<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 MARCH 31, 1999 COMMISSION FILE NO. 2-28596
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 May 1, 1999.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
as of May 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 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</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
MARCH 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES
Policy charges $ 206.2 $ 159.0
Life insurance premiums 53.5 53.2
Net investment income 363.3 364.5
Realized (losses) gains on investments (5.4) 16.6
Other 19.5 14.3
-------- --------
637.1 607.6
-------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 263.8 261.9
Other benefits and claims 50.5 46.3
Policyholder dividends on participating policies 10.1 10.8
Amortization of deferred policy acquisition costs 60.7 47.7
Other operating expenses 104.3 102.1
-------- --------
489.4 468.8
-------- --------
Income before federal income tax expense 147.7 138.8
Federal income tax expense 48.5 47.7
-------- --------
Net income $ 99.2 $ 91.1
======== ========
</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)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
----------- ------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $13,721.1 in 1999; $13,721.3 in 1998) $ 14,093.5 $ 14,245.1
Equity securities (cost $104.8 in 1999; $110.4 in 1998) 124.2 127.2
Mortgage loans on real estate, net 5,364.6 5,328.4
Real estate, net 244.3 243.6
Policy loans 478.9 464.3
Other long-term investments 65.1 44.0
Short-term investments 330.3 289.1
----------- -----------
20,700.9 20,741.7
----------- -----------
Cash 21.3 3.4
Accrued investment income 229.9 218.7
Deferred policy acquisition costs 2,143.3 2,022.2
Other assets 467.0 420.3
Assets held in separate accounts 53,469.9 50,935.8
----------- -----------
$ 77,032.3 $ 74,342.1
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 19,900.7 $ 19,767.1
Other liabilities 877.8 866.1
Liabilities related to separate accounts 53,469.9 50,935.8
----------- -----------
74,248.4 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 914.7 914.7
Retained earnings 1,667.4 1,579.0
Accumulated other comprehensive income 198.0 275.6
----------- -----------
2,783.9 2,773.1
----------- -----------
$ 77,032.3 $ 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)
Three Months Ended March 31, 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 -- -- 91.1 -- 91.1
Net unrealized losses on securities available-
for-sale arising during the period -- -- -- (11.1) (11.1)
----------
Total comprehensive income 80.0
----------
------- -------- ---------- -------- ----------
BALANCE, MARCH 31, 1998 $ 3.8 $ 914.7 $ 1,403.4 $ 236.0 $ 2,557.9
======= ======== ========== ======== ==========
BALANCE, JANUARY 1, 1999 $ 3.8 $ 914.7 $ 1,579.0 $ 275.6 $ 2,773.1
Comprehensive income:
Net income -- -- 99.2 -- 99.2
Net unrealized losses on securities available-
for-sale arising during the period -- -- -- (77.6) (77.6)
----------
Total comprehensive income 21.6
----------
Dividends to shareholder (10.8) (10.8)
------- -------- ---------- -------- ----------
BALANCE, MARCH 31, 1999 $ 3.8 $ 914.7 $ 1,667.4 $ 198.0 $ 2,783.9
======= ======== ========== ======== ==========
</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)
Three Months Ended March 31, 1999 and 1998
(in millions)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 99.2 $ 91.1
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 263.8 261.9
Capitalization of deferred policy acquisition costs (152.3) (131.2)
Amortization of deferred policy acquisition costs 60.7 47.7
Amortization and depreciation 2.5 (2.9)
Realized losses (gains) on investments, net 5.4 (16.6)
Increase in accrued investment income (11.2) (13.5)
(Increase) decrease in other assets (49.9) 32.7
Increase (decrease) in policy liabilities 7.0 (97.7)
Increase in other liabilities 53.5 58.6
Other, net (2.1) (3.0)
-------- --------
Net cash provided by operating activities 276.6 227.1
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 524.1 442.1
Proceeds from sale of securities available-for-sale 143.2 224.4
Proceeds from repayments of mortgage loans on real estate 89.5 241.0
Proceeds from sale of real estate -- 30.3
Proceeds from repayments of policy loans and sale of other invested assets 4.7 10.0
Cost of securities available-for-sale acquired (662.6) (852.1)
Cost of mortgage loans on real estate acquired (125.3) (241.7)
Cost of real estate acquired (0.7) (0.2)
Short-term investments, net (41.2) (136.6)
Other, net (39.8) (14.9)
-------- --------
Net cash used in investing activities (108.1) (297.7)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (13.5) --
Increase in investment product and universal life insurance product
account balances 756.8 621.2
Decrease in investment product and universal life insurance product
account balances (893.9) (694.3)
-------- --------
Net cash used in financing activities (150.6) (73.1)
-------- --------
Net increase (decrease) in cash 17.9 (143.7)
Cash, beginning of period 3.4 175.6
-------- --------
Cash, end of period $ 21.3 $ 31.9
======== ========
</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
Three Months Ended March 31, 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) Accounting Pronouncements
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 March
31, 1999 by $0.9 million.
