Select Retirement
Act File No. 333-155368
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 5
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO |
6311 |
31-4156830
|
(State or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial Classification
Code Number) |
(I.R.S. Employer
Identification Number) |
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Address,
including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Robert W. Horner, III
Vice President – Corporate Governance and
Secretary
One Nationwide
Plaza
Columbus, Ohio 43215
Telephone: (614) 249-7111
(Name, address, including zip code, and telephone number, including area code, of agent for service)
__________________________________________________
|
Approximate date of commencement of proposed sale to the public: May 1,
2012 |
If any of the securities being
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] |
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering. |
[ ] |
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |
[ ] |
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |
[ ] |
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act. |
[ ] |
Large accelerated
filer |
[ ] |
Accelerated filer
|
[ ] |
Non-accelerated filer (Do not
check if a smaller reporting company) |
[X] |
Smaller reporting
Company |
[ ] |
Select Retirement
INDIVIDUAL SUPPLEMENTAL IMMEDIATE FIXED INCOME
ANNUITY CONTRACT
Issued by
NATIONWIDE LIFE INSURANCE COMPANY
The date of this prospectus is May 1, 2012.
This prospectus describes Select Retirement, individual supplemental immediate fixed income annuity contracts (referred to as "Contracts") issued by Nationwide Life Insurance
Company ("Nationwide"), which are offered to investors with Morgan Stanley Smith Barney LLC, its affiliates, or any successors (collectively, "MSSB"). The Contract provides for guaranteed income for the life of a designated
person based on the Contract Owner's account at MSSB, provided all conditions specified in this prospectus are met, regardless of the actual performance or value of the investments in Your Account.
The Contract has no cash surrender value and does not provide a death benefit.
Prospective purchasers may apply to purchase a Contract through MSSB broker dealers who have entered into a selling agreement with Nationwide Investment Services Corporation
("NISC"), a subsidiary of Nationwide that acts as the general distributor of the Contracts sold through this prospectus.
This prospectus provides important information that a prospective purchaser
of a Contract should know before investing. Please read this prospectus carefully and keep it for future reference.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The Contracts 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.
The Contract:
· |
Is NOT insured or endorsed by a bank or any government agency |
· |
Is NOT available in every state |
A purchase of this Contract is subject to certain risks. Please see the "Risk Factors" section on page
15. The Contract is novel and innovative. To date, the tax consequences of the Contract have not been addressed in binding published legal authorities; however, we understand that the Internal Revenue Service ("IRS") may
be considering tax issues associated with products similar to the Contracts, and there is no certainty as to what the IRS will conclude is the proper tax treatment for the Contracts. Consequently, you should consult a tax advisor before
purchasing a Contract.
For information on how to contact Nationwide, see "Contacting the Service Center" on page 37.
TABLE OF CONTENTS
SUMMARY OF
THE
CONTRACTS
|
1
|
Preliminary note regarding terms
used in this prospectus. |
|
What is the
Contract? |
|
How does the Contract generally
work? |
|
How much will the Contract
cost? |
|
What are the requirements to
purchase the Contract? |
|
Is this Contract right for
you? |
|
Who is Morgan Stanley Smith
Barney LLC? |
|
What are the Eligible Portfolios
and how are they managed? |
|
Can a Contract be purchased by
an Individual Retirement Account? |
|
Can the Contract Owner cancel
the Contract? |
|
Does the Contract contain any
type of spousal benefit? |
|
Does the Contract contain any
kind of Guaranteed Lifetime Withdrawal Base increases? |
|
RISK
FACTORS
|
15
|
Your Account may perform well
enough that you may not receive any Guaranteed Lifetime Income Payments from Nationwide under the Contract. |
|
Your Investment choices are
limited by the Contract. |
|
You must remain invested in Your
Account at MSSB to maintain your Contract. |
|
You may die before receiving
payments from us. |
|
Early Withdrawals or Excess
Withdrawals will reduce or eliminate the Guarantee provided by your Contract. |
|
The Contract Fee will reduce the
growth of Your Account. |
|
Actions of your creditors may
reduce or eliminate the Guarantee provided by your Contract. |
|
Your Guarantee may terminate if
MSSB no longer manages the Eligible Portfolios. |
|
Nationwide determines that an
Eligible Portfolio is no longer eligible as an investment option under the Contract. |
|
Additional deposits that
exceed $2,000,000 in Total Gross Deposits could suspend or terminate your Contract. |
|
Nationwide's claims paying
ability. |
|
Tax Consequences.
|
|
YOUR
RELATIONSHIP WITH MSSB AND
NATIONWIDE
|
16
|
The Contract. |
|
Management of Your
Account. |
|
THE
ACCUMULATION
PHASE
|
17
|
What is the Guaranteed Lifetime
Withdrawal Base and how is it calculated? |
|
Can the Guaranteed Lifetime
Withdrawal Base change during the Accumulation Phase? |
|
What if the Account Value falls
to the Minimum Account Value before the Withdrawal Start Date
but your Guaranteed Lifetime Withdrawal Base is above zero? |
|
THE WITHDRAWAL
PHASE
|
19
|
What events trigger the
Withdrawal Phase? |
|
What is the Withdrawal Start
Date and what does it mean? |
|
What is the Guaranteed Lifetime
Withdrawal Amount and how is it calculated? |
|
Can the Guaranteed Lifetime
Withdrawal Base change during the Withdrawal Phase? |
|
Do Early Withdrawals and Excess
Withdrawals affect the Guaranteed Lifetime Withdrawal Amount
and the Guaranteed Lifetime Withdrawal Base differently? |
|
What if the Account Value and
the Guaranteed Lifetime Withdrawal Base decline to zero due to
Excess Withdrawals during the Withdrawal Phase? |
|
TRIGGERING THE
INCOME
PHASE
|
22
|
What events will trigger the
Income Phase? |
|
How is the Contract transitioned
into the Income Phase? |
|
THE INCOME
PHASE
|
23
|
How much will each Guaranteed
Lifetime Income Payment be? |
|
Will the Guaranteed Lifetime
Income Payment ever increase or decrease? |
|
How often are the Guaranteed
Lifetime Income Payments paid? |
|
How long will the Guaranteed
Lifetime Income Payments be paid? |
|
TERMS AND
CONDITIONS OF THE
CONTRACT
|
23
|
What does it mean to have a
change in "terms and conditions" of the Contract? |
|
How will a change to the terms
and conditions of the Contract affect an existing Contract? |
|
SPOUSAL
CONTINUATION
OPTION
|
24
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What is the Spousal Continuation
Option? |
|
Election of the Spousal
Continuation Option. |
|
How much does the Spousal
Continuation Option cost? |
|
Is it possible to pay for the
Spousal Continuation Option but not receive a benefit from it? |
|
THE CONTRACT
FEE
|
25
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How much is the Contract
Fee? |
|
When and how is the Contract Fee
assessed? |
|
Will the Contract Fee be the
same amount from quarter to quarter? |
|
Will advisory and other fees
impact the Account Value and the Guarantee under the Contract? |
|
MANAGING
WITHDRAWALS FROM YOUR
ACCOUNT
|
26
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DEATH
PROVISIONS
|
27
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MARRIAGE
TERMINATION
PROVISIONS
|
28
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Marriage termination in the
Accumulation or Withdrawal Phases. |
|
Marriage termination in the
Income Phase. |
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SUSPENSION AND
TERMINATION
PROVISIONS
|
29
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What does it mean to have a
suspended Contract? |
|
What will cause a Contract to be
suspended? |
|
What can be done to take the
Contract out of suspension? |
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Specific suspension events and
their cures. |
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What will cause a Contract to be
terminated? |
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FEDERAL INCOME
TAX
CONSIDERATIONS
|
32
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Taxation of Distributions from
the Contract. |
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Taxation of Eligible
Portfolios or Former Eligible Portfolios that are not held by an Individual Retirement Account. |
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Additional Medicare
Tax. |
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Section 1035
Exchanges. |
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Qualified Retirement
Plans. |
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Income Tax
Withholding. |
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State and Local Tax
Considerations. |
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Non-Resident
Aliens. |
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Payment of Advisory or Service
Fees. |
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Seek Tax Advice.
|
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MISCELLANEOUS
PROVISIONS
|
36
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Ownership of the
Contract. |
|
Periodic communications to
Contract Owners. |
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Amendments to the
Contract. |
|
Assignment. |
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Misstatements.
|
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DISTRIBUTION
(MARKETING) OF THE
CONTRACT
|
36
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LEGAL
OPINION
|
37
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ABOUT
NATIONWIDE
|
37
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CONTACTING THE
SERVICE
CENTER
EXPERTS
|
37
37 |
DISCLOSURE OF
COMMISSION POSITION ON
INDEMNIFICATION
|
37
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DEFINITIONS
|
38
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APPENDIX
A |
A-1 |
Information about Nationwide and the product may also be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C., or may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC at 100 F Street NE, Washington, D.C. 20549. Additional information on the
operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. The SEC also maintains a website (www.sec.gov) that contains the prospectus and other information.
Preliminary note regarding terms used in this
prospectus.
Certain terms used in this prospectus have specific and important meanings. Some are explained below. Others are explained as they appear in the
prospectus. Additionally, in the back of this prospectus, there is a "Definitions" provision containing definitions of all of the terms used in the prospectus.
Ø |
"We," "us," "our," "Nationwide" or the "Company" means Nationwide Life Insurance
Company. |
Ø |
"You" or "yours," "Owner" or "Contract Owner" means the owner of the
Contract. If more than one Owner is named, each Owner may also be referred to as a "joint owner." Joint owners are permitted only when they are spouses as recognized by applicable Federal law. |
Ø |
"Your Account" means the unified managed account you own. As described
further below, "Select UMA" is a unified managed account investment advisory program offered by MSSB. MSSB offers Your Account through registered representatives and investment advisor representatives ("Financial Advisors") of
MSSB. You must purchase a Contract with the assistance of these Financial Advisors. Financial Advisors assist clients in analyzing whether the investment options are appropriate for the client. If your
Financial Advisor recommends a MSSB account to you, upon your request, MSSB will open Your Account. MSSB acts as introducing broker to Citigroup Global Markets Inc. ("CGMI"), which acts as clearing broker for Your
Account. The assets in Your Account are custodied at CGMI. |
The following is a summary of the Contract. Unless otherwise
noted, this prospectus assumes that you are the sole Contract Owner. You should read the entire prospectus in addition to this summary.
What is the Contract?
The Contract is an Individual Supplemental Immediate Fixed Income Annuity
Contract that is available for you to purchase if you open and own Your Account. If you own Your Account, then you and your Financial Advisor have determined that one or more MSSB investment options available in the Select UMA investment
advisory program is appropriate for you. The Contract is an optional feature available on Your Account for those investors who intend to use the assets in their account to provide income payments for retirement or other long-term
purposes.
Specifically, the Contract provides for annuity payments ("Guaranteed Lifetime Income Payments") to be paid to you under circumstances outlined below as long as you meet the
conditions of the Contract as described in this prospectus. If, or when, you are eligible and elect to take withdrawals ("Guaranteed Lifetime Withdrawals") from Your Account, and if, or when, the value of the assets in Your Account ("Your
Account Value") falls below a certain amount or you live to a certain age, you will receive Guaranteed Lifetime Income Payments from us for the rest of your life (the "Guarantee"). The amount of your Guaranteed Lifetime Withdrawals will
be based on a percentage of the value of Your Account when you first purchase the Contract (with adjustments for additions and withdrawals, the "Guaranteed Lifetime Withdrawal Base") and will vary based on Your Account Value and other actions you
take with regard to Your Account, as described in this prospectus.
The Contract also offers a Spousal Continuation Option available at the
time of application and a potential 5% increase (the 5% roll-up) in the Guaranteed Lifetime Withdrawal Base during the Accumulation Phase:
· |
The Spousal Continuation Option allows, upon your death, your surviving spouse to
continue the Contract and receive all the rights and benefits associated with the Contract (see "Spousal Continuation Option," later in this prospectus). |
· |
The Contract's potential 5% roll-up is calculated based on your original Guaranteed
Lifetime Withdrawal Base and may increase the Guaranteed Lifetime Withdrawal Base. This feature is only available during the Accumulation Phase (see "Can the Guaranteed Lifetime Withdrawal
Base change during the Accumulation Phase?," later in this prospectus). |
Guaranteed Lifetime Income Payments under your Contract are triggered if
the withdrawals (within the permitted limits of the Contract) and/or poor market performance reduce Your Account Value to $10,000 or less. Note: If a triggering event does not occur, you
will not receive any payments under this Contract and your Guarantee will have no value.
The Contract Guarantee is based on the age and life of the
Annuitant. For Non-Qualified Contracts, the Annuitant is you, the Contract Owner and the Owner of Your Account. If this Contract is issued to a trustee of a trust or a custodian of an Individual Retirement Account ("IRA"), you
must be the Annuitant, and if you elect the Spousal Continuation Option (discussed later in this prospectus), you and your spouse must be Co-Annuitants and your spouse must be listed as the beneficiary of Your Account.
It is important to note that the Contract itself has no cash surrender value because there are no assets attributable directly to it. All obligations under the
Contract to make Guaranteed Lifetime Income Payments to you are tied to Your Account. If you surrender your interest in or otherwise terminate Your Account, this Contract also terminates
and you will not receive any Guaranteed Lifetime Income Payments under this Contract.
The Contract may terminate and you may not receive any Guaranteed Lifetime Income Payments under this Contract if you terminate your Select UMA Account or if for any reason MSSB
no longer manages any Eligible Portfolios or Former Eligible Portfolios (as defined below) in the Select UMA program.
Payments under the Contract are backed only by the claims paying ability of
Nationwide and are not guaranteed by MSSB or any of its affiliates.
How does the Contract generally work?
The life of the Contract can generally be described as having three phases: an "Accumulation Phase," a "Withdrawal Phase," and an "Income Phase." Your Contract will
begin in the Accumulation Phase, and you must affirmatively elect to enter the Withdrawal Phase. After a triggering event (described below) occurs, you can elect to enter the Income Phase.
Accumulation Phase. During the Accumulation Phase, Your Account is just like any other advisory account at
MSSB, except that Your Account must be 100% invested in an "Eligible Portfolio" or "Former Eligible Portfolio." Eligible Portfolios are those Select UMA program investment models that contain certain permissible investments under the
Contract. A Former Eligible Portfolio is a previously permissible investment model that is no longer available to new Contract Owners. Please see "What are the Eligible
Portfolios and how are they managed?," later in this prospectus for more information on the Select UMA program and the Eligible Portfolios currently available for the Guarantee.
The Contract provides an increase in your Guaranteed Lifetime Withdrawal Base each Contract Anniversary (the anniversary of the date we issue your Contract) equal to the greatest
of:
(a) |
The current Guaranteed Lifetime Withdrawal Base, adjusted for transactions in the
previous Contract Year that affected the Guaranteed Lifetime Withdrawal Base; |
(b) |
Your Account Value as of that Contract Anniversary; or |
(c) |
The original Guaranteed Lifetime Withdrawal Base with a 5% roll-up. This
is equal to the original Guaranteed Lifetime Withdrawal Base plus 5% of the original Guaranteed Lifetime Withdrawal Base for each Contract Anniversary that has been reached. An adjustment will be made to the calculations for transactions
that increase or decrease the Guaranteed Lifetime Withdrawal Base. |
The greatest of these three amounts will become your new Guaranteed
Lifetime Withdrawal Base at your next Contract Anniversary. The review of these three amounts is referred to as the "Annual Benefit Base Review." See "Can the Guaranteed
Lifetime Withdrawal Base change during the Accumulation Phase?," later in the prospectus for more information.
You may make Additional Deposits (payments applied to Your Account after
the Contract is issued), which will increase your Guaranteed Lifetime Withdrawal Base. Any withdrawals taken during the Accumulation Phase will reduce your Guaranteed Lifetime Withdrawal Base.
Withdrawal Phase. Anytime after you (and your spouse, if you elected the Spousal Continuation Option), reach
the age of 55, you may elect to begin the Withdrawal Phase. You must submit a Withdrawal Phase election form to us to enter the Withdrawal Phase. The day Nationwide receives your Withdrawal Phase election form indicating that
you are eligible and affirmatively elect to begin taking annual withdrawals of the Guaranteed Lifetime Withdrawal Amount is considered the "Withdrawal Start Date." Once the Contract is in the Withdrawal Phase, you can take annual
withdrawals up to a certain amount, the "Guaranteed Lifetime Withdrawal Amount," from Your Account without reducing your Guaranteed Lifetime Withdrawal Base and any potential Guaranteed Lifetime Income Payments.
Once you elect to begin taking Guaranteed Lifetime Withdrawals, you may withdraw up to 4%, the "Guaranteed Lifetime Withdrawal Percentage," of your Guaranteed Lifetime Withdrawal
Base from Your Account without reducing your Guaranteed Lifetime Withdrawal Base and any potential Guaranteed Lifetime Income Payments. When you (and your spouse, if you elected the Spousal Continuation Option) reach age 65, your
Guaranteed Lifetime Withdrawal Percentage increases to 5%. At that time, you may withdraw up to 5% of your Guaranteed Lifetime Withdrawal Base from Your Account without reducing your Guaranteed Lifetime Withdrawal Base and any potential
Guaranteed Lifetime Income Payments.
Income
Phase. If and when any of the following triggering events occur, the Contract will be eligible to begin the Income Phase:
· |
Your Account Value, after the Withdrawal Start Date, falls below the greater of
$10,000 or the Guaranteed Lifetime Withdrawal Amount (the "Minimum Account Value"); or |
· |
Your Account Value is invested in the Minimum Account Value Eligible Portfolio, as
discussed in the "Suspension and Termination Provisions" section later in this prospectus, and you reach the age of 55; or |
· |
You, after the Withdrawal Start Date, affirmatively elect to begin the Income Phase
by submitting the appropriate administrative forms. |
At that time, you will instruct MSSB to transfer the remaining value in Your Account to us, and we will begin making annual guaranteed fixed annuity payments to you for as long
as you (or your spouse, if the Spousal Continuation Option, described herein, is elected) live. After this transition into the Income Phase, Your Account is closed and you no longer own interests in the Eligible Portfolio or Former
Eligible Portfolio. Rather, your ownership interest lies in the guaranteed stream of annuity payments - the Guaranteed Lifetime Income Payments - which Nationwide is obligated to provide. Note: It is possible that you may never receive Guaranteed Lifetime Income Payments if none of the triggering events occur. If you (and your spouse, if the Spousal Continuation Option is elected)
die before any of the triggering events occur, no benefit is payable under this Contract.
How much will the Contract cost?
Accumulation Phase and Withdrawal Phase. During both the Accumulation Phase and Withdrawal Phase, you will pay
a fee for the Contract (the "Contract Fee" or "Fee"), which will be deducted from Your Account Value on a quarterly basis. The Fee is calculated as a percentage (the "Contract Fee Percentage") of your Guaranteed Lifetime Withdrawal Base
(not Your Account Value) as of the end of the calendar quarter. Please see "The Contract Fee," for more information.
The Fee compensates us for the risk we assume in providing you Guaranteed Lifetime Income Payments. We intend to invest the fees as we invest
our General Account assets. We take into account the amount of Guaranteed Lifetime Income Payments and anticipated cash-flow requirements when making investments. Nationwide is not obligated to invest in accordance with any
particular investment objective, but will generally adhere to our overall investing philosophy.
The Fee is calculated as follows:
Contract Fee Percentage x (# of days in the quarter/365) x Guaranteed Lifetime Withdrawal Base as of quarter end
We reserve the right to increase the Contract Fee Percentage (up to a maximum of 1.45% of your Guaranteed Lifetime Withdrawal Base or 1.75% of your Guaranteed Lifetime Withdrawal
Base with the Spousal Continuation Option elected) and will provide written notice to you. We provide a two-year Contract Fee Percentage guarantee, during which time we will not increase the Contract Fee Percentage (if at all) before your
second Contract Anniversary. Please see "Terms and Conditions of the Contract," for more information.
Note: The Contract Fee is in addition to any charges that are imposed in connection with Your Account including advisory
and other charges imposed by your Financial Advisor, MSSB, or any of the investments that comprise Your Account. Any fees you pay that are deducted from Your Account Value, including the Contract Fee, will negatively affect the growth of
Your Account Value.
Maximum Recurring Contract Fees |
(assessed on the first day of
each calendar quarter against the Guaranteed Lifetime Withdrawal Base as of the last day of the previous calendar quarter) |
Contract
Fee |
|
Spousal
Continuation Option Fee |
|
Total Contract Fee (including the Spousal Continuation Option)
|
|
Income Phase.
During the Income Phase, no Contract Fee is assessed.
Neither MSSB nor your Financial Advisor receives any compensation from
Nationwide directly associated with the sale of the Contracts or for administrative services associated with the Contract. In order to maintain your Contract, you must keep Your Account invested in an Eligible Portfolio or Former Eligible
Portfolio. MSSB and their Financial Advisors will receive annual advisory fees and other compensation relevant to services provided in connection with the Select UMA program as outlined in your client agreement (the "Client Agreement")
and as disclosed in the MSSB ADV (as defined below) during the Accumulation and Withdrawal Phases of the Contract.
What are the requirements to purchase the
Contract?
The Contract is only available for purchase by investors who elect and continue to invest, with the help of their Financial Advisor, in the Eligible Portfolios approved by
Nationwide and offered by MSSB in the Select UMA program. Upon such election, MSSB will open Your Account.
You, as the Owner of Your Account at MSSB, may purchase a Contract from
MSSB, which is also a broker-dealer, when you open Your Account. To purchase the Contract without the Spousal Continuation Option, the Annuitant must be between 45 and 75 at the time of application. To purchase the Contract
with the Spousal Continuation Option, the younger Annuitant must be between 45 and 80 and the older Annuitant must be 84 or younger at the time of application.
1
The current Contract Fee is 1.00%.
2
The current Spousal Continuation Option Fee is 0.20%.
3 The current Total Contract Fee is 1.20%.
To purchase a Contract, the value of Your Account on the date of application must equal $50,000 or more. We reserve the right to refuse to accept Additional Deposits
made into Your Account for your Guaranteed Lifetime Withdrawal Base, including your initial deposit ("Total Gross Deposits") that exceed $2,000,000. Withdrawals do not impact the limit of $2,000,000 in Total Gross Deposits.
Please see the "Risk Factors" and "Suspension and Termination
Provisions," later in this prospectus.
Additionally, on the date of application (and continuously thereafter),
Your Account must be allocated to one of the Eligible Portfolios as discussed herein. Once you select an Eligible Portfolio, you may switch to another Eligible Portfolio, but Your Account Value must always remain invested in an Eligible
Portfolio in order to maintain the benefits and the Guarantee associated with the Contract. If Nationwide determines that an Eligible Portfolio is no longer eligible as an investment option, you may remain in the Former Eligible Portfolio
as indicated in the "Terms and Conditions of the Contract" section.
Note: IF AT ANY
TIME 100% OF YOUR ACCOUNT IS NOT INVESTED IN AN ELIGIBLE PORTFOLIO OR FORMER ELIGIBLE PORTFOLIO, YOUR CONTRACT WILL BE SUSPENDED AND MAY TERMINATE (see "Suspension and Termination
Provisions"). Ensuring that you continue to maintain Your Account and that it remains invested according to the terms of the Contract is your responsibility.
Is this Contract right for you?
This Contract is meant to protect your assets in the event market
fluctuations bring Your Account Value below the Minimum Account Value or in the event you outlive your assets. This Contract does NOT protect the actual investments in Your Account. For example, if you initially invest $600,000
in Your Account and the value of Your Account within that year falls to $400,000, we are not required to add $200,000 to Your Account. Instead, we guarantee that you will be able to withdraw, after reaching the age of 55, Guaranteed
Lifetime Withdrawal Amounts equal to 4% of $600,000 (instead of 4% of $400,000). We guarantee this even if such withdrawals bring Your Account Value to $0.
It is also important to understand, that even after you have reached age 55 and start taking Guaranteed Lifetime Withdrawals from Your Account, those withdrawals are made from
Your Account. We are required to start using our own money to make Guaranteed Lifetime Income Payments only when, and if, Your Account Value reaches the Minimum Account Value because of withdrawals within the limits of this Contract
and/or poor investment performance. We limit our risk of having to make Guaranteed Lifetime Income Payments by limiting the amount you may withdraw each year from Your Account without reducing your Guaranteed Lifetime Withdrawal Base. If the investment return on Your Account over time is sufficient to generate gains that can sustain systematic or periodic withdrawals equal to the Guaranteed Lifetime Withdrawal Amount, then Your Account
Value will never be reduced to the Minimum Account Value and we will never have to make Guaranteed Lifetime Income Payments to you.
There are many variables, however, other than average annual return on Your Account, that will determine whether the investments in Your Account, without the Contract, would have
generated enough gain over time to sustain systematic or periodic withdrawals equal to the Guaranteed Lifetime Withdrawals you would have received if you had purchased the Contract. Your Account Value may have declined over time before
beginning the Income Phase, which means that your investments would have to produce an even greater return after the Income Phase to make up for the investment losses before that date. Moreover, studies have shown that individual years of
negative annual average investment returns can have a disproportionate impact on the ability of your retirement investments to sustain systematic withdrawals over an extended period, depending on the timing of the poor investment
returns.
|
Who is Morgan Stanley Smith Barney LLC? |
Morgan Stanley Smith Barney LLC ("MSSB LLC") is a financial services firm. MSSB LLC's principal activities include retail and institutional private client services,
including but not limited to providing advice with respect to financial markets, securities and commodities, and executing securities and commodities transactions as broker or dealer; securities underwriting and investment banking; investment
management (including fiduciary and administrative services); and trading and holding securities and commodities for its own account.
MSSB LLC is registered as a securities broker-dealer, investment advisor, and futures commission merchant. Affiliates of MSSB LLC are registered as commodity pool operators
and/or commodity trading advisors.
On January 13, 2009, Morgan Stanley and Citigroup Inc. agreed to a
transaction (the "Transaction") combining the Global Wealth Management Group of Morgan Stanley & Co. Incorporated and the Smith Barney division of CGMI into a new joint venture. The Transaction closed on May 31, 2009. The
joint venture now owns MSSB LLC, a recently formed investment advisor and broker-dealer that is registered with the Securities and Exchange Commission. CGMI (the clearing broker for Your Account) is an indirect wholly-owned subsidiary of
Citigroup Inc. For purposes of this prospectus, "MSSB" refers to MSSB LLC and its affiliates, or any successors. Nationwide is not affiliated with MSSB and does not manage Your Account.
|
What are the Eligible Portfolios and how are they managed? |
Eligible Portfolios are those Select UMA asset allocation investment models ("Models") established by MSSB and approved by Nationwide, which contain certain permissible
investments under the Contract. Each of the Models available as an Eligible Portfolio corresponds to a specific investment risk profile. The Models are comprised of asset classes and asset class percentages established by
MSSB. You and your Financial Advisor select the actual investments within each asset class from a list of investment products ("Investment Products") created by MSSB and approved by Nationwide. These Investment Products can take the form
of Mutual Funds, Exchange Traded Funds and/or Separately Managed Accounts. You and your Financial Advisor may elect any combination of the permitted Investment Products to fulfill each asset class percentage:
Mutual Funds - A mutual fund is a professionally managed type of collective investment that pools money from many investors and invests it in stocks, bonds, short-term money
market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis, and is an open end investment company registered under the Investment Company Act of 1940.
Exchange Traded Funds ("ETFs") - An ETF is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at
approximately the same price as the net asset value of its underlying assets over the course of the trading day. Many ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500.
Separately Managed Accounts ("SMAs") - A SMA is comprised of individual securities which an Overlay Manager will invest in for the client, based on an investment model provided
by one or more separately registered investment managers ("sub-managers"), which invests for the client based on their own investment decision. This differs from a mutual fund because the investor directly owns the securities instead of owning a
share in a pool of securities. Please see "Your Relationship with MSSB and Nationwide," for more information about the Overlay Manager.
MSSB selects the list of Investment Products available to you and your Financial Advisor from among those that MSSB can recommend based on MSSB's due diligence
research. MSSB bases its research on factors such as consistency with investment strategy and historical performance. The list of Investment Products that MSSB recommends will change when MSSB identifies additional Investment
Products that satisfy MSSB's research, or when MSSB determines that existing Investment Products no longer satisfy MSSB's research. Nationwide also reviews the list of available Investment Products to ensure that it is comfortable with
the risk that each Investment Product could generate. MSSB provides the list of available Investment Products to your Financial Advisor.
As the provider of the Guarantee under the Contracts, we maintain sole discretion as to which investment options will be permitted under the Contracts as Eligible
Portfolios. We only make available those Eligible Portfolios that we determine carry an acceptable amount of risk for Nationwide to manage the Guarantee. We monitor the risk that investments in Your Account will not generate
sufficient income for you to sustain your Guaranteed Lifetime Withdrawals during your lifetime. If, after making an Eligible Portfolio available, we subsequently determine that such Eligible Portfolio carries too much risk (the risk that
we will have to make Guaranteed Lifetime Income Payments), we will adjust the list of Eligible Portfolios, re-characterizing those portfolios that we determine to be too risky to continue offering as "Former Eligible Portfolios." We will
notify Contract Owners that originally selected a now Former Eligible Portfolio of their contractual options, which are described in the "Terms and Conditions of the Contract" section later in
this prospectus.
Four Step Investment Process
At or before the time of this Contract application, you and your Financial
Advisor will follow the process below to select your Eligible Portfolio:
Step 1: Set Investment
Objectives
Your Financial Advisor helps you establish your investment objectives for Your Account.
Step 2: Select Investment Model/Eligible Portfolio
Based on your investment objectives, your Financial Advisor recommends one Model for Your Account from the Models permitted as Eligible Portfolios. The Select UMA
program offers Models that are Eligible Portfolios and those that are not Eligible Portfolios. If you wish to receive the benefit of this Contract, you must select an Eligible Portfolio.
Step 3: Select Investment Products
Your Financial Advisor then works with you to select the specific Investment Products that will meet the requirement for each asset class and asset class percentage within the
Eligible Portfolio you selected.
Once you have (with the assistance of your Financial Advisor) selected the
Investment Products for each asset class in the Model you have chosen, the Overlay Manager will purchase the investments in a manner consistent with the Model and the Investment Products selected.
Step 4: Ongoing Review Process
Your Financial Advisor will contact you to determine whether short-term or long-term changes are needed in the Eligible Portfolio you selected. You may change to a
different Model from among the Models permitted as Eligible Portfolios, and you and your Financial Advisor may also change to other Investment Products from the Investment Products that are permitted for Eligible Portfolios.
Additionally, you may remain in a Former Eligible Portfolio as indicated in the "Terms and Conditions of the Contract"
section. If you move Your Account assets to a non-Eligible Portfolio (any Select UMA Model that is not an Eligible Portfolio) at any time, your Contract will be suspended. Please see "Suspension and Termination Provisions," later in this prospectus for more information. Note: Reallocating Your Account out of the Eligible Portfolio elected at the time of application
may have negative tax consequences. Please consult a qualified tax advisor for more information.
Eligible Portfolios Summary
The following tables reflect a summary of each Eligible Portfolio that is currently available for election under the Contract. The Eligible Portfolios are listed from
most conservative to least conservative. The target allocations may be changed by MSSB from time to time as provided in the Client Agreement and the MSSB ADV. MSSB monitors each Eligible Portfolio's holdings and will
periodically rebalance Your Account as provided in the Client Agreement to realign it with the current asset allocations for your Eligible Portfolio.
The value of your Eligible Portfolio will fluctuate over time. This means it will rise and fall in response to market events. Although past performance is
not a guarantee of future results, historically, investments that have had higher fluctuations have provided higher long term returns, along with higher risks of loss. The Return chart below shows that as you move up the risk ladder from
conservative investments to aggressive investments, you have the potential to receive higher long term returns but may also experience higher fluctuations in value.
Capital Preservation oriented. Total return oriented, but may have higher current income. Suitable for short time horizon (3 to 5 years). |
Capital appreciation
oriented. Minimal income needs. Increasing equity exposure. Longer time horizon – at least a market cycle (5 years or more). |
Aggressive growth
oriented. No current income consideration. Greater volatility than broad stock market. Longest time horizon (10+ years). |
The target allocation categories listed below reflect investment asset
categories only, and not specific Investment Products. You and your Financial Advisor select the Investment Products to satisfy each Target Allocation. More explanation of each category follows the tables. The percentage ranges
shown are target ranges only, and may change if deemed appropriate by MSSB. Additionally, the index percentages used to establish the benchmark as determined by MSSB are provided for each Eligible Portfolio. The indices and
percentages provided by MSSB are established by MSSB based on the asset allocation of the selected Model. MSSB has determined that the benchmarks are appropriate for use as a gauge of performance of the associated Eligible
Portfolios. The indices work together to provide a blended performance percentage of how your Eligible Portfolio should perform. Your Financial Advisor will discuss how your Eligible Portfolio performed as compared to the
benchmark. Not every asset class is represented by a corresponding index. A summary of the referenced asset classes and indices follows the Eligible Portfolio tables.
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 1 w/o Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0% |
0% |
0% |
0% |
0% |
0% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Core Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
100%
Fixed |
0% |
0% |
40
- 60% |
0
- 20% |
5
- 25% |
20
- 40% |
Investment Strategy: Fixed Income- An all fixed income model for a most conservative investor that seeks conservative risk investments with minimal
market volatility. This investment strategy is most appropriate for investors with an investment time horizon of 1 to 3 years. Investment Objective: The investment objective for this Model has a primary emphasis on capital preservation. This Model is classified
to have low volatility. It is most suitable for an investor that is comfortable with minimal fluctuations in their portfolio, and the possibility of larger declines in value, in order to grow their portfolio over time.
Investment Risk: Fixed income is historically
considered less risky than equities. Model 1 has 100% of the assets in fixed income or cash. Therefore, of all of the Eligible Portfolios, this portfolio provides the most conservative investment risk.
Benchmark: 70% BC Aggregate Bond (U.S. Fixed Income)/ 30% 90-Day
T-Bills (Cash) |
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 2 w/o Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0
- 20% |
0
- 20% |
0
- 10% |
0
- 10% |
0
- 10% |
0
- 10% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Core Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
25%
Equity 75% Fixed |
0
- 20% |
0
- 10% |
30
- 50% |
0
- 20% |
0
- 20% |
5
- 25% |
Investment Strategy: Global Balanced- A global balanced model with a higher emphasis on income for a conservative investor that seeks long term
growth through achieving a balance between income and capital growth globally. This investment strategy is most appropriate for investors with an investment time horizon of 3 to 5 years.
Investment Objective: The investment
objective for this Model has a primary emphasis on income with some capital growth. This Model is classified to have low volatility. It is most suitable for an investor that is comfortable with minimal fluctuations in their
portfolio, and the possibility of larger declines in value, in order to grow their portfolio over time. Investment Risk: Fixed income is historically considered less risky than equities. Model 2 has 75% of the assets in fixed income or cash and 25% in
equities. Therefore, of all of the Eligible Portfolios, this portfolio provides a more aggressive investment risk than Model 1 and less aggressive than Models 3 and 4.
Benchmark: 18% Russell 1000 (U.S. Equity) / 7% MSCI EAFE
(International Equity)/ 60% BC Aggregate Bond (U.S. Fixed Income)/15% 90-Day T-Bills (Cash) |
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 3 w/o Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0
- 20% |
0
- 20% |
0
- 15% |
0
- 15% |
0
- 10% |
0
- 10% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Core Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
40%
Equity 60% Fixed |
0
- 20% |
0
- 10% |
25
- 45% |
0
- 15% |
0
- 20% |
0
- 20% |
Investment Strategy: Global Balanced- A global balanced
model utilizing equities, fixed income, and cash seeking some growth and moderate level of income for a moderate investor that seeks long term growth through achieving a balance between income and capital growth globally. This investment
strategy is most appropriate for investors with an investment time horizon of 3 to 5 years. Investment Objective: The investment objective for this Model has a primary emphasis on capital growth and income. This Model is classified to have
medium volatility. It is most suitable for an investor that is comfortable with fluctuations in their portfolio, and the possibility of larger declines in value, in order to grow their portfolio over time.
Investment Risk: Fixed income is historically
considered less risky than equities. Model 3 has 60% of the assets in fixed income or cash and 40% in equities. Therefore, of all of the Eligible Portfolios, this portfolio provides a more aggressive investment risk than Models
1 and 2 and less aggressive than Model 4.
Benchmark: 28% Russell 3000 (U.S Equity)/ 12% MSCI EAFE
(International Equity)/ 50% BC Aggregate Bond (Fixed Income)/10% 90-Day T-Bills (Cash) |
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 4 w/o Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0
- 20% |
0
- 20% |
0
- 15% |
0
- 15% |
0
- 15% |
0
- 15% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Core Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
50%
Equity 50% Fixed |
0
- 20% |
0
- 15% |
25
- 45% |
0
- 15% |
0
- 20% |
0
- 15% |
Investment Strategy: Global Balanced- A global balanced model utilizing equities, fixed income, and cash seeking a
moderate level of growth and income for a moderate investor that seeks long term growth through achieving a balance between income and capital growth globally. This investment strategy is most
appropriate for investors with an investment time horizon of 5 to 7 years. Investment Objective: The investment objective for this Model has a primary emphasis on capital growth with some focus on income. This
Model is classified to have medium volatility. It is most suitable for an investor that is comfortable with fluctuations in their portfolio, and the possibility of larger declines in value, in order to grow their portfolio over time.
Investment Risk: Fixed income is historically
considered less risky than equities. Model 4 has 50% of the assets in fixed income or cash and 50% in equities. Therefore, of all of the Eligible Portfolios, this portfolio provides the most aggressive investment
risk. Benchmark: 35% Russell 3000 (U.S. Equity)/ 15%
MSCI AC World x U.S. (International Equity)/ 50% BC Aggregate Bond (U.S. Fixed Income) |
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 1 w/ Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0% |
0% |
0% |
0% |
0% |
0% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Municipal Bond Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
100%
Fixed |
0% |
0% |
40
- 60% |
0
- 20% |
5
- 25% |
20
- 40% |
Investment Strategy: Fixed Income- An all fixed income model for a most conservative investor that seeks conservative risk investments, with
minimal market volatility. This investment strategy is most appropriate for investors with an investment time horizon of 1 to 3 years.
Investment Objective: The investment
objective for this Model has a primary emphasis on capital preservation. This Model is classified to have low volatility. It is most suitable for an investor that is comfortable with minimal fluctuations in their portfolio, and the
possibility of larger declines in value, in order to grow their portfolio over time. One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income.
Interest paid by the issuer (i.e., the municipality, state or local government) to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located, subject to certain
restrictions. Therefore, for taxable accounts, it can be a tax advantage to invest in municipal bonds in lieu of core fixed income investments.
Investment Risk: Fixed income is historically
considered less risky than equities. Model 1 has 100% of the assets in fixed income or cash. Therefore, of all of the Eligible Portfolios, this portfolio provides the most conservative investment risk.
Benchmark: 70% BC Municipal Bond (U.S. Fixed Income)/ 30% 90-Day
T-Bills (Cash) |
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 2 w/ Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0
- 20% |
0
- 20% |
0
- 10% |
0
- 10% |
0
- 10% |
0
- 10% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Municipal Bond Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
25%
Equity 75% Fixed |
0
- 20% |
0
- 10% |
30
- 50% |
0
- 20% |
0
- 20% |
5
- 25% |
Investment Strategy: Global Balanced- A global balanced model with a higher emphasis on income for a conservative investor that seeks long term
growth through achieving a balance between income and capital growth globally. This investment strategy is most appropriate for investors with an investment time horizon of 3 to 5 years.
Investment Objective: The investment
objective for this Model has a primary emphasis on income with some capital growth. This Model is classified to have low volatility. It is most suitable for an investor that is comfortable with minimal fluctuations in their portfolio, and
the possibility of larger declines in value, in order to grow their portfolio over time. One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest
paid by the issuer (i.e., the municipality, state or local government) to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located, subject to certain
restrictions. Therefore, for taxable accounts, it can be a tax advantage to invest in municipal bonds in lieu of core fixed income investments.
Investment Risk: Fixed income is historically
considered less risky than equities. Model 2 has 75% of the assets in fixed income or cash and 25% in equities. Therefore, of all of the Eligible Portfolios, this portfolio provides a slightly more aggressive investment risk than Model
1. Benchmark: 18% Russell 1000 (U.S. Equity)/ 7%
MSCI EAFE (International Equity)/ 60% BC Municipal Bond (U.S. Fixed Income) /15% 90-Day T-Bills (Cash) |
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 3 w/ Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0
- 20% |
0
- 20% |
0
- 15% |
0
- 15% |
0
- 10% |
0
- 10% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Municipal Bond Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Term Bond |
40%
Equity 60% Fixed |
0
- 20% |
0
- 10% |
25
- 45% |
0
- 15% |
0
- 20% |
0
- 20% |
Investment Strategy: Global Balanced- A global balanced
model utilizing equities, fixed income, and cash seeking some growth and moderate level of income for a moderate investor that seeks long term growth through achieving a balance between income and capital growth globally. This investment
strategy is most appropriate for investors with an investment time horizon of 3 to 5 years. Investment Objective: The investment objective for this Model has a primary emphasis on capital growth and income. This Model is
classified to have medium volatility. It is most suitable for an investor that is comfortable with fluctuations in their portfolio, and the possibility of larger declines in value, in order to grow their portfolio over time. One of the primary
reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest paid by the issuer (i.e., the municipality, state or local government) to bond holders is often exempt from
all federal taxes, as well as state or local taxes depending on the state in which the issuer is located, subject to certain restrictions. Therefore, for taxable accounts, it can be a tax advantage to invest in municipal bonds in lieu of
core fixed income investments. Investment
Risk: Fixed income is historically considered less risky than equities. Model 3 has 60% of the assets in fixed income or cash and 40% in equities. Therefore, of all of the Eligible Portfolios, this portfolio provides
a more aggressive investment risk than Models 1 and 2 and less aggressive than Model 4. Benchmark: 28% Russell 3000 (U.S. Equity) / 12% MSCI EAFE (International Equity)/ 50% BC Municipal Bond (U.S. Fixed Income)/10% 90-Day T-Bills (Cash)
|
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Select UMA Model 4 w/ Municipal Bonds |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0
- 20% |
0
- 20% |
0
- 15% |
0
- 15% |
0
- 15% |
0
- 15% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Municipal Bond Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Term Bond |
50%
Equity 50% Fixed |
0
- 20% |
0
- 15% |
25
- 45% |
0
- 15% |
0
- 20% |
0
- 15% |
Investment Strategy: Global Balanced- A global balanced model utilizing equities, fixed income, and cash seeking a moderate level of growth and
income for a moderate investor that seeks long term growth through achieving a balance between income and capital growth globally. This investment strategy is most appropriate for investors with an investment time horizon of 5 to 7
years. Investment
Objective: The investment objective for this Model has a primary emphasis on capital growth with some focus on income. This Model is classified to have medium volatility. It is most suitable for an investor that is
comfortable with fluctuations in their portfolio, and the possibility of larger declines in value, in order to grow their portfolio over time. One of the primary reasons municipal bonds are considered separately from other types of bonds
is their special ability to provide tax-exempt income. Interest paid by the issuer (i.e., the municipality, state or local government) to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in
which the issuer is located, subject to certain restrictions. Therefore, for taxable accounts, it can be a tax advantage to invest in municipal bonds in lieu of core fixed income investments.
Investment Risk: Fixed income is historically
considered less risky than equities. Model 4 has 50% of the assets in fixed income or cash and 50% in equities. Therefore, of all of the Eligible Portfolios, this portfolio provides the most aggressive investment
risk. Benchmark: 35% Russell 3000 (U.S. Equity)/ 15%
MSCI AC World x U.S. (International Equity)/ 50% BC Municipal Bond (U.S. Fixed Income) |
The Eligible Portfolios are made up of the following asset
classes. Investment Products are then chosen to represent the appropriate asset classes within each Eligible Portfolio. The available Investment Products are mutual funds, exchange traded funds and separately managed
accounts.
Asset Classes (listed in order of lowest historical risk to highest historical risk):
U.S. Short Duration Bond- This asset class is generally comprised of securities made up of United States
dollar-denominated Treasuries, government-related securities, and investment grade United States corporate securities. The duration of these bonds is typically between less than 1 year and 5 years.
U.S. Municipal Bond Fixed Income- This asset class is generally comprised of investment grade municipal
bonds.
U.S. Core Fixed Income- An asset class that is generally comprised of securities made up of United States
dollar-denominated Treasuries, government-related securities, and investment grade United States corporate securities.
U.S. High Yield Fixed
Income- An asset class that is generally comprised of fixed income securities that have below investment grade credit ratings and carry higher risks, but generally offer higher yields than investment-grade bonds.
International Fixed Income- An asset class that is generally comprised of securities made up of non-U.S. dollar
denominated Treasuries, international government-related securities, and investment grade international corporate securities.
U.S. Large Cap Value Equity- An asset class that is generally comprised of securities issued by U.S. companies with large
market capitalizations (typically $10 billion or more). These securities have the potential for long-term capital appreciation and are generally considered to be undervalued relative to a major unmanaged stock index based on
price-to-current earnings, book value, asset value, or other factors. In aggregate, the securities within this asset class will generally have below-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth
figures compared to the average of the U.S. diversified large-cap asset class.
U.S. Large Cap Growth Equity- An asset class that is generally comprised of securities issued by U.S. companies with large
market capitalizations (typically $10 billion or more). These securities have the potential for long-term capital appreciation and are generally defined as companies with expected long-term earnings growth rates significantly higher than
the earnings growth rates of the stocks represented in a major unmanaged stock index. In aggregate, the securities within this asset class will generally have above-average price-to-earnings ratios, price-to-book ratios, and three-year earnings
growth figures compared to the average of the U.S. diversified large-cap asset class.
U.S. Mid Cap Value Equity- An asset class that is generally comprised of securities issued by U.S. companies with market capitalizations typically in the $2 - $10 billion range. These securities have the
potential for long-term capital appreciation and are generally considered to be undervalued relative to a major unmanaged stock index based on price-to-current earnings, book value, asset value, or other factors. In aggregate, the
securities within this asset class will generally have below-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified mid-cap asset class.
U.S. Mid Cap Growth Equity- An asset class that is generally comprised of securities issued by U.S. companies with market
capitalizations typically in the $2 - $10 billion range. These securities have the potential for long-term capital appreciation and are generally defined as companies with expected long-term earnings growth rates significantly higher than
the earnings growth rates of the stocks represented in a major unmanaged stock index. In aggregate, the securities within this asset class will generally have above-average price-to-earnings ratios, price-to-book ratios, and three-year earnings
growth figures compared to the average of the U.S. diversified mid-cap asset class.
U.S. Small Cap Value
Equity- An asset class that is generally comprised of securities issued by U.S. companies with market capitalizations typically below $2 - $3 billion. These securities have the potential for long-term capital
appreciation and are generally considered to be undervalued relative to a major unmanaged stock index based on price-to-current earnings, book value, asset value, or other factors. In aggregate, the securities within this asset class will
generally have below-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified small-cap asset class.
U.S. Small Cap Growth Equity- An asset class that is generally
comprised of securities issued by U.S. companies with market capitalizations typically below $2 - $3 billion. These securities have the potential for long-term capital appreciation and are generally defined as companies with expected
long-term earnings growth rates significantly higher than the earnings growth rates of the stocks represented in a major unmanaged stock index. In aggregate, the securities within this asset class will generally have above-average price-to-earnings
ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified small-cap asset class.
Developed International Equity- An asset class that is generally comprised of securities with primary trading markets
outside of the United States in developed international markets.
Emerging Markets Equity- An asset class that is generally comprised of securities with primary trading markets in developing countries outside of the U. S. that have low standards of democratic governments, free
market economies, industrialization, social programs, and human rights guarantees for its citizens.
The following indices are listed from the lowest historical risk to the
highest historical risk. Risk is defined as the long term historical standard deviation of each asset class, which measures the degree of volatility.
Benchmark Indices (listed in order of lowest risk to highest risk), which represent various asset classes:
90-Day T-Bills- Index that measures returns of three-month Treasury Bills. (Applicable to: Cash)
BC Municipal Bond- This index is representative of the tax-exempt bond market and is made up of investment grade municipal
bonds issued after December 31, 1990, having a remaining maturity of at least one year. (Applicable to: U.S. Fixed Income)
BC Aggregate Bond- This market value-weighted index measures fixed-rate, publicly placed, dollar-denominated, and
non-convertible investment grade debt issues. (Applicable to: U.S. Fixed Income)
Russell 1000- Index
that measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index
membership. The Russell 1000 represents approximately 92% of the U.S. market. The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new
and growing equities are reflected. (Applicable to: U.S. Equity)
Russell 3000- This
index measures the performance of the largest 3000 U.S. companies representing 98% of the investable U.S. equity market. (Applicable to: U.S. Equity)
MSCI All Country World- A free float-adjusted market capitalization weighted index that is designed to measure the equity
market performance of developed markets. As of June 2007 it consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. (Applicable to: International Equity)
MSCI EAFE- The Morgan Stanley Capital International Europe, Australasia and Far East Index is a market-weighted index
composed of companies representative of the market structure of 20 developed market countries in Europe, Australasia and the Far East. (Applicable to: International Equity)
The Eligible Portfolios offered by MSSB are subject to the same risks faced by similar investment options available in the market, including, without limitation, market risk (the
risk of an overall down market), interest rate risk (the risk that rising or declining interest rates will hurt your investment returns), idiosyncratic risk (the risk that an individual asset will hurt your returns), and concentration risk (the risk
that due to concentrations in a certain segment of the market which performs poorly, your returns are lower than the overall market). The Eligible Portfolios may not achieve their respective investment objectives regardless of whether or not you
purchase the Contract.
Can a Contract be purchased by an Individual Retirement Account?
You may purchase a Contract for your IRA, Roth IRA, SEP IRA or Simple IRA (collectively, an "IRA"). You must designate yourself as the Annuitant of the IRA if your
custodian will be listed as the owner. The Contract is held within the IRA for your benefit. If you elect the Spousal Continuation Option (discussed herein), you and your spouse must be Co-Annuitants, and your spouse must be
listed as the sole beneficiary of Your Account.
For Contracts within an IRA, Nationwide makes Guaranteed Lifetime Income
Payments to the IRA unless otherwise directed by the trustee. Any IRA payments made to you are considered an IRA distribution and will be taxed as such. Distributions that you receive from your IRA with respect to the Contract
will generally be treated as ordinary taxable income. You should refer to your IRA disclosure documents and/or Internal Revenue Service Publication 590 for the rules applicable to IRAs and their distributions.
Can the Contract Owner cancel the Contract?
After you purchase and receive the Contract, you have up to 30 days to cancel your Contract. We call this the "Examination Period." In order to cancel your
Contract, you must provide us with the approved cancellation form (which can be obtained from the Service Center) at the Service Center within 30 days after receiving the Contract (or such longer period that your state may require). We
will then terminate your Contract and refund to Your Account the full amount of any Fee we have already assessed.
After the Examination Period has expired, you can cancel your Contract
by:
· |
advising us and MSSB that you want to terminate the Contract; or |
· |
liquidating all of the investments in Your Account; or |
· |
terminating Your Account. |
If you cancel your Contract, before or after the examination period, a 30-day waiting period may be imposed before you can purchase another Contract for Your
Account.
There are other actions or inactions that can cause the Contract to terminate as well (see "Suspension and Termination
Provisions," for more information).
Does the Contract contain any type of spousal
benefit?
Yes. At the time of application, you may elect to add the Spousal Continuation Option to your Contract. The Spousal Continuation Option allows a surviving
spouse to continue to take withdrawals during the Withdrawal Phase and receive payments during the Income Phase, for the duration of his or her lifetime, provided that the conditions outlined in this prospectus are satisfied. In order to
elect the Spousal Continuation Option for Non-Qualified Contracts, you must be the owner of Your Account and list your spouse as Co-Annuitant of the Contract. If Your Account is held by an IRA, the sole beneficiary to the IRA must be your
spouse. There is a maximum Spousal Continuation Option Fee Percentage equal to a rate of 0.30% of the Guaranteed Lifetime Withdrawal Base associated with the Spousal Continuation Option. Currently, the Spousal Continuation
Option Fee Percentage is equal to a rate of 0.20% of the Guaranteed Lifetime Withdrawal Base.
Does the Contract contain any kind of Guaranteed Lifetime Withdrawal Base increases?
Yes. During both the Accumulation Phase and the Withdrawal Phase, the Contract contains an anniversary step-up feature, the "Annual Benefit Base Review" where if, on
any Contract Anniversary, Your Account Value exceeds the Guaranteed Lifetime Withdrawal Base, we will automatically increase your Guaranteed Lifetime Withdrawal Base to equal that Your Account
Value. Please see "What is the Guaranteed Lifetime Withdrawal Base and how is it calculated?," for more information.
Your Account may perform well enough that you may not
receive any Guaranteed Lifetime Income Payments from Nationwide under the Contract.
The assets in Your Account must be invested in accordance with one of the
designated Eligible Portfolios. The Eligible Portfolios, together with the limits on the amount you may withdraw annually without reducing your Guaranteed Lifetime Withdrawal Base, are intended to minimize the risk to us that we will be
required to make Guaranteed Lifetime Income Payments to you. Accordingly, the risk against which the Contract protects, i.e., that Your Account Value will be reduced below the Minimum Account Value by withdrawals and/or poor investment performance,
or that you will live beyond the age when Your Account Value is reduced below the Minimum Account Value, is likely to be small. In this case, you will have paid us fees for the life of your Contract and received no payments in
return.
Your investment choices are limited by the Contract.
The Guarantee associated with the Contract is contingent on your investments being allocated to one of the Eligible Portfolios or a Former Eligible Portfolio. The
Eligible Portfolios may be managed in a more conservative fashion than other investments available to you. If you do not purchase the Contract, it is possible that you may invest in other types of investments that experience higher growth
or lower losses, depending on the market, than the Eligible Portfolios experience.
You must remain invested in Your Account at MSSB to
maintain your Contract.
In order to receive any benefits under the Contract, you must maintain Your Account at MSSB and pay the annual advisory fees and other compensation associated with the Select UMA
program. If you terminate Your Account with MSSB or transfer Your Account to another firm, the Contract will automatically terminate and you will not receive any payments or other benefits under the Contract.
You may die before receiving payments from us.
Despite general societal increases in longevity, you may still die prematurely, and thus never receive any payments under the Contract. This Contract is designed to
provide protection, in many cases, to clients who live beyond life expectancy. However, you do not have to live beyond life expectancy to receive payments under the Contract, and conversely, living beyond your life expectancy does not
guarantee payments from us under the Contract.
Early Withdrawals or Excess
Withdrawals will reduce or eliminate the Guarantee provided by your Contract.
Withdrawals can cause you to lose the right to any Guaranteed Lifetime Income Payments under the Contract. If you take withdrawals before the Withdrawal Start Date (an
"Early Withdrawal") or if you withdraw more than the Guaranteed Lifetime Withdrawal Amount in a given year after the Withdrawal Start Date (an "Excess Withdrawal"), you will reduce the Guaranteed Lifetime Withdrawal Base and consequently, the amount
of any Guaranteed Lifetime Withdrawals. Multiple Early Withdrawals and/or multiple Excess Withdrawals can reduce your Guaranteed Lifetime Withdrawal Base and Your Account Value to zero. If this occurs, any Guaranteed Lifetime
Withdrawals could be substantially reduced or eliminated.
Note: The Contract
does not require us or MSSB to warn you or provide you with notice regarding potentially adverse consequences that may be associated with any withdrawals or other types of transactions involving Your Account.
The Contract Fee will reduce the growth of Your Account.
The deduction of the Contract Fee each quarter will negatively affect the growth of Your Account. Depending on how long you live and how your investments perform, you
may be financially better off without purchasing the Contract.
Actions of your creditors may reduce or eliminate the
Guarantee provided by your Contract.
You own Your Account and the assets held in it. We have no
ownership or control over Your Account or the assets held in it. The assets in Your Account are not subject to our creditors. However, assets in Your Account may be subject to attachment by your creditors. Moreover,
because you may liquidate Your Account at any time, you are also entitled to pledge the assets in Your
Account as collateral for a loan. There is a risk that if you pledge the assets in Your Account as collateral for a loan and the value of the assets in Your Account
decreases, your creditors may liquidate assets in Your Account to pay the loan. This liquidation will be treated as a withdrawal from Your Account. If it is an Early Withdrawal or an Excess Withdrawal, it could cause you to
lose the right to receive Guaranteed Lifetime Income Payments under the Contract. Therefore, using the assets in Your Account as collateral for a loan may cause you to lose the Guarantee available under the Contract.
Your Guarantee may terminate if MSSB no longer manages the Eligible Portfolios.
We will only pay the Guarantee under this Contract if MSSB manages the Eligible Portfolios or Former Eligible Portfolios. If, for any reason, MSSB no longer manages
the Eligible Portfolios or Former Eligible Portfolios, we reserve the right to suspend the Contract. If you choose to continue your Contract and the Guarantee, you must transfer Your Account Value to a third party account approved by us
or to an annuity contract that we, or one of our affiliates, offer. If you choose not to transfer Your Account Value, this Contract and the Guarantee will terminate.
Nationwide determines that an Eligible Portfolio is no longer eligible as an investment option under the Contract.
As the provider of the Guarantee, we maintain sole discretion as to which investment options will be offered under the Contracts as Eligible Portfolios. We only make
available those Eligible Portfolios that we determine carry an acceptable amount of risk for Nationwide to manage the Guarantee. If, after making an Eligible Portfolio available, we subsequently determine that such Eligible Portfolio
carries too much risk for Nationwide to manage the Guarantee, we will re-characterize the Eligible Portfolio as a Former Eligible Portfolio. Re-characterizing an Eligible Portfolio as a Former Eligible Portfolio triggers a term and
condition change for those Contract Owners invested in the affected Former Eligible Portfolio. Upon any such re-characterization, we will notify affected Contract Owners and explain their contractual options. Please see the "Terms and Conditions of the Contract," for more information about terms and conditions changes.
Additional deposits that exceed $2,000,000 in Total Gross Deposits could suspend or terminate your Contract.
Nationwide does not control the assets in Your Account so it cannot set limits on the amount of Additional Deposits you can add to Your Account. Nationwide does,
however, control how the Guaranteed Lifetime Withdrawal Base is calculated which directly impacts Nationwide's obligation to make Guaranteed Payments under the Contract. In order to manage Nationwide's risk of making Guaranteed Payments,
Nationwide reserves the right to refuse to accept for your Guaranteed Lifetime Withdrawal Base any Additional Deposit in excess of $2,000,000 in Total Gross Deposits if certain requirements are not met. If such an Additional Deposit is
made and the requirements are not met, your Contract may be suspended which could lead to Contract termination. Please see "Suspension and Termination Provisions," for more
information.
Nationwide's claims paying ability.
The Contract is not a separate account product. This means that the assets supporting the Contract are not held in a separate account of Nationwide for the exclusive
benefit of Contract Owners and are not insulated from the claims of our creditors. Your Guaranteed Lifetime Income Payments will be paid from our General Account and, therefore, are subject to our claims paying
ability. Payments under the Contract are not guaranteed by MSSB.
Tax Consequences.
The Contract is novel and innovative. To date, the tax consequences of the Contract have not been addressed in binding published legal authorities. We
intend to treat your Contract as an annuity contract in reporting taxable income attributable to the Contract to you and to the Internal Revenue Service. Assuming the Contract is correctly treated as an annuity contract for tax purposes,
Guaranteed Lifetime Income Payments you receive in the Income Phase will be ordinary income to you that is taxable to the extent provided under the tax rules for annuities. We believe that, in general, the tax treatment of transactions
involving investments in Your Account more likely than not will be the same as it would be in the absence of the Contract. We can provide no assurances, however, that a court would agree with the foregoing interpretations of the law if
the Internal Revenue Service were to challenge the foregoing treatment. You should consult a tax advisor before purchasing a Contract. Please see "Federal Income Tax
Considerations," for a discussion of the tax issues related to ownership of the Contract.
YOUR RELATIONSHIP WITH MSSB AND NATIONWIDE
The Contract.
The Contract is an individual supplemental immediate fixed income annuity contract. That means that the Contract you are purchasing entitles you to an immediate fixed
income annuity contract if, and only if, one of the triggering events discussed earlier in this prospectus occurs. The Contract is designed for investors in Select UMA Models approved as Eligible Portfolios who intend to use the assets in
their Account as the basis for periodic withdrawals to provide income for retirement or for other purposes.
Nationwide is not your investment advisor. Rather, MSSB provides Overlay Manager services for the Eligible Portfolios that your Financial Advisor may
recommend. Additionally, MSSB provides the Select UMA services even if you do not purchase a Nationwide Contract or decide to terminate your Nationwide Contract. You and your Financial Advisor determine whether to invest in an Eligible
Portfolio. If you decide to invest in an Eligible Portfolio, as a requirement to open Your Account, you will sign the Client Agreement.
The Select UMA program is governed by the Client Agreement that you sign with MSSB. You sign the Client Agreement with MSSB at or before the time MSSB opens Your
Account (a requirement for issuance of the Contract). In the Client Agreement, you authorize MSSB to provide investment advisory services to you, including the selection of your Eligible Portfolio. MSSB will act through your
Financial Advisor, an employee of MSSB, who serves as an advisor to you. The Overlay Manager is a division of MSSB. The Overlay Manager constructs and maintains your Eligible Portfolio by implementing your choice of Model and
Investment Product by arranging for the execution of trades in Your Account, placing orders for the purchase, sale, or redemption of shares of mutual funds and exchange-traded funds in accordance with the Model you have selected, and rebalancing
Your Account. Please read the Client Agreement carefully. More information regarding the Select UMA program is provided in the relevant MSSB Form ADV, Schedule H (the "MSSB ADV"), which you may obtain from your MSSB Financial
Advisor.
You may apply to purchase a Contract by completing an application. When your application is approved, we provide the Contract's Guarantee
to you on the assumption and condition that Your Account remains invested in one of the Eligible Portfolios or a Former Eligible Portfolio. We require MSSB to provide data to us to monitor the Eligible Portfolios or Former Eligible
Portfolio and to alert us of any changes to the allocations within them.
Your Financial Advisor is a representative of and is affiliated with MSSB,
the broker-dealer that is authorized to offer Your Account with these Contracts. Nationwide has an agreement with MSSB to offer the Contracts. MSSB works with your Financial Advisor to assist you in purchasing a Contract.
While the Contract is in the Accumulation and Withdrawal Phases, MSSB is responsible for administering Your Account, including processing additional payments and withdrawals,
deducting and remitting to us the Contract Fee, assessing advisory and any other fees associated with Your Account, and providing you with statements, confirmations and other correspondence. During the Accumulation and Withdrawal Phases,
Nationwide is responsible for maintaining your Guaranteed Lifetime Withdrawal information, including your Guaranteed Lifetime Withdrawal Amount and your overall Guaranteed Lifetime Withdrawal Base.
If and when one of the triggering events occurs, you will be contacted to elect to enter the Income Phase. You will close Your Account and transfer any remaining
assets to us. We will then issue you an immediate fixed income annuity contract that will result in Guaranteed Lifetime Income Payments from us for the remainder of your (and your spouse's, if the Spousal Continuation Option is
elected) lifetime. Once the Income Phase begins, your relationship with MSSB, with respect to Your Account, terminates. All administrative responsibilities undertaken by MSSB during the Accumulation and Withdrawal Phases will
be performed by Nationwide, the issuer of the Contract and the entity obligated to pay you Guaranteed Lifetime Income Payments for the rest of your (or your spouse's, if the Spousal Continuation Option is elected) lifetime.
Management of Your Account.
Management of Your Account is governed by the Client Agreement. The
Contract requires that you remain invested in one of the Eligible Portfolios or a Former Eligible Portfolio in order to maintain the Guarantee associated with the Contract. Neither Nationwide nor MSSB is responsible for ensuring that the
assets in Your Account remain invested according to the terms of the Contract.
Once Your Account is opened and you purchase the Contract, you will begin
the first phase of the Contract – the Accumulation Phase. During this phase, you will establish your original Guaranteed Lifetime Withdrawal Base, which is equal to Your Account Value when the Contract is issued.
What is the Guaranteed Lifetime Withdrawal Base and how is it calculated?
The Guaranteed Lifetime Withdrawal Base is the amount we use to calculate the Guaranteed Lifetime Withdrawals. On the date we issue the Contract, your original
Guaranteed Lifetime Withdrawal Base equals Your Account Value. The anniversary of the date we issue your Contract is known as the "Contract Anniversary" and each one-year period between subsequent Contract Anniversaries is referred to as
a "Contract Year."
Can the Guaranteed Lifetime Withdrawal Base change during the Accumulation Phase?
Yes. There are several ways that your Guaranteed Lifetime Withdrawal Base can increase or decrease during the Accumulation Phase:
1. |
The Annual
Benefit Base Review. On each Contract Anniversary during the Accumulation Phase, we do an Annual Benefit Base Review to see if you are eligible for an increase to your Guaranteed
Lifetime Withdrawal Base. We will examine the following three items and Your Guaranteed Lifetime Withdrawal Base will be set equal to the greatest of: |
|
(a) |
the current Guaranteed Lifetime Withdrawal Base, adjusted for transactions in the previous Contract Year that affected the Guaranteed Lifetime
Withdrawal Base; |
|
(b) |
Your Account Value as of the Contract Anniversary; or |
|
(c) |
the original Guaranteed Lifetime Withdrawal Base with a 5% roll-up. This is equal to the original Guaranteed Lifetime Withdrawal Base plus
5% of the original Guaranteed Lifetime Withdrawal Base for each Contract Anniversary that has been reached. An adjustment will be made to the calculations for transactions that increase or decrease the Guaranteed Lifetime Withdrawal
Base. |
Any increase to the Guaranteed Lifetime Withdrawal Base will be automatic
if there are no terms and conditions changes. Otherwise, we require an election to increase the Guaranteed Lifetime Withdrawal Base. Please see "Terms and Conditions of the
Contract," for an explanation of the impact upon the Guaranteed Lifetime Withdrawal Base if there is a terms and conditions change.
Note: Since the Contract Fee is calculated based on the Guaranteed Lifetime Withdrawal Base, increases to the Guaranteed
Lifetime Withdrawal Base will result in higher Contract Fees. Under the automatic Annual Benefit Base Review feature, you agree to pay the larger Fee.
You can cancel the automatic Annual Benefit Base Review by notifying us.
2. |
Additional
Deposits to Your Account in the Accumulation Phase. The Contract permits you to make Additional Deposits to Your Account during the Accumulation Phase. Additional Deposits will result in an immediate increase to your
Guaranteed Lifetime Withdrawal Base equal to the dollar amount of the Additional Deposit. |
Note: We
reserve the right to refuse to accept an Additional Deposit made into Your Account for your Guaranteed Lifetime Withdrawal Base that brings your Total Gross Deposits above $2,000,000. Please see "Suspension and Termination Provisions," for more information. Your Account Value may increase above $2,000,000 due to market performance without suspension.
3. |
Early
Withdrawals from Your Account. An Early Withdrawal is any withdrawal you take from Your Account prior to your elected Withdrawal Start Date (discussed later in this provision). Early Withdrawals will result in a decrease
to your Guaranteed Lifetime Withdrawal Base. The amount of that decrease will be the greater of (a) or (b), where: |
(a) |
= the dollar amount of the Early Withdrawal;
and |
|
(b) |
= |
a "proportional amount" derived from the following calculation: (A ÷ B) × C,
where: |
A = the
dollar amount of the Early Withdrawal;
B = Your
Account Value on the date of the Early Withdrawal; and
C = your
Guaranteed Lifetime Withdrawal Base on the date of the Early Withdrawal.
Note:
When an Early Withdrawal occurs at a time when the market is doing well enough that Your Account Value exceeds the Guaranteed Lifetime Withdrawal Base, an Early Withdrawal will result in a dollar for dollar reduction in the Guaranteed Lifetime
Withdrawal Base. When an Early Withdrawal occurs at a time when the market has declined so that Your Account Value is less than the Guaranteed Lifetime Withdrawal Base, an Early Withdrawal will result in a proportional reduction to the
Guaranteed Lifetime Withdrawal Base. Furthermore, the more the market has declined (i.e., the greater the difference between Your Account Value and the Guaranteed Lifetime
Withdrawal Base), the greater impact the proportional reduction will have on the remaining Guaranteed Lifetime Withdrawal Base resulting in a larger decrease to the overall Guaranteed Lifetime Withdrawals.
Example Early Withdrawal Calculations |
In this example, the Account Value is greater than the Guaranteed Lifetime Withdrawal Base. |
|
In this example, the Account Value is less than the Guaranteed Lifetime Withdrawal Base: |
At the time of the
Early Withdrawal: |
|
At the time of the
Early Withdrawal: |
Account
Value = |
$500,000 |
|
Account
Value = |
$400,000 |
Guaranteed Lifetime
Withdrawal Base = |
$450,000 |
|
Guaranteed Lifetime
Withdrawal Base = |
$450,000 |
Withdrawal Amount = |
$15,000 |
|
Withdrawal Amount = |
$15,000 |
Guaranteed Lifetime
Withdrawal Base reduction calculations: |
|
Guaranteed Lifetime
Withdrawal Base reduction calculations: |
Dollar
amount = |
$15,000 |
|
Dollar
amount = |
$15,000 |
Proportional amount ($15,000 ÷ $500,000) x $450,000 = |
$13,500 |
|
Proportional amount ($15,000 ÷ $400,000) x $450,000 = |
$16,875 |
After the Early
Withdrawal: |
|
After the Early
Withdrawal: |
Account Value
($500,000 -
$15,000) = |
$485,000 |
|
Account Value
($400,000 -
$15,000) = |
$385,000 |
Guaranteed Lifetime Withdrawal Base ($450,000 - $15,000) = |
$435,000 |
|
Guaranteed Lifetime Withdrawal Base ($450,000 - $16,875) = |
$433,125 |
In the case of an Early Withdrawal that causes any reduction to your Guaranteed Lifetime Withdrawal Base, we will provide you with the opportunity to restore your Guaranteed
Lifetime Withdrawal Base to the amount that was in effect prior to the Early Withdrawal. To do so, within 45 days of the withdrawal, you must make Additional Deposits to Your Account equal to or greater than the Early Withdrawal amount,
and submit a request to us in writing to restore your Guaranteed Lifetime Withdrawal Base as of the date of the Early Withdrawal. In the event you restore your Guaranteed Lifetime Withdrawal Base after an Early Withdrawal, we reserve the
right to limit this restoration of your Guaranteed Lifetime Withdrawal Base to one time per Contract Year, not to exceed three times during the life of the Contract. We will confirm with you that your Guaranteed Lifetime Withdrawal Base
is restored, and will notify you if you reach the limit of withdrawal restorations.
What if the Account Value falls to the Minimum Account
Value before the Withdrawal Start Date but your Guaranteed Lifetime Withdrawal Base is above zero?
If Your Account Value falls below the Minimum Account Value before your
Withdrawal Start Date, your Contract will be suspended. Please see "Suspension and Termination Provisions," later in this prospectus for more information.
What events trigger the Withdrawal Phase?
Your Account and the Contract will continue in the Accumulation Phase until you (or in the case of Co-Annuitants, the younger Co-Annuitant) reach the age of 55 and affirmatively
elect to enter the second phase of the Contract – the Withdrawal Phase. To elect to enter the Withdrawal Phase, you and your Financial Advisor must complete a Withdrawal Phase election form and send the form to the Service
Center.
What is the Withdrawal Start Date and what does it mean?
Your Withdrawal Start Date is the date that we receive a completed Withdrawal Phase election form indicating your choice, once you are eligible under the Contract to enter the
Withdrawal Phase. The Withdrawal Phase entitles you to begin taking annual withdrawals up to the Guaranteed Lifetime Withdrawal Amount (discussed later in this provision) without reducing your
Guaranteed Lifetime Withdrawal Base. To be eligible to enter the Withdrawal Phase, you must reach age 55 or older. In the case of Co-Annuitants, your eligibility to elect to enter the
Withdrawal Phase is based on the date the younger Co-Annuitant reaches the age of 55. However, for Contracts owned by an IRA, distributions in an amount necessary to satisfy your minimum required distributions as provided in the Internal
Revenue Code will not reduce your Guaranteed Lifetime Withdrawal Base, regardless of the age of your spouse. This means that if you must meet required minimum distributions, you may enter the Withdrawal Phase.
If you are eligible, and you wish to enter the Withdrawal Phase, you must complete a Withdrawal Phase election form. You may request the form through your Financial
Advisor or from the Service Center. Your Withdrawal Start Date will be the date we receive your completed Withdrawal Phase election form at the Service Center, even if you do not take an actual withdrawal at that time. We will
notify you that we received your completed Withdrawal Phase election form. If you take a withdrawal after the age of 55 and have not completed the Withdrawal Phase election form, you and your Financial Advisor will be
notified. Upon notification, if you do not complete a Withdrawal Phase election form within 30 days, your withdrawal will be considered an Early Withdrawal and
your Guaranteed Lifetime Withdrawal Base will be reduced as stated in the "Early Withdrawals from Your Account"
section. Note: If your Withdrawal Start Date is in the initial Contract Year or in the year you turn 55, the amount of your initial withdrawals may be prorated based upon
the number of days remaining in that calendar year.
If you do not affirmatively elect to enter the Withdrawal Phase, every
withdrawal you take will be considered an Early Withdrawal. As described in the "Early Withdrawals from Your Account" section, Early Withdrawals will reduce your Guaranteed Lifetime
Withdrawal Base. If you do not enter the Withdrawal Phase, you will continue to pay for the Guarantee but will not receive the benefit of the Guaranteed Lifetime Withdrawals.
Once you enter the Withdrawal Phase, the Early Withdrawal provisions of this prospectus are inapplicable to your Contract and your potential 5% roll-up to the Guaranteed Lifetime
Withdrawal Base that was available in the Accumulation Phase will no longer be available.
What is the Guaranteed
Lifetime Withdrawal Amount and how is it calculated?
The Guaranteed Lifetime Withdrawal
Amount is the maximum amount you may withdraw each calendar year after your Withdrawal Start Date without reducing your Guaranteed Lifetime Withdrawal Base. The Guaranteed Lifetime Withdrawal Amount is
calculated by multiplying your Guaranteed Lifetime Withdrawal Base by your Guaranteed Lifetime Withdrawal Percentage.
Your Guaranteed Lifetime Withdrawal Percentage depends on your age (or in
the case of Co-Annuitants, the younger Co-Annuitant's age) at the time of the withdrawal. Your Guaranteed Lifetime Withdrawal Percentage will automatically increase on the calendar year after you (or in the case of Co-Annuitants, the
younger Co-Annuitant) turns 65.
Your Age (or in the case of a Co-Annuitant, the age of the younger Co-Annuitant)
at the time of the withdrawal |
Guaranteed Lifetime Withdrawal Percentage |
55
– 64 |
4% |
65 or
older |
5% |
In other words:
Guaranteed Lifetime
Withdrawal Amount |
= |
Guaranteed Lifetime
Withdrawal Base |
X |
Guaranteed Lifetime
Withdrawal Percentage |
Note: Although
withdrawals taken that do not exceed the Guaranteed Lifetime Withdrawal Amount do not reduce the Guaranteed Lifetime Withdrawal Base, they do reduce Your Account Value.
Note: Your Guaranteed Lifetime Withdrawal Amount should be considered when you determine your periodic withdrawal strategy
for retirement income or other purposes. Amounts withdrawn in excess of the Guaranteed Lifetime Withdrawal Amount will negatively impact your Guaranteed Lifetime Withdrawal Base and any Guaranteed Lifetime Income Payments that may be
payable to you under this Contract in the future.
The Guaranteed Lifetime Withdrawal Amount is not cumulative. In
other words, taking less than the Guaranteed Lifetime Withdrawal Amount in one calendar year does not entitle you to withdraw more than the Guaranteed Lifetime Withdrawal Amount in a subsequent calendar year.
|
Can the Guaranteed Lifetime Withdrawal Base change during the Withdrawal Phase? |
Yes. There are several ways that your Guaranteed Lifetime Withdrawal Base can increase or decrease during the Withdrawal Phase:
1. |
The Annual
Benefit Base Review. On each Contract Anniversary during the Withdrawal Phase, we do an Annual Benefit Base Review to see if you are eligible for an increase to your Guaranteed
Lifetime Withdrawal Base. We will examine the following two items and your Guaranteed Lifetime Withdrawal Base will be set equal to the greater of: |
|
(a) |
the current Guaranteed Lifetime Withdrawal Base, adjusted for transactions in the previous Contract Year that affected the Guaranteed Lifetime
Withdrawal Base; or |
|
(b) |
Your Account Value as of the Contract Anniversary. |
Any increase to the Guaranteed Lifetime Withdrawal Base will be automatic if there are no terms and conditions changes. Otherwise, we require an election to increase
the Guaranteed Lifetime Withdrawal Base. Please see "Terms and Conditions of the Contract," for an explanation of the impact upon the Guaranteed Lifetime Withdrawal Base if there is a terms
and conditions change.
Note: Since the Contract Fee is calculated based on the Guaranteed Lifetime Withdrawal Base, increases to the Guaranteed
Lifetime Withdrawal Base will result in higher Contract Fees. Under the automatic Annual Benefit Base Review feature, you agree to pay the larger Fee.
You can cancel the automatic Annual Benefit Base Review by notifying us.
2. |
Additional Deposits to Your Account in the Withdrawal
Phase. Just as in the Accumulation Phase, the Contract permits you to make Additional Deposits to Your Account during the Withdrawal Phase, which will result in an immediate increase to your Guaranteed Lifetime Withdrawal Base
equal to the dollar amount of the Additional Deposit. |
Note: We reserve
the right to refuse to accept an Additional Deposit made into Your Account for your Guaranteed Lifetime Withdrawal Base that brings your Total Gross Deposits above $2,000,000. Please see
"Suspension and Termination Provisions," for more information. Your Account Value may increase above $2,000,000 due to market performance without suspension.
3. |
|
Excess Withdrawals from Your Account. Excess
Withdrawals are any withdrawals taken after your Withdrawal Start Date that, during any calendar year, exceed the Guaranteed Lifetime Withdrawal Amount. Excess Withdrawals will result in a decrease to your Guaranteed Lifetime Withdrawal
Base. The amount of that decrease will be the greater of (a) or (b), where: |
(a) |
=the dollar amount of the Excess Withdrawal (the amount withdrawn during any
calendar year in excess of the Guaranteed Lifetime Withdrawal Amount); and |
|
(b) |
= |
a "proportional amount" derived from the following calculation: (A ÷ B) × C,
where: |
A = the dollar amount of the Excess
Withdrawal;
B = Your Account Value (which will be reduced by any Guaranteed Lifetime Withdrawal
Amounttaken) on the date of the Excess Withdrawal; and
C = your Guaranteed Lifetime Withdrawal
Base on the date of the Excess Withdrawal.
