Select Retirement
1933 Act File No. 333-_______
United States Securities and Exchange Commission
Washington, D.C. 20549
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
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6311
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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:
April 30, 2021
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. |
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If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration
statement
for the same offering. |
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|
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
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
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated
filer",
"smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
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Large
accelerated filer |
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Accelerated
filer |
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Non-accelerated
filer (Do not check if a smaller reporting company) |
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Smaller
reporting company |
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Emerging
growth company |
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Persons who are to respond to the
collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.
CALCULATION OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered |
Amount
to be Registered |
Proposed
Maximum Offering Price Per Unit |
Proposed
Maximum Aggregate Offering Price, including previously registered securities1 |
Amount
of Registration Fee, including fee paid for previously registered securities |
Single
Purchase Payment Deferred Index-Linked Annuity Contract |
N/A
|
N/A
|
$1,345,496,540.85
2 |
$150,974.18
3 |
1 |
The amount to be registered
and the proposed maximum offering price per unit are not applicable in that these contracts are not issued in predetermined amounts or units. The proposed maximum aggregate offering price is estimated solely for the purpose of determining the
registration fee. |
2 |
This registration statement
is registering $1,000,000,000 of additional securities. This registration statement also includes unsold securities previously registered under the Securities Act of 1933 ("Securities Act") on Form S-1 (File No. 333-229802) filed by the Registrant
on February 22, 2019 ("Prior Registration Statement"). Pursuant to Rule 415(a)(6) under the Securities Act, all unsold securities from the Prior Registration Statement will be added to this Registration Statement and the offering of securities under
the Prior Registration Statement will be deemed terminated as of the date of effectiveness of this Registration Statement. As of April 22, 2021, there were $345,496,540.85 of unsold securities registered pursuant to the Prior Registration Statement.
|
3 |
The
registrant is paying $109,100 to register the $1,000,000,000 of additional securities. Additionally, pursuant to Rule 415(a)(6) under the Securities Act, $41,874.18 (calculated at the rate in effect at the time the Prior Registration Statement was
filed) of filing fees paid in connection with the unsold securities from the Prior Registration Statement shall continue to apply to the unsold securities. |
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Nationwide Defined Protection® Annuity
Individual Single Purchase Payment Deferred Annuity Contract
with Index-Linked Strategies
Issued by
NATIONWIDE LIFE INSURANCE COMPANY
Prospectus Dated April 30, 2021
This prospectus describes the Nationwide Defined Protection® Annuity Contract (the "Contract"), including all material rights and obligations under the Contract. Please read this
prospectus carefully and keep it for future reference. Special terms used throughout this prospectus are defined under "Defined Terms."
The Contract is issued by us, Nationwide Life Insurance
Company. The Contract is designed to help you invest on a tax-deferred basis and meet long-term financial goals. You may select one or more investment options, each linking to the performance of a specific market index and including a defined level
of protection against loss.
We refer to these investment
options as "Strategies." Currently, each Strategy is linked to one of the following indexes:
BlackRock
Select Factor Index |
J.P.
Morgan Mozaic IISM Index |
MSCI
EAFE Index |
NYSE
® Zebra Edge® Index |
SG
Macro Compass Index |
S&P
500SM Average Daily Risk Control 10% USD Price Return Index |
S&P
500® Index |
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An investment in a Strategy does not represent an investment
in the linked index or any securities or other assets included in the linked index.
Each Strategy has a start date and an end date, and we refer
to the duration between those two dates as the "Strategy Term." At the end of a Strategy Term, you may reinvest in the same Strategy or transfer your money to another Strategy available for investment. You cannot transfer between Strategies until
the end of a Strategy Term.
Your Contract will gain or
lose value based on the performance of your Strategies. Your gains and losses depend on the application of important factors that make up the Strategy. In addition to the linked index, the length of the Strategy Term, and the defined downside
protection, these factors include a "Participation Rate" and "Strategy Spread."
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The Participation Rate acts as
a multiplier because it has the effect of multiplying the performance of the Index, positive or negative. If the Participation Rate is greater than 100%, it increases upside potential while also increasing risk of loss. Conversely, if the
Participation Rate is lower than 100%, it decreases upside potential while also decreasing risk of loss. A Participation Rate may be set as low as 5%. A low Participation Rate would cause a Strategy to participate in the performance of the linked
index to only a small extent. |
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The
Strategy Spread is an annualized percentage used as a deduction in the calculation of gains and losses. If the Strategy Spread is greater than 0%, its application will operate to negatively impact the performance of the Strategy. This means it will
reduce gains and potentially increase losses. The Strategy Spread can result in losses under a Strategy even if the linked Index has increased in value. |
Gains or losses related to the performance of a Strategy,
which we refer to as "Strategy Earnings," are applied to your Contract at certain times during the Strategy Term. Strategy Earnings may be positive, negative, or equal to zero. We will apply Strategy Earnings
to your Contract on the last day of the Strategy Term. We will also apply Strategy Earnings to your Contract when you take a withdrawal prior to the end of a Strategy Term, and when we calculate the death benefit. Strategy Earnings are calculated
without taking into account any contingent deferred sales charges or market value adjustments under the Contract.
Before you purchase the Contract, you should carefully
consider the consequences of taking withdrawals. Each year under the Contract, a certain percentage of your contract value may be withdrawn and will receive preferred treatment. We refer to these withdrawals as "Preferred Withdrawals." If you take a
Preferred Withdrawal prior to the end of a Strategy Term, we calculate your rate of return in the same way that we would calculate your rate of return at the end of the Strategy Term. Upon a Preferred Withdrawal, any losses will be limited by the
Strategy’s defined downside protection.
If you
have taken the maximum amount of Preferred Withdrawals, any excess amounts withdrawn will be treated as "Non-Preferred Withdrawals." Non-Preferred Withdrawals may have a more negative impact to the performance of your Contract when compared to
Preferred Withdrawals.
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Non-Preferred Withdrawals may
be subject to contingent deferred sales charges and negative market value adjustments, both of which will negatively impact the performance of your Contract. |
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If you take
a Non-Preferred Withdrawal prior to the end of a Strategy Term, which is also an event upon which we apply gains and losses to your Contract, we will calculate your rate of return in a different manner than if the withdrawal were a Preferred
Withdrawal. The difference will reduce gains and may increase losses. In addition, losses related to the Non-Preferred Withdrawal could exceed the Strategy’s defined downside protection, exposing you to a greater risk of loss.
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Each Strategy includes a Lock-In
feature. If you decide to exercise the Lock-In feature for a Strategy, the performance of the Index as of a certain date will be fixed for the remainder of the Strategy Term.
You should understand that while the Contract provides some
protection against loss, you can lose money under the Contract. It is possible to lose a substantial amount of your principal investment. You should not buy the Contract if you are not willing to assume the risks associated with the Contract. See
"Risk Factors" beginning on page 19.
Prospective
purchasers may obtain an application to purchase the Contract through broker-dealers that have been appointed by us as insurance agents and that have selling agreements with Nationwide Investment Services Corporation ("NISC"), the principal
underwriter for the Contracts. NISC will use its best efforts to sell the Contracts, but is not required to sell any number or dollar amount of Contracts. We may stop offering the Contracts at any time.
Index-linked annuity contracts are complicated investments.
You should speak with a financial professional about the Contract’s features, benefits, and risks, and whether the Contract is appropriate for you based on your financial situation and objectives.
This prospectus does not constitute an offering in any
jurisdiction in which the Contract may not lawfully be sold.
All guarantees under the Contract are subject to our
creditworthiness and claims-paying ability.
The Contract
is not a bank deposit, is not FDIC insured, and is not insured or endorsed by any bank or government agency. The Contract may not be available in every state.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
For
information on how to contact Nationwide, see Contacting the Service Center. |
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Table of Contents
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Available Information
The SEC maintains a website (www.sec.gov)
that contains the prospectus and other information.
DEFINED
TERMS
Provided below is a list of special terms used
throughout this prospectus. Certain other special terms are defined in context where they first appear in this prospectus.
Adjusted
Index Performance (AIP) – A percent that represents the Index Performance adjusted for a Strategy’s Participation Rate and Strategy Spread. The AIP is the Index Performance multiplied by the
Participation Rate and then reduced by the product of the Strategy Spread multiplied by the Elapsed Term. The AIP is used in the Strategy Earnings Percentage and Non-Preferred Strategy Earnings Percentage calculations. |
Annuitant
- The person upon whose life any life-contingent annuity payments depend and the person whose death triggers the Death Benefit. The Annuitant is also the person to whom
annuity payments are made once you reach Annuitization. |
Annuitization
Date - The date on which annuity payments begin. |
Annuity
Commencement Date - The date on which annuity payments are scheduled to begin. |
Beneficiary
- A person designated by the Contract Owner who may receive certain benefits under the Contract, including the Death Benefit. |
Business
Day - Each day that the New York Stock Exchange is open for regular trading. A Business Day ends at the same time that regular trading on the New York Stock Exchange closes (typically 4:00 p.m. Eastern
Time). |
Cash
Withdrawal - The dollar amount paid to the Contract Owner upon a partial withdrawal or full surrender. A Cash Withdrawal is equal to the Gross Withdrawal minus any applicable CDSC and deducted taxes, and reflects
the application of any MVA. |
Charitable
Remainder Trust - A trust meeting the requirements of Section 664 of the Code. |
Code
- The Internal Revenue Code of 1986, as amended. |
Contingent
Annuitant - The person who becomes the Annuitant if the Annuitant dies before the Annuitization Date. |
Contingent
Beneficiary - The person or entity designated by the Contract Owner to receive any benefits accorded to a Beneficiary if there are no surviving Beneficiaries when the Annuitant dies. |
Contingent
Deferred Sales Charge (CDSC) - A charge that may be assessed if you take a Non-Preferred Withdrawal during the first six Contract Years. |
Contract
- The Nationwide Defined Protection® Annuity Contract, the individual single purchase payment deferred annuity
contract with index-linked strategies described in this prospectus. |
Contract
Accumulation Value - The sum of your Strategy Accumulation Values as of a given date. |
Contract
Anniversary - Each recurring twelve-month anniversary of the Date of Issue while the Contract remains in force. |
Contract
Owner (you) - The person possessing all rights under the Contract prior to the Annuitization Date, along with any Joint Owner. As the context requires, "you" refers to a potential or existing Contract Owner.
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Contract
Value - The sum of your Strategy Values as of a given date. |
Contract
Year - The twelve-month period starting on the Date of Issue and each Contract Anniversary. A Contract Year ends on the day prior to a Contract Anniversary. |
Crediting
Factors - For any Strategy, the Index, Strategy Term, Protection Level, Participation Rate, and Strategy Spread. See "Crediting Factors" for a description of each Crediting Factor. |
Date
of Issue - The date we issue the Contract. Your Purchase Payment is applied to the Contract on the Date of Issue. |
Death
Benefit - The benefit triggered upon the death of the Annuitant, provided such death occurs before the Annuitization Date while the Contract is in force and there is no Contingent Annuitant.
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Default
Option – the Strategy where your Strategy Value will be transferred to if you have Strategy Value invested in a Strategy that will not be available for reinvestment for the next Strategy Term and we do not
receive instructions from you prior to the close of business on the Strategy Term End Date. |
Elapsed
Term - The number of calendar days that have elapsed during a Strategy Term divided by 365. |
Gross
Withdrawal - A value that we calculate each time you take a partial withdrawal or full surrender representing the impact of the withdrawal. When you take a partial withdrawal or full surrender, the Gross Withdrawal
equals the reduction in your Modified Contract Value and related Modified Strategy Value. A Gross Withdrawal equals the related Cash Withdrawal plus any applicable CDSC and deducted taxes, and minus any applicable MVA (which can be positive or
negative). |
Index
- The market index associated with a Strategy. |
Index
Performance - The change in the value of an Index, expressed as a percentage, between the first day of a Strategy Term (or another date for a substitute Index) and a specific future day during that Strategy Term.
The Index Performance may be positive, negative, or equal to zero. |
Index
Value - On a Business Day, the closing value of an Index published for that day. On a day other than a Business Day, the Index Value will be the closing value of the Index for the previous Business Day.
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Individual
Retirement Account - An account that qualifies for favorable tax treatment under Section 408(a) of the Code but does not include Roth IRAs. |
Individual
Retirement Annuity (IRA) - An annuity contract that qualifies for favorable tax treatment under Section 408(b) of the Code, but does not include Roth IRAs or Simple IRAs. |
Interim
Strategy Earnings - The amount applied to your Strategy when you take a partial withdrawal or full surrender on a day other than the Strategy Term End Date. |
Investment-Only
Contract - A Contract purchased by a qualified pension, profit-sharing, or stock bonus plan as defined by Section 401(a) of the Code. |
Joint
Owner - The person, if any, designated as a second person (in addition to the Contract Owner) to possess an undivided interest in the Contract. If there is a Joint Owner, references to Contract Owner and Joint
Owner will apply to both of them, or either of them, unless the context requires otherwise. |
Lock-In
- The feature under the Contract that allows an Index Value as of a certain date to be locked-in for purposes of calculating the Index Performance for a Strategy for the remainder of the Strategy Term.
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Lock-In
Date - The date as of which the Index Value for a Strategy is locked in under the Lock-In feature. |
Market
Value Adjustment (MVA) - The adjustment that may be applied if you take a Non-Preferred Withdrawal during the MVA Period. |
Modified
Contract Value - The sum of your Modified Strategy Values as of a given date, which equals the maximum Gross Withdrawal that can be taken from the Contract on any given date. |
Modified
Strategy Value - The maximum Gross Withdrawal that may be taken from a Strategy as of a given date during a Strategy Term. On a Strategy Term End Date, the Modified Strategy Value is equal to your Strategy Value
plus any Term Strategy Earnings. On any day other than the Strategy Term End Date, the Modified Strategy Value is equal to your Strategy Value plus any Interim Strategy Earnings that would be applied if you withdrew your entire Strategy
Value. |
MVA
Period - The period of time during which Nationwide may apply the MVA to partial withdrawals and a full surrender. The MVA Period begins on the Date of Issue and ends after the sixth Contract Year.
|
Nationwide
(we, us, our) - Nationwide Life Insurance Company. |
Non-Preferred
Strategy Earnings Percentage (NSEP) - A rate of interest (which may be positive, negative, or equal to zero) used to calculate Interim Strategy Earnings applied to a Strategy when a Non-Preferred Withdrawal is
taken prior to the Strategy Term End Date. |
Non-Preferred
Withdrawal - Any portion of a Gross Withdrawal from the Contract that is in excess of the Remaining Preferred Withdrawal Amount. Interim Strategy Earnings for a Non-Preferred Withdrawal are calculated using the
Non-Preferred Strategy Earnings Percentage (or NSEP). Non-Preferred Withdrawals may also be subject to CDSCs and MVAs. All or a portion of any withdrawal may be subject to federal income taxes, and Contract Owners taking withdrawals before age
59½ may be subject to a 10% penalty tax. |
Non-Preferred
Withdrawal Adjustment Percentage – A percent that can reduce your Interim Strategy Earnings if you take a Non-Preferred Withdrawal. It is part of the NSEP calculation. |
Non-Qualified
Contract - A Contract which does not qualify for favorable tax treatment as a Qualified Plan, IRA, Roth IRAs, SEP IRA, or Simple IRA. |
Participation
Rate - The proportion of the Index Performance that is reflected in the Strategy’s performance. |
Preferred
Withdrawal - Any portion of a Gross Withdrawal from the Contract that is less than or equal to the Remaining Preferred Withdrawal Amount. Preferred Withdrawals are not subject to any CDSC or MVA. In addition,
Interim Strategy Earnings for a Preferred Withdrawal are calculated using the Strategy Earnings Percentage (SEP). All or a portion of any withdrawal may be subject to federal income taxes, and Contract Owners taking withdrawals before age 59½
may be subject to a 10% penalty tax. |
Preferred
Withdrawal Amount - The dollar amount of Gross Withdrawals that you can take during a given Contract Year without taking a Non-Preferred Withdrawal. |
Preferred
Withdrawal Percentage – the percentage of your Contract Value that you can withdraw each Contract Year as a Preferred Withdrawal. |
Protection
Level - An amount of downside protection under a Strategy for a Strategy Term. |
Purchase
Payment - Money paid into the Contract by the Contract Owner. |
Qualified
Plan - A retirement plan that receives favorable tax treatment under Section 401 of the Code, including Investment-Only Contracts. In this prospectus, all provisions applicable to Qualified Plans also apply to
Investment-Only Contracts unless specifically stated otherwise. |
Remaining
Preferred Withdrawal Amount - The Preferred Withdrawal Amount for a Contract Year minus the total dollar amount of all Preferred Withdrawals from the Contract already taken that Contract Year. The Remaining
Preferred Withdrawal Amount will never be less than zero. |
Roth
IRA - An annuity contract which qualifies for favorable tax treatment under Section 408A of the Code. |
Simplified
Employee Pension IRA (SEP IRA) - An annuity contract which qualifies for favorable tax treatment under Section 408(k) of the Code. A SEP IRA is unrelated to the Strategy Earnings Percentage (SEP) described
throughout this prospectus, which is a rate of return used to calculate Strategy Earnings. |
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 may be found under "Contacting the Service Center." |
Simple
IRA - An annuity contract which qualifies for favorable tax treatment under Section 408(p) of the Code. |
Strategy
- Each investment option to which you may allocate your Purchase Payment or Contract Value. |
Strategy
Accumulation Value - The value of a Strategy if unrealized Strategy Earnings were to be applied to the Strategy Value using only the SEP as of a given date during a Strategy Term. It is the daily value expressed in
dollars that is provided to show how the Strategy is performing throughout a Strategy Term. |
Strategy
Earnings - The amount applied to a Strategy, including Term Strategy Earnings and/or Interim Strategy Earnings, on a given date or over a period of time. Strategy Earnings may be positive, negative, or equal to
zero. Strategy Earnings may be negative when the Index Performance decreases or when the Index Performance increases but does not increase enough to offset the impact of any applicable Strategy Spread. |
Strategy
Earnings Percentage (SEP) - A rate of interest (which may be positive, negative, or equal to zero) used to calculate Term Strategy Earnings applied to a Strategy on the Strategy Term End Date, as well as any
Interim Strategy Earnings applied to a Strategy when a Preferred Withdrawal is taken prior to the Strategy Term End Date. The SEP is also used in the calculation of the Death Benefit. |
Strategy
Spread - An annualized percentage used as a deduction in the calculation of a Strategy’s performance. The Strategy Spread, when greater than zero, reduces Strategy Earnings. To calculate the Strategy
Spread’s impact at any point in time, it is multiplied by the Elapsed Term (e.g., a 2% Strategy Spread on a 3-year Strategy Term will reduce earnings calculated at the end of the Strategy Term by 6% (subject to the downside protection of the
Protection Level)). |
Strategy
Term - The duration of a Strategy, expressed in years. |
Strategy
Term End Date - The last day of a Strategy Term. |
Strategy
Value - The value of a Strategy without taking into account any potential gains or losses caused by future Strategy Earnings. |
Surrender
Value - The amount available upon full surrender of the Contract. The Surrender Value is equal to the Modified Contract Value minus any applicable CDSC and after any applicable MVA. We may deduct taxes from the
Surrender Value. |
Term
Strategy Earnings - Strategy Earnings applied to a Strategy upon the maturity of a Strategy on the Strategy Term End Date. |
SUMMARY
This summary provides a brief overview of the Contract. You
should carefully read the entire prospectus before you decide whether to purchase the Contract. The Contract may not be currently available in all states, may vary in your state, or may not be available from all selling firms or from all financial
professionals.
Who is Nationwide? Nationwide is the issuer of the Contract. Nationwide is a stock life insurance company organized under Ohio law, with its home office located 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, Guam, the U.S. Virgin Islands, and Puerto Rico.
What is the purpose of the Contract? The Contract is designed to help you invest on a tax-deferred basis and meet long-term financial goals, such as retirement funding. Prior to annuitization, you allocate the money under your Contract to one or more of
the index-linked Strategies that we offer. The return on your investment in a Strategy depends (in part) on the performance of the Strategy’s Index over the course of its Strategy Term. The value of your Contract will increase or decrease
depending on the amount of earnings that we credit to your Contract. When earnings are credited to your contract you may experience a gain or a loss depending on whether the earnings are positive or negative.
Each Strategy includes a defined level of downside protection
that limits the amount of loss you can experience during a Strategy Term. We refer to this defined downside protection as a "Protection Level." Each Strategy also includes a percentage that determines the proportion of the index performance you
receive over the course of a Strategy Term, which is referred to as a "Participation Rate." A Strategy’s Participation Rate can be as low as 5%. Some Strategies also have an annualized percentage that is deducted from earnings called a
"Strategy Spread."
You may access your money at any time
prior to annuitization by taking partial withdrawals or fully surrendering your Contract. When you take a withdrawal or full surrender, you are withdrawing a portion or all of the value of your investment(s) in one or more Strategies, which is
referred to as your "Strategy Value(s)." The Contract allows you to take a certain amount of "preferred" withdrawals on an annual basis. Withdrawals in excess of the permissible amount of preferred withdrawals are referred to as "Non-Preferred
Withdrawals." When you take a preferred withdrawal, we will calculate your earnings in the same manner as we calculate your earnings at the end of a Strategy Term. This manner for calculating earnings is generally more advantageous than when we
calculate earnings for non-preferred withdrawals.
Non-preferred withdrawals taken in the first six years of the
Contract are subject to contingent deferred sales charges and may be subject to a negative market value adjustment, both of which will negatively impact the performance of your Contract. All or a portion of any withdrawal may be subject to federal
income taxes, and Contract Owners taking withdrawals before age 59½ may be subject to a 10% penalty tax.
The Contract has a Death Benefit that may be triggered prior
to the Annuitization Date upon the death of the Annuitant. See "Death Benefit and Succession Rights."
Once you reach the Annuitization Date, we pay guaranteed
income in the form of annuity payments. The duration and dollar amount of the annuity payments will depend on the dollar amount that you annuitize and the annuity payment option that you select. See "Annuitization."
All payments under the Contract are subject to our financial
strength and claims-paying ability, as well as the terms and conditions described in this prospectus.
You should not buy the Contract if you are looking for a
short-term investment or if you plan on taking withdrawals in excess of the permitted amount of Preferred Withdrawals in any Contract Year, as described in this prospectus. You should understand that while the Contract provides some protection
against loss, you can lose money under the Contract. It is possible to lose a substantial amount of your principal investment. You should not buy the Contract if you are not willing to assume the risks associated with the Contract. See "Risk
Factors."
How can the Contract be categorized under the
Code? The Contract can be categorized under the Code as a:
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Charitable Remainder Trust
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Individual Retirement
Annuity (IRA) |
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Investment-Only Contract
(Qualified Plans) |
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Non-Qualified Contract
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Roth IRA
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Simplified Employee Pension
IRA ("SEP IRA") |
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Simple
IRA |
If you purchase the Contract as
an Individual Retirement Account or Roth IRA, the Contract will not provide you with any additional tax deferral benefits.
See "Contract Types and Federal Tax Considerations" for
additional detail.
How do I purchase the Contract? You may purchase the Contract by completing an application and submitting a Purchase Payment of at least $25,000 to our Service Center. Only one Purchase Payment is allowed under the Contract. We may agree to accept
multiple payments as part of a single Purchase Payment.
What are the investment options under the Contract? You may allocate your money under the Contract to one or more of the index-linked Strategies that are available for investment under the Contract. If you are simultaneously invested in the same Strategy for Strategy
Terms that began on different dates, those investments will be considered separate Strategies. You may be invested in no more than five Strategies at any given time. There is no minimum dollar amount that can be allocated to a Strategy. Allocations
to Strategies must be in whole percentages.
The
Contract currently offers the following Strategies*:
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BlackRock Select Factor
Index, 1 Year, 100% Protection Level Strategy |
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BlackRock Select Factor
Index, 1 Year, 95% Protection Level Strategy |
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BlackRock Select Factor
Index, 1 Year, 90% Protection Level Strategy |
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BlackRock Select Factor
Index, 3 Year, 100% Protection Level Strategy |
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BlackRock Select Factor
Index, 3 Year, 95% Protection Level Strategy |
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BlackRock Select Factor
Index, 3 Year, 90% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 1 Year, 100% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 1 Year, 95% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 1 Year, 90% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 3 Year, 100% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 3 Year, 95% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 3 Year, 90% Protection Level Strategy |
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MSCI EAFE Index, 1 Year,
100% Protection Level Strategy |
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MSCI EAFE Index, 1 Year, 95%
Protection Level Strategy |
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MSCI EAFE Index, 1 Year, 90%
Protection Level Strategy |
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MSCI EAFE Index, 3 Year, 95%
Protection Level Strategy |
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MSCI EAFE Index, 3 Year, 90%
Protection Level Strategy |
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NYSE® Zebra Edge®
Index, 1 Year, 100% Protection Level Strategy |
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NYSE® Zebra Edge®
Index, 1 Year, 95% Protection Level Strategy |
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NYSE® Zebra Edge®
Index, 1 Year, 90% Protection Level Strategy |
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NYSE® Zebra Edge®
Index, 3 Year, 100% Protection Level Strategy |
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NYSE® Zebra Edge®
Index, 3 Year, 95% Protection Level Strategy |
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NYSE® Zebra Edge®
Index, 3 Year, 90% Protection Level Strategy |
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SG Macro Compass Index, 1
Year, 100% Protection Level Strategy |
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SG Macro Compass Index, 1
Year, 95% Protection Level Strategy |
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SG Macro Compass Index, 1
Year, 90% Protection Level Strategy |
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SG Macro Compass Index, 3
Year, 100% Protection Level Strategy |
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SG Macro Compass Index, 3
Year, 95% Protection Level Strategy |
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SG Macro Compass Index, 3
Year, 90% Protection Level Strategy |
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S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 1 Year, 100% Protection Level Strategy |
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S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 1 Year, 95% Protection Level Strategy |
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S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 1 Year, 90% Protection Level Strategy |
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S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 3 Year, 100% Protection Level Strategy |
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S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 3 Year, 95% Protection Level Strategy |
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S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 3 Year, 90% Protection Level Strategy |
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S&P 500® Index, 1
Year, 100% Protection Level Strategy |
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S&P 500® Index, 1
Year, 95% Protection Level Strategy |
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S&P 500® Index, 1
Year, 90% Protection Level Strategy |
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S&P 500® Index, 3
Year, 95% Protection Level Strategy |
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S&P 500® Index, 3
Year, 90% Protection Level Strategy |
* See
"What are the Crediting Factors for a Strategy?" for information on the Participation Rate and Strategy Spread for each Strategy. Each Strategy has its own Minimum Participation Rate that will never be less than 5%, and each Strategy has its
own Maximum Strategy Spread that will never be greater than the initial Strategy Spread identified in your Contract at the Date of Issue plus 2%. When a Strategy has both a Participation Rate less than 100% and a Strategy Spread greater than zero,
the Participation Rate and Strategy Spread combine to reduce gains when Index Performance is positive. Additionally, when a Strategy has both a Participation Rate greater than 100% and a Strategy Spread greater than zero, the Participation Rate and
Strategy Spread combine to increase losses when Index Performance is negative.
Each Index is described in more detail under "Indexes –
Market Exposures and Investment Risks" and "Indexes – Descriptions of the Indexes." We reserve the right to make Strategies available for investment that use Indexes other than those listed above. There is no guarantee that a Strategy using
any of the Indexes listed above will always be available for investment.
Once you reach the Annuitization Date, the Strategies are not
available for investment.
You should understand that Index
Performance is important, but it is not the only factor used to calculate gains or losses under the Contract. Each Strategy has multiple components that impact your Strategy Earnings, either by adjusting the Index Performance or otherwise increasing
or decreasing gain or loss.
What factors will affect my
investment gains and losses under the Contract? Each Strategy has the following five Crediting Factors: an Index, which is the market index linked to a Strategy; a Strategy Term, which represents the duration of the
Strategy in years; a Protection Level, which represents an amount of downside protection under a Strategy for a Strategy Term; a Participation Rate, which represents the proportion of the Index Performance reflected in the Strategy’s
performance; and a Strategy Spread, which is an annualized percentage used as a deduction in the calculation of a Strategy’s performance. The Index, Strategy Term and Protection Level will not change for as long as we continue to offer the
Strategy, while the Participation Rate and Strategy Spread can change for future Strategy Terms.
When selecting a Strategy for investment, you should not select
a Strategy based on any single Crediting Factor in isolation. While one Crediting Factor for a Strategy may be more or less favorable or attractive to you, the other Crediting Factors also impact whether that Strategy is appropriate for you based on
your financial needs and goals. You should consult a financial professional prior to selecting a Strategy for investment.
The following provides a brief description of the five
Crediting Factors. See "Crediting Factors" for additional information.
1.
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Index
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The Index is the market
index to which a Strategy is linked. The different Indexes under the Contract provide exposure to different markets and asset classes, all of which may perform differently compared to each other and during different time periods. When we calculate
Strategy Earnings, if the Index Performance is negative, you will lose money under your Contract unless the Strategy’s downside protection protects you from the loss. When the Index Performance is positive, you may or may not gain money under
your Contract, depending on the impact of the Strategy Spread. |
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We
calculate the Index Performance on a point-to-point basis, which is done by comparing: |
(a)
|
The value of the Index on
the first day of the Strategy Term (the "Strategy Term Start Date") to |
(b)
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The value
of the Index on a specific future date during the Strategy Term, which could be the last day of the Strategy Term (the "Strategy Term End Date") or any date prior to the Strategy Term End Date on which you take a withdrawal. |
The result of this comparison
will be the percentage change in the value of the Index between those two points in time. We refer to that change as the "Index Performance." For example, if the Index Value on the first and last day of a Strategy Term equals 1,000 and 1,100,
respectively, the Index Performance between those two dates equals +10% (i.e., (10% = (1,100 – 1,000) / 1000). Conversely, if the Index Value on the first and last day of a Strategy Term equals 1,000 and
900, respectively, the Index Performance between those two dates equals -10% (i.e., -10% = (900 –1,000) / 1000).
Because we calculate Index Performance by
comparing the value of the Index between two specific points in time, Index Performance may be negative or flat even if the Index performed positively for certain time periods between those two specific points in time. This is true even for
Strategies with Strategy Terms longer than one year.
Please note that there are certain
exceptions to the manner in which we calculate Index Performance:
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Lock-In. We calculate Index Performance differently when you have exercised the Lock-In feature for a Strategy. You may exercise the Lock-In feature on any business day prior to the Strategy Term End Date. Exercising the Lock-In
feature operates to fix the Index Performance for the remainder of the Strategy Term as the change in the value of the Index between the Strategy Term Start Date and the "Lock-In Date." |
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For example, if the Index
Value on the Strategy Term Start Date equals 1,000, and then on a given day during the Strategy Term, you lock-in an Index Value of 1,100, your Index Performance will be +10% for the remainder of the Strategy Term. This would be true even if the
Index later increases in value above 1,100 or decreases in value below 1,100. |
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Index
Performance may not equate to Strategy Earnings depending on the other Crediting Factors applicable to the Strategy. You should fully understand the operation and impact of the Lock-In feature prior to purchasing the Contract or exercising the
Lock-In feature. See "Lock-In Risk" and "Lock-In" for additional information. |
Index Substitution. We calculate Index Performance differently in the event that we substitute an Index during a Strategy Term. Subject to regulatory approval, we may substitute the Index during a Strategy Term if the Index is discontinued
or if there is a substantial change to the calculation of the Index. See "Crediting Factors – Indexes."
Certain Indexes available under this
Contract do not include income from any dividends paid by component companies. The exclusion of dividends from an Index will lower the Index Performance, particularly over the course of time. Certain Indexes are comprised of foreign issuers and
include exchange rate methodologies that may lower a Strategy’s returns. See "Crediting Factors – Indexes."
2.
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Strategy Term |
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The Strategy Term represents
the duration of the Strategy, expressed in years. Currently, the Strategies offered under the contract have Strategy Terms of either 1 or 3 years. If you select a one-year Strategy Term, the performance of your investment will depend on the
performance of the Index for up to a one-year period. If you select a three-year Strategy Term, the performance of your investment will depend on the performance of the Index for up to a three-year period. |
3.
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Protection Level |
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The Protection Level
represents an amount of downside protection under a Strategy for a Strategy Term. The Protection Level is presented as a percentage (e.g., 100%, 95%, 90%). A higher Protection Level provides more protection
against loss than a lower Protection Level. For example, if you select a Strategy with a 90% Protection Level, your rate of return that is calculated at the end of the Strategy Term cannot be lower than -10%. If you select a Strategy with a 100%
Protection level, your rate of return that is calculated at the end of the Strategy Term cannot be lower than 0%. |
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The Protection Level only
applies when we apply Strategy Earnings to your Contract at the end of a Strategy Term or when you take a Preferred Withdrawal prior to the end of a Strategy Term. Even when the Protection Level applies, unless the Protection Level is 100%, the
Protection Level provides only limited protection against loss. |
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The Protection Level’s
defined downside protection does not apply to a Non-Preferred Withdrawal. There is some downside protection provided for Non-Preferred Withdrawals, but the Protection Level’s defined downside protection may be reduced by certain negative
adjustments associated with the Non-Preferred Withdrawal. This means that your risk of loss increases when you take a Non-Preferred Withdrawal prior to the end of a Strategy Term. |
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It is possible to lose a
substantial amount of your principal investment under this Contract. The CDSC and MVA may also result in a loss of principal and related earnings if you take a Non-Preferred Withdrawal from your Contract during the first six Contract Years. This
risk exists even if you are invested in a Strategy with an Index that is performing positively as of the date of your withdrawal. |
4.
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Participation Rate |
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The
Participation Rate represents the proportion of the Index Performance that is reflected in the Strategy’s performance. The Participation Rate is presented as a percentage greater or less than, or equal to, 100% (e.g., 50% or 150%). The Participation Rate may have the effect of increasing or decreasing gains or losses as follows: |
•
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If the Participation Rate is
greater than 100%, it will increase your upside potential when the Index Performance is positive. For example, if your Participation Rate is 150%, we will multiply any positive Index Performance by 150%. |
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A Participation Rate greater
than 100% also increases your downside risk. For example, if your Participation Rate is 150%, we will multiply any negative Index Performance by 150% (subject to any applicable defined downside protection). |
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If the Participation Rate is
less than 100%, it will decrease your upside potential when the Index Performance is positive. For example, if your Participation Rate is 90%, we will apply only 90% of the positive Index Performance. |
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A Participation Rate lower
than 100% also decreases your downside risk when Index Performance is negative. For example, if your Participation Rate is 90%, we will only apply 90% of the negative Index Performance (subject to any applicable defined downside protection).
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If the
Participation Rate is equal to 100%, it will neither increase nor decrease your upside potential or downside risk. |
We declare a new Participation Rate at the
start of each Strategy Term, which may be different than the prior Participation Rate for the same Strategy. A Participation Rate may be set as low as 5%. A low Participation Rate would cause a Strategy to participate in the performance of the
linked index to only a small extent. A Strategy’s Participation Rate for a particular Strategy Term may be different for newly issued Contracts than for existing Contracts.
5.
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Strategy Spread |
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The Strategy Spread is an
annualized percentage used as a deduction in the calculation of a Strategy’s performance. A Strategy Spread greater than 0% always has the effect of reducing a Strategy’s performance. A Strategy will never have a Strategy Spread lower
than 0%. |
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The impact of a Strategy
Spread increases over the course of the Strategy Term, reaching its full potential impact on the Strategy Term End Date. For instance, if a Strategy with a 1-year Strategy Term has a Strategy Spread of 2%, the potential impact of the Strategy Spread
will not reach 2% until the Strategy Term End Date. If a Strategy with a 3-year Strategy Term has a Strategy Spread of 2%, the potential impact of the Strategy Spread will not reach 6% (2% per year) until the Strategy Term End Date. |
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A Strategy Spread can result in
negative Strategy Earnings even if you have positive Index performance. |
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We
declare a new Strategy Spread at the start of each new Strategy Term, which may be different than the prior Strategy Spread for the same Strategy. Each Strategy has its own Maximum Strategy Spread that will never be greater than the initial Strategy
Spread plus 2%. A Strategy’s Strategy Spread for a particular Strategy Term may be different for newly issued Contracts than for existing Contracts. |
How do I know what the Crediting Factors are for a Strategy that
I want to invest in? As long as we continue to offer any Strategy listed above under "What are the investment options under the Contract," its Index, Strategy Term, and Protection Level will not change.
The Participation Rate and Strategy Spread for each Strategy
will be declared prior to the beginning of each Strategy Term and are subject to change from Strategy Term to Strategy Term. Such changes will be subject to the following conditions and considerations:
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The Participation Rate is
guaranteed to never be lower than the "Minimum Participation Rate" applicable to that Strategy. Each Strategy has its own Minimum Participation Rate. Regardless, a Participation Rate will never be less than 5%. |
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When the Participation Rate
increases from one Strategy Term to the next, your upside potential will increase, but your risk of loss also increases. |
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When the Participation Rate
decreases from one Strategy Term to the next, your upside potential decreases, but your risk of loss also decreases. |
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The
Strategy Spread is guaranteed never to be greater than the "Maximum Strategy Spread" applicable to that Strategy. The Maximum Strategy Spread for each Strategy will equal the initial Strategy Spread for that Strategy plus 2%. |
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When the Strategy Spread
increases from one Strategy Term to the next, the Strategy Spread will have a greater impact on your gains and losses, decreasing gains and potentially increasing losses. |
Before purchasing this Contract, you should contact the
Service Center or your financial professional for information on the available Strategies and the current Participation Rates and Strategy Spreads. For existing contract owners, at least 30 days prior to the end of the Strategy Term, we will send
you a notice stating (i) the Strategies that will be available for investment at the end of the Strategy Term, (ii) their respective Crediting Factors, including the Participation Rate and Strategy Spread that we declared for the upcoming Strategy
Term, and (iii) how to communicate your instructions to us regarding what to do with your money invested in the maturing Strategy.
When selecting a Strategy for investment, you should understand
that your gains or losses for a Strategy will not equal the gains or losses in the Index you choose. Each Strategy has multiple components that impact your Strategy Earnings, either by adjusting the Index Performance or otherwise increasing or
decreasing gain or loss. You should not select a Strategy based on any single Crediting Factor in isolation. While one Crediting Factor for a Strategy may be more or less favorable or attractive to you, the other Crediting Factors also impact
whether that Strategy is appropriate for you based on your financial needs and goals. You should consult a financial professional prior to selecting a Strategy for investment.
When are gains and losses applied to my Contract? Strategy Earnings are applied to your Contract at the end of a Strategy Term. Strategy Earnings are also applied to your Contract if you take a withdrawal prior to the end of a Strategy Term. Depending on the amount of
your withdrawal, when you take a withdrawal prior to the end of a Strategy Term, we may calculate your Strategy Earnings differently than at the end of a Strategy Term. See, How are my gains
and losses calculated when I take a Preferred Withdrawal prior to the end of a Strategy Term? and How are my gains and losses calculated when I take a Non-Preferred Withdrawal prior to the end of a Strategy Term?
How does the point-to-point calculation of Index Performance
impact my gains and losses? Each Strategy uses a point-to-point calculation to determine the Index Performance. Under a point-to-point calculation, the Index Performance will be the percentage change in the value of
the Index between the first day of the Strategy Term and the Strategy Term End Date (unless the Lock-In feature has been exercised). If a withdrawal is taken, the Index Performance will be the percentage change in the value of the Index between the
first day of the Strategy Term and the date of the withdrawal (unless the Lock-In feature has been exercised prior to the withdrawal).
Use of a point-to-point calculation results in Index
Performance being calculated at a single point in time, even for a Strategy with a three-year Strategy Term. As a result, you may experience negative or flat performance even when the Index experienced gains through some, or most, of the Strategy
Term or prior to a withdrawal.
How are gains and losses
calculated at the end of a Strategy Term? We calculate your Strategy Earnings at the end of a Strategy Term using the following process:
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First, we calculate the
Index Performance. If you have not exercised the Lock-in feature, the Index Performance will be the change in the value of the Index between the first day of the Strategy Term and the Strategy Term End Date. If you have exercised the Lock-in
feature, the Index Performance will be the change in the value of the Index between the first day of the Strategy Term and the date the value of the Index was locked-in. |
•
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Second, we calculate the
Adjusted Index Performance. The Adjusted Index Performance reflects the application of the Participation Rate and the Strategy Spread to the Index Performance. |
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The formula for calculating
the Adjusted Index Performance is as follows: (Index Performance x Participation Rate) – (Strategy Spread x Elapsed Term). At the end of the Strategy Term, "Elapsed Term" will equal the length of the Strategy Term expressed in years,
currently, 1 or 3. |
•
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Third, we calculate your
rate of return, which will be applied as a percentage of the value of your investment in the Strategy. We refer to this rate of return as the "Strategy Earnings Percentage." The Strategy Earnings Percentage will equal the greater of (a) the Adjusted
Index Performance or (b) the Protection Level minus 100%. |
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Fourth,
using the Strategy Earnings Percentage, we calculate the dollar amount of gains or losses that will be applied to your Contract. We calculate that dollar amount by multiplying the Strategy Earnings Percentage by the value of your investment in the
Strategy. |
The table below provides
examples of how your Strategy Earnings are calculated at the end of a Strategy Term. It assumes:
(i)
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a one-year Strategy Term;
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(ii)
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a Protection
Level of 90%; |
(iii)
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a
Participation Rate of 100%; |
(iv)
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a Strategy
Spread of 2%; |
(v)
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the value of
your investment in the Strategy at the beginning of the Strategy Term equals $10,000; and |
(vi)
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no
withdrawals were taken during the Strategy Term. |
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Example
– Table 1 |
Index
Performance |
Strategy
Earnings applied at end of a Strategy Term |
Index
Performance = 10% |
Your
Strategy Earnings would be +$800• The Adjusted Index Performance equals 8%. This is calculated as follows: (10% x 100%) – (2% x 1) =
8%.• The Strategy Earnings Percentage equals 8%. The Adjusted Index Performance (8%) is greater than the Protection Level minus 100%
(-10%).• The Strategy Earnings equal +$800. This is calculated by multiplying the Strategy Earnings Percentage (8%) by the value of the investment
($10,000).• The value of your investment would now equal $10,800. |
Index
Performance = -5% |
Your
Strategy Earnings will be -$700• The Adjusted Index Performance equals -7%. This is calculated as follows: (-5% x 100%) – (2% x 1) =
-7%.• The Strategy Earnings Percentage equals -7%. The Adjusted Index Performance (-7%) is greater than the Protection Level minus 100%
(-10%).• The Strategy Earnings equal -$700. This is calculated by multiplying the Strategy Earnings Percentage (-7%) by the value of the investment
($10,000).• The value of your investment would now equal $9,300.In this scenario, the
90% Protection Level did not limit the amount of negative Strategy Earnings that were applied to the Contract. |
Index
Performance = -15% |
Your
Strategy Earnings will be -$1,000• The Adjusted Index Performance equals -17%. This is calculated as follows: (-15% x 100%) – (2% x 1) =
-17%.• The Strategy Earnings Percentage equals -10%. The Protection Level minus 100% (-10%) is greater than the Adjusted Index Performance
(-17%).• The Strategy Earnings equal -$1,000. This is calculated by multiplying the Strategy Earnings Percentage (-10%) by the value of the investment
($10,000).• The value of your investment would now equal $9,000.In this scenario, the
90% Protection Level limited the amount of negative Strategy Earnings that were applied to the Contract. If there was no downside protection, the Strategy Earnings would have been -$1,700. |
The examples
above assume a Participation Rate of 100%, which means that the Participation Rate neither increased nor decreased upside potential or downside risk. The table below compares how the Strategy Earnings in Example – Table 1 would change if the
Participation Rate was increased to 110% or decreased to 90% and all other assumptions remained the same.
Example
– Table 2 |
Index
Performance |
Strategy
Earnings applied at end of a Strategy Term using different Participation Rates based on stated assumptions |
100%
Participation Rate (Example – Table 1) |
110%
Participation Rate |
90%
Participation Rate |
Index
Performance = 10% |
+$800
|
+$900
|
+$700
|
Index
Performance = -5% |
-$700
|
-$750
|
-$650
|
Index
Performance = -15% |
-$1,000
|
-$1,000
|
-$1,000
|
As illustrated in the table above,
compared to Example – Table 1 which assumed a 100% Participation Rate:
•
|
A 110% Participation Rate
increased gains when the Index performed positively, but also increased losses when the Index performed negatively. |
•
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Conversely, a 90%
Participation Rate decreased gains when the Index performed positively, but also decreased losses when the Index performed negatively. |
•
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In all cases, when the Index
Performance was so negative that the Adjusted Index Performance was below the Strategy’s defined downside protection, the Protection Level limited the realized losses. |
When is a withdrawal a Preferred Withdrawal or Non-Preferred
Withdrawal, and what is the difference? Whenever you take a withdrawal, including at the end of a Strategy Term, the withdrawal will be treated as either a "Preferred Withdrawal" or a "Non-Preferred Withdrawal." The
Contract allows you to take a certain amount of Preferred Withdrawals each Contract Year, which we refer to as the "Preferred Withdrawal Amount." Any withdrawals in excess of the Preferred Withdrawal Amount will be Non-Preferred Withdrawals. If a
given withdrawal exceeds the limit on Preferred Withdrawals, the non-excess portion will be treated as a Preferred Withdrawal and the excess portion will be treated as a Non-Preferred Withdrawal.
Each Contract year, we track your "Remaining Preferred
Withdrawal Amount" for each Strategy, which is the remaining amount of Preferred Withdrawals that may be taken from that Strategy. If you are invested in multiple Strategies, your Strategies will have different Remaining Preferred Withdrawal
Amounts. As a result, a partial withdrawal or full surrender will not result in the same level of Preferred Withdrawals across your Strategies.
Preferred Withdrawal Amount.
At the beginning of each Contract Year prior to annuitization, your Preferred Withdrawal Amount for that Contract Year is equal to the greater of:
(a)
|
Your Contract Value at the
beginning of the Contract Year (immediately prior to any partial withdrawal or full surrender on such day) multiplied by the applicable Preferred Withdrawal Percentage, or |
(b)
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The
amount required to meet minimum distribution requirements for the Contract under the Code. |
The Preferred Withdrawal Percentage is 7% for the first six
Contract Years and then increases to 10.00% after you have completed six Contract Years.
Below we summarize the differences between Preferred
Withdrawals and Non-Preferred Withdrawals under the Contract:
|
Subject
to Contingent Deferred Surrender Charges? |
Subject
to Market Value Adjustment? |
Does
the Downside Protection Provided by the Protection Level Apply? |
Strategy
Earnings Calculation? |
Non-Preferred
Withdrawals |
Yes
|
Yes
|
Reduced
|
Less
Favorable than Preferred Withdrawals |
|
Subject
to Contingent Deferred Surrender Charges? |
Subject
to Market Value Adjustment? |
Does
the Downside Protection Provided by the Protection Level Apply? |
Strategy
Earnings Calculation? |
Preferred
Withdrawals |
No
|
No
|
Yes
|
More
favorable than Non-Preferred Withdrawals |
How are my gains and losses calculated when I take a Preferred Withdrawal prior to the end of a Strategy Term? If you take a Preferred Withdrawal prior to the end of a Strategy Term, we will calculate Strategy Earnings using the same
rate of return calculation that we use to calculate Strategy Earnings at the end of a Strategy Term (the Strategy Earnings Percentage), although you should understand how that process operates in the context of a withdrawal.
•
|
First, we calculate the
Index Performance. The Index Performance will be the percentage change in the value of the Index between the first day of the Strategy Term and the date of the withdrawal. (If you previously exercised the Lock-in feature, the Index Performance will
be the percentage change that was locked-in.) |
•
|
Second, we calculate the
Adjusted Index Performance. When calculating the Adjusted Index Performance, the Participation Rate will be applied in the same manner as at the end of the Strategy Term, but the impact of the Strategy Spread will depend on the amount of time that
has elapsed during the Strategy Term. The Strategy Spread is determined by multiplying the Strategy Spread by the Elapsed Term. |
•
|
Third, we calculate your
rate of return. For Preferred Withdrawals this is the Strategy Earnings Percentage. The Strategy Earnings Percentage will equal the greater of (a) the Adjusted Index Performance or (b) the Protection Level minus 100%. |
•
|
Fourth,
we calculate your gains or losses based on your rate of return. Your Strategy Earnings will impact the amount of Strategy Value that we deduct from your Contract in order to satisfy the Preferred Withdrawal. When you have a gain, we will deduct less Strategy Value than the amount of the Preferred Withdrawal. When you have a loss, we will deduct more Strategy Value than the amount of the Preferred Withdrawal. In
either case, you will receive the amount of the Preferred Withdrawal that you requested. We calculate gains and losses on withdrawals, and in turn the amount of Strategy Value to deduct when you take a Preferred Withdrawal, using the formula
described in "Calculation of Strategy Earnings – Interim Strategy Earnings." |
The table below provides examples of how your gains and losses
are calculated when you take a Preferred Withdrawal prior to the end of a Strategy Term. It assumes the following:
(i)
|
a one-year Strategy Term;
|
(ii)
|
a Protection
Level of 90%; |
(iii)
|
a
Participation Rate of 100%; |
(iv)
|
a Strategy
Spread of 2%; and |
(v)
|
that you
take a $1,000 Preferred Withdrawal at the midpoint of the Strategy Term. |
|
|
Example
– Table 3 |
Index
Performance |
Strategy
Earnings on a Preferred Withdrawal |
Index
Performance to Date = 10% |
You
will receive the $1,000 Preferred Withdrawal as requested, but we will reduce your Strategy Value by only $917.43. This is because the Preferred Withdrawal resulted in a gain of +$82.57 to
your Strategy Value. Explanation:• The Adjusted Index Performance equals 9%. This is calculated as follows:
(10% x 100%) – (2% x .5) = 9%.• The Strategy Earnings Percentage equals 9%. The Adjusted Index Performance (9%) is greater than the Protection Level minus
100% (-10%).• The Strategy Earnings equal $82.57. This is calculated by multiplying the Strategy Earnings Percentage (9%) by the amount of the Preferred
Withdrawal ($1,000), and then dividing by 1 plus the Strategy Earnings Percentage.• The Strategy Value is reduced by $917.43 ($1,000 minus $82.57).
|
Index
Performance to Date = -5% |
You
will receive the $1,000 Preferred Withdrawal as requested, but we will reduce your Strategy Value by $1,063.83. This is because the Preferred Withdrawal resulted in a loss of -$63.83.
Explanation:• The Adjusted Index Performance equals -6%. This is calculated as follows: (-5% x 100%) – (2% x .5) =
-6%.• The Strategy Earnings Percentage equals -6%. The Adjusted Index Performance (-6%) is greater than the Protection Level minus 100%
(-10%).• The Strategy Earnings equal -$63.83. This is calculated by multiplying the Strategy Earnings Percentage (-6%) by the amount of the Preferred Withdrawal
($1,000), and then dividing by 1 plus the Strategy Earnings Percentage.• The Strategy Value is reduced by $1,063.83 ($1,000 minus
-$63.83).In this scenario, the 90% Protection Level did not limit the amount of negative Strategy Earnings applied to the Contract. |
Example
– Table 3 |
Index
Performance |
Strategy
Earnings on a Preferred Withdrawal |
Index
Performance to Date = -15% |
You
will receive the $1,000 Preferred Withdrawal as requested, but we will reduce your Strategy Value will be reduced by $1,111.11. This is because the Preferred Withdrawal resulted in a loss of -$111.11.
Explanation:• The Adjusted Index Performance equals -16%. This is calculated as follows: (-15% x 100%) – (2%
x .5) = -16%.• The Strategy Earnings Percentage equals -10%. The Protection Level minus 100% (-10%) is greater than the Adjusted Index Performance
(-16%).• The Strategy Earnings equal -$111.11. This is calculated by multiplying the Strategy Earnings Percentage (-10%) by the amount of the Preferred
Withdrawal ($1,000), and then dividing by 1 plus the Strategy Earnings Percentage.• The Strategy Value is reduced by $1,111.11 ($1,000 minus
-$111.11).In this scenario, the 90% Protection Level limited the amount of negative Strategy Earnings applied to the Contract. If there was no downside protection, the
Strategy Earnings would have been -$190.48. |
All or a portion of any withdrawal may be subject to federal
income taxes, and Contract Owners taking withdrawals before age 59½ may be subject to a 10% penalty tax.
How are my gains and losses calculated when I take a
Non-Preferred Withdrawal prior to the end of a Strategy Term? If you take a Non-Preferred Withdrawal prior to the end of a Strategy Term, we calculate the Strategy Earnings applied to your Contract using a process
that differs (except as otherwise noted below) from the process we would use if you were taking a Preferred Withdrawal.
•
|
First, we calculate the
Index Performance. This is not calculated differently than if you were taking a Preferred Withdrawal. |
•
|
Second, we calculate the
Adjusted Index Performance. This too is not calculated differently than if you were taking a Preferred Withdrawal. |
•
|
Third, we calculate your
rate of return. For Non-Preferred Withdrawals, we refer to this rate of return as the "Non-Preferred Strategy Earnings Percentage." Compared to the rate of return called the "Strategy Earnings Percentage" which would
apply if you were taking a Preferred Withdrawal, the Non-Preferred Strategy Earnings Percentage operates to reduce gains and potentially increase losses. |
|
When we calculate the
Non-Preferred Strategy Earnings Percentage, the calculation proportionately reduces your gains based on the amount of time remaining in the Strategy Term (i.e., any gains are pro-rated). The calculation also
may increase losses. Losses may be increased due to the application of the "Non-Preferred Withdrawal Adjustment Percentage," which reduces your downside protection and exposes you to a greater risk of loss. |
|
The negative impacts of
taking a Non-Preferred Withdrawal prior to the end of a Strategy Term can be magnified or reduced depending on the length of the Strategy Term and the amount of time that has elapsed during a Strategy Term. See "Risk Factors – Non-Preferred
Withdrawal Risk." |
|
See "Appendix C:
Non-Preferred Strategy Earnings Percentage" for a detailed explanation of how we calculate the Non-Preferred Strategy Earnings Percentage. |
•
|
Fourth,
we calculate your gains or losses based on your rate of return. Same as when you take a Preferred Withdrawal, your Strategy Earnings will impact the amount of Strategy Value that we deduct in order to satisfy the Non-Preferred Withdrawal.
|
How do Gains and
Losses compare for a Preferred Withdrawal and a Non-Preferred Withdrawal based on the same withdrawal assumptions? The table below compares how your Strategy Earning would change if the $1,000 Preferred Withdrawal
reflected in Example – Table 3 above was instead a $1,000 Non-Preferred Withdrawal, also taken at the midpoint of the Strategy Term. For the Non-Preferred Withdrawal, the table below assumes a Non-Preferred Withdrawal Adjustment Percentage of
2%. All other assumptions are the same as in Table 3.
Example
– Table 4 |
Index
Performance |
Gains
and Losses on a Preferred Withdrawal (Example – Table 3) |
Gains
and Losses on a Non-Preferred Withdrawal* |
Index
Performance = 10% |
+$82.57
|
+$43.06
|
Index
Performance = -5% |
-$63.83
|
-$63.83
|
Index
Performance = -15% |
-$111.11
|
-$123.60
|
In
this scenario, the Protection Level limited the amount of negative Strategy Earnings applied to the Contract. If there was no downside protection, the Strategy Earnings would have been $190.48. |
In
this scenario, the Protection Level did not apply, but the amount of negative Strategy Earnings was limited by the reduced downside protection. If there was no downside protection, the Strategy Earnings would have been $190.48. |
As illustrated in the table above, other than gains
calculated at the end of a Strategy Term, any gain that you realize on a Non-Preferred Withdrawal will be less than the gain you would have realized on a Preferred Withdrawal. While the loss that you realize on a Non-Preferred Withdrawal may be
equal to the loss you would have realized on a Preferred Withdrawal, your downside protection will be lower, exposing you to a greater risk of loss.
If taken during the first six Contract Years, the
Non-Preferred Withdrawal would also be subject to a contingent deferred sales charge as well as a market value adjustment that may be negative. See "How and why are Contingent Deferred Sales Charges (CDSCs) and Market Value Adjustments (MVAs)
applied to Non-Preferred Withdrawals?" below. The table above does not include the reduction in Strategy Value due to such a contingent deferred sales charge or market value adjustment. Contingent deferred sales
charges and negative market value adjustments will further reduce the value of your Contract when you take a Non-Preferred Withdrawal (perhaps significantly) and they are not subject to any downside protection under the Contract.
Additionally, all or a portion of any withdrawal may be
subject to federal income taxes, and Contract Owners taking withdrawals before age 59½ may be subject to a 10% penalty tax.
What is the downside protection when I take a Non-Preferred
Withdrawal prior to the end of a Strategy Term? When you take a Non-Preferred Withdrawal prior to the end of a Strategy Term, the defined downside protection provided by the Protection Level does not apply to the
Non-Preferred Withdrawal. The Contract still provides downside protection to the withdrawal, but the downside protection is reduced.
For comparison purposes, when you take a Preferred Withdrawal
prior to the end of a Strategy Term, your rate of return will be no lower than the Protection Level minus 100%. For example, if your Strategy has a 90% Protection Level, your rate of return will be no lower than -10%. When you take a Non-Preferred
Withdrawal prior to the end of a Strategy Term, your rate of return will be no lower than the Protection Level minus 100%, minus an additional amount related to the
Non-Preferred Withdrawal Adjustment Percentage. The Non-Preferred Withdrawal Adjustment Percentage therefore operates to reduce your downside protection when you take a Non-Preferred Withdrawal prior to the Strategy Term End Date.
The Non-Preferred Withdrawal Adjustment Percentage for all
Strategies is 2% on an annualized basis. See "Calculation of Strategy Earnings – Non-Preferred Withdrawal Adjustment Percentage" for more information on the purpose of the Non-Preferred Withdrawal Adjustment Percentage.
The negative impact of the Non-Preferred Withdrawal Adjustment
Percentage on downside protection decreases as the Strategy Term elapses. This is because the impact of the Non-Preferred Withdrawal Adjustment Percentage is calculated by multiplying the Non-Preferred Withdrawal Adjustment Percentage by a factor
that decreases as time elapses, nearly reaching zero on the day prior to the Strategy Term End Date. At the beginning of the Strategy Term, the impact of Non-Preferred Withdrawal Adjustment Percentage is at its greatest, resulting in the least
possible downside protection. On the day prior to the Strategy Term End Date, the impact of the Non-Preferred Withdrawal Adjustment Percentage is at its least, only slightly decreasing your downside protection that would otherwise apply under the
Protection Level.
For example,
assuming a one-year Strategy Term and a Protection Level of 90%:
•
|
If you took a Non-Preferred
Withdrawal on the first day of the Strategy Term, the lowest possible rate of return related to the withdrawal would be -12%, meaning that you could realize a 2% greater loss than otherwise permitted by the Protection Level. |
•
|
If you took a Non-Preferred
Withdrawal at the midpoint of the Strategy Term, the lowest possible rate of return related to the withdrawal would be -11%, meaning that you could realize a 1% greater loss than otherwise permitted by the Protection Level. |
•
|
If you
took a Non-Preferred Withdrawal on the day prior to the Strategy Term End Date, the lowest possible rate of return related to the withdrawal would be -10.005%, meaning that you could realize a 0.005% greater loss than otherwise permitted by the
Protection Level. |
Because the
Non-Preferred Withdrawal Percentage is annualized, its impact is magnified for Strategy Terms longer than one year.
For example, assuming a three-year Strategy Term and a
Protection Level of 90%:
•
|
If you took a Non-Preferred
Withdrawal on the first day of the Strategy Term, the lowest possible rate of return related to the withdrawal would be -16%, meaning that you could realize a 6% greater loss than otherwise permitted by the Protection Level. |
•
|
If you took a Non-Preferred
Withdrawal at the midpoint of the Strategy Term, the lowest possible rate of return related to the withdrawal would be -13%, meaning that you could realize a 3% greater loss than otherwise permitted by the Protection Level. |
•
|
If you
took a Non-Preferred Withdrawal on the day prior to the Strategy Term End Date, the lowest possible rate related to the withdrawal would be -10.005%, meaning that you could realize a 0.005% greater loss than otherwise permitted by the Protection
Level. |
You should understand that
any reduced downside protection associated with Non-Preferred Withdrawals is in addition to any applicable contingent deferred sales charges or negative market value adjustments.
How and why are Contingent Deferred Sales Charges (CDSCs) and
Market Value Adjustments (MVAs) applied to Non-Preferred Withdrawals?
Contingent Deferred Sales Charges. During the first six Contract Years, if you take a Non-Preferred Withdrawal (including at the end of a Strategy Term), the Non-Preferred Withdrawal will be subject to a CDSC. After the sixth Contract
Year, no withdrawals are subject to CDSCs. CDSCs are not subject to any downside protection under the Contract and are in addition to any applicable MVA.
The Contract is designed to be a long-term investment. We
charge the CDSC during the first six Contract Years to offset costs associated with the distribution of the Contract.
When a CDSC is imposed, the charge will equal the applicable
"CDSC Percentage" multiplied by the dollar amount of the Non-Preferred Withdrawal. The CDSC Percentage will depend on the number of Contract Years you have completed when you take a Non-Preferred Withdrawal. The CDSC Percentage schedule is set forth
below. The CDSC Percentage schedule starts at 8.00% for the first two Contract Years and then declines with each completed Contract Year thereafter until it reaches 0% after six completed Contract Years.
Number
of Completed Contract Years |
CDSC
Percentage |
0
|
8.00%
|
1
|
8.00%
|
2
|
7.00%
|
3
|
6.00%
|
4
|
5.00%
|
5
|
4.00%
|
6+
|
0.00%
|
There are
circumstances under which a CDSC may be waived. See "Waiver or Reduction of the CDSC or MVA" and "Increase in Remaining Preferred Withdrawal Amount after a Long-Term Care and Terminal Illness or Injury (CDSC
and MVA Waiver)."
Market Value Adjustments. During the first six Contract Years, if you take a Non-Preferred Withdrawal (including at the end of a Strategy Term), the Non-Preferred Withdrawal will be subject to an MVA. After the sixth Contract
Year, no withdrawals are subject to MVAs. MVAs may be positive or negative. Negative MVAs are not subject to any downside protection under the Contract and are in addition to any applicable CDSC.
The Contract is designed to be a long-term investment. When
you take a withdrawal, we may be required to liquidate interest rate sensitive fixed-income assets that we hold in order to satisfy our payment obligations under the Contract. The MVA is intended to approximate, without duplicating, our investment
experience when we liquidate those assets. When interest rates have increased, the MVA will be negative. Conversely, when interest rates have decreased, the MVA will be positive. See "Contingent Deferred Sales Charge and Market Value
Adjustment—Market Value Adjustment" for more information on how interest rates impact the MVA.
When an MVA is imposed, the MVA will equal the calculated "MVA
Factor" multiplied by the dollar amount of the Non-Preferred Withdrawal. See "Contingent Deferred Sales Charge and Market Value Adjustment—Market Value Adjustment" for an explanation of how we calculate the MVA Factor, as well as "Appendix E:
MVA Examples" for examples of how we calculate an MVA.
There are circumstances under which an MVA may be waived. See "Waiver or Reduction of the CDSC or MVA" and "Increase in Remaining Preferred Withdrawal Amount after a Long-Term Care and Terminal Illness or Injury (CDSC and MVA Waiver)."
Example Impact of CDSC and Negative MVA. If applicable, a CDSC and negative MVA will reduce your return on the Contract (perhaps significantly). For example, assume that you take a $1,000 Non-Preferred Withdrawal. Further, assume an 8% CDSC
and a 3% negative MVA. In addition to the $1,000 withdrawal, an additional $110 would be deducted from the value of your Contract as a result of the CDSC and the MVA (i.e., (8% x $1,000) + (3% x $1,000) = $110). The CDSC and MVA are applied independently of any Strategy Earnings that may be applied to your Contract, either on a Strategy Term End Date or upon taking a
Non-Preferred Withdrawal prior to a Strategy Term End Date.
What may I do at the end of a Strategy Term? A Strategy Term begins on the first day of the Strategy Term and ends on its Strategy Term End Date. Prior to the close of business on the Strategy Term End Date, you may take any one or more of the permissible actions
listed below.
•
|
Reinvest – You may reinvest some or all of your Strategy Value in the same Strategy for another Strategy Term (with the Participation Rate and Strategy Spread that we declare for the upcoming Strategy Term), assuming that the
Strategy is available for investment. |
•
|
Transfer – You may transfer free of charge some or all of your Strategy Value to another Strategy that is available for investment. |
•
|
Partial
Withdrawal or Full Surrender – You may take a partial withdrawal or fully surrender the Contract, which will be treated as a Preferred Withdrawal and/or a Non-Preferred Withdrawal, depending on your Remaining
Preferred Withdrawal Amount. |
If you do not take any action prior to the close of business
on a Strategy Term End Date, your Strategy Value will be reinvested in the same Strategy, but with the Participation Rate and Strategy Spread that we declare for the upcoming Strategy Term. If the same Strategy is no longer available for investment,
the Strategy Value will be transferred to the Default Option. for the upcoming Strategy Term. See "Default Option."
Does the Contract provide a death benefit? Yes. Prior to the Annuitization Date, the Death Benefit is triggered on the death of the Annuitant, provided that (i) the death occurs prior to the Annuitization Date; (ii) the Contract is in force at the time of the
death; and (iii) there is no Contingent Annuitant. Except as otherwise provided in this prospectus, the Death Benefit will equal the Contract Accumulation Value (which may be more, less, or equal to your Contract Value).
What annuity payment options are available once I reach the
Annuitization Date? Subject to certain restrictions described in this prospectus, you may select from the following three annuity payment options under the Contract:
•
|
Single life annuity;
|
•
|
Joint and Survivor Annuity;
or |
•
|
Single
life annuity with 10 or 20-year term certain. |
Other annuity
payments options may be available. If no annuity payment option is selected prior to the latest possible Annuitization Date, we will automatically select the single life annuity with a 20-year term certain for you. Once an annuity payment option is
selected - whether by you or automatically by us - it may not be changed. All annuity payments are paid on a fixed basis.
How do I contact Nationwide?
If you need more information, or you wish to submit a request, you should contact us at our Service Center:
By
Mail |
P.O.
Box 182021, Columbus, Ohio 43218-2021 |
By
Phone |
1-800-848-6331
(TDD 1-800-238-3035) |
By
Fax |
1-888-634-4472
|
On
the Internet |
www.nationwide.com
|
RISK FACTORS
The purchase and continued ownership of the Contract involves
certain risks. You should carefully consider the following factors, in addition to the matters set forth elsewhere in this prospectus, prior to purchasing the Contract or deciding whether to maintain the Contract.
GENERAL LIQUIDITY RISK
We designed the Contract to be a long-term investment, not a
short-term investment. You may take partial withdrawals or a full surrender at any time while your Contract is invested in one or more Strategies, but there may be negative consequences for doing so if the withdrawal amount exceeds the Remaining
Preferred Withdrawal Amount. Withdrawals in excess of the Remaining Preferred Withdrawal Amount will be calculated in a different manner than if the withdrawal were a Preferred Withdrawal, and it may be subject to a CDSC and a negative MVA, which
will negatively impact the performance of your Contract.
It’s important to note that while the CDSC and MVA are
only applicable for the first six Contract Years, withdrawals will always be treated as either Preferred Withdrawals or Non-Preferred Withdrawals, even after the first six Contract Years. This means there is no "surrender period" after which all
withdrawals will be treated the same. See "Non-Preferred Withdrawal Risk" below. In addition, any partial withdrawal or full surrender may also be subject to a 10% additional federal tax if taken before age 59½. If you plan on taking
Non-Preferred Withdrawals, or if you plan to take partial withdrawals or a full surrender prior to age 59½, this Contract may not be appropriate for you.
We may defer payment for a partial withdrawal or full
surrender under this Contract for up to six months if the insurance regulatory authority of the state in which we issued the Contract approves such deferral. There are other circumstances under which we may delay the payment of partial withdrawals
or full surrenders, as described in this prospectus. See "Withdrawals – General."
It is not possible to take withdrawals or surrender your
Contract once you reach the Annuitization Date.
INVESTMENT RISK
The following describe various investment risks associated
with the Contract:
•
|
When you invest in a
Strategy, you are not directly participating in the performance of any stocks or other assets. Instead, the performance of the Strategy depends (in part) on the performance of its Index. The performance of an Index is based on changes in the values
of the securities or other assets that comprise or define the Index. The securities comprising or defining the Indexes are subject to a variety of investment risks, many of which are complicated and interrelated. These risks may affect capital
markets generally, specific market segments, or specific issuers. The performance of the Indexes may fluctuate, sometimes rapidly and unpredictably. Negative Index performance may cause you to realize investment
losses. Your investment losses may be significant. |
|
For a description of particular
investment risks to which the Indexes are subject, see "Indexes – Market Exposures and Investment Risks." |
•
|
The
historical performance of an Index or a Strategy does not guarantee future results. It is impossible to predict whether an Index or a Strategy will perform positively or negatively over the course of a Strategy Term. |
•
|
While it is not possible to
invest directly in an Index under the Contract or otherwise, when you invest in a Strategy, you are indirectly exposed to the investment risks associated with its Index. If you invest in a Strategy that has an Index with higher investment risks,
your investment in that Strategy indirectly exposes you to those higher investment risks. |
•
|
Because the Indexes under
the Contract are all comprised or defined (at least in part) by a collection of equity securities, each Index is exposed to market risk and issuer risk. Market risk is the risk that market fluctuations may cause the value of a security or asset to
fluctuate, sometimes rapidly and unpredictably. Issuer risk is the risk that the value of an issuer’s securities may decline for reasons directly related to the issuer, as opposed to the market generally. |
•
|
We calculate Index
Performance by comparing the value of the Index between two specific points in time which means Index Performance may be negative or flat even if the Index performed positively for certain time periods between those two specific points in time. This
is true even for Strategies with three-year Strategy Terms. |
•
|
If you are invested in
multiple Strategies at the time that you request a partial withdrawal, you cannot select the specific Strategy(s) from which the partial withdrawal is to be taken. Your partial withdrawal will be allocated among all of your Strategies so that after
the withdrawal is processed, the Strategy Values are allocated in the same proportion as before the withdrawal. This means that when you take a withdrawal you may be required to withdrawal money from a Strategy(s) that is performing negatively even
if you have other Strategy(s) performing positively at the time of the withdrawal. |
•
|
Certain Indexes available
under this Contract do not include income from any dividends paid by component companies. The exclusion of dividends from an Index will lower the Index Performance, particularly over the course of time. Additionally, certain Indexes are comprised of
foreign issuers and include exchange rate methodologies that may lower a Strategy’s returns. See, "Indexes – Market Exposures and Investment Risks" for a summary of other important investment risks to which each Index under the Contract
is exposed. |
•
|
In March
2020, the World Health Organization declared the COVID-19 outbreak a pandemic, which has resulted in market volatility and general economic uncertainty. Significant market volatility and negative investment returns in the market resulting from the
COVID-19 pandemic could have a negative impact on the performance of the Indexes to which the Strategies are linked. |
LIMITED GROWTH POTENTIAL RISK (STRATEGY SPREAD AND
PARTICIPATION RATE RISK)
When you invest in a Strategy,
the growth (or upside) potential of your investment is not capped, but if your Strategy has a Strategy Spread greater than 0%, it will reduce the upside potential of your investment. In addition, if the Participation Rate is less than 100%, the
Participation Rate will also dampen the upside potential of your investment.
As part of the process for calculating Strategy Earnings, we
calculate the AIP, which is then used to calculate the Strategy Earnings Percentage (SEP) and Non-Preferred Strategy Earnings Percentage (NSEP). See "Calculation of Strategy Earnings." The AIP is the Index Performance after the application of the
Strategy Spread and the Participation Rate.
The Strategy
Spread represents an annualized percentage rate that always has the effect of reducing the Index Performance. The effect of the Strategy Spread gradually increases over the course of the Strategy Term, reaching its full impact on the Strategy Term
End Date.
•
|
When comparing Strategies
with Strategy Terms that are the same length and all other Crediting Factors are the same, you should understand that a higher Strategy Spread is always more unfavorable to you than a lower Strategy Spread. |
•
|
When determining the maximum
impact a Strategy Spread will have on your Index Performance you multiply the Strategy Spread by the number of years in the Strategy Term (e.g., if the Strategy Spread is 2% and the Strategy Term is 3 years, this will reduce the Index Performance
(after it’s been multiplied by the Participation Rate) by 6% at the end of the Strategy Term). Note: in leap years, there may be an additional day of Strategy Spread. See "Crediting Factors – Strategy Spread." |
•
|
When
comparing Strategies with Strategy Terms that differ in length, a higher Strategy Spread will always be more unfavorable to you on an annual basis, but the overall impact of a lower Strategy Spread over a multi-year Strategy Term may be more
unfavorable to you than the overall impact of a higher Strategy Spread over a shorter Strategy Term. |
The Participation Rate represents the proportion of Index
Performance that is reflected in the AIP, and may have the effect of amplifying or dampening the Index Performance.
•
|
If the Participation Rate is
greater than 100%, there will be more upside potential when the Index Performance is positive but more downside potential when the Index Performance is negative (subject to the level of loss protection provided by the Strategy’s Protection
Level). |
•
|
If the Participation Rate is
less than 100%, there will be less upside potential when the Index Performance is positive but less downside potential when the Index Performance is negative (subject to the amount of downside protection provided by the Strategy’s Protection
Level). |
•
|
If the
Participation Rate is equal to 100%, the Participation Rate will have no impact. |
When selecting a Strategy for investment, you should not
select a Strategy based on any single Crediting Factor, including the Participation Rate or the Strategy Spread. While one Crediting Factor for a Strategy may be more or less favorable or attractive to you, the other Crediting Factors also impact
whether that Strategy is appropriate for you based on your financial needs and goals. You should consult with a financial professional prior to selecting a Strategy for investment.
REINVESTMENT RISK
Except in the limited circumstances under which we may
substitute an Index, the Index, Strategy Term and Protection Level will not change for as long as we offer a Strategy. However, the Participation Rate and Strategy Spread may change from Strategy Term to Strategy Term. You do not have the right to
reject any Participation Rate or Strategy Spread that we declare for a future Strategy Term. If you do not wish to invest in any of the Strategies at some point in the future, your only option will be to fully surrender your Contract. A full
surrender may be subject to a CDSC and an MVA, and may also have negative tax consequences.
The extent to which you may transfer Strategy Value among the
Strategies is restricted. Strategy Value in a Strategy cannot be transferred until the end of the Strategy Term, even if we substitute an Index during the Strategy Term, and you cannot transfer Strategy Value into a Strategy while its Strategy Term
is ongoing. This restricts your ability to react to changes in market conditions during a Strategy Term other than through withdrawals and by exercising the Lock-In feature, which also has risks. You should consider whether the inability to
reallocate Strategy Value at any time is consistent with your financial needs.
At least 30 days prior to the end of the Strategy Term, we
will send you a notice stating (i) the Strategies that will be available for investment at the end of the Strategy Term, (ii) their respective Crediting Factors, including the Participation Rate and Strategy Spread that we declared for the upcoming
Strategy Term, and (iii) how to communicate your instructions to us regarding what to do with your money invested in the maturing Strategy. In order to transfer Strategy Value from a Strategy on the Strategy Term End Date to another Strategy that is
available for investment, we must receive your transfer request prior to the close of business on the Strategy Term End Date (or if the Strategy Term End Date is not a Business Day, then at least one Business Day prior to the Strategy Term End
Date). If we do not receive such a transfer request, your Strategy Value will be treated in the following manner:
•
|
If the same Strategy is
available for investment for another Strategy Term, your Strategy Value will remain in the same Strategy, but with the Participation Rate and Strategy Spread that we declare for the upcoming Strategy Term. This will occur even if the new
Participation Rate and Strategy Spread are different from the Strategy’s Participation Rate and Strategy Spread for the previous Strategy Term or since you last selected that Strategy for investment. The Strategy may no longer be appropriate
for your investment goals. |
•
|
If the
same Strategy is no longer available for investment, the Strategy Value will be transferred to the Default Option for the upcoming Strategy Term. |
If you are reinvested in the same Strategy or transferred into
the Default Option because we did not receive a transfer request from you, and you do not wish to be invested in that Strategy or the Default Option and want to make a change before the end of the new Strategy Term, your only option will be to fully
surrender the Contract. You can take a partial withdrawal to mitigate your unwanted investment exposure, but if you are invested in multiple Strategies, you cannot instruct us to take the partial withdrawal solely from the undesired Strategy.
Instead, your partial withdrawal will be allocated among all of your Strategies.
In addition, taking a partial withdrawal or full surrender may
result in adjustments and charges, and may result in loss of principal or related earnings even if the Index was performing positively at the time of the partial withdrawal or full surrender. See "Non-Preferred Withdrawal or Excessive Risk" below.
Taking a partial withdrawal or a full surrender may also have negative tax consequences.
NON-PREFERRED OR
EXCESSIVE WITHDRAWAL RISK
To the extent possible, you
should carefully manage the amount of your partial withdrawals, and the timing of any full surrender, to avoid taking withdrawals greater than the Preferred Withdrawal Amount (Non-Preferred Withdrawals).
Non-Preferred Withdrawals are subject to applicable CDSCs. The
amount of a CDSC, if any, will depend on the amount of a Non-Preferred Withdrawal and the number of Contract Years that you have completed when you take a Non-Preferred Withdrawal. The CDSC schedule starts at 8.00% for the first two Contract Years
and then declines with each completed Contract Year thereafter until it reaches 0% after six completed Contract Years. When a CDSC applies to a Non-Preferred Withdrawal, the CDSC will reduce the amount of your Cash Withdrawal. Preferred Withdrawals
are not subject to CDSCs.
Non-Preferred Withdrawals are
subject to MVAs during the MVA Period, which lasts until you have completed six Contract Years. An MVA—which may be positive, negative, or equal to zero—is assessed as a percentage of the Non-Preferred Withdrawal. If an MVA is negative,
the MVA will reduce the amount of your Cash Withdrawal. Preferred Withdrawals are not subject to MVAs.
When you take a Non-Preferred Withdrawal prior to the Strategy
Term End Date, we use the NSEP rather than the SEP to calculate earnings. The NSEP formula is typically less advantageous to you than the SEP formula, which is used to calculate any earnings when you take a Preferred Withdrawal. The NSEP formula is
less advantageous to you than the SEP formula under the following conditions:
•
|
If the AIP is positive at
the time of your Non-Preferred Withdrawal, the AIP will be reduced under the NSEP, while the SEP formula would not reduce the AIP. This means we will apply less Strategy Earnings under the NSEP formula. |
•
|
If the
AIP is less than the downside protection provided by the Strategy’s Protection Level at the time of your Non-Preferred Withdrawal, the NSEP’s Non-Preferred Withdrawal Adjustment Percentage will result in
losses, including loss of principal, that are greater than the amount of downside protection provided by your Protection Level. |
It is important to note that the potential impact of the
Non-Preferred Withdrawal Adjustment Percentage on the NSEP decreases over the course of a Strategy Term. There is a risk that you may require Non-Preferred Withdrawals when the impact on the NSEP is higher.
