Quarterly Report

10-Q 1 d10q.htm QUARTERLY REPORT Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 2-64559

NATIONWIDE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)


Ohio		31-4156830
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

One Nationwide Plaza, Columbus, Ohio		43215
(Address of principal executive offices)		(Zip Code)

(614) 249-7111

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of October 28, 2005, the registrant had 3,814,779 shares outstanding of its common stock (par value $1 per share).

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 in the reduced disclosure format.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION		1

ITEM 1 Unaudited Consolidated Financial Statements		1

ITEM 2 Management’s Narrative Analysis of the Results of Operations		26

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk		57

ITEM 4 Controls and Procedures		57

PART II – OTHER INFORMATION		58

ITEM 1 Legal Proceedings		58

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds		60

ITEM 3 Defaults Upon Senior Securities		60

ITEM 4 Submission of Matters to a Vote of Security Holders		60

ITEM 5 Other Information		60

ITEM 6 Exhibits		60

SIGNATURE		62

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 September 30,						Nine months ended September 30,
	2005			2004			2005		2004
Revenues:
Policy charges	$	268.7		$	254.4		$	790.7	$	763.3
Life insurance premiums		58.9			70.9			190.3		201.4
Net investment income		534.3			514.3			1,578.7		1,499.4
Net realized (losses) gains on investments, hedging instruments and hedged items and hedged items		(15.1	)		(11.4	)		6.1		(50.0	)
Other		0.6			1.3			1.5		7.8

Total revenues		847.4			829.5			2,567.3		2,421.9

Benefits and expenses:
Interest credited to policyholder account values		338.5			322.7			996.0		950.7
Other benefits and claims		91.1			100.2			282.1		280.4
Policyholder dividends on participating policies		6.9			7.1			24.9		26.8
Amortization of deferred policy acquisition costs		115.9			94.1			345.9		299.9
Interest expense on debt, primarily with Nationwide Financial Services, Inc. (NFS)		17.4			15.0			48.7		44.9
Other operating expenses		135.3			147.0			396.8		433.3

Total benefits and expenses		705.1			686.1			2,094.4		2,036.0

Income from continuing operations before federal income tax expense		142.3			143.4			472.9		385.9
Federal income tax (benefit) expense		(13.1	)		36.3			70.3		87.7

Income from continuing operations		155.4			107.1			402.6		298.2
Cumulative effect of adoption of accounting principle, net of taxes		—			—			—		(3.3	)

Net income	$	155.4		$	107.1		$	402.6	$	294.9

See accompanying notes to unaudited consolidated financial statements,

including Note 8 which describes related party transactions.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Consolidated Balance Sheets

(in millions, except per share amounts)


	September 30, 2005		December 31, 2004
	(Unaudited)
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $27,031.0 in 2005; $26,708.7 in 2004)	$	27,454.3	$	27,652.0
Equity securities (cost $30.8 in 2005; $37.7 in 2004)		42.6		48.1
Mortgage loans on real estate, net		8,621.7		8,649.2
Real estate, net		85.6		83.9
Policy loans		594.6		644.5
Other long-term investments		562.7		539.6
Short-term investments, including amounts managed by a related party		1,756.2		1,645.8

Total investments		39,117.7		39,263.1

Cash		1.1		15.5
Accrued investment income		371.6		364.2
Deferred policy acquisition costs		3,550.2		3,416.6
Other assets		1,863.7		2,099.8
Assets held in separate accounts		61,773.4		60,798.7

Total assets	$	106,677.7	$	105,957.9

Liabilities and Shareholder’s Equity
Liabilities:
Future policy benefits and claims	$	36,254.0	$	36,383.1
Short-term debt		382.2		215.0
Long-term debt, payable to NFS		706.6		700.0
Other liabilities		3,232.2		3,645.2
Liabilities related to separate accounts		61,773.4		60,798.7

Total liabilities		102,348.4		101,742.0

Shareholder’s equity:
Common stock, $1 par value; authorized - 5.0 shares; issued and outstanding - 3.8 shares		3.8		3.8
Additional paid-in capital		274.4		274.4
Retained earnings		3,871.5		3,543.9
Accumulated other comprehensive income		179.6		393.8

Total shareholder’s equity		4,329.3		4,215.9

Total liabilities and shareholder’s equity	$	106,677.7	$	105,957.9

See accompanying notes to unaudited consolidated financial statements,

including Note 8 which describes related party transactions.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Consolidated Statements of Shareholder’s Equity

Nine Months Ended September 30, 2005 and 2004

(Unaudited)

(in millions)


	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income			Total shareholder’s equity
Balance as of December 31, 2003	$	3.8	$	271.3	$	3,257.2		$	467.3		$	3,999.6

Comprehensive income:
Net income		—		—		294.9			—			294.9
Net unrealized losses on securities available-for-sale arising during the period, net of taxes		—		—		—			(21.1	)		(21.1	)
Accumulated net losses on cash flow hedges, net of taxes		—		—		—			(5.9	)		(5.9	)

Total comprehensive income												267.9

Dividends to NFS		—		—		(125.0	)		—			(125.0	)

Balance as of September 30, 2004	$	3.8	$	271.3	$	3,427.1		$	440.3		$	4,142.5

Balance as of December 31, 2004	$	3.8	$	274.4	$	3,543.9		$	393.8		$	4,215.9

Comprehensive income:
Net income		—		—		402.6			—			402.6
Net unrealized losses on securities available-for-sale arising during the period, net of taxes		—		—		—			(235.3	)		(235.3	)
Accumulated net gains on cash flow hedges, net of taxes		—		—		—			21.1			21.1

Total comprehensive income												188.4

Dividends to NFS		—		—		(75.0	)		—			(75.0	)

Balance as of September 30, 2005	$	3.8	$	274.4	$	3,871.5		$	179.6		$	4,329.3

See accompanying notes to unaudited consolidated financial statements,

including Note 8 which describes related party transactions.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Consolidated Statements of Cash Flows

(Unaudited)

(in millions)


	Nine months ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	402.6		$	294.9
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses on investments, hedging instruments and hedged items		(6.1	)		50.0
Interest credited to policyholder account values		996.0			950.7
Capitalization of deferred policy acquisition costs		(345.3	)		(382.4	)
Amortization of deferred policy acquisition costs		345.9			299.9
Amortization and depreciation		49.4			54.0
Increase in accrued investment income		(7.4	)		(8.1	)
Decrease (increase) in other assets		262.3			(45.8	)
(Decrease) increase in policy and other liabilities		(382.7	)		34.8
Other, net		(35.9	)		(14.2	)

Net cash provided by operating activities		1,278.8			1,233.8

Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale		3,863.2			2,803.9
Proceeds from sale of securities available-for-sale		2,252.9			1,112.5
Proceeds from repayments of mortgage loans on real estate		1,850.2			1,344.4
Cost of securities available-for-sale acquired		(5,570.1	)		(4,924.5	)
Cost of mortgage loans on real estate originated or acquired		(1,699.2	)		(1,584.0	)
Net change in short-term investments		(84.7	)		226.6
Collateral received – securities lending, net		87.6			154.1
Other, net		(627.7	)		(155.5	)

Net cash provided by (used in) investing activities		72.2			(1,022.5	)

Cash flows from financing activities:
Net change in short-term debt		167.2			106.3
Net proceeds from issuance of long-term debt		6.6			—
Cash dividends paid to NFS		(75.0	)		(125.0	)
Investment and universal life insurance product deposits		1,561.8			3,023.9
Investment and universal life insurance product withdrawals		(3,026.0	)		(3,211.5	)

Net cash used in financing activities		(1,365.4	)		(206.3	)

Net (decrease) increase in cash		(14.4	)		5.0
Cash, beginning of period		15.5			0.1

Cash, end of period	$	1.1		$	5.1

See accompanying notes to unaudited consolidated financial statements,

including Note 8 which describes related party transactions.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements

September 30, 2005 and 2004

(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 U.S. generally accepted accounting principles (GAAP) 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 GAAP for complete financial statements. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. 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, 2004 included in the Company’s 2004 Annual Report on Form 10-K.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

(2)

Summary of Significant Accounting Policies

Reclassification

Certain items in the unaudited consolidated financial statements and related notes have been reclassified to conform to the current presentation.

(3)

Recently Issued Accounting Standards

In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (SFAS) No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, issued by the Financial Accounting Standards Board (FASB). SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Retrospective application of SOP 05-1 to previously issued financial statements is not permitted. Initial application of SOP 05-1 should be as of the beginning of an entity’s fiscal year. The Company will adopt SOP 05-1 effective January 1, 2007. Although the Company is currently unable to quantify the impact of adoption, SOP 05-1 could have a material impact on the Company’s financial position and/or results of operations once adopted.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154), which replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changes (APB 20), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 requires retrospective application of changes in accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported on the income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, SFAS 154 requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. SFAS 154 carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate and justifying a change in accounting principle on the basis of preferability. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. The Company will adopt SFAS 154 effective January 1, 2006. SFAS 154 is not expected to have any impact on the Company’s financial position or results of operations upon adoption.

In March 2004, the Emerging Issues Task Force (EITF) reached consensus on further guidance concerning the identification of and accounting for other-than-temporary impairments and disclosures for cost method investments, as required by EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1), which was issued on October 23, 2003. The Company disclosed in its Quarterly Report on Form 10-Q for the period ended June 30, 2004 that this additional guidance would be applied during its third quarter beginning July 1, 2004. Also, effective June 30, 2004, the Company revised its method of evaluating securities to be sold based on additional interpretation of the intent to hold criteria in EITF 03-1. This revision had no impact on the Company’s financial position or results of operations.

On September 8, 2004, the FASB issued for comment FASB Staff Position (FSP) EITF Issue 03-1-a, which was intended to provide guidance related to the application of paragraph 16 of EITF 03-1, and proposed FSP EITF Issue 03-1-b, which proposed a delay in the effective date of EITF 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. Based on comments received on these proposals, on September 30, 2004 the FASB issued FSP EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, which delayed the effectiveness of the guidance in EITF 03-1 in its entirety, with the exception of certain disclosure requirements. The delay had no impact on the Company’s financial position or results of operations.

At its June 29, 2005 meeting, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment. Instead, the FASB will issue proposed FSP EITF 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP will supersede EITF 03-1 and EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value (EITF Topic D-44). The final FSP, retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP FAS 115-1), will replace the guidance set forth in paragraphs 10-18 of EITF 03-1 with references to existing other-than-temporary impairment guidance. FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. At its September 14, 2005 meeting, the FASB decided that FSP FAS 115-1 would be applied prospectively effective for periods beginning after December 15, 2005. The FASB also decided to add a footnote to clarify that the final FSP will not address when a debt security should be designated as nonaccrual or how to subsequently report income on a nonaccrual debt security. The finalized FSP is expected to be issued during the fourth quarter of 2005. The Company continues to actively monitor its portfolio for any securities deemed to be other-than-temporarily impaired based on the guidance in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SEC SAB No. 59, Accounting for Noncurrent Marketable Equity Securities, which is expected to be the guidance referenced in FSP FAS 115-1. Because the Company’s existing policies are consistent with the guidance in FSP FAS 115-1, the adoption of FSP FAS 115-1 is not expected to have an impact on the Company’s financial position or results of operations.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

In June 2004, the FASB issued FSP FAS 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability (FSP FAS 97-1), to clarify the guidance related to unearned revenue reserves (URR). The primary purpose of FSP FAS 97-1 is to address the practice question of whether SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), issued by the AICPA, restricts the application of the URR guidance in SFAS No. 97 to situations in which profits are expected to be followed by losses. Because the Company was computing its URR in accordance with FSP FAS 97-1 at the time SOP 03-1 was adopted, the issuance of FSP FAS 97-1 had no impact on the Company’s financial position or results of operations at the time of adoption.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law on December 8, 2003. In accordance with FSP FAS 106-1, Accounting and Disclosure Requirements Related to The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-1), issued in January 2004, the Company elected to defer accounting for the effects of the Act until the FASB issued guidance on how to account for the provisions of the Act. In May 2004, the FASB issued FSP FAS 106-2, Accounting and Disclosure Requirements Related to The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-2), which superceded FSP FAS 106-1 and provided guidance on accounting and disclosures related to the Act. Specifically, measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost on or after the date of enactment must reflect the effects of the Act. The Company’s adoption of FSP FAS 106-2, effective June 30, 2004, had no impact on the Company’s financial position or results of operations due the application of Company maximum contribution caps and because the Company does not apply to the United States government for benefit reimbursements.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106 (SFAS 132R). SFAS 132R provides revised disclosure guidance for pension and other postretirement benefit plans but does not change the measurement or recognition of those plans under existing guidance. Disclosures previously required under SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which was replaced by SFAS 132R, were retained. In addition, SFAS 132R requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans on both an interim period and annual basis. See Note 7 for required disclosures. The Company adopted SFAS 132R effective December 31, 2003, except for the provisions relating to annual disclosures about estimated benefit payments, which was adopted in the fourth quarter of 2004, as permitted by SFAS 132R. Adoption of SFAS 132R had no impact on the Company’s financial position or results of operations.

