HomeMy WebLinkAboutFinancial Statements of Nationwide Retire. Solutions
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Nationwide~
Retirement Solutions
a Nationwide" Financial company
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RE: State of New York Audit Requirements
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August 4, 2006 i c, ,.
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Dear Entity Official:
As part of the service provided by Nationwide Retirement Solutions, and to satisfy the audit provisions
defined by the rules and regulations governing deferred compensation plans in the State of New York,
please find the following information enclosed:
I, Investment Performance Report - Indicates earnings from the various funds offered in the
deferred compensation plans in the State of New York, along with other account activity by
Group.
2. Audited Financial Statements of Nationwide Retirement Solutions, Inc. and Nationwide Life
Insurance Co.
3. Statement of Auditing Standards by KPMG Peat Marwick (SAS 70).
The materials enclosed provide a financial analysis of Nationwide Retirement Solutions, Inc. and
Nationwide Life Insurance Co., prepared in accordance with generally accepted accounting principles.
A copy of this audit report will be filed with the Department of New York Civil Service Board. The
material contained in this mailing is provided to assist with your audit, and therefore should remain
together and stored where it will be readily available to the auditors.
To protect the confidentiality of your employees' information, NRS is no longer including copies of the
participant statements with this mailing. Participant statements can be downloaded from the
NRSFORU website, accessing your entity's ESA Level 1 access. Enclosed you will find instructions to
access the Web to obtain copies of participant statements using your entity's ESA Level 1 access. If
your entity is not presently enrolled, also enclosed is the application to obtain an ESA Level 1 password
and user id.
Should you have any questions regarding this information or require participant statements placed on a
CD and mailed to you, please contact me at 1-877-677-3678, press 8 and enter extension 48719. I can
be reached between 7:30 a.m. and 3:30 p.m. ET.
Sincerelx,
ch"f~.)-
Che~~I~T
Unit Manager/Statements
DC-4003-11/02
Securities offered by Nationwide Investment Services Corporation. Member NASD
In Michigan only: Nationwide Investment Svcs. Corporation
5900 Parkwood Place. Columbus. OH 43016
Nationwide Retirement Solutions -We're On Your Side!
Employer Security Administrator Request Form
This form is required to establish one person within a plan office as the Employer Security
Administrator on the NRS web site who will administer the other web site roles for your employer
account. Employer Access role has the same viewing capability and is not limited.
All fields are required. Please print.
Please fax this form to 614-854-8862, attention: Lana Siekkinen
Date
Plan Name:
PlanlP1an Number:
Name of person requesting access:
TRle:
"SSN or Tax 10 Number:
"This nine-digit number is used for identification and setup purposes only. If you are a NRS participant, your employer
access is added to your existing user name and password to eliminate multiple user names to the seme person.
Access will be established to perform the following functions:
View Customer Account, View Aggregate Account, View Current Allocations, Establish access for Staff
Positions within the Plan office, View Plan Reports, and View Plan Level and Participant Level Statements
Plan Contact Infonnation:
Phone number:
Address:
Email Address:
Authorizing signature required: (For securlty/aooft pu_. approva' should be someone other than person requesting the access)
Plan Official's name:
TRle:
Signature:
Date:
A letter will be emailed to verify that access has been established. If you need help or additional information, please
feel free to call1-8n-617-3678, option 8, extension 4-8806.
7124/2006
Web site: www.nrsforu.com
Log on with User Id & Password.
You will need Adobe Reader to view statements.
If you do not have a User Id & Password, you may obtain them from Nationwide Retirement
Solutions by completing the enclosed Employer Security Administrator Request Form.
Log In:
Enter User ID in "Usemame"
Enter Password
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For Entity Level Data:
From options in the left column:
Click on "Reports"
Click on "Account Summary"
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To view Participant Statements:
Click on "Participant Information"
Click on "Search"
Enter Participant's Social Security Number
Click on "Submit"
~logOff
- _._-S;~-cnteria ~ to be
SSN. Omit: aI dashes in the
_____enay.
Enter Social Security Number here.
No dashes.
SSN Search:
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Click on the 'Submit" button. Hitting the
'Enter' key will not take you to the
'Account Summary' screen.
p- .........
.......
To view Participant Statements:
Participant's Social Security Number and Entity Number will appear
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To view Participant Statements (cont.):
Account Summary screen
cwn.t~IIA... 1......
--.~ Participant's name
and address
Entity Number shows here
.. ___Personal b1fonnatton
contributions Per Pay
~Tax COllbtbution:
$ 50.00
AIOf: 7J11r.lICN
__O."1T1l1 Electlonl
IMomtM6oft Em""'" Pre- Tax Accowat
-...... NATIONWIDE FIXED ACCOt.WT 100.00 %
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NATIONWIDE FIXEO
_ _ACCOUNT
T......
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10000
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TomlFlxedOptlone:
$13.901.83
51390763
To view Participant Statements (cont.):
Click on "Statements"
A list of up to 9 quarters appear under "Statement Period"
Click on the "View Statement" box next to the quarter to be viewed
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IMllI2004-1213112004
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ooo112O{l5.06I3012005
07101J2005-0S/30J2005
1010112005-12/3112005
0110112006-03/3112006
lW0112006.06I3OI2006
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"View Statement" box
for 2"" quarter of 2006.
Click here to see get a
pelf of that statement.
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VTSA5033 . D E FER RED CDHP4ItSATIDN P l A N REPORT DATE D1/D3/2DD6 .
INVESTHENT PERFDRHANCE PAGE NO 8J7S1
D1/01/2005 TO 12131/2005
NTC FBO: Totf'l OF SaJTIflllD NO. 3260
ACCDlM"IN; & FINANCE DEPT
TlJN>I OF SaJTIflllD
PO BOX 1179
SaJTIflllD NY
119710959
SERIESIINQ PREVIOUS REPORT -----DEFERRALS----- EXCHANGE HITHDRAHALS EXCHAII;E ADHIN DEFERRED ASSET CIIlRENT INVESTHENT
ACCDlM" VALUE GROSS NET IN lIJT OlARGES SALES DIGS FEES VALUE PERFDRIlANCE
NH: FIXOl 196235.57 0.00 0.00 0.00 27933.35 0.00 0.00 '0.00 O.DO 175738.89 7436.67
NH: FIX02 153330.76 3D735.86 3D735.86 78575.32 3996.56 0.00 0.00 0.00 0.00 268475.21 9829.83
NH: PHT 080 3056.62 920.0D 920.00 0.00 O.OD O.OD 0.00 0.00 26.49 4028.83 78.70
NH: IDA 070 560.81 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.61 600.60 43.40
NH: NGS 080 94263.89 5166.12 5166.12 45139.34 0.00 75418.51 0.00 0.00 866.92 88517.27 20233.35
NH: YKG 080 0.00 120.00 120.00 15083.7D 0.00 0.00 0.00 0.00 46.1D 15569.36 411. 76
NH: OOV 080 9725.03 0.00 0.00 4333.12 0.00 14426.46 O.OD 0.00 15.36 0.00 383.67
NH: .PH 080 0.00 1676.72 1676.72 50405.53 621.80 0.00 0.00 0.00 310.64 55016.92 3867.11
NH: .PS 080 23999.83 2990.04 2990.04 0.00 0.00 8559.36 0.00 O.OD 154 .52 19976.39 1700 .40
NH: ACI 080 D.OD 4975.52 4975.52 28215.84 0.00 8448.95 0.00 O.DO 151.91 25063.35 472.85
NH:NF 08D 25356.81 1780.00 1780.00 O.OD 657.90 0.00 0.00 0.00 204.80 28172.83 1898.72
NH: HIG 080 10815.05 1040.00 1040.00 O.OD O.DO 0.00 0.00 0.00 88.31 12231.41 464.67
NH: HHF 080 110080.53 3900.00 3900.00 0.00 0.00 78575.32 0.00 0.00 367.80 36178.08 1140.67
NH: FEI 095 313381.82 15678.47 15678.47 0.00 D.DO 12D921.14 O.OD 0.00 2258.15 215185.88 9304.88
NH: TOO D95 2923.05 220.00 220.00 D.OO 0.00 0.00 0.00 0.00 28.79 3272.36 158.10
NH: PVF 080 ID9548.06 10267.22 10267.22 0.00 O.OD 0.00 0.00 0.00 901.50 125540.10 6626.32
NH: GFA 095 205.21 0.00 0.00 54674.88 0.00 0.00 0.00 0.00 234.52 59230.41 4584.84
NH: TCl 095 182447.52 21638.70 21638.70 O.OD 0.00 0.00 0.00 0.00 1767.54 207078.50 4759.82
NH: FHG 095 425748.94 4490.40 4490.40 0.00 17682.97 411810.46 0.00 0.00 613.81 0.00 -132.1D
NH: FOIl 09S 126743.68 30084.63 30084.63 425447.56 3473.03 0.00 0.00 0.00 4832.72 655282.14 81312.02
NH: TFF 080 53287.52 4554.94 4554.94 21591.81 6325.17 0.00 0.00 0.00 487.20 79657.32 7035.42
NH: JF 095 233808.89 24243.45 24243.45 O.OD 16361.D7 8518.33 D.DO 0.00 2088.16 239238.74 8153.96
NH: FIG 095 0.00 300.0D 300.00 0.00 0.00 0.00 0.00 0.00 0.58 300.54 1.12
NH: FAH 095 5432.71 2600.00 2600.00 0.00 0.00 0.00 0.00 0.00 62.81 8287.74 317.84
NH: HFI 095 12903.79 300.00 300.00 0.00 0.00 0.00 0.00 0.00 123.70 13700.24 620.15
NH: DSP 095 90677 .60 12396 .54 12396 .54 0.00 0.00 0.00 0.00 0.00 905.04 106659.03 4489.93
NH: SCF 080 4547.89 455.00 455.00 0.00 0.00 0.00 0.00 0.00 38.75 5560.12 595.98
NH: IDF 080 27199.19 866.16 866.16 0.00 0.00 28215.84 0.00 0.00 33.35 0.00 183 .84
NH: TCI 080 1689.21 0.00 0.00 0.00 0.00 1638.07 0.00 0.00 4.25 0.00 -46.89
NH: DAF 080 24398.53 1696.50 1696.50 0.00 0.00 0.00 0.00 0.00 2D1. 95 26933.31 1040.23
NH: DGF 080 16762.87 1600.04 1600.04 20665.35 0.00 8518.29 0.00 0.00 164.55 33186 .45 2841.03
NH: NIV 080 58759.56 9530.79 9530.79 0.00 0.00 9063.97 0.00 0.00 449.46 60829.46 2052.54
NH: DPH 080 4312.73 285.00 285.00 0.00 0.00 4620.93 0.00 0.00 5.33 0.00 28.53
NH: sse 080 22567.34 37D9.0D 3709.0D 0.00 D.OO 8666.25 0.00 0.00 121. 33 17796.37 307.61
NH: ACV 080 33235.19 3076.25 3D76.25 49250.48 0.00 0.00 0.00 0.00 493.22 88971.96 3903.26
NH: 1111 080 0.00 0.00 0.00 129.83 O.DO D.OO 0.00 0.00 0.28 129.73 0.18
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VI'SA5033 . D E FER RED CDI1P.SATIDN P LAN REPORT DATE D1/D3/2DD6 .
INVESTI1ENT PERFDRI1ANCE PAGE NO 8,752
D1/D1/2DD5 TO 12131/2005
NTC FBD: TDI'tI DF SOOTHDLD NO. 326D
SERIESIUVQ PREVIl1.IS REPORT -----DEFERRALS----- EXCHAN;E IIITHDRAHALS EXCHAN;E ADI1IN DEFERRED ASSET CURRENT INVESTI1ENT
ACCDlM" VALUE GROSS NET IN lll1r CHARGES SALES CHGS FEES VALUE PERFDRI1ANCE
foil: NI1C 08D 265.11 2405.DD 2405.0D 1D'l85.30 0.00 O.OD O.DD O.DO 80.91 15364.89 1790.39
foil: NSC 08D 14811.00 1969.19 1969.19 D.DO O.OD 17096 .18 O.OD O.DD 73.lV+ O.OD 389.83
ItlP foil FIX 349566.33 3D735.86 30735.86 78575.32 31929.91 O.OD D.DD O.DD O.DO _214.1D 17266.50
ItlP foil VAR 2043515.98 174935.68 174935.68 725922.74 45121.94 804498.D6 D.DO D.DO 18208.2D 2247560 .33 171D14.13
.... foil TOT 2393082.31 205671.54 205671.54 804498.06 77051.85 804498 .D6 D.DD D.DO 18208.20 2691774.43 188280.63
ItlP ALL FIX 349566.33 30735.86 30735.86 78575.32 31929.91 0.00 0.00 0.00 0.00 _214.10 17266.50
ItlP ALL VAR 2043515.98 174935.68 174935.68 725922.74 45121.94 804498.06 0.00 0.00 18208.20 2247560.33 171014.13
.... ALL TOT 2393082.31 205671.54 205671.54 804498.06 77051.85 804498.06 0.00 0.00 18208.20 2691774.43 188280.63
.
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VISA5033 .
DEFERRED COMP.SATION PLAN
INVESTMENT PERFORMANCE
01/01/2005 TO 1V31/2005
NTC FBD: TDN'l OF SOUTHOLD
* DIVESTMENT SERIES *
TRANS IN
NIt: FIX01 NATIDNltIDE FDlED ACCOlIIT
NIt: FD<02 NATIDNIIIDE FDlED ACCOlIIT
NIt: PMT 080 PIMCO TTLRETRN FND CLS A
NIt: IDA 070 GARTMDRE INVDES AGGR SC
NIt: NGS 080 NEU BER GENESIS FD TC
NIt: YKG 080 VAN<AMP GROHTH & INC FD A
NIt: OGV 080 JPM DIVERSFD MDCP VAL FD A
.....: JPM 080 JPM MIDCAP VALUE A
NIt: JPS 080 JPM INTL EQUITY FD SLCT SIt
NIt: ACI 080 AM CENT VISTA FD IC
NIt: NF 080 GARTMDRE NATIlHIIDE RHI 0
NIt: MIG 080 MASS INV GRTHS1X FND CLS A
NIt: MMF 080 GARTMDRE MONEY It(T FD PS
NIt: FEI 095 Fro EQUITY INCOME FND
NIt: TCG 095 AM CENT GROHTH FND IC
.....: PVF 080 PTNtt VOYAGER FND CLS A
.....: GFA 095 GROHTH FND OF AMERICA A
.....: TCL 095 AM CENT ULTRA IC
NIt: FMG 095 FID MAGELLAN FND
NIt: FCN 095 FID CONTRARHI
NIt: TFF 080 TEMP FOREIGN FND CLS A
N1t:.JF 095.WIJS RHI
NIt: FIG 095 FED US G'TSC FND 2-5 YS IS
NIt: FAM 095 FID ASSET I1ANAGER
NIt: MFI 095 MS 1FT FIXED INCM PORT IC
NIt: DSP 095 DREY SIP SOO INDEX RHI
.....: SCF 080 GVIT SMALL COMPANY I
NIt: IDF 080 AIM DYNAMICS RHI IC
.....: TCI 080 AM CENT INT'L DISC IC
.....: OAF 080 DREY APPRECIATION FND INC
.....: OGF 080 DPP GLOBAL FND CLS A
.....: NIY 080 GARTMDRE SIP SOO INDEX ISC
.....: DPM 080 DREY PREM MDCAPSlK CLS A
.....: BSC 080 _ CAP MGMT SML CO FD IC
NIt: ACV 080 AM CENT VALUE IC
NIt: NBI 080 GARTMDRE BOND INDEX RHI A
NIt: NMC 080 GARTMDRE MIDCAP It(T INDX A
NIt: NSC 080 GARTMDRE SMALL CAP INDEX A
0.00
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.... ..... TOT
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.... ALL TOT
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TRANS OUT
0.00
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REPORT DATE 01/03/2006
.
PAGE NO
8,753
NO. 3260
MVA CHARGES
AD.J HDUEXCII TOTAL CURR UNITS
0.00
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CURRENT UNIT VALUE
65205.96319612
204702.05896196
3197.19374817
485 .57458119
52330.17040673
11120.111045'18
0.00000000
42785.78506510
15975.62247151
22405.78384757
1043.04960560
601.37008751
10094.82618086
21364 .54353830
446 .55907194
27S02.99707970
7874 .13205548
62201.59639547
0.00000000
135930.65132433
24710.27705890
99Z58.23748977
180.76753455
3846.29397117
6896 .54611811
67684 .69759129
2522.01611096
0.00000000
0.00000000
24067.05714483
14549.03574694
54053.80714229
0.00000000
11928 .83828940
S0963.12569135
108.30162961
10510.13513992
0.00000000
2.695l3546
1.31154128
1. 26011599
1.23688367
1.69151501
1.3Z843143
1.68614721
1.Z8586932
1. Z5042903
1.11861095
27.01005405
20.33924541
3.58382397
10.01210319
7.32795691
4.56459687
7.52214'188
3.32915071
3.21933365
4.82070941
3.22365175
2.41026586
1. 66259986
2.15473481
1. 98653671
1.57582176
2.20463359
1.34765264
2.61696463
1.11909454
2.28100664
1.12535021
1.73391530
1.49187823
1.74581057
1.19781421
1.46191068
1.41388291
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
RETIREMENT PLAN ADMINISTRATION OPERATIONS
Report on Controls Placed in Operation and
Tests of Operating Effectiveness
As of December 31, 2005 and for the period from
January 1,2005 through December 31, 2005
COMPAS
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
RETIREMENT PLAN ADMINISTRATION OPERATIONS
Report on Controls Placed in Operation and
Tests of Operating Effectiveness
TABLE OF CONTENTS
Section I - Independent Service Auditors' Report Provided By KPMG LLP ...................................................1
Section 11 - Description of Relevant Controls Provided by NRS Deferred Compensation ..............................4
Overview Of Operations ........................................................... ................................................. .... ................ .......5
Relevant Aspects Of The Control Environment Risk Assessment And Monitoring ............................................6
Organization............................................................................................................................................. ....6
Management Control................................................................................................................. ............. ......6
Personnel Po !icies and Procedures............................................................................................................... 6
Internal Audit ..................................................................................................................................... ... .... ...7
Other Considerations............................................................................................................................. .......7
Description Of Transaction Processing................................................................................................................. 8
Retirement Plan Administration-New Plan Set-Up .................................................... .... ................... .... .... 8
Retirement Plan Administration-Plan Maintenance ..... .................... .............................. ....... ....... .............8
Retirement Plan Administration-Participant Enrollments ............................................. ........... ... ... ....... ....9
Retirement Plan Administration-Participant Account Maintenance .........................................................9
Retirement Plan Contributions/Receipts .................................................................................................... I 0
Retirement Plan Withdrawals/Disbursements...................................... ...... ..................... ...........................12
Retirement Plan Exchanges/Investment Election Changes..................................... .............. ............. ... .....16
Investment Transactions............................................................................................................................. 1 7
Unit Valuation ......................................................................................... .................. ................. ............... .19
User Organization Reporting.................................................................................................................... .21
Description of Computerized Information Systems.................................................................................. .22
Program and System Software Change Control.........................................................................................24
Logical Access.......................................................................................................................................... .27
Physical Access..........................................................................................................................................30
System Backups ................................ ............................................................................ .............................32
Internet Service Center.............................................................................................................................. . 34
Control Objectives And Related Controls................................................................. ..................... ... ............. .....36
User Control Considerations............................................................................................................................ ...37
Section III - Information Provided by KPMG LLP ..........................................................................................38
Control Objectives, Related Controls, And Tests Of Operating Effectiveness...................................................39
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Section I -
Independent Service Auditors' Report
Provided By KPMG LLP
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KPMG LLP
Suite 500
191 West Nationwide Boulevard
Columbus,OH 43215-2568
Telephone
Fax
Internet
6142492300
6142492348
www.us.kpmg.com
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Independent Service Auditors' Report
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Thc Board of Dircctors
Nationwide Financial Scrviccs, Inc.:
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We have examincd the accompanying dcscription of the controls of Nationwide Retirement Solutions, Inc.
(thc Company) Rctircmcnt Plan Administration Opcrations applicablc to thc processing of transactions for
uscrs of thc COMPAS rccord-kceping systcm. Our examination included procedurcs to obtain reasonable
assurance about whether (I) the accompanying description presents fairly, in all matcrial respccts, the
aspccts ofthc Company's controls that may be relcvant to a uscr organization's internal control as it rclates
to an audit of financial statements; (2) the controls included in the description wcre suitably designed to
achicve the control objcctives specified in thc description, if those controls were complied with
satisfactorily and user organizations and sub-scrvicc organizations applicd the controls contcmplatcd in thc
design of thc Company's controls; and (3) such controls had bcen placcd in opcration as of
Deccmber 31, 2005. The Company uses sub-service organizations to pcrform ccrtain data entry functions,
valuc certain plan invcstments/insurance products and perform ccrtain administrative functions at the plan
level. The accompanying description includes only those controls and related control objectives of the
Company for which CaMP AS is the record-keeping system and does not include controls and related
control objectives of the sub-scrvice organizations. Our examination did not extend to controls of the sub-
service organizations. The control objectives were specified by the managcmcnt of the Company. Our
examination was performed in accordance with standards established by the American Institute of Certified
Public Accountants and included those procedures we considered necessary in the circumstances to obtain
a rcasonable basis for rendering our opinion.
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In our opinion, the accompanying description of the aforementioned controls presents fairly, in all material
respects, the relevant aspects of the Company's controls that had been placcd in operation as of
December 31,2005, Also, in our opinion, the controls, as described, are suitably designed to provide
reasonable assurance that the specified control objectives would be achieved if the described controls were
complied with satisfactorily and user organizations and sub-service organizations applied the controls
contemplated in the design of the Company's controls.
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In addition to the procedures we considered necessary to render our opinion as expressed in the previous
paragraph, we applied tests to specific controls, which are presented in Section III of this report, to obtain
evidence about their cffectiveness in meeting the control objectives, described in Section III, during the
period from January I, 2005 to December 31, 2005. The specific controls and the nature, timing, extent,
and results of the tests are listed in Section III. This information has been provided to user organizations of
the Company and to their auditors to be taken into consideration, along with information about the internal
control at user organizations, when making assessments of control risk for user organizations. In our
opinion, thc controls that were tested, as described in Section III, were operating with sufficient
effectiveness to provide reasonable, but not absolute, assurance that the control objectives specified in
Section III were achieved during the period from January 1,2005 to December 31, 2005.
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KPMG LLP, a U S Ilm'led Ilab<i~ypartnerstl'P, IS the U.S
member hrm 01 KPMG International. a Sw,ss cooperatlVf'
.....
iA.'!~tI
However, the scope of our engagement did not include tests to determine whether control objectives not
listed in Section III were achieved; accordingly, we express no opinion on the achievement of control
objectives not listed in Section III.
The relative effectiveness and significance of specific controls at the Company and their effect on
assessments of control risk at user organizations are dependent on their interaction with the controls and
other factors present at individual user organizations. We have performed no procedures to evaluate the
effectiveness of controls at individual user organizations.
The description of controls at the Company is as of December 31, 2005, and information about tests of the
operating effectiveness of specific controls covers the period from January 1,2005 to December 31,2005.
Any projection of such information to the future is subject to the risk that, because of change, the
description may no longer portray the controls in existence. The potential effectiveness of specific controls
at the Company is subject to inherent limitations and, accordingly, errors or fraud may occur and not be
detected. Furthermore, the projection of any conclusions, based on our findings, to future periods is subject
to the risk that changes made to the system or controls, or the failure to make needed changes to the system
or controls, may alter the validity of such conclusions.
This report is intended solely for the information and use of management of the Company, its user
organizations, and the independent auditors of its user organizations, and is not intended to be, and should
not be, used by anyone other than these specified parties.
KPM<:i:T Lep
March 21, 2006
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Section II -
Description of Relevant Controls
Provided by NRS Deferred Compensation
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OVERVIEW OF OPERATIONS
Nationwide Financial Services, Inc. (the Company or NFS) provides a breadth of services to retirement plan user
organizations. Certain retirement plan operations of the Company are provided by Nationwide Retirement
Solutions, Inc. (NRS) Retirement Plan Administration Operations (NRS Deferred Comp). NRS is an indirect
wholly owned subsidiary ofNFS.
NRS Deferred Comp is one of the Company's core businesses and is one of nine long-term savings business lines.
NRS Deferred Comp offers a range of investment products and services to meet the retirement and savings needs
of owners and employees.
NRS Deferred Comp has two primary types of customers (collectively, User Organizations): defined contribution
plan participants and defined contribution plan sponsors. The majority of participants contribute to employer
sponsored plans (including Internal Revenue Code section 401 and 457 plans), which allow the accumulation of
retirement assets through pre-tax employee contributions. Contracts with plans are separated into two different
levels of service based upon whether NRS Deferred Comp handles the participant accounting. These levels of
service are Full Service (plan and participant level records are maintained) and UnaIlocated Service (only plan
level records are maintained). This report has been prepared to provide information on NRS Deferred Comp' s
controls, which may be relevant to internal control of both types of User Organizations as weIl as both levels of
service entered into by the plans.
NRS Deferred Comp uses two record keeping systems, COMPAS and AS/400, to process and record retirement
plan administration operations for different User Organizations. This report is applicable only to plans processed
on COMP AS. For the plans processed on AS/400, a separate service auditors' report covers those operations.
Description of Relevant Controls
5
RELEVANT ASPECTS OF THE CONTROL ENVIRONMENT
RISK ASSESSMENT AND MONITORING
This description of internal control of the Company as it relates to User Organization accounts has been prepared
to provide information for use by the Plan Sponsors, administrators and independent auditors of NRS Deferred
Comp's User Organizations in discharging their responsibilities. It has been prepared taking into consideration the
guidance contained in American Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 70, "Reports on the Processing of Transactions by Service Organizations," as amended. As this
description is intended to focus on features that may be relevant to internal control ofNRS Deferred Comp's User
Organizations, it does not encompass all aspects of the services provided or procedures followed by NRS
Deferred Comp for User Organization accounts.
Organization
The Company's deferred compensation activities are overseen by the Company's Board of Directors and Audit
Committee of the Board of Directors. The Board of Directors is comprised of eleven (II) members including nine
(9) external board members. The Audit Committee monitors internal and external examinations of the Company's
retirement plan activities and ensures that suitable internal control is maintained. NRS Deferred Comp, which has
the responsibility for the processing of certain plan transactions, is organized along geographical regions of the
User Organizations it serves, with a senior executive responsible for oversight of the business unit's activities.
The senior executive reports to the President of the Company.
NRS Deferred Comp's activities are conducted in accordance with established policy and procedural guides,
which are periodically updated. The responsibilities of NRS Deferred Comp are allocated among personnel to
segregate the following functions: input of transactions; processing of transactions; recording of transactions;
custody of assets; and reconcilement activities.
Management Control
A formal management information and reporting system exists to provide monitoring of key controls and
performance measurements by management. Adherence to NRS Deferred Comp's controls is monitored through
periodic management reporting of exceptions and production and transaction volume. Results of NRS Deferred
Comp's operations are communicated to various levels of management and are accumulated in a monthly report
to executives of the Company.
Personnel Policies and Procedures
The Company has formal hiring practices that are designed to ensure that new employees are qualified for their
job responsibilities. New position hiring must be jointly approved by the Human Resources Department and the
manager of the department requiring the position. Hiring policies include: meeting minimum education and
experience requirements, and completion of reference, background, and credit investigation checks. The Company
is an affirmative action/equal employment opportunity employer.
Training of personnel is accomplished through supervised on-the-job training, seminars and in-house courses.
Certain positions require completion of specific training. It is the immediate supervisor's responsibility to ensure
that employees have completed such training. Department managers are also responsible for encouraging training
and development to continue to qualify personnel for their functional responsibilities.
Description of Relevant Controls
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Performance reviews are conducted on a periodic basis. Employees are evaluated on objective criteria based on
performance.
Internal Andit
NRS Deferred Comp's activities are subject to review by the Office of Internal Audit (Internal Audit). Internal
Audit is established as an independent, objective appraiser of the Nationwide group of companies' (Nationwide)
activities, acting in the interest of Nationwide and its policyholders, and at the direction of senior management
and the Audit Committee.
Internal Audit is organized into five distinct departments including Property and Casualty Audit, Life and General
Audit, Information Systems Audit, Allied Internal Audit, and Internal Security. Each department is responsible
for specific lines of business, which allows the internal auditors to specialize in certain functional areas. During
the performance of audit engagements, Internal Audit reviews the reliability and integrity of operational and
financial controls; ascertains the extent of compliance with established policies, plans, procedures, laws and
regulations to which Nationwide is subject; verifies the accuracy and propriety of transactions processed; and
ascertains the reliability of management information developed within the organization. Internal Audit reviews
the automated system application controls and reviews the adequacy of internal control to account for and
safeguard assets, deter fraud, detect errors, and promote the efficient and effective use of Nationwide's resources.
Internal Audit prepares an annual audit plan, which is reviewed and approved by executive management and the
Audit Committee. The plan is developed using a formal risk management methodology and provides for an audit
approach covering business issues deemed significant by Internal Audit. Activities for the year typically include
operational and financial audits, special projects, and system development reviews. Formal reports of audit
findings are provided to management after each audit and significant audit findings are summarized and reported
to the Audit Committee. Finally, audit findings are tracked to ensure that action is taken on reported audit findings
and there is an escalation process for issues that are not resolved timely.
Other Considerations
The Company's control activities are documented in a combination of manuals, which are updated periodically.
A Conflict of Interest policy exists and a Conflict of Interest Statement is required to be completed by managers
and other employees except those whose duties are clerical in nature.
The Company is subject to regulation and supervision by the State Insurance Departments (Insurance
Departments) in the states in which it operates. As such, the Company is required to file periodic reports with and
is subject to periodic examination by these regulatory authorities.
The Company carries fidelity bond insurance coverage with non-affiliated insurance carriers. The Company also
carries errors and omissions insurance coverage with Employers Insurance of Wausau, a Mutual Company (a
former affiliate).
Description of Relevant Controls
7
DESCRIPTION OF TRANSACTION PROCESSING
Retirement Plan Administration-New Plan Set-Up
New plan documents are received by a Plan Administrator, who then completes a COMPAS Setup checklist to
verifY that documents have been signed and have been received in good order. The Plan Administrator signs off
on the COMP AS Setup checklist, verifYing that the documents are in good order. The Plan Administrator passes
the new Plan Add Setup document to the COMPAS Plan Support Analyst to be entered on the COMPAS System.
The COMP AS Plan Support Analyst verifies that all of the documents are in good order prior to setting up the
new plan on COMP AS.
After the new plan has been established, the plan setup document is passed to a Quality Control (QC) partner for
verification and sign-off. If the QC Partner finds an error noted on the checklist, the plan set up documents are
passed back to the COMP AS Plan Support Analyst for correction. Once the error is corrected, the COMP AS Plan
Support Analyst returns the documents to the QC Partner for verification that the correction has been made.
Once the new plan is set up on COMP AS, notification is sent to the Administration Support Analysts. The
Administration Support Analyst reviews the new plan setup on COMP AS and then forwards the checklist and
pertinent documents to the Plan Administrator for registered principal review. The registered principal reviews the
documents, signs the COMP AS Setup checklist and forwards all documents to Imaging.
The time standard to set up a new plan on COMP AS is two business days from the time the case is considered in
good order.
Retirement Plan Administration-Plan Maintenance
Occasionally, changes are made to the general information of a plan. Significant changes include, but are not
limited to, contract charges, plan name, interest rates and interest rate guarantee periods. Upon initiation of a
change by a plan or NRS Deferred Comp, the Plan Sponsor works with NRS Deferred Comp's agents to make the
changes. Endorsements are also filed in the corresponding state with state regulatory agencies if required.
Depending on the type of change, if necessary, the change will be included in a contract amendment, which is
reviewed and signed by either an Authorized Plan Representative or a NRS Deferred Comp Representative. The
responsible area (i.e. Administration, Financial Operations, Actuarial, etc.) will forward the change request to the
COMP AS Plan Support Team. The COMP AS Plan Support Analyst processes the necessary changes on
COMPAS.
After the plan change has been processed on COMPAS, the documentation is passed to a Quality Control (QC)
partner with the COMP AS Plan Support Team for verification and sign-off. If the QC Partners finds an error
noted on the COMP AS Setup Checklist, the documentation is passed back to the COMP AS Plan Support Analyst
for correction. Once the error is corrected, the COMP AS Plan Support Analyst returns the documents to the QC
Partner for verification that the correction has been made.
Once the changes have been made, notification is sent to the responsible area. The responsible area reviews the
changes and approval is noted on the documentation. The documentation is then forwarded to Imaging.
Description of Relevant Controls
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Retirement Plan Administration-Participant Enrollments
Participants typically enroll on a Participation Agreement (P A), Payroll Deduction Authorization and Service
Request (P A) form. The PAs can be remitted to the Plan Administration home office for manual account set-up.
The time standard for enrollments is one day.
Manual Enrollments
New business applications are received by Mail Services Imaging Services where they are date and time stamped
and imaged. The applications are then forwarded to the Plan Administration New Business Team for processing.
The New Business Processor reviews the new business application to ensure it is in good order (name, address,
date of birth, etc.). If the new business application is not in good order, the New Business Processor forwards the
business application the appropriate department (Direct Access is used when investment election and/or
contribution amount is missing; CSR will obtain all missing demographic data) who will try to collect the missing
information. Such phone calls are recorded and retained for 3 years to document participant authorization. If the
New Business Processor is not able to obtain the necessary information within 30 days, the new business
application is mailed back to the Retirement Specialist for resolution or to the participant for a self-enrollment.
Once the new business application is determined to be in good order, the New Business Processor enters the
relevant information into COMPAS system. At the completion of entry, the system lists error and warning
messages, which can then be addressed by the New Business Processor before submission. The enrollment is
immediately processed as a non-financial transaction, and the account is established on the system. The
application itself is forwarded to the QA Processor who reviews the New Business Processor's work and verifies
that data entries are correct. Nightly, the COMP AS system applies any purchases that where received prior to the
input of the form and generates the application confirmation letters to the participant and plan sponsor. Each day,
the New Business Team is required to individually review the COMP AS Daily Error Report for errors originated
from their processor 10. Errors are displayed on-line and on Report "1061 Daily Error Report." Once the database
has been reviewed, each processor is tasked with the responsibility of making the correction(s). The correction of
agent errors is also the responsibility of the New Business Team.
Every month, a registered principal reviews new business applications that have been manually processed. The
registered principal also verifies that the enrollment form was signed and was properly completed. The registered
principal's review is evidenced by a stamped signature on the Participation Agreement.
Retirement Plan Administration-Participant Account Maintenance
Typical changes to participant accounts, which require participant account maintenance, include changes related
to a participant's name, personal information, social security number and investment elections. Changes
pertaining to investment elections and exchanges are discussed in the Retirement Plan Exchanges/Investment
Elections section of this document.
Requests for maintenance can be received either through telephone, the Internet Service Center (ISC), or hard
copy from the plan. Typically, 99% of maintenance requests are received via telephone. If received by telephone,
the Customer Service Representative requires the account holder verifies their name, social security number and
date of birth to ensure the request is being received by an authorized source. The request will be entered into
COMP AS. At the completion of entry, the system lists error and warning messages so that they can be
immediately addressed before submission. The non-financial transactions are effective immediately and are
viewable on-line. If received via the ISC, the participant will be required to enter their user name and password
for access to their account. Any change requested will be processed when the ISC interfaces with COMP AS.
Description of Relevant Controls
9
Hard copy or manually processed items are processed by a New Business Processor, who also determines if the
items are in proper order and properly authorized. Items requiring QC are forwarded to the QA Processor via the
Imaging system who then validates the entry paperwork. Name and address changes are typically processed
within 5 days. On a quarterly basis, participant account statements are generated that indicate the changes made to
the participant's account. See User Organization Reporting for a description of the User Organization Reporting
Process. Investment election change requests are handled in the same manner as Exchanges (see the section of this
document entitled Retirement Plan ExchangeslElection Changes). For all participant maintenance transactions,
COMP AS will generate an error report on a daily basis for any improperly processed maintenance transactions.
Error reports are reviewed by the New Business Processor.
Retirement Plan Contributions/Receipts
Each business day, money associated with retirement plan contributions is received by NRS Deferred Comp in
one of three forms:
. Checks
. Wires
. ACH (Automatic Clearing House)
Checks are remitted either via the Direct Deposit Account (Iockbox) with the bank or via U.S. Mail/Overnight
Mail. All purchases received (except lockbox) follow the imaging process.
Receiot of Checks via Lockbox
Certain plans remit retirement plan contributions and payroll documents to a designated lockbox. The bank
deposits the checks into the bank account. The bank then remits two copies of the checks, check detail (Advice of
Credit and Batch Detail Listing) and the payroll documents via courier to the Retail Service Center Payroll Team.
A processor reviews the payroll documents sent by the bank with each deposit and verifies that all deposits listed
on the Advice of Credit and Batch Detail Listing are received and accurate. The processor then enters all checks
received on the COMP AS system. The next day the processor verifies all deposit tickets received from the bank
were listed on the 1192 Daily Purchases Received Report generated by COMP AS.
Receiot of Checks via the U.S. Mail/Overnil!ht Mail
Certain Plans remit retirement plan contributions to NRS Deferred Comp via U.S. Mail or Overnight Express
Mail. Imaging Services receives and opens all mail and places a "For Deposit Only" stamp on the back of each
check. A log of checks received is prepared by Mail Services. The log and checks are then remitted by Mail
Services to a check processor in the Retail Service Center. After receiving the checks, the check processor strictly
endorses and photocopies checks for that day's deposits. The check processor then prepares a deposit ticket and
forwards the deposit ticket, checks and log to a QC processor for review. After approval from the QC processor,
the deposit tickets and checks are returned to the check processor who is responsible for remitting deposit tickets
and checks to Treasury Services. Beginning in March 2005, the evidence of the review of the QC processor is
captured in the Imaging system.
Description of Relevant Controls
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Receipt via Wire
A payroll processor is responsible for printing the Incoming Wire Report three times a day (10:00 a.m., 2:00 p.m.,
and 4:00 p.m.) from bank's website. The Payroll Processor then enters the wire receipts for their region into the
COMP AS system. To ascertain accuracy ofthe information entered onto the system, a Payroll Processor, separate
from the initial Payroll Processor who entered the information onto the system, performs a regional QC,
validating that all wires for the day are accounted for. All processors then sign off on the ACH/Wire Log which is
forwarded to Reconciliation next business day.
Receipt via ACH
A Payroll Processor is responsible for printing the Income Wire Report three times a day (10:00 a.m., 2:00 p.m.,
and 4:00 p.m.) from Bank One's website. The Payroll Processor then enters all Automated Clearing House (ACH)
receipts for their region onto the COMP AS system. To ascertain accuracy of the information entered onto the
system, a Payroll Processor, separate from the initial Payroll Processor who entered the information onto the
system, would perform a QC review.
Contributions/Receipts
Each business day, detail supporting retirement plan contributions is remitted to NRS Deferred Comp in one of
three formats:
. Hardcopy
. Fax
. Direct Transmission
Hardcopy detail supporting retirement plan contributions can be remitted either via a lockbox, U.S. Mail, or
Overnight Mail. Imaging Services receives and opens U.S. Mail. Hardcopy detail is remitted from the bank, Mail
Services, or Imaging Services, depending on who initially received the detail, to the Retail Service Center Payroll
Team for processing. Alternatively, the plans can fax retirement plan contribution information to the Retail
Service Center.
Once the deposit receipt information and corresponding retirement plan contribution detail is received by the
Retail Service Center Payroll Team, a Payroll Processor is responsible for reconciling the receipt information with
the retirement plan contribution detail. For detail with over 105 participants, the Payroll Processor then enters the
receipt information into COMP AS and may forward the retirement plan contribution detail (if received via
lockbox or mail) to an outside data entry service. Entities with 75 participants or less are entered into COMP AS
where the processor has to verify the data and make appropriate changes.
The outside data entry service enters and transmits the retirement plan contribution information through data
transmission onto COMPAS several times a day. COMPAS has an internal verification process, which reviews
contributions via data transmission for pre-established criteria.
If the retirement plan contribution detail entered or uploaded into COMP AS does not balance to the receipt
information, COMP AS will place the information in an unbalanced status until the discrepancy is resolved.
Information which is "in balance" according to COMPAS is assigned an effective date. COMPAS updates the
participant accounts using the information from the nightly flow. A Financial Transaction Register (FTR) report is
generated by COMPAS after the nightly flow. The FTR report shows that the total dollars received on COMPAS
were actually processed. These balancing procedures are performed by the Financial Service Representatives in
the reconciliation area to ensure that contributions are processed or placed in a suspense account.
Description of Relevant Controls
II
Financial Operations personnel perform cash reconciliation on both a monthly and daily basis. All monthly
reconciliations are reviewed by management within IO business days after the statements are received, and
initialed as evidence of approval.
Daily, the Payroll Processing Team Manager or team lead will review the regional unbalanced screen in
COMPAS, which shows any unprocessed batches (deferral contributions). This screen is used to monitor the
timeliness of processing contributions against internal time standards (same day for contributions). If there are
any unprocessed batches, the Payroll Processing Team Manager or Team Lead will designate a Payroll Processor
to review, investigate, and resolve any unprocessed payrolls on the COMP AS unbalanced screen. All calls made
to the entity in an effort to resolve the unprocessed payrolls are documented by the designated Payroll Processor.
The team manager or team lead later reviews the unbalanced screen to verifY with the Payroll Processors that the
unbalanced payroll batches are being researched by a Payroll Processor. Also, the Payroll Processor will note any
calls to the entity to resolve problems on the batch header. The team manager / team lead completes the Checks
Received Report daily in order to compile and balance all deposits across the recordkeeping systems. The report
is then forwarded to the reconciliation department. The Recon Processor verifies that the total amount on the
ledger matches the amounts on the COMPAS and COMPAS reports. The Recon Processor validates that the "To
Received Cash" amount matches off with the credits on the ledger. If the deposits don't match, the Recon
Processor validates that all wires were entered on COMP AS and uses the Checks Received Report to identifY any
outstanding issues. The Reconciliation Processor then enters dollar amounts from the outstanding issues on the
Recon as an open item. Plan Administration researches any open items on the Recon that do not have a
corresponding debit/credit for offset and resolves the items within 60 days.
Payroll deferrals that do not have an exact match on the COMP AS system are sent to the "Suspense Account" for
various reasons, such as: the entered social security number/entity number combination does not exist on the
system, the account is at a closed or restricted status, or the life insurance premium exceeds the total deferral
amount. Suspense reconciliations are done on a weekly basis and are distributed to all team managers.
Each of the Suspense Account items must be researched and identified, and the final resolution must be made by
the sixth day. Individual suspense tickets are delivered to the regional processing teams by the Internal Control
Unit each day, and the "1176 Purchase Suspense Aged Open Items Report" shows all unresolved suspense items
for all regions to date. This report is reviewed daily by the processing teams to identifY and clear suspense items.
The team managers review the Regional Open Items Summary Report upon receipt each week on the access
database to ensure suspense items are being resolved within the time standard.
Retirement Plan Witbdrawalsillisbursements
Withdrawals
Participants can withdraw funds from their accounts using one of the following options:
I. Annuitization / Systematic withdrawal
a. Purchased Annuity
b. Designated Amount Systematic Withdrawal
c. Designated Period Systematic Withdrawal
d. Required Minimum Distribution
e. Manual Pull Systematic Withdrawal
Description of Relevant Controls
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2. Immediate Payment
a. Lump Sum
b. Partial Lump Sum
3. Future Payment
4. Unforeseen Emergency (Financial Hardship) Withdrawals
a. Paper Application Request
b. Database Phone Request
5. Outgoing funds to another carrier plan
a. Rollover
b. Transfer
c. Purchase Service Credit
d. Plan to Plan Transfer
6. In-Service Withdrawal (not actively deferring, but not terminated)
Upon receiving a request from a participant to withdraw funds, a Customer Service Representative mails the
participant a package containing payout election forms (except special cases which mail their own forms). The
participant completes the appropriate form based on which withdrawal option they are choosing and mails or
faxes the completed form to NRS Deferred Compo A completed and signed form is required for all withdrawals
(except unforeseen emergencies processed by phone). Imaging Services will receive and scan the payout election
forms, which are then forwarded to the distribution teams. Upon receipt of the payout election forms, a
Disbursement Team Processor reviews the forms to determine the withdrawal option selected.
Annuitization
The Income Products Service Center (IPSC) is responsible for maintaining the account information and making
all future payments for participants electing a purchased annuity option for payout! Annuitization. Purchased
Payments are reflected as a lump sum distribution from the plan with all of the assets moving to the Income
Products Payout Service Center (IPPSC) and future distributions made from the Repetitive Payment System
(RPS). For purchased annuities, the payout election forms are received by the NRS processing units who screen
the applications for good order requirements and then forward them to an IPPSC processor. The IPPSC processor
establishes the customer account and then enters the Annuitization information contained on the payout election
forms on RPS. The set up in RPS and the rate calculation will be QC reviewed by another member ofIPPSC. This
review is evidenced by the reviewer signing the approval slip attached to the supporting documentation. Once the
customer account has been established on RPS, the IPPSC processor sends an email to NRS Deferred Comp
Disbursement Team Processor (a generic email address is used to ensure that the regions receive each request)
requesting the account to be surrendered from COMPAS. The NRS Deferred Comp Disbursement Team
Processor processes a surrender/transfer on COMP AS with the funds being sent IPPSC via ACH. The NRS
Deferred Comp Distribution Quality Control Processor will review the Annuitization surrender for accuracy. The
following day, a Balancing Processor will obtain a COMP AS report, which lists all processed distributions and
confirms the ACH, which will move the money from the COMP AS bank account to the IPPSC bank account.
Additionally, the Balancing Processor will inform the IPPSC Processor, via email notification, that the surrender
is completed. Participants with a minimum balance of $5,000 have the option to choose a Metropolitan Purchased
Annuity. The paperwork is mailed from the NRS fulfillment area when participants request a distribution packet.
Once the completed paperwork is received by the NRS processing unit, it is screened for good order requirements.
The NRS Deferred Comp Disbursement Team Processor processes a surrender/transfer on COMPAS. The NRS
Deferred Comp Distribution Quality Control Processor will review the Annuitization surrender for accuracy. The
Description of Relevant Controls
13
following day, a Balancing Processor will obtain the Daily Distribution Reconciliation Report, which lists all
processed distributions. When the first payment is generated from RPS through PMTS, the IPPSC processor
receives a First Time Payment Report from RPS. This report is matched to the original supporting detail for the
new set up and is verified for accuracy by a member of the IPSC team. The manager approving the checks on
PMTS reviews the first time payment report for evidence of review by another member of IPPSC and a copy of
the supporting detail. The manager will approve the checks on PMTS upon the completion of his/her review.
After the initial payment, reoccurring payments will be processed automatically. Once approved, the checks will
be printed and mailed by Document Services in Grove City, Ohio. Once the first benefit payment commences, the
benefit election cannot be changed.
An RPS report identifying the expected checks from RPS, along with a PMTS report that identifies the checks
that were cut is produced weekly. These reports are reviewed as part of the balancing by the IPPSC team.
Payments are balanced daily, monthly, quarterly, and annually depending on the term elected by the participant. If
the person elected payment via ACH, verification is performed to ensure the payment is issued accurately and
timely. For check payments that exceed $10,000, the option and dollar amount is reviewed by the IPPSC team.
IPPSC receives Daily Error Report to identify surrenders that did not process on COMP ASIRPS and a Rejected
Report indicating where RPS attempted to produce a check and PMTS did not produce the check. RPS also
produces an Action Required Report that identifies pending account set-ups and account changes, as well as an
Activity Report, which identifies everything processed on RPS the previous business day. The IPPSC Support
Services team reviews the Action Required Report and investigates any unusual items. The Activity Report is
utilized primarily for research purposes.
A participant can elect a Systematic Withdrawal to remain in the plan. In these cases, the withdrawal request
would be processed by a NRS Deferred Comp Disbursement Team Processor and the periodic payment schedule
would be established in COMP AS following a good order screening. Once the periodic payment schedule is
established, periodic withdrawals will automatically be made and a check will be sent to the participant based on
the term elected or when the distribution was processed.
Unforeseen Emergencv Withdrawals
Participants may apply to receive funds for an unforeseen emergency in two ways: paper application or over the
phone application. If a participant has an unforeseen emergency, they can call the phone center. The phone center
representative will ask the participant a series of questions for identification. Upon successfully answering all of
the questions, the phone center representative will input the participant request into the Unforeseen Emergency
Database. Withdrawals under $10,000 do not require any further approval or manual intervention. If the
unforeseen emergency request exceeds $10,000, the phone center representative places the request into a pending
file and a Call Center Team Lead will call the participant back to obtain the required documentation. Any request
approved over the UE Database is retrieved by the disbursement processing team and processed (following the
normal distribution process). The paperless process is extended to participants one time only.
Overview of the Distribution Process
For all other payout requests, the processor ensures the participant's name, address, and social security number
agrees to information included on COMPAS. The processor also reviews the date of birth to ensure that minimum
distribution requirements governed by the Internal Revenue Code (IRC) are met. The processor checks the
participants' tax elections. Finally, the processor checks to see if the waiver of notice box has been initialed on the
request form. This means that the transaction will be entered on COMP AS with a future effective date. The
processor accesses COMP AS and enters the payee and distribution information for immediate payments, outgoing
funds to another carrier, in-service withdrawals, and financial hardships. Once the transaction is entered, the
Distribution Quality Control (QC) Representative will perform a QC review to verify that the information entered
Description of Relevant Controls
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matches the distribution requested by the participant. COMP AS will interface the withdrawal information with
PMTS, the company-wide payment processing system. The following day, PMTS and COMPAS reports are
produced and remitted to a Balancing Processor. The Balancing Processor will obtain and generated the
COMP AS report. The Balancing Processor reconciles withdrawal requests as reported on the three systems. The
Balancing Processor's name is automatically entered onto each withdrawal request on PMTS after review. If a
discrepancy or error is noted, the Balancing Processor will input the error reason into the QC Balancing Error
Database. The Balancing Processor will forward the request to the Distribution Maintenance Representative to
correct the transaction. Once the correction is made, the request will be QC'd by the manager (in the case of a
manual check) or the QA Process again if the error was created on the COMP AS system. Once the transactions
have been balanced, the balanced report is passed to the region manager for approval. All requests are approved
on-line and evidenced by the manager's name being automatically entered onto each withdrawal request after
review. Payout election forms are then remitted to "closed" in the Imaging System. Items that are processed on
COMP AS, but not PMTS appear on our reconciliation reports. Items that error during the interface between
COMP AS and PMTS are identified on the Daily Error Report and resolved by the Distribution Maintenance
Representative.
