payable Premium
Segment costs loss expenses (1) (2) revenue
- ----------------------------------- -------------- ------------------ ----------------- ---------------- --------------
<C> <C> <C> <C> <C> <C>
1996: Variable Annuities $ 791,611 - - -
Fixed Annuities 242,421 14,952,877 687 24,030
Life Insurance 414,417 1,995,802 395,739 174,612
Corporate and Other (81,940) 230,381 25,048 -
-------------- ------------------ ---------------- --------------
Total $1,366,509 17,179,060 421,474 198,642
============== ================== ================ ==============
1995: Variable Annuities 571,283 - - -
Fixed Annuities 221,111 14,221,622 455 32,774
Life Insurance 366,876 1,898,641 383,983 166,332
Corporate and Other (138,914) 238,351 28,886 -
-------------- ------------------ ---------------- --------------
Total $1,020,356 16,358,614 413,324 199,106
============== ================== ================ ==============
1994: Variable Annuities 395,397 - - -
Fixed Annuities 198,639 12,633,253 240 20,134
Life Insurance 327,079 1,806,762 371,984 156,524
Corporate and Other 74,445 233,569 26,927 -
-------------- ------------------ ---------------- --------------
Total $ 995,560 14,673,584 399,151 176,658
============== ================== ================ ==============
<CAPTION>
- ----------------------------------- -------------- ------------------- ----------------- ---------------- --------------
Column A Column G Column H Column I Column J Column K
- ----------------------------------- -------------- ------------------- ----------------- ---------------- --------------
Net Amortization Other
investment Benefits, claims, of deferred operating
income losses and policy expenses Premiums
Segment (3) settlement expenses acquisition costs (3) written
- ----------------------------------- -------------- ------------------- ----------------- ----------------- --------------
1996: Variable Annuities $ (21,449) 4,624 57,412 132,357
Fixed Annuities 1,050,557 838,533 38,635 79,737
Life Insurance 174,002 211,386 37,347 78,965
Corporate and Other 154,649 106,037 - 51,335
-------------- ------------------- ----------------- -----------------
Total $1,357,759 1,160,580 133,394 342,394
============== =================== ================= =================
1995: Variable Annuities (17,640) 2,881 26,264 109,089
Fixed Annuities 1,002,718 804,980 29,499 80,260
Life Insurance 171,255 201,986 31,021 68,832
Corporate and Other 137,700 105,646 (4,089) 14,773
-------------- ------------------- ----------------- -----------------
Total $1,294,033 1,115,493 82,695 272,954
============== =================== ================= =================
1994: Variable Annuities (13,415) 2,277 22,135 83,701
Fixed Annuities 903,572 702,082 29,849 69,975
Life Insurance 166,329 191,006 29,495 69,861
Corporate and Other 154,325 97,302 4,089 17,115
-------------- ------------------- ----------------- -----------------
Total $1,210,811 992,667 85,568 240,652
============== =================== ================= =================
<FN>
- ----------
(1) Unearned premiums are included in Column C amounts.
(2) Column E agrees to the sum of the Balance Sheet captions, Policyholders'
dividend accumulations and Other policyholder funds.
(3) Allocations of net investment income and certain general expenses are based
on a number of assumptions and estimates, and reported operating results
would change by segment if different methods were applied.
</TABLE>
See accompanying independent auditors' report.
<PAGE> 27
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Reinsurance
As of December 31, 1996, 1995 and 1994
and for each of the years then ended
($000's omitted)
<TABLE>
<CAPTION>
- ------------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Column A Column B Column C Column D Column E Column F
- ------------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Percentage
Ceded to Assumed from of amount
Gross amount other companies other companies Net amount assumed to net
----------------- ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
1996:
Life insurance in force $47,071,264 6,633,567 288,593 40,726,290 0.7%
================= ================= ================ ================ ===============
Premiums:
Life insurance 225,615 29,282 2,309 198,642 1.2%
Accident and health insurance 291,871 305,789 13,918 - N/A
----------------- ----------------- ---------------- ---------------- ---------------
Total $ 517,486 335,071 16,227 198,642 8.2%
================= ================= ================ ================ ===============
1995:
Life Insurance in force $41,087,025 8,935,743 391,174 32,542,456 1.2%
================= ================= ================ ================ ===============
Premiums:
Life insurance 221,257 24,360 2,209 199,106 1.1%
Accident and health insurance 298,058 313,036 14,978 - N/A
----------------- ----------------- ---------------- ---------------- ---------------
Total $ 519,315 337,396 17,187 199,106 8.6%
================= ================= ================ ================ ===============
1994:
Life Insurance in force $35,926,633 7,550,623 829,742 29,205,752 2.8%
================= ================= ================ ================ ===============
Premiums:
Life insurance 198,705 24,912 2,865 176,658 1.6%
Accident and health insurance 303,435 321,696 18,261 - N/A
----------------- ----------------- ---------------- ---------------- ---------------
Total $ 502,140 346,608 21,126 176,658 12.0%
================= ================= ================ ================ ===============
<FN>
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on invesment products and universal life insurance
products.
