10-Q 1 l88206ae10-q.txt NATIONWIDE LIFE INSURANCE CO. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 COMMISSION FILE NO. 2-28596 NATIONWIDE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) OHIO 31-4156830 (State or other jurisdiction ) (I.R.S. Employer Identification No.) of incorporation or organization ONE NATIONWIDE PLAZA COLUMBUS, OHIO 43215 (614) 249-7111 (Address, including zip code and telephone number, including area code, of Registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO --- --- All voting stock was held by affiliates of the Registrant on May 4, 2001. COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding as of May 4, 2001 (Title of Class) THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. 2 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES FORM 10-Q INDEX

PART I FINANCIAL INFORMATION Item 1 Unaudited Consolidated Financial Statements 3 Item 2 Management's Narrative Analysis of the Results of Operations 13 Item 3 Quantitative and Qualitative Disclosures About Market Risk 23 PART II OTHER INFORMATION Item 1 Legal Proceedings 23 Item 2 Changes in Securities 24 Item 3 Defaults Upon Senior Securities 24 Item 4 Submission of Matters to a Vote of Security Holders 24 Item 5 Other Information 24 Item 6 Exhibits and Reports on Form 8-K 24 SIGNATURE 25

2 3 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 MARCH 31, ----------------------------- 2001 2000 ============================================================================================================================ REVENUES Policy charges $ 267.7 $ 272.6 Life insurance premiums 63.9 66.9 Net investment income 422.9 407.6 Net realized losses on investments, hedging instruments and hedged items (3.9) (3.1) Other 5.9 5.2 ---------------------------------------------------------------------------------------------------------------------------- 756.5 749.2 ---------------------------------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES Interest credited to policyholder account balances 301.2 294.2 Other benefits and claims 65.0 67.3 Policyholder dividends on participating policies 10.5 12.0 Amortization of deferred policy acquisition costs 92.9 85.9 Interest expense on short-term borrowings 2.3 - Other operating expenses 115.6 122.1 ---------------------------------------------------------------------------------------------------------------------------- 587.5 581.5 ---------------------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and cumulative effect of adoption of accounting principle 169.0 167.7 Federal income tax expense 44.6 54.4 ---------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of adoption of accounting principle 124.4 113.3 Cumulative effect of adoption of accounting principle, net of tax (4.8) - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 119.6 $ 113.3 ============================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 3 4 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Balance Sheets (in millions, except per share amounts)

(UNAUDITED) MARCH 31, DECEMBER 31, 2001 2000 ============================================================================================================================== ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity securities (cost $15,620.3 in 2001; $15,245.8 in 2000) $ 16,051.3 $ 15,443.0 Equity securities (cost $45.0 in 2001; $103.5 in 2000) 41.5 109.0 Mortgage loans on real estate, net 6,349.9 6,168.3 Real estate, net 309.3 310.7 Policy loans 572.7 562.6 Other long-term investments 91.3 101.8 Short-term investments 660.1 442.6 ------------------------------------------------------------------------------------------------------------------------------ 24,076.1 23,138.0 ------------------------------------------------------------------------------------------------------------------------------ Cash 24.0 18.4 Accrued investment income 273.0 251.4 Deferred policy acquisition costs 2,906.2 2,865.6 Other assets 520.3 396.7 Assets held in separate accounts 58,645.8 65,897.2 ------------------------------------------------------------------------------------------------------------------------------ $ 86,445.4 $ 92,567.3 ============================================================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Future policy benefits and claims $ 22,596.2 $ 22,183.6 Short-term borrowings 179.0 118.7 Other liabilities 1,593.8 1,164.9 Liabilities related to separate accounts 58,645.8 65,897.2 ------------------------------------------------------------------------------------------------------------------------------ 83,014.8 89,364.4 ------------------------------------------------------------------------------------------------------------------------------ Shareholder's equity: Capital shares, $1 par value. Authorized 5.0 million shares, issued and outstanding 3.8 million shares 3.8 3.8 Additional paid-in capital 646.1 646.1 Retained earnings 2,555.9 2,436.3 Accumulated other comprehensive income 224.8 116.7 ------------------------------------------------------------------------------------------------------------------------------ 3,430.6 3,202.9 ------------------------------------------------------------------------------------------------------------------------------ $ 86,445.4 $ 92,567.3 ==============================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 4 5 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Statements of Shareholder's Equity (Unaudited) Three Months Ended March 31, 2001 and 2000 (in millions)

ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY =================================================================================================================================== Balance as of January 1, 2000 $ 3.8 $ 766.1 $ 2,011.0 $ (15.9) $ 2,765.0 Comprehensive income: Net income - - 113.3 - 113.3 Net unrealized losses on securities available- for-sale arising during the period, net of tax - - - (7.3) (7.3) -------- Total comprehensive income 106.0 -------- Dividends to shareholder - - (50.0) - (50.0) ----------------------------------------------------------------------------------------------------------------------------------- Balance as of March 31, 2000 $ 3.8 $ 766.1 $ 2,074.3 $ (23.2) $ 2,821.0 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AS OF JANUARY 1, 2001 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9 Comprehensive income: Net income - - 119.6 - 119.6 Net unrealized gains on securities available- for-sale arising during the period, net of tax - - - 103.8 103.8 Cumulative effect of adoption of accounting principle, net of tax - - - 3.6 3.6 Accumulated net gains on cash flow hedges, net of tax - - - 0.7 0.7 -------- Total comprehensive income 227.7 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 2001 $ 3.8 $ 646.1 $ 2,555.9 $ 224.8 $ 3,430.6 ===================================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 5 6 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2001 and 2000 (in millions)

