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As filed with the Securities and Exchange Commission.
'33 Act File No. 33-58997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 5
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
63
(Primary Standard Industrial Classification Code Number)
31-4156830
(IRS Employer Identification Number)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43216-6609
(Principal Executive Offices of Registrant) (Zip Code)
DENNIS W. CLICK, SECRETARY, ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43216-6609
TELEPHONE: (614) 249-7111
(Name, address, zip code, telephone number of agent for service)
Approximate date of proposed sale to the public: May 27, 1999
If any securities registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [ X ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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NATIONWIDE LIFE INSURANCE COMPANY
Cross Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
<TABLE>
<CAPTION>
Caption in
Form S-1 Item No. and Caption Prospectus
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus..........................................................Outside Front Cover
2. Inside Front and Outside Back Cover
Table of Contents...........................................................................Inside Front Cover
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.........................................................Summary Information
(Not applicable with respect to
ratio of earnings to fixed charges)
4. Use of Proceeds....................................................................................Investments
5. Determination of Offering Price.................................................................Not Applicable
6. Dilution .......................................................................................Not Applicable
7. Selling Security Holders........................................................................Not Applicable
8. Plan of Distribution................................................................Variable Annuity Contracts
and the Distribution of GTOs
9. Description of Securities to be Registered..................................................Description of the
Guaranteed Term Options
10. Interests of Named Experts and Counsel..........................................................Not Applicable
11. Information with Respect to Registrant..............................................................Nationwide
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..................................................Not Applicable
</TABLE>
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GUARANTEED TERM OPTIONS
Under Variable Annuity Contracts Issued by
NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43216-6609
Telephone: 1-800-238-3035
The Date of this Prospectus is May 27, 1999
THIS PROSPECTUS MUST BE READ ALONG WITH THE APPROPRIATE VARIABLE ANNUITY
PROSPECTUS AND THE PROSPECTUSES DESCRIBING THE UNDERLYING MUTUAL FUND INVESTMENT
OPTIONS. ALL OF THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND MAINTAINED FOR
FUTURE REFERENCE.
This prospectus describes investment options referred to as Guaranteed Term
Options ("GTOs"), offered by Nationwide Life Insurance Company ("Nationwide").
The GTOs are available under certain variable annuity contracts issued by
Nationwide. Generally, the variable annuity contracts offered by Nationwide
provide an array of underlying mutual fund investment options, to which the
contract owner allocates his or her purchase payments. The GTOs are separate,
guaranteed interest investment options available under variable annuity
contracts.
GTOs provide for guaranteed interest rates to be credited over specified
durations (referred to as "Guaranteed Terms"). Three (3), five (5), seven (7)
and ten (10) year GTOs are available. The Specified Interest Rate is guaranteed
to be credited for the duration of the Guaranteed Term on a daily basis,
resulting in a guaranteed annual effective yield unless a withdrawal from the
GTO occurs for any reason prior to the expiration of the Guaranteed Term.
Different interest rates apply to each GTO and are determined by Nationwide in
its sole discretion.
GTOs will produce a guaranteed annual effective yield at the Specified Interest
Rate SO LONG AS AMOUNTS INVESTED ARE NEITHER WITHDRAWN NOR TRANSFERRED PRIOR TO
THE END OF THE GUARANTEED TERM. IN THE EVENT OF A TRANSFER FOR ANY REASON PRIOR
TO THE EXPIRATION OF THE GUARANTEED TERM, THE AMOUNT TRANSFERRED WILL BE SUBJECT
TO A MARKET VALUE ADJUSTMENT.
Variable annuity prospectuses in which the GTOs are offered describe certain
charges and deductions which may apply to the GTOs. A more detailed discussion
of these charges and deductions, as they relate to particular variable annuity
contracts, is contained in the variable annuity prospectuses.
The minimum amount that may be allocated to a GTO is $1,000.
Nationwide established the Nationwide Multiple Maturity Separate Account,
pursuant to Ohio law, to aid in reserving and accounting for GTO obligations.
However, all of the general assets of Nationwide are available for the purpose
of meeting the guarantees of the GTOs. Amounts allocated to the GTOs are
generally invested in fixed income investments purchased by Nationwide. Variable
annuity Contract Owners allocating amounts to a GTO have no claim against any
assets of Nationwide, including assets held in the Nationwide Multiple Maturity
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE GTOS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATE
JURISDICTIONS AND, ACCORDINGLY, REPRESENTATIONS MADE IN THIS PROSPECTUS DO NOT
CONSTITUTE AN OFFERING IN SUCH JURISDICTIONS.
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TABLE OF CONTENTS
GLOSSARY.............................................. 4
INFORMATION ABOUT THE GTOS............................ 5
1. General...................................... 5
2. The Specified Interest Rate.................. 6
3. The Investment Period........................ 6
4. Guaranteed Terms............................. 7
5. GTOs at Maturity............................. 7
6. The Market Value Adjustment ................. 7
A. General Information Regarding the
Market Value Adjustment...................... 7
B. Constant Maturity Treasury Rates........ 8
C. The Market Value Adjustment
Formula...................................... 8
7. Contract Charges............................. 9
8. GTOs at Annuitization........................10
INVESTMENTS...........................................10
CONTRACTS AND THE DISTRIBUTION
(MARKETING) OF THE GTOS...............................10
NATIONWIDE LIFE INSURANCE COMPANY.....................10
1. Business.....................................10
A. Organization............................10
B. Description of the Business.............11
C. Product Segments........................11
D. Regulation..............................12
E. Competition.............................13
F. Employees...............................13
2. Properties...................................13
3. Legal Proceedings............................13
4. Market for Nationwide Life Insurance
Company's Common Stock and
Related Shareholder Matters..................14
5. Consolidated Financial Statements and
Supplementary Data...........................14
6. Selected Financial Data......................14
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................16
Introduction.................................16
A. Results of Operations....................16
(i) Revenues..........................17
(ii) Benefits and Expenses.............18
(iii) Year 2000 Compliance Issues.......18
(iv) Recently Issued Accounting
Standards.........................19
(v) Statutory Premiums and
Deposits..........................19
B. Business Segments .......................21
(i) Variable Annuities................22
(ii) Fixed Annuities...................23
(iii) Life Insurance....................25
(iv) Corporate and Other...............27
C. Quantitative and Qualitative Disclosures
About Market Risk............................27
(i) Market Risk Sensitive Financial
Instruments.......................27
(ii) Interest Rate Risk................27
(iii) Asset/Liability Management
Strategies to Manage Interest
Rate Risk.........................28
(iv) Characteristics of Interest Rate
Financial Instruments.............29
(v) Equity Market Risk................30
8. Directors and Executive Officers.............31
9. Executive Compensation.......................36
A. Compensation............................36
B. Executive Incentive Plans...............37
C. Management Incentive Plan...............37
D. Performance Incentive Plan..............38
E. Sustained Performance Incentive Plan....38
F. Deferred Compensation Program...........38
G. Savings Plan............................39
H. Supplemental Defined Contribution
Plan....................................39
I. Long-Term Equity Compensation Plan......40
J. Stock Options and Stock Appreciation
Rights..................................41
K. Options/SARs Exercises and Holdings.....42
L. Pension Plans...........................42
(i) Retirement Plan...................43
(ii) Excess and Supplemental Plans.....43
10. Compensation Committee Joint Report on
Executive Compensation.......................44
A. Introduction............................44
B. Compensation Philosophy and Objectives..45
C. Elements of 1998 Executive
Compensation............................45
D. Base Salaries...........................45
E. Annual Incentive Compensation...........46
F. Long-Term Incentive Compensation........46
(i) Executive Incentive Plan..........46
(ii) Long-Term Equity Compensation
Plan..............................47
G. Compensation of the Chief Executive
Officer.................................47
H. Policy on Deductibility of
Compensation............................48
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(i) Nationwide Life Insurance
Company Compensation Committee...48
11. Exhibits, Financial Statements, Schedules
and Reports.................................49
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GLOSSARY
CONSTANT MATURITY TREASURY RATE- The rate of interest used in the Market Value
Formula. Constant Maturity Treasury Rates for maturity durations of 1, 2, 3, 5,
7 and 10 years are declared regularly by the Federal Reserve Board.
GUARANTEED TERM- The period corresponding to a 3, 5, 7 or 10 year GTO. Amounts
allocated to a GTO will be credited with a Specified Interest Rate over the
corresponding guaranteed term, so long as such amounts are not distributed from
the GTO prior to the Maturity Date. Because every guaranteed term will end on
the final day of a calendar quarter, the guaranteed term may last for up to 3
months beyond the 3, 5, 7 or 10 year anniversary of the allocation to the GTO.
GUARANTEED TERM OPTION ("GTO")- An investment option offered under the Contracts
which provides a Specified Interest Rate over Guaranteed Terms, so long as
certain conditions are met.
MARKET VALUE ADJUSTMENT- The upward or downward adjustment in value of amounts
allocated to a GTO which are withdrawn from the GTO for any reason prior to the
Maturity Period.
MATURITY DATE- The date on which a GTO matures. The date will be the last day of
the calendar quarter during the third, fifth, seventh or tenth anniversary on
which amounts are allocated to a 3, 5, 7 or 10 year GTO, respectively.
MATURITY PERIOD- The period during which the value of amounts allocated under a
GTO may be distributed without any Market Value Adjustment. The Maturity Period
will begin on the day following the Maturity Date and will end on the thirtieth
day after the Maturity Date.
SPECIFIED INTEREST RATE- The Specified Interest Rate is the interest rate
guaranteed to be credited to amounts allocated to a GTO so long as the
allocations are not distributed for any reason prior to the Maturity Period.
SPECIFIED VALUE- The amount of a GTO allocation, plus interest accrued at the
Specified Interest Rate minus surrenders, transfers and any other amounts
distributed. The Specified Value is subject to a Market Value Adjustment at all
times other than during the Maturity Period.
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INFORMATION ABOUT THE GTOS
1. GENERAL
GTOs are guaranteed interest rate investment options available under
certain variable annuity contracts issued by Nationwide. There are four
different GTOs available: a 3 year GTO, a 5 year GTO; a 7 year GTO and a 10
year GTO. A GTO may be purchased through purchase payments made under those
variable annuity contracts which offer GTOs, or through transfers form
other investment options also available under such contracts. Not all of
the variable annuity contracts issued by Nationwide offer GTOs, nor are
GTOs available in every state jurisdiction. If GTOs are available under a
variable annuity, the prospectus for the variable annuity and this
prospectus must be read together.
The guarantees associated with the GTOs are borne exclusively by and are
legal obligations of Nationwide. A separate account, authorized and created
in accordance with of Ohio law, was established for the sole purpose of
reserving and accounting for assets associated with the GTOs. The assets of
the separate account are owned by Nationwide. Contract owners with GTOs
have no claim against the assets of the separate account, maintain no
interest in the separate account and do not participate in the investment
experience of the separate account.
GTOs provide for a guaranteed interest rate (the Specified Interest Rate),
to be credited as long as any amount allocated to the GTO is not
distributed for any reason prior to the Maturity Date of the GTO. Each GTO
has a Guarantee Term. Generally, a 3 year GTO offers guaranteed interest at
a Specified Interest Rate over 3 years, a 5 year GTO offers guaranteed
interest at a Specified Interest Rate over 5 years, and so on. Because
every GTO will mature on the last day of a calendar quarter, the Guaranteed
Term of a GTO may extend for up to 3 months beyond the 3, 5, 7 or 10 year
anniversary of allocations made to 3, 5, 7 or 10 year GTOs, respectively.
Amounts allocated to a GTO will be credited at the Specified Interest Rate
for the duration of the Guaranteed Term associated with the GTO. Specified
Interest Rates for each GTO are declared periodically at the sole
discretion of Nationwide. The Investment Period is the period of time
during which declared Specified Interest Rates will be effective for new
allocations. Investment Periods will typically last for one month, but may
be longer or shorter depending on interest rate fluctuations in financial
markets. During any particular Investment Period, any transfer allocation
or new purchase payment allocation to a GTO will earn the Specified
Interest Rate effective for that Investment Period for the duration of the
Guaranteed Term of the GTO (see "Specified Interest Rates and Guaranteed
Terms").
The Specified Interest Rate will be credited daily to amounts allocated to
a GTO, providing an annual effective yield. Although the Specified Interest
Rate will continue to be credited as long as allocations remain in the GTO
prior to the Maturity Date, surrenders, transfers or withdrawals for any
other reason will be subject to a Market Value Adjustment.
The Market Value Adjustment is accomplished through the use of the Market
Value Adjustment Factor, derived by the Market Value Adjustment Formula,
which is multiplied by that part of the Specified Value being withdrawn or
transferred, resulting in either an increase or a decrease in the amount of
the withdrawal or transfer. The Market Value Adjustment formula reflects
the relationship between three factors:
(1) the Constant Maturity Treasury Rate for the period coinciding with the
Guaranteed Term of the GTO at investment;
(2) the Constant Maturity Treasury Rate for the number of years remaining
in a Guaranteed Term when the surrender, transfer or other withdrawal
from the GTO occurs; and
(3) the number of days remaining in the Guaranteed Term of the GTO.
Generally, the Market Value Adjustment formula approximates the
relationship between prevailing interest rates at the time of the GTO
allocation, prevailing interest rates at time of transfer or surrender and
the amount of time remaining in a Guaranteed Term (see "The Market Value
Adjustment").
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Variable annuity contract owners having GTOs with Maturity Dates coinciding
with the end of the calendar quarter will be notified of the impending
expiration of the GTO at least 15 days and at most 30 days prior to the end
of each calendar quarter. Contract owners will then have the option of
directing the withdrawal or transfer of the GTO, during the Maturity
Period, without application of any Market Value Adjustment. However, any
transfers from the GTO during this period may be subject to a contingent
deferred sales charge, assessed by the variable annuity contract.
If no direction is received by the thirtieth day following the Maturity
Date, amounts in the GTO will be automatically transferred (with no Market
Value Adjustment) to the Money Market sub-account available in the variable
annuity. For the period commencing with the first day after the Maturity
Date and ending on the thirtieth day following the Maturity Date, the GTO
will be credited with the same Specified Interest Rate in effect before the
Maturity Date (see "GTOs at Maturity").
The minimum amount of any allocation to a GTO is $1,000.
Under certain rare circumstances, when volatility in financial markets
compromises the ability of Nationwide to process allocations to or from the
GTOs in an orderly manner, Nationwide may temporarily suspend the right to
make additional allocations to the GTOs and/or to effect transfers or
withdrawals from the GTOs. Nationwide anticipates invoking this suspension
only when acceptance of additional allocations or the processing of
withdrawals or transfers from GTOs may not be executed by Nationwide in a
manner consistent with its obligations to variable annuity contract holders
with existing or prospective interests in one or more GTOs. Under no
circumstances, however, will Nationwide limit a variable annuity contract
owner's right to make at least one allocation to a GTO, and one transfer or
withdrawal from a GTO, in any calendar year. All contract owners will be
promptly notified of Nationwide's determination to invoke any suspension in
the right to make allocations to, or to effect withdrawals or transfers
from, the GTOs. In addition, the variable annuity contracts which offer
GTOs may impose certain restrictions on the transferability of invested
assets within the variable annuity contract. The variable annuity
prospectus should be consulted with regard to specific transfer limitation
provisions.
2. THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by
Nationwide to be credited to allocations made to the GTOs for the
corresponding Guaranteed Term, so long as no portion of the allocation is
distributed for any reason prior to the Maturity Date. Different Specified
Interest Rates may be established for the 4 different GTOs.
Generally, Nationwide will declare new Specified Interest Rates monthly;
however, depending on interest rate fluctuations, declarations of new
Specified Interest Rates may occur more or less frequently. Nationwide
observes no specific method in establishing the Specified Interest Rates.
However, Nationwide will attempt to declare Specified Interest Rates which
are related to interest rates associated with fixed-income investments
available at the time and having durations and cash flow attributes
compatible with the Guaranteed Terms of the GTOs. In addition, the
establishment of Specified Interest Rates may be influenced by other
factors, including competitive considerations, administrative costs and
general economic trends. Nationwide has no way of predicting what Specified
Interest Rates may be declared in the future and there is no minimum
Specified Interest Rate for any of the GTOs.
3. THE INVESTMENT PERIOD
The Investment Period is the period of time during which a particular
Specified Interest Rate is in effect for new allocations to the various
GTOs. All allocations made to a GTO during an Investment Period are
credited with the Specified Interest Rate in effect at the time of
allocation. An Investment Period ends when a new Specified Interest Rate
relative to the applicable GTO is declared. Subsequent declarations of new
Specified Interest Rates have no effect on allocations made to GTOs during
prior Investment Periods. Prior allocations to the GTO will be credited
with the Specified Interest Rate in effect when the allocation was made.
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The Specified Interest Rate is credited to allocations made to GTOs on a
daily basis, resulting in an annual effective yield, guaranteed by
Nationwide, unless amounts are withdrawn or transferred from the GTO for
any reason prior to the Maturity Date. The Specified Interest Rate will be
credited for the entire Guaranteed Term associated with the GTO. If amounts
are withdrawn or transferred from the GTO for any reason prior to the
Maturity Date, a Market Value Adjustment will be applied to the amount
withdrawn or transferred.
Information concerning the Specified Interest Rates in effect for the
various GTOs can be obtained by calling the following toll free phone
number: 1-800-238-3035.
4. GUARANTEED TERMS
The Guaranteed Term is the period of time corresponding with the selected
GTO for which the Specified Interest Rate is guaranteed to be in effect, so
long as the amounts allocated remain in the GTO until the Maturity Date. A
Guaranteed Term always expires on a Maturity Date which will be the last
day of a calendar quarter, which may last up to 3 months past the
anniversary date of the allocation to the GTO.
For example, if an allocation is made to a 10 year GTO on August 1, 1999,
the Specified Interest Rate for that GTO will be credited until September
30, 2009; the Guaranteed Term will begin on August 1, 1999 and end on
September 30, 2009.
Guaranteed Terms will be exactly 3, 5, 7 or 10 years only when an
allocation to a GTO occurs on the first day of a calendar quarter.
5. GTOS AT MATURITY
Nationwide will send notice to variable annuity contract owners of
impending Maturity Dates (always the last day of a calendar quarter) at
least fifteen days and at most thirty days prior to the end of a Guaranteed
Term. The notice will include the projected value of the GTO on the
Maturity Date and will also specify options that variable annuity contract
owners have with respect to the maturing GTO.
Once the GTO matures, variable annuity contract owners may:
(1) surrender the GTO, in part or in whole, without a Market Value
Adjustment during the thirty day period following the Maturity Date;
however, surrender charges under the variable annuity contract, if
applicable, will be assessed;
(2) Wholly or partially transfer the GTO, without a Market Value
Adjustment, to any other investment option under the variable annuity
contract, including any of the mutual fund sub-accounts, or another
GTO of the same or different duration during the thirty day period
following the Maturity Date. A confirmation of any such transfer will
be sent immediately after the transfer is processed; or
(3) Elect not to transfer or surrender all or a portion of the GTO, in
which case, the GTO will be automatically transferred to the Money
Market sub-account of the variable annuity contract at the end of the
thirty day period following the Maturity Date. A confirmation will be
sent immediately after the automatic transfer is executed.
The GTO will continue to be credited with the Specified Interest Rate in
effect before the Maturity Date during the thirty day period following the
Maturity Date, and prior to any of the transactions set forth in (1), (2),
or (3) above.
6. THE MARKET VALUE ADJUSTMENT
A. GENERAL INFORMATION REGARDING THE MARKET VALUE ADJUSTMENT
GTOs which are surrendered, transferred or distributed for any reason
prior to the Maturity Date for the GTO, will be subject to a Market
Value Adjustment. The Market Value Adjustment is determined by the
multiplication of a Market Value Adjustment Factor (arrived at by
calculation of the Market Value Adjustment Formula) by the Specified
Value, or the portion of the Specified Value being withdrawn. The
Specified Value is the amount of the allocation to the GTO, plus
interest accrued at the Specified Interest Rate minus prior
distributions. The Market Value Adjustment
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may either increase or decrease the amount of the distribution.
The Market Value Adjustment is intended to approximate, without
duplicating, Nationwide's experience when it liquidates assets in order
to satisfy contractual obligations. Such obligations arise when
variable annuity contract owners make withdrawals or transfers, or when
the operation of the variable annuity contract requires a distribution,
such as a death benefit. When liquidating assets, Nationwide may
realize either a gain or a loss.
If prevailing interest rates are higher than the Specified Interest
Rate in effect at the time of the GTO allocation, Nationwide will
realize a loss when it liquidates assets in order to process a
surrender, death benefit or transfer; and therefore, application of the
Market Value Adjustment under such circumstances will decrease the
amount of the distribution.
Conversely, if prevailing interest rates are lower than the Specified
Interest Rate in effect at the time of the GTO allocation, Nationwide
will realize a gain when it liquidates assets in order to process a
surrender, death benefit or transfer; therefore, application of the
Market Value Adjustment under such circumstances will increase the
amount of the distribution.
Nationwide measures the relationship between prevailing interest rates
and the Specified Interest Rates it declares through the Market Value
Adjustment Formula, and relies upon Constant Maturity Treasury Rates to
represent both prevailing interest rates and Specified Interest Rates.
The Market Value Adjustment Formula and the Constant Maturity Treasury
Rates are described more fully below.
B. CONSTANT MATURITY TREASURY RATES
The Market Value Adjustment Formula for deriving the Market Value
Adjustment Factor is based on Constant Maturity Treasury Rates which
are declared by the Federal Reserve Board on a regular basis.
Nationwide utilizes Constant Maturity Treasury Rates in its Market
Value Adjustment Formula because they represent a readily available and
consistently reliable interest rate benchmark in financial markets,
which can be relied upon to reflect the relationship between Specified
Interest Rates declared by Nationwide and the prospective interest rate
fluctuations.
Constant Maturity Treasury Rates for 1, 2, 3, 5, 7 and 10 years are
published by the Federal Reserve Board on a regular basis. To the
extent that the Market Value Adjustment formula shown below requires a
rate associated with a maturity not published (a 4, 6, 8 or 9 year
maturity), Nationwide will calculate such rates based on the
relationship of the published rates. For example, if the published 3
year rate is 6% and the published 5 year rate is 6.50%, the 4 year rate
will be 6.25%.
