<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 COMMISSION FILE NO. 2-28596
</TABLE>
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 31-4156830
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
--- ---
ALL VOTING STOCK WAS HELD BY AFFILIATES OF THE REGISTRANT ON NOVEMBER 12, 1997.
COMMON STOCK - 3,814,779 SHARES ISSUED AND OUTSTANDING AS OF NOVEMBER 12, 1997
(Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Narrative Analysis of the Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
Assets 1997 1996
------ ----------------- ----------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $12,313.6 in 1997; $11,970.9 in 1996) $12,738.7 12,304.6
Equity securities (cost $60.8 in 1997; $43.9 in 1996) 73.8 59.1
Mortgage loans on real estate, net 5,135.4 5,272.1
Real estate, net 305.1 265.8
Policy loans 403.9 371.8
Other long-term investments 23.0 28.7
Short-term investments 431.8 4.8
----------------- ----------------
19,111.7 18,306.9
----------------- ----------------
Cash 100.7 43.8
Accrued investment income 221.3 210.2
Deferred policy acquisition costs 1,570.0 1,366.5
Investment in subsidiaries classified as discontinued operations - 485.7
Other assets 394.6 426.5
Assets held in Separate Accounts 36,791.6 26,926.7
----------------- ----------------
$58,189.9 47,766.3
================= ================
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $17,817.8 17,179.1
Policyholders' dividend accumulations 369.4 361.4
Other policyholder funds 59.7 60.1
Accrued federal income tax:
Current 46.3 30.2
Deferred 207.1 162.2
----------------- ----------------
253.4 192.4
----------------- ----------------
Dividend payable - 485.7
Other liabilities 536.2 423.0
Liabilities related to Separate Accounts 36,791.6 26,926.7
----------------- ----------------
55,828.1 45,628.4
----------------- ----------------
Shareholder's equity:
Capital shares, $1.00 par value. Authorized 5.0 million shares, issued and
outstanding 3.8 million shares 3.8 3.8
Additional paid-in capital 914.7 527.9
Retained earnings 1,229.9 1,432.6
Unrealized gains on securities available-for-sale, net 213.4 173.6
----------------- ----------------
2,361.8 2,137.9
----------------- ----------------
$58,189.9 47,766.3
================= ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions of dollars)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Investment product and universal life insurance product
policy charges $143.3 102.3 393.4 288.8
Life insurance premiums 50.2 47.2 155.9 150.3
Net investment income 355.3 339.9 1,047.6 1,009.6
Realized gains (losses) on investments (4.8) (5.1) 4.3 4.3
Other income 12.4 9.9 38.2 28.5
------------- ------------- ------------- -------------
556.4 494.2 1,639.4 1,481.5
------------- ------------- ------------- -------------
Benefits and expenses:
Interest credited 256.0 245.6 756.9 732.9
Other benefits and claims 41.8 51.5 134.3 139.4
Provision for policyholders' dividends on participating policies 9.1 8.7 31.3 31.5
Amortization of deferred policy acquisition costs 43.7 25.7 126.7 96.8
Other operating expenses 97.9 91.8 286.0 239.9
------------- ------------- ------------- -------------
448.5 423.3 1,335.2 1,240.5
------------- ------------- ------------- -------------
Income from continuing operations before federal
income tax expense 107.9 70.9 304.2 241.0
------------- ------------- ------------- -------------
Federal income tax expense (benefit):
Current 28.2 35.3 83.4 93.9
Deferred 9.5 (10.0) 23.5 (9.4)
------------- ------------- ------------- -------------
37.7 25.3 106.9 84.5
------------- ------------- ------------- -------------
Income from continuing operations 70.2 45.6 197.3 156.5
Income from discontinued operations (less federal income
tax expense of $1.0 and $5.0 in 1996) - 2.3 - 9.6
------------- ------------- ------------- -------------
Net income $ 70.2 47.9 197.3 166.1
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
(in millions of dollars)
<TABLE>
<CAPTION>
Unrealized
gains (losses)
Additional on securities Total
Capital paid-in Retained available-for- shareholder's
shares capital earnings sale, net equity
------------- ------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
1996:
Balance, January 1, 1996 $3.8 657.1 1,583.3 384.3 2,628.5
Dividends to shareholder - (79.3) (356.3) (28.6) (464.2)
Net income - - 166.1 - 166.1
Unrealized losses on securities
available-for-sale, net - - - (249.8) (249.8)
------------- ------------- ---------------- ------------------- -------------------
Balance, September 30, 1996 $3.8 577.8 1,393.1 105.9 2,080.6
============= ============= ================ =================== ===================
1997:
Balance, January 1, 1997 3.8 527.9 1,432.6 173.6 2,137.9
Capital contributions - 836.8 - - 836.8
Dividends to shareholder - (450.0) (400.0) - (850.0)