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 fiscal years beginning after June 15, 1999.
It may be implemented earlier provided adoption occurs as of the
beginning of any fiscal quarter after issuance. The Company plans to
adopt this Statement in first quarter 2000 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 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
(in millions) MARCH 31,
---------------------------------------------------------------------------------------
1999 1998
-------- -------
<S> <C> <C>
Unrealized losses on securities available-for-
Sale arising during the period:
Gross $ (154.4) $ (22.9)
Adjustment to deferred policy acquisition costs 29.6 7.8
Related federal tax benefit 41.7 5.9
-------- -------
Net (83.1) (9.2)
-------- -------
Reclassification adjustment for net losses (gains)
On securities available-for-sale realized during
the period:
Gross 8.5 (2.9)
Related federal tax (benefit) expense (3.0) 1.0
-------- -------
Net 5.5 (1.9)
-------- -------
Total Other Comprehensive Income $ (77.6) $ (11.1)
======== =======
</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.
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 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 Enterprise employee and agent benefit plans and all realized
gains and losses on investments in a Corporate and Other segment.
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 March 31, 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) $ 143.5 $ 287.6 $ 151.1 $ 60.3 $ 642.5
Benefits and expenses 77.3 244.8 122.0 45.3 489.4
----------- ----------- ---------- ---------- -----------
Operating income before federal
Income tax 66.2 42.8 29.1 15.0 153.1
Realized losses on investments -- -- -- (5.4) (5.4)
----------- ----------- ---------- ---------- -----------
Consolidated income before
Federal income tax $ 66.2 $ 42.8 $ 29.1 $ 9.6 $ 147.7
=========== =========== ========== ========== ===========
Assets as of period end $ 50,132.3 $ 15,396.4 $ 5,527.9 $ 5,975.7 $ 77,032.3
=========== =========== ========== ========== ===========
1998
Operating revenue (1) $ 114.3 $ 289.3 $ 127.2 $ 60.2 $ 591.0
Benefits and expenses 65.0 244.3 107.1 52.4 468.8
----------- ----------- ---------- ---------- -----------
Operating income (loss) before
Federal income tax 49.3 45.0 20.1 7.8 122.2
Realized gains on investments -- -- -- 16.6 16.6
----------- ----------- ---------- ---------- -----------
Consolidated income before
Federal income tax $ 49.3 $ 45.0 $ 20.1 $ 24.4 $ 138.8
=========== =========== ========== ========== ===========
Assets as of period end $ 40,742.8 $ 14,514.0 $ 4,228.6 $ 6,132.1 $ 65,617.5
=========== =========== ========== ========== ===========
</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).
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 has
not been certified as a class. The Company intends to defend this
lawsuit vigorously.
9
<PAGE> 10
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) Nationwide Corporation's
control of the Company through its beneficial ownership of
approximately 97.8% of the combined voting power of all the outstanding
common stock and approximately 81.5% of the economic interest in the
Company; (ii) the Company's primary reliance, as a holding company, on
dividends from its subsidiaries to meet debt payment obligations and
the applicable regulatory restrictions on the ability of the Company's
subsidiaries to pay such dividends; (iii) the potential impact on the
Company's reported net income that could result from the adoption of
certain accounting standards issued by the FASB; (iv) tax law changes
impacting the tax treatment of life insurance and investment products;
(v) 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; (vi) adverse state and
federal legislation and regulation, including limitations on premium
levels, increases in minimum capital and reserves, and other financial
viability requirements; (vii) failure to expand distribution channels
in order to obtain new customers or failure to retain existing
customers; (viii) inability to carry out marketing and sales plans,
including, among others, changes to certain products and acceptance of
the revised products in the market; (ix) 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; (x) general
economic and business conditions which are less favorable than
expected; (xi) unanticipated changes in industry trends and ratings
assigned by nationally recognized statistical rating organizations or
A.M. Best Company, Inc.; (xii) inaccuracies in assumptions regarding
future persistency, mortality, morbidity and interest rates used in
calculating reserve amounts and (xiii) 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.