C. THE MARKET VALUE ADJUSTMENT FORMULA
The Market Value Adjustment Formula is utilized when a distribution is
made from a GTO during the Guaranteed Term. The Market Value Adjustment
is a calculation expressing the relationship between three factors:
(1) the Constant Maturity Treasury Rate for the period of time
coinciding with the Guaranteed Term of the GTO;
(2) the Constant Maturity Treasury Rate for a period coinciding
with the time remaining in the Guaranteed Term of a GTO when a
distribution giving rise to a Market Value Adjustment occurs;
and
(3) the number of days remaining in the Guaranteed Term of the GTO.
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The formula for determining the Market Value Adjustment Factor is
--- --- t
| (1 + a) |
| ------------------------ |
| (1 + b + .0025) |
--- ---
Where:
a = the Constant Maturity Treasury Rate for a period equivalent to
the Guaranteed Term at the time of deposit in the GTO;
b = the Constant Maturity Treasury Rate at the time of distribution
for a period of time equivalent to the time remaining in the
Guaranteed Term. In determining the number of years to maturity,
any partial year will be counted as a full year, unless this
would cause the number of years to exceed the Guaranteed Term;
and
t = the number of days until the Maturity Date, divided by 365.25.
In the case of "a" above, the Constant Maturity Treasury Rate
utilized will be the Constant Maturity Treasury Rate declared on
Fridays by the Federal Reserve Board, and placed in effect by
Nationwide on the Wednesday immediately preceding the Investment
Period during which the allocation to the GTO was made.
In the case of "b" above, the Constant Maturity Treasury Rate
utilized will be the Constant Maturity Treasury Rate declared on
Fridays by the Federal Reserve Board, and placed in effect by
Nationwide on the Wednesday immediately preceding the withdrawal,
transfer or other distribution giving rise to the Market Value
Adjustment.
The Market Value Adjustment Factor will be equal to 1 during the Investment
Period.
The Market Value Adjustment Formula shown above also accounts for some of
the administrative and processing expenses incurred when fixed-interest
investments are liquidated. This is represented in the addition of .0025 in
the Market Value Adjustment Formula.
The result of the Market Value Adjustment Formula shown above is the Market
Value Adjustment Factor. The Market Value Adjustment Factor is the market
value multiplied by the specified value, or that portion of the specified
value being distributed from a GTO in order to effect a Market Value
Adjustment. The Market Value Adjustment Factor will either be greater, less
than or equal to 1 and will be multiplied by the Specified Value or that
portion of the Specified Value being withdrawn, from the GTO for any
reason. If the result is greater than 1, a gain will be realized by the
variable annuity contract owner; if less than 1, a loss will be realized.
If the Market Value Adjustment Factor is exactly 1, no gain or loss will be
realized.
If the Federal Reserve Board halts publication of Constant Maturity
Treasury Rates, or if, for any other reason, Constant Maturity Treasury
Rates are not available, Nationwide will use appropriate rates based on
treasury bond yields.
Examples of how to calculate Market Value Adjustments are provided in the
Appendix.
7. CONTRACT CHARGES.
The variable annuity contracts under which GTOs are made available have
various fees and charges, some of which may be assessed against allocations
made to GTOs.
Contingent deferred sales charges, if applicable, will be assessed against
full or partial surrenders from the GTOs. If a surrender occurs prior to
the Maturity Date for a particular GTO, the amount surrendered is subject
to a Market Value Adjustment in addition to the contingent deferred sales
charges. The variable annuity prospectus fully describes the contingent
deferred sales charges. Please refer to the variable annuity prospectus for
complete details regarding the contingent deferred sales charges under the
variable annuity contracts.
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Mortality and expense risk charges, administrative charges and contract
maintenance charges which may be assessed under variable annuity contracts
are not assessed against any allocation to a GTO. Such charges apply only
to the underlying mutual fund options.
8. GTOs AT ANNUITIZATION
GTOs are not available as investment options if the variable annuity
contract is annuitized. If a variable annuity contract is annuitized while
a GTO is in effect, and prior to the Maturity Date of the GTO, a Market
Value Adjustment will apply to amounts transferred to other investment
options under the variable annuity contract which may be used during
annuitization.
INVESTMENTS
Nationwide intends to invest GTO allocations received in high quality, fixed
interest investments (investment grade bonds, mortgages, and collateralized
mortgage obligations) in the same manner as Nationwide invests its general
account assets. Nationwide takes into account the various maturity durations of
the GTOs (3, 5, 7 and 10 years) and anticipated cash-flow requirements when
making investments. Nationwide is not obligated to invest GTO allocations in
accordance with any particular investment objective, but will generally adhere
to the overall investing philosophy of Nationwide. The Specified Interest Rates
declared by Nationwide for the various GTOs will not necessarily correspond to
the performance of the nonunitized separate account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOs
The GTOs are available only as investment options under certain variable annuity
contracts issued by Nationwide. The appropriate variable annuity prospectus and
Statement of Additional Information should be consulted for information
regarding the distribution of the variable annuity contracts.
NATIONWIDE LIFE INSURANCE COMPANY
1. BUSINESS
A. ORGANIZATION
Nationwide Life Insurance Company ("Nationwide") is an Ohio stock legal reserve
life insurance company incorporated in 1929. Nationwide offers a variety of
variable and fixed annuities, and life insurance products.
Prior to January 27, 1997, Nationwide was wholly-owned by Nationwide
Corporation. On that date, Nationwide Corporation contributed the outstanding
shares of Nationwide's common stock to Nationwide Financial Services, Inc., a
holding company formed by Nationwide Corporation in November 1996 for Nationwide
and other companies within the Nationwide group that offer or distribute
long-term savings and retirement products. On March 11, 1997, Nationwide
Financial Services completed an initial public offering of its Class A common
stock.
During 1996 and 1997, Nationwide Corporation and Nationwide Financial Services
completed certain transactions in anticipation of the initial public offering
that focused the business of Nationwide Financial Services on long-term savings
and retirement products. On September 24, 1996, Nationwide declared a dividend
payable to Nationwide Corporation on January 1, 1997 consisting of the
outstanding shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings and retirement products. In addition, during 1996,
Nationwide entered into two reinsurance agreements whereby all of Nationwide's
accident and health and group life insurance business was ceded to two
affiliates effective January 1, 1996. These subsidiaries, Employers Life
Insurance Company of Wausau, National Casualty Company and West Coast Life
Insurance Company, through December 31, 1996, and all accident and health and
group life insurance business have been accounted for as discontinued
operations. Additionally, Nationwide paid $900.0 million of dividends, $50.0
million to Nationwide Corporation on December 31, 1996 and $850.0 million to
Nationwide Financial Services, which then made an equivalent dividend to
Nationwide Corporation, on February 24, 1997.
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<PAGE> 13
Nationwide Financial Services contributed $836.8 million to the capital of
Nationwide during March 1997.
Wholly-owned subsidiaries of Nationwide as of December 31, 1998 include
Nationwide Life and Annuity Insurance Company, Nationwide Advisory Services,
Inc., Nationwide Investment Services Corporation and NWE, Inc.
Nationwide is a member of the Nationwide Insurance Enterprise, which consists of
Nationwide Mutual Insurance Company and all of its subsidiaries and affiliates.
Nationwide Life and Annuity Company offers various forms of variable life
insurance products, and fixed and variable annuity products. Nationwide Advisory
Services. Inc. is a registered broker-dealer providing investment management and
administration services. Nationwide Investment Services Corporation, contributed
by Nationwide Corporation on April 5, 1996, is a registered broker-dealer doing
business solely in the deferred compensation market and acts as an investment
adviser. NWE, Inc. was formed by Nationwide to hold special investments.
B. DESCRIPTION OF THE BUSINESS
Nationwide is a leading provider of long-term savings and retirement products.
Nationwide offers variable annuities, fixed annuities and life insurance as well
as investment management services, pension products and administrative services.
By developing and offering a wide variety of products, Nationwide believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. Nationwide markets its products through a broad
spectrum of wholesale and retail distribution channels, including independent
broker/dealers, national and regional brokerage firms, pension plan
administrators, financial institutions, exclusive sales representatives and
Nationwide insurance agents.
Nationwide is one of the leaders in the development and sale of variable
annuities. For the year ended December 31, 1998, Nationwide was the third
largest writer of individual variable annuity contracts in the United States
based on sales, according to The Variable Annuity Research & Data Service. Its
principal annuity series, The BEST of AMERICA(R), allows the customer to choose
multiple investment options, including mutual funds managed by premier mutual
fund managers.
Nationwide has grown substantially in recent years as a result of its long-term
investment in developing the distribution channels necessary to reach its target
customers and the products required to meet the demands of these customers.
Nationwide believes its growth has been further enhanced by favorable
demographic trends, the growing tendency of Americans to supplement traditional
sources of retirement income with self-directed investments, such as products
offered by Nationwide, and the performance of the financial markets,
particularly the U.S. stock markets, in recent years.
C. PRODUCT SEGMENTS
Nationwide has three product segments: Variable Annuities, Fixed Annuities and
Life Insurance. In addition, Nationwide 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 (other than the portion allocated to the Variable Annuities
and Life Insurance segments) and revenues and expenses related to group annuity
contracts sold to Nationwide Insurance Enterprise employee benefits plans in a
Corporate and Other segment.
The Variable Annuities segment, which accounted for $218.4 million (or 41%) of
Nationwide's operating income before federal income tax expense for 1998,
consists of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by independent investment managers and
Nationwide, with investment returns accumulating on a tax-deferred basis.
The Fixed Annuities segment, which accounted for $175.3 million (or 33%) of
Nationwide's operating income before federal income tax expense for 1998,
consists of annuity contracts that generate a return for the customer at a
specified interest rate, fixed for a prescribed period, with returns
accumulating on a tax-deferred basis. Such contracts consist of single premium
deferred annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment also includes the fixed option
under Nationwide's variable annuity contracts, which accounted for 81%
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<PAGE> 14
of Nationwide's fixed annuity sales in 1998 and 75% of Nationwide's fixed
annuity policy reserves as of December 31, 1998. During 1998, the average
crediting rates on contracts (including the fixed option under Nationwide's
variable annuity contracts) in the Fixed Annuities segment was 5.95%.
Substantially all of Nationwide's crediting rates on its fixed annuity contracts
are guaranteed for a period not exceeding 15 months.
The Life Insurance segment, which accounted for $94.8 million (or 18%) of
Nationwide's operating income before federal income tax expense for 1998, is
composed of a wide range of variable universal life insurance, whole life
insurance, universal life insurance, term life insurance and corporate-owned
life insurance products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis.
The Corporate and Other segment accounted for $40.2 million (or 8%) of
Nationwide's operating income (which excludes realized gains and losses on
investments) before federal income tax expense for 1998.
D. REGULATION
Nationwide and Nationwide Life and Annuity Insurance Company, as with other
insurance companies, are subject to extensive regulation and supervision in the
jurisdictions in which they do business. Such regulations limit the amount of
dividends and other payments that can be paid by insurance companies without
prior approval and impose restrictions on the amount and type of investments
insurance companies may hold. These regulations also affect many other aspects
of insurance companies businesses, including licensing of insurers and their
products and agents, risk-based capital requirements and the type and amount of
required asset valuation reserve accounts. These regulations are primarily
intended to protect policyholders rather than shareholders. Nationwide can not
predict the effect that any proposed or future legislation may have on the
financial condition or results of operations of Nationwide.
Insurance companies are required to file detailed annual and quarterly financial
statements with state insurance regulators in each of the states in which they
do business, and their business and accounts are subject to examination by such
agencies at any time. In addition, insurance regulators periodically examine an
insurer's financial condition, adherence to statutory accounting practices and
compliance with insurance department rules and regulations. Applicable state
insurance laws, rather than federal bankruptcy laws, apply to the liquidation or
the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three to four years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners. The most
recently completed examination of Nationwide's insurance subsidiaries was
conducted by the Ohio and Delaware insurance departments for the four-year
period ended December 31, 1996. The final reports of these examinations did not
result in any significant issues or adjustments.
The payment of dividends by Nationwide is subject to restrictions set forth in
the insurance laws and regulations of Ohio, its domiciliary state. The Ohio
insurance laws require Ohio-domiciled life insurance companies to seek prior
regulatory approval to pay a dividend or distribution of cash or other property
if the fair market value thereof, together with that of other dividends or
distributions made in the preceding 12 months, exceeds the greater of:
(i) 10% of statutory-basis policyholders' surplus as of the prior December
31; or
(ii) the statutory-basis net income of the insurer for the 12-month period
ending as of the prior December 31. The Ohio insurance laws also
require insurers to seek prior regulatory approval for any dividend
paid from other than earned surplus.
Earned surplus is defined under the Ohio insurance laws as the amount equal to
Nationwide's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus must be reasonable in relation to the insurer's outstanding
liabilities and adequate for its financial needs. The payment of dividends by
Nationwide may also be subject to restrictions set forth in the insurance laws
of New York that limit the amount of statutory profits on Nationwide's
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<PAGE> 15
participating policies (measured before dividends to policyholders) that can
inure to the benefit of Nationwide and its stockholders. Nationwide currently
does not expect such regulatory requirements to impair its ability to pay
operating expenses and dividends in the future.
E. COMPETITION
Nationwide competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer alternative
products and, with respect to other insurers, and have higher ratings than
Nationwide. Nationwide believes that competition in Nationwide's lines of
business is based on price, product features, commission structure, perceived
financial strength, claims-paying ratings, service and name recognition.
National banks, with their preexisting customer bases for financial services
products, may pose increasing competition in the future to insurers who sell
annuities including Nationwide, as a result of the U.S. Supreme Court's 1994
decision in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company, which permits national banks to sell annuity products of life insurance
companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made by
members of Congress and the Clinton Administration. Currently, the Bank Holding
Company Act restricts banks from being affiliated with insurance companies. None
of these proposals has yet been enacted, and it is not possible to predict
whether any of these proposals will be enacted, or, if enacted, their potential
effect on Nationwide.
F. EMPLOYEES
As of December 31, 1998, Nationwide had approximately 3,660 employees. None of
the employees of Nationwide are covered by a collective bargaining agreement and
Nationwide believes that its employee relations are satisfactory.
2. PROPERTIES
Nationwide's principal executive offices are located in Columbus, Ohio.
Nationwide leases its home office complex, consisting of approximately 448,000
square feet, from Nationwide Mutual Insurance Company and its subsidiaries at
One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus,
Ohio. Nationwide believes that its present facilities are adequate for the
anticipated needs of Nationwide.
3. LEGAL PROCEEDINGS
Nationwide 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 Nationwide.
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.
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<PAGE> 16
In November 1997, two plaintiffs, one who was the owner of a variable life
insurance policy and the other who was the owner of a variable annuity contract,
commenced a lawsuit in a federal court in Texas against Nationwide and the
American Century group of defendants (Robert Young and David D. Distad v.
Nationwide Life Insurance Company et al.). In this lawsuit, plaintiffs seek to
represent a class of variable life insurance policy 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, Nationwide and
American Century's motions to dismiss the complaint. The remaining claims
against Nationwide 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 14, 1998,
plaintiffs filed their petition for interlocutory review. On March 26, 1999, the
appeals court denied plaintiffs' motion for reconsideration of the denial of
interlocatory review. Nationwide intends to defend the case vigorously.
On October 29, 1998, Nationwide and certain of its subsidiaries were 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 Nationwide's
customers and seeks unspecified compensatory and punitive damages. Nationwide
currently is evaluating this lawsuit, which has not been certified as a class.
Nationwide 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 Nationwide in the future.
4. MARKET FOR NATIONWIDE'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for the Nationwide's shares of
common stock. All of the 3,814,779 shares of Nationwide's common stock issued
and outstanding are owned by Nationwide Financial Services.
Nationwide paid $100.0 million in dividends to Nationwide Financial Services
during 1998. No cash dividends were paid during 1997 and $50.0 million was paid
to Nationwide Corporation during 1996.
On January 1, 1997, Nationwide paid a dividend valued at $485.7 million to
Nationwide Corporation consisting of the outstanding shares of common stock of
Employers Life Insurance Company of Wausau, National Casualty Company, and West
Coast Life Insurance Company. Also, on February 24, 1997, Nationwide paid a
dividend to Nationwide Financial Services, and Nationwide Financial Services
paid an equivalent dividend to Nationwide Corporation, consisting of securities
having an aggregate fair value of $850.0 million. The dividend payments were
approved by the Department of Insurance of the State of Ohio.
Nationwide currently does not have a formal dividend policy.
5. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Nationwide and subsidiaries are
included in a separate section of this report which is indexed in Item 11 -
Exhibits, Financial Statement Schedules, and Reports.
Semi-annual and annual reports are sent to contract owners of the variable
annuity and life insurance contracts issued through registered Separate Accounts
of Nationwide.
The audited financial statements have been included herein in reliance upon the
report of KPMG LLP, independent certified public accountants, Two Nationwide
Plaza, Columbus, Ohio 43215, and upon the authority of said firm as experts in
accounting and auditing.
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<PAGE> 17
6. SELECTED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data. The
consolidated income statement data set forth below for the years ended December
31, 1994 through 1998 and the consolidated balance sheet data as of December 31,
1994 through 1998 are derived from the consolidated financial statements of
Nationwide. The summary consolidated financial data set forth below should be
read in conjunction with the consolidated financial statements of Nationwide and
notes thereto and the other financial information, including Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included elsewhere herein.
Selected Consolidated Financial Data (1)
($000's omitted)
<TABLE>
<CAPTION>
As of and for the year ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total revenues $2,475,703 $2,217,445 1,992,838 1,798,651 1,599,499
Total benefits and expenses 1,918,595 1,787,518 1,677,341 1,511,079 1,357,641
Income from continuing operations before federal 557,108 429,927 315,497 287,572 241,858
income tax expense and cumulative effect of
changes in accounting principles
Federal income tax expense 190,381 150,195 110,889 99,808 78,589
Income from continuing operations before other 336,727 279,732 204,608 187,764 163,269
items
Income from discontinued operations (less federal -- -- 11,324 24,714 20,459
income tax expense)
Cumulative effect of changes in accounting -- -- -- -- --
principles
Net income $366,727 $279,732 215,932 212,478 183,728
Total assets $74,342,070 $59,790,656 47,766,246 38,507,633 29,246,024
</TABLE>
(1) Consolidated financial data of Nationwide as of and for the years ended
December 31, 1995 and 1994 has been restated to reflect the discontinued
operations treatment of certain Nationwide's subsidiaries and lines of
business that were unrelated to the long-term savings and retirement
products business. See note 15 to the consolidated financial statements
herein for additional information regarding the discontinued operations
treatment.
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<PAGE> 18
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Management's narrative analysis and results of operations of Nationwide and
subsidiaries for the three years ended December 31, 1998 should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this report.
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
Nationwide. 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 Nationwide 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 Nationwide;
(ii) Nationwide Financial Services' 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 Nationwide Financial Services' subsidiaries to pay such
dividends;
(iii) The potential impact on Nationwide'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, including limitations on
premium levels, increase 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 Nationwide's investment portfolio or a reduction in the demand
for Nationwide'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 Nationwide 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.
A. RESULTS OF OPERATIONS
In addition to net income, Nationwide reports net operating income, which
excludes realized investment gains and losses and results of discontinued
operations. Net operating income is commonly used in the insurance industry
as a measure of on-going earnings performance.
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<PAGE> 19
The following table reconciles Nationwide's reported net income to net operating
income for each of the last three years.
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Net income $366.7 $279.7 $215.9
Realized gains on investments, net of tax (18.5) (7.9) (1.0)
Income from discontinued operations, net of tax - - (11.3)
--------------- -------------- ---------------
Net operating income 348.2 $271.8 $203.6
=============== ============== ===============
</TABLE>
(i) Revenues
Total revenues for 1998, excluding realized gains and losses on investments,
increased to $2.45 billion compared to $2.21 billion for 1997 and $1.99 billion
for 1996. Increases in policy charges and net investment income accounted for
most of the growth.
Policy charges include asset fees, which are primarily earned from separate
account assets generated from sales of variable annuities; administration fees,
which include fees charged per contract on a variety of Nationwide's products
and premium loads on universal life insurance products; surrender fees, which
are charged as a percentage of premiums withdrawn during a specified period of
annuity and certain life insurance contracts and cost of insurance charges
earned on universal life insurance products. Policy charges for each of the last
three years were as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Asset fees $494.7 $384.8 $275.5
Cost of insurance charges 88.8 68.5 53.2
Administrative fees 73.8 59.5 50.1
Surrender fees 41.6 32.4 22.1
--------------- -------------- ---------------
Total policy charges $698.9 $545.2 $400.9
=============== ============== ===============
</TABLE>
The growth in asset fees reflects increases in total separate account assets of
$13.2 billion, or 35%, in 1998 and $10.8 billion, or 40% in 1997. Record
variable annuity sales and strong equity market performance in each of the last
three years have resulted in separate account balances increasing 145% from
$20.81 billion at the beginning of 1996 to $50.94 billion at the end of 1998.
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 $14.95 billion at the end of 1998 compared to $10.44 billion
and $7.52 billion at the end of 1997 and 1996, respectively.
The growth in administrative fees is consistent with the increased number of
annuity and life insurance contracts in force during 1998 compared to the prior
two years. Nearly all of the increase in surrender charges over the past two
years is attributable to policyholder withdrawals in the Variable Annuities
segment, and is driven by an overall increase in variable annuity policy
reserves.
Net investment income includes the gross investment income earned on investments
supporting fixed annuities and certain life insurance products as well as the
yield on Nationwide's general account invested assets which are not allocated to
product segments. Net investment income grew from $1.36
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<PAGE> 20
billion and $1.41 billion in 1996 and 1997, respectively, to $1.48 billion in
1998 primarily due to increased invested assets to support growth in fixed
annuity and life insurance policy reserves. Fixed annuity policy reserves, which
include the fixed option of Nationwide's variable annuity products, increased
$682.4 million in 1997 and $704.7 million in 1998 and were $14.90 billion as of
year-end 1998. The growth in life insurance reserves was led by corporate-owned
life insurance products, where fixed reserves increased $201.1 million in 1997
and $596.7 million in 1998. The increase in net investment income due to growth
in invested assets was partially offset by declining investment yields in 1998
and 1997 due to lower market interest rates.
The $20.3 million and $10.6 million increases in other income during 1998 and
1997, respectively, were primarily attributable to growth in Nationwide's mutual
fund operations.