Disbursements
Withdrawal payments (disbursements) can be issued in one of four formats:
I. Manualcheck
2. Operations check
3. ACH (An ACH is also used to transfer funds to the IPSC account when an annuity is purchased)
4. Wire
Pavment via Manual Check
Manual checks are used in certain situations (e.g., multiple beneficiary payments, payments to those with a
foreign address, and instances where corrective processing must be performed). For manual checks, the
withdrawal information is entered on PMTS. A manual check request is prepared and printed by the disbursement
team processor. The manual check request, along with the withdrawal request detail from COMP AS, is given to
the region manager for review and approval. The manual check request and detail is then forwarded to Treasury
Services. The Treasury Services Processor accesses PMTS and validates the payee and amount is correct and that
the account balance is sufficient to cover the request. The check is then prepared and logged according to the
method of delivery that will be used (regular mail, overnight, or pick-up by a NRS Deferred Comp processor).
The checks are mailed directly from Treasury Services to the designated recipient. A second processor will
perform a QC review of the request and the check before the check is mailed. After a batch of manual checks has
been printed, a Treasury Services Disbursement Accountant compares the PMTS system report, which lists the
checks requested with the check log, which shows all checks printed. Any discrepancies between the number of
checks requested and the number of checks printed, is followed up by the Treasury Service Disbursement
Accountant.
Pavment via ODerations Check
Operations checks are those checks electronically approved and automatically sent through the system. Operations
checks are printed in the Document Services print shop located in Grove City, Ohio based on information entered
onto PMTS and remitted to Document Services for mailing unless special mailing instructions are involved.
Special mailing instructions are entered onto PMTS by the NRS Deferred Comp Balancing Processor. A file is
transmitted from PMTS to the Document Services print queue. The checks marked for ADMIN on the PMTS
system are delivered back to the NRS Distribution Processing Teams to satisfy the special instructions.
Description of Relevant Controls
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Infrequently, a check is destroyed in the printing process and NRS Deferred Comp Disbursement Team is notified I
to reissue the destroyed check.
For both manual and operations checks, there is an electronic signature in the system. Once a check request has
been approved in the system, the system allows the electronic signature to be printed on the checks. I
Pavment via ACH or Wire
For manual ACH or Wire requests, a Treasury Services Accountant reviews for proper authorization and approves
the request electronically. PMTS will then create and send a transmission file to the bank.
Disbursements
Cash reconciliations are performed on a daily and monthly basis both by the Reconciliation Team and Treasury
Service personnel. Monthly reconciliations are reviewed by management within 10 business days after the
statements are received, and initialed as evidence of approval.
Retirement Plan ExchangeslInvestment Election Changes
Each business day, NRS Deferred Comp receives exchanges/investment election changes from User
Organizations in one of three formats:
I. Telephone
2. Internet Service Center (ISC)
3. U.S. Mail or Facsimile
Via Teleohone
The telephone exchange and investment election change request process enables participants to call NRS Deferred
Comp's Customer Service Center and transfer money from one investment fund to another (in the case of an
exchange) or change the manner in which certain future participant contributions will be allocated (in the case of
investment election changes). Telephone exchange and investment election change services are provided only at
the participant level. Participants can utilize the Voice Response Unit (VRU) to systematically perform these
transactions, or can prompt out to a Customer Service Representative to perform these transactions.
If utilizing the VRU system, the participant is prompted to enter his/her social security number and personal
identification number (PIN) before the participant can access any account information or perform any
transactions.
If dealing with a Customer Service Representative, the participant is asked to confirm his/her name, social
security number, and date of birth before transactions are processed or information is released. Telephone
exchange requests are processed only between funds that are full service, in which the individual participant-level
records are maintained on CaMP AS. Transactions are entered into CaMP AS and confirmed with the participant.
A QC Review will be completed the following day on a sampling of fund exchanges; this is completed on a daily
basis. The sample will be selected from a CaMP AS generated report of all funds exchanges processed by the
Customer Service the previous day. An independent QC individual will randomly select 10-20% of the prior day
exchanges and will verifY the exchange processed within the system accurately reflects the request made within
the participant phone call. Completion of this review will be evidenced the QC's signature. If an error is
identified, it is entered into the Service Tracking database for monitoring and resolution.
Description of Relevant Controls
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Additionally, participants receive a confirmation of the exchange and/or investment election change by mail.
Via ISC
The ISC allows access to the COMP AS website from the Internet. The ISC allows participants to access current
fund balance information, make changes to future investment allocations, and allows the movement of participant
funds between investment options. Tbe ISC feeds COMP AS on a daily basis. Participants receive a confirmation
of the exchange and/or investment election change made via the web through the mail.
The ISC transactions and COMP AS data are protected with a combination of routers, servers, a network firewall
and transaction encryption methods. Unique participant information is required to gain access to the ISC and to
establish an Internet account and password to that account. Once the account is established a personal password is
required to gain access.
ISC transactions use I28-bit encryption for transactions between the participant, the website, and the firewall for
web browsers that support I28-bit encryption, otherwise transactions may be encrypted using 56-bit or 40-bit
encryption. Should a user log on with an Internet browser using less than 40-bit encryption, the session is
terminated. After 15 minutes of inactivity with any browser the session is terminated.
Via U.S. Mail or Facsimile
From time to time, participants (in the case offull service customers) and plans (in the case of unallocated service
customers) may wish to exchange funds or change the manner in which future contributions are allocated to
investment options. Plan Managers may exchange funds from one investment option to another, but may not
change allocation mixes. Only participants can change allocation mixes. Certain of these transactions are
requested via a hardcopy request that is remitted via U.S. Mail. Such hardcopy requests are received by Imaging
Services and are imaged and forwarded onto the Retail Service Center. Members of these transactions are
remitted via facsimile. A New Business Processor in the Retail Service Center upon receiving the request either
via U.S. Mail or facsimile will then process the requested exchange via COMPAS system. Account holder
receives a confirmation of the exchange and/or investment election change by mail.
A Quality Control Review (QC) will be completed on a sampling of exchanges on a daily basis. The sample will
be selected from a COMP AS generated report of all fund exchanges processed the previous day. An independent
QC individual will randomly select 10-20% of the prior day exchanges and will verify the exchange processed
within the system accurately reflects the requests the request made within the participant phone call. Completion
of the review will be evidenced by the QC's signature. If an error is identified, it is entered into the Service
Tracking Database for monitoring and resolution. Once added into the database, an error is to be resolved within 5
business days. Items may be pended for longer than five days provided all research has been completed and
documentation provided for the pending item. Team leads and managers monitor the Service Tracking Database
on a daily basis to determine the status of each pending inquiry/item. Any exchange items needing retroactive
investment processing must have management approval.
Investment Transactions
NRS Deferred Comp provides a full service contract level of service. Full service contracts are contracts whereby
NRS Deferred Comp maintains participant records. Therefore, investment transactions are kept at the participant
and plan levels.
Investment transactions are the direct result of contribution, withdrawal and exchange transactions entered onto
COMPAS the previous day for participant (for full service contracts) level.
Description of Relevant Controls
17
Variable Investment Ootions
Each day between 12:00 a.m. - 4:00 a.m., COMP AS sends daily trade information to the Buy/Sell Trading System
(BUYS). The interface feed received from COMPAS by BUYS is balanced to the administrative feed received by
the general ledger system. The independent source files are provided by COMP AS and are accessed by the
Financial Operations area to confirm the information in BUYS agrees with the independent source data. This
balancing process is completed for each line of business. By 5:00 a.m., BUYS notifies each Financial Operations
staff member of the status of the National Securities Clearing Corporation (NSCC) flow. The BUYS system is
programmed to identify all trades that can be processed through NSCC. NSCC allows trades to be initiated and
settled in a more timely and cost efficient manner (on a net basis) than manual fax order forms sent directly to the
fund houses. By 5 :00 a.m. BUYS creates and sends a batch file to the NSCC of the daily trades. This alerts the
staff if manual fax order forms need to be initiated for missed NSCC processing by an individual line of business.
By 8:00 a.m. the Financial Operations staff log into BUYS and balances the general ledger system to the trades
received for each separate account within BUYS and approves the daily trade activity. By 9:00 a.m. the Financial
Operations staff faxes the manual order forms to the fund houses that do not use NSCC. By 9:30 a.m. BUYS posts
the manual trades to the Investment Data System (VIDS). Around 10:00 a.m., manual wires are posted to PMTS,
and by I :00 p.m. the Disbursement Wire Totals Report and Manual Payment Summary Approval Sheet signed by
management are sent to Treasury Services for final approval and initiation of wires. The NSCC notifies BUYS of
the trades rejected as soon as they occur. This allows Nationwide to research and resolve any rejected trades in a
timely manner. Confirmed or accepted trade notifications are received twice a day from NSCC - once at
10:00 a.m. and then again around 12:00 p.m. The final NSCC confirmation and settlement information are
received around 12:00 p.m. and an e-mail notification is sent to Financial Operations. After 12:00 p.m. the NSCC
settlement information is balanced to the Cash Requirement Report and settlement notification spreadsheet is
completed and faxed to Settlement Bank and Treasury Services.
Manual wire requests (fax orders) are approved by management prior to being faxed to the fund houses. In the
usual case, manual wire requests are automatically set up on PMTS by an interface between PMTS and BUYS. A
member of the Financial Operations team verifies that the BUYS Disbursement Report agrees to each pending
wire on PMTS. If a wire does not exist that should be on PMTS, the team member enters the wire into PMTS. If a
wire exists that should not, the team member removes or deletes the request from PMTS. An authorized approver
must approve each wire request established in PMTS. A Manual Payment Summary Approval Sheet is printed
from PMTS and signed by the authorized approver. The Manual Payment Summary Approval Sheet and the
Disbursement Wire Summary are reviewed by Treasury Services for proper authorization. Once the authorization
has been noted, Treasury Services approves the wires on PMTS and the wires are released to the bank for
processing.
Each morning, the Portfolio Accounting Department receives a daily buy/sell interface file with trade information
through COMP AS. This buy/sell file is printed and reviewed for the correct processing date by the Accounting
Supervisor. After verifying the correct processing date on the file, the file is downloaded onto a buy/sell group of
spreadsheets creating the buy/sell package, a report which summarizes all variable investments to be purchased or
sold for the day.
The buy/sell package is reviewed for accuracy by a Senior Accountant to ensure that the Net Asset Value (NA V)
per share (i.e., the price at which the mutual fund can be bought or sold during that day) and total dollar amount to
be traded with the mutual fund(s) for that date is accurate. This buy/sell package is then reviewed by the
Accounting Supervisor and evidenced by his/her signature on the buy/sell package. The trade is then placed with
the mutual fund house by the Accounting Department. Additionally, after the review is complete, the information
is interfaced to VIDS.
Description of Relevant Controls
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On a periodic basis (no less frequently than monthly), investment transactions with mutual fund houses are
reconciled to mutual fund account statements by a Senior Accountant in Portfolio Accounting that is independent
of the Accountant placing the trade. Placing the reconciliation in the reconciliation file evidences this review.
Fixed Investment Ootions
Each evening COMP AS updates the general ledger system for the fixed investments purchased and sold that day.
A Senior Accountant performs monthly ledger reconciliations of fixed investments to the financial transaction
information on COMP AS, which includes all deposits and withdrawals. In addition, a quarterly reconciliation is
performed to ensure that the interface between COMP AS and the general ledger system is working correctly. This
reconciliation involves an Accounting Supervisor verifying the fixed investment balances per the general ledger
system to reports of fixed investment balances per COMP AS. A Senior Actuarial Assistant ensures that the fixed
investment balances per this report agree to what was entered onto the Company's general ledger system.
Quarterly, COMPAS valuation summaries are uploaded by NRS Deferred Comp Systems Department to a
website and then downloaded by the Actuarial Department. Either an actuarial analyst or a Senior Actuarial
Assistant reconciles the COMP AS valuation summaries to data obtained from the original source table data files
from COMP AS. On a quarterly basis, a senior actuary approves fixed investment data to be uploaded to the
general ledger system by the Finance Department.
Unit Valuation
Both variable and fixed investment options are valued based upon unit values multiplied by the number of units
held (Le., an underlying investment option's unit value multiplied by the number of units held by the participant
equals the value of the investment option). The change in unit value is calculated for each underlying mutual fund
in a variable annuity contract and for each fixed investment option. These calculations are performed daily by the
V ALU system for variable investment options and COMP AS for fixed investment options. Beginning in
July 2005, for variable investment options, an Associate in the Unit Value Accounting Department, independent
of the Associate who entered the information into V ALU, reviews a system-generated report of the data entry
information for accuracy and evidences review by initialing the system-generated report. For fixed investment
options, an actuarial assistant in the NRS Deferred Comp's Actuarial Department reviews interest earned monthly
for reasonableness compared to the contract rate.
Both variable and fixed investment option unit calculations are equal to the previous day's unit value multiplied
by a Net Investment Factor (NIF).
Variable Investment Ootions
The NIF for the variable investment option is calculated using the following formula:
NIF = [(NA V,+ Div + Cap Gains)/NA V,.,] - (Adys * Daily Admin Charge)
where
NA V, = The mutual fund's NA Vat the end of today.
NA V,., = The mutual fund's NA Vat the end of yesterday.
Div = Dividends. Accumulated income distributed by the mutual fund at the end of today.
Cap Gains = Capital Gains. Distribution of net capital gains by the mutual fund at the end of today.
Adys = The number of days since the last unit value calculation.
Daily Admin Charge = The daily administrative charge assessed by the contract.
Description oj Relevant Controls
19
Each evening, an Associate in the Unit Value Accounting Department contacts the mutual fund houses and
electronically receives the current day's dividend rate, capital gain rate, NA V per share and change in NA V per
share and then enters this information onto V ALU.
An Associate in the Unit Value Accounting Department, independent of the Associate who entered the
information onto V ALU, reviews a print screen of the data entry information for accuracy; this is evidenced by
the Associate initialing the print screen. Once the information is input onto V ALU, V ALU calculates the current
unit value using the above formula. VALU then interfaces with COMPAS and updates COMPAS with current
unit values.
Dividend and Capital Gain rate information is received by the Unit Value area and entered into the V ALU system.
This information is then posted to VIDS along with the NA V information. By the 5th workday of each month,
the Portfolio Accounting Area (PA) requests a VIDS5210 report (Daily Dividend Contact List). This report
illustrates the Dividend and/or Cap Gain amounts that the VIDS system has calculated for the current General
Ledger period. The (P A) will retrieve the Dividend and lor Capital Gain information from the fund houses by
calling, monthly account statements or DST Vision access. These amounts are written on the VIDS5210 report.
Any variances over the acceptable amount, $500, are researched by the (P A). The Accountant will verify that the
Dividend ICap Gain rates and Record/Reinvest dates that the V ALU system supplied agree to the fund house
information. The Accountant is independent of the Associate that entered the information onto V ALU and of the
Associate that placed the trades with the fund house.
Once all Dividend and/or Capital Gain information is reconciled, the (P A) will input the information into the
VIDS system for monthly processing. The reconciliation is placed in a file evidencing the review.
Fixed Investment Ootions
The NIF for fixed investment option is calculated using the following formula:
NIF = (I + Interest) IIN
where
. Interest = The annual interest rate credited on the guaranteed return insurance contract which includes the
guaranteed interest rate earned less any contract charges assessed
. N = Number of days in the year
COMP AS has fixed investment options for contracts underwritten by the Company as well as other insurance
carriers. For Company contracts, interest rates on the fixed investment options are determined and reviewed
quarterly by a Company actuary. For these insurance contracts which have their interest rate determined by a
Company actuary, interest rates are reviewed and approved by a senior actuarial officer.
On the first business day of each quarter, the interest rate calculation for fixed investment options is electronically
downloaded by a senior actuarial analyst who reconciles COMP AS valuation summaries to the data obtained from
the original source data files on COMP AS. The data then runs through nightly flow and the COMP AS unit value
process updates COMP AS with current unit values.
For fixed investment options that may have interest rates change throughout the quarter, the Company actuary
will create a memo which orders a change in interest rate for that particular fixed investment option. This memo
(which lists the fund #, daily factor, and the new interest rate) is then delivered to the Internal Control Team
Manager who reviews the memo for reasonableness. The memo is then given to Accounting Clerk II who
manually enters the change into COMPAS. During the nightly flow, COMPAS updates the interest rate credited
Description of Relevant Controls
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information maintained on COMPAS. The following business day, the Internal Control Team Manager wi\l
compare COMP AS with the memo to ensure the change was made. Any discrepancies are investigated and
followed up by the Internal Control Team Manager.
User Organization Reporting
Statements
Participant and plan statements are generated through COMPAS beginning on the first day following the calendar
quarters. Prior to COMP AS generating statements, files of statement data are received from outside providers and
reviewed by the Statement Unit Team for good order. These files are reconciled against COMP AS files and
reports are generated to balance the data and to report unbalanced accounts.
The Statement Unit Team performs an audit ensuring all financial transactions fields on the statement and funds
available to the entity are properly being reported. These fields include beginning and ending balances, deferrals
and incoming transfers, withdrawals and surrenders, exchanges, charges and gain/loss on investments. In addition,
non-financial data is verified including phone numbers and address. Also, fund performance is verified. Both
participant and plan statements are included in the audit. Once verified, statements are released to be printed and
inserted into statement envelopes. Systematic and manual controls are in place to ensure insertion quality and
counts.
The control activities consist of the following:
. An audit is performed by the Statement Unit Team prior to the releasing of statements to be printed. The audit
consists of verifying all fund balances by calculating the unit values and verifying that the beginning balance
agrees with the previous periods ending balance. They also ensure that all financial transactions are included
in the audit. The address and phone numbers, etc. are checked. An audit checklist is prepared and initialed by
the processor and by a Unit Manager to ensure completeness of the audit. A 3x9 bar code is printed on each
statement page to ensure page counts are accurate.
. Before the statements are inserted into envelopes, the Statement Unit Team verifies the accuracy of the Job
Ticket via a pre-run report. Once the statements are inserted into envelopes, the NSC quality control team
performs a 'Mailroom Audit'. This consists of pulling approximately every 70th statement, and opening it up
to ensure that statements are properly included, the correct postage is metered, the correct envelope is used,
and that the address presentation meets postal requirements.
. Investment/insurance product provider data not accounted for by NRS Deferred Comp is remitted
electronically to COMP AS. The information is received via teleprocessing, data tape, data cartridge or
hardcopy report depending on the outside provider. The teleprocess file is received directly by the Systems
area, while the other media is received by the Statement Team. The Statement Team takes the data tape and
data cartridges to Systems to load. Once loaded or received via teleprocessing, a report is generated showing
the total values on the file. The values are reviewed for reasonableness, based on previous statement periods,
and are verified to a hardcopy report which accompanies the file, tape or cartridge. Once the data is identified
as in "good order" the reconciliation program runs and produces balanced and unbalanced reports, based on a
comparison ofCOMPAS' records to the carrier's records. Unbalanced records are reconciled at the participant
account level and the "good order" statements are mailed by the fifth business day after the end of the quarter.
The Statement Unit Team reviews the statements ensuring that all the information from each provider is
received and reviews the statements for accuracy.
Description of Relevant Controls
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. Accounts that 'error out' during the reconciliation process are researched and corrected within 30 days. A I
report of these accounts is used to monitor and record when the statement was corrected and mailed to ensure
that this process has been completed. The Statement Manager monitors the resolution of the unbalanced
statements. A report is created listing all the statements that contain errors. The corrected statements are I
marked off this report as they are corrected.
Tax Reoorting
Taxpayer information is entered onto Deferred Compensation Payout System (DCPS) by processors for the
participant's tax form. Payment information is then electronically fed to PMTS from DCPS. PMTS electronically
feeds ENPRES withdrawal information in order for the IRS Tax Forms W-2, 1042S, Puerto Rican 480.6, and
1099 to be prepared. Four copies of these forms are printed. The administrative copy is delivered to the NRS
Deferred Comp tax-reporting analyst who then files it in Payouts Administration for their records. The copies for
the state and federal taxation departments are forwarded to those respective entities. The participant copy is
mailed to the participant.
Monthly, ENPRES generates rejection reports for unusual withdrawal information electronically fed to it by
PMTS. These rejection reports are forwarded monthly to the Internal Control Area to determine the nature of each
unusual item. True discrepancies are forwarded to tax maintainers to be corrected. The distribution manager
reviews all corrections made on discrepancy items and checks to make sure they are resolved within time
standards prior to the release of the tax information. The tax-reporting analyst reviews the following month's
rejection report to ensure discrepancies were properly cleared. After the tax reporting analyst reviews the report, it
is submitted to the NRS Deferred Comp disbursement manager. Since the exception reports are cumulative (i.e.
error conditions remain on the report until corrected and/or cleared), the NRS Deferred Comp disbursement team
can review the report at year-end to determine if the necessary changes have been made in order to release the
year-end tax information.
Description of Computerized Information Systems
NRS Deferred Comp uses a number of different computerized information systems in order to process User
Organization transactions. Most of these systems have been developed internally. These systems include the
following:
. COMPAS - The record keeping system for participants. Although COMPAS has been in existence since
1983, frequent updates have kept pace with customer requests and allowed a steady rate of growth from that
period to the current date. COMPAS is an Information Management Systems (IMS) application, which is a
system-level software used to manage and access IMS databases in both the on-line and batch environments.
IMS requires certain activities to take place to invoke its actions; therefore, an IMS call from an application
program is used. Certain definitions must exist (control blocks) to define IMS databases and to define the
accesses to those databases. COMPAS uses a batch flow to apply the majority of financial and non-financial
transactions. Investments include fixed and variable options provided by various financial institutions. Daily
interfaces provide pricing information for the variable products while fixed pricing is calculated daily based
on certain predetermined rate factors. COMP AS uses a combination of different on-line inquiry transactions
to aid in customer's inquiries. On-line update transactions are also available for plan level activity. COMP AS
has the ability to house a large number of accounts (now over 1.3 million records), and process large volumes
of transactions (as many as 300 thousand in one batch flow) while still meeting daily service level agreements.
COMPAS interfaces with different systems to facilitate User Organization record keeping and provides daily
reports which support transaction activity.
Description of Relevant Controls
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. CAFE- Client Server Accounting Front End System - This is an accounting system that posts financial
participant level activity to the General Ledger.
. STOP - The Suspended Transactions of Participants (STOP) system sends and receives errored payments
to/from COMP AS due to missing information. Once errored, certain transactions are released automatica\1y
back into the COMP AS flow where it stays in suspense until it is cleared on the participant's account. While
in suspense, it shows up on the error report until corrected. Reports accompany this process to support the
activity, such as on-going corrections, reconciliation, etc.
. WINS - The system holds COMP AS data warehousing information for up-front validity.
. DCPS - Supports on-going participant payout functions made from COMP AS.
. RPS - The Repetitive Payment System processes payout information for participants.
. ENPRES/Tax Port - Accumulates withholding amounts in order to prepare tax Forms W -2, 1042S, Puerto
Rican 480.6 and 1099.
. Retail Desktop - The system is used by Customer Service Representatives to respond to telephone inquiries
and transaction requests.
. Vikinl! Data Entrv svstem - A data entry system which electronica\1y batches processed items and feeds these
items to COMP AS through the nightly processing flow.
. EAP - A system used to track electronica\1y processed account transactions.
. RCS - Retail Commission System - This system is used by Nationwide Retirement Solutions Administration
to track incoming participant deferrals to have commissions paid.
. PEBS - Payro\1 Entry and Balancing System - This system is used by Customer Service Representatives to
process incoming participant deferrals and transfers.
. NLPS - NRS Loan Processing System - This system is used by Customer Service Representatives to process
and track participant loan requests.
. Voice Response Unit (VRU) - VRU provides participants of retirement plans, via their touch-tone phone,
balance and current investment a\1ocation information, a\1ows them to change their future investment
a\1ocation, and a\1ows them to generate immediate exchange transactions to be processed in that night's batch
processmg.
. Internet Service Center fISC) - ISC provides participants and Preferred Plan Administrators with a variety of
plan and individual participant level information, including balances and current investment a\1ocations. The
ISC a\1ows input of exchange and withdrawal transactions. It also a\1ows a participant to add a mutual fund to
their plan beyond those selected by the plan administrator.
. BUYS - BUYS is an intermediary between Private Sector Retirement Plans and the National Securities
Clearing House. It is used for the execution of mutual fund trades on behalf of the Private Sector Retirement
Plans.
. V ALU - The V ALU System receives Net Asset Values from the various Fund Houses doing business with
Nationwide. For Private Sector Retirement Plans, V ALU generates net unit values (unit values with the asset
management charges deducted) and makes these available to the Keynote Batch Processing System.
Description of Relevant Controls
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. PMTS - The Payments System is used for the processing of all Plan-related disbursements. These can be I
checks, ACHs, or Wires.
. Tax Calculator - The Keynote Batch Processing system accesses the Tax Calculator when processing a
taxable withdrawal transaction. This system receives basic withdrawal data from Keynote and returns the I
federal and state and other entity withholding amounts.
. vms - VIDS is used for investment transaction and investment income record keeping.
The following describes the general controls surrounding COMPAS, BUYS, VALU, PMTS, Tax Calculator, and
Interactive Media (ISC and VRU), the primary NRS Deferred Comp processing systems. General controls
establish the control environment in which all applications are developed and processed. Therefore, the general
data processing procedures have an impact on the effectiveness of controls in all applications.
Program and System Software Change Control
COMPAS
Change control standards are formalized and set forth in the COMP AS Program Maintenance Standards. A
separate system region is maintained for testing and production staging. Both this region and the production
region are limited to authorized individuals. All programs are run from the production environment. Change
requests are maintained and coordinated by a centralized group, Production Processing. Annuity Systems
management approval is required for all production migrations, and user approval is required for all changes that
directly affect processing. Acknowledgments of production migrations are sent to NRS Technology Solutions
Systems Developers and Service Center Management.
PMTS
A BA and/or a processor can request a change by completing and submitting a request, known as a CTS form.
Periodically, a Financial Operations BA reviews open CTS forms and prioritizes the change requests based on
their urgency. Once prioritized, business requirements and expected testing results are created by the BA who
discusses the requirements with the Programmer assigned to the CTS form. The Programmer is responsible for
creating the design document, which is reviewed by the BA. Coding and unit testing is performed once the design
document has been approved. The BA is responsible for conducting and recording acceptance testing. If there are
no discrepancies between the expected test results and the actual test results, the BA will approve the
implementation of the changes requested in the CTS form.
In addition, the Programmer submits a TL for approval to the Payment Systems Division Manager who is
responsible for ensuring that the change has been tested and approved for implementation. Upon approval by both
the BA Manager and the Payment System Division Manager, the Programmer initiates the 5 Step New
Functionality notice to the customers and the Payment System Team. The 5 Step New Functionality notice is a
document that details the change being implemented, changes to the functionality, and the effective date. As the
last step, the Programmer closes the CTS form and logs the implementation date.
Description of Relevant Controls
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Tax Calculator
The Nationwide Financial (NF) Tax Reporting Unit has set January I and January 31 effective dates for federal
and state tax rule changes, respectively. Based upon these deadlines, the changes are performed as follows:
. Federal Tax Rule Chanl!es - NF Tax Reporting Unit obtains federal tax rule changes in early October or
November and forwards them to the Financial Operations Systems, as well as the Controls Unit and the
Shared Applications Tax Systems Team who are responsible for performing coding, table changes, test
scenarios, and unit testing. Once this has been completed, the administration areas perform acceptance testing.
Any discrepancies that arise are reviewed and resolved. The federal tax rule changes are moved into
production in December with an effective date of January 1. Additional tax changes can also occur during the
year.
. State Tax Rule Chanl!es - NF Tax Reporting Unit obtains state tax rule changes in November or early
December and forwards them to the Financial Operations Systems and Controls Unit as well as the Shared
Applications Tax Systems Team that is responsible for performing coding, table changes, test scenarios, and
unit testing. Once this has been completed, the administration areas perform acceptance testing. Any
discrepancies that arise are reviewed and resolved. The state tax rule changes are moved into production at the
end of January with an effective date of January 31. Additional tax changes can also occur during the year.
The Financial Operations Systems and Controls Unit and the Shared Applications Tax Systems Unit are
responsible for reviewing the changes to the tax rules and the interpretation of the rules. Once the rules have been
interpreted, the Financial Operations Systems and Controls Unit submits a CTS form for the T AXCALC to the
Shared Applications Tax Systems Team. Each CTS form includes a target date for implementation in production.
An administration area BA approves implementation of the changes if there are no discrepancies found during
acceptance testing. The approval is emailed to the Financial Operations Systems and Controls Unit, who forwards
their approval to the Shared Applications Tax Systems Team. The Shared Application Tax Systems Team will
then complete a transmittal form for the mainframe Tax Calculator and a data change request form for the Unix
Tax Calculator.
VALU
For changes to be made to V ALU, a Request for Change (RFC) needs to be completed by the V ALU Project
Lead. The V ALU Project Lead submits the RFC as soon as work begins on the change and an implementation
date is finalized. The RFC captures information regarding the change: summary of change, description of change,
contact information, implementation window, impacts to customers during implementation, after install, and
postponement of change, installation strategy, back-out strategy, verification strategy, and classification of the
change (e.g., minor, significant, major) as well as lines of business impacted.
In addition, an ITTL/TTL (Internal Transmittal) request form needs to be completed online by the V ALU
Programmers interested in making the change. The V ALU Programmer completes the form with information
regarding the application area, Harvest (a change management software) environment, change type, application
name, approver, description of the change, effective date and time, server name, and comments/instructions.
When selecting the approver, the system automatically provides the user's manager and that manager's manager
as choices. The user also has the option of selecting another approver.
Description of Relevant Controls
25
Once the form is completed and submitted, the selected approver is notified ofthe request via electronic mail. The
approver is responsible for reviewing the request and approving or rejecting the request. The user is notified of the
status of the request (i.e. approval, assignment, completion, etc.) during the entire process. Once the request is
approved, the Programmer making the change completes a V ALU Change Approval Form. A specification
reviewer, tester, user, and the Unit Manager must approve the form before the change is migrated into the
production environment.
If V ALU Developers are making changes to production code, they must create one or more Harvest (change
management software) package(s). Production code is checked out into these packages, and the developers make
their changes to the code. The packages are promoted into the Development testing environment by the
developers for unit and system testing. Packages are promoted into the Alpha and Beta environments by the
V ALU Project Lead or manager for Acceptance Testing (AT). Developers can always demote packages from
Alpha or Beta into Development if changes need to be made. However, Developers do not have access to promote
into Alpha or Beta. This is to limit the possibility of changes being installed into the acceptance testing
environments (Alpha and Beta) after AT. All Harvest package installed into Production must be installed in all
testing environments first - Development, Alpha, and Beta.
BUYS
For business enhancements changes to be made to BUYS, a BA sends a notice to the Project Lead advising
himlher of a need for a business or system change. The Project Lead adds the request to the Central Tracking
System, if BA has not done that, and prioritizes, assigns, and schedules the change. For system changes, a BUYS
Team member submits a change request to the Project Lead who will add the request to CTS form and/or Issue
Log. The Project Lead is responsible for prioritizing and scheduling requests. When the change, other than a data
change, is scheduled, a Request for Change (RFC) is initiated. The RFC follows the Information Technology
Service Management (ITSM) Change Management Process through to completion.
Once changes have been made and unit testing completed, the Programmer requests the Project Lead to move the
changes from the unit test environment to the beta test environment, and when changes have been moved, notifies
the BUYS Team, the BA, and Financial Operations Accounting Managers, where applicable, via electronic mail
that the code is available in the test environment. The BA is responsible for performing quality assurance testing.
The Programmer completes a BUYS transmittal for all changes. The Project Lead reviews and secures approvals
to implement the change. The Programmer completes an online ITTLrrTL Request Form, for modules within
Harvest, with information regarding the application area, Harvest environment, change type, application name,
approver, description of the change, effective date and time, server name, and comments/instructions. When
selecting the approver, the system automatically provides the Programmer's manager and that manager's manager
as choices. The Programmer also has the option of selecting another approver.
Once the form is completed and submitted, the selected approval personnel are notified of the request via
electronic mail. The approver is responsible for reviewing the request and approving or disapproving the request.
The Programmer is notified of the status of the request (i.e. approval, assignment, completion, etc.) during the
entire process.
Interactive Media (I-Media)
For changes to be made to the ISC or VRU, an I-Media transmittal form is required. Most changes to the ISC and
VRU come from the Line of Business areas in Nationwide Financial. Once those requests have been approved an
individual is assigned to manage a project that develops and implements those changes. The Project Manager has
responsibility for creation and maintenance of the ITTL. The Project Manager is responsible for gathering the
required signatures from the responsible groups for the ITTL, which includes the tech lead, project lead, and the
Description oj Relevant Controls
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business sponsors. Once the changes have been made on the project, testing of the changes are required to
promote the code to production. The Harvest Librarian is the only user with the ability to promote code into the
production environment.
Logical Access
COMPAS
A formal security policy is established and requires strict adherence by NRS Deferred Comp employees. Unique
user IDs and passwords are required to gain access to COMP AS. The level of access granted is limited by job
function. User access to COMP AS requires formal management approval.
Each user requires a valid user ID and password to gain access to COMP AS. The System Administrator assigns
user IDs and passwords. Users are required to change their password during their initial logon. Passwords are six
to eight characters in length, alphanumeric, and cannot be blank. Users are logged off the database after a
predetermined length of inactivity. Passwords expire every forty-five days.
In order to obtain access to COMPAS, users must complete a Network Access Form and must obtain formal
approval from management. The completed and authorized form is forwarded to the Production Management who
is responsible for setting up the COMP AS user ID and password for the database. The Production Management
team then sends a confirmation back to the administrator area indicating that the user access has been set up. The
administrator requestor is responsible for notifYing the user that their access has been set up.
It is the responsibility of the user's manager to have access revoked for employees who are leaving or
transferring. The manager must complete a COMP AS Access Form and obtain approval from their supervisor.
The completed and approved form is forwarded to the Production Management area that revokes the access. On a
quarterly basis, Production Management reviews the user access listing to ensure that all users are valid and that
they require the access to perform their job functions. If any unauthorized IDs are identified during the review,
Production Management takes appropriate action to have the access revoked.
PMTS
There are eleven security roles within PMTS. Each user is assigned a security role. Passwords are six to eight
characters in length, alphanumeric, and cannot be blank. Users are automatically logged-off the database after a
predetermined length of inactivity. In addition, users can have no more than two concurrent sessions of the PMTS
application open. Passwords are not currently set to expire; however, user management is required to enforce user
password changes on a monthly basis. The Financial Operations System Administrator sends an electronic mail to
all PMTS users on a monthly basis, requesting that PMTS users change their passwords. User management is
required to ensure that user password changes have occurred within their respective areas.
Users must complete the PMTS System Access Request form in order to obtain access to PMTS. User access to
PMTS requires formal management approval. Once the form has been completed and approved, the user forwards
the form to the Financial Operations Security Administrator who reviews the request to ensure that required
information has been completed and that management authorization has been obtained. The Financial Operations
Security Administrator then sets up the PMTS ID and security role within PMTS, and notifies the user as well as
the approver via electronic mail that the user's access has been set up.
It is the responsibility of the user's manager to have access revoked for employees who are leaving or
transferring. The manager must complete the PMTS System Access Request Form and obtain approval from
Financial Operations management. The completed and approved form is forwarded to the Financial Operations
Security Administrator who will revoke the access. On a monthly basis, the Financial Operations System
Description of Relevant Controls
27
Administrator performs a comparison of PMTS users to the Lotus Notes IDs. Any PMTS user IDs that do not
exist on Lotus Notes will be deleted. Managers, division managers, directors, and vice presidents review
employee access for appropriateness on a quarterly basis.
Tax Calculator
User access to the Tax Calculator requires formal management approval. Access is granted based upon the user's
job function. Each user requires a valid user ID and password to gain access to the Tax Calculator. The System
Administrator assigns user IDs and passwords. Due to software limitations, Tax Calculator does not force users to
change their passwords upon initial logon. Passwords are six to eight characters in length, alphanumeric, and
cannot be blank. Users are locked out after a predetermined length of inactivity. In addition, passwords are set to
expire every 42 days and users cannot reuse their passwords of the last twelve months.
In order to obtain access to the Tax Calculator, users must complete a Network Access Form and must obtain
formal approval from management of both Financial Operations and Tax Calculator. Once the form has been
completed and approved, the user forwards the form to the ID Administrator who is responsible for setting up the
Tax Calculator ID and password. The ID Administrator will notify the requestor via electronic mail that the user's
access has been established upon completion.
It is the responsibility of the user manager to have access revoked for employees who are leaving or transferring.
The manager must complete a Network Access Form and obtain approval from Financial Operations and Tax
Calculator management. The completed and approved form is forwarded to ID Administration who will revoke
the access. On a quarterly basis, the Tax Systems Unit reviews the user access listing to ensure that all users are
valid and that they require the access to perform their job function. If any unauthorized IDs are identified during
the review, Financial Operations is notified and appropriate action is taken to have the access revoked.
VALU
There are twenty security roles within V ALU. Each user is assigned a security role. The system administrator
assigns user IDs and creates those accounts as OlD (Oracle Internet Directory) accounts. A user with an OlD
account uses his or her user ID with their Nationwide Sign On (NWIE - Nationwide Insurance Enterprise)
password. This Sign On password must include an upper and lower case letters and a number. In addition,
passwords must be a minimum of 8 characters long. However, the password cannot contain any special characters
because Oracle does not support them. As per the Sign On standard, user accounts are disabled after 5 consecutive
invalid logon attempts. Additionally, Sign On passwords must be reset every 56 days.
In order to obtain access to the V ALU application, the application manager submits the Network Access Form
that is sent to ID Administration. The ID administrator is responsible for setting up the user's access based upon
the access requested. The ID administrator will notify the V ALU system administrator of the user's initial logon
information once the user's access has been set up. The V ALU application manager is responsible for obtaining
approval from the Financial Operations manager for the security roles to be assigned to the new user ID. The
V ALU system administrator is responsible for setting up the user's access role in V ALU based on the approved
form.
It is the Financial Operations responsibility to advise the V ALU system administrator of employees leaving or
transferring. A Network Access Form is completed to indicate a change in user access or to delete user access.
Financial Operations and V ALU management must approve the form. For personnel that no longer require V ALU
access, the Network Access Form is completed by the application manager and is submitted to ID Administration
who is responsible for revoking the user's access. The user's V ALU role is automatically revoked when their
connectivity access is revoked. For users that require their V ALU access to be modified (e.g. new role within the
V ALU business unit), the V ALU system administrator modifies their V ALU role. On a quarterly basis, V ALU
Description of Relevant Controls
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management reviews user listings to ensure that the users are valid and require the access to perform their job
function. If any unauthorized IDs are identified, V ALU management takes the appropriate action to have the
access revoked.
BUYS
There are four roles within BUYS: Inquiry, reporting, batch approver, and external bank accounts
(approver/adjuster). Each user is assigned a role. Each user requires a valid user ID and password to gain access to
BUYS. The System Administrator assigns user IDs and passwords. Due to software limitations, BUYS does not
force users to change their passwords upon initial logon. Passwords are six to eight characters in length,
alphanumeric, and cannot be blank. Users are logged off the database after a predetermined length of inactivity.
Passwords do not expire.
In order to obtain access to BUYS, users must complete a Network Access Form and must obtain formal approval
from management of both Financial Operations and security. The completed and authorized form is forwarded to
the ID Administrator who is responsible for setting up the Oracle user ID and password for the Financial
Operations (FlOP) database instance. Once the Oracle ID has been setup, the Financial Operations (BUYS)
security administrator instructs the BUYS Team to grant the user a role, which controls the user's access to the
database. Financial Operations utilizes a form to document each user's role. The form contains approval from the
user's manager, BUYS, and Financial Operations. A BUYS Security Administrator is responsible for granting the
user the requested access. This entails setting up an Oracle ID for the user by the System Administrator within the
Systems Controls group. Once the Oracle ID has been set up, the System Administrator sends the Oracle ID
information via electronic mail to the BUYS Team who writes a transmittal, to be processed by the department
ADS (Application Database Specialist), to grant the user's administrative role to the Oracle ID. The BUYS Team
then sends a confirmation back to the security administrator and Operations management, indicating that the user
access has been set up. The security administrator is responsible for notifying the user that access has been set up.
It is the responsibility of the user's manager to have access revoked for employees who are leaving or
transferring. The manager must complete a Network Access Form and obtain approval from Financial Operations
and BUYS management. The completed and approved form is forwarded to the ID Administrator and the BUYS
Security Administrator who revokes the access. On a quarterly basis, Financial Operations management reviews
the user access listing to ensure that all users are valid and that they require the access to perform their job
function. If any unauthorized IDs are identified during the review, Financial Operations management takes
appropriate action to have the access revoked.
I-Media
Plan providers can manage their accounts in the system. They use their access IDs and passwords which are
verified in the database. The participant can create a user name and a password (both of which must be between
eight and twenty characters) and the process is supported by system prompts and system Help messages. A
password must be alphanumeric and the account is suspended after three invalid logon attempts. Plan participants
can access their account information via VRU using the same security parameters discussed above. A participant
and a Plan Provider can also call in to the Support Team and have a team member provide services for them.
Access to databases and programs of the VRU and ISC by Nationwide personnel is limited to properly authorized
individuals. Their access is granted upon completion of an access request form and approval of their manager.
The user ID is set up by a central Nationwide ID support team. Once an ID is assigned to a user, the database
administrator sets up user access based on the user's job function and manager approval.
Description of Relevant Controls
29
The database administrator is responsible for reviewing Nationwide user access profile periodically to ensure that
all users are valid and that they require the access to perform their job function. If any unauthorized IDs are
identified during the review, the database administrator will take appropriate action to revoke the access.
Physical Access
COMPAS is housed at the Nationwide Data Center North (NDCN). NDCN is located at Lewis Center, OR. The
low profile, tornado resistant building was constructed to withstand 250 mile-per-hour winds. Access to the
building is restricted by card key controlled doors and armed security officers 24 hours a day, 7 days a week. The
glass wall of the security office located in the front of the building is bullet proof. The lobby is in full view ofthe
security officers. A security fence surrounds the entire building. Security cameras surveying the groups are
monitored by the security officers on duty. Emergency exists are located inside a separate fence around the
perimeter of the data center area. No signs explicitly identifY the building asa data center.
The computer room inside NDCN is staffed 24 hours a day, 7 days a week. It has floor-to-ceiling walls, and all of
its windows face inside. All doors of NDCN are card key controlled and are locked at all times. In addition,
external doors are equipped with alarms that are monitored by the security officers 24 hours a day, seven days a
week.
Nationwide's Enterprise Facility Services (EFS) is responsible for the card key system. It is configured to log
each use. A hardcopy of the log is printed out in the security office and is reviewed by one of the third shift
security officers every day.
For permanent access to NDCN, a written request signed by the Director ofNDCN is required before a card key
is issued by EFS. Access levels are programmed into the card key according to the job functions performed. Two
types of access are set-up at NDCN: the first type allows access into the office areas and the break room and the
second type grants access to the control room, computer room and tape library. Visitors and others who are not
NDCN employees are required to sign in at the security office and must be accompanied by an NDCN employee
at all times. Temporary card keys are issued by the security officers on-site only after a written request from an
NDCN manager is received. However, a temporary card key will not allow the visitor to enter the computer room
and must be returned to the security office before leaving the building. The security office keeps a record of all
temporary card keys issued. Programmers are not allowed to enter the computer room unless needed and must
first receive approval from NDCN management.
Monthly, one of the NDCN shift managers reviews a report generated by EFS that lists all people with access to
NDCN by access level. Employees' access levels are changed as needed when there is a change in job functions
performed. Card keys are retrieved from terminated personnel.
Cleaning crew members are full time Nationwide employees who are granted access to various parts of the data
center building based on functions performed.
The NDCN is comprised of raised anti-static tile floor panels, drop ceilings and walls that are all noncombustible.
It is a tornado-resistant structure that can withstand 250-MPH maximum winds. Fire extinguishers, halon and dry
pipe fire suppression systems protect computing equipment from fire damage. In addition, smoke, photoelectric,
ionization and water detection systems are in place. Chillers, air conditioning units and temperature and humidity
devices monitor and control the NDCN. NDCN equipment is protected by an uninterruptible power supply, two
battery banks, and three generators.
The BUYS, V ALU, PMTS, Tax Calculator, and I-Media systems all reside at the Nationwide Data Center South
(NDCS). A visitor must check in with the receptionist on duty and must obtain a visitor/contractor badge between
8:00 a.m. and 5:00 p.m.
Description of Relevant Controls
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The NDCS manager is responsible for granting temporary access upon receipt of a written request from a
manager. Temporary access is granted to Nationwide employees and contractors on an as-needed basis only and is
limited to the duration of the approved change or emergency fix to be performed. To be allowed into the South
Data Center, an employee or contractor must be listed by name in an emergency activity or planned changed, both
of which are documented through NSC problem/change management processes. Operations staff, on duty 24
hours a day, seven days a week, verifies this listing before admitting personnel. Long-term temporary access to
the South Data Center (6 to 12 months) is extended to engineers or contractors involved in long term continuous
projects. Engineers and Nationwide employees must request renewal of their access through management once it
expires. Programmers are not allowed to enter the computer room unless needed and approved by NOCS
management.
All doors of NDCS are card key controlled and are locked at all times. In addition, external doors are equipped
with alarms that are monitored by NDCS employees. The operator on duty must buzz visitors into the operations
room. Upon entering the data center via the card key controlled front door, operations staff verify that the visitor
is listed in an approved change or emergency activity. Visitors are required to sign in, documenting employee or
contractor 10 number, time in, and control number of the change or emergency problem they are present to work
on. After hours access to the NDCS floor is restricted by card key controlled elevators and doors. No signs
explicitly identify the building or the floor as a data center to the general public.
NOCS is divided into two sections, the control room and the computer room. It has floor-to-ceiling walls. While
some of its windows face outside, the glass is tinted to prevent viewing from outside. In addition, curtains are
closed unless there is a cubicle whose partitions serve as curtains.
For permanent access to NDCS, a written request signed by the NDCS manager is required before a card key
programmed with appropriate access level is issued by Enterprise Facility Services (EFS).
Each month, the NDCS manager reviews an access listing generated by EFS that lists all people having access to
NDCS by access level for appropriateness. Access level is changed as needed when there is a change in job
functions performed. Card keys are disabled and retrieved from terminated personnel.
Environmental controls in place in the computer room include a Halon system with delay and kill switches, hand
held fire extinguishers, smoke detectors in ceiling and below floor, and a raised floor with trough and a drainage
system.
The computer room contains, among other equipment, the following:
. Network and distributed computing hardware,
. Console and peripherals,
. Communications equipment,
. Electronic media,
. Power distribution units,
. PBX, and
. Air conditioning units.
UPS batteries and a diesel generator dedicated to NOCS are stored separately in other rooms. Environmental
controls in place in these rooms include a sprinkler system with dry pipes (in standby mode), smoke detectors in
ceiling, and hand held fire extinguishers. The UPS room also has hydrogen detectors installed.
The Preventive/Predictive Maintenance Department of Nationwide and external service firms perform regular
inspections and maintenance of environmental control equipment in NDCS, the UPS room, and the generator
room.
Description of Relevant Controls
31
System Backups
The Storage Services department at Nationwide determines the backup schedule based upon on the users' needs.
The NDCS is responsible for ensuring that the backup schedule that is set up is executed accordingly. A tape
library is currently kept on site and an off-site location is maintained at Iron Mountain Off-site Data Protection in
Dublin, Ohio. The Tape Information System (TIS) is the tape management system that is used for keeping track
of the backup tapes generated on a daily basis.
Data Centers
NDCN provides redundancy for all functionality that resides in the NDCS for back-up and recovery purposes.
The Storage Services department at Nationwide determines the backup schedule based upon on the users' needs.
The data centers are responsible for ensuring that the backup schedule that is set up is executed accordingly. A
tape library is currently kept on site and an off-site location is maintained at Iron Mountain. TIS is the tape
management system that is used for keeping track of the backup tapes generated on a daily basis.
Backup standards, procedures and guidelines are documented and available on-line. Critical tables, reports,
statements, files and transactions are backed up daily and available on-line for immediate recovery and/or
regeneration. Critical information is also backed up to tape on a daily, weekly and monthly basis. Full system
backups are performed weekly. Backup tapes are stored at an off-site facility. A log sheet is maintained to identify
and inventory off-site tape storage and rotation. Database activity is logged to allow for roll forward and roll back
procedures. Database logs are copied from on-line files to tape when the on-line files are full.
COMP AS
COMP AS database backups are performed every Sunday night after the database has ended for the day and/or
before SBSIMS (IMS Information Management System) is started the following Monday morning. In addition, all
database batch and online database updates are also logged and processed daily.
To provide a quick database recovery response the IMS Software and Database Support create and maintain dual
copies of the weekly database backups and their daily batch and online updates. One copy of the weekly database
backups and their daily IMS updates are kept on site for quick recovery response, if and when needed, while a
second copy of the weekly database backups and their daily IMS updates are sent off site to Iron Mountain Off-
site Data Protection in Dublin, Ohio.
Currently, the on site database backups and logs are kept for 14 days which is 2 cycles of 1 weekly backup and
that week's logs (up to the next Sunday backup). The off site database backups and logs are kept for 21 days. The
extra 7 days are for shipping and handling.
PMTS
The PMTS production database is located on a server and is backed up every night. NSC performs incremental
backups on a nightly basis, and full backups are performed on a weekly and monthly basis. Data tapes are stored
off site. Backups are scripted to run automatically. Netbackup runs on a 28-day calendar so every 1", 7", 14", and
28" day, a full backup runs. The backup performed on the I" is kept offsite for a period of I year unless special
arrangements are made by PMTS management to keep the data offsite longer. The backups performed on the 7'h,
14", and 28th are kept offsite for two months. During the 24 other days when full backups are not performed,
incremental backups are performed which pick up anything added or changed in the last 24 hours.
Description of Relevant Controls
32
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PMTS database backups are scheduled, controlled, and run through Maestro and the NSC Database
Administration (DBA) Team. The NSC DBA Team performs database restores and recoveries. The retention level
for all database SQL-BackTrack hot and cold backups are kept offsite for two months unless otherwise indicated
by the NSC DBA Team.
Tax Calculator
The Unix Tax Calculator production database is located on a server and a hot backup is performed every Monday
night, and a cold backup is performed every Friday. NSC performs incremental backups on a nightly basis, and
full backups are performed on a weekly and monthly basis. Data tapes are stored offsite. Backups are scripted to
run automatically. Netbackup runs on a 28-day calendar so every 1",7"', 14"', and 28'" days, a full backup runs.
