<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
--- ---
All voting stock was held by affiliates of the Registrant on August 1, 1998.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
(Title of Class) as of August 1, 1998
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
<TABLE>
INDEX
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Narrative Analysis of the Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions of dollars)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------------
1998 1997 1998 1997
------ ------ -------- --------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $175.0 $129.7 $ 334.0 $ 250.1
Life insurance premiums 52.0 50.3 105.2 105.7
Net investment income 367.0 351.3 731.5 692.3
Realized gains (losses) on investments 5.0 (11.9) 21.6 9.2
Other 16.8 15.9 31.1 25.7
------ ------ -------- --------
615.8 535.3 1,223.4 1,083.0
------ ------ -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 264.7 253.7 526.6 500.9
Other benefits and claims 40.6 43.3 86.9 92.5
Policyholder dividends on participating policies 11.5 11.6 22.3 22.2
Amortization of deferred policy acquisition costs 54.1 39.6 101.8 83.0
Other operating expenses 106.6 94.2 208.7 188.1
------ ------ -------- --------
477.5 442.4 946.3 886.7
------ ------ -------- --------
Income before federal tax expense 138.3 92.9 277.1 196.3
Federal tax expense 47.5 32.5 95.2 69.2
------ ------ -------- --------
Net income $ 90.8 $ 60.4 $ 181.9 $ 127.1
====== ====== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
<TABLE>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
----------- ------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $13,140.3 in 1998; $12,732.9 in 1997) $13,611.2 $13,204.1
Equity securities (cost $82.5 in 1998; $67.8 in 1997) 99.1 80.4
Mortgage loans on real estate, net 5,241.5 5,181.6
Real estate, net 274.8 311.4
Policy loans 441.6 415.3
Other long-term investments 22.7 25.2
Short-term investments 192.1 358.4
--------- ---------
19,883.0 19,576.4
--------- ---------
Cash 5.9 175.6
Accrued investment income 213.8 210.5
Deferred policy acquisition costs 1,859.1 1,665.4
Other assets 407.0 438.4
Assets held in Separate Accounts 45,974.9 37,724.4
--------- ---------
$68,343.7 $59,790.7
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $18,982.9 $18,702.8
Other liabilities 823.2 885.6
Liabilities related to Separate Accounts 45,974.9 37,724.4
--------- ---------
65,781.0 57,312.8
--------- ---------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5.0 million shares, issued and
outstanding 3.8 million shares 3.8 3.8
Additional paid-in capital 914.7 914.7
Retained earnings 1,394.2 1,312.3
Accumulated other comprehensive income 250.0 247.1
--------- ---------
2,562.7 2,477.9
--------- ---------
$68,343.7 $59,790.7
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
<TABLE>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Six Months Ended June 30, 1998 and 1997
(in millions of dollars)
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
-------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997
BALANCE, JANUARY 1, 1997 $3.8 $ 527.9 $1,432.6 $173.6 $2,137.9
Comprehensive income:
Net income -- -- 127.1 -- 127.1
Unrealized net losses on securities
available-for-sale arising during the period -- -- -- (32.4) (32.4)
--------
Total comprehensive income 94.7
--------
Capital contributions -- 836.8 -- -- 836.8
Dividends to shareholder -- (450.0) (400.0) -- (850.0)
---- ------- -------- ------ --------
BALANCE, JUNE 30, 1997 $3.8 $ 914.7 $1,159.7 $141.2 $2,219.4
==== ======= ======= ====== ========
1998
BALANCE, JANUARY 1, 1998 $3.8 $ 914.7 $1,312.3 $247.1 $2,477.9
Comprehensive income:
Net income -- -- 181.9 -- 181.9
Unrealized net losses on securities
available-for-sale arising during the period -- -- -- 2.9 2.9
--------
Total comprehensive income 184.8
--------
Dividend to shareholder (100.0) (100.0)
---- ------- ------- ------ --------
BALANCE, JUNE 30, 1998 $3.8 $ 914.7 $1,394.2 $250.0 $2,562.7
==== ======= ======= ====== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
<TABLE>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 1998 and 1997
(in millions of dollars)
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181.9 $ 127.1
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 526.6 500.9
Capitalization of deferred policy acquisition costs (294.6) (235.7)
Amortization of deferred policy acquisition costs 101.8 83.0
Amortization and depreciation (4.4) 2.0
Realized gains on investments, net (21.6) (9.2)
(Increase) decrease in accrued investment income (3.3) 1.1
Decrease in other assets 30.4 21.7
(Decrease) increase in policy liabilities (2.3) 60.5
Decrease in other liabilities (63.9) (19.8)
Other, net (6.3) (2.2)
--------- ---------
Net cash provided by operating activities 444.3 529.4
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 761.6 437.7
Proceeds from sale of securities available-for-sale 464.4 225.9
Proceeds from repayments of mortgage loans on real estate 337.5 164.7
Proceeds from sale of real estate 58.7 23.2
Proceeds from repayments of policy loans and sale of other invested assets 14.1 21.9
Cost of securities available-for-sale acquired (1,637.1) (1,236.6)
Cost of mortgage loans on real estate acquired (401.1) (418.6)
Cost of real estate acquired (0.3) (21.5)
Policy loans issued and other invested assets acquired (33.9) (37.8)
Short-term investments, net 166.3 (282.7)
--------- ---------
Net cash used in investing activities (269.8) (1,123.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions -- 836.8
Cash dividends paid to shareholder (100.0) --