Realized gains and losses on investments are not considered by Nationwide to be
recurring components of earnings. Nationwide makes decisions concerning the sale
of invested assets based on a variety of market, business, tax and other
factors.
(ii) Benefits and Expenses
Interest credited to policyholder account balances totaled $1.07 billion in 1998
compared to $1.02 billion in 1997 and $982.3 million in 1996 and principally
relates to fixed annuity and corporate-owned life insurance products. The growth
in interest credited reflects the increase in policy reserves previously
discussed partially offset by reduced average crediting rates. The average
crediting rate on fixed annuity policy reserves was 5.95% in 1998 compared to
6.12% and 6.30% in 1997 and 1996, respectively.
Amortization of deferred policy acquisition costs (DAC) increased to $47.3
million in 1998 and $33.8 million in 1997 principally due to the Variable
Annuities segment, which accounted form $36.1 and $30.4 million of the increases
as a result of strong sales growth in each of the last two years.
Operating expenses were $419.7 million in 1998, a 9% increase from 1997
operating expenses of $384.9 million. Operating expenses were $342.4 million in
1996. The increase reflects the growth in the number of annuity and life
insurance contracts in-force and the related increase in administrative
processing costs. Increased operating expenses in 1998 also reflect the cost of
certain technology initiatives.
Federal income tax expense was $190.4 million representing an effective tax rate
of 34.2% for 1998. Federal income tax expense in 1997 and 1996 was $150.2
million and $110.9 million, respectively, representing effective rates of 34.9%
and 35.2%.
(iii) Year 2000 Compliance Issues
Nationwide 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, Nationwide is required to renovate or replace many computer
systems so that the systems will function properly after December 31, 1999.
Nationwide 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. Nationwide 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, Nationwide 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.
Nationwide 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.
Nationwide's facilities in Columbus, Ohio have been inventoried, assessed, and
tested as being Year 2000 compliant. Systems supporting Nationwide's
infrastructure such as telecommunications, voice and networks were renovated and
will be brought into
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<PAGE> 21
compliance before the end of the second quarter 1999.
Nationwide has also addressed issues associated with the exchange of electronic
data with external organizations. Nationwide has completed an inventory and
assessment of all business partners utilizing electronic interfaces with
Nationwide and processes have been put in place to allow Nationwide to accept
data regardless of the format.
In addition to resolving internal Year 2000 readiness issues, Nationwide 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, Nationwide has contacted mutual fund
organizations that provide funds for Nationwide'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
Nationwide 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. Nationwide has identified external risk
scenarios, prioritized those risks and is now in the process of developing
contingency plans to minimize the impact to Nationwide, 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. Nationwide 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.
(iv) Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133-Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 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. SFAS 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. Nationwide plans to adopt this Statement in first quarter 2000 and is
currently evaluating the impact on results of operations and financial
condition.
In March 1998, The American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position 98-1 -
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use (SOP 98-1). SOP 98-1 provides guidance intended to standardize accounting
practices for costs incurred to develop or obtain computer software for internal
use. Specifically, SOP 98-1 provides guidance for determining whether computer
software is for internal use and when costs incurred for internal use software
are to be capitalized. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. Nationwide does not expect the adoption
of SOP 98-1, which occurred on January 1, 1999, to have a material impact on
Nationwide's financial statements.
(v) Statutory Premiums and Deposits
Nationwide sells its products through a broad distribution network comprised of
wholesale and retail distribution channels. Wholesale distributors are
unaffiliated entities that sell Nationwide'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 Nationwide who market products directly to a customer base
identified by Nationwide and include exclusive sales representatives and
Nationwide Insurance Enterprise insurance agents.
3
<PAGE> 22
Statutory premiums and deposits by distribution channel for each of the last
three years are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997 1996
(in millions of dollars) Amount Amount Amount
<S> <C> <C> <C>
Wholesale channels: $3,682.0 $3,699.1 $3,607.8
Independent broker/dealers 337.4 --- ---
National or regional brokerage firms(1) 2,036.0 1,653.2 947.2
Financial institutions 2,854.6 2,325.0 1,911.6
Pension plan administrators 654.7 195.0 20.0
Total wholesale channels 9,555.7 7,872.3 6,486.6
============= ============ ============
Retail channels:
Exclusive retail sales representatives 2,327.9 1,862.1 1,528.0
Nationwide agents 935.5 602.7 525.5
------------- ------------ ------------
Total retail channels 3,263.4 2,464.8 2,053.5
------------- ------------ ------------
Total external premiums and
deposits 12,819.1 10,337.1 8,540.1
------------- ------------ ------------
Nationwide Insurance Enterprise
employee and agent benefit plans 323.3 174.9 502.5
------------- ------------ ------------
Total statutory premiums and deposits 13,142.4 $10,512.0 $9,042.6
============= ============ ============
</TABLE>
(1) Prior to 1998, national and regional brokerage firm sales were included in
independent broker/dealer sales.
Excluding Nationwide Insurance Enterprise benefit plan sales, Nationwide
achieved annual sales growth of 24%, 21% and 29% in 1998, 1997 and 1996,
respectively.
Nationwide'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. Nationwide 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.
Nationwide also markets group deferred compensation retirement plans to
employees of state and local governments for use under Internal Revenue Code
(IRC) Section 457. Nationwide utilizes its sponsorship by the National
Association of Counties and The United States Conference of Mayors when
marketing IRC Section 457 products. In addition, Nationwide 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.
1
<PAGE> 23
External statutory premiums and deposits by product are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
The BEST OF AMERICA products:
Individual variable annuities $4,661.1 $4,269.6 $3,801.5
Group variable annuities 2,760.0 2,220.5 1,807.1
Variable universal life 315.9 220.0 165.4
Private label annuities 1,093.3 1,006.4 625.9
IRC Section 457 annuities 2,155.3 1,716.5 1,425.8
The NEA Valuebuilder annuities 172.6 145.6 102.2
Traditional/Universal life 246.0 248.4 253.9
Corporate owned life insurance 645.8 195.0 20.0
Other 769.1 315.1 338.3
--------------- -------------- ---------------
$12,819.1 $10,337.1 $8,540.1
=============== ============== ===============
</TABLE>
B. BUSINESS SEGMENTS
Nationwide has three product segments: Variable Annuities, Fixed Annuities and
Life Insurance. In addition, Nationwide reports certain other revenues and
expenses in a Corporate and Other segment. All information set forth below
relating to Nationwide's Variable Annuities segment excludes the fixed option
under Nationwide's variable annuity contracts. Such information is included in
Nationwide's Fixed Annuities segment.
The following table summarizes operating income before federal income tax
expense for Nationwide's business segments for each of the last three years:
<TABLE>
<CAPTION>
(millions of dollars) 1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Operating income:
Variable annuity $218.4 $150.9 $ 90.3
Fixed annuity 175.3 169.5 135.4
Life insurance 94.8 70.9 67.2
Corporate and other 40.2 27.5 22.9
--------------- -------------- ---------------
$528.7 $418.8 $315.8
=============== ============== ===============
</TABLE>
2
<PAGE> 24
(i) 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 Nationwide, with investment returns accumulating on a
tax-deferred basis. Nationwide's variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts.
The following table summarizes certain selected financial data for Nationwide's
Variable Annuities segment for the years indicated:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
<S> <C> <C> <C>
Income Statement Data:
Revenues $ 529.5 $ 404.0 $ 284.6
Benefits and Expenses 311.1 253.1 194.3
Operating income before federal income tax
expense $ 218.4 $ 150.9 $ 90.3
=================== =================== ==================
Other Data:
Statutory premiums and deposits(1) $ 9,543.3 $ 7,535.8 $ 6,500.3
Policy reserves as of year end $46,420.8 $34,486.7 $24,278.1
Pre-tax operating income to average policy
reserves 0.54% 0.51% 0.44%
</TABLE>
(1) Statutory data, have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
2
<PAGE> 25
Variable Annuities segment revenues reflect a significant increase in policy
charges, primarily asset fees, consistent with the growth in variable annuity
policy reserves. Asset fees were $479.1 million in 1998 up 29% from $370.2
million in 1997 and totaled $261.8 million in 1996. Asset fees are charged as a
percentage of policy reserves which have increased substantially in the past
three years as a result of steady premium growth and through market appreciation
on investments underlying reserves. Variable annuity policy reserves grew $11.93
billion during 1998 reaching $46.42 billion as of year end 1998 compared to
growth in 1997 of $10.21 billion and year end 1997 reserves of $34.49 billion.
During 1996, policy reserves increased $7.52 billion.
Nationwide has continued to achieve high sales growth through deeper penetration
of existing distribution channels and through the addition of new sales outlets.
In addition, growing consumer acceptance of equity-based retirement savings
products, a robust United States stock market and low interest rates have all
combined to provide a very favorable environment for variable annuity sales.
Nationwide's broad network of strong distribution relationships coupled with
product innovation allowed Nationwide to maintain its ranking as the third
largest seller of individual variable annuities in the United States during
1998. Nationwide sales of all variable annuities increased 27% during 1998 to a
record $9.54 billion compared to $7.54 billion in 1997. Variable annuity sales
in 1997 represented a 16% increase over 1996 sales of $6.50 billion.
An example of Nationwide's ability to develop innovative products and to
leverage its strong distributor relationships to maintain its competitive
position is America's FUTURE Annuity. This individual variable annuity product
was developed in late 1997 in partnership with distributors and offers the
customer greater flexibility and investment choice with insurance charges lower
than comparable products sold through the financial planning community. Sales of
this product reached $2.4 billion during 1998, its first full year of
availability.
Although the equity markets were more volatile in 1998 than in the previous two
years, equity market conditions over each of the past three years have
contributed significantly to the growth in variable annuity policy reserves.
Variable annuity policy reserves reflect market appreciation of $6.80 billion,
$5.21 billion and $2.72 billion in 1998, 1997 and 1996, respectively.
Increased variable annuity revenues were partially offset by increased
amortization of DAC in 1998 compared to 1997 and 1996 due to overall growth in
the variable annuity business and by increased operating expenses.
Operating expenses increased 15% during 1998 and 20% during 1997; however, the
growth in expenses was far outpaced by the 31% and 42% increased in revenues
over those same periods. As a result, operating income as a percentage of
reserves has improved 0.54% in 1998 up 3 basis points from 1997 and up 10 basis
points from 1996. Nationwide has controlled operating expense growth by
increasing productivity through investments in technology and economies of
scale.
(ii) 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 Nationwide's variable annuity contracts.
2
<PAGE> 26
The following table summarizes certain selected financial data for Nationwide's
Fixed Annuities segment for the years indicated:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Income Statement Data:
Revenues:
Net investment income $1,116.6 $1,098.2 $1,050.6
Other 35.7 43.2 42.0
-------------- -------------- --------------
1,152.3 1,141.4 1,092.6
-------------- -------------- --------------
Benefits and expenses:
Interest credited to policyholder account balances 828.6 823.4 805.0
Other benefits and expenses 148.4 148.5 152.2
-------------- -------------- --------------
977.0 971.9 957.2
-------------- -------------- --------------
Operating income before federal income tax expense $175.3 $169.5 $135.4
============== ============== ==============
Other Data:
Statutory premiums and deposits (1) $2,068.0 $2,137.9 $1,600.5
Policy reserves as of year end $14,898.9 $14,194.2 $13,511.8
Pre-tax operating income to average policy reserves 1.21% 1.22% 1.03%
</TABLE>
(1) Statutory data have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Fixed annuities segment results reflect an increase in interest spread income
attributable to growth in fixed annuity policy reserves and wider interest
margins. Interest spread is the differential between net investment income and
interest credited to policyholder account balances. Interest spreads vary
depending on crediting rates offered by competitors, performance of the
investment portfolio, changes in market interest rates and other factors. The
following table depicts the interest margins on general account policy reserves
in the Fixed Annuities segment for each of the last three years.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Net investment income 8.02% 8.16% 8.22%
Interest credited 5.95 6.12 6.30
--------------- -------------- ---------------
2.07% 2.04% 1.92%
=============== ============== ===============
</TABLE>
1
<PAGE> 27
The declining interest rate environment has put pressure on interest margins
when fixed income investments mature or prepay and are reinvested at lower
rates; however, mortgage loan and bond prepayment income actually increased
interest margins in 1998. Prepayment income added 8 additional basis points to
the 1998 interest margin compared to 1997. Nationwide expects 1999 interest
margins excluding prepayment income to return to historically normal levels of
190 to 195 basis points.
Nationwide is able to mitigate the effects of lower investment yields by
periodically resetting the rates credited on fixed annuity contracts. As of
December 31, 1998, $7.17 billion, or 48% of fixed annuity policy reserves, were
in contracts where the guaranteed interest rate is reestablished each quarter.
Fixed annuity policy reserves of $5.29 billion are in contracts that adjust the
crediting rate on an annual basis with portions resetting in each calendar
quarter. Nationwide also has $1.36 billion of fixed annuity policy reserves that
call for the crediting rate to be reset annually on each January 1. The
remaining $1.08 billion of fixed annuity policy reserves are in payout status
where Nationwide has guaranteed periodic, typically monthly, payments.
Fixed annuity policy reserves increased to $14.90 billion as of year-end
compared to $14.19 billion a year ago and $13.51 billion as of the end of 1996.
Fixed annuity sales during 1998 were $2.07 billion, essentially even with 1997
sales of $2.14 billion, reflecting the low interest rate environment and
customer preference for equity-linked products. Sales in 1996 were $1.60
billion. The increase in sales in 1998 and 1997 over 1996 reflects the impact of
first year bonus crediting rate programs for certain of Nationwide's variable
annuity products. Such programs initially attract sales to the Fixed Annuities
segment. Over the subsequent twelve months, the funds are then systematically
transferred to variable investments. Most of Nationwide's fixed annuity sales
are premiums allocated to the guaranteed fixed option of variable annuity
contracts. Fixed annuity sales for 1998 include $1.68 billion in premiums
allocated to the fixed option under a variable annuity contract, compared to
$1.67 billion in 1997 and $1.24 billion in 1996.
Results in 1996 were adversely impacted by a $13.0 million charge related to
reserve strengthening for the immediate annuity line.
(iii) 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 also allow the customer to build cash value on a
tax-deferred basis.
2
<PAGE> 28
The following table summarizes certain selected financial data for Nationwide's
life insurance segment for the years indicated.
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Income Statement Data:
------------- -------------- -------------
Revenues $551.2 $473.1 $435.6
------------- -------------- -------------
Benefits and expenses 456.4 402.2 368.4
------------- -------------- -------------
Operating income before federal income tax expense $94.8 $70.9 $67.2
============= ============== =============
Other Data:
Statutory premiums(1):
Traditional and universal life $246.0 $248.4 $253.9
Variable universal life 316.0 220.0 165.4
Corporate-owned life 645.8 195.0 20.0
Policy reserves as of year end:
Traditional and universal life 2,439.7 2,369.5 2,295.5
Variable universal life 1,270.1 895.6 622.6
Corporate-owned life 903.6 221.9 20.8
</TABLE>
1) Statutory data have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
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 Nationwide
has aggressively expanded its distribution capabilities. Investment life
premiums and deposits increased from $185.4 million in 1996 to $415.0 million in
1997 to $961.8 million in 1998. As a result of the sales growth and high
persistency, revenues from investment life products increased to $150.4 million
in 1998 from $71.9 million in 1997 and $45.5 million in 1996. Nationwide
believes there are growth opportunities for investment life products and in 1999
will be introducing new products and expanding distribution to new outlets to
better penetrate these markets.
The increase in benefits and expenses is composed primarily of increased
interest credited to policyholders and increased operating expenses. Death
claims and other policyholder benefits reflected modest growth during 1997 and
1998. Interest credited to policyholders increased $36.9 million in 1998
reaching $115.4 million compared to $78.5 million a year ago. Interest credited
to policyholders totaled $70.2 million in 1996. The increased corporate-owned
life insurance business discussed previously accounted for most of the
increases. Operating expenses grew to $101.7 million in 1998 compared to $94.5
million and $78.9 million in 1997 and 1996, respectively, reflecting the
increased number of policies in-force as well as technology related
expenditures.
2
<PAGE> 29
(iv) Corporate and Other
The following table summarizes certain selected financial data for Nationwide's
Corporate and Other segment for the years indicated:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
<S> <C> <C> <C>
Income Statement Data:
Revenues $ 214.3 $ 187.8 $ 180.4
Benefits and expenses 174.1 160.3 157.5
------------------- ----------------- -------------------
Operating income before federal income tax
expense(1) $ 40.2 $ 27.5 $ 22.9
=================== ================= ===================
</TABLE>
(1) Excludes realized gains (losses) on investments and discontinued operations.
Revenues in the Corporate and Other segment consist of net investment income on
invested assets not allocated to the three product segments, investment
management fees and other revenues earned from Nationwide mutual funds other
than the portion allocated to the Variable Annuities and Life Insurance segments
and net investment income and policy charges from group annuity contracts issued
to Nationwide Insurance Enterprise employee and agent benefit plans.
C. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(i) Market Risk Sensitive Financial Instruments
Nationwide is subject to potential fluctuations in earnings and the fair value
of certain of its assets and liabilities, as well as variations in expected cash
flows due to changes in market interest rates and equity prices. The following
discussion focuses on specific exposures Nationwide has to interest rate and
equity price risk and describes strategies used to manage these risks. The
discussion is limited to financial instruments subject to market risks and is
not intended to be a complete discussion of all the risks Nationwide is exposed
to.
(ii) Interest Rate Risk
Fluctuations in interest rates can potentially impact Nationwide's earnings and
cash flows, and the fair value of its assets and liabilities. Generally, in a
declining interest rate environment, Nationwide may be required to reinvest the
proceeds from matured and prepaid investments at rates lower than the overall
yield of the portfolio, which could reduce interest spread income. In addition,
minimum guaranteed crediting rates (typically 3% or 3.5%) on certain annuity
contracts could result in a reduction of Nationwide's interest spread income in
the event of a significant and prolonged decline in interest rates from market
rates at the end of 1998. The average crediting rate of annuity products during
1998 was 5.95%, well in excess of the guaranteed rates. Nationwide mitigates
this risk by investing in assets with maturities and durations that match the
expected characteristics of the liabilities and by investing in mortgage backed
securities with limited prepayment exposure.
Conversely, a rising interest rate environment could result in a reduction of
interest spread income or an increase in policyholder surrenders. Investment
supporting annuity liabilities generally have a weighted average maturity of
seven years when purchased and therefore, the change in yield of the portfolio
will lag changes in market interest rates. This lag is increased if the rate of
prepayments of mortgage-backed securities slows. To the extent Nationwide sets
renewal rates based on current market value rates, this will result in reduced
interest spreads. Alternatively, if Nationwide sets renewal crediting rates
while attempting to maintain a desired spread from the portfolio yield, the
rates offered by Nationwide may be less than new money rates offered by
competitors. This difference could result in an increase in surrender activity
by policyholders. If Nationwide could not fund the surrenders with its cash flow
from operations, Nationwide may be required to sell investments, which likely
would have declined in value due to the increase in interest rates. Nationwide
mitigates this risk by offering products that assess surrender charges or market
1
<PAGE> 30
value adjustments at the time of surrender, by investing in assets with
maturities and durations that match the expected characteristics of the
liabilities, and by investing in mortgage-backed securities with limited
prepayment exposure.
(iii) Asset/Liability Management Strategies to Manage Interest Rate Risk
Nationwide employs an asset/liability management approach tailored to the
specific requirements of each of its products. Nationwide's general account
investments are primarily managed in a number of pools that are segregated by
weighted average maturity of the assets acquired by the pools. For fixed
maturity securities and mortgages, the weighted average maturity is based on
repayments which are scheduled to occur under the terms of the asset. For
mortgage backed securities, repayments are determined using the current rate of
repayment of the underlying mortgages and the terms of the securities. Each
product line has an investment strategy based on its specific characteristics.
The strategy establishes asset duration, quality and other guidelines.
Nationwide determines the amount of new investments needed for each line to
arrive at the amount of new investments needed for each pool by month. The
investments acquired for each pool are shared on a proportional basis by each of
the lines requesting investments in the pool based on their actual investment
needs.
For all business having future benefits which cannot be changed at the option of
the policyholder, the underlying assets are managed in a separate pool. The
duration of assets and liabilities in this pool are kept as close together as
possible. For assets, the repayment cash flows, plus anticipated coupon
payments, are used in calculating asset duration. Future benefits and expenses
are used for liabilities. On December 31, 1998, the average duration of assets
in this pool as 7.5 years and the average duration of the liabilities was 7.8
years. Policy reserves on this business were $1.1 billion as of December 31,
1998.
Because the timing of the payment of future benefits on the majority of
Nationwide's business can be changed by the policyholder, Nationwide employs
cash flow testing techniques in its asset/liability management process.
Annually, Nationwide's annuity and insurance business is analyzed to determine
the adequacy of the reserves supporting such business. This analysis is
accomplished by projecting under a number of possible future interest rate
scenarios the anticipated cash flows from such business and the assets required
to support such business. The first seven of these scenarios are required by the
state insurance laws. Projections are also made using 13 additional scenarios
which involve more extreme fluctuations in future interest rates. Finally, to
get a statistical analysis of possible results and to minimize any bias in the
20 predetermined scenarios, additional projections are made using 50 randomly
generated interest rate scenarios. For Nationwide's 1998 cash flow testing
process, interest rates for 90-day treasury bills ranged from 0.7% to 9.5% under
the 20 predetermined scenarios and 1.2% to 21.9% under the 50 random scenarios.
Interest rates for longer maturity treasury securities had comparable ranges.
The values produced by each projection are used to determine future gains or
losses from Nationwide's annuity and insurance business, which, in turn, are
used to quantify the adequacy of Nationwide's reserves over the entire
projection period. The results of Nationwide's cash flow testing indicated that
Nationwide's reserves were adequate as of December 31, 1998.
2
<PAGE> 31
(iv) Characteristics of Interest Rate Sensitive Financial Instruments
The following table provides information about Nationwide's financial
instruments that are sensitive to changes in interest rates. Insurance contracts
that subject Nationwide to significant mortality risk, including life insurance
contracts and life-contingent immediate annuities, do not meet the definition of
a financial instrument and are not included in the table.
