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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. 3
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)
DENNIS W. CLICK, 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, 1998
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> <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, 1998
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 AN 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, will 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>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
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")..................................................10
C. The MVA Formula.................................................................................10
6. Contract Charges.....................................................................................10
7. GTOs at Annuitization................................................................................11
INVESTMENTS...................................................................................................11
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................................................................................12
D. Regulation......................................................................................13
E. Competition.....................................................................................14
F. Employees.......................................................................................14
2. Properties...........................................................................................14
3. Legal Proceedings....................................................................................14
4. Submission of Matters to a Vote of Security Holders..................................................15
5. Consolidated Financial Statements and Supplementary Data.............................................15
6. Selected Financial Data..............................................................................15
7. Management's Discussion and Analysis of Financial Condition
and Consolidated Results of Operations...............................................................16
A. Results of Operations............................................................................16
(i) Revenues.................................................................................17
(ii) Benefits and Expense.....................................................................17
(iii) Discontinued Operations..................................................................18
(iv) Statutory Premiums and Deposits..........................................................18
B. Business Segments................................................................................20
(i) Variable Annuities.......................................................................20
(ii) Fixed Annuities..........................................................................22
(iii) Life Insurance...........................................................................23
C. Liquidity and Capital Resources..................................................................25
D. Investments......................................................................................27
(i) General..................................................................................27
(ii) Fixed Maturity Securities................................................................28
(iii) Mortgage Loans...........................................................................30
E. Inflation........................................................................................32
F. Proposed Legislation.............................................................................32
</TABLE>
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<TABLE>
<S> <C>
8. Directors and Executive Officers....................................................................33
9. Executive Compensation..............................................................................37
A. Compensation...................................................................................37
B. Executive Incentive Plan.......................................................................38
C. Management Incentive Plan......................................................................38
D. Sustained Performance Incentive Plan...........................................................38
E. Deferred Compensation Program..................................................................39
F. Savings Plan...................................................................................39
G. Supplemental Defined Contribution Plan.........................................................39
H. Long-Term Equity Compensation Plan.............................................................39
I. Stock Options and Stock Appreciation Rights....................................................40
J. Options/SARs Exercises and Holdings............................................................41
K. Pension Plan...................................................................................41
(i) Retirement Plan...........................................................................41
(ii) Excess and Supplemental Plans.............................................................42
10. Compensation Committee Joint Report on Executive Compensation.......................................43
A. Introduction...................................................................................43
B. Elements of 1997 Executive Compensation........................................................44
C. Base Salaries..................................................................................44
D. Annual Incentive Compensation..................................................................44
E. Long-Term Incentive Compensation...............................................................45
(i) Executive Incentive Plan..................................................................45
(ii) Long-Term Equity Compensation Plan........................................................45
F. Compensation of the Chief Executive Officer....................................................46
G. Policy on Deductibility of Compensation Committe...............................................46
(i) Nationwide Life Insurance Company Compensation Committe....................................47
11. Exhibits, Financial Statements, Schedules and Reports...............................................48
</TABLE>
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GLOSSARY
COMPANY- 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 provisions 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, if applicable, 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 GTO. Amounts allocated to a
GTO will be credited with a Specified Interest Rate over the corresponding
Guaranteed Term, so long as such amounts are not distributed from the GTO prior
to the Maturity Date. Because every Guaranteed Term will end on the final day of
a calendar quarter, the Guaranteed Term may last for up to 3 months beyond the
3, 5, 7 or 10 year anniversary of the allocation to the GTO.
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 Contract 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 will 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 Contracts issued by the
Company which offer GTOs, or through transfers from other investment options
under the 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 an MVA, 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 Contract offering GTOs may be
wholly or partially allocated to one or more GTOs;
(2) a subsequent or additional purchase payment made under a 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
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 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 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 Contracts under which GTOs are offered may impose certain
restrictions on the transferability of invested assets within the Contract.
In the Contracts and prospectuses, such restrictions refer to limitations
affecting transfers between the "Variable Account" (underlying mutual
funds) and the "Fixed Account", if applicable. (The Fixed Account is 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 Specified Interest Rates may be
declared in the future 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,
1998, the Specified Interest Rate for that GTO will be credited until
September 30, 2008; the Guaranteed Term will begin on August 1, 1998
and end on September 30, 2008.
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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 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 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.
9
<PAGE> 12
B. CONSTANT MATURITY TREASURY RATES ("CMT RATES")
The formula (the "MVA Formula") for deriving the MVA Factor is based on
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 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) ] (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. CONTRACT CHARGES.
The 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.
10
<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 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 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.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOS
The GTOs are available only as investment options under certain 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 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 and life insurance on a participating and a
non-participating basis.
Prior to January 27, 1997, NLIC was wholly owned by Nationwide Corporation
(Nationwide Corp.). On that date, Nationwide Corp. contributed the outstanding
shares of NLIC's common stock to Nationwide Financial Services, Inc. (NFS), a
holding company formed by Nationwide Corp. in November 1996 for NLIC and other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. On March 11, 1997, NFS completed an
initial public offering of its Class A common stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain transactions in
anticipation of the initial public offering that focused the business of NFS on
long-terms savings and retirement products. On September 24, 1996, NLIC declared
a dividend payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings and retirement products. In addition, during 1996,
NLIC entered into two reinsurance agreements whereby all of NLIC's accident and
health and group life insurance business was ceded to two affiliates effective
January 1, 1996. These subsidiaries, Employers Life Insurance Company of Wausau
(ELICW), National Casualty Company
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<PAGE> 14
(NCC) and West Coast Life Insurance Company (WCLIC), through December 31, 1996,
and all accident and health and group life insurance business have been
accounted for as discontinued operations. Additionally, NLIC paid $900.0 million
of dividends, $50.0 million to Nationwide Corp. on December 31, 1996 and $850.0
million to NFS, which then made an equivalent dividend to Nationwide Corp., on
February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March 1997.
Wholly owned subsidiaries of NLIC as of December 31, 1997 include Nationwide
Life and Annuity Insurance Company (NLAIC), 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."
The Company is a member of the Nationwide Insurance Enterprise, which consists
of Nationwide Mutual Insurance Company (NMIC) and all of its subsidiaries and
affiliates.
NLAIC offers universal life insurance, variable universal life insurance and
individual annuity contracts on a non-participating basis. 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 to hold special investments.
B. DESCRIPTION OF BUSINESS
The Company is a leading provider of long-term savings and retirement products.
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 Nationwide
Insurance Enterprise insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the year ended December 31, 1997, the Company was the third
largest writer of individual variable annuity contracts in the United States
(U.S.) based on sales, according to The Variable Annuity Research & Data
Service. Its principal annuity series, The BEST of AMERICA, allows the customer
to choose from up to 39 investment options, including mutual funds managed by
premier mutual fund managers.
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.
C. PRODUCT SEGMENTS
The Company has three product segments: Variable Annuities, Fixed Annuities and
Life Insurance. In addition, the Company reports corporate revenues and
expenses, investments and related investment income supporting capital not
specifically allocated to its product segments, revenues and expenses of its
investment advisor subsidiary (other than the portion allocated to the Variable
Annuities and Life Insurance segments) and revenues and expenses related to
group annuity contracts sold to Nationwide Insurance Enterprise employee
benefits plans in a Corporate and Other segment.
The Variable Annuities segment, which accounted for $150.9 million (or 36%) of
the Company's operating income before federal income tax expense for 1997,
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 $169.5 million (or 40%) of the
Company's operating income before federal income tax expense for 1997, 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
12
<PAGE> 15
immediate annuities. The Fixed Annuities segment also includes the fixed option
under the Company's variable annuity contracts, which accounted for 78% of the
Company's fixed annuity sales in 1997 and 73% of the Company's fixed annuity
policy reserves as of December 31, 1997. During 1997, the average crediting
rates on contracts (including the fixed option under the Company's variable
annuity contracts) in the Fixed Annuities segment was 6.12%. 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 $70.9 million (or 17%) of the
Company's operating income before federal income tax expense for 1997, is
composed of a wide range of variable universal life insurance, whole life
insurance, universal life insurance, term life insurance and corporate-owned
life insurance products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis.
The Corporate and Other segment accounted for $27.5 million (or 7%) of the
Company's operating income (which excludes realized gains and losses on
investments) before federal income tax expense for 1997.
Additional information related to the Company's business segments is included in
note 14 to the consolidated financial statements and Financial Statement
Schedule III.
D. REGULATION
NLIC and NLAIC, as with other insurance companies, are subject to extensive
regulation and supervision in the jurisdictions in which they do business. Such
regulations limit the amount of dividends and other payments that can be paid by
insurance companies without prior approval and impose restrictions on the amount
and type of investments insurance companies may hold. These regulations also
affect many other aspects of insurance companies businesses, including licensing
of insurers and their products and agents, risk-based capital requirements and
the type and amount of required asset valuation reserve accounts. These
regulations are primarily intended to protect policyholders rather than
shareholders. 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.
Insurance companies are required to file detailed annual and quarterly financial
statements with state insurance regulators in each of the states in which they
do business, and their business and accounts are subject to examination by such
agencies at any time. In addition, insurance regulators periodically examine an
insurer's financial condition, adherence to statutory accounting practices and
compliance with insurance department rules and regulations. Applicable state
insurance laws, rather than federal bankruptcy laws, apply to the liquidation or
the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three to four years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners (NAIC). The
insurance subsidiaries are currently under examination by the Ohio and Delaware
insurance departments for the four-year period ended December 31, 1996. While
final reports of these examinations have not yet been issued, management does
not expect such reports to raise any significant issues or adjustments.
The payment of dividends by NLIC is subject to restrictions set forth in the
insurance laws and regulations of Ohio, its domiciliary state. The Ohio
insurance laws require Ohio-domiciled life insurance companies to seek prior
regulatory approval to pay a dividend or distribution of cash or other property
if the fair market value thereof, together with that of other dividends or
distributions made in the preceding 12 months, exceeds the greater of (i) 10% of
statutory-basis policyholders' surplus as of the prior December 31 or (ii) the
statutory-basis net income of the insurer for the 12-month period ending as of
the prior December 31. The Ohio insurance laws also require insurers to seek
prior regulatory approval for any dividend paid from other than earned surplus.
Earned surplus is defined under the Ohio insurance laws as the amount equal to
the Company's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus must be reasonable in relation to the insurer's outstanding
liabilities and adequate for its financial needs. As a result of the $850.0
million dividend paid on February 24, 1997, any dividend paid by NLIC during the
12-month period immediately following the dividend would be an extraordinary
dividend under Ohio insurance laws. Accordingly, no such dividend could be paid
without prior regulatory approval. The payment of dividends by NLIC may also be
subject to restrictions set
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<PAGE> 16
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
stockholders. The Company currently does not expect such regulatory requirements
to impair its ability to pay operating expenses and dividends in the future.
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.
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, 1997, the Company had approximately 3,250 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 430,000
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
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 February 1997, NLIC was named as a defendant in a
lawsuit filed in New York Supreme Court related to the sale of whole life
policies on a "vanishing premium" basis (John H. Snyder v. 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 has not been certified as a class action. In April, 1997,
a motion to dismiss the Snyder complaint in its entirety was filed by the
defendants, and the plaintiff has opposed such motion.
In November 1997, two plaintiffs, one who was the owner of a variable life
insurance contract and the other who was the owner of a variable annuity
contract, commenced an action against NLIC and the American Century group of
defendants (Robert Young and David D. Distad v. Nationwide Life Insurance
Company et al.). In this action, plaintiffs seek to represent a class of
variable life insurance contract owners and variable annuity contract owners
whom they claim were allegedly misled when purchasing these variable contracts
into believing that some portion of their premiums were invested in a publicly
traded mutual fund when, in fact, the premium monies were invested in a mutual
fund whose shares may only be purchased by insurance companies. The complaint
seeks unspecified compensatory, treble and punitive damages. In January 1998,
both NLIC and American Century filed motions to dismiss the entire complaint.
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<PAGE> 17
Plaintiffs' counsel have opposed these motions and the federal court in Texas
heard arguments on the motions to dismiss in April, 1998. This lawsuit is in an
early stage and has not been certified as a class action. NLIC intends to defend
this case vigorously.
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.
4. MARKET FOR NATIONWIDE LIFE INSURANCE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
There is no established public trading market for the NLIC's shares of common
stock. All of the 3,814,779 shares of NLIC's common stock issued and outstanding
are owned by NFS.
NLIC paid no cash dividends during 1997 and $50.0 million to Nationwide Corp.
during 1996.
On January 1, 1997, NLIC paid a dividend valued at $485.7 million to Nationwide
Corp. consisting of the outstanding shares of common stock of ELICW, NCC and
WCLIC. Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid an
equivalent dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million. The dividend payments were 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 dividend payments during 1998.
Reference is made to Note 10 of the consolidated financial statements for
information regarding dividend restrictions.
5. 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 11 - Exhibits, Financial Statement Schedules, and Reports.
Semi-annual and annual reports are sent to contract owners of the variable
annuity and life insurance contracts issued through registered Separate Accounts
of the Company.
The audited financial statements have been included herein is reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants, Two
Nationwide Plaza, Columbus, Ohio 43215, and upon the authority of said firm as
experts in accounting and auditing.
6. SELECTED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data. The
consolidated income statement data set forth below for the years ended December
31, 1993 through 1997 and the consolidated balance sheet data as of December 31,
1993 through 1997 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 Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included elsewhere herein.
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<PAGE> 18
<TABLE>
<CAPTION>
Selected Consolidated Financial Data (1)
($000's omitted)
As of and for the year ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,217,445 1,992,838 1,798,651 1,599,499 1,597,993
Total benefits and expenses 1,787,518 1,677,341 1,511,079 1,357,641 1,319,985
Income from continuing operations before 429,927 315,497 287,572 241,858 278,008
federal income tax expense and cumulative
effect of changes in accounting principles
Federal income tax expense 150,195 110,889 99,808 78,589 94,905
Income from continuing operations before 279,732 204,608 187,764 163,269 183,103
other items
Income from discontinued operations (less -- 11,324 24,714 20,459 28,637
federal income tax expense)
Cumulative effect of changes in accounting -- -- -- -- --
principles
Net income $ 279,732 215,932 212,478 183,728 211,509
$59,790,656 47,766,246 38,507,633 29,246,024 24,700,213
Total assets
</TABLE>
(1) Consolidated financial data of the Company as of and for the years ended
December 31, 1995, 1994 and 1993 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 15 to the consolidated financial statements
herein for additional information regarding the discontinued operations
treatment.
7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
Management's narrative analysis of the results of operations of NLIC and
subsidiaries for the three years ended December 31, 1997 follows. The discussion
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this report.
Management's narrative analysis 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. Forward-looking
statements include, but are not limited to, statements which represent the
Company's beliefs concerning future levels of sales and redemptions of the
Company's products, investment yields and interest spread, or the earnings or
profitability of the Company's activities. 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. Readers are directed to consider these and other
risks and uncertainties described in more detail elsewhere in documents filed by
the Company with the Securities and Exchange Commission. The Company undertakes
no obligation to update or revise any forward-looking information, whether as a
result of new information, future events, or otherwise.
A. RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating income, which
excludes realized investment gains and losses and results of discontinued
operations. Net operating income is commonly used in the insurance industry as a
measure of on-going earnings performance.
The following table reconciles the Company's reported net income to net
operating income for each of the last three years.
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<PAGE> 19
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
------------------------ ---- ---- ----
<S> <C> <C> <C>
Net income $ 279.7 $ 215.9 $ 212.5
Realized gains on investments, net of tax (7.9) (1.0) (0.1)
Income from discontinued operations, net of tax -- (11.3) (24.7)
------- ------- -------
Net operating income $ 271.8 $ 203.6 $ 187.7
</TABLE>
(i) Revenues
Total revenues for 1997, excluding realized gains and losses on investments,
increased to $2.21 billion compared to $1.99 billion for 1996 and $1.80 billion
for 1995. Increases in policy charges and net investment income accounted for
most of the growth.
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 premiums withdrawn during a specified period of
annuity and certain life insurance contracts and cost of insurance charges
earned on universal life insurance products. Policy charges for each of the last
three years were as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Asset fees $384.8 $275.5 $184.8
Administrative fees 59.5 50.1 40.7
Surrender fees 32.4 22.1 17.3
Cost of insurance charges 68.5 53.2 43.8
------ ------ ------
Total policy charges $545.2 $400.9 $286.6
</TABLE>
The growth in asset fees reflects increases in total separate account assets of
40% in 1997 and 45% in 1996. As of year end, total separate account assets were
$37.72 billion.