Net income - - 197.3 - 197.3
Unrealized gains on securities
available-for-sale, net - - - 39.8 39.8
------------- ------------- ---------------- ------------------- -------------------
Balance, September 30, 1997 $3.8 914.7 1,229.9 213.4 2,361.8
============= ============= ================ =================== ===================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1997 and 1996
(in millions of dollars)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 197.3 166.1
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs (358.2) (313.7)
Amortization of deferred policy acquisition costs 126.7 96.8
Amortization and depreciation (0.5) 5.2
Realized gains on investments, net (4.3) (4.3)
Deferred federal income tax 23.5 15.1
Increase in accrued investment income (11.1) (2.5)
Decrease (increase) in other assets 31.4 (36.0)
Increase in policyholder account balances 58.2 233.3
Increase in policyholders' dividend accumulations 8.0 10.0
Increase (decrease) in accrued federal income tax payable 16.1 (0.6)
Increase in other liabilities 113.2 176.6
Other, net (3.9) (19.3)
-------------- --------------
Net cash provided by operating activities 196.4 326.7
-------------- --------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 640.8 917.4
Proceeds from sale of securities available-for-sale 248.7 223.3
Proceeds from repayments of mortgage loans on real estate 296.1 191.1
Proceeds from sale of real estate 23.2 16.1
Proceeds from repayments of policy loans and sale of other invested assets 19.8 18.6
Cost of securities available-for-sale acquired (1,732.1) (1,047.9)
Cost of mortgage loans on real estate acquired (552.2) (721.7)
Cost of real estate acquired (24.3) (4.8)
Policy loans issued and other invested assets acquired (48.2) (43.1)
Short-term investments, net (428.2) (62.3)
-------------- --------------
Net cash used in investing activities (1,556.4) (513.3)
-------------- --------------
Cash flows from financing activities:
Proceeds from capital contributions 836.8 -
Increase in investment product and universal life insurance product account balances 2,343.1 1,851.3
Decrease in investment product and universal life insurance product account balances (1,763.0) (1,597.0)
-------------- --------------
Net cash provided by financing activities 1,416.9 254.3
-------------- --------------
Net increase in cash 56.9 67.7
Cash, beginning of period 43.8 9.4
-------------- --------------
Cash, end of period $ 100.7 77.1
============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 1997
(1) Organization and Basis of Presentation
--------------------------------------
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
a wholly owned subsidiary of Nationwide Corporation (Nationwide Corp.).
On January 27, 1997, Nationwide Corp. contributed the common stock of
NLIC to Nationwide Financial Services, Inc. (NFS). NFS was formed by
Nationwide Corp. in November 1996 as a holding company for members of
the Nationwide Insurance Enterprise that offer or distribute long-term
savings and retirement products. NLIC and its subsidiaries are
collectively referred to as "the Company."
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with generally accepted
accounting principles, which differ from statutory accounting practices
prescribed or permitted by regulatory authorities, for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein reflects all adjustments (all of which are normal and
recurring in nature) which are, in the opinion of management, necessary
for a fair presentation of financial position and results of
operations. Operating results for all periods presented are not
necessarily indicative of the results that may be expected for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
1996 included in the Company's annual report on Form 10-K.
Certain items in the prior period consolidated financial statements
have been reclassified to conform to the current period presentation.
(2) Dividends and Capital Contributions
-----------------------------------
On September 24, 1996, NLIC's Board of Directors declared a dividend to
Nationwide Corp. consisting of the common stock of certain subsidiaries
classified as discontinued operations. As of and during the year ended
December 31, 1996, these previously wholly owned subsidiaries of NLIC
were classified as discontinued operations since they do not offer or
distribute long-term savings and retirement products. The dividend was
paid by NLIC on January 1, 1997.
On February 24, 1997, NLIC paid a dividend to NFS, which made an
equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. NLIC recognized a
gain of $14.4 million on the transfer of securities.
On March 10, 1997 and March 11, 1997, NFS made cash capital
contributions to NLIC totaling $836.8 million.
