-----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, BFIruIN8SF/Sv17AQ5EqUPERhm18PHgqEHngxKRGxxL3sjUhqQRT/VEhG2xnStTJ oSzh6SVEdho52NggqfeRJA== 0000950152-98-009037.txt : 19981118 0000950152-98-009037.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950152-98-009037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751573 BUSINESS ADDRESS: STREET 1: ONE NATIONWIDE PLZ CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142497111 10-Q 1 NATIONWIDE LIFE INSURANCE COMPANY 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 SEPTEMBER 30, 1998 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 August 1, 1998. COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding as of November 1, 1998 (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 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk 22 PART II OTHER INFORMATION Item 1 Legal Proceedings 23 Item 2 Changes in Securities and Use of Proceeds 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 of dollars)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- REVENUES Policy charges $ 180.6 $ 143.3 $ 514.6 $ 393.4 Life insurance premiums 48.4 50.2 153.6 155.9 Net investment income 374.8 355.3 1,106.3 1,047.6 Realized gains (losses) on investments 5.6 (4.8) 27.2 4.3 Other 17.6 12.4 48.7 38.2 ------------- ------------- ------------- ------------- 627.0 556.4 1,850.4 1,639.4 ------------- ------------- ------------- ------------- BENEFITS AND EXPENSES Interest credited to policyholder account balances 269.0 256.0 795.6 756.9 Other benefits and claims 47.5 41.8 134.4 134.3 Policyholder dividends on participating policies 8.6 9.1 30.9 31.3 Amortization of deferred policy acquisition costs 57.5 43.7 159.3 126.7 Other operating expenses 106.1 97.9 314.8 286.0 ------------- ------------- ------------- ------------- 488.7 448.5 1,435.0 1,335.2 ------------- ------------- ------------- ------------- Income before federal tax expense 138.3 107.9 415.4 304.2 Federal tax expense 46.5 37.7 141.7 106.9 ------------- ------------- ------------- ------------- Net income $ 91.8 $ 70.2 $ 273.7 $ 197.3 ============= ============= ============= =============
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 of dollars, except per share amounts)
(UNAUDITED) SEPTEMBER 30, DECEMBER 31, ASSETS 1998 1997 ------------------- ------------------ Investments: Securities available-for-sale, at fair value: Fixed maturity securities (cost $13,241.1 in 1998; $12,732.9 in 1997) $ 13,976.8 $ 13,204.1 Equity securities (cost $110.5 in 1998; $67.8 in 1997) 125.3 80.4 Mortgage loans on real estate, net 5,187.0 5,181.6 Real estate, net 263.5 311.4 Policy loans 452.6 415.3 Other long-term investments 22.2 25.2 Short-term investments 264.7 358.4 ------------------- ------------------ 20,292.1 19,576.4 ------------------- ------------------ Cash 3.5 175.6 Accrued investment income 228.1 210.5 Deferred policy acquisition costs 1,870.8 1,665.4 Other assets 401.2 438.4 Assets held in Separate Accounts 42,679.5 37,724.4 ------------------- ------------------ $ 65,475.2 $ 59,790.7 =================== ================== LIABILITIES AND SHAREHOLDER'S EQUITY Future policy benefits and claims $ 19,234.9 $ 18,702.8 Other liabilities 783.2 885.6 Liabilities related to Separate Accounts 42,679.5 37,724.4 ------------------- ------------------ 62,697.6 57,312.8 ------------------- ------------------ 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 1,486.0 1,312.3 Accumulated other comprehensive income 373.1 247.1 ------------------- ------------------ 2,777.6 2,477.9 ------------------- ------------------ $ 65,475.2 $ 59,790.7 =================== ==================
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) Nine Months Ended September 30, 1998 and 1997 (in millions of dollars)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S STOCK CAPITAL EARNINGS INCOME EQUITY ----------- ------------- --------------- ------------------ ----------------- 1997 BALANCE, JANUARY 1, 1997 $ 3.8 $ 527.9 $ 1,432.6 $ 173.6 $ 2,137.9 Comprehensive income: Net income - - 197.3 - 197.3 Unrealized net gains on securities available-for-sale arising during the - - - 39.8 39.8 period ----------------- Total comprehensive income 237.1 ----------------- Capital contributions - 836.8 - - 836.8 Dividends to shareholder - (450.0) (400.0) - (850.0) ----------- ------------- --------------- ---------------- ----------------- BALANCE, SEPTEMBER 30, 1997 $ 3.8 $ 914.7 $ 1,229.9 $ 213.4 $ 2,361.8 =========== ============= =============== ================ ================= 1998 BALANCE, JANUARY 1, 1998 $ 3.8 $ 914.7 $ 1,312.3 $ 247.1 $ 2,477.9 Comprehensive income: Net income - - 273.7 - 273.7 Unrealized net gains on securities available-for-sale arising during the - - - 126.0 126.0 period ----------------- Total comprehensive income 399.7 ----------------- Dividend to shareholder (100.0) (100.0) =========== ============= =============== ================ ================= BALANCE, SEPTEMBER 30, 1998 $ 3.8 $ 914.7 $ 1,486.0 $ 373.1 $ 2,777.6 =========== ============= =============== ================ =================
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) Nine Months Ended September 30, 1998 and 1997 (in millions of dollars)