Increase in investment product and universal life insurance product
account balances 1,278.5 1,010.3
Decrease in investment product and universal life insurance product
account balances (1,522.7) (1,210.1)
--------- ---------
Net cash (used in) provided by financing activities (344.2) 637.0
--------- ---------
Net (decrease) increase in cash (169.7) 42.6
Cash, beginning of period 175.6 43.8
--------- ---------
Cash, end of period $ 5.9 $ 86.4
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 1998
(1) Basis of Presentation
- --- ---------------------
The accompanying unaudited consolidated financial statements of
Nationwide Life Insurance Company and subsidiaries (NLIC or
collectively the Company) have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities,
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein reflects all adjustments (all of which are normal and
recurring in nature) which are, in the opinion of management, necessary
for a fair presentation of financial position and results of
operations. Operating results for all periods presented are not
necessarily indicative of the results that may be expected for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
1997 included in the Company's annual report on Form 10-K.
(2) Comprehensive Income
- --- --------------------
Pursuant to the Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income", the Consolidated Statements
of Shareholders' Equity include a new measure called "Comprehensive
Income". Comprehensive Income includes net income as well as certain
items that are reported directly within a separate component of
shareholders' equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(in millions of dollars) JUNE 30, JUNE 30,
- ------------------------ ------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $28.9 $139.3 $ 7.1 $(62.5)
Adjustment to deferred policy acquisition costs (6.9) (47.6) 0.9 18.6
Related federal tax (expense) benefit (7.6) (32.1) (2.8) 15.3
----- ------ ----- ------
Net 14.4 59.6 5.2 (28.6)
----- ------ ----- ------
Reclassification adjustment for net (gains) losses
on securities available-for-sale realized during
the period:
Gross (0.6) 11.1 (3.5) (5.9)
Related federal tax expense (benefit) 0.2 (3.9) 1.2 2.1
----- ------ ----- ------
Net (0.4) 7.2 (2.3) (3.8)
----- ------ ----- ------
Total Other Comprehensive Income (Loss) $14.0 $ 66.8 $ 2.9 $(32.4)
===== ====== ===== ======
</TABLE>
7
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(3) Accounting Pronouncements
- --- -------------------------
On January 1, 1998 the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." FAS 131 establishes
standards for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports. FAS
131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
FAS 131 did not affect results of operations or financial position, nor
did it affect the manner in which the Company defines its operating
segments. The segment information required for interim reports is
included in note 4.
In March 1998, The American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance intended to
standardize accounting practices for costs incurred to develop or
obtain computer software for internal use. Specifically, SOP 98-1
provides guidance for determining whether computer software is for
internal use and when costs incurred for internal-use software are to
be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998 with earlier application
encouraged. The adoption of SOP 98-1, planned for the first quarter of
1999, is not expected to have a material impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Contracts that contain embedded
derivatives, such as certain insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 with earlier application permitted. The
Company is currently evaluating the impact of this Statement on results
of operations and financial condition.
(4) Segment Disclosures
- --- -------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds
managed by independent investment managers and the Company, with
investment returns accumulating on a tax-deferred basis. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The 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 variable
annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
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), revenues and expenses related to group annuity contracts
sold to Nationwide Insurance Enterprise employee and agent benefit
plans and all realized gains and losses on investments in a Corporate
and Other segment.
8
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the three months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- ------------------------------------ ----------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $135.7 $286.2 $135.5 $ 53.4 $610.8
Benefits and expenses 80.0 243.1 113.0 41.4 477.5
------ ------ ------ ------ ------
Operating income before federal
income tax 55.7 43.1 22.5 12.0 133.3
Realized gains on investments -- -- -- 5.0 5.0
------ ------ ------ ------ ------
Consolidated income before
federal income tax $ 55.7 $ 43.1 $ 22.5 $ 17.0 $138.3
====== ====== ====== ====== ======
1997
Operating revenue (1) $ 94.0 $282.2 $116.0 $ 55.0 $547.2
Benefits and expenses 59.2 238.1 102.3 42.8 442.4
------ ------ ------ ------ ------
Operating income before federal
income tax 34.8 44.1 13.7 12.2 104.8
Realized losses on investments -- -- -- (11.9) (11.9)
------ ------ ------ ------ ------
Consolidated income before
federal income tax $ 34.8 $ 44.1 $ 13.7 $ 0.3 $ 92.9
====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Excludes realized gains and losses on investments.
