-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NZwNJWknxb4mmj6zDogKbT/FIrbuRkKtJCqF1K39ZzULW+UlQjiDaqNTlVGl2f97 m9k5nsF5HGImnHjZ+3NjRw== 0000950152-99-004441.txt : 19990517 0000950152-99-004441.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950152-99-004441 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONWIDE LIFE INSURANCE CO CENTRAL INDEX KEY: 0000205695 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 314156830 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-64559 FILM NUMBER: 99622253 BUSINESS ADDRESS: STREET 1: ONE NATIONWIDE PLZ CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142497111 10-Q 1 NATIONWIDE LIFE INSURANCE COMPANY 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, 1999 COMMISSION FILE NO. 2-28596 NATIONWIDE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) OHIO 31-4156830 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
ONE NATIONWIDE PLAZA COLUMBUS, OHIO 43215 (614) 249-7111 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) 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 1, 1999. COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding as of May 1, 1999 (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 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19 PART II OTHER INFORMATION Item 1 Legal Proceedings 19 Item 2 Changes in Securities 20 Item 3 Defaults Upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6 Exhibits and Reports on Form 8-K 20 SIGNATURE 21
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, ------------------------- 1999 1998 -------- -------- REVENUES Policy charges $ 206.2 $ 159.0 Life insurance premiums 53.5 53.2 Net investment income 363.3 364.5 Realized (losses) gains on investments (5.4) 16.6 Other 19.5 14.3 -------- -------- 637.1 607.6 -------- -------- BENEFITS AND EXPENSES Interest credited to policyholder account balances 263.8 261.9 Other benefits and claims 50.5 46.3 Policyholder dividends on participating policies 10.1 10.8 Amortization of deferred policy acquisition costs 60.7 47.7 Other operating expenses 104.3 102.1 -------- -------- 489.4 468.8 -------- -------- Income before federal income tax expense 147.7 138.8 Federal income tax expense 48.5 47.7 -------- -------- Net income $ 99.2 $ 91.1 ======== ========
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, ASSETS 1999 1998 ----------- ------------ Investments: Securities available-for-sale, at fair value: Fixed maturity securities (cost $13,721.1 in 1999; $13,721.3 in 1998) $ 14,093.5 $ 14,245.1 Equity securities (cost $104.8 in 1999; $110.4 in 1998) 124.2 127.2 Mortgage loans on real estate, net 5,364.6 5,328.4 Real estate, net 244.3 243.6 Policy loans 478.9 464.3 Other long-term investments 65.1 44.0 Short-term investments 330.3 289.1 ----------- ----------- 20,700.9 20,741.7 ----------- ----------- Cash 21.3 3.4 Accrued investment income 229.9 218.7 Deferred policy acquisition costs 2,143.3 2,022.2 Other assets 467.0 420.3 Assets held in separate accounts 53,469.9 50,935.8 ----------- ----------- $ 77,032.3 $ 74,342.1 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Future policy benefits and claims $ 19,900.7 $ 19,767.1 Other liabilities 877.8 866.1 Liabilities related to separate accounts 53,469.9 50,935.8 ----------- ----------- 74,248.4 71,569.0 ----------- ----------- 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 914.7 914.7 Retained earnings 1,667.4 1,579.0 Accumulated other comprehensive income 198.0 275.6 ----------- ----------- 2,783.9 2,773.1 ----------- ----------- $ 77,032.3 $ 74,342.1 =========== ===========
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, 1999 and 1998 (in millions)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S STOCK CAPITAL EARNINGS INCOME EQUITY ----- ------- -------- ------ ------ BALANCE, JANUARY 1, 1998 $ 3.8 $ 914.7 $ 1,312.3 $ 247.1 $ 2,477.9 Comprehensive income: Net income -- -- 91.1 -- 91.1 Net unrealized losses on securities available- for-sale arising during the period -- -- -- (11.1) (11.1) ---------- Total comprehensive income 80.0 ---------- ------- -------- ---------- -------- ---------- BALANCE, MARCH 31, 1998 $ 3.8 $ 914.7 $ 1,403.4 $ 236.0 $ 2,557.9 ======= ======== ========== ======== ========== BALANCE, JANUARY 1, 1999 $ 3.8 $ 914.7 $ 1,579.0 $ 275.6 $ 2,773.1 Comprehensive income: Net income -- -- 99.2 -- 99.2 Net unrealized losses on securities available- for-sale arising during the period -- -- -- (77.6) (77.6) ---------- Total comprehensive income 21.6 ---------- Dividends to shareholder (10.8) (10.8) ------- -------- ---------- -------- ---------- BALANCE, MARCH 31, 1999 $ 3.8 $ 914.7 $ 1,667.4 $ 198.0 $ 2,783.9 ======= ======== ========== ======== ==========
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, 1999 and 1998 (in millions)
