10-Q 1 l90818ae10-q.txt NATIONEWIDE LIFE INSURANCE COMPANY 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED 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. NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES FORM 10-Q INDEX PART I FINANCIAL INFORMATION Item 1 Unaudited Consolidated Financial Statements 3 Item 2 Management's Narrative Analysis of the Results of Operations 16 Item 3 Quantitative and Qualitative Disclosures About Market Risk 26 PART II OTHER INFORMATION Item 1 Legal Proceedings 27 Item 2 Changes in Securities 27 Item 3 Defaults Upon Senior Securities 27 Item 4 Submission of Matters to a Vote of Security Holders 27 Item 5 Other Information 27 Item 6 Exhibits and Reports on Form 8-K 27 SIGNATURE 28 2 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 36.7 (2.1) 34.9 (15.9) 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 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 (34.9) 15.9 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) 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 ===================================================================================================================

(5) 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. 11 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued 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. 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 ===================================================================================================================

12 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 $ 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 revenue(1) 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. (6) 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 ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS INTRODUCTION The following analysis of unaudited consolidated results of operations of the Company should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere herein. Management's discussion and analysis contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include, among others, the following possibilities: (i) the potential impact on the Company's reported net income that could result from the adoption of certain accounting standards issued by the Financial Accounting Standards Board; (ii) tax law changes impacting the tax treatment of life insurance and investment products; (iii) heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors; (iv) adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; (v) failure to expand distribution channels in order to obtain new customers or failure to retain existing customers; (vi) inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance of the new and/or revised products in the market; (vii) changes in interest rates and the capital markets causing a reduction of investment income and/or asset fees, reduction in the value of the Company's investment portfolio or a reduction in the demand for the Company's products; (viii) general economic and business conditions which are less favorable than expected; (ix) unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations; and (x) inaccuracies in assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts. RESULTS OF OPERATIONS Revenues Total operating revenues, which exclude net realized gains and losses on investments, hedging instruments and hedged items for third quarter 2001 increased to $741.6 million compared to $752.7 million for the same period in 2000. For the first nine months of 2001 and 2000, total operating revenues were $2.26 billion and $2.25 billion, respectively. Policy charges include asset fees, which are primarily earned from separate account assets generated from sales of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products; administration fees, which include fees charged per contract on a variety of the Company's products and premium loads on universal life insurance products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period of annuity and certain life insurance contracts. Policy charges for the comparable periods of 2001 and 2000 were as follows:

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ===================================================================================================== Asset fees $ 149.7 $ 185.6 $ 466.6 $ 541.5 Cost of insurance charges 51.5 40.4 147.7 112.5 Administrative fees 26.4 35.7 98.8 99.6 Surrender fees 16.3 23.1 54.9 69.9 ----------------------------------------------------------------------------------------------------- Total policy charges $ 243.9 $ 284.8 $ 768.0 $ 823.5 =====================================================================================================