Net investment income includes the gross investment income earned on investments
supporting fixed annuities and certain life insurance products as well as the
yield on the Company's general account invested assets which are not allocated
to product segments. Net investment income grew from $1.29 billion and $1.36
billion in 1995 and 1996, respectively, to $1.41 billion in 1997 primarily due
to increased invested assets to support growth in fixed annuity policy reserves.
Fixed annuity policy reserves, which include the fixed option of the Company's
variable annuity products, increased $727.8 million in 1996 and $682.4 million
in 1997 and were $14.19 billion as of year end 1997. The increase in net
investment income due to growth in invested assets was partially offset by
declining investment yields in 1997 and 1996 due to lower market interest rates.
Realized gains and losses on investments are not considered by the Company to be
recurring components of earnings and are reported in the Corporate and Other
segment. The Company makes decisions concerning the sale of invested assets
based on a variety of market, business, tax and other factors. Net realized
gains on investments were $11.1 million in 1997 compared to realized losses of
$0.3 million and $1.7 million in 1996 and 1995, respectively. Realized gains in
1997 include $14.4 million recognized when securities of $850.0 million were
paid to NFS, which subsequently paid to Nationwide Corp., as a dividend on
February 24, 1997 as a part of certain transactions that were completed in
anticipation of NFS' initial public offering. Also, during 1997, the Company
recorded a realized loss of $16.2 million related to the sale of a single
corporate bond investment that had deteriorated due to the credit quality of the
issuer.
(ii) Benefits and Expenses
Interest credited to policyholder account balances totaled $1.02 billion in 1997
compared to $982.3 million in 1996 and $950.3 million in 1995 and principally
relates to fixed annuity products. The growth in interest credited reflects the
increase in fixed annuity policy reserves previously discussed partially offset
by reduced average crediting rates. The average crediting rate on fixed annuity
policy reserves was 6.12% in 1997 compared to 6.30% and 6.58% in 1996 and 1995,
respectively.
17
<PAGE> 20
Amortization of deferred policy acquisition costs (DAC) increased to $167.2
million in 1997 compared to $133.4 million in 1996 and $82.7 million in 1995.
The increase is principally related to increased business in the Variable
Annuities segment.
Operating expenses were $384.9 million in 1997, a 12% increase from 1996
operating expenses of $342.4 million. Operating expenses were $273.0 million in
1995. The increase reflects the growth in the number of annuity and life
insurance contracts in-force and the related increase in administrative
processing costs. Increased operating expenses in 1997 also reflect the cost of
certain technology initiatives.
The Company has developed a plan to address issues related to the Year 2000. The
problem relates to many existing computer programs using only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Company has been evaluating its exposure to the Year
2000 issue through a review of all of its operating systems as well as
dependencies on the systems of others since 1996. The Company expects all system
changes and replacements needed to achieve Year 2000 compliance to be completed
by the end of 1998. Compliance testing will be completed in the first quarter of
1999. The Company charges to expense all costs associated with these system
changes as the costs are incurred.
Operating expenses in 1997 include approximately $45 million on technology
projects, which includes costs related to Year 2000 and the development of a new
policy administration system for traditional life insurance products and other
system enhancements. The Company anticipates spending a comparable amount in
1998 on technology projects, including Year 2000 initiatives.
Federal income tax expense was $150.2 million representing an effective tax rate
of 34.9% for 1997. Federal income tax expense in 1996 and 1995 was $110.9
million and $99.8 million, respectively, representing effective rates of 35.2%
and 34.7%.
(iii) Discontinued Operations
Discontinued operations include the results of (i) the three NLIC subsidiaries
whose outstanding common stock, on September 24, 1996, was declared as a
dividend payable to Nationwide Corp. on January 1, 1997 and (ii) NLIC's accident
and health and group life insurance business which was ceded to affiliates
effective January 1, 1996. The Company entered into these transactions in 1996
in order to focus its business on long-term savings and retirement products. The
transactions are described in note 15 of the consolidated financial statements.
The Company 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 and $24.7 million in 1995. There was no income from discontinued operations
in 1997.
(iv) Statutory Premiums and Deposits
The Company sells its products through a broad distribution network comprised of
wholesale and retail distribution channels. Wholesale distributors are
unaffiliated entities that sell the Company's products to their own customer
base and include investment broker/dealers, pension plan administrators and
financial institutions. The Company has access to over 1,000 broker/dealers and
over 30,000 registered representatives who sell individual and group variable
annuities, fixed annuities and variable life insurance in all 50 states and the
District of Columbia. Over 250 regional pension plan administrators market the
Company's group variable and fixed annuities to employers sponsoring employee
retirement programs. The Company currently has relationships with over 180 banks
selling individual variable and fixed annuities (under the Company's brand name
and on a private-label basis), variable universal life insurance and group
pension products.
Retail distributors are representatives of the Company who market products
directly to a customer base identified by the Company and include
representatives of affiliated sales companies and Nationwide Insurance
Enterprise insurance agents. The Company markets products on a retail basis to
state and local governments and to teachers through affiliated sales companies.
Approximately 4,300 licensed Nationwide Insurance Enterprise insurance agents
sell life insurance and individual annuities primarily targeting holders of
personal automobile and homeowners' insurance policies issued by the Nationwide
Insurance Enterprise.
18
<PAGE> 21
Statutory premiums and deposits by distribution channel for each of the last
three years are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----
(in millions of dollars) Amount % Amount % Amount %
------------------------ ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Wholesale channels:
Investment dealers $3,894.1 37.7% $3,627.8 42.5% $2,835.4 42.8%
Pension market 2,325.0 22.5 1,911.6 22.4 1,573.7 23.8
Financial institutions 1,653.2 16.0 947.2 11.1 515.4 7.8
-------- ---- -------- ----
Total wholesale channels 7,872.3 76.2 6,486.6 76.0 4,924.5 74.4
Retail channels:
Public sector and teachers market 1,862.1 18.0 1,528.0 17.9 1,244.9 18.8
Nationwide agents 602.7 5.8 525.5 6.1 446.5 6.8
-------- ---- -------- ---- ------- -----
Total retail channels 2,464.8 23.8 2,053.5 24.0 1,691.4 25.6
-------- ---- -------- ---- ------- -----
Total external premiums and 10,337.1 100.0% 8,540.1 100.0% 6,615.9 100.0%
deposits
======== ===== ======= ===== ======= =====
Nationwide Insurance Enterprise
employee and agent benefit plans 174.9 502.5 182.1
-------- -------- -------
Total statutory premiums
and deposits $10,512.0 $9,042.6 $6,798.0
========= ======== ========
</TABLE>
Excluding Nationwide Insurance Enterprise benefit plan sales, the Company
achieved annual sales growth of 21%, 29%, and 21 % in 1997, 1996 and 1995,
respectively. The Company's goal is 20% annual growth in external sales and
management believes the Company is well positioned to achieve that goal in 1998.
The Company's flagship products are marketed under The BEST of AMERICA brand,
and include individual and group variable annuities and variable life insurance.
The BEST of AMERICA products allow customers to choose from among investment
options managed by premier mutual fund managers. The Company has also developed
private label variable and fixed annuity products in conjunction with other
financial services providers which allow those providers to sell individual
variable and fixed annuities with substantially the same features as the
Company's brand name products to their own customer bases under their own brand
name.
The Company also markets group deferred compensation retirement plans to
employees of state and local governments for use under Internal Revenue Code
(IRC) Section 457. The Company utilizes its sponsorship by the National
Association of Counties and The United States Conference of Mayors when
marketing IRC Section 457 products. In addition, the Company utilizes an
exclusive arrangement with the National Education Association (NEA) to market
tax-qualified annuities under IRC 403(b) to NEA members. Variable annuities
developed for the NEA members are sold under the NEA Valuebuilder brand.
External statutory premiums and deposits by product are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
------------------------ ---- ---- ----
<S> <C> <C> <C>
The BEST OF AMERICA products:
Individual variable annuities $4.269.7 $ 3,801.5 $ 2,740.6
Group variable annuities 2,220.5 1,807.1 1,457.6
Variable universal life 220.3 165.4 101.3
Private label annuities 1,006.3 625.9 389.7
IRC Section 457 annuities 1,715.7 1,425.8 1,191.1
The NEA Valuebuilder annuities 145.5 102.2 53.8
Other 759.1 612.2 681.8
--------- --------- ---------
$10,337.1 $ 8,540.1 $ 6,615.9
========= ========= =========
</TABLE>
19
<PAGE> 22
3. BUSINESS SEGMENTS
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, revenues and expenses of its investment
advisor subsidiary (other than the portion allocated to the Variable Annuities
and Life Insurance segments) and revenues and expenses related to group annuity
contracts sold to Nationwide Insurance Enterprise employee benefit plans in a
Corporate and Other segment. All information set forth below relating to the
Company's Variable Annuities segment excludes the fixed option under the
Company's variable annuity contracts. Such information is included in the
Company's Fixed Annuities segment.
The following table summarizes operating income before federal income tax
expense for the Company's business segments for each of the last three years.
<TABLE>
<CAPTION>
(millions of dollars) 1997 1996 1995
--------------------- ---- ---- ----
<S> <C> <C> <C>
Operating income:
Variable annuity $ 150.9 $ 90.3 $ 50.8
Fixed annuity 169.5 135.4 137.0
Life insurance 70.9 67.2 67.6
Corporate and other 27.5 22.9 33.9
------- ------- -------
$ 418.8 $ 315.8 $ 289.3
======= ======= =======
</TABLE>
(i) 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.
20
<PAGE> 23
The following table summarizes certain selected financial data for the Company's
Variable Annuities segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
- ----------------------- ---------- ---------- ----------
INCOME STATEMENT DATA (1)
<S> <C> <C> <C>
Revenues:
Asset fees $ 370.2 $ 261.8 $ 172.8
Administrative fees 21.8 18.1 14.0
Surrender fees 21.9 13.6 10.0
---------- ---------- ----------
Total policy charges 413.9 293.5 196.8
Net investment income and other (2) (9.9) (8.9) (7.8)
---------- ---------- ----------
404.0 284.6 189.0
Benefits and expenses:
Benefits and claims 5.9 4.6 2.9
Amortization of DAC 87.8 57.4 26.3
Other operating expenses 159.4 132.2 109.0
---------- ---------- ----------
253.1 194.3 138.2
---------- ---------- ----------
Operating income before federal income tax expense $ 150.9 $ 90.3 $ 50.8
========== ========== ==========
OTHER DATA (1)
Statutory premiums and deposits (3) $ 7,535.8 $ 6,500.3 $ 4,399.3
Withdrawals 2,683.3 1,697.4 1,071.6
Policy reserves as of year end $ 34,486.7 $ 24,278.1 $ 16,761.8
Ratio of policy charges to average policy reserves 1.41% 1.43% 1.44%
Pre-tax operating income to average policy reserves 0.51% 0.44% 0.37%
</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.
(3) Statutory data have been derived from the Annual Statements of NLIC and
NLAIC, as filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices.
Variable annuity segment results reflect 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 $370.2 million in 1997 up 41 % from $261.8
million in 1996 and totaled $172.8 million in 1995. The increase in assets fees
reflects substantial growth in policy reserve levels as a result of steady
premium growth and through market appreciation on investments underlying
reserves. Variable annuity policy reserves grew $10.21 billion during 1997
reaching $34.49 billion as of year end 1997 compared to growth in 1996 of $7.52
billion and year end 1996 reserves of $24.28 billion. Total policy charges as a
percentage of policy reserves remained relatively stable between 141 and 144
basis points during the last three years presented, reflecting no or minimal
changes in the levels of policy charges for most variable annuity products.
The Company has sustained high sales growth over the recent three year period
through deeper penetration of existing distribution channels and the addition of
new sales outlets. In addition, variable annuity sales reflect growing consumer
demand for equity-based retirement savings investments, coupled with a robust
stock market and lower interest rates. Significant increases in production
through financial institutions, pension plan administrators and public sector
markets have contributed strongly to the growth in variable annuity sales in
1997, when sales increased 16% to a record $7.54 billion compared to $6.50
billion in 1996. Variable annuity sales in 1996 represented a 48% increase over
1995 sales of $4.40 billion.
21
<PAGE> 24
Favorable equity market conditions over the past three years have also
contributed significantly to the growth in variable annuity policy reserves.
Variable annuity policy reserves reflect market appreciation of $5.21 billion,
$2.72 billion and $2.93 billion in 1997, 1996 and 1995, respectively.
The increase in amortization of DAC in 1997 compared to 1996 and 1995 is due to
overall growth in the variable annuity business.
The growth in operating expenses also reflects the overall growth in the
variable annuity business. Operating expenses were 54 basis points of average
variable annuity policy reserves for 1997 comparing favorably to 64 basis points
and 80 basis points for 1996 and 1995, respectively. The Company has controlled
operating expense growth by increasing productivity through investments in
technology and economies of scale.
(ii) 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 includes the
fixed option under the Company's variable annuity contracts.
The following table summarizes certain selected financial data for the Company's
Fixed Annuities segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Policy charges $ 15.9 $ 18.0 $ 16.4
Life insurance premiums 27.3 24.0 32.8
Net investment income 1,098.2 1,050.6 1,002.8
---------- ---------- ----------
1,141.4 1,092.6 1,052.0
---------- ---------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 823.4 805.0 775.7
Other benefits and claims 23.3 33.8 29.5
Amortization of DAC 39.8 38.6 29.5
Other operating expenses 85.4 79.8 80.3
---------- ---------- ----------
971.9 957.2 915.0
---------- ---------- ----------
Operating income before federal income tax expense $ 169.5 $ 135.4 $ 137.0
---------- ---------- ----------
OTHER DATA (1)
Statutory premiums and deposits (2) $ 2,137.9 $ 1,600.5 $ 1,864.2
Withdrawals and benefits 1,710.0 1,375.5 1,151.6
Policy reserves as of year end $ 14,194.2 $ 13,511.8 $ 12,784.0
Net interest margin on general account policy reserves 2.04% 1.92% 1.92%
Pre-tax operating income to average policy reserves 1.22% 1.03% 1.14%
</TABLE>
(1) Includes the fixed option under the Company's variable annuity contracts.
(2) Statutory data have been derived from the Annual Statements of NLIC and
NLAIC, as filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices.
22
<PAGE> 25
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 to 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 margins on general account policy reserves
in the Fixed Annuities segment for each of the last three years.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net investment income 8.16% 8.22% 8.50%
Interest credited 6.12 6.30 6.58
---- ---- ----
2.04% 1.92% 1.92%
==== ==== ====
</TABLE>
The Company expects interest margins to compress during 1998 reflecting the
lower interest rate environment available for new invested assets. The Company
is able to mitigate the effects of lower investment yields by periodically
resetting the rates credited on fixed annuity contracts. As of December 31,
1997, $6.85 billion, or 48% of fixed annuity policy reserves, were in contracts
where the guaranteed interest rate is reestablished each quarter. Fixed annuity
policy reserves of $4.88 billion are in contracts that adjust the crediting rate
on an annual basis with portions resetting in each calendar quarter. The Company
also has $1.40 billion of fixed annuity policy reserves that call for the
crediting rate to be reset annually on each January 1. The remaining $1.06
billion of fixed annuity policy reserves are in payout status where the Company
has guaranteed periodic, typically monthly, payments.
Fixed annuity policy reserves increased to $14.19 billion as of year-end
compared to $13.51 billion a year ago and $12.78 billion as of the end of 1995.
The growth reflects increased fixed annuity sales in 1997 through the financial
institutions and investment dealer channels. Sales for 1997 were up 34% to $2.14
billion compared to $1.60 billion in 1996. Sales in 1995 totaled $1.86 billion.
Most of the Company's fixed annuity sales are premiums allocated to the
guaranteed fixed option of variable annuity contracts. Fixed annuity sales for
1997 include $1.67 billion in premiums allocated to the fixed option under a
variable annuity contract, compared to $1.24 billion in 1996. Sales growth in
1997 reflects the success of proprietary fixed product sales through financial
institutions, as well as the impact of a 1.00% first-year bonus crediting rate
offered on The BEST of AMERICA - America's Vision product during the second half
of 1997.
The decrease in other benefits and claims reflects a $13.0 million charge in
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 1996 of $6.0
million due to changes in estimates of expected future profits as a result of
favorable investment spread and persistency experience.
(iii) Life Insurance
The Life Insurance segment consists of insurance products, including variable
universal life insurance and corporate-owned insurance products, that provide a
death benefit and may also allow the customer to build cash value on a
tax-deferred basis.
