<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been
subject to the filing requirements for at least the past 90 days.
YES X NO
---- ------
All voting stock was held by affiliates of the Registrant on November 1, 1999.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and
outstanding as of November 1, 1999 (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> <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 21
PART II OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $ 231.7 $ 180.6 $ 656.0 $ 514.6
Life insurance premiums 51.5 48.4 153.9 153.6
Net investment income 379.2 374.8 1,114.6 1,106.3
Realized gains (losses) on investments 6.2 5.6 (7.5) 27.2
Other 26.6 17.6 66.5 48.7
-------- -------- -------- --------
695.2 627.0 1,983.5 1,850.4
-------- -------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 272.4 269.0 803.6 795.6
Other benefits and claims 51.7 47.5 146.5 134.4
Policyholder dividends on participating policies 8.7 8.6 30.5 30.9
Amortization of deferred policy acquisition costs 68.6 57.5 196.1 159.3
Other operating expenses 120.2 106.1 333.5 314.8
-------- -------- -------- --------
521.6 488.7 1,510.2 1,435.0
-------- -------- -------- --------
Income before federal income tax expense 173.6 138.3 473.3 415.4
Federal income tax expense 58.4 46.5 158.8 141.7
-------- -------- -------- --------
Net income $ 115.2 $ 91.8 $ 314.5 $ 273.7
======== ======== ======== ========
</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, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $14,941.6 in 1999; $13,721.3 in 1998) $15,022.2 $14,245.1
Equity securities (cost $81.7 in 1999; $110.4 in 1998) 102.7 127.2
Mortgage loans on real estate, net 5,613.9 5,328.4
Real estate, net 250.4 243.6
Policy loans 505.4 464.3
Other long-term investments 77.6 44.0
Short-term investments 409.0 289.1
--------- ---------
21,981.2 20,741.7
--------- ---------
Cash 21.3 3.4
Accrued investment income 248.3 218.7
Deferred policy acquisition costs 2,416.6 2,022.2
Other assets 385.7 420.3
Assets held in separate accounts 57,249.6 50,935.8
--------- ---------
$82,302.7 $74,342.1
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $21,455.6 $19,767.1
Other liabilities 796.3 866.1
Liabilities related to separate accounts 57,249.6 50,935.8
--------- ---------
79,501.5 71,569.0
--------- ---------
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 766.1 914.7
Retained earnings 1,970.4 1,579.0
Accumulated other comprehensive income 60.9 275.6
--------- ---------
2,801.2 2,773.1
--------- ---------
$82,302.7 $74,342.1
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
(in millions)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
----------- ------------- --------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ 3.8 $ 914.7 $ 1,312.3 $ 247.1 $ 2,477.9
Comprehensive income:
Net income - - 273.7 - 273.7
Net unrealized gains on securities
available-for-sale arising during the - - - 126.0 126.0
period
----------
Total comprehensive income 399.7
----------
Dividends to shareholder - - (100.0) - (100.0)
----- ------- --------- ------- ---------
BALANCE, SEPTEMBER 30, 1998 $ 3.8 $ 914.7 $ 1,486.0 $ 373.1 $ 2,777.6
===== ======= ========= ======= =========
BALANCE, JANUARY 1, 1999 $ 3.8 $ 914.7 $ 1,579.0 $ 275.6 $ 2,773.1
Comprehensive income:
Net income - - 314.5 - 314.5
Net unrealized losses on securities
available-for-sale arising during the - - - (238.2) (238.2)
period
----------
Total comprehensive income 76.3
----------
Capital contribution - 26.4 87.9 23.5 137.8
Dividends to shareholder - (175.0) (11.0) - (186.0)
----- ------- --------- ------- ---------
BALANCE, SEPTEMBER 30, 1999 $ 3.8 $ 766.1 $ 1,970.4 $ 60.9 $ 2,801.2
===== ======= ========= ======= =========
</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, 1999 and 1998
(in millions)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 314.5 $ 273.7
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 803.6 795.6
Capitalization of deferred policy acquisition costs (481.6) (437.5)
Amortization of deferred policy acquisition costs 196.1 159.3
Amortization and depreciation 3.3 (6.0)
Realized losses (gains) on investments, net 7.5 (27.2)
Increase in accrued investment income (17.6) (17.6)
Decrease in other assets 38.6 35.8
Decrease in policy liabilities (17.1) (10.4)
Increase (decrease) in other liabilities 39.1 (170.5)