The decline in asset fees reflects a decrease in total average separate account assets of $12.07 billion (18%) and $5.28 billion (8%) for the three and nine months ended September 30, 2001, respectively, compared to the same periods a year ago. Market depreciation on variable annuity and investment life insurance products, partially offset by net flows into these products, have resulted in the decrease in average separate account balances. 16 Cost of insurance charges are assessed on the net amount at risk on universal life insurance policies. The net amount at risk is equal to a policy's death benefit minus the related policyholder account value. The amount charged is based on the insured's age and other underwriting factors. The increase in cost of insurance charges is due primarily to growth in the net amount at risk related to corporate and individual investment life insurance reflecting expanded distribution and increased acceptance by producers and consumers. The net amount at risk related to corporate and individual investment life insurance grew to $32.0 billion as of September 30, 2001 compared to $26.30 billion a year ago. The decline in administrative fees in third quarter 2001 compared to a year ago is partially attributable to a decrease in premiums on individual investment life policies and certain corporate-owned life policies where the Company collects a premium load. Also contributing to the decline are case terminations in the Institutional Products segment that generated additional administrative fees in third quarter 2000. Surrender charges decreased as a result of continued improvement in customer retention in the Individual Annuity segment in the first nine months of 2001 compared to the same period a year ago. Net investment income includes the 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 of related investment expenses. General account assets supporting insurance products are closely correlated to the underlying reserves on these products. Net investment income grew from $412.6 million in the third quarter of 2000 to $435.0 million in the third quarter of 2001 and from $1.23 billion in the first nine months of 2000 to $1.29 billion in the first nine months of 2001. The increases were primarily due to increased invested assets to support growth in individual fixed annuity, institutional products and life insurance policy reserves, partially offset by lower yields. General account reserves supporting these products increased $2.96 billion to $24.76 billion as of the end of third quarter 2001 compared to $21.80 billion a year ago. Realized gains and losses on investments, hedging instruments and hedged items are not considered by the Company to be recurring components of earnings. The Company makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. In addition, included in this caption are changes in the fair value of items qualifying as fair value hedges, the related hedged items and the ineffective portion of cash flow hedges, all of which are not considered recurring components of earnings. Other income includes management fees, commissions and other income earned by subsidiaries of the Company that provide investment management, marketing, distribution and administration services. Benefits and Expenses Interest credited to policyholder account balances totaled $314.8 million in third quarter 2001 compared to $292.4 million in third quarter 2000, while year-to-date 2001 interest credited totaled $923.9 million compared to $876.9 million a year ago and principally relates to fixed annuities, both individual and institutional, and investment life insurance products. The growth in interest credited reflects the increase in policy reserves for these products, partially offset by lower crediting rates in the Institutional segment. The decline in amortization of deferred policy acquisition costs (DAC), which totaled $85.2 million and $91.6 million in the third quarter of 2001 and 2000, respectively, is consistent with lower earnings in the Individual Annuity segment. On a year-to-date basis, DAC amortization totaled $265.2 million in 2001 compared to $263.7 million in 2000. Operating expenses decreased 12% to $109.8 million in third quarter 2001 compared to $125.2 million in third quarter 2000. For the first nine months of 2001, operating expenses were $327.3 million, down 11% from $365.7 million for the first nine months of 2000. The decrease reflects the Company's commitment to aggressive expense management in response to volatile equity markets. Federal income tax expense was $52.8 million in third quarter 2001 compared to $50.9 million in third quarter 2000, representing effective tax rates of 27.6% and 28.8% for third quarter 2001 and 2000 respectively. For the first nine months of 2001 and 2000 federal income tax expense was $141.9 million and $157.2 million, representing effective tax rates of 26.7% and 31.0%, respectively. An increase in tax exempt income and investment tax credits resulted in the decrease in effective rates. 17 Other Data In managing business, the Company analyzes operating performance using a non-GAAP measure called net operating income. The Company calculates net operating income by adjusting net income to exclude net realized gains and losses on investments, hedging instruments and hedged items and cumulative effect of change in accounting principles. Net operating income or similar measures are commonly used in the insurance industry as a measure of ongoing earnings performance. The excluded items are important in understanding the Company's overall results of operations. Net operating income should not be viewed as a substitute for net income determined in accordance with GAAP, and you should note that the Company's definition of net operating income may differ from that used by other companies. However, the Company believes that the presentation of net operating income as it is measured for management purposes enhances the understanding of the Company's results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company's business. The Company excludes net realized gains and losses on investments, hedging instruments and hedged items from net operating income because the timing of transactions resulting in recognition of gains or losses is largely at the Company's discretion and the amount of these gains and losses is heavily influenced by and fluctuates in part according to the availability of market opportunities. Including the fluctuating effects of these transactions could distort trends in the underlying profitability of the Company's business. The following table reconciles the Company's reported net income to net operating income for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------- (in millions) 2001 2000 2001 2000 =========================================================================================================== Net income $ 138.6 $ 126.0 $ 381.7 $ 350.2 Net realized (gains) losses on investments, hedging instruments and hedged items, net of tax (23.9) 1.3 (22.7) 10.3 Cumulative effect of adoption of accounting principles, net of tax - - 7.1 - ----------------------------------------------------------------------------------------------------------- Net operating income $ 114.7 $ 127.3 $ 366.1 $ 360.5 ===========================================================================================================