23
<PAGE> 26
The following table summarizes certain selected financial data for the Company's
Life Insurance segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Cost of insurance charges $ 68.5 $ 53.2 $ 43.8
Other policy charges 36.8 33.4 27.5
Total policy charges 105.3 86.6 71.3
---------- ---------- ----------
Life insurance premiums 178.1 174.6 166.3
Net investment income 189.1 174.0 171.3
Other 0.6 0.4 0.2
---------- ---------- ----------
473.1 435.6 409.1
---------- ---------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 78.5 70.2 69.0
Other benefits and claims 149.0 141.2 133.0
Policyholder dividends 40.6 40.7 39.7
Amortization of DAC 39.6 37.4 31.0
Other operating expenses 94.5 78.9 68.8
---------- ---------- ----------
402.2 368.4 341.5
---------- ---------- ----------
Operating income before federal income tax expense $ 70.9 $ 67.2 $ 67.6
========== ========== ==========
OTHER DATA:
Statutory premiums (1):
Traditional and universal life $ 248.4 $ 253.9 $ 248.3
Variable universal life 220.0 165.4 104.1
Corporate-owned life 195.0 20.0 -
Policy reserves as of year end:
Traditional and universal life 2,369.5 2,295.5 2,213.7
Variable universal life 892.1 622.6 446.8
Corporate-owned life 225.4 20.8 -
Life insurance in force:
Traditional and universal life 27,495.7 28,107.0 27,616.9
Variable universal life 11,337.4 8,094.6 4,926.5
Corporate-owned life $ 426.3 $ 73.0 $ -
</TABLE>
(1) Statutory data have been derived from the Annual Statements of NLIC and
NLAIC, as filed with insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Life Insurance segment results reflect revenue growth in the variable universal
life insurance line driven by a steady increase in insurance in-force and 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 $57.1 million in 1997, an
increase of $18.5 million, or 48%, compared to $38.6 million in 1996. For 1995,
variable universal life insurance policy charges were $26.7 million. The growth
in variable universal life policy charges is attributable to the growth in
insurance in-force and policy reserves, which increased 40% and 43%,
respectively, in 1997. During 1996, variable universal life insurance in-force
and policy reserves increased 64% and 39%, respectively. Growth in insurance
in-force and policy reserves is due to strong sales from both investment dealers
and Nationwide Insurance Enterprise insurance agents, combined with high
persistency. In February, 1998, the Company introduced a new variable universal
life insurance product called Next Generation, which offers an innovative,
tiered-pricing structure that maximizes cash value. The Company anticipates
continued sales growth in 1998 for variable universal life insurance as well as
its recent entry into corporate-owned insurance products.
24
<PAGE> 27
The growth in operating expenses is due to technology-related costs combined
with the increase in variable life insurance policies in-force.
Technology-related expenses in 1997 were $16.5 million, compared to $3.2 million
in 1996. The majority of the expenses are for a new policy administration system
to support traditional life insurance products and for activities to make
systems Year 2000 compliant.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 148.7 $ 154.7 $ 137.6
Other 39.1 25.7 12.7
---------- ---------- ----------
187.8 180.4 150.3
---------- ---------- ----------
Benefits and expenses:
Interest credited to policy reserves 114.7 106.1 105.6
Other operating expenses 45.6 51.4 10.8
---------- ---------- ----------
160.3 157.5 116.4
---------- ---------- ----------
Operating income before federal income tax expense(1) $ 27.5 $ 22.9 $ 33.9
========== ========== ==========
OTHER DATA:
Statutory premiums and deposits (2) $ 174.9 $ 502.6 $ 182.1
Withdrawals and benefits 205.4 140.3 144.4
Policy reserves as of year end 3,791.9 3,302.5 2,644.3
Nationwide retail mutual fund assets(3) $ 2,555.0 $ 2,136.2 $ 2,113.9
</TABLE>
(1) Excludes realized gains (losses) on investments and discontinued
operations.
(2) Statutory data have been derived from the Annual Statements of NLIC and
NLAIC, as filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices.
(3) Excludes mutual funds selected as investment options under the Company's
variable annuity and variable universal life insurance contracts and mutual
funds selected as investment options under Nationwide Insurance Enterprise
employee and agent benefit plans.
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 previously presented, the Company also
reports realized gains and losses on investments in the Corporate and Other
segment. Net realized gains on investments were $11.1 million in 1997 compared
to realized losses of $0.3 million and $1.7 million in 1996 and 1995,
respectively. Realized gains in 1997 include $14.4 million recognized when
securities of $850.0 million were paid to NFS, which subsequently paid to
Nationwide Corp., as a dividend on February 24, 1997 as a part of certain
transactions that were completed in anticipation of NFS' initial public
offering. Also, during 1997, the Company recorded a realized loss of $16.2
million related to the sale of a single corporate bond investment that had
deteriorated due to the credit quality of the issuer.
25
<PAGE> 28
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 if the fair market value of the dividend, together
with that of other dividends made within 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 prior year. NLIC's statutory-basis
policyholders' surplus as of December 31, 1997 was $1.13 billion and
statutory-basis net income for 1997 was $111.7 million. 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, any
dividend paid by NLIC during the twelve-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.
NFS contributed amounts totaling $836.8 million to NLIC on March 10, 1997 and
March 11, 1997. The Company believes it has adequate statutory capital and
surplus to satisfy all regulatory requirements and to support its growth over
the following year.
The Company's principal sources of funds are premiums and deposits 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, commissions 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 operating expenses
paid) was $1.15 billion, $858.3 million and $1.11 billion in 1997, 1996 and
1995, respectively. Net cash used in investing activities (principally
reflecting investments purchased less investments called, redeemed or sold) was
$1.96 billion, $771.3 million and $1.73 billion in 1997, 1996 and 1995,
respectively. Net cash provided by (used in) financing activities (principally
reflecting the capital contribution in 1997 only, cash dividends paid in 1996
and 1995 only and deposits to investment product and universal life insurance
product account balances less withdrawals from such account balances) was $945.5
million, $(52.7) million and $617.5 million in, 1997, 1996 and 1995,
respectively.
Also available as a source of funds to the Company is a $600.0 million revolving
credit facility entered into by NLIC and Nationwide Mutual Insurance Company in
August 1996 with a five year term with a group of national financial
institutions. In September 1997, the credit agreement was amended to include NFS
as a party to and borrower under the agreement. The facility provides for
several and not joint liability with respect to any amount drawn by any party.
To date, no amounts have been drawn down on the facility. The facility provides
covenants, including, but not limited to, requirements that NLIC maintain
statutory surplus in excess of $875 million.
A primary liquidity concern with respect to annuity and life insurance products
is the risk of early policyholder withdrawal. The Company mitigates this risk by
offering variable products where the investment risk is transferred to the
policyholder, charging surrender fees at the time of withdrawal for certain
products, applying a market value adjustment to withdrawals for certain products
in the Company's general account, and monitoring and matching anticipated cash
inflows and outflows.
26
<PAGE> 29
For individual annuity products ($27.1 billion of reserves as of December 31,
1997) the surrender charge is calculated as a percentage of the lesser of
deposits made or the amount surrendered and is assessed at declining rates
during the first seven years after a deposit is made.
For group annuity products ($20.5 billion of reserves as of December 31, 1997),
the surrender charge amounts and periods can vary significantly, depending on
the terms of each contract and the compensation structure for the producer.
Generally, surrender charge percentages for group products are less than
individual products because the Company incurs lower expenses at contract
origination for group products.
Life insurance policies are also subject to withdrawal. However, they are less
susceptible to withdrawal than are annuity products because policyholders
generally must undergo a new underwriting process and may incur a surrender fee
in order to obtain a new insurance policy.
The short-term and long-term liquidity requirements of the Company are monitored
regularly to match cash inflows with cash requirements. The Company periodically
reviews its short-term 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-term 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 products. The Company's general account
investments are primarily managed in a number of pools that are segregated by
weighted average maturity of the assets required by the pools. On fixed maturity
securities and mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms of the asset. For mortgage backed
securities, repayments are determined using the current rate of repayment of the
underlying 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 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, 1997, the average duration of assets
in this pool was 7.39 years and the average duration of the liabilities was 7.90
years. Policy reserves on this business were $1.06 billion as of December 31,
1997.
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 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 the 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 1997 cash flow testing
process, interest rates for 90-day treasury bills ranged from 0.5% to 12.4%
under the 20 predetermined scenarios and 0.9% to 29.4% 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 1997 indicated that the Company's reserves were adequate as of December
31, 1997.
27
<PAGE> 30
The Company manages its investment portfolio in part to reduce its exposure to
interest rate fluctuations. In general, the market 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.
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.
INVESTMENTS
General
The Company's assets are divided between separate account and general account
assets. As of December 31, 1997, $37.72 billion (or 63%) of the Company's total
assets were held in separate accounts and $22.07 billion (or 37%) were held in
the Company's general account, including $19.67 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 funds. All of the investment risk in the Company's separate
account assets is borne by the Company's customers, with the exception of $365.5
million of policy reserves as of December 31, 1997 ($280.2 million as of
December 31, 1996) for which the Company bears the investment risk. In addition
to the information presented herein, see note 3 to the consolidated financial
statements for further information regarding the Company's investments.
The following table summarizes the Company's consolidated general account
invested assets by asset category.
December 31, 1997 December 31, 1996
------------------- -------------------
Carrying % of Carrying % of
(in millions of dollars) Value Total Value Total
--------- ----- --------- -----
Fixed maturity securities $13,204.1 67.5% $12,304.6 67.2%
Mortgage loans, net 5,181.6 26.5 5,272.1 28.8
Real estate, net 311.4 1.6 265.8 1.5
Policy loans 415.3 2.1 371.8 2.0
Equity securities 80.4 0.4 59.1 0.3
Other long-term investments 25.2 0.1 28.7 0.2
Short-term investments 358.4 1.8 4.8 --
--------- ----- --------- -----
Total $19,576.4 100.0% $18,306.9 100.0%
========= ===== ========= =====
28
<PAGE> 31
Fixed Maturity Securities
The following table summarizes the composition of the Company's general account
fixed maturity securities by category.
December 31, 1997 December 31, 1996
------------------- -------------------
Carrying % of Carrying % of
(in millions of dollars) Value Total Value Total
--------- ----- --------- -----
U.S. government/agencies $ 313.7 2.4% $ 279.2 2.3%
Foreign governments 95.8 0.7 101.9 0.8
State and political subdivisions 1.6 -- 6.7 0.1
Mortgage-backed securities:
U.S. government/agencies 3,750.3 28.4 3,665.3 29.8
Non-government/agencies -- -- -- --
Corporate:
Public 4,597.3 34.8 4,339.7 35.3
Private 4,445.4 33.7 3,911.8 31.7
========= ===== ========= =====
Total $13,204.1 100.0% $12,304.6 100.0%
========= ===== ========= =====
The average duration and average maturity of the Company's general account fixed
maturity securities as of December 31, 1997 were approximately 3.44 and 7.77
years, respectively. As a result, the market value of the Company's general
account investments may fluctuate significantly in response to changes in
interest rates. In addition, the Company may also be likely to experience
investment losses to the extent its liquidity need require the disposition of
general account fixed maturity securities in unfavorable interest rate
environments.
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% were in the highest two NAIC Designations
as of December 31, 1997.
29
<PAGE> 32
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.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- -------------------
NAIC Rating Agency Carrying % of Carrying % of
Designation (1) Equivalent Designation (2) Value Total Value Total
- --------------- -------------------------- --------- ----- --------- -----
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 8,809.3 66.7% $ 8,447.5 68.7%
2 Baa 4,116.6 31.2 3,629.9 29.5
3 Ba 220.9 1.7 166.6 1.3
4 B 53.7 0.4 49.7 0.4
5 Caa and lower 3.6 -- 10.9 0.1
6 In or near default -- -- -- --
--------- ----- --------- -----
$13,204.1 100.0% $12,304.6 100.0%
========= ===== ========= =====
</TABLE>
- ----------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown 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's general account mortgage-backed security (MBS) investments include
residential MBSs and multi-family mortgage pass-through certificates. As of
December 31, 1997, MBSs were $3.75 billion (or 28%) of the carrying value of the
general account fixed maturity securities available-for-sale, 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), Real Estate Mortgage Investment Conduits (REMICs) 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, 1997, $2.65 billion (or 71%) of the carrying value of the general
account MBS portfolio was invested in planned amortization class CMOs/REMICs
(PACs). PACs are securities whose cash flows are designed to remain constant
over a variety of mortgage prepayment environments. Other classes in the
CMO/REMIC security are structured to accept the volatility of mortgage
prepayment changes, thereby insulating the PAC class.
30
<PAGE> 33
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- --------------------
Carrying % of Carrying % of
(in millions of dollars) Value Total Value Total
--------- ----- -------- -----
<S> <C> <C> <C> <C>
Accrual $ 48.5 1.3% $ 41.4 1.1%
Planned Amortization Class 2,645.3 70.5 2,970.6 81.0
Sequential 19.8 0.5 2.5 0.1
Scheduled 160.6 4.3 167.2 4.6
Targeted Amortization Class 90.8 2.4 87.7 2.4
Very Accurately Defined Maturity 550.1 14.7 395.9 10.8
Multi-family Mortgage Pass-through Certificates 235.2 6.3 -- --
-------- ----- -------- -----
$3,750.3 100.0% $3,665.3 100.0%
======== ===== ======== =====
</TABLE>
The Company invests in private fixed maturity securities because of the (i)
generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business
covenants available in private fixed maturity security loan agreements and (iii)
stronger prepayment protection. Although private fixed maturity securities are
not registered with the Securities and Exchange Commission and generally are
less liquid than public fixed maturity securities, restrictive financial and
business covenants included in private fixed maturity security loan agreements
generally are designed to compensate for the impact of increased liquidity risk.
A significant majority of the private fixed maturity securities that the Company
holds are participations in issues that are also owned by other investors. In
addition, some of the private fixed maturity securities are rated by nationally
recognized rating agencies and substantially all have been assigned a rating
designation by the NAIC.
The Company has not invested in derivative securities other than MBSs.
Mortgage Loans
As of December 31, 1997, general account mortgage loans were $5.18 billion (or
26%) 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. Commitments to fund mortgage loans of
$341.4 million extending into 1998 were outstanding as of December 31, 1997.
In June 1997, the Company exchanged $359.7 million of multi-family mortgage
loans with the Federal Home Loan Mortgage Corporation (FHLMC) for FHLMC
multi-family mortgage pass-through certificates supported by the exchanged
loans. The transaction resulted in the reclassification of the exchanged amount
from mortgage loans on real estate to fixed maturity securities
available-for-sale on the consolidated balance sheet. No gain or loss was
recognized as a result of the exchange.
31
<PAGE> 34
The summary below depicts loans by remaining principal balance as of December
31, 1997:
Apartment
(in millions of dollars) Office Warehouse Retail & other Total
------ --------- -------- --------- --------
East North Central $131.7 $135.3 $ 627.7 $154.3 $1,049.0
East South Central 33.9 25.4 155.4 72.9 287.6
Mountain 25.6 28.5 110.4 103.6 268.1
Middle Atlantic 120.6 93.7 166.0 15.3 395.6
New England 53.7 42.6 145.3 -- 241.6
Pacific 216.6 338.1 426.2 89.7 1,070.6
South Atlantic 113.3 145.5 491.0 317.9 1,067.7
West North Central 134.0 8.7 73.2 52.9 268.8
West South Central 116.6 114.1 188.2 162.4 581.3
------ ------ -------- ------ --------
$946.0 $931.9 $2,383.4 $969.0 5,230.3
====== ====== ======== ======
Less valuation allowances and unamortized discount 48.7
--------
Total mortgage loans on real estate, net $5,181.6
========
As of December 31, 1997, the Company's largest exposure to any single borrowing
group was $98.5 million, or 2% of the Company's general account mortgage
portfolio.
The following table sets forth the maturity and principal repayment schedule for
the Company's general account mortgage loan portfolio.
December 31, 1997 December 31, 1996
------------------------------ -------------------------------
Aggregate Aggregate
Principal Balance % of Total Principal Balance % of Total
of Mortgage Principal of Mortgage Principal
Loans Maturing Balance Loans Maturing Balance
----------------- ---------- ----------------- ----------
1997 $ -- 0.0% $ 162.0 3.0%
1998 197.8 3.8 210.2 3.9
1999 294.8 5.6 349.3 6.6
2000 451.5 8.6 519.5 9.7
2001 267.2 5.1 357.1 6.7
2002 362.4 6.9 429.8 8.1
Thereafter 3,656.6 70.0 3,302.6 62.0
-------- ----- -------- -----
$5,230.3 100.0% $5,330.5 100.0%
======== ===== ======== =====
32
<PAGE> 35
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 American Council of Life Insurance (ACLI) for the periods
indicated.
