1
As filed with the Securities and Exchange Commission.
'33 Act File No. ________333-49112
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
AMENDMENT NO. 2
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
63
(Primary Standard Industrial Classification Code Number)
31-4156830
(IRS Employer Identification Number)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Principal Executive Offices of Registrant) (Zip Code)
PATRICIA R. HATLER, SECRETARY, ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
TELEPHONE: (614) 249-7111
(Name, address, zip code, telephone number of agent for service)
Approximate date of proposed sale to the public: DecemberMay 1, 20002001
If any securities registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [ X ]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed Maximum Proposed Maximum Amount of registration
securities to be registered offering price per aggregate offering fee
registered unit price
- -------------------------------------------------------------------------------------------------------------------------------
Flexible Purchase * * $250,000,000 $66,000
Payment Modified
Guaranteed Annuity
Contracts
- -------------------------------------------------------------------------------------------------------------------------------
*The maximum aggregate offering price is estimated for the purpose of
determining a registration fee. The amount to be registered and the proposed
maximum offering price per unit are not applicable since these securities are
not issued in specified amounts or units.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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NATIONWIDE LIFE INSURANCE COMPANY
Cross Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
Caption in
Form S-1 Item No. and Caption Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus..........................................................Outside Front Cover
2. Inside Front and Outside Back Cover
Table of Contents ..........................................................................Inside Front Cover
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.........................................................Summary Information
(Not applicable with respect to
ratio of earnings to fixed charges)
4. Use of Proceeds....................................................................................Investments
5. Determination of Offering Price.................................................................Not Applicable
6. Dilution........................................................................................Not Applicable
7. Selling Security Holders........................................................................Not Applicable
8. Plan of Distribution.................................................Distribution of Guaranteed Period Options
9. Description of Securities to be Registered........................Description of the Guaranteed Period Options
10. Interests of Named Experts and Counsel..........................................................Not Applicable
11. Information with Respect to Registrant.......................................Nationwide Life Insurance Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..................................................Not Applicable
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FLEXIBLE PURCHASE PAYMENT MODIFIED GUARANTEED ANNUITY CONTRACTS
Supporting Guaranteed Period Options
Issued by
NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43215
Telephone: 1-800-848-6331
The date of this prospectus is DecemberMay 1, 2000.2001.
THIS PROSPECTUS SHOULD BE READ CAREFULLY AND MAINTAINED FOR FUTURE REFERENCE.
SUMMARY INFORMATION
This prospectus describes Flexible Purchase Payment Modified Guaranteed Annuity
Contracts supporting investment options referred to as Guaranteed Period
Options, offered by Nationwide Life Insurance Company ("Nationwide").
Guaranteed Period Options provide for guaranteed interest rates to be credited
over specified durations (referred to as "Guaranteed Periods"). Three (3), four
(4), five (5), six (6), seven (7), eight (8), nine (9), and ten (10) year
Guaranteed Period Options are available. The minimum amount that may be
allocated to a Guaranteed Period Option is $1,000. An interest rate determined
by Nationwide ("Specified Interest Rate") is guaranteed to be credited for the
duration of the Guaranteed Period on a daily basis, resulting in a guaranteed
annual effective yield. Different interest rates apply to each Guaranteed Period
Option and are determined and guaranteed by Nationwide in its sole discretion.
- --------------------------------------------------------------------------------
GUARANTEED PERIOD OPTIONS WILL PRODUCE A GUARANTEED ANNUAL EFFECTIVE YIELD AT
THE SPECIFIED INTEREST RATE SO LONG AS AMOUNTS INVESTED ARE NEITHER WITHDRAWN
NOR TRANSFERRED PRIOR TO THE END OF THE GUARANTEED PERIOD. WITHDRAWALS OR
TRANSFERS FOR ANY
REASON PRIOR TO THE EXPIRATION OF THE GUARANTEED PERIOD, EXCEPT FOR PAYMENT OF
THE DEATH BENEFIT, ARE SUBJECT TO A MARKET VALUE ADJUSTMENT AND MAY BE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE. TRANSFERS BETWEEN GUARANTEED PERIOD
OPTIONS PRIOR TO THE EXPIRATION OF A GUARANTEED PERIOD ARE SUBJECT TO A MARKET
VALUE ADJUSTMENT, BUT ARE NOT SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE.
HOWEVER, ANY AMOUNT TRANSFERRED TO A NEW GUARANTEED PERIOD PRIOR TO MATURITY
WILL BE SUBJECT TO A NEW CONTINGENT DEFERRED SALES CHARGE SCHEDULE.
- --------------------------------------------------------------------------------
Nationwide established the Nationwide Multiple Maturity Separate Account-2,
pursuant to Ohio law, to aid in reserving and accounting for Guaranteed Period
Option obligations. However, all of the general assets of Nationwide are
available for the purpose of meeting the guarantees of the Guaranteed Period
Options. Amounts allocated to the Guaranteed Period Options are generally
invested in fixed income investments purchased by Nationwide. Contract owners
allocating amounts either to a Guaranteed Period Option or the Transition
Account have no claim against any assets of Nationwide, including assets held in
the Nationwide Multiple Maturity Separate Account-2.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE GUARANTEED PERIOD OPTIONS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE
IN ALL STATE JURISDICTIONS AND, ACCORDINGLY, REPRESENTATIONS MADE IN THIS
PROSPECTUS DO NOT CONSTITUTE AN OFFERING IN SUCH JURISDICTIONS.
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TABLE OF CONTENTS
Glossary.............................................Glossary....................................................
Synopsis of the Contracts............................Contracts...................................
Minimum Initial and Subsequent
Purchase Payments..................................
Charges and Expenses............................Expenses...................................
Annuity Payments................................
Taxation........................................Payments.......................................
Taxation...............................................
Ten Day Free Look...............................Look......................................
Types of Contracts ...........................................................................
Non-Qualified Annuity Contracts.................Contracts................................
Individual Retirement Annuities.................Annuities (IRAs).................
Simplified Employee Pension IRAs................IRAs (SEP IRAs)............
Simple IRAs.....................................IRAs............................................
Roth IRAs.......................................IRAs..............................................
Tax Sheltered Annuities.........................Annuities................................
Qualified Plans.................................Plans........................................
Investing in the Contract............................Contract...................................
Guaranteed Period Options.......................Options..............................
The Specified Interest Rate.................Rate........................
The Investment Period.......................Period..............................
Guaranteed Periods..........................Periods.................................
Guaranteed Period Options at Maturity.......Maturity..............
Transition Account..............................Account.....................................
Contingent Deferred Sales Charge................Charges......................
Market Value Adjustment.........................Adjustment................................
General Information.........................Information Regarding the
Market Value Adjustment.......................
Interest Rate Swap..........................Swap.................................
The Market Value Adjustment
Rate formula...........................Formula.......................................
Contract Ownership..............................Ownership.....................................
Joint Ownership.............................Ownership....................................
Contingent Ownership........................Ownership...............................
Annuitant..........................................
Contingent Annuitant........................Annuitant...............................
Beneficiary and.............................and
Contingent Beneficiary.................Beneficiary........................
Premium Taxes...................................Taxes..........................................
Right to Revoke.................................
Transfers.......................................
Surrender (Redemption)..........................Revoke........................................
Transfers..............................................
Surrenders under ORPs.......................(Redemptions)...............................
Surrenders under TSAs.......................
AssignmentUnder a Tax Sheltered
Annuity.......................................
Surrenders Under a Texas Optional
Retirement Program or a Louisiana
Optional Retirement Plan......................
Assignment.............................................
Annuitizing the Contract
Annuitization...............................Annuitization......................................
Annutization Date...........................Date..................................
Annuity Commencement Date...................Date..........................
Fixed Payment Annuity.......................Annuity..............................
Frequency and AmountsAmount of
Annuity Payments.......................Payments..............................
Fixed Payment Annuity Payment Options.....................Options......................
Death Benefits..................................Benefits..............................................
Death of Contract Owner -
Non-Qualified Contracts................Contracts............................
Death of Annuitant -
Non-Qualified Contracts............................
Death of Contract Owner/Annuitant
Death of Annuitant
Non-Qualified Contracts.....................Annuitant......................
Death Benefit Payment...........................Payment..................................
Required Distributions
Required Distributions for
Non-Qualified Contracts.....................Contracts............................
Required Distributions for
Tax Sheltered Annuities.....................Annuities............................
Required Distributions for
IRAs,Individual Retirement Annuities, SEP IRAs, and
Simple IRAs.................IRAs........................................
Required Distributions for
Roth IRAs...................................IRAs..........................................
New Minimum Required
Distribution Rules.................................
Federal Tax Considerations
Federal Income Taxes............................
Withholding.....................................Taxes...................................
Withholding............................................
Non-Resident Aliens.............................Aliens....................................
Federal Estate, Gift, and Generation
Skipping Transfer Taxes.....................Taxes............................
Charge for Tax..................................Tax.........................................
Tax Changes.....................................
Statements...........................................
Investments..........................................Changes............................................
Statements..................................................
Investments.................................................
Contracts and the Distribution (Marketing) of the
Guaranteed Period Options.......................Options..............................
Nationwide Life Insurance Company....................Company...........................
Business...............................................
Organization.......................................
Business Organization...........................
Description of the Business.....................
Business Segments...............................
Ratings.........................................
Competition.....................................
Regulation......................................
Employees.......................................
Properties......................................Segments..................................
Ratings............................................
Competition........................................
Regulation.........................................
Employees..........................................
Properties.............................................
Legal Proceedings...............................Proceedings......................................
Submissions of Matters to a Vote of Security HoldersHolders...
Market for Nationwide Life Insurance
Company'sNationwide's Common Stock and
Related Shareholder Matters.................Matters.......................
Selected Consolidated Financial Statements and
Supplementary Data..........................
Selected Financial Data.........................Data...................
Management's Discussion andNarrative Analysis of Financial Condition andthe Results
of Operations..................................
Introduction................................Operations.....................................
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Results of Operations.......................
(i) Revenues
(ii)Operations..............................
Revenues......................................
Benefits and Expenses..........
(iii)Expenses.........................
Sales Information..............Information.............................
Business Segments ..........................
(i) Variable Annuities.............
(ii) Fixed Annuities................
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(iii)Segments..................................
Individual Annuity............................
Institutional Products........................
Life Insurance..............................
(iv) Corporate and Other.........................Insurance................................
Corporate.....................................
Quantitative and Qualitative Disclosures About
Market Risk...............................
(i)Risk........................................
Market Risk Sensitive Financial Instruments.
(ii)Instruments........
Interest Rate Risk..........................
(iii)Risk.............................
Asset/Liability Management Strategies to
Manage Interest Rate Risk........................................
(iv)Risk...............
Characteristics of Interest Rate Sensitive
Financial Instruments.......................
(v)Instruments...................
Equity Market Risk..........................Risk.............................
Inflation..........................................
Directors and Executive Officers.............................Officers.......................
Executive Compensation.................................
Compensation.......................................
Compensation.............................................Performance Incentive Plan.........................
Office of Investments Incentive Plan...............
Executive Incentive Plans................................
Management Incentive Plan................................
Performance Incentive Plan...............................Plan...........................
Deferred Compensation Program............................Program......................
Savings Plan.............................................Plan.......................................
Supplemental Defined Contribution Plan...................Plan.............
Nationwide Financial Services, Inc. 1996
Long-Term Equity Compensation Plan................................................
Stock OptionsPlan.............
Option/SAR Grants in Last Fiscal Year..............
Aggregated Option/SAR Exercises in Last
Fiscal Year and Stock Appreciation Rights..............
Options/SARsFiscal Year-End
Option/SAR Values..............................
Aggregated Option/SAR Exercises in Last
Fiscal Year and Holdings ...........................................Fiscal Year-End Option/SAR
Values for Villanova Capital, Inc.
(a subsidiary of Nationwide Financial
Services, Inc.)................................
Pension Plans............................................
(i)Plans......................................
Retirement Plan.............................
(ii)Plan................................
Excess and Supplemental Plans.......................................Plans..................
Compensation Committee Joint Report on
Executive Compensation...................................
Introduction.............................................Compensation.............................
Introduction.......................................
Compensation Philosophy and Objectives......................................Objectives.............
Elements of 19992000 Executive Compensation........................................Compensation............
Base Salaries............................................Salaries......................................
Annual Incentive Compensation............................Compensation......................
Long-Term Incentive Compensation...........................
(i)Compensation...................
Nationwide Financial Services, Inc. 1996
Long-Term Equity Compensation Plan..........Plan ...........
Compensation of the Chief Executive
Officer..............Officers ................................
Policy on Deductibility of Compensation..................
(i)Compensation............
Nationwide Financial Services, Corporation Committee.......................
(ii)Inc.'s
Compensation Committee........................
Nationwide Life Insurance Company
Compensation Committee...................................Committee...................
Security Ownership of Certain Beneficial
Owners and Management.........................
Certain Relationships and Other Transactions.......
Intercompany Agreement........................
Federal Income Taxes..........................
Lease.........................................
Modified Coinsurance Agreements...............
Cost Sharing Agreement........................
Cash Management Agreements....................
Repurchase Agreement..........................
Transactions With Management And Others.......
Exhibits, Financial Statements,Statement Schedules and Reports.............................................Reports...
Appendix..............................................
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GLOSSARY
ACCUMULATION UNIT - An accounting unit of measure used to calculate the contract
value allocated to the variable account before the annuitization date.
ANNUITIZATION DATE - The date the annuity payments begin.
ANNUITY COMMENCEMENT DATE - The date on which annuity payments are scheduled to
begin. This date may be changed by the contract owner with Nationwide's consent.
ANNUITY UNIT - An accounting unit of measure used to calculate the variable
annuity payments.
CONTRACT VALUE - The sum of all amounts allocated to any of the Guaranteed
Period Options plus any amount allocated to the Transition Account.
CONTRACT YEAR - Each year the Contract remains in force beginning with the date
the Contract is issued.
GUARANTEED PERIOD - The period corresponding to a 3, 4, 5, 6, 7, 8, 9, or 10
year Guaranteed Period Option. Amounts allocated to a Guaranteed Period Option
will be credited with a Specified Interest Rate over the corresponding
guaranteed period, so long as such amounts are not distributedwithdrawn or transferred from
the Guaranteed Period Option prior to the Maturity Date. The Guaranteed Period
may last for up to 3 months beyond the 3, 4, 5, 6, 7, 8, 9, or 10 year
anniversary of the allocation to the Guaranteed Period Option due to every
Guaranteed Period ending on the final day of a calendar quarter.
GUARANTEED PERIOD OPTION YEAR - Each 12 month period beginning with the date a
new allocation is made to a Guaranteed Period Option. New allocations include
transfers from one Guaranteed Period Option to another, or new Purchase Payments
allocated to a Guaranteed Period Option.
INDIVIDUAL RETIREMENT ANNUITY (IRA) - An annuity contract that qualifies for
favorable tax treatment under Section 408(b) of the Internal Revenue Code, , but
does not include Roth IRAs.
INTEREST RATE SWAPS - Interest rate quotations for 1, 2, 3, 4, 5, 7 and 10 years
published by the Federal Reserve Board on a regular basis. Nationwide uses
interest rate swaps in its Market Value Adjustment (MVA) formula because they
represent a readily available and consistently reliable interest rate benchmark
in financial markets.
INVESTMENT PERIOD - The period of time beginning with a declaration by the
Company of new Guaranteed Period Option interest rates (the different Specified
Interest Rates for each of the Guaranteed Period Options) and ending with the
subsequent declaration of new Specified Interest Rates.
INVESTMENT-ONLY CONTRACT - A contract purchased by a Qualified Pension,
Profit-Sharing or Stock Bonus Plan as defined by Section 401(a) of the Internal
Revenue Code.
MARKET VALUE ADJUSTMENT - The upward or downward adjustment in value of amounts
allocated to a Guaranteed Period Option which are withdrawn from the Guaranteed
Period Option for any reason, other than payment of the death benefit, prior to
the Maturity Date.
MATURITY DATE - The date on which a particular Guaranteed Period Option matures.
Such date will be the last day of a calendar quarter in which the third, fourth,
fifth, sixth, seventh, eighth, ninth or tenth anniversary of the date on which
amounts are allocated to a 3, 4, 5, 6, 7, 8, 9 or 10 year Guaranteed Period
Option, respectively.
NATIONWIDE - Nationwide Life Insurance Company.
NON-QUALIFIED ANNUITY CONTRACT - A contract which does not qualify for favorable tax
treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP IRA,
Simple IRA, or Tax Sheltered Annuity.
QUALIFIED PLAN - A retirement planRetirement plans that receivesreceive favorable tax treatment under the
provisionsprovision of Section 401(a) and 403(a) of the Internal Revenue Code.Code, including
Investment-only Contracts. In this prospectus, all provisions applicable to
Qualified Plans also apply to Investment-only Contracts unless specifically
stated otherwise.
ROTH IRA - An individual retirement annuity which qualifies for favorable tax
treatment under Section 408A of the Internal Revenue Code.
SEP IRA - An annuity contract which qualifies for favorable tax treatment under
Section 408(k) of the Internal Revenue Code.
SIMPLE IRA - An annuity contract which qualifies for favorable tax treatment
under Section 408(p) of the Internal Revenue Code.
SPECIFIED INTEREST RATE - The interest rate guaranteed to be credited to amounts
allocated under a selected Guaranteed Period Option so long as such allocations
are not distributed for any reason from the Guaranteed Period Option prior to
the Guaranteed Period Option Maturity Date.
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SPECIFIED VALUE - The amount allocated to a Guaranteed Period Option minus
withdrawals and transfers out of the Guaranteed Period Option, plus interest
accrued at the Specified Interest Rate. The Specified Value is subject to a
Market Value Adjustment, except for payment of the death benefit, at all times
prior to the Maturity Date.
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TAX SHELTERED ANNUITY - An annuity which qualifies for favorable tax treatment
under Section 403(b) of the Internal Revenue Code.
TRANSITION ACCOUNT - An account with interest rates that are set monthly by
Nationwide.
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SYNOPSIS OF THE CONTRACTS
The contracts described in this prospectus are flexible purchase payment
contracts. The contracts may be issued as either individual or group contracts.
In those states where contracts are issued as group contracts, references
throughout this prospectus to "contract(s)" will also mean "certificate(s). and
"contract owner" will mean "participant."
The contracts can be categorized as:
- Investment Only;
-o Investment-only;
o Non-Qualified;
-o Individual Retirement Annuities;
-Annuities ("IRAs");
o Roth IRAs;
-o Tax Sheltered Annuities;
-o SEP IRAs; and
-o Simple IRAs.
For more detailed information with regard to the differences in contract types,
please see "Types of Contracts" later in this prospectus. Minimum Initial and
Subsequent Purchase Payments:
MINIMUM INITIAL MINIMUM
CONTRACTAND
SUBSEQUENT PURCHASE SUBSEQUENT
TYPE PAYMENT PAYMENTS
Investment-only $10,000 $1,000
Non-Qualified $10,000 $1,000
IRA $2,000 $1,000
Roth IRA $2,000 $1,000
Tax Sheltered $10,000 $1,000
Annuity
SEP IRA $2,000 $1,000
Simple IRA $2,000 $1,000PAYMENTS:
MINIMUM
CONTRACT MINIMUM INITIAL SUBSEQUENT
TYPE PURCHASE PAYMENT PAYMENTS
- -------- ---------------- ----------
Investment-only $10,000 $ 1,000
Non-Qualified $10,000 $ 1,000
IRA $ 2,000 $ 1,000
Roth IRA $ 2,000 $ 1,000
Tax Sheltered $10,000 $ 1,000
Annuity
SEP IRA $ 2,000 $ 1,000
Simple IRA $ 2,000 $ 1,000
Each purchase payment may be allocated to any combination of Guarantee Period
Options or the Transition Account. However, a minimum of $1,000 must be
deposited into each Guarantee Period Option elected.
CHARGES AND EXPENSES
IfNationwide does not deduct a surrender occurssales charge from purchase payments upon deposit
into the contract. However, if any amount of a Guaranteed Period Option is
withdrawn prior to the Maturity Date for a particular Guarantee Period Option,
the amount surrenderedwithdrawn is subject to a Market Value Adjustment in addition to any
applicable contingent deferred sales charges ("CDSC").
Nationwide does not deduct a sales charge from purchase payments upon deposit
into the contract. However, Nationwide may deduct a CDSC if any amount is
withdrawn or transferred from a Guaranteed Period Option prior to the Maturity
Date. This CDSC reimburses Nationwide for sales expenses. The amount of the CDSC will
not exceed 5% of contract value surrendered.(1)the amount withdrawn.
The CDSC for the 10 year Guaranteed Period Option applies as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
NUMBER OF COMPLETED YEARS IN
GUARANTEED PERIOD OPTION FROM CDSC
DATE OF PURCHASE PAYMENT PERCENTAGE
----------------------------- ----------
0 5%
1 5%
2 4%
3 4%
4 3%
5 3%
6 2%
7 2%
8 1%
9 1%
10 0%
For Guarantee Period Options less than 10 years, the CDSC is not assessed once
the Guarantee Period Option reaches the Maturity Date. For instance, if the 5
year Guarantee Period Option is elected, the CDSC schedule is as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
NUMBER OF COMPLETED YEARS IN
GUARANTEED PERIOD OPTION FROM CDSC
DATE OF PURCHASE PAYMENT PERCENTAGE
----------------------------- ----------
0 5%
1 5%
2 4%
3 4%
4 3%
5 0%
(1)
Each contract year, the contract owner may withdraw without a CDSC the greater
of:
(1) 10% of the Contract Value; or
(2) any amount withdrawn to meet minimum distribution requirements under the
Internal Revenue Code.
A Market Value Adjustment will apply to any free amounts withdrawn prior to the
Maturity Date (see "Market Value Adjustment"). The free withdrawal privilege is
non-cumulative. Free amounts not taken during any given contract year cannot be
taken as free amounts in a subsequent contract year (see "Contingent Deferred
Sales Charge").
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Withdrawals8
The Internal Revenue Code may be restrictedimpose restrictions on withdrawals for contracts
issued as Tax Sheltered Annuities dueor contracts issued to Internal Revenue Code restrictions.Qualified Plans.
ANNUITY PAYMENTS
Annuity payments begin on the annuitization date. TheAnnuity payments will be based
on the annuity payment option chosen at the time of applicationprior to annuitization (see "Annuity"Fixed Payment
Annuity Payment Options").
TAXATION
How a contract is taxed depends on the type of contract issued and the purpose
for which the contract is purchased. Nationwide will charge against the contract
any premium taxes levied by any governmental authority (see "Federal Tax
Considerations" and "Premium Taxes").
TEN DAY FREE LOOK
Contract owners may return the contract for any reason within ten days of
receipt and Nationwide will refund the contract value, including any applicable
market value adjustment or other amounts required by law (see "Right to
Revoke").
TYPES OF CONTRACTS
The contracts described in this prospectus are classified according to the tax
treatment they are subject to under the Internal Revenue Code. The following is
a general description of the various types of contracts. Eligibility
requirements, tax benefits (if any), limitations, and other features of the
contracts will differ depending on the type of contract.
NON-QUALIFIED ANNUITY CONTRACTS
A Non-Qualified Annuity Contract is a contract that does not qualify for certain tax
benefits under the Internal Revenue Code, and which is not an IRA, a Roth IRA, a
SEP IRA, a Simple IRA, or a Tax Sheltered Annuity.
Upon the death of the owner of a Non-Qualified Annuity Contract, mandatory distribution
requirements are imposed to ensure distribution of the entire balance in the
contract within a required statutory period.
Non-Qualified Annuity Contracts that are owned by natural persons allow for the deferral
of taxation on the income earned in the contract until it is distributed or
deemed to be distributed.
INDIVIDUAL RETIREMENT ANNUITIES (IRAS)
Individual Retirement Annuities are contracts that are issued by insurance
companies and satisfy the following
requirements:
-o the contract is not transferable by the owner;
-o the premiums are not fixed;
-o the annual premium cannot exceed $2,000 (although rollovers of greater
amounts from qualified plans, tax-sheltered annuities and other IRAs
can be received);
-o certain minimum distribution requirements must be satisfied after the
owner attains the age of 70 1/2;
-o the entire interest of the owner in the contract is nonforfeitable;
and
-o after the death of the owner, additional distribution requirements may
be imposed to ensure distribution of the entire balance in the
contract within the statutory period of time.
Depending on the circumstance of the owner, all or a portion of the
contributions made to the account may be deducted for federal income tax
purposes.
Failure to make the mandatory distributions can result in an additional penalty
tax of 50% of the excess of the amount required to be distributed over the
amount that was actually distributed.
IRAs may receive rollover contributions from other Individual Retirement
Accounts, andother Individual Retirement Annuities, from Tax Sheltered Annuities, and
from qualified retirement plans, including 401(k) plans.
For further details regarding IRAs, please refer to the disclosure statement
provided when the IRA was established.
SIMPLIFIED EMPLOYEE PENSION IRAS (SEP IRAS)
A SEP IRA is a written plan established by an employer for the benefit of
employees which permits the employer to make contributions to an IRA established
for the benefit of each employee.
An employee may make deductible contributions to a SEP IRA in the same way, and
with the same restrictions and limitations, as for an IRA. In addition, the
employer may make contributions to the SEP IRA, subject to dollar and percentage
limitations imposed by both the Internal Revenue Code and the written plan.
A SEP IRA plan established by an employer must satisfy certain requirements:
-satisfy:
o minimum participation rules;
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-o top-heavy contribution rules;
-o nondiscriminatory allocation rules; and
-o requirements regarding a written allocation formula.
In addition, the plan cannot restrict withdrawals of non-elective contributions,
and must restrict withdrawals of
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elective contributions before March 15th of the following year.
SIMPLE IRAS
A Simple IRA is an individual retirement annuity which is funded exclusively by
a qualified salary reduction arrangement andthat satisfies the following:
-following
requirements:
o vesting requirements,
-requirements;
o participation requirements; and
-o administrative requirements.
The funds contributed to a Simple IRA cannot be commingled with funds in IRAs or
SEP IRAs.
A Simple IRA cannot receive rollover distributions except from another Simple
IRA.
ROTH IRAS
Roth IRA contracts are contracts that are issued by insurance companies and
satisfy the following requirements:
-o the contract is not transferable by the owner;
-o the premiums are not fixed;
-o the annual premium cannot exceed $2,000 (although rollovers of greater
amounts from other Roth IRAs and IRAs can be received);
-o the entire interest of the owner in the contract is nonforfeitable;
and
-o after the death of the owner, certain distribution requirements may be
imposed to ensure distribution of the entire balance in the contract
within the statutory period of time.
A Roth IRA can receive a rollover from an IRA; however, the amount rolled over
from the IRA to the Roth IRA is required to be included in the owner's federal
gross income at the time of the rollover, and will be subject to federal income
tax.
There are income limitations on eligibility to participate in a Roth IRA and
additional income limitations for eligibility to roll over amounts from an IRA
to a Roth IRA. For further details regarding Roth IRAs, please refer to the
disclosure statement provided when the Roth IRA was established.
TAX SHELTERED ANNUITIES
Certain tax-exempt organizations (described in section 501(c)(3) of the Internal
Revenue Code) and public school systems may establish a plan under which annuity
contracts can be purchased for their employees. These annuity contracts are
often referred to as Tax Sheltered Annuities.
Purchase payments made to Tax Sheltered Annuities are excludibleexcludable from the income
of the employee, up to statutory maximum amounts. These amounts should be set
forth in the plan adopted by the employer. The owner's interest in the contract
is nonforfeitable (except for failure to pay premiums) and cannot be
transferred. Certain minimum distribution requirements must be satisfied after
the owner attains the age of 70 1/2, and after the death of the owner.
Additional distribution requirements may be imposed to ensure distribution of
the entire balance in the contract within the required period of time.
QUALIFIED PLANS
Contracts that are owned by Qualified Plans are not intended to confer tax
benefits on the beneficiaries of the plan; they are used as investment vehicles
for the plan. The income tax consequences to the beneficiary of a Qualified Plan
are controlled by the operation of the plan, not by operation of the assets in
which the plan invests.
Beneficiaries of Qualified Plans should contact their employer and/or trustee of
the plan to obtain and review the plan, trust, summary plan description and
other documents for the tax and other consequences of being a participant in a
qualified plan.
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11Qualified Plan.
INVESTING IN THE CONTRACT
There are eight different Guaranteed Period Options available: a 3 year
Guaranteed Period Option,Option; a 4 year Guaranteed Period Option; a 5 year Guaranteed
Period Option; a 6 year Guaranteed Period Option; a 7 year Guaranteed Period
Option; an 8 year Guaranteed Period Option; a 9 year Guaranteed Period Option;
and a 10 year Guaranteed Period Option. Contract owners may elect to have
Purchase Payments allocated among the Guaranteed Period Options and the
Transition Account. The minimum amount of any allocation to a Guaranteed Period
Option is $1,000. If a contract owner does not specify how the Purchase Payment
is to be allocated, the entire Purchase Payment will be allocated to the
Transition Account.
The guarantees associated with the Guaranteed Period Options are borne
exclusively by, and are legal obligations of, Nationwide. A separate account,
authorized and created in accordance with Ohio law, was established for the sole
purpose of reserving and accounting for assets associated with the Guaranteed
Period Options. The assets of the separate account are owned by Nationwide.
Contract owners have no claim against the assets of the separate account,
maintain no interest in the separate account and do not participate in the
investment experience of the separate account.
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The cumulative total of all purchase payments under contracts issued by
Nationwide on the life of any one annuitant cannot exceed $1,500,000 without
Nationwide's prior consent.
GUARANTEED PERIOD OPTIONS
Guaranteed Period Options provide for a guaranteed interest rate (the "Specified
Interest Rate"), to be credited as long as any amount allocated to the
Guaranteed Period Option is not distributed for any reason, prior to the
Maturity Date of the Guaranteed Period Option. Each Guaranteed Period Option has
a Guarantee Period. Generally, a 3 year Guaranteed Period Option offers
guaranteed interest at a Specified Interest Rate over 3 years, a 4 year
Guaranteed Period Option offers guaranteed interest at a Specified Interest Rate
over 4 years, and so on. Because every Guaranteed Period Option will mature on
the last day of a calendar quarter, the Guaranteed Period of a Guaranteed Period
Option may extend for up to 3 months beyond the 3, 4, 5, 6, 7, 8, 9, or 10 year
anniversary of allocations made to 3, 4, 5 , 6, 7, 8, 9, or 10 year Guaranteed
Period Option, respectively.
Amounts allocated to a Guaranteed Period Option will be credited at the
Specified Interest Rate for the duration of the Guaranteed Period associated
with the Guaranteed Period Option. Specified Interest Rates for each Guaranteed
Period Option are declared periodically at the sole discretion of Nationwide.
The Investment Period is the period of time during which declared Specified
Interest Rates will be effective for new allocations. Investment Periods will
typically last for two weeks, but may be longer or shorter depending on interest
rate fluctuations in financial markets. During any particular Investment Period,
any transfer allocation or new purchase payment allocation to a Guaranteed
Period Option will earn the Specified Interest Rate effective for that
Investment Period for the duration of the Guaranteed Period of the Guaranteed
Period Option (see "Specified Interest Rates and Guaranteed Periods").
The Specified Interest Rate will be credited daily to amounts allocated to a
Guaranteed Period Option, providing an annual effective yield. The Specified
Interest Rate will continue to be credited as long as allocations receiving that
rate remain in the Guaranteed Period Option until the Maturity Date. However,
any surrenders, transfers or withdrawals for any reason, except to pay the death
benefit, prior to the Maturity Date will be subject to a Market Value Adjustment
(see "Market Value Adjustment").
THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by Nationwide to
be credited to allocations made to the Guaranteed Period Options for the
corresponding Guaranteed Period, so long as no portion of the allocation is
distributed for any reason prior to the Maturity Date. Different Specified
Interest Rates may be established for the 8 different Guaranteed Period Options.
Generally, Nationwide will declare new Specified Interest Rates bi-weekly;
however, depending on interest rate fluctuations, declarations of new Specified
Interest Rates may occur more or less frequently. Nationwide observes no
specific method in establishing the Specified Interest Rates. However,
Nationwide will attempt to declare Specified Interest Rates which are related to
interest rates associated with fixed-income investments available at the time
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and having durations and cash flow attributes compatible with the Guaranteed
Periods of the Guaranteed Period Options. In addition, the establishment of
Specified Interest Rates may be influenced by other factors, including
competitive considerations, administrative costs and general economic trends.
Nationwide has no way of predicting what Specified Interest Rates may be
declared in the future and there is no minimum Specified Interest Rate for any
of the Guaranteed Period Options.
THE INVESTMENT PERIOD
The Investment Period is the period of time during which a particular Specified
Interest Rate is in effect for new allocations to the various Guaranteed Period
Options. All allocations made to a Guaranteed Period Option during an Investment
Period are credited with the Specified Interest Rate in effect at the time of
allocation. An Investment Period ends when a new Specified Interest Rate
relative to the applicable Guaranteed Period Option is declared. Subsequent
declarations of new Specified Interest Rates have no effect on allocations made
to Guaranteed Period Options during prior Investment Periods. Prior allocations
to the Guaranteed Period Option will be credited with the Specified Interest
Rate in effect when the allocation was made.
The Specified Interest Rate is credited to allocations made to Guaranteed Period
Options on a daily basis, resulting in an annual effective yield, guaranteed by
Nationwide, unless amounts are withdrawn or transferred from the Guaranteed
Period Option for any reason prior to the Maturity Date. The Specified Interest
Rate will be credited for the entire Guaranteed Period associated with the
Guaranteed Period Option. If amounts are withdrawn or transferred from the
Guaranteed Period Option for any
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reason, except payment of the death benefit, prior to the Maturity Date, a
Market Value Adjustment will be applied to the amount withdrawn or transferred.
Information concerning the Specified Interest Rates in effect for the various
Guaranteed Period Options can be obtained by calling the following toll free
phone number: 1-800-848-6331.
GUARANTEED PERIODS
The Guaranteed Period is the period of time corresponding with the selected
Guaranteed Period Option for which the Specified Interest Rate is guaranteed to
be in effect, so long as the amounts allocated remain in the Guaranteed Period
Option until the Maturity Date. A Guaranteed Period always expires on a Maturity
Date which will be the last day of a calendar quarter, which may last up to 3
months past the anniversary date of the allocation to the Guaranteed Period
Option.
For example, if an allocation is made to a 10 year Guaranteed Period Option on
February 1, 2001, the Specified Interest Rate for that Guaranteed Period Option
will be credited until March 31, 2011; the Guaranteed Period will begin on
February 1, 2001 and end on March 31, 2011.
Guaranteed Periods will be exactly 3, 4, 5, 6, 7, 8, 9, or 10 years only when an
allocation to a Guaranteed Period Option occurs on the last day of a calendar
quarter.
GUARANTEED PERIOD OPTIONS AT MATURITY
Nationwide will send notice to contract owners of impending Maturity Dates
(always the last day of a calendar quarter) at least 90 days prior to the end of
a Guaranteed Period. The notice will include the projected value of the
Guaranteed Period Option on the Maturity Date.
Once the Guaranteed Period Option matures, contract owners may:
(1) surrender the Guaranteed Period Option, in part or in whole, without
a Market Value Adjustment andand/or a contingent deferred sales charge;
(2) wholly transfer the Guaranteed Period Option to another Guaranteed
Period Option of the same or different duration without a Market
Value Adjustment and/or a contingent deferred sales charge. A
confirmation of any such transfer will be sent immediately after the
transfer is processed; or
(3) partially transfer amounts of the Guaranteed Period Option to various
Guaranteed Period Options of different durations without a Market
Value Adjustment or a contingent deferred sales
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13 charge. A
confirmation of any such transfer will be sent immediately after the
transfer is processed; or
(4) elect not to transfer or surrender all or a portion of the Guaranteed
Period Option, in which case, the remaining portion of the Guaranteed
Period Option will be automatically transferred to the Transition
Account following the Maturity Date. A confirmation will be sent
immediately after the automatic transfer is executed.
If no direction is received by Nationwide prior to the Maturity Date of a
Guaranteed Period Option all amounts in that Guaranteed Period Option will
automatically be transferred to the Transition Account.
TRANSITION ACCOUNT
Amounts not allocated to a Guaranteed Period Option are held in the Transition
Account. The Transition Account is a short-term liquid investment account. THE
TRANSITION ACCOUNT IS NOT DESIGNED FOR LONG TERM INVESTING.
Nationwide will declare a new interest rate each month forwhich will apply to all
funds in the Transition Account.
Transfers or surrenders from the Transition Account may be made at any time
without application of a Market Value Adjustment or contingent deferred sales
charge.
CONTINGENT DEFERRED SALES CHARGES
No sales charge deduction is made from the purchase payments when amounts are
deposited into the contracts. However, if any amount is surrenderedwithdrawn from a
Guaranteed Period Option prior to its Maturity Date, Nationwide will deduct a
contingent deferred sales charge ("CDSC").
The CDSC will not exceed 5% of contract value surrendered.the amount withdrawn. The CDSC is calculated by
multiplying the applicable CDSC percentage (noted below) by the amount
surrendered.
For purposes of calculating the CDSC surrenders are considered to come first
from the Transition Account until it is exhausted and then from each Guaranteed
Period Option in proportion to the total remaining contract value, unless the
contract owner specifies otherwise. (For tax purposes, a surrender is usually
treated as a withdrawal of earnings first.)
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The CDSC for the 10 year Guaranteed Period Option applies as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
NUMBER OF COMPLETED YEARS IN
GUARANTEED PERIOD OPTION FROM CDSC
DATE OF PURCHASE PAYMENT PERCENTAGE
----------------------------- ----------
0 5%
1 5%
2 4%
3 4%
4 3%
5 3%
6 2%
7 2%
8 1%
9 1%
10 0%
For Guaranteed Period Options less than 10 years, the CDSC is not assessed once
the Guaranteed Period Option reaches the Maturity Date. For instance, if the 5
year Guaranteed Period Option is elected, the CDSC schedule is as follows:
Number of Completed Years in CDSC
Guaranteed Period Option from Percentage
Date of Purchase Payment
NUMBER OF COMPLETED YEARS IN
GUARANTEED PERIOD OPTION FROM CDSC
DATE OF PURCHASE PAYMENT PERCENTAGE
----------------------------- ----------
0 5%
1 5%
2 4%
3 4%
4 3%
5 0%
The CDSC is used to cover sales expenses, including commissions (maximum of 5%
of contract value)each allocation to a Guaranteed Period), production of sales material, and
other promotional expenses. If expenses are greater than the CDSC, the shortfall
will be made up from Nationwide's general assets.
All or a portion of any withdrawal may be subject to federal income taxes.
Contract owners taking withdrawals before age 59 1/2 may be subject to a 10%
penalty tax.
Waiver of Contingent Deferred Sales Charge
Each contract year, the contract owner may withdraw without a CDSC the greater
of:
(a) 10% of the Contract Value; or
(b) any amount withdrawn to meet minimum distribution requirements under
the Internal Revenue Code.
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A Market Value Adjustment will apply to any free amounts withdrawn prior to the
Maturity Date. The CDSC-free privilege is non-cumulative. Free amounts not taken
during any given contract year cannot be taken as free amounts in a subsequent
contract year.
In addition, no CDSC will be deducted:
(1) upon the annuitization of contracts which have been in force for at
least two years;
(2) for amounts withdrawn from the Transition Account or transferred from
the Transition Account to any Guaranteed Period Option;
(3) for amounts transferred prior to maturity from a Guaranteed Period
Option to a new Guaranteed Period Option within the contract;
(4) upon payment of the death benefit payment prior to the Annuitization
Date;
(4)(5) from any values which have been held under a Guarantee Period Option
for the applicable Guaranteed Period.
Further, a CDSC will not apply if the contract owner is confined to a Long Term
Care Facility or Hospital for a continuous 180 day period commencing while the
Contract is in-force. In the case of joint ownership, the waiver will apply if
either joint owner is confined. Request for waiver must be received by
Nationwide during the period of confinement or no later than 90 days after the
confinement period ends. If the withdrawal request is received later than 90
days after the confinement period ends, the surrender charge, if applicable,
will be assessed. Written notice and proof of confinement must be received in a
form satisfactory to Nationwide and be recorded at Nationwide's home office
prior to the waiver of surrender charges.
Nationwide may waive the CDSC if a contract described in this prospectus is
exchanged for another Nationwide contract (or a contract of any of its
affiliated insurance companies). A Market Value Adjustment may apply if the
contract is exchanged. A CDSC may apply to the contract received in the
exchange.
The CDSC will not be eliminated if to do so would be unfairly discriminatory or
prohibited by state law.
MARKET VALUE ADJUSTMENT
GENERAL INFORMATION REGARDING THE MARKET VALUE ADJUSTMENT
Guaranteed Period Options which are surrendered, transferred or distributed for
any reason, except to pay the death benefit, prior to the Maturity Date for the
Guaranteed Period Option will be subject to a Market Value Adjustment. The
Market Value Adjustment is determined by the multiplication of a Market Value
Adjustment factor (arrived at by calculation of the Market Value Adjustment
formula) by the specified value, or the portion of the specified value being
withdrawn. The
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specified value is the amount of the allocation to the Guaranteed Period Option,
plus interest accrued at the specified interest rate minus prior distributions.
The Market Value Adjustment may either increase or decrease the amount of the
distribution.
The Market Value Adjustment is intended to approximate, without duplicating,
Nationwide's experience when it liquidates assets in order to satisfy
contractual obligations. Such obligations arise when contract owners make
withdrawals or transfers, or when the operation of the Contract requires a
distribution, such as a death benefit. When liquidating assets, Nationwide may
realize either a gain or a loss.
If prevailing interest rates are higher than the specified interest rate in
effect at the time of the Guaranteed Period Option allocation, Nationwide is
likely to realize a loss when it liquidates assets in order to process a
surrender or transfer; and therefore, application of the Market Value Adjustment
under such circumstances will decrease the amount of the distribution.
Conversely, if prevailing interest rates are lower than the specified interest
rate in effect at the time of the Guaranteed Period Option allocation,
Nationwide is likely to realize a gain when it liquidates assets in order to
process a surrender or transfer; therefore, application of the Market Value
Adjustment under such circumstances will likely increase the amount of the
distribution.
Nationwide measures the relationship between prevailing interest rates and the
Specified Interest Rates it declares through the Market Value Adjustment
formula, and relies on the interest rate swap yields to represent both
prevailing interest rates and specified interest rates. The Market Value
Adjustment formula and the interest rate swap are described more fully below.
INTEREST RATE SWAP
The Market Value Adjustment formula for deriving the Market Value Adjustment
factor is based on interest rate swaps which are published by the Federal
Reserve Board on a regular basis. Nationwide utilizes interest rate swaps in its
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15
Value Adjustment formula because they represent a readily available and
consistently reliable interest rate benchmark in financial markets, which can be
relied upon to reflect the relationship between specified interest rates
declared by Nationwide and the prospective interest rate fluctuations.
Interest rate swap quotations for 1, 2, 3, 4, 5, 7 and 10 years are published by
the Federal Reserve Board on a regular basis. To the extent that the Market
Value Adjustment formula shown below requires a rate associated with a maturity
not published (such as a 6, 8 or 9 year maturity), Nationwide will calculate
such rates based on the relationship of the published rates. For example, if the
published 5 year rate is 6% and the published 7 year rate is 6.50%, the 6 year
rate will be calculated as 6.25%.
THE MARKET VALUE ADJUSTMENT FORMULA
The Market Value Adjustment formula is utilized when a distribution is made from
a Guaranteed Period Option during the Guaranteed Period. The Market Value
Adjustment is a calculation expressing the relationship between three factors:
(1) the interest rate swap yield for the period of time coinciding with
the Guaranteed Period of the Guaranteed Period Option;
(2) the interest rate swap yield for a period coinciding with the time
remaining in the Guaranteed Period of a Guaranteed Period Option when
a distribution giving rise to a Market Value Adjustment occurs; and
(3) the number of days remaining in the Guaranteed Period of the
Guaranteed Period Option.
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The formula for determining the Market Value Adjustment factor isis:
t
[ (1 + a) ]
[ =================== ] to the power t------------------------
[ (1 + b + .0025) ]
Where:
a = the Interest Rate Swap for a period equivalent to the Guaranteed Period at
the time of deposit in the Guaranteed Period Option;
b = the Interest Rate Swap at the time of distribution for a period of time
equivalent to the time remaining in the Guaranteed Period. In determining
the number of years to maturity, any partial year will be counted as a full
year, unless it would cause the number of years to exceed the Guaranteed
Period; and
t = the number of days until the Maturity Date, divided by 365.25.
In the case of "a" above, the Interest Rate Swap utilized will be the rate
published by the Federal Reserve Board on the day prior to the date of an
allocation to the Guaranteed Period Option was made. If no rate is published
one day prior to the date of an allocation to the Guaranteed Period Option,
then the most recent published rate available will be utilized.
In the case of "b" above, the Interest Rate Swap utilized will be the rate
published by the Federal Reserve Board on the day prior to the date of
withdrawal, transfer or distribution. If no rate is published one day prior
to the date of withdrawal, transfer or distribution, then the most recent
published rate available will be utilized.
The Market Value Adjustment factor will be equal to 1 during the investment
period.
The Market Value Adjustment formula shown above also accounts for some of the
administrative and processing expenses incurred when fixed-interest investments
are liquidated. This is represented in the addition of .0025 in the Market Value
Adjustment formula.
The result of the Market Value Adjustment formula shown above is the Market
Value Adjustment factor. The Market Value Adjustment factor is the market value
multiplied by the specified value, or that portion of the specified value being
distributed from a Guaranteed Period Option in order to effect a Market Value
Adjustment. The Market Value Adjustment factor will either be greater, less than
or equal to 1 and will be multiplied by the specified value or that portion of
the specified value being withdrawn, from the Guaranteed Period Option for any
reason except payment of the death benefit. If the result is greater than 1, a
gain will be realized by the contract owner; if less than 1, a loss will be
realized. If the Market Value Adjustment factor is exactly 1, no gain or loss
will be realized.
If the Federal Reserve Board halts publication of interest rate swaps, or if,
for any other reason, interest rate swaps are not available, Nationwide will use
appropriate rates based on U.S. Treasury Bond yields.
Examples of how to calculate Market Value Adjustments are provided in the
Appendix.
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CONTRACT OWNERSHIP
The contract owner has all rights under the contract. Purchasers who name
someone other than themselves as the contract owner will have no rights under
the contract.
Contract owners of Non-Qualified Contracts may name a new contract owner at any
time before the annuitization date. Any change of contract owner automatically
revokes any prior contract owner designation. Changes in contract ownership may
result in federal income taxation and may be subject to state and federal gift
taxes.
A change in contract ownership must be submitted in writing and recorded at
Nationwide's home office. Once recorded, the change will be effective as of the
date signed. However, the change will not affect any payments made or actions
taken by Nationwide before itthe change was recorded.
The contract owner may also request a change in the annuitant, contingent
annuitant, contingent owner, beneficiary, or contingent beneficiary before the
annuitization date. These changes must be:
-o on a Nationwide form;
-o signed by the contract owner; and
-o received at Nationwide's home office before the annuitization date.
Nationwide must review and approve any change requests. For Non-Qualified
Contracts, if any contract owner is not a natural person, the change of the
annuitant will be treated as the death of the contract owner and will result in
a distribution, regardless of whether a contingent annuitant is also named. Such
distribution will be made as if the contract owner died at the date of such
change.
On the annuitization date, the annuitant will become the contract owner.
JOINT OWNERSHIP
Joint owners each own an undivided interest in the contract.
Contract owners can name a joint owner at any time before annuitization subject
to the following conditions:
-o joint owners can only be named for Non-Qualified Contracts;
-o joint owners must be spouses at the time joint ownership is requested,
unless state law requires Nationwide to allow non-spousal joint
owners;
-o the exercise of any ownership right in the contract will generally
require a written request signed by both joint owners;
-o an election in writing signed by both contract owners must be made to
authorize Nationwide to allow the exercise of ownership rights
independently by either joint owner; and
-o Nationwide will not be liable for any loss, liability, cost, or
expense for acting in accordance with the instructions of either joint
owner.
CONTINGENT OWNERSHIP
The contingent owner is entitled to certain benefits under the contract if a
contract owner who is NOT the annuitant dies before the annuitization date, and
there is no surviving joint owner.
The contract owner may name or change a contingent owner at any time before the
annuitization date. To change the contingent owner, a written request must be
submitted to Nationwide. Once Nationwide has recorded the change, it will be
effective as of the date it was signed, whether or not the contract owner was
living at the time itthe change was recorded. The change will not affect any
action taken by Nationwide before the change was recorded.
ANNUITANT
The annuitant is the person who will receive annuity payments and upon whose
continuation of life any annuity payment involving life contingencies depends.