Other, net (0.6) (8.3)
-------- --------
Net cash provided by operating activities 885.8 586.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 1,681.9 1,097.7
Proceeds from sale of securities available-for-sale 336.1 550.6
Proceeds from repayments of mortgage loans on real estate 350.0 546.7
Proceeds from sale of real estate 5.7 74.6
Proceeds from repayments of policy loans and sale of other invested assets 23.7 21.1
Cost of securities available-for-sale acquired (2,479.9) (2,181.6)
Cost of mortgage loans on real estate acquired (452.2) (556.4)
Cost of real estate acquired (11.1) (0.5)
Short-term investments, net (20.5) 93.8
Other, net (84.3) (51.9)
-------- --------
Net cash used in investing activities (650.6) (405.9)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (188.5) (100.0)
Increase in investment product and universal life insurance product
account balances 2,690.9 1,808.5
Decrease in investment product and universal life insurance product
account balances (2,719.7) (2,061.6)
-------- --------
Net cash used in financing activities (217.3) (353.1)
-------- --------
Net increase (decrease) in cash 17.9 (172.1)
Cash, beginning of period 3.4 175.6
-------- --------
Cash, end of period $ 21.3 $ 3.5
======== ========
</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, 1999
(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,
1998 included in the Company's annual report on Form 10-K.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
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." The SOP, which has been adopted
prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining
internal use software. Prior to the adoption of SOP 98-1, the Company
expensed internal use software related costs as incurred. The effect of
adopting the SOP was to increase net income for the quarter ended
September 30, 1999 by $2.8 million and by $6.1 million for the first
nine months of 1999.
In June 1998, the Financial Accounting Standards Board (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. In July 1999 the FASB issued Statement 137 which delayed
the effective date of FAS 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt this Statement in first quarter 2001
and is currently evaluating the impact on results of operations and
financial condition.
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) COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within a separate component of shareholder's
equity that bypass net income. Currently, the Company's only component
of Other Comprehensive Income (Loss) is unrealized gains (losses) on
securities available-for-sale. The related before and after federal
income tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in millions) SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------- ------------------------------- -------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Unrealized (losses) gains on securities
available-for-sale arising during the period:
Gross $ (91.6) $ 266.5 $ (487.9) $ 273.6
Adjustment to deferred policy acquisition costs 15.3 (73.7) 108.7 (72.8)
Related federal income tax benefit (expense) 29.9 (67.4) 132.5 (70.2)
--------------- --------------- --------------- ---------------
Net (46.4) 125.4 (246.7) 130.6
--------------- --------------- --------------- ---------------
Reclassification adjustment for net (gains) losses
on securities available-for-sale realized
during the period:
Gross (2.0) (3.5) 13.0 (7.0)
Related federal income tax expense (benefit) 0.8 1.2 (4.5) 2.4
--------------- --------------- --------------- ---------------
Net (1.2) (2.3) 8.5 (4.6)
--------------- --------------- --------------- ---------------
Total Other Comprehensive (Loss) Income $ (47.6) $ 123.1 $ (238.2) $ 126.0
=============== =============== =============== ===============
</TABLE>
(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 adviser subsidiary, revenues
and expenses related to group annuity contracts sold to Nationwide
Insurance 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
During first quarter 1999 the Company revised the allocation of net
investment income among its Life Insurance and Corporate and Other
segments. Also, certain amounts previously reported as other income
were reclassified to operating expense. Amounts reported for prior
periods have been restated to reflect these changes.