1998 1997 --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 273.7 $ 197.3 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 795.6 756.9 Capitalization of deferred policy acquisition costs (437.5) (358.2) Amortization of deferred policy acquisition costs 159.3 126.7 Amortization and depreciation (6.0) (0.5) Realized gains on investments, net (27.2) (4.3) (Increase) decrease in accrued investment income (17.6) (11.1) Decrease in other assets 35.8 31.4 (Decrease) increase in policy liabilities (10.4) 66.2 (Decrease) increase in other liabilities (170.5) 152.8 Other, net (8.3) (3.9) --------------- ---------------- Net cash provided by operating activities 586.9 953.3 --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of securities available-for-sale 1,097.7 640.8 Proceeds from sale of securities available-for-sale 550.6 248.7 Proceeds from repayments of mortgage loans on real estate 546.7 296.1 Proceeds from sale of real estate 74.6 23.2 Proceeds from repayments of policy loans and sale of other invested assets 21.1 19.8 Cost of securities available-for-sale acquired (2,181.6) (1,732.1) Cost of mortgage loans on real estate acquired (556.4) (552.2) Cost of real estate acquired (0.5) (24.3) Policy loans issued and other invested assets acquired (51.9) (48.2) Short-term investments, net 93.8 (428.2) --------------- ---------------- Net cash used in investing activities (405.9) (1,556.4) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital contributions - 836.8 Cash dividends paid to shareholder (100.0) - Increase in investment product and universal life insurance product account balances 1,808.5 1,586.2 Decrease in investment product and universal life insurance product account balances (2,061.6) (1,763.0) --------------- ---------------- Net cash (used in) provided by financing activities (353.1) 660.0 --------------- ---------------- Net (decrease) increase in cash (172.1) 56.9 Cash, beginning of period 175.6 43.8 --------------- ---------------- Cash, end of period $ 3.5 $ 100.7 =============== ================
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 Nine Months Ended September 30, 1998 (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, 1997 included in the Company's annual report on Form 10-K. (2) Comprehensive Income -------------------- Pursuant to the Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income", the Consolidated Statements of Shareholders' Equity include a new measure called "Comprehensive Income". Comprehensive Income includes net income as well as certain items that are reported directly within a separate component of shareholders' 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 NINE MONTHS ENDED (in millions of dollars) SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------------------------------------------- ------------------------------- 1998 1997 1998 1997 --------------- --------------- --------------- --------------- Unrealized gains (losses) on securities available-for-sale arising during the period: Gross $ 266.5 $ 152.4 $ 273.6 $ 89.9 Adjustment to deferred policy acquisition costs (73.7) (46.6) (72.8) (28.0) Related federal tax (expense) benefit (67.4) (36.9) (70.2) (21.6) --------------- --------------- --------------- --------------- Net 125.4 68.9 130.6 40.3 --------------- --------------- --------------- --------------- Reclassification adjustment for net (gains) losses on securities available-for-sale realized during the period: Gross (3.5) 5.2 (7.0) (0.7) Related federal tax expense (benefit) 1.2 (1.9) 2.4 0.2 --------------- --------------- --------------- --------------- Net (2.3) 3.3 (4.6) (0.5) --------------- --------------- --------------- --------------- Total Other Comprehensive Income $ 123.1 $ 72.2 $ 126.0 $ 39.8 =============== =============== =============== ===============
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) Accounting Pronouncements ------------------------- On January 1, 1998 the Company adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and selected information about operating segments in interim financial reports. FAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of FAS 131 did not affect results of operations or financial position, nor did it affect the manner in which the Company defines its operating segments. The segment information required for interim reports is included in note 4. 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." SOP 98-1 provides guidance intended to standardize accounting practices for costs incurred to develop or obtain computer software for internal use. Specifically, SOP 98-1 provides guidance for determining whether computer software is for internal use and when costs incurred for internal-use software are to be capitalized. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998 with earlier application encouraged. The adoption of SOP 98-1, planned for the first quarter of 1999, is not expected to have a material impact on the Company's consolidated financial statements. 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 all fiscal quarters of fiscal years beginning after June 15, 1999 with earlier application permitted. The Company is currently evaluating the impact of this Statement on results of operations and financial condition. (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. 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 advisor subsidiary (other than the portion allocated to the Variable Annuities and Life Insurance segments), 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. 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 following table summarizes the financial results of the Company's business segments for the three months ended September 30, 1998 and 1997.
