<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000 Commission File No. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Nationwide Plaza
Columbus, Ohio 43215
(614) 249-7111
(Address, including zip code and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been
subject to the filing requirements for at least the past 90
days.
Yes X No
------- ------
All voting stock was held by affiliates of the Registrant on May 5, 2000.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and
outstanding as of May 5, 2000 (Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE
FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Narrative Analysis of the Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
2000 1999
-------------- -------------
<S> <C> <C>
REVENUES
Policy charges $ 272.6 $ 206.2
Life insurance premiums 66.9 53.5
Net investment income 407.6 363.3
Net realized losses on investments (3.1) (5.4)
Other 5.2 19.5
-------------- -------------
749.2 637.1
-------------- -------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 294.2 263.8
Other benefits and claims 67.3 50.5
Policyholder dividends on participating policies 12.0 10.1
Amortization of deferred policy acquisition costs 85.9 60.7
Other operating expenses 122.1 104.3
-------------- -------------
581.5 489.4
-------------- -------------
Income before federal income tax expense 167.7 147.7
Federal income tax expense 54.4 48.5
-------------- -------------
Net income $ 113.3 $ 99.2
============== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
------------------- ------------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $15,211.8 in 2000; $15,377.3 in 1999) $ 15,079.5 $ 15,294.0
Equity securities (cost $94.2 in 2000; $84.9 in 1999) 112.5 92.9
Mortgage loans on real estate, net 5,869.2 5,786.3
Real estate, net 266.2 254.8
Policy loans 534.2 519.6
Other long-term investments 74.5 73.8
Short-term investments 40.8 416.0
------------------- ------------------
21,976.9 22,437.4
------------------- ------------------
Cash 1.0 4.8
Accrued investment income 244.5 238.6
Deferred policy acquisition costs 2,678.0 2,554.1
Other assets 348.1 305.9
Assets held in separate accounts 71,640.0 67,135.1
------------------- ------------------
$ 96,888.5 $ 92,675.9
=================== ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 21,491.6 $ 21,861.6
Other liabilities 935.9 914.2
Liabilities related to separate accounts 71,640.0 67,135.1
------------------- ------------------
94,067.5 89,910.9
------------------- ------------------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5.0 million shares, issued and
outstanding 3.8 million shares 3.8 3.8
Additional paid-in capital 766.1 766.1
Retained earnings 2,074.3 2,011.0
Accumulated other comprehensive income (23.2) (15.9)
------------------- ------------------
2,821.0 2,765.0
------------------- ------------------
$ 96,888.5 $ 92,675.9
=================== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Three Months Ended March 31, 2000 and 1999
(in millions)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
----------- ------------- --------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 $ 3.8 $ 914.7 $ 1,579.0 $ 275.6 $ 2,773.1
Comprehensive income:
Net income - - 99.2 - 99.2
Net unrealized losses on securities available-
for-sale arising during the period - - - (77.6) (77.6)
-----------------
Total comprehensive income 21.6
-----------------
Dividends to shareholder - - (10.8) - (10.8)
----------- ------------- --------------- ------------------------------------
BALANCE, MARCH 31, 1999 $ 3.8 $ 914.7 $ 1,667.4 $ 198.0 $ 2,783.9
=========== ============= =============== ====================================
BALANCE, JANUARY 1, 2000 $ 3.8 $ 766.1 $ 2,011.0 $ (15.9) $ 2,765.0
Comprehensive income:
Net income - - 113.3 - 113.3
Net unrealized losses on securities available-
for-sale arising during the period - - - (7.3) (7.3)
-----------------
Total comprehensive income 106.0
-----------------
Dividends to shareholder - - (50.0) - (50.0)
----------- ------------- --------------- ------------------------------------
BALANCE, MARCH 31, 2000 $ 3.8 $ 766.1 $ 2,074.3 $ (23.2) $ 2,821.0
=========== ============= =============== ====================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 2000 and 1999
(in millions)
<TABLE>
<CAPTION>
2000 1999
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 113.3 $ 99.2
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 294.2 263.8
Capitalization of deferred policy acquisition costs (189.2) (152.3)
Amortization of deferred policy acquisition costs 85.9 60.7
Amortization and depreciation (1.4) 2.5
Realized losses on investments, net 3.1 5.4
Increase in accrued investment income (5.9) (11.2)
Increase in other assets (42.3) (49.9)
Increase in policy liabilities 61.6 7.0
Increase in other liabilities 82.6 53.5
Other, net (4.5) (2.1)
--------------- --------------
Net cash provided by operating activities 397.4 276.6
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 715.5 524.1
Proceeds from sale of securities available-for-sale 258.2 143.2
Proceeds from repayments of mortgage loans on real estate 125.1 89.5
Proceeds from sale of real estate 2.1 -
Proceeds from repayments of policy loans and sale of other invested assets 10.7 4.7
Cost of securities available-for-sale acquired (816.2) (662.6)
Cost of mortgage loans on real estate acquired (216.2) (125.3)
Cost of real estate acquired (1.5) (0.7)
Short-term investments, net 375.2 (41.2)
Other, net (28.3) (39.8)
--------------- --------------