</TABLE>
See accompanying independent auditors' report.
<PAGE> 28
<TABLE>
<CAPTION>
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
- ------------------------------------------------- ------------ ----------------------------- ------------ -------------
Column A Column B Column C Column D Column E
- ------------------------------------------------- ------------ ----------------------------- ------------ -------------
Balance at Charged to Balance at
beginning of costs and Charged to Deductions end of
Description period expenses other accounts (1) period
- ------------------------------------------------- ------------ ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1996:
Valuation allowances - mortgage loans on real
estate $49,128 4,497 - 2,587 51,038
Valuation allowances - real estate 25,819 (10,600) - - 15,219
------------ ------------ -------------- ------------ -------------
Total $74,947 (6,103) - 2,587 66,257
============ ============ ============== ============ =============
1995:
Valuation allowances - fixed maturity securities - 8,908 - 8,908 -
Valuation allowances - mortgage loans on real
estate 46,381 7,433 - 4,686 49,128
Valuation allowances - real estate 27,330 (1,511) - - 25,819
------------ ------------ -------------- ------------ -------------
Total $73,711 14,830 - 13,594 74,947
============ ============ ============== ============ =============
1994:
Valuation allowances - fixed maturity securities 4,800 (4,800) - - -
Valuation allowances - mortgage loans on real
estate 42,150 20,445 - 16,214 46,381
Valuation allowances - real estate 31,357 (4,027) - - 27,330
------------ ------------ -------------- ------------ -------------
Total $78,307 11,618 - 16,214 73,711
============ ============ ============== ============ =============
<FN>
- ----------
(1) Amounts represent direct write-downs charged against the valuation allowance.
</TABLE>
See accompanying independent auditors' report.
<PAGE> 46
APPENDIX
Example A
Assume that a Contract Owner made a $10,000 allocation on the first day of a
calendar quarter into a 5 year Guaranteed Term Option. The Specified Interest
Rate at the time is 8% and the 5-year CMT Rate in effect for the Specified
Interest Rate is 8%. The Contract Owner decides to surrender the GTO 985 days
from maturity. The Specified Value of the GTO is $11,937.69. At this time, the 3
year CMT Rate is 7%. (985/365.25 is 2.69 which rounds up to 3.)
d
-------------
1 + a 365.25
-----------------------
MVA Factor = 1 + b + 0.0025
985
-------------
1 + 0.08 365.25
-----------------------
MVA Factor = 1 + 0.07 + 0.0025
MVA Factor = 1.01897
Surrender Value = Specified Value x MVA Factor
Surrender Value = 11,937.69 x 1.01897
*Surrender Value = $12,164.15
*Assumes no variable annuity Contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = the Friday CMT Rate declared by the Federal Reserve Board, and placed in
effect by the Company on the Wednesday immediately preceding the
Investment Period during which the allocation to the GTO was made.
b = The Friday CMT Rate declared by the Federal Reserve Board, and placed in
effect by the Company on the Wednesday immediately preceding the
withdrawal, transfer or other distribution giving rise to the MVA.
d = the number of days remaining in the Guaranteed Term
Example B
Assume Contract Owner made a $10,000 allocation on the first day of a calendar
quarter into a 5-year Guaranteed Term Option. The Specified Interest Rate at the
time is 8% and the 5-year CMT Rate in effect for the Specified Interest Rate is
8%. The Contract Owner decides to surrender his money 985 days from maturity.
