<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 2-28596
</TABLE>
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 31-4156830
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
----- -----
All voting stock was held by affiliates of the Registrant on August 1, 1998.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
as of November 1, 1998 (Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Narrative Analysis of the Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities and Use of Proceeds 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURE 25
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND
SUBSIDIARIES (a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $ 180.6 $ 143.3 $ 514.6 $ 393.4
Life insurance premiums 48.4 50.2 153.6 155.9
Net investment income 374.8 355.3 1,106.3 1,047.6
Realized gains (losses) on investments 5.6 (4.8) 27.2 4.3
Other 17.6 12.4 48.7 38.2
------------- ------------- ------------- -------------
627.0 556.4 1,850.4 1,639.4
------------- ------------- ------------- -------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 269.0 256.0 795.6 756.9
Other benefits and claims 47.5 41.8 134.4 134.3
Policyholder dividends on participating policies 8.6 9.1 30.9 31.3
Amortization of deferred policy acquisition costs 57.5 43.7 159.3 126.7
Other operating expenses 106.1 97.9 314.8 286.0
------------- ------------- ------------- -------------
488.7 448.5 1,435.0 1,335.2
------------- ------------- ------------- -------------
Income before federal tax expense 138.3 107.9 415.4 304.2
Federal tax expense 46.5 37.7 141.7 106.9
------------- ------------- ------------- -------------
Net income $ 91.8 $ 70.2 $ 273.7 $ 197.3
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND
SUBSIDIARIES (a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------------- ------------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $13,241.1 in 1998; $12,732.9 in 1997) $ 13,976.8 $ 13,204.1
Equity securities (cost $110.5 in 1998; $67.8 in 1997) 125.3 80.4
Mortgage loans on real estate, net 5,187.0 5,181.6
Real estate, net 263.5 311.4
Policy loans 452.6 415.3
Other long-term investments 22.2 25.2
Short-term investments 264.7 358.4
------------------- ------------------
20,292.1 19,576.4
------------------- ------------------
Cash 3.5 175.6
Accrued investment income 228.1 210.5
Deferred policy acquisition costs 1,870.8 1,665.4
Other assets 401.2 438.4
Assets held in Separate Accounts 42,679.5 37,724.4
------------------- ------------------
$ 65,475.2 $ 59,790.7
=================== ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 19,234.9 $ 18,702.8
Other liabilities 783.2 885.6
Liabilities related to Separate Accounts 42,679.5 37,724.4
------------------- ------------------
62,697.6 57,312.8
------------------- ------------------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5.0 million shares, issued and
outstanding 3.8 million shares 3.8 3.8
Additional paid-in capital 914.7 914.7
Retained earnings 1,486.0 1,312.3
Accumulated other comprehensive income 373.1 247.1
------------------- ------------------
2,777.6 2,477.9
------------------- ------------------
$ 65,475.2 $ 59,790.7
=================== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
(in millions of dollars)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
----------- ------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
1997
BALANCE, JANUARY 1, 1997 $ 3.8 $ 527.9 $ 1,432.6 $ 173.6 $ 2,137.9
Comprehensive income:
Net income - - 197.3 - 197.3
Unrealized net gains on securities
available-for-sale arising during the - - - 39.8 39.8
period
-----------------
Total comprehensive income 237.1
-----------------
Capital contributions - 836.8 - - 836.8
Dividends to shareholder - (450.0) (400.0) - (850.0)
----------- ------------- --------------- ---------------- -----------------
BALANCE, SEPTEMBER 30, 1997 $ 3.8 $ 914.7 $ 1,229.9 $ 213.4 $ 2,361.8
=========== ============= =============== ================ =================
<CAPTION>
<S> <C> <C> <C> <C> <C>
1998
BALANCE, JANUARY 1, 1998 $ 3.8 $ 914.7 $ 1,312.3 $ 247.1 $ 2,477.9
Comprehensive income:
Net income - - 273.7 - 273.7
Unrealized net gains on securities
available-for-sale arising during the - - - 126.0 126.0
period
-----------------
Total comprehensive income 399.7
-----------------
Dividend to shareholder (100.0) (100.0)
=========== ============= =============== ================ =================
BALANCE, SEPTEMBER 30, 1998 $ 3.8 $ 914.7 $ 1,486.0 $ 373.1 $ 2,777.6
=========== ============= =============== ================ =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
(in millions of dollars)
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 273.7 $ 197.3
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 795.6 756.9
Capitalization of deferred policy acquisition costs (437.5) (358.2)
Amortization of deferred policy acquisition costs 159.3 126.7
Amortization and depreciation (6.0) (0.5)
Realized gains on investments, net (27.2) (4.3)
(Increase) decrease in accrued investment income (17.6) (11.1)
Decrease in other assets 35.8 31.4
(Decrease) increase in policy liabilities (10.4) 66.2
(Decrease) increase in other liabilities (170.5) 152.8
Other, net (8.3) (3.9)
--------------- ----------------
Net cash provided by operating activities 586.9 953.3
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 1,097.7 640.8
Proceeds from sale of securities available-for-sale 550.6 248.7
Proceeds from repayments of mortgage loans on real estate 546.7 296.1
Proceeds from sale of real estate 74.6 23.2
Proceeds from repayments of policy loans and sale of other invested assets 21.1 19.8
Cost of securities available-for-sale acquired (2,181.6) (1,732.1)
Cost of mortgage loans on real estate acquired (556.4) (552.2)
Cost of real estate acquired (0.5) (24.3)
Policy loans issued and other invested assets acquired (51.9) (48.2)
Short-term investments, net 93.8 (428.2)
--------------- ----------------
Net cash used in investing activities (405.9) (1,556.4)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions - 836.8
Cash dividends paid to shareholder (100.0) -
Increase in investment product and universal life insurance product
account balances 1,808.5 1,586.2
Decrease in investment product and universal life insurance product
account balances (2,061.6) (1,763.0)
--------------- ----------------
Net cash (used in) provided by financing activities (353.1) 660.0
--------------- ----------------
Net (decrease) increase in cash (172.1) 56.9
Cash, beginning of period 175.6 43.8
--------------- ----------------
Cash, end of period $ 3.5 $ 100.7
=============== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND
SUBSIDIARIES (a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 1998
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Nationwide Life Insurance Company and subsidiaries (NLIC or
collectively the Company) have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities,
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein reflects all adjustments (all of which are normal and
recurring in nature) which are, in the opinion of management, necessary
for a fair presentation of financial position and results of
operations. Operating results for all periods presented are not
necessarily indicative of the results that may be expected for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
1997 included in the Company's annual report on Form 10-K.