1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 99.2 $ 91.1 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 263.8 261.9 Capitalization of deferred policy acquisition costs (152.3) (131.2) Amortization of deferred policy acquisition costs 60.7 47.7 Amortization and depreciation 2.5 (2.9) Realized losses (gains) on investments, net 5.4 (16.6) Increase in accrued investment income (11.2) (13.5) (Increase) decrease in other assets (49.9) 32.7 Increase (decrease) in policy liabilities 7.0 (97.7) Increase in other liabilities 53.5 58.6 Other, net (2.1) (3.0) -------- -------- Net cash provided by operating activities 276.6 227.1 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of securities available-for-sale 524.1 442.1 Proceeds from sale of securities available-for-sale 143.2 224.4 Proceeds from repayments of mortgage loans on real estate 89.5 241.0 Proceeds from sale of real estate -- 30.3 Proceeds from repayments of policy loans and sale of other invested assets 4.7 10.0 Cost of securities available-for-sale acquired (662.6) (852.1) Cost of mortgage loans on real estate acquired (125.3) (241.7) Cost of real estate acquired (0.7) (0.2) Short-term investments, net (41.2) (136.6) Other, net (39.8) (14.9) -------- -------- Net cash used in investing activities (108.1) (297.7) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid (13.5) -- Increase in investment product and universal life insurance product account balances 756.8 621.2 Decrease in investment product and universal life insurance product account balances (893.9) (694.3) -------- -------- Net cash used in financing activities (150.6) (73.1) -------- -------- Net increase (decrease) in cash 17.9 (143.7) Cash, beginning of period 3.4 175.6 -------- -------- Cash, end of period $ 21.3 $ 31.9 ======== ========
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, 1999 (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 generally accepted accounting principles, 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 generally accepted accounting principles 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, 1998 included in the Company's annual report on Form 10-K. (2) Accounting Pronouncements In March 1998, The American Institute of Certified Public Accountant's Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP, which has been adopted prospectively as of January 1, 1999, requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. Prior to the adoption of SOP 98-1, the Company expensed internal use software related costs as incurred. The effect of adopting the SOP was to increase net income for the quarter ended March 31, 1999 by $0.9 million. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Contracts that contain embedded derivatives, such as certain insurance contracts, are also addressed by the Statement. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Statement is effective for fiscal years beginning after June 15, 1999. It may be implemented earlier provided adoption occurs as of the beginning of any fiscal quarter after issuance. The Company plans to adopt this Statement in first quarter 2000 and is currently evaluating the impact on results of operations and financial condition. 7 8 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued (3) Comprehensive Income Comprehensive Income includes net income as well as certain items that are reported directly within a separate component of shareholder's equity that bypass net income. Currently, the Company's only component of Other Comprehensive Income is unrealized gains (losses) on securities available-for-sale. The related before and after federal tax amounts are as follows:
THREE MONTHS ENDED (in millions) MARCH 31, --------------------------------------------------------------------------------------- 1999 1998 -------- ------- Unrealized losses on securities available-for- Sale arising during the period: Gross $ (154.4) $ (22.9) Adjustment to deferred policy acquisition costs 29.6 7.8 Related federal tax benefit 41.7 5.9 -------- ------- Net (83.1) (9.2) -------- ------- Reclassification adjustment for net losses (gains) On securities available-for-sale realized during the period: Gross 8.5 (2.9) Related federal tax (benefit) expense (3.0) 1.0 -------- ------- Net 5.5 (1.9) -------- ------- Total Other Comprehensive Income $ (77.6) $ (11.1) ======== =======
(4) Segment Disclosures The Company uses differences in products as the basis for defining its reportable segments. The Company reports three product segments: Variable Annuities, Fixed Annuities and Life Insurance. The Variable Annuities segment consists of annuity contracts that provide the customer with the opportunity to invest in mutual funds managed by independent investment managers and the Company, with investment returns accumulating on a tax-deferred basis. The Company's variable annuity products consist almost entirely of flexible premium deferred variable annuity contracts. The Fixed Annuities segment consists of annuity contracts that generate a return for the customer at a specified interest rate, fixed for a prescribed period, with returns accumulating on a tax-deferred basis. Such contracts consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. The Fixed Annuities segment includes the fixed option under variable annuity contracts. 8 9 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 variable universal life insurance and corporate-owned life insurance products, that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. In addition to the product segments, the Company reports corporate revenues and expenses, investments and related investment income supporting capital not specifically allocated to its product segments, revenues and expenses of its investment adviser subsidiary, revenues and expenses related to group annuity contracts sold to Nationwide Insurance Enterprise employee and agent benefit plans and all realized gains and losses on investments in a Corporate and Other segment. During first quarter 1999 the Company revised the allocation of net investment income among its Life Insurance and Corporate and Other segments. Also, certain amounts previously reported as other income were reclassified to operating expense. Amounts reported for prior periods have been restated to reflect these changes. The following table summarizes the financial results of the Company's business segments for the three months ended March 31, 1999 and 1998.