2001 2000 ============================================================================================================================ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 119.6 $ 113.3 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 301.2 294.2 Capitalization of deferred policy acquisition costs (198.6) (189.2) Amortization of deferred policy acquisition costs 92.9 85.9 Amortization and depreciation (7.5) (1.4) Realized losses on investments, hedging instruments and hedged items 3.9 3.1 Cumulative effect of adoption of accounting principle 7.4 - Increase in accrued investment income (21.6) (5.9) Decrease (increase) in other assets 0.5 (42.3) Increase in policy liabilities 5.3 61.6 Increase in other liabilities 140.8 82.6 Other, net 0.3 (4.5) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 444.2 397.4 ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of securities available-for-sale 907.2 715.5 Proceeds from sale of securities available-for-sale 33.7 258.2 Proceeds from repayments of mortgage loans on real estate 190.9 125.1 Proceeds from sale of real estate 0.1 2.1 Proceeds from repayments of policy loans and sale of other invested assets 29.3 10.7 Cost of securities available-for-sale acquired (1,255.4) (816.2) Cost of mortgage loans on real estate acquired (354.0) (216.2) Cost of real estate acquired (0.1) (1.5) Short-term investments, net (217.5) 375.2 Other, net 60.8 (28.3) ---------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (605.0) 424.6 ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of short-term borrowings 60.3 - Cash dividends paid - (100.0) Increase in investment and universal life insurance product account balances 1,281.6 962.3 Decrease in investment and universal life insurance product account balances (1,175.5) (1,688.1) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 166.4 (825.8) ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 5.6 (3.8) Cash, beginning of period 18.4 4.8 ---------------------------------------------------------------------------------------------------------------------------- Cash, end of period $ 24.0 $ 1.0 ============================================================================================================================

See accompanying notes to unaudited consolidated financial statements. 6 7 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements Three Months Ended March 31, 2001 (1) Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements of Nationwide Life Insurance Company and subsidiaries (NLIC or collectively, the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America, which differ from statutory accounting practices prescribed or permitted by regulatory authorities, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The financial information included herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2000 included in the Company's annual report on Form 10-K. (2) New Accounting Principle ------------------------ In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, was adopted by the Company effective January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. As of January 1, 2001, the Company had $755.4 million notional amount of freestanding derivatives with a market value of ($7.0) million. All other derivatives qualified for hedge accounting under SFAS 133. The adoption of SFAS 133 resulted in the Company recording a net transition adjustment loss of $4.8 million (net of related income tax of $2.6 million) in net income. In addition, a net transition adjustment loss of $3.6 million (net of related income tax of $2.0 million) was recorded in accumulated other comprehensive income at January 1, 2001. The adoption of SFAS 133 resulted in the Company derecognizing $17.0 million of deferred assets related to hedges, recognizing $10.9 million of additional derivative instrument liabilities and $1.3 million of additional firm commitment assets, while also decreasing hedged future policy benefits by $3.0 million and increasing the carrying amount of hedged investments by $10.6 million. Further, the adoption of SFAS 133 resulted in the Company reporting total derivative instrument assets and liabilities of $44.8 million and $107.1 million, respectively, as of January 1, 2001. Also, the Company expects that the adoption of SFAS 133 will increase the volatility of reported earnings and other comprehensive income. The amount of volatility will vary with the level of derivative and hedging activities and fluctuations in market interest rates and foreign currency exchange rates during any period. (3) Derivatives ----------- QUALITATIVE DISCLOSURE Interest Rate Risk Management The Company is exposed to changes in the fair value of fixed rate investments (commercial mortgage loans and corporate bonds) due to changes in interest rates. To manage this risk, the Company enters into various types of derivative instruments to minimize fluctuations in fair values resulting changes in from interest rates. The Company principally uses interest rate swaps and short Eurodollar futures to manage this risk. 7 8 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued Under interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments, thereby creating floating rate investments. Short Eurodollar futures change the fixed rate cash flow exposure to variable rate cash flows. With short Eurodollar futures, if interest rates rise (fall), the gains (losses) on the futures adjust the fixed rate income on the investments, thereby creating floating rate investments. As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to changes in the fair value of the commitment due to changes in interest rates during the commitment period. To manage this risk, the Company enters into short Treasury futures. With short Treasury futures, if interest rates rise (fall), the gains (losses) on the futures will offset the change in fair value of the commitment. Floating rate investments (commercial mortgage loans and corporate bonds) expose the Company to fluctuations in cash flow and investment income due to changes in interest rates. To manage this risk, the Company enters into receive fixed, pay variable over-the-counter interest rate swaps or long Eurodollar futures strips to convert the variable rate investments to a fixed rate. In using interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments, thereby creating fixed rate assets. The long Eurodollar futures change the variable rate cash flow exposure to fixed rate cash flows. With long Eurodollar futures, if interest rates rise (fall), the losses (gains) on the futures are used to reduce the variable rate income on the investments, thereby creating fixed rate investments. Foreign Currency Risk Management In conjunction with the Company's medium-term note programs, the Company issues both fixed and variable rate liabilities denominated in foreign currencies. The Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange rates and interest rates. To manage this risk, the Company enters into cross-currency interest rate swaps to convert these liabilities to a variable US dollar rate. For a fixed rate liability, the cross-currency interest rate swap is structured to receive a fixed rate, in the foreign currency, and pay a variable US dollar rate, generally 3-month libor. For a variable rate liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign currency, and pay a variable US dollar rate, generally 3-month libor. The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency due to changes in foreign currency exchange rates and interest rates. To manage this risk, the Company uses cross-currency interest rate swaps to convert these assets to variable US dollar rate instruments. Cross-currency interest rate swaps are structured to pay a fixed rate, in the foreign currency, and receive a variable US dollar rate, generally 3-month libor. Non-Hedging Derivatives The Company may enter into over-the-counter basis swaps (receive one variable rate, pay another variable rate) to change the rate characteristics of a specific investment to better match the variable rate paid on a liability. While the pay-side terms of the basis swap will line up with the terms of the asset, the Company may not be able to match the receive-side terms of the derivative to a specific liability; therefore, basis swaps may not receive hedge accounting treatment. 8 9 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued QUANTITATIVE DISCLOSURE Fair Value Hedges Changes in the fair value of derivative instruments designated as fair value hedges, and the corresponding changes in the fair value of the hedged asset or liability, attributable to the risk being hedged, are included in net realized losses on investments, hedging instruments and hedged items in the consolidated statements of income. Amounts receivable or payable under interest rate swaps are recognized as an adjustment to net investment income or interest credited to policyholder account balances consistent with the nature of the hedged item. During the quarter ended March 31, 2001, a loss of $1.7 million was recognized in net realized losses on investments, hedging instruments and hedged items. This represents the ineffective portion of the fair value hedging relationships. There were no gains or losses attributable to the portion of the derivative instrument's change in value excluded from the assessment of hedge effectiveness. There were also no gains or losses recognized in earnings as a result of hedged firm commitments no longer qualifying as fair value hedges. Cash Flow Hedges Changes in the fair value of derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income (AOCI). Amounts receivable or payable under interest rate swaps are recognized as an adjustment to net investment income or interest credited to policyholder account balances consistent with the nature of the hedged item. In the event that a derivative instrument was liquidated and the hedged item remained on the books, the gain or loss on the derivative would be reclassified out of AOCI over the life of the underlying asset. The Company is not anticipating any reclassification out of AOCI over the next 12-month period. Net realized losses on investments, hedging instruments and hedged items include less than $0.1 million of net gains for the quarter ended March 31, 2001 representing the ineffective portion of the cash flow hedging relationships. There were no gains or losses attributable to the portion of the derivative instruments' change in value excluded from the assessment of hedge effectiveness. Other Derivative Instruments, Including Embedded Derivatives Net realized losses on investments for the quarter ended March 31, 2001 include a loss of $0.5 million, related to other derivative instruments, including embedded derivatives. A $38.0 million loss was recorded in the quarter ended March 31, 2001 on the change in value of cross-currency interest rate swaps hedging variable rate medium term notes denominated in foreign currencies. An offsetting gain of $37.2 million was recorded to reflect the change in spot rates during the quarter on these variable rate liabilities. Additional gains of $0.3 million were also recorded related to other derivative instruments not receiving hedge accounting treatment and embedded derivatives. 9 10 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued (4) Comprehensive Income (Loss) --------------------------- Comprehensive income (loss) includes net income as well as certain items that are reported directly within a separate component of shareholders' equity that bypass net income. Other comprehensive income (loss) is comprised of unrealized gains (losses) on securities available-for-sale and accumulated net gains on cash flow hedges. The related before and after federal income tax amounts are as follows:

THREE MONTHS ENDED MARCH 31, ------------------------------- (in millions) 2001 2000 ========================================================================================================== Unrealized gains (losses) on securities available-for- sale arising during the period: Gross $ 220.6 $ (32.8) Adjustment to deferred policy acquisition costs (65.1) 20.6 Related federal income tax (expense) benefit (54.4) 4.3 ---------------------------------------------------------------------------------------------------------- Net 101.1 (7.9) ---------------------------------------------------------------------------------------------------------- Reclassification adjustment for net losses on securities available-for-sale realized during the period: Gross 4.2 0.9 Related federal income tax benefit (1.5) (0.3) ---------------------------------------------------------------------------------------------------------- Net 2.7 0.6 ---------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) on securities available-for-sale 103.8 (7.3) ---------------------------------------------------------------------------------------------------------- Accumulated net gains on cash flow hedges: Transition adjustment 5.6 - Gross 1.1 - Related federal income tax expense (2.4) - ---------------------------------------------------------------------------------------------------------- Other comprehensive income on cash flow hedges 4.3 - ---------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) $ 108.1 $ (7.3) ==========================================================================================================

(5) Segment Disclosures ------------------- The Company uses differences in products as the basis for defining its reportable segments. The Company reports three product segments: Individual Annuity, Institutional Products and Life Insurance. The Individual Annuity segment consists of both variable and fixed annuity contracts. Individual annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, variable annuity contracts provide the customer with access to a wide range of investment options and asset protection in the event of an untimely death, while fixed annuity contracts generate a return for the customer at a specified interest rate fixed for a prescribed period. The Company's individual annuity products consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. The Institutional Products segment is comprised of the Company's group pension and payroll deduction business, both public and private sectors, and medium-term note programs. The public sector includes the 457 business in the form of fixed and variable annuities. The private sector includes the 401(k) business generated through fixed and variable annuities. 10 11 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued The Life Insurance segment consists of insurance products, including universal life insurance, corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) products, which provide a death benefit and also allow the customer to build cash value on a tax-advantaged basis. In addition to the product segments, the Company reports a Corporate segment. The Corporate segment includes net investment income not allocated to the three product segments, certain revenues and expenses of the Company's broker/dealer subsidiary, unallocated expenses and interest expense on short-term borrowings. In addition to these operating revenues and expenses, the Company also reports net realized gains and losses on investments, hedging instruments and hedged items in the Corporate segment. The following table summarizes the financial results of the Company's business segments for the three months ended March 31, 2001 and 2000.

