10-Q/A 1 l92346ae10-qa.txt NATIONWIDE LIFE INSURANCE COMPANY 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-Q/A QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 COMMISSION FILE NO. 2-28596 NATIONWIDE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) OHIO 31-4156830 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) ONE NATIONWIDE PLAZA COLUMBUS, OHIO 43215 (614) 249-7111 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO --- --- All voting stock was held by affiliates of the Registrant on November 1, 2001. COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding as of November 1, 2001 (Title of Class) THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. The undersigned registrant hereby amends Part 1, Item 1 of its Quarterly Report for the quarterly period ended September 30, 2001 in order to bring related party transaction presentation and disclosure into compliance as follows: PART I - FINANCIAL INFORMATION ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Statements of Income (Unaudited) (in millions)

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------------------------------- 2001 2000 2001 2000 ============================================================================================================================== REVENUES Policy charges $ 243.9 $ 284.8 $ 768.0 $ 823.5 Life insurance premiums 59.4 51.7 189.8 180.7 Net investment income 435.0 412.6 1,286.8 1,229.6 Net realized gains (losses) on investments, hedging instruments and hedged items: Unrelated parties (7.7) (2.1) (9.5) (15.9) Related party 44.4 - 44.4 - Other 3.3 3.6 12.4 12.8 ------------------------------------------------------------------------------------------------------------------------------ 778.3 750.6 2,291.9 2,230.7 ------------------------------------------------------------------------------------------------------------------------------ BENEFITS AND EXPENSES Interest credited to policyholder account balances 314.8 292.4 923.9 876.9 Other benefits and claims 66.8 56.2 209.0 185.2 Policyholder dividends on participating policies 9.5 8.3 31.1 31.8 Amortization of deferred policy acquisition costs 85.2 91.6 265.2 263.7 Interest expense on short-term borrowings 0.8 - 4.7 - Other operating expenses 109.8 125.2 327.3 365.7 ------------------------------------------------------------------------------------------------------------------------------ 586.9 573.7 1,761.2 1,723.3 ------------------------------------------------------------------------------------------------------------------------------ Income before federal income tax expense and cumulative effect of adoption of accounting principles 191.4 176.9 530.7 507.4 Federal income tax expense 52.8 50.9 141.9 157.2 ------------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of adoption of accounting principles 138.6 126.0 388.8 350.2 Cumulative effect of adoption of accounting principles, net of tax - - (7.1) - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 138.6 $ 126.0 $ 381.7 $ 350.2 ==============================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 3 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Balance Sheets (in millions, except per share amounts)

(UNAUDITED) SEPTEMBER 30, DECEMBER 31, 2001 2000 ============================================================================================================================== ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity securities (cost $16,964.3 in 2001; $15,245.8 in 2000) $ 17,573.4 $ 15,443.0 Equity securities (cost $106.3 in 2001; $103.5 in 2000) 96.5 109.0 Mortgage loans on real estate, net 6,809.7 6,168.3 Real estate, net 191.3 310.7 Policy loans 586.8 562.6 Other long-term investments 117.9 101.8 Short-term investments, primarily managed by a related party 771.2 442.6 ------------------------------------------------------------------------------------------------------------------------------ 26,146.8 23,138.0 ------------------------------------------------------------------------------------------------------------------------------ Cash 24.9 18.4 Accrued investment income 308.0 251.4 Deferred policy acquisition costs 3,035.1 2,865.6 Other assets 753.1 396.7 Assets held in separate accounts 54,526.6 65,897.2 ------------------------------------------------------------------------------------------------------------------------------ $ 84,794.5 $ 92,567.3 ============================================================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Future policy benefits and claims $ 24,764.0 $ 22,183.6 Short-term borrowings 25.0 118.7 Other liabilities 1,743.5 1,164.9 Liabilities related to separate accounts 54,526.6 65,897.2 ------------------------------------------------------------------------------------------------------------------------------ 81,059.1 89,364.4 ------------------------------------------------------------------------------------------------------------------------------ Shareholder's equity: Capital shares, $1 par value. Authorized 5.0 million shares, issued and outstanding 3.8 million shares 3.8 3.8 Additional paid-in capital 646.1 646.1 Retained earnings 2,783.0 2,436.3 Accumulated other comprehensive income 302.5 116.7 ------------------------------------------------------------------------------------------------------------------------------ 3,735.4 3,202.9 ------------------------------------------------------------------------------------------------------------------------------ $ 84,794.5 $ 92,567.3 ==============================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 4 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Statements of Shareholder's Equity (Unaudited) Nine Months Ended September 30, 2001 and 2000 (in millions)

ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY ================================================================================================================================== Balance as of January 1, 2000 $ 3.8 $ 766.1 $ 2,011.0 $ (15.9) $ 2,765.0 Comprehensive income: Net income - - 350.2 - 350.2 Net unrealized gains on securities available-for- sale arising during the period, net of tax - - - 45.5 45.5 ----------------- Total comprehensive income 395.7 Dividends to shareholder - - (90.0) - (90.0) ---------------------------------------------------------------------------------------------------------------------------------- Balance as of September 30, 2000 $ 3.8 $ 766.1 $ 2,271.2 $ 29.6 $ 3,070.7 ================================================================================================================================== BALANCE AS OF JANUARY 1, 2001 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9 Comprehensive income: Net income - - 381.7 - 381.7 Net unrealized gains on securities available-for- sale arising during the period, net of tax - - - 176.1 176.1 Cumulative effect of adoption of accounting principles, net of tax - - - 5.9 5.9 Accumulated net gains on cash flow hedges, net of tax - - - 3.8 3.8 ----------------- Total comprehensive income 567.5 Dividends to shareholder - - (35.0) - (35.0) ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AS OF SEPTEMBER 30, 2001 $ 3.8 $ 646.1 $ 2,783.0 $ 302.5 $ 3,735.4 ==================================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 5 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2001 and 2000 (in millions)