Net cash provided by (used in) investing activities 424.6 (108.1)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (100.0) (13.5)
Increase in investment product and universal life insurance product
account balances 962.3 756.8
Decrease in investment product and universal life insurance product
account balances (1,688.1) (893.9)
--------------- --------------
Net cash used in financing activities (825.8) (150.6)
--------------- --------------
Net (decrease) increase in cash (3.8) 17.9
Cash, beginning of period 4.8 3.4
--------------- --------------
Cash, end of period $ 1.0 $ 21.3
=============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Nationwide Life Insurance Company and subsidiaries (NLIC or
collectively the Company) have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities,
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
included herein reflects all adjustments (all of which are normal and
recurring in nature) which are, in the opinion of management, necessary
for a fair presentation of financial position and results of
operations. Operating results for all periods presented are not
necessarily indicative of the results that may be expected for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
1999 included in the Company's annual report on Form 10-K.
(2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). FAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. The
Statement also addresses contracts that contain embedded derivatives,
such as certain insurance contracts. FAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. In July 1999 the FASB issued Statement No. 137 which delayed the
effective date of FAS 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt this Statement in first quarter 2001
and is currently evaluating the impact on results of operations and
financial condition.
(3) COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within a separate component of shareholder's
equity that bypass net income. Currently, the Company's only component
of Other Comprehensive Income is unrealized gains (losses) on
securities available-for-sale. The related before and after federal tax
amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(in millions) MARCH 31,
-----------------------------------------------------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Unrealized losses on securities available-for-
sale arising during the period:
Gross $ (32.8) $ (154.4)
Adjustment to deferred policy acquisition costs 20.6 29.6
Related federal tax benefit 4.3 41.7
--------------- ---------------
Net (7.9) (83.1)
--------------- ---------------
Reclassification adjustment for net losses
on securities available-for-sale realized during
the period:
Gross 0.9 8.5
Related federal tax benefit (0.3) (3.0)
--------------- ---------------
Net 0.6 5.5
--------------- ---------------
Total Other Comprehensive Income $ (7.3) $ (77.6)
=============== ===============
</TABLE>
7
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(4) SEGMENT DISCLOSURES
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
an untimely death and flexible payout options including lump-sum,
systematic withdrawal or a stream of payments for life. 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, tax-deferred accumulation of savings and flexible
payout options including lump-sum, systematic withdrawal or a stream of
payments for life. 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, which provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenues and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its investment advisor subsidiary, revenues
and expenses related to group annuity contracts sold to Nationwide
employee and agent benefit plans and all realized gains and losses on
investments in a Corporate and Other segment.
The following table summarizes the financial results of the Company's
business segments for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
------------------------------------ --------------- --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000
Operating revenue (1) $ 189.2 $ 327.1 $ 179.6 $ 56.4 $ 752.3
Benefits and expenses 104.9 281.7 146.3 48.6 581.5
--------------- --------------- --------------- -------------- ------------
Operating income before
federal income tax expense 84.3 45.4 33.3 7.8 170.8
Net realized losses on investments - - - (3.1) (3.1)
--------------- --------------- --------------- -------------- ------------
Consolidated income before
federal income tax expense $ 84.3 $ 45.4 $ 33.3 $ 4.7 $ 167.7
=============== =============== =============== ============== ============
Assets as of period end $ 66,683.1 $ 16,749.1 $ 7,069.8 $ 6,386.5 $ 96,888.5
=============== =============== =============== ============== ============
1999
Operating revenue (1) $ 143.5 $ 287.6 $ 151.1 $ 60.3 $ 642.5
Benefits and expenses 77.3 244.8 122.0 45.3 489.4
--------------- --------------- --------------- -------------- ------------
Operating income before
federal income tax expense 66.2 42.8 29.1 15.0 153.1
Net realized losses on investments - - - (5.4) (5.4)
--------------- --------------- --------------- -------------- ------------
Consolidated income before
federal income tax expense $ 66.2 $ 42.8 $ 29.1 $ 9.6 $ 147.7
=============== =============== =============== ============== ============
Assets as of period end $ 50,132.3 $ 15,396.4 $ 5,527.9 $ 5,975.7 $ 77,032.3
=============== =============== =============== ============== ============
</TABLE>
- ----------
(1) Excludes net realized gains and losses on investments.