The following table summarizes the financial results of the Company's
business segments for the three months ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
------------------------------------ --------------- --------------- --------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
1999
Operating revenue (1) $ 159.4 $ 292.1 $ 162.5 $ 75.0 $ 689.0
Benefits and expenses 86.3 248.1 130.7 56.5 521.6
--------------- --------------- --------------- ----------------- ------------
Operating income before federal
income tax 73.1 44.0 31.8 18.5 167.4
Realized gains on investments - - - 6.2 6.2
--------------- --------------- --------------- ----------------- ------------
Consolidated income before
federal income tax $ 73.1 $ 44.0 $ 31.8 $ 24.7 $ 173.6
=============== =============== =============== ================= ============
1998
Operating revenue (1) $ 128.6 $ 289.5 $ 140.8 $ 62.5 $ 621.4
Benefits and expenses 73.5 245.7 117.9 51.6 488.7
--------------- --------------- --------------- ----------------- ------------
Operating income before federal
income tax 55.1 43.8 22.9 10.9 132.7
Realized gains on investments - - - 5.6 5.6
--------------- --------------- --------------- ----------------- ------------
Consolidated income before
federal income tax $ 55.1 $ 43.8 $ 22.9 $ 16.5 $ 138.3
=============== =============== =============== ==============================
</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, 1999 and
1998.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
------------------------------------ --------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1999
Operating revenue (1) $ 457.7 $ 866.0 $ 466.9 $ 200.4 $ 1,991.0
Benefits and expenses 247.4 733.2 376.8 152.8 1,510.2
--------------- --------------- --------------- -------------- --------------
Operating income before federal
income tax 210.3 132.8 90.1 47.6 480.8
Realized losses on investments - - - (7.5) (7.5)
--------------- --------------- --------------- -------------- --------------
Consolidated income before
federal income tax $ 210.3 $ 132.8 $ 90.1 $ 40.1 $ 473.3
=============== =============== =============== ============= ===============
Assets as of period end $ 53,475.8 $ 16,682.4 $ 6,018.2 $ 6,126.3 $ 82,302.7
=============== =============== =============== ============= ===============
1998
Operating revenue (1) $ 370.9 $ 865.0 $ 402.2 $ 185.1 $ 1,823.2
Benefits and expenses 210.8 733.1 337.7 153.4 1,435.0
--------------- --------------- --------------- ------------- ---------------
Operating income before federal
income tax 160.1 131.9 64.5 31.7 388.2
Realized gains on investments - - - 27.2 27.2
--------------- --------------- --------------- ------------- ---------------
Consolidated income before
federal income tax $ 160.1 $ 131.9 $ 64.5 $ 58.9 $ 415.4
=============== =============== =============== ============= ===============
Assets as of period end $ 40,020.7 $ 14,675.0 $ 4,857.7 $ 5,921.8 $ 65,475.2
=============== =============== =============== ============= ===============
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
(5) CONTINGENCIES
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court 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).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. On June
11, 1999, the Company and the other named defendants filed a motion to
dismiss the amended complaint. The Company intends to defend this
lawsuit vigorously.
(6) TRANSACTIONS WITH AFFILIATES
During second quarter 1999, NLIC entered into a modified coinsurance
arrangement to reinsure the 1999 operating results of an affiliated
company, Employers Life Insurance Company of Wausau (ELOW) retroactive
to January 1, 1999. In August 1999, NLIC paid a dividend of $175.0
million to its parent company, Nationwide Financial Services, Inc.
(NFS). NFS used $120.8 million of the dividend to purchase ELOW in
September 1999 and immediately merged ELOW into NLIC terminating the
modified coinsurance arrangement. Because ELOW was an affiliate, the
Company accounted for the merger similar to a pooling-of-interests;
however, prior period financial statements were not restated due to
immateriality. The net assets of ELOW on the purchase date of $137.8
million are reflected as a capital contribution to shareholder's
equity. The reinsurance and merger combined contributed $1.46 million
to year to date net income.
10
<PAGE> 11
24
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.
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 and (xi) failure of the Company or its significant
business partners and vendors to identify and correct all non-Year
2000 compliant systems or to develop and execute adequate
contingency plans.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
(in millions) 1999 1998 1999 1998
---------------------------------------------------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net income $ 115.2 $ 91.8 $ 314.5 $ 273.7
Realized (gains) losses on investments, net of tax (4.0) (3.6) 4.9 (17.7)
----------- ----------- ---------- ---------
Net operating income $ 111.2 $ 88.2 $ 319.4 $ 256.0
=========== =========== ========== =========
</TABLE>
11
<PAGE> 12
Revenues
Total operating revenues, which exclude realized gains and losses
on investments, for third quarter 1999 increased to $689.0 million
compared to $621.4 million for the same period in 1998. For the
first nine months of 1999 and 1998, total operating revenues were
$1.99 billion and $1.82 billion, respectively. Increases in policy
charges and other income were the key drivers to revenue growth.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of variable annuities
and variable life insurance products; cost of insurance charges
earned on universal life insurance products; administration fees,
which include fees charged per contract on a variety of the
Company's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of
premiums withdrawn during a specified period of annuity and
certain life insurance contracts. Policy charges for the
comparable periods of 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
(in millions) 1999 1998 1999 1998
--------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Asset fees $ 159.1 $ 126.2 $ 451.7 $ 365.4
Cost of insurance charges 30.5 23.4 84.8 64.4
Administrative fees 28.0 20.0 75.8 54.0
Surrender fees 14.1 11.0 43.7 30.8
------------- ------------- ------------- --------------
Total policy charges $ 231.7 $ 180.6 $ 656.0 $ 514.6
============= ============= ============= =============
</TABLE>
The growth in asset fees reflects a 34% increase in total separate
account assets which reached $57.25 billion as of September 30,
1999 compared to $42.68 billion a year ago. Continued strong net
cash flows from variable annuity and variable life insurance
products as well as market appreciation have contributed
significantly to the increase in separate account assets.