10
<PAGE> 11
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
MARCH 31,
-------------------------
(in millions) 1999 1998
--------------------------------------------------------- ------- -------
<S> <C> <C>
Net income $ 99.2 $ 91.1
Realized losses (gains) on investments, net of tax 3.5 (10.8)
------- -------
Net operating income $ 102.7 $ 80.3
======= =======
</TABLE>
Revenues
Total revenues for the first quarter of 1999, excluding realized gains
and losses on investments, increased to $642.5 million compared to
$591.0 million for the same period in 1998. Increases in policy charges
and other income contributed to revenue growth, while net investment
income and life insurance premiums were relatively unchanged.
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 first quarter of 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
(in millions) 1999 1998
--------------------------------------------------------- ------- -------
<S> <C> <C>
Asset fees $ 140.4 $ 113.2
Cost of insurance charges 25.9 19.3
Administrative fees 25.8 16.9
Surrender fees 14.1 9.6
------- -------
Total policy charges $ 206.2 $ 159.0
======= =======
</TABLE>
The growth in asset fees reflects a 23% increase in total separate
account assets which reached $53.47 billion as of March 31, 1999
compared to $43.33 billion a year ago. Steady growth in sales of
variable annuity and variable life insurance products as well as market
appreciation have contributed significantly to the increase in separate
account assets.
11
<PAGE> 12
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 products.
The net amount at risk related to individual variable universal life
insurance grew to $15.99 billion as of March 31, 1999 compared to
$11.38 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. Nearly all of the increase in surrender charges is 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 (losses) gains on
investments were $(5.4) million and $16.6 million for the first quarter
of 1999 and 1998, respectively. The first quarter 1999 net realized
losses on investments include a $9.2 million loss on a single fixed
maturity security.
Other income includes fees earned by the Company's investment
management subsidiary. The growth in other income reflects a $2.86
billion increase in this subsidiary's assets under management compared
to a year ago.
Benefits and Expenses
Total benefits and expenses were $489.4 million in first quarter 1999,
a 4% increase over first quarter 1998. The increase is due mainly to
growth in amortization of deferred acquisition costs (DAC). Interest
credited, other policyholder benefits and other operating expenses were
relatively flat compared to the year ago first quarter.
The growth in the Variable Annuities segment business and related
revenues is the primary reason for the increase in amortization of
deferred policy acquisition costs (DAC) which totaled $60.7 million and
$47.7 million in the first quarter of 1999 and 1998, respectively.
Federal income tax expense was $48.5 million and $47.7 million for the
first quarter of 1999 and 1998, respectively. These amounts represent
effective tax rates of 32.8% for the first quarter of 1999 and 34.4% in
1998.
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. Conversions of existing traditional life
policies to the new compliant system will continue through second
quarter 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.
12
<PAGE> 13
The Company's facilities in Columbus, Ohio have been inventoried,
assessed, and tested as being Year 2000 compliant. Systems supporting
the Company's infrastructure such as telecommunications, voice and
networks were renovated and will be brought into compliance before the
end of the second quarter 1999.
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.
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
the Company's variable annuity and life products and wholesale
producers to determine when they will be Year 2000 compliant. The
results are currently being gathered and analyzed.
In addition to the contingency plans developed for electronic
interfaces between the Company and its business partners, contingency
plans were also developed for wholesale producers who may not become
compliant before the end of 1999. Additional contingency plans will be
developed for mutual fund organizations during the second quarter 1999.
The Company has identified external risk scenarios, prioritized those
risks and is now in the process of developing contingency plans to
minimize the impact to the Company, customers and producers.