2001 2000 ============================================================================================================================ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 381.7 $ 350.2 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 923.9 876.9 Capitalization of deferred policy acquisition costs (556.9) (586.8) Amortization of deferred policy acquisition costs 265.2 263.7 Amortization and depreciation (23.4) (7.4) Realized (gains) losses on investments, hedging instruments and hedged items: Unrelated parties 9.5 15.9 Related party (44.4) - Cumulative effect of adoption of accounting principles 10.9 - Increase in accrued investment income (56.6) (9.2) Increase in other assets (186.8) (53.3) Increase in policy liabilities 21.1 0.5 Increase in other liabilities 248.6 269.7 Other, net 2.4 27.4 ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 995.2 1,147.6 ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of securities available-for-sale 3,076.6 2,479.2 Proceeds from sale of securities available-for-sale 247.7 432.3 Proceeds from repayments of mortgage loans on real estate 639.8 609.4 Proceeds from sale of real estate 168.5 2.2 Proceeds from repayments of policy loans and sale of other invested assets 57.3 17.2 Cost of securities available-for-sale acquired (4,958.7) (2,345.8) Cost of mortgage loans on real estate acquired (1,246.8) (950.1) Cost of real estate acquired (0.3) (6.1) Short-term investments, net (328.6) (197.3) Other, net (150.9) (116.8) ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,495.4) (75.8) ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of short-term borrowings (93.7) - Cash dividends paid (35.0) (140.0) Increase in investment and universal life insurance product account balances 4,517.3 3,609.4 Decrease in investment and universal life insurance product account balances (2,881.9) (4,544.0) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1,506.7 (1,074.6) ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 6.5 (2.8) Cash, beginning of period 18.4 4.8 ---------------------------------------------------------------------------------------------------------------------------- Cash, end of period $ 24.9 $ 2.0 ============================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 6 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements Nine Months Ended September 30, 2001 (1) Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements of Nationwide Life Insurance Company and subsidiaries (NLIC or collectively, the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which differ from statutory accounting practices prescribed or permitted by regulatory authorities, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The financial information included herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2000 included in the Company's annual report on Form 10-K. (2) New Accounting Principles ------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, was adopted by the Company effective January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. As of January 1, 2001, the Company had $755.4 million notional amount of freestanding derivatives with a market value of ($7.0) million. All other derivatives qualified for hedge accounting under SFAS 133. The adoption of SFAS 133 resulted in the Company recording a net transition adjustment loss of $4.8 million (net of related income tax of $2.6 million) in net income. In addition, a net transition adjustment loss of $3.6 million (net of related income tax of $2.0 million) was recorded in accumulated other comprehensive income at January 1, 2001. The adoption of SFAS 133 resulted in the Company derecognizing $17.0 million of deferred assets related to hedges, recognizing $10.9 million of additional derivative instrument liabilities and $1.3 million of additional firm commitment assets, while also decreasing hedged future policy benefits by $3.0 million and increasing the carrying amount of hedged investments by $10.6 million. Further, the adoption of SFAS 133 resulted in the Company reporting total derivative instrument assets and liabilities of $44.8 million and $107.1 million, respectively, as of January 1, 2001. The Company expects that the adoption of SFAS 133 will increase the volatility of reported earnings and other comprehensive income. The amount of volatility will vary with the level of derivative and hedging activities and fluctuations in market interest rates and foreign currency exchange rates during any period. 7 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued In November 1999, the Emerging Issues Task Force (EITF) issued EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20). The Company adopted EITF 99-20 on April 1, 2001. EITF 99-20 establishes the method of recognizing interest income and impairment on asset-backed investment securities. EITF 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased beneficial interests in securitized financial assets. Pursuant to EITF 99-20, based on current information and events, if the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, net of tax, upon adoption of EITF 99-20 on April 1, 2001 decreased net income by $2.3 million with a corresponding increase to accumulated other comprehensive income. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and the use of the pooling-of-interests method has been eliminated. SFAS 142 applies to all acquired intangible assets whether acquired singularly, as part of a group, or in a business combination. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets, and will carry forward provisions in Opinion 17 related to internally developed intangible assets. SFAS 142 changes the accounting for goodwill and intangible assets with indefinite lives from an amortization method to an impairment-only approach. The amortization of goodwill from past business combinations will cease upon adoption of this statement, which will be January 1, 2002 for the Company. Companies will also be required to evaluate all existing goodwill and intangible assets with indefinite lives for impairment within six months of adoption. Any transitional impairment losses will be recognized in the first interim period in the year of adoption and will be recognized as the effect of a change in accounting principle. The Company does not expect any material impact of adopting SFAS 141 and SFAS 142 on the results of operations and financial position. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 is effective for fiscal years beginning after December 15, 2001 (January 1, 2002 for the Company) and will carry forward many of the provisions of SFAS 121 and Opinion 30. Under SFAS 144, if a long-lived asset is part of a group that includes other assets and liabilities, then the provisions of SFAS 144 apply to the entire group. In addition, SFAS 144 does not apply to goodwill and other intangible assets that are not amortized. Management does not expect the adoption of SFAS 144 to have a material impact on the results of operations or financial position of the Company. 8 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued (3) Derivatives ----------- QUALITATIVE DISCLOSURE Interest Rate Risk Management The Company is exposed to changes in the fair value of fixed rate investments (commercial mortgage loans and corporate bonds) due to changes in interest rates. To manage this risk, the Company enters into various types of derivative instruments to minimize fluctuations in fair values resulting from changes in interest rates. The Company principally uses interest rate swaps and short Eurodollar futures to manage this risk. Under interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments, thereby creating floating rate investments. Short Eurodollar futures change the fixed rate cash flow exposure to variable rate cash flows. With short Eurodollar futures, if interest rates rise (fall), the gains (losses) on the futures adjust the fixed rate income on the investments, thereby creating floating rate investments. As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to changes in the fair value of the commitment due to changes in interest rates during the commitment period. To manage this risk, the Company enters into short Treasury futures. With short Treasury futures, if interest rates rise (fall), the gains (losses) on the futures will offset the change in fair value of the commitment. Floating rate investments (commercial mortgage loans and corporate bonds) expose the Company to fluctuations in cash flow and investment income due to changes in interest rates. To manage this risk, the Company enters into receive fixed, pay variable over-the-counter interest rate swaps or long Eurodollar futures strips to convert the variable rate investments to a fixed rate. In using interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments, thereby creating fixed rate assets. The long Eurodollar futures change the variable rate cash flow exposure to fixed rate cash flows. With long Eurodollar futures, if interest rates rise (fall), the losses (gains) on the futures are used to reduce the variable rate income on the investments, thereby creating fixed rate investments. Foreign Currency Risk Management In conjunction with the Company's medium-term note programs, from time to time, the Company issues both fixed and variable rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange rates and interest rates. To manage these risks, the Company enters into cross-currency interest rate swaps to convert these liabilities to a variable US dollar rate. For a fixed rate liability, the cross-currency interest rate swap is structured to receive a fixed rate, in the foreign currency, and pay a variable US dollar rate, generally 3-month libor. For a variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign currency, and pay a variable US dollar rate, generally 3-month libor. The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency due to changes in foreign currency exchange rates and interest rates. To manage this risk, the Company uses cross-currency interest rate swaps to convert these assets to variable US dollar rate instruments. Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in the foreign currency, and receive a variable US dollar rate, generally 3-month libor. 9 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued Non-Hedging Derivatives The Company may enter into over-the-counter basis swaps (receive one variable rate, pay another variable rate) to change the rate characteristics of a specific investment to better match the variable rate paid on a liability. While the pay-side terms of the basis swap will line up with the terms of the asset, the Company may not be able to match the receive-side terms of the derivative to a specific liability; therefore, basis swaps may not receive hedge accounting treatment. QUANTITATIVE DISCLOSURE Fair Value Hedges Changes in the fair value of derivative instruments designated as fair value hedges, and the corresponding changes in the fair value of the hedged asset or liability, attributable to the risk being hedged, are included in net realized gains and losses on investments, hedging instruments and hedged items in the consolidated statements of income. Amounts receivable or payable under interest rate swaps are recognized as an adjustment to net investment income or interest credited to policyholder account balances consistent with the nature of the hedged item. During the three and nine months ended September 30, 2001, losses of $4.2 million and $3.2 million, respectively, were recognized in net realized gains and losses on investments, hedging instruments and hedged items. This represents the ineffective portion of the fair value hedging relationships. There were no gains or losses attributable to the portion of the derivative instrument's change in value excluded from the assessment of hedge effectiveness. There were also no gains or losses recognized in earnings as a result of hedged firm commitments no longer qualifying as fair value hedges. Cash Flow Hedges Changes in the fair value of derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income (AOCI). Amounts receivable or payable under interest rate swaps are recognized as an adjustment to net investment income or interest credited to policyholder account balances consistent with the nature of the hedged item. In the event that a derivative instrument was liquidated and the hedged item remained on the books, the gain or loss on the derivative would be reclassified out of AOCI over the life of the underlying asset. The Company is not anticipating any reclassifications out of AOCI over the next 12-month period. The ineffective portion of cash flow hedges is included in net realized gains and losses on investments, hedging instruments and hedged items in the consolidated statements of income. For the three months ended September 30, 2001, the ineffective portion of cash flow hedges was less than $0.1 million. There were no gains or losses attributable to the portion of the derivative instruments' change in value excluded from the assessment of hedge effectiveness. Other Derivative Instruments, Including Embedded Derivatives Net realized gains and losses on investments, hedging instruments and hedged items for the three and nine months ended September 30, 2001 include a gain of $0.4 million and a loss of $1.4 million, respectively, related to other derivative instruments, including embedded derivatives. For the three and nine months ended September 30, 2001 a $50.6 million gain and a $14.2 million loss, respectively, were recorded on the change in value of cross-currency interest rate swaps hedging variable rate medium-term notes denominated in foreign currencies. An offsetting loss of $50.4 million and a gain of $12.6 million were recorded to reflect the change in spot rates during the three and nine months ended September 30, 2001 on these variable rate liabilities. 10 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued (4) Related Party Transaction ------------------------- During the third quarter 2001, NLIC entered into a transaction with Nationwide Mutual Insurance Company (NMIC), whereby it sold 78% of its interest in a limited partnership (representing 49% of the limited partnership) to NMIC for $158.9 million. As a result of this sale, NLIC recorded a realized gain of $44.4 million, and related tax expense of $15.5 million. The sale price, which was paid in cash, represented the fair value of the limited partnership and was based on a valuation of the limited partnership and its underlying investments. The valuation was completed by qualified management of the limited partnership and utilized a combination of internal and independent valuations of the underlying investments of the limited partnership. Additionally, senior financial officers and the Boards of Directors of NLIC, its parent, Nationwide Financial Services, Inc. (NFS), and NMIC separately reviewed and approved the valuation prior to the execution of this transaction. NLIC continues to hold an economic and voting interest in the limited partnership of approximately 14%, with NMIC holding the remaining interests. (5) Comprehensive Income (Loss) --------------------------- Comprehensive income (loss) includes net income as well as certain items that are reported directly within a separate component of shareholder's equity that bypass net income. Other comprehensive income (loss) is comprised of unrealized gains (losses) on securities available-for-sale and accumulated net gains on cash flow hedges. The related before and after federal income tax amounts are as follows:

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------------------------------------------------------- (in millions) 2001 2000 2001 2000 ======================================================================================================= Unrealized gains (losses) on securities available-for-sale arising during the period: Transition adjustment - EITF 99-20 $ - $ - $ 3.5 $ - Gross 229.3 116.0 381.4 86.6 Adjustment to deferred policy acquisition costs (78.1) (34.9) (122.2) (25.8) Related federal income tax expense (52.9) (28.4) (91.9) (21.3) ------------------------------------------------------------------------------------------------------- Net 98.3 52.7 170.8 39.5 ------------------------------------------------------------------------------------------------------- Reclassification adjustment for net losses (gains) on securities available-for-sale realized during the period: Gross 6.4 (2.9) 11.7 9.2 Related federal income tax (benefit) expense (2.2) 1.0 (4.1) (3.2) ------------------------------------------------------------------------------------------------------- Net 4.2 (1.9) 7.6 6.0 ------------------------------------------------------------------------------------------------------- Other comprehensive income on securities available-for-sale 102.5 50.8 178.4 45.5 ------------------------------------------------------------------------------------------------------- Accumulated net gain on cash flow hedges: Transition adjustment - FAS 133 - - 5.6 - Gross 5.0 - 5.8 - Related federal income tax expense (1.8) - (4.0) - ------------------------------------------------------------------------------------------------------- Other comprehensive income on cash flow hedges 3.2 - 7.4 - ------------------------------------------------------------------------------------------------------- Total Other Comprehensive Income $105.7 $ 50.8 $185.8 $ 45.5 =======================================================================================================