9
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- ----------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $ 255.8 $ 575.5 $ 264.0 $ 106.5 $ 1,201.8
Benefits and expenses 150.8 487.4 220.3 87.8 946.3
--------- --------- -------- -------- ---------
Operating income before federal
income tax 105.0 88.1 43.7 18.7 255.5
Realized gains on investments -- -- -- 21.6 21.6
--------- --------- -------- -------- ---------
Consolidated income before
federal income tax $ 105.0 $ 88.1 $ 43.7 $ 40.3 $ 277.1
========= ========= ======== ======== =========
Assets as of period end $43,113.0 $14,549.5 $4,706.0 $5,975.2 $68,343.7
========= ========= ======== ======== =========
1997
Operating revenue (1) $ 180.8 $ 567.0 $ 230.6 $ 95.4 $ 1,073.8
Benefits and expenses 116.6 485.3 199.9 84.9 886.7
--------- --------- -------- -------- ---------
Operating income before federal
income tax 64.2 81.7 30.7 10.5 187.1
Realized gains on investments -- -- -- 9.2 9.2
--------- --------- -------- -------- ---------
Consolidated income before
federal income tax $ 64.2 $ 81.7 $ 30.7 $ 19.7 $ 196.3
========= ========= ======== ======== =========
Assets as of period end $30,791.9 $13,974.5 $3,604.0 $5,255.5 $53,625.9
========= ========= ======== ======== =========
</TABLE>
- ----------
(1) Excludes realized gains and losses on investments.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes
included elsewhere herein.
NLIC is the primary operating subsidiary of Nationwide Financial
Services, Inc. (NFS), the holding company for companies within the
Nationwide Insurance Enterprise that offer or distribute long-term
savings and retirement products. In March 1997, NFS sold 23.6
million shares of its newly-issued Class A common stock in an
initial public offering.
Management's discussion and analysis contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of the Company. These
forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) the potential
impact on the Company's reported net income that could result from
the adoption of certain accounting standards issued by the FASB;
(ii) tax law changes impacting the tax treatment of life insurance
and investment products; (iii) heightened competition, including
specifically the intensification of price competition, the entry
of new competitors and the development of new products by new and
existing competitors; (iv) adverse state and federal legislation
and regulation, including limitations on premium levels, increases
in minimum capital and reserves, and other financial viability
requirements; (v) failure to expand distribution channels in order
to obtain new customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including,
among others, changes to certain products and acceptance of the
revised products in the market; (vii) changes in interest rates
and the stock markets causing a reduction of investment income or
asset fees, reduction in the value of the Company's investment
portfolio or a reduction in the demand for the Company's products;
(viii) general economic and business conditions which are less
favorable than expected; (ix) unanticipated changes in industry
trends and ratings assigned by nationally recognized statistical
rating organizations or A.M. Best Company; and (x) inaccuracies in
assumptions regarding future persistency, mortality, morbidity and
interest rates used in calculating reserve amounts.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes realized investment gains and losses. Net
operating income is commonly used in the insurance industry as a
measure of on-going earnings performance.
11
<PAGE> 12
The following table reconciles the Company's reported net income
to net operating income for the three and six month periods ended
June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------
(in millions of dollars) 1998 1997 1998 1997
-------------------------------------------------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
Net income $90.8 $60.4 $181.9 $127.1
Realized (gains) losses on investments, net of tax (3.3) 7.6 (14.1) (6.2)
----- ----- ------ ------
Net operating income $87.5 $68.0 $167.8 $120.9
===== ===== ====== ======
</TABLE>
Revenues
Total revenues for second quarter 1998, excluding realized gains
and losses on investments, increased to $610.8 million compared to
$547.2 million for the same period in 1997. For the first six
months of 1998 and 1997, total revenues excluding realized gains
and losses on investments were $1.20 billion and $1.07 billion,
respectively. Increases in policy charges and net investment
income were the key drivers to revenue growth.
Policy charges include asset fees, which are primarily earned on
variable annuity policy reserves; 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 the
comparable periods of 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(in millions of dollars) 1998 1997 1998 1997
-------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Asset fees $126.0 $ 89.1 $239.2 $171.0
Administrative fees 17.1 15.9 34.0 30.3
Surrender fees 10.2 7.8 19.8 16.0
Cost of insurance charges 21.7 16.9 41.0 32.8
------ ------ ------ ------
Total policy charges $175.0 $129.7 $334.0 $250.1
====== ====== ====== ======
</TABLE>
The growth in asset fees reflects a 40% increase in total separate
account assets which reached $45.97 billion as of June 30, 1998
compared to $32.87 billion a year ago. Steady growth in premiums
and market appreciation have contributed significantly to the
increase in separate account assets.
