-----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, Lv9Kd5sK2ynlvvD5vOvHWdn9Sgv78rUdPRkWD9j0lH9GfAh2WCnyZ2kbZWy/MScp u3PBy/BQnZ8++gll0EBlRw== 0000950152-97-002387.txt : 19970329 0000950152-97-002387.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950152-97-002387 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 1934 Act SEC FILE NUMBER: 002-64559 FILM NUMBER: 97567260 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, 1996 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 (Title of Class) Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) 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 FEBRUARY 28, 1997. COMMON STOCK - 3,814,779 SHARES ISSUED AND OUTSTANDING AS OF DECEMBER 31, 1996 (Title of Class) 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, ordinary life insurance, universal life insurance, variable universal life insurance and term and endowment coverage on a participating and a non-participating basis. During 1996, NLIC discontinued its individual and group accident and health insurance 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 and is implementing a plan to cease writing any new business prior to December 31, 1997. As of December 31, 1996, NLIC was wholly owned by Nationwide Corporation (Nationwide Corp.). Wholly owned subsidiaries of NLIC as of December 31, 1996 include Nationwide Life and Annuity Insurance Company (NLAIC), Employers Life Insurance Company of Wausau (ELICW), National Casualty Company (NCC), West Coast Life Insurance Company (WCLIC), 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 (Enterprise), which consists of Nationwide Mutual Insurance Company (NMIC) and all of its subsidiaries and affiliates. In November 1996, Nationwide Corp. formed Nationwide Financial Services, Inc. (NFS) as a holding company for NLIC and the other companies of the Enterprise that offer or distribute long-term savings and retirement products. On January 27, 1997, Nationwide Corp. contributed to NFS the common stock of the Company and three marketing and distribution companies. In anticipation of the restructuring described above, on September 24, 1996, NLIC's Board of Directors declared a dividend payable January 1, 1997 to Nationwide Corp. consisting of the outstanding shares of common stock of certain subsidiaries (ELICW, NCC and WCLIC) 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 ELICW and NMIC effective January 1, 1996. NLAIC offers universal life insurance, variable universal life insurance and individual annuity contracts on a non-participating basis. ELICW, purchased on December 31, 1994, writes group accident and health insurance and group life insurance business. On December 31, 1993, Nationwide Corp. contributed all of the outstanding shares of common stock of NCC, WCLIC and NAS to the Company. NCC is a property casualty company that serves as a fronting company for a property casualty subsidiary of NMIC. WCLIC principally writes high dollar term life insurance business. 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 on January 18, 1994 to hold special investments. 2 3 Description of Business The Company is a leading provider of long-term savings and retirement products to retail and institutional customers throughout the United States (U.S.). 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 Enterprise insurance agents. The Company is one of the leaders in the development and sale of variable annuities. For the year ended December 31, 1996, the Company was the fourth largest U.S. writer of individual variable annuity contracts based on sales, according to The Variable Annuity Research & Data Service. Its principal variable annuity series, The Best of America, allows the customer to choose from 36 investment options, including mutual funds managed by such well-known firms as American Century, Dreyfus, Fidelity, Janus, Neuberger & Berman, Oppenheimer, T. Rowe Price, Templeton, Vanguard and Warburg Pincus, as well as mutual funds managed by the Company. In the mid-1970's, to capitalize on anticipated opportunities in the growing market for long-term savings and retirement products, the Company embarked on a specific strategy of broadening its distribution channels and product offerings beyond selling traditional life insurance. Over a 20-year period, the Company added financial planners, pension plan administrators, securities firms and banks as new distribution channels. Such distribution channels in the aggregate accounted for approximately 93.8% of the Company's sales in 1996. Currently, the Company administers approximately 15,000 pension plans and has distribution arrangements with 151 banks and other financial institutions, over 1,000 broker/dealers and over 30,000 registered representatives. The Company has payroll deduction variable annuity enrollee customers in approximately 6,000 state and local government entities and 1,800 school districts, which have been obtained principally through sponsorship relationships with the National Association of Counties and The United States Conference of Mayors and an exclusive contractual arrangement with The National Education Association of the United States. 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. The Company believes that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for its products. According to U.S. Census Bureau projections, the number of Americans between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1 million in 2005, making this "preretirement" age group the fastest growing segment of the U.S. population. The Company believes that Americans increasingly are supplementing traditional sources of retirement income, such as employer-provided defined benefit plans and Social Security, with self-directed investments. Product Segments During 1996, the Company changed its reporting segments to better reflect the way the businesses are managed. Prior periods have been restated to reflect these changes. Operating segment data is presented in note 16 to the consolidated financial statements and in Financial Statement Schedule III. 3 4 The Company has three primary operating segments: Variable Annuities, Fixed Annuities and Life Insurance. The Variable Annuities segment, which accounted for $90.2 million (or 28.7%) of the Company's operating income (which excludes realized gains and losses on investments and discontinued operations) before federal income tax expense for 1996, 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 $135.4 million (or 43.0%) of the Company's operating income before federal income tax expense for 1996, 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 70.5% of the Company's fixed annuity policy reserves as of December 31, 1996. For the year ended December 31, 1996, the average crediting rates on contracts (including the fixed option under the Company's variable annuity contracts) in the Fixed Annuities segment was 6.3%. 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 $67.2 million (or 21.4%) of the Company's operating income before federal income tax expense for 1996, consists of insurance products, including variable life insurance products, that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. In addition, the Company reports corporate income and expenses not specifically allocated to its product segments in a Corporate and Other segment, which accounted for $21.8 million (or 6.9%) of the Company's operating income before federal income tax expense for 1996. Regulation NLIC and its insurance company subsidiaries, 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 stockholders. 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. 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. 4 5 Employees As of December 31, 1996, the Company had approximately 3,200 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 465,000 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 - ------ ----------------- From time to time 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 defendents 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. 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. 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 is in the early stage and has not been certified as a class action. NLIC intends to defend these cases vigorously. There can be no assurance that any future litigation relating to pricing and sales practices will not have a material effect on the Company. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- On April 3, 1996, a special meeting of the sole shareholder of NLIC was held. The purpose of this meeting was to vote on a proposal to amend and restate the Code of Regulations of Nationwide Life Insurance Company to update the titles and duties of certain officers and consider revisions in the indemnification provisions. The Proxy Committee cast all 3,814,779 shares in favor of the resolution, none against. No shares were withheld from the vote. 5 6 On April 4, 1996, NLIC held its annual shareholder meeting. At the annual meeting, the shareholder elected as Directors the six nominees of the Board of Directors by the following vote of the Proxy Committee:
Nominee Shares For Shares Withheld ------- ---------- --------------- One-Year Term: Joseph J. Gasper 3,814,779 -0- Three-Year Term: Keith W. Eckel 3,814,779 -0- Charles L. Fuellgraf, Jr. 3,814,779 -0- Dimon Richard McFerson 3,814,779 -0- Arden L. Shisler 3,814,779 -0- Harold W. Weihl 3,814,779 -0-
The term of office of the Directors, Lewis J. Alphin, Willard J. Engel, Fred C. Finney, Henry S. Holloway, David O. Miller, C. Ray Noecker, James F. Patterson, Robert L. Stewart and Nancy C. Thomas, continued after the meeting. 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. As of December 31, 1996, none of the 3,814,779 shares of NLIC's common stock issued and outstanding was held by public shareholders. Nationwide Corp. was the sole shareholder of NLIC's common stock until January 27, 1997, when it contributed all of the outstanding shares of NLIC's common stock to NFS. NLIC paid cash dividends of $50,000,000 and $7,450,000 to Nationwide Corp. during 1996 and 1995, respectively. On September 24, 1996, NLIC's Board of Directors declared a dividend payable January 1, 1997 to Nationwide Corp., consisting of the outstanding shares of common stock of ELICW, NCC and WCLIC, amounting to $485,707,298. On February 6, 1997 NLIC's Board of Directors declared an $850,000,000 dividend which was paid on February 24, 1997 to NFS, which then made an equivalent distribution to Nationwide Corp. This dividend payment was 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 further dividend payments during 1997. Reference is made to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and note 12 to the consolidated financial statements for information regarding dividend restrictions. ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA - ------ ------------------------------------ The following table sets forth certain summary consolidated financial data. The consolidated income statement data set forth below for the years ended December 31, 1992 through 1996 and the consolidated balance sheet data as of December 31, 1992 through 1996 are derived from the consolidated financial statements of the Company. The summary consolidated financial data set forth below should be read in conjunction with the consolidated financial statements of the Company and notes thereto and the other financial information, including Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein. 6 7 Selected Consolidated Financial Data (1) ($000's omitted)
As of and for the year ended December 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 --------------- ------------- ------------- ------------- -------------- Total revenues $ 1,992,838 1,798,651 1,599,499 1,597,993 1,368,429 Total benefits and expenses 1,677,341 1,511,079 1,357,641 1,319,985 1,239,877 --------------- ------------- ------------- ------------- -------------- Income from continuing operations before federal income tax expense and cumulative effect of changes in accounting principles 315,497 287,572 241,858 278,008 128,552 Federal income tax expense 110,889 99,808 78,589 94,905 33,804 --------------- ------------- ------------- ------------- -------------- Income from continuing operations before other items 204,608 187,764 163,269 183,103 94,748 Income from discontinued operations (less federal income tax expense) 11,324 24,714 20,459 28,637 2,067 Cumulative effect of changes in accounting principles - - - (231) - --------------- ------------- ------------- ------------- -------------- Net income $ 215,932 212,478 183,728 211,509 96,815 =============== ============= ============= ============= ============== Total assets $ 47,766,246 38,507,633 29,246,024 24,700,213 20,763,028 =============== ============= ============= ============= ============== ---------- (1) Consolidated financial data of the Company as of and for the years ended December 31, 1995, 1994, 1993 and 1992 has been restated to reflect the discontinued operations treatment of certain NLIC subsidiaries and lines of business that were unrelated to the long-term savings and retirement products business. See note 2 to the consolidated financial statements herein for additional information regarding the discontinued operations treatment.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------ --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- INTRODUCTION The following analysis of consolidated results of operations and financial condition of the Company should be read in conjunction with Item 6 - Selected Consolidated Financial Data and the consolidated financial statements and related notes included elsewhere herein. RESULTS OF OPERATIONS Policy Charges. 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 assets withdrawn during a specified period (usually the first seven years) of annuity and certain life insurance contracts; and cost-of-insurance charges earned on universal life insurance products. For 1996, policy charges were $400.9 million, a 39.9% increase from $286.5 million in 1995. Policy charges increased 32.0% in 1995 from $217.2 million in 1994. Increases in policy charges have resulted primarily from increases in separate account assets and the resulting higher levels of asset fees, as well as a moderate increase in all of the fees discussed above due to the growth in customer accounts. 7 8 Life Insurance Premiums. Life insurance premiums are earned primarily from traditional life insurance in the Life Insurance segment, but are also earned from the sale of life-contingent immediate annuities in the Fixed Annuities segment. Life insurance premiums from traditional life insurance policies are recognized as revenue when due from the policyholder. For life-contingent immediate annuities, net premium (i.e., the portion of the premium which covers benefits and expenses) is recognized as revenue when received. Any premium received in excess of the net premium is deferred and recognized as revenue over the expected benefit period. Traditional life insurance products accounted for 87.9%, 83.5% and 88.6% of the total life insurance premiums in 1996, 1995 and 1994, respectively. Life insurance premiums were $198.6 million for 1996, a 0.3% decrease from $199.1 million for 1995. The slight decrease in 1996 was due to an $8.7 million decrease in sales of life-contingent immediate annuities offset by an $8.3 million increase in traditional life insurance premiums. Life insurance premiums increased 12.7% in 1995 from $176.7 million in 1994. The 1995 increase in life insurance premiums resulted from an increase in traditional life insurance in-force in the Life Insurance segment and growth in the Fixed Annuities segment. Net Investment Income. 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 was $1.36 billion in 1996, $1.29 billion in 1995 and $1.21 billion in 1994. Net investment income has increased as a result of growth in the Company's general account invested assets. General account invested assets were $18.31 billion, $17.78 billion and $15.18 billion as of December 31, 1996, 1995 and 1994, respectively. Realized Gains/(Losses) on Investments. Realized gains (losses) on investments are not considered by the Company to be a recurring source of earnings (operations). The Company makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. All realized gains and losses are reported in the Corporate and Other segment. Net realized losses on investments were $0.3 million in 1996, $1.7 million in 1995 and $16.5 million in 1994. Other Income. Other income consists of investment management fees earned by a subsidiary of the Company from the management of Nationwide mutual funds. Net investment management fees earned on Nationwide mutual fund assets selected as investment options for variable annuity products and variable life insurance products are reported in the Variable Annuities segment and Life Insurance segment, respectively. The Company also sells its mutual fund products separately, and investment management fees from these assets are included in the Corporate and Other segment. Other income was $35.9 million in 1996, $20.7 million in 1995 and $11.3 million in 1994. The increase in other income in 1996 and 1995 resulted primarily from an increase in asset management fees earned on mutual fund assets. Benefits and Claims. Benefits and claims consist primarily of interest credited on fixed annuity products and life insurance benefits in the Life Insurance segment. Benefits and claims increased 4.0% to $1.16 billion in 1996 from 1995. Benefits and claims increased 12.4% to $1.12 billion in 1995 from $992.7 million in 1994. The changes in benefits and claims from year to year are primarily attributable to the changes in interest credited which are discussed in the Fixed Annuities segment results below. Life insurance benefits have remained consistent over the periods. Policyholder Dividends. Policyholder dividends are paid on certain participating policies, primarily in the Life Insurance segment. Policyholder dividends were $41.0 million in 1996, a 2.8% increase over 1995. Policyholder dividends increased 2.8% to $39.9 million in 1995 from $38.8 million in 1994. Amortization of DAC. Amortization of deferred policy acquisition costs (DAC) results from the capitalization of commissions and other costs of acquiring new contracts and the amortization of these costs over the estimated life of the contract. Amortization of DAC was $133.4 million in 1996, a 61.3% increase over 1995. Amortization of DAC decreased 3.4% to $82.7 million in 1995 from $85.6 million in 1994. The increase in 1996 was primarily attributable to growth in all product segments while the decrease in 1995 resulted from a decrease in the amortization rate for variable and fixed individual annuities due to lower than anticipated lapse rates and strong separate account asset performance. 8 9 Operating Expenses. Operating expenses were $342.4 million in 1996, an 25.4% increase from 1995. Operating expenses increased 13.4% to $273.0 million in 1995 from $240.7 million in 1994. These increases were primarily due to the increasing number of individual and group annuity contracts in-force and the related increase in administrative processing costs. The Company has controlled its operating expenses by taking advantage of economies of scale and by increasing productivity through investments in technology. As a result, the ratio of operating expenses to total assets declined to 0.72% in 1996 and 0.71% in 1995 from 0.82% in 1994. Federal Income Tax Expense. Federal income tax expense was $110.9 million, $99.8 million and $78.6 million, representing effective tax rates of 35.2%, 34.7% and 32.5% for 1996, 1995 and 1994, respectively. The increase in the 1996 effective tax rate is the result of greater benefits in 1995 and 1994 from charitable donations of appreciated securities. Net Operating Income. Net operating income is net income, excluding realized gains and losses on investments (net of related federal income tax) and discontinued operations. Net operating income for 1996 was $203.7 million, an 8.5% increase from 1995. The Company's net operating income increased 8.2% to $187.7 million in 1995 from $173.5 million in 1994. Discontinued Operations. Discontinued operations include the results of (i) the three NLIC subsidiaries whose outstanding capital stock, on September 24, 1996, was declared as a dividend to Nationwide Corp. and (ii) all of NLIC's accident and health and group life business which was ceded to affiliates effective January 1, 1996. NLIC 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, a 54.3% decrease from $24.7 million in 1995. The decrease is attributable to losses incurred on group accident and health business, which are due to increases in the volume of claims and medical costs. Income from discontinued operations was $24.7 million in 1995, a 20.5% increase from $20.5 million in 1994. The increase is attributable to the income reported by ELICW, which NLIC acquired effective December 31, 1994. EFFECT OF DIVIDEND AND CAPITAL CONTRIBUTIONS On February 24, 1997, NLIC paid a dividend to NFS, which subsequently made a dividend payment to Nationwide Corp., consisting of securities having an aggregate fair value of $850.0 million. On March 10, 1997 and March 11, 1997, NFS made cash capital contributions to NLIC totaling $836.8 million. These transactions resulted in a net decrease in invested assets of NLIC of $13.2 million, which is expected to result in a decrease in net investment income in the future. RESULTS OF OPERATIONS BY PRODUCT SEGMENT The Company has three product segments: Variable Annuities, Fixed Annuities and Life Insurance. In addition, the Company reports corporate income and expenses and investments and related investment income supporting capital not specifically allocated to its product segments 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. 9 10 The table below presents summary financial data for the Company by segment.
As of and for the Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------------------------------------------ (Dollars in millions) REVENUES: Variable Annuities (1) $ 284.6 189.0 132.7 Fixed Annuities (1) 1,092.6 1,052.0 939.9 Life Insurance 435.6 409.1 383.1 Corporate and Other 180.3 150.3 160.3 ------------------------------------------ Total operating revenues 1,993.1 1,800.4 1,616.0 Realized losses on investments (0.3) (1.7) (16.5) ------------------------------------------ Total revenues $ 1,992.8 1,798.7 1,599.5 ========================================== INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL INCOME TAX EXPENSE: Variable Annuities $ 90.3 50.8 24.6 Fixed Annuities 135.4 137.0 139.0 Life Insurance 67.2 67.6 53.0 Corporate and Other 22.9 33.9 41.8 ------------------------------------------ Total operating income 315.8 289.3 258.4 Realized losses on investments (0.3) (1.7) (16.5) ------------------------------------------ Total income from continuing operations before federal income tax expense $ 315.5 287.6 241.9 ========================================== POLICY RESERVES: Variable Annuities (2) $24,278.1 16,761.8 10,751.1 Fixed Annuities (2) 13,511.8 12,784.0 11,247.0 Life Insurance 2,938.9 2,660.5 2,425.2 Corporate and Other 3,302.5 2,644.3 2,252.7 ------------------------------------------ Total policy reserves (3) $44,031.3 34,850.6 26,676.0 ========================================== ---------- (1) Revenues related to the fixed option under the Company's variable annuity contracts are included in Fixed Annuities. (2) Policy reserves related to the fixed option under the Company's variable annuity contracts are included in Fixed Annuities. As of December 31, 1996, 1995 and 1994, such policy reserves represented $9.52 billion, $8.83 billion and $7.27 billion, respectively. (3) Total policy reserves as presented here differ from the amounts set forth in the Company's financial statements because the presented amounts exclude (i) accident and health and group life insurance business ceded to other members of the Enterprise and (ii) the fixed annuity policy reserves ceded to Franklin Life Insurance Company (Franklin Life). See Item 13 - Certain Relationships and Related Transactions.