1997 1996 1995
---------------- ---------------- ----------------
Company ACLI(1) Company ACLI(1) Company ACLI(1)
------- ------- ------- ------- ------- -------
Delinquent (2) 0.19% 0.90% 0.79% 1.79% 0.63% 2.35%
In foreclosure (3) 0.19 0.58 0.79 1.10 0.63 1.45
Restructured (4) 0.77 4.61 1.11 6.81 1.48 8.27
---- ---- ---- ---- ---- -----
Subtotal 0.96 5.51 1.90 8.60 2.11 10.62
Foreclosed - year to date 1.07 0.84 0.35 1.01 0.74 1.75
==== ==== ==== ==== ==== =====
Total 2.03% 6.35% 2.25% 9.61% 2.85% 12.37%
==== ==== ==== ==== ==== =====
- ----------
(1) Source: ACLI Investment Bulletins entitled "Quarterly Survey of
Mortgage Loan Delinquencies and Foreclosures," numbers 1399, 1367 and
1289, dated March 9, 1998, March 6, 1997 and February 28, 1996,
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.
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 annuity contracts and life insurance
policies, and sales of contracts are influenced by the interest rate
environment. In general, the fair value of the Company's fixed maturity
securities 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 of interest rate changes through asset/liability management,
product design, management of crediting rates, surrender charges and market
value adjustments at withdrawal for certain products and management of mortality
charges and dividend scales with respect to its in-force life insurance
policies.
33
<PAGE> 36
PROPOSED LEGISLATION
The Clinton Administration's 1999 budget proposal contains provisions which, if
enacted, would eliminate many tax benefits currently afforded to annuity
products and certain life insurance products. These provisions appear to be
inconsistent with what the Company believes to be the Administration's desire to
encourage private sector long-term savings.
Currently, policyholders are permitted to exchange life insurance, endowment or
annuity contracts for similar contracts without being required to pay tax on the
accretion of value within the contracts being transferred in the exchange. In
addition, policyholders who hold variable annuity or life insurance contracts
are currently permitted to transfer funds between various investment options
offered under such contracts on a tax-free basis. The 1999 budget proposal, if
enacted in its current form, Would make all exchanges involving insurance
contracts immediately taxable. In addition, under the budget proposal each
investment option offered under a single variable contract would be treated as a
separate variable contract, and thus transfers of funds between different
investment options would cause the amounts transferred to be subject to tax, to
the extent there has been accretion in value. The budget proposal would also
reduce policyholders' tax basis in annuity and life insurance contracts by the
mortality and expense charges paid, increasing future taxable gains. Most of the
tax benefits of corporate-owned life insurance products would also be eliminated
by the budget proposal.
The Company supports social policy that encourages private sector savings, and
believes that the provisions contained in the budget proposal clearly run
counter to that goal. Annuity products are specifically designed for long-term
and retirement savings and play an important role in millions of individuals'
financial protection plans. However, there can be no assurance as to whether
legislation will be enacted which would contain provisions with possible adverse
effects on the Company's ability to sell its annuity and life insurance
products.
8. DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
The Company's Board of Directors currently consists of the following sixteen
Directors:
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
---- --- -------------- ---------------------
<S> <C> <C> <C>
Charles L. Fuellgraf, Jr. 66 1969 1999
Harold W. Weihl 65 1990 1999
Nancy C. Thomas 63 1986 2001
Dimon R. McFerson 61 1981 2002
Robert L. Stewart 61 1992 2004
David O. Miller 59 1996 2006
Willard J. Engel 58 1994 2006
James F. Patterson 56 1989 2007
Arden L. Shisler 56 1984 2008
Joseph J. Gasper 54 1996 2008
C. Ray Noecker 51 1994 2012
A. Irv Bell 52 1998 2013
Frederick C. Finney 51 1992 2013
Keith W. Eckel 51 1996 2014
Lewis J. Alphin 49 1993 2015
Yvonne L. Montgomery 43 1998 2022
</TABLE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dimon R. McFerson 61 Chairman and Chief Executive Officer-Nationwide
Insurance Enterprise
Joseph J. Gasper 54 President and Chief Operating Officer
Robert A. Oakley 51 Executive Vice President - Chief Financial Officer
Robert J. Woodward, Jr. 56 Executive Vice President - Chief Investment Officer
W. Sidney Druen 55 Senior Vice President and General Counsel
Harvey S. Galloway, Jr. 64 Senior Vice President - Chief Actuary
</TABLE>
34
<PAGE> 37
<TABLE>
<S> <C> <C>
Richard A. Karas 55 Senior Vice President - Sales - Financial Services
Susan A. Wolken 47 Senior Vice President - Operations
Matthew S. Easley 41 Vice President - Marketing and Administrative Services
Joseph P. Rath 48 Vice President - Chief Compliance Officer
</TABLE>
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 Nationwide
Insurance Enterprise since December 1992. He has been Chairman and Chief
Executive Officer-Nationwide Insurance Enterprise of Nationwide Financial
Services, Inc. ("NFS") since December 1996 and a director of NFS since November
1996. Mr. McFerson has been a director of the Company and Nationwide Mutual
Insurance Company since April 1988 and Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise of the Company and Nationwide Mutual
Insurance Company since April 1996. Previously he was elected Chief Executive
Officer of Nationwide Life Insurance Company in December 1992, and President and
Chief Executive Officer-Nationwide Insurance Enterprise of the Company in
December 1993. He was President and general Manager of Nationwide Mutual
Insurance Company from April 1988 to April 1991; President and Chief Operating
Officer of Nationwide Mutual Insurance from April 1991 to December 1992; and
President and Chief Executive Officer of Nationwide Mutual Insurance from
December 1992 to April 1996. Mr. McFerson has been with the Nationwide Insurance
Enterprise for 18 years.
JOSEPH J. GASPER has been President and Chief Operating Officer of NFS since
December 1996 and a director of NFS since November 1996. Mr. Gasper has been
President and Chief Operating Officer of the Company and director since April
1996. Previously, he was Executive Vice President - Property/Casualty Operations
of Nationwide Mutual Insurance Company from April 1995 to April 1996. He was
Senior Vice President - Property/Casualty Operations of Nationwide Mutual
Insurance Company from September 1993 to April 1995. Prior to that time, Mr.
Gasper held numerous positions within the Nationwide Insurance Enterprise. Mr.
Gasper has been with the Nationwide Insurance Enterprise for 31 years.
C. RAY NOECKER has been a director of the Company since 1994. Mr. Noecker owns
and manages the 1,100-acre Noecker Farms in Fairfield and Pickaway counties in
Central Ohio. He is a member and past president of the Ohio Farm Bureau
Federation.
CHARLES L. FUELLGRAF, JR. has been a director of the Company since November
1969. Mr. Fuellgraf has been Chief Executive Officer of Fuellgraf Electric
Company, an electrical contractor, of Butler, Pennsylvania and Nashville,
Tennessee since 1986. He serves on the board of directors of several companies
of the Nationwide Insurance Enterprise.
ROBERT L. STEWART has been a director of the Company since 1989. Mr. Stewart
owns Sunnydale Mining and a grain farm, both located in Jewett, Ohio. Mr.
Stewart has served on the board of the Ohio Farm Bureau Federation (1978-1989)
and as president of the Ohio Holstein Association board. Mr. Stewart was a
director of Landmark, Inc., a farm supply cooperative, which is now part of
Indianapolis-based Countrymark, and the Ohio Agricultural Stabilization and
Conservation Service board.
NANCY C. THOMAS has been a director of the Company since 1986. She is chairman
(since 1989) of Nationwide Property and Casualty Insurance Company and a trustee
of Nationwide Investing Foundation, a trust that issues shares in four mutual
funds. She also serves on the boards of several Nationwide subsidiaries and
affiliates. Ms. Thomas is a past president and former director of the Ohio
Agricultural Marketing Association and served on the boards of the Ohio Farm
Bureau Federation and Landmark, Inc., a former Ohio farm supply cooperative, and
as the Midwest regional representative on the American Farm Bureau women's
committee. She's also a former director of the Louisville YMCA.
35
<PAGE> 38
HAROLD W. WEIHL has been a director of the Company since April 1990, and serves
on the boards of several Nationwide affiliates and subsidiaries, including
Nationwide Investing Foundation, a trust that issues shares in four mutual
funds. He was elected chairman of Nationwide General in 1996. Mr. Weihl is an
owner and operator of the 550-acre Weihl Farms in northwest Ohio since 1955, is
a member of the Ohio Vegetable and Potato Growers Association, the American
Shorthorn and the Ohio Soybeans associations, and Mid-Wood, Inc., a Wood County
cooperative, of which he's a former director. He's former president of the
Findlay Sugar Beet Growers Association, former chairman of the Wood County Soil
and Water District board, and chairman of the Middletown Township zoning appeals
board.
LEWIS J. ALPHIN has been a director of the Company since 1993. He is also a
director of several Nationwide subsidiaries and affiliates. Mr. Alphin owns and
operates an 800-acre farm in Mt. Olive. He taught agriculture business at James
Sprunt Community College in Kenansville, N.C., for more than 22 years before
retiring in 1994. He is the former board chairman of the Cape Fear Farm Credit
Association, a member and former vice president, secretary/treasurer, and
director of the Duplin County Agribusiness Council, and a former board member of
the Duplin County Farm Bureau, the North Carolina Farm Bureau, and the Farm
Credit Council.
KEITH W. ECKEL has been a director of the Company since April 1996. Mr. Eckel is
a partner of Fred W. Eckel Sons and president of Eckel Farms, Inc., in northeast
Pennsylvania. He received the Master Farmer award from Penn State University in
1982. He is a former president of the Pennsylvania Farm Bureau, a position he
held for 15 years, and the Lackawanna County Cooperative Extension Association.
Mr. Eckel has served as a board member and executive committee member of the
American Farm Bureau. He is a former vice president of the Pennsylvania Council
of Cooperative Extension Associations, and former board member of the
Pennsylvania Vegetable Grower's Association.
WILLARD J. ENGEL has been a director of the Company since 1994. He is also a
director of several Nationwide subsidiaries and affiliates. Mr. Engel has been
general manager of the Lyon County Cooperative Oil Company in Marshall,
Minnesota, since 1975. He previously was a division manager of the Truman
Farmers Elevator. He's a former director of the Western Co-op Transport in
Montevideo, Minnesota, a member and former director and legislative committee
chairman of the Northwest Petroleum Association in St. Paul, and a former
director of Farmland Industries in Kansas City.
FRED C. FINNEY has been a director of the Company since 1992. He is also a
director of several Nationwide subsidiaries and affiliates. Mr. Finney is the
owner and operator of the Moreland Fruit Farm and operator of the Melrose
Orchard in Wooster, Ohio. He's past president of the Ohio Farm Bureau
Federation, the Ohio Fruit Growers Society, Wayne County Farm Bureau, and the
Westwood Ruritan Club.
A. I. BELL has been a director of the Company since April, 1998. Mr. Bell has
served as a state trustee of the Ohio Farm Bureau Federation from 1991 to 1998
and as president that last four years. He oversees the Bell family farm in
Zanesville, Ohio. The farm is the hub of a multi-family swine network, in
addition to grain and beef operations. Mr. Bell has represented the Ohio Farm
Bureau at state and national level activities, and has traveled internationally
representing Ohio agriculture. In 1995, he was introduced into The Ohio State
University Department of Animal Sciences Hall of Fame.
YVONNE L. MONTGOMERY has been a director since April, 1989. Ms. Montgomery is
senior vice president/general manager of southern customer operations for United
States Customer Operations for Xerox Corporation. A resident of Atlanta,
Georgia, Ms. Montgomery oversees eight customer business units across the
southern United States as well as all business and marketing functions in the
regions. Ms. Montgomery joined Xerox in 1976 as a sales representative and
progressed through management positions, including vice president - field
operations, and executive assistant to the chairman and CEO.
DAVID O. MILLER has been a director of the Company since November 1996. Mr.
Miller has been a farm owner and land developer since 1962. He is the President
of the Owen Potato Farm Inc. 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 companies of the Nationwide
Insurance Enterprise. He is also a director of the National Cooperative Business
Association.
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. He serves
36
<PAGE> 39
on the board of directors of several companies of the Nationwide Insurance
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 director of the Company since November 1996. 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 companies of the Nationwide
Insurance Enterprise. He is also a director of the National Cooperative Business
Association.
ROBERT A. OAKLEY has been Executive Vice President - Chief Financial Officer of
the Company since December 1996. Mr. Oakley has been Executive Vice President -
Chief Financial Officer of the Nationwide Insurance Enterprise since April 1995.
Previously, he was Senior Vice President - Chief Financial Officer of the
Nationwide Insurance Enterprise from October 1993 to April 1995. Prior to that
time, Mr. Oakley held several positions within the Nationwide Insurance
Enterprise. Mr. Oakley has been with the Nationwide Insurance Enterprise for 22
years.
ROBERT J. WOODWARD, JR. has been Executive Vice President - Chief Investment
Officer of the Company since December 1996. Mr. Woodward has been Executive Vice
President - Chief Investment Officer of the Nationwide Insurance Enterprise
since August 1995. Previously, he was Senior Vice President - Fixed Income
Investments of the Nationwide Insurance Enterprise from March 1991 to August
1995. Prior to that time, Mr. Woodward held several positions within the
Nationwide Insurance Enterprise. Mr. Woodward has been with the Nationwide
Insurance Enterprise for 33 years.
W. SIDNEY DRUEN has been Senior Vice President and General Counsel of the
Company since December 1996. Mr. Druen has been Senior Vice President and
General Counsel and Assistant Secretary of the Nationwide Insurance Enterprise
since September 1994. Previously, he was Vice President, Deputy General Counsel
and Assistant Secretary of the Nationwide Insurance Enterprise from October 1989
to September 1994. Prior to that time, Mr. Druen held several positions within
the Nationwide Insurance Enterprise. Mr. Druen has been with the Nationwide
Insurance Enterprise for 28 years.
HARVEY S. GALLOWAY, JR. has been Senior Vice President - Chief Actuary of the
Company since December 1996. Mr. Galloway has been Senior Vice President - Chief
Actuary - Life, Health and Annuities of the Nationwide Insurance Enterprise from
January 1993 to April 1993. Previously, he was Senior Vice President and Chief
Actuary of the Nationwide Insurance Enterprise from January 1993 to April 1993.
Prior to that time, Mr. Galloway held several positions within the Nationwide
Insurance Enterprise. Mr. Galloway has been with the Nationwide Insurance
Enterprise for 28 years.
RICHARD A. KARAS has been Senior Vice President-Sales-Financial Services of the
Company since December 1996. Mr. Karas has been Senior Vice President - Sales -
Financial Services of the Nationwide Insurance Enterprise since March 1993.
Previously, he was Vice President - Sales - Financial Services of the Nationwide
Insurance Enterprise from February 1989 to March 1993. Prior to that time, Mr.
Karas held several positions within the Nationwide Insurance Enterprise. Mr.
Karas has been with the Nationwide Insurance Enterprise for 33 years.
SUSAN A. WOLKEN has been Senior Vice President - Life Company Operations of the
Company since July 1997. Ms. Wolken has been Senior Vice President - Life
Company Operations of the Nationwide Insurance Enterprise since June 1997.
Previously, she was Senior Vice President - Enterprise Administration of the
Nationwide Insurance Enterprise from July 1996 to June 1997. Prior to that time,
she was Senior Vice President - Human Resources of the Nationwide Insurance
Enterprise from April 1995 to July 1996. From September 1993 to April 1995 Ms.
Wolken was Vice President - Human Resources of the Nationwide Insurance
Enterprise. From October 1989 to September 1993 she was Vice President
Individual Life and Health Operations of the Nationwide Insurance Enterprise.
Ms. Wolken has been with the Nationwide Insurance Enterprise for 23 years.
MATTHEW S. EASLEY has been Vice President - Marketing and Administrative
Services of the Company since December 1996. Mr. Easley has been Vice President
- - Life Marketing and Administrative Services of the Nationwide Insurance
Enterprise since May 1996. Mr. Easley was Vice President - Annuity and Pension
Actuarial of the Nationwide Insurance Enterprise from August 1989 to May 1996.
Prior to that time, Mr. Easley
37
<PAGE> 40
held several positions within the Nationwide Insurance Enterprise. Mr. Easley
has been with the Nationwide Insurance Enterprise for 15 years.
JOSEPH P. RATH has been Vice President - Chief Compliance Officer of the Company
since April 1997. Mr. Rath has been Vice President - Compliance for Nationwide
Advisory Services, Inc. and Nationwide Investment Services Corp. since April
1997. He has also been Vice President - Product and Market Compliance for the
Nationwide Insurance Enterprise since April 1997. Previously, he was Vice
President - Associate General Counsel of the Nationwide Insurance Enterprise
from October 1988 to April 1997. Prior to that time, Mr. Rath held several
positions within the Nationwide Insurance Enterprise. Mr. Rath has been with the
Nationwide Insurance Enterprise for 21 years.