Net investment income includes the 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 $351.3 million and $692.3 million in
the second quarter and first half of 1997, respectively, to $367.0
million and $731.5 million in the comparable periods of 1998
primarily due to increased invested assets to support growth in
fixed annuity and life insurance policy reserves. Fixed annuity
policy reserves, which include the fixed option of variable
annuity contracts, increased to $14.26 billion as of June 30, 1998
compared to $14.19 billion as of December 31, 1997 and $13.72
billion a year ago.
12
<PAGE> 13
The Company does not consider realized gains and losses on
investments to be recurring components of earnings. The Company
makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. Net realized
gains (losses) on investments were $5.0 million and ($11.9)
million for second quarter 1998 and 1997, respectively. For the
first six months of 1998, the Company reported realized gains on
investments of $21.6 million compared to $9.2 million of realized
gains for the first six months of 1997.
Benefits and Expenses
Interest credited to policyholder account balances principally
relates to fixed annuity products. For the second quarter and
first six months of 1998 interest credited totaled $264.7 million
and $526.6 million, respectively, compared to $253.7 million and
$500.9 million in the same periods of 1997. The growth in interest
credited reflects the increase in fixed annuity and life insurance
policy reserves previously discussed, partially offset by reduced
average crediting rates. The average crediting rate on fixed
annuity policy reserves was 5.96% and 5.95% during the second
quarter and first six months of 1998 compared to 6.21% and 6.14%
in the comparable periods of 1997.
The significant growth in the Variable Annuities segment business
is the primary reason for the increase in amortization of deferred
policy acquisition costs (DAC) which totaled $54.1 million and
$39.6 million in second quarter of 1998 and 1997, respectively. On
a year to date basis, DAC totaled $101.8 million in 1998 compared
to $83.0 million in 1997.
Operating expenses increased 13% to $106.6 million in second
quarter 1998 compared to $94.2 million in second quarter 1997. For
the first half of 1998, operating expenses were $208.7 million, up
11% from $188.1 million for the first half of 1997. The increases
reflect growth in the number of annuity and life insurance
contracts in force and the related increase in administrative
processing costs. Operating expenses also include costs of certain
technology initiatives including projects related to the Year
2000.
Federal tax expense was $47.5 million and $32.5 million,
representing effective tax rates of 34.3% and 35.0% for second
quarter 1998 and 1997, respectively. For the first six months of
1998 and 1997 federal tax expense was $95.2 million and $69.2
million, representing effective tax rates of 34.4% and 35.3%,
respectively.
Year 2000
The Company has developed and implemented a plan to address issues
related to the Year 2000. The problem relates to many existing
computer systems using only two digits to identify a year in a
date field. These systems were designed and developed without
considering the impact of the upcoming change in the century. If
not corrected, many computer systems could fail or create
erroneous results when processing information dated after December
31, 1999. Like many organizations, the Company is required to
renovate or replace many computer systems so that the systems will
function properly after December 31, 1999. The Company has
completed an inventory and assessment of all computer systems and
has developed a plan to renovate or replace all applications that
were identified as not Year 2000 compliant. As of the end of July
1998, the Company has renovated 97% of all applications that
required renovation. Testing of the renovated programs is in
process, including running each application with the date moved
forward to Year 2000. The Company expects to complete the testing
of all renovated applications by the end of 1998. For applications
being replaced, the Company anticipates all replacement systems to
be in place and functioning by the end of 1998. Contingency plans
are substantially completed which identify actions to be taken
should the Company's renovation and replacement strategies fall
behind schedule.
The Company is also completing an inventory and assessment of all
vendor products. As of the end of July 1998, 83% of products had
been assessed and 69% were Year 2000 compliant. The Company is
certifying that each vendor product is Year 2000 compliant. At the
end of July 1998, 24% of vendor products that were identified as
Year 2000 compliant had been certified. The Company anticipates
having all vendor products assessed and certified by the end of
1998. Any vendor products that can not be certified as Year 2000
compliant will be replaced or eliminated.
13
<PAGE> 14
In addition to resolving internal Year 2000 readiness issues, the
Company is working with all external organizations (business
partners) to assess Year 2000 issues associated with the exchange
of electronic data. The Company has completed an inventory and
assessment of all interfaces with business partners and is in
process of testing those interfaces. The Company has also
initiated plans to survey producer business partners to ascertain
their Year 2000 readiness.
Operating expenses in the first six months of 1998 and 1997
include approximately $22.6 million and $22.5 million,
respectively, for technology projects, including costs related to
Year 2000. In the second half of 1998, the Company anticipates
spending an amount comparable to expense for the first half of
1998. At this time, no significant Year 2000 costs are anticipated
in 1999. Management does not anticipate that the completion of
Year 2000 renovation and replacement activities will result in a
reduction in operating expenses. Rather, personnel and resources
currently allocated to Year 2000 issues will be assigned to other
technology-related projects.