Individual Institutional Life (in millions) Annuity Products Insurance Corporate Total =================================================================================================================== 2001 Net investment income $ 124.4 $ 211.7 $ 79.9 $ 6.9 $ 422.9 Other operating revenue 144.0 57.0 130.6 5.9 337.5 ------------------------------------------------------------------------------------------------------------------- Total operating revenue(1) 268.4 268.7 210.5 12.8 760.4 ------------------------------------------------------------------------------------------------------------------- Interest credited to policyholder account balances 100.3 158.1 42.8 - 301.2 Amortization of deferred policy acquisition costs 56.4 12.8 23.7 - 92.9 Interest expense on short-term borrowings - - - 2.3 2.3 Other benefits and expenses 49.2 42.7 94.3 4.9 191.1 ------------------------------------------------------------------------------------------------------------------- Total expenses 205.9 213.6 160.8 7.2 587.5 ------------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) 62.5 55.1 49.7 5.6 172.9 Net realized losses on investments, hedging instruments and hedged items - - - (3.9) (3.9) ------------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and cumulative effect of adoption of accounting principle $ 62.5 $ 55.1 $ 49.7 $ 1.7 $ 169.0 =================================================================================================================== Assets as of period end $ 41,748.1 $ 34,062.1 $ 8,285.1 $ 2,350.1 $ 86,445.4 ===================================================================================================================

11 12 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued

Individual Institutional Life (in millions) Annuity Products Insurance Corporate Total =================================================================================================================== 2000 Net investment income $ 123.3 $ 206.7 $ 65.8 $ 11.8 $ 407.6 Other operating revenue 163.4 62.3 113.8 5.2 344.7 ------------------------------------------------------------------------------------------------------------------- Total operating revenue(1) 286.7 269.0 179.6 17.0 752.3 ------------------------------------------------------------------------------------------------------------------- Interest credited to policyholder account balances 101.6 159.2 33.4 - 294.2 Amortization of deferred policy acquisition costs 56.7 12.3 16.9 - 85.9 Other benefits and expenses 56.7 38.3 96.0 10.4 201.4 ------------------------------------------------------------------------------------------------------------------- Total expenses 215.0 209.8 146.3 10.4 581.5 ------------------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) 71.7 59.2 33.3 6.6 170.8 Net realized losses on investments, hedging instruments and hedged items - - - (3.1) (3.1) ------------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and cumulative effect of adoption of accounting principle $ 71.7 $ 59.2 $ $ 33.3 $ 3.5 $ 167.7 =================================================================================================================== Assets as of period end $47,598.5 $ 40,827.9 $ 7,069.8 $ 1,392.2 $96,888.4 ===================================================================================================================

---------- (1) Excludes net realized gains and losses on investments, hedging instruments and hedged items. (6) Contingencies ------------- On October 29, 1998, the Company was named in a lawsuit filed in Ohio state court related to the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (Mercedes Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999, the complaint was amended to, among other things, add Marcus Shore as a second plaintiff. The amended complaint is brought as a class action on behalf of all persons who purchased individual deferred annuity contracts or participated in group annuity contracts sold by the Company and the other named Company affiliates which were used to fund certain tax-deferred retirement plans. The amended complaint seeks unspecified compensatory and punitive damages. No class has been certified. On June 11, 1999, the Company and the other named defendants filed a motion to dismiss the amended complaint. On March 8, 2000, the court denied the motion to dismiss the amended complaint filed by the Company and other named defendants. The Company intends to defend this lawsuit vigorously. 12 13 ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS INTRODUCTION The following analysis of unaudited consolidated results of operations of the Company should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere herein. Management's discussion and analysis contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include, among others, the following possibilities: (i) the potential impact on the Company's reported net income that could result from the adoption of certain accounting standards issued by the Financial Accounting Standards Board; (ii) tax law changes impacting the tax treatment of life insurance and investment products; (iii) heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors; (iv) adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; (v) failure to expand distribution channels in order to obtain new customers or failure to retain existing customers; (vi) inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance of the new and/or revised products in the market; (vii) changes in interest rates and the capital markets causing a reduction of investment income and/or asset fees, reduction in the value of the Company's investment portfolio or a reduction in the demand for the Company's products; (viii) general economic and business conditions which are less favorable than expected; (ix) unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations; and (x) inaccuracies in assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts. RESULTS OF OPERATIONS In addition to net income, the Company reports net operating income, which excludes net realized gains and losses on investments, hedging instruments and hedged items and cumulative effect of adoption of accounting principle. Net operating income is commonly used in the insurance industry as a measure of on-going earnings performance. The following table reconciles the Company's reported net income to net operating income for the first quarter of 2001 and 2000.

THREE MONTHS ENDED MARCH 31, ------------------------------- (in millions) 2001 2000 ========================================================================================================== Net income $ 119.6 $ 113.3 Net realized losses on investments, hedging instruments and hedged items, net of tax 2.5 2.0 Cumulative effect of adoption of accounting principle, net of tax 4.8 - ---------------------------------------------------------------------------------------------------------- Net operating income $ 126.9 $ 115.3 ==========================================================================================================

Revenues Total revenues for the first quarter of 2001, excluding net realized gains and losses on investments, hedging instruments and hedged items increased to $760.4 million compared to $752.3 million for the same period in 2000. 13 14 Policy charges include asset fees, which are primarily earned from separate account assets generated from sales of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products; administration fees, which include fees charged per contract on a variety of the Company's products and premium loads on universal life insurance products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period of annuity and certain life insurance contracts. Policy charges for the first quarter of 2001 and 2000 were as follows:

THREE MONTHS ENDED MARCH 31, ------------------------------- (in millions) 2001 2000 ========================================================================================================== Asset fees $ 159.5 $ 175.9 Cost of insurance charges 46.6 35.1 Administrative fees 41.3 36.7 Surrender fees 20.3 24.9 ---------------------------------------------------------------------------------------------------------- Total policy charges $ 267.7 $ 272.6 ==========================================================================================================