The Specified Value of the GTO is $11,937.69. At this time, the 3 year CMT Rate
is 9%. (985/365.25 is 2.69 which rounds up to 3.)
d
--------------
1 + a 365.25
-----------------------
MVA Factor = 1 + b + 0.0025
985
--------------
1 + 0.08 365.25
----------------------------
MVA Factor = 1 + 0.09 + 0.0025
67
<PAGE> 47
MVA Factor = 0.96944
Surrender Value = Specified Value x MVA Factor
Surrender Value = 11,937.69 x 0.96944
*Surrender Value = $11,572.87
*Assumes no variable annuity Contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = the Friday CMT Rate declared by the Federal Reserve Board, and placed in
effect by the Company on the Wednesday immediately preceding the
Investment Period during which the allocation to the GTO was made.
b = The Friday CMT Rate declared by the Federal Reserve Board, and placed in
effect by the Company on the Wednesday immediately preceding the
withdrawal, transfer or other distribution giving rise to the MVA.
d = the number of days remaining in the Guaranteed Term
68
<PAGE> 48
The table set forth below illustrates the impact of a MVA applied upon a full
surrender of a 10 year GTO allocation, at various stages of the corresponding
Guaranteed Term. These figures are based on CMT Rate of 8% (a in the MVA
Formula) and varying current yield CMT Rates shown in the first column (b in the
MVA Formula).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Time Remaining to the End
of the Guaranteed Term Specified Value Market Value Market
Current Yield Adjustment Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12.00% 9 Years $10,800 -29.35% $7,630
- -------------------------------------------------------------------------------------------------
7 Years $12,597 -23.68% $9,614
- -------------------------------------------------------------------------------------------------
5 Years $14,693 -17.55% $12,114
- -------------------------------------------------------------------------------------------------
2 Years $18,509 -7.43% $17,134
- -------------------------------------------------------------------------------------------------
180 Days $20,785 -1.88% $20,394
- -------------------------------------------------------------------------------------------------
10.00% 9 Years $10,800 -16.94% $8,970
- -------------------------------------------------------------------------------------------------
7 Years $12,597 -13.44% $10,904
- -------------------------------------------------------------------------------------------------
5 Years $14,693 -9.80% $13,253
- -------------------------------------------------------------------------------------------------
2 Years $18,509 -4.04% $17,761
- -------------------------------------------------------------------------------------------------
180 Days $20,785 -1.01% $20,575
- -------------------------------------------------------------------------------------------------
9.00% 9 Years $10,800 -9.84% $9,731
- -------------------------------------------------------------------------------------------------
7 Years $12,597 -7.74% $11,622
- -------------------------------------------------------------------------------------------------
5 Years $14,693 -5.59% $13,872
- -------------------------------------------------------------------------------------------------
2 Years $18,509 -2.28% $18,067
- -------------------------------------------------------------------------------------------------
180 Days $20,785 -0.57% $20,667
- -------------------------------------------------------------------------------------------------
8.00% 9 Years $10,800 -2.06% $10,578
- -------------------------------------------------------------------------------------------------
7 Years $12,597 -1.61% $12,394
- -------------------------------------------------------------------------------------------------
5 Years $14,693 -1.15% $14,524
- -------------------------------------------------------------------------------------------------
2 Years $18,509 -0.46% $18,424
- -------------------------------------------------------------------------------------------------
180 Days $20,785 -0.11% $20,762
- -------------------------------------------------------------------------------------------------
7.00% 9 Years $10,800 6.47% $11,499
- -------------------------------------------------------------------------------------------------
7 Years $12,597 5.00% $13,227
- -------------------------------------------------------------------------------------------------
5 Years $14,693 3.55% $15,215
- -------------------------------------------------------------------------------------------------
2 Years $18,509 1.40% $18,768
- -------------------------------------------------------------------------------------------------
180 Days $20,785 0.34% $20,856
- -------------------------------------------------------------------------------------------------
6.00% 9 Years $10,800 15.84% $12,511
- -------------------------------------------------------------------------------------------------
7 Years $12,597 12.11% $14,122
- -------------------------------------------------------------------------------------------------
5 Years $14,693 8.51% $15,943
- -------------------------------------------------------------------------------------------------
2 Years $18,509 3.32% $19,123
- -------------------------------------------------------------------------------------------------
180 Days $20,785 0.81% $20,953
- -------------------------------------------------------------------------------------------------
4.00% 9 Years $10,800 37.45% $14,845
- -------------------------------------------------------------------------------------------------
7 Years $12,597 28.07% $16,133
- -------------------------------------------------------------------------------------------------
5 Years $14,693 19.33% $17,533
- -------------------------------------------------------------------------------------------------
2 Years $18,509 7.32% $19,864
- -------------------------------------------------------------------------------------------------
180 Days $20,785 1.76% $21,151
- -------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 49
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 Life
Insurance Company provides as follows:
Section 1. Indemnification of Directors, Officers and Employees.