8
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(5) CONTINGENCIES
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint
filed by the Company and other named defendants. The Company intends to
defend this lawsuit vigorously.
9
<PAGE> 10
ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes
included elsewhere herein.
Management's discussion and analysis contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of the Company. These
forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) the potential
impact on the Company's reported net income that could result from
the adoption of certain accounting standards issued by the FASB;
(ii) tax law changes impacting the tax treatment of life insurance
and investment products; (iii) heightened competition, including
specifically the intensification of price competition, the entry
of new competitors and the development of new products by new and
existing competitors; (iv) adverse state and federal legislation
and regulation, including limitations on premium levels, increases
in minimum capital and reserves and other financial viability
requirements; (v) failure to expand distribution channels in order
to obtain new customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including,
among others, changes to certain products and acceptance of the
revised products in the market; (vii) changes in interest rates
and the capital markets causing a reduction of investment income
or asset fees, reduction in the value of the Company's investment
portfolio or a reduction in the demand for the Company's products;
(viii) general economic and business conditions which are less
favorable than expected; (ix) unanticipated changes in industry
trends and ratings assigned by nationally recognized statistical
rating organizations or A.M. Best Company, Inc.; and (x)
inaccuracies in assumptions regarding future persistency,
mortality, morbidity and interest rates used in calculating
reserve amounts.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes net realized investment gains and losses.
Net operating income is commonly used in the insurance industry as
a measure of on-going earnings performance.
The following table reconciles the Company's reported net income
to net operating income for the first quarter of 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(in millions) 2000 1999
--------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Net income $ 113.3 $ 99.2
Net realized losses on investments, net of tax 2.0 3.5
---------------- -----------------
Net operating income $ 115.3 $ 102.7
================ =================
</TABLE>
Revenues
Total revenues for the first quarter of 2000, excluding net
realized gains and losses on investments, increased to $752.3
million compared to $642.5 million for the same period in 1999.
Increases in policy charges and net investment income were the key
drivers to revenue growth.
10
<PAGE> 11
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of variable annuities
and variable life insurance products; cost of insurance charges
earned on universal life insurance products; administration fees,
which include fees charged per contract on a variety of the
Company's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of
premiums withdrawn during a specified period of annuity and
certain life insurance contracts. Policy charges for the first
quarter of 2000 and 1999 were as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------
(in millions) 2000 1999
-------------------------------------- ------------- -------------
Asset fees $ 175.9 $ 140.4
Cost of insurance charges 35.1 25.9
Administrative fees 36.7 25.8
Surrender fees 24.9 14.1
------------- -------------
Total policy charges $ 272.6 $ 206.2
============= =============
The growth in asset fees reflects a 34% increase in total separate
account assets, which reached $71.64 billion as of March 31, 2000,
compared to $53.47 billion a year ago. Steady growth in sales of
variable annuity and variable life insurance products as well as
market appreciation have contributed significantly to the increase
in separate account assets.
Cost of insurance charges are assessed as a percentage of the net
amount at risk on universal life insurance policies. The net
amount at risk is equal to a policy's death benefit minus the
related policyholder account value. The increase in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual variable universal life insurance
reflecting expanded distribution and increased customer demand for
variable life insurance products. The net amount at risk related
to individual variable universal life insurance grew to $21.10
billion as of March 31, 2000 compared to $15.99 billion a year
ago.
The growth in administrative fees is attributable to a significant
increase in premiums on individual variable life policies and
certain corporate-owned life policies where the Company collects a
premium load. Nearly all of the increase in surrender charges is
attributable to policyholder withdrawals in the Variable Annuities
segment and reflects the overall increase in variable annuity
policy reserves and an increase in surrender rates in first
quarter 2000.