VARIABLE FIXED LIFE CORPORATE (in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL - ------------------------------------ --------------- --------------- --------------- ---------------- ------------- 1998 Operating revenue (1) $ 135.3 $ 289.5 $ 142.6 $ 54.0 $ 621.4 Benefits and expenses 80.2 245.7 118.2 44.6 488.7 --------------- --------------- --------------- ----------------- ------------ Operating income before federal income tax 55.1 43.8 24.4 9.4 132.7 Realized gains on investments - - - 5.6 5.6 --------------- --------------- --------------- ----------------- ------------ Consolidated income before federal income tax $ 55.1 $ 43.8 $ 24.4 $ 15.0 $ 138.3 =============== =============== =============== ================ ============= 1997 Operating revenue (1) $ 108.6 $ 286.4 $ 118.6 $ 47.6 $ 561.2 Benefits and expenses 68.6 241.6 97.7 40.6 448.5 --------------- --------------- --------------- ---------------- ------------- Operating income before federal income tax 40.0 44.8 20.9 7.0 112.7 Realized losses on investments - - - (4.8) (4.8) --------------- --------------- --------------- ----------------- ------------ Consolidated income before federal income tax $ 40.0 $ 44.8 $ 20.9 $ 2.2 $ 107.9 =============== =============== =============== ================ =============
- ---------- (1) Excludes realized gains and losses on investments. 9 10 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Financial Services, Inc.) Notes to Unaudited Consolidated Financial Statements, Continued The following table summarizes the financial results of the Company's business segments for the nine months ended September 30, 1998 and 1997.
VARIABLE FIXED LIFE CORPORATE (in millions of dollars) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL - ------------------------------------ --------------- --------------- --------------- -------------- --------------- 1998 Operating revenue (1) $ 391.1 $ 865.0 $ 406.6 $ 160.5 $ 1,823.2 Benefits and expenses 231.0 733.1 338.5 132.4 1,435.0 --------------- --------------- --------------- -------------- --------------- Operating income before federal income tax 160.1 131.9 68.1 28.1 388.2 Realized gains on investments - - - 27.2 27.2 --------------- --------------- --------------- -------------- --------------- Consolidated income before federal income tax $ 160.1 $ 131.9 $ 68.1 $ 55.3 $ 415.4 --------------- --------------- --------------- -------------- --------------- Assets as of period end $ 40,020.7 $ 14,675.0 $ 4,857.7 $ 5,921.8 $ 65,475.2 =============== =============== =============== ============== =============== 1997 Operating revenue (1) $ 289.4 $ 853.4 $ 349.2 $ 143.1 $ 1,635.1 Benefits and expenses 185.2 726.9 297.6 125.5 1,335.2 --------------- --------------- --------------- -------------- --------------- Operating income before federal income tax 104.2 126.5 51.6 17.6 299.9 Realized gains on investments - - - 4.3 4.3 --------------- --------------- --------------- -------------- --------------- Consolidated income before federal income tax $ 104.2 $ 126.5 $ 51.6 $ 21.9 $ 304.2 =============== =============== =============== ============== =============== Assets as of period end $ 34,553.8 $ 14,233.7 $ 3,728.9 $ 5,673.5 $ 58,189.9 =============== =============== =============== ============== ===============
- ---------- (1) Excludes realized gains on investments. (5) Contingencies ------------- On October 29, 1998, Nationwide Financial Services, Inc., NLIC's parent company, and certain of its subsidiaries were named in a lawsuit filed in the Common Pleas Court of Franklin County, Ohio 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 is in an early stage and has not been certified as a class. The Company intends to defend this lawsuit vigorously. 10 11 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. NLIC is the primary operating subsidiary of Nationwide Financial Services, Inc. (NFS), the holding company for companies within the Nationwide Insurance Enterprise that offer or distribute long-term savings and retirement products. In March 1997, NFS sold 23.6 million shares of its newly-issued Class A common stock in an initial public offering. 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 FASB; (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, changes to certain products and acceptance of the revised products in the market; (vii) 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; (viii) general economic and business conditions which are less favorable than expected; (ix) unanticipated changes in industry trends and ratings assigned by nationally recognized statistical rating organizations or A.M. Best Company, Inc.; 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 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 for the three and nine month periods ended September 30, 1998 and 1997.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ (in millions of dollars, except per share amounts) 1998 1997 1998 1997 - ------------------------------------------------------ ----------- ----------- ------------ ----------- Net income $ 91.8 $ 70.2 $ 273.7 $ 197.3 Realized (gains) losses on investments, net of tax (3.6) 2.9 (17.7) (3.3) ----------- ----------- ------------ ----------- Net operating income $ 88.2 $ 73.1 $ 256.0 $ 194.0 =========== =========== ============ ===========
11 12 Revenues Total revenues for third quarter 1998, excluding realized gains and losses on investments, increased to $621.4 million compared to $561.2 million for the same period in 1997. For the first nine months of 1998 and 1997, total revenues excluding realized gains and losses on investments were $1.82 billion and $1.64 billion, respectively. Increases in policy charges and net investment income were the key drivers to revenue growth. Policy charges include asset fees, which are primarily earned on variable annuity policy reserves; administration fees, which include fees charged per contract on a variety of the Company's products and premium loads on universal life insurance products; surrender fees, which are charged as a percentage of premiums withdrawn during a specified period of certain annuity and life insurance contracts; and cost of insurance charges earned on universal life insurance products. Policy charges for the comparable periods of 1998 and 1997 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- (in millions of dollars) 1998 1997 1998 1997 - --------------------------------------------- ------------- ------------- ------------- ------------- Asset fees $ 126.2 $ 105.0 $ 365.4 $ 276.0 Administrative fees 20.0 12.7 54.0 43.0 Surrender fees 11.0 8.3 30.8 24.3 Cost of insurance charges 23.4 17.3 64.4 50.1 ------------- ------------- ------------- ------------- Total policy charges $ 180.6 $ 143.3 $ 514.6 $ 393.4 ============= ============= ============= =============