Note: When an
Excess Withdrawal occurs at a time when the market is doing well enough that Your Account Value exceeds the Guaranteed Lifetime Withdrawal Base, an Excess Withdrawal will result in a dollar for dollar reduction in the Guaranteed Lifetime Withdrawal
Base. When an Excess Withdrawal occurs at a time when the market has declined so that Your Account Value is less than the Guaranteed Lifetime Withdrawal Base, an Excess Withdrawal will result in a proportional reduction to the Guaranteed
Lifetime Withdrawal Base. Furthermore, the more the market has declined (i.e., the greater the difference between Your Account Value and the Guaranteed Lifetime Withdrawal Base),
the greater impact the proportional reduction will have on the remaining Guaranteed Lifetime Withdrawal Base, resulting in a larger decrease to overall Guaranteed Lifetime Withdrawals.
Example Excess Withdrawal Calculations |
In this example, the Account Value is greater than the Guaranteed Lifetime Withdrawal Base: |
|
In this example, the Account Value is less than the Guaranteed Lifetime Withdrawal Base: |
At the time of the
Excess Withdrawal: |
|
At the time of the
Excess Withdrawal: |
Account
Value = |
$500,000 |
|
Account
Value = |
$400,000 |
Guaranteed Lifetime Withdrawal
Base = |
$450,000 |
|
Guaranteed Lifetime Withdrawal
Base = |
$450,000 |
Guaranteed Lifetime Withdrawal
Amount = |
$22,500 |
|
Guaranteed Lifetime Withdrawal Amount = |
$22,500 |
Withdrawal
Amount = |
$30,000 |
|
Withdrawal
Amount = |
$30,000 |
Excess Withdrawal Amount ($30,000 - $22,500) = |
$7,500 |
|
Excess Withdrawal Amount ($30,000 - $22,500) = |
$7,500 |
Guaranteed Lifetime Withdrawal Base reduction calculations: |
|
Guaranteed Lifetime Withdrawal Base reduction calculations: |
Dollar
amount = |
$7,500 |
|
Dollar
amount = |
$7,500 |
Proportional amount ($7,500 ÷ $477,500) x $450,000 = |
$7,068 |
|
Proportional amount ($7,500 ÷ $377,500) x $450,000 = |
$8,940 |
After the Excess
Withdrawal: |
|
After the Excess
Withdrawal: |
Account Value
($500,000 -
$30,000) = |
$470,000 |
|
Account Value
($400,000 -
$30,000) = |
$370,000 |
Guaranteed Lifetime Withdrawal Base ($450,000 - $7,500) = |
$442,500 |
|
Guaranteed Lifetime Withdrawal Base ($450,000 - $8,940) = |
$441,060 |
If your Contract is issued as an asset in an IRA, and the only withdrawals you take from the assets in Your Account are those taken to meet required minimum distributions for
that account under the Internal Revenue Code, those withdrawals will not be considered Excess Withdrawals, even if the withdrawal exceeds the Guaranteed Lifetime Withdrawal Amount.
In the case of an Excess Withdrawal that causes any reduction to your Guaranteed Lifetime Withdrawal Base, we will provide you with the
opportunity to restore your Guaranteed Lifetime Withdrawal Base to the amount that was in effect prior to the Excess Withdrawal. To do so, within 45 days of the withdrawal, you must make Additional
Deposits to Your Account equal to or greater than the Excess Withdrawal amount, and submit a request to us in writing to restore your Guaranteed Lifetime Withdrawal Base as of the date of the Excess
Withdrawal. In the event you restore your Guaranteed Lifetime Withdrawal Base after an Excess Withdrawal, we reserve the right to limit this restoration of your Guaranteed Lifetime Withdrawal Base to one time
per Contract Year, not to exceed three times during the life of the Contract. We will confirm with you that your Guaranteed Lifetime Withdrawal Base is restored, and will notify you if you reach the limit of withdrawal
restorations.
Note: The Guaranteed Lifetime Withdrawal Base will never decrease due to market
performance, even if Your Account Value goes down.
Do Early Withdrawals and Excess Withdrawals affect the
Guaranteed Lifetime Withdrawal Amount and the Guaranteed Lifetime Withdrawal Base differently?
Yes. Early Withdrawals are considered "early" because they are
taken before your Withdrawal Start Date, when your Guaranteed Lifetime Withdrawal Amount has not yet been established. If you take Early Withdrawals, your Guaranteed Lifetime Withdrawal Base will be reduced by the greater of the dollar
amount of the Early Withdrawal or the proportional amount calculation. The proportional amount calculation for Early Withdrawals (as described above) uses Your Account Value at the time of the Early Withdrawal.
Excess Withdrawals are in "excess" of your Guaranteed Lifetime Withdrawal Amount, an amount established after your Withdrawal Start Date. If you take withdrawals in
excess of your Guaranteed Lifetime Withdrawal Amount, your Guaranteed Lifetime Withdrawal Base will be reduced by the greater of the dollar amount of the Excess Withdrawal or the proportional amount calculation. The proportional amount
calculation for Excess Withdrawals (as described above) will apply to Your Account Value on the date of the Excess Withdrawal (minus any Guaranteed Lifetime Withdrawal Amount taken on that day). Thus, Your Account Value is reduced by the Guaranteed
Lifetime Withdrawal Amount and any Excess Withdrawal Amount.
What if the Account Value and the Guaranteed Lifetime
Withdrawal Base decline to zero due to Excess Withdrawals during the Withdrawal Phase?
If both Your Account Value and the Guaranteed Lifetime Withdrawal Base
decline to zero, the Contract will automatically terminate without value.
TRIGGERING THE INCOME PHASE
What events will trigger the Income Phase?
Your Account will continue in the Withdrawal Phase until any of the following events, referred to as "triggering events," occurs:
· |
Your Account Value, after your Withdrawal Start Date, falls below the greater of
$10,000 or the Guaranteed Lifetime Withdrawal Amount (the "Minimum Account Value"); |
· |
Your Account Value is invested in the Minimum Account Value Eligible Portfolio, as
discussed in the "Suspension and Termination Provisions" section, and you reach your Withdrawal Start Date; or |
· |
You, after your Withdrawal Start Date, affirmatively elect to begin the Income Phase
by submitting the appropriate administrative forms. |
For Contracts owned by an IRA, the Co-Annuitant for whom the IRA was
established shall not be precluded from entering the Income Phase if a triggering event occurs, regardless of the age of their spouse.
Note: It is possible that you may never begin the Income Phase. If you (and your spouse, if the Spousal
Continuation Option is elected) die before any of the triggering events occurs, no benefit is payable under this Contract.
How is the Contract transitioned into the Income
Phase?
If, and when, a triggering event occurs, we will send you a written notice informing you that you have met all of the conditions in order for your Contract to transition from the
Withdrawal Phase to the Income Phase. The notice will contain an Income Phase election form.
If you decide to transition your Contract into the Income Phase, you must return the executed Income Phase election form to the Service Center and instruct MSSB to liquidate Your
Account and transfer any remaining balance to us. Any unpaid Contract Fee will be charged against Your Account on a pro-rated basis, but will not affect your Guaranteed Lifetime Withdrawal Base. We will accept those assets as a
premium payment for your immediate fixed income annuity contract ("Annuity"). Shortly thereafter, we will issue your Annuity, and we will begin making Guaranteed Lifetime Income Payments to you. The date the Annuity is issued
is referred to as the "Annuity Commencement Date." The Guaranteed Lifetime Income Payments will continue for as long as you (or your spouse, if the Spousal Continuation Option is elected) live.
If you decide not to transition your Contract into the Income Phase by indicating your choice on the Income Phase election form and returning the form to the Service Center, your
Contract will terminate and we will make no payments to you.
If we do not receive an Income Phase election form within 90 days of
sending it from the Service Center, we will assume you do not intend to transition your Contract into the Income Phase and you wish to terminate your Contract. The Contract Fees that you have paid us, including the fees that you paid
during this 90 day period, will not be refunded. You will not receive any benefits of the Guarantee and will not receive any Guaranteed Lifetime Income Payments from us.
How much will each Guaranteed Lifetime Income Payment
be?
Each Guaranteed Lifetime Income Payment will be the same amount as your most recent Guaranteed Lifetime Withdrawal Amount. However, your first Guaranteed
Lifetime Income Payment will be prorated based on the amount previously withdrawn during the calendar year prior to beginning the Income Phase. No Additional Deposits and no Guaranteed
Lifetime Withdrawals are permitted.
Will the Guaranteed Lifetime Income Payment ever increase
or decrease?
No. The Guaranteed Lifetime Income Payments will always be the same amount.
How often are the Guaranteed Lifetime Income Payments paid?
The Guaranteed Lifetime Income Payments will be paid to you at the frequency you request on your Income Phase election form.
Note: Although you elect the frequency of payment, we reserve the right to decrease the frequency so that each scheduled
payment is at least $100.
How long will the Guaranteed Lifetime Income Payments
be paid?
Once the Guaranteed Lifetime Income Payments begin, they will continue until the death of the Annuitant (or the Co-Annuitant if the Spousal Continuation Option was
elected).
TERMS AND CONDITIONS OF THE CONTRACT
What does it mean to have a change in "terms and
conditions" of the Contract?
Nationwide can change certain terms and conditions of the Contract after
you have purchased the Contract. These terms and conditions are: determination of which Select UMA Models are Eligible Portfolios and changes to the Contract Fee Percentages associated with the Eligible Portfolios.
How will a change to the terms and conditions of the Contract affect an existing Contract?
If Nationwide changes one or more terms and conditions of the Contract after it is issued, the change will not apply to your Contract unless you agree to such
change. Your acceptance or rejection of any such change will impact the Annual Benefit Base Review which, as of the effective date of the change of terms and conditions, will no longer be automatic. Rather, in order to take
advantage of any Annual Benefit Base Review, you will have to consent to have the Annual Benefit Base Review applied to your Contract. In other words, in order to receive the benefit associated with the Annual Benefit Base Review, you
must also accept the new terms and conditions associated with the Contract. At the time of the terms and conditions change, we will provide you with the information necessary to make this determination. Specifically, we will
provide: Your Account Value; the current Guaranteed Lifetime Withdrawal Base; the current terms and conditions associated with the Contract; and instructions on how to communicate your election to Nationwide.
If you accept the new terms and conditions associated with the Contract, we will continue with the Annual Benefit Base Review at the time of your next Contract
Anniversary.
If you refuse to accept the terms and conditions, or we do not receive your election to accept the terms and conditions change within 60 days after the day we send notification
to you (in which case we will assume you do not intend to invoke the Annual Benefit Base
Review), the new terms and conditions of the Contract will not apply to your Contract. Your Guaranteed Lifetime Withdrawal Base will stay at the same value as of the
most recent Contract Anniversary and you will no longer have an Annual Benefit Base Review. However, if you submit Additional Deposits to Your Account, you will receive a dollar for dollar increase to your Guaranteed Lifetime Withdrawal
Base. Once you decline a terms and conditions change, you will no longer be permitted to accept any other terms and conditions change or reinstate your Annual Benefit Base Review.
If we re-characterize an Eligible Portfolio to a Former Eligible Portfolio, you will be notified of this term and condition change as stated in this section. If you
choose to switch to another Eligible Portfolio, you may continue your Annual Benefit Base Review. If you choose to remain in the Former Eligible Portfolio, you will no longer be permitted to accept any other terms and conditions change or
reinstate your Annual Benefit Base Review, and the cost of the Former Eligible Portfolio will remain the same. If MSSB no longer offers a Former Eligible Portfolio, the "Suspension and
Termination Provisions" section will apply. Please see "Suspension and Termination Provisions," for more information.
During the first two years of the Contract, we guarantee that the Contract Fee Percentage will not increase from the price that was in effect at the time you purchased the
Contract. Other terms and conditions may change upon notice to you as stated above. After your second Contract Anniversary, Contract Fee Percentage changes are considered a term and condition change. Any Contract Fee
Percentage increase will not rise above the maximum Contract Fee Percentage provided in the "How much will the Contract cost?" and "The
Contract Fee" sections of this prospectus, and you will be notified of any terms and conditions change according to this "Terms and Conditions of the Contract" section.
SPOUSAL CONTINUATION OPTION
What is the Spousal Continuation Option?
The Spousal Continuation Option allows, upon your death, your surviving spouse to continue the Contract and receive all the rights and benefits associated with the Contract,
including Guaranteed Lifetime Withdrawals and, possibly, Guaranteed Lifetime Income Payments.
Election of the Spousal Continuation
Option.
The following conditions apply to Contracts electing the Spousal Continuation Option:
(1) |
The Spousal Continuation Option must be elected at the time of application, and the
younger spouse must be between 45 and 80 and the older spouse must be 84 or younger. |
(2) |
Both spouses (or a revocable trust of which either or both of the spouses is/are
grantor(s)) must be named as owners of Your Account and the Annuitant(s) of Your Contract. For Contracts issued to IRAs and Roth IRAs, you and your spouse must be Co-Annuitants, and the person for whom the IRA or Roth IRA was
established must name their spouse the sole beneficiary of Your Account. |
(3) |
If, prior to the Withdrawal Start Date, your marriage terminates due to divorce,
dissolution, or annulment, or a Co-Annuitant dies, we will remove the Spousal Continuation Option from your Contract after you submit to the Service Center a written request and evidence of the marriage termination or death that is satisfactory to
Nationwide. After removal of the Spousal Continuation Option, we will not charge you the Spousal Continuation Option Fee Percentage. Once the Spousal Continuation Option is removed from the Contract, the option may not be
re-elected or added to cover a subsequent spouse. |
(4) |
If, on or after the Withdrawal Start Date, your marriage terminates due to divorce,
dissolution, or annulment, or a Co-Annuitant dies, you may not remove the Spousal Continuation Option from the Contract. The remaining Owner of the Contract will continue to be charged the Spousal Continuation Option Fee Percentage, and
after the remaining Owner of the contract submits to the Service Center a written request in a form acceptable to Nationwide, the remaining Owner of the Contract's former spouse will no longer be eligible to receive withdrawals. |
(5) |
For Contracts with non-natural owners (other than IRAs), one spouse must be the
Annuitant and the other spouse must be the Co-Annuitant. |
(6) |
Upon either Co-Annuitant's death, the surviving spouse must keep Your Account open
and comply with all of the requirements of this Contract. |
(7) |
If you enter the Income Phase of the Contract, both you and your spouse must be
named primary beneficiaries of the Contract at that time to ensure the Guaranteed Lifetime Income Payments will continue for both lives. |
How much does the Spousal Continuation Option cost?
The maximum Spousal Continuation Option Fee Percentage is 0.30% of your Guaranteed Lifetime Withdrawal Base. Currently, the Spousal Continuation Option Fee Percentage
is 0.20% of your Guaranteed Lifetime Withdrawal Base and is assessed in the same manner and at the same time as the Contract Fee. The Spousal Continuation Fee is in addition to the Contract Fee, resulting in a maximum total of 1.75% and a
current total of 1.20%.
Is it possible to pay for the Spousal Continuation Option but not receive a benefit from it?
There are situations where you would not receive the benefit of the Spousal Continuation Option. For example, if on or after the Withdrawal Start Date your spouse dies
before you, the benefits associated with the option will not be realized. Also, if withdrawals are taken after the Withdrawal Start Date and your marriage terminates due to death, divorce, dissolution, or annulment, you may not remove the
Spousal Continuation Option from the Contract and you must continue to pay the Spousal Continuation Option Fee.
How much is the Contract Fee?
The maximum Contract Fee Percentage for the Contract is a rate of 1.45% of the Guaranteed Lifetime Withdrawal Base. The current Contract Fee Percentage is 1.00% of the
Guaranteed Lifetime Withdrawal Base. If you choose to elect the Spousal Continuation Option, there is an additional fee (see "How much does the Spousal Continuation Option
cost?"). Once your Contract is issued, the Contract Fee associated with your Contract will not increase, except possibly, if you affirmatively elect the change of any terms and conditions, or if you have to go to the Minimum
Account Value Eligible Portfolio and the Contract Fee Percentage is higher. Please see "Terms and Conditions of the Contract," for more information about terms and
conditions.
The Contract Fee is in addition to charges that are imposed in connection with advisory, custodial, platform and other services, or charges imposed by Investment Products
comprising Your Account at MSSB.
We provide a price guarantee during the first two years that you own the
Contract. During this time, your Contract Fee Percentage will not increase above the Contract Fee Percentage that was in place at the date of issuance of the Contract. After your second Contract Anniversary, a change in the
Contract Fee Percentage will be considered a terms and conditions change. Please see "Terms and Conditions of the Contract," for more information.
Some states and other governmental entities (e.g., municipalities) charge premium taxes or similar taxes to
Nationwide. Nationwide will not pass these taxes through to the Contract owner.
When and how is the Contract Fee
assessed?
The Contract Fee is only assessed during the Accumulation and Withdrawal Phases of the Contract. It is deducted from Your Account on a calendar quarter basis at the
beginning of each quarter in the same manner as MSSB's advisory fees for Your Account. The Fee is paid in advance based on the value of the Guaranteed Lifetime Withdrawal Base as of the last day of the previous calendar
quarter. If you make an Additional Deposit or take an Early or Excess Withdrawal during the pre-paid quarter, your Fee will not be impacted for that quarter since the Fee was paid in advance. The Fee for the following quarter
will be impacted because the Guaranteed Lifetime Withdrawal Base will reflect any increase from an Additional Deposit or a decrease from an Early or Excess Withdrawal.
The Contract Fee Percentage is assessed at the beginning of the quarter because it corresponds with MSSB's billing, and the quarterly billing will have no other impact other than
to reduce Your Account Value. The Contract Fee will be deducted by MSSB and remitted to us. To facilitate this, you must sign the Client Agreement allowing MSSB to deduct the Fee from Your Account. The sale or
transfer of investments in Your Account to pay the Contract Fee will not reduce your Guaranteed Lifetime Withdrawal Base, but will reduce Your Account Value.
For example:
Contract Fee Percentage: |
1.00% |
Number of days in calendar quarter: |
90 |
Number of days in the calendar year: |
365 |
Guaranteed Lifetime Withdrawal Base (as of the end of the previous quarter): |
$500,000 |
Contract Fee Calculation: $500,000 x [1.00% x (90 ÷ 365)] = |
$1,232.87 |
If your Contract is issued in the middle of a quarter, we will prorate your Contract Fee for that quarter. Thereafter, the Fee for the next calendar quarter will be
calculated based on the Guaranteed Lifetime Withdrawal Base as of the end of the prior calendar quarter. If you terminate your Contract in the middle of a quarter, we will prorate that quarter's Fee and will return the remainder to
you.
We will allow you the flexibility to pay the Fees in ways other than through a deduction from Your Account consistent with your Client Agreement.
Will the Contract Fee be the same amount from quarter to quarter?
Since the Fee is based on your Guaranteed Lifetime Withdrawal Base at the end of the previous quarter, any time the Guaranteed Lifetime Withdrawal Base increases (via Additional
Deposits or the Annual Benefit Base Review) so does the amount of the Fee for the next quarter. Likewise, any time the Guaranteed Lifetime Withdrawal Base decreases (via Early
Withdrawals or Excess Withdrawals), so does the amount of the Fee for the next quarter. Additionally, if you elect an Annual Benefit Base Review when a higher or lower Contract Fee Percentage is in effect, the dollar amount of your
Contract Fee will increase or decrease accordingly. Thus, the only way the dollar amount of your Contract Fee will remain the same is if your Guaranteed Lifetime Withdrawal Base and the Contract Fee Percentage associated with your
Contract stays the same.
Will advisory and other fees impact the Account Value and the Guarantee under the Contract?
They might. The provisions of your Contract currently allow for a "Withdrawal Exception" whereby withdrawals up to a certain amount can be deducted from Your Account
each calendar quarter to pay for MSSB's advisory and other service fees associated with Your Account without being considered Early Withdrawals/Excess Withdrawals, as applicable. Currently, the maximum amount of the Withdrawal Exception
is a total of 3.00% of Your Account Value each calendar year.
If MSSB's actual fees for advice and other services exceed 3.00% of Your
Account Value, and you withdraw the entire fee amount from Your Account, the amount withdrawn above the 3.00% limit will be considered an Early Withdrawal/Excess Withdrawal, as applicable, and will reduce your Guaranteed Lifetime Withdrawal Base.
This means that if you have not yet reached your Withdrawal Start Date and you exceed the Withdrawal Exception, you will have an Early Withdrawal. If you have reached your Withdrawal Start Date and you exceed the Withdrawal Exception, you
will have an Excess Withdrawal if you also take the full Guaranteed Lifetime Withdrawal Amount for that year. Both Early Withdrawals and Excess Withdrawals reduce your Guaranteed Lifetime Withdrawal Base.
MANAGING WITHDRAWALS FROM YOUR ACCOUNT
There are many factors that will influence your decision of when to take
withdrawals from Your Account and in what amount. No two investors' situations will be exactly the same. You should carefully weigh your decision to take withdrawals from Your Account, the timing of the withdrawals, and the
amounts. You should consult with your Financial Advisor and a tax advisor. In addition to the advice you may receive from your advisor, here are a few things to consider:
First: |
Early Withdrawals and Excess
Withdrawals will reduce your Guaranteed Lifetime Withdrawal Base. The reduction may be substantial, especially if Your Account Value is significantly lower than it was when the Guaranteed Lifetime Withdrawal Base was last computed or
adjusted. |
Second: |
Once you are ready to begin
taking withdrawals of the Guaranteed Lifetime Withdrawal Amount from Your Account, consider setting up a quarterly, monthly or other systematic withdrawal program. Doing so may help limit the risk that you will make an Excess
Withdrawal. |
Third: |
Consider the timing of your
withdrawals. Because your Guaranteed Lifetime Withdrawal Base can increase on your Contract Anniversary via the automatic Annual Benefit Base Review, the higher Your Account Value is on your Contract
Anniversary, the more likely you will be to receive an increase in your Guaranteed Lifetime Withdrawal Base. You might have a higher Guaranteed Lifetime Withdrawal Base if you defer withdrawals until after your Contract
Anniversary. |
Fourth: |
Consider that the longer you wait
to begin taking withdrawals of the Guaranteed Lifetime Withdrawal Amount, the less likely it is that you will receive any Guaranteed Lifetime Income Payments. Taking withdrawals reduces Your Account Value. If you wait to begin
taking withdrawals, you are likely to reach the Minimum Account Value later in your life, and at the same time, your remaining life expectancy will be shorter. |
The treatment of the Contract upon the death of an Annuitant depends on a
number of factors. Those include whether the Contract Owner is a natural or non-natural person, whether there is a Co-Annuitant, and whether the Contract is in the Accumulation or Withdrawal Phase or the Income Phase.
|
|
Annuitant's Death in Accumulation or Withdrawal Phase |
Annuitant's Death in Income Phase |
|
|
|
|
Sole Contract Owner |
Sole Annuitant (no Spousal Continuation Option) |
The Contract terminates and we will make no payments under the Contract. We will return that portion of the current quarter's Contract Fee attributable to the time
period between your death and the end of the current calendar quarter. |
We will calculate the remaining amount of transferred Account Value that has not yet been paid to you in the form of Guaranteed Lifetime Income Payments. We will make
payments to your beneficiary in the same frequency as the Withdrawal Phase in the amount equal to your Guaranteed Lifetime Withdrawals until that amount has been paid. If all remaining transferred Account Value has already been paid to
you at the time of your death in the form of Guaranteed Lifetime Income Payments, we will make no further payments. |
Co-Annuitants (spouses with the Spousal Continuation Option) |
If the Contract Owner/Co-Annuitant of the Contract dies, the Contract will continue with the surviving Co-Annuitant as the sole Contract Owner and sole Annuitant.
|
· If the Contract Owner/Co-Annuitant of the Contract dies, we will continue to make Guaranteed Lifetime
Income Payments to the surviving Contract Owner/Co-Annuitant for the duration of his or her lifetime.
· Upon the surviving Contract Owner/Co-Annuitant's death, we will calculate the remaining amount of transferred Account Value that has not yet been paid in the form of Guaranteed
Lifetime Income Payments. We will make payments to your beneficiary in the same frequency as the Withdrawal Phase in the amount equal to the Guaranteed Lifetime Withdrawals until that amount has been paid. |
|
|
Annuitant's Death in Accumulation or Withdrawal Phase |
Annuitant's Death in Income Phase |
|
|
|
|
Joint Contract Owners (spouses) |
Sole Annuitant (no Spousal Continuation Option) |
If a Joint Owner who is the Annuitant dies, the Contract terminates and we will make no payments under the
Contract. We will return that portion of the current quarter's Contract Fee attributable to the time period between your death and the end of the current calendar quarter. |
If a Joint Owner who is the Annuitant dies, we will calculate the remaining amount of transferred Account Value that has
not yet been paid to you in the form of Guaranteed Lifetime Income Payments. We will make payments to your beneficiary in the same frequency as the Withdrawal Phase in the amount equal to your Guaranteed Lifetime Withdrawals until that
amount has been paid. If all remaining transferred Account Value has already been paid to you at the time of your death in the form of Guaranteed Lifetime Income Payments, we will make no further payments. |
If a Joint Owner who is not the Annuitant dies, the Contract will continue with the surviving Joint Owner/Annuitant as
the sole Contract Owner. |
If a Joint Owner who is not the Annuitant dies, the Contract will continue with the surviving Joint Owner/Annuitant as the sole Contract Owner receiving Guaranteed Lifetime
Income Payments. |
Co-Annuitants (spouses with the Spousal Continuation Option) |
If a Joint Owner/Co-Annuitant dies, the Contract will continue with the surviving Joint Owner/Co-Annuitant as the sole Contract Owner and sole Annuitant.
|
· If a Joint Owner/Co-Annuitant dies, we will continue to make Guaranteed Lifetime Income Payments to the
surviving Joint Owner/Co-Annuitant for the duration of his or her lifetime. · Upon the surviving Joint Owner/Co-Annuitant's death, we will calculate the remaining amount of transferred
Account Value that has not yet been paid in the form of Guaranteed Lifetime Income Payments. We will make payments to your beneficiary in the same frequency as the Withdrawal Phase in the amount equal to the Guaranteed Lifetime
Withdrawals until that amount has been paid. |
MARRIAGE TERMINATION PROVISIONS
In the event of a divorce, dissolution or annulment whose decree or other
agreement affects a Contract, we will require written notice in a manner acceptable to us.
Marriage termination in the Accumulation or Withdrawal
Phases.
If the marriage terminates during the Accumulation or Withdrawal Phase and you did not elect the Spousal Continuation Option:
· |
If you remain the sole owner of Your Account, there will be no change to the
Contract. |
· |
If your former spouse becomes the sole owner of Your Account, the Contract will be
issued as a new Contract, with a new Guaranteed Lifetime Withdrawal Base (calculated as of the date the new Contract is issued) with your former spouse as Contract Owner and Annuitant, and the Contract will terminate upon the death of the
Annuitant. Alternately, the former spouse may elect to terminate the Contract. |
· |
If Your Account is divided between you and your former spouse, the Contract will be
reissued as two Contracts (one to each of the former spouses). The Guarantee will not carry over and a new Guaranteed Lifetime Withdrawal Base will be established based on the value of each new account as of the date the new Contracts are
issued. Each former spouse will be the named Contract Owner and Annuitant of their respective reissued Contract, and each Contract will terminate upon the death of the respective Annuitant. Alternately, each former spouse may
elect to terminate their respective Contract. |
If the marriage terminates during the Accumulation or Withdrawal Phases and
you elected the Spousal Continuation Option:
· |
If Your Account is taken over solely by one of the Joint Owners (the "Receiving
Joint Owner"), the Receiving Joint Owner may elect whether to have the Contract reissued with him/her as the sole Contract Owner and Annuitant, or continue the Contract with both former spouses remaining as Joint Owners and the Receiving Joint Owner
as the annuitant. In either situation, the Contract will terminate upon the death of the Annuitant. Alternately, the Receiving Joint Owner may elect to terminate the Contract. |
· |
If Your Account is divided between the Joint Owners (the former spouses), the
Contract will be reissued as two Contracts (one to each of the former spouses), with the contractual Guarantee divided in proportion to the division of the assets in Your Account and a new Guaranteed Lifetime Withdrawal Base will be established for
each Contract based on the value of each account as of the date the new Contracts are issued. The Joint Owners may remain as Joint Owners on each reissued Contract, with one former spouse named as Annuitant on each of the Contracts, or each may
become the sole Contract Owner and Annuitant on their respective reissued Contract. In either situation, the Contract will terminate upon the death of the Annuitant. Alternately, each former spouse may elect to terminate their
respective Contract. |
Marriage termination in the Income Phase.
If, during the Income Phase, the marriage terminates, the Contract will not be reissued. We will make Guaranteed Lifetime Income Payments to one or more payees as set
forth in the relevant decree, order, or judgment.
Contract Owners should consult with their own advisors to assess the tax
consequences associated with these marriage termination provisions.
SUSPENSION AND TERMINATION PROVISIONS
Suspension and termination provisions only apply during the Accumulation and
Withdrawal Phases of the Contract.
What does it mean to have a suspended
Contract?
Contract suspension will not otherwise change or suspend the calculation of the benefits or charges under your Contract.
If you do not cure the suspension of your Contract, we will terminate your Contract, which will eliminate the Guarantee. You will not receive any benefits of the
Guarantee and will not receive any Guaranteed Lifetime Income Payments from us.
What will cause a Contract to be
suspended?
There are several events that can cause a Contract to be suspended. Some of them are within your control; some are not. We reserve the right to suspend the
Contract if any of the following events occur:
· |
You do not comply with any provision of this prospectus, including, but not limited
to, the requirement that you maintain Your Account at MSSB and invest the assets as required by an Eligible Portfolio or a Former Eligible Portfolio, and the requirement that you execute an agreement that provides for the deduction and remittance of
the Contract Fee; |
· |
Your Account Value falls below the Minimum Account Value; |
· |
MSSB no longer manages any Eligible Portfolios or Former Eligible Portfolios;
or |
· |
You make an Additional Deposit to Your Account when Your Account already exceeds
$2,000,000 in Total Gross Deposits, or you make an Additional Deposit to Your Account that causes Your Account to exceed $2,000,000 in Total Gross Deposits. |
If one of the suspension events occurs, we will provide you with a suspension notice indicating what exactly is triggering the suspension and when the termination will
occur. The purpose of this notice is to give you the opportunity to cure the issue that has triggered the suspension. You will have 45 days to correct the suspension event. If you correct the issue within 45 days in
a manner acceptable to us, the termination will not take effect.
What can be done to take the Contract out of suspension?
The notice will indicate that there is a specific suspension period, during which you will have the ability to preserve the Guarantee associated with your
Contract. The notice will contain a description of one or more actions you can take to take the Contract out of suspension and avoid termination.
If you do not or cannot cure the issue causing the suspension by the end of the suspension period, your Contract will terminate on the date indicated in the notice.
Specific suspension events and their cures.
Your Account Value falls to the Minimum Account Value before the Withdrawal Start Date. If
Your Account Value falls below the Minimum Account Value before your Withdrawal Start Date, your Contract will be suspended. The suspension notification will indicate that you must elect one of three options for the Contract:
1. |
Make Additional Deposits to Your Account to bring Your Account Value above the
Minimum Account Value; |
2. |
Transfer Your Account Value to the Minimum Account Value Eligible
Portfolio. The Minimum Account Value Eligible Portfolio is only available to Contract Owners whose Account Value falls below the Minimum Account Value before the Withdrawal Start Date; or |
3. |
Terminate the Contract. |
If you choose to invest in the Minimum Account Value Eligible Portfolio under these circumstances, Your Account Value must remain allocated to the Minimum Account Value Eligible
Portfolio until your Withdrawal Start Date, at which time Your Account will transition to the Income Phase, as discussed in the "Triggering the Income Phase" section.
The Minimum Account Value Eligible Portfolio currently available with a Contract Fee Percentage of 1.00% is:
Eligible Portfolio |
Target Allocations |
U.S. Equity |
Minimum Account Value Eligible Portfolio |
U.S. Large Cap Value Equity |
U.S. Large Cap Growth Equity |
U.S. Mid Cap Value Equity |
U.S. Mid Cap Growth Equity |
U.S. Small Cap Value Equity |
U.S. Small Cap Growth Equity |
0% |
0% |
0% |
0% |
0% |
0% |
Composition |
International Equity |
U.S. Fixed Income |
International Fixed Income |
Cash |
Developed International Equity |
Emerging Markets Equity |
U.S. Core Fixed Income |
U.S. High Yield Fixed Income |
International Fixed Income |
Cash/U.S. Short Duration Bond |
100%
Fixed |
0% |
0% |
40
- 60% |
0
- 20% |
5
- 25% |
20
- 40% |
Investment Strategy: Fixed Income- An all fixed income model for a most conservative investor that seeks conservative risk investments with minimal
market volatility. In order to accommodate a lower account value, the portfolio is only comprised of exchange traded funds (ETFs) which have lower minimum investment requirements.
Investment Objective: The investment
objective for this Model has a primary emphasis on capital preservation. This Model is classified to have low volatility. It is most suitable for an investor that is comfortable with minimal fluctuations in their portfolio, and the
possibility of larger declines in value, in order to grow their portfolio over time. Investment Risk: Fixed income is historically considered less risky than equities. The Minimum Account Value Eligible Portfolio has 100%
of the assets in fixed income or cash. Therefore, of all of the Eligible Portfolios, this portfolio provides the most conservative investment risk.
Benchmark: 70% BC Aggregate Bond (U.S. Fixed Income)/ 30% 90-Day
T-Bills (Cash) |
For a summary of the asset categories and benchmark indices, please refer
to the Eligible Portfolios summary earlier in the prospectus.
If you do not notify us of your election by the end of the suspension
period, we will assume that you intend to terminate the Contract.
MSSB no longer manages any Eligible Portfolios or Former Eligible Portfolios. If MSSB no longer
manages any Eligible Portfolios or Former Eligible Portfolios, and Nationwide no longer partners with MSSB, we reserve the right to suspend the Contract. The only way to cure this suspension (to preserve your Guarantee under the Contract)
is to transfer Your Account Value to a third party account approved by us or to an annuity contract that we, or one of our affiliates, offer.
Ø |
If you decide to transfer to a third party account approved by us, please keep in
mind the following: |
· |
The charges for those products may be higher than the Contract Fee Percentage
assessed in connection with your Contract; |
· |
You will not be charged any transfer fees by us other than the termination fees
imposed by your custodian consistent with your custodial agreement; and |
· |
The value transferred for the Guarantee will be equal to the Guaranteed Lifetime
Withdrawal Base on the Valuation Day of the transfer (a Valuation Day is any day the New York Stock Exchange is open for trading). |
Ø |
If you decide to transfer Your Account Value to an annuity contract that we, or one
of our affiliates, offer, the amount transferred to the new annuity contract will be equal to the value of Your Account on the Valuation Day of the transfer, and the basis for your Guarantee will be equal to the Guaranteed Lifetime Withdrawal Base
on the Valuation Day of the transfer. |
Ø |
If you choose not to transfer Your Account Value, or fail to transfer Your Account
Value before the end of the suspension period, the Contract and the Guarantee will terminate. |
Additional
Deposits that exceed $2,000,000 in Total Gross Deposits. We must manage the risk that your Guaranteed Lifetime Payments may become too large for us to guarantee. While we do not manage Your Account, we maintain sole
discretion as to how high your Guaranteed Lifetime Withdrawal Base may increase. Therefore, we reserve the right to refuse to accept an Additional Deposit made into Your Account for your Guaranteed Lifetime Withdrawal Base that brings
your Total Gross Deposits above $2,000,000. Our decision to accept your Additional Deposit for your Guaranteed Lifetime Withdrawal Base will be based on one or more factors, including but not limited to: age, spouse age (if applicable),
Annuitant age, state of issue, total Account Value, election of the Spousal Continuation Option, current market conditions, and current hedging costs. All such decisions will be based on internally established actuarial guidelines and
will be applied in a nondiscriminatory manner. Note: If you have more than one MSSB account with this Guarantee, the $2,000,000 limit in Total Gross Deposits applies to
the aggregate account value of Your Accounts.
Since you will not independently be able to make the determination as to
whether an Additional Deposit will be accepted for your Guaranteed Lifetime Withdrawal Base, you and your Financial Advisor should contact the Service Center prior to making any Additional Deposit
that you suspect may exceed $2,000,000 in Total Gross Deposits. We will assist you in determining whether your Additional Deposit will be accepted for your Guaranteed Lifetime Withdrawal Base calculation. This
pre-deposit inquiry prevents an inadvertent suspension of your Contract, because submitting Additional Deposits that exceed the $2,000,000 in Total Gross Deposits limit without Nationwide's prior
approval will suspend your Contact, which could lead to Contract termination.
More specifically, the following scenarios apply to the
Contract:
· |
Pre-Deposit Inquiry. If you
contact us before you submit an Additional Deposit that you know or suspect will exceed the $2,000,000 in Total Gross Deposits limit, we will perform an analysis and make a determination as to whether we will accept the Additional Deposit for your
Guaranteed Lifetime Withdrawal Base. We will notify you of our determination within a reasonable time. |
o |
If we permit the application of all or a portion of an Additional
Deposit to the Guaranteed Lifetime Withdrawal Base calculation, that amount will be reflected in your Guaranteed Lifetime Withdrawal Base at the time you deposit the Additional Deposit to Your Account, provided such deposit is made within 5 days of
our notification of approval and provided that such deposit does not exceed the amount evaluated in the pre-deposit inquiry. If you make such Additional Deposit after the expiration of the permitted time period, or it is for an amount
greater than that submitted in the pre-deposit inquiry, we will treat the Additional Deposit as if no pre-deposit inquiry was made (see "No Pre-Deposit Inquiry" below) and will immediately suspend your Contract. |
o |
If we exercise our right to refuse to accept all or a portion of an
Additional Deposit for the Guaranteed Lifetime Withdrawal Base (and you have not made the Additional Deposit), we will not suspend your Contract. If however, you proceed to make the Additional Deposit after our notification of our refusal
to accept the Additional Deposit for your Guaranteed Lifetime Withdrawal Base, we will treat the Additional Deposit as if no pre-deposit inquiry was made (see "No Pre-Deposit Inquiry" below) and will immediately suspend your Contract.
|
· |
No Pre-Deposit
Inquiry. If you do not contact us before you submit an Additional Deposit that causes Your Account to exceed the $2,000,000 in Total Gross Deposits limit, we will immediately suspend
your Contract. We will notify you of the suspension and the reason for the suspension. Then, we will perform an analysis and make a determination as to whether we will accept the Additional Deposit for your Guaranteed
Lifetime Withdrawal Base. We will notify you of our determination within a reasonable time during the suspension period. Note: In the event of multiple Additional Deposits
that cause Total Gross Deposits to exceed $2,000,000, each deposit will have its own suspension period and review determination. Multiple Additional Deposits will be evaluated in the order they are deposited. |
o |
If we permit the application of all or a portion of an Additional
Deposit to the Guaranteed Lifetime Withdrawal Base calculation, that amount will be reflected in your Guaranteed Lifetime Withdrawal Base as of the date you deposited the Additional Deposit to Your Account and we will immediately remove the
Contract's suspension. We will notify you that the suspension has been removed. |
o |
If we exercise our right to refuse to accept all or a portion of an
Additional Deposit for the Guaranteed Lifetime Withdrawal Base, your Contract will continue to be suspended (as of the date of the Additional Deposit). We will notify you and your Financial Advisor immediately of the Contract's suspended
status and will request that you remove the Additional Deposit(s) from Your Account. The notification will indicate that the Contract will remain suspended until you remove the Additional Deposit(s) that caused your Total Gross Deposits
to exceed $2,000,000 from Your Account, and that if you do not withdraw the necessary amount from Your Account before the end of the suspension period, the Contract will terminate and you will not be
eligible for any of the benefits associated with the Contract. During the suspension period, any withdrawal will not constitute an Early Withdrawal or an Excess Withdrawal. |
What will cause a Contract to be terminated?
If you fail to cure the cause of a Contract suspension within 45 days, your Contract will terminate. We will provide you with a pre-termination notice indicating what
exactly has triggered the termination and when the termination will be effective. The purpose of this pre-termination notice is to give you the opportunity to either cure the issue that has triggered the termination, or to preserve your
Guarantee under the Contract by transferring Your Account Value to a third party account approved by us or to an annuity contract we, or one of our affiliates, offer. If you cure the issue before the termination date in a manner
acceptable to us, the termination will not take effect.
Ø |
If you decide to transfer to a third party account approved by us, please keep in
mind the following: |
· |
The charges for those products may be higher than the Contract Fee Percentage
assessed in connection with your Contract; |
· |
You will not be charged any transfer fees by us other than the termination fees
imposed by your custodian consistent with your custodial agreement; |
· |
The value transferred for the Guarantee will be equal to the Guaranteed Lifetime
Withdrawal Base on the Valuation Day of the transfer. |
Ø |
If you decide to transfer Your Account Value to an annuity contract that we, or one
of our affiliates, offer, the amount transferred to the new annuity contract will be equal to the value of Your Account on the Valuation Day of the transfer, and the basis for your Guarantee will be equal to the Guaranteed Lifetime Withdrawal Base
on the Valuation Day of the transfer. |
If you do not cure the issue within the termination cure period, or if you
fail to transfer Your Account Value before the end of the termination cure period, the Contract and the Guarantee will terminate. If the Contract does terminate, we will provide you with written notification of the Contract's
termination.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based on our understanding of current United
States federal income tax laws. It is a general discussion and does not address all possible circumstances that may be relevant to the tax treatment of a particular Contract Owner. This discussion does not address the tax
treatment of transactions involving the investment assets held in Your Account, except to the extent that they may be affected by ownership of the Contract. This discussion does not address matters relating to federal estate and gift tax
consequences, or state and local income, estate, inheritance, or other tax consequences of ownership of a Contract.
This Contract is a new and innovative product. The IRS has not
yet addressed the tax consequences of ownership of, or distributions from, the Contract (or products similar to the Contract) in any formal ruling or other type of guidance that may be used or cited as precedent. It is possible that the
IRS could attempt to apply rules different than the ones described below to the taxation of the distributions from the Contract and/or for transactions taking place within Your Account.
The Contract is in form an annuity contract, and we intend to treat the Contract as an annuity for federal income tax purposes. The Contract will be paid for by
periodic payments to Nationwide in exchange for a promise to make periodic payments upon the occurrence of certain events, which payments will cease upon death, with the express purpose of providing long-term income
security. Consequently, we intend to report taxable income under the Contract to you consistent with the rules applicable to annuity contracts, and the payments will be treated as being annuity payments made after the annuity starting
date. We can give no assurances that the IRS will agree with our interpretation regarding the proper tax treatment of the Contract, or the tax implications to the investments in Your Account that may arise by reason of the Contract, or
that a Court would agree with our interpretation if the IRS were to challenge such tax treatments.
Except as provided in the
"Death Provisions" section above, we will make no Guaranteed Lifetime Income Payments to your beneficiary. We will not return any fees except for the portion of the current
quarter's Fees paid in advance.
Because this is a new and innovative product, there are no binding
authorities directly addressing the taxation of distributions from the Contract, or how ownership of the Contract may affect the taxation of transactions within Your Account. Any relevant authorities are susceptible to numerous
interpretations, some of which may cause the IRS to disagree with our interpretations. If the IRS were to successfully challenge the tax treatment described herein, it could have a material and adverse effect on the tax consequences of
the acquisition, owning, and disposition of investments in Your Account. In addition, it is possible that, due to changes in your circumstances in future years, the tax consequences under the qualified dividend and straddle rule could
change. For example, losses may be realized when it has become likely that the value of Your Account has been reduced to the greater of $10,000 or your Guaranteed Lifetime Withdrawal Amount. You should consult with your own tax
advisors regarding the potential tax implications of purchasing and/or owning a Contract, based on your individual circumstances.
Tax consequences with respect to Your Account and/or your Contract may also be adversely affected by future changes in the tax law.
The IRS addressed arrangements that are similar to the Contract in Private Letter Rulings 200939018, 200949007, 200949036, 201001016, and 201105004. Pursuant to
§6110(k)(3) of the Internal Revenue Code, private letter rulings may not be used or cited as precedent, and therefore cannot be relied upon as authoritative rulings by the IRS. With respect to the arrangements described in those
private letter rulings, the IRS concluded that: (a) the annuity contract would be treated as an annuity within the meaning of §72 of the Internal Revenue Code; (b) the annuity would not create a right of reimbursement for losses
realized on account assets for purposes of §165 and therefore would not prevent a current deduction for such losses; (c) the annuity would not be treated as diminishing the account owner's risk of loss on account assets for purposes of applying
the holding period requirements of §1(h)(11); and (d) the annuity contract and the account assets would not, either at the time of the issuance of the contract or subsequently, be viewed as components of a straddle within the meaning of
§1092.
THE FOLLOWING GENERAL DISCUSSION IS BASED ON THE ASSUMPTION THAT THE CONTRACT WILL BE TREATED AS AN ANNUITY FOR INCOME TAX PURPOSES.
Taxation of Distributions from the Contract.
If and when you begin the Income Phase, any Guaranteed Lifetime Income Payments made from the Contract are expected to be substantially equal periodic payments, paid no less
frequently than annually, and are to be paid while the Annuitant is living (or, if the Spousal Continuation Option is elected, while either Co-Annuitant is living), and will terminate upon the death of the Annuitant (or, if the Spousal Continuation
Option is elected, upon the death of the surviving Co-Annuitant). For federal income tax purposes, Guaranteed Lifetime Income Payments should be treated as amounts received as an annuity, and should be taxed in accordance with the rules
applicable to annuity payments. As amounts received as an annuity, the portion of these payments that is allocable to income should be taxable to you as ordinary income, and the portion of the payments that is allocable to your after tax
payments of premiums for the Contract, or basis, should be treated as the nontaxable return of basis. The amount excludable from each Guaranteed Lifetime Withdrawal in the Income Phase will be determined by the following calculation:
Excludable Amount |
= |
Guaranteed Lifetime
Withdrawal |
X
|
Contract Owner's investment in the Contract |
the expected total amount of Guaranteed
Lifetime Income Payments over the life of the Contract* |
*The "expected total amount of the Guaranteed Lifetime Income Payments over
the life of the Contract" is equal to the amount of one Guaranteed Lifetime Withdrawal payment multiplied by a factor that is determined by your life expectancy. The life expectancy factor tables appear in Treasury Regulation
1.72-9.
The maximum amount excludable from income is the investment in the Contract; once the entire after-tax investment in the Contract is recovered, all Guaranteed Lifetime Income
Payments would be fully includable in income. If payments cease by reason of the death of an Annuitant before the after-tax basis has been fully recovered through Guaranteed Lifetime Income Payments, such unrecovered amounts should be
allowable as an income tax deduction in the Contract Owner's last taxable year.
We anticipate that the investment in the Contract will be equal to all amounts paid to us from Your Account. However, it is possible that the IRS could take the
position that a portion or all of such payments are nondeductible expenses that are not includible in your investment in the Contract.
Taxation of Eligible Portfolios or Former Eligible Portfolios that are not held by an Individual Retirement Account.
We believe that in both form and substance the Contract is an annuity for income tax purposes and should be taxed in accordance with the rules applicable to
annuities. Similarly, we believe that transactions (such as sales, redemptions, exchanges, distributions, etc.) involving the investments in the Eligible Portfolios or Former Eligible Portfolios should receive the same income tax
treatment as would be accorded them in the absence of the Contract. The taxation of such transactions is outside the scope of this prospectus, and you should consult with your advisors regarding any matters relating to transactions within
Your Account.
The sale of any assets in Your Account in order to pay the Contract Fee for your Contract will be a taxable event, in the same manner as if the assets were
sold for any other purpose. Payments of the Contract Fee for your Contract are not on a tax-free basis and are not deductible.
Although the question is not completely free of doubt, we believe that the Eligible Portfolios or Former Eligible Portfolios will not be subject to the "straddle" rules by reason
of owning the Contract. The IRS defines straddle as offsetting positions in actively traded personal property. Positions are considered "offsetting" if holding one position substantially diminishes the risk of loss on another position
held by a taxpayer. If the straddle rules were to apply to the Eligible Portfolios or Former Eligible Portfolios, the holding period for determining whether the sale of an asset qualifies for long-term capital gain treatment would be
suspended, and recognition of losses from the sale of investments could be deferred. To date, there have been no binding published authorities on this matter, and the IRS may seek to impose the straddle tax rules to your Eligible
Portfolio or Former Eligible Portfolio, which could result in adverse tax consequences (such as the deferral of the income tax deduction for losses incurred in Your Account) to you.
Additional Medicare Tax.
The 2010 Health Care Act added Section 1411 to the Code, which imposes an
additional tax of 3.8% on certain unearned income of individuals, trusts and estates, for tax years commencing after December 31, 2012. The additional tax will apply to the lesser of (a) the taxpayer’s net investment income and (b)
the excess of the taxpayer’s modified adjusted gross income over a threshold amount (the threshold amount is $250,000 in the case of a joint return or surviving spouse; $125,000 in the case of a married individual filing a separate return; and
$200,000 in any other case). “Net investment income” is equal to the sum of (i) gross income from interest, dividends, annuities, royalties, and rents (other than income derived from any trade or business to which the tax does not
apply), (ii) other gross income derived from any business to which the tax applies, and (iii) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or
business to which the tax does not apply, less (iv) deductions properly allocable to such income. Although no official guidance has been provided, it appears that any amounts that are treatable as taxable distributions when they are paid
from an annuity contract would be included in the computation of net investment income.
Section 1035 Exchanges.
Although Section 1035 of the Internal Revenue Code provides rules that permit the tax-free exchange of annuity contracts under certain conditions, the Contract does not permit
any such exchanges, either from or into another annuity, except as stated in the "Suspension and Termination Provisions" and "Marriage
Termination Provisions" of this prospectus.
Qualified Retirement Plans: Individual Retirement
Accounts.
The Contract is not offered as an Individual Retirement Annuity described in Section 408(b) of the Internal Revenue Code; however, it may be issued to the trustee or custodian of
an IRA described in Section 408(a) of the Internal Revenue Code. The Contract is not issued to employer sponsored qualified retirement plans described in section 401 of the Internal Revenue Code, or as a tax sheltered annuity described in
Section 403(b) of the Internal Revenue Code.
If the Contract is purchased inside an IRA, then the beneficial owner of
the IRA must be an Annuitant under the Contract. Payments from the Contract will be made to the IRA. Income received by an IRA is generally received by it tax free, whereas distributions from the IRA are generally treated as
ordinary income (or, in the case of certain distributions from Roth IRAs, as nontaxable income). For questions regarding tax matters related to your IRA, including matters relating to the taxation of distributions and required minimum
distributions, please refer to the information provided to you by the custodian or trustee of the IRA.
We have made no determination as to whether this Contract complies with the
terms, conditions and requirements of, or applicable law governing, an IRA. It is your responsibility to determine such compliance matters.
We are not responsible for administering any legal or tax requirements applicable to your IRA, including but not limited to determining the timing and amount of any distributions
that may be required, designation of beneficiaries, etc. You or your service provider are responsible for all such matters.
The value of your Contract may be required to be considered in determining the amount of the required distributions from your IRA. We will provide a value of the
Contract to your custodian or trustee upon request, but will not determine the total required minimum distribution amount that your IRA will be required to make.
You should consult your plan description and with your custodian or trustee to determine the income tax consequences with respect to contributions to, ownership of, and
distributions from, your IRA.
Income Tax Withholding.
Distributions of income from the Contract are subject to federal income tax. We will withhold the tax from the distributions unless you request
otherwise. However, under some circumstances, the Internal Revenue Code will not permit you to waive withholding. Such circumstances include:
· |
if you do not provide us with a taxpayer identification number; or
|
· |
if we receive notice from the Internal Revenue Service that the taxpayer
identification number furnished by you is incorrect. |
If you are prohibited from waiving withholding, as described above, the
distribution will be subject to mandatory back-up withholding. The mandatory back-up withholding rate is established by Section 3406 of the Internal Revenue Code and is applied against the amount of income that is
distributed.
State and Local Tax Considerations.
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. Prospective purchasers of the Contract should consult a financial consultant, tax advisor or legal counsel to discuss any state or local taxation
questions.
Non-Resident Aliens.
Generally, income that is payable to a non-resident alien is subject to
federal income tax at a rate of 30%. We are 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:
· |
Provide us with a properly completed withholding contract claiming the treaty
benefit of a lower tax rate or exemption from tax; and |
· |
Provide us with an individual taxpayer identification number. |
If the non-resident alien does not meet the above conditions, we will withhold 30% of income from the distribution.
Exemption from the 30% withholding is also potentially available for a non-resident alien if the following is provided:
· |
sufficient evidence that the distribution is connected to the non-resident alien's
conduct of business in the United States; |
· |
sufficient evidence that the distribution is includable in the
non-resident alien's gross income for United States federal income tax purposes; and |
· |
a properly completed withholding contract claiming the exemption. |
Note that for the preceding exemption, the distributions would be subject to the same withholding rules that are applicable to payments to United States persons, including
back-up withholding, which is currently at a rate of 28% if a correct taxpayer identification number is not provided.
Payment of Advisory or Service Fees.
Payment of Advisory or Service Fees in excess of 3.00% of Your Account Value will reduce the Guaranteed Lifetime Withdrawal Base
and Guaranteed Lifetime Withdrawals under the Contract. The Withdrawal Exception differs from your Maximum Contract Fee Percentage because the 3% Withdrawal Exception is based on Account Value, while your Maximum Contract Fee
Percentage is based on your Guaranteed Lifetime Withdrawal Base. If you pay advisory or service fees for a Contract issued to your IRA from other assets in your IRA, that payment will not be a "distribution" from your IRA under the
Internal Revenue Code. If you pay advisory or service fees for a Contract issued to your IRA from other assets held outside your IRA, these fees would generally be treated as an additional contribution to your IRA, would be subject to all
of the restrictions and limitations that any other contribution to an IRA would be subject to and, depending on your individual circumstances, may not be a permissible contribution. Such payment may also have other tax consequences to
you, and you should consult a tax advisor for further information.
Seek Tax Advice.
The above description of federal income tax consequences of the different
types of IRAs which may hold a Contract offered by this prospectus is only a brief summary meant to alert you to the issues and is not intended as tax advice. Anything less than full compliance with the applicable rules, all of which are
subject to change, may have adverse tax consequences. Any person considering the purchase of a Contract in connection with an IRA should first consult a qualified tax advisor with regard to the suitability of a Contract for the
IRA.
We can provide no assurances, in the event the Internal Revenue Service was to challenge the foregoing treatment that a court would agree with the foregoing interpretations of
the law. You should consult with your independent tax and legal advisors before purchasing the Contract.
Ownership of the Contract.
If you and any joint Contract Owner are individuals, each Owner is required to be named as a Contract Owner. If the Owner is a trust or other non-natural person, an
individual must be named as Annuitant.
Periodic communications to Contract
Owners.
Statements regarding Your Account will be provided to you periodically by your Financial Advisor, or a designated third party.
During the Accumulation and Withdrawal Phases, we will send you and your Financial Advisor an annual statement. You and your Financial Advisor will receive automatic
confirmation statements containing information about any change in your Guaranteed Lifetime Withdrawal Base, and you may receive these confirmation statements more frequently than annually at no additional charge. For more information,
please contact the Service Center.
Amendments to the Contract.
Changes in the Contract may need to be approved by the state insurance departments. The consent of the Contract Owner to an amendment will be obtained to the extent
required by law.
Assignment.
You may not assign your interest in the Contract during the Accumulation or
Withdrawal Phase. You may not assign your interest in the Contract during the Income Phase without Nationwide’s prior approval.
Misstatements.
If the age of the Annuitant or any Co-Annuitant is misstated, any Contract
benefits will be re-determined using the correct age(s). If any overpayments have been made, future payments will be adjusted. Any underpayments will be paid in full.
DISTRIBUTION (MARKETING) OF THE CONTRACT
Nationwide Investment Services Corporation ("NISC") acts as the national
distributor of the Contracts sold through this prospectus. NISC is registered as a broker-dealer under the Securities Exchange Act of 1934 ("1934 Act") and is a member of the Financial Industry Regulatory Authority
("FINRA"). NISC's address is One Nationwide Plaza, Columbus, Ohio 43215. In Michigan only, NISC refers to Nationwide Investment Svcs. Corporation. NISC is a wholly owned subsidiary of Nationwide. We do not
pay commissions to NISC or to unaffiliated broker-dealers for the promotion and sale of the Contracts.
NISC does not sell Contracts directly to purchasers. Contracts
sold through this prospectus can be purchased through registered representatives, appointed by Nationwide, of FINRA broker-dealer member firms. NISC has entered into a selling agreement with MSSB to sell the Contracts through their
registered representatives. Their registered representatives are licensed as insurance agents by applicable state insurance authorities and appointed as agents of Nationwide in order to sell the Contracts. Nationwide offers
these Contracts on a continuous basis; however no broker- dealer is obligated to sell any particular amount of Contracts. For limited periods of time, Nationwide may pay additional compensation to broker-dealers as part of special sales
promotions. Regardless of any amount paid or received by Nationwide, the amount of expenses you pay under the Contract will not vary because of such payments to or from such selling firms. Nationwide will not pass sales
expenses through to the Contract Owner.
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Contracts described in this prospectus and the organization of Nationwide, its authority to issue the Contracts under Ohio law, and the validity of the Contracts under Ohio law have been passed on by Nationwide's Office of
General Counsel.
Nationwide is a stock life insurance company organized under Ohio law in
March 1929, with its Home Office at One Nationwide Plaza, Columbus, Ohio 43215. Nationwide is a provider of life insurance, annuities and retirement products. It is admitted to do business in all states, the District of
Columbia and Puerto Rico.
Nationwide is a member of the Nationwide group of companies. Nationwide Mutual Insurance Company and Nationwide Mutual Fire Insurance Company (the "Companies") are the
ultimate controlling persons of the Nationwide group of companies. The Companies were organized under Ohio law in December 1925 and 1933 respectively. The Companies engage in a general insurance and reinsurance business, except
life insurance.
Nationwide is relying on the exemption provided by Rule 12h-7 under the 1934 Act. In reliance on that exemption, Nationwide does not file periodic reports that would
be otherwise required under the 1934 Act.
You can request additional information about Nationwide by contacting the
Service Center.
CONTACTING THE SERVICE CENTER
All inquiries, paperwork, information requests, service requests, and transaction requests should be made to the Service Center:
· |
by telephone at 1-800-848-6331 (TDD 1-800-238-3035) |
· |
by mail to P.O. Box 182021, Columbus, Ohio 43218-2021. |
Nationwide may be required to provide information about your contract to government regulators. If mandated under applicable law, Nationwide may be required to reject
a purchase payment and to refuse to process transaction requests for transfers, withdrawals, loans, and/or death benefits until instructed otherwise by the appropriate regulator.
Nationwide will use reasonable procedures to confirm that instructions are genuine and will not be liable for following instructions that it reasonably determined to be
genuine. Nationwide may record telephone requests. Telephone and computer systems may not always be available. Any telephone system or computer, whether yours or Nationwide's, can experience outages or slowdowns for
a variety of reasons. The outages or slowdowns could prevent or delay processing. Although Nationwide has taken precautions to support heavy use, it is still possible to incur an outage or delay. To avoid technical
difficulties, submit transaction requests by mail.
The consolidated financial statements and schedules of Nationwide Life
Insurance Company and subsidiaries as of December 31, 2011 and 2010, and for each of the years in the three-year period ended December 31, 2011, have been included herein in reliance upon the report of KPMG LLP, independent registered public
accounting firm, and upon the authority of said firm as experts in accounting and auditing. KPMG LLP is located at 191 West Nationwide Blvd., Columbus, Ohio 43215.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to directors, officers and controlling persons of Nationwide pursuant to the foregoing provisions, or otherwise, Nationwide has been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
Nationwide will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
1933 Act and will be governed by the final adjudication of such issue.
|
Accumulation Phase- The phase of the Contract from the time the Contract is issued until the
Withdrawal Phase. |
|
Account Value- The value of the assets in Your Account, as determined as of the close of
business on a Valuation Day. |
|
Additional Deposit(s)- Payments applied to Your Account after the Contract is
issued. |
|
Annuitant- The person whose life span is used to measure the Guarantee during the
Accumulation, Withdrawal and Income Phases under the Contract. |
Annuity- The supplemental immediate fixed income annuity contract issued to you when you begin the Income Phase of the Contract.
|
Annuity Commencement Date- The date the Annuity is issued. |
|
Client Agreement- The agreement you sign that authorizes MSSB and the Overlay Manager to
provide the specified services to you regarding Your Account. |
|
Co-Annuitant- If the Contract is jointly owned and you elect the Spousal Continuation Option,
you must name a spouse as Co-Annuitant, which is the second person whose life span is used to measure the Guarantee during the Accumulation, Withdrawal and Income Phases under the Contract. |
|
Contract- The Guarantee and supplemental immediate fixed income annuity issued by Nationwide,
including any endorsements or riders. |
|
Contract Anniversary- The
anniversary of the date we issue your Contract. |
|
Contract Fee or Fee- The fee that is assessed quarterly from Your Account during the
Accumulation Phase and Withdrawal Phase and remitted to us by MSSB. |
|
Contract Fee Percentage-The percentage that is multiplied by your Guaranteed Lifetime
Withdrawal Base to determine your Contract Fee. |
|
Contract Owner or you- The person, entity and/or Joint Owner that maintains all rights under
the Contract, including the right to direct who receives Guaranteed Lifetime Income Payments. |
|
Contract Year- The one-year period starting on the date we issue the Contract and each
Contract Anniversary thereafter. |
|
Early Withdrawal- Any withdrawal you take from Your Account prior to the Withdrawal Start
Date. |
|
Excess Withdrawal- The portion of a withdrawal taken after the Withdrawal Start Date that is
in excess of the Guaranteed Lifetime Withdrawal Amount. |
|
General Account- An account that includes Nationwide's assets, which are available to our
creditors. |
|
Guarantee- Our obligation to pay you Guaranteed Lifetime Income Payments for the rest of your
life, provided that you comply with the terms of the Contract. |
|
Guaranteed Lifetime Income Payments- Payments you receive during the Income Phase from
Nationwide. |
|
Guaranteed Lifetime Withdrawals- Withdrawals you make after the Withdrawal Start Date during
the Withdrawal Phase. The amount of each Guaranteed Lifetime Withdrawal will be equal to your most recent Guaranteed Lifetime Withdrawal Amount. |
|
Guaranteed Lifetime Withdrawal Amount- The amount that you can withdraw from Your Account
each calendar year during the Withdrawal Phase without reducing your Guaranteed Lifetime Withdrawal Base. This amount is non-cumulative, meaning that withdrawals not taken cannot
be carried over from one year to the next. |
|
Guaranteed Lifetime Withdrawal Base- The amount multiplied by the Guaranteed Lifetime
Withdrawal Percentage to determine the Guaranteed Lifetime Withdrawal Amount. The Guaranteed Lifetime Withdrawal Base may increase or decrease, as described in this prospectus. |
|
Guaranteed Lifetime Withdrawal Percentage- The percentage multiplied by the Guaranteed
Lifetime Withdrawal Base to determine the Guaranteed Lifetime Withdrawal Amount, and varies based on age and the time of the withdrawal. |
|
Income Phase- The phase of the Contract during which we are obligated to make Guaranteed
Lifetime Income Payments to the Annuitant. |
|
Individual Retirement Account or IRA- An account that qualifies for favorable tax treatment
under Section 408(a) of the Internal Revenue Code, but does not include Roth IRAs. |
|
Joint Owner- One of two Contract Owners, each of which owns an undivided interest in the
Contract. Joint Owners must be spouses as recognized under applicable federal law. |
|
MSSB- Morgan Stanley Smith Barney, LLC, its affiliates, or any successors. |
|
Nationwide, we or us- Nationwide Life Insurance Company. |
|
Non-Qualified Contract- A Contract that does not qualify for favorable tax treatment under
the Internal Revenue Code as an IRA, Roth IRA, SEP IRA, or Simple IRA. |
Roth IRA- An account that qualifies for favorable tax treatment under Section 408A of the Internal Revenue Code.
|
SEC or Commission- Securities and Exchange Commission. |
|
SEP IRA- An account that qualifies for favorable tax treatment under Section 408(k) of the
Internal Revenue Code. |
Service Center- The department of Nationwide responsible for receiving all service and transaction requests relating to the
contract. For
service and transaction requests
submitted other than by telephone (including fax requests), the Service Center is Nationwide's mail and document processing facility. For service and transaction requests communicated by telephone, the Service Center is Nationwide's
operations processing facility. Information on how to contact the Service Center is in the "Contacting the Service Center" provision.
|
Simple IRA- An account that qualifies for favorable tax treatment under Section 408(p) of the
Internal Revenue Code. |
|
Total Gross Deposits- The total of all deposits, including your initial deposit and excluding
any withdrawals, made into Your Account. |
|
Valuation Date or Day- Each day the New York Stock Exchange is open for
business. The value of Your Account is determined at the end of each Valuation Date, which is generally at 4:00 pm EST, but may be earlier on certain days when the New York Stock Exchange is closed early. |
|
Withdrawal Phase- The phase of the Contract during which you take Guaranteed Lifetime
Withdrawals from Your Account. |
|
Withdrawal Start Date- The date we receive at the Service Center your completed Withdrawal
Phase election form indicating your eligibility (and the Co-Annuitant's eligibility, if applicable) and desire to enter the Withdrawal Phase and begin taking annual withdrawals of the Guaranteed Lifetime Withdrawal Amount from Your
Account. |
|
You- In this prospectus, "you" means the Contract Owner and/or Joint Owners.
|
|
Your Account- The Select UMA account you own. |
APPENDIX A
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
2011 Form S-1 MD&A and Consolidated Financial Statements
BUSINESS
Overview
Nationwide Life Insurance Company (NLIC, or collectively with its subsidiaries, the Company) was incorporated in 1929 and is an Ohio domiciled stock life insurance
company. The Company is a member of the Nationwide group of companies (Nationwide), which is comprised of Nationwide Mutual Insurance Company (NMIC) and all of its subsidiaries and affiliates.
All of the outstanding shares of NLIC’s common stock are owned by Nationwide Financial Services, Inc. (NFS), a holding company formed by Nationwide Corporation (Nationwide
Corp.), a majority-owned subsidiary of NMIC.
Wholly-owned subsidiaries of NLIC as of December
31, 2011 include Nationwide Life and Annuity Insurance Company (NLAIC) and Nationwide Investment Services Corporation (NISC). NLAIC offers individual annuity contracts, universal life insurance, variable universal life insurance and
corporate-owned life insurance (COLI) on a non-participating basis. NISC is a registered broker-dealer.
The Company is a leading provider of long-term
savings and retirement products in the United States of America (U.S.). The Company develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, investment products sold
to institutions, life insurance and investment advisory services.
On December 31, 2009, NLIC merged with an
affiliate, Nationwide Life Insurance Company of America and subsidiaries (NLICA), with NLIC as the surviving entity. In addition, NLIC’s subsidiary, NLAIC, merged with a subsidiary of NLICA, Nationwide Life and Annuity Company of
America (NLACA), effective as of December 31, 2009, with NLAIC as the surviving entity. The mergers were completed to streamline the enterprise's capital structure and create operational efficiencies.
Business Segments
Management views the Company’s business
primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.
The primary segment profitability measure that management uses is pre-tax operating earnings (loss), which is calculated by adjusting income (loss) from continuing operations
before federal income tax expense (benefit) to exclude: (1) net realized investment gains and losses, except for operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting
treatment, trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on guaranteed minimum death benefit (GMDB) contracts and securitizations); (2) other-than-temporary
impairment losses; (3) the adjustment to amortization of deferred policy acquisition costs (DAC) related to net realized investment gains and losses; and (4) net losses attributable to noncontrolling interest.
The following table summarizes pre-tax operating earnings (loss) by segment for the years ended December 31:
(in millions) |
|
|
|
|
2011 |
|
2010 |
2009 |
|
|
|
|
|
|
|
|
|
Individual
Investments |
|
|
|
|
$ 354 |
|
$
185 |
$
288 |
Retirement
Plans |
|
|
|
|
$ 193 |
|
$
192 |
$
136 |
Individual
Protection |
|
|
|
|
$ 300 |
|
$
261 |
$
192 |
Corporate and Other |
|
|
|
|
$ (54) |
|
$ (36) |
$ (4) |
Individual
Investments
The Individual Investments segment consists of individual annuity products marketed under the Nationwide DestinationSM and other Nationwide-specific or private label brands. Nationwide offers a wide array of annuity products including deferred variable annuities, deferred fixed
annuities, immediate annuities, as well as newer and more innovative products such as portfolio income insurance. Deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options
including lump sum, systematic withdrawal or a stream of payments for life. In addition, deferred variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while
deferred fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods. Immediate annuities differ from deferred annuities in that the initial premium is exchanged for a stream of
income for a certain period or for the owner’s lifetime. The majority of assets and recent sales for the Individual Investments segment consist of deferred variable annuities.
The following table summarizes selected financial data for the Company’s Individual Investments segment for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
Total
revenues |
$ 1,483 |
|
$
1,342 |
|
$
1,107 |
Account values as of year end |
$ 52,733 |
|
$ 49,211 |
|
$ 44,411 |
Retirement
Plans
The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector primarily includes Internal
Revenue Code (IRC) Section 401 business, and the public sector primarily includes IRC Section 457 and Section 401(a) business, both in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as
well as administration-only business.
The following table summarizes selected financial
data for the Company’s Retirement Plans segment for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
Total
revenues |
$ 811 |
|
$
789 |
|
$
772 |
Account values as of year end |
$ 24,871 |
|
$ 25,208 |
|
$ 24,133 |
Individual
Protection
The Individual Protection segment consists of life insurance products, including individual variable, COLI and bank-owned life insurance (BOLI) products; traditional life
insurance products; and universal life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.
The following table summarizes selected financial data for the Company’s Individual Protection segment for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
Total
revenues |
$ 1,459 |
|
$
1,437 |
|
$
1,405 |
Life
insurance policy reserves as of year end |
$ 20,928 |
|
$
20,628 |
|
$
19,175 |
Life insurance in force as of year end |
$ 148,930 |
|
$ 144,175 |
|
$ 132,357 |
Corporate
and Other
The Corporate and Other segment includes the medium-term note (MTN) program; non-operating realized gains and losses and related amortization, including mark-to-market
adjustments on embedded derivatives, net of economic hedges, related to products with living benefits included in the Individual Investments segment; other-than-temporary impairment losses; and other revenues and expenses not allocated to other
segments.
The following table summarizes selected financial data for the Company’s Corporate and Other segment for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
Operating
revenues |
$ 68 |
|
$
80 |
|
$
145 |
Funding agreements backing MTNs |
$ 292 |
|
$ 799 |
|
$ 1,652 |
Additional information related to the
Company’s business segments is included in Note 19 to the audited consolidated financial statements included in the F pages of this report.
Marketing and
Distribution
The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include
independent broker-dealers and regional firms, financial institutions and wirehouses, pension plan administrators, and life insurance specialists. Representatives of the Company that market products directly to a customer base include
Nationwide Retirement Solutions, Inc. (NRS) and Nationwide Financial Network (NFN) producers, which includes the agency distribution force of the Company’s ultimate majority parent company, NMIC. The Company believes its broad range
of competitive products, strong distributor relationships and diverse distribution network position it to compete effectively in the rapidly growing retirement savings market.
Unaffiliated Distribution
Independent
Broker-Dealers and Regional Firms. The Company sells individual annuities, group retirement plans and life insurance through independent broker-dealers (including brokerage general agencies and producer groups in the Individual
Protection segment) and regional firms in each state and the District of Columbia. The Company believes that it has developed strong broker-dealer relationships based on its diverse product mix, large selection of fund options and
administrative technology. In addition to such relationships, the Company believes its financial strength and the Nationwide brand name are competitive advantages in these distribution channels. The Company regularly seeks to
expand this distribution network.
Financial Institutions and Wirehouses. The Company markets individual variable and fixed annuities (under its
brand names and on a private label basis) and IRC Section 401 plans and life insurance through financial institutions and wirehouses, consisting primarily of banks and their subsidiaries. The Company believes that it has competitive
advantages in this distribution channel, including its expertise in training financial institution personnel to sell annuities and pension products, its breadth of product offerings, its financial strength, the Nationwide brand name, and the ability to offer private label products.
Pension
Plan Administrators. The Company markets group retirement plans organized pursuant to IRC Section 401 and sponsored by employers as part of employee retirement programs through regional pension plan administrators. The Company
also has linked pension plan administrators to the financial planning community to sell group pension products. The Company targets employers with 25 to 2,000 employees because it believes that these plan sponsors tend to require
extensive record-keeping services from pension plan administrators and therefore are more likely to become long-term customers.
Life
Insurance Specialists. The Company markets COLI and BOLI through life insurance specialists, which are firms that specialize in the design, implementation and administration of executive benefit plans.
Affiliated Distribution
NRS.
The Company markets various products and services to the public sector, primarily on a retail basis, through several sales organizations. The Company markets group variable annuities and fixed annuities as well as administration
and record-keeping services to state and local governments for use in their IRC Section 457 and Section 401(a) retirement programs. The Company maintains endorsement arrangements with state and local government entities, including the
National Association of Counties (NACo), The United States Conference of Mayors (USCM) and The International Association of Fire Fighters (IAFF).
NFN
Producers. NFN producers distribute Nationwide life insurance, annuity, mutual fund and group annuity products to individuals through Nationwide exclusive agents and independent agents. Nationwide agents sell
traditional, universal and variable universal life insurance products and individual annuities through the licensed agency distribution force of NMIC. Nationwide agents primarily target the holders of personal automobile and
homeowners’ insurance policies issued by NMIC and affiliated companies.
Reinsurance
The Company follows the industry practice of reinsuring with other companies a portion of its life insurance and annuity risks in order to reduce net liability on individual
risks, to provide protection against large losses and to obtain greater diversification of risks and statutory capital relief. The maximum amount of individual ordinary life insurance retained by the Company on any one life is $10
million. The Company cedes insurance primarily on an automatic basis, whereby risks are ceded to a reinsurer on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a facultative basis,
whereby the reinsurer’s prior approval is required for each risk reinsured.
The Company has entered into reinsurance
contracts with certain unaffiliated reinsurers to cede a portion of its general account life, annuity and health business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid and unpaid claims, and
certain other amounts and totaled $704 million and $739 million as of December 31, 2011 and 2010, respectively. Under the terms of the contracts, specified assets have been placed in trusts as collateral for the recoveries. The
trust assets are invested in investment grade securities, the fair value of which must at all times be greater than or equal to 100% or 102% of the reinsured reserves, as outlined in each of the underlying contracts. Certain portions of
the Company’s variable annuity guaranteed benefit risks are also reinsured. These treaties reduce the Company’s exposure to death benefit and income benefit guarantee risk in the Individual Investments segment. The Company has
no other material reinsurance arrangements with unaffiliated reinsurers.
The Company’s only material reinsurance
agreements with affiliates are the modified coinsurance agreements pursuant to which NLIC ceded to other members of Nationwide all of its accident and health insurance business not ceded to unaffiliated reinsurers, as described in Note 16 to the
audited consolidated financial statements included in the F pages of this report.
Ratings
Ratings with respect to claims-paying ability and financial strength are one factor in establishing the competitive position of insurance companies. These ratings
represent each agency’s opinion of an insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. Such factors are important to policyholders, agents
and intermediaries. They are not evaluations directed toward the protection of investors and are not recommendations to buy, sell or hold securities. Rating agencies utilize quantitative and qualitative analysis, including the
use of key performance indicators, financial and operating ratios and proprietary capital models to establish ratings for the Company and certain subsidiaries. The Company’s ratings are continuously evaluated relative to its
performance as measured using these metrics and the impact that changes in the underlying business in which it is engaged can have on such measures. In an effort to minimize the adverse impact of this risk, the Company maintains regular
communications with the rating agencies, performs evaluations utilizing its own calculations of these key metrics and considers such evaluation in the way it conducts its business.
Ratings are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance products. Rating agencies continually
review the financial performance and condition of insurers, including the Company. Any lowering of the Company’s ratings could have an adverse effect on the Company’s ability to market its products and could increase the rate
of surrender of the Company’s products. Both of these consequences could have an adverse effect on the Company’s liquidity and, under certain circumstances, net income. NLIC and NLAIC each have financial strength
ratings of “A+” (Superior) from A.M. Best Company, Inc. (A.M. Best). Their claims-paying ability/financial strength are rated “A1” (Good) by Moody’s Investors Service, Inc. (Moody’s) and
“A+” (Strong) by Standard & Poor’s Rating Services (S&P). The Company’s financial strength is also reflected in the ratings of its commercial paper, which is rated “AMB-1” by A.M. Best,
“P-1” by Moody’s and “A-1” by S&P.
These ratings are subject to ongoing review by A.M.
Best, Moody’s and S&P, and the maintenance of such ratings cannot be assured. If any rating is reduced from its current level, the Company’s financial position and results of operations could be adversely
affected.
Competition
The Company competes with many other insurers as well as non-insurance financial services companies, some of whom have greater financial resources, offer alternative products
and, with respect to other insurers, have higher ratings than the Company. While no single company dominates the marketplace, many of the Company’s competitors have well-established national reputations and substantially greater
financial resources and market share than the Company. Competition in the Company’s lines of business primarily is based on price, product features, commission structure, perceived financial strength, claims-paying ability, customer
and producer service, and name recognition.
Regulation
Regulation at State Level
NLIC and NLAIC, as with other insurance
companies, are subject to regulation by the states in which they are domiciled and/or transact business. All states have enacted legislation that requires each insurance holding company and each insurance company in an insurance holding
company system to register with the insurance regulatory authority of the insurance company’s state of domicile and annually furnish financial and other information concerning the operations of companies within the holding company system that
materially affect the operations, management or financial condition of the insurers within such system. Under such laws, a state insurance authority usually must approve in advance the direct or indirect acquisition of 10% or more of the
voting securities of an insurance company domiciled in its state.
NLIC and NLAIC are subject to the insurance
holding company laws in the State of Ohio. Under such laws, material transactions within an insurance holding company system affecting insurers must be fair and equitable, and each insurer’s policyholder surplus following any
dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs. The State of Ohio insurance holding company laws also require prior
notice or regulatory approval of the change of control of an insurer or its holding company, material intercorporate transfers of assets within the holding company structure and certain other material transactions involving entities within the
holding company structure.
NLIC and NLAIC are regulated and supervised in the jurisdictions in which they do business. Among other things, states regulate operating licenses; agent licenses;
advertising and marketing practices; the form and content of insurance policies, including pricing; the type and amount of investments; statutory capital requirements; payment of dividends by insurance company subsidiaries; assessments by guaranty
associations; affiliate transactions; and claims practices. The Company cannot predict the effect that any proposed or future legislation may have on the financial condition or results of operations of the Company.
Insurance companies are required to file detailed annual and quarterly statutory 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 regulators 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 restructuring of insurance companies. Changes in
regulations, or in the interpretation of existing laws or regulations, may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the Company’s insurance
subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Company’s financial position or results of operations. Effective with the annual reporting period ending December 31,
2010, the National Association of Insurance Commissioners (NAIC) adopted revisions to the Annual Financial Reporting Model Regulation, or the
Model
Audit
Rule, related to auditor independence, corporate governance and internal control over financial reporting. The adopted revisions require that NLIC and NLAIC each file reports with state insurance departments
regarding management’s assessment of internal controls over financial reporting. The requirements of the revised Model Audit Rule did not impact the Company’s financial position or results of operations.