7
<PAGE> 8
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of operations
and financial condition of the Company should be read in conjunction
with the unaudited consolidated financial statements and related notes
included elsewhere herein.
Management's narrative analysis of the results of operations contains
forward-looking statements that are intended to enhance the reader's
ability to assess the future financial performance of the Company.
These forward-looking statements are not based on historical
information and are being made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Because these
statements are subject to numerous assumptions, risks, and
uncertainties, actual results could be materially different. The
following factors, among others, may have such an impact: changes in
economic conditions; movements in interest rates and the stock markets;
competitive pressures on product pricing and services; success and
timing of business strategies; and the nature and extent of legislation
and regulatory actions and reforms.
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate income and expenses, investments and related investment
income supporting capital not specifically allocated to its product
segments and interest expense on debt in a Corporate and Other segment.
RESULTS OF OPERATIONS
The Company reported net income of $70.2 million for third quarter 1997
compared with $47.9 million for the same period last year. For the
first nine months of the year, net income was $197.3 million versus
$166.1 million in the corresponding period of 1996.
Total revenues for third quarter 1997, excluding realized gains and
losses on investments, increased 12% to $561.2 million compared to
$499.3 million for third quarter 1996. Year-to-date, revenues increased
11% to $1.64 billion compared to $1.48 billion a year ago. The
increases in revenues were primarily driven by increases in policy
charges and net investment income.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of variable annuities;
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
third quarter 1997, policy charges were $143.3 million, a 40% increase
from $102.3 million in third quarter 1996. Through nine months of 1997,
policy charges were $393.4 million, a 36% increase from $288.8 million
for the first nine months of 1996. The increase in policy charges is
due primarily to increases in separate account assets and the resulting
higher levels of asset fees. Total separate account assets have
increased 49% from $24.67 billion as of September 30, 1996 to $36.79
billion as of September 30, 1997.
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 $355.3 million and $1.05 billion, respectively, for the
three and nine months ended September 30, 1997 compared to $339.9
million and $1.01 billion for the corresponding periods in 1996. Net
investment income has increased primarily as a result of the increase
in invested assets to support growth in fixed annuity policy reserves.
8
<PAGE> 9
Realized gains and losses on investments are not considered by the
Company to be recurring components of earnings. The Company makes
decisions concerning the sale of invested assets based on a variety of
market, business, tax and other factors. All realized gains and losses
are reported in the Corporate and Other segment. Net realized losses on
investments were $4.8 million in third quarter 1997 compared to
realized losses of $5.1 million in third quarter 1996. On a year-to
date basis, the Company reported net realized gains of $4.3 million in
both 1997 and 1996. Realized gains in 1997 include $14.4 million
recognized when securities of $850.0 million were paid to Nationwide
Corp. as a dividend on February 24, 1997. See note 2 to the unaudited
consolidated financial statements. Also, during 1997, the Company
recorded realized losses of $5.2 million and $11.0 million during the
third and second quarter, respectively, related to the write-down of a
single corporate bond investment due to deterioration in the credit
quality of the issuer.
Total benefits and expenses were $448.5 million and $1.34 billion,
respectively, for the three and nine months ended September 30, 1997,
compared with $423.3 million and $1.24 billion for the corresponding
periods in 1996. The increases in expenses were attributable to
increases in amortization of deferred policy acquisition costs (DAC)
and other operating expenses.
Amortization of DAC increased 70% from $25.7 million in third quarter
1996 to $43.7 million in third quarter 1997. Amortization of DAC in
third quarter 1996 was reduced $14.8 million due to changes in
estimates of expected future profits as a result of favorable
investment and persistency experience. For the first nine months of
1997 amortization of DAC was $126.7 million, up 31% from $96.8 million
in the first nine months of 1996. In addition to the $14.8 million
reduction in 1996, the increase is principally related to increased
business in the Variable Annuities segment.
Operating expenses were $97.9 million in third quarter 1997, a 7%
increase from third quarter 1996 operating expenses of $91.8 million.
Operating expenses were up 19% to $286.0 million for the nine months
ended September 30, 1997 from $239.9 million for the same period of
1996. The increase is primarily due to an increase in the number of
annuity and life insurance contracts in-force and the related increase
in administrative processing costs. In addition, operating expenses in
third quarter 1997 include approximately $10 million on technology
projects related to year 2000 and the development of a new policy
administration system for the traditional life insurance line bringing
year to date expenses on theses projects to approximately $30 million.
