-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WYlBddX7tUzrz1sHvhwvxArmXpjctXNrO2KQJlGw5c6TOwV8p60rC7ZLjGAfJZbi jThHO8yn8hLIqY1irgDn6Q== 0000950152-98-002805.txt : 19980401 0000950152-98-002805.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950152-98-002805 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONWIDE LIFE INSURANCE CO CENTRAL INDEX KEY: 0000205695 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 314156830 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-64559 FILM NUMBER: 98580679 BUSINESS ADDRESS: STREET 1: ONE NATIONWIDE PLZ CITY: COLUMBUS STATE: OH ZIP: 43216 BUSINESS PHONE: 6142497111 10-K 1 NATIONWIDE LIFE INSURANCE COMPANY 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) OHIO 31-4156830 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
ONE NATIONWIDE PLAZA COLUMBUS, OHIO 43215 (614) 249-7111 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE 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 MARCH 20, 1998. COMMON STOCK - 3,814,779 SHARES ISSUED AND OUTSTANDING AS OF MARCH 20, 1998 (Title of Class) THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. 2 PART I ITEM 1 BUSINESS - ------ -------- ORGANIZATION Nationwide Life Insurance Company (NLIC) was incorporated in 1929 and is an Ohio stock legal reserve life insurance company. NLIC offers a variety of forms of variable annuities, fixed annuities and life insurance on a participating and a non-participating basis. Prior to January 27, 1997, 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 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 and 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, Employers Life Insurance Company of Wausau (ELICW), National Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC), through December 31, 1996, and all accident and health and group life insurance business have been accounted for as discontinued operations. 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 as of December 31, 1997 include Nationwide Life and Annuity Insurance Company (NLAIC), Nationwide Advisory Services, Inc. (NAS), Nationwide Investment Services Corporation (NISC) and NWE, Inc. (NWE). NLIC and its subsidiaries are collectively referred to as "the Company." The Company is a member of the Nationwide Insurance Enterprise, which consists of Nationwide Mutual Insurance Company (NMIC) and all of its subsidiaries and affiliates. NLAIC offers universal life insurance, variable universal life insurance and individual annuity contracts on a non-participating basis. NAS is a registered broker-dealer providing investment management and administration services. NISC, contributed by Nationwide Corp. on April 5, 1996, is a registered broker-dealer doing business solely in the deferred compensation market. NWE was formed by NLIC to hold special investments. The Company is a leading provider of long-term savings and retirement products. The Company offers variable annuities, fixed annuities and life insurance as well as mutual funds and pension products and administrative services. By developing and offering a wide variety of products, the Company believes that it has positioned itself to compete effectively in various stock market and interest rate environments. The Company markets its products through a broad spectrum of wholesale and retail distribution channels, including financial planners, pension plan administrators, securities firms, banks and Nationwide Insurance Enterprise insurance agents. 2 3 The Company is one of the leaders in the development and sale of variable annuities. For the year ended December 31, 1997, the Company was the third largest writer of individual variable annuity contracts in the United States (U.S.) based on sales, according to The Variable Annuity Research & Data Service. Its principal annuity series, The BEST of AMERICA, allows the customer to choose from up to 39 investment options, including mutual funds managed by premier mutual fund managers. The Company 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. The Company 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 the Company, and the performance of the financial markets, particularly the U.S. stock markets, in recent years. BUSINESS SEGMENTS The Company has three product segments: Variable Annuities, Fixed Annuities and Life Insurance. In addition, the Company reports corporate revenues and expenses, investments and related investment income supporting capital not specifically allocated to its product segments, revenues and expenses of its investment advisor subsidiary (other than the portion allocated to the Variable Annuities and Life Insurance segments) 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 $150.9 million (or 36%) of the Company's operating income before federal income tax expense for 1997, 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 Fixed Annuities segment, which accounted for $169.5 million (or 40%) of the Company's operating income before federal income tax expense for 1997, 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 the Company's variable annuity contracts, which accounted for 78% of the Company's fixed annuity sales in 1997 and 73% of the Company's fixed annuity policy reserves as of December 31, 1997. During 1997, the average crediting rates on contracts (including the fixed option under the Company's variable annuity contracts) in the Fixed Annuities segment was 6.12%. Substantially all of the Company's crediting rates on its fixed annuity contracts are guaranteed for a period not exceeding 15 months. The Life Insurance segment, which accounted for $70.9 million (or 17%) of the Company's operating income before federal income tax expense for 1997, 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 $27.5 million (or 7%) of the Company's operating income (which excludes realized gains and losses on investments) before federal income tax expense for 1997. Additional information related to the Company's business segments is included in Note 14 to the consolidated financial statements and Financial Statement Schedule III. 3 4 RATINGS Ratings with respect to claims-paying ability and financial strength have become an increasingly important factor in establishing the competitive position of insurance companies. Ratings are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance products. Rating organizations continually review the financial performance and condition of insurers, including the Company. Any lowering of the Company's ratings could have a material adverse effect on the Company's ability to market its products and could increase the surrender of the Company's annuity products. Both of these consequences could, depending upon the extent thereof, have a material adverse effect on the Company's liquidity and, under certain circumstances, net income. NLIC is rated "A+" (Superior) by A.M. Best Company, Inc. and its claims-paying ability is rated "Aa2" (Excellent) by Moody's Investor Services, Inc. and "AA+" (Excellent) by Standard & Poor's Corporation. The foregoing ratings reflect each rating agency's opinion of NLIC's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed toward the protection of investors. Such factors are of concern to policyholders, agents and intermediaries. COMPETITION The Company 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, have higher ratings than the Company. The Company believes that competition in the Company'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 the Company, 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 the Company. REGULATION NLIC and NLAIC, 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. The Company can not predict the effect that any proposed or future legislation may have on the financial condition or results of operations of the Company. 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. 4 5 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 (NAIC). The insurance subsidiaries are currently under examination by the Ohio and Delaware insurance departments for the four-year period ended December 31, 1996. While final reports of these examinations have not yet been issued, management does not expect such reports to raise any significant issues or adjustments. The payment of dividends by NLIC 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 the Company'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. As a result of the $850.0 million dividend paid on February 24, 1997, any dividend paid by NLIC during the 12-month period immediately following the dividend would be an extraordinary dividend under Ohio insurance laws. Accordingly, no such dividend could be paid without prior regulatory approval. 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 stockholders. The Company currently does not expect such regulatory requirements to impair its ability to pay operating expenses and dividends in the future. EMPLOYEES As of December 31, 1997, the Company had approximately 3,250 employees. None of the employees of the Company are covered by a collective bargaining agreement and the Company believes that its employee relations are satisfactory. ITEM 2 PROPERTIES - ------ ---------- The Company's principal executive offices are located in Columbus, Ohio. The Company leases its home office complex, consisting of approximately 430,000 square feet, from NMIC and its subsidiaries at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus, Ohio. The Company believes that its present facilities are adequate for the anticipated needs of the Company. ITEM 3 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 pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements. 5 6 In October 1996, a policyholder of NLIC filed a complaint in Alabama state court against NLIC and an agent of NLIC (Wayne M. King v. Nationwide Life Insurance Company and Danny Nix) related to the sale of a whole life policy on a "vanishing premium" basis and seeking unspecified compensatory and punitive damages. The King case was dismissed with prejudice on June 25, 1997 pursuant to an agreement between the parties. In February 1997, NLIC was named as a defendant in a lawsuit filed in New York Supreme Court also related to the sale of whole life policies on a "vanishing premium" basis (John H. Snyder v. Nationwide Mutual Insurance Company, Nationwide Mutual Insurance Co. and Nationwide Life Insurance Co.). The plaintiff in such lawsuit seeks to represent a national class of NLIC policyholders and claims unspecified compensatory and punitive damages. This lawsuit has not been certified as a class action. On April 22, 1997, a motion to dismiss the Snyder complaint in its entirety was filed by the defendants, and the plaintiff has opposed such motion. 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 action against NLIC and the American Century group of defendants (Robert Young and David Distad v. Nationwide Life Insurance Company et al.). In this action, plaintiffs seek to represent a class of variable life insurance contract owners and variable annuity contract owners whom they claim were allegedly misled when purchasing these variable contracts into believing that some portion of their premiums were invested in a publicly traded mutual fund when, in fact, the premium monies were invested in a mutual fund whose shares may only be purchased by insurance companies. The complaint seeks unspecified compensatory, treble and punitive damages. In January 1998, both NLIC and American Century filed motions to dismiss the entire complaint. Plaintiffs' counsel opposed these motions and the federal court in Texas will hear arguments on the motions to dismiss on April 1, 1998. This lawsuit is in an early stage and has not been certified as a class action. NLIC intends to defend this case vigorously. There can be no assurance that any litigation relating to pricing and sales practices will not have a material adverse effect on the Company in the future. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- Omitted due to reduced disclosure format. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER - ------ ------------------------------------------------------------ MATTERS ------- There is no established public trading market for the NLIC's shares of common stock. All of the 3,814,779 shares of NLIC's common stock issued and outstanding are owned by NFS. NLIC paid no cash dividends during 1997 and $50.0 million to Nationwide Corp. during 1996. On January 1, 1997, NLIC paid a dividend valued at $485.7 million to Nationwide Corp. consisting of the outstanding shares of common stock of ELICW, NCC and 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 dividend payments were approved by the Department of Insurance of the State of Ohio. NLIC currently does not have a formal dividend policy. Management of NLIC currently does not anticipate making dividend payments during 1998. Reference is made to note 10 of the consolidated financial statements for information regarding dividend restrictions. 6 7 ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA - ------ ------------------------------------ Omitted due to reduced disclosure format. ITEM 7 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS - ------ ------------------------------------------------------------ INTRODUCTION Management's narrative analysis of the results of operations of NLIC and subsidiaries for the three years ended December 31, 1997 follows. This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Management's narrative analysis contains forward-looking statements that are intended to enhance the reader's ability to assess the future financial performance of the Company. These forward-looking statements are not based on historical information and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment yields and interest spread, or the earnings or profitability of the Company's activities. Because these statements are subject to numerous assumptions, risks, and uncertainties, actual results could be materially different. The following factors, among others, may have such an impact: changes in economic conditions; movements in interest rates and the stock markets; competitive pressures on product pricing and services; success and timing of business strategies; and the nature and extent of legislation and regulatory actions and reforms. Readers are directed to consider these and the other risks and uncertainties described in more detail elsewhere in documents filed by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise. RESULTS OF OPERATIONS In addition to net income, the Company 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. The following table reconciles the Company's reported net income to net operating income for each of the last three years.