10 11 Variable Annuities Revenues. Revenues in the Variable Annuities segment consist of policy charges and other income. Policy charges consist of asset fees, which are generally a percentage of separate account assets deposited for the purchase of variable annuities; administration fees, which are generally a specific dollar amount per contract; and surrender fees, which are charged against assets withdrawn during a specified period (generally the first seven years) of variable annuity contracts. The separate account assets generated by the Variable Annuities segment do not contribute to net investment income of the Company because the customer receives the investment benefit and bears the investment risk of these assets. Other income includes net investment management fees earned on separate account assets held in mutual funds managed by a subsidiary of NLIC. Revenues were $284.6 million in 1996, a 50.6% increase from 1995. Revenues increased 42.4% to $189.0 million in 1995 from $132.7 million in 1994. Revenues have increased primarily as a result of growth in separate account assets related to this segment and the corresponding growth in asset fees, which were $261.8 million, $172.8 million and $120.4 million in 1996, 1995 and 1994, respectively. Asset fees as a percentage of variable annuity separate account assets have remained relatively stable during the periods presented, reflecting minimal changes in the levels of asset fees charged on most variable annuity products. Income from Continuing Operations Before Federal Income Tax Expense. Income from continuing operations before federal income tax expense was $90.3 million in 1996, a 77.8% increase from 1995. Income from continuing operations before federal income tax expense increased 106.5% to $50.8 million in 1995 from $24.6 million in 1994. Increases have primarily resulted from growth in variable annuity separate account assets and the corresponding increases in asset fees combined with expense levels which have decreased as a percentage of revenues. Total expenses were $189.7 million, $135.4 million and $105.8 million, or 66.7%, 71.6% and 79.7% of total revenues, for 1996, 1995 and 1994, respectively. During the period, the Company has controlled its operating expenses by taking advantage of economies of scale and by increasing productivity through investments in technology. Policy Reserves. Variable annuity policy reserves increased 44.9% from $16.76 billion as of December 31, 1995 to $24.28 billion as of December 31, 1996. Of this increase, $2.72 billion was due to market appreciation of separate account assets, while $6.50 billion of statutory premiums and deposits offset by $1.70 billion of withdrawals and policy charges resulted in the remainder of the increase. Variable annuity policy reserves increased 55.9% to $16.76 billion as of December 31, 1995 from $10.75 billion as of December 31, 1994, which was a 36.8% increase from $7.86 billion as of December 31, 1993. Market appreciation accounted for $2.93 billion of the increase in 1995 while market depreciation accounted for an $84.0 million decrease in 1994. Statutory premiums and deposits were $4.40 billion and $3.82 billion, while withdrawals and policy charges were $1.32 billion and $840.0 million, in 1995 and 1994, respectively. Fixed Annuities Revenues. Revenues in the Fixed Annuities segment consist mainly of net investment income, which is earned on invested assets allocated to support fixed annuity policy reserves and shareholders' equity allocated to such segment. Total revenues were $1.09 billion, $1.05 billion and $939.9 million in 1996, 1995 and 1994, respectively. Net investment income was $1.05 billion, $1.00 billion and $903.7 million, representing average pre-tax yields on the assets supporting this segment of 8.22%, 8.50% and 8.59%, in 1996, 1995 and 1994, respectively. The increase in net investment income for each period presented is the result of the increases in policy reserves discussed below and the corresponding increase in invested assets. Interest Credited. Interest credited on account balances was $805.0 million, $775.7 million and $680.9 million, representing crediting rates of 6.30%, 6.58% and 6.47%, for 1996, 1995 and 1994, respectively. The differential between net investment income and interest credited on account balances resulted in spreads of $245.6 million, $227.1 million and $222.8 million, or 1.92%, 1.92% and 2.12%, in 1996, 1995 and 1994, respectively. Spreads vary depending on crediting rates offered by competitors, performance of the investment portfolio and other factors. The higher spread in 1994 is primarily the result of declining interest rates in late 1993 and early 1994 which resulted in lower crediting rates. 11 12 Income from Continuing Operations Before Federal Income Tax Expense. Income from continuing operations before federal income tax expense was $135.4 million in 1996, a 1.2% decrease from 1995. Income from continuing operations before federal income tax expense decreased 1.4% to $137.0 million in 1995 from $139.0 million in 1994. Narrowing spreads, offset by asset growth, caused 1996 and 1995 earnings to decline from 1994. Policy Reserves. Fixed annuity policy reserves increased 5.7% to $13.51 billion as of December 31, 1996, from $12.78 billion as of December 31, 1995. Statutory premiums and deposits of $1.60 billion and interest credited of $805.0 million were offset by $1.68 billion of withdrawals, annuity benefits and policy charges. Policy reserves increased 13.6% to $12.78 billion as of December 31, 1995 from $11.25 billion as of December 31, 1994. Statutory premiums and deposits were $1.86 billion and $1.31 billion, while interest credited was $775.7 million and $680.9 million in 1995 and 1994, respectively. Withdrawals and policy charges were $1.10 billion and $895.0 million in 1995 and 1994, respectively. Life Insurance Revenues. Revenues in the Life Insurance segment consist of the life insurance premiums and policy charges, as well as net investment income. Total revenues were $435.6 million, $409.1 million and $383.1 million for 1996, 1995 and 1994, respectively. The increases are attributed to increases in life insurance in-force with the majority of the growth coming from the variable universal life product. Income from Continuing Operations Before Federal Income Tax Expense. Income from continuing operations before federal income tax expense was $67.2 million in 1996, a 0.6% decrease from $67.6 million for 1995. The decrease is attributable to the increased amount of amortization of DAC due to increased volume and higher general expenses due to increased sales offset by an increase in revenues from the variable universal product. Income from continuing operations before federal income tax expense increased 27.5% to $67.6 million in 1995 from $53.0 million in 1994. The increase is due to growth in insurance in-force, particularly variable universal life, combined with only minimal increases in expenses. Life Insurance In-Force. Life insurance in-force was $37.72 billion, $33.41 billion and $30.13 billion as of December 31, 1996, 1995 and 1994, respectively. Nearly two-thirds of the growth of life insurance in-force is in variable universal life and term insurance policies. Corporate and Other Revenues. Revenues in the Corporate and Other segment consist of net investment income on invested assets not allocated to the three product segments, all realized investment gains and losses, 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 Enterprise employee and agent benefit plans. Total revenues excluding realized gains and losses were $180.3 million for 1996, a 20.0% increase from 1995. The increase in 1996 is the result of an increase in investment income and investment management fees earned. Total revenues excluding realized gains and losses were $150.3 million and $160.3 million in 1995 and 1994, respectively. The decrease is a result of a reduction of $155.0 million of invested assets. Effective December 31, 1994, the Company transferred $155.0 million of invested assets from the Corporate and Other segment for the purchase of ELICW. Realized losses on investments were $0.3 million, $1.7 million and $16.5 million in 1996, 1995 and 1994, respectively. Income from Continuing Operations Before Federal Income Tax Expense. Income from continuing operations before federal income tax expense excluding realized gains and losses was $22.9 million, $33.9 million and $41.8 million in 1996, 1995 and 1994, respectively. The decrease in 1996 from 1995 is due to a decrease in net investment income and higher operating expenses. The change from 1994 to 1995 is primarily attributed to the change in revenues discussed above. 12 13 INTERCOMPANY AGREEMENTS The Company has existing arrangements with NMIC and other affiliates that address the sharing of federal income taxes, the leasing of office space and the sharing of certain operational and administrative services. These arrangements have been in effect for all periods for which financial data is presented herein. See Item 13 - Certain Relationships and Related Transactions-Existing Arrangements with the Enterprise. The Company does not believe that expenses recognized under the intercompany arrangements are materially different from expenses that would have been recognized had the Company operated on a stand-alone basis. NMIC and its U.S. subsidiaries, including the Company, file a consolidated federal income tax return. The members of the consolidated group currently have a tax sharing arrangement which provides for each member to bear essentially the same federal income tax liability as if separate tax returns were filed. For the years ended December 31, 1996, 1995 and 1994, the Company made federal income tax payments under the tax sharing arrangement of $115.8 million, $51.8 million and $83.2 million, respectively. See Item 13 - Certain Relationships and Related Transactions-Existing Arrangements with the Enterprise-Federal Income Taxes. The Company leases approximately 465,000 square feet of office space at a current market rate of $19.53 per square foot, with limited exceptions, from NMIC and certain of its subsidiaries. For the years ended December 31, 1996, 1995 and 1994, the Company made lease payments to NMIC and its subsidiaries of $9.1 million, $9.0 million and $8.1 million, respectively. See Item 13 - Certain Relationships and Related Transactions-Existing Arrangements with the Enterprise-Lease. 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 such agreement are subject to allocation among NMIC and such subsidiaries. Amounts allocated to the Company were $101.6 million, $107.1 million and $100.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. Under the cost sharing agreement, expenses are allocated in accordance with NAIC guidelines and are based on standard allocation techniques and procedures acceptable under general cost accounting practices. Measures used to allocate expenses include individual employee estimates of time spent, special cost studies, salary expense, commissions expense and other measures that are agreed to by the participating companies and are within regulatory and industry guidelines and practices. The cost sharing agreement will remain in effect until terminated upon the consent of both NMIC and the Company. See Item 13 - Certain Relationships and Related Transactions-Existing Arrangements with the Enterprise-Cost Sharing Agreement. REINSURANCE The Company follows the customary industry practice of reinsuring (ceding) a portion of its life insurance and annuity risks with other companies in order to reduce net liability on individual risks, to provide protection against large losses and to obtain greater diversification of risks. The ceding of risk does not discharge the original insurer from its primary obligation to the policyholder. The Company has entered into a reinsurance contract to cede a portion of its general account individual annuity reserves to Franklin Life. Total recoveries due from Franklin Life were $240.5 million and $245.3 million as of December 31, 1996 and 1995, respectively. Under the terms of the contract, Franklin Life 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 no other material reinsurance arrangements with unaffiliated reinsurers. 13 14 The only material reinsurance agreements which the Company has with affiliates are the modified coinsurance agreements pursuant to which NLIC reinsured all of its accident and health and group life insurance business to ELICW and NMIC. See Item 13 - Certain Relationships and Related Transactions-Existing Arrangements with the Enterprise-Modified Coinsurance Agreements. NLIC entered into these reinsurance agreements because its accident and health and group life insurance business was unrelated to NLIC's long-term savings and retirement products. Accordingly, all accident and health and group life insurance business is accounted for as discontinued operations. Under the modified coinsurance agreements, invested assets are retained by the ceding company and investment earnings are paid to the reinsurer. Under the terms of such 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 NLIC for NLIC's retention of such risk. The contracts 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. NLIC believes that the terms of such modified coinsurance agreements are consistent in all material respects with what NLIC could have obtained with unaffiliated parties. Total premiums ceded under the intercompany reinsurance agreements were $321.6 million during 1996. The effect of the reinsurance agreements was an increase in NLIC's income from discontinued operations before federal income tax expense of $4.5 million during 1996. NLIC does not expect the intercompany reinsurance agreements to have any material adverse effect on NLIC's future operations. LIQUIDITY AND CAPITAL RESOURCES State insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of certain prescribed limitations without prior approval. The ability of NLIC to pay dividends is subject to restrictions set forth in the insurance laws and regulations of Ohio, its domiciliary state. The Ohio insurance laws require 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 policyholders' surplus as of the prior December 31 or (ii) the 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. 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 NLIC and its stockholder. NLIC currently does not expect such regulatory requirements to impair its ability to pay operating expenses and dividends in the future. However, NLIC can give no assurance that dividends will be declared or paid. As a result of the $850.0 million dividend paid on February 24, 1997 and the dividend by NLIC of the stock of certain subsidiaries that do not operate in the long-term savings and retirement market, any dividend paid by NLIC during the 12-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. NLIC has no reason to believe that any reasonably foreseeable dividend to be paid by NLIC would not receive the required approval. NLIC's statutory capital and surplus was $1.00 billion as of December 31, 1996. NLIC paid a dividend of $850.0 million on February 24, 1997. NFS contributed amounts totaling $836.8 million to NLIC on March 10, 1997 and March 11, 1997. NLIC believes that after such dividend and such contribution from NFS, NLIC has adequate statutory capital and surplus to satisfy all regulatory requirements and to support its growth over the following year. 14 15 NLIC paid the dividend by transferring primarily fixed maturity investments with an aggregate market value on February 24, 1997 of $850.0 million from the Corporate and Other segment. NLIC recognized a gain of $14.4 million on the transfer of the securities. The related tax impact of the gain will be recognized but will not be paid as long as the securities are held by NMIC and NLIC remains within the consolidated federal tax return of NMIC. NLIC's principal sources of funds are premiums and other considerations paid, contract charges earned, net investment income received and proceeds from investments called, redeemed or sold. The principal uses of these funds are the payment of benefits on annuity contracts and life insurance policies, operating expenses and the purchase of investments. Net cash provided by operating activities (reflecting principally (i) premiums and contract charges collected, less (ii) benefits paid on life insurance products, plus (iii) income collected on invested assets, less (iv) commissions and other general expenses paid) was $346.2 million, $187.6 million and $39.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash used by investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was $771.3 million, $1.72 billion and $1.39 billion in the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by financing activities (principally reflecting deposits to investment product and universal life insurance product account balances less withdrawals from such account balances and capital contributions less dividends paid) was $459.5 million, $1.54 billion and $1.34 billion for the years ended December 31, 1996, 1995 and 1994, respectively. A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. The Company closely evaluates and manages this risk. The following table summarizes the Company's annuity policy reserves as of December 31, 1996 and 1995 by the contractholder's ability to withdraw funds.
As of As of December 31, 1996 December 31, 1995 ----------------------- ------------------------ Policy Policy Reserves % Reserves % ------------- --------- ------------- ---------- (Dollars in millions) Not subject to discretionary withdrawal $ 1,139.5 2.8% $ 1,087.2 3.4% Subject to discretionary withdrawal with adjustment: With market value adjustment 35,463.2 86.3 27,312.1 84.8 At contract value, less surrender charge of 5% or more 1,046.6 2.5 992.1 3.1 ------------- --------- ------------- ---------- 37,649.3 91.6 29,391.4 91.3 Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge less than 5% 3,443.2 8.4 2,798.7 8.7 ------------- --------- ------------- ---------- Total annuity policy reserves $41,092.5 100.0% $32,190.1 100.0% ============= ========= ============= ==========
Life insurance policies are also subject to withdrawal. However, they are less susceptible to withdrawal than are annuity contracts because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. NLIC's principal sources of liquidity to meet unexpected cash outflows are its portfolio of liquid assets and its net operating cash flow. The short- and long-term liquidity requirements of the Company are monitored regularly to match cash inflows with cash requirements. The Company periodically reviews its short- and long-term projected sources and uses of funds and the asset/liability, investment and cash flow assumptions underlying these projections. Adjustments are made periodically with respect to the Company's investment policies to reflect changes in the Company's short- and long-term cash needs and changing business and economic conditions. 15 16 The Company employs an asset/liability management approach tailored to the specific requirements of each of its product lines. The Company's general account invested assets are primarily managed in a number of pools that are separated by weighted average maturity of the assets acquired by the pools. On bonds and mortgages, the weighted average maturity is based on repayments which are scheduled to occur under the terms of the asset. For mortgage backed securities, repayments are determined using the current rate of repayment of the underlying pool of mortgages and the terms of the securities. Each product line has an investment strategy based on the specific characteristics of such product line. The strategy establishes asset duration, quality and other guidelines. The Company's actuaries determine the amount of new investments needed for each line to arrive at the amount of new investments needed for each pool by month. The investments acquired for each pool are shared on a proportional basis by each of the lines requesting investments in the pool based on their actual investment needs. For all business having future benefits which cannot be changed at the option of the policyholder, the underlying assets are managed in a separate pool. The duration of assets and liabilities in this pool are kept as close together as possible. For assets, the repayment cash flows, plus anticipated coupon payments, are used in calculating asset duration. Future benefits and expenses are used for liabilities. On December 31, 1996, the average duration of assets in this pool was 6.80 years and the average duration of the liabilities was 7.44 years. Policy reserves on this business were $1.11 billion as of December 31, 1996. Because the timing of the payment of future benefits on the majority of the Company's business can be changed by the policyholder, the Company employs cash flow testing techniques as a final step in its asset/liability management process. Annually, the Company's annuity and insurance business is analyzed to determine the adequacy of the reserves supporting such business. This analysis is accomplished by projecting under a number of possible future interest rate scenarios the anticipated cash flows from such business and the assets required to support such business. The first seven of these scenarios are required by state insurance laws. Projections are also made using 13 additional scenarios which involve more extreme fluctuations in future interest rates. Finally, to get a statistical analysis of possible results and to minimize any bias in the 20 predetermined scenarios, additional projections are made using 200 randomly generated interest rate scenarios. For the Company's 1996 cash flow testing process, interest rates for 90-day treasury bills ranged from 0.4% to 11.5% under the 20 predetermined scenarios and 0.8% to 25.3% under the 200 random scenarios. Interest rates for longer maturity treasury securities had comparable ranges. The values produced by each projection are used to determine future gains or losses from the Company's annuity and insurance business, which, in turn, are used to quantify the adequacy of the Company's reserves over the entire projection period. The results of the Company's cash flow testing for year end 1996 indicated that the Company's reserves were adequate as of December 31, 1996. The Company manages its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the fair value of the Company's fixed maturity portfolio increases or decreases in inverse relationship with fluctuations in interest rates. For example, if interest rates rise, the Company's fixed maturity investments will generally decrease in value. Additionally, the Company's net investment income may be affected by interest rate changes. If interest rates decline, net investment income will decrease if high-yielding fixed maturity investments mature or are sold and the proceeds therefrom are reinvested in securities yielding a lower rate. 16 17 On August 12, 1996, NLIC and NMIC entered into a Credit Facility (Credit Facility) which provides for a $600.0 million loan over a five-year term on a fully revolving basis with a group of banks led by Morgan Guaranty Trust Company of New York. The Credit Facility provides for several and not joint liability with respect to any amount drawn by either NLIC or NMIC. To date, neither NLIC nor NMIC has drawn down any amount under the Credit Facility. The Credit Facility provides for several borrowing options including interest at a spread over LIBOR, money market auction, CD or base rate. The Credit Facility also provides covenants, including, but not limited to, restrictions on decreases in the statutory surplus of NMIC below $2.75 billion, mergers and sales of assets if a default has occurred and is continuing, transactions with affiliates (which must be on an arm's-length basis on terms at least as favorable to NLIC or NMIC as could have been obtained from a third party who was not affiliated with NLIC or NMIC) and restrictions on the creation, assumption or suffering to exist of liens. In addition, the Credit Facility provides for customary representations, warranties and events of default. Pursuant to the terms of the Credit Facility, NLIC may not declare or pay a dividend if it is, or if the payment thereof would cause it to be, in default under such facility. Events of default under the Credit Facility include, among others, the failure of NMIC and its affiliates to maintain beneficial ownership of more than 50% of the combined voting power of NLIC's outstanding voting stock and the failure of NLIC to maintain statutory surplus in excess of $875.0 million. Amounts borrowed under the Credit Facility may be used for, among other things, general corporate purposes. Given the Company's historic cash flow and current financial results, management of the Company believes that the cash flow from the operating activities of the Company over the next year will provide sufficient liquidity for the operations of the Company, as well as provide sufficient funds to enable the Company to make dividend payments. INVESTMENTS General The Company's assets are divided between separate account and general account assets. As of December 31, 1996, $26.9 billion (or 56.3%) of the Company's total assets were held in separate accounts and $20.9 billion (or 43.7%) were held in the Company's general account, including $18.3 billion of general account investments. Separate account assets consist primarily of deposits from the Company's variable annuity business. Most separate account assets are invested in various mutual fund options available within the variable annuity products sold by the Company. All of the investment risk in the Company's separate account assets is borne by the Company's customers, with the exception of $280.2 million of policy reserves as of December 31, 1996 ($205.7 million as of December 31, 1995) for which the Company bears the investment risk. General account assets consist mainly of investments generated by premiums on life insurance products and deposits in the Company's Fixed Annuities segment. The Company generates profits on these products in part, based on the spread between the yield on general account invested assets and crediting rates on these products. The Company's general account investment policies emphasize high quality, diversification across asset classes and individual risks, and a buy and hold strategy. The Company's general account assets are invested primarily in fixed maturity securities and commercial mortgage loans. The Company has a general policy of diversifying investments within asset categories. Additionally, the Company's investment policy provides that fixed maturity investments are limited to purchases of investment grade securities or unrated securities which, in the opinion of the Company, should qualify for such rating. The Company monitors its exposure to individual borrowers, credit risks, industries or property types and geographic locations. The Company's investments are subject to suitability and diversification requirements under applicable insurance laws. The Investment Committee of the Board of Directors of the Company, which is comprised of the Chairman and five outside directors, meets ten times a year. Such committee approves investment policy and strategy, approves all mortgage loans and large private placements and reviews and ratifies all other investments. In relation to the life insurers reporting to the American Council of Life Insurance (ACLI), the Company's general account investment portfolio has achieved (i) higher net investment yields, (ii) lower bond default rates and (iii) lower mortgage delinquency rates, in each case in each of the three years ended December 31, 1996. 17 18 Fixed Maturity As of December 31, 1996, general account fixed maturity securities were $12.3 billion (or 67.2%) of the carrying value of consolidated general account invested assets. As of such date, public and private fixed maturity securities constituted $8.4 billion (or 68.3%) and $3.9 billion (or 31.7%), respectively, of total general account fixed maturity securities. The Company's general account fixed maturity securities portfolio consists primarily of investment grade corporate fixed maturity securities, high-quality mortgage-backed securities and U.S. government and agency obligations. Below investment grade fixed maturity securities in the Company's general account as of December 31, 1996 included the securities of 23 issuers representing approximately 1.8% of the carrying value of total fixed maturity securities. The Company's investment policy provides that fixed maturity investments are limited to purchases of investment grade securities or unrated securities which, in the opinion of the Company, should qualify for such rating. All of the below grade fixed maturity securities held in the Company's general account as of December 31, 1996 were investment grade securities when purchased by the Company. The National Association of Insurance Commissioners (NAIC) assigns securities quality ratings and uniform valuations called "NAIC Designations" which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with a designation in class 1 being of the highest quality. Of the Company's general account fixed maturity securities, 98.2% by the carrying value were in the highest two NAIC Designations as of December 31, 1996. The following table sets forth an analysis of credit quality, as determined by NAIC Designation, of the Company's general account fixed maturity securities portfolio as of December 31, 1996 and 1995.