Recently Issued Accounting Pronouncements See note 2 to the unaudited consolidated financial statements for a discussion of recently issued accounting pronouncements. Sales Information In managing business, the Company regularly monitors and reports a non-GAAP measure titled sales. Sales or similar measures are commonly used in the insurance industry as a measure of business generated in the period. Sales should not be viewed as a substitute for revenues determined in accordance with GAAP, and the Company's definition of sales might differ from that used by other companies. Sales generate assets, which ultimately drive revenues from policy charges. Sales are comprised of statutory premiums or deposits on annuities, pension plans and life insurance products sold to a wide variety of customer bases. Statutory premiums and deposits are calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and then adjusted to arrive at sales. Sales also include deposits on administration only group pension plans. Sales are stated net of internal replacements, which in the Company's opinion provides a more meaningful disclosure of sales. In addition, sales exclude: funding agreements issued to secure notes issued to foreign and domestic investors through an unrelated third party trust under the Company's two medium-term note programs; BOLI; large case pension plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, they do not produce steady production flow that lends itself to meaningful comparisons and are therefore excluded from sales. 18 The Company believes that the presentation of sales as measured for management purposes enhances the understanding of the Company's business and helps depict trends that may not be apparent in the results of operations due to differences between the timing of sales and revenue recognition. The Company's flagship products are marketed under The BEST of AMERICA(R) brand, and include individual and group variable annuities and variable life insurance. The BEST of AMERICA products allow customers to choose from investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial services providers which allow those providers to sell products to their own customer bases under their own brand name. The Company also markets group deferred compensation retirement plans to employees of state and local governments for use under Internal Revenue Code (IRC) Section 457. The Company utilizes its sponsorship by the National Association of Counties and The United States Conference of Mayors when marketing IRC Section 457 products. Sales by product and segment for the comparable periods of 2001 and 2000 are summarized as follows:

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------------------- (in millions) 2001 2000 2001 2000 ====================================================================================================== The BEST of AMERICA products $ 895.1 $ 1,398.3 $ 2,948.3 $ 4,282.1 Private label annuities 359.7 235.6 1,116.7 784.3 Other - 5.8 2.8 81.0 ------------------------------------------------------------------------------------------------------ Total individual variable annuity sales 1,254.8 1,639.7 4,067.8 5,147.4 ------------------------------------------------------------------------------------------------------ Deferred fixed annuities 543.7 133.5 1,296.9 325.0 Immediate fixed annuities 29.4 26.2 102.5 95.8 ------------------------------------------------------------------------------------------------------ Total individual fixed annuity sales 573.1 159.7 1,399.4 420.8 ------------------------------------------------------------------------------------------------------ Total individual annuity sales $ 1,827.9 $ 1,799.4 $ 5,467.2 $ 5,568.2 ====================================================================================================== The BEST of AMERICA products $ 716.4 $ 897.3 $ 2,425.0 $ 3,046.4 Other 16.6 11.1 43.9 37.4 ------------------------------------------------------------------------------------------------------ Total private sector pension plan sales 733.0 908.4 2,468.9 3,083.8 ------------------------------------------------------------------------------------------------------ Total public sector pension plan sales - IRC Section 457 annuities 366.8 427.5 1,156.9 1,732.8 ------------------------------------------------------------------------------------------------------ Total institutional products sales $ 1,099.8 $ 1,335.9 $ 3,625.8 $ 4,816.6 ====================================================================================================== The BEST of AMERICA variable life series $ 120.4 $ 155.8 $ 409.9 $ 419.2 Corporate-owned life insurance 78.0 152.9 593.7 476.2 Traditional/Universal life insurance 56.7 59.2 178.9 179.8 ------------------------------------------------------------------------------------------------------ Total life insurance sales $ 255.1 $ 367.9 $ 1,182.5 $ 1,075.2 ======================================================================================================

The Company sells its products through a broad distribution network. Unaffiliated entities that sell the Company's products to their own customer base include independent broker/dealers, brokerage firms, financial institutions, pension plan administrators and life insurance specialists. Representatives of the Company who market products directly to a customer base identified by the Company consists of Nationwide Retirement Solutions. The Company also distributes savings products through the agency distribution force of its ultimate parent company, Nationwide Mutual Insurance Company. 19 Sales by distribution channel are summarized as follows.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ===================================================================================================== Independent broker/dealers $ 937.2 $ 1,456.2 $ 3,198.7 $ 4,593.4 Brokerage firms 568.5 294.5 1,598.2 902.7 Financial institutions 818.8 736.6 2,361.8 2,148.1 Pension plan administrators 224.7 228.7 767.8 819.6 Life insurance specialists 78.1 154.9 593.8 482.5 Nationwide agents 171.2 184.6 533.7 619.5 Nationwide Retirement Solutions 384.3 447.7 1,221.5 1,894.2 -----------------------------------------------------------------------------------------------------