VARIABLE FIXED LIFE CORPORATE (in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL ------------------------------------ ----------- ----------- ---------- ---------- ----------- 1999 Operating revenue (1) $ 143.5 $ 287.6 $ 151.1 $ 60.3 $ 642.5 Benefits and expenses 77.3 244.8 122.0 45.3 489.4 ----------- ----------- ---------- ---------- ----------- Operating income before federal Income tax 66.2 42.8 29.1 15.0 153.1 Realized losses on investments -- -- -- (5.4) (5.4) ----------- ----------- ---------- ---------- ----------- Consolidated income before Federal income tax $ 66.2 $ 42.8 $ 29.1 $ 9.6 $ 147.7 =========== =========== ========== ========== =========== Assets as of period end $ 50,132.3 $ 15,396.4 $ 5,527.9 $ 5,975.7 $ 77,032.3 =========== =========== ========== ========== =========== 1998 Operating revenue (1) $ 114.3 $ 289.3 $ 127.2 $ 60.2 $ 591.0 Benefits and expenses 65.0 244.3 107.1 52.4 468.8 ----------- ----------- ---------- ---------- ----------- Operating income (loss) before Federal income tax 49.3 45.0 20.1 7.8 122.2 Realized gains on investments -- -- -- 16.6 16.6 ----------- ----------- ---------- ---------- ----------- Consolidated income before Federal income tax $ 49.3 $ 45.0 $ 20.1 $ 24.4 $ 138.8 =========== =========== ========== ========== =========== Assets as of period end $ 40,742.8 $ 14,514.0 $ 4,228.6 $ 6,132.1 $ 65,617.5 =========== =========== ========== ========== ===========
---------- (1) Excludes realized gains and losses on investments. (5) 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). The plaintiff in such lawsuit seeks to represent a national class of the Company's customers and seeks unspecified compensatory and punitive damages. The Company is currently evaluating this lawsuit, which has not been certified as a class. The Company intends to defend this lawsuit vigorously. 9 10 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) Nationwide Corporation's control of the Company through its beneficial ownership of approximately 97.8% of the combined voting power of all the outstanding common stock and approximately 81.5% of the economic interest in the Company; (ii) the Company's primary reliance, as a holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the Company's subsidiaries to pay such dividends; (iii) the potential impact on the Company's reported net income that could result from the adoption of certain accounting standards issued by the FASB; (iv) tax law changes impacting the tax treatment of life insurance and investment products; (v) 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; (vi) adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; (vii) failure to expand distribution channels in order to obtain new customers or failure to retain existing customers; (viii) inability to carry out marketing and sales plans, including, among others, changes to certain products and acceptance of the revised products in the market; (ix) changes in interest rates and the capital markets causing a reduction of investment income or asset fees, reduction in the value of the Company's investment portfolio or a reduction in the demand for the Company's products; (x) general economic and business conditions which are less favorable than expected; (xi) unanticipated changes in industry trends and ratings assigned by nationally recognized statistical rating organizations or A.M. Best Company, Inc.; (xii) inaccuracies in assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts and (xiii) failure of the Company or its significant business partners and vendors to identify and correct all non-Year 2000 compliant systems or to develop and execute adequate contingency plans. 10 11 RESULTS OF OPERATIONS In addition to net income, the Company reports net operating income, which excludes realized investment gains and losses. 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.