It is also important to understand that the Non-Preferred
Withdrawal Adjustment Percentage is an annualized percentage. This means that the maximum impact that the Non-Preferred Withdrawal Adjustment Percentage can have on a one-year Strategy Term is a 2% greater loss than the amount of downside protection
provided by the Strategy’s Protection Level. The maximum impact that the Non-Preferred Withdrawal Adjustment Percentage can have on a three-year Strategy Term is a 6% greater loss than the amount of downside protection provided by the
Strategy’s Protection Level.
CHANGES TO
PARTICIPATION RATE AND STRATEGY SPREAD RISK
Except in
the limited circumstances under which we may substitute an Index, the Crediting Factors for a Strategy will not change for the duration of an ongoing Strategy Term. Also, except in the limited circumstances under which we may substitute an Index,
the Index, Strategy Term and Protection Level will not change for as long as we offer a Strategy. However, the Participation Rate and Strategy Spread may change from Strategy Term to Strategy Term. Other than the guaranteed minimums and maximums
associated with a Strategy’s Participation Rate and Strategy Spread, which will not change for the entire time that the Strategy is offered under the Contract, there is no guarantee that a Strategy’s current Participation Rate and
Strategy Spread will remain the same while you own the Contract.
You do not have the right to reject any Participation Rate or
Strategy Spread that we declare for a future Strategy Term. If you do not wish to invest in any of the Strategies at some point in the future, your only option will be to fully surrender your Contract. A full
surrender may be subject to a CDSC and an MVA, and any earnings on a Non-Preferred Withdrawal would be calculated using the Non-Preferred Strategy Earnings Percentage (NSEP). A full surrender may also have negative tax consequences.
You should evaluate whether our ability to change the
Participation Rate and Strategy Spread, and your inability to reject such changes, is consistent with your investment goals. When such changes occur, you should also evaluate whether those changes are appropriate for you based on your investment
goals and, if not, you should evaluate your options under the Contract, which may be limited and may have negative consequences associated with them, as described throughout this prospectus.
LOCK-IN
RISK
Under the Lock-In feature, you may lock in an Index
Value for a Strategy prior to the Strategy Term End Date. If you exercise the Lock-In feature, the Index Value that is next calculated after we receive your request will be locked in for purposes of calculating the Index Performance for the
remainder of the Strategy Term. You should consider the following risks related to the Lock-In feature:
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You may exercise the Lock-In
feature only once during a Strategy Term. Once you exercise the Lock-In feature for a Strategy, it may not be revoked. |
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Once you exercise the
Lock-In feature for a Strategy, you will no longer participate in the Index’s performance for the remainder of the Strategy Term, even if the Index performs positively. |
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As a result of locking in an
Index Value, the Index Performance will not change for the remainder of the Strategy Term. However, the Index Performance is not the only factor when calculating your Strategy Earnings. Neither the AIP, SEP, nor NSEP will be locked in and will
continue to change (perhaps negatively) over the course of the Strategy Term. |
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Even if you lock in an Index
Value that, in turn, locks in a positive Index Performance, it may be possible to receive negative Strategy Earnings. This happens when the Strategy Spread component that is deducted from the Index Performance at the end of the Strategy Term (after
the Index Performance has been multiplied by the Participation Rate) is greater than the positive Index Performance that was locked-in. |
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You should carefully
consider the merits of locking in a negative Index Performance. If you lock in an Index Value that, in turn, locks in a negative Index Performance, it will not be possible to receive positive Strategy Earnings throughout the remainder of the
Strategy Term. Under such circumstances, it is possible that you would have realized less losses or no losses if you exercised the Lock-In feature at a different time or not at all. |
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If you exercise the Lock-In
feature for a Strategy, there is no additional earning potential for the Strategy Value allocated to the locked-in Strategy until the end of the Strategy Term (it does not accrue interest and there is no potential for additional earnings).
|
•
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Although you may contact our
Service Center to obtain the last calculated Index Value, you will not know the locked-in Index Value in advance. This is because we lock in the Index Value next calculated after we receive your request. The Index Value that is locked in may be
lower than the Index Value that you last obtained or that was last calculated prior to receiving your request. |
•
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We will
not provide advice or notify you regarding whether you should exercise the Lock-In feature or the optimal time for doing so, if one exists. You bear the risk that you will fail to exercise the Lock-In feature at the optimal time during a Strategy
Term. You also bear the risk that you will exercise the Lock-In feature at a sub-optimal time during a Strategy Term. We will not warn you if you exercise the Lock-In feature at a sub-optimal time. We are not responsible for any losses related to
your decision whether or not to exercise the Lock-In feature. |
INDEX SUBSTITUTION RISK
The Index for a Strategy generally will not change for the
duration of an ongoing Strategy Term. However, we may substitute the Index during a Strategy Term in limited circumstances. Subject to regulatory approval, we may substitute the Index if (a) the Index is discontinued or (b) there is a substantial
change to the calculation of the Index. If we substitute an Index, the new Index will be similar in composition to the old Index. We will seek to notify you at least 30 days prior to substituting an Index for any Strategy in which you are invested.
However, in the event that it is necessary to substitute on less than 30 days’ notice due to circumstances outside of our control, we will provide notice of the substitution as soon as practicable.
You will have no right to reject the substitution of an Index.
If we substitute the Index for a Strategy in which you are invested, you will not be permitted to transfer your Strategy Value until the end of the Strategy Term. See "Reinvestment Risk" above.
If we substitute the Index for a Strategy in which you are
invested, the performance of the new Index may differ significantly from the performance of the old Index. This may negatively affect the Strategy Earnings applied to your Strategy and the Index Values that you can lock-in under the Lock-In
feature.
INVESTMENT RISK
DURING THE RIGHT TO EXAMINE PERIOD
Under state insurance
laws, you have the right, during a limited period of time, to examine the Contract and decide if you want to keep it or cancel it. This right is referred to as a "free look" right. The length of this time period depends on state law and may vary
depending on whether the purchase is a replacement of another annuity contract. For ease of administration, Nationwide will honor any free look cancellation request that is in good order and received at the Service Center or postmarked within 30
days after the Date of Issue.
Where state law requires
the return of purchase payments for free look cancellations, Nationwide will return the Purchase Payment applied to the Contract, less any withdrawals from the Contract and any applicable federal and state income tax withholding. Where state law
requires the return of contract value for free look cancellations, Nationwide will return the Contract Accumulation Value as of the date of the cancellation, less any withdrawals from the Contract and any applicable federal and state income tax
withholding. It is possible that your Contract Accumulation Value may be less than your Purchase Payment.
NATIONWIDE’S FINANCIAL STRENGTH AND CLAIMS-PAYING ABILITY
RISK
Our general account assets support our guarantees
under the Contract and are subject to claims by our creditors. As such, our guarantees under the Contract are subject to our financial strength and claims-paying ability. There is a risk that we may default on those guarantees. You need to consider
our financial strength and claims-paying ability in meeting our guarantees under the Contract. You may obtain information on our financial condition by reviewing our financial statements included in this prospectus. Additionally, information
concerning our business and operations is set forth under "Nationwide Life Insurance Company and Subsidiaries."
In March 2020, the World Health Organization declared the
COVID-19 outbreak a pandemic, which has resulted in operational disruptions, as well as market volatility and general economic uncertainty. While Nationwide has implemented risk management and contingency plans and taken preventative measures and
other precautions so it can continue to provide products and services to its customers, even as many of its employees and the employees of its service providers continue to work remotely, it is not currently possible to accurately estimate the full
impact that the COVID-19 pandemic will have on Nationwide’s businesses as Nationwide continues to be subject to certain risks that could negatively impact its operations.
Additionally, prolonged current economic conditions, consumer
behavior, economic shutdowns, state and federal legislation intended to ease the impact of the COVID-19 pandemic on consumers and voluntary hardship assistance that Nationwide provides to its customers, among other factors related to COVID-19, could
affect the amount of sales and profitability of Nationwide’s businesses and could have a negative impact on its financial condition and operations.
While Nationwide is confident in its ability to manage the
financial risks related to COVID-19, the extent and duration or the risks related to the COVID-19 pandemic are unknown at this time. It is possible these risks could impact Nationwide’s financial strength and claims-paying ability. There are
many factors beyond Nationwide’s control that cannot be mitigated or foreseen that could have a negative impact on Nationwide and the operation of the contract. Nationwide continues to monitor the economic situation and assess its impact on
its business operations closely.
To request additional
information about Nationwide, contact the Service Center.
CYBER SECURITY RISK
Nationwide’s businesses are highly dependent upon its
computer systems and those of its business partners. This makes Nationwide potentially susceptible to operational and information security risks resulting from a cyber-attack. These risks include direct risks, such as theft, misuse, corruption, and
destruction of data maintained by Nationwide, and indirect risks, such as denial of service, attacks on service provider websites, and other operational disruptions that impede Nationwide’s ability to electronically interact with service
providers. Cyber-attacks affecting Nationwide, intermediaries, and other service providers may adversely affect Nationwide and Contract values. In connection with any such cyber-attack, Nationwide and/or its service providers and intermediaries may
be subject to regulatory fines and financial losses and/or reputational damage. Although Nationwide undertakes substantial efforts to protect its computer systems from cyber-attacks, including internal processes and technological defenses that are
preventative or detective, and other controls designed to provide multiple layers of security assurance, there can be no guarantee that Nationwide or its service providers will avoid losses due to cyber-attacks or information security breaches in
the future.
Cyber-attacks
may negatively affect your investment in the Contract. In the event that values under your Contract are adversely affected as a result of the failure of Nationwide’s cyber-security controls, Nationwide will take reasonable steps to restore
such levels to the levels that they would have been had the cyber-attack not occurred. Nationwide will not, however, be responsible for any adverse impact to values under your Contract that result from your or your designee’s negligent acts or
failure to use reasonably appropriate safeguards to protect against cyber-attacks.
BUSINESS CONTINUITY RISK
Nationwide is exposed to risks related to natural and man-made
disasters and catastrophes, such as storms, fires, earthquakes, public health crises and terrorist acts, which could adversely affect Nationwide’s ability to administer the contracts. Natural and man-made disasters may require a significant
contingent of Nationwide’s employees to work from remote locations. During these periods, Nationwide could experience decreased productivity, and a significant number of Nationwide’s workforce or certain key personnel may be unable to
fulfill their duties if Nationwide’s data or systems are disabled or destroyed. In addition, an extended period of remote work arrangements could introduce operational risk and impair Nationwide’s ability to administer the
contract.
Nationwide outsources certain critical
business functions to third parties and, in the event of a natural or man-made disaster, relies upon the successful implementation and execution of the business continuity planning of such entities. While Nationwide closely monitors the business
continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely beyond Nationwide’s control. If one or more of the third parties to whom Nationwide outsources such
critical business functions experience operational failures, Nationwide’s ability to administer the contract could be impaired.
GENERAL INFORMATION ABOUT THE CONTRACT
THE CONTRACT
This prospectus describes the Contract. The Contract is an
agreement between Nationwide and you, the Contract Owner or Joint Owner. The Contract is designed to help you invest on a tax-deferred basis and meet long-term financial goals, such as retirement funding. Under the Contract, you use your Purchase
Payment or Contract Value to invest in one or more of the index-linked Strategies that we offer under the Contract, each including a defined level of downside protection. The return on your investment in a Strategy depends (in part) on the
performance of the Strategy’s Index over the course of its Strategy Term. The value of your Contract will increase or decrease depending on the amount of Strategy Earnings that we credit to your Contract. When Strategy Earnings are credited to
your contract you may experience a gain or a loss depending on whether the Strategy Earnings are positive or negative.
On the Annuitization Date, if it occurs, we promise to begin
paying annuity payments based on the amount annuitized and the annuity payment option selected. You may not invest in the Strategies once you reach the Annuitization Date. See "Annuitization" for information on annuitizing the Contract.
The Contract has a Death Benefit that may be triggered prior
to the Annuitization Date upon the death of the Annuitant. A surviving spouse may be eligible to continue the Contract. See "Death Benefit and Succession Rights."
All payments under the Contract are subject to the terms and
conditions described in this prospectus, as well as our financial strength and claims-paying ability.
The Contract is available as a Non-Qualified Contract, which
will provide you with certain tax deferral features under the Code. On the other hand, if you purchase the Contract as an Individual Retirement Account or Roth IRA, the Contract will not provide you with any additional tax deferral benefits.
STATE VARIATIONS
This prospectus describes the material rights and obligations
under the Contract. Certain provisions of the Contract may be different from the general description in this prospectus due to variations required by state law. For example, state law may require different right to examine and cancel periods. The
state in which your Contract is issued also governs whether certain features will vary under your Contract. All material rights and obligations under your Contract will be included in your Contract or in riders or endorsements attached to your
Contract. To review a copy of your Contract and any riders or endorsements, contact the Service Center. For more detailed information regarding provisions that vary by state, please see Appendix F: State
Variations later in this prospectus.
PREMIUM
TAXES
We will charge against your Contract any premium
taxes levied by a state or other government entity in connection with your Contract. Premium tax rates currently range from 0% to 5.0%. This range is subject to change. The method that we use to assess premium taxes will be determined by us at our
sole discretion in compliance with state law. Nationwide will assess premium taxes to the Contract at the time Nationwide is assessed the premium taxes by the state. Premium taxes may be deducted from death benefit proceeds.
NON-PARTICIPATING
The Contract is non-participating, meaning that the Contract
will not share in our profits or surplus.
ASSIGNMENT
To the extent allowed by state law, we reserve the right to
refuse our consent to any assignment at any time on a non-discriminatory basis if the assignment would violate or result in noncompliance with any applicable state or federal law or regulation. The Contract Owner may request to assign or transfer
rights under the Contract by sending us a signed and dated request. We will not be bound by an assignment until we acknowledge it.
If we consent to an assignment, the assignment takes effect on
the date it is signed, unless otherwise specified by the request. We are not responsible for the validity of an assignment, any tax consequences of any assignment, or for any payment or other settlement made prior to our receipt and consent of and
assignment.
Upon assignment or a change in ownership of
the Contract, the Death Benefit under the Contract will be the Surrender Value (rather than the Contract Accumulation Value) unless the requirements specified under "Death Benefit and Succession Rights – Calculation of the Death Benefit" are
satisfied.
BENEFICIALLY OWNED CONTRACTS
A beneficially owned contract is a contract that is inherited
or purchased by a beneficiary and the beneficiary holds the contract as a beneficiary (as opposed to treating the contract as his/her own) to facilitate the distribution of a death benefit or contract value in accordance with the applicable federal
tax laws (see Required Distributions). An owner of a beneficially owned contract is referred to as a "beneficial owner."
There are two types of beneficially owned contracts, a
"continued beneficially owned contract" and a "purchased beneficially owned contract." A continued beneficially owned contract is when a beneficiary inherits a contract and continues that contract as a beneficial owner. A "purchased beneficially
owned contract" is when a beneficiary purchases a new contract using a death benefit or contract value that the beneficiary inherited under a different annuity contract.
Not all options and features described in this prospectus are
available to beneficially owned contracts:
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Withdrawals under
beneficially owned contracts are subject to applicable CDSC and Market Value Adjustments except when the withdrawals are made from a continued beneficially owned contract that is inherited as death benefit proceeds (as opposed to inherited contract
value). |
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A beneficial owner must be
both the Contract Owner and the Annuitant of a beneficially owned contract, and no additional parties may be named. |
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No changes to the parties
will be permitted on any beneficially owned contract, except that a beneficial owner may request changes to their successor beneficiary(ies). |
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Beneficially owned contracts
cannot be assigned, except that a beneficial owner may assign rights to the distribution payments. |
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There is
no death benefit payable on a on a continued beneficially owned contract. After the death of the beneficial owner, any remaining death benefit or contract value to be distributed will be payable to a successor beneficiary in accordance with
applicable federal tax laws. |
A
beneficiary who is the surviving spouse of a contract owner has the option under the tax laws to continue the contract as the sole contract owner and treat the contract as the spouse’s own. If a spouse continues the contract as the sole
contract owner, the spouse will not be treated as a beneficial owner and this section will not apply.
PURCHASING THE
CONTRACT
PURCHASE PAYMENT
The Contract is issued in consideration of the single Purchase
Payment paid by the Contract Owner. Only one Purchase Payment is allowed under the Contract. The minimum Purchase Payment is $25,000.
Your Purchase Payment should be made payable to Nationwide
Life Insurance Company and submitted to our Service Center. Your Purchase Payment must be made in U.S. dollars and must be in a form acceptable to us. You may choose to make your Purchase Payment by personal check, Electronic Funds Transfer (EFT),
or wire transfer. We will not accept a Purchase Payment in cash, by credit card, or by money order or travelers check. We reserve the right not to accept third-party checks.
We reserve the right to reject a Purchase Payment that is
comprised of multiple payments paid to us over a period of time. If we permit you to make multiple payments as part of your Purchase Payment, the Contract will not be issued until all such payments are received. We reserve the right to hold such
multiple payments in a non-interest bearing account until the Date of Issue.
Unless we agree in writing, we will not accept your Purchase
Payment if your Purchase Payment plus any other purchase payments for any other annuity contracts issued by Nationwide to the Contract Owner, Annuitant, or Contingent Annuitant exceeds $1,000,000.
We reserve the right to refuse any application for the
Contract. If we refuse your application, we will return your Purchase Payment.
We may be required to provide information about your Contract
to government regulators. If mandated under applicable law, we may be required to reject a Purchase Payment and to refuse to process transaction requests under the Contract until instructed otherwise by the appropriate regulator.
DATE OF ISSUE
The Date of Issue is the date we issue your Contract. Your
Purchase Payment is applied to the Contract on the Date of Issue. The Date of Issue will be the date as of which we have both received your Purchase Payment and approved your Contract application.
ALLOCATING YOUR PURCHASE PAYMENT
You tell us how to apply your Purchase Payment by specifying
in the Contract application your desired allocation among the Strategies that are available for investment on the Date of Issue. You may invest your Purchase Payment in a single Strategy or in multiple Strategies. You may be invested in no more than
five Strategies at any given time. If you are simultaneously invested in the same Strategy for Strategy Terms that began on different dates, those investments are considered separate Strategies for purposes of the maximum number of Strategies that
you can have and for calculating the values and Strategy Earnings under this Contract. There is no minimum dollar amount that can be allocated to a Strategy. Allocations to Strategies must be in whole percentages.
RIGHT TO EXAMINE AND CANCEL
You have the right to examine and cancel the Contract. If you
elect to cancel the Contract, you may return it to the Service Center within a certain period of time known as the "free look" period. Depending on the state in which the Contract was purchased (and, in some states, if the Contract is purchased as a
replacement for another annuity contract), the free look period may be 10 days or longer. For ease of administration, Nationwide will honor any free look cancellation request that is in good order and received at the Service Center or postmarked
within 30 days after the Date of Issue regardless of the state in which your Contract was issued.
Where state law requires the return of purchase payments for
free look cancellations, Nationwide will return the Purchase Payment applied to the Contract, less any withdrawals from the Contract and any applicable federal and state income tax withholding. Where state law requires the return of contract value
for free look cancellations, Nationwide will return the Contract Accumulation Value as of the date of the cancellation, less any withdrawals from the Contract and any applicable federal and state income tax withholding.
PARTIAL
NON-PREFERRED WITHDRAWAL TREATED AS A FULL SURRENDER
Nationwide may treat a request for a partial withdrawal as a
request for a full surrender of the Contract if the following three criteria exist: (i) any portion of the partial withdrawal is a Non-Preferred Withdrawal; (ii) the partial withdrawal would reduce the Contract Value to an amount less than $5,000;
and (iii) the Purchase Payment minus the sum of any Gross Withdrawals since the Date of Issue is less than $5,000.
PARTIES TO THE CONTRACT AND RELATED PERSONS
Nationwide and the Contract Owner (including any Joint Owner)
are the parties to the Contract. Other related persons—including any Annuitant, Contingent Annuitant, Beneficiary, and Contingent Beneficiary—have certain rights under the Contract. If the person purchasing the Contract names someone
else as the Contract Owner, the purchaser will have no rights under the Contract unless he or she is named under the Contract as one of the other related persons listed above.
NATIONWIDE
Nationwide issues the Contract to the Contract Owner (and any
Joint Owner). Nationwide assumes certain risks and promises to make certain payments under the Contract, as described in this prospectus.
CONTRACT OWNER
The Contract Owner has all rights under the Contract before
the Annuitization Date, unless a Joint Owner is named, in which case the Contract Owner and the Joint Owner have equal rights under the Contract before the Annuitization Date. If you are purchasing the Contract for someone else and you will not be a
Contract Owner, then you will have no rights under the Contract.
As of the Annuitization Date, the Annuitant(s) exercise all
remaining rights under the Contract. See "Annuitization."
JOINT OWNER
If a Contract has a Joint Owner, the Contract Owner and the
Joint Owner have an undivided interest in the Contract.
Non-Qualified Contract Owners can name a Joint Owner at any
time before the Annuitization Date. However, Joint Owners must be spouses at the time joint ownership is requested, unless state law requires Nationwide to allow non-spousal Joint Owners. Joint ownership is not permitted for Contracts owned by a
non-natural Contract Owner.
Generally, the exercise of
any ownership rights under the Contract must be in writing and signed by both Joint Owners. However, if a written election, signed by both Contract Owners, authorizing Nationwide to allow the exercise of ownership rights independently by either
Joint Owner is submitted, Nationwide will permit Joint Owners to act independently. If such an authorization is submitted, Nationwide will not be liable for any loss, liability, cost, or expense for acting in accordance with the instructions of
either Joint Owner.
If either Joint Owner dies before
the Annuitization Date, the Contract continues with the surviving Joint Owner as the remaining Contract Owner.
ANNUITANT AND CONTINGENT ANNUITANT
Annuitant
The Annuitant is the person who will receive annuity payments
once you reach the Annuitization Date. The Annuitant is also the person whose death prior to the Annuitization Date triggers payment of the Death Benefit.
On the Date of Issue, the Annuitant must be age 85 or younger
unless we approve a request to name an older Annuitant.
Only a Non-Qualified Contract Owner may name someone other
than himself/herself as the Annuitant. The Contract Owner may not name a new Annuitant without Nationwide’s consent.
Contingent Annuitant
If a Contingent Annuitant is named and the Annuitant dies
before the Annuitization Date, the Contingent Annuitant becomes the Annuitant. If the Contingent Annuitant becomes the Annuitant, all provisions of the Contract which are based on the death of the Annuitant will become based on the death of the
Contingent Annuitant. In addition, once the Contingent Annuitant becomes the Annuitant, a new Contingent Annuitant cannot be named.
Only
Non-Qualified Contract Owners may name a Contingent Annuitant.
On the Date of Issue, the Contingent Annuitant must be age 85
or younger unless we approve a request to name an older Contingent Annuitant.
BENEFICIARIES AND CONTINGENT BENEFICIARIES
The Beneficiary is the person who is entitled to the Death
Benefit if the Annuitant (and Contingent Annuitant, if applicable) dies before the Annuitization Date and there is no Joint Owner. The Contract Owner can name more than one Beneficiary. Multiple Beneficiaries will share the Death Benefit equally,
unless otherwise specified.
A Contingent Beneficiary
will succeed to the rights of the Beneficiary if no Beneficiary is alive when a Death Benefit is paid. The Contract Owner can name more than one Contingent Beneficiary. Multiple Contingent Beneficiaries will share the Death Benefit equally, unless
otherwise specified.
Unless otherwise directed by the
Contract Owner, the following applies with respect to Beneficiaries and Contingent Beneficiaries under the Contract:
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After the death of the
Contract Owner (and Joint Owner, if any), a Beneficiary may name a successor beneficiary. A successor beneficiary will have the right to receive any payment or rights under the Contract after the Beneficiary’s death to which the Beneficiary
would have been entitled, if he or she were alive. |
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If there is more than one
Beneficiary under the Contract, they share equally in any payment or rights under the Contract to which they are entitled. |
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If there
is more than one Contingent Beneficiary under the Contract, they share equally in any payment under the Contract to which they are entitled. |
CHANGES TO PERSONS NAMED UNDER THE CONTRACT
To the extent allowed by state law, we reserve the right to
refuse our consent to any request to change the Contract Owner at any time on a non-discriminatory basis if the change would violate or result in noncompliance with any applicable state or federal law or regulation. Prior to the Annuitization Date
(and subject to any existing assignments), the Contract Owner may request to change the following:
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Contract Owner
(Non-Qualified Contracts only); |
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Joint Owner (must be the
Contract Owner’s spouse); |
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Annuitant (subject to
Nationwide’s underwriting and approval); |
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Contingent Annuitant
(subject to Nationwide’s underwriting and approval); |
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Beneficiary; or |
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Contingent Beneficiary.
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The Contract Owner must submit the
request to Nationwide in writing and Nationwide must receive the request at the Service Center before the Annuitization Date. Once Nationwide receives and records the change request, the change will be effective as of the date the written request
was signed (unless otherwise specified by the Contract Owner), whether or not the Contract Owner or Annuitant is living at the time it was recorded. The change will not affect any action taken by Nationwide before the change was recorded.
Any request to change the Contract Owner must be signed by the
existing Contract Owner and the person designated as the new Contract Owner. Nationwide may require a signature guarantee.
If the Contract Owner is not a natural person and there is a
change of the Annuitant, distributions will be made as if the Contract Owner died at the time of the change, regardless of whether the Contract Owner named a Contingent Annuitant.
Nationwide reserves the right to reject any change request
that would alter the nature of the risk that Nationwide assumed when it originally issued the Contract.
Certain features under the Contract may have specific
requirements as to who can be named as the Contract Owner, Annuitant, and/or Beneficiary in order to receive the benefit of the feature. Changes to the parties to the Contract may result in the termination or loss of benefit of these features.
If we permit an
assignment or a change in ownership of the Contract, the Death Benefit under the Contract will be the Surrender Value (rather than the Contract Accumulation Value) unless the requirements specified under "Death Benefit and Succession Rights –
Calculation of the Death Benefit" are satisfied.
STRATEGIES
GENERAL
You may invest in one or more of the Strategies offered under
the Contract. When you invest in a Strategy, you remain invested in that Strategy for the length of the Strategy Term. The total amount of Strategy Earnings applied over the life of your Contract, if any, will depend on the Strategies that you
select for investment and the actions that you take under the Contract.
You may have no more than five Strategies at any given time.
Strategy Earnings are calculated separately for each Strategy. If you are simultaneously invested in the same Strategy for Strategy Terms that began on different dates, those investments are considered separate Strategies for purposes of the maximum
number of Strategies that you can have and for calculating the values and Strategy Earnings under the Contract.
The amount of Strategy Earnings applied to a Strategy during
and at the end of a Strategy Term depends on several factors, including:
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The Strategy’s
Crediting Factors (including the Index); |
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The performance of the
Strategy’s Index; and |
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The
extent to which you take withdrawals, if any. |
We reserve the right to add or remove Strategies, subject to
any necessary regulatory approval. We will not remove a Strategy during an ongoing Strategy Term.
CURRENT STRATEGIES
The Contract currently offers the following Strategies*:
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BlackRock Select Factor
Index, 1 Year, 100% Protection Level Strategy |
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BlackRock Select Factor
Index, 1 Year, 95% Protection Level Strategy |
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BlackRock Select Factor
Index, 1 Year, 90% Protection Level Strategy |
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BlackRock Select Factor
Index, 3 Year, 100% Protection Level Strategy |
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BlackRock Select Factor
Index, 3 Year, 95% Protection Level Strategy |
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BlackRock Select Factor
Index, 3 Year, 90% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 1 Year, 100% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 1 Year, 95% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 1 Year, 90% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 3 Year, 100% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 3 Year, 95% Protection Level Strategy |
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J.P. Morgan Mozaic IISM
Index, 3 Year, 90% Protection Level Strategy |
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MSCI EAFE Index, 1 Year,
100% Protection Level Strategy |
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MSCI EAFE Index, 1 Year, 95%
Protection Level Strategy |
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MSCI EAFE Index, 1 Year, 90%
Protection Level Strategy |
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MSCI EAFE Index, 3 Year, 95%
Protection Level Strategy |
•
|
MSCI EAFE Index, 3 Year, 90%
Protection Level Strategy |
•
|
NYSE® Zebra Edge®
Index, 1 Year, 100% Protection Level Strategy |
•
|
NYSE® Zebra Edge®
Index, 1 Year, 95% Protection Level Strategy |
•
|
NYSE® Zebra Edge®
Index, 1 Year, 90% Protection Level Strategy |
•
|
NYSE® Zebra Edge®
Index, 3 Year, 100% Protection Level Strategy |
•
|
NYSE® Zebra Edge®
Index, 3 Year, 95% Protection Level Strategy |
•
|
NYSE® Zebra Edge®
Index, 3 Year, 90% Protection Level Strategy |
•
|
SG Macro Compass Index, 1
Year, 100% Protection Level Strategy |
•
|
SG Macro Compass Index, 1
Year, 95% Protection Level Strategy |
•
|
SG Macro Compass Index, 1
Year, 90% Protection Level Strategy |
•
|
SG Macro Compass Index, 3
Year, 100% Protection Level Strategy |
•
|
SG Macro Compass Index, 3
Year, 95% Protection Level Strategy |
•
|
SG Macro Compass Index, 3
Year, 90% Protection Level Strategy |
•
|
S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 1 Year, 100% Protection Level Strategy |
•
|
S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 1 Year, 95% Protection Level Strategy |
•
|
S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 1 Year, 90% Protection Level Strategy |
•
|
S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 3 Year, 100% Protection Level Strategy |
•
|
S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 3 Year, 95% Protection Level Strategy |
•
|
S&P 500® Average
Daily Risk Control 10% USD Price Return Index, 3 Year, 90% Protection Level Strategy |
•
|
S&P 500® Index, 1
Year, 100% Protection Level Strategy |
•
|
S&P 500® Index, 1
Year, 95% Protection Level Strategy |
•
|
S&P 500® Index, 1
Year, 90% Protection Level Strategy |
•
|
S&P 500® Index, 3
Year, 95% Protection Level Strategy |
•
|
S&P 500® Index, 3
Year, 90% Protection Level Strategy |
* See "What are the Crediting
Factors for a Strategy?" for information on the Participation Rate and Strategy Spread for each Strategy. Each Strategy has its own Minimum Participation Rate which will never be less than 5%, and each Strategy has its own Maximum Strategy Spread
that will never be greater than the initial Strategy Spread identified in your Contract at the Date of Issue plus 2%. When a Strategy has both a Participation Rate less than 100% and a Strategy Spread greater than zero, the Participation Rate and
Strategy Spread combine to reduce gains when Index Performance is positive. Additionally, when a Strategy has both a Participation Rate greater than 100% and a Strategy Spread greater than zero, the Participation Rate and Strategy Spread combine to
increase losses when Index Performance is negative.
STRATEGY EARNINGS
We credit Strategy Earnings to a Strategy on the
Strategy Term End Date. We refer to this form of Strategy Earnings as "Term Strategy Earnings." Term Strategy Earnings represent Strategy Earnings paid on the Strategy Value of a Strategy as of the Strategy Term End Date. Term Strategy Earnings take
into account the performance of the Strategy’s Index over the course of the entire Strategy Term (except when the Lock-In feature has been exercised or in the event that the Index has been substituted).
We also credit Strategy Earnings to a Strategy when
you take a partial withdrawal or full surrender prior to the Strategy Term End Date. We refer to this form of Strategy Earnings as "Interim Strategy Earnings." Interim Strategy Earnings represent both (i) any Strategy Earnings paid on any portion of
the partial withdrawal or full surrender that is a Preferred Withdrawal and (ii) any Strategy Earnings paid on any portion of the partial withdrawal or full surrender that is a Non-Preferred Withdrawal. Interim Strategy Earnings take into account
the performance of the Strategy’s Index between the beginning of the Strategy Term and the date on which the partial withdrawal or full surrender was taken (except when the Lock-In feature has been exercised or in the event that the Index has
been substituted). Interim Strategy Earnings are not applied on a Strategy Term End Date, because only Term Strategy Earnings are applied on a Strategy Term End Date.
If you exercise the Lock-In feature for a Strategy,
Term Strategy Earnings and Interim Strategy Earnings will take into account the performance of the Strategy’s Index from the beginning of the Strategy Term until the Lock-In Date. See "Calculation of Strategy Earnings – Lock-In."
See "Calculation of Strategy Earnings" for
information about how Term Strategy Earnings and Interim Strategy Earnings are calculated.
ACTIONS ON STRATEGY TERM END DATES
At the end of a Strategy Term, you may take any one
or more of the permissible actions listed below.
•
|
Reinvest – You may reinvest some or all of your Strategy Value in the same Strategy for another Strategy Term (with the Participation Rate and Strategy Spread that we declare for the upcoming Strategy Term), assuming that the
Strategy is available for investment. |
•
|
Transfer
– You may transfer some or all of your Strategy Value to another Strategy that is available for investment for a Strategy Term (with the Participation Rate and Strategy Spread that we declare for the upcoming
Strategy Term). |
•
|
Partial Withdrawal or Full
Surrender – You may take a partial withdrawal or fully surrender the Contract, which will be treated as a Preferred Withdrawal and/or a Non-Preferred Withdrawal, depending on your Remaining Preferred
Withdrawal Amount. |
For each
of your Strategies, at least 30 days prior to the end of the Strategy Term, we will send you a notice stating (i) the Strategies that will be available for investment at the end of the Strategy Term, (ii) their respective Crediting Factors,
including the Participation Rate and Strategy Spread that we declared for the upcoming Strategy Term, and (iii) how to communicate your instructions to us regarding what to do with the Strategy Value invested in the maturing Strategy.
If we do not receive instructions from you prior to the close
of business on the Strategy Term End Date (or if the Strategy Term End Date is not a Business Day, then at least one Business Day prior to the Strategy Term End Date), your Strategy Value in the maturing Strategy will be treated as follows:
•
|
If the maturing Strategy is
available for reinvestment, your entire Strategy Value in the maturing Strategy will be reinvested in the same Strategy for another Strategy Term, but with the Participation Rate and Strategy Spread that we declare for the upcoming Strategy Term.
|
•
|
If the
maturing Strategy is not available for reinvestment, your entire Strategy Value in the maturing Strategy will be transferred to the Default Option. |
If your Strategy Value is reinvested in the same Strategy or
transferred to the Default Option, and you do not wish to be invested in that Strategy or the Default Option, your only option will be to fully surrender the Contract. You can take a partial withdrawal to mitigate your unwanted investment exposure,
but if you are invested in multiple Strategies, you cannot instruct us to take the partial withdrawal solely from the undesired Strategy. Instead, your partial withdrawal will be allocated among all of your Strategies so that after the withdrawal is
processed, the Strategy Values are allocated in the same proportion as before the withdrawal.
DEFAULT OPTION
As described above, if you have Strategy Value invested in a
Strategy that will not be available for reinvestment for the next Strategy Term, and if we do not receive instructions from you prior to the close of business on the Strategy Term End Date (or if the Strategy Term End Date is not a Business Day,
then at least one Business Day prior to the Strategy Term End Date), your entire Strategy Value in the maturing Strategy will be transferred to the Default Option. The Default Option is a 1-Year S&P 500® 100% Protection Level Strategy.
If you have Strategy Value invested in a Strategy that will
not be available for reinvestment for the next Strategy Term, we will send you the Default Option’s Participation Rate and Strategy Spread for the next Strategy Term at least 30 days prior to the end of the Strategy Term End Date.
We will not change the Index for the Default Option unless the
Index of the Default Option is discontinued or there is a substantial change to the calculation of the Index as described in "Crediting Factors – Indexes."
TRANSFERS BETWEEN STRATEGIES
On a Strategy Term End Date, you may transfer free of charge
some or all of your Strategy Value in the maturing Strategy to another Strategy that is available for investment.
You are not permitted to transfer Strategy Value from a
Strategy other than on its Strategy Term End Date. Nor are you permitted to transfer Strategy Value into a Strategy if its Strategy Term is ongoing.
If your Strategy Term End Date is a Business Day, a transfer
request must be received by our Service Center prior to the close of business on that Business Day. If we do not receive a transfer request from you prior to the close of business on that Business Day, the transfer will not occur. If your Strategy
Term End Date is not a Business Day, a transfer request must be received by our Service Center at least one Business Day prior to the Strategy Term End Date. If we do not receive a transfer request from you at least one Business Day prior to the
Strategy Term End Date, the transfer will not occur. Transfer requests may be submitted in writing to our Service Center and must be signed by the Contract Owner. At our discretion, we may accept transfer requests by telephone or, if available, by
Internet.
Your transfer request will not be deemed to be
received by our Service Center until it is in good order. To be in good order, the transfer request must identify:
•
|
Your Contract Number;
|
•
|
The date
of the first day of the upcoming Strategy Term; |
•
|
The Strategy (or Strategies)
from which you are transferring Strategy Value and the amount(s) to be transferred; and |
•
|
The
Strategy (or Strategies) to which you are transferring Strategy Value and the amount(s) (by percentage) to be transferred. |
CREDITING FACTORS
GENERAL
Each Strategy has Crediting Factors that serve different
purposes and impact your investment differently. We use the Crediting Factors to calculate the Strategy Earnings for each Strategy.
Each Strategy has the following five Crediting Factors:
(1)
|
Index;
|
(2)
|
Strategy Term; |
(3)
|
Protection Level; |
(4)
|
Participation Rate; and
|
(5)
|
Strategy
Spread. |
The table below briefly summarizes how the
various Crediting Factors impact a Strategy.
Index
|
The
market index to which the Strategy is linked |
Strategy
Term |
The
duration of the Strategy in years |
Protection
Level |
A
factor in the Strategy’s defined downside protection. A higher Protection Level means a higher amount of downside protection. A lower Protection Level means a lower amount of downside protection. |
Participation
Rate |
A
factor that amplifies or dampens the Strategy’s performance compared to the Index Performance. A higher Participation Rate means greater upside potential but also greater downside potential (subject to the downside protection). A lower
Participation Rate means less upside potential but also less downside potential (also subject to the downside protection). |
Strategy
Spread |
A
factor used as a deduction in calculating a Strategy’s performance. In general, a higher Strategy Spread will reduce a Strategy’s performance more than a lower Strategy Spread. |
When selecting a Strategy for investment, you should not select
a Strategy based on any single Crediting Factor in isolation. While one Crediting Factor for a Strategy may be more or less favorable or attractive to you, the other Crediting Factors also impact whether that Strategy is appropriate for you based on
your financial needs and goals. You should consult with a financial professional prior to selecting a Strategy for investment.
Except in the limited circumstances under which we may
substitute an Index (see "Index" below), the Crediting Factors for a Strategy will not change for the duration of a given Strategy Term. The Index, Strategy Term and Protection Level will not change for as long as we continue offering a Strategy.
However, the Participation Rate and Strategy Spread may change from Strategy Term to Strategy Term, subject to guaranteed minimums and maximums. More specifically:
•
|
For those Strategies that
are available for initial investment under your Contract on the Date of Issue, their Crediting Factors (as well as any associated guaranteed minimums and maximums) will be described in your Contract. |
•
|
For any new Strategies that
we make available for investment under your Contract after the Date of Issue, their Crediting Factors (as well as any associated guaranteed minimums and maximums) will be declared by us at least 30 days prior to the beginning of their first Strategy
Terms. |
•
|
For all
Strategies, after their first Strategy Terms, we will declare their Participation Rates and Strategy Spreads at least 30 days prior to the beginning of an upcoming Strategy Term, subject to their associated guaranteed minimums and maximums.
|
A
Strategy’s Participation Rate and Strategy Spread for a particular Strategy Term may be different for newly issued Contracts than for existing Contracts.
The remainder of this section provides information about the
Crediting Factors and the purposes that they serve under the Contract.
INDEXES
The Strategies are index-linked investment options. This means
that the performance of a Strategy will depend, in part, on the performance of a particular market index over the course of a Strategy Term.
The Indexes under the Contract provide exposure to different
markets and asset classes, all of which may perform differently compared to each other and during different time periods. When we calculate Strategy Earnings, if the Index Performance is negative, you will lose money under your Contract unless the
Strategy’s downside protection protects you from the loss. When the Index Performance is positive, you may or may not gain money under your Contract, depending on the impact of the Strategy Spread.
We calculate the Index Performance on a point-to-point basis,
which is done by comparing:
(a)
|
The value of the Index on
the first day of the Strategy Term (the "Strategy Term Start Date") to |
(b)
|
The value
of the Index on a specific future date during the Strategy Term, which could be the last day of the Strategy Term (the "Strategy Term End Date") or any date prior to the Strategy Term End Date on which you take a withdrawal. |
The Indexes for the Strategies that we are offering for
investment currently include:
•
|
BlackRock Select Factor
Index (Ticker: BSELFCTX) |
•
|
J.P. Morgan Mozaic IISM
Index (Ticker: JMOZAIC2) |
•
|
MSCI EAFE Index (Ticker:
MXEA) |
•
|
NYSE® Zebra Edge®
Index (Ticker: ZEDGENY) |
•
|
SG Macro Compass Index
(Ticker: SGMACRO) |
•
|
S&P 500SM Average Daily
Risk Control 10% USD Price Return Index (Ticker: SPXAV10P) |
•
|
S&P
500® Index (Ticker: SPX) |
Market
Exposures and Investment Risks
The table below reflects
each Index’s primary market exposures and associated investment risks. A description of each investment risk immediately follows the table.
|
BlackRock
Select Factor Index |
J.P.
Morgan Mozaic IISM Index |
MSCI
EAFE Index |
NYSE®
Zebra Edge® Index |
SG
Macro Compass Index |
S&P
500SM Average Daily Risk Control 10% USD Price Return Index |
S&P
500® Index |
Primary
Market Exposures |
U.S.
Equity |
√
|
√
|
|
√
|
√
|
√
|
√
|
Non-U.S.
Equity |
|
√
|
√
|
|
√
|
|
|
Fixed
Income |
√
|
√
|
|
√
|
√
|
|
|
Commodities
|
|
√
|
|
|
√
|
|
|
Investment
Risks |
Brexit
Risk |
|
√
|
|
|
|
|
|
Commodities
Risk |
|
√
|
|
|
√
|
|
|
|
BlackRock
Select Factor Index |
J.P.
Morgan Mozaic IISM Index |
MSCI
EAFE Index |
NYSE®
Zebra Edge® Index |
SG
Macro Compass Index |
S&P
500SM Average Daily Risk Control 10% USD Price Return Index |
S&P
500® Index |
Currency
Conversion Risk |
|
√
|
√
|
|
√
|
|
|
Equity
Risk |
√
|
√
|
√
|
√
|
√
|
√
|
√
|
Fixed
Income Risk |
√
|
√
|
√
|
√
|
√
|
|
|
Futures
Risk |
|
√
|
|
√
|
√
|
|
|
Government
Bond Risk |
√
|
√
|
|
√
|
√
|
|
|
Large-Capitalization
Company Risk |
√
|
√
|
√
|
√
|
√
|
√
|
√
|
Leverage
Risk |
|
√
|
|
√
|
√
|
|
|
Market
Non-Participation Risk |
√
|
√
|
|
√
|
√
|
√
|
|
Mid-
or Small-Capitalization Company Risk |
√
|
√
|
√
|
|
|
|
|
Momentum
Risk |
|
√
|
|
|
|
|
|
Non-U.S.
Securities Risk |
|
√
|
√
|
|
√
|
|
|
Performance
Drag Risk |
√
|
|
|
|
√
|
|
|
U.S.
Treasury Risk |
√
|
√
|
|
√
|
√
|
|
|
Underlying
ETF Risks |
√
|
|
|
|
|
|
|
Volatility
Control Risk |
√
|
√
|
|
√
|
√
|
√
|
|
Brexit Risk. Bonds issued by
the United Kingdom government are subject to risks related to the United Kingdom exiting the European Union (commonly referred to as "Brexit"). Brexit has led to volatility in global financial markets, in
particular those of the United Kingdom and across Europe, and the weakening in political, regulatory, consumer, corporate and financial confidence in the United Kingdom and Europe. Given the size and importance of the United Kingdom's economy,
uncertainty or unpredictability about its legal, political and/or economic relationships with Europe has been, and may continue to be, a source of instability and may cause the prices of bonds issued by the United Kingdom government to fall, perhaps significantly.
Commodities Risk. The
performance of commodity investments can be extremely volatile and unpredictable. Prices of commodities are primarily affected by global supply and demand, but they are also significantly influenced by, among other factors, speculative actions,
currency exchange rates, governmental programs and policies, national and international political and economic events, changes in interest and exchange rates, trading activities, and sudden disruptions in supply.
Currency Conversion Risk.
Indexes exposed to non-U.S. markets generally include methodologies for converting foreign currencies into U.S. dollars. Those methodologies may take into account conversion costs and/or exchange rates. The
conversion of foreign currencies into U.S. dollars may negatively impact the performance of the Index. This risk can be impacted by many factors, such as existing and expected rates of inflation; existing and expected interest rate levels;
political, civil, or military unrest; the extent of governmental surpluses or deficits; fiscal and trade policies pursued by governments; and the Index’s methodology for currency conversions. Currency exchange rates can be very volatile and
can change quickly and unpredictably.
Equity Risk. Equity securities (e.g., common stocks) are subject to changes in value. The values of equity securities may be volatile
and can be influenced by a number of factors, such as changes in (or perceived changes in) general capital markets, specific market segments, or specific issuers.
Fixed Income Risk.
Fixed income instruments (e.g., bonds) are subject to investment risks such as interest rate risk (i.e., negative fluctuations in market value due to changes in interest rates) and credit risk
(i.e., the risk of default by the obligors). The market price of a fixed income instrument can be volatile and influenced by a number of factors,
particularly its duration, yield as compared to current market interest rates, and the actual or perceived credit quality of the issuer.
Futures Risk. A futures
contract is a financial instrument in which a party agrees to pay a fixed price for the delivery of an asset or commodity at a specified future date. The price of a futures contract reflects the expected value of the asset upon delivery in the
future, whereas the spot price of an asset reflects the immediate value of the asset. A variety of factors can lead to a disparity between the expected future price of an asset and the spot price at a given point in time. In addition, futures
markets are subject to disruptions due to various factors, including lack of liquidity, participation of speculators, and government regulation and intervention. Futures contracts are subject to the risk of default by obligors. These factors and
others can cause the price of futures contracts to be volatile. Futures contracts may be subject to legal and regulatory uncertainty, particularly futures contracts that are not traded on regulated exchanges.
Government Bond Risk. The
prices of government bonds are significantly influenced by the creditworthiness of the governments that issue them. Any decline or perceived decline in a government’s creditworthiness, as a result of a credit rating downgrade or otherwise, may
cause the prices of that government’s bonds to fall, perhaps significantly, and may cause increased volatility in local or global credit markets. In recent years, U.S. rating agencies have downgraded the creditworthiness and/or assigned
negative outlooks to many governments worldwide, including the U.S., U.K., Germany, and Japan, and may do so again in the future.
Large-Capitalization Company Risk. In general, large-capitalization companies may be less able than smaller-capitalization companies to adapt to changing market conditions. Large-capitalization companies may be more mature and subject to more limited
growth potential compared with smaller-capitalization companies. During different market cycles, the performance of large-capitalization companies has trailed the overall performance of the broader securities markets.
Leverage Risk. An Index is
leveraged when its market exposure is greater than 100%. Depending on an Index’s methodology, an Index may use leverage with respect to all components or only particular components. When an Index is leveraged, any price movements in its
leveraged components will result in greater changes in the value of the Index than if the Index were not leveraged. In particular, the use of leverage will magnify any negative performance which, in turn, could adversely affect the value of the
Index (perhaps significantly). Leverage may significantly increase an Index’s volatility, even if leverage is being used as part of a volatility control overlay.
Market Non-Participation Risk.
At times, an Index may have less than 100% total market exposure. Any portion of an Index without market exposure will not participate in positive market movements and may not earn any returns. An Index may not have
full market exposure because it has a cash component, or an Index may have a methodology that partially reduces or entirely removes the Index’s exposure to a particular market or all markets for a period of time. Market non-participation could
cause an Index to miss a potential recovery in the market or in an underlying asset class.
Momentum Risk. Momentum
investing generally seeks to capitalize on positive trends in the returns of financial instruments. However, there is no guarantee that recent trends in returns will continue in the future. Momentum investing may not perform well in markets
characterized by short-term volatility.
Mid- or
Small-Capitalization Company Risk. Compared to large-capitalization companies, mid-capitalization companies may be less stable and more susceptible to adverse developments. In addition, the securities of
mid-capitalization companies may be more volatile and less liquid than those of large-capitalization companies. All of the risks associated with mid-capitalization companies are magnified with respect to small-capitalization companies.
Non-U.S. Securities Risk.
Securities of non-U.S. issuers are subject to the risks associated with investing in those non-U.S. markets, such as heightened risks of inflation or nationalization. Non-U.S. securities may decline in value due to
political, economic, and geographic events affecting issuers of non-U.S. securities or non-U.S. markets. In addition, non-U.S. securities markets may trade a small number of securities and may be unable to respond effectively to changes in trading
volume, potentially making prompt liquidation of holdings difficult or impossible at times.
Performance Drag Risk. Even
though the Indexes track the performance of securities and other financial instruments, they are not actual portfolios of investments and do not incur the fees or other costs generally associated with managing and owning a portfolio of investments.
Nonetheless, in order to more closely align the performance of the Index with the performance of a managed portfolio that takes identical positions as the Index, the Index (and one underlying index, in the
case of the SG Macro Compass
Index) includes deductions from the value of the Index as part of its methodology. These deductions negatively impact the performance of the Index. The performance of the Index would be higher if these fees or other costs were not deducted.
In addition, with respect to the BlackRock Select Factor Index
which tracks the performance of multiple exchange-traded funds ("ETFs"), the underlying ETFs are subject to management fees, other expenses, and transaction costs that negatively impact their performance and market prices and, consequently,
negatively impact the performance of the Index. These negative impacts on performance are compounded by the annualized rate that the BlackRock Select Factor Index deducts from its value as part of its methodology.
The drags on Index Values as described above, potentially
together with the Strategy Spread and Participation Rate under a Strategy, increase your risk of loss, subject to the downside protection provided by the Strategy.
Underlying ETF Risks. The ETFs
that underlie the BlackRock Select Factor Index are subject several investment risks. Such risks may adversely affect the ETFs’ performance and, consequently, the performance of the Index.
•
|
Risks Common to the Underlying
ETFs |
•
|
Performance Risk. Each ETF may perform negatively over short periods due to short-term market movements and over longer periods during more prolonged market downturns. |
•
|
Issuer Risk. The performance of each ETF depends on the performance of individual securities in which the ETF has exposure. Changes in the financial condition or credit rating of an issuer of those securities may cause the value of
the securities to decline. |
•
|
Tracking Error Risk. Each ETF seeks to track the investment results of a specific market index. There is no guarantee that an ETF’s investment results will have a high degree of correlation to the performance of the index that it seeks
to track, or that the ETF will achieve its investment objective. Each ETF may be subject to tracking error, which is the divergence of an ETF’s performance from that of the index it seeks to track. This risk may be heightened during times of
increased market volatility or other unusual market conditions. Among other reasons, tracking error may result because an ETF incurs fees and expenses while the index does not. Certain ETFs may experience higher tracking error than is typical for
ETFs that track a market index. |
•
|
Market
Trading Risks. Each ETF faces numerous market trading risks, including the potential lack of an active market for fund shares, losses from trading in secondary markets, periods of high volatility, and disruptions in
the creation/redemption process. Any of these factors, among others, may lead to an ETF’s shares trading at a premium or discount to net asset value. |
•
|
Risks Common to the Underlying
Equity ETFs. The underlying equity ETFs are subject to "Equity Risk," "Large-Capitalization Company Risk," and "Mid- or Small-Capitalization Company Risk" as described above. |
•
|
Risks
Common to the Underlying Fixed Income ETFs. The underlying fixed income ETFs are subject to "Fixed Income Risk," "Government Bond Risk," and "U.S. Treasury
Risk" as described above. They are also subject to the following risks: |
•
|
Declining Interest Rate
Risk. Each Fixed Income ETF is exposed to the risk that the ETF’s income may decline if interest rates fall. This decline in income can occur because the ETF may subsequently invest in lower-yielding bonds as
bonds in its portfolio mature, are near maturity or are called, bonds in the underlying index are substituted, or the ETF otherwise needs to purchase additional bonds. |
•
|
Low and
Negative Interest Rate Risk. Each Fixed Income ETF is exposed to the risks that during periods of very low or negative interest rates, the ETF may be unable to maintain positive returns or pay dividends. Very low or
negative interest rates may magnify interest rate risk. Changing interest rates, including rates that fall below zero, may have unpredictable effects on markets, result in heightened market volatility, and detract from the ETF’s performance to
the extent the ETF is exposed to such interest rates. Additionally, under certain market conditions in which interest rates are low and the market prices for portfolio securities have increased, the ETF may have a very low, or even negative yield. A
low or negative yield would cause the ETF to lose money in certain conditions and over certain time periods. An increase in interest rates will generally cause the value of securities held by the ETF to decline, may lead to heightened volatility in
the fixed-income markets, and may adversely affect the liquidity of certain fixed-income investments, including those held by the ETF. The historically low interest rate environment heightens the risks associated with rising interest rates.
|
•
|
Risks Specific to Particular
Underlying ETFs |
•
|
iShares MSCI USA Value
Factor ETF – Value Stock Risk. This ETF primarily invests in stocks deemed to be undervalued. Stocks that are perceived as undervalued may fail to appreciate for long periods of time and may never realize their
full potential value. |
•
|
iShares MSCI USA Momentum
Factor ETF – Momentum Factor Risk. This ETF primarily invests in stocks that are deemed to exhibit relatively higher price momentum characteristics (i.e., stocks
exhibiting strong recent price trends). Stocks that previously exhibited high momentum characteristics may not experience positive momentum in the future or may experience more volatility than the market as a whole. |
•
|
iShares MSCI USA Quality
Factor ETF – Quality Stock Risk. This ETF primarily invests in stocks that are deemed to have quality characteristics identified through certain fundamental metrics. Even if a stock is deemed to be a quality
stock, there is no guarantee that the past performance of that stock will continue. Companies that issue these stocks may experience lower than expected returns or may experience negative growth, as well as increased leverage, resulting in lower
than expected or negative returns. |
•
|
iShares MSCI USA Size Factor
ETF – Low Size Risk. From a defined universe of large- and mid-capitalization companies, this ETF emphasizes investments in stocks with smaller capitalizations within the investable universe. Relative to the
larger companies within the investable universe, stocks of such smaller companies may be less stable and more susceptible to adverse developments, and their securities may be more volatile and less liquid. |
•
|
iShares
MSCI Min Vol USA ETF – Minimum Volatility Risk. This ETF emphasizes investments in stocks that are deemed to have lower volatility. There is no guarantee that such stocks will be any less volatile than the
market as a whole or any other stocks, and could be more volatile. The ETF may experience high volatility. |
Volatility Control Risk.
Volatility is a measure of the degree of variation in the returns of an asset over a period of time. If an Index includes a volatility control overlay or other volatility control methodologies, the Index may reduce
its exposure to one or more markets during periods of volatility in order to mitigate dramatic changes in the value of the Index. To the extent that an Index reduces its market exposure in response to volatility, the Index will not be fully
participating in any growth in that market. Reducing market exposure during periods of volatility may mitigate the impact of short-term, significant market fluctuations in the Index’s return, but may also cause the Index to not fully
participate in market recoveries. There is no guarantee that any volatility control methodology will be successful.
Because volatility control may limit an Index’s
participation in rising markets, volatility control may ultimately limit your gains (if any) under a Strategy. In addition, each Strategy already provides limited downside protection in the form of its Protection Level. You should therefore consider
whether selecting a Strategy that is linked to an Index that also includes volatility control is consistent with your risk tolerances and investment goals.
Descriptions of the Indexes
Provided below is a description of each Index. You may obtain
additional information about any Index, including information about its components, weightings, performance, and methodologies, and similar information about any ETFs or other indexes that underlie an Index, by contacting your financial professional
or our Service Center.
BlackRock Select Factor Index
Summary
The BlackRock Select Factor Index is designed to provide
diversified, multi-asset exposure, while seeking to maintain a target volatility. The Index has dynamic exposure (as discussed further below) to eight ETFs that are actively traded on a U.S. stock exchange (NYSE Arca), including five ETFs that
invest in equities ("Equity ETFs"), two ETFs that invest in fixed income instruments ("Fixed Income ETFs"), and an ETF against which the Index may take a short position ("Hedged ETF") in order to partially hedge its exposure to equity markets. The
Index also has a cash component.
Each Equity ETF tracked
by the Index emphasizes one of the following equity strategies:
•
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Value – Stocks with
lower valuations based on fundamentals |
•
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Momentum – Stocks
exhibiting strong recent price trends |
•
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Quality – Stocks with
strong and stable balance sheets |
•
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Size – Stocks of
relatively smaller, more nimble companies |
•
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Minimum Volatility –
Stocks with lower levels of historical volatility |
Each Fixed Income ETF tracked by the Index primarily invests
in U.S. Treasury obligations, one investing in short-term bonds and the other investing in long-term bonds.
The Index is
considered to be "dynamic" because the Index adjusts its market exposures in response to changing market conditions. All such adjustments are performed pursuant to a rules-based methodology. The Index adjusts its market exposures primarily by
changing the target weightings of the ETFs that the Index tracks. In general, when markets are volatile, the Index reduces its exposure to the U.S. equity market (generally by reducing the target weightings of the Equity ETFs) and shifts its fixed
income exposure from short-term bonds to long-term bonds (by changing the target weightings among the Fixed Income ETFs). Conversely, when markets are more favorable, the Index increases its exposure to the U.S. equity market (generally by
increasing the target weightings of the Equity ETFs) and shifts its fixed income exposure from long-term bonds to short-term bonds (by changing the target weightings among the Fixed Income ETFs). Similarly, the Index may adjust the weighting of its
short position on the Hedged ETF or the cash component in response to changing market conditions.
The performance of the Index reflects the reinvestment of ETF
dividends back into the Index after the close of trading on the ex-dividend date. Return generated from the Index’s exposure to cash is included in the return of the Index.
Blackrock Index Services, LLC ("BIS") is the index provider
for this Index. BIS is not affiliated with Nationwide.
Underlying ETFs
General
BlackRock Fund Advisors ("BFA") serves as the investment
adviser for each underlying ETF. Each ETF seeks to track the investment results of a particular market index. BFA uses a representative sampling indexing strategy to manage each ETF. "Representative sampling" is an indexing strategy that involves
investing in a representative sample of securities that collectively has an investment profile similar to that of the applicable market index.
BFA is not affiliated with either Nationwide or the index
providers for the ETFs’ underlying indexes. Nor is Nationwide affiliated with any of the index providers for the ETFs’ underlying indexes. BFA and BIS are affiliates.
Information about the Equity ETFs
Provided below is a brief description of the five Equity ETFs.
Each Equity ETF seeks to track the investment results of a variant index of the MSCI USA Index. MSCI Inc. is the index provider for the MSCI USA Index and the variant indexes.
The MSCI USA Index is a weighted index that includes U.S.
large- and mid- capitalization stocks, as defined by MSCI Inc. As of March 31, 2021, the MSCI USA Index had 621 component companies with a capitalization range (from largest to smallest) of approximately $2.8 trillion to $3.6 billion. The stocks
included in each variant index are selected from the stocks included in the broader MSCI USA Index (except for the variant MSCI USA Low Size Index, which includes all the stocks from the MSCI USA Index, as discussed further below).
•
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iShares MSCI USA Value
Factor ETF: This ETF seeks to track the investment results of the MSCI USA Enhanced Value Index, a weighted index composed of stocks with value characteristics
and relatively lower valuations. The MSCI USA Enhanced Value Index includes stocks that exhibit certain higher value characteristics based on price-to-book value, price-to-forward earnings, and enterprise value-to-cash flow from operations relative
to their peers within the corresponding Global Industry Classification Standard (GICS®) sector. |
•
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iShares MSCI USA Momentum
Factor ETF: This ETF seeks to track the investment results of the MSCI USA Momentum SR Variant Index, a weighted index composed of stocks exhibiting relatively higher price momentum characteristics. In general,
momentum stocks are stocks that exhibit strong recent price trends. The MSCI USA Momentum SR Variant Index selects stocks based on the stocks’ momentum scores. MSCI Inc. calculates momentum scores by analyzing the stocks’ excess returns
and deviations in weekly returns over historical periods. |
•
|
iShares MSCI USA Quality
Factor ETF: This ETF seeks to track the investment results of the MSCI USA Sector Neutral Quality Index, a weighted index composed of stocks with quality
characteristics as identified through certain fundamental metrics. The MSCI USA Sector Neutral Quality Index selects stocks that exhibit certain higher quality characteristics (i.e., high return on equity, low earnings variability, and low leverage) relative to their peers within the corresponding Global Industry Classification Standard (GICS®) sector. |
•
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iShares
MSCI USA Size Factor ETF: This ETF seeks to track the investment results of the MSCI USA Low Size Index, a weighted index that emphasizes relatively smaller
average market capitalizations within the capitalization range of the MSCI USA Index. The MSCI USA Low Size Index includes all stocks in the MSCI USA Index, and is therefore comprised of only large- and mid-capitalization stocks. However, the MSCI
USA Low Size Index reweights the stocks such that the weightings of the companies on the lower end of the capitalization range are greater than the companies on the higher end of the capitalization range. |
•
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iShares MSCI USA Min Vol
Factor ETF: This ETF seeks to track the investment results of the MSCI USA Minimum Volatility (USD) Index, a weighted index composed of stocks that, in the
aggregate, have lower volatility characteristics relative to the U.S. large- and mid-cap equity market. The MSCI USA Minimum Volatility (USD) Index selects stocks using a rules-based methodology that is designed to construct a portfolio with the
lowest absolute volatility. "Lowest absolute volatility" is measured by MSCI Inc. using a multi-factor risk model and an optimization tool that aims to determine the least volatile index composition based on the projected market risk of the
securities in the MSCI USA Index and certain weighting constraints. |
Information about the Fixed Income ETFs
Provided below is a brief description of the two Fixed Income
ETFs. Each Fixed Income ETF seeks to track the investment results of an index that measures the performance of public obligations of the U.S. Treasury within a range of remaining maturities. The index provider for these indexes is ICE Data Indices,
LLC or its affiliates.
•
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iShares 1-3 Year Treasury
Bond ETF: This ETF seeks to track the investment results of the ICE U.S. Treasury 1-3 Year Bond Index, which is composed of U.S. Treasury bonds with remaining
maturities between one and three years. |
•
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iShares
20+ Year Treasury Bond ETF: This ETF seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index, which is composed of U.S. Treasury
bonds with remaining maturities greater than 20 years. |
Information about the Hedged ETF
As discussed under "Volatility Control" immediately below, the
Index may partially hedge its exposure to the U.S. equity market by taking a short position against the iShares Core S&P 500® ETF. This ETF seeks to track the investment results of the S&P 500® Index. Please see the description of the S&P 500® Index later in this section for information about that index.
The Index creates this short position by assigning a negative
weighting to the Hedged ETF within the Index’s equity allocation.
In general, when the Hedged ETF is negatively weighted within
the Index’s equity allocation:
•
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The value of the
Index’s equity position will be lower when the Hedged ETF performs positively, and |
•
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The value
of the Index’s equity position will be higher when the Hedged ETF performs negatively. |
The impact on the value of the Index’s equity position
will be proportionate to the Hedged ETF’s negative weighting. In the most defensive market state, the negative weighting is set to a target weight of -50%. In a neutral market state, the negative weighting is set to a target weight of -33.33%.
In an aggressive market state, the negative weighting is set to a target weight of 0%. To the extent that the target weighting is less than 0%, this Index will not be fully participating in any equity market growth.
Volatility Control
The Index seeks to maintain a target annualized volatility of
5%. In accordance with its rules, the Index may manage volatility by dynamically adjusting the target weightings of (i) the Equity ETFs and Fixed Income ETFs, (ii) the cash component, and (iii) the short position against the Hedged ETF as discussed
in this section. Depending on market conditions, the Index’s target weighting for its cash component may be greater than its target weightings for its other components.
Weighting and Rebalancing
On a monthly basis, as part of the Index’s dynamic
adjustments, the Index computes the target weightings of the Equity ETFs based on its rule-based methodology reflecting factors such as (i) the current stage of the economic cycle (i.e., contraction,
expansion, recovery, or slowdown), (ii) the extent to which an Equity ETF offers attractive value (based on market prices of underlying stocks) relative to underlying fundamentals (based on financial reporting metrics of constituent companies); and
(iii) the extent to which daily adjusted returns demonstrate above-market price momentum. Any changes to the Equity ETFs’ target weightings are introduced in equal increments over a rebalancing period that generally extends for 10 business
days.
On a daily
basis, the Index uses market signals derived from the high-yield bond market to compute the target weightings of the Fixed Income ETFs and the Index’s short position against the Hedged ETF. Changes to these target weightings are introduced in
equal increments over a period that generally extends for 5 business days. The Index also uses these market signals to maintain the Index’s volatility control overlay on a daily basis. The resulting adjustments for the volatility control
overlay are implemented with a one business day lag.
Performance Drag
The performance of the Index reflects the deduction of an
annualized rate of 0.50% plus a rate equal to the effective federal funds rate (i.e., a rate that banks pay when borrowing funds from each other) applied to ETF positions having positive weight in the Index. In addition, the underlying ETFs are
subject to management fees, other expenses, and transaction costs.
Exclusive Licensing
Use of the Index in connection with annuity contracts has been
exclusively licensed to Nationwide. The exclusive licensing agreement will expire on May 1, 2022, unless extended by the parties.
J.P. Morgan Mozaic
IISM Index
Summary
The J.P. Morgan Mozaic IISM Index provides exposure to the performance of futures contracts referencing a diversified group of equities, fixed income assets, and commodities. The
Index generally includes nine components selected on a monthly basis from a defined universe of 15 potential components. The Index emphasizes high momentum (i.e., positive trends in the returns) when selecting
and weighting its components. The Index also targets a level volatility.
A futures contract is a financial instrument in which a party
agrees to pay a fixed price for the delivery of an asset at a specified future date. The market value of a futures contract is affected by the price or value of the underlying asset referenced by the contract. In general, although the value of a
futures contract may or may not track the price or value of the referenced asset, as the price or value of the referenced asset rises (or falls), the market value of the futures contract will generally rise (or fall). The Index, through its exposure
to its potential constituents (which include indexes that track commodity futures), is currently exposed solely to futures contracts that are traded on regulated futures exchanges, but the Index may in the future be exposed to over-the-counter
contracts traded through facilities that are subject to lesser degrees of regulation or no substantive regulation.
Returns from investing in futures contracts are generally
derived from three sources: (a) changes in the price of the relevant futures contracts (which is known as the "price return"); (b) any profit or loss realized when replacing the relevant futures contract as it reaches its expiration date with a
similar futures contract that has a later expiration date (which is known as the "roll return,"); and (c) any interest earned on the cash deposited as collateral for the purchase of the relevant futures contracts (which is known as the "collateral
return"). The Index, which is an "excess return index," measures the "price return" and "roll return" associated with an investment in uncollateralized future contracts. In contrast, a "total return" index
would also measure the "collateral return" as well as the "price return" and "roll return."
J.P. Morgan Securities plc ("JPMS plc") is the index provider.
JPMS plc is not affiliated with Nationwide.
Possible Index
Components
Described below are the Index’s
possible equity, fixed income, and commodities components.
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Equity Components. The possible equity components are futures contracts that provide exposure to the performance of equity indexes. There are six possible equity components, each represented by futures contracts referencing the:
|
(1)
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S&P 500® Index (comprised of large-capitalization U.S. companies); |
(2)
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Nasdaq-100 Index® (comprised of large-capitalization non-financial U.S. and foreign companies traded on The Nasdaq Stock Market); |
(3)
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Russell 2000® Index (comprised of small-capitalization U.S. companies); |
(4)
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DAX® Index (comprised of large-capitalization companies traded on the Frankfurt Stock Exchange); |
(5)
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FTSE® 100 Index (comprised of large-capitalization companies traded on the London Stock Exchange); or |
(6)
|
Tokyo Stock Price Index
(TOPIX®) (comprised of large-capitalization companies traded on the Tokyo Stock Exchange). |
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Fixed Income Components. The possible fixed income components are futures contracts that provide exposure to the performance of U.S and foreign government bonds. There are six possible fixed income components, each represented by futures
contracts referencing a particular group of bonds. The six referenced groups of bonds are: |
(1)
|
Short-term U.S. Treasury
notes (i.e., notes issued by the U.S. government); |
(2)
|
Medium-term U.S. Treasury
notes; |
(3)
|
Long-term U.S. Treasury
notes; |
(4)
|
Euro Bunds (bonds issued by
the German federal government); |
(5)
|
Gilts (bonds issued by the
U.K. government); and |
(6)
|
JBGs
bonds issued by the Japanese government). |
The Index’s exposure to fixed income components may be
greater, perhaps significantly greater, than its exposure to equity or commodities components. If the Index has greater exposure to fixed income components, a change in the value of the Index’s fixed income futures contracts may have a greater
impact on the Index’s return than a change in the value of the Index’s equity or commodities components.
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Commodities Components. The possible commodities components are indexes that track the performance of futures contracts referencing commodities in the energy, industrial metal, and precious metal sectors. There are three possible commodities
components. The three underlying indexes are: |
(1)
|
Bloomberg Energy SubindexSM (comprised of futures referencing the commodities included in the relevant sector within the Bloomberg Commodity IndexSM); |
(2)
|
Bloomberg Industrial Metals
SubindexSM (comprised of futures referencing the commodities included in the relevant sector within the Bloomberg Commodity IndexSM); and |
(3)
|
Bloomberg
Precious Metals SubindexSM (comprised of futures referencing the commodities included in the relevant sector within the Bloomberg Commodity IndexSM). |
The index provider for these indexes is Bloomberg Index
Services Limited. Bloomberg Index Services Limited is not affiliated with JPMS plc or Nationwide.
Volatility Control
The Index seeks to maintain a target annualized volatility of
4.2%. In general, when assigning a weight to a selected component as discussed under "Weighting and Rebalancing" below, if the recent volatility (calculated as the highest annualized volatility observed over 22, 65 and 130 day periods) of the
selected component is greater than the target volatility, the component will be assigned a lesser weight within the Index. Conversely, if the recent volatility of a selected component is less than the target volatility, the component will be
assigned a greater weight within the Index. During periods of high volatility, the total weight of the Index’s components may be lower than 100%. A total weight of less than 100% means that the Index is partially uninvested.
The Index also includes an "exposure flattening" feature. If
on any day the Index’s overall weekly return on a rolling basis is less than -3%, the Index progressively decreases its overall market exposure to 0% (i.e., completely uninvested). After five weekdays,
the Index will restore its market exposures by progressively increasing its exposure to each component until that exposure has been fully restored, subject to the initiation of further exposure flattening.
Leverage
The Index may be subject to increased volatility due to the
potential use of significant leverage. The Index may use leverage to increase return from its components or manage volatility in accordance with its rule-based methodology. When the Index uses leverage, the total weight of the Index components will
be greater than 100%, up to a maximum of 300%. The Index’s individual fixed income components can be significantly leveraged, with maximum weights ranging from 45% up to 250%. By comparison, no individual equity or commodity component can
represent more than 15% in total weight. In general, the Index is most likely to use leverage when recent volatility is lower than the target volatility.
Weighting and
Rebalancing
The Index utilizes a rules-based methodology
based on momentum and target volatility to select, weight, and rebalance its components. On a monthly basis, the Index selects for inclusion the nine components with the highest performance over the previous six month period and then assigns weights
to those components based on recent volatility and the Index’s target volatility, all subject to the Index’s rules-based constraints (such as weight caps on individual components and total weight). The composition of the Index is then
implemented at the beginning of the following calendar month over a five-day rebalancing period, determined separately for each component. The Index may provide exposure to more or fewer than nine components while it is being rebalanced each month.
Depending on recent volatility, it is possible that fewer than nine components could be selected for inclusion.
Exclusive Licensing
Use of the Index in connection with annuity contracts has been
exclusively licensed to Nationwide. The exclusivity term under the licensing agreement will expire on December 31, 2024, unless terminated earlier by J.P. Morgan Securities LLC or extended by the parties.
MSCI EAFE
Index
The MSCI EAFE Index is designed to
represent the performance of common stocks of large- and mid-capitalization companies across 21 developed markets, including countries in Europe, Australasia, and the Far East, excluding the U.S. and Canada. The Index is available for a number of
regions and market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. As of March 31, 2021, the Index had a capitalization range (from largest to smallest) of approximately
$322.4 billion to $1.3 billion.
The Index is a price
index and does not include dividends declared by any of the companies in the Index.
The index provider for this Index is MSCI Inc. MSCI Inc. is
not affiliated with Nationwide.
NYSE® Zebra Edge® Index
General
The NYSE® Zebra Edge® Index is an equally-weighted index
that uses a rules-based, contrarian methodology. The Index selects stocks from the NYSE® U.S. Large Cap Equal Weight IndexTM, which is comprised of large-capitalization companies. As of March 31, 2021, the NYSE® U.S. Large Cap Equal Weight IndexTM had a
capitalization range (from largest to smallest) of approximately $2.25 trillion to $8 billion.
The Index favors "cool" stocks over "hot" stocks. Cool stocks
are stocks that have experienced lower trading frequency over the last two years and lower volatility over the last three months and one year. Hot stocks are stocks that have experienced the highest trading frequency over the last two years and the
highest volatility over the last three months and one year.
The index provider for this Index is NYSE®. NYSE® is not affiliated with Nationwide.
Construction
The Index is reconstructed on a quarterly basis. From the
universe of 500 stocks in the NYSE® U.S. Large Cap Equal Weight IndexTM, the Index removes the 350 "hottest" stocks. The remaining 150 stocks are selected and weighted equally within the Index. The Index is not rebalanced
during the quarter, except in connection with the risk control process discussed below.
Volatility Control
To mitigate the effects of volatility on returns, the Index
uses a risk control process. Rebalancing under the risk control process occurs daily. If recent volatility in the Index’s equity exposure exceeds 5%, the Index moves a portion of its equity allocation to U.S. Treasury futures. If recent
volatility in the Index’s total exposure exceeds 5%, the Index moves a portion of its allocation to cash. If recent volatility is below 5%, the Index maintains equity exposure of at least 100%.
Leverage
The Index may be subject to increased volatility due to the
potential use of significant leverage. Subject to the Index’s risk control process, when recent volatility is below 5%, the Index’s equity exposure may be increased beyond 100% up to a 150% maximum.
SG Macro Compass Index
Summary
The SG Macro Compass Index is a rules-based index tracking the
performance of thirteen underlying indexes, providing exposure to a diversified group of equity, fixed income, and commodities futures. Eleven of the underlying indexes are composed of (or reference) equities, fixed income, or commodities futures
contracts. The remaining two underlying indexes are composed of U.S. stocks. The Index also seeks to maintain a target volatility.
The index provider for this Index and all of the underlying
indexes is Société Générale or an affiliate thereof. Société Générale is not affiliated with Nationwide.
Underlying Futures Indexes
A futures contract is a financial instrument in which a party
agrees to pay a fixed price for the delivery of an asset at a specified future date. The market value of a futures contract is affected by the price or value of the underlying asset referenced by the contract. In general, although the value of a
futures contract may or may not track the price or value of the referenced asset, as the price or value of the referenced asset rises (or falls), the market value of the futures contract will generally rise (or fall). The Index is exposed solely to
futures contracts that are traded on regulated futures exchanges.
Returns from investing in futures contracts are generally
derived from three sources: (a) changes in the price of the relevant futures contract (which is known as the "price return"); (b) any profit or loss realized when replacing the relevant futures contract as it reaches its expiration date with a
similar futures contract that has a later expiration date (which is known as the "roll return"); and (c) any interest earned on the cash deposited as collateral for the purchase of the relevant futures contract (which is known as the "collateral
return"). The underlying futures indexes are "excess return" indexes, meaning they measure the "price return" and "roll return" associated with an investment in uncollateralized future contracts, rather than a "total return" index which would also
measure the "collateral return."
Provided below is a
brief description of the eleven underlying indexes composed of (or referencing) futures contracts.
•
|
Equity Futures Indexes –
IND1CUE1, IND1CEE1, IND1CJE1: The three equity futures underlying indexes provide the SG Macro Compass Index with exposure to stock markets. Each underlying index gains exposure to stock market performance by
including specific futures contracts that track certain U.S. and foreign stock market indexes. The underlying indexes’ futures contracts reference, respectively, the S&P 500® Index (comprised of large-capitalization U.S. companies), the DAX® Index (comprised of large-capitalization companies traded on the Frankfurt Stock Exchange), and the Nikkei 225® Index (comprised of large-capitalization companies traded on the Tokyo Stock Exchange). |
•
|
Fixed Income Futures Indexes
– IND1BJB, IND1BFV, IND1BTY, IND1BUS, IND1BOE, IND1CER1, IND1BUB: The seven fixed income futures underlying indexes provide the SG Macro Compass Index with exposure to the performance of groups of U.S. and
foreign government bonds. Each underlying index gains exposure to these government bonds by including futures contracts that reference U.S. Treasury notes (5, 10, and 20 year notes issued by the U.S. government), Euro Bunds (5, 10, and 30 year bonds
issued by the German federal government), and JGBs (10 year bonds issued by the Japanese government). |
•
|
Commodities
Futures Index – IND1CARC: The commodities futures underlying index exposes the SG Macro Compass Index to the performance of commodities (excluding gold and silver). The underlying index gains exposure to these
commodities by including futures contracts that reference natural gas, WTI crude, Brent crude oil, gasoline blendstock, heating oil, corn, wheat, Kansas wheat, soybean, soybean oil, soybean meal, cotton, coffee, sugar, live cattle, lean hogs,
copper, aluminum, nickel, gas oil, and zinc. |
Underlying U.S. Stock
Indexes
The two underlying indexes composed of
U.S. stocks further expose the SG Macro Compass Index to the U.S. stock market. Both underlying indexes employ rules-based methodologies to select and track stocks included in the S&P 500® Index. Please see the description of the S&P
500® Index later in this section for information about that index.
Provided below is a brief description of the two underlying
indexes composed of U.S. stocks.
•
|
SGI Low Vol 200 Index: The SGI Low Vol 200 Index selects on a monthly basis the 200 stocks that, subject to a liquidity threshold, have exhibited lowest relative volatility over the previous year. It then weights those stocks inversely
proportional to their volatility, with stocks exhibiting lower volatility receiving greater weighting. |
•
|
SGI Equity
Value US Index: The SGI Equity Value US Index selects on a quarterly basis an equally weighted basket of the 100 stocks that score the highest according to a value methodology. The index’s value
|
|
methodology seeks to
identify undervalued stocks by comparing stocks according to five fundamental ratios: book to price; earnings to price; one year forward earnings to price; earnings before interest, taxes, depreciation, and amortization (EBITDA) to enterprise value;
and free cash flow to price. |
Volatility Control
The Index seeks to maintain a target annualized volatility of
approximately 5%. In accordance with its rules-based methodology, during periods of high volatility, the Index may reduce its exposure to any basket of underlying indexes, in which case the Index may be only partially invested. During periods of low
volatility, the Index may increase its exposure to any basket of underlying indexes, in which case the Index may have an exposure greater than 100%.