In July 2003, the AICPA issued SOP 03-1 to address many topics. The most significant topic affecting the Company was the accounting for contracts with guaranteed minimum death benefits (GMDB). SOP 03-1 requires companies to evaluate the significance of a GMDB to determine whether a contract should be accounted for as an investment or insurance contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. SOP 03-1 also provides guidance on separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, return based on a contractually referenced pool of assets or index, annuitization options, and sales inducements to contract holders. The Company adopted SOP 03-1 effective January 1, 2004, which resulted in a $3.3 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

The following table summarizes the components of cumulative effect adjustments recorded in the Company’s 2004 consolidated statements of income:


(in millions)	January 1, 2004
Increase in future policy benefits:
Ratchet interest crediting	$	(12.3	)
Secondary guarantees - life insurance		(2.4	)
GMDB claim reserves		(1.8	)
Guaranteed minimum income benefits (GMIB) claim reserves		(1.0	)

Subtotal		(17.5	)
Adjustment to amortization of deferred policy acquisition costs related to above		12.4
Deferred federal income taxes		1.8

Cumulative effect of adoption of accounting principle, net of taxes	$	(3.3	)

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(4)

Variable Annuity Contracts

The Company issues traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contract holder. The Company also issues non-traditional variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contract holders. The Company provides four primary guarantee types under non-traditional variable annuity contracts: (1) GMDB; (2) guaranteed minimum accumulation benefits (GMAB); (3) GMIB; and (4) a hybrid guarantee with GMAB and guaranteed minimum withdrawal benefits (GMWB).

The GMDB provides a specified minimum return upon death. Many, but not all, of these death benefits are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivor’s death. The Company has offered six primary GMDB types:

•

Return of premium – provides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net premiums.” There are two variations of this benefit. In general, there is no lock in age for this benefit. However, for some contracts the GMDB reverts to the account value at a specified age, typically age 75.

•

Reset – provides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to lock-in age) account value adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for others the GMDB reverts to the account value at age 75, 85, 86 or 90.

•

Ratchet – provides the greater of a return of premium death benefit or the highest specified “anniversary” account value (prior to age 86) adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: monthaversary – evaluated monthly; annual – evaluated annually; and five-year – evaluated every fifth year.

•

Rollup – provides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated at generally 5% simple interest up to the earlier of age 86 or 200% of adjusted premiums. There are two variations of this benefit. For certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to the account value at age 75.

•

Combo – provides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either age 81 or 86.

•

Earnings enhancement – provides an enhancement to the death benefit that is a specified percentage of the adjusted earnings accumulated on the contract at the date of death. There are two versions of this benefit: (1) the benefit expires at age 86, and a credit of 4% of account value is deposited into the contract; and (2) the benefit does not have an end age, but has a cap on the payout and is paid upon the first death in a spousal situation. Both benefits have age limitations. This benefit is paid in addition to any other death benefits paid under the contract.

The GMAB, offered in the Company’s Capital Preservation Plus (CPP) contract rider, is a living benefit that provides the contract holder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contract holder at the issuance of the variable annuity contract. In some cases, the contract holder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.

The GMIB is a living benefit that provides the contract holder with a guaranteed annuitization value. The GMIB types are:

•

Ratchet – provides an annuitization value equal to the greater of account value, net premiums or the highest one-year anniversary account value (prior to age 86) adjusted for withdrawals.

•

Rollup – provides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated at 5% compound interest up to the earlier of age 86 or 200% of adjusted premiums.

•

Combo – provides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB benefit.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

Beginning in March 2005, the Company began offering a hybrid GMAB/GMWB living benefit through its Capital Preservation Plus Lifetime Income contract rider. This living benefit combines a GMAB feature in its first 5-10 years (virtually identical to the previously described CPP benefit) with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of the insured’s life. In the event that the insured’s contract value is exhausted through such withdrawals, the Company shall continue to fund future withdrawals at a pre-defined level until the insured’s death. In some cases, the contract owner has the right to drop the GMWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy. All GMAB contracts with the hybrid GMAB/GMWB living benefit rider are included with GMAB contracts in the following tables.

The following table summarizes the account values and net amount at risk, net of reinsurance, for variable annuity contracts with guarantees invested in both general and separate accounts as of the dates indicated:


	September 30, 2005					December 31, 2004
(in millions)	Account value		Net amount at risk¹		Wtd. avg. attained age	Account value		Net amount at risk¹		Wtd. avg. attained age
GMDB:
Return of premium	$	9,312.7	$	38.7	60	$	9,675.4	$	54.1	59
Reset		16,927.2		82.7	62		17,315.9		153.2	62
Ratchet		10,621.0		32.6	65		9,621.0		42.3	64
Rollup		603.3		8.8	69		638.6		9.7	68
Combo		2,519.4		22.5	67		2,519.9		19.2	67

Subtotal		39,983.6		185.3	63		39,770.8		278.5	62
Earnings enhancement		406.7		25.0	61		310.1		18.0	60

Total - GMDB	$	40,390.3	$	210.3	63	$	40,080.9	$	296.5	62

GMAB²:
5 Year	$	849.6	$	0.6	N/A	$	460.6	$	0.1	N/A
7 Year		955.1		0.3	N/A		568.4		—	N/A
10 Year		536.3		0.1	N/A		304.0		—	N/A

Total - GMAB	$	2,341.0	$	1.0	N/A	$	1,333.0	$	0.1	N/A

GMIB³:
Ratchet	$	440.4	$	—	N/A	$	437.7	$	—	N/A
Rollup		1,180.1		0.1	N/A		1,188.2		—	N/A
Combo		0.6		—	N/A		1.0		—	N/A

Total - GMIB	$	1,621.1	$	0.1	N/A	$	1,626.9	$	—	N/A

Net amount at risk is calculated on a seriatum basis and represents the greater of the respective guaranteed benefit less the account value and zero. As it relates to GMIB, net amount at risk is calculated as if all policies were eligible to annuitize immediately, although all GMIB options have a waiting period of at least 7 years from issuance, with the earliest annuitizations beginning in 2006.

GMAB contracts with the hybrid GMAB/GMWB living benefit rider had account values of $543.3 as of September 30, 2005.

The weighted average period remaining until expected annuitization is not meaningful and has not been presented because there is currently no material GMIB exposure.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

Following is a rollforward of the liabilities for guarantees on variable annuity contracts reflected in the Company’s general account for the periods indicated:


(in millions)	GMDB			GMAB			GMIB		Total
Balance as of December 31, 2003	$	21.8		$	4.3		$	—	$	26.1
Expense provision		25.0			—			0.8		25.8
Net claims paid		(23.2	)		—			—		(23.2	)
Value of new business sold		—			24.7			—		24.7
Change in fair value		—			(8.4	)		—		(8.4	)

Balance as of December 31, 2004		23.6			20.6			0.8		45.0
Expense provision		24.6			—			0.2		24.8
Net claims paid		(24.1	)		—			—		(24.1	)
Value of new business sold		—			32.7			—		32.7
Change in fair value		—			(2.9	)		—		(2.9	)

Balance as of September 30, 2005	$	24.1		$	50.4		$	1.0	$	75.5

The following table summarizes account balances of contracts with guarantees that were invested in separate accounts as of the dates indicated:


(in millions)	September 30, 2005		December 31, 2004
Mutual funds:
Bond	$	3,846.1	$	4,136.8
Domestic equity		27,559.0		27,402.4
International equity		2,001.7		1,831.3

Total mutual funds		33,406.8		33,370.5
Money market funds		1,526.8		1,313.6

Total	$	34,933.6	$	34,684.1

The Company’s GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments. GMIB claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total assessments. The Company regularly evaluates GMDB and GMIB claim reserve estimates used and adjusts the additional liability balances as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the calculation of GMIB claim reserves assumes benefit utilization ranges from a low of 3% when the contract holder’s annuitization value is 10% in the money to 100% utilization when the contract holder is 90% in the money.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

The following assumptions and methodology were used to determine the GMDB claim reserves as of September 30, 2005 and December 31, 2004:

•

Data used was based on a combination of historical numbers and future projections involving 50 probabilistically generated economic scenarios

•

Mean gross equity performance – 8.1%

•

Equity volatility – 18.7%

•

Mortality – 100% of Annuity 2000 table

•

Asset fees – equivalent to mutual fund and product loads

•

Discount rate – 8.0%

Lapse rate assumptions vary by duration as shown below:


Duration (years)	1	2	3	4	5	6	7	8	9	10+
Minimum	4.50%	5.50%	6.50%	8.50%	10.50%	10.50%	10.50%	17.50%	17.50%	17.50%
Maximum	4.50%	8.50%	11.50%	17.50%	22.50%	22.50%	22.50%	22.50%	22.50%	19.50%

GMABs and hybrid GMABs/GMWBs are considered embedded derivatives under current accounting guidance, resulting in the related liabilities being separated from the host insurance product and recognized at fair value, with changes in fair value reported in earnings, and therefore, excluded from the SOP 03-1 policy benefits.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(5)

Federal Income Taxes

During the third quarter of 2005, the Company refined its separate account dividends received deduction (DRD) estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all open tax years (2000 – 2005). In addition, the Company recorded $5.6 million of net benefit adjustments in the third quarter of 2005, primarily related to differences between the estimated tax liability and the amounts reported on the Company’s tax returns and revised estimates of permanent income tax deductions expected to be generated in 2005.

Total federal income tax expense differs from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before federal income taxes as follows for the periods indicated:


	Three months ended September 30,
	2005					2004
(in millions)	Amount			%		Amount			%
Computed (expected) tax expense	$	49.8		35.0		$	50.2		35.0
Tax exempt interest and dividends received deduction		(62.6	)	(44.0	)		(10.4	)	(7.3	)
Income tax credit		(6.0	)	(4.2	)		(2.5	)	(1.8	)
Interest accrual		3.9		2.8			—		—
Other, net		1.8		1.2			(1.0	)	(0.6	)

Total	$	(13.1	)	(9.2	)	$	36.3		25.3


	Nine months ended September 30,
	2005					2004
(in millions)	Amount			%		Amount			%
Computed (expected) tax expense	$	165.5		35.0		$	135.1		35.0
Tax exempt interest and dividends received deduction		(86.7	)	(18.3	)		(33.7	)	(8.7	)
Income tax credit		(13.6	)	(2.9	)		(7.9	)	(2.1	)
Interest accrual		3.9		0.8			—		—
Other, net		1.2		0.3			(5.8	)	(1.5	)

Total	$	70.3		14.9		$	87.7		22.7

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(6)

Comprehensive Income

Comprehensive income includes net income and certain items that are reported directly within separate components of shareholder’s equity that are not recorded in net income (other comprehensive income or loss). The following table summarizes the Company’s other comprehensive (loss) income, before and after federal income tax benefit (expense), for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(in millions)	2005			2004			2005			2004
Net unrealized (losses) gains on securities available-for-sale arising during the period:
Net unrealized (losses) gains before adjustments	$	(483.6	)	$	401.5		$	(503.9	)	$	(121.9	)
Net adjustment to deferred policy acquisition costs		135.6			(108.5	)		134.2			47.3
Net adjustment to future policy benefits and claims		58.2			(41.9	)		22.4			1.4
Related federal income tax benefit (expense)		101.5			(87.9	)		121.6			25.6

Net unrealized (losses) gains		(188.3	)		163.2			(225.7	)		(47.6	)

Reclassification adjustment for net realized losses (gains) on securities available-for-sale realized during the period:
Net unrealized losses (gains)		8.9			9.6			(14.7	)		40.8
Related federal income tax (benefit) expense		(3.2	)		(3.4	)		5.1			(14.3	)

Net reclassification adjustment		5.7			6.2			(9.6	)		26.5

Other comprehensive (loss) income on securities available-for-sale		(182.6	)		169.4			(235.3	)		(21.1	)

Accumulated net holding gains (losses) on cash flow hedges:
Unrealized holding gains (losses)		3.6			(6.6	)		32.4			(9.1	)
Related federal income tax (expense) benefit		(1.2	)		2.3			(11.3	)		3.2

Other comprehensive income (loss) on cash flow hedges		2.4			(4.3	)		21.1			(5.9	)

Total other comprehensive (loss) income	$	(180.2	)	$	165.1		$	(214.2	)	$	(27.0	)

Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the three and nine month periods ended September 30, 2005 and 2004, respectively.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(7)

Pension Plan and Postretirement Benefits Other Than Pensions

The Company and certain affiliated companies not included in these consolidated financial statements participate in a defined benefit pension plan sponsored by Nationwide Mutual Insurance Company (NMIC). The following table summarizes the components of net periodic benefit cost for the NMIC pension plan as a whole, including amounts not related to the Company, for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(in millions)	2005			2004			2005			2004
Service cost	$	33.6		$	31.8		$	100.7		$	91.4
Interest cost		33.7			34.2			101.1			100.5
Expected return on plan assets		(43.0	)		(44.8	)		(129.1	)		(125.8	)
Recognized net actuarial loss		0.9			(2.3	)		2.8			—
Amortization of prior service cost		1.1			1.8			3.4			3.4
Amortization of unrecognized transition asset		(0.3	)		(0.3	)		(0.9	)		(1.0	)

Net periodic benefit cost	$	26.0		$	20.4		$	78.0		$	68.5

NMIC and all participating employers, including the Company, have contributed a total of $240.2 million to this pension plan during 2005, including $125.2 million of funding for plan year 2004 and $115.0 million of funding for plan year 2005. The Company’s total contribution of $41.1 million through September 30, 2005 represents $20.6 million of funding for plan year 2004 and $20.5 million of funding for plan year 2005. No additional contributions to this pension plan are anticipated for the remainder of the year. Tax planning strategies influence the timing of plan contributions.