Federal income tax expense was $37.7 million and $25.3 million,
representing effective tax rates of 34.9% and 35.7% for third quarter
1997 and 1996, respectively. For the first nine months of 1997 and 1996
federal income tax expense was $106.9 million and $84.5 million,
representing an effective tax rate of 35.1% in both periods.
Discontinued operations include the results of (i) the three NLIC
subsidiaries whose outstanding common stock, on September 24, 1996, was
declared as a dividend to Nationwide Corp. and (ii) NLIC's accident and
health and group life insurance business which was ceded to affiliates
during the third quarter of 1996. NLIC did not recognize any gain or
loss on the disposal of these subsidiaries or discontinuance of the
accident and health and group life insurance business. Income from
discontinued operations was $2.3 million and $9.6 million during the
third quarter and for the first nine months of 1996, respectively.
There was no income from discontinued operations in 1997 as a result of
the transfer by the Company of the ownership of the three subsidiaries
to Nationwide Corp. on January 1, 1997 and the reinsurance agreements.
EFFECT OF SPECIAL DIVIDENDS AND CASH CAPITAL CONTRIBUTIONS
On December 31, 1996, NLIC paid a $50.0 million dividend (the $50
Million Dividend) to Nationwide Corp. On February 24, 1997, NLIC paid a
dividend to NFS, which subsequently made a dividend payment to
Nationwide Corp., consisting of securities having an aggregate fair
value of $850.0 million (the $850 Million Dividend). The $50 Million
Dividend and the $850 Million Dividend are collectively referred to as
the "Special Dividends".
On March 10, 1997, and March 11, 1997, NFS made cash capital
contributions to NLIC totaling $836.8 million.
9
<PAGE> 10
Because (i) the Special Dividends preceded the cash capital
contributions, and (ii) the cash capital contributions were invested at
lower yields than the yield on the investments used to fund the $850
Million Dividend, the aggregate effect of the Special Dividends and the
cash capital contributions was approximately a $2.5 million reduction
in net investment income for third quarter 1997 and a $10.6 million
reduction in net investment income for the first nine months of 1997.
RESULTS OF OPERATIONS BY SEGMENT
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate income and expenses and investments and related investment
income supporting capital not specifically allocated to its product
segments in a Corporate and Other segment. All information set forth
below relating to the Company's Variable Annuities segment excludes the
fixed option under the Company's variable annuity contracts. Such
information is included in the Company's Fixed Annuities segment.
Variable Annuities
The Variable Annuities segment 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 Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts. The following table summarizes
selected unaudited income statement data for the Company's Variable
Annuities segment for the periods indicated.
VARIABLE ANNUITIES SELECTED INCOME STATEMENT DATA (1)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
----------- ------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policy charges $110.9 $75.8 46% $297.1 $210.7 41%
Net investment income and
other income (2) (2.3) (2.6) 12 (7.7) (7.0) (10)
------------ ----------- --------- ----------- ------------ ---------
108.6 73.2 48 289.4 203.7 42
------------ ----------- --------- ----------- ------------ ---------
Benefits and expenses:
Benefits and claims 1.6 1.0 60 4.3 3.5 23
Amortization of deferred policy
acquisition costs 25.1 10.2 146 64.6 38.9 66
Other operating expenses 41.9 32.1 31 116.3 94.3 23
------------ ----------- --------- ----------- ------------ ---------
68.6 43.3 58 185.2 136.7 35
------------ ----------- --------- ----------- ------------ ---------
Operating income before federal
income tax expense $ 40.0 $29.9 34% $104.2 $ 67.0 56%
============ =========== ========= =========== ============ =========
</TABLE>
----------
(1) Excludes the fixed option under the Company's variable annuity
contracts which is reported in the Company's Fixed Annuities
segment.
(2) The Company's method of allocating net investment income
results in a charge (negative net investment income) to this
segment which is recognized in the Corporate and Other
segment. The charge relates to non-invested assets which
support this segment on a statutory basis.
10
<PAGE> 11
Variable annuity segment results reflected a sharp increase in policy
charge revenues partially offset by increases in amortization of DAC
and other operating expenses. The increase in policy charge revenues is
attributable to growth in asset fees. Asset fees were $101.1 million in
third quarter 1997 up 48% from $68.3 million in third quarter 1996.