Contingency plan efforts are expected to be completed by the end of the
third quarter 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. The Company anticipates spending less than
$5 million on Year 2000 activities in 1999, and spent $2.4 million
during first quarter 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.
Recently Issued Accounting Standards
See note 2 to the unaudited consolidated financial statements for a
discussion of recently issued accounting standards.
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 brokerage firms, pension plan administrators and
financial institutions. Retail distributors are representatives of the
Company who market products directly to a customer base identified by
the Company and include exclusive sales representatives and Nationwide
Insurance Enterprise insurance agents.
13
<PAGE> 14
Statutory premiums and deposits by distribution channel for the first
quarter of 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- --------------------------
(in millions) AMOUNT % AMOUNT %
--------------------------------------------- ---------- ----- ---------- -----
<S> <C> <C> <C> <C>
WHOLESALE CHANNELS
Independent broker/dealers $ 862.9 25.3% $ 875.4 29.1%
National and regional brokerage firms 111.4 3.3 86.0 2.9
Financial institutions 520.2 15.2 449.3 15.0
Pension plan administrators 927.3 27.2 734.1 24.4
Life specialists 186.8 5.5 89.9 3.0
---------- ----- ---------- -----
Total wholesale channels 2,608.6 76.5 2,234.7 74.4
---------- ----- ---------- -----
RETAIL CHANNELS
Exclusive retail sales representatives 592.3 17.3 586.0 19.5
Nationwide agents 211.5 6.2 183.1 6.1
---------- ----- ---------- -----
Total retail channels 803.8 23.5 769.1 25.6
---------- ----- ---------- -----
Total external premiums and deposits 3,412.4 100.0% 3,003.8 100.0%
========== ===== ========== =====
Nationwide Insurance Enterprise employee
and agent benefit plans 66.4 59.8
---------- ----------
Total statutory premiums and deposits $ 3,478.8 $ 3,063.6
========== ==========
</TABLE>
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved sales growth of 14% in the first quarter of 1999
compared to the first quarter of 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 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.
14
<PAGE> 15
External statutory premiums and deposits by product for the first
quarter of 1999 and 1998 are summarized as follows.
<TABLE>
<CAPTION>
(in millions) 1999 1998
--------------------------------------------- ---------- ----------
<S> <C> <C>
The BEST of AMERICA(R) products:
Individual variable annuities $ 1,136.8 $ 1,120.0
Group variable annuities 901.8 702.1
Variable universal life insurance 90.5 67.5
Private label annuities 304.4 235.2
IRC Section 457 annuities 530.9 548.7
The NEA Valuebuilder annuities 37.0 37.3
Traditional/Universal life insurance 60.0 59.3
Bank-owned life insurance 86.6 75.2
Corporate-owned life insurance 100.1 14.7
Other 164.3 143.8
---------- ---------
$ 3,412.4 $ 3,003.8
========== =========
</TABLE>
BUSINESS SEGMENTS
The Company reports three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports certain
other revenue and expenses 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 income
tax expense for the Company's business segments for the first quarter
of 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
(in millions) 1999 1998
--------------------------------------------- ---------- ----------
<S> <C> <C>
Variable Annuities $ 66.2 $ 49.3
Fixed Annuities 42.8 45.0
Life Insurance 29.1 20.1
Corporate and Other 15.0 7.8
---------- ---------
$ 153.1 $ 122.2
========== =========
</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.
15
<PAGE> 16
The following table summarizes certain selected financial data for the
Variable Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
(in millions) 1999 1998
---------------------------------------------------- ---------- ----------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 143.5 $ 114.3
Benefits and expenses 77.3 65.0
---------- ---------
Operating income before federal income tax $ 66.2 $ 49.3
========== =========
OTHER DATA
Statutory premiums and deposits (1) $ 2,457.8 $ 2,289.0
Policy reserves as of period end $ 48,840.8 $39,666.7
Pre-tax operating income to average policy reserves 0.56% 0.54%
</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.
Variable annuity segment results reflect substantially increased asset
fee revenue partially offset by increases in DAC amortization and other
operating expenses. Asset fees increased to $135.6 million in the first
quarter of 1999, up 24% from $109.5 million in the same period a year
ago. The increase in asset fees is due to continued growth in variable
annuity policy reserve levels resulting from strong variable annuity
sales and market appreciation on investments underlying reserves.