(in millions of dollars) 1997 1996 1995 ------- ------- ------- Net income $ 279.7 $ 215.9 $ 212.5 Realized gains on investments, net of tax (7.9) (1.0) (0.1) Income from discontinued operations, net of tax - (11.3) (24.7) ======= ======= ======= Net operating income $ 271.8 $ 203.6 $ 187.7 ======= ======= =======
Revenues Total revenues for 1997, excluding realized gains and losses on investments, increased to $2.21 billion compared to $1.99 billion for 1996 and $1.80 billion for 1995. Increases in policy charges and net investment income accounted for most of the growth. 7 8 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 the Company's products and premium loads on universal life insurance products; surrender fees, which are charged as a percentage of premiums withdrawn during a specified period of 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:
(in millions of dollars) 1997 1996 1995 ------- ------- ------- Asset fees $ 384.8 $ 275.5 $ 184.8 Administrative fees 59.5 50.1 40.7 Surrender fees 32.4 22.1 17.3 Cost of insurance charges 68.5 53.2 43.8 ------- ------- ------- Total policy charges $ 545.2 $ 400.9 $ 286.6 ======= ======= =======
The growth in asset fees reflects increases in total separate account assets of 40% in 1997 and 45% in 1996. As of year end, total separate account assets were $37.72 billion. 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 $1.29 billion and $1.36 billion in 1995 and 1996, respectively, to $1.41 billion in 1997 primarily due to increased invested assets to support growth in fixed annuity policy reserves. Fixed annuity policy reserves, which include the fixed option of the Company's variable annuity products, increased $727.8 million in 1996 and $682.4 million in 1997 and were $14.19 billion as of year end 1997. The increase in net investment income due to growth in invested assets was partially offset by declining investment yields in 1997 and 1996 due to lower market interest rates. Realized gains and losses on investments are not considered by the Company to be recurring components of earnings and are reported in the Corporate and Other segment. The Company makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. Net realized gains on investments were $11.1 million in 1997 compared to realized losses of $0.3 million and $1.7 million in 1996 and 1995, respectively. Realized gains in 1997 include $14.4 million recognized when securities of $850.0 million were paid to NFS, which subsequently paid to Nationwide Corp., as a dividend on February 24, 1997 as a part of certain transactions that were completed in anticipation of NFS' initial public offering. Also, during 1997, the Company recorded a realized loss of $16.2 million related to the sale of a single corporate bond investment that had deteriorated due to the credit quality of the issuer. Benefits and Expenses Interest credited to policyholder account balances totaled $1.02 billion in 1997 compared to $982.3 million in 1996 and $950.3 million in 1995 and principally relates to fixed annuity products. The growth in interest credited reflects the increase in fixed annuity policy reserves previously discussed partially offset by reduced average crediting rates. The average crediting rate on fixed annuity policy reserves was 6.12% in 1997 compared to 6.30% and 6.58% in 1996 and 1995, respectively. Amortization of deferred policy acquisition costs (DAC) increased to $167.2 million in 1997 compared to $133.4 million in 1996 and $82.7 million in 1995. The increase is principally related to increased business in the Variable Annuities segment. Operating expenses were $384.9 million in 1997, a 12% increase from 1996 operating expenses of $342.4 million. Operating expenses were $273.0 million in 1995. 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 1997 also reflect the cost of certain technology initiatives. 8 9 The Company has developed a plan to address issues related to the Year 2000. The problem relates to many existing computer programs using only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Company has been evaluating its exposure to the Year 2000 issue through a review of all of its operating systems as well as dependencies on the systems of others since 1996. The Company expects all system changes and replacements needed to achieve Year 2000 compliance to be completed by the end of 1998. Compliance testing will be completed in the first quarter of 1999. The Company charges to expense all costs associated with these system changes as the costs are incurred. Operating expenses in 1997 include approximately $45 million on technology projects, which includes costs related to Year 2000 and the development of a new policy administration system for traditional life insurance products and other system enhancements. The Company anticipates spending a comparable amount in 1998 on technology projects, including Year 2000 initiatives. Federal income tax expense was $150.2 million representing an effective tax rate of 34.9% for 1997. Federal income tax expense in 1996 and 1995 was $110.9 million and $99.8 million, respectively, representing effective rates of 35.2% and 34.7%. Discontinued Operations Discontinued operations include the results of (i) the three NLIC subsidiaries whose outstanding common stock, on September 24, 1996, was declared as a dividend payable to Nationwide Corp. on January 1, 1997 and (ii) NLIC's accident and health and group life insurance business which was ceded to affiliates effective January 1, 1996. The Company entered into these transactions in 1996 in order to focus its business on long-term savings and retirement products. The transactions are described in note 15 of the consolidated financial statements. The Company did not recognize any gain or loss on the disposal of these subsidiaries or discontinuance of the accident and health and group life insurance business. Income from discontinued operations was $11.3 million in 1996 and $24.7 million in 1995. There was no income from discontinued operations in 1997. Statutory Premiums and Deposits The Company sells its products through a broad distribution network comprised of wholesale and retail distribution channels. Wholesale distributors are unaffiliated entities that sell the Company's products to their own customer base and include investment broker/dealers, pension plan administrators and financial institutions. The Company has access to over 1,000 broker/dealers and over 30,000 registered representatives who sell individual and group variable annuities, fixed annuities and variable life insurance in all 50 states and the District of Columbia. Over 250 regional pension plan administrators market the Company's group variable and fixed annuities to employers sponsoring employee retirement programs. The Company currently has relationships with over 180 banks selling individual variable and fixed annuities (under the Company's brand name and on a private-label basis), variable universal life insurance and group pension products. Retail distributors are representatives of the Company who market products directly to a customer base identified by the Company and include representatives of affiliated sales companies and Nationwide Insurance Enterprise insurance agents. The Company markets products on a retail basis to state and local governments and to teachers through affiliated sales companies. Approximately 4,300 licensed Nationwide Insurance Enterprise insurance agents sell life insurance and individual annuities primarily targeting holders of personal automobile and homeowners' insurance policies issued by the Nationwide Insurance Enterprise. 9 10 Statutory premiums and deposits by distribution channel for each of the last three years are summarized as follows: 1997 1996 1995 ---------------------- ---------------------- ---------------------- (in millions of dollars) Amount % Amount % Amount % --------- -------- --------- --------- --------- --------- Wholesale channels: Investment dealers $ 3,894.1 37.7% $ 3,627.8 42.5% $ 2,835.4 42.8% Pension market 2,325.0 22.5 1,911.6 22.4 1,573.7 23.8 Financial institutions 1,653.2 16.0 947.2 11.1 515.4 7.8 --------- -------- --------- --------- --------- --------- Total wholesale channels 7,872.3 76.2 6,486.6 76.0 4,924.5 74.4 Retail channels: Public sector and teachers market 1,862.1 18.0 1,528.0 17.9 1,244.9 18.8 Nationwide agents 602.7 5.8 525.5 6.1 446.5 6.8 --------- -------- --------- --------- --------- --------- Total retail channels 2,464.8 23.8 2,053.5 24.0 1,691.4 25.6 --------- -------- --------- --------- --------- --------- Total external premiums and deposits 10,337.1 100.0% 8,540.1 100.0% 6,615.9 100.0% ========= ======== ========= ========= ========= ========= Nationwide Insurance Enterprise employee and agent benefit plans 174.9 502.5 182.1 --------- --------- --------- Total statutory premiums and deposits $10,512.0 $ 9,042.6 $ 6,798.0 ========= ========= =========
Excluding Nationwide Insurance Enterprise benefit plan sales, the Company achieved annual sales growth of 21%, 29%, and 21% in 1997, 1996 and 1995, respectively. The Company's goal is 20% annual growth in external sales and management believes the Company is well positioned to achieve that goal in 1998. The Company's flagship products are marketed under The BEST of AMERICA brand, and include individual and group variable annuities and variable life insurance. The BEST of AMERICA products allow customers to choose from among investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial services providers which allow those providers to sell individual variable and fixed annuities with substantially the same features as the Company's brand name products to their own customer bases under their own brand name. The Company also markets group deferred compensation retirement plans to employees of state and local governments for use under Internal Revenue Code (IRC) Section 457. The Company utilizes its sponsorship by the National Association of Counties and The United States Conference of Mayors when marketing IRC Section 457 products. In addition, the Company utilizes an exclusive arrangement with the National Education Association (NEA) to market tax-qualified annuities under IRC 403(b) to NEA members. Variable annuities developed for the NEA members are sold under the NEA Valuebuilder brand. External statutory premiums and deposits by product are as follows:
(in millions of dollars) 1997 1996 1995 ---------- ---------- ---------- The BEST of AMERICA products: Individual variable annuities $ 4,269.7 $ 3,801.5 $ 2,740.6 Group variable annuities 2,220.5 1,807.1 1,457.6 Variable universal life 220.3 165.4 101.3 Private label annuities 1,006.3 625.9 389.7 IRC Section 457 annuities 1,715.7 1,425.8 1,191.1 The NEA Valuebuilder annuities 145.5 102.2 53.8 Other 759.1 612.2 681.8 ---------- ---------- ---------- $ 10,337.1 $ 8,540.1 $ 6,615.9 ========== ========== ==========
10 11 BUSINESS SEGMENTS The Company has three product segments: Variable Annuities, Fixed Annuities and Life Insurance. In addition, the Company reports corporate income 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) and revenues and expenses related to group annuity contracts sold to Nationwide Insurance Enterprise employee benefit plans 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 each of the last three years.
(in millions of dollars) 1997 1996 1995 ---------- ---------- ---------- Operating income: Variable annuity $ 150.9 $ 90.3 $ 50.8 Fixed annuity 169.5 135.4 137.0 Life insurance 70.9 67.2 67.6 Corporate and other 27.5 22.9 33.9 ---------- ---------- ---------- $ 418.8 $ 315.8 $ 289.3 ========== ========== ==========
Variable Annuities The Variable Annuities segment consists of annuity contracts that provide the customer with the opportunity to invest in mutual funds managed by independent investment managers and the Company, with investment returns accumulating on a tax-deferred basis. The Company's variable annuity products consist almost entirely of flexible premium deferred variable annuity contracts. 11 12 The following table summarizes certain selected financial data for the Company's Variable Annuities segment for the years indicated.