Year-to-date, assets fees were up 41% to $264.9 million compared to
$187.9 million for the first nine months of 1996. Total policy charges
as a percentage of policy reserves remained relatively stable around
140 basis points during the periods presented, reflecting no or minimal
changes in the levels of policy charges for most variable annuity
products.
During third quarter 1997, variable annuity policy reserves increased
$3.71 billion to $33.59 billion as of September 30, 1997. Variable
annuity policy reserves have grown $9.31 billion since December 31,
1996. Compared to one year ago, policy reserves are up 51% or $11.33
billion. Variable annuity policy reserve growth is primarily the result
of increased sales production through financial institutions, pension
plan administrators and public sector markets and strong equity market
conditions.
During third quarter and for the first nine months of 1997, variable
annuity policy reserves reflect market appreciation of $2.47 billion
and $5.57 billion compared to market appreciation of $581.8 million and
$1.71 billion in the same periods of 1996.
Variable annuity sales increased 25% to $1.90 billion in third quarter
1997 compared to $1.52 billion in third quarter 1996. For the first
nine months of 1997, variable annuity sales were $5.67 billion compared
to $4.96 billion a year ago representing an increase of 14%.
Sales comparisons for fourth quarter 1997 are expected to be favorable
to the prior year for both variable annuities and fixed annuities and
the Company anticipates total annuity sales for 1997 to approach $10
billion.
The increase in DAC amortization in 1997 compared to a year ago is due
to overall growth in the variable annuity business coupled with an $8.8
million reduction in third quarter 1996 DAC amortization due to changes
in estimates of expected future profits as a result of favorable
investment and persistency experience.
The growth in operating expenses also reflects the overall growth in
the variable annuity business. Operating expenses were 53 basis points
and 60 basis points of average variable annuity policy reserves for
third quarter 1997 and 1996, respectively. On a year-to-date basis,
operating expenses were 54 basis points in 1997 compared to 64 basis
points in 1996. During 1997, the Company has controlled operating
expense growth while increasing productivity through investments in
technology.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for a
prescribed period, 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.
11
<PAGE> 12
The following table summarizes selected unaudited income statement data
for the Company's Fixed Annuities segment for the periods indicated.
FIXED ANNUITIES SELECTED INCOME STATEMENT DATA (1)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
---------- ------------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policy charges $ 2.4 $ 4.2 (43)% $ 11.1 $ 13.3 (17)%
Life insurance premiums 7.1 5.0 42 23.1 20.5 13
Net investment income 276.9 263.6 5 819.2 783.8 5
---------- ------------- --------- ----------- ------------ ---------
286.4 272.8 5 853.4 817.6 4
---------- ------------- --------- ----------- ------------ ---------
Benefits and expenses:
Interest credited 206.1 201.0 3 612.9 599.8 2
Other benefits and claims 5.5 17.5 (69) 19.2 31.5 (39)
Amortization of deferred policy
acquisition costs 8.6 3.9 121 29.8 25.7 16
Other operating expenses 21.4 18.7 14 65.0 55.9 16
---------- ------------- --------- ----------- ------------ ---------
241.6 241.1 - 726.9 712.9 2
---------- ------------- --------- ----------- ------------ ---------
Operating income before federal
income tax expense $ 44.8 $ 31.7 41% $126.5 $104.7 21%
========== ============= ========= =========== ============ =========
</TABLE>
----------
(1) Includes the fixed option under the Company's variable annuity
contracts.
Fixed annuity segment results reflect an increase in interest spread
income attributable to growth in fixed annuity policy reserves and
wider interest margins. Interest spread is the differential between net
investment income and interest credited on policyholder account
balances. Interest spreads vary depending on crediting rates offered by
competitors, performance of the investment portfolio, changes in market
interest rates and other factors. The following table depicts the
interest spread earned in the Fixed Annuities segment for the three and
nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net investment income (average pre-tax yield) 8.20% 8.22% 8.18% 8.23%
Interest credited (average crediting rates) 6.10 6.27 6.12 6.30
------------- ------------- ------------- --------------
2.10% 1.95% 2.06% 1.93%
============= ============= ============= ==============
</TABLE>
For fourth quarter 1997 and into 1998, interest margins on
individual annuities, which comprise 45% of fixed annuity policy
reserves, are expected to narrow. This margin compression reflects
the impact of first year bonus crediting rate programs and the
maturity of certain investments yielding above current market
rates. Interest margins on group annuities, which comprise 55% of
fixed annuity policy reserves are expected to remain near 1997
levels.