Net investment income includes the gross investment income earned
on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general
account invested assets which are not allocated to product
segments. Net investment income grew from $363.3 million in the
first quarter of 1999 to $407.6 million in the first quarter of
2000 primarily due to increased invested assets to support growth
in fixed annuity policy reserves coupled with an increase in
average yield on the investment portfolio. Fixed annuity policy
reserves, which include the fixed option of variable annuity
contracts, increased $1.13 billion to $16.20 billion as of the end
of first quarter 2000 compared to $15.07 billion a year ago.
The Company does not consider realized gains and losses on
investments to be recurring components of earnings. The Company
makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. Net realized
losses on investments were $3.1 million and $5.4 million for the
first quarter of 2000 and 1999, respectively. The first quarter
1999 net realized losses on investments include a $9.2 million
loss on a single fixed maturity security.
Benefits and Expenses
Total benefits and expenses were $581.5 million in first quarter
2000, a 19% increase over first quarter 1999. The increase is due
mainly to growth in amortization of deferred acquisition costs
(DAC), interest credited and other operating expenses.
11
<PAGE> 12
Interest credited to policyholder account balances totaled $294.2
million in first quarter 2000 compared to $263.8 million in first
quarter 1999 and principally relates to fixed annuity and
investment life insurance products. The growth in interest
credited reflects the increase in policy reserves previously
discussed and increased average crediting rates. The average
crediting rate on fixed annuity policy reserves was 5.73% in first
quarter 2000 compared to 5.60% in first quarter 1999.
The growth in amortization of DAC which totaled $85.9 million and
$60.7 million in the first quarter of 2000 and 1999, respectively,
is principally due to the Variable Annuities segment and is
attributable to growth in revenues and an increase in surrender
activity in first quarter 2000.
Operating expenses were $122.1 million in first quarter 2000, a
17% increase from first quarter 1999 operating expenses of $104.3
million. The increase reflects the growth in the number of annuity
and life insurance contracts in force, particularly related to
variable annuities and variable universal life insurance and the
related increase in administrative processing costs.
Federal income tax expense was $54.4 million and $48.5 million for
the first quarter of 2000 and 1999, respectively. These amounts
represent effective tax rates of 32.4% for the first quarter of
2000 and 32.8% in 1999.
Recently Issued Accounting Standards
See note 2 to the unaudited consolidated financial statements for
a discussion of recently issued accounting standards.
Sales Information
The following table summarizes total Company sales by business
segment for the first quarter of 2000 and 1999.
<TABLE>
<CAPTION>
(in millions) 2000 1999
----------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Variable annuities $ 3,275.2 $ 2,457.8
Fixed annuities 742.2 617.4
Life insurance 410.7 250.5
----------------- -------------------
Total core premiums and deposits 4,428.1 3,325.7
Internal replacements (376.9) (97.4)
----------------- -------------------
Total core sales 4,051.2 3,228.3
----------------- -------------------
Bank-owned life insurance (BOLI) 19.0 86.7
Institutional products 161.7 -
Nationwide employee and agent benefit plans 58.3 66.4
----------------- -------------------
Total sales $ 4,290.2 $ 3,381.4
================= ===================
</TABLE>
Total core sales represent amounts that are recurring and are the
sales figures management uses to set and evaluate the Company's
sales goals. The Company reports statutory premiums and deposits
related to life insurance and annuity products as core sales.
Sales of institutional products represent sales of funding
agreements that secure notes issued to foreign investors through a
third party trust under the Company's $2 billion medium-term note
program. The program was launched in July 1999 as a means to
expand spread based product offerings. The Company excludes
institutional products and BOLI sales as well as deposits into
Nationwide employee and agent benefit plans from its targeted core
sales comparisons. Although funding agreements and BOLI contribute
to asset and earnings growth they do not produce steady production
flow that lends itself to meaningful comparisons. The Company also
excludes internal replacements from its targeted core sales
comparisons.
Total core sales reached $4.05 billion in the first quarter of
2000, an increase of 25% over 1999. Total annuity sales, net of
internal replacements, contributed $3.64 billion and $2.98 billion
in the first quarter of 2000 and 1999, respectively. Core life
insurance sales for first quarter 2000 were up 64% to $410.7
million.
