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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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<S> <C>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 2-28596
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NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 31-4156830
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
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ALL VOTING STOCK WAS HELD BY AFFILIATES OF THE REGISTRANT ON MARCH 20, 1998.
COMMON STOCK - 3,814,779 SHARES ISSUED AND OUTSTANDING AS OF MARCH 20, 1998
(Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
ITEM 1 BUSINESS
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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-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 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 (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.
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.
2
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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.
BUSINESS 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
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.
3
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RATINGS
Ratings with respect to claims-paying ability and financial
strength have become an increasingly important factor in
establishing the competitive position of insurance companies.
Ratings are important to maintaining public confidence in the
Company and its ability to market its annuity and life insurance
products. Rating organizations continually review the financial
performance and condition of insurers, including the Company. Any
lowering of the Company's ratings could have a material adverse
effect on the Company's ability to market its products and could
increase the surrender of the Company's annuity products. Both of
these consequences could, depending upon the extent thereof, have
a material adverse effect on the Company's liquidity and, under
certain circumstances, net income. NLIC is rated "A+" (Superior)
by A.M. Best Company, Inc. and its claims-paying ability is
rated "Aa2" (Excellent) by Moody's Investor Services, Inc. and
"AA+" (Excellent) by Standard & Poor's Corporation.
The foregoing ratings reflect each rating agency's opinion of
NLIC's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations
directed toward the protection of investors. Such factors are of
concern to policyholders, agents and intermediaries.
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.
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.
4
<PAGE> 5
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 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.
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.
ITEM 2 PROPERTIES
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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.
ITEM 3 LEGAL PROCEEDINGS
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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.
5
<PAGE> 6
In October 1996, a policyholder of NLIC filed a complaint in
Alabama state court against NLIC and an agent of NLIC (Wayne M.
King v. Nationwide Life Insurance Company and Danny Nix) related
to the sale of a whole life policy on a "vanishing premium" basis
and seeking unspecified compensatory and punitive damages. The
King case was dismissed with prejudice on June 25, 1997 pursuant
to an agreement between the parties.
In February 1997, NLIC was named as a defendant in a lawsuit filed
in New York Supreme Court also related to the sale of whole life
policies on a "vanishing premium" basis (John H. Snyder v.
Nationwide Mutual Insurance Company, Nationwide Mutual Insurance
Co. and Nationwide Life Insurance Co.). The plaintiff in such
lawsuit seeks to represent a national class of NLIC 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 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 action against NLIC and
the American Century group of defendants (Robert Young and David
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. Plaintiffs' counsel opposed these
motions and the federal court in Texas will hear arguments on the
motions to dismiss on April 1, 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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Omitted due to reduced disclosure format.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
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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.
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ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
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Omitted due to reduced disclosure format.
ITEM 7 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
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INTRODUCTION
Management's narrative analysis of the results of operations of
NLIC and subsidiaries for the three years ended December 31, 1997
follows. This 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 the 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.
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.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
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<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>
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.
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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
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<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
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Total policy charges $ 545.2 $ 400.9 $ 286.6
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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.
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.
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.
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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%.
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.
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.
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Statutory premiums and deposits by distribution channel for each
of the last three years are summarized as follows:
<TABLE>
1997 1996 1995
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(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
deposits 10,337.1 100.0% 8,540.1 100.0% 6,615.9 100.0%
========= ======== ========= ========= ========= =========
Nationwide Insurance Enterprise
employee and agent benefit plans 174.9 502.5 182.1
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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>
10
<PAGE> 11
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>
(in 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>
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.
11
<PAGE> 12
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
---------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA (1)
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 159.4 132.3 109.0
---------- ---------- ----------
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%
----------
<FN>
(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.
</FN>
</TABLE>
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.
12
<PAGE> 13
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.
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%
----------
<FN>
(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.
</FN>
</TABLE>
13
<PAGE> 14
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.
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.
14
<PAGE> 15
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 $ -
----------
<FN>
(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.
</FN>
</TABLE>
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.
15
<PAGE> 16
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.
Corporate and Other
The following table summarizes certain selected financial data for
the Company's Corporate and Other segment for the years indicated.
<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
----------
<FN>
(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.
</FN>
</TABLE>
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.