The backup performed on the I" is kept offsite for a period of I year unless special arrangements are made by Tax
Calculator management to keep the data offsite longer. The backups performed on the 7'h, 14"', and 28'h are kept
offsite for two months. During the 24 other days when full backups are not performed incremental backups are
performed which pick up anything added or changed in the last 24 hours.
The Unix Tax Calculator database backups are scheduled, controlled, and rerun through Maestro and the NSC
Database DBA Team. The NSC DBA Team performs database restores and recoveries. The retention level for all
database SQL-BackTrack hot and cold backups are kept offsite for two months unless otherwise indicated by the
NSC DBA Team.
VALU
The V ALU application is located on a server and is backed up every night. Netbackup runs on a 28-day calendar
so every I", 7'h, 14"', and 28'h days, a full backup runs. The backup performed on the I" is kept offsite for a period
of I year unless special arrangements are made by V ALU management to keep the data offsite longer. The
backups performed on the 7"', 14"', and 28'" are kept onsite for two months. During the 24 other days when full
backups are not performed, incremental backups are performed which pick up anything added or changed in the
last 24 hours.
The V ALU production database is backed up to tape every Tuesday, Wednesday, Thursday, Friday and Saturday.
All database SQL-BackTrack hot and cold backups are kept offsite for two months unless otherwise indicated by
the NSC DBA team. V ALU production databases hot backup is scheduled every Tuesday, Wednesday, Thursday,
Friday, and Saturday from the V ALU production database on the Ford server to V ALU DR database on the audi2
server. V ALU production databases startup and shutdown is scheduled for every Sunday.
NSC is responsible for data and database structure backups as well as Harvest backups. UNIX logs and reports
files are backed up by V ALU to the disaster recovery directories on a nightly basis. UNIX executables are copied
to the disaster recovery directories when a new install is performed in production through the Harvest install
process. Production /vol/valu directories reside on a NAS appliance in EDC-S and are snap copied to EDC-N, so
there is always a backup copy of /vol/valu that can be used if the primary copy is lost.
NSC is planning a project to make the V ALU database clone a "gold copy," which will be copied to tape and will
be used to refresh the DR instance on the Audi2 server. This will reduce the number of hot database copies in
each cycle from three to one.
BUYS
BUYS database is located on a server and is backed up every night. The Application File System (/vol/buys)
resides on a NAS appliance in EDC-S and is snap copied to EDC-N, so there is always a backup copy of
/vol/buys that can be used if the primary copy is lost. Netbackup runs on a 28-day calendar so every I", 7"', 14"',
and 28'" days, a full backup runs. The backup performed on the I" is kept offsite for a period of I year unless
Description of Relevant Controls
33
special arrangements are made by BUYS management to keep the data offsite longer. The backups performed on
the 7'h, 14th, and 28th are kept onsite for two months. During the 24 other days when full backups are not
performed, incremental backups are performed which pick up anything added or changed in the last 24 hours.
Nightly backups are done for both the database and the Unix file directory for BUYS. On every NYSE day, the
BUYS Maestro schedule runs to send the last file of the cycle to the NSCC. After this schedule successfully
completes, three DBA maintained Maestro jobs run to do a "clone copy," and then a hot backup (tape), and a hot
copy (refresh of the DR instance on Bmw2) of the database. After the Tape Backup has successfully completed
the BUYS Maestro schedule synchronizes the disaster recovery version of the UNIX file directory to the
production version. The retention level for all database SQL-BackTrack hot and cold backups are kept offsite for
a period of two months unless otherwise indicated by the DBA team. NSC determines where backup tapes are
maintained and for how long. There is currently no schedule for shutting down the BUYS production database.
I-Media
NSC does a daily hot backup of the databases. Each database is associated with an NFS Line of Business (LOB)
application or service database. The backup allows for continuous operation while the backup is being run.
The Storage Services department determines the backup schedule based on I-Media and users' needs. The NOCS
is responsible for ensuring that the backup schedule is executed. A tape library is currently kept on site and off-
site Iron Mountain Off-site Data Protection in Dublin, Ohio. The TIS is used for keeping track of the backup
tapes.
A report is sent to management in I-Media after the completion of the backup process. The report shows the
database names, backup start and finish time and successful or unsuccessful completion of the backup. The hot
backup tapes are copied immediately following the backup process. The first copy is retained at the data center.
The second copy is moved to the offsite location. The backup tapes are retained, as shown on a documented
schedule at the data center.
Internet Service Center
The use of the ISC is determined by agreement with the Plan administrator. The flow of data through the ISC
begins with a customer accessing the corresponding Nationwide website. When a user session is initiated, a
session cookie is placed on the user's browser without a time stamp. The browser maintains this session cookies
as long as the browser session is "alive." A session ID is assigned and stored on the database as well as a time
stamp of the login and each successive hit by that particular session ID. The user's last login is also stored on the
database. At the Nationwide site, the user selects the participant account option and is taken to the customer login
screen. New plan participants can call to request this type of web access to their accounts or complete the setup
access request on the website. They must provide their social security number or tax ID number, account
numbers, as well as specify whether they are a producer or group session sponsor. Once this information is
authenticated, the user is prompted to select a user name and a password, both of which must be between eight
and twenty alphanumeric characters. The user name and password are case sensitive. The user name has to be
unique. The password does not expire; however, the account will be suspended after five invalid password
attempts. The user must call the Customer Service Center in order to get hislher password reset. A Customer
Service Center representative will perform the required user authentication procedures prior to resetting the user
password.
Users must follow security standards in order to access Private Sector Retirement Plan information on the
website. One of the security standards is encryption. If a user attempts to login without the required level of
encryption, he/she will receive an error message indicating access was denied.
Description of Relevant Controls
34
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Once the user name and password have been authenticated, the user can review account summaries and
statements for past quarters, change allocations, review individual fund performance, change user ID and/or
password and perform various types of exchanges. The social security number or tax ID number is the primary
key of the database, thus preventing unauthorized users from viewing any accounts other than their own. If a user
has multiple accounts, he/she is prompted to select the account he/she wishes to access from a list of identified
accounts. Users cannot make withdrawals or request loans through the Internet. Users receive a confirmation via
mail for all changes made to their account. If an address change is made, the confirmation is sent to both the old
and new address. The application servers are the same servers used by the VRU system. These two application
servers run redundant and have the capability to fail over to one another.
The ISC allows access to the Private Sector Retirement Plans' from the Internet. As previously described, the ISC
allows access to participant's current fund balance information, allows changes to future investment allocations,
and allows the movement of participant funds between investment options.
The ISC's transactions and Private Sector Retirement Plans' data are protected with a combination of routers,
servers, network firewalls, and transaction encryption methods. The applications and systems change control
processes, data center and disaster recovery are the same as the other Nationwide platforms.
Unique participant information is required to gain access to the ISC and to establish an Intemet account and a
password to that account. Once the account is established, a personal password is required to gain access.
The ISC uses 128-bit encryption for all transactions between the participant and the website and between the
website and the firewall for web browsers that support 128-bit encryption; otherwise transactions may be
encrypted using 56-bit or 40-bit encryption. Should a user log on with an Internet browser using less than 40-bit
encryption, the session is terminated. The session is terminated after 15 minutes of inactivity with any browser.
NDC-N provides redundancy for all functionality that resides in the NDC-S. Database servers are synchronized at
intervals during the day.
Because the Internet site's functionality is critical to the business, a hot-site for recovery purposes has been
established.
Description of Relevant Controls
35
CONTROL OBJECTIVES AND RELATED CONTROLS
NRS Deferred Comp's control objectives and related controls are included in Section III of this report,
"Information Provided by KPMG LLP." Although the control objectives and related controls are presented in
Section III, they are an integral part ofNRS Deferred Comp's description of controls.
Description of Relevant Controls
36
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USER CONTROL CONSIDERATIONS
Processing of transactions for User Organizations performed by NRS Deferred Comp and the controls of NRS
Deferred Comp cover only a portion of the overall internal control of each User Organization. It is not feasible for
control objectives relating to the processing of transactions to be solely achieved by NRS Deferred Compo
Therefore, each NRS Deferred Comp User Organization's internal control must be evaluated in conjunction with
NRS Deferred Comp's controls and testing summarized in Sections II and III ofthis report.
This section highlights those internal control responsibilities that the Company believes should be present for each
User Organization and has considered in developing the controls for NRS Deferred Comp described in this report.
In order for User Organizations to rely on the controls relating to objectives reported on herein, each user must
evaluate its own internal control to determine if the following procedures are in place. Furthermore, the following
list of controls is intended to address only those controls surrounding the interface and communication between
each User Organization and NRS Deferred Compo Accordingly, this list does not purport to be, and is not, a
complete listing of the controls, which provide a basis for the assertions underlying the financial statements of
plans serviced by NRS Deferred Compo
. Instructions and information provided to NRS Deferred Comp from User Organizations should be in
accordance with the provisions of the plan agreement, trust agreement or other applicable governing
agreements or documents between NRS Deferred Comp and the User Organization.
. Timely written notification of changes to the plan, its objectives and its participants should be adequately
communicated to NRS Deferred Compo
. Timely written notification should be provided of changes to individuals authorized to instruct NRS Deferred
Comp to perform activities on behalf of User Organizations.
. Timely review of reports, including tax reports, provided by NRS Deferred Comp of account balances and
related activity should be performed by the User Organization, and written notice should be provided to NRS
Deferred Comp of discrepancies as compared to User Organization records.
. Timely notification should be provided to NRS Deferred Comp of changes in related parties for purposes of
identifying party-in-interest transactions.
. User Organizations should ensure that all IRS requirements and filings have been met.
. If applicable, User Organizations should ensure that the plan continues to meet the requirements of the
Employee Retirement Income Security Act (ERISA) and the Department of Labor.
. Authorized Plan Representatives should be responsible for monitoring the timeliness of changes to User
Organization accounts.
. Authorized Plan Representatives should ensure that all participant enrollments are properly authorized.
. Authorized Plan Representatives should maintain adequate physical and logical security controls over on-site
terminals with the capability to interface with COMP AS.
. Users of the ISC should implement controls surrounding User IDs and passwords established for account use.
Passwords should be different from the User ID, contain both letters and numbers, be difficult to guess and be
routinely changed.
Description of Relevant Controls
37
Section III -
Information Provided by
KPMG LLP
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CONTROL OBJECTIVES, RELATED CONTROLS, AND
TESTS OF OPERATING EFFECTIVENESS
Retirement Plan Administration-New Plan Set-Up
Control Objective 1: Controls provide reasonable assurance that new plans are properly approved by authorized
individuals and processed accurately.
Controls Tests Performed Results of Tests
New plan documents are given to the Inquired of the NFO Operations Director to No exceptions
Support Analyst to be established on the be informed of the procedures for processing noted.
COMP AS system. The Support Analyst new plan documents, including the
verifies the documents are in good order completion of the Pre-Production Checklist.
and initials the Pre-Production Checklist
prior to establishing the new plan on For a selection of new plans, inspected the
COMPAS. Pre-Production Checklists to determine
whether they were signed-off by the Support
Analyst for verification that the plan
documents are in good order.
The plan documents are reconciled to the For a selection of new plans, inspected the No exceptions
system by a Support Analyst to ensure the Pre-Production Checklists to determine noted.
plan was established accurately on whether they were signed off by the Support
COMP AS. The reviewer initials the Pre- Analyst for verification that the plan was
Production Checklist to evidence the established accurately on COMP AS.
review occurred. Any discrepancies
identified are noted on the Pre-Production
Checklist and forwarded back to the
originator for correction.
The Pre-Production Checklist and new For a selection of new plans, inspected the No exceptions
plan set-up documents are reviewed by a Pre-Production Checklists to determine noted.
Registered Principal for authorization. whether they were signed off by the
This review is evidenced by signing the Registered Principal for verification of
Pre-Production Checklist. authorization.
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
Information Provided by KPMG LLP
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Retirement Plan Administration-Plan Maintenance
Control Objective 2: Controls provide reasonable assurance that changes to plan contracts are received from
authorized sources and processed accurately.
Controls Tests Performed Results of Tests
Upon initiation of a change by a plan or by NRS Inquired ofthe NFO Operations No exceptions
Deferred Comp, the Plan Sponsor works with Division Manager to be informed of noted.
NRS Deferred Comp Representatives to make the procedures for performing changes
the changes. The changes are then included in a to a plan.
contract endorsement, which is reviewed and
signed by either an Authorized Plan For a selection changes, inspected the
Representative or an authorized NRS Deferred contract endorsements to determine
Comp Representative. whether changes were included in the
contract endorsement and whether the
endorsement was signed by an
Authorized Plan Representative or
authorized NRS Deferred Comp
Representative.
Changes are processed onto COMP AS by the Inquired of the NFO Operations No exceptions
respective area (i.e., Administration, Financial Division Manager to be informed of noted.
Operations, Actuarial, etc.). The functional the procedures for performing changes
manager of each respective area reviews and to plan information on COMP AS.
approves the changes made to the plan on For a selection of plan changes,
COMP AS.
inspected the COMPAS print-out for
the plan to determine whether the
appropriate approval was obtained to
help ensure accuracy of the changes
performed.
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
Information Provided by KPMG LLP
40
Retirement Plan Administration-Participant Enrollments
Control Objective 3: Controls provide reasonable assurance that participant enrollments are authorized and
processed accurately.
Controls Tests Performed Results of Tests
Teleprocessed enrollments can be transmitted Inquired of the Division Manager to No exceptions
with or without electronic signatures. be informed of the electronic noted.
Teleprocessed enrollments containing electronic signature process.
signatures are systematically processed through
CaMP AS. The participant is authorizing and For a selection of New Business
verifYing that the information keyed into the Processors, inspected a selection of
system is accurate and complete. This is new business applications to
evidenced through the electronic signature determine whether the applications
process. were authorized as evidenced through
the electronic signature.
Teleprocessed enrollments that do not contain the For a selection of New Business No exceptions
electronic signature of the participant are pended Processors, inspected a selection of noted.
within the EAP system until receipt of the signed participant agreements to determine
participation agreement. When a signed whether the agreements include
participation agreement is received, a New manual authorization.
Business Processor logs onto EAP and releases
the record for systematic processing. The account
set-up is reviewed for quality consistent with the
Manual Enrollment process.
New business applications are received either via For a selection of New Business Exceptions noted.
the Imaging System electronically or mail. The Processors, inspected a selection of 4 out of60
New Business Processor enters the information new business applications to applications
into V ikingJDesktop systems then forwards the determine whether they were inspected were not
imaged document to the QC Partner via the reviewed by the QC Partner. reviewed by the
Imaging System or Hardcopy. Once the QC is QC partner.
performed, the document is forwarded to a
Registered Principal (RP) for review. Hardcopy As a mitigating
documents are reviewed for appropriateness and control, tested
approval. The review is evidenced by stamping below in this
the front of the document. Documents received objective, the
via Imaging are validated electronically. CaMP AS
application
provides edit
checks to control
data entry.
Information Provided by KPMG LLP
41
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Controls Tests Performed Results of Tests
Daily, a registered principal reviews new For a selection of New Business Exceptions noted.
manually/imaged processed business Processors, inspected a selection of 150utof60
applications. The registered principal also verifies new business applications to applications
that the enrollment form was signed and properly determine whether the applications inspected were not
completed. This review is evidenced by the were reviewed by a registered reviewed by the
registered principal's manual stamp or on line principal. registered
approval through the imaging system on the New principal.
Business document.
As a mitigating
control, tested
below in this
objective, the
COMP AS
application
provides edit
checks to control
data entry.
After release to the nightly flow, COMPAS Inquired of the Service Team Unit No exceptions
electronically validates whether information has Manager to be informed of the process noted.
been entered into certain fields (name, address, by which errors are reviewed.
date of birth, pay period ending date, Retirement For a selection of dates, inspected a
Specialist number, allocation percentage,
insurance premium, etc.) in accordance with pre- selection of error reports to determine
established parameters. If these fields do not have whether they are reviewed by the
data entered into them or if the data is entered in Financial Services Analyst and
a manner that is inconsistent with the pre- Financial Services Representatives
established parameters, an error report is and any errors are resolved.
generated. The error reports are reviewed and
corrective action is taken to resolve the error.
Once the error is resolved, the account is
established on COMP AS systematically.
Each day, the Regional Teams are required to For a selection of dates, inspected a No exceptions
individually review the COMP AS Error Report selection of error reports to determine noted.
Database for errors originated from their whether the transactions that errored
processor 10. Errors will be displayed and printed were displayed and printed in the
in the "Green Bar." "Green Bar," and the reports were
reviewed by the Regional Teams.
COMP AS will generate an error report for any For a selection of dates, inspected a No exceptions
improperly processed maintenance transactions. selection of error reports to determine noted.
Error reports are reviewed by the Financial whether they are reviewed by the
Services Analyst and Financial Services Support Financial Services Analyst and the
Representative. Financial Services Representatives.
Information Provided by KPMG LLP
42
Controls Tests Performed Results of Tests
Once the requests are processed, COMP AS For a selection of dates, inspected a No exceptions
electronically validates that information has been selection of error reports to determine noted.
entered into the necessary fields in accordance whether errors contained in the reports
with pre-established parameters. If a problem are followed-up on and errors
exists, error reports are automatically generated resolved in a timely manner.
by COMP AS. Error reports are received initially
by the Financial Services Analyst and Financial
Services Support Representative, who follows up
with the corresponding agents to identify the
reasons for the errors and take corrective action.
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Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective. I
Information Provided by KPMG LLP
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Retirement Plan Administration-Participant Account Maintenance
Control Objective 4: Controls provide reasonable assurance that changes to participant accounts are received
from authorized sources and processed accurately.
Controls Tests Performed Results of Tests
Received via Telephone:
If received by telephone, the Financial Observed a call between a participant and a No exceptions
Services Analysts require participants to Financial Service Support Representative to noted.
verify name, social security number, and determine whether the Financial Support
date of birth to ensure the request is being Representative verifies the participant's
received by an authorized source. name, social security number, and date of
birth prior to providing participant account
information or performing account
maintenance.
Received via ISC:
Participants accessing the ISC in order to Inquired ofthe NFO Operations Division No exceptions
request an exchange/investment election Manager to be informed of the procedures noted.
change are required to establish an account for authenticating a user to the ISC.
profile with a user name and password.
Authorization to enter the ISC is Performed a system query to determine
accomplished by the participant entering whether access to the ISC requires a valid
the profile's user name and password. The user name and password.
participant later receives confirmation of
the transaction by mail.
Received via Hard Copy:
Hard copy requests for non-financial Inquired of the NFO Operations Division Exception noted.
changes are processed in the New Business Manager to be informed of the process by 2 out of 60 non-
department. Proper authorization is which manual items are processed. financial changes
received by the participant signature on the were not
change request. Account changes are For a manually processed item, observed the forwarded to a
processed on the desktop system and Financial Services Analyst and Financial peer for quality
forwarded to a peer for quality control. Services Support Representative to control.
determine whether the Financial Services
Analyst and Financial Services Support
Representative reviewed the item to verify
that it contained the proper authorization.
For a selection of dates, inspected a selection
of non-financial changes to determine
whether they were forwarded to a peer for
quality control.
Information Provided by KPMG LLP
44
Controls Tests Performed Results of Tests
All Participant Maintenance:
COMP AS will generate an error report for Inquired of the Service Team Unit manager No exceptions
any improperly processed maintenance to be informed of the procedures performed noted.
transactions. Error reports are reviewed by to identify, review, and resolve improperly
the Financial Services Analyst and processed maintenance transactions.
Financial Services Support Representative. Performed a system query to determine
whether improperly processed maintenance
transactions were captured in an error report.
For a selection of dates, inspected the error
reports to determine whether the reports
were reviewed by both a Financial Services
Analyst and Financial Services Support
Representative and errors were resolved.
Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective.
Information Provided by KPMG LLP
45
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Retirement Plan Contributions/Receipts
Coutrol Objective 5: Controls provide reasonable assurance that contribution/receipts are recorded completely
and accurately in User Organization accounts.
Controls Tests Performed Results of Tests
Lockboxes:
Deposit slips are received daily from the Inquired of the Service Team Unit Manager No exceptions
bank. The processor verifies that deposit to be informed of the procedures performed noted.
tickets were received from the bank using to reconcile the bank deposit slips to the
the Daily Purchases Received report Daily Payments Received report.
generated by PEBS.
For a selection of dates, inspected the
deposit slips and the corresponding Daily
Payments Received reports to determine
whether reconciliations were performed and
any errors identified were resolved.
U.S. Mail/Overnight Mail:
Imaging Services prepares a deposit ticket Inquired ofthe Service Team Unit Manager Exceptions noted.
and forwards it along with the checks and to be informed of the procedures for 2 out of 15 check
the check log to a QC Processor for reviewing checks that are scanned and logs reviewed did
review. After approval, items are returned matching them to deposit tickets. not contain the
to the imaging services representative, who appropriate
has the responsibility of remitting them to For a selection of dates, inspected the check approval.
Treasury Services. Beginning in March log to determine whether the QC process
2005, the evidence of the review of the QC reviews the logs and approves the items for As a mitigating
processor is captured in the Imaging deposit, and to determine whether any control, tested
system. discrepancies identified are resolved. below in this
objective,
Financial
Operations staff
completes daily
and monthly cash
reconciliations.
Information Provided by KPMG LLP
46
Controls Tests Performed Results of Tests
Wires:
To ascertain accuracy of the wire Inquired of the Service Team Unit Manager No exceptions
information entered onto the system, a to be informed of the QC procedures noted.
Payroll Processor, separate from the initial performed for wire transfers.
processor who entered the information
onto the system, performs a QC review. For a selection of wire transfers, inspected
the QC review to determine whether a
Payroll Processor, separate from the initial
processor who entered the information,
performed a QC review.
ACH:
To ascertain accuracy of the ACH Inquired of the Service Team Unit Manager No exceptions
information entered onto the system, a to be informed of the procedures performed noted.
Payroll Processor, separate from the initial during the quality control review for ACH
processor who entered the information transactions.
onto the system, performs a QC review.
For a selection of ACH transactions,
inspected the QC reviews to determine
whether a Payroll Processor, separate from
the initial processor who entered the
information, performed a QC review.
All Contributions/Receipts:
Cash reconciliations are completed by Inquired of the Service Team Unit Manager No exceptions
Financial Operations on a daily and to be informed of the procedures for noted.
monthly basis. Monthly reconciliations are performing cash reconciliations and the
reviewed by management after completion review performed by management after
of the reconciliation. completion of the reconciliation.
For a selection of dates, inspected the cash
reconciliations to determine whether the cash
reconciliations were completed and the
monthly cash reconciliations were reviewed
by management after completion.
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Controls Tests Performed Results of Tests
The payroll processing team manager or Inquired of the NFO Operations Director and Exception noted.
team lead reviews the PEBS "unsolved the Service Team Unit Manager to be 12 out of 30
report" daily, which shows any informed of the procedures for reviewing the unresolved reports
unprocessed batches; as well as monitors daily unresolved report for any unprocessed inspected were not
the timeliness of processing contributions payroll batches, and the internal time dated and initialed
against internal time standards. For any standards for processing contributions. by the purchase
unprocessed batches, a Payroll Processor is processor to
assigned to investigate and resolve For a selection of dates, inspected the daily evidence that the
unprocessed payrolls. The unresolved unresolved reports to determine whether the report was
report is dated and initialed by the Payroll Processor reviewed the reports and researched.
purchase processor proving that the report any transactions identified on the report are
was researched. investigated and resolved. As mitigating
controls, tested in
this objective,
Financial
Operations staff
completes daily
and monthly cash
reconciliations
and the payroll
processing team
managers veri fy
Incoming
contributions.
The payroll processing team manager or Inquired ofthe Service Team Unit manager No exceptions
team lead verifies the accuracy of the to be informed of the procedures for noted.
incoming contributions (i.e. that the dollar verifying the accuracy of the incoming
amount of the check matches that of the contributions and refunds of suspense
suspense deferral) when reviewing deferrals.
contributions, and approves any refunds of
suspense deferred. For a selection of dates, inspected the
incoming contributions to determine whether
the Payroll Processing Team Manager or
Team Lead verified the accuracy of the
incoming contributions and approved any
refunds of suspense deferrals.
Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective.
Information Provided by KPMG UP
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Retirement Plan Withdrawals/Disbursements
Coutrol Objective 6: Controls provide reasonable assurance that withdrawals/disbursements are properly
authorized, accurately processed and recorded in a timely manner.
Controls Tests Performed Results of Tests
WITHDRAWALS
Annuitization:
The payout service center processor Inquired of the Service Team Unit Manager No exceptions
contacts a Disbursement Team Processor to be informed of the procedures for noted.
and advises him/her to surrender the reviewing payout requests and resolving any
account from the COMP AS system. errors identified.
COMP AS then electronically remits the
transaction to RPS. The following day a For a selection of annuitization surrenders,
COMPAS report is systematically inspected the COMP AS report and PMTS
generated and given to a Balancing system to determine whether annuitization
Processor, who reviews the Annuitization surrenders were reviewed by the Balancing
surrenders for accuracy. Processor.
The manager approving the checks on Inquired of the Service Team Unit Manager No exceptions
PMTS reviews the first time payment to be informed of the procedures for noted.
report for evidence of review by another approving checks on PMTS.
member of IPPSC and a copy of the
supporting detail. The manager will For a selection of dates, inspected the PMTS
approve the checks on PMTS upon the system to determine whether the manager
completion ofhis/her review. approved the check indicating inspection of
the first time payment report for evidence of
review by another member of IPPSC.
Unforeseen Emergency Withdrawals:
The withdrawal request is immediately Inquired of the NFO Operations Division No exceptions
passed to the unforeseen emergency Manager to be informed of the procedures noted.
approver for the specified region. The for processing unforeseen emergency
approver will review the request and distributions.
approve or deny based upon the established
criteria for allowable distributions. For a selection of emergency withdrawals,
inspected the corresponding emergency
withdrawal requests to determine whether
the appropriate approval was obtained from
the unforeseen emergency approver for the
specified region.
Information Provided by KPMG LLP
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Controls Tests Performed Results of Tests
All Other Withdrawal Options:
Daily, PMTS and COMPAS reports are Inquired ofthe Service Team Unit Manager No exceptions
produced and remitted to a Balancing to be informed of the process by which the noted.
Processor. The QC Representative is withdrawal information input into the
responsible for ensuring the withdrawal system agrees to the payout election forms.
information input into the systems agrees For a selection of dates, inspected PMTS to
to the payout election forms. The
Balancing Processor's name is determine whether the Balancing
automatically entered onto each withdrawal Processor's name is automatically entered
request on PMTS after review. onto the withdrawal request indicating that
the withdrawal information input into the
system agrees to the payout election forms.
The error spreadsheet is used by processors Inquired ofthe Service Team Unit Manager Exception noted.
and is reviewed by the team managers to to be informed of the procedures performed 2 out of IS errors
ensure unprocessed items are resolved to resolve errors identified during the were not resolved
timely. reconciliation of the withdrawal information within three days.
input into the systems to the payout election
forms. As a mitigating
control, tested
For a selection of error spreadsheets, below in this
inspected an error to determine whether objective, the QC
errors identified are reviewed and resolved representative
in a timely manner by the Team Managers. reviews the Daily
Aged Open Items
report.
Withdrawal requests are approved on-line. Inquired of the NFO Operations Director to No exceptions
The manager's name is automatically be informed ofthe procedures for online noted.
entered onto each withdrawal request on approval for participant withdrawals, and
PMTS after review. inspected the list of users and their
corresponding approval limits to be
informed of the approval limits for each
manager.
Inspected the online configuration to
determine whether online approval limits
within the system are commensurate with
the corresponding approval limits
established by management.
Performed a system query to determine
whether online approval is required for
participant withdrawals.
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Controls Tests Performed Results of Tests
The Daily Aged Open Items Report shows Inquired of the Service Team Unit Manager No exceptions
unresolved suspense items for all regions to to be informed of the procedures for noted.
date. This report is reviewed daily by the reviewing the Daily Aged Open Items
processing teams to identify and clear Report.
suspense. Performed a system query to determine
whether suspense items are captured in the
Daily Aged Open Items Report.
For a selection of dates, inspected the Daily
Aged Open Items Reports to determine
whether they were reviewed by the
processing teams and suspense items are
cleared.
DISBURSEMENTS
Manual Checks:
For manual checks, the processor remits Inquired of the Accounting Supervisor to be No exceptions
withdrawal request detail from CaMP AS informed of the procedures performed by noted.
and a manual check request form is Treasury Services to verify the payment
reviewed to a processor in Treasury information contained in the manual checks
Services who reconciles the information matches the information in the PMTS
entered onto PMTS by the processor system, and that the account balance is
determines to the manual check request and sufficient to fund the withdrawal.
the account balance is sufficient to fund the
withdrawal. For a selection of manual checks, inspected
the withdrawal request detail and the manual
check request form to determine whether
Treasury Services verified that the payment
information contained in the manual checks
matched the information in the PMTS
system, and that the account balance was
sufficient to fund the withdrawal.
After a batch of manual checks has been Inquired of the Accounting Supervisor to be No exceptions
printed, a Treasury Services Disbursement informed of the procedures performed by noted.
Accountant compares the PMTS check Treasury Services to verify that the checks
request report, which lists the checks requested match the checks printed.
requested, with the check log, which shows
the checks printed. Any discrepancies For a selection of dates, inspected the PMTS
between the number of checks requested check register to determine whether
and the number of checks printed is Treasury Services verified that the checks
followed up by the Treasury Service requested matched the checks printed.
Disbursement Accountant.
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Controls Tests Performed Results of Tests
Operations Checks:
After a batch of operations checks have Inquired of the Document Solutions No exceptions
been printed in the print shop, a print shop Manager, to be informed of the procedures noted.
processor will compare the system report performed to verify that the checks are
(which lists the number of requests sent) to printed completely.
the number of checks printed (which is
indicated on the printer). Any discrepancies For a selection of dates, inspected the
are followed up and resolved by the print balance report to determine whether the
shop processor. print shop processor verified that the checks
requested matched the checks printed.
ACH or Wire:
For manual ACH submissions, ACH Inquired of the Accounting Supervisor, to be No exceptions
withdrawal requests are reviewed by a informed of the procedures performed by noted.
Treasury Services Accountant to ensure Treasury Services to verify ACH
that the request was properly authorized by withdrawals.
the appropriate personnel. After review, the
Treasury Services Accountant sends the For a selection of ACH withdrawals,
ACH submission to the bank identified by inspected the ACH withdrawal requests to
the participant. determine whether the appropriate
authorization was obtained, and the Treasury
Services Accountant reviewed the
transactions.
All Disbursements:
Cash reconciliations are completed by Inquired of Treasury Services to be No exceptions
Treasury Services on a daily and monthly informed of the procedures for performing noted.
basis. Monthly reconciliations are reviewed cash reconciliations and the review
by management within 10 business days performed by management on a monthly
after the receipt of the bank statements. basis.
For a selection of months, inspected the cash
reconciliations to determine whether the
reconciliations were reviewed by
management within 10 business days after
the receipt of the bank statements.
Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective.
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Retirement Plan ExchangeslInvestment Election Changes
Control Objective 7: Controls provide reasonable assurance that exchanges/allocation changes are properly
authorized and accurately recorded.
Controls Tests Performed Results of Tests
Exchanges/Investment Election Received via Telephone:
The participant can either utilize the VRU Inquired of the NFO Operations Division No exceptions
to systematically perform the transaction or Manager to be informed of the procedures in noted.
prompt out to a Customer Service place to verifY the identity of the requestor,
Representative (CSR) to perform the and the review of exchange transactions by a
transaction. In both instances the QC team member.
participant is required to either enter or Observed the CSR receive incoming calls to
verify his/her social security number, PIN
or other identifying information. If determine whether the CSR verified the
performed by a CSR, the exchange is participant's name, social security number,
reviewed by a QC team member for and date of birth prior to processing any
accuracy on COMP AS. transactions or providing participant
information.
A Quality Control (QC) review is For a selection of exchange transactions
conducted on a sampling of fund
exchanges on a weekly basis. The sample performed by a CSR, inspected the
is selected from a COMPAS generated exchange to determine whether a QC team
report of all fund exchanges processed the member reviewed the transaction for
previous week. An independent QC accuracy.
individual randomly selects 10-20% of the
prior week's exchanges and verifies the
exchange processed within the system
accurately reflects the request made within
the participant phone call. Completion of
this review is evidenced by the QCer's
signature and date. Each FSR logs 100% of
his/her exchanges on a QC log which is
maintained in a designated file in
chronological order.
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Controls Tests Performed Results of Tests
Exchanges/Allocation Changes Received via ISC:
Participants accessing the ISC in order to Inspected the ISC instructions and access No exceptions
request an exchange/allocation change are security procedures to be informed of the noted.
required to establish an account profile procedures in place for authenticating users
with a user name and password. to the ISC.
Authorization to enter the ISC is
accomplished by the participant entering Performed a system query to determine
the profile's user name and password. whether access to the ISC requires the
correct entry of a valid user name and
password.
Exchanges/Allocation Changes Received via Teleprocessing:
Once the requests are processed, CaMP AS For a selection of dates, inspected a No exceptions
electronically validates that information selection of error reports to determine noted.
has been entered into the necessary fields whether errors contained in the reports are
in accordance with pre-established followed-up on and errors resolved in a
parameters. If a problem exists, error timely manner.
reports are automatically generated by
CaMP AS. Error reports are received
initially by the Financial Services Analyst
and Financial Services Support
Representative, who follows up with the
corresponding agents to identify the
reasons for the errors and take corrective
action.
Exchanges/Investment Election Changes Received via U.S. Mail or Facsimile:
The Financial Services Analyst and Inquired of the NFO Operations Division No exceptions
Financial Services Support Representative Manager to be informed of the procedures noted.
process the requested changes via the performed by the QC Processor to verify that
Viking Data Entry system or the Retail requested changes are processed completely
Desktop system. The next business day, and accurately.
the Financial Services Analyst and
Financial Services Support Representative For a selection of dates, inspected the
deliver the document to a QC Processor requested changes to determine whether the
for review. QC Processor reviewed the transactions for
completeness and accuracy.
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
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Investment Transactions
Control Objective 8: Controls provide reasonable assurance that variable and fixed investment transactions are
authorized and processed in accordance with User Organization instructions and accurately recorded in participant
accounts.
Controls Tests Performed Results of Tests
Manual transactions are quality checked Inquired of the NFO Operations Division No exceptions
for authorization and accuracy the Manager to be informed of the procedures in noted.
following day by another Case place to help ensure that investment
Administrator, FSSR or financial transactions are authorized and processed
processor. accurately.
For a selection of variable and fixed
investment transactions, inspected the
transactions to determine whether they are
reviewed by a case administrator, FSSR, or
financial processor the day after the
transaction is received.
See additional testing in Retirement Plan Contributions/Receipts (Control Objective 5), Retirement Plan
Withdrawals/Disbursements (Control Objective 6), and Retirement Plan Exchanges/Allocation Changes
sections (Control Objective 7).
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
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Control Objective 9: Controls provide reasonable assurance that trade orders for variable investment options are
executed and settled accurately and on a timely basis.
Controls Tests Performed Results of Tests
Every morning, the Portfolio Accounting Inquired of the Accounting Supervisor, to be No exceptions
Department receives a daily buy/sell informed of the procedures performed to noted.
interface file with trade information verify that the buy/sell transactions are
through COMP AS. This buy/sell file is processed using the correct processing date.
printed and reviewed for the correct
processing date by the Accounting For a selection of buy/ sell transactions,
Supervisor. inspected the buy/sell file to determine
whether the Accounting Supervisor verifies
that the buy/sell transactions were processed
using the correct processing date.
On a periodic basis (no less frequently Inquired of the Senior Accountant to be No exceptions
than monthly), investment transactions informed of the process by which mutual noted.
with mutual fund houses are reconciled to fund houses are reconciled to mutual fund
mutual fund account statements by a account statements.
Senior Accountant in Portfolio
Accounting that is independent of the For a selection of months, inspected the
Accountant placing the trade. Placing the reconciliation performed of the mutual fund
reconciliation in the reconciliation file houses to the mutual fund account statements.
evidences this review.
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
Information Provided by KPMG LLP
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Control Objective 10: Controls provide reasonable assurance that properly authorized trade orders for fixed
investment options are executed and settled accurately and on a timely basis.
Controls Tests Performed Results of Tests
A quarterly reconciliation is performed to Inquired of the Accounting Director to be No exceptions
verify that the interface between informed of the procedures for performing the noted.
COMPAS and the general ledger system quarterly reconciliations.
is working correctly. This reconciliation
involves an Accounting Supervisor Inspected a selection of quarterly
verifying the fixed investment balances reconciliations to determine whether the
per the general ledger system agree to Accounting Supervisor verified that the fixed
reports of fixed investment balances per investment balances per the general ledger
COMPAS. system agreed to reports of fixed investment
balances per COMP AS.
Quarterly, COMPAS valuation summaries Inquired of the Actuary to be informed of the No exceptions
are uploaded by the COMP AS systems process by which the Actuarial Department noted.
department to a website and then reconciles the valuation summaries to source
downloaded by the Actuarial Department. data.
Either an actuarial analyst or a Senior
Actuarial Assistant reconciles the For a selection of dates, inspected the
COMP AS valuation summaries to data COMP AS valuation summaries to determine
obtained from the original source table whether the actuarial analyst or a senior
data files from COMPAS. actuarial assistant reconciled the valuation
summaries to the data obtained from the
original source table data files from
COMP AS.
See additional testing in Retirement Plan ContributionslReceipts (Control Objective 5), Retirement Plan
Withdrawals/Disbursements (Control Objective 6), and Retirement Plan Exchanges/Allocation Changes
sections (Control Objective 7).
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
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Unit Valuation
Control Objective 11: Controls provide reasonable assurance that variable investment option unit values and
fixed investment options are recorded completely and accurately and that income from variable and fixed
investment options is recorded accurately and timely in the correct period.
Controls Tests Performed Results of Tests
Variable Investment Options:
Beginning in July of 2005, for variable Inquired of the Senior Accountant to Exceptions noted.
investment options, an Associate in the Unit be informed ofthe procedures Documentation
Value Accounting Department, independent performed to help ensure that the could not be
of the Accounting Technician who entered system generated report is reviewed by provided to support
the information onto V ALU, reviews a the associate. the fact that the
system-generated report of the data entry reports were
information for accuracy. This is evidenced For a selection of days, inspected the reviewed for the
by the Associate who reviewed the system generated report to determine period January I,
information initialing the system-generated whether the associate reviews the print
report. screen of the data entry information for 2005 through
accuracy indicated by the associate July 7, 2005 or that
initialing the print screen. the review was
performed by an
associate
independent ofthe
associate who
entered the
information onto
VALU.
However, from
July 2005 to the end
of the audit period,
the control was
operating effectively.
As mitigating
controls, tested
below in this
objective, a dividend
and capital gains
reasonableness test is
performed and the
mutual funds are
reconciled monthly.
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Controls Tests Performed Results of Tests
On a monthly basis the Dividend Report is For a selection of months, inspected No exceptions noted.
reviewed by Portfolio Accounting (P A). the Dividend Report to determine
whether variances over the acceptable
amount, $500, are researched by the
PA.
An Accountant in the Portfolio Accounting Inquired of the Accounting Supervisor No exceptions noted.
Department requests a dividend or capital to be informed of the process by which
gain reasonableness test from the vms the Portfolio Accounting Department
system no less frequently than monthly. performs a dividend or capital gain
reasonableness test.
For a selection of months, inspected
the dividend or capital gain
reasonableness test to determine
whether it is performed on a monthly
basis.
Mutual funds are reconciled on a monthly Inquired of the Accounting Supervisor No exceptions noted.
basis. to be informed of the process by which
the mutual funds are reconciled.
For a selection of months, inspected
the mutual fund reconciliation to
determine whether it is performed on a
monthly basis.
Fixed Investment Options:
Interest rates on the fixed investment options Inquired of the Actuary to be informed No exceptions noted.
are determined periodically by a Company of the procedures by which interest
actuary. For non-indexed contracts, rates are determined.
actuarially determined initial and renewal
interest rates for cases greater than or equal For a selection of interest rates for
to $10 million are reviewed by a Senior cases greater than or equal to $10
Actuarial Officer. million, inspected the non-indexed
contracts to determine whether they
were reviewed by a Senior Actuarial
Officer.
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Controls Tests Performed Results of Tests
For fixed investment options, an actuarial Inquired of the Associate Actuary Life No exceptions noted.
assistant in the Actuarial Department to be informed ofthe procedures
reviews interest earned monthly for performed on a monthly basis to
reasonableness compared to the contract review the interest earned on fixed
rate. investment options.
For a selection of months, inspected
the interest earned to determine
whether it is reviewed by the Actuarial
Department on a monthly basis for
reasonableness, and whether the
interest earned was compared to the
contract rate.
See additional testing at Case Administration - New Case Set-Up Control Objective (Control Objective I)
I Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective.
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User Organization Reporting
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Control Objective 12: Controls provide reasonable assurance that user organization and tax (Forms W-2, 1042S,
480.6, and 1099) statements are complete, accurate and distributed to authorized parties.
Controls Tests Performed Results of Tests
Statements:
The Statement Unit team performs an audit Inquired of the Financial Services No exceptions
on a quarterly basis, prior to the releasing of Specialist, to be informed of the noted.
the statements, ensuring financial procedures performed by the Statement
transaction fields on the statement and funds Unit Team on a quarterly basis to help
available to the entity are completely and ensure that financial and non-financial
accurately reported. These fields include information contained in the statements is
beginning and ending balances, deferrals properly reported.
and incoming transfers, withdrawals and
surrenders, exchanges, charges and gain/loss For a selection of statements, inspected the
on investments. If addition non-financial financial and non-financial information to
information is verified (i.e., phone numbers, determine whether the Statement Unit
addresses, etc.) an audit checklist is prepared Team reviewed financial and non-financial
and initialed by the processor and by a Unit information contained in the statements to
Manager to ensure completeness of the help ensure that it is completely and
audit. accurately reported.
Accounts that are found in error during the Inquired of the Financial Services No exceptions
reconciliation process are researched and Specialist, to be informed of the procedures noted.
corrected within 30 days. An "error out" performed to correct errors identified
report is generated and used to moni tor and during the reconciliation process.
record when the statement was corrected and
mailed. Inspected a selection of quarterly error
reports to determine whether the error out
reports are reviewed periodically and
whether errors were researched and
corrected within 30 days.
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Controls Tests Performed Results of Tests
Tax Reporting:
Monthly, the ENPRES system generates Inquired of the Service Team Unit No exceptions
rejection reports for unusual withdrawal Manager to be informed of the procedures noted.
information electronically fed into it by performed to resolve discrepancies noted in
PMTS. These rejection reports are the rejection reports from the ENPRES
forwarded monthly to the Internal Controls system, and the time standards that they are
area to determine the nature of each unusual required to adhere to.
item. True discrepancies are forwarded to
tax maintainers to be corrected. The For a selection of ENPRES system
distribution manager reviews corrections rejection reports, inspected transactions to
made and verifies resolution within time determine whether rejection reports were
standards prior to the release of the tax reviewed by the Internal Controls area, and
information. discrepancies forwarded to tax maintainers
for correction within the time standards.
The tax reporting analyst reviews the Inquired of the Service Team Unit Exception noted.
following month's rejection report to ensure Manager to be informed of the procedures Two exceptions
that any discrepancies were properly performed by the tax reporting analyst and contained in the
corrected. After the tax reporting analyst tax reporting manager to review the reject rejection reports
completes the review, the rejection report is report to help ensure that discrepancies reviewed were not
submitted to the tax reporting manager for were properly corrected. resolved by the
review. following month.
For a selection of ENPRES system Further testing
rejection reports, inspected the reports to indicated that the
determine whether they were reviewed by two items were
the tax reporting analyst and the tax resolved before
reporting manager, and any discrepancies the production of
identified were corrected. the reports.
Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective.
Information Provided by KPMG LLP
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Computerized Information Systems
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Control Objective 13: Controls provide reasonable assurance that changes to existing systems are authorized,
tested, approved, properly implemented and documented.
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Controls Tests Performed Results of Tests
COMP AS:
Change control standards are documented. Inspected COMP AS change control No exceptions
standards through ChangeMan change noted.
management software to determine
whether they exist and are documented.
Separate test/development and production Inspected the COMP AS application to No exceptions
environments exist. determine whether separate noted.
test/development and production
environments exist.
Segregation of duties exists between the Inquired ofthe IT Applications Manager No exceptions
development group and the transmittal team and Systems Engineer on appropriateness noted.
that performs program change promotions of access to the COMP AS development
into production. and production libraries to be informed of
the process to limit access to appropriate
Access to the staging and production personnel.
libraries is limited to authorized individuals
and provides for segregation of duties Inspected the access of a selection of
between the development and transmittal development and transmittal team members
team members. to determine whether access to staging and
production is limited to authorized
personnel and provides segregation of
duties.
Management approval is required for For a selection of COMP AS program No exceptions
program changes prior to production changes, inspected both approval and test noted.
promotion. documentation to determine the following:
whether management and user/quality
Developers, Quality Assurance, and/or users assurance approval is required for program
are required to perform testing and sign-off changes prior to promotion into production
before modified programs are migrated into and whether testing is performed by the
production. Test results and exceptions are progranuner and QA prior to change
documented and explained. migration into production (with test results
being documented a~d explained).
Program change modifications are tracked Inspected Nationwide's online Central No exceptions
from initiation to completion. Tracking System to determine whether noted.
program change modifications are tracked
from initiation to completion.
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Controls Tests Performed Results of Tests
Change and test documentation is Inspected COMPAS change management No exceptions
maintained in a central repository. software and associated COMP AS noted.
Transmittal documentation to determine
whether change and test documentation is
retained.
PMTS:
Change control standards are documented. Inspected change control process No exceptions
documentation to determine whether noted.
change control procedures are documented.
Separate tesVdevelopment and production Inspected the application for separate No exceptions
environments exist. tesVdevelopment and production noted.
environments to determine whether they
exist.
The Business Analyst must approve Inspected a selection of Work Request No exceptions
program changes prior to the promotion of Transmittals to determine whether a noted.
code into the production environment. A Business Analyst approved program
Work Request Transmittal must be changes prior to promotion into production
completed and approved by management for and whether the Transmittal was signed by
all changes. both the developer and QA to indicate
testing has been performed.
The Work Request Transmittal must be
signed by the developer and QA to indicate
testing has been performed.
Change and test documentation is Inspected the Harvest central package No exceptions
maintained in a central repository. repository to determine whether change noted.
and test documentation is maintained.
Segregation of duties exists between the Inquired ofthe IT Applications Manager No exceptions
development group and the administrative and IT Applications Director on noted.
team that performs program change appropriateness of access to the beta and
migrations into production. production libraries to be informed of the
process to limit access to appropriate
Access to the staging and production personnel.
libraries is limited to appropriate personnel
and provides for segregation of duties Inspected the access of a selection of
between the development and transmittal development and transmittal team members
team members. to determine whether access to staging and
production is limited to authorized
personnel and provides segregation of
duties.
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Controls Tests Performed Results of Tests
Program change modifications are tracked Inspected Nationwide's online Central No exceptions
from initiation to completion. Tracking System to determine whether noted.
program change modifications are tracked
from initiation to completion.
Tax Calculator:
Change control standards are documented. Inspected change control procedures to No exceptions
determine whether they are documented. noted.
Separate test/development and production Separate test/development and production No exceptions
environments exist. environments exist. noted.
Segregation of duties exists between the Inspected a list of users who have Tax No exceptions
development group and the administrative Calculator system ID access and access to noted.
team that performs program change migrate Tax Calculator program changes
migrations into production. into production to determine whether a
segregation of duties exists and whether
Access to the staging and production access is limited to appropriate personnel.
libraries is limited to appropriate personnel
and provides for segregation of duties
between the development and transmittal
team members.
Management approval is required for From a system-generated list of program No exceptions
program changes prior to promotion into changes within ChangeMan, inspected a noted.
production. selection of package ID migrations into the
production environment to determine
Developer, Quality Assurance (QA), and/or whether they were authorized by the
users are required to perform testing and developer and QAlend user and approved
sign-off before modified programs are by systems management prior to promotion
migrated into production. Test results and into production.
exceptions are documented and explained.
Program change modifications are tracked Inspected Nationwide's online Central No exceptions
from initiation to completion. Tracking System to determine whether noted.
program change modifications are tracked
from initiation to completion.
Change and test documentation is Inspected change and test documentation to No exceptions
maintained in a central repository. determine whether developer and QAluser noted.
approval of program change promotions is
documented and retained (equating to
change and test documentation
maintenance).
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Controls Tests Performed Results of Tests
VALU:
Change control standards are documented. Inspected change management No exceptions
documentation to determine whether noted.
change control standards are documented.
Separate test/development and production Inspected the application for separate No exceptions
environments exist. test/development and production noted.
environments to determine whether they
exist.
Segregation of duties exists between the Inquired of the IT Applications Manager No exceptions
development group and the administrative and IT Applications Director on noted.
team that performs program change appropriateness of access to the beta and
migrations into production. production libraries to be informed of the
process to limit access to appropriate
Access to the staging and production personnel.
libraries is limited to appropriate personnel
and provides for segregation of duties Inspected the access of a selection of
between the development and transmittal development and transmittal team members
team members. to determine whether access to staging and
production is limited to authorized
personnel and provides segregation of
duties.
Management approval is required for For a selection of program changes No exceptions
program changes prior to migration into promoted into production, inspected the noted.
production. corresponding V ALU Implementation
Specification Forms to determine whether
Developers, QA, and/or users are required to the appropriate approvals were obtained for
perform testing and sign-off before modified program changes prior to their promotion
programs are promoted into production. Test into production and whether testing and
results and exceptions are documented and sign-off was obtained prior to modified
explained. programs being promoted into production.
Program change modifications are tracked Inspected Nationwide's online Central No exceptions
from initiation to completion. Tracking System to determine whether noted.
program change modifications are tracked
from initiation to completion.
Change and test documentation is Inspected the Harvest central package No exceptions
maintained in a central repository repository to determine whether change noted.
and test documentation is centrally
maintained.
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Controls Tests Performed Results of Tests
BUYS:
Change control standards are documented. Inspected the BUYS change management No exceptions
policy and transmittal documentation to noted.
determine whether they are documented.
Separate test/development and production Inspected the application for separate No exceptions
environments exist. test/development and production noted.
environments to determine whether they
exist.