9. EXECUTIVE COMPENSATION
A. COMPENSATION
Pursuant to the Cost Sharing Agreement (hereinafter defined), the salaries and
benefits of certain officers and employees of the Company and its subsidiaries,
including the Named Executive Officers (hereinafter defined), will be paid by
Nationwide Mutual Insurance Company and reimbursed in accordance with the terms
of the Cost Sharing Agreement.
The following table provides certain information concerning compensation
received by the Company's Chief Executive Officer and the four remaining most
highly paid executive officers (the "Named Executive Officers") as of the last
fiscal year, for the last two fiscal years ended December 31, 1997 and 1996
solely for services rendered to the Company and its subsidiaries.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
----------------------
Annual Compensation Awards
-------------------------------------------------------------------
Restricted Underlying
Other Annual Stock Securities
Name and Salary Bonus Compensation Award(s) Options/SARs All Other
Principal Position Year $ $ $ $ # Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dimon R. McFerson: ....... 1997 336,654 111,780(2) (4) 907,147(8) 40,000 19,860(7)
Chairman And Chief 1996 324,790 71,820(3) (4) 14,482(5)
Executive Officer -
Nationwide Insurance
Enterprise(1)
Joseph J. Gasper: ....... 1997 358,066 97,250(2) (4) 396,563(8) 30,000 18,155(7)
President and Chief 1996 232,959 48,425(3) (4) 10,684(5)
Operating Officer(6)
Harvey S. Galloway, Jr. .. 1997 258,520 70,200(2) (4) 150,494(8) 7,500 14,243(7)
Senior Vice President- 1996 247,520 57,057(3) (4) 11,769(5)
Chief Actuary - Life
Annuities
Richard A. Karas: 1997 246,058 72,900(2) (4) 167,508(8) 10,000 13,020(7)
Senior - Vice President 1996 216,905 52,437(3) (4) 9,855(5)
Sales-Financial
Services
James E. Brock: .......... 1997 226,751 61,190(2) (4) 140,859(8) 7,500 12,292(7)
Senior Vice President - 1996 217,520 50,127(3) (4) 10,259(5)
Corporate Development
</TABLE>
(1) Figures in the table, other than Long Term Compensation Awards, represent
compensation received by Mr. McFerson solely for his services rendered to
the Company and its subsidiaries as allocated pursuant to a Cost Sharing
Agreement.
(2) Represents the amount received by the Named Executive Officers under the
MIP (hereinafter defined) in 1998 for the 1997 award year.
(3) Represents the amount received by the Named Executive Officers under the
MIP in 1997 for the 1996 award year.
(4) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(5) Represents contributions made or credited by the Company in 1996 under the
Savings Plan (hereinafter defined) and the DC Supplemental Plan
(hereinafter defined). The following are the amounts for the Savings Plan
and the DC Supplemental
38
<PAGE> 41
Plan: McFerson $1,575 for the Savings Plan and $12,907 for the DC
Supplemental Plan; Gasper $3,465 for the Savings Plan and $7,219 for the DC
Supplemental Plan; Galloway $4,500 for the Savings Plan and $7,269 for the
DC Supplemental Plan; Karas $4,500 for the Savings Plan and $5,355 for the
DC Supplemental Plan; and Brock $4,500 for the Savings Plan and $5,795 for
the DC Supplemental Plan.
(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 the Executive Vice President
Property/Casualty Operations of Nationwide Mutual Insurance Company and
received compensation from Nationwide Mutual Insurance Company and its
property/casualty insurance subsidiaries for services rendered to such
companies. Such compensation is not reflected in the table.
(7) Represents contributions made or credited by the Company in 1997 under the
Savings Plan and the DC Supplemental Plan. The following are the amounts
for the Savings Plan and the DC Supplemental Plan: McFerson $2,142 for the
Savings Plan and $19,609 for the DC Supplemental Plan; Gasper $4,760 for
the Savings Plan and $13,395 for the DC Supplemental Plan; Galloway $4,760
for the Savings Plan and $9,483 for the DC Supplemental Plan, Karas $4,760
for the Savings Plan and $8,260 for the DC Supplemental Plan; Brock $4,760
for the Savings Plan and $7, 532 for the DC Supplemental Plan.
(8) The following are the number of shares and value of the restricted stock at
the end of the last fiscal year for: McFerson - 38,602 shares, at a value
of $1,394,497; Gasper - 16,875 shares, at a value of $609,609; Galloway -
6,404 shares, at a value of $231,345; Karas - 7,128 shares, at a value of
$257,499 and Brock - 5,994 shares, at a value of $216,533.
B. EXECUTIVE INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain the Executive
Incentive Plan (the "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 Nationwide
Mutual Insurance Company and its subsidiaries and affiliates (the "Nationwide
Insurance 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.
C. MANAGEMENT INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain the Management
Incentive Plan (the "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
Nationwide Insurance 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
keep 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 base
incentive amount, depending solely on the achievement of the performance
measures.
D. SUSTAINED PERFORMANCE INCENTIVE PLAN
Prior to 1997, Nationwide Mutual Insurance Company and certain of its
subsidiaries and affiliates, including Nationwide Life Insurance Company,
maintained the Sustained Performance Incentive Plan (the "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 Nationwide
Insurance Enterprise over the preceding four years. Performance measures were
based on profitability, growth and strategic objectives for the Nationwide
Insurance 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.
Nationwide Mutual Insurance Company and the participating subsidiaries and
affiliates terminated the SPIP at the close of calendar year 1996. A payment
under the SPIP was made in 1997, covering performance measured for the period
from 1993 to 1996. Such payment was 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 year 1996. Payments made in 1997
for such performance measurement period were made in shares of restricted stock
of the
39
<PAGE> 42
Company under the Company's 1996 Long-Term Equity Compensation Plan. Messrs.
McFerson, Gasper, Galloway, Karas and Brock received 23,602, 6,875, 3,404, 3,128
and 2,994 shares of restricted stock, respectively.
E. DEFERRED COMPENSATION PROGRAM
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain a deferred
compensation program (the "Officers' Deferred Compensation Program") pursuant to
which officers of participating companies may elect to defer payment of amounts
otherwise payable to them. An eligible officer is permitted to enter into a
deferral agreement pursuant to which such officer may annually elect to defer a
portion of his or her salary or incentive compensation earned under the MIP or
EIP during the following year. Any such election is effective prospectively.
Amounts deferred under the Officer's Deferred Compensation Program will
generally be payable in annual installments beginning in January of the calendar
year following the calendar year in which the officer terminates employment.
Amounts deferred under the Officer's Deferred Compensation Program are credited
with interest. The interest rate is based on the fixed rate option in the
Savings Plan.
F. SAVINGS PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain the Nationwide
Insurance Enterprise Savings Plan (the "Savings Plan"), a qualified
profit-sharing plan including a qualified cash or deferred arrangement covering
eligible employees of participating companies within the Nationwide Insurance
Enterprise. Under the Savings Plan, participants who are not residents of Puerto
Rico may elect to contribute between 1% and 22% of their compensation to
accounts established on their behalf under the Savings Plan in the form of
voluntary salary reductions on a pretax basis and participants who are residents
of Puerto Rico may make contributions on an after-tax basis. The participating
companies are obligated to make matching employer contributions, for the benefit
of their participating employees, at the rate of 70% of the first 2% of
compensation deferred or contributed to the Savings Plan by each employee, and
40% of the next 4% of compensation deferred or contributed by each employee to
the Savings Plan. All amounts contributed to the Savings Plan are held in a
separate account for each participant and are invested in one or more funds made
available under the Savings Plan and selected by the participant. Normally, a
participant receives the value of his or her account upon termination of
employment, although a participant may withdraw all or a part of the amounts
credited to his or her accounts during employment under certain circumstances
including attainment of age 59 1/2, or receive a loan of a portion of his or her
account balance. Under the Savings Plan, a participant is immediately vested in
all amounts credited to his or her account as a result of salary deferrals (and
earnings on those deferrals) or after-tax contributions (and earnings on those
contributions), as applicable. A participant is vested in amounts attributable
to employer matching contributions (and earnings on those contributions) over a
period of five years.
G. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain an unfunded,
nonqualified defined contribution supplemental benefit plan, the Nationwide
Insurance Enterprise Supplemental Defined Contribution Plan (the "DC
Supplemental Plan"), which provides benefits, equal to employer matching
contributions that would have been made under the Savings Plan for the
participants, in the absence of the IRC Section 401(a)(17) limitation on
compensation that can be considered and the IRC Section 402(g) limitation on
amounts that can be deferred under the Savings Plan reduced by actual employer
matching contributions made to the Savings Plan. Participants are limited to
those officers earning in excess of $160,000 annually. Benefits under the DC
Supplemental Plan vest at the same time as employer matching contributions vest
under the Savings Plan.
H. LONG-TERM EQUITY COMPENSATION PLAN
The Board of Directors of the Company has adopted the Nationwide Financial
Services, Inc. 1996
Long-Term Equity Compensation Plan (the "LTEP"). The purpose of the LTEP is to
benefit the stockholders of the Company by encouraging high levels of
performance by selected officers, directors and employees of the Company and
certain of its affiliates, attracting and retaining the services of such
individuals and aligning the interests of such individuals with those of the
stockholders.
The LTEP grants the Company Compensation Committee, which will administer the
LTEP, flexibility in creating the terms and restrictions deemed appropriate for
particular awards as facts and circumstances warrant. The LTEP is intended to
constitute a non-qualified, unfunded, unsecured plan for incentive and deferred
40
<PAGE> 43
compensation and is not intended to be subject to any requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The LTEP
is intended to satisfy the requirements of Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, and awards under the LTEP which are performance-based
are intended to qualify as "performance-based compensation" for purposes of
Section 162(m) of the Internal Revenue Code ("IRC").
The LTEP provides for the grant of any or all of the following, types of awards:
(i) stock options, including incentive stock options and non-qualified stock
options, for shares of Class A Common Stock; (ii) stock appreciation fights
("SARs"), either in tandem with stock options or freestanding; (iii) restricted
stock; and (iv) performance awards. Any stock option granted in the form of an
incentive stock option must satisfy the applicable requirements of Section 422
of the IRC. Awards may be made to the same person on more than one occasion and
may be granted singly, in combination or in tandem as determined by the Company
Compensation Committee.
The LTEP was effective as of December 11, 1996. No awards may be granted under
the LTEP after December 11, 2006, and the LTEP may be terminated by the Board of
Directors of NFS prior to such date. In the event of expiration or earlier
termination of the LTEP, the LTEP will remain in effect until such time as all
awards granted thereunder have been satisfied or have expired. No new awards may
be made under the LTEP after its expiration or termination.
I. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table shows, as to the Named Executive Officers in the Summary
Compensation Table, certain information concerning stock options granted during
the 1997 fiscal year under the LTEP.
41
<PAGE> 44
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE OR BASE GRANT DATE
OPTIONS GRANTED FISCAL YEAR PRICE $/SH PRESENT VALUE
NAME (#)(1) EXPIRATION DATE ($)(2)
---- ------ --------------- ------
<S> <C> <C> <C> <C> <C>
Dimon R. McFerson 40,000 16.5% 23.50% March 6, 2007 369,200
Joseph J. Gasper 30,000 12.4% 23.50% March 6, 2007 276,900
Harvey S. Galloway, Jr. 7,500 3.1% 23.50% March 6, 2007 69,225
Richard A. Karas 10,000 4.1% 23.50% March 6, 2007 92,300
James E. Brock 7,500 3.1% 23.50% March 6, 2007 69,225
</TABLE>
(1) One-third of the options granted become exercisable each year on the
anniversary of the grant date. Options may be accelerated upon a change of
control or certain other events of termination of employment.
(2) The estimated grant date present value dollar amounts in this column are
the result of calculations made using the Black-Scholes model, a
theoretical method for estimating the present value of stock options based
on a complex set of assumptions. The material assumptions and adjustments
incorporated in the Black-Scholes model used to estimate the value of
these options include the following
- An exercise price on the options equal to the fair market value of
the underlying stock on the date of the grant, as listed in the
table.
- The rate available at the time the grant was made on zero-coupon
U.S. Government issues with a remaining term equal to the expected
life. The risk-free rate was 6.54%.
- Dividend yield was 1.02% representing the estimated annualized
dividend paid on shares of Common Stock at the date of the grant.
- An option term before exercise of 5 years, which represents the
typical period that options are held prior to exercise.
- Volatility of the stock price of 36.4 percent, reflecting the daily
stock price volatility for the one-year period following the grant
date.
- No adjustments were made for vesting requirements,
non-transferability, or risk of forfeiture.
J. OPTIONS/SARS EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named Executive
Officers, concerning the exercise of options and/or SARs during 1997 and
unexercised options and SARs held as of fiscal year-end December 31, 1997, under
the LTEP.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE MONEY
UNEXERCISED OPTIONS AT FY-END OPTIONS AT FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Dimon R. McFerson 0/40,000 0/505,000
Joseph J. Gasper 0/30,000 0/378,750
Harvey S. Galloway, Jr. 0/7,500 0/94,688
Richard A. Karas 0/10,000 0/126,250
James E. Brock 0/7,500 0/94,688
</TABLE>
K. PENSION PLANS
(i) RETIREMENT PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including the Company, maintain a qualified defined-benefit plan,
the Nationwide Insurance Enterprise Retirement Plan (the "Retirement Plan"). In
general, a participant's annual retirement benefit under the Retirement Plan
will be equal to the sum of (i) 1.25% of the participant's Final Average
Compensation times years of service (to a maximum of 35 years) and (ii) 0.50% of
the participant's Final Average Compensation in excess of Social Security
Covered Compensation times years of service (to a maximum of 35 years). Final
Average Compensation, for the portion of the participant's benefit which is
attributable to service on or after January 1, 1996, is the average of the
highest five consecutive covered compensation amounts of the participant in the
42
<PAGE> 45
participant's last 10 years of service, For the portion of a participant's
benefit attributable to service prior to January 1, 1996, Final Average
Compensation is the average of the highest three consecutive covered
compensation amounts of the participant in the participant's last 10 years of
service. Covered compensation, for purposes of determining Final Average
Compensation under either method, is calculated on a calendar-year basis and
includes compensation from any member of the Nationwide Insurance Enterprise.
With respect to Messrs. Gasper, Galloway, Karas and Brock, because each such
officer's compensation is allocated solely to the Company and its subsidiaries,
covered compensation includes the compensation listed under the headings Salary,
Bonus and LTIP Payouts shown in the Summary Compensation Table. Covered
compensation for Mr. McFerson includes the amount set forth under the headings
Salary, Bonus and LTIP shown in the Summary Compensation Table and additional
compensation amounts received for services rendered to other companies of the
Nationwide Insurance 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 tinder 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 IRC.
(ii) EXCESS AND SUPPLEMENTAL PLANS
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain an unfunded,
nonqualified defined-benefit excess benefit plan, the Nationwide Insurance
Enterprise Excess Benefit Plan (the "Excess Plan") and an unfunded, nonqualified
defined-benefit supplemental benefit plan pursuant to which certain participants
may receive a supplemental retirement benefit, the Nationwide Insurance
Enterprise Supplemental Retirement Plan (the "Supplemental Plan"). Any
participant whose benefits are limited under the Retirement Plan by reason of
limitations under Section 415 of the 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 certain other
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 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.
43
<PAGE> 46
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$125,000 $30,615 $40,820 $51,025 $61,229 $71,434
150,000 41,703 55,604 69,506 83,407 97,308
175,000 49,203 65,604 82,006 98,407 114,808
200,000 56,703 75,604 94,506 113,407 132,308
225,000 64,203 85,604 107,006 128,407 149,808
250,000 71,703 95,604 119,506 143,407 167,308
300,000 86,703 115,604 144,506 173,407 202,308
400,000 116,703 155,604 194,506 233,407 272,308
450,000 131,703 175,604 219,506 263,407 307,308
500,000 146,703 195,604 244,506 293,407 342,308
600,000 176,703 235,604 294,506 353,407 412,308
700,000 206,703 275,604 344,506 413,407 482,308
750,000 221,703 295,604 369,506 443,407 517,308
</TABLE>
All Named Executive Officers have a portion of their benefit calculated based on
the post 1995 definition of Final Average Compensation. As of December 31, 1995,
the number of credited years of service under the Retirement Plan for Messrs.
McFerson, Gasper, Galloway, Karas and Brock was 23 years, 29.5 years, 31.5 years
and 26.5 years, respectively. Mr. McFerson's credited years of service include,
pursuant to an agreement with Nationwide Mutual Insurance Company, 8.17 years in
excess of those actually earned through employment by the Nationwide Insurance
Enterprise. The benefit attributable to those additional years will be paid by
Nationwide Mutual Insurance Company (not the Retirement Plan) and is reduced by
the benefit payable under the retirement plan of Mr. McFerson's previous
employer. Each of the Named Executive Officers earned additional years of
service in 1996 and 1997, and their benefit for such years and all future years
will be calculated under the new definition of Final Average Compensation.