In addition to the defined benefit pension plan, the Company and certain affiliated companies not included in these consolidated financial statements participate in life and health care defined benefit plans sponsored by NMIC. The following table summarizes the components of net periodic benefit cost (income) for the NMIC postretirement benefit plans as a whole, including amounts not related to the Company, for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(in millions)	2005			2004			2005			2004
Service cost	$	2.3		$	1.5		$	7.2		$	6.9
Interest cost		4.0			2.9			12.0			13.1
Expected return on plan assets		(2.2	)		(2.4	)		(6.6	)		(6.6	)
Recognized net actuarial loss (gain)		0.4			(1.4	)		1.1			1.1
Amortization of prior service cost		(3.6	)		(3.4	)		(11.0	)		(10.2	)

Net periodic benefit cost (income)	$	0.9		$	(2.8	)	$	2.7		$	4.3

NMIC and all participating employers, including the Company, expect to contribute a total of $17.2 million to the postretirement benefit plans during 2005. Through September 30, 2005, $12.9 million had been contributed, including $2.6 million by the Company. Additional contributions to the plan totaling $4.3 million are anticipated from NMIC and all participating employers, including $0.9 million by the Company, for the remainder of the year. Postretirement benefit plan contributions generally are funded on a monthly basis.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(8)

Related Party Transactions

The Company has entered into significant, recurring transactions and agreements with NMIC, other affiliates and subsidiaries as a part of its ongoing operations. These include annuity and life insurance contracts, office space leases, and agreements related to reinsurance, cost sharing, administrative services, marketing, intercompany loans, intercompany repurchases, cash management services and software licensing. These transactions and agreements are described more fully in Note 16 to the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K and in Part II, Item 5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. During the third quarter of 2005, there have been no material changes to the nature and terms of these transactions and agreements.

Amounts on deposit with a related party in cash management for the benefit of the Company were $547.9 million and $500.2 million as of September 30, 2005 and December 31, 2004, respectively, and were recorded in short-term investments.

The Company periodically enters into intercompany loan agreements with NFS at terms the Company believes are materially consistent with what NFS could have obtained from unaffiliated parties. During the quarter ended June 30, 2005, the Company loaned $15.0 million to NFS. The loan was repaid during the quarter, and related interest income was immaterial. The Company had no other loan activity with NFS during the first nine months of 2005.

The Company also participates in intercompany repurchase agreements with affiliates whereby the seller transfers securities to the buyer at a stated value. Upon demand or after a stated period, the seller repurchases the securities at the original sales price plus interest. As of September 30, 2005 and December 31, 2004, the Company had no cash borrowings outstanding from affiliated entities under such agreements. During the first nine months of 2005 and 2004, the maximum outstanding borrowings under such agreements were $55.3 million and $227.7 million, respectively, and the amounts the Company incurred for interest expense on intercompany repurchase agreements during these periods were immaterial. The Company believes that the terms of the repurchase agreements are materially consistent with what the Company could have obtained from unaffiliated parties.

Funds of Gartmore Global Investments, Inc. (GGI), an affiliate, are offered to the Company’s customers as investment options in certain of the Company’s products. As of September 30, 2005 and December 31, 2004, customer allocations to GGI funds totaled $15.41 billion and $14.06 billion, respectively. For the distribution and servicing of these funds, GGI paid the Company $13.2 million and $11.6 million for the quarters ended September 30, 2005 and 2004, respectively ($38.1 million and $33.3 million for the first nine months of 2005 and 2004, respectively).

During the first nine months of 2005 and 2004, NLIC paid dividends to NFS totaling $75.0 million and $125.0 million, respectively.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(9)

Contingencies

Legal Matters

The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses. Some of the matters, including certain of those referred to below, are in very preliminary stages, and the Company does not have sufficient information to make an assessment of plaintiffs’ claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, that are difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by the Company’s management, that the outcomes of such pending investigations and legal proceedings are likely to have a material adverse effect on the Company’s consolidated financial position. However, given the large and/or indeterminate amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Company’s consolidated financial results in a particular quarterly or annual period.

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 to life insurers other than the Company.

The financial services industry, including mutual fund, variable annuity, life insurance and distribution companies, has also been the subject of increasing scrutiny by regulators, legislators and the media over the past two years. Numerous regulatory agencies, including the SEC, the National Association of Securities Dealers and the New York State Attorney General, have commenced industry-wide investigations regarding late trading and market timing in connection with mutual funds and variable insurance contracts, and have commenced enforcement actions against some mutual fund and life insurance companies on those issues. The Company has been contacted by or received subpoenas from the SEC and the New York State Attorney General, who are investigating market timing in certain mutual funds offered in insurance products sponsored by the Company. The Company is cooperating with this investigation and is responding to information requests.

In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are compensation arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, the use of side agreements and finite reinsurance agreements, and funding agreements issued to back medium-term note (MTN) programs. Related investigations and proceedings may be commenced in the future. The Company and/or its affiliates have been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state attorneys general for information relating to these investigations into compensation and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, the use of side agreements and finite reinsurance agreements, and funding agreements backing the MTN program. The Company is cooperating with regulators in connection with these inquiries.

These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide legislation, rules and regulations that could significantly affect the financial services industry, including life insurance and annuity companies. These proceedings also could affect the outcome of one or more of the Company’s litigation matters.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. On December 27, 2004, the case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding there entitled In Re Mutual Funds Investment Litigation. In response, on May 13, 2005, the plaintiff filed a First Amended Complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The First Amended Complaint purports to disclaim, with respect to market timing or stale price trading in NLIC’s annuities sub-accounts, any allegation based on NLIC’s untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any class member’s purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who, prior to NLIC’s untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The First Amended Complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or class member, including all compensatory damages and costs. On June 24, 2005, NLIC filed a motion to dismiss the First Amended Complaint. The plaintiff has opposed that motion. NLIC intends to defend this lawsuit vigorously.

On January 21, 2004, the Company was named in a lawsuit filed in the United States District Court for the Northern District of Mississippi entitled United Investors Life Insurance Company v. Nationwide Life Insurance Company and/or Nationwide Life Insurance Company of America and/or Nationwide Life and Annuity Insurance Company and/or Nationwide Life and Annuity Company of America and/or Nationwide Financial Services, Inc. and/or Nationwide Financial Corporation, and John Does A-Z. In its complaint, plaintiff United Investors alleges that the Company and/or its affiliated life insurance companies caused the replacement of variable insurance policies and other financial products issued by United Investors with policies issued by the Nationwide defendants. The plaintiff raises claims for (1) violations of the Federal Lanham Act, and common law unfair competition and defamation, (2) tortious interference with the plaintiff’s contractual relationship with Waddell & Reed, Inc. and/or its affiliates, Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc. and W&R Insurance Agency, Inc., or with the plaintiff’s contractual relationships with its variable policyholders, (3) civil conspiracy, and (4) breach of fiduciary duty. The complaint seeks compensatory damages, punitive damages, pre- and post-judgment interest, a full accounting, a constructive trust, and costs and disbursements, including attorneys’ fees. The Company filed a motion to dismiss the complaint on June 1, 2004. On February 8, 2005 the court denied the motion to dismiss. On March 23, 2005, the Company filed its answer. The Company intends to defend this lawsuit vigorously.

On October 31, 2003, NLIC and Nationwide Life and Annuity Insurance Company (NLAIC) were named in a lawsuit seeking class action status filed in the United States District Court for the District of Arizona entitled Robert Helman et al v. Nationwide Life Insurance Company et al. The suit challenges the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans. On April 8, 2004, the plaintiff filed an amended class action complaint on behalf of all persons who purchased an individual variable deferred annuity contract or a certificate to a group variable annuity contract issued by NLIC or NLAIC which were allegedly used to fund certain tax-deferred retirement plans. The amended class action complaint seeks unspecified compensatory damages. NLIC and NLAIC filed a motion to dismiss the complaint on May 24, 2004. On July 27, 2004, the court granted the motion to dismiss. The plaintiff has appealed that dismissal to the United States Court of Appeals for the Ninth Circuit. NLIC and NLAIC intend to defend this lawsuit vigorously.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

On August 15, 2001, the Company was named in a lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. The plaintiffs first amended their complaint on September 5, 2001 to include class action allegations and have subsequently amended their complaint three times. As amended, in the current complaint the plaintiffs seek to represent a class of ERISA qualified retirement plans that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that the Company breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments allegedly received by the Company, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. On December 13, 2001, the plaintiffs filed a motion for class certification. The plaintiffs filed a supplement to that motion on September 19, 2003. The Company opposed that motion on December 24, 2003. On July 6, 2004, the Company filed a Revised Memorandum in Support of Summary Judgment. The plaintiffs have opposed that motion. The Company intends to defend this lawsuit vigorously.

Tax Matters

The Company’s federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and the Company is currently under examination for the 2000-2002 tax years. The Company has established tax reserves representing its best estimate of additional amounts it may be required to pay if certain tax positions it has taken are challenged and ultimately denied by the IRS. These reserves are reviewed regularly and are adjusted as events occur that the Company believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items, additional exposure based on current calculations, identification of new issues, release of administrative guidance or rendering of a court decision affecting a particular tax issue. The Company believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.

A significant component of the tax reserve is related to the separate account DRD. The Company has not yet reached an agreement with the IRS, and there can be no assurance that such an agreement will be reached. However, favorable resolution of the separate account DRD and/or other identified issues could result in a potentially significant benefit to the Company’s future results of operations.

(10)

Securitization Transactions

Since 2001, the Company has sold $557.0 million of credit enhanced equity interests in Low-Income-Housing Tax Credit Funds (Tax Credit Funds) to unrelated third parties. The Company has guaranteed cumulative after-tax yields to the third party investors ranging from 4.38% to 5.25% over periods ending between 2002 and 2021. As of September 30, 2005, the Company held guarantee reserves totaling $5.6 million on these transactions. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit Funds provide a stream of tax benefits to the investors that will generate a yield and return of capital. If the tax benefits are not sufficient to provide these cumulative after-tax yields, then the Company must fund any shortfall, which is mitigated by stabilization collateral set aside by the Company at the inception of the transactions. The maximum amount of undiscounted future payments that the Company could be required to pay the investors under the terms of the guarantees is $1.40 billion. The Company does not anticipate making any payments related to the guarantees.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

At the time of the sales, $5.1 million of net sale proceeds were set aside as collateral for certain properties owned by the Tax Credit Funds that had not met all of the criteria necessary to generate tax credits. Such criteria include completion of construction and the leasing of each unit to a qualified tenant, among others. Properties meeting the necessary criteria are considered to have “stabilized.” The properties are evaluated regularly, and the collateral is released when stabilized. No stabilization collateral amounts were released into income during the first nine months of 2005 and 2004. As of September 30, 2005 and December 31, 2004, $1.4 million of stabilization collateral was unrecognized and recorded as a reserve.