Leverage
The Index may be subject to increased volatility due to the
potential use of significant leverage. The Index may use leverage to manage volatility or increase returns in accordance with its rules-based methodology. When the Index uses leverage, the Index may increase its total exposure up to a maximum of
200%.
Weighting and Rebalancing
The underlying indexes have predetermined weights based on an
algorithmic model that looks at real GDP growth and inflation expectations in order to identify a current market state, either "expansion," "contraction," or "neutral." A neutral or contraction market state will result in the underlying fixed income
indexes being weighted significantly greater than the equity or commodities indexes. An expansion market state will result in the equity indexes being weighted significantly greater than the fixed income or commodities indexes. When the Index has
greater exposure to a particular market, which is done by weighting the corresponding underlying indexes to a greater extent, fluctuations in that market will have a greater impact on the Index’s return than fluctuations in the other
markets.
On quarterly basis, the Index identifies the
current market state and rebalances the weights of the underlying fixed income and equity indexes accordingly.
The commodities-based underlying index has a constant
weighting regardless of the market state.
Performance
Drag
The performance of the Index reflects the deduction
of transaction and replication costs from the returns of the underlying indexes. The transaction and replication costs, deducted as an annualized percentage on a daily basis, are fixed for each underlying index and range from 0.22% to 0.69%. The
"transaction costs" represent an estimate of the costs that would be incurred to buy and sell the index components each time the Index rebalances due to changes in weightings of the Index components. The "replication costs" represent an estimate of
the financing costs that would be incurred in holding an investment in the index components. The deduction of these costs occurs at the Index level (i.e., the return on the Index is reduced based on the applicable transaction and replication costs).
One underlying index also includes replication costs which serve to reduce its return.
Exclusive License
Use of the Index in connection with annuity contracts has been
exclusively licensed to Nationwide. The exclusive licensing agreement will expire on or about May 1, 2023, unless extended by the parties.
S&P 500® Average Daily Risk Control 10% USD Price Return Index
The S&P 500® Average Daily Risk Control 10% USD Price Return Index seeks to limit the volatility of the S&P 500® Index to a target level of 10%.
This Index has exposure to two components: its underlying
index (the S&P 500® Index) and a cash component. Please see "S&P 500® Index" below for a description of the underlying index. The Index is dynamically adjusted based on its target volatility. The Index is considered to
be "dynamically adjusted" because the Index adjusts its market exposures in response to changing market conditions. The Index assesses market conditions on a daily basis and adjusts its weightings based on its methodology. Generally, if volatility
increases, the Index moves weight out of the underlying index and into cash. Conversely, if volatility decreases, the Index moves more weight into the underlying index and weights less in cash.
This Index does not include dividends declared by any of the
companies in the underlying index as part of its return. Return is generated within the Index by the cash component when equity exposure is less than 100%.
The index provider for this Index is S&P Dow Jones Indices
LLC ("SPDJI"). SPDJI is not affiliated with Nationwide.
S&P 500® Index (Ticker: SPX)
The S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The Index includes 500 leading companies and captures approximately 80%
coverage of available market capitalization. As of March 31, 2021, the Index had a capitalization range (from largest to smallest) of approximately $2.1 trillion to $4.2 billion.
This Index does not include dividends declared by any of the
companies in this Index.
The index provider for this
Index is SPDJI. SPDJI is not affiliated with Nationwide.
Additional Index Information
We reserve the right to add or remove any Index in the future.
There is no guarantee that a Strategy using any of the Indexes listed above will always be available for investment.
The Index for a Strategy generally will not change for the
duration of an ongoing Strategy Term. However, we also reserve the right to substitute the Index during a Strategy Term at any time, in limited circumstances. Subject to regulatory approval, we may substitute the Index if (a) the Index is
discontinued or (b) there is a substantial change to the calculation of the Index. If we substitute an Index, the new Index will be similar in composition to the old Index. We will seek to notify you at least 30 days prior to substituting an Index
for any Strategy in which you are invested. However, in the event that it is necessary to substitute on less than 30 days’ notice due to circumstances outside of our control, we will provide notice of the substitution as soon as
practicable.
If we substitute an Index during a Strategy
Term, the Index Performance for the Strategy (unless the Lock-In feature has been exercised) will be equal to the result of compounding the performance of the old index prior to the substitution date and the performance of the new index after the
substitution date. This is equal to (1+A) x (1+B) -1 where:
•
|
A is equal to the percentage
change in the value of the old Index between the Strategy Term Start Date (or the first day during the Strategy Term on which the old Index was used, whichever is later) and the value of the Index on the date of substitution; and |
•
|
B is
equal to the percentage change in the value of the new Index between the date of substitution and the relevant later date in the Strategy Term. |
For example, assume that we substitute the Index for a
Strategy on a date during the Strategy Term. Also assume that the Index Performance for the old Index between the Strategy Term Start Date and the substitution date was +10%, and that the Index Performance for the new Index between the substitution
date and the Strategy Term End Date was -5%. In this scenario, the Index Performance between the Strategy Term Start Date and the Strategy Term End Date would be +4.5%, i.e. (1+10%) x (1 + -5%) -1.
STRATEGY TERM
The Strategy Term represents the duration of the Strategy,
expressed in years. Each Strategy has its own Strategy Term. The lengths of Strategy Terms may vary among Strategies. The length of a Strategy Term will not change for as long as we continue to offer that Strategy. Currently, the Strategies offered
under the contract have Strategy Terms of either 1 or 3 years.
A Strategy Term may begin on the Date of Issue or a Contract
Anniversary. A Strategy Term ends on its Strategy Term End Date, which will always be a Contract Anniversary.
Because you are not permitted to transfer Contract Value
during a Strategy Term, you should understand that a Strategy with a longer Strategy Term provides less flexibility to allocate your Contract Value than a Strategy with a shorter Strategy Term. This means if you invest in Strategies with longer
Strategy Terms, you will have fewer opportunities to transfer Contract Value among the Strategies.
PROTECTION LEVEL
The Protection Level represents an amount of downside
protection under a Strategy for a Strategy Term. The Protection Level is presented as a percentage (e.g., 100%, 95%, 90%). A higher Protection Level provides more protection against loss than a lower
Protection Level. For example, if you select a Strategy with a 90% Protection Level, your rate of return that is calculated at the end of the Strategy Term cannot be lower than -10%. If you select a Strategy with a 100% Protection level, your rate
of return that is calculated at the end of the Strategy Term cannot be lower than 0%. The Protection Level for a Strategy will not change for as long as we offer that Strategy.
The maximum
amount of loss that you may realize on a Strategy Term End Date, or when you take a Preferred Withdrawal, is your Protection Level minus 100% (e.g. a 100% Protection Level minus 100% protects you from all
market loss; a 90% Protection Level minus 100% protects you from loss in excess of -10%; etc.). In those circumstances, we use the Strategy Earnings Percentage (SEP) to calculate your Strategy Earnings.
The Protection Level’s defined downside protection does
not apply to a Non-Preferred Withdrawal. There is some downside protection provided for Non-Preferred Withdrawals, but the maximum amount of loss that you may realize is greater when you take a Non-Preferred Withdrawal. In that circumstance, we use
the Non-Preferred Strategy Earnings Percentage (NSEP) to calculate your Strategy Earnings. For the NSEP, the maximum amount of loss that you may realize is greater than the maximum amount of loss under the SEP due to the Non-Preferred Withdrawal
Adjustment Percentage.
You should understand that the
Protection Level provides only limited protection against downside potential. The Protection Level does not provide absolute protection against negative Strategy Earnings. You may lose money, and it is possible to lose a substantial amount of your
principal investment under this Contract. When comparing Strategies with different Protection Levels, a higher Protection Level provides more protection against loss than a lower Protection Level.
You should also understand that the downside protection provided
by a Strategy’s Protection Level only applies to a single Strategy Term. If you remain invested in the Strategy over multiple Strategy Terms, you can experience losses up to the downside protection (and more, if you take a Non-Preferred
Withdrawal) each Strategy Term. In effect, the cumulative losses over multiple Strategy Terms could significantly exceed the level of downside protection provided by the Protection Level for one Strategy Term.
Example
The table below illustrates the impact of
the Protection Level on the SEP and the NSEP. See "Calculation of Strategy Earnings – Strategy Earnings Percentage (SEP) and Non-Preferred Strategy Earnings Percentage (NSEP)."
Protection
Level |
Your
Maximum Amount of Loss using the SEP for 1 and 3 Year Strategy Terms |
Your
Maximum Amount of Loss using the NSEP* for 1-Year Strategy Term |
Your
Maximum Amount of Loss using the NSEP* for 3-Year Strategy Term |
100%
|
0%
|
-2%
|
-6%
|
95%
|
-5%
|
-7%
|
-11%
|
90%
|
-10%
|
-12%
|
-16%
|
* Assumes a
withdrawal on the first day of the Strategy Term and therefore the highest possible impact of the Non-Preferred Withdrawal Adjustment Percentage of 2%. The potential impact of the Non-Preferred Withdrawal Adjustment Percentage on the NSEP gradually
decreases over the course of a Strategy Term, reaching its least potential impact on the day prior to the Strategy Term End Date. As a result, your maximum amount of loss using the NSEP will gradually decrease as the Strategy Term elapses.
PARTICIPATION RATE
The Participation Rate represents the portion of the Index
Performance that is used to calculate the AIP. The Participation Rate is presented as a percentage greater or less than, or equal to, 100% (e.g., 50% or 150%). The Participation Rate may have the effect of
increasing gains or losses (or neither) as follows:
•
|
If the Participation Rate is
greater than 100%, it will increase your upside potential when the Index Performance is positive. For example, if your Participation Rate is 150%, we will multiply any positive Index Performance by 150%. |
|
A Participation Rate greater
than 100% also increases your downside risk. For example, if your Participation Rate is 150%, we will multiply any negative Index Performance by 150% (subject to any applicable defined downside protection). |
•
|
If the Participation Rate is
less than 100%, it will decrease your upside potential when the Index Performance is positive. For example, if your Participation Rate is 90%, we will apply only 90% of the positive Index Performance. |
|
A
Participation Rate lower than 100% also decreases your downside risk when Index Performance is negative. For example, if your Participation Rate is 90%, we will only apply 90% of the negative Index Performance (subject to any applicable defined
downside protection). |
•
|
If the Participation Rate is
equal to 100%, it will neither increase nor decrease your upside potential or downside risk. |
The Participation Rate for a Strategy will not change for the
duration of a Strategy Term. However, we may change a Strategy’s Participation Rate for future Strategy Terms. The Participation Rate for a Strategy is guaranteed to never be lower than the applicable "Minimum Participation Rate." Each
Strategy has its own Minimum Participation Rate, which will never be less than 5%.
Example
The table below illustrates the impact of
the Participation Rate on the AIP. The Participation Rate is used to calculate the AIP, which is an adjusted Index Performance. The formula for the AIP may be found under "Calculation of Strategy Earnings – Adjusted Index Performance."
Index
Performance |
Participation
Rate |
Adjusted
Index Performance (Assuming 0% Strategy Spread) |
+10%
|
125%
|
+12.5%
|
+10%
|
100%
|
+10%
|
+10%
|
50%
|
+5%
|
+10%
|
15%
|
1.5%
|
-10%
|
125%
|
-12.5%
|
-10%
|
100%
|
-10%
|
-10%
|
50%
|
-5%
|
-10%
|
15%
|
-1.5%
|
STRATEGY SPREAD
The Strategy Spread is an annualized percentage used as a
deduction in the calculation of a Strategy’s performance. A Strategy Spread greater than 0% always has the effect of reducing a Strategy’s performance. A Strategy will never have a Strategy Spread lower than 0%. With all other Crediting
Factors being equal, a Strategy Spread allows Nationwide to offer a higher Participation Rate for a Strategy than what would be offered on the same Strategy without the Strategy Spread.
The Strategy Spread will not change for the duration of a
Strategy Term. However, we may change a Strategy’s Strategy Spread for future Strategy Terms. The Strategy Spread is guaranteed to never be greater than the applicable "Maximum Strategy Spread." Each Strategy has its own Maximum Strategy
Spread that will never be greater than the initial Strategy Spread at Date of Issue plus 2%.
To calculate the Strategy Spread’s impact at any point
in time, it is multiplied by the Elapsed Term. As an annualized percentage, the Strategy Spread’s potential impact increases over the course of the Strategy Term, reaching its full impact on the Strategy Term End Date. For instance, if a
Strategy has a one-year Strategy Term and a Strategy Spread of 2%, the impact of the Strategy Spread will not reach 2% until the Strategy Term End Date. Further, if a Strategy has a three-year Strategy Term and a Strategy Spread of 2%, the impact of
the Strategy Spread will not reach 6% until the Strategy Term End Date.
During a leap year there may be an additional day of accrual
of the Strategy Spread if leap day is part of the Strategy Term (e.g. for a 1-year Strategy Term, in non-leap years the Elapsed Term at the end of the Strategy Term would be 1, but in a leap year the Elapsed Term would be 1.0027.)
A Strategy Spread can result in negative Strategy Earnings even
if you have positive Index performance. See "Limited Growth Potential Risk (Strategy Spread and Participation Rate Risk)" for additional risk information about the Strategy Spread.
Examples
The table below illustrates the impact of
the Strategy Spread on a Strategy with a one-year Strategy Term. The Strategy Spread is used to calculate the Adjusted Index Performance (AIP), which is effectively the Index Performance adjusted for the Participation Rate and Strategy Spread. The
table assumes the AIP is calculated at the end of the Strategy Term. See "Calculation of Strategy Earnings – Adjusted Index Performance."
Index
Performance |
Strategy
Spread* |
Adjusted
Index Performance* (Assuming 100% Participation Rate) |
+10%
|
2%
|
+8.0%
|
+5%
|
2%
|
+3.0%
|
+1%
|
2%
|
-1.0%
|
-5%
|
2%
|
-7.0%
|
-10%
|
2%
|
-12.0%
|
* This column
assumes that the Strategy has a Strategy Spread of 2%.
STRATEGY AND CONTRACT VALUES
As reflected in the table below, there are various values
associated with each of your Strategies, and there are related values associated with your entire Contract. This section provides additional detail about each of these values.
Value
Associated with a Strategy |
Related
Value Associated with the Entire Contract |
Strategy
Value |
Contract
Value |
Strategy
Accumulation Value |
Contract
Accumulation Value |
Modified
Strategy Value |
Modified
Contract Value |
In addition to the
values included in the table above, your Contract also has a Surrender Value. The Surrender Value is the amount available upon full surrender of the Contract. The Surrender Value is equal to the Modified Contract Value minus any applicable CDSC and
after any applicable MVA. We may deduct taxes from the Surrender Value.
See "Appendix B: Modified Strategy Value Formula and Examples"
for examples of the Surrender Value calculation.
STRATEGY
VALUE AND CONTRACT VALUE
Strategy Value
The Strategy Value represents, as of a given date during a
Strategy Term, the value of a Strategy without taking into account any unrealized Strategy Earnings. The Strategy Value is not a cash value that can be withdrawn. Instead, it is a value that we use to calculate your Term Strategy Earnings, the
Strategy Accumulation Value, and the Modified Strategy Value. A Strategy’s Strategy Value only changes when we apply Term Strategy Earnings on a Strategy Term End Date, or when you take a partial withdrawal or transfer amounts in or out of the
Strategy.
If the first day of a Strategy Term is the
Date of Issue, the Strategy Value equals the portion of the Purchase Payment allocated to the Strategy. If the first day of a Strategy Term is a Contract Anniversary, the Strategy Value is the Strategy Value for the Strategy Account on the previous
Strategy Term End Date (if any), minus transfers to other Strategy(s) plus transfers from other Strategy(s).
Each subsequent day during the Strategy Term, the Strategy
Value equals:
(1)
|
The Strategy Value on the
first day of the Strategy Term, as described above, minus |
(2)
|
The total dollar amount of
all Gross Withdrawals deducted from the Strategy during the Strategy Term, plus |
(3)
|
The total dollar amount of
all Strategy Earnings applied to the Strategy during the Strategy Term, plus |
(4)
|
The amount of any adjustment
to the Strategy Value in connection with the Death Benefit during the Strategy Term (see "Death Benefit and Succession Rights – Calculation of the Death Benefit"), minus |
(5)
|
The
amount of any premium taxes deducted from the Strategy during the Strategy Term. |
Contract Value
Your Contract Value always equals the sum of all your Strategy
Values. Like your Strategy Value(s), your Contract Value is not a cash value that can be withdrawn.
STRATEGY ACCUMULATION VALUE AND CONTRACT ACCUMULATION
VALUE
Strategy Accumulation Value
The Strategy Accumulation Value is the value of a Strategy if
unrealized Strategy Earnings were to be applied to the entire Strategy Value using the Strategy Earnings Percentage (or SEP) as of a given date. The Strategy Accumulation Value is not a cash value that can be withdrawn. The Strategy Accumulation
Value is a daily value expressed in dollars that is provided to show how a Strategy is performing throughout a Strategy Term.
Each day during a Strategy Term, the Strategy Accumulation
Value is equal to the Strategy Value x (1 + SEP).
Examples
The following three examples assume a
Strategy Value of $50,000.
•
|
If on a day during the
Strategy Term, the SEP equals 10%, your Strategy Accumulation Value on that day equals $55,000. |
•
|
If on a day during the
Strategy Term, the SEP equals 0%, your Strategy Accumulation Value on that day equals $50,000. |
•
|
If on a
day during the Strategy Term, the SEP equals -8%, your Strategy Accumulation Value on that day equals $46,000. |
Contract Accumulation Value
Your Contract Accumulation Value always equals the sum of your
Strategy Accumulation Values as of a given date. Like your Strategy Accumulation Value(s), your Contract Accumulation Value is not a cash value that may be withdrawn.
MODIFIED STRATEGY VALUE AND MODIFIED CONTRACT VALUE
Modified Strategy Value
The Modified Strategy Value is the maximum Gross Withdrawal
that may be taken from a Strategy as of a given date during a Strategy Term. On a Strategy Term End Date, the Modified Strategy Value is equal to your Strategy Value plus any Term Strategy Earnings. On any day other than the Strategy Term End Date,
the Modified Strategy Value is equal to your Strategy Value plus any Interim Strategy Earnings that would be applied if you withdrew your entire Strategy Value. You should understand the following:
•
|
In order to take the maximum
Gross Withdrawal from a Strategy, you must fully surrender your Contract. A full surrender will terminate the Contract. |
•
|
If you take a partial
withdrawal or full surrender that is greater than the Remaining Preferred Withdrawal Amount (a Non-Preferred Withdrawal), it may be subject to a CDSC and an MVA, and any Interim Strategy Earnings on the Non-Preferred Withdrawal would be calculated
using the Non-Preferred Strategy Earnings Percentage (NSEP). |
•
|
The
calculation of the Modified Strategy Value depends on the amount of the Preferred Withdrawal allocated to that Strategy. Preferred Withdrawals are always allocated among all of your Strategies using a specific formula described in the "Withdrawals
– Preferred Withdrawals and Non-Preferred Withdrawals" section. |
On the Strategy
Term End Date, your Strategy Value and your Modified Strategy Value will always be the same.
See "Appendix B: Modified Strategy Value Formula and Examples"
for the formula we use when calculating the Modified Strategy Value and for examples of the calculation.
Modified Contract Value
Your Modified Contract Value always equals the sum of your
Modified Strategy Values as of a given date. Your Modified Contract Value represents the maximum Gross Withdrawal that you may take from your Contract as of a given date.
In order to take the maximum Gross Withdrawal from the
Contract, you must fully surrender your Contract. A full surrender will terminate the Contract.
SURRENDER VALUE
The Surrender Value is the amount available upon full
surrender of the Contract. The Surrender Value is equal to the Modified Contract Value minus any applicable CDSC and plus any applicable MVA. We may deduct taxes from the Surrender Value.
CALCULATION OF STRATEGY EARNINGS
We credit Strategy Earnings to a Strategy on the Strategy Term
End Date. We refer to this form of Strategy Earnings as "Term Strategy Earnings." Term Strategy Earnings represent Strategy Earnings paid on the Strategy Value of a Strategy as of the Strategy Term End Date. Term Strategy Earnings take into account
the performance of the Strategy’s Index (except when the Lock-In feature has been exercised or in the event that the Index has been substituted) and the other Crediting Factors over the course of the entire Strategy Term.
We also apply Strategy Earnings to a Strategy when you take a
partial withdrawal or full surrender prior to the Strategy Term End Date. We refer to this form of Strategy Earnings as "Interim Strategy Earnings."
Interim Strategy Earnings take into account the performance of
the Strategy’s Index between the beginning of the Strategy Term and the date on which the partial withdrawal or full surrender was taken (except when the Lock-In feature has been exercised or in the event that the Index has been substituted)
and other Crediting Factors.
If you exercise the Lock-In
feature for a Strategy, Term Strategy Earnings and Interim Strategy Earnings will take into account the performance of the Strategy’s Index from the beginning of the Strategy Term until the Lock-In Date. See "Calculation of Strategy Earnings
– Lock-In."
All Strategy Earnings may be positive,
negative, or equal to zero.
TERM STRATEGY EARNINGS
On a Strategy Term End Date, the Term Strategy Earnings that
will be applied to a Strategy are equal to the Strategy Value multiplied by the Strategy Earnings Percentage (SEP).
Term Strategy Earnings are always calculated using only the
SEP, which differs from Interim Strategy Earnings, which may be calculated using the SEP and/or the Non-Preferred Strategy Earnings Percentage (NSEP), depending on whether or not your gross withdrawal amount exceeds the Remaining Preferred
Withdrawal Amount.
Term Strategy Earnings Examples
The examples below illustrate the
calculation of Term Strategy Earnings, which are only calculated on a Strategy Term End Date. Term Strategy Earnings = Strategy Value x SEP. The following examples assume a Strategy Value of $50,000.
•
|
If the SEP equals 10%: Term
Strategy Earnings = $50,000 x 10% = $5,000 |
•
|
If the SEP equals 0%: Term
Strategy Earnings = $50,000 x 0% = $0 |
•
|
If the
SEP equals -8%: Term Strategy Earnings = $50,000 x -8% = -$4,000 |
INTERIM STRATEGY EARNINGS
Interim Strategy Earnings represent both:
•
|
any Strategy Earnings paid
on any portion of the partial withdrawal or full surrender that is a Preferred Withdrawal; and |
•
|
any
Strategy Earnings paid on any portion of the partial withdrawal or full surrender that is a Non-Preferred Withdrawal. |
As reflected in the three-step process below, Interim Strategy
Earnings may be calculated using either the SEP, the NSEP, or both. For a particular Strategy:
•
|
If the partial withdrawal or
full surrender results in only a Preferred Withdrawal, your Interim Strategy Earnings will be calculated based solely on the SEP. |
•
|
If there is no Remaining
Preferred Withdrawal Amount when the partial withdrawal or full surrender is taken, the entire withdrawal will be treated as a Non-Preferred Withdrawal, and your Interim Strategy Earnings will be calculated based solely on the NSEP. |
•
|
If the
partial withdrawal or full surrender is made up of both a Preferred Withdrawal and a Non-Preferred Withdrawal, your Interim Strategy Earnings will be calculated based on both the SEP and NSEP. |
Upon taking a partial withdrawal or full surrender prior to
the Strategy Term End Date, we calculate Interim Strategy Earnings (your gains or losses) using the following three-step process:
•
|
Step One – We calculate the Interim Strategy Earnings for each Strategy for any portion of the partial withdrawal or full surrender that is a Preferred Withdrawal as follows: |
Interim Strategy Earnings on a Preferred
Withdrawal = SEP x amount of the Preferred Withdrawal attributable to the Strategy / (1 + SEP)
•
|
Step Two – We calculate the Interim Strategy Earnings for each Strategy for any portion of the partial withdrawal or full surrender that is a Non-Preferred Withdrawal as follows: |
Interim Strategy Earnings on a
Non-Preferred Withdrawal = NSEP x amount of the Non-Preferred Withdrawal attributable to the Strategy / (1 + NSEP)
•
|
Step Three – We add the Interim Strategy Earnings calculated in Steps One and Two to determine your total Interim Strategy Earnings applied to your Strategy in connection with the partial withdrawal or full surrender.
|
Interim Strategy Earnings will
impact the amount of Strategy Value that we deduct from your Contract in order to satisfy a withdrawal. When you have a gain, we will deduct less Strategy Value than the amount of the Gross Withdrawal that you requested. When you have a loss, we
will deduct more Strategy Value than the amount of the Gross Withdrawal that you requested. In either case, the amount of the Gross Withdrawal that you requested does not change based on the Interim Strategy Earnings. A withdrawal’s impact to
the Strategy Value is called the "Net Withdrawal", which is equal to the amount of the Gross Withdrawal requested minus the Interim Strategy Earnings calculated under the three-step process above.
If you take a withdrawal on the Strategy Term End Date, the
withdrawal is processed after any Term Strategy Earnings are applied to your Contract and there will be no Interim Strategy Earnings calculated on the withdrawal. This is because the SEP and NSEP will always equal zero immediately after the Term
Strategy Earnings are applied on the Strategy Term End Date.
The three-step process described above is applied on a
Strategy by Strategy basis. If you are invested in multiple Strategies, your Strategies will likely have different Remaining Preferred Withdrawal Amounts attributable to each Strategy. As a result, it is unlikely that a partial withdrawal or full
surrender will result in the same level of Preferred Withdrawals across your Strategies. A Preferred Withdrawal is proportionately allocated among the Strategies based on the Strategy Accumulation Values at the time of the withdrawal. A
Non-Preferred Withdrawal is proportionately allocated among the Strategies based on the Modified Strategy Values at the time of the withdrawal, or if the withdrawal is part Preferred Withdrawal and part Non-Preferred Withdrawal, a Non-Preferred
Withdrawal is proportionately allocated among the Strategies based on the Modified Strategy Values that remain after the Preferred Withdrawal is taken.
Examples
The tables below illustrate the calculation
of Interim Strategy Earnings applied to a Strategy. In these examples, the partial withdrawal from a Strategy is greater than the Remaining Preferred Withdrawal Amount. A portion of the Gross Withdrawal is a Preferred Withdrawal, and a portion is a
Non-Preferred Withdrawal.
Positive
Strategy Earnings
Preferred
Withdrawal |
Interim
Strategy Earnings on the Preferred Withdrawal (Step One)* |
Non-
Preferred Withdrawal |
Interim
Strategy Earnings on the Non-Preferred Withdrawal (Step Two)** |
Total
Interim Strategy Earnings (Step Three) |
$7,000
|
$913
|
$4,000
|
$364
|
$1,277
|
* Assumes an SEP
of 15%
** Assumes an NSEP of 10%
Negative Strategy Earnings
Preferred
Withdrawal |
Interim
Strategy Earnings on the Preferred Withdrawal (Step One)* |
Non-
Preferred Withdrawal |
Interim
Strategy Earnings on the Non-Preferred Withdrawal (Step Two)** |
Total
Interim Strategy Earnings (Step Three) |
$7,000
|
-$778
|
$4,000
|
-$545
|
-$1,323
|
* Assumes an SEP
of -10%
** Assumes an NSEP of
-12%
STRATEGY EARNINGS PERCENTAGE (SEP) AND
NON-PREFERRED STRATEGY EARNINGS PERCENTAGE (NSEP)
On
each day during a Strategy Term, we calculate the SEP and the NSEP for each Strategy. The SEP and NSEP generally change on a day-to-day basis. Neither the SEP nor the NSEP will impact the performance of your Strategy until Strategy Earnings are
applied.
SEP
The SEP is the rate of return used to calculate Strategy
Earnings when you receive Term Strategy Earnings and when you receive Interim Strategy Earnings on a Preferred Withdrawal. The SEP compares the Adjusted Index Performance to the amount of downside protection provided by a Strategy’s Protection
Level, and applies whichever is greater, resulting in gains based on the full AIP or losses subject to the downside protection provided by the Strategy’s Protection Level.
More specifically, the SEP for a Strategy is the greater of
(a) the Adjusted Index Performance or (b) the Protection Level minus 100%.
Examples
The following examples illustrate the
calculation of the SEP based on the formula described above. For the following examples, assume the Protection Level is 90% (and therefore protects you from loss in excess of -10%).
•
|
If the AIP equals 20%, the
SEP equals 20% (20% is greater than -10%) |
•
|
If the AIP equals -5%, the
SEP equals -5% (-5% is greater than -10%) |
•
|
If the
AIP equals -15%, the SEP equals -10% (-15% is less than -10%) |
NSEP
The NSEP is the rate of return used to calculate Strategy
Earnings upon a Non-Preferred Withdrawal. Like the SEP, the NSEP compares the AIP to the amount of downside protection provided by the Strategy’s Protection Level; however, the NSEP is different because it prorates (reduces) positive earnings
and includes the Non-Preferred Withdrawal Adjustment Percentage when the AIP would result in a loss that exceeds the amount of downside protection provided by the Strategy’s Protection Level.
Importantly, your potential maximum amount of loss under the SEP
and the NSEP are not the same. Your potential maximum amount of loss under the NSEP will be greater due to the assessment of the Non-Preferred Withdrawal Adjustment Percentage. See "Calculation of Strategy Earnings – Non-Preferred Withdrawal
Adjustment Percentage" for additional information.
The
NSEP calculation effectively works as follows:
•
|
If the AIP is greater than
0%, the NSEP proportionately reduces your gains based on the amount of time remaining in the Strategy Term (i.e., any gains are pro-rated) (resulting in less gains compared to the SEP which does not reduce the AIP); |
•
|
If the AIP is less than 0%
but greater than or equal to the amount of downside protection provided by the Protection Level, the NSEP will equal the AIP (NSEP will be equal to SEP); and |
•
|
If the
AIP is less than the amount of downside protection provided by the Protection Level, the Non-Preferred Withdrawal Adjustment Percentage applies, and it will reduce the NSEP to an amount less than the downside protection provided by the Protection
Level (resulting in more losses compared to SEP). |
It’s important to note that while the NSEP can be less
than the downside protection provided by a Strategy’s Protection Level, the Protection Level does limit how negative the NSEP can be. The most negative the NSEP could be for a Strategy is: (the Strategy’s Protection Level – 100%)
– (Non-Preferred Withdrawal Adjustment Percentage x Strategy Term).
The Non-Preferred Withdrawal Adjustment Percentage will only
be applicable if the AIP is less than the downside protection provided by the Protection Level (Protection Level minus 100%) when you take a Non-Preferred Withdrawal.
See "Appendix C: Non-Preferred Strategy Earnings Percentage"
for the NSEP formula and examples of the NSEP calculation.
NON-PREFERRED WITHDRAWAL ADJUSTMENT PERCENTAGE
The Non-Preferred Withdrawal Adjustment Percentage is a factor
in the NSEP formula (see "Appendix C: Non-Preferred Strategy Earnings Percentage" for the NSEP formula). The assessment of the Non-Preferred Withdrawal Adjustment Percentage is the reason why your potential maximum amount of loss under the NSEP is
greater than under the SEP. The Non-Preferred Withdrawal Adjustment Percentage is 2%.
We buy various assets to support our obligation to pay the
strategy earnings under the contract. When you take a withdrawal before a Strategy’s Strategy Term End Date, we may realize costs associated with changes in the market value of these assets and any unamortized expenses from purchasing these
assets. We use the Non-Preferred Withdrawal Adjustment Percentage, when applicable, to take into account the approximate current market value of assets in tandem with the unamortized cost of the purchase of these assets.
The potential
impact of the Non-Preferred Withdrawal Adjustment Percentage on the NSEP gradually decreases over the course of a Strategy Term, reaching its least potential impact on the day prior to the Strategy Term End Date. As a result, your maximum amount of
loss under the NSEP will gradually decrease as the Strategy Term elapses. Nonetheless, your maximum amount of loss under the NSEP will never be equal to or less than your maximum amount of loss under the SEP.
Based on the NSEP formula, the potential impact of a
Non-Preferred Withdrawal Adjustment Percentage within the NSEP formula is directly related to the length of a Strategy Term. For example, if one Strategy has a one-year Strategy Term and another Strategy has a three-year Strategy Term, the potential
impact of the Non-Preferred Withdrawal Adjustment Percentage for the three-year Strategy Term is three times greater than for the one-year Strategy Term.
If you do not take any Non-Preferred Withdrawals, the
Non-Preferred Withdrawal Adjustment Percentage will not affect your Contract.
ADJUSTED INDEX PERFORMANCE (AIP)
Each day during a Strategy Term, including the Strategy Term
End Date, we calculate the AIP. The AIP is calculated for each Strategy using the Index Performance, the Participation Rate, and the Strategy Spread. The AIP generally changes on a day-to-day basis. The AIP does not directly affect your Strategy
Earnings. Rather the AIP is used in the calculation of the Strategy Earnings Percentage (or SEP) and the Non-Preferred Strategy Earnings Percentage (or NSEP).
The AIP for a Strategy is calculated as follows: (Index
Performance x Participation Rate) – (Strategy Spread x Elapsed Term).
For example, if a Strategy with a 1-year Strategy Term has a
Participation Rate of 80% and a Strategy Spread of 2%:
•
|
If the Index Performance is
10% after half a year, then the AIP on that date would be 7% (10% Index Performance X 80% Participation Rate minus 2% Strategy Spread X Elapsed Term of .5) |
•
|
If the
Index Performance is 10% after one year, then the AIP on that date would be 6% (10% Index Performance X 80% Participation Rate minus 2% Strategy Spread X Elapsed Term of 1). |
You should understand that the AIP does not equal the
percentage change in the value of Strategy’s Index between the beginning of a Strategy Term and a future date during the Strategy Term. Instead, the AIP represents an adjusted Index Performance since it reflects the impact of the Participation
Rate and the Strategy Spread.
•
|
The Participation Rate may
have the effect of amplifying or dampening the AIP, depending on whether the Participation Rate is greater or less than 100%, respectively. See "Crediting Factors – Participation Rate." |
•
|
A
Strategy Spread greater than 0% always has the effect of reducing the AIP. The effect of the Strategy Spread gradually increases over the course of the Strategy Term, reaching its full potential impact on the Strategy Term End Date. See "Crediting
Factors – Strategy Spread." |
INDEX PERFORMANCE
Each day during a Strategy Term, including the Strategy Term
End Date, we calculate the Index Performance. We calculate the Index Performance for a Strategy on a point-to-point basis, and the Index Performance generally fluctuates day to day. Use of a point-to-point calculation results in Index Performance
being calculated at a single point in time, even for a Strategy with a three-year Strategy Term. As a result, you may experience negative or flat performance even when the Index experienced gains through some, or most, of the Strategy Term or prior
to a withdrawal.
While the Index Performance is
important to the amount of Strategy Earnings that are ultimately applied to a Strategy, you should understand that we do not calculate Strategy Earnings based solely on the Index Performance. Rather, the Index Performance is used in the calculation
of the AIP.
We calculate the Index Performance for a
Strategy as follows:
Index
Performance = (A – B) / B, where:
A = Index Value on that specific date
during the Strategy Term
B = Index
Value on the first day of a Strategy Term
For example, if
the Index Value on the first and last day of a Strategy Term equals 1,000 and 1,100, respectively, the Index Performance between those two dates equals +10% (i.e., (1,100 – 1,000) / 1,000). Conversely,
if the Index Value on the first and last day of a Strategy Term equals 1,000 and 900, respectively, the Index Performance between those two dates equals -10% (i.e., ((900 –1,000) / 1,000).
If an Index Value is not provided to us by an Index provider
or is otherwise unavailable on a Business Day, the Index Value will be the closing value of the Index for the previous Business Day.
As described under "Crediting Factors – Indexes," there
are circumstances under which we may substitute an Index during a Strategy Term. If we substitute an Index during a Strategy Term, we will calculate the Index Performance for the old Index between the first day of the Strategy Term (or the first day
on which the old Index was used, whichever is later) until the date of substitution. After the date of substitution, we will calculate the Index Performance for the new Index from the date of substitution until the calculation date. We will then add
the Index Performance for the old Index (which may be positive, negative, or equal to zero) to the Index Performance of the new Index (which may be positive, negative, or equal to zero).
LOCK-IN
For any Strategy, on any Business Day prior to the Strategy
Term End Date, you may lock in the Index Value for that Strategy. The locked-in Index Value will be used for purposes of calculating the Index Performance for the remainder of the Strategy Term. As a result, the Index Performance will not change for
the remainder of the Strategy Term. If you are simultaneously invested in the same Strategy for Strategy Terms that began on different dates, those investments will be considered separate Strategies.
For example, if the Index Value on the first day of a Strategy
Term equals 1,000, and then on a given day during the Strategy Term, you lock-in an Index Value of 1,100, your Index Performance will be +10% for the remainder of the Strategy Term, even if the Index is later valued during the Strategy Term at an
amount greater than 1,100 or less than 1,100.
For each
Strategy, the Lock-In feature may be exercised only once during a Strategy Term. If you have multiple Strategies, you may exercise the Lock-In feature for any, all, or none of the Strategies during their respective Strategy Terms, and you may
exercise the Lock-In feature at different times during the Strategies’ respective Strategy Terms. Exercise of the Lock-In feature is irrevocable.
To exercise the Lock-In feature for a Strategy, you must
submit a request to our Service Center. If we receive your request prior to the close of business on a Business Day, we will lock-in the Index Value for that Strategy calculated on that Business Day as of the close of business. If we receive your
request on a non-Business Day, or after the close of a Business Day, we will lock in the Index Value for that Strategy calculated on the next Business Day as of the close of business.
If the Index for a Strategy is substituted after you exercise
the Lock-In feature for that Strategy, as described under "Crediting Factors – Index," changes in the value of the new Index will not impact your Strategy. We will use the Index Performance for the old Index as of the Lock-In Date for purposes
of calculating your Strategy Earnings. That Index Performance will not change under any circumstances for the remainder of the Strategy Term.
You should fully understand the risks associated with the
Lock-In feature. See "Risk Factors – Lock-In Risk."
WITHDRAWALS
At any time prior to the Annuitization Date, you may take a
partial withdrawal or fully surrender the Contract.
•
|
When you take a partial
withdrawal, you are withdrawing a portion of your money under the Contract. For a partial withdrawal, the Cash Withdrawal must be at least $100. |
•
|
When you
take a full surrender, you are withdrawing all of your money under the Contract. Unlike a partial withdrawal, a full surrender results in the termination of your Contract. |
If you are invested in multiple Strategies at the time that
you request a partial withdrawal, you cannot select the specific Strategy(s) from which a partial withdrawal is to be taken. The withdrawal is allocated so that after the withdrawal is processed, the Strategy Values are allocated in the same
proportion as before the withdrawal. This is described under "Preferred Withdrawals and Non-Preferred Withdrawals" below.
You should
carefully consider the consequences of taking withdrawals greater than the Preferred Withdrawal Amount (referred to as Non-Preferred Withdrawals) before you purchase the Contract, as they may be subject to CDSCs and MVAs, and the earnings
calculation applicable to these withdrawals is less advantageous to you than the earnings calculation applicable to Preferred Withdrawals.
You must submit a request for a partial withdrawal or full
surrender to our Service Center. We will not process a request until it is received by us in good order. We will not consider the request to be in good order unless the request (i) is in writing or another form that we deem acceptable and (ii)
includes all the information necessary for us to process the request.
We reserve the right to:
•
|
Suspend or delay the date of
any partial withdrawal or full surrender payment while a partial withdrawal or full surrender request is not in good order; |
•
|
Delay payment of any partial
withdrawal or full surrender for up to six months from the date that we receive the request, subject to regulatory approval; and |
•
|
Require
that the signature(s) associated with any partial withdrawal or full surrender request be guaranteed by a qualifying institution or other firm qualified to give such a guaranty. |
If you wish to fully surrender the Contract, you will receive
the Surrender Value. The Surrender Value equals your Modified Contract Value minus any applicable CDSC and after the application of any MVA. We may also deduct taxes from the amount payable to you.
Nationwide may treat a request for a partial withdrawal as a
request for a full surrender of the Contract if the following three criteria exist: (i) any portion of the partial withdrawal is a Non-Preferred Withdrawal; (ii) the partial withdrawal would reduce the Contract Value to an amount less than $5,000;
and (iii) the Purchase Payment minus the sum of any Gross Withdrawals since the Date of Issue is less than $5,000.
GROSS WITHDRAWALS, NET WITHDRAWALS, AND CASH WITHDRAWALS
When you take a partial withdrawal or full surrender, we
calculate the Gross Withdrawal(s), Net Withdrawal(s), and Cash Withdrawal(s) associated with that transaction.
•
|
Gross Withdrawal. With respect to the Contract as a whole, a Gross Withdrawal refers to the reduction in your Modified Contract Value as a result of the partial withdrawal or full surrender. With respect to a particular Strategy, a Gross
Withdrawal refers to the reduction in your Modified Strategy Value as a result of the partial withdrawal or full surrender. A Gross Withdrawal does not represent the amount that you actually receive. A Gross Withdrawal equals the related Cash
Withdrawal plus any applicable CDSC and taxes withheld, and minus any applicable MVA (which can be positive or negative). |
•
|
Net Withdrawal. With respect to the Contract as whole, a Net Withdrawal refers to the reduction in your Contract Value as a result of the partial withdrawal or full surrender. With respect to a particular Strategy, a Net Withdrawal
refers to the reduction in your Strategy Value as a result of the partial withdrawal or full surrender. A Net Withdrawal does not represent the amount that you actually receive and serves only as a tracking value used by us in the administration of
your Contract. A Net Withdrawal equals the related Gross Withdrawal minus any Interim Strategy Earnings. |
•
|
Cash
Withdrawal. With respect to the Contract as a whole, a Cash Withdrawal refers to the total dollar amount that you receive as a result of the partial withdrawal or full surrender. A Cash Withdrawal equals the related
Gross Withdrawal minus any applicable CDSC and deducted taxes, and after the application of any MVA. |
When you take a partial withdrawal, you must indicate the
dollar amount of the withdrawal. You must also indicate whether that dollar amount should be taken in the form of a Gross Withdrawal or a Cash Withdrawal under the Contract.
•
|
If you indicate that the
dollar amount should be taken in the form of a Gross Withdrawal under the Contract, you will not necessarily know the dollar amount that you will actually receive, but you will know the overall reduction to your Modified Contract Value. Your Cash
Withdrawal may be more or less than the Gross Withdrawal that you requested. |
•
|
If you
indicate that the dollar amount should be taken in the form of a Cash Withdrawal under the Contract, you will know the dollar amount that you will actually receive, but you will not necessarily know the overall reduction to your Modified Contract
Value. In order to pay you a certain Cash Withdrawal, we may need to reduce your Modified Contract Value by an amount greater than the Cash Withdrawal that you requested. |
PREFERRED
WITHDRAWALS AND NON-PREFERRED WITHDRAWALS
General
Preferred Withdrawals are not subject to any CDSC or MVA, and
Interim Strategy Earnings for a Preferred Withdrawal are calculated using the Strategy Earnings Percentage (SEP).
Non-Preferred Withdrawals may be subject to CDSCs and MVAs,
and Interim Strategy Earnings for a Non-Preferred Withdrawal are calculated using the Non-Preferred Strategy Earnings Percentage (or NSEP).
Each Contract Year, your total Gross Withdrawals (if any) up
to your Preferred Withdrawal Amount will be treated as Preferred Withdrawals. Any Gross Withdrawal in excess of your Preferred Withdrawal Amount will be treated as a Non-Preferred Withdrawal.
At any given time during a Contract Year, your Remaining
Preferred Withdrawal Amount represents the total amount of Gross Withdrawals that may be taken from your Contract during the remainder of the Contract Year as Preferred Withdrawals. If only a portion of a Gross Withdrawal exceeds your Remaining
Preferred Withdrawal Amount, the amounts up to the Remaining Preferred Withdrawal Amount will be treated as a Preferred Withdrawal and the excess portion will be treated as a Non-Preferred Withdrawal.
You should carefully consider the consequences of taking
Non-Preferred Withdrawals, as these withdrawals may be subject to CDSCs and MVAs. In addition, when you take a Non-Preferred Withdrawal prior to the Strategy Term End Date, we use the NSEP rather than the SEP to calculate Interim Strategy Earnings.
The NSEP formula is typically less advantageous to you than the SEP formula, which is used to calculate any Interim Strategy Earnings when you take a Preferred Withdrawal.
Calculating the Preferred Withdrawal Amount and the Remaining
Preferred Withdrawal Amount
At the beginning of each
Contract Year prior to the Annuitization Date, your Preferred Withdrawal Amount for that Contract Year will be the greater of (1) your Contract Value at the beginning of the Contract Year (immediately prior to any partial withdrawal or full
surrender on such day) multiplied by the applicable Preferred Withdrawal Percentage, or (2) the amount required to meet minimum distribution requirements for this Contract under the Code. The table below sets forth the Preferred Withdrawal
Percentages under the Contract. The applicable Preferred Withdrawal Percentage will depend on the number of completed Contract Years. As reflected in the table below, the Preferred Withdrawal Percentage increases after you have completed six
Contract Years.
Number
of Completed Contract Years |
Preferred
Withdrawal Percentage |
0
|
7.00%
|
1
|
7.00%
|
2
|
7.00%
|
3
|
7.00%
|
4
|
7.00%
|
5
|
7.00%
|
6+
|
10.00%
|
On any day during a Contract Year,
your Remaining Preferred Withdrawal Amount equals the Preferred Withdrawal Amount for that Contract Year minus the total dollar amount of all Gross Withdrawals already taken during the Contract Year. The
Remaining Preferred Withdrawal Amount will never be less than zero.
Each Contract Year’s Preferred Withdrawal Amount is
non-cumulative. If you have a Remaining Preferred Withdrawal Amount greater than zero at the end of a Contract Year, that Remaining Preferred Withdrawal Amount will not be added to your Preferred Withdrawal Amount for the next Contract Year or any
later Contract Year. Each Gross Withdrawal during a Contract Year will decrease your Preferred Withdrawal Amount dollar-for-dollar.
Preferred
Withdrawals and Non-Preferred Withdrawals at a Strategy Level
When you take a withdrawal, we determine how the Gross
Withdrawal is allocated among your Strategies based on whether the withdrawal is a Preferred Withdrawal and/or Non-Preferred Withdrawal. A Preferred Withdrawal is proportionately allocated among the Strategies based on the Strategy Accumulation
Values at the time of the withdrawal. A Non-Preferred Withdrawal is proportionately allocated among the Strategies based on the Modified Strategy Values at the time of the withdrawal, or if the withdrawal is part Preferred Withdrawal and part
Non-Preferred Withdrawal, a Non-Preferred Withdrawal is proportionately allocated among the Strategies based on the Modified Strategy Values that remain after the Preferred Withdrawal is taken.
Withdrawals are proportioned differently among the Strategies
for Preferred Withdrawals and Non-Preferred Withdrawals as a result of the different Interim Strategy Earnings calculations used for Preferred Withdrawals and Non-Preferred Withdrawals. Interim Strategy Earnings on a Preferred Withdrawal use the
SEP, and Interim Strategy Earnings on Non-Preferred Withdrawals use the NSEP.
After a withdrawal is processed, the Strategy Values will be
allocated in the same proportion as before the withdrawal.
More specifically, when you take a withdrawal, we determine
the Preferred Withdrawal and Non-Preferred Withdrawal amounts attributable to each Strategy using the following two-step process:
Step One – We first determine the portion of the Preferred Withdrawal attributable to each Strategy as follows:
Portion of a Preferred Withdrawal
attributable to a Strategy = A x B / C, where:
A = The dollar amount of the Preferred
Withdrawal
B = The Strategy
Accumulation Value for the Strategy (prior to the partial withdrawal or full surrender)
C = The Contract Accumulation Value (prior
to the partial withdrawal or full surrender)
Step Two – We next determine the portion of the Non-Preferred Withdrawal attributable to each Strategy as follows:
Portion of a Non-Preferred Withdrawal
attributable to a Strategy = A x (B – C) / (D – E), where:
A = The dollar amount of the Non-Preferred
Withdrawal
B = The Modified Strategy
Value for the Strategy (prior to the partial withdrawal or full surrender)
C = The portion of a Preferred Withdrawal
attributable to the Strategy (calculated in Step One)
D = The Modified Contract Value (prior to
the partial withdrawal or full surrender)
E = The dollar amount of the Preferred
Withdrawal
See "Appendix D: Withdrawal Examples" for
examples of Preferred Withdrawals and Non-Preferred Withdrawals.
CONTINGENT DEFERRED SALES CHARGE AND MARKET VALUE
ADJUSTMENT
CONTINGENT DEFERRED SALES CHARGE
When you take a Non-Preferred Withdrawal under the Contract
during the first six Contract Years, the Non-Preferred Withdrawal will be subject to a Contingent Deferred Sales Charge (CDSC). After the sixth Contract Year, no withdrawals will be subject to a CDSC. A CDSC always has the effect of reducing your
Cash Withdrawal. We will never apply a CDSC to a Preferred Withdrawal.
When a CDSC is imposed, the CDSC will equal the CDSC Base x
CDSC Percentage.
The CDSC Base will equal the dollar
amount of the Non-Preferred Withdrawal. If only a portion of a Gross Withdrawal is treated as a Non-Preferred Withdrawal, the CDSC Base will equal the portion of the Gross Withdrawal that is a Non-Preferred Withdrawal.
The CDSC
Percentage will depend on the number of Contract Years you have completed when you take a Non-Preferred Withdrawal. The CDSC Percentage schedule is set forth below. The CDSC Percentage schedule starts at 8.00% for the first two Contract Years and
then declines with each completed Contract Year thereafter until it reaches 0% after six completed Contract Years.
Number
of Completed Contract Years |
CDSC
Percentage (as a percentage of the CDSC Base) |
0
|
8.00%
|
1
|
8.00%
|
2
|
7.00%
|
3
|
6.00%
|
4
|
5.00%
|
5
|
4.00%
|
6+
|
0.00%
|
No CDSC is charged on the payment
of the Death Benefit, any partial withdrawals or full surrender after the Death Benefit is paid, or annuity payments made after Annuitization Date.
CDSCs are intended to reimburse us for expenses that we incur
in connection with the sale of the Contract.
MARKET VALUE
ADJUSTMENT
When you take a Non-Preferred Withdrawal
during the MVA Period, which is the first six Contract Years, the Non-Preferred Withdrawal will be subject to a Market Value Adjustment (MVA). After the sixth Contract Year, Non-Preferred Withdrawals will not be subject to MVAs. We will never apply
an MVA to a Preferred Withdrawal.
An MVA, when applied,
may be positive, negative, or equal to zero. If an MVA is negative, it will decrease your Cash Withdrawal. If an MVA is positive, it will increase your Cash Withdrawal. If an MVA is equal to zero, it will have no effect on your Cash
Withdrawal.
The MVA is intended to approximate, without
duplicating, our experience when we liquidate fixed-income assets in order to satisfy our payment obligations under the Contract. We utilize a market value reference rate to determine this approximation. When liquidating assets, Nationwide may
realize either a gain or a loss. If the market value reference rate has increased relative to the market value reference rate on the Date of Issue, the MVA will be negative. Conversely, if the market value reference rate has decreased relative to
the market value reference rate on the Date of Issue, the MVA will be positive.
When an MVA is imposed, the MVA will equal the MVA Base x MVA Factor.
In the formula above, the MVA Base equals the dollar amount of
the Non-Preferred Withdrawal. If only a portion of a Gross Withdrawal is treated as a Non-Preferred Withdrawal, the MVA Base will equal the portion of the Gross Withdrawal that is a Non-Preferred Withdrawal.
We calculate the MVA Factor using the following formula:
MVA Factor = MVA Scaling Factor x (A
– B) x N/12, where:
A = Initial
Market Value Reference Rate
B =
Market Value Reference Rate on the date we process the withdrawal
N = Number of whole (partial months will be
rounded up to the next whole month) remaining in the MVA Period, calculated from the date that we process the withdrawal
In the formula above, the MVA Scaling Factor will be greater
or less than, or equal to, 1.0. The MVA Scaling Factor is declared by Nationwide and is included in your Contract. Within the formula, the MVA Scaling Factor serves to amplify or dampen the MVA Factor for purposes of the MVA calculation. An MVA
Scaling Factor greater than 1.0 increases the magnitude of the MVA, an MVA Scaling Factor less than 1.0 dampens the magnitude of the MVA. An MVA Scaling Factor equal to 1 has no effect on the MVA.
The Market Value
Reference Rate refers to the yield of the MVA Index, which is the Bloomberg Barclays U.S. Corporate Index. The Market Value Reference Rate of the MVA Index as of the Date of Issue (the Initial Market Value Reference Rate) is included in your
Contract. The daily Market Value Reference Rate may be obtained thereafter by contacting the Service Center. If the daily Market Value Reference Rate is not available on any day on which the value is needed, we will use the Market Value Reference
Rate for the previous Business Day.
If the Market Value
Reference Rate is no longer available, or if we at our sole discretion determine that the Market Value Reference Rate is no longer appropriate for purposes of calculating the MVA, we will substitute another method for determining the MVA, subject to
any required regulatory approval. We will notify you of any such change.
See "Appendix E: MVA Examples" for examples of the MVA
calculation.
WAIVER OR REDUCTION OF THE CDSC OR MVA
Nationwide may waive (or reduce) any applicable CDSC and waive
some or part of the MVA for the following transactions:
(1)
|
No CDSC or MVA is charged on
payment of the Death Benefit or on any partial withdrawals or full surrender after the Death Benefit is paid. |
(2)
|
Nationwide may
decide not to charge a CDSC and/or apply an MVA if the Contract is surrendered in exchange for another contract issued by Nationwide or one of its affiliated insurance companies. If another contract issued by Nationwide or one of its affiliates is
exchanged for the Contract, Nationwide may reduce the CDSC and/or waive part of the MVA on the Contract. A CDSC and/or MVA may apply to the contract received in exchange for the Contract. |
INCREASE IN REMAINING PREFERRED WITHDRAWAL AMOUNT AFTER A
LONG-TERM CARE AND TERMINAL ILLNESS OR INJURY (CDSC AND MVA WAIVER)
General
After the occurrence of a Long-Term Care Event ("LTC Event")
or Terminal Illness or Injury Event ("TI Event") all partial withdrawals and any full surrender will be treated entirely as Preferred Withdrawals (thereby requiring us to waive any otherwise applicable CDSCs and MVAs). This CDSC and MVA waiver is
only available if the Contract Owner and Annuitant are the same person, and as of the Date of Issue that person is no older than 80 years old.
In addition, for purposes of this CDSC and MVA waiver, if the
Contract Owner is not a natural person, we will treat the Annuitant as the Contract Owner.
There are no charges associated with these waivers.
Long-Term Care Event
An LTC Event occurs if at any time after the first Contract
Anniversary, the Contract Owner (or Annuitant if the Contract Owner is not a natural person) is confined to a Long-Term Care Facility or Hospital beginning after the Date of Issue and is confined for a continuous period of 90 days or more. If there
is a Joint Owner, the confinement of the Contract Owner or Joint Owner may qualify as an LTC Event. An LTC Event waiver claim (including written proof of confinement) must be received by us while the confinement is ongoing or within 90 days after
the confinement ends. If it was not reasonably possible to give written proof of confinement in the time required, we will not reduce or deny the waiver if such proof is given as soon as reasonably possible. In any event, the written proof required
must be given no later than one year from after the confinement ends unless the Contract Owner was legally incapacitated.
A "Hospital" is defined as a state licensed facility which is
operated as a hospital according to the law of the jurisdiction in which it is located; operates primarily for the care and treatment of sick or injured persons as inpatients; provides continuous 24 hours a day nursing service by or under the
supervision of a registered graduate professional nurse (R.N.) or a licensed practical nurse (L.P.N.); is supervised by a staff of physicians; and has medical and diagnostic facilities.
A "Long-Term Care Facility" is defined as a state licensed
skilled nursing facility or intermediate care facility that does not include: a home for the aged or mentally ill, a community living center, or a place that primarily provides domiciliary, residency, or retirement care; or a place owned or operated
by a member of the Contract Owner's immediate family.
Terminal Illness
or Injury Event
A TI Event occurs if at any time after
the first Contract Anniversary, the Contract Owner (or Annuitant if the Contract Owner is not a natural person) is diagnosed by a physician (who is not a party to the Contract nor an immediate family member of a party to the Contract) as having a
Terminal Illness or Injury beginning after the Date of Issue. If there is a Joint Owner, the Terminal Illness or Injury of the Contract Owner or Joint Owner may qualify as a TI Event.
A "Terminal Illness or Injury" is defined as an illness or
injury diagnosed after the Date of Issue by a physician that is expected to result in death within 12 months of diagnosis.
DEATH BENEFIT AND SUCCESSION RIGHTS
DEATH PRIOR TO ANNUITIZATION
Death of Contract Owner who is not the Annuitant
If the deceased Contract Owner (or Joint Owner) is not an
Annuitant, and the deceased Contract Owner (or Joint Owner) dies before the Annuitization Date while the Contract is in force, no Death Benefit is payable. Under such circumstances, contractual rights under the Contract will succeed as
follows:
(1)
|
Contract Owner / Joint Owner. If there is a surviving Contract Owner or Joint Owner, the survivor becomes the sole Contract Owner. The Contract otherwise continues uninterrupted. |
(2)
|
Beneficiary(ies). If there is no surviving Contract Owner or Joint Owner, the Beneficiary(ies) becomes (become) the new contract owner for purposes of the Code. |
(3)
|
Contingent Beneficiary(ies). If there is no surviving Beneficiary, the Contingent Beneficiary(ies) becomes (become) the new contract owner for purposes of the Code. |
(4)
|
Last
Surviving Contract Owner's or Joint Owner’s Estate. If there is no surviving Contingent Beneficiary, the estate of the last surviving Contract Owner or Joint Owner becomes the new Contract Owner.
|
Death of Contract Owner who is the
Annuitant
If the deceased Contract Owner (or Joint
Owner) is an Annuitant, and the deceased Contract Owner (or Joint Owner) dies before the Annuitization Date while the Contract is in force, the Death Benefit may or may not become payable depending on whether there is a Contingent Annuitant.
If there is Contingent Annuitant, the Contingent Annuitant
takes the place of the deceased Annuitant under the Contract and no Death Benefit is payable. There will no longer be a Contingent Annuitant under the Contract.
If there is no Contingent Annuitant, the Death Benefit becomes
payable. Rights to the Death Benefit will be as follows:
(1)
|
Contract Owner / Joint Owner. If there is a surviving Contract Owner or Joint Owner, the survivor is entitled to the Death Benefit. |
(2)
|
Beneficiary(ies). If there is no surviving Contract Owner or Joint Owner, the Beneficiary(ies) is (are) entitled to the Death Benefit. |
(3)
|
Contingent Beneficiary(ies). If there is no surviving Beneficiary, the Contingent Beneficiary(ies) is (are) entitled to the Death Benefit. |
(4)
|
Last
Surviving Contract Owner's or Joint Owner’s Estate. If there is no surviving Contingent Beneficiary, the estate of the last surviving Contract Owner or Joint Owner is entitled to the Death Benefit.
|
Death of Annuitant who is not the
Contract Owner
If the deceased Annuitant is not the
Contract Owner (or Joint Owner), and the deceased Annuitant dies before the Annuitization Date while the Contract is in force, the Death Benefit may or may not become payable depending on whether there is a Contingent Annuitant.
If there is a Contingent Annuitant, the Contingent Annuitant
takes the place of the deceased Annuitant under the Contract and no Death Benefit is payable. The Contract otherwise continues without interruption and there will no longer be a Contingent Annuitant under the Contract.
If there is no
Contingent Annuitant, the Death Benefit becomes payable. Rights to the Death Benefit will be as follows:
(1)
|
Beneficiary(ies). The Beneficiary(ies) is (are) entitled to the Death Benefit. |
(2)
|
Contingent Beneficiary(ies). If there is no surviving Beneficiary, the Contingent Beneficiary(ies) is (are) entitled to the Death Benefit. |
(3)
|
Last
Surviving Contract Owner's or Joint Owner’s Estate. If there is no surviving Contingent Beneficiary, the estate of the last surviving Contract Owner or Joint Owner is entitled to the Death Benefit.
|
DEATH AFTER ANNUITIZATION
After the Annuitization Date, under no circumstances will the
Death Benefit become payable. All payments under the Contract depend on the annuity payment option selected.
PAYMENT OF THE DEATH BENEFIT
When the Death Benefit becomes payable, we will not pay the
Death Benefit until we receive in writing at our Service Center each of the following:
•
|
Proper proof of death;
|
•
|
Instructions regarding the
method of distribution; and |
•
|
Any forms
required by a state or other jurisdiction. |
Proper proof of death includes:
•
|
A certified copy of the death
certificate of the deceased Annuitant; |
•
|
A copy of a certified decree
of a court of competent jurisdiction as to the finding of death; |
•
|
A written statement by a
medical doctor who attended the deceased; or |
•
|
Any other
proof of death that we deem acceptable. |
The methods of distribution depend on the person (or people)
to whom the Death Benefit will be paid. Under all circumstances, the method of distribution selected must comply with any applicable requirements under the Code.
The following applies to the payment of the Death
Benefit:
(1)
|
If the person entitled to
receive the Death Benefit is the surviving spouse of the deceased Contract Owner, the surviving spouse can do one of the following: |
a.
|
Elect to receive their
portion of the Death Benefit as a lump sum; |
b.
|
Elect to receive their
portion of the Death Benefit as an annuity; |
c.
|
Elect to receive their
portion of the Death Benefit as any distribution that is permitted by state and federal regulations and is acceptable to Nationwide; or |
d.
|
Elect to
continue the Contract with his or her portion of the Death Benefit and become the new Contract Owner. |
(2)
|
For any other person(s)
entitled to receive the Death Benefit, he or she can do one of the following: |
a.
|
Elect to receive their
portion of the Death Benefit as a lump sum; |
b.
|
Elect to receive their
portion of the Death Benefit as an annuity; or |
c.
|
Elect to
receive their portion of the Death Benefit as any distribution that is permitted by state and federal regulations and is acceptable to Nationwide. |
If the Contract has more than one Beneficiary entitled to the
Death Benefit, the Contract Value will continue to be allocated to the applicable Strategies until the first Beneficiary provides Nationwide with all the information necessary to pay that Beneficiary’s portion of the Death Benefit. At the time
the first Beneficiary’s proceeds are paid, the remaining portion(s) of the Death Benefit that is allocated to the Strategies will be reallocated to the Transition Account until instructions are received from the remaining
Beneficiary(ies).
If any
Beneficiary entitled to receive the Death Benefit elects to continue the Contract as the new owner or becomes a beneficial owner of the Contract, the Beneficiary’s entire portion of the Death Benefit will be automatically reallocated to the
Default Option. This reallocation to the Default Option will occur on the date the Beneficiary’s election is received in good order. The Default Option’s Strategy Term will begin on the date the Beneficiary’s portion of the Death
Benefit is reallocated to the Default Option. The Crediting Factors applicable to the Default Option will be the new business Crediting Factors in effect on the date the Beneficiary’s portion of the Death Benefit is reallocated to the Default
Option. Thereafter, any partial withdrawal or full surrender is treated as a Preferred Withdrawal.
The Transition Account is a short-term liquid investment
account. We establish interest rates for all amounts in the Transition Account on a monthly basis, but we do not guarantee any specific minimum rate. The Transition Account is not designed for long-term investing. The Contract Owner cannot elect to
allocate Contract Value to the Transition Account. Withdrawals from the Transition Account are not subject to any CDSCs or MVAs. The value in the Transition Account will equal the amount of the Death Benefit transferred into the Transition Account
plus any interest credited to the Transition Account minus any amounts withdrawn from the Transition Account.
CALCULATION OF THE DEATH BENEFIT
Except as provided below, the Death Benefit will equal the
Contract Accumulation Value as of the date the Death Benefit becomes payable. The Strategy Value for each Strategy is adjusted to equal its Strategy Accumulation Value on that date, and as a result, the Contract Value is adjusted to equal the
Contract Accumulation Value on that date. The Contract Accumulation Value may be less than, greater than, or equal to your Contract Value.
If the Contract Owner is changed, or if the Contract is
assigned, prior to the Death Benefit becoming payable, the Death Benefit will equal the Surrender Value rather than the Contract Accumulation Value, except in any of the following circumstances:
(a)
|
The new Contract Owner or
assignee assumes full ownership of the Contract. We reserve the right to determine when such circumstances occur in our sole discretion. Examples of such circumstances may include (a) when ownership is transferred from an individual to a revocable
trust for the benefit of the same individual; (b) when ownership changes due to a change in a Contract Owner’s spouse; or (c) when ownership changes because there is a change to a court appointed guardian representing the Contract Owner during
the Contract Owner’s lifetime. |
(b)
|
Ownership of a Contract as
an IRA or Roth IRA is being changed from one custodian to another, from the Contract Owner to a custodian, or from a custodian to the Contract Owner. |
(c)
|
The assignment is for the
purpose of effectuating an exchange pursuant to Section 1035 of the Code. |
(d)
|
The
change is the removal of a Contract Owner or Joint Owner when the Contract is jointly owned. |
Taxes may be deducted from the Death Benefit in all
circumstances.
ANNUITIZATION
Annuity Commencement Date
The Annuity Commencement Date is the date on which annuity
payments are scheduled to begin. Generally, the Contract Owner designates the Annuity Commencement Date at the time of application. If no Annuity Commencement Date is designated at the time of application, Nationwide will establish the Annuity
Commencement Date as the date the Annuitant reaches age 90. The Contract Owner may initiate a change to the Annuity Commencement Date at any time. Additionally, Nationwide will notify the Contract Owner approximately 90 days before the impending
Annuity Commencement Date of the opportunity to change the Annuity Commencement Date or annuitize the contract.
Any request to change the Annuity Commencement Date must meet
the following requirements:
•
|
the request is made prior to
the Annuitization Date; |
•
|
the requested date is at
least two years after the Date of Issue; |
•
|
the requested date is not
later than the first day of the first calendar month after the Annuitant’s 90th birthday unless approved by Nationwide; and |
•
|
the
request for change is made in writing, submitted to the Service Center and approved by Nationwide. |
Generally,
Nationwide will not initiate annuitization until specifically directed to do so. However, for Non-Qualified Contracts only, Nationwide will automatically initiate annuitization within 45 days after the Annuity Commencement Date (whether default or
otherwise), unless (1) Nationwide has had direct contact with the Contract Owner (indicating that the contract is not abandoned); or (2) the Contract Owner has taken some type of action which is inconsistent with the desire to annuitize.
Annuitization
Annuitization is the period during which annuity payments are
received. Annuitization is irrevocable once annuity payments have begun. Upon Annuitization Date, the Annuitant must elect an annuity payment option.
Annuity purchase rates are used to determine the amount of the
annuity payments based upon the annuity payment option elected. Actual purchase rates used to determine annuity payments will be those in effect on the Annuitization Date. Annuity benefits at the time of their commencement will not be less than
those that would be provided by the application of the Surrender Value to purchase a single premium immediate annuity contract at purchase rates offered by Nationwide at the time to the same class of annuitants.
Fixed Annuity Payments
Fixed annuity payments provide for level annuity payments.
Premium taxes are deducted prior to determining fixed annuity payments. The fixed annuity payments will remain level unless the annuity payment option provides otherwise.
Frequency and Amount of Payments
Annuity payments are based on the annuity payment option
elected.
If the net amount to be annuitized is less than
$2,000, Nationwide reserves the right to pay this amount in a lump sum instead of periodic annuity payments.
Nationwide reserves the right to change the frequency of
payments if the amount of any payment becomes less than $100. The payment frequency will be changed to an interval that will result in payments of at least $100. Nationwide will send annuity payments no later than 10 Business Days after each annuity
payment date.
Annuity Payment Options
The Annuitant must elect an annuity payment option before the
Annuitization Date. If the Annuitant does not elect an annuity payment option, the fixed single life annuity with 240 monthly payments guaranteed annuity payment option will be assumed as the automatic form of payment upon annuitization. Once
elected or assumed, the annuity payment option may not be changed.
Not all of the annuity payment options may be available in all
states. Additionally, the annuity payment options available may be limited based on the Annuitant’s age (and the joint annuitant’s age, if applicable) or requirements under the Code.
Nationwide reserves the right to refuse any purchase payment
that would result in the cumulative total for all contracts issued by Nationwide on the life of any one Annuitant or owned by any one Contract Owner to exceed $1,000,000. If a Contract Owner does not submit purchase
payments in excess of $1,000,000, or if Nationwide has refused to accept purchase payments in excess of $1,000,000, the references in this provision to purchase payments in excess of $1,000,000 will not apply. If the Contract Owner is permitted to
submit purchase payments in excess of $1,000,000, additional restrictions apply, as follows.
Annuity Payment Options for Contracts with Total Purchase
Payments and/or Surrender Value Annuitized Less Than or Equal to $2,000,000
If, at the Annuitization Date, the total of the purchase
payment made to the contract and/or the Surrender Value annuitized is less than or equal to $2,000,000, the annuity payment options available are:
•
|
Single life; |
•
|
Joint and survivor; and
|
•
|
Single
life with a 10 or 20 year term certain. |
Each of the annuity payment options is discussed more
thoroughly below.
Single Life
The single life annuity payment option provides for annuity
payments to be paid during the lifetime of the Annuitant. This option is not available if the Annuitant is 86 or older on the Annuitization Date.
Payments will cease with the last payment before the
Annuitant’s death. For example, if the Annuitant dies before the second annuity payment date, the Annuitant will receive only one payment. The Annuitant will only receive two annuity payments if he or she dies before the third payment date,
and so on. No death benefit will be paid.
No withdrawals
other than the scheduled annuity payments are permitted.
Joint and Survivor
The joint and survivor annuity payment option provides for
annuity payments to continue during the joint lifetimes of the Annuitant and joint annuitant. After the death of either the Annuitant or joint annuitant, payments will continue for the life of the survivor. This option is not available if the
Annuitant or joint annuitant is 86 or older on the Annuitization Date.
Payments will cease with the last payment due prior to the
death of the last survivor of the Annuitant and joint annuitant. As is the case of the single life annuity payment option, there is no guaranteed number of payments. Therefore, it is possible that if the Annuitant dies before the second annuity
payment date, the Annuitant will receive only one annuity payment. No death benefit will be paid.
No withdrawals other than the scheduled annuity payments are
permitted.
Single Life with a 10 or 20 Year Term
Certain
The single life with a 10 or 20 year term
certain annuity payment option provides that monthly annuity payments will be paid during the Annuitant’s lifetime or for the term selected, whichever is longer. The term may be either 10 or 20 years.
If the Annuitant dies before the end of the 10 or 20 year
term, payments will be paid to the beneficiary for the remainder of the term.
No withdrawals other than the scheduled annuity payments are
permitted.
Any Other Option
Annuity payment options not set forth in this provision may be
available. Any annuity payment option not set forth in this provision must be approved by Nationwide.
Annuity Payment Options for Contracts with Total Purchase
Payments and/or Surrender Value Annuitized Greater Than $2,000,000
If, at the Annuitization Date, the total of the purchase
payment made to the contract and/or the Surrender Value to be annuitized is greater than $2,000,000, Nationwide may limit the annuity payment option to the longer of:
1.
|
a fixed single life annuity
with a 20 year term certain; or |
2.
|
a fixed
single life annuity with a term certain to age 95. |
Annuitization of Amounts Greater than $5,000,000
Additionally, Nationwide may limit the amount that may be
annuitized on a single life to $5,000,000. If the total amount to be annuitized is greater than $5,000,000 under this contract and/or for all Nationwide issued annuity contracts with the same Annuitant, the Contract Owner must:
1.
|
reduce the amount to be
annuitized to $5,000,000 or less by taking a partial withdrawal from the Contract; |
2.
|
reduce the amount to be
annuitized to $5,000,000 or less by exchanging the portion of the Surrender Value in excess of $5,000,000 to another annuity contract; or |
3.
|
annuitize
the portion of the Surrender Value in excess of $5,000,000 under an annuity payment option with a term certain, if available. |
CONTRACT TYPES AND FEDERAL TAX CONSIDERATIONS
Types of Contracts
The contracts described in this prospectus are classified
according to the tax treatment to which they are subject under the Code. Following is a general description of the various contract types. Eligibility requirements, tax benefits (if any), limitations, and other features of the contracts will differ
depending on contract type.
Non-Qualified Contracts
A Non-Qualified Contract is a contract that does not qualify
for certain tax benefits under the Code, such as deductibility of purchase payments, and which is not an IRA, Roth IRA, SEP IRA, or Simple IRA.
Upon the death of the owner of a Non-Qualified Contract,
mandatory distribution requirements are imposed to ensure distribution of the entire balance in the contract within a required period.
Non-Qualified Contracts that are owned by natural persons
allow the deferral of taxation on the income earned in the contract until it is distributed or deemed to be distributed. Non-Qualified Contracts that are owned by non-natural persons, such as trusts, corporations, and partnerships are generally
subject to current income tax on the income earned inside the contract, unless the non-natural person owns the contract as an agent of a natural person.
Charitable Remainder Trusts
Charitable Remainder Trusts are trusts that meet the
requirements of Section 664 of the Code. Non-Qualified Contracts that are issued to Charitable Remainder Trusts will differ from other Non-Qualified Contracts in three respects:
1.
|
Waiver of sales charges. In
addition to any sales load waivers included in the contract, Charitable Remainder Trusts may also withdraw the difference between: |
a.
|
the contract value on the
day before the withdrawal; and |
b.
|
the total
amount of purchase payments made to the contract (less an adjustment for amounts surrendered). |
2.
|
Contract ownership at
annuitization. On the annuitization date, if the contract owner is a Charitable Remainder Trust, the Charitable Remainder Trust will continue to be the contract owner and the annuitant will NOT become the contract owner. |
3.
|
Recipient
of death benefit proceeds. With respect to the death benefit proceeds, if the contract owner is a Charitable Remainder Trust, the death benefit is payable to the Charitable Remainder Trust. Any designation in conflict with the Charitable Remainder
Trust’s right to the death benefit will be void. |
While these provisions are intended to facilitate a Charitable
Remainder Trust’s ownership of this contract, the rules governing Charitable Remainder Trusts are numerous and complex. A Charitable Remainder Trust that is considering purchasing this contract should seek the advice of a qualified tax and/or
financial professional prior to purchasing the contract. An annuity that has a Charitable Remainder Trust endorsement is not a Charitable Remainder Trust; the endorsement is merely to facilitate ownership of the contract by a Charitable Remainder
Trust.
Individual Retirement Annuities (IRAs)
IRAs are contracts that satisfy the provisions of Section
408(b) of the Code, including the following requirements:
•
|
the contract is not
transferable by the owner; |
•
|
the premiums are not fixed;
|
•
|
if the contract owner is
younger than age 50, the annual premium cannot exceed $5,500; if the contract owner is age 50 or older, the annual premium cannot exceed $6,500 (although rollovers of greater amounts from Qualified Plans, tax sheltered annuities, certain 457
governmental plans, and other IRAs can be received); |
•
|
certain minimum distribution
requirements must be satisfied after the owner attains the age of 70½ prior to January 1, 2020. See "Tax Changes" for the change the SECURE Act made to this requirement; |
•
|
the entire interest of the
owner in the contract is nonforfeitable; and |
•
|
after the death of the
owner, additional distribution requirements may be imposed to ensure distribution of the entire balance in the contract within the statutory period of time. |
Depending on the circumstance of the owner, all or a portion
of the contributions made to the account may be deducted for federal income tax purposes.
IRAs may receive rollover contributions from other individual
retirement accounts, other individual retirement annuities, tax sheltered annuities, certain 457 governmental plans, and qualified retirement plans (including 401(k) plans).
When the owner of an IRA attains the age of 70½ prior to
January 1, 2020, the Code requires that certain minimum distributions be made. The SECURE Act, which was enacted on December 20, 2019, increased the age an IRA owner is required to begin certain minimum distributions from age 70½ to age 72 for
those who turn age 70 ½ on or after January 1, 2020. In addition, upon the death of the owner of an IRA, mandatory distribution requirements are imposed by the Code to ensure distribution of the entire contract value within the required
statutory period. Due to the Treasury Regulations valuation rules, the amount used to compute the mandatory distributions may exceed the contract value.
Failure to make the mandatory distributions can result in an
additional penalty tax of 50% of the excess of the amount required to be distributed over the amount that was actually distributed.
For further details regarding IRAs, refer to the disclosure
statement provided when the IRA was established and the annuity contract’s IRA endorsement.
As used herein, the term "individual retirement plans" shall
refer to both individual retirement annuities and individual retirement accounts that are described in Section 408 of the Code.
One-Rollover-Per-Year Limitation
A contract owner can receive a distribution from an IRA and
roll it into another IRA within 60 days from the date of the distribution and not have the amount of the distribution included in taxable income. Only one rollover per year from a contract owner’s IRA is allowed. The one year period begins on
the date the contract owner receives the IRA distribution, and not on the date the IRA was rolled over.
The one-rollover-per-year limitation as applies in the
aggregate to all the IRAs that a taxpayer owns. This means that a contract owner cannot make an IRA rollover distribution if, within the previous one year period, an IRA rollover distribution was taken from any other IRAs owned by the taxpayer.
Also, rollovers between an individual’s Roth IRAs would prevent a separate rollover within the 1-year period between the individual’s traditional IRAs within the one-year period, and vice versa.
Direct transfers IRA funds between IRA trustees are not
subject to the one rollover per year limitation because such transfers are not considered rollover distributions. Also, a rollover from a traditional IRA to a Roth IRA (a conversion) is not subject to the one roll over per year limitation, and such
a rollover is disregarded in applying the one rollover per year limitation to other rollovers.
Roth IRAs
Roth IRA contracts are contracts that satisfy the provisions
of Section 408A of the Code, including the following requirements:
•
|
the contract is not
transferable by the owner; |
•
|
the premiums are not fixed;
|
•
|
if the contract owner is
younger than age 50, the annual premium cannot exceed $5,500; if the contract owner is age 50 or older, the annual premium cannot exceed $6,500 (although rollovers of greater amounts from other Roth IRAs and other individual retirement plans can be
received); |
•
|
the entire interest of the
owner in the contract is nonforfeitable; and |
•
|
after the death of the
owner, certain distribution requirements may be imposed to ensure distribution of the entire balance in the contract within the statutory period of time. |
A Roth IRA can receive a rollover from an individual
retirement plan or another eligible retirement plan; however, the amount rolled over from the individual retirement plan or other eligible retirement plan to the Roth IRA is required to be included in the owner’s federal gross income at the
time of the rollover, and will be subject to federal income tax. However, a rollover or conversion of an amount from an IRA or eligible retirement plan after December 31, 2017 cannot be recharacterized back to an IRA.
For further
details regarding Roth IRAs, please refer to the disclosure statement provided when the Roth IRA was established and the annuity contract’s IRA endorsement.