(2) Comprehensive Income
--------------------
Pursuant to the Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income", the Consolidated Statements
of Shareholders' Equity include a new measure called "Comprehensive
Income". Comprehensive Income includes net income as well as certain
items that are reported directly within a separate component of
shareholders' equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in millions of dollars) SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------------------------- -------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $ 266.5 $ 152.4 $ 273.6 $ 89.9
Adjustment to deferred policy acquisition costs (73.7) (46.6) (72.8) (28.0)
Related federal tax (expense) benefit (67.4) (36.9) (70.2) (21.6)
--------------- --------------- --------------- ---------------
Net 125.4 68.9 130.6 40.3
--------------- --------------- --------------- ---------------
Reclassification adjustment for net (gains) losses
on securities available-for-sale realized during
the period:
Gross (3.5) 5.2 (7.0) (0.7)
Related federal tax expense (benefit) 1.2 (1.9) 2.4 0.2
---------------
--------------- --------------- ---------------
Net (2.3) 3.3 (4.6) (0.5)
--------------- --------------- --------------- ---------------
Total Other Comprehensive Income $ 123.1 $ 72.2 $ 126.0 $ 39.8
=============== =============== =============== ===============
</TABLE>
7
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND
SUBSIDIARIES (a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(3) Accounting Pronouncements
-------------------------
On January 1, 1998 the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." FAS 131 establishes
standards for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports. FAS
131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
FAS 131 did not affect results of operations or financial position, nor
did it affect the manner in which the Company defines its operating
segments. The segment information required for interim reports is
included in note 4.
In March 1998, The American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance intended to
standardize accounting practices for costs incurred to develop or
obtain computer software for internal use. Specifically, SOP 98-1
provides guidance for determining whether computer software is for
internal use and when costs incurred for internal-use software are to
be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998 with earlier application
encouraged. The adoption of SOP 98-1, planned for the first quarter of
1999, is not expected to have a material impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Contracts that contain embedded
derivatives, such as certain insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 with earlier application permitted. The
Company is currently evaluating the impact of this Statement on results
of operations and financial condition.
(4) Segment Disclosures
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds
managed by independent investment managers and the Company, with
investment returns accumulating on a tax-deferred basis. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred basis.
Such contracts consist of single premium deferred annuities, flexible
premium deferred annuities and single premium immediate annuities. The
Fixed Annuities segment includes the fixed option under variable
annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenues and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its investment advisor subsidiary (other than
the portion allocated to the Variable Annuities and Life Insurance
segments), revenues and expenses related to group annuity contracts
sold to Nationwide Insurance Enterprise employee and agent benefit
plans and all realized gains and losses on investments in a Corporate
and Other segment.
8
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the three months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- ------------------------------------ --------------- --------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
1998
Operating revenue (1) $ 135.3 $ 289.5 $ 142.6 $ 54.0 $ 621.4
Benefits and expenses 80.2 245.7 118.2 44.6 488.7
--------------- --------------- --------------- ----------------- ------------
Operating income before federal
income tax 55.1 43.8 24.4 9.4 132.7
Realized gains on investments - - - 5.6 5.6
--------------- --------------- --------------- ----------------- ------------
Consolidated income before
federal income tax $ 55.1 $ 43.8 $ 24.4 $ 15.0 $ 138.3
=============== =============== =============== ================ =============
1997
Operating revenue (1) $ 108.6 $ 286.4 $ 118.6 $ 47.6 $ 561.2
Benefits and expenses 68.6 241.6 97.7 40.6 448.5
--------------- --------------- --------------- ---------------- -------------
Operating income before federal
income tax 40.0 44.8 20.9 7.0 112.7
Realized losses on investments - - - (4.8) (4.8)
--------------- --------------- --------------- ----------------- ------------
Consolidated income before
federal income tax $ 40.0 $ 44.8 $ 20.9 $ 2.2 $ 107.9
=============== =============== =============== ================ =============
</TABLE>
- ----------
(1) Excludes realized gains and losses on investments.
9
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- ------------------------------------ --------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
1998
Operating revenue (1) $ 391.1 $ 865.0 $ 406.6 $ 160.5 $ 1,823.2
Benefits and expenses 231.0 733.1 338.5 132.4 1,435.0
--------------- --------------- --------------- -------------- ---------------
Operating income before federal
income tax 160.1 131.9 68.1 28.1 388.2
Realized gains on investments - - - 27.2 27.2
--------------- --------------- --------------- -------------- ---------------
Consolidated income before
federal income tax $ 160.1 $ 131.9 $ 68.1 $ 55.3 $ 415.4
--------------- --------------- --------------- -------------- ---------------
Assets as of period end $ 40,020.7 $ 14,675.0 $ 4,857.7 $ 5,921.8 $ 65,475.2
=============== =============== =============== ============== ===============
1997
Operating revenue (1) $ 289.4 $ 853.4 $ 349.2 $ 143.1 $ 1,635.1
Benefits and expenses 185.2 726.9 297.6 125.5 1,335.2
--------------- --------------- --------------- -------------- ---------------
Operating income before federal
income tax 104.2 126.5 51.6 17.6 299.9
Realized gains on investments - - - 4.3 4.3
--------------- --------------- --------------- -------------- ---------------
Consolidated income before
federal income tax $ 104.2 $ 126.5 $ 51.6 $ 21.9 $ 304.2
=============== =============== =============== ============== ===============
Assets as of period end $ 34,553.8 $ 14,233.7 $ 3,728.9 $ 5,673.5 $ 58,189.9
=============== =============== =============== ============== ===============
</TABLE>
- ----------
(1) Excludes realized gains on investments.