16
<PAGE> 17
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.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ --------------------------------------------------------
The consolidated financial statements of Nationwide Life Insurance
Company and Subsidiaries are included in a separate section of
this report which is indexed in Item 14 - Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.
Semi-annual and annual reports are sent to contract owners of the
variable annuity and life insurance contracts issued through
registered Separate Accounts of the Company.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
17
<PAGE> 18
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Omitted due to reduced disclosure format.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
Omitted due to reduced disclosure format.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Omitted due to reduced disclosure format.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
Omitted due to reduced disclosure format.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Page
---------------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES:
Schedule I Consolidated Summary of Investments - Other Than Investments in
Related Parties as of December 31, 1997 F-25
Schedule III Supplementary Insurance Information as of December 31, 1997, 1996 and
1995 and for each of the years then ended F-26
Schedule IV Reinsurance as of December 31, 1997, 1996 and 1995 and for each of the
years then ended F-27
Schedule V Valuation and Qualifying Accounts for the years ended December 31,
1997, 1996 and 1995 F-28
All other schedules are omitted because they are not applicable or
not required, or because the required information has been
included in the audited consolidated financial statements or notes
thereto
EXHIBIT INDEX 21
</TABLE>
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
NATIONWIDE LIFE INSURANCE COMPANY (Registrant)
By /s/ Dimon R. McFerson
-------------------------------------------------
Dimon R. McFerson, Chairman and Chief Executive
Officer - Nationwide Insurance Enterprise
</TABLE>
Date: March 4, 1998
19
<PAGE> 20
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 4, 1998.
<TABLE>
<S> <C>
/s/ Dimon R. McFerson /s/ Joseph J. Gasper
- ------------------------------------------------------------ ----------------------------------------------------------
Dimon R. McFerson, Chairman and Chief Executive Joseph J. Gasper, President and Chief Operating
Officer - Nationwide Insurance Enterprise and Director Officer and Director
/s/ Lewis J. Alphin /s/ Keith W. Eckel
- ------------------------------------------------------------ ----------------------------------------------------------
Lewis J. Alphin, Director Keith W. Eckel, Director
/s/ Willard J. Engel /s/ Fred C. Finney
- ------------------------------------------------------------ ----------------------------------------------------------
Willard J. Engel, Director Fred C. Finney, Director
/s/ Charles L. Fuellgraf, Jr. /s/ Henry S. Holloway
- ------------------------------------------------------------ ----------------------------------------------------------
Charles L. Fuellgraf, Jr., Director Henry S. Holloway, Director
/s/ David O. Miller /s/ C. Ray Noecker
- ------------------------------------------------------------ ----------------------------------------------------------
David O. Miller, Director C. Ray Noecker, Director
/s/ James F. Patterson /s/ Arden L. Shisler
- ------------------------------------------------------------ ----------------------------------------------------------
James F. Patterson, Director Arden L. Shisler, Director
/s/ Robert L. Stewart /s/ Nancy C. Thomas
- ------------------------------------------------------------ ----------------------------------------------------------
Robert L. Stewart, Director Nancy C. Thomas, Director
/s/ Harold W. Weihl /s/ Robert A. Oakley
- ------------------------------------------------------------ ----------------------------------------------------------
Harold W. Weihl, Director Robert A. Oakley, Executive Vice President - Chief
Financial Officer
/s/ Mark R. Thresher
- ------------------------------------------------------------
Mark R. Thresher, Vice President - Controller
(Chief Accounting Officer)
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
Exhibit Page
- ---------- ----
3.1 Amended Articles of Incorporation of Nationwide Life Insurance
Company, dated March 14, 1986 23
3.2 Form of Amended and Restated Code of Regulations of Nationwide
Life Insurance Company (previously filed as Exhibit 3 to Form
10-K, Commission File Number 2-28596, filed March 28, 1997,
and incorporated herein by reference)
10.1 Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation (previously
filed as Exhibit 10.1 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.1.1 First Amendment to the Tax Sharing Agreement among Nationwide
Mutual Insurance Company, Nationwide Corporation and any
corporation that may hereafter be a subsidiary of Nationwide
Corporation (previously filed as Exhibit 10.2.1 to Form 10-K,
Commission File Number 1-12785, filed March 31, 1998, and
incorporated herein by reference)
10.2 Form of First Amendment to Cost Sharing Agreement among parties
named therein (previously filed as Exhibit 10.2 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.3 Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company (previously filed