To the extent there are cash deficits in any specific property owned by the Tax Credit Funds, property reserves, property operating guarantees and reserves held by the Tax Credit Funds are exhausted before the Company is required to perform under its guarantees. To the extent the Company is ever required to perform under its guarantees, it may recover any such funding out of the cash flow distributed from the sale of the underlying properties of the Tax Credit Funds. This cash flow distribution would be paid to the Company prior to any cash flow distributions to unrelated third party investors.

(11)

Variable Interest Entities

As of September 30, 2005 and December 31, 2004, the Company had relationships with 18 and 14 variable interest entities (VIEs), respectively, where the Company was the primary beneficiary. Each of these VIEs is a conduit that assists the Company in structured products transactions. One of the VIEs is used in the securitization of mortgage loans, while the others are involved in the sale of Tax Credit Funds to third party investors where the Company provides guaranteed returns (see Note 10). The results of operations and financial position of these VIEs are included along with corresponding minority interest liabilities in the accompanying consolidated financial statements.

The net assets of these VIEs totaled $395.1 million and $366.4 million as of September 30, 2005 and December 31, 2004, respectively.

The following table summarizes the most significant components of net assets as of the dates indicated:


(in millions)	September 30, 2005		December 31, 2004
Mortgage loans on real estate	$	31.8	$	32.1
Other long-term investments		418.4		401.2
Short-term investments		40.2		31.7
Other assets		37.8		35.6
Short-term debt		32.6		32.6
Other liabilities		94.1		116.3

The total exposure to loss on these VIEs where the Company is the primary beneficiary was immaterial as of September 30, 2005 and December 31, 2004. For the mortgage loan VIE, to which the short-term debt relates, the creditors have no recourse against the Company in the event of default by the VIE.

In addition to the VIEs described above, the Company holds variable interests, in the form of limited partnerships or similar investments, in a number of Tax Credit Funds where the Company is not the primary beneficiary. These investments have been held by the Company for periods of 1 to 9 years and allow the Company to experience certain tax credits and other tax benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that qualify as VIEs, but for which the Company is not the primary beneficiary. The total exposure to loss on these VIEs was $29.1 million and $36.3 million as of September 30, 2005 and December 31, 2004, respectively.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

(12)

Segment Information

Management of the Company views its business primarily based on the underlying products, and this is the basis used for defining its reportable segments. The Company reports four segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other. The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from continuing operations before federal income taxes and the cumulative effect of adoption of accounting principles to exclude: (a) net realized gains and losses on investments, hedging instruments and hedged items, except for periodic net coupon settlements on non-qualifying derivatives; (b) net realized gains and losses related to securitizations; and (c) the adjustment to amortization of deferred policy acquisition costs (DAC) related to net realized gains and losses.

The Individual Investments segment consists of individual The BEST of AMERICA^® and private label deferred variable annuity products, deferred fixed annuity products, income products, and advisory services program revenues and expenses. Individual deferred 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, individual 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 individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector includes Internal Revenue Code (IRC) Section 401(k) business and the public sector includes IRC Section 457 and Section 401(a) business, both in the form of fixed and variable group annuities.

The Individual Protection segment consists of investment life insurance products, including individual variable, corporate-owned and bank-owned life insurance products; traditional life insurance products; and universal life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

The Corporate and Other segment includes certain structured products business; the MTN program; net investment income not allocated to product segments; periodic net coupon settlements on non-qualifying derivatives; unallocated expenses; interest expense on debt; revenues and expenses of the Company’s non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

The following tables summarize the Company’s business segment operating results for the periods indicated:

Three months ended September 30, 2005

(in millions)

Individual
Investments

Retirement
Plans

Individual
Protection

Corporate
and Other

Total

Revenues:

Policy charges

136.6

35.4

96.7

—

268.7

Life insurance premiums

24.5

—

34.4

—

58.9

Net investment income

208.5

160.9

82.6

82.3

534.3

Net realized losses on investments, hedging instruments and hedged items¹

—

(15.2

)

(15.2

)

Other

0.3

—

0.4

0.7

Total revenues

369.9

196.3

213.7

67.5

847.4

Benefits and expenses:

Interest credited to policyholder account values

140.5

113.1

45.9

39.0

338.5

Other benefits and claims

35.8

—

55.3

—

91.1

Policyholder dividends on participating policies

—

6.9

—

6.9

Amortization of DAC

92.2

12.3

15.8

(4.4

)

115.9

Interest expense on debt

—

17.4

Other operating expenses

48.3

45.6

39.2

2.2

135.3

Total benefits and expenses

316.8

171.0

163.1

54.2

705.1

Income from continuing operations before federal income tax expense

53.1

25.3

50.6

13.3

142.3

Net realized losses on investments, hedging instruments and hedged items¹

—

15.2

Adjustment to amortization of DAC related to net realized losses

(4.4

)

Pre-tax operating earnings

53.1

25.3

50.6

24.1

Excluding periodic net coupon settlements on non-qualifying derivatives.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004


	Three months ended September 30, 2004
(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
Revenues:
Policy charges	$	124.2	$	37.8	$	92.4	$	—		$	254.4
Life insurance premiums		25.1		—		45.8		—			70.9
Net investment income		208.1		160.7		81.5		64.0			514.3
Net realized losses on investments, hedging instruments and hedged items¹		—		—		—		(13.3	)		(13.3	)
Other		—		—		—		3.2			3.2

Total revenues		357.4		198.5		219.7		53.9			829.5

Benefits and expenses:
Interest credited to policyholder account values		143.0		110.6		46.1		23.0			322.7
Other benefits and claims		43.1		—		57.1		—			100.2
Policyholder dividends on participating policies		—		—		7.1		—			7.1
Amortization of DAC		65.3		10.5		18.3		—			94.1
Interest expense on debt		—		—		—		15.0			15.0
Other operating expenses		53.0		47.7		42.6		3.7			147.0

Total benefits and expenses		304.4		168.8		171.2		41.7			686.1

Income from continuing operations before federal income tax expense		53.0		29.7		48.5		12.2		$	143.4

Net realized losses on investments, hedging instruments and hedged items¹		—		—		—		13.3

Pre-tax operating earnings	$	53.0	$	29.7	$	48.5	$	25.5

Excluding periodic net coupon settlements on non-qualifying derivatives.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004

Nine months ended September 30, 2005

(in millions)

Individual
Investments

Retirement
Plans

Individual
Protection

Corporate
and Other

Total

Revenues:

Policy charges

397.7

109.0

284.0

—

790.7

Life insurance premiums

68.2

—

122.1

—

190.3

Net investment income

621.2

480.1

251.9

225.5

1,578.7

Net realized gains on investments, hedging instruments and hedged items¹

—

6.3

Other

0.9

0.2

—

0.2

1.3

Total revenues

1,088.0

589.3

658.0

232.0

2,567.3

Benefits and expenses:

Interest credited to policyholder account values

421.2

331.9

137.0

105.9

996.0

Other benefits and claims

108.1

—

174.0

—

282.1

Policyholder dividends on participating policies

—

24.9

—

24.9

Amortization of DAC

245.6

35.4

63.8

1.1

345.9

Interest expense on debt

—

48.7

Other operating expenses

139.4

137.3

110.4

9.7

396.8

Total benefits and expenses

914.3

504.6

510.1

165.4

2,094.4

Income from continuing operations before federal income tax expense

173.7

84.7

147.9

66.6

472.9

Net realized gains on investments, hedging instruments and hedged items¹

—

(6.3

)

Adjustment to amortization of DAC related to net realized gains

—

1.1

Pre-tax operating earnings

173.7

84.7

147.9

61.4

Assets as of period end

52,730.6

29,638.2

14,508.3

9,800.6

106,677.7

Excluding periodic net coupon settlements on non-qualifying derivatives.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Unaudited Consolidated Financial Statements, Continued

September 30, 2005 and 2004


	Nine months ended September 30, 2004
(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
Revenues:
Policy charges	$	374.3	$	117.9	$	271.1	$	—		$	763.3
Life insurance premiums		62.2		—		139.2		—			201.4
Net investment income		622.4		471.8		245.0		160.2			1,499.4
Net realized losses on investments, hedging instruments and hedged items¹		—		—		—		(57.1	)		(57.1	)
Other		0.2		—		—		14.7			14.9

Total revenues		1,059.1		589.7		655.3		117.8			2,421.9

Benefits and expenses:
Interest credited to policyholder account values		431.4		324.2		137.2		57.9			950.7
Other benefits and claims		104.4		—		176.0		—			280.4
Policyholder dividends on participating policies		—		—		26.8		—			26.8
Amortization of DAC		206.5		30.5		62.9		—			299.9
Interest expense on debt		—		—		—		44.9			44.9
Other operating expenses		151.6		138.6		122.9		20.2			433.3

Total benefits and expenses		893.9		493.3		525.8		123.0			2,036.0

Income (loss) from continuing operations before federal income tax expense		165.2		96.4		129.5		(5.2	)	$	385.9

Net realized losses on investments, hedging instruments and hedged items¹		—		—		—		57.1

Pre-tax operating earnings	$	165.2	$	96.4	$	129.5	$	51.9

Assets as of period end	$	50,168.4	$	28,706.6	$	12,057.0	$	10,863.3		$	101,795.3

Excluding periodic net coupon settlements on non-qualifying derivatives.

ITEM 2 Management’s Narrative Analysis of the Results of Operations

TABLE OF CONTENTS


Forward-Looking Information		27

Overview		28

Critical Accounting Policies and Recently Issued Accounting Standards		30

Results of Operations		34

Sales		36

Business Segments		41

Related Party Transactions		56

Contractual Obligations and Commitments		57

Off-Balance Sheet Transactions		57

Forward-Looking Information

The information included herein 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 Nationwide Life Insurance Company and its subsidiaries (NLIC, or collectively, the Company). Whenever used in this report, words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “project,” “target” and other words of similar meaning are intended to identify such forward-looking statements. 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 and related disclosures that could result from the adoption of certain accounting and/or financial reporting standards issued by the Financial Accounting Standards Board, Public Company Accounting Oversight Board or other standard-setting bodies;

(ii)

tax law changes impacting the tax treatment of life insurance and investment products;

(iii)

repeal of the federal estate tax;

(iv)

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;

(v)

adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;

(vi)

failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;

(vii)

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;

(viii)

changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees; an acceleration of the amortization of deferred policy acquisition costs (DAC); or a reduction in the demand for the Company’s products;

(ix)

reduction in the value of the Company’s investment portfolio as a result of changes in interest rates and yields in the market as well as geopolitical conditions and political, regulatory, judicial, economic or financial events affecting the market generally and companies in the Company’s investment portfolio specifically, including, without limitation, the recent bankruptcy filings by Delta Air Lines, Inc. and Northwest Airlines Corporation;

(x)

general economic and business conditions which are less favorable than expected;

(xi)

competitive, regulatory or tax changes that affect the cost of, or demand for, the Company’s products;

(xii)

unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

(xiii)

settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheet;

(xiv)

deviations from assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts and in pricing the Company’s products; and

(xv)

adverse litigation results and/or resolution of litigation and/or arbitration or investigation results.

Overview

The following analysis of unaudited consolidated results of operations and financial condition of the Company should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere herein.

The Company is a leading provider of long-term savings and retirement products in the United States of America and is a wholly-owned subsidiary of Nationwide Financial Services, Inc. (NFS). The Company develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and advisory services.

Business Segments

The following table summarizes pre-tax operating earnings by segment for the periods indicated:


	Three months ended September 30,					Nine months ended September 30,
(in millions)	2005		2004		Change	2005		2004		Change
Individual Investments	$	53.1	$	53.0	—	$	173.7	$	165.2	5%
Retirement Plans		25.3		29.7	(15)%		84.7		96.4	(12)%
Individual Protection		50.6		48.5	4%		147.9		129.5	14%
Corporate and Other		24.1		25.5	(5)%		61.4		51.9	18%

The Individual Investments segment consists of individual The BEST of AMERICA® and private label deferred variable annuity products, deferred fixed annuity products, income products, and advisory services program revenues and expenses. Individual deferred 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, individual 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 individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

The Individual Protection segment consists of investment life insurance products, including individual variable, corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) products; traditional life insurance products; and universal life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

The Corporate and Other segment includes certain structured products business; the medium-term note (MTN) program; net investment income not allocated to product segments; periodic net coupon settlements on non-qualifying derivatives; unallocated expenses; interest expense on debt; revenues and expenses of the Company’s non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.

Revenues and Expenses

The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products, which are assessed on the amount of insurance in force in excess of the related policyholder account value; administrative 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 for annuity and certain life insurance contracts. Net investment income includes earnings on investments supporting fixed annuities, the MTN program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment expenses.

The Company makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of available-for-sale securities and other investments, and changes in valuation allowances on mortgage loans on real estate are reported in realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; and periodic net coupon settlements on non-qualifying derivatives.

Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administrative, marketing and distribution services.

The Company’s primary expenses include interest credited to policyholder account values, other benefits and claims, amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed annuities, funding agreements backing the Company’s MTN program and certain life insurance products. Other benefits and claims include policyholder benefits in excess of policyholder account values for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.

Profitability

The Company’s profitability largely depends on its ability to effectively price and manage risk on its various products, administer customer funds and control operating expenses.

In particular, the Company’s profitability is driven by fee income on separate account products, general account asset levels and the Company’s ability to manage interest spread income. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to policyholder account values. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates; the competitive environment; and other factors. In recent periods, the Company has taken actions to address low interest rate environments and the resulting impact on interest spread margins, lowering commission rates for individual fixed annuities and invoking contractual provisions that limit the amount of variable annuity deposits allocated to the guaranteed fixed option. Also, the majority of new business now contains lower floor guarantees than were historically provided.

In addition, life insurance profits are significantly impacted by mortality, morbidity and persistency experience.

Cumulative Effect of Adoption of Accounting Principle

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). SOP 03-1 addresses many topics. The most significant topic affecting the Company was the accounting for contracts with guaranteed minimum death benefits (GMDB). SOP 03-1 requires companies to evaluate the significance of a GMDB to determine whether a contract should be accounted for as an investment or insurance contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. SOP 03-1 also provides guidance on separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, return based on a contractually referenced pool of assets or index, annuitization options, and sales inducements to contract holders. The Company adopted SOP 03-1 effective January 1, 2004, which resulted in a $3.3 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. Also, see Note 3 to the unaudited consolidated financial statements included in this report.

Critical Accounting Policies and Recently Issued Accounting Standards

The most critical estimates include those used in determining DAC and amortization of DAC for investment products and universal life insurance products, impairment losses on investments, valuation allowances for mortgage loans on real estate, federal income taxes, and pension and other postretirement employee benefits.

Note 2 to the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K provides a summary of significant accounting policies. Note 3 to the unaudited consolidated financial statements included in Part I, Item 1 – Unaudited Consolidated Financial Statements of this report provides a discussion of recently issued accounting standards.

Deferred Policy Acquisition Costs for Investment Products and Universal Life Insurance Products

The Company has deferred the costs of acquiring investment products and universal life insurance products business, principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. Investment products consist primarily of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period.

For investment products (principally individual and group annuities) and universal life insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance, policy administration and surrender charges, less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note 2(e) to the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K.

The most significant assumptions that are involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8% growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. This process is referred to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the Standard & Poor’s (S&P) 500 Index, as part of its pre-set parameters the Company’s reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.

Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense (DAC unlocking), which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.

The Company evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These parameters are designed to appropriately reflect the Company’s long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of short-term experience on the Company’s recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period of time, or if the recorded balance falls outside of these parameters and the Company determines it is not reasonably possible to get back within the parameters during this period of time, assumptions are required to be unlocked and DAC is recalculated using revised best estimate assumptions. Otherwise, DAC is not unlocked to reflect updated assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean process.

For other investment products and universal life insurance products, DAC is adjusted each quarter to reflect revised best estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net separate account performance. Any resulting DAC unlocking adjustments are reflected currently in the consolidated statements of income.

Impairment Losses on Investments

Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.

Under the Company’s accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise settled in a way that may limit the Company’s ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment for a reasonable period until the security’s forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities the Company estimates cash flows over the life of purchased beneficial interests in securitized financial assets. If the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate, considering both timing and amount, then the Company recognizes an other-than-temporary impairment and writes down the purchased beneficial interest to fair value.

For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to amortized cost or cost, as appropriate, of the security; the amount and length of time a security’s fair value has been below amortized cost or cost; specific credit issues and financial prospects related to the issuer; the Company’s intent to hold or dispose of the security; and current economic conditions.

Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.

Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.

Significant changes in the factors the Company considers when evaluating investments for impairment losses, including significant deterioration in the credit worthiness of individual issuers, could result in a significant change in impairment losses reported in the consolidated financial statements.

Valuation Allowances for Mortgage Loans on Real Estate

The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments, hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.

The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by the Company and reflects the Company’s best estimate of probable credit losses, including losses incurred at the balance sheet date, but not yet identified by specific loan. The Company’s periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

Significant changes in the factors the Company considers in determining the valuation allowance for mortgage loans on real estate could result in a significant change in the valuation allowance reported in the unaudited consolidated financial statements.

Federal Income Taxes

The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the unaudited consolidated statements of income.

A significant component of the tax reserve is related to the separate account dividends received deduction (DRD). The Company has not yet reached an agreement with the IRS, and there can be no assurance that such an agreement will be reached. However, favorable resolution of the separate account DRD and/or other identified issues could result in a potentially significant benefit to the Company’s future results of operations.

Pension and Other Postretirement Employee Benefits

Pension and other postretirement employee benefits (OPEB) assumptions are revised annually in conjunction with preparation of the Company’s Annual Report on Form 10-K. The 2004 pension expense for substantially all of the Company’s employees and certain agents totaled $13.7 million, an increase of $0.5 million over 2003 pension expense of $13.2 million. The increase primarily was due to decreasing interest rates at the plan level, reflected in a lower discount rate. For the Company’s primary pension plan, the discount rate used to value cash flows was lowered to 5.50% to determine 2004 pension expense from 6.00% used in 2003, and the long-term expected rate of return on plan assets was lowered to 7.25% for 2004 from 7.75% for 2003.

The 2004 and 2003 OPEB expense for substantially all of the Company’s employees and certain agents totaled $1.1 million. The discount rate used to value cash flows was lowered to 6.10% to determine 2004 OPEB expense from 6.60% in 2003, and the long-term expected rate of return on plan assets was lowered to 7.00% for 2004 from 7.50% for 2003.

The Company employs a prospective building block approach in establishing the discount rate and the expected long-term rate of return on plan assets. This process is integrated with the determination of other economic assumptions such as salary scale. For a given measurement date, the discount rate is set by reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be settled. For pension benefits, a downward adjustment in the discount rate is included for plan administration and other expenses likely to be charged by an insurer. Since the OPEB liability includes both claims and administration expenses, a similar downward adjustment is not appropriate for the OPEB discount rate. The historical real rate of return for the reference bonds is subtracted from the yield on these bonds to generate an assumed inflation rate. The expected real rates of return on various asset sub-classes are developed based on historic risk premiums for those sub-classes. The expected real rates of return, reduced for investment expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target portfolio. This expected real rate of return varies by plan and changes when the plan’s target investment portfolio changes. The expected long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This process effectively sets the expected return for the plan’s portfolio at the yield for the reference bond portfolio, adjusted for expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the market do not impact the expected risk premiums. However, as the yield for the reference bonds fluctuates, the assumed inflation rate and the expected long-term rate are adjusted in tandem.

The following illustrates the impact of changes in individual assumptions (without changing any other assumption) on expenses in 2004: (1) a 50 basis point increase in the pension discount rate would have decreased 2004 pension expense by approximately 10%, and a 50 basis point increase in the pension long-term expected rate of return would have decreased 2004 pension expense by approximately 13%; and (2) a 50 basis point increase in the OPEB discount rate would have decreased 2004 OPEB expense by approximately 21%, and a 50 basis point increase in the OPEB long-term expected rate of return would have decreased 2004 OPEB expense by approximately 11%.

Results of Operations

Third Quarter – 2005 Compared to 2004

The following table summarizes the Company’s consolidated results of operations for the periods indicated:


	Three months ended September 30,
(in millions)	2005			2004			Change
Revenues:
Policy charges:
Asset fees	$	156.3		$	144.1		8%
Cost of insurance charges		68.6			65.4		5%
Administrative fees		23.3			23.1		1%
Surrender fees		20.5			21.8		(6)%

Total policy charges		268.7			254.4		6%

Life insurance premiums		58.9			70.9		(17)%
Net investment income		534.3			514.3		4%
Net realized losses on investments, hedging instruments and hedged items		(15.1	)		(11.4	)	NM
Other		0.6			1.3		NM

Total revenues		847.4			829.5		2%

Benefits and expenses:
Interest credited to policyholder account values		338.5			322.7		5%
Other benefits and claims		91.1			100.2		(9)%
Policyholder dividends on participating policies		6.9			7.1		(3)%
Amortization of DAC		115.9			94.1		23%
Interest expense, primarily with NFS		17.4			15.0		16%
Other operating expenses		135.3			147.0		(8)%

Total benefits and expenses		705.1			686.1		3%

Income from continuing operations before federal income tax expense		142.3			143.4		—
Federal income tax (benefit) expense		(13.1	)		36.3		NM

Net income	$	155.4		$	107.1		45%

Excluding additional federal income tax benefits recorded during the third quarter of 2005, the increase in net income primarily was driven by higher asset fees and lower other operating expenses. Higher amortization of DAC and a decline in life insurance premiums partially offset the increases.

Higher asset fee income primarily occurred within the Individual Investments segment, where the primary factor was strong equity market performance during the quarter.

The decrease in other operating expenses was driven by lower general sales expenses and incentive compensation.

The increase in amortization of DAC primarily occurred within the Individual Investments segment resulting from increased profits and a true-up related to fixed annuities.

The decline in life insurance premiums was driven by a decline in fixed life sales within the Individual Protection segment.

During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all open tax years (2000 – 2005). In addition, the Company recorded $5.6 million of net benefit adjustments in the third quarter of 2005, primarily related to differences between the estimated tax liability and the amounts reported on the Company’s tax returns and revised estimates of permanent income tax deductions expected to be generated in 2005. Therefore, the effective tax rates in 2005 and 2004 are not comparable.

Year-to-Date – 2005 Compared to 2004

The following table summarizes the Company’s consolidated results of operations for the periods indicated:


	Nine months ended September 30,
(in millions)	2005		2004			Change
Revenues:
Policy charges:
Asset fees	$	456.8	$	437.3		4%
Cost of insurance charges		202.5		193.0		5%
Administrative fees		68.4		67.2		2%
Surrender fees		63.0		65.8		(4)%

Total policy charges		790.7		763.3		4%

Life insurance premiums		190.3		201.4		(6)%
Net investment income		1,578.7		1,499.4		5%
Net realized gains (losses) on investments, hedging instruments and hedged items		6.1		(50.0	)	NM
Other		1.5		7.8		NM

Total revenues		2,567.3		2,421.9		6%

Benefits and expenses:
Interest credited to policyholder account values		996.0		950.7		5%
Other benefits and claims		282.1		280.4		1%
Policyholder dividends on participating policies		24.9		26.8		(7)%
Amortization of DAC		345.9		299.9		15%
Interest expense, primarily with NFS		48.7		44.9		8%
Other operating expenses		396.8		433.3		(8)%

Total benefits and expenses		2,094.4		2,036.0		3%

Income from continuing operations before federal income tax expense		472.9		385.9		23%
Federal income tax expense		70.3		87.7		NM

Income from continuing operations		402.6		298.2		35%
Cumulative effect of adoption of accounting principle, net of taxes		—		(3.3	)	NM

Net income	$	402.6	$	294.9		37%

Excluding additional federal income tax benefits recorded during the third quarter of 2005, the increase in net income was driven by net realized gains on investments, hedging instruments and hedged items, lower other operating expenses, and higher interest spread income and asset fees. Higher amortization of DAC and a decline in life insurance premiums partially offset the overall improvement.

The Company recorded net realized gains on investments, hedging instruments and hedged items in the first nine months of 2005 compared to significant net realized losses in the same period a year ago primarily due to a $47.5 million decline in impairment charges.

The decrease in other operating expenses primarily was due to lower general sales costs, employee benefit costs and VIE expenses.

The increase in interest spread income was driven by the Corporate and Other segment due to increased returns on variable rate assets, higher invested asset levels and income from mortgage loan prepayment penalties and bond call premiums. In addition, the increase in interest credited to policyholder account values primarily was driven by higher average crediting rates related to the Company’s MTN program (3.37% in the first nine months of 2005 compared to 1.60% in the same period a year ago) due to an increase in the 3-month LIBOR rate to which most of these liabilities are indexed.

The increase in asset fees was primarily driven by the Individual Investments segment. The increase was due to increases in both the average separate account values and the average asset fee rate along with a strong equity market during the current quarter.

The increase in amortization of DAC primarily occurred within the Individual Investments segment resulting from increased profits and a true-up related to fixed annuities.

The decline in life insurance premiums was driven by the fixed life business within the Individual Protection segment and was due to an unfavorable business mix and higher reinsurance premiums.