(in millions of dollars) 1997 1996 1995 ---------- ---------- ---------- INCOME STATEMENT DATA (1) Revenues: Asset fees $ 370.2 $ 261.8 $ 172.8 Administrative fees 21.8 18.1 14.0 Surrender fees 21.9 13.6 10.0 ---------- ---------- ---------- Total policy charges 413.9 293.5 196.8 Net investment income and other (2) (9.9) (8.9) (7.8) ---------- ---------- ---------- 404.0 284.6 189.0 ---------- ---------- ---------- Benefits and expenses: Benefits and claims 5.9 4.6 2.9 Amortization of DAC 87.8 57.4 26.3 Other operating expenses 159.4 132.3 109.0 ---------- ---------- ---------- 253.1 194.3 138.2 ========== ========== ========== Operating income before federal income tax expense $ 150.9 $ 90.3 $ 50.8 ========== ========== ========== OTHER DATA (1) Statutory premiums and deposits (3) $ 7,535.8 $ 6,500.3 $ 4,399.3 Withdrawals 2,683.3 1,697.4 1,071.6 Policy reserves as of year end $ 34,486.7 $ 24,278.1 $ 16,761.8 Ratio of policy charges to average policy reserves 1.41% 1.43% 1.44% Pre-tax operating income to average policy reserves 0.51% 0.44% 0.37% ---------- (1) Excludes the fixed option under the Company's variable annuity contracts which is reported in the Company's Fixed Annuities segment. (2) The Company's method of allocating net investment income results in a charge (negative net investment income) to this segment which is recognized in the Corporate and Other segment. The charge relates to non-invested assets which support this segment on a statutory basis. (3) Statutory data have been derived from the Annual Statements of NLIC and NLAIC, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
Variable annuity segment results reflect a sharp increase in policy charge revenues partially offset by increases in amortization of DAC and other operating expenses. The increase in policy charge revenues is attributable to growth in asset fees. Asset fees were $370.2 million in 1997 up 41% from $261.8 million in 1996 and totaled $172.8 million in 1995. The increase in assets fees reflects substantial growth in policy reserve levels as a result of steady premium growth and through market appreciation on investments underlying reserves. Variable annuity policy reserves grew $10.21 billion during 1997 reaching $34.49 billion as of year end 1997 compared to growth in 1996 of $7.52 billion and year end 1996 reserves of $24.28 billion. Total policy charges as a percentage of policy reserves remained relatively stable between 141 and 144 basis points during the last three years presented, reflecting no or minimal changes in the levels of policy charges for most variable annuity products. The Company has sustained high sales growth over the recent three year period through deeper penetration of existing distribution channels and the addition of new sales outlets. In addition, variable annuity sales reflect growing consumer demand for equity-based retirement savings investments, coupled with a robust stock market and lower interest rates. Significant increases in production through financial institutions, pension plan administrators and public sector markets have contributed strongly to the growth in variable annuity sales in 1997, when sales increased 16% to a record $7.54 billion compared to $6.50 billion in 1996. Variable annuity sales in 1996 represented a 48% increase over 1995 sales of $4.40 billion. 12 13 Favorable equity market conditions over the past three years have also contributed significantly to the growth in variable annuity policy reserves. Variable annuity policy reserves reflect market appreciation of $5.21 billion, $2.72 billion and $2.93 billion in 1997, 1996 and 1995, respectively. The increase in amortization of DAC in 1997 compared to 1996 and 1995 is due to overall growth in the variable annuity business. The growth in operating expenses also reflects the overall growth in the variable annuity business. Operating expenses were 54 basis points of average variable annuity policy reserves for 1997 comparing favorably to 64 basis points and 80 basis points for 1996 and 1995, respectively. The Company has controlled operating expense growth by increasing productivity through investments in technology and economies of scale. 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 the Company's variable annuity contracts. The following table summarizes certain selected financial data for the Company's Fixed Annuities segment for the years indicated.
(in millions of dollars) 1997 1996 1995 ---------- ---------- ---------- INCOME STATEMENT DATA (1) Revenues: Policy charges $ 15.9 $ 18.0 $ 16.4 Life insurance premiums 27.3 24.0 32.8 Net investment income 1,098.2 1,050.6 1,002.8 ---------- ---------- ---------- 1,141.4 1,092.6 1,052.0 ---------- ---------- ---------- Benefits and expenses: Interest credited to policyholder account balances 823.4 805.0 775.7 Other benefits and claims 23.3 33.8 29.5 Amortization of DAC 39.8 38.6 29.5 Other operating expenses 85.4 79.8 80.3 ---------- ---------- ---------- 971.9 957.2 915.0 ========== ========== ========== Operating income before federal income tax expense $ 169.5 $ 135.4 $ 137.0 ========== ========== ========== OTHER DATA (1) Statutory premiums and deposits (2) $ 2,137.9 $ 1,600.5 $ 1,864.2 Withdrawals and benefits 1,710.0 1,375.5 1,151.6 Policy reserves as of year end $ 14,194.2 $ 13,511.8 $ 12,784.0 Net interest margin on general account policy reserves 2.04% 1.92% 1.92% Pre-tax operating income to average policy reserves 1.22% 1.03% 1.14% ---------- (1) Includes the fixed option under the Company's variable annuity contracts. (2) Statutory data have been derived from the Annual Statements of NLIC and NLAIC, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
13 14 Fixed annuity 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.
1997 1996 1995 ---------- ---------- ---------- Net investment income 8.16% 8.22% 8.50% Interest credited 6.12 6.30 6.58 ---------- ---------- ---------- 2.04% 1.92% 1.92% ========== ========== ==========
The Company expects interest margins to compress during 1998 reflecting the lower interest rate environment available for new invested assets. The Company is able to mitigate the effects of lower investment yields by periodically resetting the rates credited on fixed annuity contracts. As of December 31, 1997, $6.85 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 $4.88 billion are in contracts that adjust the crediting rate on an annual basis with portions resetting in each calendar quarter. The Company also has $1.40 billion of fixed annuity policy reserves that call for the crediting rate to be reset annually on each January 1. The remaining $1.06 billion of fixed annuity policy reserves are in payout status where the Company has guaranteed periodic, typically monthly, payments. Fixed annuity policy reserves increased to $14.19 billion as of year-end compared to $13.51 billion a year ago and $12.78 billion as of the end of 1995. The growth reflects increased fixed annuity sales in 1997 through the financial institutions and investment dealer channels. Sales for 1997 were up 34% to $2.14 billion compared to $1.60 billion in 1996. Sales in 1995 totaled $1.86 billion. Most of the Company's fixed annuity sales are premiums allocated to the guaranteed fixed option of variable annuity contracts. Fixed annuity sales for 1997 include $1.67 billion in premiums allocated to the fixed option under a variable annuity contract, compared to $1.24 billion in 1996. Sales growth in 1997 reflects the success of proprietary fixed product sales through financial institutions, as well as the impact of a 1.00% first-year bonus crediting rate offered on The BEST of AMERICA - America's Vision product during the second half of 1997. The decrease in other benefits and claims reflects a $13.0 million charge in 1996 related to reserve strengthening in the immediate annuity line due to changes in estimated profitability based on revised assumptions for mortality and reinvestment rates. Amortization of DAC reflects a reduction in 1996 of $6.0 million due to changes in estimates of expected future profits as a result of favorable investment spread and persistency experience. Life Insurance The Life Insurance segment consists of insurance products, including variable universal life insurance and corporate-owned insurance products, that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. 14 15 The following table summarizes certain selected financial data for the Company's Life Insurance segment for the years indicated.
(in millions of dollars) 1997 1996 1995 ---------- ---------- ---------- INCOME STATEMENT DATA Revenues: Cost of insurance charges $ 68.5 $ 53.2 $ 43.8 Other policy charges 36.8 33.4 27.5 ---------- ---------- ---------- Total policy charges 105.3 86.6 71.3 Life insurance premiums 178.1 174.6 166.3 Net investment income 189.1 174.0 171.3 Other 0.6 0.4 0.2 ---------- ---------- ---------- 473.1 435.6 409.1 ---------- ---------- ---------- Benefits and expenses: Interest credited to policyholder account balances 78.5 70.2 69.0 Other benefits and claims 149.0 141.2 133.0 Policyholder dividends 40.6 40.7 39.7 Amortization of DAC 39.6 37.4 31.0 Other operating expenses 94.5 78.9 68.8 ---------- ---------- ---------- 402.2 368.4 341.5 ========== ========== ========== Operating income before federal income tax expense $ 70.9 $ 67.2 $ 67.6 ========== ========== ========== OTHER DATA: Statutory premiums (1): Traditional and universal life $ 248.4 $ 253.9 $ 248.3 Variable universal life 220.0 165.4 104.1 Corporate-owned life 195.0 20.0 - Policy reserves as of year end: Traditional and universal life 2,369.5 2,295.5 2,213.7 Variable universal life 892.1 622.6 446.8 Corporate-owned life 225.4 20.8 - Life insurance in force: Traditional and universal life 27,495.7 28,107.0 27,616.9 Variable universal life 11,337.4 8,094.6 4,926.5 Corporate-owned life $ 426.3 $ 73.0 $ - ---------- (1) Statutory data have been derived from the Annual Statements of NLIC and NLAIC, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
Life Insurance segment results reflect revenue growth in the variable universal life insurance line driven by a steady increase in insurance in-force and policy reserves partially offset by higher operating expenses associated with technology-related costs in the traditional life insurance lines. Variable universal life insurance policy charges were $57.1 million in 1997, an increase of $18.5 million, or 48%, compared to $38.6 million in 1996. For 1995, variable universal life insurance policy charges were $26.7 million. The growth in variable universal life policy charges is attributable to the growth in insurance in-force and policy reserves, which increased 40% and 43%, respectively, in 1997. During 1996, variable universal life insurance in-force and policy reserves increased 64% and 39%, respectively. Growth in insurance in-force and policy reserves is due to strong sales from both investment dealers and Nationwide Insurance Enterprise insurance agents, combined with high persistency. In February, 1998, the Company introduced a new variable universal life insurance product called Next Generation, which offers an innovative, tiered-pricing structure that maximizes cash value. The Company anticipates continued sales growth in 1998 for variable universal life insurance as well as its recent entry into corporate-owned insurance products. 15 16 The growth in operating expenses is due to technology-related costs combined with the increase in variable life insurance policies in-force. Technology-related expenses in 1997 were $16.5 million, compared to $3.2 million in 1996. The majority of the expenses are for a new policy administration system to support traditional life insurance products and for activities to make systems Year 2000 compliant. Corporate and Other The following table summarizes certain selected financial data for the Company's Corporate and Other segment for the years indicated.
(in millions of dollars) 1997 1996 1995 ------------ ------------ ------------ INCOME STATEMENT DATA: Revenues: Net investment income $ 148.7 $ 154.7 $ 137.6 Other 39.1 25.7 12.7 ------------ ------------ ------------ 187.8 180.4 150.3 ------------ ------------ ------------ Benefits and expenses: Interest credited to policy reserves 114.7 106.1 105.6 Other operating expenses 45.6 51.4 10.8 ------------ ------------ ------------ 160.3 157.5 116.4 ============ ============ ============ Operating income before federal income tax expense(1) $ 27.5 $ 22.9 $ 33.9 ============ ============ ============ OTHER DATA: Statutory premiums and deposits (2) $ 174.9 $ 502.6 $ 182.1 Withdrawals and benefits 205.4 140.3 144.4 Policy reserves as of year end 3,791.9 3,302.5 2,644.3 Nationwide retail mutual fund assets(3) $ 2,555.0 $ 2,136.2 $ 2,113.9 ---------- (1) Excludes realized gains (losses) on investments and discontinued operations. (2) Statutory data have been derived from the Annual Statements of NLIC and NLAIC, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. (3) Excludes mutual funds selected as investment options under the Company's variable annuity and variable universal life insurance contracts and mutual funds selected as investment options under Nationwide Insurance Enterprise employee and agent benefit plans.