<TABLE>
<CAPTION>
(in millions of dollars) 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 1,092.7 $ 1,049.2 $ 1,667.6 $ 1,386.3 $ 882.7
Average interest rate 8.0% 7.5% 7.3% 7.2% 7.0%
Mortgage and other
asset-backed securities:
Principal $ 905.3 $ 964.3 $ 870.7 $ 588.9 $ 367.3
Average interest rate 7.3% 7.4% 7.2% 7.4% 7.4%
Other fixed maturity securities:
Principal $ 7.8 $ 72.0 $ 54.6 $ 103.3 $ 60.6
Average interest rate 8.5% 6.4% 7.0% 6.6% 6.9%
Mortgage loans on real estate:
Principal $ 185.9 $ 373.9 $ 313.1 $ 339.5 $ 408.8
Average interest rate 9.2% 9.3% 7.0% 8.5% 7.6%
LIABILITIES
Deferred fixed annuities:
Principal $ 1,639.6 $ 1,548.3 $ 1,733.7 $ 1,232.5 $ 1,169.6
Average credited rate 5.2% 4.8% 4.5% 4.3% 4.1%
Immediate annuities:
Principal $ 20.6 $ 20.7 $ 22.3 $ 25.2 $ 29.9
Average credited rate 7.3% 7.3% 7.3% 7.3% 7.4%
</TABLE>
<TABLE>
<CAPTION>
(in millions of dollars) Thereafter Total Fair Value
<S> <C> <C> <C>
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 2,864.0 $ 8,942.5 $ 9,364.2
Average interest rate 7.6%
Mortgage and other
asset-backed securities:
Principal $ 718.3 $ 4,414.8 $ 4,499.4
Average interest rate 7.0%
Other fixed maturity securities:
Principal $ 65.7 $ 364.0 $ 381.5
Average interest rate 6.8%
Mortgage loans on real estate:
Principal $ 3,749.6 $ 5,370.8 $ 5,527.6
Average interest rate 7.1%
LIABILITIES
Deferred fixed annuities:
Principal $ 8,270.7 $ 15,594.4 $ 15,282.0
Average credited rate 4.1%
Immediate annuities:
Principal $ 53.1 $ 171.8 $ 201.6
Average credited rate 7.4%
</TABLE>
Additional information about the characteristics of the financial instruments
and assumptions underlying the data presented in the table above are as follows:
Mortgage and other asset-backed securities (MBSs): The maturity year is
determined based on the terms of the securities and the current rate of
prepayment of the underlying pools of mortgages. Nationwide limits its exposure
to prepayments by purchasing less volatile types of MBSs (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Investments - Fixed Maturity Securities").
Other Fixed Maturity Securities and Mortgage Loans on Real Estate: The maturity
year is determined based on the maturity date of the security or loan.
Deferred Fixed Annuities: the maturity year is based on the expected date of
policyholder withdrawal, taking into account actual experience, current interest
rates, and contract terms. Included are group annuity contracts ($10.30 billion)
which are generally subject to market value adjustment upon surrender and may
also be subject to surrender charges. Of the total group annuity liabilities,
$7.17 billion was in contracts where the crediting rate is reset quarterly. For
the remaining $3.13 billion of group annuity reserves, the crediting rate is
reset annually on January 1. Also included are $5.29 billion of individual
annuity liabilities where the crediting rate is reset annually, with portions
resetting in each calendar quarter. Such individual annuity contracts are also
subject to surrender charges calculated as a percentage of the lesser of
deposits made or the amount surrendered and assessed at declining rates during
the first seven
1
<PAGE> 32
years after a deposit is made. The average crediting rate is calculated as the
difference between the projected yield of the assets backing the liabilities and
a targeted interest spread.
Immediate Annuities: Included are non-life contingent contracts in payout status
where Nationwide has guaranteed periodic, typically monthly, payments. The
maturity year is based on the terms of the contract.
(v) Equity Market Risk
Asset fees calculated as a percentage of the separate account assets are a
significant source of revenue to Nationwide. At December 31, 1998, 86% of
separate account assets were invested in equity mutual funds. Gains and losses
in the equity markets will result in corresponding increases and decreases in
Nationwide's separate account assets and the reported asset fee revenue. In
addition, a decrease in separate account assets may decrease Nationwide's
expectations of future profit margins which may require Nationwide to accelerate
the amortization of deferred policy acquisition costs.
2
<PAGE> 33
8. DIRECTORS AND EXECUTIVE OFFICERS
Nationwide's Board of Directors currently consists of the following fifteen
Directors:
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
<S> <C> <C> <C>
Lewis J. Alphin 50 1993 2015
A. I. Bell 53 1998 2013
Kenneth D. Davis 45 1999 2002
Keith W. Eckel 52 1996 2014
Willard J. Engel 59 1994 2006
Fred C. Finney 52 1992 2013
Joseph J. Gasper 55 1996 2008
Dimon R. McFerson 62 1981 2002
David O. Miller 60 1996 2006
Yvonne L. Montgomery 44 1998 2022
Ralph M. Paige 56 1999 2002
James F. Patterson 57 1989 2007
Arden L. Shisler 57 1984 2008
Robert L. Stewart 62 1992 2004
Nancy C. Thomas 64 1986 2001
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NATIONWIDE
<S> <C> <C>
Dimon R. McFerson 62 Chairman and Chief Executive Officer
Joseph J. Gasper 55 President and Chief Operating Officer
Robert A. Oakley 52 Executive Vice President - Chief Financial Officer
Robert J. Woodward, Jr. 57 Executive Vice President - Chief Investment Officer
James E. Brock 51 Senior Vice President - Corporate Development
John R. Cook 56 Senior Vice President - Chief Communications Officer
Philip C. Gath 51 Senior Vice President - Chief Actuary
Richard D. Headley 50 Senior Vice President - Chief Information Technology Officer
Donna A. James 41 Senior Vice President - Human Resources
Richard A. Karas 56 Senior Vice President - Sales - Financial Services
Douglas C. Robinette 44 Senior Vice President - Marketing and Product Development
</TABLE>
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<PAGE> 34
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NATIONWIDE
<S> <C> <C>
Susan A. Wolken 48 Senior Vice President - Life Company Operations
Bruce C. Barnes 51 Vice President - Technology Strategy and Planning
Dennis W. Click 60 Vice President - Secretary
David A. Diamond 43 Vice President - Enterprise Controller
Matthew S. Easley 42 Vice President - Investment Life Actuarial
R. Dennis Noice 52 Vice President - Systems
Joseph P. Rath 49 Vice President - Product and Market Compliance
Mark R. Thresher 42 Vice President - Finance and Treasurer
</TABLE>
Biographical information for each of the individuals listed in the above table
is set forth below.
DIMON R. MCFERSON has been Chief Executive Officer since December 1992. Mr.
McFerson has been a director since April 1988. Previously he was elected Chief
Executive Officer in December 1992, and President and Chief Executive Officer in
December 1993. He was President and General Manager of Nationwide Mutual
Insurance Company from April 1988 to April 1991; President and Chief Operating
Officer of Nationwide Mutual Insurance from April 1991 to December 1992; and
President and Chief Executive Officer of Nationwide Mutual Insurance from
December 1992 to April 1996. Mr. McFerson has been with Nationwide for 19 years.
JOSEPH J. GASPER has been President and Chief Operating Officer and Director
since April 1996. Previously, he was Executive Vice President -
Property/Casualty Operations of Nationwide Mutual Insurance Company from April
1995 to April 1996. He was Senior Vice President - Property/Casualty Operations
of Nationwide Mutual Insurance Company from September 1993 to April 1995. Prior
to that time, Mr. Gasper held numerous positions within Nationwide. Mr. Gasper
has been with Nationwide for 32 years.
LEWIS J. ALPHIN has been a Director of Nationwide since 1993. He is also a
Director of several Nationwide subsidiaries and affiliates. Mr. Alphin owns and
operates an 800-acre farm in Mt. Olive. He taught agriculture business at James
Sprunt Community College in Kenansville, N.C., for more than 22 years before
retiring in 1994. He is the former board chairman of the Cape Fear Farm Credit
Association, a member and former vice president, secretary/treasurer, and
director of the Duplin County Agribusiness Council, and a former board member of
the Duplin County Farm Bureau, the North Carolina Farm Bureau, and the Farm
Credit Council.
A. I. BELL has been a Director of Nationwide since April, 1998. Mr. Bell has
served as a state trustee of the Ohio Farm Bureau Federation from 1991 to 1998
and as president that last four years. He oversees the Bell family farm in
Zanesville, Ohio. The farm is the hub of a multi-family swine network, in
addition to grain and beef operations. Mr. Bell has represented the Ohio Farm
Bureau at state and national level activities, and has traveled internationally
representing Ohio agriculture. In 1995, he was introduced into The Ohio State
University Department of Animal Sciences Hall of Fame.
KENNETH D. DAVIS has been a Director of Nationwide since April 1999. Mr. Davis
has been Chairman of the Board of South Central Power Company since August 1979,
and currently oversees the Davis family farm located in Leesburg, Ohio. Mr.
Davis served as Director of the Farm Bureau Bancorp from October 1998 to March
1998. In addition, Mr. Davis has served in various officer positions with the
Ohio Farm Bureau Federation since December 1989, with his most recent position
as Trustee and President, a position he held from March 1998 to March 1999. Mr.
Davis also held officer positions with the Highland County Farm Bureau from June
1997 to September 1997, including Trustee and President from September 1984 to
September 1997.
KEITH W. ECKEL has been a Director of Nationwide since April 1996. Mr. Eckel is
a partner of Fred W. Eckel Sons and president of Eckel Farms, Inc., in northeast
Pennsylvania. He received the Master Farmer award from Penn State University in
1982.
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<PAGE> 35
He is a former president of the Pennsylvania Farm Bureau, a position he held for
15 years, and the Lackawanna County Cooperative Extension Association. Mr. Eckel
has served as a board member and executive committee member of the American Farm
Bureau. He is a former vice president of the Pennsylvania Council of Cooperative
Extension Associations, and former board member of the Pennsylvania Vegetable
Grower's Association.
WILLARD J. ENGEL has been a Director of Nationwide since 1994. He is also a
Director of several Nationwide subsidiaries and affiliates. Mr. Engel has been
general manager of the Lyon County Cooperative Oil Company in Marshall,
Minnesota, since 1975. He previously was a division manager of the Truman
Farmers Elevator. He's a former director of the Western Co-op Transport in
Montevideo, Minnesota, a member and former director and legislative committee
chairman of the Northwest Petroleum Association in St. Paul, and a former
director of Farmland Industries in Kansas City.
FRED C. FINNEY has been a Director of Nationwide since 1992. He is also a
Director of several Nationwide subsidiaries and affiliates. Mr. Finney is the
owner and operator of the Moreland Fruit Farm and operator of the Melrose
Orchard in Wooster, Ohio. He's past president of the Ohio Farm Bureau
Federation, the Ohio Fruit Growers Society, Wayne County Farm Bureau, and the
Westwood Ruritan Club.
DAVID O. MILLER has been a Director of Nationwide since November 1996. Mr.
Miller has been a farm owner and land developer since 1962. He is the President
of the Owen Potato Farm Inc. and is a partner of M&M Enterprises in Licking
County, Ohio. He is Chairman of the Board of the Wausau Insurance Companies and
serves on the board of directors of several companies of the Nationwide group.
He is also a director of the National Cooperative Business Association.
YVONNE L. MONTGOMERY has been a Director of Nationwide since April, 1998. Ms.
Montgomery is senior vice president/general manager of southern customer
operations for United States Customer Operations for Xerox Corporation. A
resident of Atlanta, Georgia, Ms. Montgomery oversees eight customer business
units across the southern United States as well as all business and marketing
functions in the regions. Ms. Montgomery joined Xerox in 1976 as a sales
representative and progressed through management positions, including Vice
President - Field Operations, and Executive Assistant to the Chairman and CEO.
RALPH M. PAIGE has been a Director of Nationwide since April 1999. Mr. Paige has
been the Executive Director of the Federation of Southern Cooperatives/Land
Assistance Fund since 1969. Mr. Paige also served as the National Field
Director/Georgia State Director from 1981 to 1984.
JAMES F. PATTERSON has been a Director of Nationwide since April 1989. Mr.
Patterson has operated the Patterson Fruit Farm in Chesterland, Ohio since 1964
and has been the President of Patterson Farms, Inc. since December 1991. He is
Chairman of the Board of Nationwide Mutual Fire Insurance Company. He serves on
the Board of Directors of several companies of the Nationwide group. He is also
a trustee of The Ohio State University and serves on the Board of Directors of
the University Hospitals Health System in Cleveland, Ohio and Geauga Hospital,
Inc. in Chardon, Ohio.
ARDEN L. SHISLER has been Director of Nationwide since April 1984. Mr. Shisler
has been President and Chief Executive Officer of K & B Transport, Inc., a
trucking firm in Dalton, Ohio since January 1992. Previously, he was Chief
Operating Officer of K & B Transport, Inc. from April 1986 to January 1992.
Prior to that time, Mr. Shisler held several positions with K & B Transport,
Inc. He is Chairman of the Board of Nationwide Mutual Insurance Company and
serves on the Board of Directors of several companies of the Nationwide group.
He is also a director of the National Cooperative Business Association.
ROBERT L. STEWART has been a Director of Nationwide since 1989. Mr. Stewart owns
Sunnydale Mining and a grain farm, both located in Jewett, Ohio. Mr. Stewart has
served on the board of the Ohio Farm Bureau Federation (1978-1989) and as
President of the Ohio Holstein Association board. Mr. Stewart was a Director of
Landmark, Inc., a farm supply cooperative, which is now part of
Indianapolis-based Countrymark, and the Ohio Agricultural Stabilization and
Conservation Service board.
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<PAGE> 36
NANCY C. THOMAS has been a Director of Nationwide since 1986. She is chairman
(since 1989) of Nationwide Property and Casualty Insurance Company and a Trustee
of Nationwide Investing Foundation, a trust that issues shares in four mutual
funds. She also serves on the boards of several Nationwide subsidiaries and
affiliates. Ms. Thomas is a past president and former director of the Ohio
Agricultural Marketing Association and served on the boards of the Ohio Farm
Bureau Federation and Landmark, Inc., a former Ohio farm supply cooperative, and
as the Midwest regional representative on the American Farm Bureau women's
committee. She's also a former director of the Louisville YMCA.
ROBERT A. OAKLEY has been Executive Vice President - Chief Financial Officer
since April 1995. Previously, he was Senior Vice President - Chief Financial
Officer from October 1993 to April 1995. Prior to that time, Mr. Oakley held
several positions within Nationwide. Mr. Oakley has been with Nationwide for 23
years.
ROBERT J. WOODWARD, JR. has been been Executive Vice President - Chief
Investment Officer since August 1995. Previously, he was Senior Vice President -
Fixed Income Investments from March 1991 to August 1995. Prior to that time, Mr.
Woodward held several positions within Nationwide. Mr. Woodward has been with
Nationwide for 34 years.
JAMES E. BROCK has been Senior Vice President - Corporate Development since July
1997. Previously, he was Senior Vice President - Company Operations from
December 1996 to July 1997 and was also Senior Vice President - Life Company
Operations from April 1996 to July 1997. Mr. Brock was Senior Vice President -
Investment Products Operations from November 1990 to April 1996. Prior to that
time, Mr. Brock held several positions within Nationwide. Mr. Brock has been
with Nationwide for 29 years.
JOHN R. COOK, JR. has been Senior Vice President - Chief Communications Officer
since May 1997. Previously, Mr. Cook was Senior Vice President - Chief
Communications Officer of USAA from July 1989 to May 1997.
PHILIP C. GATH has been Senior Vice President - Chief Actuary since May 1998.
Previously, Mr. Gath was Vice President - Product Manager - Individual Variable
Annuity from July 1997 to May 1998. Mr. Gath was Vice President - Individual
Life Actuary from August 1989 to July 1997. Prior to that time, Mr. Gath held
several positions within Nationwide. Mr. Gath has been with Nationwide for 30
years.
RICHARD D. HEADLEY has been Senior Vice President - Chief Information Technology
Officer since October 1997. Previously, Mr. Headley was Chairman and Chief
Executive Officer of Banc One Services Corporation from 1992 to October 1997.
From January 1975 until 1992 Mr. Headley held several positions with Banc One
Corporation.
DONNA A. JAMES has been Senior Vice President - Human Resources since December
1997. Previously, she was Vice President Human Resources from July 1996 to
December 1997. Prior to that time Ms. James was Vice President - Assistant to
the CEO from March 1996 to July 1996. From May 1994 to March 1996 she was
Associate Vice President - Assistant to the CEO. Prior to that time Ms. James
held several positions within Nationwide. Ms. James has been with Nationwide for
17 years.
RICHARD A. KARAS has been Senior Vice President - Sales - Financial Services
since March 1993. Previously, he was Vice President - Sales - Financial Services
from February 1989 to March 1993. Prior to that time, Mr. Karas held several
positions within Nationwide. Mr. Karas has been with Nationwide for 34 years.
DOUGLAS C. ROBINETTE has been Senior Vice President - Marketing and Product
Management since May 1998. Previously, Mr. Robinette was Executive Vice
President, Customer Services of Employers Insurance of Wausau (Wausau), a member
of the Nationwide group, from September 1996 to May 1998. Prior to that time he
was Executive Vice President, Finance and Insurance Services of Wausau from May
1995 to September 1996. From November 1994 to May 1995, Mr. Robinette was Senior
Vice President, Finance and Insurance Services of Wausau. From May 1993 to
November 1994 he was Senior Vice President, Finance of Wausau. Prior to that
time, Mr. Robinette held several positions within the
3
<PAGE> 37
Nationwide group. Mr. Robinette has been with the Nationwide group for 12 years.
SUSAN A. WOLKEN has been Senior Vice President - Life Company Operations since
June 1997. Previously, she was Senior Vice President - Enterprise Administration
from July 1996 to June 1997. Prior to that time, she was Senior Vice President -
Human Resources from April 1995 to July 1996. From September 1993 to April 1995
Ms. Wolken was Vice President - Human Resources. From October 1989 to September
1993 she was Vice President - Individual Life and Health Operations. Ms. Wolken
has been with Nationwide for 24 years.
BRUCE C. BARNES has been Vice President - Technology Strategy and Planning since
May 1998. Previously, Mr. Barnes was Vice President - Information Systems from
February 1997 to May 1998. Mr. Barnes was Vice President - Life Systems from May
1996 to May 1998. Previously, he was Vice President - Investment Product Systems
from April 1995 to May 1996. Prior to that time, Mr. Barnes was Vice President -
Individual Investment Products/Common Systems from May 1994 to April 1995 and
Associate Vice President - Individual Investment Products/Common Systems from
May 1992 to May 1994. Mr. Barnes was Vice President - Information Services of
PHP Benefits Systems, Inc. from January 1987 to January 1992. Mr. Barnes has
been with Nationwide for 7 years.
DENNIS W. CLICK has been has been Vice President - Secretary since December
1997. Previously, he was Vice President - Assistant Secretary from December 1996
to December 1997. Mr. Click was Vice President - Assistant Secretary from August
1994 to December 1997. Mr. Click was Associate Vice President and Assistant
Secretary from August 1989 to August 1994. Prior to that time, he held several
positions within Nationwide. Mr. Click has been with Nationwide for 38 years.
DAVID A. DIAMOND has been Vice President - Enterprise Controller since August
1996. Previously, he was Vice President - Controller from October 1993 to August
1996. Prior to that time, Mr. Diamond held several positions within Nationwide.
Mr. Diamond has been with Nationwide for 10 years.
MATTHEW S. EASLEY has been Vice President - Investment Life Actuarial since June
1998. Mr. Easley was Vice President - Marketing and Administrative Services from
December 1996 to June 1998. Mr. Easley was Vice President - Life Marketing and
Administrative Services from May 1996 to June 1998. Mr. Easley was Vice
President - Annuity and Pension Actuarial from August 1989 to May 1996. Prior to
that time, Mr. Easley held several positions within Nationwide. Mr. Easley has
been with Nationwide for 16 years.
R. DENNIS NOICE has been Vice President - Systems since April 1998. Previously,
he was Vice President - Retail Operations from March 1997 to April 1998. Prior
to that time, Mr. Noice was Vice President - Individual Investment Products from
October 1989 to March 1997. Prior to that time, Mr. Noice held several positions
within Nationwide. Mr. Noice has been with Nationwide for 27 years.
JOSEPH P. RATH has been Vice President - Product and Market Compliance since
April 1997. Previously, he was Vice President - Associate General Counsel of
Nationwide from October 1988 to April 1997. Prior to that time, Mr. Rath held
several positions within Nationwide. Mr. Rath has been with Nationwide for 22
years.
MARK R. THRESHER has been Vice President - Controller since August 1996.
Previously, he was Vice President and Treasurer from June 1996 to August 1996.
Prior to joining Nationwide, Mr. Thresher served as a partner with KPMG LLP.
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<PAGE> 38
9. EXECUTIVE COMPENSATION
A. COMPENSATION
Pursuant to a Cost Sharing Agreement, the salaries and benefits of certain
officers and employees of Nationwide and its subsidiaries, including Named
Executive Officers, will be paid by Nationwide Mutual Insurance Company and
reimbursed in accordance with the terms of the Cost Sharing Agreement.
The following table provides certain information concerning compensation
received by Nationwide's Chief Executive Officer and the four remaining most
highly paid executive officers (the "Named Executive Officers") as of the last
fiscal year, for the last three fiscal years ended December 31, 1998, 1997 and
1996 solely for services rendered to Nationwide and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------
Annual Compensation Awards
---------------------------------------- --------------------------
Restricted Underlying
Other Annual Stock Securities
Name and Salary Bonus Compensation Award(s) Options/SARs All Other
Principal Position Year $ $ $ $ # Compensation
- ------------------------- --------- ------------ ------------ -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dimon R. McFerson: 1998 430,970 392,982(4) (5) ----- 60,000
Chairman and Chief 1997 336,654 111,780(2) (5) 907,147(10) 40,000 19,860(6)
Executive Officer - 1996 324,790 71,820(3) (5) 14,482(5)
Nationwide Insurance
Enterprise(1)
Joseph J. Gasper: 1998 461,308 330,647(4) (5) ----- 40,000 21,491(9)
President and Chief 1997 358,066 97,250(2) (5) 396,563(10) 30,000 18,155(8)
Operating Officer 1996 232,959(7) 48,425(3) (5) ----- ----- 10,684(6)
Richard A. Karas: 1998 283,847 212,503(4) (5) ----- 20,000 13,174(9)
Senior Vice President- 1997 246,058 72,900(2) (5) 167,508(10) 10,000 13,020(8)
Sales-Financial Services 1996 216,905 52,437(3) (5) 9,855(6)
Robert J. Woodward: 1998 236,599 209,607(4) (5) ----- 12,000 10,883(9)
Executive Vice 1997 223,803 53,694(2) (5) 182,877(10) 10,000 11,453(8)
President - Chief 1996 222,784 59,399(3) (5) ----- ----- 10,470(6)
Investment Officer
Douglas C. Robinette: 1998 232,500 118,683(4) (5) 103,050(10) 3,200 8,940(9)
Senior Vice President - 1997 ----- ----- ----- ----- -----
Marketing and Product 1996 ----- ----- ----- ----- -----
Management
</TABLE>
(1) Figures in the table, other than Restricted Stock, Securities Underlying
Options/SARs and All Other Compensation, represent compensation received by
Mr. McFerson and Mr. Woodward for their service rendered to Nationwide
Financial Services and its subsidiaries as allocated pursuant to the Cost
Sharing Agreement.