As part of their routine regulatory oversight process, state insurance departments periodically conduct detailed examinations of the books, records and accounts of insurance
companies domiciled in their states. Such examinations generally are conducted in cooperation with the insurance departments of multiple states under guidelines promulgated by the NAIC. The most recently completed financial
examination of NLIC and NLAIC was conducted by the Ohio Department of Insurance (ODI) for the five-year period ended December 31, 2006 on
behalf of itself and several other states. The examination was completed during the first quarter of 2008 and did not result in any significant issues or adjustments. The ODI has begun an exam of the five- year period ended
December 31, 2011 on behalf of itself and several other states which is expected to be completed in 2013.
State insurance regulatory authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to insurers’ compliance with
applicable insurance laws and regulations. NLIC and NLAIC are currently undergoing regulatory market conduct examinations in five states. NLIC and NLAIC continuously monitor sales, marketing and advertising practices and
related activities of their agents and personnel and provide continuing education and training in an effort to ensure compliance with applicable insurance laws and regulations. There can be no assurance that any non-compliance with such
applicable laws and regulations would not have a material adverse effect on the Company.
In December 2004, the NAIC adopted amendments to
its Producer Licensing Model Act related to disclosure requirements with respect to compensation of insurance producers. The most recent state to adopt compensation disclosure regulation is New York. Effective January 1, 2011, all
insurance producers in New York must provide purchasers with disclosure about the compensation they are paid. Although the Company is not aware of other regulatory or legislative developments or proposals regarding producer compensation
disclosure that would have a material impact on its operations, some states have indicated they will continue to review producer compensation disclosure requirements, and additional changes that could impact the Company are possible.
Federal Initiatives
Although the United States federal government
generally has not directly regulated the insurance business, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expands the federal presence in
insurance oversight. Title V includes two major insurance components: (1) the creation of a
Federal Insurance Office within the Treasury Department with authority to preempt state measures inconsistent with international agreements; and (2) the streamlining of
state-level surplus lines and reinsurance regulation. Other titles under the Dodd-Frank Act that may
impact insurance companies include Title II which provides an orderly liquidation authority relating to certain financial companies in default or in danger of default whose failure and resolution under otherwise applicable guidance would have
serious adverse effects on U.S. financial stability and no private sector alternative is available to prevent default, Title VII which regulates certain over the counter derivatives contracts and the entities that enter into such contracts, and
Title X which regulates consumer financial protection. The Dodd-Frank Act requires implementation by rule-making, which has
started but is far from completion. The effects of the Dodd-Frank Act and regulations thereunder cannot
be predicted. The following is a summary of certain aspects of the Dodd-Frank Act that may affect the
Company. While its primary focus is on the banking sector, the legislation impacts insurers in a number
of ways, including but not limited to:
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Systemic Risk and Reporting.
Under the Dodd-Frank Act, nonbank financial companies, including insurance companies and their holding
companies that the newly-created Financial Stability Oversight Council (FSOC) designates as systemically important will become subject to supervision by the Federal
Reserve Board under heightened prudential standards. Proposed standards include (among
others) risk-based capital requirements, leverage limits, liquidity requirements, risk management requirements, “living will” requirements, limitations on credit exposures, stress testing, early remediation and concentration limits.
Criteria for designating nonbank financial companies as systemically important and the details of the heightened prudential standards and other regulations that will be applicable to such companies have not yet been finalized. The FSOC can also recommend that a financial regulatory agency, including a state insurance regulator, adopt heightened standards with respect to financial activities or practices of
the entities it regulates (regardless of whether such entities have been designated as systemically important) and, if not adopted, such agency must justify such non-adoption. In addition, the new Office of Financial Research and Federal Insurance
Office will collect information from insurers; although they are required to the extent possible to rely upon the reports of existing regulatory authorities. |
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Orderly Liquidation. The Dodd-Frank Act provides that, upon the recommendation
of designated regulatory agencies and a systemic risk determination by the Secretary of the Treasury in consultation with the President of the U.S., a failing financial company can be precluded from ordinary resolution under the Bankruptcy Code or
other bankruptcy and be resolved instead under the orderly liquidation authority provided for in the Dodd-Frank Act, with the Federal Deposit Insurance Corporation (FDIC) acting as receiver. In such case, creditors and other stakeholders in such a
company could be treated less favorably than under the Bankruptcy Code or such other normal bankruptcy regime. Insurance holding companies and their non-insurance company
subsidiaries may be subject to this authority. Insurance companies are generally exempt from the liquidation authority, but the FDIC has “backup authority” to place
an insurance company into orderly liquidation under state law if the state regulator has not done so within 60 days of a systemic risk determination. |
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Liquidation Fund Assessments. The Dodd-Frank Act creates an Orderly
Liquidation Fund to help fund the cost of resolving failing financial companies under the orderly liquidation authority. Such fund would be funded by assessments on
financial companies with $50 billion or more in assets– including, potentially, insurance companies and their holding companies. The size of an entity appears to be a major determinant as to the amount of any assessment, but other non-size risk factors are required to be taken into consideration. For insurance
companies, contributions to state insurance guaranty funds must be considered. |
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The Volcker Rule. The Dodd-Frank Act contains a rule (Volcker Rule) which
restricts the ability of an insured depository institution, any company that controls an insured depository institution, and companies that are affiliated with any such insured depository institution or companies controlling an insured depository
institution, to engage in proprietary trading and sponsor or invest in hedge funds and private equity funds that rely upon certain exemptions from the Investment Company Act of 1940. The Volcker Rule contains, among other exemptions, an
exemption for investment activity of a regulated insurance company or its affiliates solely for the general account of such insurance company if such activity complies with the insurance company investment laws of the state or
jurisdiction in which the company is domiciled and the appropriate federal banking regulators, after consultation with the FSOC and the relevant state insurance commissioners, have not jointly determined that such laws are insufficient to protect
the safety and soundness of the institution or the financial stability of the United States. The Volcker Rule will take effect on July 21, 2012, but entities that are subject to the rule will not be required to bring their activities and investments
into compliance with the rule until July 21, 2014, and certain investments will be permitted to be retained for a longer period of time. As required by the Dodd-Frank Act, in January 2011 the FSOC completed a study regarding
implementation of the Volcker Rule that contained, among other things, recommendations as to how to accommodate the business of insurance within an insurance company. In October 2011, the federal regulators proposed regulations
implementing the statutory requirements of the Volcker Rule. Given the wide ranging request for public comment, it is not possible to assess the impact of the Volcker Rule on the Company and its affiliates, or on their investments or insurance
products, at this time. The comment period closes on March 31, 2012. |
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Bureau of Consumer Financial Protection. The Dodd-Frank Act creates the Bureau
of Consumer Financial Protection as an independent agency within the Federal Reserve with the authority to adopt rules and regulate consumer financial products and services. Insurance products are specifically exempted from the
Bureau’s authority; however because the Bureau only recently commenced operations, effects of the exemption cannot be predicted. |
Many policy questions are yet to be
resolved—as mandatory studies are concluded and released and as the many federal agencies will need to implement the various reforms through rulemakings and other processes.
In view of recent events involving certain financial institutions and the financial markets, it is possible that there could be increased federal oversight responsibilities with
respect to the business of insurance and thus the business of the Company. See also “Risk Factors—The recently enacted
Dodd-Frank Wall Street Reform and Consumer Protection Act and certain other potential changes in federal laws and regulations may adversely affect the Company’s business, results of operations and financial
condition.”
Potential future federal legislation, regulation, administrative policies and court decisions can also significantly
and adversely affect certain areas of the Company’s business, particularly the life insurance and annuity business. In addition to the laws and regulations discussed above, these areas include pension and employee welfare
benefit plan regulation, additional financial services regulation and taxation. For example, the following events
could adversely affect the Company’s business:
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Changes in Employee Retirement Income Security Act of 1974 (ERISA) that impact the sales of group annuities; |
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Changes in tax laws that reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life
insurance products, or that otherwise affect how the benefits provided by life insurance and annuity contracts are taxed; and modification of the federal estate tax. The estate tax was modified in 2010, effective for 2010 through 2012,
and additional modification to this temporary change is expected to occur prior to 2013; |
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Changes in the availability of, or rules concerning the establishment and operation of, 401(k), 403(b) and 457 plans or individual retirement
accounts; or |
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Changes in tax and ERISA regulations, such as the proposed regulations that would alter the manner in which 401(k) plans may be
marketed. |
Regulation of Dividends and Other Payments
The payment of dividends by NLIC is subject to
restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of 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 (1) 10% of statutory-basis policyholders’ surplus as of
the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLIC’s statutory capital and surplus as of December 31, 2011 was $3.6 billion, and statutory net income for the year ended December 31,
2011 was $18 million. During the year ended December 31, 2011, NLIC did not pay dividends to NFS. As of January 1, 2012, NLIC has the ability to pay dividends to NFS totaling $359 million without obtaining prior
approval.
The State of 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 State of Ohio insurance laws as the amount equal to the 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 must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment of dividends
by the Company may also be subject to restrictions set forth in the insurance laws of the state of New York that limit the amount of statutory profits on the Company’s participating policies (measured before dividends to policyholders) that
can inure to the benefit of the Company and its stockholders. The Company currently does not expect such regulatory requirements to impair its ability to pay operating expenses and dividends in the future.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer
solvency, the NAIC has adopted a model law to implement risk-based capital (RBC) requirements for life insurance companies. The requirements are designed to monitor capital adequacy and to raise the level of protection that statutory
surplus provides for policyholders. The model law measures four major areas of risk facing life insurers: (1) the risk of loss from asset defaults and asset value fluctuation; (2) the risk of loss from adverse mortality (the
relative incidence of death in a given time) and morbidity (the relative incidence of disability resulting from disease or physical impairment) experience; (3) the risk of loss from mismatching of asset and liability cash flow due to changing
interest rates; and (4) business risks. Insurers having less statutory surplus than required by the RBC model formula will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.
Based on the formula adopted by the NAIC, the adjusted capital of NLIC and NLAIC as of December 31, 2011 exceeded the levels at which they would be required to take corrective
action.
Assessments Against and Refunds to Insurers
Insurance guaranty association laws exist in
each state, the District of Columbia, Guam, the U.S. Virgin Islands and the Commonwealth of Puerto Rico. Insurers doing business in any of these jurisdictions can be assessed for policyholder losses incurred by insolvent insurance
companies. The amount and timing of any future assessment on or refund to NLIC and its insurance subsidiaries under these laws cannot be reasonably estimated and are beyond the control of NLIC and its insurance subsidiaries. A
large part of the assessments paid by NLIC and its insurance subsidiaries pursuant to these laws may be used as credits for a portion of NLIC and its insurance subsidiaries’ premium taxes. For the years ended December 31, 2011,
2010, and 2009, credits received by the Company were immaterial.
Annuity
Sales Practices
The Company's annuity sales practices are subject
to strict regulation. Any material change to the standards governing the Company's sales practices, including applicable state law and regulations, could affect the Company's business. In 2010, the NAIC amended the Suitability
in Annuity Transactions Model Regulation (SAT) Model. Prior versions of the SAT Model have been adopted in over 40 states. To date, approximately 20 states have adopted regulations that are substantially consistent with the amended 2010
SAT Model or portions thereof and several states have proposed such regulations. The 2010 SAT Model places requirements regarding annuity suitability assessment, supervision and training upon insurance producers and insurance
companies. As adopted in most jurisdictions, it also places ultimate liability upon issuing insurance companies for the suitable sale of all annuity contracts. The additional responsibilities and liabilities established under
the 2010 SAT Model, which the states may choose to model their regulations upon, augment operational and compliance burdens for the Company, and establish heightened risks for issuing insurers related to annuity contract transactions.
Securities Laws
NLIC and NLAIC, and certain policies and contracts offered by these companies, are subject to regulation under the federal securities laws administered by the SEC and under
certain state securities laws. Certain separate accounts of NLIC and NLAIC are registered as investment companies under the Investment Company Act of 1940, as amended (Investment Company Act). Separate account interests under
certain variable annuity contracts and variable insurance policies issued by NLIC and NLAIC are also registered under the Securities Act of 1933, as amended (Securities Act). One affiliate of the Company is registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended (Securities Exchange Act), and is a member of, and subject to regulation by, the Financial Industry Regulatory Authority. NISC, a registered broker-dealer subsidiary of the Company, is
subject to the SEC’s net capital rules.
One affiliate of the Company is an investment
advisor registered under the Investment Advisors Act of 1940, as amended, and the Securities Act. The investment companies managed by this subsidiary are registered with the SEC under the Investment Company Act, and the shares of certain
of these entities are qualified for sale in certain states and the District of Columbia.
All aspects of the investment advisory
activities of NLIC are subject to applicable federal and state laws and regulations in the jurisdictions in which they conduct business. These laws and regulations primarily are intended to benefit investment advisory clients and
investment company shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the transaction of business for failure to comply with such laws and regulations. In such
event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the activities in which the investment advisor may engage, suspension or revocation of the investment advisor’s registration as
an advisor, censure and fines.
ERISA
On December 13, 1993, the U.S. Supreme Court issued
its opinion in John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank, holding that certain assets in excess of amounts necessary to satisfy guaranteed obligations held by Hancock in its general account under a participating
group annuity contract are “plan assets” and therefore subject to certain fiduciary obligations under the ERISA. ERISA requires that fiduciaries perform their duties solely in the interest of ERISA plan participants and
beneficiaries, and with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Court
imposed ERISA fiduciary obligations to the extent that the insurer’s general account is not reserved to pay benefits under guaranteed benefit policies (i.e., benefits whose value would not fluctuate in accordance with the insurer’s
investment experience).
The U.S. Secretary of Labor issued final
regulations on January 5, 2000, providing guidance for determining, in cases where an insurer issues one or more policies backed by the insurer’s general account to or for the benefit of an employee benefit plan, which assets of the insurer
constitute plan assets for purposes of ERISA and the IRC. The regulations apply only with respect to a policy issued by an insurer to an ERISA plan on or before December 31, 1998. In the case of such a policy, most provisions of the
regulations became applicable on July 5, 2001. Generally, where the basis of a claim is that insurance company general account assets constitute plan assets, no person will be liable under ERISA or the IRC for conduct occurring prior to
July 5, 2001. However, certain provisions under the final regulations are applicable as follows: (1) certain contract termination features became applicable on January 5, 2000 if the insurer engages in certain unilateral actions; and (2)
the initial and separate account disclosure provisions became applicable July 5, 2000. New non-guaranteed benefit policies issued after December 31, 1998 subject the issuer to ERISA fiduciary obligations. Since the Company
issues fixed group annuity contracts that are backed by its general account and used to fund employee benefit plans, the Company is subject to these requirements.
Tax
Matters
Life insurance products may be used to provide income tax deferral and income tax free death benefits; annuity contracts may be used to provide income tax
deferral. The value of these benefits is related to the level of income tax and capital gains tax rates. Changes to the income tax rates and the capital gains tax rates can affect the value of these benefits, and therefore the
desirability of those products.
The U.S. Congress periodically has considered possible legislation that, if enacted, could materially reduce or eliminate many of the tax advantages of purchasing and owning
annuity and life insurance products. Recent legislative proposals have included provisions that, if enacted, would (a) disallow a portion of the income tax interest deduction for many businesses that own life insurance; (b) alter the calculation of
a life insurance company’s separate account dividends received deduction (DRD); (c) impose a “financial crisis responsibility fee” on certain insurance companies; and (d) impose additional information reporting requirements with
respect to variable insurance products and resales of
certain life insurance contracts. If
these proposals or others of this type were enacted, the Company’s sale of COLI, variable annuities, and variable life products could be adversely affected.
In addition, the President of the U.S.
has made a proposal to impose a financial services responsibility fee upon depository institution holding companies with $50 billion or more in assets and nonbank financial firms subject to Federal Reserve supervision in order to recoup
government contributions to TARP whether or not the firms applied for or received TARP funding. Likewise, nonfinancial firms that applied for or accepted TARP funding would not be subject to the proposed fee. The financial
services industry remains opposed to the proposal which the Administration first announced in January 2010. Additional changes to the Internal Revenue Code to address the fiscal challenges currently faced by the federal government may
also be made. These changes could include changes to the taxation of life insurance, annuities, mutual funds, retirement savings plans, and other investment alternatives offered by the Company. Such changes could have an adverse impact on
the desirability of the products offered by the Company.
Employees
As of December 31, 2011, the Company had approximately 2,873 employees, none of which were covered by a collective bargaining agreement.
Risk Factors
Adverse capital and credit market conditions may significantly affect the Company’s ability to meet liquidity needs and impact its
capital position.
The capital and credit markets have been experiencing extreme volatility and disruption during the last several years. Recently, the volatility and disruption reached
unprecedented levels. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. While the capital and credit market conditions have improved, continuing market
volatility suggests the markets remain fragile.
The Company needs liquidity to pay its operating
expenses, interest on its debt and to replace certain maturing liabilities. The principal sources of the Company’s liquidity are insurance premiums, annuity considerations, deposit funds, cash flow from its investment portfolio and
assets. The investment portfolio consists mainly of cash or assets that are readily convertible into cash. Sources of liquidity also include a variety of short and long-term instruments, including commercial paper and long-term
debt.
In the event current resources do not satisfy the Company’s needs, the Company may have to seek additional financing. The availability of additional financing
will depend on a variety of factors including market conditions, the availability of credit generally and specifically to the financial services industry, market liquidity, the Company’s credit ratings, as well as the possibility that
customers or lenders could develop a negative perception of the Company’s long- or short-term financial prospects if it incurs large investment losses or if the level of business activity decreases. Similarly, the Company’s access to
funds may be impaired if regulatory authorities or rating agencies take negative actions against it. The Company’s internal sources of liquidity may prove to be insufficient, and in such case, it may not be able to successfully
obtain additional financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the
capital and credit markets may also limit the Company’s access to capital required to operate its business, most significantly its insurance operations. Such market conditions may limit the Company’s ability to:
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replace, in a timely manner, maturing liabilities; |
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satisfy statutory capital requirements; |
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generate fee income and market-related revenue to meet liquidity needs; and |
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access the capital necessary to grow its business. |
As such, the Company may be forced to issue shorter-term securities than it prefers, or bear an unattractive cost of capital, which could decrease the Company’s
profitability and significantly reduce its financial flexibility. The Company’s results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the financial markets.
Continued difficult conditions in the capital markets and the economy may adversely affect the Company’s business, results of
operations, financial condition and liquidity, and these conditions may not improve in the near-future.
The Company’s business, financial condition, results of operations and the valuation and liquidity of some of its investments have been materially affected by conditions in
the domestic and global capital markets and the economy generally, and these conditions may not improve in the near-future. As a result of the recent global financial crisis, the U.S., Europe and Asia entered a deep recession that
persisted through June 2009, despite governmental intervention in the world’s major economies. Although many economists believe the recent recession in the U.S. ended in 2009, the economic recovery has been slow, and the
unemployment rate is expected to remain high for some time. In addition, concerns continue to persist over geopolitical issues, inflation, defaults by certain nations on their sovereign debt, the downgrade by Standard & Poor’s
Ratings Services, a Standard & Poor’s Financial Services LLC business (S&P) of U.S. Treasury securities, the availability and cost of credit, equity markets, the U.S. mortgage market and real estate market in the U.S. Some
economists believe that some level of deflation risk remains in the U.S. economy. These factors have contributed to increased market volatility and diminished expectations for the economy and the markets going forward.
The initial problems arising in 2009 from the sub-prime segment of the residential mortgage-backed securities market spread to a broad range of mortgage- and asset-backed and
other fixed income securities and to a wide range of financial institutions and markets, asset classes and sectors. As a result, the market for fixed income securities experienced decreased liquidity, increased price volatility, credit
downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to sell. In addition, domestic and international equity and credit markets have also experienced increased
volatility and turmoil, with companies, such as the Company, that have exposure to the real estate, mortgage and credit markets particularly affected. These events have had, and may continue to have, an adverse effect on the Company, in
part because it has a large investment portfolio and also because difficult economic factors will adversely affect consumer demand for the Company’s products. The Company’s revenues are likely to decline in such circumstances,
its profit margins could erode and its financial position could be adversely affected.
In addition, regulatory developments relating to
the recent financial crisis may also significantly affect the Company’s operations and prospects in ways that cannot be predicted. U.S. and overseas governmental or regulatory authorities, including the SEC, the Board of Governors of the
Federal Reserve System (the Federal Reserve Board), the Office of the Comptroller of the Currency (OCC) and the National Association of Insurance Commissioners (NAIC), are considering enhanced or new regulatory requirements intended to prevent
future crises or otherwise stabilize the institutions under their supervision. New regulations will likely affect critical matters, including capital requirements, and published proposals by insurance regulatory authorities that could
reduce the pressure on the Company’s capital position may not be adopted or may be adopted in a form that does not afford as much capital relief as anticipated. If the Company fails to manage the impact of these developments
effectively, its prospects, results and financial condition could be materially and adversely affected.
There can be
no assurance that actions of the U.S. government, Federal Reserve Board and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect.
In response to difficult capital markets and economic conditions, the U.S. government, Federal Reserve Board and other governmental regulatory bodies undertook several
initiatives in an attempt to stabilize the capital markets and stimulate economic growth. These initiatives have included the American Recovery and Reinvestment Act of 2009, popularly known as the “stimulus package”; the
Housing and Economic Recovery Act of 2008, which established the HOPE for Homeowners program providing for mortgage assistance for homeowners at risk of foreclosure; the Homeowner Affordability and Stability Plan, a $75.0 billion program intended to
help up to 7 to 9 million homeowners restructure or refinance their mortgages to avoid foreclosure; and the Emergency Economic Stabilization Act of 2008 (EESA). EESA gave the U.S. Treasury the authority to, among other things, purchase up to $700
billion of securities (including newly issued preferred shares and subordinated debt) from financial institutions for the purpose of stabilizing the financial markets. The U.S. government, the Federal Reserve Bank of New York, the Federal
Deposit Insurance Corporation and other governmental and regulatory bodies also took other actions to address the financial crisis, including establishment of the Troubled Asset Relief Program (TARP). In addition to these programs, which
remain effective, federal and state and governments could pass additional legislation responsive to current economic and credit market conditions. The Company did not receive any funds from TARP nor did it materially participate in any
other of the aforementioned programs.
The Company believes that the actions described
above, together with additional actions announced by the U.S. Treasury and other regulatory agencies, have had a positive effect on the financial markets in the short term, but their continuing effectiveness and effect on the financial markets
remain uncertain. There can be no assurances that as these initiatives expire, any comparable legislation will be enacted, or that the U.S. economy will continue to grow without any such additional governmental
support. Further, the recently enacted the Dodd-Frank Act places certain limitations on the ability of the Federal Reserve and other governmental agencies to provide loans and other emergency support to nondepository financial
institutions. The existing levels of volatility and limited availability of credit may continue to affect all financial institutions, including the Company.
The
downgrade of the U.S. Government’s credit rating by S&P could adversely affect the Company.
On August 5, 2011, S&P lowered its long-term
sovereign credit rating on the U.S. from “AAA” to “AA+” and on August 8, 2011 correspondingly lowered its long-term issuer credit ratings and issue ratings on certain government sponsored enterprises (including Fannie Mae and
Freddie Mac), agencies, Federal Home Loan Banks and Federal Farm Credit Banks (among others) from “AAA” to “AA+”. In its press release, S&P expressed that the downgrade reflected its opinion that the budget
plan to which Congress and the Obama administration recently agreed did not accomplish what would be necessary to stabilize the U.S. government’s fiscal position and, more generally, that the effectiveness of U.S. policymaking and political
institutions has proven ineffective at a time of severe fiscal and economic challenges. S&P also commented that the outlook on the U.S. ratings remained negative and further downgrades are possible within the next two years, absent
agreement on proposed spending reductions and other negative trends. Further budget difficulties and any further downgrades by S&P or other Nationally Recognized Statistical Rating Organizations (NRSROs) could have a material adverse
effect on the capital and credit markets and the results of operations, financial condition and cash flows of the Company and its affiliates and subsidiaries as owners of U.S. government and agency securities and otherwise.
The impairment of other financial institutions could adversely affect the Company.
The Company has exposure to many different industries, issuers and counterparties, and routinely executes transactions in the financial services industry, including brokers and
dealers, commercial banks, investment banks, hedge funds, other investment funds and other institutions. Many of these transactions expose the Company to credit risk in the event of default of the counterparty. In
addition, with respect to secured transactions, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or
derivative exposure due to it. The Company also has exposure to these issuers in the form of holdings in unsecured debt instruments, derivative transactions and stock investments of these issuers. There can be no assurance that
any such realized losses or impairments to the carrying value of these assets would not materially and adversely affect the Company’s business, financial position and results of operations.
The Company is exposed to significant financial and capital markets risk (including equity markets risk), which may adversely affect its
access to capital, results of operations, financial condition and liquidity, and the Company’s net investment income can vary from period to period.
The Company is exposed to significant financial and
capital markets risk, including changes in interest rates, credit spreads, equity prices, real estate values, foreign currency exchange rates, domestic and foreign market volatility, the performance of the economy in general, the performance of the
specific obligors included in its portfolio and other factors outside the Company’s control. Such factors and the following economic and interest rate risks could lead to uncertainty or volatility in the capital and credit markets
generally which may limit the Company’s access to capital required to operate its business.
The Company’s exposure to interest rate risk
relates to the market price and cash flow variability associated with changes in interest rates. The Company’s investment portfolio contains interest rate sensitive instruments, such as bonds and derivatives, which may be adversely
impacted by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond its control. The recent financial crisis, and related volatility in equity,
bond and real estate values, may result in a protracted economic slowdown. This may lead to a prolonged deflationary period, accompanied by a sustained period of very low interest rates. U.S. long-term interest rates remain at relatively
low levels by historical standards. During periods of low or declining interest rates, as cash becomes available from premiums on insurance and annuity policies and from the maturity, redemption or sale of existing securities or from
other sources, the yield on the new investments purchased will be lower than that on existing investments, thus lowering the average yield that the Company earns on its investment portfolio. Conversely, inflation may increase and interest
rates may suddenly spike, which could have a material affect on the Company’s results of operations, insofar as inflation may affect interest rates. A rise in interest rates would negatively impact the net unrealized position of the
Company’s investment portfolio, particularly on interest sensitive instruments such as bonds, which typically decrease in value during periods of rising interest rates. Although the Company seeks to carefully measure and manage its
interest rate risk positions, the Company’s estimate of its liability cash flow profile may be inaccurate, and it might need to sell assets during a period of rising or falling interest rates in order to cover any such liability, which could
adversely affect the Company’s financial position and results of operations.
The Company’s exposure to credit spreads
relates primarily to market price and cash flow variability associated with changes in credit spreads. A widening of credit spreads would increase unrealized losses in the investment portfolio and, if issuer credit spreads increase as a
result of fundamental credit deterioration, would likely result in higher other-than-temporary impairments. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturities. In
addition, market volatility can make it difficult to value certain of the Company’s securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period-to-period
changes from market volatility, which could have a material adverse effect on the Company’s results of operations or financial condition. Securities market volatility, changes in interest rates, changes in credit spreads and
defaults, a lack of pricing transparency, market liquidity, declines in equity prices, and the strengthening or weakening of foreign currencies against the U.S. dollar, individually or in tandem, could have a material adverse effect on the
Company’s results of operations, financial condition or cash flows through realized losses, impairments and changes in unrealized positions.
The Company’s exposure to equity risk relates
primarily to the potential for lower earnings associated with certain of the Company’s insurance businesses, such as variable annuities, where fee income is earned based upon the fair value of the assets under management. In
addition, certain of the Company’s annuity products offer guaranteed benefits, which increase the Company’s potential benefit exposure and statutory reserve and capital requirements should equity markets decline, which could deplete
capital. Increased reserve and capital requirements could lead to rating agency downgrades.
The Company’s insurance and investment
products are sensitive to interest rate fluctuations and expose the Company to the risk that falling interest rates or credit spreads will reduce the Company’s margin, or the difference between the returns earned on the investments that
support the obligations under these products and the amounts that must be paid to policyholders and contractholders. Because the Company may reduce the interest rates credited on most of these products only at limited, pre-established
intervals, and because some contracts have guaranteed minimum interest crediting rates, declines in interest rates may adversely affect the profitability of these products.
There may be economic scenarios, including periods of rising interest rates, which could increase life insurance policy loan and surrender and withdrawal activity in a given
period. Such situations could result in cash outflows requiring that the Company sell investments at a time when the prices of those investments are adversely affected, which may result in realized investment
losses. Unanticipated withdrawals and terminations may also cause the Company to accelerate the amortization of deferred acquisition costs (DAC) and/or value of business acquired (VOBA), which reduces net income.
As of December 31, 2011, the Company does not hold any European sovereign debt or material investment exposure in Greece, Ireland, Italy, Portugal or Spain.
Guarantees within certain of the Company’s products that protect policyholders against significant downturns in equity markets may
decrease the Company’s earnings, increase the volatility of its results if hedging or risk management strategies prove ineffective, result in higher hedging costs and expose the Company to increased counterparty risk.
Certain of the Company’s variable annuity products include guaranteed benefits. The Company provides five primary guarantee types of variable annuity contracts: (1)
guaranteed minimum death benefits (GMDB); (2) guaranteed minimum accumulation benefits (GMAB); (3) guaranteed minimum income benefits (GMIB); (4) guaranteed lifetime withdrawal benefits (GLWB); and (5) a hybrid guarantee with GMAB and
GLWB. Periods of significant and sustained downturns in equity markets, increased equity volatility, and/or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance
liabilities associated with such products, resulting in a reduction to net income. The Company uses derivative instruments to attempt to mitigate the liability exposure and the volatility of net income associated with these liabilities, and while
the Company believes that these and other actions have mitigated the risks related to these benefits, the Company remains liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to
pay. In addition, the Company is subject to the risk that hedging and other risk management procedures prove ineffective or that unanticipated policyholder behavior or mortality, combined with adverse market events, produces economic
losses beyond the scope of the risk management techniques employed. These, individually or collectively, may have a material adverse effect on net income, financial condition or liquidity. The company is also subject to the risk that the cost of
hedging these guaranteed minimum benefits increases as implied volatilities increase and/or interest rates decrease, resulting in a reduction to net income.
Some of the
Company’s investments are relatively illiquid and are in asset classes that have been experiencing significant market valuation fluctuations.
The Company holds certain investments that may lack
liquidity, such as certain fixed maturity securities (privately placed bonds and structured securities based upon residential or commercial mortgage loans or trust preferred securities); mortgage loans; policy loans; equity real estate, including
real estate joint ventures; and other limited partnership interests.
If the Company requires significant amounts of cash on short notice in excess of normal cash requirements or is required to post or return collateral in connection with the
investment portfolio, derivatives transactions or securities lending activities, the Company may have difficulty selling these investments in a timely manner, be forced to sell them for less than the Company otherwise would have been able to
realize, or both.
The Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, debt securities in unrealized loss positions that are not
other-than-temporarily impaired before recovery. The Company may realize investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread
environments.
The Company has exposure to mortgage-backed securities, which could cause declines in the value of its investment portfolio.
Securities and other capital markets products connected to residential mortgage lending, particularly those backed by non-agency loans, have become less liquid. Recently, markets
for these securities have been more volatile, especially for investments backed by subprime and Alt-A mortgage loans. The value of the Company’s investments in mortgage-backed securities may be negatively impacted by an unfavorable
change in or increased uncertainty regarding delinquency rates, foreclosures, home prices and refinancing opportunities. Further deterioration in the performance of the residential mortgage sector could cause declines in the value of that portion of
the Company’s investment portfolios.
In addition, other types of mortgage-backed
securities, including commercial mortgage-backed securities, may deteriorate due to prevailing market conditions, and such deterioration could cause declines in the value of the Company’s investment portfolio. Weakness in commercial real
estate fundamentals, along with a decrease in the overall liquidity and availability of capital, has led to a very difficult refinancing environment and an increase in the overall delinquency rates on commercial mortgages in the commercial
mortgage-backed securities market. Difficult conditions in the global financial markets and the overall economic downturn would put additional pressure on these fundamentals through rising vacancies, falling rent rates and falling
property values. The extent and duration of any future market or sector decline are unknown, as is the potential impact of such a decline on the Company’s investment portfolio.
Defaults on commercial mortgage loans and volatility in performance may adversely affect the Company’s results of operations and
financial condition.
Commercial mortgage loans could face heightened delinquency and default risk due to recent economic conditions and the resulting adverse impacts on the obligors of these loans.
In addition, future refinancing risks could be experienced for many commercial mortgage loans. As such, these conditions could lead to declining values on certain of such instruments. The performance of the Company’s commercial mortgage loan
investments, however, may fluctuate in the future. An increase in the default rate of the Company’s commercial mortgage loan investments or a borrower’s inability to refinance or pay off its loan at maturity could have an adverse effect
on its results of operations and financial condition. If these loans are not refinanced or paid in full at maturity, the Company’s mortgage loan investments could be adversely affected. Any geographic or sector concentration of the
Company’s commercial mortgage loans may have adverse effects on its investment portfolios and, consequently, on its results of operations or financial condition. While the Company seeks to mitigate this risk by having a broadly diversified
portfolio, events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on its investment portfolios to the extent that the portfolio is concentrated.
The Company’s investments are reflected within the financial statements utilizing different accounting bases. Accordingly, the
Company may not have recognized differences, which may be significant, between cost and fair value in the Company’s financial statements.
The Company’s investments primarily consist
of fixed maturity and equity securities, short-term investments, mortgage loans, policy loans and alternative investments. On the basis of U.S. generally accepted accounting principles (GAAP), the carrying value of such investments is as
follows:
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Fixed maturity and equity securities are primarily classified as available-for-sale and are reported at their fair value. Unrealized gains and
losses on these securities are recorded as a separate component of other comprehensive income or loss, net of policyholder related amounts and deferred income taxes. |
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Short-term investments include investments with remaining maturities of one year or less at the time of acquisition and are reported at fair
value. |
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Mortgage loans held-for-investment are recorded at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or
expenses, and valuation allowances. |
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Policy loans are carried at unpaid principal balances. |
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Alternative investments are generally reported based on the equity method of accounting. |
Investments not carried at fair value in the Company’s financial statements (principally mortgage loans, policy loans, and other limited partnerships) may have fair values
which are substantially higher or lower than the carrying value reflected in the Company’s financial statements. Each of such asset classes are regularly evaluated for impairment under the accounting guidance appropriate to the respective
asset class.
The Company’s valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions which are
subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect the Company’s results of operations or financial condition.
Fixed maturity and equity securities and certain other investments are reported at fair value on the balance sheet. Fair value is defined as the price that would be received to
sell an asset in an orderly transaction between market participants at the measurement date. In accordance with GAAP, the Company has categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective
valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within
different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.
The Company categorizes securities carried at fair value in the consolidated balance sheets as follows:
• Level 1—Unadjusted quoted prices accessible in active markets for identical assets or liabilities at the measurement date and mutual funds where the value per share
(unit) is determined and published daily and is the basis for current transactions.
• Level 2—Unadjusted quoted prices for
similar assets in active markets or inputs (other than quoted prices) that are observable or that are derived principally from or corroborated by observable market data through correlation or other means.
• Level 3—Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect
management’s best estimate about the assumptions market participants would use at the measurement date in pricing the asset. Consideration is given to the risk inherent in both the method of valuation and the valuation inputs.
The determination of fair values by management in the absence of quoted market prices is based on: (i) the availability and quality of prices from independent pricing services;
(ii) valuation methodologies; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about investments, including estimates
of the timing and amounts of expected future cash flows and the credit standing of the issuer. The use of different methodologies and assumptions may have a material effect on the fair value amounts. During periods of market disruption, including
periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of the Company’s securities. There may be certain asset classes that were in active markets with
significant observable data that become illiquid due to the financial environment. In such cases, more securities may fall to Level 3 and thus require more subjectivity and management judgment. As such, valuations may include inputs and assumptions
that are less observable or require greater estimation, as well as valuation methods that require greater estimation, which could result in values that are different from the value at which the investments could ultimately be sold. Further, rapidly
changing credit and equity market conditions could materially impact the valuation of securities as reported within the Company’s consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases
in value may have a material adverse effect on the Company’s results of operations or financial condition. For additional information on the Company’s valuation methodology, see
Overview—Fair Value Measurements.
The
determination of the amount of allowances and impairments taken on the Company’s investments are judgmental and could materially impact its results of operations or financial position.
The determination of the amount of allowances and impairments vary by investment type and is based on the Company’s periodic evaluation and assessment of known and inherent
risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and
impairments in operations as such evaluations are revised.
Market volatility can make it more difficult to
value the Company’s securities if trading in such securities becomes less frequent. In addition, a forced sale by holders of large amounts of a security, whether due to insolvency, liquidity or other issues with respect to such
holders could result in declines in the price of a security. There can be no assurance that management has accurately assessed the level of impairments taken and allowances reflected in the financial statements. Furthermore, additional
impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.
Management considers a wide range of factors about
an investment’s issuer and uses its best judgment in evaluating the cause of the decline in the fair value of the investment and in assessing the prospects for recovery. Inherent in management’s evaluation of an investment are
assumptions about the operations of the issuer and its future earnings potential.
The collectability of a mortgage loan is based on
the ability of the borrower to repay and/or the value of the underlying collateral. The quality of a loan is generally defined by the specific financial position and condition of a borrower and the underlying collateral. Many of the
Company’s commercial mortgage loans are structured with balloon payment maturities, exposing the Company to risks associated with the borrowers’ ability to make the balloon payment or refinance the property.
As part of the underwriting process, specific guidelines are followed to ensure the initial quality of a new mortgage loan. Third-party appraisals are generally
obtained to support loaned amounts as the loans are usually collateral dependent.
The Company actively monitors the credit quality of
its mortgage loans to support the development of the valuation allowance. This monitoring process includes quantitative analyses which facilitate the identification of deteriorating loans, and qualitative analyses which consider other
factors relevant to the borrowers’ ability to repay. Loans with deteriorating credit fundamentals are identified for special surveillance procedures and are categorized based on the severity of their deterioration and
management’s judgment as to the likelihood of loss.
Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and either the present value of expected future cash flows
discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
In addition to the loan-specific reserves, the
Company maintains a non-specific reserve for losses developed based on loan surveillance categories and property type classes and reflects management’s best estimate of probable credit losses inherent in the portfolio as of the balance sheet
date but not yet attributable to specific loans. Management’s periodic evaluation of the adequacy of the non-specific reserve is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that
may affect a borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors
For additional information on the Company’s impairment review process, see Note 2 to the audited consolidated financial statements included in the F pages of this
report
Certain changes in accounting and/or financial reporting standards issued by the Financial Accounting Standards Board (FASB), the SEC, the
NAIC, the Federal Reserve Board, state insurance departments or other standard-setting bodies could have a material adverse impact on the Company’s financial position or results of operations.
The Company is subject to the application of GAAP, the principles of which are periodically revised and/or expanded. As such, the Company is required to adopt new or revised
accounting and/or financial reporting standards issued by recognized accounting standard setters or regulators, including the FASB. It is possible that future requirements could change the Company’s current application of GAAP, resulting in a
material adverse impact on the Company’s financial position or results of operations.
In addition, the Company’s insurance
subsidiaries are required to comply with SAP. SAP and various components of SAP (such as actuarial reserve methodologies) are subject to review by the NAIC and its task forces and committees, as well as state insurance departments, in an
effort to address emerging issues and otherwise improve or alter financial reporting. Various proposals are currently, or have been previously, pending before committees and task forces of the NAIC, some of which, if enacted, would
negatively affect the Company. The NAIC is also currently working to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves and the accounting for such reserves. The
Company cannot predict whether or in what form reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect the Company. Calculations made in accordance with SAP govern the ability of the
Company’s insurance company subsidiaries to pay dividends to their respective parent companies.
In addition, the NAIC Accounting Practices and Procedures Manual provides that state insurance departments may permit insurance companies domiciled therein to depart from SAP by
granting them permitted practices. The Company cannot predict what permitted and prescribed practices any applicable state insurance department may allow or mandate in the future, nor can the Company predict whether or when the insurance
departments of states of domicile of the Company’s competitors may permit them to utilize advantageous accounting practices that depart from SAP. As of the date of this prospectus, no permitted practices are utilized by the
Company’s insurance subsidiaries. Moreover, although states generally defer to interpretations of the insurance department of the state of domicile with respect to regulations and guidelines, neither the action of the domiciliary
state nor action of the NAIC is binding on a state. Accordingly, a state could choose to follow a different interpretation. The Company can give no assurances that future changes to SAP or components of SAP or the granting of
permitted practices to the Company’s competitors will not have a materially negative impact on the Company’s financial condition or results of operations.
The amount of statutory capital that the Company’s insurance company subsidiaries have and the amount of statutory capital they must
hold can vary significantly from time to time and is sensitive to a number of factors outside of the Company’s control, including equity market and credit market conditions.
The Company conducts the vast majority of its business directly or through licensed insurance company subsidiaries. Insurance regulators and the NAIC prescribe
accounting standards and statutory capital and reserve requirements for the Company’s U.S. insurance company subsidiaries. The NAIC has established regulations that provide minimum capitalization requirements based on risk-based
capital, or RBC, formulas for both life and property and casualty companies. The RBC formula for life companies established capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest
rate, operational and management and expense recovery risks associated with life and annuity products that contain death benefits or certain living benefits.
In any particular year, statutory surplus amounts
and RBC ratios may increase or decrease depending on a variety of factors, including the amount of statutory income or losses generated by the Company’s insurance company subsidiaries (which itself is sensitive to equity market and credit
market conditions), the amount of additional capital they must hold to support their business growth, changes in equity market levels, the value of certain fixed maturity and equity securities in their investment portfolios, the value of certain
derivative instruments that do not get hedge accounting treatment, changes in interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. Increases in the amount of required statutory reserves reduce
the statutory surplus used in calculating the Company’s insurance company subsidiaries’ RBC ratios.
The Company’s insurance company
subsidiaries’ statutory surplus and RBC ratios have a significant influence on their financial strength ratings, which, in turn, are important to their ability to compete effectively. To the extent that any of the Company’s
insurance company subsidiaries’ statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, they may need to raise capital. If they were not able to raise additional
capital in such a scenario, any ratings downgrade that followed could have a material adverse effect on their business, financial condition, results of operations and liquidity.
The Company is rated by S&P, Moody’s and A.M. Best, and a decline in ratings could adversely affect the Company’s
operations.
Financial strength ratings, which various NRSROs publish as indicators of an insurance company’s ability to meet contractholder and policyholder obligations, are important
to maintaining public confidence in the Company’s products, its ability to market its products and its competitive position. Downgrades in the Company’s financial strength ratings or those of its insurance company subsidiaries could have
a material adverse effect on its financial condition and results of operations in many ways, including reducing new sales of insurance products, annuities and other investment products; adversely affecting the Company’s relationships with its
sales force and independent sales intermediaries; materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders; requiring the Company to reduce prices for many of its products and services to
remain competitive; and adversely affecting the Company’s ability to obtain reinsurance at reasonable prices or at all.
In addition to the financial strength ratings of
the Company’s insurance subsidiaries, various NRSROs also publish credit ratings for NFS and several of its subsidiaries. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner
and are important factors in the Company’s overall funding profile and ability to access certain types of liquidity. Downgrades in the Company’s credit ratings could have an adverse effect on its financial condition and results of
operations in many ways, including adversely limiting the Company’s access to capital markets, potentially increasing the cost of debt, and requiring the Company to post collateral.
As of December 31, 2011, the Company’s
financial strength was rated “A+” by S&P and A.M. Best and “A1” by Moody’s. NLIC and NLAIC each had financial strength ratings of “A+” (Superior) from A.M. Best. Their claims-paying ability/financial
strength were rated “A1” (Good) by Moody’s and “A+” (Strong) by S&P.
In view of the difficulties experienced recently by
many financial institutions, including the Company’s competitors in the insurance industry, the Company believes it is possible that the NRSROs will heighten the level of scrutiny that they apply to such institutions, will increase the
frequency and scope of their credit reviews, will request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the NRSRO models for maintenance of certain ratings
levels.
On August 8, 2011, S&P lowered its long-term counterparty credit and financial strength ratings to “AA+” from “AAA” on the member companies of five
U.S. life insurance groups. The rating actions on these groups followed the downgrade of the long-term sovereign credit rating on the U.S. to “AA+” from “AAA” as described above. S&P’s press
release related to the action stated that although S&P’s view of these companies’ credit profile had not changed, the rating action was based on the view that the U.S. credit rating constrains their financial strength rating on
insurers and the high concentration of these companies’ businesses and assets within the U.S. S&P also indicated that if it were to lower its rating on the U.S. again, they would likely take the same rating action on such
insurers. It is possible that S&P or other NRSROs may take similar actions at any time and without notice with respect to other insurers and groups, including the Company and its affiliates and subsidiary insurance companies as
investors in U.S. government and agency securities or otherwise.
The Company cannot predict what actions rating
agencies may take, or what actions it may take in response to the actions of rating agencies, which could adversely affect its business. As with other companies in the financial services industry, the Company’s ratings could be downgraded at
any time and without any notice by any NRSRO.
The impact
of sustained or significant deterioration in economic conditions on the Company’s customers and vendors could adversely affect the Company’s business.
The Company is exposed to risks associated
with the potential financial instability of the Company’s customers, many of whom may be adversely affected by the volatile conditions in the financial markets. As a result of uncertainties with respect to financial institutions and
the global credit markets, increases in energy costs, and other macro-economic challenges currently affecting the economy of the United States and other parts of the world, customers may experience serious cash flow problems and other financial
difficulties. As a result, they may modify, delay, or cancel plans to purchase the Company’s products, may make changes in the mix of products purchased that are unfavorable to the Company or may surrender (in the case of annuities)
contracts early, imposing greater liquidity needs on the Company earlier than the Company expected. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be
able to pay, or may delay payment of, premiums and other amounts that are owed to the Company. Any liability of current or potential customers to pay the Company for its products may adversely affect the Company’s earnings and cash
flow.
In addition, the Company is susceptible to risks associated with the potential financial instability of the vendors on which the Company relies to provide services or to whom the
Company delegates certain functions. The same conditions that may affect the Company’s customers also could adversely affect the Company’s vendors, causing them to significantly and quickly increase their prices or reduce
their output. The Company’s business depends on the Company’s ability to perform, in an efficient and uninterrupted fashion, the Company’s necessary business functions, and any interruption in the services provided by
third parties could also adversely affect the Company’s cash flow, profitability, and financial condition.
If the
Company’s business does not perform well or if actual experience versus estimates used in valuing and amortizing DAC varies significantly, the Company may be required to accelerate the amortization of DAC, which could adversely affect the
Company’s results of operations or financial condition.
The Company incurs significant costs in connection
with acquiring new and renewal business. Those costs that vary with and primarily are related to the production of new and renewal business are deferred and referred to as deferred acquisition costs or DAC. The recovery of DAC is dependent upon the
future profitability of the related business. The amount of future profit or margin primarily is dependent on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency (how long a contract stays with a
company), interest crediting rates, dividends paid to policyholders, expenses to administer the business, creditworthiness of reinsurance counterparties, and certain economic variables, such as inflation. Of these factors, the Company anticipates
that investment returns are most likely to impact the rate of amortization of such costs. The aforementioned factors enter into management’s estimates of gross profits, which generally are used to amortize such costs. If the estimates of gross
profits were overstated, then the amortization of such costs would be accelerated in the period the actual experience is known or when estimates are reevaluated and would result in a charge to income.
Significant or sustained equity market declines
could result in an acceleration of amortization of DAC related to variable annuity and variable universal life contracts, resulting in a charge to operations. Such adjustments could have a material adverse effect on the Company’s results of
operations or financial condition. In October 2010, the FASB issued Accounting Standards Update (ASU) 2010-26, which amends FASB Accounting Standards Codification (ASC) 944, Financial
Services—Insurance. This guidance amends Topic 944 by modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The amendments are required to
be applied prospectively with retrospective application permitted. The Company will adopt this guidance retrospectively, effective January 1, 2012. The Company is currently in the process of determining the impact of adoption. It is expected the
adoption of this guidance will have a material impact to DAC and retained earnings. See Critical Accounting Policies and Recently Issued Accounting Standards—Deferred Policy Acquisition Costs
for Investment and Universal Life Insurance Products.
Deviations
from assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts could have a material adverse impact on the Company’s results of operations or financial condition.
The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those related to persistency, mortality,
morbidity and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. As such, significant deviations from one or
more of these assumptions could result in a material adverse impact on the Company’s results of operations or financial condition.
The
Company’s insurance subsidiaries are subject to extensive regulations designed to benefit or protect policyholders rather than the Company.
The Company is subject to extensive state
regulatory oversight in the jurisdictions in which the Company does business. State insurance regulators and the NAIC continually reexamine existing laws and regulations and may impose changes in the future that put further regulatory
burdens on insurers and that may have an adverse effect on the Company’s business, financial condition, results of operations and liquidity.
Changes in regulations or in the interpretation of
existing laws or regulations may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the Company’s insurance subsidiaries. Any proposed or future state legislation or
regulations, as well as proposed or future federal legislation or regulations, may negatively impact the Company’s financial position or results of operations. Any such regulation is aimed at benefiting or protecting policy holders, rather
than the Company or its security holders.
Although the federal government generally has not
directly regulated the insurance business in the past, certain federal initiatives can have an impact on the Company’s business. Current and proposed measures that may significantly affect the insurance business include proposals to
create an optional federal charter for insurers or to supervise insurance holding companies at a federal level, limitations on antitrust immunity, minimum solvency requirements, health care reform, systemic risk regulation and grant of resolution
authority to a federal agency, uniform market conduct standards, credit for reinsurance initiatives and other proposals at the federal level to replace or streamline state regulatory processes. In view of recent events involving certain
financial institutions and the financial markets, it is possible that the U.S. federal government will impose a federal system of insurance regulation or increase federal oversight responsibilities. The Dodd-Frank Act establishes a
Federal Insurance Office within the Department of the Treasury to be headed by a director appointed by the Secretary of the Treasury. While not having general supervisory regulatory authority over the business of insurance, the director
of this office will perform various functions with respect to insurance (other than health insurance), including serving as a non-voting member of the FSOC established by the Dodd-Frank Act and making recommendations to the Council regarding
insurers to be designated for stricter regulation. The director is also required to conduct a study on how to modernize and improve the system of insurance regulation in the United States, including by increased national uniformity
through either a federal charter or effective action by the states. The Council may recommend that state insurance regulators or other regulators apply new or heightened safeguards for activities or practices the Company and other
insurers or other financial services companies engage in that could create or increase the risk that significant liquidity, credit or other problems spread among financial companies. The Company cannot predict whether any such
recommendations will be made or their effect on the Company’s business, results of operations, cash flows or financial condition.
See
Regulation—Regulation at State Level for a general description of the regulation of the Company.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act and certain other potential changes in federal laws and regulations may adversely affect the Company’s business, results of operations and financial condition.
In July 2010 Congress passed, and the President
signed, the Dodd-Frank Act. Policy and rule-making conducted following the enactment of the Dodd-Frank Act has and will continue to significantly change financial regulation in several ways. At this time, the Company cannot predict the impact this
financial reform legislation will have on the Company’s business, results of operations, or financial condition. The full impact of the Dodd-Frank Act on the Company will not be determined until the numerous regulations required by the act are
finalized. However, the Company anticipates that Nationwide’s business and operations will be affected in at least the following ways:
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Nationwide (including the Company) may become subject to new or increased capital requirements. |
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Nationwide (including the Company) may be exposed to increased oversight, including new required reporting, due to the creation of new federal
agencies (e.g., the Dodd-Frank Act created the FSOC, Office of Financial Research and the Federal Insurance Office). |
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Under the orderly liquidation authority set forth in Title II of the Dodd-Frank Act, the Federal Deposit Insurance Corporation (FDIC), as receiver
of a covered financial company, succeeds to the rights, title, powers and privileges of the company and its stockholders, members, directors and officers and may take over and operate the company with all the powers of shareholders, members,
directors and officers. The FDIC has the power to liquidate the company through the sale of assets, or transfer of assets to a bridge financial company, to merge the company with another company or transfer assets and liabilities, to pay valid
obligations that come due to the extent funds are available, to terminate rights and claims of stockholders and creditors (except their right to payment, resolution, or other satisfaction of their claims in accordance with the provisions of Title
II) and to determine and pay claims. To the extent Nationwide or any of its affiliates is a stockholder or creditor in a firm that becomes a covered financial company in receivership, they could become subject to a termination of rights or claims
consistent with the provisions of Title II by the FDIC. If NLIC becomes a covered financial company, its creditors would become subject to FDIC’s orderly liquidation authority under Title II and therefore subject to termination of rights
similar to a liquidation of depository institutions under the Federal Deposit Insurance Act. While the FDIC has backup authority to initiate a liquidation of an insurance company if a state insurance department fails to act within 60 days of a
determination triggering orderly liquidation procedures, the FDIC’s authority is limited to standing in the place of the state insurance department and to filing the appropriate judicial action in the appropriate state court to place the
insurer into orderly liquidation under the laws and requirements of the state. Under Ohio law, the insurance company subsidiaries of the Company would therefore be subject to receivership or liquidation by the Ohio Department of Insurance pursuant
to Ohio insurance law. As a financial company with total consolidated assets of equal to or greater than $50 billion, Nationwide could become subject to a risk based assessment to pay in full the obligations issued by the FDIC as receiver to the
Secretary of the Treasury. The FDIC must impose assessments on a graduated basis according to a risk matrix. In recommending and establishing a risk matrix, the FSOC and the FDIC must consider, among other factors, assessments imposed upon on a
financial company or affiliate that is an insured depository institution pursuant to the Federal Deposit Insurance Act, a member of the Securities Investor Protection Corporation pursuant to the Securities Investors Protection Act or an insurance
company assessed pursuant to state law to cover the cost of state insolvency proceedings. Thus any assessment imposed upon Nationwide under Title II would need to consider a risk matrix recognizing assessments imposed upon insurance company
subsidiaries of the Company by a state insurance guaranty fund or upon Nationwide Bank as a member of the FDIC. |
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Nationwide’s investment activities in connection with its own accounts, including its general account, may become subject to new limitations
or restrictions applicable to depository institution holding companies under the Volcker Rule or be impacted by market changes as a result of such limitations or restrictions. |
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The Dodd-Frank Act generally requires all agreements or arrangements that fall within the ‘swap’ or ‘security-based swap’
definitions in the Dodd-Frank Act to be traded on an exchange or regulated swap execution facility and to be centrally cleared through regulated central clearinghouses, unless an exemption is available, which includes transactions not accepted for
exchange trading or central clearing. These provisions are subject to implementation pursuant to rulemaking by the SEC and the Commodity Futures Trading Commission (CFTC), which have not been completed. The requirement to exchange trade
and centrally clear swap and security-based swap transactions, as well as the CFTC and SEC rules implementing the provisions of the Dodd-Frank Act may adversely affect the Company’s ability to engage in various derivatives transactions of the
type the Company has found useful in the past. Under the Dodd-Frank Act entities which are deemed to be ‘swap dealers’ or ‘major swap participants’ (MSP) will be required to register with the CFTC and entities
which are deemed to be ‘security based swap dealers’ or ‘major security-based swap participants’ (MSBSP and collectively with MSPs, major participants) will be required to register with the SEC. All such dealers and major
participants will be subject to capital and margin requirements, as well as business conduct rules and reporting requirements, each to be determined pursuant to regulations to be promulgated by the CFTC, SEC and certain prudential
regulators. Until regulations delineating the dealer and major participant |
definitions and registration requirements are finalized, it is uncertain whether the Company’s derivatives activities may require the Company to register with the CFTC
and/or SEC and comply with the capital, margin and business conduct requirements. However, even if the Company is not considered to be a dealer or major participant, the requirement that all, or a significant portion, of the
Company’s derivative trading activity be conducted over exchanges or swap execution facilities and centrally cleared may impact the availability of such products, their cost to the Company and will likely increase the amount and nature of
margin/collateral the Company must maintain with respect to such transactions. Specifically, under existing central clearing arrangements in the market, the central clearinghouse, and its members typically reserve the right to
unilaterally increase the amount of margin/collateral required to be maintained from time to time, and during times of market volatility or stress tend to exercise such right. In the event the Company is required to agree to such terms in
order to continue to execute derivative transactions, it could have an adverse impact on the Company’s finances and liquidity, especially during times of market stress and volatility.
|
·
|
Additionally, under the Dodd-Frank Act most banking institutions (with which the Company enters into a substantial portion of its derivatives)
will be required to conduct at least a portion of their traditional over-the-counter derivatives businesses outside their depositary institutions. The affiliates through which these institutions will conduct such over-the-counter
derivatives businesses might be less creditworthy than the depository institutions themselves, and netting of counterparty exposures across such affiliates and their related banks will not be allowed, potentially affecting the credit risk these
counterparties pose to the Company and the degree to which the Company is able to enter into transactions with these counterparties. |
|
·
|
Finally, the definitions of ‘swap’ and ‘security-based swap’ in the Dodd-Frank Act are extremely broad and,
when applied literally, could encompass a number of arrangements that have not traditionally been viewed as part of the over-the-counter derivatives market, such as various insurance products offered by the Company, and regulations clarifying such
defined terms have not yet been finalized. It is uncertain at this time what impact the Dodd-Frank Act may have on the Company’s traditional insurance or annuity business. |
|
·
|
The new derivatives regulatory scheme under the Dodd-Frank Act may generally increase the costs of hedging which would impact the Company’s
derivatives activities. Nationwide’s investment activities utilize derivatives with respect to the Company’s own accounts as well as in connection with benefits offered with the Company’s variable insurance
products. The Company cannot predict the effect the new regulatory regime will have on the Company’s hedging costs, hedging strategy or implementation thereof or whether the Company will need, or choose, to increase or change
the composition of the risks the Company does not hedge. |
|
·
|
The Company’s offerings of BOLI policies may be subject to new limitations or prohibitions on bank purchases of such products that result
from rule-making related to such products or enforcement actions that affect individual banks or regulations or guidelines limiting the amount of BOLI. |
|
·
|
Increased standards of care for broker dealers may affect pricing and compliance burdens, as well as third-party distribution of the
Company’s variable insurance products. |
|
·
|
Increased rule-making by state agencies to improve the regulation of sales to seniors may result in increased compliance burdens on the
Company’s operations and distribution of insurance products. |
Litigation
or regulatory actions could have a material adverse impact on the Company.
See Note 17 to the Company’s audited
consolidated financial statements included in the F pages of this report for a description of litigation and regulatory actions and the related notes thereto included elsewhere in this prospectus for a description of litigation and regulatory
actions. These and future litigation or regulatory matters may negatively affect the Company by resulting in the payment of substantial awards or settlements, increasing legal and compliance costs, requiring the Company to change certain aspects of
its business operations, diverting management attention from other business issues, causing significant harm to the Company’s reputation with customers, making it more difficult to retain current customers and recruit and retain employees and
agents.
A large scale pandemic, the continued threat of terrorism and ongoing military and other actions may result in decreases in the
Company’s net income, revenue and assets under management and may adversely impact its investment portfolio.
A large scale pandemic, the continued threat of
terrorism within the United States and abroad, ongoing military and other actions, and heightened security measures in response to these types of threats may cause significant volatility and declines in the United States, European and other
securities markets, loss of life, property damage, additional disruptions to commerce
and reduced economic activity. Actual terrorist attacks could cause a decrease in the Company’s net income and/or revenue as a result of decreased economic activity and/or
payment of claims. In addition, some of the assets in the Company’s investment portfolio may be adversely affected by declines in the securities markets and economic activity caused by a large scale pandemic, the continued threat of terrorism,
ongoing military and other actions and heightened security measures. Moreover, any significant short term increase in mortality experience versus the Company’s projections as a result of such events or otherwise could cause benefit
payments to exceed established projection reserves. As a result, the Company could require significant amounts of cash to pay claims on short notice and in excess of normal cash requirements. In the case of such an event, the
Company may have difficulty selling assets in a timely manner, be forced to sell them for less than the Company otherwise would have been able to realize, or both.
The Company cannot predict whether or the
extent to which industry sectors in which it maintains investments may suffer losses as a result of potential decreased commercial and economic activity, how any such decrease might impact the ability of companies within the affected industry
sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.
Although the Company does not believe that a large
scale pandemic, other catastrophic mortality event or the continued threat of terrorist attacks will have any material impact on its financial strength or performance, it can offer no assurances that this threat, future terrorist-like events in the
United States and abroad, or military actions by the United States will not have a material adverse impact on its financial condition or results of operations.
The
Company operates in a highly competitive industry, which can significantly impact operating results.
See
Business - Competition for a description of competitive factors affecting the Company. The Company’s revenues and profitability could be impacted negatively due to
competition.
Unauthorized data access and other security breaches could have an adverse impact on the Company’s business and
reputation.
Security breaches and other improper accessing of data in the Company’s facilities, networks or databases could result in loss or theft of data and information or systems
interruptions that may expose it to liability and have an adverse impact on its business. Moreover, any compromise of the security of the Company’s data could harm its reputation and business. There can be no assurances that the Company will
be able to implement security measures to prevent such security breaches.
Losses due
to system failures or physical locations being unavailable to conduct business could have an adverse impact on the Company’s business and reputation.
Network, utility, telecommunications, hardware
and/or software failures could prevent the Company from conducting its business for a sustained period of time. The Company’s facilities could be inaccessible due to a disaster or natural catastrophe.
Changes in tax laws could adversely affect the Company and its subsidiaries.
Life insurance products may be used to provide income tax deferral and income tax free death benefits; annuity contracts may be used to provide income tax deferral. The value of
these benefits is related to the level of income tax and capital gains tax rates. Changes to the income tax rates and the capital gains tax rates can affect the value of these benefits, and therefore the desirability of those products.
The U.S. Congress periodically has considered possible legislation that, if enacted, could materially reduce or eliminate many of the tax advantages of purchasing and owning
annuity and life insurance products. Recent legislative proposals have included provisions that, if enacted, would (a) disallow a portion of the income tax interest deduction for many businesses that own life insurance; (b) alter the calculation of
a life insurance company’s separate account dividends received deduction (DRD); (c) impose a “financial crisis responsibility fee” on certain insurance companies; and (d) impose additional information reporting requirements with
respect to variable insurance products and resales of certain life insurance contracts. If these proposals or others of this type were enacted, the Company’s sale of COLI, BOLI, variable annuities, and variable life products could be adversely
affected.
Additionally, changes to the Internal Revenue Code to address the fiscal challenges currently faced by the federal government may also be made. These changes could include
changes to the taxation of life insurance, annuities, mutual funds, retirement savings plans, and other investment alternatives offered by the Company. Such changes could have an adverse impact on the desirability of the products offered by the
Company. See Description of Business—Regulation— Tax Matters for information regarding tax laws.
Changes to
Regulations Under ERISA Could Adversely Affect The Company’s Distribution Model by Restricting The Company’s Ability to Provide Customers With Advice.
The prohibited transaction rules of the
Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code generally restrict the provision of investment advice to ERISA plans and participants and Individual Retirement Account (IRAs) owners if the investment
recommendation results in fees paid to the individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen. In March 2010, the Department of Labor (DOL) issued proposed regulations which provide
limited relief from these investment advice restrictions. If the proposed rules are issued in final form and no additional relief is provided regarding these investment advice restrictions, the ability of the Company’s affiliated
broker-dealers and their registered representatives to provide investment advice to ERISA plans and participants, and with respect to IRAs, could be restricted. Also, the fee and revenue arrangements of certain advisory programs may be required to
be revenue neutral, resulting in potential lost revenues for these broker-dealers and their affiliates.
In addition, the DOL has issued a number of
regulations recently that increase the level of disclosure that must be provided to plan sponsors and participants. Although the DOL recently delayed the effective date of certain of these ERISA disclosure requirements, the requirements
will likely increase the Company’s regulatory and compliance burden, resulting in increased costs.
Changes in
state insurance regulations regarding suitability of annuity product sales may affect the Company’s operations and the Company’s profitability.
State insurance regulators are becoming more active
in adopting and enforcing suitability standards with respect to sales of annuities, both fixed and variable. In particular, the NAIC has adopted a revised Suitability in Annuity Transactions Model Regulation (SAT), that will, if enacted by the
states, place new responsibilities upon issuing insurance companies with respect to the suitability of annuity sales, including responsibilities for training agents. It will also place ultimate liability upon issuing insurance companies for the
suitable sale of annuity contracts. Several states have already enacted laws based on the SAT. Such regulations and responsibilities could increase the Company’s operational costs or compliance costs or burdens, or expose the Company to
increased liability if it violates such regulations and responsibilities. See Description of Business—Annuity Sales Practices.
Consolidation of distributors of insurance products may adversely affect the insurance industry and the profitability of the
Company’s business.
The Company distributes many of the Company’s individual products through other financial institutions such as banks and broker–dealers. An increase in bank and
broker–dealer consolidation activity could increase competition for access to distributors, result in greater distribution expenses and impair the Company’s ability to expand the Company’s customer base. Consolidation of
distributors and/or other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to the Company.
PROPERTIES
Pursuant to an arrangement between NMIC and certain
of its subsidiaries, during 2011 the Company leased on average approximately 538,510 square feet of office space in the three building home office complex and in other offices in central Ohio. The Company believes that its present and
planned facilities are adequate for the anticipated needs of the Company.
LEGAL PROCEEDINGS
Nationwide Financial Services, Inc. (NFS, or collectively with its subsidiaries, "the Company") was formed in November 1996. NFS is the holding company for Nationwide
Life Insurance Company (NLIC), Nationwide Life and Annuity Insurance Company (NLAIC) and other companies that comprise the life insurance and retirement savings operations of the Nationwide group of companies (Nationwide). This group includes
Nationwide Financial Network (NFN), an affiliated distribution network that markets directly to its customer base. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.
The Company is a subject to legal and regulatory
proceedings in the ordinary course of its business. The Company's legal and regulatory matters include proceedings specific to the Company and other proceedings generally applicable to business practices in the industries in which the Company
operates. The Company's litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcomes cannot be predicted. Regulatory proceedings also could affect the outcome of one
or more of the Company's litigation matters. Furthermore, it is often not possible to determine the ultimate outcomes of the pending regulatory investigations and legal proceedings or to provide reasonable ranges of potential losses with
any degree of certainty. Some matters, including certain of those referred to below, are in very
preliminary stages, and the Company does not have
sufficient information to make an assessment of the plaintiffs' claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the
event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, which are difficult to
quantify and cannot be defined based on the information currently available. The Company believes, however, that based on currently known information, the ultimate outcome of all pending legal and regulatory matters is not likely to have
a material adverse effect on the Company's consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that such
outcomes could materially affect the Company's consolidated financial position or results of operations in a particular quarter or annual period.
The financial services industry has been the
subject of increasing scrutiny on a broad range of issues by regulators and legislators. The Company and/or its affiliates have been contacted by, self reported or received subpoenas from state and federal regulatory agencies, including
the Securities and Exchange Commission, and other governmental bodies, state securities law regulators and state attorneys general for information relating to, among other things, sales compensation, the allocation of compensation, unsuitable sales
or replacement practices, and claims handling and escheatment practices. The Company is cooperating with and responding to regulators in connection with these inquiries and will cooperate with Nationwide Mutual Insurance Company (NMIC) in
responding to these inquiries to the extent that any inquiries encompass NMIC's operations.
On November 20, 2007, Nationwide Retirement
Solutions, Inc. (NRS) and NLIC were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama entitled Ruth A. Gwin and Sandra H. Turner, and a class of similarly situated
individuals v. Nationwide Life Insurance Company, Nationwide Retirement Solutions, Inc., Alabama State Employees Association, PEBCO, Inc. and Fictitious Defendants A to Z. On March 12, 2010, NRS and NLIC were named in a Second Amended Class
Action Complaint filed in the Circuit Court of Jefferson County, Alabama entitled Steven E. Coker, Sandra H. Turner, David N. Lichtenstein and a class of similarly situated individuals v. Nationwide
Life Insurance Company, Nationwide Retirement Solutions, Inc., Alabama State Employees Association, Inc., PEBCO, Inc. and Fictitious Defendants A to Z claiming to represent a class of all participants in the Alabama State Employees
Association, Inc. (ASEA) Plan, excluding members of the Deferred Compensation Committee, ASEA's directors, officers and board members, and PEBCO's directors, officers and board members. On October 22, 2010, the parties to this action
executed a stipulation of settlement that agreed to certify a class for settlement purposes only, that provided for payments to the settlement class, and that provided for releases, certain bar orders, and dismissal of the case, subject to the
Circuit Courts' approval. The Courts have approved the settlement and the settlement amounts have been paid, but have not yet been distributed to class members. On February 28, 2011, the Court in the Gwin case entered an Order
permitting ASEA/PEBCO to assert indemnification claims for attorneys' fees and costs, but barring them from asserting any other claims for indemnification. On April 22, 2011, ASEA and PEBCO filed a second amended cross claim complaint in
the Gwin case against NRS and NLIC seeking indemnification. These claims seeking indemnification remain severed. On April 29, 2011, the Companies filed a motion to dismiss ASEA’s and PEBCO’s amended cross complaint
or alternatively for summary judgment. On December 6, 2011 the Court entered an Order that NRS owes indemnification to ASEA and PEBCO for the Coker (Gwin) class action, that NRS does not have a duty to indemnify ASEA and PEBCO for fees
associated with the Interpleader action that NRS filed in Montgomery County and dismissing NLIC. On December 31, 2011, the Court denied the Company’s motion to certify this order for an interlocutory appeal. NRS continues
to defend this case vigorously.
On August 15, 2001, NFS and NLIC were named in a
lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v.
Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. In the plaintiffs' sixth amended complaint, filed November 18, 2009, they amended the list of named plaintiffs and claim to represent a class of qualified
retirement plan trustees under Employee Retirement Income Security Act of 1974 (ERISA) that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that
NLIC and NFS breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments allegedly received by NFS and NLIC, other unspecified relief
for restitution, declaratory and injunctive relief, and attorneys' fees. On November 6, 2009, the Court granted the plaintiff's motion for class certification and certified a class of "All trustees of all employee pension benefit plans
covered by ERISA which had variable annuity contracts with NFS and NLIC or whose participants had individual variable annuity contracts with NFS and NLIC at any time from January 1, 1996, or the first date NFS and NLIC began receiving payments from
mutual funds based on a percentage of assets invested in the funds by NFS and NLIC, whichever came first, to the date of November 6, 2009". On October 20, 2010, the Second Circuit Court of Appeals granted NLIC's 23(f) petition agreeing to
hear an appeal of the District Court's order granting class certification. On October 21, 2010, the District Court dismissed NFS from the lawsuit. On October 27, 2010, the District Court stayed the underlying action pending a
decision from the Second Circuit Court of Appeals. On February 6, 2012, the Second Circuit Court of Appeals vacated the class certification order that was issued on November 6, 2009 and remanded the case back to the District Court for
further consideration. The plaintiffs have renewed their motion for class certification. NLIC continues to defend this lawsuit vigorously.
On May 14, 2010, NLIC was named in a lawsuit filed
in the Western District of New York entitled Sandra L. Meidenbauer, on behalf of herself and all others similarly situated v. Nationwide Life Insurance Company. The plaintiff claims
to represent a class of all individuals who purchased a variable life insurance policy from NLIC during an unspecified period. The complaint claims breach of contract, alleging that NLIC charged excessive monthly deductions and costs of
insurance resulting in reduced policy values and, in some cases, premature lapsing of policies. The complaint seeks reimbursement of excessive charges, costs, interest, attorney's fees, and other relief. NLIC filed a motion to
dismiss the complaint on July 23, 2010. NLIC filed a motion to disqualify the proposed class representative on August 27, 2010. Plaintiff filed a motion to amend the complaint on September 17, 2010, and NLIC filed an opposition
to the motion to amend on November 2, 2010. On October 13, 2011, plaintiff voluntarily dismissed the lawsuit without prejudice.
On October 22, 2010, NRS was named in a lawsuit
filed in the U.S. District Court, Middle District of Florida, Orlando Division entitled Camille McCullough, and Melanie Monroe, Individually and on behalf of all others similarly situated v. National
Association of Counties, NACO Research Foundation, NACO Financial Services Corp., NACO Financial Center, and Nationwide Retirement Solutions, Inc. The Plaintiffs' First Amended Class Action Complaint and Demand for Jury Trial was
filed on February 18, 2011. If the Court determined that the Plan was governed by ERISA, then Plaintiffs sought to represent a class of "All natural persons in the U.S. who are currently employed or previously were employed at any point
during the six years preceding the date Plaintiffs filed their Original Class Action Complaint, by a government entity that is or was a member of the National Association of Counties, and who participate or participated in the Section 457 Deferred
Compensation Plan for Public Employees endorsed by the National Association of Counties and administered by Nationwide Retirement Solutions, Inc." If the Court determined that the Plan was not governed by ERISA, then the Plaintiffs sough
to represent a class of "All natural persons in the U.S. who are currently employed or previously were employed at any point during the four years preceding the date Plaintiffs filed their Original Class Action Complaint, by a government entity that
is or was a member of the National Association of Counties, and who participate or participated in a Section 457 Deferred Compensation Plan for Public Employees endorsed by the National Association of Counties and administered by Nationwide
Retirement Solutions, Inc." The First Amended Complaint alleged ERISA Violation, Breach of Fiduciary Duty - NACO, Aiding and Abetting Breach of Fiduciary Duty - Nationwide, Breach of Fiduciary Duty - Nationwide, and Aiding and Abetting
Breach of Fiduciary Duty - NACO. The First Amended Complaint asked for actual damages, lost profits, lost opportunity costs, restitution, and/or other injunctive or other relief, including without limitation (a) ordering Nationwide and
NACO to restore all plan losses, (b) ordering Nationwide to refund all fees associated with Nationwide's Plan to Plaintiffs and Class members, (c) ordering NACO and Nationwide to pay the expenses and losses incurred by Plaintiffs and/or any Class
member as a proximate result of Defendants' breaches of fiduciary duty, (d) forcing NACO to forfeit the fees that NACO received from Nationwide for promoting and endorsing its Plan and disgorging all profits, benefits, and other compensation
obtained by NACO from its wrongful conduct, and (e) awarding Plaintiff and Class members their reasonable and necessary attorney's fees and cost incurred in connection with this suit, punitive damages, and pre-judgment and post judgment interest, at
the highest rates allowed by law, on the damages awarded. On March 21, 2011, the Company filed a motion to dismiss the plaintiffs' first amended complaint. On July 1, 2011, the plaintiffs filed their motion for class certification
and later sought to amend their complaint. On November 25, 2011 the District Court entered an Order granting NACO's motion to dismiss, NRS's motion to dismiss, denying plaintiffs' motion to file an amended complaint, that all other
remaining pending motions are moot, dismissing the class-wide claims with prejudice, dismissing individual claims without prejudice, and ordering the Clerk to close this case. On December 27, 2011, the plaintiffs filed a notice of
appeal. The parties have agreed to resolve the dispute on an individual basis and as part of that settlement will not pursue any further appeal. The Company intends to defend this case vigorously.
On December 27, 2006, NLIC and NRS were named as
defendants in a lawsuit filed in Circuit Court, Cole County Missouri entitled State of Missouri, Office of Administration, and Missouri State Employees Deferred Comp Plan v. NLIC and
NRS. The complaint seeks recovery for breach of contract and breach of the implied covenant of good faith and fair dealing against NLIC and NRS as well as a breach of fiduciary duty against NRS. The complaint seeks to
recover the amount of the market value adjustment withheld by NLIC ($19 million), prejudgment interest, loss of investment income from ING due to the Companies’ assessment of the market value adjustment. On March 8, 2007 the
Companies filed a motion to remove this case from state court to federal court in Missouri. On March 20, 2007 the State filed a motion to remand to state court and to stay court order. On April 3, 2007 the case was remanded to
state court. On June 25, 2007 the Companies filed an Answer. On October 16, 2009, the plaintiff filed a partial motion for summary judgment. On November 20, 2009, the Companies filed a response to the plaintiff's
motion for summary judgment and also filed a motion for summary judgment on behalf of the Companies. On February 26, 2010, the court denied Missouri's partial motion for summary judgment and granted the Companies’ motion for summary
judgment and dismissed the case. On March 8, 2011, the Missouri Court of Appeals reversed the granting of the Companies’ motion for summary judgment and directed the trial court to enter judgment in favor of the State and against
the Companies in the amount of $19 million, plus statutory interest at the rate of 9% per annum from June 2, 2006. On March 22, 2011, the Companies filed with the Missouri Court of Appeals, a motion for rehearing and an application for
transfer to the Supreme Court of Missouri. On May 3, 2011, the Missouri Court of Appeals for the Western District overruled the Companies’ motion for rehearing and denied the motion to transfer the case to the Missouri Supreme
Court. On June 28, 2011, the Companies’ application to the Missouri Supreme Court to hear a further appeal was denied. On
July 1, 2011, the Companies paid the amount of the
judgment plus simple interest at 9%. On August 9, 2011, the plaintiffs filed a Satisfaction of Judgment.
On June 8, 2011, NMIC and NLIC were named in a
lawsuit filed in Court of Common Pleas, Cuyahoga County, Ohio entitled Stanley Andrews and Donald Clark, on their behalf and on behalf of the class defined herein v. Nationwide Mutual Insurance Company and Nationwide Life Insurance Company. The complaint alleges that Nationwide has an obligation to review the Social Security Administration Death
Master File database for all life insurance policyholders who have at least a 70% probability of being deceased according to actuarial tables. The complaint further alleges that Nationwide is not conducting such a review. The
complaint seeks injunctive relief and declaratory judgment requiring Nationwide to conduct such a review, and alleges Nationwide has violated the covenant of good faith and fair dealing and has been unjustly enriched by not having conducted such
reviews. The complaint seeks certification as a class action. Nationwide removed the case to federal court on July 6, 2011. Plaintiffs filed a motion to remand to state court on August 8, 2011. On October
26, 2011, the Northern District of Ohio remanded the case to Ohio State court. Nationwide appealed the order to remand on November 4, 2011. Including Andrews, there are four similar class actions in Ohio: two against Western
& Southern; one against Cincinnati Life. At the case management conference on November 21, 2011, the State Court order Plaintiffs to file an opposition to the motion to dismissed Nationwide filed in federal
court. Plaintiffs filed their opposition to Nationwide’s motion to dismiss on December 19, 2011. By order dated January 18, 2012, the State Court issued an order dismissing the lawsuit. The court issued its
opinion on January 23, 2012. On January 30, 2012, plaintiffs filed their appeal.
The general distributor, NISC, is not engaged in any
litigation of any material nature.
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for
NLIC’s shares of common stock. All 3,814,779 issued and outstanding shares of NLIC’s common stock are owned by NFS. NLIC did not repurchase any shares of its common stock or sell any unregistered shares of its
common stock during 2011.
NLIC did not pay any dividends or return capital to NFS during 2011, 2010 and 2009.
NLIC currently does not have a formal dividend
policy.
See Business – Regulation – Regulation of Dividends and Other Payments for information regarding dividend restrictions.