(5) Contingencies
-------------
On October 29, 1998, Nationwide Financial Services, Inc., NLIC's parent
company, and certain of its subsidiaries were named in a lawsuit filed
in the Common Pleas Court of Franklin County, Ohio related to the sale
of deferred annuity products for use as investments in tax-deferred
contributory retirement plans (Mercedes Castillo v. Nationwide
Financial Services, Inc., Nationwide Life Insurance Company and
Nationwide Life and Annuity Insurance Company). The plaintiff in such
lawsuit seeks to represent a national class of the Company's customers
and seeks unspecified compensatory and punitive damages. The Company is
currently evaluating this lawsuit, which is in an early stage and has
not been certified as a class. The Company intends to defend this
lawsuit vigorously.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes
included elsewhere herein.
NLIC is the primary operating subsidiary of Nationwide Financial
Services, Inc. (NFS), the holding company for companies within the
Nationwide Insurance Enterprise that offer or distribute long-term
savings and retirement products. In March 1997, NFS sold 23.6
million shares of its newly-issued Class A common stock in an
initial public offering.
Management's discussion and analysis contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of the Company. These
forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) the potential
impact on the Company's reported net income that could result from
the adoption of certain accounting standards issued by the FASB;
(ii) tax law changes impacting the tax treatment of life insurance
and investment products; (iii) heightened competition, including
specifically the intensification of price competition, the entry
of new competitors and the development of new products by new and
existing competitors; (iv) adverse state and federal legislation
and regulation, including limitations on premium levels, increases
in minimum capital and reserves, and other financial viability
requirements; (v) failure to expand distribution channels in order
to obtain new customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including,
among others, changes to certain products and acceptance of the
revised products in the market; (vii) changes in interest rates
and the capital markets causing a reduction of investment income
or asset fees, reduction in the value of the Company's investment
portfolio or a reduction in the demand for the Company's products;
(viii) general economic and business conditions which are less
favorable than expected; (ix) unanticipated changes in industry
trends and ratings assigned by nationally recognized statistical
rating organizations or A.M. Best Company, Inc.; and (x)
inaccuracies in assumptions regarding future persistency,
mortality, morbidity and interest rates used in calculating
reserve amounts.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes realized investment gains and losses. Net
operating income is commonly used in the insurance industry as a
measure of on-going earnings performance.
The following table reconciles the Company's reported net income
to net operating income for the three and nine month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
(in millions of dollars, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income $ 91.8 $ 70.2 $ 273.7 $ 197.3
Realized (gains) losses on investments, net of tax (3.6) 2.9 (17.7) (3.3)
----------- ----------- ------------ -----------
Net operating income $ 88.2 $ 73.1 $ 256.0 $ 194.0
=========== =========== ============ ===========
</TABLE>
11
<PAGE> 12
Revenues
Total revenues for third quarter 1998, excluding realized gains and losses on
investments, increased to $621.4 million compared to $561.2 million for the same
period in 1997. For the first nine months of 1998 and 1997, total revenues
excluding realized gains and losses on investments were $1.82 billion and $1.64
billion, respectively. Increases in policy charges and net investment income
were the key drivers to revenue growth.
Policy charges include asset fees, which are primarily earned on variable
annuity policy reserves; administration fees, which include fees charged per
contract on a variety of the Company's products and premium loads on universal
life insurance products; surrender fees, which are charged as a percentage of
premiums withdrawn during a specified period of certain annuity and life
insurance contracts; and cost of insurance charges earned on universal life
insurance products. Policy charges for the comparable periods of 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
(in millions of dollars) 1998 1997 1998 1997
- --------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Asset fees $ 126.2 $ 105.0 $ 365.4 $ 276.0
Administrative fees 20.0 12.7 54.0 43.0
Surrender fees 11.0 8.3 30.8 24.3
Cost of insurance charges 23.4 17.3 64.4 50.1
------------- ------------- ------------- -------------
Total policy charges $ 180.6 $ 143.3 $ 514.6 $ 393.4
============= ============= ============= =============
</TABLE>
The growth in asset fees reflects a 30% increase in total separate account
assets which reached $42.68 billion as of September 30, 1998 compared to $32.87
billion a year ago. Despite declines in the equity markets during third quarter
1998, separate account assets have grown significantly from a year ago due to
steady growth in premiums.
Net investment income includes the investment income earned on investments
supporting fixed annuities and certain life insurance products as well as the
yield on the Company's general account invested assets which are not allocated
to product segments. Net investment income grew from $355.3 million and $1.05
billion in the third quarter and first nine months of 1997, respectively, to
$374.8 million and $1.11 billion in the comparable periods of 1998 primarily due
to increased invested assets to support growth in fixed annuity and life
insurance policy reserves. Fixed annuity policy reserves, which include the
fixed option of variable annuity contracts, increased to $14.38 billion as of
September 30, 1998 compared to $14.19 billion as of December 31, 1997 and $13.97
billion a year ago. Growth in corporate investment life general account reserves
from $74.9 million at the end of third quarter 1997 to $781.3 million as of
September 30, 1998 accounted for most of the increased contribution to net
investment income from the Life Insurance segment.