This person must be age 85 or younger at the time of contract issuance, unless
Nationwide approves a request for an annuitant of greater age. The annuitant may
be changed before the annuitization date with Nationwide's consent.
CONTINGENT ANNUITANT
If the annuitant dies before the annuitization date, the contingent annuitant
becomes the annuitant. The contingent annuitant must be age 85 or younger at the
time of contract issuance unless Nationwide has approved a request for ana
contingent annuitant of greater age. All provisions of the contract which are
based on the death of the annuitant prior to the annuitization date will be
based on the death of the last survivor of the annuitant and contingent
annuitant.
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A Contingent Annuitantcontingent annuitant may be selected only for a Contractcontract issued as a
Non-Qualified Contract.
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BENEFICIARY AND CONTINGENT BENEFICIARY
The beneficiary is the person who is entitled to the death benefit if the
annuitant dies before the annuitization date and there is no joint owner.owner or
contingent annuitant. The contract owner can name more than one beneficiary.
Multiple beneficiaries will share the death benefit equally, unless otherwise
specified.
The contract owner may change the beneficiary or contingent beneficiary during
the annuitant's lifetime by submitting a written request to Nationwide. Once
recorded by Nationwide, the change will be effective as of the date it was
signed, whether or not the annuitant was living at the time it was recorded. The
change will not affect any action taken by Nationwide before the change was
recorded.
PREMIUM TAXES
Nationwide will charge against the contract value any premium taxes levied by a
state or other government entity. Premium tax rates currently range from 0% to
5.0%. This range is subject to change. The method used to assess premium tax
will be determined by Nationwide at its sole discretion in compliance with state
law.
If applicable, Nationwide will deduct premium taxes from the contract either at:
(1) the time the contract is surrendered;
(2) annuitization; or
(3) such earlier date as Nationwide becomes subject to premium taxes.
Premium taxes may be deducted from death benefit proceeds.
RIGHT TO REVOKE
Contract owners have a ten day "free look" to examine the contract. The contract
may be returned to Nationwide's home office for any reason within ten days of
receipt and Nationwide will refund the contract value or another amount required
by law. The refunded contract value will reflect the deduction of any contract
charges, including any applicable market value adjustment, unless otherwise
required by law. All Individual Retirement Annuity, SEP IRA, Simple IRA and Roth
IRA refunds will be a return of purchase payments. State and/or federal law may
provide additional free look privileges.
TRANSFERS
Transfers among the Guaranteed Period Options and the Transition Account must be
made prior to the annuitization date.
Transfers from a Guaranteed Period Option to another Guaranteed Period Option
prior to its Maturity Date are subject to a contingent deferred sales charges
and a Market Value Adjustment. Transfers
from a Guaranteed Period Option to the Transition Account are not permitted
prior to its Maturity Date. Transfers from the Transition Account may be made at
anytime without the assessment of a contingent deferred sales charge or a Market
Value Adjustment.
The minimum amount that may be transferred either from or to any Guaranteed
Period Option is $1,000.
SURRENDER (REDEMPTION)SURRENDERS (REDEMPTIONS)
Contract owners may surrender some or all of their contract value before the
earlier of the annuitization date or the annuitant's death. Surrender requests
must be in writing and Nationwide may require additional information. When
taking a full surrender, the contract must accompany the written request.
Nationwide may require a signature guarantee.
Nationwide will surrender any amount from any Guaranteed Period Option(s) and
any amount from the Transition Account needed to equal: (a) the dollar amount
requested; less (b) any contingent deferred sales charges, premium taxes and
Market Value Adjustment that may apply.
If a partial surrender is requested, amounts will first be surrendered from the
Transition Account (if any), unless otherwise instructed by the Contract Owner.contract owner.
Amounts surrendered in excess of amounts in the Transition Account will be
surrendered from each of the Guaranteed Period Options. The amounts surrendered
from each Guaranteed Period Option will be in the same proportion that the
contract owner's interest in each Guaranteed Period Option bears to the total
remaining contract value.
Payment from the Guaranteed Period Options will be made within seven days of
receipt of both proper written application and proof of interest satisfactory to
Nationwide. However, Nationwide may be required, pursuant to state law, to
reserve the right to postpone any payments up to 6 months.
A CDSC may apply. The contract owner may take the CDSC from either:
(a) the amount requested; or
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(b) the contract value remaining after the contract owner has received the
amount requested.
If the contract owner does not make a specific election, any applicable CDSC
will be taken from the contract value remaining after the contract owner has
received the amount requested.
The CDSC deducted is a percentage of the amount requested by the contract owner.
Amounts deducted for CDSC are not subject to subsequent CDSC.
SURRENDERS UNDER A TAX SHELTERED ANNUITY
Contract owners of a Tax Sheltered Annuity may surrender part or all of their
contract value before the earlier of the annuitization date or the annuitant's
death, except as provided below:
(A) Contract value attributable to contributions made under a qualified cash or
deferred arrangement (within the meaning of Internal Revenue Code Section
402(g)(3)(A)), a salary reduction agreement (within the meaning of Internal
Revenue Code Section 402(g)(3)(C)), or transfers from a Custodial Account
(described in Section 403(b)(7) of the Internal Revenue Code), may be
surrendered only:
(1) when the contract owner reaches age 59 1/2, separates from service,
dies, or becomes disabled (within the meaning of Internal Revenue Code
Section 72(m)(7)); or
(2) in the case of hardship (as defined for purposes of Internal Revenue
Code Section 401(k)), provided that any such hardship surrender may
NOT include any income earned on salary reduction contributions.
(B) The surrender limitations described in Section A also apply to:
(1) salary reduction contributions to Tax Sheltered Annuities made for
plan years beginning after December 31, 1988;
(2) earnings credited to such contracts after the last plan year beginning
before January 1, 1989, on amounts attributable to salary reduction
contributions; and
(3) all amounts transferred from 403(b)(7) Custodial Accounts (except that
earnings and employer contributions as of December 31, 1988 in such
Custodial Accounts may be withdrawn in the case of hardship).
(C) Any distribution other than the above, including a ten day free look
cancellation of the contract (when available) may result in taxes,
penalties, and/or retroactive disqualification of a Tax Sheltered Annuity.
In order to prevent disqualification of a Tax Sheltered Annuity after a ten day
free look cancellation, Nationwide will transfer the proceeds to another Tax
Sheltered Annuity upon proper direction by the contract owner.
These provisions explain Nationwide's understanding of current withdrawal
restrictions. These restrictions may change.
Distributions pursuant to Qualified Domestic Relations Orders will not violate
the restrictions stated above.
SURRENDERS UNDER A TEXAS OPTIONAL RETIREMENT PROGRAM OR A LOUISIANA OPTIONAL
RETIREMENT PLAN
Redemption restrictions apply to contracts issued under the Texas Optional
Retirement Program or the Louisiana Optional Retirement Plan.
The Texas Attorney General has ruled that participants in contracts issued under
the Texas Optional Retirement Program may only take withdrawals if:
- -o the participant dies;
- -o the participant retires;
- -o the participant terminates employment due to total disability; or
- -o the participant that works in a Texas public institution of higher
education terminates employment.
A participant under a contract issued under the Louisiana Optional Retirement
Plan may only take distributions from the contract upon retirement or
termination of employment. All retirement benefits under this type of plan must
be paid as lifetime income; lump sum cash payments are not permitted, except for
death benefits.
Due to the restrictions described above, a participant under either of these
plans will not be able to withdraw cash values from the contract unless one of
the applicable conditions is met. However, contract value may be transferred to
other carriers, subject to any CDSC.
Nationwide issues this contract to participants in the Texas Optional Retirement
Program in reliance upon and in compliance with Rule 6c-7 of the Investment
Company Act of 1940. Nationwide issues this contract to participants in the
Louisiana Optional Retirement Plan in reliance upon and in compliance with an
exemptive order that Nationwide received from the SEC on August 22, 1990.
SURRENDERS UNDER A TAX SHELTERED ANNUITY
Contract owners of a Tax Sheltered Annuity may surrender part or all of their
contract value before the earlier of the annuitization date or the annuitant's
death, except as provided below:
A. Contract value attributable to contributions made under a qualified cash or
deferred arrangement (within the meaning of Internal Revenue Code Section
402(g)(3)(A)), a salary reduction agreement (within the meaning of Internal
Revenue Code Section 402(g)(3)(C)), or transfers from a Custodial Account
(described in Section 403(b)(7) of the Internal Revenue Code), may be
surrendered only:
1. when the contract owner reaches age 59 1/2, separates from service,
dies, or becomes disabled (within the meaning of Internal Revenue Code
Section 72(m)(7)); or
2. in the case of hardship (as defined for purposes of Internal Revenue
Code Section 401(k)), provided that any such hardship surrender may
NOT include any income earned on salary reduction contributions.
B. The surrender limitations described in Section A also apply to:
1. salary reduction contributions to Tax Sheltered Annuities made for
plan years beginning after December 31, 1988;
2. earnings credited to such contracts after the last plan year beginning
before January 1, 1989, on amounts attributable to salary reduction
contributions; and
3. all amounts transferred from 403(b)(7) Custodial Accounts (except that
earnings and employer contributions as of December 31, 1988 in such
Custodial Accounts may be withdrawn in the case of hardship).
C. Any distribution other than the above, including a ten day free look
cancellation of the contract (when available) may result in taxes,
penalties, and/or retroactive disqualification of a Tax Sheltered Annuity.
In order to prevent disqualification of a Tax Sheltered Annuity after a ten day
free look cancellation, Nationwide will transfer the proceeds to another Tax
Sheltered Annuity upon proper direction by the contract owner.
These provisions explain Nationwide's understanding of current withdrawal
restrictions. These restrictions may change.
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Distributions pursuant to Qualified Domestic Relations Orders will not violate
the restrictions stated above.18
ASSIGNMENT
Contract rights are personal to the contract owner(s) and may not be assigned
without Nationwide's consent.
Investment-only Contracts, Individual Retirement Annuities, Roth IRAs, SEP IRAs,
Simple IRAs, and Tax Sheltered Annuities may not be assigned, pledged or
otherwise transferred except where allowed by law.
A Non-Qualified Contract owner may assign some or all rights under the contract.
An assignment must occur before annuitization while the annuitant is alive. The
assignment will become effective once it is recorded by Nationwide at its home
office. The assignment will not be recorded until Nationwide has received
sufficient direction from the contract owner and assignee as to the proper
allocation of contract rights under the assignment.
Nationwide is not responsible for the validity or tax consequences of any
assignment. Nationwide is not liable for any payment or settlement made before
the assignment is recorded. Assignments will not be recorded until Nationwide
receives sufficient direction from the contract owner and the assignee regarding
the proper allocation of contract rights.
Amounts pledged or assigned will be treated as distributions and will be
included in gross income to the extent that the cash value exceeds the
investment in the contract for the taxable year in which it was pledged or
assigned. Amounts assigned may be subject to a tax penalty equal to 10% of the
amount included in gross income.
Assignment of the entire contract value may cause the portion of the contract
value exceeding the total investment in the contract and previously taxed
amounts to be included in gross income for federal income tax purposes each year
that the assignment is in effect.
ANNUITIZING THE CONTRACT
ANNUITIZATION
Annuitization is the period during which annuity payments are received.
ItAnnuitization is irrevocable once payments have begun. Amounts allocated to a
Guaranteed Period Option that are annuitized prior to the Maturity Date are
subject to a Market Value Adjustment. Upon arrival of the annuitization date,
the annuitant must choose:
(1) an annuity payment option; and
(2) either achoose one of the fixed payment annuity variable payment annuity, or an
available combination.options available.
Nationwide guarantees that each payment under athe fixed payment annuity will be
the same throughout annuitization. Under a variable payment annuity, the amount
of each payment will vary with the performance of the underlying mutual funds
chosen by the contract owner.
ANNUITIZATION DATE
The annuitization date is the date that annuity payments begin. ItAnnuitization
will be the first day of a calendar month unless otherwise agreed, and must be
at least 2 years after the contract is issued. If the contract is issued to fund
a Tax Sheltered Annuity, annuitization may occur during the first 2 years
subject to Nationwide's approval.
ANNUITY COMMENCEMENT DATE
The annuity commencement date is the date on which annuity payments are
scheduled to begin. If a contract owner does not choose an annuity commencement
date, a date will be established for the contract by Nationwide. For Qualified
Plans, Individual Retirement Annuities and Tax Sheltered Annuities, if the
contract owner does not choose the annuity commencement date then the annuity
commencement date established on the date of contract issuance will be the date
on which the contract owner reaches 70 1/2. For Non-Qualified contracts, if the
contract owner does not choose the annuity commencement date then the annuity
commencement date established on the date of contract issuance will be the date
on which the contract owner reaches 90. The contract owner may change the
annuity commencement date before annuitization. This change must be in writing
and approved by Nationwide.
FIXED PAYMENT ANNUITY
A fixed payment annuity is an annuity where the amount of the annuity payments
remains level.
The first payment under a fixed payment annuity is determined on the
annuitization date based on an "age last birthday" basisthe annuitant's age (in accordance with the
contract) by:
(1) deducting applicable premium taxes from the total contract value; then
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(2) applying the contract value amount specified by the contract owner to
the fixed payment annuity table for the annuity payment option
elected.
Subsequent payments will remain level unless the annuity payment option elected
provides otherwise. Nationwide does not credit discretionary interest during
annuitization.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Payments are made based on the annuity payment option selected, unless:
- -o the amount to be distributed is less than $5,000, in which case Nationwide
may make one lump sum payment of the contract value; or
- -17
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o an annuity payment would be less than $50, in which case Nationwide can
change the frequency of payments to intervals that will result in payments
of at least $50. Payments will be made at least annually.
FIXED PAYMENT ANNUITY PAYMENT OPTIONS
Contract owners must elect an annuity payment option before the annuitization
date. The annuity payment options are:
(1) LIFE ANNUITY - An annuity payable periodically, but at least annually, for
the lifetime of the annuitant. Payments will end upon the annuitant's
death. For example, if the annuitant dies before the second annuity payment
date, the annuitant will receive only one annuity payment. The annuitant
will only receive two annuity payments if he or she dies before the third
annuity payment date, and so on.
(2) JOINT AND LAST SURVIVOR ANNUITY - An annuity payable periodically, but at
least annually, during the joint lifetimes of the annuitant and a
designated second individual. If one of these parties dies, payments will
continue for the lifetime of the survivor. As is the case under option 1,
there is no guaranteed number of payments. Payments end upon the death of
the last surviving party, regardless of the number of payments received.
(3) LIFE ANNUITY WITH 120 OR 240 MONTHLY PAYMENTS GUARANTEED - An annuity
payable monthly during the lifetime of the annuitant. If the annuitant dies
before all of the guaranteed payments have been made, payments will
continue to the end of the guaranteed period and will be paid to a designee
chosen by the annuitant at the time the annuity payment option was elected.
The designee may elect to receive the present value of the remaining
guaranteed payments in a lump sum. The present value will be computed as of
the date Nationwide receives the notice of the annuitant's death.
Not all of the annuity payment options may be available in all states. Contract
owners may request other options before the annuitization date. These options
are subject to Nationwide's approval.
If an annuity payment option is not elected by the contract owner prior to the
annuity commencement date then a fixed payment life annuity with a guarantee
period of 240 months will be the automatic form of payment. Contracts issued
under Qualified Plans, Individual Retirement Annuities and Tax Sheltered
Annuities are subject to the "minimum distribution" requirements set forth in
the plan, contract, and the Internal Revenue Code.
DEATH BENEFITS
DEATH OF CONTRACT OWNER - NON-QUALIFIED CONTRACTS
If the contract owner who is not the annuitant dies before the annuitization
date, the joint owner becomes the contract owner. If no joint owner is named,
the contingent owner becomes the contract owner. If no contingent owner is
named, the last surviving contract owner's estate becomes the contract owner.
If the contract owner and annuitant are the same, and the contract
owner/annuitant dies before the annuitization date, the contingent owner will
not have any rights in the contract unless the contingent owner is also the
beneficiary and there is no joint owner.
Distributions under Non-Qualified Contracts will be made pursuant to the
"Required Distributions for Non-Qualified Contracts" provision.
DEATH OF CONTRACT OWNER/ANNUITANT
If a contract owner who is also the annuitant dies before the annuitization
date, a death benefit is payable according to the "Death of the Annuitant -
Non-Qualified Contracts" provision.
A joint owner will receive a death benefit if a contract owner/annuitant dies
before the annuitization date.
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If the contract owner/annuitant dies after the annuitization date, any benefit
that may be payable will be paid according to the selected annuity payment
option.
DEATH OF ANNUITANT - NON-QUALIFIED CONTRACTS
If the annuitant who is not a contract owner dies before the annuitization date,
a death benefit is payable to the beneficiary unless a contingent annuitant is
named. If a contingent annuitant is named, the contingent annuitant becomes the
annuitant and no death benefit is payable.
The beneficiary may elect to receive the death benefit:
(1) in a lump sum;
(2) as an annuity; or
(3) in any other manner permitted by law and approved by Nationwide.
The beneficiary must notify Nationwide of this election within 60 days of the
annuitant's death.
If no beneficiary survives the annuitant, the contingent beneficiary receives
the death benefit. Contingent beneficiaries will share the death benefit
equally, unless otherwise specified.
If no beneficiaries or contingent beneficiaries survive the annuitant, the
contract owner or the last surviving contract owner's estate will receive the
death benefit.
If the annuitant dies after the annuitization date, any benefit that may be
payable will be paid according to the selected annuity payment option.
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DEATH OF CONTRACT OWNER/ANNUITANT
If a contract owner who is also the annuitant dies before the annuitization
date, a death benefit is payable according to the "Death of the Annuitant --
Non-Qualified Contracts" provision.
A joint owner will receive a death benefit if a contract owner/annuitant dies
before the annuitization date.
If the contract owner/annuitant dies after the annuitization date, any benefit
that may be payable will be paid according to the selected annuity payment
option.
DEATH BENEFIT PAYMENT
The death benefit is equal to the contract value but is not subject to a Market
Value Adjustment or contingent deferred sales charge. The value of the death
benefit will be determined as of the date Nationwide receives in writing at its
home office the following three items:
(1) proper proof of the annuitant's death;
(2) an election specifying distribution method; and
(3) any applicable state required form(s).
Proof of death is either:
(1) a copy of a certified death certificate;
(2) a copy of a certified decree of a court of competent jurisdiction as
to the finding of death;
(3) a written statement by a medical doctor who attended the deceased; or
(4) any other proof satisfactory to Nationwide.
The beneficiary must elect a method of distribution which complies with the
"Distribution Provisions" of this contract. The beneficiary may elect to receive
such death benefits in the form of:
(1) a lump sum distribution;
(2) an annuity payout; or
(3) any distribution that is permitted under state and federal regulations
and is acceptable by Nationwide.
If such election is not received by the Nationwide within 60 days of the
annuitant's death, the beneficiary will be deemed to have elected a cash payment
as of the last day of the 60 day period.
Payment of the death benefit will be made or will commence within 30 days after
receipt of proof of death and notification of the election.
REQUIRED DISTRIBUTIONS
Any distribution paid that is NOT due to payment of the death benefit may be
subject to a CDSC and will be subject to an MVA if the distribution is taken
before the expiration of the Guarantee Period.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS
Internal Revenue Code Section 72(s) requires Nationwide to make certain
distributions when a contract owner dies. The following distributions will be
made according to thosein accordance with the following requirements:
(1) If any contract owner dies on or after the annuitization date and
before the entire interest in the contract has been distributed, then
the remaining interest must be distributed at least as rapidly as the
distribution method in effect on the contract owner's death.
(2) If any contract owner dies before the annuitization date, then the
entire interest in the contract (consisting of either the death
benefit or the contract value reduced by charges set forth elsewhere
in the contract) will be distributed within 5 years of the contract
owner's death, provided however:
(a) any interest payable to or for the benefit of a natural person
(referred to herein as a "designated beneficiary"), may be
distributed over the life of the designated beneficiary or over a
period not longer than the life expectancy of the designated
beneficiary. Payments must begin within one year of the contract
owner's death unless otherwise permitted by federal income tax
regulations;
(b) if the designated beneficiary is the surviving spouse of the
deceased contract owner, the spouse can choose to become the
contract owner instead of receiving a 20
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death benefit. Any
distributions required under these distribution rules will be
made upon that spouse's death.
In the event that the contract owner is not a natural person (e.g., a trust or
corporation), then, for purposes of these distribution provisions:
(a) the death of the annuitant will be treated as the death of a contract
owner;
(b) any change of annuitant will be treated as the death of a contract
owner; and
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(c) in either case, the appropriate distribution will be made upon the
death or change, as the case may be.
These distribution provisions do not apply to any contract exempt from Section
72(s) of the Internal Revenue Code by reason of Section 72(s)(5) or any other
law or rule.
The designated beneficiary must elect a method of distribution and notify
Nationwide of this election within 60 days of the contract owner's death.
REQUIRED DISTRIBUTIONS FOR TAX SHELTERED ANNUITIES
Distributions from Tax Sheltered Annuities will be made according to the Minimum
Distribution and the Minimum Distribution and Incidental Benefit ("MDIB")
provisions of Section 401(a)(9) of the Internal Revenue Code. Distributions will
be made to the annuitant according to the selected annuity payment option over a
period not longer than:
(a) the life of the annuitant or the joint lives of the annuitant and the
annuitant's designated beneficiary; or
(b) a period not longer than the life expectancy of the annuitant or the
joint life expectancies of the annuitant and the annuitant's
designated beneficiary.
Required distributions do not have to be withdrawn from this contract if they
are being withdrawn from another Tax Sheltered Annuity of the annuitant.
If the annuitant's entire interest in a Tax Sheltered Annuity will be
distributed in equal or substantially equal payments over a period described in
a) or b), the payments will begin on the required beginning date. The required
beginning date is the later of:
(a) April 1 of the calendar year following the calendar year in which the
annuitant reaches age 70 1/2; or
(b) the annuitant's retirement date.
Provision (b) does not apply to any employee who is a 5% owner (as defined in
Section 416 of the Internal Revenue Code) with respect to the plan year ending
in the calendar year when the employee attains the age of 70 1/2.
Distribution commencing on the required distribution date must satisfy minimum
distribution and incidental benefitMDIB
provisions set forth in the Internal Revenue Code. Those provisions require that
distributions cannot be less than the amount determined by dividing the
annuitant's interest in the Tax Sheltered Annuity determined by the end of the
previous calendar year by:
(a) the annuitant's life expectancy; or if applicable,
(b) the joint and survivor life expectancy of the annuitant and the
annuitant's beneficiary.
The life expectancies and joint life expectancies are determined by reference to
Treasury Regulation 1.72-9.
If the annuitant dies before distributions begin, the interest in the Tax
Sheltered Annuity must be distributed by December 31 of the calendar year in
which the fifth anniversary of the annuitant's death occurs unless:
(a) the annuitant names his or her surviving spouse as the beneficiary and
the spouse chooses to receive distribution of the contract in
substantially equal payments over his or her life (or a period not
longer than his or her life expectancy) and beginning no later than
December 31 of the year in which the annuitant would have attained age
70 1/2; or
(b) the annuitant names a beneficiary other than his or her surviving
spouse and the beneficiary elects to receive distribution of the
contract in substantially equal payments over his or her life (or a
period not longer than his or her life expectancy) beginning no later
than December 31 of the year following the year in which the annuitant
dies.
If the annuitant dies after distributions have begun, distributions must
continue at least as rapidly as under the schedule used before the annuitant's
death.
If distribution requirements are not met, a penalty tax of 50% is levied on the
difference between the amount that should have been distributed for that 21
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year
and the amount that actually was distributed for that year.
REQUIRED DISTRIBUTIONS FOR INDIVIDUAL RETIREMENT ANNUITIES, SEP IRAS AND
SIMPLE IRAS
Distributions from an Individual Retirement Annuity, SEP IRA or Simple IRA must
begin no later than April 1 of the calendar year following the calendar year in
which the contract owner reaches age 70 1/2. DistributionDistributions may be paid in a lump
sum or in substantially equal payments over:
(a) the contract owner's life or the lives of the contract owner and his
or her spouse or designated beneficiary; or
(b) a period not longer than the life expectancy of the contract owner or
the joint life expectancy of the contract owner and the contract
owner's designated beneficiary.
If the contract owner dies before distributions begin, the interest in the
Individual Retirement Annuity, SEP IRA or Simple IRA must be distributed by
December 31 of the
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calendar year in which the fifth anniversary of the contract owner's death
occurs, unless:
(a) the contract owner names his or her surviving spouse as the
beneficiary and such spouse chooses to:
(1) treat the contract as an Individual Retirement Annuity, SEP IRA
or Simple IRA established for his or her benefit; or
(2) receive distribution of the contract in substantially equal
payments over his or her life (or a period not longer than his or
her life expectancy) and beginning no later than December 31 of
the year in which the contract owner would have reached age 70
1/2; or
(b) the contract owner names a beneficiary other than his or her surviving
spouse and such beneficiary elects to receive a distribution of the
contract in substantially equal payments over his or her life (or a
period not longer than his or her life expectancy) beginning no later
than December 31 of the year following the year of the contract
owner's death.
Required distributions do not have to be withdrawn from this contract if they
are being withdrawn from another Individual Retirement Annuity, SEP IRA or
Simple IRA of the contract owner.
If the contract owner dies after distributions have begun, distributions must
continue at least as rapidly as under the schedule being used before the
contract owner's death. However, a surviving spouse who is the beneficiary under
the annuity payment option may treat the contract as his or her own, in the same
manner as is described in section (a)(1) of this provision.
If distribution requirements are not met, a penalty tax of 50% is levied on the
difference between the amount that should have been distributed for that year
and the amount that actually was distributed for that year.
A portion of each distribution will be included in the recipient's gross income
and taxed at ordinary income tax rates. The portion of a distribution which is
taxable is based on the ratio between the amount by which non-deductible
purchase payments exceed prior non taxable distributions and total account
balances at the time of the distribution. The owner of an Individual Retirement
Annuity, SEP IRA or Simple IRA must annually report the amount of non-deductible
purchase payments, the amount of any distribution, the amount by which non
deductible purchase payments for all years exceed non taxable distributions for
all years, and the total balance of all Individual Retirement Annuities, SEP IRA
or Simple IRA.
If the contract owner dies before the entire interest in the contract has been
distributed, the balance will also be included in his or her gross estate.
REQUIRED DISTRIBUTIONS FOR ROTH IRAS
The rules for Roth IRAs do not require distributions to begin during the
contract owner's lifetime.
When the contract owner dies, the interest in the Roth IRA must be distributed
by December 31 of the calendar year in which the fifth anniversary of his or her
death occurs, unless:
(a) the contract owner names his or her surviving spouse as the
beneficiary and the spouse chooses to:
(1) treat the contract as a Roth IRA established for his or her
benefit; or
(2) receive distribution of the contract in substantially equal
payments over his or her life (or a period not longer than his or
her life expectancy) and beginning no later than December 31 of
the year following 22
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the year in which the contract owner would
have reached age 70 1/2; or
(b) the contract owner names a beneficiary other than his or her surviving
spouse and the beneficiary chooses to receive distribution of the
contract in substantially equal payments over his or her life (or a
period not longer than his or her life expectancy) beginning no later
than December 31 of the year following the year in which the contract
owner dies.
Distributions from Roth IRAs may be either taxable or nontaxable, depending upon
whether they are "qualified distributions" or "non-qualified distributions" (see
"Federal Tax Considerations").
NEW MINIMUM REQUIRED DISTRIBUTION RULES
In January 2001, the Department of the Treasury promulgated new Minimum Required
Distribution rules, which are to be applicable to Qualified Plans, Tax Sheltered
Annuities, and IRAs. These rules are proposed to be effective for 2002 and
subsequent years.
The new Minimum Required Distribution rules have substantially simplified the
calculation of the required distributions. Under the proposed regulations:
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(a) a uniform table is used to determine the contract owner/participant's
life expectancy and uses the joint life expectancy of the contract
owner/participant and a person 10 years younger recalculated annually;
and
(b) if the contract owner/participant's spouse is the sole designated
beneficiary and is more than 10 years younger than the contract
owner/beneficiary, then their joint life expectancy, recalculated
annually, may be used instead.
These life expectancies will generally be longer than the life expectancies that
are available under the previous proposed regulations, thereby permitting the
distribution to be spread out over a longer period of time.
In addition, the designated beneficiary's identity does not have to be
determined until December 31 of the year following the contract
owner/participant's death. Under the previous proposed regulations, the
designated beneficiary had to be determined not later than the required
beginning date (generally, when the contract owner/participant attained age 70
1/2).
FEDERAL TAX CONSIDERATIONS
FEDERAL INCOME TAXES
The tax consequences of purchasing a contract described in this prospectus will
depend on:
- -o the type of contract purchased;
- -o the purposes for which the contract is purchased; and
- -o the personal circumstances of individual investors having interests in the
contracts.
See "Synopsis of the Contracts" for a brief description of the various types of
contracts and the different purposes for which the contracts may be purchased.
Existing tax rules are subject to change, and may affect individuals differently
depending on their situation. Nationwide does not guarantee the tax status of
any contracts or any transactions involving the contracts.
If the contract is purchased as an investment of certain retirement plans (such
as qualified retirement plans, Individual Retirement Accounts, and custodial
accounts as described in Sections 401, 408(a), and 403(b)(7) of the Internal
Revenue Code), the tax advantages enjoyed by the contract owner and/or annuitant
may relate to participation in the plan rather than ownership of the annuity
contract. Such plans are permitted to purchase investments other than annuities
and retain tax-deferred status.
The following is a brief summary of some of the federal income tax
considerations related to the contracts. In addition to the federal income tax,
distributions from annuity contracts may be subject to state and local income
taxes. The tax rules across all states and localities are not uniform and
therefore will not be discussed in this prospectus. Tax rules that may apply to
contracts issued in U.S. territories such as Puerto Rico and Guam are also not
discussed. Nothing in this prospectus should be considered to be tax advice.
Contract owners and prospective contract owners are encouraged toshould consult a financial
consultant, tax advisor or legal counsel to discuss the taxation and use of the
contracts.
The Internal Revenue Code sets forth different income tax rules for the
following types of annuity contracts:
- -o Individual Retirement Annuities;
- -o SEP IRAs;
- -o Simple IRAs;
- -o Roth IRAs;
- -o Tax Sheltered Annuities; and
- -o "Non-Qualified Annuities."
Individual Retirement Annuities, SEP IRAs and Simple IRAs
Distributions from Individual Retirement Annuities, SEP IRAs and Simple IRAs are
generally taxed when received. If any of the amount contributed to the
IRAIndividual Retirement Annuity was nondeductible for federal income tax purposes,
then a portion of each distribution is excludable from income.
If distributions of income from an IRAIndividual Retirement Annuity are made prior
to the date that the owner attains the age of 59 1/2 years, the income is
subject to both the regular income tax and an additional penalty tax of 10%. is
generally applicable. (For Simple IRAs, the 10% penalty is increased to 25% if
the distribution is made during the 2 year period beginning on the date that the
individual first participated in the Simple IRA.) The 10% penalty tax can be
avoided if the distribution is:
- -o made to a beneficiary on or after the death of the owner;
- -o attributable to the owner becoming disabled (as defined in the Internal
Revenue Code);
- -o part of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of the
owner, or
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the joint lives (or joint life expectancies) of the owner and his
or her designated beneficiary;
- -o used for qualified higher education expenses; or
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- -o used for expenses attributable to the purchase of a home for a qualified
first-time buyer.
Roth IRAs
Distributions of earnings from Roth IRAs are taxable or non-taxable depending
upon whether they are "qualified distributions" or "nonqualified distributions."
A "qualified distribution" is one that satisfies the five-year rule and meets
one of the following requirements:
- -o it is made on or after the date on which the contract owner attains age 59
1/2;
- -o it is made to a beneficiary (or the contract owner's estate) on or after
the death of the contract owner;
- -o it is attributable to the contract owner's disability; or
- -o it is used for expenses attributable to the purchase of a home for a
qualified first-time buyer.
The five year rule generally is satisfied if the distribution is not made within
the five taxable year period beginning with the first taxable year in which a
contribution is made to any Roth IRA established for the owner.
A qualified distribution is not included in gross income for federal income tax
purposes.
A non-qualified distribution is not includibleincludable in gross income to the extent
that the distribution, when added to all previous distributions, does not exceed
thatthe total amount of contributions made to the Roth IRA. Any non-qualified
distribution in excess of the aggregate amount oftotal contributions will be includedis includable in the contract
owner's gross income in the year that is distributed to the contract owner.
Special rules apply for Roth IRAs that have proceeds received from an IRA prior
to January 1, 1999 if the owner elected the special 4-year income averaging
provisions that were in effect for 1998.
If non-qualified distributions of income from a Roth IRA are made prior to the
date that the owner attains the age of 59 1/2 years, the income is subject to
both the regular income tax and an additional penalty tax of 10%. The penalty
tax can be avoided if the distribution is:
- -o made to a beneficiary on or after the death of the owner;
- -o attributable to the owner becoming disabled as(as defined in the Internal
Revenue Code;
- -Code);
o part of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of the
owner, or the joint lives (or joint life expectancies) of the owner and his
or her designated beneficiary;
- -o for qualified higher education expenses; or
- -o used for expenses attributable to the purchase of a home for a qualified
first-time buyer.
If the contract owner dies before the contract is completely distributed, the
balance maywill be included in the contract owner's gross estate for tax purposes.
Tax Sheltered Annuities
Distributions from Tax Sheltered Annuities are generally taxed when received. A
portion of each distribution is excludable from income based on a formula
established pursuant to the Internal Revenue Code. The formula excludes from
income the amount invested in the contract divided by the number of anticipated
payments until the full investment in the contract is recovered. Thereafter all
distributions are fully taxable.
If a distribution of income is made from a Tax Sheltered Annuity prior to the
date that the owner attains the age of 59 1/2 years, the income is subject to
both the regular income tax and an additional penalty tax of 10%. The penalty
tax can be avoided if the distribution is:
- -o made to a beneficiary on or after the death of the owner;
- -o attributable to the owner becoming disabled as(as defined in the Internal
Revenue Code;
- -Code);
o part of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of the
owner, or the joint lives (or joint life expectancies) of the owner and his
or her designated beneficiary;
- -o for qualified higher education expenses;
- -o used for expenses attributable to the purchase of a home for a qualified
first-time buyer; or
- -o made to the owner after separation from service with his or her employer
after age 55.
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27
Non-Qualified Contracts - Natural Persons as Contract Owners
Generally, the income earned inside a Non-Qualified Annuity Contract that is
owned by a natural person is not taxable until it is distributed from the
contract.
23
25
Distributions before the annuitization date are taxable to the contract owner to
the extent that the cash value of the contract exceeds the contract owner's
investment at the time of the distribution. Distributions, for this purpose,
include partial surrenders, any portion of the contract that is assigned or
pledged; or any portion of the contract that is transferred by gift. For these
purposes, a transfer by gift may occur upon annuitization if the contract owner
and the annuitant are not the same individual.
With respect to annuity distributions on or after the annuitization date, a
portion of each annuity payment is excludable from taxable income. The amount
excludable is based on the ratio between the contract owner's investment in the
contract and the expected return on the contract. Once the entire investment in
the contract is recovered, all distributions are fully includable in income. The
maximum amount excludable from income is the investment in the contract. If the
annuitant dies before the entire investment in the contract has been excluded
from income, and as a result of the annuitant's death no more payments are due
under the contract, then the unrecovered investment in the contract may be
deducted on his or her final tax return.
In determining the taxable amount of a distribution, all annuity contracts
issued after October 21, 1988 by the same company to the same contract owner
during the same calendar year will be treated as one annuity contract.
A special rule applies to distributions from contracts that have investments
that were made prior to August 14, 1982. For those contracts, distributions that
are made prior to the annuitization date are treated first as a recovery of the
investment in the contract as of that date. A distribution in excess of the
amount of the investment in the contract as of August 14, 1982, will be treated
as taxable income.
The Internal Revenue Code imposes a penalty tax if a distribution is made before
the contract owner reaches age 59 1/2. The amount of the penalty is 10% of the
portion of any distribution that is includibleincludable in gross income. The penalty tax
does not apply if the distribution is:
- -o the result of a contract owner's death;
- -o the result of a contract owner's disability as(as defined in the Internal
Revenue Code;
- -Code);
o one of a series of substantially equal periodic payments made over the life
(or life expectancy) of the contract owner or the joint lives (or joint
life expectancies) of the contract owner and the beneficiary selected by
the contract owner to receive payment under the annuity payment option
selected by the contract owner; or
- -o is allocable to an investment in the contract before August 14, 1982.
Non-Qualified Contracts - Non-Natural Persons as Contract Owners
The previous discussion related to the taxation of Non-Qualified Contracts owned
by individuals. Different rules (the so-called "non-natural persons" rules)
apply if the contract owner is not a natural person.
Generally, contracts owned by corporations, partnerships, trusts, and similar
entities are not treated as annuity contracts under the Internal Revenue Code.
Therefore, income earned under a Non-Qualified Contract that is owned by a
non-natural person is taxed as ordinary income during the taxable year that it
is earned. Taxation is not deferred, even if the income is not distributed out
of the contract. The income is taxable as ordinary income, not capital gain.
The non-natural persons rules do not apply to all entity-owned contracts. A
contract that is owned by a non-natural person as an agent of an individual is
treated as owned by the individual. This would cause the contract to be treated
as an annuity under the Internal Revenue Code, allowing tax deferral. However,
this exception does not apply when the non-natural person is an employer that
holds the contract under a non-qualified deferred compensation arrangement for
one or more employees.
The non-natural persons rules also do not apply to contracts that are:
- -o acquired by the estate of a decedent by reason of the death of the
decedent;
- -o issued in connection with certain qualified retirement plans and individual
retirement plans;
- -o purchased by an employer upon the termination of certain qualified
retirement plans.
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WITHHOLDING
Pre-death distributions from the contracts are subject to federal income tax.
Nationwide will withhold the tax from the distributions unless the contract
owner requests otherwise. If the distribution is from a Tax Sheltered Annuity,
it will be subject to mandatory 20% withholding that cannot be waived, unless:
- -o the distribution is made directly to another Tax Sheltered Annuity or IRA;
or
- -24
26
o the distribution satisfies the minimum distribution requirements imposed by
the Internal Revenue Code.
In addition, under some circumstances, the Internal Revenue Code will not permit
contract owners may notto waive withholdingwithholding. Such circumstances include:
o if the payee does not provide Nationwide with a taxpayer identification
number; or
o if Nationwide receives notice from the Internal Revenue Service that the
taxpayer identification number furnished by the payee is incorrect.
If a contract owner is prohibited from waiving withholding, as described above,
the distribution iswill be subject to mandatory back-up withholding (if no taxpayer identification number
is given or if the Internal Revenue Service notifies Nationwide that mandatory
back-up withholding is required).withholding. Mandatory
back-up withholding rates are 31% of income that is distributed.
NON-RESIDENT ALIENS
Generally, a pre-death distribution from a contract to a non-resident alien is
subject to federal income tax at a rate of 30% of the amount of income that is
distributed. Nationwide is required to withhold this amount and send it to the
Internal Revenue Service. Some distributions to non-resident aliens may be
subject to a lower (or no) tax if a treaty applies. In order to obtain the
benefits of such a treaty, the non-resident alien must:
(1) provide Nationwide with proof of residency and citizenship (in
accordance with Internal Revenue Service requirements); and
(2) provide Nationwide with an individual taxpayer identification number.
If the non-resident alien does not meet the above conditions, Nationwide will
withhold 30% of income from the distribution.
Another way to avoid the 30% withholding is for the non-resident alien to
provide Nationwide with sufficient evidence that:
(1) the distribution is connected to the non-resident alien's conduct of
business in the United States; and
(2) the distribution is includibleincludable in the non-resident alien's gross
income for United States federal income tax purposes.
Note that these distributions may be subject to back-up withholding, currently
31%, if a correct taxpayer identification number is not provided.
FEDERAL ESTATE, GIFT, AND GENERATION SKIPPING TRANSFER TAXES
The following transfers may be considered a gift for federal gift tax purposes:
-o a transfer of the contract from one contract owner to another; or
-o a distribution to someone other than a contract owner.
Upon the contract owner's death, the value of the contract may subject to estate
taxes, even if all or a portion of the value is also subject to federal income
taxes.
Section 2612 of the Internal Revenue Code may require Nationwide to determine
whether a death benefit or other distribution is a "direct skip" and the amount
of the resulting generation skipping transfer tax, if any. A direct skip is when
property is transferred to, or a death benefit or other distribution is made to:
(a) an individual who is two or more generations younger than the contract
owner; or
(b) certain trusts, as described in Section 2613 of the Internal Revenue
Code (generally, trusts that have no beneficiaries who are not 2 or
more generations younger than the contract owner).
If the contract owner is not an individual, then for this purpose ONLY,
"contract owner" refers to any person:
- -o who would be required to include the contract, death benefit,
distribution, or other payment in his or her federal gross estate at
his or her death; or
- -o who is required to report the transfer of the contract, death benefit,
distribution, or other payment for federal gift tax purposes.
If a transfer is a direct skip, Nationwide will deduct the amount of the
transfer tax from the death benefit, distribution or other payment, and remit it
directly to the Internal Revenue Service.
CHARGE FOR TAX
Nationwide is not required to maintain a capital gain reserve liability on
Non-Qualified Contracts. If tax 26
29
laws change requiring a reserve, Nationwide may
implement and adjust a tax charge.
TAX CHANGES
The foregoing tax information is based on Nationwide's understanding of federal
tax laws. It is NOT intended as tax advice. All information is subject to
change without notice. For more details, contactYou should consult with your personal tax and/or financial advisor.adviser
for more information.
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27
STATEMENTS
Nationwide will mail contract owners statements and reports. Therefore, contract
owners should promptly notify Nationwide of any address change.
These mailings will contain:
-o statements showing the contract's quarterly activity;
-o confirmation statements showing transactions that affect the contract's
value. Confirmation statements will not be sent for recurring transactions.
Instead, confirmation of recurring transactions will appear in the
contract's quarterly statements;
Contract owners should review statements and confirmations carefully. All errors
or corrections must be reported to Nationwide immediately to assure proper
crediting to the contract. Unless Nationwide is notified within 30 days of
receipt of the statement, Nationwide will assume statements and confirmation
statements are correct.
INVESTMENTS
Nationwide intends to invest Guaranteed Period Option allocations received in
fixed interest investments (bonds, mortgages, and collateralized mortgage
obligations) in the same manner as Nationwide invests its general account
assets. Nationwide takes into account the various maturity durations of the
Guaranteed Period Options (3, 4, 5, 6, 7, 8, 9, and 10 years) and anticipated
cash-flow requirements when making investments. Nationwide is not obligated to
invest Guaranteed Period Option allocations in accordance with any particular
investment objective, but will generally adhere to the overall investing
philosophy of Nationwide. The Specified Interest Rates declared by Nationwide
for the various Guaranteed Period Options will not necessarily correspond to the
performance of the nonunitized separate account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GUARANTEED PERIOD OPTIONS
Nationwide Investment Services Corporation ("NISC"), acts as the principal
underwriter and national
distributor of the contracts sold through this prospectus. NISC is registered as
a broker-dealer under the Securities Exchange Act of 1934, and is a member of
the National Association of Securities Dealers, Inc. NISC's address is Two
Nationwide Plaza, Columbus, Ohio 43215. NISC is a wholly-owned subsidiary of
Nationwide.
Contracts sold through this prospectus can be purchased through registered
representatives, appointed by Nationwide, of NASD broker-dealer firms.
Nationwide pays broker-dealers compensation for promoting, marketing and selling
the variable life and variable annuity contracts it sponsors. In turn, the
broker-dealers pay a portion of the compensation to their registered
representatives, under their own arrangements. Nationwide does not expect the
compensation paid to such broker-dealers (including NISC) to exceed 5.0% of
premium payments (on a present value basis) for sales of the contracts described
in this prospectus. For limited periods of time, Nationwide may pay additional
compensation to broker-dealers as part of special sales promotions. Nationwide
offers these contracts on a continuous basis, however no broker dealer is
obligated to sell any particular amount of contracts.
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30
NATIONWIDE LIFE INSURANCE COMPANY
BUSINESS
ORGANIZATION
Nationwide Life Insurance Company ("Nationwide") was incorporated in 1929
and is an Ohio stock legal reserve life insurance company incorporated in 1929.company. Nationwide
offers a variety of variableforms of individual annuities, private and fixed annuities,public
sector pension plans and life insurance products.on a participating and a
non-participating basis.
Prior to January 27, 1997, Nationwide was wholly-ownedwholly owned by Nationwide
Corporation.Corporation ("Nationwide Corp."). On that date, Nationwide CorporationCorp.
contributed the outstanding shares of Nationwide's common stock to
Nationwide Financial Services, Inc. ("NFS"), a holding company formed by
Nationwide CorporationCorp. in November 1996 for Nationwide and other companies
within the Nationwide group of companies that offer or distribute
long-term savings and retirement products. On March 11,6, 1997, Nationwide Financial ServicesNFS completed
an initial public offering of its Class A common stock.
During 1996 and 1997, Nationwide CorporationCorp. and Nationwide Financial
ServicesNFS completed certain
transactions in anticipation of the initial public offering that focused
the business of Nationwide Financial ServicesNFS on long-term savings and retirement products. On
September 24, 1996, Nationwide declared a dividend payable to Nationwide
CorporationCorp. on January 1, 1997 consisting of the outstanding shares of common
stock of certain subsidiaries that do not offer or distribute long-term
savings and retirement products. In addition, during 1996,
26
28
Nationwide entered into two reinsurance agreements whereby all of
Nationwide's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. Additionally,
Nationwide paid $900.0 million of dividends, $50.0 million to Nationwide
CorporationCorp. on December 31, 1996 and $850.0 million to Nationwide Financial Services,NFS, which then made an
equivalent dividend to Nationwide Corporation,Corp., on February 24, 1997.
Nationwide Financial ServicesNFS contributed $836.8 million to the capital of Nationwide during March
1997.
Wholly-ownedWholly owned subsidiaries of Nationwide as of December 31, 19982000 include
Nationwide Life and Annuity Insurance Company, Nationwide Advisory
Services, Inc. and Nationwide Investment Services Corporation.
Nationwide is a member of the Nationwide group of companies, which
consists of Nationwide Mutual Insurance Company and all of its
subsidiaries and affiliates.
Nationwide Life and Annuity Insurance Company offers universal life
insurance, variable universal life insurance, corporate-owned life
insurance and individual annuity contracts on a non-participating basis, and fixed and
variable annuity products.basis.
Nationwide Advisory Services, Inc. is a
registered broker-dealer providing investment management and administration
services. Nationwide Investment Services
Corporation is aare registered broker-dealer doing business solely inbroker/dealers.
Nationwide, along with its affiliates (collectively, the deferred compensation market.
DESCRIPTION OF THE BUSINESS
Nationwide"Company"), is a
leading provider of long-term savings and retirement products in the
United States.States (U.S.). Nationwide develops and sells a diverse range of
products including individual annuities, private and public sector pension
plans, and life insurance. By developing and offering a wide variety of
products, Nationwidethe Company believes that it has positioned itself to compete
effectively in various stock market and interest rate environments. NationwideThe
Company markets its products through a broad spectrum of distribution
channels, including independent broker/dealers, national and regional
brokerage firms, pension
plan administrators, life insurance specialists, financial institutions,
Nationwide Retirement Solutions sales
representatives,agents and Nationwide agents.
NationwideRetirement Solutions.
The Company is one of the leaders in the development and sale of variable
annuities. As of December 31, 1999, Nationwide2000, the Company was the fifththird largest
writer of individual variable annuity contracts in the United States based on
assets,U.S., according to
The Variable Annuity Research & Data Service.
NationwideThe Company has grown substantially in recent years as a result of its
long-term investment in developing the distribution channels necessary to
reach its target customers and the products required to meet the demands
of these customers. NationwideThe Company believes its growth has been further
enhanced by favorable demographic
28
31 trends, the growing tendency of
Americans to supplement traditional sources of retirement income with
self-directed investments, such as products offered by Nationwide,the Company, and
the performance of the financial markets, particularly the U.S. stock
markets, in recent years.
BUSINESS SEGMENTS
NationwideThe Company has redefined its business segments in order to align this
disclosure with the way management currently views its core operations.
This updated view better reflects the different economics of the Company's
various businesses and also aligns well with the Company's current market
focus. As a result, the Company now reports three product segments:
Variable Annuities, Fixed AnnuitiesIndividual Annuity, Institutional Products and Life Insurance. In
addition, Nationwidethe Company reports corporate revenues and expenses, investments
and related investment income supporting capital not specifically
allocated to its product segments and revenues and expenses of its
investment adviser subsidiary and revenues and expenses related to
group annuity contracts sold to Nationwide Corporation employee benefits
plansbroker/dealer subsidiaries in a Corporate and Other segment.