SELECTED CONSOLIDATED FINANCIAL DATA
|
Years ended or as of December 31, |
|
|
|
|
(in millions) |
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
Total
revenues |
$ 2,208 |
|
$
3,254 |
|
$
3,469 |
|
$
2,117 |
|
$
3,827 |
Net (loss)
income |
$ (338) |
|
$
180 |
|
$
259 |
|
$
(887) |
|
$
482 |
Net (loss)
income attributable to NLIC |
$ (282) |
|
$
240 |
|
$
311 |
|
$
(815) |
|
$
527 |
|
|
|
|
|
|
|
|
|
|
Balance Sheets Data: |
|
|
|
|
|
|
|
|
|
Total
assets |
$ 112,682 |
|
$
107,397 |
|
$
98,989 |
|
$
91,804 |
|
$
117,624 |
Long-term
debt |
$ 991 |
|
$
978 |
|
$
706 |
|
$
706 |
|
$
700 |
Shareholder's equity |
$ 5,807 |
|
$
5,784 |
|
$
4,966 |
|
$
3,293 |
|
$
5,504 |
As described in Business – Overview, the results of operations for NLICA and its subsidiaries for 2009 and all
prior years are reflected as though the companies were combined for all periods presented.
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND FINANCIAL DISCLOSURE
Forward Looking
Information
The information included herein contains certain forward-looking statements with respect to the results of operations and businesses of Nationwide Life Insurance Company and
subsidiaries (NLIC, or collectively, the Company). Whenever used in this report, words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,”
“project,” “target,” and other words of similar meaning are intended to identify such forward-looking statements. These forward-looking statements involve
certain risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:
|
(i) |
the potential impact on the Company’s reported operations and related disclosures that could result from the adoption of
certain accounting and/or financial reporting standards issued by the FASB, the SEC or other standard-setting bodies; |
|
(ii) |
tax law changes impacting the tax treatment of life insurance and investment products; |
|
(iii) |
modification of the federal estate tax; |
|
(iv) |
heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new
products by new and existing competitors; |
|
(v) |
adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and
reserves, and other financial viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulatory changes resulting from sales practice investigations and/or claims
handling and escheat investigations; |
|
(vi) |
failure to expand distribution channels in order to obtain new customers or failure to retain existing customers; |
|
(vii) |
changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees; an acceleration of the amortization
of deferred policy acquisition costs (DAC) and/or value of business acquired (VOBA); a reduction in separate account assets or a reduction in the demand for the Company’s products; increased liabilities related to living benefits and death
benefit guarantees; |
|
(viii) |
reduction in the value of the Company’s investment portfolio as a result of changes in interest rates, yields and liquidity in
the market as well as geopolitical conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Company’s investment portfolio
specifically; increased liabilities related to living benefits and death benefit guarantees; corresponding impact on the ultimate realizability of deferred tax assets; |
|
(ix) |
general economic and business conditions, including capital and credit market conditions, which are less favorable than expected;
|
|
(x) |
competitive, regulatory or tax changes that affect the cost of, or demand for, the Company’s products; |
|
(xi) |
unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations; |
|
(xii) |
deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness), morbidity and
interest rates used in calculating reserve amounts and in pricing the Company’s products; |
|
(xiii) |
adverse litigation results and/or resolution of litigation and/or arbitration, investigation and/or inquiry results that could result in monetary
damages or impact the manner in which the Company conducts its operations; |
|
(xiv) |
adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from
failure to meet privacy regulations and/or protect the Company’s customers’ confidential information. |
|
(xv) |
actions of regulatory authorities under the Dodd-Frank Act and the Federal Deposit Insurance Act and other possible legislative and
regulatory actions and reforms; |
|
(xvi) |
uncertainty about the effectiveness of the U.S. government’s programs to stabilize the financial system or the promulgation of
additional regulations; |
|
(xvi) |
realized losses with respect to impairments of assets in the investment portfolio of the Company; |
|
(xvii) |
exposure to losses related to variable annuity guarantee benefits, including from significant and sustained downturns or extreme
volatility in equity markets; |
|
(xviii) |
unfavorable changes in the market value of our mortgage-backed securities; and |
|
(xix) |
defaults on commercial mortgages and volatility in their performance. |
Overview
Following is management’s discussion and analysis of the financial condition and results of operations of the Company for the three years ended December 31,
2011. This discussion should be read in conjunction with the audited consolidated financial statements and related notes beginning on page F-1 of this report.
See Business – Overview for a description of the Company and its ownership structure.
See Business – Business Segments for a description of the components of each segment and a description of
management’s primary profitability measure.
Revenues
and Expenses
The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees,
which are earned primarily from separate account values generated from the sale of individual and group variable annuities and life insurance products; cost of insurance charges earned on all life insurance products except traditional, which are
assessed on the amount of insurance in force in excess of the related policyholder account value; administrative fees, which include fees charged per contract on a variety of the Company's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period for annuity and certain life insurance contracts. Net investment income includes earnings on investments supporting fixed
annuities, the MTN program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment expenses. Other income includes asset fees, administrative fees, commissions
and other income earned by subsidiaries of the Company that provide administrative, marketing and distribution services.
Management makes decisions concerning the sale of
invested assets based on a variety of market, business, tax and other factors. All realized gains and losses generated by these sales, and changes in the valuation allowance not related to specific mortgage loans are reported in net
realized investment gains and losses. Also included in net realized investment gains and losses are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of hedged items; the
ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; change in fair value of embedded derivatives; and periodic net amounts paid or received on interest
rate swaps that do not qualify for hedge accounting treatment. All charges related to other-than-temporary impairments of available-for-sale securities and other investments are reported in other-than-temporary impairment
losses.
The Company’s primary expenses include interest credited to policyholder accounts, life insurance and annuity benefits, amortization of DAC and general business operating
expenses. Interest credited principally relates to individual and group fixed annuities, funding agreements backing the MTN program and certain life insurance products. Life insurance and annuity benefits include policyholder
benefits in excess of policyholder accounts for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.
The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from management’s initial estimates, with a
corresponding charge or credit to current period earnings. This process is referred to by the Company as a “true-up”, which generally is performed, and the resulting impact recognized, on a quarterly
basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or credit to
earnings if evidence suggests that these future assumptions and estimates should be revised. The Company refers to this process as “unlocking”, which generally is performed on an annual basis with any corresponding charge or
credit reflected in the second quarter. In addition, the Company regularly monitors its actual experience and evaluates relevant internal and external information impacting its assumptions and may unlock more frequently than annually if
such information and analysis warrants.
Profitability
The Company’s profitability largely depends on
its ability to effectively price and manage risk on its various products, administer customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and distribution of
lapses affect surrender charges and impact DAC amortization assumptions when lapse experience changes significantly.
In particular, the Company’s profitability is
driven by fee income on separate account products, general and separate account asset levels, and management’s ability to manage interest spread income. While asset fees are largely at guaranteed annual rates, amounts earned vary
directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to policyholder
accounts. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates and the level of invested assets;
the competitive environment; and other factors.
In addition, life insurance profits are significantly
impacted by mortality, morbidity and persistency experience. Asset impairments and the tax position of the Company also impact profitability.
Cumulative
Effect of Adoption of Accounting Principle
In March 2010, the FASB issued ASU 2010-11 which
clarifies the scope exception for embedded credit derivatives. The Company adopted this guidance effective July 1, 2010 and elected fair value treatment for synthetic collateralized debt obligations. The adoption of this guidance resulted
in a cumulative effect adjustment of $9 million decrease, net of taxes, to retained earnings with a corresponding increase to accumulated other comprehensive income (AOCI).
In June 2009, the FASB issued guidance under FASB ASC 810, Consolidation. This guidance changes the consolidation
guidance applicable to a variable interest entity (VIE). The Company adopted this guidance effective January 1, 2010. The adoption of this guidance resulted in an increase to noncontrolling interest of $46 million.
In April 2009, the FASB issued guidance under FASB ASC 320, Investments – Debt and Equity
Securities. The Company adopted this guidance as of January 1, 2009. The adoption of this guidance resulted in a cumulative-effect adjustment of $250 million increase, net of taxes, as an adjustment to the opening
balance of retained earnings with a corresponding decrease to the opening balance of AOCI.
Nationwide
Life Insurance Company of America and Subsidiaries Merger
On December 31, 2009, NLIC merged with its
affiliate, NLICA, with NLIC as the surviving entity. In addition, NLIC’s subsidiary, NLAIC, merged with a subsidiary of NLICA, NLACA, effective as of December 31, 2009, with NLAIC as the surviving entity. The merger was
accounted for at historical cost in a manner similar to a pooling of interests because the involved entities are under common control. NLICA and subsidiaries are reflected in the Company’s current and prior year consolidated
financial statements at the historical cost of the transferred net assets to provide comparative information as though the companies were combined for all periods presented.
Fair Value Measurements
As described in Note 2 to the audited consolidated
financial statements included in the F pages of this report, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources while unobservable inputs reflect the Company’s view of market assumptions in the absence of
observable market information. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. In determining fair value, the Company uses various methods including market, income and
cost approaches.
The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of
the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.
The Company categorizes financial assets and
liabilities recorded at fair value in the consolidated balance sheets as Level 1, Level 2 or Level 3 depending on the observability of inputs used to measure fair value.
The Company reviews its fair value hierarchy classifications for financial assets and liabilities quarterly. Changes in observability of significant valuation inputs identified
during these reviews may trigger reclassifications. Reclassifications are reported as transfers at the beginning of the period in which the change occurs.
Investments
The following table summarizes the sources used in determining the fair values of fixed maturity securities as of the dates indicated:
[Missing Graphic Reference]As of December 31, 2011,
Level 3 investments comprised 5% of total investments measured at fair value compared to 6% as of December 31, 2010.
To determine the fair value of securities for which market quotations are available, independent pricing services are most often utilized. For these securities, the Company
obtains the pricing services’ methodologies, inputs and assumptions and classifies the investments accordingly in the fair value hierarchy.
Non-binding broker quotes are also utilized to
determine the fair value of certain corporate debt, mortgage-backed and other asset-backed securities when quotes are not available from independent pricing services. Broker quotes are considered unobservable inputs, and these securities are
classified accordingly in the fair value hierarchy as only one broker quote is ordinarily obtained, the investment is not traded on an exchange, the pricing is not available to other entities and/or the transaction volume in the same or similar
investments has decreased such that generally only one quotation is available. As the brokers often do not provide the necessary transparency into their quotes
and methodologies, the Company periodically performs reviews and tests to ensure that quotes are a reasonable estimate of the investments’ fair value.
For certain fixed maturity securities not valued
using independent pricing services or broker quotes, a corporate pricing matrix or internally developed pricing model is most often used. The corporate pricing matrix is developed using private spreads for corporate securities with varying weighted
average lives and credit quality ratings. The weighted average life and credit quality rating of a particular fixed maturity security to be priced using the corporate pricing matrix are important inputs into the model and are used to determine a
corresponding spread that is added to the appropriate U.S. Treasury yield to create an estimated market yield for that security. The estimated market yield and other relevant factors are then used to estimate the fair value of the particular
security.
Credit Risk Associated with
Derivatives
The Company periodically evaluates the risks within the derivative portfolios due to credit exposure. When evaluating this risk, the Company considers several factors
which include, but are not limited to, the counterparty risk associated with derivative receivables, the Company’s own credit as it relates to derivative payables, the collateral thresholds associated with each counterparty, and changes in
relevant market data in order to gain insight into the probability of default by the counterparty. In addition, the effect the Company’s exposure to credit risk could have on the effectiveness of the Company’s hedging relationships is
considered. As of December 31, 2011 and 2010, the impact of the exposure to credit risk on the fair value measurement of derivatives and the effectiveness of the Company’s hedging relationships was
immaterial.
As of December 31, 2011 and 2010, the Company had received $1.0 billion and $351 million, respectively, of cash for derivative collateral, which is in turn invested in short-term
investments and fixed maturity securities. The Company held no material securities as off-balance sheet collateral on derivative transactions as of December 31, 2011 and 2010. As of December 31, 2011 and 2010, the Company had
pledged fixed maturity securities with a fair value of $152 million and $28 million, respectively, as collateral to various derivative counterparties. There are no contingent features associated with the Company’s derivative
instruments which would require additional collateral to be pledged to counterparties.
Future Policy Benefits and Claims
The fair value measurements for future policy benefits and claims relate to embedded derivatives associated with contracts with living benefit riders (GMABs, GLWBs) and
equity-indexed annuities. Related derivatives are internally valued. The valuation of guaranteed minimum benefit embedded derivatives is based on capital market and actuarial risk assumptions, including risk margin
considerations reflecting policyholder behavior. The Company uses observable inputs, such as
published swap rates, in its capital market
assumptions. Actuarial assumptions, including lapse behavior and mortality rates, are based on actual experience.
See Note 7 to the audited consolidated financial
statements included in the F pages of this report for a discussion of the net realized gains recognized on living benefit embedded derivatives.
Critical Accounting Policies
and Recently Issued Accounting Standards
The consolidated financial statements were
prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions affecting the amounts reported in the financial statements and accompanying notes.
The Company’s most critical estimates include, but are not limited to, those used to determine the following: the balance and amortization of DAC, investment
impairment losses, valuation allowances for mortgage loans, certain investment and derivative valuations, future policy benefits and claims liabilities including the valuation of embedded derivatives resulting from living benefit guarantees on
variable annuity contracts, goodwill, provision for income taxes and valuation of deferred tax assets. Actual results may differ significantly from those estimates.
Note 2 and Note 3 to the audited consolidated financial statements included in the F pages of this report
provide a summary of significant accounting policies and a discussion of recently issued accounting standards, respectively.
Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products
Investment
and universal life insurance products. The Company has deferred certain costs that vary with and primarily relate to acquiring business, consisting principally of commissions, premium taxes, certain expenses of the policy issue
and underwriting department, certain variable sales expenses that relate to and vary with the production of new and renewal business and other acquisition expenses net of those acquisition costs ceded to reinsurers. In addition, the Company defers
sales inducements, such as interest credit bonuses and jumbo deposit bonuses. The methods and assumptions used to amortize and assess recoverability of DAC depend on the type of insurance product.
Investment products primarily consist of individual and group variable and fixed deferred annuities in the Individual Investments and Retirement Plans
segments. Universal life insurance products include universal life insurance, variable universal life insurance, COLI, BOLI and other interest-sensitive life insurance policies in the Individual Protection segment. For these
products, the Company amortizes DAC with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, policy charges, and net realized investment gains and losses less policy
benefits and policy maintenance expenses. DAC for investments and universal life insurance products is subject to recoverability testing in the year of policy issuance and DAC for universal life insurance products is also subject to loss recognition
testing at the end of each reporting period.
The Company adjusts the DAC asset related to
investment and universal life insurance products to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale with the corresponding adjustment recorded in accumulated other comprehensive income (AOCI). The
adjustment to DAC represents the change in amortization of DAC that would have been required as a charge or credit to operations had such unrealized amounts been realized and allocated to the product lines.
The assumptions used in the estimation of future gross profits are based on the Company’s current best estimates of future events and are reviewed as part of an annual
process during the second quarter. During the annual process, the Company performs a comprehensive study of assumptions, including mortality and persistency studies, maintenance expense studies, and an evaluation of projected general and
separate account investment returns. The most significant assumptions that are involved in the estimation of future gross profits include future net separate account investment performance, surrender/lapse rates, interest margins and
mortality. Quarterly, consideration is given as to whether adjustments to the assumptions in the annual process for all other product lines are necessary. Currently, the Company’s long-term assumption for net separate account
investment performance is approximately 7% growth per year. The Company reviews this assumption, like others, as part of its annual process. Variances from the long-term assumption are expected since the majority of the
investments in the underlying separate accounts are in equity securities, which correlate in the aggregate with the Standard & Poor’s (S&P) 500 Index. The Company bases its reversion to the mean process on actual net
separate account investment performance from the anchor date to the valuation date. The Company then assumes different performance levels over the next three years such that the separate account mean return measured from the anchor date
to the end of the life of the product equals the long-term assumption. The assumed net separate account investment performance used in the DAC models is intended to reflect what is anticipated. However, based on historical
returns of the S&P 500 Index, and as part of its pre-set parameters, the Company’s
reversion to the mean process generally limits net separate account investment performance to 0-15% during the three-year reversion period.
In addition to the comprehensive annual study of assumptions, management evaluates the appropriateness of the individual variable annuity DAC balance quarterly within pre-set
parameters. These parameters are designed to appropriately reflect the Company’s long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of short-term experience on the
Company’s recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period, or if the recorded balance falls outside of these
parameters and management determines it is highly improbable to get back within the parameters during this time period, assumptions are required to be unlocked, and DAC is recalculated using revised best estimate assumptions. When DAC
assumptions are unlocked and revised, the Company continues to use the reversion to the mean process.
Changes in assumptions can have a significant
impact on the amount of DAC reported for investment and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is
required to record an increase or decrease in DAC amortization expense, which could be significant. In general, increases in the estimated long-term general and separate account returns result in increased expected future profitability
and may lower the rate of DAC amortization, while increases in long-term lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.
For variable annuity products, the DAC balance is sensitive to the effects of changes in the Company’s estimates of gross profits, primarily due to the significant portion
of the Company’s gross profits that are dependent upon the rate of return on assets held in separate accounts. This rate of return influences fees earned by the Company from these products and costs incurred by the Company
associated with minimum contractual guarantees, as well as other sources of future expected gross profits. As previously stated, the Company’s current long-term assumption for net separate account investment performance is
approximately 7% growth per year. In its ongoing evaluation of this assumption, the Company monitors its historical experience, market information and other relevant trends. To demonstrate the sensitivity of both the
Company’s variable annuity product DAC balance, which was approximately $2.6 billion in aggregate at December 31, 2011, and related amortization, a 1% increase (to 8%) or decrease (to 6%) in the long-term assumption for net separate account
investment performance would result in an approximately $8 million net increase or net decrease, respectively, in DAC amortization over the following year. The information provided above considers only changes in the assumption for
long-term net separate account investment performance and excludes changes in other assumptions used in the Company’s evaluation of DAC.
During the second quarter of 2011, the Company
conducted its annual comprehensive review of model assumptions used to project DAC and other related balances, including sales inducement assets, VOBA and unearned revenue reserves. The review covered all assumptions including mortality,
lapses, expenses and general and separate account returns. As a result of this review, certain assumptions were unlocked. The unlocked assumptions primarily related to favorable equity market performance, which caused the
variable annuity DAC balance to fall outside the Company’s preset parameters for the prescribed period, the update of actual performance in the Retirement Plans segment, and interest spread, mortality and maintenance expense assumptions in the
Individual Protection segment.
During the second quarter of 2011, the Company’s recorded balance of individual variable annuity DAC fell outside the Company’s preset parameters for the prescribed
period, which primarily was driven by favorable equity market performance compared to assumed net separate account returns. Accordingly, the Company recalculated DAC using revised best estimate assumptions, which resulted in an increase
in DAC and other related balances, including sales inducement assets, and a decrease in DAC amortization and other related balances of $114 million pre-tax in the Individual Investments segment. The Company used the reversion to the mean
process with the anchor date that was reset during 2007. The Company evaluated the assumed separate account performance level over the next three years and determined that the assumptions inherent in the reversion period were
reasonable. The annual net separate account growth rate for the mean reversion period is 15%.
Based upon the market performance in the second
half of 2011, the DAC balance for variable annuities is currently outside of the preset parameters. Accordingly, future periods may incur additional amortization of DAC if the Company’s actual returns are less than the assumed net
separate account performance.
The pre-tax positive (negative) impact on the Company’s assets and liabilities as a result of the unlocking of assumptions during the year ended December 31, 2011 was as
follows:
(in millions) |
DAC |
VOBA |
Unearned Revenue Reserves |
Sales Inducement Assets |
Total |
|
|
|
|
|
|
Segment: |
|
|
|
|
|
Individual
Investments |
$ 121 |
$ - |
$ - |
$ 4 |
$ 125 |
Retirement
Plans |
6 |
- |
- |
- |
6 |
Individual
Protection |
36 |
16 |
(17) |
- |
35 |
Total |
$ 163 |
$ 16 |
$ (17) |
$ 4 |
$ 166 |
During the second quarter of 2010, the Company
unlocked model assumptions in conjunction with its annual comprehensive review. The unlocked assumptions primarily related to lapse assumptions in the Individual Investment segment, market performance assumptions in the Retirement Plans segment, and
mortality, lapse and market performance assumptions in the Individual Protection segment.
The pre-tax positive (negative) impact on the
Company’s assets and liabilities as a result of the unlocking of assumptions during the year ended December 31, 2010 was as follows:
(in millions) |
DAC |
VOBA |
Unearned Revenue Reserves |
Sales Inducement Assets |
Total |
|
|
|
|
|
|
Segment: |
|
|
|
|
|
Individual
Investments |
$
4 |
$
- |
$
- |
$
- |
$
4 |
Retirement
Plans |
7 |
- |
- |
- |
7 |
Individual
Protection |
(22) |
13 |
1 |
- |
(8) |
Total |
$ (11) |
$ 13 |
$ 1 |
$ - |
$ 3 |
During the fourth quarter of 2009, the
Company’s recorded balance of individual variable annuity DAC fell outside the Company’s preset parameters for the prescribed period, which primarily was driven by the continued market recovery and favorable market performance compared
to assumed net separate account returns. Accordingly, the Company recalculated DAC using revised best estimate assumptions, which resulted in an increase in DAC and other related balances, including sales inducement assets, and a decrease
in DAC amortization and other related balances of $219 million pre-tax in the Individual Investments segment. The Company used the reversion to the mean process with the anchor date that was reset during 2007. The Company
evaluated the assumed separate account performance level over the next three years and determined that the assumptions inherent in the reversion period were reasonable. The annual net separate account growth rate for the mean reversion
period was 15%, the maximum rate under the Company’s parameters.
During the second quarter of 2009, the Company
conducted its annual comprehensive review of model assumptions used to project DAC and other related balances, including sales inducement assets, VOBA and unearned revenue reserves. The unlocked assumptions primarily related to lower
expected investment spreads and separate account returns across all segments.
The pre-tax positive (negative) impact on the
Company’s assets and liabilities as a result of the unlocking of these assumptions during the year ended December 31, 2009 was as follows:
(in millions) |
DAC |
VOBA |
Unearned Revenue Reserves |
Sales Inducement Assets |
Total |
|
|
|
|
|
|
Segment: |
|
|
|
|
|
Individual
Investments |
$
192 |
$
- |
$
- |
$
11 |
$
203 |
Retirement
Plans |
(8) |
- |
- |
- |
(8) |
Individual
Protection |
(44) |
(13) |
10 |
- |
(47) |
Total |
$ 140 |
$ (13) |
$ 10 |
$ 11 |
$ 148 |
Traditional
life insurance products. Generally, DAC is 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 is estimated using the same assumptions as those used for computing liabilities for future policy benefits at issuance. Under existing accounting guidance, the concept of DAC unlocking does not apply to
traditional life insurance products, although evaluations of DAC for recoverability at the time of policy issuance and loss recognition testing at each reporting period are required.
Results of
Operations
2011 Compared to 2010
The following table summarizes the Company’s
consolidated results of operations for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
Change |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
Policy charges: |
|
|
|
|
|
Asset fees |
$ 724 |
|
$
655 |
|
11% |
Cost of insurance
charges |
472 |
|
476 |
|
(1%) |
Administrative fees
|
259 |
|
209 |
|
24% |
Surrender fees |
51 |
|
59 |
|
(14%) |
Total policy
charges |
1,506 |
|
1,399 |
|
8% |
Premiums |
531 |
|
484 |
|
10% |
Net investment income
|
1,844 |
|
1,825 |
|
1% |
Net realized investment
losses |
(1,609) |
|
(236) |
|
NM |
Other-than-temporary impairment
losses |
|
|
|
|
|
Total other-than-temporary impairment losses |
(162) |
|
(394)
|
|
(59%) |
Non-credit portion of loss recognized in other comprehensive income |
95 |
|
174 |
|
(45%) |
Net other-than-temporary impairment losses recognized in earnings |
(67) |
|
(220) |
|
(70%) |
Other revenues |
3 |
|
2 |
|
50% |
Total revenues |
$ 2,208 |
|
$ 3,254 |
|
(32%) |
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
Interest credited to policyholder
accounts |
$ 1,033 |
|
$
1,056 |
|
(2%) |
Benefits and claims
|
1,062 |
|
873 |
|
22% |
Policyholder dividends
|
67 |
|
78 |
|
(14%) |
Amortization of deferred policy
acquisition costs |
76 |
|
396 |
|
(81%) |
Amortization of VOBA and other
intangible assets |
11 |
|
18 |
|
(39%) |
Interest expense |
70 |
|
55 |
|
27% |
Other expenses, net of
deferrals |
609 |
|
574 |
|
6% |
Total benefits and expenses |
$ 2,928 |
|
$ 3,050 |
|
(4%) |
|
|
|
|
|
|
(Loss) income from continuing operations before federal income tax (benefit) expense |
$ (720) |
|
$
204 |
|
NM |
Federal income tax (benefit) expense |
(382) |
|
24 |
|
NM |
Net (loss) income |
$ (338) |
|
$
180 |
|
NM |
Less: Net loss attributable to noncontrolling interest |
56 |
|
60 |
|
(7%) |
Net (loss) income attributable to NLIC |
$ (282) |
|
$ 240 |
|
NM |
The Company recorded a net loss for the year ended
December 31, 2011 compared to net income in the prior year primarily due to increases net realized investment losses and benefits and claims. Lower other-than-temporary impairment losses, higher policy charges and lower amortization of
DAC offset the overall decline.
During 2011, the Company recorded an increase in net realized investment losses of $912 million on interest rate swaps utilized as economic hedges designed to protect statutory
capital attributable to the declining interest rate environment in 2011. Additionally, the Company recognized an increase in net realized investment losses on living benefit embedded derivatives, net of economic hedging, of $372
million. These net realized losses primarily were driven by market volatility.
Benefits and claims increased primarily due to
reserve increases related to the growth in sales of L.inc and universal life insurance no-lapse guarantee products. Additionally, market volatility increased reserves on GMDB contracts and higher life-contingent immediate annuity reserves
related to new premium further contributed to the increase in benefits and claims.
Other-than-temporary impairment losses improved $153 million due to lower impairments on fixed maturity securities and commercial mortgage loans. As credit markets
have stabilized, cash flows generated from structured securities have also stabilized resulting in reduced impairments. Lower commercial mortgage loan impairments are attributed to improved performance of the underlying collateral of the
mortgage loans.
Higher asset and administrative fees drove the increase in policy charges primarily in the Individual Investments segment. Asset fees increased due to higher average
separate account values (up 12%). Administrative fees improved due to growth in sales of L.inc product new business.
Lower amortization of DAC primarily was due to a
favorable DAC unlock of $163 million during 2011 compared to an unfavorable DAC unlock of $11 million during 2010. Refer to Critical Accounting Polices and Recently Issued Accounting
Standards for a description of the DAC unlocks. Higher net realized investment losses on living benefit embedded derivatives in 2011 lowered amortization of DAC by $86 million. Additionally, lower gross profits further
contributed to the decline in amortization of DAC during 2011.
2010
Compared to 2009
The following table summarizes the Company’s consolidated results of operations for the years ended December 31:
(dollars in millions) |
2010 |
2009 |
Change |
|
|
|
|
Revenues: |
|
|
|
Policy charges: |
|
|
|
Asset fees |
$
655 |
$
562 |
17% |
Cost of insurance
charges |
476 |
470 |
1% |
Administrative fees
|
209 |
154 |
36% |
Surrender fees |
59 |
59 |
0% |
Total policy
charges |
1,399 |
1,245 |
12% |
Premiums |
484 |
470 |
3% |
Net investment income
|
1,825 |
1,879 |
(3%) |
Net realized investment (losses)
gains |
(236) |
454 |
(152%) |
Other-than-temporary impairment
losses |
|
|
|
Total other-than-temporary impairment losses |
(394)
|
(992)
|
(60%) |
Non-credit portion of loss recognized in other comprehensive income |
174 |
417 |
(58%) |
Net other-than-temporary impairment losses recognized in earnings |
(220) |
(575) |
(62%) |
Other income |
2 |
(4) |
(150%) |
Total revenues |
$ 3,254 |
$ 3,469 |
(6%) |
|
|
|
|
Benefits and expenses: |
|
|
|
Interest credited to policyholder
accounts |
$
1,056 |
$
1,100 |
(4%) |
Benefits and claims
|
873 |
812 |
8% |
Policyholder dividends
|
78 |
87 |
(10%) |
Amortization of deferred policy
acquisition costs |
396 |
466 |
(15%) |
Amortization of VOBA and other
intangible assets |
18 |
63 |
(71%) |
Interest expense |
55 |
55 |
0% |
Other expenses, net of
deferrals |
574 |
579 |
(1%) |
Total benefits and expenses |
$ 3,050 |
$ 3,162 |
(4%) |
|
|
|
|
Income from continuing operations before federal income tax expense |
$
204 |
$
307 |
(34%) |
Federal income tax expense |
24 |
48 |
(50%) |
Net income |
$
180 |
$
259 |
(31%) |
Less: Net loss attributable to noncontrolling interest |
60 |
52 |
15% |
Net income attributable to NLIC |
$ 240 |
$ 311 |
(23%) |
The decline in net income for the year ended
December 31, 2010 compared to the prior year was primarily was due to net realized investment losses and higher benefits and claims. Lower other-than-temporary impairment losses, higher policy charges and lower amortization of DAC and
VOBA offset the decline in net income.
During 2010, the Company recorded net realized
investment losses on living benefit embedded derivatives, net of economic hedging, of $155 million, a decrease of $569 million compared to 2009. These net realized losses were primarily driven by market volatility in the second quarter
and mortality and withdrawal assumption updates. Additionally, the Company recorded losses of $123 million on interest rate swaps utilized as statutory capital hedges in 2010 compared to gains of $183 million in 2009, attributable to
declines in interest rates during 2010. The overall decrease was partially offset by lower losses on derivatives associated with the Company’s economic hedging program for GMDB contracts of $84 million.
Higher benefits and claims were attributable to market-driven changes in the Company’s GMDB reserves. Improvements in the equity market conditions continued to
reduce the Company’s reserves on GMDB contracts during 2010. However, the reduction in exposure in 2010 was not as significant as 2009 resulting in higher GMDB benefit expense of $52 million.
Other-than-temporary impairment losses improved
$355 million favorably impacted by the strengthening economic environment, which led to advances in credit and equity markets in 2010. Improved credit conditions resulted in more stable expectations regarding future cash flows on
lower-rated corporate bonds and structured securities. During the year ended December 31, 2009, the Company recorded other-than-temporary impairment losses of $575 million related to lower fixed maturity and equity security impairments
driven by stabilizing market conditions in 2009 and changes in accounting literature pertaining to other-than-temporary impairments of investment securities.
Higher asset and administrative fees drove the
increase in policy charges. Asset fees increased primarily in the Individual Investment segment due to higher average separate account values (up 19%) driven by improved equity market performance. Administrative fees improved
due to growth in sales of L.inc and universal life insurance products.
Net realized investment losses on living benefit
embedded derivatives in 2010 compared to gains in 2009 lowered amortization of DAC by $346 million in 2010. The decline in amortization was offset by unfavorable DAC unlocks in 2010 of $11 million compared to favorable DAC unlocks in 2009
of $140 million. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of the DAC unlocks. Additionally, higher gross profits in
the Individual Investments and Individual Protection segments further offset the decline in amortization of DAC during 2010. During the year ended December 31, 2009, the Company recorded net realized investment gains on living benefit
embedded derivatives, net of economic hedging losses of $414 million as a result of higher interest rates, lower volatility assumptions and an increase to the nonperformance component of the discount rate in 2009.
Amortization of VOBA and other intangible assets decreased due to a favorable VOBA unlock of $13 million in 2010 compared to an unfavorable VOBA unlock of $13 million in
2009. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of the 2010 and 2009 VOBA unlocks. Additionally, the Retirement
Plans segment recorded a pre-tax charge of $8 million during 2009 related to the exit of NFN retirement services channel.
Business Segments
Individual Investments
2011 Compared to
2010
The following table summarizes selected financial data for the Company’s Individual Investments segment for the years ended December 31:
(in millions) |
|
2011 |
|
2010 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Policy charges: |
|
|
|
|
|
|
Asset fees |
|
$ 593 |
|
$
525 |
|
13% |
Administrative fees
|
|
160 |
|
91 |
|
76% |
Surrender fees |
|
28 |
|
30 |
|
(7%) |
Total policy
charges |
|
781 |
|
646 |
|
21% |
Premiums |
|
234 |
|
209 |
|
12% |
Net investment income
|
|
527 |
|
569 |
|
(7%) |
Other revenues |
|
(59) |
|
(82) |
|
(28%) |
Total revenues |
|
$ 1,483 |
|
$ 1,342 |
|
11% |
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
Interest credited to policyholder
accounts |
|
$ 374 |
|
$ 391 |
|
(4%) |
Benefits and claims
|
|
476 |
|
354 |
|
34% |
Amortization of deferred policy
acquisition costs |
|
96 |
|
231 |
|
(58%) |
Amortization of VOBA and other
intangible assets |
|
1 |
|
1 |
|
0% |
Other expenses, net of deferrals |
|
182 |
|
180 |
|
1% |
Total benefits and expenses |
|
$ 1,129 |
|
$ 1,157 |
|
(2%) |
Pre-tax operating earnings |
|
$ 354 |
|
$ 185 |
|
91% |
Pre-tax operating earnings increased for the year ended December 31, 2011 compared to 2010 due to higher policy charges and lower amortization of DAC, partially offset by higher
benefits and claims.
Higher administrative and asset fees drove the increase in policy charges. Administrative fees increased $69 million due to growth in sales of L.inc product new
business. Average equity market growth and positive net cash flows improved asset fees by $68 million as average separate account values grew 12%.
A favorable DAC unlock in 2011 lowered amortization
of DAC by $121 million. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of DAC unlocks.
The increase in benefits and claims was attributable to higher guaranteed benefit expense of $57 million related to growth in L.inc product new business. Additionally,
market volatility increased reserves on GMDB contracts by $40 million (offset by economic hedging gains of $31 million included in other revenues) and higher life-contingent immediate annuity reserves of $32 million related to new premium further
contributed to the increase in benefits and claims.
2010 Compared to
2009
The following table summarizes selected financial data for the Company’s Individual Investments segment for the years ended December 31:
(dollars in millions) |
|
2010 |
|
2009 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Policy charges: |
|
|
|
|
|
|
Asset fees |
|
$
525 |
|
$
441 |
|
19% |
Administrative fees
|
|
91 |
|
50 |
|
82% |
Surrender fees |
|
30 |
|
31 |
|
(3%) |
Total policy
charges |
|
646 |
|
522 |
|
24% |
Premiums |
|
209 |
|
191 |
|
9% |
Net investment income
|
|
569 |
|
562 |
|
1% |
Other revenues |
|
(82) |
|
(168) |
|
(51%) |
Total revenues |
|
$ 1,342 |
|
$ 1,107 |
|
21% |
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
Interest credited to policyholder
accounts |
|
$ 391 |
|
$ 394 |
|
(1%) |
Benefits and claims
|
|
354 |
|
247 |
|
43% |
Amortization of deferred policy
acquisition costs |
|
231 |
|
(1) |
|
NM |
Amortization of VOBA and other
intangible assets |
|
1 |
|
1 |
|
- |
Other expenses, net of deferrals |
|
180 |
|
178 |
|
1% |
Total benefits and expenses |
|
$ 1,157 |
|
$ 819 |
|
41% |
Pre-tax operating earnings |
|
$ 185 |
|
$ 288 |
|
(36%) |
The decline in pre-tax operating earnings for the year ended December 31, 2010 compared to 2009 was driven by higher amortization of DAC and higher benefits and
claims. The declines were offset by higher policy charges, other revenues and premiums.
Higher amortization of DAC primarily was driven by
lower favorable DAC unlocks in 2010 compared to 2009, which lowered amortization of DAC by $188 million. Refer to Critical Accounting Polices and Recently Issued Accounting
Standards for a description of DAC unlocks. Additionally, higher variable annuity gross profits in 2010 contributed to the overall increase in amortization.
Higher benefits and claims were attributable to market-driven changes in the Company’s GMDB reserves. Improvements in the equity market conditions continued to
reduce the Company’s reserves on GMDB contracts during 2010. However, the reduction in exposure in 2010 was not as significant as 2009 resulting in higher GMDB benefit expense of $52 million. Additionally, higher
guaranteed benefit expense of $31 million related to growth in L.inc product new business and higher reserve accruals on income products of $17 million driven by higher sales (see premium discussion below) contributed to the overall increase in
benefits and claims.
Higher asset and administrative fees drove the increase in policy charges. Asset fees increased due to higher average separate account values (up 19%) driven by
improved equity market performance. Administrative fees improved due to growth in sales of L.inc product new business.
Other revenues resulted in a lower net loss due to
a decline in net realized losses of $84 million on derivatives associated with the Company’s economic hedging program for GMDB contracts.
A 6% increase in sales of income products in the
current year generated higher premiums driven by customer demand.
Retirement
Plans
2011 Compared to 2010
The following table summarizes selected financial
data for the Company’s Retirement Plans segment for the years ended December 31:
(in millions) |
|
2011 |
|
2010 |
|
Change |
|
|
|
|
|
|
|
Statements Operations Data |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Policy charges: |
|
|
|
|
|
|
Asset
fees |
|
$ 88 |
|
$
89 |
|
(1%) |
Administrative
fees |
|
7 |
|
8 |
|
(13%) |
Surrender fees |
|
1 |
|
1 |
|
- |
Total policy charges |
|
96 |
|
98 |
|
(2%) |
Net investment income |
|
715 |
|
691 |
|
3% |
Total revenues |
|
$ 811 |
|
$ 789 |
|
3% |
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
Interest credited to policyholder
accounts |
|
$ 441 |
|
$ 424 |
|
4% |
Amortization of deferred policy
acquisition costs |
|
19 |
|
30 |
|
(37%) |
Other expenses, net of deferrals |
|
158 |
|
143 |
|
10% |
Total benefits and expenses |
|
$ 618 |
|
$ 597 |
|
4% |
Pre-tax operating earnings |
|
$ 193 |
|
$ 192 |
|
1% |
Pre-tax operating earnings were up slightly for the year ended December 31, 2011 compared to 2010.
Interest spread income increased primarily due to a 4% increase in the average general account assets as compared to the prior year.
2010 Compared to
2009
The following table summarizes selected financial data for the Company’s Retirement Plans segment for the years ended December 31:
(dollars in millions) |
|
2010 |
|
2009 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Policy charges: |
|
|
|
|
|
|
Asset
fees |
|
$
89 |
|
$
83 |
|
7% |
Administrative
fees |
|
8 |
|
9 |
|
(11%) |
Surrender fees |
|
1 |
|
1 |
|
0% |
Total policy charges |
|
98 |
|
93 |
|
5% |
Net investment income |
|
691 |
|
679 |
|
2% |
Total revenues |
|
$ 789 |
|
$ 772 |
|
2% |
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
Interest credited to policyholder
accounts |
|
$ 424 |
|
$ 433 |
|
(2%) |
Amortization of deferred policy
acquisition costs |
|
30 |
|
45 |
|
(33%) |
Amortization of VOBA and other
intangible assets |
|
- |
|
9 |
|
NM |
Other expenses, net of deferrals |
|
143 |
|
149 |
|
(4%) |
Total benefits and expenses |
|
$ 597 |
|
$ 636 |
|
(6%) |
Pre-tax operating earnings |
|
$ 192 |
|
$ 136 |
|
41% |
Pre-tax operating earnings increased for the year ended December 31, 2010 compared to 2009 primarily due to higher interest spread income and lower amortization of DAC, VOBA and
other intangible assets.
Interest spread income increased as interest spread margins widened to 227 basis points in 2010 compared to 211 basis points in 2009 due to improved market yields and lower
crediting rates. Included in 2010 were 4 basis points, or $5 million, of mortgage loan prepayments and bond call premiums compared to 3 basis point, or $4 million, in 2009.
Amortization of DAC declined due to a favorable DAC unlock of $7 million in 2010 compared to an unfavorable DAC unlock of $8 million in 2009. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of the 2010 and 2009 DAC unlocks.
The decline in amortization of VOBA and other intangible assets was driven by the Company’s exit of the NFN retirement services channel in 2009. As a result, a
pre-tax charge of $8 million was recorded in 2009 related to VOBA and intangible assets.
Individual
Protection
2011 Compared to 2010
The following table summarizes selected financial
data for the Company’s Individual Protection segment for the years ended December 31:
(in millions) |
|
2011 |
|
2010 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Policy charges: |
|
|
|
|
|
|
Asset
fees |
|
$ 43 |
|
$
41 |
|
5% |
Cost of insurance
charges |
|
472 |
|
476 |
|
(1%) |
Administrative
fees |
|
92 |
|
107 |
|
(14%) |
Surrender fees |
|
22 |
|
28 |
|
(21%) |
Total policy charges |
|
629 |
|
652 |
|
(4%) |
Premiums |
|
297 |
|
275 |
|
8% |
Net investment income
|
|
533 |
|
510 |
|
5% |
Total revenues |
|
$ 1,459 |
|
$ 1,437 |
|
2% |
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
Interest credited to policyholder
accounts |
|
$ 198 |
|
$
199 |
|
(1%) |
Benefits and claims
|
|
598 |
|
524 |
|
14% |
Policyholder dividends
|
|
67 |
|
78 |
|
(14%) |
Amortization of deferred policy
acquisition costs |
|
103 |
|
184 |
|
(44%) |
Amortization of VOBA and other
intangible assets |
|
12 |
|
19 |
|
(37%) |
Other expenses, net of deferrals |
|
181 |
|
172 |
|
5% |
Total benefits and expenses |
|
$ 1,159 |
|
$ 1,176 |
|
(1%) |
Pre-tax operating earnings |
|
$ 300 |
|
$ 261 |
|
15% |
The increase in pre-tax operating earnings for the year ended December 31, 2011 compared to 2010 was due to lower amortization of DAC, higher interest spread income and higher
premiums, partially offset by higher benefits and claims and lower policy charges.
Lower amortization of DAC primarily was
attributable to a favorable DAC unlock of $36 million in 2011 compared to an unfavorable unlock of $22 million in 2010. Refer to Critical Accounting Polices and Recently Issued Accounting
Standards for a description of the DAC unlocks.
Interest spread income increased primarily due to
4% growth in average general account assets during 2011 driven by continued growth of the fixed universal life insurance business.
Premiums improved during 2011 due to fewer ceded
premiums on new traditional life insurance products.
The decrease in policy charges was driven by an
unfavorable unlock of assumptions related to administration fees during 2011. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of the
unlock.
Growth in universal life insurance no-lapse guarantee products and updates to benefit ratio assumptions increased benefits and claims.
2010 Compared to
2009
The following table summarizes selected financial data for the Company’s Individual Protection segment for the years ended December 31:
(dollars in millions) |
|
2010 |
|
2009 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Policy charges: |
|
|
|
|
|
|
Asset
fees |
|
$
41 |
|
$
38 |
|
8% |
Cost of insurance
charges |
|
476 |
|
470 |
|
1% |
Administrative
fees |
|
107 |
|
99 |
|
8% |
Surrender fees |
|
28 |
|
27 |
|
4% |
Total policy charges |
|
652 |
|
634 |
|
3% |
Premiums |
|
275 |
|
279 |
|
(1%) |
Net investment income |
|
510 |
|
492 |
|
4% |
Total revenues |
|
$ 1,437 |
|
$ 1,405 |
|
2% |
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
Interest credited to policyholder
accounts |
|
$
199 |
|
$
201 |
|
(1%) |
Benefits and claims
|
|
524 |
|
538 |
|
(3%) |
Policyholder dividends
|
|
78 |
|
87 |
|
(10%) |
Amortization of deferred policy
acquisition costs |
|
184 |
|
158 |
|
16% |
Amortization of VOBA and other
intangible assets |
|
19 |
|
45 |
|
(58%) |
Other expenses, net of deferrals |
|
172 |
|
184 |
|
(7%) |
Total benefits and expenses |
|
$ 1,176 |
|
$ 1,213 |
|
(3%) |
Pre-tax operating earnings |
|
$ 261 |
|
$ 192 |
|
36% |
The increase in pre-tax operating earnings for
the year ended December 31, 2010 compared to 2009 was driven by lower amortization of VOBA, higher policy charges, higher interest spread income and lower benefits expense. The increase was partially offset by higher amortization of
DAC.
Amortization of VOBA and other intangible assets decreased due to a favorable VOBA unlock of $13 million in 2010 compared to an unfavorable VOBA unlock of $13 million in
2009. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of the VOBA unlocks.
Interest spread income increased primarily due to a 5% rise in average general account assets during 2010 driven by growth in sales of universal life insurance products and
crediting rate reductions in traditional and corporate life products.
The increase in policy charges was driven by growth
in administration fees due to growth in universal life insurance sales.
Updates to benefit ratio assumptions due to
improved equity market conditions lowered benefits and claims by $9 million.
Higher amortization of DAC primarily was attributable to higher gross profits during 2010. The increase was partially offset by lower unfavorable DAC unlocks of $22
million in 2010 compared to $44 million in 2009. Refer to Critical Accounting Polices and Recently Issued Accounting Standards for a description of the DAC unlocks.
Corporate
and Other
2011 Compared to 2010
The following table summarizes selected financial
data for the Company’s Corporate and Other segment for the years ended December 31:
(in millions) |
|
2011 |
|
2010 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
Net
investment income |
|
$ 69 |
|
$
55 |
|
25% |
Other revenues |
|
(1) |
|
25 |
|
NM |
Total operating revenues |
|
$ 68 |
|
$ 80 |
|
(15%) |
|
|
|
|
|
|
|
Benefits and operating expenses: |
|
|
|
|
|
|
Interest
credited to policyholder accounts |
|
$ 20 |
|
$
42 |
|
(52%) |
Interest
expense |
|
70 |
|
55 |
|
27% |
Other expenses, net of deferrals |
|
32 |
|
19 |
|
68% |
Total benefits and operating expenses |
|
$ 122 |
|
$ 116 |
|
5% |
Pre-tax
operating loss |
|
$ (54) |
|
$
(36) |
|
50% |
|
|
|
|
|
|
|
Add: non-operating net realized investment losses1 |
|
(1,546) |
|
(177) |
|
NM |
Add: non-operating other-than-temporary
impairment losses |
|
(67) |
|
(220) |
|
(70%) |
Add: adjustment to amortization of DAC and
other related to net |
|
|
|
|
|
|
realized investment gains and losses |
|
156 |
|
59 |
|
NM |
Add: net loss attributable to noncontrolling interest |
|
(56) |
|
(60) |
|
(7%) |
Loss from continuing operations before federal |
|
|
|
|
|
|
income tax benefit |
|
$ (1,567) |
|
$ (434) |
|
261% |
__________
|
1 |
Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment,
trading portfolio realized gains and losses, trading portfolio valuation changes, net realized gains and losses related to hedges on GMDB contracts and securitizations). |
The Company recorded a larger pre-tax operating loss during the year ended December 31, 2011 compared to 2010 due to lower other revenues and higher interest
expense. The declines were partially offset by improved interest spread income.
Lower other revenues were driven by gains on sale
of commercial mortgage loans held for sale of $14 million and valuation gains on synthetic collateralized debt obligations of $10 million in 2010.
Interest expense increased $15 million due to
interest payments made in 2011 on a variable funding surplus note issued by an indirect wholly-owned subsidiary of NLIC on December 31, 2010 and borrowings on a line of credit agreement with NLIC’s parent company, NFS. See Liquidity and Capital Resources for additional details.
Interest spread income increased due to higher
asset volume as proceeds from borrowings on a line of credit agreement with NFS were invested in fixed maturity securities during 2011. Additionally, lower interest spread losses on MTNs of $16 million contributed to the increase due to
declining asset volume as a result of note maturities of $504 million during 2011.
Higher non-operating realized investment losses
were attributable to increased losses of $912 million on interest rate swaps utilized as statutory capital hedges attributable to the declining interest rate environment. Additionally, the Company recognized higher net realized investment
losses on living benefit embedded derivatives, net of economic hedging, of $372 million.
Non-operating other-than-temporary impairment
losses were favorably impacted by stabilized credit markets in 2011.
Higher net losses on living benefit embedded
derivatives during 2011 favorably impacted the adjustment to amortization of DAC and other related to net realized investment gains and losses.
See Note 6 of the audited consolidated financial
statements included in the F pages of this report, for additional information on net realized investment gains and losses and other-than-temporary impairment losses.
2010 Compared to 2009
The following table summarizes selected financial
data for the Company’s Corporate and Other segment for the years ended December 31:
(in millions) |
|
2010 |
|
2009 |
|
Change |
|
|
|
|
|
|
|
Statements of Operations Data |
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
Net
investment income |
|
$
55 |
|
$
146 |
|
(62%) |
Other revenues |
|
25 |
|
(1) |
|
NM |
Total operating revenues |
|
$ 80 |
|
$ 145 |
|
(45%) |
|
|
|
|
|
|
|
Benefits and operating expenses: |
|
|
|
|
|
|
Interest
credited to policyholder accounts |
|
$
42 |
|
$
72 |
|
(42%) |
Interest
expense |
|
55 |
|
55 |
|
0% |
Other expenses, net of deferrals |
|
19 |
|
22 |
|
(14%) |
Total benefits and operating expenses |
|
$ 116 |
|
$ 149 |
|
(22%) |
Pre-tax
operating loss |
|
$
(36) |
|
$
(4) |
|
NM |
|
|
|
|
|
|
|
Add: non-operating net realized investment losses1 |
|
(177) |
|
619 |
|
NM |
Add: non-operating total
other-than-temporary impairment losses |
|
(220) |
|
(575) |
|
(62%) |
Add: adjustment to amortization of DAC and
other related to net |
|
|
|
|
|
|
realized investment gains and losses |
|
59 |
|
(297) |
|
NM |
Add: net loss attributable to noncontrolling interest |
|
(60) |
|
(52) |
|
15% |
Loss from continuing operations before federal |
|
|
|
|
|
|
income tax benefit |
|
$ (434) |
|
$ (309) |
|
40% |
__________
|
1 |
Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment,
trading portfolio realized gains and losses, trading portfolio valuation changes, net realized gains and losses related to hedges on GMDB contracts and securitizations). |
The Company recorded a larger pre-tax operating loss during the year ended December 31, 2010 compared to 2009 due to lower interest spread income offset by higher other
revenues.
The decrease in interest spread income was driven by lower income on distressed securities primarily due to a decline in the size of the portfolio during
2010. Additionally, lower MTN interest spread income contributed to the decline due to lower U.S. London Interbank Offered Rate (LIBOR) rates and declining asset volume as a result of note maturities of $851 million during
2010.
Higher other revenues were driven by gains on sale of commercial mortgage loans held for sale of $14 million during 2010. Additionally, the Company elected fair value
treatment for synthetic collateralized debt obligations previously held as available for sale securities as permitted by the adoption of new accounting guidance. During 2010, the Company recorded valuation gains of $10 million on these
synthetic collateralized debt obligations.
Lower non-operating realized investment gains and
losses were driven by realized losses of $155 million on living benefit embedded derivatives, net of economic hedging activity, in 2010 compared to gains of $414 million in 2009. Additionally, the Company recorded losses of $123 million
on interest rate swaps utilized as statutory capital hedges in 2010 compared to gains of $183 million in 2009. During the year ended December 31, 2009, the Company recorded net realized investment gains on living benefit embedded derivatives, net of
economic hedging losses of $414 million as a result of higher interest rates, lower volatility assumptions and an increase to the nonperformance component of the discount rate in 2009.
Non-operating other-than-temporary impairment
losses improved $355 million favorably impacted by the improvements in equity and credit markets in 2010. Improved credit conditions resulted in more stable expectations regarding future cash flows on lower-rated corporate bonds and
structured securities. During the year ended December 31, 2009, the Company recorded other-than-temporary impairment losses of $575 million related to lower fixed maturity and equity security impairments driven by stabilizing market conditions in
2009 and changes in accounting literature pertaining to other-than-temporary impairments of investment securities.
The losses on living benefit embedded derivatives
during 2010 favorably impacted the adjustment to amortization of DAC and other related to net realized investment gains and losses.
See Note 6 of the audited consolidated financial
statements included in the F pages of this report, for additional information on net realized investment gains and losses and other-than-temporary impairment losses.
Liquidity and Capital Resources
Liquidity and capital resources demonstrate the
overall financial strength of the Company and its ability to generate cash flows from its operations and borrow funds at competitive rates to meet operating and growth needs.
The Company’s capital structure consists of long-term debt and shareholder’s equity. The following table summarizes the Company’s capital structure
as of December 31:
(in millions) |
2011 |
2010 |
2009 |
|
|
|
|
Long-term debt |
$ 991 |
$ 978 |
$ 706 |
|
|
|
|
Shareholder's equity, excluding accumulated other
comprehensive income (loss) |
5,181 |
5,463 |
5,232 |
Accumulated other comprehensive income (loss) |
626 |
321 |
(266) |
Total shareholder's equity |
$ 5,807 |
$ 5,784 |
$ 4,966 |
Total capital |
$ 6,798 |
$ 6,762 |
$ 5,672 |
A primary liquidity concern with respect to annuity
and life insurance products is the risk of early policyholder withdrawal. The Company attempts to mitigate this risk by offering variable products where the investment risk is transferred to the policyholder, charging surrender fees at
the time of withdrawal for certain products, applying a market value adjustment to withdrawals for certain products in the Company’s general account, and monitoring and matching anticipated cash inflows and outflows.
For individual annuity products, surrender charges generally are calculated as a percentage of deposits and are assessed at declining rates during the first seven years after a
deposit is made.
For group annuity products, surrender charge amounts and periods can vary significantly depending on the terms of each contract and the compensation structure for the
producer. Generally, surrender charge percentages for group products are less than individual products because the Company incurs lower expenses at contract origination for group products. In addition, the majority of general
account group annuity reserves are subject to a market value adjustment at withdrawal.
Life insurance policies are less susceptible to
withdrawal than annuity products because policyholders generally must undergo a new underwriting process and may incur a surrender fee in order to obtain a new insurance policy.
The short-term and long-term liquidity requirements of the Company are monitored regularly to match cash inflows with cash requirements. The Company reviews its
short-term and long-term projected sources and uses of funds and the asset/liability, investment and cash flow assumptions underlying these projections. The Company periodically makes adjustments to its investment policies to reflect
changes in short-term and long-term cash needs and changing business and economic conditions.
Given the Company’s historical cash flows
from operating and investing activities and current financial results, management of the Company believes that cash flows from operating activities over the next year will provide sufficient liquidity for the operations of the Company and sufficient
funds for interest payments.
Short-Term
Debt
The following table summarizes short-term debt and weighted average annual interest rates as of December 31:
(in millions) |
|
2011 |
|
2010 |
|
|
|
|
|
$600 million
commercial paper program (0.30% and 0.35%, respectively) |
|
$ 300 |
|
$
300 |
$600 million
promissory note and line of credit (1.73% in 2011) |
|
$ 477 |
|
$
- |
Total short-term debt |
|
$ 777 |
|
$ 300 |
In May 2011, NMIC, NFS, and NLIC entered into a
$600 million revolving credit facility upon expiration of its existing facility of the same amount. The new facility matures in May 2015 and is subject to various covenants, as defined in the agreement. NLIC had no amounts outstanding
under the new or existing facilities as of December 31, 2011 and December 31, 2010.
In April 2011, the Company entered into a $600
million unsecured revolving promissory note and line of credit agreement with its parent company, NFS. Outstanding principal balances of the line of credit bear interest at the rate of six-month U.S. LIBOR plus 1.25%. Interest is due and payable as
of the last day of each interest period, as defined in the agreement, while there are outstanding principal balances. Under the terms of the agreement, NLIC may borrow, repay and re-borrow advances under the line of credit at any time prior to the
termination of the note, which, among other conditions, is April 2012, subject to automatic renewal for additional one year periods unless either party terminates the agreement. NLIC had a weighted average of $506 million of the line of credit
outstanding during 2011. During 2011, $600 million was the maximum amount outstanding.
In June 2010, NLIC entered into an agreement
reducing the commercial paper program from $800 million to $600 million. The rating agency guidelines recommend that NLIC maintain minimum liquidity backup, which includes cash and liquid assets as well as committed bank lines, equal to
50% of any amounts outstanding under the commercial paper program. Therefore, availability under the aggregate $600 million credit facility is reduced by the amount outstanding in excess of available cash and liquid assets. NLIC had a weighted average of $301 million of the commercial paper outstanding during 2011. During 2011, $333 million was the maximum amount of the commercial paper outstanding.
The Company has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending
program. The maximum amount available under the agreement is $350 million. The borrowing rate on this program is equal to one-month U.S. LIBOR. The Company had no amounts outstanding under this agreement as of
December 31, 2011 and 2010.
The terms of each debt instrument contain various restrictive covenants, including, but not limited to, minimum statutory surplus and minimum net worth requirements, and maximum
debt to tangible net worth requirements, as defined in the agreements. The Company was in compliance with all covenants as of December 31, 2011 and 2010.
The amount of interest paid on short-term
debt was $5 million in 2011 and immaterial in 2010 and 2009.
Long-Term
Debt
The following table summarizes long term debt as of December 31:
(in millions) |
|
2011 |
|
2010 |
|
|
|
|
|
8.15%
surplus note, due June 27, 2032, payable to NFS |
|
$ 300 |
|
$
300 |
7.50%
surplus note, due December 17, 2031, payable to NFS |
|
300 |
|
300 |
6.75%
surplus note, due December 23, 2033, payable to NFS |
|
100 |
|
100 |
Variable
funding surplus note, due December 31, 2040 |
|
285 |
|
272 |
Other |
|
6 |
|
6 |
Total long-term debt |
|
$ 991 |
# |
$ 978 |
On December 31, 2010, Olentangy Reinsurance, LLC, a
special purpose financial captive insurance subsidiary of NLAIC domiciled in the State of Vermont, issued a variable funding surplus note to Nationwide Corporation, a majority-owned subsidiary of NMIC. The note is redeemable in full or
partial amount at any time subject to proper notice and approval. A redemption premium shall be payable if the note is redeemed on or prior to the third anniversary date of the note’s issuance. The note bears interest at the rate of
three-month U.S. LIBOR plus 2.80% payable quarterly. Olentangy Reinsurance, LLC agrees to draw down or reduce principal amounts in accordance with the terms outlined in the purchase agreement. The maximum amount outstanding
under the agreement is $313 million in 2016. The Company made interest payments on this surplus note of $9 million during 2011. Any payment of interest or principal on the note requires the prior approval of the State of Vermont.
The Company made interest payments to NFS on surplus notes totaling $54 million in 2011, 2010, and 2009. Payments of interest and principal under the notes require the
prior approval of the ODI.
Guarantees
See Note 6 to the audited consolidated financial
statements included in the F pages of this report for a description of the potential impact on liquidity of the Company’s tax credit funds.
Contractual Obligations and
Commitments
The following table summarizes the Company’s contractual obligations and commitments as of December 31, 2011 expected to be paid in the periods
presented. Payment amounts reflect the Company’s estimate of undiscounted cash flows related to these obligations and commitments. Balance sheet amounts were determined in accordance with GAAP and may differ from the
summation of undiscounted cash flows. The most significant difference relates to future policy benefits for life and health insurance, which include discounting.
|
Payments due by period |
Amount |
|
Less |
|
|
More |
|
per |
|
than
1 |
1-3 |
3-5 |
than
5 |
|
balance |
(in millions) |
year |
years |
years |
years |
Total |
sheet |
|
|
|
|
|
|
|
Debt1: |
|
|
|
|
|
|
Short-term |
$
778 |
$
- |
$
- |
$
- |
$
778 |
$
777 |
Long-term |
63 |
126 |
127 |
1,937 |
2,253 |
991 |
Subtotal |
$ 841 |
$ 126 |
$ 127 |
$ 1,937 |
$ 3,031 |
$ 1,768 |
|
|
|
|
|
|
|
License obligation |
1 |
- |
- |
- |
1 |
- |
|
|
|
|
|
|
|
Purchase and
lending commitments: |
|
|
|
|
|
|
Fixed maturity securities4 |
20 |
- |
- |
- |
20 |
- |
Commercial mortgage loans4 |
22 |
- |
- |
- |
22 |
- |
Limited
partnerships3 |
130 |
- |
- |
- |
130 |
- |
Subtotal |
$ 172 |
$ - |
$ - |
$ - |
$ 172 |
$ - |
|
|
|
|
|
|
|
Future
policy benefits and claims 5,6,7: |
|
|
|
|
|
|
Fixed
annuities and fixed option of variable annuities |
1,585 |
2,946 |
2,040 |
4,888 |
11,459 |
10,095 |
Life
insurance |
764 |
1,558 |
1,560 |
18,054 |
21,936 |
9,338 |
Single
premium immediate annuities |
318 |
582 |
496 |
2,996 |
4,392 |
2,455 |
Group
pension deferred fixed annuities |
1,471 |
2,670 |
2,167 |
8,148 |
14,456 |
12,638 |
Funding
agreements backing MTNs |
|
|
|
|
|
|
and accident & health insurance2,8,11 |
632 |
- |
- |
- |
632 |
727 |
Subtotal |
$ 4,770 |
$ 7,756 |
$ 6,263 |
$ 34,086 |
$ 52,875 |
$ 35,253 |
|
|
|
|
|
|
|
Cash and
securities collateral 9, 10: |
|
|
|
|
|
|
Cash collateral on securities
lending |
105 |
- |
- |
- |
105 |
105 |
Cash collateral on derivative
transactions |
1,028 |
- |
- |
- |
1,028 |
1,028 |
Securities collateral on derivative
transactions |
1 |
- |
- |
- |
1 |
- |
Subtotal |
$ 1,134 |
$ - |
$ - |
$ - |
$ 1,134 |
$ 1,133 |
|
|
|
|
|
|
|
Total |
$ 6,918 |
$ 7,882 |
$ 6,390 |
$ 36,023 |
$ 57,213 |
$ 38,154 |
__________
|
1 |
No contractual provisions exist that could create, increase or accelerate those obligations presented. The amount presented includes
contractual principal payments and interest based on rates in effect at December 31, 2011. |
|
2 |
No contractual provisions exist that could create, accelerate or materially increase those obligations presented. The amount presented
includes contractual principal payments and interest based on rates in effect at December 31, 2011. |
|
3 |
Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the obligations presented are either
date or event specific. For date specific obligations, the Company is required to fund a specified amount on a stated date provided there are no defaults under the agreement. For event specific obligations, the Company is
required to fund a specified amount of its capital commitment when properties in a fund become fully stabilized. For event specific obligations, the call date of these commitments may extend beyond one year but has been reflected in
payments due in less than one year due to the call features. The Company’s capital typically is called within one to four years, depending on the timing of events. |
|
4 |
A significant portion of policy contract benefits and claims to be paid do not have stated contractual maturity dates and may not result in any
ultimate payment obligation. Amounts reported represent estimated undiscounted cash flows out of the Company’s general account related to death, surrender, annuity and other benefit payments under policy contracts in force at
December 31, 2011. Separate account payments are not reflected due to the matched nature of these obligations and because the contract owners bear the investment risk of such deposits. Estimated payment amounts were developed
based on the Company’s historical experience and related contractual provisions. Significant assumptions incorporated in the reported amounts include future policy lapse rates (including the impact of customer decisions to make
future premium payments to keep the related policies in force); coverage levels remaining unchanged from those provided under contracts in force at December 31, 2011; future interest crediting rates; and estimated timing of
payments. Actual amounts will vary, potentially by a significant amount, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in future periods. |
|
5 |
Contractual provisions exist which could adjust the amount and/or timing of those obligations reported. Key assumptions related to
payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to and from the fixed and separate accounts of the variable annuities, claim experience with respect to guarantees, and future interest
crediting level. Assumptions for future interest crediting levels were made based on processes consistent with the Company’s past practices, which is at the discretion of the Company, subject to guaranteed minimum crediting rates in
many cases and/or subject to contractually obligated increases for specified time periods. Many of the contracts with potentially accelerated payments are subject to surrender charges, which are generally calculated as a percentage of
deposits made and are assessed at declining rates during the first seven years after a deposit is made. Amounts disclosed include an estimate of those accelerated payments, net of applicable surrender charges. See Note 2 to the
audited consolidated financial statements included in the F pages of this report for a description of the Company’s method for establishing life and annuity reserves in accordance with GAAP. |
|
6 |
Certain assumptions have been made about mortality experience and retirement patterns in the amounts reported. Actual deaths and
retirements may differ significantly from those projected, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of these contracts
that could accelerate those obligations presented. Amounts disclosed do not include an estimate of those accelerated payments. Most of the contracts with potentially accelerated payments are subject to surrender charges, which
are generally calculated as a percentage of the commuted value of the remaining term certain benefit payments and are assessed at declining rates during the first seven policy years. |
|
7 |
Contractual provisions exist that could increase those obligations presented. The process for determining future interest crediting
rates as described in note 5 above was used to develop the estimates of payments due by period. |
|
8 |
Amounts presented include contractual principal and interest based on rates in effect at December 31, 2011. |
|
9 |
Since the timing of the return of collateral is uncertain, these obligations have been reflected in payments due in less than one
year. |
|
10 |
The table above excludes certain derivative liabilities, for more information on these instruments see Characteristics of Interest Rate Sensitive Financial Instruments. Embedded derivatives on guaranteed benefit annuity programs are included in future policy benefits and claims in the
table above. |
|
11 |
Health reserves are immaterial and are reflected in the less than one year column. |
Investments
General
The Company’s assets are divided between
separate account and general account assets. As of December 31, 2011, $65.2 billion (58%) of the Company’s total assets were held in separate accounts compared to $64.9 billion (60%), as of December 31, 2010 and $47.5 billion (42%)
were held in the Company’s general account compared to $42.5 billion (40%), as of December 31, 2010, including $37.7 billion of general account investments compared to $35.3 billion as of December 31, 2010.
Separate account assets primarily consist of investments made with deposits from the Company’s variable annuity and variable life insurance business. Most
separate account assets are invested in various mutual funds. After deducting fees or expense charges, the investment performance in the Company’s separate account assets is passed through to the Company’s
customers. See Note 6 to the audited consolidated financial statements included in the F pages of this report for further information regarding the Company’s investments.
The following table summarizes the Company’s consolidated general account investments by asset category as of December 31:
|
2011 |
|
|
|
2010 |
|
|
|
Carrying |
|
%
of |
|
Carrying
|
|
% of |
(in millions) |
value |
|
total |
|
value |
|
total |
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
Fixed maturity
securities |
$ 29,201 |
|
78% |
|
$
26,434 |
|
75% |
Equity securities |
20 |
|
- |
|
42 |
|
- |
Mortgage
loans, net |
5,748 |
|
15% |
|
6,125 |
|
17% |
Policy
loans |
1,008 |
|
3% |
|
1,088 |
|
3% |
Short-term
investments |
1,125 |
|
3% |
|
1,062 |
|
3% |
Other investments |
566 |
|
1% |
|
558 |
|
2% |
Total |
$ 37,668 |
|
100% |
|
$ 35,309 |
|
100% |
Available-for-Sale
Securities
The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of available-for-sale securities as of the dates indicated:
|
|
Gross |
Gross |
|
|
Amortized
|
unrealized
|
unrealized
|
Fair |
(in millions) |
cost |
gains |
losses |
value |
|
|
|
|
|
December 31,
2011 |
|
|
|
|
Fixed maturity
securities: |
|
|
|
|
U.S. Treasury
securities and obligations of U.S. |
|
|
|
|
Government corporations and
agencies |
$
506 |
$
124 |
$
- |
$
630 |
Obligations of
states and political subdivisions |
1,501 |
177 |
- |
1,678 |
Debt securities
issued by foreign governments |
102 |
18 |
- |
120 |
Corporate
public securities |
14,132 |
1,336 |
111 |
15,357 |
Corporate
private securities |
3,998 |
327 |
27 |
4,298 |
Residential
mortgage-backed securities |
5,280 |
255 |
311 |
5,224 |
Commercial
mortgage-backed securities |
1,347 |
64 |
32 |
1,379 |
Collateralized
debt obligations |
410 |
17 |
125 |
302 |
Other asset-backed securities |
201 |
16 |
4 |
213 |
Total fixed maturity
securities |
$ 27,477
|
$
2,334 |
$
610 |
$ 29,201 |
Equity securities |
19 |
2 |
1 |
20 |
Total available-for-sale securities |
$ 27,496 |
$ 2,336 |
$ 611 |
$ 29,221 |
|
|
|
|
|
December 31, 2010
|
|
|
|
|
Fixed maturity
securities: |
|
|
|
|
U.S. Treasury
securities and obligations of U.S. |
|
|
|
|
Government corporations and
agencies |
$
497 |
$
87 |
$
- |
$
584 |
Obligations of
states and political subdivisions |
1,410 |
15 |
48 |
1,377 |
Debt securities
issued by foreign governments |
110 |
13 |
- |
123 |
Corporate
public securities |
11,921 |
879 |
84 |
12,716
|
Corporate
private securities |
4,038 |
257 |
47 |
4,248 |
Residential
mortgage-backed securities |
5,811 |
183 |
355 |
5,639 |
Commercial
mortgage-backed securities |
1,167 |
51 |
32 |
1,186 |
Collateralized
debt obligations |
365 |
13 |
126 |
252 |
Other asset-backed securities |
294 |
19 |
4 |
309 |
Total fixed maturity
securities |
$ 25,613 |
$ 1,517
|
$
696 |
$ 26,434 |
Equity securities |
39 |
3 |
- |
42 |
Total available-for-sale securities |
$ 25,652 |
$ 1,520 |
$ 696 |
$ 26,476 |
Refer to Note 6 to the audited consolidated financial statements
included in the F pages of this report for additional information regarding the nature of the Company’s portfolio of available-for-sale securities and the methodology and inputs used in evaluating whether the securities are
other-than-temporarily impaired.
Collateral Exposure
The Company’s portfolio of residential mortgage-backed securities
are comprised of investments securitized by the cash flows of mortgage loans with four primary collateral characteristics: government agency, prime, Alt-A and sub-prime. In general, recent market activity has negatively impacted the valuation of
securities containing Alt-A and sub-prime collateral.
The Company considers Alt-A collateral to be mortgages whose
underwriting standards do not qualify the mortgage for prime financing terms. Typical underwriting characteristics that cause a mortgage to fall into the Alt-A classification may include, but are not limited to, inadequate loan
documentation of a borrower’s financial information, debt-to-income ratios above normal lending limits, loan-to-value ratios above normal lending limits that do not have primary mortgage insurance, a borrower who is a temporary resident, and
loans securing non-conforming types of real estate. Alt-A mortgages are generally issued to borrowers having higher Fair Isaac Credit Organization (FICO) scores, and the lender typically charges a slightly higher interest rate for such
mortgages.
The Company considers sub-prime collateral to be mortgages that are first or second-lien mortgage loans issued to borrowers that cannot qualify for prime or Alt-A financing
terms, as demonstrated by recent delinquent rent or housing payments or substandard FICO scores. The Company considers prime collateral to be mortgages whose underwriting standards qualify the mortgage for regular conforming or jumbo loan
programs. In addition, government agency collateral is considered to be mortgages securitized by government agencies both implicitly and explicitly backed by the full faith and credit of the U.S. Government.
The following
tables summarize the distribution by collateral classification of the Company’s general account residential mortgage-backed securities as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
Amortized
|
|
|
|
fair value
|
(in millions) |
|
cost |
|
Fair value |
|
total |
|
|
|
|
|
|
|
Government agency
|
|
$
2,690 |
|
$
2,916 |
|
56% |
Prime |
|
942 |
|
899 |
|
17% |
Alt-A |
|
1,220 |
|
1,048 |
|
20% |
Sub-prime |
|
428 |
|
361 |
|
7% |
Total |
|
$ 5,280 |
|
$ 5,224 |
|
100% |
The following tables summarize the distribution by rating and origination year, respectively, of the Company’s general account residential mortgage-backed securities as of
December 31, 2011:
|
Alt-A |
Sub-prime |
|
|
|
% of |
|
|
|
% of |
|
Amortized
|
|
fair value
|
|
Amortized
|
|
fair value
|
(in millions) |
cost |
Fair value |
total |
|
cost |
Fair value |
total |
|
|
|
|
|
|
|
|
AAA 1 |
$
- |
$
- |
- |
|
$
34 |
$
33 |
9% |
AA 1 |
44 |
41 |
4% |
|
81 |
76 |
21% |
A 1 |
41 |
41 |
4% |
|
35 |
33 |
9% |
BBB 1 |
106 |
108 |
10% |
|
68 |
59 |
16% |
BB and below 1 |
1,029 |
858 |
82% |
|
210 |
160 |
45% |
Total |
$ 1,220 |
$ 1,048 |
100% |
|
$ 428 |
$ 361 |
100% |
|
|
|
|
|
|
|
|
Pre-2005 |
$
322 |
$
320 |
31% |
|
$
302 |
$
254 |
70% |
2005 |
506 |
437 |
42% |
|
48 |
44 |
12% |
2006 |
221 |
161 |
15% |
|
63 |
46 |
13% |
2007 |
171 |
130 |
12% |
|
13 |
15 |
4% |
2011 |
- |
- |
- |
|
2 |
2 |
1% |
Total |
$ 1,220 |
$ 1,048 |
100% |
|
$ 428 |
$ 361 |
100% |
__________
|
1 |
Based on the Company’s standard rating as of the date indicated. |
The following tables summarize the distribution by collateral
classification of the Company’s general account residential mortgage-backed securities as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
Amortized
|
|
|
|
fair value
|
(in millions) |
|
cost |
|
Fair value |
|
total |
|
|
|
|
|
|
|
Government agency
|
|
$
2,795 |
|
$
2,929 |
|
52% |
Prime |
|
973 |
|
944 |
|
17% |
Alt-A |
|
1,545 |
|
1,333 |
|
23% |
Sub-prime |
|
498 |
|
433 |
|
8% |
Total |
|
$ 5,811 |
|
$ 5,639 |
|
100% |
The following tables summarize the distribution by rating and origination year, respectively, of the Company’s general account residential mortgage-backed securities as of
December 31, 2010:
|
Alt-A |
Sub-prime |
|
|
|
% of |
|
|
|
% of |
|
Amortized
|
|
fair value
|
|
Amortized
|
|
fair value
|
(in millions) |
cost |
Fair value |
total |
|
cost |
Fair value |
total |
|
|
|
|
|
|
|
|
AAA 1 |
$
68 |
$
67 |
5% |
|
$
185 |
$
180 |
41% |
AA 1 |
112 |
108 |
8% |
|
74 |
63 |
15% |
A 1 |
49 |
42 |
3% |
|
25 |
21 |
5% |
BBB 1 |
132 |
124 |
9% |
|
49 |
48 |
11% |
BB and below 1 |
1,184 |
992 |
75% |
|
165 |
121 |
28% |
Total |
$ 1,545 |
$ 1,333 |
100% |
|
$ 498 |
$ 433 |
100% |
|
|
|
|
|
|
|
|
Pre-2005 |
$
428 |
$
409 |
31% |
|
$
350 |
$
305 |
70% |
2005 |
616 |
534 |
40% |
|
61 |
58 |
13% |
2006 |
290 |
223 |
17% |
|
70 |
54 |
13% |
2007 |
211 |
167 |
12% |
|
17 |
16 |
4% |
Total |
$ 1,545 |
$ 1,333 |
100% |
|
$ 498 |
$ 433 |
100% |
__________
|
1 |
Based on the Company’s standard rating as of the date indicated. |
The following table summarizes the distribution of the Company’s
general account commercial mortgage-backed securities, collateralized debt obligations and other asset-backed securities collateral by collateral classification and rating, as of the dates indicated:
|
Amortized cost |
Fair value |
|
|
|
A and |
|
|
|
|
A and |
|
(in millions) |
AAA 1 |
AA 1 |
below 1 |
Total |
|
AAA 1 |
AA 1 |
below 1 |
Total |
|
|
|
|
|
|
|
|
|
|
December 31,
2011: |
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed
securities |
$
685 |
$
140 |
$
522 |
$ 1,347
|
|
$
724 |
$
142 |
$
513 |
$ 1,379
|
Collateralized debt
obligations |
55 |
66 |
289 |
410 |
|
59 |
64 |
179 |
302 |
Credit cards |
6 |
62 |
- |
68 |
|
6 |
66 |
- |
72 |
Aviation |
- |
- |
41 |
41 |
|
- |
- |
43 |
43 |
Franchise/business
loans |
- |
- |
54 |
54 |
|
- |
- |
51 |
51 |
Student loans |
5 |
- |
- |
5 |
|
5 |
- |
- |
5 |
Tobacco |
- |
- |
7 |
7 |
|
- |
- |
6 |
6 |
Manufactured housing
|
- |
2 |
3 |
5 |
|
- |
2 |
3 |
5 |
Other |
- |
3 |
18 |
21 |
|
- |
4 |
27 |
31 |
Total |
$ 751 |
$ 273 |
$ 934 |
$ 1,958 |
|
$ 794 |
$ 278 |
$ 822 |
$ 1,894 |
|
|
|
|
|
|
|
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed
securities |
$ 566
|
$ 141 |
$ 460 |
$ 1,167 |
|
$ 593
|
$ 142 |
$ 451 |
$ 1,186 |
Collateralized debt
obligations |
21 |
26 |
318 |
365 |
|
24 |
26 |
202 |
252 |
Credit cards |
61 |
- |
- |
61 |
|
64 |
- |
- |
64 |
Aviation |
- |
- |
92 |
92 |
|
- |
- |
97 |
97 |
Franchise/business
loans |
6 |
3 |
62 |
71 |
|
7 |
2 |
63 |
72 |
Student loans |
30 |
- |
- |
30 |
|
29 |
- |
- |
29 |
Tobacco |
- |
- |
8 |
8 |
|
- |
- |
7 |
7 |
Manufactured housing
|
3 |
- |
3 |
6 |
|
3 |
- |
3 |
6 |
Other |
- |
3 |
23 |
26 |
|
- |
3 |
31 |
34 |
Total |
$ 687 |
$ 173 |
$ 966 |
$ 1,826 |
|
$ 720 |
$ 173 |
$ 854 |
$ 1,747 |
__________
|
1 |
Based on the Company’s standard rating as of the date indicated. |
Mortgage Loans, Net of
Allowance
As of December 31, 2011, general account mortgage loans were $5.7 billion (15%) of the carrying value of consolidated general account investments compared to $6.1 billion (17%)
as of December 31, 2010. Commercial mortgage loans represent 100% of the total mortgage loan portfolio as of December 31, 2011. Commitments to fund mortgage loans of $22 million were outstanding as of December 31, 2011 compared
to $24 million as of December 31, 2010.