THREE MONTHS ENDED MARCH 31, ------------------------- (in millions) 1999 1998 --------------------------------------------------------- ------- ------- Net income $ 99.2 $ 91.1 Realized losses (gains) on investments, net of tax 3.5 (10.8) ------- ------- Net operating income $ 102.7 $ 80.3 ======= =======
Revenues Total revenues for the first quarter of 1999, excluding realized gains and losses on investments, increased to $642.5 million compared to $591.0 million for the same period in 1998. Increases in policy charges and other income contributed to revenue growth, while net investment income and life insurance premiums were relatively unchanged. Policy charges include asset fees, which are primarily earned from separate account assets generated from sales of variable annuities and variable 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 1999 and 1998 were as follows:
THREE MONTHS ENDED MARCH 31, ------------------------- (in millions) 1999 1998 --------------------------------------------------------- ------- ------- Asset fees $ 140.4 $ 113.2 Cost of insurance charges 25.9 19.3 Administrative fees 25.8 16.9 Surrender fees 14.1 9.6 ------- ------- Total policy charges $ 206.2 $ 159.0 ======= =======
The growth in asset fees reflects a 23% increase in total separate account assets which reached $53.47 billion as of March 31, 1999 compared to $43.33 billion a year ago. Steady growth in sales of variable annuity and variable life insurance products as well as market appreciation have contributed significantly to the increase in separate account assets. 11 12 Cost of insurance charges are assessed as a percentage of 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 increase in cost of insurance charges is due primarily to growth in the net amount at risk related to individual variable universal life insurance reflecting expanded distribution and increased customer demand for variable life products. The net amount at risk related to individual variable universal life insurance grew to $15.99 billion as of March 31, 1999 compared to $11.38 billion a year ago. The growth in administrative fees is attributable to a significant increase in premiums on individual variable life policies and certain corporate-owned life policies where the Company collects a premium load. Nearly all of the increase in surrender charges is attributable to policyholder withdrawals in the Variable Annuities segment, and reflects the overall increase in variable annuity policy reserves. The Company does not consider realized gains and losses on investments 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. Net realized (losses) gains on investments were $(5.4) million and $16.6 million for the first quarter of 1999 and 1998, respectively. The first quarter 1999 net realized losses on investments include a $9.2 million loss on a single fixed maturity security. Other income includes fees earned by the Company's investment management subsidiary. The growth in other income reflects a $2.86 billion increase in this subsidiary's assets under management compared to a year ago. Benefits and Expenses Total benefits and expenses were $489.4 million in first quarter 1999, a 4% increase over first quarter 1998. The increase is due mainly to growth in amortization of deferred acquisition costs (DAC). Interest credited, other policyholder benefits and other operating expenses were relatively flat compared to the year ago first quarter. The growth in the Variable Annuities segment business and related revenues is the primary reason for the increase in amortization of deferred policy acquisition costs (DAC) which totaled $60.7 million and $47.7 million in the first quarter of 1999 and 1998, respectively. Federal income tax expense was $48.5 million and $47.7 million for the first quarter of 1999 and 1998, respectively. These amounts represent effective tax rates of 32.8% for the first quarter of 1999 and 34.4% in 1998. Year 2000 The Company has developed and implemented a plan to address issues related to the Year 2000. The problem relates to many existing computer systems using only two digits to identify a year in a date field. These systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer systems could fail or create erroneous results when processing information dated after December 31, 1999. Like many organizations, the Company is required to renovate or replace many computer systems so that the systems will function properly after December 31, 1999. The Company has completed an inventory and assessment of all computer systems and has implemented a plan to renovate or replace all applications that were identified as not Year 2000 compliant. The Company has renovated all applications that required renovation. Testing of the renovated programs included running each application in a Year 2000 environment and was completed as planned during 1998. For applications being replaced, the Company had all replacement systems in place and functioning as planned by year-end 1998. The shareholder services system that supports mutual fund products was fully deployed during the first quarter 1999. Conversions of existing traditional life policies to the new compliant system will continue through second quarter 1999. The Company has completed an inventory and assessment of all vendor products and has tested and certified that each vendor product is Year 2000 compliant. Any vendor products that could not be certified as Year 2000 compliant were replaced or eliminated in 1998. 