The decrease in sales in the independent broker/dealer channel reflects lower demand for variable annuities due to volatile equity markets and a shift in private sector pension plan sales from group annuities issued by the Company to trust products issued by an affiliate, Nationwide Trust Company. Sales through brokerage firms increased 93% in third quarter 2001 compared to third quarter 2000 and are up 77% for the first nine months, principally due to the addition of Waddell & Reed as a distributor. Sales through financial institutions grew 11% in third quarter 2001 compared to a year ago, and grew 10% for the first nine months of 2001 compared to the first nine months of 2000, driven mainly by the appointment of new distributors in the bank channel who sell fixed annuity products. The increase in sales through life insurance specialists during the first nine months of 2001 compared to the same period a year ago reflects increased sales of COLI products that occurred in the first half of 2001. Third quarter 2001 sales through this channel were impacted by the volatile economic climate as fewer businesses are creating new employee benefit programs. Nationwide Retirement Solutions sales reached $384.3 million during third quarter 2001, a 14% decrease from a year ago. In this channel, sales declined from a year ago reflecting the impact of previously lost cases on recurring deposits. The decline in sales is also attributable to a shift in both Private and Public sector sales from group annuity contracts issued by the Company to administration only and Trust Company products provided by affiliates. Lower sales through this channel for the first nine months of 2001 compared to the same period a year ago reflects the impact of previously lost cases on recurring deposits. BUSINESS SEGMENTS The Company reports three product segments: Individual Annuity, Institutional Products and Life Insurance. In addition, the Company reports certain other revenues and expenses in a Corporate segment. The following table summarizes operating income before federal income tax expense for the Company's business segments for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ================================================================================================================= Individual Annuity $ 53.4 $ 71.8 $ 177.1 $ 214.6 Institutional Products 49.0 57.8 158.4 172.8 Life Insurance 43.4 39.1 135.9 108.9 Corporate 8.9 10.3 24.4 27.0 ----------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 154.7 $ 179.0 $ 495.8 $ 523.3 =================================================================================================================

20 Individual Annuity 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 following table summarizes certain selected financial data for the Company's Individual Annuity segment for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ================================================================================================================= INCOME STATEMENT DATA Revenues: Policy charges $ 120.2 $ 147.0 $ 374.9 $ 437.8 Net investment income 135.7 119.5 387.3 361.1 Premiums on immediate annuities 14.2 6.6 47.9 38.2 ----------------------------------------------------------------------------------------------------------------- 270.1 273.1 810.1 837.1 ----------------------------------------------------------------------------------------------------------------- Benefits and expenses: Interest credited to policyholder account balances 111.0 98.8 316.4 296.8 Other benefits 16.4 7.5 52.0 39.4 Amortization of deferred policy acquisition costs 53.0 60.9 164.2 175.1 Other operating expenses 36.3 34.1 100.4 111.2 ----------------------------------------------------------------------------------------------------------------- 216.7 201.3 633.0 622.5 ----------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 53.4 $ 71.8 $ 177.1 $ 214.6 ================================================================================================================= OTHER DATA Sales: Individual variable annuities $ 1,254.8 $ 1,639.7 $ 4,067.8 $ 5,147.4 Individual fixed annuities 573.1 159.7 1,399.4 420.8 ----------------------------------------------------------------------------------------------------------------- Total individual annuity sales $ 1,827.9 $ 1,799.4 $ 5,467.2 $ 5,568.2 ================================================================================================================= Average account balances: General account $ 7,808.8 $ 6,893.1 $ 7,336.1 $ 6,965.6 Separate account 32,754.8 39,008.8 34,006.6 38,146.1 ----------------------------------------------------------------------------------------------------------------- Total average account balances $ 40,563.6 $ 45,901.9 $ 41,342.7 $ 45,111.7 ================================================================================================================= Account balances as of period end: Individual variable annuities $ 32,758.2 $ 41,645.8 Individual fixed annuities 5,164.1 3,792.0 ----------------------------------------------------------------------------------------------------------------- Total account balances $ 37,922.3 $ 45,437.8 ================================================================================================================= Return on average equity 12.0% 21.5% 14.3% 20.9% Pre-tax operating income to average account balances 0.53% 0.63% 0.57% 0.63% ------------------------------------------------------------------------------------ -----------------------------