Simplified Employee Pension IRAs (SEP IRA)
A SEP IRA is a written plan established by an employer for the
benefit of employees which permits the employer to make contributions to an IRA established for the benefit of each employee.
An employee may make deductible contributions to a SEP IRA
subject to the same restrictions and limitations as an IRA. In addition, the employer may make contributions to the SEP IRA, subject to dollar and percentage limitations imposed by both the Code and the written plan.
A SEP IRA plan must satisfy:
•
|
minimum participation rules;
|
•
|
top-heavy contribution
rules; |
•
|
nondiscriminatory allocation
rules; and |
•
|
requirements regarding a
written allocation formula. |
In
addition, the plan cannot restrict withdrawals of non-elective contributions, and must restrict withdrawals of elective contributions before March 15th
of the following year.
When the owner of a SEP IRA
attains the age of 70½ prior to January 1, 2020, the Code requires that certain minimum distributions be made. The SECURE Act, which was enacted on December 20, 2019 and increased the age an IRA owner is required to begin certain minimum
distributions from age 70½ to age 72 for those who turn age 70½ on or after January 1, 2020. Due to Treasury Regulations valuation rules, the amount used to compute the minimum distributions may exceed the contract value. In addition, upon
the death of the owner of a SEP IRA, mandatory distribution requirements are imposed by the Code to ensure distribution of the entire contract value within the required statutory period.
Simple IRAs
A Simple IRA is an Individual Retirement Annuity that is
funded exclusively by a qualified salary reduction arrangement and satisfies:
•
|
vesting requirements;
|
•
|
participation requirements;
and |
•
|
administrative requirements.
|
The funds contributed to a Simple
IRA cannot be commingled with funds in other individual retirement plans or SEP IRAs.
A Simple IRA cannot receive rollover distributions except from
another Simple IRA.
When the owner of a Simple IRA
attains the age of 70½ prior to January 1, 2020, the Code requires that certain minimum distributions be made. The SECURE Act, which was enacted on December 20, 2019 and increased the age an IRA owner is required to begin certain minimum
distributions from age 70½ to age 72 for those who turn age 70 ½ on or after January 1, 2020.. Due to the Treasury Regulations valuation rules, the amount used to compute the minimum distributions may exceed the contract value. In
addition, upon the death of the owner of a Simple IRA, mandatory distribution requirements are imposed by the Code to ensure distribution of the entire contract value within the required statutory period.
Investment Only (Qualified Plans)
Contracts that are owned by Qualified Plans are not intended
to confer tax benefits on the beneficiaries of the plan; they are used as investment vehicles for the plan. The income tax consequences to the beneficiary of a Qualified Plan are controlled by the operation of the plan, not by operation of the
assets in which the plan invests.
Beneficiaries of
Qualified Plans should contact their employer and/or trustee of the plan to obtain and review the plan, trust, summary plan description and other documents for the tax and other consequences of being a participant in a Qualified Plan.
Federal Tax Considerations
The tax consequences of purchasing a contract described in
this prospectus will depend on:
•
|
the type of contract
purchased; |
•
|
the purposes for which the
contract is purchased; and |
•
|
the personal circumstances
of individual investors having interests in the contracts. |
See Synopsis of the Contracts for a brief description of the various types of contracts and the different purposes for which the contracts may be purchased.
Existing tax rules are subject to change, and may affect
individuals differently depending on their situation. Nationwide does not guarantee the tax status of any contracts or any transactions involving the contracts.
If the contract is purchased as an investment of certain
retirement plans (such as qualified retirement plans, IRAs, and custodial accounts as described in Sections 401, 408(a), and 403(b)(7) of the Internal Revenue Code), the tax advantages enjoyed by the contract owner and/or annuitant may relate to
participation in the plan rather than ownership of the annuity contract. Such plans are permitted to purchase investments other than annuities and retain tax-deferred status.
The following is a brief summary of some of the federal income
tax considerations related to the contracts. In addition to the federal income tax, distributions from annuity contracts may be subject to state and local income taxes. The tax rules across all states and localities are not uniform and therefore
will not be discussed in this prospectus. Tax rules that may apply to contracts issued in U.S. territories such as Puerto Rico and Guam are also not discussed. Nothing in this prospectus should be considered to be tax advice. Contract owners and
prospective contract owners should consult a financial professional, tax advisor or legal counsel to discuss the taxation and use of the contracts.
The Internal Revenue Code sets forth different income tax
rules for the following types of annuity contracts:
•
|
IRAs;
|
•
|
SEP IRAs; |
•
|
Simple IRAs; |
•
|
Roth IRAs; and |
•
|
Non-Qualified Contracts.
|
IRAs, SEP IRAs and Simple IRAs
Distributions from IRAs, SEP IRAs and Simple IRAs are
generally taxed when received. If any portion of the amount contributed to the IRA was nondeductible for federal income tax purposes, then a portion of each distribution is excludable from income.
If distributions of income from an IRA are made prior to the
date that the owner attains the age of 59½ years, the income is subject to an additional penalty tax of 10% unless an exception applies. (For Simple IRAs, the 10% penalty is increased to 25% if the distribution is made during the 2-year period
beginning on the date that the individual first participated in the Simple IRA.) The 10% penalty tax can be avoided if the distribution is:
•
|
made to a beneficiary on or
after the death of the owner; |
•
|
attributable to the owner
becoming disabled (as defined in the Internal Revenue Code); |
•
|
part of a series of
substantially equal periodic payments made not less frequently than annually for the life (or life expectancy) of the owner, or the joint lives (or joint life expectancies); or of the owner and his or her designated beneficiary; |
•
|
used for qualified higher
education expenses; |
•
|
used for expenses
attributable to the purchase of a home for a qualified first-time buyer |
If the contract owner dies before the contract is completely
distributed, the balance will be included in the contract owner’s gross estate for estate tax purposes.
Roth IRAs
Distributions of earnings from Roth IRAs are taxable or
non-taxable depending upon whether they are "qualified distributions" or "nonqualified distributions." A "qualified distribution" is one that is made after the Roth IRA has satisfied the five-year rule and meets one of the following
requirements:
•
|
it is made on or after the
date on which the contract owner attains age 59½; |
•
|
it is made to a beneficiary
(or the contract owner's estate) on or after the death of the contract owner; |
•
|
it is attributable to the
contract owner's disability; or |
•
|
it is used for expenses
attributable to the purchase of a home for a qualified first-time buyer. |
The five-year rule is satisfied if a five-taxable year period
has passed. The five taxable-year period begins with the first taxable year in which a contribution is made to any Roth IRA established for the owner.
A qualified distribution is not included in gross income for
federal income tax purposes.
A non-qualified
distribution is not includable in gross income to the extent that the distribution, when added to all previous distributions, does not exceed the total amount of contributions made to the Roth IRA. Any non-qualified distribution in excess of the
total contributions is includable in the contract owner's gross income in the year that is distributed to the contract owner.
Special rules apply for Roth IRAs that have proceeds received
from an IRA prior to January 1, 1999 if the owner elected the special four-year income averaging provisions that were in effect for 1998.
If non-qualified distributions of income from a Roth IRA are
made prior to the date that the owner attains the age of 59½ years, the income is subject to an additional penalty tax of 10% unless an exception applies. The penalty tax can be avoided if the distribution is:
•
|
made to a beneficiary on or
after the death of the owner; |
•
|
attributable to the owner
becoming disabled (as defined in the Internal Revenue Code); |
•
|
part of a series of
substantially equal periodic payments made not less frequently than annually for the life (or life expectancy) of the owner, or the joint lives (or joint life expectancies) of the owner and his or her designated beneficiary; |
•
|
for qualified higher
education expenses; or |
•
|
used for expenses
attributable to the purchase of a home for a qualified first-time buyer. |
If the contract owner dies before the contract is completely
distributed, the balance will be included in the contract owner's gross estate for tax purposes.
Non-Qualified Contracts - Natural Persons as Contract
Owners
Generally, the income earned inside a
Non-Qualified Annuity Contract that is owned by a natural person is not taxable until it is distributed from the contract.
Distributions before the Annuitization Date are taxable to the
contract owner to the extent that the cash value of the contract exceeds the contract owner's investment at the time of the distribution. In general, the investment in the contract is equal to the purchase payments made with after-tax dollars,
reduced by any nontaxable distributions. Distributions, for this purpose, include partial surrenders, any portion of the contract that is assigned or pledged; or any portion of the contract that is transferred by gift. For these purposes, a transfer
by gift may occur upon annuitization if the contract owner and the annuitant are not the same individual.
With respect to annuity distributions on or after the
Annuitization Date, a portion of each annuity payment is excludable from taxable income. The amount excludable is based on the ratio between the contract owner's investment in the contract and the expected return on the contract. Once the entire
investment in the contract is recovered, all distributions are fully includable in income. The maximum amount excludable from income is the investment in the contract. If the annuitant dies before the entire investment in the contract has been
excluded from income, and as a result of the annuitant's death no more payments are due under the contract, then the unrecovered investment in the contract may be deducted on his or her final tax return.
Commencing after December 31, 2010, the Internal Revenue Code
provides that if only a portion of a nonqualified annuity contract is annuitized for either (a) a period of 10 years or greater, or (b) for the life or lives of one or more persons, then the portion of the contract that has been annuitized would be
treated as if it were a separate annuity contract. This means that an Annuitization Date can be established for a portion of the annuity contract (rather than requiring the entire contract to be annuitized at once) and the above description of the
taxation of annuity distributions after the Annuitization Date would apply to the portion of the contract that has been annuitized. The investment in the contract is required to be allocated pro rata between the portion of the contract that is
annuitized and the portion that is not. All other benefits under the contract (e.g., death benefit) would also be reduced pro rata. For example, if 1/3 of the cash value of the contract were to be annuitized, the death benefit would also be reduced
by 1/3.
In determining the taxable amount of a
distribution that is made prior to the annuitization date, all annuity contracts issued after October 21, 1988 by the same company to the same contract owner during the same calendar year will be treated as one annuity contract.
A special rule applies to distributions from contracts that
have investments in the contract that were made prior to August 14, 1982. For those contracts, distributions that are made prior to the Annuitization Date are treated first as the nontaxable recovery of the investment in the contract as of that
date. A distribution in excess of the amount of the investment in the contract as of August 14, 1982, will be treated as taxable income.
The Internal
Revenue Code imposes a penalty tax if a distribution is made before the contract owner reaches age 59½. The amount of the penalty is 10% of the portion of any distribution that is includable in gross income. The penalty tax does not apply if
the distribution is:
•
|
the result of a contract
owner's death; |
•
|
the result of a contract
owner's disability (as defined in the Internal Revenue Code); |
•
|
one of a series of
substantially equal periodic payments made over the life (or life expectancy) of the contract owner or the joint lives (or joint life expectancies) of the contract owner and the beneficiary selected by the contract owner to receive payment under the
annuity payment option selected by the contract owner; or |
•
|
is allocable to an
investment in the contract before August 14, 1982. |
If the contract owner dies before the contract is completely
distributed, the balance will be included in the contract owner's gross estate for estate tax purposes.
Non-Qualified Contracts - Non-Natural Persons as Contract
Owners
The previous discussion related to the taxation
of Non-Qualified Contracts owned by individuals. Different rules (the so-called "non-natural persons" rules) apply if the contract owner is not a natural person.
Generally, contracts owned by corporations, partnerships,
trusts, and similar entities are not treated as annuity contracts under the Internal Revenue Code. Therefore, income earned under a Non-Qualified Contract that is owned by a non-natural person is taxed as ordinary income during the taxable year that
it is earned. Taxation is not deferred, even if the income is not distributed out of the contract. The income is taxable as ordinary income, not capital gain.
The non-natural persons rules do not apply to all entity-owned
contracts. For purposes of the rule that annuity contracts that are owned by non-natural persons are not treated as annuity contracts for tax purposes, a contract that is owned by a non-natural person as an agent of an individual is treated as owned
by the individual. This would cause the contract to be treated as an annuity under the Internal Revenue Code, allowing tax deferral. However, this exception does not apply when the non-natural person is an employer that holds the contract under a
non-qualified deferred compensation arrangement for one or more employees.
The non-natural persons rules also do not apply to contracts
that are:
•
|
acquired by the estate of a
decedent by reason of the death of the decedent; |
•
|
issued in connection with
certain qualified retirement plans and individual retirement plans; |
•
|
purchased by an employer
upon the termination of certain qualified retirement plans; or |
•
|
immediate annuities within
the meaning of Section 72(u) of the Internal Revenue Code. |
If the annuitant, who is the individual treated as owning the
contract, dies before the contract is completely distributed, the balance may be included in the annuitant's gross estate for estate tax purposes, depending on the obligations that the non-natural owner may have owed to the annuitant.
Exchanges
As a general rule, federal income tax law treats exchanges of
property in the same manner as a sale of the property. However, pursuant to Section 1035 of the Internal Revenue Code, an annuity contract may be exchanged tax-free for another annuity contract, provided that the obligee (the person to whom the
annuity obligation is owed) is the same for both contracts. If the exchange includes the receipt of other property, such as cash, in addition to another annuity contract special rules may cause a portion of the transaction to be taxable to the
extent of the value of the other property.
IRS Rev.
Proc. 2011-38 addresses the income tax consequences of the direct transfer of a portion of the cash value of an annuity contract in exchange for the issuance of a second annuity contract. A direct transfer that satisfies the revenue procedure will
be treated as a tax-free exchange under Section 1035 of the Code if, for a period of at least 180 from the date of the direct transfer, there are no distributions or surrenders from either annuity contract involved in the exchange. In addition, the
180 day period will be deemed to have been satisfied with respect to amounts received as an annuity for a period of 10 years or more, or as an annuity for the life of one or more persons. The taxation of distributions (other than distributions
described in the immediately preceding sentence) received from either contract within the 180 day period will be determined using general tax principles to determine the substance of those payments. For example, they could be treated as taxable
"boot" in an otherwise tax-free exchange, or as a distribution from the new contract. Please discuss any tax consequences concerning any contemplated or completed transactions with a professional tax advisor. See, also, Non-Qualified Contracts -
Natural Persons as Contract Owners, above.
Additional
Medicare Tax
Section 1411 of the Internal Revenue Code
imposes a surtax of 3.8% on certain net investment income received by individuals and certain trusts and estates. The surtax is imposed on the lesser of (a) net investment income or (b) the excess of the modified adjusted gross income over a
threshold amount. For individuals, the threshold amount is $250,000 (married filing jointly); $125,000 (married filing separately); or $200,000 (other individuals). The threshold for an estate or trust is $7,500.
Modified adjusted gross income is equal to gross income with
several modifications. Consult with a qualified tax advisor regarding how to determine modified adjusted gross income for purposes of determining the applicability of the surtax.
Net investment income includes, but is not limited to,
interest, dividends, capital gains, rent and royalty income, and income from nonqualified annuities. Net investment income does not include, among other things, distributions from certain qualified plans (such as IRAs, Roth IRAs, and plans described
in Internal Revenue Code Sections 401(a), 401(k), 403(a), 403(b) or 457(b)); however, such distributions, to the extent that they are includible in income for federal income tax purposes, are includible in modified adjusted gross income.
Same-Sex Marriages, Domestic Partnership and Other Similar
Relationships
The Treasury issued final regulations that
address what relationships are considered a marriage for federal tax purposes. The final regulations definition of marriage reflects the United States Supreme Court holdings in Windsor and Obergefell, as well as Rev. Proc. 2017-13.
The final regulations define the terms "spouse", "husband",
"wife", and "husband and wife" to be gender neutral so that such terms can apply equally to same sex couples and opposite sex couples. The regulations adopt the "place of celebration" rule to determine marital status for federal tax purposes. A
marriage of two individuals is recognized for federal tax purposes if the marriage is recognized by a state, possession, or territory of the US in which the marriage was entered into, regardless of the couples place of domicile.
Consistent with Rev. Proc. 2013-17, the final regulations
provide that relationships entered into as civil unions, or registered domestic partnerships that is not denominated as marriages under state law are not marriages for federal tax purposes. Therefore, the favorable income-tax deferral options
afforded by federal tax law to a married spouse under Code Sections 72 and 401(a)(9) are not available to individuals who have entered into these formal relationships.
Withholding
Pre-death distributions from the contracts are subject to
federal income tax. Nationwide will withhold the tax from the distributions unless the contract owner requests otherwise. Under some circumstances, the Code will not permit contract owners to waive withholding. Such circumstances include:
•
|
if the payee does not
provide Nationwide with a taxpayer identification number; or |
•
|
if Nationwide receives
notice from the Internal Revenue Service that the taxpayer identification number furnished by the payee is incorrect. |
If a contract owner is prohibited from waiving withholding, as
described above, the distribution will be subject withholding rates established by Section 3405 of the Internal Revenue Code and is applied against the amount of income that is distributed.
Non-Resident Aliens
Generally, a pre-death distribution from a contract to a
non-resident alien is subject to federal income tax at a rate of 30% of the amount of income that is distributed. Nationwide is required to withhold this amount and send it to the Internal Revenue Service. Some distributions to non-resident aliens
may be subject to a lower (or no) tax if a treaty applies. In order to obtain the benefits of such a treaty, the non-resident alien must:
1.
|
provide Nationwide with a
properly completed withholding certificate claiming the treaty benefit of a lower tax rate or exemption from tax; and |
2.
|
provide
Nationwide with an individual taxpayer identification number. |
If the non-resident alien does not meet the above conditions,
Nationwide will withhold 30% of income from the distribution.
Another exemption from the 30% withholding is available if the
non-resident alien provides Nationwide with sufficient evidence that:
1.
|
the distribution is
connected to the non-resident alien's conduct of business in the United States; |
2.
|
the distribution is
includable in the non-resident alien's gross income for United States federal income tax purposes; and |
3.
|
provide
Nationwide with a properly completed withholding certificate 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.
This prospectus does not address any tax matters that may
arise by reason of application of the laws of a non-resident alien’s country of citizenship and/or country of residence. Purchasers and prospective purchasers should consult a financial professional, tax advisor or legal counsel to discuss the
applicability of laws of those jurisdictions to the purchase or ownership of a contract.
FATCA
Under Sections 1471 through 1474 of the Internal Revenue Code
(commonly referred to as FATCA), distributions from a Contract to a foreign financial institution or to a nonfinancial foreign entity, each as described by FATCA, may be subject to United States tax withholding at a flat rate equal to 30% of the
taxable amount of the distribution, irrespective of the status of any beneficial owner of the Contract or of the distribution. Nationwide may require you to provide certain information or documentation (e.g., Form W-9 or Form W-8BEN) to determine
its withholding requirements under FATCA.
Federal Estate,
Gift, and Generation Skipping Transfer Taxes
The
following transfers may be considered a gift for federal gift tax purposes:
•
|
a transfer of the contract
from one contract owner to another; or |
•
|
a distribution to someone
other than a contract owner. |
Upon
the contract owner's death, the value of the contract may subject to estate taxes, even if all or a portion of the value is also subject to federal income taxes.
Section 2612 of the Internal Revenue Code may require
Nationwide to determine whether a death benefit or other distribution is a "direct skip" and the amount of the resulting generation skipping transfer tax, if any. A direct skip is when property is transferred to, or a death benefit or other
distribution is made to:
a)
|
an individual who is two or
more generations younger than the contract owner; or |
b)
|
certain
trusts, as described in Section 2613 of the Internal Revenue Code (generally, trusts that have no beneficiaries who are not two or more generations younger than the contract owner). |
If the contract owner is not an individual, then for this
purpose only, "contract owner" refers to any person:
•
|
who would be required to
include the contract, death benefit, distribution, or other payment in his or her federal gross estate at his or her death; or |
•
|
who is required to report
the transfer of the contract, death benefit, distribution, or other payment for federal gift tax purposes. |
If a transfer is a direct skip, Nationwide will deduct the
amount of the transfer tax from the death benefit, distribution or other payment, and remit it directly to the Internal Revenue Service.
Charge for Tax
Nationwide is not required to maintain a capital gain reserve
liability on Non-Qualified Contracts. If tax laws change requiring a reserve, Nationwide may implement and adjust a tax charge.
Tax Changes
The CARES Act was enacted on March 27, 2020. The CARES Act
made numerous changes to the Internal Revenue Code effective January 1, 2020, including the following:
•
|
Waiving the 2020 lifetime
and post death minimum distribution requirement (RMD) from defined contribution plans and IRAs, including the 2019 RMD taken in 2020 for those individuals turning 70½ in 2019. Additionally, 2020 will not be counted in measuring the five-year
distribution period requirement for post death RMDs, with the result that the five-year period is extended by one year. |
•
|
Relief for
coronavirus-related distributions and loans from qualified plans and IRAs, which includes an exception from the 10% penalty for early distribution and an exemption from the 20% mandatory withholding requirement. |
Along with the passage of the CARES Act, the IRS extended the
deadline to make a 2019 IRA or Roth IRA contribution to July 15, 2020 in order to coincide with the extended deadline for filing an individual’s income tax return.
The SECURE Act was enacted on December 20, 2019. The SECURE
Act made numerous changes to the Code effective January 1, 2020, including the following:
•
|
Increasing the age a
contract owner must begin RMDs under IRAs and certain qualified plans from age 70½ to age 72. |
•
|
Requiring an individual
beneficiary of an inherited IRA and certain qualified plans to withdraw their entire inherited interest within 10 years of the original contract owner’s death. |
•
|
Repealing the 70½ age
limitation that prohibited an individual from making an IRA contribution. |
The Tax Cuts and Jobs Act (the Act) was enacted on December
22, 2017. The Act made numerous changes to the Code effective January 1, 2018, including the following:
•
|
Lowered the federal
individual and corporate income tax rates; |
•
|
Doubled the federal estate
and gift tax exclusion amount to $10 million; |
•
|
Eliminated the ability to
recharacterize the rollover or conversion of amounts from IRAs or eligible retirement plans to a Roth IRA. |
State Taxation
The tax rules across the various states and localities are not
uniform and therefore are not 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. Contract owners and prospective contract owners should consult a
financial professional, tax advisor or legal counsel to discuss the taxation and use of the contracts.
REQUIRED DISTRIBUTIONS
The Internal Revenue Code requires that certain distributions
be made from the contracts issued in conjunction with this prospectus. Following is an overview of the required distribution rules applicable to each type of contract. Please consult a qualified tax or financial professional for more specific
required distribution information.
Required Distributions
- General Information
In general, a beneficiary is an
individual or other entity that the contract owner designates to receive death proceeds upon the contract owner's death. The distribution rules in the Internal Revenue Code make a distinction between "beneficiary" and "designated beneficiary" when
determining the life expectancy that may be used for payments that are made from IRAs, SEP IRAs, Simple IRAs, and Roth IRAs after the death of the annuitant, or that are made from Non-Qualified Contracts after the death of the contract owner. A
designated beneficiary is a natural person who is designated by the contract owner as the beneficiary under the contract. Non-natural beneficiaries (e.g. charities or certain trusts) are not designated beneficiaries for the purpose of required
distributions and the life expectancy of such a beneficiary is zero.
Life expectancies and joint life expectancies will be
determined in accordance with the relevant guidance provided by the Internal Revenue Service and the Treasury Department, including but not limited to Treasury Regulation 1.72-9 and Treasury Regulation 1.401(a)(9)-9.
Required distributions paid upon the death of the contract
owner are paid to the beneficiary or beneficiaries stipulated by the contract owner. How quickly the distributions must be made may be determined with respect to the life expectancies of the beneficiaries. For Non-Qualified Contracts, the
beneficiaries used in the determination of the distribution period are those in effect on the date of the contract owner's death. For contracts other than Non-Qualified Contracts, the beneficiaries used in the determination of the distribution
period do not have to be determined until September 30th of the year following the contract owner's death. If there is more than one beneficiary, the life expectancy of the beneficiary with the shortest life expectancy is used to determine the
distribution period. Any beneficiary that is not a designated beneficiary has a life expectancy of zero.
For IRAs, SEP IRAs, Simple IRAs, Roth IRAs and Tax-Sheltered
Annuities, the SECURE Act that was enacted on December 20, 2019 generally eliminated the option to take required minimum distributions over a designated beneficiary’s life expectancy. In the case of a contract owner who dies on or after
January 1, 2020, an individual beneficiary under a
qualified contract must
withdraw the entire balance of the contract by December 31 of the tenth year following the contract owner’s death. There are limited exceptions to this rule and a prospective purchaser contemplating the purchase of the contract should consult
a qualified tax advisor.
Required Distributions for
Non-Qualified Contracts
Internal Revenue Code Section
72(s) requires Nationwide to make certain distributions when a contract owner dies. The following distributions will be made in accordance with the following requirements:
1.
|
If any contract owner dies
on or after the Annuitization Date and before the entire interest in the contract has been distributed, then the remaining interest must be distributed at least as rapidly as the distribution method in effect on the contract owner's death.
|
2.
|
If any
contract owner dies before the Annuitization Date, then the entire interest in the contract (consisting of either the death benefit or the Contract Value reduced by charges set forth elsewhere in the contract) will be distributed within 5 years of
the contract owner's death, provided however: |
a.
|
any interest payable to or
for the benefit of a designated beneficiary may be distributed over the life of the designated beneficiary or over a period not longer than the life expectancy of the designated beneficiary. Payments must begin within one year of the contract
owner's death unless otherwise permitted by federal income tax regulations; and |
b.
|
if the
designated beneficiary is the surviving spouse of the deceased contract owner, the spouse can choose to become the contract owner instead of receiving a death benefit. Any distributions required under these distribution rules will be made upon that
spouse's death. |
In the event that the contract owner is
not a natural person (e.g., a trust or corporation), for purposes of these distribution provisions:
a)
|
the death of the annuitant
will be treated as the death of a contract owner; |
b)
|
any change of annuitant will
be treated as the death of a contract owner; and |
c)
|
in either
case, the appropriate distribution will be made upon the death or change, as the case may be. |
These distribution provisions do not apply to any contract
exempt from Section 72(s) of the Internal Revenue Code by reason of Section 72(s)(5) or any other law or rule.
Required Distributions for IRAs, SEP IRAs, Simple IRAs, and
Roth IRAs
Required
Distributions During the Life of the Contract Owner
For contract owners who attained the age of 70½ prior to
January 1, 2020, distributions from an IRA, SEP IRA or Simple IRA must begin no later than April 1 of the calendar year following the calendar year in which the contract owner reaches age 70½. For contract owners who attain age 70 ½ on or
after January 1, 2020, the SECURE Act raised the age that distributions from IRA, SEP IRA, or Simple IRA must begin to age 72. For those contract owners, distributions must begin no later than April 1 of the calendar year following the calendar year
in which the contract owner reaches age 72. Distributions may be paid in a lump sum or in substantially equal payments over:
a)
|
the life of the contract
owner or the joint lives of the contract owner and the contract owner's designated beneficiary; or |
b)
|
a period
not longer than the period determined under the table in Treasury Regulation 1.401(a)(9)-9, which is the deemed joint life expectancy of the contract owner and a person 10 years younger than the contract owner. If the designated beneficiary is the
spouse of the contract owner, the period may not exceed the longer of the period determined under such table or the joint life expectancy of the contract owner and the contract owner's spouse, determined in accordance with Treasury Regulation.
|
For IRAs, SEP IRAs, and Simple IRAs,
required distributions do not have to be withdrawn from this contract if they are being withdrawn from another IRA, SEP IRA, or Simple IRA of the contract owner.
If the contract owner's entire interest in an IRA, SEP IRA, or
Simple IRA will be distributed in equal or substantially equal payments over a period described in (a) or (b) above, the payments must begin on or before the required beginning date. The required beginning date is April 1 of the calendar year
following the calendar year in which the contract owner
reaches age 70½ (age 72
for those contract owners who turn age 72 on or after January 1, 2020). The rules for Roth IRAs do not require distributions to begin during the contract owner's lifetime, therefore, the required beginning date is not applicable to Roth IRAs.
Required
Distributions Upon Death of a Contract Owner Before January 1, 2020
Death Before Required
Beginning Date
If the contract owner dies before
January 1, 2020 and before the required beginning date (in the case of an IRA, SEP IRA, or Simple IRA) or before the entire Contract Value is distributed (in the case of Roth IRAs), any remaining interest in the contract must be distributed by
December 31st of the fifth year following the contract owner’s death or over a period exceeding:
(a)
|
The life or life expectancy
of the designated beneficiary, with such life expectancy determined under the tables prescribed by Treasury Regulation 1.401(a)(9)-9. Distributions must begin by the end of the calendar following the year of death. |
a.
|
In the case of a non-spouse
designated beneficiary, the life expectancy is determined in the calendar year following the contract owner’s death, with such life expectancy reduced by one for each subsequent calendar year that elapsed from the year the life expectancy was
determined. |
b.
|
If a designated beneficiary
dies after January 1, 2020, any remaining interest must be distributed by December 31st of the tenth year following the death of the designated
beneficiary. |
c.
|
If the
sole designated beneficiary is the surviving spouse of the contract owner, then distributions must begin by the later of the calendar year following the year of the contract owner’s death or the end of the calendar year in which the contract
owner would have turned 70 ½ (age 72 for those who turn age 70 ½ on or after January 1, 2020). |
Death on or after
Required Beginning Date
If the contract owner
dies before January 1, 2020 and on or after the required beginning date, the interest in the IRA, SEP IRA, or Simple IRA must be distributed at least as rapidly as the distribution method in effect on the contract owner's death. If the designated
beneficiary receiving distributions dies after January 1, 2020, any remaining interest must be distributed by December 31st of the tenth year following
the death of the designated beneficiary.
Purchasers and
prospective purchasers should consult a financial professional, tax advisor or legal counsel to discuss the taxation and use of the contracts.
Required
Distributions Upon Death of a Contract Owner On or After January 1, 2020
If the contract owner dies on or after January 1, 2020 and the
designated beneficiary is not an eligible designated beneficiary as defined under Code Section 401(a)(9), then the entire balance of the contract must be distributed by December 31 of the tenth year following the contract owner’s death. This
10-year post-death distribution period applies regardless of whether the contract owner dies before or after the contract owner’s required beginning date.
In the case of an eligible designated beneficiary, which
includes (1) the contract owner’s surviving spouse, (2) a minor child of the contract owner, (3) a disabled individual, (4) a chronically ill individual, or (5) an individual not more than 10 years younger than the contract owner, the entire
balance of the contract can be distributed over a period not exceeding the life or life expectancy of the eligible designated beneficiary. The life or life expectancy period is generally determined as described in the Death Before Required Beginning Date section above, provided that distributions begin within one year of death. If an eligible designated beneficiary dies before the entire interest is
distributed, the remaining interest must be distributed by December 31st of the tenth year following the eligible designated beneficiary’s death.
A distribution in the form of annuity payments (an
annuitization) that began on or after January 1, 2020 while the contract owner was alive may need to be commuted or modified after the contract owner’s death in order to comply with the post-death distribution requirements. However,
distributions in the form of annuity payments (an annuitization) that began prior to January 1, 2020, while the contract owner was alive, can continue under that method after the death the contract owner without modification.
In additional, a beneficiary who is not an eligible designated
beneficiary or a designated beneficiary must withdraw the entire account balance by December 31st of the fifth year following the contract owner’s
death.
Regardless of
whether the contract owner dies before or on or after January 1, 2020, a designated beneficiary who is the surviving spouse of the deceased contract owner may choose to become the contract owner. Any distributions required under these distribution
rules will be made upon that spouse’s death.
Purchasers and prospective purchasers should consult a
financial professional, tax advisor or legal counsel to discuss the taxation and use of the contracts.
If distribution requirements are not met, a penalty tax of 50%
is levied on the difference between the amount that should have been distributed for that year and the amount that actually was distributed for that year.
For IRAs, SEP IRAs, and Simple IRAs, all or a portion of each
distribution will be included in the recipient's gross income and taxed at ordinary income tax rates. The portion of a distribution that is taxable is based on the ratio between the amount by which non-deductible purchase payments exceed prior
non-taxable distributions and total account balances at the time of the distribution. The owner of an IRA, SEP IRA, or Simple IRA must annually report the amount of non-deductible purchase payments, the amount of any distribution, the amount by
which non-deductible purchase payments for all years exceed non taxable distributions for all years, and the total balance of all IRAs, SEP IRAs, or Simple IRAs.
Distributions from Roth IRAs may be either taxable or
nontaxable, depending upon whether they are "qualified distributions" or "non-qualified distributions."
OTHER INFORMATION
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 |
•
|
By Internet at
www.nationwide.com |
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 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.
We 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 under the Contract until instructed otherwise by the appropriate regulator.
DISTRIBUTION
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.
Contracts sold through this prospectus can be purchased
through registered representatives, appointed by Nationwide, of FINRA broker-dealer firms. Nationwide pays broker-dealers compensation for promoting, marketing and selling the contracts it sponsors. In turn, the broker-dealers pay a portion of the
compensation to their registered representatives, under their own arrangements.
Nationwide does not expect the compensation paid to such
broker-dealers (including NISC) to exceed 8% of Purchase Payments (on a present value basis) for sales of the contracts described in this prospectus.
ABOUT NATIONWIDE
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, Guam,
the U.S. Virgin Islands, 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 of 1925 and 1933 respectively. The Companies engage in a general insurance and reinsurance business, except life insurance.
To request additional information about Nationwide, contact
the Service Center.
See "Nationwide Life Insurance
Company and Subsidiaries" for additional information.
Nationwide may use the proceeds from this offering for any
legitimate corporate purpose.
GENERAL ACCOUNT AND
SEPARATE ACCOUNTS
The assets in our general account are
chargeable with claims by any of our contract owners and creditors, and are subject to the liabilities arising from any of our businesses. Our general account assets do not include the assets in the Index-Linked Annuity Separate Account, an
insulated separate account where we hold assets to support future Strategy Earnings. Our general account assets also do not include the assets in any other insulated Nationwide separate accounts.
We exercise sole discretion over the investment of our general
account assets, and we bear the associated investment risk. You will not share in the investment experience of our general account assets. We invest our general account assets in accordance with state insurance law.
The Index-Linked Annuity Separate Account is a non-unitized
separate account and is not registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940. We own and control the assets in the Index-Linked Annuity Separate Account and you do not have any interest in or claim
to the assets in the Index-Linked Annuity Separate Account. Unlike some variable annuities that utilize separate accounts, you do not share in the investment performance of the assets in the Index-Linked Annuity Separate Account. The Index-Linked
Annuity Separate Account was established under the laws of Ohio. The assets in the Index-Linked Annuity Separate Account are not subject to claims by our creditors or subject to liabilities arising from any of our other businesses.
We may invest the assets of the Index-Linked Annuity Separate
Account in any asset permitted under state law, including hedging instruments such as derivative contracts. We may move assets between the Index-Linked Annuity Separate Account and the general account. Where permitted by applicable law, we reserve
the right to make certain changes to the structure and operation of the Index-Linked Annuity Separate Account. We will not make any such changes without receiving any necessary approval of any applicable state insurance department. We will notify
you of any changes in writing.
EXEMPTION FROM PERIODIC
REPORTING
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.
STATEMENTS TO CONTRACT OWNERS
Prior to the Annuitization Date, statements will be sent to
the Contract Owner’s last known address. You should promptly notify the Service Center of any address change.
We will mail the following statements to you:
•
|
statements showing the
Contract’s quarterly activity; and |
•
|
confirmation
statements showing transactions that affect the Contract’s value. |
You can receive information from Nationwide faster and reduce
the amount of mail they receive by signing up for Nationwide’s eDelivery program. Nationwide will notify you by email when important documents (statements, prospectuses and other documents) are ready for you to view, print, or download from
Nationwide’s secure server. To choose this option, go to nationwide.com/login.
You should review statements carefully. All errors or
corrections must be reported to Nationwide immediately to assure proper crediting to the Contract. Unless Nationwide is notified within 30 days of receipt of the statement, Nationwide will assume statements are correct.
MISTATEMENTS OF
AGE OR SEX
If the age or sex of the Contract Owner,
Joint Owner, Annuitant, Contingent Annuitant, Beneficiary or Contingent Beneficiary is misstated, all payments and benefits under the Contract will be adjusted. Payments and benefits will be based on the correct age or sex. Proof of age of any of
these individuals may be required at any time, in a form satisfactory to Nationwide. When the age or sex of any individual named in the application, including any supplemental applications, has been misstated, the dollar amount of any overpayment
will be deducted from the next payment or payments due under the Contract.
The dollar amount of any underpayment made by Nationwide as a
result of an age or sex misstatement will be paid in full with the next payment due under the Contract. The dollar amount of any overpayment made by Nationwide as a result of an age or sex misstatement will reduce the next payment due under the
Contract, and will continue to reduce subsequent payments under the Contract, until all of the overpayment is recouped. Any adjustment for overpayment or underpayment will include interest charged or credited, as applicable, at the rate required by
law, but not exceeding 6%.
EXPERTS
The statutory financial statements and schedules of Nationwide
Life Insurance Company as of December 31, 2020 and 2019, and for each of the years in the three-year period ended December 31, 2020, 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.
The KPMG LLP report dated March 19, 2021 of Nationwide Life
Insurance Company includes explanatory language that states that the financial statements are prepared by Nationwide Life Insurance Company using statutory accounting practices prescribed or permitted by the Ohio Department of Insurance, which is a
basis of accounting other than U.S. generally accepted accounting principles. Accordingly, the KPMG LLP audit report states that the financial statements are not presented fairly in accordance with U.S. generally accepted accounting principles and
further states that those statements are presented fairly, in all material respects, in accordance with statutory accounting practices prescribed or permitted by the Ohio Department of Insurance.
LEGAL OPINION
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.
LEGAL PROCEEDINGS
Nationwide Life Insurance Company
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 subject to legal and regulatory proceedings in
the ordinary course of its business. These include proceedings specific to the Company and proceedings generally applicable to business practices in the industries in which the Company operates. The outcomes of these proceedings cannot be predicted
due to their complexity, scope, and many uncertainties. The Company believes, however, that based on currently known information, the ultimate outcome of all pending legal and regulatory proceedings is not likely to have a material adverse effect on
the Company’s financial position. The Company maintains Professional Liability Insurance and Director and Officer Liability insurance policies that may cover losses for certain legal and regulatory proceedings. The Company will make adequate
provision for any probable and reasonably estimable recoveries under such policies.
The various businesses conducted by the Company are subject to
oversight by numerous federal and state regulatory entities, including but not limited to the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor, the Internal Revenue Service, the Office of the
Comptroller of the Currency and state insurance
authorities. Such regulatory
entities may, in the normal course of business, be engaged in general or targeted inquiries, examinations and investigations of the Company and/or its affiliates. With respect to all such scrutiny directed at the Company or their affiliates, the
Company is cooperating with regulators.
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.
APPENDIX A:
ADDITIONAL INDEX DISCLOSURES
BLACKROCK SELECT FACTOR
INDEX
The BlackRock Select Factor Index (the "Index") is
a product of BlackRock Index Services, LLC and has been licensed for use by Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company ("Licensee").
The Index does not guarantee future income or protect against
loss of principal. There can be no assurance that an investment strategy or financial product based on or in any way tracking the Index will be successful. Indexes are unmanaged and one cannot invest directly in an index.
This Product is not sponsored, endorsed, marketed, sold, or
distributed by BlackRock Index Services, LLC, BlackRock, Inc., or any of its affiliates, or any of their respective third party licensors (including the Index calculation agent, as applicable) (collectively, "BlackRock"). BlackRock makes no
representation or warranty, express or implied, to the owners of this Product or any member of the public regarding the advisability of investing in this Product or the ability of the Index to meet its stated objectives. BlackRock’s only
relationship to Licensee with respect to the Index is the licensing of the Index and certain trademarks of BlackRock. The Index is created, compiled, and calculated by BlackRock Index Services, LLC without regard to Licensee or this Product.
BlackRock Index Services, LLC has no obligation to take the needs of Licensee or the owners of this Product into consideration in calculating the Index. BlackRock is not responsible for and has not participated in the determination of the benefits
and charges of this Product or the timing of the issuance or sale of this Product or in the determination or calculation of the equation by which this Product is to be converted into cash, surrendered or redeemed, as the case may be. BlackRock has
no obligation or liability in connection with the administration of this Product. There is no assurance that products based on the Index will accurately track index performance or provide positive investment returns. BlackRock Index Services, LLC is
not an investment advisor. Inclusion of a security within an index is not a recommendation by BlackRock to buy, sell, or hold such security, nor is it considered to be investment advice. Notwithstanding the foregoing, BlackRock, Inc. and its
affiliates may independently issue and/or sponsor financial products unrelated to this Product currently being issued by Licensee, but which may be similar to and competitive with this Product. In addition, BlackRock, Inc. and its affiliates may
trade financial products which are linked to the performance of the Index.
THE INDEX AND THE INDEX DATA ARE PROVIDED "AS-IS" AND "AS
AVAILABLE". BlackRock DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE Index OR ANY DATA RELATED THERETO OR ANY COMMUNICATION WITH RESPECT THERETO, INCLUDING, ORAL, WRITTEN, or ELECTRONIC COMMUNICATIONS. BlackRock
SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. BlackRock MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE,
TITLE, NON-INFRINGEMENT, OR AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THIS PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE Index OR WITH RESPECT TO ANY DATA contained therein or RELATED THERETO. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT WHATSOEVER SHALL BlackRock BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN BlackRock AND LICENSEE.
BlackRock®, BlackRock Select Factor Index and the
corresponding logos are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries. All rights reserved.
BLOOMBERG BARCLAYS U.S. CORPORATE INDEX
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS® is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index
Services Limited ("BISL") (collectively, "Bloomberg"), or Bloomberg’s licensors own all proprietary rights in the "Bloomberg Barclays U.S. Corporate Index."
Neither Barclays Bank PLC, Barclays Capital Inc., nor any
affiliate (collectively "Barclays") nor Bloomberg is the issuer or producer of Nationwide Defined Protection® Annuity and neither Bloomberg nor
Barclays has any responsibilities, obligations or duties to purchasers in Nationwide Defined Protection® Annuity. The Bloomberg Barclays U.S.
Corporate Index is licensed for use by Nationwide Life Insurance Company ("Nationwide") as the Issuer of Nationwide Defined Protection® Annuity. The
only relationship of Bloomberg and Barclays with the Issuer in respect of Bloomberg Barclays
U.S. Corporate Index is the
licensing of the Bloomberg Barclays U.S. Corporate Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer of Nationwide Defined Protection® Annuity or the owners of Nationwide Defined
Protection® Annuity.
Additionally, Nationwide may for itself execute transaction(s)
with Barclays in or relating to Bloomberg Barclays U.S. Corporate Index in connection with Nationwide Defined Protection® Annuity. Purchasers
acquire Nationwide Defined Protection® Annuity from Nationwide and purchasers neither acquire any interest in Bloomberg Barclays U.S. Corporate
Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making a purchase in Nationwide Defined Protection®
Annuity. Nationwide Defined Protection® Annuity is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor
Barclays makes any representation or warranty, express or implied, regarding the advisability of the purchase of Nationwide Defined Protection®
Annuity or the advisability of purchasing securities generally or the ability of the Bloomberg Barclays U.S. Corporate Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or
suitability of Nationwide Defined Protection® Annuity with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for or has
participated in the determination of the timing of, prices at, or quantities of Nationwide Defined Protection® Annuity to be issued. Neither
Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of Nationwide Defined Protection® Annuity or any other third
party into consideration in determining, composing or calculating the Bloomberg Barclays U.S. Corporate Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of Nationwide
Defined Protection® Annuity.
The licensing agreement between Bloomberg and Barclays is
solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of Nationwide Defined Protection® Annuity, investors or other
third parties. In addition, the licensing agreement between Nationwide Financial Services, Inc. and Bloomberg is solely for the benefit of Nationwide Financial Services, Inc. and Bloomberg and not for the benefit of the owners of Nationwide Defined
Protection® Annuity, investors or other third parties.
NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE
ISSUER, INVESTORS OR OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX.
NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX OR ANY DATA INCLUDED THEREIN.
NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX OR
ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE
LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION,
ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS, EVEN IF ADVISED OF THE POSSIBLITY OF SUCH, RESULTING FROM THE USE OF THE BLOOMBERG BARCLAYS U.S. CORPORATE INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO NATIONWIDE DEFINED
PROTECTION® ANNUITY.
None of the information supplied by Bloomberg or Barclays and
used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank PLC. Barclays Bank PLC is registered in England No. 1026167,
registered office 1 Churchill Place London E14 5HP.
J.P.
MORGAN MOZAIC II INDEX
The J.P. Morgan Mozaic IISM Index ("J.P. Morgan Index") has been licensed to Nationwide Life Insurance Company (the "Licensee") for the Licensee’s benefit. Neither the Licensee
nor the Contract (the "Product") is sponsored, operated, endorsed, sold or promoted by J.P. Morgan Securities LLC ("JPMS") or any of its affiliates (together and individually, "J.P. Morgan"). J.P. Morgan makes no representation and no warranty,
express or implied, to investors in or owners of the Product (or any person taking exposure to it) or any member of the public in any other circumstances (each a "Contract Owner"): (a) regarding the advisability of investing in securities or other
financial or insurance products generally or in the Product particularly; or (b) the suitability or appropriateness of an exposure to the J.P. Morgan Index in seeking to achieve any particular objective. It is for those taking an exposure to the
Product and/or the J.P. Morgan Index to satisfy themselves
of these matters and such
persons should seek appropriate professional advice before making any investment. J.P. Morgan is not responsible for and does not have any obligation or liability in connection with the issuance, administration, marketing or trading of the Product.
The publication of the J.P. Morgan Index and the referencing of any asset or other factor of any kind in the J.P. Morgan Index do not constitute any form of investment recommendation or advice in respect of any such asset or other factor by J.P.
Morgan and no person should rely upon it as such. J.P. Morgan does not act as an investment adviser or investment manager in respect of the J.P. Morgan Index or the Product and does not accept any fiduciary duties in relation to the J.P. Morgan
Index, the Licensee, the Product or any Contract Owner.
The J.P. Morgan Index has been designed and is compiled,
calculated, maintained and sponsored by J.P. Morgan without regard to the Licensee, the Product or any Contract Owner. The ability of the Licensee to make use of the J.P. Morgan Index may be terminated on short notice and it is the responsibility of
the Licensee to provide for the consequences of that in the design of the Product. J.P. Morgan does not accept any legal obligation to take the needs of any person who may invest in a Product into account in designing, compiling, calculating,
maintaining or sponsoring the J.P. Morgan Index or in any decision to cease doing so.
J.P. Morgan does not give any representation, warranty or
undertaking, of any type (whether express or implied, statutory or otherwise) in relation to the J.P. Morgan Index, as to condition, satisfactory quality, performance or fitness for purpose or as to the results to be achieved by an investment in the
Product or any data included in or omissions from the J.P. Morgan Index, or the use of the J.P. Morgan Index in connection with the Product or the veracity, currency, completeness or accuracy of the information on which the J.P. Morgan Index is
based (and without limitation, J.P. Morgan accepts no liability to any Contract Owner for any errors or omissions in that information or the results of any interruption to it and J.P. Morgan shall be under no obligation to advise any person of any
such error, omission or interruption). To the extent any such representation, warranty or undertaking could be deemed to have been given by J.P. Morgan, it is excluded save to the extent that such exclusion is prohibited by law. To the fullest
extent permitted by law, J.P. Morgan shall have no liability or responsibility to any person or entity (including, without limitation, to any Contract Owners) for any losses, damages, costs, charges, expenses or other liabilities howsoever arising,
including, without limitation, liability for any special, punitive, indirect or consequential damages (including loss of business or loss of profit, loss of time and loss of goodwill), even if notified of the possibility of the same, arising in
connection with the design, compilation, calculation, maintenance or sponsoring of the J.P. Morgan Index or in connection with the Product."
The J.P. Morgan Index is the exclusive property of J.P.
Morgan. J.P. Morgan is under no obligation to continue compiling, calculating, maintaining or sponsoring the J.P. Morgan Index and may delegate or transfer to a third party some or all of its functions in relation to the J.P. Morgan Index.
J.P. Morgan may independently issue or sponsor other indices
or products that are similar to and may compete with the J.P. Morgan Index and the Product. J.P. Morgan may also transact in assets referenced in the J.P. Morgan Index (or in financial instruments such as derivatives that reference those assets). It
is possible that these activities could have an effect (positive or negative) on the value of the J.P. Morgan Index and the Product.
No actual investment which allowed tracking of the performance
of the Index was possible before December 2016. Any hypothetical "back-tested" information provided is illustrative only and derived from proprietary models designed with the benefit of hindsight based on certain data (which may or may not
correspond with the data that someone else would use to back-test the Indices) and assumptions and estimates (not all of which may be specified herein and which are subject to change without notice). The results obtained from different models,
assumptions, estimates and/or data may be materially different from the results presented herein and such hypothetical "back-tested" information should not be considered indicative of the actual results that might be obtained from an investment or
participation in a financial instrument or transaction referencing the Indices. J.P. Morgan expressly disclaims any responsibility for (i) the accuracy or completeness of the models, assumptions, estimates and data used in deriving the hypothetical
"back-tested" information, (ii) any errors or omissions in computing or disseminating the hypothetical "back-tested" information, and (iii) any uses to which the hypothetical "back-tested" information may be put by any recipient of such
information.
Each of the above paragraphs is severable.
If the contents of any such paragraph is held to be or becomes invalid or unenforceable in any respect in any jurisdiction, it shall have no effect in that respect, but without prejudice to the remainder of this notice.
MSCI EAFE INDEX
The product referred to herein is not sponsored, endorsed, or
promoted by MSCI, and MSCI bears no liability with respect to any such product or any index on which such product is based. The Contract contains a more detailed description of the limited relationship MSCI has with Nationwide and any related
funds.
THIS PRODUCT IS
NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI INC. ("MSCI"), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR
CREATING ANY MSCI INDEX (COLLECTIVELY, THE "MSCI PARTIES"). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE
BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY NATIONWIDE. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY OF
INVESTING IN PRODUCTS GENERALLY OR IN THIS PRODUCT PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF
THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THIS PRODUCT OR THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER
OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT,
OR QUANTITIES OF THIS PRODUCT TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THIS PRODUCT IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE ISSUER OR
OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THIS FUND.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI
PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE PRODUCT, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL
HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY
EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO EACH MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY
LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
NYSE® ZEBRA EDGE® INDEX
The mark NYSE® is a registered trademark of NYSE Group, Inc., Intercontinental Exchange, Inc. or their affiliates and is being utilized by ICE Data Indices, LLC
under license and agreement. The marks Zebra® and Zebra Edge® are registered trademarks of Zebra Capital Management, LLC, may not be used without prior authorization from Zebra Capital Management, LLC, and are
being utilized by ICE Data Indices, LLC under license and agreement.
ICE Data Indices, LLC owns all intellectual and other property
rights to the NYSE® Zebra Edge® Index (the
"Index"), including the composition and the calculation of the Index, excluding the methodology and formula for the Index. Zebra Capital Management, LLC owns all intellectual and other property rights to the methodology and formula for the Index,
which are being used by ICE Data Indices, LLC under license from Zebra Capital Management, LLC (together with its subsidiaries and affiliates, "Zebra").
The Index has been licensed by ICE Data Indices, LLC (together
with its subsidiaries and affiliates, "IDI") to UBS AG and sub-licensed by UBS AG (together with its subsidiaries and affiliates, "UBS") to Nationwide Life Insurance Company ("Nationwide"). Neither Nationwide nor the Contract (the "Product") is
sponsored, operated, endorsed, recommended, sold or promoted by Zebra, IDI or UBS. Neither Zebra, IDI nor UBS makes any representation or gives any warranty, express or implied, regarding the advisability or possible benefits of purchasing the
Product or any other financial product. Clients should undertake their own due diligence and seek appropriate professional advice before purchasing any financial product, including the Product.
The Index and
other information disseminated by IDI are for informational purposes only, are provided on an "as is" basis, and are not intended for trading purposes. Neither Zebra nor IDI makes any warranty, express or implied, as to, without limitation, (i) the
correctness, accuracy, reliability or other characteristics of the Index, (ii) the results to be obtained by any person or entity from the use of the Index for any purpose, or (iii) relating to the use of the Index and other information covered by
the Product, including, but not limited to, express or implied warranties of merchantability, fitness for a particular purpose or use, title or non-infringement. IDI does not warrant that the Index will be uninterrupted and is under no obligation to
continue compiling, calculating, maintaining or sponsoring the Index.
The Index (including the methodology(ies) and formula(s)
therefor) has been designed and is compiled, calculated, maintained and sponsored without regard to any financial products that reference the Index (including the Product), any licensee, sub-licensor or sub-licensee of the Index, any client or any
other person. Zebra, IDI and UBS may independently issue and/or sponsor other indices and products that are similar to and/or may compete with the Index and the Product. Zebra, IDI and UBS may also transact in assets referenced in the Index (or in
financial instruments such as derivatives that reference those assets), including those which could have a positive or negative effect on the value of the Index and the Product.
None of Zebra, IDI or UBS shall bear any responsibility or
liability, whether for negligence or otherwise, with respect to (i) any inaccuracies, omissions, mistakes or errors in the methodology(ies) and formula(s) for, or computation of, the Index (and shall not be obligated to advise any person of and/or
to correct any such inaccuracies, omissions, mistakes or errors), (ii) the use of and/or reference to the Index by Zebra, IDI, UBS or any other person in connection with any financial product or otherwise, or (iii) any economic or other loss which
may be directly or indirectly sustained by any client or other person dealing with any such financial product or otherwise. Any client or other person dealing with such financial products does so, therefore, in full knowledge of this disclaimer and
can place no reliance whatsoever on Zebra, IDI or UBS nor bring claims, actions or legal proceedings in any manner whatsoever against any of them.
SG MACRO COMPASS INDEX
The SG Macro Compass Index (the "Index") is the exclusive
property of SG Americas Securities, LLC (SG Americas Securities, LLC, together with its affiliates, "SG"). SG has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC ("S&P") to maintain and calculate the Index. "SG
Americas Securities, LLC", "SGAS", "Société Générale", "SG", "Société Générale Indices", "SGI", and "SG Macro Compass Index" (collectively, the "SG Marks") are trademarks or service marks of SG. SG has
licensed use of the SG Marks to Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company (collectively, "Nationwide") for use in certain life insurance and annuities offered by Nationwide (the "Products"). With respect to
the Products, SG’s sole contractual relationship with Nationwide is to license the Index and the SG Marks to Nationwide. None of SG, S&P, or other third party licensor (collectively, the "Index Parties") to SG is acting, or has been
authorized to act, as an agent of Nationwide or has in any way sponsored, promoted, solicited, negotiated, endorsed, offered, sold, issued, supported, structured or priced any Products or provided investment advice to Nationwide.
No Index Party has passed on the legality or suitability of,
or the accuracy or adequacy of the descriptions and disclosures relating to, the Products, including those disclosures with respect to the Index. The Index Parties make no representation whatsoever, whether express or implied, as to the advisability
of purchasing, selling or holding any product linked to the Index, including the Products, or the ability of the Index to meet its stated objectives, including meeting its target volatility. The Index Parties have no obligation to, and will not,
take the needs of Nationwide or any Product owner into consideration in determining, composing or calculating the Index. The selection of the Index as a crediting option under a Product does not obligate Nationwide or SG to invest life insurance
premium or annuity premium payments in the components of the Index.
THE INDEX PARTIES MAKE NO REPRESENTATION OR WARRANTY
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, AND HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES (INCLUDING, WITHOUT LIMITATION, THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE), WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN OR
RELATING THERETO, AND IN PARTICULAR DISCLAIM ANY GUARANTEE OR WARRANTY EITHER AS TO THE QUALITY, ACCURACY, TIMELINESS AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN, THE RESULTS OBTAINED FROM THE USE OF THE INDEX AND/OR THE
CALCULATION OR COMPOSITION OF THE INDEX, OR CALCULATIONS MADE WITH RESPECT TO ANY PRODUCT AT ANY PARTICULAR TIME ON ANY PARTICULAR DATE OR OTHERWISE. THE INDEX PARTIES SHALL NOT BE LIABLE (WHETHER IN NEGLIGENCE OR OTHERWISE) TO ANY PERSON FOR ANY
ERROR OR OMISSION IN THE INDEX OR IN THE CALCULATION OF THE INDEX, AND THE INDEX PARTIES ARE UNDER NO OBLIGATION TO ADVISE ANY PERSON OF ANY ERROR THEREIN, OR FOR ANY INTERRUPTION IN THE CALCULATION OF THE
INDEX. NO INDEX PARTY SHALL
HAVE ANY LIABILITY TO ANY PARTY FOR ANY ACT OR FAILURE TO ACT BY THE INDEX PARTIES IN CONNECTION WITH THE DETERMINATION, ADJUSTMENT OR MAINTENANCE OF THE INDEX. WITHOUT LIMITING THE FOREGOING, IN NO EVENT SHALL AN INDEX PARTY HAVE ANY LIABILITY FOR
ANY DIRECT DAMAGES, LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
No Index Party is a fiduciary or agent of any purchaser,
seller or holder of a Product. None of SG, S&P, or any third party licensor shall have any liability with respect to the Products in which an interest crediting option is based is on the Index, nor for any loss relating to the Products, whether
arising directly or indirectly from the use of the Index, its methodology, any SG Mark or otherwise. No Index Party has any obligation to make payments under the Products.
In calculating the performance of the Index, SG deducts fixed
transaction and replication costs, each calculated and deducted on a daily basis. The transaction and replication costs cover, among other things, rebalancing and replication costs. The total amount of transaction and replication costs is not
predictable and will depend on a number of factors, including the leverage of the Index, which may be as high as 200%, the performance of the indexes underlying the Index, market conditions and the changes in the macro regimes, among other factors.
The transaction and replication costs, which are increased by the Index’s leverage, will reduce the potential positive change in the Index and increase the potential negative change in the Index. While the volatility control applied by the
Index may result in less fluctuation in rates of return as compared to indices without volatility controls, it may also reduce the overall rate of return as compared to products not subject to volatility controls.
S&P 500 AVERAGE DAILY RISK CONTROL 10% INDEX
The S&P 500 Average Daily Risk Control 10% USD Price
Return Index ("S&P 500 Average Daily Risk Control USD Price Return Index") is a product of S&P Dow Jones Indices LLC or its affiliates ("SPDJI"), and has been licensed for use by Nationwide. Standard & Poor’s® and
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S&P DOW JONES INDICES NOR THIRD PARTY LICENSOR GUARANTEES THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P 500 AVERAGE DAILY RISK CONTROL 10% USD PRICE RETURN INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION,
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S&P 500 INDEX
The "S&P 500" is a product of S&P Dow Jones Indices
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APPENDIX B:
MODIFIED STRATEGY VALUE FORMULA AND EXAMPLES
MODIFIED
STRATEGY VALUE FORMULA AND EXAMPLES
The Modified
Strategy Value is the maximum Gross Withdrawal that may be taken from a Strategy as of a given date during a Strategy Term. On a Strategy Term End Date, the Modified Strategy Value is equal to your Strategy Value plus any Term Strategy Earnings. On
any day other than the Strategy Term End Date, the Modified Strategy Value is equal to your Strategy Value plus any Interim Strategy Earnings that would be applied if you withdrew your entire Strategy Value. The maximum Gross Withdrawal from a
Strategy would be subject to any applicable CDSC and MVA.
Each day during a Strategy Term, we calculate the Modified
Strategy Value for a Strategy using the following formula:
Modified Strategy Value = Lesser of A or B,
where:
A = Strategy Accumulation
Value;
B = C + D, where:
C = The portion of the Remaining Preferred
Withdrawal Amount attributable to the Strategy
D = E x (F - G), but never less than 0,
where:
E = 1 + NSEP
F = Strategy Value
G = C / (1 + SEP)
Examples of the Modified Strategy Value
Calculation
The examples below
illustrate the calculation of the Modified Strategy Value for two separate Strategies.
Example for Strategy 1: This example assumes a positive SEP and NSEP.
Assume the following values:
•
|
The Strategy Value (F) is
$70,000 |
•
|
The Remaining Preferred
Withdrawal Amount (C) is $5,000 |
•
|
The SEP is 5% |
•
|
The NSEP
is 3% |
The Modified
Strategy Value is calculated as follows:
•
|
A = $73,500 (i.e., $70,000 x (1 + 5%)). The Strategy Accumulation Value (A) is calculated using the formula Strategy Accumulation Value = Strategy Value x (1 + SEP). |
•
|
B =
$72,195.24 (i.e., $5,000 + $67,195.24) |
❍
|
C = $5,000, as assumed
|
❍
|
D =
$67,195.24 (i.e., 1.03 x ($70,000 - $4,761.90)) |
■ |
E = 1.03 (i.e., 1 + 3%) |
■ |
F = $70,000, as assumed
|
■
|
G =
$4,761.90 (i.e. $5,000 / (1 + 5%)) |
•
|
Modified Strategy Value =
$72,195.24 (i.e., lesser of $73,500 or $72,195.24) |
Example for Strategy 2: This example uses a negative SEP and NSEP.
Assume the following values:
•
|
The Strategy Value (F) is
$30,000 |
•
|
The Remaining Preferred
Withdrawal Amount (C) is $2,000 |
•
|
The SEP is -2% |
•
|
The NSEP
is -2% |
The
Modified Strategy Value is calculated as follows:
•
|
A = $29,400 (i.e., $30,000 x (1 - 2%). The Strategy Accumulation Value (A) is calculated using the formula Strategy Accumulation Value = Strategy Value x (1 + SEP). |
•
|
B =
$29,400 (i.e., $2,000 + $27,400) |
❍
|
C = $2,000, as assumed
|
❍
|
D =
$27,400 (i.e., 0.98 x ($30,000 - 2,040.82)) |
■ |
E = 0.98 (i.e., 1 - 2%) |
■ |
F = $30,000, as assumed
|
■
|
G =
$2,040.82 (i.e., $2.000 / (1 - 2%)) |
•
|
Modified Strategy Value =
$29,400 (i.e., lesser of $29,400 or $29,400) |
APPENDIX C:
NON-PREFERRED STRATEGY EARNINGS PERCENTAGE
The following
is the Non-Preferred Strategy Earnings Percentage (NSEP) formula that we use to calculate Interim Strategy Earnings for Non-Preferred Withdrawals:
NSEP = Greater of A or B, where:
A = C x D, where:
C = Adjusted Index Performance
D = 1 if C is less than 0, or (ET / ST) if
C is greater than or equal to zero
ET
= Elapsed Term (i.e., the number of calendar days elapsed in the Strategy Term divided by 365)
ST = Strategy Term (in whole years, e.g.,
1, 2, 3)
B = E – F x (ST
– ET), where:
E = Protection
Level – 100%
F = Non-Preferred
Withdrawal Adjustment Percentage
ST =
Strategy Term in years (in whole years, e.g., 1, 2, 3)
ET = Elapsed Term (i.e., the number of
calendar days elapsed in the Strategy Term divided by 365)
Examples of the Non-Preferred Strategy
Earnings Percentage Calculation
The
examples below illustrate the calculation of the NSEP based on the formula described above. All examples assume the Strategy Term (ST) is 3 years and the Elapsed Term (ET) is 1.25 years. Therefore ST – ET is 1.75 years (i.e., 3 – 1.25).
First, in order to calculate the NSEP, (A)
must be calculated in accordance with the formula described above. The following illustrates the calculation of (A) based on different Non-Preferred Adjusted Index Performances (AIPs):
(a)
|
If the AIP is 12%, then D is
0.4167 (i.e., 1.25 / 3). A would be 5% (i.e., 12% x 0.4167) |
(b)
|
If the AIP is -6%, then D is
1. A would be -6% (i.e., -6% x 1) |
(c)
|
If the
AIP is -15%, then D is 1. A would be -15% (i.e., -15% x 1) |
In order to calculate the NSEP, (B) must
also be calculated in accordance with the formula described above. The following illustrates the calculation of (B) based on different Protection Levels and Non-Preferred Withdrawal Adjustment Percentages:
(a)
|
If Protection Level is 90%
and Non-Preferred Withdrawal Adjustment Percentage is 2%, then B is -13.5% (i.e., (90%-100%) – 2% x 1.75) |
(b)
|
If Protection Level is 100%
and Non-Preferred Withdrawal Adjustment Percentage is 2%, then B is -3.5% (i.e., (100%-100%) – 2% x 1.75) |
(c)
|
If
Protection Level is 90% and Non-Preferred Withdrawal Adjustment Percentage is 3%, then B is -15.25% (i.e., (90%-100%) – 3% x 1.75) |
Lastly, the NSEP is calculated as the
greater of (A) and (B). The following illustrates the calculation of the NSEP based on the calculations of A and B above:
(a)
|
If A equals 5% and B equals
-13.5%, the NSEP equals 5%. |
(b)
|
If A equals -6% and B equals
-3.5%, the NSEP equals -3.5%. |
(c)
|
If A
equals -15% and B equals -15.25%, the NSEP equals -15%. |
APPENDIX D:
WITHDRAWAL EXAMPLES
A contract owner makes a Purchase
Payment of $100,000 and allocates it all to a single Strategy. On the date of the Purchase Payment the Strategy Value is $100,000. The Strategy has the following Crediting Factors:
•
|
Index XYZ |
•
|
Protection Level of 90%
(represents a downside protection of -10%) |
•
|
3-Year Strategy Term
|
•
|
Participation Rate of 80%
|
•
|
Strategy Spread of 1.00%
|
EVENT 1: PREFERRED AND NON-PREFERRED WITHDRAWAL WITH POSITIVE INTERIM STRATEGY EARNINGS
Assume the contract owner takes a Gross Withdrawal of $14,000
after 219 days have elapsed since the start of the Strategy Term. Assume the following values apply on the date of the withdrawal:
•
|
Index XYZ’s Index
Performance is 32.00% |
•
|
CDSC Percentage = 8.00%
|
•
|
MVA Factor = 3.25%
|
1.
|
Calculate the Strategy Earnings Percentage (SEP) and Non-Preferred Strategy Earnings Percentage (NSEP) |
The table below illustrates the calculation of the SEP and
NSEP on that date.
SEP and NSEP
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Step
Six |
Step
Seven |
Step
Eight |
Elapsed
Term |
Adjusted
Index Performance (AIP) |
Downside
Protection for SEP |
Downside
Protection for NSEP |
Elapsed
Term / Strategy Term |
Factor
to use in NSEP |
Strategy
Earnings Percentage (SEP) |
Non-Preferred
Strategy Earnings Percentage (NSEP) |
0.60
|
25.00%
|
-10.00%
|
-14.80%
|
0.20
|
0.20
|
25.00%
|
5.00%
|
where:
•
|
Step One: 0.60 = (219
days/365 days) |
•
|
Step Two: 25.00% = [ (80% x
32.00%) - 1.00% x 0.60)] (i.e. AIP = Participation Rate x Index Performance – Strategy Spread x Elapsed Term) |
•
|
Step Three: -10.00% = (90% -
100%) (i.e. downside protection for SEP = Protection Level – 100%) |
•
|
Step Four: -14.80% = [90% -
100% - 2.00% x (3 - 0.60)] (i.e. downside protection for NSEP = Protection Level – 100% - Non-Preferred Withdrawal Adjustment Percentage x (Strategy Term – Elapsed Term) |
•
|
Step Five: 0.20 = (0.60 / 3)
(i.e. Elapsed Term / Strategy Term, which is representative of the amount of time that has passed in the Strategy Term) |
•
|
Step Six: 0.20 (Use result
of Step Five if result of Step Four is 0% or greater; otherwise use 1) |
•
|
Step Seven: 25.00% =
(Greater of 25.00% or -10.00%) (i.e. SEP = Greater of AIP or downside protection for SEP) |
•
|
Step Eight: 5.00% = (Greater
of 25.00% x 0.20 or -14.80%) (i.e. NSEP = Greater of (AIP x result of Step Six) or downside protection for NSEP) |
2.
|
Calculate the Strategy Earnings |
The table below illustrates the calculation of Interim
Strategy Earnings applied to the Strategy as a result of the withdrawal.
Strategy
Earnings
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Dollar
Amount of Preferred Withdrawal |
Interim
Strategy Earnings on the Preferred Withdrawal |
Dollar
Amount of Non-Preferred Withdrawal |
Interim
Strategy Earnings on the Non-Preferred Withdrawal |
Total
Interim Strategy Earnings |
$7,000
|
$1,400
|
$7,000
|
$333
|
$1,733
|
where:
•
|
Step One: $7,000 = Lesser of
7% of $100,000 or $14,000 (i.e. dollar amount of Preferred Withdrawal is the lesser of the maximum Preferred Withdrawal Amount (7% of Contract Value at start of contract year) and the requested withdrawal) |
•
|
Step Two: $1,400 = [25.00% x
$7,000 / (1 + 25.00%)] (i.e. SEP x Preferred Withdrawal / (1+ SEP)) |
•
|
Step Three: $7,000 =
($14,000 - $7,000) (i.e. dollar amount of Non-Preferred Withdrawal equals requested withdrawal minus dollar amount of Preferred Withdrawal) |
•
|
Step Four: $333 = [5.00% x
$7,000 / (1 + 5.00%)] (i.e. NSEP x Non-Preferred Withdrawal / (1+ NSEP)) |
•
|
Step Five: $1,733 = ($1,400
+ $333) (i.e. sum of Steps Two and Four) |
3.
|
Calculate the Contract Value |
The table below illustrates the calculation of the Contract
Value after the withdrawal.
Contract Value
Contract
Value before Withdrawal |
Gross
Withdrawal |
Total
Strategy Earnings |
Contract
Value after Withdrawal |
$100,000
|
$14,000
|
$1,733
|
$87,733
|
where:
Contract Value after Withdrawal: $87,733 = $100,000 - $14,000
+ $1,733
4.
|
Calculate the Cash Withdrawal |
The table below illustrates the calculation of the Cash
Withdrawal received by the owner as a result of the withdrawal.
Cash Withdrawal
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Gross
Withdrawal |
CDSC
Base/MVA Base |
CDSC
|
MVA
|
Cash
Withdrawal |
$14,000
|
$7,000
|
$560
|
$228
|
$13,668
|
where:
•
|
Step One: $14,000 (Gross
Withdrawal) |
•
|
Step Two: $7,000 (i.e. CDSC
Base and MVA Base = Non-Preferred Withdrawal) |
•
|
Step Three: $560 = ($7,000 x
8.00%) (i.e. CDSC Base x CDSC Percentage) |
•
|
Step Four: $228 = ($7,000 x
3.25%) (i.e. MVA Base x MVA Factor) |
•
|
Step Five: $13,668 = $14,000
- $560 +$228 (i.e. Result of Step One minus Step Three plus Step Four) |
EVENT 2: PREFERRED AND
NON-PREFERRED WITHDRAWAL WITH NEGATIVE INTERIM STRATEGY EARNINGS
Assume the contract owner takes a Gross Withdrawal of $14,000
after 400 days (i.e. 1 year and 35 days) have elapsed since the start of the Strategy Term. Assume the following values apply on the date of the withdrawal:
•
|
Index XYZ’s Index
Performance is -20.00% |
•
|
CDSC Percentage = 8.00%
|
•
|
MVA Factor = 3.25%
|
1.
|
Calculate the Strategy Earnings Percentage (SEP) and Non-Preferred Strategy Earnings Percentage (NSEP) |
The table below illustrates the calculation of the SEP and
NSEP on that date.
SEP and
NSEP
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Step
Six |
Step
Seven |
Step
Eight |
Elapsed
Term |
Adjusted
Index Performance (AIP) |
Downside
Protection for SEP |
Downside
Protection for NSEP |
Elapsed
Term / Strategy Term |
Factor
to use in NSEP |
Strategy
Earnings Percentage (SEP) |
Non-Preferred
Strategy Earnings Percentage (NSEP) |
1.096
|
-17.096%
|
-10.00%
|
-13.81%
|
0.365
|
1.00
|
-10.00%
|
-13.81%
|
where:
•
|
Step One: 1.096 = (400
days/365 days) |
•
|
Step Two: -17.096% = [ (80%
x -20.00%) - 1.00% x 1.096)] (i.e. AIP = Participation Rate x Index Performance – Strategy Spread x Elapsed Term) |
•
|
Step Three: -10.00% = (90% -
100%) (i.e. downside protection for SEP = Protection Level – 100%) |
•
|
Step Four: -13.81% = [90% -
100% - 2.00% x (3 - 1.096)] (i.e. downside protection for NSEP = Protection Level – 100% - Non-Preferred Withdrawal Adjustment Percentage x (Strategy Term – Elapsed Term) |
•
|
Step Five: 0.365 = (1.096 /
3) (i.e. Elapsed Term / Strategy Term) |
•
|
Step Six: 1.00 (Use result
of Step Five if result of Step Four is 0% or greater; otherwise use 1) |
•
|
Step Seven: -10.00% =
(Greater of -17.096% or -10.00%) (i.e. SEP = Greater of AIP or downside protection for SEP) |
•
|
Step Eight: -13.81% =
(Greater of -17.096% x 1.00 or -13.81%) (i.e. NSEP = Greater of (AIP x result of Step Six) or downside protection for NSEP) |
2.
|
Calculate the Strategy Earnings |
The table below illustrates the calculation of Interim
Strategy Earnings applied to the Strategy as a result of the withdrawal.
Strategy Earnings
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Dollar
Amount of Preferred Withdrawal |
Interim
Strategy Earnings on the Preferred Withdrawal |
Dollar
Amount of Non-Preferred Withdrawal |
Interim
Strategy Earnings on the Non-Preferred Withdrawal |
Total
Interim Strategy Earnings |
$6,141
|
-$682
|
$7,859
|
-$1,259
|
-$1,941
|
where:
•
|
Step One: $6,141 = Lesser of
7% of $87,733 or $14,000 (i.e. dollar amount of Preferred Withdrawal is the lesser of the maximum Preferred Withdrawal Amount (7% of Contract Value at start of contract year) and the requested withdrawal) |
•
|
Step Two: -$682 = [-10.00% x
$6,141 / (1 + (-10.00%)] (i.e. SEP x Preferred Withdrawal / (1+ SEP)) |
•
|
Step Three: $7,859 =
($14,000 - $6,141) (i.e. dollar amount of Non-Preferred Withdrawal equals requested withdrawal minus dollar amount of Preferred Withdrawal) |
•
|
Step Four: -$1,259 =
[-13.81% x $7,859 / (1 + (-13.81%)] (i.e. NSEP x Non-Preferred Withdrawal / (1+ NSEP)) |
•
|
Step Five: -$1,941 = (-$682
+ (-$1,259)) (i.e. sum of Steps Two and Four) |
3.
|
Calculate the Contract Value |
The table below illustrates the calculation of the Contract
Value as a result of the withdrawal.
Contract Value
Contract
Value before Event |
Gross
Withdrawal |
Total
Strategy Earnings |
Contract
Value after Event |
$87,733
|
$14,000
|
-$1,941
|
$71,792
|
where:
Contract Value
after Event: $71,792 = $87,733 - $14,000 + (-$1,941)
4.
|
Calculate the Cash Withdrawal |
The table below illustrates the calculation of the Cash
Withdrawal received by the owner as a result of the withdrawal.
Cash Withdrawal
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Gross
Withdrawal |
CDSC
Base/MVA Base |
CDSC
|
MVA
|
Cash
Withdrawal |
$14,000
|
$7,859
|
$629
|
$255
|
$13,626
|
where:
•
|
Step One: $14,000 (Gross
Withdrawal) |
•
|
Step Two: $7,859 (i.e. CDSC
Base and MVA Base = Non-Preferred Withdrawal) |
•
|
Step Three: $629 = ($7,859 x
8.00%) (i.e. CDSC Base x CDSC Percentage) |
•
|
Step Four: $255 = ($7,859 x
3.25%) (i.e. MVA Base x MVA Factor) |
•
|
Step Five: $13,626 = $14,000
- $629 +$255 (i.e. Result of Step One minus Step Three plus Step Four) |
EVENT 3: NON-PREFERRED
WITHDRAWAL WITH POSITIVE INTERIM STRATEGY EARNINGS
Assume the contract owner takes a Gross Withdrawal of $10,000
after 600 days (i.e. 1 year and 235 days) have elapsed since the start of the Strategy Term. On that date the Preferred Withdrawal Amount is now zero because the full Preferred Withdrawal Amount for the contract year was taken in Event 2 described
above. Assume the following values apply to that date:
•
|
Index XYZ’s Index
Performance is 15.7425% |
•
|
CDSC Percentage = 8.00%
|
•
|
MVA Factor = -1.50%
|
1.
|
Calculate the Strategy Earnings Percentage (SEP) and Non-Preferred Strategy Earnings Percentage (NSEP) |
The table below illustrates the calculation of the SEP and
NSEP on that date.
SEP and NSEP
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Step
Six |
Step
Seven |
Step
Eight |
Elapsed
Term |
Adjusted
Index Performance (AIP) |
Downside
Protection for SEP |
Downside
Protection for NSEP |
Elapsed
Term / Strategy Term |
Factor
to use in NSEP |
Strategy
Earnings Percentage (SEP) |
Non-Preferred
Strategy Earnings Percentage (NSEP) |
1.644
|
10.950%
|
-10.00%
|
-12.712%
|
0.548
|
0.548
|
10.950%
|
6.00%
|
•
|
Step One: 1.644 = (600 days
/ 365 days) |
•
|
Step Two: 10.95% = [ (80% x
15.7425%) - 1.00% x 1.644)] (i.e. AIP = Participation Rate x Index Performance – Strategy Spread x Elapsed Term) |
•
|
Step Three: -10.00% = (90% -
100%) (i.e. downside protection for SEP = Protection Level – 100%) |
•
|
Step Four: -12.712% = [90% -
100% - 2.00% x (3 - 1.644)] (i.e. downside protection for NSEP = Protection Level – 100% - Non-Preferred Withdrawal Adjustment Percentage x (Strategy Term – Elapsed Term) |
•
|
Step Five: 0.548 = (1.644 /
3) (i.e. Elapsed Term / Strategy Term) |
•
|
Step Six: 0.548 (Use result
of Step Five if result of Step Four is 0% or greater; otherwise use 1) |
•
|
Step Seven: 10.950% =
(Greater of 10.950% or -10.00%) (i.e. SEP = Greater of AIP or downside protection for SEP) |
•
|
Step Eight: 6.00% = (Greater
of 10.95% x 0.548 or -12.712%) (i.e. NSEP = Greater of (AIP x result of Step Six) or downside protection for NSEP) |
2.
|
Calculate the Strategy Earnings |
The table below illustrates the calculation of Interim
Strategy Earnings applied to the Strategy as a result of the withdrawal.
Strategy
Earnings
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Dollar
Amount of Preferred Withdrawal |
Interim
Strategy Earnings on the Preferred Withdrawal |
Dollar
Amount of Non-Preferred Withdrawal |
Interim
Strategy Earnings on the Non-Preferred Withdrawal |
Total
Interim Strategy Earnings |
$0
|
$0
|
$10,000
|
$566
|
$566
|
where:
•
|
Step One: Remaining
Preferred Withdrawal is zero |
•
|
Step Two: $0 = [10.95% x $0
/ (1 + 10.95%)] (i.e. SEP x Preferred Withdrawal / (1+ SEP)) |
•
|
Step Three: $10,000 =
($10,000 - $0) (i.e. dollar amount of Non-Preferred Withdrawal equals requested withdrawal minus dollar amount of Preferred Withdrawal) |
•
|
Step Four: $566 = [6.00% x
$10,000 / (1 + 6.00%)] (i.e. NSEP x Non-Preferred Withdrawal / (1+ NSEP)) |
•
|
Step Five: $566 = ($0 +
$566) (i.e. sum of Steps Two and Four) |
3.
|
Calculate the Contract Value |
The table below illustrates the calculation of the Contract
Value as a result of the withdrawal.