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. In addition to the operating revenues previously presented, the Company also reports realized gains and losses on investments in the Corporate and Other segment. Net realized gains on investments were $11.1 million in 1997 compared to realized losses of $0.3 million and $1.7 million in 1996 and 1995, respectively. Realized gains in 1997 include $14.4 million recognized when securities of $850.0 million were paid to NFS, which subsequently paid to Nationwide Corp., as a dividend on February 24, 1997 as a part of certain transactions that were completed in anticipation of NFS' initial public offering. Also, during 1997, the Company recorded a realized loss of $16.2 million related to the sale of a single corporate bond investment that had deteriorated due to the credit quality of the issuer. 16 17 PROPOSED LEGISLATION The Clinton Administration's 1999 budget proposal contains provisions which, if enacted, would eliminate many tax benefits currently afforded to annuity products and certain life insurance products. These provisions appear to be inconsistent with what the Company believes to be the Administration's desire to encourage private sector long-term savings. Currently, policyholders are permitted to exchange life insurance, endowment or annuity contracts for similar contracts without being required to pay tax on the accretion of value within the contracts being transferred in the exchange. In addition, policyholders who hold variable annuity or life insurance contracts are currently permitted to transfer funds between various investment options offered under such contracts on a tax-free basis. The 1999 budget proposal, if enacted in its current form, would make all exchanges involving insurance contracts immediately taxable. In addition, under the budget proposal each investment option offered under a single variable contract would be treated as a separate variable contract, and thus transfers of funds between different investment options would cause the amounts transferred to be subject to tax, to the extent there has been accretion in value. The budget proposal would also reduce policyholders' tax basis in annuity and life insurance contracts by the mortality and expense charges paid, increasing future taxable gains. Most of the tax benefits of corporate-owned life insurance products would also be eliminated by the budget proposal. The Company supports social policy that encourages private sector savings, and believes that the provisions contained in the budget proposal clearly run counter to that goal. Annuity products are specifically designed for long-term and retirement savings and play an important role in millions of individuals' financial protection plans. However, there can be no assurance as to whether legislation will be enacted which would contain provisions with possible adverse effects on the Company's ability to sell its annuity and life insurance products. ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ -------------------------------------------------------- The consolidated financial statements of Nationwide Life Insurance Company and Subsidiaries are included in a separate section of this report which is indexed in Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Semi-annual and annual reports are sent to contract owners of the variable annuity and life insurance contracts issued through registered Separate Accounts of the Company. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURES --------------------- None. 17 18 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- Omitted due to reduced disclosure format. ITEM 11 EXECUTIVE COMPENSATION - ------- ---------------------- Omitted due to reduced disclosure format. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- Omitted due to reduced disclosure format. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- Omitted due to reduced disclosure format. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ----------------------------------------------------------------
Page --------------- CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 F-3 Consolidated Statements of Shareholder's Equity for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6 FINANCIAL STATEMENT SCHEDULES: Schedule I Consolidated Summary of Investments - Other Than Investments in Related Parties as of December 31, 1997 F-25 Schedule III Supplementary Insurance Information as of December 31, 1997, 1996 and 1995 and for each of the years then ended F-26 Schedule IV Reinsurance as of December 31, 1997, 1996 and 1995 and for each of the years then ended F-27 Schedule V Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995 F-28 All other schedules are omitted because they are not applicable or not required, or because the required information has been included in the audited consolidated financial statements or notes thereto EXHIBIT INDEX 21
18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By /s/ Dimon R. McFerson ------------------------------------------------- Dimon R. McFerson, Chairman and Chief Executive Officer - Nationwide Insurance Enterprise
Date: March 4, 1998 19 20 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 4, 1998. /s/ Dimon R. McFerson /s/ Joseph J. Gasper - ------------------------------------------------------------ ---------------------------------------------------------- Dimon R. McFerson, Chairman and Chief Executive Joseph J. Gasper, President and Chief Operating Officer - Nationwide Insurance Enterprise and Director Officer and Director /s/ Lewis J. Alphin /s/ Keith W. Eckel - ------------------------------------------------------------ ---------------------------------------------------------- Lewis J. Alphin, Director Keith W. Eckel, Director /s/ Willard J. Engel /s/ Fred C. Finney - ------------------------------------------------------------ ---------------------------------------------------------- Willard J. Engel, Director Fred C. Finney, Director /s/ Charles L. Fuellgraf, Jr. /s/ Henry S. Holloway - ------------------------------------------------------------ ---------------------------------------------------------- Charles L. Fuellgraf, Jr., Director Henry S. Holloway, Director /s/ David O. Miller /s/ C. Ray Noecker - ------------------------------------------------------------ ---------------------------------------------------------- David O. Miller, Director C. Ray Noecker, Director /s/ James F. Patterson /s/ Arden L. Shisler - ------------------------------------------------------------ ---------------------------------------------------------- James F. Patterson, Director Arden L. Shisler, Director /s/ Robert L. Stewart /s/ Nancy C. Thomas - ------------------------------------------------------------ ---------------------------------------------------------- Robert L. Stewart, Director Nancy C. Thomas, Director /s/ Harold W. Weihl /s/ Robert A. Oakley - ------------------------------------------------------------ ---------------------------------------------------------- Harold W. Weihl, Director Robert A. Oakley, Executive Vice President - Chief Financial Officer /s/ Mark R. Thresher - ------------------------------------------------------------ Mark R. Thresher, Vice President - Controller (Chief Accounting Officer)
20 21 EXHIBIT INDEX Exhibit Page - ---------- ---- 3.1 Amended Articles of Incorporation of Nationwide Life Insurance Company, dated March 14, 1986 23 3.2 Form of Amended and Restated Code of Regulations of Nationwide Life Insurance Company (previously filed as Exhibit 3 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.1 Form of Tax Sharing Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and any corporation that may hereafter be a subsidiary of Nationwide Corporation (previously filed as Exhibit 10.1 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.1.1 First Amendment to the Tax Sharing Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and any corporation that may hereafter be a subsidiary of Nationwide Corporation (previously filed as Exhibit 10.2.1 to Form 10-K, Commission File Number 1-12785, filed March 31, 1998, and incorporated herein by reference) 10.2 Form of First Amendment to Cost Sharing Agreement among parties named therein (previously filed as Exhibit 10.2 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.3 Modified Coinsurance Agreement between Nationwide Life Insurance Company and Nationwide Mutual Insurance Company (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.4 Modified Coinsurance Agreement between Employers Life Insurance Company of Wausau and Nationwide Life Insurance Company (previously filed as Exhibit 10.4 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.5 Credit Facility, dated August 12, 1996, among Nationwide Life Insurance Company, Nationwide Mutual Insurance Company, the banks named therein and Morgan Guaranty Trust Company of New York, the administrative agent (previously filed as Exhibit 10.5 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.5.1 Amendment dated as of September 8, 1997 to the Credit Agreement dated as of August 12, 1996 among Nationwide Mutual Insurance Company, Nationwide Life Insurance Company, the banks party thereto and Morgan Guaranty Trust Company of New York, as administrative agent (previously filed as Exhibit 10(a) to Form 10-Q for the quarterly period ended September 30, 1997, Commission File Number 1-12785, filed November 13, 1997, and incorporated herein by reference) 10.6 Form of Lease Agreement between Nationwide Life Insurance Company and Nationwide Mutual Insurance Company (previously filed as Exhibit 10.6 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.7 General Description of Nationwide Insurance Enterprise Executive Incentive Plan (previously filed as Exhibit 10.7 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.8 General Description of Nationwide Insurance Enterprise Management Incentive Plan (previously filed as Exhibit 10.8 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.9 Nationwide Insurance Enterprise Excess Benefit Plan effective as of December 31, 1996 (previously filed as Exhibit 10.9 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.10 Nationwide Insurance Enterprise Supplemental Retirement Plan effective as of December 31, 1996 (previously filed as Exhibit 10.10 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 21 22 10.11 Nationwide Salaried Employees Severance Pay Plan (previously filed as Exhibit 10.11 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.12 Nationwide Insurance Enterprise Supplemental Defined Contribution Plan effective as of January 1, 1996 (previously filed as Exhibit 10.12 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.13 General Description of Nationwide Insurance Enterprise Individual Deferred Compensation Program previously filed as Exhibit 10.13 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.14 General Description of Nationwide Mutual Insurance Company Directors Deferred Compensation Program (previously filed as Exhibit 10.14 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 10.15 Deferred Compensation Agreement, dated as of September 3, 1979, between Nationwide Mutual Insurance Company and D. Richard McFerson (previously filed as Exhibit 10.15 to Form 10-K, Commission File Number 2-28596, filed March 28, 1997, and incorporated herein by reference) 27 Financial Data Schedule (electronic filing only) - ------ All other exhibits referenced by Item 601 of Regulation S-K are not required under the related instructions or are inapplicable and therefore have been omitted. 22 EX-3.1 2 EXHIBIT 3.1 1 Exhibit 3.1 AMENDED ARTICLES OF INCORPORATION NATIONWIDE LIFE INSURANCE COMPANY FIRST: The name of said Corporation shall be "NATIONWIDE LIFE INSURANCE COMPANY." SECOND: Said Corporation is to be located, and its principal office maintained in the City of Columbus, Ohio. THIRD: Said Corporation is formed for the purpose of (a) making insurance upon the lives of individuals and every insurance appertaining thereto or connected therewith on both participating and non-participating plans, (b) granting, purchasing or disposing of annuities on both participating and non-participating plans, (c) taking risks connected with or appertaining to making insurance on life or against accidents to persons, or sickness, temporary or permanent disability on both participating and non-participating plans, (d) investing funds, (e) borrowing money on either a secured or unsecured basis in furtherance of the foregoing, and (f) engaging in all activities permitted life insurance companies under the laws of the State of Ohio. FOURTH: No holder of shares of this Corporation shall be entitled as such, as a matter of right, to subscribe for or purchase shares now or hereafter authorized. The capital stock of this Corporation shall be Five Million Dollars ($5,000,000.00) divided into Five Million (5,000,000) Common shares of the par value of One Dollar ($1.00) each, which may be subscribed and purchased, or otherwise acquired for such consideration at not less than par, and under such terms and conditions as the Board of Directors may prescribe. FIFTH: Dividends may be declared and paid on the outstanding stock, subject to the restrictions herein contained. Dividends on the capital stock shall be paid only from the earned surplus of the Corporation. Unless those policyholders owning participating insurance policies or contracts shall have received an equitable dividend arising out of savings in mortality, savings in expense loadings and excess interest earnings, if any, from such participating policies, no dividend from such savings and earnings shall be declared or paid on capital stock in an amount in excess of seven percent (7%) per annum, computed on the par value of the stock from date of original issue to date of retirement or date of payment of dividend. SIXTH: The corporate powers and business of the Corporation shall be exercised, conducted and controlled, and the corporate property managed by a Board of Directors consisting of not less than three (3), nor more than twenty-one (21), as may from time to time be fixed by the Code of Regulations of the Corporation. At