Segregation of duties exists between the Inquired of the IT Applications Manager No exceptions
development group and the administrative and IT Applications Director on noted.
team that performs program change appropriateness of access to the beta and
migrations into production. production libraries to be informed of the
process to limit access to appropriate
Access to the staging and production personnel.
libraries is limited to appropriate personnel
and provides for segregation of duties Inspected the access of a selection of
between the development and transmittal development and transmittal team members
team members. to determine whether access to staging and
production is limited to authorized
personnel and provides segregation of
duties.
Management approval is required for For a selection of program changes No exceptions
program changes prior to promotion into promoted into production, inspected the noted.
production. corresponding BUYS Implementation
Specification Forms to determine whether
Developers, QA, and/or users are required to the forms were actually completed and
perform testing and sign-off before modified approved by the appropriate personnel
programs are promoted into production. Test prior to the program change being
results and exceptions are documented and promoted into production.
explained.
Program change modifications are tracked Inspected Nationwide's online Central No exceptions
from initiation to completion. Tracking System to determine whether noted.
program change modifications are tracked
from initiation to completion.
Change and test documentation is Inspected the Harvest central package No exceptions
maintained in a central repository repository to determine whether change noted.
and test documentation is centrally
maintained.
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I-Media:
Change control standards are documented. Inspected change management process No exceptions
documentation to determine whether noted.
change control standards are documented.
Separate test/development and production Inspected the application for separate No exceptions
environments exist. test/development and production noted.
environments to determine whether they
exist.
Segregation of duties exists between the From both a listing of developers with No exceptions
development group and the administrative authorized access to the alpha environment, noted.
team that performs program change as well as a listing of transmittal team
migrations into production. members authorized to make program
changes from alpha into beta, inspected a
selection of developers and transmittal
team members to determine whether a
segregation of duties exists.
Update access to the database tables is Inquired of the IT Business Consultant, No exceptions
limited to authorized individuals. corroborated with the IT Applications noted.
Manager, and inspected system-generated
update access lists to iMedia database
tables to determine whether that access is
limited to appropriate personnel.
Change requests require management For a selection of program changes, No exceptions
approval. A transmittal form must be inspected the corresponding iMedia noted.
completed for each change request. The Production Transmittal Forms to determine
form must contain the required approvals in whether the changes were tested and
order to be processed. approved by the appropriate personnel
prior to promotion into production.
The transmittal form must be signed by QA
or an end-user to indicate testing has been
performed prior to promotion into
production.
Program change modifications are tracked Inspected Nationwide's online Central No exceptions
from initiation to completion. Tracking System to determine whether noted.
program change modifications are tracked
from initiation to completion.
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Controls Tests Performed Results of Tests
Change and test documentation is Inspected the Harvest central package No exceptions
maintained in a central repository. repository to determine whether change noted.
and test documentation is centrally
maintained.
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Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
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Control Objective 14: Controls provide reasonable assurance that logical access to programs and data is limited
to properly authorized individuals.
Controls Tests Performed Results of Tests
COMPAS:
A formal security policy exists. Inspected the formal COMP AS security No excepti ons
policy to determine whether it exists and is noted.
documented.
Unique user IDs and passwords are required Observed both a valid and invalid access No exceptions
to gain access to COMP AS. attempt into COMP AS to determine noted.
whether unique IDs and passwords are
required to gain entry.
Passwords are set up according to the Inspected the Password Creation Standards No exceptions
Password Creation Standards. and the RACF password settings to noted.
determine whether passwords are set up
according to the Password Creation
Standards.
User access to COMP AS requires formal Inspected a selection of user IDs to RACF No excepti ons
management approval. security and a selection of COMP AS user noted.
access email approvals to determine
whether user access to COMP AS requires
formal management approval.
On a quarterly basis, user management Inspected a selection of COMP AS No exceptions
reviews the list of user IDs with access to quarterly user access reviews to determine noted.
the application to ensure that it is limited to whether user management review of
appropriate individuals. COMP AS access rights is performed on a
quarterly basis.
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Controls Tests Performed Results of Tests
A periodic access review is completed by Inspected the periodic access review Exception noted.
management of terminated and transferred completed by COMPAS management of Access reviews
employees to ensure that access to terminated and transferred employees to are being
COMP AS is revoked in a timely manner. determine whether the review was performed
appropriately performed. periodically;
however, there
are no procedures
performed to
ensure that
terminated and
transferred
employee access
is revoked from
the system in a
timely manner.
As mitigating
controls, tested in
this objective, the
system is
configured to
remove LDAP
access
automatically
when an
employee is
marked as
terminated in the
HR system; and
business owners
perform a
quarterly review
of user access to
COMP AS.
Applications utilizing Microsoft Active Inspected the Nationwide master LDAP No exceptions
Directory (for single sign-on authentication) account configuration and the real-time noted.
automatically disable user network accounts automated driver created by the BPS
upon termination notification from Termination division to determine whether
Nationwide Human Resources. applications utilizing Active Directory (for
single sign-on authentication)
automatically disable user network account
upon termination notification from
Nationwide Human Resources.
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Controls Tests Performed Results of Tests
PMTS:
A formal security policy exists. Inspected the security policy to determine No exceptions
whether it exists and is documented. noted.
Unique user IDs and passwords are required Inspected a query of password security No exceptions
to gain access to the application. parameters and observed both a valid and noted.
invalid usemame/password combination
access attempt into the application to
determine whether unique user IDs and
passwords are required to gain access.
Users are locked out after a predetermined Inspected the security settings to determine No exceptions
length of inactivity and are limited to two whether the application is configured to noted.
concurrent sessions of the application. lock out users after a predetermined length
of inactivity and limit users to only two
concurrent application settings.
User access to the application requires From a system-generated listing of new No exceptions
formal management approval. users added to the application, inspected a noted.
selection ofPMTS Security Forms to
determine whether the proper management
approval was obtained.
On a quarterly basis management reviews Inspected a selection of PMTS quarterly No exceptions
the list of users with access to the user access reviews to determine whether noted.
application to ensure that it is limited to user management review was performed on
appropriate individuals. a quarterly basis.
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Controls Tests Performed Results of Tests
A periodic access review is completed by Inspected the periodic access review Exception noted.
management of terminated and transferred completed by PMTS management of Access reviews
employees to ensure access to PMTS is terminated and transferred employees to are being
revoked in a timely manner. determine whether the review was performed
appropriately performed. periodically;
however, there are
no procedures
performed to
ensure that
terminated and
transferred
employee access
is revoked from
the system in a
timely manner.
As mitigating
controls, tested
above in this
objective, the
system is
configured to
remove LDAP
access
automatically
when an employee
is marked as
terminated in the
HR system; and
business owners
perform a
quarterly review
of user access to
PMTS.
Applications utilizing Oracle LDAP (for Inspected Oracle LDAP and Nationwide No exceptions
single sign-on authentication) automatically master LDAP account configurations and noted.
disable user network accounts upon the real-time automated driver created by
termination notification from Nationwide the BPS Termination division to determine
Human Resources. whether applications utilizing Oracle
LDAP (for single sign-on authentication)
automatically disable user network
accounts upon termination notification
from Nationwide Human Resources.
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Controls Tests Performed Results of Tests
Tax Calculator:
A formal security policy exists. Inspected the security policy to determine No exceptions
whether a formal security policy exists. noted.
Unique user IDs and passwords are required Inspected the session security parameters No exceptions
to gain access to the Tax Calculator. for the mainframe version of the Tax noted.
Calculator application to determine
whether unique user IDs and passwords are
required to gain access.
Passwords are set up according to the Inspected the session security parameters No exceptions
Password Creation Standards. for the mainframe version of the Tax noted.
Calculator application to determine
whether passwords are set up according to
the password creation standards.
The Security Administrator is responsible Inspected the Tax Calculator Security There were no
for granting users access to the system based Access Policy - Application ID Request users added to the
on their job function. Process document and attempted to inspect application for the
a selection of Tax Calculator access period under
User access to the application requires requests to determine whether user access review.
formal management approval. to the Tax Calculator (mainframe version)
requires formal management approval and
access granted is based on job function.
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Controls Tests Performed Results of Tests
Tax Systems Unit is responsible for Attempted to inspect a selection of Exception noted.
periodically reviewing user access lists for quarterly access reviews to determine Periodic access
appropriateness. whether user management review was reviews are not
performed on a quarterly basis. performed for the
Tax Calculator
application.
As mitigating
controls, tested
above in this
objective,
password
parameters are
enforced for Tax
Calculator, which
protects the user
ID of the
terminated
employee from
compromise; and
the system is
configured to
automatically
remove network
access when an
employee is
marked as
terminated in the
HR system.
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Controls Tests Performed Results of Tests
A periodic access review is completed by Attempted to inspect a selection of Exception noted.
management of terminated and transferred quarterly access reviews to determine Periodic access
employees to ensure access to Tax whether user management review was reviews are not
Calculator is revoked in a timely manner. performed on a periodic basis. performed for the
Tax Calculator
application.
As mitigating
controls, tested
above in this
objective,
password
parameters are
enforced for Tax
Calculator, which
protects the user
ID of the
terminated
employee from
compromise; and
the system is
configured to
automatically
remove network
access when an
employee is
marked as
terminated in the
HR system.
VALU:
A formal security policy exists. Inspected the security policy to determine No exceptions
whether it exists and is documented. noted.
Unique user IDs and passwords are required Inspected a query of password security No exceptions
to gain access to the application. parameters and observed both a valid and noted.
invalid usemame/password combination
access attempt into the application to
determine whether unique user IDs and
passwords are required to gain access.
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Controls Tests Performed Results of Tests
Passwords are set up according to the Inspected the documented password No exceptions
Password Creation Standards. creation standards and system password noted.
configurations to determine whether
passwords are set up according to the
standards.
User access to the application requires For a selection of new user application No exceptions
formal management approval. additions, inspected a selection of noted.
corresponding V ALU Access Forms to
determine whether formal management
approval was obtained.
On a quarterly basis management reviews Inspected a selection of V ALU quarterly No exceptions
the list of users with access to the user access reviews to determine whether noted.
application to ensure that it is limited to user management review was performed on
appropriate individuals. a quarterly basis.
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Controls Tests Performed Results of Tests
A periodic access review is completed by Inspected the periodic access review Exception noted.
management of terminated and transferred completed by V ALU management of Access reviews
employees to ensure access to V ALU is terminated and transferred employees to are being
revoked in a timely manner. determine whether the review was performed
appropriately performed. periodically;
however, there are
no procedures
performed to
ensure that
terminated and
transferred
employee access
is revoked from
the system in a
timely manner.
As mitigating
controls, tested
above in this
objective, the
system is
configured to
remove LOAP
access
automatically
when an employee
is marked as
terminated in the
HR system; and
business owners
perform a
quarterly review
of user access to
VALU.
Applications utilizing Oracle LOAP (for Inspected Oracle LOAP and Nationwide No exceptions
single sign-on authentication) automatically master LOAP account configurations and noted.
disable user network accounts upon the real-time automated driver created by
termination notification from Nationwide the BPS Termination division to determine
Human Resources. whether applications utilizing Oracle
LOAP (for single sign-on authentication)
automatically disable user network account
upon termination notification from
Nationwide Human Resources.
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Controls Tests Performed Results of Tests
BUYS:
A formal security policy exists. Inspected the BUYS Security Policy to No exceptions
determine whether it formally exists and is noted.
documented.
Unique user IDs and passwords are required Inspected screenshots displaying an invalid No exceptions
to gain access to BUYS. user access attempt into the application to noted.
determine whether unique user IDs and
passwords are required for entry.
Passwords are set up according to the Inspected the documented BUYS security Exception noted.
Password Creation Standards. policy and system password configurations Due to system
to determine whether passwords are set up limitations,
according to the standards. system
configuration does
not force users to
change their
default password.
As mitigating
controls, tested in
below in this
objective and in
Control Objective
9, only authorized
users are given
access to BUYS
and all BUYS
trades are
reconciled
monthly to the
mutual fund
statements.
User access to the application requires For a selection of new user additions to the No exceptions
formal management approval. application, inspected corresponding noted.
BUYS Security Access Request Forms to
determine whether formal management
approval was obtained.
On a quarterly basis management reviews Inspected a selection of BUYS quarterly No exceptions
the list of users with access to the user access reviews to determine whether noted.
application to ensure that it is limited to user management review was performed on
appropriate individuals. a quarterly basis.
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Controls Tests Performed Results of Tests
A periodic access review is completed by Inspected the periodic access review Exception noted.
management of terminated and transferred completed by BUYS management of Access reviews
employees to ensure access to BUYS is terminated and transferred employees to are being
revoked in a timely manner. determine whether the review was performed
appropriately performed. periodically;
however, there are
no procedures
performed to
ensure that
terminated and
transferred
employee access
is revoked from
the system in a
timely manner.
As mitigating
controls, tested
above in this
objective, the
system is
configured to
automatically
remove network
access when an
employee is
marked as
terminated in the
HR system; and
business owners
perform a
quarterly review
of user access to
BUYS.
I-Media:
A formal security policy exists. Inspected the ISC security policy to No exceptions
determine whether it formally exists and is noted.
documented.
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Controls Tests Performed Results of Tests
Valid personal information is required to Inspected iMedia online setup procedures No exceptions
gain initial access to the ISC to make future and iMedia login screenshots to determine noted.
allocation changes and exchanges between whether a unique user ill/password
accounts. combination is required to gain access to
the ISC and make future allocation changes
Unique user IDs and passwords are required and exchanges between accounts.
to gain access to the ISC.
Standard configuration settings for servers, Inspected documented network No exceptions
firewalls and routers are established to infrastructure configuration settings noted.
control logical access to and from the ISC controlling logical access to and from the
and application data. ISC and application data to determine
whether standards exist.
Participants have access to only their Inspected iMedia backend database web No exceptions
individual accounts via ISC. code and observed a customer account noted.
access attempt into iMedia to determine
Access to plan information and underlying whether participants only have access to
participant data via the ISC is restricted. their individual plan information/accounts
via the ISC.
Update access is limited to properly Inspected system-generated update access No exceptions
authorized personnel. lists to iMedia database tables to determine noted.
whether update access is limited to
appropriate personnel.
Audit functions are utilized to monitor Inquired of the IT Business Consultant to No exceptions
system activities. be informed of the procedures performed to noted.
review the audit logs.
Inspected iMedia audit function log events
to determine whether audit functions are
utilized to monitor system activities in the
VRU application.
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Based on the tests of operating effectiveness described above and the limited impact of the exceptions noted
above, the controls are operating with sufficient effectiveness to achieve this control objective.
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Control Objective 15: Controls provide reasonable assurance that physical access to computer equipment;
storage media and program documentation is limited to properly authorized individuals.
Controls Tests Performed Results of Tests
Procedures are in place to ensure that access Inspected the Nationwide Data Center No exceptions
to both the NDCN and NDCS is limited to North and Data Center South fact sheet and noted.
appropriate personnel. was informed of the facility, equipment,
and processes utilized at the data center.
Procedures are in place to ensure that access Inspected the Nationwide Data Center No exceptions
to both the NDCN and NDCS is limited to North and Data Center South access noted.
appropriate personnel. control procedures to be informed of the
access policies and procedures for the data
center.
Visitors are required to sign in and out when Inspected a selection ofNDCN and NDCS No exceptions
visiting Nationwide Data Center North and Visitor Registers to determine whether noted.
Data Center South. visitors signed in and out when visiting the
data centers.
Visitor access to Nationwide Data Center From the visitor log, inspected a selection No exceptions
North and Data Center South requires data of access request authorization emails to noted.
center management approval. determine whether visitor access to the data
center requires management approval.
Management reviews the list of users with Inspected a selection of monthly No exceptions
access to both Nationwide Data Center certification reports, signed off by the shift noted.
North and Data Center South on a monthly manager, to determine whether access to
basis to ensure that access is limited to the data center was reviewed for
appropriate personnel. appropriateness.
Surveillance cameras and key card scanners Observed the data center and inquired of No exceptions
are utilized to actively monitor all entrances the on-duty security personnel to determine noted.
to Nationwide Data Center North and Data whether key cards restrict access and
Center South. surveillance cameras are utilized to
monitor access to the data center.
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
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Control Objective 16: Controls provide reasonable assurance that data transmissions between participants and
the ISC, and the ISC and application servers are protected from unauthorized disclosure.
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Controls Tests Performed Results of Tests
A formal security policy exists. Inspected the ISC security policy to No exceptions
determine whether a formal policy exists. noted.
User ID and password are required in Inspected ISC login documentation and No exceptions
order to gain access to ISC. observed an invalid username/password noted.
combination attempt into the ISC to
determine whether a user ID and password
are required to gain access.
Transactions and data containing Inspected screenshots of Microsoft Internet No exceptions
participant information sent over the ISC Explorer security settings, the Certificate of noted.
are protected by encryption. Participant Authority for the ISC website, and data
connections that do not use encrypted packet capture reports of participant
browsers are dropped. information between web, application, and
database servers to determine whether
transactions and data containing participant
information sent over the ISC are protected
by encryption and participant connections
that do not use encrypted browsers are
dropped.
A third-party penetration test is performed Inspected attack and penetration testing No exceptions
periodically to identify network evidence and MS Access tracking database noted.
vulnerabilities. The results are reviewed used by management to categQrize attack and
by management and resolved accordingly. penetration test results to determine whether
third-party penetration testing is performed
periodically to help identify network
vulnerabilities with testing results reviewed
by management and resolved accordingly.
Network Intrusion Detection Systems Inspected the following features of the No exceptions
(IDS) are in place and monitored. Intrusion Detection System: security event noted.
viewer, IDS sensor management center, and
an example IDS sensor log to determine
whether network intrusion detection systems
(IDS) are in place and monitored by Security
Personnel.
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Controls Tests Performed Results of Tests
Firewall configuration processes exist. Inspected the Nationwide Information No exceptions
Security Policy and visual firewall schematics noted.
in relation to iMedia to determine whether
firewall configuration processes exist and are
documented.
Access to the customer data while in Inspected system-generated ID access lists to No exceptions
storage at the database server is limited to databases supporting the iMedia application noted.
appropriate personnel. to determine whether access is restricted to
authorized and technically competent
personnel.
Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
Information Provided by KPMG LLP
84
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Control Objective 17: Control provide reasonable assurance that administrative and operational procedures are
established within the systems operations to provide for adequate back up and retention of systems data.
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Controls Tests Performed Results of Tests
Formal tape backup procedures are in place. Inspected tape backup procedures to No exceptions
determine whether they are in place. noted.
Formal procedures are in place for tape Inspected the vault picking lists procedures No exceptions
retention and backup tape box information. for tapes going off site and tapes returning noted.
from offsite to determine whether formal
procedures are in place.
Backup tapes are stored at an offsite facility. From a list of days, inspected a selection of No exceptions
vault pick up sheets to determine whether noted.
backups are sent offsite.
Critical tables, reports, files and transactions From a list of backup jobs, inspected a No exceptions
are backed up periodically and available on- selection of key system backups to noted.
line for immediate recovery and/or determine whether critical tables, reports,
regeneration of statements and reports. files, and transactions are being
periodically backed up and made available
online.
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Based on the tests of operating effectiveness described above, the controls are operating with sufficient
effectiveness to achieve this control objective.
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Information Provided by KPMG LLP I
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Financial Statements
December 31, 2005 and 2004
(With Independent Auditors' Report Thereon)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Table of Contents
Page
Independent Auditors' Report
Consolidated Balance Sheets
2
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
3
4
Notes to Consolidated Financial Statements
5
6
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KPMG LLP
Suite 500
191 West Nationwide Boulevard
Columbus,OH 43215-2568
Telephone
Fax
Internet
6142492300
6142492348
www.us.kpmg.com
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Independent Auditors' Report
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The Board of Directors
Nationwide Retirement Solutions, Inc.:
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We have audited the accompanying consolidated balance sheets of Nationwide Retirement Solutions, Inc.
and subsidiaries (indirectly a wholly owned subsidiary of Nationwide Financial Services, Inc.) (the
Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations,
stockholder's equity and cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
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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 consolidated financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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As described in note I, the Company and National Deferred Compensation, Inc. merged as of
December 31, 2005. The accompanying 2004 financial statements have been restated to present the
financial statements, on a consolidated basis, as if the merger has occurred on December 31, 2003.
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In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Nationwide Retirement Solutions, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then
ended in conformity with U.S. generally accepted accounting principles.
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KPMGs- LCP
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March 31, 2006
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KPMG LLP, a U,S. lim~ed liabildy ~rt""",hip, i$lhe U.S
member firm of KPMG lolernallonal, a Swiss cooperative
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NATIONWIDE RETIREMENT SOLUTIONS,INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
December 31, 2005 and 2004
Assets
Current assets:
Cash and cash equivalents (notes 3 and 5)
Accounts receivable
Contractual investment, current portion (note 4)
Due from affiliates (note 5)
Prepaid expenses
Total current assets
Goodwill and intangible assets, net of accumulated amortization (notes 8 and 9)
Property and equipment, net of accumulated depreciation and
amortization (note 10)
Contractual investment, net of current portion (note 4)
Other
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities (note 13) $
Due to affiliates (notes 5 and 12)
Deferred revenue, current portion (note II)
Obligation under consulting agreement, current portion (notes 8 and 13)
Current federal income taxes payable
Total current liabilities
Deferred federal income tax (note 6)
Deferred revenue, net of current portion (note 11)
Obligation under consulting agreement, net of current portion (notes 8 and 13)
Total liabilities
Stockholders' equity:
Common stock of Nationwide Retirement Solutions, Inc. (NRS),
$1 par value. Authorized 500,000 shares; issued and
outstanding 236,494 shares
Additional paid-in capital
Retained earnings
Total stockholders' equity
Commitments and contingencies (notes 7 and 13)
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
2
2005
2004
Restated - Note 1
$
51,670,928
9,143,455
7,465
2,234,471
40,416,444
8,047,527
49,943
2,233,766
21,530
50,769,210
19,656,819
1,307,361
200,000
7,873
71,941,263
$
63,056,319
19,800,055
1,130,471
200,000
7,873
84,194,718
3,604,940
6,250,973
369,000
101,292
8,520,809
18,847,014
1,687,648
1,452,000
1,322,845
23,309,507
2,886,619
5,759,684
483,000
96,469
398,027
9,623,799
995,348
1,821,000
1,131,048
13,571,195
236,494 236,494
28,852,574 28,852,574
31,796,143 29,281,000
60,885,211 58,370,068
$ 84,194,718 71,941,263
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements of Operations
Years ended December 31, 2005 and 2004
2005
Revenue:
Commissions and asset fees (note 5)
Administrative and marketing fees
Other income
Total revenue
$ 66,075,392
40,969,015
1,505,469
108,549,876
Expenses:
Commissions
General and administrative (notes 5, 7, 12 and 13)
Consultant fees
Amortization of intangibles (note 8)
Depreciation and amortization of property and equipment
Total expenses
Net income before income tax
Federal income tax (note 6):
Current expense
Deferred expense (benefit)
354,230
80,769,722
1,061,580
280,085
366,507
82,832,124
25,717,752
8,510,309
692,300
9,202,609
16,515,143
Net income
$
See accompanying notes to consolidated financial statements.
3
2004
Restated - Note 1
64,661,662
44,743,184
352,202
109,757,048
583,231
71,993,735
2,637,743
272,528
451,332
75,938,569
33,818,479
12,113,379
(85,713)
12,027,666
21,790,813
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements o[Stockholder's Equity
Years ended December 31, 2005 and 2004
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Common Additional
stock paid-in capital
Balance, December 31 , 2003 (Restated ~ Note I) $ 236,494 28,852,574
Net income
Balance, December 31, 2004 (Restated- Note I) 236,494 28,852,574
Dividend to stockholder
Net income
Balance, December 31, 2005 $ 236,494 28,852,574
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See accompanying notes to consolidated financial statements.
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4
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Retained
earnings
7,490,187
21,790,813
29,281,000
(14,000,000)
16,515.143
31,796,143
Total
36,579,255
21,790.813
58,370,068
(14,000,000)
16,515,143
60,885,211
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 2005 and 2004
2005
Cash flows from operating activities:
Net income $ 16,515,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 646,592
Deferred federal income tax expense (benefit) 692,300
Decrease (increase) in assets:
Accounts receivable (1,095,928)
Due from affiliates (705)
Federal income tax receivable
Prepaid expenses 21,530
Contractual investment 42,478
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 718,321
Deferred revenue (483,000)
Due to affiliates 491,289
Current federal income taxes 8,122,782
Net cash provided by operating activities 25,670,802
Cash flows from investing activities:
Capitalization of software development costs (189,615)
Net cash used in investing activities (189,615)
Cash flows from financing activities:
Dividend to stockholder (14,000,000)
Principal payments on obligation under consulting agreement (226,703)
Principal payments on obligation under buyout agreement
Net cash used in financing activities (14,226,703 )
Net increase in cash and cash equivalents 11,254,484
Cash and cash equivalents:
Beginning of year 40,416,444
End of year $ 51,670,928
Supplemental disclosure of cash flow information:
Cash paid for federal income tax, net $ 387,527
See accompanying notes to consolidated financial statements.
5
2004
Restated - Note 1
21,790,813
723,860
(85,713)
2,395,840
2,782
567,787
(21,530)
(31,803)
1,762,168
(631,000)
(3,003,577)
398,027
23,867,654
(523,945)
(523,945)
(215,906)
(153,656)
(369,562)
22,974,147
17,442,297
40,416,444
11,147,565
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
I (I) Organization and Description of Business
Nationwide Retirement Solutions, Inc. and subsidiaries (Nationwide Retirement Solutions Insurance
Agency, Inc., Nationwide Retirement Solutions, Inc. of Arizona, Nationwide Retirement Solutions, Inc. of
Ohio, and Nationwide Retirement Solutions, Inc. of Texas) (collectively NRS or the Company) are wholly
owned subsidiaries ofNFS Distributors, Inc. (NFSDI). NFSDI is a wholly owned subsidiary of Nationwide
Financial Services, Inc. (NFS). NFS is a majority owned subsidiary of Nationwide Corporation (Corp.),
which is a subsidiary of Nationwide Mutual Insurance Company (NMIC) and Nationwide Mutual Fire
Insurance Company. NRS is in the business of developing, marketing, and administering the operation of
deferred compensation plans and other retirement savings plans for governmental units and educational
institutions throughout the United States.
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Prior to December 31,2005, National Deferred Compensation, Inc. (NDC) was a wholly owned subsidiary
ofNFSDI and an affiliate ofNRS subject to common control. NDC, a licensed insurance agency, provided
record-keeping services for deferred compensation plans under Sections 457 and 401(k) of the Internal
Revenue Code in the public sector and for private industry. NDC also performed marketing and enrollment
functions for certain of the deferred compensation plans it administered.
Effective December 31,2005, NDC was merged with NRS, with NRS the surviving corporation. As such,
in accordance with U.S. generally accepted accounting principles (GAAP), the December 31, 2004
financial statements have been restated to reflect the merger as if it occurred on December 31, 2003.
(2)
Summary of Significant Accounting Policies
The significant accounting policies followed by NRS and subsidiaries that materially affect financial
reporting are summarized below. The accompanying consolidated financial statements have been prepared
in accordance with GAAP.
The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly from those estimates.
(a) Principles of Consolidation and Combination
The consolidated financial statements include the accounts of NRS and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in the
consolidation.
(b) Intangible Assets and Goodwill
Intangible assets (note 8) are amortized on a straight-line basis over five to fifteen years. The
Company assesses the recoverability of intangible assets by determining whether the amortization of
the intangible assets' balance over its remaining life can be recovered through projected
undiscounted future operating cash flows. The assessment of the recoverability of intangible assets
will be impacted if estimated future operating cash flows are not achieved.
6 (Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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The accounts of the Company includes goodwill (note 9), which represents the excess of purchase
price over fair value of net assets acquired. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill is not
amortized but rather evaluated periodically for impairment. Annually, or when events or
circumstances dictate, the Company tests for impairment of the goodwill. The determinants used for
this evaluation include management's estimate of the fair value of the reporting unit and the carrying
amount of the reporting unit. There were no impairment adjustments for the years ended
December 31, 2005 or 2004.
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(c) Property and Equipment
Property and equipment (note 10) are stated at cost less accumulated depreciation. Except for
capitalized software development costs, depreciation is provided using the double-declining balance
method or straight-line basis, as appropriate, over the cstimated useful lives of the various assets.
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Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, requires the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Capitalized costs are amortized over three years on a
straight-line basis. The Company capitalized $189,615 and $523,945 in software development costs
during 2005 and 2004, respectively. Such capitalized costs are classified as property and equipment,
net of amortization. The Company amortized $362,717 and $429,601 in capitalized software
development costs during 2005 and 2004, respectively.
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(d) Impairment of Long-Lived Assets
In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets,
(SFAS 144), long-lived assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment
adjustroents for the years ended December 31, 2005 and 2004.
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(e) Commissions and Asset Fees
The Company receives commission payments under contracts with certain insurance camers,
primarily Nationwide Life Insurance Company (NLIC), an affiliate. Commission income is
recognized when plan payroll defcrrals are processed at the insurance carrier.
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The Company receives asset fees in lieu of commissions under certain administrative and marketing
contracts with certain plan sponsors. Assct fees are calculated as a percentage of assets under
management and are recorded as revenuc when eamed.
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(Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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(f) Administrative and Marketing Fee Income
The Company receives fee income under administrative and marketing contracts with certain plan
sponsors. Additionally, the Company receives fee income under agreements with NLIC and
Nationwide Investment Services Corporation (NISC), both affiliated companies, for marketing and
service center support for certain NLIC annuity and life products, and for the payment, on behalf of
NISC, of certain litigation (see note 13) and regulatory fees and charges, respectively. Fee income is
recognized when assessed by the Company.
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Administrative fees represent revenue earned under certain contracts for administering participant
accounts or insurance carrier payroll deferrals. The Company recognizes the administrative fee
income when the fee is assessed.
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(g) Commission Expense
Commission expense represents compensation paid under contracts with independent contractors for
enrollment and servicing activities related to certain deferred compensation plans. Such
compensation is expensed when payable.
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(h) Federal Income Tax
As a result of NFS' s acquisition activity in 2002, Corp.' s ownership percentage of NFS was reduced
from 79.8% to 63.0%. Therefore NFS and its subsidiaries no longer qualify to be included in the
NMIC consolidated federal income tax return.
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Under Internal Revenue Code regulations, NFS and its subsidiaries cannot file a life/nonlife
consolidated federal income tax return until five full years following NFS' departure from the NMIC
consolidated federal income tax return group. Therefore, NFS and its direct nonlife insurance
company subsidiaries will file a consolidated federal income tax return; NLIC and Nationwide Life
and Annuity Insurance Company will file a consolidated federal income tax return; the direct nonlife
insurance companies under NLIC will file separate federal income tax returns; Nationwide Life
Insurance Company of America (NLICA) and its direct life insurance company subsidiaries will file
a consolidated federal income tax return; and the direct nonlife insurance companies under NLICA
will file a consolidated federal income tax return, until 2008, when NFS expects to be able to file a
single consolidated federal income tax return with all of it subsidiaries.
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The Company provides for federal income taxes based on amounts the Company believes it will
ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the
deductibility of certain expenses and the realization of certain tax credits. In the event the ultimate
deductibility of certain expenses or the realization of certain tax credits differ from estimates, the
Company may be required to significantly change the provision for federal income taxes recorded in
the consolidated financial statements.
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(Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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The Company utilizes the asset and liability method of accounting for income tax. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under this method, the
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established when necessary to
reduce the deferred tax assets to the amounts expected to be realized.
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(i) Comprehensive Income
Comprehensive income includes net income as well as certain items that are reported directly within
a separate component of stockholder's equity and are excluded from net income. Currently, net
income is the Company's only component of comprehensive income.
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(j) Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all short-term investments to
be cash equivalents, as the original investment maturity dates are less than three months.
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(k) Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, contractual investment, due
from affiliates, prepaid expenses, accounts payable and accrued liabilities, due to affiliates and
federal income taxes payable approximates fair value.
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Reclassifications
Certain items in the 2004 consolidated financial statements and related notes have been reclassified
to conform to the 2005 presentation.
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(I)
The Company uses a controlled disbursement system for settling obligations. This system is an
arrangement with a disbursing bank which allows the Company to retain funds in short-term investment
accounts until checks are presented for payment. Hence, this system allows the Company to operate in a
negative cash position offset by funds held in short-term investment accounts. See note 5.
I (4) Contractual Investment
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In accordance with the Company's agreement with a certain deferred compensation plan (the Plan), the
Company is required to maintain at least $200,000 on deposit in cash or investment in mutual fund shares
during the term of the contract with the Plan, which ended December 31, 2005.
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(Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
The deposits are maintained to reimburse the Plan for any losses due to changes in market value between
the date mutual fund investments are credited to the participants' accounts and the mutual fund trade date.
As a result, the Company is subject to the risks of changes in the fair value of mutual fund share deposits
where Plan investments are credited prior to the cash settlement with the mutual funds. Gains and losses
are reflected in general and administrative expense in the accompanying consolidated statements of
operations. The combined current and noncurrent contractual investment amounts with carrying values of
$207,465 and $249,943 at December 31, 2005 and 2004, respectively, approximates fair value.
(5) Related Party Transactions
NLIC is the primary insurance carrier for the deferred compensation plans and other retirement savings
plans administered by the Company. Revenue from NLIC, including the marketing and development fee,
was approximately $59,723,000 in 2005 and $63,287,000 in 2004. Related amounts receivable from NLIC
at December 31, 2005 and 2004 are included in due from affiliates.
The Company reimbursed NMIC approximately $72,955,536 in 2005 and $71,091,609 in 2004 for certain
operating expenses allocated to the Company. Such expense allocations are made periodically based on
services provided and other factors and are not subject to a written agreement. The Company may have
paid more or less than these amounts if it had to procure these services on its own. Related amounts due to
NMIC at December 31, 2005 and 2004 for certain operating expenses are included in due to affiliates.
Cash and cash equivalents include the Company's participation in a short-term investment pool managed
by Nationwide Cash Management Company (NCMC), an affiliated company. At its discretion, NCMC
invests and reinvests assets of the pool. The investment pool consists primarily of commercial paper,
acceptances and other investment securities of a short-term nature and are stated at cost, which
approximates fair value. Amounts invested in NCMC as of December 31, 2005 and 2004 were
$51,139,171 and $39,528,078, respectively.
The Company paid dividends of$14,000,000 to NFSDI in 2005.
(6) Federal Income Taxes
Total income tax expense for the years ended December 31, 2005 and 2004 differs from the amount
computed by applying the U.S. federal income tax rate to net income before tax as follows:
2005 2004
Amount % Amount %
Expected tax expense $ 9,001,213 35.0% $ 11,836,468 35.0%
Nondeductible meals and
entertainment 211,896 0.8 191,301 0.6
Accrual adjustment (10,500) (103)
Total (effective
rate of each year) $ 9,202,609 35.8% $ 12,027,666 35.6%
10 (Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 3 I, 2005 and 2004
The tax effects of temporary differences that give risc to significant components of the net deferred tax
liability as of December 31, 2005 and 2004 are as follows:
2005
2004
Deferred tax assets:
Accumulated depreciation
Intangible assets
Accrued legal fees
Deferred revenue
Total gross deferred tax assets
Deferred tax liabilities:
Accrued pension liability
Goodwill
Internally developed software costs
Total gross deferred tax liabilities
Net deferred tax liability
983
131,055
244,640
806,400
1,183,078
$
359
136,385
190,457
637,350
964,551
29,929
1,692,861
455,636
2,178,426
995,348
2,257,148
395,051
2,652,199
1,687,648
$
The Company determines a valuation allowance based on their analysis of future deductible amounts. As
of December 31, 2005 and 2004, management believes it is more likely than not that all future deductible
amounts can be offset by future taxable amounts or recovery of federal income tax paid within the statutory
carryback period.
(7)
Leases
The Company has certain noncancelable operating lease agreements primarily for office space. Future
minimum lease payments under noncancelable operating leases as of December 31, 2005 are:
2006
2007
2008
2009
2010
$
280,699
246,014
153,017
94,178
93,138
867,046
Total minimum lease payments
$
Total rent expense was $2,324,659 and $2,614,578 in 2005 and 2004, respectively, which includcs
$1,762,427 and $2,058,713 paid to related parties in 2005 and 2004, respectively.
II
(Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31,2005 and 2004
(8)
Intangible Assets
Effective October 10, 1996, the Company acquired certain intangible assets in the form of administrative,
endorsement and trust agreements for the exclusive rights to market life insurance and health plans to
certain collectively bargained public employees from Public Employee Benefit Consultants, Inc. (PEBCI).
Additionally, the Company entered into an agreement with the seller (Seller) to provide future consulting
services. The intangible assets attributable to thcse agreements were fully amortized at December 31, 2001.
In December 200 I, the Company and NLIC entered into a new agreement with the Seller that released the
Company and NLIC from any obligation to make further payments under the October 1996 agreement.
Under the new agreement, the Company will pay the Seller approximately $3 million through 20 II. The
agreement provided for an initial payment of $500,000 upon execution of the agreement and scheduled
annual payments thereafter, which vest at 20% per year. In addition, the Company will pay noncompete
and compensatory payments of approximately $829,000 through 2006. Vesting of the annual payments,
and the obligation to make the noncompete and compensatory payments, is contingent upon certain
performance requirements of the Seller. The intangible asset attributable to this agreement, net of
accumulated amortization, was $1,124,842 and $981,605 at December 31, 2005 and 2004, respectively.
The actual intangible asset as of December 31. 2005 and accumulated amortization for the year ended
December 31, 2005, and the estimated intangible asset and accumulated amortization balances as of the
end of and for the next five years are as follows:
Intangible
asset
Aceumulated
amortization
2005
2006
2007
2008
2009
2010
$
2,184,869
2,515,580
2,515,580
2,515,580
2,515,580
2,515,580
1,060,027
1,343,136
1,577,625
1,812,114
2,046,603
2,281,092
(9)
Goodwill
In 1998, NFS acquired NDC for approximately $24 million in excess of the fair value of the net assets
acquired (goodwill). The Company completed its 2005 impairment testing and concluded there was no
impairment loss on existing goodwill. The net unamortized goodwill balance was $18,675,213, which
consisted of goodwill of $23,846,588 and accumulated amortization of $5,171,375 at December 31,2005
and 2004.
12
(Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 3 I, 2005 and 2004
(10) Property and Equipment
The Company owns data processing equipment and software and furniture and fixtures. The costs of each
type of asset at December 31, 2005 and 2004 are as follows:
Data processing equipment and software
Furniture and fixtures
2005
2,246,317
267,226
2,513,543
(1,383,072)
1,130,471
$
2004
10,913,519
723,643
11,637,162
(10,329,801)
1,307,361
Accumulated depreciation
Net
$
(11) Deferred Revenue
On August 22, 2003, the Company entered into a settlement agreement with Monumental Life Insurance
Company (Monumental), resulting in the discontinuance of the Company's marketing of Monumental
universal and term life insurance products in the public seetor marketplace. Under terms of the agreement,
the Company paid Monumental $14 million in cash and agreed to waive its right to future cash
compensation related to the then existing block of Monumental policies. The Company's management
determined the present value of the foregone compensation to be $3,371,000, and recorded this amount as
deferred revenue. Also, under the agreement, the Company retains the obligation for administration of the
existing policies. The deferred revenue is being amortized to income over approximately 20 years, the
expected term of the Company's servicing obligation. The amount of deferred revenue recognized as
income in 2005 and 2004 was $483,000 and $631,000, respectively, and is included in commissions and
asset fees in the accompanying eonsolidated statements of operations.
(12) Pension Plan and Postretirement Benefits Other Than Pensions
NFS, and certain affiliated companies, including the Company, participate in a defined benefit pension
plan sponsored by NMIC. This plan covers all employees of participating companies who have completed
at least one year of service. Plan contributions are invested in a group annuity contract issued by NUC. All
participants are eligible for benefits based on an account balance feature. Participants last hired before
2002 are eligible for benefits based on the highest average annual salary of a specified number of
consecutive years of the last ten years of service, if such benefits are of greater value than the account
balance feature. NFS funds pension costs accrued for direct employees plus an allocation of pension costs
accrued for employees of affiliates, including the Company, whose work benefits NFS.
In addition to the NMIC pension plan, NFS, and certain affiliated companies, including the Company,
participate in life and health care defined benefit plans sponsored by NMIC for qualifying retirees.
Postretirement life and health care benefits are contributory and generally are available to full-time
employees, hired prior to June I, 2000, who have attained age 55 and have accumulated IS years of scrvice
13
(Continued)
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NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
after reaching age 40. Postretirement health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition, there are caps on NFS' portion of
the per-participant cost of the postretirement health care benefits. NFS' policy is to fund the cost of health
care benefits in amounts determined at the discretion of management. Plan assets are invested primarily in
group annuity contracts issued by NLIC.
The Company's portion of allocated expenscs related to these plans are included as a component of the
Company's salary benefit expense, which is included in general and administrative expense in the
accompanying consolidated statements of operations.
(13) Commitments and Contingencies
On May 17, 1982, the Company entered into a consulting agreement with a former majority stockholder
and director of the Company. The agreement terminated December 31, 1986. Under the terms of this
termination agreement, the consultant continued to receive compensation until June 30, 2002 based upon
asset balances of participants held by NLIC who were enrolled before January I, 1987. Payments made
subsequent to June 30, 2002, which are payable for fifteen years, are made under a non-qualified deferred
compensation agreement of amounts deferred under the aforementioned termination agreement. Amounts
paid under the deferred compensation agreement are reimbursed by NLIC, and therefore do not impact the
Company's consolidated financial statements.
The scheduled annual payments subject to vesting and performance requirements payable to the Seller
under the December 2001 consulting agreement, as described in note 8, are included in obligation under
consulting agreement as of December 31,2005 and 2004.
In connection with NLIC's election in 2000 not to renew a service agreement to provide administration and
marketing services to certain educational institutions, the Company assumed the obligations under a related
settlement agreement between a certain consultant and NLIC. Under the settlement agreement, the
Company paid $153,656 in 2004, the last year of the buyout agreement.
The Company is involved in various claims, legal actions, and regulatory mallers arising in the ordinary
course of business. Accruals for these claims and legal actions have been provided to the extent that it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the
opinion of management, the ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or liquidity.
The Company recognized insurance recoveries of approximately $6.58 million during 2004 related to prior
litigation costs on settled cases. These one time insurance recoveries are reflected in general and
administrative expenses in the accompanying consolidated statements of operations.
Under an agreement between the Company and NISC, the Company pays certain litigation costs directly
related to deferred compensation plans administered by the Company, and other matters primarily related
to agent noncompete and arbitration cases.
14
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM lOoK
[Xl ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 2-64559
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of incorporation or organization)
3 I -4156830
(IRS Employer Identification No.)
One Nationwide Plaza, Columbus, Ohio
(Address of principal executive offices)
43215
(Zip Code)
(614) 249-7111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes I I No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15( d) of the Act.
Yes I ) No IX]
Indicate by check mark whether the registrant (I) has filed all reports required to be filed by Section 13 or 15( d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes (X] No I )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form IO-K or any arnendmentto this Form 1O-K. IX]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule I2b-2 of the Exchange Act. (Check one):
Large accelerated filer I ] Accelerated filer I ) Non-accelerated filer IX]
Indicate by a check mark whether the registrant is a shell company (as defmed in Rule I2b-2 of the Exchange Act). Yes I I No IX)
No established published trading market exists for the registrant's common stock, par value $1.00 per share. As of February 21,
2006,3,814,779 shares ofthe registrant's common stock were outstanding, all of which are held by Nationwide Financial Services,
Inc.
The Registrant meets the conditions set fortb in General Instruction 1(I)(a) and (b) of Form 10-K and is tberefore filing
this Form with the reduced disclosure format.
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORMIO-K
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PART I............................................................................................. ..............................................................................................1
ITEM 1 BUSINESS.......... ........... ........ ................... ............ .............. ...................... ......................... ....................................... J
ITEM 1A RISK FACTORS ........................................................................................................................................................6
ITEM 1 B UNRESOLVED STAFF COMMENTS ........................................................................................................................... 9
ITEM 2 PROPERTIES .............. ......... ............... ...... ............. ............. ................ ......... ......................... ......... ...........................9
ITEM 3 LEGAL PROCEEDINGS ........ .................... ............... ............ ............ ............ ........................... ........ ............... ............ 9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................................................11
PART II ...................................................................................................................................................................................... 12
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES...... ...................... ........ ...... ..................... ............................ ................... ........................ ...12
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA ......................................................................................................12
ITEM 7 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS .......................................................13
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................................46
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................. 53
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNT ANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .........53
ITEM 9A CONTROLS AND PROCEDURES ..............................................................................................................................53
ITEM 9B OTHER INFORMATION ...........................................................................................................................................54
PART 111......................................................................................................................................................................................54
ITEM]O DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...............................................................................54
ITEM] I EXECUTIVE COMPENSATION .................................................................................................................................54
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERs..............................................................................................................................................................54
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....................................................................................54
ITEM]4 PRINCIPAL ACCOUNTING FEES AND SERVICES .....................................................................................................55
PART IV ......................................................................................................................................................................................56
ITEM]5 EXHmlTs, FINANCIAL STATEMENT SCHEDULES ...................................................................................................56
SIGNATURES ............................................................................................................................................................................61
CERTIFICA TIONS....................................................................................................................................................................62
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................................................F-I
CONSOLIDATED STATEMENTS OF INCOME................................................................................................................ F-2
CONSOLIDATED BALANCE SHEETS ............................................................................................................................... F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY..............................................................................F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS ...................................................................................................... F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................................................................................... F-6
PART I
ITEM I
BUSINESS
I Overview
Nationwide Life Insurance Company (NLlC, or collectively with its subsidiaries, the Company) was incorporated in 1929 and
is an Ohio stock legal reserve 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 NLlC's common stock are owned by Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corporation (Nationwide Corp.), a majority-owned subsidiary ofNMIC.
Wholly-owned subsidiaries of NLIC as of December 3 I, 2005 include Nationwide Life and Annuity Insurance Company
(NLAIC) and Nationwide Investment Services Corporation (NISC). NLAIC offers universal life insurance, variable universal
life insurance, corporate-owned life insurance (COLI) and individual annuity contracts on a non-participating basis. NISC is a
registered broker/dealer.
The Company is a leading provider oflong-term savings and retirement products in the United States of America (U.S.). The
Company develops and sells a diverse range of products including individual annuities, private and public group retirement
plans, other investment products sold to institutions, life insurance and advisory services. The Company sells its products
through a diverse distribution network. Unaffiliated entities that sell the Company's products to their own customer bases
include independent broker/dealers, fmancial institutions, wirehouse and regional firms, pension plan administrators, and life
insurance specialists. Representatives of affiliates who market products directly to a customer base include Nationwide
Retirement Solutions, Inc. (NRS), Nationwide Financial Network (NFN) producers and TBG Insurance Services Corporation
(TBG Financial). The Company also distributes products through the agency distribution force of its ultimate majority parent
company, NMIC. The Company believes its broad range of competitive products, strong distributor relationships and diverse
distribution network position it to compete effectively in the rapidly growing retirement savings market under various
economic conditions.
I Business Segments
Individual Investments
The Individual Investments segment consists of individual The BEST of AMERICA@ and private label deferred variable
annuity products, deferred fixed annuity products, income products and advisory services. Individual 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, individual variable annuity contracts provide the customer
with access to a wide range of investment options and asset protection in the event of an untimely death, while individual fixed
annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.
Retirement Plans
The Retirement Plans segment is comprised of the Company's private and public sector retirement plans business. The private
sector includes Internal Revenue Code (IRC) Section 401(k) business, and the public sector includes IRC Section 457 and
Section 401(a) business, both in the form of fixed and variable group annuities.
Indl1lidual Protection
The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and
bank-owned life insurance (BOLl) products; traditional life insurance products; and universal life insurance products. Life
insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.
Corporate and Other
The Corporate and Other segment includes certain structured products business; the medium-term note (MTN) program; net
investment income not allocated to product segments; periodic net coupon settlements on non-qualifying derivatives; unallocated
expenses; interest expense on debt; revenue and expenses of the Company's non-insurance subsidiaries not reported in other
segments; and net realized gains and losses related to securitizations.
Additional information related to the Company's business segments is included in Note 19 to the audited consolidated financial
statements included in the F pages of this report.
I Reinsurance
The Company follows the industry practice of reinsuring a portion of its life insurance and annuity risks with other companies in
order to reduce net liability on individual risks, to provide protection against large losses and to obtain greater diversification of
risks. The maximum amount of individual ordinary life insurance retained by the Company on anyone life is $5.0 million. The
Company cedes insurance primarily on an automatic basis, under which risks are ceded to a reinsurer on specific blocks of
business where the underlying risks meet certain predetermined criteria, and on a facultative basis, under which the reinsurer's
prior approval is required for each risk reinsured. The Company also cedes insurance on a case-by-case basis particularly where
the Company may be writing new risks or is unwilling to retain the full costs associated with new lines of business. The
Company maintains catastrophic reinsurance coverage to protect against large losses related to a single event. The ceding of risk
does not discharge the original insurer from its primary obligation to the policyholder.
The Company has entered into reinsurance contracts with certain unaffiliated reinsurers to cede a portion of its general account
life, annuity and health business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid
and unpaid claims, and certain other amounts and totaled $909.6 million and $894.3 million as of December 31, 2005 and
2004, respectively. The impact of these contracts on the Company's results of operations is immaterial. The ceding of risk
does not discharge the original insurer from its primary obligation to the contractholder. Under the terms of the contracts,
specified assets have been placed in trusts as collateral for the recoveries. The trust assets are invested in investment grade
securities, the fair value of which must at all times be greater than or equal to 100% or 102% of the reinsured reserves, as
outlined in each of the underlying contracts. The Company has no other material reinsurance arrangements with unaffiliated
reinsurers. The Company's only material reinsurance agreements with affiliates are the modified coinsurance agreements
pursuant to which NLlC ceded to other members of Nationwide all of its accident and health insurance business not ceded to
unaffiliated reinsurers, as described in Note IS to the audited consolidated financial statements included in the F pages of this
report.
I Ratings
Ratings with respect to claims-paying ability and financial strength have become an increasingly important factor in establishing
the competitive position of insurance companies. These ratings represent each rating agency's opinion of an insurance
company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. They
are not evaluations directed toward the protection of investors and are not recommendations to buy, sell or hold securities. Such
factors are of concern to policyholders, agents and intermediaries. Furthermore, rating agencies utilize proprietary capital
adequacy models to establish ratings for the Company and certain subsidiaries. The Company's ratings are at risk from
changes in these models and the impact that changes in the underlying business in which it is engaged can have on such
models. To mitigate this risk, the Company maintains regular communications with the rating agencies, performs evaluations
using such capital adequacy models, and considers such models in the design of its products and transactions to minimize the
adverse impact of this risk.