Pre-tax operating earnings totaled $53.4 million in third quarter 2001, down 26% compared to a year ago earnings of $71.8 million. For the first nine months of 2001 pre-tax operating earnings were $177.1 million compared to $214.6 million for the first nine months of 2000. 21 Asset fees decreased to $103.1 million in the third quarter of 2001, down 17% from $124.1 million in the same period a year ago. For the first nine months of 2001, asset fees totaled $318.7 million down 12% from the first nine months of 2000 total of $361.9 million. Asset fees are calculated daily and charged as a percentage of separate account assets. The decrease in asset fees is due to market depreciation on investments underlying reserves. For the three and nine months ended September 30, 2001, average separate account assets decreased 16% to $32.75 billion and 11% to $34.01 billion respectively, compared to the same periods a year ago. Surrender fees decreased by $5.6 million to $12.8 million in the third quarter of 2001 compared to a year ago. For the first nine months of 2001, surrender fees totaled $42.3 million compared to $61.3 million in the same period a year ago. These decreases were due to improved persistency in individual variable and fixed annuities. Operating expenses were $36.3 million in third quarter 2001, an increase of 6% over third quarter 2000. During the first nine months of 2001, operating expenses totaled $100.4 million, a decrease of 10% over the first nine months of 2000 total of $111.2 million reflecting management's focus on expense management in response to volatile equity markets. The following table depicts the interest spread on average general account reserves in the Individual Annuity segment for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- 2001 2000 2001 2000 ======================================================================================================== Net investment income 7.50% 7.89% 7.65% 7.84% Interest credited 5.69 5.73 5.75 5.68 -------------------------------------------------------------------------------------------------------- Interest spread 1.81% 2.16% 1.90% 2.16% ========================================================================================================