The decline in asset fees reflects a decrease in total average separate account assets of $7.12 billion (10%) in first quarter 2001 compared to a year ago. Market depreciation on variable annuity and investment life insurance products, partially offset by net flows into these products, have resulted in the decrease in average separate account balances. Cost of insurance charges are assessed on the net amount at risk on universal life insurance policies. The net amount at risk is equal to a policy's death benefit minus the related policyholder account value. The amount charged is based on the insured's age and other underwriting factors. The increase in cost of insurance charges is due primarily to growth in the net amount at risk related to individual investment life insurance reflecting expanded distribution and increased acceptance by producers and consumers. The net amount at risk related to individual investment life insurance grew to $25.28 billion as of March 31, 2001 compared to $21.10 billion a year ago. The growth in administrative fees is attributable to a significant increase in premiums on individual investment life policies and certain corporate-owned life policies where the Company collects a premium load. Surrender charges decreased as a result of continued improvement in customer retention in the Individual Annuity segment. Net investment income includes the investment income earned on investments supporting fixed annuities and certain life insurance products as well as the yield on the Company's general account invested assets which are not allocated to product segments, net of related investment expenses. General account assets supporting insurance products are closely correlated to the underlying reserves on these products. Net investment income grew from $407.6 million in the first quarter of 2000 to $422.9 million in the first quarter of 2001 primarily due to increased invested assets to support growth in individual fixed annuity, institutional products and life insurance policy reserves. General account reserves supporting these products increased $1.11 billion to $22.60 billion as of the end of first quarter 2001 compared to $21.49 billion a year ago. Realized gains and losses on investments are not considered by the Company to be recurring components of earnings. The Company makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. In addition, included in this caption are changes in the fair value of items qualifying as fair value hedges, the related hedged items and the ineffective portion of cash flow hedges, all of which are not considered recurring components of earnings. Other income includes fees earned by the Company's broker/dealers as well as commissions and other income for marketing, distribution and administration services. 14 15 Benefits and Expenses Interest credited to policyholder account balances totaled $301.2 million in first quarter 2001 compared to $294.2 million in first quarter 2000 and principally relates to fixed annuities, both individual and institutional, and investment life insurance products. The growth in interest credited reflects the increase in COLI policy reserves. The growth in amortization of deferred policy acquisition costs (DAC), which totaled $92.9 million and $85.9 million in the first quarter of 2001 and 2000, respectively, is principally due to the Life Insurance segment as a result of growth in the number of policies in-force in first quarter 2001. Operating expenses were $115.6 million in first quarter 2001, a 5% decrease from first quarter 2000 operating expenses of $122.1 million. The decrease reflects the Company's commitment to aggressive expense management in response to volatile equity markets. Federal income tax expense was $42.0 million and $54.4 million for the first quarter of 2001 and 2000, respectively. These amounts represent effective tax rates of 26.0% for the first quarter of 2001 and 32.4% in 2000. An increase in tax exempt income and investment tax credits resulted in the decrease in the effective rate. Recently Issued Accounting Pronouncements See note 2 to the unaudited consolidated financial statements for a discussion of recently issued accounting pronouncements. Sales Information Sales are comprised of annuities, pension plans and life insurance products sold to a wide variety of customer bases. Sales are stated net of internal replacements, which in the Company's opinion provides a more meaningful disclosure of sales. In addition, sales exclude: funding agreements issued to secure notes issued to foreign and domestic investors through an unrelated third party trust under the Company's two medium-term note programs; BOLI; large case pension plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, they do not produce steady production flow that lends itself to meaningful comparisons and are therefore excluded from sales. The Company sells its products through a broad distribution network. Unaffiliated entities that sell the Company's products to their own customer base include independent broker/dealers, brokerage firms, financial institutions, pension plan administrators, life insurance specialists and Nationwide agents. Representatives of the Company who market products directly to a customer base identified by the Company include Nationwide Retirement Solutions. Sales by distribution channel for the first quarter of 2001 and 2000, are summarized as follows:

(in millions) 2001 2000 ========================================================================================================== Independent broker/dealers $ 1,192.7 $ 1,550.8 Brokerage firms 339.3 308.0 Financial institutions 722.4 644.4 Pension plan administrators 302.8 332.1 Life insurance specialists 377.8 230.0 Nationwide agents 168.8 211.3 Nationwide Retirement Solutions 432.3 774.8 ----------------------------------------------------------------------------------------------------------

The decrease in sales in the independent broker/dealer channel reflects lower demand for variable annuities due to volatile equity markets, and a shift in private sector pension plan sales from group annuities issued by the Company to trust products issued by an affiliate, Nationwide Trust Company. 15 16 Sales through financial institutions grew 14% in first quarter 2001 compared to a year ago, driven mainly by the appointment of new distributors in the bank channel and increased fixed annuity sales. The increase in sales through life insurance specialists reflects increased sales of COLI products. For the second consecutive year, NLIC is a market leader in COLI sales, with a focus on mid-sized cases. Lower sales through Nationwide Retirement Solutions reflects the Company's exit from the teacher market in early 2000, the impact of previously lost cases on recurring deposits, and a shift in public sector pension sales from group annuities issued by the Company to administration only services provided by affiliates. The Company's flagship products are marketed under The BEST of AMERICA(R) brand, and include individual and group variable annuities and variable life insurance. The BEST of AMERICA products allow customers to choose from investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial services providers which allow those providers to sell products to their own customer bases under their own brand name. The Company also markets group deferred compensation retirement plans to employees of state and local governments for use under Internal Revenue Code (IRC) Section 457. The Company utilizes its sponsorship by the National Association of Counties and The United States Conference of Mayors when marketing IRC Section 457 products. Sales by product and segment for the first quarter of 2001 and 2000 are summarized as follows.