11 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued (6) Segment Disclosures ------------------- The Company uses differences in products as the basis for defining its reportable segments. The Company reports three product segments: Individual Annuity, Institutional Products and Life Insurance. The Individual Annuity segment consists of both variable and fixed annuity contracts. Individual annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, variable annuity contracts provide the customer with access to a wide range of investment options and asset protection in the event of an untimely death, while fixed annuity contracts generate a return for the customer at a specified interest rate fixed for a prescribed period. The Company's individual annuity products consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. The Institutional Products segment is comprised of the Company's group pension and payroll deduction business, both public and private sectors, and medium-term note programs. The public sector includes the 457 business in the form of fixed and variable annuities. The private sector includes the 401(k) business generated through fixed and variable annuities. The Life Insurance segment consists of insurance products, including universal life insurance, corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) products, which provide a death benefit and also allow the customer to build cash value on a tax-advantaged basis. In addition to the product segments, the Company reports a Corporate segment. The Corporate segment includes net investment income not allocated to the three product segments, certain revenues and expenses of the Company's broker/dealer subsidiary, unallocated expenses and interest expense on short-term borrowings. In addition to these operating revenues and expenses, the Company also reports net realized gains and losses on investments, hedging instruments and hedged items in the Corporate segment. 12 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued The following table summarizes the financial results of the Company's business segments for the three months ended September 30, 2001 and 2000.

INDIVIDUAL INSTITUTIONAL LIFE (in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL ========================================================================================================== 2001 Net investment income $ 135.7 $ 211.8 $ 80.7 $ 6.8 $ 435.0 Other operating revenue 134.4 47.3 121.6 3.3 306.6 ---------------------------------------------------------------------------------------------------------- Total operating revenue(1) 270.1 259.1 202.3 10.1 741.6 ---------------------------------------------------------------------------------------------------------- Interest credited to policyholder account balances 111.0 159.2 44.6 - 314.8 Amortization of deferred policy acquisition costs 53.0 10.4 21.8 - 85.2 Interest expense on short-term borrowings - - - 0.8 0.8 Other benefits and expenses 52.7 40.5 92.5 0.4 186.1 ---------------------------------------------------------------------------------------------------------- Total expenses 216.7 210.1 158.9 1.2 586.9 ---------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) 53.4 49.0 43.4 8.9 154.7 Net realized gains on investments, hedging instruments and hedged items - - - 36.7 36.7 ---------------------------------------------------------------------------------------------------------- Income before federal income tax expense and cumulative effect of adoption of accounting principles $ 53.4 $ 49.0 $ 43.4 $ 45.6 $191.4 ========================================================================================================== 2000 Net investment income $ 119.5 $ 203.7 $ 73.5 $ 15.9 $412.6 Other operating revenue 153.6 68.9 114.0 3.6 340.1 ---------------------------------------------------------------------------------------------------------- Total operating revenue1 273.1 272.6 187.5 19.5 752.7 ---------------------------------------------------------------------------------------------------------- Interest credited to policyholder account balances 98.8 153.6 40.0 - 292.4 Amortization of deferred policy acquisition costs 60.9 15.2 15.5 - 91.6 Other benefits and expenses 41.6 46.0 92.9 9.2 189.7 ---------------------------------------------------------------------------------------------------------- Total expenses 201.3 214.8 148.4 9.2 573.7 ---------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) 71.8 57.8 39.1 10.3 179.0 Net realized losses on investments, hedging instruments and hedged items - - - (2.1) (2.1) ---------------------------------------------------------------------------------------------------------- Income (loss) before federal income tax expense and cumulative effect of adoption of accounting principles $ 71.8 $ 57.8 $ 39.1 $ 8.2 $176.9 ==========================================================================================================