The Variable AnnuitiesIndividual Annuity segment, which accounted for $290.3$281.7 million (or 47%(40%)
of Nationwide'sthe Company's operating income before federal income tax expense for
1999,2000, consists of both variable and fixed annuity contracts. Individual
annuity contracts thatprovide the customer with tax-deferred accumulation of
savings and flexible payout options including lump sum, systematic
withdrawal or a stream of payments for life. In addition, variable annuity
contracts provide the customer with access to a wide range of investment
options tax-deferred accumulation of
savings,and asset protection in the event of an untimely death, and flexible
payouts including a lump sum, systematic withdrawal or a stream of payments
for life.
The Fixed Annuities segment, which accounted for $177.2 million (or 29%) of
Nationwide's operating income before federal income tax expense for 1999,
consists ofwhile
fixed annuity contracts that generate a return for the customer at a specified
interest rate fixed for a prescribed period, tax-deferred
accumulation of savings and flexible pay out options including a lump sum,
systematic withdrawal or a stream of payments for life. Such contractsperiod. The Company's individual
annuity products consist of single premium deferred annuities, flexible
premium deferred annuities and single premium immediate annuities.
The Fixed Annuities
segment also includes the fixed option under Nationwide's variable annuity
contracts, which accounted for 72% of Nationwide's fixed annuity sales in
1999 and 71% of Nationwide's fixed annuity policy reserves as of December
31, 1999. During 1999, the average crediting rates on contracts (including
the fixed option under Nationwide's variable annuity contracts) in the
Fixed Annuities segment was 5.59%. Approximately 87% of Nationwide's
crediting rates on its fixed annuity contracts are guaranteed for a period
not exceeding 15 months.
The Life InsuranceInstitutional Products segment, which accounted for $120.8$230.7 million
(or 20%(33%) of Nationwide'sthe
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29
Company's operating income before federal income tax expense for 1999,2000, is
comprised of the Company's group and payroll deduction business, both
public and private sectors, and medium-term note program. The public
sector includes the 457 business in the form of fixed and variable
annuities. The private sector includes the 401(k) business generated
through fixed and variable annuities.
The Life Insurance segment, which accounted for $152.9 million (22%) of
the Company's operating income before federal income tax expense for 2000,
is composed of a wide range of variableinsurance products including universal life
insurance, whole
life insurance, universal life insurance, term life insurance and
corporate-owned life insurance products that("COLI") and bank-owned life
insurance ("BOLI"), which provide a death benefit and
may also allow the
customer to build cash value on a tax-deferredtax-advantaged basis.
The Corporate and Other segment accounted for $29.8$37.1 million (or 4%(5%) of Nationwide'sthe Company's
operating income (which excludes net realized gains and losses on
investments) before federal income tax expense for 1999.2000.
RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive
position of insurance companies. Ratings are important to maintaining
public confidence in Nationwidethe Company and its ability to market its annuity and
life insurance products. Rating organizations continually review the
financial performance and condition of insurers, including Nationwide.the Company.
Any lowering of Nationwide'sthe Company's ratings could have a material adverse effect
on Nationwide'sthe Company's ability to market its products and could increase the
surrender of Nationwide'sthe Company's annuity products. Both of these consequences
could, depending upon the extent thereof, have a material adverse effect
on Nationwide'sthe Company's liquidity and, under certain circumstances, net income.
NationwideThe Company is rated "A+" (Superior) by A.M. Best Company, Inc. and its
claims-paying ability/financial strength is rated "Aa2""Aa3" (Excellent) by
Moody's Investor Services, Inc. ("Moody's"), "AA+" (Excellent)"AA" (Very Strong) by
Standard & Poor's, Corporationa Division of The McGraw-Hill Companies, Inc. ("S&P")
and "AA+" (Excellent)(Very Strong) by Duff & Phelps Credit Rating Co.Fitch.
The foregoing ratings reflect each rating agency's opinion of Nationwide's
financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed toward the
protection of 29
32
investors. Such factors are of concern to policyholders,
agents and intermediaries.
The Company's financial strength is also reflected in the ratings of
commercial paper. The commercial paper is rated "A-1+" by S&P and "P-1" by
Moody's.
COMPETITION
NationwideThe Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers
and mutual funds, some of whom have greater financial resources, offer
alternative products and, with respect to other insurers, have higher
ratings than Nationwide. Nationwidethe Company. The Company believes that competition in the
Nationwide'sCompany's lines of business is based on price, product features,
commission structure, perceived financial strength, claims-paying ratings,
service and name recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the Act)"Act"), was signed
into law. The Act modernizes the regulatory framework for financial
services in the United StatesU. S. and allows bank,banks, securities firms and insurance
companies to affiliate more directly than they have been permitted to do
in the past. At this timeWhile the Act facilitates these affiliations, to date no
significant competitors of the Company have acquired, or have been
acquired by, a banking entity under authority of the Act. Nevertheless, it
is not possible to predictanticipate whether such affiliations might occur in the
effect the Act will have on
the financial services industry and Nationwide.future.
REGULATION
Nationwide and Nationwide Life and Annuity Insurance Company, as with
other insurance companies, are subject to extensive regulation and
supervision in the jurisdictions in which they do business. Such
regulations limit the amount of dividends and other payments that can be
paid by insurance companies without prior approval and impose restrictions
on the amount and type of investments insurance companies may hold. These
regulations also affect many other aspects of insurance companies'
businesses, including licensing of insurers and their products and agents,
risk-based capital requirements and the type and amount of required asset
valuation reserve accounts. These regulations are primarily intended
28
30
to protect policyholders rather than shareholders. Nationwide can notThe Company cannot
predict the effect that any proposed or future legislation may have on the
financial condition or results of operations of Nationwide.the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states
in which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance
regulators periodically examine an insurer's financial condition,
adherence to statutory accounting practices and compliance with insurance
department rules and regulations. Applicable state insurance laws, rather
than federal bankruptcy laws, apply to the liquidation or the
restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once
every three to four years) of the books, records and accounts of insurance
companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states
under guidelines promulgated by the National Association of Insurance
Commissioners. The most recently completed examination of Nationwide'sthe Company's
insurance subsidiaries was conducted by the Ohio and Delaware insurance
departments for the four-year period ended December 31, 1996. The final
reports of these examinations did not result in any significant issues or
adjustments.
The payment of dividends by Nationwide is subject to restrictions set
forth in the insurance laws and regulations of Ohio, its domiciliary
state. The Ohio insurance laws require Ohio-domiciled life insurance
companies to seek prior regulatory approval to pay a dividend or
distribution of cash or other property if the fair market value thereof,
together with that of other dividends or distributions made in the
preceding 12 months, exceeds the greater of:
(i) 10% of statutory-basis policyholders' surplus as of the prior
December 31; or
(ii) the statutory-basis net income of the insurer for the 12-month
period ending as of the prior December 31.
The Ohio insurance laws also require insurers to seek prior regulatory
approval for any dividend paid from other than earned surplus. Earned
surplus is defined under the Ohio insurance laws as the amount equal to
Nationwide'sthe Company 's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus
30
33 must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. The payment
of dividends by Nationwide may also be subject to restrictions set forth
in the insurance laws of New York that limit the amount of statutory
profits on Nationwide's participating policies (measured before dividends
to policyholders) that can inure to the benefit of Nationwidethe Company and its
stockholders. NationwideThe Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends
in the future.
EMPLOYEES
As of December 31, 1999, Nationwide2000, the Company had approximately 3,9004,100 employees.
None of the employees of Nationwidethe Company are covered by a collective bargaining
agreement and Nationwidethe Company believes that its employee relations are
satisfactory.
PROPERTIES
Nationwide's principal executive offices are located in Columbus, Ohio.
Nationwide leases its home office complex, consisting of approximately
523,000 square feet, fromPursuant to an arrangement between Nationwide Mutual Insurance Company and
certain of its subsidiaries, at One Nationwide Plaza, Two Nationwide Plaza and Three
Nationwide Plaza,during 2000 the Company leased on average
approximately 734,000 square feet of office space primarily in the four building
home office complex in Columbus, Ohio. Nationwidethe Company believes that its present
facilities are adequate for the anticipated needs of Nationwide.the Company.
LEGAL PROCEEDINGS
NationwideThe 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 Nationwide.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 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 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 and American Century. The remaining
claims against Nationwide allege securities fraud, common law fraud, civil
conspiracy, and breach of contract. The District Court, on December 2,
1998, issued an order denying plaintiffs' motion for class certification
and the appeals court declined to review the order denying class
certification upon interlocutory appeal. On June 11, 1999, the District
Court denied the plaintiffs' motion to amend their complaint and reconsider
class certification. In January 2000 Nationwide and American Century
settled this lawsuit now limited to the claims of the two named plaintiffs.
On February 9, 2000 the court dismissed this lawsuit with prejudice.
On October 29, 1998, Nationwide 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
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31
Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999, the
complaint was amended to, among other things, add Marcus Shore as a second
plaintiff. The amended complaint is brought as a class action on behalf of all
persons who purchased individual deferred annuity contracts or participated in
group annuity contracts sold by Nationwide and the other named Nationwide
affiliates which were used to fund certain tax-deferred retirement plans. The
amended complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, Nationwide and the other named defendants
filed a motion to dismiss the 31
34
amended complaint. On March 8, 2000, the court
denied a motion to dismiss the amended complaint filed by Nationwide and other
name defendants. Nationwide 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 Nationwidethe Company in the future.
SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999,2000, no matters were submitted to a vote of
security holders, through the solicitation of proxies or otherwise.
MARKET FOR NATIONWIDE'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for Nationwide's shares of common
stock. All of the 3,814,779 shares of Nationwide's common stock issued and
outstanding are owned by Nationwide Financial Services.NFS.
Nationwide declared $236.0$50.0 million and $61.0 million in dividends to NFS during
2000 and 1999, respectively. In addition, Nationwide Financial
Services during 1999. Nationwide paid cash dividends of $100.0 million to
Nationwide Financial Services during 1998sought and no cash dividends were paid
during 1997.
On January 1, 1997, Nationwide paid a dividend valued at $485.7 million to
Nationwide Corporation consisting ofobtained prior
regulatory approval from the outstanding shares of common stock
of Employers Life Insurance Company of Wausau, National Casualty Company
and West Coast Life Insurance Company. Also, on February 24, 1997,
Nationwide paid a dividend to Nationwide Financial Services, and Nationwide
Financial Services paid an equivalent dividend to Nationwide Corporation,
consisting of securities having an aggregate fair value of $850.0 million.
The dividend payments were approved by theOhio Department of Insurance to return $120.0
million and $175.0 million of the
State of Ohio.capital to NFS during 2000 and 1999, respectively.
Nationwide currently does not have a formal dividend policy.
30
32
SELECTED CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Nationwide and its subsidiaries
are included in a separate section of this report which is indexed in Item
11 - Exhibits, Financial Statement Schedules, and Reports.
Semi-annual and annual reports are sent to contract owners of the variable
annuity and life insurance contracts issued through registered separate
accounts of Nationwide.
The audited financial statements have been included herein in reliance upon
the report of KPMG LLP, independent certified public accountants, Two
Nationwide Plaza, Columbus, Ohio 43215, and upon the authority of said firm
as experts in accounting and auditing.
SELECTED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data.
The consolidated income statement data set forth below for the years ended
December 31, 1995 throughFIVE-YEAR SUMMARY
RESULTS OF OPERATIONS(1)
Years ended December 31,
---------------------------------------------------------------------------
(in millions, except per share amounts) 2000 1999 1998 1997 1996
- --------------------------------------- ---- ---- ---- ---- ----
Policy charges $ 1,092.2 $ 895.6 $ 698.9 $ 545.2 $ 400.9
Life insurance premiums 240.0 220.8 200.0 205.4 198.6
Net investment income 1,668.4 1,530.5 1,486.8 1,413.9 1,357.8
Realized gains (losses) on investments (24.9) (11.0) 17.9 11.1 (0.2)
Other 194.6 167.4 108.1 62.8 59.5
----------- ----------- ----------- ----------- -----------
Total revenues 3,170.3 2,803.3 2,511.7 2,238.4 2,016.6
----------- ----------- ----------- ----------- -----------
Interest credited and other benefits 1,470.0 1,349.2 1,284.4 1,235.4 1,201.6
Interest expense on debt and trust securities 48.5 47.2 35.1 26.1 --
Other expenses 1,027.9 834.1 686.7 569.9 486.9
----------- ----------- ----------- ----------- -----------
Total benefits and expenses 2,546.4 2,230.5 2,006.2 1,831.4 1,688.5
----------- ----------- ----------- ----------- -----------
Income from continuing operations before federal
income tax expense 623.9 572.8 505.5 407.0 328.1
Federal income tax expense 189.0 191.5 173.1 141.8 115.8
----------- ----------- ----------- ----------- -----------
Income from continuing operations $ 434.9 $ 381.3 $ 332.4 $ 265.2 $ 212.3
----------- ----------- ----------- ----------- -----------
Net income $ 434.9 $ 381.3 $ 332.4 $ 265.2 $ 223.6
----------- ----------- ----------- ----------- -----------
Basic and diluted net income per common share(2) $ 3.38 $ 2.96 $ 2.58 $ 2.14 --
Cash dividends declared $ 0.46 $ 0.38 $ 0.30 $ 0.18 --
Diluted average shares outstanding 128.9 128.6 128.6 124.1 --
----------- ----------- ----------- ----------- -----------
RECONCILIATION OF NET INCOME TO NET OPERATING
INCOME(1)
Net income $ 434.9 $ 381.3 $ 332.4 $ 265.2 $ 223.6
Less: Realized (gains) losses on investments, net
of tax 16.1 7.0 (11.7) (7.9) (1.0)
Less: Income from discontinued operations, net of
tax -- -- -- -- (11.3)
----------- ----------- ----------- ----------- -----------
Net operating income 451.0 388.3 320.7 257.3 211.3
Pro forma adjustments -- -- -- (2.9) (26.2)
----------- ----------- ----------- ----------- -----------
Pro forma net operating income $ 451.0 $ 388.3 $ 320.7 $ 254.4 $ 185.1
----------- ----------- ----------- ----------- -----------
Pro forma net operating income per common share $ 3.50 $ 3.02 $ 2.49 $ 1.98 $ 1.44
Net operating return on average realized equity(3) 16.7% 16.6% 15.8% 14.5% --
----------- ----------- ----------- ----------- -----------
(1) Comparisons between 2000, 1999 and 1998 results of operations and those of
prior years are affected by the consolidated balance sheet dataCompany's initial public offering in March
1997 and companion offerings of senior notes and capital securities as well
as the payment of December 31, 1995 through 1999certain special dividends. Pro forma amounts adjust for
these transactions.
(2) Actual earnings and book value per common share amounts have not been
presented for 1996, because such amounts are derived fromnot meaningful due to the
consolidated
financial statementseffects of Nationwide. The summary consolidated financial data
set forth below should be read in conjunction with the consolidated
financial statements of Nationwide and notes theretoinitial public offering and the $900.0 million of dividends paid
prior to the initial public offering.
(3) Based on net operating income and excluding accumulated other financial information, including Management's Discussion and Analysis ofcomprehensive
income.
(4) During 2000, Nationwide Financial Condition and Results of Operations, included elsewhere herein.
32Services, Inc. began reporting new
product segments.
31
35
Selected Consolidated Financial Data (1)
($000's omitted)33
SUMMARY OF FINANCIAL POSITION(1)
As of and for the year ended December 31,
--------------------------------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share amounts) 2000 1999 1998 1997 1996
1995- --------------------------------------- ---- ---- ---- ---- ----
Total revenues 2,694,464 $2,475,703 $2,217,445 1,992,838 1,798,651
Total benefits and expenses 2,088,151 1,918,595 1,787,518 1,677,341 1,511,079
Income from continuing operations before federal 606,493 557,108 429,927 315,497 287,572
income tax expense and cumulative effect of
changes in accounting principles
Federal income tax expense (benefit) (136,738) 190,381 150,195 110,889 99,808
Income from continuing operations before other 405,117 336,727 279,732 204,608 187,764
items
Income from discontinued operations (less federal -- -- -- 11,324 24,714
income tax expense)
Cumulative effect of changes in accounting -- -- -- -- --
principles
Net income $405,117 $366,727 $279,732 215,932 212,478invested assets $ 25,359.2 $ 22,587.9 $ 20,940.5 $ 19,673.2 $ 18,317.3
Deferred policy acquisition costs 2,872.7 2,555.8 2,022.3 1,665.4 1,366.5
Separate account assets 65,968.8 67,155.3 50,935.8 37,724.4 26,926.7
Other assets 977.9 755.0 772.6 829.9 1,159.7
------------- ------------- ------------ ------------ -----------
Total assets $92,672,867 $74,342,070 $59,790,656 47,766,246 38,507,633$ 93,178.6 $ 93,054.0 $ 74,671.2 $ 59,892.9 $ 47,770.2
------------- ------------- ------------ ------------ -----------
Policy reserves $ 22,243.3 $ 21,868.3 $ 19,772.2 $ 18,702.8 $ 17,600.6
Separate account liabilities 65,968.8 67,155.3 50,935.8 37,724.4 26,926.7
Other liabilities 1,370.6 944.9 917.3 943.1 1,111.2
Long-term debt 298.4 298.4 298.4 298.4 --
------------- ------------- ------------ ------------ -----------
Total liabilities 89,881.1 90,266.9 71,923.7 57,668.7 45,638.5
------------- ------------- ------------ ------------ -----------
NFS-obligated mandatorily redeemable capital and 300.0 300.0 300.0 100.0 --
preferred securities of subsidiary trusts
Shareholders' equity 2,997.5 2,487.1 2,447.5 2,124.2 2,131.7
------------- ------------- ------------ ------------ -----------
Total liabilities and shareholders' equity $ 93,178.6 $ 93,054.0 $ 74,671.2 $ 59,892.9 $ 47,770.2
------------- ------------- ------------ ------------ -----------
Book value per common share(2) $ 23.29 $ 19.35 $ 19.04 $ 16.53 --
------------- ------------- ------------ ------------ -----------
CUSTOMER FUNDS MANAGED AND ADMINISTERED
Individual annuity $ 43,694.9 $ 44,023.7 $ 35,315.2 $ 28,156.4 $ 21,153.4
Institutional products 47,154.0 48,321.7 38,582.0 25,812.4 19,939.0
Life insurance 7,225.5 5,913.8 4,613.4 3,487.0 2,938.9
Asset management, gross 22,953.4 22,866.7 19,825.5 7,840.0 5,969.0
Less intercompany eliminations (10,031.7) (9,978.5) (8,154.4) (5,285.0) (3,832.8)
------------- ------------- ------------ ------------ -----------
Asset management, net 12,921.7 12,888.2 11,670.8 2,555.0 2,136.2
------------- ------------- ------------ ------------ -----------
$ 110,996.1 $ 111,147.4 $ 90,181.4 $ 60,010.8 $ 46,167.5
============= ============= ============ ============ ===========
Years ended December 31,
-----------------------------------------------------------------
(in millions) 2000 1999 1998 1997 1996
- ------------- ---- ---- ---- ---- ----
OPERATING INCOME BEFORE FEDERAL INCOME TAX EXPENSES
BY BUSINESS SEGMENT(1),(4)
Individual annuity $ 276.3 $ 254.4 $ 230.2 $ 186.9 $ 100.9
Institutional products 224.6 201.5 164.8 126.2 117.3
Life insurance 161.1 122.7 88.8 66.7 67.2
Asset management 4.5 22.9 14.0 11.7 8.4
Corporate (17.7) (17.7) (10.2) 4.4 34.5
---------- ---------- ---------- ---------- ----------
$ 648.8 $ 583.8 $ 487.6 $ 395.9 $ 328.3
---------- ---------- ---------- ---------- ----------
SALES BY BUSINESS SEGMENT(4)
Individual annuity $ 7,338.7 $ 6,392.3 $ 6,140.2 $ 5,636.1 $ 4,815.9
Institutional products 7,392.2 6,645.6 5,461.8 3,981.9 3,085.7
Life insurance 1,530.2 1,095.9 653.2 468.7 419.3
---------- ---------- ---------- ---------- ----------
(1) Consolidated financial dataComparisons between 2000, 1999 and 1998 results of Nationwideoperations and those of
prior years are affected by the Company's initial public offering in March
1997 and companion offerings of senior notes and capital securities as of and forwell
as the years ended
December 31, 1995 and 1994 has been restated to reflect the discontinued
operations treatmentpayment of certain Nationwide's subsidiariesspecial dividends. Pro forma amounts adjust for
these transactions.
(2) Actual earnings and lines of
business that were unrelatedbook value per common share amounts have not been
presented for 1996, because such amounts are not meaningful due to the
long-term savingseffects of initial public offering and retirement
products business. See note 15the $900.0 million of dividends paid
prior to the consolidated financial statements
herein for additional information regarding the discontinued operations
treatment.
33initial public offering.
(3) Based on net operating income and excluding accumulated other comprehensive
income.
(4) During 2000, Nationwide Financial Services, Inc. began reporting new
product segments.
32
3634
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
Management's narrative analysis and results of operations of Nationwide and
subsidiaries for the three years ended December 31, 19992000 follows. This
discussion should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this report.
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 Nationwide.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 Nationwide'sthe Company's reported net income that could
result from the adoption of certain accounting standards issued by
the FASB;Financial Accounting Standards Board;
(ii) tax law changes impacting the tax treatment of life insurance and
investment products;
(iii) heightened competition, including specifically the intensification
of price competition, the entry of new competitors and the
development of new products by new and existing competitors;
(iv) adverse state and federal legislation and regulation, including
limitations on premium levels, increases in minimum capital and
reserves and other financial viability requirements;
(v) failure to expand distribution channels in order to obtain new
customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including, among
others, development of new products and/or changes to certain
existing products and acceptance of the new and/or revised products
in the market;
(vii) changes in interest rates and the capital markets causing a
reduction of investment income and/or asset fees, reduction in the
value of Nationwide's investment portfolio or a reduction in the
demand for Nationwide'sthe 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.;organizations; and
(x) inaccuracies in assumptions regarding future persistency, mortality,
morbidity and interest rates used in calculating reserve amounts; and
(xi) failure of Nationwide's 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.amounts.
RESULTS OF OPERATIONS
In addition to net income, Nationwidethe 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.
34
37
The following table reconciles Nationwide'sthe Company's reported net income to net
operating income for each of the last three years.
(in millions of dollars)millions) 2000 1999 1998
1997------------- ---- ---- ----
Net income $405.1 $366.7 $279.7
Realized gains$ 475.3 $ 405.1 $ 366.7
Net realized losses 12.6 7.6 (18.5)
(gains) on investments,
net of tax
7.6 (18.5) (7.9)--------- --------- ---------
Net operating income $412.7 $348.2 $271.8$ 487.9 $ 412.7 $ 348.2
========= ========= =========
(i) Revenues
Total operating revenues, for 1999, excludingwhich exclude net realized gains and losses
on investments, increased to $3.00 billion in 2000 compared to $2.70
billion compared tofor 1999 and $2.45 billion for 1998 and $2.21 billion
for 1997.1998. The growth in operating
revenues over the past two years has primarily been driven by
increases in policy charges and net investment income.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of individual and group
variable annuities and variableinvestment 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 Nationwide'sthe 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
33
35
specified period of annuity and certain life insurance contracts.
Policy charges for each of the last three years were as follows:
(in millions of dollars)millions) 2000 1999 1998
1997------------- ---- ---- ----
Asset fees $616.5 $494.7 $384.8$ 714.6 $ 616.5 $ 494.7
---------- --------- ---------
Cost of insurance charges156.5 117.0 88.8
68.5charges ---------- --------- ---------
Administrative fees 134.2 102.4 73.8
59.5---------- --------- ---------
Surrender fees 86.1 59.6 41.6
32.4---------- --------- ---------
Total policy charges $895.5 $698.9 $545.2$ 1,091.4 $ 895.5 $ 698.9
========== ========= =========
The growth in asset fees reflects increases in total average separate
account assets of $16.20$11.99 billion or 32%,(21%) in 19992000 and $13.2$13.26 billion
or 35%(30%) in 1998. Record1999. Net flows into variable annuity sales and strong equityinvestment life
insurance products as well as market performanceappreciation, as measured on a
daily average basis, in each of the last three years have resulted in
the increase in average separate account balances increasing 149% from
$26.93 billion at the beginning of 1997 to $67.14 billion at the end of 1999.balances.
Cost of insurance charges are assessed as a percentage ofon the net amount at risk on
universal life insurance policies. The net amount at risk is equal to
a policy's death benefit minus the related policyholder account
value. The amount charged is based on the insured's age and other
underwriting factors. The increase in cost of insurance charges is
due primarily to growth in the net amount at risk related to
individual variable universalinvestment life insurance reflecting expanded distribution
and increased customer demand for variable life
products.acceptance by producers and consumers. The net amount
at risk related to individual variable universalinvestment life insurance grew to
$24.69 billion at the end of 2000 compared to $19.76 billion and
$14.95 billion at the end of 1999 compared to $14.95 billion
and $10.44 billion at the end of 1998, and 1997, respectively.
The growth in administrative fees is attributable to a significant
increase in premiums on individual variableinvestment life insurance policies and certain
Corporate-ownedcorporate-owned life policies where the company collects a premium
load. Nearly
allThe substantial majority of the increase in surrender charges
over the past two years is attributable to policyholder withdrawals
in the Variable AnnuitiesIndividual Annuity segment, and is driven by an overall
increase in individual variable annuity policy reserves and a
heightened competitive environment in the individual annuity
marketplace.
Net investment income includes the gross investment income earned on
investments supporting fixed annuities and certain life insurance
products as well as the yield on Nationwide'sthe Company's general account
invested assets which are not allocated to product segments.segments, net of
related investment expenses. General account assets supporting
insurance products are closely correlated to the underlying reserves
on these products. Net investment income grew from $1.41$1.48 billion and $1.48
billion in 1997 and 1998, respectively, to
$1.52 billion in 1998 and 1999, respectively, to $1.65 billion in
2000 primarily due to increased invested assets to support growth in
individual fixed annuity, institutional products and life insurance
policy reserves. Fixed annuity policyGeneral account reserves which include the
fixed option of Nationwide's variable annuitysupporting these products
increased $704.7grew by $322.0 million in 1998 and $1.69
35
38$2.09 billion in 2000 and 1999,
respectively and were $16.59$22.18 billion as of year-end 1999.at December 31, 2000. The growth in life
insurance reserves was led by corporate-owned life insurance products, where
fixed reserves increased $596.7 million in 1998 and $180.0 million in 1999. The
increasechange
in net investment income due to growthwas also impacted by average yields on
investments, which increased by 24 basis points in invested assets was partially
offset2000 and declined
by declining investment yields24 basis points in 1999 and 1998 due to lowerfollowing market interest rates.
Nationwide doesrate trends.
Realized gains and losses on investments are not consider realized gains or lossesconsidered by the
Company to be recurring components of earnings. Nationwide makes
decisions concerning the sale of invested assets based on a variety
of market, business, tax and other factors.
Other income includes fees earned by the Company's broker/dealers in
1999 and 1998, fees for investment management services, as well as
commissions and other income for marketing, distribution and
administration services.
(ii) Benefits and Expenses
Interest credited to policyholder account balances totaled $1.18
billion in 2000 compared to $1.10 billion in 1999 compared toand $1.07 billion
in 1998 and $1.02 billion in 1997 and principally relates to fixed annuityannuities, both individual
and institutional, and investment life insurance products. The growth
in interest credited reflects the increase in policy reserves
previously discussed partially offset by reducedand an overall increase in average crediting
rates.rates during 2000. The average
34
36
crediting rate on fixed annuity policy reserves in the Individual
Annuity and Institutional Products segments was 5.59%5.64% and 5.98% in
2000 compared to 5.72% and 5.72% in 1999 compared to 5.95% and 6.12%5.89% and 6.16% in 1998, and 1997,
respectively.
Amortization of deferred policy acquisition costs (DAC) increased
to$79.5 million in 2000 and $58.1 million in 1999 and $47.3 million in 1998 principally due to
the Variable
AnnuitiesIndividual Annuity segment which accounted for $38.9 million and $36.1 million of the
increases as a result of growth in the number of
policies and related policy
reservesin-force in each of the last two years.years coupled with
increased surrender activity during 2000. Amortization of DAC
increased in the Life Insurance segment as a result of growth in
policies in-force.
Operating expenses were $463.4$478.9 million in 1999,2000, a 10%3% increase from
19981999 operating expenses of $419.7$463.4 million. Operating expenses were
$384.9$419.7 million in 1997.1998. The increase reflects the growth in the
number of annuity and life insurance contracts in-force particularly related to variable annuities and
variable universal life insurance, and the
related increase in administrative processing costs. 1999 and 1998
also include costs associated with investment management activities
which were assigned to an affiliate in mid-1999.
Federal income tax expense was $201.4$207.7 million representing an
effective tax rate of 33.2%30.4% for 1999.2000. Federal income tax expense in
1999 and 1998 and 1997 was $190.4$201.4 million and $150.2$190.4 million, respectively,
representing effective rates of 34.2%33.2% and 34.9%34.2%. (iii) Year 2000
Nationwide developedAn increase in tax
exempt income 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 changeinvestment tax credits resulted 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,
Nationwide was required to renovate or replace many computer systems so that the
systems would function properly after December 31, 1999.
Nationwide completed an inventory and assessment of all computer systems.
Nationwide renovated or replaced all applications that were not compliant.
Testing of all systems included running each applicationdecrease in
a Year 2000
environment and was completed as planned during 1998. For applications being
replaced, Nationwide had all replacement systems in place and functioning as
planned by year-end 1998.
Nationwide completed an inventory and assessment of all vendor products and
tested and certified each as Year 2000 compliant. Any vendor products that could
not be certified as Year 2000 compliant were replaced or eliminated in 1998.
Nationwide's facilities in Columbus, Ohio were inventoried, assessed and tested
as being Year 2000 compliant. Mission critical systems supporting Nationwide's
infrastructure such as telecommunications, voice and networks were renovated and
brought into compliance as planned during the second quarter of 1999.
Nationwide also addressed issues associated with the exchange of electronic data
with external organizations. Nationwide completed an inventory and assessment of
all business partners utilizing electronic interfaces with Nationwide and
processes were put in place to allow Nationwide to accept data regardless of the
format. Contingency plans were completed that allow Nationwide to continue to
send or receive data in the event of failures related to electronic
transmissions.
In addition to resolving internal Year 2000 readiness issues, Nationwide
conducted a due diligence effort with external organizations, including mutual
fund organizations, financial institutions and wholesale producers. This
involved communication and
36
39
follow-up with critical business partners to determine if they will be in a
position to continue doing business in the Year 2000 and beyond. All of our
critical business partners have reported that they are compliant.
As part of its risk management strategy, Nationwide identified risk scenarios
including the identification of external risk factors that could cause business
interruptions from Year 2000 related events. These risk scenarios included
increased customer service volume, increased producer service volume, utility
failures, technology failures and disruptions in business operations, finance
and cash flow. Nationwide completed its mitigation and contingency plans to
address these risks that would, except for complete utility failure, permit
uninterrupted service to customer and producers.
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. Year 2000 activities totaled $6.4 million during 1999. The cost
associated with the completion of Year 2000 renovation and replacement and
efforts will not result in a reduction in operation expenses. Rather, personnel
and resources that were allocated to the Year 2000 issues have been reassigned
to other technology-related projects.
(iv)effective rates.
(iii) Sales Information
Sales as measured by statutory premiumsare comprised of annuities, pension plans and deposits, by distribution channel
for eachlife insurance
products sold to a wide variety of the last three years are summarized as follows:
(in millions of dollars)customer bases. The 1999 1998 1997
Independent broker/dealers $5,441.6 $5004.2 $4,976.6
National or regional brokerage firms(1) 919.3 615.3 -
Financial institutions 2,436.7 2,108.3 1,681.9
Pension plan administrators 1,169.7 1,015.8 916.7
Nationwide Retirement Solutions
sales representatives 2,549.0 2,470.1 1,937.0
Nationwide agents 965.6 959.7 630.2
Life insurance specialists 420.0 91.1 -
Total core premiums and deposits 13,901.9 12,264.5 10,142.4
Bank-owned life insurance (BOLI) 123.2 554.6 194.7
Institutional products 577.2 - -
Nationwide employee
and agent benefit plans 334.1 323.3 174.9
Total sales $14,936.4 $13,142.4 $10,512.0
(1) Prior to 1998
national and regional brokerage firm sales were included in
independent broker/dealer sales.
The 1998 and 1997 statutory premiums and deposits haveinformation has been restated to conform to the to 19992000
presentation, which better reflects multi-product sales across all
distribution channels.
Total core premiums and deposits represent amounts thatSales are recurring and arestated net of internal replacements, which in the Company's
opinion provides a more meaningful disclosure of sales. In addition,
sales figures management uses to set and evaluate Nationwide's sales goals.
Sales of institutional products represent sales ofexclude: funding agreements thatissued to secure notes issued to
foreign investors through aan unrelated third party trust under Nationwide'sthe
Company's $2 billion medium-term note program. The program was launched in
July 1999 as a means to expand spread based product offerings. Nationwide
excludes institutional productsprogram; bank-owned life
insurance (BOLI); large case pension plan acquisitions; and BOLI sales as well as deposits
into Nationwide employee and agent benefit plans from its targeted sales comparisons.plans. Although funding agreements and BOLIthese
products contribute to asset and earnings growth, they do not produce
steady production flow that lends itself to meaningful comparisons. Nationwide achieved annual core sales growth of 13%, 21%,comparisons
and 19%
in 1999, 1998 and 1997, respectively.
37
40
Nationwideare therefore excluded from sales.
The Company sells its products through a broad distribution network.
Unaffiliated entities that sell Nationwide'sthe Company's products to their own
customer base include independent broker/dealers, national and regional brokerage firms,
financial institutions, pension plan administrators, life insurance
specialists and financial institutions.Nationwide agents. Representatives of Nationwide or its affiliatesthe Company who
market products directly to a customer base identified by Nationwidethe Company
include Nationwide Retirement Solutions
sales representatives and Nationwide agents.Solutions.
Sales by distribution channel for each of the last three years are
summarized as follows:
(in millions) 2000 1999 1998
------------- ---- ---- ----
Independent
broker/dealers $ 5,933.4 $ 5,097.8 $ 4,841.8
Brokerage firms 1,183.8 900.2 601.3
Financial institutions 2,868.0 2,431.2 2,005.5
Pension plan
administrators 1,044.2 1,165.7 1,015.8
Nationwide Retirement
Solutions 2,328.6 2,470.3 2,445.9
Nationwide agents 815.8 787.9 731.8
Life insurance
specialists 711.4 420.0 91.1
The competitive environment for individual annuity sales through the
independent broker/dealer channel has become very challenging;
however, total sales through this channel (including retirement plans
and life insurance) were up 9%16% in 19992000 reflecting the strength of
Nationwide'sthe Company's multiple product strategy.strategy, appointment of new
distributors, introduction of new products and features and a broad
distribution network. Sales through financial institutions grew 16%18%
during 19992000 and 25%21% during 19981999 driven mainly by proprietary individualthe appointment of
new distributors in the bank channel and increased fixed annuity
products sales.
35
37
The increase in sales through life insurance specialists reflects
$711.4 million of COLI sales in 2000 compared to $409.2 million of corporate owned life insurance (COLI) sales in
1999 compared to $91.1 million
in 1998.1999. Nationwide Financial Services entered the COLI market in 1998 and has quickly
become a market leader through a focus on mid-sized cases. Nationwide'sThe
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)AMERICA products allow customers to choose from among
investment options managed by premier mutual fund managers. NationwideThe
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.
Nationwide36
38
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. NationwideThe Company utilizes its
sponsorship by the National Association of Counties and The United
States Conference of Mayors when marketing Internal
Revenue CodeIRC Section 457 products.
38
41
Core statutory premiumsSales by product and deposits by productsegment for each of the last three years are as follows:
(in millions of dollars) 2000 1999 1998
1997------------------------ ---- ---- ----
The BestBEST of America(R) products: $4,665.3 $4,661.1 $4,267.3AMERICA products $ 5,475.4 $ 4,639.2 $ 4,656.1
Private label annuities 1,280.3 1093.3 981.9
The NEA Valuebuilder annuities 168.5 172.6 134.8998.7 947.8 778.1
Other 880.8 727.2 307.890.9 382.5 332.9
Total individual variable annuity sales 6,565.0 5,969.5 5,767.1
Deferred fixed annuities 6,994.9 6,654.2 5,691.8534.8 332.5 315.2
Immediate fixed annuities 127.7 64.2 52.9
---------- ---------- ----------
Total individual fixed annuity sales 662.5 396.7 368.1
---------- ---------- ----------
Total individual annuity sales $ 7,227.5 $ 6,366.2 $ 3,135.2
========== ========== ==========
The BestBEST of America(R) groupAMERICA products $ 3,931.4 $ 3,537.7 $ 2,760.0
Other 47.3 83.1 41.8
Total private sector pension series 3,537.6 2,760.0 2,221.1plan sales 3,978.7 3,620.8 2,801.8
IRC Section 457 annuities 2,190.4 2,155.3 1,716.5
Other 83.1 41.8 44.32,148.8 2,190.3 2,143.0
---------- ---------- ----------
Total group annuitiespublic sector pension plan sales 2,148.8 2,190.3 2,143.0
---------- ---------- ----------
Total institutional products sales $ 6,127.5 $ 5,811.1 4,957.1 3,981.9$ 4,944.8
========== ========== ==========
The BEST of AMERICA variable life series $ 573.4 $ 425.9 $ 316.0
Corporate-owned life insurance 711.4 409.2 91.1
Traditional/Universal life insurance 245.4 260.8 246.1
248.3
The Best of America(R) variable life series 425.9 316.0 220.4
Corporate owned life insurance 409.2 91.1 ----------- ---------- ----------
Total life insurance sales $ 1,530.2 $ 1,095.9 $ 653.2
468.7
Total core premiums and deposits $13,901.9 $12,264.5 $10,142.4========== ========== ==========
BUSINESS SEGMENTS
NationwideThe Company has redefined its business segments in order to align this
disclosure with the way management currently views its core operations.
This updated view better reflects the different economics of the Company's
various businesses and also aligns well with the current market focus. The
Company has three product segments: Variable Annuities, Fixed AnnuitiesIndividual Annuity, Institutional
Products and Life Insurance. In addition, Nationwidethe Company reports certain
other revenues and expenses in a Corporate and Other segment. All information set forth below
relating1999 and 1998
amounts have been restated to Nationwide's Variable Annuities segment excludesreflect the fixed option
under Nationwide's variable annuity contracts. Such information is included in
Nationwide's Fixed Annuities segment.new business segments.
The following table summarizes operating income before federal income tax
expense for Nationwide'sthe Company's business segments for each of the last three
years:years.
(millions of dollars)(in millions) 2000 1999 1998
1997- ------------- ---- ---- ----
Operating income:
Variable annuity $290.3 $218.4 $150.9
Fixed annuity 177.2 175.3 169.5Individual Annuity $ 281.7 $ 259.2 $ 231.5
Institutional Products 230.7 217.8 180.4
Life insuranceInsurance 152.9 120.8 88.8
66.7
Corporate and other 29.8 46.2 31.737.1 20.3 28.0
========= ========= =========
Operating income before
federal income tax expense $ 702.4 $ 618.1 $528.7 $418.8$ 528.7
37
39
42
(i) Variable AnnuitiesIndividual Annuity
The Variable AnnuitiesIndividual Annuity segment consists of both variable and fixed
annuity contracts. Individual annuity contracts thatprovide the customer
with tax-deferred accumulation of savings and flexible payout options
including lump sum, systematic withdrawal or a stream of payments for
life. In addition, variable annuity contracts provide the customer
with access to a wide range of investment options tax-deferred
accumulation of savings,and asset
protection in the event of an untimely death, and
flexible payout options includingwhile fixed annuity
contracts generate a lump sum, systematic withdrawal orreturn for the customer at a stream
of paymentsspecified interest
rate fixed for life. Nationwide's variablea prescribed period. The Company's individual annuity
products consist almost
entirely of single premium deferred annuities, flexible
premium deferred variable annuity contracts.annuities and single premium immediate annuities.
The following table summarizes certain selected financial data for Nationwide's
Variable AnnuitiesIndividual Annuity segment for the years indicated:indicated.
(in millions of dollars)millions) 2000 1999 1998
1997- ------------- ---- ---- ----
INCOME STATEMENT DATA:
RevenuesDATA
Revenues:
Policy charges $ 626.7573.2 $ 501.6484.6 $ 387.1389.5
Net investment income 483.2 458.9 431.7
Premiums on immediate annuities 52.7 26.8 23.1
------------ ------------ ------------
1,109.1 970.3 844.3
Benefits and Expenses 336.4 283.2 236.2expenses:
Interest credited to policyholder account balances 396.4 384.9 357.9
Amortization of DAC 238.7 170.9 129.2
Other benefits 54.0 23.8 22.5
Other operating expenses 138.3 131.5 103.2
------------ ------------ ------------
827.4 711.1 612.8
------------ ------------ ------------
Operating income before federal income tax expense $ 290.3281.7 $ 218.4259.2 $ 150.9231.5
============ ============ ============
OTHER DATA:
Statutory premiums and deposits(1)DATA
Sales:
Individual variable annuities $ 9,916.06,565.0 $ 9,543.35,969.5 $ 7,535.8
Policy reserves5,767.1
Individual fixed annuities 662.5 396.7 368.1
------------ ------------ ------------
Total individual annuity sales $ 7,227.5 $ 6,366.2 $ 6,135.2
============ ============ ============
Average account balances:
Separate account $ 37,934.0 $ 31,929.2 $ 25,563.9
General account 6,942.9 6,712.5 6,072.8
------------ ------------ ------------
Total average account balances $ 44,876.9 $ 38,641.7 $ 31,636.7
============ ============ ============
Account balances as of year endend:
Individual variable annuities $ 61,197.239,621.9 $ 46,420.840,274.7 $ 34,486.732,029.2
Individual fixed annuities 3,941.8 3,722.2 3,280.9
------------ ------------ ------------
Total account balances $ 43,563.7 $ 43,996.9 $ 35,310.1
============ ============ ============
Return on average equity 20.4% 19.7% 20.2%
Pre-tax operating income to average policy reserves 0.55% 0.54% 0.51%account balances 0.63% 0.67% 0.73%
(1) Statutory data, have been derived from the Annual Statements of
Nationwide's life insurance subsidiaries, as filed with insurance
regulatory authorities and prepared in accordance with statutory
accounting practices.38
40
Pre-tax operating earnings reached a record $290.3$281.7 million in 1999,2000, up 33%9%
compared to 1999 earnings of $259.2 million, which were up 12% from
1998. Improved Variable Annuity segment results are primarily due to growth in asset
fees partially offset by increased DAC amortization.
Asset fees were $596.6$478.5 million in 2000 up 15% from $415.0 million in
1999 up 25% from $479.1and totaled $337.8 million in 1998 and
totaled $370.2 million in 1997.1998. Asset fees are calculated
daily and charged as a percentage of policy
reserves whichseparate account reserves.
Average separate account assets have increased substantially in the
past three years as a result of strong net cash flows and through market appreciation on investments
underlying reserves. Variable annuity policy reserves grew $14.78 billion during
1999 reaching $61.20 billion asand net flows
of year end 1999 compared to growth in 1998 of
$11.93$675.2 million, $1.28 billion and year end$3.08 billion in 2000, 1999 and
1998, reserves of $46.42 billion. During 1997, policy
reserves increased $10.21 billion.
Salesrespectively. While separate account assets reflect market
depreciation in 1999 of $9.92 billion offset by withdrawals and surrenders totaling
$6.52 billion generated net cash flows of $3.40 billion. Although 1999 net cash
flows are down from the $5.28 billion and $4.85 billion achieved in 1998 and
1999, respectively, Nationwide has shown the ability to consistently generate2000, there was substantial positive cash flows and increase its base of asset fee generating
reserves in a very competitive environment. The increase in withdrawal and
surrender activity is attributable to an increase in competitionmarket appreciation in
the individual variable annuity market which has increased transfers to competitor's
products and the overall aging of Nationwide's book of individual annuity
business. Nationwide will introduce new products, new product features and new
retention strategies during 2000 in an effort to decrease the rate of
surrenders. Although the equity markets have been more volatile in recent years,
equity market conditions over eachfirst half of the past three years haveyear, which contributed
significantly to the growth in
variable annuity policy reserves. Variable
annuity policy reserves reflect market appreciation of $10.55 billion, $6.80
billion and $5.21 billion in 1999, 1998 and 1997, respectively.average separate account assets.
Amortization of DAC increased 31%40% to $162.8$238.7 million in 2000 compared
to $170.9 million and $129.2 million in 1999 compared to $123.9
million and $87.8 million in 1998, and 1997, respectively.
The growth in DAC amortization is consistent with the overall growth
in the variableindividual annuity business.
Efficiencies achieved through improved operating scale have enabled Nationwide
to improve operating margins to 55 basis point of average policy reserves, up
from 54 basis points in 1998business and 51 basis points in 1997.
40
43
(ii) Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that generate a return
for the customer at a specified interest rate for a prescribed period,
tax-deferred accumulating of savings and flexible payout options including a
lump sum, systematic withdrawal or a stream of payments for life. 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 Nationwide's variable annuity contracts.
The following table summarizes certain selected financial data for Nationwide's
Fixed Annuities segment for the years indicated:
(in millions of dollars) 1999 1998 1997
INCOME STATEMENT DATA:
Revenues:
Net investment income $1,134.5 $1,116.6 $1,098.2
Other 43.4 35.7 43.2
1,117.9 1,152.3 1,141.4
BENEFITS AND EXPENSES:
Interest credited to policyholder account 837.5 828.6 823.4
balances
Other benefits and expenses 163.2 148.4 148.5
1,000.7 977.0 971.9
Operating income before federal income tax expense $177.2 $175.3 $169.5
OTHER DATA:
Statutory premiums and deposits (1) $3,467.2 $2,068.0 $2,137.9
Policy reserves as of year end $16,591.9 $14,898.9 $14,194.2
Pre-tax operating income to average policy reserves 1.14% 1.21% 1.22%
(1)Statutory data have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Fixed annuities segment results reflect an increase in interest spread income
attributable to growth in fixed annuity policy reserves offset by narrower
interest margins during 1999. Interest spread is the differential between net
investment income and interest credited to policyholder account balances.
Interest spreads vary depending on crediting rates offered by competitors,
performance of the investment portfolio, including the rate of prepayments
changes in market interest rates and other factors.surrender
activity.
The following table depicts the interest marginsspread on average general
account policy reserves in the Fixed AnnuitiesIndividual Annuity segment for each of the
last three years.
2000 1999 1998
1997---- ---- ----
Net investment income 7.57% 8.02% 8.16%7.88% 7.58% 7.77%
Interest credited 5.59% 5.95% 6.12%
1.98% 2.07% 2.04%5.64 5.72 5.89
Interest spread 2.24% 1.86% 1.88%
41
44
During 1998 and 1999 the first half of 1999, NationwideCompany experienced an increase in mortgage
loan and bond prepayment fees and such income accounted for
approximately 94 basis points of the interest spread in 19992000 compared
to 167 basis points and 811 basis points in 1999 and 1998, and 1997, respectively.
The recent increasesIncreases in interest rates havein early 2000 generated higher net
investment income and slowed prepayment activity and Nationwide expects
interest spreads to remain at 190 to 195 basis points, excluding the impact of
mortgage loan and bond prepayment income.
Nationwideactivity.
The Company is able to mitigate the effects of changes in investment
yields by periodically resetting the rates credited on fixed
features of individual annuity contracts. As of December 31, 1999, $7.28 billion, or 44% of2000,
individual fixed annuity policy reserves were
in contracts where the guaranteed interest rate is reestablished each quarter.
Fixedand fixed option of
variable annuity policy reserves of $5.89$2.42 billion and $2.50 billion,
respectively, are in contracts that adjust the crediting rate
on an annual basisperiodically with portions resetting in each calendar quarter. NationwideThe
Company also has $1.39 billion$398.7 million of fixed option of variable annuity
policy reserves related to private label annuities that call for the
crediting rate to be reset annually on each January 1 and $1.45$1.52
billion of individual fixed annuity policy reserves that are in
payout status where Nationwidethe Company has guaranteed periodic, typically
monthly, payments.