(in millions) 2001 2000 ========================================================================================================== The BEST of AMERICA products $ 1,025.6 $ 1,303.9 Private label annuities 221.5 273.9 Other 2.5 32.4 ------------------------------------------------------------------------------------------------------- Total individual variable annuity sales 1,249.6 1,610.2 ------------------------------------------------------------------------------------------------------- Deferred fixed annuities 316.2 85.1 Immediate fixed annuities 39.1 39.1 ------------------------------------------------------------------------------------------------------- Total individual fixed annuity sales 355.3 124.2 ------------------------------------------------------------------------------------------------------- Total individual annuity sales $ 1,604.9 $ 1,734.4 ======================================================================================================= The BEST of AMERICA products $ 938.0 $ 1,198.6 Other 13.9 16.1 ------------------------------------------------------------------------------------------------------- Total private sector pension plan sales 951.9 1,214.7 ------------------------------------------------------------------------------------------------------- Total public sector pension plan sales - IRC Section 457 annuities 402.1 691.6 ------------------------------------------------------------------------------------------------------- Total institutional products sales $ 1,354.0 $ 1,906.3 ======================================================================================================= The BEST of AMERICA variable life series $ 140.6 $ 125.3 Corporate-owned life insurance 377.8 228.5 Traditional/Universal life insurance 58.8 56.9 ------------------------------------------------------------------------------------------------------- Total life insurance sales $ 577.2 $ 410.7 =======================================================================================================

BUSINESS SEGMENTS The Company reports three product segments: Individual Annuity, Institutional Products and Life Insurance. In addition, the Company reports certain other revenues and expenses in a Corporate segment. 16 17 The following table summarizes operating income before federal income tax expense for the Company's business segments for the first quarter of 2001 and 2000.

THREE MONTHS ENDED MARCH 31, ------------------------------- (in millions) 2001 2000 ========================================================================================================== Individual Annuity $ 62.5 $ 71.7 Institutional Products 55.1 59.2 Life Insurance 49.7 33.3 Corporate 5.6 6.6 ---------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 172.9 $ 170.8 ==========================================================================================================

Individual Annuity The Individual Annuity segment consists of both variable and fixed annuity contracts. Individual annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, variable annuity contracts provide the customer with access to a wide range of investment options and asset protection in the event of an untimely death, while fixed annuity contracts generate a return for the customer at a specified interest rate fixed for a prescribed period. The Company's individual annuity products consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. 17 18 The following table summarizes certain selected financial data for the Company's Individual Annuity segment for the periods indicated.

THREE MONTHS ENDED MARCH 31, ---------------------------- (in millions) 2001 2000 ======================================================================================================= INCOME STATEMENT DATA Revenues: Policy charges $ 128.0 $ 145.8 Net investment income 124.4 123.3 Premiums on immediate annuities 16.0 17.6 ------------------------------------------------------------------------------------------------------- 268.4 286.7 ------------------------------------------------------------------------------------------------------- Benefits and expenses: Interest credited to policyholder account balances 100.3 101.6 Other benefits 15.7 16.8 Amortization of deferred policy acquisition costs 56.4 56.7 Other operating expenses 33.5 39.9 ------------------------------------------------------------------------------------------------------- 205.9 215.0 ------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 62.5 $ 71.7 ======================================================================================================= OTHER DATA Sales: Individual variable annuities $ 1,249.6 $ 1,610.2 Individual fixed annuities 355.3 124.2 ------------------------------------------------------------------------------------------------------- Total individual annuity sales $ 1,604.9 $ 1,734.4 ======================================================================================================= Average account balances: General account $ 6,914.4 $ 7,072.4 Separate account 35,225.4 37,421.4 ------------------------------------------------------------------------------------------------------- Total average account balances $ 42,139.8 $ 44,493.8 ======================================================================================================= Account balances as of period end: Individual variable annuities $ 35,625.0 $ 42,182.0 Individual fixed annuities 4,223.7 3,701.7 ------------------------------------------------------------------------------------------------------- Total account balances $ 39,848.7 $ 45,883.7 ======================================================================================================= Return on average equity 16.6% 20.3% Pre-tax operating income to average account balances 0.59% 0.64% -------------------------------------------------------------------------------------------------------

Pre-tax operating earnings totaled $62.5 million in first quarter 2001, down 13% compared to a year ago. The decrease in earnings is primarily a result of lower asset and surrender fees, partially offset by lower operating expenses. Asset fees decreased to $108.2 million in the first quarter of 2001, down 8% from $117.2 million in the same period a year ago. Asset fees are calculated daily and charged as a percentage of separate account assets. The decrease in asset fees is due to market depreciation on investments underlying reserves. Average separate account assets decreased 6% to $35.23 billion as of March 31, 2001 compared to $37.42 billion a year ago. Surrender fees decreased by $7.9 million to $15.2 million in the first quarter of 2001. Fueling this decrease was the improvement in variable annuity lapse rates over the first quarter of 2000, which totaled 10.3%, excluding internal replacements, in the first quarter of 2001, 220 basis points better than a year ago. Operating expenses were $33.5 million in first quarter 2001, a decrease of 16% over first quarter 2000, reflecting management's focus on expense management in response to depressed equity markets. 18 19 The following table depicts the interest spread on average general account reserves in the Individual Annuity segment for the periods indicated.

THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 ========================================================================================================== Net investment income 7.90% 7.87% Interest credited 5.80 5.74 ---------------------------------------------------------------------------------------------------------- Interest spread 2.10% 2.13% ==========================================================================================================

The Company experienced an increase in mortgage loan and bond prepayment fees and such income accounted for approximately 8 basis points of the interest spread in first quarter 2001 compared to no basis points in the same period a year ago. The Company anticipates interest spreads over the next several quarters to range between 195 and 200 basis points, excluding the impact of mortgage loan and bond prepayment income. Led by variable product deposits of $1.48 billion and withdrawals and surrenders of $1.20 billion, Individual Annuity segment deposits in first quarter 2001 of $1.83 billion offset by withdrawals and surrenders totaling $1.29 billion generated net flows of $540.8 million compared to the $292.5 million achieved a year ago. Despite the competitive nature of the individual annuity market, the Company has demonstrated the ability to generate positive net flows by leveraging its broad distribution network and innovative product development resources. Changes in the Company's products, including the introduction of new products with reduced policy charges have slightly decreased the ratio of asset fees to average separate account assets within the segment. This ratio was 1.23% as of March 31, 2001 compared to 1.25% a year ago. The decrease in pre-tax operating income to average assets in 2001 and 2000 is primarily driven by the mix of products and producer compensation arrangements. Increased sales of products with lower policy charges and increased sales of trail commission individual variable annuities are impacting margins, as measured by return on average account balances. Individual Annuity sales, which exclude internal replacements, during first quarter 2001 were $1.60 billion, down from $1.73 billion in the year ago quarter. Sales of fixed annuities nearly tripled to $316.2 million in first quarter 2001 compared to $85.1 million in first quarter 2000, offsetting the decline in variable annuity sales. Institutional Products The Institutional Products segment is comprised of the Company's group pension and payroll deduction business, both public and private sectors, and medium-term note programs. The public sector includes the 457 business in the form of fixed and variable annuities. The private sector includes the 401(k) business generated through fixed and variable annuities. The sales figures do not include business generated through the Company's two medium-term note programs, large case pension plan acquisitions and Nationwide employee and agent benefit plans, however the income statement data does reflect this business. 19 20 The following table summarizes certain selected financial data for the Company's Institutional Products segment for the periods indicated.

THREE MONTHS ENDED MARCH 31, ------------------------------ (in millions) 2001 2000 ========================================================================================================= INCOME STATEMENT DATA Revenues: Asset fees $ 47.3 $ 55.0 Net investment income 211.7 206.7 Other 9.7 7.3 --------------------------------------------------------------------------------------------------------- 268.7 269.0 --------------------------------------------------------------------------------------------------------- Benefits and expenses: Interest credited to policyholder account balances 158.1 159.2 Other benefits and expenses 55.5 50.6 --------------------------------------------------------------------------------------------------------- 213.6 209.8 --------------------------------------------------------------------------------------------------------- Operating income before federal income tax expense $ 55.1 $ 59.2 ========================================================================================================= OTHER DATA Sales: Private sector pension plans $ 951.9 $ 1,214.7 Public sector pension plans 402.1 691.6 --------------------------------------------------------------------------------------------------------- Total institutional products sales $ 1,354.0 $ 1,906.3 ========================================================================================================= Average account balances: General account $ 11,008.6 $10,707.4 Separate account 24,625.6 27,777.1 --------------------------------------------------------------------------------------------------------- Total average account balances $ 35,634.2 $38,484.5 ========================================================================================================= Account balances as of period end: Private sector pension plans $ 16,194.0 $20,212.5 Public sector pension plans 15,637.6 19,628.0 Medium-term note programs 1,931.9 704.0 --------------------------------------------------------------------------------------------------------- Total account balances $ 33,763.5 $40,544.5 ========================================================================================================= Return on average equity 22.7% 24.7% Pre-tax operating income to average account balances 0.62% 0.62% ---------------------------------------------------------------------------------------------------------

Institutional Products segment results reflect a slight increase in interest spread income attributable to growth in average general account assets. Interest spread is the differential between net investment income and interest credited to policyholder account balances. Interest spreads vary depending on crediting rates offered by competitors, performance of the investment portfolio, including the rate of prepayments, changes in market interest rates and other factors. The following table depicts the interest spread on general account reserves in the Institutional Products segment for the periods indicated.

THREE MONTHS ENDED MARCH 31, 2001 2000 ========================================================================================================== Net investment income 7.69% 7.72% Interest credited 5.74% 5.95% ---------------------------------------------------------------------------------------------------------- Interest spread 1.95% 1.77% ==========================================================================================================

20 21 The Company experienced an increase in mortgage loan and bond prepayment fees and such income accounted for approximately 15 basis points of the interest spread in first quarter 2001 compared to no basis points in the same period a year ago. The Company anticipates interest spreads over the next several quarters to range between 175 and 180 basis points, excluding the impact of mortgage loan and bond prepayment income. Asset fees declined 14% to $47.3 million in the quarter ended March 31, 2001 compared to a year ago. The decline was driven by an 11% drop in average separate account assets in the quarter compared to a year ago. Net investment income increased 2% to $211.7 million in the first quarter of 2001 compared to a year ago. Driving this increase was a 3% increase in the average general account balance in the quarter compared to a year ago and the increase in mortgage loan and bond prepayment income. Interest credited and other benefits and expenses in first quarter 2001 were flat compared to a year ago. Institutional Products segment deposits in first quarter 2001 of $1.39 billion, offset by participant withdrawals and surrenders totaling $1.29 billion, generated net flows from participant activity of $102.3 million, a 65% decrease over first quarter 2000 net flows of $290.3 million. Changes in the Company's products, including the introduction of new institutional products with reduced policy charges, and the mix of business have slightly decreased the ratio of asset fees to average separate account assets within the segment. This ratio was 0.77% in first quarter 2001 compared to 0.79% in first quarter 2000. Institutional Products sales during first quarter 2001 reached $1.35 billion compared to sales of $1.91 billion in first quarter 2000. In the private sector, while the Company sold a record number of plans in the first quarter 2001, sales declined compared to a year ago due to the weak equity markets which reduced the average plan size of take-over cases. In the public sector, sales declined from a year ago reflecting the impact of previously lost cases on recurring deposits. Life Insurance The Life Insurance segment consists of insurance products, including universal life insurance, COLI and BOLI products, which provide a death benefit and also allow the customer to build cash value on a tax-advantaged basis. 21 22 The following table summarizes certain selected financial data for the Company's Life Insurance segment for the periods indicated.