Covered compensation paid by the Company for the fiscal year ended December 31,
1997, for Messrs. McFerson, Gasper, Galloway, Karas and Brock was $563,927,
$601,448, $466,778, $430,680 and $407,766, respectively.
10. COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
A. INTRODUCTION
On March 6, 1997, NFS began an initial public offering of shares of Class A
Common Stock, in which approximately twenty percent of NFS became publicly
traded. Nationwide Mutual Insurance Company through a wholly-owned subsidiary,
owns approximately twenty percent of the outstanding shares of NFS. Because the
Company is the principal operating Subsidiary of the Company, the Nationwide
Life Insurance Company Compensation Committee (the "Nationwide Life Compensation
Committee") established all components of 1997 compensation for the Company's
executive officers, with the exception of incentive grants made by the NFS
Compensation Committee under the LTEP.
Mr. Dimon R. McFerson, the Company's Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise, serves also in the same capacity for
NFS. Pursuant to a Cost Sharing Agreement, compensation for Mr. McFerson is
allocated among the companies in the Nationwide Insurance Enterprise for whom
services are performed. The amounts are paid by Nationwide Mutual Insurance
Company and reimbursed by the other companies in accordance with the terms of
the Cost Sharing Agreement. The 1997 compensation for Mr. McFerson reported in
the compensation tables and discussed in this report is the amount allocated to
the Company and its subsidiaries under the Cost Sharing Agreement and is solely
for services rendered to the Company and its subsidiaries. Compensation for the
other executives named in the compensation tables was not allocated and is their
aggregate 1997 compensation for services rendered to the Company and its
subsidiaries.
The Nationwide Life Compensation Committee and the NFS Compensation Committee
are both comprised solely of non-employee directors.
B. COMPENSATION PHILOSOPHY AND OBJECTIVES
The Nationwide Life Compensation Committee and the NFS Compensation Committee
(collectively referred to herein as the "Compensation Committees") believe that
the compensation program for the Company's executive officers should support the
Company and the Nationwide Insurance Enterprise vision and business strategies.
In addition, compensation should be determined within a competitive framework
based on overall financial results, business unit results, teamwork, and
individual contributions that help build value for the Company's stockholders.
The primary objectives of the compensation program are to:
44
<PAGE> 47
- Provide a direct link between pay and performance;
- Allocate a larger percentage of executive compensation to pay that
is at-risk in order to positively influence behavior and support
accountability;
- Attract, retain and motivate top-caliber employees required for new
business directions;
- Offer total compensation opportunities that are fully competitive
with the appropriate external markets in design and pay level; and
- Emphasize the need to focus on stockholder value, in addition to
providing- competitive value to customers.
As part of the overall compensation philosophy, the Compensation Committees have
determined that total compensation and each of the elements that comprise total
compensation (base salary, annual incentives, long term incentives) should be
targeted at the 50th percentile of the market. The Compensation Committees
believe that differences in individual performance should result in
significantly different levels of compensation. Therefore, individual pay
delivered may be higher or lower than the 50th percentile of the market,
depending on individual performance.
Competitive market data is provided to the Compensation Committees by
independent compensation consultants. This data compares the Company's and the
Nationwide Insurance Enterprise's compensation practices to various groups of
comparator companies. These comparator companies compete with the Company and
with the Nationwide Insurance Enterprise for customers, capital, and employees,
and are comparable to the Company or Nationwide Insurance Enterprise in size,
scope, and business focus. This group includes both multi-line insurers and
diversified financial organizations.
The companies chosen for the compensation comparator group are not necessarily
the same companies that comprise the peer group in the Performance Graph below
included in this Proxy Statement. The compensation comparator group includes
more companies than those in the peer group because it gives the Compensation
Committees a broader data base for comparison purposes.
C. ELEMENTS OF 1997 EXECUTIVE COMPENSATION
The key elements of the Company's executive compensation program are base
salary, annual incentives and long-term compensation. The following discussion
relates to the Company's executive officers other than Mr. McFerson whose
compensation is discussed separately in the Compensation of the Chief Executive
Officer.
D. BASE SALARIES
Base salaries offer security to executives and allow the Company to attract
competent executive talent and maintain a stable management team. They also
allow executives to be rewarded for individual performance, and encourage the
development of executives. Pay for individual performance rewards executives for
achieving goals that may not be immediately evident in common financial
measurements.
Base salaries for executive officers are initially determined by evaluating
executives' levels of responsibility, prior experience, breadth of knowledge,
internal equity, and external pay practices.
In determining increases to base salaries for 1997, the Nationwide Life
Compensation Committee considered relevant external market data, as described
above in Compensation Philosophy and Objectives. However, increases to base
salaries were driven primarily by individual performance that was evaluated
based on levels of individual contribution to NFS and the Nationwide Insurance
Enterprise. When evaluating individual performance, the Nationwide Life
Compensation Committee considered, among other things, the executive's efforts
in promoting Company and Nationwide Insurance Enterprise values; continuing
educational and management training; improving product quality; developing
relationships with customers, suppliers, and employees; and demonstrating
leadership abilities among coworkers. No specific formula was used in evaluating
individual performance, and the weighting given to each factor with respect to
each executive officer was within the individual discretion and judgment of each
member of the Nationwide Life Compensation Committee. Base salaries for the
executive officers were increased in 1997 by an average of 8,9%, a rate
comparable to the median base salary increases provided at comparator companies.
Executive officer salaries were established at a level that is consistent with
the goals stated in Compensation Philosophy and Objectives.
E. ANNUAL INCENTIVE COMPENSATION
The MIP promotes the pay-for-performance philosophy of the Compensation
Committees by providing executives with direct financial rewards in the form of
annual cash incentives. Awards for 1997 were based on
45
<PAGE> 48
the performance of Return on Equity and Premium Growth of the Company, and
Return on Equity, Revenue Growth and Expense Management of the Nationwide
Insurance Enterprise.
Each year, the Nationwide Life Compensation Committee establishes specific
performance measures for the MIP. Participants are provided a target incentive
opportunity that represents a percentage of their base salary. In 1997,
individual targets ranged from six to fifteen percent of base salary. Individual
payouts under the MIP may range from zero to 200 percent of the individual's
target incentive amount, depending on the achievement of the performance
measures. For 1997, the excellent results achieved for the Return on Equity and
the Premium Growth of the Company; and the Return on Equity, the Revenue Growth
and the Expense Management of the Nationwide Insurance Enterprise resulted in a
payout of 167 percent of target for Mr. Gasper. For 1997, the excellent results
achieved for the Return on Equity and the Premium Growth of the Company resulted
in payouts of 180 percent of target for Mr. Galloway, Mr. Karas and Mr. Brock.
These amounts are reflected in the Bonus column in the Summary Compensation
Table.
F. LONG-TERM INCENTIVE COMPENSATION
In keeping with the philosophy of the Compensation Committees to provide a total
compensation package that favors at-risk components of pay, long-term incentives
comprise a significant portion of an executive's total compensation package.
When determining long-term incentive award sizes, the Compensation Committees
consider the executives' levels of responsibility, position within the Company
or Nationwide Insurance Enterprise, prior experience, historical award data,
various performance criteria, and compensation practices at comparator
companies.
The Compensation Committees utilize the two long-term incentive plans described
below. While each plan has a different objective, the plans work together in
order to achieve a balance among operational and strategic goals, market pay
orientation, and alignment of executive interests with that of stockholders.
(i) EXECUTIVE INCENTIVE PLAN
Under the EIP, participants receive cash awards based on the achievement of
measures tied to the performance of the Company and the Nationwide Insurance
Enterprise over a three-year period. New performance cycles start annually. The
EIP participants are granted a target incentive amount that represents a
percentage (from 5% to 25%) of their base salary. Individual payouts may range
from zero to 200 percent of the individual's target incentive amount, depending
solely on the achievement of the performance measures.
The EIP award paid for 1997 was based on the three-year period from 1995 to
1997. Performance was measured by the Return on Equity of NFS, and the Trade
Combined Ratio and the Net Written Premium Growth of the Nationwide Insurance
Enterprise. For 1995-1997, the outstanding results achieved for the Return on
Equity of the Company and the Trade Combined Ratio and the Net Written Premium
Growth of the Nationwide Insurance Enterprise resulted in a payout of 200
percent of target for Mr. Gasper, and 200 percent of target for Mr. Galloway,
Mr. Karas and Mr. Brock. The amounts are reflected in the LTIP payout column in
the Summary Compensation Table.
Award opportunities under the EIP, which were approved by the Nationwide Life
Compensation Committee for the 1997-1999 period, are reflected in the LTIP Award
Table. The executive officers received target incentive amounts representing 15%
to 25% of base salary. The performance measures are the same as those measured
for the 1995-1997 period. These opportunities were determined consistent with
the plan design described above, and the goals stated in Compensation Philosophy
and Objectives.
(ii) LONG-TERM EQUITY COMPENSATION PLAN
The LTEP authorizes grants of stock options, stock appreciation rights,
restricted stock, and performance awards. The objectives of the LTEP are to
encourage high levels of performance by selected officers, directors and
employees of the Company and certain of its affiliates, to attract and retain
the services of such individuals, and to align the interests of such individuals
with those of the stockholders.
During March 1997, the NFS Compensation Committee made grants to executive
officers and others under the LTEP. Award sizes were determined based on
competitive equity grant practices using the median practices at comparator
companies and the individual's impact on NFS's performance and were determined
consistent with the goals stated in Compensation Philosophy and Objectives.
One-half of the grant was awarded in restricted stock with vesting contingent
upon continued service with NFS or the Nationwide Insurance Enterprise over a
three-year period. The other half was awarded in non-qualified stock options
that have an exercise price equal to the fair market value of the Common Stock
on the date of the option grant. Such options become exercisable in equal
installments over a three-year term, and expire ten years after
46
<PAGE> 49
the date of grant. The LTEP awards were split equally between restricted stock
and options in order to enhance the stock ownership of the Company's top
executives at the time of the initial public offering.
G. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Dimon R. McFerson serves as the Company's Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise, as well as in the same capacity for
NFS. Except for grants made under the LTEP in March 1997 by the Company
Compensation Committee, all components of Mr. McFerson's compensation for 1997
were established by the Nationwide Life Compensation Committee.
As discussed above in the Introduction, a portion of Mr. McFerson's annual
compensation is allocated to the Company for services rendered to the Company,
based on the time Mr. McFerson devotes to his responsibilities with the Company.
The compensation reported for Mr. McFerson in the compensation tables and
discussed in this report represents amounts paid for Mr. McFerson's services as
Chairman and Chief Executive Officer-Nationwide Insurance Enterprise of the
Company and its subsidiaries.
Mr. McFerson's 1997 compensation was determined pursuant to the same philosophy
and objectives described earlier in this report and used for all executive
officers. In determining the compensation of Mr. McFerson for 1997, the
Nationwide Life Compensation Committee reviewed the strong Company and
Nationwide Insurance Enterprise financial results for 1996, Mr. McFerson's
superior leadership of the Nationwide Insurance Enterprise since 1992, his
extensive experience in the industry, and his successful efforts in NFS's
initial public offering. The portion of Mr. McFerson's base salary compensation
allocated to the Company totaled $336,654 in 1997, an increase of 3.7 percent
over 1996. This increase reflects both an adjustment in Mr. McFerson's annual
base salary rate, and an increase in the cost allocation. In 1997, Mr.
McFerson's annual base salary rate was increased by 5.3 percent. This increase
positioned Mr. McFerson's base salary compensation at approximately the 50th
percentile of the comparator companies.
The portion of Mr. McFerson's annual incentive award allocated to NFS earned in
1997 under the MIP was $111,780. This award was 29.3 percent of his allocated
base salary compensation, and reflected 180 percent of his target incentive.
This payment was determined by the level of achievement of specified financial,
operational and strategic goals as assessed by the Company's Board of Directors
in their annual performance evaluation of Mr. McFerson.
Under the LTEP, the Company Compensation Committee granted Mr. McFerson 15,000
shares of restricted stock and 40,000 stock option shares. In making this grant,
the NFS Compensation Committee took into account competitive levels of long-term
compensation for Chief Executive Officers of major diversified insurance and
financial services organizations with similar size and scope, as well as Mr.
McFerson's role in the initial public offering. In addition, the NFS
Compensation Committee reflected NFS's desire to have top officers build a
significant personal level of stock ownership in NFS, so as to better align
their interests with those of other stockholders.
G. POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the IRC provides that executive compensation in excess of $1
million will not be deductible for purposes of corporate income taxes unless it
is performance-based compensation and is paid pursuant to a plan meeting certain
requirements of the IRC. The Compensation Committees intend to continue
increased reliance on performance-based compensation programs. Such programs
will be designed to fulfill, in the best possible manner, future corporate
business objectives. To the extent consistent with this goal, the Compensation
Committees currently anticipate that such programs will also be designed to
satisfy the requirements of Section 162(m) of the IRC with respect to the
deductibility of compensation paid. However, the Compensation Committees may
award compensation that is not fully deductible if the Compensation Committees
determine that such award is consistent with their philosophy and in the best
interests of the Company and its stockholders.
47
<PAGE> 50
(i) NATIONWIDE LIFE INSURANCE COMPANY COMPENSATION COMMITTEE
David 0. Miller, Chairman
Willard J. Engel
Fred C. Finney
Charles L. Fuellgraf, Jr.
Henry S. Holloway
Nancy C. Thomas
48
<PAGE> 51
11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
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, 1997
Schedule III Supplementary Insurance Information as of December 31,
1997, 1996 and 1995 and for each of the years then
ended
Schedule IV Reinsurance as of December 31, 1997, 1996 and 1995 and
for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995
All other schedules are omitted because they are not required or
because the required information has been included in the
consolidated financial statements or notes thereto.