12 13 The Company's facilities in Columbus, Ohio have been inventoried, assessed, and tested as being Year 2000 compliant. Systems supporting the Company's infrastructure such as telecommunications, voice and networks were renovated and will be brought into compliance before the end of the second quarter 1999. The Company has also addressed issues associated with the exchange of electronic data with external organizations. The Company has completed an inventory and assessment of all business partners utilizing electronic interfaces with the Company and processes have been put in place to allow the Company to accept data regardless of the format. In addition to resolving internal Year 2000 readiness issues, the Company is surveying significant external organizations (business partners) to assess if they will be Year 2000 compliant and be in a position to do business in the Year 2000 and beyond. Specifically, the Company has contacted mutual fund organizations that provide funds for the Company's variable annuity and life products and wholesale producers to determine when they will be Year 2000 compliant. The results are currently being gathered and analyzed. In addition to the contingency plans developed for electronic interfaces between the Company and its business partners, contingency plans were also developed for wholesale producers who may not become compliant before the end of 1999. Additional contingency plans will be developed for mutual fund organizations during the second quarter 1999. The Company has identified external risk scenarios, prioritized those risks and is now in the process of developing contingency plans to minimize the impact to the Company, customers and producers. Contingency plan efforts are expected to be completed by the end of the third quarter 1999. Operating expenses in 1998 and 1997 include approximately $44.7 million and $45.4 million, respectively, for technology projects, including costs related to Year 2000. The Company anticipates spending less than $5 million on Year 2000 activities in 1999, and spent $2.4 million during first quarter 1999. Management does not anticipate that the completion of Year 2000 renovation and replacement activities will result in a reduction in operating expenses. Rather, personnel and resources currently allocated to Year 2000 issues will be assigned to other technology-related projects. Recently Issued Accounting Standards See note 2 to the unaudited consolidated financial statements for a discussion of recently issued accounting standards. Statutory Premiums and Deposits The Company sells its products through a broad distribution network comprised of wholesale and retail distribution channels. Wholesale distributors are unaffiliated entities that sell the Company's products to their own customer base and include independent broker/dealers, national and regional brokerage firms, pension plan administrators and financial institutions. Retail distributors are representatives of the Company who market products directly to a customer base identified by the Company and include exclusive sales representatives and Nationwide Insurance Enterprise insurance agents. 13 14 Statutory premiums and deposits by distribution channel for the first quarter of 1999 and 1998 are summarized as follows:
1999 1998 ----------------------------- -------------------------- (in millions) AMOUNT % AMOUNT % --------------------------------------------- ---------- ----- ---------- ----- WHOLESALE CHANNELS Independent broker/dealers $ 862.9 25.3% $ 875.4 29.1% National and regional brokerage firms 111.4 3.3 86.0 2.9 Financial institutions 520.2 15.2 449.3 15.0 Pension plan administrators 927.3 27.2 734.1 24.4 Life specialists 186.8 5.5 89.9 3.0 ---------- ----- ---------- ----- Total wholesale channels 2,608.6 76.5 2,234.7 74.4 ---------- ----- ---------- ----- RETAIL CHANNELS Exclusive retail sales representatives 592.3 17.3 586.0 19.5 Nationwide agents 211.5 6.2 183.1 6.1 ---------- ----- ---------- ----- Total retail channels 803.8 23.5 769.1 25.6 ---------- ----- ---------- ----- Total external premiums and deposits 3,412.4 100.0% 3,003.8 100.0% ========== ===== ========== ===== Nationwide Insurance Enterprise employee and agent benefit plans 66.4 59.8 ---------- ---------- Total statutory premiums and deposits $ 3,478.8 $ 3,063.6 ========== ==========
Excluding Nationwide Insurance Enterprise benefit plan sales, the Company achieved sales growth of 14% in the first quarter of 1999 compared to the first quarter of 1998. 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(R) products allow customers to choose from among 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. In addition, the Company utilizes an exclusive arrangement with the National Education Association (NEA) to market tax-qualified annuities under IRC 403(b) to NEA members. Variable annuities developed for the NEA members are sold under the NEA Valuebuilder brand. 14 15 External statutory premiums and deposits by product for the first quarter of 1999 and 1998 are summarized as follows.