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
independent broker/dealers, national and regional wirehouses,
financial institutions, pension plan administrators and life
specialists. The Company has access to over 1,100 independent
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. The Company currently has relationships with 185
financial institutions 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. Over 250 regional pension plan administrators market the
Company's group variable and fixed annuities to employers
sponsoring employee retirement programs.
Retail distributors are representatives of the Company who market
products directly to a customer base identified by the Company and
include exclusive retail sales representatives of the Company's
distribution subsidiaries and Nationwide Insurance Enterprise
insurance agents. The Company markets products on a retail basis
to state and local governments and to teachers through its
subsidiary distribution organizations. Approximately 4,300
Nationwide Insurance Enterprise insurance agents are licensed to
sell life insurance and individual annuities primarily targeting
holders of personal automobile and homeowners' insurance policies
issued by the Nationwide Insurance Enterprise.
Statutory premiums and deposits by distribution channel are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions of dollars) 1998 1997 1998 1997
-------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
WHOLESALE CHANNELS
Independent broker/dealers $1,050.5 $ 971.2 $1,925.9 $1,827.1
National and regional wirehouses (1) 88.5 -- 174.5 --
Financial institutions 642.7 378.1 1,092.0 719.4
Pension plan administrators 696.6 530.9 1,430.7 1,138.8
Life specialists 364.6 15.0 454.5 45.0
-------- -------- -------- --------
Total wholesale channels 2,842.9 1,895.2 5,077.6 3,730.3
-------- -------- -------- --------
RETAIL CHANNELS
Exclusive retail sales representatives 543.0 429.1 1,129.0 978.8
Nationwide agents 303.5 152.7 486.6 294.6
-------- -------- -------- --------
Total retail channels 846.5 581.8 1,615.6 1,273.4
-------- -------- -------- --------
Total external premiums and deposits 3,689.4 2,477.0 6,693.2 5,003.7
======== ======== ======== ========
Nationwide Insurance Enterprise employee
and agent benefit plans 55.7 19.1 115.5 70.6
-------- -------- -------- --------
Total statutory premiums and deposits $3,745.1 $2,496.1 $6,808.7 $5,074.3
======== ======== ======== ========
</TABLE>
--------
(1) Prior to 1998, national and regional wirehouse sales were
included in independent broker/dealer sales.
14
<PAGE> 15
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved sales growth of 49% in the second quarter of 1998
compared to the second quarter of 1997. On a year to date basis,
sales have increased 34% in 1998 compared to 1997. The Company
believes it is well positioned to achieve its goal of 20% annual
growth in external sales in 1998.
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand, and include individual and group variable
annuities and variable life insurance. The BEST of AMERICA(R)
products allow customers to choose from 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.
The Company offers corporate-owned life insurance (COLI).
Corporations purchase COLI to provide protection against the death
of selected employees and to fund non-qualified benefit plans.
External statutory premiums and deposits by product are summarized
as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions of dollars) 1998 1997 1998 1997
-------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $1,378.6 $1,079.2 $2,498.6 $2,021.1
Group variable annuities 672.1 508.1 1,374.2 1,080.9
Variable universal life insurance 74.9 51.3 142.4 97.9
Private label annuities 339.7 265.3 574.9 495.5
IRC Section 457 annuities 499.4 394.7 1,048.1 916.9
The NEA Valuebuilder annuities 43.6 34.4 80.9 61.9
Corporate-owned life insurance 364.6 15.0 454.5 45.0
Traditional/Universal life insurance 62.1 62.5 121.4 123.3
Other 254.4 66.5 398.2 161.2
-------- -------- -------- --------
$3,689.4 $2,477.0 $6,693.2 $5,003.7
======== ======== ======== ========
</TABLE>
15
<PAGE> 16
BUSINESS SEGMENTS
The Company reports three product segments: Variable Annuities,
Fixed Annuities and Life Insurance. In addition, the Company
reports corporate revenue and expenses, investments and related
investment income supporting capital not specifically allocated to
its product segments, revenues and expenses of its investment
advisor subsidiary (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 and agent benefit plans in a
Corporate and Other segment. All information set forth below
relating to the Variable Annuities segment excludes the fixed
option under variable annuity contracts. Such information is
included in the Fixed Annuities segment.
The following table summarizes operating income before federal tax
expense for the Company's business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(in millions of dollars) 1998 1997 1998 1997
------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Variable Annuities $ 55.7 $ 34.8 $105.0 $ 64.2
Fixed Annuities 43.1 44.1 88.1 81.7
Life Insurance 22.5 13.7 43.7 30.7
Corporate and Other 12.0 12.2 18.7 10.5
------ ------ ------ ------
$133.3 $104.8 $255.5 $187.1
====== ====== ====== ======
</TABLE>
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.