Variable annuity policy reserves grew $2.42 billion during the first
quarter of 1999 reaching $48.84 billion as of March 31, 1999 and have
increased 23% compared to a year ago. Variable annuity sales increased
7% for the first quarter 1999, reaching $2.46 billion compared to $2.29
billion in the year ago quarter. Compared to fourth quarter 1998,
variable annuity sales increased 20%. Sales of 401(k) plans and private
label variable annuities led sales growth in first quarter 1999,
posting increases of 28% and 29%, respectively, compared to first
quarter 1998.
Favorable equity market conditions during the first quarter of 1999
also contributed significantly to the growth in variable annuity policy
reserves. Variable annuity policy reserves reflect market appreciation
of $1.28 billion during the first three months of 1999. Over the past
twelve months, variable annuity policy reserves have increased $4.27
billion as a result of market appreciation.
Amortization of DAC increased 34% to $35.4 million in first quarter
1999 compared to $26.4 million in first quarter 1998. Operating
expenses were $41.6 million in first quarter 1999, an increase of 11%
over first quarter 1998. The growth in DAC amortization and operating
expenses reflect the overall growth in the variable annuity business.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred basis.
Such contracts consist of single premium deferred annuities, flexible
premium deferred annuities and single premium immediate annuities. The
Fixed Annuities segment includes the fixed option under variable
annuity contracts.
16
<PAGE> 17
The following table summarizes certain selected financial data for the
Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
(in millions) 1999 1998
---------------------------------------------------- ------------ ------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 275.3 $ 277.2
Other 12.3 12.1
------------ ------------
287.6 289.3
------------ ------------
Benefits and expenses:
Interest credited to policyholder account balances 202.2 205.9
Other benefits and expenses 42.6 38.4
------------ ------------
244.8 244.3
------------ ------------
Operating income before federal income tax $ 42.8 $ 45.0
============ ============
OTHER DATA
Statutory premiums and deposits (1) $ 617.4 $ 498.1
Policy reserves as of period end $ 15,065.2 $ 14,229.1
Pre-tax operating income to average policy reserves 1.14% 1.27%
</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.
Fixed annuity segment results reflect a slight increase in interest
spread income attributable to growth in fixed annuity policy reserves
offset by lower interest margins. Interest spread is the differential
between net investment income and interest credited to policyholder
account balances. Interest spreads vary depending on crediting rates
offered by competitors, performance of the investment portfolio,
changes in market interest rates and other factors. The following table
depicts the interest spreads on general account policy reserves in the
Fixed Annuities segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net investment income 7.62% 8.01%
Interest credited 5.60 5.95
------------ ------------
2.02% 2.06%
============ ============
</TABLE>
The Company experienced an increase in mortgage loan and bond
prepayment fees in the first quarter of 1999 and such income accounted
for approximately 15 basis points of the interest spread compared to 9
basis points in first quarter 1998. The Company anticipates interest
spreads over the next several quarters to be 190 to 195 basis points,
excluding the impact of mortgage loan and bond prepayment income.
Fixed annuity policy reserves increased to $15.07 billion as of March
31, 1999 compared to $14.90 billion as of the end of 1998 and $14.23
billion a year ago.
17
<PAGE> 18
First quarter fixed annuity sales grew to $617.4 million in 1999
compared to $498.1 million in 1998. Most of the Company's fixed annuity
sales are premiums allocated to the fixed option of variable annuity
contracts. First quarter 1999 fixed annuity sales include $521.7
million in premiums allocated to the fixed option under a variable
annuity contract, compared to $402.4 million in first quarter 1998. The
increase is attributable to a first-year bonus interest rate program in
effect during the first quarter of 1999.
The increase in other benefits and expenses in first quarter 1999
compared to a year ago is attributable to growth in business.
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.