Cost of insurance charges are assessed as a percentage of the net
amount at risk on universal life insurance policies. The net
amount at risk is equal to a policy's death benefit minus the
related policyholder account value. The increase in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual variable universal life insurance
reflecting expanded distribution and increased customer demand for
variable life insurance products. The net amount at risk related
to individual variable universal life insurance grew to $18.38
billion as of September 30, 1999 compared to $13.71 billion a year
ago.
The growth in administrative fees is attributable to a significant
increase in premiums on individual variable life policies and
certain corporate-owned life policies where the Company collects a
premium load. The increase in surrender charges is primarily
attributable to policyholder withdrawals in the Variable Annuities
segment, and reflects the overall increase in variable annuity
policy reserves.
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 on investments were $6.2 million and $5.6 million for third
quarter 1999 and 1998, respectively. For the first nine months of
1999, the Company reported realized losses on investments of $7.5
million compared to $27.2 million of realized gains for the first
nine months of 1998.
Other income includes fees earned by the Company's investment
management subsidiary. The growth in other income reflects a $2.29
billion increase in this subsidiary's assets under management
compared to a year ago.
12
<PAGE> 13
Benefits and Expenses
Total benefits and expenses were $521.6 million in third quarter
1999, a 7% increase over third quarter 1998, while year to date
1999 benefits and expenses were $1.51 billion compared to $1.44
billion a year ago. The increase is due mainly to growth in
amortization of deferred acquisition costs (DAC) and other
operating expenses. Interest credited and other policyholder
benefits were up slightly compared to the year ago third quarter
and nine month periods.
The significant growth in the Variable Annuities segment business
is the primary reason for the increase in amortization of DAC
which totaled $68.6 million and $57.5 million in third quarter
1999 and 1998, respectively. On a year to date basis, amortization
of DAC totaled $196.1 million in 1999 compared to $159.3 million
in 1998.
Operating expenses increased 13% to $120.2 million in third
quarter 1999 compared to $106.1 million in third quarter 1998. For
the first nine months of 1999, operating expenses were $333.5
million, up 6% from $314.8 million for the first nine months of
1998. The increases in operating expenses reflect the substantial
growth in the number of annuity and life insurance contracts in
force, particularly related to variable annuities and variable
universal life insurance, that the Company has experienced in the
last year and the related increase in administrative processing
costs.
Federal income tax expense was $58.4 million and $46.5 million,
representing effective tax rates of 33.6% for both third quarter
1999 and 1998. For the first nine months of 1999 and 1998 federal
tax expense was $158.8 million and $141.7 million, representing
effective tax rates of 33.6% and 34.1%, 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 implemented 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 included running
each application in a Year 2000 environment and was completed as
planned during 1998. For applications being replaced, the Company
had all replacement systems in place and functioning as planned by
year-end 1998. The shareholder services system that supports
mutual fund products was fully deployed during the first quarter
1999. Conversion of existing traditional life policies to the new
compliant system was completed by July 1999.
The Company has completed an inventory and assessment of all
vendor products and has tested and certified that each vendor
product is Year 2000 compliant. Any vendor products that could not
be certified as Year 2000 compliant were replaced or eliminated in
1998.
The Company's facilities in Columbus, Ohio have been inventoried,
assessed and tested as being Year 2000 compliant. Mission-critical
systems supporting the Company's infrastructure such as
telecommunications, voice and networks were renovated and brought
into compliance as planned during the second quarter.
13
<PAGE> 14
The Company has also addressed issues associated with the exchange
of electronic data with external organizations. The Company has
completed an inventory and assessment of all business partners
utilizing electronic interfaces with the Company and processes
have been put in place to allow the Company to accept data
regardless of the format. Contingency plans were completed in the
third quarter that will allow the Company to continue to send or
receive data in the event of failures related to other exchanges
of data.