General Account Fixed Maturity Securities - Credit Quality As of December 31, 1996 As of December 31, 1995 --------------------------- --------------------------- NAIC Rating Agency Carrying % of Carrying % of Designation (1) Equivalent Designation (2) Value Total Value Total ---------------- ----------------------------- --------------- ----------- --------------------------- (Dollars in millions) 1 Aaa/Aa/A $ 8,447.5 68.7% $ 8,643.9 69.2% 2 Baa 3,629.9 29.5 3,562.9 28.5 3 Ba 166.6 1.3 224.1 1.8 4 B 49.7 0.4 44.9 0.4 5 Caa and lower 10.9 0.1 2.8 - 6 In or near default - - 7.0 0.1 --------------- ----------- --------------------------- $12,304.6 100.0% $12,485.6 100.0% =============== =========== =========================== ---------- (1) NAIC Designations are assigned no less frequently than annually. Some designations for securities shown as of December 31, 1996 have been assigned to securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories. (2) Comparison's between NAIC and Moody's designations are published by the NAIC. In the event no Moody's rating is available, the Company has assigned internal ratings corresponding to the public rating.
The Company maintains significant general account investments in mortgage-backed securities (MBSs). The Company's general account MBS investments include residential MBSs and commercial MBSs. As of December 31, 1996, MBSs were $3.67 billion (or 29.8%) of the carrying value of the general account fixed maturity securities, all of which were guaranteed by the U.S. government or an agency of the U.S. government. 18 19 The Company believes that general account MBS investments add diversification, liquidity, credit quality and additional yield to its general account fixed maturity securities portfolio. The objective of the Company's general account MBS investments is to provide reasonable cash flow stability and increased yield. General account MBS investments include collateralized mortgage obligations (CMOs) and mortgage-backed pass-through securities. The Company's general account MBS investments do not include interest-only securities or principal-only securities or other MBSs which may exhibit extreme market volatility. Prepayment risk is an inherent risk of holding MBSs. However, the degree of prepayment risk is particular to the type of MBS held. The Company limits its exposure to prepayments by purchasing less volatile types of MBSs. As of December 31, 1996, $2.97 billion (or 81.0% of the carrying value of the general account MBS portfolio was invested in planned amortization class CMOs (PACs). PACs are securities whose cash flows are designed to remain constant over a variety of mortgage prepayment environments. Other classes in the CMO security are structured to accept the volatility of mortgage prepayment changes, thereby insulating the PAC class. Of the remaining general account MBS portfolio, $2.5 million (or 0.1%) was invested in mortgage-backed pass-through or sequential CMOs. Pass-throughs are securities in which the monthly cash flows of principal and interest (both scheduled and prepayments) generated by the underlying mortgages are distributed on a pro rata basis to the holders of the securities. A sequential MBS is structured to divide the CMO security into sequentially ordered classes. Receipt of principal payments are made currently on all classes. While these securities are more sensitive to prepayment risk than PACs, the Company does not consider them highly volatile securities. The following table sets forth the distribution by investment type of the Company's general account MBS portfolio as of December 31, 1996. General Account Mortgage-Backed Securities - Investment Type (1)
As of December 31, 1996 ----------------------------- Carrying % of Value Total --------------- ------------ (Dollars in millions) Accrual $ 41.4 1.1% Planned Amortization Class 2,970.6 81.0 Sequential 2.5 0.1 Scheduled 167.2 4.6 Targeted Amortization Class 87.7 2.4 Very Accurately Defined Maturity 395.9 10.8 --------------- ------------ $3,665.3 100.0% =============== ============ ---------- (1) All general account mortgage-backed securities are agency-backed.
Pursuant to the Company's investment policies, the Company does not invest in derivative securities other than MBSs. 19 20 Mortgage Loans As of December 31, 1996, general account mortgage loans were $5.27 billion (or 28.8%) of the carrying value of consolidated general account invested assets. As of such date, commercial mortgage loans constituted substantially all (99.9%) of total general account mortgage loans with the remainder being 76 residual residential loans originated prior to 1981 with a principal balance of $2.7 million. These mortgages, substantially all of which are made on a non-recourse basis, consist primarily of fixed rate mortgages on existing income-producing properties. As of December 31, 1996, there were two second mortgages totaling $2.6 million and no construction loans, participating or convertible mortgages or land development loans. Commitments to fund mortgage loans of $327.5 million extending into 1997 were outstanding as of December 31, 1996. See notes 5 and 9 to the consolidated financial statements for an analysis of activity in the valuation allowance account for mortgage loans and a summary of mortgage loans by region and property type. The Company aggressively seeks to manage and resolve its troubled commercial mortgage loans. Commercial mortgage loans are placed into default immediately following the Company failing to receive payment when due. With respect to a delinquent mortgage loan, the Company seeks to enforce the assignment of rents clause in order to gain control of the rental income from the property shortly following the default in payment. The foreclosure process with respect to a delinquent mortgage loan is generally initiated by the Company prior to the second mortgage payment becoming delinquent. Over the last five years, the Company has recovered approximately 74% of the unpaid principal of all of its mortgage loans in default. The following table sets forth the delinquency, foreclosure and restructured commercial mortgage loan experience for the Company and for the life insurers reporting to the ACLI for the periods indicated.
The Company and Life Insurance Industry Problem Loan Comparison For the Year Ended For the Year Ended For the Year Ended December 31, 1996 December 31, 1995 December 31, 1994 ------------------------ ----------------------- ------------------------ Company ACLI (1) Company ACLI (1) Company ACLI (1) ------------ ----------- ----------- ----------- ----------- ------------ Delinquent (2) 0.79% 1.79% 0.63% 2.35% 0.48% 3.38% In foreclosure (3) 0.79 1.10 0.63 1.45 0.48 1.80 Restructured (4) 1.11 6.81 1.48 8.27 1.95 9.58 ------------ ----------- ----------- ----------- ----------- ------------ Subtotal 1.90 8.60 2.11 10.62 2.43 12.96 Foreclosed - year to date 0.35 1.01 0.74 1.75 1.18 2.52 ------------ ----------- ----------- ----------- ----------- ------------ Total 2.25% 9.61% 2.85% 12.37% 3.61% 15.48% ============ =========== =========== =========== =========== ============ ---------- (1) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage Loan Delinquencies and Foreclosures," numbers 1367, 1326 and 1289, dated March 6, 1997, February 28, 1996 and March 9, 1995, respectively. (2) Commercial mortgage loans are classified by the Company and the ACLI as delinquent when they are 60 days or more past due. (3) Delinquent includes loans in foreclosure; therefore, subtotal and total lines exclude "In foreclosure" amounts. (4) Commercial mortgage loans are classified by the Company and the ACLI as restructured when they are in good standing, but the basic terms have been modified as a result of an actual or anticipated delinquency.
20 21 INFLATION Many of the Company's assets and liabilities are monetary in nature and sensitive to the interest rate environment which can be affected by inflation. The Company is exposed to the risk of a reduction in interest spread or profit margins when interest rates fluctuate. Bond calls, mortgage prepayments, contract surrenders and withdrawals of annuities and life insurance policies are influenced by the interest rate environment. In general, the fair value of the Company's fixed maturities portfolio increases or decreases inversely with fluctuations in interest rates. For example, if interest rates rise, the Company's fixed maturity investments will generally decrease in value. Additionally, the Company's net investment income may be affected by the interest rate changes. If interest rates decline, net investment income will decrease if high-yielding fixed maturity investments mature or are sold and the proceeds therefrom are reinvested in securities yielding a lower rate. Management attempts to mitigate the negative impact if interest rate changes through asset/liability management, product design, management of crediting rates, relatively high surrender charges and management of mortality charges and dividend scales with respect to its in-force life insurance policies, but there can be no assurance that such attempts will be completely successful. Extreme changes in the interest rate environment could cause net interest margins to fluctuate from historical levels. 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 --------------------- Not applicable. 21 22 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- The following table provides information regarding the executive officers and directors of the Company. Executive officers perform duties for the Company and other members of the Enterprise.
Name Age Position with the Company -------------------------------- ------ ---------------------------------------------------------------------- Dimon Richard McFerson (1) 59 Chairman and Chief Executive Officer - Nationwide Insurance Enterprise and Director Joseph J. Gasper 53 President and Chief Operating Officer and Director Gordon E. McCutchan 61 Executive Vice President - Law and Corporate Services and Secretary Robert A. Oakley 50 Executive Vice President - Chief Financial Officer Robert J. Woodward, Jr. 55 Executive Vice President - Chief Investment Officer James E. Brock 49 Senior Vice President - Life Company Operations Thomas L. Crumrine 54 Senior Vice President - Property and Casualty Insurance W. Sidney Druen 54 Senior Vice President and General Counsel and Assistant Secretary Mark E. Fiebrink 45 Senior Vice President - Chief Actuary - Property and Casualty Danny M. Fullerton 48 Senior Vice President - Property and Casualty Marketing Harvey S. Galloway, Jr. 62 Senior Vice President - Chief Actuary - Life, Health and Annuities Richard A. Karas 54 Senior Vice President - Sales-Financial Services James A. Taylor 52 Senior Vice President - Property and Casualty Insurance Susan A. Wolken 46 Senior Vice President - Enterprise Administration Duane M. Campbell 61 Vice President and Treasurer Lewis J. Alphin (3) 48 Director Keith W. Eckel (3) 50 Director Willard J. Engel (2)(3) 57 Director Fred C. Finney (2) 50 Director Charles L. Fuellgraf, Jr.(1)(2) 65 Director Henry S. Holloway (1)(2) 64 Director David O. Miller (1)(2) 58 Director C. Ray Noecker (3) 50 Director James F. Patterson (3) 54 Director Arden L. Shisler (1) 55 Director Robert L. Stewart (3) 60 Director Nancy C. Thomas (1)(2) 62 Director Harold W. Weihl 64 Director ---------- (1) Member of the Executive Committee. (2) Member of the Salary and Compensation Committee. (3) Member of the Audit Committee.
Biographical information for each of the individuals listed in the above table is set forth below. DIMON RICHARD MCFERSON has been Chief Executive Officer of the Enterprise since December 1992. He has been Chairman and Chief Executive Officer-Enterprise of the Company since April 1996 and a director of the Company since April 1988. Previously, he was elected President and Chief Executive Officer-Enterprise of NLIC and NLAIC in December 1993. He was President and General Manager from April 1988 to April 1991; President and Chief Operating Officer from April 1991 to December 1992; and President and Chief Executive Officer from December 1992 to April 1996 of NMIC, Nationwide Mutual Fire Insurance Company and Nationwide Property and Casualty Insurance Company. Mr. McFerson has been with the Enterprise for 17 years. 22 23 JOSEPH J. GASPER has been President and Chief Operating Officer and a director of the Company since April 1996. Previously, he was Executive Vice President-Property/Casualty Operations of the Enterprise from April 1995 to April 1996 and Senior Vice President Property/Casualty Operations of the Enterprise from September 1993 to April 1995. Prior to that time, Mr. Gasper held numerous positions within the Enterprise. Mr. Gasper has been with the Enterprise for 30 years. GORDON E. MCCUTCHAN has been Executive Vice President-Law and Corporate Services and Secretary of the Company since September 1994. Previously, he was Executive Vice President, General Counsel and Secretary of the Enterprise from November 1989 to September 1994. Prior to that time, Mr. McCutchan held several positions within the Enterprise. Mr. McCutchan has been with the Enterprise for 33 years. ROBERT A. OAKLEY has been Executive Vice President-Chief Financial Officer of the Company since April 1995. Previously, he was Senior Vice President-Chief Financial Officer of the Enterprise from October 1993 to April 1995. Prior to that time, Mr. Oakley held several positions within the Enterprise. Mr. Oakley has been with the Enterprise for 21 years. ROBERT J. WOODWARD, JR. has been Executive Vice President-Chief Investment Officer of the Company since August 1995. Previously, he was Senior Vice President-Fixed Income Investments of the Enterprise from March 1991 to August 1995. Prior to that time, Mr. Woodward held several positions within the Enterprise. Mr. Woodward has been with the Enterprise for 32 years. JAMES E. BROCK has been Senior Vice President-Life Company Operations of the Company since April 1996. Previously, he was Senior Vice President-Investment Product Operations of the Enterprise from November 1990 to April 1996. Prior to that time, Mr. Brock held several positions within the Enterprise. Mr. Brock has been with the Enterprise for 27 years. THOMAS L. CRUMRINE has been Senior Vice President-Property and Casualty Insurance of the Company since March 1996. Previously, he was Senior Vice President-Claims of the Enterprise from April 1995 to March 1996. Prior to that time, Mr. Crumrine held several positions within the Enterprise. Mr. Crumrine has been with the Enterprise for 30 years. W. SIDNEY DRUEN has been Senior Vice President and General Counsel and Assistant Secretary of the Company since September 1994. Previously, he was Vice President, Deputy General Counsel and Assistant Secretary of the Enterprise from October 1989 to September 1994. Prior to that time, Mr. Druen held several positions within the Enterprise. Mr. Druen has been with the Enterprise for 27 years. MARK E. FIEBRINK has been Senior Vice President-Chief Actuary-Property and Casualty of the Company since May 1993. Previously, he was Senior Vice President-Finance of Employers Insurance of Wausau A Mutual Company and Wausau Service Corporation from May 1992 to May 1993. Prior to that time, Mr. Fiebrink held several positions with the Wausau Insurance Companies. Mr. Fiebrink has been with the Enterprise for 11 years. DANNY M. FULLERTON has been Senior Vice President-Property and Casualty Marketing of the Company since November 1996. Previously, he was Vice President-Agency Operations of the Enterprise from July 1994 to November 1996. Prior to that time, Mr. Fullerton held several positions within the Enterprise. Mr. Fullerton has been with the Enterprise for 12 years. HARVEY S. GALLOWAY, JR. has been Senior Vice President-Chief Actuary-Life, Health and Annuities of the Company since April 1993. Previously, he was Senior Vice President and Chief Actuary of the Enterprise from January 1983 to April 1993. Prior to that time, Mr. Galloway held several positions within the Enterprise. Mr. Galloway has been with the Enterprise for 27 years. RICHARD A. KARAS has been Senior Vice President-Sales-Financial Services of the Company since March 1993. Previously, he was Vice President-Sales-Financial Services of the Enterprise from February 1989 to March 1993. Prior to that time, Mr. Karas held several positions within the Enterprise. Mr. Karas has been with the Enterprise for 32 years. 23 24 JAMES A. TAYLOR has been Senior Vice President-Property and Casualty Insurance of the Company since March 1996. Previously, he was Vice President-North Carolina/Alabama/Georgia of the Enterprise from January 1996 to March 1996. Prior to that time, Mr. Taylor held several positions within the Enterprise. Mr. Taylor has been with the Enterprise for 30 years. SUSAN A. WOLKEN has been Senior Vice President-Enterprise Administration of the Company since July 1996. Previously, she was Senior Vice President-Human Resources of the Enterprise from April 1995 to July 1996. Prior to that time, she held several positions within the Enterprise. Ms. Wolken has been with the Enterprise for 22 years. DUANE M. CAMPBELL has been Vice President and Treasurer of the Company since August 1996. Previously, he was Assistant Treasurer of the Enterprise from January 1987 to August 1996. Prior to that time, Mr. Campbell held several positions within the Enterprise. Mr. Campbell has been with the Enterprise for 33 years. LEWIS J. ALPHIN has been a director of the Company since April 1993. Mr. Alphin has been a farm owner and operator in Mt. Olive, North Carolina, since 1971. Mr. Alphin serves on the board of directors of several members of the Enterprise. KEITH W. ECKEL has been a director of the Company since April 1996. Mr. Eckel has been Partner of Fred W. Eckel Sons and President of Eckel Farms, Inc. since May 1968. Mr. Eckel serves on the board of directors of several members of the Enterprise. He is also an advisory board member of Penn Security Bank and Trust Company. WILLARD J. ENGEL has been a director of the Company since April 1994. Mr. Engel has been General Manager of Lyon County Co-operative Oil Co. since March 1975. Mr. Engel serves on the board of directors of several members of the Enterprise. FRED C. FINNEY has been a director of the Company since April 1992. Mr. Finney has been owner and operator of Moreland Fruit Farm and operator of Melrose Orchard since January 1985. Mr. Finney serves on the board of directors of several members of the Enterprise. CHARLES L. FUELLGRAF, JR. has been a director of the Company since April 1969. Mr. Fuellgraf has been Chief Executive Officer of Fuellgraf Electric Company, an electrical contractor, of Butler, Pennsylvania, and Nashville, Tennessee, since 1986. He is Chairman of the Board of Nationwide Communications Inc. and serves on the board of directors of several members of the Enterprise. HENRY S. HOLLOWAY has been a director of the Company since April 1986. Mr. Holloway has been a farm owner and operator in Darlington, Maryland, since 1959. He is Chairman of the Board of the Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company and Nationwide Corp. and serves on the board of directors of several members of the Enterprise. He is also a director of the National Cooperative Business Association and the Forest Hill State Bank. DAVID O. MILLER has been a director of the Company since April 1985. Mr. Miller has been a farm owner and land developer since 1962. He is the President of the Owen Potato Farm Inc., the owner of The Berry Barn and is a partner of M&M Enterprises in Licking County, Ohio. He is Chairman of the Board of the Wausau Insurance Companies and serves on the board of directors of several members of the Enterprise. He is also a director of the National Cooperative Business Association. C. RAY NOECKER has been a director of the Company since April 1994. Mr. Noecker has been owner and manager of Noecker Farms since March 1969. Mr. Noecker serves on the board of directors of several members of the Enterprise. 24 25 JAMES F. PATTERSON has been a director of the Company since April 1989. Mr. Patterson has operated the Patterson Fruit Farm in Chesterland, Ohio, since 1964 and has been the President of Patterson Farms, Inc. since December 1991. He is Chairman of the Board of Nationwide Mutual Fire Insurance Company and serves on the board of directors of several members of the Enterprise. He is also a trustee of The Ohio State University and serves on the board of directors of the University Hospitals Health System in Cleveland, Ohio, and Geauga Hospital, Inc. in Chardon, Ohio. ARDEN L. SHISLER has been a director of the Company since April 1984. Mr. Shisler has been President and Chief Executive Officer of K & B Transport, Inc., a trucking firm in Dalton, Ohio, since January 1992. Previously, he was Chief Operating Officer of K & B Transport, Inc. from April 1986 to January 1992. Prior to that time, Mr. Shisler held several positions with K & B Transport, Inc. He is Chairman of the Board of Nationwide Mutual Insurance Company and serves on the board of directors of several members of the Enterprise. He is also a director of the National Cooperative Business Association. ROBERT L. STEWART has been a director of the Company since April 1989. Mr. Stewart has been owner/operator of Sunnydale Farms since 1960 and owner/operator of Sunnydale Mining since 1989. He is Chairman of the Board of Farmland Insurance Companies and serves on the board of directors of several members of the Enterprise. NANCY C. THOMAS has been a director of the Company since April 1986. Mrs. Thomas has been a farm owner/operator of Da-Ma-Lor Farms since November 1958. She is Chairman of the Board of Nationwide Property and Casualty Insurance Company and serves on the board of directors of several members of the Enterprise. She is also a director of Farm Credit Services (4th District). HAROLD W. WEIHL has been a director of the Company since April 1990. Mr. Weihl has been owner and operator of Weihl Farms since April 1950. He is Chairman of the Board of Nationwide General Insurance Company and serves on the board of directors of several members of the Enterprise. The Company's Board of Directors currently consists of fifteen directors, divided into three classes. The term of the first class will expire at the annual meeting of the sole shareholder to be held in 1997, the term of the second class will expire at the annual meeting of the sole shareholder in 1998 and the term of the third class will expire at the annual meeting of the sole shareholder in 1999. Messrs. Alphin, Engel, Gasper, Miller and Noecker are members of the first class; Messrs. Finney, Holloway, Patterson and Stewart and Mrs. Thomas are members of the second class; and Messrs. Eckel, Fuellgraf, McFerson, Shisler and Weihl are members of the third class. At each annual meeting of the sole shareholder, directors will be elected for a three-year term to succeed the directors whose terms are then to expire. Officers of the Company are elected annually and serve until their retirement, resignation or removal. The Board of Directors has an Audit Committee currently consisting of six directors, none of whom is an officer or employee of the Company. Messrs. Alphin, Eckel, Engel, Noecker, Patterson and Stewart are the members of such committee. The Audit Committee recommends to the Board of Directors the selection of independent certified public accountants to audit annually the books and records of the Company, reviews the activities and the reports of the independent certified public accountants and reports the results of such review to the Board of Directors. The Audit Committee also considers the adequacy of the Company's internal controls and internal auditing methods and procedures. The Board of Directors has a Salary and Compensation Committee currently consisting of six directors, none of whom is an officer or employee of the Company, which, as authorized by the Board of Directors, makes determinations with respect to non-cash compensation to officers, directors and employees of the Company. Messrs. Engel, Finney, Fuellgraf, Holloway and Miller and Mrs. Thomas are the members of such committee. The Board of Directors has an Executive Committee currently consisting of six directors, which, to the extent authorized by the Board of Directors, exercises all the powers and authority of the Board of Directors in the management of the business and affairs of the Company. Messrs. Fuellgraf, Holloway, McFerson, Miller and Shisler and Mrs. Thomas are the members of such committee. 25 26 ITEM 11 EXECUTIVE COMPENSATION - ------- ---------------------- The following summary compensation table sets forth information regarding the compensation of the Chief Executive Officer and each of the four most highly compensated executive officers of the Company (collectively, the "Named Executive Officers") for the fiscal year ended December 31, 1996 solely for services rendered to NLIC and its subsidiaries. Pursuant to a cost sharing agreement, the salaries and benefits of certain of the officers and employees of the Company, including the Named Executive Officers, will be paid by NMIC and reimbursed in accordance with the terms of such agreement. See Item 13 - Certain Relationships and Related Transactions for a complete description of the cost sharing agreement.