49
<PAGE> 52
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life
Insurance Company and subsidiaries (collectively the Company), a wholly owned
subsidiary of Nationwide Financial Services, Inc., as of December 31, 1997 and
1996, 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,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1997 1996
------
----------------- ---------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $13,204.1 $12,304.6
Equity securities 80.4 59.1
Mortgage loans on real estate, net 5,181.6 5,272.1
Real estate, net 311.4 265.8
Policy loans 415.3 371.8
Other long-term investments 25.2 28.7
Short-term investments 358.4 4.8
---------- ---------
19,576.4 18,306.9
---------- ---------
Cash 175.6 43.8
Accrued investment income 210.5 210.2
Deferred policy acquisition costs 1,665.4 1,366.5
Investment in subsidiaries classified as discontinued operations - 485.7
Other assets 438.4 426.5
Assets held in Separate Accounts 37,724.4 26,926.7
---------- ---------
$59,790.7 $47,766.3
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Future policy benefits and claims $18,702.8 $17,600.6
Other liabilities 885.6 1,101.1
Liabilities related to Separate Accounts 37,724.4 26,926.7
---------- ---------
57,312.8 45,628.4
---------- ---------
Commitments and contingencies (notes 7 and 13)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 914.7 527.9
Retained earnings 1,312.3 1,432.6
Unrealized gains on securities available-for-sale, net 247.1 173.6
---------- ---------
2,477.9 2,137.9
---------- ---------
$59,790.7 $47,766.3
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Investment product and universal life insurance product policy charges $ 545.2 $ 400.9 $ 286.6
Traditional life insurance premiums 205.4 198.6 199.1
Net investment income 1,409.2 1,357.8 1,294.0
Realized gains (losses) on investments 11.1 (0.3) (1.7)
Other 46.5 35.9 20.7
---------- ---------- ----------
2,217.4 1,992.9 1,798.7
---------- ---------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Other benefits and claims 178.2 178.3 165.2
Policyholder dividends on participating policies 40.6 41.0 39.9
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Other operating expenses 384.9 342.4 273.0
---------- ---------- ----------
1,787.5 1,677.4 1,511.1
---------- ---------- ----------
Income from continuing operations before federal income tax expense 429.9 315.5 287.6
Federal income tax expense 150.2 110.9 99.8
---------- ---------- ----------
Income from continuing operations 279.7 204.6 187.8
Income from discontinued operations (less federal income tax expense
of $4.5 and $7.4 in 1996 and 1995, respectively) - 11.3 24.7
---------- ---------- ----------
Net income $ 279.7 $ 215.9 $ 212.5
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(in millions of dollars)
<TABLE>
<CAPTION>
Unrealized
gains
(losses)
Additional on securities Total
Common paid-in Retained available- shareholder's
stock capital earnings for-sale, net equity
----------- ------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 $3.8 $ 606.2 $1,378.2 $(119.7) $1,868.5
Capital contribution - 51.0 - (4.1) 46.9
Net income - - 212.5 - 212.5
Dividends to shareholder - - (7.5) - (7.5)
Unrealized gains on securities available-
for-sale, net - - - 508.1 508.1
-------- -------- -------- -------- ---------
December 31, 1995 3.8 657.2 1,583.2 384.3 2628.5
Net income - - 215.9 - 215.9
Dividends to shareholder - (129.3) (366.5) (39.8) (535.6)
Unrealized losses on securities available-
for-sale, net - - - (170.9) (170.9)
-------- -------- -------- -------- ---------
December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9
Capital contribution - 836.8 - - 836.8
Net income - - 279.7 - 279.7
Dividends to shareholder - (450.0) (400.0) - (850.0)
Unrealized gains on securities available-
for-sale, net - - - 73.5 73.5
-------- -------- -------- -------- ---------
December 31, 1997 $3.8 $ 914.7 $1,312.3 $ 247.1 $2,477.9
======== ======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1997 1996 1995
------------------------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 279.7 $ 215.9 $ 212.5
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Capitalization of deferred policy acquisition costs (487.9) (422.6) (321.3)
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Amortization and depreciation (2.0) 7.0 10.2
Realized (gains) losses on invested assets, net (11.1) (0.3) 3.3
(Increase) decrease in accrued investment income (0.3) 2.8 (16.9)
(Increase) decrease in other assets (12.7) (38.9) 39.9
(Decrease) increase in policy liabilities (23.1) (151.0) 123.9
Increase in other liabilities 230.6 191.4 27.0
Other, net (10.9) (61.7) 1.8
----------- --------- --------
Net cash provided by operating activities 1,146.1 858.3 1,113.4
----------- --------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 993.4 1,162.8 634.6
Proceeds from sale of securities available-for-sale 574.5 299.6 107.3
Proceeds from maturity of fixed maturity securities held-to-maturity - - 564.4
Proceeds from repayments of mortgage loans on real estate 437.3 309.0 207.8
Proceeds from sale of real estate 34.8 18.5 48.3
Proceeds from repayments of policy loans and sale of other invested assets 22.7 22.8 53.6
Cost of securities available-for-sale acquired (2,828.1) (1,573.6) (1,942.4)
Cost of fixed maturity securities held-to-maturity acquired - - (593.6)
Cost of mortgage loans on real estate acquired (752.2) (972.8) (796.0)
Cost of real estate acquired (24.9) (7.9) (10.9)
Policy loans issued and other invested assets acquired (62.5) (57.7) (75.9)
Short-term investments, net (354.8) 28.0 77.8
----------- --------- --------
Net cash used in investing activities (1,959.8) (771.3) (1,725.0)
----------- --------- --------
Cash flows from financing activities:
Proceeds from capital contributions 836.8 - -
Cash dividends paid - (50.0) (7.5)
Increase in investment product and universal life insurance
product account balances 2,488.5 1,781.8 1,883.7
Decrease in investment product and universal life insurance
product account balances (2,379.8) (1,784.5) (1,258.7)
----------- --------- --------
Net cash provided by (used in) financing activities 945.5 (52.7) 617.5
----------- --------- --------
Net increase in cash 131.8 34.3 5.9
Cash, beginning of year 43.8 9.5 3.6
----------- --------- --------
Cash, end of year $ 175.6 $ 43.8 $ 9.5
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
wholly owned by Nationwide Corporation (Nationwide Corp.). On that
date, Nationwide Corp. contributed the outstanding shares of NLIC's
common stock to Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corp. in November 1996 for NLIC and the
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. On March 11
1997, NFS completed an initial public offering of its Class A common
stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or 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 two affiliates effective January 1, 1996. These subsidiaries,
through December 31, 1996, and all accident and health and group life
insurance business have been accounted for as discontinued operations
for all periods presented. See notes 11 and 15. Additionally, NLIC paid
$900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc.,
Nationwide Investment Services Corporation and NWE, Inc. NLIC and its
subsidiaries are collectively referred to as "the Company."
The Company is a leading provider of long-term savings and retirement
products. The Company is subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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 from
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, 1997 or 1996.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual and group
variable and fixed annuities. 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.
(d) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) SEPARATE ACCOUNTS
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $365.5 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the Separate Accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) FUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
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 4.
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) PARTICIPATING BUSINESS
Participating business represents approximately 50% in 1997 (52%
in 1996 and 54% in 1995) of the Company's life insurance in force,
77% in 1997 (78% in 1996 and 79% in 1995) of the number of life
insurance policies in force, and 27% in 1997 (40% in 1996 and 47%
in 1995) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) FEDERAL INCOME TAX
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) REINSURANCE CEDED
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis. 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 11 and 15.
(j) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 - REPORTING
COMPREHENSIVE INCOME was issued in June 1997 and is effective for
fiscal years beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a
period except those resulting from investments by shareholders and
distributions to shareholders and includes net income.
Comprehensive income would be reported in addition to earnings
amounts currently presented. The Company will adopt the statement
and begin reporting comprehensive income in the first quarter of
1998.
(k) RECLASSIFICATION
Certain items in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1997 and
1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ - $ 313.7
Obligations of states and political subdivisions 1.6 - - 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
------------ --------- --------- -----------
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
------------ --------- --------- -----------
$ 12,800.7 $ 498.3 $ (14.5) $ 13,284.5
============ ========= ========= ===========
December 31, 1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 275.7 $ 4.8 $ (1.3) $ 279.2
Obligations of states and political subdivisions 6.2 0.5 - 6.7
Debt securities issued by foreign governments 100.7 2.1 (0.9) 101.9
Corporate securities 7,999.3 285.9 (33.7) 8,251.5
Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3
------------ --------- --------- -----------
Total fixed maturity securities 11,970.9 384.7 (51.0) 12,304.6
Equity securities 43.9 15.6 (0.4) 59.1
------------ --------- --------- -----------
$ 12,014.8 $ 400.3 $ (51.4) $ 12,363.7
============ ========= ========= ===========
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1997, 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
(in millions of dollars) cost fair value
-------------- ----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 419.2 $ 422.1
Due after one year through five years 4,573.5 4,708.4
Due after five years through ten years 2,772.6 2,879.7
Due after ten years 1,333.4 1,443.6
----------- -----------
9,098.7 9,453.8
Mortgage-backed securities 3,634.2 3,750.3
----------- -----------
$ 12,732.9 $ 13,204.1
=========== ===========
</TABLE>
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- ----------
<S> <C> <C>
Gross unrealized gains $ 483.8 $349.0
Adjustment to deferred policy acquisition costs (103.7) (81.9)
Deferred federal income tax (133.0) (93.5)
-------- -------
$ 247.1 $173.6
======== =======
</TABLE>
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>
(in millions of dollars) 1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $137.5 $(289.2) $876.3
Equity securities (2.7) 8.9 -
Fixed maturity securities held-to-maturity - - 75.6
------- ------- -------
$134.8 $(280.3) $ 951.9
======= ======= =======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1997,
1996 and 1995 were $574.5 million, $299.6 million and $107.3 million,
respectively. During 1997, gross gains of $9.9 million ($6.6 million
and $4.8 million in 1996 and 1995, respectively) and gross losses of
$18.0 million ($6.9 million and $2.1 million in 1996 and 1995,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25.4 million 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 $3.5
million.
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 nearly 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 $3.32 billion,
resulting in a gross unrealized gain of $155.9 million.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million ($51.8 million as
of December 31, 1996), which includes $3.9 million ($41.7 million as of
December 31, 1996) of impaired mortgage loans on real estate for which
the related valuation allowance was $0.1 million ($8.5 million as of
December 31, 1996) and $16.0 million ($10.1 million as of December 31,
1996) of impaired mortgage loans on real estate for which there was no
valuation allowance. During 1997, the average recorded investment in
impaired mortgage loans on real estate was approximately $31.8 million
($39.7 million in 1996) and interest income recognized on those loans
was $1.0 million ($2.1 million in 1996), which is equal to interest
income recognized using a cash-basis method of income recognition.
<PAGE> 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
------------- -------------
<S> <C> <C>
Allowance, beginning of year $51.0 $49.1
(Reductions) additions charged to operations (1.2) 4.5
Direct write-downs charged against the allowance (7.3) (2.6)
------ ------
Allowance, end of year $42.5 $51.0
====== ======
</TABLE>
Real estate is presented at cost less accumulated depreciation of $45.1
million as of December 31, 1997 ($30.3 million as of December 31, 1996)
and valuation allowances of $11.1 million as of December 31, 1997
($15.2 million as of December 31, 1996).
Investments that were non-income producing for the twelve month period
preceding December 31, 1997 amounted to $19.4 million ($26.8 million
for 1996) and consisted of $3.0 million ($0.2 million in 1996) in
securities available-for-sale, $16.4 million ($20.6 million in 1996) in
real estate and none ($5.9 million in 1996) in other long-term
investments.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 911.6 $ 917.1 $ 685.8
Equity securities 0.8 1.3 1.3
Fixed maturity securities held-to-maturity - - 201.8
Mortgage loans on real estate 457.7 432.8 395.5
Real estate 42.9 44.3 38.3
Short-term investments 22.7 4.2 10.6
Other 21.0 4.0 7.2
-------- -------- --------
Total investment income 1,456.7 1,403.7 1,340.5
Less investment expenses 47.5 45.9 46.5
-------- -------- --------
Net investment income $1,409.2 $1,357.8 $1,294.0
======== ======== ========
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ 3.6 $(3.5) $ 4.2
Equity securities 2.7 3.2 3.4
Mortgage loans on real estate 1.6 (4.1) (7.1)
Real estate and other 3.2 4.1 (2.2)
------ ------ ------
$11.1 $(0.3) $(1.7)
====== ====== ======
</TABLE>
Fixed maturity securities with an amortized cost of $6.2 million as
of December 31, 1997 and 1996 were on deposit with various
regulatory agencies as required by law.
<PAGE> 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts
represents approximately 86% and 87% of the total liability for future
policy benefits as of December 31, 1997 and 1996, respectively. The
average interest rate credited on investment product policies was
approximately 6.1%, 6.3% and 6.6% for the years ended December 31,
1997, 1996 and 1995, 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 by issue year and were 6.9%
and 6.6% in 1997 and 1996, respectively. Interest rates have
generally ranged from 6.0% to 10.5% for previous issue years.
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
$220.2 million and $240.5 million as of December 31, 1997 and 1996,
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 11. All other reinsurance agreements are not material
to either premiums or reinsurance recoverables.
(5) FEDERAL INCOME TAX
The Company's current federal income tax liability was $60.1 million
and $30.2 million as of December 31, 1997 and 1996, respectively.
<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $200.1 $183.0
Liabilities in Separate Accounts 242.0 188.4
Mortgage loans on real estate and real estate 19.0 23.4
Other assets and other liabilities 59.2 53.7
------- ------
Total gross deferred tax assets 520.3 448.5
Less valuation allowance (7.0) (7.0)
------- ------
Net deferred tax assets 513.3 441.5
------- ------
Deferred tax liabilities:
Deferred policy acquisition costs 480.5 399.3
Fixed maturity securities 193.3 133.2
Deferred tax on realized investment gains 40.1 37.6
Equity securities and other long-term investments 7.5 8.2
Other 22.2 25.4
------- ------
Total gross deferred tax liabilities 743.6 603.7
------- ------
Net deferred tax liability $230.3 $162.2
======= ======
</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, 1997, 1996 and 1995.
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable $121.7 $116.5 $88.7
Deferred tax expense (benefit) 28.5 (5.6) 11.1
------ ------ ------
$150.2 $110.9 $99.8
====== ====== ======
</TABLE>
Total federal income tax expense for the years ended December 31, 1997,
1996 and 1995 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
(in millions of dollars) Amount % Amount % Amount %
---------------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $150.5 35.0 $110.4 35.0 $100.6 35.0
Tax exempt interest and dividends
received deduction - 0.0 (0.2) (0.1) - 0.0
Other, net (0.3) (0.1) 0.7 0.3 (0.8) (0.3)
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $150.2 34.9 $110.9 35.2 $ 99.8 34.7
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $91.8 million, $115.8 million and
$51.8 million during the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE> 15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
FIXED MATURITY AND EQUITY SECURITIES: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices.
MORTGAGE LOANS ON REAL ESTATE, NET: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
POLICY LOANS, SHORT-TERM INVESTMENTS AND CASH: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in Separate Accounts is based on quoted market prices. The
fair value of liabilities related to Separate Accounts is the
amount payable on demand, which includes certain surrender
charges.
INVESTMENT CONTRACTS: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
<PAGE> 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
POLICY RESERVES ON LIFE INSURANCE CONTRACTS: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 13.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
(in millions of dollars) amount fair value amount fair value
------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $13,204.1 $13,204.1 $12,304.6 $12,304.6
Equity securities 80.4 80.4 59.1 59.1
Mortgage loans on real estate, net 5,181.6 5,509.7 5,272.1 5,397.9
Policy loans 415.3 415.3 371.8 371.8
Short-term investments 358.4 358.4 4.8 4.8
Cash 175.6 175.6 43.8 43.8
Assets held in Separate Accounts 37,724.4 37,724.4 26,926.7 26,926.7
Liabilities:
Investment contracts 14,708.2 14,322.1 13,914.4 13,484.5
Policy reserves on life insurance contracts 3,345.4 3,182.4 3,392.8 3,197.5
Liabilities related to Separate Accounts 37,724.4 36,747.0 26,926.7 26,164.2
</TABLE>
(7) RISK DISCLOSURES
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduce demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
CREDIT RISK: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
<PAGE> 17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
INTEREST RATE RISK: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
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.
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 $341.4 million
extending into 1998 were outstanding as of December 31, 1997. The
Company also had $63.9 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1997.
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 20% (21% in 1996) in any geographic area and no more than 2% (2%
in 1996) with any one borrower as of December 31, 1997. As of December
31, 1997, 46% (44% in 1996) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1997 and 1996. See note 4.
(8) 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 year of service. 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.
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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 (the 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, 1997, 1996 and 1995 were $7.5 million, $7.4
million and $10.5 million, respectively.
The Company had no net accrued pension expense as of December 31, 1997
($1.1 million as of December 31, 1996).
The net periodic pension cost for the Retirement Plan as a whole for
the years ended December 31, 1997 and 1996 and for the Nationwide
Insurance Companies and Affiliates Retirement Plan as a whole for the
year ended December 31, 1995 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 77.3 $ 75.5 $ 64.5
Interest cost on projected benefit obligation 118.6 105.5 95.3
Actual return on plan assets (328.0) (210.6) (249.3)
Net amortization and deferral 196.4 101.8 143.4
-------- -------- --------
$ 64.3 $ 72.2 $ 53.9
======== ======== ========
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate 6.50% 6.00% 7.50%
Rate of increase in future compensation levels 4.75% 4.25% 6.25%
Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
</TABLE>
Information regarding the funded status of the Retirement Plan as a
whole as of December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,547.5 $1,338.6
Nonvested 13.5 11.1
-------- ---------
$1,561.0 $1,349.7
======== =========
Net accrued pension expense:
Projected benefit obligation for services rendered to date $2,033.8 $1,847.8
Plan assets at fair value 2,212.9 1,947.9
--------- ---------
Plan assets in excess of projected benefit obligation 179.1 100.1
Unrecognized prior service cost 34.7 37.9
Unrecognized net gains (330.7) (202.0)
Unrecognized net asset at transition 33.3 37.2
--------- ---------
$ (83.6) $ (26.8)
========= =========
</TABLE>
<PAGE> 19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted average discount rate 6.00% 6.50%
Rate of increase in future compensation levels 4.25% 4.75%
</TABLE>
Assets of the Retirement Plan are invested in group annuity contracts
of NLIC and Employers Life Insurance Company of Wausau (ELICW).
(9) 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 (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1997 and 1996 was $36.5 million and $34.9 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1997, 1996 and
1995 was $3.0 million, $3.3 million and $3.1 million, respectively.
Information regarding the funded status of the plan as a whole as of
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees $ 93.3 $ 93.0
Fully eligible, active plan participants 31.6 23.7
Other active plan participants 113.0 84.0
-------- --------
Accumulated postretirement benefit obligation 237.9 200.7
Plan assets at fair value 69.2 63.0
-------- --------
Plan assets less than accumulated postretirement benefit obligation (168.7) (137.7)
Unrecognized transition obligation of affiliates 1.5 1.7
Unrecognized net losses (gains) 1.6 (23.2)
-------- --------
$(165.6) $(159.2)
======== ========
</TABLE>
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year) $ 7.0 $ 6.5 $ 6.2
Interest cost on accumulated postretirement
benefit obligation 14.0 13.7 14.2
Actual return on plan assets (3.6) (4.3) (2.7)
Amortization of unrecognized transition
obligation of affiliates 0.2 0.2 3.0
Net amortization and deferral (0.5) 1.8 (1.6)
------- ------ ------
$17.1 $17.9 $19.1
======= ====== ======
</TABLE>
Actuarial assumptions used for the measurement of the APBO and the
NPPBC for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
APBO:
Discount rate 6.70% 7.25% 6.75%
Assumed health care cost trend rate:
Initial rate 12.13% 11.00% 11.00%
Ultimate rate 6.12% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
NPPBC:
Discount rate 7.25% 6.65% 8.00%
Long term rate of return on plan
assets, net of tax 5.89% 4.80% 8.00%
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 10.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
</TABLE>
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,
1997 by $0.4 million and have no impact on the NPPBC for the year ended
December 31, 1997.