Ratings are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance
products. Rating agencies continually review the financial performance and condition of insurers, including the Company.
Any lowering of the Company's ratings could have a material 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 a material
adverse effect on the Company's liquidity and, under certain circumstances, net income. NLlC and NLAIC each have
financial strength ratings of "A+" (Superior) from A.M. Best Company, Inc. (A.M. Best), and their claims-paying
ability/financial strength are rated "Aa3" (Excellent) by Moody's Investors Service, Inc. (Moody's) and "AA-" (Very Strong)
by Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. (S&P). The Company's financial
strength is also reflected in the ratings of its commercial paper, which is rated "AMB-I" by A.M. Best, "P-I" by Moody's and
"A-I+" by S&P.
These ratings are subject to periodic review by A.M. Best, Moody's and S&P, and the continued retention of such ratings cannot
be assured. If any rating is reduced from its current level, the Company's fmancial position and results of operations could be
adversely affected.
2
I Competition
The Company competes with many other insurers as well as non-insurance fmancial services companies, including banks,
broker/dealers and mutual funds, some of whom have greater financial resources, offer alternative products and, with respect to
other insurers, have higher ratings than the Company. While no single company dominates the marketplace, many of the
Company's competitors have well-established national reputations and substantially greater financial resources and market
share than the Company. Competition in the Company's lines of business primarily is based on price, product features,
commission structure, perceived financial strength, claims-paying ratings, customer and producer service, and name recognition.
I Regulation
Regulation at State Level
NLIC and NLAIC, as with other insurance companies, are subject to regulation by the states in which they are domiciled and/or
transact business. Most states have enacted legislation that requires each insurance holding company and each insurance
company in an insurance holding company system to register with the insurance regulatory authority of the insurance company's
state of domicile and annually furnish financial and other information concerning the operations of companies within the holding
company system that materially affect the operations, management or financial condition of the insurers within such system. In
many cases, under such laws, a state insurance authority must approve in advance the direct or indirect acquisition of 10"10 or
more of the voting securities ofan insurance company domiciled in its state.
NLIC and NLAIC are subject to the insurance holding company laws in the State of Ohio. Under such laws, all transactions
within an insurance holding company system affecting insurers must be fair and equitable, and each insurer's policyholder
surplus following any such transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs.
The State of Ohio insurance holding company laws also require prior notice or regulatory approval of the change of control of an
insurer or its holding company, material intercorporate transfers of assets within the holding company structure and certain other
material transactions involving entities within the holding company structure.
NLIC and NLAIC are regulated and supervised in the jurisdictions in which they do business. Among other things, states
regulate operating licenses; agent licenses; advertising and marketing practices; the form and content of insurance policies,
including pricing; the type and amount of investments; statutory capital requirements; payment of dividends by insurance
company subsidiaries; assessments by guaranty associations; affiliate transactions; and claims practices. These regulations are
primarily intended to protect policyholders rather than shareholders. The Company cannot predict the effect that any proposed or
future legislation may have on the fmancial condition or results of operations of the Company.
Insurance companies are required to file detailed annual and quarterly statutory financial statements with state insurance
regulators in each of the states in which they do business, and their business and accounts are subject to examination by such
agencies at any time. In addition, insurance regulators periodically examine an insurer's financial condition, adherence to
statutory accounting practices, and compliance with insurance department rules and regulations. Applicable state insurance laws,
rather than federal bankruptcy laws, apply to the liquidation or restructuring of insurance companies. Changes in regulations, or
in the interpretation of existing laws or regulations, may adversely impact pricing, reserve adequacy or exposure to litigation
and could increase the costs of regulatory compliance by the Company's insurance subsidiaries. Any proposed or future state
legislation or regulations may negatively impact the Company's financial position or results of operations.
As part of their routine regulatory oversight process, state insurance departments periodically conduct detailed examinations of
the books, records and accounts of insurance companies domiciled in their states. Such examinations generally are conducted in
cooperation with the insurance departments of multiple states under guidelines promulgated by the National Association of
Insurance Commissioners (NAIC). The most recently completed examinations ofNLIC and NLAIC were conducted by the Ohio
Department of Insurance (001) for the five-year period ended December 31, 2001. These examinations did not result in any
significant issues or adjustments. The 001 will conduct its next examination ofNLIC and NLAIC during 2006.
State insurance regulatory authorities regularly make inquiries, hold investigations and administer market conduct examinations
with respect to insurers' compliance with applicable insurance laws and regulations. NLIC and NLAIC are currently undergoing
regulatory market conduct examinations in 13 states. NLIC and NLAIC continuously monitor sales, marketing and advertising
practices and related activities of their agents and personnel and provide continuing education and training in an effort to ensure
compliance with applicable insurance laws and regulations. There can be no assurance that any non-compliance with such
applicable laws and regulations would not have a material adverse effect on the Company.
3
In December 2004, the NAIC adopted model legislation implementing new disclosure requirements with respect to
compensation of insurance producers. During 2005, several states (Arkansas, Connecticut, Georgia, Nevada, Oregon, Rhode
Island and Texas) adopted legislation addressing producer compensation or disclosure. All adopted legislation focused on the
producer rather than the insurance company. At the December 2005 NAIC Meeting, state regulators commented that the urgency
to enact the NAIC model and to develop additional requirements had decreased significantly. As a result of these developments,
the Company believes that the impact of the NAIC model legislation and related regulation will be minimal.
Regulation of Dividends and Other Payments
State insurance laws generally restrict the ability of insurance companies to pay cash dividends and make other payments in
excess of certain prescribed limitations without prior approval. The Company is limited in the amount of shareholder
dividends it may pay without prior approval by the ODJ. The statutory capital and surplus ofNLIC as of December 31, 2005
and 2004 was $2.60 billion and $2.39 billion, respectively. The statutory net income of NLIC for the years ended December
31,2005,2004 and 2003 was $462.5 million, $317.7 million and $444.4 million, respectively. As of January 1,2006, based
on statutory financial results as of and for the year ended December 31, 2005, NLIC could pay dividends totaling $277.5
million without obtaining prior approval. On February 22, 2006, NLIC declared a $70.0 million dividend to NFS.
The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than
earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Company's
unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's policyholder surplus must be reasonable in relation to
the insurer's outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC 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 NLIC's
participating policies (measured before dividends to policyholders) that can inure to the benefit of the Company and its
shareholder.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted a model law to implement risk-based capital (RBC)
requirements for life insurance companies. The requirements are designed to monitor capital adequacy and to raise the level of
protection that statutory surplus provides for policyholders. The model law measures four major areas of risk facing life insurers:
(I) the risk of loss from asset defaults and asset value fluctuation; (2) the risk of loss from adverse mortality (the relative
incidence of death in a given time) and morbidity (the relative incidence of disability resulting from disease or physical
impairment) experience; (3) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates; and
(4) business risks. Insurers having less statutory surplus than required by the RBC model formula will be subject to varying
degrees of regulatory action depending on the level of capital inadequacy.
Based on the formula adopted by the NAlC, the adjusted capital of NLIC and NLAIC as of December 31, 2005 exceeded the
levels at which they would be required to take corrective action.
Assessments Against and Refunds to Insurers
Insurance guaranty association laws exist in each state, the District of Columbia and the Commonwealth of Puerto Rico. Insurers
doing business in any of these jurisdictions can be assessed for policyholder losses incurred by insolvent insurance companies.
The amount and timing of any future assessment on or refund to NLIC and its insurance subsidiaries under these laws cannot be
reasonably estimated and are beyond the control ofNLIC and its insurance subsidiaries. A large part of the assessments paid by
NLlC and its insurance subsidiaries pursuant to these laws may be used as credits for a portion of NLIC and its insurance
subsidiaries' premium taxes. For the years ended December 31, 2005, 2004 and 2003, net premium tax refunds received by the
Company were immaterial.
Securities Laws
NLlC and NLAlC, and certain policies and contracts offered by these companies, are subject to regulation under the federal
securities laws administered by the U.S. Securities and Exchange Commission (SEC) and under certain state securities laws.
Certain separate accounts of NLIC and NLAIC are registered as investment companies under the Investment Company Act of
1940, as amended (Investment Company Act). Separate account interests under certain variable annuity contracts and variable
insurance policies issued by NLIC and NLAIC are also registered under the Securities Act of 1933, as amended. Certain
affiliates of the Company are registered as broker/dealers under the Securities Exchange Act of 1934, as amended (Securities
Exchange Act), and are members of, and subject to regulation by, the National Association of Securities Dealers (NASD).
4
Certain affiliates of the Company are investment advisors registered under the Investment Advisors Act of 1940, as amended.
The investment companies managed by such subsidiaries are registered with the SEC under the Investment Company Act, and the
shares of certain of these entities are qualified for sale in certain states and the District of Columbia. A subsidiary of the
Company is registered with the SEC as a transfer agent. Certain subsidiaries of the Company are also subject to the SEC's net
capital rules.
All aspects of the investment advisory activities of NLIC and NLAIC 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 event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the
activities in which the investment advisor may engage, suspension or revocation of the investment advisor's registration as an
advisor, censure and fmes.
ERISA Considerations
On December 13, 1993, the U.S. Supreme Court issued its opinion in John Hancock Mutual Life Insurance Company v. Harris
Trust and Savings Bank, holding that certain assets in excess of amounts necessary to satisfy guaranteed obligations held by
Hancock in its general account under a participating group annuity contract are "plan assets" and therefore subject to certain
fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA requires that
fiduciaries perform their duties solely in the interest of ERISA plan participants and beneficiaries, and with the care, skill,
prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of
an enterprise of a like character and with like aims. The Court imposed ERISA fiduciary obligations to the extent that the
insurer's general account is not reserved to pay benefits under guaranteed benefit policies (i.e., benefits whose value would not
fluctuate in accordance with the insurer's investment experience).
The U.S. Secretary of Labor issued fmal regulations on January 5, 2000, providing guidance for the purpose of determining, in
cases where an insurer issues one or more policies backed by the insurer's general account to or for the benefit of an employee
benefit plan, which assets of the insurer constitute plan assets for purposes of ERISA and the IRC. The regulations apply only
with respect to a policy issued by an insurer to an ERISA plan on or before December 31, 1998. In the case of such a policy,
most provisions of the regulations became applicable on July 5, 200 I. Generally, where the basis of a claim is that insurance
company general account assets constitute plan assets, no person will be liable under ERISA or the IRC for conduct occurring
prior to July 5, 2001. However, certain provisions under the final regulations are applicable as follows: (I) certain contract
termination features became applicable on January 5, 2000 if the insurer engages in certain unilateral actions; and (2) the initial
and separate account disclosure provisions became applicable July 5, 2000. New policies issued after December 3 I, 1998 which
are not guaranteed benefit policies subject the issuer to ERISA fiduciary obligations. Since NLIC issues fixed group annuity
contracts that are backed by its general account and used to fund employee benefit plans, NLIC is subject to these
requirements.
Tax Legislation
United States Federal income tax payable by policyholders on investment earnings is deferred during the accumulation period
of certain life insurance and annuity products. This favorable tax treatment may give certain of NLIC's products a
competitive advantage over other non-insurance products. The Jobs and Growth Tax Relief Reconciliation Act of 2003
reduces the federal income tax rates applicable to certain dividends and capital gains realized by individuals. The American
Jobs Creation Act of2004 modified and codified the rules applicable to nonqualified deferred compensation plans, a market in
which the Company provides services and products. In 2003, the U.S. Treasury Department issued new regulations regarding
the taxation of split dollar life insurance contracts, and in 2005 it issued new regulations regarding the determination of
required minimum distributions from certain annuity products and the valuation of life insurance contracts for federal tax
purposes. These legislative and regulatory changes may lessen the competitive advantage of certain of NLIC's products
compared to other investments that generate dividend and/or capital gain income. As a result, demand for certain ofNLIC's
products that offer income tax deferral may be negatively impacted.
5
The U.S. Congress periodically has considered possible legislation that would eliminate many of the tax benefits currently
afforded to annuity products. In November 2005, the President's Advisory Panel on Federal Tax Reform issued a report
containing proposals, which if enacted as proposed, could materially reduce the tax advantages of purchasing variable annuity
and cash value life insurance products as compared to other investment vehicles. The report included several proposals
regarding the creation of tax-advantaged retirement and life savings accounts that were similar to proposals previously made
by the Bush administration. Although the proposals were not enacted in 2005, those proposals, or other similar proposals,
could be introduced for enactment in future periods.
I Available Information
The Company files Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on Form lOoK and other
reports electronically with the SEC, which are available on the SEC's web site (http;//www.sec.gov). In addition, all reports
filed by the Company with the SEC may be read and copied at the SEC's Public Reference Room located at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. The Company also provides electronic and/or paper copies of these reports, free of
charge. Requests for copies should be made to Mark Barnett, Vice President - Investor Relations, One Nationwide Plaza,
Columbus, Ohio 43215-2220, or via telephone at 614-677-5331.
ITEM IA RISK FACTORS
Changes In general economic and market conditions and Interest rates may significantly affect the value of the Company's
Investment portfolio.
The Company's investment portfolio primarily consists of fixed-income securities and mortgage loans on real estate. The
market values of these invested assets fluctuate depending on general economic and market conditions and the interest rate
environment. For example, if interest rates rise, the investments generally will decrease in value. If interest rates decline, the
investments generally will increase in value with the possible exception of mortgage-backed securities (MBSs), which may
decline due to higher prepayments on the mortgages underlying the securities.
MBSs, including collateralized mortgage obligations (CMOs), are subject to prepayment risks that vary with interest rates,
among other things. During periods of declining interest rates, MBSs generally prepay faster as the underlying mortgages are
prepaid and/or rermanced by borrowers in order to take advantage of lower rates. MBSs that have an amortized cost greater
than par (I.e., purchased at a premium) may incur a reduction in yield or a loss as a result of such prepayments. In addition,
during such periods, the Company generally will be unable to reinvest the proceeds of any such prepayment at comparable
yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases. MBSs that have
an amortized value less than par (I.e., purchased at a discount) may incur a decrease in yield or a loss as a result of slower
prepayments.
The Company attempts to mitigate the negative impact of interest rate changes through asset/liability management, including
investing in non-callable bonds where practical and purchasing private placement bonds and entering into mortgage loan
contracts that provide prepayment protection. There can be no assurance, however, that management will be able to
successfully manage the negative impact of interest rate changes. Additionally, for business, regulatory or other reasons, the
Company periodically may elect or be required to sell certain of its invested assets when their fair values are less than their
original cost, resulting in realized capital losses, which would reduce net income.
Changes In interest rates and In the financial markets moy reduce the Company's interest spread Income, eamings and
sales.
The Company is exposed to various interest rate risks. Many of the products contain guarantees that require the Company to
credit at least a minimum rate of interest to policyholders. In addition, for competitive reasons, the Company may at times
continue to credit above-minimum interest rates to policyholders despite reductions in prevailing market interest rates.
Current crediting rates for many of the Company's individual annuity products are at or near the contractual minimum rates.
Decreases in market interest rates would result in declines in the portfolio yield on investments backing the Company's
individual annuity products. A reduction in interest spread income, the difference between the interest rates that the Company
credits policyholders and the yield the Company is able to earn on investments, may reduce earnings. If policyholders cancel
their policies or withdraw the cash values of their policies to seek better investment yields in response to changing interest
rates, the Company's revenues are likely to decrease. If market interest rates decline, net investment income will decrease if
higher-yielding fixed-income securities mature or are redeemed and the proceeds must be reinvested in lower-yielding
securities.
6
Volatility in interest rates and equity markets could reduce consumer demand for the Company's products and result in lower
sales.
Changes In Interest rates may negatively Impact the Company's liquidity.
Significant increases in prevailing interest rates may cause the Company's policyholders to withdraw the cash value of their
policies as they seek more attractive returns. If large numbers of policyholders or policyholders with large balances withdraw
their policy values, the Company may be required to borrow funds or liquidate investments to raise the cash necessary to fund
their withdrawals. Particularly in periods of volatile interest rates, liquidations can result in capital losses to the Company.
Because volatile interest rates often make fixed-income investments like mortgages and privately placed bonds more difficult
to sell, there is also a risk that the Company will find it difficult to raise the cash necessary to fund a very large amount of
withdrawal activity.
A decline In the equity markets can cause the values of the Company's separate account assets to decline and reduce
revenues, Increase claims, Increase payment obligations under guaranteed contracts and result In the accelerated
amortization of defe"ed policy acquisition costs (DAC).
A significant source of revenues for the Company is derived from asset management fees, which are calculated as a
percentage of separate account assets. Gains and losses in the equity markets will result in corresponding increases or
decreases in separate account assets and asset management fee revenue. In addition, a decrease in separate account assets may
decrease the Company's expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in
guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC. See Part I/, Item 7 A
- Quantitative and Qualitative Disc/osures About Market Risk - Equity Market Risk for a complete discussion of risk factors
related to equity market risk, including guaranteed contracts.
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 consolidated net income.
The process of calculating reserve amounts for 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, morbidity and interest rates (the
rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results
could differ significantly from those assumed. As such, deviations from one or more of these assumptions could result in
material adverse impacts on the Company's consolidated net income.
A decline In the Company's financial strength ratings could adversely affect the Company's operations.
See Part I, Item I - Business - Ratings for a description of risk factors related to ratings.
NLIC and NLAIC are subject to extensive regulations designed to benefit or protect policyholders rather than the
Company.
See Part I. Item I - Business - Regulation - Regulation at State Level for a general description of the regulations designed to
benefit or protect policyholders. Changes in regulations or in the interpretation of existing laws or regulations may adversely
impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the
Company's insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the
Company's financial position or results of operations.
7
Certain changes In federal laws and regulations may adversely affect the Company's fmanc/al position or results of
operations.
Although the federal government does not directly regulate the insurance industry, federal legislation, administrative policies and
court decisions may significantly and adversely affect certain areas of the Company's business. In addition to product tax issues,
these areas include pension and employee welfare benefit plan regulation, financial services regulation and taxation generally.
For example, the following events could adversely affect the Company's business:
. changes in laws such as ERISA, as amended, that apply to group annuities (see Part I, Item I - Business - Regulation -
ERISA Considerations for a complete discussion of ERISA);
. changes in tax laws that would reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by
the holders of annuities and life insurance products;
. repeal of the federal estate tax;
. changes in applicable regulations that could restrict the ability of some companies to purchase certain COLI products;
. changes in the availability of, or rules concerning the establishment and operation of, Section 401(k), 403(b) and 457
plans or individual retirement accounts;
. changes in tax laws (see Part I, Item I - Business - Regulation - Potential Tax Legislation for a description of risk
factors related to potential tax legislation); or
. changes in tax regulations, such as the proposed regulations that would alter the way tax sheltered annuities described in
Section 403(b) ofthe IRC may be offered and sold.
Litigation or regulatory actions In connection with late trading, market timing, compensation and bidding arrangements,
unsuitable sales and replacements, the use of finite reinsurance and/or other sales practices could have a material adverse
effect on the Company.
See Part I, Item 3 - Legal Proceedings for a description of litigation and regulatory actions. These and future litigation
matters may negatively affect the Company by resulting in the payment of substantial awards or settlements, increasing legal
and compliance costs, diverting management attention from other business issues or harming the Company's reputation with
customers.
Certain changes In accounting and/or fmancial reporting standards Issued by the Financial Accounting Standards Board
(FASB), the SEC or other standard-setting bodies could have a material adverse impact on the Company's financial
position or results of operations.
The Company is subject to the application of U.S. generally accepted accounting principles (GAAP), which periodically are
revised andlor expanded. As such, the Company periodically is required to adopt new or revised accounting andlor financial
reporting standards issued by recognized accounting standard setters or regulators, including the F ASB and the SEC. It is
possible that future requirements could change the Company's current application of GAAP, resulting in a material adverse
impact on the Company's financial position or results of operations.
The continued threat of terrorism and ongoing military and other actions may result In decreases In the Company's
consolidated net Income, revenue and assets under management and may adversely affect the Company's consolidated
Investment portfolio.
The continued threat of terrorism within the U.S. and abroad and the 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.
Actual terrorist attacks could cause a decrease in the Company's consolidated net income andlor revenue as a result of
decreased economic activity andlor payment of claims. In addition, some of the assets in the Company's investment portfolio
may be adversely affected by declines in the securities markets and economic activity caused by the continued threat of
terrorism, ongoing military and other actions and heightened security measures.
8
The Company cannot predict at this time whether and the extent to which industry sectors in which the Company maintains
investments may suffer losses as a result of potential decreased commercial and economic activity, or how any such decrease
might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities, or
how the value of any underlying collateral might be affected.
Although the Company does not believe that the continued threat of terrorist attacks will have any material impact on the
Company's financial strength or performance, the Company can offer no assurances that this threat, future terrorist-like events
in the U.S. and abroad or military actions by the U.S. will not have a material adverse effect on the Company's business,
financial position or results of operations.
The Company operates In a highly competitive Industry, which can significantly Impact operating results.
See ParI I. Ilem J - Business - Compelilion for a description of competitive factors affecting the Company. The Company's
revenues and profitability could be negatively impacted as a result of competition.
ITEM IB UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2005 the Company leased on average
approximately 903,000 square feet of office space in the three building home office complex and in other offices in central
Ohio. In addition, during 2005 NMIC announced plans to build and occupy a six-story, 130,000 square foot building in
Columbus, Ohio. The Company expects to lease some of this space from NMIC. The Company believes that its present and
planned facilities are adequate for the anticipated needs of the Company.
ITEM 3
LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is not possible to
determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of
potential losses. Some of the matters, including certain of those referred to below, are in very preliminary stages, and the
Company does not have sufficient information to make an assessment of plaintiffs' claims for liability or damages. In some of
the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event
of certification) the size of the class and class period. In many of the cases, plaintiffs are seeking undefined amounts of
damages or other relief, including punitive damages and equitable remedies, that are difficult to quantiI)' and cannot be
defmed based on the information currently available. The Company does not believe, based on information currently known
by the Company's management, that the outcomes of such pending investigations and legal proceedings are likely to have a
material adverse effect on the Company's consolidated financial position. However, given the large andlor indeterminate
amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in
certain matters could have a material adverse effect on the Company's consolidated financial results in a particular quarterly
or annual period.
In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits relating
to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards
or settlements against life insurers other than the Company.
The fmancial services industry, including mutual fund, variable annuity, life insurance and distribution companies, has also
been the subject of increasing scrutiny by regulators, legislators and the media over the past few years. Numerous regulatory
agencies, including the SEC, the NASD and the New York State Attorney General, have commenced industry-wide
investigations regarding late trading and market timing in connection with mutual funds and variable insurance contracts, and
have commenced enforcement actions against some mutual fund and life insurance companies on those issues. The Company
has been contacted by or received subpoenas from the SEC and the New York State Attorney General, who are investigating
market timing in certain mutual funds offered in insurance products sponsored by the Company. The Company has
cooperated with these investigations. Information requests from the New York State Attorney General and the SEC with
respect to investigations into late trading and market timing were last responded to by the Company and its affiliates in
December 2003 and April 2005, respectively, and no further information requests have been received with respect to these
matters.
9
In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and
bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of
insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are
compensation and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their
affiliates, the use of side agreements and finite reinsurance agreements, and funding agreements issued to back MTN
programs. Related investigations and proceedings may be commenced in the future. The Company and/or its affiliates have
been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state
attorneys general for information relating to these investigations into compensation, revenue sharing and bidding
arrangements, anti-competitive activities, unsuitable sales or replacement practices, the use of side agreements and finite
reinsurance agreements, and funding agreements backing the MTN program. The Company is cooperating with regulators in
connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries
encompass NMIC's operations.
These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide
legislation, rules and regulations that could significantly affect the financial services industry, including life insurance and
annuity companies. These proceedings also could affect the outcome of one or more of the Company's litigation matters.
There can be no assurance that any such litigation or regulatory actions will not have a material adverse effect on the
Company in the future.
On February I I, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin County, Ohio
entitled Michael Carr v. Nationwide Life Insurance Company. The complaint seeks recovery for breach of contract, fraud by
omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified
compensatory damages, disgorgement of all amounts in excess of the guaranteed maximum annual premium and attorneys'
fees. On February 2, 2006, the court granted the plaintiff's motion for class certification on the breach of contract and unjust
enrichment claims. The court certified a class consisting of all residents of the United States who, during the class period
from February 10, 1995 through February 2, 2006, purchased life insurance policies from NLIC that provided for guaranteed
maximum premiums and who paid premiums on a modal basis to NLIC. Excluded from the class are NLIC; any parent,
subsidiary or affiliate ofNLIC; all employees, officers and directors ofNLIC; and any justice, judge or magistrate judge ofthe
State of Ohio who may hear the case. The case is currently set for trial on April 10, 2006. NLIC intends to defend this
lawsuit vigorously.
On April 13,2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County,
Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District
Court for the Southern District of Illinois on June 1,2004. On December 27, 2004, the case was transferred to the United
States District Court for the District of Maryland and included in the multi-district proceeding there entitled In Re Mutual
Funds Investment Litigation. In response, on May 13, 2005, the plaintiff filed a First Amended Complaint purporting to
represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance
product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that
experienced market timing or stale price trading activity. The First Amended Complaint purports to disclaim, with respect to
market timing or stale price trading in NLIC's annuities sub-accounts, any allegation based on NLIC's untrue statement,
failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any
class member's purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the
alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have
made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or
deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who,
prior to NLIC's untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or
contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested
in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The First
Amended Complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or
class member, including all compensatory damages and costs. On June 24, 2005, NLIC filed a motion to dismiss the First
Amended Complaint. The plaintiff has opposed that motion. NLIC intends to defend this lawsuit vigorously.
10
On January 21, 2004, the Company was named in a lawsuit filed in the United States District Court for the Northern District
of Mississippi entitled Uniled Inveslors Life Insurance Company v. Nationwide Life Insurance Company and/or Nalionwide
Life Insurance Company of America and/or Nalionwide Life and Annuity Insurance Company and/or Nalionwide Life and
Annuity Company of America and/or Nalionwide Financial Services, Inc. and/or Nalionwide Financial Corporalion, and John
Does A-Z. In its complaint, plaintiff United Investors alleges that the Company andlor its affiliated life insurance companies
caused the replacement of variable insurance policies and other financial products issued by United Investors with policies
issued by the Nationwide defendants. The plaintiff raises claims for: (I) violations of the Federal Lanham Act, and common
law unfair competition and defamation; (2) tortious interference with the plaintiff's contractual relationship with Waddell &
Reed, Inc. andlor its affiliates, Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc. and W&R Insurance
Agency, Inc., or with the plaintiff's contractual relationships with its variable policyholders; (3) civil conspiracy; and (4)
breach of fiduciary duty. The complaint seeks compensatory damages, punitive damages, pre- and post-judgment interest, a
full accounting, a constructive trust, and costs and disbursements, including attorneys' fees. The Company filed a motion to
dismiss the complaint on June 1,2004. On February 8, 2005 the court denied the motion to dismiss. On March 23, 2005, the
Company filed its answer, and on December 30, 2005, the Company filed a motion for summary judgment. The Company
intends to defend this lawsuit vigorously.
On October 31, 2003, NLlC and NLAIC were named in a lawsuit seeking class action status filed in the United States District
Court for the District of Arizona entitled Roberl Helman el al v. Nalionwide Life Insurance Company el al. The suit
challenges the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans. On April
8, 2004, the plaintiff filed an amended class action complaint on behalf of all persons who purchased an individual variable
deferred annuity contract or a certificate to a group variable annuity contract issued by NLlC or NLAIC which were allegedly
used to fund certain tax-deferred retirement plans. The amended class action complaint seeks unspecified compensatory
damages. NLlC and NLAlC filed a motion to dismiss the complaint on May 24, 2004. On July 27, 2004, the court granted
the motion to dismiss. The plaintiff has appealed that dismissal to the United States Court of Appeals for the Ninth Circuit.
NLlC and NLAIC intend to defend this lawsuit vigorously.
On August 15, 2001, the Company was named in a lawsuit filed in the United States District Court for the District of
Connecticut entitled Lou Haddoclc, as Iruslee of Ihe Flyle Tool & Die, Incorporaled Deferred Compensalion Plan, el al v.
Nalionwide Financial Services, Inc. and Nalionwide Life Insurance Company. The plaintiffs first amended their complaint on
September 5, 200 I to include class action allegations and have subsequently amended their complaint three times. As
amended, in the current complaint the plaintiffs seek to represent a class of ERISA qualified retirement plans that purchased
variable annuities from NLlC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts
and that the Company breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds.
The complaint seeks disgorgement of some or all ofthe payments allegedly received by the Company, other unspecified relief
for restitution, declaratory and injunctive relief, and attorneys' fees. On December 13,2001, the plaintiffs filed a motion for
class certification. The plaintiffs filed a supplement to that motion on September 19, 2003. The Company opposed that
motion on December 24, 2003. On July 6, 2004, the Company filed a Revised Memorandum in Support of Summary
Judgment. The Company's motion for summary judgment was denied with respect to all claims on February 24, 2006. The
Company intends to defend this lawsuit vigorously.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
II
PART II
ITEM 5
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
ofNLIC'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 2005.
NLIC declared and paid to NFS $185.0 million, $125.0 million and $60.0 million in cash dividends during 2005,2004 and 2003,
respectively. In addition, NLIC sought and obtained prior regulatory approval from the 001 to return to NFS $100.0 million
of capital during 2003. There was no return of capital to NFS during 2005 and 2004. On February 22, 2006, NLIC declared a
$70.0 million dividend to NFS.
NLIC currently does not have a formal dividend policy.
See Part J, Item I - Business - Regulation - Regulation of Dividends and Other Payments for information regarding dividend
restrictions.
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
Omitted due to reduced disclosure format.
12
ITEM 7
MANAGEMENT'S NARRA TIVE ANALYSIS OF THE RESULTS OF OPERATIONS
TABLE OF CONTENTS
FORWARD-LOOKING INFORMATION ............................................................................................................................................. 14
OVERVIEW ....................................................................................................................................................................................15
CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS ................................................................ 16
RESULTS OF OPERATIONS......... ...................... ............... ........................... ......................................... ........ ............................... ....20
SALES ............... ......... ............. ............. ......... ................ ......................... .............. ............ .................... ................ ..... ........... .........22
BUSINESS SEGMENTS. .............. ......... .............. ................ ....................... .............. ............. ........... ....... ................. .................. .......27
RELATED PARTY TRANSACTIONS ..... ............. ..................... .............................. ....................... .............. .......... ................... ..........44
CONTRACTUAL OBLIGATIONS AND COMMITMENTS .....................................................................................................................44
OFF-BALANCE SHEET TRANSACTIONS ............ .................. ......................... ........................... ......................... ..................... .........46
I3
Forward-Looking Information
The information included herein contains certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the results of operations and businesses of the Company. Whenever used in
this report, words such as "anticipate," "estimate," "expect," "intend," "plan," "believe," "project," "target," and other words
of similar meaning are intended to identifY such forward-looking statements. These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected,
forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:
(I) the potential impact on the Company's reported net income and related disclosures that could result from the
adoption of certain accounting and/or financial reporting standards issued by the F ASB, the SEC or other
standard-setting bodies;
(ii) tax law changes impacting the tax treatment of life insurance and investment products;
(iii) repeal ofthe federal estate tax;
(iv) heightened competition, including specifically the intensification of price competition, the entry of new
competitors and the development of new products by new and existing competitors;
(v) adverse state and federal legislation and regulation, including limitations on premium levels, increases in
minimum capital and reserves, and other financial viability requirements; restrictions on mutual fund distribution
payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from
industry practice investigations;
(vi) failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;
(vii) inability to carry out marketing and sales plans, including, among others, development of new products and/or
changes to certain existing products and acceptance ofthe new and/or revised products in the market;
(viii) changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees; an
acceleration of the amortization ofDAC; or a reduction in the demand for the Company's products;
(ix) reduction in the value of the Company's investment portfolio as a result of changes in interest rates and yields in
the market as well as geopolitical conditions and the impact of political, regulatory, judicial, economic or
financial events, including terrorism, affecting the market generally and companies in the Company's investment
portfolio specifically;
(x) general economic and business conditions which are less favorable than expected;
(xi) competitive, regulatory or tax changes that affect the cost of, or demand for, the Company's products;
(xii) unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
(xiii) settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheet;
(xiv) deviations from assumptions regarding future persistency, mortality, morbidity and interest rates used in
calculating reserve amounts and in pricing the Company's products; and
(xv) adverse litigation results and/or resolution of litigation and/or arbitration or investigation results.
14
I Overview
Following is management's narrative analysis of the results of operations of the Company for the three years ended December
31,2005. This discussion should be read in conjunction with the audited consolidated financial statements and related notes
beginning on page F-I of this report.
See Part I, Item I - Business - Overview for a description of the Company and its ownership structure.
Business Segments
Management of the Company views its business primarily based on the underlying products, and this is the basis used for
defining its reportable segments. The Company reports four segments: Individual Investments, Retirement Plans, Individual
Protection, and Corporate and Other.
The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by
adjusting income from continuing operations before federal income taxes and the cumulative effect of adoption of accounting
principles to exclude: (I) net realized gains and losses on investments, hedging instruments and hedged items, except for
periodic net coupon settlements on non-qualifying derivatives; (2) net realized gains and losses related to securitizations; and
(3) the adjustment to amortization ofDAC related to net realized gains and losses.
See Part I, Item I - Business - Business Segments for a description of the components of each segment.
The following table summarizes pre-tax operating earnings (loss) by segment for the years ended December 3 I:
(dollars in millions) 2005 2004 Change 2003 Chanl!e
Individuallnvesbloel1l> S 223.8 $ 220.0 2% $ 166.3 32%
Retirement Plans 114.3 125.3 (9"10) 122.5 20/0
Individual Protection 192.8 170.6 13% 150.0 14%
Corporate and Other 80.7 62.1 30% 96.4 (36%)
Revenues and Expenses
The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment
income. Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of
individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal
life insurance products, which are assessed on the amount of insurance in force in excess of the related policyholder account
value; administrative fees, which include fees charged per contract on a variety of the Company's products and premium loads
on universal life insurance products; and surrender fees, which are charged as a percentage of premiums withdrawn during a
specified period for annuity and certain life insurance contracts. Net investment income includes earnings on investments
supporting fixed annuities, the MTN program and certain life insurance products, and earnings on invested assets not allocated
to product segments, all net of related investment expenses. Other income includes asset fees, administrative fees,
commissions and other income earned by subsidiaries of the Company that provide administrative, marketing and distribution
services.
Management makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other
factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of
available-for-sale securities and other investments, and changes in valuation allowances on mortgage loans on real estate are
reported in realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in the
fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of hedged items; the
ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge
accounting treatment; and periodic net coupon settlements on non-qualifying derivatives.
15
The Company's primary expenses include interest credited to policyholder account values, other benefits and claims,
amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group
fixed annuities, funding agreements backing the Company's MTN program and certain life insurance products. Other benefits
and claims include policyholder benefits in excess of policyholder account values for universal life and individual deferred
annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate
annuities.
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.
In particular, the Company's profitability is driven by fee income on separate account products, general account asset levels
and management's ability to manage interest spread income. Interest spread income is comprised of net investment income,
excluding any applicable allocated charges for invested capital, less interest credited to policyholder account values. 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; the competitive environment; and other factors. In recent
periods, management has taken actions to address low interest rate environments and the resulting impact on interest spread
margins, including reducing commissions on fixed annuity sales, launching new products with new guaranteed rates,
discontinuing the sale of its leading annual reset fixed annuities and invoking contractual provisions that limit the amount of
variable annuity deposits allocated to the guaranteed fixed option. Also, the majority of new business now contains lower
floor guarantees than were historically provided.
In addition, life insurance profits are significantly impacted by mortality, morbidity and persistency experience.
Cumulative Elfect of Adoption of Accounting Principle
The Company adopted Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), effective January I, 2004, which resulted in
a $3.3 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. See Note 3to the audited
consolidated financial statements included in the F pages of this report for a complete description of SOP 03- I.
Critical Accounting Policies and Recently Issued Accounting Standards
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the fmancial statements. Actual results could differ significantly from those estimates.
The most critical estimates include those used to determine the following: the balance, recoverability and amortization of
DAC for investment products and universal life insurance products; impainnentlosses on investments; valuation allowances
for mortgage loans on real estate; federal income tax provisions; the liability for future policy benefits; and pension and other
postretirement employee benefits.
Note 2 and Note 3 to the audited consolidated financial statements included in the F pages of this report provide a summary of
significant accounting policies and a discussion of recently issued accounting standards, respectively.
Deferred Polley Acquisition Costs for Investment Products and Universal Life Insurance Products
The Company has deferred the costs of acquiring investment products and universal life insurance products business,
principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses
that relate to and vary with the production of new and renewal business. Investment products primarily consist of individual
and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable
universal life insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing at
the time of policy issuance and loss recognition testing at the end of each reporting period.
16
For investment products (principally individual and group annuities) and universal life insurance products, DAC is being
amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected
interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized gains and losses
less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life
insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-
sale, as described in Note 2(b) to the audited consolidated financial statements included in the F pages of this report.
The most significant assumptions that are involved in the estimation of future gross profits include future net separate account
performance, surrender/lapse rates, interest margins and mortality. The Company's long-term assumption for net separate
account performance is currently 8% growth per year. If actual net separate account performance varies from the 8%
assumption, the Company assumes different performance levels over the next three years such that the mean return equals the
long-term assumption. This process is referred to as a reversion to the mean. The assumed net separate account return
assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the
S&P 500 Index, and as part of its pre-set parameters, the Company's reversion to the mean process generally limits returns to
0-15% during the three-year reversion period.
Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal
life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or
assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense (referred to
as DAC unlocking), which could be significant. In general, increases in the estimated general and separate account returns
result in increased expected future profitability and may lower the rate of DAC amortization, while increases in
lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase
the rate of DAC amortization.
Management evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These
parameters are designed to appropriately reflect the Company's long-term expectations with respect to individual variable
annuity contracts while also evaluating the potential impact of short-term experience on the Company's recorded individual
variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters
for a prescribed period of time, or if the recorded balance falls outside of these parameters and management determines it is
not reasonably possible to get back within the parameters during this period oftime, assumptions are required to be unlocked
and DAC is recalculated using revised best estimate assumptions. Otherwise, DAC is not unlocked to reflect updated
assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean
process.
For other investment products and universal life insurance products, DAC is adjusted each quarter to reflect revised best
estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net
separate account performance. Any resulting DAC unlocking adjustments are reflected currently in the consolidated
statements of income.
Impairment Losses on Investments
Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity
of recording impairment losses for other-than-temporary declines in the fair value of investments.
Under the Company's accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise
settled in a way that may limit the Company's ability to fully recover cost, an impairment is deemed to be other-than-
temporary unless the Company has both the ability and intent to hold the investment until the security's forecasted recovery
and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities
management estimates cash flows over the life of purchased beneficial interests in securitized fmancial assets. If management
estimates that the fair value of its beneficial interest is not greater than or equal to its carrying value based on current
information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate
(considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the
purchased beneficial interest to fair value.
For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have the ability
and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all
amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not
limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length
of time a security's fair value has been below cost or amortized cost; specific credit issues and financial prospects related to
the issuer; management's intent to hold or dispose ofthe security; and current economic conditions.
17
Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.
Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.
Significant changes in the factors management considers when evaluating investments for impairment losses, including
significant deterioration in the credit worthiness of individual issuers, could result in a significant change in impairment losses
reported in the consolidated financial statements.
Valuation Allowances for Mortgage Loans on Real Estate
The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio
managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
When management determines that a loan is impaired, a provision for loss is established equal to the difference between the
carrying value and the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair
value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the
Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date,
but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on
investments, hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received
on non-accrual status mortgage loans on real estate is included in net investment income in the period received.
The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by management
and reflects management's best estimate of probable credit losses, including losses incurred at the balance sheet date but not
yet identified by specific loan. Management's periodic evaluation of the adequacy of the allowance for losses is based on past
loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and
other relevant factors.
Significant changes in the factors management considers in determining the valuation allowance for mortgage loans on real
estate could result in a significant change in the valuation allowance reported in the consolidated financial statements.
Federal Income Taxes
Management provides for federal income taxes based on amounts it 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, management
may be required to significantly change the provision for federal income taxes recorded in the consolidated fmancial
statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.
The Company's federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and the Company is
currently under examination for the 2000-2002 tax years. Management has established tax reserves representing its best
estimate of additional amounts it may be required to pay if certain tax positions it has taken are challenged and ultimately
denied by the IRS. These reserves are reviewed regularly and are adjusted as events occur that management believes impact
its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial
agreement on the deductibility/non-deductibility 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.
Management believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and
other tax-related matters for all open tax years.
A significant component of the tax reserve is related to the separate account dividends received deduction (ORD). The
Company has not reached any final agreements with the IRS with respect to the ORD, and there can be no assurance that any
such agreements will be reached. However, resolution of the separate account ORD and/or other identified issues could result
in a potentially significant adjustment to the Company's future results of operations.
Future Policy Benefits
The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions,
including those related to persistency, mortality, morbidity and interest rates.
18
The Company calculates its liability for future policy benefits for investment products in the accumulation phase and universal
life and variable universal life insurance policies as the policy account balance, which represents participants' net premiums
and deposits plus investment performance and interest credited less applicable contract charges.
The Company's liability for funding agreements to an unrelated third party trust equals the balance that accrues to the benefit
of the contractholder, including interest credited. The funding agreements constitute insurance obligations considered annuity
contracts under Ohio insurance laws.
The liability for future policy benefits for traditional life insurance policies has been calculated by the net level premium
method using interest rates varying from 5.4% to 6.0% and estimates of mortality, morbidity, investment yields and
withdrawals that were used or being experienced at the time the policies were issued.
The liability for future policy benefits for payout annuities has been calculated using the present value of future benefits and
maintenance costs discounted using interest rates varying from 3.0% to 13.0%. Also, as of December 31, 2005 and 2004, the
calculated reserve was adjusted to reflect the incremental reserve that would be required if unrealized gains and losses had
been realized and the proceeds reinvested at lower interest rates, which would have resulted in the use of a lower discount rate.
Pension and Other Postretirement Employee Beneflls
Pension and other postretirement employee benefits (OPES) assumptions are revised at least annually in conjunction with
preparation of the Company's Annual Report on Form 1O-K. The 2005 pension expense for substantially all of the
Company's employees and certain agents totaled $16.6 million, an increase of $2.9 million over 2004 pension expense of
$13.7 million. Expenses increased at the plan level primarily due to decreasing interest rates, reflected in a lower discount
rate. The discount rate used to value cash flows was lowered to 5.00% to determine 2005 pension expense from 5.50% for
2004, and the long-term expected rate of return on plan assets was lowered to 6.75% for 2005 from 7.25% for 2004.
The 2005 and 2004 OPES (income) expense for substantially all of the Company's employees and certain agents was $(0.1)
million and $0.3 million, respectively. The discount rate used to value cash flows was lowered to 5.70% to determine 2005
OPES expense from 6.10% in 2004, and the long-term expected rate of return on plan assets was lowered to 6.50% for 2005
from 7.00% for 2004.
Management employs a prospective building block approach in establishing the discount rate and the expected long-term rate
of return on plan assets. This process is integrated with the determination of other economic assumptions such as salary scale.
The discount rate is set by reference to the yield on high quality corporate bonds to reflect pension settlement rates. For
December 31, 2005 and 2004, the reference bond portfolio was the Moody's AA long term corporate bond index. For pension
benefits, a downward adjustment of 50-75 basis points in the discount rate was included for plan administration and other
expenses. Since the OPES liability includes both claims and administration expenses, a similar downward adjustment was not
appropriate for the OPES discount rate. The historical real rate of return for the reference bonds is subtracted from the yield
on these bonds to generate an assumed inflation rate. The expected real rates of return on various asset sub-classes are
developed based on historic risk premiums for those sub-classes. The expected real rates of return, reduced for investment
expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target
portfolio. This expected real rate of return varies by plan and changes when the plan's target investment portfolio changes.
The expected long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This
process effectively sets the expected return for the plan's portfolio at the yield for the reference bond portfolio, adjusted for
expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations
in the market do not impact the expected risk premiums. However, as the yield for the reference bonds fluctuates, the
assumed inflation rate and the expected long-term rate are adjusted in tandem.
The following illustrates the impact of changes in individual assumptions (without changing any other assumption) on
expenses in 2005: (I) a 50 basis point increase in the pension discount rate would have decreased 2005 pension expense by
approximately 13%, while a 50 basis point decrease in the pension discount rate would have increased 2005 pension expense
by approximately 29%; (2) a 50 basis point increase in the pension long-term expected rate of return would have decreased
2005 pension expense by approximately 12%, while a 50 basis point decrease in the pension long-term expected rate of return
would have increased 2005 pension expense by approximately 12%; (3) a 50 basis point increase in the OPES discount rate
would have decreased 2005 OPES expense by approximately 31 %, while a 50 basis point decrease in the OPES discount rate
would have increased 2005 OPES expense by approximately 31%; and (4) a 50 basis point increase in the OPEB long-term
expected rate of return would have decreased 2005 OPES expense by approximately 19%, while a 50 basis point decrease in
the OPES long-term expected rate of return would have increased 2005 OPES expense by approximately 19%.
19
I Results of Operations
2005 Compared to 2004
The following table summarizes the Company's consolidated results of operations for the years ended December 31:
(dollars in millions) 2005 2004 OlaJu(e
Revenues:
Policy charges:
Asset fees $ 613.2 $ 588.5 4%
Cost of insurance charges 270.5 259.7 40/0
Administrative fees 89.9 91.5 (2%)
Surrender fees 81.5 85.5 (5%)
Total policy charges 1,055.1 1,025.2 3%
Life insurance premiums 260.0 270.4 (4%)
Net inveslIreDt income 2,105.2 2,000.5 5%
Net realized gains (losses) on investments, hedging instrwnents and hedged items 10.6 (36.4) NM
Other 2.2 9.8 (78"/0)
Total revenues 3,433.1 3,269.5 5%
Benefits and expenses:
Interest credited to policyholder account values 1,331.0 1;2.77.2 4%
Other benefits and claim; 377.5 369.2 2%
Policyholder dividends on participating policies 33.1 36.2 (9%)
AIrorti2ation ofDAC 466.3 410.1 14%
Interest expense, jrinwily with NFS 66.3 59.8 11%
Other operating expenses 538.8 582.0 (7%)
Total benefits and expenses 2,813.0 2,734.5 3%
Income from continuing operations before federal income tax expense 620.1 535.0 16%
Federal income tax expense 95.6 120.0 (20%)
Income from continuing operations S24.5 415.0 26%
~~ve~~m~onmaccountingprinc~~~mtaxes (3.3) NM
Net income $ S24.5 $ 411.7 27%
Excluding additional federal income tax benefits recorded during the third and fourth quarters of2005 as discussed below, the
increase in net income primarily was driven by additional interest spread income; the recognition of net realized gains on
investments, hedging instruments and hedged items in 2005 compared to net losses in 2004; lower other operating expenses;
and higher assets fees. Increased amortization of DAC partially offset the overall improvement.
The increase in interest spread income was driven by the Corporate and Other and Individual Investments segments. Within
Corporate and Other, higher interest spread income was due to increased invested asset levels primarily as a result of higher
excess capital and surplus retained in the Corporate and Other segment and improved earnings from common stock and real
estate investments. The increase in interest spread income within the Individual Investments segment primarily resulted from
a higher level of invested assets and lower crediting rates.
The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005 compared to net
realized losses in 2004 primarily due to a significant decline in impairment charges.
The decline in other operating expenses primarily was due to lower general sales and employee benefit costs.
Asset fees rose primarily due to increases in both average separate account values and the average asset fee rate charged
within the Individual Investments segment.
20
Higher amortization of DAC primarily occurred within the Individual Investments segment due to increased variable annuity
revenues. Fixed annuity true-ups and unlocking also contributed to the increase.
During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the
Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million
related to all open tax years (2000 - 2005). In addition, the Company recorded $5.6 million of net benefit adjustments in the
third quarter of 2005, primarily related to differences between the estimated tax liability and the amounts reported on the
Company's tax returns and revised estimates of permanent income tax deductions expected to be generated in 2005. During
the fourth quarter of2005, the Company revised the estimate for the separate account DRD and recorded an additional federal
income tax benefit of $8.0 million based on additional information available at year end. Therefore, the full year 2005
effective tax rate of 15.4% was lower than the 2004 rate of 22.4% primarily due to the additional DRD recorded in 2005
compared to 2004.
2004 Compared 10 2003
The following table summarizes the Company's consolidated results of operations for the years ended December 3 I:
(dollars in millions)
2004
2003
Cban2e
Revenues:
Policy charges:
Asset fees
Cost of insurance charges
Administrative fees
Surrender fees
Total policy charges
Life insurance premimns
Net investment income
Net realized losses on investments, hedging instruments and hedged items
Other
Total revenues
Income from continuing operations before federal income tax expense
Federal income tax expense
Income from continuing operations
Cumulative effect of adoption of accounting principle, net of taxes
Net income
$ 588.5 $ 516.8 14%
259.7 250.0 4%
91.5 82.0 12"10
85.5 75.3 14%
1,025.2 924.1 11%
270.4 279.8 (3%)
2,000.5 1,973.1 1%
(36.4) (85.2) NM
9.8 12.8 (23%)
3,269.5 3,104.6 5%
1,277.2 1,309.2 (2"10)
369.2 380.0 (3%)
36.2 41.2 (12"/0)
410.1 375.9 9%
59.8 48.4 24%
582.0 515.5 13%
2,734.5 2,670.2 2"10
535.0 434.4 23%
120.0 96.2 25%
415.0 338.2 23%
(3.3) (0.6) NM
$ 411.7 $ 337.6 22"/0
Benefits and expenses:
Interest credited to policyholder account values
Other benefits and claim;
Policyholder dividends on participating policies
Amlrtization ofDAC
Interest expense, primarily mth NFS
Other operating expenses
Total benefits and expenses
The increase in net income primarily was driven by higher assets fees, additional interest spread income and a decline in net
realized losses on investments, hedging instruments and hedged items, partially offset by higher other operating expenses and
amortization of DAC.
The increase in asset fees was due to changes in the market value of the investment options underlying the account values,
which followed the general upward trends of the equity markets.
The increase in interest spread income primarily occurred in the Individual Investments segment and was due to higher
income from mortgage loan prepayment penalties and bond call premiums along with increased average account values.
21
The decline in net realized losses on investments, hedging instruments and hedged items was driven by an improving market
and credit environment and the impact of market pricing and portfolio alignment. Other-than-temporary and other investment
impairments were positively impacted by the improved credit environment.