(2) Represents the amount received by the Named Executive Officers under the
MIP (hereinafter defined) in 1998 for the 1997 award year.
(3) Represents the amount received by the Named Executive Officers under the
MIP in 1997 for the 1996 award year.
(4) Represents the amount received by the Named Executive Officers under the
PIP (hereinafter defined) in 1999 for the 1998 award year.
(5) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(6) Represents contributions made or credited by Nationwide Financial Services
in 1996 under the Savings Plan (hereinafter defined) and the DC
Supplemental Plan (hereinafter defined). The following are the amounts for
the Savings Plan and the DC Supplemental Plan: McFerson $1,575 for the
Savings Plan and $12,907 for the DC Supplemental Plan; Gasper $3,465 for
the Savings Plan and $7,219 for the DC Supplemental Plan; Woodward $3,439
for the Savings Plan and $7,031 for the DC Supplemental Plan and Karas
$4,500 for the Savings Plan and $5,355 for the DC Supplement Plan.
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<PAGE> 39
(7) Represents compensation received by Mr. Gasper solely for his services
rendered to Nationwide Financial Services in 1996 as allocated pursuant to
the Cost Sharing Agreement. Prior to April 1996, Mr. Gasper was the
Executive Vice President - Property/Casualty Operations of Nationwide
Mutual Insurance Company and received compensation from Nationwide Mutual
Insurance Company and its property/casualty insurance subsidiaries for
services rendered to such companies. Such compensation is not reflected in
the table.
(8) Represents contributions made or credited by Nationwide Financial Services
for 1997 under the Savings Plan and the DC Supplemental Plan. The following
are the amounts for the Savings Plan and the DC Supplemental Plan: McFerson
$2,142 for the Savings Plan and $19,609 for the DC Supplemental Plan;
Gasper $4,760 for the Savings Plan and $13,395 for the DC Supplement Plan;
Karas $4,760 for the Savings Plan and $8,260 for the DC Supplemental Plan
and Woodward $3,468 for the Savings Plan and $7,985 for the DC Supplemental
Plan.
(9) Represents contributions made or credited by Nationwide Financial Services
for 1998 under the Savings Plan and the DC Supplemental Plan. The following
are the amounts for the Savings Plan and the DC Supplemental Plan and in
the case of Mr. McFerson, above market interest on deferred compensation:
McFerson $2,206 for the Savings Plan and $20,224 for the DC Supplemental
Plan and $848 for the above market interest on deferred compensation;
Gasper $4,800 for the Savings Plan and $16,691 for the DC Supplemental
Plan; Karas $4,800 for the Savings Plan and $8,374 for the DC Supplemental
Plan; Woodward $3,497 for the Savings Plan and $7,386 for the DC
Supplemental Plan; and Robinette $4,800 for the Savings Plan and $4,140 for
the DC Supplemental Plan.
(10) The following are the number of shares and value of the restricted stock at
the end of the last fiscal year for: McFerson - 38,602 shares, at a value
of $1,995,241; Gasper - 16,875 shares, at a value of $872,227; Karas -
7,128 shares, at a value $368,424; Woodward - 7,782 shares at a value of
$402,232; and Robinette - 2,400 shares, at a value of $124,050.
B. EXECUTIVE INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Executive Incentive Plan. Under
the Executive Incentive Plan, annual payments are made to the Named Executive
Officers and certain other officers of the participating companies based on the
achievement of measures tied to the performance of the Nationwide Mutual
Insurance Company and its subsidiaries and affiliates (the "Nationwide Group")
and the relevant operating company over the preceding three years. Performance
measures are based on profitability and growth objectives which are established
in advance by the Board of Directors of the participating company. Under the
Executive Incentive Plan, the participant will be granted a target incentive
amount that represents a percentage (from 10% to 30% depending on the
participant's position within the participating company) of the participant's
base salary. The actual amount received by the participant will range from zero
to twice the target incentive amount, depending solely on the achievement of the
performance measures.
C. MANAGEMENT INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Management Incentive Plan. Under
the Management Incentive Plan, annual payments are made to the Named Executive
Officers and certain other management employees of the participating companies
based on the achievement of measures tied to the performance of the Nationwide
Insurance Enterprise, the relevant operating company, the relevant business unit
and the individual participant over the preceding year. Performance measures are
based on profitability, growth, expense management and keep strategic objectives
which are established in advance. Under the Management Incentive Plan, the
participant will be granted a target incentive amount that represents a
percentage (from 5% to 15% depending on the participant's position within the
participating company) of the participant's base salary. The actual amount
received by the participant under the Management Incentive Plan will range from
zero to twice the base incentive amount, depending solely on the achievement of
the performance measures. Beginning in 1998, Named Executive Officers and
certain other officers of the participating companies no longer participate in
the Management Incentive
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<PAGE> 40
Plan, but rather participate in the Performance Incentive Plan.
D. PERFORMANCE INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Performance Incentive Plan
implemented in 1998. Under the Performance Incentive Plan., annual payments are
made to Named Executive Officers and certain other management employees of the
participating companies based on the achievement of measures tied to the
performance of the Nationwide Group, the relevant operating company, the
relevant business unit and the individual participant over the preceding year.
Performance measures are based on a broad series of key financial results,
financial and operational comparison to external peer comparators, the extent of
accomplishment of strategic initiatives, and other factors and results impacting
organization performance, and further based upon individual employee
performance. Under the Performance Incentive Plan, the participant will be
granted a target incentive amount that represents a percentage (from 20% to 50%
depending on the participant's position within the participating company) of the
participant's base salary. The actual amount received by the participant under
the Performance Incentive Plan will range from zero to no maximum factor of the
participant's base salary, depending solely on the achievement of the
performance measures.
E. SUSTAINED PERFORMANCE INCENTIVE PLAN
Prior to 1997, Nationwide Mutual Insurance Company and certain of its
subsidiaries and affiliates, including Nationwide, maintained the Sustained
Performance Incentive Plan. Under the Sustained Performance Incentive Plan,
payments were made to Named Executive Officers and other senior officers of the
participating companies in each odd-numbered calendar year based on the
achievement of measures tied to the performance of the Nationwide Group over the
preceding four years. Performance measures were based on profitability, growth
and strategic objectives for the Nationwide Group which were established in
advance by the Boards of Directors of the participating companies. Under the
Sustained Performance Incentive Plan, participants were granted target incentive
amounts that represented a percentage (10% to 20% depending on the participant's
position within the participating company) of the sum of the participant's base
salary for the last two years of the performance cycle. The actual amount
received by the participant ranged from zero to twice the target incentive
amount, depending solely on the achievement of the performance measures.
Nationwide Mutual Insurance Company and the participating subsidiaries and
affiliates terminated the Sustained Performance Incentive Plan at the close of
calendar year 1996. A payment under the Sustained Performance Incentive Plan was
made in 1997, covering performance measured for the period from 1993 to 1996.
Such payment was made in cash as provided in the Sustained Performance Incentive
Plan. To facilitate the termination of the Sustained Performance Incentive Plan,
the performance measurement period for 1995 to 1998 was closed at the end of
calendar year 1996. Payments made in 1997 for such performance measurement
period were made in shares of restricted stock of Nationwide Financial Services
under Nationwide Financial Services' 1996 Long-Term Equity Compensation Plan.
Messrs. McFerson, Gasper, Karas and Woodward received 23,602, 6,875, 3,128 and
4,282 shares of restricted stock, respectively.
F. DEFERRED COMPENSATION PROGRAM
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain a deferred compensation program (the
"Officers' Deferred Compensation Program") pursuant to which officers of
participating companies may elect to defer payment of amounts otherwise payable
to them. An eligible officer is permitted to enter into a deferral agreement
pursuant to which such officer may annually elect to defer a portion of his or
her salary or incentive compensation earned under the Performance Incentive
Plan, Management Incentive Plan or Executive Incentive Plan during the following
year. Any such election is effective prospectively. Amounts deferred under the
Officer's Deferred Compensation Program will generally be payable in annual
installments beginning in January of the calendar year following the calendar
year in which the officer terminates employment. Amounts deferred under the
Officers' Deferred Compensation Program are credited with interest.
The interest rate is based on the fixed rate option in the Savings Plan.
2
<PAGE> 41
G. SAVINGS PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Nationwide Group Savings Plan
(the "Savings Plan"), a qualified profit-sharing plan including a qualified cash
or deferred arrangement covering eligible employees of participating companies
within the Nationwide Group. Under the Savings Plan, participants who are not
residents of Puerto Rico may elect to contribute between 1% and 22% of their
compensation to accounts established on their behalf under the Savings Plan in
the form of voluntary salary reductions on a pretax basis and participants who
are residents of Puerto Rico may make contributions on an after-tax basis. The
participating companies are obligated to make matching employer contributions,
for the benefit of their participating employees, at the rate of 70% of the
first 2% of compensation deferred or contributed to the Savings Plan by each
employee, and 40% of the next 4% of compensation deferred or contributed by each
employee to the Savings Plan. All amounts contributed to the Savings Plan are
held in a separate account for each participant and are invested in one or more
funds made available under the Savings Plan and selected by the participant.
Normally, a participant receives the value of his or her account upon
termination of employment, although a participant may withdraw all or a part of
the amounts credited to his or her accounts during employment under certain
circumstances including attainment of age 59 1/2, or receive a loan of a portion
of his or her account balance. Under the Savings Plan, a participant is
immediately vested in all amounts credited to his or her account as a result of
salary deferrals (and earnings on those deferrals) or after-tax contributions
(and earnings on those contributions), as applicable. A participant is vested in
amounts attributable to employer matching contributions (and earnings on those
contributions) over a period of five years.
H. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain an unfunded,
nonqualified defined contribution supplemental benefit plan, the Nationwide
Group Supplemental Defined Contribution Plan (the "DC Supplemental Plan"), which
provides benefits, equal to employer matching contributions that would have been
made under the Savings Plan for the participants, in the absence of the IRC
Section 401(a)(17) limitation on compensation that can be considered and the IRC
Section 402(g) limitation on amounts that can be deferred under the Savings Plan
reduced by actual employer matching contributions made to the Savings Plan.
Participants are limited to those officers earning in excess of $160,000
annually. Benefits under the DC Supplemental Plan vest at the same time as
employer matching contributions vest under the Savings Plan.
I. LONG-TERM EQUITY COMPENSATION PLAN
The purpose of the Long Term Equity Compensation Plan is to benefit the
stockholders of Nationwide Financial Services by encouraging high levels of
performance by selected officers, directors and employees of Nationwide
Financial Services and certain of its affiliates, attracting and retaining the
services of such individuals and aligning the interests of such individuals with
those of the stockholders.
The Long Term Equity Compensation Plan provides for the grant of any or all of
the following, types of awards: (i) stock options, including incentive stock
options and non-qualified stock options, for shares of Class A Common Stock;
(ii) stock appreciation rights, either in tandem with stock options or
freestanding; (iii) restricted stock; and (iv) performance awards. Any stock
option granted in the form of an incentive stock option must satisfy the
applicable requirements of Section 422 of the IRC. Awards may be made to the
same person on more than one occasion and may be granted singly, in combination
or in tandem as determined by Nationwide Financial Services Compensation
Committee.
The Long Term Equity Compensation Plan grants the Nationwide Financial Services
Compensation Committee, which administers the Long Term Equity Compensation
Plan, flexibility in creating the terms and restrictions deemed appropriate for
particular awards as facts and circumstances warrant. The Long Term Equity
Compensation Plan is intended to constitute a non-qualified, unfunded, unsecured
plan for incentive and deferred compensation and is not intended to be subject
to any requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Awards under the Long Term Equity Compensation Plan which are
performance-based are intended to qualify as "performance-based
3
<PAGE> 42
compensation" for purposes of Section 162(m) of the Internal Revenue Code of
1986, as amended.
No awards may be granted under the Long Term Equity Compensation Plan after
December 11, 2006, and the Long Term Equity Compensation Plan may be terminated
by the Board of Directors of Nationwide Financial Services prior to such date.
In the event of expiration or earlier termination of the Long Term Equity
Compensation Plan, the Long Term Equity Compensation Plan will remain in effect
until such time as all awards granted thereunder have been satisfied or have
expired.
J. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table shows, as to Named Executive Officers in the Summary
Compensation Table, certain information concerning stock options granted during
the 1998 fiscal year under the Long Term Equity Compensation Plan.
4
<PAGE> 43
OPTION/STOCK APPRECIATION RIGHTS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANT
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE OR BASE GRANT DATE
OPTIONS GRANTED FISCAL YEAR PRICE $/SH PRESENT VALUE
NAME (1) EXPIRATION DATE (2)
<S> <C> <C> <C> <C> <C>
Dimon R. McFerson 60,000 18.7% $39.375 February 10, 2008 $924,600
Joseph J. Gasper 40,000 12.4% 39.375 February 10, 2008 616,400
Richard A. Karas 20,000 6.2% 39.375 February 10, 2008 308,200
Robert J. Woodward 12,000 3.7% 39.375 February 10, 2008 184,920
Douglas C. Robinette 3,200 1.0% 42.9375 May 12, 2008 51,136
</TABLE>
(1) One-third of the options granted become exercisable each year on the
anniversary of the grant date. Options may be accelerated upon a change of
control or certain other events of termination of employment.
(2) The estimated grant date present value dollar amounts in this column are
the result of calculations made using the Black-Scholes model, a
theoretical method for estimating the present value of stock options based
on a complex set of assumptions. The material assumptions and adjustments
incorporated in the Black-Scholes model used to estimate the value of
these options include the following:
o An exercise price on the options equal to the fair market value of the
underlying stock on the date of the grant, as listed in the table.
o The rate available at the time the grant was made on zero-coupon U.S.
Government issues with a remaining term equal to the expected life.
The risk-free rate was 5.49% for the February 10, 1998 grants and
5.63% for the May 12, 1998 grant.
o Dividends at a rate of $0.24 per share for the February 10, 1998
grants and $0.32 for the May 12, 1998 grant, representing the
annualized dividends paid on shares of common stock at the date of
grant.
o An option term before exercise of 5 years, which represents the
typical period that options are held prior to exercise.
o Volatility of the stock price of 36.6% for the February 10, 1998
grants, reflecting the daily stock price volatility for the
approximate eleven month period from the initial public offering to
the grant date, and 34.8% for the May 12, 1998, reflecting the daily
stock price volatility for the one-year period prior to the grant
date.
o No adjustments were made for vesting requirements,
non-transferability, or risk of forfeiture.
K. OPTIONS/STOCK APPRECIATION RIGHTS EXERCISES AND HOLDINGS
The following table provides information, with respect to Named Executive
Officers, concerning the exercise of options and/or Stock Appreciation Rights
during 1998 and unexercised options and Stock Appreciation Rights held as of
fiscal year-end December 31, 1998, under the Long-Term Executive Compensation
Plan.
AGGREGATED OPTION/S STOCK APPRECIATION RIGHTS AR EXERCISES IN LAST FISCAL
YEAR AND YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE MONEY
UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR -END ($)
NAME YEAR-END EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
Dimon R. McFerson 13,333/86,667 375,824/1,490,426
Joseph J. Gasper 10,000/60,000 281,875/1,056,250
Richard A. Karas 3,333/26,667 93,949/434,176
Robert J. Woodward, Jr. 3,333/18,677 93,949/335,676
Douglas C. Robinette 0/3,200 0/28,000
</TABLE>
2
<PAGE> 44
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLANS
NAME PERFORMANCE OR THRESHOLD ($) TARGET ($) MAXIMUM ($)
OTHER PERIOD
UNTIL
MATURATION OR
PAYOUT
<S> <C> <C> <C> <C>
Dimon R. McFerson 1998-2000 36,351 196,491 392,982
Joseph J. Gasper 1998-2000 25,530 138,000 276,000
Richard A Karas 1998-2000 15,000 45,000 90,000
Robert J. Woodward, Jr. 1998-2000 11,962 64,659 129,318
Douglas C. Robinette 1998-2000 11,500 34,500 69,000
</TABLE>
The Long Term Incentive Plan Table above reflects participation of each Named
Executive Officer in the Executive Incentive Plan for the performance cycle of
January 1, 1998 through December 31, 2000. For Messrs. McFerson, Gasper and
Woodward, payment is based upon the executive's base salary at the end of the
three-year performance cycle, a predetermined percentage of that salary, and the
achievement of specified levels of Return on Equity of Nationwide Financial
Services, and Trade Combined Ratio and Net Written Premium Growth of Nationwide
over the three-year period. The threshold amount will be earned if approximately
93% of the targeted Return on Equity of Nationwide Financial Services and a
minimal specified level of a combination of the Trade Combined Ratio and Net
Written Premium Growth of Nationwide are achieved for the three-year period. The
target amount will be earned if 100% of the targeted Return on Equity of
Nationwide Financial Services and a targeted specified level of a combination of
the Trade Combined Ratio and Net Written Premium Growth of Nationwide is
achieved for the three-year period. The maximum amount will be earned if
approximately 123% of the targeted Return on Equity of Nationwide and a maximum
specified level of a combination of the Trade Combined Ratio and Net Written
Premium Growth of Nationwide are achieved for the three-year period. For Messrs.
Karas and Robinette, payment is based upon the same factors except that the
performance measurement criteria used is only the Return on Equity of Nationwide
Financial Services. Base salary levels as of December 31, 1998, were used to
calculate the estimated dollar value of the future payments. No payment will be
made if the minimal performance results are not achieved.
L. PENSION PLANS
(i) Retirement Plan
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide Life Insurance Company, maintain a qualified
defined-benefit plan, the Nationwide Group Retirement Plan (the "Retirement
Plan"). In general, a participant's annual retirement benefit under the
Retirement Plan will be equal to the sum of:
(i) 1.25% of the participant's Final Average Compensation times years of
service (to a maximum of 35 years); and
(ii) 0.50% of the participant's Final Average Compensation in excess of
Social Security Covered Compensation times years of service (to a
maximum of 35 years).
Final Average Compensation, for the portion of the participant's benefit which
is attributable to service on or after January 1, 1996, is the average of the
highest five consecutive covered compensation amounts of the participant in the
participant's last 10 years of service. For the portion of a participant's
benefit attributable to service prior to January 1, 1996, Final Average
Compensation is the average of the highest three consecutive covered
compensation amounts of the participant in the participant's last 10 years of
service. Covered compensation, for purposes of determining Final Average
Compensation under either method, is calculated on a calendar-year basis and
includes compensation from any member of the Nationwide Insurance Enterprise.
With respect to Messrs. Gasper, Karas and Robinette, because each such officer's
compensation is allocated solely to Nationwide Financial Services and its
subsidiaries, covered compensation includes the compensation listed under the
headings Salary, Bonus and Long-Term Incentive Plan Payouts shown in the Summary
3
<PAGE> 45
Compensation Table. Covered compensation for Messrs. McFerson and Woodard
includes the amount set forth under the headings Salary, Bonus and Long-Term
Incentive Plan shown in the Summary Compensation Table and additional
compensation amounts received for services rendered to other companies of the
Nationwide Group. Social Security Covered Compensation means the average of the
Social Security wage bases in effect during the 35-year period ending with the
last day of the year the participant attains Social Security retirement age. The
portion of a participant's benefit attributable to years of service credited
prior to 1996 is also subject to post-retirement increases following the
commencement of benefits or the participant's attainment of age 65, whichever is
later.
A participant becomes fully vested after the completion of five years of vesting
service. The Retirement Plan generally provides for payments to or on behalf of
each vested participant upon such participant's retirement on his or her normal
retirement date or later, although provision is made for payment of early
retirement benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62 for those
with 5 or more years of vesting service. The normal retirement date tinder the
Retirement Plan is the later of the date the participant attains age 65 or
completes five years of vesting service. Death benefits are payable to a
participant's spouse or, under certain circumstances, the named beneficiary, of
a participant who dies with a vested benefit under the Retirement Plan or while
an employee. The Retirement Plan also provides for the funding of retiree
medical benefits under Section 401(h) of the Internal Revenue Code.
(ii) Excess and Supplemental Plans
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain an unfunded, nonqualified
defined-benefit excess benefit plan, the Nationwide Group Excess Benefit Plan
(the "Excess Plan") and an unfunded, nonqualified defined-benefit supplemental
benefit plan pursuant to which certain participants may receive a supplemental
retirement benefit, the Nationwide Group Supplemental Retirement Plan (the
"Supplemental Plan"). Any participant whose benefits are limited under the
Retirement Plan by reason of limitations under Section 415 of the Internal
Revenue Group on the maximum benefit that may be paid under the Retirement Plan
will receive, under the Excess Plan, that portion of the benefit that he or she
would have been entitled to receive under the Retirement Plan in the absence of
such limitations. Officers who earn in excess of $160,000 annually, have at
least 5 years of vesting service and whose benefits under the Retirement Plan
are limited by reason of certain other limitations under the Internal Revenue
Group, may receive benefits under the Supplemental Plan. Benefits under the
Supplemental Plan will be the sum of: (i) 1.25% of the participant's Final
Average Compensation times years of service (up to a maximum of 40 years); and
(ii) 0.75% of the participant's Final Average Compensation in excess of Social
Security Covered Compensation times years of service (up to a maximum of 40
years) reduced by benefits accrued under the Retirement Plan and the Excess
Plan. The benefits under the Supplemental Plan, for individuals participating in
that plan on January 1, 1999, and the Excess Plan vest at the same time as
benefits vest under the Retirement Plan. Benefits for all other participants in
the Supplemental Plan vest over a period of 5 years of participation in that
plan.