-------------- (1) Excludes net realized gains and losses on investments, hedging instruments and hedged items. 13 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued The following table summarizes the financial results of the Company's business segments for the nine months ended September 30, 2001 and 2000.

INDIVIDUAL INSTITUTIONAL LIFE (in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL =============================================================================================================== 2001 Net investment income $ 387.3 $ 635.3 $ 241.7 $ 22.5 $ 1,286.8 Other operating revenue 422.8 158.6 376.7 12.1 970.2 --------------------------------------------------------------------------------------------------------------- Total operating revenue(1) 810.1 793.9 618.4 34.6 2,257.0 --------------------------------------------------------------------------------------------------------------- Interest credited to policyholder account balances 316.4 476.0 131.5 - 923.9 Amortization of deferred policy acquisition costs 164.2 36.2 64.8 - 265.2 Interest expense on short-term borrowings - - - 4.7 4.7 Other benefits and expenses 152.4 123.3 286.2 5.5 567.4 --------------------------------------------------------------------------------------------------------------- Total expenses 633.0 635.5 482.5 10.2 1,761.2 --------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) 177.1 158.4 135.9 24.4 495.8 Net realized gains on investments, hedging instruments and hedged items - - - 34.9 34.9 --------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and cumulative effect of adoption of accounting principles $ 177.1 $ 158.4 $ 135.9 $ 59.3 $ 530.7 =============================================================================================================== Assets as of period end $39,944.9 $33,120.7 $ 8,548.1 $ 3,180.8 $84,794.5 ===============================================================================================================

14 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued

INDIVIDUAL INSTITUTIONAL LIFE (in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL ================================================================================================================ 2000 Net investment income $ 361.1 $ 612.2 $ 214.2 $ 42.1 $ 1,229.6 Other operating revenue 476.0 192.7 335.5 12.8 1,017.0 ---------------------------------------------------------------------------------------------------------------- Total operating revenue(1) 837.1 804.9 549.7 54.9 2,246.6 ---------------------------------------------------------------------------------------------------------------- Interest credited to policyholder account balances 296.8 465.5 114.6 - 876.9 Amortization of deferred policy acquisition costs 175.1 39.2 49.4 - 263.7 Other benefits and expenses 150.6 127.4 276.8 27.9 582.7 ---------------------------------------------------------------------------------------------------------------- Total expenses 622.5 632.1 440.8 27.9 1,723.3 ---------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) 214.6 172.8 108.9 27.0 523.3 Net realized losses on investments, hedging instruments and hedged items - - - (15.9) (15.9) ---------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and cumulative effect of adoption of accounting principles $ 214.6 $ 172.8 $ 108.9 $ 11.1 $ 507.4 ================================================================================================================ Assets as of period end $47,255.8 $40,005.9 $ 7,939.0 $ 2,486.5 $97,687.2 ================================================================================================================

---------- (1) Excludes net realized gains and losses on investments, hedging instruments and hedged items. (7) Contingencies ------------- On October 29, 1998, the Company was named in a lawsuit filed in Ohio state court related to the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (Mercedes Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999, the complaint was amended to, among other things, add Marcus Shore as a second plaintiff. The amended complaint is brought as a class action on behalf of all persons who purchased individual deferred annuity contracts or participated in group annuity contracts sold by the Company and the other named Company affiliates which were used to fund certain tax-deferred retirement plans. The amended complaint seeks unspecified compensatory and punitive damages. No class has been certified. On June 11, 1999, the Company and the other named defendants filed a motion to dismiss the amended complaint. On March 8, 2000, the court denied the motion to dismiss the amended complaint filed by the Company and other named defendants. The Company intends to defend this lawsuit vigorously. 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. NATIONWIDE LIFE INSURANCE COMPANY --------------------------------- (Registrant) Date: January 22, 2002 /s/Mark R. Thresher --------------------------------------------------- Mark R. Thresher Senior Vice President - Finance - Nationwide Financial (Chief Accounting Officer) 16