Led by variable product deposits of $8.20 billion and withdrawals and
surrenders of $5.98 billion, Individual Annuity segment deposits in
2000 of $8.87 billion offset by withdrawals and surrenders totaling
$6.47 billion generated net flows of $2.40 billion compared to the
$2.83 billion and $3.63 billion achieved in 1999 and 1998,
respectively. Despite the competitive nature of the individual
annuity market, the Company has demonstrated the ability to generate
positive net flows by leveraging its broad distribution network and
innovative product development resources. The Company successfully
introduced new products, features and retention strategies during
2000.
Changes in the Company's products, including the introduction of new
products with reduced policy charges have slightly decreased the
ratio of asset fees to average separate account assets within the
segment. This ratio was 1.26% in 2000 compared to 1.29% and 1.30% in
1999 and 1998, respectively.
The decrease in pre-tax operating income to average assets in 2000
and 1999 is primarily driven by the mix of products, which is
demonstrated by average separate account assets accounting for 84.4%,
82.6% and 80.8% of total average account balances in 2000, 1999 and
1998, respectively. Higher sales of trail commission individual
variable annuities and increased amortization of policy acquisition
costs are also impacting margins.
39
41
Individual Annuity sales, which exclude internal replacements, during
2000 were $7.23 billion compared to sales of $6.37 billion in 1999
and $6.14 billion in 1998. Sales growth in 2000 was driven by The
BEST of AMERICA variable annuities and reflects the successful
introduction of the Extra Value rider, which accounted for $2.65
billion of sales. In addition, sales of deferred fixed annuities
increased 61% to $534.8 million driven by additional bank
distribution.
(ii) Institutional Products
The Institutional Products segment is comprised of the Company's
group pension and payroll deduction business, both public and private
sectors, and medium-term note program. The public sector includes the
457 business in the form of fixed and variable annuities. The private
sector includes the 401(k) business generated through fixed and
variable annuities. The sales figures do not include business
generated through the Company's medium-term note program, large case
pension plan acquisitions and Nationwide employee and agent benefit
plans, however the income statement data does reflect this business.
The following table summarizes certain selected financial data for the Company's
Institutional Products segment for the years indicated.
(in millions) 2000 1999 1998
- ------------- ---- ---- ----
INCOME STATEMENT DATA
Revenues:
Asset fees $ 220.2 $ 190.3 $ 149.0
Net investment income 827.4 771.2 784.7
Other 31.4 21.6 18.8
1,079.0 983.1 952.5
Benefits and expenses:
Interest credited to policyholder account balances 628.8 580.9 595.7
Other benefits and expenses 219.5 184.4 176.4
------------ ------------ ------------
848.3 765.3 772.1
------------ ------------ ------------
Operating income before federal income tax expense $ 230.7 $ 217.8 $ 180.4
============ ============ ============
OTHER DATA
Sales:
Private sector pension plans $ 3,978.7 $ 3,620.8 $ 2,801.8
Public sector pension plans 2,148.8 2,190.3 2,143.0
------------ ------------ ------------
Total individual institutional products sales $ 6,127.5 $ 5,811.1 $ 4,944.8
============ ============ ============
Average account balances:
Separate account $ 27,806.7 $ 22,350.3 $ 16,995.4
General account 10,521.2 10,147.7 9,667.4
------------ ------------ ------------
Total average account balances $ 38,327.9 $ 32,498.0 $ 26,662.8
============ ============ ============
Account balances as of year end:
Private sector pension plans $ 18,001.4 $ 19,246.2 $ 14,568.8
Public sector pension plans 17,294.5 18,949.2 15,801.4
Medium-term notes 1,627.7 574.5 --
------------ ------------ ------------
Total account balances $ 36,923.6 $ 38,769.9 $ 30,370.2
============ ============ ============
Return on average equity 24.2% 24.5% 22.0%
Pre-tax operating income to average account balances 0.59% 0.65% 0.66%
40
42
Institutional Products segment earnings growth in 2000 and 1999 was
driven by higher asset fees from 24% and 32% increases in average
separate account assets in 2000 and 1999, respectively. Net
investment income increased $56.2 million in 2000 to $827.4 million,
following a decline in 1999 of $13.5 million to $771.2 million. The
change in net investment income was driven by higher average general
account assets in each year and an increase in average investment
yields in 2000 and a decrease in average investment yields in 1999.
The increase in interest credited in 2000 is primarily the result of
a 4% increase in average general account reserves and an increase in
the average crediting rate of 26 basis points. The decrease in
interest credited in 1999 is primarily the result of a 44 basis point
decrease in the average interest-crediting rate reflecting lower
market rates, offset by a 5% increase in average general account
reserves. Higher operating expenses in 2000 reflect the significant
technology investments made as part of the new business model in the
public sector business.
The following table depicts the interest spread on average general
account reserves in the Institutional Products segment for each of
the last three years.
2000 1999 1998
---- ---- ----
Net investment 7.86% 7.60% 8.12%
income
Interest credited 5.98 5.72 6.16
Interest spread 1.88% 1.88% 1.96%
During 1998 and 1999 the Company experienced an increase in mortgage
loan and bond prepayment fees and such income accounted for
approximately 4 basis points of the interest spread in 2000 compared
to 8 basis points and 22 basis points in 1999 and 1998, respectively.
Increases in interest rates in early 2000 generated higher net
investment income and slowed prepayment activity.
The Company is able to mitigate the effects of changes in investment
yields by periodically resetting the rates credited on fixed features
sold through group annuity contracts. Fixed annuity policy reserves
in the Institutional Products segment as of December 31, 2000,
included $7.03 billion in contracts where the guaranteed interest
rate is reestablished each quarter and $545.9 million in contracts
that adjust the crediting rate periodically with portions resetting
in each calendar quarter. In this segment, the Company also has
$809.4 million of fixed option of variable annuity policy reserves
that call for the crediting rate to be reset annually on January 1.
The remaining $574.5
million$1.63 billion of fixed annuity policy reserves relate
to funding agreements issued in conjunction with Nationwide'sthe Company's
medium-term note program where the crediting rate is either fixed for
the term of the contract.
Fixed annuitycontract or variable, based on an underlying index.
Institutional Products segment deposits in 2000 of $6.33 billion
offset by participant withdrawals and surrenders totaling $5.59
billion generated net flows from participant activity of $738.9
million. Net flows in 2000 are down from the $1.55 billion and $2.00
billion achieved in 1999 and 1998, respectively. Net case
(terminations) acquisitions were ($1.32) billion in 2000, $810.8
million in 1999 and none in 1998. The increase in net terminations in
2000 reflects the increasingly competitive environment particularly
in the public sector market.
Changes in the Company's products, including the introduction of new
institutional products with reduced policy reserves increasedcharges, and the mix of
business have slightly decreased the ratio of asset fees to $16.59 billion as of year-endaverage
separate account assets within the segment. This ratio was 0.79% in
2000 compared to $14.90 billion0.83% and 0.86% in 1999 and 1998, respectively.
The Company has recently experienced decreases in pre-tax operating
income to average account balances, which reached 0.59% in 2000,
compared to 0.65% in 1999 and to 0.66% in 1998. The decreases were
primarily driven by a year agochange in the mix of products, including new
products with reduced policy charges and $14.19 billion as of the end of 1997.
The 1999 growth reflects increased sales levels as well as the acquisition of
Employers Life of Wausau.
Fixed annuityin separate
account products.
Institutional Products sales during 1999 were $3.472000 reached $6.13 billion
compared to 1998 sales of $2.07 billion. Sales$5.81 billion in 1999 include $577.2 million of funding agreements issued
in conjunction with Nationwide's medium-term note program.
Most of Nationwide's fixed annuity sales are premiums allocated to the fixed
option of variable annuity contracts. Fixed annuity sales for 1999 include $2.49and $4.94 billion in
premiums allocated41
43
1998. The growth in each year is primarily attributable to the fixed option under a variable annuity
contract, compared to $1.68 billionprivate
sector plans. The independent broker/dealer, brokerage firms and
financial institutions channels all reported sales growth in 1998 and $1.67 billion in 1997. The
increase in 1999 was driven by Nationwide's dollar cost averaging program that
offers customers a first year bonus interest rate and transfers the account
balance systematically to variable options over a six or twelve month period.excess
of 10 percent each year.
(iii) Life Insurance
The Life Insurance segment consists of insurance products, including
variable
universal life insurance, COLI and corporate-owned life insuranceBOLI products, thatwhich provide a
death benefit and also allow athe customer to build cash value on a
tax-deferredtax-advantaged basis.
42
45
(ii) Life Insurance
The following table summarizes certain selected financial data for Nationwide'sthe Company's
Life Insurance segment for the years indicated.
(in millions of dollars)millions) 2000 1999 1998
1997- ------------- ---- ---- ----
INCOME STATEMENT DATA
Revenues $646.1 $544.1 $468.3Revenues:
Total policy charges $ 266.6 $ 199.0 $ 141.6
Other 476.5 447.1 402.5
743.1 646.1 544.1
Benefits and389.3 359.5 308.3
Operating expenses 200.9 165.8 147.0
---------- ---------- ----------
590.2 525.3 455.3
401.6---------- ---------- ----------
Operating income before federal income tax expense $120.8 $88.8 $66.7$ 152.9 $ 120.8 $ 88.8
========== ========== ==========
OTHER DATA
Statutory premiums(1):
Variable universalSales:
The BEST of AMERICA variable life insurance $426.0 $315.9 $220.3series $ 573.4 $ 425.9 $ 316.0
Corporate-owned life insurance 532.3 645.8 194.7
Traditional & universal711.4 409.2 91.1
Traditional/Universal life insurance 245.4 260.8 246.1
248.4---------- ---------- ----------
Total life insurance sales $ 1,530.2 $ 1,095.9 $ 653.2
========== ========== ==========
Policy reserves as of year end:
Variable universalIndividual investment life insurance $1,832.3 $1,270.1 $895.6
Corporate-owned$ 2,092.0 $ 1,832.3 $ 1,270.1
Corporate investment life insurance $1,498.6 $903.6 $221.92,552.3 1,498.6 903.6
Traditional and universal life insurance $2,582.9 $2,439.7 $2,369.51,813.0 1,787.0 1,689.4
Universal life insurance 768.2 795.9 750.3
---------- ---------- ----------
Total policy reserves $ 7,225.5 $ 5,913.8 $ 4,613.4
========== ========== ==========
Return on average equity 11.5% 11.0% 8.9%
(1)Statutory data have been derived from the Annual Statements of Nationwide's
life insurance subsidiaries, as filed with insurance regulatory authorities
and prepared in accordance with statutory accounting practices.
Life Insurance segment earnings in 19992000 increased 36%27% to $120.8$152.9
million, up from $88.8$120.8 million a year ago and $66.7$88.8 million in 1997.1998.
Continued strong sales and reserve growth from both individual and
corporate owned investment life insurance products contributed to the sharp
earnings increases.
Driven primarily by increased policy charges, revenues from
investment life products increased to $322.4 million in 2000 compared
to $226.5 million in 1999 compared toand $145.4 million in 1998
and $69.8 million 1997.1998. The revenue
growth reflects significantly increased policy reserve levels as
individual investment life reserves increased 44%14% in 19992000 to $1.83$2.09
billion compared to $1.27$1.83 billion a year ago and $895.6 million$1.27 billion at the
end of 1997.1998. Corporate owned investment life reserves, which include both
BOLICOLI and corporate-owned (COLI)BOLI products, reached $1.50$2.55 billion, up from $903.6
million$1.50 billion
and $221.9$903.6 million at the end of 19981999 and 1997,1998, respectively.
Pre-tax earnings from investment life products reached $53.4$85.3 million
1999in 2000 compared to $29.6$53.4 million a year ago and $14.7$29.6 million in
1997.1998. The strong revenue growth discussed previously more than offset
increased operating expenses and slightly elevated mortality experience, which continues to remain
within pricing assumptions.
Traditional and universalassociated with the growth in business.
Traditional/Universal life pre-tax earnings jumped 14%slightly increased to
$67.6 million in 2000 compared to $67.4 million in 1999 compared toand were
42
44
$59.2 million in 1998 and were $52.0 million in 1997.1998. The 1998 results reflect additional expenses
related to the installation of a new policy administration system.
Total life insurance premiumssales, excluding all BOLI and deposits for 1999 were $1.22Nationwide
employee and agent benefit plan sales increased 40% to $1.53 billion
in 2000 compared to $1.21$1.10 billion during 1998 and $663.4 million in 1997. Excluding BOLI sales of
$123.2 million in 1999 and $554.7$653.2 million in 1998, life insurance sales
increased 68% in 1999 and 39% in
1998. Sales in 19992000 include record levels of production for
individual variableinvestment life insurance and COLI, reflecting Nationwide'sthe
Company's efforts to sell variable life through multiple channels and growing
producer and consumer and producer demand.acceptance of these product offerings.
(iv) Corporate
The Corporate segment includes net investment income not allocated to
the three product segments, unallocated expenses and Otherinterest expense
on short-term borrowings. 1999 and 1998 results also include
investment management activities associated with Nationwide mutual
funds. During 1999, these investment management activities were
assigned to an affiliate. In addition to these operating revenues and
expenses, the Company also reports net realized gains and losses on
investments in the Corporate segment.
The following table summarizes certain selected financial data for
Nationwide'sthe Company's Corporate and Other segment for the years indicated:
43
46indicated.
(in millions of dollars)millions) 2000 1999 1998
1997- ------------- ---- ---- ----
INCOME STATEMENT DATA
Revenues $252.5Operating revenues $ 249.372.1 $ 209.5
Benefits and103.7 $ 106.4
Operating expenses 222.7 203.1 177.835.0 83.4 78.4
Operating income $ 37.1 $ 20.3 $ 28.0
before federal income
tax expense(1) $29.8 $ 46.2 $ 31.7expense1
(1)1 Excludes net realized gains (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 employee and agent benefit plans. During 1999, Nationwide assigned
its investment advisory and related agreements associated with Nationwide mutual
funds to an affiliate.investments
In addition to the operating revenue previouslyrevenues presented Nationwidein the table above,
the Company also reports net realized gains and losses on investments
in the Corporate and Other
segment. NationwideThe Company realized net investment
(losses) gains of $(11.6)($19.4) million, ($11.6) million and $28.4 million
during 2000, 1999 and $11.11998, respectively. During 2000 the Company
recognized a total of $19.4 million during 1999, 1998 and 1997, respectively.
44
47of realized losses on three fixed
maturity security holdings.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(i) Market Risk Sensitive Financial Instruments
NationwideMARKET RISK SENSITIVE FINANCIAL INSTRUMENTS
The Company is subject to potential fluctuations in earnings and the fair
value of certain of its assets and liabilities, as well as variations in
expected cash flows due to changes in market interest rates and equity
prices. The following discussion focuses on specific exposures Nationwidethe Company
has to interest rate and equity price risk and describes strategies used to
manage these risks. The discussion is limited to financial instruments
subject to market risks and is not intended to be a complete discussion of
all the risks Nationwide is exposed to.
(ii)(i) Interest Rate Risk
Fluctuations in interest rates can potentially impact Nationwide'sthe Company's
earnings, and cash flows, and the fair value of its assets and liabilities.
Generally, in a declining interest rate environment, Nationwidethe Company may be
required to reinvest the proceeds from matured and prepaid investments
at rates lower than the overall yield of the portfolio, which could
reduce interest spread income. In addition, minimum guaranteed crediting
rates (typically 3%3.0% or 3.5%) on certain annuity contracts could result
in a reduction of Nationwide'sthe Company's interest spread income in the event of a
significant and prolonged decline in interest rates from market rates at
the end of 1999.2000. The average crediting rate of fixed annuity products
during 19992000 was 5.59%,5.64% and 5.98% for the Individual Annuity and
Institutional Products segments, respectively, well in excess of the
guaranteed rates. NationwideThe Company mitigates this risk by investing in assets
with maturities and durations that match the expected characteristics of
the liabilities and by investing in mortgage backedmortgage- and asset-backed
securities with limited prepayment exposure.
Conversely, a rising interest rate environment could result in a
reduction of interest spread income or an increase in policyholder
surrenders. InvestmentsExisting general account investments supporting annuity
liabilities generally have a weighted average maturity of
seven43
45
approximately 4.5 years when purchasedas of December 31, 2000 and therefore, the
change in yield of the portfolio will lag changes in market interest
rates. This lag is increased if the rate of prepayments of mortgage-backed securities
slows. To the extent Nationwidethe Company sets renewal rates based on current
market value rates, this will result in reduced interest spreads.
Alternatively, if Nationwidethe Company sets renewal crediting rates while
attempting to maintain a desired spread from the portfolio yield, the
rates offered by Nationwidethe Company may be less than new money rates offered by
competitors. This difference could result in an increase in surrender
activity by policyholders. If Nationwidethe Company could not fund the surrenders
with its cash flow from operations, Nationwidethe Company may be required to sell
investments, which likely would have declined in value due to the
increase in interest rates. NationwideThe Company mitigates this risk by offering
products that assess surrender charges or market value adjustments at
the time of surrender, by investing in assets with maturities and
durations that match the expected characteristics of the liabilities,
and by investing in mortgage-backedmortgage- and asset-backed securities with limited
prepayment exposure.
(iii)(ii) Asset/Liability Management Strategies to Manage Interest Rate Risk
NationwideThe Company employs an asset/liability management approach tailored to
the specific requirements of each of its products. Nationwide's general
account investments are primarily managed in a number of pools that are
segregated by weighted averageEach product line has
an investment strategy based on its specific characteristics. The
strategy establishes asset maturity of the assets acquired by the
pools.and duration, quality and other
guidelines. For fixed maturity securities and mortgages, the weighted
average maturity is based on repayments, which are scheduled to occur
under the terms of the asset. For mortgage backedmortgage- and asset-backed securities,
repayments are determined using the current rate of repayment of the
underlying mortgages or assets and the terms of the securities.
Each product line has an
investment strategy based on its specific characteristics. The strategy
establishes asset duration, quality and other guidelines. Nationwide
determines the amount of new investments needed for each line to arrive
at the amount of new investments needed for each pool by month. The
investments acquired for each pool are shared on a proportional basis by
each of the lines requesting investments in the pool based on their
actual investment needs.
For all businessindividual immediate annuities having future benefits which cannot
be changed at the option of the policyholder, the underlying assets are
managed in a separate pool. The duration of assets and liabilities in
this pool are kept as close together as possible. For assets, the
repayment cash flows, plus anticipated coupon payments, are used in
calculating asset duration. Future 45
48
benefits and expenses are used for
liabilities. OnAs of December 31, 1999,2000, the average duration of assets in
this pool as 7.09was 7.40 years and the average duration of the liabilities was
7.417.51 years. PolicyIndividual immediate annuity policy reserves on this
business were $1.5$1.52 billion as of December 31, 1999.2000.
Because the timing of the payment of future benefits on the majority of
Nationwide'sthe Company's business can be changed by the policyholder, Nationwidethe Company
employs cash flow testing techniques in its asset/liability management
process. In addition, each year Nationwide'sthe Company's annuity and insurance
business is analyzed to determine the adequacy of the reserves
supporting such business. This analysis is accomplished by projecting
the anticipated cash flows from such business and the assets required to
support such business under a number of possible future interest rate
scenarios. The first seven7 of these scenarios are required by state
insurance regulation. Projections are also made using 1411 additional
scenarios, which involve more extreme fluctuations in future interest
rates.rates and equity markets. Finally, to get a statistical analysis of
possible results and to minimize any bias in the 2118 predetermined
scenarios, additional projections are made using 50 randomly generated
interest rate scenarios. For Nationwide's 1999the Company's 2000 cash flow testing
process, interest rates for 90-day treasury bills ranged from 0.73%1.02% to
11.98%12.99% under the 2118 predetermined scenarios and 1.44%0.39% to 18.53%28.48% under
the 50 random scenarios. Interest rates for longer maturity treasury
securities had comparable ranges. The values produced by each projection
are used to determine future gains or losses from Nationwide'sthe Company's annuity
and insurance business, which, in turn, are used to quantify the
adequacy of Nationwide'sthe Company's reserves over the entire projection period.
The results of Nationwide'sthe Company's cash flow testing indicated that Nationwide'sthe
Company's reserves were adequate as of December 31, 1999.2000.
44
46
49
(iv)(iii) Characteristics of Interest Rate Sensitive Financial Instruments
The following table provides information about Nationwide'sthe Company's financial
instruments as of December 31, 2000 that are sensitive to changes in
interest rates. Insurance contracts that subject Nationwidethe Company to
significant mortality risk, including life insurance contracts and
life-contingent immediate annuities, do not meet the definition of a
financial instrument and are not included in the table.
45
47
1999
(in millions of dollars) 2000 2001 2002 2003 2004 2005 Thereafter Total Fair Value Fair Value
- ------------------------ ---- ---- ---- ---- ---- ---------- ----- ---------- ----------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,088.8 $1,669.0 $1,674.3 $1,047.6 $971.6 $3,100.3 $9,551.6 $9,536.5$1,578.1 $1,565.5 $1,169.1 $1,018.9 $1,313.1 $3,388.1 $10,032.8 $ 9,858.2 $ 9,536.5
Average interest rate 7.5% 7.4% 7.1% 7.1%7.4% 7.2% 7.9%7.4% 7.6% 8.2% 7.7%
Mortgage and other
asset-backed securities:
Principal $997.2 $920.5 $761.0 $551.8$1,193.7 $ 448.8 $1,606.6991.3 $ 5,285.9725.7 $ 555.5 $ 431.1 $1,295.5 $ 5,192.8 $ 5,169.7 $ 5,196.9
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.4% 7.5% 7.6% 7.8% 7.8% 7.8%
Other fixed maturity
securities:
Principal $76.4 $70.3 $107.7 $34.0 $43.9 $207.5 $539.8 $560.6$ 56.0 $ 8.8 $ 26.1 $ 49.0 $ 12.3 $ 346.4 $ 498.6 $ 415.1 $ 560.6
Average interest rate 6.4% 6.0% 7.0% 7.8% 6.5%10.9% 8.3% 7.9% 7.6% 8.0% 7.9%
Mortgage loans on real estate:
Principal $292.8 $270.9 $369.9 $391.2 $483.2 $4,024.5 $5,832.5 $5,745.5$ 253.6 $ 393.8 $ 487.5 $ 488.2 $ 776.9 $3,812.4 $ 6,212.4 $ 6,327.8 $ 5,745.5
Average interest rate 9.00% 8.3%8.7% 8.6% 7.8% 7.7% 7.8%8.1% 7.9% 8.2% 7.9% 8.0%
LIABILITIES
Deferred fixed annuities:
Principal $2,076.0 $1,646.0 $1,448.0 $1,286.0 $1,149.0 $9,626.8 $17,231.8 $16,674.6$2,239.0 $1,495.0 $1,282.0 $1,105.0 $ 964.0 $9,404.9 $16,430.3 $15,697.8 $16,197.4
Average credited rate 5.5% 5.4% 5.4% 5.4% 5.4% 5.5%5.8% 5.8% 5.9% 6.0% 6.1% 6.2% 6.1%
Immediate annuities:
Principal $27.0 $24.0 $21.0 $19.0 $17.0 $123.0 $231.0 $237.8$ 45.0 $ 41.0 $ 35.0 $ 32.0 $ 28.0 $ 204.0 $ 385.0 $ 282.0 $ 237.8
Average credited rate 7.2% 7.2% 7.2% 7.2% 7.3% 7.3% 7.3%
Short-term borrowings:
Principal $ 120.0 -- -- -- -- -- $ 120.0 $ 118.7 --
Average interest rate 6.5% -- -- -- -- -- 6.5%
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value - - $15.0 $16.0 $90.8 $240.9 $362.7 $4.8-- $ 30.0 $ 62.5 $ 133.9 $ 290.6 $ 417.8 $ 934.8 $ (21.3) $ 4.8
Weighted average pay rate - - 2.7%-- 4.1% 6.7% 6.8% 6.4% 6.9% 6.6% 6.8% 6.9%
Weighted average receive - - 7.5% 6.1% 6.1% 6.2%-- 7.8% 6.6% 6.7% 7.0% 6.8% 6.9%
rate
Pay variable/receive fixed
Notional value - - - - $320.4 $285.3 $605.7 $(25.3)-- $ 5.0 $ 28.1 $ 343.4 $ 394.2 $ 293.5 $ 1,064.2 $ (32.1) $ (25.3)
Weighted average pay rate - - - - 6.4% 6.5%-- 6.8% 6.9% 7.0% 7.1% 7.0% 7.1%
Weighted average receive - - - - 3.0%-- 7.0% 4.0% 3.1% 2.6% 5.4% 3.6%
rate
Pay variable/receive
variable
Notional value -- -- $ 375.9 $ 9.0 $ 316.0 $ 30.0 $ 730.9 $ 5.2 --
Weighted average pay rate -- -- 6.9% 6.9% 6.8% 7.2% 6.9%
Weighted average receive -- -- 4.0% 6.8% 5.0% 7.4% 4.6%
rate
Interest rate futures:
Long positions
Contract amount/notional $ 36.0 $ 34.0 $ 6.0 $ 4.0 $ 1.0 -- $ 81.0 $ 0.3 --
Weighted average
settlement price $ 92.8 $ 92.8 $ 92.5 $ 92.3 $ 92.3 -- $ 92.8
Short positions
Contract amount/notional $323.6 $256.0 $168.0 $22.0 $9.0 $3.0 $781.6 $1.3$1,685.8 $1,349.0 $ 922.0 $ 696.0 $ 403.0 $ 523.0 $ 5,578.8 $ (16.3) $ 1.3
Weighted average
settlement price $94.4 $93.4 $93.2 $93.0 $92.8 $92.6$ 93.5 $ 93.0 $ 93.0 $ 92.9 $ 92.8 $ 92.6 $ 93.0
4746
50
The following table provides information about Nationwide's financial
instruments as of December 32, 1998 that are sensitive to charges in
interest rates.
(in millions of dollars) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 1,092.7 $1,049.2 $1,667.6 $1,386.3 $882.7 $2,864.0 $8,942.5 $9,364.2
Average interest rate 8.0% 7.5% 7.3% 7.2% 7.0% 7.6%
Mortgage and other
asset-backed securities:
Principal $905.3 $964.3 $870.7 $588.9 $367.3 $718.3 $4,414.8 $4,499.4
Average interest rate 7.3% 7.4% 7.2% 7.4% 7.4% 7.0%
Other fixed maturity
securities:
Principal $7.8 $72.0 $54.6 $103.3 $60.6 $65.7 $364.0 $381.5
Average interest rate 8.5% 6.4% 7.0% 6.6% 6.9% 6.8%
Mortgage loans on real estate:
Principal $185.9 $373.9 $313.1 $339.5 $408.8 $3,749.6 $5,370.8 $5,527.6
Average interest rate 9.2% 9.3% 7.0% 8.5% 7.6% 7.1%
LIABILITIES
Deferred fixed annuities:
Principal $1,639.6 $1,548.3 $1,733.7 $1,232.5 $1,169.6 $8,270.7 $15,594.4 $15,282.0
Average credited rate 5.2% 4.8% 4.5% 4.3% 4.1% 4.1%
Immediate annuities:
Principal $20.6 $20.7 $22.3 $25.2 $29.9 $53.1 $171.8 $201.6
Average credited rate 7.3% 7.3% 7.3% 7.3% 7.4% 7.4%
48
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the
table above are as follows:
MortgageMortgage- and other asset-backed securities (MBSs)(MBSs and ABSs): The maturity
year is determined based on the terms of the securities and the
current rate of prepayment of the underlying pools of mortgages. Nationwidemortgages or
assets. The Company limits its exposure to prepayments by purchasing
less volatile types of MBSs.MBSs and ABSs.
Other Fixed Maturity Securitiesfixed maturity securities and Mortgage Loansmortgage loans on Real Estate:real estate:
The maturity year is determined based on the maturity date of the
security or loan.
Deferred Fixed Annuities: thefixed annuities: The maturity year is based on the expected
date of policyholder withdrawal, taking into account actual
experience, current interest rates, and contract terms. Included are
group annuity contracts ($9.70 billion)representing $8.39 billion of general account
liabilities as of December 31, 2000, which are generally subject to
market value adjustment upon surrender and which may also be subject
to surrender charges. Of the total group annuity liabilities, $7.28$7.03
billion waswere in contracts where the crediting rate is reset
quarterly. Forquarterly, $545.9 million were in contracts that adjust the remaining $2.42 billion of group annuity
reserves,crediting
rate on an annual basis with portions resetting in each calendar
quarter and $809.4 million were in contracts where the crediting rate
is reset annually on January 1. Also included
are $5.89Fixed annuity policy reserves of
$1.63 billion of individual annuity liabilitiesrelate to funding agreements issued in conjunction with
the Company's medium-term note program where the crediting rate is
reset annually, with portions resettingeither fixed for the term of the contract or variable, based on an
underlying index. Also included in each calendar quarter.
Suchdeferred fixed annuities are
certain individual annuity contracts, which are also subject to
surrender charges calculated as a percentage of the lesser of
deposits made or the amount surrendered and assessed at declining
rates during the first seven years after a deposit is made. At
December 31, 2000, individual annuity general account liabilities
totaling $4.92 billion were in contracts where the crediting rate is
reset periodically, with portions resetting in each calendar quarter
and $398.7 million that reset annually on January 1. The average
crediting rate is calculated as the difference between the projected
yield of the assets backing the liabilities and a targeted interest
spread. However, for certain individual annuities the credited rate
is also adjusted to partially reflect current new money rates.
Immediate Annuities:annuities: Included are non-life contingent contracts in
payout status where Nationwidethe Company has guaranteed periodic, typically
monthly, payments. The maturity year is based on the terms of the
contract.
48
51Short-term borrowings: The maturity year is the stated maturity date
of the obligation.
Derivative financial instruments: The maturity year is based on the
terms of the related contracts. Interest rate swaps include
cross-currency swaps that eliminate all foreign currency exposure the
Company has with existing assets and liabilities. Underlying details
by currency have therefore been omitted. Variable swap rates and
settlement prices reflect those in effect at December 31, 2000.
(iv) Equity Market Risk
Asset fees calculated as a percentage of the separate account assets
are a significant source of revenue to Nationwide.the Company. At December 31,
1999,2000, 88% of separate account assets were invested in equity mutual
funds. Gains and losses in the equity markets will result in
corresponding increases and decreases in Nationwide'sthe Company's separate
account assets and the reported asset fee revenue. In addition, a
decrease in separate account assets may decrease Nationwide'sthe Company's
expectations of future profit margins, which may require Nationwidethe Company
to accelerate the amortization of deferred policy acquisition costs.
INFLATION
The rate of inflation did not have a material effect on revenues or
operating results of the Company during 2000, 1999 or 1998.
47
49
DIRECTORS AND EXECUTIVE OFFICERS
Nationwide'sThe Company's Board of Directors currently consists of the following
sixteenfourteen Directors:
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
---- --- -------------- ---------------------
Lewis J. Alphin 5152 1993 2015
A. I. Bell 5455 1998 2013
Nancy C. Breit 65 1986 2001
Yvonne M. Curl 4546 1998 2022
Kenneth D. Davis 4647 1999 2002
Keith W. Eckel 5354 1996 2014
Willard J. Engel 6061 1994 2006
Fred C. Finney 5354 1992 2013
Joseph J. Gasper 5657 1996 2008
WilliamW. G. Jurgensen 49 2000 2003
Dimon R. McFerson 63 1981 2002
David O. Miller 6162 1996 2006
Ralph M. Paige 5758 1999 2002
James F. Patterson 5859 1989 2007
Arden L. Shisler 58 1984 200864 1992 2004
Robert L. Stewart 63 1992 200464 1986 2001
49
52
EXECUTIVE OFFICERSNationwide Life's Executive Officers currently consist of the following
twenty-two Officers:
NAME AGE POSITION WITH NATIONWIDE
---- --- ------------------------
Dimon R. McFerson 63 Chairman
William G. Jurgensen 49 Chief Executive Officer
Joseph J. Gasper 56 President and Chief Operating Officer
Richard D. Headley 51 Executive Vice President - Chief Information Technology Officer
Robert A. Oakley 53 Executive Vice President - Chief Financial Officer
Robert J. Woodward, Jr. 58 Executive Vice President - Chief Investment Officer
John R. Cook, Jr. 57 Senior Vice President - Chief Communications Officer
Thomas L. Crumrine 59 Senior Vice President
David A. Diamond 4446 Senior Vice President - Corporate Controller
Joseph J. Gasper 57 President and Chief Operating Officer
Philip C. Gath 5253 Senior Vice President - Chief Actuary - Nationwide Financial
Patricia R. Hatler 4546 Senior Vice President, General Counsel and Secretary
Donna A. James 42Richard D. Headley 52 Executive Vice President
Michael S. Helfer 55 Executive Vice President - Corporate Strategy
David K. Hollingsworth 48 Senior Vice President - Business Development and Sponsor Relations
David R. Jahn 52 Senior Vice President - Product Management
Donna A. James 43 Executive Vice President - Chief Human ResourcesAdministrative Officer
William J. Jurgensen 49 Chairman of the Board and Chief Executive Officer
Richard A. Karas 5758 Senior Vice President - Sales - Financial Services
Gregory S. Lashutka 5657 Senior Vice President - Corporate Relations
Edwin P. McCausland, Jr. 56 Senior Vice President - Fixed Income Securities
Dimon Richard McFerson 64 Chairman (retired December 30, 2000)
Robert A. Oakley 54 Executive Vice President - Chief Financial Officer
Mark D. Phelan 46 Senior Vice President - Technology and Operations
Douglas C. Robinette 46 Senior Vice President - Claims
Mark R. Thresher 4344 Senior Vice President - Finance - Nationwide Financial(Chief Accounting Officer)
Susan A. Wolken 4950 Senior Vice President - Product Management and Nationwide
Financial Marketing
Rhodes B. Baker 53Robert J. Woodward, Jr. 59 Executive Vice President - Life Company Operations
Dennis W. Click 61 Vice President - Secretary
R. Dennis Noice 53 Vice President - SystemsChief Investment Officer
48
50
Biographical information for each of the individuals listed in the above table
is set forth below.
W. G. "JERRY" JURGENSEN has beenDIMON R. MCFERSON, until his retirement in December 2000, was Chief Executive
Officer of Nationwide since
August 2000 and a director since May 2000. Previously, he was Executive Vice
President of Bank One Corporation from 1998 to 2000. Mr. Jurgensen was Executive
Vice President of First Chicago NBD Corporation and Chairman of FCC National
Bank from 1996 to 1998; he also held other positions from 1990 to 1996. Mr.
Jurgensen was Executive Vice President of Norwest Corporation from 1987 to 1990.
Prior to 1987, Mr. Jurgensen held numerous positions with Norwest Corporation
from 1973 to 1990.
DIMON R. MCFERSON has been a Director since April 1988 and Chairman since April 1996. He served as Chief Executive Officer from April 1996 to August 2000. He was elected Chief Executive Officer in December
1992, and President and Chief Executive Officer in December 1993. He was
President and General Manager of Nationwide Mutual Insurance Company from April
1988 to April 1991; President and Chief Operating Officer of Nationwide Mutual
Insurance Company from April 1991 to December 1992; and President and Chief
Executive Officer of Nationwide Mutual Insurance Company from December 1992 to
April 1996. Mr. McFerson has beenwas with Nationwide for 2021 years.
W.G. JURGENSEN has been a Director and Chief Executive Officer since 2000.
Previously, he was Executive Vice President of Bank One Corporation from 1998 to
May 2000. Prior to Bank One's merger with First Chicago NBD, Mr. Jurgensen
served from 1990 to 1998 as Executive Vice President with First Chicago, leading
various business units. For 17 years, Mr. Jurgensen was with Norwest
Corporation, beginning as a corporate banking officer and serving in
increasingly responsible roles including president and CEO of Norwest Investment
Services and management of the treasury function. Mr. Jurgensen's final post was
Executive Vice President - Corporate Banking.
JOSEPH J. GASPER has been President and Chief Operating Officer and Director of
Nationwide since April 1996. Previously, he was Executive Vice President -
Property/Casualty Operations of Nationwide Mutual Insurance Company from April
1995 to April 1996. He was Senior Vice President - Property/Casualty Operations
of Nationwide Mutual Insurance Company from September 1993 to April 1995. Prior
to that time, Mr. Gasper held numerous positions within Nationwide. Mr. Gasper
has been with Nationwide for 3334 years.
50
53
LEWIS J. ALPHIN has been a Director of Nationwide since 1993. Mr. Alphin owns
and operates an 800-acre farm in Mt. Olive, NC. He taught agriculture business
at James Sprunt Community CollegeCollegy in Kenansville, NC for more than 22 years
before retiring in 1994. He is the former board chairman of the Cape Fear Farm
Credit Association, a member and former vice president, secretary/treasurer, and
director of the Duplin County Agribusiness Council, and a former board member of
the Southern States Cooperative (1986 to 1993). Mr. Alphin is a member of the
Duplin County Farm Bureau, the North Carolina Farm Bureau, ad the Farm Credit
Council. He is a member and former director of the Oak Wolfe Fire Department.
A. I. BELL has been a Director of Nationwide since April, 1998. Mr. Bell has
served as a state trustee of the Ohio Farm Bureau Federation from 1991 to 1998
and as president that last four years. He oversees the Bell family farm in
Zanesville, Ohio. The farm is the hub of a multi-family swine network, in
addition to grain and beef operations. Mr. Bell has represented the Ohio Farm
Bureau at state and national level activities, and has traveled internationally
representing Ohio agriculture. In 1995, he was introduced into The Ohio State
University Department of Animal Sciences Hall of Fame.
NANCY C. BREIT has been a Director of Nationwide since 1986. Mrs. Thomas is a
board member of Farm Credit Services' 4th District and serves on the advisory
board of Walsh University in North Canton, OH. She is a past president and
former director of the Ohio Agricultural Marketing Association and served on the
boards of the Ohio Farm Bureau Federation and Landmark, Inc., a farm supply
cooperative which is now part of Indianapolis-based Countrymark, and as the
Midwest regional representative on the American Farm Bureau women's committee.
YVONNE M. CURL has been a Director of Nationwide since April 1998. Ms. MontgomeryCurl is
senior vice president/general managerVice President - Public Sector
Worldwide/Document Solutions GroupChief Marketing Officer for Avaya Inc. located in Basking
Ridge, NJ. Prior to joining Avaya Inc. in November 2000, she was employed by the
Xerox Corporation. A resident of
Washington, DC, Ms. Montgomery is in charge of providing an integrated,
industry-focused portfolio of document solutions and services to the public
sector worldwide. Ms. MontgomeryShe joined Xerox in 1976 as a sales representative and
progressed through management positions, including vice president-field
operations andpresident - field
operations; executive assistant to thete chairman and CEO.CEO; and as corporate vice
president serving as senior vice president and general manager, public sector
worldwide/global solutions group.
JOHN R. COOK, JR. has been Senior Vice President - Chief Communications Officer
since May 1997. Previously, Mr. Cook was Senior Vice President - Chief
Communications Officer of USAA from July 1989 to May 1997. Mr. Cook has been
with Nationwide for 3 years.
THOMAS L. CRUMRINE has been Senior Vice President of Nationwide since September
1997. Previously he was Senior Vice President - Property/Casualty from March
1996 to September 1997. Prior to that time he was Senior Vice President - Claims
from April 1995 to March 1996, Vice President - Claims from 1993 to March 1996,
Vice President Agency Sales 1991 to 1993, Vice President of Agency Services 1989
to 1991. Prior to that Mr. Crumrine held several positions with Nationwide.
KENNETH D. DAVIS has been a Director of Nationwide since April 1999. Mr. Davis
is the immediate past president of the Ohio Farm Bureau Federation. He served as
a member of the Ohio Farm Bureau Federation's board of trustees from 1989 until
1999. He served as first vice president of the board from 1994 until 1998. Mr.
Davis serves on the board of directors of his local rural electric cooperatives
and is a member of many agriculture organizations including the Ohio Corn
Growers, Ohio Cattlemen's and Ohio Soybean associations.
49
51
DAVID A. DIAMOND has been Senior Vice President - Corporate Controller since
December 11, 2000. Previously, Mr. Diamond was Senior Vice President - Corporate
Controller from August 1999 to December 2000. He was Vice President - Controller
from October 1993 to August 1999. Prior to that time, Mr. Diamond held several
positions within Nationwide. Mr. Diamond has been with Nationwide for 12 years.
KEITH W. ECKEL has been a Director of Nationwide since April 1996. Mr. Eckel is
a partner of Fred W. Eckel Sons and president of Eckel Farms, Inc. in northeast
Pennsylvania. He received the Master Farmer award from Penn State University in
1982. Mr. Eckel is a member of the Pennsylvania Agricultural Land Preservation
Board. He is a former president of the Pennsylvania Farm Bureau, a position he
held for 15 years, and the Lackawanna County Cooperative Extension Association.
He has served as a board member and executive committee member of the American
Farm Bureau Federation. He is a former vice president of the Pennsylvania
Council of Cooperative Extension Associations and former board member of the
Pennsylvania Vegetable Growers Association.
WILLARD J. ENGEL has been a Director of Nationwide since 1994. Mr. Engel served
as general manager of Lyon County Co-Operative Oil Co. in Marshall, MN from 1975
to 1997, and occasionally serves on a consulting basis. He previously was a
division manager of the Truman Farmers Elevator. He is a former director of the
Western Co-op Transport in Montevideo, MN, a former director and legislative
committee chairman of the Northwest Petroleum Association in St. Paul, and a
former director of Farmland Industries in Kansas City.
FRED C. FINNEY has been a Director of Nationwide since 1992. Mr. Finney is the
owner and operator of the Moreland Fruit Farm and operator of Melrose Orchard in
Wooster, OH. He is past president of the Ohio Farm Bureau Federation, the Ohio
Fruit Growers Society, Wayne County Farm Bureau, and the Westwood Ruritan Club.
He is a member of the American Berry Cooperative.
51PHILIP C. GATH has been Senior Vice President - Chief Actuary - Nationwide
Financial since May 1998. Previously, Mr. Gath was Vice President - Product
Manager - Individual Variable Annuity from July 1997 to May 1998. Mr. Gath was
Vice President - Individual Life Actuary from August 1989 to July 1997. Prior to
that time, Mr. Gath held several positions within Nationwide. Mr. Gath has been
with Nationwide for 32 years.
PATRICIA R. HATLER has been Senior Vice President, General Counsel and Secretary
since April 2000. Previously, she was Senior Vice President and General Counsel
from July 1999 to April 2000. Prior to that time, she was General Counsel and
Corporate Secretary of Independence Blue Cross from 1983 to July 1999.
MICHAEL S. HELFER has been Executive Vice President - Corporate Strategy since
August 2000. He is a former partner and head of the financial institutions group
at Wilmer, Cutler and Pickering, a 350-lawyer international law firm
headquartered in Washington, D.C. He served as that firm's Chairman and Chief
Executive Officer from 1995 to 1998.
DAVID K. HOLLINGSWORTH has been Senior Vice President - Business Development and
Sponsor Relations since April 2000. Previouly, he was Senior Vice President -
Multi Channel and Sponsor relations from August 1999 until April 2000.
Previously, he was Senior Vice President - Marketing from June 1999 to August
1999. Prior to that time, Mr. Hollingsworth held numerous positions within
Nationwide. Mr. Hollingsworth has been with Nationwide for 26 years.
DAVID R. JAHN has been Senior Vice President - Product Management since November
2000. Previously, he was Senior Vice President - Commercial Insurance from March
1998 to November 2000. Previously, he was Vice President - Property/Casualty
Operations and Vice President - Resource Management from March 1996 to January
1998. Prior to that time, Mr. Jahn has held numerous positions within
Nationwide. Mr. Jahn has been with Nationwide for 29 years.
DONNA A. JAMES has been Executive Vice President - Chief Administrative Officer
since July 2000. Previously, she was Senior Vice President - Chief Human
Resources Officer from May 1999 to July 2000. She was Senior Vice President -
Human Resources from December 1997 to May 1999. Previously, she was Vice
President - Human Resources from July 1996 to December 1997. Prior to that time,
Ms. James was Vice President - Assistant to the CEO of Nationwide from March
1996 to July 1996. From May 1994 to March 1996, she was Associate Vice President
- - Assistant to the CEO of Nationwide. Previously, Ms. James held several
positions within Nationwide. Js. James has been with Nationwide for 19 years.
RICHARD D. HEADLEY has been Executive Vice President for Nationwide since July
2000. Previously, he was Executive Vice President - Chief Information Technology
Officer from May 1999 to July 2000. He was Senior Vice President - Chief
Information Technology
50
5452
Officer from October 1997 to May 1999. Previously, Mr. Headly was Chairman and
Chief Executive Officer of Banc One Services Corporation from 1992 to Octover
1997. From January 1975 until 1992, Mr. Headley held several positions with Banc
One Corporation. Mr. Headley has been with Nationwide for 3 years.
RICHARD A. KARAS has been Senior Vice President - Sales - Financial Services
since March 1993. Previously, he was Vice President - Sales - Financial Services
from February 1989 to March 1993. Prior to that time, Mr. Karas held several
positions within Nationwide. Mr. Karas has been with Nationwide for 36 years.
GREGORY S. LASHUTKA has been Senior Vice President - Corporate Relations since
January 2000. Previously, he was the Mayor of the City of Columbus (Ohio) from
January 1992 to December 1999. From January 1986 to December 1991, Mr. Lashutka
was a Partner with Squire, Sanders & Dempsey. From January 1978 to December
1985, he was City Attorney for the City of Columbus (Ohio).
EDWIN P. MCCAUSLAND, JR. has been Senior Vice President - Fixed Income
Securities since 1999. Mr. McCausland has 29 years of experience in insurance
investments beginning his career in 1970 with Connecticut Mutual Life Insurance
Company. He joined Phoenix Mutual Life Insurance Company in 1981 as second Vice
President of Bond Investments and rising to Vice President of Pension
Operations. He was Vice President and Managing Director of Mass Mutual Life
Insurance Company prior to joining Nationwide.
DAVID O. MILLER has been a Director of Nationwide since November 1996. Mr.
Miller has been Chairman of the Board since 1998. Mr. Miller is president of
Owen Potato Farm, Inc. and a partner of M&M Enterprises in Licking County, OH.
He is a director and board chairman of the National Cooperative Business
Association, director of Cooperative Business International and the
International Cooperative Alliance, and serves on the educational executive
committee of the National Council of Farmer Cooperatives. He was president of
the Ohio Farm Bureau Federation from 1981 to 1985 and was vice president for six
years. Mr. Miller served a two year term on the board of the American Farm
Bureau Association. He is past president of the Ohio Vegetable and Potato
Growers Association, and was a director of Landmark, Inc., a farm supply
cooperative which is now part of Indianapolis-based Countrymark.
ROBERT A. OAKLEY has been Executive Vice President - Chief Financial Officer and
Treasurer since December 2000. Previously, Mr. Oakley was Executive Vice
President - Chief Financial Officer from April 1995 to December 2000. Prior to
that, Mr. Oakley was Senior Vice President - Chief Financial Officer from
October 1993 to April 1995. Prior to that time, Mr. Oakley held several
positions within Nationwide. Mr. Oakley has been with Nationwide for 25 years.
RALPH M. PAIGE has been a Director of Nationwide since April 1999. Mr. Paige has
been the Executive Director of the Federation of Southern Cooperatives/Land
Assistance Fund since 1969. Mr. Paige also served as the National Field
Director/Georgia State Director from 1981 to 1984.
JAMES F. PATTERSON has been a Director of Nationwide since April 1989. Mr.
Patterson is president of Patterson Farms, Inc. and has operated Patterson Fruit
Farm in Chesterland, OH since 1964. Mr. Patterson is on the boards of The Ohio
State University Hospitals Health System in Cleveland, Geauga Hospital, Inc. and
the National Cooperative Business Association. He is past president of the Ohio
Farm Bureau Federation and former member of Cleveland Foundation's Lake and
Geauga Advisory Committees.
MARK D. PHELAN has been Senior Vice President - Technology and Operations since
December 2000. Previously, he was Senior Vice President - Technology Services
from 1998 to December 2000. His previous management experience includes five
years (1977 - 1982) with the data processing division's sales group at IBM
Corporation. From 1982 through 1990, Mr. Phelan served as Director of AT&T's
Consumer Communications Services Group and he was subsequently promoted to Sales
Vice President for the Eastern Region of the Business Communications Services
Division. In 1992, he became Executive Vice President - Sales and Marketing for
the Electronic Commerce Division of Checkfree Corporation, a position he held
for five years. From 1997 until 1998, he was in private consulting.
DOUGLAS C. ROBINETTE has been Senior Vice President - Claims since November
2000. Previously he was Senior Vice President - Claimes and Financial Services
from 1999 to November 2000. Prior to that time, Mr. Robinette was Senior Vice
President - Marketing and Product Management from May 1998 to 1999. Mr.