as Exhibit 10.3 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.4 Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company (previously
filed as Exhibit 10.4 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.5 Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent (previously filed as Exhibit 10.5 to Form
10-K, Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.5.1 Amendment dated as of September 8, 1997 to the Credit Agreement
dated as of August 12, 1996 among Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, the banks party thereto
and Morgan Guaranty Trust Company of New York, as administrative
agent (previously filed as Exhibit 10(a) to Form 10-Q for the
quarterly period ended September 30, 1997, Commission File Number
1-12785, filed November 13, 1997, and incorporated herein by
reference)
10.6 Form of Lease Agreement between Nationwide Life Insurance Company
and Nationwide Mutual Insurance Company (previously filed as
Exhibit 10.6 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.7 General Description of Nationwide Insurance Enterprise Executive
Incentive Plan (previously filed as Exhibit 10.7 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.8 General Description of Nationwide Insurance Enterprise Management
Incentive Plan (previously filed as Exhibit 10.8 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.9 Nationwide Insurance Enterprise Excess Benefit Plan effective as of
December 31, 1996 (previously filed as Exhibit 10.9 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.10 Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of December 31, 1996 (previously filed as Exhibit
10.10 to Form 10-K, Commission File Number 2-28596, filed March 28,
1997, and incorporated herein by reference)
21
<PAGE> 22
10.11 Nationwide Salaried Employees Severance Pay Plan (previously filed
as Exhibit 10.11 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.12 Nationwide Insurance Enterprise Supplemental Defined Contribution
Plan effective as of January 1, 1996 (previously filed as Exhibit
10.12 to Form 10-K, Commission File Number 2-28596, filed March 28,
1997, and incorporated herein by reference)
10.13 General Description of Nationwide Insurance Enterprise Individual
Deferred Compensation Program previously filed as Exhibit 10.13 to
Form 10-K, Commission File Number 2-28596, filed March 28, 1997,
and incorporated herein by reference)
10.14 General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program (previously filed as
Exhibit 10.14 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.15 Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard McFerson
(previously filed as Exhibit 10.15 to Form 10-K, Commission File
Number 2-28596, filed March 28, 1997, and incorporated herein by
reference)
27 Financial Data Schedule (electronic filing only)
- ------
All other exhibits referenced by Item 601 of Regulation S-K are not
required under the related instructions or are inapplicable and
therefore have been omitted.
22
<PAGE> 1
Exhibit 3.1
AMENDED ARTICLES OF INCORPORATION
NATIONWIDE LIFE INSURANCE COMPANY
FIRST: The name of said Corporation shall be "NATIONWIDE LIFE INSURANCE
COMPANY."
SECOND: Said Corporation is to be located, and its principal office maintained
in the City of Columbus, Ohio.
THIRD: Said Corporation is formed for the purpose of (a) making insurance upon
the lives of individuals and every insurance appertaining thereto or connected
therewith on both participating and non-participating plans, (b) granting,
purchasing or disposing of annuities on both participating and non-participating
plans, (c) taking risks connected with or appertaining to making insurance on
life or against accidents to persons, or sickness, temporary or permanent
disability on both participating and non-participating plans, (d) investing
funds, (e) borrowing money on either a secured or unsecured basis in furtherance
of the foregoing, and (f) engaging in all activities permitted life insurance
companies under the laws of the State of Ohio.
FOURTH: No holder of shares of this Corporation shall be entitled as such,
as a matter of right, to subscribe for or purchase shares now or hereafter
authorized.
The capital stock of this Corporation shall be Five Million Dollars
($5,000,000.00) divided into Five Million (5,000,000) Common shares of the par
value of One Dollar ($1.00) each, which may be subscribed and purchased, or
otherwise acquired for such consideration at not less than par, and under such
terms and conditions as the Board of Directors may prescribe.
FIFTH: Dividends may be declared and paid on the outstanding stock, subject to
the restrictions herein contained. Dividends on the capital stock shall be paid
only from the earned surplus of the Corporation. Unless those policyholders
owning participating insurance policies or contracts shall have received an
equitable dividend arising out of savings in mortality, savings in expense
loadings and excess interest earnings, if any, from such participating policies,
no dividend from such savings and earnings shall be declared or paid on capital
stock in an amount in excess of seven percent (7%) per annum, computed on the
par value of the stock from date of original issue to date of retirement or date
of payment of dividend.