In addition to resolving internal Year 2000 readiness issues, the
Company is conducting a due diligence effort with significant
external organizations, including mutual fund organizations,
financial institutions and wholesale producers, to assess if they
will be Year 2000 compliant. This involves communication and
follow-up with critical business partners to determine if they
will be in a position to continue doing business in the Year 2000
and beyond. To-date, 87% of our critical business partners have
reported that they are compliant. Our communication efforts with
the remaining business partners will continue until compliance is
assured or until regulatory rulings indicate actions to be taken
related to non-compliant firms. Contingency plans have been
developed for mutual fund organizations, financial institutions
and wholesale producers who may not become compliant prior to the
end of 1999.
As part of its risk management strategy, the Company has
identified risk scenarios including the identification of external
risk factors that could cause business interruptions from Year
2000 related events. These risk scenarios include increased
customer service volume, increased producer service volume,
utility failures, technology failures and disruptions in business
operations, finance and cash flow. The Company has completed its
mitigation and contingency plans to address these risks that
would, except for complete utility failure, permit uninterrupted
service to customers and producers.
During 1998 and the first nine months of 1999 communications
regarding the Company's Year 2000 readiness has been sent to all
customers and producers, on several different occasions in the
form of brochures and literature included with statements and
billings. This process will continue for the remainder of 1999.
Operating expenses in 1998 and 1997 include approximately $44.7
million and $45.4 million, respectively, for technology projects,
including costs related to Year 2000. Expenditures for Year 2000
projects for the first nine months of 1999 totaled $5.3 million.
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.
Recently Issued Accounting Standards
See note 2 to the unaudited consolidated financial statements for
a discussion of recently issued accounting standards.
14
<PAGE> 15
Targeted Statutory Premiums and Deposits
Targeted statutory premiums and deposits represent amounts that
are recurring and are the sales figures management uses to set and
evaluate the Company's sales goals. Targeted sales exclude funding
agreements sold to secure notes issued under the Company's $2
billion medium term note program, bank-owned life insurance (BOLI)
as well as deposits into Nationwide Insurance employee and agent
benefit plans. Although the excluded amounts contribute to asset
and earnings growth they do not produce steady production flow
that lends itself to meaningful comparisons.
The Company sells its products through a broad distribution
network. Unaffiliated entities that sell the Company's products to
their own customer base include independent broker/dealers,
national and regional wirehouses, pension plan administrators and
financial institutions. Representatives of the Company who market
products directly to a customer base identified by the Company
include Nationwide Retirement Solutions sales representatives and
Nationwide Insurance agents.
The following table summarizes targeted statutory premiums and
deposits by distribution channel.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
(in millions) 1999 1998 1999 1998
--------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Independent broker/dealers $ 1,402.0 $ 1,285.1 $ 4,135.3 $ 3,839.6
National and regional wirehouses 220.4 165.9 678.8 470.3
Financial institutions 650.6 471.1 1,860.0 1,592.4
Pension plan administrators 261.2 232.3 934.4 789.6
Nationwide Retirement Solutions
sales representatives 639.9 616.2 1,871.2 1,813.3
Nationwide Insurance agents 217.6 233.7 672.5 737.8
Life specialists 145.7 30.2 286.2 59.5
------------- ------------- ------------- -------------
$ 3,537.4 $ 3,034.5 $ 10,438.4 $ 9,302.5
============= ============= ============= =============
</TABLE>
The 1998 statutory premiums and deposits have been restated to
conform to the 1999 presentation which better reflects
multi-product sales across all distribution channels.
The competitive environment for individual annuity sales through
the independent broker/dealer channel has become very challenging;
however, total sales through this channel (including retirement
plans and life insurance) were up 9% in the quarterly comparisons
reflecting the strength of the Company's multiple product
strategy.
Sales of individual annuities through financial institutions grew
32% during third quarter 1999 compared to third quarter 1998
driven mainly by proprietary individual annuity products sales.
The Company's recent initiative to expand sales through national
and regional wirehouses has also contributed to sales growth in
1999 as sales of individual annuities through this channel rose
55% to $122.3 million in the recent third quarter compared to the
same period last year.
Life insurance sales, excluding BOLI, were $311.0 million for
third quarter 1999, up 77% from a year ago. On a comparable basis,
nine month sales increased 63% to $763.4 million.
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 products to their own customer bases under
their own brand name.
15
<PAGE> 16
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.