12
<PAGE> 13
The Company sells its products through a broad distribution
network. Unaffiliated entities that sell the Company's products to
their own customer base include independent broker/dealers,
national and regional brokerage firms, pension plan
administrators, life insurance specialists and financial
institutions. Representatives of the Company or its affiliates who
market products directly to a customer base identified by the
Company include Nationwide Retirement Solutions sales
representatives and Nationwide agents.
Core sales by distribution channel for the first quarter of 2000
and 1999, are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------
(in millions) AMOUNT % AMOUNT %
------------------------------------------------------------ --------------------------- ------------
<S> <C> <C> <C> <C>
Independent broker/dealers $ 1,550.6 38.3% $ 1,260.5 39.0%
National and regional brokerage firms 308.0 7.6 211.3 6.6
Financial institutions 644.4 15.9 529.9 16.4
Pension plan administrators 332.1 8.2 337.5 10.5
Nationwide Retirement Solutions
sales representatives 774.8 19.1 601.7 18.6
Nationwide agents 211.3 5.2 187.3 5.8
Life insurance specialists 230.0 5.7 100.1 3.1
--------------- --------------------------- ------------
Total core sales $ 4,051.2 100.0% $ 3,228.3 100.0%
=============== =========================== ============
</TABLE>
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand and include individual and group variable
annuities and variable life insurance. The BEST of AMERICA(R)
products allow customers to choose from investment options
managed by premier mutual fund managers. The Company has also
developed private label variable and fixed annuity products in
conjunction with other financial services providers which allow
those providers to sell products to their own customer bases under
their own brand name.
The Company also markets group deferred compensation retirement
plans to employees of state and local governments for use under
Internal Revenue Code (IRC) Section 457. The Company utilizes its
sponsorship by the National Association of Counties and The United
States Conference of Mayors when marketing IRC Section 457
products. In addition, the Company utilizes an exclusive
arrangement with the National Education Association (NEA) to
market tax-qualified annuities under IRC 403(b) to NEA members.
Variable annuities developed for the NEA members are sold under
the NEA Valuebuilder brand. Beginning in April 2000, the Company
discontinued active marketing of new sales to NEA members.
13
<PAGE> 14
Core sales by product for the first quarter of 2000 and 1999 are
summarized as follows.
<TABLE>
<CAPTION>
(in millions) 2000 1999
----------------------------------------------------------- -------------
<S> <C> <C>
Best of America(R) products $ 1,319.1 $ 1,136.8
Private label annuities 273.9 304.4
The NEA Valuebuilder annuities 34.8 37.0
Other 106.4 55.9
------------- -------------
Total individual annuities 1,734.2 1,534.1
------------- -------------
Best of America(R) group pension series 1,198.6 901.8
IRC Section 457 annuities 691.6 530.9
Other 16.1 11.0
------------- -------------
Total group annuities 1,906.3 1,443.7
------------- -------------
Traditional/Universal life insurance 56.9 60.0
Best of America(R) variable life series 125.3 90.4
Corporate-owned life insurance 228.5 100.1
------------- -------------
Total life insurance 410.7 250.5
------------- -------------
Total core sales $ 4,051.2 $ 3,228.3
============== =============
</TABLE>
BUSINESS SEGMENTS
The Company reports three product segments: Variable Annuities,
Fixed Annuities and Life Insurance. In addition, the Company
reports certain other revenues and expenses in a Corporate and
Other segment. All information set forth below relating to the
Company's Variable Annuities segment excludes the fixed option
under the Company's variable annuity contracts. Such information
is included in the Company's Fixed Annuities segment.
The following table summarizes operating income before federal
income tax expense for the Company's business segments for the
first quarter of 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
(in millions) 2000 1999
-------------------------------------------------------------- -----------------
<S> <C> <C>
Variable Annuities $ 84.3 $ 66.2
Fixed Annuities 45.4 42.8
Life Insurance 33.3 29.1
Corporate and Other 7.8 15.0
----------------- -----------------
$ 170.8 $ 153.1
================= =================
</TABLE>
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment
options, tax-deferred accumulation of savings, asset protection in
the event of an untimely death and flexible payout options
including lump-sum, systematic withdrawal or a stream of payments
for life. The Company's variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts.