The growth in asset fees reflects a 30% increase in total separate account assets which reached $42.68 billion as of September 30, 1998 compared to $32.87 billion a year ago. Despite declines in the equity markets during third quarter 1998, separate account assets have grown significantly from a year ago due to steady growth in premiums. 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 investment income grew from $355.3 million and $1.05 billion in the third quarter and first nine months of 1997, respectively, to $374.8 million and $1.11 billion in the comparable periods of 1998 primarily due to increased invested assets to support growth in fixed annuity and life insurance policy reserves. Fixed annuity policy reserves, which include the fixed option of variable annuity contracts, increased to $14.38 billion as of September 30, 1998 compared to $14.19 billion as of December 31, 1997 and $13.97 billion a year ago. Growth in corporate investment life general account reserves from $74.9 million at the end of third quarter 1997 to $781.3 million as of September 30, 1998 accounted for most of the increased contribution to net investment income from the Life Insurance segment. 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 gains (losses) on investments were $5.6 million and ($4.8) million for third quarter 1998 and 1997, respectively. For the first nine months of 1998, the Company reported realized gains on investments of $27.2 million compared to $4.3 million of realized gains for the first nine months of 1997. Benefits and Expenses Interest credited to policyholder account balances principally relates to fixed annuity products. For the third quarter and first nine months of 1998 interest credited totaled $269.0 million and $795.6 million, respectively, compared to $256.0 million and $756.9 million in the same periods of 1997. The growth in interest credited reflects the increase in fixed annuity and life insurance policy reserves previously discussed, partially offset by reduced average crediting rates. The average crediting rate on fixed annuity policy reserves was 5.96% during both the third quarter and first nine months of 1998 compared to 6.10% and 6.12% in the comparable periods of 1997. 12 13 The significant growth in the Variable Annuities segment business is the primary reason for the increase in amortization of deferred policy acquisition costs (DAC) which totaled $57.5 million and $43.7 million in third quarter 1998 and 1997, respectively. On a year to date basis, amortization of DAC totaled $159.3 million in 1998 compared to $126.7 million in 1997. Other operating expenses increased 8% to $106.1 million in third quarter 1998 compared to $97.9 million in third quarter 1997. For the first nine months of 1998, operating expenses were $314.8 million, up 10% from $286.0 million for the first nine months of 1997. The increases reflect growth in the number of annuity and life insurance contracts in force and the related increase in administrative processing costs. Operating expenses also include costs of certain technology initiatives including projects related to the Year 2000. Federal tax expense was $46.5 million and $37.7 million, representing effective tax rates of 33.6% and 34.9% for third quarter 1998 and 1997, respectively. For the first nine months of 1998 and 1997 federal tax expense was $141.7 million and $106.9 million, representing effective tax rates of 34.1% and 35.1%, respectively. 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 developed 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 is in process, including running each application in a Year 2000 environment. The Company expects to complete the testing of all renovated applications by the end of 1998. For applications being replaced, the Company expects to have all replacement systems in place and functioning by the end of 1998, with the exception of the policy administration system for traditional life products which will be in place and functioning by the end of March 1999. Contingency plans are substantially completed which identify actions to be taken should the Company's renovation strategies fall behind schedule. The Company has completed an inventory and assessment of all vendor products and is testing and certifying that each vendor product is Year 2000 compliant. At the end of September 1998, 76% of vendor products had been tested and certified as Year 2000 compliant. The Company anticipates having all vendor products tested and certified by the end of 1998. Any vendor products that can not be certified as Year 2000 compliant will be replaced or eliminated. 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 our variable annuity and life products. The same action will be taken with wholesale producers before the end of 1998. The Company has also addressed issues associated with the exchange of electronic data with business partners. The Company has completed an inventory and assessment of all business partners including electronic interfaces. Processes have been put in place and programs initiated to process data irrespective of the format by converting non-compliant data into a Year 2000 compliant format. The Company's assessment of Year 2000 issues has also included non-information technology systems with embedded computer chips. The Company's building systems such as fire, security, and elevators and escalators supporting facilities in Columbus, Ohio have been tested and are Year 2000 compliant. 