Interest spreads narrowed in the third quarter of 2001 and on a year-to-date basis compared to the prior year. A combination of the current competitive environment, a sharp decline in interest rates and a by-product of the Company's investment strategy all contributed to the reduction in spreads. As a strategic move to maintain market share, the Company did not lower crediting rates in the third quarter as quickly as earned rates declined. In addition, throughout 2001, the Company had a significant increase in cash flows in the general account due to strong fixed annuity sales. During the time between when a commitment is made to purchase a commercial mortgage loan or private placement bond and closing, typically 30 to 60 days, the cash is invested short-term. This strategy, while sound over the long-term, can provide short-term pressure on spreads, especially in a declining interest rate environment. Led by variable product deposits of $1.42 billion offset by withdrawals and surrenders of $1.09 billion, Individual Annuity segment deposits in third quarter 2001 of $1.99 billion offset by withdrawals and surrenders totaling $1.17 billion generated net flows of $825.7 million compared to the $641.1 million achieved a year ago. Despite the competitive nature of the individual annuity market, the Company has demonstrated the ability to generate positive net flows by expanding its broad distribution network and innovative product development resources. The decrease in pre-tax operating income to average assets in third quarter and the first nine months of 2001 compared to the same periods in 2000 is primarily a result of the Company's expense structure not being as elastic as the revenue stream. Individual Annuity sales, which exclude internal replacements, during third quarter 2001 were $1.83 billion, up slightly from $1.80 billion in the year ago quarter, while year-to-date 2001 sales of individual annuities were $5.47 billion compared to $5.57 billion in 2000. The addition of new selling arrangements and volatile equity markets drove the growth in sales of deferred fixed annuities which totaled $543.7 million in the third quarter 2001 compared to $133.5 million in third quarter 2000, offsetting the decline in variable annuity sales. Sales of deferred fixed annuities for the first nine months of 2001 were $1.30 billion compared to $325.0 million for the first nine months of 2000. 22 Institutional Products 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 sales figures do not include business generated through the Company's two medium-term note programs, large case pension plan acquisitions and Nationwide employee and agent benefit plans, however the income statement data does reflect this business. The following table summarizes certain selected financial data for the Company's Institutional Products segment for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ================================================================================================================= INCOME STATEMENT DATA Revenues: Asset fees $ 42.4 $ 57.2 $ 135.4 $ 167.8 Net investment income 211.8 203.7 635.3 612.2 Other 4.9 11.7 23.2 24.9 ----------------------------------------------------------------------------------------------------------------- 259.1 272.6 793.9 804.9 ----------------------------------------------------------------------------------------------------------------- Benefits and expenses: Interest credited to policyholder account balances 159.2 153.6 476.0 465.5 Other benefits and expenses 50.9 61.2 159.5 166.6 ----------------------------------------------------------------------------------------------------------------- 210.1 214.8 635.5 632.1 ----------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 49.0 $ 57.8 $ 158.4 $ 172.8 ================================================================================================================= OTHER DATA Sales: Private sector pension plans $ 733.0 $ 908.4 $ 2,468.9 $ 3,083.8 Public sector pension plans 366.8 427.5 1,156.9 1,732.8 ----------------------------------------------------------------------------------------------------------------- Total institutional products sales $ 1,099.8 $ 1,335.9 $ 3,625.8 $ 4,816.6 ================================================================================================================= Average account balances: General account $ 11,769.0 $ 10,344.4 $ 11,427.7 $ 10,461.6 Separate account 22,714.2 28,628.2 23,692.3 28,220.0 ----------------------------------------------------------------------------------------------------------------- Total average account balances $ 34,483.2 $ 38,972.6 $ 35,120.0 $ 38,681.6 ================================================================================================================= Account balances as of period end: Private sector pension plans $ 15,334.0 $ 19,482.3 Public sector pension plans 14,600.5 18,950.4 Medium-term notes 2,880.5 1,287.2 ----------------------------------------------------------------------------------------------------------------- Total account balances $ 32,815.0 $ 39,719.9 ================================================================================================================= Return on average equity 20.6% 26.9% 22.8% 26.0% Pre-tax operating income to average account balances 0.57% 0.59% 0.60% 0.60% -----------------------------------------------------------------------------------------------------------------

Asset fees declined 26% to $42.4 million in the quarter ended September 30, 2001 compared to a year ago, while year-to-date 2001 asset fees were $135.4 million compared to $167.8 million in 2000. The decline was driven by a 21% decrease in average separate account assets in the quarter compared to the quarter ended a year ago and a 16% drop in year-to-date average separate account assets for the first nine months of 2001 compared to the same period a year ago. 23 Net investment income increased to $211.8 million (4%) in the third quarter of 2001 compared to a year ago. Year-to-date net investment income also increased 4% from the same period a year ago. Driving these increases were 14% and 9% increases in the average general account balance in the third quarter and first nine months of 2001, respectively, compared to the same periods a year ago, offset by lower yields. Institutional Products segment results reflect an increase in interest spread income attributable to growth in average general account assets. Interest spread is the differential between net investment income and interest credited to policyholder account balances. Interest spreads vary depending on crediting rates offered by competitors, performance of the investment portfolio, including the rate of prepayments, changes in market interest rates and other factors. The following table depicts the interest spread on average general account reserves in the Institutional Products segment for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- 2001 2000 2001 2000 ===================================================================================================== Net investment income 7.20% 7.88% 7.41% 7.80% Interest credited 5.41 5.94 5.55 5.93 ----------------------------------------------------------------------------------------------------- Interest spread 1.79% 1.94% 1.86% 1.87% =====================================================================================================