Contract Value
Contract
Value before Event |
Gross
Withdrawal |
Total
Strategy Earnings |
Contract
Value after Event |
$71,792
|
$10,000
|
$566
|
$62,358
|
where:
Contract Value after Event: $62,358 = $71,792 - $10,000 +
$566
4.
|
Calculate the Cash Withdrawal |
The table below illustrates the calculation of the Cash
Withdrawal received by the owner as a result of the withdrawal.
Cash Withdrawal
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Gross
Withdrawal |
CDSC
Base/MVA Base |
CDSC
|
MVA
|
Cash
Withdrawal |
$10,000
|
$10,000
|
$800
|
-$150
|
$9,050
|
where:
•
|
Step One: $10,000 (Gross
Withdrawal) |
•
|
Step Two: $10,000 (i.e. CDSC
Base and MVA Base = Non-Preferred Withdrawal) |
•
|
Step Three: $800 = ($10,000
x 8.00%) (i.e. CDSC Base x CDSC Percentage) |
•
|
Step Four: -$150 = ($10,000
x (-1.50%)) (i.e. MVA Base x MVA Factor) |
•
|
Step Five: $9,050 = $10,000
- $800 + (-$150) (i.e. Result of Step One minus Step Three plus Step Four) |
EVENT 4: PREFERRED AND
NON-PREFERRED WITHDRAWAL WITH MINIMAL INDEX PERFORMANCE
The contract owner takes a Gross Withdrawal of $8,730 after
800 days (i.e. 2 years and 70 days) have elapsed since the start of the Strategy Term. Assume the following values apply to that date:
•
|
Index XYZ’s Index
Performance is 2.2525% |
•
|
CDSC Percentage = 7.00%
|
•
|
MVA Factor = 2.00%
|
1.
|
Calculate the Strategy Earnings Percentage (SEP) and Non-Preferred Strategy Earnings Percentage (NSEP) |
The table below illustrates the calculation of the SEP and
NSEP on that date.
SEP and NSEP
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Step
Six |
Step
Seven |
Step
Eight |
Elapsed
Term |
Adjusted
Index Performance (AIP) |
Downside
Protection for SEP |
Downside
Protection for NSEP |
Elapsed
Term / Strategy Term |
Factor
to use in NSEP |
Strategy
Earnings Percentage (SEP) |
Non-Preferred
Strategy Earnings Percentage (NSEP) |
2.192
|
-0.39%
|
-10.00%
|
-11.62%
|
0.731
|
1.00
|
-0.39%
|
-0.39%
|
•
|
Step One: 2.192 = (800 days
/ 365 days) |
•
|
Step Two: -0.39% = [ (80% x
2.2525%) - 1.00% x 2.192)] (i.e. AIP = Participation Rate x Index Performance – Strategy Spread x Elapsed Term) |
•
|
Step Three: -10.00% = (90% -
100%) (i.e. downside protection for SEP = Protection Level – 100%) |
•
|
Step Four: -11.62% = [90% -
100% - 2.00% x (3 - 2.192)] (i.e. downside protection for NSEP = Protection Level – 100% - Non-Preferred Withdrawal Adjustment Percentage x (Strategy Term – Elapsed Term) |
•
|
Step Five: 0.731 = (2.192 /
3) (i.e. Elapsed Term / Strategy Term) |
•
|
Step Six: 1.00 (Use result
of Step Five if result of Step Four is 0% or greater; otherwise use 1) |
•
|
Step Seven: -0.39% =
(Greater of -0.39% or -10.00%) (i.e. SEP = Greater of AIP or downside protection for SEP) |
•
|
Step Eight: -0.39% =
(Greater of -0.39% x 1.00 or -11.62%) (i.e. NSEP = Greater of (AIP x result of Step Six) or downside protection for NSEP) |
2.
|
Calculate the Strategy Earnings |
The table below illustrates the calculation of Interim
Strategy Earnings applied to the Strategy as a result of the withdrawal.
Strategy Earnings
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Dollar
Amount of Preferred Withdrawal |
Interim
Strategy Earnings on the Preferred Withdrawal |
Dollar
Amount of Non-Preferred Withdrawal |
Interim
Strategy Earnings on the Non-Preferred Withdrawal |
Total
Interim Strategy Earnings |
$4,365
|
-$17
|
$4,365
|
-$17
|
-$34
|
where:
•
|
Step One: $4,365 = Lesser of
7% of $62,358 or $8,730 (i.e. dollar amount of Preferred Withdrawal is the lesser of the maximum Preferred Withdrawal Amount (7% of Contract Value at start of contract year) and the requested withdrawal) |
•
|
Step Two: -$17 = [-0.39% x
4,365 / (1 + (-0.39%)] (i.e. SEP x Preferred Withdrawal / (1+ SEP)) |
•
|
Step Three: $4,365 = ($8,730
- $4,365) (i.e. dollar amount of Non-Preferred Withdrawal equals requested withdrawal minus dollar amount of Preferred Withdrawal) |
•
|
Step Four: -$17 = [-0.39% x
$4,365 / (1 + (-0.39%)] (i.e. NSEP x Non-Preferred Withdrawal / (1+ NSEP)) |
•
|
Step Five: -$34 = ((-$17) +
(-$17)) (i.e. sum of Steps Two and Four) |
3.
|
Calculate the Contract Value |
The table below illustrates the calculation of the Contract
Value as a result of the withdrawal.
Contract Value
Contract
Value before Event |
Gross
Withdrawal |
Total
Strategy Earnings |
Contract
Value after Event |
$62,358
|
$8,730
|
-$34
|
$53,594
|
where:
Contract Value after Event: $53,594 = $62,358 - $8,730 +
(-$34)
4.
|
Calculate the Cash Withdrawal |
The table below illustrates the calculation of the Cash
Withdrawal received by the owner as a result of the withdrawal.
Cash Withdrawal
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Gross
Withdrawal |
CDSC
Base/MVA Base |
CDSC
|
MVA
|
Cash
Withdrawal |
$8,730
|
$4,365
|
$306
|
$87
|
$8,511
|
where:
•
|
Step One: $8,730 (Gross
Withdrawal) |
•
|
Step Two: $4,365 (CDSC Base
and MVA Base = Non-Preferred Withdrawal) |
•
|
Step Three: $306 = ($4,365 x
7.00%) (i.e. CDSC Base x CDSC Percentage) |
•
|
Step Four: $87 = ($4,365 x
2.00%) (i.e. MVA Base x MVA Factor) |
•
|
Step Five: $8,511 = $8,730 -
$306 + $87 (i.e. Result of Step One minus Step Three plus Step Four) |
EVENT 5: TERM STRATEGY
EARNINGS
At the end of the 3-year Strategy Term,
Term Strategy Earnings are calculated and applied to the Strategy and then the contract owner surrenders the contract.
Assume the following values apply to that date:
•
|
Index XYZ’s Index
Performance is 18.60% |
•
|
CDSC Percentage = 6.00%
|
•
|
MVA Factor = 1.00%
|
1.
|
Calculate the Strategy Earnings Percentage (SEP) |
The table below illustrates the calculation of the SEP on that
date.
SEP
Step
One |
Step
Two |
Step
Three |
Step
Four |
Elapsed
Term |
Adjusted
Index Performance (AIP) |
Downside
Protection for SEP |
Strategy
Earnings Percentage (SEP) |
3.00
|
11.88%
|
-10.00%
|
11.88%
|
where:
•
|
Step One: 3.00 = (1095 days
/ 365 days) |
•
|
Step Two: 11.88% = [ (80% x
18.60%) - 1.00% x 3.00)] (i.e. AIP = Participation Rate x Index Performance – Strategy Spread x Elapsed Term) |
•
|
Step Three: -10.00% = (90% -
100%) (i.e. downside protection for SEP = Protection Level – 100%) |
•
|
Step Four: 11.88% = (Greater
of 11.88% or -10.00%) (i.e. SEP = Greater of AIP or downside protection for SEP) |
2.
|
Calculate the Strategy Earnings |
The table below illustrates the calculation of Interim
Strategy Earnings applied to the Strategy as a result of the withdrawal.
Strategy Earnings
Strategy
Value |
Term
Strategy Earnings |
$53,594
|
$6,367
|
Term Strategy Earnings: $6,367 =
$53,594 x 11.88%
3.
|
Calculate the Contract Value |
The table below illustrates the calculation of the Contract
Value as a result of the withdrawal.
Contract
Value
Contract
Value before Event |
Total
Strategy Earnings |
Contract
Value after Event |
$53,594
|
$6,367
|
$59,961
|
where:
Contract Value after Event: $59,961 = $53,594 + $6,367
4.
|
Calculate the Cash Withdrawal for a full surrender |
The table below illustrates the calculation of the Cash
Withdrawal received by the owner as a result of the surrender.
Cash Withdrawal
Step
One |
Step
Two |
Step
Three |
Step
Four |
Step
Five |
Gross
Withdrawal |
CDSC
Base/MVA Base |
CDSC
|
MVA
|
Cash
Withdrawal |
$59,961
|
$55,764
|
$3,346
|
$558
|
$57,173
|
where:
•
|
Step One: $59,961 (Gross
Withdrawal) |
•
|
Step Two: $55,764 (CDSC Base
and MVA Base = Non-Preferred Withdrawal = $59,961 – 7% x $59,961) |
•
|
Step Three: $3,346 =
($55,764 x 6.00%) (i.e. CDSC Base x CDSC Percentage) |
•
|
Step Four: $558 = ($55,764 x
1.00%) (i.e. MVA Base x MVA Factor) |
•
|
Step Five: $57,173 = $59,961
- $3,346 + $558 (i.e. Result of Step One minus Step Three plus Step Four) |
APPENDIX E: MVA
EXAMPLES
Examples
We calculate the MVA Factor using the
following formula:
MVA Factor = MVA
Scaling Factor x (A – B) x N/12, where:
A = Initial Market Value Reference
Rate
B = Market Value Reference Rate
on the date we process the withdrawal
N = Number of whole months (partial months
will be rounded up to the next whole month) remaining in the MVA Period, calculated from the date that we process the withdrawal
Both examples assume the following:
•
|
The MVA Scaling Factor is
1.0 |
•
|
The
Initial Market Value Reference Rate is 3.50% |
Example 1:
Assume:
•
|
The MVA is calculated 13-1/2
months after the Date of Issue |
•
|
The
Market Value Reference Rate on that date is 4.00% |
Then the MVA Factor is calculated using the
following values:
•
|
A is 3.50% |
•
|
B is 4.00% |
•
|
N is 59
(i.e. there are 58-1/2 months remaining in the MVA Period (72 months – 13-1/2 months), which is rounded up to 59 months) |
The MVA Factor on that date is -2.46% (i.e.
1.00 x (3.50% - 4.00%) x 59/12
Example
2:
Assume:
•
|
The MVA is calculated 39
months after the Date of Issue |
•
|
The
Market Value Reference Rate on that date is 3.10% |
Then the MVA Factor is calculated using the
following values:
•
|
A is 3.50% |
•
|
B is 3.10% |
•
|
N is 33
(i.e. there are 33 months remaining in the MVA Period 72 months – 39 months) |
The MVA Factor on that date is 1.10% (i.e.
1.00 x (3.50% - 3.10%) x 33/12
APPENDIX F:
STATE VARIATIONS
Described below are the variations to
certain prospectus disclosures resulting from state law or the instruction provided by state insurance authorities as of the date of this prospectus. Information regarding a state’s requirements does not mean that Nationwide currently offers
contracts within that jurisdiction. These variations are subject to change without notice and additional variations may be imposed as required by specific states.
State
|
State
Law Variations |
California
|
• Under
the Right to Examine and Cancel section, for Contract Owners aged 65 or older on the Date of Issue, if the Contract is returned the Contract Owner is entitled to a refund of the greater of the Purchase
Payment or the Contract Accumulation Value on the day the Contract is received by Nationwide or the agent who sold the Contract Owner the Contract. • Contingent Deferred Sales Charge is referred to as Surrender Charge.
• Under the Calculation of the Death Benefit section, changes to the Contract Owner or assignment of the Contract do not change the Death Benefit to the Surrender Value. The Death Benefit will
continue to be the Contract Accumulation Value. • The Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event (CDSC and MVA Waiver) section
is not available. |
Connecticut
|
• Under
The Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event (CDSC and MVA Waiver) section, "Long-Term Care Event" is referred to as "Confinement."
• Under the Long-Term Care Event subsection of The Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event
(CDSC and MVA Waiver) section, Confinement occurs if at any time after the second Contract Anniversary, the Contract Owner (or Annuitant if the Contract Owner is not a natural person) is confined to a Long-Term Care Facility or Hospital for a
continuous period of 90 days or more. • Under the Terminal Illness or Injury Event subsection of the Long-Term Care Event section of The Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event (CDSC and MVA Waiver) section, a TI Event occurs if at any time after the second Contract
Anniversary, the Contract Owner (or Annuitant if the Contract Owner is not a natural person) is diagnosed by a physician (who is not a party to the Contract nor an immediate family member of a party to the Contract) as having a Terminal Illness or
Injury beginning after the Date of Issue. • Under the Calculation of the Death Benefit section, changes to the Contract Owner or assignment of the Contract do not change the Death Benefit to
the Surrender Value. The Death Benefit will continue to be the Contract Accumulation Value. |
Florida
|
• Purchase
Payments for any other annuity contract issued by Nationwide to the Contract Owner, Annuitant, or Contingent Annuitant will not be considered for purposes of determining whether the Purchase Payment under this Contract exceeds $1,000,000.
• The Annuity Commencement Date must be at least one year after the Date of Issue. • Under the Annuity Payment Options for Contracts with Total Purchase Payments and/or Surrender Value
Annuitized Less Than or Equal to $2,000,000, Annuity Payment Options for Contracts with Total Purchase Payments and/or Surrender Value Annuitized Greater Than $2,000,000, and Annuitization of Amounts Greater
than $5,000,000 sections, references to "Surrender Value" are replaced with "Contract Accumulation Value." |
Hawaii
|
•
Joint Owners are not limited to spouses. |
Illinois
|
• Joint
Owners are not limited to spouses. • Incontestability - This Contract, attached application, including any attached supplemental applications, together with any amendments, optional riders and endorsements, if any, will not be
contested. • Misstatements made as to the sex of the Contract Owner, Joint Owner, Annuitant, Contingent Annuitant, Beneficiary or Contingent Beneficiary are excluded from the Misstatements of Age or
Sex section. |
Massachusetts
|
• The
Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event (CDSC and MVA Waiver) section is not available. |
State
|
State
Law Variations |
New
Jersey |
• The
Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event (CDSC and MVA Waiver) section is not available. • Joint Owners are not limited to spouses. • Purchase
Payments for any other annuity contract issued by Nationwide to the Contract Owner, Annuitant, or Contingent Annuitant will not be considered for purposes of determining whether the Purchase Payment under this Contract exceeds $1,000,000.
• CDSC and/or MVA will not be waived under the Waiver or Reduction of the CDSC or MVA section if the Contract is surrendered in exchange for another contract issued by Nationwide or one of its
affiliated insurance companies. Additionally the CDSC and/or MVA will not be waived if another contract issued by Nationwide or one of its affiliates is exchanged for the Contract. • The Contract cannot be categorized as a Charitable
Remainder Trust. • Extends spousal rights to any party to a civil union. |
Pennsylvania
|
• Strategies
with 3-year Strategy Terms are not available. |
Texas
|
• Purchase
Payments for any other annuity contract issued by Nationwide to the Contract Owner, Annuitant, or Contingent Annuitant will not be considered for purposes of determining whether the Purchase Payment under this Contract exceeds $1,000,000.
• Purchase CDSC and/or MVA will not be waived under the Waiver or Reduction of the CDSC or MVA section if the Contract is surrendered in exchange for another contract issued by Nationwide or one of
its affiliated insurance companies. Additionally, the CDSC and/or MVA will not be waived if another contract issued by Nationwide or one of its affiliates is exchanged for the Contract. |
Washington
|
•
The Terminal Illness or Injury Event subsection under The Increase in Remaining Preferred Withdrawal Amount After a Long-Term Care or Terminal Illness or Injury Event (CDSC
and MVA Waiver) section is not available. |
APPENDIX G:
NATIONWIDE LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION & ANALYSIS AND STATUTORY FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
NATIONWIDE LIFE INSURANCE COMPANY
(A Wholly Owned Subsidiary of Nationwide Financial Services,
Inc.)
2020 Form S-1 MD&A, Statutory Financial
Statements and Supplemental Schedules
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 affiliates and subsidiaries.
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.
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 and group annuities, individual and group life insurance products, private and public sector
group retirement plans, investment products sold to institutions and advisory services.
Wholly-owned subsidiaries of NLIC as of December 31, 2015
include Nationwide Life and Annuity Insurance Company ("NLAIC"), Nationwide Investment Services Corporation ("NISC") and Eagle Captive Reinsurance, LLC ("Eagle"). NLAIC primarily offers individual annuity contracts, universal life insurance,
variable universal life insurance, term life insurance and corporate-owned life insurance ("COLI") on a non-participating basis. NISC is a registered broker-dealer. Eagle is an Ohio domiciled special purpose financial captive insurance
company.
Business Segments
Management views the Company’s business primarily based
on its underlying products and uses this basis to define its four reportable segments: Life Insurance, Annuities, Retirement Solutions and Corporate Solutions and Other.
"Pre-tax operating earnings" used below is defined as income
before federal income tax expense and net realized capital losses on investments.
Life Insurance
The Life Insurance segment consists of life insurance
products, including individual variable universal life, traditional life insurance products, fixed universal life insurance products and indexed universal life insurance products. Life insurance products provide a death benefit and, for certain
products, allow the customer to build cash value on a tax-advantaged basis.
The following table summarizes selected financial data for the
Company’s Life Insurance segment for the years ended:
|
|
December
31, |
(in
millions) |
|
2020
|
|
2019
|
|
2018
|
Total
revenues
|
|
$834
|
|
$883
|
|
$895
|
Pre-tax operating
earnings
|
|
$
(12) |
|
$
10 |
|
$
28 |
Annuities
The Annuities segment consists of individual deferred annuity
products and immediate annuities. Individual deferred annuity contracts consist of deferred variable annuity contracts, deferred fixed annuity contracts and deferred fixed indexed annuity contracts. 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. Deferred fixed annuity contracts offered by the Company generate a return for the customer at a specified interest rate fixed for prescribed periods, while deferred fixed indexed annuity contracts
generate a return for the customer based on market performance with caps and floors. Immediate annuities differ from deferred annuities in that the initial premium is exchanged for a stream of income for a certain period and/or for the owner’s
lifetime without future access to the original investment.
The following table summarizes selected financial data for the
Company’s Annuities segment for the years ended:
|
|
December
31, |
(in
millions) |
|
2020
|
|
2019
|
|
2018
|
Total
revenues
|
|
$5,247
|
|
$6,010
|
|
$5,656
|
|
|
December
31, |
(in
millions) |
|
2020
|
|
2019
|
|
2018
|
Pre-tax operating
earnings
|
|
$355
|
|
$434
|
|
$375
|
Retirement Solutions
The Retirement Solutions segment is comprised of the private
and public sector retirement plans businesses. The private sector business primarily includes Internal Revenue Code ("IRC") Section 401-qualified plans funded through fixed and variable group annuity contracts. The public sector business primarily
includes IRC Section 457 (b) and Section 401(a) governmental plans, both in the form of full-service arrangements that provide plan administration along with fixed and variable group annuities, as well as in the form of administration-only business.
The Retirement Solutions segment also includes stable value wrap products and solutions.
The following table summarizes selected financial data for the
Company’s Retirement Solutions segment for the years ended:
|
|
December
31, |
(in
millions) |
|
2020
|
|
2019
|
|
2018
|
Total
revenues
|
|
$7,132
|
|
$5,470
|
|
$5,181
|
Pre-tax operating
earnings
|
|
$
115 |
|
$
128 |
|
$
118 |
Corporate Solutions and Other
The Corporate Solutions and Other segment includes COLI and
bank-owned life insurance ("BOLI") products, small business group life insurance, spread income on Federal Home Loan Bank of Cincinnati ("FHLB") funding agreements and net investment income on invested assets not assigned to other reportable
segments. Certain COLI and BOLI products include stable value wrap products and solutions.
The following table summarizes selected financial data for the
Company’s Corporate Solutions and Other segment for the years ended:
|
|
December
31, |
(in
millions) |
|
2020
|
|
2019
|
|
2018
|
Total
revenues
|
|
$1,903
|
|
$2,089
|
|
$2,263
|
Pre-tax operating
earnings
|
|
$
608 |
|
$
461 |
|
$
489 |
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, financial institutions, wirehouses and regional firms, pension plan administrators, life insurance agencies, life
insurance specialists, registered investment advisors, producer groups and independent marketing organizations. 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. NMIC completed the transition away from utilizing the exclusive agent model in 2020. The Company
believes its broad range of competitive products, strong distributor relationships and diverse distribution network position it to compete effectively under various economic conditions.
Unaffiliated Distribution
Independent Broker-Dealers, Registered Investment Advisors,
Regional Firms, Life Insurance Agencies, Producer Groups and Independent Marketing Organizations. The Company sells individual annuities, mutual funds, group retirement plans and life insurance products through
independent broker-dealers, registered investment advisors and agencies (including brokerage general agencies, producer groups and independent marketing organizations in the Life Insurance and Annuities segments) and regional firms in each state and
the District of Columbia. The Company believes that it has developed strong 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 annuities, mutual funds, private sector retirement plans and life insurance products through financial institutions and wirehouses, consisting primarily of
banks and their subsidiaries. The Company markets individual annuities and life insurance products under its brand name and on a private-label basis. The Company believes that it has competitive advantages in this distribution channel, including its
expertise in training financial institution personnel to sell annuities, life insurance 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. NRS markets various
products and services to the public sector, primarily on a retail basis, through several sales organizations. NRS 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. NRS maintains endorsement arrangements with state and local government entities, including the National Association of Counties and the International Association of
Fire Fighters.
NFN Producers. NFN producers include independent agents and included Nationwide exclusive agents. All agents appointed with Nationwide may be authorized to distribute Nationwide life insurance, annuity, mutual fund and group annuity
products. Nationwide exclusive agents sold traditional, universal and variable universal life insurance products, and individual annuities through the licensed agency distribution force of NMIC and primarily targeted the holders of personal
automobile and homeowners’ insurance policies issued by NMIC and affiliated companies. As noted above, NMIC has completed its transition from utilizing the exclusive agent model in 2020.
Reinsurance
The Company follows the industry practice of reinsuring with
other companies a portion of its life insurance, annuity and health risks in order to reduce net liability on individual risks, to provide protection against large losses, achieve greater diversification of risks and obtain statutory capital relief.
The maximum net amount at risk of individual ordinary life insurance retained by the Company on any one life is $10 million. The Company cedes insurance on both 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 unaffiliated reinsurance contracts totaled $16 million and $15 million as of December 31, 2020 and
2019, respectively.
Under the terms of certain
contracts, specified assets are generally 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 Life Insurance and Annuities segments. The Company has no other material reinsurance arrangements with unaffiliated reinsurers.
The Company’s material reinsurance agreements with
affiliates are the modified coinsurance agreement, pursuant to which NLIC cedes to NMIC nearly all of its accident and health insurance business not ceded to unaffiliated reinsurers, the 100% coinsurance agreement with funds withheld with Eagle to
cede specified guaranteed minimum death benefits ("GMDB") and guaranteed lifetime withdrawal benefits ("GLWB") obligations provided under substantially all of the variable annuity contracts issued and to be issued by NLIC, the modified coinsurance
agreement with NLAIC, pursuant to which NLIC assumes certain inforce and subsequently issued fixed individual deferred annuity contracts, the modified coinsurance agreement with NLAIC, pursuant to which NLIC assumes certain variable universal life
insurance, whole life
insurance and universal life
insurance policies, and the 100% coinsurance agreement with NLAIC, pursuant to which NLIC assumes a certain life insurance contract, as described in Note 11 to the audited statutory 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. Ratings are
continually evaluated relative to 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 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. As of December 31, 2020, NLIC has a financial strength rating of "A+g" (Superior) from A.M. Best Company, Inc. ("A.M. Best") and its claims-paying ability/financial strength is 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" (Outstanding) by
A.M. Best, "P-1" (Superior) by Moody’s and "A-1" (Strong) by S&P.
Competition
The Company competes with many other insurers as well as
non-insurance financial services companies, some of which 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 greater financial resources and larger market share than the Company. Competition in the Company’s lines of business is primarily based on price, product features, commission structure, perceived financial strength,
claims-paying ability, customer and producer service and name recognition.
See also "Risk Factors
– The Company operates in a highly competitive industry, which can significantly impact operating results."
Regulation
Regulation at State Level
NLIC and NLAIC are each domiciled and licensed in the State of
Ohio as life insurers. The Ohio Department of Insurance ("ODI") serves as their domiciliary regulator. NLIC is licensed and regulated as a life insurer in all 50 states, the District of Columbia, Guam, Virgin Islands and Puerto Rico. NLAIC is
licensed and regulated as a life insurer in 49 states (excluding New York) and the District of Columbia. JNL is domiciled in the State of Texas, with the Texas Department of Insurance serving as its domiciliary regulator. JNL is licensed as a life
insurer in 49 states (excluding New York) and the District of Columbia. JNLNY is domiciled and licensed as a life insurer in the state of New York, with the New York Department of Financial Services ("NY DFS") serving as its domiciliary regulator.
Eagle is domiciled in Ohio and is licensed in Ohio as a special purpose financial captive insurance company regulated by ODI. Olentangy is domiciled in Vermont and is licensed in Vermont as a special purpose financial captive insurance company
regulated by the Vermont Department of Financial Regulation.
State insurance authorities have broad administrative powers
with respect to various aspects of the insurance business. Among other areas, these authorities regulate advertising and marketing; privacy; acquisitions; payment of dividends; the form and content of insurance policies (including pricing);
operating and agent licenses; regulation of premium rates; premium tax increases; rating and underwriting restrictions and limitations; asset and reserve valuation requirements; enterprise risk management; surplus requirements; accounting standards;
Risk Based Capital ("RBC") requirements; statutory reserve and capital requirements; assessments by guaranty associations; affiliate transactions; unfair trade and
claims practices; admittance of
assets to statutory surplus; maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; the type, amounts and valuations of investments permitted; reinsurance transactions, including the role of captive
reinsurers; and other matters.
The National Association
of Insurance Commissioners ("NAIC") is the U.S. standard setting and regulatory support organization created and governed by the chief insurance regulatory authorities of the 50 states, the District of Columbia and the five U.S. territories. A
primary mandate of the NAIC is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC also provides standardized insurance industry accounting and
reporting guidance through the NAIC Accounting Practices and Procedures Manual ("the Accounting Manual"). However, model insurance laws and regulations are only effective when adopted by the states, and statutory accounting and reporting principles
continue to be established by individual state laws, regulations and permitted practices. Changes to the Accounting Manual or modifications by the various state insurance departments may affect the statutory capital and surplus of NLIC, NLAIC, JNL,
JNLNY, Olentangy and Eagle.
Insurance Holding Company
Regulation
NLIC is a wholly-owned subsidiary of NFS,
which in turn is a wholly-owned subsidiary of Nationwide Corp., a majority-owned subsidiary of NMIC. NMIC is the ultimate controlling entity of the Nationwide group of companies. As such, Nationwide is subject to certain insurance laws of each of
the states of domicile of its insurance subsidiaries and affiliates. 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 to furnish annually 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 (generally referred to as "insurance holding company acts"). Generally, under such laws, among other requirements, transactions within the insurance holding company system to which
the Company’s operating insurance companies are a party must be fair and reasonable, and, if material or of a specified category, they require prior notice and approval or non-disapproval by the state of domicile of each insurance company that
is party to the transaction. In addition, 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.
Group-Wide Supervision
The NAIC has promulgated model laws for adoption in the United
States that would provide for "group-wide" supervision of certain insurance holding companies in addition to the current regulation of insurance subsidiaries. While the timing of their adoption and content will vary by jurisdiction, the following
generally represent the areas of focus in these model laws: (1) uniform standards for insurer corporate governance; (2) group-wide supervision of insurance holding companies; (3) adjustments to risk-based capital calculations to account for
group-wide risks; and (4) additional regulatory and disclosure requirements for insurance holding companies.
Some laws which facilitate group-wide supervision have already
been enacted in the jurisdictions in which the Company operates, such as Own Risk and Solvency Assessment ("ORSA") reporting, which requires larger insurers to assess the adequacy of its and its group’s risk management and current and future
solvency position, and Corporate Governance Annual Disclosure reporting, which requires insurance groups to report on their governance structure, policies and practices. In December 2020, the NAIC adopted a U.S. group capital calculation ("GCC")
using an RBC aggregation methodology. The GCC is intended to be a financial tool to assist regulators in identifying risks that may emanate from a holding company system and to holistically understand the financial condition of non-insurance
entities and how capital is distributed across an entire group. It is a quantitative measure used to complement the view of group-specific risks provided in the ORSA. In addition, the GCC is intended to comply with the requirements under the Covered
Agreements with the European Union (EU) and the United Kingdom (UK). The GCC is intended to meet the requirement that the States have a "worldwide group capital calculation" in place by November 7, 2022 in order to avoid the EU or UK from imposing a
group capital assessment or requirement at the level of the worldwide parent. It is anticipated that states will adopt the revisions to the NAIC Insurance Holding Company System Model Act (#440) and Insurance Holding Company System Model Regulation
(#450) which implements the GCC prior to November 2022 and that the ultimate controlling entity of each group will the file its first GCC with its lead state regulator in 2022. As such, Nationwide anticipates filing its first GCC with ODI in 2022.
At this time, we cannot predict what, if any, additional capital requirements, compliance costs or other impacts the GCC will impose on the Company.
Principles-Based
Reserving
In June 2016, the NAIC adopted a
recommendation that activated a principles-based reserving approach for life insurance products. Principles-based reserving replaces the reserving methods for life insurance products for which the current formulaic basis for reserves may not fully
reflect the risks or costs of the liability or obligations of the insurer. The principles-based reserving approach had a three-year phase in period. At the Company’s discretion, it could be applied to new individual life business beginning as
early as January 1, 2017, and was required to be applied for all new individual life business issued January 1, 2020 and later. The Company started the application of the principles-based reserving approach on all new individual life business on
January 1, 2020. The principles-based reserving approach did not affect reserves for policies in force prior to January 1, 2020 and had no material impact on the Company’s statutory financial statements.
In 2019, the NAIC adopted revisions to the Valuation Manual
Requirements for Principle-Based Reserves for Variable Annuities ("VM-21"), which provided comprehensive updates to the Commissioners Annuity Reserve Valuation Method of reserving for variable annuities. VM-21 provided the choice of (1) full
adoption beginning January 1, 2020, (2) an election to grade in over 3 years, or (3) an election to grade in over 7 years, subject to commissioner discretion. The Company elected to fully adopt the change in reserving valuation basis, as of January
1, 2020, and recorded an increase to statutory capital and surplus of $78 million.
Captive Reinsurance Regulation
The NAIC continues to consider changes that would regulate
more strictly captive reinsurance companies that assume business directly written in more than one state.
The NAIC Model Regulation entitled "Valuation of Life
Insurance Policies," commonly known as "Regulation XXX," establishes statutory reserve requirements for term life insurance policies and universal life insurance policies with secondary guarantees, such as those issued by NLAIC and reinsured by its
captive, Olentangy. Actuarial Guideline 38 ("AG 38") clarifies the application of Regulation XXX with respect to certain universal life insurance products with secondary guarantees. As the result of an NAIC study on the use of captives and special
purpose vehicles to transfer insurance risk-related products subject to Regulation XXX and AG 38, Actuarial Guideline 48 ("AG 48") was created. The purpose and intent of AG48 is to establish uniform, national standards governing Regulation XXX and
AG 38 reserve financing arrangements. The provisions of AG 48 apply to new policies that were issued on or after January 1, 2015. The NAIC adopted a revised Credit for Reinsurance Model Law in January 2016 and the Term and Universal Life Insurance
Reserving Financing Model Regulation in December 2016 to replace AG 48. The model regulation is consistent with AG 48, and will replace AG 48 in a state upon the state’s adoption of the model law and regulation. AG 48 and the model laws and
regulations currently have no effect on the Company as policies issued by NLAIC and reinsured by its captive, Olentangy, were issued and ceded prior to January 1, 2015.
In 2018, the NAIC adopted a framework for proposed revisions
to the current Actuarial Guideline No. 43 ("AG 43") and RBC "C-3 Phase II" system applicable to variable annuities reserve and capital requirements. Changes included: (i) aligning economically-focused hedge assets with liability valuations; (ii)
reforming standard scenarios for AG 43 and C3 Phase II; (iii) revising asset admissibility for derivatives and deferred tax assets; and (iv) standardizing capital market assumptions and aligning total asset requirements and reserves. The revised
framework was effective January 1, 2020 and includes an optional three-year phase in. The impact to the Company was minimal due to its continued utilization of a captive which will not be impacted by AG 43 and resulted in a reduction of AG
43-related reserves that were not ceded to the captive. See also "Risk Factors - The Company may be unable to mitigate the impact of Regulation XXX and Actuarial Guideline 38, potentially resulting in a negative
impact to its capital position".
Macro-Prudential
Supervision
The NAIC has been focused on a
Macro-Prudential Initiative ("MPI") to improve state macro-prudential supervisory tools. The MPI focuses on four areas for potential enhancement: (1) liquidity, (2) recovery and resolution, (3) capital stress testing and (4) identifying exposure
concentrations. The NAIC explained that the key objectives of the MPI are to better monitor and respond to the impact of external financial and economic risk to supervised firms; better monitor and respond to risks emanating from or amplified by the
supervised firms that might be transmitted externally and which may result in significant market impacts or financial, reputational, litigation or regulatory risks for the firm; and increase public awareness of NAIC/state monitoring capabilities
regarding macro-prudential trends within the U.S. insurance sector and their implications. In December 2020, the NAIC adopted amendments to the Model Holding Company Act and Regulation that implements requirements related to their proposed
stress-testing framework for qualifying life insurers which will have to be adopted by state legislatures to become effective. Given the uncertainty of the ultimate outcome of this initiative, at this time the Company is unable to estimate the
expected impact on the Company.
Regulation of
Dividends and Other Distributions
See Note 14 to the
audited statutory financial statements in the F pages of this report for a discussion of dividend restrictions.
Annual and Quarterly Reports and Statutory Examinations
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, in accordance with accounting practices and procedures prescribed or permitted by state insurance regulatory authorities, 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. NLIC, NLAIC, JNL and Eagle each file reports with state insurance departments regarding
management’s assessment of internal controls over financial reporting in compliance with the Annual Financial Reporting Model Regulation, as adopted in the states in which they do business.
As part of their routine regulatory oversight process, state
insurance regulatory authorities periodically conduct detailed examinations, generally once every three to five years, of the books, records and accounts of insurance companies domiciled in their states. Such examinations generally are conducted in
coordination with the insurance departments of other domestic states under guidelines promulgated by the NAIC. The ODI’s most recently completed financial examination of NLIC and NLAIC concluded in 2018 and was for the five-year period ended
December 31, 2016. Additionally, the ODI’s most recently completed financial examination of Eagle was as of December 31, 2016 and concluded in 2018.
The most recently completed financial examination of JNL and
JNLNY by the Texas Department of Insurance and NY DFS, respectively, was as of December 31, 2016 and concluded in 2018.
Vermont, in coordination with the timing of the ODI exams
above, completed an examination of Olentangy in 2018 for the two-year period ended December 31, 2016. The examinations for NLIC, NLAIC, JNL, JNLNY, Eagle and Olentangy were completed during the second quarter of 2018 and did not result in any
significant issues or adjustments. The examination reports are available to the public.
Market Conduct
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, including among other things, the form and content of disclosure to consumers,
advertising, sales practices and complaint handling. State regulators have imposed significant fines on various insurers for improper market conduct. NLIC, NLAIC, JNL and JNLNY continually monitor sales, marketing and advertising practices and
related activities of 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 guarantee that any non-compliance with such applicable laws
and regulations would not have a material adverse effect on the Company.
Guaranty Associations and Similar Arrangements
Each of the 50 states of the U.S. and the District of Columbia
have laws requiring insurance companies doing business within its jurisdiction to participate in various types of guaranty associations or other similar arrangements. These arrangements provide certain levels of protection to policy owners from
losses arising from insurance policies or annuity contracts issued by insurance companies that become impaired or insolvent. Typically, assessments are levied (up to prescribed limits) on member insurers on a basis which is related to the member
insurer’s proportionate share of the business written by all member insurers, in the lines of business in which the impaired or insolvent member insurer was writing. Some jurisdictions permit member insurers to recover assessments paid through
full or partial premium tax offsets, usually over a period of years.
Assessments levied against the Company and subsidiaries during
the past three years have not been material. The amount and timing of any future assessment on or refund to NLIC, NLAIC, JNL, or JNLNY under these laws are beyond the control of NLIC, NLAIC, JNL, and JNLNY. A portion of the assessments paid by NLIC,
NLAIC, JNL, or JNLNY pursuant to these laws may be used as credits for a portion of NLIC, NLAIC, JNL, or JNLNY’s premium taxes. For the years ended December 31, 2020, 2019 and 2018, credits received by the Company have not been material.
Statutory
Surplus
As licensed insurers, NLIC, NLAIC, JNL and JNLNY
are subject to the supervision of the regulators of each state, and each state has the discretionary authority, in connection with the ongoing licensing of such entity, to limit or prohibit writing new business within its jurisdiction when, in the
state’s judgment, such entity is not maintaining adequate statutory surplus or capital or is operating in a hazardous financial condition. The Company does not currently anticipate that any regulator would limit the amount of new business that
NLIC, NLAIC, JNL and JNLNY may write due to an inability to meet the levels of statutory surplus required by the regulators. Olentangy is subject to the specific requirements and restrictions of its Licensing Order, as issued by the State of
Vermont, and Eagle is subject to the specific requirements and restrictions of its Licensing Order, as issued by the State of Ohio.
Risk-Based Capital
NLIC, NLAIC, JNL, JNLNY, Olentangy and Eagle are subject to
the RBC requirements for life insurance companies. All states have adopted the NAIC RBC model law or a substantially similar law. The RBC calculation, which regulators use to assess the sufficiency of an insurer’s statutory surplus, measures
the risk characteristics of a company’s assets, liabilities and certain off-balance sheet items. In general, RBC is calculated by applying factors to various asset, premium, claim, expense and reserve items. The requirements result in insurers
maintaining, for the protection of policyholders, capital in excess of statutory surplus requirements. 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. See Note 9 to the audited statutory financial statements included in the F pages of this report for additional discussion of RBC requirements. Olentangy is subject to the separate requirements and restrictions of its
Licensing Order, as issued by the State of Vermont. Eagle is subject to the separate requirements and restrictions of its Licensing Order, as issued by the State of Ohio.
Annuity Sales Practices
The Company’s annuity sales practices are subject to
strict regulation. State insurance and certain federal regulators are becoming more active in adopting and enforcing suitability standards that create additional responsibilities with respect to sales of annuities, both fixed and variable. Such
regulations and responsibilities could increase the Company’s operational costs or compliance costs or burdens, or expose the Company to increased liability for any violation of such regulations and responsibilities.
On February 13, 2020, the NAIC adopted revisions to the model
annuity suitability rule to incorporate a heightened standard of care. The adoption of amendments by the NAIC has resulted in subsequent adoption by individual states, which may result in additional activities necessary to comply. Additionally, some
state insurance and securities regulators are actively engaged in the development and adoption of rulemaking in this space independent from the NAIC.
Regulation of Investments
The Company is subject to state laws and regulations that
require diversification of its investment portfolios and limit the amount of investments in certain investment categories such as below-investment grade fixed income securities, real estate-related equity and common stocks. Failure to comply with
these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring statutory surplus, and, in some instances, could require divestiture of such non-qualifying
investments. The Company believes that its investments are in compliance, in all material respects, with such laws and regulations as of December 31, 2020.
Federal Initiatives
Although the U.S. federal government generally has not
directly regulated the insurance business, federal legislation and administrative policies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("the Dodd-Frank Act") expand the federal presence in insurance
oversight.
The Dodd-Frank Act established the Financial
Stability Oversight Counsel ("FSOC"), which has authority to designate non-bank financial companies as systemically important financial institutions ("non-bank SIFIs"), thereby subjecting them to enhanced prudential standards and supervision by the
Federal Reserve. The prudential standards for non-bank SIFIs include enhanced RBC requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements,
special debt-to-equity limits for certain companies, early remediation procedures and recovery and resolution planning. It is possible, although not likely, that the Company could be designated as a non-bank SIFI by the FSOC. Being so designated
would subject the Company to enhanced oversight and prudential standards by the Federal Reserve, beyond those applicable to our competitors not so designated.
On December 4,
2019, the FSOC approved a proposal that would significantly alter its process for making such non-bank SIFI designations. Among other things, the new guidance will: require the FSOC to focus on regulating activities that pose systemic risk, allowing
for the involvement of primary regulators, rather than designations of individual firms (also known as an "activities-based approach"); shorten the designation process by removing the first step from what is currently a three-step process; invite
participation from firms under consideration for designation earlier in the designation process to provide greater transparency; require a cost-benefit analysis prior to making a designation, which must include a determination of the likelihood of
the potential systemic impact actually occurring; and clarify the "off ramp" process for firms who have been designated as SIFIs.
In addition, the Dodd-Frank Act established the Federal
Insurance Office ("FIO") within the U.S. Department of the Treasury ("Treasury"), which has the authority to participate on behalf of the U.S. in the negotiations of international insurance agreements with foreign regulators, as well as to collect
information about the insurance industry and recommend prudential standards, and, along with the U.S. Trade Representative ("USTR"), to enter into covered agreements with one or more foreign governments which have the ability to preempt inconsistent
state insurance measures. While not having general supervisory or regulatory authority over the business of insurance, the director of the FIO will perform various functions with respect to insurance (other than health insurance), including serving
as a non-voting member of FSOC and making recommendations to FSOC regarding insurers to be designated for more stringent regulation.
Further, Dodd-Frank Act established the Consumer Financial
Protection Bureau ("CFPB") as an independent agency within the Federal Reserve to supervise and regulate institutions that provide certain financial products and services to consumers. Although consumer financial products and services generally
exclude the business of insurance, the CFPB does have authority to regulate non-insurance consumer financial products and services.
Securities Laws
Certain of NLIC, NLAIC and JNF’s products, policies and
contracts are subject to regulation under the federal securities laws administered by the Securities and Exchange Commission ("SEC") and under certain state securities laws. Certain separate accounts of NLIC, NLAIC, JNL and JNLNY are registered as
investment companies under the Investment Company Act of 1940, as amended. Separate account interests under certain variable annuity contracts and variable insurance policies issued by NLIC, NLAIC, JNL and JNLNY are also registered under the
Securities Act of 1933 (the "Securities Act"). NISC and JNSC, subsidiaries of the Company, are registered as broker-dealers under the Securities Exchange Act of 1934, and are members of, and subject to regulation by, the Financial Industry
Regulatory Authority and are also subject to the SEC’s net capital rules.
NIA, a subsidiary of the Company, is an investment advisor
registered under the Investment Advisors Act of 1940, as amended, and under the Securities Act.
All aspects of investment advisory activities are subject to
applicable federal and state laws and regulations in the jurisdictions in which they conduct business. These laws and regulations are primarily 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 events, 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.
On June 5, 2019, the SEC adopted a package of rulemaking and
interpretive guidance regarding the standards of conducts for broker-dealers and investment advisors. Of particular note was the adoption of a new "best interest" standard for broker-dealers when making recommendations to retail customers of any
securities transaction or investment strategy involving securities. Also adopted as part of the package was a new "relationship summary" disclosure requirement for broker-dealers and investment advisors that must be provided to "retail investors."
Generally, compliance with the SEC’s adopted package of rulemaking and interpretive guidance was required by June 30, 2020.
Derivatives Regulation
The Company’s derivatives use is subject to statutory
and regulatory requirements of the states of Ohio, the Company’s domiciliary state, and New York, where the Company is licensed to sell certain products. Each state requires the Company to follow a board-approved derivatives’ use plan.
The Company’s derivatives’ use plan meets the requirements of both states. While the statutory constructs and regulatory oversight of Ohio and New York are historically consistent, there is a possibility the two states could diverge in
their respective regulation of the Company’s derivatives use creating additional expense or lost opportunity to the Company.
Title VII of the
Dodd-Frank Act is a framework to regulate the over-the-counter ("OTC") derivatives markets through the required clearing of certain types of OTC transactions and the posting of collateral, each of which results in additional risk mitigation costs to
the Company. NLIC and NLAIC, currently required to clear specified OTC derivatives products, expect to be subject to the posting and collection of initial margin on its non-cleared OTC derivatives portfolios with certain of their counterparties
beginning in September of 2021. As a result of the novel coronavirus ("COVID-19") pandemic, the Basel Committee on Banking Supervision ("BCBS") and the International Organization of Securities Commissions ("IOSCO") released a joint statement which
encourages local regulators to adopt rule changes that would have the effect of delaying the posting and collection of initial margin from NLIC and NLAIC until September 2022. There is a risk that local regulatory responses to the BCBS-IOSCO
statement may be inconsistent and result in different requirements across jurisdictions and across regulators. These increased, and potentially differing, initial margin requirements may require the Company to hold more cash and highly liquid
securities with lower yields than it might otherwise hold in the absence of the initial margin requirements; potentially resulting in a reduction of investment income. Furthermore, US and global regulation of the derivatives markets continues to
evolve, potentially creating unexpected costs as well as opportunities.
Privacy and Cybersecurity Regulation
The Company is regulated by the federal Gramm-Leach-Bliley Act
("GLBA") and subject to federal and state regulations promulgated thereunder that require financial institutions and other businesses to ensure the privacy, security and confidentiality of nonpublic personal information, including laws that regulate
the use and disclosure of, among others, Social Security numbers and health information. Federal and state laws require notice to affected individuals, law enforcement, regulators and others if there is a breach of the security of certain personal
information, including Social Security numbers and health information. Federal regulations require financial institutions and creditors to implement effective programs to detect, prevent, and mitigate identity theft. Federal and state laws and
regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited commercial e-mail, text or fax messages to consumers and customers. Federal laws and regulations regulate the permissible uses of certain
personal information, including consumer report information. Federal and state legislatures and regulatory bodies continue to expand regulation regarding these subjects and the privacy and security of personal information. Despite functionally
similar laws and regulations, there is ongoing risk of non-uniform regulatory interpretation and application due to the multiplicity of state and federal regulators examining the Company.
The California Consumer Privacy Act of 2018 ("CCPA") grants
all California residents the right to know the information a business has collected from them and the sourcing and sharing of that information, as well as a right to have a business delete their personal information (with some exceptions). The
CCPA’s definition of "personal information" is more expansive than those found in other privacy laws applicable to the Company in the United States. Failure to comply with CCPA could result in regulatory fines, further, the law grants a right
of action for any unauthorized disclosure of personal information as a result of failure to maintain reasonable security procedures. The CCPA became effective on January 1, 2020 and enforcement by California’s Attorney General began July 1,
2020. Final regulations were promulgated shortly thereafter.
New York’s cybersecurity regulation for financial
services institutions, including insurance entities under its jurisdiction, requires entities to establish and maintain a cybersecurity program designed to protect consumer’s private data. The regulation specifically provides for: (i) senior
leader and Board oversight of the covered entity’s cybersecurity program; (ii) controls relating to the governance framework for a cybersecurity program; (iii) risk-based minimum standards for technology systems for data protection; (iv)
requirements for cyber breach responses, including notice to the NY DFS of material events; and (v) identification and documentation of material deficiencies, remediation plans and annual certification of regulatory compliance with the NY DFS.
In 2017, the NAIC adopted the Insurance Data Security Model
Law ("the Cybersecurity Model Law"), which established standards for data security and notification of cybersecurity events in states where adopted. The Cybersecurity Model Law has been adopted in Ohio and several other states. Additional states may
follow. The Cybersecurity Model Law could impose significant new regulatory burdens intended to protect the confidentiality, integrity and availability of information systems. The NAIC model law is functionally similar to the NY DFS rule. The NAIC
has also established a Big Data working group devoted to ensuring that regulations and regulatory activities appropriately protect consumers from harm which could result from technological developments in the insurance sector. For 2020, the working
group has been charged with (i) reviewing current regulatory frameworks used to oversee insurers’ use of consumer and non-insurance data; (ii) proposing a mechanism to provide resources and allow states to share resources to facilitate their
ability to conduct technical analysis of, and data collection related to, the review of complex models used by insurers for underwriting, rating and claims; and (iii) assess data needs and required tools for state insurance regulators to
appropriately monitor the marketplace and evaluate underwriting, rating, claims and marketing practices.
Compliance with
existing and emerging privacy and cybersecurity regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of client information could adversely
affect our reputation and have a material effect on our business, financial condition and results of operations.
Employee Retirement Income Security Act
On June 21, 2018, the United States Court of Appeals for the
Fifth Circuit vacated the Department of Labor’s ("DOL") 2016 Fiduciary Rule. As a result, the fiduciary standards under ERISA revert to those in place before the issuance of the regulations, e.g., the "Five Part Test". On June 29, 2020, the
DOL released technical amendments that reinstated the Five Part Test for fiduciary status and reverted the DOL fiduciary framework back to the framework prior to the now-defunct 2016 Fiduciary Rule. On December 18, 2020, the DOL adopted a new
Prohibited Transaction Class Exemption ("PTE"), "Improving Investment Advice for Workers & Retirees." The new PTE took effect on February 16, 2021.
In addition, ERISA fiduciary obligations are imposed on
certain assets in excess of amounts necessary to satisfy guaranteed obligations held by an insurance company in its general account under a participating group annuity contract 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). 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.
See also "Risk
Factors—Changes to regulations under ERISA could adversely affect the Company’s distribution model by restricting the Company’s ability to provide customers with advice."
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 rates 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic
Security ("CARES") Act was signed into law and includes certain income tax provisions relevant to businesses. The Company is required to recognize the effect for the period the law was enacted. For year ended December 31, 2020, the CARES Act did not
have a material impact on the Company’s total tax.
On December 22, 2017, the federal Tax Cuts and Jobs Act ("the
Act"), was signed into law. The Act made broad and complex changes to the U.S. tax code, including the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The Company continues to monitor and
assess, as it is issued, IRS guidance addressing implementation of various provisions of the Act to determine potential impact on the Company’s life and annuity offerings and the resulting financial conditions or results of operations of the
Company.
Additional changes to the IRC 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. One example is the passage of the Setting Every Community Up for Retirement Enhancement ("SECURE") Act of 2019 which made changes affecting beneficiaries of retirement accounts including IRAs. Such changes could have an adverse impact on
the desirability of the products offered by the Company.
Employees
The Company does not have any employees of its own, but rather
is provided personnel by NMIC pursuant to a Cost Sharing Agreement.
Risk
Factors
Risks Related to Economic and Financial Market
Conditions
Adverse capital and credit market conditions
may significantly affect the Company’s ability to meet liquidity needs and access the capital required to operate its business, most significantly its insurance operations.
The Company’s insurance, annuity and investment
products, as well as its investment returns and access to and cost of financing, are sensitive to disruptions, uncertainty or volatility in the capital and credit markets, including as a result of the current COVID-19 pandemic thereby ultimately
impacting the Company’s profitability and ability to support or grow its businesses. In the insurance industry, liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations in order to meet
its financial commitments. The principal sources of the Company’s liquidity are insurance premiums, annuity considerations, deposit funds and cash, including from its investment portfolio and assets. Sources of liquidity also include surplus
notes and a variety of short-term debt instruments, including intercompany borrowings, FHLB programs and commercial paper.
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 its 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 a case, it may not be able to successfully obtain additional financing on favorable terms, or at all.
As such, the Company may be forced to issue debt with terms
and conditions that may be unfavorable to it, bear an unattractive cost of capital or sell certain assets, any of 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 capital and credit market.
Difficult conditions in the global economy and capital markets
could adversely affect the Company’s business and operating results and these conditions may not improve in the near future.
At times throughout the past few years, and currently as a
result of impacts of the COVID-19 pandemic, volatile conditions have characterized financial markets. Stressed conditions, volatility and disruptions in global capital markets, particular markets or financial asset classes could adversely affect the
Company’s investment portfolio. Disruptions in one market or asset class can also spread to other markets or asset classes.
General economic conditions, including the conditions that
result from the COVID-19 pandemic, could also adversely affect the Company by impacting consumer behavior and pressuring investment results. Consumer behavior changes could include decreased demand for the Company’s products. For example,
holders of interest-sensitive life insurance and annuity products may engage in an elevated level of discretionary withdrawals of contractholder funds. Investment results could be adversely affected as deteriorating financial and business conditions
affect the issuers of the securities in the investment portfolio.
The impact on distributors, vendors and customers of sustained
or significant deterioration in economic conditions could adversely affect the Company’s business.
The Company is exposed to risks associated with the potential
financial instability of its customers and distributors, many of whom may be adversely affected by volatile conditions in the financial markets or an economic slowdown, including as a result of the COVID-19 pandemic. As a result of uncertainties
with respect to financial institutions and the global credit markets, changes in energy costs, and other macroeconomic challenges currently or potentially affecting the economy of the U.S. and other parts of the world, customers and distributors may
experience serious cash flow problems and other financial difficulties. In addition, events in the U.S. or foreign markets and political and social unrest in various countries around the world can impact the global economy and capital markets. The
impact of such events is difficult to predict. Protectionist trade policy actions, such as tariffs and quotas could adversely affect the Company’s investment results, as an increase in the scope and size of tariffs could disrupt global supply
chains and increase inflationary pressures which may have an adverse effect on economic activity. As a result, they may modify, delay, or cancel plans to buy or sell the Company’s products, or make changes in the mix of products bought or
sold, that are unfavorable to the Company.
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 distributors could also 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 its ability to perform, in an
efficient and uninterrupted fashion, its necessary business functions, and any interruption in the services provided by third parties could also adversely affect the Company’s business, results of operations and financial condition.
Potential changes to the manner in which the London Inter-bank
Offered Rate ("LIBOR") is determined and the potential for the replacement or discontinuation of LIBOR as a benchmark interest rate may affect the Company’s cost of capital and net investment income.
LIBOR is an interest rate benchmark which underpins hundreds
of trillions of dollars of financial contracts around the world; it is available in five currencies and a range of tenors. On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel LIBOR panel banks
to submit LIBOR quotes after 2021. It remains unclear if, how and in what form, LIBOR may continue to exist after that date. The U.S. Federal Reserve, based on the recommendations of the New York Federal Reserve’s Alternative Reference Rate
Committee (constituted of major derivative market participants and their regulators), has begun publishing a Secured Overnight Funding Rate ("SOFR") which is intended, but not mandated, to replace U.S. dollar LIBOR, and SOFR-based investment
products have been issued in the U.S. Proposals for alternative reference rates for other currencies have also been announced or have already begun publication. There is no broad market consensus on the use of SOFR as a replacement for LIBOR. Cash
and derivatives markets continue to slowly develop in response to these new rates and questions around liquidity in these rates and how to appropriately adjust these rates to mitigate or eliminate any economic value transfer at the time of
transition remain a significant concern for the Company and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial instruments to which the Company has exposure or the
activities in the Company’s businesses will vary depending on a variety of factors. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on certain derivatives and floating rate securities the Company
holds, and any other assets, liabilities, models, assumptions, and the cost of capital, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitability of these products and instruments may be adversely
affected.
Risks Related to Investments
The Company is exposed to significant financial market risk,
which may adversely affect its results of operations and financial condition, and may cause the Company’s net investment income to vary from period to period.
The Company is exposed to significant financial market 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 specific obligors included
in its portfolio and other factors outside the Company’s control. Adverse changes in these rates, spreads and prices may occur due to changes in monetary policy and the economic climate, the liquidity of a market or market segment, investor
return expectations and/or risk tolerance, insolvency or financial distress of key market makers or participants, or changes in market perceptions of credit worthiness.
The Company’s exposure to interest rate risk relates
primarily 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 affected
by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond its control. For instance, an event such as the outbreak of the COVID-19 pandemic has adversely
impacted the global economy and capital markets and the continuing impact of that event is difficult to predict. 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 or as securities are realized prior to maturity, the yield on new investments
will be lower than that on existing investments, thus lowering the average yield that the Company earns on its investment portfolio. Although the Company seeks to carefully measure and manage its interest rate risk positions, the Company’s
estimate of the liability cash flow profile may be inaccurate, and it might need to sell assets in order to cover the liability, which could adversely affect the Company’s financial position and results of operations.
The
Company’s insurance and investment products are also 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, or may be subject to regulatory minimum rates, declines in interest rates may adversely affect the profitability of these
products.
There may be economic scenarios, including
periods of rising interest rates, that increase the attractiveness of other investments to the Company’s customers, which could increase life insurance policy loan, 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 other expenses, which reduces net income in the period of the acceleration.
The Company’s exposure to credit spreads primarily
relates to market price and cash flow variability associated with changes in credit spreads. A widening of credit spreads would increase unrealized losses or decrease unrealized gains 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 securities.
The Company invests or may invest a portion of its portfolio
in alternative investments, such as private equity funds, real estate funds, hedge funds and tax credit funds. The capital and surplus of the Company can be affected by changes in the underlying value of the investments. In addition, the timing and
amount of distributions from such funds, which depend on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions, can be inherently difficult to predict and can impact the
Company’s net realized capital gains and losses.
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 and investment advisory business, in each case where fee income is generally 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 its potential benefit exposure. Statutory reserve and capital requirements for these products are sensitive to market
movements, which could deplete capital. Increased reserve and capital requirements could lead to rating agency downgrades.
The Company is exposed to many different industries, issuers,
and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, hedge funds and other investment funds and institutions. Many of these
transactions expose the Company to credit risk in the event of default of the counterparty. While counterparty risk is generally secured, 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 may have further exposure to these issuers in the form of holdings in unsecured debt instruments, derivative
transactions and stock investments of these issuers. Realized losses or impairments to the carrying value of these assets may materially and adversely affect the Company’s business, results of operations and financial condition.
For additional information on market risk, see Quantitative and Qualitative Disclosures about Market Risk.
The Company uses derivative instruments to manage exposures
and mitigate risks. See Note 2 and Note 6 to the audited statutory financial statements in the F pages of this report for additional information regarding the Company’s use of derivatives instruments.
The Company maintains an Asset Valuation Reserve ("AVR") as
prescribed by the NAIC for the purpose of offsetting potential credit related investment losses on each invested asset category, excluding cash, policy loans and income receivable. The Company records an Interest Maintenance Reserve ("IMR") as
prescribed by the NAIC, which represents the net deferral for interest-related gains or losses arising from the sale of certain investments, such as bonds, mortgage loans and loan-backed and structured securities sold. See Note 2 to the audited
statutory financial statements included in the F pages of this report for additional information regarding the Company’s use of an AVR and IMR.
Some of the
Company’s investments are relatively illiquid.
The
Company holds certain investments that may lack liquidity, such as privately placed bonds and structured securities based upon residential or commercial mortgage loans or trust preferred securities, commercial mortgage loans, policy loans, consumer
loans secured by securities portfolios, 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 it will be required to sell, bonds and stocks in an unrealized loss position. Investment losses, however, may be realized to the extent liquidity needs require the disposition of bonds and stocks 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, may become less liquid. 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. In addition, securities backed by commercial mortgages are sensitive to the strength of the related underlying mortgage loans, the U.S. economy, and
the supply and demand for commercial real estate. Deterioration in the performance of the residential and commercial mortgage sector, including as a result of the COVID-19 pandemic, could cause declines in the value of that portion of the
Company’s investment portfolios.
Defaults on
commercial mortgage loans and volatility in performance may adversely affect the Company’s results of operations and financial condition.
A decline in the commercial real estate market within the U.S.
resulting from changes in interest rates, real estate market conditions or an economic downturn, including as a result of the COVID-19 pandemic, may have a negative impact on the value of the Company’s commercial mortgage loan portfolio. The
Company has a broadly diversified commercial mortgage loan portfolio (i.e., property type or geographic location), but negative developments across a certain property type or the occurrence of a negative event within a geographic region may have a
significant negative impact, if the Company has some concentration risk within that property type or geographic region. The Company’s operations and financial conditions may be adversely affected from an increase in borrower defaults within
the Company’s commercial mortgage loan portfolio.
The determination of the amount of allowances and impairments
taken on the Company’s investments is judgmental and could materially impact its results of operations or financial position.
The Company’s determination of the amount of allowances
and impairments varies by investment type and is based on its periodic evaluation and assessment of known and inherent risks associated with the relevant asset class. Such evaluations and assessments are revised as conditions change and new
information becomes available. The Company updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Market volatility, including as a result of the COVID-19 pandemic, 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. 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.
For additional information on the
Company’s allowance and impairment review process, see Note 2 to the audited statutory financial statements included in the F pages of this report.
The Company’s valuation of investments is based on
amortized cost, fair value, and the equity method of accounting in the Company’s statutory financial statements, which may be significantly different than the values at which the investments may ultimately be realized.
The Company’s investments primarily consist of bonds,
stocks, investments in subsidiaries, mortgage loans, policy loans, cash equivalents, short-term investments and alternative investments. On the basis of accounting practices prescribed or permitted by the ODI the carrying value of such investments
is as follows:
•
|
Bonds are generally stated
at amortized cost, except those with an NAIC designation of "6", which are stated at the lower of amortized cost or fair value. Changes in fair value of bonds stated at fair value are charged to capital and surplus. |
•
|
Loan-backed and structured
securities, which are included in bonds in the statutory financial statements, are stated in a manner consistent with the bond guidelines, but with additional consideration given to the special valuation rules implemented by the NAIC applicable to
residential mortgage-backed securities that are not backed by U.S. government agencies, commercial mortgage-backed securities and certain other structured securities. Under these guidelines, an initial and adjusted NAIC designation is determined for
each security. The initial NAIC designation, which takes into consideration the security’s amortized cost relative to an NAIC-prescribed valuation matrix, is used to determine the reporting basis (i.e., amortized cost or lower of amortized
cost or fair value). |
•
|
Preferred stocks are
generally stated at amortized cost, except those with an NAIC designation of "4" through "6", which are stated at the lower of amortized cost or fair value. Common stocks are stated at fair value. Changes in fair value of stocks stated at fair value
are charged to capital and surplus. |
•
|
The investment in the
Company’s wholly-owned insurance subsidiaries, NLAIC and Eagle, and wholly-owned noninsurance subsidiaries, NISC and NIA, are carried using the equity method of accounting. The Company’s investment in JNF, an unaudited downstream
noninsurance holding company, is based on the individual audited subsidiary, controlled and affiliated entities owned by the holding company in accordance with the "look through" provisions of Statements of Statutory Accounting Principles ("SSAP")
No. 97, Investments in Subsidiary, Controlled and Affiliated Entities. Investments in NLAIC, JNF and NISC are included in stocks, and the investment in Eagle is included in other invested assets on the statutory statements of admitted assets,
liabilities, capital and surplus. |
•
|
Commercial mortgage loans
are recorded at unpaid principal balance, adjusted for premiums and discounts, less a valuation allowance. |
•
|
Policy loans, which are
collateralized by the related insurance policy, are carried at the outstanding principal balance and do not exceed the cash surrender value of the policy. As such, no valuation allowance for policy loans is required. |
•
|
Cash equivalents include
highly liquid investments with original maturities of less than three months and, effective December 31, 2020, amounts on deposit in internal qualified cash pools. |
•
|
Short-term investments
consist primarily of government agency discount notes with maturities of twelve months or less at acquisition and are carried at amortized cost, which approximates fair value. Prior to December 31, 2020, included amounts on deposit in internal
qualified cash pools. |
•
|
Alternative
investments are generally reported based on the equity method of accounting. |
Investments not carried at fair value in the Company’s
statutory financial statements (certain bonds and stocks and commercial mortgage loans) may have fair values which are substantially higher or lower than the carrying value reflected in the Company’s statutory financial statements. Each such
asset class is regularly evaluated for impairment under the accounting guidance appropriate to the respective asset class.
The Company’s valuation of certain bonds and stocks held
at fair value may include methodologies, estimates and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially and adversely affect the Company’s results of operations
or financial condition.
See Note 2 to the audited
statutory financial statements included in the F pages of this report, for a discussion of the Company’s fair value categories and valuation methodologies.
The determination of fair values in the absence of quoted
market prices is based on valuation methodologies, values of securities the Company deems to be comparable and assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on
the estimated fair value amounts. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within the Company’s statutory 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.
Risks Related to
the Legal and Regulatory Environment of the Insurance Industry
Certain changes in accounting and/or financial reporting
standards issued by the National Association of Insurance Commissioners, state insurance departments, the Securities and Exchange Commission or other standard-setting bodies could have a material adverse impact on the Company’s financial
condition or results of operations.
The Company’s
insurance entities are required to comply with the Statutory Accounting Principles ("SAP") established by the NAIC and adopted and administered by state departments of insurance. The various components of SAP (such as actuarial reserve
methodologies) are currently subject to review by the NAIC and its task forces and committees, as well as by state insurance departments, in an effort to address emerging issues and otherwise improve or alter financial reporting. Calculations made
in accordance with SAP also govern the ability of the Company’s insurance entities to pay dividends to their respective parent companies. The NAIC is 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’s insurance
entities.
The Accounting Manual provides that state
insurance departments may permit insurance companies domiciled therein to depart from SAP through prescribed practices or by granting them permitted practices. Olentangy was granted a permitted practice from the State of Vermont, allowing Olentangy
to carry assets placed in a trust account by Union Hamilton Reinsurance Ltd. and held for the benefit of the ceding insurer, under a reinsurance agreement that increased NLAIC’s valuation of Olentangy by $67 million as of December 31, 2020 and
December 31, 2019. Eagle applies prescribed practices from the State of Ohio that allow an alternative reserve basis on assumed obligations, with respect to specified GMDB and GLWB contract riders provided under substantially all of the variable
annuity contracts issued and to be issued by NLIC and an alternative reserve basis on assumed obligations with respect to specified GLWB contract riders provided under certain fixed indexed annuity contracts issued and to be issued by NLAIC. The
prescribed practice related to NLIC guaranteed risks decreased NLIC’s valuation of this subsidiary by $711 million and $411 million as of December 31, 2020 and December 31, 2019, respectively. The prescribed practice related to NLAIC
guaranteed risks increased NLIC’s valuation of this subsidiary by $523 million and $226 million as of December 31, 2020 and December 31, 2019, respectively.
However, 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. Moreover, although states generally defer to the interpretations of the insurance department of the state of domicile with respect to the application of regulations and guidelines,
neither the action of the domiciliary state nor the action of the NAIC is binding on a non-domiciliary state. Accordingly, a state could choose to follow a different interpretation. The Company can give no guarantees that future changes to SAP or
components of SAP, or the ability to apply a prescribed practice or the granting of permitted practices to the Company’s competitors, will not have a material impact on the Company’s financial condition or results of operations.
The Company’s insurance entities are subject to extensive
regulation.
The Company’s insurance entities are
subject to extensive state regulatory oversight in the jurisdictions in which each does business, as well as to federal oversight with respect to certain portions of their business. Insurance companies are regulated by the insurance departments of
the states in which they are domiciled or licensed. The primary purpose of such regulatory supervision is to protect policyholders, rather than the Company. State insurance authorities have broad administrative powers with respect to various aspects
of the insurance business. Accordingly, the Company could be adversely affected by, among other things, changes in state law relating to advertising and marketing; privacy; acquisitions; payment of dividends; the form and content of insurance
policies (including pricing); operating and agent licenses; regulation of premium rates; premium tax increases; rating and underwriting restrictions and limitations; asset and reserve valuation requirements; enterprise risk management; surplus
requirements; accounting standards; RBC requirements, statutory reserve and capital requirements; assessments by guaranty associations; affiliate transactions; unfair trade and claims practices; admittance of assets to statutory surplus; maximum
interest rates on life insurance policy loans and minimum accumulation or surrender values; the type, amounts and valuations of investments permitted; reinsurance transactions, including the role of captive reinsurances; and other matters. Changes
in state regulations, or in the interpretation or application of existing state laws or regulations, including as a result of the COVID-19 pandemic, may adversely impact the Company’s pricing, capital requirements, reserve adequacy or exposure
to litigation and could increase the costs of regulatory compliance.
Changes are
often implemented by state regulators in order to benefit policyholders to the detriment of insurers. State insurance regulators and the NAIC continually re-examine existing laws and regulations and may impose changes in the future that put further
regulatory burdens on the Company, and thus, could have an adverse effect on its results of operations and financial condition.
In addition, state insurance laws, rather than federal
bankruptcy laws, govern the liquidation or restructuring of insurance companies. Virtually all states in which the Company operates require the Company bear a portion of the loss suffered by some insureds as a result of impaired or insolvent
insurance companies via participation in state guaranty associations.
From time to time, increased scrutiny has been placed upon the
U.S. insurance regulatory framework, and a number of state legislatures have considered or enacted legislative measures that alter, and in many cases increase, state authority to regulate insurance and reinsurance companies. In addition to
legislative initiatives of this type, the NAIC and insurance regulators are regularly involved in a process of re-examining existing laws and regulations and their application to insurance and reinsurance companies.
At the federal level, the Company could be affected by laws
and regulations that may affect certain aspects of the insurance industry. While the federal government in most contexts currently does not directly regulate the insurance business, federal legislation and administrative policies in a number of
areas, including limitations on antitrust immunity, minimum solvency requirements, systemic risk regulation, grant of resolution authority to a federal agency, uniform market conduct standards, credit for reinsurance initiatives, other proposals at
the federal level to replace or streamline state regulatory processes, employment and employee benefits regulation, financial services regulation, and federal taxation, can significantly affect the insurance business.
This state regulatory oversight and various proposals at the
federal level could in the future adversely affect the Company’s ability to sustain adequate returns in certain lines of business. The Company cannot predict the effect any proposed or future legislation or change in the interpretation or
application of existing laws or regulations may have on its financial condition or results of operations.
A failure to comply with rules and regulations in a
jurisdiction could lead to disciplinary action, the imposition of fines or the revocation of the license, permission or authorization necessary to conduct the Company’s business in that jurisdiction, all of which could have a material adverse
effect on the continued conduct of business in a particular jurisdiction.
The Company could be adversely affected if its controls designed
to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.
The Company’s business is highly dependent on the
ability to engage on a daily basis in a large number of insurance underwriting, claims processing and investment activities, many of which are highly complex. These activities often are subject to internal guidelines and policies, as well as to
legal and regulatory standards. A control system, no matter how well-designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Ineffective controls could lead to financial loss,
unanticipated risk exposure (including underwriting, credit and investment risk) or damage to the Company’s reputation.
Litigation or regulatory actions could have a material adverse
impact on the Company.
Current and future litigation or
regulatory investigations and actions in the ordinary course of operating the Company’s business, including class action lawsuits, 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, harming the Company’s reputation with customers or making it more difficult to
retain current customers and to recruit and retain agents or Nationwide employees. See Note 13 to the audited statutory financial statements included in the F pages of this report for a description of litigation and regulatory actions.
The amount of statutory capital that the Company and its
insurance 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 and the regulatory environment and rules.
The
Company conducts the vast majority of its business through its licensed insurance entities. Insurance regulators and the NAIC prescribe accounting standards and statutory capital and reserve requirements for the Company and its U.S. insurance
entities. The NAIC has established regulations that provide minimum capitalization requirements based on RBC
formulas for life insurance
companies. The RBC formula for life companies establishes capital requirements relating to insurance, business, asset and interest rate risk, including equity, interest rate, operational and management and expense recovery risks associated with life
and annuity products that contain death benefits and/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 entities (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, changes in reserve requirements, credit market volatility, changes in consumer behavior, the value of certain bonds 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, and changes to the NAIC RBC formulas. Nationally Recognized Statistical Rating
Organizations ("NRSROs") may also implement changes to their internal models, which differ from the NAIC RBC model, that have the effect of increasing or decreasing the amount of statutory capital that the Company’s insurance entities must
hold in order to maintain their current ratings. Increases in the amount of required statutory reserves reduce the statutory surplus used in calculating the Company’s insurance entities’ RBC ratios.
In December 2017, former President Trump signed into law
H.R.1, commonly referred to as the Tax Cuts and Jobs Act. Following the reduction in the federal corporate income tax rate pursuant to the Tax Cuts and Jobs Act, the NAIC adopted revisions to certain factors used to calculate life RBC. These
revisions to the NAIC’s life RBC calculation have resulted in increases in RBC charges and reductions in the RBC ratios of the Company’s insurance entities. The NAIC is also studying RBC revisions for bonds, real estate, and longevity
risk, but the Company is currently unable to project the impact of any potential regulatory changes resulting from such proposals.
The Company’s insurance entities’ 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 entities’ statutory capital
resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, capital may need to be raised. If the Company is unable to raise additional capital in such a scenario, any ratings downgrade that followed could
have a material adverse effect on its business, financial condition, results of operations and liquidity. See Note 14 to the audited statutory financial statements included in the F pages of this report for a further discussion of RBC.
Changes in tax laws could adversely affect the Company.
Congress has periodically considered legislation that, if
enacted, could materially reduce or eliminate many of the tax advantages of purchasing and owning annuity and life insurance products, such as disallowing a portion of the income tax interest deduction for many businesses that own life insurance. In
addition, Congress has considered proposals to further limit contributions to retirement plans and accelerate the distributions from such plans after the death of the participant. If these proposals or other changes affecting the taxation of life
insurance and/or annuity contracts, or the qualification requirements for retirement plans, were to be enacted, the Company’s sale of COLI, BOLI, variable annuities, variable life products and other retirement plan products could be adversely
affected.
Congress and various state legislatures also
have considered proposals to reduce the taxation of certain products or investments that may compete with life insurance. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the
advantage or create a disadvantage for certain of the Company’s products, making them less competitive. Such proposals, if adopted, could have a material effect on the Company’s profitability and financial condition or ability to sell
such products, and could result in the surrender of some existing contracts and policies.
The products that the Company sells have different tax
characteristics, in some cases generating tax deductions for the Company. The level of profitability of certain products is significantly dependent on these characteristics and the Company’s ability to continue to generate taxable income,
which is taken into consideration when pricing products and is a component of the Company’s capital management strategies. Accordingly, changes in tax law, the Company’s ability to generate taxable income, or other factors impacting the
availability or value of the tax characteristics generated by the Company’s products, could impact product pricing and returns or require the Company to reduce its sales of these products or implement other actions that could be disruptive to
the Company’s businesses. In addition, the adoption of "principles-based" approaches for statutory reserves may lead to significant changes to the way tax reserves are determined and thus reduce future tax deductions.
The Company incorporated changes in RBC calculations at year
end 2018 as a result of the Tax Cuts and Jobs Act. Changes primarily in asset, insurance and interest rate risk factors increased capital and decreased RBC ratios of the Company’s insurance entities. RBC ratios after the adjustment remain well
above required minimums.
See "Business—Tax Matters" for further discussion of other changes in federal tax laws and regulations that may adversely affect the Company’s business, results of operations and financial condition.
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 ERISA and the IRC
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. Although the DOL issued final regulations which provide limited relief from these investment advice restrictions, the investment advice restrictions could restrict 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. Also, the investment advice restrictions may require the fee and revenue
arrangements of certain advisory programs to be revenue neutral, resulting in potential lost revenues for these broker-dealers and their affiliates. However, the DOL’s new proposed 2020 PTE may provide further relief from existing investment
advice limitations under ERISA. A final PTE was adopted on December 18, 2020 and took effect on February 16, 2021.
In addition, the DOL has issued a number of regulations that
increase the level of disclosure that must be provided to plan sponsors and participants. These ERISA disclosure requirements will increase the Company’s regulatory and compliance burden, resulting in increased costs. See "Business – The Company’s insurance entities are subject to extensive regulation" for further information on the impact of regulations issued by the DOL.
Changes in state insurance laws regarding the suitability of
product sales and fiduciary/best interest standards may affect the Company’s operations and profitability.
The Company’s annuity sales practices are currently
subject to strict regulation. State insurance regulators are becoming more active in adopting and enforcing suitability standards with respect to sales of annuities, both fixed and variable. Following the NAIC’s February 2020 adoption of
amendments to its model annuity suitability rule incorporating a best interest standard, multiple states have adopted or proposed amendments incorporating the updated NAIC model. Some states have already enacted or proposed legislation to impose new
or expanded fiduciary/best interest standards on broker-dealers, investment advisors and/or insurance agents providing services to retail investors. Additionally, some state regulators have adopted or signaled they will be pursuing rule-making in
this space. For example, on August 1, 2018 the NY DFS adopted "best interest" amendments to its existing annuity suitability regulation and expanded its scope to include "in-force" recommendations and life insurance policies. Any material changes to
the standards governing the Company’s sales practices, including applicable state laws and regulations, could affect the Company’s business, results of operations and financial condition. See
"Business—Regulation—Annuity Sales Practices."
The Company may be unable to mitigate the impact of Regulation
XXX and Actuarial Guideline 38, potentially resulting in a negative impact to NLAIC’s capital position and/or a reduction in sales of NLAIC’S term and universal life insurance products.
The NAIC Model Regulation entitled "Valuation of Life
Insurance Policies," commonly known as "Regulation XXX," establishes statutory reserve requirements for term life insurance policies and universal life insurance policies with secondary guarantees, such as those issued by NLAIC. Actuarial Guideline
38 ("AG 38") is intended to clarify the application of Regulation XXX with respect to certain universal life insurance products with secondary guarantees.
In 2014, the NAIC approved a new regulatory framework
applicable to the use of captive insurers in connection with Regulation XXX and Guideline AXXX transactions. Among other things, the framework called for more disclosure of an insurer’s use of captives in its statutory financial statements,
and narrows the types of assets permitted to back statutory reserves that are required to support the insurer’s future obligations. In 2014, the NAIC implemented the framework through Actuarial Guideline ("AG 48"), which requires the actuary
of the ceding insurer that opines on the insurer’s reserves to issue a qualified opinion if the framework is not followed. The requirements of AG 48 became effective as of January 1, 2015 in all states without any further action necessary by
state legislatures or insurance regulators to implement them, and apply prospectively to new policies issued and new reinsurance transactions entered into on or after January 1, 2015. In late 2016, the NAIC adopted an update to AG 48 and a model
regulation that contains the same substantive requirements as the updated AG 48. The states have started to adopt the model regulation.