The table below summarizes the carrying values of mortgage loans by regional exposure and property type as of December 31:
(in millions) |
Office |
Warehouse |
Retail |
Apartment |
Hotel |
Other |
Total |
2011 |
|
|
|
|
|
|
|
Mortgage loans: |
|
|
|
|
|
|
|
New England |
$ 62 |
$ 18 |
$ 27 |
$ - |
$ 18 |
$ - |
$ 125 |
Middle Atlantic |
161 |
219 |
291 |
57 |
- |
7 |
735 |
East North Central |
88 |
146 |
421 |
254 |
40 |
21 |
970 |
West North Central |
3 |
56 |
58 |
69 |
32 |
- |
218 |
South Atlantic |
102 |
284 |
643 |
231 |
19 |
- |
1,279 |
East South Central |
24 |
30 |
132 |
83 |
10 |
- |
279 |
West South Central |
37 |
116 |
211 |
144 |
31 |
- |
539 |
Mountain |
90 |
103 |
130 |
122 |
- |
67 |
512 |
Pacific |
208 |
315 |
332 |
179 |
112 |
5 |
1,151 |
Total amortized cost |
$ 775 |
$ 1,287 |
$ 2,245 |
$ 1,139 |
$ 262 |
$ 100 |
$ 5,808 |
|
|
|
|
|
|
|
|
Total valuation allowance |
$ (12) |
$ (15) |
$ (15) |
$ (3) |
$ (15) |
$ - |
$ (60) |
|
|
|
|
|
|
|
|
Total mortgage loans, net of allowance |
|
|
|
|
|
$ 5,748 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
Mortgage loans: |
|
|
|
|
|
|
|
New England |
$ 66 |
$ 19 |
$ 41 |
$ 27 |
$ 33 |
$ - |
$ 186 |
Middle Atlantic |
138 |
214 |
272 |
91 |
- |
8 |
723 |
East North Central |
82 |
154 |
440 |
324 |
65 |
8 |
1,073 |
West North Central |
4 |
57 |
59 |
40 |
45 |
- |
205 |
South Atlantic |
92 |
368 |
667 |
204 |
19 |
- |
1,350 |
East South Central |
15 |
35 |
112 |
90 |
10 |
- |
262 |
West South Central |
37 |
120 |
219 |
147 |
115 |
- |
638 |
Mountain |
86 |
111 |
141 |
181 |
- |
67 |
586 |
Pacific |
262 |
339 |
374 |
141 |
77 |
5 |
1,198 |
Total amortized cost |
$ 782 |
$ 1,417 |
$ 2,325 |
$ 1,245 |
$ 364 |
$ 88 |
$ 6,221 |
|
|
|
|
|
|
|
|
Total valuation allowance |
$ (15) |
$ (15) |
$ (24) |
$ (13) |
$ (29) |
$ - |
$ (96) |
|
|
|
|
|
|
|
|
Total mortgage loans, net of allowance |
|
|
|
|
|
$ 6,125 |
As of December 31, 2011, the Company’s largest exposure to any
single borrower, region and property type was 1%, 22% and 39%, respectively, of the Company’s general account mortgage loan portfolio compared to 1%, 22% and 37%, respectively, as of December 31, 2010.
As of December
31, 2011 and 2010, the Company’s mortgage loans classified as delinquent, foreclosed and restructured were immaterial as a percentage of the total mortgage loan portfolio.
Credit Quality
Information
Given the current market environment, the Company considers mortgage loans that are backed by apartment or hotel collateral to be higher-risk property types. This
determination is based on the fact that these property types generally have leases or room rates that are short-term in length and can be adjusted quickly. For apartments, this has generally led to defaults early in the cycle but lower
loss-severity. For hotels, this has generally led to higher levels of defaults and loss-severity. In addition, apartments and hotels are generally highly leveraged and are bought and sold more frequently, which often leads to
higher loan-to-value (LTV) ratios in a recessionary environment. Apartments and hotels also are generally correlated to the housing market, as apartments can be affected by housing affordability and supply issues, and hotels can be
affected by declines in disposable income.
With regard to the other remaining property types (office, industrial, retail), the Company also considers mortgage loans to be high-risk if their collateral characteristics
include, but are not limited to: LTV ratios greater than 90%, low debt service coverage ratios, increases in vacancies or concessions, falling rental rates, and other loan specific characteristics that could indicate additional
risk.
The following table provides relevant asset quality information on these high-risk categories of mortgage loans as of December 31:
|
|
|
Other |
|
Total |
% |
(in millions) |
Apartment |
Hotel |
high-risk |
|
Portfolio |
of total |
2011 |
|
|
|
|
|
|
Total valuation
allowance |
$
3 |
$
15 |
$
28 |
|
$
60 |
77% |
|
|
|
|
|
|
|
Refinanced loans1 |
$
73 |
$
25 |
$
78 |
|
$
823 |
21% |
Modified loans2 |
$ - |
$ 68 |
$ 29 |
|
$ 202 |
48% |
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
Total valuation
allowance |
$
13 |
$
29 |
$
43 |
|
$
96 |
89% |
|
|
|
|
|
|
|
Refinanced loans1 |
$
75 |
$
33 |
$
154 |
|
$
875 |
30% |
Modified loans2 |
$
72 |
$
65 |
$
38 |
|
$
176 |
99% |
__________
|
|
1 Includes all loans refinanced at any time during the term of the loan. |
|
2 Includes all loans modified at any time during
the term of the loan |
As noted above, an individual mortgage loan’s LTV ratio is an additional indicator of risk and the calculation of this ratio utilizes certain assumptions and estimates made
by the Company. The LTV ratio is calculated as a ratio of the amortized cost of the subject loans to the value of the underlying real estate collateral. The collateral value component is determined based on the Company’s view of normalized
property operating income for the real estate divided by the prevailing market capitalization rates. In determining the normalized property operating income, the Company relies upon the most recent property operating statement information, and makes
certain assumptions of future property rental income, property expenses, and expectations for vacancies, among other items.
The Company’s practice is to obtain updated property operating
statements at least on an annual basis. The Company performs an annual internal valuation of each property, based on these property operating statements. The Company’s practice is to obtain external appraisals during the
initial underwriting of the loan.
The following table represents the amortized cost (excluding valuation
allowances) and average LTV ratio of mortgage loans considered high-risk as of December 31:
|
Apartment |
|
Hotel |
|
Other high-risk |
|
|
|
|
|
|
|
|
(in millions) |
Amortized cost |
Average LTV |
Amortized cost |
Average LTV |
Amortized cost |
Average LTV |
2011 |
|
|
|
|
|
|
New England |
$ - |
- |
$ 18 |
92% |
$ 4 |
46% |
Middle Atlantic |
57 |
59% |
- |
- |
73 |
79% |
East North Central |
254 |
72% |
40 |
73% |
67 |
95% |
West North Central |
69 |
83% |
32 |
93% |
27 |
97% |
South Atlantic |
231 |
76% |
19 |
69% |
147 |
99% |
East South Central |
83 |
88% |
10 |
88% |
10 |
91% |
West South Central |
144 |
77% |
31 |
105% |
15 |
95% |
Mountain |
122 |
75% |
- |
- |
67 |
96% |
Pacific |
179 |
69% |
112 |
83% |
148 |
89% |
Total |
$ 1,139 |
73% |
$ 262 |
85% |
$ 558 |
92% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
New England |
$ 27 |
99% |
$ 33 |
84% |
$
10 |
82% |
Middle Atlantic |
91 |
83% |
- |
- |
93 |
82% |
East North Central |
324 |
85% |
65 |
104% |
158 |
101% |
West North Central |
40 |
92% |
45 |
84% |
8 |
84% |
South Atlantic |
204 |
85% |
19 |
66% |
245 |
101% |
East South Central |
90 |
81% |
10 |
86% |
35 |
94% |
West South Central |
147 |
84% |
115 |
108% |
62 |
96% |
Mountain |
181 |
85% |
- |
- |
45 |
96% |
Pacific |
141 |
73% |
77 |
85% |
256 |
90% |
Total |
$ 1,245 |
84% |
$ 364 |
94% |
$ 912 |
95% |
The Company’s practice is to put a mortgage loan on non-accrual
status whenever the facts and circumstances of the individual borrower or the property’s performance indicate that the Company is not likely to collect future payments. The facts and circumstances which would lead to this decision
would include, but not be limited to, the borrower missing a payment, the borrower is not expected to be able to remedy missed payments in a timely manner based upon the property’s cash flows, or if the Company is informed by the borrower that
they will not be able to make future payments for verifiable reasons.
Interest received on non-accrual status mortgage loans is included in net investment income in the period received. Interest income on performing mortgage loans is
recognized over the life of the loan using the effective-yield method.
For additional information on the Company’s valuation allowance on mortgage loans, see Note 2 to the audited consolidated financial statements included in the F pages of
this report
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market 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 interest rate, foreign currency and equity market risks to which the Company is exposed and describes strategies used to attempt to manage
these risks. This discussion is limited to financial instruments subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.
Interest Rate Risk
Fluctuations in interest rates can impact the Company’s earnings,
cash flows and the fair value of its assets and liabilities. In a declining interest rate environment, the Company may be required to reinvest the proceeds from maturing and prepaying
investments at rates lower than the overall portfolio yield, which could
reduce future interest spread income. In addition, minimum guaranteed crediting rates on certain annuity contracts could prevent the Company from lowering its interest crediting rates to levels commensurate with prevailing market interest
rates, resulting in a reduction to the Company’s interest spread income. The average crediting rate for fixed annuity products during 2011 was 3.44% and 3.61% for the Individual Investments and Retirement Plans segments,
respectively (compared to 3.75% and 3.59%, respectively, during 2010), well in excess of guaranteed rates.
The Company attempts to mitigate this risk by managing the maturity and
interest-rate sensitivities of assets to be consistent with those of liabilities. In recent years, management has taken actions to address low interest rate environments and the resulting impact on interest spread margins, including
reducing commissions on fixed annuity sales, launching new products with new guaranteed rates, discontinuing the sale of its leading annual reset fixed annuities and invoking contractual provisions that limit the amount of variable annuity deposits
allocated to the guaranteed fixed option. In addition, the Company adheres to a strict discipline of setting interest crediting rates on new business at levels adequate to provide returns consistent with management
expectations.
Conversely, a rising interest rate environment could result in a reduction of interest spread income or an increase in policyholder surrenders. Existing general
account investments supporting annuity liabilities had a weighted average maturity of approximately 7 years as of December 31, 2011. Therefore, a change in portfolio yield will lag changes in market interest rates. This lag
increases if the rate of prepayments of securities slows. To the extent the Company sets renewal rates based on current market rates, this will result in reduced interest spreads. Alternatively, if the Company sets renewal
crediting rates while attempting to maintain a desired spread from the portfolio yield, the rates offered by the Company may be less than new money rates offered by competitors. This difference could result in an increase in surrender
activity by policyholders. If unable to fund surrenders with cash flow from operations, the Company might need to sell assets, which likely would have declined in value due to the increase in interest rates. The Company
attempts to mitigate this risk by offering products that assess surrender charges and/or market value adjustments at the time of surrender, and by managing the maturity and interest-rate sensitivities of assets to approximate those of
liabilities.
The Company offers a variety of variable annuity programs with guaranteed minimum balance or guaranteed withdrawal benefits, and options are utilized to economically hedge a
portion of these products. See Equity Market Risk for further explanation.
Asset/Liability Management
Strategies to Manage Interest Rate Risk
The Company employs an asset/liability management approach tailored to the specific requirements of each of its products. Each line of business has an investment policy based on
its specific characteristics. The policy establishes asset maturity and duration, quality and other relevant guidelines.
An underlying pool or pools of investments support each general account
line of business. These pools consist of whole assets purchased specifically for the underlying line of business. In general, assets placed in any given portfolio remain there until they mature (or are called), but active
management of specific securities, sectors and several top-down risks may result in portfolio turnover or transfers among the various portfolios.
Investment strategies are executed by dedicated investment professionals
based on the investment policies established for the various pools. To assist them in this regard, they receive periodic projections of investment needs from each line’s management team. Line of business management teams,
investment portfolio managers and finance professionals periodically evaluate how well assets purchased and the underlying portfolio match the underlying liabilities for each line. In addition, sophisticated Asset/Liability Management
models are employed to project the assets and liabilities over a wide range of interest rate scenarios to evaluate the efficacy of the strategy for a line of business.
Using this information, in conjunction with each line’s investment
strategy, actual asset purchases or commitments are made. In addition, plans for future asset purchases are formulated when appropriate. This process is repeated frequently so that invested assets for each line match its
investment needs as closely as possible. The primary objectives are to ensure that each line’s liabilities are invested in accordance with its investment strategy and that over or under investment is minimized.
As part of
this process, the investment portfolio managers provide each line’s actuaries with forecasts of anticipated rates that the line’s future investments are expected to produce. This information, in combination with yields
attributable to the line’s current investments and its investment “rollovers,” gives the line actuaries data to use in computing and declaring interest crediting rates for their lines of business in conjunction with management
approval.
There are two approaches to developing investment policies:
|
·
|
For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the Company attempts to
manage risk with a combination cash matching/duration matching strategy. Duration is a measure of the sensitivity of price to changes in interest rates. For a rate movement of 100 basis points, the fair value of liabilities
with a duration of 5 years would change by approximately 5%. For this type of liability, the Company generally targets an asset/liability duration mismatch of -0.25 to +0.50 years. In addition, the Company attempts to minimize
asset and liability cash flow mismatches, especially over the first five years. However, the desired degree of cash matching is balanced against the cost of cash matching. |
|
·
|
For liabilities where the Company has the right to modify the credited rate and policyholders also have options, the Company’s risk
management process includes modeling both the assets and liabilities over multiple stochastic scenarios. The Company considers a range of potential policyholder behavior as well as the specific liability crediting
strategy. This analysis, combined with appropriate risk tolerances, drives the Company’s investment policy. |
Use of Derivatives to Manage
Interest Rate Risk
The Company uses derivative instruments to manage exposures and mitigate risks associated with interest rates, equity markets, foreign currency and credit. These derivative
instruments primarily include interest rate swaps, futures contracts and options. Certain features embedded in the Company’s investments, equity-indexed life and annuity contracts and certain variable life and annuity contracts require
derivative accounting. All derivative instruments are carried at fair value and are reflected as assets or liabilities in the consolidated balance sheets.
Interest rate risk
management: The Company uses interest rate contracts, primarily interest rate swaps, to reduce or alter interest rate exposure arising from mismatches between assets and liabilities. In the case of interest rate swaps,
the Company enters into a contractual agreement with a counterparty to exchange, at specified intervals, the difference between fixed and variable rates of interest, calculated on a reference notional amount.
Interest rate
swaps are used by the Company in association with fixed and variable rate investments to achieve cash flow streams that support certain financial obligations of the Company and to produce desired investment returns. As such, interest rate
swaps are generally used to convert fixed rate cash flow streams to variable rate cash flow streams or vice versa. The Company also enters into interest rate swap transactions which are structured to provide a hedge against the negative impact of
higher interest rates on the Company’s statutory capital position.
Credit risk management: The Company enters into credit derivative contracts, primarily credit default swaps,
under which the Company buys and sells credit default protection on standardized credit indices, which are established baskets of creditors, or on specific corporate creditors. These derivatives allow the Company to manage or modify its
credit risk profile in general or its credit exposure to specific creditors.
Characteristics of Interest Rate
Sensitive Financial Instruments
The tables below provide information about the Company’s financial instruments as of December 31, 2011 that are sensitive to changes in interest rates. Insurance
contracts that subject the 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.
|
Estimated year of maturities/repayments |
|
|
|
2011 |
2010 |
|
|
|
|
|
|
There- |
|
Fair |
Fair |
(in millions) |
2012 |
2013 |
2014 |
2015 |
2016 |
after |
Total |
Value |
Value |
Assets |
|
|
|
|
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
Principal |
$ 896 |
$ 1,448 |
$ 1,405 |
$ 1,081 |
$ 1,461 |
$ 11,839 |
$ 18,130 |
$ 19,655 |
$ 16,964 |
Weighted average interest rate |
5.72% |
5.41% |
5.02% |
4.64% |
5.14% |
5.65% |
5.48% |
|
|
Mortgage and other asset- |
|
|
|
|
|
|
|
|
backed securities: |
|
|
|
|
|
|
|
|
|
Principal |
$ 2 |
$ 16 |
$ 3 |
$ 26 |
$ 13 |
$ 7,178 |
$ 7,238 |
$ 7,118 |
$ 7,386 |
Weighted average interest rate |
3.30% |
4.52% |
5.69% |
4.42% |
5.25% |
5.05% |
5.05% |
|
|
Other fixed maturity securities: |
|
|
|
|
|
|
|
Principal |
$ 67 |
$ 57 |
$ 76 |
$ 131 |
$ 72 |
$ 1,706 |
$ 2,109 |
$ 2,428 |
$ 2,084 |
Weighted average interest rate |
5.69% |
5.19% |
6.00% |
5.44% |
5.89% |
5.95% |
5.89% |
|
|
Mortgage loans: |
|
|
|
|
|
|
|
|
|
Principal |
$ 549 |
$ 411 |
$ 542 |
$ 794 |
$ 804 |
$ 2,701 |
$ 5,801 |
$ 5,861 |
$ 5,863 |
Weighted average interest rate |
6.06% |
5.92% |
5.96% |
5.53% |
5.70% |
5.87% |
5.83% |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Individual deferred fixed annuities: |
|
|
|
|
|
|
|
Principal |
$ 761 |
$ 728 |
$ 802 |
$ 499 |
$ 401 |
$ 1,572 |
$ 4,763 |
$ 5,118 |
$ 4,921 |
Weighted average crediting rate |
3.39% |
3.27% |
2.92% |
2.91% |
2.90% |
2.94% |
|
|
|
Group pension deferred fixed annuities: |
|
|
|
|
|
|
Principal |
$ 1,472 |
$ 1,322 |
$ 1,166 |
$ 1,010 |
$ 863 |
$ 6,606 |
$ 12,439 |
$ 12,004 |
$ 11,324 |
Weighted average crediting rate |
3.63% |
3.53% |
3.46% |
3.41% |
3.34% |
3.25% |
|
|
|
Funding agreements backing MTNs: |
|
|
|
|
|
|
|
|
Principal |
$ 289 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 289 |
$ 294 |
$ 816 |
Weighted average crediting rate |
4.99% |
- |
- |
- |
- |
- |
- |
|
|
Immediate annuities: |
|
|
|
|
|
|
|
|
|
Principal |
$ 68 |
$ 60 |
$ 52 |
$ 45 |
$ 38 |
$ 240 |
$ 503 |
$ 576 |
$ 558 |
Weighted average crediting rate |
6.16% |
6.11% |
6.14% |
6.22% |
6.30% |
6.37% |
|
|
|
Short-term debt: |
|
|
|
|
|
|
|
|
|
Principal |
$ 777 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 777 |
$ 777 |
$ 300 |
Weighted average interest rate |
0.67% |
- |
- |
- |
- |
- |
0.67% |
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
Principal |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 991 |
$ 991 |
$ 1,081 |
$ 1,039 |
Weighted average interest rate |
- |
- |
- |
- |
- |
8.95% |
8.95% |
|
|
|
Estimated year of maturities/repayments |
|
|
|
2011 |
2010 |
|
|
|
|
|
|
There- |
|
Fair |
Fair |
(in millions, except settlement prices) |
2012 |
2013 |
2014 |
2015 |
2016 |
after |
Total |
Value |
Value |
Derivative Financial Instruments |
|
|
|
|
|
|
|
|
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
Pay fixed/receive variable: |
|
|
|
|
|
|
|
|
Notional value |
$ 701 |
$ 2,556 |
$ 1,103 |
$ 724 |
$ 1,831 |
$ 13,731 |
$ 20,646 |
$ (2,140) |
$ (68) |
Weighted average pay rate |
2.06% |
1.25% |
1.82% |
2.30% |
1.77% |
3.41% |
2.82% |
|
|
Weighted average receive rate1 |
0.29% |
0.30% |
0.28% |
0.29% |
0.29% |
0.29% |
0.29% |
|
|
Pay variable/receive fixed: |
|
|
|
|
|
|
|
|
Notional value |
$ 1,152 |
$ 2,475 |
$ 817 |
$ 1,018 |
$ 1,730 |
$ 15,132 |
$ 22,324 |
$ 2,161 |
$ 189 |
Weighted average pay rate1 |
0.33% |
0.29% |
0.28% |
0.33% |
0.28% |
0.29% |
0.29% |
|
|
Weighted average receive rate |
1.59% |
1.48% |
1.79% |
2.66% |
1.54% |
3.32% |
2.80% |
|
|
Pay fixed/receive fixed: |
|
|
|
|
|
|
|
|
|
Notional value |
$ 11 |
$ 22 |
$ - |
$ - |
$ 48 |
$ 93 |
$ 174 |
$ 1 |
$ (11) |
Weighted average pay rate |
4.70% |
4.54% |
- |
- |
4.73% |
5.66% |
5.20% |
|
|
Weighted average receive rate |
6.10% |
5.86% |
- |
- |
6.16% |
6.11% |
6.09% |
|
|
Credit default swaps sold: |
|
|
|
|
|
|
|
|
Notional value |
$ 3 |
$ 10 |
$ - |
$ - |
$ - |
$ - |
$ 13 |
$ 1 |
$ 1 |
Weighted average receive rate |
6.00% |
1.39% |
- |
- |
- |
- |
2.45% |
|
|
Credit default swaps purchased: |
|
|
|
|
|
|
|
Notional value |
$ - |
$ 15 |
$ - |
$ - |
$ - |
$ 2 |
$ 17 |
$ (1) |
$ - |
Weighted average pay rate |
- |
1.75% |
- |
- |
- |
2.10% |
1.79% |
|
|
Total return swaps2: |
|
|
|
|
|
|
|
|
|
Notional value |
$ 3,300 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 3,300 |
$ (27) |
$ (11) |
Embedded derivatives: |
|
|
|
|
|
|
|
|
|
Notional value |
$
- |
$
- |
$
- |
$
- |
$ - |
$ - |
$ - |
$ (1,911) |
$ (226) |
Treasury futures: |
|
|
|
|
|
|
|
|
|
Short positions: |
|
|
|
|
|
|
|
|
|
Contract amount/notional value |
$ 2 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 2 |
$ - |
|
Weighted average settlement price |
$ 110.20 |
$
- |
$
- |
$
- |
$ - |
$ - |
$ 110.20 |
|
|
Equity futures: |
|
|
|
|
|
|
|
|
|
Short positions: |
|
|
|
|
|
|
|
|
|
Contract amount/notional value |
$ 1,736 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 1,736 |
$ (21) |
$ (20) |
Weighted average settlement price |
$ 1,097.53 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 1,097.53 |
|
|
Long positions: |
|
|
|
|
|
|
|
|
|
Contract amount/notional value |
$ 27 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 27 |
$ - |
$ - |
Weighted average settlement price |
$ 1,254.35 |
$ - |
$ - |
$ - |
$ - |
$ - |
$ 1,254.35 |
|
|
Option contracts |
|
|
|
|
|
|
|
|
|
Long positions: |
|
|
|
|
|
|
|
|
|
Contract amount/notional value |
$ 1,916 |
$ 510 |
$ 271 |
$ 148 |
$ 129 |
$ 4,187 |
$ 7,161 |
$ 1,004 |
$ 212 |
Weighted average settlement price |
$ 1,173.94 |
$ 1,277.43 |
$ 1,348.32 |
$ 1,205.85 |
$ 1,423.92 |
$ 38.41 |
$ 529.13 |
|
|
________
|
1 |
Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of December 31, 2011. |
|
2 |
Total return swaps are based on the Europe, Australasia and Far East Index
from Morgan Stanley Capital International (EAFE Index). |
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the table on the proceeding page are as follows:
Mortgage-backed
securities and other asset-backed securities: The year of maturity is determined based on the terms of the securities and the current estimated rate of prepayment of the underlying pools of mortgages or assets. The
Company limits its exposure to prepayments by purchasing less volatile types of mortgage-backed securities and asset-backed securities investments.
Corporate bonds and other fixed maturity securities and mortgage loans: The maturity year is that of the security or loan.
Individual deferred
fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and contract terms. Individual deferred fixed annuities are
certain individual annuity contracts, which are also subject to surrender charges calculated as a percentage of the deposits made and assessed at declining rates during the first seven years after a deposit is made. Individual deferred
fixed annuities included $0.7 billion of participating group annuity contracts in 2011 ($0.8 billion in 2010) were in contracts where the crediting rate is guaranteed for a set term. As of December 31, 2011, individual deferred fixed
annuity general account liabilities totaling $4.4 billion ($4.3 billion in 2010) were in contracts where the crediting rate is reset periodically with portions resetting in each calendar quarter, and $671 million that reset annually in 2011 compared
to $572 million in 2010. Individual fixed annuity policy reserves of $1.5 billion in 2011 and 2010 were in contracts that adjust the crediting rate every five years. Individual deferred fixed annuity policy reserves of $439
million in 2011 were in contracts that adjust the crediting rate every three years compared to
$478 million
in 2010. 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 deferred annuities the
crediting rate is also adjusted to partially reflect current new money rates.
Group pension deferred fixed 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 were group annuity contracts representing $12.6 billion and $11.9 billion of general account liabilities as of December 31, 2011 and
2010, respectively, which are generally subject to market value adjustment upon surrender and which also may be subject to surrender charges. Of the total group deferred fixed annuity liabilities, $11.3 billion ($10.6 billion in 2010)
were in contracts where the crediting rate is reset quarterly, $593 million ($541 million in 2010) were in contracts that adjust the crediting rate on an annual basis with portions resetting in each calendar quarter, and $694 million ($720 million
in 2010) were in contracts where the crediting rate is reset annually on January 1.
Funding agreements
backing MTNs: Funding agreements issued in conjunction with the MTN program where the crediting rate either is fixed for the term of the contract or is variable based on an underlying index.
Immediate annuities: Non-life contingent contracts in payout status where the Company has guaranteed periodic payments, typically monthly, are included. The maturity year is
based on the term of the contract.
Short-term debt and long-term debt: 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
contract. Interest rate swaps include cross-currency interest rate swaps, which are used to reduce the Company’s existing asset and liability foreign currency exposure. Cross-currency interest rate swaps in place against
each foreign currency obligation hedge the Company against adverse currency movements with respect to both period interest payments and principal repayment. Underlying details by currency therefore have been omitted. Variable
swap rates and settlement prices reflect rates and prices in effect as of December 31, 2011.
Foreign Currency
Risk
As part of its regular investing activities, the Company may purchase foreign currency denominated investments. These investments and the associated income expose the
Company to volatility associated with movements in foreign exchange rates. In an effort to mitigate this risk, the Company uses cross-currency swaps. As foreign exchange rates change, the increase or decrease in the cash flows
of the derivative instrument generally offsets the changes in the functional-currency equivalent cash flows of the hedged item.
Equity Market Risk
Asset fees
calculated as a percentage of separate account assets are a significant source of revenue to the Company. As of December 31, 2011, approximately 77% of separate account assets were invested in equity mutual funds (approximately 78% as of
December 31, 2010). Gains and losses in the equity markets result in corresponding increases and decreases in the Company’s separate account assets and asset fee revenue. In addition, a decrease in separate account assets
may decrease the Company’s expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate amortization of DAC.
The
Company’s long-term assumption for net separate account returns is 7% annual growth. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each
quarter, the Company would evaluate its DAC balance and underlying assumptions to determine the need for unlocking. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to
other factors affecting profitability, including the possibility of unlocking of DAC assumptions.
Many of the Company’s individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value
is less than a specified amount, which may be based on premiums paid less amounts withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value to fall below this specified amount,
which varies from contract to contract based on the date the contract was entered into as well as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value. This could result in additional GMDB
claims.
In an effort to mitigate this risk, the Company implemented a GMDB economic hedging program for certain new and existing business. Prior to implementation of the GMDB
hedging program in 2000, the Company managed this risk primarily by entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the
economic value of the designated GMDB. Currently the program
shorts equity index futures, which provides an offset to changes in the value of the designated obligation. The futures are not designated as hedges and, therefore, hedge accounting is not applied. The Company’s economic
and accounting hedges are not perfectly offset. Therefore, the hedging activity is likely to lead to earnings volatility. As of December 31, 2011 and 2010, the Company’s net amount at risk was $2.1 billion and $1.3
billion, respectively. As of December 31, 2011 and 2010, the Company’s reserve for GMDB claims was $80 million and $46 million, respectively.
The Company issues variable annuity contracts through its separate
accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. The Company also provides various forms of guarantees to benefit the related
contractholders. The Company provides five primary guarantee types of variable annuity contracts: (1) GMDB; (2) GMIB; (3) GMAB; (4) GLWB; and (5) a hybrid guarantee with GMAB and GLWB.
The GMDB,
offered on every variable annuity contract, provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the
option to terminate the contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivor’s death.
The GMIB, which was offered as a rider to several variable annuity
contracts, is a living benefit that provides the contractholder with a guaranteed annuitization value.
The GMAB, offered in the Company’s Capital Preservation Plus
contract rider, is a living benefit that provides the contractholder with a guaranteed return of deposits, adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10 years) selected by the contractholder at the issuance of
the variable annuity contract. In some cases, the contractholder also has the option, after a specified time period, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a
minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.
The GLWB, offered in the Company’s Lifetime Income contract rider
(L.inc), is a living benefit that provides for enhanced retirement income security without the liquidity loss associated with annuitization. The withdrawal rates vary based on the age when withdrawals begin and are applied to a benefit
base to determine the guaranteed lifetime income amount available to a contractholder. The benefit base is equal to the variable annuity premium at contract issuance and may increase as a result of a feature driven by account performance
and policy duration. L.inc is the only living benefit guarantee offered on new variable annuity contract sales.
Equity market risk
management: These variable annuity products and related obligations expose the Company to various market risks, predominately interest rate and equity risk. Adverse changes in the equity markets or interest rate movements expose
the Company to significant volatility. To mitigate these risks and hedge the guaranteed benefit obligations, the Company enters into a variety of derivatives including interest rate swaps, equity index futures, options and total return
swaps.
Inflation
The rate of
inflation did not have a material effect on the revenues or operating results of the Company during 2011, 2010, or 2009.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
Name |
|
Age |
|
Date
Service Began |
|
|
|
|
|
Timothy G. Frommeyer |
|
47 |
|
January 2009 |
Peter A. Golato |
|
58 |
|
January 2009 |
Stephen S. Rasmussen |
|
59 |
|
January 2009 |
Mark R. Thresher |
|
55 |
|
January 2009 |
Kirt A. Walker |
|
48 |
|
December 2009 |
For biographical information on Messrs. Frommeyer, Golato, Rasmussen, Thresher, and Walker, please see the information provided below in “Executive Officers of the
Registrant.”
Executive Officers of the Registrant
Name |
|
Age |
|
Position with NLIC |
|
|
|
|
|
Stephen S. Rasmussen |
|
59 |
|
NMIC Chief Executive Officer1 |
Kirt A. Walker |
|
48 |
|
President and Chief Operating
Officer |
Patricia R. Hatler |
|
57 |
|
Executive Vice President–Chief Legal
and Governance Officer |
Matthew Jauchius |
|
42 |
|
Executive Vice President – Chief
Marketing and Strategy Officer |
Michael C. Keller |
|
52 |
|
Executive Vice President–Chief
Information Officer |
Gale V. King |
|
55 |
|
Executive Vice President–Chief
Administrative Officer |
Mark R. Thresher |
|
55 |
|
Executive Vice
President–Finance |
Anne L. Arvia |
|
48 |
|
Senior Vice President–NW Retirement
Plans |
John L. Carter |
|
47 |
|
Senior Vice President–Distribution
and Sales |
Timothy G. Frommeyer |
|
47 |
|
Senior Vice President–Chief Financial
Officer |
Peter A. Golato |
|
58 |
|
Senior Vice President–Nationwide
Financial Network |
Harry H. Hallowell |
|
51 |
|
Senior Vice President–Chief
Investment Officer |
Eric S. Henderson |
|
49 |
|
Senior Vice President–Individual
Products and Solutions |
Michael J. Mahaffey |
|
39 |
|
Senior Vice President–Chief Risk
Officer |
Kai V. Monahan |
|
44 |
|
Senior Vice President–Internal
Audit |
Steven C. Power |
|
54 |
|
Senior Vice President–Nationwide
Financial |
Michael S. Spangler |
|
45 |
|
Senior Vice President–President,
Nationwide Investment Management Group |
__________
|
1 |
NMIC is our ultimate parent company; however, Mr. Rasmussen does not serve as NLIC’s chief executive officer. |
Business experience for each of the individuals listed in the previous
table is set forth below:
Stephen S. Rasmussen has been the Nationwide enterprise chief executive officer since February 2009. He
previously served as the President and Chief Operating Officer of NMIC and Executive Vice President of NLIC from September 2003 to February 2009. He has served as a director of NLIC since January 2009.
Kirt A. Walker has been President and Chief Operating Officer and a director of NLIC since December
2009. Previously, Mr. Walker was President and Chief Operating Officer–Nationwide Insurance of NMIC since March 2009. Prior to that time, he served as President, Nationwide Insurance Exclusive Operations of NMIC from
November 2008 to March 2009; President, Nationwide Insurance Eastern Operations of NMIC from March 2006 to October 2008; and President, Allied Insurance of NMIC from September 2003 to February 2006. Mr. Walker has been with Nationwide
since 1986.
Patricia R. Hatler has been Executive Vice President–Chief Legal and Governance Officer of NLIC since December
2004. Previously, Ms. Hatler served as Executive Vice President and General Counsel from October 2004 to December 2004.
Matthew Jauchius
has been Executive Vice President–Chief Marketing and Strategy Officer since December 2010. Prior to that time, he was Senior Vice President–Chief Strategy Officer and OCEO Administration from April 2009 to December 2010 and
served as Vice President–PCIO Strategy for NMIC from April 2007 to April 2009, and Vice President–Strategic Planning for NMIC from June 2006 to April 2007. Prior to that time, Mr. Jauchius was Associate Principal with McKinsey
& Company from September 1998 to June 2006.
Michael C. Keller has been Executive Vice President–Chief Information Officer of NLIC since August
2001. Mr. Keller has been Executive Vice President–Chief Information Officer of several other Nationwide companies since June 2001.
Gale V. King has
been Executive Vice President–Chief Administrative Officer of NLIC since February 2009. Previously, she was Senior Vice President–Property and Casualty Human Resources of NMIC from October 2003 to February 2009. Ms.
King has been with Nationwide since 1983.
Mark R. Thresher has been Executive Vice President–Finance of NLIC since December 2009 and has served as a director
of NLIC since January 2009. Prior to that time, he was President and Chief Operating Officer of NLIC from May 2004 to December 2009.
Anne L. Arvia
has been Senior Vice President–NW Retirement Plans of NLIC since November 2009. Previously, she was Senior Vice President–Nationwide Bank from September 2006 to October 2009. Prior to joining Nationwide Bank, Ms.
Arvia served as the Chief Executive Officer of ShoreBank, a community and environmental bank, from May 2002 to August 2006.
John L. Carter
has been Senior Vice President–Distribution and Sales of NLIC and President of Nationwide Financial Distributors, Inc., as well as Senior Vice President of several other Nationwide companies, since November 2005.
Timothy G. Frommeyer has been Senior Vice President–Chief Financial Officer of NLIC and several other Nationwide companies since November 2005, and has served as a director of NLIC since
January of 2009.
Peter A. Golato has been Senior Vice President–Nationwide Financial Network of NLIC and several other Nationwide
companies since September 2011, and has served as a director of NLIC since January 2009. Prior to that time, he served as Senior Vice President–Individual Protection Business Head of NLIC and several other Nationwide companies from
May 2004 to September 2011.
Harry H. Hallowell has been Senior Vice President–Chief Investment Officer of NLIC since January
2010. Previously, Mr. Hallowell served as Senior Vice President and Treasurer of NLIC and several other Nationwide companies from January 2006 through December 2009.
Eric S.
Henderson has been Senior Vice President–Individual Products and Solutions of NLIC and several other companies within Nationwide since September 2011. Previously, Mr. Henderson served as Senior Vice President–Individual
Investments Business Head from August 2007 to September 2011 and as Vice President and Chief Financial Officer–Individual Investments from August 2004 to August 2007.
Michael W.
Mahaffey has been Senior Vice President–Chief Risk Officer of NLIC and several other Nationwide companies since November 2008. Prior to that time, he was Vice President–Enterprise Risk Management of NMIC from 2007
to 2008, and Associate Vice President–Enterprise Risk Management of NMIC from 2005 to 2007.
Kai V. Monahan
has been Senior Vice President–Internal Audit of NLIC and several other Nationwide companies since November 2008. Previously, Mr. Monahan was a Partner in Ernst & Young's Business Risk Services practice from 2004 to
2008.
Steven C. Power has been Senior Vice
President–Nationwide Financial since January 2010. Previously, Mr. Power was President and CEO of NatCity Investments, Inc., a wholly owned subsidiary of National
City Corporation, from July 2004 to April 2009.
Michael S. Spangler has been Senior Vice President–Investment Management Group since May
2008. Previously, Mr. Spangler was Managing Director at Morgan Stanley from May 2004 to June 2008.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
Our mission is to create value for customers and businesses by
protecting what is important to them, helping them build a secure financial future, and providing the best personalized customer experience through competitively priced, high quality products. We motivate our executives to achieve these
goals, in part, by delivering direct rewards, including base salary, short-term and long-term incentives and other benefits and perquisites. Consistent with our pay for performance philosophy, we focus our compensation programs
substantially upon sustained financial performance as well as overall customer satisfaction. Payments will increase or decrease to the extent we meet our pre-established performance expectations. The discussion below is
intended to show how:
|
·
|
our financial planning process leads to financial objectives; |
|
·
|
we translate financial and individual objectives into incentive opportunities; |
|
·
|
we consider individual performance and use other non-financial factors to create flexibility in our compensation programs; and |
|
·
|
we think about both the level and form of these rewards, which we believe helps us to attract and retain the executive talent that is necessary to
create stakeholder value. |
NMIC Human Resources Committee
Our board relies on the human resources committee of the NMIC board of
directors for compensation decisions. The NMIC human resources committee’s primary purpose is to discharge the responsibilities of the NMIC board of directors as to the compensation of our executive officers and the executive
officers of our parent company, subsidiaries and affiliates. Other duties of the NMIC human resources committee include carrying out the board of directors’ oversight responsibilities by reviewing our human resources, compensation
and benefit practices.
The operation of the NMIC human resources committee is outlined in a charter that has been adopted by the NMIC board of directors. The charter provides that the
committee’s duties include, among other things:
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establishment of an overall compensation philosophy; |
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oversight and review of human resources programs for directors, executive officers and employees; and |
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responsibility for approval of salaries, incentive compensation plans and awards under such plans for certain executive officers, including those
named in the “Summary Compensation Table for 2011,” whom we refer to as the “named executive officers.” |
The NMIC human resources committee met seven times during
2011.
Compensation Consultants
The NMIC human resources committee has the sole authority to retain and
terminate any consultant assisting in the evaluation of compensation and has the power to retain independent counsel, auditors or others to assist in the conduct of any investigation into matters within the NMIC human resources committee’s
scope of responsibilities. The NMIC human resources committee has retained Pearl Meyer & Partners, or “PM&P,” to be its compensation consultant. PM&P consultants attend NMIC human resources committee
meetings in order to provide information and perspective on competitive compensation practices and to raise issues management and/or the NMIC human resources committee should address. With committee concurrence, management, at times,
directed PM&P to prepare additional materials in support of committee agendas, which included data, analysis and any supporting background material needed for the discussions. PM&P also recommended pay program and compensation
changes. Upon request of the NMIC human resources committee, members of management also attended these meetings in order to provide information or expertise. When the NMIC human resources committee met in executive session,
certain members of management and PM&P attended as needed. PM&P does not provide any other services to NMIC or its subsidiaries or affiliates.
Role of Executives in Establishing the Compensation
of our Named Executive Officers
Management reviews the compensation of all of our executive officers annually. In addition, during 2011, management submitted the compensation of Messrs. Walker,
Frommeyer, Rasmussen, Carter and Golato to the NMIC human resources committee for review and approval. Mr. Rasmussen’s compensation was also reviewed and approved by the entire NMIC board of directors. The NMIC human
resources committee’s review included the compensation targets, payments and individual performance contributions of our named executive officers.
Compensation Objectives and Philosophy
The NMIC human
resources committee believes the compensation programs for executive officers should support our business strategies and operate within a market competitive framework. In addition, the NMIC human resources committee determines
compensation based on our overall financial results, as well as individual and group contributions that help build value for stakeholders. Our compensation programs are designed to drive desired behaviors in our executive officers using a
mix of compensation elements to satisfy the personal and financial needs of our current and future workforce given existing and forecasted business conditions and cost constraints. Our board of directors is committed to this compensation
philosophy. The objectives of our compensation programs are to:
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maintain a link between pay and performance; |
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ensure a substantial percentage of executive compensation is contingent upon both our performance and each executive officer’s individual
performance; |
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attract, retain and motivate top-caliber executive officers; |
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offer compensation that is competitive in level and form; and |
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motivate executive officers to focus on the customer experience. |
The following table illustrates our primary compensation components and
the intended links to our objectives:
Compensation
element |
Description
|
Links to
objectives |
|
|
|
Base Salary |
Cash compensation that is a fixed
component of total compensation. |
·attract and retain top-caliber executive talent ·recognize executive officers’ skills, competencies, experience and job responsibilities
·reward
individual performance against pre-established objectives ·provide a competitive level of compensation for the day-to-day performance of typical job duties |
|
|
|
Annual Incentive |
Cash payments awarded after the completion
of a one-year performance period. |
·reward executives for achieving objective annual performance goals ·recognize performance on individual objectives relative to the performance of other executive
officers |
|
|
|
Long-Term Incentive |
Cash awards based on performance over
multiple years and subject to forfeiture. |
·reward executives for sustained long-term performance ·retain and motivate executives to ensure business stability and success
·recognize
the achievement of performance objectives that drive long-term success and financial stability and create value for our customers ·maintain a substantial portion of incentives earned in previous years at risk of forfeiture depending on
future sustained financial growth ·create a link between Nationwide Financial Services, Inc., or “NFS,” our direct parent company, and NMIC to better facilitate a shared business model |
|
|
|
Perquisites and Executive
Benefits |
Includes pension plans,
deferred compensation plans and personal perquisites. |
·attract and retain top-caliber executive talent ·provide income after retirement and enable saving of income for retirement |
Organizational Structure with Respect to Compensation Decisions
Our named executive officers provide services to other Nationwide
companies in addition to NLIC. Decisions regarding their total compensation levels are made by the NMIC human resources committee based on their roles within NFS and NMIC, as applicable. The NMIC human resources
committee does not consider the roles of named executive officers with respect to NLIC in determining total compensation. Instead, the portion of total compensation for our named executive officers paid by us was determined pursuant to a
cost-sharing agreement among several Nationwide companies, which allocated the portion of compensation used to determine our named executive officers. The remainder of their compensation was allocated to and paid by other Nationwide
companies according to the terms of the cost-sharing agreement.
Amounts we disclose in this report reflect only compensation allocated to and paid by NLIC; however, performance is measured at the NFS and/or NMIC level, which includes NLIC
performance, when determining compensation for our named executive officers. As a result, metrics and results discussed herein will refer to NFS or NMIC metrics and results as applicable. Filings for 2009 and prior years in which
compensation was reported for Messrs. Walker, Frommeyer, Rasmussen and Carter showed the compensation amounts paid by NFS, which was used to determine the named executive officers in those filings. The methods we use for the allocation of
compensation paid to our named executive officers varies by officer and the type of compensation and is discussed in more detail in “2011 Compensation Programs Design and Implementation.”
Benchmarking and Compensation Target-Setting Process
The NMIC human resources committee uses competitive market data as an
important tool to make decisions on compensation. The NMIC human resources committee compared our compensation practices to those of companies that compete with NMIC for customers, capital and/or executive officers, and are similar to
NMIC or NFS in size, scope, and/or business focus. Our market data sources included:
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companies in two peer groups that the NMIC human resources committee identified in order to provide a holistic view of the competitive market,
consisting of: |
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22 companies in the insurance and broader financial services industry (“Industry Comparator Group”); and |
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a general industry comparator group consisting of forty-five public companies above and below NMIC’s Fortune 500 ranking (“Fortune
Comparator Group,” based on revenue); and |
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companies that participate in commercially available financial services industry and general industry compensation surveys. |
The insurance companies in the Industry Comparator Group are:
·Met Life, Inc. |
·Principal Financial Group, Inc. |
·CNA Financial Corp |
·Prudential Financial, Inc. |
·Travelers Cos, Inc. |
·Unum Group |
·Hartford Financial Services |
·Genworth Financial, Inc. |
·Chubb Corp |
·Lincoln National Corp. |
·AFLAC, Inc. |
·Progressive Corp-Ohio |
·Allstate Corp |
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|
The banks in the Industry Comparator Group are:
·PNC Financial Services Group, Inc. |
·BB&T Corp |
·KeyCorp |
·Sun Trust Banks, Inc. |
·American Express Co. |
·Northern Trust Corp |
·State Street Corp |
·Fifth Third Bancorp |
·Comerica, Inc. |
The surveys used to determine the financial services industry
competitive market data are:
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Diversified Insurance Study of Executive Compensation, Towers Watson, 2010 |
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Towers Watson Global Financial Services Studies Executive Database, Towers Watson, 2010 |
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US Property and Casualty Insurance Compensation Survey Report, Mercer HR Consulting, 2010 |
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Financial services companies who participate in the Hewitt Total Compensation Measurement (TCM) Executive survey, 2010
|
The survey used to determine the general industry competitive market data is:
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Towers Watson U.S. CDB General Industry Executive Database, Towers Watson, 2010 |
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U.S. Mercer Benchmark Database – Executive, Mercer HR Consulting, 2010 |
The surveys
cover companies comparable in size to NMIC and we did not rely on any one company or any single survey source. We used market data specific to the financial services industry, if available, for the named executive officers because the
NMIC human resources committee believed it was appropriate to compare our positions to others that require similar skills, knowledge and experience. We used general industry data for positions requiring broad skills not unique to the
financial services industry, such as the NMIC Chief Executive Officer and our Chief Financial Officer. Of the sources available to us, including proxy statements of other companies and commercially available surveys, we used the sources
we believe have the best matches for our positions. We generally target pay at the market median because we believe such targets are necessary to compete for talent; however, when necessary to attract or retain exceptional talent or a
unique skill set, we may target total compensation or an individual element of compensation above the median. Annually, we participate in a talent planning process to:
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anticipate talent demands and identify implications; |
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identify critical roles; |
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conduct talent assessments; and |
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identify successors for critical roles. |
The data gathered during this process helps us identify what we refer to
as “benchmark plus” executives or roles for which we will manage total compensation up to the 75th percentile of the market data, primarily by increasing the
short-term and long-term incentive targets as a percent of salary. These positions may be those that lead a new business initiative or lead a significant business or enterprise initiative that directly impacts core strategic initiatives
identified in the overall Nationwide business strategy.
Actual pay is expected to vary based on actual results compared to goals. Executive officers can earn top-quartile pay for results exceeding the business plan and/or
expectations with respect to individual performance objectives, and they can earn bottom-quartile pay for results not meeting acceptable performance standards.
The following table identifies the target compensation levels, a
comparison of our target total compensation to the respective market target compensation level, and the rationale for providing total compensation at those levels.
Name
|
Market target total
compensation level |
Named executive
officer target total compensation market percentiles |
Rationale
|
|
|
|
|
Kirt A. Walker, President and Chief Operating Officer |
Market median |
Near median |
This is a competitive level of
compensation relative to the market data |
|
|
|
|
Timothy G. Frommeyer, Senior Vice
President—Chief Financial Officer |
Up to the 75th percentile |
Near 75th percentile |
The complexity of Mr.
Frommeyer’s role as our Chief Financial Officer and board member and his responsibilities to the NMIC board of directors and many internal and external stakeholders led NMIC to apply benchmark plus principles and target his compensation at up
to the 75th percentile, consistent with NMIC’s talent management guidelines. |
|
|
|
|
Stephen S. Rasmussen, NMIC Chief
Financial Officer |
Market median |
Between 25th percentile and median |
Mr. Rasmussen assumed his role
as the NMIC Chief Executive Officer in 2009. Accordingly, the NMIC human resources committee has moved his target compensation closer to the median over the last three years and believes this is a competitive level of compensation
relative to the market data and Mr. Rasmussen’s experience in his role. |
|
|
|
|
John L. Carter, Senior Vice
President—Distribution and Sales |
Up to the 75th percentile |
Between median and 75th percentile |
As President of NFS
Distributors, Inc., Mr. Carter has led the development of a successful sales and distribution organization with a sales strategy predicated on a team-based sales approach unique in the financial services industry. This led NMIC to apply
benchmark plus principles and target his compensation at up to the 75th percentile, consistent with NMIC’s talent management guidelines. |
|
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|
|
Peter A. Golato, Senior Vice
President—Nationwide Financial Network |
N/A-internal peer
relationships |
N/A |
This is a competitive level of
compensation relative to the scope of Mr. Golato’s role as compared to his peers, who manage other business lines in NFS. While we used market data for this role as a reference point, the match reflected a broader range of
responsibilities as compared to Mr. Golato’s responsibilities, and has been very volatile for the last several years; therefore, internal considerations played a primary role in our decision making. |
The NMIC human resources committee determined the total compensation
targets for the named executive officers, which are benchmarked to the competitive external market, as well as the individual elements that are distributed among base salary, annual incentive and long-term incentive. Annually, we review
and may adjust targets for company and individual performance in order to recognize competitive market compensation and performance in determining the final compensation we deliver to executive officers. We have different review
procedures depending on the level and role of the executive officer. For top-tier executive officers, including Messrs. Rasmussen and Walker, PM&P prepared a summary of competitive market data that the NMIC human resources committee
used in making compensation decisions. This provided an impartial frame of reference for these executive officers. For all other named executive officers, our internal compensation department summarized the competitive market
data and provided the information to senior management and the NMIC human resources committee for review and use in decision making. The following is an overview of these review procedures:
Kirt A. Walker
PM&P prepared a market analysis for Mr. Walker, our President and
Chief Operating Officer, which included a summary of the 25th, median and 75th percentile
market data and covered the following compensation elements: base salary, target annual incentive opportunity and target total cash compensation, and long-term incentive opportunity and target total direct compensation. The analysis took
into account the size and complexity of his job, as measured by assets managed, compared to the market data. Other factors PM&P evaluated when determining individual competitiveness included:
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the degree to which the market data consist of sources of executive talent for NMIC; |
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the comparability of Mr. Walker’s job responsibilities to benchmark job responsibilities; |
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Mr. Walker’s experience, tenure and performance; and |
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the responsibilities of Mr. Walker’s position, internal equity and strategic importance to NMIC. |
PM&P also presented an aggregate analysis of the competitiveness of
all of Mr. Rasmussen’s direct reports with respect to the market median, and the NMIC human resources committee considered this analysis in addition to Mr. Rasmussen’s recommendation in approving Mr. Walker’s base salary and 2011
target incentive levels.
Timothy G. Frommeyer, John L. Carter and Peter A. Golato
The NMIC human resources committee reviewed a number of inputs with
regard to Messrs. Frommeyer, Carter and Golato, including:
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their current compensation levels and relative market competitive pay levels; |
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the identification of Messrs. Frommeyer and Carter as occupying benchmark plus roles as well as summaries of their accomplishments and Mr.
Golato’s accomplishments in 2010; |
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recommendations from Mr. Walker, for Messrs. Carter and Golato, and from NMIC’s Chief Financial Officer for Mr. Frommeyer, in considering
2011 base salary adjustments and incentive target levels; and |
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|
reviewed and approved Mr. Carter’s sales incentive plan for 2011. |
Stephen S. Rasmussen
For Mr. Rasmussen, the NMIC Chief Executive Officer, PM&P summarized
the median market data for the position and explained any adjustments necessary to attain appropriately competitive compensation for each key element. For 2011, the NMIC human resources committee’s final decision on pay targets was
subject to the NMIC board of directors’ assessment of Mr. Rasmussen’s 2010 performance. PM&P provided recommendations for Mr. Rasmussen’s 2011 compensation program and met with the NMIC human resources committee,
which determined a recommendation for Mr. Rasmussen’s compensation targets. The NMIC human resources committee’s recommendation was reviewed and approved by the full NMIC board of directors.
Pay Mix
We compensate
executive officers through a mix of base salary, annual incentive, long-term incentive, benefit plans, perquisites and deferred compensation plans. The plans and the target opportunities for base salary, annual incentives and long-term
incentives are reviewed annually by the NMIC human resources committee to ensure total compensation and the mix of pay elements are competitive and changes reflect both the competitive market data and individual performance. This ensures
we continue to retain talent in key areas and provides a framework for recruiting new talent.
We determine an appropriate mix of pay elements by using the market data
trends as a guideline. However, in practice, we may adjust individual components above or below the mix represented in the market data while maintaining the recommended target total compensation range. Some of the reasons we may deviate
from the mix of elements represented in market data include:
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recruiting needs based on compensation received by a candidate in previous positions; |
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year-to-year variation in the market data, indicating the market data may be volatile; |
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differences between the responsibilities of our position and the positions represented in the market data; and |
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a desire to change the alignment of our incentives between short-term and long-term goals for particular positions. |
For 2011, the above analysis resulted in the following allocated target compensation levels for the named executive officers:
Name1 |
Base
salary (percentage of target total compensation) |
Target
annual incentive percentage (percentage of target total compensation) |
Target
long- term incentive (percentage of target total compensation) |
Total
compensation target |
Percentage
of total target compensation attributed to target incentives |
|
|
|
|
|
|
Kirt A. Walker |
$355,625 (34%)
|
80% (27%) |
$410,630 (39%)
|
$1,005,914 |
66% |
Timothy G. Frommeyer
|
$226,107 (35%)
|
65% (23%) |
$61,780 (42%) |
$321,937 |
65% |
Stephen S. Rasmussen
|
$146,970 (13%)
|
150% (20%) |
$798,240 (67%)
|
$1,169,715 |
87% |
John L. Carter |
$191,349 (32%) |
120% (37%) |
$231,222 (31%) |
$677,908 |
68% |
Peter A. Golato
|
$287,199 (40%) |
65% (27%) |
$207,853 (33%) |
$655,198 |
60% |
__________
|
1 |
Dollar amounts shown represent the amounts allocated to us under the cost-sharing agreement. Percentages are calculated based on the
total compensation elements, including unallocated amounts that are not shown in the table. |
The elements summarized in the table above illustrate the following
points relative to our executive compensation philosophy:
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Consistent with market practices, a relatively small percentage of the total target compensation is distributed as base salary, as the NMIC human
resources committee believes compensation should be delivered to our named executive officers based on performance. |
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|
A substantial percentage of the total target compensation is comprised of variable incentives, delivered through a mix of annual incentive
programs, which are more focused on short-term financial results, and long-term incentive programs, which are focused on achievements over multiple years and most closely align with building sustained value for our customers. |
We exercised judgment and modified the above principles for the following executives for the following reasons:
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Mr. Carter’s role is more heavily focused on current-year, or short-term, achievements, goals and objectives than other members of NFS’
management team, which is consistent with the manner in which senior sales executives are paid in the market. |
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|
Mr. Golato’s base salary reflects a higher percentage of the total target compensation to reflect the market data trend for base salary for
that position, and the incentive targets are consistent with the relationship of internal peers. |
The table below identifies the percentage increase in base salary and
short-term and long-term incentive targets for the named executive officers in 2011 as compared to 2010. The table also sets forth the reasons for the changes. Actual base salary and incentive payments will also be influenced
by changes in the allocation percentages, as discussed below in “2011 Compensation Programs Design and Implementation.”
Name |
Base salary change
% |
Short-term incentive target change
% |
Long-term incentive
target change % |
Rationale
|
|
|
|
|
|
Kirt A. Walker |
11% |
7% |
0% |
Mr. Walker exceeded his 2010
performance expectations compared to pre-established objectives. Adjustments to base salary and short-term incentive targets positioned his target total direct compensation near the median of the market data for his position.
|
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|
|
|
|
Timothy G. Frommeyer
|
5% |
0% |
5% |
Mr. Frommeyer exceeded his 2010
performance expectations compared to pre-established objectives with respect to initiating changes to large case life insurance retention and exception policies, developing sales and financial roadmaps and business performance reviews, contributing
to the NFS plan that exceeds market and achieves expense reductions, developing pricing standards policy, and developing his associates to increase their engagement. These accomplishments, in addition to a review of the market data,
resulted in an increase to his base salary and long-term incentive targets. |
|
|
|
|
|
Stephen S. Rasmussen
|
11% |
0% |
4% |
Mr. Rasmussen exceeded
expectations on his 2010 strategic objectives, and increases to his base salary and long-term incentive target resulted in an appropriately competitive level of target total compensation relative to the market data. |
|
|
|
|
|
John L. Carter |
2% |
20% |
10% |
Mr. Carter exceeded his 2010
performance expectations compared to pre-established objectives with respect to sales objectives; performance review, sales process and alignment initiatives; and significant improvement in associate engagement. Accordingly, Mr. Carter received a
base salary increase as well as increases to his incentive targets to maintain alignment with the market data trend. |
|
|
|
|
|
Peter A. Golato
|
2% |
0% |
0% |
Mr. Golato achieved his 2010
performance expectations compared to pre-established objectives with respect to Corporate Insurance Markets profit and loss objectives, policy growth and cross sell objectives for specified sales initiatives, infrastructure implementation for
tracking and reporting production, and achieving or exceeding plan for net revenue, total sales and operating expenses. |
2011 Compensation Programs Design and
Implementation
We discuss the following items in this section:
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what we intend to accomplish with our compensation programs; |
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how we determine the amount for each element of compensation; and |
|
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the impact of performance on compensation. |
The principal components of 2011 compensation for our named executive
officers are base salary and annual and long-term incentives. Each component of compensation serves a different purpose, as discussed in “Compensation Objectives and Philosophy.”
Base Salary
Our overall pay philosophy is to establish base salaries that are
generally at the median of the companies represented in the market data. We typically base a departure from the median on factors such as incumbent experience and industry or functional expertise, scope of job responsibilities as compared
to similar positions in the market, special retention needs and executive performance. In determining adjustments to the named executive officers’ salaries for 2011, the NMIC human resources committee evaluated the
following:
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salaries for comparable positions in the marketplace, taking scope of responsibility into account; |
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NMIC and NFS’s recent financial performance, both overall and with respect to key financial indicators; |
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the annual performance evaluation of each executive officer compared to previously established objectives; and |
|
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management recommendations. |
Mr. Rasmussen’s base salary was allocated to NFS using NFS’s
operating revenue as a percentage of NMIC's total operating revenue. We allocated 100% of the base salary for all other named executive officers to NFS since these named executive officers primarily support this business
unit. Salary was further allocated to us as follows:
|
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|
Base salaries for Messrs. Frommeyer and Rasmussen were allocated using a variety of different factors including policies in-force, new policy counts,
premiums, commissions, time studies and revenue, excluding one-time, unusual or unrelated expenses. |
|
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|
Base salary for Mr. Walker was allocated using policy in-force counts from various NFS business segments. |
|
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|
Base salary for Mr. Carter was allocated using new policy counts from various NFS business segments. |
|
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|
Base salary for Mr. Golato was allocated using policy in-force counts from the NFS individual protection business segment. |
Base salary rates for the named executive officers increased by a weighted average of 8% in 2011. The NMIC human resources committee established unallocated base
salary rates consistent with the philosophy, objectives and factors described above. The overall salary increase percentage reflects the impact of competitive market data and individual and company performance and enables us to maintain
competitive salaries. Actual base salaries paid by us, which are reported in “Summary Compensation Table for 2011,” also reflect changes in the allocation percentages from 2010 to 2011.
Annual Incentive: Performance Incentive Plan and Sales Incentive Plan
In 2011, we used annual incentive plans to provide a substantial
portion of at-risk pay to our named executive officers, which promoted our pay-for-performance philosophy. These plans provide participants with direct financial rewards in the form of annual incentives the participants earn subject to
the achievement of key financial and strategic objectives. Plan metrics vary based on each executive officer’s role and are discussed in more detail below. The annual incentive design fulfills the following
objectives:
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emphasizes a one-company culture while recognizing the need to maintain some business unit focus; |
|
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|
focuses on the Nationwide customer experience; and |
|
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|
aligns incentive plans between associates and management. |
In 2011, the
NMIC human resources committee set specific company performance measures; goals for threshold, plan and outstanding results; and weightings for each performance measure under each annual incentive plan in which the named executive officers
participate. The NMIC human resources committee approved a target annual incentive award opportunity as a percentage of base salary for each participant and approved all payments made under these plans. We base our target
incentive award opportunities on our executive officers’ responsibilities, their value to us and the competitive market data for similar positions. The use of these market data is discussed in “Compensation Objectives and
Philosophy.”
We allocated annual incentives for Messrs. Frommeyer and Rasmussen to NFS based on NFS’ operating revenue as a percentage of NMIC’s total operating
revenue. We allocated 100% of the annual incentives for the other named executive officers to NFS. Annual incentives were further allocated to us using a variety of different factors including policies in-force, new policy
counts, premiums, commissions, time studies and revenue, excluding one-time, unusual or unrelated expenses.
Performance Incentive Plan
We make annual
payments to certain executive officers under the Performance Incentive Plan, or “PIP.” In 2011, all of our named executive officers participated in the PIP, with the exception of Mr. Carter, who participated in the Sales
Incentive Plan, or “SIP,” for reasons discussed below. Under the PIP, the participant is assigned a target incentive amount representing a percentage of the participant’s year-end base salary. The actual
amount participants receive under the PIP will be a percentage of the target incentive depending on the achievement of specific business and individual performance objectives.
Our performance measures under the PIP are based on a broad series of
key financial, business and strategic goals, as well as individual performance objectives. The specific measures vary by executive officer depending on individual positions and roles. We determine the annual incentive
performance metrics and weights after an analysis of NFS’ financial and strategic goals and those of Nationwide, such as growth, profitability, capital efficiency and strategic objectives. When determining performance levels for the
PIP payout scale, the NMIC human resources committee considered the probability of attaining performance levels, historical performance and payouts, industry and competitor outlooks, run rate trends and plan, and business mix and performance
volatility. The maximum award is 200% of the target amount before individual adjustments.
The NMIC human resources committee authorizes the use of discretion by
the NMIC Chief Executive Officer to adjust calculated incentive payments by up to plus or minus 25%. The NMIC Chief Executive Officer can use discretion if the calculated performance score does not reflect actual
accomplishments. Factors the NMIC Chief Executive Officer may consider include, but are not limited to:
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changes in industry and competitive conditions that occur after target setting; |
|
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|
execution and achievement of key performance indicators that have a longer-term financial impact; |
|
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|
performance on key performance indicators, such as customer experience, associate engagement and agency ratings, that may not be reflected in the
financial results; and |
|
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|
achievement of financial results consistent with Nationwide’s values. |
Proposed
adjustments greater than plus or minus 25% require the NMIC human resources committee’s approval. The NMIC Chief Executive Officer did not exercise discretion to adjust performance scores that ultimately determined the incentive
pool.
The NMIC human resources committee may also adjust the actual performance results for one-time or unusual financial items that have impacted actual performance but which
management believes should not be included to penalize or receive credit for incentive purposes. Examples may include, but are not limited to:
|
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|
Gains and losses from the acquisition or divestiture of businesses and/or operations and related deferred costs; |
|
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|
Non-recurring, unanticipated tax adjustments; and |
|
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|
Errors and/or omissions during target calculations. |
We
define the financial goals used in the tables below as follows:
|
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|
We define Consolidated Net Operating Income, or “CNOI,”, as a non-GAAP financial measure which highlights NMIC’s results from
continuing operations. CNOI excludes the impact of realized gains and losses on sales of investments and hedging instruments, certain hedged items, other than temporary impairments, discontinued operations and extraordinary items, net of
tax. |
|
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|
We determine NI/Allied number of relationships per household by dividing the performance year-ending total relationship count by the performance
year-ending total household count, for certain pre-defined Nationwide Insurance and Allied Insurance products and lines of businesses. |
|
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|
We determine NI/Allied household growth by measuring the increase or decrease in current performance year-ending household count over the prior
performance year-ending household count, as a percentage, for certain pre-defined Nationwide Insurance and Allied Insurance products and lines of business. |
|
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|
We determine NI/Allied commercial direct written premium growth by measuring the increase or decrease in the current performance year-ending
Nationwide Insurance and Allied Insurance commercial lines direct written premium over the prior performance year-ending Nationwide Insurance and Allied Insurance commercial lines direct written premium, as a percentage. |
|
·
|
We calculate NFS Return on Capital by dividing NFS net operating income for the year, excluding interest income on excess capital and adding back
debt expense, by the total NFS GAAP equity plus long-term debt at the beginning of the year, excluding excess capital. Both the Nationwide Bank segment and the impact of medium-term notes are excluded from this calculation.
|
|
·
|
NFS Sales: New and renewal production premiums and deposits, previously referred to as “sales,” are not derived from any
specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Management believes
that the presentation of new and renewal production premiums and deposits enhances the understanding of our business and helps depict longer-term trends that may not be apparent in the results of operations due to differences between the timing of
sales and revenue recognition. |
Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis
are recognized as revenue when due, as calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity products involve an initial deposit or a
series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums collected (cash basis) and
deposits received (cash basis) are aggregated and reported as statutory premiums and annuity consideration revenues.
As calculated and analyzed by management, statutory premiums and deposits
on individual and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services
program are adjusted as described below to arrive at new and renewal production premiums and deposits.
We report new and renewal production premiums and deposits as net of
internal replacements, which we believe provides a more meaningful disclosure of production in a given period. In addition, our definition of new and renewal production premiums and deposits excludes funding agreements issued under our
MTN program; asset transfers associated with large case BOLI and large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth,
their production flows potentially can mask trends in the underlying business and thus do not provide meaningful comparisons and analyses.
For 2011, the NMIC human resources committee approved the following objectives and weights under the PIP for Messrs. Walker, Frommeyer, Rasmussen and Golato. The
target amounts for the PIP vary by executive officer. The final incentive payments were adjusted with approval of the NMIC human resources committee as described in "Determination of the Final Annual Incentive Payments."
|
|
|
|
2011 PIP
Metrics and Performance for Messrs. Walker, Frommeyer, Rasmussen and Golato |
|
Weights
(%) |
|
|
Metric |
Messrs.
Walker and Golato |
Messrs.
Frommeyer and Rasmussen |
2011
established business goals
|
2011
incentive performance
results5 |
|
|
|
|
|
Enterprise Consolidated Net
Operating Income1 |
50 |
50 |
$992,000,000 |
$585,200,000 |
|
|
|
|
|
Customer Enthusiasm Index2 |
20 |
20 |
8.51 |
8.52 |
|
|
|
|
|
NI/Allied # of Relationships per
Household |
5 |
6.25 |
1.643 |
1.661 |
|
|
|
|
|
NI/Allied Household
Growth |
|
6.25 |
-2.43% |
-2.99% |
|
|
|
|
|
NI/Allied Commercial DWP
Growth |
|
2.5 |
-1.94% |
5.49% |
|
|
|
|
|
NFS Return on
Capital |
15 |
9 |
9.85% |
14.19% |
|
|
|
|
|
NFS Sales3 |
10 |
6 |
$17,825,400,000
|
$19,549,600,000
|
|
|
|
|
|
Strategic Nonfinancial
Objectives4 |
|
Up to +/- 25% |
Discussed below in
“Determination of the Final Annual Incentive Payments” |
+16% of final objective
performance |
|
|
|
|
|
__________
|
1 |
Performance on CNOI of $350,000,000 must be achieved in order for payment to be earned on the Customer Enthusiasm Metric. Performance on
CNOI of $694,400,000, or threshold performance, must be achieved in order for CNOI or business unit metrics to be paid. |
|
2 |
Mean customer satisfaction with NMIC on a scale of one to ten as determined by an external consultant. |
|
3 |
Excluding Single Premium Universal Life business line |
|
4 |
Applies to Mr. Rasmussen only. |
|
5 |
These amounts are unaudited. |
Sales Incentive Plan
Mr. Carter
participated in the SIP in 2011. The primary focus of the SIP was on NFS business segment sales results, which represented 85% of Mr. Carter’s total target incentive. Mr. Carter participated in the SIP rather than the PIP
because he is the leader of the sales organization, and because the SIP was designed with a primary emphasis on results that he directly
influences. These metrics are consistent with prevalent
practices for similar roles in the financial services industry. In addition, 15% of his 2011 scorecard had the same metrics under which we measure other members of NFS’ management team under the PIP, thus maintaining alignment with
NFS’ overall financial goals. For 2011, his maximum award opportunity under the plan was 200% of his target amount. The NMIC Chief Executive Officer had the discretion to adjust scores for individual sales metrics by plus
or minus 25%, subject to approval by the NMIC human resources committee of the final SIP payment. This discretion was not exercised in 2011. When determining the performance levels for the payout under the SIP, the planning process
included consideration of the current plan year to new plan year rates of sales growth. We used a different incentive scale for each of our various business segments to reflect key differences among them, such as:
|
·
|
the competitive and market environment in which each business segment operates; |
|
·
|
the outlook for sales growth of the industry and competitors; |
|
·
|
the level of maturity of each business segment; |
|
·
|
historical rates of sales growth; and |
|
·
|
our expectation as to the difficulty of achieving the planned rates of sales growth in each business segment. |
Following are the annual incentive performance metrics and weights for
the SIP. Mr. Carter's final incentive payments were adjusted with approval of the NMIC human resources committee as described in "Determination of the Final Annual Incentive Payments."
|
|
|
|
2011 SIP Metrics and Performance for Mr.
Carter |
Performance Criteria
|
Weight (%) |
2011
established goals
|
2011
incentive performance
results1 |
Sales
Metrics (weighted 85%) Individual
Investments Group: |
|
|
|
Variable/Immediate
Annuities |
29.75 |
$6,168,100,000
|
$7,748,400,000 |
Fixed Annuities
|
3.18 |
$215,000,000
|
$448,100,000
|
|
|
|
|
Retirement
Plans Group: |
|
|
|
Private Sector
|
17.00 |
$5,202,800,000
|
$4,996,300,000 |
Public Sector
|
4.26 |
$4,320,000,000
|
$4,296,700,000
|
|
|
|
|
Individual
Protection Group: |
|
|
|
Total 1st year |
17.00 |
$230,600,000
|
$210,900,000
|
Total Renewal
|
4.25 |
$848,900,000
|
$857,800,000
|
Corporate |
3.18 |
$390,000,000
|
$605,500,000
|
|
|
|
|
Nationwide
Funds Group |
|
|
|
Funds |
6.38 |
$450,000,000
|
$385,900,000
|
|
|
|
|
NFS and
Enterprise Metrics (weighted 15%) |
|
|
|
|
|
|
|
Enterprise Consolidated Net
Operating Income1 |
7.50 |
$992,000,000 |
$585,200,000 |
Customer Enthusiasm Index
(Mean Satisfaction with Company)2 |
3.00 |
8.51 |
8.52 |
NFS Return on
Capital |
2.25 |
9.85% |
14.19% |
NFS Sales3 |
1.50 |
$17,825,400,000
|
$19,549,600,000
|
|
|
|
|
2011 SIP Metrics and Performance for Mr.
Carter |
Performance Criteria
|
Weight (%) |
2011
established goals
|
2011
incentive performance
results1 |
NI/Allied # of Relationships
per Household |
0 .75 |
1.643 |
1.661 |
__________
|
1 |
Performance on CNOI of $350,000,000 must be achieved in order for payment to be earned on the Customer Enthusiasm Metric. Performance
on CNOI of $694,400,000, or threshold performance, must be achieved in order for CNOI or business unit metrics to be paid. |
|
2 |
Mean customer satisfaction with NMIC on a scale of one to ten as determined by an external consultant. |
|
3 |
Excluding Single Premium Universal Life business line |
|
4 |
These amounts are unaudited |
Determination of the Final Annual Incentive Payments
To determine the 2011 annual incentive compensation payments for our
named executive officers, the NMIC human resources committee assessed each executive officer’s performance under the PIP or SIP, as applicable, considering the measures in the tables above, as well as the executive officer’s overall
performance, our overall financial performance and management’s assessment of performance on individual objectives. In assessing final performance for the PIP, the NMIC human resources committee reviewed actual performance relative
to established goals and considered the following items: earnings quality, the level of catastrophic losses, industry results, achievement of strategic performance metrics, and business conditions and capital stewardship.
In 2011, NMIC
experienced unprecedented claims due to multiple weather-related catastrophes across the United States, leading to record property/casualty claims, life insurance and other benefits paid. Because of incentive plan design features tying
incentive payments to CNOI, payments are disproportionally affected by the effects of higher-than-planned weather losses, although the losses are not in the control of the plan participants. Under the approved 2011 PIP design, as well as
the NMIC and NFS metrics of the SIP, business unit metrics would not be paid despite strong performance on those metrics if CNOI did not meet the threshold performance level of $694,400,000. As a result, the NMIC human resources committee
exercised its discretion to allow payments to be made on business unit metrics if CNOI performance achieved $350,000,000, which was previously established as the hurdle for the payment of the Customer Enthusiasm metric, instead of the $694,400,000
performance level originally required in the plan design as the threshold for any payment for business unit metrics. This adjustment recognizes the strong performance of our business units and the continued focus on excellent customer
service during a year in which our customers needed us most, while maintaining NMIC’s financial stability.
The actual amounts Messrs. Walker and Rasmussen receive under the PIP,
and the amount Mr. Carter receives for the sales metrics under the SIP, will be a percentage of the target incentive depending solely on the achievement of the approved metrics and management’s assessment of individual performance
measures. For Messrs. Frommeyer, Carter and Golato, incentive payments are made from a pool calculated by adding the total of all participants’ incentive target amounts within an organizational unit. For Mr. Carter, only
15% of his target amount, the amount attributed to his NFS and enterprise metrics, contributed to this pool. The pool is multiplied by the overall performance score for the year and further adjusted, if applicable, at the discretion of
the NMIC Chief Executive Officer and/or the NMIC human resources committee. This establishes the maximum amount we will pay to the participants in each pool, whether shared among participants or paid to a single
individual. Senior management then reviewed each of the participants within this pool to evaluate personal performance and individual contributions relative to the other participants in the pool. To the extent management
discretion is used to reduce or eliminate the award of a participant in the pool, the amount of incentive not awarded to that participant is included in the total amount available in the pool to be distributed to the other participants. For 2011,
the NMIC Chief Executive Officer exercised his discretion to increase the payment as recommended by management under the PIP for Mr. Frommeyer based on individual and relative performance contributions, which was approved by the NMIC human resources
committee.
For Mr. Rasmussen, the NMIC board of directors also considered non-financial objectives that were reviewed and discussed by the NMIC human resources committee and approved
by the NMIC board. These non-financial objectives focused on the following three categories:
|
·
|
Delivering results through highly engaged associates, with regard to creating an engaging work experience by improving leadership effectiveness,
establishment of a diverse pipeline for senior leadership talent, and ensuring qualified successors are identified for key management roles; |
|
·
|
Enabling execution of Nationwide’s strategy with accountability, with regard to customer enthusiasm, growing and retaining relationships per
household, strengthening distribution effectiveness, progress on executing critical business transformation programs and achieving marketing expense and full time equivalent benchmarks as well as identifying advertising return on investment
benchmarks and achievement strategy; and |
|
·
|
The accountability and transparency of Nationwide’s governance, with regard to continuing board engagement with senior line and functional
leaders, adhering to and reinforcing Nationwide’s code of conduct, maintaining effective relationships with sponsor and community organizations, and maintaining quality communications with associates and key stakeholders. |
Each independent director on the NMIC board of directors gave Mr. Rasmussen a rating on a twenty-point scale for each objective and an overall rating on the same
scale. PM&P summarized the results and met with the chairwoman of the NMIC human resources committee to review the evaluation. PM&P then met with the NMIC human resources committee to discuss the ratings and arrive at
an overall score to be recommended to and approved by the NMIC board of directors. This score was then applied as a modifier to his performance on financial results, and the resulting payment, which included a 16% increase to his payment
based on financial objectives, was approved by the NMIC board of directors.
The resulting adjusted cash payouts for our named executive officers, which are shown in columns (d) and (g) of the “Summary Compensation Table for 2011,” as well as
the payouts that would have been received without the adjustment, are as follows:
Name
|
Comparison of
unadjusted annual incentive payment to target |
Comparison of adjusted
annual incentive payment to target |
Summary of
rationale |
|
|
|
|
Kirt A. Walker |
23% of target |
78% of target |
Performance compared to the PIP
objectives as adjusted by the NMIC human resources committee |
|
|
|
|
Timothy G. Frommeyer
|
23% of target |
80% of target |
Performance compared to the PIP
objectives as adjusted by the NMIC human resources committee, and a discretionary adjustment based on exceeding expected performance on individual objectives |
|
|
|
|
Stephen S. Rasmussen
|
27% of target |
84% of target |
Performance compared to the PIP
objectives as adjusted by the NMIC human resources committee, and further modified based on exceeding expectations on pre-established strategic objectives |
|
|
|
|
John L. Carter |
114% of target
|
122% of target
|
Performance compared to the SIP
objectives as adjusted by the NMIC human resources committee for the portion of his scorecard representing NFS and NMIC metrics |
|
|
|
|
Peter A. Golato
|
23% of target |
78% of target |
Performance compared to the PIP
objectives as adjusted by the NMIC human resources committee |
Long-Term Incentives
In 2011, the
NMIC human resources committee administered the Nationwide Long-Term Performance Plan, or “LTPP,” to award long-term incentives to the named executive officers. Long-term incentive compensation constitutes a significant
portion of an executive officer’s total compensation package, consistent with our philosophy of emphasizing pay that is conditional or contingent on our performance. The LTPP is intended to accomplish the following
objectives:
|
·
|
reward sustained long-term value creation with appropriate consideration of risk capacity, appetite and limits; |
|
·
|
deliver market-competitive target compensation consistent with organizational performance; |
|
·
|
retain and motivate executives to ensure business stability and success; |
|
·
|
focus on metrics that executives understand and can influence; and |
|
·
|
minimize incentive plan target-setting negotiation. |
We established long-term incentive targets in 2011 based on a review of
relevant market data and/or comparisons to other business segment leaders. We described the target-setting process in “Benchmarking and Compensation Target-Setting Process.”
In 2010, the
NMIC board of directors requested a review of the design of Nationwide’s long-term incentive plan to determine whether it was consistent with Nationwide’s mission and strategy as a mutual organization. A new plan design was
proposed and approved for 2011 awards that measure performance over a three-year period, which is consistent with external market practices for mutual companies. The metrics used to measure performance are operating revenue growth and
capital strength, and potential payments range from zero to two and one-half times the target amount.