Targeted statutory premiums and deposits by product are summarized
as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
(in millions) 1999 1998 1999 1998
----------------------------------------- ------------- ------------------------------------------
<S> <C> <C> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $ 1,176.4 $ 1,141.5 $ 3,609.1 $ 3,640.1
Group variable annuities 891.7 709.1 2,681.0 2,083.3
Variable universal life insurance 107.8 89.7 297.9 232.1
Private label annuities 321.8 260.4 987.0 835.3
IRC Section 457 annuities 550.9 551.8 1,603.4 1,599.9
The NEA Valuebuilder annuities 39.3 36.7 125.1 117.6
Corporate-owned life insurance 145.7 30.2 286.2 59.6
Traditional/Universal life insurance 57.5 55.4 179.3 176.8
Other 246.3 159.7 669.4 557.8
------------- ------------- ------------- -------------
$ 3,537.4 $ 3,034.5 $ 10,438.4 $ 9,302.5
============= ============ ============= =============
</TABLE>
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
certain other revenues and expenses 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 tax
expense for the Company's business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(in millions) 1999 1998 1999 1998
------------------------------------ ------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
Variable Annuities $ 73.1 $ 55.1 $ 210.3 $ 160.1
Fixed Annuities 44.0 43.8 132.8 131.9
Life Insurance 31.8 22.9 90.1 64.5
Corporate and Other 18.5 10.9 47.6 31.7
------------- ------------- ------------- -------------
$ 167.4 $ 132.7 $ 480.8 $ 388.2
============= ============= ============= =============
</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) 1999 1998 1999 1998
----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 159.4 $ 128.6 $ 457.7 $ 370.9
Benefits and expenses 86.3 73.5 247.4 210.8
------------- ------------- ------------- --------------
Operating income before federal income tax expense $ 73.1 $ 55.1 $ 210.3 $ 160.1
============= ============= ============= ==============
OTHER DATA
Statutory premiums and deposits (1) $ 2,470.2 $ 2,477.5 $ 7,552.5 $ 7,493.0
Policy reserves as of period end $ 52,099.0 $ 38,814.1 $ 52,099.0 $ 38,814.1
Pre-tax operating income to average policy reserves 0.56% 0.55% 0.56% 0.55%
</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.
Pre-tax operating earnings reached a record $73.1 million in third
quarter 1999, up 33% compared to the year ago third quarter. Year
to date pre-tax earnings were up 31%. Improved Variable Annuity
segment results are primarily due to growth in asset fees
partially offset by increased DAC amortization.
Asset fees increased to $154.6 million in third quarter 1999, up
26% from $122.4 million in the same period a year ago. For the
first nine months of 1999, asset fees totaled $436.7 million up
23% from the first nine months of 1998. The increase in asset fees
reflects a 34% increase in policy reserve levels compared to a
year ago resulting from strong net cash flows as well as market
appreciation on investments underlying reserves.
Third quarter sales of $2.47 billion offset by withdrawals and
surrenders totaling $1.45 billion generated net cash flows of
$1.02 billion representing the tenth time in the last eleven
quarters that net cash flows have exceeded $1.0 billion. Year to
date net cash flows reached $3.20 billion. Although 1999 net cash
flows are down from the $1.45 billion and $4.33 billion achieved
in the third quarter and first nine months of 1998, the Company
has shown the ability to consistently generate substantial
positive cash flows and increase its base of asset fee generating
reserves in a very competitive environment.
Poor equity market performance in the recent third quarter reduced
reserves by $2.52 billion; however, over the past twelve months
equity market conditions have been very favorable, contributing
$8.61 billion to the increase in reserves through market
appreciation.
Amortization of DAC increased 23% to $40.9 million in third
quarter 1999 compared to $33.2 million in third quarter 1998. DAC
amortization for the first nine months of 1999 increased to $115.1
million compared to $90.1 million for the first nine months of
1998. The growth in DAC amortization is consistent with the
overall growth in the variable annuity business.
Changes in the Company's products and mix of business have
slightly decreased policy charges as a percentage of reserves from
1.35% in third quarter 1998 to 1.29% in third quarter 1999.
However, efficiencies achieved through improved operating scale
have enabled the Company to maintain steady operating margins of
56 basis points of average policy reserves.
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) 1999 1998 1999 1998
----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 281.5 $ 280.9 $ 834.9 $ 834.7
Other 10.6 8.6 31.1 30.3
------------- ------------- ------------- --------------
292.1 289.5 866.0 865.0
------------- ------------- ------------- --------------
Benefits and expenses:
Interest credited to policyholder account balances 208.9 207.0 613.6 619.2
Other benefits and expenses 39.2 38.7 119.6 113.9
------------- ------------- ------------- --------------
248.1 245.7 733.2 733.1
------------- ------------- ------------- --------------
Operating income before federal income tax expense $ 44.0 $ 43.8 $ 132.8 $ 131.9
============= ============= ============= ==============
OTHER DATA
Statutory premiums and deposits (1) $ 1,073.1 $ 381.7 $ 2,439.4 $ 1,341.0
Policy reserves as of period end $ 16,149.8 $ 14,380.0 $ 16,149.8 $ 14,380.0
Pre-tax operating income to average policy reserves 1.13% 1.22% 1.16% 1.23%
</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.