The Company’s subsidiary, NLAIC, has implemented
reinsurance and capital management transactions to mitigate the capital impact of Regulation XXX and AG 38 for certain term life insurance and universal life insurance policies with secondary guarantees. These arrangements are subject to review by
state insurance regulators and rating agencies and, for any new transactions entered into in the future, are subject to AG 48 as well. For those insurance policies where NLAIC
has not implemented reinsurance
and capital management transactions to mitigate the capital impact of Regulation XXX and AG 38, NLAIC has experienced a negative impact on its financial condition and results of operations. If NLAIC is unable to implement solutions to mitigate the
impact of in force Regulation XXX and AG 38 business, this may continue to have a negative impact on its financial condition and results of operations.
Risks Related to the Business and Operations of the
Company
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 and claims-paying ability 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, competitive position and ability to market products. Such factors are
important to policyholders, agents and intermediaries; however, they are not evaluations directed towards the protection of investors and are not recommendations to buy, sell or hold securities. Downgrades in NLIC and its subsidiaries’
financial strength ratings could have an adverse effect on their financial condition and certain of their results of operations in many ways, including reducing new sales and renewals of insurance products, annuities, and other investment products,
adversely affecting their relationships with their sales force and independent sales intermediaries, materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders, requiring a reduction in
prices to remain competitive, and adversely affecting their ability to obtain reinsurance at reasonable prices or at all.
Additionally, 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 credit ratings for NFS and its subsidiaries could have an adverse effect on the Company’s financial condition and results of operations in many ways, including adversely limiting access to
capital markets, potentially increasing the cost of debt, and requiring the posting of collateral.
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. 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.
See
"Business—Ratings" for further information on current financial strength, claims-paying ability and credit ratings.
Guarantees within certain of the Company’s and its
insurance entities’ products may adversely affect the Company’s financial condition or results of operations.
The Company offers guarantees which can include a return of no
less than the 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 can also include benefits payable in the event of death, upon annuitization, upon periodic withdrawal or at specified dates during the accumulation period.
NLIC remains ultimately liable for the specific guaranteed
benefits and is subject to the risk that reinsurers are unable or unwilling to pay. In addition, NLIC is subject to the risk that hedging and other risk management procedures prove ineffective, or the estimates and assumptions made in connection
with their use fail to reflect or correspond to the actual liability exposure, 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 risks, individually or collectively, may have a material adverse effect on the Company’s financial condition or results of operations.
An inability to access the Company’s credit facilities
could have a material adverse effect on its financial condition and results of operations.
The Company maintains committed unsecured revolving credit
facilities. The Company relies on these facilities as a potential source of liquidity, which could be critical in enabling it to meet its obligations as they come due, particularly during periods when alternative sources of liquidity are limited.
The Company’s ability to borrow under these facilities is conditioned on the Company’s satisfaction of covenants and other requirements contained in the facilities. The Company’s
failure to satisfy the
requirements contained in the facilities would, among other things, restrict the Company’s access to the facilities when needed and, consequently, could have an adverse effect on the Company’s financial condition and results of
operations.
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 Company’s earnings significantly depend upon the
extent to which the actual experience is consistent with the assumptions the Company uses in setting prices for its products and establishing liabilities for some future policy benefits and claims. Such amounts are established based on estimates by
actuaries of how much the Company will need to pay for future benefits and claims. The process of calculating reserve amounts for some products within a life insurance organization involves the use of a number of assumptions, including those related
to persistency (how long a contract stays with a company), mortality (the likelihood of death or the likelihood of survival), morbidity (likelihood of sickness or disability) and interest rates (the rates expected to be paid or received on financial
instruments, including insurance or investment contracts). In addition, significant changes in mortality or morbidity could emerge gradually over time, due to changes in the natural environment, including climate change, the health habits of the
insured population, treatment patterns and technologies for disease or disability, the economic environment, or other factors. Actual results could differ significantly from those assumed. Although the Company may be permitted to increase premiums
or adjust other charges and credits during the life of certain policies or contracts, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability or may cause the policies or contracts to
lapse. As such, significant deviations from one or more of these assumptions, including as a result of the COVID-19 pandemic, could result in a material adverse impact on the Company’s life insurance entities’ results of operations or
financial condition.
Pricing of the Company’s
insurance and deferred annuity products are also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency within the Company’s
annuities business may be significantly impacted by the value of guaranteed minimum benefits contained in many of the Company’s annuity products being higher than current account values, in light of poor equity market performance or extended
periods of low interest rates, as well as other factors. Persistency could be adversely affected generally by developments affecting client perceptions of the Company, including perceptions arising from adverse publicity. Many of the Company’s
products also provide the Company’s customers with wide flexibility with respect to the amount and timing of premium deposits and the amount and timing of withdrawals from the policy’s value. Results may vary based on differences between
actual and expected premium deposits and withdrawals for these products, especially if these product features are relatively new to the marketplace. The pricing of certain of the Company’s annuity products that contain certain living benefit
guarantees is also based on assumptions about utilization rates, or the percentage of contracts that will utilize the benefit during the contract duration, including the timing of the first lifetime income withdrawal. Results may vary based on
differences between actual and expected benefit utilization. The development of a secondary market for life insurance, including life settlements or "viaticals" and investor-owned life insurance, and third-party investor strategies in the annuities
business, could adversely affect the profitability of existing business and the Company’s pricing assumptions for new business.
The Company’s risk management policies, practices and
procedures could leave it exposed to unidentified or unanticipated risks, which could negatively affect its business or result in losses.
The Company has developed an enterprise-wide risk management
framework to mitigate risk and loss to the Company, and maintains policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is exposed. Many of the Company’s risk management
strategies or techniques are based upon historical customer and market behavior, and all such strategies and techniques are based to some degree on management’s subjective judgment. The Company cannot provide assurance that its risk management
framework, including the underlying assumptions or strategies, will be accurate and effective.
The risk management policies and procedures, including hedge
programs at NLIC and NLAIC, utilize derivative financial instruments, and expect to do so in the future. Nonetheless, the Company’s policies and procedures to identify, monitor, and manage both internal and external risks may not effectively
mitigate these risks or predict future exposures, which could be different or significantly greater than expected. As the Company’s businesses change and the markets in which the Company operates evolve, the Company’s risk management
framework may not evolve at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not appropriately identified, monitored or managed. Additional risks and uncertainties
not currently known to the Company, or that it currently deems to be immaterial, may adversely affect its business, results of operations and financial condition.
A large-scale
pandemic or epidemic, natural and man-made catastrophes, climate change, the continued threat or acts of terrorism, or 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 or epidemic, natural and man-made catastrophes, climate change, the continued threat or acts of terrorism within the U.S. 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 U.S., European, and other securities markets, loss of life, property damage, additional disruptions to commerce and reduced economic activity. As a result, the Company’s net
income and/or revenue, and some of the assets in the Company’s investment portfolio, may be adversely affected by declines in the securities markets and economic activity.
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 the
interest or principal on their securities, or how the value of any underlying collateral might be affected.
The ongoing events resulting from the outbreak of the COVID-19
pandemic and the potential for future similar events, could have an adverse impact on the Company’s financial condition, results of operations, cash flows, liquidity and prospects.
The Company is closely monitoring developments related to the
COVID-19 pandemic and assessing its impact on its business. It is not currently possible to accurately estimate the full impact that this pandemic will have on our business. The COVID-19 pandemic and associated economic slowdown has and/or could
continue to adversely impact the results of operations, financial condition, cash flows, liquidity and prospects of the Company in a number of ways including:
•
|
The Company’s
investment portfolio (and, specifically, the valuations of investment assets held) has been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome. Moreover,
changes in interest rates, reduced liquidity or a continued slowdown in the U.S. or in global economic conditions may also adversely affect the values and cash flows of these assets. The Company’s investments in mortgages and mortgage-backed
securities could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays or moratoriums on foreclosures or enforcement actions with respect to delinquent or defaulted mortgages imposed
by governmental authorities. Further, extreme market volatility may leave the Company unable to react to market events in a prudent manner consistent with the Company’s historical investment practices in dealing with more orderly markets;
|
•
|
The Company provided
COVID-19 hardship assistance to its customers including suspending cancellation of certain policies, deferring premium payment deadlines and waiving certain late fees and may elect to do so again in the future as a result of the COVID-19 pandemic.
|
•
|
Potential state or federal
legislation and regulation intended to ease the impact of the COVID-19 pandemic on consumers that could mandate waiver of late fees and/or limit or eliminate the ability to cancel policies for non-payment of premiums; |
•
|
Potential impacts to
financial product revenues due to the overall economic slowdown, including the decline in economic activity, reductions in the sale of financial products due to the current market conditions, a reduction in fees collected from assets under
management, a reduction in new sales, and an increased number of customers experiencing difficulty in paying premiums; |
•
|
While the Company has
implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on
the Company’s business from such events. An extended period of remote work arrangements could introduce operational risk and impair the Company’s ability to manage its business. |
•
|
The Company also outsources
certain critical business activities to third parties. As a result, the Company relies upon the successful implementation and execution of the business continuity planning of such entities in the current environment. While the Company closely
monitors the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside the Company’s control. If one or more of the third parties to whom the
Company outsources certain critical business activities experience operational failures as a result of the impacts from the spread of COVID-19, or claim that they cannot perform due to a force majeure, it may have a material adverse effect on the
Company’s business, financial condition, results of operations, liquidity and cash flows; and |
•
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Potential
impacts to the cost and availability of reinsurance. |
Additionally,
there is risk that the current efforts underway by governmental and non-governmental organizations to combat the spread and severity of COVID-19 and related public health issues may not be effective or may be prolonged. Finally, the Company cannot
predict how legal and regulatory responses to concerns about COVID-19 and related public health issues will impact its business.
The continued spread of COVID-19 has led to disruption and
volatility in the global capital markets which could increase the Company’s funding costs, limit its access to the capital markets or result in a decision by lenders not to extend credit. Accordingly, the Company may in the future have
difficulty accessing debt and capital on attractive terms, or at all, which could have a material adverse effect on its business, results of operations, financial condition and liquidity.
The duration of the COVID-19 pandemic is uncertain, and the
foregoing impacts and other unforeseen impacts not referenced herein, as well as the ultimate impact of the COVID-19 pandemic, are difficult to predict and could have a material adverse effect on the Company’s business, financial condition,
results of operations, cash flows, liquidity and prospects. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, results of operations, cash flows, liquidity or prospects, it may also have the
effect of heightening many of the other risks described herein.
The Company operates in a highly competitive industry, which can
significantly impact operating results.
The
Company’s ability to compete is based on a number of factors including scale, service, product features, price, investment performance, commission structure, distribution capacity, financial strength ratings and name recognition. The Company
competes with a large number of financial services companies such as banks, mutual funds, broker-dealers, insurers and asset managers, many of which have advantages over the Company in one or more of the above competitive factors. The
Company’s revenues and profitability could be impacted negatively due to such competition. The competitive landscape in which the Company operates may be further affected by government-sponsored programs and longer-term fiscal policies.
Competitors that receive governmental financing or other assistance or subsidies, including governmental guarantees of their obligations, may have or obtain pricing or other competitive advantages. Competitors that are not subject to the same
regulatory framework may also have a pricing advantage as a result of lower capital requirements.
See
"Business—Competition" for a further description of competitive factors affecting the Company.
The Company’s products and services are complex and are
frequently sold through intermediaries, and a failure of such intermediaries to properly perform services, or their misrepresentation of the Company’s products or services, could have an adverse effect on the Company’s business, results
of operations and financial condition.
Many of the
Company’s products and services are complex and are frequently sold through intermediaries. In particular, the Company is reliant on intermediaries in its unaffiliated distribution channels to describe and explain its products to potential
customers. The intentional or unintentional misrepresentation of the Company’s products and services in advertising materials or other external communications, or inappropriate activities by the Company’s personnel or an intermediary,
could adversely affect the Company’s reputation and business prospects, as well as lead to potential regulatory actions or litigation.
The Company’s business success depends, in part, on
effective information technology systems and on continuing to develop and implement improvements in technology.
The Company depends in large part on technology systems for
conducting business and processing claims, as well as for providing the data and analytics it utilizes to manage its business, and thus the Company’s business success is dependent on maintaining the effectiveness of existing technology systems
and on continuing to develop and enhance technology systems that support its business processes and strategic initiatives in a cost- and resource- efficient manner. Some system development projects that are long-term in nature, may negatively impact
the Company’s expense ratios as it invests in the projects, and may cost more to complete than the Company expects. In addition, system development projects may not deliver the benefits the Company expects once they are complete, or may be
replaced or become obsolete more quickly than expected, which could result in accelerated recognition of expenses. If the Company does not effectively and efficiently manage and upgrade its technology portfolio, including with respect to the
technology portfolio of its recently acquired businesses, or if the costs of doing so are higher than it expects, the Company’s ability to provide competitive services to new and existing customers in a cost-effective manner and its ability to
implement its strategic initiatives could be adversely impacted.
The Company faces
a risk of non-availability and increased cost of reinsurance.
Market conditions beyond the Company’s control,
including as a result of the COVID-19 pandemic, determine the availability and cost of the reinsurance protection it purchases. The Company can offer no guarantees that reinsurance will remain continuously available to it to the same extent, and
with the same terms and rates, as are currently available. If the Company is unable to maintain its current level of reinsurance or purchase new reinsurance protection in amounts that it considers sufficient and at prices that it considers
acceptable, the Company would either have to be willing to accept an increase in its net exposures or reduce its insurance writings. A significant reinsurer’s insolvency or inability to make payments under the terms of a reinsurance treaty
could subject the Company to credit risk with respect to its ability to recover amounts due from reinsurers. Because of the risks set forth above, the Company may not be able to collect all amounts due to it from reinsurers, and reinsurance coverage
may not be available to it in the future at commercially reasonable rates or at all. These risks could have a material adverse effect on the results of operations or financial condition of the Company.
A breach of information security or other unauthorized data
access could have an adverse impact on the Company’s business and reputation.
In the ordinary course of business, the Company collects,
processes, transmits, and stores large quantities of personally identifiable information, customer financial and health information, and proprietary business information (collectively referred to herein as "Sensitive Information"). The secure
processing, storage, maintenance, and transmission of this Sensitive Information are vital to the Company’s operations and business strategy. Although the Company undertakes substantial efforts to reasonably protect Sensitive Information,
including internal processes and technological defenses that are preventative or detective, and other commercially reasonable controls designed to provide multiple layers of security, Sensitive Information maintained by the Company may be vulnerable
to attacks (including during the COVID-19 pandemic) by computer hackers, to physical theft by other third-party criminals, or to other compromise due to error or malfeasance by an individual providing services. Attacks may include both sophisticated
cyber-attacks perpetrated by organized crime groups, "hactivists," or state-sponsored groups, as well as non-technical attacks ranging from sophisticated social engineering to simple extortion or threats, which can lead to access, disclosure,
disruption or further attacks. Such events may expose the Company to civil and criminal liability or regulatory action, require consumer and regulatory notification of the unauthorized data access harming its reputation among customers, deter people
from purchasing the Company’s products, cause system interruptions, require significant technical, legal and other remediation expenses, and otherwise have an adverse impact on its business. Third parties to whom the Company outsources certain
functions are also subject to the risks outlined above, and if such a third party suffers a breach of information security involving the Company’s Sensitive Information, such breach may result in the Company incurring substantial costs and
other negative consequences, including a material adverse effect on its business, financial condition, results of operations and liquidity. The Company offers no guarantees that it will be able to implement information security measures to prevent
all breaches of information security.
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, business systems,
hardware and/or software failures due to a computer virus or cyber-attack, such as a distributed denial of service attack, 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, natural or man-made catastrophe, blackout, terrorist attack, pandemic (such as COVID-19) or war. Even if the personnel providing services to the Company are able to report to work, they may be unable to perform their
duties for an extended period of time if the Company’s data or systems are disabled or destroyed. There can be no assurance that the Company’s business continuation plans and insurance coverages would be effective in mitigating any
negative effects on the Company’s operations or profitability, and the Company could be adversely impacted by any disruption of its ability to conduct business.
Nationwide employee error, misconduct, or excessive risks may be
difficult to detect and prevent and could adversely affect the Company.
As an insurance enterprise, the Company is in the business of
accepting certain risks. The associates who conduct the Company’s business, including executive officers and other members of management, sales managers, investment professionals, product managers, sales agents, and other personnel, do so in
part by making decisions and choices that involve exposing the Company to risk. These include decisions such as setting underwriting guidelines and standards, product design and pricing, determining what assets to purchase for investment and when to
sell them, deciding which business opportunities to pursue, and other decisions. Losses may result from, among other things, excessive risk, fraud,
errors, failure to document
transactions properly, failure to obtain proper internal authorization or failure to comply with regulatory requirements. Although the Company employs controls and procedures designed to monitor individual business decisions and prevent the Company
from taking excessive risks, it is not always possible to deter or prevent individual misconduct, and the precautions the Company takes to prevent and detect this activity may not be effective in all cases. The impact of those losses and excessive
risks could harm the Company’s reputation and have a material adverse effect on the Company’s financial condition and business operations.
The Company’s business may be adversely affected if
Nationwide is unable to hire and retain qualified employees.
There is significant competition from within the financial
services and life insurance industries, and from businesses outside those industries, for qualified employees, especially those in key positions and those possessing highly specialized underwriting knowledge. The Company’s performance is
largely dependent on the talents, efforts and proper conduct of highly-skilled individuals, including the Company’s senior executives. For many of the Company’s senior positions, it competes for talent not just with insurance or
financial service companies, but with other large companies and other businesses. The Company’s continued ability to compete effectively in its business and to expand into new business areas depends on its ability to attract new personnel and
to retain and motivate its existing personnel. If the Company is not able to successfully attract, retain, and motivate the personnel that provide services to it, its business, financial results and reputation could be materially and adversely
affected.
The Company may be subject to intellectual
property risk.
The Company relies on copyright,
trademark, patent and trade secret laws, as well as various contractual rights and obligations, to protect its intellectual property. Although the Company uses a broad range of measures to protect its intellectual property rights, third parties may
infringe or misappropriate its intellectual property. The Company may resort to litigation in order to enforce its intellectual property rights. Such litigation would represent a diversion of resources that may be significant in amount, and the
final outcome of any litigation cannot be predicted with certainty. The Company’s inability to successfully secure or enforce the protection of the Company’s intellectual property assets, despite the Company’s best efforts, could
have a material adverse effect on its business and ability to compete.
The Company also may be subject to costly litigation in the
event that another party alleges that its operations or activities infringe upon that party’s intellectual property rights. The Company may be subject to claims by third parties for alleged infringement of third-party patents, copyrights,
trademarks, trade secrets or breach of any license. If the Company were found to have infringed any third-party intellectual property rights, it could incur substantial liability, and in limited circumstances could be enjoined from providing certain
products or services to its customers. Alternatively, the Company could be required to enter into costly licensing arrangements with third parties to resolve any alleged intellectual property infringement claims brought by third parties.
Acquisitions and integration of acquired businesses and
dispositions or other structural changes may result in operating difficulties, unforeseen liabilities or asset impairments, and other unintended consequences.
From time to time the Company may investigate and pursue
acquisition or disposition opportunities if it believes that such opportunities are consistent with its long-term objectives and that the potential rewards of an acquisition or disposition justify the risks.
The Company’s ability to achieve certain financial
benefits it anticipates from its acquisitions will depend in part upon its ability to successfully grow the businesses consistent with its anticipated acquisition economics. The Company’s financial results could be adversely affected by
unanticipated performance issues, unforeseen liabilities, transaction-related charges, diversion of management time and resources to acquisition integration challenges or growth strategies, loss of key Nationwide employees, amortization of expenses
related to intangibles, charges for impairment of long-term assets or goodwill and indemnifications.
The process of integrating an acquired company or business can
be complex and costly and may create unforeseen operating difficulties and expenditures. Acquired businesses may not perform as projected, any cost savings and other synergies anticipated from the acquisition may not materialize and costs associated
with the integration may be greater than anticipated. Acquired businesses may not be successfully integrated, resulting in substantial costs or delays and adversely affecting the Company’s ability to compete. Accordingly, the Company’s
results of operations might be materially and adversely affected.
The Company faces
a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti-money laundering, and sanctions statutes and regulations.
A major focus of governmental policy on financial institutions
in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the "PATRIOT Act") substantially broadened the scope of United States anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States, and by expanding the categories of financial institutions to which such laws and
regulations apply to include some categories of insurance companies. Certain financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in
their dealings with certain types of high-risk clients and implement a written client identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report
certain types of suspicious transactions without notifying the affected clients. Similarly, the US government has been escalating the obligations and requirements associated with sanctions laws including those enforced by the Office of Foreign
Assets Control ("OFAC"). Regulatory authorities routinely examine financial institutions to ensure that they have policies and procedures reasonably designed to comply with applicable requirements and for compliance with the policies and procedures
and these substantive obligations. Failure of a financial institution to maintain and implement adequate programs, including policies and procedures, to combat money laundering and terrorist financing, or to comply with all of the relevant laws or
regulations, could have serious legal and reputational consequences for the institution, including causing applicable regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. The Company and its subsidiaries are subject to OFAC,
and anti-money laundering statutes and certain regulations, and its compliance obligations under these rules result in increased costs and allocation of internal resources
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 its 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 its 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 2020 the Company occupied on average approximately 557,347 square feet of office space in the five-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
See Note 13 to the audited statutory financial statements
included in the F pages of this report for a discussion of legal proceedings.
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 2020.
NLIC did not pay any dividends or return capital to NFS during
2020, 2019 or 2018.
NLIC currently does not have a
formal dividend policy.
See Business – Regulation – Regulation of Dividends and Other Distributions and Risk-Based Capital for information regarding dividend restrictions.
SELECTED
FINANCIAL DATA
Five-Year Summary
|
|
Year
ended or as of December 31, |
(in
millions) |
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
Statutory
Statements of Operations Data |
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
15,116 |
|
$
14,452 |
|
$
13,995 |
|
$
14,802 |
|
$
14,213 |
Total benefits and
expenses
|
|
$
14,050 |
|
$
13,419 |
|
$
12,985 |
|
$
13,817 |
|
$
13,245 |
Net
income
|
|
$
487 |
|
$
629 |
|
$
711 |
|
$
1,039 |
|
$
751 |
Statutory
Statements of Admitted Assets, Liabilities, Capital and Surplus Data |
|
|
|
|
|
|
|
|
|
|
Total invested
assets
|
|
$
50,281 |
|
$
48,044 |
|
$
45,020 |
|
$
42,507 |
|
$
41,115 |
Total admitted
assets
|
|
$166,217
|
|
$155,133
|
|
$139,341
|
|
$145,670
|
|
$133,345
|
Total
liabilities
|
|
$157,112
|
|
$146,311
|
|
$132,496
|
|
$139,721
|
|
$128,137
|
Total capital and
surplus
|
|
$
9,105 |
|
$
8,822 |
|
$
6,845 |
|
$
5,949 |
|
$
5,208 |
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, businesses and financial condition of the Company made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Whenever used in
this report, words such as "anticipate," "estimate," "expect," "intend," "plan," "believe," "project," "target," "will," "shall," "could," "may" and other words of similar meaning, and any statement concerning the Company’s potential future
response or responses to the COVID-19 pandemic, including any statement concerning the effect of the pandemic on the Company’s business, financial condition, liquidity or results of operations, are intended to identify such forward-looking
statements. These forward-looking statements are based on current expectations and involve a number of risks and uncertainties that are difficult to predict. These forward-looking statements are not a guarantee of future performance, and certain
important factors that may cause actual results to differ materially from those expressed or implied in such forward-looking statements include, among others, the following possibilities:
(a)
|
fluctuations in the results
of operations or financial condition; |
(b)
|
actual claims losses
exceeding reserves for claims; |
(c)
|
difficult economic and
business conditions, including financial, capital and credit market conditions as a result of changes in interest rates or prolonged periods of low interest rates, equity prices, volatility, yields and liquidity in the equity and credit markets, as
well as geopolitical conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, epidemics or pandemics (such as the COVID-19 pandemic), impacting financial markets generally and companies in the
Company’s investment portfolio specifically; |
(d)
|
the degree to which the
Company chooses not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies the Company does implement; |
(e)
|
changes in certain
accounting and/or financial reporting standards issued by the Financial Accounting Standards Board ("FASB"), SEC, NAIC or other standard-setting bodies; |
(f)
|
the inability to maintain
the availability of systems and facilities in the event of a disaster, natural or man-made catastrophe (such as the COVID-19 pandemic), blackout, terrorist attack or war; |
(g)
|
heightened competition that
affects the cost of, and demand for, the Company’s products, specifically including the intensification of price competition, the entry of new competitors, consolidation, technological innovation and the development of new products by new and
existing competitors; |
(h)
|
adverse
state and federal legislation and regulation, including in response to the COVID-19 pandemic, with respect to, among other things, tax law changes impacting the federal estate tax and tax treatment of life insurance and investment products;
limitations on premium levels; restrictions on product approval and policy issuance; increases in minimum capital and reserves and other financial viability requirements; restrictions on mutual fund service fee payments; changes affecting sales
practices, including investigations and/or claims handling and escheat investigations; and regulatory actions of the DOL under ERISA, in particular proposed rule-making with respect to |
|
fiduciary obligations,
rule-making adopted by regulatory authorities under the Dodd-Frank Act and the Federal Deposit Insurance Act, including SEC comprehensive rulemaking and guidance regarding standards of conduct for broker dealers and investment advisers; |
(i)
|
the inability to mitigate
the capital impact associated with statutory reserving and capital requirements; |
(j)
|
failure to maintain or
expand distribution channels; |
(k)
|
possible difficulties in
executing, integrating and realizing projected results of acquisitions, divestitures and restructurings; |
(l)
|
loss of key vendor
relationships or failure of a vendor to protect confidential and proprietary information or otherwise perform (including as a result of the COVID-19 pandemic); |
(m)
|
changes in interest rates
and the equity markets causing a reduction in the market value of the Company’s investment portfolio, investment income and/or asset fees; an acceleration of other expenses; 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; or an impact on ultimate realizability of deferred tax assets; |
(n)
|
outlook changes and
downgrades in the financial strength and claims-paying ability ratings of the Company assigned by NRSROs; |
(o)
|
competitive, regulatory or
tax changes that affect the cost of, or demand for, products; |
(p)
|
fluctuations in RBC levels;
|
(q)
|
settlement of tax
liabilities for amounts that differ significantly from those recorded on the balance sheets; |
(r)
|
deviations from assumptions
regarding future persistency, mortality and morbidity rates (including as a result of natural and man-made catastrophes, pandemics, including the COVID-19 pandemic, epidemics, malicious acts, terrorist acts and climate change), and interest rates
used in calculating reserve amounts and in pricing products; |
(s)
|
adverse results and/or
resolution of litigation, arbitration, regulatory investigation and/or inquiry; |
(t)
|
the availability, pricing
and effectiveness of reinsurance; |
(u)
|
the effectiveness of
policies and procedures for managing risk; |
(v)
|
interruption in
telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; |
(w)
|
adverse consequences,
including financial and reputational costs, regulatory problems and potential loss of customers resulting from a breach of information security, a failure to meet privacy regulations, or inability to secure and maintain the confidentiality of
proprietary or customers’ personal information; |
(x)
|
the inability to protect
intellectual property and defend against claims of infringement; |
(y)
|
realized losses with respect
to impairments of assets in the investment portfolio of the Company; |
(z)
|
exposure to losses related
to variable annuity guarantee benefits, including from downturns and volatility in equity markets; |
(aa)
|
statutory reserve
requirements associated with term and universal life insurance policies under Regulation XXX, Guideline AXXX and principles-based reserving requirements; |
(ab)
|
lack of liquidity in certain
investments, access to credit facilities, or other inability to access capital; and |
(ac)
|
defaults
on commercial mortgages and volatility in their performance. |
The Company undertakes no commitment to revise or update any
forward-looking statements as a result of new information, future events or development, except as required by law. For a more complete description of the various risks, uncertainties, and other factors that could affect future results, see Risk Factors.
Overview
The following discussion provides an assessment of the
financial position and results of operations of the Company for the three years ended December 31, 2020. This discussion and analysis is based on and should be read in conjunction with the audited statutory 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
life insurance premiums, annuity considerations, policy charges, health insurance premiums and net investment income. Life insurance premiums are recognized as revenue over the premium paying period of the related polices. Annuity considerations are
recognized as revenue when received. Policy charges are comprised of several components including asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable annuities and life
insurance products and 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. Policy charges also include
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/deposits withdrawn during a
specified period for annuity and certain life insurance contracts. Health insurance premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Net investment income includes earnings on investments
supporting fixed annuities, FHLB funding agreements, certain life insurance products and earnings on invested assets not allocated to product segments, all net of related investment expenses.
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 are reported in net realized capital gains and losses. Also included in net realized investment gains and losses are the
impact of exercised, matured or terminated derivatives. All charges related to other-than-temporary impairments of bonds, specific commercial mortgage loans, other investments, and changes in the valuation allowance not related to specific
commercial mortgage loans are reported in net realized capital gains and losses.
The Company’s primary expenses include benefits to
policyholders and beneficiaries, commissions and other business expenses. Policy benefits and claims that are expensed include interest credited to policy account balances, benefits and claims incurred in the period in excess of related policy
reserves and other changes in future policy benefits. Commissions include commissions paid by the Company to affiliates and non-affiliates on sales of products. See Business – Marketing and Distribution
for a description of the Company’s unaffiliated and affiliated distribution channels.
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.
In particular, the Company’s
profitability is driven by premiums and annuity considerations for life and accident and health contracts, fee income on separate account products, general and separate account asset levels and management’s ability to manage interest spread
income. Premiums and annuity considerations for life and accident and health contracts can vary based on a variety of market, business and other factors. 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.
Fair Value Measurements
See Note 2 and Note 7 to the audited statutory financial
statements included in the F pages of this report for details regarding the Company’s policies for fair value measurements of certain assets and liabilities.
Credit Risk Associated with Derivatives
See Note 6 to the audited statutory financial statements
included in the F pages of this report for details regarding the Company’s evaluation of credit risk associated with derivatives.
Significant
Accounting Estimates and Significant Accounting Policies
The preparation of the statutory financial statements requires
the Company to make estimates and assumptions that affect the amounts reported in the statutory financial statements and accompanying notes. Significant estimates include legal and regulatory reserves, certain investment and derivative valuations,
future policy benefits and claims, provision for income taxes and valuation of deferred tax assets. Actual results could differ significantly from those estimates.
Note 2 to the audited statutory financial statements included
in the F pages of this report provide a summary of significant accounting policies.
Results of Operations
2020 Compared to 2019
The following table summarizes the Company’s results of
operations for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2020
|
|
2019
|
|
Change
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$10,637
|
|
$10,168
|
|
5%
|
Net investment
income
|
|
2,107
|
|
1,974
|
|
7%
|
Amortization of interest maintenance
reserve
|
|
-
|
|
(2)
|
|
100%
|
Other revenues
|
|
2,372
|
|
2,312
|
|
3%
|
Total
revenues
|
|
$15,116
|
|
$14,452
|
|
5%
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$15,013
|
|
$14,782
|
|
2%
|
Increase in reserves for future policy benefits and
claims
|
|
1,627
|
|
1,501
|
|
8%
|
Net transfers from separate
accounts
|
|
(3,544)
|
|
(3,747)
|
|
5%
|
Commissions
|
|
646
|
|
674
|
|
(4%)
|
Dividends to
policyholders
|
|
36
|
|
38
|
|
(5%)
|
Reserve adjustment on reinsurance
assumed
|
|
(172)
|
|
(246)
|
|
30%
|
Other
expenses
|
|
444
|
|
417
|
|
6%
|
Total benefits and
expenses
|
|
$14,050
|
|
$13,419
|
|
5%
|
Income before federal income tax expense and net realized capital losses on
investments
|
|
$
1,066 |
|
$
1,033 |
|
3%
|
Federal income tax expense (benefit)
|
|
4
|
|
(73)
|
|
105%
|
Income before net realized capital losses on
investments
|
|
$
1,062 |
|
$
1,106 |
|
(4%)
|
Net realized capital losses on investments, net of tax and transfers to the interest maintenance
reserve
|
|
(575)
|
|
(477)
|
|
(21%)
|
Net
income
|
|
$
487 |
|
$
629 |
|
(23%)
|
The Company recorded lower net
income for the year ended December 31, 2020 compared to 2019, primarily due to higher benefits to policyholders and beneficiaries, a larger increase in reserves for future policy benefits and claims, increased net realized capital losses on
investments, net of tax and transfers, lower net transfers from separate accounts and lower reserve adjustment on reinsurance assumed, partially offset by increases in premiums and annuity considerations and net investment income.
The increase in benefits to policyholders and beneficiaries
was primarily related to public sector retirement plans surrender benefits and withdrawals, partially offset by lower surrender benefits in individual variable annuities and fixed annuities.
Increases in reserves for future policy benefits and claims
were principally related to larger reserve increases in private sector retirement plans driven by plan acquisitions, that were partially offset by smaller increases in COLI and BOLI product reserves due to the effect of lower premiums and higher
paid death benefits.
Net realized capital losses on
investments, net of tax and transfers were primarily driven by higher losses in the derivative hedging program period over period.
The decrease in net transfers from separate accounts primarily
reflect the lower annuity considerations and benefits to policyholders and beneficiaries for individual variable annuity products.
The lower
reserve adjustment on reinsurance assumed was primarily due to a decrease in assumed annuity and surrender benefits on the fixed annuity modified coinsurance agreement with NLAIC.
The increase in premiums and annuity considerations was
primarily related to private sector and public sector retirement plans, partially offset by declines in individual annuity products and COLI and BOLI products.
The increase in net investment income was principally due to
an increase in invested assets not assigned to other reportable segments.
2019 Compared to 2018
The following table summarizes the Company’s results of
operations for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$10,168
|
|
$
9,829 |
|
3%
|
Net investment
income
|
|
1,974
|
|
1,927
|
|
2%
|
Amortization of interest maintenance
reserve
|
|
(2)
|
|
(1)
|
|
(100%)
|
Other revenues
|
|
2,312
|
|
2,240
|
|
3%
|
Total
revenues
|
|
$14,452
|
|
$13,995
|
|
3%
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$14,782
|
|
$13,961
|
|
6%
|
Increase in reserves for future policy benefits and
claims
|
|
1,501
|
|
736
|
|
104%
|
Net transfers from separate
accounts
|
|
(3,747)
|
|
(2,468)
|
|
(52%)
|
Commissions
|
|
674
|
|
670
|
|
1%
|
Dividends to
policyholders
|
|
38
|
|
40
|
|
(5%)
|
Reserve adjustment on reinsurance
assumed
|
|
(246)
|
|
(352)
|
|
30%
|
Other
expenses
|
|
417
|
|
398
|
|
5%
|
Total benefits and
expenses
|
|
$13,419
|
|
$12,985
|
|
3%
|
Income before federal income tax expense and net realized capital losses on
investments
|
|
$
1,033 |
|
$
1,010 |
|
2%
|
Federal income tax (benefit) expense
|
|
(73)
|
|
64
|
|
(214%)
|
Income before net realized capital losses on
investments
|
|
$
1,106 |
|
$
946 |
|
17%
|
Net realized capital losses on investments, net of tax and transfers to the interest maintenance
reserve
|
|
(477)
|
|
(235)
|
|
(103%)
|
Net
income
|
|
$
629 |
|
$
711 |
|
(12%)
|
The Company recorded lower net
income for the year ended December 31, 2019 compared to 2018, primarily due to higher increase in reserves for future policy benefits and claims, net realized capital losses on investments, net of tax and transfers and lower reserve adjustment on
reinsurance assumed, partially offset by an increase in net transfers from separate accounts and premiums and annuity considerations.
Higher increase in reserves for future policy benefits and
claims was due to change in aggregate reserves driven by larger increases in public sector retirement plan reserves and Corporate Solutions’ product reserves and lower decrease in fixed annuity product reserves. The change for public sector
products was primarily due to plan sponsor acquisitions in 2019. The change for Corporate Solutions’ products was primarily due to premiums growth.
Net realized capital losses on investments, net of tax and
transfers were primarily driven by higher losses in the derivative hedging program period over period.
Reserve adjustment on reinsurance assumed increased mainly due
to change in reserves as a result of decreases in assumed annuity and surrender benefits on the fixed annuity modified coinsurance agreement with NLAIC.
The increase in net transfers from separate accounts was
driven by higher net transfers from separate accounts in public sector retirement plan products and lower net transfers to separate accounts in Corporate Solutions’ products.
Business Segments
Life
Insurance
2020 Compared to 2019
The following table summarizes selected financial data for the
Company’s Life Insurance segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2020
|
|
2019
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$394
|
|
$
413 |
|
(5%)
|
Net investment
income
|
|
247
|
|
262
|
|
(6%)
|
Other
revenues
|
|
193
|
|
208
|
|
(7%)
|
Total
revenues
|
|
$834
|
|
$
883 |
|
(6%)
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$689
|
|
$
756 |
|
(9%)
|
Increase in reserves for future policy benefits and
claims
|
|
62
|
|
21
|
|
195%
|
Net transfers from separate
accounts
|
|
(85)
|
|
(105)
|
|
19%
|
Commissions
|
|
21
|
|
30
|
|
(30%)
|
Dividends to
policyholders
|
|
36
|
|
38
|
|
(5%)
|
Other
expenses
|
|
123
|
|
133
|
|
(8%)
|
Total benefits and
expenses
|
|
$846
|
|
$
873 |
|
(3%)
|
Pre-tax operating
earnings
|
|
$
(12) |
|
$
10 |
|
(220%)
|
Pre-tax operating earnings
decreased for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to lower net premiums, higher increase in reserves for future policy benefits and claims and lower net transfers from separate accounts,
partially offset by lower benefits to policyholders and beneficiaries.
Lower net premiums were due to individual variable life
insurance, individual universal life and traditional life insurance products.
The increase in reserves for future policy benefits and claims
was driven by individual universal life and individual variable life insurance products.
The decrease in net transfers from separate accounts reflect
the decrease in benefits to policyholders and beneficiaries, lower premiums and the increase in reserves for future policy benefits and claims for individual variable life insurance products.
The decrease in benefits to policyholders and beneficiaries
were related to individual variable life and individual universal life insurance products.
2019 Compared to 2018
The following table summarizes selected financial data for the
Company’s Life Insurance segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$
413 |
|
$410
|
|
1%
|
Net investment
income
|
|
262
|
|
270
|
|
(3%)
|
Amortization of interest maintenance
reserve
|
|
-
|
|
1
|
|
(100%)
|
Other
revenues
|
|
208
|
|
214
|
|
(3%)
|
Total
revenues
|
|
$
883 |
|
$895
|
|
(1%)
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
756 |
|
$713
|
|
6%
|
Increase in reserves for future policy benefits and
claims
|
|
21
|
|
4
|
|
425%
|
Net transfers from separate
accounts
|
|
(105)
|
|
(71)
|
|
(48%)
|
Commissions
|
|
30
|
|
27
|
|
11%
|
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Dividends to
policyholders
|
|
38
|
|
40
|
|
(5%)
|
Other
expenses
|
|
133
|
|
154
|
|
(14%)
|
Total benefits and
expenses
|
|
$873
|
|
$867
|
|
1%
|
Pre-tax operating
earnings
|
|
$
10 |
|
$
28 |
|
(64%)
|
Pre-tax operating earnings
decreased for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to higher benefits to policyholders and beneficiaries and increase in reserves for future policy benefits and claims, partially offset by an
increase in net transfers from separate accounts.
The
increase in reserves for future policy benefits and claims was driven by individual universal life insurance products.
The increase in net transfers from separate accounts was due
to higher net transfers from separate accounts for individual variable life insurance.
Annuities
2020 Compared to 2019
The following table summarizes selected financial data for the
Company’s Annuities segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2020
|
|
2019
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$
3,407 |
|
$
4,202 |
|
(19%)
|
Net investment
income
|
|
338
|
|
319
|
|
6%
|
Amortization of interest maintenance
reserve
|
|
4
|
|
1
|
|
300%
|
Other
revenues
|
|
1,498
|
|
1,488
|
|
1%
|
Total
revenues
|
|
$
5,247 |
|
$
6,010 |
|
(13%)
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
7,140 |
|
$
7,993 |
|
(11%)
|
(Decrease) increase in reserves for future policy benefits and
claims
|
|
(78)
|
|
25
|
|
(412%)
|
Net transfers from separate
accounts
|
|
(2,490)
|
|
(2,695)
|
|
8%
|
Commissions
|
|
437
|
|
442
|
|
(1%)
|
Reserve adjustment on reinsurance
assumed
|
|
(172)
|
|
(246)
|
|
30%
|
Other
expenses
|
|
55
|
|
57
|
|
(4%)
|
Total benefits and
expenses
|
|
$
4,892 |
|
$
5,576 |
|
(12%)
|
Pre-tax operating
earnings
|
|
$
355 |
|
$
434 |
|
(18%)
|
Pre-tax operating earnings
decreased for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to lower annuity considerations, net transfers from separate accounts and reserve adjustment on reinsurance assumed, partially offset by a
decline in benefits to policyholders and beneficiaries and a higher decrease in reserves for future policy benefits and claims.
Annuity considerations decreased due to lower sales of
individual variable annuities, immediate annuities and fixed annuities.
The decrease in net transfers from separate accounts primarily
reflect the lower annuity considerations and benefits to policyholders and beneficiaries for individual variable annuity products.
The lower reserve adjustment on reinsurance assumed was
primarily due to a decrease in assumed annuity and surrender benefits on the fixed annuity modified coinsurance agreement with NLAIC.
The decline in benefits to policyholders and beneficiaries was
principally driven by lower surrender benefits in individual variable annuities and fixed annuities.
The higher decrease in reserves for future policy benefits and
claims was driven by individual immediate annuities, partially offset increased guaranteed benefit reserves in individual variable annuity products.
2019 Compared to
2018
The following table summarizes selected financial
data for the Company’s Annuities segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$
4,202 |
|
$
3,868 |
|
9%
|
Net investment
income
|
|
319
|
|
319
|
|
0%
|
Amortization of interest maintenance
reserve
|
|
1
|
|
1
|
|
0%
|
Other
revenues
|
|
1,488
|
|
1,468
|
|
1%
|
Total
revenues
|
|
$
6,010 |
|
$
5,656 |
|
6%
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
7,993 |
|
$
7,980 |
|
0%
|
Increase (decrease) in reserves for future policy benefits and
claims
|
|
25
|
|
(211)
|
|
112%
|
Net transfers from separate
accounts
|
|
(2,695)
|
|
(2,618)
|
|
(3%)
|
Commissions
|
|
442
|
|
434
|
|
2%
|
Reserve adjustment on reinsurance
assumed
|
|
(246)
|
|
(352)
|
|
30%
|
Other
expenses
|
|
57
|
|
48
|
|
19%
|
Total benefits and
expenses
|
|
$
5,576 |
|
$
5,281 |
|
6%
|
Pre-tax operating
earnings
|
|
$
434 |
|
$
375 |
|
16%
|
Pre-tax operating earnings
increased for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to higher annuity considerations, partially offset by a decrease in the reserve adjustment on reinsurance assumed and a higher increase in
reserves for future policy benefits and claims.
Annuity
considerations increased due to higher sales of variable annuities, immediate annuities, fixed annuities and in-plan guarantees.
The lower reserve adjustment on reinsurance assumed was
primarily due to a decrease in assumed annuity and surrender benefits on the fixed annuity modified coinsurance agreement with NLAIC.
The higher increase in reserves for future policy benefits and
claims was driven by fixed annuity products and variable annuity products.
Retirement Solutions
2020 Compared to 2019
The following table summarizes selected financial data for the
Company’s Retirement Solutions segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2020
|
|
2019
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$
5,939 |
|
$
4,324 |
|
37%
|
Net investment
income
|
|
843
|
|
824
|
|
2%
|
Amortization of interest maintenance
reserve
|
|
(4)
|
|
(4)
|
|
0%
|
Other
revenues
|
|
354
|
|
326
|
|
9%
|
Total
revenues
|
|
$
7,132 |
|
$
5,470 |
|
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
6,582 |
|
$
5,308 |
|
24%
|
Increase in reserves for future policy benefits and
claims
|
|
1,582
|
|
1,135
|
|
39%
|
Net transfers from separate
accounts
|
|
(1,372)
|
|
(1,319)
|
|
(4%)
|
Commissions
|
|
94
|
|
96
|
|
(2%)
|
Other
expenses
|
|
131
|
|
122
|
|
7%
|
|
|
December
31, |
|
|
(in
millions) |
|
2020
|
|
2019
|
|
Change
|
Total benefits and
expenses
|
|
$7,017
|
|
$5,342
|
|
31%
|
Pre-tax operating
earnings
|
|
$
115 |
|
$
128 |
|
(10%)
|
Pre-tax operating earnings
decreased for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase in benefits to policyholders and beneficiaries and a higher increase in reserves for future policy benefits and claims,
partially offset by higher annuity considerations and increases in net transfers from separate accounts.
Benefits to policyholders and beneficiaries increased
primarily due to public sector retirement plans surrender benefits and withdrawals.
The increase in reserves for future policy benefits and claims
was primarily driven by larger reserve increases in private sector retirement plan products, partially offset by lower reserve increases in public sector retirement plan products. Current year increases for private sector retirement plans was
primarily driven by plan acquisitions.
Annuity
considerations increased primarily due to sales of private and public sector retirement plans and transfers into public sector retirement plans from Nationwide Trust Company, FSB, an affiliate.
The increase in net transfers from separate accounts primarily
reflect the higher benefits to policyholders and beneficiaries for variable public and private sector retirement plans, partially offset by their increased variable annuity considerations.
2019 Compared to 2018
The following table summarizes selected financial data for the
Company’s Retirement Solutions segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$
4,324 |
|
$4,095
|
|
6%
|
Net investment
income
|
|
824
|
|
798
|
|
3%
|
Amortization of interest maintenance
reserve
|
|
(4)
|
|
(3)
|
|
(33%)
|
Other
revenues
|
|
326
|
|
291
|
|
12%
|
Total
revenues
|
|
$
5,470 |
|
$5,181
|
|
6%
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
5,308 |
|
$4,685
|
|
13%
|
Increase in reserves for future policy benefits and
claims
|
|
1,135
|
|
876
|
|
30%
|
Net transfers from separate
accounts
|
|
(1,319)
|
|
(725)
|
|
(82%)
|
Commissions
|
|
96
|
|
95
|
|
1%
|
Other
expenses
|
|
122
|
|
132
|
|
(8%)
|
Total benefits and
expenses
|
|
$
5,342 |
|
$5,063
|
|
6%
|
Pre-tax operating
earnings
|
|
$
128 |
|
$
118 |
|
8%
|
Pre-tax operating earnings
increased for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to higher annuity considerations and increase in net transfers from separate accounts, partially offset by increase in benefits to
policyholders and beneficiaries and a higher increase in reserves for future policy benefits and claims.
Annuity considerations increased primarily due to sales of
private sector retirement plans.
The increase in net
transfers from separate accounts was primarily driven by public sector retirement plan products from account rebalancing from variable to fixed due to market growth.
The increase in reserves for future policy benefits and claims
was primarily driven by larger reserve increases in public sector retirement plan products, partially offset by lower reserve increases in private sector retirement plan products. Current year increases for public sector retirement plans was
primarily driven by plan sponsor acquisitions.
Corporate
Solutions and Other
2020 Compared to
2019
The following table summarizes selected financial
data for the Company’s Corporate Solutions and Other segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2020
|
|
2019
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$
897 |
|
$1,229
|
|
(27%)
|
Net investment
income
|
|
679
|
|
569
|
|
19%
|
Amortization of interest maintenance
reserve
|
|
-
|
|
1
|
|
0%
|
Other
revenues
|
|
327
|
|
290
|
|
13%
|
Total
revenues
|
|
$1,903
|
|
$2,089
|
|
(9%)
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
602 |
|
$
725 |
|
(17%)
|
Increase in reserves for future policy benefits and
claims
|
|
61
|
|
320
|
|
(81%)
|
Net transfers to separate
accounts
|
|
403
|
|
372
|
|
8%
|
Commissions
|
|
94
|
|
106
|
|
(11%)
|
Other
expenses
|
|
135
|
|
105
|
|
29%
|
Total benefits and
expenses
|
|
$1,295
|
|
$1,628
|
|
(20%)
|
Pre-tax operating
earnings
|
|
$
608 |
|
$
461 |
|
32%
|
Pre-tax operating earnings
increased for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to higher net investment income, a smaller increase in reserves for future policy benefits and claims and lower benefits to policyholders and
beneficiaries, partially offset by a decrease in premiums.
The increase in net investment income was principally due to
an increase in invested assets not assigned to other reportable segments.
The lower increase in reserves for future policy benefits and
claims was primarily driven by COLI and BOLI products due to lower premiums, partially offset by lower paid benefits.
The decrease in benefits to policyholders and beneficiaries
was driven by lower COLI and BOLI product surrender benefits paid, partially offset by higher paid death benefits.
Premiums decreased primarily due to lower current year case
acquisitions in COLI and BOLI products.
2019 Compared to
2018
The following table summarizes selected financial
data for the Company’s Corporate Solutions and Other segment for the years ended:
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Results
of Operations |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums and annuity
considerations
|
|
$1,229
|
|
$1,456
|
|
(16%)
|
Net investment
income
|
|
569
|
|
540
|
|
5%
|
Amortization of interest maintenance
reserve
|
|
1
|
|
-
|
|
0%
|
Other
revenues
|
|
290
|
|
267
|
|
9%
|
Total
revenues
|
|
$2,089
|
|
$2,263
|
|
(8%)
|
Benefits
and expenses |
|
|
|
|
|
|
Benefits to policyholders and
beneficiaries
|
|
$
725 |
|
$
583 |
|
24%
|
Increase in reserves for future policy benefits and
claims
|
|
320
|
|
67
|
|
378%
|
Net transfers to separate
accounts
|
|
372
|
|
946
|
|
(61%)
|
Commissions
|
|
106
|
|
114
|
|
(7%)
|
Other
expenses
|
|
105
|
|
64
|
|
64%
|
|
|
December
31, |
|
|
(in
millions) |
|
2019
|
|
2018
|
|
Change
|
Total benefits and
expenses
|
|
$1,628
|
|
$1,774
|
|
(8%)
|
Pre-tax operating
earnings
|
|
$
461 |
|
$
489 |
|
(6%)
|
Pre-tax operating earnings
decreased for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a decrease in premiums, higher increase in reserves for future policy benefits and claims and increased benefits to policyholders and
beneficiaries, partially offset by lower net transfers to separate accounts.
Premiums decreased primarily due to lower current year case
acquisitions in COLI and BOLI products.
Higher increase
in reserves for future policy benefits and claims was primarily driven by COLI and BOLI product current year premiums and transfers into fixed from variable.
The increase in benefits to policyholders and beneficiaries
was driven by increases in COLI and BOLI products.
Net
transfers to separate accounts decreased due to variable COLI and BOLI products which was driven by a decline in premiums received and an increase in surrender benefits paid.
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 operations have historically provided substantial cash flow.
The Company has sufficient cash resources to meet all current obligations for policyholder benefits, withdrawals, surrenders and policy loans. The Company also participates in inter-company repurchase agreements or other borrowing arrangements with
affiliates to satisfy short-term cash needs.
The Company
purchases investments with durations to match the expected durations of the liabilities they support. To mitigate the risks that actual withdrawals may exceed anticipated amounts or that rising interest rates may cause a decline in the value of the
Company’s bond investments, the Company imposes market value adjustments or surrender charges on the majority of its products and offers products where the investment risk is transferred to the contractholder. Liabilities related to separate
accounts, where the investment risk is typically borne by the contractholder, comprised 72.8% of total liabilities as of December 31, 2020 and 72.2% as of December 31, 2019.
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, investment and cash flow assumptions underlying these projections. The Company
periodically adjusts 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, the Company believes that cash flows from activities over the next year will provide sufficient liquidity for the operations of the Company and sufficient funds for interest payments.
Borrowed
Money
The Company and NMIC maintain a $750 million
credit facility that expired on April 2, 2020, with an option to convert outstanding balances at expiration into a one-year term loan. This credit facility was renewed on April 1, 2020 with a maturity date of April 1, 2025. The Company had no
amounts outstanding under this credit facility as of December 31, 2020 and 2019.
The Company participates in a commercial paper program with a
limit of $750 million. The Company had no commercial paper balance outstanding as of December 31, 2020 and $200 million as of December 31, 2019.
The Company has an agreement with its custodial bank to borrow
against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial
mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350 million. The borrowing rate on this program is equal to one-month London Interbank Offered Rate. The Company
had no amounts outstanding under this agreement as of December 31, 2020 and 2019.
As of December 31, 2019, the Company had access to borrow up
to $300 million from the FHLB that expired in March 2020. In March 2020, the Company renewed the agreement with the FHLB until March 19, 2021. The Company had no amounts outstanding under the agreement as of December 31, 2020 and 2019. In February
2021, the Company terminated the agreements and entered into new agreements with the FHLB, which expire February 4, 2022, and allow the Company and NLAIC access to collectively borrow up to $1.1 billion, which would be collateralized by pledged
securities. It is part of the Company’s strategy to use these funds for operations and any funds obtained from the FHLB for use in general operations would be accounted for as borrowed money.
See Note 9 to the audited statutory financial statements
included in the F pages of this report for details regarding the Company’s usage of short-term debt and FHLB funding agreement.
Surplus Notes
The surplus notes below were issued in accordance with Section
3901.72 of the Ohio Revised Code. The principal and interest on these surplus notes shall not be a liability or claim against the Company, or any of its assets, except as provided in Section 3901.72 of the Ohio Revised Code. ODI must approve
interest and principal payments before they are paid.
On
December 17, 2001, the Company issued a $300 million surplus note to NFS, with an interest rate of 7.5%, and a maturity date of December 17, 2031. Interest on the note is subject to prior approval of the ODI and is payable semi-annually on June 17
and December 17. The Company received approval from the ODI and made all interest payments as scheduled.
On June 27, 2002, the Company issued an additional $300
million surplus note to NFS, with an interest rate of 8.15%, and a maturity date of June 27, 2032. Interest on the note is subject to prior approval of the ODI and is payable semi-annually on April 15 and October 15. The Company received approval
from the ODI and made all interest payments as scheduled.
On December 23, 2003, the Company issued an additional $100
million surplus note to NFS, with an interest rate of 6.75%, and a maturity date of December 23, 2033. Interest on the note is subject to prior approval of the ODI and is payable semi-annually on January 15 and July 15. The Company received approval
from the ODI and made all interest payments as scheduled.
On December 20, 2019, the Company issued an additional $400
million surplus note to NFS, with an interest rate of 4.21%, and a maturity date of December 19, 2059. Interest on the note is subject to prior approval of the ODI and is payable semi-annually on June 1 and December 1. The Company received approval
from the ODI and made all interest payments as scheduled.
See Note 10 to the audited statutory financial statements
included in the F pages of this report for details regarding the Company’s usage of surplus notes.
Regulatory Risk-based Capital
Each insurance company’s state of domicile imposes
minimum RBC requirements that were developed by the NAIC. RBC is used to evaluate the adequacy of an insurer’s statutory capital and surplus in relation to the risks inherent in the insurer’s business related to asset quality, asset and
liability matching, mortality and morbidity, and other business factors. Regulatory compliance is determined annually based on a ratio of a company’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level
RBC, as defined by the NAIC. Companies with a ratio below 200% (or
below 250% with negative
trends) are required to take corrective action steps. The Company exceeded the minimum RBC requirements for all annual periods presented. See Note 14 to the audited statutory financial statements included in the F pages of this report for details
regarding the Company’s regulatory RBC.
Contractual
Obligations and Commitments
The following table
summarizes the Company’s contractual obligations and commitments as of December 31, 2020 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.
|
|
Payments
due by period |
(in
millions) |
|
Less
than 1 year |
|
1-3
years |
|
More
3-5 years |
|
than
5 years |
|
Total
|
Future policy benefits and
claims1,2,3,4
|
|
$5,710
|
|
8,878
|
|
7,987
|
|
82,011
|
|
104,586
|
Policyholders dividends
accumulation5
|
|
430
|
|
-
|
|
-
|
|
-
|
|
430
|
Short-term
debt6
|
|
3
|
|
-
|
|
-
|
|
-
|
|
3
|
Securities lending
payable7
|
|
102
|
|
|
|
102
|
|
|
|
|
Surplus
notes8
|
|
71
|
|
141
|
|
141
|
|
2,029
|
|
2,382
|
Total
|
|
$6,316
|
|
$9,019
|
|
$8,128
|
|
$84,040
|
|
$107,503
|
1 |
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 as of December 31, 2020. 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 as of December 31, 2020;
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. |
2 |
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 levels. Assumptions for future interest crediting levels were made based on processes consistent with the Company’s past practices,
which are 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 statutory financial statements included in the F pages of this report for a description of the Company’s method for establishing life and annuity reserves. |
3 |
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. |
4 |
Contractual provisions exist
that could increase those obligations presented. The process for determining future interest crediting rates, as described in Note 2 above, was used to develop the estimates of payments due by period. |
5 |
The provision for
policyholders' dividends payable represents the liabilities related to dividends payable in the following year on participating policies. As such, the obligations related to these liabilities are presented in the table above in the less than one
year category in the amounts of the liabilities presented in the Company's Statement of Admitted Assets, Liabilities, Capital and Surplus. |
6 |
No contractual provisions
exist that could create, increase or accelerate those obligations presented. The amount presented includes interest accrued based on rates in effect during 2020. See Note 9 to the audited statutory financial statements, included in the F pages of
this report for more details. |
7 |
Since the timing of the
return is uncertain, these obligations have been reflected in payments due in less than one year. |
8 |
See Note
10 to the audited statutory financial statements included in the F pages of this report for a discussion of the Company’s surplus notes. |
Investments
General
The Company’s assets are divided into separate account
and general account assets. Of the Company’s total assets, $114.4 billion (69%) and $105.7 billion (68%) were held in separate accounts as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the Company held assets
of $51.8 billion (31%) and $49.5 billion (32%) in general accounts, respectively, including $50.3 billion of general account invested assets as of December 31, 2020 compared to $48.0 billion as of December 31, 2019.
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.
The following table summarizes the Company’s general
account investments by asset category, as of the dates indicated:
|
|
December
31, 2020 |
|
December
31, 2019 |
(in
millions) |
|
Carrying
value |
|
%
of total |
|
Carrying
value |
|
%
of total |
Invested
assets: |
|
|
|
|
|
|
|
|
Bonds
|
|
$37,207
|
|
74%
|
|
$35,124
|
|
73%
|
Stocks
|
|
2,835
|
|
6%
|
|
2,622
|
|
6%
|
Mortgage loans, net of
allowance
|
|
7,783
|
|
15%
|
|
7,655
|
|
16%
|
Policy
loans
|
|
888
|
|
2%
|
|
903
|
|
2%
|
Derivative
assets
|
|
51
|
|
0%
|
|
94
|
|
0%
|
Cash, cash equivalents and short-term
investments
|
|
461
|
|
1%
|
|
556
|
|
1%
|
Securities lending collateral
assets
|
|
101
|
|
0%
|
|
132
|
|
0%
|
Other invested
assets
|
|
955
|
|
2%
|
|
958
|
|
2%
|
Total invested
assets
|
|
$50,281
|
|
100%
|
|
$48,044
|
|
100%
|
See Note 5 to the Company’s
audited statutory financial statements included in the F pages for further information regarding the Company’s investments.
Bonds
The NAIC assigns securities quality ratings and uniform
valuations (called NAIC designations), which are used by insurers when preparing their annual statements. For most securities, NAIC ratings are derived from ratings received from nationally recognized rating agencies. The NAIC also assigns ratings
to securities that do not receive public ratings. The designations assigned by the NAIC range from class 1 (highest quality) to class 6 (lowest quality). Of the Company’s bonds, 94% and 95% were in the two highest NAIC designations as of
December 31, 2020 and December 31, 2019, respectively.
Bonds are generally stated at amortized cost, except those
with an NAIC designation of "6", which are stated at the lower of amortized cost or fair value. Changes in the fair value of bonds stated at fair value are charged to surplus.
The following table displays the NAIC designation of the
Company’s investment in bonds, as of the dates indicated:
(in
millions) |
|
December
31, 2020 |
|
December
31, 2019 |
NAIC
designation |
|
Carrying
value |
|
Fair
value |
|
%
of total statement value |
|
Carrying
value |
|
Fair
value |
|
%
of total statement value |
1
|
|
$20,212
|
|
$22,806
|
|
54%
|
|
$19,561
|
|
$21,185
|
|
55%
|
2
|
|
14,886
|
|
16,833
|
|
40%
|
|
13,933
|
|
14,919
|
|
40%
|
3
|
|
1,635
|
|
1,695
|
|
5%
|
|
1,115
|
|
1,119
|
|
3%
|
4
|
|
353
|
|
347
|
|
1%
|
|
296
|
|
299
|
|
1%
|
5
|
|
113
|
|
109
|
|
0%
|
|
199
|
|
170
|
|
1%
|
6
|
|
8
|
|
20
|
|
0%
|
|
20
|
|
43
|
|
0%
|
7
|
|
$
37,20 |
|
$41,810
|
|
100%
|
|
$35,124
|
|
$37,735
|
|
100%
|
See Note 2 to
the Company’s audited statutory financial statements included in the F pages for the policy for valuation of bonds and stocks.
Loan-backed structured securities
Loan-backed and structured securities include residential
mortgage-backed securities, commercial mortgage-backed securities and certain other asset-backed securities.
The following table displays the NAIC designation of the
Company’s investment in loan-backed structured securities, as of the dates indicated:
(in
millions) |
|
December
31, 2020 |
|
December
31, 2019 |
NAIC
designation |
|
Statement
Value |
|
Fair
Value |
|
%
of total statement value |
|
Statement
Value |
|
Fair
Value |
|
%
of total statement value |
1
|
|
$6,759
|
|
7,024
|
|
95%
|
|
$5,035
|
|
5,200
|
|
94%
|
2
|
|
191
|
|
223
|
|
3%
|
|
231
|
|
260
|
|
4%
|
3
|
|
111
|
|
105
|
|
2%
|
|
67
|
|
62
|
|
1%
|
4
|
|
55
|
|
51
|
|
0%
|
|
63
|
|
60
|
|
1%
|
5
|
|
20
|
|
19
|
|
0%
|
|
19
|
|
18
|
|
0%
|
6
|
|
5
|
|
18
|
|
0%
|
|
18
|
|
40
|
|
0%
|
|
|
$7,141
|
|
$7,440
|
|
100%
|
|
$5,433
|
|
$5,640
|
|
100%
|
Stocks
Stocks are largely comprised of investments in affiliated
entities. Refer to Note 2 and Note 5 to the Company’s audited statutory financial statements included in the F pages for information on the valuation methodology and investment in subsidiaries.
Other Invested Assets
The Company’s other invested assets consist of primarily
of alternative investments in private equity funds, tax credit funds, real estate partnership and investment in Eagle accounted for under the equity method, and derivatives collateral and receivables.
The following table summarizes the composition of the
Company’s carrying value of other invested assets, as of the dates indicated:
|
|
December
31, |
(in
millions) |
|
2020
|
|
2019
|
Alternative
investments: |
|
|
|
|
Private equity
funds
|
|
$321
|
|
$267
|
Real estate
partnerships
|
|
366
|
|
299
|
Tax credit
funds
|
|
177
|
|
192
|
Investment in
Eagle
|
|
52
|
|
65
|
Total alternative
investments
|
|
$916
|
|
$823
|
Derivatives collateral and
receivables
|
|
39
|
|
135
|
Total other invested
assets
|
|
$955
|
|
$958
|
Mortgage Loans, Net of
Allowance
As of December 31, 2020, commercial mortgage
loans were $7.8 billion (15%) of the statement value of investments, compared to $7.7 billion (16%) as of December 31, 2019. Commitments to fund commercial mortgage loans of $114 million were outstanding as of December 31, 2020 compared to $147
million as of December 31, 2019.
As of December 31, 2020
and December 31, 2019, the Company has a diversified mortgage loan portfolio with no more than 24% and 23%, respectively, in a geographic region in the U.S., no more than 39% and 40% in a property type, respectively and no more than 1% with any one
borrower.
See Note 5 to the Company’s audited
statutory financial statements included in the F pages for the additional information on the mortgage loan portfolio.
Other Investment
Information
See Note 5 to the Company’s audited
statutory financial statements included in the F pages for the additional information on the Company’s investment in subsidiaries, real estate, and securities lending agreements. See Note 6 to the Company’s audited statutory financial
statements included in the F pages for the additional information on the Company’s derivative instruments.
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 some of its assets and liabilities, as well as variations in expected cash flows due to changes in interest rates and equity markets. 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 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 some 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 life and 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 following table presents account values by range of
minimum guaranteed crediting rates and the current weighted average crediting rates for certain of the Company’s products, as of the dates indicated:
|
|
Life
Insurance1 |
|
Annuities
2 |
|
Retirement
Solutions3 |
|
Corporate
Solutions and Other |
(in
millions) |
|
Account
value |
|
Weighted
average crediting rate |
|
Account
value |
|
Weighted
average crediting rate |
|
Account
value |
|
Weighted
average crediting rate |
|
Account
value |
|
Weighted
average crediting rate |
December
31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum guaranteed crediting rate of 3.51% or
greater
|
|
$594
|
|
4.00%
|
|
$
- |
|
-%
|
|
$
38 |
|
3.95%
|
|
$
- |
|
-%
|
Minimum guaranteed crediting rate of 3.01% to
3.50%
|
|
$
- |
|
-%
|
|
$
210 |
|
3.64%
|
|
$
6,346 |
|
3.42%
|
|
$
- |
|
-%
|
Minimum guaranteed crediting rate of 2.01% to
3.00%
|
|
$575
|
|
3.05%
|
|
$1,451
|
|
3.04%
|
|
$
4,172 |
|
2.83%
|
|
$2,306
|
|
3.04%
|
Minimum guaranteed crediting rate of 0.01% to
2.00%
|
|
$
55 |
|
2.56%
|
|
$
553 |
|
1.12%
|
|
$10,548
|
|
2.92%
|
|
$
979 |
|
3.07%
|
No minimum guaranteed crediting
rate4
|
|
$
- |
|
-%
|
|
$
56 |
|
0.55%
|
|
$
1,246 |
|
2.39%
|
|
$
- |
|
-%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum guaranteed crediting rate of 3.51% or
greater
|
|
$607
|
|
4.00%
|
|
$
- |
|
-%
|
|
$
280 |
|
3.66%
|
|
$
- |
|
-%
|
Minimum guaranteed crediting rate of 3.01% to
3.50%
|
|
$
- |
|
-%
|
|
$
203 |
|
3.54%
|
|
$13,800
|
|
3.31%
|
|
$
- |
|
-%
|
Minimum guaranteed crediting rate of 2.01% to
3.00%
|
|
$562
|
|
3.13%
|
|
$1,459
|
|
3.01%
|
|
$
2,195 |
|
2.80%
|
|
$2,336
|
|
3.12%
|
Minimum guaranteed crediting rate of 0.01% to
2.00%
|
|
$
37 |
|
2.79%
|
|
$
539 |
|
1.22%
|
|
$
1,610 |
|
2.47%
|
|
$
919 |
|
3.25%
|
No minimum guaranteed crediting
rate4
|
|
$
- |
|
-%
|
|
$
10 |
|
2.27%
|
|
$
2,882 |
|
2.29%
|
|
$
- |
|
-%
|
1 |
Includes universal life
products and the fixed investment options selected within variable life products. |
2 |
Includes individual fixed
annuity products and the fixed investment options selected within variable annuity and indexed products. |
3 |
Includes group fixed annuity
products. |
4 |
Includes
certain products with a stated minimum guaranteed crediting rate of 0%. |
The Company
attempts to mitigate this risk by managing the maturity and interest-rate sensitivities of certain of its 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, issuing contract amendments with new guaranteed rates on certain group fixed annuity products,
discontinuing the sale of its 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 believed to be adequate to provide returns consistent with management expectations.
A rising interest rate environment could also 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 eight years as of December 31, 2020. 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 its operations, the Company might need to sell assets. The Company mitigates 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 issues a variety of insurance products that expose
the Company to equity risks, including variable annuity products with guaranteed benefit features and fixed life and annuity products with indexed features. 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 and sectors 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 management team 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 management team data to use in computing and declaring interest crediting rates for their lines of business.
The Company’s risk management process includes modeling
both the assets and liabilities over multiple stochastic scenarios, as well as certain deterministic 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
See Note 6 to the audited
statutory financial statements included in the F pages of this report for a discussion of the Company’s use of derivatives to manage interest rate risk.
Characteristics of Interest Rate Sensitive Financial
Instruments
In accordance with SAP and as noted above,
the majority of the Company’s assets and liabilities are carried at amortized cost and not at fair value. As a result, the elements of market risk discussed above do not generally have a significant direct impact on the financial position or
results of operations of the Company. See Note 7 to the audited statutory financial statements included in the F pages of this report for a summary of the Company’s assets and liabilities held at fair value.
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.
Credit Risk
Credit risk is the risk the Company assumes if its debtors,
customers, reinsurers, or other counterparties and intermediaries may be unable or unwilling to pay their contractual obligations when they come due and may manifest itself through the downgrading of credit ratings of counterparties. It is the
Company’s policy to monitor credit exposure within the investment portfolio to enable it to provide for future policy obligations and to minimize undue concentrations of assets in any single geographic area, industry, or entity.
See Note 6 to the audited statutory financial statements
included in the F pages of this report for details regarding the Company’s evaluation of credit risk associated with derivatives.
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, 2020 and 2019, approximately 85% and 87% of separate account assets were invested in equity mutual funds, respectively. Gains and losses in the equity markets result in
corresponding increases and decreases in the Company’s separate account assets and asset fee revenue.
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.
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’s primary guarantees for variable annuity contracts include GMDB and GLWB.
The Company offers certain indexed life insurance and annuity
products for which the policyholders’ interest credits are based on market performance with caps and floors, and which may also include GMDB and GLWB. See Note 2 to the audited statutory financial statements included in the F pages of this
report for further information regarding these indexed features and guarantees.
Equity market and interest rate risk management: These
variable annuity and indexed products and related obligations expose the Company to various market risks, predominately interest rate and equity risk. To mitigate these risks, the Company enters into a variety of derivatives including interest rate
swaps, equity index futures, options and total return swaps. See Note 6 to the audited statutory financial statements included in the F pages of this report for a discussion of the Company’s use of derivatives to manage these risks.
Inflation
The rate of inflation did not have a material effect on the
revenues or operating results of the Company during 2020, 2019 or 2018.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the
Registrant
Name
|
|
Age
|
|
Date
Service Began |
John
L. Carter |
|
58
|
|
February
2013 |
Timothy
G. Frommeyer |
|
56
|
|
January
2009 |
Steven
A. Ginnan |
|
53
|
|
June
2018 |
Eric
S. Henderson |
|
58
|
|
March
2012 |
Mark
R. Thresher |
|
64
|
|
January
2009 |
Kirt
A. Walker |
|
57
|
|
November
2009 |
For biographical information
on Messrs. Carter, Frommeyer, Ginnan, Henderson, 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 |
Gale
V. King |
|
64
|
|
Executive
Vice President-Chief Administrative Officer |
Mark
R. Thresher |
|
64
|
|
Executive
Vice President |
James
R. Fowler |
|
49
|
|
Executive
Vice President-Chief Information Officer |
Tina
Ambrozy |
|
50
|
|
Senior
Vice President-NF Strategic Customer Solutions |
Ann
S. Bair |
|
58
|
|
Senior
Vice President-Marketing Management-Financial Services |
Pamela
A. Biesecker |
|
59
|
|
Senior
Vice President-Head of Taxation |
John
L. Carter |
|
58
|
|
President
and Chief Operating Officer |
Joel
L. Coleman |
|
55
|
|
Senior
Vice President-Chief Investment Officer |
Rae
Ann Dankovic |
|
53
|
|
Senior
Vice President-Nationwide Financial Services Legal |
Steven
M. English |
|
46
|
|
Senior
Vice President-External Affairs |
Timothy
G. Frommeyer |
|
56
|
|
Senior
Vice President-Chief Financial Officer |
Steven
A. Ginnan |
|
53
|
|
Senior
Vice President-Chief Financial Officer-Nationwide Financial |
Mia
S. Hairston |
|
52
|
|
Senior
Vice President-Human Resources – NF |
Craig
A. Hawley |
|
53
|
|
Senior
Vice President-Annuity Distribution |
Eric
S. Henderson |
|
58
|
|
Senior
Vice President-Nationwide Annuity |
David
LaPaul |
|
55
|
|
Senior
Vice President and Treasurer |
Kevin
G. O’Brien |
|
52
|
|
Senior
Vice President-IT Chief Financial Officer, Procurement & BTO |
Juan
J. Perez |
|
40
|
|
Senior
Vice President-Corporate Solutions |
Scott
Ramey |
|
49
|
|
Senior
Vice President-Retirement Plan Sales |
Sandra
L. Rich |
|
60
|
|
Senior
Vice President |
Michael
A. Richardson |
|
52
|
|
Senior
Vice President-Chief Technology Officer - Nationwide Financial |
Kristi
L. Rodriquez |
|
47
|
|
Senior
Vice President-Nationwide Retirement Institute |
Denise
L. Skingle |
|
50
|
|
Senior
Vice President-Finance & Strategy Legal and Corporate Secretary |
Holly
R. Snyder |
|
53
|
|
Senior
Vice President-Nationwide Life |
Michael
S. Spangler |
|
55
|
|
Senior
Vice President-Investment Management Group |
Business experience for each of the individuals listed in the
previous table is set forth below:
Kirt A. Walker has been a Director of NLIC since November 2009 and has been Chief Executive Officer of NMIC since October 2019. Immediately prior to that, Mr. Walker was President and Chief Operating Officer of NLIC from December 2009
to October 2019 and President and Chief Operating Officer-Nationwide Financial for NMIC from October 2009 to October 2019. Previously, he served as President and Chief Operating Officer-Nationwide Insurance for NMIC from February 2009 through
October 2009, Division President-NI Eastern Operations for NMIC from March 2006 to February 2009, and President-Allied Insurance Operations from August 2003 through March 2006. Mr. Walker has been with Nationwide since 1986.
Gale V. King has been Executive Vice President–Chief Administrative Officer of NLIC since July 2015. Previously, she was Senior Vice President–Property and Casualty Human Resources of NMIC from October 2003 to January
2008. Ms. King has been with Nationwide since 1983.
Mark R. Thresher has been
Executive Vice President 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.
James R. Fowler has been
Executive Vice President-Chief Information Officer of NLIC since August 2018 and as well as several other Nationwide companies.
Tina Ambrozy has been Senior
Vice President-NF Strategic Customer Solutions since October 2019. Previously, Ms. Ambrozy was Senior Vice President-NF Sales and Distribution of NLIC from December 2016 to October 2019. Currently, Ms. Ambrozy serves as President of NFS
Distributors, Inc. and Nationwide Financial Assignment Company since December 2016 and President of Nationwide Investment Services Corporation since April 2017. Ms. Ambrozy also serves as Director of other Nationwide companies. Ms. Ambrozy has been
with Nationwide since 1996.
Ann Bair has been Senior Vice President-Marketing Management - Financial Services since October 2020. Ms. Bair has been with Nationwide since 2006 in various marketing roles.
Pamela A. Biesecker has been
Senior Vice President-Head of Taxation of NLIC since May 2007. Currently, she serves as Senior Vice President-Head of Taxation for other Nationwide companies. Ms. Biesecker has been with Nationwide since November 2006.
John L. Carter has been
President and Chief Operating Officer-Nationwide Financial since October 2019. Previously, Mr. Carter was Senior Vice President–Nationwide Retirement Plans of NLIC from April 2013 to October 2019, President of Nationwide Retirement Solutions,
Inc. from July 2015 to October 2019and President and Chief Operating Officer of Nationwide Retirement Solutions, Inc. from July 2013 to July 2015. He has also served as a Director of NLIC since February 2013. Prior to that time, Mr. Carter served as
Senior Vice President of other Nationwide companies from November 2005 to April 2013.
Joel L. Coleman has been
Senior Vice President-Chief Investment Officer since August 2020. Mr. Coleman has held various finance and investment roles. Mr. Coleman has been with Nationwide since June 2020.
Rae Ann Dankovic has been
Senior Vice President-Nationwide Financial Services Legal of NLIC since February 2013. Ms. Dankovic has been with Nationwide since 1993.
Steven M. English has been
Senior Vice President-External Affairs since June 2020. Mr. English has been with Nationwide since 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 2009.
Steven A. Ginnan has been
Senior Vice President-Chief Financial Officer-Nationwide Financial of NLIC and several other Nationwide companies since 2018 and has served as Director of NLIC since June 2018.
Mia Hairston has been Senior
Vice President-Human Resources - NF since December 2019. Ms. Hairston has been with Nationwide since November 1992.
Craig Hawley has been Senior
Vice President-Annuity Distribution since October 2019. Mr. Hawley has been with Nationwide since March 2017 and was previously with Jefferson National Life Insurance Company in a legal role.
Eric S. Henderson has been
Senior Vice President–Nationwide Annuity of NLIC and several other companies within Nationwide since November 2019. He has also served as a Director of NLIC since March 2012. Previously, Mr. Henderson served as Senior Vice
President–Individual Products & Solutions from October 2011 to November 2019, Senior Vice President-Individual Investments Business Head from August 2007 to October 2011 and as Vice President-CFO-Individual Investments from August 2004 to
August 2007.
David LaPaul has been Senior Vice President and Treasurer of NLIC since November 2010. Currently, Mr. LaPaul serves as Senior Vice President and Treasurer for other Nationwide companies. He is also a Director for several Nationwide
companies. Mr. LaPaul has been with Nationwide since 2010.
Kevin O’Brien has been
Senior Vice President-IT Chief Financial Officer, Procurement & BTO since February 2020. Previously, Mr. O’Brien served in various financial roles as well as mergers and acquisitions. Mr. O’Brien has been with Nationwide since April
1998.
Juan J. Perez has been Senior Vice President-Corporate Solutions since February 2021. Mr. Perez has been with Nationwide since 2009.
Scott Ramey has been Senior
Vice President-Retirement Plan Sales since September 2019. Mr. Ramey has been with Nationwide since 2019.
Sandra L. Rich has been Senior
Vice President of NLIC since July 2015. Currently, Ms. Rich serves as Senior Vice President-Chief Compliance Officer of NMIC. Ms. Rich has been with Nationwide since 1999.
Michael A. Richardson has been
Senior Vice President-Chief Technology Officer-Nationwide Financial of NLIC since February 2020. Mr. Richardson has been with Nationwide since 2004.
Kristi L. Rodriquez has been
Senior Vice President-Nationwide Retirement Institute since November 2020. Ms. Rodriquez has been with Nationwide since 2015.
Denise Skingle has been Senior
Vice President-Finance & Strategy Legal and Corporate Secretary since June 2020. Ms. Skingle has been with Nationwide since September 2005.
Holly Snyder has been Senior
Vice President-Nationwide Life since October 2019. Ms. Snyder has been with Nationwide since 2003 in various product, financial, business development roles.