THREE MONTHS ENDED MARCH 31, --------------------------- (in millions) 2001 2000 ====================================================================================================== INCOME STATEMENT DATA Revenues: Total policy charges $ 82.7 $ 64.5 Net investment income 79.9 65.8 Other 47.9 49.3 ------------------------------------------------------------------------------------------------------ 210.5 179.6 ------------------------------------------------------------------------------------------------------ Benefits 102.6 95.9 Operating expenses 58.2 50.4 ------------------------------------------------------------------------------------------------------ 160.8 146.3 ------------------------------------------------------------------------------------------------------ Operating income before federal income tax expense $ 49.7 $ 33.3 ====================================================================================================== OTHER DATA Sales: The BEST of AMERICA variable life series $ 140.6 $ 125.3 Corporate-owned life insurance 377.8 228.5 Traditional/Universal life insurance 58.8 56.9 ------------------------------------------------------------------------------------------------------ Total life insurance sales $ 577.2 $ 410.7 ====================================================================================================== Policy reserves as of period end: Individual investment life insurance $ 1,958.0 $ 2,000.1 Corporate investment life insurance 2,800.4 1,767.0 Traditional life insurance 1,825.0 1,795.5 Universal life insurance 770.9 765.1 ------------------------------------------------------------------------------------------------------ Total policy reserves $ 7,354.3 $ 6,327.7 ====================================================================================================== Return on average equity 12.9% 10.8% ------------------------------------------------------------------------------------------------------

Life Insurance segment earnings increased 49% to $49.7 million, up from $33.3 million a year ago. The increase in Life Insurance segment earnings is attributable to strong sales and increased investment earnings due to reserve growth in both individual and corporate investment life insurance products. Driven primarily by increased policy charges, revenues from investment life products increased to $102.8 million in first quarter 2001 compared to $72.1 million in first quarter 2000. The revenue growth reflects significantly increased policy reserve levels driven by corporate investment life reserves, which include both COLI and BOLI products and reached $2.80 billion as of March 31, 2001, up from $1.77 billion in the same period a year ago. Pre-tax earnings from investment life products reached $29.8 million in first three months of 2001 compared to $19.5 million a year ago, a 53% increase. The strong revenue growth discussed previously more than offset increased operating expenses associated with the growth in business. Traditional/Universal life pre-tax earnings increased 44% to $19.9 million in first quarter 2001 compared to $13.8 million in the same period a year ago, reflecting higher investment earnings and lower policyholder benefit costs. Total life insurance sales, excluding all BOLI and Nationwide employee and agent benefit plan sales increased 41% to $577.2 million in first quarter 2001 compared to $410.7 million in first quarter 2000. Sales in 2001 include a record level of production for COLI and continued growth of individual investment life insurance, reflecting the Company's efforts to sell through multiple channels and growing producer and consumer acceptance of these product offerings. 22 23 Corporate The following table summarizes certain selected financial data for the Company's Corporate segment for the periods indicated.

THREE MONTHS ENDED MARCH 31, ---------------------------- (in millions) 2001 2000 ===================================================================================================== INCOME STATEMENT DATA Operating revenues(1) $ 12.8 $ 17.0 Operating expenses 7.2 10.4 ----------------------------------------------------------------------------------------------------- Operating income before federal income tax expense(1) $ 5.6 $ 6.6 =====================================================================================================

--------- (1) Excludes net realized losses on investments, hedging instruments and hedged items. The Corporate segment consists of net investment income on invested assets not allocated to the three product segments, unallocated expenses and interest expense on short-term borrowings. The decrease in revenues reflects a decrease in net investment income on real estate investments. In addition to these operating revenues and expenses, the Company also reports net realized gains and losses on investments, hedging instruments and hedged items in the Corporate segment. The Company realized net investment losses of $4.2 million and net gains on hedging instruments and hedged items of $0.3 million during the first quarter of 2001 compared to realized net investment losses of $3.1 million during the first quarter of 2000. In addition, the Company realized a net after-tax loss of $4.8 million related to the adoption of FAS 133 in first quarter 2001. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted due to reduced disclosure format. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS The Company is a party to litigation and arbitration proceedings in the ordinary course of its business, none of which is expected to have a material adverse effect on the Company. In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits, relating to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements. On October 29, 1998, the Company was named in a lawsuit filed in Ohio state court related to the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (Mercedes Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999, the complaint was amended to, among other things, add Marcus Shore as a second plaintiff. The amended complaint is brought as a class action on behalf of all persons who purchased individual deferred annuity contracts or participated in group annuity contracts sold by the Company and the other named Company affiliates which were used to fund certain tax-deferred retirement plans. The amended complaint seeks unspecified compensatory and punitive damages. No class has been certified. On June 11, 1999, the Company and the other named defendants filed a motion to dismiss the amended complaint. On March 8, 2000, the court denied the motion to dismiss the amended complaint filed by the Company and other named defendants. The Company intends to defend this lawsuit vigorously. There can be no assurance that any litigation relating to pricing or sales practices will not have a material adverse effect on the Company in the future. 23 24 ITEM 2 CHANGES IN SECURITIES 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 AND REPORTS ON FORM 8-K (a) Exhibits: 10.29 Employee Leasing Agreement, dated July 1, 2000, between Nationwide Mutual Insurance Company and Nationwide Financial Services Inc. on behalf of itself and its subsidiaries (filed as exhibit 10.35 to Form 10-Q, Commission File Number 1-12785, filed May 11, 2001) (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three month period ended March 31, 2001. 24 25 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: May 11, 2001 /s/Mark R. Thresher ------------------------------------------------------ Mark R. Thresher Senior Vice President - Finance - Nationwide Financial (Chief Accounting Officer) 25