The increases in other operating expenses reflect higher advertising and promotion and employee compensation and benefits
expenses.
The increase in amortization of DAC primarily was attributable to the Individual Investments segment due to higher gross
margins on the underlying business.
The effective tax rate for 2004 was flat compared to 2003 as permanent tax deductions increased at approximately the same
rate as pre-tax earnings. The increase in permanent tax deductions in 2004 primarily was due to the release of the Phase III
tax liability driven by 2004 tax law changes and the release of tax reserves as a result of a current valuation of tax exposure
items.
Sales
The Company regularly monitors and reports a production volume metric titled "sales." Sales or similar measures are
commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.
Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a
substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance
companies. Additionally, the Company's definition of sales may differ from that used by other companies. As used in the
insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately
drive revenues.
As calculated and analyzed by management, statutory premiums and deposits on individual and group annuities and life
insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and
deposits on administration-only group retirement plans and the advisory services program are adjusted as described below to
arrive at sales.
Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life
insurance premiums determined on a GAAP basis are recognized as revenue when due, as calculated on an accrual basis in
proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity
products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a
GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums
collected (cash basis) and deposits received (cash basis) are aggregated and reported as revenues in the line item statutory
premiums and annuity considerations.
Sales, as reported by the Company, are stated net of internal replacements, which management believes provides a more
meaningful disclosure of production in a given period. In addition, the Company's definition of sales excludes funding
agreements issued under the Company's MTN program; asset transfers associated with large case BOLl and large case
retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products
contribute to asset and earnings growth, their production flows potentially can mask trends in the underlying business and thus
do not provide meaningful comparisons and analyses.
Management believes that the presentation of sales as measured for management purposes enhances the understanding of the
Company's business and helps depict longer-term trends that may not be apparent in the results of operations due to
differences between the timing of sales and revenue recognition.
The Company's flagship products are marketed under The BEST of AMERlCA brand and include individual variable and
group annuities, group private sector retirement plans, and variable life insurance. The BEST of AMERlCA products allow
customers to choose from investment options managed by premier mutual fund managers. The Company has also developed
private label variable and fixed annuity products in conjunction with other financial services providers that allow those
providers to sell products to their own customer bases under their own brand names.
.
The Company also markets group deferred compensation retirement plans to employees of state and local governments for use
under IRC Section 457. The Company utilizes its sponsorship by the National Association of Counties, The United States
Conference of Mayors and The International Association of Firefighters when marketing IRC Section 457 products.
22
See Part I, Item I - Business - Overview for a description of the Company's sales distribution network.
1005 Compared to 1004
The following table summarizes sales by product and segment for the years ended December 3] :
(dollars in millions) 2005 2004 Change
Individual Investments
Individual variable annuities:
The BEST of AMERICA products $ 3,058.8 $ 3,394.5 (10%)
Private label annuities 346.6 449.0 (23%)
Total individual variable annuities 3,405.4 3,843.5 (11%)
Individual fixed annuities 180.5 780.2 (77%)
Income products 186.6 141.0 32%
Advisory services program 231.3 ]81.0 28%
Total Individual Investments 4,003.8 4,945.7 (19%)
Retirement Plans
Private sector pension plans:
The BEST of AMERICA products 1,407.8 1,679.7 (16%)
Other 39.1 28.1 39%
Total private sector pension plans 1,446.9 1,707.8 (15%)
Public sector pension plans:
IRC Section 457 annuities 1,544.8 ],514.2 2%
Total Retirement Plans 2,991.7 3,222.0 (7%)
Individual Protection
Corporate-owned life insurance 657.5 564.5 16%
The BEST of AMERICA variable life series 426.0 439.6 (3%)
Traditional/universal life insurance 352.3 342.2 3%
Total Individual Protection 1,435.8 I ,346.3 7%
Total sales $ 8,431.3 $ 9.514.0 (11%)
See Part II. Item 7 - Management's Narrative Analysis of the Results of Operations (MD&A) - Business Segments for an
analysis of sales by product and segment.
,
23
The fOllowing table summarizes sales by distribution channel for the years ended December 31:
dollars in millions 2005 2004 Chan e
Non-affiliated:
Independent broker/dealers $ 2,437.1 $ 2,791.4 (13%)
Financial institutions 1,233.9 1,836.8 (33%)
Wirehouse and regional fums 1,227.7 1,462.5 (16%)
Pension plan administrators 354.0 404.3 (12%)
Life insurance specialists 382.4 382.8
CPA channel 115.5 96.1 20%
Total non-affiliated sales 5,750.6 6,973.9 (18%)
Affiliated:
NRS 1,573.2 1,543.0 2%
Nationwide agents 691.0 674.1 3%
TBG Financial 275.4 184.2 500/0
NFN roducers 141.1 138.8 2%
Total affiliated sales 2,680.7 2,540.1 6%
Total sales $ 8 431.3 $ 9514.0 11%
The decrease in total sales primarily was due to lower fixed annuity sales in the Individual InveSlments segment related to
deliberate actions by the Company as described earlier. In addition, sales in the Retirement Plans segment continued to
decline as a result of the movement of pension business to the NFS trust platform. In recent years, an increasing amount of
business has been sold through NFS trust products rather than NLlC group annuity contracts due to NFS' significant
investment in the development of trust product capabilities not prevalent elsewhere in the market. The overall decline
partially was offset by increased COLI sales in the Individual Protection segment.
Sales generated by financial institutions declined primarily due to both planned reductions and intense competition in fixed
annuity sales and the shift of pension business to the trust platform described above. Additionally, this channel has been
impacted by wholesaler turnover.
The decline in sales through independent broker/dealers and wirehouse and regional firms were driven by lower variable
annuity sales and the movement of pension business as mentioned above. However, partially offsetting these declines were
advisory services sales that have begun to grow through the independent broker/dealers channel and higher sales of immediate
annuities and fixed life insurance products through the wirehouse and regional firms channel.
24
2004 Compared to 2003
The following table summarizes sales by product and segment for the years ended December 31:
(dollars in millions) 2004 2003 Change
Individual Investments
Individual variable annuities:
The BEST of AMERICA products $ 3,394.5 $ 3,799.6 (11%)
Private label annuities 449.0 659.3 (32%)
Total individual variable annuities 3,843.5 4,458.9 (14%)
Individual fixed annuities 780.2 1,694.0 (54%)
Income products 141.0 143.0 (1%)
Advisory services program 181.0 25.7 NM
Total Individual Investments 4,945.7 6,321.6 (22%)
Retirement Plans
Private sector pension plans:
The BEST of AMERICA products 1,679.7 2,034.9 (17%)
Other 28.1 31.1 (10"10)
Total private sector pension plans 1,707.8 2,066.0 (17%)
Public sector pension plans:
IRC Section 457 annuities 1,514.2 1,442.4 5%
Total Retirement Plans 3,222.0 3,508.4 (8%)
Individual Protection
Corporate-owned life insurance 564.5 545.0 4%
The BEST of AMERICA variable life series 439.6 435.4 1%
TraditionaVuniversa1life insurance 342.2 299.8 14%
Total Individual Protection 1,346.3 1,280.2 5%
Total sales $ 9.514.0 $ 11,110.2 (14%)
See Part II, Item 7 -MD&A - Business Segments for an analysis of sales by product and segment.
25
The following table summarizes sales by distribution channel for the years ended December 31:
(dollars in millions) 2004 2003 Change
Non-affiliated:
Independent broker/dealers $ 2,79\.4 $ 3,045.9 (8%)
Financial institutions 1,836.8 3,037.0 (40%)
Wirehouse and regional fInns 1,462.5 1,671.5 (13%)
Pension plan administrators 404.3 513.4 (21%)
Life insurance specialists 382.8 387.5 (1%)
CPA channel 96.1 14.4 NM
Total non-affiliated sales 6,973.9 8,669.7 (20%)
Affiliated:
NRS 1,543.0 1,474.9 5%
Nationwide agents 674.1 659.3 2%
TBG Financial 184.2 160.9 14%
NFN producers 138.8 145.4 (5%)
Total affiliated sales 2,540.1 2,440.5 4%
Total sales $ 9.514.0 $ 11,110.2 (14%)
The decrease in total sales primarily was driven by lower fIxed annuity sales in the Individual Investments segment due to
deliberate actions by the Company as described earlier and lower private sector sales in Retirement Plans. These declines
were offset slightly by increased sales of both traditional/universal life insurance and COLI products in the Individual
Protection segment.
Sales generated by fInancial institutions declined due to reductions in fIxed annuity sales as described previously.
Sales through the independent broker/dealer channel decreased due to lower demand for variable annuities and the
aforementioned reduction in fIxed annuity production.
Sales generated by wirehouse and regional frrms declined due to lower sales of individual fIxed and variable annuities and
private sector retirement plans.
26
I Business Segments
Indlviduallnveslments
2005 Compared 10 2004
The following table summarizes selected financial data for the Company's Individual Investments segment for the years ended
December 31 :
ldoUars in millions) 200s 2004 Qlange
Statements of Income Data
Revenues:
Policy charges:
Asset fees $ 455.4 $ 427.7 6%
Administrative fees 15.7 15.3 3%
Surrender fees 61.3 60.6 1%
Total policy charges 532.4 503.6 6%
Premiums on income products 96.7 87.5 11%
Net investment income 822.4 824.8
Other 1.3 0.6 NM
Total revenues 1,452.8 1,416.5 3%
Benefits and expenses:
Interest credited to policyholder account values 557.7 573.5 (3%)
Other benefits and claim; 149.1 136.9 9"10
AmJrtization ofDAC 329.1 276.1 19"10
Other operating expenses 193.1 210.0 (8%)
Total benefits and expenses 1,229.0 1,196.5 3%
Pre-tax ooeratim eaminllS $ 223.8 $ 220.0 2%
Other Data
Sales:
Individual variable annuities $ 3,405.4 $ 3,843.5 (11%)
Individual fixed annuities 180.5 780.2 (77%)
Income products 186.6 141.0 32%
Advisory services JlI'O!!I1U11 231.3 181.0 28%
Total sales S 4.003.8 $ 4.945.7 (19%)
Average accolDll values:
GeneraJ account $ 14,501.5 $ 14,585.9 (1%)
Separate accolDll 34,539.0 33,030.3 5%
Advisory services program 309.3 99.1 NM
Total average accolDll values $ 49.349.8 $ 47.715.3 3%
AccoID1l values as of period end:
Individual variable annuities $ 40,343.8 $ 39,770.8 1%
Individual fixed annuities 7,354.0 7,837.2 (6%)
Income products 1,857.7 1,775.6 5%
Advisory services program 411.5 195.9 NM
Total account values $ 49.967.0 $ 49.579.5 1%
GMDB - Net amolDll at risk, net of reinsurance $ 178.4 $ 296.5 (40%)
GMDB - Reserves, net of reinsurance $ 26.9 $ 23.6 14%
Pre-tax operating ~ to average accomt values 0.45% 0.46%
27
The slight increase in pre-tax operating earnings primarily was driven by higher asset fees, lower other operating expenses,
additional interest spread income and increased premiums on income products. offset by increases in amortization of DAC
and other benefits and claims.
Asset fees rose due to increases in both average separate account values and the average asset fee rate charged. The average
variable asset fee rate increased from 1.29% to 1.32% as new business sold with higher-risk features influenced the overall
average rate. The increase in average separate account values primarily was due to the general upward trend in the equity and
fixed income markets offset in part by withdrawals that exceeded new deposits.
Other operating expenses decreased primarily due to lower sales incentives driven by reduced fixed annuity production.
The following table summarizes the interest spread on Individual Investments segment average general account values for the
years ended December 31 :
2005
2004
Net investment income
Interest credited
Interest spread on avenuze 2eneral account values
5.85%
3.85%
2.00%
5.81%
3.93%
1.88%
Interest spread margins widened during 2005 to 200 basis points compared to 188 basis points in 2004. Included in 2005 were
22 basis points, or $3 1.4 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 13
basis points, or $18.4 million, in 2004. The higher interest rate environment in 2005 relative to 2004 eased the pressure on
margins due to the interest rate floors contained in certain annuity contracts and contributed to increased margins. For 2006,
the Company expects interest spread margins to tighten in this segment and projects full year spreads of 185 to 190 basis
points, including a nominal level of prepayment activity.
The increase in premiums on income products was driven by improving the competitiveness of the Company's immediate
annuity products by increasing the fixed purchase rate offered.
Higher amortization of DAC primarily was due to increased variable annuity revenues. Fixed annuity true-ups and unlocking
also contributed to the increase.
The increase in benefits and claims primarily was driven by increased premiums from immediate annuity products and growth
in contracts containing guaranteed living benefits.
The decrease in fixed annuity sales was due to the competitive interest rate environment and the Company's exit from the
offshore business in the second quarter of2005. In addition, the variable annuity line experienced lower sales of The BEST of
AMERICA products, especially the MarketFLEX product, consistent with industry-wide declines.
28
The following table summarizes selected information about the Company's deferred individual fixed annuities, including the
fixed option of variable annuities, as of December 31, 2005:
(dollars in millions)
Account
value
Ratchet
WId. avg.
crediting
rate
Reset
WId. avg.
crediting
rate
Account
value
Minimum interest rate of3.500loor greater
Minimum interest rate 00.000/. to 3 .49%
Minimum interest rate lower than 3.00010
MY A with no minimum interest rate guarantee
Total deferred individual fixed annuities
$ N1A $ 1,388.5 4.13%
2,976.0 4.94% 5,856.6 3.09%
886.4 3.26% 353.5 3.10%
N1A N1A
$ 3,862.4 4.55% $ 7,598.6 3.28%
Market value
adjustment (MV A)
and other Total
Wtd. avg. WId. avg.
Account crediting Account crediting
value rate value rate
(dollars in millions)
Minimum interest mte 00.50010 or greater
Minimum interest rate 00.00010 to 3.49%
Minimum interest rate lower than 3.00010
MY A with no minimum interest rate guarantee
Total deferred individual fixed annuities
$ N/A
N1A
7.9 3.41%
1,543.8 3.01%
$ 1,551.7 3.01%
$ 1,388.5
8,832.6
1,247.8
1,543.8
$ 13,012.7
4.13%
3.71%
3.22%
3.01"1.
3.63%
29
2004 Compared 10 2003
The following table summarizes selected financial data for the Company's Individual Investments segment for the years
ended December 31 :
(dollars in millions) 2004 2003 OIaJu(e
Statements of Income Data
Revenues:
Policy chalges:
Asset fees $ 427.7 $ 362.4 18"10
Administrative fees 15.3 11.4 34%
Surrender fees 60.6 54.1 12%
Total policy chalges 503.6 427.9 18%
Premiums on income products 87.5 89.8 (3%)
Net investment income 824.8 807.9 2%
Other 0.6 NM
Total revenues 1,416.5 1,325.6 7%
Benefits and expenses:
Interest credited to policyllolder account values 573.5 602.5 (5%)
Other benefits and claims 136.9 155.5 (12%)
Armrtization ofDAC 276.1 228.4 21%
Other operating expenses 210.0 172.9 21%
Total benefits and expenses 1,196.5 1,159.3 3%
Pre-tax llDCI1Ilinl( earninI!:; $ 220.0 $ 166.3 32%
Otller Data
Sales:
Individual variable annuities $ 3,843.5 $ 4,458.9 (14%)
Individual fixed annuities 780.2 1,694.0 (54%)
lnconI: products 141.0 143.0 (1%)
AdvisOIy services progJ1lIll 181.0 25.7 NM
Total sales $ 4,945.7 $ 6,321.6 (22%)
Avernge account values:
GenenlI account $ 14,585.9 $ 13,815.4 6%
Separate account 33,030.3 28,224.0 17%
Advisory services PJ"OWlII1l 99.1 7.8 NM
Total a_ account values $ 47,715.3 $ 42,047.2 13%
Account values as of period end:
Individual variable annuities $ 39,770.8 $ 37,291.4 7%
Individual fixed annuities 7,837.2 7,607.4 30/0
lnconI: products 1,775.6 1,706.9 4%
AdvisOIy services projl,T3I1l 195.9 26.6 NM
Total account values $ 49.579.5 $ 46,632.3 6%
GMDB - Net arrount at risk, net of reinsurance $ 296.5 $ 982.8 (70%)
GMDB - Reserves, net of reinsurance $ 23.6 $ 21.8 8"/.
Pre-tax operating earnin~ to average account values 0.46% 0.40%
The increase in pre-tax operating earnings primarily was driven by higher asset fees, additional interest spread income and
lower other benefits and claims, partially offset by increases in amortization of DAC and other operating expenses.
30
The increase in asset fees were primarily due to changes in the market value of the investment options underlying the account
values, which followed the general trends of the equity markets.
The following table summarizes the interest spread on Individual Investments segment average general account values for the
years ended December 3 I :
2004 2oo3
Net investment income
Interest credited
Interest soread on aVenl2e genera] account values
5.81%
3.93%
1.88"10
6.03%
4.36%
1.67%
In addition to higher general account assets, interest spread margins widened during 2004 to 188 basis points compared to 167
basis points in 2003. Included in 2004 were 13 basis points, or $18.4 million, of prepayment income on mortgage loans and
bond call premiums compared to 6 basis points, or $7.8 million, in 2003. The higher interest rate environment in 2004 relative
to 2003 eased the pressure on margins due to the interest rate floors contained in certain annuity contracts and contributed to
increased margins.
The decrease in other benefits and claims primarily reflects lower guaranteed minimum death benefit (GMDB) costs in 2004.
GMDB exposure declined from the average levels experienced in 2003. This exposure moderated due to the general upward
trends ofthe equity markets in 2004 and resulted in reduced benefit payments and lower provisions for future benefits.
Higher amortization of DAC resulted from increased gross margins on the underlying business.
The increase in other operating expenses was driven by two primary factors. First, asset-based trail compensation increased
due to growth in account values. The second factor was increased expenses primarily related to advertising and promotion as
well as employee compensation and benefits.
Sales declines primarily were attributable to lower sales of fixed annuities as described previously.
The following table summarizes selected information about the Company's deferred individual fixed annuities, including the
fixed option of variable annuities, as of December 31, 2004:
(dollars in millions)
Ratchet
Wtd avg.
crediting
rate
Reset
WId. avg.
crediting
rate
Account
value
Account
value
Minimum interest rate of3.50%or greater
Minimum interest rate of3.00% to 3.49%
Minimum interest rate 100",r than 3.00%
MY A with no minimum interest rate guarantee
Total deferred individual fixed annuities
$ N1A $ 901.8 3.51%
3,163.2 5.02% 6,456.5 3.11%
873.1 3.12% 337.2 3.52%
N1A N1A
$ 4.036.3 4.61% $ 7.695.5 3.17%
Market value
adjustment (MY A)
and other Total
Wtdavg. WId. avg.
Account crediting Account crediting
value rate value rate
(dollars in millions)
Minimum interest rate of3.50% or greater
Minimum interest rate of3.00"1o to 3.49%
Minimum interest rate 10\\el' than 3.00"/.
MY A with no minimum interest rate guarantee
Total deferred individual fixed annuities
$
1,175.6
$ I.I 75.6
N1A
N1A
N1A
3.27%
3.27%
$ 901.8
9,619.7
1,210.3
1,175.6
$ 12.907.4
3.51%
3.74%
3.23%
3.27%
3.63%
31
Retirement Plans
In recent years, an increasing amount of business has been sold through NFS trust products rather than NLIC group annuity
contracts due to NFS' significant investment in the development of trust product capabilities not prevalent elsewhere in the
market.
2005 Compared 10 2004
The following table summarizes selected financial data for the Company's Retirement Plans segment for the years ended
December 31 :
(dollars in millions) 2005 2004 0Jange
Statements of Income Data
Revenues:
Policy charges:
Asset fees $ 129.5 $ 137.7 (6%)
Administrative fees 8.0 8.2 (2%)
Surrender fees 7.5 11.1 (32"10)
Total policy charges 145.0 157.0 (8%)
Net investment incom> 642.9 627.9 2"10
0Iher 0.2
Total revenues 788.1 784.9
Benefits and expenses:
Interest credited to policyholder account values 444.8 435.5 2"10
Almrtization ofDAC 47.2 39.6 19%
0Iher opetIIting expemes 181.8 184.5 (1%)
Total benefits and expemes 673.8 659.6 2"10
Pre-tax ooerating eaminl!s $ 114.3 $ 125.3 (9%)
Other Data
Sales:
Private sector $ 1,446.9 $ 1,707.8 (15%)
Public sector 1,544.8 1,514.2 2"/.
Total sales $ 2,991.7 $ 3,222.0 (7%)
Average account values:
General account $ 10,519.0 $ 9,773.8 8%
Separate account 18,739.2 19,110.9 (2"10)
Total avetlIj(e account values $ 29,258.2 $ 28,884.7 1%
Account values as of period end:
Private sector $ 13,900.9 $ 14,461.0 (4%)
Public sector 15,790.2 14,889.2 6%
Total account values $ 29.691.1 $ 29.350.2 1%
Pre-tax operating earnings to a_ account values 0.39% 0.43%
The decrease in pre-tax operating earnings primarily was driven by lower asset fees and higher amortization ofDAC, partially
offset by additional interest spread income.
The decline in asset fees was driven by the shift in sales mentioned above and continued surrenders of group annuity
contracts.
32
The increase in amortization of DAC was related to changes in private sector amortization assumptions driven by actual
experience for the declining block of group annuity business.
The following table summarizes the interest spread on Retirement Plans segment average general account values for the years
ended December 31:
200S
2004
Net investIrenl income
Interest credited
Interest soread on a_ e.eneral account values
6.11%
4.23%
1.88%
6.42"10
4.46%
1.96%
Interest spread margins decreased to 188 basis points in 2005 compared to 196 basis points in 2004. Included in the current
year were 27 basis points, or $21.1 million, of income from mortgage loan prepayment penalties and bond call premiums
compared to 18 basis points, or $17.7 million, in 2004. Excluding the impact from prepayment activity, the decrease in
margins was driven by the combination of long-duration higher yielding assets rolling over into lower yielding assets as yields
on new cash flows are below the portfolio rate. Overall interest spread income improved due to growth in general account
values, offset in part by the lower interest margins described above. For 2006, the Company expects interest spread margins
to continue to tighten in this segment and projects full year spreads of 180 to 185 basis points, including a nominal level of
prepayment activity.
Private sector sales decreased due to the declining issuance of group annuity contracts described above and the related
decrease in recurring flows.
33
2004 Compared 102003
The following table summarizes selected financial data for the Company's Retirement Plans segment for the years ended
December 31 :
(dollars in millions) 2004 2003 Olange
Statements of Income Data
Revenues:
Policy charges:
Asset fees $ 137.7 $ 134.8 2"10
Administrative fees 8.2 9.6 (15%)
Surrender fees 11.1 5.6 98%
Total policy charges 157.0 150.0 5%
Net investment income 627.9 640.2 (2"10)
Total revenues 784.9 790.2 (1%)
Benefits and expenses:
Interest credited to policyholder account values 435.5 443.2 (2"10)
Amortization ofDAC 39.6 45.6 (13%)
Other operatinj! expenses 184.5 178.9 3%
Total benefits and expenses 659.6 667.7 (1%)
J'rt>.tax 0DeI"lIIiru! earninl!s $ 125.3 $ 122.5 2"10
Other Data
Sales:
Private sector $ 1,707.8 $ 2,066.0 (17%)
Public sector 1,514.2 1,442.4 5%
Total sales $ 3.222.0 $ 3,508.4 (8%1
Average account values:
General account $ 9,773.8 $ 9,328.3 5%
Separate account 19,110.9 17,692.5 8%
Total a_ account values $ 28,884.7 $ 27,020.8 7%
Account values as of period .00:
Private sector $ 14,461.0 $ 14,992.8 (4%)
Public sector 14,889.2 13,916.9 7%
Total account values $ 29.350.2 $ 28,909.7 2"10
J'rt>.tax opera\inJ! earning; to average account values 0.43% 0.45%
Pre-tax operating earnings increased slightly primarily due to higher surrender charges, partially offset by higher other
operating expenses and lower interest spread income.
Higher surrender charges were due to increased surrender fees as a greater percentage of plans surrendered within the
surrender charge period. In addition, the trend of conversions from group annuity contracts to trust contracts continued.
The increase in other operating expenses is reflective of the growth in plans and participants in both the public sector and
private sector businesses, combined with investments in information technology to enhance the defined contribution record-
keeping platform. Higher employee benefit, marketing and advertising expenses also contributed to the increase.
34
The following table summarizes the interest spread on Retirement Plans segment average general account values for the years
ended December 3 I :
2004
2003
Net iItvestr1m incom:
h1erest credited
InIerest soread 00 avenw.e I!eIleI'llI account valUfS
6.42%
4.46"10
1.96%
6.86%
4.75%
2.11%
Interest spread margins declined to 196 basis points in 2004 compared to 211 basis points in 2003. Included in 2004 were 18
basis points, or $17.7 million, of prepayment income on mortgage loans and bond call premiums compared to 22 basis points,
or $20.1 million, in 2003. Excluding the effects of prepayment income, the decrease primarily was due to spread compression
associated with prepayment activity and lower reinvestment rates on prepaying assets.
Private sector sales decreased due to the declining issuance of group annuity contracts described above and the related
decrease in recurring flows. The increase in public sector retirement plan sales was driven by a combination of strong flows,
primarily from existing plans, and increased rollover activity associated with pension reform legislation, which expanded the
portability of public plan assets.
35
Individual Protection
2005 Compared 102004
The following table summarizes selected financial data for the Company's Individual Protection segment for the years ended
December 31 :
(dollars in millions) 200S 2004 0Iarure
Statements of Income Data
Revenues:
Policy charges:
Asset fees $ 28.3 $ 23.1 23%
Cost of insurance charges 270.5 259.7 4%
Administrative fees 66.3 68.0 (3%)
Surrender fees 12.6 13.8 (9"10)
Total policy charges 377.7 364.6 4%
Life insurance premium; 163.3 182.9 (11%)
Net investment income 332.8 327.2 2%
Total revenues 873.8 874.7
Benefits and expenses:
Interest credited to policyholder account values 182.4 181.5
Other benefits and cJairm 228.4 232.3 (2%)
Policyholder dividends on participating policies 33.1 36.2 (9%)
AIrortization ofDAC 89.0 94.4 (6%)
Other operating expenses 148.1 159.7 (7%)
Total benefits and expenses 681.0 704.1 (3%)
Pre-tax 0Denlliru! eaminl1ll S 192.8 $ 170.6 13%
~
Other Data
Sales:
Corpornte-ooned life insurance S 657.5 $ 564.5 16%
The BEST of AMERICA variable life series 426.0 439.6 (3%)
Traditional/universal life insurance 352.3 342.2 3%
Total sales S 1,435.8 $ 1,346.3 7%
Policy reserves as of period end;
Individual investment life insurance S 3,334.7 $ 3,056.1 9%
Corpornte investment life insurance 6,744.6 5,444.1 24%
Traditional life insurance 2,132.7 2,114.9 1%
Univenallife insurance 1,066.7 982.7 9%
TotaIoolicv reserves S 13,278.7 $ 1/,597.8 14%
Insurance in force as of period eod:
Individual investment life insurance S 37,539.8 $ 36,503.3 3%
Corpornte investment life insurance 23,635.5 10,904.1 1/7%
Traditional life insurance 19,940.9 21,169.1 (6%)
Universal life insurance 8,863.4 8,324.1 6%
Total insurance in force S 89,979.6 $ 76,900.6 17%
Pre-tax operating earnings increased due to lower other operating expenses and higher cost of insurance charges, partially
offset by lower life insurance premiums.
36
Lower other operating expenses primarily resulted from a decline in commissions due to a shift in mix to products with lower
commission rates. Also contributing to the increase were higher capitalization of certain software charges related to a systems
consolidation project with an increase in the amounts eligible to be capitalized and additional mutual fund expense
reimbursements from increased separate account values. .
The increase in cost of insurance charges reflects a growing block of investment and universal life business with increased
insurance in force. The aging of the block generally tends to increase the cost of insurance charged.
Life insurance premiums decreased due to lower fixed life sales and the impact of changes in reinsurance coverage from
yearly renewable term to coinsurance in the traditional life portfolio.
Sales improved primarily due to higher COLI sales, which were driven by several new large cases that closed during the year
and a more favorable legislative environment.
37
2004 Compared to 2003
The following table summarizes selected financial data for the Company's Individual Protection segment for the years ended
December 3 I :
(dollars in millions) 2004 2003 Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees $ 23.1 $ 19.5 18"10
Cost of insurance charges 259.7 250.1 4%
Administrative fees 68.0 61.0 11%
SUJTeIlder fees 13.8 15.6 (12%)
Total policy charges 364.6 346.2 5%
Life insurance premiums 182.9 190.0 (4%)
Net investment income 327.2 324.3 1%
Total revenues 874.7 860.5 2%
Benefits and expenses:
Interest credited to policyholder account values 181.5 185.6 (2%)
0Iher benefits and claims 232.3 224.5 3%
Policyholder dividends on participating policies 36.2 41.2 (12%)
AmJrtization ofDAC 94.4 101.9 (7%)
0Iher operatin!!; expenses 159.7 157.3 2%
Total benefits and expenses 704.1 710.5 (1%)
J're.tax operatin!!; ~ $ 170.6 $ 150.0 14%
Other Data
Sales:
Corporate-owned life insurance $ 564.5 $ 545.0 4%
The BEST of AMERICA variable life series 439.6 435.4 1%
Traditionalluniversa1life insurance 342.2 299.8 14%
Total sales $ 1,346.3 $ 1,280.2 5%
Policy reserves as of period end:
Individual investment life insurance $ 3,056.1 $ 2,698.7 13%
Corporate investrnent life insurance 5,444.1 4,401.5 24%
Traditional life insurance 2,114.9 2,046.4 3%
Universa1life insurance 982.7 886.0 11%
Total oolicv reserves $ 11,597.8 $ 10,032.6 16%
Insurance in force as of period end:
Individual investment life insurance $ 36,503.3 $ 35,065.8 4%
Corporate investment life insurance 10,904.1 9,263.3 18"10
Traditional life insurance 21,169.1 23,262.7 (9%)
Universa1life insurance 8,324.1 8,250.0 1%
Total insurance in force $ 76,900.6 $ 75,841.8 1%
Pre-tax operating earnings increased primarily due to higher policy charges and lower amortization of DAC, partially offset by
lower life insurance premiums and higher other benefits and claims.
The increase in policy charges primarily resulted from higher cost of insurance charges, administrative fees and asset fees,
reflecting a growing block of investment life business with increased insurance in force, account values and policy counts.
38
Amortization of DAC decreased due to the implementation of investment life business DAC model enhancements, which
provide a more rermed calculation and more timely reflections of observed trends in the underlying assumptions. However,
DAC amortization increased in the fixed life business, consistent with higher earnings.
The decrease in life insurance premiums primarily was driven by higher reinsurance premiums due to a change in the mix of
traditional life reinsurance from yearly renewable term to coinsurance.
Other benefits and claims increased despite the decrease in life insurance premiums due to less favorable mortality in 2004
compared to 2003.
The increase in sales was due to continued strength in sales of traditional/universal life insurance and COLI products. The
traditional/universal life sales increase was driven by a re-tooled universal life insurance product portfolio and expanding
distribution relationships in the non-affiliated distribution channels. The increase in COLI sales was driven by higher renewal
premiums from the funding of existing COLI cases due to continued improvement in the equity market environment and
increased participant deferrals in existing executive deferred compensation plans. Slow growth in new COLI sales, due to the
unfavorable environment for COLI and executive deferred compensation programs affecting the creation of new plans and
sales, partially offset the overall increase.
Corporate and Other
2005 Compared to 2004
The following table summarizes selected financial data for the Company's Corporate and Other segment for the years ended
December 31 :
~1JlIS in mUIms)
Statements ofIneome Data
~revenues:
Net inve5lmlnl incoole
am
Tctal ~ revenues
2005
2004
Cl1anI!.e
Net reaIi2IlCI gains (losses) 00 investm:Its, ~ insInJmrtS and hedged itfm;'
Adjustm:rt 10 anoti1lIlioo ofDAC relaled 10 net reaIi2IlCI gains
Inoome fian <mlimJing ooeratioos beflI'e federa1 incoole taxes
$ 307.1 $ 220.6 39%
1.8 15.8 (89'/0)
308.9 236.4 31%
146.1 86.7 69%
Ci6.3 59.8 11%
15.8 Z7.8 (43%)
228.2 174.3 31%
80.7 62.1 30"10
9.5 (43.0) NM
(1.0) NM
$ 89.2 $ 19.1 NM
Benefits and operating c"I""dell:
Imen:st aedited 10 poli~ acc<U1I values
Imen:st expeme 00 debt
am
Tctal bfn:fits 1IKi ~ expemes
J>re.tax operating elII1Iing;;
Other Data
Ai:ooID values as of period eod-
F'InIinI! 1oIs"",.",lls OOddngrredimrtemltrtes
$ 3,998.2 $ 4,401.6
('1'10)
, Excluding periodic net coupon settlements on non-qualifying derivatives.
Pre-tax operating earnings increased due to higher interest spread income and lower other expenses, partially offset by a
decline in other income.
Interest spread income rose due to increased invested asset levels as a result of higher excess capital and surplus retained in
this segment and improved earnings from common stock and real estate investments. Lower margins on the MTN program
offset some of these improvements.
39
The decline in other expenses primarily was due to a reclassification of activity related to variable interest entities (VIEs)
between other expenses and other income.
Other income declined due to the reclassification described above and a decrease in the number of structured products
transactions as margins on these deals compressed.
The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005 compared to net
realized losses in 2004 primarily due to a significant decline in impairment charges due to a generally improved credit
environment.
The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from
continuing operations by source for the years ended December 3 I :
(in millions) 200s 2004
Realized gains on sales, net of hedging losses:
Fixed maturity securities available-for-sale $ 65.3 $ 57.5
Hedging losses on fixed maturity sales (6.8) (15.2)
Equity securities available-for-sale 6.6 4.0
Mortgage loans on real estate 10.7 10.7
Mortgage loan hedging losses (3.3) (4.0)
Real estate 2.1 3.7
Other 1.0 8.3
Total realized JI,llins on sales, net ofhedwng losses 75.6 65.0
Realized losses on sales, net of hedging gains:
Fixed maturity securities available-for-sale (22.5) (7.8)
Hedging gains on fixed maturity sales 3.9 3.7
Equity securities available-for-sale (0.1) (0.9)
Mortgage loans on real estate (10.4) (6.8)
Mortgage loan hedging gains 7.8 2.2
Real estate (1.2)
Other (1.6) (1.9)
Total realized losses on sales, net ofhedWng JI,llins (22.9) (12.7)
Other-than-te.."",.<uy and other investment impairments:
Fixed maturity securities available-for-sale (28.1) (79.7)
Equity securities available-for-sale (0.9) (0.6)
Mortgage loans on real estate, including valuation allowance adjustment (4.5) (7.1)
Real estate (0.1) (3.2)
Other (3.2)
Total other-than-terrJpOrary and other investment in1lairments (36.8) (90.6)
Credit default swaps (7.5) 0.3
Periodic net coupon settlements on non-qualifYing derivatives 1.1 6.6
Other derivatives 1.1 (5.0)
Net realized l!ains (losses) on inVe.tlllehts. hedlzine: instruments and ~ items $ 10.6 $ (36.4)
The Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identifY and
evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See
Part II, Item 7 - MD&A - Critical Accounting Policies and Recently Issued Accounting Standards -Impairment Losses on
Investments for a complete discussion of this process.
40
2004 Compared 10 2003
The following table summarizes selected financial data for the Company's Corporate and Other segment for the years ended
December 31 :
(dollars in millions)
2004
2003
0Ia1l(e
Statements of Income Data
Operating revenues:
Net investment income
Olher
Total operating revenues
$ 220.6 $ 200.7 10"10
15.8 28.4 (44%)
236.4 229.1 3%
86.7 77.9 11%
59.8 48.4 24%
27.8 6.4 NM
174.3 132.7 31%
62.1 96.4 (36%)
(43.0) (100.8) NM
$ 19.1 $ (4.4) NM
Benefits and operating expenses:
Irterest credited to policyholder account values
Interest expeme on debt
Olher
Total benefits and operating expenses
PrcHax operatilll earnings
Net realized losses on investments, hedgiIll imtnmm and hedged item;'
Income (loss) from continuing ODenlIions before federal income taxes
other Data
Account values as of period end-
Fundinl! "2h:e...o..1l. backinl! medium-term ootes
$ 4,401.6
$ 4,606.3
(4%)
I Excluding periodic net coupon settlements on non-qualifying derivatives.
Pre-tax operating earnings declined primarily due to higher other expenses, lower other income and increased interest expense
on debt, somewhat offset by higher interest spread income.
Other expenses increased due to higher advertising and promotion and employee compensation and benefit expenses.
Lower other income primarily was due to declines in structured products earnings and trading portfolio gains.
Interest expense on debt increased primarily due to the issuance of a $100.0 million surplus note to NFS in December 2003
and increased utilization of commercial paper.
The increase in interest spread income primarily was due to higher income from mortgage loan prepayment penalties and
bond call premiums.
The decline in net realized losses on investments, hedging instruments and hedged items was driven by an improving market
and credit environment.
41
The following table summarizes net realized losses on investments, hedging instruments and hedged items from continuing
operations by source for the years ended December 31 :
Credit default swaps
Periodic net coupon settlements on non-qualirying derivatives
Other derivatives
Net realized losses on investments. hedging instruments and hedged items
2004 2003
$ 57.5 $ 98.5
(15.2) (42.4)
4.0 5.5
10.7 3.0
(4.0) (2.4)
3.7 4.2
8.3
65.0 66.4
(7.8) (27.2)
3.7 9.2
(0.9) (0.4)
(6.8) (5.0)
2.2 0.5
(1.2) (0.3)
(1.9) (2.0)
(12.7) (25.2)
(79.7) (159.4)
(0.6) (8.0)
(7.1) 11.7
(3.2) (0.8)
(90.6) (156.5)
0.3 13.3
6.6 15.6
(5.0) 1.2
(36.4) (85.2)
(in millions)
Realized gains on sales, net of hedging losses:
Fixed maturity securities available-for-sale
Hedging losses on fixed maturity sales
Equity securities available-for-sale
Mortgage loans on real estate
Mortgage loan hedging losses
Real estate
Other
Total realized gains on sales, net of hedging losses
Realized losses on sales, net of hedging gains:
Fixed maturity securities available-for-sale
Hedging gains on fixed maturity sales
Equity securities available-far-sale
Mortgage loans on real estate
Mortgage loan hedging gains
Real estate
Other
Total realized losses on sales, net of hedging gains
Other-than-temporary and other investment impairments:
Fixed maturity securities available-far-sale
Equity securities available-far-sale
Mortgage loans on real estate, including valuation allowance adjustment
Real estate
Total other-than-temporary and other investment impairments
42
The foJlowing table summarizes for the year ended December 31, 2005 the Company's largest aggregate losses on sales and
write-downs by issuer (including affiliates), the related circumstances giving rise to the losses and the circumstances that may
have affected other material investments held:
(in millions)
Fair value
otsale
(........)
YI1>
Iou..
sale
YI1>
write-dowos
December 31,1005
Net
............
Holdingsl pin
A rmjor U.S. airline. Due to a bankruptcy filing during the third quarter of2005, a write-do\\fl and sale of
certainholdingsofthisissuer~oorJ1lIcled8lthattime. S
9.7 $
$
(5.7) $
36.2 $
0.5
An autormtivc supplier which tiled for bankruptcy in 2005. This resulted in a change in sb8Icgy in Mlich all
positions ~ sold and rccognim:I as an itqlaInnent in the fourth qlmter of2005.
5.2
(3.9)
A ITBjor US. airline. Due to a ~ filing during the third quarter of 2005. a write-down and sale of
certain holdings oflhis issuer MIS COfq]Ieted 81 that tim:.
A collateralized debt obligation Experienced significant deteriomtion in the equity price bet\wcn the second
and third quarter of2005. An iJl'fl8innent \WS recognized in the third quarter.
(3.5)
18.0
4.6
(2.5)
5.8
0.1
A coI181cnllized loan obligation. Expected cash 80ws experienced deterioration in the second qmrter of
2005, and the issue was irqJBired to fair value. No further itqBinmlt is nc:ccssaJY.
(1.8)
2.7
Prefcrm:l term sccuitics plIdlascd for the purpose of selling into a securitization An i~ MIS
rccognim:I in the second quarter of200s. No further iJl'fl8innent is necessary.
(1.4)
26.1
1.8
A rcscarch-bascd phamBccutical nandilcturcr. This cotql8ny is recogni7al as a leader in pain mmagemcnt
an:! oontrolled release techoology. Because of n:renI I. stTUggIes and significartly rcduccd revenues. a
sale ofthc positionW&!l n:a1ized ssan i~ loss~thcthirdqUlll1erof2005.
10.9
(1.3)
An autorrotivc corqmy. A sale Or1\\o securities by this issuer WM ~eted in the first qtmter of2005. In
additioo, significant losses in 200S resulted in an iJl1l8innent in the fourth qmrter of2005. The rcnaining
hold~ relale to the financial SCJVices unit. and the Conpmy has the ability and intent to hold these
rcn'Bining sc:cmties to recovery.
7.7
(0.4)
(0.8)
42.6
(0.8)
u.s. ~ securities that ~ sold 81810$5 in 2005. No i~ is nocessaryon therenBining
hol<ting>.
503.4
(8.3)
849.7
55.0
Credit card-blldred securities. A sale of 8 portion of the holding!; ~Ied in 8 loss in the first and fo181h
qUlll1CrS of2005. Expcctcd cash flo\W and filir values of the n:mIini~ holdings are being Irol'Iitorm.
A provider of conrtllllications integndcd circuits 10 the telCCOITIlUlications indusby. A small portion of
these holdings \\en: sold in the third quarter of 2005, and the rcJTBining holdings \\a"C sold in the fo181h
qUllrter of2005.
Total S
I Holding5 represent anmtizcd cost oftixcd rmturity secwitics and cost ofcquity securities as of the date indicalcd.
so. 1
(1.2)
82.3
(0.6)
3.4
590.4
(1.0)
S 00.9) S
(20.9) S 1063.4 S
60.6
No other issuer had aggregate losses on sales and write-downs greater than 2.0% of the Company's total gross losses on sales
and write-downs on fixed maturity and equity securities.
43
I Related Party Transactions
In the nonnal course of business, the Company has entered into many related party transactions. See Note 15 to the audited
consolidated financial statements included in the F pages of this report for descriptions of these transactions.
Contractual Obligations and Commitments
The following table summarizes the Company's contractual obligations and commitments as of December 31, 2005 expected
to be paid in the periods presented. Payment amounts reflect the Company's estimate of undiscounted cash flows related to
these obligations and commitments. Balance sheet amounts were detennined in accordance with GAAP and in many cases
differ significantly from the summation of undiscounted cash flows. The most significant difference relates to future policy
benefits related to life and health insurance, which include discounting.
(in millions)
Less
than 1
year
Debt':
Short-tenn
LoDR-tenn, payable to NFS
Subtotal
$
252.7 $
53.7
306.4
License obligation
7.1
Purchase and lending commitments:
Fixed maturity securities'
Corrmercial mortgage loans'
Limited partnerships'
Subtotal
47.4
259.2
11 \.5
418.1
Future policy benefits and claims 4:
Fixed annuities and fixed option of variable annuities'
Life and health insurance'
Single premium immediate annuities'
Group pension deferred fixed annuities7
FundiDR aweements baclcin~ MINs'"
Subtotal
2,225.9
415.3
225.6
1,372.5
1,505.0
5,744.3
Cash and securities collateral':
Cash collateral on securities lending
Cash collateral on derivative lI1Insactions
Securities collateral on securities lending
Securities collateral on derivative lI1Insactions
Subtotal
1,102.6
203.3
53.2
1,359.1
Payments due by period
More
1-3 3-5 than 5
yean
yean
yean
Total
$ 252.7 $
2,12\.9
2,374.6
5.7
59.0
Amount
per
balance
sheet
242.3
700.0
942.3
13,19\.0
5,878.4
1,779.9
10,847.3
4,244.5
35,941.1
1,102.6
203.3
53.2
1,359.1
Total
$ 7,835.0 $ 9,492.0 $ 6,035.6 $ 29,02\.6 $ 52,384.2 $ 38,242.5
44
$
$
107.4
107.4
107.4
107.4
1,853.4
1,853.4
22.0
24.2
8.3
8.3
3,585.6
768.6
418.6
2,355.8
2,225.7
9,354.3
2,300.9
792.7
369.1
1 ,93 \.5
509.8
5,904.0
6,19\.9
9,992.7
1,834.2
8,846.9
296.8
27,162.5
47.4
267.5
11 \.5
426.4
14,304.3
11,969.3
2,847.5
14,506.7
4,537.3
48,165.1
1,102.6
203.3
53.2
1,359.1
2
3
No contractual provisions exist that could create, increase or accelerate those obligations presented. The amount
presented includes contractual principal payments and interest based on rates in effect at December 31, 2005.
No contractual provisions exist that could create, accelerate or materially increase those obligations presented.
Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the obligations presented
are either date or event specific. The date specific requirement mandates the Company fund a specified amount on a
stated date provided there are no defaults under the agreement. The event specific requirement is such that the Company
is obligated to fund a specified amount of its capital commitment when all of the properties in a fund become fully
stabilized. The ultimate call date of these commitments may extend beyond one year but have been reflected in payments
due in less than one year due to the call features. The Company's capital typically is called within one to four years,
depending on when the events contemplated in the documents transpire.
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 herein represent estimated undiscounted cash flows
out of the Company's general account related to death, surrender, annuity and other benefit payments under policy
contracts in force at December 31, 2005. Separate account payments are not reflected herein due to the matched nature of
these obligations and the fact that the contract owners maintain the investment risk of such deposits. Estimated payment
amounts reported herein were developed based on review of historical results experienced by the Company and the
related contractual provisions. Significant assumptions incorporated in the reported amounts include: future policy lapse
rates (including the impact of customer decisions to make future premium payments to keep the related policies in force),
coverage levels remaining unchanged from those provided under contracts in force at December 31, 2005, future interest
crediting rates, and the estimated timing of payments. Actual amounts will vary, potentially in a significant manner, from
the amounts indicated due to deviations between assumptions and actual results and the addition of new business in future
periods.
Contractual provisions exist which could adjust the amount and/or timing ofthose obligations reported. Key assumptions
related to payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to
and from the fixed and separate accounts of the variable annuities, claim experience with respect to guarantees, and future
interest crediting level. Assumptions for future interest crediting levels have been made based on processes consistent
with the Company's past practices, which is at the discretion of the Company, subject to guaranteed minimum crediting
rates in many cases and/or subject to contractually obligated increases for specified periods of time. Many of the
contracts with potentially accelerated timing of 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 herein include an estimate of those accelerated payments, net of applicable surrender charges. See
Note 2 (g) to the audited consolidated financial statements included in the F pages of this report for a description of the
Company's method for establishing life and annuity reserves in accordance with GAAP. Health reserves represent less
than $0.5 million of the amounts reflected in the table and are reflected in the less than one-year column.
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. The amounts disclosed herein do not include an estimate of
those accelerated payments. Most of the contracts with potentially accelerated timing of 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.
Contractual provisions exist that could increase those obligations presented. In developing the estimates of payments due
by period, the Company followed the process for determining future interest crediting rates as described in note 5 above.
See Part II. Item 7 - MD&A - Ojf-Balance Sheet Transactions for a detailed discussion of the Company's MTN program.
The amounts presented include contractual principal and interest based on rates in effect at December 31, 2005.
Since the timing of the return of collateral is uncertain, these obligations have been reflected in payments due in less than
one year. See Part ll. Item 7 - MD&A - Ojf-Balance Sheet Transactions for a detailed discussion of the impact of
collateral on the Company's balance sheets.
4
,
6
7
8
9
In addition, the Company makes discretionary pension plan and other postretirement benefit plan contributions. See Note 14
to the audited consolidated financial statements included in the F pages of this report for a detailed discussion of plan
contributions.
45
I Off-Balance Sheet Transactions
Under the MTN program, NLlC issues funding agreements to an unconsolidated third party trust to secure notes issued to
investors by the trust. The funding agreements rank pari passu with all other insurance claims of the issuing company in the
event of liquidation and should be treated as "annuities" under applicable Ohio insurance law. Therefore, the funding
agreement obligations are classified as a component of future policy benefits and claims on the consolidated balance sheets.
Because the Company is not the primary beneficiary of, and has no ownership interest in, or control over, the third party trust
that issues the notes, the Company does not include the trust in its consolidated fmancial statements. Since the notes issued
by the trust have a secured interest in the funding agreements issued by the Company, Moody's Investors Service, Inc. and
Standard & Poor's Ratings Services, a division of The McGraw-Hili Companies, Inc., assign the same ratings to the notes and
the insurance financial strength of the Company.
As of December 3 I, 2005 and 2004, the Company had received $1.1 0 billion and $874.2 million, respectively, of cash
collateral on securities lending and $203.3 million and $415.7 million, respectively, of cash for derivative collateral. As of
December 31, 2005, the Company had not received any non-cash collateral on securities lending compared to $191.8 million
received at December 3 I, 2004. Both the cash and non-cash collateral amounts are included in short-term investments with a
corresponding liability recorded in other liabilities. As of December 3 I, 2005 and 2004, the Company had loaned securities
with a fair value of $1.07 billion and $1.04 billion, respectively. The Company also held $53.2 million and $222.5 million of
securities as off-balance sheet collateral on derivative transactions as of December 31,2005 and 2004, respectively.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensilive Financial Instruments
The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well as
variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses
on specific interest rate, foreign currency and equity price risks to which the Company is exposed and describes strategies
used to manage these risks. The discussion is limited to financial instruments subject to market risks and is not intended to be
a complete discussion of all of the risks to which the Company is exposed.
Interest Rate Risk
Fluctuations in interest rates can impact the Company's earnings, cash flows and the fair value of its assets and liabilities. In a
declining interest rate environment, the Company may be required to reinvest the proceeds from maturing and prepaying
investments at rates lower than the overall yield of the portfolio, which could reduce future interest spread income. In
addition, minimum guaranteed crediting rates (ranging from 1.5% to 3.5% for a majority of the individual annuity contracts in
force) on certain individual 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 in the
event market interest rates remain at, or decline further from December 31, 2005 levels. The average crediting rate of fixed
annuity products during 2005 was 3.85% and 4.23% for the Individual Investments and Retirement Plans segments,
respectively (compared to 3.93% and 4.46%, respectively, during 2004), well in excess of the guaranteed rates.