The chart below indicates the estimated maximum annual retirement benefits that
a hypothetical participant would be entitled to receive under the Retirement
Plan including payments made under the Excess and Supplemental Plans as a result
of limitations imposed by the Internal Revenue Group, computed on a
straight-life annuity basis, if retirement occurred at age 65 and the number of
credited years of service and Final Average Compensation equaled the amounts
indicated. For purposes of the chart, it is assumed that the Final Average
Compensation is the same whether measured over the three-year averaging period
that applies to service accumulated prior to 1996 or the five-year period that
applies to service accumulated after 1995. In actual operation, the total
benefit received under the Retirement Plan (including payments made under the
Excess and Supplemental Plans) would be the total of the benefit determined
based on years of service earned under each method.
2
<PAGE> 46
YEARS OF SERVICE
<TABLE>
<CAPTION>
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$125,000 $30,478 $40,637 $50,797 $60,956 $71,115
$150,000 37,040 49,387 61,734 74,081 86,428
$175,000 48,998 65,331 81,664 97,996 114,329
$200,000 56,498 75,331 94,164 112,996 131,829
$225,000 63,998 85,331 106,664 127,996 149,329
$250,000 71,498 95,331 119,164 142,996 166,829
$300,000 86,498 115,331 144,164 172,996 201,829
$350,000 101,498 135,331 169,164 202,996 236,829
$400,000 116,498 155,331 194,164 232,996 271,829
$450,000 131,498 175,331 219,164 262,996 306,829
$500,000 146,498 195,331 244,164 292,996 341,829
$600,000 176,498 235,331 294,164 352,996 411,829
$700,000 206,498 275,331 344,164 412,996 481,829
$800,000 236,498 315,331 394,164 472,996 551,829
$900,000 266,498 355,331 444,164 532,996 621,829
</TABLE>
All Named Executive Officers have a portion of their benefit calculated based on
the post-1995 definition of Final Average Compensation. As of December 31, 1995,
the number of credited years of service under the Retirement Plan for Messrs.
McFerson, Gasper, Karas, Woodward and Robinette was 23 years, 29.5 years, 31.5
years, 31.67 years and 11.42 years, respectively. Mr. McFerson's credited years
of service include, pursuant to an agreement with Nationwide Mutual Insurance
Company, 8.17 years in excess of those actually earned through employment by the
Nationwide Group. The benefit attributable to those additional years will be
paid by Nationwide Mutual Insurance Company (not the Retirement Plan) and is
reduced by the benefit payable under the retirement plan of Mr. McFerson's
previous employer. Pursuant to an agreement with Nationwide Mutual Insurance
Company, Mr. Robinette's service with all Nationwide companies prior to January
1, 1996 will be treated as service with Nationwide Mutual Insurance Company. The
additional benefit to Mr. Robinette, if any, will be paid by Nationwide Mutual
Insurance Company, not the Retirement Plan. Each of the Named Executive Officers
earned additional years of service in 1996, 1997 and 1998 and their benefit for
such years and all future years will be calculated under the new definition of
Final Average Compensation. Covered compensation paid by Nationwide Financial
Services for the fiscal year ended December 31, 1998, for Messrs. McFerson,
Gasper, Karas, Woodward, and Robinette was $747,670, $716,035, $438,131,
$362,677 and $297,966, respectively.
10. COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
A. INTRODUCTION
Approximately twenty percent of the outstanding stock of Nationwide Financial
Services is publicly traded. Nationwide Mutual Insurance Company through a
wholly-owned subsidiary, owns approximately eighty percent of the outstanding
shares of Nationwide Financial Services. Because Nationwide is the principal
operating subsidiary of Nationwide Financial Services, the Nationwide Life
Insurance Company Compensation Committee (the "Nationwide Life Compensation
Committee") established all components of 1998 compensation for Nationwide
Financial Services' executive officers, with the exception of stock-based
incentive grants made by Nationwide Financial Services Compensation Committee
under the Long-Term Equity Compensation Plan.
Dimon R. McFerson, Nationwide Financial Services' Chairman and Chief Executive
Officer, serves also in the same capacity for Nationwide. Robert J. Woodward
Jr., Nationwide Financial Services' Executive Vice President - Chief Investment
Officer serves also in the same capacity for Nationwide. Pursuant to a Cost
Sharing Agreement, compensation for Mr. McFerson and Mr. Woodward is allocated
among the companies in the Nationwide Group for whom services are performed. The
amounts are paid by Nationwide Mutual Insurance Company and reimbursed by the
other companies in accordance with the terms of the Cost Sharing Agreement. The
1998 compensation for Mr. McFerson and Mr. Woodward reported in the compensation
tables and discussed in this report
1
<PAGE> 47
is the amount allocated to Nationwide Financial Services and its subsidiaries
under the Cost Sharing Agreement and is solely for services rendered to
Nationwide Financial Services and its subsidiaries. Compensation for the other
executives named in the compensation tables was not allocated and is their
aggregate 1998 compensation for services rendered to Nationwide Financial
Services and its subsidiaries.
The Nationwide Life Compensation Committee and the Nationwide Financial Services
Compensation Committee are both comprised solely of non-employee directors.
B. COMPENSATION PHILOSOPHY AND OBJECTIVES
The Nationwide Life Compensation Committee and the Nationwide Financial Services
Compensation Committee (collectively referred to herein as the "Compensation
Committees") believe that the compensation program for Nationwide Financial
Services' executive officers should support Nationwide Financial Services and
the Nationwide Group vision and business strategies. In addition, compensation
should be determined within a competitive framework based on overall financial
results, business unit results, teamwork, and individual contributions that help
build value for Nationwide Financial Services' stockholders. The primary
objectives of the compensation program are to:
o Provide a direct link between pay and performance;
o Allocate a larger percentage of executive compensation to pay that is
at-risk in order to positively influence behavior and support
accountability;
o Attract, retain and motivate top-caliber employees required for new
business directions;
o Offer total compensation opportunities that are fully competitive with
the appropriate external markets in design and pay level; and
o Emphasize the need to focus on stockholder value, in addition to
providing-competitive value to customers.
As part of the overall compensation philosophy, the Compensation Committees have
determined that total compensation and each of the elements that comprise total
compensation (base salary, annual incentives, long term incentives) should be
targeted at the 50th percentile of the market. The Compensation Committees
believe that differences in individual performance should result in
significantly different levels of compensation. Therefore, individual pay
delivered may be higher or lower than the 50th percentile of the market,
depending on individual performance.
Competitive market data is provided to the Compensation Committees by
independent compensation consultants. This data compares Nationwide Financial
Services' and the Nationwide Group's compensation practices to various groups of
comparable companies. These comparable companies compete with Nationwide
Financial Services and with the Nationwide Insurance Enterprise for customers,
capital, and employees, and are comparable to Nationwide Financial Services or
Nationwide Group in size, scope, and business focus. This group includes both
multi-line insurers and diversified financial organizations.
The companies chosen for the compensation comparator group are not necessarily
the same companies that comprise the peer group in the Performance Graph below
included in this Proxy Statement. The compensation comparator group includes
more companies than those in the peer group because it gives the Compensation
Committees a broader data base for comparison purposes.
C. ELEMENTS OF 1998 EXECUTIVE COMPENSATION
The key elements of Nationwide Financial Services' executive compensation
program are base salary, annual incentives and long-term compensation. The
following discussion relates to Nationwide Financial Services' executive
officers other than Mr. McFerson whose compensation is discussed separately in
the Compensation of the Chief Executive Officer.
D. BASE SALARIES
Base salaries offer security to executives and allow Nationwide Financial
Services' to attract competent executive talent and maintain a stable management
team. They also allow executives to be rewarded for individual performance, and
encourage the development of executives. Pay for individual performance rewards
executives for achieving goals that may not be immediately evident in common
financial measurements.
2
<PAGE> 48
Base salaries for executive officers are initially determined by evaluating
executives' level of responsibility, prior experience, breadth of knowledge,
internal equity, and external pay practices.
In determining increases to base salaries for 1998, the Nationwide Life
Compensation Committee considered relevant external market data, as described
above in Compensation Philosophy and Objectives. However, increases to base
salaries were driven primarily by individual performance that was evaluated
based on levels of individual contribution to Nationwide Financial Services and
the Nationwide Group. When evaluating individual performance, the Nationwide
Life Compensation Committee considered, among other things, the executive's
efforts in promoting Nationwide Financial Services and Nationwide Group values;
continuing educational and management training; improving product quality;
developing relationships with customers, suppliers, and employees; and
demonstrating leadership abilities among co-workers. No specific formula was
used in evaluating individual performance, and the weighting given to each
factor with respect to each executive officer was within the individual
discretion and judgment of each member of the Nationwide Life Compensation
Committee. Base salaries for the executive officers, including promotion
increases, were increased in 1998 by an average of 10.6%, a rate comparable to
the median base salary increases provided at comparator companies. Executive
officer salaries were established at a level that is consistent with the goals
stated in Compensation Philosophy and Objectives.
E. ANNUAL INCENTIVE COMPENSATION
The Performance Incentive Plan promotes the pay-for-performance philosophy of
the Compensation Committees by providing executives with direct financial
rewards in the form of annual cash incentives. Awards for 1998 were based on the
performance of Return on Equity and Premium Growth, other key financial
measures, financial and operational comparison to external peer competitors, to
the extent of accomplishment of strategic initiatives, and other factors and
results impacting performance for both Nationwide Financial Services, and Return
on Equity, Revenue Growth and Expense Management of the Nationwide Group, and
further based upon individual employee performance.
Each year, the Nationwide Life Compensation Committee establishes many specific
performance measures used for the Performance Incentive Plan. Participants are
provided a target incentive opportunity that represents a percentage of their
base salary. In 1998, individual targets ranged from twenty to forty-five
percent of base salary. Individual payouts under the Performance Incentive Plan
may range from zero to no maximum factor of the individual's target incentive
amount, depending on the achievement of the performance measures. For 1998, the
excellent results achieved for the Return on Equity, the Premium Growth, and
other financial and strategic performance measures of Nationwide Financial
Services and of the Nationwide Group resulted in a payout of 180 percent of
target for Mr. Gasper; and an average of 173 percent of target for Mr. Karas,
Mr. Woodward and Mr. Robinette. These amounts are reflected in the Bonus column
in the Summary Compensation Table.
F. LONG-TERM INCENTIVE COMPENSATION
In keeping with the philosophy of the Compensation Committees to provide a total
compensation package that favors at-risk components of pay, long-term incentives
comprise a significant portion of an executive's total compensation package.
When determining long-term incentive award sizes, the Compensation Committees
consider the executives' levels of responsibility, position within Nationwide
Financial Services or Nationwide Group, prior experience, historical award data,
various performance criteria, and compensation practices at comparator
companies.
The Compensation Committees utilize the two long-term incentive plans described
below. While each plan has a different objective, the plans work together in
order to achieve a balance among operational and strategic goals, market pay
orientation, and alignment of executive interests with that of stockholders.
(i) Executive Incentive Plan
Under the Executive Incentive Plan, participants receive cash awards based on
the achievement of measures tied to the performance of Nationwide Financial
Services and the Nationwide Group over a three-year period. New performance
cycles start annually. The Executive Incentive Plan participants are granted a
target incentive amount that represents a percentage (from 5% to 25%) of their
base salary. Individual payouts may range from zero to 200
3
<PAGE> 49
percent of the individual's target incentive amount, depending solely on the
achievement of the performance measures.
The Executive Incentive Plan award paid for 1998 was based on the three-year
period from 1996 to 1998. Performance was measured by the Return on Equity of
Nationwide Financial Services, and the Trade Combined Ratio and the Net Written
Premium Growth of the Nationwide Insurance Enterprise. For 1996-1998 award
period, the outstanding results achieved for the Return on Equity of Nationwide
Financial Services and the Trade Combined Ratio and the Net Written Premium
Growth of the Nationwide Group resulted in a payout of 156 percent of target for
Mr. Gasper and Mr. Woodward and 200 percent of target for Mr. Karas and Mr.
Robinette. The amounts are reflected in the Long-Term Incentive Plan payout
column in the Summary Compensation Table.
Award opportunities under the Executive Incentive Plan, which were approved by
the Nationwide Life Compensation Committee for the 1998-2000 period, are
reflected in the Long-Term Incentive Plan Award Table. The executive officers
received target incentive amounts representing 15% to 35% of base salary. The
performance measures are the same as those measured for the 1996-1998 award
period. These opportunities were determined consistent with the plan design
described above, and the goals stated in Compensation Philosophy and Objectives.
(ii) Long-Term Equity Compensation Plan
The Long-Term Equity Compensation Plan authorizes grants of stock options, stock
appreciation rights, restricted stock, and performance awards. The objectives of
the Long-Term Equity Compensation Plan are to encourage high levels of
performance by selected officers, directors and employees of Nationwide
Financial Services and certain of its affiliates, to attract and retain the
services of such individuals, and to align the interests of such individuals
with those of the stockholders.
During February 1998 and May 1998, the Nationwide Financial Services
Compensation Committee made grants to executive officers and others under the
Long-Term Equity Compensation Plan. Award sizes were determined based on
competitive equity grant practices using the median practices at comparator
companies and the individual's impact on Nationwide Financial Services'
performance and were determined consistent with the goals stated in Compensation
Philosophy and Objectives. The grant was awarded in non-qualified stock options
that have an exercise price equal to the fair market value of the Common Stock
on the date of the option grant. Such options become exercisable in equal
installments over a three-year term, and expire ten years after the date of
grant.
G. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Dimon R. McFerson serves as Nationwide Financial Services' Chairman and Chief
Executive Officer-Nationwide Insurance Enterprise, as well as in the same
capacity for Nationwide. Except for grants made under the Long-Term Incentive
Plan in February 1998 by the Nationwide Financial Services Compensation
Committee, all components of Mr. McFerson's compensation for 1998 were
established by the Nationwide Life Compensation Committee.
As discussed above in the Introduction, a portion of Mr. McFerson's annual
compensation is allocated to Nationwide Financial Services for services rendered
to Nationwide Financial Services, based on the time Mr. McFerson devotes to his
responsibilities with Nationwide Financial Services. The compensation reported
for Mr. McFerson in the compensation tables and discussed in this report
represents amounts paid for Mr. McFerson's services as Chairman and Chief
Executive Officer-Nationwide Insurance Enterprise and Nationwide Financial
Services and its subsidiaries.
Mr. McFerson's 1998 compensation was determined pursuant to the same philosophy
and objectives described earlier in this report and used for all executive
officers. In determining the compensation of Mr. McFerson for 1998, the
Nationwide Life Compensation Committee reviewed the strong Nationwide Financial
Services and Nationwide Group financial results for 1997, Mr. McFerson's
superior leadership of the Nationwide Group since 1992, his extensive experience
in the industry, and his successful efforts in Nationwide Financial Services.
The portion of Mr. McFerson's base salary compensation allocated to Nationwide
Financial Services totaled $430,970 in 1998, an increase of 12.9% percent over
1997. This increase reflects both an adjustment in Mr. McFerson's annual base
salary rate, and an increase in the cost allocation. In 1998, Mr. McFerson's
annual base salary rate was increased by 5.6 percent. This increase positioned
Mr. McFerson's base salary compensation at
4
<PAGE> 50
approximately the 50th percentile of the comparator companies.
The portion of Mr. McFerson's annual incentive award allocated to Nationwide
Financial Services earned in 1998 under the Performance Incentive Plan was
$392,982. This award was 91.2 percent of his allocated base salary compensation,
and reflected 180 percent of his target incentive. This payment was determined
by the level of achievement of specified financial, operational and strategic
goals as assessed by Nationwide's Board of Directors in their annual performance
evaluation of Mr. McFerson.
With regard to long-term incentive compensation, the portion of Mr. McFerson's
Executive Incentive Plan award allocated to Nationwide Financial Services was
$204,351, reflecting performance over the 1996-1998 award period. This award was
47.4 percent of his allocated base salary compensation, and reflected 156
percent of his target incentive. This payment was determined by the strong
results achieved for the Return on Equity of Nationwide Financial Services, the
Trade Combined Ratio and the Net Written Premium of the Nationwide Group.
Under the Long-Term Equity Compensation Plan, the Nationwide Financial Services
Compensation Committee granted Mr. McFerson 60,000 stock option shares. In
making this grant, the Nationwide Financial Services Compensation Committee took
into account competitive levels of long-term compensation for Chief Executive
Officers of major diversified insurance and financial services organizations
with similar size and scope, as well as Mr. McFerson's role in the continued
strategic position of Nationwide Financial Services. In addition, the Nationwide
Financial Services Compensation Committee reflected Nationwide Financial
Services's desire to have top officers build a significant personal level of
stock ownership in Nationwide Financial Services, so as to better align their
interests with those of other stockholders.
H. POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code provides that executive compensation
in excess of $1 million will not be deductible for purposes of corporate income
taxes unless it is performance-based compensation and is paid pursuant to a plan
meeting certain requirements of the Internal Revenue Code. The Compensation
Committees intend to continue increased reliance on performance-based
compensation programs. Such programs will be designed to fulfill, in the best
possible manner, future corporate business objectives. To the extent consistent
with this goal, the Compensation Committees currently anticipate that such
programs will also be designed to satisfy the requirements of Section 162(m) of
the IRC with respect to the deductibility of compensation paid. However, the
Compensation Committees may award compensation that is not fully deductible if
the Compensation Committees determine that such award is consistent with their
philosophy and in the best interests of Nationwide Financial Services and its
stockholders.
(i) Nationwide Life Insurance Company Compensation Committee
Willard J. Engel, Chairman
Fred C. Finney
Yvonne L. Montgomery
Robert L. Stewart
5
<PAGE> 51
11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31, 1998
Schedule III Supplementary Insurance Information as of December 31,
1998, 1997 and 1996 and for each of the years then
ended
Schedule IV Reinsurance as of December 31, 1998, 1997 and 1996 and
for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996
All other schedules are omitted because they are not applicable or
required or because the required information has been included in the
audited consolidated financial statements or notes thereto.
2
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life
Insurance Company and subsidiaries (collectively the Company) as of December 31,
1998 and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1998. In connection with our audits of the consolidated financial
statements, we also have audited the related financial statement schedules
included in the prospectus. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Columbus, Ohio
January 29, 1999
<PAGE> 53
<TABLE>
<CAPTION>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
December 31,
-----------------------
Assets 1998 1997
------ --------- ---------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $14,245.1 $13,204.1
Equity securities 127.2 80.4
Mortgage loans on real estate, net 5,328.4 5,181.6
Real estate, net 243.6 311.4
Policy loans 464.3 415.3
Other long-term investments 44.0 25.2
Short-term investments 289.1 358.4
--------- ---------
20,741.7 19,576.4
--------- ---------
Cash 3.4 175.6
Accrued investment income 218.7 210.5
Deferred policy acquisition costs 2,022.2 1,665.4
Other assets 420.3 438.4
Assets held in separate accounts 50,935.8 37,724.4
--------- ---------
$74,342.1 $59,790.7
========= =========
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $19,767.1 $18,702.8
Other liabilities 866.1 885.6
Liabilities related to separate accounts 50,935.8 37,724.4
--------- ---------
71,569.0 57,312.8
--------- ---------
Commitments and contingencies (notes 7 and 12)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 914.7 914.7
Retained earnings 1,579.0 1,312.3
Accumulated other comprehensive income 275.6 247.1
--------- ---------
2,773.1 2,477.9
--------- ---------
$74,342.1 $59,790.7
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 54
<TABLE>
<CAPTION>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions of dollars)
Years ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
Policy charges $ 698.9 $ 545.2 $ 400.9
Life insurance premiums 200.0 205.4 198.6
Net investment income 1,481.6 1,409.2 1,357.8
Realized gains (losses) on investments 28.4 11.1 (0.3)
Other 66.8 46.5 35.9
-------- -------- --------
2,475.7 2,217.4 1,992.9
-------- -------- --------
Benefits and expenses:
Interest credited to policyholder account balances 1,069.0 1,016.6 982.3
Other benefits and claims 175.8 178.2 178.3
Policyholder dividends on participating policies 39.6 40.6 41.0
Amortization of deferred policy acquisition costs 214.5 167.2 133.4
Other operating expenses 419.7 384.9 342.4
-------- -------- --------
1,918.6 1,787.5 1,677.4
-------- -------- --------
Income from continuing operations before federal income tax expense 557.1 429.9 315.5
Federal income tax expense 190.4 150.2 110.9
-------- -------- --------
Income from continuing operations 366.7 279.7 204.6
Income from discontinued operations (less federal income tax expense
of $4.5 in 1996) -- -- 11.3
-------- -------- --------
Net income $ 366.7 $ 279.7 $ 215.9
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 55
<TABLE>
<CAPTION>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1998, 1997 and 1996
(in millions of dollars)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income equity
----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
December 31, 1995 $ 3.8 $ 657.2 $1,583.2 $ 384.3 $2,628.5
Comprehensive income:
Net income -- -- 215.9 -- 215.9
Net unrealized losses on securities
available-for-sale arising during
the year -- -- -- (170.9) (170.9)
--------
Total comprehensive income 45.0
--------
Dividends to shareholder -- (129.3) (366.5) (39.8) (535.6)
------ ------- -------- ------- --------
December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9
Comprehensive income:
Net income -- -- 279.7 -- 279.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 73.5 73.5
--------
Total comprehensive income 353.2
--------
Capital contribution -- 836.8 -- -- 836.8
Dividend to shareholder -- (450.0) (400.0) -- (850.0)
------ ------- -------- ------- --------
December 31, 1997 3.8 914.7 1,312.3 247.1 2,477.9
Comprehensive income:
Net income -- -- 366.7 -- 366.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 28.5 28.5
--------
Total comprehensive income 395.2
--------
Dividend to shareholder -- -- (100.0) -- (100.0)
------ ------- -------- ------- --------
December 31, 1998 $ 3.8 $ 914.7 $1,579.0 $ 275.6 $2,773.1
====== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 56
<TABLE>
<CAPTION>
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions of dollars)
Years ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 366.7 $ 279.7 $ 215.9
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,069.0 1,016.6 982.3
Capitalization of deferred policy acquisition costs (584.2) (487.9) (422.6)
Amortization of deferred policy acquisition costs 214.5 167.2 133.4
Amortization and depreciation (8.5) (2.0) 7.0
Realized gains on invested assets, net (28.4) (11.1) (0.3)
(Increase) decrease in accrued investment income (8.2) (0.3) 2.8
(Increase) decrease in other assets 16.4 (12.7) (38.9)
Decrease in policy liabilities (8.3) (23.1) (151.0)
(Decrease) increase in other liabilities (34.8) 230.6 191.4
Other, net (11.3) (10.9) (61.7)
--------- --------- ---------
Net cash provided by operating activities 982.9 1,146.1 858.3
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 1,557.0 993.4 1,162.8
Proceeds from sale of securities available-for-sale 610.5 574.5 299.6
Proceeds from repayments of mortgage loans on real estate 678.2 437.3 309.0
Proceeds from sale of real estate 103.8 34.8 18.5
Proceeds from repayments of policy loans and sale of other invested assets 23.6 22.7 22.8
Cost of securities available-for-sale acquired (3,182.8) (2,828.1) (1,573.6)
Cost of mortgage loans on real estate acquired (829.1) (752.2) (972.8)
Cost of real estate acquired (0.8) (24.9) (7.9)
Policy loans issued and other invested assets acquired (88.4) (62.5) (57.7)
Short-term investments, net 69.3 (354.8) 28.0
--------- --------- ---------
Net cash used in investing activities (1,058.7) (1,959.8) (771.3)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from capital contributions -- 836.8 --
Cash dividends paid (100.0) -- (50.0)
Increase in investment product and universal life insurance
product account balances 2,682.1 2,488.5 1,781.8
Decrease in investment product and universal life insurance
product account balances (2,678.5) (2,379.8) (1,784.5)
--------- --------- ---------
Net cash (used in) provided by financing activities (96.4) 945.5 (52.7)
--------- --------- ---------
Net (decrease) increase in cash (172.2) 131.8 34.3
Cash, beginning of year 175.6 43.8 9.5
--------- --------- ---------
Cash, end of year $ 3.4 $ 175.6 $ 43.8
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 57
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Description of Business
----------------------------------------
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
wholly owned by Nationwide Corporation (Nationwide Corp.). On that
date, Nationwide Corp. contributed the outstanding shares of NLIC's
common stock to Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corp. in November 1996 for NLIC and the
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. On March 11,
1997, NFS completed an initial public offering of its Class A common
stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or retirement products. In addition,
during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. These subsidiaries,
through December 31, 1996, and all accident and health and group life
insurance business have been accounted for as discontinued operations
for all periods presented. See notes 10 and 14. Additionally, NLIC paid
$900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc.,
Nationwide Investment Services Corporation and NWE, Inc. NLIC and its
subsidiaries are collectively referred to as "the Company."