Fixed annuity policy reserves increased to $13.97 billion as of
September 30, 1997 compared to $13.22 billion a year ago. The
growth reflects increased fixed annuity sales in the financial
institutions and public sector channels. Third quarter 1997 sales
were up 74% to $570.1 million compared to $326.7 million in third
quarter 1996. Year-to-date, fixed annuity sales were $1.54 billion
in 1997 compared to $1.13 billion in 1996.
12
<PAGE> 13
Third quarter 1997 sales included $453.5 million in variable annuity
contract premiums allocated to the fixed option, compared to $217.4
million for the third quarter of 1996. This increase reflects the
impact of a 1.00% first-year bonus crediting rate on the BEST OF
AMERICA - America's Vision product. This bonus rate was introduced in
July 1997 and is planned to continue through November 1997. Through
nine months of 1997, sales included $1.16 billion of premiums allocated
to the fixed option under a variable contract, compared to $883.8
million in 1996.
The decrease in other benefits and claims reflects a $13.0 million
charge in the third quarter of 1996 related to reserve strengthening in
the immediate annuity line due to changes in estimated profitability
based on revised assumptions for mortality and reinvestment rates.
Amortization of DAC reflects a reduction in third quarter 1996 of $6.0
million due to changes in estimates of expected future profits as a
result of favorable investment spread and persistency experience.
Higher operating expenses reflect growth in policies in-force.
Life Insurance
The Life Insurance segment consists of insurance products, including
variable universal life insurance products, that provide a death
benefit and may also allow the customer to build cash value on a
tax-deferred basis. The following table summarizes selected unaudited
income statement data for the Company's Life Insurance segment for the
periods indicated.
LIFE INSURANCE SELECTED INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
----------- ------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policy charges $ 26.9 $ 21.6 25% $ 77.1 $ 62.7 23%
Life insurance premiums 43.1 42.2 2 132.8 129.8 2
Net investment income 48.4 43.4 12 138.9 130.0 7
Other income 0.2 0.1 100 0.4 0.3 33
----------- ------------ --------- ----------- ------------ ---------
118.6 107.3 11 349.2 322.8 8
----------- ------------ --------- ----------- ------------ ---------
Benefits and expenses:
Interest credited 19.5 17.7 10 56.5 52.4 8
Other benefits and claims 34.7 33.1 5 110.8 105.6 5
Policyholder dividends 9.1 8.6 6 31.3 31.3 -
Amortization of deferred policy
acquisition costs 10.0 11.6 (14) 32.3 32.2 -
Other operating expenses 24.4 19.9 23 66.7 55.2 21
----------- ------------ --------- ----------- ------------ ---------
97.7 90.9 7 297.6 276.7 8
----------- ------------ --------- ----------- ------------ ---------
Operating income before federal
income tax expense $ 20.9 $ 16.4 27% $ 51.6 $ 46.1 12%
=========== ============ ========= =========== ============ =========
</TABLE>
Life Insurance segment results reflect revenue growth in the
variable universal life insurance line driven by a steady increase
in policy reserves partially offset by higher operating expenses
associated with technology-related costs in the traditional life
insurance lines. Variable universal life insurance policy charges
were $14.8 million in third quarter 1997, an increase of $5.3
million compared to $9.5 million in third quarter 1996. For the
nine months ended September 30, 1997 variable universal life
insurance policy charges were $40.7 million compared to $26.6
million for the same period last year reflecting an increase of
$14.1 million.
13
<PAGE> 14
Total Life Insurance segment policy reserves increased 15% to
$3.28 billion at September 30, 1997 compared to $2.84 billion a
year ago. Reserves underlying variable universal life insurance
products represent $926.9 million, or 28% of total reserves as of
September 30, 1997 compared to $562.6 million, or 20% of total
reserves as of September 30, 1996. Total Life Insurance segment
sales were $118.2 million and $384.4 million for the three and
nine month periods ended September 30, 1997 compared to $99.2
million and $296.3 million for the same periods a year ago. Sales
of variable universal life insurance products totaled $204.2
million or 53% of year-to-date 1997 sales compared to $111.8
million or 38% of sales during the first nine months of 1996
demonstrating the Company's focus on variable products. Included
in year-to-date 1997 variable universal life insurance sales of
$204.2 million were $50.0 million of bank-owned life insurance
sales. As of September 30, 1997, $96.0 million of bank-owned life
insurance premium was pending. The related policies are expected
to be issued during fourth quarter 1997.