The Company shall 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 the Company, or is or
was serving at the request of the Company 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) shall 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 shall 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
shall 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 shall
continue as to a person who has ceased to be a director, trustee,
officer or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. The Company 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 shall ultimately be determined that he is entitled to be
indemnified by the Company as authorized in this Article VII.
Section 4. Insurance. The Company may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, member, or employee of the Company, or is or was serving
at the request of the Company 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 the Company would have the power to indemnify him
against such liability under this Article VII.
70
<PAGE> 50
Item 15. Recent Sales of Unregistered Securities
The Company, through various separate accounts -- the Nationwide
Government Plans Variable Account ("GPVA"), Nationwide Qualified
Plans Variable Account ("QPVA"), Nationwide Ohio DC Variable
Account ("Ohio DC 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:
1995 1994 1993
GPVA $ 114,207,169 $ 192,556,822 $ 59,378,261
QPVA $7,692,919,506 $1,302,851,894 $577,994,906
Ohio DC Account $ 39,456,176 $ 107,878,099 *
Separate Account-1 $ 1,330,463 $ 8,465,423 $ 10,599,636
*No contracts were sold by the Company in connection with the
Nationwide Ohio DC Variable Account in 1993 or 1992.
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 (Exhibit F)* - Copy attached hereto
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other than
Investments in Related Parties as of December 31,
1996
Schedule III Supplementary Insurance Information as of December
31, 1996, 1995 and 1994 and for each of the years
then ended
Schedule IV Reinsurance as of December 31, 1996, 1995
and 1994 and for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years
ended December 31, 1996, 1995 and 1994
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.
* Filed with the original submission of this registration statement (SEC File
No. 33-58997) on May 2, 1995.
71
<PAGE> 51
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.
72
<PAGE> 52
ACCOUNTANTS' CONSENT AND INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors of Nationwide Life Insurance Company:
The audits referred to in our report on Nationwide Life Insurance Company (the
Company) dated January 31, 1997, included the related financial statement
schedules as of December 31, 1996, and for each of the years in the three-year
period ended December 31, 1996, included in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statement taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Consolidated Financial Statements and Supplementary
Data" in the Prospectus.
KPMG Peat Marwick LLP
Columbus, Ohio
April 28, 1997
73
<PAGE> 53
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Columbus, State of Ohio, on the 28th of April, 1997.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
By /s/ JOSEPH P. RATH
---------------------------------
Joseph P. Rath
Vice President and
Associate General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 2 to the Registration Statement has been signed by the following
persons on the 28TH of April, 1997, in the capacities indicated.
Signature Title
LEWIS J. ALPHIN Director
- -----------------------------
Lewis J. Alphin
KEITH W. ECKEL Director
- -----------------------------
Keith W. Eckel
WILLARD J. ENGEL Director
- -----------------------------
Willard J. Engel
FRED C. FINNEY Director
- -----------------------------
Fred C. Finney
CHARLES L. FUELLGRAF, JR. Director
- -----------------------------
Charles L. Fuellgraf, Jr.