the first election of directors one-third of the directors shall be elected to serve until the next annual meeting, one-third shall be elected to serve until the second annual meeting, and one-third shall be elected to serve until the third annual meeting; thereafter all directors shall be elected to serve for terms of three (3) years each, and until their successors are elected and qualified. Vacancies in the Board of Directors, arising from any cause, shall be filled by the remaining directors. The directors shall be elected at the annual meetings of the stockholders by a majority vote of the stockholders present in person or by proxy, provided that vacancies may be filled as herein provided for. The stockholders of the Corporation shall have the right, subject to the statutes of the State of Ohio and these Articles of Incorporation, to adopt a Code of Regulations governing the transaction of the business and affairs of the Corporation which may be altered, amended or repealed in the manner provided by law. 23 2 The Board of Directors shall elect from their own number a Chairman of the Board of Directors, a General Chairman, and a President. The Board of Directors shall also elect a Vice President and a Secretary and a Treasurer, or a Secretary-Treasurer. The Board of Directors may also elect or appoint such additional vice presidents, assistant secretaries and assistant treasurers as may be deemed advisable or necessary, and may fix their duties. The Board of Directors may appoint such other officers as may be provided in the Code of Regulations. All officers, unless sooner removed by the Board of Directors, shall hold office for one (1) year, or until their successors are elected and qualified. Other than the Chairman of the Board of Directors, the General Chairman and the President, the officers need not be members of the Board of Directors. Officers shall be elected at each annual organization meeting of the Board of Directors, but elections or appointments to fill vacancies may be had at any meeting of the directors. A majority of the Board of Directors and officers shall, at all times, be citizens of the State of Ohio. SEVENTH: The annual meeting of the stockholders of the Corporation shall be held at such time as may be fixed in the Code of Regulations of the Corporation. Any meeting of the stockholders, annual or special, may be held in or outside of the State of Ohio. Reasonable notice of all meetings of stockholders shall be given, by mail or publication, or as prescribed by the Code of Regulations or by law. EIGHTH: These Amended Articles of Incorporation shall supersede and take the place of the Articles of Incorporation and all amendments thereto heretofore filed with the Secretary of State by and on behalf of this Corporation. Amended Effective March 14, 1986 24 EX-27 3 EXHIBIT 27
7 This schedule contains summary financial information extracted from Nationwide Life Insurance Company's Annual Report on Form 10-K for the Year ended December 31, 1997, and is qualified in its entirety by reference to such consolidated financial statements. 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 13,204 0 0 80 5,182 311 19,576 176 0 1,665 59,791 18,703 0 0 0 0 0 0 4 2,474 59,791 205 1,409 11 47 1,195 167 385 430 150 280 0 0 0 280 0.00 0.00 0 0 0 0 0 0 0
EX-99 4 EXHIBIT 99 1 INDEPENDENT AUDITORS' REPORT The Board of Directors Nationwide Life Insurance Company: We have audited the consolidated financial statements of Nationwide Life Insurance Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. 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 of 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, 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 Peat Marwick LLP Columbus, Ohio January 30, 1998 F-1 2 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Balance Sheets (in millions of dollars)
December 31, ----------------------------------- ASSETS 1997 1996 ------ ----------------- --------------- Investments: Securities available-for-sale, at fair value: Fixed maturity securities $13,204.1 $12,304.6 Equity securities 80.4 59.1 Mortgage loans on real estate, net 5,181.6 5,272.1 Real estate, net 311.4 265.8 Policy loans 415.3 371.8 Other long-term investments 25.2 28.7 Short-term investments 358.4 4.8 ---------- --------- 19,576.4 18,306.9 ---------- --------- Cash 175.6 43.8 Accrued investment income 210.5 210.2 Deferred policy acquisition costs 1,665.4 1,366.5 Investment in subsidiaries classified as discontinued operations - 485.7 Other assets 438.4 426.5 Assets held in Separate Accounts 37,724.4 26,926.7 ---------- --------- $59,790.7 $47,766.3 ========== ========= LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Future policy benefits and claims $18,702.8 $17,600.6 Other liabilities 885.6 1,101.1 Liabilities related to Separate Accounts 37,724.4 26,926.7 ---------- --------- 57,312.8 45,628.4 ---------- --------- Commitments and contingencies (notes 7 and 13) 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 914.7 527.9 Retained earnings 1,312.3 1,432.6 Unrealized gains on securities available-for-sale, net 247.1 173.6 ---------- --------- 2,477.9 2,137.9 ---------- --------- $59,790.7 $47,766.3 ========== =========
See accompanying notes to consolidated financial statements. F-2 3 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, --------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Revenues: Investment product and universal life insurance product policy charges $ 545.2 $ 400.9 $ 286.6 Traditional life insurance premiums 205.4 198.6 199.1 Net investment income 1,409.2 1,357.8 1,294.0 Realized gains (losses) on investments 11.1 (0.3) (1.7) Other 46.5 35.9 20.7 ---------- ---------- ---------- 2,217.4 1,992.9 1,798.7 ---------- ---------- ---------- Benefits and expenses: Interest credited to policyholder account balances 1,016.6 982.3 950.3 Other benefits and claims 178.2 178.3 165.2 Policyholder dividends on participating policies 40.6 41.0 39.9 Amortization of deferred policy acquisition costs 167.2 133.4 82.7 Other operating expenses 384.9 342.4 273.0 ---------- ---------- ---------- 1,787.5 1,677.4 1,511.1 ---------- ---------- ---------- Income from continuing operations before federal income tax expense 429.9 315.5 287.6 Federal income tax expense 150.2 110.9 99.8 ---------- ---------- ---------- Income from continuing operations 279.7 204.6 187.8 Income from discontinued operations (less federal income tax expense of $4.5 and $7.4 in 1996 and 1995, respectively) - 11.3 24.7 ---------- ---------- ---------- Net income $ 279.7 $ 215.9 $ 212.5 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 4 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Statements of Shareholder's Equity (in millions of dollars)
Unrealized gains (losses) Additional on securities Total Common paid-in Retained available- shareholder's stock capital earnings for-sale, net equity ----------- ------------- -------------- ---------------- ------------- December 31, 1994 $3.8 $ 606.2 $1,378.2 $(119.7) $1,868.5 Capital contribution - 51.0 - (4.1) 46.9 Net income - - 212.5 - 212.5 Dividends to shareholder - - (7.5) - (7.5) Unrealized gains on securities available- for-sale, net - - - 508.1 508.1 -------- -------- -------- -------- --------- December 31, 1995 3.8 657.2 1,583.2 384.3 2628.5 Net income - - 215.9 - 215.9 Dividends to shareholder - (129.3) (366.5) (39.8) (535.6) Unrealized losses on securities available- for-sale, net - - - (170.9) (170.9) -------- -------- -------- -------- --------- December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9 Capital contribution - 836.8 - - 836.8 Net income - - 279.7 - 279.7 Dividends to shareholder - (450.0) (400.0) - (850.0) Unrealized gains on securities available- for-sale, net - - - 73.5 73.5 -------- -------- -------- -------- --------- December 31, 1997 $3.8 $ 914.7 $1,312.3 $ 247.1 $2,477.9 ======== ======== ======== ======== =========
See accompanying notes to consolidated financial statements. F-4 5 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, ---------------------------------------------- 1997 1996 1995 ------------------------------ --------------- Cash flows from operating activities: Net income $ 279.7 $ 215.9 $ 212.5 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 1,016.6 982.3 950.3 Capitalization of deferred policy acquisition costs (487.9) (422.6) (321.3) Amortization of deferred policy acquisition costs 167.2 133.4 82.7 Amortization and depreciation (2.0) 7.0 10.2 Realized (gains) losses on invested assets, net (11.1) (0.3) 3.3 (Increase) decrease in accrued investment income (0.3) 2.8 (16.9) (Increase) decrease in other assets (12.7) (38.9) 39.9 (Decrease) increase in policy liabilities (23.1) (151.0) 123.9 Increase in other liabilities 230.6 191.4 27.0 Other, net (10.9) (61.7) 1.8 ----------- --------- -------- Net cash provided by operating activities 1,146.1 858.3 1,113.4 ----------- --------- -------- Cash flows from investing activities: Proceeds from maturity of securities available-for-sale 993.4 1,162.8 634.6 Proceeds from sale of securities available-for-sale 574.5 299.6 107.3 Proceeds from maturity of fixed maturity securities held-to-maturity - - 564.4 Proceeds from repayments of mortgage loans on real estate 437.3 309.0 207.8 Proceeds from sale of real estate 34.8 18.5 48.3 Proceeds from repayments of policy loans and sale of other invested assets 22.7 22.8 53.6 Cost of securities available-for-sale acquired (2,828.1) (1,573.6) (1,942.4) Cost of fixed maturity securities held-to-maturity acquired - - (593.6) Cost of mortgage loans on real estate acquired (752.2) (972.8) (796.0) Cost of real estate acquired (24.9) (7.9) (10.9) Policy loans issued and other invested assets acquired (62.5) (57.7) (75.9) Short-term investments, net (354.8) 28.0 77.8 ----------- --------- -------- Net cash used in investing activities (1,959.8) (771.3) (1,725.0) ----------- --------- -------- Cash flows from financing activities: Proceeds from capital contributions 836.8 - - Cash dividends paid - (50.0) (7.5) Increase in investment product and universal life insurance product account balances 2,488.5 1,781.8 1,883.7 Decrease in investment product and universal life insurance product account balances (2,379.8) (1,784.5) (1,258.7) ----------- --------- -------- Net cash provided by (used in) financing activities 945.5 (52.7) 617.5 ----------- --------- -------- Net increase in cash 131.8 34.3 5.9 Cash, beginning of year 43.8 9.5 3.6 ----------- --------- -------- Cash, end of year $ 175.6 $ 43.8 $ 9.5 =========== ========= =========
See accompanying notes to consolidated financial statements. F-5 6 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (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 11 and 15. 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. The Company is subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments. (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. F-6 7 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. Subsidiaries that are classified and reported as discontinued operations are not consolidated but rather are reported as "Investment in subsidiaries classified as discontinued operations" in the accompanying consolidated balance sheets and "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, 1997 or 1996. 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. F-7 8 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 annuities. Universal life insurance products include universal life insurance, variable universal 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. 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). 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. (e) SEPARATE ACCOUNTS Separate Account assets and liabilities represent contractholders' funds which have been segregated into accounts with specific investment objectives. For all but $365.5 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. Future policy benefits for traditional life insurance policies have been calculated using a net level premium method based on 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. See note 4. F-8 9 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 50% in 1997 (52% in 1996 and 54% in 1995) of the Company's life insurance in force, 77% in 1997 (78% in 1996 and 79% in 1995) of the number of life insurance policies in force, and 27% in 1997 (40% in 1996 and 47% in 1995) 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 11 and 15. (j) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 - REPORTING COMPREHENSIVE INCOME was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. The statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by shareholders and distributions to shareholders and includes net income. Comprehensive income would be reported in addition to earnings amounts currently presented. The Company will adopt the statement and begin reporting comprehensive income in the first quarter of 1998. (k) RECLASSIFICATION Certain items in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. F-9 10 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, 1997 and 1996 were:
Gross Gross Amortized unrealized unrealized Estimated (in millions of dollars) cost gains losses fair value -------------- ------------ ------------- ------------ 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 ============ ========= ========= =========== December 31, 1996: Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 275.7 $ 4.8 $ (1.3) $ 279.2 Obligations of states and political subdivisions 6.2 0.5 - 6.7 Debt securities issued by foreign governments 100.7 2.1 (0.9) 101.9 Corporate securities 7,999.3 285.9 (33.7) 8,251.5 Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3 ------------ --------- --------- ----------- Total fixed maturity securities 11,970.9 384.7 (51.0) 12,304.6 Equity securities 43.9 15.6 (0.4) 59.1 ------------ --------- --------- ----------- $ 12,014.8 $ 400.3 $ (51.4) $ 12,363.7 ============ ========= ========= ===========
The amortized cost and estimated fair value of fixed maturity securities available-for-sale as of December 31, 1997, by contractual 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.