The following table summarizes certain selected financial data for the
Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
(in millions) 1999 1998
---------------------------------------------------- ---------- ----------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 151.1 $ 128.5
Benefits and expenses 122.0 107.3
---------- ----------
Operating income before federal income tax $ 29.1 $ 21.2
========== ========
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 60.0 $ 59.3
Variable universal life insurance $ 90.5 $ 67.5
Corporate-owned life insurance $ 186.7 $ 89.9
Policy reserves as of period end:
Traditional and universal life insurance $ 2,459.4 $ 2,389.2
Variable universal life insurance $ 1,363.3 $ 1,031.1
Corporate-owned life insurance $ 1,097.3 $ 316.6
</TABLE>
----------
(1) Statutory data have been derived from the Quarterly Statements of
the Company's life insurance subsidiaries, as filed with insurance
regulatory authorities and prepared in accordance with statutory
accounting practices.
Life Insurance segment results reflect increased policy charge revenue
driven by growth in investment life insurance in force and policy
reserves partially offset by higher expense levels.
The increase in Life Insurance segment earnings is attributable to
strong growth in investment life insurance products, which include
individual variable universal life insurance and corporate-owned life
insurance, where the Company has aggressively expanded its distribution
capabilities. Investment life premiums and deposits increased from
$157.4 million in first quarter 1998 to $277.2 million in first quarter
1999. As a result of the sales growth and high persistency, revenues
from investment life products increased to $51.8 million in first
quarter 1999 from $27.2 million in first quarter 1998. The Company
believes there are growth opportunities for investment life products
and in 1999 will be introducing new products and expanding distribution
to new outlets to further penetrate these markets.
18
<PAGE> 19
Interest credited to policyholders increased $5.8 million in first
quarter 1999 reaching $30.6 million compared to $24.8 million in the
year ago first quarter. Increased corporate-owned life insurance
business accounted for most of the increases. Corporate investment
fixed life insurance reserves tripled to $920.0 million as of March 31,
1999 compared to $304.2 million a year ago.
Traditional and universal life insurance benefits increased $4.9
million to $38.4 million in first quarter 1999 compared to the same
period a year ago. Operating expenses remained relatively unchanged
during first quarters 1999 and 1998.
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
MARCH 31,
--------------------------------
(in millions) 1999 1998
---------------------------------------------------- ----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 60.3 $ 60.2
Benefits and expenses 45.3 52.4
----------- -----------
Operating income before federal income tax (1) $ 15.0 $ 7.8
=========== ===========
</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 Enterprise employee
and agent benefit plans.
In addition to the operating revenues previously presented, the Company
also reports realized gains and losses on investments in the Corporate
and Other segment. The Company realized net investment (losses) gains
of $(5.4) million and $16.6 million during the first quarter of 1999
and 1998, respectively.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted due to reduced disclosure format.
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.
19
<PAGE> 20
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 Nationwide Life and American Century. The remaining
claims against Nationwide Life allege securities fraud, common law
fraud, civil conspiracy, and breach of contract. On December 2, 1998,
the district court issued an order denying plaintiffs' motion for class
certification. On December 10, 1998, the district court stayed the
lawsuit pending plaintiffs' petition to the federal appeals court for
interlocutory review of the order denying class certification. On March
26, 1999, the appeals court denied plaintiffs' petition for
interlocutory review of the order. On April 28, 1999, the court denied
plaintiffs' motion for reconsideration of the denial of interlocutory
review. Nationwide Life intends to defend the case 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).
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 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.
ITEM 2 CHANGES IN SECURITIES
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month
period ended March 31, 1999.
20
<PAGE> 21
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: May 14, 1999 /s/Mark R. Thresher
---------------------------------------------
Mark R. Thresher, Vice President - Controller
(Chief Accounting Officer)
21
<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
March 31, 1999, and is qualified in its entirety by reference to such unaudited
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 14,094
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 124
<MORTGAGE> 5,365
<REAL-ESTATE> 244
<TOTAL-INVEST> 20,701
<CASH> 21
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,143
<TOTAL-ASSETS> 77,032
<POLICY-LOSSES> 19,901
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,780
<TOTAL-LIABILITY-AND-EQUITY> 77,032
54
<INVESTMENT-INCOME> 363
<INVESTMENT-GAINS> (5)
<OTHER-INCOME> 20
<BENEFITS> 314
<UNDERWRITING-AMORTIZATION> 61
<UNDERWRITING-OTHER> 104
<INCOME-PRETAX> 148
<INCOME-TAX> 49
<INCOME-CONTINUING> 99
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