14
<PAGE> 15
The following table summarizes certain selected financial data for
the Company's Variable Annuities segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 2000 1999
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 189.2 $ 143.5
Benefits and expenses 104.9 77.3
------------------ -----------------
Operating income before federal income tax expense $ 84.3 $ 66.2
================== =================
OTHER DATA
Statutory premiums and deposits (1) $ 3,275.2 $ 2,457.8
Policy reserves as of period end:
Individual $ 39,131.4 $ 30,155.0
Group 26,107.4 18,685.8
------------------ -----------------
Total $ 65,238.8 $ 48,840.8
================== =================
Pre-tax operating income to average policy reserves 0.55% 0.56%
</TABLE>
----------
(1) Statutory data has been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Pre-tax operating earnings reached a record $84.3 million in first
quarter 2000, up 27% compared to a year ago. Improved Variable
Annuity segment results are primarily due to growth in asset fees
partially offset by increased DAC amortization and other operating
expenses.
Asset fees increased to $170.6 million in the first quarter of
2000, up 26% from $135.6 million in the same period a year ago.
The increase in asset fees is due to continued growth in variable
annuity policy reserve levels resulting from increased variable
annuity sales and market appreciation on investments underlying
reserves. Variable annuity policy reserves grew $4.04 billion
during the first quarter of 2000 reaching $65.24 billion as of
March 31, 2000 and have increased 34% compared to a year ago.
Variable annuity sales increased 33% for the first quarter 2000,
reaching $3.28 billion compared to $2.46 billion in the year ago
quarter. Compared to fourth quarter 1999, variable annuity sales
increased 39%. Sales generated by brokerage firms and independent
broker/dealers led the sales growth in first quarter 2000, posting
increases of 55% and 42%, respectively, over first quarter 1999.
Favorable equity market conditions during the first quarter of
2000 also contributed significantly to the growth in variable
annuity policy reserves. Variable annuity policy reserves reflect
market appreciation of $3.04 billion during the first three months
of 2000. Over the past twelve months, variable annuity policy
reserves have increased $12.30 billion as a result of market
appreciation.
Offsetting the growth in policy reserves attributable to an
increase in deposits and market appreciation was an increase in
policyholder surrender activity. Surrenders as a percentage of
average reserves were 18%, annualized, in first quarter 2000,
compared to 12% in first quarter 1999. The increase in surrender
activity is attributable to an increase in competition in the
individual variable annuity market which has increased transfers
to competitor products and the overall aging of the Company's book
of business. The Company introduced new products, new product
features and new retention strategies during first quarter 2000 in
an effort to decrease the rate of surrenders.
Amortization of DAC increased 58% to $56.0 million in first
quarter 2000 compared to $35.4 million in first quarter 1999.
Operating expenses were $48.3 million in first quarter 2000, an
increase of 16% over first quarter 1999. The growth in DAC
amortization and operating expenses reflect the overall growth in
the variable annuity business. The increase in DAC amortization
also reflects the increase in policyholder surrenders.
15
<PAGE> 16
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, tax-deferred accumulation of
savings and flexible payout options including lump-sum, systematic
withdrawal or a stream of payments for life. Such contracts
consist of single premium deferred annuities, flexible premium
deferred annuities and single premium immediate annuities. The
Fixed Annuities segment includes the fixed option under the
Company's variable annuity contracts.
The following table summarizes certain selected financial data for
the Company's Fixed Annuities segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in millions) 2000 1999
---------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues:
Net investment income $ 304.2 $ 275.3
Other 22.9 12.3
------------------ -----------------
327.1 287.6
------------------ -----------------
Benefits and expenses:
Interest credited to policyholder account balances 225.4 202.2
Other benefits and expenses 56.3 42.6
------------------ -----------------
281.7 244.8
------------------ -----------------
Operating income before federal income tax expense $ 45.4 $ 42.8
================== =================
OTHER DATA
Statutory premiums and deposits (1) $ 903.9 $ 617.4
Policy reserves as of period end:
Individual $ 7,617.8 $ 7,047.4
Group 7,877.9 8,017.8
Institutional 704.0 -
------------------ -----------------
Total $ 16,199.7 $ 15,065.2
================== =================
Pre-tax operating income to average policy reserves 1.11% 1.14%
</TABLE>
----------
(1) Statutory data has been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Fixed annuity segment results reflect a slight increase in
interest spread income attributable to growth in fixed annuity
policy reserves partially offset by lower interest margins in
first quarter 2000 compared to first quarter 1999. 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, including the rate of prepayments,
changes in market interest rates and other factors.