The Company does not consider realized gains and losses on investments to be
recurring components of earnings. The Company makes decisions concerning the
sale of invested assets based on a variety of market, business, tax and other
factors. Net realized gains (losses) on investments were $5.6 million and ($4.8)
million for third quarter 1998 and 1997, respectively. For the first nine months
of 1998, the Company reported realized gains on investments of $27.2 million
compared to $4.3 million of realized gains for the first nine months of 1997.
Benefits and Expenses
Interest credited to policyholder account balances principally relates to fixed
annuity products. For the third quarter and first nine months of 1998 interest
credited totaled $269.0 million and $795.6 million, respectively, compared to
$256.0 million and $756.9 million in the same periods of 1997. The growth in
interest credited reflects the increase in fixed annuity and life insurance
policy reserves previously discussed, partially offset by reduced average
crediting rates. The average crediting rate on fixed annuity policy reserves was
5.96% during both the third quarter and first nine months of 1998 compared to
6.10% and 6.12% in the comparable periods of 1997.
12
<PAGE> 13
The significant growth in the Variable Annuities segment business is the primary
reason for the increase in amortization of deferred policy acquisition costs
(DAC) which totaled $57.5 million and $43.7 million in third quarter 1998 and
1997, respectively. On a year to date basis, amortization of DAC totaled $159.3
million in 1998 compared to $126.7 million in 1997.
Other operating expenses increased 8% to $106.1 million in third quarter 1998
compared to $97.9 million in third quarter 1997. For the first nine months of
1998, operating expenses were $314.8 million, up 10% from $286.0 million for the
first nine months of 1997. The increases reflect growth in the number of annuity
and life insurance contracts in force and the related increase in administrative
processing costs. Operating expenses also include costs of certain technology
initiatives including projects related to the Year 2000.
Federal tax expense was $46.5 million and $37.7 million, representing effective
tax rates of 33.6% and 34.9% for third quarter 1998 and 1997, respectively. For
the first nine months of 1998 and 1997 federal tax expense was $141.7 million
and $106.9 million, representing effective tax rates of 34.1% and 35.1%,
respectively.
Year 2000
The Company has developed and implemented a plan to address issues related to
the Year 2000. The problem relates to many existing computer systems using only
two digits to identify a year in a date field. These systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer systems could fail or create erroneous results
when processing information dated after December 31, 1999. Like many
organizations, the Company is required to renovate or replace many computer
systems so that the systems will function properly after December 31, 1999. The
Company has completed an inventory and assessment of all computer systems and
has developed a plan to renovate or replace all applications that were
identified as not Year 2000 compliant. The Company has renovated all
applications that required renovation. Testing of the renovated programs is in
process, including running each application in a Year 2000 environment. The
Company expects to complete the testing of all renovated applications by the end
of 1998. For applications being replaced, the Company expects to have all
replacement systems in place and functioning by the end of 1998, with the
exception of the policy administration system for traditional life products
which will be in place and functioning by the end of March 1999. Contingency
plans are substantially completed which identify actions to be taken should the
Company's renovation strategies fall behind schedule.
The Company has completed an inventory and assessment of all vendor products and
is testing and certifying that each vendor product is Year 2000 compliant. At
the end of September 1998, 76% of vendor products had been tested and certified
as Year 2000 compliant. The Company anticipates having all vendor products
tested and certified by the end of 1998. Any vendor products that can not be
certified as Year 2000 compliant will be replaced or eliminated.
In addition to resolving internal Year 2000 readiness issues, the Company is
surveying significant external organizations (business partners) to assess if
they will be Year 2000 compliant and be in a position to do business in the Year
2000 and beyond. Specifically, the Company has contacted mutual fund
organizations that provide funds for our variable annuity and life products. The
same action will be taken with wholesale producers before the end of 1998.
The Company has also addressed issues associated with the exchange of electronic
data with business partners. The Company has completed an inventory and
assessment of all business partners including electronic interfaces. Processes
have been put in place and programs initiated to process data irrespective of
the format by converting non-compliant data into a Year 2000 compliant format.
The Company's assessment of Year 2000 issues has also included non-information
technology systems with embedded computer chips. The Company's building systems
such as fire, security, and elevators and escalators supporting facilities in
Columbus, Ohio have been tested and are Year 2000 compliant.
13
<PAGE> 14
Operating expenses in the first nine months of 1998 and 1997 include
approximately $32.7 million and $33.5 million, respectively, for technology
projects, including costs related to Year 2000. In the fourth quarter of 1998,
the Company anticipates spending approximately $8 million on technology
projects, including Year 2000. At this time, no significant Year 2000 costs are
anticipated in 1999. Management does not anticipate that the completion of Year
2000 renovation and replacement activities will result in a reduction in
operating expenses. Rather, personnel and resources currently allocated to Year
2000 issues will be assigned to other technology-related projects.
Statutory Premiums and Deposits
The Company sells its products through a broad distribution network comprised of
wholesale and retail distribution channels. Wholesale distributors are
unaffiliated entities that sell the Company's products to their own customer
base and include independent broker/dealers, national and regional wirehouses,
financial institutions, pension plan administrators and life specialists. The
Company has access to over 1,100 independent broker/dealers and over 30,000
registered representatives who sell individual and group variable annuities,
fixed annuities and variable life insurance in all 50 states and the District of
Columbia. The Company currently has relationships with 185 financial
institutions selling individual variable and fixed annuities (under the
Company's brand name and on a private-label basis), variable universal life
insurance and group pension products. Over 250 regional pension plan
administrators market the Company's group variable and fixed annuities to
employers sponsoring employee retirement programs.