16
<PAGE> 17
The following table summarizes certain selected financial data for
the Variable Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
(in millions of dollars) 1998 1997 1998 1997
---------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Asset fees $ 122.2 $ 85.0 $ 231.7 $ 163.8
Administrative fees 5.9 6.4 12.0 11.5
Surrender fees 7.2 5.3 13.7 10.9
--------- --------- --------- ---------
Total policy charges 135.3 96.7 257.4 186.2
Net investment income and other (2) 0.4 (2.7) (1.6) (5.4)
--------- --------- --------- ---------
135.7 94.0 255.8 180.8
Benefits and expenses:
Benefits and claims 0.9 1.5 2.0 2.7
Amortization of DAC 30.5 20.0 56.9 39.5
Other operating expenses 48.6 37.7 91.9 74.4
--------- --------- --------- ---------
80.0 59.2 150.8 116.6
--------- --------- --------- ---------
Operating income before federal tax expense $ 55.7 $ 34.8 $ 105.0 $ 64.2
========= ========= ========= =========
OTHER DATA (1)
Statutory premiums and deposits (3) $ 2,726.5 $ 1,938.4 $ 5,015.5 $ 3,767.3
Withdrawals $ 1,210.6 $ 637.4 $ 2,135.5 $ 1,307.3
Policy reserves as of period end $41,962.1 $29,878.8 $41,962.1 $29,878.8
Ratio of policy charges to average policy reserves 1.33% 1.40% 1.33% 1.41%
Pre-tax operating income to average policy reserves 0.55% 0.51% 0.54% 0.48%
</TABLE>
----------
(1) Excludes the fixed option under the variable annuity contracts
which is reported in the 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 Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Variable annuity segment results reflect substantially increased
asset fee revenue partially offset by increases in DAC
amortization and other operating expenses. Asset fees increased to
$122.2 million in the second quarter of 1998, up 44% from $85.0
million in the same period a year ago. For the first half of 1998,
asset fees totaled $231.7 million up 41% from the first half of
1997. The increase in asset fees is due to continued growth in
variable annuity policy reserve levels resulting from strong
variable annuity sales and market appreciation on investments
underlying reserves.
Variable annuity policy reserves grew $2.30 billion during the
second quarter of 1998 reaching $41.96 billion as of June 30, 1998
and have increased 40% compared to a year ago. Variable annuity
policy reserves have grown $7.48 billion during the first six
months of 1998. The Company continues to sustain high sales growth
through deeper penetration of existing distribution channels and
expansion into new sales outlets. Second quarter 1998 premiums
grew across all distribution channels reaching $2.73 billion, 41%
above year-ago second quarter sales of $1.94 billion. During the
first half of 1998, variable annuity sales reached $5.02 billion
up 33% from the first half of 1997. Included in 1998 sales are
$700 million for second quarter and $1.1 billion year-to-date for
America's FUTURE Annuity(R), the Company's lower-fee individual
annuity introduced in November 1997.
Favorable equity market conditions during the first half of 1998
also contributed significantly to the growth in variable annuity
policy reserves. Variable annuity policy reserves reflect market
appreciation of $4.56 billion during the first six months of 1998.
17
<PAGE> 18
The growth in amortization of DAC and other operating expenses
reflects the overall growth in the variable annuity business.
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 variable annuity contracts.
The following table summarizes certain selected financial data for
the Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
(in millions of dollars) 1998 1997 1998 1997
----------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Policy charges $ 2.9 $ 4.2 $ 6.2 $ 8.7
Life insurance premiums 6.7 5.2 15.5 16.0
Net investment income 276.6 272.8 553.8 542.3
--------- --------- --------- ---------
286.2 282.2 575.5 567.0
--------- --------- --------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 206.3 205.9 412.2 406.8
Other benefits and claims 6.3 2.5 13.6 13.7
Amortization of DAC 10.8 9.1 21.7 21.2
Other operating expenses 19.7 20.6 39.9 43.6
--------- --------- --------- ---------
243.1 238.1 487.4 485.3
--------- --------- --------- ---------
Operating income before federal tax expense $ 43.1 $ 44.1 $ 88.1 $ 81.7
========= ========= ========= =========
OTHER DATA (1)
Statutory premiums and deposits (2) $ 461.2 $ 409.8 $ 959.3 $ 970.2
Withdrawals and benefits $ 464.7 $ 390.4 $ 1,010.5 $ 933.7
Policy reserves as of period end $14,256.1 $13,724.5 $14,256.1 $13,724.5
Net interest spread on general account
policy reserves 2.03% 2.02% 2.05% 2.05%
Pre-tax operating income to average policy reserves 1.21% 1.29% 1.24% 1.20%
</TABLE>
----------
(1) Includes the fixed option under the variable annuity
contracts.