The Company attempts to mitigate this risk by managing the maturity and interest-rate sensitivities of the assets to be
consistent with those of the liabilities. In recent periods, management has taken actions to address low interest rate
environments and the resulting impact on interest spread margins, including reducing commissions on fixed annuity sales,
launching new products with new guaranteed rates, discontinuing the sale of its leading annual reset fixed annuities and
invoking contractual provisions that limit the amount of variable annuity deposits allocated to the guaranteed fixed option. In
addition, the Company adheres to a strict discipline of setting interest crediting rates on new business at levels adequate to
provide returns consistent with management expectations.
46
Conversely, a rising interest rate environment could result in a reduction of interest spread income or an increase in
policyholder surrenders. Existing general account investments supporting annuity liabilities had a weighted average maturity
of approximately 6.0 years as of December 31, 2005. Therefore, the change in yield of the portfolio 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 the Company was unable to fund surrenders with its cash flow from operations, the Company
might need to sell assets, which likely would have declined in value due to the increase in interest rates. The Company
attempts to mitigate this risk by offering products that assess surrender charges and/or market value adjustments at the time of
surrender, and by managing the maturity and interest-rate sensitivities ofthe assets to approximate those ofthe liabilities.
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, including combinations of common and dedicated asset pools, supports each general
account line of business. The common asset pools are generally maintained on the basis of the desired maturity characteristics of
the assets used (e.g., 4 to 7 years average weighted life). The various lines of business are given "ownership" percentages of assets
acquired by the pools depending on their contribution to the amounts purchased in the pools, in a manner analogous to investment
year allocations. This methodology is sometimes referred to as synthetic segmentation. Additionally, dedicated pools of assets
have been created for certain liabilities or groups of liabilities within most lines. These pools consist of whole assets purchased
specifically for the underlying line of business. In general, assets placed in any given portfolio remain there until they mature (or
are called), but active management of specific securities, sectors, and several top down risks may result in portfolio turnover or
transfers among the various portfolios.
Investment strategies are executed by dedicated investment professionals based on the guidance 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 tearns, investment portfolio managers and fmance professionals periodically evaluate how well assets
purchased and the underlying portfolio match the underlying liabilities for each line. Strategy adjustments are made when needed.
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 enough so that
invested assets for each line match its investment needs as closely as possible. The primary objectives are to ensure that each line's
liabilities are invested in accordance with its investment strategy and that over or under investment is minimized.
As part of this process, the investment portfolio managers provide each line's actuaries with forecasts of anticipated rates that the
line's future investments are expected to produce. This information, in combination with yields attributable to the line's current
investments and its investment "rollovers," gives the line actuaries data to use in computing and declaring interest crediting rates
for their lines of business in conjunction with management approval.
There are two approaches to developing investment policies:
· For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the
Company manages risk with a combination cash matching/duration matching strategy. Duration is a measure of the
sensitivity of price to changes in interest rates. For a rate movement of 100 basis points the fair value of liabilities with a
duration of 5 years would change by approximately 5%. For this type of liability, the Company generally targets an
asset!Jiability duration mismatch of -0.25 to -+{).50 years. In addition, the Company attempts to minimize asset and
liability cash flow mismatches, especially over the first five years. However, the desired degree of cash matching is
balanced against the cost of cash matching.
. For liabilities where the Company has the right to modi/)' the credited rate and policyholders also have options, the
Company's risk management process includes modeling both the assets and liabilities over multiple stochastic scenarios.
The Company considers a range of potential policyholder behavior as well as the specific liability crediting strategy. This
analysis, combined with appropriate risk tolerances, drive the Company's investment policy.
47
Use of Derivatives to Manage Interest Rate Risk
The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be
exposed to interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. To mitigate this risk,
the Company enters into various types of derivative instruments to minimize this mismatch, with fluctuations in the fair values
of the derivatives offselling changes in the fair values of the investments resulting from changes in interest rates. The
Company principally uses pay fixed/receive variable interest rate swaps to manage this risk.
Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments. The
fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in the Company receiving the
variable interest payments on the swap, generally 3-month U.S. London Interbank Offered Rate (LlBOR), and the credit
spread on the investment. The net receipt ofa variable rate will then match the variable rate paid on the liability.
As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to
changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to the loans
being funded. To manage this risk, the Company enters into short U.S. Treasury futures during the commitment period. With
short U.S. Treasury futures, if interest rates riselfall, the gainsllosses on the futures will offset the change in fair value of the
commitment attributable to the change in interest rates.
The Company periodically purchases variable rate investments (i.e., commercial mortgage loans and corporate bonds). As a
result, the Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such
variability poses risks to the Company when the assets are funded with fixed rate liabilities. To manage this risk, the
Company may enter into receive fixed/pay variable interest rate swaps.
In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The
variable interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving
the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a fixed rate will then
match the fixed rate paid on the liability.
The Company manages interest rate risk at the segmentleve!. Different segments may simultaneously hedge interest rate risks
associated with owning fixed and variable rate investments considering the risk relevant to a particular segment.
Foreign Currency Risk Management
In conjunction with the Company's MTN program, the Company periodically issues both fixed and variable rate liabilities
denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to
changes in foreign currency exchange rates and related interest rates. To manage these risks, the Company enters into cross-
currency interest rate swaps to convert these liabilities to a U.S. dollar rate.
The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency due to changes
in foreign currency exchange rates and related interest rates. To manage this risk, the Company uses cross-<:urrency interest
rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments. Cross-currency interest rate swaps on
assets are structured to pay a fixed rate, in the foreign currency, and receive a variable U.S. dollar rate, generally 3-month U.S.
LlBOR. These derivative instruments are designated as a fair value hedge of the fixed rate foreign denominated asset.
For a variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign
currency, and pay a variable U.S. dollar rate, generally 3-month u.s. LlBOR. As both sides of the cross-currency interest rate
swap are variable, the derivative instrument is a basis swap. While the receive-side terms of the cross-<:urrency interest rate
swap will line up with the terms of the liability, the Company is not able to match the pay-side terms of the derivative to a
specific asset. Therefore, these derivative instruments do not receive hedge accounting treatment.
Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in the foreign currency,
and receive a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the
foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash
flow hedge.
48
Characteristics of Interest Rate Sensitive Financial Instruments
The table below provides information about the Company's financial instruments as of December 31, 2005 that are sensitive
to changes in interest rates. Insurance contracts that subject the Company to significant mortality risk, including life insurance
contracts and life-contingent immediate annuities, do not meet the defmition of a financial instrument and are not included in
the table.
Estimated year of maturities/repayments 2005 2004
There- Fair Fair
(in millioos) 2006 2007 2008 2009 2010 after Total V.... Value
Assets
Fixed maturity secmities:
Corpomte bonds:
Principal S 1,762.2 S 2,641.8 S 1,986.1 S 1,624.0 S 1,411.6 S 6,666.5 S 16,092.2 S 16,349.7 S 17,566.9
Weighted average interest rate 7.30% 4.14% 4.71% 5.17% 6.64% 6.23% 5.75%
Mortgage and other asset-
backed securities:
Principal S 869.6 S 905.7 S 831.7 $ 729.3 $ 1.009.9 $ 5.165.3 S 9,511.5 S 9,4233 S 8,517.2
Weighted average interest rate 5.44% 5.57% 5.15% 5.37% 5.16% 5.00'10 6.25%
Other fIXed naturity securities:
Principal S 99.0 $ 44.2 $ 63.8 S 87.9 $ 69.3 S 991.0 $ 1,355.2 S 1,425,1 $ 1,567.9
Weighted average interest rate 5.11% 5.31% 5.08% 5.65% 4.53% 5.99% 5.76%
Mortgage 10a0s on "'" estate:
Principal $ 267.1 S 406.5 S 401.9 S 423.5 $ 426.5 $ 5,061.9 $ 6,987.4 S 8,S03.0 S 8,942.7
Weighted avmage interest rate 6.97% 6.41% 5.8?i'/o 6.15% 6.42% 6.22% 6.25%
Uabililics
Individual deferred fixed annuities:
Principal $ 1,391.2 $ 1,209.3 S 823.1 $ 650.0 $ 566.4 $ 2,588.8 $ 7,228.8 S 11,296.6 S 12,247.6
Weighted average crediting rate 3.33% 3.{)9I'1o 3.02% 3.05% 3.10% 3.13%
Group pension deferred fIXed
amuitics:
Principe] $ 1,452.3 S 1,243.7 S 1,068.7 $ 917.8 S 798.4 S 5,366.4 S 10,847.3 S 10,8803 $ 9,814.4
Weighted average crediting rate 3.95% 3.91% 3.87% 3.86% 3.88% 3.91%
Fonding agJOCIIIODts bocking MfNs:
Principal S 1,365.1 $ 1,636.8 $ 490.1 $ S 460.4 $ 292.1 $ 4,244.5 S 3,9983 $ 4,401.6
Weighted average crediting rate 3.77% 3.64% 3.49% 3.80% 2.13%
lnmediale annuities:
Principal $ 230.3 S 202.9 $ 178.5 S 156.3 S 131.4 $ 862.0 $ 1,761.4 S 432.0 $ 407.0
Weighted average cn:diting rate 6.79% 6.82% 6.86% 6.90% 6.95% 7.00%
Short-term debt:
Principal S 242.3 $ S $ $ S $ 242.3 S 2423 S 215.0
Weighted average interest rate 4.30% 4.30%
Long-term debt:
Principal $ S $ S $ $ 700.0 $ 700.0 S 822.8 $ 743.9
Weighted average interest rate 7.67% 7.67%
49
Estimated year of maturities/repayments 2005 2004
There-- Fair Fair
(in millions, except settlement prices) 2006 2007 2008 2009 2010 after Total Valac Value
Derivative FiaaDciallDstrumcau
Interest rate swaps:
Pay fixed/receive variable:
Notional value $ 378.5 $ 316.4 $ 235.3 $ 175.7 $ 264.9 $ 750.5 $ 2,121.3 $ (69,6) $ (167.5)
Weighted average pay rate 4.65% 4.77% 4.51% 4.71% 4.79% 5.29010 4.90%
Weighted average receive rate' 4.41% 4.36% 4.36% 4.40",. 4.41% 4.66% 4.49%
Pay fixed/receive variable,
forward starting:
Notional value $ 7.8 $ $ $ 28.3 $ $ 366.2 $ 402.3 $ (0.2) $ (1.2)
Weighted average pay rate 4.81% 4.790/0 5.01% 4.99%
Weighted average receive rate 4.54% 4.54% 4.54% 4.54%
Pay variable/receive fixed:
Notional value $ 567.7 $ 594.4 $ 228.8 $ $ 5.7 $ 278.5 $ 1,675.1 $ 280.4 $ 585.5
Weighted average pay ratel 4.85% 4.48% 5.06% 5.39% 5.15% 4.80%
Weighted average receive rate 4.23% 4.04% 5.21% 8.52% 6.09% 4.62%
Pay variable/receive variable:
Notional value $ 102.6 $ $ $ $ $ $ 102.6 $ 13.5 $ 93.5
Weighted average pay ratel 4.80% 4.80%
Weighted average receive rate' 4.94% 4.94%
Pay fixed/receive fixed:
Notional value $ 35.1 $ 44.0 $ 16.8 $ 64.1 $ 44.2 $ 116.0 $ 320.2 $ (42.6) $ (87.4)
Weighted average pay rate 4.64% 5.98% 5.83% 5.73% 3.80% 5.79% 5.40%
Weighted average receive rate 3.82% 3.41% 4.04% 4.16% 4.20% 5.73% 4.59%
Convertible asset swaps:
Notional value $ 10.0 $ $ $ $ $ $ 10.0 $ 0,2 $ 2.6
Weighted average pay rate
Weighted average receive rate 4.99010 4.99%
Credit default swaps sold:
Notional value $ 117.0 $ 106.0 $ 115.0 $ 24.5 $ 55.0 $ 26.0 $ 443.5 $ 3.0 $ 7.4
Weighted average receive rate 1.28% 1.01% 0.57% 0.58% 0.73% 1.08% 0.92%
Credit default swaps purchased:
Notional value $ 3.5 $ 2.5 $ 9.5 $ 0.8 $ $ 0.5 $ 16.8 $ $ 4.9
Weighted average pay rate 5.00% 2.00% 1.07% 5.00% 5.00% 2.32%
Total return swaps2:
Notional value $ 75.0 $ $ $ $ $ $ 75.0 $ 0.1 $
Embedded derivatives:
Notional value $ $ $ $ $ $ 20.0 $ 20.0 $ 7.2 $ 10.8
Treasury futures:
Short positions:
Contract amount/notional value $ 4.7 $ $ $ $ $ $ 4.7 $ $ (0.3)
Weighted average settlement price 108.31 108.31
Long positions:
Contract amount/notional value $ 39.7 $ $ $ $ $ $ 39.7 $ 0.3 $ (4.4)
Weighted average senlement price 108.77 108.77
Equity futures:
Short positions:
Contract amount/notional value $ 73.9 $ $ $ $ $ $ 73.9 $ 1.4 $ (1.9)
Weighted average settlement price 1,268.7 1,268.7
Long positions:
Contract amount/notional value $ 2.2 $ $ $ $ $ $ 2.2 $ $
Weighted average settlement price 1,271.4 1.271.4
Option contracts
Long positions:
Contract amount/notional value $ 238.2 $ $ 9.8 $ 65.6 $ 86.3 $ 374.5 $ 774.4 $ 30.8 $ 10.5
Weighted average settlement price 1,192.3 972.7 1.062.2 1.096.6 1,078.4 1,112.7
I Variable rates are generally based on 1,3 or 6-month U.S. LIBOR and reflect the effective rate as of December 31,2005.
2 Total return swaps are based on the Lehman CMBS index.
50
Additional information about the characteristics of the financial instruments and assumptions underlying the data presented in
the table on the proceeding page are as follows:
Mortgage-backed and other asset-backed securities: The year of maturity is determined based on the terms of the securities
and the current rate of prepayment of the underlying pools of mortgages or assets. The Company limits its exposure to
prepayments by purchasing less volatile types of MBS and ABS investments.
Corporate bonds and other fIXed maturity securities and mortgage loans on real estate: The maturity year is that of the
security or loan.
Individual deferred fIXed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into
account actual experience, current interest rates and contract terms. Individual deferred fixed annuities are certain individual
annuity contracts, which are also subject to surrender charges calculated as a percentage of the deposits made and assessed at
declining rates during the first seven years after a deposit is made. Also included in deferred fixed annuities were $6.70
billion of participating group annuity contracts in 2005 ($6.19 billion in 2004). As of December 31, 2005, individual annuity
general account liabilities totaling $5.69 billion were in contracts where the crediting rate is reset periodically with portions
resetting in each calendar quarter ($6.87 billion in 2004), and $936.9 million that reset annually on January I ($990.0 million
in 2004). Individual fixed annuity policy reserves of $3.33 billion were in contracts that adjust the crediting rate every five
years ($3.29 billion in 2004). Individual fixed annuity policy reserves of $926.2 million in 2005 were in contracts that adjust
the crediting rate every three years ($749.9 million in 2004). The average crediting rate is calculated as the difference
between the projected yield of the assets backing the liabilities and a targeted interest spread. However, for certain individual
annuities the credited rate is also adjusted to partially reflect current new money rates.
Group pension deferred fIXed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking
into account actual experience, current interest rates and contract terms. Included were group annuity contracts representing
$10.84 billion and $10.13 billion, respectively, of general account liabilities as of December 31, 2005 and 2004, which are
generally subject to market value adjustment upon surrender and which also may be subject to surrender charges. Of the total
group annuity liabilities in 2005, $9.69 billion were in contracts where the crediting rate is reset quarterly ($8.98 billion in
2004), $616.9 million were in contracts that adjust the crediting rate on an annual basis with portions resetting in each
calendar quarter ($459.8 million in 2004), and $530.3 million were in contracts where the crediting rate is reset annually on
January 1 ($691.1 million in 2004).
Funding agreements backing MTNs: As of December 31, 2005 and 2004, fixed annuity policy reserves of $4.0 billion and
$4.40 billion, respectively, relate to funding agreements issued in conjunction with the Company's MTN program where the
crediting rate is either fixed for the term of the contract or variable, based on an underlying index.
Immediate annuities: Non-life contingent contracts in payout status where the Company has guaranteed periodic payments,
typically monthly, are included. The maturity year is based on the term of the contract.
Short-term debt and long-term debt: The maturity year is the stated maturity date of the obligation.
Derivative financial instruments: The maturity year is based on the term of the related contract. Interest rate swaps include
cross-currency interest rate swaps that eliminate all of the Company's existing asset and liability foreign currency exposure.
Cross-currency interest rate swaps in place against each foreign currency obligation hedge the Company against adverse
currency movements with respect to both period interest payments and principal repayment. Underlying details by currency
have therefore been omitted. Variable swap rates and settlement prices reflect rates and prices in effect as of December 31,
2005.
Equity Market Risk
Asset fees calculated as a percentage of the separate account assets are a significant source of revenue to the Company. As of
December 31, 2005, approximately 83% of separate account assets were invested in equity mutual funds (approximately 82%
as of December 31, 2004). Gains and losses in the equity markets result in corresponding increases and decreases in the
Company's separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the
Company's expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed
contract claims, which also may require the Company to accelerate the amortization of DAC.
51
The Company's long-tenn assumption for net separate account returns is 8% annual growth, earned evenly throughout the
year. If equity markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted
share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than
had the Company's long-tenn assumption for net separate account returns been realized. This analysis assumes no other
factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the
Company would evaluate its DAC balance and underlying assumptions to detennine whether unlocking is appropriate. The
Company can provide no assurance that the experience of flat equity market returns would not result in changes to other
factors affecting profitability, including the possibility of unlocking ofDAC assumptions.
Many of the Company's individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if
the annuitant dies and the contract value is less than a specified amount, which may be based on the 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.
To mitigate this risk, the Company has implemented a GMDB economic hedging program for certain new and existing
business. Prior to implementation of the GMDB hedging program in 2003, the Company managed this risk primarily by
entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the
economic value of the GMDB obligation up to a return of the contractholder's premium payments. However, the first 10% of
GMDB claims are not hedged. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in
the value of the designated obligation. The Company's economic evaluation of the GMDB obligation is not consistent with
current accounting treatment of the GMDB obligation. Therefore, the hedging activity will lead to earnings volatility. This
volatility was negligible in 2005. As of December 31, 2005 and 2004, the net amount at risk was $1.08 billion and $1.71
billion before reinsurance, respectively, and $178.4 million and $296.5 million net of reinsurance, respectively. As of
December 31, 2005 and 2004, the Company's reserve for GMDB claims was $26.9 million and $23.6 million, respectively.
See Note 3 to the audited consolidated financial statements included in the F pages of this report for discussion of the impact
of adopting a new accounting principle regarding GMDB reserves in 2004.
The Company also offers certain variable annuity products with a guaranteed minimum accumulation benefit (GMAB) rider.
A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a
specified period of time (5, 7 or 10 years) selected by the contractholder at the time of issuance of the variable annuity
contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue
the variable annuity contract without the GMAB. The design of the GMAB rider limits the risk to the Company in a variety
of ways including asset allocation requirements, which serve to reduce the Company's potential exposure to underlying fund
perfonnance risks. Specifically, the GMAB tenns limit asset allocation by: (I) requiring partial allocation of assets to a
guaranteed tenn option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to
hedge; or (2) requiring all assets be allocated to one of the approved asset allocation funds or models defined by the Company.
A GMAB represents an embedded derivative in the variable annuity contract that is required to be separated from, and valued
apart from, the host variable annuity contract. The embedded derivative is carried at fair value and reported in other future
policy benefits and claims. The Company initially records an offset to the fair value of the embedded derivative on the
balance sheet, which is amortized through the income statement over the term of the GMAB period of the contract. The fair
value of the GMAB embedded derivative is calculated based on actuarial assumptions related to the projected benefit cash
flows incorporating numerous assumptions including, but not limited to, expectations of contractholder persistency, market
returns, correlations of market returns and market return volatility.
52
The Company began selling contracts with the GM~B feature on May 1,2003. Beginning October I, 2003, the Company
launched an eDbanced version of the rider that offered increased equity exposure to the contractholder in return for a higher
charge. The Company simultaneously began economically hedging the GMAB exposure for those risks that exceed a level it
considered acceptable. The GMAB economic hedge consists of shorting interest rate futures and S&P 500 Index futures
contracts and does not qualify for hedge accounting under current guidance. Upon reaching scale, the Company anticipates
the purchase of S&P 500 Index put options and over-the-counter basket put options, which are constructed in order to
minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) to the audited consolidated fmancial
statements included in the F pages of this report for discussion of economic hedges. The objective of the GMAB economic
hedge strategy is to manage the exposures with risk beyond a level considered acceptable to the Company. The Company is
exposed to equity market risk related to the GMAB feature should the growth in the underlying investments, including any
GTO investment, fail to reach the guaranteed return level. The GMAB embedded derivative will create volatility in earnings;
however, the hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2005 and
2004. As of December 31, 2005 and 2004, the fair value of the GMAB embedded derivative was $67.9 million and $20.6
million, respectively. The increase in the fair value of the GMAB embedded derivative was driven by the value of new
business sold during 2005.
Beginning in March 2005, the Company began offering a hybrid GMAB/guaranteed minimum withdrawal benefit (GMWB)
through its Capital Preservation Plus Lifetime Income contract rider. This living benefit combines a GMAB feature in its first
5-10 years with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of
the insured's life. In the event that the insured's contract value is exhausted through such withdrawals, the Company shall
continue to fund future withdrawals at a pre-defined level until the insured's death. In some cases, the contract owner has the
right to drop the GMWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher level. This
benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset
allocation strategy as previously described above.
Inflation
The rate of inflation did not have a material effect on the revenues or operating results of the Company during 2005, 2004 or
2003.
ITEMS
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 - Exhibits, Financial Statement Schedules for an index to the Company's audited consolidated linancial
statements included in the F pages of this report.
Semi-annual and annual reports are sent to contract owners of the variable annuity and life insurance contracts issued through
registered separate accounts of the Company.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCWSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Eva/uadon of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on such evaluation, such officers have concluded that the Company's disclosure controls and procedures are effective
as of the end of the period covered by this Annual Report.
53
Changes in Internal Control Over Financial Reporting
There have been no changes during the Company's fourth fiscal quarter to its internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
However, effective January I, 2006, the Company commenced using a new accounting system to record, allocate and report
financial transactions related to expenses. In addition, during 2006 the Company plans to implement further changes to
certain components ofthe new accounting and reporting system. This new system will result in certain changes that may have
a material affect on the Company's internal control over financial reporting. The implemented and planned system changes
were undertaken to standardize accounting systems, improve management reporting and consolidate accounting functions for
the Company, its subsidiaries and affiliates, and were not undertaken in response to any actual or perceived significant
deficiencies in the Company's internal control over financial reporting.
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10 DIRECfORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted due to reduced disclosure format.
ITEM II
EXECUTIVE COMPENSATION
Omitted due to reduced disclosure format.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Omitted due to reduced disclosure format.
ITEM IJ CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted due to reduced disclosure format.
54
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for services rendered by KPMG LLP, the Company's independent registered public
accounting firm, for: (I) the audits of the audited consolidated fmancial statements for NFS and its subsidiaries, including
consolidated or individual financial statement audits of other NFS subsidiaries, where appropriate, for each of the years ended
December 31, 2005 and 2004; (2) the reviews of the consolidated fmancial statements included in the Quarterly Reports on
Form 10-Q for NFS and NLlC filed during each year indicated; and (3) fees billed for other services rendered by KPMG LLP.
200S
2004
Audit fees
Audit related fees'
Tax fees'
Total fees
$ 5,341,800
844,353
60,200
$ 6,246,353
$ 5,590,900
925,313
192,945
$ 6,709,158
I Audit related fees were principally for reports on internal controls (Statement on Auditing Standards No. 70, Service
Organizations); financial statement audits of employee benefit plans; consultations with management regarding the
accounting treatment of transactions or potential impact of rulings prescribed by the SEC, F ASB or other accounting
standard setting bodies; and other audit related agreed-upon procedures reports.
, Tax fees were for tax consultation regarding federal tax issues resulting from IRS examinations, assistance with IRS or other
taxing authority audits, and activities such as tax planning and preparing tax returns to be filed with various taxing
authorities.
None of the above fees fall under the de minimis exception to the pre-approval rules.
The NLlC Audit Committee (on behalf of the Company and its subsidiaries) has adopted pre-approval policies and procedures
for services provided by the independent registered public accounting firm. The Audit Committee approves four categories of
services: audit, audit related, tax and non-audit services. Each year the independent registered public accounting firm submits
to the Audit Committee a list of services and a fee is estimated and presented to the Audit Committee for approval. The Audit
Committee pre-approves both the services and the related fees. Requests for the independent registered public accounting firm
to provide any additional services or to increase the budget for approved services during the course of the year must also be
pre-approved by the Audit Committee. Such specific pre-approval may be provided at a meeting of the Audit Committee or
between meetings, as necessary, by the Chairman of the Audit Committee to whom pre-approval has been delegated. The
Chairman is directed to update the full Audit Committee at the next Audit Committee meeting for any interim approvals
granted. The Audit Committee periodically monitors the services rendered by and actual fees paid to the independent
registered public accounting firm to ensure that such services are within the parameters it pre-approved.
55
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Finn F-I
Consolidated Statements ofIncome for the years ended December 31, 2005, 2004 and 2003 F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-3
Consolidated Statements of Shareholder's Equity for the years ended December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedules
Schedule I - Consolidated Summary of Investments - Other Than Investments in Related Parties as of
December 31, 2005 F-54
Schedule III - Supplementary Insurance Information as of December 31, 2005, 2004 and 2003 and for the
years then ended F-55
Schedule IV - Reinsurance as of December 31, 2005, 2004 and 2003 and for the years then ended F-56
Schedule V - Valuation and QualifYing Accounts for the years ended December 31, 2005, 2004 and 2003 F-57
All other schedules are omitted because they are not applicable or not required, or because the required
information has been included in the audited consolidated financial statements or notes thereto.
Exhibit
3.1
10.1
10.2
10.3
10.4
10.5
Exhibit Index
Amended Articles of Incorporation of Nationwide Life Insurance Company, dated February 3,
2000 (previously filed as Exhibit 3.1 to Form IO-K, Commission File Number 2-64559, filed
March 24,2003, and incorporated herein by reference)
3.2
Form of Amended and Restated Code of Regulations of Nationwide Life Insurance Company,
dated May 7, 2002 (previously filed as Exhibit 3.2 to Form 8-K, Commission File Number 2-
64559, filed December 9,2004, and incorporated herein by reference)
Form of Tax Sharing Agreement dated as of October I, 2002 among Nationwide Financial
Services, Inc. and any corporation that may hereafter be a subsidiary of Nationwide Financial
Services, Inc. (previously filed as Exhibit 10.2 to Form IO-K, Commission File Number 1-
12785, filed March 11,2004, and incorporated herein by reference)
Form of Tax Sharing Agreement dated as of October I, 2002 among Nationwide Life Insurance
Company and any corporation that may hereafter be a subsidiary of Nationwide Life Insurance
Company (previously filed as Exhibit 10.2 to Form 10-K, Commission File Number 1-12785,
filed March 11,2004, and incorporated herein by reference)
Form of Amended and Restated Cost Sharing Agreement among parties named therein
(previously filed as Exhibit 10.3 to Form IO-K, Commission File Number 1-12785, filed March
14,2003, and incorporated herein by reference)
Modified Coinsurance Agreement between Nationwide Life Insurance Company and
Nationwide Mutual Insurance Company (previously filed as Exhibit 10.4 to Form S-I,
Registration Number 333-18527, filed March 5, 1997, and incorporated herein by reference)
Five Year Credit Agreement, dated May 17,2004, among Nationwide Financial Services, Inc.,
Nationwide Life Insurance Company, Nationwide Mutual Insurance Company, the banks party
thereto and Bank One, NA, as agent and Citicorp USA, Inc., as syndication agent (previously
filed as Exhibit 10.2 to Form IO-Q, Commission File Number 1-12785, filed August 6, 2004,
and incorporated herein by reference)
56
10.6 364-Day Credit Agreement dated May 17, 2004, among Nationwide Financial Services, Inc.,
Nationwide Life Insurance Company, Nationwide Mutual Insurance Company, the banks party
thereto and Bank One, NA, as agent and Citicorp USA, Inc., as syndication agent (previously
filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed August 6, 2004,
and incorporated herein by reference)
10.7 Form of Lease Agreement between Nationwide Mutual Insurance Company, Nationwide Life
Insurance Company, Nationwide Life and Annuity Insurance Company and Nationwide
Financial Services, Inc. (previously filed as Exhibit 10.7 to Form S-I, Registration Number 333-
18527, filed March 5,1997, and incorporated herein by reference)
10.8. General Description of Nationwide Performance Incentive Plan (previously filed as Exhibit 10.9
to Form IO-K, Commission File Number 1-12785, filed March 29, 2001, and incorporated
herein by reference)
10.9. Form of Amended and Restated Nationwide Office ofInvestments Incentive Plan dated as of
October 7, 2003 (previously filed as Exhibit 10.13 to Form 10-K, Commission File Number 1-
12785, filed March 1,2005, and incorporated herein by reference)
10.10. Nationwide Excess Benefit Plan effective as of January I, 2000 (previously filed as Exhibit
10.14 to Form 10-K, Commission File Number 1-12785, filed March 1,2005, and incorporated
herein by reference)
10.11. Nationwide Supplemental Retirement Plan As Amended and Restated effective January 1,2000
(previously filed as Exhibit 10.1 to Form IO-K, Commission File Number 1-12785, filed March
1,2005, and incorporated herein by reference)
10.12. Nationwide Severance Pay Plan effective as of March 1,2003 (previously filed as Exhibit 10.]6
to Form IO-K, Commission File Number 1-12785, filed March I, 2005, and incorporated herein
by reference)
10.13. Nationwide Supplemental Dermed Contribution Plan effective as of January I, 2005 (previously
filed as Exhibit 10.17 to Form IO-K, Commission File Number 1-12785, filed March I, 2005,
and incorporated herein by reference)
10.14. Nationwide Individual Deferred Compensation Plan effective as of January 1,2005 (previously
filed as Exhibit 10.18 to Form 10-K, Commission File Number 1-12785, filed March 1,2005,
and incorporated herein by reference)
10.15. Nationwide Board of Directors Deferred Compensation Plan effective as of January I, 2005
(previously filed as Exhibit 10.19 to Form 10-K, Commission File Number 1-12785, filed
March ], 2005, and incorporated herein by reference)
10.16 Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide
Life Insurance Company and Nationwide Cash Management Company (previously filed as
Exhibit 10.22 to Form 10-K, Commission File Number 1-12785, filed March II, 2004, and
incorporated herein by reference)
10.17 Master Repurchase Agreement between Nationwide Life Insurance Company, Nationwide Life
and Annuity Insurance Company, and Nationwide Mutual Insurance Company and certain of its
Subsidiaries and affiliates (previously filed as Exhibit 10.20 to Form 10-K, Commission File
Number 1-12785, filed March 29, 2000, and incorporated herein by reference)
10.18. Form of Employment Agreement, dated January I, 2000, between Nationwide Mutual Insurance
Company and Patricia Hatler (previously filed as Exhibit 10.25 to Form IO-Q, Commission File
Number 1-12785, filed August 14,2000, and incorporated herein by reference)
57
10.] 8.1. Amendment of Employment Agreement, effective as of March ], 2005, between Nationwide
Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.28.1 to Form ]0-
K, Commission File Number 1-12785, filed March I, 2005, and incorporated herein by
reference)
10.19. Form of Employment Agreement, dated January I, 2000, between Nationwide Mutual Insurance
Company and Donna James (previously filed as Exhibit 10.27 to Form 10-Q, Commission File
Number 1-12785, filed August ]4,2000, and incorporated herein by reference)
10.19.]. Amendment of Employment Agreement, effective as of March ],2005, between Nationwide
Mutual Insurance Company and Donna James (previously filed as Exhibit 10.30.1 to Form 10-
K, Commission File Number 1-12785, filed March I, 2005, and incorporated herein by
reference)
10.20. Form of Employment Agreement, dated January], 2000, between Nationwide Mutual Insurance
Company and Greg Lashutka (previously filed as Exhibit] 0.28 to Form IO-Q, Commission File
Number 1-12785, filed August ]4,2000, and incorporated herein by reference)
10.20.]. Amendment of Employment Agreement, effective as of March ], 2005, between Nationwide
Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit ]0.31.1 to Form 10-
K, Commission File Number 1-12785, filed March I, 2005, and incorporated herein by
reference)
10.21. Form of Employment Agreement between Nationwide Mutual Insurance Company and Robert
Rosholt (previously filed as Exhibit 10.30 to Form 10-Q, Commission File Number 1-]2785,
filed May 14,2003, and incorporated herein by reference)
10.22. Form of Employment Agreement, dated May 26, 2000, between Nationwide Mutual Insurance
Company and W.G. Jurgensen (previously filed as Exhibit 10.32 to Form ]O-Q, Commission
File Number 1-12785, filed November 13,2000, and incorporated herein by reference)
10.22.1. Amendment of Employment Agreement, effective as of March I, 2005, between Nationwide
Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.34.1 to Form
IO-K, Commission File Number 1-12785, filed March I, 2005, and incorporated herein by
reference)
10.23. Form of Employment Agreement, dated February 25, 2004, between Nationwide Mutual
Insurance Company and Terri L. Hill (previously filed as Exhibit 10.1 to Form 10-Q,
Commission File Number 1-]2785, filed May 7, 2004, and incorporated here by reference)
]0.24. Form of Employment Agreement, dated February 25, 2004, between Nationwide Mutual
Insurance Company and Kathleen D. Ricord (previously filed as Exhibit ]0.2 to Form 10-Q,
Commission File Number 1-12785, filed May 7, 2004, and incorporated here by reference)
10.25. Form of Employment Agreement, dated January 1,2004 and fully executed on April 7, 2004,
between Nationwide Financial Services, Inc. and Mark R. Thresher (previously filed as Exhibit
10.3 to Form 10-Q, Commission File Number 1-]2785, filed August 6, 2004, and incorporated
herein by reference)
]0.26. Offer Letter for Keith Millner dated November 19,2004 (previously filed as Exhibit 10.1 to
Form 8-K, Commission File Number 1-]2785, filed December 3, 2004, and incorporated herein
by reference)
10.27. Form of Employment Agreement, dated June 4, 2001, between Nationwide Mutual Insurance
Company and Michael C. Keller (previously filed as Exhibit] 0.36 to Form 10-Q, Commission
File Number 1-12785, filed August ]0,2001, and incorporated herein by reference)
58
10.27.1* Amendment of Employment Agreement, effective as of March 1,2005, between Nationwide
Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.42.1 to Form
10-K, Commission File Number 1-12785, filed March I, 2005, and incorporated herein by
reference)
10.28* Employment letter agreement between Nationwide Financial Services, Inc. and John Carter
dated October 27, 2005 (previously filed as Exhibit 10.1 Form 10-Q, Commission File Number
1-12785, filed November 3, 2005, and incorporated herein by reference)
10.29* Summary of terms of employment of Timothy G. Frommeyer (previously filed as Exhibit 10.2
to Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and incorporated
herein by reference)
10.30 Form of Employee Leasing Agreement, dated July I, 2000, between Nationwide Mutual
Insurance Company and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.35
to Form IO-Q, Commission File Number 1-12785, filed May 11,2001, and incorporated herein
by reference)
]0.3] Form of Surplus Note, dated December 17,2001, between Nationwide Financial Services, Inc.
and Nationwide Life Insurance Company (previously filed as Exhibit ]0.32 to Form IO-K,
Commission File Number 2-64559, filed March 23, 2003, and incorporated herein by reference)
] 0.32 Form of Surplus Note, dated June 26, 2002, between Nationwide Financial Services, Inc. and
Nationwide Life Insurance Company (previously filed as Exhibit 10.33 to Form 10-K,
Commission File Number 2-64559, filed March 23, 2003, and incorporated herein by reference)
]0.33 Form of Surplus Note, dated December 23,2003, between Nationwide Financial Services, Inc.
and Nationwide Life Insurance Company (previously filed as Exhibit 10.34 to Form 100K,
Commission File Number 2-64559, filed March 11,2004, and incorporated herein by reference)
10.34* Employment Offer Letter Agreement between Nationwide Financial Services, Inc. and Gail
Snyder dated November 28, 2005 (previously filed as Exhibit 10.49 to Form IO-K, Commission
File Number 1-]2785, filed March 1,2006, and incorporated herein by reference)
] 8 Letter regarding change in accounting principle from KPMG LLP (previously filed as Exhibit
]8 to Form IO-Q, Commission File Number 1-]2785, filed November ]2, 2003, and
incorporated herein by reference)
31.1 Certification of W.G. Jurgensen pursuant to ]8 V.S.c. section 1350, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Timothy G. Frommeyer pursuantto 18 V.S.C. section 1350, as adopted pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of W.G. Jurgensen pursuant to ]8 V.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in
accordance with Regulation S-K, Item 60](b)(32Xii) and shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of ] 934 or incorporated by reference into
any document filed under the Securities Act of ]933, except as shall be expressly set forth by
specific reference to such filing)
32.2 Certification of Timothy G. Frommeyer pursuant to ]8 V.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in
accordance with Regulation S-K, Item 60 I (b )(32Xii) and shall note be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into
any document filed under the Securities Act of 1933, except as shall be expressly set forth by
specific reference to such filing)
59
. Management Compensatory Plan
All other exhibits referenced by Item 601 of Regulation S-K are not required under the related instructions or
are inapplicable and therefore have been omitted.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY.
(Registrant)
Date: March I, 2006
By Is! W.G. Jur2ensen
W.G. Jurgensen, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Is! Arden L. Shisler
Arden L. Shisler, Chairman of the Board
February 22, 2006
Date
Is! W.G. Jurgensen
W.G. Jurgensen, Chief Executive Officer
and Director
March 1, 2006
Date
Is! Joseph A. Alutto
Joseph A. Alutto, Director
February 22, 2006 Is! James G. Brocksmith, Jr.
Date James G. Brocksmith, Jr., Director
February 22, 2006
Date
Is! Keith W. Eckel
Keith W. Eckel, Director
February 22, 2006 Is! Lydia M. Marshall
Date Lydia M. Marshall, Director
February 22, 2006
Date
Is! Donald L. McWhorter
Donald L. McWhorter, Director
February 22, 2006 Is! David O. Miller
Date David O. Miller, Director
February 22, 2006
Date
Is! Martha Miller de Lombera
Martha Miller de Lombera, Director
February 22, 2006 Is! James F. Patterson
Date James F. Patterson, Director
February 22, 2006
Date
Is! Gerald D. Prothro
Gerald D. Prothro, Director
February 22, 2006 Is! Alex Shumate
Date Alex Shumate, Director
February 22, 2006
Date
Is! Mark R. Thresher
Mark R. Thresher, President and Chief
Operating Officer
March I, 2006
Date
Is! Timothy G. Frommeyer
Timothy G. Frommeyer, Senior Vice
President - Chief Financial Officer
March I, 2006
Date
61
Exhibit 31.1
CERTtFICA TtON
I, W.O. Jurgensen, certify that:
I. I have reviewed this report on Form 10-K of Nationwide Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officers and 1 are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over fmancial reporting that occurred during the
registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and 1 have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March I, 2006
Is! W.O. Jur~ensen
Name: W.O. Jurgensen
Title: Chief Executive Officer
62
Exhibit 31.2
CERTIFICATION
I, Timothy G. Frommeyer, certify that:
I. I have reviewed this report on Form 10-K of Nationwide Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over fmancial reporting.
Date: March I, 2006
Isl Timothv G. Frommever
Name: Timothy G. Frommeyer
Title: Senior Vice President - Chief Financial Officer
63
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Nationwide Life Insurance Company (the "Company") on Form IO-K for the period ending
December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof(the "Report"), I, W.G. Jurgensen, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ~1350, as adopted pursuant to ~906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge, that:
(I) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result
of operations of the Company.
March I, 2006
Is! W.G. Jureensen
Name: W.G. Jurgensen
Title: Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to Nationwide Life Insurance Company and
will be retained by Nationwide Life Insurance Company and furnished to the Securities and Exchange Commission or its staff upon
request.
64
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.c. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Nationwide Life Insurance Company (the "Company") on Fonn IO-K for the period ending
December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy G.
Frommeyer, Senior Vice President - Chief Financial Officer of the Company, certify, pursuant to 18 V.S.C. ~1350, as adopted
pursuantto ~906 ofthe Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(I) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The infonnation contained in the Report fairly presents, in all material respects, the financial condition and result
of operations of the Company.
March I, 2006
Is! Timothv G. Frommever
Name: Timothy G. Frommeyer
Title: Senior Vice President - Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Nationwide Life Insurance Company and
will be retained by Nationwide Life Insurance Company and furnished to the Securities and Exchange Commission or its staff upon
request.
65
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life Insurance Company and subsidiaries (the
Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we
also have audited the fmaneial statement schedules as listed in the accompanying index. These consolidated fmancial
statements and fmancial statement schedules are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Nationwide Life Insurance Company and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
As discussed in note 3 to the consolidated financial statements, the Company adopted the American Institute of Certified
Public Accountants' Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts andfor Separate Accounts, in 2004.
Isl KPMG LLP
Columbus, Ohio
March I, 2006
F-I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a \\1loIIy-owned subsidiary of Nationwide Financial Servkel, Inc.)
Consolidated Statements of Income
(in lDIJions)
Years ended December 31,
2005 2004 2003
Revenues:
Policy charges $ 1,055.1 $ 1,025.2 $ 924.1
Life insurance premium; 260.0 270.4 279.8
Net investm:nt incorre 2,105.2 2,000.5 1,973.1
Net realized!!flim (losses) on invesbrents, ~ instrurn.ns am
hedged item; 10.6 (36.4) (85.2)
Other 2.2 9.8 12.8
Total revenues 3,433.1 3,269.5 3,104.6
Benefits and expenses:
Interest credited to poliC}holder account values 1,331.0 1,277.2 1,309.2
Other benefits am claim; 377.5 369.2 380.0
PoliC}holder dividends on participating policies 33.1 36.2 41.2
Arrorti2ation of deferred policy acquisition oosts 466.3 410.1 375.9
Interest expense on debt, prirmrily with Nationwide Fina1x:ial SelVioes, Ire. (NFS) 66.3 59.8 48.4
Other~expemes 538.8 582.0 515.5
Total benefits am expemes 2,8l3.0 2,734.5 2,670.2
lncoo1e from continuing operations before federal imm: tax expense 620.1 535.0 434.4
Federal incorre tax expense 95.6 120.0 96.2
lncoo1e from continuing operations 524.5 415.0 338.2
OlmJIative effect of adoption of accounting principles, rel of taxes (3.3) (0.6)
Net incorre $ 524.5 $ 411.7 $ 337.6
See accompanying notes to consolidated fmancial statements, including Note 15 which describes related party transactions.
F-2
NATIONWIDE UFE INSURANCE COMPANY AND SUBSIDlARIFS
(a wholly-owned subsidiary of Nationwide Financial Services, Ine.)
Consolidated Balance Sbeets
(in millions, except per sbare amounts)
December 31,
2005 2004
Assets
Investments:
Secwities available-for-sale, at fitir value:
Fixed maturity secwities (cost $26,958.9 in 2005; $26,708.7 in 2004)
Equity secwities (cost $35.1 in 2005; $37.7 in 2004)
Mortgage loans on real estate, net
Real estate, net
Policy loans
Other long-term investments
Short-term investments, including armwrts lI1lII1lI!led by a related party
Total investments
Cash
Accrued inves1ment income
Deferred policy acquisition costs
Other assets
Assets held in separate accowrts
Total assets
Uabilities and Shareholder's Equity
Liabilities:
Future policy benefits and claims
Short-term debt
Long-term debt, payable to NFS
Other liabilities
Liabilities related to separate accowrts
Total liabilities
$
27,198.1 $ 27,652.0
42.1 48.1
8,458.9 8,649.2
84.9 83.9
604.7 644.5
641.5 539.6
1,596.6 1,645.8
38,626.8 39,263.1
0.9 15.5
344.0 364.2
3,597.9 3,416.6
1,699.1 2,099.8
62,689.8 60.798.7
106.958.5 $ 105.957.9
$
$ 35,941.1 $ 36,383.1
242.3 215.0
700.0 700.0
3,130.1 3,645.2
62,689.8 60,798.7
102,703.3 101,742.0
Shareholder's equity:
Conmon stock, $1 par value; authorized - 5.0 shares; issued
and outstanding - 3.8 shares
Additional paid-in capital
Retained earnings
Accumulated other com>rehensive income
Total shareholder's equity
Total liabilities and shareholder's eauitv
3.8 3.8
274.4 274.4
3,883.4 3,543.9
93.6 393.8
4,255.2 4,215.9
$ 106.958.5 $ 105,957.9
See accompanying notes to consolidated financial statements, including Note 15 which describes related party transactions.
F-3
NATIONWIDE UFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(in miUioos)
Accumlated
Additional other Total
Capital paid-in Retained comprehensive shareholder's
shares capital earnings income equity
Balance as of December 31, 2002 $ 3.8 $ 171.1 $ 2,979.6 $ 394.3 $ 3,548.8
Comprehensive income:
Net income 337.6 337.6
Net unrealized gains on securities available.for-saIe
arising dwing the period, net of taxes 99.6 99.6
Accumulated net losses on cash flow hedges, net
of taxes (26.6) (26.6)
Total comprehensive income 410.6
Capital contributed by NFS 200.2 200.2
Capital returned to NFS (100.0) (100.0)
Dividends to NFS (60.0) (60.0)
Balance as of December 31, 2003 3.8 271.3 3,257.2 467.3 3,999.6
Comprehensive income:
Net income 411.7 411.7
Net unrealized losses on securities available-for-saIe
arising dwing the period, net of taxes (42.7) (42.7)
Accumulated net losses on cash flow hedges, net
of taxes (30.8) (30.8)
Total comprehensive income 338.2
Capital contributed by NFS 3.1 3.1
Dividends to NFS (125.0) (125.0)
Balance as of December 31, 2004 3.8 274.4 3,543.9 393.8 4,215.9
Comprehensive income:
Net income 524.5 524.5
Net unrealized losses on securities available-for-saIe
arising dwing the period, net of taxes (327.3) (327.3)
Accumulated net gains on cash flow hedges, net
of taxes 27.1 27.1
Total comprehensive income 224.3
Dividends to NFS (1S5.0) (185.0)
Balance as of December 31. 2005 $ 3.~ $ 274.4 $ 3-!ll9.4 $ 93.6 $ 4.255.2
See accompanying notes to consolidated financial statements, including Note 15 which describes related party transactions.
F-4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owued subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
Years ended December 31,
2005 2004 2003
Cash flows from operating activities:
Net income $ 524.5 $ 411.7 $ 337.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized (gains) losses on investments, hedging instrwnents and
hedged items (10.6) 36.4 85.2
Interest credited to policyholder account values 1,331.0 1;277.2 1,309.2
Capitalimtion of deferred policy acquisition costs (460.5) (496.4) (567.2)
Amortization of deferred policy acquisition costs 466.3 410.1 375.9
Amortization and depreciation 65.6 73.0 69.3
Decrease (increase) in other assets 591.0 (303.5) (735.9)
(Decrease) increase in policy and other liabilities (511.1) 324.4 342.3
Other, net (114.9) 1.5 45.4
Net cash provided by operatillj( activities 1,881.3 1,734.4 1;261.8
Cash flows from investlllJl activities:
Proceeds from maturity of securities available-for-sale 4,198.5 3,099.4 4,101.6
Prnceeds from sale of securities available-for-sale 2,619.7 2,485.5 2,220.5
Proceeds from repayments of mortgage loam on real estate 2,854.6 1,920.9 1,478.3
Cost of securities available-far-sale acquired (6,924.1) (6,291.4) (9,366.7)
Cost of mortgage loam on real estate originated or acquired (2,524.9) (2,169.9) (1,914.4)
Net decrease (increase) in short-term investmmts 56.9 205.9 (639.9)
Collateral received (paid) - securities lending, net 36.6 89.4 (26.1)
Other, net 121.6 (357.2) 280.3
Net cash provided by (used in) investing activities 438.9 (1,017.4) (3,866.4)
Cash flows from flnancillJl activities:
Net proceeds from issuance of long-term debt to NFS 100.0
Net increase in short-term debt 27.3 15.2 199.8
Capital contributed by NFS 3.1 200.2
Capital retwned to NFS (100.0)
Cash dividends paid to NFS (185.0) (125.0) (60.0)
Investment and universal life insurance product deposits 2,845.4 3,561.6 5,116.1
Investment and universal life insurance product withdrawals (5,022.5) (4,156.5) (2,852.3)
Net cash (used in) provided by financing activities (2.334.8) (701.6) 2,603.8
Net (decrease) increase in cash (14.6) 15.4 (0.8)
Cash, beJ!innj1lj( of period 15.5 0.1 0.9
Cash. end ofoeriod $ 0.9 $ 15.5 $ 0.1
See accompanying notes to consolidated financial statements, including Note IS which describes related party transactions.
F-5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(I) Organization and Description of Business
Nationwide Life Insurance Company (NLIC, or collectively with its subsidiaries, the Company) was incorporated in
1929 and is an Ohio stock legal reserve 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 ofNLIC's common stock are owned by Nationwide Financial Services, Inc. (NFS), a holding
company fonned by Nationwide Corporation (Nationwide Corp.), a majority-owned subsidiary ofNMIC.
Wholly-owned subsidiaries of NLIC as of December 31, 2005 include Nationwide Life and Annuity Insurance Company
(NLAIC) and Nationwide Investment Services Corporation (NISC). NLAIC offers universal life insurance, variable
universal life insurance, corporate-owned life insurance (COLI) and individual annuity contracts on a non-participating
basis. NISC is a registered broker/dealer.
The Company is a leading provider oflong-tenn savings and retirement products in the United States of America (U.S.).
The Company develops and sells a diverse range of products including individual annuities, private and public group
retirement plans, other investment products sold to institutions, life insurance and advisory services. The Company sells
its products through a diverse distribution network. Unaffiliated entities that sell the Company's products to their own
customer bases include independent broker/dealers, fmancial institutions, wirehouse and regional finns, pension plan
administrators, and life insurance specialists. Representatives of affiliates who market products directly to a customer
base include Nationwide Retirement Solutions, Inc. (NRS), Nationwide Financial Network (NFN) producers and TBG
Insurance Services Corporation (TBG Financial). The Company also distributes products through the agency
distribution force of its ultimate majority parent company, NMIC.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed by the Company that materially affect financial reporting are summarized
below. The accompanying consolidated fmancial statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP).
The preparation of financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from
those estimates.