Robinette was Executive Vice President, Customer Services of Employers Insurance
of Wausau, a member of the Nationwide group until 1998, from September 1996 to
May 1998. Prior to that time, he was Executive Vice President, Finance and
Insurance Services of Wausau from May 1995 to September 1996. From November 1994
to May 1995, Mr. Robinette was Senior Vice
51
53
President, Finance and Insurance Services of Wausau. From May 1993 to November
1994, he was Senior Vice President, Finance of Wausau. Prior to that time, Mr.
Robinette held several positions within the Nationwide group. Mr. Robinette has
been with Nationwide for 14 years.
ARDEN L. SHISLER has been a Director of Nationwide since 1984. Mr. Shisler is
president and chief executive officer of K&B Transport, Inc., a trucking firm in
Dalton, OH. He is a director of the National Cooperative Business Association in
Washington, DC. He is a former board member and vice president of the Ohio Farm
Bureau Federation and past president of the Ohio Agricultural Marketing
Association, an Ohio Farm Bureau Federation subsidiary. He is a member of the
Ohio Trucking Association, the Ohio Trucking Safety Council, the Wayne County
Farm Bureau, Cornerstone Community Church, the Advisory Committee of The Ohio
State University Agriculture Technical Institute and a board member of the
Wilderness Center.
ROBERT L. STEWART has been a Director of Nationwide since 1989. Mr. Stewart is
the owner and operator of Sunnydale Farms and Mining in Jewett, OH. He served on
the board of the Ohio Farm Bureau Federation and as president of the Ohio
Holstein Association board. Mr. Stewart was a director of the Ohio Agricultural
Stabilization and Conservation Service board and Landmark, Inc. a farm supply
cooperative which is now part of Indianapolis-based Countrymark.
RICHARD D. HEADLEY has been Executive Vice President - Chief Information
Technology Officer since May 1999. He was Senior Vice President - Chief
Information Technology Officer from October 1997 to May 1999. Previously, Mr.
Headley was Chairman and Chief Executive Officer of Banc One Services
Corporation from 1992 to October 1997. From January 1975 until 1992 Mr. Headley
held several positions with Banc One Corporation. Mr. Headley has been with
Nationwide for 2 years.
ROBERT A. OAKLEY has been Executive Vice President - Chief Financial Officer
since April 1995. Previously, he was Senior Vice President - Chief Financial
Officer from October 1993 to April 1995. Prior to that time, Mr. Oakley held
several positions within Nationwide. Mr. Oakley has been with Nationwide for 24
years.
ROBERT J. WOODWARD, JR. has been Executive Vice President - Chief Investment
Officer since August 1995. Previously, he was Senior Vice President - Fixed
Income Investments from March 1991 to August 1995. Prior to that time, Mr.
Woodward held several positions within Nationwide. Mr. Woodward has been with
Nationwide for 35 years.
JOHN R. COOK, JR. has been Senior Vice President - Chief Communications Officer
since May 1997. Previously, Mr. Cook was Senior Vice President - Chief
Communications Officer of USAA from July 1989 to May 1997. Mr. Cook has been
with Nationwide for 2 years.
DAVID A. DIAMOND has been Senior Vice President - Corporate Controller since
August 1999. He was Vice President-Controller from August 1996 to August 1999.
Previously, he was Vice President - Controller from October 1993 to August 1996.
Prior to that time, Mr. Diamond held several positions within Nationwide. Mr.
Diamond has been with Nationwide for 11 years.
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55
PHILIP C. GATH - has been Senior Vice President - Chief Actuary - Nationwide
Financial since May 1998. Previously, Mr. Gath was Vice President - Product
Manager - Individual Variable Annuity from July 1997 to May 1998. Mr. Gath was
Vice President - Individual Life Actuary from August 1989 to July 1997. Prior to
that time, Mr. Gath held several positions within Nationwide. Mr. Gath has been
with Nationwide for 31 years.
PATRICIA R. HATLER has been Senior Vice President, General Counsel and Secretary
since April 2000. Previously, she was Senior Vice President and General Counsel
from July 1999 to April 2000. Prior to that time, she was General Counsel and
Corporate Secretary of Independence Blue Cross from 1983 to July 1999.
DONNA A. JAMES has been Senior Vice President - Chief Human Resources Officer
since May 1999. She was Senior Vice President - Human Resources from December
1997 to May 1999. Previously she was Vice President - Human Resources from July
1996 to December 1997. Prior to that time, Ms. James was Vice President -
Assistant to the CEO of Nationwide from March 1996 to July 1996. From May 1994
to March 1996 she was Associate Vice President - Assistant to the CEO for
Nationwide. Previously Ms. James held several positions within Nationwide. Ms.
James has been with Nationwide for 18 years.
RICHARD A. KARAS has been Senior Vice President - Sales - Financial Services
since March 1993. Previously, he was Vice President - Sales - Financial Services
from February 1989 to March 1993. Prior to that time, Mr. Karas held several
positions within Nationwide. Mr. Karas has been with Nationwide for 35 years.
GREGORY S. LASHUTKA has been Senior Vice President - Corporate Relations since
January 2000. Previously, he was the Mayor of the City of Columbus (Ohio) from
January 1992 to December 1999. From January 1986 to December 1991, Mr. Lashutka
was a Partner with Squire, Sanders & Dempsey. From January 1978 to December
1985, he was City Attorney for the City of Columbus (Ohio).
MARK R. THRESHER has been Senior Vice President - Finance - Nationwide Financial
since May 1999. He was Vice President - Controller from August 1996 to May 1999.
He was Vice President and Treasurer from November 1996 to February 1997.
Previously, he was Vice President and Treasurer from June 1996 to November 1996.
Prior to joining Nationwide, Mr. Thresher served as a partner with KPMG LLP from
July 1988 to June 1996.
RICHARD M. WAGGONER has been Senior Vice President - Operations since May 1999.
Previously, he was President of Nationwide Services from May 1997 to May 1999.
Prior to that time, Mr. Waggoner has held numerous positions within the
Nationwide group of companies. Mr. Waggoner has been with Nationwide for 24
years.
SUSAN A. WOLKEN has been Senior Vice President - Product Management and
Nationwide Financial Marketing since May 1999. Previously, Ms. Wolken was Senior
Vice President - Life Company Operations from June 1997 to May 1999. She was
Senior Vice President - Enterprise Administration from July 1996 to June 1997.
Prior to that time, she was Senior Vice President - Human Resources from April
1995 to July 1996. From September 1993 to April 1995, Ms. Wolken was Vice
President - Human Resources. From October 1989 to September 1993 she was Vice
President - Individual Life and Health Operations. Ms. Wolken has been with
Nationwide for 2526 years.
RHODES B. BAKERROBERT J. WOODWARD, JR. has been Executive Vice President - Life Company OperationsChief Investment
Officer since May
1999.August 1995. Previously, he was Senior Vice President - Individual AnnuitiesFixed
Income Investments from May 1998March 1991 to May 1999.August 1995. Prior to that time, heMr.
Woodward held several positions within Nationwide. Mr. BakerWoodward has been with
Nationwide for 2236 years.
DENNIS W. CLICK has been Vice President - Secretary since December 1997.
Previously, he was Vice President - Assistant Secretary from December 1996 to
December 1997. Mr. Click was Vice President - Assistant Secretary from August
1994 to December 1997. Mr. Click was Associate Vice President and Assistant
Secretary from August 1989 to August 1994. Prior to that time, he held several
positions within Nationwide. Mr. Click has been with Nationwide for 39 years.
R. DENNIS NOICE has been Vice President - Systems - Nationwide Financial since
April 1999. He was Vice President - Systems - Nationwide Financial Services from
April 1998 to April 1999. Previously, he was Vice President - Retail Operations
from March 1997 to April 1998. Prior to that time, Mr. Noice was Vice President
Individual Investment Products from October 1989 to March 1997. Prior to that
time, Mr. Noice held several positions within Nationwide. Mr. Noice has been
with Nationwide for 28 years.
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EXECUTIVE COMPENSATION
COMPENSATION
Pursuant to a Cost Sharing Agreement, the salaries and benefits of certain
officers and employees of Nationwidethe Company and its subsidiaries, including the
Named Executive Officers, will be paid by Nationwide Mutual Insurance Company
and reimbursed in accordance with the terms of the Cost Sharing Agreement.
The following table provides certain information concerning compensation
received by Nationwide's former Chief Executive Officer, Nationwide's current
Chairman of the Board and Chief Executive Officer, and the four remainingother most
highly paid executive officers (the "Named Executive Officers") as of
the last fiscal year, for the last three
fiscal years ended December 31, 2000, 1999 1998 and 1997 solely1998 for services rendered to
Nationwide and its subsidiaries.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------
Annual Compensation------------------------------------ -----------------------------------------
Awards -----------------------------------------------------------------------Payouts
--------------------------- ----------
Restricted Securities Long Term
Other Annual Stock Award(s) Underlying Incentive
Name and Salary Bonus Compensation $Award(s) Options/SARs # Plan All Other
Principal Position Year $ $ $ $ # Payouts Compensation
- ------------------------------------------------------------------------------------------------------------------------------------------------------------- ---- ------- ----------- ------------ ----------- -------------- ---------- ------------
Dimon R. McFerson: 1999 446,900 1,008,504(2) _____ 109,700 _____ 22,785(11)2000 475,471 1,259,550 (3) (6) 875,469 65,000 -- 44,662 (10)
Chairman and Chief 1999 446,900 1,008,504 (4) (6) -- 109,700 -- 22,785
Executive Officer(1),(2) 1998 430,970 392,982(3)392,982 (5) _____(6) -- 60,000 204,351(9) 23,278(12)204,351 (9) 23,278
W. G. Jurgensen: 2000 230,290 951,660 (3) (6) 700,000 (7) 210,000 -- 7,235 (10)
Chairman of the Board -- -- -- -- -- -- -- --
and Chief Executive Officer - 1997 381,717 111,780(4) (5) 907,147(7) 40,000 207,000(10) 21,751(13)
Nationwide Financial
Services, Inc.(1)
(5)-- -- -- -- -- -- -- --
Officer(2)
Joseph J. Gasper: 1999 512,308 952,282(2) (5) _____ 78,000(8) _____ 21,492(11)2000 634,499 1,132,145 (3) (6) 1,077,500 (7) 76,100 -- 45,876 (10)
President and Chief 1999 512,308 952,282 (4) (6) -- 78,000 (8) -- 21,492
Operating Officer 1998 461,308 330,647(3)330,647 (5) _____(6) -- 40,000 143,520(9) 21,491(12)
Operating Officer 1997 358,066 97,250(4)143,520 (9) 21,491
Robert J. Woodward: 2000 246,577 580,944 (3) (6) 164,319 (7) 12,200 -- 14,961 (10)
Executive Vice 1999 280,293 503,928 (4) (6) -- 21,800 -- 11,406
President - Chief 1998 236,599 209,607 (5) 396,563(7) 30,000 155,600(10) 18,155(13)(6) -- 12,000 80,694 (9) 10,883
Investment Officer(2)
Richard A. Karas: 2000 339,231 317,791 (3) (6) 202,031 (7) 15,000 -- 23,108 (10)
Senior Vice 1999 307,308 330,021(2)330,021 (4) (6) -- 34,400 (8) -- 13,177
President - Sales - 1998 283,847 212,503 (5) _____ 34,400(8) _____ 13,177(11)(6) -- 20,000 90,000 (9) 13,174
Financial Services
Mark R. Thresher: 2000 262,622 274,142 (3) (6) 140,075 (7) 11,400 -- 15,806 (10)
Senior Vice President 1999 219,846 244,609 (4) (6) 61,688 (7) 19,250 (8) -- 12,099
- Finance(2) 1998 283,847 212,503(3)185,704 122,644 (5) _____ 20,000 90,000(9) 13,174(12)
Sales - Financial 1997 246,058 72,900(4) (5) 167,508(7)(6) -- 10,000 81,000(10) 13,020(13)
Services
Robert J. Woodward: 1999 280,293 503,928(2) (5) _____ 21,800 _____ 11,406(11)
Executive Vice 1998 236,599 209,607(3) (5) _____ 12,000 80,694(9) 10,883(12)
President - Chief 1997 223,803 53,694(4) (5) 182,877(7) 10,000 73,219(10) 11,453(13)
Investment Officer(1)
Susan A. Wolken: 1999 239,962 259,979(2) (5) 71,969(6) 16,715(8) _____ 10,343(11)
Senior Vice President 1998 228,654 156,978(3) (5) _____ 12,000 68,700(9) 7,778(12)
Product Management 1997 199,443 57,240(4) (5) 17,625(7) 2,000 58,869(10) 8,316(13)
and Marketing60,600 (9) 8,231
(1) Mr. McFerson retired as Chairman and Chief Executive Officer of the Company
on July 31, 2000. His title changed to Chairman of the Company on August 1,
2000. He retired as Chairman and Director of the Company on December 30,
2000.
(2) Figures in the table, other than Restricted Stock Awards, Securities
Underlying Options/Stock Appreciation RightsSARs and All Other Compensation, represent compensation
received by Mr.Messrs. McFerson, Jurgensen, Gasper, Woodward and Mr. WoodwardThresher for
their service rendered to Nationwide Financial Services and its subsidiariesthe Company as allocated pursuant to the Cost
Sharing Agreement.
(2)(3) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan (hereinafter defined)in 2001 for the 2000 award year. Mr. Woodward's
bonus payout includes amounts received under the Office of Investments
Incentive Plan.
(4) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan in 2000 for the 1999 award year. (3)Mr. Woodward's
bonus payout includes amounts received under the Office of Investments
Incentive Plan.
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55
(5) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan in 1999 for the 1998 award year.
(4) Represents the amount received by the Named Executive Officers under the
Management Incentive Plan (hereinafter defined) in 1998 for the 1997 award
year.
(5)(6) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(6)(7) The following is the number of shares and value of restricted stock at the
end of the last2000 fiscal year for Ms. Wolkenfor: Mr. Jurgensen - 1,75025,000 shares at a value
of $48,891.
(7) The following are the number of shares and value of the restricted stock at
the end of the last fiscal year for:$1,187,500; Mr. McFersonGasper - 15,00040,000 shares at a value of $419,063;$1,900,000; Mr.
GasperWoodward - 10,0006,100 shares at a value of $279,375;$289,750; Mr.
54
57 Karas - 4,0007,500 shares at
a value of $111,750;$356,250; and Mr. WoodwardThresher - 3,5006,700 shares at a value of
$97,781 and Ms. Wolken - 750 shares at a value of 20,953.$318,250.
(8) Mr. Gasper's options include 2,500 Villanova Capital, Inc. ("VCI") (a
subsidiary of Nationwide Financial Services, Inc.) options; Mr. Karas'Karas's
options include 2,000 VCI options; and Ms. Wolken'sMr. Thresher's options include 1,5002,000
VCI options.
(9) Represents the amount received by the Named Executive Officers under the
Executive Incentive Plan (hereinafter defined) in 1999 for the award period 1996 -to 1998.
(10) Represents the amount received by the Named Executive Officers under the
Executive Incentive Plan in 1998 for the award period 1995 to 1997.
(11) Represents contributions made or credited by Nationwide Financial Servicesthe Company for 1999 under the Savings Plan and the DC Supplemental Plan (hereinafter
defined). The following are the amounts for the Savings Plan and the DC
Supplemental Plan: McFerson - $2,241 for the Savings Plan and $20,544 for
the DC Supplemental Plan; Mr. Gasper - $4,800 for the Savings Plan and
$16,692 for the DC Supplemental Plan; Mr. Karas - $4,800 for the Savings
Plan and $8,377 for the DC Supplemental Plan; Mr. Woodward - $3,665 for the
Savings Plan and $7,741 for the DC Supplemental Plan; and Ms. Wolken -
$4,800 for the Savings Plan and $5,543 for the DC Supplemental Plan.
(12) Represents contributions made or credited by Nationwide Financial Services,
Inc. for 1998 under the Savings Plan and the DC Supplemental Plan. The
following are the amounts for the Savings Plan and the DC Supplemental
Plan, and in the case of Mr. McFerson, above-market interest on deferred
compensation: Mr. McFerson - $2,206 for the Savings Plan and $20,224 for
the DC Supplemental Plan and $848 for the above-market interest on deferred
compensation; Mr. Gasper - $4,800 for the Savings Plan and $16,691 for the
DC Supplemental Plan; Mr. Karas - $4,800 for the Savings Plan and $8,374
for the DC Supplemental Plan; Mr. Woodward - $3,497 for the Savings Plan
and $7,386 for the DC Supplemental Plan; and Ms. Wolken - $4,800 for the
Savings Plan and $2,978 for the DC Supplemental Plan.
(13) Represents contributions made or credited by Nationwide Financial Services,
Inc. for 19972000 under the
Savings Plan and the DC Supplemental Plan. The following are the amounts
for the Savings Plan and the DC Supplemental Plan: Mr. McFerson - $2,142$2,379
for the Savings Plan, and $19,609$42,283 for the DC Supplemental Plan; Mr.
Jurgensen - $2,379 for the Savings Plan and $4,856 for the DC Supplemental
Plan; Mr. Gasper - $4,760$4,713 for the Savings Plan and $13,395$41,163 for the DC
Supplemental Plan; Mr. Woodward - $3,060 for the Savings Plan and $11,901
for the DC Supplemental Plan; Mr. Karas - $4,760$5,100 for the Savings Plan and
$8,260 for the DC Supplemental Plan; Mr. Woodward - $3,468 for the Saving
Plan and $7,985$18,008 for the DC Supplemental Plan; and Ms. WolkenMr. Thresher - $4,760$5,095 for the
Savings Plan and $3,556$10,711 for the DC Supplemental Plan.
EXECUTIVEPERFORMANCE INCENTIVE PLAN
Prior to May 1, 1999, Nationwide Mutual Insurance Company and certain of
its subsidiaries and affiliates, including Nationwide, maintained the
Executive Incentive Plan (EIP). Under the EIP, annual payments were made to
the Named Executive Officers and certain other officers of the
participating companies based on the achievement of measures tied to the
performance of the Nationwide Mutual Insurance Company and its subsidiaries
and affiliates (the "Nationwide Group") and the relevant operating company
over the preceding three years. Performance measures were based on
profitability and growth objectives that were established in advance by the
Board of Directors of the participating company. Under the EIP, the
participant was granted a target incentive amount that represented a
percentage (from 10% to 30% depending on the participant's position within
the participating company) of the participant's base salary. The actual
amount received by the participant ranged from zero to twice the target
incentive amount, depending solely on the achievement of the performance
measures. Nationwide and the participating subsidiaries and affiliates
terminated the EIP in May 1999. As of May 1999, the Named Executive
Officers no longer participate in the EIP, but rather participated inmaintains the Performance Incentive Plan which is later defined.
MANAGEMENT INCENTIVE PLAN
Prior to 1999, Nationwide Mutual Insurance Company and certain of its
subsidiaries and affiliates, including Nationwide, maintain the Management
Incentive Plan (MIP). Under the MIP prior to 1998, annual payments were
made to the Named Executive Officers and certain other management employees
of the participating companies based on the achievement of measures
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58
tied to the performance of Nationwide and the relevant operating company,
the relevant business unit and the individual participant over the
preceding year. Performance measures were based on profitability, growth,
expense management and key strategic objectives, which were established in
advance. Under the MIP, the participant was granted a target incentive
amount that represented a percentage (from 5% to 15% depending on the
participant's position within the participating company) of the
participant's base salary. The actual amount received by the participant
under the MIP ranged from zero to twice the base incentive amount,
depending solely on the achievement of the performance measures.
Nationwide and the participating subsidiaries and affiliates terminated the
Management Incentive Plan, with respect to these officers, at the close of
calendar year 1997, and, for all other participants at the close of
calendar year 1998. Beginning in 1998, the Named Executive Officers and
certain other officers of the participating companies no longer participate
in the MIP, but rather participate in the Performance Incentive Plan.
PERFORMANCE INCENTIVE PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintain the Performance Incentive Plan
(PIP)("PIP"), first
implemented in 1998. Under the PIP, annual payments are made to the Named
Executive Officers and certain other management employees of the
participating companies based on the achievement of measures tied to the
performance of the Nationwide, the relevant operating company, the relevant business unit
and the individual participant over the preceding year. Performance
measures are based on a broad series of key financial results, financial
and operational comparison to external peer comparators, the extent of
accomplishment of strategic initiatives, and other factors and results
impacting organization performance, and further based upon individual
employee performance. Under the PIP, the participant will be granted a
target incentive amount that represents a percentage (from 5%4.5% to 50%150%
depending on the participant's position within the participating company)
of the participant's base salary. The actual amount received by the
participant under the PIP will range from zero to no maximum factor of the
participant's base salary, depending solely on the achievement of the
performance measures.
DEFERRED COMPENSATION PROGRAMOFFICE OF INVESTMENTS INCENTIVE PLAN
Nationwide maintains the Office of Investments Incentive Plan (the "OIP"),
first implemented in 1999. Under the OIP, annual payments are made to Mr.
Woodward and certain other investment professionals within the investment
department based on the achievement of measures tied to performance of the
investment organization and the individual participant. Performance
measures are based on investment objectives and operating company short
and long-term investment performance versus market indices. Under the OIP,
the participant will be granted a target incentive amount that represents
a percentage (from 15% to 85% depending on the participant" position
within the participating company) of the midpoint of the salary range for
the participant's position within the Company. The actual amount received
by the participant under the OIP will typically range from zero to a
maximum of two times the participant's target percentage opportunity,
depending on the performance of the investment organization and the
individual participant.
EXECUTIVE INCENTIVE PLAN
Prior to May 1, 1999, Nationwide Mutual Insurance Company and certain of
its subsidiaries and affiliates, including Nationwide, maintainmaintained the
Executive Incentive Plan ("EIP"). Under the EIP, annual payments were made
to the Named Executive Officers and certain other officers of the
participating companies based on the achievement of measures tied to the
performance of Nationwide and the relevant operating company over the
preceding three years. Performance measures were based on profitability
and growth objectives that were established in advance by the Board of
Directors of the participating company. Under the EIP, the participant was
granted a target incentive amount that represented a percentage (from 10%
to 30% depending on the participant's position within the participating
company) of the participant's base
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56
salary. The actual amount received by the participant ranged from zero to
twice the target incentive amount, depending solely on the achievement of
the performance measures.
Nationwide and the participating subsidiaries and affiliates terminated
the EIP in May 1999. As of May 1999, the Named Executive Officers no
longer participated in the EIP, but rather participated in the PIP.
DEFERRED COMPENSATION PROGRAM
Nationwide maintains a deferred compensation program (the "Officers'"Nationwide
Individual Deferred Compensation Program"Plan") pursuant to which elected officers
of participating companies may elect to defer payment of amounts otherwise
payable to them. An eligible officer is permitted to enter into a deferral
agreement pursuant to which such officer may annually elect to defer a
portion of his or her salary or incentive compensation earned during the
following year.year or performance cycle. Any such election is effective
prospectively. Amounts deferred under the Officer'sNationwide Individual Deferred
Compensation ProgramPlan will generally be payable in annual installments
beginning in January of the calendar year following the calendar year in
which the officer terminates employment or after the expiration andof the
deferral period elected by the participant. Accounts under the Nationwide
Individual Deferred Compensation Plan are credited with deferrals and
earnings based on the net investment return on the participants' choice of
investment measures from those offered under the Nationwide Individual
Deferred Compensation Plan.
Nationwide also maintains a deferred compensation plan (the "Employees'
Deferred Compensation Plan") pursuant to which certain employees of
participating companies, who earn in excess of $85,000 per year and who
are not eligible for the Nationwide Individual Deferred Compensation Plan,
may elect to defer payment of amounts otherwise payable to them. An
eligible employee is permitted to enter into a deferral agreement pursuant
to which such employee may annually elect to defer a portion of his or her
salary or incentive compensation earned during the following year or
performance cycle. Any such election is effective prospectively. Amounts
deferred under the Officers'Employees' Deferred Compensation Program arePlan will generally be
payable in annual installments beginning in January of the calendar year
after the expiration of the deferral period elected by the participant.
Each participant's account under the Employees' Deferred Compensation Plan
is credited with interest. The interest rate isdeferrals and earnings, based on the fixed rate option
innet investment
return on the Savingsparticipants' choice of investment measures from those
offered under the Employees' Deferred Compensation Plan.
SAVINGS PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintainmaintains the Nationwide Savings Plan (the "Savings Plan"), a
qualified profit-sharing plan including a qualified cash or deferred
arrangement covering eligible employees of participating companies. Under
the Savings Plan, participants who are not residents of Puerto Rico may
elect to contribute between 1% and 22% of their compensation to accounts
established on their behalf under the Savings Plan in the form of
voluntary salary reductions on a pretax basis andbasis; participants who are
residents of Puerto Rico may make contributions on an after-tax basis. The
participating companies are obligated to make matching employer
contributions, for the benefit of their participating employees, at the
rate of 70% of the first 2% of compensation deferred or contributed to the
Savings Plan by each employee, and 40% of the next 4% of compensation
deferred or contributed by each employee to the Savings Plan. All amounts
contributed to the Savings Plan are held in a separate account for each
participant and are 56
59
invested in one or more funds made available under the
Savings Plan and selected by the participant. Normally, a participant
receives the value of his or her account upon termination of employment,
although a participant may withdraw all or a part of the amounts credited
to his or her accountsaccount during employment under certain circumstances
including attainment of age 59 1/2, or receive a loan of a portion of his
or her account balance. Under the Savings Plan, a participant is
immediately vested in all amounts credited to his or her account as a
result of salary deferrals (and earnings on those deferrals) or after-tax
contributions (and earnings on those contributions), as applicable. A
participant is vested in amounts attributable to employer matching
contributions (and earnings on those contributions) over a period of five
years.
55
57
SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintainmaintains an unfunded, nonqualified defined contribution
supplemental benefit plan, the Nationwide Supplemental Defined
Contribution Plan (the "DC Supplemental Plan"), which provides benefits
equal to employer matching contributions that would have been made under
the Savings Plan for the participants in the absence of the IRC
Section 401(a)(17) limitation on
compensation that can be considered, found in Section 401(a)(17) of the
Internal Revenue Code of 1986, as amended ("IRC"), and the IRC Section
402(g) limitation on amounts that can be deferred under the Savings Plan,
reduced by actual employer matching contributions made to the Savings
Plan. Participants are limited to those elected officers earning in excess
of $170,000 annually. Benefits under the DC Supplemental Plan vest at the
same time as employer matching contributions vest under the Savings Plan.
NATIONWIDE FINANCIAL SERVICES, INC. 1996 LONG-TERM EQUITY COMPENSATION
PLAN
The purpose of the Long TermNationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan (LTEP)(the "LTEP") is to benefit the stockholders of
Nationwide Financial Services, Inc. by encouraging high levels of
performance by selected officers, directors and employees of Nationwide
Financial Services, Inc. and certain of its affiliates, attracting and
retaining the services of such individuals and aligning the interests of
such individuals with those of the stockholders.
The LTEP provides for the grant of any or all of the following, types of
awards:
(i) stock options, including incentive stock options and non-qualifiednonqualified
stock options, for shares of Class A Common Stock;
(ii) stock appreciation rights ("SARs"), either in tandem with stock
options or freestanding;
(iii) restricted stock; and
(iv) performance awards.
Any stock option granted in the form of an incentive stock option must
satisfy the applicable requirements of IRC Section 422 of the Internal Revenue
Code.422. Awards may be made
to the same person on more than one occasion and may be granted
singularly, in combination or in tandem as determined by Nationwide
Financial Services, Inc. Compensation Committee.
The LTEP grants the Nationwide Financial Services Compensation Committee, which administers the LTEP,
flexibility in creating the terms and restrictions deemed appropriate for
particular awards as facts and circumstances warrant. The LTEP is intended
to constitute a non-qualified,nonqualified, unfunded, unsecured plan for incentive and
deferred compensation and is not intended to be subject to any
requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Awards under the LTEP which are performance-based are
intended to qualify as "performance-based compensation" for purposes of
Section 162(m) of the Internal Revenue Code
of 1986, as amended.IRC.
No awards may be granted under the LTEP after December 11, 2006, and the
LTEP may be terminated by the Board of Directors of Nationwide Financial
Services, Inc. prior to such date. In the event of expiration or earlier
termination of the LTEP, the LTEP will remain in effect until such time as
all awards previously granted thereunder have been satisfied or have
expired.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table shows, as to Named Executive Officers in the Summary
Compensation Table, certain information concerning stock options granted
during the 1999 fiscal year under the Long Term Equity Compensation Plan.
5756
6058
OPTION/STOCK APPRECIATION RIGHTSSAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES % OF TOTAL EXERCISE PRICE
UNDERLYING OPTIONS SECURITIES GRANTED OR BASE PRICE GRANT DATE
OPTIONS/SARS GRANTED1 TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE OR BASE GRANT DATE
OPTIONS GRANTEDPER SHARE PRESENT VALUE2
NAME # FISCAL YEAR PRICE $/SH PRESENT VALUE
NAME (1)$ EXPIRATION DATE (2)$
---- --------------------- --------------- ------------- --------------- --------------
Dimon R. McFerson 75,000 7.2% $48.12565,000 5.6% 26.9375 February 9, 2009 $1,508,250
34,700 3.4% $38.250 November 9, 2009 545,1372010 730,600
W. G. Jurgensen 210,000 18.0% 28.0000 May 26, 2010 2,509,500
Joseph J. Gasper 50,000 4.8% $48.12576,100 6.5% 26.9375 February 9, 2009 1,005,500
25,500 2.5% $38.250 November 9, 2009 400,6052010 855,364
Robert J. Woodward, Jr. 15,000 1.4% $48.12512,200 1.0% 26.9375 February 9, 2009 301,650
6,800 0.7% $38.250 November 9, 2009 106,8282010 137,128
Richard A. Karas 25,000 2.4% $48.12515,000 1.3% 26.9375 February 9, 2009 502,750
7,400 0.7% $38.250 November 9, 2009 116,254
Susan A. Wolken 9,215 0.9% $48.1252010 168,600
Mark R. Thresher 11,400 1.0% 26.9375 February 9, 2009 185,314
6,000 0.6% $38.250 November 9, 2009 94,2602010 128,136
(1)1 One-third of the options granted become exercisable on each year onof the first
three anniversary dates of the grant, date.except for 60,000 of Mr. Jurgensen's
option grant, which becomes one-fifth exercisable on each of the first five
anniversary dates of the grant. Options may be accelerated upon a change of
control or certain other events of termination of employment.
(2)2 The estimated grant date present value dollar amounts in this column are the
result of calculations made using the Black-Scholes model, a theoretical
method for estimating the present value of stock options based on a complex
set of assumptions. The material assumptions and adjustments incorporated in
the Black-Scholes model used to estimate the value of these options include
the following:
-o An exercise price on the options equal to the fair market value of
the underlying stock on the date of the grant, as listed in the
table.
-o The rate available at the time the grant was made on zero-coupon
U.S. Government issues with a remaining term equal to the expected
life. The risk-free rate was 4.91%6.85% for the February 9, 1999 grants2000 grant
and 5.97%6.60% for the November 9, 1999May 26, 2000 grant.
-o Dividends at a rate of $0.30$0.40 per share for the February 9, 19992000
grant and $0.40$0.48 per share for the November 9, 1999May 26, 2000 grant, representing
the annualized dividends paid on shares of common stock at the date
of grant.
-o An option term before exercise of 5five years, which represents the
typical period that options are held prior to exercise.
-o Volatility of the stock price of 42.02%41.47% for the February 9, 19992000
grant and 42.25% for the May 26, 2000 grant, reflecting the average
daily stock price volatility for the one-year
period prior to the grant date, and 41.23% for the November 9, 1999
grant, reflecting the daily stock price volatility for the one-year
period prior to the grant date.
-since Nationwide Financial Services,
Inc.'s initial public offering on March 6, 1997.
o No adjustments were made for vesting requirements,
non-transferability, or risk of forfeiture.
OPTIONS/STOCK APPRECIATION RIGHTS EXERCISES AND HOLDINGS
The following table provides information, with respect to Named Executive
Officers, concerning the exercise of options and/or Stock Appreciation
Rights during 1999 and unexercised options and Stock Appreciation Rights
held as of fiscal year-end December 31, 1999, under the Long-Term Executive
Compensation Plan.
AGGREGATED OPTION/S STOCK APPRECIATION RIGHTSSAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/STOCK APPRECIATION RIGHTSSAR VALUES
NAME SHARES VALUE REALIZED
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS/SARS AT VALUE OF UNEXERCISED IN-THE MONEYIN-THE-MONEY
ACQUIRED ON UNEXERCISED OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR -END
($)
EXERCISE YEAR-ENDVALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME # $ # $
- ---- ----------- -------------- ------------------------------- ---------------------------------
Dimon R. McFerson 2,500 $31,250 44,167/163,033 107,241/59,165-- -- 272,200/-- 3,045,038/--
W. G. Jurgensen -- -- --/210,000 --/4,095,000
Joseph J. Gasper _____ _____ 33,333/112,167 88,750/44,375
Richard A Karas _____ _____ 10,667/33,133 29,585/14,790-- -- 81,834/139,766 3,887,115/6,638,885
Robert J. Woodward, Jr _____ _____ 13,333/49,067 29,585/14,790
Susan A. Wolken _____ _____ 5,333/23,792 5,915/2,960-- -- 25,267/30,733 325,970/325,293
Richard A Karas -- -- 34,133/43,267 371,150/408,237
Mark R. Thresher -- -- 15,418/26,232 144,678/298,485
5857
6159
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES FOR VILLANOVA CAPITAL, INC. (A SUBSIDIARY OF NATIONWIDE
FINANCIAL SERVICES, INC.)
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS/SARS AT VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON FISCAL YEAR-END OPTIONS AT FISCAL YEAR -END
EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME # $ # $
- ---- ----------- -------------- ------------------------------- ---------------------------------
Dimon R. McFerson -- -- --/-- --/--
W. G. Jurgensen -- -- --/-- --/--
Joseph J. Gasper -- -- 500/2,000 --/--
Robert J. Woodward, Jr -- -- --/-- --/--
Richard A Karas -- -- 400/1,600 --/--
Mark R. Thresher -- -- 400/1,600 --/--
PENSION PLANS
(i) Retirement Plan
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintainmaintains a qualified defined-benefit plan, the Nationwide
Retirement Plan (the "Retirement Plan"). In general, a participant's
annual retirement benefit under the Retirement Plan will be equal to
the sum of:
(i)o 1.25% of the participant's Final Average Compensation times
years of service (to a maximum of 35 years); and
(ii)o 0.50% of the participant's Final Average Compensation in excess
of Social Security Covered Compensation times years of service
(to a maximum of 35 years).
Final Average Compensation, for the portion of the participant's
benefit whichthat is attributable to service on or after January 1, 1996,
is the average of the highest five consecutive covered compensation
amounts of the participant in the participant's last 10 years of
service. For the portion of a participant's benefit attributable to
service prior to January 1, 1996, Final Average Compensation is the
average of the highest three consecutive covered compensation amounts
of the participant in the participant's last 10 years of service.
Covered compensation, for purposes of determining Final Average
Compensation under either method, is calculated on a calendar-year
basis and includes compensation from any member company of
Nationwide. With respect to Messrs. Gasper andMr. Karas, and
Ms. Wolken, because each such officer'shis compensation is
allocated solely to Nationwide Financial Services, Inc. and its
subsidiaries, covered compensation includes the compensation listed
under the headings Salary, Bonus and Long-Term Incentive PlanLTIP Payouts shown in the
Summary Compensation Table. Covered compensation for Messrs.
McFerson, Jurgensen, Gasper, Woodward and WoodwardThresher includes the
amount set forth under the headings Salary, Bonus and Long-Term Incentive PlanLTIP Payouts
shown in the Summary Compensation Table and additional compensation
amounts received for services rendered to other companies of Nationwide.Nationwide companies.
Social Security Covered Compensation means the average of the Social
Security wage bases in effect during the 35-year period ending with
the last day of the year the participant attains Social Security
retirement age. The portion of a participant's benefit attributable
to years of service credited prior to 1996 is also subject to
post-retirement increases following the commencement of benefits or
the participant's attainment of age 65, whichever is later.
A participant becomes fully vested after the completion of five years
of vesting service. The Retirement Plan generally provides for
payments to or on behalf of each vested participant upon such
participant's retirement on his or her normal retirement date or
later, although provision is made for payment of early retirement
benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62
for those with 5 or more years of vesting service. The normal
retirement date under the Retirement Plan is the later of the date
the participant attains age 65 or completes five years of vesting
service. Death benefits are payable to a participant's spouse or,
under certain circumstances, the named beneficiary of a participant
who dies with a
58
60
vested benefit under the Retirement Plan or while an employee. The
Retirement Plan also provides for the funding of retiree medical
benefits under Section 401(h) of the Internal Revenue Code.IRC.
(ii) Excess and Supplemental Plans
Nationwide Mutual Insurance Company and certain of its subsidiaries and
affiliates, including Nationwide, maintainmaintains an unfunded, nonqualified defined-benefit excess
benefit plan, the Nationwide Excess Benefit Plan (the "Excess" Nationwide
Excess Plan") and an unfunded, nonqualified defined-benefit
supplemental benefit plan pursuant to which certain participants may
receive a supplemental retirement benefit, the Nationwide
Supplemental Retirement Plan (the "Supplemental Plan"). Any
participant whose benefits are limited under the Retirement Plan by
reason of limitations under IRC Section 415 of the Internal Revenue Group on the maximum benefit
that may be paid under the Retirement Plan will receive, under the
Excess Plan, that portion of the benefit that he or she would have
been entitled to receive under the Retirement Plan in the absence of
such limitations. Officers who earn in excess of $170,000 annually,
have at least 5 years of vesting service and whose benefits under the
Retirement Plan are limited 59
62
by reason of certain other limitations
under the Internal Revenue Group,IRC, may receive benefits under the Supplemental Plan.
Benefits under the Supplemental Plan will be the sum of:
(i)o 1.25% of the participant's Final Average Compensation times
years of service (up to a maximum of 40 years); and
(ii)o 0.75% of the participant's Final Average Compensation in excess
of Social Security Covered Compensation times years of service
(up to a maximum of 40 years) reduced by benefits accrued under
the Retirement Plan and the Excess Plan.
The benefits under the Supplemental Plan, for individuals
participating in that plan on January 1, 2000,1999, and the Excess Plan
vest at the same time as benefits vest under the Retirement Plan.
Benefits for all other participants in the Supplemental Plan vest
over a period of 5 years of participation in that plan.
The following chart below indicates the estimated maximum annual retirement
benefits that a hypothetical participant would be entitled to receive
under the Retirement Plan, including payments made under the Excess
and Supplemental Plans, as a result of limitations imposed by the Internal Revenue Code, computed on a straight-life annuity basis, if
retirement occurred at age 65 and the number of credited years of
service and Final Average Compensation equaled the amounts indicated.
For purposes of the chart, it is assumed that the Final Average
Compensation is the same whether measured over the three-year
averaging period that applies to service accumulated prior to 1996 or
the five-year period that applies to service accumulated after 1995.
In actual operation, the total benefit received under the Retirement
Plan (including payments made under the Excess and Supplemental
Plans) would be the total of the benefit determined based on years of
service earned under each method.
6059
6361
YEARS OF SERVICE
FINAL AVERAGE ----------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
------------- ---------- ---------- ---------- ---------- ----------
$125,000 $30,342 $40,456 $50,570 $60,684 $70,798
$150,000 36,905 49,206 61,508 73,809 86,111
$175,000 48,794 65,059 81,324 97,589 113,853
$200,000 56,294 75,059 94,824 112,589 131,353
$225,000 63,794 85,059 106,324 127,589 148,853
$250,000 71,294 95,059 118,824 142,589 166,353
$300,000 86,294 115,059 143,824 172,589 201,353
$350,000 101,294 135,059 168,824 202,589 236,353
$400,000 116,294 155,059 193,824 232,589 271,353
$450,000 131,294 175,059 218,824 262,589 306,353
$500,000 146,294 195,059 243,824 292,589 341,353
$600,000 176,294 235,059 293,824 352,589 411,353
$700,000 206,294 275,059 343,824 412,589 481,353
$800,000 236,294 315,059 393,824 472,589 551,353
$900,000 266,294 355,059 443,824 532,589 621,353
1,000,000 296,294 395,059 493,824 592,589 691,353$ 125,000 $ 30,180 $ 40,240 $ 50,300 $ 60,360 $ 70,420
$ 150,000 36,743 48,990 61,238 73,482 85,733
$ 175,000 48,551 64,735 80,919 97,103 113,286
$ 200,000 56,051 74,735 93,419 112,103 130,786
$ 225,000 63,551 84,735 105,919 127,103 148,286
$ 250,000 71,051 94,735 118,419 142,103 165,786
$ 300,000 86,051 114,735 143,419 172,103 200,786
$ 350,000 101,051 134,735 168,419 202,103 235,786
$ 400,000 116,051 154,735 193,419 232,103 270,786
$ 450,000 131,051 174,735 218,419 262,103 305,786
$ 500,000 146,051 194,735 243,419 292,103 340,786
$ 700,000 206,051 274,735 343,419 412,103 480,786
$ 900,000 266,051 354,735 443,419 532,103 620,786
1,100,000 326,294 435,059 543,824 652,589 761,353
1,200,000 356,294 475,059 593,824 712,589 831,353326,051 434,735 543,419 652,103 760,786
1,700,000 506,051 674,735 843,419 1,012,103 1,180,786
1,900,000 566,051 754,735 943,419 1,132,103 1,320,786
2,000,000 596,051 794,735 993,419 1,192,103 1,390,786
All Named Executive Officers have a portion or all of their benefit
calculated based on the post-1995 definition of Final Average
Compensation. As of December 31, 1995, the number of credited years
of service under the Retirement Plan for Messrs. McFerson, Gasper,
Karas, Woodward and Ms.
WolkenKaras was 23 years, 29.5 years, 31.5 years, 31.67 years and 21.1731.5
years, respectively. Mr. Jurgensen and Mr. Thresher had no credited
service under the Retirement Plan at that time. Mr. McFerson's
credited years of service include pursuant to
an agreement with Nationwide Mutual Insurance Company, 8.17 years in excess of those
actually earned through employment by the Nationwide.Nationwide pursuant to an
agreement with Nationwide Mutual Insurance Company. The benefit
attributable to those additional years will be paid by Nationwide
Mutual Insurance Company (not the Retirement Plan) and is reduced by
the benefit payable under the retirement plan of Mr. McFerson's
previous employer. Each of the Named Executive Officers, other than
Mr. Jurgensen and Mr. Thresher, earned additional years of service in
the years 1996 1997, 1998through 2000. Mr. Thresher began participation in the
Retirement Plan in 1997. Mr. Jurgensen will become eligible to
participate in the Retirement Plan in 2001, but is entitled, pursuant
to an agreement with Nationwide Mutual Insurance Company, to a
retirement benefit of 4% of his highest 5-year average compensation
for each full or partial year of service with Nationwide, to a
maximum of 16.25 years, if he completes at least five years of
service or becomes entitled to severance benefits under the
agreement. For purposes of such agreement, Mr. Jurgensen's highest
5-year average compensation is the average of his salary and
1999incentive compensation over the five-year period, or the period of
his employment by Nationwide, if shorter, that produces the highest
average. This benefit is reduced by the benefits received under the
Retirement Plan, Supplemental Plan and theirExcess Plan, as well as any
benefit received under any defined benefit pension plans maintained
by Mr. Jurgensen's prior employers, and will be paid by Nationwide
Mutual Insurance Company (not the Retirement Plan). The benefit of
each Named Executive Officer for suchthe years since 1995 and all future
years will be calculated under the new5-year definition of Final Average
Compensation. Covered compensation paid by Nationwide Financial
Services, Inc. for the fiscal year ended December 31, 1999,2000, for
Messrs. McFerson, Jurgensen, Gasper, Woodward, Karas Woodward, and Ms. WolkenThresher was
$1,074,758, $988,802, $611,209, $525,07060
62
$1,488,747, $241,185, $1,529,207, $498,691, $770,162; and $465,640,$527,231,
respectively.
COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
Approximately 20% of the shares of Nationwide Financial Services, Inc. is 18.6% publicly traded.owned. Nationwide
Mutual Insurance Company through a wholly-owned
subsidiary, owns approximately 80%81.4% of the
outstanding shares of the Nationwide Financial Services.Services, Inc. Because
Nationwide is the principal operating subsidiary of Nationwide Financial
Services, Inc., the Nationwide Life Insurance Company Compensation
Committee (the "Nationwide Life Compensation Committee") established all
components of 19992000 compensation for Nationwide Financial Services'Services, Inc.'s
executive officers, with the exception of stock-based incentive grants
made by the Nationwide Financial Services, Inc.'s Compensation Committee under
the Long-Term Equity Compensation Plan.LTEP.
Dimon R. McFerson, Nationwide Financial Services'Services, Inc.'s Chairman and
Chief Executive Officer servesthrough July 31, 2000, served also in the same
capacity for Nationwide. Effective August 1, 2000, Mr. McFerson's title
was changed to Chairman for Nationwide Financial Services, Inc., as well
as for Nationwide. Mr. McFerson remained as Chairman of Nationwide
Financial Services, Inc.and Nationwide until his retirement on December
30, 2000. Effective May 26, 2000, W. G. Jurgensen was named Chief
Executive Officer-Elect for Nationwide Financial Services, Inc. and for
Nationwide, and effective August 1, 2000, was named Chief Executive
Officer for both companies. In January 2001, Mr. Jurgensen was named
Chairman of the Board and Chief Executive Officer of Nationwide Financial
Services, Inc. Robert J. Woodward, Jr., Nationwide Financial Services'Services,
Inc.'s Executive Vice President - Chief Investment Officer, serves also in
the same capacity for Nationwide. Pursuant to athe Cost Sharing Agreement,
compensation for Mr.Messrs. McFerson, Jurgensen, Gasper, Woodward and
Mr.
WoodwardThresher is allocated among the companies in the Nationwide GroupMutual Insurance
Company for whom services are performed. The amounts are paid by
Nationwide Mutual Insurance Company or Nationwide and reimbursed by the
other
61
64 companies in accordance with the terms of the Cost Sharing
Agreement. The 19992000 compensation for Mr.Messrs. McFerson, Jurgensen, Gasper,
Woodward, and Mr. WoodwardThresher reported in the compensation tables and discussed
in this report is the amount allocated to Nationwide Financial Services,
Inc. and its subsidiaries under the Cost Sharing Agreement and is solely
for services rendered to Nationwide Financial Services, Inc. and its
subsidiaries. Compensation for the other executives namedMr. Karas in the compensation tables was
not allocated and is theirhis aggregate 19992000 compensation for services rendered
to Nationwide Financial Services, Inc. and its subsidiaries.
The Nationwide Life Compensation Committee and the Nationwide Financial
Services, Inc.'s Compensation Committee are both comprised solely of
non-employee directors.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Nationwide Life Compensation Committee and the Nationwide Financial
Services, Inc.'s Compensation Committee (collectively referred to herein
as the "Compensation Committees") believe that the compensation program
for Nationwide Financial Services'Services, Inc.'s executive officers should
support Nationwide Financial Services, Inc.'s and Nationwide's vision and
business strategies. In addition, compensation should be determined within
a competitive framework based on overall financial results, business unit
results, teamwork, and individual contributions that help build value for
Nationwide Financial Services'Services, Inc.'s stockholders. The primary objectives
of the compensation program are to:
- provideo Provide a direct link between pay and performance;
- allocateo Allocate a larger percentage of executive compensation to pay that is
at-risk in order to positively influence behavior and support
accountability;
- attract,o Attract, retain and motivate top-caliber employees required for new
business directions;
- offero Offer total compensation opportunities that are fully competitive
with the appropriate external markets in design and pay level; and
- emphasizeo Emphasize the need to focus on stockholder value, in addition to
providing-competitive value to customers.
61
63
As part of the overall compensation philosophy, the Compensation
Committees have determined that total compensation and each of the
elements that comprise total compensation (base salary, annual incentives,
long term incentives) should be targeted at the 50th percentile of the
market. The Compensation Committees believe that differences in individual
performance should result in significantly different levels of
compensation. Therefore, individual pay delivered may be higher or lower
than the 50th percentile of the market, depending on individual
performance.
Competitive market data is provided to the Compensation Committees by
independent compensation consultants. This data compares Nationwide
Financial Services'Services, Inc.'s and the Nationwide's compensation practices to
various groups of comparablecomparator companies. These comparablecompator companies compete
with Nationwide Financial Services, Inc. for customers, capital and
employees, and are comparable to Nationwide Financial Services, Inc. in
size, scope and business focus. This group includes both multi-line
insurers and diversified financial organizations.