As previously mentioned, the Company recorded additional federal income tax benefits and recoverables and net benefit adjustments in the third quarter of 2005. Therefore, the effective tax rates in 2005 and 2004 are not comparable.

Sales

The Company regularly monitors and reports a production volume metric titled “sales.” Sales or similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.

Sales are not derived from any specific generally accepted accounting principles (GAAP) income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Additionally, the Company’s definition of sales may differ from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately drive revenues.

As calculated and analyzed by the Company, statutory premiums and deposits on individual and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services program are adjusted as described below to arrive at sales.

Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis are recognized as revenue when due, as calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums collected (cash basis) and deposits received (cash basis) are aggregated and reported as revenues in the line item statutory premiums and annuity considerations.

Sales, as reported by the Company, are stated net of internal replacements, which the Company believes provides a more meaningful disclosure of production in a given period. In addition, the Company’s definition of sales excludes funding agreements issued under the Company’s MTN program; large case 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, therefore, are excluded from sales.

The Company believes that the presentation of sales as measured for management purposes enhances the understanding of the Company’s business and helps depict longer-term 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 brand and include individual variable and group annuities, group private sector retirement plans, 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 that allow those providers to sell products to their own customer bases under their own brand names.

The Company also markets group deferred compensation retirement plans to employees of state and local governments for use under IRC Section 457. The Company utilizes its sponsorship by the National Association of Counties, The United States Conference of Mayors and the International Association of Firefighters when marketing IRC Section 457 products.

The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, life insurance specialists and representatives of certain certified public accounting (CPA) firms. Representatives of affiliates who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), Nationwide Financial Network producers and TBG Insurance Services Corporation (TBG Financial). The Company also distributes products through the agency distribution force of its ultimate parent company, Nationwide Mutual Insurance Company (NMIC), or Nationwide agents.

Third Quarter – 2005 Compared to 2004

The following table summarizes sales by product and segment for the periods indicated:


	Three months ended September 30,
(in millions)	2005		2004		Change
Individual Investments
Individual variable annuities:
The BEST of AMERICA products	$	716.9	$	747.3	(4)%
Private label annuities		79.8		97.9	(18)%

Total individual variable annuities		796.7		845.2	(6)%
Individual fixed annuities		31.0		276.2	(89)%
Income products		46.4		46.5	—
Advisory services program		65.1		50.0	30%

Total Individual Investments		939.2		1,217.9	(23)%

Retirement Plans
Private sector pension plan:
The BEST of AMERICA products		361.0		402.0	(10)%
Other		—		5.8	(100)%

Total private sector pension plan		361.0		407.8	(11)%

Public sector pension plan:
IRC Section 457 annuities		397.6		372.8	7%

Total Retirement Plans		758.6		780.6	(3)%

Individual Protection
Corporate-owned life insurance		174.8		127.8	37%
The BEST of AMERICA variable life series		105.1		113.0	(7)%
Traditional/universal life insurance		83.8		80.6	4%

Total Individual Protection		363.7		321.4	13%

Total sales	$	2,061.5	$	2,319.9	(11)%

See Part I, Item 2 – Management’s Narrative Analysis of the Results of Operations (MD&A) – Business Segments of this report for an analysis of sales by product and segment.

The following table summarizes sales by distribution channel for the periods indicated:


	Three months ended September 30,
(in millions)	2005		2004		Change
Non-affiliated:
Independent broker/dealers	$	591.0	$	659.4	(10)%
Financial institutions		277.7		507.8	(45)%
Wirehouse and regional firms		301.0		338.5	(11)%
Pension plan administrators		92.1		97.4	(5)%
Life insurance specialists		82.5		93.8	(12)%
CPA channel		30.6		22.5	36%

Total non-affiliated sales		1,374.9		1,719.4	(20)%

Affiliated:
NRS		404.9		379.7	7%
Nationwide agents		157.9		153.3	3%
TBG Financial		92.3		34.2	170%
NFN producers		31.5		33.3	(5)%

Total affiliated sales		686.6		600.5	14%

Total sales	$	2,061.5	$	2,319.9	(11)%

The decrease in total sales was primarily due to lower than planned fixed annuity sales due to the competitive rate environment in the Individual Investments segment. Retirement Plans sales continue to decline primarily due to the movement of pension business to the Nationwide Trust Company, FSB (NTC) platform. Individual Protection sales increased due to the strong performance of the COLI product.

Sales generated by financial institutions declined primarily due to planned reductions and intense competition in fixed annuity sales and the shift of pension business to the NTC platform. This channel also has been impacted by wholesaler turnover.

Lower sales through the independent broker/dealers channel were driven by reductions in variable annuity production and the movement of pension business to NTC. However, advisory services sales have begun to grow in this channel.

Sales generated by wirehouse and regional firms decreased due to lower variable annuity sales and the shift of pension business to NTC, partially offset by increases in sales of immediate annuities and fixed life insurance products.

Sales through TBG Financial increased primarily due to two new large cases acquired in the third quarter of 2005.

NRS sales increases were driven by growth in NRS’ core small case city and county businesses and higher plan transfers to NRS products.

Year-to-Date – 2005 Compared to 2004

The following table summarizes sales by product and segment for the periods indicated:


	Nine months ended September 30,
(in millions)	2005		2004		Change
Individual Investments
Individual variable annuities:
The BEST of AMERICA products	$	2,292.8	$	2,694.4	(15)%
Private label annuities		264.3		352.5	(25)%

Total individual variable annuities		2,557.1		3,046.9	(16)%
Individual fixed annuities		148.7		667.3	(78)%
Income products		134.0		112.6	19%
Advisory services program		182.1		116.8	56%

Total Individual Investments		3,021.9		3,943.6	(23)%

Retirement Plans
Private sector pension plan:
The BEST of AMERICA products		1,111.1		1,318.5	(16)%
Other		39.1		20.9	87%

Total private sector pension plan		1,150.2		1,339.4	(14)%

Public sector pension plan:
IRC Section 457 annuities		1,165.8		1,146.0	2%

Total Retirement Plans		2,316.0		2,485.4	(7)%

Individual Protection
Corporate-owned life insurance		552.5		474.7	16%
The BEST of AMERICA variable life series		317.9		330.8	(4)%
Traditional/universal life insurance		256.0		252.5	1%

Total Individual Protection		1,126.4		1,058.0	6%

Total sales	$	6,464.3	$	7,487.0	(14)%

See Part I, Item 2 – MD&A – Business Segments of this report for an analysis of sales by product and segment.

The following table summarizes sales by distribution channel for the periods indicated:


	Nine months ended September 30,
(in millions)	2005		2004		Change
Non-affiliated:
Independent broker/dealers	$	1,872.7	$	2,203.0	(15)%
Financial institutions		938.4		1,502.1	(38)%
Wirehouse and regional firms		935.3		1,153.9	(19)%
Life insurance specialists		313.4		332.2	(6)%
Pension plan administrators		288.3		312.6	(8)%
CPA channel		94.0		67.6	39%

Total non-affiliated sales		4,442.1		5,571.4	(20)%

Affiliated:
NRS		1,187.0		1,167.5	2%
Nationwide agents		496.9		501.7	(1)%
TBG Financial		239.4		144.9	65%
NFN producers		98.9		101.5	(3)%

Total affiliated sales		2,022.2		1,915.6	6%

Total sales	$	6,464.3	$	7,487.0	(14)%

The decrease in total sales primarily was due to the shift of pension business to the NTC platform and continued challenges in the Individual Investments segment. Sales within this segment have been negatively impacted by lower than planned fixed annuity sales due to the competitive environment. In addition, advisory services sales have not increased as quickly as expected despite a strong third quarter.

Sales generated by financial institutions declined primarily due to both planned reductions and intense competition in fixed annuity sales and the shift of business to the NTC platform. This channel also has been impacted by wholesaler turnover. The overall decline was partially offset by growth in immediate annuity and variable life insurance products.

Sales through the independent broker/dealers channel decreased due to sluggish variable annuity and variable life insurance sales. Individual Investments sales were lower overall despite recent growth in advisory services sales.

Sales generated by wirehouse and regional firms decreased due to lower variable annuity sales and the shift of pension business to NTC. The decline was partially offset by higher sales of immediate annuities and fixed life insurance products.

Sales through TBG Financial increased primarily due to two new large cases acquired in the third quarter of 2005, higher renewal premiums from the funding of existing executive deferred compensation plans and strong first year sales of its private placement product.

Business Segments

Individual Investments

Third Quarter – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Individual Investments segment for the periods indicated:


	Three months ended September 30,
(in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	116.8	$	105.1	11%
Administrative fees		4.0		3.6	11%
Surrender fees		15.8		15.5	2%

Total policy charges		136.6		124.2	10%

Premiums on income products		24.5		25.1	(2)%
Net investment income		208.5		208.1	—
Other		0.3		—	100%

Total revenues		369.9		357.4	3%

Benefits and expenses:
Interest credited to policyholder account values		140.5		143.0	(2)%
Other benefits and claims		35.8		43.1	(17)%
Amortization of DAC		92.2		65.3	41%
Other operating expenses		48.3		53.0	(9)%

Total benefits and expenses		316.8		304.4	4%

Pre-tax operating earnings	$	53.1	$	53.0	0%

Other Data
Sales:
Individual variable annuities	$	796.7	$	845.2	(6)%
Individual fixed annuities		31.0		276.2	(89)%
Income products		46.4		46.5	—
Advisory services program		65.1		50.0	30%

Total sales	$	939.2	$	1,217.9	(23)%

Average account values:
General account	$	14,517.0	$	14,623.7	(1)%
Separate account		34,460.7		32,669.1	5%
Advisory services program		345.3		111.1	211%

Total average account values	$	49,323.0	$	47,403.9	4%

Pre-tax operating earnings to average account values		0.43%		0.45%

The slight increase in pre-tax operating earnings primarily was driven by higher asset fees, lower other benefits and claims, lower other operating expenses, and additional interest spread income. Higher amortization of DAC substantially offset the overall improvement.

Asset fees rose due to increases in both average separate account values and the average asset fee rate. Asset fees are calculated daily and charged as a percentage of separate account values. The average variable asset fee rate increased from 1.29% to 1.36% as new business sold with higher-risk features influenced the overall average rate.

The decrease in other benefits and claims primarily reflects a true-up resulting from higher market returns and rising interest rates during the period. In addition, a positive market lowered GMAB costs, including hedging.

Other operating expenses improved primarily due to higher mutual fund reimbursements from larger separate account values.

The following table summarizes the interest spread on Individual Investments segment average general account values for the periods indicated:


	Three months ended September 30,
	2005	2004
Net investment income	5.92%	5.84%
Interest credited	3.87%	3.91%

Interest spread on average general account values	2.05%	1.93%

Interest spread margins widened during the third quarter of 2005 to 205 basis points compared to 193 basis points in the same period a year ago. Included in the current quarter were 33 basis points, or $11.8 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 18 basis points, or $6.4 million, in the same period a year ago.

The substantial increase in amortization of DAC resulted from increased profits and a true-up related to fixed annuities.

The decline in sales was driven by both the variable and fixed annuity businesses. Variable annuity production decreased primarily due to a more competitive environment. Fixed annuity sales declined due to the Company’s intentional reduction in individual fixed annuity business due to the challenging interest rate environment.

Year-to-Date – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Individual Investments segment for the periods indicated:


	Nine months ended September 30,
(in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	338.8	$	316.9	7%
Administrative fees		11.5		11.1	4%
Surrender fees		47.4		46.3	2%

Total policy charges		397.7		374.3	6%

Premiums on income products		68.2		62.2	10%
Net investment income		621.2		622.4	—
Other		0.9		0.2	350%

Total revenues		1,088.0		1,059.1	3%

Benefits and expenses:
Interest credited to policyholder account values		421.2		431.4	(2)%
Other benefits and claims		108.1		104.4	4%
Amortization of DAC		245.6		206.5	19%
Other operating expenses		139.4		151.6	(8)%

Total benefits and expenses		914.3		893.9	2%

Pre-tax operating earnings	$	173.7	$	165.2	5%

Other Data
Sales:
Individual variable annuities	$	2,557.1	$	3,046.9	(16)%
Individual fixed annuities		148.7		667.3	(78)%
Income products		134.0		112.6	19%
Advisory services program		182.1		116.8	56%

Total sales	$	3,021.9	$	3,943.6	(23)%

Average account values:
General account	$	14,583.1	$	14,557.6	—
Separate account		34,328.7		32,616.9	5%
Advisory services program		283.7		74.9	279%

Total average account values	$	49,195.5	$	47,249.4	4%

Account values as of period end:
Individual variable annuities	$	39,988.5	$	37,411.0	7%
Individual fixed annuities		7,562.6		7,850.1	(4)%
Income products		1,832.2		1,746.8	5%
Advisory services program		375.9		131.0	187%

Total account values	$	49,759.2	$	47,138.9	6%

GMDB - Net amount at risk, net of reinsurance	$	210.3	$	477.5	(56)%
GMDB - Reserves, net of reinsurance	$	24.1	$	29.7	(19)%
Pre-tax operating earnings to average account values		0.47%		0.47%

The increase in pre-tax operating earnings primarily was driven by higher asset fees, lower other operating expenses, additional interest spread income and higher premiums on income products. Higher amortization of DAC partially offset the overall increase.