SIXTH: The corporate powers and business of the Corporation shall be exercised,
conducted and controlled, and the corporate property managed by a Board of
Directors consisting of not less than three (3), nor more than twenty-one (21),
as may from time to time be fixed by the Code of Regulations of the Corporation.
At the first election of directors one-third of the directors shall be elected
to serve until the next annual meeting, one-third shall be elected to serve
until the second annual meeting, and one-third shall be elected to serve until
the third annual meeting; thereafter all directors shall be elected to serve for
terms of three (3) years each, and until their successors are elected and
qualified. Vacancies in the Board of Directors, arising from any cause, shall be
filled by the remaining directors.
The directors shall be elected at the annual meetings of the stockholders by a
majority vote of the stockholders present in person or by proxy, provided that
vacancies may be filled as herein provided for.
The stockholders of the Corporation shall have the right, subject to the
statutes of the State of Ohio and these Articles of Incorporation, to adopt a
Code of Regulations governing the transaction of the business and affairs of the
Corporation which may be altered, amended or repealed in the manner provided by
law.
23
<PAGE> 2
The Board of Directors shall elect from their own number a Chairman of the Board
of Directors, a General Chairman, and a President. The Board of Directors shall
also elect a Vice President and a Secretary and a Treasurer, or a
Secretary-Treasurer. The Board of Directors may also elect or appoint such
additional vice presidents, assistant secretaries and assistant treasurers as
may be deemed advisable or necessary, and may fix their duties. The Board of
Directors may appoint such other officers as may be provided in the Code of
Regulations. All officers, unless sooner removed by the Board of Directors,
shall hold office for one (1) year, or until their successors are elected and
qualified. Other than the Chairman of the Board of Directors, the General
Chairman and the President, the officers need not be members of the Board of
Directors. Officers shall be elected at each annual organization meeting of the
Board of Directors, but elections or appointments to fill vacancies may be had
at any meeting of the directors.
A majority of the Board of Directors and officers shall, at all times, be
citizens of the State of Ohio.
SEVENTH: The annual meeting of the stockholders of the Corporation shall be held
at such time as may be fixed in the Code of Regulations of the Corporation. Any
meeting of the stockholders, annual or special, may be held in or outside of the
State of Ohio. Reasonable notice of all meetings of stockholders shall be given,
by mail or publication, or as prescribed by the Code of Regulations or by law.
EIGHTH: These Amended Articles of Incorporation shall supersede and take the
place of the Articles of Incorporation and all amendments thereto heretofore
filed with the Secretary of State by and on behalf of this Corporation.
Amended Effective March 14, 1986
24
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Nationwide
Life Insurance Company's Annual Report on Form 10-K for the Year ended December
31, 1997, and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 13,204
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 80
<MORTGAGE> 5,182
<REAL-ESTATE> 311
<TOTAL-INVEST> 19,576
<CASH> 176
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,665
<TOTAL-ASSETS> 59,791
<POLICY-LOSSES> 18,703
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,474
<TOTAL-LIABILITY-AND-EQUITY> 59,791
205
<INVESTMENT-INCOME> 1,409
<INVESTMENT-GAINS> 11
<OTHER-INCOME> 47
<BENEFITS> 1,195
<UNDERWRITING-AMORTIZATION> 167
<UNDERWRITING-OTHER> 385
<INCOME-PRETAX> 430
<INCOME-TAX> 150
<INCOME-CONTINUING> 280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 280
<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>
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life
Insurance Company and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules 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. Also in our opinion, the related 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.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
F-1
<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.
F-2
<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.
F-3
<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.
F-4
<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.
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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>
F-10
<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.
F-11
<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.
F-12
<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.
F-13
<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.
F-14
<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.
F-15
<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.
F-16
<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.
F-17
<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>
F-18
<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>
F-19
<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.
F-20
<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.
F-21
<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.
F-22
<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>
F-23
<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>
F-24
<PAGE> 25
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.
F-25
<PAGE> 26
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.
F-26
<PAGE> 27
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.
F-27
<PAGE> 28
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.
F-28