(in millions) 1999 1998 --------------------------------------------- ---------- ---------- The BEST of AMERICA(R) products: Individual variable annuities $ 1,136.8 $ 1,120.0 Group variable annuities 901.8 702.1 Variable universal life insurance 90.5 67.5 Private label annuities 304.4 235.2 IRC Section 457 annuities 530.9 548.7 The NEA Valuebuilder annuities 37.0 37.3 Traditional/Universal life insurance 60.0 59.3 Bank-owned life insurance 86.6 75.2 Corporate-owned life insurance 100.1 14.7 Other 164.3 143.8 ---------- --------- $ 3,412.4 $ 3,003.8 ========== =========
BUSINESS SEGMENTS The Company reports three product segments: Variable Annuities, Fixed Annuities and Life Insurance. In addition, the Company reports certain other revenue and expenses in a Corporate and Other segment. All information set forth below relating to the Variable Annuities segment excludes the fixed option under variable annuity contracts. Such information is included in the Fixed Annuities segment. The following table summarizes operating income before federal income tax expense for the Company's business segments for the first quarter of 1999 and 1998.
THREE MONTHS ENDED MARCH 31, ---------------------------- (in millions) 1999 1998 --------------------------------------------- ---------- ---------- Variable Annuities $ 66.2 $ 49.3 Fixed Annuities 42.8 45.0 Life Insurance 29.1 20.1 Corporate and Other 15.0 7.8 ---------- --------- $ 153.1 $ 122.2 ========== =========
Variable Annuities The Variable Annuities segment consists of annuity contracts that provide the customer with the opportunity to invest in mutual funds managed by independent investment managers and the Company, with investment returns accumulating on a tax-deferred basis. The Company's variable annuity products consist almost entirely of flexible premium deferred variable annuity contracts. 15 16 The following table summarizes certain selected financial data for the Variable Annuities segment for the periods indicated.
THREE MONTHS ENDED MARCH 31, ---------------------------- (in millions) 1999 1998 ---------------------------------------------------- ---------- ---------- INCOME STATEMENT DATA Revenues $ 143.5 $ 114.3 Benefits and expenses 77.3 65.0 ---------- --------- Operating income before federal income tax $ 66.2 $ 49.3 ========== ========= OTHER DATA Statutory premiums and deposits (1) $ 2,457.8 $ 2,289.0 Policy reserves as of period end $ 48,840.8 $39,666.7 Pre-tax operating income to average policy reserves 0.56% 0.54%
---------- (1) Statutory data have been derived from the Quarterly Statements of the Company's life insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Variable annuity segment results reflect substantially increased asset fee revenue partially offset by increases in DAC amortization and other operating expenses. Asset fees increased to $135.6 million in the first quarter of 1999, up 24% from $109.5 million in the same period a year ago. The increase in asset fees is due to continued growth in variable annuity policy reserve levels resulting from strong variable annuity sales and market appreciation on investments underlying reserves. Variable annuity policy reserves grew $2.42 billion during the first quarter of 1999 reaching $48.84 billion as of March 31, 1999 and have increased 23% compared to a year ago. Variable annuity sales increased 7% for the first quarter 1999, reaching $2.46 billion compared to $2.29 billion in the year ago quarter. Compared to fourth quarter 1998, variable annuity sales increased 20%. Sales of 401(k) plans and private label variable annuities led sales growth in first quarter 1999, posting increases of 28% and 29%, respectively, compared to first quarter 1998. Favorable equity market conditions during the first quarter of 1999 also contributed significantly to the growth in variable annuity policy reserves. Variable annuity policy reserves reflect market appreciation of $1.28 billion during the first three months of 1999. Over the past twelve months, variable annuity policy reserves have increased $4.27 billion as a result of market appreciation. Amortization of DAC increased 34% to $35.4 million in first quarter 1999 compared to $26.4 million in first quarter 1998. Operating expenses were $41.6 million in first quarter 1999, an increase of 11% over first quarter 1998. The growth in DAC amortization and operating expenses reflect the overall growth in the variable annuity business. Fixed Annuities The Fixed Annuities segment consists of annuity contracts that generate a return for the customer at a specified interest rate, fixed for a prescribed period, with returns accumulating on a tax-deferred basis. Such contracts consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. The Fixed Annuities segment includes the fixed option under variable annuity contracts. 16 17 The following table summarizes certain selected financial data for the Fixed Annuities segment for the periods indicated.