Michael S. Spangler has been
Senior Vice President–Investment Management Group of NLIC since February 2010. Previously, Mr. Spangler was Managing Director at Morgan Stanley from May 2004 to June 2008.
Joseph D. Sprague has been
Senior Vice President-Business/Corporate Solutions of NLIC since October 2019. Mr. Sprague has been with Nationwide since 2006.
Eric Stevenson has been Senior
Vice President-Retirement Plan Sales of NLIC and several other Nationwide companies since January 2019.
EXECUTIVE COMPENSATION
Executive Compensation
Nationwide Life Insurance Company ("NLIC") does not have any
employees of its own, but rather is provided its executive officers and other personnel by Nationwide Mutual Insurance Company ("NMIC"), pursuant to the Third Amended and Restated Cost Sharing Agreement, dated January 1, 2014, among NMIC, Nationwide
Mutual Fire Insurance Company, and their respective direct and indirect subsidiaries and affiliates including NLIC (the "Cost Sharing Agreement"). All personnel providing services to NLIC are employees of NMIC, except for a small number of personnel
who are employees of an NLIC subsidiary. As a result of the Cost Sharing Agreement, NLIC does not determine or pay any compensation to its executive officers or any other personnel providing services to NLIC. Accordingly, NLIC is not responsible for
determining or paying any compensation awarded to, earned by, or paid to its executive officers. NMIC determines and pays the salaries, bonuses, and awards earned by NLIC’s executive officers. NMIC also determines whether and to what extent
NLIC’s executive officers may participate in any employee benefit plans. NLIC does not have any employment agreements or compensation plans with or related to its executive officers and does not provide pension or retirement benefits,
perquisites, or other personal benefits to its executive officers. NLIC does not have arrangements to make payments to its executive officers upon their termination or in the event of a change in control of the company.
Under the Cost Sharing Agreement, NLIC’s executive
officers receive compensation for providing services to multiple Nationwide companies, including NLIC. NLIC reimburses NMIC for the portion of the total compensation allocable to NLIC, as determined by NMIC under the Cost Sharing Agreement. See
Certain Relationships and Related Transactions for more information about the Cost Sharing Agreement and other related party transactions.
Director Compensation
The directors of NLIC are also executive officers of NLIC and
are not separately compensated for their service on the NLIC 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 16, 2021, 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. 1 Nationwide Plaza Columbus, Ohio 43215 |
|
3,814,779
shares |
|
100%
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Related Party Transactions
NLIC 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, office space cost sharing arrangements, and agreements related to reinsurance, cost sharing, tax
sharing, administrative services, marketing, intercompany loans, intercompany repurchases, cash management services and software licensing. Measures used to determine the allocation among companies includes individual employee estimates of time
spent, special cost studies, the number of full-time employees and other methods agreed to by the participating companies.
See Note 12 (Transactions
with Affiliates) to the audited financial statements included in the F pages of this report for further discussion of related party transactions, including amounts specifically allocated to NLIC under the Cost Sharing Agreement.
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.
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. 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; and |
•
|
any
interest or association that interferes with independent exercise of judgment in the best interest of Nationwide. |
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. Each reported possible conflict
of interest is reviewed by the Office of Ethics and addressed by appropriate action. The Office of Ethics submits an annual summary report to the Audit Committee covering each conflict of interest reported by a director or an executive officer who
reports to Mr. Walker, and the disposition of each matter. An annual summary report of the matters disclosed by other elected officers is submitted to the Chief Legal Officer.
NATIONWIDE LIFE INSURANCE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
Independent Auditors Report
Audit Committee of the Board of Directors Nationwide Life Insurance Company:
We have audited the accompanying financial statements of Nationwide Life Insurance Company (the Company), which comprise the statutory statements of
admitted assets, liabilities, capital and surplus as of December 31, 2020 and 2019, and the related statutory statements of operations, changes in capital and surplus, and cash flow for each of the years in the
three-year period ended December 31, 2020, and the related notes to the statutory financial statements (statutory financial statements).
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with statutory accounting practices prescribed
or permitted by the Ohio Department of Insurance (the Department). Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend
on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinions.
Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles
As described in Note 2 to the financial statements, the financial statements are prepared by the Company using statutory accounting practices prescribed
or permitted by the Department, which is a basis of accounting other than U.S. generally accepted accounting principles. Accordingly, the financial statements are not intended to be presented in accordance with U.S. generally accepted
accounting principles.
The effects on the financial statements of the variances between the statutory accounting practices described in Note 2 and
U.S. generally accepted accounting principles, although not reasonably determinable, are presumed to be material.
Adverse Opinion on U.S. Generally Accepted Accounting Principles
In our opinion, because of the significance of the variances between statutory accounting practices and U.S. generally accepted accounting principles
discussed in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles paragraph, the financial statements referred to above do not present fairly, in accordance with U.S. generally accepted accounting principles, the
financial position of the Company as of December 31, 2020 and 2019, or the results of its operations or its cash flows for each of the years in the three-year period ended December 31, 2020.
Opinion on Statutory Basis of Accounting
In our
opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, capital and surplus of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash
flow for each of the years in the three-year period ended December 31, 2020, in accordance with statutory accounting practices prescribed or permitted by the Department described in Note 2.
Other Matter
Our audits were conducted for the purpose
of forming an opinion on the financial statements as a whole. The supplementary information included in Schedule I Consolidated Summary of Investments Other Than Investments in Related Parties,
Schedule III Supplementary Insurance Information, Schedule IV Reinsurance and Schedule V Valuation and Qualifying Accounts is presented for purposes of additional analysis and is
not a required part of the financial statements but is supplementary information required by the Securities and Exchange Commissions Regulation S-X. Such information is the responsibility of
management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial
statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other
additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.
Columbus, Ohio
March 19, 2021
F-2
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions, except share amounts) |
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Admitted assets |
|
|
|
|
|
|
|
|
Invested assets |
|
|
|
|
|
|
|
|
Bonds |
|
$ |
37,207 |
|
|
$ |
35,124 |
|
Stocks |
|
|
2,835 |
|
|
|
2,622 |
|
Mortgage loans, net of allowance |
|
|
7,783 |
|
|
|
7,655 |
|
Policy loans |
|
|
888 |
|
|
|
903 |
|
Derivative assets |
|
|
51 |
|
|
|
94 |
|
Cash, cash equivalents and short-term investments |
|
|
461 |
|
|
|
556 |
|
Securities lending collateral assets |
|
|
101 |
|
|
|
132 |
|
Other invested assets |
|
|
955 |
|
|
|
958 |
|
Total invested assets |
|
$ |
50,281 |
|
|
$ |
48,044 |
|
Accrued investment income |
|
|
692 |
|
|
|
573 |
|
Deferred federal income tax assets, net |
|
|
642 |
|
|
|
601 |
|
Federal income tax receivable |
|
|
11 |
|
|
|
108 |
|
Other assets |
|
|
184 |
|
|
|
152 |
|
Separate account assets |
|
|
114,407 |
|
|
|
105,655 |
|
Total admitted assets |
|
$ |
166,217 |
|
|
$ |
155,133 |
|
|
|
|
|
|
|
|
|
|
Liabilities, capital and surplus |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Future policy benefits and claims |
|
$ |
41,002 |
|
|
$ |
39,139 |
|
Policyholders dividend accumulation |
|
|
430 |
|
|
|
452 |
|
Short-term debt |
|
|
3 |
|
|
|
203 |
|
Asset valuation reserve |
|
|
466 |
|
|
|
479 |
|
Payable for securities |
|
|
177 |
|
|
|
113 |
|
Derivative liabilities |
|
|
87 |
|
|
|
23 |
|
Securities lending payable |
|
|
101 |
|
|
|
132 |
|
Other liabilities |
|
|
1,929 |
|
|
|
1,682 |
|
Accrued transfers from separate accounts |
|
|
(1,490 |
) |
|
|
(1,567 |
) |
Separate account liabilities |
|
|
114,407 |
|
|
|
105,655 |
|
Total liabilities |
|
$ |
157,112 |
|
|
$ |
146,311 |
|
|
|
|
|
|
|
|
|
|
Capital and surplus |
|
|
|
|
|
|
|
|
Capital shares ($1 par value; authorized - 5,000,000 shares, issued and outstanding - 3,814,779
shares) |
|
$ |
4 |
|
|
$ |
4 |
|
Surplus notes |
|
|
1,100 |
|
|
|
1,100 |
|
Additional paid-in capital |
|
|
1,998 |
|
|
|
1,998 |
|
Unassigned surplus |
|
|
6,003 |
|
|
|
5,720 |
|
Total capital and surplus |
|
$ |
9,105 |
|
|
$ |
8,822 |
|
Total liabilities, capital and surplus |
|
$ |
166,217 |
|
|
$ |
155,133 |
|
See accompanying notes to statutory financial statements.
F-3
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Statutory Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and annuity considerations |
|
$ |
10,637 |
|
|
$ |
10,168 |
|
|
$ |
9,829 |
|
Net investment income |
|
|
2,107 |
|
|
|
1,974 |
|
|
|
1,927 |
|
Amortization of interest maintenance reserve |
|
|
- |
|
|
|
(2 |
) |
|
|
(1 |
) |
Other revenues |
|
|
2,372 |
|
|
|
2,312 |
|
|
|
2,240 |
|
Total revenues |
|
$ |
15,116 |
|
|
$ |
14,452 |
|
|
$ |
13,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Benefits to policyholders and beneficiaries |
|
$ |
15,013 |
|
|
$ |
14,782 |
|
|
$ |
13,961 |
|
Increase in reserves for future policy benefits and claims |
|
|
1,627 |
|
|
|
1,501 |
|
|
|
736 |
|
Net transfers from separate accounts |
|
|
(3,544 |
) |
|
|
(3,747 |
) |
|
|
(2,468 |
) |
Commissions |
|
|
646 |
|
|
|
674 |
|
|
|
670 |
|
Dividends to policyholders |
|
|
36 |
|
|
|
38 |
|
|
|
40 |
|
Reserve adjustment on reinsurance assumed |
|
|
(172 |
) |
|
|
(246 |
) |
|
|
(352 |
) |
Other expenses |
|
|
444 |
|
|
|
417 |
|
|
|
398 |
|
Total benefits and expenses |
|
$ |
14,050 |
|
|
$ |
13,419 |
|
|
$ |
12,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income tax expense and net realized capital losses on
investments |
|
$ |
1,066 |
|
|
$ |
1,033 |
|
|
$ |
1,010 |
|
Federal income tax expense (benefit) |
|
|
4 |
|
|
|
(73 |
) |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before net realized capital losses on investments |
|
$ |
1,062 |
|
|
$ |
1,106 |
|
|
$ |
946 |
|
Net realized capital (losses) on investments, net of federal income tax (benefit) expense of $(26), $7 and $8 in 2020,
2019 and 2018, respectively, and excluding $(4), $0 and $(1) of net realized capital (losses) transferred to the interest maintenance reserve in 2020, 2019 and 2018, respectively |
|
|
(575 |
) |
|
|
(477 |
) |
|
|
(235 |
) |
Net income |
|
$ |
487 |
|
|
$ |
629 |
|
|
$ |
711 |
|
See accompanying notes to statutory financial statements.
F-4
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Statutory Statements of Changes in Capital and Surplus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Capital shares |
|
|
Surplus
notes |
|
|
Additional paid-in capital |
|
|
Unassigned surplus |
|
|
Capital and surplus |
|
Balance as of December 31, 2017 |
|
$ |
4 |
|
|
$ |
700 |
|
|
$ |
963 |
|
|
$ |
4,282 |
|
|
$ |
5,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
711 |
|
|
|
711 |
|
Change in asset valuation reserve |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12 |
) |
|
|
(12 |
) |
Change in deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
72 |
|
|
|
72 |
|
Change in net unrealized capital gains and losses, net of tax expense of $88 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(304 |
) |
|
|
(304 |
) |
Change in nonadmitted assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6 |
) |
|
|
(6 |
) |
Capital contribution from Nationwide |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services, Inc. |
|
|
- |
|
|
|
- |
|
|
|
435 |
|
|
|
- |
|
|
|
435 |
|
Balance as of December 31, 2018 |
|
$ |
4 |
|
|
$ |
700 |
|
|
$ |
1,398 |
|
|
$ |
4,743 |
|
|
$ |
6,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
629 |
|
|
|
629 |
|
Change in asset valuation reserve |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(107 |
) |
|
|
(107 |
) |
Change in deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(29 |
) |
|
|
(29 |
) |
Change in net unrealized capital gains and losses, net of tax (benefit) of ($29) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
426 |
|
|
|
426 |
|
Change in nonadmitted assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
59 |
|
|
|
59 |
|
Change in surplus notes |
|
|
- |
|
|
|
400 |
|
|
|
- |
|
|
|
- |
|
|
|
400 |
|
Capital contribution from Nationwide Financial Services, Inc. |
|
|
- |
|
|
|
- |
|
|
|
600 |
|
|
|
- |
|
|
|
600 |
|
Other, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
Balance as of December 31, 2019 |
|
$ |
4 |
|
|
$ |
1,100 |
|
|
$ |
1,998 |
|
|
$ |
5,720 |
|
|
$ |
8,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in reserve on account of change in valuation basis |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
78 |
|
|
|
78 |
|
Cumulative effect of change in accounting
principle |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
5 |
|
Balance as of January 1, 2020 |
|
$ |
4 |
|
|
$ |
1,100 |
|
|
$ |
1,998 |
|
|
$ |
5,803 |
|
|
$ |
8,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
487 |
|
|
|
487 |
|
Change in asset valuation reserve |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13 |
|
|
|
13 |
|
Change in deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41 |
|
|
|
41 |
|
Change in net unrealized capital gains and losses, net of tax (benefit) of ($3) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(313 |
) |
|
|
(313 |
) |
Change in nonadmitted assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(21 |
) |
|
|
(21 |
) |
Other, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
|
|
(7 |
) |
Balance as of December 31, 2020 |
|
$ |
4 |
|
|
$ |
1,100 |
|
|
$ |
1,998 |
|
|
$ |
6,003 |
|
|
$ |
9,105 |
|
See accompanying notes to statutory financial statements.
F-5
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Statutory Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums collected, net of reinsurance |
|
$ |
10,648 |
|
|
$ |
10,184 |
|
|
$ |
9,812 |
|
Net investment income |
|
|
2,034 |
|
|
|
1,825 |
|
|
|
2,041 |
|
Other revenue |
|
|
2,664 |
|
|
|
2,708 |
|
|
|
2,329 |
|
Policy benefits and claims paid |
|
|
(14,886 |
) |
|
|
(14,778 |
) |
|
|
(13,947 |
) |
Commissions, operating expenses and taxes, other than federal income tax paid |
|
|
(885 |
) |
|
|
(847 |
) |
|
|
(710 |
) |
Net transfers from separate accounts |
|
|
3,620 |
|
|
|
3,805 |
|
|
|
2,606 |
|
Policyholders dividends paid |
|
|
(38 |
) |
|
|
(40 |
) |
|
|
(45 |
) |
Federal income taxes recovered |
|
|
121 |
|
|
|
87 |
|
|
|
74 |
|
Net cash provided by operating activities |
|
$ |
3,278 |
|
|
$ |
2,944 |
|
|
$ |
2,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold, matured or repaid: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
3,404 |
|
|
$ |
3,547 |
|
|
$ |
3,366 |
|
Stocks |
|
|
37 |
|
|
|
58 |
|
|
|
1 |
|
Mortgage loans |
|
|
640 |
|
|
|
910 |
|
|
|
580 |
|
Derivative assets |
|
|
- |
|
|
|
4 |
|
|
|
560 |
|
Other assets |
|
|
905 |
|
|
|
381 |
|
|
|
190 |
|
Total investment proceeds |
|
$ |
4,986 |
|
|
$ |
4,900 |
|
|
$ |
4,697 |
|
Cost of investments acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
(5,527 |
) |
|
$ |
(6,327 |
) |
|
$ |
(4,499 |
) |
Stocks |
|
|
(517 |
) |
|
|
(454 |
) |
|
|
(608 |
) |
Mortgage loans |
|
|
(769 |
) |
|
|
(800 |
) |
|
|
(762 |
) |
Derivative assets |
|
|
(580 |
) |
|
|
(687 |
) |
|
|
- |
|
Other assets |
|
|
(837 |
) |
|
|
(340 |
) |
|
|
(610 |
) |
Total investments acquired |
|
$ |
(8,230 |
) |
|
$ |
(8,608 |
) |
|
$ |
(6,479 |
) |
Net decrease in policy loans |
|
|
15 |
|
|
|
2 |
|
|
|
36 |
|
Net cash used in investing activities |
|
$ |
(3,229 |
) |
|
$ |
(3,706 |
) |
|
$ |
(1,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities and miscellaneous sources: |
|
|
|
|
|
|
|
|
|
|
|
|
Surplus notes |
|
$ |
- |
|
|
$ |
400 |
|
|
$ |
- |
|
Capital contribution from Nationwide Financial Services, Inc. |
|
|
- |
|
|
|
600 |
|
|
|
435 |
|
Net change in deposits on deposit-type contract funds and other insurance liabilities |
|
|
160 |
|
|
|
(714 |
) |
|
|
228 |
|
Net change in short-term debt |
|
|
(200 |
) |
|
|
(162 |
) |
|
|
365 |
|
Derivative liabilities |
|
|
65 |
|
|
|
2 |
|
|
|
(135 |
) |
Other cash (used) provided |
|
|
(169 |
) |
|
|
93 |
|
|
|
(172 |
) |
Net cash (used in) provided by financing activities and
miscellaneous |
|
$ |
(144 |
) |
|
$ |
219 |
|
|
$ |
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash, cash equivalents and short-term investments |
|
$ |
(95 |
) |
|
$ |
(543 |
) |
|
$ |
1,135 |
|
Cash, cash equivalents and short-term investments at
beginning of year |
|
|
556 |
|
|
|
1,099 |
|
|
|
(36 |
) |
Cash, cash equivalents and short-term investments at
end of year |
|
$ |
461 |
|
|
$ |
556 |
|
|
$ |
1,099 |
|
Supplemental disclosure of non-cash
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of bond investments |
|
$ |
799 |
|
|
$ |
592 |
|
|
$ |
573 |
|
Intercompany transfer of securities |
|
$ |
- |
|
|
$ |
6 |
|
|
$ |
108 |
|
Intercompany transfer of mortgages |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
155 |
|
See accompanying notes to statutory financial statements.
F-6
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Nationwide Life Insurance Company (NLIC or 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 NLICs common stock are owned by Nationwide Financial Services, Inc.
(NFS), a holding company formed by Nationwide Corporation, a majority-owned subsidiary of NMIC.
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 wide range of products and services, which include fixed and variable individual annuities,
private and public sector group retirement plans, life insurance, investment advisory services and other investment products. The Company is licensed to conduct business in all fifty states, the District of Columbia, Guam, Puerto Rico and the U.S.
Virgin Islands.
The Company sells its products through a diverse distribution network. Unaffiliated entities that sell
the Companys products to their own customer bases include independent broker-dealers, financial institutions, wirehouses and regional firms, pension plan administrators, life insurance agencies, life insurance specialists and registered
investment advisors. Representatives of affiliates who market products directly to a customer base include Nationwide Retirement Solutions, Inc. and Nationwide Financial Network producers, which includes the agency distribution force of the
Companys ultimate parent company, NMIC. NMIC completed the transition away from utilizing the exclusive agent model in 2020. The Company believes its broad range of competitive products, strong distributor relationships and diverse
distribution network position it to compete effectively under various economic conditions.
Wholly-owned subsidiaries of
NLIC as of December 31, 2020 include Nationwide Life and Annuity Insurance Company (NLAIC) and its wholly-owned subsidiaries, Olentangy Reinsurance, LLC (Olentangy) and Nationwide SBL, LLC (NWSBL), Jefferson
National Financial Corporation (JNF) and its wholly-owned subsidiaries, Jefferson National Securities Corporation (JNSC) and Jefferson National Life Insurance Company (JNLIC), and its wholly-owned subsidiary,
Jefferson National Life Insurance Company of New York (JNLNY), Eagle Captive Reinsurance, LLC (Eagle), Nationwide Investment Services Corporation (NISC) and Nationwide Investment Advisor, LLC (NIA).
NLAIC primarily offers fixed indexed annuity contracts and individual annuity contracts, universal life insurance, variable universal life insurance, term life insurance and corporate-owned life insurance on a
non-participating basis. Olentangy is a Vermont domiciled special purpose financial captive insurance company. NWSBL offers a securities-based lending product and is an Ohio limited liability company and
nonadmitted subsidiary. JNF is a distributor of tax-advantaged investing solutions for registered investment advisors, fee-based advisors and the clients they serve.
JNSC is a registered broker-dealer. JNLIC and JNLNY are licensed to underwrite both fixed and variable annuity products. Eagle is an Ohio domiciled special purpose financial captive insurance company. NISC is a registered broker-dealer. NIA is a
registered investment advisor.
The Company is subject to regulation by the insurance departments of states in which it is
domiciled and/or transacts business and undergoes periodic examinations by those departments.
As of December 31,
2020 and 2019, the Company did not have a significant concentration of financial instruments in a single investee, industry or geographic region. Also, the Company did not have a concentration of business transactions with a particular customer,
lender, distribution source, market or geographic region in which a single event could cause a severe impact on the Companys financial position after considering insurance risk that has been transferred to external reinsurers.
(2) |
Summary of Significant Accounting Policies |
Use of Estimates
The preparation of the statutory financial statements requires the Company to make estimates and assumptions that affect the
amounts reported in the statutory financial statements and accompanying notes. Significant estimates include legal and regulatory reserves, certain investment and derivative valuations, future policy benefits and claims, provision for income taxes
and valuation of deferred tax assets. Actual results could differ significantly from those estimates.
Basis of Presentation
The statutory financial statements of the Company are presented on the basis of accounting practices prescribed
or permitted by the Ohio Department of Insurance (the Department). Prescribed statutory accounting practices are those practices incorporated directly or by reference in state laws, regulations and general administrative rules applicable
to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by the domiciliary state regulatory authority.
F-7
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The Companys subsidiary, Eagle, applies a prescribed practice which
values assumed guaranteed minimum death benefits (GMDB) and guaranteed lifetime withdrawal benefits (GLWB) risks on variable annuity contracts from NLIC and GLWB risks on fixed indexed annuity contracts from NLAIC using
separate alternative reserving bases from the Statutory Accounting Principles detailed within the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures manual (NAIC SAP) pursuant to
Ohio Revised Code Chapter 3964 and approved by the Department. The prescribed practice related to NLIC guaranteed risks decreased the Companys subsidiary valuation of Eagle, included in other invested assets on the statutory statements of
admitted assets, liabilities, capital and surplus, by $711 million and $411 million as of December 31, 2020 and 2019, respectively. The prescribed practice related to NLAIC guaranteed risks, increased the Companys subsidiary
valuation of Eagle, included in other invested assets on the statutory statements of admitted assets, liabilities, capital and surplus, by $523 million and $226 million as of December 31, 2020 and 2019, respectively.
Olentangy was granted a permitted practice from the State of Vermont allowing Olentangy to carry the assets placed into a
trust account by Union Hamilton Reinsurance Ltd. (UHRL) on its statutory statements of admitted assets, liabilities, capital and surplus at net admitted asset value. This permitted practice increased NLAICs valuation of this
subsidiary, included in stocks on the statutory statements of admitted assets, liabilities, capital and surplus, by $67 million as of December 31, 2020 and 2019.
There was no difference in the Companys net income as a result of prescribed or permitted practices. If the prescribed
or permitted practices were not applied, the Companys risk-based capital would continue to be above regulatory action levels. A reconciliation of the Companys capital and surplus between NAIC SAP and prescribed and permitted practices is
shown below:
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(in millions) |
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SSAP # |
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F/S Page |
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State of domicile |
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As of December 31, 2020 |
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As of December 31, 2019 |
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Capital and Surplus |
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Statutory Capital and Surplus |
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OH |
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$ |
9,105 |
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$ |
8,822 |
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State Prescribed Practice: |
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Subsidiary valuation - Eagle: NLIC risks ceded |
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52 |
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3 |
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OH |
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711 |
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411 |
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Subsidiary valuation - Eagle: NLAIC risks ceded |
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52 |
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3 |
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OH |
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(523 |
) |
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(226 |
) |
State Permitted Practice: |
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Subsidiary valuation - Olentangy |
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20 |
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3 |
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VT |
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(67 |
) |
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(67 |
) |
Statutory Capital and Surplus, NAIC SAP |
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$ |
9,226 |
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$ |
8,940 |
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Statutory accounting practices vary in some respects from U.S. generally accepted accounting
principles (GAAP), including the following practices:
Financial Statements
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● |
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Statutory financial statements are prepared using language and groupings substantially the same as the annual
statements of the Company filed with the NAIC and state regulatory authorities; |
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● |
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assets must be included in the statutory statements of admitted assets, liabilities, capital and surplus at
net admitted asset value and nonadmitted assets are excluded through a charge to capital and surplus; |
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● |
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an asset valuation reserve (AVR) is established in accordance with the NAIC Annual Statement
Instructions for Life and Accident and Health Insurance Companies and is reported as a liability, and changes in the AVR are reported directly in capital and surplus; |
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● |
|
an interest maintenance reserve (IMR) is established in accordance with the NAIC Annual Statement
Instructions for Life and Accident and Health Insurance Companies and is reported as a liability, and the amortization of the IMR is reported as revenue; |
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● |
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the expense allowance associated with statutory reserving practices for investment contracts held in the
separate accounts is reported in the general account as a negative liability; |
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● |
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accounting for contingencies requires recording a liability at the midpoint of a range of estimated possible
outcomes when no better estimate in the range exists; |
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surplus notes are accounted for as a component of capital and surplus; |
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costs related to successful policy acquisitions are charged to operations in the year incurred;
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● |
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negative cash balances are reported as negative assets; |
F-8
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
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● |
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certain income and expense items are charged or credited directly to capital and surplus;
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● |
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amounts on deposit in internal qualified cash pools are reported as cash equivalents; |
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the statutory statements of cash flows are presented on the basis prescribed by the NAIC; and
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● |
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the statutory financial statements do not include accumulated other comprehensive income.
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Future Policy Benefits and Claims
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Deposits to universal life contracts, investment contracts and limited payment contracts are included in
revenue; and |
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future policy benefit reserves are based on statutory requirements. |
Reinsurance Ceded
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Certain assets and liabilities are reported net of ceded reinsurance balances; and |
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● |
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provision is made for amounts receivable and outstanding for more than 90 days through a charge to capital and
surplus. |
Investments
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Investments in bonds are generally stated at amortized cost, except those with an NAIC designation of
6, which are stated at the lower of amortized cost or fair value; |
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investments in preferred stocks are generally stated at amortized cost, except those with an NAIC designation
of 4 through 6, which are stated at the lower of amortized cost or fair value; |
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other-than-temporary impairments on bonds, excluding loan-backed and structured securities, are measured based
on fair value and are not reversible; |
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the proportional amortized cost method is utilized to determine the liquidation value of Low-Income Housing Tax Credit Funds (Tax Credit Funds); |
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admitted subsidiary, controlled and affiliated entities are not consolidated; rather, those investments are
generally carried at audited statutory capital and surplus or GAAP equity, as appropriate, and are recorded as an equity investment in stocks or other invested assets; |
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equity in earnings of subsidiary companies is recognized directly in capital and surplus as net unrealized
capital gains or losses, while dividends from unconsolidated companies are recorded in operations as net investment income; |
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undistributed earnings and valuation adjustments from investments in joint ventures, partnerships and limited
liability companies are recognized directly in capital and surplus as net unrealized capital gains or losses; |
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changes in non-specific mortgage loan reserves are measured under an
incurred loss model and are recorded directly in capital and surplus as net unrealized capital gains or losses; and |
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gains on sales of investments between affiliated companies representing economic transactions are deferred at
the parent level until the related assets are paid down or an external sale occurs. |
Separate Accounts
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Assets and liabilities of guaranteed separate accounts are reported as separate account assets and separate
account liabilities, respectively. |
Derivative Instruments
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Derivatives used in effective hedging transactions are valued in a manner consistent with the hedged asset or
liability; |
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unrealized gains and losses on derivatives that are not considered to be effective hedges are charged to
capital and surplus; |
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interest earned on derivatives is charged to net investment income; and |
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embedded derivatives are not separated from the host contract and accounted for separately as a derivative
instrument. |
F-9
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Goodwill
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Goodwill is limited to 10% of the prior reporting periods adjusted statutory surplus, with any goodwill
in excess of this limitation nonadmitted through a charge to surplus; and |
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goodwill is amortized and charged to surplus. |
Federal Income Taxes
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● |
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Changes in deferred federal income taxes are recognized directly in capital and surplus with limitations on
the amount of deferred tax assets that can be reflected as an admitted asset (15% of surplus); and |
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uncertain tax positions are subject to a more likely than not standard for federal and foreign
income tax loss contingencies only. |
Nonadmitted Assets
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In addition to the nonadmitted assets described above, certain other assets are nonadmitted and charged
directly to capital and surplus. These include prepaid assets, certain software, disallowed IMR and other receivables outstanding for more than 90 days. |
The financial information included herein is prepared and presented in accordance with SAP prescribed or permitted by the
Department. Certain differences exist between SAP and GAAP, which are presumed to be material.
Revenues and Benefits
Life insurance premiums are recognized as revenue over the premium paying period of the related policies when due. Annuity
considerations are recognized as revenue when received. Health insurance premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Policy benefits and claims that are expensed include interest
credited to policy account balances, benefits and claims incurred in the period in excess of related policy reserves and other changes in future policy benefits.
Future Policy Benefits and Claims
Future policy benefits for traditional products are based on statutory mortality and interest requirements without
consideration of withdrawals. The principal statutory mortality tables and interest assumptions used on policies in force are the 1958 Commissioners Standard Ordinary (CSO) table at interest rates of 2.5%, 3.0%, 3.5%, 4.0% and
4.5%, the 1941 CSO table at an interest rate of 2.5%, the 1980 CSO table at interest rates of 4.0%, 4.5%, 5.0% and 5.5%, the 2001 CSO table at an interest rate of 4.0% and 3.5% and the 2017 CSO table at an interest rate of 3.5% and 4.5%. Beginning
January 1, 2020, the Company has applied principles-based reserving to all new individual life business. For business subject to principles-based reserving, additional reserves may be held where the deterministic and/or stochastic reserves are
in excess of net premium reserves, as defined by Valuation Manual 20, Requirements for Principle-Based Reserves for Life Products (VM-20).
Future policy benefits for universal life and variable universal life contracts have been calculated based on
participants contributions plus interest credited on any funds in the fixed account less applicable contract charges. These policies have been adjusted for possible future surrender charges in accordance with the Commissioners Reserve
Valuation Method (CRVM). For business subject to principles-based reserving, the Company has calculated reserves under VM-20.
Future policy benefits for annuity products have been established based on contract term, interest rates and various contract
provisions. Individual deferred annuity contracts issued in 1990 and after have been adjusted for possible future surrender charges in accordance with the Commissioners Annuity Reserve Valuation Method (CARVM).
As of 2019, the Company calculated its reserves for variable annuity products with guaranteed minimum death, accumulation and
withdrawal benefits and other contracts involving guaranteed benefits similar to those offered with variable annuities under the standard scenario of Actuarial Guideline XLIII CARVM for Variable Annuities, which exceeded the stochastic
70th percentile Conditional Tail Expectations scenario. Effective January 1, 2020, the Company changed its reserve valuation basis for variable annuities due to changes to Valuation Manual 21, Requirements for Principle-Based Reserves for
Variable Annuities (VM-21) and as a result, the Company calculated its reserves using a stochastic reserve, which is floored at the cash surrender value.
The aggregate reserves for individual accident and health policies consist of active life reserves, disabled life reserves and
unearned premium reserves. The active life reserves for disability income are reserved for on the net level basis, at a 3.0% interest rate, using either the 1964 Commissioners Disability Table (for policies issued prior to 1982) or the 1985
Commissioners Individual Disability Table A (for policies issued after 1981). The active life reserves for major medical insurance (both scheduled and unscheduled benefits) are based on the benefit ratio method for policies issued after 1981.
F-10
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The active life reserves for accident and health policies are reserved for on
the net level basis, at a 3.0% interest rate, using either the 1956 Inter-Company Hospital-Surgical tables, the 1974 Medical Expense tables or the 1959 Accidental Death Benefits table.
The disabled life reserves for accident and health policies are calculated using the 1985 Commissioners Individual
Disability Table A at a 3.0% interest rate. Unearned premium reserves are based on the actual gross premiums and actual days.
The aggregate reserves for group accident and health and franchise accident and health policies consist of disabled life
reserves and unearned premium reserves. Reserves for benefits payable on disabled life claims are based on the 2012 Group Long-Term Disability (GLTD) Valuation Table, at varying interest rates of 2.75% - 6.0%, for group policies and the 1987
Commissioners Group Disability Table, at varying interest rates of 2.75% - 10.25%, for franchise policies.
Future
policy benefits and claims for group long-term disability policies are the present value (discounted between 2.75% and 6.00%) of amounts not yet due on reported claims and an estimate of amounts to be paid on incurred but unreported claims. Future
policy benefits and claims on other group health policies are not discounted.
The Company issues fixed and floating rate
funding agreements to the Federal Home Loan Bank of Cincinnati (FHLB). The liabilities for such funding agreements are treated as annuities under Ohio law for life insurance companies and recorded in future policy benefits and claims.
Refer to Note 9 for additional details.
Separate Accounts
Separate account assets represent contractholders funds that have been legally segregated into accounts with specific
investment objectives. Separate account assets are primarily recorded at fair value, with the value of separate account liabilities set to equal the fair value of separate account assets. Separate account assets are primarily comprised of public,
privately-registered and non-registered mutual funds, whose fair value is primarily based on the funds net asset value. Other separate account assets are recorded at fair value based on the methodology
that is applicable to the underlying assets. In limited circumstances, other separate account assets are recorded at book value when the policyholder does not participate in the underlying portfolio experience.
Separate account liabilities, in conjunction with accrued transfers from separate accounts, represent contractholders
funds adjusted for possible future surrender charges in accordance with the CARVM and the CRVM, respectively. The difference between full account value and CARVM/CRVM is reflected in accrued transfers to separate accounts, as prescribed by the NAIC,
in the statutory statements of admitted assets, liabilities, capital and surplus. The annual change in the difference between full account value and CARVM/CRVM and its applicable federal income tax is reflected in the statutory statements of
operations as part of the net transfers to separate accounts and federal income tax, respectively.
Retained Assets
The Company does not retain beneficiary assets. During a death benefit claim, the death benefit settlement method
is payment to the beneficiary in the form of a check or electronic funds transfer.
Investments
Bonds and stocks of unaffiliated companies. Bonds are generally stated at amortized cost, except those with an
NAIC designation of 6, which are stated at the lower of amortized cost or fair value. Preferred stocks are generally stated at amortized cost, except those with an NAIC designation of 4 through 6, which are stated
at the lower of amortized cost or fair value. Common stocks are stated at fair value. Changes in the fair value of bonds and stocks stated at fair value are charged to capital and surplus.
Loan-backed and structured securities, which are included in bonds in the statutory financial statements, are stated in a
manner consistent with the bond guidelines, but with additional consideration given to the special valuation rules implemented by the NAIC applicable to residential mortgage-backed securities that are not backed by U.S. government agencies,
commercial mortgage-backed securities and certain other structured securities. Under these guidelines, an initial and adjusted NAIC designation is determined for each security. The initial NAIC designation, which takes into consideration the
securitys amortized cost relative to an NAIC-prescribed valuation matrix, is used to determine the reporting basis (i.e., amortized cost or lower of amortized cost or fair value).
Interest income is recognized when earned, while dividends are recognized when declared. The Company nonadmits investment
income due and accrued when amounts are over 90 days past due.
F-11
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
For investments in loan-backed and structured securities, the Company
recognizes income and amortizes discounts and premiums using the effective-yield method based on prepayment assumptions, generally obtained using a model provided by a third-party vendor, 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 in the period
the estimates are revised. All other investment income is recorded using the effective-yield method without anticipating the impact of prepayments.
Purchases and sales of bonds and stocks are recorded on the trade date, with the exception of private placement bonds, which
are recorded on the funding date. Realized gains and losses are determined on a specific identification method on the trade date.
Independent pricing services are most often utilized, and compared to pricing from additional sources, to determine the fair
value of bonds and stocks for which market quotations or quotations on comparable securities are available. For these bonds and stocks, the Company obtains the pricing services methodologies and classifies the investments accordingly in the
fair value hierarchy.
A corporate pricing matrix is used in valuing certain corporate bonds. The corporate pricing matrix
was developed using publicly available spreads for privately-placed corporate bonds with varying weighted average lives and credit quality ratings. The weighted average life and credit quality rating of a particular bond 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 bond. The estimated market yield and
other relevant factors are then used to estimate the fair value of the particular bond.
Non-binding broker quotes are also utilized to determine the fair value of certain
bonds when deemed appropriate or when valuations are not available from independent pricing services or a corporate pricing matrix. These bonds are classified with the lowest priority 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. Inputs used in the development of prices are not
provided to the Company by the brokers as the brokers often do not provide the necessary transparency into their quotes and methodologies. At least annually, the Company performs reviews and tests to ensure that quotes are a reasonable estimate of
the investments fair value. Price movements of broker quotes are subject to validation and require approval from the Companys management. Management uses its knowledge of the investment and current market conditions to determine if the
price is indicative of the investments fair value.
For all bonds, the Company considers its ability and intent to
hold the security for a period of time sufficient to allow for the anticipated recovery in value, the expected recovery of principal and interest and the extent to which the fair value has been less than amortized cost. If the decline in fair value
to below amortized cost is determined to be other-than-temporary, a realized loss is recorded equal to the difference between the amortized cost of the investment and its fair value.
The Company periodically reviews loan-backed and structured securities in an unrealized loss position by comparing the present
value of cash flows, including estimated prepayments, expected to be collected from the security to the amortized cost basis of the security. If the present value of cash flows expected to be collected, discounted at the securitys effective
interest rate, is less than the amortized cost basis of the security, the impairment is considered other-than-temporary and a realized loss is recorded.
All other bonds in an unrealized loss position are periodically reviewed to determine if a decline in fair value to below
amortized cost is other-than-temporary. Factors considered during this review include timing and amount of expected cash flows, ability of the issuer to meet its obligations, financial condition and future prospects of the issuer, amount and quality
of any underlying collateral and current economic and industry conditions that may impact an issuer.
Stocks may
experience other-than-temporary impairment based on the prospects for full recovery in value in a reasonable period of time and the Companys ability and intent to hold the stock to recovery. If a stock is determined to be
other-than-temporarily impaired, a realized loss is recorded equal to the difference between the cost basis of the investment and its fair value.
F-12
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Investments in subsidiaries. The investment in the
Companys wholly-owned insurance subsidiaries, NLAIC and Eagle, are carried using the equity method of accounting applicable to U.S. insurance subsidiary, controlled and affiliated (SCA) entities. This requires the investment to be
recorded based on the value of its underlying audited statutory surplus. Furthermore, the equity method of accounting would be discontinued if the investment is reduced to zero, unless the Company has guaranteed obligations of the subsidiary or
otherwise committed to provide further financial support. In accordance with the look through provisions of Statements of Statutory Accounting Principles (SSAP) No. 97, Investments in Subsidiary, Controlled and
Affiliated Entities, the valuation of JNF, an unaudited downstream noninsurance holding company, is based on the individual audited SCA entities owned by the holding company. Additionally, all non-affiliated
liabilities, commitments, contingencies, guarantees or obligations of the holding company are reflected in the determination of the carrying value of the investments. The Companys investment in NISC and NIA, wholly-owned non-insurance subsidiaries, are carried using the equity method of accounting applicable to U.S. non-insurance subsidiary, controlled and affiliated entities. This requires
the investment to be recorded based on its underlying audited GAAP equity. Investments in NLAIC, JNF and NISC are included in stocks, and the investment in Eagle is included in other invested assets on the statutory statements of admitted assets,
liabilities, capital and surplus.
Mortgage loans, net of allowance. The Company holds commercial
mortgage loans that are collateralized by properties throughout the U.S. Mortgage loans are held at unpaid principal balance adjusted for premiums and discounts, less a valuation allowance. The Company also holds commercial mortgage loans of these
property types that are under development. Mortgage loans under development are collateralized by the borrowers common stock.
As part of the underwriting process, specific guidelines are followed to ensure the initial quality of a new mortgage loan.
Third-party appraisals are obtained to support loaned amounts as the loans are collateral dependent or guaranteed.
The
collectability and value of a mortgage loan is based on the ability of the borrower to repay and/or the value of the underlying collateral. Many of the Companys 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. Loans are considered delinquent when contractual payments are 90 days past due.
Mortgage loans require a loan-specific reserve 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 requires a loan-specific reserve, a provision for loss is established equal to the difference between the
carrying value and the fair value of the collateral less costs to sell. Loan-specific reserve charges are recorded in net realized capital gains and losses. In the event a loan-specific reserve charge is reversed, the recovery is also recorded in
net realized capital gains and losses.
In addition to the loan-specific reserves, the Company maintains a non-specific reserve based primarily on loan surveillance categories and property type classes, which reflects managements best estimates of probable credit losses inherent in the portfolio of loans without
specific reserves as of the date of the statutory statements of admitted assets, liabilities, capital and surplus. Managements 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 group of borrowers ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current
economic conditions and other relevant factors. Non-specific reserve changes are recorded directly in capital and surplus as net unrealized capital gains and losses.
Management evaluates the credit quality of individual mortgage loans and the portfolio as a whole through a number of loan
quality measurements, including, but not limited to, loan-to-value (LTV) and debt service coverage (DSC) ratios. The LTV ratio 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. These loan quality measurements contribute to managements assessment of relative credit risk in the mortgage loan portfolio. Based on underwriting criteria and ongoing assessment of the properties performance, management believes
the amounts, net of valuation allowance, are collectible. This process identifies the risk profile and potential for loss individually and in the aggregate for the commercial mortgage loan portfolios. These factors are updated and evaluated at least
annually. Due to the nature of the collateral underlying mortgage loans under development, these loans are not evaluated using the LTV and DSC ratios described above.
Interest income on performing mortgage loans is recognized in net investment income 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 restored to accrual status when the principal and interest is current and it is determined the future principal and interest payments are probable or the loan is modified.
Policy loans. Policy loans, which are collateralized by the related insurance policy, are held 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.
F-13
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Cash and cash equivalents. Cash and cash equivalents include
highly liquid investments with original maturities of less than three months and, effective December 31, 2020, amounts on deposit in internal qualified cash pools. The Company and various affiliates maintain 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 in the internal qualified cash pool.
Short-term investments. Short-term investments consist primarily of government agency discount notes with
maturities of twelve months or less at acquisition. Short-term investments also include outstanding promissory notes with initial maturity dates of one-year or less with certain affiliates. The Company carries
short-term investments at amortized cost, which approximates fair value. As of December 31, 2019, short-term investments also included amounts on deposit with NCMC.
Other invested assets. Other invested assets consist primarily of alternative investments in private
equity funds, private debt funds, tax credit funds, real estate partnerships and the investment in Eagle. Except for investments in certain tax credit funds, these investments are recorded using the equity method of accounting. Changes in carrying
value as a result of the equity method are reflected as net unrealized capital gains and losses as a direct adjustment to capital and surplus. Gains and losses are generally recognized through income at the time of disposal or when operating
distributions are received. Partnership interests in tax credit funds are held at amortized cost with amortization charged to net investment income over the period in which the tax benefits, primarily credits, are earned. Tax credits are recorded as
an offset to tax expense in the period utilized.
The Company has sold $2.3 billion, $2.2 billion and
$2.0 billion in Tax Credit Funds to unrelated third parties with outstanding guarantees as of December 31, 2020, 2019 and 2018, respectively. The Company has guaranteed after-tax benefits to the
third-party investors through periods ending in 2037. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit 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 $1.4 billion, but the Company does not anticipate making any material payments related to the guarantees. The Companys 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, (3) the Company oversees the asset
management of the deals and (4) changes in tax laws are explicitly excluded from the Companys guarantees of after-tax benefits.
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 in 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 the 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 invested assets of the Company. Periodically, the Company may receive non-cash collateral, which would be recorded
off-balance sheet. The Company recognizes loaned securities in bonds. A securities lending payable is recorded in other liabilities for the amount of cash collateral received. If the fair value of the
collateral received (cash and/or securities) is less than the fair value of the securities loaned, the shortfall is nonadmitted. Net income received from securities lending activities is included in net investment income. Because the borrower or the
Company may terminate a securities lending transaction at any time, if loans are terminated in advance of the reinvested collateral asset maturities, the Company would repay its securities lending obligations from operating cash flows or the
proceeds of sales from its investment portfolio, which includes significant liquid securities.
Derivative Instruments
The Company uses derivative instruments to manage exposures and mitigate risks primarily associated with interest rates,
equity markets and foreign currency. These derivative instruments primarily include interest rate swaps, cross-currency swaps, futures and options.
Derivative instruments used in hedging transactions considered to be effective hedges are reported in a manner consistent with
the hedged items. Derivative instruments used in hedging transactions that do not meet or no longer meet the criteria of an effective hedge are accounted for at fair value with changes in fair value recorded in capital and surplus as unrealized
gains or losses.
The fair value of derivative instruments is determined using various valuation techniques relying
predominantly on observable market inputs. These inputs include interest rate swap curves, credit spreads, interest rates, counterparty credit risk, equity volatility and equity index levels.
F-14
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The Companys 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 forms of cash and marketable securities. Non-cash collateral received is recorded off-balance sheet.
Cash flows and payment accruals on derivatives are recorded in net investment income.
Fair Value Measurements
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
Companys 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 assets and liabilities held at fair value in the
statutory statements of admitted assets, liabilities, capital and surplus 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. Primary inputs to this valuation technique may include
comparative trades, bid/asks, interest rate movements, U.S. Treasury rates, London Interbank Offered Rate (LIBOR), prime rates, cash flows, maturity dates, call ability, estimated prepayments and/or underlying collateral values.
Level 3. Prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement. Inputs reflect managements best estimates of 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. Primary inputs to this valuation technique include broker quotes and comparative trades.
The Company reviews its fair value hierarchy classifications for 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.
Asset Valuation Reserve
The Company maintains an AVR as prescribed by the NAIC for the purpose of offsetting potential credit related investment
losses on each invested asset category, excluding cash, policy loans and income receivable. The AVR contains a separate component for each category of invested assets. The change in AVR is charged or credited directly to capital and surplus.
F-15
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Interest Maintenance Reserve
The Company records an IMR as prescribed by the NAIC, which represents the net deferral for interest-related gains or losses
arising from the sale of certain investments, such as bonds, mortgage loans and loan-backed and structured securities sold. The IMR is applied as follows:
|
|
|
for bonds, the designation from the NAIC Capital Markets and Investments Analysis Office must not have changed
more than one designation between the beginning of the holding period and the date of sale; |
|
|
|
the bond must never have been classified as a default security; |
|
|
|
for mortgage loans, during the prior two years, they must not have had interest more than 90 days past due,
been in the process of foreclosure or in the course of voluntary conveyance, nor had restructured terms; and |
|
|
|
for loan-backed and structured securities, all interest-related other-than-temporary impairments and
interest-related realized gains or losses on sales of the securities. |
The realized gains or losses, net
of related federal income tax, from the applicable bonds and mortgage loans sold, have been removed from the net realized gain or loss amounts and established as a net liability. This liability is amortized into income such that the amount of each
capital gain or loss amortized in a given year is based on the excess of the amount of income which would have been reported that year, if the asset had not been disposed of over the amount of income which would have been reported had the asset been
repurchased at its sale price. In the event the unamortized IMR liability balance is negative, the balance is reclassified as an asset and fully nonadmitted. The Company utilizes the grouped method for amortization. Under the grouped method, the
liability is amortized into income over the remaining period to expected maturity based on the groupings of the individual securities into five-year bands.
Goodwill
For companies whose operations are primarily insurance related, goodwill is the excess of the cost to acquire a company over
the Companys share of the statutory book value of the acquired entity. Goodwill is recorded in stocks in the statutory statements of admitted assets, liabilities and surplus. Goodwill is amortized on a straight-line basis over the period of
economic benefit, not to exceed ten years, with a corresponding charge to surplus.
Unamortized goodwill totaled
$100 million and $116 million as of December 31, 2020 and 2019, respectively. All unamortized goodwill as of December 31, 2020 and 2019, is related to the acquisition of JNF, which represents 55% and 69%, respectively, of
JNFs gross SCA value. All goodwill was admitted as of December 31, 2020 and 2019. Amortization of goodwill totaled $16 million for the years ended December 31, 2020, 2019 and 2018. No goodwill was impaired during these periods.
Federal Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets,
net of any nonadmitted portion and statutory valuation allowance, and deferred tax liabilities, are recognized for the expected future tax consequences attributable to differences between the statutory financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. 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. The change in deferred taxes, excluding the impact of taxes on unrealized capital gains or losses and nonadmitted deferred taxes, is charged directly to surplus.
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 statutory financial statements, which could be significant.
Tax reserves are reviewed regularly and are adjusted as events occur that the Company 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, release of administrative guidance or rendering of a court decision affecting a particular tax issue. The Company believes its tax reserves reasonably provide for potential assessments that may result from
Internal Revenue Service (IRS) examinations and other tax-related matters for all open tax years.
The Company is included in the NMIC consolidated federal income tax return.
F-16
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Reinsurance Ceded
The Company cedes insurance to other companies in order to limit potential losses and to diversify its exposures. Such
agreements do not relieve the Company of 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 are reported in the statutory statements of admitted assets, liabilities, capital and surplus on a net basis within the related future
policy benefits and claims of the Company.
Participating Business
Participating business, which refers to policies that participate in profits through policyholder dividends, represented
approximately 4% of the Companys life insurance in force in 2020 and 2019, and 50% of the number of life insurance policies in force in 2020 and 2019. The provision for policyholder dividends was based on the respective years dividend
scales, as approved by the Board of Directors. Policyholder dividends are recognized when declared. No additional income was allocated to participating policyholders during 2020 and 2019.
Accounting Changes and Corrections of Errors
During 2020, the Company identified and corrected an error in the variable annuity ceded premium calculation under the
intercompany 100% coinsurance agreement with Eagle. The error resulted in an understatement of ceded premiums for the years ended December 31, 2019 and 2018. In accordance with SSAP No. 3, Accounting Changes and Corrections of Errors, the
total prior period correction of $9 million was reported in 2020 as a negative adjustment to unassigned funds (surplus) and consisted of $11 million of ceded premiums, offset by $2 million of taxes.
Effective January 1, 2020, the Company changed its reserve valuation basis for variable annuities due to changes to VM-21. As a result of this change, the Company records stochastic reserves, floored at the cash surrender value, instead of reserves using the standard scenario previously required under Actuarial Guideline XLIII
CARVM for Variable Annuities. The impacts of the valuation basis change were recognized as of January 1, 2020, resulting in an increase to statutory capital and surplus of $78 million. In addition, the Company changed its
reserve valuation basis for stable value wraps covering certain group life insurance policies from Separate Accounts Funding Guaranteed Minimum Benefits Under Group Contracts, to VM-21. There was no impact to
statutory capital and surplus as a result of this change.
During 2020, the Company modified its approach used to schedule
the reversals of its deferred tax assets for policyholder reserves under SSAP No. 101, Income Taxes (SSAP No. 101). Prior to 2020 the Company scheduled the reversals of its deferred tax assets for policyholder reserves by
estimating the reserve reversal using the aggregate policyholder reserve. As of January 1, 2020, the Company is now taking a disaggregate approach and calculates reversal of the deferred tax assets for policyholder reserves on a product-by-product basis. The new method is more precise and better reflects how the deferred tax assets for policyholder reserves moves with the underlying reserve liability.
SSAP No. 101 permits a company to modify its scheduling method so long as the modification is treated as change in accounting principle. The impact of the change increases the Companys net admitted deferred tax asset $6 million and
$5 million as of December 31, 2020 and January 1, 2020, respectively, with a commensurate increase in capital and surplus. There was no impact on net income.
Recently Adopted Accounting Standard
In December 2020, the Company adopted revisions to SSAP No. 2R, Cash, Cash Equivalents, Drafts and Short-Term Investments
(SSAP No. 2R). The adopted revisions require internal cash pooling arrangements to meet certain criteria to be considered qualified cash pools, with investments in qualifying pools reported as cash equivalents on the statutory statements
of admitted assets, liabilities, capital and surplus. The Companys cash pool meets the criteria to be considered a qualified cash pool under SSAP No. 2R. The internal cash pooling arrangement with NCMC was historically classified as short-term
investments, resulting in a change in classification to cash equivalents.
COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus (COVID-19) a pandemic. The COVID-19 pandemic conditions create financial market volatility and uncertainty regarding whether and when certain customer behaviors
will return to historical patterns, including sales of new and retention of existing policies, life insurance mortality and credit allowance exposure. Although impacting certain sales and revenues, none of the aforementioned items have had a
material impact on the overall financial condition of the Company. The extent to which the COVID-19 pandemic may impact the Companys ongoing operations and financial condition will depend on future
developments that are evolving and uncertain.
F-17
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Subsequent Events
The Company evaluated subsequent events through March 19, 2021, the date the statutory financial statements were issued.
The Department is in the process of implementing Ohio Administrative Code 3901-1-67, Alternative Derivative and Reserve Accounting Practices (the Rule). Once adopted and implemented, the Rule will constitute a prescribed practice as contemplated by the NAIC SAP. The
prescribed practice is to allow Ohio-domiciled insurance companies to utilize certain alternative derivative and reserve accounting practices for eligible derivative instruments and indexed products, respectively, in order to better align the
measurement of indexed product reserves and the derivatives that hedge them. Effective March 15, 2021, the Department allows Ohio-domiciled insurance companies the option to immediately utilize the alternative derivative and reserve accounting
practices contemplated by the Rule. The Company plans to adopt the prescribed practice allowed under the Rule effective January 1, 2021. The Company continues to evaluate the impact of the adoption.
On March 9, 2021, the Companys Board of Directors declared an ordinary dividend of up to $550 million payable
to NFS on or around March 24, 2021.
F-18
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
(3) |
Analysis of Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics
|
The following table summarizes the analysis of individual annuities actuarial reserves by
withdrawal characteristics, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
General account |
|
|
Separate account with guarantees |
|
|
Separate account non- guaranteed |
|
|
Total |
|
|
% of Total |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
190 |
|
|
$ |
162 |
|
|
$ |
- |
|
|
$ |
352 |
|
|
|
0 |
% |
At book value less current surrender charge of 5% or more |
|
|
219 |
|
|
|
- |
|
|
|
- |
|
|
|
219 |
|
|
|
0 |
% |
At fair value |
|
|
- |
|
|
|
- |
|
|
|
65,990 |
|
|
|
65,990 |
|
|
|
92 |
% |
Total with market value adjustment or at fair value |
|
$ |
409 |
|
|
$ |
162 |
|
|
$ |
65,990 |
|
|
$ |
66,561 |
|
|
|
92 |
% |
At book value without adjustment (minimal or no charge or adjustment) |
|
|
3,480 |
|
|
|
- |
|
|
|
8 |
|
|
|
3,488 |
|
|
|
5 |
% |
Not subject to discretionary withdrawal |
|
|
1,755 |
|
|
|
- |
|
|
|
62 |
|
|
|
1,817 |
|
|
|
3 |
% |
Total, gross |
|
$ |
5,644 |
|
|
$ |
162 |
|
|
$ |
66,060 |
|
|
$ |
71,866 |
|
|
|
100 |
% |
Less: Reinsurance ceded |
|
|
(112 |
) |
|
|
- |
|
|
|
- |
|
|
|
(112 |
) |
|
|
|
|
Total, net |
|
$ |
5,532 |
|
|
$ |
162 |
|
|
$ |
66,060 |
|
|
$ |
71,754 |
|
|
|
|
|
Amount included in Subject to discretionary withdrawal at book value less current surrender charge of 5% or more that will move to
Subject to discretionary withdrawal at book value without adjustment (minimal or no charge or adjustment) |
|
$ |
67 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
19 |
|
|
$ |
181 |
|
|
$ |
29 |
|
|
$ |
229 |
|
|
|
0 |
% |
At book value less current surrender charge of 5% or more |
|
|
270 |
|
|
|
- |
|
|
|
- |
|
|
|
270 |
|
|
|
1 |
% |
At fair value |
|
|
- |
|
|
|
- |
|
|
|
61,535 |
|
|
|
61,535 |
|
|
|
91 |
% |
Total with market value adjustment or at fair value |
|
$ |
289 |
|
|
$ |
181 |
|
|
$ |
61,564 |
|
|
$ |
62,034 |
|
|
|
92 |
% |
At book value without adjustment (minimal or no charge or adjustment) |
|
|
3,587 |
|
|
|
- |
|
|
|
11 |
|
|
|
3,598 |
|
|
|
5 |
% |
Not subject to discretionary withdrawal |
|
|
1,761 |
|
|
|
- |
|
|
|
56 |
|
|
|
1,817 |
|
|
|
3 |
% |
Total, gross |
|
$ |
5,637 |
|
|
$ |
181 |
|
|
$ |
61,631 |
|
|
$ |
67,449 |
|
|
|
100 |
% |
Less: Reinsurance ceded |
|
|
(104 |
) |
|
|
- |
|
|
|
- |
|
|
|
(104 |
) |
|
|
|
|
Total, net |
|
$ |
5,533 |
|
|
$ |
181 |
|
|
$ |
61,631 |
|
|
$ |
67,345 |
|
|
|
|
|
Amount included in Subject to discretionary withdrawal at book value less current surrender charge of 5% or more that will move to
Subject to discretionary withdrawal at book value without adjustment (minimal or no charge or adjustment) |
|
$ |
128 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
128 |
|
|
|
|
|
F-19
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the analysis of group annuities actuarial
reserves by withdrawal characteristics, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
General account |
|
|
Separate account with guarantees |
|
|
Separate account non- guaranteed |
|
|
Total |
|
|
% of Total |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
17,393 |
|
|
$ |
2,483 |
|
|
$ |
- |
|
|
$ |
19,876 |
|
|
|
43 |
% |
At book value less current surrender charge of 5% or more |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
0 |
% |
At fair value |
|
|
- |
|
|
|
- |
|
|
|
19,670 |
|
|
|
19,670 |
|
|
|
43 |
% |
Total with market value adjustment or at fair value |
|
$ |
17,396 |
|
|
$ |
2,483 |
|
|
$ |
19,670 |
|
|
$ |
39,549 |
|
|
|
86 |
% |
At book value without adjustment (minimal or no charge or adjustment) |
|
|
6,000 |
|
|
|
- |
|
|
|
- |
|
|
|
6,000 |
|
|
|
13 |
% |
Not subject to discretionary withdrawal |
|
|
591 |
|
|
|
- |
|
|
|
3 |
|
|
|
594 |
|
|
|
1 |
% |
Total, gross |
|
$ |
23,987 |
|
|
$ |
2,483 |
|
|
$ |
19,673 |
|
|
$ |
46,143 |
|
|
|
100 |
% |
Less: Reinsurance ceded |
|
|
(58 |
) |
|
|
- |
|
|
|
- |
|
|
|
(58 |
) |
|
|
|
|
Total, net |
|
$ |
23,929 |
|
|
$ |
2,483 |
|
|
$ |
19,673 |
|
|
$ |
46,085 |
|
|
|
|
|
Amount included in Subject to discretionary withdrawal at book value less current surrender charge of 5% or more that will move to
Subject to discretionary withdrawal at book value without adjustment (minimal or no charge or adjustment) |
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
16,485 |
|
|
$ |
2,166 |
|
|
$ |
- |
|
|
$ |
18,651 |
|
|
|
44 |
% |
At book value less current surrender charge of 5% or more |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
0 |
% |
At fair value |
|
|
- |
|
|
|
- |
|
|
|
18,284 |
|
|
|
18,284 |
|
|
|
43 |
% |
Total with market value adjustment or at fair value |
|
$ |
16,486 |
|
|
$ |
2,166 |
|
|
$ |
18,284 |
|
|
$ |
36,936 |
|
|
|
87 |
% |
At book value without adjustment (minimal or no charge or adjustment) |
|
|
5,354 |
|
|
|
- |
|
|
|
- |
|
|
|
5,354 |
|
|
|
12 |
% |
Not subject to discretionary withdrawal |
|
|
584 |
|
|
|
2 |
|
|
|
- |
|
|
|
586 |
|
|
|
1 |
% |
Total, gross |
|
$ |
22,424 |
|
|
$ |
2,168 |
|
|
$ |
18,284 |
|
|
$ |
42,876 |
|
|
|
100 |
% |
Less: Reinsurance ceded |
|
|
(60 |
) |
|
|
- |
|
|
|
- |
|
|
|
(60 |
) |
|
|
|
|
Total, net |
|
$ |
22,364 |
|
|
$ |
2,168 |
|
|
$ |
18,284 |
|
|
$ |
42,816 |
|
|
|
|
|
Amount included in Subject to discretionary withdrawal at book value less current surrender charge of 5% or more that will move to
Subject to discretionary withdrawal at book value without adjustment (minimal or no charge or adjustment) |
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
|
|
|
|
F-20
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the analysis of deposit-type contracts and
other liabilities without life or disability contingencies by withdrawal characteristics, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
General account |
|
|
Separate account non- guaranteed |
|
|
Total |
|
|
% of Total |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
2 |
|
|
|
0 |
% |
At fair value |
|
|
12 |
|
|
|
- |
|
|
|
12 |
|
|
|
0 |
% |
Total with market value adjustment or at fair value |
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
14 |
|
|
|
0 |
% |
At book value without adjustment (minimal or no charge or adjustment) |
|
|
728 |
|
|
|
3 |
|
|
|
731 |
|
|
|
22 |
% |
Not subject to discretionary withdrawal |
|
|
2,540 |
|
|
|
13 |
|
|
|
2,553 |
|
|
|
78 |
% |
Total, gross |
|
$ |
3,282 |
|
|
$ |
16 |
|
|
$ |
3,298 |
|
|
|
100 |
% |
Less: Reinsurance ceded |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Total, net |
|
$ |
3,282 |
|
|
$ |
16 |
|
|
$ |
3,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
3 |
|
|
|
0 |
% |
At fair value |
|
|
13 |
|
|
|
- |
|
|
|
13 |
|
|
|
0 |
% |
Total with market value adjustment or at fair value |
|
$ |
16 |
|
|
$ |
- |
|
|
$ |
16 |
|
|
|
0 |
% |
At book value without adjustment (minimal or no charge or adjustment) |
|
|
775 |
|
|
|
4 |
|
|
|
779 |
|
|
|
25 |
% |
Not subject to discretionary withdrawal |
|
|
2,331 |
|
|
|
12 |
|
|
|
2,343 |
|
|
|
75 |
% |
Total, gross |
|
$ |
3,122 |
|
|
$ |
16 |
|
|
$ |
3,138 |
|
|
|
100 |
% |
Less: Reinsurance ceded |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Total, net |
|
$ |
3,122 |
|
|
$ |
16 |
|
|
$ |
3,138 |
|
|
|
|
|
The following table is a reconciliation of total annuity actuarial reserves and deposit fund
liabilities, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
Life, accident and health annual statement: |
|
|
|
|
|
|
|
|
Annuities, net (excluding supplemental contracts with life contingencies) |
|
$ |
29,445 |
|
|
$ |
27,880 |
|
Supplemental contracts with life contingencies, net |
|
|
16 |
|
|
|
17 |
|
Deposit-type contracts |
|
|
3,282 |
|
|
|
3,122 |
|
Subtotal |
|
$ |
32,743 |
|
|
$ |
31,019 |
|
Separate accounts annual statement: |
|
|
|
|
|
|
|
|
Annuities, net (excluding supplemental contracts with life contingencies) |
|
$ |
88,378 |
|
|
$ |
82,264 |
|
Other contract deposit funds |
|
|
16 |
|
|
|
16 |
|
Subtotal |
|
$ |
88,394 |
|
|
$ |
82,280 |
|
Total annuity actuarial reserves and deposit fund
liabilities, net |
|
$ |
121,137 |
|
|
$ |
113,299 |
|
F-21
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the analysis of life actuarial reserves by
withdrawal characteristics, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General account |
|
|
Separate account - nonguaranteed1 |
|
(in millions) |
|
Account value |
|
|
Cash value |
|
|
Reserve |
|
|
Account value |
|
|
Cash value |
|
|
Reserve |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal, surrender values or policy loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term policies with cash value |
|
$ |
- |
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Universal life |
|
|
2,585 |
|
|
|
2,600 |
|
|
|
2,764 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Universal life with secondary guarantees |
|
|
360 |
|
|
|
288 |
|
|
|
720 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Indexed universal life with secondary guarantees |
|
|
179 |
|
|
|
130 |
|
|
|
191 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other permanent cash value life insurance |
|
|
- |
|
|
|
1,300 |
|
|
|
2,607 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Variable life |
|
|
1,887 |
|
|
|
1,965 |
|
|
|
2,060 |
|
|
|
24,591 |
|
|
|
24,581 |
|
|
|
24,582 |
|
Miscellaneous reserves |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Subtotal |
|
$ |
5,011 |
|
|
$ |
6,294 |
|
|
$ |
8,353 |
|
|
$ |
24,591 |
|
|
$ |
24,581 |
|
|
$ |
24,591 |
|
Not subject to discretionary withdrawal or no cash value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term policies without cash value |
|
|
- |
|
|
|
- |
|
|
|
275 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Accidental death benefits |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Disability - active lives |
|
|
- |
|
|
|
- |
|
|
|
13 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Disability - disabled lives |
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Miscellaneous reserves |
|
|
- |
|
|
|
- |
|
|
|
30 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total, gross |
|
$ |
5,011 |
|
|
$ |
6,294 |
|
|
$ |
8,730 |
|
|
$ |
24,591 |
|
|
$ |
24,581 |
|
|
$ |
24,591 |
|
Less: reinsurance ceded |
|
|
(10 |
) |
|
|
(10 |
) |
|
|
(240 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total, net |
|
$ |
5,001 |
|
|
$ |
6,284 |
|
|
$ |
8,490 |
|
|
$ |
24,591 |
|
|
$ |
24,581 |
|
|
$ |
24,591 |
|
|
1 |
In 2020, the classification of certain group life insurance policies was changed from separate accounts with
guarantees to separate accounts nonguaranteed as a result of a change in the reserve valuation basis, as described in Note 2. |
F-22
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General account |
|
|
Separate account -
nonguaranteed |
|
(in millions) |
|
Account value |
|
|
Cash value |
|
|
Reserve |
|
|
Account value |
|
|
Cash value |
|
|
Reserve |
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to discretionary withdrawal, surrender values or policy loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term policies with cash value |
|
$ |
- |
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Universal life |
|
|
2,549 |
|
|
|
2,561 |
|
|
|
2,728 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Universal life with secondary guarantees |
|
|
335 |
|
|
|
265 |
|
|
|
613 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Indexed universal life with secondary guarantees |
|
|
140 |
|
|
|
99 |
|
|
|
146 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other permanent cash value life insurance |
|
|
- |
|
|
|
1,328 |
|
|
|
2,676 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Variable life |
|
|
1,903 |
|
|
|
1,992 |
|
|
|
2,080 |
|
|
|
21,853 |
|
|
|
21,840 |
|
|
|
19,596 |
|
Subtotal |
|
$ |
4,927 |
|
|
$ |
6,256 |
|
|
$ |
8,254 |
|
|
$ |
21,853 |
|
|
$ |
21,840 |
|
|
$ |
19,596 |
|
Not subject to discretionary withdrawal or no cash value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term policies without cash value |
|
|
- |
|
|
|
- |
|
|
|
299 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Accidental death benefits |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Disability - active lives |
|
|
- |
|
|
|
- |
|
|
|
12 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Disability - disabled lives |
|
|
- |
|
|
|
- |
|
|
|
57 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Miscellaneous reserves |
|
|
- |
|
|
|
- |
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total, gross |
|
$ |
4,927 |
|
|
$ |
6,256 |
|
|
$ |
8,659 |
|
|
$ |
21,853 |
|
|
$ |
21,840 |
|
|
$ |
19,596 |
|
Less: reinsurance ceded |
|
|
(10 |
) |
|
|
(10 |
) |
|
|
(272 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total, net |
|
$ |
4,917 |
|
|
$ |
6,246 |
|
|
$ |
8,387 |
|
|
$ |
21,853 |
|
|
$ |
21,840 |
|
|
$ |
19,596 |
|
The following table is a reconciliation of life actuarial reserves, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
Life, accident and health annual statement: |
|
|
|
|
|
|
|
|
Life Insurance, net |
|
$ |
8,400 |
|
|
$ |
8,292 |
|
Accidental death benefits, net |
|
|
1 |
|
|
|
1 |
|
Disability - active lives, net |
|
|
12 |
|
|
|
10 |
|
Disability - disabled lives, net |
|
|
51 |
|
|
|
52 |
|
Miscellaneous reserves, net |
|
|
26 |
|
|
|
32 |
|
Subtotal |
|
$ |
8,490 |
|
|
$ |
8,387 |
|
Separate accounts annual statement: |
|
|
|
|
|
|
|
|
Life insurance1 |
|
$ |
24,884 |
|
|
$ |
22,138 |
|
Miscellaneous reserves |
|
|
9 |
|
|
|
5 |
|
Subtotal |
|
$ |
24,893 |
|
|
$ |
22,143 |
|
Total life actuarial reserves, net |
|
$ |
33,383 |
|
|
$ |
30,530 |
|
|
1 |
In 2020, life insurance account value, cash value and reserve includes separate accounts with guarantees of
$302 million for universal life. In 2019, life insurance account value, cash value and reserve includes separate accounts with guarantees of $297 million and $2.2 billion for universal life and variable life, respectively.
|
F-23
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Direct Premium Written by Managing General Agents and Third Party
Administrators
The following table summarizes direct premium written by managing general agents and third party
administrators as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Managing general agent/ third party reserve |
|
FEIN number |
|
|
Exclusive contract |
|
Types of business
written |
|
Types of
authority granted1 |
|
Total Direct Premium |
|
Meridian Management Group, LLC |
|
|
22-3713596 |
|
|
Not Exclusive |
|
Accident & health |
|
U / P / B |
|
$ |
42 |
|
RMTS - Manufacturers & Traders Trust Co. |
|
|
20-1049240 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
26 |
|
Fringe Insurance Benefits, Inc. |
|
|
74-2616364 |
|
|
Not Exclusive |
|
Accident & health |
|
B / P / U |
|
|
41 |
|
Star Line Group |
|
|
04-3499188 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
7 |
|
AccuRisk Solutions, LLC |
|
|
31-1777676 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P /U |
|
|
90 |
|
Merchants Benefit Administration, Inc. |
|
|
86-0875918 |
|
|
Exclusive |
|
Accident & health |
|
B / C / CA / P |
|
|
14 |
|
Roundstone Management, Ltd. |
|
|
27-0371422 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
75 |
|
Gilsbar, Inc. |
|
|
72-0519951 |
|
|
Not Exclusive |
|
Accident & health |
|
B / P / U |
|
|
75 |
|
Matrix |
|
|
01-0544915 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
19 |
|
IRC |
|
|
74-2824053 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
28 |
|
TMS RE Inc |
|
|
65-0644164 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
70 |
|
United Group Programs Inc. |
|
|
59-1896277 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
9 |
|
USMGU |
|
|
46-4619917 |
|
|
Not Exclusive |
|
Accident & health |
|
C / CA / B / P / U |
|
|
1 |
|
Total Direct
Premiums Written and Produced |
|
|
|
$ |
497 |
|
|
1 |
Authority code key includes: C claims payment, CA claims adjustment, B- binding authority, P-premium collection, U- underwriting. |
F-24
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The Companys separate account statement includes assets legally insulated from the general account as of the dates
indicated, attributed to the following product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
December 31, 2019 |
|
(in millions) |
|
Separate account
assets legally insulated |
|
|
Separate account
assets
(not legally insulated) |
|
|
Separate account
assets legally insulated |
|
|
Separate account
assets
(not legally insulated) |
|
Product / Transaction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual annuities |
|
$ |
71,875 |
|
|
$ |
- |
|
|
$ |
67,222 |
|
|
$ |
- |
|
Group annuities |
|
|
17,550 |
|
|
|
- |
|
|
|
16,187 |
|
|
|
- |
|
Life insurance |
|
|
24,982 |
|
|
|
- |
|
|
|
22,246 |
|
|
|
- |
|
Total |
|
$ |
114,407 |
|
|
$ |
- |
|
|
$ |
105,655 |
|
|
$ |
- |
|
The following table summarizes amounts paid towards separate account guarantees by the general
account and related risk charges paid by the separate account for the years ended:
|
|
|
|
|
|
|
|
|
(in millions) |
|
Total paid toward separate account guarantees |
|
|
Risk charges paid to
general account |
|
2020 |
|
$ |
26 |
|
|
$ |
631 |
|
2019 |
|
$ |
58 |
|
|
$ |
612 |
|
2018 |
|
$ |
18 |
|
|
$ |
594 |
|
2017 |
|
$ |
13 |
|
|
$ |
559 |
|
2016 |
|
$ |
36 |
|
|
$ |
507 |
|
The Company does not engage in securities lending transactions within its separate accounts.
Most separate accounts held by the Company relate to individual and group variable annuity and variable universal life
insurance contracts of a non-guaranteed return nature. The net investment experience of the separate accounts is credited directly to the contract holder and can be positive or negative. The individual
variable annuity contracts generally provide an incidental death benefit of the greater of account value or premium paid (net of prior withdrawals). However, many individual variable annuity contracts also provide death benefits equal to
(i) the most recent fifth-year anniversary account value, (ii) the highest account value on any previous anniversary, (iii) premiums paid increased 5% or certain combinations of these, all adjusted for prior withdrawals. The death
benefit and cash value under the variable universal life policies may vary with the investment performance of the underlying investments in the separate accounts. The assets and liabilities of these separate accounts are carried at fair value and
are non-guaranteed.
Certain other separate accounts offered by the Company
contain groups of variable universal life policies wherein the assets supporting account values on the underlying policies reside in Private Placement Separate Accounts. They provide a quarterly interest rate based on a crediting formula that
reflects the market value to book value ratio of the investments, investment portfolio yield and a specified duration.
Certain other separate accounts relate to a guaranteed term option, which provides a guaranteed interest rate that is paid
over certain maturity durations ranging from three to ten years, so long as certain conditions are met. If amounts allocated to the guaranteed term option are distributed prior to the maturity period, a market value adjustment can be assessed. The
assets and liabilities of these separate accounts are carried at fair value.
Another separate account offered by the
Company contains a group of universal life policies wherein the assets supporting the account values on the underlying policies reside in a Private Placement Separate Account. It provides an annual interest rate guarantee, subject to a minimum
guarantee of 3%. The interest rate declared each year reflects the anticipated investment experience of the account. The business has been included as a nonindexed guarantee less than or equal to 4%.