The Company is a leading provider of long-term savings and retirement
products, including variable annuities, fixed annuities and life
insurance.
(2) Summary of Significant Accounting Policies
------------------------------------------
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
<PAGE> 58
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) Consolidation Policy
--------------------
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. Operations that are classified
and reported as discontinued operations are not consolidated but
rather are reported as "Income from discontinued operations" in
the accompanying consolidated statements of income. All
significant intercompany balances and transactions have been
eliminated.
(b) Valuation of Investments and Related Gains and Losses
-----------------------------------------------------
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy acquisition costs that would have
been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as
of December 31, 1998 or 1997.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
<PAGE> 59
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) Revenues and Benefits
---------------------
Investment Products and Universal Life Insurance Products:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
(d) Deferred Policy Acquisition Costs
---------------------------------
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. For traditional life insurance
products, these deferred policy acquisition costs are
predominantly being amortized with interest over the premium
paying period of the related policies in proportion to the ratio
of actual annual premium revenue to the anticipated total premium
revenue. Such anticipated premium revenue was estimated using the
same assumptions as were used for computing liabilities for future
policy benefits. Deferred policy acquisition costs are adjusted to
reflect the impact of unrealized gains and losses on fixed
maturity securities available-for-sale as described in note 2(b).
(e) Separate Accounts
-----------------
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $743.9 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy Benefits
----------------------
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges. The average interest rate credited on investment product
policy reserves was 6.0%, 6.1% and 6.3% for the years ended
December 31, 1998, 1997 and 1996, respectively.
Future policy benefits for traditional life insurance policies
have been calculated by the net level premium method using
interest rates varying from 6.0% to 10.5% and estimates of
mortality, morbidity, investment yields and withdrawals which were
used or which were being experienced at the time the policies were
issued, rather than the assumptions prescribed by state regulatory
authorities.
<PAGE> 60
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) Participating Business
----------------------
Participating business represents approximately 40% in 1998 (50%
in 1997 and 52% in 1996) of the Company's life insurance in force,
74% in 1998 (77% in 1997 and 78% in 1996) of the number of life
insurance policies in force, and 14% in 1998 (27% in 1997 and 40%
in 1996) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) Federal Income Tax
------------------
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) Reinsurance Ceded
-----------------
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis. All of the Company's accident
and health and group life insurance business is ceded to
affiliates and is accounted for as discontinued operations. See
notes 10 and 14.
<PAGE> 61
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(j) Recently Issued Accounting Pronouncements
-----------------------------------------
On January 1, 1998 the Company adopted SFAS No. 131 - Disclosures
about Segments of an Enterprise and Related Information (SFAS
131). SFAS 131 supersedes SFAS No. 14 - Financial Reporting for
Segments of a Business Enterprise. SFAS 131 establishes standards
for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports.
SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
adoption of SFAS 131 did not affect results of operations or
financial position, nor did it affect the manner in which the
Company defines its operating segments. The segment information
required for annual financial statements is included in note 13.
On January 1, 1998, the Company adopted SFAS No. 132 - Employers'
Disclosures about Pensions and Other Postretirement Benefits (SFAS
132). SFAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. The Statement does not change
the measurement or recognition of benefit plans in the financial
statements. The revised disclosures required by SFAS 132 are
included in note 8.
In June 1998, the FASB issued SFAS No. 133 - Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 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. SFAS 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.
In March 1998, The American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued
Statement of Position 98-1 - Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP
98-1 provides guidance intended to standardize accounting
practices for costs incurred to develop or obtain computer
software for internal use. Specifically, SOP 98-1 provides
guidance for determining whether computer software is for internal
use and when costs incurred for internal use software are to be
capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does
not expect the adoption of SOP 98-1, which occurred on January 1,
1999, to have a material impact on the Company's financial
statements.
(k) Reclassification
----------------
Certain items in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1998
presentation.
<PAGE> 62
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) Investments
-----------
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1998 and
1997 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
------------------------ ---- ----- ------ ----------
<S> <C> <C> <C> <C>
December 31, 1998:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 255.9 $ 13.0 $ -- $ 268.9
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 106.5 4.5 -- 111.0
Corporate securities 9,899.6 423.2 (18.7) 10,304.1
Mortgage-backed securities 3,457.7 104.2 (2.4) 3,559.5
--------- ------ ------ ---------
Total fixed maturity securities 13,721.3 544.9 (21.1) 14,245.1
Equity securities 110.4 18.3 (1.5) 127.2
--------- ------ ------ ---------
$13,831.7 $563.2 $(22.6) $14,372.3
========= ====== ====== =========
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ -- $ 313.7
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
--------- ------ ------ ---------
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
--------- ------ ------ ---------
$12,800.7 $498.3 $(14.5) $13,284.5
========= ====== ====== =========
</TABLE>
As of December 31, 1998 the Company had entered into S&P 500 futures
contracts with a notional amount of $20.0 million to reduce the risk of
changes in the fair market value of certain investments classified as
equity securities. These contracts had an unrealized loss of $1.3
million as of December 31, 1998 which is included in the recorded
amount of the equity securities and in accumulated other comprehensive
income, net of tax, similar to other unrealized gains and losses on
securities available-for-sale.
<PAGE> 63
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1998, by expected
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
(in millions of dollars) cost fair value
---- ----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 2,019.9 $ 2,048.0
Due after one year through five years 8,169.1 8,470.6
Due after five years through ten years 2,795.0 2,927.7
Due after ten years 737.3 798.8
--------- ---------
$13,721.3 $14,245.1
========= =========
</TABLE>
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997
---- ----
<S> <C> <C>
Gross unrealized gains $ 540.6 $ 483.8
Adjustment to deferred policy acquisition costs (116.6) (103.7)
Deferred federal income tax (148.4) (133.0)
------- -------
$ 275.6 $ 247.1
======= =======
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $52.6 $137.5 $(289.2)
Equity securities 4.2 (2.7) 8.9
----- ------ -------
$56.8 $134.8 $(280.3)
===== ====== =======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1998,
1997 and 1996 were $610.5 million, $574.5 million and $299.6 million,
respectively. During 1998, gross gains of $9.0 million ($9.9 million
and $6.6 million in 1997 and 1996, respectively) and gross losses of
$7.6 million ($18.0 million and $6.9 million in 1997 and 1996,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1998 was $3.7 million. No valuation
allowance has been recorded for these loans as of December 31, 1998.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million which includes
$3.9 million of impaired mortgage loans on real estate for which the
related valuation allowance was $0.1 million and $16.0 million of
impaired mortgage loans on real estate for which there was no valuation
allowance. During 1998, the average recorded investment in impaired
mortgage loans on real estate was approximately $9.1 million ($31.8
million in 1997) and interest income recognized on those loans was $0.3
million ($1.0 million in 1997), which is equal to interest income
recognized using a cash-basis method of income recognition.
<PAGE> 64
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997
---- ----
<S> <C> <C>
Allowance, beginning of year $42.5 $51.0
Reductions credited to operations (0.1) (1.2)
Direct write-downs charged against the allowance -- (7.3)
----- -----
Allowance, end of year $42.4 $42.5
===== =====
</TABLE>
Real estate is presented at cost less accumulated depreciation of $21.5
million as of December 31, 1998 ($45.1 million as of December 31, 1997)
and valuation allowances of $5.4 million as of December 31, 1998 ($11.1
million as of December 31, 1997).
Investments that were non-income producing for the twelve month period
preceding December 31, 1998 amounted to $42.4 million ($19.4 million
for 1997) and consisted of $32.7 million ($3.0 million in 1997) in
securities available-for-sale and $9.7 million ($16.4 million in 1997)
in real estate.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 982.5 $ 911.6 $ 917.1
Equity securities 0.8 0.8 1.3
Mortgage loans on real estate 458.9 457.7 432.8
Real estate 40.4 42.9 44.3
Short-term investments 17.8 22.7 4.2
Other 30.7 21.0 4.0
-------- -------- --------
Total investment income 1,531.1 1,456.7 1,403.7
Less investment expenses 49.5 47.5 45.9
-------- -------- --------
Net investment income $1,481.6 $1,409.2 $1,357.8
======== ======== ========
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $(0.7) $ 3.6 $(3.5)
Equity securities 2.1 2.7 3.2
Mortgage loans on real estate 3.9 1.6 (4.1)
Real estate and other 23.1 3.2 4.1
----- ----- -----
$28.4 $11.1 $(0.3)
===== ===== =====
</TABLE>
Fixed maturity securities with an amortized cost of $6.5 million and
$6.2 million as of December 31, 1998 and 1997, respectively, were on
deposit with various regulatory agencies as required by law.
<PAGE> 65
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) Federal Income Tax
------------------
The Company's current federal income tax liability was $72.8 million
and $60.1 million as of December 31, 1998 and 1997, respectively.
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Future policy benefits $207.7 $200.1
Liabilities in Separate Accounts 319.9 242.0
Mortgage loans on real estate and real estate 17.5 19.0
Other assets and other liabilities 58.9 59.2
------ ------
Total gross deferred tax assets 604.0 520.3
Less valuation allowance (7.0) (7.0)
------ ------
Net deferred tax assets 597.0 513.3
------ ------
Deferred tax liabilities:
Deferred policy acquisition costs 568.7 480.5
Fixed maturity securities 212.2 193.3
Deferred tax on realized investment gains 34.8 40.1
Equity securities and other long-term investments 9.6 7.5
Other 21.6 22.2
------ ------
Total gross deferred tax liabilities 846.9 743.6
------ ------
Net deferred tax liability $249.9 $230.3
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. There
has been no change in the valuation allowance for the years ended
December 31, 1998, 1997 and 1996.
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently payable $186.1 $121.7 $116.5
Deferred tax expense (benefit) 4.3 28.5 (5.6)
------ ------ ------
$190.4 $150.2 $110.9
====== ====== ======
</TABLE>
<PAGE> 66
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Total federal income tax expense for the years ended December 31, 1998,
1997 and 1996 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(in millions of dollars) Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $195.0 35.0 $150.5 35.0 $110.4 35.0
Tax exempt interest and dividends
received deduction (4.9) (0.9) - 0.0 (0.2) (0.1)
Other, net 0.3 0.1 (0.3) (0.1) 0.7 0.3
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $190.4 34.2 $150.2 34.9 $110.9 35.2
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $173.4 million, $91.8 million and
$115.8 million during the years ended December 31, 1998, 1997 and 1996,
respectively.
(5) Comprehensive Income
--------------------
Pursuant to SFAS No. 130 - Reporting Comprehensive Income, which the
Company adopted January 1, 1998, the Consolidated Statements of
Shareholder's Equity include a new measure called "Comprehensive
Income". Comprehensive Income includes net income as well as certain
items that are reported directly within separate components of
shareholders' equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal tax amounts are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $ 58.2 $141.1 $(272.4)
Adjustment to deferred policy acquisition costs (12.9) (21.8) 57.0
Related federal income tax (expense) benefit (15.9) (41.7) 44.0
------ ------ ------
Net 29.4 77.6 (171.4)
------ ------ ------
Reclassification adjustment for net (gains) losses
on securities available-for-sale realized
during the period:
Gross (1.4) (6.3) 0.7
Related federal income tax expense (benefit) 0.5 2.2 (0.2)
------ ------ -------
Net (0.9) (4.1) 0.5
------ ------ -------
Total Other Comprehensive Income $ 28.5 $ 73.5 $(170.9)
====== ====== =======
</TABLE>
(6) Fair Value of Financial Instruments
-----------------------------------
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
<PAGE> 67
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for
equity securities exclude the fair value of futures contracts
designated as hedges of equity securities.
Mortgage loans on real estate, net: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Separate account assets and liabilities: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
<PAGE> 68
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Policy reserves on life insurance contracts: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
Commitments to extend credit: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 7.
Futures contracts: The fair value for futures contracts is based
on quoted market prices.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
Carrying Estimated Carrying Estimated
(in millions of dollars) amount fair value amount fair value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $14,245.1 $14,245.1 $13,204.1 $13,204.1
Equity securities 128.5 128.5 80.4 80.4
Mortgage loans on real estate, net 5,328.4 5,527.6 5,181.6 5,509.7
Policy loans 464.3 464.3 415.3 415.3
Short-term investments 289.1 289.1 358.4 358.4
Cash 3.4 3.4 175.6 175.6
Assets held in separate accounts 50,935.8 50,935.8 37,724.4 37,724.4
Liabilities:
Investment contracts 15,468.7 15,158.6 14,708.2 14,322.1
Policy reserves on life insurance contracts 3,914.0 3,768.9 3,345.4 3,182.4
Liabilities related to separate accounts 50,935.8 49,926.5 37,724.4 36,747.0
Futures contracts 1.3 1.3 -- --
</TABLE>
(7) Risk Disclosures
----------------
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
Credit Risk: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
Interest Rate Risk: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
<PAGE> 69
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $156.0 million
extending into 1999 were outstanding as of December 31, 1998. The
Company also had $40.0 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1998.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 22% (20% in 1997) in any geographic area and no more than 2% (2%
in 1997) with any one borrower as of December 31, 1998. As of December
31, 1998, 42% (46% in 1997) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
Reinsurance: The Company has entered into a reinsurance contract to
cede a portion of its general account individual annuity business to
The Franklin Life Insurance Company (Franklin). Total recoveries due
from Franklin were $187.9 million and $220.2 million as of December 31,
1998 and 1997, respectively. The contract is immaterial to the
Company's results of operations. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder.
Under the terms of the contract, Franklin has established a trust as
collateral for the recoveries. The trust assets are invested in
investment grade securities, the market value of which must at all
times be greater than or equal to 102% of the reinsured reserves.
(8) Pension Plan and Postretirement Benefits Other Than Pensions
------------------------------------------------------------
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. The Company funds pension costs accrued for direct
employees plus an allocation of pension costs accrued for employees of
affiliates whose work efforts benefit the Company. Assets of the
Retirement Plan are invested in group annuity contracts of NLIC and
Employers Life Insurance Company of Wausau (ELICW).
Pension costs charged to operations by the Company during the years
ended December 31, 1998, 1997 and 1996 were $2.0 million, $7.5 million
and $7.4 million, respectively. The Company has recorded a prepaid
pension asset of $5.0 million as of December 31, 1998 and no prepaid or
accrued pension asset or expense as of December 31, 1997.
<PAGE> 70
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1998 and 1997 was $40.1 million and $36.5 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1998, 1997 and
1996 was $4.1 million, $3.0 million and $3.3 million, respectively.
Information regarding the funded status of the pension plan as a whole
and the postretirement life and health care benefit plan as a whole as
of December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------- -----------------------
(in millions of dollars) 1998 1997 1998 1997
--------------------------------------------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $2,033.8 $1,847.8 $237.9 $ 200.7
Service cost 87.6 77.3 9.8 7.0
Interest cost 123.4 118.6 15.4 14.0
Actuarial loss 123.2 60.0 15.6 24.4
Plan curtailment in 1998/merger in 1997 (107.2) 1.5 - -
Benefits paid (75.8) (71.4) (8.6) (8.2)
-------- -------- ------- -------
Benefit obligation at end of year 2,185.0 2,033.8 270.1 237.9
-------- -------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,212.9 1,947.9 69.2 63.0
Actual return on plan assets 300.7 328.1 5.0 3.6
Employer contribution 104.1 7.2 12.1 10.6
Plan merger - 1.1 - -
Benefits paid (75.8) (71.4) (8.4) (8.0)
-------- -------- ------- -------
Fair value of plan assets at end of year 2,541.9 2,212.9 77.9 69.2
-------- -------- ------- -------
Funded status 356.9 179.1 (192.2) (168.7)
Unrecognized prior service cost 31.5 34.7 - -
Unrecognized net (gains) losses (345.7) (330.7) 16.0 1.6
Unrecognized net (asset) obligation at transition (11.0) 33.3 1.3 1.5
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ 31.7 $ (83.6) $(174.9) $(165.6)
======== ======== ======= =======
</TABLE>
<PAGE> 71
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of the pension plan and
postretirement life and health care benefit plan:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------- -----------------------
1998 1997 1998 1997
-------- ------ -------- --------
<S> <C> <C> <C> <C>
Weighted average discount rate 5.50% 6.00% 6.65% 6.70%
Rate of increase in future compensation levels 3.75% 4.25% -- --
Assumed health care cost trend rate:
Initial rate -- -- 15.00% 12.13%
Ultimate rate -- -- 8.00% 6.12%
Uniform declining period -- -- 15 Years 12 Years
</TABLE>
The net periodic pension cost for the pension plan as a whole for the
years ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
-------------------------------------------------------------------------------- ---- ----
<S> <C> <C>
Service cost (benefits earned during the period) $ 87.6 $ 77.3 $ 75.5
Interest cost on projected benefit obligation 123.4 118.6 105.5
Expected return on plan assets (159.0) (139.0) (116.1)
Recognized gains (3.8) - -
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation 4.2 4.2 4.1
------- ------- -------
$ 55.6 $ 64.3 $ 72.2
======= ======= =======
</TABLE>
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with the Nationwide Insurance Enterprise and employees of
WSC ended participation in the plan. A curtailment gain of $67.1
million resulted (consisting of a $107.2 million reduction in the
projected benefit obligation, net of the write-off of the $40.1 million
remaining unamortized transition obligation related to WSC). The
Company anticipates that the plan will settle the obligation related to
WSC employees with a transfer of assets during 1999.
Basis for measurements, net periodic pension cost for the pension plan:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 6.00% 6.50% 6.00%
Rate of increase in future compensation levels 4.25% 4.75% 4.25%
Expected long-term rate of return on plan assets 7.25% 7.25% 6.75%
</TABLE>
<PAGE> 72
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the postretirement benefit plan as a whole for
the years ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost (benefits attributed to employee service during the year) $ 9.8 $ 7.0 $ 6.5
Interest cost on accumulated postretirement benefit obligation 15.4 14.0 13.7
Actual return on plan assets (5.0) (3.6) (4.3)
Amortization of unrecognized transition obligation of affiliates 0.2 0.2 0.2
Net amortization and deferral 1.2 (0.5) 1.8
----- ----- -----
$21.6 $17.1 $17.9
===== ===== =====
</TABLE>
Actuarial assumptions used for the measurement of the accumulated
postretirement benefit obligation (APBO) and the NPPBC for the
postretirement benefit plan for 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
NPPBC:
Discount rate 6.70% 7.25% 6.65%
Long term rate of return on plan
assets, net of tax 5.83% 5.89% 4.80%
Assumed health care cost trend rate:
Initial rate 12.00% 11.00% 11.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
</TABLE>
For the postretirement benefit plan as a whole, a one percentage point
increase or decrease in the assumed health care cost trend rate would
have no impact on the APBO as of December 31, 1998 and have no impact
on the NPPBC for the year ended December 31, 1998.
(9) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
----------------------------------------------------------------------
and Dividend Restrictions
-------------------------
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 1998, 1997
and 1996 was $1.32 billion, $1.13 billion and $1.00 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1998, 1997 and 1996 was $171.0 million, $111.7 million and
$73.2 million, respectively.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 1998,
the maximum amount available for dividend payment from the Company to
its shareholder without prior approval of the Department was $71.0
million.
<PAGE> 73
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(10) Transactions With Affiliates
----------------------------
As part of the restructuring described in note 1, NLIC paid a dividend
valued at $485.7 million to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of ELICW, National
Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC).
Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid
an equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1998, 1997 and 1996, the
Company made lease payments to NMIC and its subsidiaries of $8.0
million, $8.4 million and $9.1 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $95.0 million, $85.8 million and $101.6
million in 1998, 1997 and 1996, respectively. The allocations are based
on techniques and procedures in accordance with insurance regulatory
guidelines. Measures used to allocate expenses among companies include
individual employee estimates of time spent, special cost studies,
salary expense, commissions expense and other methods agreed to by the
participating companies that are within industry guidelines and
practices. The Company believes these allocation methods are
reasonable. In addition, the Company does not believe that expenses
recognized under the inter-company agreements are materially different
than expenses that would have been recognized had the Company operated
on a stand alone basis. Amounts payable to NMIC from the Company under
the cost sharing agreement were $31.9 million and $20.5 million as of
December 31, 1998 and 1997, respectively.
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1998 and
1997 were not material. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
<PAGE> 74
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance agreements exist between NLIC and,
respectively, NMIC and ELICW whereby all of NLIC's accident and health
and group life insurance business is ceded on a modified coinsurance
basis. NLIC entered into the reinsurance agreements during 1996 because
the accident and health and group life insurance business was unrelated
to the Company's long-term savings and retirement products.
Accordingly, the accident and health and group life insurance business
has been accounted for as discontinued operations for all periods
presented. Under modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment
risk associated with changes in interest rates is borne by ELICW or
NMIC, as the case may be. Risk of asset default is retained by the
Company, although a fee is paid by ELICW or NMIC, as the case may be,
to the Company for the Company's retention of such risk. The agreements
will remain in force until all policy obligations are settled. However,
with respect to the agreement between NLIC and NMIC, either party may
terminate the contract on January 1 of any year with prior notice. The
ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material
respects with what the Company could have obtained with unaffiliated
parties. Amounts ceded to NMIC and ELICW for the years ended December
31, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------
(in millions of dollars) NMIC ELICW NMIC ELICW NMIC ELICW
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $90.1 $106.3 $ 91.4 $199.8 $ 97.3 $224.2
Net investment income and other
revenue $11.1 $ 9.4 $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and expenses $98.8 $160.5 $100.7 $225.9 $100.5 $246.6
</TABLE>
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $248.4 million and $211.0 million as
of December 31, 1998 and 1997, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1998 were $60.0
million, $66.1 million and $76.9 million, respectively.
(11) Bank Lines of Credit
--------------------
In August 1996, NLIC, along with NMIC, entered into a $600.0 million
revolving credit facility which provides for a $600.0 million loan over
a five year term on a fully revolving basis with a group of national
financial institutions. The credit facility provides for several and
not joint liability with respect to any amount drawn by either NLIC or
NMIC. NLIC and NMIC pay facility and usage fees to the financial
institutions to maintain the revolving credit facility. All previously
existing line of credit agreements were canceled. In September 1997,
the credit agreement was amended to include NFS as a party to and
borrower under the agreement. As of December 31, 1998 the Company had
no amounts outstanding under the agreement.
<PAGE> 75
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(12) Contingencies
-------------
On October 29, 1998, the Company and certain of its affiliates were
named in a lawsuit filed in the Common Pleas Court of Franklin County,
Ohio related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
The plaintiff in such lawsuit seeks to represent a national class of
the Company's customers and seeks unspecified compensatory and punitive
damages. The Company is currently evaluating this lawsuit, which is in
an early stage and has not been certified as a class. The Company
intends to defend this lawsuit vigorously.
(13) Segment Information
-------------------
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
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its investment advisor subsidiary (other than
the portion allocated to the Variable Annuities and Life Insurance
segments), 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.
<PAGE> 76
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Variable Fixed Life Corporate
(in millions of dollars) Annuities Annuities Insurance and Other Total
- ------------------------------------ --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
1998:
Net investment income (1) $ (31.3) $ 1,116.6 $ 231.6 $ 164.7 $ 1,481.6
Other operating revenue 560.8 35.7 319.6 49.6 965.7
--------- --------- -------- -------- ---------
Total operating revenue (2) 529.5 1,152.3 551.2 214.3 2,447.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 828.6 115.4 125.0 1,069.0
Amortization of deferred policy
acquisition costs 123.9 44.2 46.4 -- 214.5
Other benefits and expenses 187.2 104.2 294.6 49.1 635.1
--------- --------- -------- -------- ---------
Total expenses 311.1 977.0 456.4 174.1 1,918.6
--------- --------- -------- -------- ---------
Operating income (loss) before
federal income tax 218.4 175.3 94.8 40.2 528.7
Realized gains on investments -- -- -- 28.4 28.4
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 218.4 $ 175.3 $ 94.8 $ 68.6 $ 557.1
========= ========= ======== ======== =========
Assets as of year end $47,668.7 $15,215.7 $5,187.6 $6,270.1 $74,342.1
========= ========= ======== ======== =========
1997:
Net investment income (1) $ (26.9) $ 1,098.2 $ 189.1 $ 148.8 $ 1,409.2
Other operating revenue 430.9 43.2 284.0 39.0 797.1
--------- --------- -------- -------- ---------
Total operating revenue (2) 404.0 1,141.4 473.1 187.8 2,206.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 823.4 78.5 114.7 1,016.6
Amortization of deferred policy
acquisition costs 87.8 39.8 39.6 -- 167.2
Other benefits and expenses 165.3 108.7 284.1 45.6 603.7
--------- --------- -------- -------- ---------
Total expenses 253.1 971.9 402.2 160.3 1,787.5
--------- --------- -------- -------- ---------
Operating income before federal
income tax 150.9 169.5 70.9 27.5 418.8
Realized gains on investments -- -- -- 11.1 11.1
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 150.9 $ 169.5 $ 70.9 $ 38.6 $ 429.9
========= ========= ======== ======== =========
Assets as of year end $35,278.7 $14,436.3 $3,901.4 $6,174.3 $59,790.7
========= ========= ======== ======== =========
</TABLE>
<PAGE> 77
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Variable Fixed Life Corporate
(in millions of dollars) Annuities Annuities Insurance and Other Total
------------------------------------ ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1996:
Net investment income (1) $ (21.5) $ 1,050.6 $ 174.0 $ 154.7 $ 1,357.8
Other operating revenue 306.1 42.0 261.6 25.7 635.4
---------- ---------- --------- --------- ---------
Total operating revenue (2) 284.6 1,092.6 435.6 180.4 1,993.2
---------- ---------- --------- --------- ---------
Interest credited to policyholder
account balances -- 805.0 70.2 107.1 982.3
Amortization of deferred policy
acquisition costs 57.4 38.6 37.4 -- 133.4
Benefits and expenses 136.9 113.6 260.8 50.4 561.7
---------- ---------- --------- --------- ---------
Total expenses 194.3 957.2 368.4 157.5 1,677.4
---------- ---------- --------- --------- ---------
Operating income before federal
income tax 90.3 135.4 67.2 22.9 315.8
Realized losses on investments -- -- -- (0.3) (0.3)
---------- ---------- --------- --------- ---------
Consolidated income from
continuing operations before
federal tax expense $ 90.3 $ 135.4 $ 67.2 $ 22.6 $ 315.5
========== ========== ======== ======== =========
Assets as of year end $ 25,069.7 $ 13,994.7 $3,353.3 $5,348.5 $47,766.2
========== ========== ======== ======== =========
</TABLE>
-----------
(1) The Company's method of allocating net investment income results
in a charge (negative net investment income) to the Variable
Annuities segment which is recognized in the Corporate and Other
segment. The charge relates to non-invested assets which support
this segment on a statutory basis.
(2) Excludes realized gains and losses on investments.
The Company has no significant revenue from customers located outside
of the United States nor does the Company have any significant
long-lived assets located outside the United States.
(14) Discontinued Operations
-----------------------
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. Prior to the
contribution by Nationwide Corp. of the outstanding common stock of
NLIC to NFS, NLIC effected certain transactions with respect to certain
subsidiaries and lines of business that were unrelated to long-term
savings and retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend
payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of three subsidiaries: ELICW, NCC
and WCLIC. ELICW writes group accident and health and group life
insurance business and maintains it offices in Wausau, Wisconsin. NCC
is a property and casualty company with offices in Scottsdale, Arizona
that serves as a fronting company for a property and casualty
subsidiary of NMIC. WCLIC writes high dollar term life insurance
policies and is located in San Francisco, California. ELICW, NCC and
WCLIC have been accounted for as discontinued operations in the
accompanying consolidated financial statements through December 31,
1996. The Company did not recognize any gain or loss on the disposal of
these subsidiaries.
<PAGE> 78
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Also, during 1996, NLIC entered into two reinsurance agreements whereby
all of NLIC's accident and health and group life insurance business was
ceded to ELICW and NMIC, effective January 1, 1996. See note 10 for a
complete discussion of the reinsurance agreements. The Company has
discontinued its accident and health and group life insurance business
and in connection therewith has entered into reinsurance agreements to
cede all existing and any future writings to other affiliated
companies. NLIC's accident and health and group life insurance business
is accounted for as discontinued operations for all periods presented.
The Company did not recognize any gain or loss on the disposal of the
accident and health and group life insurance business. The assets,
liabilities, results of operations and activities of discontinued
operations are distinguished physically, operationally and for
financial reporting purposes from the remaining assets, liabilities,
results of operations and activities of the Company.
A summary of the results of operations of discontinued operations for
the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C>
Revenues $ -- $ -- $ 668.9
Net income $ -- $ -- $ 11.3
</TABLE>
A summary of the assets and liabilities of discontinued operations as
of December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Assets, consisting primarily of investments $221.5 $247.3 $3,288.5
Liabilities, consisting primarily of policy benefits and claims $221.5 $247.3 $2,802.8
</TABLE>
<PAGE> 79
APPENDIX
Example A
Assume that a variable annuity contract owner made a $10,000 allocation on the
first day of a calendar quarter into a 5 year Guaranteed Term Option. The
Specified Interest Rate at the time is 8% and the 5-year Constant Maturity
Treasury Rate in effect for the Specified Interest Rate is 8%. The variable
annuity contract owner decides to surrender the GTO 985 days from maturity. The
Specified Value of the GTO is $11,937.69. At this time, the 3 year Constant
Maturity Treasury Rate is 7%.
(985/365.25 is 2.69 which rounds up to 3.)
---- ----
---- ---- | d |
| | | ---------- |
| 1 + a | | 365.25 |
| -------------------- | ---- ----
MVA FACTOR = | 1 + b + 0.0025 |
| |
---- ----
---- ----
---- ---- | 985 |
| | | --------- |
| 1 + 0.08 | | 365.25 |
| ------------------- | ---- ----
MVA FACTOR = | 1 + 0.07 + 0.0025 |
| |
---- ----
MVA FACTOR = 1.01897
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 1.01897
*SURRENDER VALUE = $12,164.15
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = The Constant Maturity Treasury Rate declared on Friday by the Federal
Reserve Board, and placed in effect by Nationwide on the Wednesday
immediately preceding the Investment Period during which the allocation
to the GTO was made.
b = The Constant Maturity Treasury Rate declared on Friday by the Federal
Reserve Board, and placed in effect by Nationwide on the Wednesday
immediately preceding the withdrawal, transfer or other distribution
giving rise to the Market Value Adjustment.
d = The number of days remaining in the Guaranteed Term.
Example B
Assume variable annuity contract owner made a $10,000 allocation on the first
day of a calendar quarter into a 5-year Guaranteed Term Option. The Specified
Interest Rate at the time is 8% and the 5-year Constant Maturity Treasury Rate
in effect for the Specified Interest Rate is 8%. The variable annuity contract
owner decides to surrender his money 985 days from maturity. The Specified Value
of the GTO is $11,937.69. At this time, the 3 year Constant Maturity Treasury
Rate is 9%. (985/365.25 is 2.69 which rounds up to 3.)
---- ----
---- ---- | d |
| | | ---------- |
| 1 + a | | 365.25 |
| -------------------- | ---- ----
MVA FACTOR = | 1 + b + 0.0025 |
| |
---- ----
---- ----
---- ---- | 985 |
| | | --------- |
| 1 + 0.08 | | 365.25 |
| ------------------- | ---- ----
MVA FACTOR = | 1 + 0.09 + 0.0025 |
| |
---- ----
34
<PAGE> 80
MVA FACTOR = 0.96944
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 0.96944
*SURRENDER VALUE = $11,572.87
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = The Constant Maturing Treasury Rate declared by the Federal Reserve Board
on Friday and placed in effect by Nationwide on the Wednesday immediately
preceding the Investment Period during which the allocation to the GTO
was made.
b = The Constant Maturing Treasury Rate declared by the Federal Reserve Board
on Friday and placed in effect by Nationwide on the Wednesday immediately
preceding the withdrawal, transfer or other distribution giving rise to
the Market Value Adjustment.
d = The number of days remaining in the Guaranteed Term.
35
<PAGE> 81
The table set forth below illustrates the impact of a Market Value Adjustment
applied upon a full surrender of a 10 year GTO allocation, at various stages of
the corresponding Guaranteed Term. These figures are based on CMT Rate of 8% (a
in the Market Value Adjustment Formula) and varying current yield CMT Rates
shown in the first column (b in the Market Value Adjustment Formula).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
TIME REMAINING TO THE
END OF THE GUARANTEED SPECIFIED VALUE MARKET VALUE MARKET
CURRENT YIELD TERM ADJUSTMENT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12.00% 9 Years $10,800 -29.35% $7,630
- --------------------------------------------------------------------------------------------------
7 Years $12,597 -23.68% $9,614
- --------------------------------------------------------------------------------------------------
5 Years $14,693 -17.55% $12,114
- --------------------------------------------------------------------------------------------------
2 Years $18,509 -7.43% $17,134
- --------------------------------------------------------------------------------------------------
180 Days $20,785 -1.88% $20,394
- --------------------------------------------------------------------------------------------------
10.00% 9 Years $10,800 -16.94% $8,970
- --------------------------------------------------------------------------------------------------
7 Years $12,597 -13.44% $10,904
- --------------------------------------------------------------------------------------------------
5 Years $14,693 -9.80% $13,253
- --------------------------------------------------------------------------------------------------
2 Years $18,509 -4.04% $17,761
- --------------------------------------------------------------------------------------------------
180 Days $20,785 -1.01% $20,575
- --------------------------------------------------------------------------------------------------
9.00% 9 Years $10,800 -9.84% $9,731
- --------------------------------------------------------------------------------------------------
7 Years $12,597 -7.74% $11,622
- --------------------------------------------------------------------------------------------------
5 Years $14,693 -5.59% $13,872
- --------------------------------------------------------------------------------------------------
2 Years $18,509 -2.28% $18,067
- --------------------------------------------------------------------------------------------------
180 Days $20,785 -0.57% $20,667
- --------------------------------------------------------------------------------------------------
8.00% 9 Years $10,800 -2.06% $10,578
- --------------------------------------------------------------------------------------------------
7 Years $12,597 -1.61% $12,394
- --------------------------------------------------------------------------------------------------
5 Years $14,693 -1.15% $14,524
- --------------------------------------------------------------------------------------------------
2 Years $18,509 -0.46% $18,424
- --------------------------------------------------------------------------------------------------
180 Days $20,785 -0.11% $20,762
- --------------------------------------------------------------------------------------------------
7.00% 9 Years $10,800 6.47% $11,499
- --------------------------------------------------------------------------------------------------
7 Years $12,597 5.00% $13,227
- --------------------------------------------------------------------------------------------------
5 Years $14,693 3.55% $15,215
- --------------------------------------------------------------------------------------------------
2 Years $18,509 1.40% $18,768
- --------------------------------------------------------------------------------------------------
180 Days $20,785 0.34% $20,856
- --------------------------------------------------------------------------------------------------
6.00% 9 Years $10,800 15.84% $12,511
- --------------------------------------------------------------------------------------------------
7 Years $12,597 12.11% $14,122
- --------------------------------------------------------------------------------------------------
5 Years $14,693 8.51% $15,943
- --------------------------------------------------------------------------------------------------
2 Years $18,509 3.32% $19,123
- --------------------------------------------------------------------------------------------------
180 Days $20,785 0.81% $20,953
- --------------------------------------------------------------------------------------------------
4.00% 9 Years $10,800 37.45% $14,845
- --------------------------------------------------------------------------------------------------
7 Years $12,597 28.07% $16,133
- --------------------------------------------------------------------------------------------------
5 Years $14,693 19.33% $17,533
- --------------------------------------------------------------------------------------------------
2 Years $18,509 7.32% $19,864
- --------------------------------------------------------------------------------------------------
180 Days $20,785 1.76% $21,151
- --------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII of the Amended Code of Regulations of Nationwide
provides as follows:
Section 1. Indemnification of Directors, Officers and Employees.
Nationwide will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is
or was a director, officer or employee of Nationwide, or is or was
serving at the request of Nationwide as a director, trustee,
officer, member, or employee of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture,
trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action,
suit or proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the State of Ohio.
Such indemnification (unless ordered by a court) will be made as
authorized in a specific case upon a determination that
indemnification of the director, trustee, officer or employee is
proper in the circumstances because he has met the applicable
standards of conduct set forth in the General Corporation Law of
the State of Ohio. Such determination will be made (1) by the
Board of Directors by a majority vote of a quorum consisting of
directors who were not, and are not, parties to or threatened with
any such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal
counsel meeting the requirements of independence prescribed by the
General Corporation Law of Ohio, or (3) by the shareholders, or
(4) by the Court of Common Pleas or the court in which such
action, suit or proceeding was brought.
Section 2. Other Rights. The foregoing right of indemnification
will not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under the Articles of
Incorporation, these Regulations, any agreement, vote of
shareholders or disinterested directors or otherwise, and will
continue as to a person who has ceased to be a director, trustee,
officer or employee and will inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. Nationwide may pay
expenses, including attorneys' fees, incurred in defending any
action, suit or proceeding referred to in Section 1 of this
Article VII, in advance of the final disposition of such action,
suit or proceeding as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the
director, trustee, officer or employee to repay such amount,
unless it will ultimately be determined that he is entitled to be
indemnified by Nationwide as authorized in this Article VII.
Section 4. Insurance. Nationwide may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, member, or employee of Nationwide, or is or was serving
at the request of Nationwide as a director, trustee, officer or
employee of another corporation, domestic or foreign, non-profit
or for profit, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not Nationwide would have the power to indemnify him
against such liability under this Article VII.
37
<PAGE> 83
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Nationwide, through various separate accounts -- the Nationwide
Government Plans Variable Account ("GPVA"), Nationwide Qualified
Plans Variable Account ("QPVA"), Nationwide Ohio DC Variable
Account ("Ohio DC Variable Account") and Nationwide Life Insurance
Company Separate Account-1 ("Separate Account-1") -- offers
contracts to qualified pension plans and certain government plans
in reliance on Section 3(a)(2) of the Securities Act of 1933 and
in certain cases, Rule 144A thereunder. Data relating to the
amount of securities sold are:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
GPVA $610,638,932 $507,939,747 $280,386,514
QPVA $2,564,861,472 $1,994,897,334 $1,791,418,614
Ohio DC Variable Account $173,209,797 $111,516,201 $77,667,672
Separate Account-1 $897,853 $1,254,595 $926,109
</TABLE>
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
(a)
<TABLE>
<CAPTION>
Exhibit Index Page
<S> <C>
(3)(i) Certificate of Incorporation (Exhibit A)*
(3)(ii) Code of Regulations (Exhibit B)*
(4) Annuity Endorsement to Contracts (Exhibit C)* E
(5) Opinion Regarding Legality (Exhibit D) E
(21) Subsidiaries of the Registrant (Exhibit D)*
(23) Consent of Experts and Counsel (Exhibit E) E
(24) Power of Attorney (Exhibit F)* - Copy attached hereto
</TABLE>
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1998, 1997 and 1996 Consolidated Statements of
Cash Flows for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other than
Investments in Related Parties as of December 31,
1998
Schedule III Supplementary Insurance Information as of December
31, 1998, 1997 and 1996 and for each of the years
then ended
Schedule IV Reinsurance as of December 31, 1998, 1997 and 1996
and for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997 and 1996
38
<PAGE> 84
All other schedules to the consolidated financial statements
referenced by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and have therefore
been omitted.
* Filed with the original submission of this registration statement (SEC File
No. 33-58997) on May 2, 1995.
Item 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the determining of any liability under the
Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
39
<PAGE> 85
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Nationwide Life Insurance Company:
We consent to the use of our report included and to the reference to our firm
under the heading "Consolidated Financial Statements and Supplemental Data" in
the Prospectus.
KPMG LLP
Columbus, Ohio
April 27, 1999
40
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 5 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Columbus, State of Ohio, on the 26th of May, 1999.
NATIONWIDE LIFE INSURANCE COMPANY
----------------------------------------------
(Registrant)
By/s/JOSEPH P. RATH
----------------------------------------------
Joseph P. Rath
Vice President - Product and Market Compliance
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 5 to the Registration Statement has been signed by the following
persons on the 26th of May, 1999, in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
LEWIS J. ALPHIN Director
- -------------------------------------------------
Lewis J. Alphin
A. I. BELL Director
- -------------------------------------------------
A. I. Bell
KENNETH D. DAVIS Director
- -------------------------------------------------
Kenneth D. Davis
KEITH W. ECKEL Director
- -------------------------------------------------
Keith W. Eckel
WILLARD J. ENGEL Director
- -------------------------------------------------
Willard J. Engel
FRED C. FINNEY Director
- -------------------------------------------------
Fred C. Finney
JOSEPH J. GASPER President and Chief
- ------------------------------------------------- Operating Office and Director
Joseph J. Gasper
DIMON R. McFERSON Chairman and Chief Executive Officer
- ------------------------------------------------- and Director
Dimon R. McFerson
DAVID O. MILLER Chairman of the Board and Director
- -------------------------------------------------
David O. Miller
YVONNE L. MONTGOMERY Director
- -------------------------------------------------
Yvonne L. Montgomery
ROBERT A. OAKLEY Executive Vice President- and
- ------------------------------------------------- Chief Financial Officer
Robert A. Oakley
RALPH M. PAIGE Director
- -------------------------------------------------
Ralph M. Paige
JAMES F. PATTERSON Director
- -------------------------------------------------
James F. Patterson
ARDEN L. SHISLER Director
- -------------------------------------------------
Arden L. Shisler
ROBERT L. STEWART Director
- -------------------------------------------------
Robert L. Stewart
NANCY C. THOMAS Director
- -------------------------------------------------
Nancy C. Thomas
By/s/JOSEPH P. RATH
-----------------------------------
Joseph P. Rath
Attorney-in-Fact
</TABLE>
41