THREE MONTHS ENDED MARCH 31, --------------------------------- (in millions) 1999 1998 ---------------------------------------------------- ------------ ------------ INCOME STATEMENT DATA Revenues: Net investment income $ 275.3 $ 277.2 Other 12.3 12.1 ------------ ------------ 287.6 289.3 ------------ ------------ Benefits and expenses: Interest credited to policyholder account balances 202.2 205.9 Other benefits and expenses 42.6 38.4 ------------ ------------ 244.8 244.3 ------------ ------------ Operating income before federal income tax $ 42.8 $ 45.0 ============ ============ OTHER DATA Statutory premiums and deposits (1) $ 617.4 $ 498.1 Policy reserves as of period end $ 15,065.2 $ 14,229.1 Pre-tax operating income to average policy reserves 1.14% 1.27%
---------- (1) Statutory data have been derived from the Quarterly Statements of the Company's life insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Fixed annuity segment results reflect a slight increase in interest spread income attributable to growth in fixed annuity policy reserves offset by lower interest margins. 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, changes in market interest rates and other factors. The following table depicts the interest spreads on general account policy reserves in the Fixed Annuities segment.
THREE MONTHS ENDED MARCH 31, --------------------------------- 1999 1998 ------------ ------------ Net investment income 7.62% 8.01% Interest credited 5.60 5.95 ------------ ------------ 2.02% 2.06% ============ ============
The Company experienced an increase in mortgage loan and bond prepayment fees in the first quarter of 1999 and such income accounted for approximately 15 basis points of the interest spread compared to 9 basis points in first quarter 1998. The Company anticipates interest spreads over the next several quarters to be 190 to 195 basis points, excluding the impact of mortgage loan and bond prepayment income. Fixed annuity policy reserves increased to $15.07 billion as of March 31, 1999 compared to $14.90 billion as of the end of 1998 and $14.23 billion a year ago. 17 18 First quarter fixed annuity sales grew to $617.4 million in 1999 compared to $498.1 million in 1998. Most of the Company's fixed annuity sales are premiums allocated to the fixed option of variable annuity contracts. First quarter 1999 fixed annuity sales include $521.7 million in premiums allocated to the fixed option under a variable annuity contract, compared to $402.4 million in first quarter 1998. The increase is attributable to a first-year bonus interest rate program in effect during the first quarter of 1999. The increase in other benefits and expenses in first quarter 1999 compared to a year ago is attributable to growth in business. Life Insurance The Life Insurance segment consists of insurance products, including variable universal life insurance and corporate-owned life insurance products, that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. The following table summarizes certain selected financial data for the Life Insurance segment for the periods indicated.
THREE MONTHS ENDED MARCH 31, ------------------------------- (in millions) 1999 1998 ---------------------------------------------------- ---------- ---------- INCOME STATEMENT DATA Revenues $ 151.1 $ 128.5 Benefits and expenses 122.0 107.3 ---------- ---------- Operating income before federal income tax $ 29.1 $ 21.2 ========== ======== OTHER DATA Statutory premiums (1): Traditional and universal life insurance $ 60.0 $ 59.3 Variable universal life insurance $ 90.5 $ 67.5 Corporate-owned life insurance $ 186.7 $ 89.9 Policy reserves as of period end: Traditional and universal life insurance $ 2,459.4 $ 2,389.2 Variable universal life insurance $ 1,363.3 $ 1,031.1 Corporate-owned life insurance $ 1,097.3 $ 316.6
---------- (1) Statutory data have been derived from the Quarterly Statements of the Company's life insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. Life Insurance segment results reflect increased policy charge revenue driven by growth in investment life insurance in force and policy reserves partially offset by higher expense levels. The increase in Life Insurance segment earnings is attributable to strong growth in investment life insurance products, which include individual variable universal life insurance and corporate-owned life insurance, where the Company has aggressively expanded its distribution capabilities. Investment life premiums and deposits increased from $157.4 million in first quarter 1998 to $277.2 million in first quarter 1999. As a result of the sales growth and high persistency, revenues from investment life products increased to $51.8 million in first quarter 1999 from $27.2 million in first quarter 1998. The Company believes there are growth opportunities for investment life products and in 1999 will be introducing new products and expanding distribution to new outlets to further penetrate these markets. 18 19 Interest credited to policyholders increased $5.8 million in first quarter 1999 reaching $30.6 million compared to $24.8 million in the year ago first quarter. Increased corporate-owned life insurance business accounted for most of the increases. Corporate investment fixed life insurance reserves tripled to $920.0 million as of March 31, 1999 compared to $304.2 million a year ago. Traditional and universal life insurance benefits increased $4.9 million to $38.4 million in first quarter 1999 compared to the same period a year ago. Operating expenses remained relatively unchanged during first quarters 1999 and 1998. Corporate and Other The following table summarizes certain selected financial data for the Corporate and Other segment for the periods indicated.