Year to date Fixed Annuity segment results reflect an increase in
interest spread income attributable to growth in fixed annuity
policy reserves. For the recent quarter interest spread income was
down slightly compared to 1998 as lower spreads offset reserve
growth. 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net investment income 7.48% 8.09% 7.57% 8.03%
Interest credited 5.55 5.96 5.57 5.96
------------- ------------- ------------ -------------
1.93% 2.13% 2.00% 2.07%
============= ============= ============= =============
</TABLE>
18
<PAGE> 19
During the first half of 1999 the Company experienced an increase
in mortgage loan and bond prepayment fees and such income
accounted for approximately 10 basis points of the interest spread
in the first nine months of 1999. Prepayment activity was slowed
by the recent rise in interest rates and accounted for only 3
basis points of the interest spread in third quarter 1999.
Comparatively, prepayment fees contributed 10 basis points and 16
basis points of the interest spread during the first nine months
and third quarter of 1998, respectively. The Company anticipates
that recent increases in interest rates will continue to slow
prepayment activity and expects interest spreads to remain at 190
to 195 basis points, excluding the impact of mortgage loan and
bond prepayment income.
Policy reserves increased to $16.15 billion as of September 30,
1999 compared to $14.38 billion a year ago and are up over $1.0
billion just since last quarter. The increases reflect increased
sales levels as well as the acquisition of ELOW described in note
6 to the unaudited consolidated financial statements. Current
quarter policy reserves include $570 million of group pension and
structured settlement reserves from the ELOW transaction.
Third quarter fixed annuity sales increased to $1.07 billion in
1999 compared to $381.7 million in 1998. Sales for the first nine
months of 1999 of $2.44 billion were also higher compared to $1.34
billion in 1998. Third quarter 1999 sales include the initial
$316.9 million funding agreement securing notes issued in
conjunction with the Company's medium term note program. This
program was launched in July 1999 as a means to expand
spread-based product offerings.
Primarily driven by the Company's dollar cost averaging (DCA)
program that offers customers a first year bonus interest rate and
transfers the account balance systematically to variable options
over a twelve month period, most of the Company's fixed annuity
sales are premiums allocated to the fixed option of variable
annuity contracts. Third quarter 1999 fixed annuity sales include
$658.3 million in premiums allocated to the fixed option under a
variable annuity contract, compared to $287.8 million in third
quarter 1998. As of September 30, 1999, reserves include $672
million under the DCA program.
Other benefits and expenses were relatively flat in third quarter
1999 compared to a year ago.
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) 1999 1998 1999 1998
----------------------------------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 162.5 $ 140.8 $ 466.9 $ 402.2
Benefits and expenses 130.7 117.9 376.8 337.7
------------- ------------- ------------- --------------
Operating income before federal income tax expense $ 31.8 $ 22.9 $ 90.1 $ 64.5
============= ============= ============= ==============
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 57.5 $ 55.4 $ 179.3 $ 176.9
Variable universal life insurance $ 107.8 $ 89.7 $ 298.0 $ 232.1
Corporate-owned life insurance $ 145.7 $ 135.3 $ 372.8 $ 589.9
Policy reserves as of period end:
Traditional and universal life insurance $ 2,525.5 $ 2,423.2 $ 2,525.5 $ 2,423.2
Variable universal life insurance $ 1,532.9 $ 1,058.8 $ 1,532.9 $ 1,058.8
Corporate-owned life insurance $ 1,288.1 $ 829.9 $ 1,288.1 $ 829.9
</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 1999 Life Insurance segment earnings increased 39%
to $31.8 million, up from $22.9 million a year ago. Year to date
earnings increased $25.6 million reaching $90.1 million. Continued
strong sales and reserve growth from both individual and corporate
owned investment life insurance products contributed to the sharp
earnings increases.