Retail distributors are representatives of the Company who market products
directly to a customer base identified by the Company and include exclusive
retail sales representatives of the Company's distribution subsidiaries and
Nationwide Insurance Enterprise insurance agents. The Company markets products
on a retail basis to state and local governments and to teachers through its
subsidiary distribution organizations. Approximately 4,300 Nationwide Insurance
Enterprise insurance agents are licensed to sell life insurance and individual
annuities primarily targeting holders of personal automobile and homeowners'
insurance policies issued by the Nationwide Insurance Enterprise.
Statutory premiums and deposits by distribution channel are summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
(in millions of dollars) 1998 1997 1998 1997
- --------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
WHOLESALE CHANNELS
Independent broker/dealers $ 925.4 $ 954.8 $ 2,851.3 $ 2,781.9
National and regional wirehouses (1) 78.6 - 253.1 -
Financial institutions 457.2 452.6 1,549.2 1,172.0
Pension plan administrators 730.2 594.8 2,160.9 1,733.6
Life specialists 135.3 5.0 589.8 50.0
------------- ------------- ------------- -------------
Total wholesale channels 2,326.7 2,007.2 7,404.3 5,737.5
------------- ------------- ------------- -------------
RETAIL CHANNELS
Exclusive retail sales representatives 588.4 430.6 1,717.4 1,409.4
Nationwide agents 224.5 150.8 711.1 445.4
------------- ------------- ------------- -------------
Total retail channels 812.9 581.4 2,428.5 1,854.8
------------- ------------- ------------- -------------
Total external premiums and deposits 3,139.6 2,588.6 9,832.8 7,592.3
============= ============= ============= =============
Nationwide Insurance Enterprise employee
and agent benefit plans 88.5 42.9 204.0 113.5
------------- ------------- ------------- -------------
Total statutory premiums and deposits $ 3,228.1 $ 2,631.5 $ 10,036.8 $ 7,705.8
============= ============= ============= =============
</TABLE>
- ---------
(1) Prior to 1998, national and regional wirehouse sales were included in
independent broker/dealer sales.
14
<PAGE> 15
Excluding Nationwide Insurance Enterprise benefit plan sales, the Company
achieved sales growth of 21% in the third quarter of 1998 compared to the third
quarter of 1997. On a year to date basis, sales have increased 30% in 1998
compared to 1997. The Company believes it is well positioned to achieve its goal
of 20% annual growth in external sales in 1998.
The Company's flagship products are marketed under The BEST of AMERICA(R) brand,
and include individual and group variable annuities and variable life insurance.
The BEST of AMERICA(R) products allow customers to choose from among investment
options managed by premier mutual fund managers. The Company has also developed
private label variable and fixed annuity products in conjunction with other
financial services providers which allow those providers to sell individual
variable and fixed annuities with substantially the same features as the
Company's brand name products to their own customer bases under their own brand
name.
The Company also markets group deferred compensation retirement plans to
employees of state and local governments for use under Internal Revenue Code
(IRC) Section 457. The Company utilizes its sponsorship by the National
Association of Counties and The United States Conference of Mayors when
marketing IRC Section 457 products. In addition, the Company utilizes an
exclusive arrangement with the National Education Association (NEA) to market
tax-qualified annuities under IRC 403(b) to NEA members. Variable annuities
developed for the NEA members are sold under the NEA Valuebuilder brand.
The Company offers corporate-owned life insurance (COLI). Corporations purchase
COLI to provide protection against the death of selected employees and to fund
non-qualified benefit plans.
External statutory premiums and deposits by product are summarized as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $ 1,141.5 $ 1,131.0 $ 3,640.1 $ 3,152.1
Group variable annuities 709.1 568.5 2,083.3 1,649.4
Variable universal life insurance 89.7 56.2 232.1 154.1
Private label annuities 260.4 274.0 835.3 769.5
IRC Section 457 annuities 551.8 395.2 1,599.9 1,312.1
The NEA Valuebuilder annuities 36.7 35.4 117.6 97.3
Corporate-owned life insurance 135.3 5.0 589.8 50.0
Traditional/Universal life insurance 55.4 57.0 176.8 180.3
Other 159.7 66.3 557.9 227.5
------------- ------------- ------------- --------------
$ 3,139.6 $ 2,588.6 $ 9,832.8 $ 7,592.3
============= ============= ============= ==============
</TABLE>
15
<PAGE> 16
BUSINESS SEGMENTS
The Company reports three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. In addition, the Company reports corporate revenue and
expenses, investments and related investment income supporting capital not
0pecifically allocated to its product segments, revenues and expenses of its
investment advisor subsidiary (other than the portion allocated to the Variable
Annuities and Life Insurance segments) and revenues and expenses related to
group annuity contracts sold to Nationwide Insurance Enterprise employee and
agent benefit plans in a Corporate and Other segment. All information set forth
below relating to the Variable Annuities segment excludes the fixed option under
variable annuity contracts. Such information is included in the Fixed Annuities
segment.
The following table summarizes operating income before federal tax expense for
the Company's business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
- ------------------------------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Variable Annuities $ 55.1 $ 40.0 $ 160.1 $ 104.2
Fixed Annuities 43.8 44.8 131.9 126.5
Life Insurance 24.4 20.9 68.1 51.6
Corporate and Other 9.4 7.0 28.1 17.6
------------- ------------- ------------- --------------
$ 132.7 $ 112.7 $ 388.2 $ 299.9
============= ============= ============= ==============
</TABLE>
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual
funds managed by independent investment managers and the Company,
with investment returns accumulating on a tax-deferred basis. The
Company's variable annuity products consist almost entirely of
flexible premium deferred variable annuity contracts.