THREE MONTHS ENDED MARCH 31, -------------------------------- (in millions) 1999 1998 ---------------------------------------------------- ----------- ----------- INCOME STATEMENT DATA Revenues $ 60.3 $ 60.2 Benefits and expenses 45.3 52.4 ----------- ----------- Operating income before federal income tax (1) $ 15.0 $ 7.8 =========== ===========
---------- (1) Excludes realized gains and losses on investments. Revenues in the Corporate and Other segment consist of net investment income on invested assets not allocated to the three product segments, investment management fees and other revenues earned from Nationwide mutual funds and net investment income and policy charges from group annuity contracts issued to Nationwide Insurance Enterprise employee and agent benefit plans. In addition to the operating revenues previously presented, the Company also reports realized gains and losses on investments in the Corporate and Other segment. The Company realized net investment (losses) gains of $(5.4) million and $16.6 million during the first quarter of 1999 and 1998, respectively. 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. 19 20 In November 1997, two plaintiffs, one who was the owner of a variable life insurance contract and the other who was the owner of a variable annuity contract, commenced a lawsuit in a federal court in Texas against Nationwide Life and the American Century group of defendants (Robert Young and David D. Distad v. Nationwide Life Insurance Company et al.). In this lawsuit, plaintiffs sought to represent a class of variable life insurance contract owners and variable annuity contract owners whom they claim were allegedly misled when purchasing these variable contracts into believing that the performance of their underlying mutual fund option managed by American Century, whose shares may only be purchased by insurance companies, would track the performance of a mutual fund, also managed by American Century, whose shares are publicly traded. The amended complaint seeks unspecified compensatory and punitive damages. On April 27, 1998, the district court denied, in part, and granted, in part, motions to dismiss the complaint filed by Nationwide Life and American Century. The remaining claims against Nationwide Life allege securities fraud, common law fraud, civil conspiracy, and breach of contract. On December 2, 1998, the district court issued an order denying plaintiffs' motion for class certification. On December 10, 1998, the district court stayed the lawsuit pending plaintiffs' petition to the federal appeals court for interlocutory review of the order denying class certification. On March 26, 1999, the appeals court denied plaintiffs' petition for interlocutory review of the order. On April 28, 1999, the court denied plaintiffs' motion for reconsideration of the denial of interlocutory review. Nationwide Life intends to defend the case vigorously. 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). The plaintiff in such lawsuit seeks to represent a national class of the Company's customers and seeks unspecified compensatory and punitive damages. The Company is currently evaluating this lawsuit, which has not been certified as a class. The Company intends to defend this lawsuit vigorously. There can be no assurance that any litigation relating to pricing or sales practices will not have a material adverse effect on the Company in the future. ITEM 2 CHANGES IN SECURITIES 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: 27 Financial Data Schedule (electronic filing only) (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three month period ended March 31, 1999. 20 21 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 14, 1999 /s/Mark R. Thresher --------------------------------------------- Mark R. Thresher, Vice President - Controller (Chief Accounting Officer) 21 EX-27 2 EXHIBIT 27
7 This schedule contains summary financial information extracted from Nationwide Life Insurance Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999, and is qualified in its entirety by reference to such unaudited consolidated financial statements. 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 14,094 0 0 124 5,365 244 20,701 21 0 2,143 77,032 19,901 0 0 0 0 0 0 4 2,780 77,032 54 363 (5) 20 314 61 104 148 49 99 0 0 0 99 0.00 0.00 0 0 0 0 0 0 0
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