Interest spread on average general account reserves decreased from the prior year for the quarter and year-to-date. For Institutional pension products, the Company sets interest crediting rates prior to the start of the quarter. In addition, the time between when a deposit is received and an investment commitment is made, and the actual close on a commercial mortgage loan or private placement bond can be 30 to 60 days. These practices will put pressure on spreads in a declining interest rate environment. In addition, the Company experienced a significant amount of transfers into the general account placing further pressure on spreads. Other benefits and expenses in third quarter 2001 decreased 17% compared to a year ago. For the first nine months of 2001 other benefits and expenses totaled $159.5 million, down 4% from the first nine months of 2000. The decreases are the result of expense reductions in the group public sector pension business in response to a lower revenue base. Institutional Product sales during third quarter 2001 reached $1.10 billion compared to sales of $1.34 billion in third quarter 2000. For the first nine months of 2001, sales reached $3.63 billion compared to sales of $4.82 billion for the same period a year ago. The Private Sector continues to be impacted by the volatile equity markets, which reduced the average plan size of take-over cases and a slowing economy, which has resulted in reduced demand for new cases. In the Public Sector, sales declined from a year ago reflecting the impact of previously lost cases on recurring deposits. Institutional Products segment deposits in third quarter 2001 of $1.13 billion offset by participant withdrawals and surrenders totaling $918.7 million generated net flows from participant activity of $214.7 million, a 18% increase over third quarter 2000. Year-to-date 2001 net flows decreased 8% to $426.5 million compared to year-to-date 2000 net flows of $464.3 million. Life Insurance The Life Insurance segment consists of insurance products, including universal life insurance, COLI and BOLI products, which provide a death benefit and also allow the customer to build cash value on a tax-advantaged basis. 24 The following table summarizes certain selected financial data for the Company's Life Insurance segment for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ================================================================================================================= INCOME STATEMENT DATA Revenues: Total policy charges $ 76.3 $ 68.9 $ 234.5 $ 193.0 Net investment income 80.7 73.5 241.7 214.2 Other 45.3 45.1 142.2 142.5 ----------------------------------------------------------------------------------------------------------------- 202.3 187.5 618.4 549.7 ----------------------------------------------------------------------------------------------------------------- Benefits 104.6 97.0 319.6 292.2 Operating expenses 54.3 51.4 162.9 148.6 ----------------------------------------------------------------------------------------------------------------- 158.9 148.4 482.5 440.8 ----------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 43.4 $ 39.1 $ 135.9 $ 108.9 ================================================================================================================= OTHER DATA Sales: The BEST of AMERICA variable life series $ 120.4 $ 155.8 $ 409.9 $ 419.2 Corporate-owned life insurance 78.0 152.9 593.7 476.2 Traditional/Universal life insurance 56.7 59.2 178.9 179.8 ----------------------------------------------------------------------------------------------------------------- Total life insurance sales $ 255.1 $ 367.9 $ 1,182.5 $ 1,075.2 ================================================================================================================= Policy reserves as of period end: Corporate investment life insurance $ 2,981.6 $ 2,378.8 Individual investment life insurance 1,944.7 2,152.1 Traditional life insurance 1,853.2 1,807.0 Universal life insurance 779.4 770.7 ----------------------------------------------------------------------------------------------------------------- Total policy reserves $ 7,558.9 $ 7,108.6 ================================================================================================================= Return on average equity 10.8% 12.6% 12.0% 12.1% -----------------------------------------------------------------------------------------------------------------

Life Insurance segment results reflect increased revenues driven by growth in investment life insurance in force. Life Insurance segment earnings increased 11% to $43.4 million for the third quarter 2001, up from $39.1 million a year ago. On a year-to-date basis segment earnings increased 25% to $135.9 million in 2001 from $108.9 million in 2000. The increase in Life Insurance segment earnings is attributable to strong sales and increased investment life earnings due to reserve growth in both individual and corporate investment life insurance products. Driven primarily by increased policy charges, revenues from investment life products increased to $97.6 million in third quarter 2001 compared to $83.9 million in third quarter 2000, while year-to-date revenues increased to $296.9 million for 2001 compared to $232.9 million for 2000. The revenue growth reflects significantly increased policy reserve levels driven by corporate investment life reserves, which include both BOLI and COLI products, which reached $2.98 billion as of September 30, 2001, up from $2.38 billion in the same period a year ago. Pre-tax operating earnings from investment life products totaled $25.1 million in third quarter 2001 a 20% increase from $20.9 million in third quarter 2000, while the first nine months of 2001 reached $77.4 compared to $61.1 million a year ago, a 27% increase. The strong revenue growth discussed previously was offset by higher life insurance benefits due to the growth in the number of policies in-force in the third quarter and first nine months of 2001. Traditional/Universal life pre-tax operating earnings increased slightly to $18.3 million in third quarter 2001 compared to $18.2 million in the same period a year ago. For the first nine months of 2001, pre-tax operating earnings increased 22% to $58.5 million compared to $47.8 million for the first nine months of 2000, reflecting higher investment earnings and lower operating expenses. 25 Total life insurance sales, excluding BOLI and Nationwide employee and agent benefit plan sales, decreased 31% to $255.1 million in third quarter 2001 compared to $367.9 million during the same period in 2000. For the first nine months of 2001, total life insurance sales, excluding BOLI and Nationwide employee and agent benefit plan sales, increased $107.3 million over 2000 and totaled $1.18 billion. In the quarter, individual market sales were adversely impacted by uncertainty surrounding estate planning. While the number of applications and policies issued are in line with prior year, the average size is down. COLI sales are down given the depressed economic environment where corporations are not forming new executive benefit plans and existing plans are being funded at lower levels. Corporate The following table summarizes certain selected financial data for the Company's Corporate segment for the periods indicated.