(10) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
<PAGE> 21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The statutory capital and surplus of NLIC as of December 31, 1997, 1996
and 1995 was $1.13 billion, $1.00 billion and $1.36 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1997, 1996 and 1995 was $111.7 million, $73.2 million and
$86.5 million, respectively.
As a result of the $850.0 million dividend paid on February 24, 1997,
any dividend paid by NLIC during the twelve-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. The Company has no reason to
believe that any reasonably foreseeable dividend to be paid by NLIC
would not receive the required 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 shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) TRANSACTIONS WITH AFFILIATES
As part of the restructuring described in note 1, NLIC paid a dividend
valued at $485.7 million to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of ELICW, National
Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC).
Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid
an equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the
Company made lease payments to NMIC and its subsidiaries of $8.4
million, $9.1 million and $9.0 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $85.8 million, $101.6 million and $107.1
million in 1997, 1996 and 1995, 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 inter-company 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 $20.5 million and $15.1 million as of
December 31, 1997 and 1996, 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 1997 and
1996 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> 22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance agreements 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 the Company'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 the Company's 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 the Company for the Company'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. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material
respects with what the Company could have obtained with unaffiliated
parties. Amounts ceded to NMIC and ELICW for the years ended December
31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
(in millions of dollars) NMIC ELICW NMIC ELICW
-------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
Premiums $ 91.4 $199.8 $ 97.3 $224.2
Net investment income and other revenue $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and other expenses $100.7 $225.9 $100.5 $246.6
</TABLE>
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $211.0 million and $4.8 million as of
December 31, 1997 and 1996, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
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 $46.9 million. As discussed in note 15, WCLIC
is accounted for as discontinued operations.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1997 were $66.1
million, $76.9 million and $57.3 million, respectively.
(12) BANK LINES OF CREDIT
In August 1996, NLIC, along with NMIC, entered into a $600.0 million
revolving credit facility which provides for a $600.0 million loan over
a five year term on a fully revolving basis with a group of national
financial institutions. The credit facility provides for several and
not joint liability with respect to any amount drawn by 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. In September 1997,
the credit agreement was amended to include NFS as a party to and
borrower under the agreement.
<PAGE> 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) 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.
(14) SEGMENT INFORMATION
The Company has three product 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 Fixed Annuities segment also includes the
fixed option under the Company's variable annuity contracts. 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 and
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.
The following table summarizes revenues and income from continuing
operations before federal income tax expense for the years ended
December 31, 1997, 1996 and 1995 and assets as of December 31, 1997,
1996 and 1995, by segment.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Variable Annuities $ 404.0 $ 284.6 $ 189.1
Fixed Annuities 1,141.4 1,092.6 1,052.0
Life Insurance 473.1 435.6 409.1
Corporate and Other 198.9 180.1 148.5
----------- ---------- ----------
$ 2,217.4 $ 1,992.9 $ 1,798.7
=========== ========== ==========
Income from continuing operations before federal income tax
expense:
Variable Annuities $ 150.9 $ 90.3 $ 50.8
Fixed Annuities 169.5 135.4 137.0
Life Insurance 70.9 67.2 67.6
Corporate and Other 38.6 22.6 32.2
----------- ---------- ----------
$ 429.9 $ 315.5 $ 287.6
=========== ========== ==========
Assets:
Variable Annuities $ 35,278.7 $ 25,069.7 $ 17,333.0
Fixed Annuities 14,436.3 13,994.7 13,250.4
Life Insurance 3,901.4 3,353.3 3,027.4
Corporate and Other 6,174.3 5,348.6 4,896.8
----------- ---------- ----------
$ 59,790.7 $ 47,766.3 $ 38,507.6
=========== ========== ==========
</TABLE>
<PAGE> 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(15) DISCONTINUED OPERATIONS
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. Prior to the
contribution by Nationwide Corp. of the outstanding common stock of
NLIC to NFS, 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
payable to Nationwide Corp. on January 1, 1997 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 with offices in Scottsdale, Arizona
that serves as a fronting company for a property and casualty
subsidiary of NMIC. 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 in the
accompanying consolidated financial statements through December 31,
1996. The Company did not recognize any gain or loss on the disposal of
these subsidiaries.
Also, 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 11 for a
complete discussion of the reinsurance agreements. The Company 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. NLIC's accident and health and group life insurance business
is accounted for as discontinued operations for all periods presented.
The Company 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 the Company.
A summary of the results of operations of discontinued operations for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ - $ 668.9 $ 776.9
Net income $ - $ 11.3 $ 24.7
</TABLE>
A summary of the assets and liabilities of discontinued operations as
of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Assets, consisting primarily of investments $247.3 $3,288.5 $3,206.7
Liabilities, consisting primarily of policy benefits and claims $247.3 $2,802.8 $2,700.0
</TABLE>
<PAGE> 53
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 will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is
or was a director, officer or employee of 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) will be made as
authorized in a specific case upon a determination that
indemnification of the director, trustee, officer or employee is
proper in the circumstances because he has met the applicable
standards of conduct set forth in the General Corporation Law of
the State of Ohio. Such determination will be made (1) by the
Board of Directors by a majority vote of a quorum consisting of
directors who were not, and are not, parties to or threatened with
any such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal
counsel meeting the requirements of independence prescribed by the
General Corporation Law of Ohio, or (3) by the shareholders, or
(4) by the Court of Common Pleas or the court in which such
action, suit or proceeding was brought.
Section 2. Other Rights. The foregoing right of indemnification
will not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under the Articles of
Incorporation, these Regulations, any agreement, vote of
shareholders or disinterested directors or otherwise, and will
continue as to a person who has ceased to be a director, trustee,
officer or employee and will inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. 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 will 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.
77
<PAGE> 54
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:
<TABLE>
<CAPTION>
1995 1996 1995
<S> <C> <C> <C>
GPVA $ 114,207,169
QPVA $7,692,919,506
Ohio DC Account $ 39,456,176
Separate Account-1 $ 1,330,463
</TABLE>
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
(a)
<TABLE>
<CAPTION>
Exhibit Index Page
<S> <C> <C>
(3)(i) Certificate of Incorporation (Exhibit A)*
(3)(ii) Code of Regulations (Exhibit B)*
(4) Annuity Endorsement to Contracts (Exhibit C)* E
(5) Opinion Regarding Legality (Exhibit D) E
(21) Subsidiaries of the Registrant (Exhibit D)*
(23) Consent of Experts and Counsel (Exhibit E) E
(24) Power of Attorney (Exhibit F)* - Copy attached hereto
</TABLE>
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
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, 1997
Schedule III Supplementary Insurance Information as of
December 31, 1997, 1996 and 1995 and for each of
the years then ended
Schedule IV Reinsurance as of December 31, 1997, 1996 and 1995
and for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years
ended December 31, 1997, 1996 and 1995
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.
78
<PAGE> 55
* Filed with the original submission of this registration statement (SEC
File No. 33-58997) on May 2, 1995.
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.
79
<PAGE> 56
INDEPENDENT AUDITORS' CONSENT AND 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 30, 1998, included the related financial statement
schedules as of December 31, 1997, and for each of the years in the three-year
period ended December 31, 1997, 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 statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our report included and to the reference to our firm
under the heading "Consolidated Financial Statements and Supplemental Data" in
the Prospectus.
KPMG Peat Marwick LLP
Columbus, Ohio
April 30, 1998
80
<PAGE> 57
<PAGE> 1
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions of dollars)
As of December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------- ------------- -------------- ---------------
Column A Column B Column C Column D
- ----------------------------------------------------------------------------- ------------- -------------- ---------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- ----------------------------------------------------------------------------- ------------- -------------- ---------------
Fixed maturity securities available-for-sale:
Bonds:
<S> <C> <C> <C>
U.S. Government and government agencies and authorities $ 3,859.7 $ 3,981.7 $ 3,981.7
States, municipalities and political subdivisions 1.6 1.6 1.6
Foreign governments 93.3 95.8 95.8
Public utilities 1,555.3 1,609.8 1,609.8
All other corporate 7,223.0 7,515.2 7,515.2
---------- ---------- ----------
Total fixed maturity securities available-for-sale 12,732.9 13,204.1 13,204.1
---------- ---------- ----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 67.8 78.0 78.0
Non-redeemable preferred stock - 2.4 2.4
---------- ---------- ----------
Total equity securities available-for-sale 67.8 80.4 80.4
---------- ---------- ----------
Mortgage loans on real estate, net 5,228.1 5,181.6 (1)
Real estate, net:
Investment properties 254.9 235.7 (1)
Acquired in satisfaction of debt 82.6 75.7 (1)
Policy loans 415.3 415.3
Other long-term investments 27.9 25.2 (2)
Short-term investments 358.4 358.4
---------- ----------
Total investments $19,167.9 $19,576.4
========== ==========
</TABLE>
- ----------
(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 3 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains (losses) of
investments in limited partnerships.
See accompanying independent auditors' report.
<PAGE> 2
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions of dollars)
As of December 31, 1997, 1996 and 1995 and for each of the years then ended
<TABLE>
<CAPTION>
- -------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- -------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Deferred Future policy Other policy
policy benefits, losses, Unearned claims and
acquisition claims and premiums benefits payable Premium
Segment costs loss expenses (1) (1) revenue
- ------------------------------- ------------------ -------------------- ------------------- ------------------ ---------------
1997: Variable Annuities $1,018.4 $ - $ -
Fixed Annuities 277.9 14,103.1 27.3
Life Insurance 472.9 2,683.4 178.1
Corporate and Other (103.8) 1,916.3 -
-------- ------------- ---------
Total $1,665.4 $18,702.8 $ 205.4
======== ============= =========
1996: Variable Annuities $ 792.1 $ - $ -
Fixed Annuities 242.0 13,388.9 24.0
Life Insurance 414.4 2,391.5 174.6
Corporate and Other (82.0) 1,820.2 -
-------- ------------- ---------
Total $1,366.5 $17,600.6 $ 198.6
======== ============= =========
1995: Variable Annuities $ 569.8 $ - $ -
Fixed Annuities 220.7 12,759.3 32.8
Life Insurance 366.9 2,282.6 166.3
Corporate and Other (136.9) 1,730.0 -
-------- ------------- ---------
Total $1,020.5 $ 16,771.9 $ 199.1
======== ============= =========
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
Column A Column G Column H Column I Column J Column K
- ---------------------------------------------------- -------------------- ------------------- ------------------ ----------------
Net investment Benefits, claims, Amortization Other
income losses and of deferred policy operating Premiums
Segment (2) settlement expenses acquisition costs expenses written
(2)
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
<C> <C> <C> <C> <C>
1997: Variable Annuities $ (26.8) $ 5.9 $ 87.8 $ 159.4
Fixed Annuities 1,098.2 846.7 39.8 85.4
Life Insurance 189.1 227.5 39.6 94.5
Corporate and Other 148.7 114.7 - 45.6
-------- ---------- ------- -------
Total $1,409.2 $ 1,194.8 $ 167.2 $ 384.9
======== ========== ======= =======
1996: Variable Annuities $ (21.4) $ 4.6 $ 57.4 $ 132.3
Fixed Annuities 1,050.6 838.5 38.6 79.7
Life Insurance 174.0 211.4 37.4 79.0
Corporate and Other 154.6 106.1 - 51.4
-------- ---------- ------- -------
Total $1,357.8 $ 1,160.6 $ 133.4 $ 342.4
======== ========== ======= =======
1995: Variable Annuities $ (17.6) $ 2.9 $ 26.3 $ 109.1
Fixed Annuities 1,002.7 805.0 29.5 80.3
Life Insurance 171.2 202.0 31.0 68.8
Corporate and Other 137.7 105.6 (4.1) 14.8
-------- ---------- ------- -------
Total $1,294.0 $ 1,115.5 $ 82.7 $ 273.0
======== ========== ======= =======
</TABLE>
- ----------
(1) Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
<PAGE> 3
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions of dollars)
As of December 31, 1997, 1996 and 1995 and for each of the years then ended
<TABLE>
<CAPTION>
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
--------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1997:
Life insurance in force $ 52,648.4 $13,678.7 $ 289.7 $ 39,259.4 0.7%
=========== ========= ======== =========== =======
Premiums:
Life insurance $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1%
Accident and health insurance 261.2 272.6 11.4 - N/A
----------- ---------- --------- ----------- -------
Total $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6%
=========== ========= ========= =========== =======
1996:
Life insurance in force $47,150.6 $11,164.6 $ 288.6 $ 36,274.6 0.8%
=========== ========= ======== =========== =======
Premiums:
Life insurance $ 225.6 $ 29.3 $ 2.3 $ 198.6 1.2%
Accident and health insurance 291.9 305.8 13.9 - N/A
----------- --------- -------- ----------- -------
Total $ 517.5 $ 335.1 $ 16.2 $ 198.6 8.2%
=========== ========= ======== =========== =======
1995:
Life Insurance in force $41,087.9 $ 8,935.7 $ 391.2 $ 32,543.4 1.2%
=========== ========= ======== =========== =======
Premiums:
Life insurance $ 221.3 $ 24.4 $ 2.2 $ 199.1 1.1%
Accident and health insurance 298.0 313.0 15.0 - N/A
----------- --------- -------- ----------- -------
Total $ 519.3 $ 337.4 $ 17.2 $ 199.1 8.6%
=========== ========= ======== =========== =======
</TABLE>
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
<PAGE> 4
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions of dollars)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------- ------------- -------------
Column A Column B Column C Column D Column E
- --------------------------------------------------- ----------------------------------------------- ------------- -------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end of
Description of period expenses accounts (1) period
- --------------------------------------------------- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997:
Valuation allowances - fixed maturity securities $ - $ 16.2 $ - $ 16.2 $ -
Valuation allowances - mortgage loans on real estate 51.0 (1.2) - 7.3 42.5
Valuation allowances - real estate 15.2 (4.1) - - 11.1
-------- ------ ------- ------- -------
Total $ 66.2 $ 10.9 $ - $ 23.5 $ 53.6
======== ====== ======= ======= =======
1996:
Valuation allowances - mortgage loans on real estate $ 49.1 $ 4.5 $ - $ 2.6 $ 51.0
Valuation allowances - real estate 25.8 (10.6) - - 15.2
-------- ------ ------- ------- -------
Total $ 74.9 $ (6.1) $ - $ 2.6 $ 66.2
======== ====== ======= ======= =======
1995:
Valuation allowances - fixed maturity securities $ - $ 8.9 $ - $ 8.9 $ -
Valuation allowances - mortgage loans on real estate 46.4 7.4 - 4.7 49.1
Valuation allowances - real estate 27.3 (1.5) - - 25.8
-------- ------ ------- ------- -------
Total $ 73.7 $ 14.8 $ - $ 13.6 $ 74.9
======== ====== ======= ======= =======
</TABLE>
- ----------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
See accompanying independent auditors' report.
<PAGE> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 3 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 30th of April, 1998.
NATIONWIDE LIFE INSURANCE COMPANY
-----------------------------------------
(Registrant)
By /s/JOSEPH P. RATH
-----------------------------------------
Joseph P. Rath
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 3 to the Registration Statement has been signed by the following
persons on the 30th of April, 1998, in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C>
LEWIS J. ALPHIN Director
- ---------------------------
Lewis J. Alphin
A. I. BELL Director
- ---------------------------
A. I. Bell
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.
JOSEPH J. GASPER President and Chief
- ---------------------------
Joseph J. Gasper Operating Office and Director
DIMON R. McFERSON Chairman and Chief Executive Officer
- ---------------------------
Dimon R. McFerson Nationwide Insurance Enterprise and Director
DAVID O. MILLER Chairman of the Board and Director
- ---------------------------
David O. Miller
YVONNE L. MONTGOMERY Director
- ---------------------------
Yvonne L. Montgomery
C. RAY NOECKER Director
- ---------------------------
C. Ray Noecker
ROBERT A. OAKLEY Executive Vice President-
- ---------------------------
Robert A. Oakley Chief Financial Officer
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
</TABLE>
85