Summary Compensation Table Long-term Annual Compensation Compensation ----------------------------------------- ---------------- Other Annual LTIP All Other Name and Bonus Compensation Payouts Compensation principal position Year Salary (1) (2) (3) (4) ----------------------------- ------ ----------- ----------- ----------------- ---------------- ----------------- Dimon Richard McFerson 1996 $324,790 80,058 - 149,803 13,363 Chairman and Chief 1995 122,072 34,208 - 133,272 7,360 Executive Officer - 1994 127,568 41,244 - 70,427 6,891 Nationwide Insurance Enterprise Harvey S. Galloway, Jr. (5) 1996 239,531 67,645 - 71,708 11,587 Senior Vice President and 1995 - - - - - Chief Actuary - Life, 1994 - - - - - Health and Annuities Robert J. Woodward, Jr. 1996 222,784 59,399 - 64,698 10,610 Executive Vice President - 1995 174,717 48,059 - 99,319 9,873 Chief Investment Officer 1994 172,172 57,559 - 43,981 8,486 Joseph J. Gasper (6) 1996 232,959 - - - 10,650 President and Chief 1995 - - - - - Operating Officer 1994 - - - - - James E. Brock 1996 158,420 43,421 - 47,412 7,641 Senior Vice President - 1995 150,982 40,819 - 44,790 7,303 Life Company Operations 1994 140,478 40,060 - 41,513 6,868 ---------- (1) Represents the amount received by the Named Executive Officer under the Management Incentive Plan. See description of the plan following this table. (2) Aggregate perquisites and other personal benefits are less than the lower of $50,000 or 10% of combined salary and bonus. (3) Represents the amount received by the Named Executive Officer under the Executive Incentive Plan and under the Sustained Performance Incentive Plan in 1995. No payouts were made in 1996 or 1994 under the Sustained Performance Incentive Plan. See description of each plan following this table. (4) Represents contributions made or credited to the Named Executive Officer by the Company under the Nationwide Insurance Enterprise Savings Plan and the Nationwide Insurance Enterprise Supplemental Defined Contribution Plan. See description of each plan following this table.
26 27 (5) Represents compensation received by Mr. Galloway solely for his services rendered to the Company in 1996 as allocated pursuant to a cost sharing agreement. During 1995 and 1994, compensation received by Mr. Galloway was allocated to Nationwide Corp. pursuant to the cost sharing agreement. Such compensation is not reflected in the table. (6) Represents compensation received by Mr. Gasper solely for his services rendered to the Company in 1996 as allocated pursuant to a cost sharing agreement. Prior to April 1996, Mr. Gasper was Executive Vice President - Property/Casualty Operations of NMIC and received compensation from NMIC and its property/casualty insurance subsidiaries for services rendered to such companies. Such compensation is not reflected in the table. INCENTIVE PLANS Sustained Performance Incentive Plan Prior to 1997, NMIC and certain of its subsidiaries and affiliates, including NLIC, maintained the Sustained Performance Incentive Plan (SPIP). Under the SPIP, payments were made to the Named Executive Officers and other senior officers of the participating companies in each odd numbered calendar year based on the achievement of measures tied to the performance of the Enterprise over the preceding four years. Performance measures were based on profitability, growth and strategic objectives for the Enterprise which were established in advance by the Boards of Directors of the participating companies. Under the SPIP, participants were granted target incentive amounts that represented a percentage (10% to 20% depending on the participant's position within the participating company) of the sum of the participant's base salary for the last two years of the performance cycle. The actual amount received by the participant ranged from zero to twice the target incentive amount, depending solely on the achievement of the performance measures. NMIC and the participating subsidiaries and affiliates terminated the SPIP at the close of calendar year 1996. If a payment under the SPIP is made in 1997, covering performance measured for the period from 1993 to 1996, such payment will be made in cash as provided in the SPIP. To facilitate the termination of the SPIP, the performance measurement period for 1995 to 1998 was closed at the end of calendar 1996. Payments made in 1997 for such performance measurement period will be made in shares of restricted stock of NFS. Executive Incentive Plan NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain the Executive Incentive Plan (EIP). Under the EIP, annual payments are made to the Named Executive Officers and certain other officers of the participating companies based on the achievement of measures tied to the performance of the Enterprise and the relevant operating company over the preceding three years. Performance measures are based on profitability and growth objectives which are established in advance by the Board of Directors of the participating company. Under the EIP, the participant will be granted a target incentive amount that represents a percentage (from 5% to 25% depending on the participant's position within the participating company) of the participant's base salary. The actual amount received by the participant will range from zero to twice the target incentive amount, depending solely on the achievement of the performance measures. 27 28 Management Incentive Plan NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain the Management Incentive Plan (MIP). Under the MIP, annual payments are made to the Named Executive Officers and certain other management employees of the participating companies based on the achievement of measures tied to the performance of the Enterprise, the relevant operating company, the relevant business unit and the individual participant over the preceding year. Performance measures are based on profitability, growth, expense management and key strategic objectives which are established in advance. Under the MIP, the participant will be granted a target incentive amount that represents a percentage (from 5% to 15% depending on the participant's position within the participating company) of the participant's base salary. The actual amount received by the participant under the MIP will range from zero to twice the target incentive amount, depending solely on the achievement of the performance measures. PENSION PLANS Nationwide Insurance Enterprise Retirement Plan NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain a qualified defined benefit plan, the Nationwide Insurance Enterprise Retirement Plan (Retirement Plan). In general, a participant's annual retirement benefit under the Retirement Plan will be equal to the sum of (i) 1.25% of the participant's Final Average Compensation times years of service (to a maximum of 35 years) and (ii) 0.50% of the participant's Final Average Compensation in excess of Social Security Covered Compensation times years of service (to a maximum of 35 years). Final Average Compensation, for the portion of the participant's benefit which is attributable to service on or after January 1, 1996, is the average of the highest five consecutive covered compensation amounts of the participant in the participant's last 10 years of service. For the portion of a participant's benefit attributable to service prior to January 1, 1996, Final Average Compensation is the average of the highest 3 consecutive covered compensation amounts of the participant in the participant's last 10 years of service. Covered compensation, for purposes of determining Final Average Compensation under either method, is calculated on a calendar year basis and includes compensation from any member of the Enterprise. Covered compensation for all of the Named Executive Officers includes the amounts set forth under the headings Salary, Bonus and LTIP Payouts and a portion of the compensation that is included under the heading Other Annual Compensation in the Summary Compensation Table and additional compensation amounts received for services rendered to other members of the Enterprise. Social Security Covered Compensation means the average of the social security wage bases in effect during the 35 year period ending with the last day of the year the participant attains social security retirement age. The portion of a participant's benefit attributable to years of service credited prior to 1996 is also subject to post-retirement increases following the commencement of benefits or the participant's attainment of age 65, whichever is later. A participant becomes fully vested after the completion of five years of vesting service. The Retirement Plan generally provides for payments to or on behalf of each vested participant upon such participant's retirement on his or her normal retirement date or later, although provision is made for payment of early retirement benefits on a reduced basis commencing at age 55 for those participants with 15 or more years of vesting service or at age 62 for those with 5 or more years of vesting service. The normal retirement date under the Retirement Plan is the later of the date the participant attains age 65 or completes five years of vesting service. Death benefits are payable to a participant's spouse or, under certain circumstances, the named beneficiary, of a participant who dies with a vested benefit under the Retirement Plan or while an employee. The Retirement Plan also provides for the funding of retiree medical benefits under Section 401(h) of the Internal Revenue Code (IRC). 28 29 Nationwide Insurance Enterprise Excess Benefit and Supplemental Retirement Plans NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain an unfunded, nonqualified defined benefit excess benefit plan, the Nationwide Insurance Enterprise Excess Benefit Plan (Excess Plan) and an unfunded, nonqualified defined benefit supplemental benefit plan pursuant to which certain participants may receive a supplemental retirement benefit, the Nationwide Insurance Enterprise Supplemental Retirement Plan (Supplemental Plan). Any participant whose benefits are limited under the Retirement Plan by reason of limitations under Section 415 of the IRC on the maximum benefit that may be paid under the Retirement Plan will receive, under the Excess Plan, that portion of the benefit that he or she would have been entitled to receive under the Retirement Plan in the absence of such limitations. Officers who earn in excess of $160,000 annually, have at least 5 years of vesting service and whose benefits under the Retirement Plan are limited by reason of other certain limitations under the IRC, may receive benefits under the Supplemental Plan. Benefits under the Supplemental Plan will be the sum of (i) 1.25% of the participant's Final Average Compensation times years of service (up to a maximum of 40 years) and (ii) 0.75% of the participant's Final Average Compensation in excess of Social Security Covered Compensation times years of service (up to a maximum of 40 years) reduced by benefits accrued under the Retirement Plan and the Excess Plan. The benefits under the Excess and Supplemental Plans vest at the same time as benefits vest under the Retirement Plan. The chart below indicates the estimated maximum annual retirement benefits that a hypothetical participant would be entitled to receive under the Retirement Plan (including payments made under the Excess and Supplemental Plans as a result of limitations imposed by the IRC) computed on a straight-life annuity basis, if retirement occurred at age 65 and the number of credited years of service and Final Average Compensation equaled the amounts indicated. For purposes of the chart, it is assumed that the Final Average Compensation is the same whether measured over the three-year averaging period that applies to service accumulated prior to 1996 or the five-year period that applies to service accumulated after 1995. In actual operation, the total benefit received under the Retirement Plan (including payments made under the Excess and Supplemental Plans) would be the total of the benefit determined based on years of service earned under each method. Pension Plan Table
Years of Service Final Average ------------------------------------------------------------------ Compensation 15 20 25 30 35 ------------------------------------------------------------------------------------- $125,000 30,744 40,992 51,241 61,489 71,737 150,000 41,898 55,864 69,830 83,795 97,761 175,000 49,398 65,864 82,330 98,795 115,261 200,000 56,898 75,864 94,830 113,795 132,761 225,000 64,398 85,864 107,330 128,795 150,261 250,000 71,898 95,864 119,830 143,795 167,761 300,000 86,898 115,864 144,830 173,795 202,761 400,000 116,898 155,864 194,830 233,795 272,761 450,000 131,898 175,864 219,830 263,795 307,761 500,000 146,898 195,864 244,830 293,795 342,761
All Named Executive Officers have a portion of their benefit calculated based on the post-1995 definition of Final Average Compensation. As of December 31, 1995, the number of credited years of service under the Retirement Plan for Messrs. McFerson, Galloway, Woodward, Gasper and Brock was 23 years, 26.5 years, 32.7 years, 29.5 years and 26.5 years, respectively. Mr. McFerson's credited years of service include, pursuant to an agreement with NMIC, 8.17 years in excess of those actually earned through employment by the Enterprise. The benefit attributable to those additional years will be paid by NMIC (not the Retirement Plan) and is reduced by the benefit payable under the retirement plan of Mr. McFerson's previous employer. 29 30 Each of the Named Executive Officers earned an additional year of service in 1996 and their benefit for such year and all future years will be calculated under the new definition of Final Average Compensation. Covered compensation paid by the Company for the fiscal year ended December 31, 1996 for Messrs. McFerson, Galloway, Woodward, Gasper and Brock was $444,217, $392,313, $348,003, $349,412 and $343,167, respectively. SAVINGS PLANS Nationwide Insurance Enterprise Savings Plan NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain the Nationwide Insurance Enterprise Savings Plan (Savings Plan), a qualified profit sharing plan including a qualified cash or deferred arrangement covering eligible employees of participating companies within the Enterprise. Under the Savings Plan, participants who are not residents of Puerto Rico may elect to contribute between 1% and 16% of their compensation to accounts established on their behalf under the Savings Plan in the form of voluntary salary reductions on a pre-tax basis and participants who are residents of Puerto Rico may make contributions on an after-tax basis. The participating companies are obligated to make matching employer contributions, for the benefit of their participating employees, at the rate of 70% of the first 2% of compensation deferred or contributed to the Savings Plan by each employee, and 40% of the next 4% of compensation deferred or contributed by each employee to the Savings Plan. All amounts contributed to the Savings Plan are held in a separate account for each participant and are invested in one or more funds made available under the Savings Plan and selected by the participant. Normally, a participant receives the value of his or her account upon termination of employment, although a participant may withdraw all or a part of the amounts credited to his or her accounts during employment under certain circumstances including attainment of age 59 1/2, or receive a loan of a portion of his or her account balance. Under the Savings Plan, a participant is immediately vested in all amounts credited to his or her account as a result of salary deferrals (and earnings on those deferrals) or after-tax contributions (and earnings on those contributions), as applicable. A participant is vested in amounts attributable to employer matching contributions (and earnings on those contributions) over a period of five years. Nationwide Insurance Enterprise Supplemental Defined Contribution Plan NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain an unfunded, nonqualified defined contribution supplemental benefit plan, the Nationwide Insurance Enterprise Supplemental Defined Contribution Plan (DC Supplemental Plan), which provides benefits, equal to employer matching contributions that would have been made under the Savings Plan for the participants, in the absence of the IRC limitations on compensation that can be considered and amounts that can be deferred under the Savings Plan less actual matching contributions to the Savings Plan in the absence of the limitations under IRC Sections 401(a)(17) and 402(g), reduced by actual employer contributions made to the Savings Plan. Participants are limited to those officers earning in excess of $160,000 annually. Benefits under the DC Supplemental Plan vest at the same time as employer matching contributions vest under the Savings Plan. DEFERRED COMPENSATION PROGRAM NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain a deferred compensation program (Officers' Deferred Compensation Program) pursuant to which officers of participating companies may elect to defer payment of amounts otherwise payable to them. In addition, participants receive credit for employer matching contributions which were not made under the Savings Plan or DC Supplemental Plan and any reduction in benefits under the Retirement Plan, Supplemental Plan or Excess Plan as a result of salary or other deferrals under the Deferred Compensation Program. An eligible officer is permitted to enter into a deferral agreement pursuant to which such officer may annually elect to defer a portion of his or her salary or his or her incentive compensation earned under the Management Incentive Plan or Executive Incentive Plan during the following year. Any such election is effective prospectively. Amounts deferred under the Officers' Deferred Compensation Program will generally be payable in annual installments beginning in January of the calendar year following the calendar year in which the officer terminates employment. Amounts deferred under the Officers' Deferred Compensation Program are credited with interest. The interest rate is based on the fixed rate option in the Savings Plan. 30 31 NATIONWIDE SALARIED EMPLOYEES SEVERANCE PAY PLAN NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain the Nationwide Salaried Employees Severance Pay Plan (Severance Plan), an unfunded plan which provides severance benefits to employees whose employment is involuntarily terminated due to unsatisfactory job performance or job elimination without an offer of replacement employment within the Enterprise or with a successor employer. Employees will not be entitled to benefits if their employment is terminated as a result of theft, absenteeism, insubordination and other similar problems. The benefit provided is a lump sum payment determined on the basis of years of service completed (a minimum of 6 months of service is required) and salary, with a maximum benefit of 8 weeks of salary plus an additional week of salary for each full or partial year of service in excess of 11 years. DIRECTOR COMPENSATION Directors of the Company also serve as a director on the boards of various other Enterprise companies. Compensation for services as a director consists of a base annual rate for each director plus varying amounts for fringe benefits and reimbursement of out-of-pocket expenses. Directors who are also officers are excluded from this arrangement. The following table represents total compensation payments made to the directors, who are not also officers, from the Company for the fiscal year ended December 31, 1996.
Director Compensation --------------------------- ------------------- Lewis J. Alphin $10,344 Keith W. Eckel 7,222 Willard J. Engel 10,188 Fred C. Finney 11,648 Charles L. Fuellgraf, Jr. 8,820 Henry S. Holloway 14,059 David O. Miller 13,783 C. Ray Noecker 10,847 James F. Patterson 10,949 Arden L. Shisler 13,621 Robert L. Stewart 12,039 Nancy C. Thomas 10,072 Harold W. Weihl 9,856
Directors' Deferred Compensation Program NMIC and certain of its subsidiaries and affiliates, including NLIC, maintain a deferred compensation program applicable to nonemployee members of their Board of Directors (Directors' Deferred Compensation Program). Each director who has been elected to the board of directors at least twice and has served for at least 3 years on the Board of Directors of a participating company is entitled to monthly payments, following termination of his or her service on the board of directors, of a monthly amount equal to the monthly director's fee being received by that director at the time of his or her retirement from the Board of Directors. The number of monthly payments will equal the number of months the individual served on the Board of Directors (other than months in which he or she was also a salaried officer of the participating company). 31 32 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- Security Ownership of Certain Beneficial Owners as of February 28, 1997.