Driven primarily by increased policy charges, revenues from
investment life products increased to $61.9 million in third
quarter 1999 from $41.6 million in third quarter 1998. On a year
to date basis, investment life product revenues increased to
$165.6 million in 1999 from $103.4 million in 1998. The revenue
growth reflects significantly increased policy reserve levels as
individual investment life reserves increased 45% to $1.53 billion
compared to $1.06 billion a year ago. Corporate owned investment
life reserves, which include both BOLI and corporate-owned (COLI)
products, surged 55% to $1.29 billion, up from $829.9 million at
the end of third quarter 1998.
Pre-tax earnings from investment life products reached $14.3
million during third quarter 1999, up 55% compared to $9.2 million
in the comparable period a year ago. The strong revenue growth
discussed previously more than offset a 48% increase in operating
expenses and slightly elevated mortality experience, which
continues to remain within pricing assumptions. Through nine
months investment life pre-tax earnings totaled $42.0 million in
1999 compared to $23.7 million in 1998.
Traditional and universal life pre-tax earnings jumped 28% to
$17.5 million in third quarter 1999 compared to $13.7 million in
third quarter 1998 and reached $48.1 million for the first nine
months of 1999 up from $40.8 million a year ago. These increases
reflect reduced expenses related to the installation of a new
policy administration system.
Total life insurance premiums and deposits for the third quarter
1999, including sales of traditional life insurance products which
increased modestly from $55.4 million to $57.5 million, were
$311.0 million compared to $280.4 million during third quarter
1998. Year to date life insurance sales are down at $850.1 million
in 1999 compared to $998.9 million; however, excluding BOLI, 1999
year to date sales are up 63%. Sales in 1999 include record levels
of production for individual variable life insurance and COLI.
20
<PAGE> 21
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) 1999 1998 1999 1998
--------------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 75.0 $ 62.5 $ 200.4 $ 185.1
Benefits and expenses 56.5 51.6 152.8 153.4
----------- ----------- ----------- -----------
Operating income before federal income tax expense (1) $ 18.5 $ 10.9 $ 47.6 $ 31.7
=========== =========== =========== ===========
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
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 and net investment income and
policy charges from group annuity contracts issued to Nationwide
Insurance 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. The Company realized net
investment gains of $6.2 million and $5.6 million during the third
quarter of 1999 and 1998, respectively.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted due to reduced disclosure format.
21
<PAGE> 22
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 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 Nationwide Life and the American Century
group of defendants (Robert Young and David D. Distad v.
Nationwide Life Insurance Company et al.). In this lawsuit,
plaintiffs sought 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 district 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. The District
Court, on December 2, 1998, issued an order denying plaintiffs'
motion for class certification and the appeals court declined to
review the order denying class certification upon interlocutory
appeal. On June 11, 1999, the District Court denied the
plaintiffs' motion to amend their complaint and reconsider class
certification. NLIC intends to defend this lawsuit (now limited to
the claims of the two named plaintiffs) vigorously.
On October 29, 1998, the Company was named in a lawsuit filed in
Ohio state court 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). On May 3, 1999, the complaint was amended to,
among other things, add Marcus Shore as a second plaintiff. The
amended complaint is brought as a class action on behalf of all
persons who purchased individual deferred annuity contracts or
participated in group annuity contracts sold by the Company and
the other named Company affiliates which were used to fund certain
tax-deferred retirement plans. The amended complaint seeks
unspecified compensatory and punitive damages. On June 11, 1999,
the Company and the other named defendants filed a motion to
dismiss the amended complaint. 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.
22
<PAGE> 23
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:
No reports on Form 8-K were filed during the three month
period ended September 30, 1999.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
(Registrant)
Date: November 15, 1999 /s/Mark R. Thresher
------------------------------------
Mark R. Thresher, Senior Vice President -
Finance - Nationwide Financial
(Chief Accounting Officer)
24
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONWIDE
LIFE INSURANCE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 15,022
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 103
<MORTGAGE> 5,614
<REAL-ESTATE> 250
<TOTAL-INVEST> 21,981
<CASH> 21
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,417
<TOTAL-ASSETS> 82,303
<POLICY-LOSSES> 21,456
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,797
<TOTAL-LIABILITY-AND-EQUITY> 82,303
154
<INVESTMENT-INCOME> 1,115
<INVESTMENT-GAINS> (8)
<OTHER-INCOME> 67
<BENEFITS> 950
<UNDERWRITING-AMORTIZATION> 196
<UNDERWRITING-OTHER> 334
<INCOME-PRETAX> 473
<INCOME-TAX> 159
<INCOME-CONTINUING> 315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 315
<EPS-BASIC> 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>