We define the financial goals used in the LTPP as follows:
|
·
|
We determine operating revenue growth by comparing current performance year-ending operating revenue, net of interest credited, to prior performance
year-ending operating revenue, net of interest credited. Operating revenue is a non-GAAP financial measure. Operating revenue excludes realized gains and losses on sales of investments and hedging instruments, discontinued
operations and extraordinary items. |
|
·
|
We determine capital strength by combining our internal economic capital rating (50%) and Standard & Poor’s capital rating
(50%). |
Performance on each metric is compared to a matrix where the x axis is capital strength and the y axis is operating revenue growth. A 1.0 score is awarded when
operating revenue growth, net of interest credited, equals plan and capital strength equals a AA rating. The final score is determined at the intersection of the operating revenue growth and capital strength performance on the
matrix. A final score is determined at the end of each year in the performance period based on the matrix approved for that year, and the final score at the end of the three-year period will be the average of the three annual
scores. At its meeting on February 14, 2012, the NMIC human resources committee approved a score for the first year of the 2011-2013 performance period of 1.61.
The grants under this plan are reported in “Grants of Plan-Based
Awards,” and the first payments under this new design will be made following the conclusion of the 2011-2013 performance period.
Long-term Incentive Transition
Program
Because awards under the new metrics will not be paid until 2014, the NMIC human resources committee approved a transition program to provide payments under the former plan
following the 2011 and 2012 performance periods. Prior to 2011, our long-term awards were paid using a “banking” methodology, and when the plan was discontinued, participants had incentives earned under previous performance
periods remaining in their banks, and subject to forfeiture, as we describe below. The transition program provides for payments to participants based on the participants’ former banks and current long-term incentive targets, using
the same calculation methodology that would have been in place if the plan had continued over the following two years. Following the conclusion of the 2012 performance period, no further payments will be made from the banks.
The metric we
used to measure long-term performance for purposes of the transition program was GAAP return on equity, or “GAAP ROE,” which is calculated by dividing consolidated net income by beginning GAAP equity. The performance score was
calculated by dividing GAAP ROE by a hurdle rate, which was the cost of capital. The final score was adjusted in accordance with the methodology approved by the NMIC human resources committee for 2008 unrealized losses to recognize that
they were included in a prior performance period, and Nationwide Indemnity reserve strengthening. In 2011, the NMIC human resources committee also approved an adjustment to exclude the impact of the statutory capital hedge from the
performance score, which will align GAAP accounting used in the GAAP ROE calculation with the intent of NMIC’s “New Mutual” strategy, risk and capital goals. The calculations were reviewed and validated by the NMIC
internal audit department in accordance with the NMIC human resources committee’s direction.
If the final
performance score for the year is equal to one, we will award the target incentive amount. If the performance score is less than one, then the incentive award will be less than target, and may be negative. If the performance
score is greater than one, the incentive award will be greater than target, and the maximum award is two and one-half times the target amount. We add the award to, or subtract the award from, the opening balance of a bookkeeping account
for the executive officer. We refer to the bookkeeping account as a “bank.” The executive officer receives one-third of the positive bank balance, if any, as the long-term incentive payment. A time value
of money factor is applied to participant targets to account for the fact that, due to a "banking methodology," only one third of the target, after performance is applied, is available for payment in any one performance period. For 2011,
the time value of money was 7%, which was added to the target award. The target incentive award, increased by the time value of money factor and multiplied by the final performance score, determined the current year award for transition program
purposes.
The 2011 GAAP ROE award payments are based on performance, and all participants are subject to the same calculation. At its meeting on February 14, 2012, the NMIC
human resources committee approved an adjusted final performance score of 0.11, which reflected a .74 increase from the unadjusted score of (.63). These awards, of which one-third was distributed as a cash payment, are reported for the
2011 performance period in column (g) of the “Summary Compensation Table for 2011.”
Growth in Equity
Awards
In 2009, certain senior executives, including all of our named executive officers, had 20% of their total long-term target measured on the growth in equity to be measured at the
end of three-year cycles. Since the GAAP ROE metric is measured on an annual basis under the previous plan design, this additional metric was intended to encourage our most senior executives to consider our long-term viability rather than
short-term annual performance, and to reestablish our capital base, which had declined due to unusual market conditions in 2008. The growth in equity score is calculated by dividing the December 31, 2011 ending GAAP equity by the January
1, 2009 beginning GAAP equity. Following the conclusion of the 2009-2011 performance period, the NMIC human resources committee approved the final performance score of 1.47, which was multiplied by the target amounts. Resulting
payments are reported in column (g) of the “Summary Compensation Table for 2011.”
We allocated long-term incentive payments as follows:
Name
|
GAAP ROE long-term
incentive allocation |
Growth in equity
long-term incentive allocation |
|
|
|
Kirt A. Walker |
100% to NFS |
Not allocated to us because Mr.
Walker was in a different role within the NMIC enterprise when the award was granted |
|
|
|
Timothy G. Frommeyer
|
NFS’ operating revenue as
a percentage of NMIC’s total operating revenue |
100% to NFS because role
reported to NFS leadership at the time the award was granted |
|
|
|
Stephen S. Rasmussen
|
NFS’ operating revenue as
a percentage of NMIC’s total operating revenue |
NFS’ operating revenue as
a percentage of NMIC’s total operating revenue |
|
|
|
John L. Carter |
100% to NFS |
100% to NFS |
|
|
|
Peter A. Golato
|
100% to NFS |
100% to NFS |
Long-term incentives were further allocated to us using a variety of different factors including policies in-force, new policy counts, premiums, commissions, time studies and
revenue, excluding one-time, unusual or unrelated expenses.
Personal Benefits and Perquisites
We provide to our executive officers certain perquisites and other
personal benefits, including health and welfare benefits, which are the same for all associates, and pension and savings plans, deferred compensation plans and personal perquisites we believe are consistent with market competitive
practices. Incremental costs, as applicable, are included in columns (h) and (i) of the “Summary Compensation Table for 2011.”
Termination Benefits and
Payments
It is Nationwide’s practice to provide severance agreements to the NMIC Chief Executive Officer and a limited number of senior executive officers, including most of the
NMIC Chief Executive Officer’s direct reports. Of our named executive officers, we have entered into severance agreements with Messrs. Rasmussen and Walker. We believe these agreements are a standard industry practice for
these positions and are necessary to attract and retain executive officers at this level. The agreements provide certain protections to the executive officer with regard to compensation and benefits. In exchange for those
protections, the executive officer agrees to keep our information confidential, agrees not to solicit our employees or customers and agrees not to compete with Nationwide. We provide additional information with respect to post-termination
benefits provided under these severance agreements in “Potential Payments Upon Termination or Change of Control.”
Certain termination-of-employment events may trigger post-termination
payments and benefits in the event that a severance agreement does not apply to the payments and benefits. Those events include retirement, severance, termination for cause, death, disability and voluntary termination. The
details of the benefits and payments made upon termination are also described in “Potential Payments Upon Termination or Change of Control.”
Impact of Regulatory Requirements on
Compensation
There were no regulatory requirements that influenced our compensation arrangements.
Conclusion
As discussed
in “Compensation Objectives and Philosophy,” we design our compensation programs to be competitive, to attract and retain top talent and to drive our performance, with the ultimate goal of increasing stakeholder and customer
value. To attain these objectives, we compare ourselves to other companies that are similar to us in setting target pay opportunities and financial business goals. In 2011, the objectives for incentive purposes were established
to reward value-creating performance and we awarded a substantial percentage of total compensation opportunity to our named executive officers in the form of pay-at-risk. Our business results produced payments under our annual and
long-term incentive plans for our named executive officers, rewarding our executive officers with reasonable actual pay relative to our 2011 performance, commensurate with our pay-for-performance philosophy.
Compensation Committee Interlocks and Insider
Participation
Our board of directors does not have a compensation committee.
Summary Compensation Table for 2011
Name and principal position (a) |
Year (b) |
Salary (c) |
Bonus (d) |
|
Non-equity incentive plan compensation (g) |
Change in pension value and non-qualified deferred compensation
earnings3 (h) |
All other compensation (i) |
Total (j) |
|
|
|
|
|
|
|
|
|
|
|
|
Kirt A. Walker, President and
Chief Operating Officer |
2011 |
385,666 |
- |
|
269,623 |
2 |
89,180 |
|
22,279 |
4 |
766,748 |
|
2010 |
350,046 |
- |
|
763,519 |
|
51,174 |
|
28,366 |
|
1,193,105 |
|
2009 |
- |
- |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Timothy G.
Frommeyer, Senior Vice President–
Chief Financial Officer |
2011 |
234,389 |
2,854 |
1 |
119,155 |
2 |
371,439 |
|
13,007 |
5 |
740,844 |
|
2010 |
232,186 |
6,301 |
|
103,515 |
|
170,091 |
|
13,047 |
|
525,140 |
|
2009 |
247,986 |
59,463 |
|
519,292 |
|
115,148 |
|
7,448 |
|
949,337 |
|
|
|
|
|
|
|
|
|
|
|
|
Stephen S. Rasmussen, NMIC Chief
Executive Officer |
2011 |
159,532 |
- |
|
517,158 |
2 |
146,351 |
|
24,820 |
6 |
847,861 |
|
2010 |
136,449 |
- |
|
1,145,460 |
|
41,509 |
|
20,635 |
|
1,344,053 |
|
2009 |
84,987 |
17,975 |
|
143,796 |
|
26,478 |
|
3,040 |
|
276,276 |
|
|
|
|
|
|
|
|
|
|
|
|
John L. Carter, Senior
Vice President– Distribution and Sales |
2011 |
194,792 |
- |
|
484,716 |
2 |
146,016 |
|
13,551 |
7 |
839,075 |
|
2010 |
300,185 |
3,824 |
|
594,181 |
|
105,878 |
|
21,753 |
|
1,025,821 |
|
2009 |
301,604 |
11,371 |
|
567,467 |
|
32,298 |
|
6,715 |
|
919,455 |
|
|
|
|
|
|
|
|
|
|
|
|
Peter A. Golato, Senior Vice
President–Nationwide Financial Network |
2011 |
292,053 |
- |
|
216,436 |
2 |
227,961 |
|
17,256 |
8 |
753,706 |
|
2010 |
290,141 |
8,676 |
|
433,983 |
|
220,143 |
|
17,970 |
|
970,913 |
|
|
|
|
|
|
|
|
|
|
|
|
______
|
1 |
Represents the amount determined under the PIP and paid in 2012 for the 2011 performance year that was not attributable to the financial
objectives under the plans. |
|
2 |
Represents the amount determined under the PIP for Messrs. Walker, Frommeyer, Rasmussen and Golato, and under the SIP for Mr. Carter, that
was paid in 2012 for the 2011 performance year that was attributable to financial objectives, or for Mr. Rasmussen, financial and strategic objectives; the amount earned in 2011 for the GAAP ROE transition program award attributable to the 2011
performance year; and the amount earned in 2011 under the LTPP for the growth in equity award, and allocated to us pursuant to the cost-sharing agreement, as follows: Mr. Walker—$221,292 (PIP), and $48,331 (GAAP ROE);
Mr. Frommeyer—$25,683 (PIP), $7,647 (GAAP ROE) and $85,825 (growth in equity); Mr. Rasmussen—$208,565 (PIP), $97,868 (GAAP ROE) and 210,725 (growth in equity); Mr. Carter—$383,185 (SIP), $29,974 (GAAP ROE) and
$71,557 (growth in equity); and Mr. Golato—$127,658 (PIP), $24,464 (GAAP ROE) and $64,314 (growth in equity). One-third of the GAAP ROE award was paid in cash, in addition to one-third of the opening bank balance, pursuant to a
transition period during the implementation of a new long-term plan design. |
|
3 |
Represents the change in pension value for all named executive officers. There were no above-market earnings on deferred
compensation. |
|
4 |
Includes tax grossups in the amounts of $89, $145 and $473 for amenities received at company events and the contribution we made on behalf of Mr.
Walker in the amount of $15,465 under the Nationwide Supplemental Defined Contribution Plan. |
|
5 |
Includes a tax grossup in the amount of $354 for amenities received at a company event. Aggregate value of perquisites and personal
benefits is less than $10,000. |
|
6 |
Includes the value of amenities received at company events, and tax grossups in the amounts of $65, $195 and $202 for such amenities, the actual
incremental cost of Mr. Rasmussen’s personal use of the company plane in the amount of $10,487, the contribution we made on behalf of Mr. Rasmussen in the amount of $11,621 under the Nationwide Supplemental Defined Contribution Plan and the
company-paid portion for parking expenses and automotive service in the executive parking garage. There were no deadhead flights in 2011. |
|
7 |
Includes tax grossups in the amounts of $14, $15 and $33 for amenities received at company events. Aggregate value of perquisites and
personal benefits is less than $10,000. |
|
8 |
Includes tax grossups in the amounts of $535, $507, and $71 for amenities received at, and spousal travel expenses for company
events. Aggregate value of perquisites and personal benefits is less than $10,000. |
Grants of Plan-Based Awards in 2011
|
|
|
Estimated future payouts under non-equity incentive plan awards 1 |
Name (a) |
Grant date (b) |
Threshold (c) |
|
Target (d) |
|
Maximum (e) |
|
|
|
|
|
|
|
|
Kirt A. |
2/15/2011 |
2,3 |
$141,854 |
|
$283,708 |
|
$709,270 |
Walker |
2/15/2011 |
4 |
0 |
|
$439,374 |
|
$1,098,435 |
|
2/15/2011 |
5 |
0 |
|
$410,630 |
|
$1,026,575 |
|
|
|
|
|
|
|
|
Timothy G. |
2/15/2011 |
2,3 |
$17,836 |
|
$35,671 |
|
n/a |
Frommeyer |
2/15/2011 |
4 |
$0 |
|
$69,522 |
|
$173,804 |
|
2/15/2011 |
5 |
$0 |
|
$64,973 |
|
$162,434 |
|
|
|
|
|
|
|
|
Stephen S. |
2/15/2011 |
2,3 |
$124,725 |
|
$249,450 |
|
$623,625 |
Rasmussen |
2/15/2011 |
4 |
$0 |
|
$889,705 |
|
$2,224,263 |
|
2/15/2011 |
5 |
$0 |
|
$831,500 |
|
$2,078,750 |
|
|
|
|
|
|
|
|
John L. |
2/15/2011 |
2,3 |
$156,786 |
|
$313,572 |
|
$627,144 |
Carter |
2/15/2011 |
4 |
$0 |
|
$272,492 |
|
$681,230 |
|
2/15/2011 |
5 |
$0 |
|
$254,665 |
|
$636,663 |
|
|
|
|
|
|
|
|
Peter A. |
2/15/2011 |
2,3 |
$81,832 |
|
$163,664 |
|
n/a |
Golato |
2/15/2011 |
4 |
$0 |
|
$222,403 |
|
$556,008 |
|
2/15/2011 |
5 |
$0 |
|
$207,853 |
|
$519,634 |
___________
1 |
Values are the amounts allocated to us
pursuant to the cost-sharing agreement. |
2 |
We calculated thresholds for metrics other
than CNOI separately after a $350,000,000 performance level was achieved on CNOI, as adjusted by the NMIC human resources committee. Actual payment may be less than the amount shown. |
3 |
Represents a PIP, or for Mr. Carter a SIP,
award. |
4 |
Represents a GAAP ROE award under the
LTPP. Also includes a 7% time value of money factor. |
5 |
Represents an LTPP award using operating
revenue growth and capital strength as metrics. |
Annual Incentive
On
February 15, 2011, we granted annual incentive award opportunities to our named executive officers. These award opportunities are reflected as earned in the “Summary Compensation Table for 2011” in columns (d) and
(g).
The NMIC human resources committee uses annual incentive plans and assesses individual overall performance, company financial performance and other goals, and distributes awards
from the incentive pool pursuant to the PIP, or in the case of Mr. Carter, the SIP.
The NMIC Chief Executive Officer may adjust payments under the PIP or
SIP by up to plus or minus 25% subject to approval of the final payment by the NMIC human resources committee. Additionally, the NMIC human resources committee may adjust the actual performance results for one-time or unusual financial
items that have impacted actual performance but management believes they should not include to penalize or receive credit for incentive purposes. The NMIC human resources committee exercised their discretion to allow payments to be made
on business unit metrics if CNOI performance of $350,000,000 was achieved. This adjustment recognizes the strong performance of our business units and the continued focus on excellent customer service during a year in which our customers
needed us most, while maintaining the financial stability of NMIC.
For 2011, the objective performance criteria we used to measure performance under the PIP and SIP are discussed in “Compensation Discussion and
Analysis.”
In 2011, goals under the PIP were met at 78% to 84% of the target amount, including the adjustment approved by the NMIC human resources committee and a discretionary adjustment
to Mr. Frommeyer’s payment based upon individual objectives. The goals for Mr. Carter under the SIP were met at 122% of the target amount, including the adjustment made by the NMIC human resources committee to the NFS and NMIC
portion of his scorecard. We discuss this in more detail in “Compensation Discussion and Analysis.”
Long-term Incentive Compensation
On February
15, 2011, we granted long-term incentive target opportunities to all of our named executive officers.
The NMIC human resources committee granted target opportunities for a
new long-term plan based on operating revenue growth and capital strength, to be measured at the end of a three-year period. Performance on each metric is compared to a matrix where the x axis is capital strength and the y axis is
operating revenue growth. A final score is determined at the end of each year in the performance period based on the matrix approved for that year, and the final score at the end of the three-year period will be the average of the three
annual scores. At their meeting on February 14, 2012, the NMIC human resources committee approved a score for the first year of the 2011-2013 performance period of 1.61. The first payments under this new plan will be made following the
conclusion of the 2011-2013 performance period.
The NMIC human resources committee also established GAAP ROE target opportunities pursuant to a long-term incentive transition program, using the same calculation methodology
that would have been in place if the prior plan had continued, because awards under the new metrics will not be paid until 2014. The performance score for GAAP ROE is calculated by dividing GAAP ROE by a hurdle rate, which is the cost of
capital. Target amounts are also multiplied by a time value of money factor. We add the final award to, or subtract the award from, the opening balance of a bookkeeping account for the executive officer. We refer to
the bookkeeping account as a “bank.” The executive officer receives one-third of the positive bank balance, if any, as the long-term incentive payment. The final score was adjusted in accordance with the methodology
approved by the NMIC human resources committee, as discussed in “Compensation Discussion and Analysis.” Following the conclusion of the 2012 performance period, no further payments will be made from the banks.
Executive Severance Agreements
NMIC has entered into executive severance agreements with Messrs.
Rasmussen and Walker. The initial term of the agreement for both executive officers ended December 31, 2011, with automatic one-year renewals commencing on January 1, 2012, unless NMIC or the executive officer gives notice of
nonrenewal.
The agreements provide that NMIC will pay salary, incentive compensation, and benefits as determined by NMIC’s board of directors, or a committee thereof. The
agreements also contain provisions related to certain payments and benefits NMIC would pay upon specified termination events. The details of those provisions are set forth below in “Potential Payments Upon Termination or Change of
Control.”
Pension Benefits for 2011
Name (a) |
|
Plan name (b) |
|
Number of years credited service (c) |
Present value of accumulated benefit1
(d) |
Payments during last fiscal year (e) |
|
|
|
|
|
|
|
|
|
Kirt A. Walker |
|
Nationwide Retirement
Plan |
|
13 |
|
52,566 |
|
- |
|
|
Nationwide Supplemental
Retirement Plan |
|
13 |
|
87,788 |
|
- |
|
|
|
|
|
|
|
|
|
Timothy G. Frommeyer
|
|
Nationwide Retirement
Plan |
|
24 |
|
524,406 |
|
- |
|
|
Nationwide Supplemental
Retirement Plan |
|
24 |
|
637,360 |
|
- |
|
|
|
|
|
|
|
|
|
John L. Carter |
|
Nationwide Retirement
Plan |
|
6 |
|
57,923 |
|
- |
|
|
Nationwide Supplemental
Retirement Plan |
|
5 |
|
272,889 |
|
- |
|
|
|
|
|
|
|
|
|
Stephen S. Rasmussen
|
|
Nationwide Retirement
Plan |
|
13 |
|
22,146 |
|
- |
|
|
Nationwide Supplemental
Retirement Plan |
|
13 |
|
192,192 |
|
- |
|
|
|
|
|
|
|
|
|
Peter Golato |
|
Nationwide Retirement
Plan |
|
17 |
|
729,472 |
|
- |
|
|
Nationwide Supplemental
Retirement Plan |
|
17 |
|
730,138 |
|
- |
1
These amounts are unaudited.
The “Pension Benefits for 2011” table reports the years of
credited service and the present value of accrued benefits under the Nationwide Retirement Plan, or “NRP,” and the Nationwide Supplemental Retirement Plan, or “SRP,” as of December 31, 2011. We discuss these plans
in more detail below. The reported values are the present value of accrued benefits with benefit commencement occurring at normal retirement age, which is age sixty-five, payable as a life annuity. Optional payment forms are
available with reduced payments. A full single lump sum payment option is not available.
Credited Service
The credited service reported in the “Pension Benefits for
2011” table represents complete years of credited service under the NRP and SRP; however, the NRP and the SRP provide for crediting of service in different ways. The NRP provides one month of credited service for each month a
participant works, beginning with the participant’s hire date. The SRP credits service based on the date an individual first becomes a participant. For details regarding how the SRP credits service, see the
“Nationwide Supplemental Retirement Plan” section below. We provide no additional credited service under the NRP and the SRP to the named executive officers.
Present Value of Accumulated Benefits
The reported
present values of accumulated benefits, which are payable as a life annuity, are based upon the benefit earned from service and compensation as of December 31, 2011. The present values assume the participant survives to, and commences his
or her benefit at, the earliest age at which unreduced benefits are payable, which is age sixty-five.
We base the present value determinations on the measurement date,
discount rate, and postretirement mortality in accordance with FASB ASC 715, Compensation-Retirement Benefits. For the December 31, 2011, and 2010 valuations, the discount rates
used under this guidance were 4.10% and 5.20%, respectively. There is no mortality discount prior to age sixty-five in the values reported above. We also used the PPA Mortality Table.
Pension plan
compensation includes base salary and certain management incentives. We allocate benefit values based on the compensation reported in the “Summary Compensation Table for 2011,” and reflect the arrangement under the cost
sharing agreement. For Messrs. Rasmussen, Frommeyer, Carter, Golato, and Walker, the pension benefit values reflect the cost allocated to us.
Qualified Pension
Plans
Nationwide Retirement Plan
Nationwide maintains a qualified defined benefit plan called the
Nationwide Retirement Plan, or the “NRP.” In general, the named executive officers and other participants in the NRP will receive an annual retirement benefit under the NRP equal to the greater of the benefit calculated under
the final average pay formula, if applicable, or the account balance formula. We describe these formulae below. Any participant, including a named executive officer, who we hired on or after January 1, 2002, will receive
an annual retirement benefit under the NRP based solely on the account balance formula.
Participants become fully vested in the NRP after the completion of
three years of service. The accrued benefit is payable as a life annuity. Optional payment forms are available, however, with reduced payments. A full, single lump sum payment option is not available.
The NRP allows
a participant the option of receiving his or her benefit at any age, provided that he or she is vested when he or she leaves Nationwide. If a participant terminates his or her employment with Nationwide before age sixty-five, and decides
to receive benefits before age sixty-five, the participant will receive an actuarially reduced monthly benefit amount to reflect the longer payout period due to early distribution. Prior to January 1, 2010, benefits for vested
participants who we hired before January 1, 2002, and who terminated employment after age fifty-five, were eligible for a subsidized early retirement benefit. The subsidized early retirement benefit is reduced 1% per year from age
sixty-five to age sixty-two and 5% per year from age sixty-two to age fifty-five. Messrs. Golato and Rasmussen are eligible for the subsidized early retirement benefits. Although we hired Messrs. Frommeyer and
Walker before January 1, 2002, they have not met the age requirement to be eligible for subsidized early retirement benefits. As a result, they are only eligible for actuarially reduced benefits upon termination. We hired Mr.
Carter after January 1, 2002, and he is eligible only for an actuarially reduced benefit upon termination.
Effective January 1, 2010, the NRP was amended to eliminate the
subsidized early retirement benefit for those employees who were hired before January 1, 2002. If the age requirements are met, for these individuals, the NRP benefit upon termination of employment will be the greatest of the four
following calculations: (i) the Final Average Pay (FAP) formula without the subsidized early retirement factor; (ii) the account balance formula at the time of termination of employment; (iii) the FAP formula benefit as of December 31, 2009, with
the subsidized early retirement factor; or (iv) the account balance formula as of December 31, 2009.
The NRP provides a pre-retirement death benefit payable to a
participant’s spouse. The NRP also provides for the funding of retiree medical benefits under Section 401(h) of the Internal Revenue Code.
The Final Average Pay Formula
We compute the
FAP formula benefit as follows:
|
·
|
1.25% of the participant’s final average compensation, as defined below, multiplied by the number of years of service, up to a maximum of
thirty-five years subject to the limitations set forth in the Internal Revenue Code; plus |
|
·
|
0.50% of the participant’s final average compensation in excess of Social Security covered compensation, as defined below, multiplied by the
number of years of service, up to a maximum of thirty-five years and subject to the limitations set forth in the Internal Revenue Code. |
For services rendered prior to January 1, 1996, final average
compensation is equal to the average of the highest three consecutive covered compensation amounts of the participant in the participant’s last ten years of service. For services rendered on January 1, 1996, or later, final
average compensation is equal to the average of the highest five consecutive covered compensation amounts of the participant in the participant’s last ten years of service. The NRP defines covered compensation to mean all wages
reported on a Form W-2 Wage and Tax Statement from any Nationwide company, plus compensation deferred under Sections 125, 132(f)(4) and 401(k) of the Internal Revenue Code and excluding:
|
·
|
severance pay and other amounts following the later of: (i) the pay period that includes the participant’s date of termination, or
(ii) the pay period in which the participant’s date of termination is posted to Nationwide’s payroll system; |
|
·
|
a lump-sum payment for vacation days made upon termination of employment or pursuant to an election by the participant; |
|
·
|
imputed income, executive officer perquisites and benefits paid under any long-term performance or equity plan; |
|
·
|
income imputed to any participant as a result of the provisions of health or other benefits to members of the participant’s
household; |
|
·
|
any payment made to a participant to offset the tax cost of other amounts Nationwide paid that are included in the participant’s income for
federal tax purposes; |
|
·
|
any payment of deferred compensation made prior to the participant’s severance date; |
|
·
|
expense reimbursement or expense allowances including reimbursement for relocation expenses; |
|
·
|
retention payments made on or after January 1, 2002; |
|
·
|
all gross-up payments, including the related compensation payment, made on or after January 1, 2002; and |
|
·
|
compensation earned following the date on which a participant’s employment status changes from eligible to ineligible and during the period
he or she is ineligible. |
Covered compensation is subject to Internal Revenue Code limits and, for purposes of determining final average compensation, is calculated on a calendar-year basis.
Social
Security covered compensation means the average of the Social Security wage bases in effect during the thirty-five-year period ending with the last day of the year that the participant attains Social Security retirement age. The portion
of a participant’s benefit attributable to years of service with certain Nationwide companies credited prior to 1996 is also subject to post-retirement increases following the commencement of benefits or the participant’s attainment of
age sixty-five, whichever is later.
Account Balance Formula
For employees hired before January 1, 2002, benefits are the greater of
the final average pay formula determination or the account balance formula, described below. We use the account balance formula to determine the retirement benefit under the NRP for all employees hired or rehired on or after
January 1, 2002. The notional account under the account balance formula is comprised of the following components:
|
·
|
Opening Balance Amount: We determined the accrued benefit under the FAP formula as
of December 31, 2001, and converted this accrued benefit into a lump sum that reflected the current value of that benefit; plus |
|
·
|
Pay Credits: We add amounts to the account every pay period based on the
participant’s years of service and compensation. The pay credits range from 3% of pay if the participant has up to thirty-five months of service, plus 3% of pay over the Social Security wage base for the year in question, to 7% of
pay for those with over twenty-two years of service, plus 4% of pay over the Social Security wage base for the year in question; plus |
|
·
|
Interest Credits: We add interest amounts to the account on a biweekly basis based on the
thirty-year United States Treasury bill rate in effect from the second month preceding the current quarter. The minimum interest rate is 3.25%. |
Effective January 1, 2010, participants eligible for the FAP
formula are not eligible to receive pay credits under the account balance formula after December 31, 2009; however, such participants do continue to receive interest credits on their account balance benefit.
Supplemental Defined Benefit Plan
NMIC maintains the Nationwide Supplemental Retirement Plan, or
“SRP,” an unfunded, nonqualified supplemental defined benefit plan. The SRP provides supplemental retirement benefits to individuals who are in an executive-level position and who are receiving compensation in excess of the
limits set by Section 401(a)(17) of the Internal Revenue Code. An individual’s participation in the SRP begins the first day of January of the calendar year following the date they meet the eligibility
requirements. Participants receive the following benefits under the SRP:
|
·
|
1.25% of the participant’s final average compensation, as defined in the “Qualified Pension Plans” section above, multiplied by
the number of years of service, up to a maximum of forty years; plus |
|
·
|
0.75% of the participant’s final average compensation in excess of Social Security-covered compensation, as defined in “Qualified
Pension Plans” above, multiplied by the number of years of service, up to a maximum of forty years; less |
|
·
|
benefits the executive accrued under the NRP. |
For purposes of the SRP, the definition of “covered
compensation” is the same as described above in “Final Average Pay (FAP) Formula,” without the Internal Revenue Code limits and including, at the time of deferral, any compensation that would be deferred pursuant to an individual
compensation agreement with any Nationwide company.
To the extent permitted under the rules governing nondiscrimination for the NRP, all or a portion of the benefit under the SRP for participants who were fully vested on December
31, 2008, was transferred to the NRP. As a result, for most fully vested participants, a greater portion of their retirement benefit will be provided under the NRP.
In addition, the SRP provides all participants with a minimum benefit
equal to the accrued benefit under the SRP as of December 31, 2007. For participants who first became eligible on or after January 1, 1999, and before January 1, 2007, benefits vest over a period of five years. Benefits vest
for participants who first become eligible on or after January 1, 2007, over a period of 49 months. The vested percentage is based on the lesser of the participant’s vested percentage in the NRP or the vested percentage pursuant to
a specified vesting percentage schedule under the SRP.
For all individuals who are new participants on or after January 1, 2009, the SRP credits service by providing twelve months of credited service on the date they become a
participant and credits twelve months of service for each subsequent calendar year only if the individual meets the eligibility requirements as of the last day of the calendar year. For individuals who were participants in the SRP before
January 1, 2009, the SRP provides one month of credited service for each month the participant performs service, beginning on the participant’s date of hire through December 31, 2007. After December 31, 2007, these participants
received credits for twelve months of service for a calendar year only if the individual meets the SRP eligibility requirements as of the last day of the calendar year.
Effective January 1, 2010, the SRP no longer provides a subsidized early
retirement benefit for participants whose benefit calculation includes months of credited service accrued or credited on or after January 1, 2010. For an affected participant, the SRP determines his or her benefit by providing the
greatest of three benefit calculations:
|
·
|
his or her SRP benefit as of December 31, 2007, with the subsidized early retirement factors; |
|
·
|
his or her total benefit as of December 31, 2009 minus the benefits accrued under the NRP at date of termination, with the subsidized early
retirement factors; or |
|
·
|
his or her SRP benefit without subsidized early retirement factors at the date of termination. |
Nationwide Savings Plan
The Nationwide Savings Plan, or the “NSP,” is a qualified
profit-sharing plan that includes a qualified cash or deferred arrangement and covers eligible employees of participating Nationwide companies. Under the NSP, our named executive officers and other eligible participants may elect to
contribute between 1% and 80% of their compensation to accounts established on their behalf. Participant contributions are in the form of voluntary, pre-tax salary deductions or after-tax “Roth 401(k)” salary
deductions. Participants who reach the age of fifty during the plan year may also make “catch up” contributions for that year of up to $5,500 for 2010. Participating Nationwide companies make matching employer
contributions for the benefit of their participating employees, at a rate of 50% of the first 6% of compensation deferred or contributed to the NSP by each employee. The NSP holds all amounts that the participants contribute in a separate
account for each participant and invests the amounts in the available investment options chosen by the participant.
For purposes
of the NSP, covered compensation includes all wages reported on a Form W-2 Wage and Tax Statement from any Nationwide company, plus compensation deferred under Sections 125, 132(f)(4) and 401(k) of the Internal Revenue Code and
excludes:
|
·
|
severance pay and other amounts following the later of (i) the pay period that includes the participant’s date of termination, and (ii) the
pay period in which the participant’s date of termination is posted to Nationwide’s payroll system; |
|
·
|
company car value or subsidy or reimbursement for loss of a company car; |
|
·
|
a lump-sum payment for vacation days made upon termination of employment or pursuant to an election by the participant; |
|
·
|
imputed income, executive officer perquisites and benefits paid under any long-term performance or equity plan; |
|
·
|
income imputed to any participant as a result of the provision of health or other benefits to members of the participant’s
household; |
|
·
|
any payment made to a participant to offset the tax cost of other amounts Nationwide paid that are included in the participant’s income for
federal tax purposes; |
|
·
|
any payment of deferred compensation made prior to the participant’s severance date or on account of a participant's severance date;
and |
|
·
|
expense reimbursement or expense allowances including reimbursement for relocation expenses. |
Covered
compensation is subject to Internal Revenue Code limits and is calculated on a calendar-year basis.
A participant is eligible to receive the value of his or her vested
account balance upon termination of his or her employment. However, he or she may withdraw all or a part of the amounts credited to his or her account prior to termination, such as upon attainment of age fifty-nine and one-half years
old. A participant is immediately vested in all amounts credited to his or her account as a result of salary deferrals or after-tax contributions and earnings or losses on those deferrals or contributions, as
applicable. Vesting in employer matching contributions and earnings or losses on those contributions occurs on a pro rata basis over a period of five years.
The NSP offers an automatic enrollment and automatic increase feature,
which applies to participants contributing less than 12% of their compensation.
Nonqualified
Deferred Compensation for 2011 |
Name (a) |
Executive contributions in last fiscal year1
(b)
|
Registrant contributions in last fiscal year2
(c)
|
Aggregate earnings in last fiscal year3
(d)
|
Aggregate withdrawals/ distributions4
(e)
|
Aggregate balance at last fiscal year end5
(f)
|
Kirt A. Walker
|
$50,137 |
$10,105 |
$19,909 |
$48,945 |
$1,013,471 |
Timothy G
Frommeyer |
- |
$7,778 |
$5,972 |
$23,265 |
$139,386 |
Stephen S.
Rasmussen |
- |
$9,742 |
$(4,648) |
- |
$99,043 |
John L. Carter
|
- |
$9,850 |
$10,115 |
- |
$237,210 |
Peter A. Golato
|
- |
$9,809 |
$4,198 |
- |
$98,443 |
________
|
1 |
Amount represents voluntary deferrals to the Nationwide Individual Deferred Compensation Plan. |
|
2 |
Amount represents company contributions to the Nationwide Supplemental Defined Contribution Plan. |
|
3 |
Amount represents investment gain from applicable nonqualified deferred compensation plans attributable to all prior year deferrals in the
plans. Investment gains or losses are attributable to the investment selections the executive officer makes. Executive officers may choose from approximately eighty investment options for the Nationwide Individual Deferred
Compensation Plan and the Nationwide Supplemental Defined Contribution Plan, and from sixteen investment options for the Nationwide Economic Value Incentive Plan. The Nationwide Economic Value Incentive Plan is a terminated plan that
provided for involuntarily deferred compensation we may still pay to an executive officer based on his or her distribution election. The executive officer may change his investment options once every five business days. |
|
4 |
Amount represents distributions from the Nationwide Individual Deferred Compensation Plan. |
|
5 |
Represents balances in the following plans: the Nationwide Individual Deferred Compensation Plan, the Nationwide Supplemental Defined Contribution
Plan and the Nationwide Economic Value Incentive Plan. |
Nonqualified Deferred
Compensation Plans
Executive deferred compensation benefits are a key component of our total rewards philosophy. We provide competitive levels of deferred compensation benefits to
attract and provide for long-term retention of key talent and to reward for long-term service. These benefits allow executives to prepare for retirement and make up for regulatory limits on qualified plans.
Nationwide Individual Deferred Compensation Plan
Under the “Nationwide Individual Deferred Compensation
Plan,” or “IDC Plan,” eligible executives of participating Nationwide companies may elect to defer payment of compensation otherwise payable to them. Eligible executive officers may enter into deferral agreements in
which they may annually elect to defer up to 80% of their salary and annual incentive compensation they earn during the following year or performance cycle. Participants may also defer up to 80% of the long-term incentive compensation
they earn during the following performance cycle. Deferral elections are effective prospectively. Amounts an executive officer defers under the IDC Plan are generally payable in cash in annual installments beginning in January
of the calendar year immediately following the calendar year in which the executive officer terminates his or her employment, including due to the death of the participant. However, an executive officer may elect to receive payments after
the expiration of the deferral period the executive officer elects, from one to ten years from the year in which the deferral of compensation applies. If the entire account balance is less than $25,000 at the time a payment is due, the
entire account balance will be distributed, regardless of the distribution election on file. We credit individual accounts under the IDC Plan with deferral amounts and earnings or losses based on the net investment return on the
participant’s choice of investment measures offered under the IDC Plan. No guaranteed or above-market earnings are available under this plan. The plan restricts participants’ changes in investment options to once
every seven calendar days. Each participant is always fully vested in his or her accrued amount.
The IDC Plan permits a participant or beneficiary to take an unscheduled
withdrawal from his or her account provided that such elective withdrawal applies only to amounts earned and vested, including earnings, on or before December 31, 2004, and any such withdrawal is subject to a 10% early withdrawal
penalty.
Nationwide Supplemental Defined Contribution Plan
The Nationwide Supplemental Defined Contribution Plan, or “NSDC
Plan,” is an unfunded, nonqualified defined contribution supplemental benefit plan. The NSDC Plan provides benefits equal to employer matching contributions that would have been made for the participants under the Nationwide Savings
Plan, or “NSP,” but for the Internal Revenue Code’s limitation on compensation that can be considered for deferrals to the NSP. Only executives of certain Nationwide companies whose annual compensation is in excess of
the limit set forth in the Internal Revenue Code are eligible to participate in the NSDC Plan. The benefits under the plan vest after five years of participation.
For purposes of the NSDC Plan, “covered compensation” refers
to covered compensation as defined in “Nationwide Savings Plan” above, without the Internal Revenue Code limits and including, at the time of deferral, any compensation that would be deferred pursuant to an individual compensation
agreement with any Nationwide company. We credit individual accounts under the NSDC Plan with deferral amounts and earnings or losses based on the net investment return on the participant’s choice of investment measures offered
under the plan. No guaranteed or above-market earnings are available under this plan. Participants may change their investment options on a daily basis.
Payouts under the NSDC Plan are made as follows:
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·
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credits made for plan years prior to 1996, and earnings on those amounts, are paid in January of the year following the year the participant’s
employment terminates; |
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unless otherwise elected in accordance with the terms of the plan, credits made to the plan for plan years after 1995, and earnings on those amounts,
are paid in 10 installments for participants who qualify for a benefit from the NRP and whose account balance exceeds $25,000, and in a single lump sum payment for all other participants. |
Potential Payments Upon Termination or Change of
Control
We have entered into agreements and maintain plans that require us to provide compensation to our named executive officers upon a termination of employment or for good reason
following a substantial reorganization. The following narrative describes the payments and benefits the named executive officers could receive under these agreements and plans. The tables that follow reflect our estimate of the
payments and benefits, to the extent allocable to us under the cost-sharing agreement, we would provide to each of our named executive officers under various termination scenarios or for good reason following a substantial
reorganization. The amounts shown in the tables assume that terminations of employment and, as applicable, the change of control, occurred on December 31, 2011.
Payments and benefits that are generally available to all salaried
employees, and that do not discriminate in favor of the executive officers, such as disability benefits, are not disclosed. Generally, the amounts shown are estimates and actual payments and benefits could be more or less than the amounts
shown.
Payments Made Upon Standard Termination
General Termination Payments
Regardless of
the manner in which an executive officer’s employment terminates, he or she is entitled to receive the following amounts, which are earned during employment:
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·
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vested amounts contributed, plus related earnings under, the Nationwide Savings Plan, the Nationwide Individual Deferred Compensation Plan, and
the Nationwide Supplemental Defined Contribution Plan; |
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amounts accrued and vested under the Nationwide Retirement Plan and the Nationwide Supplemental Retirement Plan; and |
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unused paid time off, up to specified limits and subject to certain limitations as specified within our paid time off plan. |
Annual Incentive Awards
The effect of a termination of employment on certain executive
officers’ annual incentives is controlled by the terms of either the PIP or the SIP, as applicable. Under these plans, unless otherwise provided by the NMIC human resources committee in connection with specified terminations of
employment, we make a payment of an annual incentive only if, and to the extent, the executive officer has attained the performance goals with respect to the related performance period, and only if we employ the executive officer through the end of
the performance period. However, in the event an executive officer’s employment terminates during the performance period due to death or disability, the executive officer or the executive officer’s estate will receive a
portion or all of the incentive as the NMIC human resources committee determines. In the event an executive officer’s employment terminates during the performance period due to retirement or involuntary termination of the executive
officer’s employment for our convenience, the executive officer will remain eligible to receive a portion of the incentive based on the amount of time the executive officer was employed during the performance period and the executive
officer’s attainment of the performance goals for the performance period.
Nationwide Long-Term Performance Plan
The NMIC board
of directors approved a new LTPP plan design for 2011 awards that will measure performance over a three-year period. The design requires both revenue growth and capital strength in order for participants to receive payments, which will
range from zero to two and one-half times the target amount. The first payments under this new design will be made following the conclusion of the 2011-2013 performance period. If a voluntary termination of employment or
termination for cause occurs prior to the last day of the performance period, an executive officer’s outstanding target award opportunities will be forfeited, otherwise the target award opportunity will be prorated based on the number of days
worked in the performance period. Because the termination payment tables that follow assume that the named executive officers worked through the first year of the performance period, the amounts shown in the tables relating to the
operating revenue growth/capital strength awards under the LTPP reflect prorated opportunities for termination without cause or for good reason or for termination due
to death, disability or retirement, which would be paid after December
31, 2013, based on actual performance. Performance was estimated for purposes of these tables.
A transition plan was also approved to provide payments from
participants’ remaining 2011 GAAP ROE opening bookkeeping entries, which we refer to as “bank balance(s),” adjusted based on performance in 2011 and 2012, including any potential payments made due to termination of
employment.
We calculated 2011 GAAP ROE payments under the transition program, using the same methodology that would have been in place if the prior plan design had
continued. Under the transition program, if a termination of employment occurs prior to the last day of the performance period, other than a termination due to death, disability or retirement, an executive officer’s current-year
target award opportunity will be forfeited. In addition, the opening bank balance is forfeited, subject to the exceptions set forth below. Because the termination payment tables that follow assume that the named executive
officers worked through the performance period, we assumed that the executives earned the entire current-year award amounts. Accordingly, the amounts shown in the tables relating to GAAP ROE awards under the transition program, which
reflect what would be paid following various termination scenarios, include the opening bank balance and the current year award opportunity amounts, based on actual 2011 performance results, earned under the transition program in
2011. The opening bank balance plus the current year 2011 award amounts constitute the total bank balance.
The exception to forfeiture of the opening bank balance applies if the
executive officer has met the age and vesting requirements, which are determined in the same manner as vesting service is determined under the NRP, set forth in the table below. If met, the executive officer will receive distribution of
the vested portion of the award bank balance in the year following the year of termination. If termination occurs on the last day of the performance period, as we have assumed for our tables, the executive officer would receive the 2011
opening bank balance, plus one-third of the 2011 GAAP ROE target award multiplied by the performance score, which would be paid as a lump sum in the year following the year of termination.
Age |
Under 55 at termination |
Under 55 at termination |
Under 55 at termination |
Under 55 at termination |
At or over 55 but under 62 at termination |
At or over 55 but under 62 at termination |
At or over 55 but under 62 at termination |
Months of Vesting Service |
120–179 |
180–239 |
240–299 |
300 or more |
60–83 |
84–119 |
120 or more |
Vested Portion |
25% |
35% |
50% |
100% |
50% |
70% |
100% |
For performance periods 2009-2011 and 2010-2012, 20% of the total
long-term incentive target opportunity for our executive officers is related to growth in equity measured using the change in equity over the three-year performance period. This amount will be fully payable at the end of each three-year performance
period subject to continued employment with us. The first performance period ends December 31, 2011, and the last performance period ends December 31, 2012. We made no new grants using this metric in 2011.
If a
termination of employment occurs (other than termination due to death, disability or retirement) prior to the last day of the three-year performance period, the portion of an executive officer’s current-year long-term target award opportunity
that is based on growth in equity will be forfeited. In addition, if an executive officer’s termination is voluntary or for cause, any outstanding target award opportunities based on growth in equity will also be
forfeited. However, if the Company terminates the executive officer without cause, the executive officer will receive any outstanding target award opportunities on a prorated basis, subject to actual performance, in the year following the
year in which the termination occurs.
For a description of the retirement, death and disability provisions in the LTPP, see “Payments Made Upon Retirement” and “Payments Made Upon Death or
Disability.”
Severance Payments and Benefits
Those named executive officers who do not have a severance agreement
participate in the Nationwide Severance Pay Plan. The plan is generally available to all of our salaried employees and provides for certain payments if an employee, including an executive officer, involuntarily leaves the company due to
job elimination. The longer an executive officer works for us, the more the executive officer may be eligible to receive as severance pay benefits when the executive officer’s employment ends. In order to receive payment
under the Nationwide Severance Pay Plan, if eligible, the executive officer must sign a severance and release agreement. We generally calculate severance pay as one week for each year of service, not to exceed twenty-five
years of service, with a minimum of two weeks. Years of
service used to calculate the severance payment includes all types of service with us, including service with affiliates and subsidiaries, calculated through the last date of employment.
NFS' former
compensation committee approved severance agreement guidelines applicable to our executive officers. The guidelines provide for severance benefits that may be available to executive officers in addition to the Nationwide Severance Pay
Plan, assuming the executives signs the appropriate release. The guidelines allow management to offer the following when negotiating severance agreements with executive officers:
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a lump-sum cash payment equal to six to twelve months, depending on the circumstances of departure, of the annual base salary in effect on the
date of termination; |
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paid leave of absence of twenty-one days for executive officers over the age of forty to permit the executive officer time to seek legal advice
regarding the terms of the severance agreement; |
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short-term incentive payments earned under the PIP, prorated to the date of termination; |
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up to one year of executive placement services, or a lump-sum payment of $6,800 in lieu of such services; |
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payout of the current year earned but unused paid time off; and |
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transfer of ownership of certain computer equipment, less any Nationwide-licensed software or operating system, to the executive
officer. |
Messrs. Rasmussen and Walker have executive severance agreements that provide certain severance payments and benefits upon termination without cause or for good reason following
a substantial reorganization. The following description of Messrs. Rasmussen’s and Walker’s agreements and the amounts presented in the tables that follow are based on the terms of the agreements as they existed on December
31, 2011, and assume a termination of employment, and such triggering events as are contemplated by the executive severance agreements, occurred on December 31, 2011.
The executive severance agreements in effect as of December 31, 2011,
for Messrs. Rasmussen and Walker are substantially similar to each other. Each agreement contains material non-competition, non-solicitation and confidentiality provisions, which condition Nationwide’s promises to pay severance on
the executive officer’s compliance with such provisions. The agreements also condition receipt of severance upon the execution of a binding release of NMIC and other related parties.
Under Mr.
Rasmussen’s and Mr. Walker’s executive severance agreements in effect as of December 31, 2011, upon a termination by NMIC without cause or a resignation for good reason after a substantial reorganization of NMIC, the following payments
and benefits would be provided:
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a lump-sum cash payment equal to two times the annual base salary in effect immediately before the termination, payable within 30 days following
the executive’s termination; |
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a lump-sum cash payment equal two times the short-term incentive compensation that would have been earned pursuant to the PIP during the fiscal
year in which the executive officer’s termination date occurs payable based on actual performance over the full year, payable when annual bonuses are paid to our other executives; |
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a lump-sum cash payment equal to the cost, including a gross-up payment to cover income and FICA taxes on the payment, to the executive officer of
continuing the medical and dental coverage under COBRA, or under the retiree medical provisions of the Company’s medical plan, if applicable, for the executive officer, his spouse and dependents, for a specified period of time following the
executive’s termination date; |
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supplemental benefits equal to the benefits the executive officer would have been entitled to receive on the termination date under certain
retirement and deferred compensation plans, had the executive officer been fully vested in those plans on the termination date, less any benefits the executive officer actually receives under those plans, paid at the time the executive’s
benefits are otherwise paid under the applicable plans; |
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in the event that the executive officer’s termination date occurs within three years of the date on which the executive officer would have
been first eligible to retire under the Nationwide Retirement Plan, a supplemental benefit equal to the benefits the executive officer would have received under the Nationwide Retirement Plan, the Nationwide Supplemental Retirement Plan and the
Nationwide Excess Benefit Plan, had the executive officer earned service and age credit for the period ending on the earlier of three years after the executive officer’s termination date or the |
earliest date the executive officer would have been eligible to retire
under the Nationwide Retirement Plan and had the executive officer been fully vested under those plans, less any benefits the executive officer actually receives under those plans, paid at the time the executive’s benefits are otherwise paid
under the applicable plans;
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a lump-sum cash payment equal to the matching contributions that the Company would have made for the executive officer under the Nationwide
Savings Plan and the Nationwide Supplemental Defined Contribution Plan during the severance period defined in the agreement, as if the executive officer’s contributions had continued in the same amount and at the same rate in effect
immediately prior to the executive officer’s termination date, payable within 30 days following the executive’s termination date; |
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service and age credits for the purpose of eligibility under the Company’s retiree medical plan, as if the executive officer had continued
employment through the executive severance agreement’s specified severance period; |
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the right to retain certain computer and office equipment and furniture used at the executive officer’s home; and |
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amounts earned, accrued or owed but not paid and benefits owed under employee benefit plans and
programs. |
Whether a “substantial reorganization” has occurred will be
determined by the board of directors of NMIC.
If the board of directors has determined that a substantial reorganization has occurred, it may establish a period of time during which the executive may terminate his employment
if an event constituting “good reason” occurs. Under the severance agreements, the executive will have “good reason” to terminate his employment during the period established by the board of directors if any of the
following events occur and remain uncured for 30 days after the executive’s notice to NMIC of the event:
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a material diminution in the executive’s authority, duties or responsibilities, as reasonably determined by the board of directors of
NMIC; |
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a material change in the geographic location at which the executive must perform services; |
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a material diminution in the executive’s base salary, other than due to a change in base salary for all senior executives in NMIC;
or |
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any action or inaction of NMIC that constitutes a material breach by the NMIC of the severance agreement. |
Under the severance agreements, “cause” means any of the following:
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the executive has been convicted of a felony; |
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the executive neglects, refuses or fails to perform his material duties to the NMIC, which failure has continued for a period of at least 30 days
after notice from NMIC; |
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the executive engages in misconduct in the performance of his duties; |
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the executive engages in public conduct that is harmful to the reputation of NMIC; |
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the executive breaches his non-competition, non-disclosure or non-solicitation covenants; or |
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the executive breaches NMIC’s written code of business conduct and ethics. |
Payments Made Upon Retirement
If an
executive officer were to retire on December 31, 2011, under the transition program, the executive officer would receive one-third of the 2011 GAAP ROE target award amount multiplied by the performance score, plus the 2011 opening bank balance, paid
as a lump sum in the year following the year in which the termination occurs. For purposes of GAAP ROE transition program payments and growth in equity awards, retirement means a termination of employment on or after the date on which the
executive officer has attained:
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·
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age fifty-five and completed 180 months of vesting service; or |
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·
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age sixty-two and completed sixty months of vesting service, |
as determined under the NRP.
For the growth in equity award, the executive officer will receive an
amount equal to the total target incentive opportunity for 2009 and two-thirds of the total target incentive opportunity for 2010 multiplied by the respective performance scores based on growth in equity. For the 2011 LTPP awards relating
to operating revenue growth/capital strength, the executive officer will receive an amount equal to one-third of the total target incentive opportunity for the 2011-2013 performance period multiplied by the respective performance scores paid in the
year following the end of the performance period. For purposes of operating revenue growth/capital strength awards, retirement means a termination of employment on or after the date on which the executive officer has
attained:
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•
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age fifty-five and completed 120 months of vesting service; or |
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•
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age sixty-two and completed sixty months of vesting service, |
as determined under the NRP.
The PIP and the SIP provide that if an executive officer retires, the
executive officer will receive his or her short-term incentive compensation earned during the fiscal year in which termination occurs. The short-term compensation payment is prorated to reflect services performed through the date of
employment termination and is based on actual performance for the year.
Payments Made Upon Death or Disability
If an
executive officer dies or becomes disabled, in addition to any applicable benefits listed in “Payments Made Upon Standard Termination,” the executive officer will receive benefits under our disability plan or payments under the
Company’s life insurance plan, as appropriate. In addition, under the PIP and the SIP, the executive officer will receive his or her short-term incentive compensation earned during the fiscal year in which the termination
occurs. The short-term compensation payment is prorated to reflect services performed through the date of employment termination and is based on the actual performance for the year.
Under the LTPP
and the LTPP transition program, if an executive officer’s employment terminates due to death or disability, the LTPP provides for distribution of the bank balance in the manner described above under “Payments Made Upon Retirement”
(except that in the case of death, distributions will be made to the executive officer’s beneficiary).
Payments Made Upon a Change of Control or Termination
Upon or Following a Change of Control
The PIP, the SIP, and the LTPP do not provide for special treatment of awards upon a change in control.
The following tables reflect our estimates of the allocated payments and
benefits our named executive officers would have received if a termination of employment or a change of control of NLIC or NMIC had occurred on December 31, 2011.
Kirt A. Walker
Benefits and payments upon termination |
|
Voluntary termination |
Termination without cause or for good reason following a substantial reorganization |
For cause termination |
Death, disability, or retirement |
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Short-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
Annual
incentives 1 |
|
$ 221,292 |
|
|
|
$
- |
|
$
- |
|
$ 221,292 |
|
Long-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
GAAP ROE awards
2 |
|
325,408 |
|
|
|
325,408 |
|
- |
|
624,565 |
|
Growth in
Equity 09-11 awards 3 |
|
- |
|
|
|
- |
|
- |
|
-
|
|
Growth in
Equity 10-12 awards 4 |
|
- |
|
|
|
61,324 |
|
- |
|
61,324 |
|
Revenue/Capital
Strength awards 5 |
|
- |
|
|
|
164,236 |
|
- |
|
164,236 |
|
Benefits and
perquisites: |
|
|
|
|
|
|
|
|
|
|
|
Life insurance
proceeds |
|
- |
|
|
|
- |
|
- |
|
1,576,217 |
|
Cash severance 6 |
|
- |
|
|
|
1,315,923 |
|
- |
|
- |
|
Total compensation |
|
$ 546,700 |
|
|
|
$ 1,866,891 |
|
$ - |
|
$ 2,647,634 |
|
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1 |
Reflects the amount Mr. Walker would receive with respect to the 2011 annual incentive payment under the PIP upon a termination of employment,
except for cause, on December 31, 2011. The “Termination without cause or for good reason following a substantial reorganization” column does not include the 2011 annual incentive opportunity as the severance agreement
provides that the annual incentive payment under the agreement is in lieu of the payments that would be made under the PIP. The amounts were not reduced to their present value. |
|
2 |
Reflects the amount Mr. Walker would receive with respect to the GAAP ROE awards under the transition program upon a termination of employment,
except for cause, on December 31, 2011. Mr. Walker would not have qualified for retirement under the transition program, but would have been 35% vested. Accordingly, the amounts shown for a voluntary termination or a
termination without cause or due to substantial reorganization assume distribution of the total payment for 2011, plus 35% of one-half of the 2011 opening bank balance, which would have been paid in 2012. The amounts shown for termination
due to death, disability or retirement (not eligible) assume distribution of one-third of the 2011 GAAP ROE target award multiplied by the performance score, plus the 2011 opening bank balance, which would have been paid in 2012. The
amounts were not reduced to their present value. |
|
3 |
Reflects the amount Mr. Walker would receive with respect to 2009-2011 growth in equity awards under the LTPP upon termination on December 31,
2011. Because Mr. Walker was not allocated to us during 2009, he would not receive a 2009-2011 growth in equity award from us in any circumstance. |
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4 |
Reflects the amount Mr. Walker would receive with respect to 2010-2012 growth in equity awards under the LTPP upon termination without cause or
due to substantial reorganization, or for death, disability or retirement, on December 31, 2011. No new growth in equity award opportunities were granted in 2011. For termination without cause or due to substantial
reorganization, or for death, disability or retirement (not eligible), outstanding target award opportunities from prior years are prorated at termination and distributed in the year following the year in which the termination occurs. As
of December 31, 2011, the executive officer had an outstanding 2010-2012 target award opportunity. Accordingly, the amounts shown for a termination without cause or due to substantial reorganization, or for death, disability or retirement
(not eligible), assume a two-thirds distribution of the outstanding award multiplied by the performance score as of year end 2011, which would have been paid in 2012. The amounts were not reduced to their present value. |
|
5 |
Reflects the amount Mr. Walker would receive with respect to the operating revenue growth/capital
strength awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2011. Mr. Walker would not have qualified for retirement under the LTPP
and would forfeit the operating revenue growth/capital strength target award
opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause or due to substantial
reorganization. Accordingly, the amounts shown assume a one-third distribution of the total 2011-2013 award using a performance score that was estimated as of December 31, 2011, which would have been paid in 2014. The amounts were not reduced to their present value. |
|
6 |
Includes lump-sum cash amounts equal to the sum of two times base salary; two times the 2011 matching amounts in the Nationwide Savings Plan and
Nationwide Supplemental Defined Contribution Plan; two times the 2011 short-term incentive bonus; two times the annual COBRA rate, grossed up for FICA and income taxes, in effect at the time of termination for Mr. Walker and his
family. The amounts were not reduced to their present value. |
Timothy G. Frommeyer
Benefits and payments upon termination |
|
Voluntary termination |
Termination without cause |
For cause termination |
Death, disability, or retirement |
|
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|
|
|
|
|
|
|
|
|
|
Short-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
Annual incentives
|
|
$ 28,537 |
|
|
|
$
28,537 |
|
$
- |
|
$
28,537 |
|
Long-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
GAAP ROE awards¹ |
|
79,184 |
|
|
|
79,184 |
|
- |
|
94,511 |
|
Growth in
Equity 09-11 awards2 |
|
85,825 |
|
|
|
85,825 |
|
- |
|
85,825 |
|
Growth in
Equity 10-12 awards 3 |
|
- |
|
|
|
9,226 |
|
- |
|
9,226 |
|
Revenue/Capital
Strength awards 4 |
|
- |
|
|
|
25,987 |
|
- |
|
25,987 |
|
Benefits and
perquisites: |
|
|
|
|
|
|
|
|
|
|
|
Life insurance
proceeds |
|
- |
|
|
|
- |
|
- |
|
431,398 |
|
Cash severance 5 |
|
- |
|
|
|
241,755 |
|
- |
|
- |
|
Total compensation |
|
$ 193,546 |
|
|
|
$ 470,514 |
|
$ - |
|
$ 675,484 |
|
|
1 |
Reflects the amount Mr. Frommeyer would receive with respect to the GAAP ROE awards under the transition program upon a termination of employment,
except for cause, on December 31, 2011. Mr. Frommeyer would not have qualified for retirement under the transition program, but would have been 100% vested. Accordingly, the amounts shown for a voluntary termination or a
termination without cause assume distribution of the total payment for 2011, plus one-half of the 2011 opening bank balance, which would have been paid in 2012. The amounts shown for termination due to death, disability or retirement (not
eligible) assume distribution of one-third of the 2011 GAAP ROE target award multiplied by the performance score, plus the 2011 opening bank balance, which would have been paid in 2012. The amounts were not reduced to their present
value. |
|
2 |
Reflects the amount Mr. Frommeyer would receive with respect to 2009-2011 growth in equity awards under the LTPP upon termination of employment,
except for cause, on December 31, 2011. For a voluntary termination or termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), outstanding target award opportunities multiplied by the
performance score are fully payable at the end of the performance period and are distributed in the year following the year in which the termination occurs. Accordingly, the amounts shown assume distribution of the total outstanding award
subject to performance, which would have been paid in 2012. The amounts were not reduced to their present value. |
|
3 |
Reflects the amount Mr. Frommeyer would receive with respect to 2010-2012 growth in equity awards under the LTPP upon termination of employment,
except for cause, on December 31, 2011. No new growth in equity award opportunities were granted in 2011. For a termination without cause or for death, disability or retirement (not eligible), outstanding target award opportunities from
prior years are prorated at termination and distributed in the year following the year in which the termination occurs. As of December 31, 2011, the executive officer had an outstanding 2010-2012 target award
opportunity. Accordingly, the amounts shown for a termination without cause, or for death, disability or retirement (not eligible), assume a two-thirds distribution of the outstanding award multiplied by the performance score as of year
end 2011, which would have been paid in 2012. The amounts were not reduced to their present value. |
|
4 |
Reflects the amount Mr. Frommeyer would receive with respect to the operating revenue growth/capital strength awards under the LTPP upon a
termination without cause, or for death, disability or retirement (not eligible), on December 31, 2011. Mr. Frommeyer would not have qualified for retirement under the LTPP and would forfeit the operating revenue growth/capital strength
target award opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause. Accordingly, the amounts shown assume a one-third distribution of the total 2011-2013 award using a
performance score that was estimated as of December 31, 2011, which would have been paid in 2014. The amounts were not reduced to their present value. |
|
5 |
Includes an estimate of the amount we would pay under the severance plan guidelines for executives described above. For purposes of
this table, we assumed a payment based on twelve months of base salary and $6,800, in lieu of outplacement services. |
Stephen S. Rasmussen
Benefits and payments upon termination |
|
Voluntary termination |
|
Termination without cause or for good reason following a substantial reorganization |
For cause termination |
Death, disability, or retirement |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
Annual incentive 1 |
|
$ 208,565 |
|
|
|
$
- |
|
$
- |
|
$ 208,565
|
|
Long-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
GAAP ROE awards
2 |
|
1,116,385 |
|
|
|
1,116,385 |
|
- |
|
1,116,385
|
|
Growth in
Equity 09-11 awards 3 |
|
210,725 |
|
|
|
210,725 |
|
|
|
210,725 |
|
Growth in
Equity 10-12 awards 4 |
|
119,210 |
|
|
|
119,210 |
|
- |
|
119,210 |
|
Revenue/Capital
Strength awards 5 |
|
332,567 |
|
|
|
332,567 |
|
|
|
332,567 |
|
Benefits and
perquisites: |
|
|
|
|
|
|
|
|
|
|
|
Life insurance
proceeds |
|
- |
|
|
|
- |
|
- |
|
466,800 |
|
Cash severance 6 |
|
- |
|
|
|
789,620 |
|
- |
|
- |
|
Total compensation |
|
$ 1,987,452 |
|
|
|
$ 2,568,507 |
|
$ - |
|
$ 2,454,252 |
|
|
1 |
Reflects the amount Mr. Rasmussen would receive with respect to the 2011 annual incentive payment under the PIP upon a termination of employment,
except for cause, on December 31, 2011. The “Termination without cause or for good reason following a substantial reorganization” column does not include the 2011 annual incentive opportunity, as the severance agreement
provides that the annual incentive payment under the agreement is in lieu of the payment that would be made under the PIP. The amounts were not reduced to their present value. |
|
2 |
Reflects the amount Mr. Rasmussen would receive with respect to the GAAP ROE awards under the transition program upon a termination of employment,
except for cause, on December 31, 2011. Mr. Rasmussen would have qualified for retirement under the transition program and would have been 100% vested. Accordingly, the amounts shown assume distribution of one-third of the 2011
GAAP ROE target award multiplied by the performance score, plus the 2011 opening bank balance, which would have been paid in 2012. The amounts were not reduced to their present value. |
|
3 |
Reflects the amount Mr. Rasmussen would receive with respect to 2009-2011 growth in equity awards under the LTPP upon termination of employment,
except for cause, on December 31, 2011. For a termination without cause or due to substantial reorganization, or for death, disability or retirement, outstanding target award opportunities multiplied by the performance score are fully payable at the
end of the performance period and are distributed in the year following the year in which the termination occurs. Accordingly, the amounts shown assume distribution of the total outstanding award subject to performance, which would have
been paid in 2012. The amounts were not reduced to their present value. |
|
4 |
Reflects the amount Mr. Rasmussen would receive with respect to 2010-2012 growth in equity awards under the LTPP upon termination of employment,
except for cause, on December 31, 2011. No new growth in equity award opportunities were granted in 2011. For a termination without cause or due to substantial reorganization, or for death, disability or retirement, outstanding target award
opportunities from prior years are prorated at termination and distributed in the year following the year in which the termination occurs. As of December 31, 2011, the executive officer had an outstanding 2010-2012 target award
opportunity. Accordingly, the amounts shown assume a two-thirds distribution of the outstanding award multiplied by the performance score as of year end 2011, which would have been paid in 2012. The amounts were not reduced to
their present value. |
|
5 |
Reflects the amount Mr. Rasmussen would receive with respect to operating revenue growth/capital strength awards under the LTPP upon a termination
of employment, except for cause, on December 31, 2011. Mr. Rasmussen would have qualified for retirement under the LTPP. Accordingly, the amounts shown assume a one-third distribution of the total 2011-2013 award using a
performance score that was estimated as of December 31, 2011, which would have been paid in 2014. The amounts were not reduced to their present value. |
|
6 |
Includes lump-sum cash amounts equal to the sum of two times base salary; three times the 2011 matching amounts in the Nationwide Savings Plan and
Nationwide Supplemental Defined Contribution Plan; two times the 2011 short-term incentive bonus; three times the annual COBRA rate, grossed up for FICA and income taxes, in effect at the time of termination for Mr. Rasmussen and his
family. The amounts were not reduced to their present value. |
John L. Carter
Benefits and payments upon termination |
|
Voluntary termination |
|
Termination without cause |
For cause termination |
Death, disability, or retirement |
|
|
|
|
|
|
|
|
|
|
|
Short-term
incentives: |
|
|
|
|
|
|
|
|
|
|
Sales
Incentive |
|
$ 383,185 |
|
|
|
$
383,185 |
|
$
- |
|
$ 383,185 |
Long-term
incentives: |
|
|
|
|
|
|
|
|
|
|
GAAP ROE awards¹ |
|
120,826 |
|
|
|
120,826 |
|
- |
|
342,496 |
Growth in
Equity 09-11 awards2 |
|
71,557 |
|
|
|
71,557 |
|
|
|
71,577 |
Growth in
Equity 10-12 awards3 |
|
- |
|
|
|
34,531 |
|
- |
|
34,531 |
Revenue/Capital
Stregnth awards 4 |
|
- |
|
|
|
101,856 |
|
- |
|
101,856 |
Benefits and
perquisites: |
|
|
|
|
|
|
|
|
|
|
Life insurance
proceeds |
|
- |
|
|
|
- |
|
- |
|
1,352,312 |
Cash severance 5 |
|
- |
|
|
|
199,630 |
|
- |
|
- |
Total compensation |
|
$ 575,568 |
|
|
|
$ 911,585 |
|
$ - |
|
$ 2,285,957 |
|
¹ |
Reflects the amount Mr. Carter would receive with respect to the GAAP ROE awards under the transition program upon a termination of employment,
except for cause, on December 31, 2011. Mr. Carter would not have qualified for retirement under the transition program and would have been 0% vested. Accordingly, the amounts shown for a voluntary termination or a termination
without cause assume distribution of the total payment for 2011, which would have been paid in 2012. Mr. Carter is not vested and would forfeit the remaining bank balance. The amounts shown for termination due to death,
disability or retirement (not eligible) assume distribution of one-third of the 2011 GAAP ROE target award multiplied by the performance score, plus the 2011 opening bank balance, which would have been paid in 2012. The amounts were not
reduced to their present value. |
|
2 |
Reflects the amount Mr. Carter would receive with respect to 2009-2011 growth in equity awards under the LTPP upon termination of employment,
except for cause, on December 31, 2011. For a voluntary termination or termination without cause, or for death, disability or retirement (not eligible), outstanding target award opportunities multiplied by the performance score are fully payable at
the end of the performance period and are distributed in the year following the year in which the termination occurs. Accordingly, the amounts shown assume distribution of the total outstanding award subject to performance, which would
have been paid in 2012. The amounts were not reduced to their present value. |
|
3 |
Reflects the amount Mr. Carter would receive with respect to 2010-2012 growth in equity awards under the LTPP upon termination of employment,
except for cause, on December 31, 2011. No new growth in equity award opportunities were granted in 2011. For a termination without cause, or for death, disability or retirement (not eligible), outstanding target award opportunities from prior years
are prorated at termination and distributed in the year following the year in which the termination occurs. As of December 31, 2011, the executive officer had an outstanding 2010-2012 target award opportunity. Accordingly, the
amounts shown for a termination without cause, or for death, disability or retirement (not eligible), assume a two-thirds distribution of the outstanding award multiplied by the performance score as of year end 2011, which would have been paid in
2012. The amounts were not reduced to their present value. |
|
4 |
Reflects the amount Mr. Carter would receive with respect to the operating revenue growth/capital strength awards under the LTPP upon a
termination without cause, or for death, disability or retirement (not eligible), on December 31, 2011. Mr. Carter would not have qualified for retirement under the LTPP and would forfeit the operating revenue growth/capital strength
target award opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause. Accordingly, the amounts shown assume a one-third distribution of the total 2011-2013
award using a performance score that was estimated as of December 31, 2011, which would have been paid in 2014. The amounts were not reduced to their present value. |
|
5 |
Includes an estimate of the amount we would pay under the severance plan guidelines for executives described above. For purposes of
this table, we assumed a payment based on twelve months of base salary and $6,800, in lieu of outplacement services. |
Benefits and payments upon termination |
|
Voluntary termination |
Termination without cause |
For cause termination |
Death, disability, or retirement |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
Annual
incentive |
|
$ 127,658 |
|
|
|
$ 127,658 |
|
$
- |
|
$ 127,658 |
|
Long-term
incentives: |
|
|
|
|
|
|
|
|
|
|
|
GAAP ROE awards
1 |
|
330,381 |
|
|
|
330,381 |
|
- |
|
330,381 |
|
Growth in
Equity 09-11 awards 2 |
|
64,314 |
|
|
|
64,314 |
|
|
|
64,314 |
|
Growth in
Equity 10-12 awards 3 |
|
31,041 |
|
|
|
31,041 |
|
- |
|
31,041 |
|
Revenue/Capital
Strength awards4 |
|
83,133 |
|
|
|
83,133 |
|
|
|
83,133 |
|
Benefits and
perquisites: |
|
|
|
|
|
|
|
|
|
|
|
Life insurance
proceeds |
|
- |
|
|
|
- |
|
- |
|
788,491 |
|
Cash severance 5 |
|
- |
|
|
|
299,427 |
|
- |
|
- |
|
Total compensation |
|
$ 636,527 |
|
|
|
$ 935,954 |
|
$ - |
|
$ 1,425,018 |
|
|
1 |
Reflects the amount Mr. Golato
would receive with respect to the GAAP ROE awards under the transition program upon a termination of employment, except for cause, on December 31, 2011. Mr. Golato would have qualified for retirement under the transition program and would have been 100% vested. Accordingly, the amounts shown assume distribution of one-third of the 2011
GAAP ROE target award multiplied by the performance score, plus the 2011 opening bank balance, which would have been paid in 2012. The amounts were not reduced to their present value. |
|
2 |
Reflects the amount Mr. Golato would receive with respect to 2009-2011 growth in equity awards under the LTPP upon termination of
employment, except for cause, on December 31, 2011. For a termination without cause, or for death, disability or retirement, outstanding target award opportunities multiplied by the performance score are fully payable at the end of the performance
period and are distributed in the year following the year in which the termination occurs. Accordingly, the amounts shown assume distribution of the total outstanding award subject to performance, which would have been paid in
2012. The amounts were not reduced to their present value. |
|
3 |
Reflects the amount Mr. Golato would receive with respect to 2010-2012 growth in equity awards under the LTPP upon termination of
employment, except for cause, on December 31, 2011. No new growth in equity award opportunities were granted in 2011. For a termination without cause, or for death, disability or retirement, outstanding target award opportunities from prior years
are prorated at termination and distributed in the year following the year in which the termination occurs. As of December 31, 2011, the executive officer had an outstanding 2010-2012 target award opportunity. Accordingly, the
amounts shown assume a two-thirds distribution of the outstanding award multiplied by the performance score as of year end 2011, which would have been paid in 2012. The amounts were not reduced to their present value. |
|
4 |
Reflects the amount Mr. Golato would receive with respect to operating revenue growth/capital strength awards under the LTPP upon a
termination of employment, except for cause, on December 31, 2011. Mr. Golato would have qualified for retirement under the LTPP. Accordingly, the amounts shown assume a one-third distribution of the total 2011-2013 award using
a performance score that was estimated as of December 31, 2011, which would have been paid in 2014. The amounts were not reduced to their present value. |
|
5 |
Includes an estimate of the amount we would pay under the severance plan guidelines for executives described above. For
purposes of this table, we assumed a payment based on twelve months of base salary and $6,800, in lieu of outplacement services. |
|
Director Compensation for 2010 |
We do not separately compensate members of our board of directors who
are also our employees or employees of our affiliates, for their service on our board of directors. As Nationwide employees, our directors receive no additional compensation for service on our board of directors.
Compensation Policies and Practices as they Relate to
Risk Management
We believe that our compensation programs do not provide incentives for excessive risk taking and do not lead to risks that are reasonably likely to have a material adverse
effect on the company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding
beneficial ownership as of March 1, 2012, of the holders of our common stock. Our directors and executive officers do not beneficially own any of our common stock.
Common Stock
The following
table sets forth the number of issued and outstanding shares of our common stock owned by each person or entity known by us to be the beneficial owner of more than five percent of such common stock.
Name and address of beneficial owner |
|
Amount and nature of beneficial ownership |
Percent of class |
|
|
|
|
|
Nationwide Financial Services,
Inc. |
|
3,814,779 shares
|
|
100% |
1 Nationwide Plaza
|
|
|
|
|
Columbus, Ohio 43215
|
|
|
|
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
License to Use Nationwide Name and Service Marks
We have a license to use the “Nationwide” trade name and
certain other service marks solely for the purpose of identifying and advertising our long-term savings and retirement business and related activities.
Nationwide Mutual
Agents
NMIC allows us to distribute our variable annuity, fixed annuity and
individual universal, variable and traditional life insurance products through NMIC agents.
See Note 16 to the audited consolidated financial statements included in
the F pages of this report for a discussion of related party transactions.
Policies and Procedures for Review and Approval of Related Person Transactions
We have a
written conflict of interests policy that is administered by the Office of Ethics and Business Practices. All executive officers and directors are subject to the policy, which is designed to cover related persons transactions with
executive officers, directors and their immediate family members. The policy prohibits:
|
·
|
using position at Nationwide or affiliation with any Nationwide company for personal gain or advantage; |
|
·
|
any interest or association that interferes with independent exercise of judgment in the best interest of Nationwide; and |
|
·
|
directly or indirectly having any position with or substantial interest in any business or property or engaging in any employment or other
activity, which takes time and attention away from performance of Nationwide job duties. |
We require our
executive officers and directors to annually complete a conflict of interests certificate. This certificate requires the executive officers and directors to represent that they have read the conflict of interests policy and disclose any
conflicts of interests. It also requires the completion of an outside business activities questionnaire. Each reported possible conflict of interest is reviewed by the Office of Ethics and Business Practices and addressed by
appropriate action. The Office of Ethics and Business Practices submits an annual summary report covering each reported conflict of interest an executive officer or director reports and the disposition of each matter to the board of
directors.
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Shareholder
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life Insurance Company and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related
consolidated statements of operations, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2011. 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 consolidated 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 the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting
principles. 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.
/s/ KPMG LLP
Columbus, Ohio
March 1, 2012
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES (a
wholly-owned subsidiary of Nationwide Financial Services, Inc.) |
Consolidated Statements of
Operations |
(in millions) |
|
Years ended December 31, |
|
2011 |
2010 |
2009 |
|
|
|
|
Revenues |
|
|
|
Policy charges |
$ 1,506 |
$
1,399 |
$
1,245 |
Premiums |
531 |
484 |
470 |
Net investment income
|
1,844 |
1,825 |
1,879 |
Net realized investment (losses)
gains |
(1,609) |
(236) |
454 |
Other-than-temporary impairment
losses |
|
|
|
Total other-than-temporary impairment losses |
(162) |
(394)
|
(992)
|
Non-credit portion of loss recognized in other comprehensive income |
95 |
174 |
417 |
Net other-than-temporary impairment losses recognized in earnings |
(67) |
(220) |
(575) |
Other revenues |
3 |
2 |
(4) |
Total revenues |
$ 2,208 |
3,254 |
3,469 |
|
|
|
|
Benefits and expenses |
|
|
|
Interest credited to policyholder
account values |
$ 1,033 |
$
1,056 |
$
1,100 |
Benefits and claims
|
1,062 |
873 |
812 |
Policyholder dividends
|
67 |
78 |
87 |
Amortization of deferred policy
acquisition costs |
76 |
396 |
466 |
Amortization of value of business
acquired and other intangible assets |
11 |
18 |
63 |
Interest expense |
70 |
55 |
55 |
Other expenses, net of deferrals |
609 |
574 |
579 |
Total benefits and expenses |
$ 2,928 |
3,050 |
3,162 |
|
|
|
|
(Loss) income before federal income taxes and noncontrolling interests |
$ (720) |
$
204 |
$
307 |
Federal income tax (benefit) expense |
(382) |
24 |
48 |
Net (loss) income |
$ (338) |
$
180 |
$
259 |
Less: Net loss attributable to noncontrolling interest |
(56) |
(60) |
(52) |
Net (loss) income attributable to Nationwide Life Insurane Company |
$ (282) |
$ 240 |
$ 311 |
See accompanying notes to consolidated
financial statements.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES (a
wholly-owned subsidiary of Nationwide Financial Services, Inc.) |
Consolidated Balance
Sheets |
(in millions, except for share and
per share amounts) |
|
December 31, |
|
|
|
2011 |
|
2010 |
|
|
|
|
Assets |
|
|
|
Investments |
|
|
|
Fixed maturity securities,
available-for-sale |
$ 29,201 |
|
$
26,434 |
Equity securities,
available-for-sale |
20 |
|
42 |
Mortgage loans, net of
allowance |
5,748 |
|
6,125 |
Policy loans |
1,008 |
|
1,088 |
Short-term investments
|
1,125 |
|
1,062 |
Other investments |
566 |
|
558 |
Total investments |
$ 37,668 |
|
$
35,309 |
|
|
|
|
Cash and
cash equivalents |
49 |
|
337 |
Accrued
investment income |
560 |
|
459 |
Deferred
policy acquisition costs |
4,425 |
|
3,973 |
Value of
business acquired |
238 |
|
259 |
Goodwill |
200 |
|
200 |
Other
assets |
4,348 |
|
1,985 |
Separate account assets |
65,194 |
|
64,875 |
Total assets |
$ 112,682 |
|
$ 107,397 |
|
|
|
|
Liabilities and Equity |
|
|
|
Liabilities |
|
|
|
Future policy benefits and
claims |
$ 35,252 |
|
$
32,676 |
Short-term debt |
777 |
|
300 |
Long-term debt |
991 |
|
978 |
Other liabilities |
4,316 |
|
2,429 |
Separate account liabilities |
65,194 |
|
64,875 |
Total liabilities |
$ 106,530 |
|
$ 101,258 |
|
|
|
|
Shareholder's equity: |
|
|
|
Common stock ($1 par
value; authorized - 5,000,000 shares, issued |
|
|
|
and outstanding - 3,814,779
shares) |
$ 4 |
|
$
4 |
Additional paid-in
capital |
1,718 |
|
1,718 |
Retained earnings |
3,459 |
|
3,741 |
Accumulated other comprehensive income |
626 |
|
321 |
Total shareholder's equity |
$ 5,807 |
|
$
5,784 |
Noncontrolling interest |
345 |
|
355 |
Total equity |
$ 6,152 |
|
$ 6,139 |
Total liabilities and equity |
$ 112,682 |
|
$ 107,397 |
See accompanying notes to consolidated financial statements.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES (a
wholly-owned subsidiary of Nationwide Financial Services, Inc.) |
Consolidated Statements of Changes
in Equity |
(in millions) |
|
Common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive income (loss) |
Total shareholder's equity |
Non-controlling interest |
Total equity |
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
$
4 |
$
1,698 |
$ 2,952
|
$
(1,361) |
$
3,293 |
$
416 |
$ 3,709
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of accounting principle, net of taxes |
- |
- |
250 |
(250) |
- |
- |
- |
Capital
contributed by NFS |
- |
20 |
- |
- |
20 |
- |
20 |
Comprehensive income (loss): |
|
|
|
|
|
|
|
Net income (loss) |
- |
- |
311
|
- |
311
|
(52) |
259 |
Other
comprehensive income |
- |
- |
- |
1,345 |
1,345 |
- |
1,345 |
Total comprehensive income (loss) |
- |
- |
311 |
1,345 |
1,656 |
(52) |
1,604 |
Change in
noncontrolling interest |
- |
- |
- |
- |
- |
(13) |
(13) |
Other,
net |
- |
- |
(3) |
- |
(3) |
- |
(3) |
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
$
4 |
$
1,718 |
$ 3,510
|
$
(266) |
$
4,966 |
$
351 |
$ 5,317
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of accounting principle, net of taxes |
- |
- |
(9) |
9 |
- |
46 |
46 |
Comprehensive income (loss): |
|
|
|
|
|
|
|
Net income (loss) |
- |
- |
240 |
- |
240 |
(60) |
180 |
Other
comprehensive income |
- |
- |
- |
578 |
578 |
- |
578 |
Total comprehensive income (loss) |
- |
- |
240 |
578 |
818 |
(60) |
758 |
Change in
noncontrolling interest |
- |
- |
- |
- |
- |
18 |
18 |
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
$
4 |
$
1,718 |
$ 3,741
|
$
321 |
$
5,784 |
$
355 |
$ 6,139
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
Net loss |
- |
- |
(282) |
- |
(282) |
(56) |
(338) |
Other
comprehensive income |
- |
- |
- |
305 |
305 |
- |
305 |
Total comprehensive income (loss) |
- |
- |
(282) |
305 |
23 |
(56) |
(33) |
Change in
noncontrolling interest |
- |
- |
- |
-
|
- |
46 |
46 |
|
|
|
|
|
|
|
|
Balance as of December 31, 2011 |
$ 4 |
$ 1,718 |
$ 3,459 |
$ 626 |
$ 5,807 |
$ 345 |
$ 6,152 |
See accompanying notes to consolidated financial statements.