Amount and Nature of Percent Title of Class Name and Address of Beneficial Owner Beneficial Ownership of Class ---------------- ----------------------------------------------------------------------- ---------- Common Stock Nationwide Financial Services, Inc. 3,814,779 Shares of 100% One Nationwide Plaza record and Columbus, Ohio 43215 beneficially (1) ---------- (1) Sole voting and investment power
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ($000's omitted) - ------- ---------------------------------------------- EXISTING ARRANGEMENTS WITH THE ENTERPRISE Organization of the Company The Company is member of the Enterprise and offers and distributes long-term savings and retirement products. On September 24, 1996, NLIC's Board of Director's declared a dividend payable January 1, 1997 to Nationwide Corp. consisting of the outstanding common stock of those subsidiaries of NLIC that do not operate in the long-term savings and retirement market. On January 27, 1997, Nationwide Corp. contributed to NFS all of the outstanding common stock of NLIC and the other companies within the Enterprise that offer or distribute long-term savings and retirement products. On December 31, 1996, NLIC paid a $50,000 cash dividend to Nationwide Corp. In addition, on February 24, 1997, NLIC made a dividend to NFS consisting of securities having an aggregate market value of $850,000. On March 10, 1997 and March 11, 1997, NFS made cash capital contributions to NLIC totaling $295,740 and $541,040, respectively. Effective January 1, 1996, NLIC entered into a 100% modified coinsurance agreement with ELICW pursuant to which all of NLIC's group accident and health and group life insurance business was reinsured by ELICW. NLIC also entered into a 100% modified coinsurance agreement with NMIC effective January 1, 1996, pursuant to which all of NLIC's individual accident and health insurance business was reinsured by NMIC. See Modified Coinsurance Agreements. Federal Income Taxes NMIC and its U.S. subsidiaries, including the NLIC and its subsidiaries, file a consolidated federal income tax return. The members of the consolidated group currently 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. For the year ended December 31, 1996, the Company made federal income tax payments under the tax sharing arrangement of $115,839. 32 33 Legal Services The attorneys in the Office of General Counsel of NMIC also operate as the law firm of Druen, Rath & Dietrich. Pursuant to a partnership agreement, the firm limits its representation to the members of the Enterprise. The partnership was formed to assure compliance with Ohio law that prohibits corporations from practicing law. Through a retainer arrangement, an annual retainer fee is paid by each member of the Enterprise based upon an estimate of time spent by each attorney working on legal matters related to the respective member during the previous year. W. Sidney Druen, Senior Vice President and General Counsel of the Company, is the senior partner in such firm, and all attorneys and other employees of the firm are salaried employees of NMIC. The firm applies all of its retainer fees toward office overhead under a rental and office expense agreement with NMIC. For the year ended December 31, 1996, the Company paid the firm $1,580 for legal services rendered to the Company which amounts were immediately remitted to NMIC. Lease Pursuant to an arrangement between NMIC and certain of its subsidiaries, the Company leases approximately 465,000 square feet of office space at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus, Ohio, at a current market rate of $19.53 per square foot, with limited exceptions. Under the arrangement, the Company determines the amount of office space necessary to conduct its operations and leases such space from NMIC, subject to availability. For the year ended December 31, 1996, the Company made payments to NMIC and its subsidiaries totaling $9,065 under such arrangement. Modified Coinsurance Agreements Effective January 1, 1996, NLIC entered into a 100% modified coinsurance agreement with ELICW. Under the agreement, NLIC cedes to ELICW, and ELICW assumes, NLIC's group accident and health and group life insurance business and any ceded or assumed reinsurance applicable to such group business. For the year ended December 31, 1996, NLIC ceded $224,224 of premium to ELICW. Effective January 1, 1996, NLIC also entered into a 100% modified coinsurance agreement with NMIC. Under the agreement, NLIC cedes to NMIC, and NMIC assumes, NLIC's individual accident and health insurance business and any ceded or assumed reinsurance applicable to such business. For the year ended December 31, 1996, NLIC ceded $97,331 of premium to NMIC. NLIC entered into these reinsurance agreements because the accident and health and group life insurance business was unrelated to NLIC's long-term savings and retirement products. Under the modified coinsurance agreements, invested assets are retained by the ceding company and investment earnings are paid to the reinsurer. Under the terms of such 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 NLIC, although a fee is paid by ELICW or NMIC, as the case may be, to NLIC for the NLIC's retention of such risk. The contracts 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. NLIC believes that the terms of such modified coinsurance contracts are consistent in all material respects with what NLIC could have obtained with unaffiliated parties. 33 34 Cost Sharing Agreement 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 such agreement are subject to allocation among NMIC and such subsidiaries. Under such agreement, for the year ended December 31, 1996, the Company made payments to NMIC totaling $101,584. Under the cost sharing agreement, expenses are allocated in accordance with National Association of Insurance Commissioner's guidelines and are based on standard allocation techniques and procedures acceptable under general cost accounting practices. Measures used to allocate expenses include individual employee estimates of time spent, special cost studies, salary expense, commissions expense and other measures that are agreed to by the participating companies and are within regulatory and industry guidelines and practices. Cash Management Agreements NMIC has entered into separate Investment Agency Agreements with Nationwide Cash Management Company (NCMC) and California Cash Management Company (CCMC), each an affiliate of the Company. Pursuant to the terms of such agreements, NCMC and CCMC make, hold and administer short-term investments (those maturing in one year or less) for NMIC and certain of its affiliates, including NLIC and it's subsidiaries. Under each agreement, expenses of NCMC or CCMC, as the case may be, are allocated pro rata among the participants based upon the participant's ownership percentage of total assets held by NCMC or CCMC. For the year ended December 31, 1996, the Company paid NCMC and CCMC fees and expenses totaling $41 under such agreements. Benefit Plans The Company participates in the common employee benefit programs with NMIC and its subsidiaries. Included in these programs are accident and health benefits, disability income benefits and life insurance benefits. The Company ultimately pays for all benefits provided to its employees under the benefit program plus an administrative processing fee, reduced by employee contributions. The administrative processing fee paid by the Company was approximately $1,000 for the year ended December 31, 1996. The Company also participates, along with NMIC and its subsidiaries and affiliates, in life insurance and health care benefit plans for qualifying retirees. Such plans are funded in amounts determined at the discretion of management of NMIC based on current and anticipated future costs. Contributions to the plan by the participating companies are primarily invested in group annuity contracts of NLIC. Contributions by the Company approximated $1,495 for the year ended December 31, 1996. Repurchase Agreement NLIC and certain of it's subsidiaries are party to a master repurchase agreement pursuant to which securities or other financial instruments are transferred between parties against the transfer of funds by the transferee for a period of time ending on a specific date or upon the demand of the transferor. FUTURE TRANSACTIONS WITH THE ENTERPRISE In the future, the Company may enter into agreements with members of the Enterprise that will not be the result of arm's length negotiations between independent parties. Conflicts of interests could arise in the future with respect to transactions involving members of the Enterprise, on the one hand, and the Company, on the other hand. In addition, under the Ohio insurance laws, arrangements and agreements between the Company and other members of the Enterprise must be fair and equitable and may be subject to the approval of the Superintendent of Insurance of the State of Ohio. The Credit Facility requires that any transaction between NLIC and any of its affiliates be on an arm's-length basis on terms at least as favorable to NLIC as could have been obtained from a third party which is not an affiliate. 34 35 Reference is made to note 13 to the consolidated financial statements herein for additional information regarding transactions with affiliates. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ----------------------------------------------------------------
Page -------- CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholder's Equity for the years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7 FINANCIAL STATEMENT SCHEDULES: Schedule I Consolidated Summary of Investments - Other Than Investments in Related Parties as of December 31, 1996 F-26 Schedule III Supplementary Insurance Information as of December 31, 1996, 1995 and 1994 and for each of the years then ended F-27 Schedule IV Reinsurance as of December 31, 1996, 1995 and 1994 and for each of the years then ended F-28 Schedule V Valuation and Qualifying Accounts for the years ended December 31, 1996, 1995 and 1994 F-29 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 E-1
35 36 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 5, 1997 36 37 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 5, 1997. /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
37 38 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES -------------------------------------------- Consolidated Financial Statements December 31, 1996, 1995 and 1994 For Inclusion in Form 10-K To Securities and Exchange Commission F-1 39 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, 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. In 1994, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. KPMG Peat Marwick LLP Columbus, Ohio January 31, 1997 F-2 40
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995 ($000's omitted) Assets 1996 1995 ------ ----------------- ---------------- Investments (notes 5, 8 and 9): Securities available-for-sale, at fair value: Fixed maturity securities (cost $11,970,878 in 1996; $11,862,556 in 1995) $12,304,639 12,485,564 Equity securities (cost $43,890 in 1996; $23,617 in 1995) 59,131 29,953 Mortgage loans on real estate, net 5,272,119 4,602,764 Real estate, net 265,759 229,442 Policy loans 371,816 336,356 Other long-term investments 28,668 61,989 Short-term investments (note 13) 4,789 32,792 ----------------- ---------------- 18,306,921 17,778,860 ----------------- ---------------- Cash 43,784 9,455 Accrued investment income 210,182 212,963 Deferred policy acquisition costs 1,366,509 1,020,356 Investment in subsidiaries classified as discontinued operations (notes 1 and 2) 485,707 506,677 Other assets (note 6) 426,441 388,214 Assets held in Separate Accounts (note 8) 26,926,702 18,591,108 ----------------- ---------------- $47,766,246 38,507,633 ================= ================ Liabilities and Shareholder's Equity ------------------------------------ Future policy benefits and claims (notes 6 and 8) $17,179,060 16,358,614 Policyholders' dividend accumulations 361,401 348,027 Other policyholder funds 60,073 65,297 Accrued federal income tax (note 7): Current 30,170 35,301 Deferred 162,212 246,627 ----------------- ---------------- 192,382 281,928 ----------------- ---------------- Dividend payable to shareholder (notes 1 and 2) 485,707 - Other liabilities 423,047 234,147 Liabilities related to Separate Accounts (note 8) 26,926,702 18,591,108 ----------------- ---------------- 45,628,372 35,879,121 ----------------- ---------------- Commitments and contingencies (notes 6, 9 and 15) Shareholder's equity (notes 3, 4, 5, 12 and 13): Capital shares, $1 par value. Authorized 5,000,000 shares, issued and outstanding 3,814,779 shares 3,815 3,815 Additional paid-in capital 527,874 657,118 Retained earnings 1,432,593 1,583,275 Unrealized gains on securities available-for-sale, net 173,592 384,304 ----------------- ---------------- 2,137,874 2,628,512 ----------------- ---------------- $47,766,246 38,507,633 ================= ================
See accompanying notes to consolidated financial statements. F-3 41 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 ($000's omitted)
1996 1995 1994 --------------- -------------- ------------- Revenues (note 16): Investment product and universal life insurance product policy charges $ 400,902 286,534 217,245 Traditional life insurance premiums 198,642 199,106 176,658 Net investment income (note 5) 1,357,759 1,294,033 1,210,811 Realized losses on investments (note 5) (326) (1,724) (16,527) Other income 35,861 20,702 11,312 --------------- -------------- ------------- 1,992,838 1,798,651 1,599,499 --------------- -------------- ------------- Benefits and expenses: Benefits and claims 1,160,580 1,115,493 992,667 Provision for policyholders' dividends on participating policies (note 12) 40,973 39,937 38,754 Amortization of deferred policy acquisition costs 133,394 82,695 85,568 Other operating expenses (note 13) 342,394 272,954 240,652 --------------- -------------- ------------- 1,677,341 1,511,079 1,357,641 --------------- -------------- ------------- Income from continuing operations before federal income tax expense 315,497 287,572 241,858 --------------- -------------- ------------- Federal income tax expense (benefit) (note 7): Current 116,512 88,700 73,559 Deferred (5,623) 11,108 5,030 --------------- -------------- ------------- 110,889 99,808 78,589 --------------- -------------- ------------- Income from continuing operations 204,608 187,764 163,269 Income from discontinued operations (less federal income tax expense of $4,453, $7,446 and $10,915 in 1996, 1995 and 1994, respectively) (note 2) 11,324 24,714 20,459 --------------- -------------- ------------- Net income $ 215,932 212,478 183,728 =============== ============== =============
See accompanying notes to consolidated financial statements. F-4 42 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Shareholder's Equity Years ended December 31, 1996, 1995 and 1994 ($000's omitted)
Unrealized gains (losses) Additional on securities Total Capital paid-in Retained available-for- shareholder's shares capital earnings sale, net equity ----------- ------------- --------------- ----------------- --------------- 1994: Balance, beginning of year $3,815 406,089 1,194,519 6,745 1,611,168 Capital contribution - 200,000 - - 200,000 Net income - - 183,728 - 183,728 Adjustment for change in accounting for certain investments in debt and equity securities, net (note 4) - - - 212,553 212,553 Unrealized losses on securities available- for-sale, net - - - (338,971) (338,971) ----------- ------------- --------------- ----------------- --------------- Balance, end of year $3,815 606,089 1,378,247 (119,673) 1,868,478 =========== ============= =============== ================= =============== 1995: Balance, beginning of year 3,815 606,089 1,378,247 (119,673) 1,868,478 Capital contribution (note 13) - 51,029 - (4,111) 46,918 Dividends to shareholder - - (7,450) - (7,450) Net income - - 212,478 - 212,478 Unrealized gains on securities available- for-sale, net - - - 508,088 508,088 ----------- ------------- --------------- ----------------- --------------- Balance, end of year $3,815 657,118 1,583,275 384,304 2,628,512 =========== ============= =============== ================= =============== 1996: Balance, beginning of year 3,815 657,118 1,583,275 384,304 2,628,512 Capital contribution (note 13) - 25 5 - 30 Dividends to shareholder - (129,269) (366,619) (39,819) (535,707) Net income - - 215,932 - 215,932 Unrealized losses on securities available- for-sale, net - - - (170,893) (170,893) ----------- ------------- --------------- ----------------- --------------- Balance, end of year $3,815 527,874 1,432,593 173,592 2,137,874 =========== ============= =============== ================= ===============
See accompanying notes to consolidated financial statements. F-5 43 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 ($000's omitted)
1996 1995 1994 ---------------- --------------- --------------- Cash flows from operating activities: Net income $ 215,932 212,478 183,728 Adjustments to reconcile net income to net cash provided by operating activities: Capitalization of deferred policy acquisition costs (422,572) (321,327) (242,431) Amortization of deferred policy acquisition costs 133,394 82,695 85,568 Amortization and depreciation 6,962 10,234 3,603 Realized (gains) losses on invested assets, net (284) 3,250 16,094 Deferred federal income tax expense (benefit) 7,603 (30,673) 9,946 Decrease (increase) in accrued investment income 2,781 (16,999) (12,808) (Increase) decrease in other assets (38,876) 39,880 (102,676) Increase in policy liabilities 305,755 135,937 118,361 Increase in policyholders' dividend accumulations 13,374 12,639 15,298 (Decrease) increase in accrued federal income tax payable (5,131) 30,836 (5,714) Increase in other liabilities 188,900 26,851 506 Other, net (61,679) 1,832 (29,595) --------------- --------------- --------------- Net cash provided by operating activities 346,159 187,633 39,880 ---------------- --------------- --------------- Cash flows from investing activities: Proceeds from maturity of securities available-for-sale 1,162,766 634,553 544,843 Proceeds from sale of securities available-for-sale 299,558 107,345 228,308 Proceeds from maturity of fixed maturity securities held-to-maturity - 564,450 491,862 Proceeds from repayments of mortgage loans on real estate 309,050 207,832 190,574 Proceeds from sale of real estate 18,519 48,331 46,713 Proceeds from repayments of policy loans and sale of other invested assets 22,795 53,587 120,506 Cost of securities available-for-sale acquired (1,573,640) (1,942,413) (1,816,370) Cost of fixed maturity securities held-to-maturity acquired - (593,636) (410,379) Cost of mortgage loans on real estate acquired (972,776) (796,026) (471,570) Cost of real estate acquired (7,862) (10,928) (6,385) Policy loans issued and other invested assets acquired (57,740) (75,910) (65,302) Short-term investments, net 28,003 77,837 (89,376) Purchase of affiliate (note 13) - - (155,000) ---------------- --------------- --------------- Net cash used in investing activities (771,327) (1,724,978) (1,391,576) ---------------- --------------- --------------- Cash flows from financing activities: Proceeds from capital contributions 30 - 200,000 Dividends paid to shareholder (50,000) (7,450) - Increase in investment product and universal life insurance product account balances 2,293,933 2,809,385 3,547,976 Decrease in investment product and universal life insurance product account balances (1,784,466) (1,258,758) (2,412,595) ---------------- --------------- -------------- Net cash provided by financing activities 459,497 1,543,177 1,335,381 ---------------- --------------- -------------- Net increase (decrease) in cash 34,329 5,832 (16,315) ---------------- --------------- --------------- Cash, beginning of year 9,455 3,623 19,938 ---------------- --------------- --------------- Cash, end of year $ 43,784 9,455 3,623 ================ =============== ===============
See accompanying notes to consolidated financial statements. F-6 44 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 ($000's omitted) (1) Organization and Description of Business ---------------------------------------- Nationwide Life Insurance Company (NLIC) is a wholly owned subsidiary of Nationwide Corporation (Nationwide Corp.). Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity Insurance Company (NLAIC), Employers Life Insurance Company of Wausau and subsidiaries (ELICW), National Casualty Company (NCC), West Coast Life Insurance Company (WCLIC), Nationwide Advisory Services, Inc. (formerly Nationwide Financial Services, Inc.), Nationwide Investment Services Corporation (formerly PEBSCO Securities Corporation) (NISC) and NWE, Inc. NLIC and its subsidiaries are collectively referred to as "the Company." Nationwide Corp. formed Nationwide Financial Services, Inc. (NFS) in November 1996 as a holding company for NLIC and the other companies of the Nationwide Insurance Enterprise that offer or distribute long-term savings and retirement products. On January 27, 1997, Nationwide Corp. contributed to NFS the common stock of NLIC and three marketing and distribution companies. NFS is planning an initial public offering of its Class A common stock during the first quarter of 1997. In anticipation of the restructuring described above, on September 24, 1996, NLIC's Board of Directors declared a dividend payable January 1, 1997 to Nationwide Corp. consisting of the outstanding shares of common stock of certain subsidiaries (ELICW, NCC and WCLIC) 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 ELICW and another affiliate effective January 1, 1996. These subsidiaries and all accident and health and group life insurance business have been accounted for as discontinued operations for all periods presented. See notes 2 and 13. In addition, as part of the restructuring described above, NLIC intends to make an $850,000 distribution to NFS which will then make an equivalent distribution to Nationwide Corp. The Company is a leading provider of long-term savings and retirement products to retail and institutional customers and is subject to competition from other financial services providers throughout the United States. The Company is subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments. The following is a description of the most significant risks facing life insurers and how the Company mitigates those risks: LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those currently recorded in the consolidated financial statements. 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 is 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-7 45 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued INTEREST RATE RISK is 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. (2) Discontinued Operations ----------------------- As discussed in note 1, NFS is a holding company for NLIC and certain other companies that offer or distribute long-term savings and retirement products. Prior to the contribution by Nationwide Corp. to NFS of the outstanding common stock of NLIC and other companies, 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 to Nationwide Corp. 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 that serves as a fronting company for a property and casualty subsidiary of Nationwide Mutual Insurance Company (NMIC), an affiliate. NCC maintains its offices in Scottsdale, Arizona. 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 for all periods presented. NLIC did not recognize any gain or loss on the disposal of these subsidiaries. A summary of the combined results of operations, including the results of the accident and health and group life insurance business ELICW assumed from NLIC in 1996, and assets and liabilities of ELICW, NCC and WCLIC as of and for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ------------ ----------- ----------- Revenues $ 668,870 422,149 84,226 Net income 11,324 26,456 11,753 Assets, consisting primarily of investments 3,029,293 2,967,326 2,537,692 Liabilities, consisting primarily of policy benefits and claims 2,543,586 2,460,649 2,179,263
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 13 for a complete discussion of the reinsurance agreements. NLIC 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 and will cease writing any new business prior to December 31, 1997. NLIC's accident and health and group life insurance business is accounted for as discontinued operations for all periods presented. NLIC 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 NLIC. F-8 46 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued A summary of the results of operations, net of amounts ceded to ELICW and NMIC in 1996, and assets and liabilities of NLIC's accident and health and group life insurance business as of and for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ------------ ----------- ----------- Revenues $ - 354,788 362,476 Net income (loss) - (1,742) 8,706 Assets, consisting primarily of investments 259,185 239,426 234,082 Liabilities, consisting primarily of policy benefits and claims 259,185 239,426 234,082
(3) 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 (GAAP) which differ from statutory accounting practices prescribed or permitted by regulatory authorities. Annual Statements for NLIC and its insurance subsidiaries, filed with the department of insurance of each insurance company's state of domicile, are prepared on the basis of accounting practices prescribed or permitted by each 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. 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 for 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, 1996 or 1995. F-9 47 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 are 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. (c) Revenues and Benefits --------------------- INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS: Investment products consist primarily of individual and group variable and fixed annuities, annuities without life contingencies and guaranteed investment contracts. 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. ACCIDENT AND HEALTH INSURANCE PRODUCTS: Accident and health insurance premiums are recognized as revenue over the terms of the policies. Policy claims are charged to expense in the period that the claims are incurred. All accident and health insurance business is accounted for as discontinued operations. See note 2. (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 agency expenses have been deferred. For investment products and universal life insurance products, deferred policy acquisition costs are being amortized with interest over the lives of the policies in relation to the present value of estimated future gross profits from projected interest margins, asset fees, cost of insurance, policy administration and surrender charges. For years in which gross profits are negative, deferred policy acquisition costs are amortized based on the present value of gross revenues. For traditional life products, these deferred policy acquisition costs are predominantly being amortized with interest over the premium paying period of the related policies in proportion to the ratio of actual annual premium revenue to the anticipated total premium revenue. Such anticipated premium revenue was estimated using the same assumptions as were used for computing liabilities for future policy benefits. Deferred policy acquisition costs are adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale as described in note 3(b). F-10 48 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (e) Separate Accounts ----------------- Separate Account assets and liabilities represent contractholders' funds which have been segregated into accounts with specific investment objectives. 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 6. Future policy benefits and claims for collectively renewable long-term disability policies and group long-term disability policies are the present value of amounts not yet due on reported claims and an estimate of amounts to be paid on incurred but unreported claims. The impact of reserve discounting is not material. Future policy benefits and claims on other group health insurance policies are not discounted. All health insurance business is accounted for as discontinued operations. See note 2. (g) Participating Business ---------------------- Participating business represents approximately 52% in 1996 (54% in 1995 and 55% in 1994) of the Company's life insurance in force, 78% in 1996 (79% in 1995 and 79% in 1994) of the number of life insurance policies in force, and 40% in 1996 (47% in 1995 and 51% in 1994) of life insurance premiums. The provision for policyholder dividends is based on current dividend scales. Future dividends are provided for ratably in future policy benefits based on dividend scales in effect at the time the policies were issued. (h) Federal Income Tax ------------------ The Company, with the exception of ELICW, files a consolidated federal income tax return with 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. Through 1994, ELICW filed a consolidated federal income tax return with Employers Insurance of Wausau A Mutual Company, an affiliate. Beginning in 1995, ELICW files a separate federal income tax return. 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. F-11 49 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (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 2 and 13. (j) Reclassification ---------------- Certain items in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. (4) Change in Accounting Principle ------------------------------ Effective January 1, 1994, the Company changed its method of accounting for certain investments in debt and equity securities in connection with the issuance of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 115 - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. As of January 1, 1994, the Company classified fixed maturity securities with amortized cost and fair value of $6,299,665 and $6,721,714, respectively, as available-for-sale and recorded the securities at fair value. Previously, these securities were recorded at amortized cost. The effect as of January 1, 1994 has been recorded as a direct credit to shareholder's equity as follows:
Excess of fair value over amortized cost of fixed maturity securities available-for-sale $ 422,049 Adjustment to deferred policy acquisition costs (95,044) Deferred federal income tax (114,452) -------------- $ 212,553 ==============
(5) Investments ----------- The amortized cost and estimated fair value of securities available-for-sale were as follows as of December 31, 1996:
Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ------------ ---------- ----------- ----------- 1996: Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 275,696 4,795 (1,340) 279,151 Obligations of states and political subdivisions 6,242 450 (2) 6,690 Debt securities issued by foreign governments 100,656 2,141 (857) 101,940 Corporate securities 7,999,310 285,946 (33,686) 8,251,570 Mortgage-backed securities 3,588,974 91,438 (15,124) 3,665,288 ------------ ---------- ------------ ------------ Total fixed maturity securities 11,970,878 384,770 (51,009) 12,304,639 Equity securities 43,890 15,571 (330) 59,131 ------------ ---------- ------------ ------------ $12,014,768 400,341 (51,339) 12,363,770 ============ ========== ============ ============
F-12 50 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The amortized cost and estimated fair value of securities available-for-sale were as follows as of December 31, 1995:
Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ------------ ---------- ----------- --------------- 1995: Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 310,186 12,764 (1) 322,949 Obligations of states and political subdivisions 8,655 1,205 (1) 9,859 Debt securities issued by foreign governments 101,414 4,387 (66) 105,735 Corporate securities 7,888,440 473,681 (25,742) 8,336,379 Mortgage-backed securities 3,553,861 165,169 (8,388) 3,710,642 ------------ ---------- ----------- --------------- Total fixed maturity securities 11,862,556 657,206 (34,198) 12,485,564 Equity securities 23,617 6,382 (46) 29,953 ------------ ---------- ----------- --------------- $11,886,173 663,588 (34,244) 12,515,517 ============ ========== =========== ===============
The amortized cost and estimated fair value of fixed maturity securities available-for-sale as of December 31, 1996, 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 cost fair value --------------- -------------- Fixed maturity securities available-for-sale: Due in one year or less $ 440,235 444,214 Due after one year through five years 3,937,010 4,053,152 Due after five years through ten years 2,809,813 2,871,806 Due after ten years 1,194,846 1,270,179 --------------- -------------- 8,381,904 8,639,351 Mortgage-backed securities 3,588,974 3,665,288 --------------- -------------- $11,970,878 12,304,639 =============== ==============
The components of unrealized gains on securities available-for-sale, net, were as follows as of December 31:
1996 1995 --------------- -------------- Gross unrealized gains $349,002 629,344 Adjustment to deferred policy acquisition costs (81,939) (138,914) Deferred federal income tax (93,471) (171,649) --------------- -------------- 173,592 318,781 Unrealized gains on securities available-for-sale, net, of subsidiaries classified as discontinued operations (note 2) - 65,523 --------------- -------------- $173,592 384,304 =============== ==============
F-13 51 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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:
1996 1995 1994 --------------- ------------- -------------- Securities available-for-sale: Fixed maturity securities $(289,247) 876,332 (675,373) Equity securities 8,905 (26) (1,927) Fixed maturity securities held-to-maturity - 75,626 (398,183) --------------- ------------- -------------- $(280,342) 951,932 (1,075,483) =============== ============= ==============
Proceeds from the sale of securities available-for-sale during 1996, 1995 and 1994 were $299,558, $107,345 and $228,308, respectively. During 1996, gross gains of $6,606 ($4,838 and $3,045 in 1995 and 1994, respectively) and gross losses of $6,925 ($2,147 and $21,280 in 1995 and 1994, respectively) were realized on those sales. During 1995, the Company transferred fixed maturity securities classified as held-to-maturity with amortized cost of $25,429 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 $3,535. 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 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 $3,320,093, resulting in a gross unrealized gain of $155,940. Investments that were non-income producing for the twelve month period preceding December 31, 1996 amounted to $26,805 ($27,712 in 1995) and consisted of $248 ($6,982 in 1995) in fixed maturity securities, $20,633 ($14,740 in 1995) in real estate and $5,924 ($5,990 in 1995) in other long-term investments. Real estate is presented at cost less accumulated depreciation of $30,338 as of December 31, 1996 ($30,482 as of December 31, 1995) and valuation allowances of $15,219 as of December 31, 1996 ($25,819 as of December 31, 1995). The recorded investment of mortgage loans on real estate considered to be impaired (under SFAS NO. 114 - ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN as amended by SFAS NO. 118 - ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURE) as of December 31, 1996 was $51,765 ($44,409 as of December 31, 1995), which includes $41,663 ($23,975 as of December 31, 1995) of impaired mortgage loans on real estate for which the related valuation allowance was $8,485 ($5,276 as of December 31, 1995) and $10,102 ($20,434 as of December 31, 1995) of impaired mortgage loans on real estate for which there was no valuation allowance. During 1996, the average recorded investment in impaired mortgage loans on real estate was approximately $39,674 ($22,181 in 1995) and interest income recognized on those loans was $2,103 ($387 in 1995), which is equal to interest income recognized using a cash-basis method of income recognition. Activity in the valuation allowance account for mortgage loans on real estate is summarized for the years ended December 31:
1996 1995 ------------- -------------- Allowance, beginning of year $49,128 46,381 Additions charged to operations 4,497 7,433 Direct write-downs charged against the allowance (2,587) (4,686) ------------- ------------- Allowance, end of year $51,038 49,128 ============= ==============
F-14 52 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued An analysis of investment income by investment type follows for the years ended December 31:
1996 1995 1994 --------------- ------------- ------------ Gross investment income: Securities available-for-sale: Fixed maturity securities $ 917,135 685,787 647,927 Equity securities 1,291 1,330 509 Fixed maturity securities held-to-maturity - 201,808 185,938 Mortgage loans on real estate 432,815 395,478 372,734 Real estate 44,332 38,344 40,170 Short-term investments 4,155 10,576 6,141 Other 3,998 7,239 2,121 --------------- ------------- -------------- Total investment income 1,403,726 1,340,562 1,255,540 Less investment expenses 45,967 46,529 44,729 --------------- ------------- --------------- Net investment income $1,357,759 1,294,033 1,210,811 =============== ============= ==============
An analysis of realized gains (losses) on investments, net of valuation allowances, by investment type follows for the years ended December 31:
1996 1995 1994 ------------ ------------ ------------ Securities available-for-sale: Fixed maturity securities $(3,462) 4,213 (7,296) Equity securities 3,143 3,386 1,422 Mortgage loans on real estate (4,115) (7,091) (20,446) Real estate and other 4,108 (2,232) 9,793 ------------ ------------ ------------ $ (326) (1,724) (16,527) ============ ============ ============
Fixed maturity securities with an amortized cost of $6,161 and $5,592 as of December 31, 1996 and 1995, respectively, were on deposit with various regulatory agencies as required by law. (6) Future Policy Benefits and Claims --------------------------------- The liability for future policy benefits for investment contracts represents approximately 87% and 87% of the total liability for future policy benefits as of December 31, 1996 and 1995, respectively. The average interest rate credited on investment product policies was approximately 6.3%, 6.6% and 6.5% for the years ended December 31, 1996, 1995 and 1994, 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 as follows: --------------
Year of issue Interest rates ----------------- ---------------------------------------- 1996 6.6%, not graded 1984-1995 6.0% to 10.5%, not graded 1966-1983 6.0% to 8.1%, graded over 20 years to 4.0% to 6.6% 1965 and prior generally lower than post 1965 issues
F-15 53 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 $240,451 and $245,255 as of December 31, 1996 and 1995, 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 13. All other reinsurance agreements are not material to either premiums or reinsurance recoverables. (7) Federal Income Tax ------------------- The tax effects of temporary differences that give rise to significant components of the net deferred tax liability as of December 31, 1996 and 1995 are as follows:
1996 1995 ----------------- --------------- Deferred tax assets: Future policy benefits $175,571 149,192 Liabilities in Separate Accounts 188,426 129,120 Mortgage loans on real estate and real estate 23,366 25,165 Other policyholder funds 7,407 7,424 Other assets and other liabilities 53,757 41,847 ----------------- --------------- Total gross deferred tax assets 448,527 352,748 Less valuation allowances (7,000) (7,000) ----------------- --------------- Net deferred tax assets 441,527 345,748 ================= =============== Deferred tax liabilities: Deferred policy acquisition costs 399,345 299,579 Fixed maturity securities 133,210 227,345 Deferred tax on realized investment gains 37,597 40,634 Equity securities and other long-term investments 8,210 3,780 Other 25,377 21,037 ----------------- --------------- Total gross deferred tax liabilities 603,739 592,375 ----------------- --------------- $162,212 246,627 ================= ===============
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, 1996, 1995 and 1994. F-16 54 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Total federal income tax expense for the years ended December 31, 1996, 1995 and 1994 differs from the amount computed by applying the U.S. federal income tax rate to income before tax as follows:
1996 1995 1994 ---------------------- ---------------------- ---------------------- Amount % Amount % Amount % ---------------------- ---------------------- ---------------------- Computed (expected) tax expense $110,424 35.0 $100,650 35.0 $84,650 35.0 Tax exempt interest and dividends received deduction (212) (0.1) (18) (0.0) (130) (0.1) Other, net 677 0.3 (824) (0.3) (5,931) (2.5) ------------ -------- ------------- -------- ------------- -------- Total (effective rate of each year) $110,889 35.2 $ 99,808 34.7 $78,589 32.5 ============ ======== ============= ======== ============= ========
Total federal income tax paid was $115,839, $51,840 and $83,239 during the years ended December 31, 1996, 1995 and 1994, respectively. (8) Disclosures about Fair Value of Financial Instruments ----------------------------------------------------- SFAS NO. 107 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (SFAS 107) requires disclosure of fair value information about existing on and off-balance sheet financial instruments. SFAS 107 defines the fair value of a financial instrument 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 based on estimates 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. SFAS 107 excludes certain assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Although insurance contracts, other than policies such as annuities that are classified as investment contracts, are specifically exempted from SFAS 107 disclosures, 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: CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amount reported in the consolidated balance sheets for these instruments approximates their fair value. FIXED MATURITY AND EQUITY SECURITIES: 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. 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. F-17 55 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued MORTGAGE LOANS ON REAL ESTATE: 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 mortgages in default is the estimated fair value of the underlying collateral. INVESTMENT CONTRACTS: 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 analyses. Interest rates used are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued. 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. POLICYHOLDERS' DIVIDEND ACCUMULATIONS AND OTHER POLICYHOLDER FUNDS: The carrying amount reported in the consolidated balance sheets for these instruments approximates their 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 9. Carrying amount and estimated fair value of financial instruments subject to SFAS 107 and policy reserves on life insurance contracts were as follows as of December 31, 1996 and 1995:
1996 1995 ------------------------------ ------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------------------------ --------------- --------------- Assets ------ Investments: Securities available-for-sale: Fixed maturity securities $12,304,639 12,304,639 12,485,564 12,485,564 Equity securities 59,131 59,131 29,953 29,953 Mortgage loans on real estate, net 5,272,119 5,397,865 4,602,764 4,961,655 Policy loans 371,816 371,816 336,356 336,356 Short-term investments 4,789 4,789 32,792 32,792 Cash 43,784 43,784 9,455 9,455 Assets held in Separate Accounts 26,926,702 26,926,702 18,591,108 18,591,108 Liabilities ----------- Investment contracts 13,914,441 13,484,526 13,229,360 12,876,798 Policy reserves on life insurance contracts 2,971,337 2,775,991 2,836,323 2,733,486 Policyholders' dividend accumulations 361,401 361,401 348,027 348,027 Other policyholder funds 60,073 60,073 65,297 65,297 Liabilities related to Separate Accounts 26,926,702 26,164,213 18,591,108 18,052,362
(9) Additional Financial Instruments Disclosures -------------------------------------------- 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. F-18 56 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 $327,456 extending into 1997 were outstanding as of December 31, 1996. 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 21% (20% in 1995) in any geographic area and no more than 2% (2% in 1995) with any one borrower as of December 31, 1996. The Company had a significant reinsurance recoverable balance from one reinsurer as of December 31, 1996 and 1995. See note 6. The summary below depicts loans by remaining principal balance as of December 31, 1996 and 1995:
Apartment Office Warehouse Retail & other Total ------------ ------------- ------------- ------------- -------------- 1996: East North Central $139,518 119,069 549,064 215,038 1,022,689 East South Central 33,267 22,252 172,968 90,623 319,110 Mountain 17,972 43,027 113,292 73,390 247,681 Middle Atlantic 129,077 54,046 160,833 18,498 362,454 New England 33,348 43,581 161,960 - 238,889 Pacific 202,562 325,046 424,295 110,108 1,062,011 South Atlantic 103,889 134,492 482,934 385,185 1,106,500 West North Central 126,467 2,441 75,180 40,529 244,617 West South Central 104,877 120,314 197,090 304,256 726,537 ------------- ------------- ------------- -------------- ------------ $890,977 864,268 2,337,616 1,237,627 5,330,488 ============ ============= ============= ============= Less valuation allowances and unamortized discount 58,369 -------------- Total mortgage loans on real estate, net $5,272,119 ==============
1995: East North Central $138,965 101,925 514,995 175,213 931,098 East South Central 21,329 13,053 180,858 82,383 297,623 Mountain - 17,219 138,220 45,274 200,713 Middle Atlantic 116,187 64,813 158,252 10,793 350,045 New England 9,559 39,525 148,449 1 197,534 Pacific 183,206 233,186 374,915 105,419 896,726 South Atlantic 106,246 73,541 446,800 278,265 904,852 West North Central 133,899 14,205 78,065 36,651 262,820 West South Central 69,140 92,594 190,299 267,268 619,301 ------------ ------------ ------------- ------------- -------------- $778,531 650,061 2,230,853 1,001,267 4,660,712 ============ ============= ============= ============= Less valuation allowances and unamortized discount 57,948 -------------- Total mortgage loans on real estate, net $4,602,764 ==============
F-19 57 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) 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 thousand hours of service within a twelve-month period and who have met certain age requirements. 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. 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. 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, 1996, 1995 and 1994 were $7,381, $10,478 and $10,063, respectively. The Company's net accrued pension expense as of December 31, 1996 and 1995 was $1,075 and $1,392, respectively. The net periodic pension cost for the Nationwide Insurance Enterprise Retirement Plan as a whole for the year ended December 31, 1996 and for the Nationwide Insurance Companies and Affiliates Retirement Plan as a whole for the years ended December 31, 1995 and 1994 follows:
1996 1995 1994 --------------- --------------- --------------- Service cost (benefits earned during the period) $ 75,466 64,524 64,740 Interest cost on projected benefit obligation 105,511 95,283 73,951 Actual return on plan assets (210,583) (249,294) (21,495) Net amortization and deferral 101,795 143,353 (62,150) --------------- --------------- --------------- $ 72,189 53,866 55,046 =============== =============== ===============
Basis for measurements, net periodic pension cost:
1996 1995 1994 --------------- --------------- --------------- Weighted average discount rate 6.00% 7.50% 5.75% Rate of increase in future compensation levels 4.25% 6.25% 4.50% Expected long-term rate of return on plan assets 6.75% 8.75% 7.00%
F-20 58 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Information regarding the funded status of the Nationwide Insurance Enterprise Retirement Plan as a whole as of December 31, 1996 and 1995 follows:
1996 1995 --------------- --------------- Accumulated benefit obligation: Vested $1,338,554 1,236,730 Nonvested 11,149 26,503 --------------- --------------- $1,349,703 1,263,233 =============== =============== Net accrued pension expense: Projected benefit obligation for services rendered to date $1,847,828 1,780,616 Plan assets at fair value 1,947,933 1,738,004 --------------- --------------- Plan assets in excess of (less than) projected benefit obligation 100,105 (42,612) Unrecognized prior service cost 37,870 42,845 Unrecognized net gains (201,952) (63,130) Unrecognized net asset at transition 37,158 41,305 --------------- --------------- $ (26,819) (21,592) =============== ===============
Basis for measurements, funded status of plan:
1996 1995 --------------- --------------- Weighted average discount rate 6.50% 6.00% Rate of increase in future compensation levels 4.75% 4.25%
Assets of the Nationwide Insurance Enterprise Retirement Plan are invested in group annuity contracts of NLIC and ELICW. (11) 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; 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, 1996 and 1995 was $34,884 and $33,537, respectively, and the net periodic postretirement benefit cost (NPPBC) for 1996, 1995 and 1994 was $3,286, $3,132 and $4,284, respectively. F-21 59 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The amount of NPPBC for the plan as a whole for the years ended December 31, 1996, 1995 and 1994 was as follows:
1996 1995 1994 ----------- ----------- ----------- Service cost (benefits attributed to employee service during the year) $ 6,541 6,235 8,586 Interest cost on accumulated postretirement benefit obligation 13,679 14,151 14,011 Actual return on plan assets (4,348) (2,657) (1,622) Amortization of unrecognized transition obligation of affiliates 173 2,966 568 Net amortization and deferral 1,830 (1,619) 1,622 ----------- ----------- ----------- $17,875 19,076 23,165 =========== =========== ===========
Information regarding the funded status of the plan as a whole as of December 31, 1996 and 1995 follows:
1996 1995 --------------- --------------- Accrued postretirement benefit expense: Retirees $ 92,954 88,680 Fully eligible, active plan participants 23,749 28,793 Other active plan participants 83,986 90,375 --------------- --------------- Accumulated postretirement benefit obligation (APBO) 200,689 207,848 Plan assets at fair value 63,044 54,325 --------------- --------------- Plan assets less than accumulated postretirement benefit obligation (137,645) (153,523) Unrecognized transition obligation of affiliates 1,654 1,827 Unrecognized net gains (23,225) (1,038) --------------- --------------- $(159,216) (152,734) =============== ===============
Actuarial assumptions used for the measurement of the APBO as of December 31, 1996 and 1995 and the NPPBC for 1996, 1995 and 1994 were as follows:
1996 1996 1995 1995 1994 APBO NPPBC APBO NPPBC NPPBC ------------ ----------- ----------- ----------- ------------ Discount rate 7.25% 6.65% 6.75% 8.00% 7.00% Long-term rate of return on plan assets, net of tax - 4.80% - 8.00% N/A Assumed health care cost trend rate: Initial rate 11.00% 11.00% 11.00% 10.00% 12.00% Ultimate rate 6.00% 6.00% 6.00% 6.00% 6.00% Uniform declining period 12 Years 12 Years 12 Years 12 Years 12 Years
The health care cost trend rate assumption has an effect on the amounts reported. 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, 1996 by $701 and the NPPBC for the year ended December 31, 1996 by $83. (12) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings and Dividend Restrictions --------------------------------------------------------------------- Each insurance company'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 each of its insurance company subsidiaries exceed the minimum risk-based capital requirements. F-22 60 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The statutory capital shares and surplus of NLIC as of December 31, 1996, 1995 and 1994 was $1,000,647, $1,363,031 and $1,262,861, respectively. The statutory net income of NLIC for the years ended December 31, 1996, 1995 and 1994 was $73,218, $86,529 and $76,532, respectively. NLIC is limited in the amount of shareholder dividends it may pay without prior approval by the Department of Insurance of the State of Ohio (the Department). NLIC's dividend of the outstanding shares of common stock of certain companies which was declared on September 24, 1996 and the anticipated $850,000 dividend (as discussed in note 1) are deemed extraordinary under Ohio insurance laws. As a result of such dividends, any dividend paid by NLIC during the 12-month period immediately following the $850,000 dividend would also be an extraordinary dividend under Ohio insurance laws. Accordingly, no such dividend could be paid without prior regulatory 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 stockholder. The Company currently does not expect such regulatory requirements to impair its ability to pay operating expenses and stockholder dividends in the future. (13) Transactions With Affiliates ---------------------------- The Company leases office space from NMIC and certain of its subsidiaries. For the years ended December 31, 1996, 1995 and 1994, the Company made lease payments to NMIC and its subsidiaries of $9,065, $8,986 and $8,133, 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 $101,584, $107,112, and $100,601 in 1996, 1995 and 1994, 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 intercompany 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 $15,111 and $1,186 as of December 31, 1996 and 1995, 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 1996 and 1995 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-23 61 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Intercompany reinsurance contracts 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 NLIC'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 NLIC's agreements, the investment risk associated with changes in interest rates is borne by NMIC or ELICW, as the case may be. Risk of asset default is retained by NLIC, although a fee is paid by NMIC or ELICW, as the case may be, to NLIC for the NLIC'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. NLIC believes that the terms of the modified coinsurance agreements are consistent in all material respects with what NLIC could have obtained with unaffiliated parties. Amounts ceded to ELICW in 1996 are included in ELICW's results of operations for 1996 which, combined with the results of WCLIC and NCC, are summarized in note 2. Amounts ceded to ELICW in 1996 include premiums of $224,224, net investment income and other revenue of $14,833, and benefits, claims and other expenses of $246,641. Amounts ceded to NMIC in 1996 include premiums of $97,331, net investment income of $10,890, and benefits, claims and other expenses of $100,476. The Company and various affiliates entered into agreements with Nationwide Cash Management Company (NCMC) and California Cash Management Company (CCMC), both affiliates, under which NCMC and CCMC act as common agents in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC and CCMC were $4,789 and $9,654 as of December 31, 1996 and 1995, respectively, and are included in short-term investments on the accompanying consolidated balance sheets. On April, 5 1996, Nationwide Corp. contributed all of the outstanding shares, with shareholder equity value of $30, of NISC to NLIC. NLIC contributed an additional $500 to NISC on August 30, 1996. 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 $46,918. As discussed in note 2, WCLIC is accounted for as discontinued operations. Effective December 31, 1994, NLIC purchased all of the outstanding shares of common stock of ELICW from Wausau Service Corporation (WSC) for $155,000. NLIC transferred fixed maturity securities and cash with a fair value of $155,000 to WSC on December 28, 1994, which resulted in a realized loss of $19,239 on the disposition of the securities. The purchase price approximated both the historical cost basis and fair value of net assets of ELICW. ELICW has and will continue to share home office, other facilities, equipment and common management and administrative services with WSC. As discussed in note 2, ELICW is accounted for as discontinued operations. Certain annuity products are sold through three affiliated companies which are also subsidiaries of Nationwide Corp. Total commissions and fees paid to these affiliates for the years ended December 31, 1996, 1995 and 1994 were $76,922, $57,280 and $50,168, respectively. (14) Bank Lines of Credit -------------------- In August 1996, NLIC, along with NMIC, established a $600,000 revolving credit facility which provides for a $600,000 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. F-24 62 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (15) 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. (16) Segment Information ------------------- The Company has three primary 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 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, 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. During 1996, the Company changed its reporting segments to better reflect the way the businesses are managed. Prior periods have been restated to reflect these changes. The following table summarizes the revenues and income from continuing operations before federal income tax expense for the years ended December 31, 1996, 1995 and 1994 and assets as of December 31, 1996, 1995 and 1994, by business segment.