The following table depicts the interest spreads on general
account policy reserves in the Fixed Annuities segment.
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
----- -----
Net investment income 7.73% 7.62%
Interest credited 5.73% 5.60
----- -----
2.00% 2.02%
===== =====
16
<PAGE> 17
Recent increases in interest rates have slowed mortgage loan and
bond prepayment activity and the Company anticipates interest
spreads over the next several quarters to range between 190 and
195 basis points, excluding the impact of mortgage loan and bond
prepayment income.
Fixed annuity policy reserves totaled $16.20 billion as of March
31, 2000 compared to $16.59 billion as of the end of 1999 and
$15.07 billion a year ago.
First quarter fixed annuity premiums and deposits grew to $903.9
million in 2000 compared to $617.4 million in 1999. Most of the
Company's fixed annuity premiums and deposits are amounts
allocated to the fixed option of variable annuity contracts. First
quarter 2000 fixed annuity premiums and deposits include $618.0
million in premiums allocated to the fixed option under a variable
annuity contract, compared to $521.7 million in first quarter
1999. The increase is primarily attributable to $161.7 million of
funding agreements issued in connection with the Company's
medium-term note program coupled with a $96.3 million increase in
the fixed option of variable annuity contract sales in the first
quarter of 2000 as compared to the first quarter of 1999. The
later increase was driven by the Company's enhanced dollar cost
averaging (DCA) program that offers customers a first year bonus
interest rate and transfers the account balance systematically to
variable options over a six or twelve month period.
The increase in other benefits and expenses in first quarter 2000
compared to a year ago is attributable to growth in business.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, which provide a death benefit and may
also allow the customer to build cash value on a tax-advantaged
basis.
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(in millions) 2000 1999
---------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 179.6 $ 151.1
Benefits and expenses 146.3 122.0
------------------ -------------------
Operating income before federal income tax expense $ 33.3 $ 29.1
================== ===================
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 56.9 $ 60.0
Variable universal life insurance 125.3 90.5
Corporate-owned life insurance 247.5 186.7
------------------ -------------------
Total $ 429.7 $ 337.2
================== ===================
Policy reserves as of period end:
Traditional and universal life insurance $ 2,560.6 $ 2,459.4
Variable universal life insurance 2,000.1 1,363.3
Corporate-owned life insurance 1,767.0 1,097.3
------------------ -------------------
Total $ 6,327.7 $ 4,920.0
================== ===================
</TABLE>
----------
(1) Statutory data has been derived from the Quarterly Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Life Insurance segment results reflect increased policy charge
revenue driven by growth in investment life insurance in force and
policy reserves partially offset by higher benefits and expense
levels.
17
<PAGE> 18
The increase in Life Insurance segment earnings is attributable to
strong growth in investment life insurance products, which include
individual variable universal life insurance and corporate-owned
life insurance, where the Company has aggressively expanded its
distribution capabilities. Investment life premiums and deposits
increased from $277.2 million in first quarter 1999 to $372.8
million in first quarter 2000. As a result of the sales growth and
high persistency, revenues from investment life products increased
to $72.1 million in first quarter 2000 from $51.8 million in first
quarter 1999.
Interest credited to policyholders increased $2.8 million in first
quarter 2000 reaching $33.4 million compared to $30.6 million in
first quarter 1999. Increased corporate-owned life insurance
business accounted for most of the increases. Corporate investment
fixed life insurance reserves increased $113.9 million to $1,033.9
million as of March 31, 2000 compared to $920.0 million a year
ago.
Traditional and universal life insurance benefits increased $4.1
million to $42.5 million in first quarter 2000 compared to the
same period a year ago due to an increase in claims. Operating
expenses increased by $3.5 million during first quarter 2000 as
compared to first quarter 1999 primarily as a result of increased
DAC amortization.