16
<PAGE> 17
The following table summarizes certain selected financial data for the Variable
Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Asset fees $ 122.4 $ 101.1 $ 354.1 $ 264.9
Administrative fees 5.7 4.3 17.7 15.8
Surrender fees 8.0 5.5 21.7 16.4
------------- ------------- ------------- --------------
Total policy charges 136.1 110.9 393.5 297.1
Net investment income and other (2) (0.8) (2.3) (2.4) (7.7)
------------- ------------- ------------- --------------
135.3 108.6 391.1 289.4
Benefits and expenses:
Benefits and claims 0.9 1.6 2.9 4.3
Amortization of DAC 33.2 25.1 90.1 64.6
Other operating expenses 46.1 41.9 138.0 116.3
------------- ------------- ------------- --------------
80.2 68.6 231.0 185.2
------------- ------------- ------------- --------------
Operating income before federal tax expense $ 55.1 $ 40.0 $ 160.1 $ 104.2
============= ============= ============= ==============
OTHER DATA (1)
Statutory premiums and deposits (3) $ 2,477.5 $ 1,900.3 $ 7,493.0 $ 5,667.6
Withdrawals $ 1,022.9 $ 714.9 $ 3,158.4 $ 2,022.2
Policy reserves as of period end $ 38,814.1 $ 33,590.2 $ 38,814.1 $ 33,590.2
Ratio of policy charges to average policy reserves 1.35% 1.40% 1.34% 1.40%
Pre-tax operating income to average policy reserves 0.55% 0.50% 0.55% 0.49%
</TABLE>
- ----------
(1) Excludes the fixed option under the variable annuity contracts which is
reported in the Fixed Annuities segment.
(2) The Company's method of allocating net investment income results in a charge
(negative net investment income) to this segment which is recognized in the
Corporate and Other segment. The charge relates to non-invested assets which
support this segment on a statutory basis.
(3) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
Variable annuity segment results reflect increased asset fee revenue partially
offset by increases in DAC amortization and other operating expenses. Asset fees
increased to $122.4 million in the third quarter of 1998, up 21% from $101.1
million in the same period a year ago. For the first nine months of 1998, asset
fees totaled $354.1 million up 34% from the first nine months of 1997. The
increase in asset fees reflects higher variable annuity policy reserve levels.
Despite poor third quarter 1998 equity market performance, variable annuity
policy reserves are still up 16% from a year ago due to strong variable annuity
sales during 1998.
The Company continues to sustain high sales growth through deeper penetration of
existing distribution channels and expansion into new sales outlets. Third
quarter 1998 premiums grew across all distribution channels reaching $2.48
billion, 30% above year-ago third quarter sales of $1.90 billion. During the
first nine months of 1998, variable annuity sales reached $7.49 billion up 32%
from the first nine months of 1997. Included in 1998 sales are $700 million for
third quarter and $1.8 billion year-to-date for America's FUTURE Annuity(R), the
Company's lower-fee individual annuity introduced in November 1997.
Other operating expenses increased 10% and 19% during the third quarter and
first nine months of 1998, respectively, compared to the same periods of 1997
reflecting growth in the variable annuity business. The Company has been able to
improve its operating margins by five basis points in third quarter and six
basis points year-to-date compared to 1997 by growing revenues faster than the
increase in expenses. The growth in amortization of DAC reflects the overall
growth in the variable annuity business.
17
<PAGE> 18
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that generate a return
for the customer at a specified interest rate, fixed for a prescribed period,
with returns accumulating on a tax-deferred basis. Such contracts consist of
single premium deferred annuities, flexible premium deferred annuities and
single premium immediate annuities. The Fixed Annuities segment includes the
fixed option under variable annuity contracts.
The following table summarizes certain selected financial data for the Fixed
Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (1)
Revenues:
Policy charges $ 3.4 $ 2.4 $ 9.6 $ 11.1
Life insurance premiums 5.2 7.1 20.7 23.1
Net investment income 280.9 276.9 834.7 819.2
------------- ------------- ------------- --------------
289.5 286.4 865.0 853.4
------------- ------------- ------------- --------------
Benefits and expenses:
Interest credited to policyholder account balances 207.0 206.1 619.2 612.9
Other benefits and claims 4.6 5.5 18.2 19.2
Amortization of DAC 12.9 8.6 34.6 29.8
Other operating expenses 21.2 21.4 61.1 65.0
------------- ------------- ------------- --------------
245.7 241.6 733.1 726.9
------------- ------------- ------------- --------------
Operating income before federal tax expense $ 43.8 $ 44.8 $ 131.9 $ 126.5
============= ============= ============= ==============
OTHER DATA (1)
Statutory premiums and deposits (2) $ 381.7 $ 570.1 $ 1,341.0 $ 1,540.3
Withdrawals and benefits $ 415.1 $ 365.3 $ 1,425.6 $ 1,299.0
Policy reserves as of period end $ 14,380.0 $ 13,970.4 $ 14,380.0 $ 13,970.4
Net interest spread on general account
policy reserves 2.13% 2.10% 2.07% 2.06%
Pre-tax operating income to average policy reserves 1.22% 1.29% 1.23% 1.23%
</TABLE>
- ----------
(1) Includes the fixed option under the variable annuity contracts.
(2) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
18
<PAGE> 19
Fixed annuity segment results reflect an increase in interest spread income
attributable to growth in fixed annuity policy reserves. Interest spread is the
difference between net investment income and interest credited to policyholder
account balances. Interest spreads vary and are influenced by various factors
including crediting rates offered by competitors, performance of the investment
portfolio, changes in market interest rates and other factors. The following
table depicts the interest spreads on general account policy reserves in the
Fixed Annuities segment for the third quarter and first nine months of 1998 and
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net investment income 8.09% 8.20% 8.03% 8.18%
Interest credited 5.96 6.10 5.96 6.12
------------- ------------- ------------- -------------
2.13% 2.10% 2.07% 2.06%
============= ============= ============= =============
</TABLE>
Mortgage loan prepayment fees in 1998 accounted for approximately 16 basis
points and 10 basis points of the interest spread in the third quarter and first
nine months of 1998, respectively. The Company anticipates interest spreads in
the fourth quarter to be comparable to third quarter 1998, excluding the impact
of mortgage loan prepayment income. Interest spreads are expected to narrow in
1999.