1996 1995 1994 ----------------- --------------- --------------- Revenues: Variable Annuities $ 284,638 189,071 132,687 Fixed Annuities 1,092,566 1,051,970 939,868 Life Insurance 435,657 409,135 383,150 Corporate and Other 179,977 148,475 143,794 ----------------- --------------- --------------- $ 1,992,838 1,798,651 1,599,499 ================= =============== =============== Income from continuing operations before federal income tax expense: Variable Annuities 90,244 50,837 24,574 Fixed Annuities 135,405 137,000 138,950 Life Insurance 67,242 67,590 53,046 Corporate and Other 22,606 32,145 25,288 ----------------- --------------- --------------- $ 315,497 287,572 241,858 ================= =============== =============== Assets: Variable Annuities 25,069,725 17,333,039 11,146,465 Fixed Annuities 13,994,715 13,250,359 11,668,973 Life Insurance 3,353,286 3,027,420 2,752,283 Corporate and Other 5,348,520 4,896,815 3,678,303 ----------------- --------------- --------------- $47,766,246 38,507,633 29,246,024 ================= =============== ===============
F-25 63 SCHEDULE I NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Summary of Investments - Other Than Investments in Related Parties As of December 31, 1996 ($000's omitted)
- --------------------------------------------------------------- --------------- -------------- ----------------- Column A Column B Column C Column D - --------------------------------------------------------------- --------------- -------------- ----------------- Amount at which shown in the consolidated Type of Investment Cost Market value balance sheet - --------------------------------------------------------------- --------------- -------------- ----------------- Fixed maturity securities available-for-sale: Bonds: U.S. Government and government agencies and authorities $ 3,757,887 3,834,762 3,834,762 States, municipalities and political subdivisions 6,242 6,690 6,690 Foreign governments 100,656 101,940 101,940 Public utilities 1,798,736 1,843,938 1,843,938 All other corporate 6,307,357 6,517,309 6,517,309 --------------- -------------- ----------------- Total fixed maturity securities available-for-sale 11,970,878 12,304,639 12,304,639 --------------- -------------- ----------------- Equity securities available-for-sale: Common stocks: Industrial, miscellaneous and all other 43,501 50,405 50,405 Non-redeemable preferred stock 389 8,726 8,726 --------------- -------------- ----------------- Total equity securities available-for-sale 43,890 59,131 59,131 --------------- -------------- ----------------- Mortgage loans on real estate, net 5,327,317 5,272,119 (1) Real estate, net: Investment properties 253,383 217,611 (1) Acquired in satisfaction of debt 57,933 48,148 (1) Policy loans 371,816 371,816 Other long-term investments 27,370 28,668 (2) Short-term investments 4,789 4,789 --------------- ---------------- Total investments $18,057,376 18,306,921 =============== ================ - ---------- (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 Management's Discussion and Analysis of Financial Condition and Results of Operations and note 5 to the consolidated financial statements. (2) Difference from Column B is primarily due to operating gains of investments in limited partnerships.
See accompanying independent auditors' report. F-26 64
SCHEDULE III NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Supplemental Insurance Information As of December 31, 1996, 1995 and 1994 and for each of the years then ended ($000's omitted) - ----------------------------------- -------------- ------------------ ----------------- ------------------ --------------- Column A Column B Column C Column D Column E Column F - ----------------------------------- -------------- ------------------ ----------------- ----------------- --------------- Deferred Future policy Other policy policy benefits, losses, claims and acquisition claims and Unearned premiums benefits payable Premium Segment costs loss expenses (1) (2) revenue - ----------------------------------- -------------- ------------------ ----------------- ---------------- -------------- 1996: Variable Annuities $ 791,611 - - - Fixed Annuities 242,421 14,952,877 687 24,030 Life Insurance 414,417 1,995,802 395,739 174,612 Corporate and Other (81,940) 230,381 25,048 - -------------- ------------------ ---------------- -------------- Total $1,366,509 17,179,060 421,474 198,642 ============== ================== ================ ============== 1995: Variable Annuities 571,283 - - - Fixed Annuities 221,111 14,221,622 455 32,774 Life Insurance 366,876 1,898,641 383,983 166,332 Corporate and Other (138,914) 238,351 28,886 - -------------- ------------------ ---------------- -------------- Total $1,020,356 16,358,614 413,324 199,106 ============== ================== ================ ============== 1994: Variable Annuities 395,397 - - - Fixed Annuities 198,639 12,633,253 240 20,134 Life Insurance 327,079 1,806,762 371,984 156,524 Corporate and Other 74,445 233,569 26,927 - -------------- ------------------ ---------------- -------------- Total $ 995,560 14,673,584 399,151 176,658 ============== ================== ================ ============== - ----------------------------------- -------------- ------------------- ----------------- ---------------- -------------- Column A Column G Column H Column I Column J Column K - ----------------------------------- -------------- ------------------- ----------------- ---------------- -------------- Net Amortization Other investment Benefits, claims, of deferred operating income losses and policy expenses Premiums Segment (3) settlement expenses acquisition costs (3) written - ----------------------------------- -------------- ------------------- ----------------- ----------------- -------------- 1996: Variable Annuities $ (21,449) 4,624 57,412 132,357 Fixed Annuities 1,050,557 838,533 38,635 79,737 Life Insurance 174,002 211,386 37,347 78,965 Corporate and Other 154,649 106,037 - 51,335 -------------- ------------------- ----------------- ----------------- Total $1,357,759 1,160,580 133,394 342,394 ============== =================== ================= ================= 1995: Variable Annuities (17,640) 2,881 26,264 109,089 Fixed Annuities 1,002,718 804,980 29,499 80,260 Life Insurance 171,255 201,986 31,021 68,832 Corporate and Other 137,700 105,646 (4,089) 14,773 -------------- ------------------- ----------------- ----------------- Total $1,294,033 1,115,493 82,695 272,954 ============== =================== ================= ================= 1994: Variable Annuities (13,415) 2,277 22,135 83,701 Fixed Annuities 903,572 702,082 29,849 69,975 Life Insurance 166,329 191,006 29,495 69,861 Corporate and Other 154,325 97,302 4,089 17,115 -------------- ------------------- ----------------- ----------------- Total $1,210,811 992,667 85,568 240,652 ============== =================== ================= ================= - ---------- (1) Unearned premiums are included in Column C amounts. (2) Column E agrees to the sum of the Balance Sheet captions, Policyholders' dividend accumulations and Other policyholder funds. (3) Allocations of net investment income and certain general 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-27 65 SCHEDULE IV NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Reinsurance As of December 31, 1996, 1995 and 1994 and for each of the years then ended ($000's omitted)
- ------------------------------- ----------------- ----------------- ---------------- ---------------- --------------- Column A Column B Column C Column D Column E Column F - ------------------------------- ----------------- ----------------- ---------------- ---------------- --------------- Percentage Ceded to Assumed from of amount Gross amount other companies other companies Net amount assumed to net ----------------- ----------------- ---------------- ---------------- --------------- 1996: Life insurance in force $47,071,264 6,633,567 288,593 40,726,290 0.7% ================= ================= ================ ================ =============== Premiums: Life insurance 225,615 29,282 2,309 198,642 1.2% Accident and health insurance 291,871 305,789 13,918 - N/A ----------------- ----------------- ---------------- ---------------- --------------- Total $ 517,486 335,071 16,227 198,642 8.2% ================= ================= ================ ================ =============== 1995: Life Insurance in force $41,087,025 8,935,743 391,174 32,542,456 1.2% ================= ================= ================ ================ =============== Premiums: Life insurance 221,257 24,360 2,209 199,106 1.1% Accident and health insurance 298,058 313,036 14,978 - N/A ----------------- ----------------- ---------------- ---------------- --------------- Total $ 519,315 337,396 17,187 199,106 8.6% ================= ================= ================ ================ =============== 1994: Life Insurance in force $35,926,633 7,550,623 829,742 29,205,752 2.8% ================= ================= ================ ================ =============== Premiums: Life insurance 198,705 24,912 2,865 176,658 1.6% Accident and health insurance 303,435 321,696 18,261 - N/A ----------------- ----------------- ---------------- ---------------- --------------- Total $ 502,140 346,608 21,126 176,658 12.0% ================= ================= ================ ================ =============== - ---------- Note: The life insurance caption represents principally premiums from traditional life insurance and life-contingent immediate annuities and excludes deposits on invesment products and universal life insurance products.
See accompanying independent auditors' report. F-28 66
SCHEDULE V NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1996, 1995 and 1994 ($000's omitted) - ------------------------------------------------- ------------ ----------------------------- ------------ ------------- Column A Column B Column C Column D Column E - ------------------------------------------------- ------------ ----------------------------- ------------ ------------- Balance at Charged to Balance at beginning of costs and Charged to Deductions end of Description period expenses other accounts (1) period - ------------------------------------------------- ------------ ------------ -------------- ------------ ------------- 1996: Valuation allowances - mortgage loans on real estate $49,128 4,497 - 2,587 51,038 Valuation allowances - real estate 25,819 (10,600) - - 15,219 ------------ ------------ -------------- ------------ ------------- Total $74,947 (6,103) - 2,587 66,257 ============ ============ ============== ============ ============= 1995: Valuation allowances - fixed maturity securities - 8,908 - 8,908 - Valuation allowances - mortgage loans on real estate 46,381 7,433 - 4,686 49,128 Valuation allowances - real estate 27,330 (1,511) - - 25,819 ------------ ------------ -------------- ------------ ------------- Total $73,711 14,830 - 13,594 74,947 ============ ============ ============== ============ ============= 1994: Valuation allowances - fixed maturity securities 4,800 (4,800) - - - Valuation allowances - mortgage loans on real estate 42,150 20,445 - 16,214 46,381 Valuation allowances - real estate 31,357 (4,027) - - 27,330 ------------ ------------ -------------- ------------ ------------- Total $78,307 11,618 - 16,214 73,711 ============ ============ ============== ============ ============= - ---------- (1) Amounts represent direct write-downs charged against the valuation allowance.
See accompanying independent auditors' report. F-29 67
EXHIBIT INDEX Exhibit Page - ------------ -------- 3 Form of Amended and Restated Code of Regulations of Nationwide Life Insurance Company E-2 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 (Incorporated by reference to Exhibit 10.2 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.2 Form of First Amendment to Cost Sharing Agreement among parties named therein (Incorporated by reference to Exhibit 10.3 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.3 Modified Coinsurance Agreement between Nationwide Life Insurance Company and Nationwide Mutual Insurance Company (Incorporated by reference to Exhibit 10.4 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.4 Modified Coinsurance Agreement between Employers Life Insurance Company of Wausau and Nationwide Life Insurance Company (Incorporated by reference to Exhibit 10.5 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 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 (Incorporated by reference to Exhibit 10.6 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.6 Form of Lease Agreement between Nationwide Life Insurance Company and Nationwide Mutual Insurance Company (Incorporated by reference to Exhibit 10.7 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.7 General Description of Nationwide Insurance Enterprise Executive Incentive Plan (Incorporated by reference to Exhibit 10.9 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.8 General Description of Nationwide Insurance Enterprise Management Incentive Plan (Incorporated by reference to Exhibit 10.10 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.9 Nationwide Insurance Enterprise Excess Benefit Plan effective as of December 31, 1996 (Incorporated by reference to Exhibit 10.11 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.10 Nationwide Insurance Enterprise Supplemental Retirement Plan effective as of December 31, 1996 (Incorporated by reference to Exhibit 10.12 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.11 Nationwide Salaried Employees Severance Pay Plan (Incorporated by reference to Exhibit 10.13 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.12 Nationwide Insurance Enterprise Supplemental Defined Contribution Plan effective as of January 1, 1996 (Incorporated by reference to Exhibit 10.14 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.13 General Description of Nationwide Insurance Enterprise Individual Deferred Compensation Program (Incorporated by reference to Exhibit 10.15 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.14 General Description of Nationwide Mutual Insurance Company Directors Deferred Compensation Program (Incorporated by reference to Exhibit 10.16 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 10.15 Deferred Compensation Agreement, dated as of September 3, 1979, between Nationwide Mutual Insurance Company and D. Richard McFerson (Incorporated by reference to Exhibit 10.11 to Form S-1, Registration Number 333-18527, filed March 5, 1997) 21 Subsidiaries of the Registrant E-10 27.1 Financial Data Schedule - 1996 27.2 Restated Financial Data Schedule - 1995 27.3 Restated Financial Data Schedule - 1994 - ---------- 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.