President/Chief Operating
JOSEPH J. GASPER Officer and Director
- -----------------------------
Joseph J. Gasper
Chairman of the Board
HENRY S. HOLLOWAY and Director
----------------------------
Henry S. Holloway
Chairman and Chief Executive Officer--Nationwide
D. RICHARD MCFERSON Insurance Enterprise and Director
- -----------------------------
D. Richard McFerson
DAVID O. MILLER Director
- -----------------------------
David O. Miller
C. RAY NOECKER Director
- -----------------------------
C. Ray Noecker
Executive Vice President-
ROBERT A. OAKLEY Chief Financial Officer
- -----------------------------
Robert A. Oakley
JAMES F. PATTERSON Director By /s/ JOSEPH P. RATH
- ----------------------------- -------------------------
James F. Patterson Joseph P. Rath
Attorney-in-Fact
ARDEN L. SHISLER Director
- -----------------------------
Arden L. Shisler
ROBERT L. STEWART Director
- -----------------------------
Robert L. Stewart
NANCY C. THOMAS Director
- -----------------------------
Nancy C. Thomas
HAROLD W. WEIHL Director
- -----------------------------
Harold W. Weihl
78
<PAGE> 54
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each of the undersigned as
directors and/or officers of NATIONWIDE LIFE INSURANCE COMPANY, and NATIONWIDE
LIFE AND ANNUITY INSURANCE COMPANY, both Ohio corporations, which have filed or
will file with the U.S. Securities and Exchange Commission under the provisions
of the Securities Act of 1933, as amended, various Registration Statements and
amendments thereto for the registration under said Act of Individual Deferred
Variable Annuity Contracts in connection with MFS Variable Account, Nationwide
Variable Account, Nationwide Variable Account-II, Nationwide Variable Account-3,
Nationwide Variable Account-4, Nationwide Variable Account-5, Nationwide
Variable Account-6, Nationwide Fidelity Advisor Variable Account, Nationwide
Multi-Flex Variable Account, Nationwide Variable Account-8, Nationwide VA
Separate Account-A, Nationwide VA Separate Account-B, Nationwide VA Separate
Account-C and Nationwide VA Separate Account-Q; and the registration of fixed
interest rate options subject to a market value adjustment offered under some or
all of the aforementioned individual Variable Annuity Contracts in connection
with Nationwide Multiple Maturity Separate Account and Nationwide Multiple
Maturity Separate Account-A, and the registration of Group Flexible Fund
Retirement Contracts in connection with Nationwide DC Variable Account,
Nationwide DCVA-II, and NACo Variable Account; and the registration of Group
Common Stock Variable Annuity Contracts in connection with Separate Account No.
1; and the registration of variable life insurance policies in connection with
Nationwide VLI Separate Account, Nationwide VLI Separate Account-2, Nationwide
VLI Separate Account-3, Nationwide VL Separate Account-A and Nationwide VL
Separate Account-B, hereby constitutes and appoints Dimon Richard McFerson,
Joseph J. Gasper, W. Sidney Druen, and Joseph P. Rath, and each of them with
power to act without the others, his/her attorney, with full power of
substitution and resubstitution, for and in his/her name, place and stead, in
any and all capacities, to approve, and sign such Registration Statements and
any and all amendments thereto, with power to affix the corporate seal of said
corporation thereto and to attest said seal and to file the same, with all
exhibits thereto and other documents in connection therewith, with the U.S.
Securities and Exchange Commission, hereby granting unto said attorneys, and
each of them, full power and authority to do and perform all and every act and
thing requisite to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming that which said attorneys, or any of
them, may lawfully do or cause to be done by virtue hereof. This instrument may
be executed in one or more counterparts.
IN WITNESS WHEREOF, the undersigned have herewith set their names and
seals as of this 2nd day of April, 1997.
<TABLE>
<CAPTION>
<S> <C>
/s/ Lewis J. Alphin /s/ David O. Miller
- ------------------------------------------------- --------------------------------------------------
Lewis J. Alphin, Director David O. Miller, Director
/s/ Keith W. Eckel /s/ C. Ray Noecker
- ------------------------------------------------- -------------------------------------------------
Keith W. Eckel, Director C. Ray Noecker, Director
/s/ Willard J. Engel /s/ Robert A. Oakley
- ------------------------------------------------- --------------------------------------------------
Willard J. Engel, Director Robert A. Oakley, Executive Vice President and Chief
Financial Officer
/s/ Fred C. Finney /s/ James F. Patterson
- ------------------------------------------------- --------------------------------------------------
Fred C. Finney, Director James F. Patterson, Director
/s/ Charles L. Fuellgraf /s/ Arden L. Shisler
- ------------------------------------------------- --------------------------------------------------
Charles L. Fuellgraf, Jr., Director Arden L. Shisler, Director
/s/ Joseph J. Gasper /s/ Robert L. Stewart
- ------------------------------------------------- --------------------------------------------------
Joseph J. Gasper, President and Chief Operating Officer Robert L. Stewart, Director
and Director
/s/ Henry S. Holloway /s/ Nancy C. Thomas
- ------------------------------------------------- --------------------------------------------------
Henry S. Holloway, Chairman of the Board, Director Nancy C. Thomas, Director
/s/ Dimon Richard McFerson /s/ Harold W. Weihl
- ------------------------------------------------- --------------------------------------------------
Dimon Richard McFerson, Chairman and Chief Executive Harold W. Weihl, Director
Officer-Nationwide Insurance Enterprise and Director
</TABLE>