13 14 Operating expenses in the first nine months of 1998 and 1997 include approximately $32.7 million and $33.5 million, respectively, for technology projects, including costs related to Year 2000. In the fourth quarter of 1998, the Company anticipates spending approximately $8 million on technology projects, including Year 2000. At this time, no significant Year 2000 costs are anticipated in 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. 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 wirehouses, financial institutions, pension plan administrators and life specialists. The Company has access to over 1,100 independent broker/dealers and over 30,000 registered representatives who sell individual and group variable annuities, fixed annuities and variable life insurance in all 50 states and the District of Columbia. The Company currently has relationships with 185 financial institutions selling individual variable and fixed annuities (under the Company's brand name and on a private-label basis), variable universal life insurance and group pension products. Over 250 regional pension plan administrators market the Company's group variable and fixed annuities to employers sponsoring employee retirement programs. Retail distributors are representatives of the Company who market products directly to a customer base identified by the Company and include exclusive retail sales representatives of the Company's distribution subsidiaries and Nationwide Insurance Enterprise insurance agents. The Company markets products on a retail basis to state and local governments and to teachers through its subsidiary distribution organizations. Approximately 4,300 Nationwide Insurance Enterprise insurance agents are licensed to sell life insurance and individual annuities primarily targeting holders of personal automobile and homeowners' insurance policies issued by the Nationwide Insurance Enterprise. Statutory premiums and deposits by distribution channel are summarized as follows:
THREE MONTHS ENDED, NINE MONTHS ENDED, SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- (in millions of dollars) 1998 1997 1998 1997 - --------------------------------------------- ------------- ------------- ------------- ------------- WHOLESALE CHANNELS Independent broker/dealers $ 925.4 $ 954.8 $ 2,851.3 $ 2,781.9 National and regional wirehouses (1) 78.6 - 253.1 - Financial institutions 457.2 452.6 1,549.2 1,172.0 Pension plan administrators 730.2 594.8 2,160.9 1,733.6 Life specialists 135.3 5.0 589.8 50.0 ------------- ------------- ------------- ------------- Total wholesale channels 2,326.7 2,007.2 7,404.3 5,737.5 ------------- ------------- ------------- ------------- RETAIL CHANNELS Exclusive retail sales representatives 588.4 430.6 1,717.4 1,409.4 Nationwide agents 224.5 150.8 711.1 445.4 ------------- ------------- ------------- ------------- Total retail channels 812.9 581.4 2,428.5 1,854.8 ------------- ------------- ------------- ------------- Total external premiums and deposits 3,139.6 2,588.6 9,832.8 7,592.3 ============= ============= ============= ============= Nationwide Insurance Enterprise employee and agent benefit plans 88.5 42.9 204.0 113.5 ------------- ------------- ------------- ------------- Total statutory premiums and deposits $ 3,228.1 $ 2,631.5 $ 10,036.8 $ 7,705.8 ============= ============= ============= =============
- --------- (1) Prior to 1998, national and regional wirehouse sales were included in independent broker/dealer sales. 14 15 Excluding Nationwide Insurance Enterprise benefit plan sales, the Company achieved sales growth of 21% in the third quarter of 1998 compared to the third quarter of 1997. On a year to date basis, sales have increased 30% in 1998 compared to 1997. The Company believes it is well positioned to achieve its goal of 20% annual growth in external sales in 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 individual variable and fixed annuities with substantially the same features as the Company's brand name 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. The Company offers corporate-owned life insurance (COLI). Corporations purchase COLI to provide protection against the death of selected employees and to fund non-qualified benefit plans. External statutory premiums and deposits by product are summarized as follows.
THREE MONTHS ENDED, NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- (in millions of dollars) 1998 1997 1998 1997 - ----------------------------------------- ------------- ------------- ------------- -------------- The BEST of AMERICA(R) products: Individual variable annuities $ 1,141.5 $ 1,131.0 $ 3,640.1 $ 3,152.1 Group variable annuities 709.1 568.5 2,083.3 1,649.4 Variable universal life insurance 89.7 56.2 232.1 154.1 Private label annuities 260.4 274.0 835.3 769.5 IRC Section 457 annuities 551.8 395.2 1,599.9 1,312.1 The NEA Valuebuilder annuities 36.7 35.4 117.6 97.3 Corporate-owned life insurance 135.3 5.0 589.8 50.0 Traditional/Universal life insurance 55.4 57.0 176.8 180.3 Other 159.7 66.3 557.9 227.5 ------------- ------------- ------------- -------------- $ 3,139.6 $ 2,588.6 $ 9,832.8 $ 7,592.3 ============= ============= ============= ==============
15 16 BUSINESS SEGMENTS The Company reports three product segments: Variable Annuities, Fixed Annuities and Life Insurance. In addition, the Company reports corporate revenue and expenses, investments and related investment income supporting capital not 0pecifically allocated to its product segments, revenues and expenses of its investment advisor subsidiary (other than the portion allocated to the Variable Annuities and Life Insurance segments) and revenues and expenses related to group annuity contracts sold to Nationwide Insurance Enterprise employee and agent benefit plans 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 tax expense for the Company's business segments.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- (in millions of dollars) 1998 1997 1998 1997 - ------------------------------------ ------------- ------------- ------------- -------------- Variable Annuities $ 55.1 $ 40.0 $ 160.1 $ 104.2 Fixed Annuities 43.8 44.8 131.9 126.5 Life Insurance 24.4 20.9 68.1 51.6 Corporate and Other 9.4 7.0 28.1 17.6 ------------- ------------- ------------- -------------- $ 132.7 $ 112.7 $ 388.2 $ 299.9 ============= ============= ============= ==============