Amortized Estimated (in millions of dollars) cost fair value -------------- ---------- Fixed maturity securities available for sale: Due in one year or less $ 419.2 $ 422.1 Due after one year through five years 4,573.5 4,708.4 Due after five years through ten years 2,772.6 2,879.7 Due after ten years 1,333.4 1,443.6 ----------- ----------- 9,098.7 9,453.8 Mortgage-backed securities 3,634.2 3,750.3 ----------- ----------- $ 12,732.9 $ 13,204.1 =========== ===========
F-10 11 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued The components of unrealized gains on securities available-for-sale, net, were as follows as of December 31:
(in millions of dollars) 1997 1996 ----------- ---------- Gross unrealized gains $ 483.8 $349.0 Adjustment to deferred policy acquisition costs (103.7) (81.9) Deferred federal income tax (133.0) (93.5) -------- ------- $ 247.1 $173.6 ======== =======
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:
(in millions of dollars) 1997 1996 1995 ----------- ------------- ----------- Securities available-for-sale: Fixed maturity securities $137.5 $(289.2) $876.3 Equity securities (2.7) 8.9 - Fixed maturity securities held-to-maturity - - 75.6 ------- ------- ------- $134.8 $(280.3) $ 951.9 ======= ======= =======
Proceeds from the sale of securities available-for-sale during 1997, 1996 and 1995 were $574.5 million, $299.6 million and $107.3 million, respectively. During 1997, gross gains of $9.9 million ($6.6 million and $4.8 million in 1996 and 1995, respectively) and gross losses of $18.0 million ($6.9 million and $2.1 million in 1996 and 1995, 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. During 1995, the Company transferred fixed maturity securities classified as held-to-maturity with amortized cost of $25.4 million to available-for-sale securities due to evidence of a significant deterioration in the issuer's creditworthiness. The transfer of those fixed maturity securities resulted in a gross unrealized loss of $3.5 million. As permitted by the Financial Accounting Standards Board's Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued in November 1995, the Company transferred nearly all of its fixed maturity securities previously classified as held-to-maturity to available-for-sale. As of December 14, 1995, the date of transfer, the fixed maturity securities had amortized cost of $3.32 billion, resulting in a gross unrealized gain of $155.9 million. The recorded investment of mortgage loans on real estate considered to be impaired as of December 31, 1997 was $19.9 million ($51.8 million as of December 31, 1996), which includes $3.9 million ($41.7 million as of December 31, 1996) of impaired mortgage loans on real estate for which the related valuation allowance was $0.1 million ($8.5 million as of December 31, 1996) and $16.0 million ($10.1 million as of December 31, 1996) of impaired mortgage loans on real estate for which there was no valuation allowance. During 1997, the average recorded investment in impaired mortgage loans on real estate was approximately $31.8 million ($39.7 million in 1996) and interest income recognized on those loans was $1.0 million ($2.1 million in 1996), which is equal to interest income recognized using a cash-basis method of income recognition. F-11 12 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:
(in millions of dollars) 1997 1996 ------------- ------------- Allowance, beginning of year $51.0 $49.1 (Reductions) additions charged to operations (1.2) 4.5 Direct write-downs charged against the allowance (7.3) (2.6) ------ ------ Allowance, end of year $42.5 $51.0 ====== ======
Real estate is presented at cost less accumulated depreciation of $45.1 million as of December 31, 1997 ($30.3 million as of December 31, 1996) and valuation allowances of $11.1 million as of December 31, 1997 ($15.2 million as of December 31, 1996). Investments that were non-income producing for the twelve month period preceding December 31, 1997 amounted to $19.4 million ($26.8 million for 1996) and consisted of $3.0 million ($0.2 million in 1996) in securities available-for-sale, $16.4 million ($20.6 million in 1996) in real estate and none ($5.9 million in 1996) in other long-term investments. An analysis of investment income by investment type follows for the years ended December 31:
(in millions of dollars) 1997 1996 1995 ----------- --------- --------- Gross investment income: Securities available-for-sale: Fixed maturity securities $ 911.6 $ 917.1 $ 685.8 Equity securities 0.8 1.3 1.3 Fixed maturity securities held-to-maturity - - 201.8 Mortgage loans on real estate 457.7 432.8 395.5 Real estate 42.9 44.3 38.3 Short-term investments 22.7 4.2 10.6 Other 21.0 4.0 7.2 -------- -------- -------- Total investment income 1,456.7 1,403.7 1,340.5 Less investment expenses 47.5 45.9 46.5 -------- -------- -------- Net investment income $1,409.2 $1,357.8 $1,294.0 ======== ======== ========
An analysis of realized gains (losses) on investments, net of valuation allowances, by investment type follows for the years ended December 31:
(in millions of dollars) 1997 1996 1995 --------- --------- -------- Securities available-for-sale: Fixed maturity securities $ 3.6 $(3.5) $ 4.2 Equity securities 2.7 3.2 3.4 Mortgage loans on real estate 1.6 (4.1) (7.1) Real estate and other 3.2 4.1 (2.2) ------ ------ ------ $11.1 $(0.3) $(1.7) ====== ====== ======
Fixed maturity securities with an amortized cost of $6.2 million as of December 31, 1997 and 1996 were on deposit with various regulatory agencies as required by law. F-12 13 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued (4) FUTURE POLICY BENEFITS AND CLAIMS The liability for future policy benefits for investment contracts represents approximately 86% and 87% of the total liability for future policy benefits as of December 31, 1997 and 1996, respectively. The average interest rate credited on investment product policies was approximately 6.1%, 6.3% and 6.6% for the years ended December 31, 1997, 1996 and 1995, respectively. The liability for future policy benefits for traditional life insurance policies has been established based upon the following assumptions: INTEREST RATES: Interest rates vary by issue year and were 6.9% and 6.6% in 1997 and 1996, respectively. Interest rates have generally ranged from 6.0% to 10.5% for previous issue years. WITHDRAWALS: Rates, which vary by issue age, type of coverage and policy duration, are based on Company experience. MORTALITY: Mortality and morbidity rates are based on published tables, modified for the Company's actual experience. 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 $220.2 million and $240.5 million as of December 31, 1997 and 1996, 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. The Company has reinsurance agreements with certain affiliates as described in note 11. All other reinsurance agreements are not material to either premiums or reinsurance recoverables. (5) FEDERAL INCOME TAX The Company's current federal income tax liability was $60.1 million and $30.2 million as of December 31, 1997 and 1996, respectively. F-13 14 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued The tax effects of temporary differences that give rise to significant components of the net deferred tax liability as of December 31, 1997 and 1996 are as follows:
(in millions of dollars) 1997 1996 ---------- ---------- Deferred tax assets: Future policy benefits $200.1 $183.0 Liabilities in Separate Accounts 242.0 188.4 Mortgage loans on real estate and real estate 19.0 23.4 Other assets and other liabilities 59.2 53.7 ------- ------ Total gross deferred tax assets 520.3 448.5 Less valuation allowance (7.0) (7.0) ------- ------ Net deferred tax assets 513.3 441.5 ------- ------ Deferred tax liabilities: Deferred policy acquisition costs 480.5 399.3 Fixed maturity securities 193.3 133.2 Deferred tax on realized investment gains 40.1 37.6 Equity securities and other long-term investments 7.5 8.2 Other 22.2 25.4 ------- ------ Total gross deferred tax liabilities 743.6 603.7 ------- ------ Net deferred tax liability $230.3 $162.2 ======= ======
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, 1997, 1996 and 1995. Federal income tax expense attributable to income from continuing operations for the years ended December 31 was as follows:
(in millions of dollars) 1997 1996 1995 --------- --------- --------- Currently payable $121.7 $116.5 $88.7 Deferred tax expense (benefit) 28.5 (5.6) 11.1 ------ ------ ------ $150.2 $110.9 $99.8 ====== ====== ======
Total federal income tax expense for the years ended December 31, 1997, 1996 and 1995 differs from the amount computed by applying the U.S. federal income tax rate to income before tax as follows:
1997 1996 1995 ---------------------- ---------------------- ---------------------- (in millions of dollars) Amount % Amount % Amount % ---------------------- ------------- -------- ------------- -------- Computed (expected) tax expense $150.5 35.0 $110.4 35.0 $100.6 35.0 Tax exempt interest and dividends received deduction - 0.0 (0.2) (0.1) - 0.0 Other, net (0.3) (0.1) 0.7 0.3 (0.8) (0.3) ------ ---- ------ ---- ------ ---- Total (effective rate of each year) $150.2 34.9 $110.9 35.2 $ 99.8 34.7 ====== ==== ====== ==== ====== ====
Total federal income tax paid was $91.8 million, $115.8 million and $51.8 million during the years ended December 31, 1997, 1996 and 1995, respectively. F-14 15 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued (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. 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. 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 includes 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. F-15 16 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 13. 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:
1997 1996 ------------------------------ ------------------------------- Carrying Estimated Carrying Estimated (in millions of dollars) amount fair value amount fair value ------------------------------ --------------- --------------- Assets: Investments: Securities available-for-sale: Fixed maturity securities $13,204.1 $13,204.1 $12,304.6 $12,304.6 Equity securities 80.4 80.4 59.1 59.1 Mortgage loans on real estate, net 5,181.6 5,509.7 5,272.1 5,397.9 Policy loans 415.3 415.3 371.8 371.8 Short-term investments 358.4 358.4 4.8 4.8 Cash 175.6 175.6 43.8 43.8 Assets held in Separate Accounts 37,724.4 37,724.4 26,926.7 26,926.7 Liabilities: Investment contracts 14,708.2 14,322.1 13,914.4 13,484.5 Policy reserves on life insurance contracts 3,345.4 3,182.4 3,392.8 3,197.5 Liabilities related to Separate Accounts 37,724.4 36,747.0 26,926.7 26,164.2