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, |
|
2011 |
2010 |
2009 |
|
|
|
|
Cash flows from operating activities: |
|
|
|
Net (loss) income |
$ (338) |
$
180 |
$
259 |
Adjustments to net (loss)
income |
|
|
|
Net realized
investment losses (gains) |
1,609 |
236 |
(454) |
Net
other-than-temporary impairment losses recognized in earnings |
67 |
220 |
575 |
Interest credited
to policyholder accounts |
1,033 |
1,056 |
1,100 |
Capitalization of
deferred policy acquisition costs |
(741) |
(634) |
(513) |
Amortization of
deferred policy acquisition costs |
76 |
396 |
466 |
Amortization and
depreciation |
48 |
(2) |
51 |
Deferred tax
(benefit) expense |
(437) |
115 |
(117) |
Changes
in: |
|
|
|
Policy liabilities |
(608) |
(579) |
(725) |
Other, net |
(632) |
(302) |
(30) |
Net cash provided by operating activities |
$ 77 |
$ 686 |
$ 612 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
Proceeds from maturity of
available-for-sale securities |
$ 2,705 |
$
3,251 |
$
3,889 |
Proceeds from sale of
available-for-sale securities |
1,585 |
2,168 |
4,211 |
Proceeds from sales/repayments of
mortgage loans |
1,124 |
996 |
773 |
Purchases of available-for-sale
securities |
(6,176) |
(5,910) |
(9,206) |
Issuance and purchases of mortgage
loans |
(751) |
(373) |
(36) |
Net (increase) decrease in short-term
investments |
(61) |
(44) |
1,910 |
Collateral received (paid),
net |
359 |
(23) |
(869) |
Other, net |
104 |
(29) |
208 |
Net cash (used in) provided by investing activities |
$ (1,111) |
$ 36 |
$ 880 |
|
|
|
|
Cash flows from financing activities: |
|
|
|
Net change in short-term
debt |
$ 477 |
$
150 |
$
(100) |
Proceeds from issuance of long-term
debt |
13 |
272 |
- |
Investment and universal life
insurance product deposits and other additions |
5,314 |
4,540 |
3,877 |
Investment and universal life
insurance product withdrawals and other deductions |
(5,024) |
(5,405) |
(5,301) |
Other, net |
(34) |
9 |
39 |
Net cash provided by (used in) financing activities |
$ 746 |
$ (434) |
$ (1,485) |
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
$ (288) |
$
288 |
$
7 |
Cash and cash equivalents, beginning of period |
337 |
49 |
42 |
Cash and cash equivalents, end of period |
$ 49 |
$ 337 |
$ 49 |
See accompanying notes to consolidated financial statements.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements
December 31, 2011, 2010 and 2009
Nationwide Life Insurance Company (NLIC, or collectively with its subsidiaries, the Company) was incorporated in 1929 and is an Ohio domiciled stock life insurance
company. The Company is a member of the Nationwide group of companies (Nationwide), which is comprised of Nationwide Mutual Insurance Company (NMIC) and all of its subsidiaries and affiliates.
All of the outstanding shares of NLIC’s common stock are owned by Nationwide Financial Services, Inc. (NFS), a holding company formed by Nationwide Corporation (Nationwide
Corp.), a majority-owned subsidiary of NMIC.
Wholly-owned subsidiaries of NLIC as of December
31, 2011 include Nationwide Life and Annuity Insurance Company (NLAIC) and Nationwide Investment Services Corporation (NISC). NLAIC offers universal life insurance, variable universal life insurance, corporate-owned life insurance (COLI)
and individual annuity contracts on a non-participating basis. NISC is a registered broker-dealer.
The Company is a leading provider of long-term
savings and retirement products in the United States of America (U.S.). The Company develops and sells a diverse range of products and services including individual annuities, private and public sector group retirement plans, investment
products sold to institutions, life insurance and advisory services.
The Company sells its products through a diverse
distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker-dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life
insurance specialists. Representatives of affiliates who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), and Nationwide Financial Network (NFN) producers, which includes the agency
distribution force of the Company’s ultimate parent company, NMIC.
On December 31, 2009, NLIC merged with its
affiliate, Nationwide Life Insurance Company of America and subsidiaries (NLICA), with NLIC as the surviving entity. In addition, NLIC’s subsidiary, NLAIC, merged with a subsidiary of NLICA, Nationwide Life and Annuity Company of
America (NLACA), effective as of December 31, 2009, with NLAIC as the surviving entity. The mergers were completed to streamline the enterprise's capital structure and create operational efficiencies. See Note 2 for further
information.
As of December 31, 2011 and 2010, the Company did not have a significant concentration of financial instruments in a single investee, industry or geographic region of the
U.S. Also, the Company did not have a concentration of business transactions with a particular customer, lender, distribution source, market or geographic region of the U.S. in which business is conducted that makes it overly vulnerable
to a single event which could cause a severe impact to the Company’s financial position.
(2) |
Summary of Significant Accounting Policies |
Use of Estimates
The consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions affecting the amounts reported in the
financial statements and accompanying notes. Significant estimates include the balance and amortization of deferred policy acquisition costs (DAC), investment impairment losses, valuation allowances for mortgage loans, certain investment
and derivative valuations, future policy benefits and claims liabilities including the valuation of embedded derivatives resulting from living benefit guarantees on variable annuity contracts, goodwill, provision for income taxes and
valuation of deferred tax assets. Actual results may differ significantly from those estimates.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Basis of Presentation
The consolidated financial statements include the
accounts of NLIC and companies in which NLIC directly or indirectly has a controlling financial interest. The consolidated financial statements include majority-owned subsidiaries and consolidated variable interest entities (VIEs). Entities in which
NLIC does not have a controlling interest but in which the Company has significant influence over the operating and financing decisions and certain other investments are reported using the equity method. All significant intercompany accounts and
transactions have been eliminated.
Certain items in the consolidated financial statements and related notes have been reclassified to conform to the current presentation.
Revenues and Benefits
Investment 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, COLI, bank-owned life insurance (BOLI) 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 charges, administrative fees and surrender charges that have been earned and assessed against policy account balances during the period. The timing of revenue
recognition as it relates to fees assessed on investment contracts and universal life contracts is determined based on the nature of such fees. Asset fees, cost of insurance charges and administrative fees are assessed on a daily or
monthly basis and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the
periods benefited. Surrender charges are recognized upon surrender of a contract in accordance with contractual terms. Policy benefits and claims that are charged to
expense include interest credited to policyholder accounts and benefits and claims incurred in the period in excess of related policyholder accounts.
Traditional
Life Insurance Products. Traditional life insurance products include those products with fixed and guaranteed premiums and benefits, and primarily consist of whole 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 that profits are recognized over the life of the
contract. This association is accomplished through the provision for future policy benefits and the deferral and amortization of policy acquisition costs.
Future Policy Benefits and Claims
The process of calculating reserve amounts for
traditional life insurance products involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality (the relative incidence of death in a given time), morbidity (the relative
incidence of disability resulting from disease or physical impairment) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts).
The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal life insurance policies as the policy
account balance, which represents participants’ net premiums and deposits plus investment performance and interest credited less applicable contract charges.
The liability for future policy benefits and
claims for traditional life insurance policies was determined using the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being
experienced at the time the policies were issued.
The liability for future policy benefits for payout
annuities was calculated using the present value of future benefits and maintenance costs discounted using interest rates at issue varying generally from 3.0% to 13.0%.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The Company offers certain universal life
insurance, variable universal life insurance and variable annuity products with secondary guarantees, guaranteed minimum death benefits (GMDB), and guaranteed minimum income benefits (GMIB). Liabilities for these
guarantees are calculated by multiplying the current benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative guarantee benefit payments plus interest. The Company
regularly evaluates its experience and assumptions and adjusts the benefit ratio as appropriate. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes with a related charge or
credit to other benefits and claims in the period of evaluation. Determination of the expected guarantee benefit payments and assessments are based on a range of scenarios and assumptions including those related to market rates of return and
volatility, contract surrenders and mortality experience. The accounting for these guarantees impacts estimated gross profits used to calculate amortization of DAC, value of business acquired (VOBA) and unearned revenue reserves. Refer to Note 4 for
discussion of these guarantees.
The Company offers various guarantees to variable annuity contractholders including a return of no less than total deposits made on the contract less any customer withdrawals,
total deposits made on the contract less any customer withdrawals plus a minimum return, or the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. These guarantees include
benefits payable in the event of death, upon annuitization, upon periodic withdrawal or at specified dates during the accumulation period. Refer to Note 4 for discussion of these guarantees.
The Company’s guaranteed minimum accumulation benefit (GMAB) and guaranteed living withdrawal benefit (GLWB) living benefit riders represent an embedded derivative in a
variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivatives are carried at fair value. Subsequent changes in the fair value of the
embedded derivatives are recognized in earnings as a component of net realized investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions.
Projections of cash flows inherent in the valuation of the embedded derivative incorporate numerous assumptions including, but not limited to, expectations of contractholder persistency, contractholder withdrawal patterns, risk neutral market
returns, correlations of market returns and market return volatility.
Reinsurance ceded
The Company cedes insurance to other companies in order to limit potential losses and to diversify its exposures. Such agreements do not discharge the original insurer from its
primary obligation to the policyholder in the event the reinsurer is unable to meet the obligations it has assumed. 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 generally are reported in the consolidated balance sheets on a gross basis, separately from the related future policy benefits and claims of the Company.
Deferred Policy Acquisition
Costs
Investment and universal life insurance products. The Company has deferred certain costs that vary with and
primarily relate to acquiring business, consisting principally of commissions, premium taxes, certain expenses of the policy issue and underwriting department, certain variable sales expenses that relate to and vary with the production of new and
renewal business and other acquisition expenses net of those acquisition costs ceded to reinsurers. In addition, the Company defers sales inducements, such as interest credit bonuses and jumbo deposit bonuses. The methods and assumptions
used to amortize and assess recoverability of DAC depend on the type of insurance product.
Investment products primarily consist of individual
and group variable and fixed deferred annuities in the Individual Investments and Retirement Plans segments. Universal life insurance products include universal life insurance, variable universal life insurance, COLI, BOLI and other
interest-sensitive life insurance policies in the Individual Protection segment. For these products, the Company amortizes DAC with interest over the lives of the policies in relation to the present value of estimated gross profits from
projected interest margins, policy charges, and net realized investment gains and losses less policy benefits and policy maintenance expenses. DAC for investments and universal life insurance products is subject to recoverability testing in the year of policy issuance, and DAC for universal life insurance products is also subject to loss recognition testing at the end of each reporting
period.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The Company adjusts the DAC asset related to
investment and universal life insurance products to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale with the corresponding adjustment recorded in accumulated other comprehensive income (AOCI). The
adjustment to DAC represents the change in amortization of DAC that would have been required as a charge or credit to operations had such unrealized amounts been realized and allocated to the product lines.
The assumptions used in the estimation of future gross profits are based on the Company’s current best estimates of future events and are reviewed as part of an annual
process during the second quarter. During the annual process, the Company performs a comprehensive study of assumptions, including mortality and persistency studies, maintenance expense studies, and an evaluation of projected general and
separate account investment returns. The most significant assumptions that are involved in the estimation of future gross profits include future net separate account investment performance, surrender/lapse rates, interest margins and
mortality. Quarterly, consideration is given as to whether adjustments to the assumptions in the annual process for all other product lines are necessary. Currently, the Company’s long-term assumption for net separate account
investment performance is approximately 7% growth per year. The Company reviews this assumption, like others, as part of its annual process. Variances from the long-term assumption are expected since the majority of the
investments in the underlying separate accounts are in equity securities, which correlate in the aggregate with the Standard & Poor’s (S&P) 500 Index. The Company bases its reversion to the mean process on actual net
separate account investment performance from the anchor date to the valuation date. The Company then assumes different performance levels over the next three years such that the separate account mean return measured from the anchor date
to the end of the life of the product equals the long-term assumption. The assumed net separate account investment performance used in the DAC models is intended to reflect what is anticipated. However, based on historical
returns of the S&P 500 Index, and as part of its pre-set parameters, the Company’s reversion to the mean process generally limits net separate account investment performance to 0-15% during the three-year reversion period.
In addition to the comprehensive annual study of assumptions, management evaluates the appropriateness of the individual variable annuity DAC balance quarterly within pre-set
parameters. These parameters are designed to appropriately reflect the Company’s long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of short-term experience on the
Company’s recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period, or if the recorded balance falls outside of these
parameters and management determines it is highly improbable to get back within the parameters during this time period, assumptions are required to be unlocked, and DAC is recalculated using revised best estimate assumptions. When DAC
assumptions are unlocked and revised, the Company continues to use the reversion to the mean process.
Changes in assumptions can have a significant
impact on the amount of DAC reported for investment and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is
required to record an increase or decrease in DAC amortization expense, which could be significant. In general, increases in the estimated long-term general and separate account returns result in increased expected future profitability
and may lower the rate of DAC amortization, while increases in long-term lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.
Traditional life insurance products. Generally, DAC is 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 is estimated using the same assumptions as those used for computing liabilities for
future policy benefits at issuance. Under existing accounting guidance, the concept of DAC unlocking does not apply to traditional life insurance products, although evaluations of DAC for recoverability at the time of policy issuance and
loss recognition testing at each reporting period are required.
See Note 5 for a discussion of assumption changes
that impacted DAC amortization and related balances.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Investments
Purchases and sales of securities are recorded on
the trade date. Realized gains and losses on sales of fixed maturity and equity securities are recognized in income based on the specific identification method. Interest and dividend income are recognized when earned.
Available-for-sale
securities. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported as a separate component of other comprehensive income, net of adjustments for DAC and VOBA, future policy benefits and
claims, policyholder dividend obligations, and deferred federal income taxes.
To determine the fair value of securities for which
market quotations are available, independent pricing services are most often utilized. For these securities, the Company obtains the pricing services’ methodologies, inputs and assumptions and classifies the investments accordingly in the fair
value hierarchy. As of December 31, 2011 and 2010, 82% and 81%, respectively, of fixed maturity securities were priced using independent pricing services.
Non-binding broker quotes are also utilized to
determine the fair value of certain corporate debt, mortgage-backed and other asset-backed securities when quotes are not available from independent pricing services. Broker quotes are considered unobservable inputs, and these securities are
classified accordingly in the fair value hierarchy as only one broker quote is ordinarily obtained, the investment is not traded on an exchange, the pricing is not available to other entities and/or the transaction volume in the same or similar
investments has decreased such that generally only one quotation is available. As the brokers often do not provide the necessary transparency into their quotes
and methodologies, the Company periodically performs reviews and tests to ensure that quotes are a reasonable estimate of the investments’ fair value.
For certain fixed maturity securities not valued
using independent pricing services or broker quotes, a corporate pricing matrix or internally developed pricing model is most often used. The corporate pricing matrix is developed using private spreads for corporate securities with varying weighted
average lives and credit quality ratings. The weighted average life and credit quality rating of a particular fixed maturity security to be priced using the corporate pricing matrix are important inputs into the model and are used to determine a
corresponding spread that is added to the appropriate U.S. Treasury yield to create an estimated market yield for that security. The estimated market yield and other relevant factors are then used to estimate the fair value of the particular
security.
When the collectability of contractual interest
payments on fixed maturity securities is considered doubtful, such securities are placed in non-accrual status and any accrued interest is excluded from investment income. These securities are not restored to accrual status until the Company
determines that payment of future principal and interest is probable.
For investments in certain residential and
commercial mortgage-backed securities, the Company recognizes income and amortizes discounts and premiums using the effective-yield method based on prepayment assumptions and the estimated economic life of the securities. When actual prepayments
differ significantly from estimated prepayments, the effective-yield is recalculated to reflect actual payments to date and anticipated future payments. Any resulting adjustment is included in net investment income. All other investment income is
recorded using the effective-yield method without anticipating the impact of prepayments.
Mortgage
loans, net of allowance. The Company holds commercial mortgage loans that are collateralized by properties throughout the U.S. Mortgage loans held-for-investment are carried at amortized cost less a valuation
allowance.
The Company maintains a valuation allowance comprised of specific reserves for impaired loans and non-specific reserves for losses inherent in the balance of the portfolio.
Specific reserve changes are included in other-than-temporary impairment losses, while changes in non-specific reserves are recorded in net realized investment gains and losses.
Interest income on performing mortgage loans is recognized over the life of the loan using the effective-yield method. Loans in default or in the process of foreclosure are
placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received. Loans are considered delinquent when contractual payments are 90 days past due.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Policy
loans. Policy loans, which are collateralized by the related insurance policy, are carried at the outstanding principal balance and do not exceed the net cash surrender value of the policy. As such, no valuation allowance for
policy loans is required.
Short-term
investments. Short-term investments consist of highly liquid mutual funds and government agency discount notes with original maturities of less than twelve months. 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 for
the benefit of the Company are included in short-term investments on the consolidated balance sheets. The Company carries short-term investments at fair value.
Other investments. Other investments consist primarily of equity method investments in joint ventures and partnerships, hedge funds and trading securities.
Securities lending. The Company has entered into securities lending agreements with a custodial bank whereby
eligible securities are loaned to third parties, primarily major brokerage firms. These transactions are used to generate additional income on the securities portfolio. The Company is entitled to receive from the borrower any payments of interest
and dividends received on loaned securities during the loan term. The agreements require a minimum of 102% of the fair value of loaned securities to be held as collateral. Cash collateral
is invested by the custodial bank in investment-grade securities, which are included in the total investments of the Company. Periodically, the Company may receive non-cash collateral, which would be recorded off-balance sheet. The Company continues
to recognize loaned securities in either available-for-sale or short-term investments, and a securities lending payable is recorded in other liabilities for the amount of cash collateral received. Net income received from securities lending
activities is included in net investment income.
Variable
interest entities. In the normal course of business, the Company has relationships with VIEs. The Company considers many factors when determining whether it is the primary beneficiary of a VIE. The
determination is based on a review of the entity’s contract and other deal related information, such as the entity's equity investment at risk, decision-making abilities, obligations to absorb economic risks and right to receive economic
rewards of the entity. Also reviewed are whether the contractual or ownership interest in the entity changes with the change in fair value of the entity and the extent to which, through the variable interest, the Company has the power to direct the
activities that most significantly impact the entity’s performance and the obligation to absorb significant losses of the entity, or the right to receive significant benefits from the entity. The Company is not required, and does
not intend, to provide financial or other support outside contractual requirements to any VIE.
The majority of the VIEs consolidated by the
Company are due to providing guarantees to limited partners related to the after tax yields by the Low-Income-Housing Tax Credit Funds (LIHTC Funds). The results of operations and financial position of each VIE for which the
Company is the primary beneficiary are included along with corresponding noncontrolling interests in the accompanying consolidated financial statements. Ownership interests held by unrelated third parties in consolidated entities are
presented as noncontrolling interests in equity.
The Company invests in fixed maturity securities
that could qualify as VIEs, including corporate securities, mortgage-backed securities, and asset-backed securities. The Company is not the primary beneficiary of these securities as the Company does not have the power to direct the
activities that most significantly impacts the entities’ performance. The Company’s maximum exposure to loss is limited to the carrying values of these securities. There are no liquidity arrangements, guarantees or
other commitments by third parties that affect the fair value of the Company’s interest in these assets. Refer to Note 6 for additional disclosures related to these investments.
Other-than-temporary
impairment evaluations. The Company periodically reviews its available-for-sale securities to determine if any decline in fair value to below cost or amortized cost is other-than-temporary. Factors considered in determining
whether a decline is other-than-temporary include the length of time a security has been in an unrealized loss position, the severity of the unrealized loss, reasons for the decline in value and expectations for the amount and timing of a recovery
in fair value.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
In assessing corporate debt securities for
other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations, the value of the company or specific collateral securing the debt, the Company’s intent to sell the security and whether it is more
likely than not the Company will be required to sell the security before the recovery of its amortized cost basis. The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations and agencies, obligations of states and
political subdivisions, and debt securities issued by foreign governments for other-than-temporary impairment by examining similar characteristics referenced above for corporate debt securities.
When evaluating whether residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations and other asset-backed securities are
other-than-temporarily impaired, the Company examines characteristics of the underlying collateral, such as delinquency and default rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the
collateral, subordination levels within the structure of the collateral pool, the quality of any credit guarantors, the Company’s intent to sell the security and whether it is more likely than not it will be required to sell the security
before the recovery of its amortized cost basis.
For all debt securities evaluated for
other-than-temporary impairment (for which the Company does not have the intent to sell and it is not more likely than not that it will be required to sell the security before the recovery of its amortized cost basis), the Company considers the
timing and present value of the cash flows. The Company evaluates its intent to sell on an individual security basis. To the extent that the present value of cash flows generated by a debt security is less than the amortized cost, an
other-than-temporary impairment is recognized through earnings.
Other-than-temporary impairment losses on
securities (where the Company does not intend to sell the security and it is not more likely than not it will be required to sell the security prior to recovery of the security’s amortized cost basis) are bifurcated with the credit portion of
the impairment loss being recognized in earnings and the non-credit loss portion of the impairment and any subsequent changes in the fair value of those debt securities being recognized in other comprehensive income, net of applicable taxes and
other offsets.
Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time, and the
Company’s ability and intent to hold the security to recovery.
It is reasonably possible that further declines in fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause
further other-than-temporary impairments in the near term, which could be significant.
Derivative Instruments
The Company uses derivative instruments to manage
exposures and mitigate risks associated with interest rates, equity markets, foreign currency and credit. These derivative instruments primarily include interest rate swaps, futures contracts and options. Certain features
embedded in the Company’s investments, market-indexed life and annuity contracts and certain variable life and annuity contracts require derivative accounting. All derivative instruments are carried at fair value and are reflected
as assets or liabilities in the consolidated balance sheets.
Fair value of derivative instruments is determined
using various valuation techniques relying predominately on observable market inputs. These inputs include interest rate swap curves, credit spreads, interest rates, counterparty credit risk, equity volatility and equity index levels. In cases where
observable inputs are not available, the Company will utilize non-binding broker quotes to determine fair value and these instruments are classified accordingly in the fair value hierarchy.
For derivatives that are not designated for hedge accounting, the gain or loss on the derivative is primarily recognized in net realized investment gains and losses.
For derivative instruments that are designated and qualify for fair value hedge accounting (e.g., hedging the exposure to changes in the fair value of an asset or a liability or
an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the hedged item, to the extent of the risk being hedged, are recognized in net realized investment gains and
losses.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
For derivative instruments that are designated and
qualify for cash flow hedge accounting (e.g., hedging the exposure to the variability in expected future cash flows that is attributable to interest rate risk), the effective portion of the gain or loss on the derivative instrument is reported as a
component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction impacts earnings in the same line item associated with the forecasted transaction. The ineffective portion of the derivative’s
change in value, if any, along with any of the derivative’s change in value that is excluded from the assessment of hedge effectiveness, are recorded in net realized investment gains and losses.
The Company’s derivative transaction
counterparties are generally financial institutions. To reduce the credit risk associated with open contracts, the Company enters into master netting agreements which permit the closeout and netting of transactions with the same counterparty upon
the occurrence of certain events. In addition, the Company attempts to reduce credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral vary based on an assessment of the credit risk of
the counterparty. The Company accepts collateral in the form of cash and marketable securities.
The Company invests in certain structured securities
that contain embedded credit derivatives. These securities are referred to as synthetic collateralized debt obligations and have maturity dates ranging from one to ten years. The credit derivatives embedded in these securities
have not been separated from their host contracts for separate fair value reporting; rather, the Company has elected to carry the entire security at fair value with any changes in fair value included in net realized investment gains and
losses. Effective July 1, 2010, these securities were transferred from available-for-sale securities to other investments.
Fair Value of Financial
Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources while unobservable inputs reflect the Company’s view of market assumptions in
the absence of observable market information. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. In determining fair value, the Company uses various methods including
market, income and cost approaches.
The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of
the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.
The Company categorizes financial assets and
liabilities carried at fair value in the consolidated balance sheets as follows:
|
·
|
Level 1 – Unadjusted quoted prices accessible in active markets for identical assets
or liabilities at the measurement date and mutual funds where the value per share (unit) is determined and published daily and is the basis for current transactions. |
|
·
|
Level 2 – Unadjusted quoted prices for similar assets or liabilities in active
markets or inputs (other than quoted prices) that are observable or that are derived principally from or corroborated by observable market data through correlation or other means. |
|
·
|
Level 3 – Prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate about the assumptions market participants would use at the measurement date in pricing the asset or
liability. Consideration is given to the risk inherent in both the method of valuation and the valuation inputs. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The Company reviews its fair value hierarchy
classifications for financial assets and liabilities quarterly. Changes in observability of significant valuation inputs identified during these reviews may trigger reclassifications. Reclassifications are reported as transfers at the beginning of
the period in which the change occurs.
Federal Income
Taxes
The Company recognizes deferred tax assets and liabilities for 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 or loss 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 management determines it is more likely than not that all or some portion of the deferred tax assets will not be realized. Interest expense and any associated penalties are shown as income tax expense.
The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are
estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may
be required to change the provision for federal income taxes recorded in the consolidated financial statements, which could be significant.
Tax reserves are reviewed regularly and are
adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial agreement with taxing authorities on the
deductibility/nondeductibility of uncertain items, additional exposure based on current calculations, identification of new issues or release of administrative guidance or rendering of a court decision affecting a particular tax issue.
NLIC files a separate consolidated federal income tax return, with its subsidiaries, and is eligible to join the NMIC consolidated tax return group in 2014.
Cash and Cash Equivalents
Cash and cash equivalents, which include highly
liquid investments with original maturities of less than three months, are carried at cost, which approximates fair value.
Value of Business Acquired
As a result of the acquisition of Provident Mutual Life Insurance Company (Provident) in 2002 and the application of purchase accounting, the Company reports an intangible asset
representing the fair value of the business in force and the portion of the purchase price that was allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts existing as of the closing date of the
Provident acquisition. The value assigned to VOBA was supported by an independent valuation study commissioned by the Company and executed by a team of qualified valuation experts, including actuarial consultants.
VOBA represents the actuarially-determined value of future cash flows for acquired insurance contracts. Expected future cash flows are determined based on projected future policy
and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, changes in reserves, operating expenses, investment income and other factors. Amortization of VOBA occurs with interest over the anticipated lives of
the major lines of business to which it relates in relation to estimated gross profits, gross margins or premiums, as appropriate. VOBA is adjusted for unrealized gains and losses on available-for-sale securities for changes in amortization that
would have been required had such unrealized amounts been realized. In the event actual experience differs or assumptions are revised, an increase or decrease in VOBA amortization expense is recorded, which could be significant.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Goodwill
In connection with acquisitions of operating
entities, the Company recognizes the excess of the purchase price over the fair value of net assets acquired as goodwill. Goodwill is not amortized, but is evaluated for impairment at the reporting unit level annually. Goodwill
of a reporting unit is tested for impairment on an interim basis, in addition to the annual evaluation if an event occurs or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount.
If a reporting unit’s carrying value is less than its fair value, the Company will perform an impairment evaluation. This evaluation utilizes an income approach to develop the implied fair value. An impairment is recognized on a reporting unit
for the amount that the carrying value of its goodwill exceeds the implied fair value of its goodwill.
The process of evaluating goodwill for impairment
requires several judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value, discount rates, expected levels of cash flows, revenues and earnings, and the selection of
comparable companies used to develop market-based assumptions. The Company performed its 2011 annual impairment test and determined that no impairment was required.
Closed Block
In connection with the sponsored demutualization of
Provident prior to its acquisition by the Company, Provident established a closed block for the benefit of certain classes of individual participating policies that had a dividend scale payable in 2001. Assets were allocated to the closed
block in an amount that produces cash flows which, together with anticipated revenues from closed block business, is reasonably expected to be sufficient to provide for (1) payment of policy benefits, specified expenses and taxes, and (2) the
continuation of dividends throughout the life of the Provident policies included in the closed block based upon the dividend scales payable for 2001, if the experience underlying such dividend scales continues.
Assets allocated to the closed block benefit only the holders of the policies included in the closed block and will not revert to the benefit of the Company. No
reallocation, transfer, borrowing or lending of assets can be made between the closed block and other portions of the Company’s general account, any of its separate accounts, or any affiliate of the Company without the approval of the
Pennsylvania Insurance Department and Ohio Department of Insurance (ODI). The closed block will remain in effect as long as any policy in the closed block is in force.
If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will
increase. If, over time, the aggregate performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. If the closed block has insufficient
funds to make guaranteed policy benefit payments, such payments will be made from the Company’s assets outside of the closed block, which are general account assets.
The assets and liabilities allocated to the closed block are recorded in the Company’s consolidated financial statements on the same basis as other similar assets and
liabilities. The carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date Provident was acquired by the Company represents the maximum future earnings from the assets and liabilities
designated to the closed block that can be recognized in income, for the benefit of stockholders, over the period the policies in the closed block remain in force.
If actual cumulative earnings exceed
expected cumulative earnings, the expected earnings are recognized in income. This is because the excess cumulative earnings over expected cumulative earnings, which represents undistributed accumulated earnings attributable to
policyholders, is recorded as a policyholder dividend obligation. Therefore, the excess will be paid to closed block policyholders as an additional policyholder dividend expense in the future unless it is otherwise offset by future
performance of the closed block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, actual earnings will be recognized in income.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The principal cash flow items that affect the
amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholder benefits, policyholder dividends, premium taxes and income taxes. The principal income and expense items
excluded from the closed block are management and maintenance expenses, commissions and net investment income and realized gains and losses on investments held outside of the closed block that support the closed block business, all of which enter
into the determination of total gross margins of closed block policies for the purpose of the amortization of VOBA. See Note 10 for further disclosure.
Separate Accounts
Separate account assets and liabilities represent contractholders’ funds that have been legally segregated into accounts with specific investment
objectives. Separate account assets are comprised of public, privately registered and non-registered mutual funds and investments in
securities. Separate account assets are recorded at fair value and the Company primarily uses net asset value (NAV) to estimate the underlying fair value for
certain mutual funds that do not have readily determinable fair values. The Company also uses market quotations to determine the underlying fair value of mutual funds when available. The value of separate account liabilities is
set to equal the fair value for separate account assets. Investment income and realized investment gains or losses of these accounts accrue directly to the contractholders.
Participating Business
Participating business, which refers to policies
that participate in profits through policyholder dividends, represented approximately 5% of the Company’s life insurance in force in 2011 (5% in 2010 and 6% in 2009), 42% of the number of life insurance policies in force in 2011 (45% in 2010
and 48% in 2009). The provision for policyholder dividends was based on then current dividend scales and has been included in future policy benefits and claims in the consolidated balance sheets.
NLICA and Subsidiaries Merger
On December 31, 2009, NLIC merged with its
affiliate, NLICA, with NLIC as the surviving entity. In addition, NLIC’s subsidiary, NLAIC, merged with a subsidiary of NLICA, NLACA, effective as of December 31, 2009, with NLAIC as the surviving entity. The merger was
accounted for at historical cost in a manner similar to a pooling of interests because the involved entities were under common control. NLICA and subsidiaries are reflected in the Company’s prior year consolidated financial
statements at the historical cost of the transferred net assets to provide comparative information as though the companies were combined for all periods presented. This presentation is consistent for both GAAP and Statutory
reporting. Since NLICA and NLACA were wholly-owned subsidiaries, there was no noncontrolling interest impact.
The Company has presented its consolidated
financial statements and accompanying notes as applicable for 2009 and prior to reflect the NLICA merger.
The following table summarizes the impact of the
merger with NLICA on the consolidated statement of operations for the year ended December 31:
(in millions) |
|
|
2009 |
|
|
|
|
Total
revenues |
|
|
$
375 |
Total
benefits and expenses |
|
|
$
357 |
Federal income tax benefit |
|
|
$ (5) |
Net income |
|
|
$ 23 |
The impact of the merger on shareholder’s equity was $1.0 billion as of December 31, 2009 and 2008, respectively.
Subsequent events
The
Company evaluated subsequent events through March 1, 2012, the date the consolidated financial statements were issued.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(3)
Recently Issued Accounting Standards
Adopted Accounting Standards
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-02, which amends the factors a creditor should consider to determine
whether a restructuring constitutes a troubled debt restructuring in Accounting Standards Codification (ASC) 310, Receivables. The Company will adopt this guidance for interim and
annual periods beginning June 15, 2011. The adoption of this guidance will have an immaterial impact on the Company’s consolidated statements of operations and consolidated balance sheets.
On December 31, 2010, the Company adopted new disclosure requirements regarding the credit quality of its financing receivables (e.g., commercial mortgage loans) and the related
allowance for credit losses within ASU 2010-20, which amends FASB ASC 310, Receivables. The adoption of this guidance resulted in increased disclosures only and had no impact on the Company's
consolidated statements of operations or consolidated balance sheets.
On January 1, 2010, the Company adopted ASU
2010-06, except for the new disclosure providing disaggregated information related to the activity in Level 3 fair value measurements, which the Company adopted effective January 1, 2011.
On July 1, 2010, the Company adopted ASU 2010-11, which clarifies the guidance and application of the scope exception for embedded credit derivatives contained within FASB ASC
815-15, Embedded Derivatives. This scope exception allows for embedded credit derivative features related only to the transfer of credit risk in the form of subordination of one financial
instrument to another to not be subject to potential bifurcation and separate accounting. The guidance also allowed companies to irrevocably elect to apply the fair value option to any investment in a beneficial interest in securitized
financial assets. The Company recorded an impact of adoption of $9 million, net of taxes, as a decrease to retained earnings with a corresponding increase to accumulated other comprehensive income on the consolidated statements of
equity.\
On January 1, 2010, the Company adopted guidance under FASB ASC 810,
Consolidation, resulting in an increase to noncontrolling interest of $46 million on the consolidated statements of equity. This guidance changes the consolidation guidance
applicable to a VIE. It also amends the guidance governing the determination of whether an entity is the VIE’s primary beneficiary (the reporting entity that must consolidate the VIE) by requiring a qualitative analysis rather than
a quantitative analysis.
In April 2009, the FASB issued guidance under FASB ASC 320, Investments – Debt and Equity
Securities. This guidance is designed to create greater clarity and consistency in accounting for and presentation of impairment losses on debt securities. This guidance is effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted. As of the beginning of the interim period of adoption, this guidance requires a cumulative-effect adjustment to reclassify the non-credit component of previously recognized
other-than-temporary impairment losses on debt securities from retained earnings to the beginning balance of AOCI. The Company adopted this guidance as of January 1, 2009. The adoption of this guidance resulted in a
cumulative-effect adjustment of $250 million, net of taxes, as an increase to the opening balance of retained earnings with a corresponding decrease to the opening balance of AOCI.
Pending Accounting Standard
In September 2011, the FASB issued ASU 2011-08,
which amends existing guidance in ASC 350, Intangibles-Goodwill and Other. The amended guidance allows an entity to conduct a qualitative assessment to determine if it is more
likely than not that the fair value of a reporting unit is less than its carrying value before performing the two-step goodwill impairment test. If the qualitative assessment indicates that it is not more likely than not that the fair
value of a particular reporting unit is less than its carrying value, then the entity is not required to perform the two-step goodwill impairment test. The Company will adopt this guidance prospectively for the annual period beginning
January 1, 2012. The adoption of this guidance will have no impact on the Company's consolidated statements of operations or consolidated balance sheets.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
In May 2011, the FASB issued ASU 2011-04, which
amends existing guidance in ASC 820, Fair Value Measurements and Disclosures. The guidance in this ASU clarifies existing fair value measurement guidance and expands disclosures
primarily related to Level 3 fair value measurements. The Company will adopt this guidance prospectively for the annual period beginning January 1, 2012. The adoption of this guidance will result in increased disclosures and
will have an immaterial impact on the Company’s consolidated statements of operations or consolidated balance sheets.
In October 2010, the FASB issued ASU 2010-26, which
amends FASB ASC 944, Financial Services - Insurance. This amends prior guidance by modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the
acquisition of new and renewal contracts. The amendments are required to be applied prospectively with retrospective application permitted. The Company will adopt this guidance retrospectively, effective January 1, 2012. The Company is currently in
the process of determining the impact of adoption. The adoption of this guidance is expected to have a material impact to DAC and retained earnings.
In June 2011, the FASB issued ASU 2011-05, which
amends existing guidance in ASC 220, Comprehensive Income. The amended guidance requires reporting entities to present net income and other comprehensive income in either a single continuous
statement or in two separate, but consecutive, statements of net income and other comprehensive income. In December 2011, the FASB issued ASU 2011-12, which defers certain changes in ASU 2011-05 related to the presentation of
reclassification adjustments out of accumulated other comprehensive income. The Company will adopt both updates retrospectively, effective December 31, 2012. The adoption of this guidance will impact the presentation of the
Company’s consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11,
which expands the disclosure requirements within ASC 210-10, Balance Sheet – Offsetting. The new disclosures require improved information about certain financial instruments
and derivatives that are either offset in accordance with GAAP or subject to enforceable master offsetting arrangements irrespective of GAAP. The Company will adopt this guidance retrospectively for interim and annual periods beginning January 1,
2013. The adoption of this guidance will result in increased disclosures only and will have no impact on the Company's consolidated statements of operations or consolidated balance sheets.
(4) Certain Long-Duration Contracts
Variable Annuity Contracts
The Company issues variable annuity contracts
through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. The Company also provides various forms of guarantees to benefit the
related contractholders. The Company provides five primary guarantee types of variable annuity contracts: (1) GMDB; (2) GMIB; (3) GMAB; (4) GLWB; and (5) a hybrid guarantee with GMAB and GLWB.
The GMDB, offered on every variable annuity contract, provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death benefit
will be paid upon death of the first spouse. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivor’s
death.
The GMIB, which was offered as a rider to several variable annuity contracts, is a living benefit that provides the contractholder with a guaranteed annuitization
value.
The GMAB, offered in the Company’s Capital Preservation Plus contract rider, is a living benefit that provides the contractholder with a guaranteed return of deposits,
adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10 years) selected by the contractholder at the issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a
specified time period, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset
allocation strategy.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The GLWB, offered in the Company’s Lifetime
Income contract rider (L.inc), is a living benefit that provides for enhanced retirement income security without the liquidity loss associated with annuitization. The withdrawal rates vary based on the age when withdrawals begin and are
applied to a benefit base to determine the guaranteed lifetime income amount available to a contractholder. The benefit base is equal to the variable annuity premium at contract issuance and may increase as a result of a feature driven by
account performance and policy duration. L.inc is the only living benefit guarantee offered on new variable annuity contract sales.
The following table summarizes information
regarding variable annuity contracts with guarantees invested in general and separate accounts as of December 31 (a contract may contain multiple guarantees):
|
|
|
2011 |
|
|
|
2010 |
|
|
|
|
|
|
Wtd.
avg. |
|
|
|
|
Wtd. avg.
|
|
General |
Separate |
Net |
attained |
|
General
|
Separate
|
Net |
attained
|
|
account |
account |
amount |
age
of |
|
account
|
account
|
amount
|
age of
|
(in millions) |
value |
value |
at risk1
|
contractholders |
|
value |
value |
at risk1 |
contractholders |
|
|
|
|
|
|
|
|
|
|
Return of
net deposits: |
|
|
|
|
|
|
|
|
|
In the event of death
|
$ 1,562 |
$11,749 |
$ 175 |
63 |
|
$
832 |
$ 8,039
|
$
39 |
62 |
Accumulation at specified
date |
$ 342 |
$ 4,138 |
$ 149 |
65 |
|
$
558 |
$ 5,394
|
$ 108
|
65 |
|
|
|
|
|
|
|
|
|
|
Minimum
return or anniversary contract value : |
|
|
|
|
|
|
|
|
|
In the event of death
|
$ 3,600 |
$28,754 |
$ 1,882 |
67 |
|
$ 2,604
|
$ 30,970 |
$ 1,271 |
67 |
At annuitization |
$ 430 |
$18,089 |
$ 574 |
65 |
|
$ 342 |
$ 12,806 |
$ 431 |
65 |
__________
|
1 |
Net amount at risk is calculated on a seriatim basis and equals the respective guaranteed benefit less the account value (or zero if the account
value exceeds the guaranteed benefit). |
Net amount at risk is highly sensitive to changes
in financial market movements. See Note 7, for a discussion of the Company’s risk management practices with respect to financial market exposure.
The following table summarizes the reserve balances, for variable annuity contracts with guarantees as of December 31:
(in millions) |
2011 |
|
2010 |
|
|
|
|
Accumulation
and withdrawal benefits |
$ 1,842 |
|
$
168 |
GMDB |
$ 80 |
|
$
46 |
GMIB |
$ 3
|
|
$ 2 |
The following table summarizes paid claims for
variable annuity contracts with guarantees as of December 31:
(in millions) |
2011 |
|
2010 |
|
|
|
|
Accumulation
and withdrawal benefits |
$ 10 |
|
$
- |
GMDB |
$ 40 |
|
$
62 |
GMIB |
$
- |
|
$ 3 |
Universal
and Variable Universal Life Insurance Contracts
The Company offers certain universal life and
variable universal life insurance products with secondary guarantees. This no lapse guarantee provides that a policy will not lapse so long as the policyholder makes minimum premium payments. The reserve balances on these
guarantees were $162 million and $87 million as of December 31, 2011 and 2010, respectively. Paid claims on contracts maintained in force by these guarantees were immaterial for the years ended December 31, 2011 and 2010,
respectively.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes information
regarding universal and variable universal life insurance contracts with no lapse guarantees invested in general and separate accounts as of December 31:
|
2011 |
|
|
|
2010 |
|
|
|
|
|
Wtd.
avg. |
|
|
|
Wtd. avg.
|
|
|
Net |
attained |
|
|
Net |
attained
|
|
Account |
amount |
age
of |
|
Account
|
amount
|
age of
|
(in millions) |
value |
at risk1
|
contractholders |
|
value |
at risk1 |
contractholders |
|
|
|
|
|
|
|
|
No lapse guarantees |
$ 1,154 |
$ 9,777 |
58 |
|
$ 1,065 |
$ 8,099 |
58 |
__________
|
1 Net amount at risk is calculated on a seriatim basis and equals
the respective guaranteed death benefit less the account value (or zero if the account value exceeds the guaranteed benefit). |
Related
Separate Accounts
The following table summarizes account balances of deferred variable annuity, variable single premium immediate annuity and variable universal life insurance contracts that were
invested in separate accounts as of December 31:
(in millions) |
2011 |
|
2010 |
|
|
|
|
Mutual
funds: |
|
|
|
Bond |
$ 5,604 |
|
$
5,364 |
Domestic equity |
34,612 |
|
33,254 |
International equity |
2,812 |
|
3,437 |
Total mutual
funds |
$ 43,028 |
|
$
42,055 |
Money market funds |
1,530 |
|
1,457 |
Total |
$ 44,558 |
|
$ 43,512 |
The Company did not transfer any assets from the
general account to the separate account to cover guarantees for any of its variable annuity contracts during the years ended December 31, 2011 and 2010.
(5)
Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred
Policy Acquisition Costs
The following table presents a reconciliation of DAC for the years ended December 31:
(in millions) |
2011 |
2010 |
2009 |
|
|
|
|
Balance at
beginning of year |
$ 3,973 |
$
3,983 |
$
4,524 |
Capitalization of DAC |
741 |
634 |
513 |
Amortization
of DAC, excluding unlocks |
(239) |
(385) |
(606) |
Amortization
of DAC related to unlocks |
163 |
(11) |
140 |
Adjustments to DAC related to unrealized gains and losses on
securities available-for-sale |
(213) |
(248) |
(588) |
Balance at end of year |
$ 4,425 |
$ 3,973 |
$ 3,983 |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The most significant contributor to the favorable
unlock recorded during 2011 was the Company’s recorded balance of individual variable annuity DAC fell outside the Company’s preset parameters for the prescribed period, which primarily was driven by favorable equity market performance
compared to assumed net separate account returns and resulted in a decrease in DAC amortization of $111 million.
During 2011, 2010 and 2009, the Company conducted
its annual comprehensive review of model assumptions and unlocked assumptions related to interest spread, mortality, lapse and market performance assumptions.
During 2009, the Company’s recorded
balance of individual variable annuity DAC fell outside the Company’s preset parameters for the prescribed period, which primarily was driven by favorable equity market performance compared to assumed net separate account returns and resulted
in a decrease in DAC amortization of $219 million.
Based upon the market performance in the second
half of 2011, the DAC balance for variable annuities is currently outside of the preset parameters. Accordingly, future periods may incur additional amortization of DAC if the Company’s actual returns are less than the assumed net
separate account performance.
Value of Business Acquired
The following table presents a reconciliation of
VOBA for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
Balance at
beginning of year |
$ 259 |
|
$
277 |
|
$
334 |
Amortization
of VOBA, excluding unlocks |
(29) |
|
(33) |
|
(36) |
Amortization
of VOBA related to unlocks |
16 |
|
13 |
|
(13) |
Net realized
gains on investments |
2 |
|
1 |
|
1 |
Adjustments to VOBA related to unrealized gains and
losses on securities |
|
|
|
|
available-for-sale |
(10) |
|
1 |
|
(9) |
Balance at end of year |
$ 238 |
|
$ 259 |
|
$ 277 |
Interest on the unamortized VOBA balance (at
interest rates ranging from 4.50% to 7.56%) is included in amortization and was $17 million, $18 million, and $20 million during the years ended December 31, 2011, 2010 and 2009, respectively. Additionally, the VOBA gross carrying amount was $585
million and $595 million and accumulated amortization of $347 million and $336 million for the years ended December 31, 2011 and 2010, respectively. The initial useful life related to the VOBA balances is 28 years.
Based on current assumptions, which are subject to change, the following table summarizes estimated amortization of VOBA for the next five years ended December 31:
(in millions) |
|
|
|
|
|
|
VOBA |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
$
21 |
2013 |
|
|
|
|
|
|
$
19 |
2014 |
|
|
|
|
|
|
$
16 |
2015 |
|
|
|
|
|
|
$
14 |
2016 |
|
|
|
|
|
|
$ 13 |
|
|
|
|
|
|
|
|
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(6)
Investments
Available-for-Sale Securities
The following table summarizes amortized cost,
gross unrealized gains and losses and fair value of available-for-sale securities as of the dates indicated:
|
|
Gross |
Gross |
|
|
Amortized |
unrealized |
unrealized |
Fair |
(in millions) |
cost |
gains |
losses |
value |
|
|
|
|
|
December 31, 2011 |
|
|
|
|
Fixed
maturity securities: |
|
|
|
|
U.S. Treasury securities and
obligations of U.S. |
|
|
|
|
Government corporations
and agencies |
$ 506 |
$ 124 |
$ - |
$ 630 |
Obligations of states and political
subdivisions |
1,501 |
177 |
- |
1,678 |
Debt securities issued by foreign
governments |
102 |
18 |
- |
120 |
Corporate public
securities |
14,132 |
1,336 |
111 |
15,357 |
Corporate private
securities |
3,998 |
327 |
27 |
4,298 |
Residential mortgage-backed
securities |
5,280 |
255 |
311 |
5,224 |
Commercial mortgage-backed
securities |
1,347 |
64 |
32 |
1,379 |
Collateralized debt
obligations |
410 |
17 |
125 |
302 |
Other asset-backed securities |
201 |
16 |
4 |
213 |
Total fixed maturity securities |
$ 27,477 |
$ 2,334 |
$ 610 |
$ 29,201 |
Equity securities |
19 |
2 |
1 |
20 |
Total available-for-sale securities |
$ 27,496 |
$ 2,336 |
$ 611 |
$ 29,221 |
|
|
|
|
|
December 31,
2010 |
|
|
|
|
Fixed
maturity securities: |
|
|
|
|
U.S. Treasury securities and
obligations of U.S. |
|
|
|
|
Government corporations
and agencies |
$
497 |
$
87 |
$
- |
$
584 |
Obligations of states and political
subdivisions |
1,410 |
15 |
48 |
1,377 |
Debt securities issued by foreign
governments |
110 |
13 |
- |
123 |
Corporate public
securities |
11,921 |
879 |
84 |
12,716 |
Corporate private
securities |
4,038 |
257 |
47 |
4,248 |
Residential mortgage-backed
securities |
5,811 |
183 |
355 |
5,639 |
Commercial mortgage-backed
securities |
1,167 |
51 |
32 |
1,186 |
Collateralized debt
obligations |
365 |
13 |
126 |
252 |
Other asset-backed securities |
294 |
19 |
4 |
309 |
Total fixed maturity securities |
$
25,613 |
$
1,517 |
$
696 |
$
26,434 |
Equity securities |
39 |
3 |
- |
42 |
Total available-for-sale securities |
$ 25,652 |
$ 1,520 |
$ 696 |
$ 26,476 |
The fair value of the Company’s
investments may fluctuate significantly in response to changes in interest rates, investment quality ratings and credit spreads. While the Company has the ability and intent to hold equity securities until recovery, and the Company does
not have the intent to sell, nor is it more likely than not it will be required to sell fixed maturity securities in unrealized loss positions, investment losses may be realized to the extent liquidity needs require the disposition of securities in
unfavorable interest rate, liquidity or credit spread environments.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes the amortized cost
and fair value of fixed maturity securities, by maturity, as of December 31, 2011. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without early
redemption penalties.
|
Amortized |
Fair |
(in millions) |
cost |
value |
Fixed
maturity securities: |
|
|
Due in one year or less
|
$ 963 |
$ 982 |
Due after one year through five
years |
6,817 |
7,215 |
Due after five years through ten
years |
7,699 |
8,478 |
Due after ten years |
4,760 |
5,408 |
Subtotal |
$ 20,239 |
$ 22,083 |
Residential mortgage-backed
securities |
5,280 |
5,224 |
Commercial mortgage-backed
securities |
1,347 |
1,379 |
Collateralized debt
obligations |
410 |
302 |
Other asset-backed securities |
201 |
213 |
Total fixed maturity securities |
$ 27,477 |
$ 29,201 |
The following table summarizes components of net
unrealized gains and losses on available-for-sale securities, as of December 31:
(in millions) |
2011 |
|
2010 1 |
|
|
|
|
Net
unrealized gains, before adjustments, taxes and fair value hedging |
$ 1,725 |
|
$
824 |
Change in
fair value attributable to fixed maturities designated in fair value hedging |
|
|
|
relationships |
(8) |
|
(20) |
Net
unrealized gains, before adjustments and taxes |
1,717 |
|
804 |
Adjustment
to DAC and VOBA |
(439) |
|
(216) |
Adjustment
to future policy benefits and claims |
(183) |
|
27 |
Adjustment
to policyholder dividend obligation |
(132) |
|
(90) |
Deferred
federal income tax expense |
(329) |
|
(184) |
Net unrealized gains on available-for-sale securities |
$ 634 |
|
$ 341 |
__________
|
1 |
Includes the $9 million, net of taxes, cumulative effect of adoption of accounting principle as of July 1, 2010 for the adoption of ASU
2010-11. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes the change in net unrealized gains and losses on available-for-sale securities reported in accumulated other comprehensive income, as of December 31:
(in millions) |
2011 |
|
2010 |
Balance at
beginning of year |
$ 341 |
|
$ (228) |
Cumulative effect of adoption of accounting principle |
- |
|
9 |
Adjusted
balance, beginning of period |
$ 341 |
|
$ (219) |
Unrealized gains and losses arising
during the period: |
|
|
|
Net unrealized
gains before adjustments |
896 |
|
1,039 |
Non-credit
impairments and subsequent changes in fair value of those debt securities |
(11) |
|
131 |
Net adjustments to
DAC and VOBA |
(223) |
|
(247) |
Net adjustment to
future policy benefits and claims |
(210) |
|
7 |
Net adjustment to
policyholder dividend obligation |
(42) |
|
(73) |
Related federal
income tax expense |
(135) |
|
(300) |
Change in unrealized gains on available-for-sale securities |
$ 275 |
|
$ 557 |
Reclassification adjustments to net investment losses, net of taxes ($(10)
and
$(2) as of December 31, 2011 and 2010, respectively) |
(18) |
|
(3) |
Change in net unrealized gains on available-for-sale securities |
$ 293 |
|
$
560 |
Balance at end of year |
$ 634 |
|
$ 341 |
The following table summarizes available-for-sale
securities, by asset class, in a gross unrealized loss position based on the amount of time each type of security has been in an unrealized loss position, as well as the related fair value and number of securities, as of the dates
indicated:
|
Less than or equal to one year |
|
More than one year |
|
|
|
Total |
|
|
|
Gross |
Number |
|
|
Gross |
Number |
|
|
Gross |
Number |
|
Fair |
unrealized |
of |
|
Fair |
unrealized |
of |
|
Fair |
unrealized |
of |
(in millions, except number of securities) |
value |
losses |
securities |
|
value |
losses |
securities |
|
value |
losses |
securities |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
Obligations of states
and |
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions |
$ 31 |
$ - |
6 |
|
$ 5 |
$ - |
1 |
|
$ 36 |
$ - |
7 |
Corporate public
securities |
1,460 |
62 |
150 |
|
309 |
49 |
54 |
|
1,769 |
111 |
204 |
Residential mortgage-backed
securities |
278 |
9 |
52 |
|
1,339 |
302 |
240 |
|
1,617 |
311 |
292 |
Collateralized debt
obligations |
78 |
2 |
10 |
|
137 |
123 |
39 |
|
215 |
125 |
49 |
Other asset-backed securities |
470 |
15 |
48 |
|
352 |
48 |
52 |
|
822 |
63 |
100 |
Total fixed maturity securities |
$ 2,317 |
$ 88 |
266 |
|
$ 2,142 |
$ 522 |
386 |
|
$ 4,459 |
$ 610 |
652 |
Equity securities |
7 |
1 |
10 |
|
- |
- |
31 |
|
7 |
1 |
41 |
Total |
$ 2,324 |
$ 89 |
276 |
|
$ 2,142 |
$ 522 |
417 |
|
$ 4,466 |
$ 611 |
693 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010 |
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
Obligations of states
and |
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions |
$
814 |
$
48 |
77 |
|
$
- |
$
- |
- |
|
$
814 |
$
48 |
77 |
Corporate public
securities |
1,009 |
28 |
109 |
|
528 |
56 |
107 |
|
1,537 |
84 |
216 |
Residential mortgage-backed
securities |
562 |
13 |
41 |
|
1,765 |
342 |
281 |
|
2,327 |
355 |
322 |
Collateralized debt
obligations |
1 |
- |
2 |
|
180 |
126 |
46 |
|
181 |
126 |
48 |
Other asset-backed securities |
458 |
28 |
51 |
|
465 |
55 |
74 |
|
923 |
83 |
125 |
Total fixed maturity securities |
$ 2,844
|
$
117 |
280 |
|
$
2,938 |
$
579 |
508 |
|
$
5,782 |
$
696 |
788 |
Equity securities |
3 |
- |
3 |
|
2 |
- |
40 |
|
5 |
- |
43 |
Total |
$ 2,847 |
$ 117 |
283 |
|
$ 2,940 |
$ 579 |
548 |
|
$ 5,787 |
$ 696 |
831 |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes gross unrealized
losses based on the ratio of estimated fair value to amortized cost, for all available-for-sale securities in an unrealized loss position, as of the dates indicated:
|
December 31, 2011 |
|
|
December 31, 2010 |
|
|
Less |
More |
|
|
Less |
More |
|
|
than
or |
than |
|
|
than or
|
than |
|
|
equal
to |
one |
|
|
equal to
|
one |
|
(in millions) |
one year |
year |
Total |
|
one year |
year |
Total |
|
|
|
|
|
|
|
|
99.9% -
80.0% |
$ 83 |
$ 158 |
$ 241 |
|
$
100 |
$
251 |
$
351 |
Less than
80.0% |
|
|
|
|
|
|
|
Residential mortgage-backed
securities |
- |
191 |
191 |
|
- |
173 |
173 |
Collateralized debt
obligations |
1 |
121 |
122 |
|
- |
113 |
113 |
Other |
5 |
52 |
57 |
|
17 |
42 |
59 |
Total |
$ 89 |
$ 522 |
$ 611 |
|
$ 117 |
$ 579 |
$ 696 |
These unrealized losses represent temporary
fluctuations in economic factors that are not indicative of other-than-temporary impairment.
Residential mortgage-backed securities are assessed
for impairment using default estimates based on loan level data, where available. Where loan level data is not available, a proxy based on collateral characteristics is used. The impairment assessment considers loss severity as a function of
multiple factors, including unpaid balance, interest rate, mortgage insurance ratios, assessed property value at origination, change in property value, loan-to-value ratio at origination and prepayment speeds. Cash flows generated by the collateral
are then utilized, along with consideration for the issue’s position in the overall structure, to determine cash flows associated with the security.
Collateralized debt obligations are assessed for
impairment using expected cash flows based on various inputs including default estimates based on the underlying corporate securities and historical and forecasted loss severities, or other market inputs when recovery estimates are not feasible.
When the collateral is regional bank and insurance company trust preferred securities, default estimates used to estimate cash flows are based on U.S. Bank Rating service data and broker research.
Management believes unrealized losses on available-for-sale securities do not represent other-than-temporary impairments as the Company does not intend to sell the securities, it
is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis or the present value of estimated cash flows were equal to or greater than the amortized cost basis of the
securities.
Mortgage Loans, Net of Allowance
The Company’s investments in mortgage loans
consist primarily of first lien and collateral dependent commercial mortgage loans. These mortgage loans are further segregated into the following classes based on the unique risk profiles of the underlying property types: office,
warehouse, retail, apartment and other.
The collectability of a mortgage loan is based on
the ability of the borrower to repay and/or the value of the underlying collateral. The quality of a loan is generally defined by the specific financial position and condition of a borrower and the underlying collateral. Many of the
Company’s mortgage loans are structured with balloon payment maturities, exposing the Company to risks associated with the borrowers’ ability to make the balloon payment or refinance the property.
As part of the underwriting process, specific guidelines are followed to ensure the initial quality of a new mortgage loan. Third-party appraisals are generally
obtained to support loaned amounts as the loans are usually collateral dependent.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The Company actively monitors the credit quality of
its mortgage loans to support the development of the valuation allowance. This monitoring process includes quantitative analyses which facilitate the identification of deteriorating loans, and qualitative analyses which consider other
factors relevant to the borrowers’ ability to repay. Loans with deteriorating credit fundamentals are identified for special surveillance procedures and are categorized based on the severity of their deterioration and
management’s judgment as to the likelihood of loss.
Mortgage loans are considered impaired when, based
on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for
loss is established equal to the difference between the carrying value and either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral
dependent.
In addition to the loan-specific reserves, the Company maintains a non-specific reserve for losses developed based on loan surveillance categories and property type classes and
reflects management’s best estimate of probable credit losses inherent in the portfolio as of the balance sheet date but not yet attributable to specific loans. Management’s periodic evaluation of the adequacy of the
non-specific reserve is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan
portfolio, current economic conditions and other relevant factors.
The following table summarizes the amortized cost
of mortgage loans by method of evaluation for credit loss, and the related valuation allowances by type of credit loss, for the years ended December 31:
(in millions) |
2011 |
2010 |
Amortized cost: |
|
|
Loans with non-specific
reserves |
$ 5,672 |
$
5,952 |
Loans with specific reserves |
136 |
269 |
Total
amortized cost |
$ 5,808 |
$
6,221 |
Valuation allowance: |
|
|
Non-specific
reserves |
$ 33 |
$
47 |
Specific reserves
|
27 |
49 |
Total valuation allowance |
$ 60 |
$ 96 |
Mortgage loans, net of allowance
|
$ 5,748 |
$ 6,125 |
The following table summarizes activity in the
valuation allowance for mortgage loans for the years ended December 31:
(in millions) |
2011 |
|
2010 |
Balance at
beginning of year |
$ 96 |
|
$ 77 |
Additions
|
25 |
|
66 |
Deductions
|
(61) |
|
(47) |
Balance at end of year |
$ 60 |
|
$ 96 |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes impaired mortgage
loans by class for the years ended December 31:
(in millions) |
Office |
Warehouse |
Retail |
Apartment |
Other |
Total |
2011 |
|
|
|
|
|
|
Amortized cost
|
$ 8 |
$ 31 |
$ 20 |
$ - |
$ 77 |
$ 136 |
Specific reserves |
(1) |
(9) |
(8) |
- |
(9) |
$ (27) |
Impaired mortgage loans, net of allowance |
$ 7 |
$ 22 |
$ 12 |
$ - |
$ 68 |
$ 109 |
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
Amortized cost
|
$
8 |
$
52 |
$
49 |
$
23 |
$
137 |
$
269 |
Specific reserves |
(1) |
(8) |
(14) |
(4) |
(22) |
$ (49) |
Impaired mortgage loans, net of allowance |
$ 7 |
$ 44 |
$ 35 |
$ 19 |
$ 115 |
$ 220 |
As of December 31, 2011, the Company’s
mortgage loans classified as delinquent and/or in non-accrual status were immaterial in relation to the total mortgage loan portfolio. The Company had no mortgage loans 90 days or more past due and still accruing interest.
The following table summarizes average recorded investment and interest income recognized for impaired mortgage loans by class for the year ended December 31, 2011:
(in millions) |
Office |
Warehouse |
Retail |
Apartment |
Other |
Total |
Average recorded
investment |
$ 7 |
$ 39 |
$ 33 |
$ 4 |
$ 93 |
$ 176 |
Interest income recognized |
$ 1 |
$ 5 |
$ 3 |
$ - |
$ 8 |
$ 17 |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Management uses an internal credit quality rating
process to reflect an internal view of the credit risk associated with individual loans, as well as the portfolio as a whole. This process considers a number of relevant loan quality measurements and factors, including loan-to-value ratio
(LTV), debt service coverage ratio (DSC), current market rent expectations, economic vacancy, property characteristics, market area, and borrower strength. LTV is calculated as a ratio of the amortized cost of a loan to the estimated
value of the underlying collateral. DSC is the amount of cash flow generated by the underlying collateral of the mortgage loan available to meet periodic interest and principal payments of the loan. This process yields an
individual internal credit quality rating score for substantially all of the Company’s mortgage loans which is then translated to a credit quality rating ranging from 1 to 5, with 1 representing the lowest risk profile and lowest potential for
loss and 5 representing the highest risk profile and highest potential for loss. These internal ratings by property are updated at least annually.
The following table summarizes the amortized cost
of mortgage loans by internal credit quality rating and by class as of the dates indicated:
(in millions) |
Office |
Warehouse |
Retail |
Apartment |
Other |
Total |
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
Rated
1 |
$ 112 |
$ 51 |
$ 120 |
$ 10 |
$ 14 |
$ 307 |
Rated
2 |
242 |
494 |
933 |
433 |
153 |
2,255 |
Rated
3 |
372 |
626 |
1,108 |
664 |
87 |
2,857 |
Rated
4 |
35 |
86 |
63 |
25 |
22 |
231 |
Rated 5 |
14 |
30 |
21 |
7 |
86 |
158 |
Total mortgage loans |
$ 775 |
$ 1,287 |
$ 2,245 |
$ 1,139 |
$ 362 |
$ 5,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010 |
|
|
|
|
|
|
Rated
1 |
$
4 |
$
- |
$
1 |
$
- |
$
- |
$
5 |
Rated
2 |
173 |
173 |
571 |
108 |
24 |
1,049 |
Rated
3 |
523 |
1,065 |
1,643 |
935 |
144 |
4,310 |
Rated
4 |
66 |
173 |
105 |
202 |
281 |
827 |
Rated 5 |
16 |
6 |
5 |
- |
3 |
30 |
Total mortgage loans |
$ 782 |
$ 1,417 |
$ 2,325 |
$ 1,245 |
$ 452 |
$ 6,221 |
Internal credit quality ratings are not used to
establish the valuation allowance; however, there is a strong correlation between the two processes. For example, mortgage loans in the category receiving the highest loss factors for determination of the valuation allowance are generally
rated with an internal credit quality rating of 4 or 5, while mortgage loans in the category receiving the lowest loss factors for determination of the valuation allowance are generally rated 1, 2 or 3.
While the internal credit ratings reflect management’s assessment of relative credit risk in the mortgage loan portfolio for the date indicated based on underwriting
criteria and ongoing assessment of the properties’ performance, management believes the amounts, net of valuation allowance, are collectible.
Securities
Lending
The fair value of loaned securities was $103 million and $269 million as of December 31, 2011 and 2010, respectively. The Company received $105 million and $276
million of cash collateral on securities lending as of December 31, 2011 and 2010, respectively. The Company did not receive any non-cash collateral on securities lending as of the balance sheet dates.
Assets on Deposit, Held in Trust and Pledged as Collateral
Fixed maturity securities with an amortized cost of $8 million were on deposit with various regulatory agencies as required by law as of December 31, 2011 and
2010. These securities continue to be included in fixed maturity securities on the consolidated balance sheets.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Tax Credit
Funds and Variable Interest Entities
The Company has sold $796 million and $747 million
in LIHTC Funds to unrelated third parties as of December 31, 2011 and 2010. The Company has guaranteed cumulative after-tax yields to the third party investors ranging from 1.00% to 7.75% through periods ending in 2027. As of
December 31, 2011 and 2010, the Company held guarantee reserves totaling $6 million on these transactions. These guarantees are in effect for periods of approximately 15 years each. The LIHTC Funds provide a stream of tax
benefits to the investors that will generate a yield and return of capital. If the tax benefits are not sufficient to provide these cumulative after-tax yields, the Company must fund any shortfall. The maximum amount of
undiscounted future payments that the Company could be required to pay the investors under the terms of the guarantees is $770 million. The Company’s risks are mitigated in the following ways: (1) the Company has the right to buyout
the equity related to the guarantee under certain circumstances, (2) the Company may replace underperforming properties to mitigate exposure to guarantee payments and (3) the Company oversees the asset management of the deals. The Company does not
anticipate making any material payments related to the guarantees.
The Company has relationships with VIEs where the
Company is the primary beneficiary. Net assets of all consolidated VIEs totaled $345 million and $355 million as of December 31, 2011 and 2010, respectively, which was composed primarily of other long-term investments of $310 million and
$315 million at December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the total exposure to loss on VIEs was immaterial (except for the impact of guarantees disclosed above). The Company’s general
credit is not exposed to the creditors or beneficial interest holders of these consolidated VIEs.
During 2010, two LIHTC Funds were consolidated as a
result of the adoption of guidance under FASB ASC 810, Consolidation. Previously, the Company was not deemed the primary beneficiary. As the managing member of the LIHTC
funds, the Company has the power to direct the activities that most significantly impact the economic power of the entities and consolidated the funds. The impact of consolidation was an increase to noncontrolling interest of $46
million.
In addition to the consolidated VIEs described above, the Company holds investments in variable interests in LIHTC Funds where the Company is not the primary beneficiary. The
carrying value of these investments was $178 million and $157 million as of December 31, 2011 and 2010, respectively. The total exposure to loss on these investments was $309 million and $218 million as of December 31, 2011 and 2010, respectively.
The total exposure to loss is determined by adding any unfunded commitments to the carrying value of the VIEs.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Net
Investment Income
The following table summarizes net investment income by investment type for the years ended December 31:
(in millions) |
2011 |
2010 |
2009 |
|
|
|
|
Fixed
maturity securities, available-for-sale |
$ 1,502 |
$
1,474 |
$
1,465 |
Equity
securities, available-for-sale |
1 |
2 |
2 |
Mortgage
loans |
370 |
396 |
445 |
Policy
loans |
56
|
55 |
61 |
Other |
(35) |
(43) |
(38) |
Gross investment
income |
$ 1,894 |
$
1,884 |
$
1,935 |
Investment expenses |
50
|
59 |
56 |
Net investment income |
$ 1,844 |
$ 1,825 |
$ 1,879 |
Net Realized
Investment Gains and Losses
The following table summarizes net realized investment gains and losses, by source, for the years ended December 31:
(in millions) |
2011 |
2010 |
2009 |
|
|
|
|
Net
derivative gains (losses) |
$ (1,636) |
$
(385) |
$
400 |
Realized
gains on sales |
64 |
176 |
192 |
Realized
losses on sales |
(45) |
(43) |
(113) |
Other |
8
|
16 |
(25) |
Net realized investment (losses) gains |
$ (1,609) |
$ (236) |
$ 454 |
In 2011, interest rate declines and equity market
volatility resulted in net realized derivative losses. Refer to Note 7 for further discussion on the Company’s derivative portfolio and related activity.
Proceeds from the sale of available-for-sale
securities were $1.6 billion, $2.2 billion and $4.2 billion during the years ended December 31, 2011, 2010 and 2009, respectively. Gross gains of $50 million, $172 million and $189 million and gross losses of $39 million, $17 million and
$70 million were realized on those sales during the years ended December 31, 2011, 2010 and 2009, respectively.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Other-Than-Temporary
Impairment Losses
The following table summarizes other-than-temporary impairments for the years ended December 31:
|
|
|
|
(in millions) |
|
Total |
Included in other comprehensive income |
Net |
2011 |
|
|
|
|
Fixed
maturity securities |
|
$ 135 |
$ (95) |
$ 40 |
Mortgage
loans |
|
25 |
- |
25 |
Other |
|
2 |
- |
2 |
Other-than-temporary impairment losses |
|
$ 162 |
$ (95) |
$ 67 |
|
|
|
|
|
2010 |
|
|
|
|
Fixed
maturity securities |
|
$
330 |
$
(174) |
$
156 |
Equity
securities |
|
5 |
- |
5 |
Mortgage loans |
|
59 |
- |
59 |
Other-than-temporary impairment losses |
|
$ 394 |
$ (174) |
$ 220 |
|
|
|
|
|
2009 |
|
|
|
|
Fixed
maturity securities |
|
$
907 |
$
(417) |
$
490 |
Equity
securities |
|
7 |
- |
7 |
Mortgage
loans |
|
72 |
- |
72 |
Other |
|
6 |
- |
6 |
Other-than-temporary impairment losses |
|
$ 992 |
$ (417) |
$ 575 |
The following table summarizes the non-credit
portion of other-than-temporary impairments, which have credit losses in earnings, and any subsequent changes in the fair value of those debt securities recognized in other comprehensive income, before federal income taxes, for the years ended
December 31:
(in millions) |
|
2011 |
2010 |
|
2009 1 |
Balance at beginning of
year |
|
$ (215) |
$
(346) |
|
$
- |
Net activity in the
period |
|
(11) |
131 |
|
(346) |
Balance at end of year |
|
$ (226) |
$ (215) |
|
$ (346) |
__________
|
1 |
Includes the $384 million cumulative effect of adoption of accounting principle as of January 1, 2009 for the adoption of guidance impacting FASB
ASC 320-10, Investments – Debt and Equity Securities. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes the cumulative
amounts related to the Company's credit portion of the other-than-temporary impairment losses on debt securities that the Company does not intend to sell and it is not more likely than not the Company will be required to sell the security prior to
recovery of the amortized cost basis, for the years ended December 31:
(in millions) |
2011 |
2010 |
2009 |
|
|
|
|
Cumulative
credit loss at beginning of year |
$ 340 |
$ 417 |
$ 507 |
New credit losses |
8 |
31 |
168 |
Incremental credit
losses |
29 |
116 |
72 |
Losses related to securities included
in the beginning balance sold or paid
down during the
period |
(49) |
(202) |
(267) |
Losses related to securities included
in the beginning balance for which there
was a change in
intent |
- |
(22) |
(63) |
Cumulative credit loss at end of year |
$ 328 |
$ 340 |
$ 417 |
(7) |
Derivative Instruments |
The Company is exposed to certain risks relating to its ongoing business operations which are managed by using derivative instruments.
Interest rate risk management: The Company uses interest rate contracts, primarily interest rate swaps, to
reduce or alter interest rate exposure arising from mismatches between assets and liabilities. In the case of interest rate swaps, the Company enters into a contractual agreement with a counterparty to exchange, at specified intervals,
the difference between fixed and variable rates of interest, calculated on a reference notional amount.
Interest rate swaps are used by the Company in
association with fixed and variable rate investments to achieve cash flow streams that support certain financial obligations of the Company and to produce desired investment returns. As such, interest rate swaps are generally used to
convert fixed rate cash flow streams to variable rate cash flow streams or vice versa. The Company also enters into interest rate swap transactions which are structured to provide a hedge against the negative impact of higher interest rates on the
Company’s statutory capital position.
Foreign
currency risk management: As part of its regular investing activities, the Company may purchase foreign currency denominated investments. These
investments and the associated income expose the Company to volatility associated with movements in foreign exchange rates. In an effort to mitigate this risk, the Company uses cross-currency swaps. As foreign exchange rates
change, the increase or decrease in the cash flows of the derivative instrument generally offsets the changes in the functional-currency equivalent cash flows of the hedged item.
Credit risk management: The Company enters into credit derivative contracts, primarily credit default swaps,
under which the Company buys and sells credit default protection on standardized credit indices, which are established baskets of creditors, or on specific corporate creditors. These derivatives allow the Company to manage or modify its
credit risk profile in general or its credit exposure to specific creditors.
Equity
market risk management: The Company has a variety of variable annuity products with guaranteed benefit features. Refer to Note 4 for description of these guarantees.
These products and related obligations expose the
Company to various market risks, predominately interest rate and equity risk. Adverse changes in the equity markets or interest rate movements expose the Company to significant volatility. To mitigate these risks and hedge the guaranteed
benefit obligations, the Company enters into a variety of derivatives including interest rate swaps, equity index futures, options and total return swaps.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Derivatives
Qualifying for Hedge Accounting
The Company uses derivative instruments that are
designated and qualify as fair value hedges in various financial transactions as follows:
|
·
|
interest rate swaps are used to hedge certain fixed rate investments such as mortgage loans and certain fixed maturity securities,
and |
|
·
|
cross-currency swaps are used to hedge foreign currency-denominated fixed maturity securities. |
The Company uses derivative instruments that are
designated and qualify as cash flow hedges in various financial transactions as follows:
|
·
|
interest rate swaps are used to hedge cash flows from variable rate investments such as mortgage loans and certain fixed maturity securities and
to hedge payments of certain funding agreement liabilities, |
|
·
|
cross-currency swaps are used to hedge interest payments and principal payments on foreign currency-denominated financial
instruments. |
Derivatives
Not Qualifying for Hedge Accounting
The Company uses derivatives not qualifying for hedge accounting in various financial transactions as follows:
|
·
|
futures, options, interest rate swaps and total return swaps are used to hedge certain guaranteed benefit rider obligations included in variable
annuity products, |
|
·
|
interest rate swaps, futures and options are used to hedge portfolio duration and other interest rate risks to which the Company is
exposed, |
|
·
|
cross-currency swaps are used to hedge foreign currency-denominated assets and liabilities, and |
|
·
|
credit default swaps are used to either buy or sell credit protection on a credit index or specific
creditor. |
Credit Risk
Associated with Derivatives Transactions
The Company periodically evaluates the risks within
the derivative portfolios due to credit exposure. When evaluating this risk, the Company considers several factors which include, but are not limited to, the counterparty credit risk associated with derivative receivables, the
Company’s own credit as it relates to derivative payables, the collateral thresholds associated with each counterparty, and changes in relevant market data in order to gain insight into the probability of default by the counterparty. In
addition, the effect the Company’s exposure to credit risk could have on the effectiveness of the Company’s hedging relationships is considered. As of December 31, 2011 and 2010, the impact of the exposure to credit risk on
the fair value measurement of derivatives and the effectiveness of the Company’s hedging relationships was immaterial.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes the fair value of
derivative instruments, the related notional amounts of the derivative instruments and the related accrued interest, collateral and master netting agreement amounts as of the dates indicated:
|
|
Derivative assets |
|
Derivative liabilities |
(in millions) |
|
Fair value |
Notional |
|
Fair value |
Notional |
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
Derivatives
designated and qualifying as hedging instruments |
|
$ 11 |
$ 145 |
|
$ 29 |
$ 310 |
Derivatives
not designated and qualifying as hedging instruments: |
|
|
|
|
|
|
Interest rate contracts
|
|
$ 2,182 |
$ 21,732 |
|
$ 2,142 |
$ 20,957 |
Equity contracts |
|
1,004 |
7,265 |
|
21 |
1,661 |
Credit default swaps
|
|
1 |
13 |
|
1 |
17 |
Other derivative contracts |
|
10 |
892 |
|
43 |
2,409 |
Gross derivative positions1 |
|
$ 3,208 |
$ 30,047 |
|
$ 2,236 |
$ 25,354 |
Accrued
interest |
|
$ 172 |
|
|
$ 179 |
|
Less: |
|
|
|
|
|
|
Cash
collateral received/paid2 |
|
$ 1,028 |
|
|
$ 223 |
|
Master netting agreements |
|
$ 2,158 |
|
|
$ 2,158 |
|
Net uncollateralized derivative positions |
|
$ 194 |
|
|
$ 34 |
|
|
|
|
|
|
|
|
December 31,
2010 |
|
|
|
|
|
|
Derivatives
designated and qualifying as hedging instruments |
|
$ 27 |
$ 210 |
|
$ 55 |
$ 931 |
Derivatives
not designated and qualifying as hedging instruments: |
|
|
|
|
|
|
Interest rate contracts
|
|
$ 556 |
$ 10,944 |
|
$ 418 |
$ 10,225 |
Equity contracts |
|
212 |
2,484 |
|
20 |
1,124 |
Credit default swaps
|
|
1 |
20 |
|
- |
17 |
Other derivative contracts |
|
42 |
1,329 |
|
53 |
1,263 |
Gross derivative positions1 |
|
$ 838 |
$ 14,987 |
|
$ 546 |
$
13,560 |
Accrued
interest |
|
$ 99 |
|
|
$ 106 |
|
Less: |
|
|
|
|
|
|
Cash collateral received/paid3 |
|
$ 351 |
|
|
$ 76 |
|
Master netting agreements |
|
$ 551 |
|
|
$ 551 |
|
Net uncollateralized derivative positions |
|
$ 35 |
|
|
$ 25 |
|
__ _______
1 Assets and liabilities included in other assets and other liabilities, respectively in the consolidated balance sheets.