F-25
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following tables summarize the separate account reserves of the Company,
as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Indexed |
|
|
Nonindexed guarantee less than or equal to 4% |
|
|
Nonindexed guarantee more than 4% |
|
|
Nonguaranteed separate accounts |
|
|
Total |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, considerations or deposits |
|
$ |
- |
|
|
$ |
417 |
|
|
$ |
- |
|
|
$ |
5,392 |
|
|
$ |
5,809 |
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For accounts with assets at: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
- |
|
|
$ |
2,480 |
|
|
$ |
166 |
|
|
$ |
110,340 |
|
|
$ |
112,986 |
|
Amortized cost |
|
|
- |
|
|
|
302 |
|
|
|
- |
|
|
|
- |
|
|
|
302 |
|
Total
reserves |
|
$ |
- |
|
|
$ |
2,782 |
|
|
$ |
166 |
|
|
$ |
110,340 |
|
|
$ |
113,288 |
|
By withdrawal characteristics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
- |
|
|
$ |
2,480 |
|
|
$ |
166 |
|
|
$ |
- |
|
|
$ |
2,646 |
|
At book value without market value adjustment and with current surrender charge of 5% or
more |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
At fair value |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
110,252 |
|
|
|
110,252 |
|
At book value without market value adjustment and with
current surrender charge less than 5% |
|
|
- |
|
|
|
302 |
|
|
|
- |
|
|
|
11 |
|
|
|
313 |
|
Subtotal |
|
$ |
- |
|
|
$ |
2,782 |
|
|
$ |
166 |
|
|
$ |
110,263 |
|
|
$ |
113,211 |
|
Not subject to discretionary withdrawal |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
77 |
|
|
|
77 |
|
Total reserves1 |
|
$ |
- |
|
|
$ |
2,782 |
|
|
$ |
166 |
|
|
$ |
110,340 |
|
|
$ |
113,288 |
|
|
1 |
The total reserves balance does not equal the liabilities related to separate accounts of
$114.4 billion in the statutory statements of admitted assets, liabilities, capital and surplus by $1.1 billion, due to an adjustment for CARVM/CRVM reserves and other liabilities that have not been allocated to the categories outlined
above. |
F-26
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonindexed |
|
|
Nonindexed |
|
|
|
|
|
|
|
|
|
|
|
|
guarantee |
|
|
guarantee |
|
|
Nonguaranteed |
|
|
|
|
|
|
|
|
|
less than or |
|
|
more than |
|
|
separate |
|
|
|
|
(in millions) |
|
Indexed |
|
|
equal to 4% |
|
|
4% |
|
|
accounts |
|
|
Total |
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, considerations or deposits |
|
$ |
- |
|
|
$ |
135 |
|
|
$ |
- |
|
|
$ |
6,007 |
|
|
$ |
6,142 |
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For accounts with assets at: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
- |
|
|
$ |
2,202 |
|
|
$ |
146 |
|
|
$ |
99,612 |
|
|
$ |
101,960 |
|
Amortized cost |
|
|
- |
|
|
|
2,463 |
|
|
|
- |
|
|
|
- |
|
|
|
2,463 |
|
Total reserves |
|
$ |
- |
|
|
$ |
4,665 |
|
|
$ |
146 |
|
|
$ |
99,612 |
|
|
$ |
104,423 |
|
By withdrawal characteristics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With market value adjustment |
|
$ |
- |
|
|
$ |
2,202 |
|
|
$ |
146 |
|
|
$ |
29 |
|
|
$ |
2,377 |
|
At book value without market value adjustment and with current surrender charge of 5% or
more |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
At fair value |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
99,499 |
|
|
|
99,499 |
|
At book value without market value adjustment and with
current surrender charge less than 5% |
|
|
- |
|
|
|
2,463 |
|
|
|
- |
|
|
|
13 |
|
|
|
2,476 |
|
Subtotal |
|
$ |
- |
|
|
$ |
4,665 |
|
|
$ |
146 |
|
|
$ |
99,541 |
|
|
$ |
104,352 |
|
Not subject to discretionary withdrawal |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71 |
|
|
|
71 |
|
Total reserves1 |
|
$ |
- |
|
|
$ |
4,665 |
|
|
$ |
146 |
|
|
$ |
99,612 |
|
|
$ |
104,423 |
|
1 |
The total reserves balance does not equal the liabilities related to separate accounts of
$105.7 billion in the statutory statements of admitted assets, liabilities, capital and surplus by $1.2 billion, due to an adjustment for CARVM/CRVM reserves and other liabilities that have not been allocated to the categories outlined
above. |
The following table is a reconciliation of net transfers to (from) separate accounts, as of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
Transfers as reported in the statutory statements of operations of the separate accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to separate accounts |
|
$ |
5,809 |
|
|
$ |
6,142 |
|
|
$ |
6,392 |
|
Transfers from separate accounts |
|
|
(8,921) |
|
|
|
(9,470) |
|
|
|
(8,461) |
|
Net transfers from separate accounts |
|
$ |
(3,112) |
|
|
$ |
(3,328) |
|
|
$ |
(2,069) |
|
Reconciling adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Exchange accounts offsetting in the general account |
|
|
(337) |
|
|
|
(321) |
|
|
|
(303) |
|
Fees not included in general account transfers |
|
|
(67) |
|
|
|
(68) |
|
|
|
(58) |
|
Other miscellaneous adjustments not included in the
general account balance |
|
|
(28) |
|
|
|
(30) |
|
|
|
(38) |
|
Transfers as reported in the statutory statements of
operations |
|
$ |
(3,544) |
|
|
$ |
(3,747) |
|
|
$ |
(2,468) |
|
F-27
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Bonds and Stocks
The following table summarizes the carrying value, the excess of fair value over carrying value, the excess of carrying value
over fair value and the fair value of bonds and stocks, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Carrying value |
|
|
Fair value in excess of carrying value |
|
|
Carrying value in excess of fair value |
|
|
Fair value |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
$ |
7 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7 |
|
States, territories and possessions |
|
|
370 |
|
|
|
59 |
|
|
|
- |
|
|
|
429 |
|
Political subdivisions |
|
|
343 |
|
|
|
71 |
|
|
|
- |
|
|
|
414 |
|
Special revenues |
|
|
2,763 |
|
|
|
564 |
|
|
|
- |
|
|
|
3,327 |
|
Industrial and miscellaneous |
|
|
26,583 |
|
|
|
3,656 |
|
|
|
46 |
|
|
|
30,193 |
|
Loan-backed and structured securities |
|
|
7,141 |
|
|
|
336 |
|
|
|
37 |
|
|
|
7,440 |
|
Total bonds |
|
$ |
37,207 |
|
|
$ |
4,686 |
|
|
$ |
83 |
|
|
$ |
41,810 |
|
Common stocks unaffiliated |
|
$ |
142 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
142 |
|
Preferred stocks unaffiliated |
|
|
97 |
|
|
|
12 |
|
|
|
- |
|
|
|
109 |
|
Total unaffiliated stocks1 |
|
$ |
239 |
|
|
$ |
12 |
|
|
$ |
- |
|
|
$ |
251 |
|
Total bonds and unaffiliated stocks1 |
|
$ |
37,446 |
|
|
$ |
4,698 |
|
|
$ |
83 |
|
|
$ |
42,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
$ |
7 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7 |
|
States, territories and possessions |
|
|
398 |
|
|
|
42 |
|
|
|
1 |
|
|
|
439 |
|
Political subdivisions |
|
|
344 |
|
|
|
52 |
|
|
|
1 |
|
|
|
395 |
|
Special revenues |
|
|
2,702 |
|
|
|
370 |
|
|
|
5 |
|
|
|
3,067 |
|
Industrial and miscellaneous |
|
|
26,240 |
|
|
|
2,012 |
|
|
|
65 |
|
|
|
28,187 |
|
Loan-backed and structured securities |
|
|
5,433 |
|
|
|
238 |
|
|
|
31 |
|
|
|
5,640 |
|
Total bonds |
|
$ |
35,124 |
|
|
$ |
2,714 |
|
|
$ |
103 |
|
|
$ |
37,735 |
|
Common stocks unaffiliated |
|
$ |
181 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
181 |
|
Preferred stocks unaffiliated |
|
|
55 |
|
|
|
4 |
|
|
|
- |
|
|
|
59 |
|
Total unaffiliated stocks1 |
|
$ |
236 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
240 |
|
Total bonds and unaffiliated stocks1 |
|
$ |
35,360 |
|
|
$ |
2,718 |
|
|
$ |
103 |
|
|
$ |
37,975 |
|
1 |
Excludes affiliated common stocks with a carrying value of $2.6 billion and $2.4 billion as of
December 31, 2020 and 2019, respectively. Affiliated common stocks includes investment in NLAIC and JNF of $2.4 billion and $180 million as of December 31, 2020, respectively, and $2.2 billion and $169 million as of
December 31, 2019, respectively. |
The carrying value of bonds on deposit with various states as
required by law or special escrow agreement was $3 million as of December 31, 2020 and 2019.
F-28
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the carrying value and fair value of bonds, by
contractual maturity, as of December 31, 2020. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without early redemption penalties:
|
|
|
|
|
|
|
|
|
(in millions) |
|
Carrying value |
|
|
Fair value |
|
Bonds: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
1,314 |
|
|
$ |
1,331 |
|
Due after one year through five years |
|
|
7,925 |
|
|
|
8,441 |
|
Due after five years through ten years |
|
|
9,450 |
|
|
|
10,557 |
|
Due after ten years |
|
|
11,377 |
|
|
|
14,041 |
|
Total bonds excluding loan-backed and structured securities |
|
$ |
30,066 |
|
|
$ |
34,370 |
|
Loan-backed and structured securities |
|
|
7,141 |
|
|
|
7,440 |
|
Total bonds |
|
$ |
37,207 |
|
|
$ |
41,810 |
|
The following table summarizes the fair value and unrealized losses on bonds and stocks
(amount by which cost or amortized cost exceeds fair value), for which other-than-temporary declines in value have not been recognized, based on the amount of time each type of bond or stock has been in an unrealized loss position, as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to one year |
|
|
More than one year |
|
|
Total |
|
(in millions) |
|
Fair
value |
|
|
Unrealized
losses |
|
|
Fair
value |
|
|
Unrealized
losses |
|
|
Fair
value |
|
|
Unrealized
losses |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, territories and possessions |
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
Special revenues |
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
Industrial and miscellaneous |
|
|
636 |
|
|
|
27 |
|
|
|
408 |
|
|
|
38 |
|
|
|
1,044 |
|
|
|
65 |
|
Loan-backed and structured securities |
|
|
1,454 |
|
|
|
15 |
|
|
|
870 |
|
|
|
23 |
|
|
|
2,324 |
|
|
|
38 |
|
Total bonds |
|
$ |
2,105 |
|
|
$ |
42 |
|
|
$ |
1,278 |
|
|
$ |
61 |
|
|
$ |
3,383 |
|
|
$ |
103 |
|
Common stocks unaffiliated |
|
|
21 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
4 |
|
Preferred stocks unaffiliated |
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
Total bonds and stocks |
|
$ |
2,135 |
|
|
$ |
46 |
|
|
$ |
1,278 |
|
|
$ |
61 |
|
|
$ |
3,413 |
|
|
$ |
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, territories and possessions |
|
$ |
23 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
1 |
|
Political subdivisions |
|
|
65 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
|
|
1 |
|
Special revenues |
|
|
397 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
397 |
|
|
|
5 |
|
Industrial and miscellaneous |
|
|
852 |
|
|
|
9 |
|
|
|
911 |
|
|
|
103 |
|
|
|
1,763 |
|
|
|
112 |
|
Loan-backed and structured securities |
|
|
704 |
|
|
|
6 |
|
|
|
1,124 |
|
|
|
28 |
|
|
|
1,828 |
|
|
|
34 |
|
Total bonds |
|
$ |
2,041 |
|
|
$ |
22 |
|
|
$ |
2,035 |
|
|
$ |
131 |
|
|
$ |
4,076 |
|
|
$ |
153 |
|
Common stocks unaffiliated |
|
|
32 |
|
|
|
- |
|
|
|
16 |
|
|
|
1 |
|
|
|
48 |
|
|
|
1 |
|
Preferred stocks unaffiliated |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
Total bonds and stocks |
|
$ |
2,074 |
|
|
$ |
22 |
|
|
$ |
2,051 |
|
|
$ |
132 |
|
|
$ |
4,125 |
|
|
$ |
154 |
|
As of December 31, 2020, management evaluated securities in an unrealized loss position
and all non-marketable securities for impairment. As of the reporting date, the Company has the intent and ability to hold these securities until the fair value recovers, which may be maturity, and therefore,
does not consider the securities to be other-than-temporarily impaired.
There was no intent to sell other-than-temporary
impairments on loan-backed and structured securities for the years ended December 31, 2020 and 2019.
F-29
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Mortgage Loans, Net of Allowance
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, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
Amortized cost: |
|
|
|
|
|
|
|
|
Loans with non-specific reserves |
|
$ |
7,819 |
|
|
$ |
7,675 |
|
Loans with specific reserves |
|
|
12 |
|
|
|
14 |
|
Total amortized cost |
|
$ |
7,831 |
|
|
$ |
7,689 |
|
Valuation allowance: |
|
|
|
|
|
|
|
|
Non-specific reserves |
|
$ |
45 |
|
|
$ |
31 |
|
Specific reserves |
|
|
3 |
|
|
|
3 |
|
Total valuation allowance1 |
|
$ |
48 |
|
|
$ |
34 |
|
Mortgage loans, net of allowance |
|
$ |
7,783 |
|
|
$ |
7,655 |
|
|
1 |
Changes in the valuation allowance are due to current period provisions. These changes in the valuation
allowance for the years ended December 31, 2020, 2019, and 2018 were immaterial. |
As of
December 31, 2020 and 2019, the Companys mortgage loans classified as delinquent and/or in non-accrual status were immaterial in relation to the total mortgage loan portfolio.
The following table summarizes the LTV ratio and DSC ratio of the mortgage loan portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV ratio |
|
|
|
DSC ratio |
(in millions) |
|
Less than 90% |
|
90% or greater |
|
Total |
|
|
|
Greater than 1.00 |
|
Less than or equal to 1.00 |
|
Total |
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartment |
|
|
$ |
2,988 |
|
|
|
$ |
25 |
|
|
|
$ |
3,013 |
|
|
|
|
|
$ |
2,993 |
|
|
|
$ |
20 |
|
|
|
$ |
3,013 |
|
Industrial |
|
|
|
1,026 |
|
|
|
|
- |
|
|
|
|
1,026 |
|
|
|
|
|
|
1,005 |
|
|
|
|
21 |
|
|
|
|
1,026 |
|
Office |
|
|
|
1,307 |
|
|
|
|
- |
|
|
|
|
1,307 |
|
|
|
|
|
|
1,304 |
|
|
|
|
3 |
|
|
|
|
1,307 |
|
Retail |
|
|
|
2,155 |
|
|
|
|
27 |
|
|
|
|
2,182 |
|
|
|
|
|
|
2,169 |
|
|
|
|
13 |
|
|
|
|
2,182 |
|
Other |
|
|
|
218 |
|
|
|
|
- |
|
|
|
|
218 |
|
|
|
|
|
|
218 |
|
|
|
|
- |
|
|
|
|
218 |
|
Total1 |
|
|
$ |
7,694 |
|
|
|
$ |
52 |
|
|
|
$ |
7,746 |
|
|
|
|
|
$ |
7,689 |
|
|
|
$ |
57 |
|
|
|
$ |
7,746 |
|
Weighted average DSC ratio |
|
|
|
2.21 |
|
|
|
|
1.52 |
|
|
|
|
2.20 |
|
|
|
|
|
|
2.21 |
|
|
|
|
0.91 |
|
|
|
|
2.20 |
|
Weighted average LTV ratio |
|
|
|
57 |
% |
|
|
|
98 |
% |
|
|
|
57 |
% |
|
|
|
|
|
57 |
% |
|
|
|
65 |
% |
|
|
|
57% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartment |
|
|
$ |
2,906 |
|
|
|
$ |
124 |
|
|
|
$ |
3,030 |
|
|
|
|
|
$ |
3,018 |
|
|
|
$ |
12 |
|
|
|
$ |
3,030 |
|
Industrial |
|
|
|
906 |
|
|
|
|
- |
|
|
|
|
906 |
|
|
|
|
|
|
905 |
|
|
|
|
1 |
|
|
|
|
906 |
|
Office |
|
|
|
1,306 |
|
|
|
|
- |
|
|
|
|
1,306 |
|
|
|
|
|
|
1,291 |
|
|
|
|
15 |
|
|
|
|
1,306 |
|
Retail |
|
|
|
2,162 |
|
|
|
|
9 |
|
|
|
|
2,171 |
|
|
|
|
|
|
2,151 |
|
|
|
|
20 |
|
|
|
|
2,171 |
|
Other |
|
|
|
205 |
|
|
|
|
- |
|
|
|
|
205 |
|
|
|
|
|
|
205 |
|
|
|
|
- |
|
|
|
|
205 |
|
Total1 |
|
|
$ |
7,485 |
|
|
|
$ |
133 |
|
|
|
$ |
7,618 |
|
|
|
|
|
$ |
7,570 |
|
|
|
$ |
48 |
|
|
|
$ |
7,618 |
|
Weighted average DSC ratio |
|
|
|
2.13 |
|
|
|
|
1.19 |
|
|
|
|
2.11 |
|
|
|
|
|
|
2.12 |
|
|
|
|
0.90 |
|
|
|
|
2.11 |
|
Weighted average LTV ratio |
|
|
|
54 |
% |
|
|
|
95 |
% |
|
|
|
54 |
% |
|
|
|
|
|
54 |
% |
|
|
|
72 |
% |
|
|
|
54% |
|
|
1 |
Excludes $85 million and $71 million of commercial mortgage loans that were under development as
of December 31, 2020 and 2019, respectively. |
As of December 31, 2020 and 2019, the Company
has a diversified mortgage loan portfolio with no more than 24% and 23%, respectively, in a geographic region in the U.S. and no more than 1% with any one borrower. The maximum and minimum lending rates for mortgage loans originated or acquired
during 2020 were 4.3% and 1.9%, respectively, and for those originated or acquired during 2019 were 12.0% and 3.1%, respectively. As of December 31, 2020 and 2019, the maximum LTV ratio of any one loan at the time of loan origination was
80% and 82%, respectively. As of December 31, 2020 and 2019, the Company did not hold mortgage loans with interest 90 days or more past due. Additionally, there were no taxes, assessments or any amounts advanced and not included in the
mortgage loan portfolio.
F-30
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
Securities Lending
The fair value of loaned securities was $244 million and $306 million as of December 31, 2020 and 2019,
respectively. The Company held $101 million and $132 million of cash collateral on securities lending as of December 31, 2020 and 2019, respectively. As of December 31, 2020, the carrying value and fair value of reinvested
collateral assets was $101 million. As of December 31, 2019, the carrying value and fair value of reinvested collateral assets was $133 million. The fair value of bonds acquired with reinvested collateral assets was $103 million
and $134 million as of December 31, 2020 and 2019, respectively. There are no securities lending transactions that extend beyond one year as of the reporting date. The Company received $148 million and $180 million
of non-cash collateral on securities lending as of December 31, 2020 and 2019, respectively.
Net Investment Income
The following table summarizes net investment income by investment type, for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
Bonds |
|
$ |
1,419 |
|
|
$ |
1,408 |
|
|
$ |
1,378 |
|
Mortgage loans |
|
|
339 |
|
|
|
353 |
|
|
|
335 |
|
Other invested assets |
|
|
384 |
|
|
|
225 |
|
|
|
228 |
|
Policy loans |
|
|
43 |
|
|
|
45 |
|
|
|
54 |
|
Other |
|
|
41 |
|
|
|
51 |
|
|
|
41 |
|
Gross investment income |
|
$ |
2,226 |
|
|
$ |
2,082 |
|
|
$ |
2,036 |
|
Investment expenses |
|
|
(119) |
|
|
|
(108) |
|
|
|
(109) |
|
Net investment income |
|
$ |
2,107 |
|
|
$ |
1,974 |
|
|
$ |
1,927 |
|
There was no investment income due and accrued that was nonadmitted as of December 31,
2020 and 2019.
Net Realized Capital Gains and Losses
The following table summarizes net realized capital gains and losses for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
Gross gains on sales |
|
$ |
36 |
|
|
$ |
71 |
|
|
$ |
22 |
|
Gross losses on sales |
|
|
(42) |
|
|
|
(21) |
|
|
|
(16) |
|
Net realized (losses) gains on sales |
|
$ |
(6) |
|
|
$ |
50 |
|
|
$ |
6 |
|
Net realized derivative losses |
|
|
(521) |
|
|
|
(515) |
|
|
|
(226) |
|
Other-than-temporary impairments |
|
|
(78) |
|
|
|
(5) |
|
|
|
(8) |
|
Total net realized losses on sales |
|
$ |
(605) |
|
|
$ |
(470) |
|
|
$ |
(228) |
|
Tax (benefit) expense on net losses |
|
|
(26) |
|
|
|
7 |
|
|
|
8 |
|
Net realized capital losses, net of tax |
|
$ |
(579) |
|
|
$ |
(477) |
|
|
$ |
(236) |
|
Less: Realized losses transferred to the IMR |
|
|
(4) |
|
|
|
- |
|
|
|
(1) |
|
Net realized capital losses, net of tax and transfers
to the IMR |
|
$ |
(575) |
|
|
$ |
(477) |
|
|
$ |
(235) |
|
For the year ended December 31, 2020, gross realized gains and gross realized losses on
sales of bonds were $26 million and $38 million, respectively. For the year ended December 31, 2019, gross realized gains and gross realized losses on sales of bonds were $56 million and $19 million, respectively. For the
year ended December 31, 2018, gross realized gains and gross realized losses on sales of bonds were $15 million and $13 million, respectively.
The Company did not enter into any material repurchase transactions that would be considered wash sales during the years ended
December 31, 2020 and 2019.
Investment Commitments
The Company had unfunded commitments related to its investment in limited partnerships and limited liability companies
totaling $483 million and $496 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, there were $21 million and $45 million of commitments to purchase private placement bonds and
$114 million and $147 million of outstanding commitments to fund mortgage loans, respectively.
F-31
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
(6) |
Derivative Instruments |
The Company is exposed to certain risks related to its ongoing business operations which are managed using derivative
instruments.
Interest rate risk management. In the normal course of business, the Company enters into transactions
that expose it to interest rate risk arising from mismatches between assets and liabilities. The Company may use interest rate swaps and futures to reduce or alter interest rate exposure.
Interest rate contracts 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 contracts are generally used to convert fixed rate cash flow streams to variable rate cash flow streams or vice
versa.
Equity market risk management. The Company issues a variety of insurance products that expose it to equity
risks. To mitigate these risks, the Company enters into a variety of derivatives including equity index futures and options.
Other 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. As foreign exchange rates change, the increase or decrease in the cash flows of the derivative
instrument are intended to mitigate the changes in the functional-currency equivalent cash flows of the hedged item. To mitigate this risk, the Company uses cross-currency swaps.
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 Companys 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. The Company also considers the impact
credit exposure could have on the effectiveness of the Companys hedging relationships. As of December 31, 2020 and 2019, the impact of the exposure to credit risk on the fair value measurement of derivatives and the effectiveness of the
Companys hedging relationships was immaterial.
The following table summarizes the fair value, carrying value and
related notional amounts of derivative instruments, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Notional amount |
|
|
Net Carrying Value |
|
|
Fair value asset |
|
|
Fair value liability |
|
|
Average fair value |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
7 |
|
|
$ |
(1) |
|
|
$ |
- |
|
|
$ |
(1) |
|
|
$ |
(1) |
|
Options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cross currency swaps |
|
|
1,524 |
|
|
|
(36) |
|
|
|
75 |
|
|
|
(49) |
|
|
|
- |
|
Futures |
|
|
3,342 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
4,873 |
|
|
$ |
(37) |
|
|
$ |
75 |
|
|
$ |
(50) |
|
|
$ |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
7 |
|
|
$ |
(1) |
|
|
$ |
- |
|
|
$ |
(1) |
|
|
$ |
- |
|
Options |
|
|
202 |
|
|
|
6 |
|
|
|
6 |
|
|
|
- |
|
|
|
1 |
|
Cross currency swaps |
|
|
1,537 |
|
|
|
66 |
|
|
|
99 |
|
|
|
(19) |
|
|
|
1 |
|
Futures |
|
|
3,153 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
4,899 |
|
|
$ |
71 |
|
|
$ |
105 |
|
|
$ |
(20) |
|
|
$ |
2 |
|
Of the $75 million and $105 million of fair value of derivative assets as of
December 31, 2020 and 2019, $24 million and $14 million were subject to master netting agreements as of December 31, 2020 and 2019, the Company received $35 million and $68 million of cash collateral and
$22 million and $45 million in pledged securities, respectively, resulting in an immaterial uncollateralized position as of December 31, 2020 and 2019. Of the $50 million and $20 million of fair value of derivative
liabilities as of December 31, 2020 and 2019, $24 million and $14 million were subject to master netting agreements as of December 31, 2020 and 2019, the Company posted $28 million and $3 million of cash collateral,
respectively, resulting in an immaterial uncollateralized position as of December 31, 2020 and 2019. Securities received as collateral are recorded off-balance sheet and exclude initial margin posted on
derivatives of $280 million and $128 million as of December 31, 2020 and 2019, respectively.
F-32
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes net gains and losses on derivatives programs
by type of derivative instrument, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses) gains recorded in operations |
|
|
Unrealized (losses) gains recorded in capital and surplus |
|
|
|
December 31, |
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
Interest rate swaps |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(5) |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
35 |
|
Options |
|
|
- |
|
|
|
3 |
|
|
|
(313) |
|
|
|
(1) |
|
|
|
4 |
|
|
|
244 |
|
Cross currency swaps |
|
|
4 |
|
|
|
(1) |
|
|
|
- |
|
|
|
(102) |
|
|
|
(13) |
|
|
|
65 |
|
Futures |
|
|
(525) |
|
|
|
(517) |
|
|
|
92 |
|
|
|
1 |
|
|
|
(169) |
|
|
|
132 |
|
Total |
|
$ |
(521) |
|
|
$ |
(515) |
|
|
$ |
(226) |
|
|
$ |
(102) |
|
|
$ |
(178) |
|
|
$ |
476 |
|
(7) |
Fair Value Measurements |
The following table summarizes assets and liabilities held at fair value as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Net Asset Value (NAV) |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
5 |
|
Common stocks unaffiliated |
|
|
53 |
|
|
|
88 |
|
|
|
1 |
|
|
|
- |
|
|
|
142 |
|
Separate account assets |
|
|
109,265 |
|
|
|
2,047 |
|
|
|
58 |
|
|
|
2,720 |
|
|
|
114,090 |
|
Assets at fair value |
|
$ |
109,318 |
|
|
$ |
2,139 |
|
|
$ |
60 |
|
|
$ |
2,720 |
|
|
$ |
114,237 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
Liabilities at fair value |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
The following table presents the rollforward of Level 3 assets and liabilities held at fair
value during the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Bonds |
|
|
Common
stocks unaffiliated |
|
|
Derivative assets1 |
|
|
Separate account assets |
|
|
Assets
at fair value |
|
Balance as of December 31, 2019 |
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
87 |
|
|
$ |
100 |
|
Net gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In operations |
|
|
(2) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2) |
|
In surplus |
|
|
5 |
|
|
|
- |
|
|
|
(1) |
|
|
|
(17) |
|
|
|
(13) |
|
Purchases |
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Sales |
|
|
(9) |
|
|
|
- |
|
|
|
(5) |
|
|
|
(12) |
|
|
|
(26) |
|
Transfers into Level 3 |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Transfers out of Level 3 |
|
|
(2) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2) |
|
Balance as of December 31, 2020 |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
58 |
|
|
$ |
60 |
|
|
1 |
Non-binding broker quotes are utilized to determine fair value of
all Level 3 derivative assets. |
Bonds transfers into and/or out of Level 3 during the year
ended December 31, 2020 are due to the changes in observability of pricing inputs and changes resulting from application of the lower of amortized cost or fair value rules based on the securitys NAIC designation.
F-33
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes assets and liabilities held at fair value as
of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Net Asset Value (NAV) |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
- |
|
|
$ |
9 |
|
Common stocks unaffiliated |
|
|
68 |
|
|
|
112 |
|
|
|
1 |
|
|
|
- |
|
|
|
181 |
|
Derivative assets |
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
Separate account assets |
|
|
101,312 |
|
|
|
1,857 |
|
|
|
87 |
|
|
|
2,091 |
|
|
|
105,347 |
|
Assets at fair value |
|
$ |
101,380 |
|
|
$ |
1,972 |
|
|
$ |
100 |
|
|
$ |
2,091 |
|
|
$ |
105,543 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
Liabilities at fair value |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
The following table presents the rollforward of Level 3 assets and liabilities held at
fair value during the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Bonds |
|
|
Common
stocks unaffiliated |
|
|
Derivative assets1 |
|
|
Separate account assets |
|
|
Assets
at fair value |
|
Balance as of December 31, 2018 |
|
$ |
8 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
80 |
|
|
$ |
91 |
|
Net gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In operations |
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
3 |
|
In surplus |
|
|
(4) |
|
|
|
- |
|
|
|
4 |
|
|
|
7 |
|
|
|
7 |
|
Purchases |
|
|
3 |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
9 |
|
Sales |
|
|
(5) |
|
|
|
- |
|
|
|
(9) |
|
|
|
- |
|
|
|
(14) |
|
Transfers into Level 3 |
|
|
24 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
Transfers out of Level 3 |
|
|
(20) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(20) |
|
Balance as of December 31, 2019 |
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
87 |
|
|
|
100 |
|
|
1 |
Non-binding broker quotes are utilized to determine fair value of
all Level 3 derivative assets. |
Bond transfers into and/or out of Level 3 during the year ended
December 31, 2019 are due to the changes in observability of pricing inputs and changes resulting from application of the lower of amortized cost or fair value rules based on the securitys NAIC designation.
F-34
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the carrying value and fair value of the
Companys assets and liabilities not held at fair value as of the dates indicated. The valuation techniques used to estimate these fair values are described below or in Note 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
(in millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total fair value |
|
|
Carrying value |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds1 |
|
$ |
1,366 |
|
|
$ |
39,072 |
|
|
$ |
1,367 |
|
|
$ |
41,805 |
|
|
$ |
37,202 |
|
Preferred stocks unaffiliated |
|
|
- |
|
|
|
104 |
|
|
|
5 |
|
|
|
109 |
|
|
|
97 |
|
Mortgage loans, net of allowance |
|
|
- |
|
|
|
- |
|
|
|
7,952 |
|
|
|
7,952 |
|
|
|
7,783 |
|
Policy loans |
|
|
- |
|
|
|
- |
|
|
|
888 |
|
|
|
888 |
|
|
|
888 |
|
Derivative assets |
|
|
- |
|
|
|
75 |
|
|
|
- |
|
|
|
75 |
|
|
|
51 |
|
Cash, cash equivalents and short-term investments |
|
|
(90 |
) |
|
|
551 |
|
|
|
- |
|
|
|
461 |
|
|
|
461 |
|
Securities lending collateral assets |
|
|
101 |
|
|
|
- |
|
|
|
- |
|
|
|
101 |
|
|
|
101 |
|
Separate account assets |
|
|
7 |
|
|
|
368 |
|
|
|
- |
|
|
|
375 |
|
|
|
317 |
|
Total assets |
|
$ |
1,384 |
|
|
$ |
40,170 |
|
|
$ |
10,212 |
|
|
$ |
51,766 |
|
|
$ |
46,900 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contracts |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,249 |
|
|
$ |
1,249 |
|
|
$ |
2,076 |
|
Derivative liabilities |
|
|
- |
|
|
|
48 |
|
|
|
- |
|
|
|
48 |
|
|
|
86 |
|
Total liabilities |
|
$ |
- |
|
|
$ |
48 |
|
|
$ |
1,249 |
|
|
$ |
1,297 |
|
|
$ |
2,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds1 |
|
$ |
1,494 |
|
|
$ |
35,302 |
|
|
$ |
930 |
|
|
$ |
37,726 |
|
|
$ |
35,115 |
|
Preferred stocks unaffiliated |
|
|
- |
|
|
|
59 |
|
|
|
- |
|
|
|
59 |
|
|
|
55 |
|
Mortgage loans, net of allowance |
|
|
- |
|
|
|
- |
|
|
|
7,856 |
|
|
|
7,856 |
|
|
|
7,655 |
|
Policy loans |
|
|
- |
|
|
|
- |
|
|
|
903 |
|
|
|
903 |
|
|
|
903 |
|
Derivative assets |
|
|
- |
|
|
|
99 |
|
|
|
- |
|
|
|
99 |
|
|
|
88 |
|
Short-term investments |
|
|
7 |
|
|
|
615 |
|
|
|
- |
|
|
|
622 |
|
|
|
622 |
|
Securities lending collateral assets |
|
|
132 |
|
|
|
- |
|
|
|
- |
|
|
|
132 |
|
|
|
132 |
|
Separate account assets |
|
|
3 |
|
|
|
334 |
|
|
|
- |
|
|
|
337 |
|
|
|
308 |
|
Total assets |
|
$ |
1,636 |
|
|
$ |
36,409 |
|
|
$ |
9,689 |
|
|
$ |
47,734 |
|
|
$ |
44,878 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contracts² |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
953 |
|
|
$ |
953 |
|
|
$ |
1,801 |
|
Derivative liabilities |
|
|
- |
|
|
|
19 |
|
|
|
- |
|
|
|
19 |
|
|
|
22 |
|
Total liabilities |
|
$ |
- |
|
|
$ |
19 |
|
|
$ |
953 |
|
|
$ |
972 |
|
|
$ |
1,823 |
|
|
1 |
Level 3 is primarily composed of industrial and miscellaneous bonds. |
|
2 |
Prior period balances updated to conform to current period presentation. |
Mortgage loans, net of allowance. The fair values of mortgage loans 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 statutory statements of admitted assets, liabilities, capital and surplus approximates fair value as policy loans are fully collateralized by the cash surrender value of underlying insurance policies.
Securities lending collateral assets. These assets are comprised of bonds and short-term investments and the
respective fair values are estimated based on the fair value methods described in Note 2.
F-35
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
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. The fair value of adjustable rate contracts approximates their carrying value.
The following tables summarize the net admitted deferred tax assets, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
(in millions) |
|
Ordinary |
|
|
Capital |
|
|
Total |
|
Total gross deferred tax assets |
|
$ |
770 |
|
|
$ |
16 |
|
|
$ |
786 |
|
Statutory valuation allowance adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Adjusted gross deferred tax assets |
|
$ |
770 |
|
|
$ |
16 |
|
|
$ |
786 |
|
Less: Deferred tax assets nonadmitted |
|
|
(41 |
) |
|
|
- |
|
|
|
(41) |
|
Net admitted deferred tax assets |
|
$ |
729 |
|
|
$ |
16 |
|
|
$ |
745 |
|
Less: Deferred tax liabilities |
|
|
(94 |
) |
|
|
(9 |
) |
|
|
(103) |
|
Net admitted deferred tax assets |
|
$ |
635 |
|
|
$ |
7 |
|
|
$ |
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
(in millions) |
|
Ordinary |
|
|
Capital |
|
|
Total |
|
Total gross deferred tax assets |
|
$ |
730 |
|
|
$ |
44 |
|
|
$ |
774 |
|
Statutory valuation allowance adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Adjusted gross deferred tax assets |
|
$ |
730 |
|
|
$ |
44 |
|
|
$ |
774 |
|
Less: Deferred tax assets nonadmitted |
|
|
(13 |
) |
|
|
(24 |
) |
|
|
(37) |
|
Net admitted deferred tax assets |
|
$ |
717 |
|
|
$ |
20 |
|
|
$ |
737 |
|
Less: Deferred tax liabilities |
|
|
(134 |
) |
|
|
(2 |
) |
|
|
(136) |
|
Net admitted deferred tax assets |
|
$ |
583 |
|
|
$ |
18 |
|
|
$ |
601 |
|
The following table summarizes components of the change in deferred income taxes reported in
capital and surplus before consideration of nonadmitted assets and changes from the prior year, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
Change |
|
Adjusted gross deferred tax assets |
|
$ |
786 |
|
|
$ |
774 |
|
|
$ |
12 |
|
Total deferred tax liabilities |
|
|
(103 |
) |
|
|
(136 |
) |
|
|
33 |
|
Net deferred tax assets |
|
$ |
683 |
|
|
$ |
638 |
|
|
$ |
45 |
|
Less: Tax effect of unrealized gains |
|
|
|
|
|
|
|
|
|
|
3 |
|
Change in deferred income tax |
|
|
|
|
|
|
|
|
|
$ |
42 |
|
F-36
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following tables summarize components of the admitted deferred tax assets
calculation, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
(in millions) |
|
Ordinary |
|
|
Capital |
|
|
Total |
|
Federal income taxes recoverable through loss carryback |
|
$ |
- |
|
|
$ |
7 |
|
|
$ |
7 |
|
Adjusted gross deferred tax assets expected to be realized1 |
|
|
633 |
|
|
|
2 |
|
|
|
635 |
|
Adjusted gross deferred tax assets offset against existing
gross deferred tax liabilities |
|
|
96 |
|
|
|
7 |
|
|
|
103 |
|
Admitted deferred tax assets |
|
$ |
729 |
|
|
$ |
16 |
|
|
$ |
745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
(in millions) |
|
Ordinary |
|
|
Capital |
|
|
Total |
|
Federal income taxes recoverable through loss carryback |
|
$ |
- |
|
|
$ |
6 |
|
|
$ |
6 |
|
Adjusted gross deferred tax assets expected to be realized1 |
|
|
583 |
|
|
|
12 |
|
|
|
595 |
|
Adjusted gross deferred tax assets offset against existing
gross deferred tax liabilities |
|
|
134 |
|
|
|
2 |
|
|
|
136 |
|
Admitted deferred tax assets |
|
$ |
717 |
|
|
$ |
20 |
|
|
$ |
737 |
|
|
1 |
Note that this amount is calculated as the lesser of the adjusted gross deferred tax assets expected to be
realized following the balance sheet due date or the adjusted gross deferred tax assets allowed per the limitation threshold. For the years ended December 31, 2020 and 2019, the threshold limitation for adjusted capital and surplus was
$1.3 billion and $1.2 billion, respectively. |
The adjusted capital and surplus used to
determine the recovery period and adjusted gross deferred tax assets allowed per the limitation threshold was $8.4 billion and $8.1 billion as of December 31, 2020 and 2019, respectively. The ratio percentage used to determine the
recovery period and adjusted gross deferred tax assets allowed per the limitation threshold was 1,176% and 1,296% as of December 31, 2020 and 2019, respectively.
The following tables summarize the impact of tax planning strategies, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
|
Ordinary |
|
|
Capital |
|
|
Total |
|
Adjusted gross deferred tax assets |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Net admitted adjusted gross deferred tax assets |
|
|
32.64 |
% |
|
|
0.00 |
% |
|
|
32.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
Ordinary |
|
|
Capital |
|
|
Total |
|
Adjusted gross deferred tax assets |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Net admitted adjusted gross deferred tax assets |
|
|
35.23 |
% |
|
|
0.00 |
% |
|
|
35.23 |
% |
The Companys tax planning strategies included the use of affiliated reinsurance for the
years ended December 31, 2020 and 2019.
There are no temporary differences for which deferred tax liabilities are
not recognized for the years ended December 31, 2020 and 2019.
F-37
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the tax effects of temporary differences and
the change from the prior year, for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
Change |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary: |
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits and claims |
|
$ |
108 |
|
|
$ |
108 |
|
|
$ |
- |
|
Investments |
|
|
116 |
|
|
|
88 |
|
|
|
28 |
|
Deferred acquisition costs |
|
|
202 |
|
|
|
201 |
|
|
|
1 |
|
Policyholders dividends accumulation |
|
|
5 |
|
|
|
5 |
|
|
|
- |
|
Compensation and benefits accrual |
|
|
10 |
|
|
|
10 |
|
|
|
- |
|
Tax credit carry-forward |
|
|
316 |
|
|
|
303 |
|
|
|
13 |
|
Other |
|
|
13 |
|
|
|
15 |
|
|
|
(2 |
) |
Subtotal |
|
$ |
770 |
|
|
$ |
730 |
|
|
$ |
40 |
|
Nonadmitted |
|
|
(41 |
) |
|
|
(13 |
) |
|
|
(28 |
) |
Admitted ordinary deferred tax assets |
|
$ |
729 |
|
|
$ |
717 |
|
|
$ |
12 |
|
Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
16 |
|
|
|
44 |
|
|
|
(28 |
) |
Subtotal |
|
$ |
16 |
|
|
$ |
44 |
|
|
$ |
(28 |
) |
Nonadmitted |
|
|
- |
|
|
|
(24 |
) |
|
|
24 |
|
Admitted capital deferred tax assets |
|
$ |
16 |
|
|
$ |
20 |
|
|
$ |
(4 |
) |
Admitted deferred tax assets |
|
$ |
745 |
|
|
$ |
737 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
(2 |
) |
|
$ |
(26 |
) |
|
$ |
24 |
|
Deferred and uncollected premium |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
- |
|
Future policy benefits and claims |
|
|
(57 |
) |
|
|
(58 |
) |
|
|
1 |
|
Deferred acquisition costs |
|
|
(28 |
) |
|
|
(43 |
) |
|
|
15 |
|
Other |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
- |
|
Subtotal |
|
$ |
(94 |
) |
|
$ |
(134 |
) |
|
$ |
40 |
|
Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
(9 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
Subtotal |
|
$ |
(9 |
) |
|
$ |
(2 |
) |
|
$ |
(7 |
) |
Deferred tax liabilities |
|
$ |
(103 |
) |
|
$ |
(136 |
) |
|
$ |
33 |
|
Net deferred tax assets |
|
$ |
642 |
|
|
$ |
601 |
|
|
$ |
41 |
|
In assessing the realizability of deferred tax assets, the Company considers whether it is
more likely than not that some portion of the total 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. Based on the Companys
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 all deferred tax assets. Therefore, no valuation
allowances have been established as of December 31, 2020 and 2019.
F-38
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the Companys income tax incurred and
change in deferred income tax. The total income tax and change in deferred income tax differs from the amount obtained by applying the federal statutory rate to income (loss) before tax as follows, for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
Current income tax (benefit) expense |
|
$ |
(22 |
) |
|
$ |
(66 |
) |
|
$ |
73 |
|
Change in deferred income tax (without tax on unrealized
gains and losses) |
|
|
(41 |
) |
|
|
29 |
|
|
|
(72 |
) |
Total income tax (benefit) expense
reported |
|
$ |
(63 |
) |
|
$ |
(37 |
) |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income and capital gains taxes |
|
$ |
465 |
|
|
$ |
563 |
|
|
$ |
783 |
|
Federal statutory tax rate |
|
|
21 |
% |
|
|
21 |
% |
|
|
21 |
% |
Expected income tax expense at statutory tax rate |
|
$ |
98 |
|
|
$ |
118 |
|
|
$ |
164 |
|
Decrease in actual tax reported resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received deduction |
|
|
(117 |
) |
|
|
(101 |
) |
|
|
(99 |
) |
Change in tax reserves |
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
Tax credits |
|
|
(48 |
) |
|
|
(53 |
) |
|
|
(51 |
) |
Tax (benefit) expense related to the Tax Cuts and Jobs Act1 |
|
|
- |
|
|
|
- |
|
|
|
(26 |
) |
Loss carryback rate differential |
|
|
(10 |
) |
|
|
- |
|
|
|
- |
|
Other |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
Total income tax (benefit) expense
reported |
|
$ |
(63 |
) |
|
$ |
(37 |
) |
|
$ |
1 |
|
|
1 |
Prior year amount represents the remeasurement of deferred tax assets revised after return filing as a
result of the Tax Cuts and Jobs Act. |
The Company incurred $6 million in federal income tax expense
in 2019 which is available for recoupment in the event of future net losses.
On March 27, 2020, the Coronavirus Aid,
Relief, and Economic Security (CARES) Act was signed into law and includes certain income tax provisions relevant to businesses. The Company is required to recognize the effect on the financial statements in the period the law was enacted. For year
ended December 31, 2020, the CARES Act did not have a material impact on the Companys financial statements.
The CARES Act amended the Tax Cuts and Jobs Act, to accelerate the ability of companies to fully recover AMT credits in 2020
versus 2021. The Company had $159 million of an income tax receivable that was previously AMT credit carryforwards as of December 31, 2019. In 2020, the Company received a refund of $158 million of its AMT credits.
The following table summarizes operating loss or tax credit carry-forwards available as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Amount |
|
|
Origination |
|
|
Expiration |
|
Business credits |
|
$ |
5 |
|
|
|
2011 |
|
|
|
2031 |
|
Business credits |
|
$ |
9 |
|
|
|
2012 |
|
|
|
2032 |
|
Business credits |
|
$ |
6 |
|
|
|
2013 |
|
|
|
2033 |
|
Business credits |
|
$ |
39 |
|
|
|
2014 |
|
|
|
2034 |
|
Business credits |
|
$ |
47 |
|
|
|
2015 |
|
|
|
2035 |
|
Business credits |
|
$ |
62 |
|
|
|
2016 |
|
|
|
2036 |
|
Business credits |
|
$ |
62 |
|
|
|
2017 |
|
|
|
2037 |
|
Business credits |
|
$ |
30 |
|
|
|
2018 |
|
|
|
2038 |
|
Business credits |
|
$ |
27 |
|
|
|
2019 |
|
|
|
2039 |
|
Business credits |
|
$ |
29 |
|
|
|
2020 |
|
|
|
2040 |
|
F-39
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The Company is included in the NMIC consolidated federal income tax return
which includes the following entities:
|
|
|
Nationwide Mutual Insurance Company
AGMC Reinsurance, Ltd Allied
Group, Inc. Allied Holding (Delaware), Inc.
Allied Insurance Company of America
Allied Property & Casualty Insurance Company
Allied Texas Agency, Inc. AMCO
Insurance Company American Marine Underwriters
Crestbrook Insurance Company
Depositors Insurance Company DVM
Insurance Agency, Inc. Eagle Captive Reinsurance, LLC
Freedom Specialty Insurance Company
Harleysville Group Inc.
Harleysville Insurance Co. of New York
Harleysville Insurance Company
Harleysville Insurance Company of New Jersey
Harleysville Lake States Insurance Company
Harleysville Life Insurance Company
Harleysville Preferred Insurance Company
Harleysville Worcester Insurance Company
Jefferson National Financial Corporation
Jefferson National Securities Corporation
Lone Star General Agency, Inc.
National Casualty Company
Nationwide Advantage Mortgage Company
Nationwide Affinity Insurance Company of America
Nationwide Agent Risk Purchasing Group. Inc.
Nationwide Agribusiness Insurance Company
Nationwide Assurance Company
Nationwide Cash Management Company |
|
Nationwide Corporation
Nationwide Financial Assignment Company
Nationwide Financial General Agency, Inc.
Nationwide Financial Services, Inc.
Nationwide General Insurance Company
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Nationwide Investment Services Corporation
Nationwide Life and Annuity Ins. Company
Nationwide Life Insurance Company
Nationwide Lloyds Nationwide
Property & Casualty Ins. Company Nationwide Retirement Solutions, Inc.
Nationwide Sales Solutions, Inc.
Nationwide Trust Company, FSB NBS
Insurance Agency, Inc. NFS Distributors, Inc.
NWD Investment Management, Inc.
Registered Investment Advisors Services, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
THI Holdings (Delaware), Inc.
Titan Insurance Company Titan
Insurance Services, Inc. Veterinary Pet Insurance Company
Victoria Fire & Casualty Company
Victoria National Insurance Company
Victoria Select Insurance Company
VPI Services, Inc. |
The method of allocation among the companies is based upon separate return calculations with
current benefit for tax losses and credits utilized in the consolidated return.
The Company did not have any protective
tax deposits under Section 6603 of the Internal Revenue Code as of December 31, 2020 and 2019.
The Company does
not have any tax loss contingencies for which it is reasonably possible that the total liability will significantly increase within twelve months of the reporting date.
F-40
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
(9) |
Short-Term Debt and Federal Home Loan Bank Funding Agreement |
Short-Term Debt
The following table summarizes the carrying value of short-term debt and weighted average annual interest rates, as of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2020 |
|
|
2019 |
|
$750 million commercial paper program (0.00%) |
|
$ |
- |
|
|
$ |
200 |
|
Accrued interest payable |
|
|
3 |
|
|
|
3 |
|
Total short-term debt |
|
$ |
3 |
|
|
$ |
203 |
|
The Company participates in a commercial paper program with a limit of $750 million. The
rating agency guidelines recommend that the Company 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. The commercial
paper will not be redeemed prior to maturity or be subject to voluntary prepayment. Proceeds from the sale of the commercial paper will be used to meet working capital requirements and for general corporate purposes, including the funding of
acquisitions.
As of December 31, 2019, the Company had access to borrow up to $300 million from the FHLB to
provide financing for operations that expired on March 22, 2020. In March 2020, the Company renewed the agreement with the FHLB until March 19, 2021. The Company had $4.3 billion and $4.0 billion in eligible collateral and no
amounts outstanding under the agreement as of December 31, 2020 and 2019, respectively. In February 2021, the Company terminated this agreement and entered into a new agreement with the FHLB, which expires February 4, 2022, that allows the
Company and NLAIC access to collectively borrow up to $1.1 billion in the aggregate, which would be collateralized by pledged securities.
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, 2020 and 2019.
The terms of certain debt instruments
contain various restrictive covenants, including, but not limited to, minimum statutory surplus defined in the agreements. The Company was in compliance with all covenants as of December 31, 2020 and 2019.
The amount of interest paid on short-term debt was immaterial in 2020, 2019 and 2018.
Federal Home Loan Bank Funding Agreements
The Company is a member of the FHLB. Through its membership, the FHLB established the Companys capacity for short-term
borrowings and cash advances under the funding agreement program at up to 50% of total admitted assets.
The
Companys Board of Directors has authorized the issuance of funding agreements up to $4.0 billion to the FHLB, shared between the Company and NLAIC, in exchange for cash advances, which are collateralized by pledged securities. The Company
uses these funds in an investment spread strategy, consistent with its other investment spread operations. As such, the Company applies SSAP No. 52, Deposit-Type Contracts, accounting treatment to these funds, consistent with its other
deposit-type contracts. It is not part of the Companys strategy to utilize these funds for operations, and any funds obtained from the FHLB for use in general operations would be accounted for consistent with SSAP No. 15, Debt and
Holding Company Obligations, as borrowed money. Membership requires the Company to purchase and hold a minimum amount of FHLB capital stock plus additional stock based on outstanding advances. The Company has $30 million in membership stock
as of December 31, 2020 and 2019. As part of the agreement, the Company purchased and held an additional $58 million and $53 million in activity stock as of December 31, 2020 and 2019, respectively, which is included in the
general account in stocks on the statutory statements of admitted assets, liabilities, capital and surplus. The Companys liability for advances from the FHLB was $2.1 billion and $1.8 billion as of December 31, 2020 and 2019,
respectively, which is included in future policy benefits and claims on the statutory statements of admitted assets, liabilities, capital and surplus. The advances were collateralized by bonds and mortgage loans with carrying values of
$2.4 billion (1.5% of total admitted assets) as of December 31, 2020 and $2.2 billion (1.4% of total admitted assets) as of December 31, 2019, which are included in the general account in bonds and mortgage loans on the statutory
statements of admitted assets, liabilities, capital and surplus.
F-41
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The following table summarizes the carrying value of surplus notes issued by the Company to NFS, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date issued |
|
Interest rate |
|
|
Par value |
|
|
Carrying value |
|
|
Interest and/ or principal paid in current year |
|
|
Total interest and/ or principal paid |
|
|
Unapproved interest and/ or principal |
|
|
Date of maturity |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/19/2001 |
|
|
7.50 |
% |
|
$ |
300 |
|
|
$ |
300 |
|
|
$ |
22 |
|
|
$ |
428 |
|
|
$ |
- |
|
|
|
12/31/2031 |
|
6/27/2002 |
|
|
8.15 |
% |
|
|
300 |
|
|
|
300 |
|
|
|
25 |
|
|
|
448 |
|
|
|
- |
|
|
|
6/27/2032 |
|
12/23/2003 |
|
|
6.75 |
% |
|
|
100 |
|
|
|
100 |
|
|
|
7 |
|
|
|
112 |
|
|
|
- |
|
|
|
12/23/2033 |
|
12/20/2019 |
|
|
4.21 |
% |
|
|
400 |
|
|
|
400 |
|
|
|
17 |
|
|
|
17 |
|
|
|
- |
|
|
|
12/19/2059 |
|
Total |
|
|
|
|
|
$ |
1,100 |
|
|
$ |
1,100 |
|
|
$ |
71 |
|
|
$ |
1,005 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/19/2001 |
|
|
7.50 |
% |
|
$ |
300 |
|
|
$ |
300 |
|
|
$ |
23 |
|
|
$ |
406 |
|
|
$ |
- |
|
|
|
12/31/2031 |
|
6/27/2002 |
|
|
8.15 |
% |
|
|
300 |
|
|
|
300 |
|
|
|
24 |
|
|
|
423 |
|
|
|
- |
|
|
|
6/27/2032 |
|
12/23/2003 |
|
|
6.75 |
% |
|
|
100 |
|
|
|
100 |
|
|
|
7 |
|
|
|
105 |
|
|
|
- |
|
|
|
12/23/2033 |
|
12/20/2019 |
|
|
4.21 |
% |
|
|
400 |
|
|
|
400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12/19/2059 |
|
Total |
|
|
|
|
|
$ |
1,100 |
|
|
$ |
1,100 |
|
|
$ |
54 |
|
|
$ |
934 |
|
|
$ |
- |
|
|
|
|
|
The surplus notes were issued in accordance with Section 3901.72 of the Ohio Revised
Code. The principal and interest on these surplus notes shall not be a liability or claim against NLIC, or any of its assets, except as provided in Section 3901.72 of the Ohio Revised Code. The Department must approve interest and principal
payments before they are paid.
The Company has a 100% coinsurance agreement with funds withheld with Eagle to cede specified GMDB and GLWB obligations
provided under substantially all of the variable annuity contracts issued and to be issued by NLIC. While the GMDB and GLWB contract riders are ceded by NLIC to Eagle, the base annuity contracts and any
non-reinsured risks will be retained by NLIC.
Amounts ceded to Eagle during 2020,
2019 and 2018 included premiums of $627 million, $529 million and $506 million, respectively, benefits and claims, net of third party reinsurance recoveries of $23 million, $17 million, and $14 million respectively, net
investment earnings on funds withheld assets of $49 million, $33 million and $20 million, respectively, and an expense allowance for third party reinsurance premiums of $1 million, $1 million and $1 million,
respectively. As of December 31, 2020 and 2019, the carrying value of the funds withheld assets was $965 million and $795 million, respectively, which consists of bonds and short-term investments that had a carrying value of
$856 million and $722 million, respectively, and mortgage loans that had a carrying value of $108 million and $73 million, respectively. As of December 31, 2020 and 2019, the Companys reserve credit for guaranteed
benefits ceded under the reinsurance agreement was $65 million and $275 million, respectively. Amounts payable to Eagle related to the reinsurance agreement were $402 million and $248 million as of as of December 31, 2020
and December 31, 2019, respectively.
The Company has a reinsurance agreement with NMIC whereby nearly all of the
Companys 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 the Companys agreement, the investment risk associated with changes in interest rates is borne by the reinsurer. Risk
of asset default is retained by the Company, although a fee is paid to the Company for the retention of such risk. The ceding of risk does not discharge the Company, as the original insurer, from its primary obligation to the policyholder. Amounts
ceded to NMIC include revenues of $281 million, $279 million and $257 million for the years ended December 31, 2020, 2019 and 2018, respectively, while benefits, claims and expenses ceded were $260 million, $273 million
and $237 million, respectively.
F-42
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The Company has an intercompany reinsurance agreement with NLAIC whereby
certain inforce and subsequently issued fixed individual deferred annuity contracts are assumed on a modified coinsurance basis. Under modified coinsurance agreements, the ceding company retains invested assets and investment earnings are paid to
the reinsurer. Under terms of the agreement, the Company bears the investment risk associated with changes in interest rates. Risk of asset default remains with NLAIC, and the Company pays a fee to NLAIC for the retention of such risk. The agreement
will remain inforce until all contract obligations are settled. The ceding of risk does not discharge the original insurer from its primary obligation to the contractholder. Amounts assumed from NLAIC are included in the Companys statutory
statement of operations for 2020, 2019 and 2018 and include premiums of $12 million, $14 million and $14 million, respectively, net investment income of $46 million, $49 million and $58 million, respectively, and
benefits, change in reserves and other expenses of $171 million, $251 million and $358 million, respectively. The reserve adjustment for 2020, 2019 and 2018 of $(172) million, $(246) million and $(352) million, respectively,
represents changes in reserves related to this fixed block of business, offset by investment earnings on the underlying assets. Policy reserves assumed under this agreement totaled $1.1 billion and $1.2 billion as of December 31, 2020
and 2019, respectively, and amounts payable related to this agreement were $8 million and $0.4 million, respectively.
The Company has an intercompany reinsurance agreement with NLAIC whereby certain variable universal life insurance, whole life
insurance and universal life insurance policies are assumed on a modified coinsurance basis. Total policy reserves under this treaty were $37 million and $39 million as of December 31, 2020 and 2019, respectively. Total premiums
assumed under this treaty were $8 million, $11 million and $8 million during 2020, 2019 and 2018, respectively.
The Company has an intercompany reinsurance agreement with NLAIC whereby a certain life insurance contract is assumed on a
100% coinsurance basis. Policy reserves assumed under this agreement totaled $158 million and $157 million as of December 31, 2020 and 2019, respectively.
The Company has entered into reinsurance contracts to cede a portion of its individual annuity and life insurance business to
unrelated reinsurers. Total reserve credits taken as of December 31, 2020 and 2019 were $420 million and $438 million, respectively. The three largest contracts are with Security Benefit Life Insurance Company (SBL), SCOR
Global Life Americas Reinsurance (SGLAR), and Security Life of Denver Insurance Company (SLD) as of December 31, 2020. Total reserve credits taken on these contracts as of December 31, 2020 and 2019 totaled
$100 million and $90 million for each year, from SBL, $44 million and $0, respectively, from SGLAR and $36 million and $41 million, respectively, from SLD. The ceding of risk does not relieve the Company, as the original
insurer, from its primary obligation to the policyholder. Under the terms of the contracts, SBL has established a trust as collateral for the recoveries, whereby the trust assets are invested in investment grade securities, the fair value of which
must at all times be greater or equal to 100% of the reinsured reserves.
F-43
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
(12) |
Transactions with Affiliates |
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, office space cost sharing arrangements, and agreements related to reinsurance, cost sharing, tax sharing, administrative services, marketing, intercompany loans,
intercompany repurchases, cash management services and software licensing. In addition, several benefit plans sponsored by NMIC are available to Nationwide employees, for which the Company has no legal obligations. Measures used to determine the
allocation among companies includes individual employee estimates of time spent, special cost studies, the number of full-time employees 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 pursuant to the Enterprise Cost Sharing Agreement. For the years ended December 31, 2020, 2019
and 2018, the Company was allocated costs from NMIC and NSC totaling $281 million, $220 million and $235 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 $3.7 billion, $3.5 billion and $3.4 billion as of December 31, 2020, 2019 and 2018, respectively. Total revenues from these contracts
were $122 million, $120 million and $119 million for the years ended December 31, 2020, 2019 and 2018, respectively, and include policy charges, net investment income from investments backing the contracts and administrative
fees. Total interest credited to the account balances were $115 million, $112 million and $107 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company may underwrite insurance policies for its officers, directors, and/or other personnel providing services to the
Company. The Company may offer discounts on certain products that are subject to applicable state insurance laws and approvals.
Under the Enterprise Cost Sharing Agreement, the Company has a cost sharing arrangement with NMIC to occupy office space. For
the years ended December 31, 2020, 2019 and 2018, the Company was allocated costs from NMIC of $13 million, $11 million and $10 million, respectively.
The Company receives an annual fee payable from the Tax Credit Funds, for which it is a guarantor and Managing Member, for its
services in connection with the oversight of the performance of the Investee Partnerships and the compliance by their managing members and managing agents thereof with the provisions of the various operating level agreements and applicable laws. The
Company earned $2 million for the years ended December 31, 2020, 2019 and 2018.
Funds of Nationwide Funds Group
(NFG), a group of Nationwide businesses that develops, sells and services mutual funds, are offered to the Companys customers as investment options in certain of the Companys products. As of December 31, 2020, 2019 and
2018, customer allocations to NFG funds totaled $69.2 billion, $66.8 billion and $60.7 billion, respectively. For the years ended December 31, 2020, 2019 and 2018, NFG paid the Company $229 million, $227 million and
$227 million, respectively, for the distribution and servicing of these funds.
Amounts on deposit with NCMC for the
benefit of the Company were $551 million and $616 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020, amounts on deposit with NCMC were comprised of $547 million of cash equivalents, with
remaining amounts in short-term investments.
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, 2020, 2019 and 2018 was $69 million, $71 million and $72 million, respectively.
The Company provides financing to Nationwide Realty Investors, LTD, a subsidiary of NMIC with interest rates ranging from 3.3%
to 5.0% and maturity dates ranging from January 2022 to June 2041. As of December 31, 2020 and 2019, the Company had mortgage loans outstanding of $414 million and $348 million, respectively.
The Company also participates in intercompany repurchase agreements with affiliates whereby the seller transfers securities to
the buyer at a stated value. Upon demand or after a stated period, the seller repurchases the securities from the buyer at the original sales price plus interest. As of December 31, 2020 and 2019, the Company had no outstanding borrowings from
affiliated entities under such agreements. During 2020 and 2019, there was no outstanding borrowings from affiliated entities at any given time. The amount the Company incurred for interest expense on intercompany repurchase agreements during 2020,
2019 and 2018 were immaterial.
During 2020, 2019 and 2018, the Company received capital contributions of $0,
$600 million and $435 million, respectively, from NFS.
F-44
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
During 2020, the Company sold securities of $59 million to Nationwide
Mutual Fire Insurance Company for cash, which resulted in a realized loss of $2 million.
During 2020, 2019 and 2018,
the Company paid capital contributions of $500 million, $400 million and $565 million, respectively, to NLAIC.
On February 11, 2020, the Company entered into an unsecured promissory note and revolving line of credit with JNLNY
whereby JNLNY can borrow up to $5 million. As of December 31, 2020, no amounts were drawn on the note.
On
November 21, 2019, NFS and the Company entered into a promissory note, where the Company borrowed $386 million from NFS at 1-month LIBOR plus 0.785%. This note was fully repaid on December 20,
2019.
During 2018, NLAIC borrowed $340 million from the Company at interest rates ranging from 3-month LIBOR plus 0.785% to 3.57% with maturity dates ranging from January 16, 2019 to March 21, 2019. During 2019, NLAIC made payments of principal and interest and, as of March 21, 2019, the
promissory notes were repaid in full.
Pursuant to financial support agreements, the Company has agreed to provide NLAIC
and JNLIC with the minimum capital and surplus required by each state in which NLAIC and JNLIC does business. These agreements do not constitute the Company as guarantor of any obligation or indebtedness of NLAIC or JNLIC or provide any creditor of
NLAIC or JNLIC with recourse to or against any of the assets of the Company.
Eagles surplus position is evaluated
quarterly to determine if an additional surplus contribution is required from the Company or if a distribution to the Company can be declared as of each quarter end.
During 2020 and 2019, the Company made surplus contributions to Eagle. On March 31, 2020 and April 17, 2020, the
Company made surplus contributions to Eagle of $555 million and $50 million, respectively. On October 17, 2019, the Company made a surplus contribution to Eagle of $9 million.
During 2020 and 2019 Eagle declared distributions to the Company based on their earned surplus position. On February 10,
2021, the Company received a dividend distribution of $292 million from Eagle that was declared on December 31, 2020. The dividend receivable was recorded in accrued investment income on the December 31, 2020 statutory statement of
admitted assets, liabilities, capital and surplus. On November 10, 2020 the Company received a total distribution of $267 million from Eagle that was declared on September 30, 2020 and consisted of a return of contributed surplus of
$184 million and a dividend of $83 million. On August 10, 2020 the Company received a return of contributed surplus distribution of $421 million from Eagle that was declared on June 30, 2020. On February 10, 2020, the
Company received a total distribution of $180 million from Eagle that was declared on December 31, 2019 and consisted of a return of contributed surplus of $9 million and a dividend of $171 million. The return of contributed
surplus was recorded in other assets and the dividend receivable was recorded in accrued investment income on the December 31, 2019 statutory statement of admitted assets, liabilities, capital and surplus. On August 9, 2019, the Company
received a dividend distribution of $41 million from Eagle that was declared on June 28, 2019. On May 10, 2019, the Company received a total distribution of $212 million from Eagle that was declared on March 26, 2019 and
consisted of a return of contributed surplus of $190 million and a dividend of $22 million.
The Company
utilizes the look-through approach in valuing its investment in Nationwide Real Estate Investors (NLIC), LLC (NW REI (NLIC)), a subsidiary of NMIC, at $90 million and $69 million as of December 31, 2020 and 2019,
respectively. NW REI (NLIC)s financial statements are not audited and the Company has limited the value of its investment in NW REI (NLIC) to the value contained in the audited statutory financial statements of the underlying investments. All
liabilities, commitments, contingencies, guarantees or obligations of the NW REI (NLIC), which are required under applicable accounting guidance, are reflected in the Companys determination of the carrying value of the investment in NW REI
(NLIC), if not already recorded in the financial statements of NW REI (NLIC).
(13) Contingencies
Legal and Regulatory Matters
The Company is subject to legal and regulatory proceedings in the ordinary course of its business. These include proceedings
specific to the Company and proceedings generally applicable to business practices in the industries in which the Company operates. The outcomes of these proceedings cannot be predicted due to their complexity, scope, and many uncertainties. The
Company believes, however, that based on currently known information, the ultimate outcome of all pending legal and regulatory proceedings is not likely to have a material adverse effect on the Companys financial condition.
F-45
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2020, 2019 and 2018 Statutory Financial Statements
The various businesses conducted by the Company are subject to oversight by
numerous federal and state regulatory entities, including but not limited to the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor, the IRS, the Office of the Comptroller of the Currency and
state insurance authorities. Such regulatory entities may, in the normal course of business, be engaged in general or targeted inquiries, examinations and investigations of the Company and/or its affiliates. With respect to all such scrutiny
directed at the Company or its affiliates, the Company is cooperating with regulators.
Guarantees
In accordance with SSAP No. 5R, Liabilities, Contingencies and Impairments of Assets, for all guarantees made to or on
behalf of wholly-owned subsidiaries, no initial liability recognition has been made and there is no net financial statement impact related to these guarantees.
The contractual obligations under NLAICs single premium deferred annuity (SPDA) contracts in force and
issued before September 1, 1988 are guaranteed by the Company. Total SPDA contracts affected by this guarantee in force as of December 31, 2020 and 2019 were approximately $8 million and $9 million, respectively.
The Company has guaranteed the obligations and liabilities of NISC, including, without limitation, the full and prompt payment
of all accounts payable to any party now or in the future. If for any reason NISC fails to satisfy any of its obligations, the Company will cause such obligation, loss or liability to be fully satisfied.
Indemnifications
In the normal course of business, the Company provides standard indemnifications to contractual counterparties. The types of
indemnifications typically provided include 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 amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these
obligations.
(14) |
Regulatory Risk-Based Capital, Dividend Restrictions and Unassigned Surplus |
The 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 companys 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 the Company is domiciled, imposes minimum RBC requirements that are developed by the
NAIC. The formulas in the model 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 to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, all of which require specified corrective action. The Company exceeded
the minimum RBC requirements for all periods presented.
The State of Ohio insurance laws require insurers 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 twelve months, exceeds the greater of (i) 10% of
statutory-basis capital and surplus as of the prior December 31 or (ii) the statutory-basis net income of the insurer for the prior year. During the years ended December 31, 2020, 2019 and 2018, the Company did not pay any dividends
to NFS. The Companys statutory capital and surplus as of December 31, 2020, was $9.1 billion and statutory net income for 2020 was $487 million. As of January 1, 2021, the Company has the ability to pay dividends to NFS
totaling $911 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 capital and surplus. Earned capital and surplus is defined under the State of Ohio insurance laws as the amount equal to the Companys 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 insurers policyholder capital and surplus must be reasonable in relation to
the insurers 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 Companys participating policies (measured before dividends to policyholders) available for the benefit of the Company and its stockholders.
The Company currently does not expect such regulatory requirements to impair the ability to pay operating expenses and
dividends in the future.
F-46
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Schedule I Summary of Investments Other Than
Investments in Related Parties
As of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
|
Type of investment |
|
Cost |
|
|
Fair value |
|
|
Amount at which
is
shown in the statutory statements of admitted
assets, liabilities,
capital and surplus |
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
U.S. government and agencies |
|
|
120 |
|
|
|
150 |
|
|
|
120 |
|
Obligations of states and political subdivisions |
|
|
3,323 |
|
|
|
3,988 |
|
|
|
3,323 |
|
Foreign governments |
|
|
63 |
|
|
|
71 |
|
|
|
63 |
|
Public utilities |
|
|
3,784 |
|
|
|
4,280 |
|
|
|
3,790 |
|
All other corporate, mortgage-backed and asset-backed securities |
|
|
29,876 |
|
|
|
33,319 |
|
|
|
29,909 |
|
Total fixed
maturity securities |
|
$ |
37,168 |
|
|
$ |
41,810 |
|
|
$ |
37,207 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trust and insurance companies |
|
|
30 |
|
|
|
33 |
|
|
|
33 |
|
Industrial, miscellaneous and all other |
|
|
113 |
|
|
|
109 |
|
|
|
109 |
|
Nonredeemable preferred stocks |
|
|
97 |
|
|
|
109 |
|
|
|
97 |
|
Total equity
securities1 |
|
$ |
240 |
|
|
$ |
251 |
|
|
$ |
239 |
|
Mortgage loans2 |
|
|
7,831 |
|
|
|
|
|
|
|
7,783 |
|
Short-term investments |
|
|
461 |
|
|
|
|
|
|
|
461 |
|
Policy loans |
|
|
888 |
|
|
|
|
|
|
|
888 |
|
Other long-term investments3 |
|
|
950 |
|
|
|
|
|
|
|
950 |
|
Total invested assets |
|
$ |
47,538 |
|
|
|
|
|
|
$ |
47,528 |
|
1 |
Amount does not agree to the statutory statements of admitted assets, liabilities, capital and surplus as
investments in related parties of $2.6 billion are excluded. |
2 |
Difference from Column B is attributable to valuation allowances on mortgage loans (see Note 5 to the
audited statutory financial statements). |
3 |
Includes derivatives, securities lending reinvested collateral assets and other invested assets. Amount does
not agree to the statutory statements of admitted assets, liabilities, capital and surplus as investments in related parties of $157 million are excluded. |
See accompanying notes to statutory financial statements and report of independent registered public accounting firm.
F-47
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Schedule III Supplementary Insurance Information
As of December 31, 2020, 2019 and 2018 and for each of the years then ended (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
|
Column F |
|
Year: Segment |
|
Deferred policy acquisition costs1 |
|
|
Future
policy
benefits, losses, claims and
loss expenses |
|
|
Unearned premiums2 |
|
|
Other policy claims
and benefits payable2 |
|
|
Premium revenue |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
$ |
5,204 |
|
|
|
|
|
|
|
|
|
|
$ |
394 |
|
Annuities |
|
|
|
|
|
|
7,837 |
|
|
|
|
|
|
|
|
|
|
|
3,443 |
|
Retirement Solutions |
|
|
|
|
|
|
22,362 |
|
|
|
|
|
|
|
|
|
|
|
5,939 |
|
Corporate Solutions and Other |
|
|
|
|
|
|
5,599 |
|
|
|
|
|
|
|
|
|
|
|
861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
$41,002 |
|
|
|
|
|
|
|
|
|
|
|
$10,637 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
$ |
5,125 |
|
|
|
|
|
|
|
|
|
|
$ |
413 |
|
Annuities |
|
|
|
|
|
|
7,955 |
|
|
|
|
|
|
|
|
|
|
|
4,202 |
|
Retirement Solutions |
|
|
|
|
|
|
20,781 |
|
|
|
|
|
|
|
|
|
|
|
4,324 |
|
Corporate Solutions and Other |
|
|
|
|
|
|
5,278 |
|
|
|
|
|
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
39,139 |
|
|
|
|
|
|
|
|
|
|
$ |
10,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
$ |
5,087 |
|
|
|
|
|
|
|
|
|
|
$ |
410 |
|
Annuities |
|
|
|
|
|
|
7,934 |
|
|
|
|
|
|
|
|
|
|
|
3,868 |
|
Retirement Solutions |
|
|
|
|
|
|
19,646 |
|
|
|
|
|
|
|
|
|
|
|
4,095 |
|
Corporate Solutions and Other |
|
|
|
|
|
|
5,670 |
|
|
|
|
|
|
|
|
|
|
|
1,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
38,337 |
|
|
|
|
|
|
|
|
|
|
$ |
9,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column G |
|
|
Column H |
|
|
Column I |
|
|
Column J |
|
|
Column K |
|
Year: Segment |
|
Net investment income3 |
|
|
Benefits, claims, losses and settlement expenses4 |
|
|
Amortization of deferred policy acquisition costs1 |
|
|
Other operating expenses |
|
|
Premiums written |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
$ |
247 |
|
|
$ |
772 |
|
|
|
|
|
|
$ |
123 |
|
|
|
|
|
Annuities |
|
|
338 |
|
|
|
7,539 |
|
|
|
|
|
|
|
55 |
|
|
|
|
|
Retirement Solutions |
|
|
843 |
|
|
|
8,258 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
Corporate Solutions and Other |
|
|
679 |
|
|
|
717 |
|
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,107 |
|
|
$ |
17,286 |
|
|
|
|
|
|
$ |
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
$ |
262 |
|
|
$ |
807 |
|
|
|
|
|
|
$ |
133 |
|
|
|
|
|
Annuities |
|
|
319 |
|
|
|
8,460 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
Retirement Solutions |
|
|
824 |
|
|
|
6,539 |
|
|
|
|
|
|
|
122 |
|
|
|
|
|
Corporate Solutions and Other |
|
|
569 |
|
|
|
1,151 |
|
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,974 |
|
|
$ |
16,957 |
|
|
|
|
|
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
$ |
270 |
|
|
$ |
744 |
|
|
|
|
|
|
$ |
154 |
|
|
|
|
|
Annuities |
|
|
319 |
|
|
|
8,203 |
|
|
|
|
|
|
|
48 |
|
|
|
|
|
Retirement Solutions |
|
|
798 |
|
|
|
5,656 |
|
|
|
|
|
|
|
132 |
|
|
|
|
|
Corporate Solutions and Other |
|
|
540 |
|
|
|
764 |
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,927 |
|
|
$ |
15,367 |
|
|
|
|
|
|
$ |
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Deferred policy acquisition costs and amortization of deferred policy acquisition costs are not applicable
for statutory basis of accounting. |
2 |
Unearned premiums and other policy claims and benefits payable are included in Column C amounts.
|
3 |
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. |
4 |
Benefits to policyholders and beneficiaries, reserves for future policy benefits and claims and commissions
are included in Column H amounts. |
See accompanying notes to statutory financial statements and report of independent
registered public accounting firm.
F-48
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Schedule IV Reinsurance
As of December 31, 2020, 2019 and 2018 and each of the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
|
|
|
|
|
Ceded to |
|
|
Assumed |
|
|
|
|
|
|
Gross |
|
|
other |
|
|
from other |
|
|
Net |
|
|
|
amount |
|
|
companies |
|
|
companies |
|
|
amount |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
146,855 |
|
|
$ |
(31,055 |
) |
|
$ |
686 |
|
|
$ |
116,486 |
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance1 |
|
$ |
1,378 |
|
|
$ |
(133 |
) |
|
$ |
8 |
|
|
$ |
1,253 |
|
Accident and health insurance |
|
|
441 |
|
|
|
(440 |
) |
|
|
- |
|
|
|
1 |
|
Total |
|
$ |
1,819 |
|
|
$ |
(573 |
) |
|
$ |
8 |
|
|
$ |
1,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
146,044 |
|
|
$ |
(31,691 |
) |
|
$ |
728 |
|
|
$ |
115,081 |
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance1 |
|
$ |
1,761 |
|
|
$ |
(661 |
) |
|
$ |
10 |
|
|
$ |
1,110 |
|
Accident and health insurance |
|
|
444 |
|
|
|
(445 |
) |
|
|
2 |
|
|
|
1 |
|
Total |
|
$ |
2,205 |
|
|
$ |
(1,106 |
) |
|
$ |
12 |
|
|
$ |
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
141,650 |
|
|
$ |
(32,380 |
) |
|
$ |
788 |
|
|
$ |
110,058 |
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance1 |
|
$ |
1,985 |
|
|
$ |
(130 |
) |
|
$ |
8 |
|
|
$ |
1,863 |
|
Accident and health insurance |
|
|
289 |
|
|
|
(373 |
) |
|
|
85 |
|
|
|
1 |
|
Total |
|
$ |
2,274 |
|
|
$ |
(503 |
) |
|
$ |
93 |
|
|
$ |
1,864 |
|
1 |
Primarily represents premiums from traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment and universal life insurance products. |
See accompanying notes to statutory financial
statements and report of independent registered public accounting firm.
F-49
NATIONWIDE LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Schedule V Valuation and Qualifying Accounts
Years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
Balance at |
|
|
|
beginning |
|
|
costs and |
|
|
|
|
|
end of |
|
Description |
|
of period |
|
|
expenses |
|
|
Deductions1 |
|
|
period |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances - mortgage loans |
|
$ |
34 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances - mortgage loans |
|
$ |
25 |
|
|
$ |
9 |
|
|
$ |
- |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances - mortgage loans |
|
$ |
23 |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
25 |
|
1 |
Amounts generally represent recoveries, payoffs and sales. |
See accompanying notes to statutory financial statements and report of independent registered public accounting firm.
F-50
Dealer
Prospectus Delivery Obligations
All dealers that effect
transactions in these securities are required to deliver a prospectus.
Available Information
The SEC maintains a website (www.sec.gov) that contains the
prospectus and other information.
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13.
|
Other Expenses of Issuance and
Distribution |
The expenses in
connection with the issuance and distribution of the contracts are as follows (except for the Securities and Exchange Commission Registration Fee, all amounts shown are estimates):
Securities and Exchange Commission Registration Fee:
$60,600
Printing Costs: $16,665
Accounting expenses: $30,000
Legal expenses: $19,970
Cost of Independent Registered Public Accounting Firm Consent:
$5,000
Cost of Independent Registered Public Accounting
Firm Audit of Registrant’s Financial Statements: $4,365,087
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.
However, 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 permitted.
Item 15.
|
Recent Sales of Unregistered
Securities. |
Not Applicable
Item 16.
|
Exhibits and Financial
Statement Schedules |
(A)
|
Exhibits
|
|
|
(3)
|
(b)
|
Nationwide
Life Insurance Company Amended and Restated Code of Regulations- filed previously on January 4, 2010, with N-4 Registration No. 333-164125. |
(4)
|
(a)
|
Individual
Annuity Contract- filed previously on July 17, 2020, with Pre-effective Amendment No. 3 to Form S-1 (Registration No. 333-229802). |
(4)
|
(b)
|
Contract
Specification Page - filed previously on July 17, 2020, with Pre-effective Amendment No. 3 to Form S-1 (Registration No. 333-229802). |
(4)
|
(c)
|
Application
- filed previously on July 17, 2020, with Pre-effective Amendment No. 3 to Form S-1 (Registration No. 333-229802). |
(4)
|
(d)
|
Increase
in Remaining Preferred Withdrawal Amount After A Long-Term Care or Terminal Illness or Injury Event Endorsement - filed previously on July 17, 2020, with Pre-effective Amendment No. 3 to Form S-1 (Registration No. 333-229802). |
(4)
|
(e)
|
Strategy
Endorsement - filed previously on July 17, 2020, with Pre-effective Amendment No. 3 to Form S-1 (Registration No. 333-229802). |
(4)
|
(f)
|
Market
Value Adjustment (MVA) Endorsement - filed previously on July 17, 2020, with Pre-effective Amendment No. 3 to Form S-1 (Registration No. 333-229802). |
(5)
|
Opinion
Regarding Legality – Attached hereto. |
(6)
|
Not
applicable |
(7)
|
Not
applicable |
(8)
|
None
|
(9)
|
Not
applicable |
(10a)
|
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 - filed previously on March 27, 2012 with Post-Effective Amendment No. 17 to Form S-1 for Nationwide Life Insurance Company, Registration No. 333-49112. |
(10b)
|
Third Amended and Restated Cost Sharing Agreement dated January 1, 2014 by and among Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance
Company, and their respective direct and indirect subsidiaries and affiliates – filed previously on March 30, 202 with Form S-1, Registration No. 333-237472. |
(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 - Attached hereto as Exhibit 5. |
(24)
|
Power
of Attorney-Attached hereto. |
(25)
|
Not
applicable |
(26)
|
Not
applicable |
(27)
|
Not
applicable |
(101.INS)
|
Not
applicable |
(101.SCH)
|
Not
applicable |
(101.CAL)
|
Not
applicable |
(101.DEF)
|
Not
applicable |
(101.LAB)
|
Not
applicable |
(101.PRE)
|
Not
applicable |
(B)
|
Financial Statement Schedules
|
All required
financial statement schedules of Nationwide Life Insurance Company are included in Part I of this registration statement.
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: |
(a)
|
To include any prospectus
required by section 10(a)(3) of the Securities Act of 1933; |
(b)
|
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 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; |
(c)
|
To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
(2)
|
That, for the 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: |
(a)
|
Any preliminary prospectus
or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424; |
(b)
|
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; |
(c)
|
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 |
(d)
|
Any other
communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
(B)
|
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
As required by the Securities Act of 1933, the Registrant
certifies that it has caused this Registration Statement to be signed by the undersigned, duly authorized, in the City of Columbus, and State of Ohio, on April 27, 2021.
NATIONWIDE
LIFE INSURANCE COMPANY |
(Registrant)
|
By:
/s/ JAMIE RUFF CASTO |
Jamie
Ruff Casto Attorney-in-Fact |
As
required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated, on April 27, 2021.
JOHN
L. CARTER |
|
John
L. Carter, President and 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 |
|
ERIC
S. HENDERSON |
|
Eric
S. Henderson, Senior Vice-Nationwide Annuity and Director |
|
STEVEN
A. GINNAN |
|
Steven
A. Ginnan, Senior Vice President-Chief Financial Officer-Nationwide Financial and Director |
|
KIRT
A. WALKER |
|
Director
|
|
|
By
/s/ Jamie Ruff Casto |
|
Jamie
Ruff Casto Attorney-in-Fact |