Asset fees rose due to increases in both average separate account values and the average asset fee rate. The average variable asset fee rate increased from 1.30% to 1.32% as new business sold with higher-risk features influenced the overall average rate.

Other operating expenses improved primarily due to higher mutual fund reimbursements from larger separate account values.

The following table summarizes the interest spread on Individual Investments segment average general account values for the periods indicated:


	Nine months ended September 30,
	2005	2004
Net investment income	5.85%	5.85%
Interest credited	3.85%	3.95%

Interest spread on average general account values	2.00%	1.90%

Interest spread margins widened during the first nine months of 2005 to 200 basis points compared to 190 basis points in the same period a year ago. Included in the current period were 22 basis points, or $24.6 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 14 basis points, or $15.3 million, in the same period a year ago. For the full year 2005, the Company expects interest spread margins to tighten and projects full year spreads of 190 to 195 basis points, including a nominal level of prepayment activity during the remainder of the year.

The increase in premiums on income products primarily resulted from higher interest rates relative to a year ago. Increased purchase rates driven by higher interest rates created a favorable environment for income products.

The substantial increase in amortization of DAC resulted from increased profits and a true-up related to fixed annuities.

The increase in other benefits and claims primarily reflects the impact of higher premiums on immediate annuity benefits.

The following table summarizes selected information about the Company’s deferred individual fixed annuities, including the fixed option of variable annuities, as of September 30, 2005:


	Ratchet			Reset
(dollars in millions)	Account value		Wtd. avg. crediting rate	Account value		Wtd. avg. crediting rate
Minimum interest rate of 3.50% or greater	$	—	N/A	$	845.8	3.52%
Minimum interest rate of 3.00% to 3.49%		3,084.5	5.06%		5,936.3	3.07%
Minimum interest rate lower than 3.00%		897.4	3.23%		355.7	3.16%
MVA with no minimum interest rate guarantee		—	N/A		—	N/A

Total deferred individual fixed annuities	$	3,981.9	4.65%	$	7,137.8	3.13%


	Market value adjustment (MVA) and other			Total
(dollars in millions)	Account value		Wtd. avg. crediting rate	Account value		Wtd. avg. crediting rate
Minimum interest rate of 3.50% or greater	$	—	N/A	$	845.8	3.52%
Minimum interest rate of 3.00% to 3.49%		—	N/A		9,020.8	3.75%
Minimum interest rate lower than 3.00%		0.9	3.03%		1,254.0	3.21%
MVA with no minimum interest rate guarantee		1,476.1	2.89%		1,476.1	2.89%

Total deferred individual fixed annuities	$	1,477.0	2.89%	$	12,596.7	3.58%

Retirement Plans

Third Quarter – 2005 Compared to 2004

Retirement Plans sales do not include large case retirement plan acquisitions and Nationwide employee and agent benefit plans. However, the statements of income data below does reflect this business.

The following table summarizes selected financial data for the Company’s Retirement Plans segment for the periods indicated:


	Three months ended September 30,
(in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	32.1	$	33.3	(4)%
Administrative fees		1.6		2.2	(27)%
Surrender fees		1.7		2.3	(26)%

Total policy charges		35.4		37.8	(6)%
Net investment income		160.9		160.7	—

Total revenues		196.3		198.5	(1)%

Benefits and expenses:
Interest credited to policyholder account values		113.1		110.6	2%
Amortization of DAC		12.3		10.5	17%
Other operating expenses		45.6		47.7	(4)%

Total benefits and expenses		171.0		168.8	1%

Pre-tax operating earnings	$	25.3	$	29.7	(15)%

Other Data
Sales:
Private sector	$	361.0	$	407.8	(11)%
Public sector		397.6		372.8	7%

Total sales	$	758.6	$	780.6	(3)%

Average account values:
General account	$	10,654.2	$	9,827.7	8%
Separate account		18,306.4		18,773.3	(2)%

Total average account values	$	28,960.6	$	28,601.0	1%

Pre-tax operating earnings to average account values		0.35%		0.42%

The decrease in pre-tax operating earnings primarily was driven by lower asset fees and lower interest spread income.

The decrease in asset fees was associated with the declining issuance of group annuity contracts in favor of NTC non-annuity products due to the quality and breadth of fund options in NTC products, continued surrenders of group annuity contracts, and ongoing conversion of NLIC annuity contracts to NTC non-annuity contracts.

The following table summarizes the interest spread on Retirement Plans segment average general account values for the periods indicated:


	Three months ended September 30,
	2005	2004
Net investment income	6.04%	6.54%
Interest credited	4.25%	4.50%

Interest spread on average general account values	1.79%	2.04%

Interest spread margins declined to 179 basis points in the third quarter of 2005 compared to 204 basis points for the comparable period a year ago. Included in the current quarter were 19 basis points, or $5.1 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 30 basis points, or $7.4 million, in the same period a year ago. The decrease in margins was driven by the combination of long-duration higher yielding assets rolling over into lower yielding assets as yields on new cash flows are below the portfolio rate.

Private sector sales decreased due to the declining issuance of group annuity contracts in favor of contracts on the NTC platform and shrinking recurring flows as group annuity contracts continue to convert to NTC contracts.

The increase in public sector sales was due to growth in the core small case city/county business.

Year-to-Date – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Retirement Plans segment for the periods indicated:


	Nine months ended September 30,
(in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	97.1	$	103.3	(6)%
Administrative fees		5.8		6.3	(8)%
Surrender fees		6.1		8.3	(27)%

Total policy charges		109.0		117.9	(8)%

Net investment income		480.1		471.8	2%
Other		0.2		—	—

Total revenues		589.3		589.7	—

Benefits and expenses:
Interest credited to policyholder account values		331.9		324.2	2%
Amortization of DAC		35.4		30.5	16%
Other operating expenses		137.3		138.6	(1)%

Total benefits and expenses		504.6		493.3	2%

Pre-tax operating earnings	$	84.7	$	96.4	(12)%

Other Data
Sales:
Private sector	$	1,150.2	$	1,339.4	(14)%
Public sector		1,165.8		1,146.0	2%

Total sales	$	2,316.0	$	2,485.4	(7)%

Average account values:
General account	$	10,437.0	$	9,682.6	8%
Separate account		18,713.1		19,085.8	(2)%

Total average account values	$	29,150.1	$	28,768.4	1%

Account values as of period end:
Private sector	$	14,014.4	$	13,991.6	—
Public sector		15,321.2		14,398.7	6%

Total account values	$	29,335.6	$	28,390.3	3%

Pre-tax operating earnings to average account values		0.39%		0.45%

The decrease in pre-tax operating earnings primarily was driven by lower asset fees and higher amortization of DAC.

The increase in amortization of DAC was related to changes in private sector amortization calculation assumptions driven by actual experience for the declining block of group annuity business.

The following table summarizes the interest spread on Retirement Plans segment average general account values for the periods indicated:


	Nine months ended September 30,
	2005	2004
Net investment income	6.13%	6.50%
Interest credited	4.24%	4.46%

Interest spread on average general account values	1.89%	2.04%

Interest spread margins decreased to 189 basis points in the first nine months of 2005 compared to 204 basis points in the same period a year ago. Included in the current period were 20 basis points, or $16.0 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 20 basis points, or $14.9 million, in the same period a year ago. The decrease in margins was driven by the combination of long-duration higher yielding assets rolling over into lower yielding assets as yields on new cash flows are below the portfolio rate. For the full year 2005, the Company expects interest spread margins to tighten and projects full year spreads of 180 to 185 basis points, including a nominal level of prepayment activity during the remainder of the year.

Individual Protection

Third Quarter – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Individual Protection segment for the periods indicated:


	Three months ended September 30,
(in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	7.4	$	5.8	28%
Cost of insurance charges		68.6		65.4	5%
Administrative fees		17.6		17.4	1%
Surrender fees		3.1		3.8	(18)%

Total policy charges		96.7		92.4	5%

Life insurance premiums		34.4		45.8	(25)%
Net investment income		82.6		81.5	1%

Total revenues		213.7		219.7	(3)%

Benefits and expenses:
Interest credited to policyholder account values		45.9		46.1	—
Other benefits and claims		55.3		57.1	(3)%
Policyholder dividends on participating policies		6.9		7.1	(3)%
Amortization of DAC		15.8		18.3	(14)%
Other operating expenses		39.2		42.6	(8)%

Total benefits and expenses		163.1		171.2	(5)%

Pre-tax operating earnings	$	50.6	$	48.5	4%

Other Data
Sales:
Corporate-owned life insurance	$	174.8	$	127.8	37%
The BEST of AMERICA variable life series		105.1		113.0	(7)%
Traditional/universal life insurance		83.8		80.6	4%

Total sales	$	363.7	$	321.4	13%

Higher pre-tax operating earnings were driven by lower other operating expenses, higher cost of insurance charges and decreased amortization of DAC. Lower life insurance premiums largely offset the overall improvement.

Lower other operating expenses primarily resulted from lower direct operating expenses, higher capitalization of certain software charges due to an increase in the amount eligible to be capitalized, and additional mutual fund expense reimbursements from larger separate account values.

Cost of insurance charges were higher principally due to the increase in business in force throughout the product lines. The aging of the portfolio in the individual life insurance business and higher COLI sales also contributed to the improvement.

The decrease in amortization of DAC was attributable to true-ups in the universal life and individual life businesses.

Life insurance premiums declined due to an unfavorable business mix and higher reinsurance premiums.

Sales improved primarily due to higher COLI sales, which were driven by several new large cases that closed during the period and a more favorable legislative environment.

Year-to-Date – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Individual Protection segment for the periods indicated:


	Nine months ended September 30,
(in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	20.9	$	17.1	22%
Cost of insurance charges		202.5		193.0	5%
Administrative fees		51.1		50.1	2%
Surrender fees		9.5		10.9	(13)%

Total policy charges		284.0		271.1	5%

Life insurance premiums		122.1		139.2	(12)%
Net investment income		251.9		245.0	3%

Total revenues		658.0		655.3	—

Benefits and expenses:
Interest credited to policyholder account values		137.0		137.2	—
Other benefits and claims		174.0		176.0	(1)%
Policyholder dividends on participating policies		24.9		26.8	(7)%
Amortization of DAC		63.8		62.9	1%
Other operating expenses		110.4		122.9	(10)%

Total benefits and expenses		510.1		525.8	(3)%

Pre-tax operating earnings	$	147.9	$	129.5	14%

Other Data
Sales:
Corporate-owned life insurance	$	552.5	$	474.7	16%
The BEST of AMERICA variable life series		317.9		330.8	(4)%
Traditional/universal life insurance		256.0		252.5	1%

Total sales	$	1,126.4	$	1,058.0	6%

Policy reserves as of period end:
Individual investment life insurance	$	3,251.3	$	2,816.9	15%
Corporate investment life insurance		6,643.0		4,866.1	37%
Traditional life insurance		2,138.0		2,092.0	2%
Universal life insurance		1,047.1		961.4	9%

Total policy reserves	$	13,079.4	$	10,736.4	22%

Insurance in force as of period end:
Individual investment life insurance	$	37,113.6	$	35,685.4	4%
Corporate investment life insurance		23,646.6		9,692.2	144%
Traditional life insurance		20,380.7		21,427.6	(5)%
Universal life insurance		8,663.8		8,349.5	4%

Total insurance in force	$	89,804.7	$	75,154.7	19%

Pre-tax operating earnings increased due to lower other operating expenses and higher cost of insurance charges and net investment income. Lower life insurance premiums in other product lines partially offset the overall increase.

The decline in other operating expenses resulted from lower direct operating expenses and premium taxes, higher capitalization of certain software charges due to an increase in the amount eligible to be capitalized, and additional mutual fund expense reimbursements from larger separate account values.

Net investment income increased primarily due to higher income from mortgage loan prepayment penalties.

Life insurance premiums declined due to an unfavorable business mix and higher reinsurance premiums.

Sales improved primarily due to higher COLI sales, which were driven by several new large cases that closed during the year and a more favorable legislative environment.