The companies chosen for the comparable compensation comparator group are not
necessarily the same companies that would be considered acomprise the peer group of Nationwide
Financial Services.Services, Inc. The comparable compensation comparator group includes more
companies than those in the peer group because it gives the Compensation
Committees a broader data basedatabase for comparison purposes.
ELEMENTS OF 19992000 EXECUTIVE COMPENSATION
The key elements of Nationwide Financial Services'Services, Inc.'s executive
compensation program are base salary, annual incentives and long-term compensation.incentives. The
following discussion relates to Nationwide Financial Services'Services, Inc.'s
executive officers other than Mr. McFerson and Mr. Jurgensen, whose
compensation is discussed separately in the Compensation of the Chief
Executive Officer.Officers.
BASE SALARIES
Base salaries offer security to executives and allow Nationwide Financial
Services, Inc. to attract competent executive talent and maintain a stable
62
65
management team. They also allow executives to be rewarded for individual
performance and encourage the development of executives. Pay for
individual performance rewards executives for achieving goals that may not
be immediately evident in common financial measurements.
Base salaries for executive officers are initially determined by
evaluating executives' levellevels of responsibility, prior experience, breadth
of knowledge, internal equity and external pay practices.
In determining increases to base salaries for 1999,2000, the Nationwide Life
Compensation Committee considered relevant external market data, as
described above in Compensation Philosophy and Objectives. However,
increases to base salaries were driven primarily by individual performance
that was evaluated based on levels of individual contribution to
Nationwide Financial Services, Inc. and Nationwide. When evaluating
individual performance, the Nationwide Life Compensation Committee
considered, among other things, the executive's efforts towards financial
results and strategic initiatives, as well as their efforts in promoting
the values of Nationwide Financial Services, Inc. and Nationwide;
continuing educational and management training; improving product quality;innovation;
developing relationships with customers, suppliers,distributors and employees; and
demonstrating leadership abilities among co-workers.coworkers. No specific formula
was used in evaluating individual performance, and the weighting given to
each factor with respect to each executive officer was within the
individual discretion and judgment of each member of the Nationwide Life
Compensation Committee. Base salaries for the executive officers,
including promotion and market competitive-driven increases, were
increased in 19992000 by an average of 13.5%9.4%, a rate comparable to the base
salary increases provided at comparablecomparator companies. Executive officer
salaries were established at a level that is consistent with the goals
stated in Compensation Philosophy and Objectives.
ANNUAL INCENTIVE COMPENSATION
The Performance Incentive Plan promotesand Office of Investments Incentive Plan
promote the pay-for-performance philosophy of the Compensation Committees
by providing executives with direct financial rewards in the form of
annual cash incentives. Awards for 19992000 were based on return on equity,
earnings and premiumrevenue growth and other key financial measures, financial
and operational comparison to external peer competitors, to the extent
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64
of accomplishment of strategic initiatives, and other factors and results
impacting performance for both Nationwide Financial Services, Inc. and return on equity, revenue growth and expense
management of
Nationwide and further based upon individual employee performance.
Each year, the Nationwide Life Compensation Committee establishes many
specific performance measures used for the Performance Incentive Plan.
Participants are provided a target incentive opportunity that represents a
percentage of their base salary. In 1999,2000, individual targets for the Named
Executive Officers other than the chief executive officers ranged from 20%55%
to 85%125% of base salary. Individual payouts under the Performance Incentive
Plan may range from zero to no maximum factor of the individual's target
incentive amount, depending on the achievement of the performance
measures. For 1999,2000, the excellent results achieved for the return on
equity, the earnings and premiumrevenue growth, and other financial and strategic
performance measures of Nationwide Financial Services, and of NationwideInc. resulted in a
payout of 175%140% of target for Mr. Gasper;Gasper and an average of 192%169% of target
for Mr.Messrs. Woodward, Karas Mr. Woodward and Ms. Wolken.Thresher. These amounts are reflected in
the Bonus column in the Summary Compensation Table.
LONG-TERM INCENTIVE COMPENSATION
In keeping with the philosophy of the Compensation Committees to provide a
total compensation package that favors at-risk components of pay,
long-term incentives comprise a significant portion of an executive's
total compensation package. When determining long-term incentive award
sizes, the Compensation Committees consider the executives' levels of
responsibility, position within Nationwide Financial Services, Inc., prior
experience, historical award data, various performance criteria, and
compensation practices at comparablecomparator companies.
The Compensation Committees utilize the long-term incentive plan described
below. This plan is designed to achieve a balance between market pay
orientation and alignment of executive interests with that of
stockholders.
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66
(i) Nationwide Financial Services, Inc.NATIONWIDE FINANCIAL SERVICES, INC. 1996 Long-Term Equity Compensation
PlanLONG-TERM EQUITY COMPENSATION
PLAN
The Long-Term Equity Compensation PlanLTEP authorizes grants of stock options, stock appreciation rights,
restricted stock and performance awards. The objectives of the Long-Term Equity Compensation PlanLTEP are to
encourage high levels of performance by selected officers, directors and
employees of Nationwide Financial Services, Inc. and certain of its
affiliates, to attract and retain the services of such individuals, and to
align the interests of such individuals with those of the stockholders.
During February 1999 and November 1999,2000, the Nationwide Financial Services, Inc. Compensation
Committee made grants to executive officers and others under the Long-Term Equity Compensation Plan.LTEP.
Award sizes were determined based on competitive equity grant practices
using the median practices at comparator companies and the individual's
impact on Nationwide Financial Services'Services, Inc.'s performance and were
determined consistent with the goals stated in Compensation Philosophy and
Objectives. The grant wasgrants were awarded in non-qualifiednonqualified stock options that
have an exercise price equal to the fair market value of theNationwide
Financial Services, Inc.'s Class A Common Stock on the date of the option
grant. Suchgrant, as well as restricted stock grants. The options become exercisable
in equal installments over a three-year term, and expire ten years after
the date of grant.grant, and the restricted stock vests at the end of a
three-year period.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICEROFFICERS
Dimon R. McFerson servesserved as Nationwide Financial Services'Services, Inc.'s Chairman
and Chief Executive Officer, as well as in the same capacity for
Nationwide.Nationwide, through July 31, 2000. He retained the title of Chairman until
his retirement on December 30, 2000. W. G. Jurgensen assumed the role of
Nationwide Financial Services, Inc.'s Chief Executive Officer - Elect, and
the same capacity for Nationwide, beginning May 26, 2000, and was named
Chief Executive Officer for both companies beginning August 1, 2000. In
January 2001, Mr. Jurgensen was named Chairman of the Board and Chief
Executive Officer of Nationwide Financial Services, Inc. Except for grants
made under the Long-Term Incentive PlanLTEP in February and
November 19992000 by the Nationwide Financial Services,
Inc.'s Compensation Committee, and an LTEP grant made to Mr. Jurgensen
upon hire, all components of Mr. McFerson'sboth Messrs. McFerson and Jurgensen's
compensation
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65
for 19992000 were established by the Nationwide Life Compensation Committee.
As discussed above in the Introduction, a portion of Mr. McFerson'sMessrs. McFerson and
Jurgensen's annual compensation is allocated to Nationwide Financial
Services, Inc. for services rendered to Nationwide Financial Services,
Inc., based on the time Mr.Messrs. McFerson devotesand Jurgensen devote to histheir
responsibilities with Nationwide Financial Services.Services, Inc. The compensation
reported for Mr.Messrs. McFerson and Jurgensen in the compensation tables and
discussed in this prospectusreport represents amounts paid for Mr. McFerson's
services as Chairman and Chief Executive Officer of and Nationwide Financial
Services, Inc. and its subsidiaries.subsidiaries prior to August 1, 2000 and Chairman
until his retirement on December 30, 2000, and for Mr. Jurgensen's
services as Chief Executive Officer - Elect of Nationwide Financial
Services, Inc. and its subsidiaries beginning May 26, 2000, and then as
Chief Executive Officer from August 1, 2000.
Mr. McFerson's 19992000 compensation was determined pursuant to the same
philosophy and objectives described earlier in this prospectusreport and used for
all executive officers. In determining the compensation of Mr. McFerson
for 1999,2000, the Nationwide Life Compensation Committee reviewed the strong
financial results of Nationwide Financial Services, Inc. for 1998,1999, Mr.
McFerson's superior leadership of the Nationwide Groupcompanies since 1992, his
extensive experience in the industry, and his successful efforts in
Nationwide Financial Services.Services, Inc. The portion of Mr. McFerson's base
salary compensation allocated to Nationwide Financial Services, Inc.
totaled $466,900$475,471 in 1999,2000, an increase of 8.3% percent1.8% over 1998.1999. This increase
reflects both an
adjustment in Mr. McFerson's annual base salary rate, and an increase in the cost allocation. In 1999,2000, Mr. McFerson's
annual base salary rate was increased by 5.3%.unchanged. This increasesalary positioned Mr.
McFerson's base salary compensation at approximately the 50th percentile
of the comparablecomparator companies. All elements of Mr. Jurgensen's 2000
compensation were determined pursuant to his employment agreement with
Nationwide Mutual Insurance Company when he assumed the role of Chief
Executive Officer for Nationwide Financial Services, Inc. effective August
1, 2000. The portion of Mr. Jurgensen's annual base salary compensation
allocated to Nationwide Financial Services, Inc. for 2000 was $230,290,
which was prorated. The basis for determination of Mr. Jurgensen's base
salary is competitive market data from peer companies, in addition to his
financial industry experience, and is consistent with the goals stated in
Compensation Philosophy and Objectives.
The portion of Mr. McFerson's annual incentive award allocated to
Nationwide Financial Services, Inc. earned in 19992000 under the Performance
Incentive Plan was $1,008,504.$1,259,550. This award was 216%265% of his allocated base
salary compensation and reflected 180% of his target incentive. This
payment was determined by the level of achievement of specified financial,
operational and strategic goals as assessed by Nationwide'sthe Nationwide Board of
Directors in their annual performance evaluation of Mr. McFerson. Under the Long-Term Equity Compensation Plan, theThe
portion of Mr. Jurgensen's annual incentive award allocated to Nationwide
Financial Services, Inc. earned in 2000 under the Performance Incentive
Plan was $951,660. This award was 240% of his allocated base salary
compensation, without consideration of proration, and reflected 160% of
his target incentive. This payment was determined by the level of
achievement of specified financial, operational and strategic goals as
assessed by the Nationwide Board of Directors in their annual performance
evaluation of Mr. Jurgensen.
Under the LTEP, Nationwide Financial Services, Inc.'s Compensation
Committee granted Mr. McFerson 109,70065,000 stock optionoptions and 32,500 restricted
stock shares. This number of stock option shares is slightly in excess of the
maximum shares permitted to be granted per person per year under the Long
Term Equity Compensation Plan prior to its amendment. The number of shares
in excess of the limit, 9,700, cannot be considered as performance-based
compensation at the time of their exercise under Section 162(m) of the
Internal Revenue Code. In making this grant,For these grants the Nationwide Financial Services, 64
67Inc.'s
Compensation Committee took into account Mr. McFerson's role in the
continued strategic positioning of Nationwide Financial Services, Inc. In
addition, under his employment agreement with Nationwide Mutual Insurance
Company, Mr. Jurgensen received 210,000 stock options and 25,000
restricted stock shares. These grants reflect the competitive levels of
long-term compensation for Chief Executive Officers of major diversified
insurance and financial services organizations with similar size and
scope, as well
as Mr. McFerson's role in the continued strategic positioning of the
Nationwide Financial Services. In addition, thescope. Nationwide Financial Services, Inc.'s Compensation Committee
reflected the Nationwide Financial Services'Services, Inc.'s desire to have top
officers build a significant personal level of stock ownership in
Nationwide Financial Services, Inc., so as to better align their interests
with those of other stockholders.
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POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue CodeIRC provides that executive compensation in excess
of $1 million willpaid to a "covered employee," as that term is defined in
this section, in any calendar year is not be deductible for purposes of
corporate income taxes unless it is performance-based compensation and is
paid pursuant to a plan meeting certain requirements of the Internal
Revenue Code.IRC. The
Compensation Committees intend to continue increased reliance on
performance-based compensation programs. Such programs will be designed to
fulfill, in the best possible manner, future corporate business
objectives. To the extent consistent with this goal, the Compensation
Committees currently anticipate that such programs will also be designed
to satisfy the requirements of Section 162(m) of the IRC with respect to
the deductibility of compensation paid. However, the Compensation
Committees may award compensation that is not fully deductible if the
Compensation Committees determine that such award is consistent with their
philosophy and in the best interests of Nationwide Financial Services,
Inc. and its stockholders.
(i) Nationwide Financial Services, Inc.'s Compensation Committee
David O. Miller, Chairman
James G. Brocksmith, Jr.
Charles L. Fuellgraf, Jr.
Donald L. McWhorter(1)McWhorter
(ii) Nationwide Life Insurance Company Compensation Committee
Willard J. Engel, Chairman
Nancy C. Breit
Fred C. Finney
Robert L. Stewart
Nancy C. Thomas
(1)Mr. McWhorter servesSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of:
(i) each person who is known by the Company to be the beneficial owner
of more than five percent of either class of Common Stock,
(ii) each director and nominee for director,
(iii) each of the Named Executive Officers, and
(iv) all of the directors and executive officers of the Company as a
group.
The Class B Common Stock is convertible into Class A Common Stock at any
time by the holder on the basis of one share of Class A Common Stock for
each share of Class B Common Stock converted.
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CLASS A COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------ ----------------------------------------- ----------------
Neuberger Berman Inc.(1) 1,566,700 6.54%
605 Third Ave.
New York, NY 10158-3698
Massachusetts Financial Services Company(2) 1,451,475 6.1%
500 Boylston Street
Boston, MA 0216
(1) Based on a Schedule 13G dated February 2, 2001, Neuberger Berman Inc.
reported shared voting power with respect to 1,565,700 and shared
dispositive power with respect to 1,566,700 shares.
(2) Based on a Schedule 13G dated February 12, 2001, Massachusetts Financial
Services Company reported sole voting power and sole dispositive power
with respect to 1,451,475 shares.
CLASS B COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------ ----------------------------------------- ----------------
Nationwide Corporation 104,745,000 100%
One Nationwide Plaza
Columbus, Ohio 43215
The table below sets forth the number of shares of stock of the Company
owned beneficially at March 12, 2001, by the directors, each nominee for
director, each Named Executive Officer and all directors and executive
officers of the Company as a group.
SECURITY OWNERSHIP
AMOUNT AND NATURE OF BENEFICIAL OPTIONS EXERCISABLE WITHIN
NAME OF BENEFICIAL OWNER OWNERSHIP(1),(2) AND (4) 60 DAYS
- ------------------------ ------------------------------- --------------------------
James G. Brocksmith, Jr. 4,880 1,666
Charles L. Fuellgraf, Jr. 19,004(3) 3,166
Joseph J. Gasper 195,173 137,200
Henry S. Holloway 8,959 3,166
W. G. Jurgensen 25,000 --
Richard A. Karas 71,737 54,133
Lydia M. Marshall 6,634 1,166
Dimon R. McFerson 324,379 272,200
Donald L. McWhorter 5,959 1,166
David O. Miller 7,943 3,166
James F. Patterson 7,752 3,166
Gerald D. Prothro 4,959 1,166
Arden L. Shisler 8,959 3,166
Mark R. Thresher 39,009 26,300
Robert J. Woodward, Jr. 54,782 38,333
Directors and Executive Officers as a Group (Total of 31) 1,297,057 840,783
(1) The shares of the Company's Class A Common Stock beneficially owned by
each person named above do not exceed one percent of the outstanding
shares of Class A Common Stock as of March 12, 2001, except Mr. McFerson
and the shares beneficially owned by the group of directors and executive
officers as a whole which represents 1.3% and 5.2%, respectively.
(2) Total includes options exercisable within 60 days.
(3) Includes 2,000 shares held by spouse and 2,000 shares held in a limited
liability partnership.
(4) Total includes shares jointly owned with spouse for the following persons:
Mr. Gasper - 17,972 shares; Mr. Holloway - 2,000 shares, Mr. McFerson -
52,179 shares; Mr. Patterson - 1,000 shares; Mr. Thresher - 6,009.
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CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
(i) Intercompany Agreement
The Company, Nationwide Mutual and Nationwide Corporation entered
into an Intercompany Agreement, certain provisions of which are
summarized below (the "Intercompany Agreement"). As used herein,
"Nationwide Mutual" means Nationwide Mutual collectively with its
subsidiaries and affiliates (other than the Company and its
subsidiaries).
Nationwide Mutual Consent to Certain Events. The Intercompany
Agreement provides that until Nationwide Mutual ceases to control at
least 50% of the combined voting power of the outstanding voting
stock of the Company, the prior written consent of Nationwide Mutual
will be required for:
(a) any consolidation or merger of the Company or any of its
subsidiaries with any person (other than with a wholly-owned
subsidiary);
(b) any sale, lease, exchange or other disposition or acquisition
of assets by the Company or any of its subsidiaries (other than
transactions to which the Company and its subsidiaries are the
only parties), or any series of related dispositions or
acquisitions involving consideration in excess of $250 million;
(c) any change in the authorized capital stock of the Company or
the creation of any additional class or series of capital stock
of the Company;
(d) any issuance by the Company or any subsidiary of the Company of
any equity securities or rights, warrants or options to
purchase such equity securities, except:
(1) shares of Class A Common Stock pursuant to employee and
director stock option, profit-sharing and other benefit
plans of the Company and its subsidiaries and any options
exercisable therefore,
(2) shares of Class A Common Stock issued upon the conversion
of any Class B Common Stock,
(3) the issuance of shares of capital stock of a wholly-owned
subsidiary of the Company to the Company or another
wholly-owned subsidiary of the Company and
(4) in the public offering of Class A Common Stock in March
1997;
(5) the dissolution, liquidation or winding up of the
Company;
(6) the amendment of the Certificate of Incorporation and
certain provisions of the Bylaws affecting corporate
governance;
(7) the election, removal or filling of a vacancy in the
office of the Chairman, Chief Executive Officer or
President of the Company;
(8) the declaration of dividends on any class or series of
capital stock of the Company, except dividends not in
excess of the most recent regular cash dividend or any
dividend per share not in excess of 15% of the then
current per share market price of the Class A Common
Stock;
(9) capital expenditures or series of related capital
expenditures of the Company or any of its subsidiaries in
excess of $250 million during any period of 12
consecutive months;
(10) the creation, incurrence or guaranty by the Company or
any of its subsidiaries of indebtedness for borrowed
money in excess of $100 million, except in connection
with the Capital Securities and the Senior Notes; and
(11) any change in the number of directors on the Board of
Directors of the Company, the determination of members of
the Board of Directors or any committee thereof and the
filling of newly created memberships and vacancies on the
Board of Directors or any committee thereof.
License to Use Nationwide Name and Service Marks. Pursuant to the
Intercompany Agreement, Nationwide Mutual granted to the Company and
certain of its subsidiaries a non-
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exclusive, nonassignable, revocable license to use the "Nationwide"
trade name and certain other service marks specifically identified in
the Intercompany Agreement (collectively, the "Service Marks") solely
for the purpose of identifying and advertising the Company's
long-term savings and retirement business and activities related to
such business.
Equity Purchase Rights. The Company has agreed that, to the extent
permitted by the New York Stock Exchange (the "NYSE") and so long as
Nationwide Mutual controls at least 50% of the combined voting power
of the outstanding voting stock of the Company, Nationwide
Corporation may purchase its pro rata share (based on its then
current percentage voting interest in the Company) of any voting
equity securities to be issued by the Company (excluding any such
securities offered pursuant to employee stock options or other
benefit plans, dividend reinvestment plans and other offerings other
than for cash).
Registration Rights. The Company has granted to Nationwide
Corporation certain demand and "piggyback" registration rights with
respect to shares of Common Stock owned by it. Nationwide Corporation
has the right to request up to two demand registrations in each
calendar year, but not more than four in any five-year period.
Nationwide Corporation will also have the right, which it may
exercise at any time and from time to time, to include the shares of
Common Stock held by it in any registration of common equity
securities of the Company, initiated by the Company on its own behalf
or on behalf of any other stockholders of the Company. These rights
are subject to certain "blackout" provisions. Such registration
rights are transferable by Nationwide Corporation.
Nationwide Mutual Agents. In the Intercompany Agreement, Nationwide
Mutual has agreed to allow the Company to distribute its variable
annuity, fixed annuity and individual universal, variable and
traditional life insurance products through Nationwide Mutual agents.
Such right is exclusive to the Company, subject to the limited right
of certain companies of Nationwide to sell such products through the
agency force, for at least five years following the equity offerings.
(ii) Federal Income Taxes
The Company is included in the consolidated United States federal
income tax return for which Nationwide Mutual is the common parent
and the Company's tax liability will be included in the consolidated
federal income tax liability of Nationwide Mutual. The Company also
may be included in certain state and local tax returns of Nationwide
Mutual or its subsidiaries.
The Company is a party to an agreement, with Nationwide Mutual and
the other companies in the consolidated returns of Nationwide Mutual,
to determine the manner in which their respective tax liabilities
will be determined (the "Tax Sharing Agreement") for 1996 and
subsequent years, as long as the Company is included in the
consolidated federal income tax return for Nationwide Financial Services,
Inc.
65Mutual. It will
also be effective for any year in which the Company is included in a
consolidated or combined state or local tax return. Under the Tax
Sharing Agreement, the Company will pay to Nationwide Mutual amounts
equal to the taxes that the Company would otherwise have to pay if
the Company were to file a separate federal income, or a separate
state or local income or franchise, tax return (including any amounts
determined to be due as a result of a redetermination of the tax
liability of the consolidated or combined group of which Nationwide
Mutual is the common parent arising from any audit or otherwise). The
Company will be responsible for all taxes, including assessments, if
any, for prior years with respect to all other taxes payable by the
Company or any of its subsidiaries, and for all other federal, state
and local taxes that may be imposed upon the Company and that are not
addressed in the Tax Sharing Agreement.
By virtue of its control of the Company and the terms of the Tax
Sharing Agreement, Nationwide Mutual effectively controls all of the
Company's tax decisions. Under the Tax Sharing Agreement, Nationwide
Mutual will have sole authority to respond to and conduct all tax
proceedings (including tax audits) relating to the Company, to file
all returns on behalf of the Company, and to determine the amount of
the Company's liability to (or entitlement to payment from)
Nationwide
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Unaudited Consolidated Financial Statements
Consolidated Statements70
Mutual under the Tax Sharing Agreement. This arrangement may result
in conflicts of Income for six monthsinterest between the Company and Nationwide Mutual.
For example, under the Tax Sharing Agreement, Nationwide Mutual may
choose to consent, compromise or settle any adjustment or deficiency
proposed by the relevant tax authority in a manner that may be
beneficial to Nationwide Mutual and detrimental to the Company. Under
the Tax Sharing Agreement, however, Nationwide Mutual is obligated to
act in good faith with regard to all persons included in the
applicable returns.
The Tax Sharing Agreement may not be amended without the prior
written consent of the Company.
(iii) Lease
Pursuant to an arrangement between Nationwide Mutual and certain of
its subsidiaries, during 2000 the Company leased on average
approximately 757,570 square feet of office space primarily in the
four building home office complex in Columbus, Ohio. This office
space was leased at current market rates ranging from $18.98 - $20.50
per square foot plus an occupancy charge of $1.84 per square foot per
year. Under the arrangement, the Company determines the amount of
office space necessary to conduct its operations and leases such
space from Nationwide Mutual, subject to availability. For the years
ended June 30,December 31, 2000, 1999 and 1999 Consolidated Balance Sheets1998, the Company made payments to
Nationwide Mutual and its subsidiaries totaling $14.3 million, $11.4
million and $9.2 million, respectively, under such arrangement.
(iv) Modified Coinsurance Agreements
Effective as of six monthsJanuary 1, 1996, Nationwide Life entered into a 100%
modified coinsurance agreement with Employers Life Insurance Company
of Wausau ("ELOW"). Under the agreement, Nationwide Life ceded to
ELOW and ELOW assumed Nationwide Life's non-variable group and
wholesale life insurance business and group and franchise health
insurance business and any ceded or assumed reinsurance applicable to
such group business. Effective July 1, 1999, the modified coinsurance
agreement was terminated. Revenues ceded to ELOW for years ended June 30,
2000 and 1999
Consolidated Statements of Shareholder's Equity for six months ended
June 30, 2000 and 1999
Consolidated Statements of Cash Flows for six months ended June 30,
2000 and 1999
Notes to Unaudited Consolidated Financial Statements
Management's Narrative Analysis of Results of Operations
Other Information
(2) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of
December 31, 1999 and 1998 Consolidated Statementswere $35.8 million and $101.2 million,
respectively, while benefits, claims and expenses ceded were $46.2
million and $160.5 million, respectively.
Effective as of IncomeJanuary 1, 1996, Nationwide Life also entered into a
100% modified coinsurance agreement with Nationwide Mutual. Under the
agreement, Nationwide Life cedes to Nationwide Mutual and Nationwide
Mutual assumes Nationwide Life's individual accident and health
insurance business and any ceded or assumed reinsurance applicable to
such individual business. Effective July 1, 1999, the modified
coinsurance agreement was amended to include Nationwide Life's group
and franchise health insurance business and any ceded or assumed
reinsurance applicable to such group business. Revenues ceded to
Nationwide Mutual for the years ended December 31, 2000, 1999 and
1998 were $170.1 million, $157.2 million and 1997
Consolidated Statements$115.7 million,
respectively, while benefits, claims and expenses ceded were $168.0
million, $151.0 million and $98.8 million, respectively.
(v) Cost Sharing Agreement
Pursuant to a cost sharing agreement among Nationwide Mutual and
certain of Shareholder's Equityits direct and indirect subsidiaries, including the
Company, Nationwide Mutual provides certain operational and
administrative services, such as sales support, advertising,
personnel and general management services, to those subsidiaries.
Expenses covered by such agreement are subject to allocation among
Nationwide Mutual and such subsidiaries. Measures used to allocate
expenses among companies include individual employee estimates of
time spent, special cost studies, salary expense, commission expense
and other methods agreed to by the participating companies that are
within industry guidelines and practices. In addition, beginning in
1999 Nationwide Services Company, a subsidiary of Nationwide Mutual
provides computer, telephone, mail, employee benefits administration,
and other services to Nationwide Mutual and certain of its direct and
indirect subsidiaries, including the Company, based on specified
rates for units of service consumed. For the years ended December 31,
2000, 1999 and 1998, the Company made
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71
payments to Nationwide Mutual and 1997
Consolidated StatementsNationwide Services Company
totaling $156.6 million, $132.3 million and $95.0 million,
respectively. The Company does not believe that expenses recognized
under these agreements are materially different than expenses that
would have been recognized had the Company operated on a stand-alone
basis.
(vi) Cash Management Agreements
Nationwide Mutual has entered into an Investment Agency Agreement
with Nationwide Cash Management Company ("NCMC"), an affiliate of Cash Flowsthe
Company. NCMC makes, holds and administers short-term investments
(those maturing in one year or less) for Nationwide Mutual and
certain of its affiliates, including Nationwide Life and certain of
the years endedCompany's other subsidiaries. Under the agreements, expenses of
NCMC are allocated pro rata among the participants based upon the
participant's ownership percentage of total assets held by NCMC. For
the year ending December 31, 2000 and 1999, 1998the Company paid NCMC
fees and 1997
Notes to Consolidated Financial Statements
(3) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31,
1999
Schedule III Supplementary Insurance Information as of December
31, 1999, 1998expenses totaling $412,981 and 1997$322,927, respectively, under
such agreements.
(vii) Repurchase Agreement
Nationwide Life and for eachcertain of the years
then ended
Schedule IV Reinsurance asCompany's other subsidiaries are
parties to Master Repurchase Agreements with various affiliates
pursuant to which securities or other financial instruments are
transferred between parties against the transfer of December 31, 1999, 1998funds by the
transferee upon the demand of either party.
(viii) Transactions With Management And Others
Joseph J. Gasper, President and 1997Chief Operating Officer and for eachDirector
of the years then ended
Schedule V ValuationCompany and Qualifying Accounts forRichard A. Karas, Senior Vice President - Sales -
Financial Services of the years ended
December 31, 1999, 1998Company are limited partners in Country
Club Properties LP, which holds a 50% interest in NRI-CCP I, LLC, a
Delaware limited liability company, 50% of which is owned by
Nationwide Realty Investors, LTD. Nationwide Realty Investors, LTD is
owned 70% by Nationwide Life and 1997
All other schedules are omitted because they are not applicable or required or
because the required information has been included in the audited consolidated
financial statements or notes thereto.
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INTERIM FINANCIAL INFORMATION
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a30% by Nationwide Mutual. Nationwide
Life is a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statementsthe Company.
The general partner of Income
(Unaudited)
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
REVENUES
Policy charges $ 266.1 $ 218.1 $ 538.7 $ 424.3
Life insurance premiums 62.1 48.9 129.0 102.4
Net investment income 409.4 372.1 817.0 735.4
Net realized losses on investments (10.7) (8.3) (13.8) (13.7)
Other 4.0 20.4 9.2 39.9
---------- ---------- ---------- ----------
730.9 651.2 1,480.1 1,288.3
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 290.3 267.4 584.5 531.2
Other benefits and claims 61.7 44.3 129.0 94.8
Policyholder dividends on participating policies 11.5 11.7 23.5 21.8
Amortization of deferred policy acquisition costs 86.2 66.8 172.1 127.5
Other operating expenses 118.4 109.0 240.5 213.3
---------- ---------- ---------- ----------
568.1 499.2 1,149.6 988.6
---------- ---------- ---------- ----------
Income before federal income tax expense 162.8 152.0 330.5 299.7
Federal income tax expense 51.9 51.9 106.3 100.4
---------- ---------- ---------- ----------
Net income $ 110.9 $ 100.1 $ 224.2 $ 199.3
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
67
70
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)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
--------------- ---------------
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $14,708.3 in 2000; $15,377.3 in 1999) $ 14,599.5 $ 15,294.0
Equity securities (cost $103.3 in 2000; $84.9 in 1999) 119.5 92.9
Mortgage loans on real estate, net 5,923.5 5,786.3
Real estate, net 281.2 254.8
Policy loans 553.5 519.6
Other long-term investments 78.8 73.8
Short-term investments 406.9 416.0
--------------- ---------------
21,962.9 22,437.4
--------------- ---------------
Cash 23.6 4.8
Accrued investment income 232.4 238.6
Deferred policy acquisition costs 2,791.6 2,554.1
Other assets 420.5 305.9
Assets held in separate accounts 70,569.1 67,135.1
--------------- ---------------
$ 96,000.1 $ 92,675.9
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 21,566.1 $ 21,861.6
Other liabilities 971.0 914.2
Liabilities related to separate accounts 70,569.1 67,135.1
--------------- ---------------
93,106.2 89,910.9
--------------- ---------------
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 766.1 766.1
Retained earnings 2,145.2 2,011.0
Accumulated other comprehensive loss (21.2) (15.9)
--------------- ---------------
2,893.9 2,765.0
--------------- ---------------
$ 96,000.1 $ 92,675.9
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
68
71
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Six Months Ended June 30, 2000 and 1999
(in millions)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
--------- ---------- ------------ ------------- -------------
BALANCE, JANUARY 1, 1999 $ 3.8 $ 914.7 $ 1,579.0 $ 275.6 $ 2,773.1
Comprehensive income:
Net income - - 199.3 - 199.3
Net unrealized losses on securities
available-for-sale arising during the - - - (190.6) (190.6)
period -------------
Total comprehensive income 8.7
-------------
Dividends to shareholder - - (11.0) - (11.0)
--------- ---------- ------------ ------------- -------------
BALANCE, JUNE 30, 1999 $ 3.8 $ 914.7 $ 1,767.3 $ 85.0 $ 2,770.8
========= ========== ============ ============= =============
BALANCE, JANUARY 1, 2000 $ 3.8 $ 766.1 $ 2,011.0 $ (15.9) $ 2,765.0
Comprehensive income:
Net income - - 224.2 - 224.2
Net unrealized losses on securities
available-for-sale arising during the - - - (5.3) (5.3)
period -------------
Total comprehensive income 218.9
-------------
Dividends to shareholder - - (90.0) - (90.0)
--------- ---------- ------------ ------------- -------------
BALANCE, JUNE 30, 2000 $ 3.8 $ 766.1 $ 2,145.2 $ (21.2) $ 2,893.9
========= ========== ============ ============= =============
See accompanying notes to unaudited consolidated financial statements.
69
72
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 2000 and 1999
(in millions)
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 224.2 $ 199.3
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 584.5 531.2
Capitalization of deferred policy acquisition costs (400.5) (322.6)
Amortization of deferred policy acquisition costs 172.1 127.5
Amortization and depreciation (3.3) 3.8
Realized losses on investments, net 13.8 13.7
Decrease (increase) in accrued investment income 6.2 (5.3)
Increase in other assets (114.6) (40.2)
Increase (decrease) in policy liabilities 44.2 (2.9)
Increase in other liabilities 69.7 49.2
Other, net (8.1) (2.9)
------------ ------------
Net cash provided by operating activities 588.2 550.8
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 1,912.9 1,172.5
Proceeds from sale of securities available-for-sale 67.5 247.7
Proceeds from repayments of mortgage loans on real estate 325.0 227.8
Proceeds from sale of real estate 2.6 5.2
Proceeds from repayments of policy loans and sale of other invested assets 12.8 10.0
Cost of securities available-for-sale acquired (1,315.5) (1,714.2)
Cost of mortgage loans on real estate acquired (474.4) (295.1)
Cost of real estate acquired (2.9) (1.9)
Short-term investments, net 9.1 61.3
Other, net (82.3) (56.9)
------------ ------------
Net cash provided by (used in) investing activities 454.8 (343.6)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (100.0) (13.5)
Increase in investment product and universal life insurance product account balances 2,305.2 1,559.7
Decrease in investment product and universal life insurance product account balances (3,229.4) (1,755.8)
------------ ------------
Net cash used in financing activities (1,024.2) (209.6)
------------ ------------
Net increase (decrease) in cash 18.8 (2.4)
Cash, beginning of period 4.8 3.4
------------ ------------
Cash, end of period $ 23.6 $ 1.0
============ ============
See accompanying notes to unaudited consolidated financial statements.
70
73
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2000
(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 expectedCountry Club Properties LP is La Quinta Land
Partners LLC. NRI-CCP I, LLC was formed for the full
year. All significant intercompany balances and transactions have been
eliminated. The accompanying unaudited consolidated financial
statements should be readpurpose of acquiring
960 acres of land in conjunction with the audited consolidated
financial statements and related notesLa Quinta, California for the year ended December 31,
1999 included in the Company's annual report on Form 10-K.
(2) Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). FAS 133, as amended by Statement Nos. 137 and
138, is effective for fiscal years beginning after June 15, 2000 and
establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Statement also addresses
contracts that contain embedded derivatives, such as certain insurance
contracts. 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 Company plans to adopt
this Statement in first quarter 2001 and is currently evaluating the
impact on results of operations and financial condition.
(3) Comprehensive Income
--------------------
Comprehensive Income (Loss) includes net income as well as certain
items that are reported directly within a separate component of
shareholder's equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income (Loss) is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal income tax amounts are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
(in millions) JUNE 30, JUNE 30,
- ------------------------------------------------------------- --------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $ 3.4 $ (241.9) $ (29.4) $ (396.3)
Adjustment to deferred policy acquisition costs (11.5) 63.8 9.1 93.4
Related federal income tax benefit 2.8 60.9 7.1 102.6
----------- ----------- ----------- -----------
Net (5.3) (117.2) (13.2) (200.3)
----------- ----------- ----------- -----------
Reclassification adjustment for net losses on securities
available-for-sale realized during the period:
Gross 11.2 6.5 12.1 15.0
Related federal income tax benefit (3.9) (2.3) (4.2) (5.3)
----------- ----------- ----------- -----------
Net 7.3 4.2 7.9 9.7
----------- ----------- ----------- -----------
Total Other Comprehensive Income (Loss) $ 2.0 $ (113.0) $ (5.3) $ (190.6)
=========== =========== =========== ===========
71
74
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(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 access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
an untimely death and flexible payout options including lump-sum,
systematic withdrawal or a stream of payments for life. 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, tax-deferred accumulation of savings and flexible
payout options including lump-sum, systematic withdrawal or a stream of
payments for life. 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, which 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,
certain revenues and expenses of its investment advisor and
broker/dealer subsidiary, revenues and expenses related to group
annuity contracts sold to Nationwide employee and agent benefit plans
and all realized gains and losses on investments in a Corporate and
Other segment.
The following table summarizes the financial results of the Company's
business segments for the three months ended June 30, 2000 and 1999.
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
2000
Operating revenue (1) $ 186.3 $ 322.7 $ 182.6 $ 50.0 $ 741.6
Benefits and expenses 101.1 275.7 146.1 45.2 568.1
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 85.2 47.0 36.5 4.8 173.5
Net realized losses on investments - - - (10.7) (10.7)
------------ ------------ ------------ ------------ ------------
Consolidated income (loss) before
federal income tax expense $ 85.2 $ 47.0 $ 36.5 $ (5.9) $ 162.8
============ ============ ============ ============ ============
1999
Operating revenue (1) $ 154.8 $ 286.3 $ 153.3 $ 65.1 $ 659.5
Benefits and expenses 83.8 240.3 124.1 51.0 499.2
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 71.0 46.0 29.2 14.1 160.3
Net realized losses on investments - - - (8.3) (8.3)
------------ ------------ ------------ ------------ ------------
Consolidated income before
federal income tax expense $ 71.0 $ 46.0 $ 29.2 $ 5.8 $ 152.0
============ ============ ============ ============ ============
- ----------
(1) Excludes net realized gains and losses on investments.
72
75
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 allocation of assets to and the
financial results of the Company's business segments as of and for the
six months ended June 30, 2000 and 1999.
VARIABLE FIXED LIFE CORPORATE
(in millions) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
2000
Operating revenue (1) $ 375.5 $ 649.8 $ 362.2 $ 106.4 $ 1,493.9
Benefits and expenses 206.0 557.4 292.4 93.8 1,149.6
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 169.5 92.4 69.8 12.6 344.3
Net realized losses on investments - - - (13.8) (13.8)
------------ ------------ ------------ ------------ ------------
Consolidated income (loss) before
federal income tax expense $ 169.5 $ 92.4 $ 69.8 $ (1.2) $ 330.5
============ ============ ============ ============ ============
Assets as of period end $ 65,514.0 $ 16,898.9 $ 7,555.3 $ 6,031.9 $ 96,000.1
============ ============ ============ ============ ============
1999
Operating revenue (1) $ 298.3 $ 573.9 $ 304.4 $ 125.4 $ 1,302.0
Benefits and expenses 161.1 485.1 246.1 96.3 988.6
------------ ------------ ------------ ------------ ------------
Operating income before federal
income tax expense 137.2 88.8 58.3 29.1 313.4
Net realized losses on investments - - - (13.7) (13.7)
------------ ------------ ------------ ------------ ------------
Consolidated income before
federal income tax expense $ 137.2 $ 88.8 $ 58.3 $ 15.4 $ 299.7
============ ============ ============ ============ ============
Assets as of period end $ 54,603.7 $ 15,641.8 $ 5,790.1 $ 5,794.2 $ 81,829.8
============ ============ ============ ============ ============
----------
(1) Excludes net 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).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint
filed by the Company and other named defendants. The Company intends to
defend this lawsuit vigorously.
73
76
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes
included elsewhere herein.
Management's discussion and analysis contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of the Company. These
forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) the potential
impact on the Company's reported net income that could result from
the adoption of certain accounting standards issued by the 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 productsresidential lots and three golf courses. The land was acquired by
newNRI-CCP I, LLC on June 15, 2000. Mr. Gasper and existing competitors; (iv) adverse stateMr. Karas each
purchased their Limited Partnership Interests in Country Club
Properties LP (the "Limited Partnership Interest") on March 11, 1999,
at a cost of $125,000. Each of Mr. Gasper's 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 acceptanceMr. Karas' Limited
Partnership Interest represents less than one percent of the
revised products in the market; (vii) changes in interest ratespartnership. Mr. Gasper 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 whichMr. Karas 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 net 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
(in millions) 2000 1999 2000 1999
Net income $ 110.9 $ 100.1 $ 224.2 $ 199.3
Net realized losses on investments, net of tax 7.0 5.4 9.0 8.9
---------- ---------- ---------- ----------
Net operating income $ 117.9 $ 105.5 $ 233.2 $ 208.2
========== ========== ========== ==========
Revenues
Total operating revenues, which exclude net realized gains and
losses on investments, for second quarter 2000 increased to $741.6
million compared to $659.5 million for the same period in 1999.
For the first six months of 2000 and 1999, total operating
revenues were $1.49 billion and $1.30 billion, respectively.
Increases in policy charges and net investment income were the key
drivers to revenue growth.
74
77
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
comparable periods of 2000 and 1999 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
- ----------------------------------------------------------- ---------- ---------- ---------- ----------
Asset fees $ 180.0 $ 152.2 $ 355.9 $ 292.6
Cost of insurance charges 37.0 28.4 72.1 54.3
Administrative fees 27.2 22.0 63.9 47.8
Surrender fees 21.9 15.5 46.8 29.6
---------- ---------- ---------- ----------
Total policy charges $ 266.1 $ 218.1 $ 538.7 $ 424.3
========== ========== ========== ==========
The growth in asset fees reflects a 21% increase in total separate
account assets which reached $70.57 billion as of June 30, 2000
compared to $58.15 billion a year ago. Continued strong sales of
variable annuity and variable life insurance products as well as
market appreciation have contributed significantly to the increase
in separate account assets.
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 equalentitled to a policy's death benefit minus the
related policyholder account value. The increaseshare of
partnership distributions and a lifetime membership in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual investment life insurance reflecting
expanded distribution and increased customer demand for variable
life insurance products. The net amount at risk related to
individual investment life insurance grew to $21.61 billion as of
June 30, 2000 compared to $17.10 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. The increase in surrender charges is primarily
attributable to policyholder withdrawals in the Variable Annuities
segment, and reflects the overall increase in variable annuity
policy reserves and an increase in surrender rates in the first
half of 2000.
Net investment income includes the gross 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 $372.1 million in the
second quarter of 1999 to $409.4 million in the second quarter of
2000 and from $735.4 million in the first half of 1999 to $817.0
million in the first half of 2000. The increases were primarily
due to increased invested assets to support growth in fixed
annuity policy reserves coupled with an increase in average yield
on the investment portfolio. Fixed annuity policy reserves, which
include the fixed option of variable annuity contracts, increased
$1.23 billion to $16.34 billion as of the end of second quarter
2000 compared to $15.11 billion a year ago.
Other income totaled $4.0 million in second quarter 2000, a
decrease of $16.4 million from second quarter 1999. For the first
half of 2000, other income totaled $9.2 million compared to $39.9
million in the first half of 1999. The decrease is due to the
assignment of the Company's investment advisory and related
agreements associated with Nationwide mutual funds to an
affiliate.
75
78
The Company does not consider realized gains and losses on
investmentsseveral golf
courses to be recurring components of earnings.developed. The Company
makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. Net realized
losses on investments were $10.7 million and $8.3 million for
second quarter 2000 and 1999, respectively. For the first six
months of 2000, the Company reported net realized losses on
investments of $13.8 million compared to $13.7 million of net
realized losses for the first six months of 1999. During the first
half of 2000 the Company recognized a total of $10.5 million of
realized losses on two fixed maturity security holdings compared
to a total of $19.9 million of realized losses on two fixed
maturity security holdings for the same period in 1999.
Benefits and Expenses
Total benefits and expenses were $568.1 million in second quarter
2000, a 14% increase over second quarter 1999, while year-to-date
2000 benefits and expenses were $1.15 billion compared to $988.6
million a year ago. The increasegolf membership is due mainly to growth in
amortization of deferred acquisition costs (DAC) and interest
credited. Additionally, other policyholder benefits and other
operating expenses were up approximately 17% compared to the year
ago second quarter and up 20% compared to the six-month period a
year ago.
The significant growth in the Variable Annuities segment business
is the primary reason for the increase in amortization of DAC
which totaled $86.2 million and $66.8 million in second quarter of
2000 and 1999, respectively. On a year-to-date basis, DAC
amortization totaled $172.1 million in 2000 compared to $127.5
million in 1999.
Consistent with the growth in fixed annuity business and higher
crediting rates, interest credited increased to $290.3 million for
the second quarter of 2000 compared to $267.4 million a year ago.
For the first half of 2000, interest credited increased $53.3
million to $584.5 million as compared to 1999.
Federal income tax expense was $51.9 million in both second
quarters, representing effective tax rates of 31.9% and 34.1% for
second quarter 2000 and 1999, respectively. For the first six
months of 2000 and 1999, federal income tax expense was $106.3
million and $100.4 million, representing effective tax rates of
32.2% and 33.5%, respectively. An increase in tax exempt income
and investment tax credits resulted in the decrease in effective
rates.
Recently Issued Accounting Standards
See note 2 to the unaudited consolidated financial statements for
a discussion of recently issued accounting standards.
Sales Information
The following table summarizes total Company sales, excluding
internal replacements, by business segment.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Variable annuity deposits $ 3,281.3 $ 2,624.5 $ 6,556.5 $ 5,082.3
Fixed annuity deposits 844.1 748.9 1,586.3 1,366.3
Life insurance premiums 296.6 201.9 707.3 452.4
---------- ---------- ---------- ----------
Total core premiums and deposits 4,422.0 3,575.3 8,850.1 6,901.0
Internal replacements (516.6) (158.2) (893.5) (255.6)
---------- ---------- ---------- ----------
Total core sales 3,905.4 3,417.1 7,956.6 6,645.4
---------- ---------- ---------- ----------
Bank-owned life insurance (BOLI) 309.7 - 328.7 86.7
Institutional products 162.8 - 324.5 -
Nationwide employee and agent benefit plans 77.6 123.7 135.9 190.1
---------- ---------- ---------- ----------
Total sales $ 4,455.5 $ 3,540.8 $ 8,745.7 $ 6,922.2
========== ========== ========== ==========
76transferable upon
death.
70
79
Total core sales represent amounts that are recurring and are the
sales figures management uses to set and evaluate the Company's
sales goals. The Company reports statutory premiums and deposits
related to life insurance and annuity products as core sales.
Sales of institutional products represent sales of funding
agreements that secure notes issued to foreign investors through a
third party trust under the Company's $2 billion medium-term note
program.
The program was launched in July 1999 as a means to expand spread
based product offerings. The Company excludes institutional
products and BOLI sales as well as deposits into Nationwide
employee and agent benefit plans from its targeted core sales.
Although funding agreements and BOLI contribute to asset and
earnings growth, they do not produce steady production flow that
lends itself to meaningful comparisons. BOLI sales in the second
quarter 2000 include $300.0 million from an affiliate. The Company
also excludes internal replacements from its targeted core sales.
Total core sales reached $3.91 billion in the second quarter of
2000, an increase of 14% over 1999, while year-to-date core sales
increased 20% over 1999. Total annuity sales, net of internal
replacements, contributed $3.61 billion and $3.22 billion in the
second quarter of 2000 and 1999, respectively. Core life insurance
sales for second quarter 2000 were up 47% to $296.6 million with
individual variable universal life and corporate-owned life
products leading the growth.
The Company sells its products through a broad distribution
network. Unaffiliated entities that sell the Company's products to
their own customer base include independent broker/dealers,
brokerage firms, pension plan administrators, life insurance
specialists and financial institutions. Representatives of the
Company or its affiliates who market products directly to a
customer base identified by the Company include Nationwide
Retirement Solutions sales representatives and Nationwide agents.
Core sales by distribution channel are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
- ---------------------------------------------------------- ---------- ---------- ---------- ----------
Independent broker/dealers $ 1,593.4 $ 1,360.5 $ 3,144.0 $ 2,621.0
Brokerage firms 300.3 237.1 608.3 448.4
Financial institutions 760.0 641.0 1,404.4 1,170.9
Pension plan administrators 258.8 335.7 590.9 673.2
Nationwide Retirement Solutions sales
representatives 671.7 606.2 1,446.5 1,207.9
Nationwide agents 223.6 196.2 434.9 383.5
Life insurance specialists 97.6 40.4 327.6 140.5
---------- ---------- ---------- ----------
Total core sales $ 3,905.4 $ 3,417.1 $ 7,956.6 $ 6,645.4
========== ========== ========== ==========
Sales through independent broker/dealers increased 17% and 20% for
the three months and six months ended June 30, 2000, respectively.
The hiring of additional wholesalers and certain product
enhancements have contributed to the growth. Sales through
financial institutions increased as we continue to add banks which
sell our products.
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 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.