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. 16 17 The following table summarizes certain selected financial data for the Variable Annuities segment for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- (in millions of dollars) 1998 1997 1998 1997 - ----------------------------------------------------- ------------- ------------- ------------- -------------- INCOME STATEMENT DATA (1) Revenues: Asset fees $ 122.4 $ 101.1 $ 354.1 $ 264.9 Administrative fees 5.7 4.3 17.7 15.8 Surrender fees 8.0 5.5 21.7 16.4 ------------- ------------- ------------- -------------- Total policy charges 136.1 110.9 393.5 297.1 Net investment income and other (2) (0.8) (2.3) (2.4) (7.7) ------------- ------------- ------------- -------------- 135.3 108.6 391.1 289.4 Benefits and expenses: Benefits and claims 0.9 1.6 2.9 4.3 Amortization of DAC 33.2 25.1 90.1 64.6 Other operating expenses 46.1 41.9 138.0 116.3 ------------- ------------- ------------- -------------- 80.2 68.6 231.0 185.2 ------------- ------------- ------------- -------------- Operating income before federal tax expense $ 55.1 $ 40.0 $ 160.1 $ 104.2 ============= ============= ============= ============== OTHER DATA (1) Statutory premiums and deposits (3) $ 2,477.5 $ 1,900.3 $ 7,493.0 $ 5,667.6 Withdrawals $ 1,022.9 $ 714.9 $ 3,158.4 $ 2,022.2 Policy reserves as of period end $ 38,814.1 $ 33,590.2 $ 38,814.1 $ 33,590.2 Ratio of policy charges to average policy reserves 1.35% 1.40% 1.34% 1.40% Pre-tax operating income to average policy reserves 0.55% 0.50% 0.55% 0.49%
- ---------- (1) Excludes the fixed option under the variable annuity contracts which is reported in the Fixed Annuities segment. (2) The Company's method of allocating net investment income results in a charge (negative net investment income) to this segment which is recognized in the Corporate and Other segment. The charge relates to non-invested assets which support this segment on a statutory basis. (3) 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 increased asset fee revenue partially offset by increases in DAC amortization and other operating expenses. Asset fees increased to $122.4 million in the third quarter of 1998, up 21% from $101.1 million in the same period a year ago. For the first nine months of 1998, asset fees totaled $354.1 million up 34% from the first nine months of 1997. The increase in asset fees reflects higher variable annuity policy reserve levels. Despite poor third quarter 1998 equity market performance, variable annuity policy reserves are still up 16% from a year ago due to strong variable annuity sales during 1998. The Company continues to sustain high sales growth through deeper penetration of existing distribution channels and expansion into new sales outlets. Third quarter 1998 premiums grew across all distribution channels reaching $2.48 billion, 30% above year-ago third quarter sales of $1.90 billion. During the first nine months of 1998, variable annuity sales reached $7.49 billion up 32% from the first nine months of 1997. Included in 1998 sales are $700 million for third quarter and $1.8 billion year-to-date for America's FUTURE Annuity(R), the Company's lower-fee individual annuity introduced in November 1997. Other operating expenses increased 10% and 19% during the third quarter and first nine months of 1998, respectively, compared to the same periods of 1997 reflecting growth in the variable annuity business. The Company has been able to improve its operating margins by five basis points in third quarter and six basis points year-to-date compared to 1997 by growing revenues faster than the increase in expenses. The growth in amortization of DAC reflects the overall growth in the variable annuity business. 17 18 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. The following table summarizes certain selected financial data for the Fixed Annuities segment for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- (in millions of dollars) 1998 1997 1998 1997 - ----------------------------------------------------- ------------- ------------- ------------- -------------- INCOME STATEMENT DATA (1) Revenues: Policy charges $ 3.4 $ 2.4 $ 9.6 $ 11.1 Life insurance premiums 5.2 7.1 20.7 23.1 Net investment income 280.9 276.9 834.7 819.2 ------------- ------------- ------------- -------------- 289.5 286.4 865.0 853.4 ------------- ------------- ------------- -------------- Benefits and expenses: Interest credited to policyholder account balances 207.0 206.1 619.2 612.9 Other benefits and claims 4.6 5.5 18.2 19.2 Amortization of DAC 12.9 8.6 34.6 29.8 Other operating expenses 21.2 21.4 61.1 65.0 ------------- ------------- ------------- -------------- 245.7 241.6 733.1 726.9 ------------- ------------- ------------- -------------- Operating income before federal tax expense $ 43.8 $ 44.8 $ 131.9 $ 126.5 ============= ============= ============= ============== OTHER DATA (1) Statutory premiums and deposits (2) $ 381.7 $ 570.1 $ 1,341.0 $ 1,540.3 Withdrawals and benefits $ 415.1 $ 365.3 $ 1,425.6 $ 1,299.0 Policy reserves as of period end $ 14,380.0 $ 13,970.4 $ 14,380.0 $ 13,970.4 Net interest spread on general account policy reserves 2.13% 2.10% 2.07% 2.06% Pre-tax operating income to average policy reserves 1.22% 1.29% 1.23% 1.23%
- ---------- (1) Includes the fixed option under the variable annuity contracts. (2) 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. 18 19 Fixed annuity segment results reflect an increase in interest spread income attributable to growth in fixed annuity policy reserves. Interest spread is the difference between net investment income and interest credited to policyholder account balances. Interest spreads vary and are influenced by various factors including 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 for the third quarter and first nine months of 1998 and 1997.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net investment income 8.09% 8.20% 8.03% 8.18% Interest credited 5.96 6.10 5.96 6.12 ------------- ------------- ------------- ------------- 2.13% 2.10% 2.07% 2.06% ============= ============= ============= =============