Corporate and Other

Third Quarter – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Corporate and Other segment for the periods indicated:


	Three months ended September 30,
(in millions)	2005			2004			Change
Statements of Income Data
Operating revenues:
Net investment income	$	82.3		$	64.0		29%
Other		0.4			3.2		(88)%

Total operating revenues		82.7			67.2		23%

Benefits and expenses:
Interest credited to policyholder account values		39.0			23.0		70%
Interest expense on debt		17.4			15.0		16%
Other		2.2			3.7		(41)%

Total benefits and operating expenses		58.6			41.7		41%

Pre-tax operating earnings		24.1			25.5		(5)%

Net realized losses on investments, hedging instruments and hedged items¹		(15.2	)		(13.3	)	14%
Adjustment to amortization of DAC related to net realized losses		4.4			—		NM

Income from continuing operations before federal income taxes	$	13.3		$	12.2		9%

¹	Excluding periodic net coupon settlements on non-qualifying derivatives.

Pre-tax operating earnings declined slightly due to a decrease in other income and an increase in interest expense, partially offset by an increase in interest spread income. The decline in other income was attributable to lower variable interest entity (VIE) and structured products earnings. Interest expense on debt was higher primarily due to increased utilization of commercial paper. The increase in interest spread income was driven by higher levels of invested assets and income from mortgage loan prepayment penalties and bond call premiums.

The following table summarizes net realized losses on investments, hedging instruments and hedged items from continuing operations by source for the periods indicated:


	Three months ended September 30,
	Three months ended September 30,
(in millions)	2005			2004
Realized gains on sales, net of hedging losses:
Fixed maturity securities available-for-sale	$	10.6		$	19.4
Hedging losses on fixed maturity sales		(1.9	)		(4.6	)
Equity securities available-for-sale		0.3			0.2
Mortgage loans on real estate		4.2			0.9
Mortgage loan hedging losses		(2.4	)		(0.7	)
Real estate		—			1.2
Other		—			5.9

Total realized gains on sales		10.8			22.3

Realized losses on sales, net of hedging gains:
Fixed maturity securities available-for-sale		(4.4	)		(1.8	)
Hedging gains on fixed maturity sales		0.1			0.2
Equity securities available-for-sale		(0.1	)		(0.4	)
Mortgage loans on real estate		(0.8	)		(0.2	)
Mortgage loan hedging gains		0.7			0.1
Other		(0.1	)		(0.3	)

Total realized losses on sales		(4.6	)		(2.4	)

Other-than-temporary and other investment impairments:
Fixed maturity securities available-for-sale		(15.3	)		(27.0	)
Mortgage loans on real estate, including valuation allowance adjustment		(1.1	)		(0.3	)
Other		(2.8	)		(3.3	)

Total other-than-temporary and other investment impairments		(19.2	)		(30.6	)

Credit default swaps		(4.4	)		4.7
Periodic net coupon settlements on non-qualifying derivatives		0.1			1.9
Other derivatives		2.2			(7.3	)

Net realized losses on investments, hedging instruments and hedged items	$	(15.1	)	$	(11.4	)

Year-to-Date – 2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Corporate and Other segment for the periods indicated:


	Nine months ended September 30,
(in millions)	2005			2004			Change
Statements of Income Data
Operating revenues:
Net investment income	$	225.5		$	160.2		41%
Other		0.2			14.7		(99)%

Total operating revenues		225.7			174.9		29%

Benefits and expenses:
Interest credited to policyholder account values		105.9			57.9		83%
Interest expense on debt		48.7			44.9		8%
Other		9.7			20.2		(52)%

Total benefits and operating expenses		164.3			123.0		34%

Pre-tax operating earnings		61.4			51.9		18%

Net realized gains (losses) on investments, hedging instruments and hedged items¹		6.3			(57.1	)	NM
Adjustment to amortization of DAC related to net realized gains		(1.1	)		—		NM

Income (loss) from continuing operations before federal income taxes	$	66.6		$	(5.2	)	NM

Other Data
Account values as of period end —
Funding agreements backing medium-term notes	$	4,049.8		$	4,818.1		(16)%

¹	Excluding periodic net coupon settlements on non-qualifying derivatives.

Pre-tax operating earnings increased primarily due to higher interest spread income and lower other expenses, partially offset by a decrease in other income. The increase in interest spread income was driven by higher invested asset levels and income from mortgage loan prepayment penalties and bond call premiums. The decline in other expenses primarily was due to lower VIE expenses. Other income decreased due to lower VIE and structured products earnings.

The Company recorded net realized gains on investments, hedging instruments and hedged items excluding operating items in the first nine months of 2005 compared to significant net realized losses in the same period a year ago primarily due to significantly lower levels of impairment charges.

The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from continuing operations by source for the periods indicated:


	Nine months ended September 30,
	Nine months ended September 30,
(in millions)	2005			2004
Realized gains on sales, net of hedging losses:
Fixed maturity securities available-for-sale	$	49.0		$	33.9
Hedging losses on fixed maturity sales		(6.0	)		(9.8	)
Equity securities available-for-sale		2.1			1.3
Mortgage loans on real estate		7.5			6.5
Mortgage loan hedging losses		(2.9	)		(2.0	)
Real estate		—			3.7
Other		1.0			6.1

Total realized gains on sales		50.7			39.7

Realized losses on sales, net of hedging gains:
Fixed maturity securities available-for-sale		(14.2	)		(6.6	)
Hedging gains on fixed maturity sales		3.7			1.0
Equity securities available-for-sale		(0.1	)		(0.9	)
Mortgage loans on real estate		(3.8	)		(6.1	)
Mortgage loan hedging gains		2.6			1.9
Real estate		—			(1.2	)
Other		(0.8	)		(1.7	)

Total realized losses on sales		(12.6	)		(13.6	)

Other-than-temporary and other investment impairments:
Fixed maturity securities available-for-sale		(21.2	)		(67.9	)
Equity securities available-for-sale		(0.9	)		(0.6	)
Mortgage loans on real estate, including valuation allowance adjustment		(3.7	)		(5.3	)
Real estate		(0.1	)		(2.8	)
Other		(3.2	)		—

Total other-than-temporary and other investment impairments		(29.1	)		(76.6	)

Credit default swaps		(6.8	)		2.0
Periodic net coupon settlements on non-qualifying derivatives		(0.2	)		7.1
Other derivatives		4.1			(8.6	)

Net realized gains (losses) on investments, hedging instruments and hedged items	$	6.1		$	(50.0	)

The Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See Part I, Item 2 – MD&A – Critical Accounting Policies and Recently Issued Accounting Standards – Impairment Losses on Investments of this report for a complete discussion of this process.

The following table summarizes for the nine months ended September 30, 2005 the Company’s largest aggregate losses on sales and write-downs by issuer (including affiliates), the related circumstances giving rise to the losses and the circumstances that may have affected other material investments held:


	Fair value at sale (proceeds)		YTD loss on sale			YTD write-downs			September 30, 2005
									Holdings¹		Net unrealized gain (loss)

(in millions)
A major U.S. airline. Due to a bankruptcy filing within the third quarter of 2005, a write-down and sale of certain holdings of this issuer were completed during the quarter.	$	9.7	$	—		$	(5.7	)	$	36.4	$	(0.6	)

A major U.S. airline. Due to a bankruptcy filing within the third quarter of 2005, a write-down of certain holdings of this issuer was completed during the quarter.		—		—			(3.5	)		18.4		2.1

A collateralized debt obligation. Experienced significant deterioration in the equity price between the second and third quarter of 2005. An impairment was recognized in the third quarter of 2005.		—		—			(2.5	)		5.8		0.1

A collateralized loan obligation. Expected cash flows experienced deterioration in the second quarter of 2005, and the issue was impaired to fair value. No further impairment was necessary during the third quarter of 2005.		—		—			(1.8	)		2.9		—

A collateralized debt obligation. Given the high exposure to the airline and auto industries and the increasingly large high yield category, a sale of the position was realized as an impairment loss during the third quarter of 2005.		9.5		—			(1.8	)		—		—

Preferred term securities purchased for the purpose of selling into a securitization. An impairment was taken in the second quarter of 2005. No further impairment was necessary during the third quarter of 2005.		—		—			(1.4	)		28.7		(0.4	)

A research-based pharmaceutical manufacturer. The company is recognized as one of the leaders of pain management and controlled release technology. Because of recent legal struggles and significantly reduced revenues, a sale of the position was realized as an impairment loss during the third quarter of 2005.		10.9		—			(1.3	)		—		—

A payroll services and temporary staffing company. Declines occurred in the fourth quarter of 2004 and first quarter of 2005 and impairments were taken. No additional impairment is necessary on the remaining holdings.		—		—			(0.9	)		2.2		0.8

U.S. government securities that were sold at a loss in the first, second and third quarters of 2005. No impairment is necessary on the remaining holdings.		358.4		(3.8	)		—			229.7		10.4

A provider of communications integrated circuits to the telecommunications industry. A small portion of the holdings was sold in the third quarter 2005. No impairment is necessary on the remaining holdings.		1.1		(1.0	)		—			2.1		0.3

Securities issued by U.S. government sponsored enterprises (not backed by the full faith and credit of the U.S. government) that were sold at a loss in the third quarter of 2005. No impairment is necessary on the remaining holdings.		59.0		(0.8	)		—			878.1		60.0

Total	$	448.6	$	(5.6	)	$	(18.9	)	$	1,204.3	$	72.7

¹	Holdings represent amortized cost of fixed maturity securities and cost of equity securities as of the date indicated.

No other issuer had an aggregated loss on sales and write-downs greater than 2% of the Company’s total gross loss on sales and write-downs on fixed maturity and equity securities.

Related Party Transactions

See Note 8 to the unaudited consolidated financial statements included in Part I, Item 1 – Unaudited Consolidated Financial Statements of this report for a discussion of related party transactions.

Contractual Obligations and Commitments

Contractual obligations and commitments have not changed materially from those disclosed in the Company’s 2004 Annual Report on Form 10-K.

Off-Balance Sheet Transactions

Under the MTN program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. The funding agreements rank pari passu with all other insurance claims of the issuing company in the event of liquidation and should be treated as “annuities” under applicable Ohio insurance law. Therefore, the funding agreement obligations are classified as a component of future policy benefits and claims on the unaudited consolidated balance sheets. Because the Company is not the primary beneficiary of, and has no ownership interest in, or control over, the third party trust that issues the notes, the Company does not include the trust in its unaudited consolidated financial statements. Since the notes issued by the trust have a secured interest in the funding agreements issued by the Company, Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., assign the same ratings to the notes and the insurance financial strength of the Company.

As of September 30, 2005 and December 31, 2004, the Company had received $1.15 billion and $874.2 million, respectively, of cash collateral on securities lending and $257.6 million and $415.7 million, respectively, of cash for derivative collateral. As of September 30, 2005, the Company had received no non-cash collateral on securities lending compared to $191.8 million at December 31, 2004. Both the cash and non-cash collateral amounts were included in short-term investments with a corresponding liability recorded in other liabilities. As of September 30, 2005 and December 31, 2004, the Company had loaned securities with a fair value of $1.12 billion and $1.04 billion, respectively. The Company also held $80.3 million and $222.5 million of securities as off-balance sheet collateral on derivative transactions as of September 30, 2005 and December 31, 2004, respectively.

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

Market risks have not changed materially from those disclosed in the Company’s 2004 Annual Report on Form 10-K.

ITEM 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

There have been no changes during the Company’s third fiscal quarter to its internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 Legal Proceedings

In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are compensation arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, the use of side agreements and finite reinsurance agreements, and funding agreements issued to back MTN programs. Related investigations and proceedings may be commenced in the future. The Company and/or its affiliates have been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state attorneys general for information relating to these investigations into compensation and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, the use of side agreements and finite reinsurance agreements, and funding agreements backing the MTN program. The Company is cooperating with regulators in connection with these inquiries.

ITEM 2 Unregistered Sales of Equity 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

None.

ITEM 6 Exhibits

10.1

Employment letter agreement between NFS and John Carter dated October 27, 2005 (previously filed as Exhibit 10.1 to the NFS Quarterly Report on Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and incorporated herein by reference).

10.2

Summary of terms of employment of Timothy G. Frommeyer as Senior Vice President – Chief Financial Officer of NFS, NLIC and NLAIC (previously filed as Exhibit 10.2 to the NFS Quarterly Report on Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and incorporated herein by reference).

31.1

Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities Act of 1933, except as shall be expressly set forth by specific reference to such filing).

32.2

Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities Act of 1933, except as shall be expressly set forth by specific reference to such filing).

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 3, 2005		/s/ Timothy G. Frommeyer
		Timothy G. Frommeyer, Senior Vice President — Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)