Fixed annuity policy reserves increased to $14.38 billion as of September 30,
1998 compared to $14.19 billion as of the end of 1997 and $13.97 billion a year
ago.
Third quarter fixed annuity sales decreased to $381.7 million in 1998 compared
to $570.1 million in 1997. Third quarter 1997 sales reflect a sales promotion
that offered customers a first-year 7% crediting rate on several of the
Company's variable contracts, which contributed approximately $200 million to
third quarter 1997 sales. Sales for the first nine months of 1998 of $1.34
billion were also down compared to $1.54 billion in 1997. Most of the Company's
fixed annuity sales are premiums allocated to the fixed option of variable
annuity contracts. Third quarter 1998 fixed annuity sales include $287.8 million
in premiums allocated to the fixed option under a variable annuity contract,
compared to $453.5 million in third quarter 1997.
On October 1, 1998 the Company introduced an 8% first year crediting rate on
individual variable annuities. The cost of this promotion will be offset by a
reduction of renewal rates on existing contracts. The Company believes these
actions will generate additional sales in the bank and brokerage channels and be
neutral to profitability.
Amortization of DAC increased $4.3 million to $12.9 million in third quarter
1998 compared to $8.6 million in third quarter 1997 reflecting higher net
interest spread.
Life Insurance
The Life Insurance segment consists of insurance products, including variable
universal life insurance and corporate-owned life insurance products, that
provide a death benefit and may also allow the customer to build cash value on a
tax-deferred basis.
19
<PAGE> 20
The following table summarizes certain selected financial data for the Life
Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Cost of insurance charges $ 23.4 $ 17.3 $ 64.4 $ 50.1
Other policy charges 14.5 9.6 38.2 27.0
------------- ------------- ------------- --------------
Total policy charges 37.9 26.9 102.6 77.1
Life insurance premiums 43.2 43.1 132.9 132.8
Net investment income 61.2 48.4 170.3 138.9
Other 0.3 0.2 0.8 0.4
------------- ------------- ------------- --------------
142.6 118.6 406.6 349.2
------------- ------------- ------------- --------------
Benefits and expenses:
Interest credited to policyholder account balances 30.7 19.5 83.0 56.5
Other benefits and claims 42.0 34.7 113.3 110.8
Policyholder dividends 8.6 9.1 30.9 31.3
Amortization of DAC 11.4 10.0 34.6 32.3
Other operating expenses 25.5 24.4 76.7 66.7
------------- ------------- ------------- --------------
118.2 97.7 338.5 297.6
------------- ------------- ------------- --------------
Operating income before federal tax expense $ 24.4 $ 20.9 $ 68.1 $ 51.6
============= ============= ============= ==============
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 55.4 $ 57.0 $ 176.9 $ 180.3
Individual investment life insurance $ 89.7 $ 56.2 $ 232.1 $ 154.1
Corporate investment life insurance $ 135.3 $ 5.0 $ 589.9 $ 50.0
Policy reserves as of period end:
Traditional and universal life insurance $ 2,423.2 $ 2,348.9
Individual investment life insurance $ 1,058.8 $ 852.0
Corporate investment life insurance $ 829.9 $ 74.9
Life insurance in force:
Traditional and universal life insurance $ 27,238.4 $ 27,628.5
Individual investment life insurance $ 14,770.3 $ 10,486.8
Corporate investment life insurance $ 1,899.6 $ 246.2
</TABLE>
- ----------
(1) Statutory data have been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Third quarter 1998 Life Insurance segment results compared to third quarter 1997
reflect continued growth in variable life policy fees, partially offset by
unfavorable mortality.
Year-to-date, Life Insurance segment results reflect increased revenues driven
by growth in investment life insurance in force and policy reserves coupled with
favorable mortality experience. These trends were partially offset by higher
expense levels.
20
<PAGE> 21
Investment life insurance (which includes individual variable universal life
insurance and corporate-owned life insurance products) policy charges were $25.9
million in the third quarter of 1998, a 75% increase compared to $14.8 million
for the third quarter of 1997. The growth in investment life insurance policy
charges is attributable to growth in individual investment life insurance policy
reserves which reached $1.89 billion as of the end of the third quarter 1998 up
$961.8 million from a year ago. Policy reserve growth continues to be driven by
strong sales from both independent broker/dealers and Nationwide Insurance
Enterprise insurance agents. Investment life insurance sales to individuals
during the third quarter of 1998 reached $89.7 million compared to $56.2 million
in the third quarter of 1997. The Company anticipates continued sales growth in
1998 for investment life insurance products.
During the first nine months of 1998, the Company continued its entry into the
corporate-owned life insurance market recording $589.8 million in
corporate-owned life insurance premiums compared to $50.0 million in the nine
months of 1997. As of September 30, 1998 the Company had $829.9 million in
corporate-owned life insurance policy reserves.
The increase in operating expenses is due to the increase in policies in force
and continued spending on a new policy administration system for traditional
life insurance policies.
Corporate and Other
The following table summarizes certain selected financial data for the Corporate
and Other segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions of dollars) 1998 1997 1998 1997
- ----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues (1):
Net investment income $ 40.2 $ 36.7 $ 123.9 $ 109.1
Other 13.8 10.9 36.6 34.0
------------- ------------- ------------- --------------
54.0 47.6 160.5 143.1
------------- ------------- ------------- --------------
Benefits and expenses:
Interest credited to policy reserves 31.3 30.4 93.4 87.5
Other operating expenses 13.3 10.2 39.0 38.0
------------- ------------- ------------- --------------
44.6 40.6 132.4 125.5
------------- ------------- ------------- --------------
Operating income before federal tax expense (1) $ 9.4 $ 7.0 $ 28.1 $ 17.6
============= ============= ============= ==============
OTHER DATA
Statutory premiums and deposits (2) $ 88.5 $ 42.9 $ 204.0 $ 113.5
Withdrawals $ 50.1 $ 20.6 $ 156.4 $ 126.7
Policy reserves as of period end $ 3,991.0 $ 3,719.8 $ 3,991.0 $ 3,719.8
Nationwide retail mutual fund assets (3) $ 2,833.3 $ 2,562.6 $ 2,833.3 $ 2,562.6
</TABLE>
- ----------
(1) Excludes realized gains and losses on investments.