77
80
Core sales by product are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(in millions) 2000 1999 2000 1999
- ----------------------------------------------------- ----------- ----------- ----------- -----------
BEST of AMERICA(R) products $ 1,622.5 $ 1,295.9 $ 2,941.6 $ 2,432.7
Private label annuities 274.8 360.8 548.7 665.2
Other 137.1 101.7 278.3 194.6
----------- ----------- ----------- -----------
Total individual annuities 2,034.4 1,758.4 3,768.6 3,292.5
----------- ----------- ----------- -----------
BEST of AMERICA(R) group pension series 950.5 887.5 2,149.1 1,789.3
IRC Section 457 annuities 613.7 521.6 1,305.3 1,052.5
Other 10.2 47.7 26.3 58.7
----------- ----------- ----------- -----------
Total group annuities 1,574.4 1,456.8 3,480.7 2,900.5
----------- ----------- ----------- -----------
Traditional/Universal life insurance 63.7 61.8 120.6 121.8
BEST of AMERICA(R) variable life series 138.1 99.7 263.4 190.2
Corporate-owned life insurance 94.8 40.4 323.3 140.5
----------- ----------- ----------- -----------
Total life insurance 296.6 201.9 707.3 452.4
----------- ----------- ----------- -----------
Total core sales $ 3,905.4 $ 3,417.1 $ 7,956.6 $ 6,645.4
=========== =========== =========== ===========
BUSINESS SEGMENTS
The Company has 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 Company's
Variable Annuities segment excludes the fixed option under the
Company's variable annuity contracts. Such information is included
in the Company's Fixed Annuities segment.
The following table summarizes operating income before federal
income tax expense for the Company's business segments.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
- ---------------------------------------------- ---------- ---------- ---------- ----------
Variable Annuities $ 85.2 $ 71.0 $ 169.5 $ 137.2
Fixed Annuities 47.0 46.0 92.4 88.8
Life Insurance 36.5 29.2 69.8 58.3
Corporate and Other 4.8 14.1 12.6 29.1
---------- ---------- ---------- ----------
$ 173.5 $ 160.3 $ 344.3 $ 313.4
========== ========== ========== ==========
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment
options, tax-deferred accumulation of savings, asset protection in
the event of an untimely death and flexible payout options
including lump-sum, systematic withdrawal or a stream of payments
for life. The Company's variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts.
78
81
The following table summarizes certain selected financial data for
the Company's Variable Annuities segment for the periods
indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
(in millions) 2000 1999 2000 1999
- -------------------------------------------------------------- ------------ ------------ ------------ -----------
INCOME STATEMENT DATA
Revenues $ 186.3 $ 154.8 $ 375.5 $ 298.3
Benefits and expenses 101.1 83.8 206.0 161.1
------------ ------------ ------------ -----------
Operating income before federal income tax expense $ 85.2 $ 71.0 $ 169.5 $ 137.2
============ ============ ============ ===========
OTHER DATA
Statutory premiums and deposits (1) $ 3,281.3 $ 2,624.5 $ 6,556.5 $ 5,082.3
Policy reserves as of period end:
Individual $ 38,911.2 $ 32,884.4
Group 25,115.1 20,378.9
------------ ------------
Total $ 64,026.3 $ 53,263.3
============ ============
Pre-tax operating income to average policy reserves 0.54% 0.56% 0.54% 0.56%
----------
(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, which differ from
Generally Accepted Accounting Principles.
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
$174.7 million in the second quarter of 2000, up 19% from $146.5
million in the same period a year ago. For the first half of 2000,
asset fees totaled $345.3 million up 22% from the first half of
1999. The increase in asset fees is due to continued growth in
variable annuity policy reserve levels resulting from increased
variable annuity sales and market appreciation on investments
underlying reserves. Variable annuity policy reserves declined
$1.21 billion during second quarter 2000 and totaled $64.03
billion as of June 30, 2000. During the first six months of 2000
reserves have increased $2.83 billion and are up 20% compared to a
year ago
Variable annuity deposits increased 25% for the second quarter
2000, reaching $3.28 billion compared to $2.62 billion in the year
ago quarter. Compared to first quarter 2000, variable annuity
deposits were flat. Variable annuity deposits grew 29% in 2000
compared to the first half of 1999, reaching $6.56 billion. Nearly
all channels contributed to the growth in 2000.
Less favorable equity market conditions during the first half of
2000 has slowed the growth in variable annuity policy reserves.
Variable annuity policy reserves reflect market appreciation of
$634.8 billion during the first six months of 2000. Over the past
twelve months, variable annuity policy reserves have increased
$6.81 billion as a result of market appreciation, due mainly to
$8.70 billion of market appreciation in the fourth quarter of
1999.
Offsetting the growth in policy reserves attributable to an
increase in deposits and market appreciation was an increase in
policyholder surrender activity. Excluding the impact of internal
replacements and transfers to the assets managed and administered
segment, surrenders as a percentage of average reserves were 13%,
annualized, in second quarter 2000, compared to 10% in second
quarter 1999. The surrender rate in the first half of 2000 was
14%, annualized, as compared to 11% for the first half of 1999.
The increase in surrender activity is attributable to an increase
in competition in the individual variable annuity market which has
increased transfers to competitor products and the overall aging
of the Company's book of business. The Company introduced new
products, new product features and new retention strategies during
first quarter 2000 in an effort to decrease the rate of
surrenders. The rate of surrenders in second quarter 2000 declined
200 basis points to an annualized rate of 13% from the first
quarter 2000 rate of 15%.
79
82
Amortization of DAC increased 44% to $56.0 million in second
quarter 2000 compared to $38.8 million in second quarter 1999. DAC
amortization for the first half of 2000 increased to $112.0
million compared to $74.2 million for the first half of 1999.
Operating expenses of $44.0 million in second quarter 2000 were
flat compared to second quarter 1999, while year-to-date 2000
operating expenses were $92.3 million compared to $85.8 million in
1999. The growth in DAC amortization and operating expenses
reflect the overall growth in the variable annuity business. The
increase in DAC amortization also reflects the increase in
policyholder surrenders.
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, tax-deferred accumulation of
savings and flexible payout options including lump-sum, systematic
withdrawal or a stream of payments for life. 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 the
Company's variable annuity contracts.
The following table summarizes certain selected financial data for
the Company's Fixed Annuities segment for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
(in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------ ------------ ------------ ------------ -----------
INCOME STATEMENT DATA
Revenues:
Net investment income $ 304.2 $ 278.1 $ 608.4 $ 553.4
Other 18.5 8.2 41.4 20.5
------------ ------------ ------------ -----------
322.7 286.3 649.8 573.9
------------ ------------ ------------ -----------
Benefits and expenses:
Interest credited to policyholder account balances 222.2 202.5 447.6 404.7
Other benefits and expenses 53.5 37.8 109.8 80.4
------------ ------------ ------------ -----------
275.7 240.3 557.4 485.1
------------ ------------ ------------ -----------
Operating income before federal income tax expense $ 47.0 $ 46.0 $ 92.4 $ 88.8
============ ============ ============ ===========
OTHER DATA
Statutory premiums and deposits (1) $ 1,006.9 $ 748.9 $ 1,910.8 $ 1,366.3
Policy reserves as of period end:
Individual $ 7,608.2 $ 7,115.5
Group 7,855.0 7,998.8
Institutional 873.6 -
------------ ------------
Total $ 16,336.8 $ 15,114.3
============ ============
Pre-tax operating income to average policy reserves 1.15% 1.22% 1.13% 1.18%
----------
(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, which differ
from Generally Accepted Accounting Principles.
Fixed annuity segment results reflect an increase in interest
spread income attributable to growth in fixed annuity policy
reserves. Interest spread is the differential between net
investment income and interest credited to policyholder account
balances. Interest spreads vary depending on crediting rates
offered by competitors, performance of the investment portfolio,
including the rate of prepayments, changes in market interest
rates and other factors.
80
83
The following table depicts the interest spreads on general
account policy reserves in the Fixed Annuities segment.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2000 1999 2000 1999
--------- --------- -------- --------
Net investment income 7.82% 7.64% 7.76% 7.64%
Interest credited 5.72 5.57 5.71 5.59
--------- --------- -------- --------
2.10% 2.07% 2.05% 2.05%
========= ========= ======== ========
Recent increases in interest rates have slowed mortgage loan and
bond prepayment activity and the Company anticipates interest
spreads over the next several quarters to range between 195 and
200 basis points, excluding the impact of mortgage loan and bond
prepayment income.
Fixed annuity policy reserves increased to $16.34 billion as of
June 30, 2000 compared to $16.59 billion as of the end of 1999 and
$15.11 billion a year ago.
Second quarter fixed annuity premiums and deposits increased to
$1.01 billion in 2000 compared to $748.9 million in 1999 while
sales for the first six months of 2000 increased to $1.91 billion
from $1.37 billion in 1999. Sales of institutional products were
$162.8 million and $324.5 million during second quarter 2000 and
the first six months of 2000, respectively, compared to no sales
in the first six months of 1999. Most of the Company's fixed
annuity sales are premiums and deposits allocated to the fixed
option of variable annuity contracts. Second quarter 2000 fixed
annuity sales include $707.2 million in premiums allocated to the
fixed option under a variable annuity contract, compared to $658.2
million in second quarter 1999. The increase in fixed annuity
premiums and deposits is primarily attributable to sales of
institutional products in the form of funding agreements issued in
connection with the Company's medium-term note program coupled
with a $49.0 million increase in the fixed option of variable
annuity contract deposits in the second quarter of 2000 as
compared to the second quarter of 1999. The later increase was
driven by the Company's enhanced dollar cost averaging (DCA)
program that offers customers a first year bonus interest rate and
transfers the account balance systematically to variable options
over a six or twelve month period.
Other benefits and expenses increased 42% to $53.5 million in
second quarter 2000 compared to a year ago. For the first half of
2000, other benefits and expenses totaled $109.8 million, up 37%
from the first half of 1999. The increase primarily reflects an
increase in immediate annuity benefits due to growth in contracts
in force.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, which provide a death benefit and may
also allow the customer to build cash value on a tax-advantaged
basis.
81
84
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
(in millions) 2000 1999 2000 1999
-------------------------------------------------- ----------- ----------- ---------- ----------
INCOME STATEMENT DATA
Revenues $ 182.6 $ 153.3 $ 362.2 $ 304.4
Benefits and expenses 146.1 124.1 292.4 246.1
----------- ----------- ---------- ----------
Operating income before federal income tax expense $ 36.5 $ 29.2 $ 69.8 $ 58.3
=========== =========== ========== ==========
OTHER DATA
Statutory premiums (1):
Traditional and universal life insurance $ 63.7 $ 61.8 $ 120.6 $ 121.8
Individual investment life insurance 138.1 99.7 263.4 190.2
Corporate investment life insurance 404.5 40.4 652.0 227.1
----------- ----------- ---------- ----------
Total $ 606.3 $ 201.9 $ 1,036.0 $ 539.1
=========== =========== ========== ==========
Policy reserves as of period end:
Traditional and universal life insurance $ 2,568.9 $ 2,476.8
Individual investment life insurance 2,044.2 1,517.8
Corporate investment life insurance 2,153.1 1,156.9
---------- ----------
Total $ 6,766.2 $ 5,151.5
========== ==========
----------
(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, which differ
from Generally Accepted Accounting Principles.
Life Insurance segment results reflect increased revenues driven
by growth in investment life insurance in force and policy
reserves, partially offset by higher benefits and 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
investment life insurance, where the Company has aggressively
expanded its distribution capabilities. Revenues from investment
life products increased to $76.9 million in second quarter 2000
from $51.9 million in second quarter 1999 as a result of the sales
growth and high persistency. On a year-to-date basis, investment
life product revenues increased to $149.0 million in 2000 from
$103.7 million in 1999.
Individual investment life insurance statutory premiums increased
39% during second quarter 2000 reaching $138.1 million compared to
$99.7 million in 1999. Excluding the $309.7 million in 2000 single
premium BOLI sales, which includes $300.0 million sold to an
affiliate, corporate investment life insurance statutory premiums
more than doubled reaching $94.8 million in second quarter 2000
compared to $40.4 million in second quarter 1999. Total investment
life insurance in force reached $28.86 billion at June 30, 2000
representing 47% of all life insurance in force compared to $21.48
billion and 43% a year ago.
Interest credited to policyholders increased $7.6 million in
second quarter 2000 reaching $41.2 million compared to $33.6
million in the year ago second quarter. For the first six months
of 2000, interest credited to policyholders increased $10.4
million over 1999. Increased corporate investment life insurance
business accounted for most of the increases. Corporate investment
fixed life insurance reserves increased 45% to $1.35 billion as of
June 30, 2000 compared to $931.5 million a year ago.
Other policy benefits increased $5.0 million and $14.2 million in
the three and six months, respectively, ended June 30, 2000 over
comparable periods in 1999, reflecting growth in insurance in
force and an increase in claims.
82
85
Corporate and Other
The following table summarizes certain selected financial data for
the Company's Corporate and Other segment for the periods
indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA
Revenues $ 50.0 $ 65.1 $ 106.4 $ 125.4
Benefits and expenses 45.2 51.0 93.8 96.3
---------- ---------- ---------- ----------
Operating income before federal income tax expense (1) $ 4.8 $ 14.1 $ 12.6 $ 29.1
========== ========== ========== ==========
----------
(1) Excludes net 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, certain revenues and expenses of the Company's
investment advisory and broker/dealer subsidiary, and net
investment income and policy charges from group annuity contracts
issued to Nationwide employee and agent benefit plans. During the
third quarter 1999, the Company assigned its investment advisory
and related agreements associated with Nationwide mutual funds to
an affiliate. The decrease in revenues reflects an increase in net
investment income offset by a decrease in investment advisory and
related fees.
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 of $10.7 million and $8.3 million during the
second quarter of 2000 and 1999, respectively.
83
86
OTHER INFORMATION
On May 22, 2000, the Board of Directors of NLIC held a Special
Meeting (the "Special Meeting"). At the Special Meeting, the Board
of Directors recommended to the sole shareholder of NLIC to adopt
amendments and restate the Amended and Restated Code of
Regulations in order to change the references from "Chairman and
Chief Executive Officer" to "Chairman or Chief Executive Officer"
and to make certain changes to the Officer and Officer Duties
Articles of the Amended and Restated Code of Regulations to
facilitate the election of a Chief Executive Officer.
On May 22, 2000, the Board of Directors elected William G. "Jerry"
Jurgensen as a Director of NLIC and as a member of the Executive
and Investment Committees. At that time, Mr. Jurgensen was also
elected as Chief Executive Officer - Elect of NLIC.
On July 26, 2000, the sole shareholder of NLIC held a Special
Meeting of the Shareholder and approved the recommended amendments
and restatement of the Amended and Restated Code of Regulations.
Effective on August 1, 2000, Mr. Jurgensen's title was changed to
Chief Executive Officer. Also effective on August 1, 2000, the
Board of Directors changed the title of Dimon R. McFerson from
Chairman and Chief Executive Officer to Chairman. Mr. McFerson's
retirement as a Director of NLIC, as a member and Chairman of the
Investment Committee, as a member of the Executive Committee and
as Chairman of NLIC will be effective on or before December 31,
2000.
84
87
172
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheetsfinancial statements of Nationwide Life
Insurance Company (the Company) and subsidiaries (collectively the Company), a wholly owned
subsidiary of Nationwide Financial Services, Inc., as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the yearslisted in the three-year period ended December 31,
1999. Theseaccompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedules as listed in the
accompanying index. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
auditing
standards.in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 19992000 and 1998,1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999,2000, in conformity with accounting
principles generally accepted accounting principles.in the United States of America. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Columbus, Ohio
January 28, 200026, 2001
273
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
December 31,
-----------------------------
Assets------------------------------------
2000 1999
1998
------ --------- ---------============================================================================================================================
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $15,294.0 $14,245.1$ 15,443.0 $ 15,294.0
Equity securities 109.0 92.9 127.2
Mortgage loans on real estate, net 6,168.3 5,786.3 5,328.4
Real estate, net 310.7 254.8 243.6
Policy loans 562.6 519.6 464.3
Other long-term investments 101.8 73.8 44.0
Short-term investments 442.6 416.0
289.1
--------- ---------- ----------------------------------------------------------------------------------------------------------------------------
23,138.0 22,437.4
20,741.7
--------- ---------- ----------------------------------------------------------------------------------------------------------------------------
Cash 18.4 4.8 3.4
Accrued investment income 251.4 238.6 218.7
Deferred policy acquisition costs 2,865.6 2,554.1 2,022.2
Other assets 396.7 305.9 420.3
Assets held in separate accounts 65,897.2 67,135.1
50,935.8
--------- ---------
$92,675.9 $74,342.1
========= =========
Liabilities and Shareholder's Equity
------------------------------------- ----------------------------------------------------------------------------------------------------------------------------
$ 92,567.3 $ 92,675.9
============================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $21,861.6 $19,767.1$ 22,183.6 $ 21,861.6
Short-term borrowings 118.7 -
Other liabilities 1,164.9 914.2 866.1
Liabilities related to separate accounts 65,897.2 67,135.1
50,935.8
--------- ---------- ----------------------------------------------------------------------------------------------------------------------------
89,364.4 89,910.9
71,569.0
--------- ---------- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 89 and 13)14)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 646.1 766.1 914.7
Retained earnings 2,436.3 2,011.0 1,579.0
Accumulated other comprehensive income (loss) 116.7 (15.9)
275.6
--------- ---------- ----------------------------------------------------------------------------------------------------------------------------
3,202.9 2,765.0
2,773.1
--------- ---------
$92,675.9 $74,342.1
========= =========- ----------------------------------------------------------------------------------------------------------------------------
$ 92,567.3 $ 92,675.9
============================================================================================================================
See accompanying notes to consolidated financial statements.
374
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions)
Years ended December 31,
---------------------------------------------
2000 1999 1998
1997
-------- -------- --------===========================================================================================================================
Revenues:
Policy charges $ 1,091.4 $ 895.5 $ 698.9
$ 545.2
Life insurance premiums 240.0 220.8 200.0 205.4
Net investment income 1,654.9 1,520.8 1,481.6 1,409.2
Realized (losses) gains on investments (19.4) (11.6) 28.4
11.1
Other 17.0 66.1 66.8
46.5
-------- -------- --------- ---------------------------------------------------------------------------------------------------------------------------
2,983.9 2,691.6 2,475.7
2,217.4
-------- -------- --------- ---------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 1,182.4 1,096.3 1,069.0 1,016.6
Other benefits and claims 241.6 210.4 175.8 178.2
Policyholder dividends on participating policies 44.5 42.4 39.6 40.6
Amortization of deferred policy acquisition costs 352.1 272.6 214.5
167.2Interest expense on short-term borrowings 1.3 - -
Other operating expenses 479.0 463.4 419.7
384.9
-------- -------- --------- ---------------------------------------------------------------------------------------------------------------------------
2,300.9 2,085.1 1,918.6
1,787.5
-------- -------- --------- ---------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 683.0 606.5 557.1 429.9
Federal income tax expense 207.7 201.4 190.4
150.2
-------- -------- --------- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 475.3 $ 405.1 $ 366.7
$ 279.7
======== ======== ===================================================================================================================================
See accompanying notes to consolidated financial statements.
475
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 2000, 1999 1998 and 19971998
(in millions)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income (loss) equity
-------- -------- ---------- -------- ----------=========================================================================================================================
December 31, 19961997 $ 3.8 $ 527.9 $1,432.6 $173.6 $2,137.9
Comprehensive income:
Net income -- -- 279.7 -- 279.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 73.5 73.5
--------
Total comprehensive income 353.2
--------
Capital contribution -- 836.8 -- -- 836.8
--------
Dividend to shareholder -- (450.0) (400.0) -- (850.0)
------ -------- -------- ------ --------
December 31, 1997 3.8 914.7 $ 1,312.3 $ 247.1 $ 2,477.9
Comprehensive income:
Net income -- --- - 366.7 --- 366.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- --- - - 28.5 28.5
-----------------------
Total comprehensive income 395.2
-----------------------
Dividend to shareholder -- --- - (100.0) --- (100.0)
------ -------- -------- ------ --------- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 3.8 914.7 1,579.0 275.6 2,773.1
=========================================================================================================================
Comprehensive income:
Net income -- --- - 405.1 --- 405.1
Net unrealized losses on securities
available-for-sale arising during
the year -- -- --- - - (315.0) (315.0)
-----------------------
Total comprehensive income 90.1
-----------------------
Capital contribution --- 26.4 87.9 23.5 137.8
--------Return of capital to shareholder - (175.0) - - (175.0)
Dividends to shareholder -- (175.0)- - (61.0) -- (236.0)
------ -------- -------- ------ --------- (61.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1999 3.8 766.1 2,011.0 (15.9) 2,765.0
=========================================================================================================================
Comprehensive income:
Net income - - 475.3 - 475.3
Net unrealized gains on securities
available-for-sale arising during
the year - - - 132.6 132.6
---------------
Total comprehensive income 607.9
---------------
Return of capital to shareholder - (120.0) - - (120.0)
Dividends to shareholder - - (50.0) - (50.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $ 3.8 $ 766.1 $2,011.0 $(15.9) $2,765.0
====== ======== ======== ====== ========646.1 $ 2,436.3 $ 116.7 $ 3,202.9
=========================================================================================================================
See accompanying notes to consolidated financial statements.
576
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
Years ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998
1997
--------- --------- ---------==============================================================================================================================
Cash flows from operating activities:
Net income $ 475.3 $ 405.1 $ 366.7 $ 279.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,182.4 1,096.3 1,069.0 1,016.6
Capitalization of deferred policy acquisition costs (778.9) (637.0) (584.2) (487.9)
Amortization of deferred policy acquisition costs 352.1 272.6 214.5 167.2
Amortization and depreciation (12.7) 2.4 (8.5)
(2.0)
Realized losses (gains) losses on invested assets, net 19.4 11.6 (28.4) (11.1)
Increase in accrued investment income (12.8) (7.9) (8.2)
(0.3)
Decrease (increase)(Increase) decrease in other assets (92.0) 122.9 16.4 (12.7)
Decrease in policy liabilities (0.3) (20.9) (8.3) (23.1)
Increase (decrease) in other liabilities 229.3 149.7 (34.8)
230.6
Other, net 22.3 (8.6) (11.3)
(10.9)
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,384.1 1,386.2 982.9
1,146.1
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 2,988.7 2,307.9 1,557.0 993.4
Proceeds from sale of securities available-for-sale 602.0 513.1 610.5 574.5
Proceeds from repayments of mortgage loans on real estate 911.7 696.7 678.2 437.3
Proceeds from sale of real estate 18.7 5.7 103.8 34.8
Proceeds from repayments of policy loans and sale of other invested assets 79.3 40.9 23.6 22.7
Cost of securities available-for-sale acquired (3,475.5) (3,724.9) (3,182.8) (2,828.1)
Cost of mortgage loans on real estate acquired (1,318.0) (971.4) (829.1) (752.2)
Cost of real estate acquired (7.1) (14.2) (0.8) (24.9)
Short-term investments, net (26.6) (27.5) 69.3
(354.8)
Other, net (182.3) (110.9) (88.4)
(62.5)
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (409.1) (1,284.6) (1,058.7)
(1,959.8)
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
ProceedsCapital returned to shareholder (120.0) (175.0) -
Net proceeds from capital contributions -- -- 836.8issuance of short-term borrowings (commercial paper) 118.7 - -
Cash dividends paid (188.5) (100.0) --(13.5) (100.0)
Increase in investment product and universal life insurance
product account balances 4,517.0 3,799.4 2,682.1 2,488.5
Decrease in investment product and universal life insurance
product account balances (5,377.1) (3,711.1) (2,678.5)
(2,379.8)
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (961.4) (100.2) (96.4)
945.5
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13.6 1.4 (172.2) 131.8
Cash, beginning of year 4.8 3.4 175.6
43.8
--------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 18.4 $ 4.8 $ 3.4
$ 175.6
========= ========= =======================================================================================================================================
See accompanying notes to consolidated financial statements.
677
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
and 1997
(1) Organization and Description of BusinessORGANIZATION AND DESCRIPTION OF BUSINESS
Nationwide Life Insurance Company (NLIC)(NLIC, or collectively with its
subsidiaries, the Company) is a leading provider of long-term savings
and retirement products in the United States and is a wholly owned
subsidiary of Nationwide Financial Services, Inc. (NFS). The Company
develops and sells a diverse range of products including variableindividual
annuities, fixed annuitiesprivate and public sector pension plans and other investment
products sold to institutions and life insurance as well as
investment management and administrative services.insurance. NLIC markets its
products through a broad network of distribution channels, including
independent broker/dealers, national and regional brokerage firms,
financial institutions, pension plan administrators, life insurance
specialists, Nationwide Retirement Solutions sales representatives, and Nationwide agents.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc., and
Nationwide Investment Services Corporation.
NLIC and its subsidiaries
are collectively referred to as "the Company."
(2) Summary of Significant Accounting PoliciesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted accounting principles,in the United
States of America which differ from statutory accounting practices
prescribed or permitted by regulatory authorities. Annual Statements
for NLIC and NLAIC, filed with the Department of Insurance of the State
of Ohio (the Department), are prepared on the basis of accounting
practices prescribed or permitted by the Department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as
state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
so prescribed. The Company has no material permitted statutory
accounting practices.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments, and the liability for
future policy benefits and claims.claims and federal income taxes. Although
some variability is inherent in these estimates, management believes
the amounts provided are adequate.
(a) Consolidation PolicyCONSOLIDATION POLICY
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
778
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(b) Valuation of Investments and Related Gains and LossesVALUATION OF INVESTMENTS AND RELATED GAINS AND LOSSES
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when theThe Company has the positive
intent and ability to hold the securities toclassifies fixed
maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as available-for-sale andavailable-for-sale.
Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of accumulated other comprehensive income in
shareholder's equity. The adjustment to deferred policy
acquisition costs represents the change in amortization of
deferred policy acquisition costs that would have been required as
a charge or credit to operations had such unrealized amounts been
realized. The Company has no fixed maturity securities classified
as held-to-maturity or trading as of December 31, 1999 or 1998.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
(c) Revenues and Benefits
Investment Products and Universal Life Insurance Products:REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate ownedcorporate-owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
Traditional Life Insurance Products:TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
879
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(d) Deferred Policy Acquisition CostsDEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) Separate AccountsSEPARATE ACCOUNTS
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $1.12 billion and $915.4
million of separate account assets at December 31, 2000 and 1999,
respectively, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy BenefitsFUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges. The average interest rate credited on investment product
policy reserves was 5.6%, 6.0% and 6.1% for the years ended
December 31, 1999, 1998 and 1997, respectively.
Future policy benefits for traditional life insurance policies
have been calculated by the net level premium method using
interest rates varying from 6.0% to 10.5% and estimates of
mortality, morbidity, investment yields and withdrawals which were
used or which were being experienced at the time the policies were
issued, rather than the assumptions prescribed by state regulatory
authorities.
9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continuedissued.
(g) Participating BusinessPARTICIPATING BUSINESS
Participating business represents approximately 29%21% in 2000 (29%
in 1999 (40%and 40% in 1998 and 50% in 1997)1998) of the Company's life insurance in force,
69%66% in 2000 (69% in 1999 (74%and 74% in 1998 and 77% in 1997)1998) of the number of life
insurance policies in force, and 13%8% in 2000 (13% in 1999 (14%and 14%
in 1998 and 27%
in 1997)1998) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) Federal Income TaxFEDERAL INCOME TAX
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp.NFS. The members of the consolidated tax return
group have a tax sharing arrangement which provides, in effect,
for each member to bear essentially the same federal income tax
liability as if separate tax returns were filed. 80
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) Reinsurance CededREINSURANCE CEDED
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(j) Recently Issued 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 1999 by $8.3 million.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"AccountingAccounting for Derivative Instruments and Hedging Activities" (FASActivities (SFAS
133). FASSFAS 133, as amended by SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and SFAS 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, is
effective for the Company as of January 1, 2001.
SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Contracts that contain embedded derivatives, such as
certain investment and insurance contracts, are also addressed by
the Statement. FAS 133It requires that an
entity to recognize all derivatives as either assets or
liabilities inon the statement of
financial positionbalance sheet and measure those instruments at
fair value.
As of January 1, 2001, the Company had $755.4 million notional
amount of freestanding derivatives with a market value of ($7.0)
million. All other derivatives qualified for hedge accounting
under SFAS 133. Adoption of SFAS 133 will result in the Company
recording a net transition adjustment loss of $4.8 million (net of
related income tax of $2.6 million) in net income. In July 1999addition, a
net transition adjustment loss of $3.6 million (net of related
income tax of $2.0 million) will be recorded in accumulated other
comprehensive income at January 1, 2001. The adoption of SFAS 133
will result in the FASB issued Statement No. 137 which delayedCompany derecognizing $17.0 million of deferred
assets related to hedges, recognizing $10.9 million of additional
derivative instrument liabilities and $1.3 million of additional
firm commitment assets, while also decreasing hedged future policy
benefits by $3.0 million and increasing the effective datecarrying amount of
FAShedged investments by $10.6 million. Further, the adoption of SFAS
133 to fiscal years beginning after June 15,
2000.will result in the Company reporting total derivative
instrument assets and liabilities of $44.8 million and $107.1
million, respectively.
Also, the Company expects that the adoption of SFAS 133 will
increase the volatility of reported earnings and other
comprehensive income. The Company plans to adopt this Statementamount of volatility will vary with the
level of derivative and hedging activities and fluctuations in
first quarter
2001market interest rates and is currently evaluating the impact on results of
operations and financial condition.foreign currency exchange rates during
any period.
(k) ReclassificationRECLASSIFICATION
Certain items in the 19981999 and 19971998 consolidated financial
statements have been reclassified to conform to the 19992000
presentation.
1081
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) InvestmentsINVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 19992000 and
19981999 were:
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
--------- ------ ------- ---------=========================================================================================================================
December 31, 1999:2000
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
governmentGovernment corporations and agencies $ 428.4277.5 $ 23.433.4 $ (2.4)0.1 $ 449.4310.8
Obligations of states and political subdivisions 0.8 -- -- 0.88.6 0.2 - 8.8
Debt securities issued by foreign governments 110.6 0.6 (0.8) 110.494.1 1.5 0.1 95.5
Corporate securities 11,414.7 118.9 (218.6) 11,315.09,758.3 235.0 135.1 9,858.2
Mortgage-backed securities 3,422.8 25.8 (30.2) 3,418.4
--------- ------ ------- ---------- U.S. Government backed 2,719.1 46.1 3.8 2,761.4
Asset-backed securities 2,388.2 36.3 16.2 2,408.3
-------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 15,377.3 168.7 (252.0) 15,294.015,245.8 352.5 155.3 15,443.0
Equity securities 84.9 12.4 (4.4) 92.9
--------- ------ ------- ---------
$15,462.2 $181.1 $(256.4) $15,386.9
========= ====== ======= =========103.5 9.5 4.0 109.0
-------------------------------------------------------------------------------------------------------------------------
$ 15,349.3 $ 362.0 $ 159.3 $ 15,552.0
=========================================================================================================================
December 31, 1998:1999
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
governmentGovernment corporations and agencies $ 255.9428.4 $ 13.023.4 $ --2.4 $ 268.9449.4
Obligations of states and political subdivisions 1.6 -- -- 1.60.8 - - 0.8
Debt securities issued by foreign governments 106.5 4.5 -- 111.0110.6 0.6 0.8 110.4
Corporate securities 9,899.6 423.2 (18.7) 10,304.19,390.4 110.3 179.9 9,320.8
Mortgage-backed securities 3,457.7 104.2 (2.4) 3,559.5
--------- ------ ------- ---------- U.S. Government backed 3,423.1 25.8 30.3 3,418.6
Asset-backed securities 2,024.0 8.6 38.6 1,994.0
-------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 13,721.3 544.9 (21.1) 14,245.115,377.3 168.7 252.0 15,294.0
Equity securities 110.4 18.3 (1.5) 127.2
--------- ------ ------- ---------
$13,831.7 $563.284.9 12.4 4.4 92.9
-------------------------------------------------------------------------------------------------------------------------
$ (22.6) $14,372.3
========= ====== ======= =========15,462.2 $ 181.1 $ 256.4 $ 15,386.9
=========================================================================================================================
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1999,2000, by expected
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
82
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Amortized Estimated
(in millions) cost fair value
--------- ---------===========================================================================================================
Fixed maturity securities available for sale:
Due in one year or less $ 847.01,288.7 $ 847.01,287.0
Due after one year through five years 5,240.5 5,205.74,577.9 4,572.4
Due after five years through ten years 5,046.9 5,005.23,071.3 3,136.6
Due after ten years 4,242.9 4,236.1
--------- ---------
$15,377.3 $15,294.0
========= =========1,200.6 1,277.3
-----------------------------------------------------------------------------------------------------------
10,138.5 10,273.3
Mortgage-backed securities 2,719.1 2,761.4
Asset-backed securities 2,388.2 2,408.3
-----------------------------------------------------------------------------------------------------------
$ 15,245.8 $ 15,443.0
===========================================================================================================
The components of unrealized gains (losses) on securities available-for-sale, net, were as follows as of
each December 31:
(in millions)
2000 1999
===========================================================================================================
Gross unrealized gains (losses) $ 202.7 $ (75.3)
Adjustment to deferred policy acquisition costs (23.2) 50.9
Deferred federal income tax (62.8) 8.5
-----------------------------------------------------------------------------------------------------------
$ 116.7 $ (15.9)
===========================================================================================================
An analysis of the change in gross unrealized gains (losses) on securities available-for-sale for the years
ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Securities available-for-sale:
Fixed maturity securities $ 280.5 $ (607.1) $ 52.6
Equity securities (2.5) (8.8) 4.2
-----------------------------------------------------------------------------------------------------------
$ 278.0 $ (615.9) $ 56.8
===========================================================================================================
Proceeds from the sale of securities available-for-sale during 2000,
1999 and 1998 were $602.0 million, $513.1 million and $610.5 million,
respectively. During 2000, gross gains of $12.1 million ($10.4 million
and $9.0 million in 1999 and 1998, respectively) and gross losses of
$25.6 million ($28.0 million and $7.6 million in 1999 and 1998,
respectively) were realized on those sales.
The Company had $13.0 million and $15.6 million of real estate
investments at December 31, 2000 and 1999, respectively, that were
non-income producing the preceding twelve months.
Real estate is presented at cost less accumulated depreciation of $25.7
million as of December 31, 2000 ($24.8 million as of December 31, 1999)
and valuation allowances of $5.2 million as of December 31, 2000 ($5.5
million as of December 31, 1999).
1183
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized (losses) gains on securities
available-for-sale, net, were as follows as of December 31:
(in millions) 1999 1998
------ -------
Gross unrealized (losses) gains $(75.3) $ 540.6
Adjustment to deferred policy acquisition costs 50.9 (116.6)
Deferred federal income tax 8.5 (148.4)
------ -------
$(15.9) $ 275.6
====== =======
An analysis of the change in gross unrealized (losses) gains on
securities available-for-sale for the years ended December 31:
(in millions) 1999 1998 1997
------- ----- ------
Securities available-for-sale:
Fixed maturity securities $(607.1) $52.6 $137.5
Equity securities (8.8) 4.2 (2.7)
------- ----- ------
$(615.9) $56.8 $134.8
======= ===== ======
Proceeds from the sale of securities available-for-sale during 1999,
1998 and 1997 were $513.1 million, $610.5 million and $574.5 million,
respectively. During 1999, gross gains of $10.4 million ($9.0 million
and $9.9 million in 1998 and 1997, respectively) and gross losses of
$28.0 million ($7.6 million and $18.0 million in 1998 and 1997,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
The Company had $15.6 million of real estate investments at December
31, 1999 that were non-income producing the preceding twelve months.
During 1998 the Company had investments of $42.4 million that were
non-income producing, which consisted of $32.7 million of securities
available-for-sale and $9.7 million of real estate.
Real estate is presented at cost less accumulated depreciation of $24.8
million as of December 31, 1999 ($21.5 million as of December 31, 1998)
and valuation allowances of $5.5 million as of December 31, 1999 ($5.4
million as of December 31, 1998).
The recorded investment of mortgage loans on real estate considered to
be impaired was $3.7$9.8 million as of both December 31, 1999 and 1998. No
valuation allowance has been recorded for these loans as of December 31, 1999 or 1998.2000 ($3.7 million as
of December 31, 1999), which includes $5.3 million (none as of December
31, 1999) of impaired mortgage loans on real estate for which the
related valuation allowance was $1.6 million (none as of December 31,
1999) and $4.5 million ($3.7 million as of December 31, 1999) of
impaired mortgage loans on real estate for which there was no valuation
allowance. During 1999,2000, the average recorded investment in impaired
mortgage loans on real estate was approximately $3.7$7.7 million ($9.13.7 million in 1998)1999)
and there was no interest income recognized on those loans. Interest income recognized on impaired loans was $0.3totaled $0.4 million in
19982000 (none in 1999) which is equal to interest income recognized using
a cash-basis method of income recognition. 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
(in millions) 2000 1999 1998
1997
----- ----- -----===========================================================================================================
Allowance, beginning of year $42.4 $42.5 $51.0$ 44.4 $ 42.4 $ 42.5
Additions (reductions) charged to operations 4.1 0.7 (0.1) (1.2)
Direct write-downs charged against the allowance (3.2) -- -- (7.3)
Allowance on acquired mortgage loans -- 1.3 --
--
----- ----- ----------------------------------------------------------------------------------------------------------------
Allowance, end of year $44.4 $42.4 $42.5
===== ===== =====
$ 45.3 $ 44.4 $ 42.4
===========================================================================================================
An analysis of investment income by investment type follows for the years ended December 31:
(in millions) 2000 1999 1998
1997
-------- -------- --------===========================================================================================================
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $1,031.3$ 1,095.5 $ 1,031.3 $ 982.5
$ 911.6
Equity securities 2.6 2.5 0.8 0.8
Mortgage loans on real estate 494.5 460.4 458.9
457.7
Real estate 32.2 28.8 40.4
42.9
Short-term investments 27.0 18.6 17.8
22.7
Other 53.2 26.5 30.7
21.0
-------- -------- -------------------------------------------------------------------------------------------------------------------
Total investment income 1,705.0 1,568.1 1,531.1 1,456.7
Less investment expenses 50.1 47.3 49.5
47.5
-------- -------- -------------------------------------------------------------------------------------------------------------------
Net investment income $1,520.8 $1,481.6 $1,409.2
======== ======== ========
$ 1,654.9 $ 1,520.8 $ 1,481.6
===========================================================================================================
An analysis of realized gains (losses) on investments, net of valuation allowances, by investment type
follows for the years ended December 31:
(in millions) 2000 1999 1998
1997
------- ----- -----
===========================================================================================================
Securities available-for-sale:
Fixed maturity securities $(25.0) $(0.7) $ 3.6(18.2) $ (25.0) $ (0.7)
Equity securities 4.7 7.4 2.1 2.7
Mortgage loans on real estate (4.2) (0.6) 3.9 1.6
Real estate and other (1.7) 6.6 23.1
3.2
------ ----- -----
$(11.6) $28.4 $11.1
====== ===== =====-----------------------------------------------------------------------------------------------------------
$ (19.4) $ (11.6) $ 28.4
===========================================================================================================
Fixed maturity securities with an amortized cost of $12.8 million and
$9.1 million as of
December 31, 1999 and $6.5 million as of December 31, 1998 were on deposit with various regulatory agencies as
required by law.law as of December 31, 2000 and 1999, respectively.
84
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) Derivative Financial InstrumentsSHORT-TERM BORROWINGS
NLIC established a $300 million commercial paper program in October
2000. Borrowings under the commercial paper program are unsecured and
are issued for terms of 364 days or less. As of December 31, 2000 the
Company had $118.7 million of commercial paper outstanding at an
average effective rate of 6.48%. See also note 13.
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, principally interest
rate swaps, interest rate futures contracts and foreign currency swaps,
to manage market risk exposures associated with changes in interest
rates and foreign currency exchange rates. Provided they meet specific
criteria, interest rate and foreign currency swaps and futures are
considered hedges and are accounted for under the accrual method and
deferral method, respectively. The Company has no significant
derivative positions that are not considered hedges. 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, ContinuedSee note 2 (j)
regarding accounting for derivatives under SFAS 133 effective January
1, 2001.
Interest rate swaps are primarily used to convert specific investment
securities and interest bearing policy liabilities from a fixed-rate to
a floating-rate basis. Amounts receivable or payable under these
agreements are recognized as an adjustment to net investment income or
interest credited to policyholder account balances consistent with the
nature of the hedged item. TheCurrently, changes in fair value of the
interest rate swap agreements are not recognized on the balance sheet,
except for interest rate swaps designated as hedges of fixed maturity
securities available-for-sale and cross currency swaps hedging foreign
denominated debt instruments, for which changes in fair values are
reported in accumulated other comprehensive income.
Interest rate futures contracts are primarily used to hedge the risk of
adverse interest rate changes related to the Company's mortgage loan
commitments and anticipated purchases of fixed rate investments. Gains
and losses are deferred and, at the time of closing, reflected as an
adjustment to the carrying value of the related mortgage loans or
investments. The carrying value adjustments are amortized into net
investment income over the life of the related mortgage loans or
investments.
Foreign currency swaps are used to convert cash flows from specific
policy liabilities and investments denominated in foreign currencies
into U.S. dollars at specified exchange rates. Amounts receivable or
payable under these agreements are recognized as an adjustment to net
investment income or interest credited to policyholder account balances
consistent with the nature of the hedged item. Gains and losses on
foreign currency swaps are recorded in earnings based on the related
spot foreign exchange rate at the end of the reporting period. Gains
and losses on these contracts offset those recorded as a result of
translating the hedged foreign currency denominated liabilities and
investments to U.S. dollars.
The following table summarizes the notional amount of derivative
financial instruments classified as hedges outstanding as of December
31, 1999. Prior to 1999 the Company's activities in derivatives were
not significant.
(in millions)
-------------
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $362.7
Pay variable/receive fixed rate swaps hedging investments $ 28.5
Other contracts hedging investments $ 19.1
Pay variable/receive fixed rate swaps hedging liabilities $577.2
Foreign currency swaps
Hedging foreign currency denominated investments $ 14.8
Hedging foreign currency denominated liabilities $577.2
Interest rate futures contracts $781.6
1485
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(5) Federal Income Tax
The tax effectsnotional amount of temporary differences that give rise to significant
components of the net deferred tax liabilityderivative financial instruments outstanding as
of December 31, 2000 and 1999 and 1998 arewere as follows:
(in millions ) 2000 1999
===========================================================================================================
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $ 934.8 $ 362.7
Pay variable/receive fixed rate swaps hedging investments 98.8 28.5
Pay variable/receive variable rate swaps hedging investments 184.0 9.0
Other contracts hedging investments 20.4 10.1
Pay variable/receive fixed rate swaps hedging liabilities 965.3 577.2
Pay variable/receive variable rate swaps hedging liabilities 546.9 --
Foreign currency swaps
Hedging foreign currency denominated investments $ 30.5 $ 14.8
Hedging foreign currency denominated liabilities 1,542.2 577.2
Interest rate futures contracts $ 5,659.8 $ 781.6
-----------------------------------------------------------------------------------------------------------
(6) FEDERAL INCOME TAX
The tax effects of temporary differences that give rise to significant components of the net deferred tax
liability as of December 31, 2000 and 1999 were as follows:
(in millions) 2000 1999
1998
---- ----===========================================================================================================
Deferred tax assets:
Fixed maturity securities $ 5.3-- $ --5.3
Future policy benefits 34.7 149.5 207.7
Liabilities in separate accounts 462.7 373.6 319.9
Mortgage loans on real estate and real estate 18.8 18.5 17.5
Other assets and other liabilities 40.3 51.1
58.9
----- -----------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 556.5 598.0
604.0
Less valuationValuation allowance (7.0) (7.0)
----- -----------------------------------------------------------------------------------------------------------------
Net deferred tax assets 549.5 591.0
597.0
----- -----------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed maturity securities 98.8 --
Equity securities and other long-term investments 6.4 10.8
Deferred policy acquisition costs 783.7 724.4 568.7
Fixed maturity securities -- 212.2
Deferred tax on realized investment gains 29.0 34.7
34.8
Equity securities and other long-term investments 10.8 9.6
Other 38.1 26.5
21.6
------ -----------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 956.0 796.4
846.9
------ -----------------------------------------------------------------------------------------------------------------
Net deferred tax liability $205.4 $249.9
====== ======$ 406.5 $ 205.4
===========================================================================================================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by futureFuture taxable
amounts or recovery of federal income tax paid within the statutory
carryback period. There
has been no change in theperiod can offset nearly all future deductible amounts. The
valuation allowance was unchanged for the years ended December 31,
1999, 1998 and 1997.
The Company's current federal income tax liability was $104.7 million
and $72.8 million as of December 31,2000, 1999 and 1998, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
(in millions) 1999 1998 1997
------ ------ ------
Currently payable $ 53.6 $186.1 $121.7
Deferred tax expense 147.8 4.3 28.5
------ ------ ------
$201.4 $190.4 $150.2
====== ====== ======1998.
1586
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company's current federal income tax liability was $108.9 million
and $104.7 million as of December 31, 2000 and 1999, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
(in millions) 2000 1999 1998
===========================================================================================================
Currently payable $ 78.0 $ 53.6 $ 186.1
Deferred tax expense 129.7 147.8 4.3
-----------------------------------------------------------------------------------------------------------
$ 207.7 $ 201.4 $ 190.4
===========================================================================================================
Total federal income tax expense for the years ended December 31, 2000,
1999 1998 and 19971998 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
2000 1999 1998
1997
---------------- ---------------- -------------------------------------- ---------------------- ----------------------
(in millions) Amount % Amount % Amount %
------ ---- ------ ---- ------ ----==================================================================================================================
Computed (expected) tax expense $239.1 35.0 $212.3 35.0 $195.0 35.0 $150.5 35.0
Tax exempt interest and dividends
received deduction (24.7) (3.6) (7.3) (1.2) (4.9) (0.9)
-- --
Income tax credits (8.0) (1.2) (4.3) (0.7) -- -- -- --- -
Other, net 1.3 0.2 0.7 0.1 0.3 0.1
(0.3) (0.1)
------ ---- ------ ---- ------ ----------------------------------------------------------------------------------------------------------------------
Total (effective rate of each year) $207.7 30.4 $201.4 33.2 $190.4 34.2
$150.2 34.9
====== ==== ====== ==== ====== ======================================================================================================================
Total federal income tax paid was $74.6 million, $29.8 million $173.4 million and
$91.8$173.4 million during the years ended December 31, 2000, 1999 and 1998,
and 1997,
respectively.
(6) Comprehensive Income(7) COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within separate components 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 arefor the years ended December 31, 2000, 1999 and 1998 were as
follows:
(in millions) 2000 1999 1998
1997
------- ------ ------===========================================================================================================
Unrealized gains (losses) on securities available-for-sale arising
during the period:
Gross $(665.3)$ 264.5 $ (665.3) $ 58.2 $141.1
Adjustment to deferred policy acquisition costs (74.0) 167.5 (12.9) (21.8)
Related federal income tax (expense) benefit (66.7) 171.4 (15.9)
(41.7)
------- ------ -----------------------------------------------------------------------------------------------------------------
Net 123.8 (326.4) 29.4
77.6
------- ------ -----------------------------------------------------------------------------------------------------------------
Reclassification adjustment for net (gains) losses on securities
available-for-sale realized during the period:
Gross 13.5 17.6 (1.4) (6.3)
Related federal income tax expense (benefit) (4.7) (6.2) 0.5
2.2
------- ------ -----------------------------------------------------------------------------------------------------------------
Net 8.8 11.4 (0.9)
(4.1)
------- ------ -----------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $(315.0)(Loss) $ 132.6 $ (315.0) $ 28.5
$ 73.5
======= ====== =================================================================================================================
(7) Fair Value 87
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial InstrumentsServices, Inc.)
Notes to Consolidated Financial Statements, Continued
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in estimating its fair value disclosures:
Fixed maturitydisclosures used the following
methods and equity securities:assumptions:
FIXED MATURITY AND EQUITY SECURITIES: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for fixed
maturity and equity securities exclude the fair value of
derivatives contracts designated as hedges of fixed maturity and
equity securities.
Mortgage loans on real estate, net:MORTGAGE LOANS ON REAL ESTATE, NET: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for impaired mortgage loans in default is the estimated fair value
of the underlying collateral.
Policy loans, short-term investments and cash:POLICY LOANS, SHORT-TERM INVESTMENTS AND CASH: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Separate account assets and liabilities:SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
Investment contracts:INVESTMENT CONTRACTS: The fair value for the Company's liabilities
under investment type contracts is disclosed usingbased on one of two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
1788
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Policy reserves on life insurance contracts:POLICY RESERVES ON LIFE INSURANCE CONTRACTS: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
Commitments to extend credit:SHORT-TERM BORROWINGS: The carrying amount reported in the
consolidated balance sheets for these instruments approximates
their fair value.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 8.