Mortgage loan prepayment fees in 1998 accounted for approximately 16 basis points and 10 basis points of the interest spread in the third quarter and first nine months of 1998, respectively. The Company anticipates interest spreads in the fourth quarter to be comparable to third quarter 1998, excluding the impact of mortgage loan prepayment income. Interest spreads are expected to narrow in 1999. Fixed annuity policy reserves increased to $14.38 billion as of September 30, 1998 compared to $14.19 billion as of the end of 1997 and $13.97 billion a year ago. Third quarter fixed annuity sales decreased to $381.7 million in 1998 compared to $570.1 million in 1997. Third quarter 1997 sales reflect a sales promotion that offered customers a first-year 7% crediting rate on several of the Company's variable contracts, which contributed approximately $200 million to third quarter 1997 sales. Sales for the first nine months of 1998 of $1.34 billion were also down compared to $1.54 billion in 1997. Most of the Company's fixed annuity sales are premiums allocated to the fixed option of variable annuity contracts. Third quarter 1998 fixed annuity sales include $287.8 million in premiums allocated to the fixed option under a variable annuity contract, compared to $453.5 million in third quarter 1997. On October 1, 1998 the Company introduced an 8% first year crediting rate on individual variable annuities. The cost of this promotion will be offset by a reduction of renewal rates on existing contracts. The Company believes these actions will generate additional sales in the bank and brokerage channels and be neutral to profitability. Amortization of DAC increased $4.3 million to $12.9 million in third quarter 1998 compared to $8.6 million in third quarter 1997 reflecting higher net interest spread. 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. 19 20 The following table summarizes certain selected financial data for the Life Insurance segment for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- (in millions of dollars) 1998 1997 1998 1997 - ----------------------------------------------------- ------------- ------------- ------------- -------------- INCOME STATEMENT DATA Revenues: Cost of insurance charges $ 23.4 $ 17.3 $ 64.4 $ 50.1 Other policy charges 14.5 9.6 38.2 27.0 ------------- ------------- ------------- -------------- Total policy charges 37.9 26.9 102.6 77.1 Life insurance premiums 43.2 43.1 132.9 132.8 Net investment income 61.2 48.4 170.3 138.9 Other 0.3 0.2 0.8 0.4 ------------- ------------- ------------- -------------- 142.6 118.6 406.6 349.2 ------------- ------------- ------------- -------------- Benefits and expenses: Interest credited to policyholder account balances 30.7 19.5 83.0 56.5 Other benefits and claims 42.0 34.7 113.3 110.8 Policyholder dividends 8.6 9.1 30.9 31.3 Amortization of DAC 11.4 10.0 34.6 32.3 Other operating expenses 25.5 24.4 76.7 66.7 ------------- ------------- ------------- -------------- 118.2 97.7 338.5 297.6 ------------- ------------- ------------- -------------- Operating income before federal tax expense $ 24.4 $ 20.9 $ 68.1 $ 51.6 ============= ============= ============= ============== OTHER DATA Statutory premiums (1): Traditional and universal life insurance $ 55.4 $ 57.0 $ 176.9 $ 180.3 Individual investment life insurance $ 89.7 $ 56.2 $ 232.1 $ 154.1 Corporate investment life insurance $ 135.3 $ 5.0 $ 589.9 $ 50.0 Policy reserves as of period end: Traditional and universal life insurance $ 2,423.2 $ 2,348.9 Individual investment life insurance $ 1,058.8 $ 852.0 Corporate investment life insurance $ 829.9 $ 74.9 Life insurance in force: Traditional and universal life insurance $ 27,238.4 $ 27,628.5 Individual investment life insurance $ 14,770.3 $ 10,486.8 Corporate investment life insurance $ 1,899.6 $ 246.2
- ---------- (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. Third quarter 1998 Life Insurance segment results compared to third quarter 1997 reflect continued growth in variable life policy fees, partially offset by unfavorable mortality. Year-to-date, Life Insurance segment results reflect increased revenues driven by growth in investment life insurance in force and policy reserves coupled with favorable mortality experience. These trends were partially offset by higher expense levels. 20 21 Investment life insurance (which includes individual variable universal life insurance and corporate-owned life insurance products) policy charges were $25.9 million in the third quarter of 1998, a 75% increase compared to $14.8 million for the third quarter of 1997. The growth in investment life insurance policy charges is attributable to growth in individual investment life insurance policy reserves which reached $1.89 billion as of the end of the third quarter 1998 up $961.8 million from a year ago. Policy reserve growth continues to be driven by strong sales from both independent broker/dealers and Nationwide Insurance Enterprise insurance agents. Investment life insurance sales to individuals during the third quarter of 1998 reached $89.7 million compared to $56.2 million in the third quarter of 1997. The Company anticipates continued sales growth in 1998 for investment life insurance products. During the first nine months of 1998, the Company continued its entry into the corporate-owned life insurance market recording $589.8 million in corporate-owned life insurance premiums compared to $50.0 million in the nine months of 1997. As of September 30, 1998 the Company had $829.9 million in corporate-owned life insurance policy reserves. The increase in operating expenses is due to the increase in policies in force and continued spending on a new policy administration system