(2) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
18
<PAGE> 19
Fixed annuity segment results reflect an increase in interest
spread income attributable to growth in fixed annuity policy
reserves. Interest spread is the difference between net investment
income and interest credited to policyholder account balances.
Interest spreads vary and are influenced by various factors
including crediting rates offered by competitors, performance of
the investment portfolio, changes in market interest rates and
other factors. The following table depicts the interest spreads on
general account policy reserves in the Fixed Annuities segment for
the second quarter and first six months of 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net investment income 7.99% 8.23% 8.00% 8.19%
Interest credited 5.96 6.21 5.95 6.14
---- ---- ---- ----
2.03% 2.02% 2.05% 2.05%
==== ==== ==== ====
</TABLE>
Mortgage loan and bond prepayment fees in the first half of 1998
accounted for approximately 6 basis points and 7 basis points of
the interest spread in the second quarter and first six months of
1998, respectively. The Company anticipates interest spreads over
the next several quarters to be comparable to second quarter 1998,
excluding the impact of mortgage loan and bond prepayment income.
Fixed annuity policy reserves increased to $14.26 billion as of
June 30, 1998 compared to $14.19 billion as of the end of 1997 and
$13.72 billion a year ago.
Second quarter fixed annuity sales increased to $461.2 million in
1998 compared to $409.8 million in 1997; however, sales for the
first six months of 1998 of $959.3 million were down slightly
compared to $970.2 million in 1997 reflecting consumer preference
for equity-linked variable products. Most of the Company's fixed
annuity sales are premiums allocated to the fixed option of
variable annuity contracts. Second quarter 1998 fixed annuity
sales include $356.4 million in premiums allocated to the fixed
option under a variable annuity contract, compared to $292.6
million in first quarter 1997.
The increase in other benefits and claims in second quarter 1998
compared to a year ago is attributable to favorable mortality
experience in the year ago second quarter.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, that provide a death benefit and may also
allow the customer to build cash value on a tax-deferred basis.
19
<PAGE> 20
The following table summarizes certain selected financial data for
the Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in millions of dollars) 1998 1997 1998 1997
----------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Cost of insurance charges $ 21.7 $ 16.9 $ 41.0 $ 32.8
Other policy charges 12.2 9.0 23.7 17.4
--------- --------- --------- ---------
Total policy charges 33.9 25.9 64.7 50.2
Life insurance premiums 45.3 45.1 89.7 89.7
Net investment income 56.0 44.9 109.1 90.5
Other 0.3 0.1 0.5 0.2
--------- --------- --------- ---------
135.5 116.0 264.0 230.6
--------- --------- --------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 27.5 19.3 52.3 37.0
Other benefits and claims 33.4 39.3 71.3 76.1
Policyholder dividends 11.5 11.6 22.3 22.2
Amortization of DAC 12.8 10.5 23.2 22.3
Other operating expenses 27.8 21.6 51.2 42.3
--------- --------- --------- ---------
113.0 102.3 220.3 199.9
--------- --------- --------- ---------
Operating income before federal tax expense $ 22.5 $ 13.7 $ 43.7 $ 30.7
========= ========= ========= =========
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 62.2 $ 62.5 $ 121.5 $ 123.3
Individual investment life insurance $ 74.9 $ 51.3 $ 142.4 $ 97.9
Corporate investment life insurance $ 364.6 $ 15.0 $ 454.5 $ 45.0
Policy reserves as of period end:
Traditional and universal life insurance $ 2,404.5 $ 2,333.7 $ 2,404.5 $ 2,333.7
Individual investment life insurance $ 1,096.4 $ 763.9 $ 1,096.4 $ 763.9
Corporate investment life insurance $ 687.4 $ 68.3 $ 687.4 $ 68.3
Life insurance in force:
Traditional and universal life insurance $27,190.6 $27,938.5 $27,190.6 $27,938.5
Individual investment life insurance $13,385.4 $ 9,697.1 $13,385.4 $ 9,697.1
Corporate investment life insurance $ 1,451.4 $ 204.4 $ 1,451.4 $ 204.4
</TABLE>
----------
(1) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Life Insurance segment results reflect increased revenues driven
by growth in investment life insurance in force and policy
reserves coupled with favorable mortality experience. These trends
were partially offset by higher expense levels.
20
<PAGE> 21
Investment life insurance (which includes individual variable
universal life insurance and corporate-owned life insurance
products) policy charges were $21.8 million in the second quarter
of 1998, a 59% increase compared to $13.7 million for the second
quarter of 1997. The growth in investment life insurance policy
charges is attributable to growth in individual investment life
insurance policy reserves which reached $1.10 billion as of the
end of the second quarter 1998 up $332.5 million from a year ago.