Corporate and Other
The following table summarizes selected unaudited income statement
data for the Company's Corporate and Other segment for the periods
indicated.
CORPORATE AND OTHER SELECTED INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
(in millions of dollars) 1997 1996 Change 1997 1996 Change
----------- ------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net investment income $36.7 $38.6 (5)% $109.2 $111.8 (2)%
Other income 10.9 7.4 47 33.9 21.3 59
----------- ------------ --------- ----------- ------------ ---------
47.6 46.0 3 143.1 133.1 8
----------- ------------ --------- ----------- ------------ ---------
Benefits and expenses:
Interest credited 30.4 26.9 13 87.5 80.7 8
Other benefits and claims - - - - (1.0) NM
Other operating expenses 10.2 21.1 (52) 38.0 34.5 10
----------- ------------ --------- ----------- ------------ ---------
40.6 48.0 (15) 125.5 114.2 10
----------- ------------ --------- ----------- ------------ ---------
Operating income before federal
income tax expense $ 7.0 $ (2.0) NM $ 17.6 $ 18.9 (7)%
=========== ============ ========= =========== ============ =========
</TABLE>
----------
NM - Not meaningful.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, investment management fees and other revenues
earned from Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments
and net investment income and policy charges from group annuity
contracts issued to Nationwide Insurance Enterprise employee and
agent benefit plans.
In addition to the operating revenues presented in the table
above, the Company also reports realized gains and losses on
investments in the Corporate and Other segment. Net realized
losses on investments were $4.8 million in third quarter 1997
compared to realized losses of $5.1 million in third quarter 1996.
On a year-to date basis, the Company reported net realized gains
of $4.3 million in both 1997 and 1996. Realized gains in 1997
include $14.4 million recognized when securities of $850.0 million
were paid to Nationwide Corp. as a dividend on February 24, 1997.
See note 2 to the unaudited consolidated financial statements.
Also, during 1997, the Company recorded realized losses of $5.2
million and $11.0 million during the third and second quarter,
respectively, related to the write-down of a single corporate bond
investment due to deterioration in the credit quality of the
issuer.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance pricing and sales practices. A number of these
lawsuits have resulted in substantial jury awards or settlements.
In October 1996, a policyholder of NLIC filed a complaint in
Alabama state court against NLIC and an agent of NLIC (Wayne M.
King v. Nationwide Life Insurance Company and Danny Nix) related
to the sale of a whole life policy on a "vanishing premium" basis
and seeking unspecified compensatory and punitive damages. The
King case was dismissed with prejudice on June 25, 1997 pursuant
to an agreement between the parties. In February 1997, NLIC was
named as a defendant in a lawsuit filed in New York Supreme Court
also related to the sale of whole life policies on a "vanishing
premium" basis (John H. Snyder v. Nationwide Mutual Insurance
Company, Nationwide Mutual Insurance Co. and Nationwide Life
Insurance Co.). The plaintiff in such lawsuit seeks to represent a
national class of NLIC's policyholders and claims unspecified
compensatory and punitive damages. This lawsuit is in the early
stage and has not been certified as a class action. On April 22,
1997, a motion to dismiss the Snyder complaint in its entirety was
filed by the defendants, and the plaintiff has opposed such
motion. There can be no assurance that any litigation relating to
pricing and sales practices will not have a material adverse
effect on the Company in the future.
ITEM 2 CHANGES IN SECURITIES
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month period
ended September 30, 1997.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: November 13, 1997 /s/ Mark R. Thresher
---------------------------------------------
Mark R. Thresher, Vice President - Controller
(Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Nationwide
Life Insurance Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1997, and is qualified in its entirety by reference to such
unaudited consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 12,739
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 74
<MORTGAGE> 5,135
<REAL-ESTATE> 305
<TOTAL-INVEST> 19,112
<CASH> 101
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,570
<TOTAL-ASSETS> 58,190
<POLICY-LOSSES> 17,818
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 369
<POLICY-HOLDER-FUNDS> 60
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,358
<TOTAL-LIABILITY-AND-EQUITY> 58,190
156
<INVESTMENT-INCOME> 1,048
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 38
<BENEFITS> 891
<UNDERWRITING-AMORTIZATION> 127
<UNDERWRITING-OTHER> 286
<INCOME-PRETAX> 304
<INCOME-TAX> 107
<INCOME-CONTINUING> 197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