Futures contracts:9.
FUTURES CONTRACTS: The fair value for futures contracts is
based on quoted market prices.
Interest rate and foreign currency swaps:INTEREST RATE AND FOREIGN CURRENCY SWAPS: The fair value for
interest rate and foreign currency swaps are calculated with
pricing models using current rate assumptions.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
2000 1999
1998
------------------------ -------------------------------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
(in millions) amount fair value amount fair value
--------- --------- --------- ----------==============================================================================================================
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $15,294.0 $15,294.0 $14,245.1 $14,245.1$ 15,451.3 $ 15,451.3 $ 15,289.7 $ 15,289.7
Equity securities 109.0 109.0 92.9 92.9 128.5 128.5
Mortgage loans on real estate, net 6,168.3 6,327.8 5,786.3 5,745.5
5,328.4 5,527.6
Policy loans 562.6 562.6 519.6 519.6
464.3 464.3
Short-term investments 442.6 442.6 416.0 416.0
289.1 289.1
Cash 18.4 18.4 4.8 4.8 3.4 3.4
Assets held in separate accounts 65,897.2 65,897.2 67,135.1 67,135.1 50,935.8 50,935.8
Liabilities:
Investment contracts (16,815.3) (15,979.8) (16,977.7) (16,428.6) (15,468.7) (15,158.6)
Policy reserves on life insurance contracts (5,368.4) (5,128.5) (4,883.9) (4,607.9)
(3,914.0) (3,768.9)Short-term borrowings (118.7) (118.7) -- --
Liabilities related to separate accounts (65,897.2) (64,237.6) (67,135.1) (66,318.7) (50,935.8) (49,926.5)
Derivative financial instruments:
Interest rate swaps hedging assets (8.3) (8.3) 4.3 4.3 - -
Interest rate swaps hedging liabilities -(26.2) (32.2) (11.5) (24.2) - -
Foreign currency swaps (24.3) (30.9) (11.8) (11.8)
- -
Futures contracts (16.0) (16.0) 1.3 1.3
(1.3) (1.3)--------------------------------------------------------------------------------------------------------------
(8) Risk Disclosures(9) RISK DISCLOSURES
The following is a description of the most significant risks
facing life insurers and how the Company mitigates those risks:
Credit Risk: 89
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
CREDIT RISK: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Interest Rate Risk:INTEREST RATE RISK: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer wouldcould
potentially have to borrow funds or sell assets prior to maturity and
potentially recognize a gain or loss.
Legal/Regulatory Risk:LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk:FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans and derivative financial instruments. These
instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $216.2$360.6 million
extending into 20002001 were outstanding as of December 31, 1999.2000. The
Company also had $28.0$55.6 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1999.2000.
Notional amounts of derivative financial instruments, primarily
interest rate swaps, interest rate futures contracts and foreign
currency swaps, significantly exceed the credit risk associated with
these instruments and represent contractual balances on which
calculations of amounts to be exchanged are based. Credit exposure is
limited to the sum of the aggregate fair value of positions that have
become favorable to NLIC, including accrued interest receivable due
from counterparties. Potential credit losses are minimized through
careful evaluation of counterparty credit standing, selection of
counterparties from a limited group of high quality institutions,
collateral agreements and other contract provisions. AtAs of December 31,
1999,2000, NLIC's credit risk from these derivative financial instruments
was $6.1$44.8 million.
Significant Concentrations of Credit Risk:SIGNIFICANT CONCENTRATIONS OF CREDIT RISK: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 23% (22%22% (23% in 1998)1999) in any geographic area and no more than 2%1% (2%
in 1998)1999) with any one borrower as of December 31, 1999.2000. As of December
31, 1999, 39% (42%2000, 36% (39% in 1998)1999) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
1990
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Reinsurance:REINSURANCE: The Company has entered into a reinsurance contractcontracts to cede
a portion of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin) and beginning in 2000 with Security
Benefit Life Insurance Company (SBL). Total recoveries due from
Franklin were $143.6$97.7 million and $187.9$143.6 million as of December 31, 2000
and 1999, and 1998, respectively.respectively, while amounts due from SBL totaled $45.4
million at December 31, 2000. The contract iscontracts are immaterial to the
Company's results of operations. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder.
Under the terms of the contract, Franklin hasand SBL have each established
a trust as collateral for the recoveries. The trust assets are invested
in investment grade securities, the market value of which must at all
times be greater than or equal to 102% and 100% of the reinsured
reserves.
(9) Pension Planreserves for Franklin and Postretirement Benefits Other Than PensionsSBL, respectively.
(10) PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service and who have met certain age requirements. Plan
contributions are invested in a group annuity contract of NLIC.
Benefits are based upon the highest average annual salary of a
specified number of consecutive years of the last ten years of service.
The Company funds pension costs accrued for direct employees plus an
allocation of pension costs accrued for employees of affiliates whose
work efforts benefit the Company.
Assets of the
Retirement Plan are invested in group annuity contracts of NLIC.
Pension cost (benefit) charged to operations by the Company during the
years ended December 31, 2000, 1999 and 1998 and 1997 were $1.9 million, $(8.3)
million $2.0
million and $7.5$2.0 million, respectively. The Company has recorded a
prepaid pension asset of $13.3$13.6 million and $5.0$13.3 million as of December
31, 19992000 and 1998,1999, respectively.
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
2000 and 1999 and 1998 was $49.6$51.0 million and $40.1$49.6 million, respectively and the
net periodic postretirement benefit cost (NPPBC) for 2000, 1999 and
1998 and
1997 was $3.8 million, $4.9 million $4.1 million and $3.0$4.1 million, respectively.
2091
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Information regarding the funded status of the pension plan as a whole
and the postretirement life and health care benefit plan as a whole as
of December 31, 19992000 and 19981999 follows:
Pension Benefits Postretirement Benefits
------------------ --------------------------------------------------- ---------------------------
(in millions) 2000 1999 19982000 1999
1998
--------------------------------------------------------- -------- -------- ------- -------===================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $2,185.0 $2,033.8$ 1,811.4 $ 2,185.0 $ 239.8 $ 270.1
$ 237.9
Service cost 81.4 80.0 87.612.2 14.2 9.8
Interest cost 125.3 109.9 123.418.7 17.6
15.4
Actuarial loss (gain) loss34.8 (95.0) 123.216.1 (64.4) 15.6
Plan settlement in 1999/curtailment in 1998-- (396.1) (107.2) -- --
Benefits paid (71.2) (72.4) (75.8)(10.4) (11.0) (8.6)
Acquired companies -- -- -- 13.3
--
-------- -------- ------- --------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,981.7 1,811.4 2,185.0276.4 239.8
270.1
-------- -------- ------- --------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,247.6 2,541.9 2,212.991.3 77.9 69.2
Actual return on plan assets 140.9 161.8 300.712.2 3.5 5.0
Employer contribution -- 12.4 104.126.3 20.9
12.1
Plan curtailment in 2000/settlement in 1999 19.8 (396.1) -- -- --
Benefits paid (71.2) (72.4) (75.8)(10.4) (11.0)
(8.4)
-------- -------- ------- --------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,337.1 2,247.6 2,541.9119.4 91.3
77.9
-------- -------- ------- --------------------------------------------------------------------------------------------------------------------------
Funded status 355.4 436.2 356.9(157.0) (148.5) (192.2)
Unrecognized prior service cost 25.0 28.2 31.5 -- --
Unrecognized net (gains) lossesgains (311.7) (402.0) (345.7)(34.1) (46.7) 16.0
Unrecognized net (asset) obligation at transition (6.4) (7.7) (11.0)1.0 1.1
1.3
-------- -------- ------- --------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 62.3 $ 54.7 $ 31.7 $(194.1) $(174.9)
======== ======== ======= =======(190.1) $ (194.1)
===================================================================================================================
21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements,Assumptions used in calculating the funded status of the pension plan
and postretirement life and health care benefit plan:plan were as follows:
Pension Benefits Postretirement Benefits
---------------- -------------------------------------------------- ---------------------------
2000 1999 19982000 1999
1998
---- ---- ------- ------===================================================================================================================
Weighted average discount rate 6.75% 7.00% 5.50%7.50% 7.80% 6.65%
Rate of increase in future compensation levels 5.00% 5.25% 3.75% -- --
Assumed health care cost trend rate:
Initial rate -- -- 15.00% 15.00%
Ultimate rate -- -- 5.50% 8.00%5.50%
Uniform declining period -- -- 5 Years 15 Years
The net periodic pension cost for the pension plan as a whole for the
years ended December 31, 1999, 1998 and 1997 follows:
(in millions) 1999 1998 1997
-------------------------------------------------------------------------------- ----------- ------------
Service cost (benefits earned during the period) $ 80.0 $ 87.6 $ 77.3
Interest cost on projected benefit obligation 109.9 123.4 118.6
Expected return on plan assets (160.3) (159.0) (139.0)
Recognized gains (9.1) (3.8) --
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation (asset) (1.4) 4.2 4.2
------- ------- --------
$ 22.3 $ 55.6 $ 64.3
======= ======= ========
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide Insurance and employees of WSC ended
participation in the plan. A curtailment gain of $67.1 million resulted
(consisting of a $107.2 million reduction in the projected benefit
obligation, net of the write-off of the $40.1 million remaining
unamortized transition obligation related to WSC). During 1999, the
plan transferred assets to settle its obligation related to WSC
employees . A settlement gain of $32.9 million was recognized.
Basis for measurements, net periodic pension cost for the pension plan:
1999 1998 1997
------ ----- -----
Weighted average discount rate 6.08% 6.00% 6.50%
Rate of increase in future compensation levels 4.33% 4.25% 4.75%
Expected long-term rate of return on plan assets 7.33% 7.25% 7.25%5 Years
-------------------------------------------------------------------------------------------------------------------
2292
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amountcomponents of NPPBCnet periodic pension cost for the postretirement benefitpension plan as a
whole for the years ended December 31, 2000, 1999 and 1998 and 1997 waswere as
follows:
(in millions) 2000 1999 1998
1997
------- ----------- -----------=========================================================================================================
Service cost (benefits earned during the period) $ 81.4 $ 80.0 $ 87.6
Interest cost on projected benefit obligation 125.3 109.9 123.4
Expected return on plan assets (184.5) (160.3) (159.0)
Recognized gains (11.8) (9.1) (3.8)
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation (asset) (1.3) (1.4) 4.2
---------------------------------------------------------------------------------------------------------
$ 12.3 $ 22.3 $ 55.6
=========================================================================================================
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide and employees of WSC ended participation in
the plan resulting in a curtailment gain of $67.1 million. During 1999,
the Plan transferred assets to settle its obligation related to WSC
employees, resulting in a gain of $32.9 million. The spin-off of
liabilities and assets was completed in the year 2000, resulting in an
adjustment to the curtailment gain of $19.8 million.
Assumptions used in calculating the net periodic pension cost for the
pension plan were as follows:
2000 1999 1998
================================================================================================================
Weighted average discount rate 7.00% 6.08% 6.00%
Rate of increase in future compensation levels 5.25% 4.33% 4.25%
Expected long-term rate of return on plan assets 8.25% 7.33% 7.25%
----------------------------------------------------------------------------------------------------------------
The components of NPPBC for the postretirement benefit plan as a whole for the years ended December 31, 2000,
1999 and 1998 were as follows:
(in millions) 2000 1999 1998
================================================================================================================
Service cost (benefits attributed to employee service during the year) $14.2$ 12.2 $ 14.2 $ 9.8 $ 7.0
Interest cost on accumulated postretirement benefit obligation 18.7 17.6 15.4
14.0
ActualExpected return on plan assets (3.5) (5.0) (3.6)(7.9) (4.8) (4.4)
Amortization of unrecognized transition obligation of affiliates 0.6 0.20.6 0.2
Net amortization and deferral (1.8) 1.2(1.3) (0.5) ----- ----- -----
$27.1 $21.6 $17.1
===== ===== =====0.6
----------------------------------------------------------------------------------------------------------------
$ 22.3 $ 27.1 $ 21.6
================================================================================================================
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 2000, 1999 1998 and 19971998 were as follows:
2000 1999 1998
1997
------- ------ ------================================================================================================================
Discount rate 7.80% 6.65% 6.70%
7.25%
Long termLong-term rate of return on plan assets, net of tax in 1999 and 1998 8.30% 7.15% 5.83% 5.89%
Assumed health care cost trend rate:
Initial rate 15.00% 15.00% 12.00% 11.00%
Ultimate rate 5.50% 6.00%5.50% 6.00%
Uniform declining period 5 Years 5 Years 12 Years
12 Years----------------------------------------------------------------------------------------------------------------
For 93
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Because current plan costs are very close to the employer dollar caps,
the health care cost trend has an immaterial effect on plan obligations
for the postretirement benefit plan as a whole,whole. For this reason, the
effect of a one percentage point increase or decrease in the assumed
health care cost trend rate would
have no impact on the APBO as of December 31, 19992000 and have no impact on
the NPPBC for the year ended December 31, 1999.
(10) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
and Dividend Restrictions2000 was not calculated.
(11) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 2000, 1999
and 1998 and 1997 was $1.28 billion, $1.35 billion $1.32 billion and $1.13$1.32 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 2000, 1999 and 1998 and 1997 was $158.7 million, $276.2 million and
$171.0 million, respectively.
The NAIC completed a project to codify statutory accounting principles
(Codification), which is effective January 1, 2001 for NLIC and $111.7 million, respectively.its
insurance company subsidiary. The resulting change to NLIC's January 1,
2001 surplus was an increase of approximately $80.0 million. The
significant change for NLIC, as a result of Codification, was the
recording of deferred taxes, which were not recorded prior to the
adoption of Codification.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 1999
$40.2 million of2000
no dividends could be paid by NLIC without prior approval. 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.shareholders.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) Transactions With Affiliates(12) TRANSACTIONS WITH AFFILIATES
During second quarter 1999, the Company entered into a modified
coinsurance arrangement to reinsure the 1999 operating results of an
affiliated company, Employers Life Insurance Company of Wausau (ELOW)
retroactive to January 1, 1999. In September 1999, NFS acquired ELOW
for $120.8 million and immediately merged ELOW into NLIC terminating
the modified coinsurance arrangement. Because ELOW was an affiliate,
the Company accounted for the merger similar to poolings-of-interests;
however, prior period financial statements were not restated due to
immateriality. The reinsurance and merger combined contributed $1.46
million to yearnet income in 1999.
94
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to date net income.Consolidated Financial Statements, Continued
The Company has a reinsurance agreement with NMIC whereby all of the
Company's accident and health business is ceded to NMIC on a modified
coinsurance basis. The agreement covers individual accident and health
business for all periods presented and group and franchise accident and
health business since July 1, 1999. Either party may terminate the
agreement on January 1 of any year with prior notice. Prior to July 1,
1999 group and franchise accident and health business and a block of
group life insurance policies were ceded to ELOW under a modified
coinsurance agreement. Under a modified coinsurance agreement, invested
assets are retained by the ceding company and investment earnings are
paid to the reinsurer. Under the terms of the Company's agreements, the
investment risk associated with changes in interest rates is borne by
the reinsurer. Risk of asset default is retained by the Company,
although a fee is paid to the Company for the retention of such risk.
The ceding of risk does not discharge the original insurer from its
primary obligation to the policyholder. The Company believes that the
terms of the modified coinsurance agreements are consistent in all
material respects with what the Company could have obtained with
unaffiliated parties. Revenues ceded to NMIC and ELOW for the years
ended December 31, 2000, 1999 and 1998 and 1997 were $170.1 million, $193.0
million, $216.9
million, and $315.3$216.9 million, respectively, while benefits, claims and
expenses ceded were $216.9$168.0 million, $259.3$197.3 million and $326.6$259.3 million,
respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to
allocation among NMIC and such subsidiaries. Measures used to allocate
expenses among companies include individual employee estimates of time
spent, special cost studies, salary expense, commission expense and
other methods agreed to by the participating companies that are within
industry guidelines and practices. In addition, beginning in 1999
Nationwide Services Company, a subsidiary of NMIC, provides computer,
telephone, mail, employee benefits administration, and other services
to NMIC and certain of its direct and indirect subsidiaries, including
the Company, based on specified rates for units of service consumed.
For the years ended December 31, 2000, 1999 1998 and 1997,1998, the Company made
payments to NMIC and Nationwide Services Company totaling $150.3
million, $124.1 million, and $95.0 million, and $85.8 million, respectively. In addition,
theThe Company
does not believe that expenses recognized under these agreements are
materially different than expenses that would have been recognized had
the Company operated on a stand-alone basis.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 2000, 1999 1998 and 1997,1998, the
Company made lease payments to NMIC and its subsidiaries of $14.1
million, $9.9 million and $8.0 million, and $8.4 million, respectively. 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or after a stated period, the
securitiesseller will be repurchased byrepurchase the sellersecurities at the original sales price plus
a price differential. Transactions under the agreements during 2000,
1999 and 1998 were not material. The Company believes that the terms of
the repurchase agreements are materially consistent with what the
Company could have obtained with unaffiliated parties.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $411.7$321.1 million and $248.4$411.7 million as
of December 31, 19992000 and 1998,1999, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
As part of certain restructuring activities that occurred prior to the
March 1997 IPO, the Company paid a dividend valued at $485.7 million to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of ELOW, National Casualty Company (NCC) and
West Coast Life Insurance Company (WCLIC). Also, on February 24, 1997,
the Company paid a dividend to NFS, and NFS paid an equivalent dividend
to Nationwide Corp., consisting of securities having an aggregate fair
value of $850.0 million. The Company recognized a gain of $14.4 million
on the transfer of securities.
Certain annuity products are sold through three affiliated companies, which
are also subsidiaries of NFS. Total commissions and fees paid to these
affiliates for the three years ended December 31, 19992000 were $56.0$65.0
million, $60.0$79.7 million and $66.1$74.9 million, respectively.
(12) Bank Lines 95
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of CreditNationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) BANK LINES OF CREDIT
Also available as a source of funds to the Company is a $1 billion
revolving credit facility entered into by NFS, NLIC and NMIC are parties to a $600.0 million revolving creditNMIC. The
facility which provides for a $600.0 million loan overis comprised of a five year term
on$700 million agreement and a fully revolving basis364
day $300 million agreement with a group of national financial
institutions. The credit facility provides for several and not joint liability
with respect to any amount drawn by any party. NFS,The facility provides
covenants, including, but not limited to, requirements that NLIC
and
NMIC pay facility and usage fees to the financial institutions to
maintain the revolving credit facility. Asstatutory surplus in excess of December 31, 1999 the$935 million. The Company had
no amounts outstanding under this agreement as of December 31, 2000. Of
the agreement.
(13) Contingenciestotal facility, $300 million is designated to back NLIC's $300
million commercial paper program. Therefore, borrowing capacity under
this facility would be reduced by the amount of any commercial paper
outstanding.
(14) CONTINGENCIES
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint
filed by the Company and other named defendants. The Company intends to
defend this lawsuit vigorously.
(14) Segment Information(15) SEGMENT INFORMATION
The Company uses differenceshas redefined its business segments in products asorder to align this
disclosure with the basis for definingway management currently views its reportable segments. Thecore operations.
This updated view better reflects the different economics of the
Company's various businesses and also aligns well with the current
market focus. As a result, the Company now reports three product
segments: Variable Annuities, Fixed AnnuitiesIndividual Annuity, Institutional Products and Life
Insurance. In addition, the Company reports certain other revenues and
expenses in a Corporate segment. All 1999 and 1998 amounts have been
restated to reflect the new business segments.
The Individual Annuity segment consists of both variable and fixed
annuity contracts. Individual annuity contracts provide the customer
with tax-deferred accumulation of savings and flexible payout options
including lump sum, systematic withdrawal or a stream of payments for
life. In addition, variable annuity contracts provide the customer with
access to a wide range of investment options and asset protection in
the event of an untimely death, while fixed annuity contracts generate
a return for the customer at a specified interest rate fixed for a
prescribed period. The Company's individual annuity products consist of
single premium deferred annuities, flexible premium deferred annuities
and single premium immediate annuities.
The Institutional Products segment is comprised of the Company's group
pension and payroll deduction business, both public and private
sectors, and medium-term note program. The public sector includes the
457 business in the form of fixed and variable annuities. The private
sector includes the 401(k) business generated through fixed and
variable annuities.
The Life Insurance segment consists of insurance products, including
universal life insurance, corporate-owned life insurance and bank-owned
life insurance products, which provide a death benefit and also allow
the customer to build cash value on a tax-advantaged basis.
2596
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
an untimely death, and flexible payout options including a lump sum,
systematic withdrawal or a stream of payments for life. 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, tax-deferred accumulation of savings, and flexible
payout options including a lump sum, systematic withdrawal or a stream
of payments for life. 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
revenue and expenses, investments and relateda Corporate
segment. The Corporate segment includes net investment income supporting capital not specifically
allocated to itsthe three product segments, certain revenues and expenses
of itsthe Company's investment advisoradvisory and broker/dealer subsidiary,
unallocated expenses and interest expense on short-term borrowings. In
addition to these operating revenues and expenses, related to group annuity contracts sold to Nationwide
Insurance employee and agent benefit plans and allthe Company also
reports net realized gains and losses on investments in athe Corporate
and Other segment.
During 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 years ended December 31, 2000, 1999 1998 and 1997.1998.
Variable FixedIndividual Institutional Life Corporate
(in millions) Annuities AnnuitiesAnnuity Products Insurance and OtherCorporate Total
------------------------------------ --------- --------- --------- --------- ---------===================================================================================================================
1999:2000:
Net investment income (1) $ (41.5)483.2 $ 1,134.5827.4 $ 253.1289.2 $ 174.755.1 $ 1,520.81,654.9
Other operating revenue 668.2 43.4 393.0 77.8 1,182.4
--------- --------- -------- -------- ---------625.9 251.6 453.9 17.0 1,348.4
-------------------------------------------------------------------------------------------------------------------
Total operating revenue (2) 626.7 1,177.9 646.1 252.5 2,703.2
--------- --------- -------- -------- ---------revenue(1) 1,109.1 1,079.0 743.1 72.1 3,003.3
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 396.4 628.8 157.2 -- 837.51,182.4
Amortization of deferred policy
acquisition costs 238.7 49.2 64.2 -- 352.1
Interest expense on short-term
borrowings -- -- -- 1.3 1.3
Other benefits and expenses 192.3 170.3 368.8 33.7 765.1
-------------------------------------------------------------------------------------------------------------------
Total expenses 827.4 848.3 590.2 35.0 2,300.9
-------------------------------------------------------------------------------------------------------------------
Operating income before
federal income tax 281.7 230.7 152.9 37.1 702.4
Realized losses on investments -- -- -- (19.4) (19.4)
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 281.7 $ 230.7 $ 152.9 $ 17.7 $ 683.0
===================================================================================================================
Assets as of year end $45,422.5 $37,217.3 $ 8,103.3 $ 1,824.2 $92,567.3
-------------------------------------------------------------------------------------------------------------------
1999:
Net investment income $ 458.9 $ 771.2 $ 253.1 $ 37.6 $ 1,520.8
Other operating revenue 511.4 211.9 393.0 66.1 1,182.4
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 970.3 983.1 646.1 103.7 2,703.2
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 384.9 580.9 130.5 128.3-- 1,096.3
Amortization of deferred policy
acquisition costs 162.8 49.7170.9 41.6 60.1 -- 272.6
Other benefits and expenses 173.6 113.5155.3 142.8 334.7 94.483.4 716.2
--------- --------- -------- -------- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 336.4 1,000.7711.1 765.3 525.3 222.783.4 2,085.1
--------- --------- -------- -------- ----------------------------------------------------------------------------------------------------------------------------
Operating income before
federal income tax 290.3 177.2259.2 217.8 120.8 29.820.3 618.1
Realized losses on investments -- -- -- (11.6) (11.6)
--------- --------- -------- -------- ---------
Consolidated income-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax expense $ 290.3259.2 $ 177.2217.8 $ 120.8 $ 18.28.7 $ 606.5
========= ========= ======== ======== ============================================================================================================================
Assets as of year end $62,599.7 $17,134.8 $6,616.7 $6,324.7$45,667.8 $39,045.1 $ 6,616.7 $ 1,346.3 $92,675.9
========= ========= ======== ======== =========-------------------------------------------------------------------------------------------------------------------
2697
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Variable FixedIndividual Institutional Life Corporate
(in millions) Annuities AnnuitiesAnnuity Products Insurance and OtherCorporate Total
------------------------------------ --------- --------- --------- --------- ---------===================================================================================================================
1998:
Net investment income (1) $ (31.3)431.7 $ 1,116.6784.7 $ 225.6 $ 170.739.6 $ 1,481.6
Other operating revenue 532.9 35.7412.6 167.8 318.5 78.666.8 965.7
--------- --------- -------- -------- ----------------------------------------------------------------------------------------------------------------------------
Total operating revenue (2) 501.6 1,152.3revenue(1) 844.3 952.5 544.1 249.3106.4 2,447.3
--------- --------- -------- -------- ----------------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances -- 828.6357.9 595.7 115.4 125.0-- 1,069.0
Amortization of deferred policy
acquisition costs 123.9 44.2129.2 38.9 46.4 -- 214.5
Other benefits and expenses 159.3 104.2125.7 137.5 293.5 78.178.4 635.1
--------- --------- -------- -------- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 283.2 977.0612.8 772.1 455.3 203.178.4 1,918.6
--------- --------- -------- -------- ----------------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax 218.4 175.3231.5 180.4 88.8 46.228.0 528.7
Realized gains on investments -- -- -- 28.4 28.4
--------- --------- -------- -------- ---------
Consolidated income-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax expense $ 218.4231.5 $ 175.3180.4 $ 88.8 $ 74.656.4 $ 557.1
========= ========= ======== ======== ============================================================================================================================
Assets as of year end $47,668.7 $15,215.7 $5,187.6 $6,270.1$36,641.8 $30,618.4 $ 5,187.6 $ 1,894.3 $74,342.1
========= ========= ======== ======== =========
1997:
Net investment income (1) $ (26.8) $ 1,098.2 $ 184.9 $ 152.9 $ 1,409.2
Other operating revenue 413.9 43.2 283.4 56.6 797.1
--------- --------- -------- -------- ---------
Total operating revenue (2) 387.1 1,141.4 468.3 209.5 2,206.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 823.4 78.5 114.7 1,016.6
Amortization of deferred policy
acquisition costs 87.8 39.8 39.6 -- 167.2
Benefits and expenses 148.4 108.7 283.5 63.1 603.7
--------- --------- -------- -------- ---------
Total expenses 236.2 971.9 401.6 177.8 1,787.5
--------- --------- -------- -------- ---------
Operating income before federal
income tax 150.9 169.5 66.7 31.7 418.8
Realized gains on investments -- -- -- 11.1 11.1
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 150.9 $ 169.5 $ 66.7 $ 42.8 $ 429.9
========= ========= ======== ======== =========
Assets as of year end $35,278.7 $14,436.3 $3,901.4 $6,174.3 $59,790.7
========= ========= ======== ======== =========-------------------------------------------------------------------------------------------------------------------
- ----------
(1) The Company's method of allocating1 Excludes net investment income results in
a charge (negative net investment income) to the Variable Annuities
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.
(2) Excludes realized gains and losses on investments.
The Company has no significant revenue from customers located outside
of the United States nor does the Company have any significant
long-lived assets located outside the United States.
8898
1
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions)
As of December 31, 2000
- ------------------------------------------------------------------------ ------------- -------------- ---------------
Column A Column B Column C Column D
- ------------------------------------------------------------------------ ------------- -------------- ---------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- ------------------------------------------------------------------------ ------------- -------------- ---------------
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 2,996.6 $ 3,072.2 $ 3,072.2
States, municipalities and political subdivisions 8.6 8.8 8.8
Foreign governments 94.1 95.5 95.5
Public utilities 1,186.6 1,195.9 1,195.9
All other corporate 10,959.9 11,070.6 11,070.6
---------- ---------- ----------
Total fixed maturity securities available-for-sale 15,245.8 15,443.0 15,443.0
---------- ---------- ----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 103.5 109.0 109.0
Non-redeemable preferred stock -- -- --
---------- ---------- ----------
Total equity securities available-for-sale 103.5 109.0 109.0
---------- ---------- ----------
Mortgage loans on real estate, net 6,214.4 6,168.3(1)
Real estate, net:
Investment properties 255.0 270.1(2)
Acquired in satisfaction of debt 42.1 40.6(2)
Policy loans 562.6 562.6
Other long-term investments 95.1 101.8(3)
Short-term investments 442.6 442.6
---------- ----------
Total investments $ 22,961.1 $ 23,138.0
========== ==========
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(2) Difference from Column B primarily results from undistributed earnings
from an unconsolidated real estate subsidiary that is carried on the
equity method, offset in part by valuation allowances for accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(3) Difference from Column B is primarily due to operating gains and/or losses
of investments in limited partnerships.
See accompanying independent auditors' report.
2
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
As of December 31, 2000, 1999 and 1998 and for each of the years then ended
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Deferred Future policy
policy benefits, losses, Other policy
acquisition claims and Unearned claims and Premium
Segment costs loss expenses premiums(1) benefits payable(1) revenue
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
2000: Individual Annuities $ 1,711.6 $ 7,008.8 $ 52.7
Institutional Products 293.7 10,944.0 --
Life Insurance 877.8 3,995.6 187.3
Corporate (17.5) 235.2 --
--------------- -------------------- ---------------
Total $ 2,865.6 $ 22,183.6 $ 240.0
=============== ==================== ===============
1999: Individual Annuities $ 1,525.1 $ 7,337.8 $ 26.8
Institutional Products 275.2 10,833.4 --
Life Insurance 702.9 3,519.9 194.0
Corporate 50.9 170.5 --
--------------- -------------------- ---------------
Total $ 2,554.1 $ 21,861.6 $ 220.8
=============== ==================== ===============
1998: Individual Annuities $ 1,316.4 $ 6,579.0 $ 23.1
Institutional Products 248.2 9,792.8 --
Life Insurance 574.2 3,225.5 176.9
Corporate (116.6) 169.8 --
--------------- -------------------- ---------------
Total $ 2,022.2 $ 19,767.1 $ 200.0
=============== ==================== ===============
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column G Column H Column I Column J Column K
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Benefits, claims, Amortization Other
Net investment losses and of deferred policy operating Premiums
Segment income(2) settlement expenses acquisition costs expenses(2) written
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
2000: Individual Annuities $ 483.2 $ 450.4 $ 238.7 $ 138.3
Institutional Products 827.4 628.8 49.2 170.3
Life Insurance 289.2 344.8 64.2 136.7
Corporate 55.1 -- -- 33.7
--------------- -------------------- ------------------- ------------------
Total $ 1,654.9 $ 1,424.0 $ 352.1 $ 479.0
=============== ==================== =================== ==================
1999: Individual Annuities $ 458.9 $ 408.7 $ 170.9 $ 131.5
Institutional Products 771.2 580.9 41.6 142.8
Life Insurance 253.1 317.1 60.1 105.7
Corporate 37.6 -- -- 83.4
--------------- -------------------- ------------------- ------------------
Total $ 1,520.8 $ 1,306.7 $ 272.6 $ 463.4
=============== ==================== =================== ==================
1998: Individual Annuities $ 431.7 $ 380.4 $ 129.2 $ 103.2
Institutional Products 784.7 595.7 38.9 137.5
Life Insurance 225.6 268.7 46.4 100.6
Corporate 39.6 -- -- 78.4
--------------- -------------------- ------------------- ------------------
Total $ 1,481.6 $ 1,244.8 $ 214.5 $ 419.7
=============== ==================== =================== ==================
- ----------
1 Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
2 Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
3
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions)
As of December 31, 2000, 1999 and 1998 and for each of the years then ended
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
--------------- -------------- ------------- ------------- ------------
2000:
Life insurance in force $ 95,475.2 $ 31,101.6 $ 16.4 $ 64,390.0 0.0%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 254.6 $ 14.8 $ 0.2 $ 240.0 0.1%
Accident and health insurance 150.8 156.8 6.0 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 405.4 $ 171.6 $ 6.2 $ 240.0 2.6%
=============== ============== ============= ============= ============
1999:
Life insurance in force $ 84,845.3 $ 26,296.5 $ 14.9 $ 58,563.7 0.0%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 242.2 $ 22.6 $ 1.2 $ 220.8 0.6%
Accident and health insurance 134.9 142.8 7.9 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 377.1 $ 165.4 $ 9.1 $ 220.8 4.2%
=============== ============== ============= ============= ============
1998:
Life insurance in force $ 63,215.9 $ 17,413.4 $ 28.0 $ 45,830.5 0.1%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 225.4 $ 27.4 $ 2.0 $ 200.0 1.0%
Accident and health insurance 169.7 179.4 9.7 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 395.1 $ 206.8 $ 11.7 $ 200.0 5.8%
=============== ============== ============= ============= ============
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
4
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Years ended December 31, 2000, 1999 and 1998
- ---------------------------------------------------------------------------------------------------- ----------------------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------- ----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions(1) period
- -------------------------------------------------------------------------------------- ------------- ----------------------------
2000:
Valuation allowances - fixed maturity securities $ -- $ -- $ -- $ -- $ --
Valuation allowances - mortgage loans on real estate 44.4 4.1 -- 3.2 45.3
Valuation allowances - real estate 5.5 0.4 -- 0.7 5.2
---------------------------- ------------- ----------------------------
Total $ 49.9 $ 4.5 $ -- $ 3.9 $ 50.5
============================ ============= ============================
1999:
Valuation allowances - fixed maturity securities $ 7.5 $ -- $ -- $ 7.5 $ --
Valuation allowances - mortgage loans on real estate 42.4 0.7 1.3(2) -- 44.4
Valuation allowances - real estate 5.4 0.9 -- 0.8 5.5
---------------------------- ------------- ----------------------------
Total $ 55.3 $ 1.6 $ 1.3 $ 8.3 $ 49.9
============================ ============= ============================
1998:
Valuation allowances - fixed maturity securities $ -- $ 7.5 $ -- $ -- $ 7.5
Valuation allowances - mortgage loans on real estate 42.5 (0.1) -- -- 42.4
Valuation allowances - real estate 11.1 (5.7) -- -- 5.4
---------------------------- ------------- ----------------------------
Total $ 53.6 $ 1.7 $ -- $ -- $ 55.3
============================ ============= ============================
- ----------
1 Amounts represent direct write-downs charged against the valuation
allowance.
2 Allowance on acquired mortgage loans.
See accompanying independent auditors' report.
99
APPENDIX
Example A
Assume that a variable annuity contract owner made a $10,000 allocation on the
first day of a calendar quarter into a 5-year Guaranteed Period Option. The
Specified Interest Rate at the time is 8% and the 5-year interest rate swap in
effect for the specified interest rate is 8%. The contract owner decides to
surrender the Guaranteed Period Option 985 days from maturity. The specified
value of the Guaranteed Period Option is $11,937.69. At this time, the 3-year
interest rate swap is 7%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
[ ----------------------- ] [ -------------- ]
MVA FACTOR = 1 + b + 0.0025 365.25
1 + 0.08 985
[ ----------------------- ] [ -------------- ]
MVA FACTOR = 1 + 0.07 + 0.0025 365.25
MVA FACTOR = 1.01897
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 1.01897
*SURRENDER VALUE = $12,164.16
*Assumes no contingent deferred sales charges are applicable.
Specified Value (for purposes of the Example) = the amount of the Guaranteed
Period Option allocation ($10,000), plus interest accrued at the Specified
Interest Rate (8%).
a = the Interest Rate Swap for a period equivalent to the Guaranteed Period
at the time of deposit in the Guaranteed Period Option;
b = the Interest Rate Swap at the time of distribution for a period of time
equivalent to the time remaining in the Guaranteed Period. In determining
the number of years to maturity, any partial year will be counted as a
full year, unless it would cause the number of years to exceed the
Guaranteed Period; and
d = The number of days remaining in the Guaranteed Period.
101
89100
Example B
Assume contract owner made a $10,000 allocation on the first day of a calendar
quarter into a 5-year Guaranteed Period Option. The specified interest rate at
the time is 8% and the 5-year interest rate swap in effect for the specified
interest rate is 8%. The variable annuity contract owner decides to surrender
his money 985 days from maturity. The specified value of the Guaranteed Period
Option is $11,937.69. At this time, the 3 year interest rate swap is 9%.
(985/365.25 is 2.69 which rounds up to 3.)
1 + a d
[ ---------------------------- ] [ -------------- ]----------------------- ---------------
MVA FACTOR = 1 + b + 0.0025 365.25
1 + 0.08 985
[ ---------------------------- ] [ -------------- ]
MVA FACTOR = 1 + 0.09 + 0.0025 365.25
MVA FACTOR = 0.96944
SURRENDER VALUE = SPECIFIED VALUE X MVA FACTOR
SURRENDER VALUE = 11,937.69 X 0.96944
*SURRENDER VALUE = $11,572.91
*Assumes contingent deferred sales charges are applicable.
Specified valueValue (for purposes of the Example) = the amount of the Guaranteed
Period Option allocation ($10,000), plus interest accrued at the Specified
Interest Rate (8%).
a = the Interest Rate Swap for a period equivalent to the Guaranteed Period
at the time of deposit in the Guaranteed Period Option;
b = the Interest Rate Swap at the time of distribution for a period of time
equivalent to the time remaining in the Guaranteed Period. In determining
the number of years to maturity, any partial year will be counted as a
full year, unless it would cause the number of years to exceed the
Guaranteed Period; and
d = The number of days remaining in the Guaranteed Period.
102
90101
The table set forth below illustrates the impact of a Market Value Adjustment
applied upon a full surrender of a 10 year Guaranteed Period Option allocation,
at various stages of the corresponding Guaranteed Period. These figures are
based on Interest Rate Swap of 8% (a in the Market Value Adjustment formula) and
varying current yield Interest Rate Swap shown in the first column (b in the
Market Value Adjustment formula).
TIME REMAINING TO
THE END OF THE GUARANTEED SPECIFIED VALUE MARKET VALUE MARKET
CURRENT YIELD GUARANTEED PERIOD SPECIFIED VALUE ADJUSTMENT VALUE
- ------------- ----------------- --------------- ------------ --------
12% 9 $ 10,800.00 -29.35% $7,631$ 7,631
7 $ 12,597.00 -23.68% $9,615$ 9,615
5 $ 14,693.00 -17.55% $12,114$ 12,114
2 $ 18,509.00 -7.43% $17,134$ 17,134
180 $ 20,785.00 -1.88% $20,393$ 20,393
10% 9 $ 10,800.00 -16.94% $8,971$ 8,971
7 $ 12,597.00 -13.44% $10,904$ 10,904
5 $ 14,693.00 -9.80% $13,254$ 13,254
2 $ 18,509.00 -4.04% $17,761$ 17,761
180 $ 20,785.00 -1.01% $20,575$ 20,575
9% 9 $ 10,800.00 -9.84% $9,737$ 9,737
7 $ 12,597.00 -7.74% $11,622$ 11,622
5 $ 14,693.00 -5.59% $13,871$ 13,871
2 $ 18,509.00 -2.28% $18,088$ 18,088
180 $ 20,785.00 -0.57% $20,667$ 20,667
8% 9 $ 10,800.00 -2.06% $10,578$ 10,578
7 $ 12,597.00 -1.61% $12,395$ 12,395
5 $ 14,693.00 -1.15% $14,524$ 14,524
2 $ 18,509.00 -0.46% $18,424$ 18,424
180 $ 20,785.00 -0.11% $20,761$ 20,761
7% 9 $ 10,800.00 6.47% $11,499$ 11,499
7 $ 12,597.00 5.00% $13,227$ 13,227
5 $ 14,693.00 3.55% $15,214$ 15,214
2 $ 18,509.00 1.40% $18,769$ 18,769
180 $ 20,785.00 0.34% $20,857$ 20,857
6% 9 $ 10,800.00 15.84% $12,511$ 12,511
7 $ 12,597.00 12.11% $14,123$ 14,123
5 $ 14,693.00 8.51% $15,944$ 15,944
2 $ 18,509.00 3.32% $19,124$ 19,124
180 $ 20,785.00 0.81% $20,953$ 20,953
4% 9 $ 10,800.00 37.45% $14,844$ 14,844
7 $ 12,597.00 28.07% $16,132$ 16,132
5 $ 14,693.00 19.33% $17,533$ 17,533
2 $ 18,509.00 7.32% $19,865$ 19,865
180 $ 20,785.00 1.76% $21,150$ 21,150
103
91102
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII of the Amended Code of Regulations of Nationwide
provides as follows:
Section 1. Indemnification of Directors, Officers and Employees.
Nationwide will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is
or was a director, officer or employee of Nationwide, or is or was
serving at the request of Nationwide as a director, trustee,
officer, member, or employee of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture,
trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action,
suit or proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the State of Ohio.
Such indemnification (unless ordered by a court) will be made as
authorized in a specific case upon a determination that
indemnification of the director, trustee, officer or employee is
proper in the circumstances because he has met the applicable
standards of conduct set forth in the General Corporation Law of
the State of Ohio. Such determination will be made (1) by the
Board of Directors by a majority vote of a quorum consisting of
directors who were not, and are not, parties to or threatened with
any such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal
counsel meeting the requirements of independence prescribed by the
General Corporation Law of Ohio, or (3) by the shareholders, or
(4) by the Court of Common Pleas or the court in which such
action, suit or proceeding was brought.
Section 2. Other Rights. The foregoing right of indemnification
will not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under the Articles of
Incorporation, these Regulations, any agreement, vote of
shareholders or disinterested directors or otherwise, and will
continue as to a person who has ceased to be a director, trustee,
officer or employee and will inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. Nationwide may pay
expenses, including attorneys' fees, incurred in defending any
action, suit or proceeding referred to in Section 1 of this
Article VII, in advance of the final disposition of such action,
suit or proceeding as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the
director, trustee, officer or employee to repay such amount,
unless it will ultimately be determined that he is entitled to be
indemnified by Nationwide as authorized in this Article VII.
Section 4. Insurance. Nationwide may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, member, or employee of Nationwide, or is or was serving
at the request of Nationwide as a director, trustee, officer or
employee of another corporation, domestic or foreign, non-profit
or for profit, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not Nationwide would have the power to indemnify him
against such liability under this Article VII.
92103
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Nationwide, through various separate accounts -- the Nationwide
Government Plans Variable Account ("GPVA"), Nationwide Qualified
Plans Variable Account ("QPVA"), Nationwide Ohio DC Variable
Account ("Ohio DC Variable Account") and Nationwide Life Insurance
Company Separate Account-1 ("Separate Account-1") -- offers
contracts to qualified pension plans and certain government plans
in reliance on Section 3(a)(2) of the Securities Act of 1933 and
in certain cases, Rule 144A thereunder. Data relating to the
amount of securities sold are:
2000 1999 1998
1997---- ---- ----
GPVA $610,638,932 $507,939,747$ 1,749,979,320 $ 2,385,872,047 $ 610,638,932
GPVA - II $ 620,098 -- --
QPVA $2,564,861,472 $1,994,897,334$11,820,871,840 $12,534,026,686 $ 2,564,861,472
Ohio DC Variable Account $173,209,797 $111,516,201
Separate Account-1 $897,853 $1,254,595$ 971,145,091 $ 1,161,465,441 $ 173,209,797
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
(a)
Exhibit
Number Exhibit Index Page
(3)(i)Exhibit
------- ------------- -------
3(a) Certificate of Incorporation (Exhibit A)- *
(3)(ii)3(b) Code of Regulations (Exhibit B)- *
(4)4(a) Individual Annuity Endorsement to Contracts (Exhibit C)Contract - *
E
(5)4(b) Group Annuity Contract - *
4(c) Group Annuity Certificates - *
5 Opinion Regarding Legality (Exhibit D)- *
E
(21) Subsidiaries23(a) Consent of the Registrant (Exhibit D)Counsel - *
(23)23(b) Consent of Experts and Counsel (Exhibit E)*- (Filed herewith) E
(24)24 Power of Attorney - Copy attached hereto(Filed herewith) E
* To be filed by Pre-EffectiveFiled with Amendment No. 1 to registration statement
(SEC File No. 333-49112) on February 9, 2001.
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 19992000 and 19981999
Consolidated Statements of Income for the years ended December 31,
2000, 1999 1998 and 19971998
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 2000, 1999 1998 and 19971998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 1998 and 19971998
Notes to Consolidated Financial Statements
(b)(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other than
Investments in Related Parties as of December 31,
19992000
104
Schedule III Supplementary Insurance Information as of December
31, 2000, 1999 1998 and 19971998 and for each of the years
then ended
Schedule IV Reinsurance as of December 31, 2000, 1999 1998 and 19971998
and for each of the years then ended 93
Schedule V Valuation and Qualifying Accounts for the years
ended December 31, 2000, 1999 1998 and 19971998
All other schedules to the consolidated financial statements
referenced by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and have therefore
been omitted.
Item 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the determining of any liability under the
Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
94105
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Nationwide Life Insurance Company:
We consent to the use of our report dated January 26, 2001 or our audits of the
consolidated financial statements of Nationwide Life Insurance Company and
Subsidiaries and the financial statement schedules.
Columbus, Ohio
April 26, 2001 KPMG LLP
106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, State of Ohio, on the 1st26th of November, 2000.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------------------------------------
(Registrant)
By : /s/ STEVEN SAVINI
---------------------------------------------------------------
Steven Savini, Esq.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the
following persons on the 1st of November, 2000 in the capacities indicated.
SIGNATURE TITLE
LEWIS J. ALPHIN Director
- ----------------------------------
Lewis J. Alphin
A. I. BELL Director
- ----------------------------------
A. I. Bell
NANCY C. BREIT Director
- ----------------------------------
Nancy C. Breit
YVONNE M. CURL Director
- ----------------------------------
Yvonne M. Curl
KENNETH D. DAVIS Director
- ----------------------------------
Kenneth D. Davis
KEITH W. ECKEL Director
- ----------------------------------
Keith W. Eckel
WILLARD J. ENGEL DIRECTOR
- ----------------------------------
Willard J. Engel
FRED C. FINNEY DIRECTOR
- ----------------------------------
Fred C. Finney
JOSEPH J. GASPER President and Chief Operating
- ---------------------------------- Officer and Director
Joseph J. Gasper
WilliAM G. JURGENSEN Chief Executive Officer and
- ---------------------------------- Director
William G. Jurgensen
DIMON R. MCFERSON Chairman and
- ---------------------------------- Director
Dimon R. McFerson
DAVID O. MILLER Chairman of the Board and
- ---------------------------------- Director
David O. Miller
ROBERT A. OAKLEY Executive Vice President and Chief
- ---------------------------------- Financial Officer
Robert A. Oakley
RALPH M. PAIGE Director
- ----------------------------------
Ralph M. Paige
JAMES F. PATTERSON Director
- ----------------------------------
James F. Patterson
ARDEN L. SHISLER Director By : /s/ STEVEN SAVINI
- ---------------------------------- ---------------------------------
Arden L. Shisler Steven Savini
ROBERT L. STEWART Director Attorney-in-Fact
- ----------------------------------April, 2001.
NATIONWIDE LIFE INSURANCE COMPANY
-------------------------------------------------
(Registrant)
By : /s/ STEVEN SAVINI
-------------------------------------------------
Steven Savini, Esq.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons on the 26th of April, 2001 in
the capacities indicated.
SIGNATURE TITLE
LEWIS J. ALPHIN Director
- ---------------------
Lewis J. Alphin
A. I. BELL Director
- ---------------------
A. I. Bell
YVONNE M. CURL Director
- ---------------------
Yvonne M. Curl
KENNETH D. DAVIS Director
- ---------------------
Kenneth D. Davis
KEITH W. ECKEL Director
- ---------------------
Keith W. Eckel
WILLARD J. ENGEL Director
- ---------------------
Willard J. Engel
FRED C. FINNEY Director
- ---------------------
Fred C. Finney
JOSEPH J. GASPER President and Chief Operating
- ---------------------
Joseph J. Gasper Officer and Director
W. G. JURGENSEN Chief Executive Officer and
- ---------------------
W. G. Jurgensen Director
DAVID O. MILLER Chairman of the Board and
- ---------------------
David O. Miller Director
RALPH M. PAIGE Director
- ---------------------
Ralph M. Paige
JAMES F. PATTERSON Director
- ---------------------
James F. Patterson
ARDEN L. SHISLER Director By : /s/ STEVEN SAVINI
- --------------------- --------------------------
Arden L. Shisler Steven Savini
ROBERT L. STEWART Director Attorney-in-Fact
- ---------------------
Robert L. Stewart