2 Excludes $1 million and $152 million of securities received and posted, respectively, as collateral on derivative transactions.
3 Excludes $8 million and $28 million of securities received and posted, respectively, as collateral on derivative transactions.
The fair value of embedded derivatives on annuity programs were $1.9 billion and $226 million as of December 31, 2011 and 2010, respectively, which are included in future policy
benefits and claims in the consolidated balance sheets.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes realized gains and
losses for derivative instruments recognized in net realized investment gains and losses in the consolidated statements of operations for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
Derivatives
designated and qualifying as hedging instruments |
$ (4) |
|
$
(9) |
|
$
(25) |
Derivatives
not designated and qualifying as hedging instruments: |
|
|
|
|
|
Interest rate contracts
|
$ (44) |
|
$
(39) |
|
$
(197) |
Equity contracts |
(45) |
|
(389) |
|
(739) |
Credit default swaps
|
- |
|
(5) |
|
8 |
Other derivative
contracts |
(23) |
|
(151) |
|
9 |
Net interest settlements |
34 |
|
16 |
|
(151) |
Total derivative
losses1 |
$ (82) |
|
$ (577) |
|
$ (1,095) |
Embedded
derivatives on guaranteed benefit annuity programs |
(1,674) |
|
98 |
|
1,432 |
Other revenue on guaranteed benefit annuities |
120 |
|
94 |
|
63 |
Change in embedded
derivative liabilities and related fees |
$ (1,554) |
|
$
192 |
|
$
1,495 |
Net realized derivative (losses) gains |
$ (1,636) |
|
$ (385) |
|
$ 400 |
_________
|
1 Included in total derivative losses are economic hedging gains of
$1.0 billion, losses of $347 million and $1.1 billion related to guaranteed benefit annuity program as of December 31, 2011, 2010 and 2009, respectively. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(8)
Fair Value of Financial Instruments
The following table summarizes assets and
liabilities measured at fair value on a recurring basis as of December 31, 2011:
(in millions) |
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
|
|
Assets |
|
|
|
|
Investments: |
|
|
|
|
Fixed maturity
securities: |
|
|
|
|
U.S. Treasury
securities and obligations of U.S. |
|
|
|
|
Government corporations and agencies |
$ 620 |
$ 6 |
$ 4 |
$ 630 |
Obligations of
states and political subdivisions |
- |
1,678 |
- |
1,678 |
Debt securities
issued by foreign governments |
120 |
- |
- |
120 |
Corporate public
securities |
1 |
15,239 |
117 |
15,357 |
Corporate private
securities |
- |
3,089 |
1,209 |
4,298 |
Residential
mortgage-backed securities |
563 |
4,653 |
8 |
5,224 |
Commercial
mortgage-backed securities |
- |
1,377 |
2 |
1,379 |
Collateralized debt
obligations |
- |
55 |
247 |
302 |
Other asset-backed securities |
- |
209 |
4 |
213 |
Total fixed maturity securities at fair value |
$ 1,304 |
$ 26,306 |
$ 1,591 |
$ 29,201 |
Equity securities |
1 |
14 |
5 |
20 |
Short-term investments
|
23 |
1,102 |
- |
1,125 |
Trading securities |
- |
- |
38 |
38 |
Total other investments at fair value |
$ 24 |
$ 1,116 |
$ 43 |
$ 1,183 |
Investments at fair value |
$ 1,328 |
$ 27,422 |
$ 1,634 |
$ 30,384 |
Cash and
cash equivalents |
49 |
- |
- |
49 |
Derivative
assets |
- |
2,204 |
1,004 |
3,208 |
Separate account assets |
62,242 |
1,000 |
1,952 |
65,194 |
Assets at fair value |
$ 63,619 |
$ 30,626 |
$ 4,590 |
$ 98,835 |
|
|
|
|
|
Liabilities |
|
|
|
|
Future
policy benefits and claims: |
|
|
|
|
Living benefits |
$ - |
$ - |
$ (1,842) |
$ (1,842) |
Equity indexed annuities |
- |
- |
(63) |
(63) |
Total future policy benefits and claims |
$ - |
$ - |
$ (1,905) |
$ (1,905) |
Derivative liabilities |
(21) |
(2,209) |
(6) |
(2,236) |
Liabilities at fair value |
$ (21) |
$ (2,209) |
$ (1,911) |
$ (4,141) |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes changes in fair
value measurements for which the Company used significant unobservable inputs (Level 3) to determine fair value for the year ended December 31, 2011:
|
Balance as of |
|
|
|
|
Transfers |
Transfers |
Balance as of |
|
December 31, |
Net gains (losses) |
|
|
into |
out
of |
December 31, |
(in millions) |
2010 |
In earnings1
|
In OCI |
Purchases |
Sales |
Level 3 |
Level 3 |
2011 |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Fixed maturity
securities: |
|
|
|
|
|
|
|
|
Corporate public
securities |
$
114 |
$ - |
$ 4 |
$ 41 |
$ (43) |
$ 1 |
$ - |
$ 117 |
Corporate private
securities |
1,161 |
(10) |
26 |
161 |
(242) |
163 |
(50) |
1,209 |
Residential
mortgage-backed securities |
9 |
- |
- |
- |
- |
- |
(1) |
8 |
Commercial
mortgage-backed securities |
2 |
- |
- |
- |
- |
- |
- |
2 |
Collateralized
debt obligations |
191 |
(2) |
5 |
87 |
(34) |
- |
- |
247 |
Other fixed maturity securities |
18 |
5 |
- |
16 |
(20) |
3 |
(14) |
8 |
Total fixed
maturity securities at fair value |
$
1,495 |
$ (7) |
$ 35 |
$ 305 |
$ (339) |
$ 167 |
$ (65) |
$ 1,591 |
Other
investments at fair value |
45 |
(4) |
- |
5 |
(3) |
- |
- |
43 |
Derivative
assets |
211 |
131 |
- |
719 |
(57) |
- |
- |
1,004 |
Separate account assets |
1,805 |
147 |
- |
- |
- |
- |
- |
1,952 |
Assets at fair value |
$ 3,556 |
$ 267 |
$ 35 |
$ 1,029 |
$ (399) |
$ 167 |
$ (65) |
$ 4,590 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Future
policy benefits and claims: |
|
|
|
|
|
|
|
|
Living benefits |
$
(168) |
$ (1,674) |
$ - |
$ - |
$ - |
$ - |
$ - |
$ (1,842) |
Equity indexed annuities |
(58) |
(5) |
- |
- |
- |
- |
- |
(63) |
Total
future policy benefits and claims |
$
(226) |
$ (1,679) |
$ - |
$ - |
$ - |
$ - |
$ - |
$ (1,905) |
Derivative liabilities |
(4) |
(2) |
- |
- |
- |
- |
- |
(6) |
Liabilities at fair value |
$ (230) |
$ (1,681) |
$ - |
$ - |
$ - |
$ - |
$ - |
$ (1,911) |
__________
|
1 |
Net gains and losses included in earnings are reported in net realized investment gains and losses, other-than-temporary impairment losses and
interest credited to policyholder accounts. The net unrealized gains on separate account assets is attributable to contractholders, and therefore, is not included in the Company’s earnings. The change in unrealized gains (losses) in earnings
on assets and liabilities still held at the end of the year was $(6) million for other investments, $154 million for derivative assets and $(1.7) billion for future policy benefits and claims. |
Transfers into and out of Level 3 during the year ended December 31, 2011 represent changes in the sources used to price certain securities. There were no significant
transfers between Levels 1 and 2 during the year ended December 31, 2011, except certain separate accounts previously included in Level 2.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes assets and
liabilities measured at fair value on a recurring basis as of December 31, 2010:
(in millions) |
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
|
|
Assets |
|
|
|
|
Investments: |
|
|
|
|
Fixed maturity
securities: |
|
|
|
|
U.S. Treasury
securities and obligations of U.S. |
|
|
|
|
Government corporations and agencies |
$
572 |
$
10 |
$
2 |
$
584 |
Obligations of
states and political subdivisions |
- |
1,377 |
- |
1,377 |
Debt securities
issued by foreign governments |
123 |
- |
- |
123 |
Corporate public
securities |
2 |
12,600 |
114 |
12,716 |
Corporate private
securities |
- |
3,087 |
1,161 |
4,248 |
Residential
mortgage-backed securities |
540 |
5,090 |
9 |
5,639 |
Commercial
mortgage-backed securities |
- |
1,184 |
2 |
1,186 |
Collateralized debt
obligations |
- |
61 |
191 |
252 |
Other asset-backed securities |
- |
293 |
16 |
309 |
Total fixed maturity securities at fair value |
$
1,237 |
$ 23,702
|
$
1,495 |
$ 26,434
|
Equity securities |
10 |
32 |
- |
42 |
Short-term investments
|
25 |
1,037 |
- |
1,062 |
Trading securities |
- |
- |
45 |
45 |
Total other investments at fair value |
$ 35 |
$ 1,069 |
$ 45 |
$ 1,149 |
Investments at fair value |
$ 1,272 |
$ 24,771 |
$ 1,540 |
$ 27,583 |
Cash and
cash equivalents |
337 |
- |
- |
337 |
Derivative
assets |
- |
627 |
211 |
838 |
Separate account assets |
12,325 |
50,745 |
1,805 |
64,875 |
Assets at fair value |
$ 13,934 |
$ 76,143 |
$ 3,556 |
$ 93,633 |
|
|
|
|
|
Liabilities |
|
|
|
|
Future
policy benefits and claims: |
|
|
|
|
Living benefits |
$
- |
$
- |
$
(168) |
$
(168) |
Equity indexed annuities |
- |
- |
(58) |
(58) |
Total future policy benefits and claims |
$
- |
$
- |
$
(226) |
$
(226) |
Derivative liabilities |
(18) |
(524) |
(4) |
(546) |
Liabilities at fair value |
$ (18) |
$ (524) |
$ (230) |
$ (772) |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes changes in fair
value measurements for which the Company used significant unobservable inputs (Level 3) to determine fair value for the year ended December 31, 2010:
|
Balance as of |
|
|
|
Transfers |
Transfers |
Balance as of |
|
December 31, |
Net gains (losses) |
Activity |
into |
out
of |
December 31, |
(in millions) |
2009 |
In earnings1
|
In OCI |
in period |
Level 3 |
Level 3 |
2010 |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
Fixed maturity
securities: |
|
|
|
|
|
|
|
Corporate public
securities |
$
215 |
$
1 |
$
4 |
$
(15) |
$
1 |
$
(92) |
$
114 |
Corporate private
securities |
1,187 |
3 |
31 |
(268) |
311 |
(103) |
1,161 |
Residential
mortgage-backed securities |
2,034 |
(1) |
4 |
(12) |
2 |
(2,018)
|
9 |
Commercial
mortgage-backed securities |
405 |
- |
1 |
- |
- |
(404) |
2 |
Collateralized
debt obligations |
240 |
(27) |
29 |
(67) |
16 |
- |
191 |
Other fixed maturity securities |
169 |
(9) |
8 |
(11) |
- |
(139) |
18 |
Total fixed
maturity securities at fair value |
$
4,250 |
$
(33) |
$
77 |
$
(373) |
$
330 |
$ (2,756) |
$
1,495 |
Other
investments at fair value |
56 |
10 |
- |
(20) |
- |
(1) |
45 |
Derivative
assets |
331 |
(91) |
- |
(29) |
- |
- |
211 |
Separate account assets |
1,628 |
177 |
- |
- |
- |
- |
1,805 |
Assets at fair value |
$ 6,265 |
$ 63 |
$ 77 |
$ (422) |
$ 330 |
$ (2,757) |
$ 3,556 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Future
policy benefits and claims: |
|
|
|
|
|
|
|
Living benefits |
$
(266) |
$
98 |
$
- |
$
- |
$
- |
$
- |
$
(168) |
Equity indexed annuities |
(45) |
(13) |
- |
- |
- |
- |
(58) |
Total
future policy benefits and claims |
$
(311) |
$
85 |
$
- |
$
- |
$
- |
$
- |
$
(226) |
Derivative liabilities |
(2) |
(2) |
- |
- |
- |
- |
(4) |
Liabilities at fair value |
$ (313) |
$ 83 |
$ - |
$ - |
$ - |
$ - |
$ (230) |
__________
|
1 |
Net gains and losses included in earnings are reported in net realized investment gains and losses, other-than-temporary impairment losses and
interest credited to policyholder accounts. The net unrealized gains on separate account assets is attributable to contractholders, and therefore, is not included in the Company’s earnings. The change in unrealized gains (losses) in earnings
on assets and liabilities still held at the end of the year was $(2) million for other investments, $(69) million for derivative assets, $85 million for future policy benefits and claims and $(2) million for derivative liabilities.
|
At December 31, 2009, most of the Company’s investments in residential mortgage-backed securities backed by Alt-A and sub-prime collateral were categorized as Level 3
financial assets because there was little market activity in these securities. During 2010, market activity increased in these securities such that they are no longer considered inactive. As such, these securities were
transferred out of Level 3 and into Level 2. Additionally, many of the Company’s investments in below investment-grade commercial mortgage-backed securities, which were categorized as Level 3 financial assets as of December 31, 2009 were
transferred to Level 2 in 2010. This was primarily due to an increase in the observable valuation inputs of market activity and availability of higher quality independent pricing data.
There were no significant transfers between Levels 1 and 2 during the year ended December 31, 2010.
Fair Value Option
The Company assesses the fair value option election for newly acquired financial assets or liabilities on a prospective basis. Except for synthetic collateralized debt
obligations, there are no material assets or liabilities for which the Company elected the fair value option.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Use of Net Asset Value for
Estimating Fair Value
The Company uses net asset value to estimate the underlying fair value for certain mutual funds that do not have readily determinable fair values, which are included in separate
accounts.
All but one of these mutual fund investments are included in Level 2 and had fair values totaling $50.0 billion as of December 31, 2010. These funds have no unfunded commitments
or restrictions and the Company always has the ability to redeem the separate account investment in these funds with the investee at net asset value daily. These mutual funds are primarily invested in domestic and international equity
funds.
The Company’s separate account assets include an investment in a mutual fund that may not be redeemed until a seven year guarantee period expires in 2016; however, net
asset value has been used to estimate the fair value of this investment as a practical expedient. This fund has no unfunded commitments or other restrictions. The investment strategy of this fund is to build a portfolio where the assets shall be
sufficient to achieve a target portfolio value by the end of the seven year guarantee period. The net asset value of this fund reported in separate account assets was $1.3 billion as of December 31, 2011 and 2010, respectively, and is included in
Level 3.
Contractholders have the ability to select and change investment categories, which will result in the underlying mutual funds being purchased and sold in the future.
Fair Value on a Nonrecurring Basis
The Company measured certain mortgage loans at fair
value, or fair value of the collateral for collateral dependent loans, on a non-recurring basis subsequent to their initial recognition, due to impairments or foreclosures recorded during the year. In determining the fair value for these mortgage
loans, the Company primarily uses the direct capitalization method based on management’s view of current market capitalization rates. Alternatively, the Company may use a discounted cash flow methodology or an independently provided
appraisal of value. Each of these methodologies is considered to represent a Level 3 fair value measurement. Refer to Note 6 for further discussion of the carrying value of impaired mortgage loans.
Financial Instruments Not
Carried at Fair Value
The following table summarizes the carrying value and fair value of the Company’s financial instruments not carried at fair value as of December 31. The
valuation techniques used to estimate these fair values are described below.
|
|
2011 |
|
|
|
2010 |
|
|
|
|
Carrying |
|
Fair |
|
Carrying
|
|
Fair |
(in millions) |
|
value |
|
value |
|
value |
|
value |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Mortgage
loans held-for-investment |
|
$ 5,748 |
|
$ 5,861 |
|
$
6,125 |
|
$
5,863 |
Policy
loans |
|
$ 1,008 |
|
$ 1,008 |
|
$
1,088 |
|
$
1,088 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Investment
contracts |
|
$ 18,318 |
|
$ 17,992 |
|
$
17,962 |
|
$
17,618 |
Short-term
debt |
|
$ 777 |
|
$ 777 |
|
$
300 |
|
$
300 |
Long-term debt |
|
$ 991 |
|
$ 1,081 |
|
$ 978 |
|
$ 1,039 |
Mortgage
loans held-for-investment: The fair values of mortgage loans held-for-investment are estimated using discounted cash flow analyses based on interest rates currently being offered for similar loans to borrowers with similar credit
ratings.
Policy loans: The carrying amount reported in the consolidated balance sheets approximates fair
value.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
Investment
contracts: For investment contracts without defined maturities, fair value is the amount payable on demand, net of surrender charges. For investment contracts with known or determined maturities, fair value is estimated
using discounted cash flow analysis. Interest rates used in this analysis are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued.
Short-term debt: The carrying amount reported in the consolidated balance sheets approximates fair
value.
Long-term debt: The fair values for long-term debt are based on estimated market prices using observable
inputs from similar debt instruments.
The following table summarizes changes in the
carrying value of goodwill by segment for the years indicated:
|
|
|
|
Retirement |
|
Individual |
|
|
(in millions) |
|
|
|
Plans |
|
Protection |
|
Total |
Balance as
of December 31, 2009 |
|
|
|
$
25 |
|
$
175 |
|
$
200 |
Adjustments |
|
|
|
- |
|
- |
|
- |
Balance as
of December 31, 2010 |
|
|
|
$
25 |
|
$
175 |
|
$
200 |
Adjustments |
|
|
|
- |
|
- |
|
- |
Balance as of December 31, 2011 |
|
|
|
$ 25 |
|
$ 175 |
|
$ 200 |
The Company’s annual impairment testing did
not result in any impairment on existing goodwill during 2011, 2010 and 2009. As of the 2011, 2010 and 2009 annual impairment testing, the fair value of the reporting units with goodwill was in excess of the carrying value. The
goodwill balances as of December 31, 2011 and 2010 have not been previously impaired.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(10)
Closed Block
The amounts shown in the following tables for assets, liabilities, revenues and expenses of the closed block are those that enter into the determination of amounts that are to be
paid to policyholders.
The following table summarizes financial information for the closed block as of December 31:
(in millions) |
|
2011 |
|
2010 |
|
|
|
|
|
Liabilities: |
|
|
|
|
Future
policyholder benefits |
|
$ 1,761 |
|
$
1,794 |
Policyholder
funds and accumulated dividends |
|
143 |
|
143 |
Policyholder
dividends payable |
|
27 |
|
28 |
Policyholder
dividend obligation |
|
156 |
|
121 |
Other policy obligations and liabilities |
|
26 |
|
13 |
Total liabilities |
|
$ 2,113 |
|
$ 2,099 |
|
|
|
|
|
Assets: |
|
|
|
|
Fixed
maturity securities available-for-sale |
|
$ 1,424 |
|
$ 1,312 |
Mortgage
loans, net |
|
210 |
|
224 |
Policy
loans |
|
170 |
|
186 |
Other assets |
|
105 |
|
162 |
Total assets |
|
$ 1,909 |
|
$ 1,884 |
Excess of reported liabilities over assets |
|
204 |
|
215 |
|
|
|
|
|
Portion of above representing other comprehensive income: |
|
|
|
|
Increase in
unrealized gain on fixed maturity securities available-for-sale |
|
$ 42 |
|
$ 73 |
Adjustment to policyholder dividend obligation |
|
(42) |
|
(73) |
Total |
|
$ - |
|
$ - |
|
|
|
|
|
Maximum future earnings to be recognized from assets and liabilities |
|
$ 204 |
|
$ 215 |
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
Fixed
maturity securities available-for-sale: |
|
|
|
|
Fair value |
|
$ 1,424 |
|
$
1,312 |
Amortized cost |
|
1,292 |
|
1,222 |
Shadow policyholder dividend obligation |
|
(132) |
|
(90) |
Net unrealized appreciation |
|
$ - |
|
$ - |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes closed block
operations for the years ended December 31:
(in millions) |
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
Premiums |
$ 77 |
|
$
83 |
|
$
90 |
Net investment income
|
102 |
|
101 |
|
106 |
Realized investment (losses)
gains |
(3) |
|
(3) |
|
2 |
Realized losses credited to policyholder benefit obligation |
(1) |
|
(1) |
|
(7) |
Total revenues |
$ 175 |
|
$ 180 |
|
$ 191 |
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
Policy and contract
benefits |
$ 145 |
|
$
131 |
|
$
133 |
Change in future policyholder
benefits and interest credited to |
|
|
|
|
|
policyholder
accounts |
(35) |
|
(23) |
|
(24) |
Policyholder dividends
|
55 |
|
56 |
|
59 |
Change in policyholder dividend
obligation |
(8) |
|
(3) |
|
4 |
Other expenses |
1 |
|
1 |
|
1 |
Total benefits and expenses |
$ 158 |
|
$ 162 |
|
$ 173 |
|
|
|
|
|
|
Total revenues, net
of benefits and expenses, before federal income |
|
|
|
|
|
tax
expense |
$ 17 |
|
$
18 |
|
$
18 |
Federal income tax expense |
6 |
|
6 |
|
6 |
Revenues, net of benefits and expenses and federal income tax |
|
|
|
|
|
expense |
$ 11 |
|
$ 12 |
|
$ 12 |
|
|
|
|
|
|
Maximum future earnings from assets and liabilities: |
|
|
|
|
|
Beginning of
period |
$ 215 |
|
$
227 |
|
$
239 |
Change during period |
(11) |
|
(12) |
|
(12) |
End of period |
$ 204 |
|
$ 215 |
|
$ 227 |
Cumulative closed block earnings from inception
through December 31, 2011, 2010 and 2009 were higher than expected as determined in the actuarial calculation. Therefore, policyholder dividend obligations (excluding the adjustment for unrealized gains on available-for-sale securities)
were $23 million, $31 million and $32 million as of December 31, 2011, 2010 and 2009, respectively.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes short-term
debt and weighted average annual interest rates as of December 31:
(in millions) |
|
2011 |
|
2010 |
|
|
|
|
|
$600 million
commercial paper program (0.30% and 0.35%, respectively) |
|
$ 300 |
|
$
300 |
$600 million
promissory note and line of credit (1.73% in 2011) |
|
$ 477 |
|
$
- |
Total short-term debt |
|
$ 777 |
|
$ 300 |
In May 2011, NMIC, NFS, and NLIC entered into a
$600 million revolving credit facility upon expiration of its existing facility of the same amount. The new facility matures in May 2015 and is subject to various covenants, as defined in the agreement. NLIC had no amounts outstanding
under the new or existing facilities as of December 31, 2011 and December 31, 2010.
In April 2011, the Company entered into a $600
million unsecured revolving promissory note and line of credit agreement with its parent company, NFS. Outstanding principal balances of the line of credit bear interest at the rate of six-month U.S. London Interbank Offered Rate (LIBOR) plus 1.25%.
Interest is due and payable as of the last day of each interest period, as defined in the agreement, while there are outstanding principal balances. Under the terms of the agreement, NLIC may borrow, repay and re-borrow advances under the line of
credit at any time prior to the termination of the note, which, among other conditions, is April 2012, subject to automatic renewal for additional one year periods unless either party terminates the agreement.
In June 2010, NLIC entered into an agreement reducing the commercial paper program from $800 million to $600 million. The rating agency guidelines recommend that NLIC
maintain minimum liquidity backup, which includes cash and liquid assets as well as committed bank lines, equal to 50% of any amounts outstanding under the commercial paper program. Therefore, availability under the aggregate $600 million
credit facility is reduced by the amount outstanding in excess of available cash and liquid assets.
The Company has entered into an agreement with its
custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. The maximum amount available under the agreement is $350 million. The borrowing rate on this program is
equal to one-month U.S. LIBOR. The Company had no amounts outstanding under this agreement as of December 31, 2011 and 2010.
The terms of each debt instrument contain various
restrictive covenants, including, but not limited to, minimum statutory surplus and minimum net worth requirements, and maximum debt to tangible net worth requirements, as defined in the agreements. The Company was in compliance with all
covenants as of December 31, 2011 and 2010.
The amount of interest paid on short-term debt was
$5 million in 2011 and immaterial in 2010 and 2009.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(12)
Long-Term Debt
The following table summarizes long-term debt as of December 31:
(in millions) |
|
2011 |
|
2010 |
|
|
|
|
|
8.15%
surplus note, due June 27, 2032, payable to NFS |
|
$ 300 |
|
$
300 |
7.50%
surplus note, due December 17, 2031, payable to NFS |
|
300 |
|
300 |
6.75%
surplus note, due December 23, 2033, payable to NFS |
|
100 |
|
100 |
Variable
funding surplus note, due December 31, 2040 |
|
285 |
|
272 |
Other |
|
6 |
|
6
|
Total long-term debt |
|
$ 991 |
|
$ 978 |
On December 31, 2010, Olentangy Reinsurance, LLC, a
special purpose financial captive insurance subsidiary of NLAIC domiciled in the State of Vermont, issued a variable funding surplus note due on December 31, 2040 to Nationwide Corporation, a majority-owned subsidiary of NMIC. The note is
redeemable in full or partial amount at any time subject to proper notice and approval. A redemption premium shall be payable if the note is redeemed on or prior to the third anniversary date of the note’s issuance. The note bears
interest at the rate of three-month U.S. LIBOR plus 2.80% payable quarterly. Olentangy Reinsurance, LLC agrees to draw down or reduce principal amounts in accordance with the terms outlined in the purchase agreement. The
maximum amount outstanding under the agreement is $313 million in 2016. The Company made interest payments on this surplus note of $9 million during 2011. Any payment of interest or principal on the note requires the prior approval of the
State of Vermont.
The Company made interest payments to NFS on surplus notes totaling $54 million in 2011, 2010 and 2009. Payments of interest and principal under the notes require the
prior approval of the ODI.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(13) |
Federal Income Taxes |
The following table summarizes the federal income tax (benefit) expense attributable to (loss) income before income attributable to noncontrolling interests, for the years ended
December 31:
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
Current tax
expense (benefit) |
|
$ 55 |
|
$
(91) |
|
$
165 |
Deferred tax (benefit) expense |
|
(437) |
|
115 |
|
(117) |
Total tax (benefit) expense |
|
$ (382) |
|
$ 24 |
|
$ 48 |
Total federal income tax (benefit) expense differs
from the amount computed by applying the U.S. federal income tax rate to (loss) income before federal income taxes and noncontrolling interests, as follows for the years ended December 31:
|
|
2011 |
|
|
|
2010 |
|
|
|
2009 |
|
|
(in millions) |
Amount |
% |
|
|
Amount |
% |
|
|
Amount |
% |
|
Rate reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
Computed
(expected tax (benefit) expense) |
$ (252) |
35 |
% |
|
$
71 |
35 |
% |
|
$
107 |
35 |
% |
|
Dividend
received deduction |
(99) |
14 |
% |
|
(50) |
(25) |
% |
|
(56) |
(18) |
% |
|
Impact of
noncontrolling interest |
20 |
(3) |
% |
|
21 |
10 |
% |
|
18 |
6 |
% |
|
Tax
credits |
(30) |
4 |
% |
|
(27) |
(13) |
% |
|
(21) |
(7) |
% |
|
Change in
tax contingency reserve |
(15) |
2 |
% |
|
(5) |
(2) |
% |
|
5 |
2 |
% |
|
Other, net |
(6) |
1 |
% |
|
14 |
7 |
% |
|
(5) |
(2) |
% |
|
Total |
$ (382) |
53 |
% |
|
$ 24 |
12 |
% |
|
$ 48 |
16 |
% |
The Company’s current federal income tax receivable (liability) was $16 million and $(50) million as of December 31, 2011 and 2010, respectively.
Total federal income taxes paid (refunded) were $121 million, $(35) million, and $(59) million during the years ended December 31, 2011, 2010, and 2009,
respectively.
During 2011, the Company recorded a tax benefit of $10 million primarily related to differences between the 2010 estimated tax liability and the amounts reported on the
Company’s 2010 tax return. These changes in estimates were primarily driven by the Company’s separate account dividends received deduction (DRD). During 2010, there were no material federal income tax expense
adjustments.
During 2009, the Company recorded $9 million of net federal income tax expense adjustments primarily related to differences between the 2008 estimated tax liability and the
amounts reported on the Company’s 2008 tax returns. These changes in estimates were primarily driven by the Company’s separate account dividends received deduction (DRD) and foreign tax credit.
As of December 31, 2011, the Company no longer has a capital loss carryforward. The Company has $59 million in low-income-housing credit carryforwards, which expire
between 2026 and 2031 and $126 million in alternative minimum tax credit carryforwards, which have an unlimited carryforward. The Company expects to fully utilize all carryforwards.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following table summarizes the tax effects of
temporary differences that give rise to significant components of the net deferred tax liability as of December 31:
(in millions) |
|
2011 |
|
2010 |
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
Future policy benefits and
claims |
|
$ 1,193 |
|
$
1,030 |
Derivatives |
|
574 |
|
27 |
Capital loss
carryforwards |
|
- |
|
178 |
Tax credit carryforwards
|
|
185 |
|
145 |
Other |
|
323 |
|
236 |
Gross deferred tax
assets |
|
$ 2,275 |
|
$
1,616 |
Valuation allowance |
|
(18)
|
|
(24) |
Net deferred tax assets |
|
$ 2,257 |
|
$ 1,592 |
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
Deferred policy acquisition
costs |
|
(1,291) |
|
$
(1,071) |
Available-for-sale
securities |
|
(764) |
|
(670) |
Value of business
acquired |
|
(86)
|
|
(89) |
Other |
|
(217) |
|
(150) |
Gross deferred tax liabilities |
|
$ (2,358) |
|
$ (1,980) |
Net deferred tax liability |
|
$ (101) |
|
$ (388) |
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. Valuation allowances are established when necessary to reduce the deferred tax assets to
amounts expected to be realized. The valuation allowance was $18 million and $24 million as of December 31, 2011 and 2010, respectively. The change in valuation allowance for the year ended December 31, 2011 was $6 million,
while there was no change in the valuation allowance for the year ended December 31, 2010 or 2009. Based on management’s analysis, it is more likely than not that the results of future operations and the implementation of tax
planning strategies will generate sufficient taxable income to enable the Company to realize the deferred tax assets for which the Company has not established valuation allowances.
A rollforward of the beginning and ending uncertain tax positions, including permanent and temporary differences, but excluding interest and penalties, is as
follows:
(in millions) |
|
|
|
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
Balance at
beginning of period |
|
|
|
$ 119 |
|
$
95 |
|
$
44 |
Additions for current year tax
positions |
|
|
|
9 |
|
18 |
|
37 |
Additions for prior years tax
positions |
|
|
|
- |
|
19 |
|
15 |
Reductions for prior years tax positions |
|
|
|
(52) |
|
(13) |
|
(1) |
Balance at end of period |
|
|
|
$ 76 |
|
$ 119 |
|
$ 95 |
The Company believes it is reasonably possible that
approximately $48 million of unrecognized tax benefits will be recognized during 2012, mostly as a result of an industry issue resolution program with the Internal Revenue Service (IRS). These tax benefits are primarily bad debt
deductions related to certain investment impairments.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The Company files income tax returns in the U.S.
federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities through the 2005 tax year. The IRS is conducting an
examination of the Company’s U.S. income tax returns for the years 2006 through 2008. Any adjustments that may result from IRS examination of tax returns are not expected to have a material effect on the results of operations, cash
flows or financial position of the Company.
(14) |
Statutory Financial Information |
Statutory Results
The Company and its life subsidiary are required to
prepare statutory financial statements in conformity with the statutory accounting practices prescribed and permitted by insurance regulatory authorities, subject to any deviations prescribed or permitted by the applicable state department of
insurance. Statutory accounting practices focus on insurer solvency and materially differ from GAAP. The principal differences include charging policy acquisition and certain sales inducement costs to expense as incurred,
establishing future policy benefits and claims reserves using different actuarial assumptions, excluding certain assets from statutory admitted assets; and valuing investments and establishing deferred taxes on a different basis. The
following tables summarize the statutory net income (loss) and statutory capital and surplus for the Company and its primary insurance subsidiary for the years ended December 31:
(in millions) |
|
|
|
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
Statutory net income (loss) |
|
|
|
|
|
|
|
|
NLIC |
|
|
|
$ 18 |
|
$
560 |
|
$
397 |
NLAIC |
|
|
|
$ (61) |
|
$
(50) |
|
$
(61) |
|
|
|
|
|
|
|
|
|
Statutory capital and surplus |
|
|
|
|
|
|
|
|
NLIC |
|
|
|
$ 3,591 |
|
$
3,686 |
|
$
3,130 |
NLAIC |
|
|
|
$ 302 |
|
$ 287 |
|
$ 214 |
On December 31, 2009, NLIC merged with its
affiliate, NLICA, with NLIC as the surviving entity. In addition, NLIC’s subsidiary, NLAIC, merged with a subsidiary of NLICA, NLACA, effective as of December 31, 2009, with NLAIC as the surviving entity. See Note 2 for
details on the accounting treatment of this transaction.
Dividend
Restrictions
The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of
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 (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior
year. During the year ended December 31, 2011, 2010 and 2009, NLIC did not pay any dividends to NFS. As of January 1, 2012, NLIC has the ability to pay dividends to NFS totaling $359 million without obtaining prior
approval.
The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned capital and
surplus is defined under the State of Ohio insurance laws as the amount equal to the 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 capital and surplus must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment
of dividends by the Company may also be subject to restrictions set forth in the insurance laws of the state of New York that limit the amount of statutory profits on the Company’s participating policies (measured before dividends to
policyholders) available for the benefit of the Company and its stockholders.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The Company currently does not expect such
regulatory requirements to impair its ability to pay operating expenses and dividends in the future.
Regulatory Risk-Based
Capital
The National Association of Insurance Commissioners’ (NAIC) Risk Based Capital (RBC) model law requires every insurer to calculate its total adjusted capital and RBC
requirement to ensure insurer solvency. Regulatory guidelines provide for an insurance commissioner to intervene if the insurer experiences financial difficulty, as evidenced by a company’s total adjusted capital falling below established
relationships to required RBC. The model includes components for asset risk, liability risk, interest rate exposure and other factors. The State of Ohio, where NLIC and NLAIC are domiciled, imposes minimum RBC requirements that were developed by the
NAIC. The formulas for determining the amount of RBC 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 total adjusted capital, as defined by the NAIC, to authorized control level RBC, 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 exceeded the minimum RBC requirements for all periods presented herein.
(15)
Other Comprehensive Income
The Company’s other comprehensive income and
loss includes net income (loss) and certain items that are reported directly within separate components of shareholder’s equity that are not recorded in net income.
The following table summarizes the Company’s other comprehensive income for the years ended December 31:
(in millions) |
Unrealized gains on available-for-sale securities |
Unrealized gains (losses) on derivatives used in cash flow hedging relationships |
Other unrealized losses |
Total other comprehensive income |
Year ended December 31, 2011 |
|
|
|
|
Other comprehensive
income before federal income taxes |
438 |
18 |
- |
456 |
Federal income tax expense |
(145) |
(6) |
- |
(151) |
Total other comprehensive income |
293 |
12 |
- |
305 |
|
|
|
|
|
Year ended December 31, 20101 |
|
|
|
|
Other comprehensive
income before federal income taxes |
862 |
27 |
- |
889 |
Federal income tax expense |
(302) |
(9) |
- |
(311) |
Total other comprehensive income |
560 |
18 |
- |
578 |
|
|
|
|
|
Year ended December 31, 20092 |
|
|
|
|
Other comprehensive
income (loss) before federal income taxes |
2,088 |
(4) |
(14) |
2,070 |
Federal income tax (expense) benefit |
(731) |
1 |
5 |
(725) |
Total other comprehensive income (loss) |
1,357 |
(3) |
(9) |
1,345 |
_______
|
1 |
During 2010, the adoption of ASU 2010-11 resulted in a cumulative effect adjustment of $9 million, net of taxes, to retained earnings with a
corresponding adjustment to AOCI, which is excluded from the table above. |
|
2 |
The adoption of guidance impacting FASB ASC 320-10, Investments – Debt and Equity
Securities during 2009 resulted in a cumulative-effect adjustment of $250 million, net of taxes, to reclassify the non-credit component of previously recognized other-than-temporary impairment losses from the beginning balance of retained
earnings to AOCI, which is excluded from the table above. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(16) |
Related Party Transactions |
The Company has entered into significant, recurring transactions and agreements with NMIC, other affiliates and subsidiaries as a part of its ongoing operations. These
include annuity and life insurance contracts, employee benefit plans, office space leases, and agreements related to reinsurance, cost sharing, administrative services, marketing, intercompany loans, intercompany repurchases, cash management
services and software licensing. Measures used to allocate expenses among companies include individual employee estimates of time spent, special cost studies, the number of full-time employees, commission expense and other methods agreed
to by the participating companies.
In addition, Nationwide Services Company, LLC (NSC), a subsidiary of NMIC, provides data processing, systems development, hardware and software support, telephone, mail and other
services to the Company, based on specified rates for units of service consumed. For the years ended December 31, 2011, 2010, and 2009, the Company made payments to NMIC and NSC totaling $241 million, $250 million, and $241 million,
respectively.
The Company has issued group annuity and life insurance contracts and performs administrative services for various employee benefit plans sponsored by NMIC or its
affiliates. Total account values of these contracts were $3.0 billion as of December 31, 2011 and 2010. Total revenues from these contracts were $148 million, $139 million, and $143 million for the years ended December 31,
2011, 2010, and 2009, respectively, and include policy charges, net investment income from investments backing the contracts and administrative fees. Total interest credited to the account balances was $122 million, $115 million, and $116
million for the years ended December 31, 2011, 2010, and 2009, respectively. The terms of these contracts are materially consistent with what the Company offers to unaffiliated parties.
The Company leases office space from NMIC. For the years ended December 31, 2011, 2010 and 2009, the Company made lease payments to NMIC of $14 million, $20 million,
and $21 million, respectively. In addition, the Company leases office space to an affiliate of NMIC.
NLIC has a reinsurance agreement with NMIC whereby
all of NLIC’s accident and health business not ceded to unaffiliated reinsurers is ceded to NMIC on a modified coinsurance basis. Either party may terminate the agreement on January 1 of any year with prior notice. Under
a modified coinsurance agreement, the ceding company retains invested assets, and investment earnings are paid to the reinsurer. Under the terms of NLIC’s agreements, the investment risk associated with changes in interest rates is
borne by the reinsurer. 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 for the years ended December 31, 2011, 2010, and 2009 were $203 million, $209 million, and $177 million, respectively, while
benefits, claims and expenses ceded during these years were $212 million, $241 million, and $196 million, respectively.
Funds of Nationwide Funds Group (NFG), an
affiliate, are offered to the Company’s customers as investment options in certain of the Company’s products. As of December 31, 2011, 2010, and 2009, customer allocations to NFG funds totaled $21.9 billion, $30.5 billion, and
$23.7 billion, respectively. For the years ended December 31, 2011, 2010, and 2009, NFG paid the Company $129 million, $103 million, and $79 million, respectively, for the distribution and servicing of these funds.
Amounts on deposit with NCMC for the benefit of the Company were $994 million and $762 million as of December 31, 2011 and 2010, respectively.
Refer to Note 12 for discussion of variable funding surplus note between Olentangy Reinsurance, LLC and Nationwide Corporation.
Certain annuity products are sold through affiliated companies, which are also subsidiaries of NFS. Total commissions and fees paid to these affiliates for the years
ended December 31, 2011, 2010, and 2009 were $64 million, $61 million, and $48 million, respectively.
During 2009, NLIC received a $20 million capital
contribution from NFS.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
During 2011 and 2010, the Company sold, at fair
value, commercial mortgage loans with a carrying value of $41 million and $117 million, respectively, to NMIC. The sales resulted in a net realized loss of $5 million and $21 million in 2011 and 2010, respectively.
Legal and Regulatory
Matters
The Company is a subject to legal and regulatory proceedings in the ordinary course of its business. The Company’s legal and regulatory matters include proceedings specific
to the Company and other proceedings generally applicable to business practices in the industries in which the Company operates. The Company’s litigation and regulatory matters are subject to many uncertainties, and given their
complexity and scope, their outcomes cannot be predicted. Regulatory proceedings also could affect the outcome of one or more of the Company’s litigations matters. Furthermore, it is often not possible to determine the
ultimate outcomes of the pending regulatory investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some matters, including certain of those referred to below, are in very
preliminary stages, and the Company does not have sufficient information to make an assessment of the plaintiffs’ claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet
decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages
and equitable remedies, which are difficult to quantify and cannot be defined based on the information currently available. The Company believes, however, that based on currently known information, the ultimate outcome of all pending
legal and regulatory matters is not likely to have a material adverse effect on the Company’s consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that such outcomes could materially affect the Company’s consolidated financial position or results of operations in a particular quarter or annual period.
The financial services industry has been the subject of increasing scrutiny on a broad range of issues by regulators and legislators. The Company and/or its affiliates have been
contacted by, self reported or received subpoenas from state and federal regulatory agencies, including the Securities and Exchange Commission, and other governmental bodies, state securities law regulators and state attorneys general for
information relating to, among other things, sales compensation, the allocation of compensation, unsuitable sales or replacement practices, and claims handling and escheatment practices. The Company is cooperating with and responding to
regulators in connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass NMIC’s operations.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
On November 20, 2007, Nationwide Retirement
Solutions, Inc. (NRS) and NLIC were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama entitled Ruth A. Gwin and Sandra H. Turner, and a class of similarly situated
individuals v Nationwide Life Insurance Company, Nationwide Retirement Solutions, Inc., Alabama State Employees Association, PEBCO, Inc. and Fictitious Defendants A to Z. On March 12, 2010, NRS and NLIC were named in a Second Amended Class
Action Complaint filed in the Circuit Court of Jefferson County, Alabama entitled Steven E. Coker, Sandra H. Turner, David N. Lichtenstein and a class of similarly situated individuals v. Nationwide
Life Insurance Company, Nationwide Retirement Solutions, Inc, Alabama State Employees Association, Inc., PEBCO, Inc. and Fictitious Defendants A to Z claiming to represent a class of all participants in the Alabama State Employees
Association, Inc. (ASEA) Plan, excluding members of the Deferred Compensation Committee, ASEA's directors, officers and board members, and PEBCO's directors, officers and board members. On October 22, 2010, the parties to this action executed a
stipulation of settlement that agrees to certify a class for settlement purposes only, that provides for payments to the settlement class, and that provides for releases, certain bar orders, and dismissal of the case, subject to the Circuit Courts'
approval. The Courts have approved the settlement and the settlement amounts have been paid, but have not yet been distributed to class members. On February 28, 2011, the Court in the Gwin case entered its Order permitting ASEA/PEBCO to assert
indemnification claims for attorneys’ fees and costs, but barring them from asserting any other claims for indemnification. On April 22, 2011, ASEA and PEBCO filed a second amended cross claim complaint in the Gwin case against NLIC and NRS
seeking indemnification. These claims seeking indemnification remain severed. On April 29, 2011, the Companies filed a motion to dismiss ASEA’s and PEBCO’s amended cross complaint or alternatively for summary judgment. On December 6,
2011 the Court entered an Order that NRS owes indemnification to ASEA and PEBCO for the Coker (Gwin) class action, that NRS does not have a duty to indemnify ASEA and PEBCO for fees associated with the Interpleader action that NRS filed in
Montgomery County and dismissing NLIC. On December 31, 2011, the Court denied NRS’s motion to certify this order for an interlocutory appeal. NRS continues to defend this case vigorously.
On August 15, 2001, NFS and NLIC were named in a
lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v.
Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. In the plaintiffs' sixth amended complaint, filed November 18, 2009, they amended the list of named plaintiffs and claim to represent a class of qualified retirement
plan trustees under Employee Retirement Income Security Act of 1974 (ERISA) that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS breached
ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments allegedly received by NFS and NLIC, other unspecified relief for restitution, declaratory and
injunctive relief, and attorneys' fees. On November 6, 2009, the Court granted the plaintiff's motion for class certification and certified a class of “All trustees of all employee pension benefit plans covered by ERISA which had variable
annuity contracts with NFS and NLIC or whose participants had individual variable annuity contracts with NFS and NLIC at any time from January 1, 1996, or the first date NFS and NLIC began receiving payments from mutual funds based on a percentage
of assets invested in the funds by NFS and NLIC, whichever came first, to the date of November 6, 2009". On October 20, 2010, the Second Circuit Court of Appeals granted NLIC's 23(f) petition agreeing to hear an appeal of the District Court's order
granting class certification. On October 21, 2010, the District Court dismissed NFS from the lawsuit. On October 27, 2010, the District Court stayed the underlying action pending a decision from the Second Circuit Court of Appeals. On February 6,
2012, the Second Circuit Court of Appeals vacated the class certification order that was issued on November 6, 2009. NLIC continues to defend this lawsuit vigorously.
On May 14, 2010, NLIC was named in a lawsuit filed in the Western District of New York entitled Sandra L. Meidenbauer, on behalf
of herself and all others similarly situated v. Nationwide Life Insurance Company. The plaintiff claims to represent a class of all individuals who purchased a variable life insurance policy from NLIC during an unspecified period. The
complaint claims breach of contract, alleging that NLIC charged excessive monthly deductions and costs of insurance resulting in reduced policy values and, in some cases, premature lapsing of policies. The complaint seeks reimbursement of excessive
charges, costs, interest, attorney's fees, and other relief. NLIC filed a motion to dismiss the complaint on July 23, 2010. NLIC filed a motion to disqualify the proposed class representative on August 27, 2010. Plaintiff filed a motion to amend the
complaint on September 17, 2010, and NLIC filed an opposition to the motion to amend on November 2, 2010. On October 13, 2011, plaintiff voluntarily dismissed the lawsuit without prejudice.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
On October 22, 2010, NRS was named in a lawsuit
filed in the U.S. District Court, Middle District of Florida, Orlando Division entitled Camille McCullough, and Melanie Monroe, Individually and on behalf of all others similarly situated v. National
Association of Counties, NACo Research Foundation, NACo Financial Services Corp., NACo Financial Center, and Nationwide Retirement Solutions, Inc. The Plaintiffs’ First Amended Class Action Complaint and Demand for Jury Trial
was filed on February 18, 2011. If the Court determines that the Plans at issue in this case are governed by ERISA, then pursuant to FED. R. CIV. P. 23, Plaintiffs seek certification of a class defined as: All natural persons in the United States
who were employed at any point after October 29, 2004 by a government entity that is or was a member of the National Association of Counties, and who participate or participated in a Section 457 Deferred Compensation Plan administered by NRS under
the National Association of Counties Deferred Compensation Program. Alternatively, if the Court determines that the Plans are not governed by ERISA, then pursuant to FED. R. CIV. P. 23, Plaintiffs seek certification of a class defined as:
All natural persons in the United States who are currently employed or previously were employed at any point after October 29, 2006, by a government entity that is or was a member of the National Association of Counties (NACo), and who participate
or participated in a Section 457 Deferred Compensation Plan administered by NRS under the National Association of Counties Deferred Compensation Program. The First Amended Complaint alleges ERISA Violation, Breach of Fiduciary Duty - NACo, Aiding
and Abetting Breach of Fiduciary Duty - NRS, Breach of Fiduciary Duty - NRS, and Aiding and Abetting Breach of Fiduciary Duty - NACo. The First Amended Complaint asks for actual damages, lost profits, lost opportunity costs, restitution, and/or
other injunctive or other relief, including without limitation (a) ordering NRS and NACo to restore all plan losses, (b) ordering NRS to refund all fees associated with NRS’s Plan to Plaintiffs and Class members, (c) ordering NACo and NRS to
pay the expenses and losses incurred by Plaintiffs and/or any Class member as a proximate result of Defendants’ breaches of fiduciary duty, (d) forcing NACo to forfeit the fees that NACo received from NRS for promoting and endorsing its Plan
and disgorging all profits, benefits, and other compensation obtained by NACo from its wrongful conduct, and (e) awarding Plaintiff and Class members their reasonable and necessary attorney’s fees and cost incurred in connection with this
suit, punitive damages, and pre-judgment and post judgment interest, at the highest rates allowed by law, on the damages awarded. On March 21, 2011, NRS filed a motion to dismiss the plaintiffs' first amended complaint. On July
1, 2011, the plaintiffs filed their motion for class certification and later sought to amend their complaint. On November 25, 2011 the District Court entered an Order granting NACO's motion to dismiss, NRS's motion to dismiss, denying plaintiffs'
motion to file an amended complaint, that all other remaining pending motions are moot, dismissing the class-wide claims with prejudice, dismissing individual claims without prejudice, and ordering the Clerk to close this case. On December 27, 2011,
the plaintiffs filed a notice of appeal. NRS intends to defend this case vigorously.
On December 27, 2006, NLIC and NRS were named as
defendants in a lawsuit filed in Circuit Court, Cole County Missouri entitled State of Missouri, Office of Administration, and Missouri State Employees Deferred Comp Plan v NLIC and
NRS. The complaint seeks recovery for breach of contract and breach of the implied covenant of good faith and fair dealing against NLIC and NRS as well as a breach of fiduciary duty against NRS. The complaint seeks to
recover the amount of the market value adjustment withheld by NLIC ($19 million), prejudgment interest, loss of investment income from ING due to the Companies’ assessment of the market value adjustment. On March 8, 2007 the
Companies filed a motion to remove this case from state court to federal court in Missouri. On March 20, 2007 the State filed a motion to remand to state court and to stay court order. On April 3, 2007 the case was remanded to
state court. On June 25, 2007 the Companies filed an Answer. On October 16, 2009, the plaintiff filed a partial motion for summary judgment. On November 20, 2009, the Companies filed a response to the plaintiff's
motion for summary judgment and also filed a motion for summary judgment on behalf of the Companies. On February 26, 2010, the court denied Missouri's partial motion for summary judgment and granted the Companies’ motion for summary
judgment and dismissed the case. On March 8, 2011, the Missouri Court of Appeals reversed the granting of the Companies’ motion for summary judgment and directed the trial court to enter judgment in favor of the State and against
the Companies’ in the amount of $19 million, plus statutory interest at the rate of 9% per annum from June 2, 2006. On March 22, 2011, the Companies filed with the Missouri Court of Appeals, a motion for rehearing and an application for
transfer to the Supreme Court of Missouri. On May 3, 2011, the Missouri Court of Appeals for the Western District overruled the Companies motion for rehearing and denied the motion to transfer the case to the Missouri Supreme Court. On June 28,
2011, the Companies application to the Missouri Supreme Court to hear a further appeal was denied. On July 1, 2011, the Companies paid the amount of the judgment plus simple interest at 9%. On August 9, 2011, the plaintiffs filed a Satisfaction of
Judgment.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
On June 8, 2011, NMIC and NLIC were named in a
lawsuit filed in Court of Common Pleas, Cuyahoga County, Ohio entitled Stanley Andrews and Donald Clark, on their behalf and on behalf of the class defined herein v. Nationwide Mutual Insurance Company and Nationwide Life Insurance Company. The complaint alleges that NMIC and NLIC have an obligation to review the Social Security Administration Death
Master File database for all life insurance policyholders who have at least a 70% probability of being deceased according to actuarial tables. The complaint further alleges that NMIC and NLIC are not conducting such a
review. The complaint seeks injunctive relief and declaratory judgment requiring NMIC and NLIC to conduct such a review, and alleges NMIC and NLIC have violated the covenant of good faith and fair dealing and have been unjustly enriched
by not having conducted such reviews. The complaint seeks certification as a class action. On July 13, 2011, NMIC and NLIC filed a motion to dismiss the case. Plaintiffs filed their opposition
to NMIC and NLIC’s motion to dismiss on December 19, 2011. By order dated January 18, 2012, the State Court issued an order dismissing the lawsuit. The State Court issued its opinion on January 23,
2012. Plaintiffs filed a Notice of Appeal to the Eighth District Court of Appeals on January 30, 2012.
Tax Matters
The Company’s federal income tax returns are routinely audited by the IRS. Management has established tax reserves as described in Note 2. Management believes its tax
reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.
In July 2009, the IRS completed an audit of the
Company’s tax years 2003 to 2005 and issued a Revenue Agent’s Report (RAR) and 30-Day Letter. The RAR challenged the Company’s dividends received deduction which the Company appealed based on the technical
merits. In 2011, the Company favorably settled this position through IRS Appeals and as a result recorded previously unrecognized tax benefits.
Indemnifications
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions,
divestitures and leases. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are
often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation
is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically,
the Company has not made any material payments pursuant to these obligations.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(18)
Reinsurance
The following table summarizes the effects of reinsurance on life, accident and health insurance in force and premiums for the years ended December 31:
(in millions) |
2011 |
2010 |
2009 |
|
|
|
|
Premiums |
|
|
|
Direct |
$ 832 |
$
808 |
$
761 |
Assumed |
- |
5 |
12 |
Ceded |
(301) |
(329) |
(303) |
Net |
$ 531 |
$ 484 |
$ 470 |
|
|
|
|
Life, accident and health insurance in force |
|
|
|
Direct |
$ 209,732 |
$
208,920 |
$
208,485 |
Assumed |
5 |
10 |
8 |
Ceded |
(60,499) |
(64,755) |
(76,136) |
Net |
$ 149,238 |
$ 144,175 |
$ 132,357 |
Total amounts recoverable under reinsurance
contracts totaled $704 million, $739 million and $755 million as of December 31, 2011, 2010 and 2009, respectively.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
(19)
Segment Information
Management views the Company’s business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual
Investments, Retirement Plans, Individual Protection, and Corporate and Other.
The primary segment profitability measure that
management uses is a non-GAAP financial measure called pre-tax operating earnings (loss), which is calculated by adjusting income before federal income taxes to exclude: (1) net realized investment gains and losses, except for operating items
(periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, net realized gains and losses related to hedges on
GMDB contracts and securitizations); (2) other-than-temporary impairment losses; (3) the adjustment to amortization of DAC and VOBA related to net realized investment gains and losses; and (4) net loss attributable to noncontrolling
interest.
Individual Investments
The Individual Investments segment consists of
individual annuity products marketed under the Nationwide DestinationSM and other Nationwide-specific or private label brands. Deferred annuity contracts
provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, deferred variable annuity contracts provide the customer
with access to a wide range of investment options and asset protection features, while deferred fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods. Immediate annuities differ from
deferred annuities in that the initial premium is exchanged for a stream of income for a certain period or for the owner’s lifetime without future access to the original investment. The majority of assets and recent
sales for the Individual Investments segment consist of deferred variable annuities.
Retirement Plans
The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector primarily includes Internal
Revenue Code (IRC) Section 401 fixed and variable group annuity business, and the public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and
variable group annuities as well as administration-only business.
Individual
Protection
The Individual Protection segment consists of life insurance products, including individual variable, COLI and BOLI products; traditional life insurance products; and universal
life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.
Corporate and
Other
The Corporate and Other segment includes non-operating realized gains and losses and related amortization, including mark-to-market adjustments on embedded derivatives, net of
economic hedges, related to products with certain living benefits; other-than-temporary impairment losses, and other revenues and expenses not allocated to other segments.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
The following tables summarize the Company’s
business segment operating results for the years ended December 31:
|
Individual |
Retirement |
Individual |
Corporate |
|
(in millions) |
Investments |
Plans |
Protection |
and Other |
Total |
2011 |
|
|
|
|
|
Revenues: |
|
|
|
|
|
Policy charges |
$ 781 |
$ 96 |
$ 629 |
$ - |
$ 1,506 |
Premiums |
234 |
- |
297 |
- |
531 |
Net investment income
|
527 |
715 |
533 |
69 |
1,844 |
Non-operating net realized investment losses1 |
- |
- |
- |
(1,546) |
(1,546) |
Other-than-temporary impairment
losses |
- |
- |
- |
(67) |
(67) |
Other
revenues2 |
(59) |
- |
- |
(1) |
(60) |
Total revenues |
$ 1,483 |
$ 811 |
$ 1,459 |
$ (1,545) |
$ 2,208 |
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
Interest credited to policyholder
accounts |
$ 374 |
$ 441 |
$ 198 |
$ 20 |
$ 1,033 |
Benefits and claims
|
476 |
- |
598 |
(12) |
1,062 |
Policyholder dividends
|
- |
- |
67 |
- |
67 |
Amortization of DAC
|
96 |
19 |
103 |
(142) |
76 |
Amortization of VOBA and other
intangible assets |
1 |
- |
12 |
(2) |
11 |
Interest expense |
- |
- |
- |
70 |
70 |
Other operating expenses |
182 |
158 |
181 |
88 |
609 |
Total benefits and expenses |
$ 1,129 |
$ 618 |
$ 1,159 |
$ 22 |
$ 2,928 |
Income
(loss) before federal income taxes |
|
|
|
|
|
and noncontrolling interests
|
$ 354 |
$ 193 |
$ 300 |
$ (1,567) |
$ (720) |
Less: non-operating net realized investment losses1 |
- |
- |
- |
1,546 |
|
Less: non-operating net
other-than-temporary
impairment losses |
- |
- |
- |
67 |
|
Less: adjustment to amortization of DAC and
other
related to net realized investment gains and losses |
|
- |
- |
- |
(156) |
|
Less: net loss attributable to noncontrolling interest |
- |
- |
- |
56 |
|
Pre-tax operating earnings (loss) |
$ 354 |
$ 193 |
$ 300 |
$ (54) |
|
|
|
|
|
|
|
Assets as of year end |
$ 58,218 |
$ 25,211 |
$ 22,959 |
$ 6,294 |
$ 112,682 |
_________
|
1 |
Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net
realized gains and losses related to hedges on GMDB contracts and securitizations). |
|
2 |
Includes operating items discussed above. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
|
Individual |
Retirement |
Individual |
Corporate |
|
(in millions) |
Investments |
Plans |
Protection |
and Other |
Total |
2010 |
|
|
|
|
|
Revenues: |
|
|
|
|
|
Policy charges |
$
646 |
$
98 |
$
652 |
$
3 |
$
1,399 |
Premiums |
209 |
- |
275 |
- |
484 |
Net investment income
|
569 |
691 |
510 |
55 |
1,825 |
Non-operating net realized investment losses1 |
- |
- |
- |
(177) |
(177) |
Other-than-temporary impairment
losses |
- |
- |
- |
(220) |
(220) |
Other
revenues2 |
(82) |
- |
- |
25 |
(57) |
Total revenues |
$ 1,342 |
$ 789 |
$ 1,437 |
$ (314) |
$ 3,254 |
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
Interest credited to policyholder
accounts |
$
391 |
$
424 |
$
199 |
$
42 |
$
1,056 |
Benefits and claims
|
354 |
- |
524 |
(5) |
873 |
Policyholder dividends
|
- |
- |
78 |
- |
78 |
Amortization of DAC
|
231 |
30 |
184 |
(49) |
396 |
Amortization of VOBA and other
intangible assets |
1 |
- |
19 |
(2) |
18 |
Interest expense |
- |
- |
- |
55 |
55 |
Other operating expenses |
180 |
143 |
172 |
79 |
574 |
Total benefits and expenses |
$ 1,157 |
$ 597 |
$ 1,176 |
$ 120 |
$ 3,050 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before federal income taxes |
|
|
|
|
|
and noncontrolling interests
|
$
185 |
$
192 |
$
261 |
$
(434) |
$ 204 |
Less: non-operating net realized investment losses1 |
- |
- |
- |
177 |
|
Less: non-operating net
other-than-temporary
impairment losses |
- |
- |
- |
220 |
|
Less: adjustment to amortization of DAC and
other
related to net realized investment gains and losses |
|
|
- |
- |
- |
(59) |
|
Less: net loss attributable to noncontrolling interest |
- |
- |
- |
60 |
|
Pre-tax operating earnings (loss) |
$ 185 |
$ 192 |
$ 261 |
$ (36) |
|
|
|
|
|
|
|
Assets as of year end |
$ 53,113 |
$ 25,599 |
$ 22,874 |
$ 5,811 |
$ 107,397 |
|
1 |
Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net
realized gains and losses related to hedges on GMDB contracts and securitizations). |
|
2 |
Includes operating items discussed above. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial
Statements, Continued
December 31, 2011, 2010 and 2009
|
Individual |
Retirement |
Individual |
Corporate |
|
(in millions) |
Investments |
Plans |
Protection |
and Other |
Total |
2009 |
|
|
|
|
|
Revenues: |
|
|
|
|
|
Policy charges |
$ 522 |
$ 93 |
$ 634 |
$ (4) |
$ 1,245 |
Premiums |
191 |
- |
279 |
- |
470 |
Net investment income |
562 |
679 |
492 |
146 |
1,879 |
Non-operating net realized investment gains1 |
- |
- |
- |
619 |
619 |
Other-than-temporary impairment losses |
- |
- |
- |
(575) |
(575) |
Other
revenues2 |
(168) |
- |
- |
(1) |
(169) |
Total revenues |
$ 1,107 |
$ 772 |
$ 1,405 |
$ 185 |
$ 3,469 |
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
Interest credited to policyholder accounts |
$ 394 |
$ 433 |
$ 201 |
$ 72 |
$ 1,100 |
Benefits and claims |
247 |
- |
538 |
27 |
812 |
Policyholder dividends |
- |
- |
87 |
- |
87 |
Amortization of DAC |
(1) |
45 |
158 |
264 |
466 |
Amortization of VOBA and other intangible assets |
1 |
9 |
45 |
8 |
63 |
Interest expense |
- |
- |
- |
55 |
55 |
Other operating expenses |
178 |
149 |
184 |
68 |
579 |
Total benefits and expenses |
$ 819 |
$ 636 |
$ 1,213 |
$ 494 |
$ 3,162 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes |
|
|
|
|
|
and noncontrolling interests
|
$
288 |
$
136 |
$
192 |
$
(309) |
$ 307 |
Less: non-operating net realized investment gains1 |
- |
- |
- |
(619) |
|
Less: non-operating net
other-than-temporary
impairment losses |
- |
- |
- |
575 |
|
Less: adjustment to amortization of DAC and
other
related to net realized investment gains and losses |
|
- |
- |
- |
297 |
|
Less: net loss attributable to noncontrolling interest |
- |
- |
- |
52 |
|
Pre-tax operating earnings (loss) |
$ 288 |
$ 136 |
$ 192 |
$ (4) |
|
|
|
|
|
|
|
Assets as of year end |
$ 48,891 |
$ 25,035 |
$ 22,115 |
$ 2,948 |
$ 98,989 |
|
1 |
Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net
realized gains and losses related to hedges on GMDB contracts and securitizations). |
|
2 |
Includes operating items discussed above. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule
I Consolidated Summary of Investments – Other Than Investments in Related Parties
As of December 31, 2011 (in millions)
Column A |
|
Column B |
|
Column C |
|
Column D |
|
|
|
|
|
|
Amount at |
|
|
|
|
|
|
which shown |
|
|
|
|
|
|
in the |
|
|
|
|
Fair |
|
consolidated |
Type of investment |
|
Cost |
|
value |
|
balance sheet |
|
|
|
|
|
|
|
Fixed maturity securities, available-for-sale: |
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government |
|
|
|
|
|
|
corporations and agencies |
|
$ 506 |
|
$ 630 |
|
$ 630 |
Obligations of states and political subdivisions |
|
1,501 |
|
1,678 |
|
1,678 |
Debt securities issued by foreign governments |
|
102 |
|
120 |
|
120 |
Public utilities |
|
2,429 |
|
2,687 |
|
2,687 |
All other corporate |
|
22,939 |
|
24,086 |
|
24,086 |
Total fixed maturity securities, available-for-sale |
|
$ 27,477 |
|
$ 29,201 |
|
$ 29,201 |
Equity securities, available-for-sale: |
|
|
|
|
|
|
Common stocks: |
|
|
|
|
|
|
Industrial, miscellaneous and all other |
|
$ 6 |
|
$ 6 |
|
$ 6 |
Nonredeemable preferred stocks |
|
13 |
|
14 |
|
14 |
Total equity securities, available-for-sale |
|
$ 19 |
|
$ 20 |
|
$ 20 |
Trading assets |
|
49 |
|
38 |
|
38 |
Mortgage loans, net of allowance |
|
5,801 |
|
|
|
5,748 |
Policy loans |
|
1,008 |
|
|
|
1,008 |
Other investments |
|
528 |
|
|
|
528 |
Short-term investments |
|
1,125 |
|
|
|
1,125 |
Total investments |
|
$ 36,007 |
|
|
|
$ 37,668 |
__________
|
1 Difference from Column B primarily is
attributable to valuation allowances due to impairments on mortgage loans (see Note 6 to the audited consolidated financial statements), hedges and commitment hedges on mortgage loans. |
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule
III Supplementary Insurance Information
As of December 31, 2011, 2010 and 2009 and for each of the years then ended (in millions)
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 |
Year: Segment |
|
costs |
|
loss expenses |
|
premiums1
|
|
benefits
payable1 |
|
revenue |
2011 |
|
|
|
|
|
|
|
|
|
|
Individual Investments |
|
$ 2,709 |
|
$ 12,550 |
|
|
|
|
|
$ 234 |
Retirement Plans |
|
269 |
|
12,638
|
|
|
|
|
|
- |
Individual Protection |
|
1,877 |
|
9,338 |
|
|
|
|
|
297 |
Corporate and Other |
|
(430) |
|
726 |
|
|
|
|
|
- |
Total |
|
$ 4,425 |
|
$ 35,252 |
|
|
|
|
|
$ 531 |
2010 |
|
|
|
|
|
|
|
|
|
|
Individual Investments |
|
$ 2,126 |
|
$ 10,541 |
|
|
|
|
|
$ 209 |
Retirement Plans |
|
269 |
|
11,874 |
|
|
|
|
|
- |
Individual Protection |
|
1,795 |
|
9,163 |
|
|
|
|
|
275 |
Corporate and Other |
|
(217) |
|
1,098 |
|
|
|
|
|
- |
Total |
|
$ 3,973 |
|
$ 32,676 |
|
|
|
|
|
$ 484 |
2009 |
|
|
|
|
|
|
|
|
|
|
Individual Investments |
|
$ 1,911 |
|
$ 10,871 |
|
|
|
|
|
$ 191 |
Retirement Plans |
|
271 |
|
11,703 |
|
|
|
|
|
- |
Individual Protection |
|
1,770 |
|
8,745 |
|
|
|
|
|
279 |
Corporate and Other |
|
31 |
|
1,831 |
|
|
|
|
|
|
Total |
|
$ 3,983 |
|
$ 33,150 |
|
|
|
|
|
$ 470 |
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column G |
|
Column H |
|
Column I |
|
Column J |
|
Column K |
|
|
Net |
|
Benefits,
claims, |
|
Amortization
|
|
Other |
|
|
|
|
investment
|
|
losses and
|
|
of deferred
policy |
|
operating |
|
Premiums |
Year: Segment |
|
income2 |
|
settlement expenses |
|
acquisition costs |
|
expenses2
|
|
written |
2011 |
|
|
|
|
|
|
|
|
|
|
Individual Investments |
|
$ 527 |
|
$
850 |
|
$ 96
|
|
$ 183 |
|
|
Retirement Plans |
|
715 |
|
441 |
|
19 |
|
158
|
|
|
Individual Protection |
|
533 |
|
863 |
|
103
|
|
193
|
|
|
Corporate and Other |
|
69 |
|
8 |
|
(142) |
|
156
|
|
|
Total |
|
$ 1,844 |
|
$ 2,162
|
|
$ 76
|
|
$ 690 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Individual Investments |
|
$ 569 |
|
$
745 |
|
$ 231 |
|
$ 181 |
|
|
Retirement Plans |
|
691 |
|
424 |
|
30 |
|
143 |
|
|
Individual Protection |
|
510 |
|
801 |
|
184 |
|
191 |
|
|
Corporate and Other |
|
55 |
|
37 |
|
(49) |
|
132 |
|
|
Total |
|
$ 1,825 |
|
$ 2,007 |
|
$ 396 |
|
$ 647 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Individual Investments |
|
$ 562 |
|
$
641 |
|
$ (1) |
|
$ 179 |
|
|
Retirement Plans |
|
679 |
|
433 |
|
45 |
|
158 |
|
|
Individual Protection |
|
492 |
|
826 |
|
158 |
|
229 |
|
|
Corporate and Other |
|
146 |
|
99 |
|
264 |
|
131 |
|
|
Total |
|
$ 1,879 |
|
$ 1,999 |
|
$ 466 |
|
$ 697 |
|
|
________
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 numerous assumptions and estimates, and reported segment operating results would change if different methods were applied.
See accompanying notes to consolidated financial statements and report of independent
registered public accounting firm.
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule
IV Reinsurance
As of December 31, 2011, 2010
and 2009 and for each of the years then ended (in millions)
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 |
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life, accident and health |
|
|
|
|
|
|
|
|
insurance in force |
|
$ 209,732 |
|
$ (60,499) |
|
$ 5 |
|
$ 149,238 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
Life insurance
1 |
|
$ 596 |
|
$ (65) |
|
$ - |
|
$ 531 |
|
- |
Accident and health insurance |
|
236 |
|
(236) |
|
- |
|
- |
|
- |
Total |
|
$ 832 |
|
$ (301) |
|
$ - |
|
$ 531 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life, accident and health |
|
|
|
|
|
|
|
|
insurance in force |
|
$ 208,920 |
|
$ (64,755) |
|
$ 10 |
|
$ 144,175 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
Life insurance
1 |
|
$ 570 |
|
$ (88) |
|
$ 1 |
|
$ 483 |
|
0.2% |
Accident and health insurance |
|
238 |
|
(241) |
|
4 |
|
1 |
|
NM |
Total |
|
$ 808 |
|
$ (329) |
|
$ 5 |
|
$ 484 |
|
1.0% |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life, accident and health |
|
|
|
|
|
|
|
|
insurance in force |
|
$ 208,485 |
|
$ (76,136) |
|
$ 8 |
|
$ 132,357 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
Life insurance 1 |
|
$ 549 |
|
$ (80) |
|
$ - |
|
$ 469 |
|
- |
Accident and health insurance |
|
212 |
|
(223) |
|
12 |
|
1 |
|
NM |
Total |
|
$ 761 |
|
$ (303) |
|
$ 12 |
|
$ 470 |
|
2.6% |
__________
|
1 |
Primarily represents premiums from traditional life insurance and life-contingent immediate annuities and excludes deposits on investment and
universal life insurance products. |
NATIONWIDE LIFE INSURANCE COMPANY
AND SUBSIDIARIES
(a
wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule
V Valuation and Qualifying Accounts
Years ended December 31, 2011, 2010, and 2009 (in millions)
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 |
|
Deductions1
|
|
period |
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
Valuation allowances - mortgage loans |
|
$ 96 |
|
$ 25 |
|
$ - |
|
$ 61 |
|
$ 60 |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Valuation allowances - mortgage loans |
|
$ 77 |
|
$ 66 |
|
$ - |
|
$ 47 |
|
$ 96 |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Valuation allowances - mortgage loans |
|
$ 42 |
|
$ 85 |
|
$ - |
|
$ 50 |
|
$ 77 |
__________
|
1 |
Amounts generally represent payoffs, sales and recoveries. |
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
Ohio's General Corporation Law expressly authorizes and Nationwide's Amended and Restated Code of Regulations provides for indemnification by Nationwide of any person who,
because such person is or was a director, officer or employee of Nationwide was or is a party; or is threatened to be made a party to:
· |
any threatened, pending or completed civil action, suit or proceeding;
|
· |
any threatened, pending or completed criminal action, suit or
proceeding; |
· |
any threatened, pending or completed administrative action or
proceeding; |
· |
any threatened, pending or completed investigative action or
proceeding. |
The indemnification will be for actual and reasonable expenses, including
attorney's fees, judgments, fines and amounts paid in settlement by such person in connection with such action, suit or proceeding, to the extent and under the circumstances permitted by Ohio's General Corporation Law. Nationwide has been
informed that in the opinion of the Securities and Exchange Commission, the indemnification of directors, officers or persons controlling Nationwide for liabilities arising under the Securities Act of 1933 ("Act") is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by a director, officer or controlling person in connection with the securities being registered, the
registrant will submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act. Nationwide and its directors, officers and/or controlling persons will be governed by the
final adjudication of such issue. Nationwide will not be required to seek the court's determination if, in the opinion of Nationwide's counsel, the matter has been settled by controlling precedent.
Item 15. Recent Sales of
Unregistered Securities – not applicable.
Item 16. Exhibits and
Financial Statement Schedules
(a)
Exhibit Description
1 |
Form of Underwriting Agreement - filed previously on October 2, 2008, with Pre-Effective Amendment 3 to Form S-1 for Nationwide Life Insurance Company, Registration No.
333-149613. |
2 |
Articles of Merger of Nationwide Life Insurance Company of America with and into Nationwide Life Insurance Company effective December 4, 2009 – filed previously on January
4, 2010, with N-4 Registration No. 333-164125. |
3(i) |
Amended Articles of Incorporation Nationwide Life Insurance Company - filed previously on October 2, 2008, with Pre-Effective Amendment 3 to Form S-1 for Nationwide Life
Insurance Company, Registration No. 333-149613. |
3(ii) |
Nationwide Life Insurance Company Amended and Restated Code of Regulations - filed previously on January 4, 2010, with N-4 Registration No. 333-164125. |
4(i) |
Individual Single Purchase Payment Immediate Fixed Income Annuity Non-Participating Contract - filed previously on February 10, 2009 with Pre-Effective Amendment 1 to Form S-1
for Nationwide Life Insurance Company, Registration No. 333-155368. |
4(ii) |
Form of Supplemental Option To The Individual Single Purchase Payment Immediate Fixed Income Annuity - filed previously on February 10, 2009 with Pre-Effective Amendment 1 to
Form S-1 for Nationwide Life Insurance Company, Registration No. 333-155368. |
4(iii) |
Form of Application for Individual Single Purchase Payment Immediate Fixed Income Annuity - filed previously on February 10, 2009 with Pre-Effective Amendment 1 to Form S-1 for
Nationwide Life Insurance Company, Registration No. 333-155368. |
5 |
Opinion Regarding Legality – Attached hereto. |
6 |
Not applicable |
7 |
Not applicable |
8 |
None. |
9 |
Not applicable |
10(i) |
Form of Administrative Services Agreement – filed previously on February 10, 2009 with Pre-Effective Amendment 1 to Form S-1 for Nationwide Life Insurance Company,
Registration No. 333-155368. |
10(ii) |
Tax Sharing Agreement dated as of January 2, 2009 between Nationwide Life Insurance Company and any corporation that is or may hereafter become a subsidiary of Nationwide Life
Insurance Company - Attached hereto. |
11 |
Not applicable |
12 |
Not applicable |
13 |
Not applicable |
14 |
Not applicable |
15 |
Not applicable |
16 |
Not applicable |
17 |
Not applicable |
18 |
Not applicable |
19 |
Not applicable |
20 |
Not applicable |
21 |
Subsidiaries of the Registrant - Attached hereto. |
22 |
Not applicable |
23(i) |
Consent of Independent Registered Public Accounting Firm - Attached hereto. |
23(ii) |
Consent of Counsel - See Exhibit 5. |
24 |
Power of Attorney - Attached hereto. |
25 |
Not applicable |
26 |
Not applicable |
27 |
Not applicable |
101.INS |
XBRL Instance Document - Attached hereto. |
101.SCH |
XBRL Taxonomy Extension Schema - Attached hereto. |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase - Attached hereto. |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase - Attached hereto. |
101.LAB |
XBRL Taxonomy Extension Label Linkbase - Attached hereto. |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase - Attached hereto. |
(b) |
Financial Statement Schedules |
Attached herein .
The undersigned registrant hereby undertakes:
|
(a)(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. Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective
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. |
Provided, however, that the undertakings set forth in paragraphs (i), (ii)
and (iii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the Registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of this registration statement.
|
(2) |
That, for the purpose of determining 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. |
|
(4) |
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as
part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as
of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of Contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
|
(5) |
That, for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the
securities: |
The undersigned Registrant undertakes that in a primary offering of
securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
(i) |
Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule
424; |
|
(ii) |
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by
the undersigned Registrant; |
|
(iii) |
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned
Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
|
(iv) |
Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
|
(b) |
The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement 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. |
|
(c) |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 ("Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officers or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Columbus, State of Ohio, on the 27 th day of March, 2012.
NATIONWIDE LIFE INSURANCE COMPANY |
(Registrant)
By:
/s/ TIMOTHY D. CRAWFORD |
Timothy D. Crawford
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the capacities and on this 27 th day of March, 2012.
|
|
KIRT A. WALKER |
|
Kirt A. Walker, President, Chief Operating Officer and Director |
|
MARK R. THRESHER |
|
Mark R. Thresher, Executive Vice President and Director |
|
TIMOTHY G. FROMMEYER |
|
Timothy G. Frommeyer, Senior Vice President-Chief Financial Officer and Director |
|
PETER A. GOLATO |
|
Peter A. Golato, Senior Vice
President-Nationwide Financial Network and Director |
|
STEPHEN S. RASMUSSEN |
|
Stephen S. Rasmussen,
Director |
|
|
|
|
|
|
By
/s/ TIMOTHY D. CRAWFORD |
|
Timothy D. Crawford |
|
Attorney-in-Fact |
|
|