(7) RISK DISCLOSURES The following is a description of the most significant risks facing life insurers and how the Company mitigates those risks: LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory environment in which an insurer operates will result in increased competition, reduce 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. 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. F-16 17 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued 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. 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 $341.4 million extending into 1998 were outstanding as of December 31, 1997. The Company also had $63.9 million of commitments to purchase fixed maturity securities outstanding as of December 31, 1997. 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 20% (21% in 1996) in any geographic area and no more than 2% (2% in 1996) with any one borrower as of December 31, 1997. As of December 31, 1997, 46% (44% in 1996) of the remaining principal balance of the Company's commercial mortgage loan portfolio financed retail properties. The Company had a significant reinsurance recoverable balance from one reinsurer as of December 31, 1997 and 1996. See note 4. (8) PENSION PLAN 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. Benefits are based upon the highest average annual salary of a specified number of consecutive years of the last ten years 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. Effective January 1, 1995, the plan was amended to provide enhanced benefits for participants who met certain eligibility requirements and elected early retirement no later than March 15, 1995. The entire cost of the enhanced benefit was borne by NMIC and certain of its property and casualty insurance company affiliates. F-17 18 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued Effective December 31, 1995, the Nationwide Insurance Companies and Affiliates Retirement Plan was merged with the Farmland Mutual Insurance Company Employees' Retirement Plan and the Wausau Insurance Companies Pension Plan to form the Nationwide Insurance Enterprise Retirement Plan (the Retirement Plan). Immediately prior to the merger, the plans were amended to provide consistent benefits for service after January 1, 1996. These amendments had no significant impact on the accumulated benefit obligation or projected benefit obligation as of December 31, 1995. Pension costs charged to operations by the Company during the years ended December 31, 1997, 1996 and 1995 were $7.5 million, $7.4 million and $10.5 million, respectively. The Company had no net accrued pension expense as of December 31, 1997 ($1.1 million as of December 31, 1996). The net periodic pension cost for the Retirement Plan as a whole for the years ended December 31, 1997 and 1996 and for the Nationwide Insurance Companies and Affiliates Retirement Plan as a whole for the year ended December 31, 1995 follows:
(in millions of dollars) 1997 1996 1995 ----------- ----------- ----------- Service cost (benefits earned during the period) $ 77.3 $ 75.5 $ 64.5 Interest cost on projected benefit obligation 118.6 105.5 95.3 Actual return on plan assets (328.0) (210.6) (249.3) Net amortization and deferral 196.4 101.8 143.4 -------- -------- -------- $ 64.3 $ 72.2 $ 53.9 ======== ======== ========
Basis for measurements, net periodic pension cost:
1997 1996 1995 ----------- ----------- ----------- Weighted average discount rate 6.50% 6.00% 7.50% Rate of increase in future compensation levels 4.75% 4.25% 6.25% Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
Information regarding the funded status of the Retirement Plan as a whole as of December 31, 1997 and 1996 follows:
(in millions of dollars) 1997 1996 ----------- ----------- Accumulated benefit obligation: Vested $1,547.5 $1,338.6 Nonvested 13.5 11.1 -------- --------- $1,561.0 $1,349.7 ======== ========= Net accrued pension expense: Projected benefit obligation for services rendered to date $2,033.8 $1,847.8 Plan assets at fair value 2,212.9 1,947.9 --------- --------- Plan assets in excess of projected benefit obligation 179.1 100.1 Unrecognized prior service cost 34.7 37.9 Unrecognized net gains (330.7) (202.0) Unrecognized net asset at transition 33.3 37.2 --------- --------- $ (83.6) $ (26.8) ========= =========
F-18 19 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 plan:
1997 1996 ----------- ----------- Weighted average discount rate 6.00% 6.50% Rate of increase in future compensation levels 4.25% 4.75%
Assets of the Retirement Plan are invested in group annuity contracts of NLIC and Employers Life Insurance Company of Wausau (ELICW). (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 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, 1997 and 1996 was $36.5 million and $34.9 million, respectively, and the net periodic postretirement benefit cost (NPPBC) for 1997, 1996 and 1995 was $3.0 million, $3.3 million and $3.1 million, respectively. Information regarding the funded status of the plan as a whole as of December 31, 1997 and 1996 follows:
(in millions of dollars) 1997 1996 ----------- ----------- Accrued postretirement benefit expense: Retirees $ 93.3 $ 93.0 Fully eligible, active plan participants 31.6 23.7 Other active plan participants 113.0 84.0 -------- -------- Accumulated postretirement benefit obligation 237.9 200.7 Plan assets at fair value 69.2 63.0 -------- -------- Plan assets less than accumulated postretirement benefit obligation (168.7) (137.7) Unrecognized transition obligation of affiliates 1.5 1.7 Unrecognized net losses (gains) 1.6 (23.2) -------- -------- $(165.6) $(159.2) ======== ========
F-19 20 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 plan as a whole for the years ended December 31, 1997, 1996 and 1995 was as follows:
(in millions of dollars) 1997 1996 1995 ----------- ------------ ------------ Service cost (benefits attributed to employee service during the year) $ 7.0 $ 6.5 $ 6.2 Interest cost on accumulated postretirement benefit obligation 14.0 13.7 14.2 Actual return on plan assets (3.6) (4.3) (2.7) Amortization of unrecognized transition obligation of affiliates 0.2 0.2 3.0 Net amortization and deferral (0.5) 1.8 (1.6) ------- ------ ------ $17.1 $17.9 $19.1 ======= ====== ======
Actuarial assumptions used for the measurement of the APBO and the NPPBC for 1997, 1996 and 1995 were as follows:
1997 1996 1995 ----------- ----------- ----------- APBO: Discount rate 6.70% 7.25% 6.75% Assumed health care cost trend rate: Initial rate 12.13% 11.00% 11.00% Ultimate rate 6.12% 6.00% 6.00% Uniform declining period 12 Years 12 Years 12 Years NPPBC: Discount rate 7.25% 6.65% 8.00% Long term rate of return on plan assets, net of tax 5.89% 4.80% 8.00% Assumed health care cost trend rate: Initial rate 11.00% 11.00% 10.00% Ultimate rate 6.00% 6.00% 6.00% Uniform declining period 12 Years 12 Years 12 Years
For the plan as a whole, a one percentage point increase in the assumed health care cost trend rate would increase the APBO as of December 31, 1997 by $0.4 million and have no impact on the NPPBC for the year ended December 31, 1997. (10) 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. F-20 21 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued The statutory capital and surplus of NLIC as of December 31, 1997, 1996 and 1995 was $1.13 billion, $1.00 billion and $1.36 billion, respectively. The statutory net income of NLIC for the years ended December 31, 1997, 1996 and 1995 was $111.7 million, $73.2 million and $86.5 million, respectively. As a result of the $850.0 million dividend paid on February 24, 1997, any dividend paid by NLIC during the twelve-month period immediately following the $850.0 million dividend would be an extraordinary dividend under Ohio insurance laws. Accordingly, no such dividend could be paid without prior regulatory approval. The Company has no reason to believe that any reasonably foreseeable dividend to be paid by NLIC would not receive the required approval. 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. (11) 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, 1997, 1996 and 1995, the Company made lease payments to NMIC and its subsidiaries of $8.4 million, $9.1 million and $9.0 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 $85.8 million, $101.6 million and $107.1 million in 1997, 1996 and 1995, 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 $20.5 million and $15.1 million as of December 31, 1997 and 1996, 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 1997 and 1996 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. F-21 22 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, 1997 and 1996 were:
1997 1996 ---------------------------- ---------------------------- (in millions of dollars) NMIC ELICW NMIC ELICW -------------- ------------- ---------------------------- Premiums $ 91.4 $199.8 $ 97.3 $224.2 Net investment income and other revenue $ 10.7 $ 13.4 $ 10.9 $ 14.8 Benefits, claims and other expenses $100.7 $225.9 $100.5 $246.6
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 $211.0 million and $4.8 million as of December 31, 1997 and 1996, respectively, and are included in short-term investments on the accompanying consolidated balance sheets. On March 1, 1995, Nationwide Corp. contributed all of the outstanding shares of common stock of Farmland Life Insurance Company (Farmland) to NLIC. Farmland merged into WCLIC effective June 30, 1995. The contribution resulted in a direct increase to consolidated shareholder's equity of $46.9 million. As discussed in note 15, WCLIC is accounted for as discontinued operations. 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, 1997 were $66.1 million, $76.9 million and $57.3 million, respectively. (12) 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. F-22 23 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued (13) CONTINGENCIES The Company is a defendant in various lawsuits. In the opinion of management, the effects, if any, of such lawsuits are not expected to be material to the Company's financial position or results of operations. (14) SEGMENT INFORMATION The Company has 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 the Company and independent investment managers, with the investment returns accumulating on a tax-deferred basis. 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. The Fixed Annuities segment also includes the fixed option under the Company's variable annuity contracts. The Life Insurance segment consists of insurance products that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. In addition, the Company reports corporate expenses and investments, and the related investment income supporting capital not specifically allocated to its product segments in a Corporate and Other segment. In addition, all realized gains and losses and investment management fees and other revenue earned from mutual funds, other than the portion allocated to the variable annuities and life insurance segments, are reported in the Corporate and Other segment. The following table summarizes revenues and income from continuing operations before federal income tax expense for the years ended December 31, 1997, 1996 and 1995 and assets as of December 31, 1997, 1996 and 1995, by segment.