for traditional life insurance policies. Corporate and Other The following table summarizes certain selected financial data for the Corporate and Other segment for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ---------------------------- (in millions of dollars) 1998 1997 1998 1997 - ----------------------------------------------------- ------------- ------------- ------------- -------------- INCOME STATEMENT DATA Revenues (1): Net investment income $ 40.2 $ 36.7 $ 123.9 $ 109.1 Other 13.8 10.9 36.6 34.0 ------------- ------------- ------------- -------------- 54.0 47.6 160.5 143.1 ------------- ------------- ------------- -------------- Benefits and expenses: Interest credited to policy reserves 31.3 30.4 93.4 87.5 Other operating expenses 13.3 10.2 39.0 38.0 ------------- ------------- ------------- -------------- 44.6 40.6 132.4 125.5 ------------- ------------- ------------- -------------- Operating income before federal tax expense (1) $ 9.4 $ 7.0 $ 28.1 $ 17.6 ============= ============= ============= ============== OTHER DATA Statutory premiums and deposits (2) $ 88.5 $ 42.9 $ 204.0 $ 113.5 Withdrawals $ 50.1 $ 20.6 $ 156.4 $ 126.7 Policy reserves as of period end $ 3,991.0 $ 3,719.8 $ 3,991.0 $ 3,719.8 Nationwide retail mutual fund assets (3) $ 2,833.3 $ 2,562.6 $ 2,833.3 $ 2,562.6
- ---------- (1) Excludes realized gains and losses on investments. (2) 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. (3) Excludes mutual funds selected as investment options under the Company's variable annuity and variable universal life insurance contracts and mutual funds selected as investment options under Nationwide Insurance Enterprise employee and agent benefit plans. 21 22 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 the Company's investment advisor subsidiary (other than the portion allocated to the Variable Annuities and Life Insurance segments) and net investment income and policy charges from group annuity contracts issued to Nationwide Insurance Enterprise employee and agent benefit plans. Growth in interest spread income and other income was driven by increased policy reserves related to Nationwide Insurance Enterprise employee and agent benefit plans and strong first nine months 1998 sales from the Company's investment advisor subsidiary, respectively. 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 gains (losses) of $5.6 million and ($4.8) million during the third quarter of 1998 and 1997, respectively. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted due to reduced disclosure format. 22 23 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. In February 1997, NLIC was named as a defendant in a lawsuit filed in New York Supreme Court related to the sale of whole life policies on a "vanishing premium" basis (John H. Snyder v. Nationwide Life Insurance Co.). In April 1998, NLIC was named as a defendant in a lawsuit filed in Ohio State Court similar to the Snyder lawsuit (David and Joan Mishler v. Nationwide Life Insurance Co.). In August 1998, Nationwide Mutual Insurance Company and NLIC and the plaintiffs executed a stipulation of settlement and submitted it to the New York Supreme Court for approval. On August 20, 1998, the Court in the Snyder lawsuit signed an order preliminarily approving a class for settlement purposes (which would include the Mishler lawsuit) and scheduled a fairness hearing for December 17, 1998. At that hearing, the Court will review the fairness and reasonableness of the proposed settlement prior to issuing a final order and judgement. The proposed settlement, which is subject to approval by the Court, provides policyholders with a potential value of approximately $100 million in policy adjustments, discounted premiums and discounted products. 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 NLIC and the American Century group of defendants (Robert Young and David D. Distad v. Nationwide Life Insurance Company et al.). In this lawsuit, plaintiffs seek 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 Court denied, in part, and granted, in part, motions to dismiss the complaint filed by NLIC and American Century. The remaining claims against NLIC allege securities fraud, common law fraud, civil conspiracy and breach of contract. Plaintiffs filed their motion in support of class certification on August 28, 1998 and NLIC and American Century filed their separate responses opposing class certification on October 9, 1998. NLIC intends to defend this case vigorously. On October 29, 1998, Nationwide Financial Services, Inc., NLIC's parent company, and certain of its subsidiaries were named in a lawsuit filed in the Common Pleas Court of Franklin County, Ohio 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 is in an early stage and 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. 23 24 ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted due to reduced disclosure format. ITEM 3 DEFAULTS UPON SENIOR SECURITIES Omitted due to reduced disclosure format. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted due to reduced disclosure format. ITEM 5 OTHER INFORMATION 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: On September 4, 1998, the Company filed a Current Report on Form 8-K concerning the announcement by Nationwide Mutual Insurance Company and the Company of a settlement in a class action lawsuit related to certain products sold by the Company. 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: November 16, 1998 /s/Mark R. Thresher --------------------------------------------- Mark R. Thresher, Vice President - Controller (Chief Accounting Officer) 25 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 September 30, 1998 and is qualified in its entirety by reference to such unaudited consolidated financial statements. 0000205695 NATIONWIDE LIFE INSURANCE COMPANY 1,000,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 13,977 0 0 125 5,187 264 20,292 4 0 1,871 65,475 19,235 0 0 0 0 0 0 4 2,774 65,475 154 1,106 27 49 930 159 315 415 142 274 0 0 0 274 0 0 0 0 0 0 0 0 0
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