E-1 EX-3 2 EXHIBIT 3 1 Exhibit 3 NATIONWIDE LIFE INSURANCE COMPANY AMENDED AND RESTATED CODE OF REGULATIONS For the Government of the Shareholders and Board of Directors ARTICLE I Meetings of Shareholders Section 1. MEETINGS IN OR OUT OF STATE. Any meeting of shareholders may be held in or outside of the State of Ohio. Section 2. REGULAR ANNUAL MEETING. A regular annual meeting of the shareholders shall be held on such date and at such place and time as is fixed by resolution of the Board of Directors. If for any reason the regular annual meeting is not held as provided for in this section, then the business to be transacted thereat may be transacted at any special meeting of shareholders called as provided for in Section 3 of this Article. Section 3. SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings of the shareholders may be called by the Chairman of the Board, Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, President, a majority of the members of the Board of Directors acting with or without a meeting, or upon the written request of persons who hold 25% of all shares outstanding and entitled to vote thereat. Upon request in writing by registered mail or delivered in person to the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, the President, the Secretary, or by any person or persons entitled to call a meeting of shareholders, it shall be the duty of the officer receiving such request forthwith to give notice to shareholders as provided in Section 4 of this Article, and if such notice shall not be so given, then the person or persons making such request may give such notice to shareholders. Such notice for special meetings shall specify the time, place and purpose or purposes thereof and no business other than that included in the statements of such notice shall be acted upon at such meeting except with the consent of all of the shareholders entitled to attend and vote at the meeting in question. Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. A written or printed notice of each regular or special meeting of the shareholders, or where the Board of Directors has elected to change the time and place of the annual meeting of shareholders as provided in Section 2 of this Article, stating the time, place and purposes thereof, shall be delivered or mailed to each shareholder of record entitled to vote at such meeting or entitled to notice. If mailed, it shall be addressed to such shareholder's last known address as shown by the books of the company. Such notices shall be so delivered or mailed not more than forty-five (45) nor less than ten (10) days before the date fixed for the meeting, and the shareholders entitled to such notice shall be those of record as of the day next preceding the day on which notice is given or if a record date therefor is fixed as provided by law or these Regulations, of record as of such date so fixed. In the event of the transfer of shares after notice has been given and prior to the holding of the meeting, it shall not be necessary to serve notice upon the transferee. If any meeting is adjourned to another time or place, no further notice as to such adjourned meeting need be given other than by announcement at the meeting at which such adjournment is taken. Section 5. WAIVER OF NOTICE. Any shareholder or shareholders entitled to notice of any shareholders' meeting may, in person or by proxy, either before, at or after such meeting, waive notice in writing, which writing shall be filed with or entered upon the records of the meeting, of any or all of the provisions of law, the Articles of Incorporation or Regulations as to notice of such meeting, including the time, place and purpose thereof or as to any irregularities in such notice or arising in connection therewith or with the giving thereof and shall thereby validate the proceedings at such meeting as fully as though all of the requirements waived had been duly met in their respective cases. The attendance of any shareholder at any such meeting, in person or by proxy, without protesting the lack of a proper notice of such meeting shall be deemed to be a waiver of notice of such meeting. E-2 2 Section 6. QUORUM. A majority of the issued and outstanding shares, the holders of which are entitled to attend and vote at a meeting of shareholders, shall constitute a quorum for the transaction of business at that meeting, but if at any regular or special meeting of the shareholders, or at any adjournment thereof, such a quorum is not present, then a majority vote of the shares present in person or by proxy shall constitute a quorum for the purpose of adjourning a meeting until a quorum competent to act on any matter or proposal is present. Section 7. VOTING. (a) WHO ENTITLED TO VOTE. Only shareholders of record of common shares on the books of the company shall be entitled to vote at any regular or special meeting of shareholders. Each such shareholder so entitled to vote shall have the right to cast one vote in person or by proxy for each share standing opposite such shareholder's name on the books of the company. (b) VOTING BY CORPORATION. Subject to the provisions of the Articles of Incorporation and Section 7(a) of this Regulation, the Chairman, and Chief Executive Officer-Nationwide Insurance Enterprise, President, Chairman of the Board of Directors, Vice President, Secretary or Treasurer of any corporation holding shares of this company and entitled to vote at any meeting shall conclusively be deemed to have authority to vote such shares and to execute proxies and written waivers or consents in relation thereto, whether such shares are held in a fiduciary capacity or otherwise, unless before a vote is taken or a consent or waiver is acted upon, a certified copy of a Regulation, Bylaw or resolution, of the Board of Directors or Executive Committee of the corporation holding such shares is delivered to the Secretary of the company, showing that such authority does not exist or is vested in some other officer or person. A person executing any such writing or so acting as one of such officers of such corporation shall, for the purposes of this paragraph be prima facie deemed to be duly elected, qualified and acting as such officer and to be fully authorized. (c) VOTING BY PROXIES. A shareholder may, through a written proxy, authorize another person (who need not be a shareholder) to vote in the shareholder's stead and to represent the shareholder at one or more shareholders' meetings or any adjournment thereof, whether regular or special meetings, but such instrument must be filed with the Secretary of the company or in the Secretary's office before the convening of the meeting and before the person authorized thereby may exercise the rights thereunder. A vote in accordance with the terms of a duly filed proxy shall be valid notwithstanding the previous death of the principal or the revocation of the appointment or the transfer of the share on which the vote was given, unless notice in writing of such death, revocation or transfer shall have been received by the Secretary of the company or in the Secretary's office or such revocation is made in open meeting before the vote is taken or the authority granted is otherwise exercised; provided, however, that no proxy hereafter made shall be valid after the expiration of eleven (11) months after date of its execution unless the shareholder executing it shall have specified therein the length of time it is to continue in force. A telegram, cablegram, wireless message or photograph, photostatic or equivalent reproduction of a writing appointing a proxy or proxies shall be a sufficient writing. Unless the writing appointing a proxy or proxies otherwise provides: (l) each proxy shall have the power of substitution and when three or more persons are appointed a majority of them or their respective substitutes may appoint a substitute or substitutes to act for all; (2) if more than one proxy is appointed, then (a) with respect to voting or giving consents at a shareholders' meeting, a majority of such proxies as attend the meeting, or if only one attends then that one may exercise all the voting and consenting authority thereat; and if an even number attend and a majority do not agree on any particular issue; each proxy so attending shall be entitled to exercise such authority with respect to an equal number of shares; (b) with respect to exercising any other authority, a majority may act for all; (3) the presence of a shareholder at a meeting shall not operate to revoke a writing appointing a proxy. A shareholder, without affecting any vote previously taken, may revoke such writing not otherwise revoked by giving notice to the company in writing or in open meeting. Section 8. INSPECTORS OF ELECTION. The Chairman of the Board, the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or the person acting as the chairman of any meeting of shareholders may, or upon the request of any shareholder or proxy entitled to vote at a meeting of shareholders shall appoint three (3) inspectors who need not be shareholders. The inspectors shall determine the number of shares outstanding, the voting rights with respect to each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; receive votes, ballots, consents, waivers, or releases; hear and determine all challenges and questions arising in connection with the vote; count and tabulate all votes, consents, waivers, and releases; determine and announce the result; and do such acts as are proper to conduct the election or vote with fairness to all shareholders. The decision, act or certificate of a majority E-3 3 of the inspectors shall be effective in all respects as the decision, act or certificate of all three (3). If requested to do so, the inspectors shall make a report in writing of any challenge, question or matter determined by them, and make and execute a certificate of any facts found by them. The certificate of the inspectors shall be prima facie evidence of the facts therein stated and of the vote as certified by them. Section 9. ORDER OF BUSINESS. At all shareholders' meetings, the order of business shall be as follows, unless changed by a majority of the shares represented at that meeting: 1. Reading of minutes of preceding meeting; 2. Reading and consideration of reports and statements--report of the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, President, any other officer, and any committee; 3. Election of directors (at annual or special meeting called for that purpose); 4. Old or unfinished business; 5. New business; 6. Adjournment. ARTICLE II Fiscal Year Section 1. Fiscal Year. The fiscal year of the company shall begin on the first day of January and end on the last day of December of each year, but the Board of Directors shall have the power to change such fiscal year at any time it deems such change advisable. ARTICLE III Directors Section 1. POWERS OF DIRECTORS. The corporate powers, business and property of the company shall be exercised, conducted and controlled by, or under the direction of, the Board of Directors except as otherwise required by statute, the Articles of Incorporation or these Regulations with regard to action required to be taken or approved by the shareholders. Section 2. NUMBER, QUALIFICATION AND ELIGIBILITY. The number of directors shall be fifteen (15). Section 3. CLASSIFICATION AND ELECTION. The directors shall be divided into three classes and each class shall consist as near as may be of one-third of the number of directors. At each regular annual meeting of shareholders, the successors of the class of directors whose term shall expire in that year shall be elected by ballot for a term of three years and until their respective successors are elected and qualified. Directors shall be elected by receiving the highest number of votes cast on the ballot. No requirements shall exist as to notice of such annual election other than those contained in this Code of Regulations. If directors are not elected at the regular annual meeting of the shareholders for any cause, they may be elected at any other meeting duly called for that purpose. Section 4. VACANCIES. Whenever a vacancy occurs in the Board of Directors of the company, the vacancy may be filled for the unexpired term by the vote of a majority of the Board of Directors present if those present constitute a quorum; provided, however, if the Board is reduced to less than a majority by reason of vacancies, however caused, the remaining directors, by a majority vote or the remaining director may fill such vacancies. The Board of Directors may declare the office of a director vacant if the director shall be declared of unsound mind by an order of court or be adjudicated a bankrupt or if the director does not qualify within sixty (60) days of election by accepting in writing election to such office or by acting at a meeting of the Board of Directors and the Board of Directors may thereupon fill such declared vacancy. Section 5. COMPENSATION. The members of the Board of Directors, other than salaried officers, shall receive such compensation as shall be fixed by the Board of Directors from time to time for the performance of services for the company, together with reimbursement for their expenses incurred in the performance of such services E-4 4 Section 6. ACTION BY UNANIMOUS WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the Articles of Incorporation or Code of Regulations, any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board Shall individually or collectively consent in writing to such action; provided action by written consent or consents shall be filed with minutes of the proceedings of the Board. Any action without a meeting of the Board shall be limited to those situations where time is of the essence and not in lieu of a regularly scheduled board meeting. ARTICLE IV Executive or Other Committees of the Board Section 1. EXECUTIVE OR OTHER COMMITTEES OF THE BOARD. The Board of Directors by vote of a majority of the Board may, at its discretion, appoint or elect an Executive Committee of not less than three (3) members from its own number, who shall have and may exercise the powers of the Board of Directors in the interim between meetings of the Board of Directors, except filling vacancies in the Board of Directors or in any committee of the Board of Directors. The Executive Committee shall, at all times, be subject to any instructions issued by the Board of Directors. Such Executive Committee shall, from time to time, make a report of its acts and transactions to the Board of Directors. Such other committees of the Board may be appointed or elected as may be provided for by resolution of the Board of Directors. The act of a majority of the Executive Committee or any other committee of the Board shall be effective in all respects as the act of such committee at a meeting, or any such committee may act by a writing signed by all of its members without a meeting. ARTICLE V Officers Section 1. OFFICERS. The officers shall be a Chairman of the Board of Directors, Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, President, one or more Vice Presidents, General Counsel, Secretary, Treasurer and such other vice presidents, assistant secretaries, assistant treasurers and other officers as the Board of Directors may appoint or elect or provide by resolution from time to time. The Chairman of the Board, Chairman and Chief Executive Officer-Nationwide Insurance Enterprise and President must be members of the Board of Directors. Any two or more of the offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law or by the Articles of Incorporation or Code of Regulations to be executed, acknowledged or verified by two or more officers. All of the above officers shall be chosen by the Board of Directors by ballot and by the vote of the majority of the Board of Directors at the regular annual meeting of the Board. The officers shall hold office until the date of the next regular annual meeting of the Board of Directors and until their respective successors are elected and qualified; provided, however, that any officer may be removed from office with or without cause at any time by a vote of at least two-thirds of the entire Board of Directors. If, for any cause, there is no regular annual meeting of the Board of Directors, or if such meeting is held and no one is elected or re-elected to one or more of the offices, the omitted election may be held in the manner above described at any other meeting of the Board of Directors if such meeting is duly called as a special meeting for that purpose or if each member of the Board of Directors shall be present or shall waive in writing the call and notice thereof. ARTICLE VI Duties of Officers Section 1. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors shall preside at all meetings of the shareholders and the Board of Directors, shall sign the record of such meetings at which the Chairman shall preside and shall have such other powers and duties as may be prescribed by the Board of Directors. In the absence of the Chairman of the Board and the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, another director shall be selected by those directors present to serve as temporary Chairman, and shall be authorized to sign the records of meetings at which such director presides. E-5 5 Section 2. CHAIRMAN AND CHIEF EXECUTIVE OFFICER-NATIONWIDE INSURANCE ENTERPRISE. The Chairman and Chief Executive Officer-Nationwide Insurance Enterprise shall be the Chief Executive Officer and shall exercise general administrative leadership and direction of the company in conformity with actions and controls established and maintained by the Board of Directors. The Chairman and Chief Executive Officer-Nationwide Insurance Enterprise shall have the power and authority to execute on behalf of the company any and all documents, contracts, instruments, or other papers to which the signature of the company is to be attached; provided, however, a facsimile signature may be printed, engraved, or stamped on any approved document, contract, instrument, or other papers of the company. In the absence of the Chairman of the Board, or at the request thereof, the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise shall preside at meetings of the shareholders and the Board of Directors, sign the record of such meetings at which the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise shall preside and shall have such other powers and duties as may be prescribed by the Board of Directors. Section 3. PRESIDENT. The President shall be the Chief Operating Officer of the company and shall, in compliance with the laws of the State of Ohio, Articles of Incorporation and this Code of Regulations, and in concurrence with the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise and actions of the Board of Directors, direct the activities of its officers. Except as provided for by resolution of the Board of Directors or by memorandum from the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, the President shall have the power and authority to execute on behalf of the company those documents, contracts, instruments, or other papers to which the signature of the company is to be attached; provided, however, a facsimile signature may be printed, engraved or stamped on any approved document, contract, instrument, or other papers of this company. The President shall exercise the discretion of and perform generally all of the duties incident to the Office of President and such other and further duties as may be required by the Board of Directors and the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise. Section 4. VICE PRESIDENTS. The Vice Presidents, who may be designated Executive Vice President, Senior Vice President, Vice President, or Associate Vice President, shall have such powers and perform such duties as may be assigned to them by the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or President and approved by the Board of Directors. The officer designated by the President and approved by the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise shall act for the President in the absence or disability of the President. Section 5. GENERAL COUNSEL. The General Counsel shall furnish legal counsel on corporate matters as required; render legal opinions to the Board of Directors, the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, President and other officers and employees as requested; interpret all laws and regulations relating to the business of the company; initiate recommendations with respect to legislation affecting the business of the company; and shall perform such other and further duties as may be required by the Board of Directors, Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or President. Section 6. SECRETARY. The Secretary shall issue notices and maintain the official records of all meetings of the shareholders and the Board of Directors and such records shall be attested by the Secretary or by such other person as shall have acted as secretary of such meeting in the case of the Secretary's absence for any reason; shall have charge of the seal, share or other security books of the company and shall issue and attest all certificates of shares or other securities of the company; provided, however, a facsimile signature may be printed, engraved or stamped on certificates for shares, bonds or other securities of the company when such certificates are countersigned by an incorporated transfer agent or registrar. In case a transfer agent or registrar of the shares or other securities of the company shall be duly appointed by it, the Secretary may place in charge of such transfer agent or registrar the seal and share or other security books of the company and such transfer agent or registrar may perform in the Secretary's stead all duties in connection with the shares of the company. The Secretary shall have power and authority to sign or attest on behalf of the company all approved instruments, papers and documents where required in carrying on the business of the company; provided, however, a facsimile signature may be printed, engraved or stamped thereon; and shall perform such other and further duties as may from time to time be assigned by the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or the President and approved by the Board of Directors. E-6 6 Section 7. TREASURER. The Treasurer shall maintain custody of all funds, securities and properties of the company; direct the receipt and deposit of all funds and securities and payment of all authorized disbursements; direct the administration of all accounting activities of the company; furnish financial reports of the company, as required; shall have the power and authority to sign or attest all approved instruments, papers and documents where required in carrying on the business of the company; and shall perform such other and further duties as may from time to time be assigned by the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or the President and approved by the Board of Directors. Section 8. ASSISTANT SECRETARY. The Assistant Secretary shall at all times act as an assistant to the Secretary and have such powers and perform such duties as shall be assigned by the Secretary and approved by the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or the President. In case both the Secretary and the Assistant Secretary are at the same time absent or unable to perform their duties the Board of Directors may appoint a secretary pro tempore with the power and duty to act as Secretary during such absence or disability of both the Secretary and Assistant Secretary. Section 9. ASSISTANT TREASURER. The Assistant Treasurer shall at all times act as an assistant to the Treasurer and shall have powers and perform such duties as shall be assigned by the Treasurer and approved by the President. Section 10. EXECUTION OF INSTRUMENTS. Any vice president and any assistant secretary or assistant treasurer shall have the power and authority to sign all approved documents, instruments, contracts or other papers in connection with the operation of the business of the company in addition to the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise, President, Treasurer and Secretary; provided, however, the signature of any of them may be printed, engraved or stamped on any approved document, contract, instrument or other papers of the company. Section 11. VACANCIES. Whenever a vacancy occurs in any office of the company for any cause, the vacancy may be filled for the unexpired term by the vote of a majority of the Board of Directors present, if those present constitute a quorum thereof. Section 12. BOND OF OFFICERS AND EMPLOYEES. Any officer or employee of the company handling funds or negotiable instruments or any other property of the company shall furnish such bond or shall be covered by a blanket bond in such amounts and with such surety and sureties as may be required by the Board of Directors. The premium of any such bond shall be paid by the company. ARTICLE VII Indemnification Section 1. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. The company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director, officer or employee of the company, or is or was serving at the request of the company as a director, trustee, officer, member, or employee of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding, to the extent and under the circumstances permitted by the General Corporation Law of the State of Ohio; provided, however, that the company shall indemnify any such person seeking indemnify in connection with an action, suit or proceeding (or part thereof) initiated by such person only if such action, suit or proceeding (or part thereof) initiated by such person was authorized by the Board of Directors of the company. Such indemnification (unless ordered by a court) shall be made as authorized in a specific case upon a determination that indemnification of the director, trustee, officer or employee is proper in the circumstances because such person has met the applicable standards of conduct set forth in the General Corporation Law of the State of Ohio. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not, and are not, parties to or threatened with any such action, suit or proceeding, or (2) if such a quorum is not obtainable, or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel meeting the requirements of independence prescribed by the General Corporation Law of Ohio, or (3) by the shareholders, or (4) by the Court of Common Pleas or the court in which such action, suit or proceeding was brought. E-7 7 Section 2. OTHER RIGHTS. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation, these Regulations, any agreement, vote of shareholders or disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director, trustee, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 3. ADVANCE PAYMENT OF EXPENSES. The company shall pay to any director, and may pay to any other person entitled to indemnification pursuant to Section 1 of this Article IX, expenses, including attorneys fees, incurred in defending any action, suit or proceeding referred to in Section 1 of this Article IX, in advance of the final disposition of such action, suit or proceeding; provided, however, that the payment of such expenses in advance of the final disposition of such action, suit or proceeding shall be made only upon delivery to the company of any legally required undertaking by or on behalf of such director or other person. Section 4. CONTRACTUAL RIGHTS; APPLICABILITY. The right to be indemnified or to the reimbursement or advancement of expenses pursuant hereto (i) is a contract right based upon good and valuable consideration, pursuant to which the person entitled hereto may bring suit as if the provision hereof were set forth in a separate written contract between the company and such person, (ii) is intended to be retroactive and shall be available with respect to events occurring prior to the adoption hereof, and (iii) shall continue to exist after the rescission or restrictive modification hereof with respect to events occurring prior thereto. Section 5. REQUESTED SERVICE. Any person serving, in any capacity, (i) another corporation of which a majority of the shares entitled to vote in the election of its directors is held by the by the company, or (ii) any employee benefit plan of the company or of any corporation referred to in clause (i), shall be deemed to be doing so at the request of the company. Section 6. INSURANCE. The company may purchase and maintain insurance on behalf of any person who is or was a director, officer, member, or employee of the company, or is or was serving at the request of the company as a director, trustee, officer or employee of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise against any liability asserted against such person and incurred in any such capacity, or arising out of the status as such, whether or not the company would have the power to indemnify such person against such liability under this Article VII. ARTICLE VIII Shares Section 1. CERTIFICATES OF SHARES. Each shareholder of the company whose shares are paid in full shall be entitled to a certificate or certificates showing the number of shares registered in such shareholder's name on the books of the company. Such certificates shall be issued in numerical order and signed by the Chairman and Chief Executive Officer-Nationwide Insurance Enterprise or the President and the Secretary, or such other officers or persons as may be authorized by the Board of Directors. The signature of any of said officers may be facsimile, engraved, stamped or printed when such certificates are countersigned by an incorporated transfer agent or registrar. A full record of each certificate as issued shall be entered on the stock record books of the company. No new certificate shall be issued until the former certificate for the same number of shares shall have been surrendered and canceled, except as provided for in Section 3 below of this Article of these Regulations. Section 2. TRANSFER OF SHARES. The shares of the company may be transferred on the books of the company by the holder thereof in person or by a duly authorized attorney upon the surrender of the certificate therefor properly endorsed and assigned. Section 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. If any share certificate in this company becomes worn, defaced or mutilated, the Secretary, upon presentation or surrender thereof, may order the same canceled, and may issue a new certificate in lieu thereof. If any share certificate be lost, stolen or destroyed, the Secretary may issue a new certificate in lieu thereof to the person entitled to such lost, stolen or destroyed certificate upon receiving a bond of indemnity containing such terms as the Board of Directors may require to protect the company or any person, firm or other corporation from loss, cost or damage resulting from the issue of such new certificate. E-8 8 Section 4. CLOSING OF TRANSFER BOOKS. The Board of Directors shall have the power to close the share transfer books of the company for a period not to exceed forty-five (45) days preceding the date of any meeting of shareholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital shares shall go into effect; provided, however, that in lieu of closing the share transfer books, the Board of Directors may fix in advance a date not exceeding forty-five (45) days preceding the date of any meeting of shareholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights or to exercise the rights in respect of any such change, conversion or exchange of shares, and in such cases only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be notwithstanding any transfer of any share on the books of the company after any such record date fixed as aforesaid. The company shall be entitled to treat the holder of record of any share or shares of the company as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to, or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Ohio. Section 5. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint, or revoke the appointment of, transfer agents and registrars and may require all certificates for shares to bear the signatures of such transfer agents and registrars, or any of them. The Board of Directors shall have authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the company. ARTICLE IX Seal Section 1. SEAL. The seal of the company shall be circular with the name of the company engraved around the margin and the word "SEAL" engraved across the center. ARTICLE X Amendments Section 1. AMENDMENTS. This Code of Regulations may be adopted, amended, changed or repealed by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power on such proposal at any meeting of shareholders of the company. Effective: April 4, 1996 E-9 EX-21 3 EXHIBIT 21 1 Exhibit 21 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES Subsidiaries of the Registrant As of December 31, 1996 State of Subsidiary Incorporation ----------------------------------------------- ------------- Nationwide Life and Annuity Insurance Company Ohio Employers Life Insurance Company of Wausau (1) Wisconsin National Casualty Company (1) Michigan West Coast Life Insurance Company (1) California Nationwide Advisory Services, Inc. Ohio Nationwide Investment Services Corporation Ohio NWE, Inc. Ohio --------------- (1) On January 1, 1997, Nationwide Life Insurance Company made a dividend payment to Nationwide Corporation consisting of the outstanding shares of common stock of these subsidiaries. All business operations of Nationwide Life Insurance Company and all of its subsidiaries are conducted using each company's legally registered name. E-10 EX-27.1 4 EXHIBIT 27.1
7 This schedule contains summary financial information from the Nationwide Life Insurance Company and Subsidiaries consolidated financial statements and is qualified in its entirety by reference to such consolidated financial statements. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 12,304,639 0 0 59,131 5,272,119 265,759 18,306,921 43,784 0 1,366,509 47,766,246 17,179,060 0 361,401 60,073 0 3,815 0 0 2,134,059 47,766,246 198,642 1,357,759 (326) 35,861 1,160,580 133,394 342,394 315,497 110,889 204,608 11,324 0 0 215,932 0 0 0 0 0 0 0 0 0
EX-27.2 5 EXHIBIT 27.2
7 This schedule contains summary financial information from the Nationwide Life Insurance Company and Subsidiaries consolidated financial statements and is qualified in its entirety by reference to such consolidated financial statements. 1,000 YEAR DEC-31-1996 JAN-01-1995 DEC-31-1995 12,485,564 0 0 29,953 4,602,764 229,442 17,778,860 9,455 0 1,020,356 38,507,633 16,358,614 0 348,027 65,297 0 3,815 0 0 2,624,697 38,507,633 199,106 1,294,033 (1,724) 20,702 1,115,493 82,695 272,954 287,572 99,808 187,764 24,714 0 0 212,478 0 0 0 0 0 0 0 0 0
EX-27.3 6 EXHIBIT 27.3
7 This schedule contains summary financial information from the Nationwide Life Insurance Company and Subsidiaries consolidated financial statements and is qualified in its entirety by reference to such consolidated financial statements. 1,000 YEAR DEC-31-1996 JAN-01-1994 DEC-31-1994 7,074,261 3,309,034 3,233,408 24,127 4,056,016 242,243 15,184,304 3,623 0 995,560 29,246,024 14,673,584 0 335,388 63,763 0 3,815 0 0 1,864,663 29,246,024 176,658 1,210,811 (16,527) 11,312 992,667 85,568 240,652 241,858 78,589 163,269 20,459 0 0 183,728 0 0 0 0 0 0 0 0 0
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