(2) Statutory data have been derived from the Quarterly Statements of the
Company's life insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
(3) Excludes mutual funds selected as investment options under the Company's
variable annuity and variable universal life insurance contracts and mutual
funds selected as investment options under Nationwide Insurance Enterprise
employee and agent benefit plans.
21
<PAGE> 22
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, investment management fees and other revenues
earned from the Company's investment advisor subsidiary (other
than the portion allocated to the Variable Annuities and Life
Insurance segments) and net investment income and policy charges
from group annuity contracts issued to Nationwide Insurance
Enterprise employee and agent benefit plans.
Growth in interest spread income and other income was driven by
increased policy reserves related to Nationwide Insurance
Enterprise employee and agent benefit plans and strong first nine
months 1998 sales from the Company's investment advisor
subsidiary, respectively.
In addition to the operating revenues previously presented, the
Company also reports realized gains and losses on investments in
the Corporate and Other segment. The Company realized net
investment gains (losses) of $5.6 million and ($4.8) million
during the third quarter of 1998 and 1997, respectively.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted due to reduced disclosure format.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity pricing and sales practices. A
number of these lawsuits have resulted in substantial jury awards
or settlements.
In February 1997, NLIC was named as a defendant in a lawsuit filed
in New York Supreme Court related to the sale of whole life
policies on a "vanishing premium" basis (John H. Snyder v.
Nationwide Life Insurance Co.). In April 1998, NLIC was named as a
defendant in a lawsuit filed in Ohio State Court similar to the
Snyder lawsuit (David and Joan Mishler v. Nationwide Life
Insurance Co.). In August 1998, Nationwide Mutual Insurance
Company and NLIC and the plaintiffs executed a stipulation of
settlement and submitted it to the New York Supreme Court for
approval. On August 20, 1998, the Court in the Snyder lawsuit
signed an order preliminarily approving a class for settlement
purposes (which would include the Mishler lawsuit) and scheduled a
fairness hearing for December 17, 1998. At that hearing, the Court
will review the fairness and reasonableness of the proposed
settlement prior to issuing a final order and judgement. The
proposed settlement, which is subject to approval by the Court,
provides policyholders with a potential value of approximately
$100 million in policy adjustments, discounted premiums and
discounted products.
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 a lawsuit in a federal
court in Texas against NLIC and the American Century group of
defendants (Robert Young and David D. Distad v. Nationwide Life
Insurance Company et al.). In this lawsuit, plaintiffs seek to
represent a class of variable life insurance contract owners and
variable annuity contract owners whom they claim were allegedly
misled when purchasing these variable contracts into believing
that the performance of their underlying mutual fund option
managed by American Century, whose shares may only be purchased by
insurance companies, would track the performance of a mutual fund,
also managed by American Century, whose shares are publicly
traded. The amended complaint seeks unspecified compensatory and
punitive damages. On April 27, 1998, the Court denied, in part,
and granted, in part, motions to dismiss the complaint filed by
NLIC and American Century. The remaining claims against NLIC
allege securities fraud, common law fraud, civil conspiracy and
breach of contract. Plaintiffs filed their motion in support of
class certification on August 28, 1998 and NLIC and American
Century filed their separate responses opposing class
certification on October 9, 1998. NLIC intends to defend this case
vigorously.
On October 29, 1998, Nationwide Financial Services, Inc., NLIC's
parent company, and certain of its subsidiaries were named in a
lawsuit filed in the Common Pleas Court of Franklin County, Ohio
related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans
(Mercedes Castillo v. Nationwide Financial Services, Inc.,
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance Company). The plaintiff in such lawsuit seeks to
represent a national class of the Company's customers and seeks
unspecified compensatory and punitive damages. The Company is
currently evaluating this lawsuit, which is in an early stage and
has not been certified as a class. The Company intends to defend
this lawsuit vigorously.
There can be no assurance that any litigation relating to pricing
or sales practices will not have a material adverse effect on the
Company in the future.
23
<PAGE> 24
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
On September 4, 1998, the Company filed a Current Report
on Form 8-K concerning the announcement by Nationwide
Mutual Insurance Company and the Company of a settlement
in a class action lawsuit related to certain products sold
by the Company.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: November 16, 1998 /s/Mark R. Thresher
---------------------------------------------
Mark R. Thresher, Vice President - Controller
(Chief Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Nationwide
Life Insurance Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1998 and is qualified in its entirety by reference to such
unaudited consolidated financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000205695
<NAME> NATIONWIDE LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 13,977
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 125
<MORTGAGE> 5,187
<REAL-ESTATE> 264
<TOTAL-INVEST> 20,292
<CASH> 4
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,871
<TOTAL-ASSETS> 65,475
<POLICY-LOSSES> 19,235
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,774
<TOTAL-LIABILITY-AND-EQUITY> 65,475
154
<INVESTMENT-INCOME> 1,106
<INVESTMENT-GAINS> 27
<OTHER-INCOME> 49
<BENEFITS> 930
<UNDERWRITING-AMORTIZATION> 159
<UNDERWRITING-OTHER> 315
<INCOME-PRETAX> 415
<INCOME-TAX> 142
<INCOME-CONTINUING> 274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 274
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