Policy reserve growth continues to be driven by strong sales from
both independent broker/dealers and Nationwide Insurance
Enterprise insurance agents. Investment life insurance sales to
individuals during the second quarter of 1998 reached $74.9
million compared to $51.3 million in the second quarter of 1997.
The Company anticipates continued sales growth in 1998 for
investment life insurance products.
During the first half of 1998, the Company continued its entry
into the corporate-owned life insurance market recording $454.5
million in corporate-owned life insurance premiums compared to
$45.0 million in the first half of 1997. As of June 30, 1998 the
Company had $687.4 million in corporate-owned life insurance
policy reserves.
The increase in operating expenses is due to the increase in
policies in force and continued spending on a new policy
administration system for traditional life insurance policies.
Corporate and Other
The following table summarizes certain selected financial data for
the Corporate and Other segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions of dollars) 1998 1997 1998 1997
------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues (1):
Net investment income $ 41.7 $ 40.4 $ 83.7 $ 72.4
Other 11.7 14.6 22.8 23.0
-------- -------- -------- --------
53.4 55.0 106.5 95.4
-------- -------- -------- --------
Benefits and expenses:
Interest credited to policy reserves 30.9 28.5 62.1 57.1
Other operating expenses 10.5 14.3 25.7 27.8
-------- -------- -------- --------
41.4 42.8 87.8 84.9
-------- -------- -------- --------
Operating income before federal tax expense (1) $ 12.0 $ 12.2 $ 18.7 $ 10.5
======== ======== ======== ========
OTHER DATA
Statutory premiums and deposits (2) $ 55.7 $ 19.1 $ 115.5 $ 70.6
Withdrawals and benefits $ 52.0 $ 30.1 $ 106.3 $ 106.1
Policy reserves as of period end $4,118.1 $3,571.8 $4,118.1 $3,571.8
Nationwide retail mutual fund assets (3) $3,015.6 $2,405.0 $3,015.6 $2,405.0
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
(2) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
(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.
21
<PAGE> 22
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.
Growth in interest spread income and other income was driven by
increased policy reserves related to Nationwide Insurance
Enterprise employee and agent benefit plans and strong first half
1998 sales from the Company's investment advisor subsidiary,
respectively.
In addition to the operating revenues previously presented, the
Company also reports realized gains and losses on investments in
the Corporate and Other segment. The Company realized net
investment gains of $5.0 million and realized net investment
losses of $11.9 million during the second quarter of 1998 and
1997, respectively.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity 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's policyholders and
claims unspecified compensatory and punitive damages. This lawsuit
has not been certified as a class action. On April 22, 1997, a
motion to dismiss the Snyder complaint in its entirety was filed
by the defendants, and the plaintiff has opposed such motion.
In April 1998, NLIC was named as a defendant in a lawsuit filed in
Ohio State Court similar to the Snyder lawsuit (David Mishler v.
Nationwide Life Insurance Co.). The plaintiff in such lawsuit
seeks to represent a similar class, makes similar allegations and
seeks unspecified compensatory and punitive damages. On June 26,
1998, a motion to dismiss the Mishler complaint in its entirety
was filed by the defendants, and the plaintiffs have 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 in a federal
court in Texas 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 the performance of their subaccount mutual fund managed by
American Century, whose shares may only be purchased by insurance
companies, would track the performance of a mutual fund, also
managed by American Century, whose shares are publicly traded. The
amended complaint seeks unspecified compensatory and punitive
damages. On April 27, 1998, the Court denied, in part, and
granted, in part, motions to dismiss the complaint filed by NLIC
and American Century. The parties are presently engaged in
discovery on the issue of whether the lawsuit should be certified
as a class action. NLIC intends to defend this case vigorously.
There can be no assurance that any litigation relating to pricing
or sales practices will not have a material adverse effect on the
Company in the future.
22
<PAGE> 23
ITEM 2 CHANGES IN SECURITIES
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month
period ended June 30, 1998.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: August 12, 1998 /s/ Mark R. Thresher
---------------------------------------------
Mark R. Thresher, Vice President - Controller
(Chief Accounting Officer)
24
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONWIDE
LIFE INSURANCE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 13,611
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 99
<MORTGAGE> 5,242
<REAL-ESTATE> 275
<TOTAL-INVEST> 19,883
<CASH> 6
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,859
<TOTAL-ASSETS> 68,344
<POLICY-LOSSES> 18,983
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,559
<TOTAL-LIABILITY-AND-EQUITY> 68,344
105
<INVESTMENT-INCOME> 732
<INVESTMENT-GAINS> 22
<OTHER-INCOME> 31
<BENEFITS> 614
<UNDERWRITING-AMORTIZATION> 102
<UNDERWRITING-OTHER> 209
<INCOME-PRETAX> 277
<INCOME-TAX> 95
<INCOME-CONTINUING> 182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