Corporate and Other
The following table summarizes certain selected financial data for
the Company's Corporate and Other segment for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(in millions) 2000 1999
---------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 56.4 $ 60.3
Benefits and expenses 48.6 45.3
------------------ -------------------
Operating income before federal income tax expense (1) $ 7.8 $ 15.0
================== ===================
</TABLE>
----------
(1) Excludes realized gains and losses on investments.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, investment management fees and other revenues
earned from Nationwide mutual funds and net investment income and
policy charges from group annuity contracts issued to Nationwide
employee and agent benefit plans. During third quarter 1999 the
Company assigned its investment advisory and related agreements
associated with Nationwide mutual funds to an affiliate. The
decrease in revenues reflects an increase in net investment income
offset by a decrease in investment advisory and related fees. The
increase in benefits and expenses is the result of increased
interest credited and general expenses.
In addition to the operating revenues previously presented, the
Company also reports realized gains and losses on investments in
the Corporate and Other segment. The Company realized net
investment losses of $3.1 million and $5.4 million during the
first quarter of 2000 and 1999, respectively.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted due to reduced disclosure format.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity pricing and sales practices. A
number of these lawsuits have resulted in substantial jury awards
or settlements.
In November 1997, two plaintiffs, one who was the owner of a
variable life insurance contract and the other who was the owner
of a variable annuity contract, commenced a lawsuit in a federal
court in Texas against Nationwide Life and the American Century
group of defendants (Robert Young and David D. Distad v.
Nationwide Life Insurance Company et al.). In this lawsuit,
plaintiffs sought to represent a class of variable life insurance
contract owners and variable annuity contract owners whom they
claim were allegedly misled when purchasing these variable
contracts into believing that the performance of their underlying
mutual fund option managed by American Century, whose shares may
only be purchased by insurance companies, would track the
performance of a mutual fund, also managed by American Century,
whose shares are publicly traded. The amended complaint seeks
unspecified compensatory and punitive damages. On April 27, 1998,
the district court denied, in part and granted, in part, motions
to dismiss the complaint filed by the Company and American
Century. The remaining claims against the Company allege
securities fraud, common law fraud, civil conspiracy and breach of
contract. On December 2, 1998, the district court issued an order
denying plaintiffs' motion for class certification. On December
10, 1998, the district court stayed the lawsuit pending
plaintiffs' petition to the federal appeals court for
interlocutory review of the order denying class certification and
the appeals court declined to review the order denying class
certification upon interlocutory appeal. On June 11, 1999, the
District Court denied the plaintiffs' motion to amend their
complaint and reconsider class certification. In January 2000, the
parties to this litigation settled this lawsuit now limited to the
claims of the two named plaintiffs. On February 9, 2000 the court
dismissed this lawsuit with prejudice.
On October 29, 1998, the Company was named in a lawsuit filed in
Ohio state court related to the sale of deferred annuity products
for use as investments in tax-deferred contributory retirement
plans (Mercedes Castillo v. Nationwide Financial Services, Inc.,
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance Company). On May 3, 1999, the complaint was amended to,
among other things, add Marcus Shore as a second plaintiff. The
amended complaint is brought as a class action on behalf of all
persons who purchased individual deferred annuity contracts or
participated in group annuity contracts sold by the Company and
the other named Company affiliates which were used to fund certain
tax-deferred retirement plans. The amended complaint seeks
unspecified compensatory and punitive damages. No class has been
certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On
March 8, 2000, the court denied the motion to dismiss the amended
complaint filed by the Company and other named defendants. The
Company intends to defend this lawsuit vigorously.
There can be no assurance that any litigation relating to pricing
or sales practices will not have a material adverse effect on the
Company in the future.
19
<PAGE> 20
ITEM 2 CHANGES IN SECURITIES
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month
period ended March 31, 2000.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: May 12, 2000 /s/Mark R. Thresher
------------------------------------------------
Mark R. Thresher
Senior Vice President - Finance -
Nationwide Financial
(Chief Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONWIDE
LIFE INSURANCE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 15,080
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 113
<MORTGAGE> 5,869
<REAL-ESTATE> 266
<TOTAL-INVEST> 21,977
<CASH> 1
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,678
<TOTAL-ASSETS> 96,889
<POLICY-LOSSES> 21,492
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4
<OTHER-SE> 2,817
<TOTAL-LIABILITY-AND-EQUITY> 96,889
67
<INVESTMENT-INCOME> 408
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 5
<BENEFITS> 362
<UNDERWRITING-AMORTIZATION> 86
<UNDERWRITING-OTHER> 122
<INCOME-PRETAX> 168
<INCOME-TAX> 54
<INCOME-CONTINUING> 113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