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- (in millions) 2001 2000 2001 2000 ================================================================================================================= INCOME STATEMENT DATA Operating revenues(1) $ 10.1 $ 19.5 $ 34.6 $ 54.9 Operating expenses 1.2 9.2 10.2 27.9 ----------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) $ 8.9 $ 10.3 $ 24.4 $ 27.0 =================================================================================================================

---------- (1) Excludes net realized gains and losses on investments, hedging instruments and hedged items. The Corporate segment consists of net investment income on invested assets not allocated to the three product segments, unallocated expenses and interest expense on short-term borrowings. The decline in revenues reflects a decrease in net investment income on real estate investments and fewer investments retained in the corporate segment as more capital and the related investments earnings are allocated to the product segments to support growth. 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. The Company realized net investment gains of $37.4 million and net losses on hedges and hedged items of $0.7 million during the third quarter of 2001 compared to realized net investment losses of $2.1 million during the third quarter of 2000. For the first nine months of 2001, the Company realized net investment gains of $33.0 million and net gains on hedges and hedged items of $1.9 million compared to realized net investment losses of $15.9 million during the first nine months of 2000. During the third quarter and first nine months of 2001, a net investment gain of $44.4 million was realized upon the reduction of an interest in a real estate partnership investment. In addition, the Company realized an after tax loss of $4.8 million related to the adoption of FAS 133 in first quarter 2001 and an after tax loss of $2.3 related to the adoption of EITF 99-20 in second quarter 2001. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted due to reduced disclosure format. 26 PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS The Company is a party to litigation and arbitration proceedings in the ordinary course of its business, none of which is expected to have a material adverse effect on the Company. In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits, relating to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements. On October 29, 1998, the Company was named in a lawsuit filed in Ohio state court related to the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (Mercedes Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999, the complaint was amended to, among other things, add Marcus Shore as a second plaintiff. The amended complaint is brought as a class action on behalf of all persons who purchased individual deferred annuity contracts or participated in group annuity contracts sold by the Company and the other named Company affiliates which were used to fund certain tax-deferred retirement plans. The amended complaint seeks unspecified compensatory and punitive damages. No class has been certified. On June 11, 1999, the Company and the other named defendants filed a motion to dismiss the amended complaint. On March 8, 2000, the court denied the motion to dismiss the amended complaint filed by the Company and other named defendants. The Company intends to defend this lawsuit vigorously. There can be no assurance that any litigation relating to pricing or sales practices will not have a material adverse effect on the Company in the future. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted due to reduced disclosure format. ITEM 3 DEFAULTS UPON SENIOR SECURITIES Omitted due to reduced disclosure format. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted due to reduced disclosure format. ITEM 5 OTHER INFORMATION Omitted due to reduced disclosure format. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.8 Form of Amended and Restated Nationwide Office of Investment Incentive Plan dated November 12, 2001 (Filed as exhibit 10.10 to Form 10-Q, Commission File Number 1-12785, filed November 13, 2001). (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three-month period ended September 30, 2001. 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONWIDE LIFE INSURANCE COMPANY --------------------------------- (Registrant) Date: November 13, 2001 /s/Mark R. Thresher ---------------------------------- Mark R. Thresher Senior Vice President - Finance - Nationwide Financial (Chief Accounting Officer) 28