(in millions of dollars) 1997 1996 1995 ------------- ------------ ------------ Revenues: Variable Annuities $ 404.0 $ 284.6 $ 189.1 Fixed Annuities 1,141.4 1,092.6 1,052.0 Life Insurance 473.1 435.6 409.1 Corporate and Other 198.9 180.1 148.5 ----------- ---------- ---------- $ 2,217.4 $ 1,992.9 $ 1,798.7 =========== ========== ========== Income from continuing operations before federal income tax expense: Variable Annuities $ 150.9 $ 90.3 $ 50.8 Fixed Annuities 169.5 135.4 137.0 Life Insurance 70.9 67.2 67.6 Corporate and Other 38.6 22.6 32.2 ----------- ---------- ---------- $ 429.9 $ 315.5 $ 287.6 =========== ========== ========== Assets: Variable Annuities $ 35,278.7 $ 25,069.7 $ 17,333.0 Fixed Annuities 14,436.3 13,994.7 13,250.4 Life Insurance 3,901.4 3,353.3 3,027.4 Corporate and Other 6,174.3 5,348.6 4,896.8 ----------- ---------- ---------- $ 59,790.7 $ 47,766.3 $ 38,507.6 =========== ========== ==========
F-23 24 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Consolidated Financial Statements, Continued (15) 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. 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 11 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, 1997, 1996 and 1995 is as follows:
(in millions of dollars) 1997 1996 1995 -------------- ------------- ------------ Revenues $ - $ 668.9 $ 776.9 Net income $ - $ 11.3 $ 24.7
A summary of the assets and liabilities of discontinued operations as of December 31, 1997, 1996 and 1995 is as follows:
(in millions of dollars) 1997 1996 1995 -------------- ------------- ------------- Assets, consisting primarily of investments $247.3 $3,288.5 $3,206.7 Liabilities, consisting primarily of policy benefits and claims $247.3 $2,802.8 $2,700.0
F-24 25 SCHEDULE I NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES (in millions of dollars) As of December 31, 1997
- ----------------------------------------------------------------------------- ------------- -------------- --------------- Column A Column B Column C Column D - ----------------------------------------------------------------------------- ------------- -------------- --------------- Amount at which shown in the Market consolidated Type of Investment Cost value balance sheet - ----------------------------------------------------------------------------- ------------- -------------- --------------- Fixed maturity securities available-for-sale: Bonds: U.S. Government and government agencies and authorities $ 3,859.7 $ 3,981.7 $ 3,981.7 States, municipalities and political subdivisions 1.6 1.6 1.6 Foreign governments 93.3 95.8 95.8 Public utilities 1,555.3 1,609.8 1,609.8 All other corporate 7,223.0 7,515.2 7,515.2 ---------- ---------- ---------- Total fixed maturity securities available-for-sale 12,732.9 13,204.1 13,204.1 ---------- ---------- ---------- Equity securities available-for-sale: Common stocks: Industrial, miscellaneous and all other 67.8 78.0 78.0 Non-redeemable preferred stock - 2.4 2.4 ---------- ---------- ---------- Total equity securities available-for-sale 67.8 80.4 80.4 ---------- ---------- ---------- Mortgage loans on real estate, net 5,228.1 5,181.6 (1) Real estate, net: Investment properties 254.9 235.7 (1) Acquired in satisfaction of debt 82.6 75.7 (1) Policy loans 415.3 415.3 Other long-term investments 27.9 25.2 (2) Short-term investments 358.4 358.4 ---------- ---------- Total investments $19,167.9 $19,576.4 ========== ==========
- ---------- (1) Difference from Column B is primarily due to valuation allowances due to impairments on mortgage loans on real estate and due to accumulated depreciation and valuation allowances due to impairments on real estate. See note 3 to the consolidated financial statements. (2) Difference from Column B is primarily due to operating gains (losses) of investments in limited partnerships. See accompanying independent auditors' report. F-25 26 SCHEDULE III NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (in millions of dollars) As of December 31, 1997, 1996 and 1995 and for each of the years then ended
- -------------------------------- ----------------- -------------------- ------------------- ------------------ --------------- Column A Column B Column C Column D Column E Column F - -------------------------------- ----------------- -------------------- ------------------- ------------------ --------------- Deferred Future policy Other policy policy benefits, losses, Unearned claims and acquisition claims and premiums benefits payable Premium Segment costs loss expenses (1) (1) revenue - ------------------------------- ------------------ -------------------- ------------------- ------------------ --------------- 1997: Variable Annuities $1,018.4 $ - $ - Fixed Annuities 277.9 14,103.1 27.3 Life Insurance 472.9 2,683.4 178.1 Corporate and Other (103.8) 1,916.3 - -------- ------------- --------- Total $1,665.4 $18,702.8 $ 205.4 ======== ============= ========= 1996: Variable Annuities $ 792.1 $ - $ - Fixed Annuities 242.0 13,388.9 24.0 Life Insurance 414.4 2,391.5 174.6 Corporate and Other (82.0) 1,820.2 - -------- ------------- --------- Total $1,366.5 $17,600.6 $ 198.6 ======== ============= ========= 1995: Variable Annuities $ 569.8 $ - $ - Fixed Annuities 220.7 12,759.3 32.8 Life Insurance 366.9 2,282.6 166.3 Corporate and Other (136.9) 1,730.0 - -------- ------------- --------- Total $1,020.5 $ 16,771.9 $ 199.1 ======== ============= ========= - ---------------------------------------------------- -------------------- ------------------- ------------------ --------------- Column A Column G Column H Column I Column J Column K - ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------- Net investment Benefits, claims, Amortization Other income losses and of deferred policy operating Premiums Segment (2) settlement expenses acquisition costs expenses written (2) - ---------------------------------------------------- -------------------- ------------------- ------------------ --------------- 1997: Variable Annuities $ (26.8) $ 5.9 $ 87.8 $ 159.4 Fixed Annuities 1,098.2 846.7 39.8 85.4 Life Insurance 189.1 227.5 39.6 94.5 Corporate and Other 148.7 114.7 - 45.6 -------- ---------- ------- ------- Total $1,409.2 $ 1,194.8 $ 167.2 $ 384.9 ======== ========== ======= ======= 1996: Variable Annuities $ (21.4) $ 4.6 $ 57.4 $ 132.3 Fixed Annuities 1,050.6 838.5 38.6 79.7 Life Insurance 174.0 211.4 37.4 79.0 Corporate and Other 154.6 106.1 - 51.4 -------- ---------- ------- ------- Total $1,357.8 $ 1,160.6 $ 133.4 $ 342.4 ======== ========== ======= ======= 1995: Variable Annuities $ (17.6) $ 2.9 $ 26.3 $ 109.1 Fixed Annuities 1,002.7 805.0 29.5 80.3 Life Insurance 171.2 202.0 31.0 68.8 Corporate and Other 137.7 105.6 (4.1) 14.8 -------- ---------- ------- ------- Total $1,294.0 $ 1,115.5 $ 82.7 $ 273.0 ======== ========== ======= =======
- ---------- (1) Unearned premiums and other policy claims and benefits payable are included in Column C amounts. (2) Allocations of net investment income and certain operating expenses are based on a number of assumptions and estimates, and reported operating results would change by segment if different methods were applied. See accompanying independent auditors' report. F-26 27 SCHEDULE IV NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES REINSURANCE (in millions of dollars) As of December 31, 1997, 1996 and 1995 and for each of the years then ended
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------ Column A Column B Column C Column D Column E Column F - ----------------------------------------------- --------------- -------------- ------------- ------------- ------------ Percentage Ceded to Assumed of amount Gross other from other Net assumed amount companies companies amount to net --------------- -------------- ------------- ------------- ------------ 1997: Life insurance in force $ 52,648.4 $13,678.7 $ 289.7 $ 39,259.4 0.7% =========== ========= ======== =========== ======= Premiums: Life insurance $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1% Accident and health insurance 261.2 272.6 11.4 - N/A ----------- ---------- --------- ----------- ------- Total $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6% =========== ========= ========= =========== ======= 1996: Life insurance in force $47,150.6 $11,164.6 $ 288.6 $ 36,274.6 0.8% =========== ========= ======== =========== ======= Premiums: Life insurance $ 225.6 $ 29.3 $ 2.3 $ 198.6 1.2% Accident and health insurance 291.9 305.8 13.9 - N/A ----------- --------- -------- ----------- ------- Total $ 517.5 $ 335.1 $ 16.2 $ 198.6 8.2% =========== ========= ======== =========== ======= 1995: Life Insurance in force $41,087.9 $ 8,935.7 $ 391.2 $ 32,543.4 1.2% =========== ========= ======== =========== ======= Premiums: Life insurance $ 221.3 $ 24.4 $ 2.2 $ 199.1 1.1% Accident and health insurance 298.0 313.0 15.0 - N/A ----------- --------- -------- ----------- ------- Total $ 519.3 $ 337.4 $ 17.2 $ 199.1 8.6% =========== ========= ======== =========== =======
- ---------- Note: The life insurance caption represents principally premiums from traditional life insurance and life-contingent immediate annuities and excludes deposits on investment products and universal life insurance products. See accompanying independent auditors' report. F-27 28 SCHEDULE V NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in millions of dollars) Years ended December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------- ------------- ------------- Column A Column B Column C Column D Column E - --------------------------------------------------- ----------------------------------------------- ------------- ------------- Balance at Charged to Charged to Balance at beginning costs and other Deductions end of Description of period expenses accounts (1) period - --------------------------------------------------- -------------------------------- ------------- ------------- ------------- 1997: Valuation allowances - fixed maturity securities $ - $ 16.2 $ - $ 16.2 $ - Valuation allowances - mortgage loans on real estate 51.0 (1.2) - 7.3 42.5 Valuation allowances - real estate 15.2 (4.1) - - 11.1 -------- ------ ------- ------- ------- Total $ 66.2 $ 10.9 $ - $ 23.5 $ 53.6 ======== ====== ======= ======= ======= 1996: Valuation allowances - mortgage loans on real estate $ 49.1 $ 4.5 $ - $ 2.6 $ 51.0 Valuation allowances - real estate 25.8 (10.6) - - 15.2 -------- ------ ------- ------- ------- Total $ 74.9 $ (6.1) $ - $ 2.6 $ 66.2 ======== ====== ======= ======= ======= 1995: Valuation allowances - fixed maturity securities $ - $ 8.9 $ - $ 8.9 $ - Valuation allowances - mortgage loans on real estate 46.4 7.4 - 4.7 49.1 Valuation allowances - real estate 27.3 (1.5) - - 25.8 -------- ------ ------- ------- ------- Total $ 73.7 $ 14.8 $ - $ 13.6 $ 74.9 ======== ====== ======= ======= =======
- ---------- (1) Amounts represent direct write-downs charged against the valuation allowance. See accompanying independent auditors' report. F-28 -----END PRIVACY-ENHANCED MESSAGE-----