The most significant estimates include those used to detennine the following: the balance, recoverability and
amortization of deferred policy acquisition (DAC) for investment products and universal life insurance products;
impairment losses on investments; valuation allowances for mortgage loans on real estate; federal income tax provisions;
the liability for future policy benefits; and pension and other postretirement employee benefits. Although some
variability is inherent in these estimates, the recorded amounts reflect management's best estimates based on facts and
circumstances as of the balance sheet date. Management believes the amounts provided are appropriate.
(a) Consolidation Policy
The consolidated financial statements include the accounts ofNLIC and companies in which NLIC directly or indirectly
has a controlling financial interest. Effective December 31, 2003, the Company applied the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51 (FIN 46R), to those variable interest entities (VIEs) with which it is
associated. As a result, the Company deconsolidated certain VIEs which previously were consolidated, as of that date.
Minority interest expense is included in other operating expenses in the consolidated statements of income, and minority
interest is included in other liabilities on the consolidated balance sheets. All significant intercompany balances and
transactions have been eliminated.
F-6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 200S, 2004 and 2003
(b) Valuation of Investments, Investment Income and Related Gains and Losses
I
I
~
The Company is required to classifY its fixed maturity securities and marketable equity securities as held-to-maturity,
available-far-sale or trading. All fixed maturity and marketable equity securities are classified as available-far-sale.
Available-far-sale securities are stated at fair value, with the unrealized gains and losses, net of adjustments to DAC, future
policy benefits and claims, and deferred federal income taxes reported as a separate component of accumulated other
comprehensive income (AOCI) in shareholder's equity. The adjustment to DAC represents the changes in amortization of
DAC that would have been required as a charge or credit to operations had such unrealized amounts been realized and
allocated to the product lines. The adjustment to future policy benefits and claims represents the increase in policy reserves
from using a discount rate that would have been required had such unrealized amounts been realized and the proceeds
reinvested at then current market interest rates, which were lower than the then current effective portfolio rate.
The fair value of fixed maturity and marketable equity securities is generally obtained from independent pricing services
based on market quotations. For fixed maturity securities not priced by independent services (generally private placement
securities and securities that do not trade regularly), an internally developed pricing model or "corporate pricing matrix" is
most often used. The corporate pricing matrix is developed by obtaining spreads versus the U.S. Treasury yield for corporate
securities with varying weighted average lives and bond ratings. The weighted average life and bond rating of a particular
fixed maturity security to be priced using the corporate matrix are important inputs into the model and are used to determine a
corresponding spread that is added to the 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 fixed maturity security.
Additionally, for valuing certain fixed maturity securities with complex cash flows such as certain mortgage-backed and asset-
backed securities, a "structured product model" is used. The structured product model uses third party pricing tools. For
securities for which quoted market prices are not available and for which the Company's structured product model is not
suitable for estimating fair values, fair values are determined using other modeling techniques, primarily a commercial
software application utilized in valuing complex securitized investments with variable cash flows. As of December 31, 2005,
72% of the fair values affixed maturity securities were obtained from independent pricing services, 20% from the Company's
pricing matrices and 8% from other sources compared to 70%, 21 % and 9%, respectively, in 2004.
Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity
of recording impairment losses for other-than-temporary declines in the fair value of investments.
Under the Company's accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise
settled in a way that may limit the Company's ability to fully recover cost, an impairment is deemed to be other-than-
temporary unless the Company has both the ability and intent to hold the investment until the security's forecasted recovery
and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities
management estimates cash flows over the life of purchased beneficial interests in securitized fmancial assets. If management
estimates that the fair value of its beneficial interest is not greater than or equal to its carrying value based on current
information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate
(considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the
purchased beneficial interest to fair value.
For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have the ability
and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all
amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not
limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length
of time a security's fair value has been below cost or amortized cost; specific credit issues and financial prospects related to
the issuer; management's intent to hold or dispose of the security; and current economic conditions.
Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.
Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.
F-7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31,2005,2004 and 2003
For mortgage-backed securities, the Company recognizes income using a constant effective yield method based on
prepayment assumptions and the estimated economic life of the securities. When estimated prepayments differ significantly
from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future
payments. Any resulting adjustment is included in net investment income. All other investment income is recorded using the
interest-method without anticipating the impact of prepayments.
The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio
managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
When management determines that a loan is impaired, a provision for loss is established equal to the difference between the
carrying value and the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair
value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the
Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date,
but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on
investments, hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received
on non-accrual status mortgage loans on real estate is included in net investment income in the period received.
The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by management
and reflects management's best estimate of probable credit losses, including losses incurred at the balance sheet date but not
yet identified by specific loan. Management's periodic evaluation of the adequacy of the allowance for losses is based on past
loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and
other relevant factors.
Real estate is carried at cost less accumulated depreciation. Real estate designated as held for disposal is carried at the lower
of the carrying value at the time of such designation or fair value less cost to sell. Other long-term investments are carried on
the equity method of accounting.
Realized gains and losses on the sale of investments are determined on the basis of specific security identification. Changes in
the Company's mortgage loan valuation allowance and recognition of impairment losses for other-than-temporary declines in
the fair values of applicable investments are included in realized gains and losses on investments, hedging instruments and
hedged items.
(c) Derivative Instruments
Derivatives are carried at fair value. On the date the derivative contract is entered into, the Company designates the derivative
as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge); a
hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability
(cash flow hedge); a foreign currency fair value or cash flow hedge (foreign currency hedge); or a non-hedge transaction. The
Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-
management objective and strategy for entering into various hedge transactions. This process includes linking all derivatives
that are designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or
to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used for hedging transactions are expected to be and, for ongoing
hedging relationships, have been highly effective in offsetting changes in fair values or cash flows of hedged items. When it
is determined that a derivative is not, or is not expected to be, highly effective as a hedge or that it has ceased to be a highly
effective hedge, the Company discontinues hedge accounting prospectively.
F-8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31,2005,2004 and 2003
The Company enters into interest rate swaps, cross-currency swaps or Euro futures to hedge the fair value of existing fixed
rate assets and liabilities. In addition, the Company uses short U.S. Treasury future positions to hedge the fair value ofbond
and mortgage loan commitments. Typically, the Company is hedging the risk of changes in fair value attributable to changes
in benchmark interest rates. Derivative instruments classified as fair value hedges are carried at fair value, with changes in
fair value recorded in realized gains and losses on investments, hedging instruments and hedged items. Changes in the fair
value of the hedged item that are attributable to the risk being hedged are also recorded in realized gains and losses on
investments, hedging instruments and hedged items.
The Company may enter into "receive fixed/pay variable" interest rate swaps to hedge existing variable rate assets or to hedge
cash flows from the anticipated purchase of investments. These derivative instruments are identified as cash flow hedges and
are carried at fair value with the offset recorded in AOCI to the extent the hedging relationship is effective. The ineffective
portion of the hedging relationship is recorded in realized gains and losses on investments, hedging instruments and hedged
items. Gains and losses on derivative instruments that are initially recorded in AOCI are reclassified out of AOCl and
recognized in earnings over the same period(s) that the hedged item affects earnings.
Accrued interest receivable or payable under interest rate and foreign currency swaps are recognized as an adjustment to net
investment income or interest credited to policyholder account values consistent with the nature of the hedged item, except for
interest rate swaps hedging the anticipated sale of investments where amounts receivable or payable under the swaps are
recorded as realized gains and losses on investments, hedging instruments and hedged items, and except for interest rate swaps
hedging the anticipated purchase of investments where amounts receivable or payable under the swaps are initially recorded in
AOCI to the extent the hedging relationship is effective.
The Company periodically may enter into a derivative transaction that will not qualify for hedge accounting. The Company
does not enter into speculative positions. Although these transactions do not qualify for hedge accounting, or have not been
designated in hedging relationships by the Company, they provide the Company with an economic hedge, which is used as
part of its overall risk management strategy. For example, the Company may sell credit default protection through a credit
default swap. Although the credit default swap may not be effective in hedging specific investments, the income stream
allows the Company to manage overall investment yields while exposing the Company to acceptable credit risk. The
Company may enter into a cross-currency basis swap (pay a variable U.S. rate and receive a variable foreign-denominated
rate) to eliminate the foreign currency exposure of a variable rate foreign-denominated liability. Although basis swaps may
qualify for hedge accounting, the Company has chosen not to designate these derivatives as hedging instruments due to the
difficulty in assessing and monitoring effectiveness for both sides of the basis swap. Derivative instruments that do not
qualify for hedge accounting or are not designated as hedging instruments are carried at fair value, with changes in fair value
recorded in realized gains and losses on investments, hedging instruments and hedged items.
(d) Revenues and Benefits
Investment Products and Universal Life Insurance Products: Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life
insurance, corporate-owned life insurance (COLI), bank-owned life insurance (BOLl) and other interest-sensitive life
insurance policies. Revenues for investment products and universal life insurance products consist of net investment income,
asset fees, cost of insurance charges, administrative fees and surrender charges that have been earned and assessed against
policy account balances during the period. The timing of revenue recognition as it relates to fees assessed on investment
contracts and universal life contracts is determined based on the nature of such fees. Asset fees, cost of insurance charges and
administrative fees are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Certain
amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue
and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract in
accordance with contractual terms. Policy benefits and claims that are charged to expense include interest credited to policy
account values and benefits and claims incurred in the period in excess of related policy account values.
F-9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31,2005,2004 and 2003
Traditional Life Insurance Products: Traditional life insurance products include those products with fixed and guaranteed
premiums and benefits and primarily consist of whole life insurance, limited-payment life insurance, tenn life insurance and
certain annuities with life contingencies. Premiums for traditional life insurance products are recognized as revenue when
due. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contract.
This association is accomplished by the provision for future policy benefits and the deferral and amortization of policy
acquisition costs.
(eJ Deferred Policy Acquisition Costs for Investment Products and Universal Life Insurance Products
The Company has deferred the costs of acquiring investment products and universal life insurance products business,
principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses
that relate to and vary with the production of new and renewal business. Investment products primarily consist of individual
and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable
universal life insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing at
the time of policy issuance and loss recognition testing at the end of each reporting period.
For investment products (principally individual and group annuities) and universal life insurance products, DAC is being
amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected
interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized gains and losses
less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life
insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-
sale, as described in Note 2(b).
The most significant assumptions that are involved in the estimation of future gross profits include future net separate account
perfonnance, surrender/lapse rates, interest margins and mortality. The Company's long-tenn assumption for net separate
account perfonnance is currently 8% growth per year. If actual net separate account perfonnance varies from the 8%
assumption, the Company assumes different perfonnance levels over the next three years such that the mean return equals the
long-tenn assumption. This process is referred to as a reversion to the mean. The assumed net separate account return
assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the
S&P 500 Index, and as part of its pre-set parameters, the Company's reversion to the mean process generally limits returns to
0- I 5% during the three-year reversion period.
Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal
life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or
assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense (referred to
as DAC unlocking), which could be significant. In general, increases in the estimated general and separate account returns
result in increased expected future profitability and may lower the rate of DAC amortization, while increases in
lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase
the rate of DAC amortization.
Management evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These
parameters are designed to appropriately reflect the Company's long-tenn expectations with respect to individual variable
annuity contracts while also evaluating the potential impact of short-tenn experience on the Company's recorded individual
variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters
for a prescribed period of time, or if the recorded balance falls outside of these parameters and management detennines it is
not reasonably possible to get back within the parameters during this period of time, assumptions are required to be unlocked
and DAC is recalculated using revised best estimate assumptions. Otherwise, DAC is not unlocked to reflect updated
assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean
process.
F-IO
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a whoJly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 200S, 2004 and 2003
For other investment products and universal life insurance products, DAC is adjusted each quarter to reflect revised best
estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net
separate account performance. Any resulting DAC unlocking adjustments are reflected currently in the consolidated
statements of income.
(f) Separate Accaunts
Separate account assets and liabilities represent contractholders' funds, which have been segregated into accounts with
specific investment objectives. Separate account assets are recorded at fair value based primarily on market quotations of the
underlying securities. The investment income and gains or losses of these accounts accrue directly to the contractholders.
The activity of the separate accounts is not reflected in the consolidated statements of income except for: (I) the fees the
Company receives, which are assessed on a daily or monthly basis and recognized as revenue when assessed and earned; and
(2) the activity related to guaranteed minimum death benefit (GMDB) and guaranteed minimum income benefit (GMIB)
contracts, which are riders to existing variable annuity contracts.
(g) Future Policy Benefits
The process of calculating reserve amounts for 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 relative incidence of death in
a given time), morbidity (the relative incidence of disability resulting from disease or physical impairment) and interest rates
(the rates expected to be paid or received on financial instruments, including insurance or investment contracts).
The Company calculates its liability for future policy benefits for investment products in the accumulation phase and universal
life and variable universal life insurance policies as the policy account balance, which represents participants' net premiums
and deposits plus investment performance and interest credited less applicable contract charges.
The Company's liability for funding agreements to an unrelated third party trust equals the balance that accrues to the benefit
of the contractholder, including interest credited. The funding agreements constitute insurance obligations considered annuity
contracts under Ohio insurance laws.
The liability for future policy benefits for traditional life insurance policies has been calculated by the net level premium
method using interest rates varying from 5.4% to 6.0% and estimates of mortality, morbidity, investment yields and
withdrawals that were used or being experienced at the time the policies were issued.
The liability for future policy benefits for payout annuities has been calculated using the present value of future benefits and
maintenance costs discounted using interest rates varying from 3.0% to 13.0"10. Also, as of December 31, 2005 and 2004, the
calculated reserve was adjusted to reflect the incremental reserve that would be required if unrealized gains and losses had
been realized and the proceeds reinvested at lower rates, which would have resulted in the use of a lower discount rate, as
discussed in Note 2(b).
(h) Participating Business
Participating business represented approximately 10% in 2005 (11% in 2004 and 13% in 2003) of the Company's life
insurance in force, 52% of the number of life insurance policies in force in 2005 (55% in 2004 and 56% in 2003) and 5% of
life insurance statutory premiums in 2005 (7% in 2004 and 11% in 2003). The provision for policyholder dividends was
based on then current dividend scales and has been included in future policy benefits and claims in the consolidated balance
sheets.
F-Il
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wbolly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
(i) Federal Income Taxes
The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. loberent 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 tbe ultimate deductibility of certain items or tbe realization of certain tax credits differs from
estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the
consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated
statements of income. Management has used best estimates to establish reserves based on current facts and circumstances
regarding tax exposure items where the ultimate deductibility is open to interpretation. Quarterly, management evaluates the
appropriateness of such reserves based on any new developments specific to their fact patterns. Information considered
includes results of completed tax examinations, Technical Advice Memorandums and other rulings issued by the Internal
Revenue Service or the tax courts.
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the fmancial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will
not be fully realized.
(j) Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits and claims incurred are deducted from the respective
income and expense accounts. Assets and liabilities related to reinsurance ceded are reported in the consolidated balance
sheets on a gross basis, separately from the related balances of the Company.
(k) Reclassification
Certain items in the 2004 and 2003 consolidated fmancial statements and related notes have been reclassified to conform to
the current presentation.
(3) Recently Issued Accounting Standards
On February 16,2006, the FASB issued SFAS No. 155, Accountingfor Certain Hybrid Financial Instruments (SFAS 155).
SFAS 155 amends SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities (SFAS 133), and SFAS No.
140, Accountingfor Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SF AS 140). SFAS 155
also resolves issues addressed in SFAS 133 Implementation Issue No. 01, Application of Statement /33 to Beneficial Interests
in Securitized Financial Assets. The following is a summary of SF AS No. 155: (I) permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (2) clarifies which
interest-only strips and principal-only strips are not subject to the requirements of SF AS 133; (3) establishes a requirement to
evaluate interests in securitized fmancial assets to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives; (5) amends SFAS 140 to eliminate the prohibition on a qualifying
special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SF AS 155 is effective for all fmancial instruments acquired or issued after the beginning of
an entity's first fiscal year that begins after September IS, 2006. Earlier adoption is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim
period for that fiscal year. Provisions of SF AS 155 may be applied to instruments that an entity holds at the date of adoption
on an instrument-by-instrument basis. Although the Company is currently unable to quantify the impact of adoption, SF AS
155 could have a material impact on the Company's financial position and/or results of operations once adopted.
F-12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05- I provides guidance on accounting
by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other
than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-
Duration Contracts and for Realized Gains and Losses from the Sale of Investments, issued by the F ASB. SOP 05-1 defmes
an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a
contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage
within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15,
2006, with earlier adoption encouraged. Retrospective application of SOP 05-1 to previously issued financial statements is
not permitted. Initial application of SOP 05-1 should be as of the beginning of an entity's fiscal year. The Company will
adopt SOP 05-1 effective January I, 2007. Although the Company is currently unable to quantify the impact of adoption,
SOP 05-1 could have a material impact on the Company's financial position and/or results of operations once adopted.
In May 2005, the F ASB issued Statement of Financial Accounting Standards (SF AS) No. 154, Accounting Changes and Error
Corrections (SF AS 154), which replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changes (APB 20),
and SF AS No.3, Reporting Accounting Changes in Interim Financial Statements. SF AS 154 applies to all voluntary changes
in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SF AS 154 requires retrospective application of changes in
accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, SF AS 154 requires that the new accounting principle be
applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than
being reported on the income statement. When it is impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, SF AS 154 requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. SF AS 154 carries forward without change the guidance contained in APB 20
for reporting the correction of an error in previously issued fmancial statements and a change in accounting estimate and
justifying a change in accounting principle on the basis of preferability. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December IS, 2005, with earlier adoption permitted. The Company will
adopt SF AS 154 effective January I, 2006. SF AS 154 is not expected to have any impact on the Company's financial position or
results of operations upon adoption.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on further guidance concerning the identification
of and accounting for other-than-temporary impairments and disclosures for cost method investments, as required by EITF
Issue No. 03-1, The Meaning of Other. Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1),
which was issued on October 23,2003. The Company began applying this additional guidance beginning July 1,2004. Also,
effective June 30, 2004, the Company revised its method of evaluating securities to be sold based on additional interpretation
of the intent to hold criteria in EITF 03-1. This revision had no impact on the Company's financial position or results of
operations.
On September 8, 2004, the F ASB issued for comment F ASB Staff Position (FSP) EITF Issue 03-I-a, which was intended to
provide guidance related to the application of paragraph 16 of EITF 03- I, and proposed FSP EITF Issue 03- I -b, which
proposed a delay in the effective date of EITF 03-1 for debt securities that are impaired because of interest rate and/or sector
spread increases. Based on comments received on these proposals, on September 30, 2004 the F ASB issued FSP EITF 03- I-
I, Effective Date of Paragraphs 10-20 ofEITF Issue No. 03-1, which delayed the effectiveness of the guidance in EITF 03-1
in its entirety, with the exception of certain disclosure requirements. The delay had no impact on the Company's financial
position or results of operations.
F-B
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 200S, 2004 and 2003
At its June 29, 2005 meeting, the F ASB decided not to provide additional guidance on the meaning of other-than-temporary
impairment. Instead, the F ASB decided to issue proposed FSP EITF 03-I-a, Implementation Guidance for the Application of
Paragraph 16 ofEITF Issue No. 03-1, as final. The final FSP supersedes EITF 03-1 and EITF Topic No. 0-44, Recognition
of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value (EITF Topic 0-
44). The final FSP, retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (FSP F AS 115-1), was issued on November 3, 2005 and replaces the guidance set forth in paragraphs 10-
18 ofEITF 03-1 with references to existing other-than-temporary impairment guidance. FSP F AS I 15-1 codifies the guidance
set forth in EITF Topic 0-44 and clarifies that an investor should recognize an impairment loss no later than when the
impairment is deemed other-than-temporary, even if a decision to sell has not been made. At its September 14,2005 meeting,
the F ASB decided that FSP F AS 115-1 would be applied prospectively effective for periods beginning after December IS,
2005. FSP FAS 115-1 does not address when a debt security should be designated as nonaccrual or how to subsequently
report income on a nonaccrual debt security. The Company continues to actively monitor its portfolio for any securities
deemed to be other-than-temporarily impaired based on the guidance in SFAS No. I IS, Accountingfor Certain Investments in
Debt and Equity Securities, and United States Securities and Exchange Commission Staff Accounting Bulletin No. 59,
Accountingfor Noncurrent Marketable Equity Securities, which is expected to be the guidance referenced in FSP FAS 115-1.
Because the Company's existing policies are consistent with the guidance in FSP FAS I IS-I, the adoption ofFSP FAS 115-1
had no impact on the Company's fmancial position or results of operations.
In July 2003, the AICPA issued Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1) to address many topics. The most
significant topic affecting the Company was the accounting for contracts with GMOB. SOP 03- I requires companies to
evaluate the significance of a GMOB to determine whether a contract should be accounted for as an investment or insurance
contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a
portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods.
The Company adopted SOP 03-1 effective January I, 2004, which resulted in a $3.3 million charge, net of taxes, as the
cumulative effect of adoption of this accounting principle.
The following table summarizes the components of cumulative effect adjustments recorded in the Company's 2004
consolidated statements of income:
(in millions)
Januarv 1. 2004
Increase in future policy benefits:
Ratchet interest crediting
Secondary guarantees - life insurance
GMDB claim reserves
GMIB claim reserves
Subtotal
Adjustment to amortization of deferred policy acquisition costs related to above
Deferred federal income taxes
Cumulative effect of adOPtion of accountiruz orinciole. net of taxes
$
(12.3)
(2.4)
(1.8)
(1.0)
(17.5)
12.4
1.8
(3.3)
$
F-14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
(4) Risk Disclosures
The following is a description of the most significant risks facing the Company and how it attempts to mitigate those risks:
Credit Risk: This is the risk that issuers of securities, mortgagees on real estate mortgage loans or other parties, including
reinsurers and derivatives counterparties, default on their contractual obligations. The Company attempts to mitigate this risk
by adhering to investment policies that provide portfolio diversification on an asset class, creditor and industry basis, and by
complying with investment limitations governed by state insurance laws and regulations, as applicable. The Company
actively monitors and manages exposures, including restructuring, reducing or liquidating investments; determines whether
any securities are impaired or loans are deemed uncollectible; and takes charges in the period such assessments are made. The
ratings of reinsurers who owe the Company money are regularly monitored along with outstanding balances as part of the
Company's reinsurance collection process, with timely follow-up on delayed payments. The aggregate credit risk taken in the
investment portfolio is influenced by management's risk/return preferences, the economic and credit environment, the
relationship of credit risk in the asset portfolio to other business risks that the Company is exposed to, and the Company's
current and expected future capital position.
Interest Rate Risk: This is the risk that interest rates will change and cause a decrease in the value of an insurer's investments
relative to the value of its liabilities, and/or an unfavorable change in prepayment activity, resulting in compressed interest
margins. For example, if liabilities come due more quickly than assets mature, an insurer could potentially have to borrow
funds or sell assets prior to maturity and potentially recognize a gain or loss. In some investments that contain borrower
options, this risk may be realized through unfavorable cash flow patterns, such as increased principal repayment when interest
rates have declined. When unfavorable interest rate movements occur, interest margins may compress, reducing profitability.
The Company attempts to mitigate this risk by offering products that transfer this risk to the purchaser and/or by attempting to
approximately match the maturity schedule of its assets with the expected payouts of its liabilities, both at inception and on an
ongoing basis. In some investments that permit prepayment at the borrower option, make-whole provisions are required such
that if the borrower prepays in a lower-rate environment, the Company may be compensated for the loss of future income. In
other situations, the Company accepts some interest rate risk in exchange for a higher yield on the investment.
Legal/Regu/atory Risk: This is the risk that changes in the legal or regulatory environment in which an insurer operates will
result in increased competition, reduced demand for a company's products, or additional expenses not anticipated by the
insurer in pricing its products. The Company attempts to mitigate this risk by offering a wide range of products and by
operating throughout the U.s., thus reducing its exposure to any single product or jurisdiction, and also by employing
practices that identify and minimize the adverse impact of this risk.
Ratings Risk: This is the risk that rating agencies change their outlook or rating of the Company or a subsidiary of the
Company. The rating agencies generally utilize proprietary capital adequacy models in the process of establishing ratings for
the Company and certain subsidiaries. The Company is at risk to changes in these models and the impact that changes in the
underlying business in which it is engaged in can have on such models. To help mitigate this risk, the Company maintains
regular communications with the rating agencies evaluates the impact of significant transactions on such capital adequacy
models and considers the same in the design of transactions to minimize the adverse impact of this risk.
Finaneia/lnstruments with Off-Ba/anee Sheet Risk: The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business through management of its investment portfolio. These financial instruments include
commitments to extend credit in the form of loans. These instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized in the consolidated balance sheets.
F-15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned suhsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 200S, 2004 and 2003
Commitments to fund fixed rate mortgage loans on real estate are agreements to lend to a borrower and are subject to
conditions established in the underlying contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a deposit. Commitments extended by the Company are based on management's case-by-
case credit evaluation of the borrower and the borrower's loan collateral. The underlying mortgaged property represents the
collateral if the commitment is funded. The Company's policy for new mortgage loans on real estate is generally to lend no
more than 80% of collateral value. Should the commitment be funded, the Company's exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amounts of these commitments less the net realizable value
of the collateral. The contractual amounts also represent the cash requirements for all unfunded commitments. Commitments
on mortgage loans on real estate of $267.5 million extending into 2006 were outstanding as of December 31, 2005 compared
to $243.7 million extending into 2005 as of December 31, 2004. The Company also had $47.4 million and $68.1 million of
commitments to purchase fixed maturity securities outstanding as of December 31, 2005 and 2004, respectively
Notional amounts of derivative financial instruments, primarily interest rate swaps, interest rate futures contracts and foreign
currency swaps, significantly exceed the credit risk associated with these instruments and represent contractual balances on
which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of
positions that have become favorable to the Company, including accrued interest receivable due from counterparties. The
Company attempts to minimize potential credit losses through careful evaluation of counterparty credit standing, selection of
counterparties from a limited group of high quality institutions, collateral agreements and other contract provisions. Any
exposures related to derivative activity are aggregated with other credit exposures between the Company and the derivative
counterparty to assess adherence to established credit limits. As of December 31, 2005, the Company's credit risk from these
derivative financial instruments was $63.5 million, net of $203.3 million of cash collateral and $53.2 million in securities
pledged as collateral compared to $46.3 million, $415.7 million and $222.5 million, respectively, as of December 31,2004.
Equity Market Risk: Asset fees calculated as a percentage of the separate account assets are a significant source of revenue to
the Company. As of December 31, 2005, approximately 83% of separate account assets were invested in equity mutual funds
(approximately 82% as of December 31, 2004). Gains and losses in the equity markets result in corresponding increases and
decreases in the Company's separate account assets and asset fee revenue. In addition, a decrease in separate account assets
may decrease the Company's expectations of future profit margins due to a decrease in asset fee revenue andlor an increase in
guaranteed contract claims, which may require the Company to accelerate the amortization ofDAC.
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 the premiums paid less
amounts withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value
to fall below this specified amount, which varies from contract to contract based on the date the contract was entered into as
well as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value.
This could result in additional GMDB claims.
In an effort to mitigate this risk, the Company has implemented a GMDB economic hedging program for certain new and
existing business. Prior to implementation of the GMDB hedging program in 2003, the Company managed this risk primarily
by entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the
economic value of the GMDB obligation up to a return of the contractholder's premium payments. However, the first 10% of
GMDB claims are not hedged. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in
the value of the designated obligation. The Company's economic evaluation of the GMDB obligation is not consistent with
current accounting treatment of the GMDB obligation. Therefore, the hedging activity will lead to earnings volatility. This
volatility was negligible in 2005. As of December 31, 2005 and 2004, the net amount at risk was $1.08 billion and $1.71
billion before reinsurance, respectively, and $178.4 million and $296.5 million net of reinsurance, respectively. As of
December 31,2005 and 2004, the Company's reserve for GMDB claims was $26.9 million and $23.6 million, respectively.
See Note 3 for discussion of the impact of adopting a new accounting principle regarding GMDB reserves in 2004.
F-16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 2005, 2004 and 2003
The Company also offers certain variable annuity products with a guaranteed minimum accumulation benefit (GMAB) rider.
A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a
specified period of time (5, 7 or 10 years) selected by the contractholder at the time of issuance of the variable annuity
contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue
the variable annuity contract without the GMAB. The design of the GMAB rider limits the risk to the Company in a variety
of ways including asset allocation requirements, which serve to reduce the Company's potential exposure to underlying fund
performance risks. Specifically, the GMAB terms limit asset allocation by: (I) requiring partial allocation of assets to a
guaranteed term option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to
hedge; or (2) requiring all assets be allocated to one ofthe approved asset allocation funds or models defined by the Company.
A GMAB represents an embedded derivative in the variable annuity contract that is required to be separated from, and valued
apart from, the host variable annuity contract. The embedded derivative is carried at fair value and reported in other future
policy benefits and claims. The Company initially records an offset to the fair value of the embedded derivative on the
balance sheet, which is amortized through the income statement over the term of the GMAB period of the contract. The fair
value of the GMAB embedded derivative is calculated based on actuarial assumptions related to the projected benefit cash
flows incorporating numerous assumptions including, but not limited to, expectations of contractholder persistency, market
returns, correlations of market returns and market return volatility.
The Company began selling contracts with the GMAB feature on May 1,2003. Beginning October 1,2003, the Company
launched an enhanced version of the rider that offered increased equity exposure to the contractholder in return for a higher
charge. The Company simultaneously began economically hedging the GMAB exposure for those risks that exceed a level it
considered acceptable. The GMAB economic hedge consists of shorting interest rate futures and S&P 500 Index futures
contracts and does not qualify for hedge accounting under current guidance. Upon reaching scale, the Company anticipates
the purchase of S&P 500 Index put options and over-the-counter basket put options, which are constructed in order to
minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) for discussion of economic hedges. The
objective of the GMAB economic hedge strategy is to manage the exposures with risk beyond a level considered acceptable to
the Company. The Company is exposed to equity market risk related to the GMAB feature should the growth in the
underlying investments, including any GTO investment, fail to reach the guaranteed return level. The GMAB embedded
derivative will create volatility in earnings; however, the hedging program provides substantial mitigation of tbis exposure.
This volatility was negligible in 2005 and 2004. As of December 31, 2005 and 2004, the fair value of the GMAB embedded
derivative was $67.9 million and $20.6 million, respectively. The increase in the fair value of the GMAB embedded
derivative primarily was due to the value of new business sold during 2005.
Beginning in March 2005, the Company began offering a hybrid GMAB/guaranteed minimum witbdrawal benefit (GMWB)
through its Capital Preservation Plus Lifetime Income (CPPLl) contract rider. This living benefit combines a GMAB feature
in its first 5-10 years with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the
duration of the insured's life. In the event that the insured's contract value is exhausted through such withdrawals, the
Company shall continue to fund future withdrawals at a pre-defined level until the insured's death. In some cases, the contract
owner has the right to drop the GMWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher
level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an
approved asset allocation strategy as previously described above.
Significant Concentrations of Credit Risk: The Company grants mainly commercial mortgage loans on real estate to
customers throughout the U.S. As of December 31, 2005, the Company had a diversified portfolio with no more than 23.8%
in any geographic region of the U.S. and no more than 1.6% with anyone borrower, compared to 25.1% and 1.6%,
respectively, as of December 31, 2004. As of December 31, 2005 and 2004,32.0% and 30.0% of the carrying value of the
Company's commercial mortgage loan portfolio financed retail properties, respectively.
Significant Business Concentrations: As of December 31, 2005 and 2004, the Company did not have a significant
concentration of financial instruments in a single investee, industry or geographic region of the U.S. Also, the Company did
not have a concentration of business transactions witb a particular customer, lender, distribution source, market or geographic
region of the U.S. in which business is conducted that makes it overly vulnerable to a single event wbich could cause a severe
impact to the Company's financial position.
F-17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
Guarantee Risk: In connection with the selling of securitized interests in Low-Income-Housing Tax Credit Funds (Tax Credit
Funds), the Company guarantees a specified minimum return to the investor. The guaranteed return varies by transaction and
follows general market trends. The Company's risk related to securitized interests in Tax Credit Funds is that the tax benefits
provided to the investor are not sufficient to provide the guaranteed cumulative after-tax yields. The Company attempts to
mitigate these risks by having qualified individuals with extensive industry experience perform due diligence on each of the
underlying properties to enSure they will be capable of delivering the amount of credits anticipated and by requiring cash
reserves to be held at various levels within these structures to provide for possible shortfalls in the amount of credits
generated. See Note 17 for further discussion of Tax Credit Funds.
Reinsurance: The Company follows the industry practice of reinsuring a portion of its life insurance and annuity risks with other
companies in order to reduce net liability On individual risks, to provide protection against large losses and to obtain greater
diversification of risks. The maximum amount of individual ordinary life insurance retained by the Company On anyone life is
$5.0 million. The Company cedes insurance primarily On an automatic basis, under which risks are ceded to a reinsurer on
specific blocks of business where the underlying risks meet certain predetermined criteria, and on a facultative basis, under which
the reinsurer's prior approval is required for each risk reinsured. The Company also cedes insurance on a case-by-case basis
particularly where the Company may be writing new risks or is unwilling to retain the full costs associated with new lines of
business. The Company maintains catastrophic reinsurance coverage to protect against large losses related to a single event. The
ceding of risk does not discharge the original insurer from its primary obligation to the policyholder.
The Company has entered into reinsurance contracts with certain unaffiliated reinsurers to cede a portion of its general account
life, annuity and health business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid
and unpaid claims, and certain other amounts and totaled $909.6 million and $894.3 million as of December 31, 2005 and
2004, respectively. The impact of these contracts on the Company's results of operations is immaterial. The ceding of risk
does not discharge the original insurer from its primary obligation to the contractholder. Under the terms of the contracts,
specified assets have been placed in trusts as collateral for the recoveries. The trust assets are invested in investment grade
securities, the fair value of which must at all times be greater than or equal to 100% or 102% of the reinsured reserves, as
outlined in each of the underlying contracts. The Company has no other material reinsurance arrangements with unaffiliated
reinsurers. The Company's only material reinsurance agreements with affiliates are the modified coinsurance agreements
pursuant to which NLlC ceded to other members of Nationwide all of its accident and health insurance business not ceded to
unaffiliated reinsurers, as described in Note 15.
Collateral - Derivatives: The Company enters into agreements with various counterparties to execute over-the-counter
derivative transactions. The Company's policy is to include a Credit Support Annex with each agreement in an effort to
protect the Company for any exposure above the approved credit threshold. This also protects the counterparty against
exposure to the Company. The Company generally posts securities as collateral and receives cash as collateral from
counterparties. The Company maintains ownership of the pledged securities at all times and is entitled to receive from the
borrower any payments for interest or dividends received on such securities during the period it is pledged as collateral.
Collateral - Securities Lending: The Company, through its agent, lends certain portfolio holdings and in turn receives cash
collateral. The cash collateral is invested in high-quality short-term investments. The Company's policy requires a minimum
of 102% of the fair value of the securities loaned to be maintained as collateral. Net returns on the investments, after payment
of a rebate to the borrower, are shared between the Company and its agent. Both the borrower and the Company can request
or return the loaned securities at any time. The Company maintains ownership of the securities at all times and is entitled to
receive from the borrower any payments for interest or dividends received on such securities during the loan term.
F-18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
(5) Fair Value of Financial Instruments
The following disclosures summarize the carrying amount and estimated fair value of the Company's financial instruments.
Certain assets and liabilities are specifically excluded from the disclosure requirements for financial instruments. For this
reason, among others, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value of a financial instrument is defined as the amount at which the financial instrument could be bought or sold, or
in the case of liabilities incurred or settled, in a current transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on the best information available in the circumstances. Such estimates affair
value should consider prices for similar assets or similar liabilities and the results of valuation techniques to the extent
available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash
flows using discount rates commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted
spread models and fundamental analysis. Valuation techniques for measuring assets and liabilities must be consistent with the
objective of measuring fair value and should incorporate assumptions that market participants would use in their estimates of
values, future revenues and future expenses, including assumptions about interest rates, default, prepayment and volatility.
Many of the Company's assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair
values to be estimated by management using matrix pricing, present value or other suitable valuation techniques. These
techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.
Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in
assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of
the instruments.
Although insurance contracts are specifically exempted from the disclosure requirements (other than those that are classified
as investment contracts), the Company's estimate of the fair values of policy reserves on life insurance contracts is provided to
make the fair value disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can have a significant effect on the estimates of fair value and
have not been considered in arriving at such estimates.
In estimating its fair value disclosures, the Company used the following methods and assumptions:
Fixed maturity and equity securities avai/able-for-sale: See Note 2(b).
Mortgage loans on real estate, net: The fair values of mortgage loans on real estate are estimated using discounted cash flow
analyses based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations. Estimated fair value is based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
Policy loans, short-term investments and cash: The carrying amounts reported in the consolidated balance sheets for these
instruments approximate their fair values.
Separate account assets and liabilities: The fair values of assets held in separate accounts are based on quoted market prices
of the underlying securities. The fair value of liabilities related to separate accounts are the amounts payable on demand,
which are net of certain surrender charges.
Investment contracts: The fair values of the Company's liabilities under investment type contracts are based on one of two
methods. For investment contracts without defined maturities, fair value is the amount payable on demand. For investment
contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used
in this analysis are similar to currently offered contracts with maturities consistent with those remaining for the contracts
being valued.
F-19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 3 I, 2005, 2004 and 2003
Policy reserves on life insurance contracts: Included are disclosures for individual life insurance, COLI, BOLl, universal life
insurance and supplementary contracts with life contingencies for which the estimated fair value is the amount payable on
demand. Also included are disclosures for the Company's limited payment policies for which the Company has used
discounted cash flow analyses to estimate fair value, similar to those used for investment contracts with known maturities.
Short-term debt, collateral received - securities lending and collateral received - derivatives: The carrying amounts reported
in the consolidated balance sheets for these instruments approximate their fair values.
Long-term debt, payable to NFS: The fair values for long-term debt are based on estimated market prices.
Commitments to extend credit: Commitments to extend credit have nominal fair values because of the short-term nature of
such commitments. See Note 4.
Interest rate and cross-currency interest rate swaps: The fair values for interest rate and cross-currency interest rate swaps
are calculated with pricing models using current rate assumptions.
Interest rate futures contracts: The fair values for futures contracts are based on quoted market prices.
The following table summarizes the carrying values and estimated fair values of fmancial instruments subject to disclosure
requirements and policy reserves on life insurance contracts as of December 31:
(in millions)
2005
Carrying Estimated
value fair value
2004
Estimated
fair value
Carrying
value
Assets
Investments:
Securities available-for-sale:
Fixed maturity securities
Equity securities
Mortgage loans on real estate, net
Policy loans
Short-term investments
Cash
Assets held in separate accounts
Liabilities
Investment contracts
Policy reserves on life insurance contracts
Short-term debt
Long-term debt, payable to NFS
Collateral received - securities lending and derivatives
Liabilities related to separate accounts
Derivative financial instruments
Interest rate swaps hedging assets
Cross-currency interest rate swaps
Interest rate futures contracts
Other derivatives
$ 27,198.1 $ 27,198.1 $ 27,652.0 $ 27,652.0
42.1 42.1 48.1 48.1
8,458.9 8,503.0 8,649.2 8,942.7
604.7 604.7 644.5 644.5
1,596.6 1,5%.6 1,645.8 1,645.8
0.9 0.9 15.5 15.5
62,689.8 62,689.8 60,798.7 60,798.7
(28,698.1 ) (26,607.2) (29,196.6) (26,870.6)
(7,243.0) (7,173.1) (7,186.5) (7,153.9)
(242.3) (242.3) (215.0) (215.0)
(700.0) (822.8) (700.0) (743.9)
(1,359.1) (1,359.1) (1,289.9) (1,289.9)
(62,689.8) (61,483.5) (60,798.7) (59,651.2)
3.3 3.3 (72.1) (72.1)
178.5 178.5 495.0 495.0
1.6 1.6 (6.5) (6.5)
41.1 41.1 36.1 36.1
F-20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned suhsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem her 3 I, 2005, 2004 and 2003
(6) Derivative Financial Instruments
Qualitative Disclosure
Interest Rate Risk Management
The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be
exposed to interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. To mitigate this risk,
the Company enters into various types of derivative instruments to minimize this mismatch, with fluctuations in the fair values
of the derivatives offsetting changes in the fair values of the investments resulting from changes in interest rates. The
Company principally uses pay fixed/receive variable interest rate swaps to manage this risk.
Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments. The
fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in the Company receiving the
variable interest payments on the swap, generally 3-month U.S. London Interbank Offered Rate (LIBOR), and the credit
spread on the investment. The net receipt of a variable rate will then match the variable rate paid on the liability.
As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to
changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to the loans
being funded. To manage this risk, the Company enters into short U.S. Treasury futures during the commitment period. With
short U.S. Treasury futures, if interest rates rise/fall, the gains/losses on the futures will offset the change in fair value of the
commitment attributable to the change in interest rates.
The Company periodically purchases variable rate investments (Le., commercial mortgage loans and corporate bonds). As a
result, the Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such
variability poses risks to the Company when the assets are funded with fixed rate liabilities. To manage this risk, the
Company may enter into receive fixed/pay variable interest rate swaps.
In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The
variable interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving
the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a fixed rate will then
match the fixed rate paid on the liability.
The Company manages interest rate risk at the segment level. Different segments may simultaneously hedge interest rate risks
associated with owning fixed and variable rate investments considering the risk relevant to a particular segment.
Foreign Currency Risk Management
In conjunction with the Company's medium-term note (MTN) program, the Company periodically issues both fixed and
variable rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the
liabilities due to changes in foreign currency exchange rates and related interest rates. To manage these risks, the Company
enters into cross-currency interest rate swaps to convert these liabilities to a U.S. dollar rate.
The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency due to changes
in foreign currency exchange rates and related interest rates. To manage this risk, the Company uses cross-currency interest
rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments. Cross-currency interest rate swaps on
assets are structured to pay a fixed rate, in the foreign currency, and receive a variable U.S. dollar rate, generally 3-month U.S.
LIBOR. These derivative instruments are designated as a fair value hedge of the fixed rate foreign denominated asset.
F-21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 200S, 2004 and 2003
For a variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign
currency, and pay a variable U.S. dollar rate, generally 3-month U.S. LIBOR. As both sides of the cross-currency interest rate
swap are variable, the derivative instrument is a basis swap. While the receive-side terms of the cross-currency interest rate
swap will line up with the terms of the liability, the Company is not able to match the pay-side terms of the derivative to a
specific asset. Therefore, these derivative instruments do not receive hedge accounting treatment.
Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in the foreign currency,
and receive a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms ofthe
foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash
flow hedge.
Equity Market Risk Management
See Note 4 for a complete discussion of the Company's equity market risk management.
Other Non-Hedging Derivatives
The Company periodically enters into basis swaps (receive one variable rate, pay another variable rate) to beller match the
cash flows received from the specific variable-rate investments with the variable rate paid on a group of liabilities. While the
pay-side terms of the basis swap will line up with the terms of the asset, the Company is not able to match the receive-side
terms of the derivative to a specific liability. Therefore, basis swaps do not receive hedge accounting treatment.
The Company sells credit default protection on selected debt instruments and combines the credit default swap with selected
assets the Company owns to replicate a higher yielding bond. These selected assets may have sufficient duration for the
related liability, but do not earn a sufficient credit spread. The combined credit default swap and investments provide the
duration and credit spread targeted by the Company. The credit default swaps do not qualifY for hedge accounting treatment.
The Company also has purchased credit default protection on selected debt instruments exposed to short-term credit concerns,
or because the combination ofthe corporate bond and purchased default protection provides sufficient spread and duration
targeted by the Company. The purchased credit default protection does not qualifY for hedge accounting treatment.
Quantitative Disclosure
Fair Value Hedges
During the years ended December 31, 2005, 2004 and 2003, a net gain of $4.1 million, a net loss of $11.3 million and a net
gain of $4.2 million, respectively, were recognized in net realized gains and losses on investments, hedging instruments and
hedged items. This represents the ineffective portion of the fair value hedging relationships. There were no gains or losses
attributable to the portion of the derivative instruments' changes in fair value excluded from the assessment of hedge
effectiveness. There were also no gains or losses recognized in earnings as a result of hedged firm commitments no longer
qualifYing as fair value hedges.
Cash Flow Hedges
For the years ended December 31, 2005, 2004 and 2003, the ineffective portion of cash flow hedges was a net gain of $3.1
million, a net gain of$1.0 million and a net loss of$5.4 million, respectively. There were no net gains or losses attributable to
the portion ofthe derivative instruments' changes in fair value excluded from the assessment of hedge effectiveness.
The Company anticipates reclassifYing less than $0.5 million in net losses out of AOCI over the next 12-month period.
F-22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned suhsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 200S, 2004 and 2003
In general, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows
associated with forecasted transactions, other than those relating to variable interest on existing financial instruments, is
twelve months or less. However, in 2003 the Company did enter into a hedge of a forecasted purchase of shares of a mutual
fund tied to the S&P 500 Index, where delivery of the shares will occur 30 years in the future. During 2005, 2004 and 2003,
the Company did not discontinue any cash flow hedges because the original forecasted transaction was no longer probable.
Additionally, no amounts were reclassified from AOCI into earnings due to the probability that a forecasted transaction would
not occur.
Other Derivative Instruments, Including Embedded Derivatives
Net realized gains and losses on investments, hedging instruments and hedged items for the years ended December 31, 2005,
2004 and 2003 included a net loss of $9.1 million, a net gain of$8.1 million and a net gain of $11.8 million, respectively,
related to other derivative instruments, including embedded derivatives, not designated in hedging relationships. In addition,
Annuity Benefits included a gain of $5.1 million for the year ended December 31, 2005 related to other derivative
instruments, including embedded derivatives, not designated in hedging relationships. For the years ended December 31,
2005,2004 and 2003, a net loss of$80.7 million, a net loss of$5.9 million and a net gain of $4.2 million, respectively, were
recorded in net realized gains and losses on investments, hedging instruments and hedged items reflecting the change in fair
value of cross-currency interest rate swaps hedging variable rate MTNs denominated in foreign currencies. Additional net
gains of$78.3 million, $5.9 million and $0.9 million were recorded in net realized gains and losses on investments, hedging
instruments and hedged items to reflect the change in spot rates of these foreign currency denominated obligations during the
years ended December 31, 2005, 2004 and 2003, respectively.
The following table summarizes the notional amount of derivative financial instruments outstanding as of December 31;
(in millions)
2005
2004
Interest rate swaps:
Pay fixed/receive variable rate swaps hedging investments
Pay variable/receive fixed rate swaps hedging investments
Pay variable/receive variable rate swaps hedging investments
Pay variable/receive fixed rate swaps hedging liabilities
Pay variable/receive variable rate swaps hedging liabilities
Pay fixed/receive variable rate swaps hedging liabilities
Other contracts hedging investments
Cross-currency interest rate swaps:
Hedging foreign currency denominated investments
Hedging foreign currency denominated liabilities
Credit delilUlt S'MIps and other non-hedging instruments
Equity option contracts
Interest rate futures contracts
Total
$
2,040.1
79.2
$
1,891.5
152.8
145.0
275.0
280.0
275.0
43.9
550.0
30.0
170.0
10.0
439.8
1,312.4
555.3
774.4
120.5
6.081.7
400.9
2,028.8
836.0
190.9
387.0
6.906.8
$
$
F-23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
(7) Investments
The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities
available-for-sale as oflbe dates indicated:
Gross G.....
Amortized unrealized unrealized Estimated
(in millions) cost 28ins losses fair value
December 31, 2005,
Fixed rmturity securities:
U.S. Tr<mury securities and obligations ofU.S.
Government corporations S 163.8 S 14.3 S 0.6 S 177.5
Agencies not backed by the full fuith and credit
oftheU.S.Go~ 849.7 61.2 6.2 904.7
Obligations of stales and political subdivisions 300.3 2.4 3.8 298.9
Debt securities issued by foreign governments 41.4 2.7 0.1 44.0
Corporate securities
Public 9,520.0 233.7 106.2 9,647.5
Private 6,572.2 195.3 6S.3 6,702.2
Mortgapbacked securities - U.S. Govenunent-backed 6,048.3 18.1 107.6 5,958.8
Asset-backed securities 3,463.2 42.6 41.3 3,464.5
T ota! fixed I11Ilurity securities 26,958.9 570.3 331.1 27,198.1
Equity securities 35.1 7.0 42.1
Total securities availabl.,.for-sale S 26,994.0 S 577.3 S 331.1 S 27,240.2
Dt..et 11beI 31, 2004:
Fixed maturity securities:
US. Tr<mury securities and obligations of US.
Government corporations $ 81.1 $ 13.9 $ 0.1 $ 94.9
Agencies not backed by the full fuith and credit
of the U S. Go~ 1,101.0 81.6 1.0 1,181.6
Obligations of stales and political subdivisions 246.8 3.1 2.7 247.2
Debt securities issued by foreign governments 41.6 2.7 0.1 44.2
Corporate securities
Public 10,192.0 448.9 26.4 10,614.5
Private 6,633.6 342.9 24.1 6,952.4
Mortgage-backed securities - US. Govenunent-backed 4,628.8 59.5 16.3 4,672.0
Asset-backed securities 3,783.8 87.7 26.3 3,845.2
Total fixed rmturity securities 26,708.7 1,040.3 97.0 27,652.0
Equity securities 37.7 10.5 0.1 48.1
Total securities availabl.,.for-sale $ 26,746.4 $ 1,050.8 $ 97.1 $ 27,700.1
F-24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 2005, 2004 and 2003
The table below summarizes the amortized cost and estimated fair value of fixed maturity securities available-for-sale, by
maturity, as of December 31, 2005. Expected maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties.
(in millions)
Fixed maturity securities available-for-saIe:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
l\1ortg/Ige-backed securities - U.S. GoVCIIllI.e.lt-backed
A=t-backed securities
Total
Amortized
cost
s
1,902.1
6,2U.8
6,160.3
3,172.2
17,447.4
6,048.3
3,463.2
26,958.9
Estimated
fair value
s
1,909.1
6,285.3
6,246.3
3,334.1
17,774.8
5,958.8
3,464.5
27,198.1
s
s
The following table presents the components of net unrealized gains on securities available-for-sale as of December 31:
(in millions \
Net unrealized gains, before adjustments and taxes
Adjustment to DAC
Adjustment to future policy benefits and claims
Deferred federal income taxes
Net unrealized gains
2005
s
246.2 $
42.4
(104.6)
(64.4\
119.6 $
2004
953.7
(144.6)
(121.6)
(240.6)
446.9
The following table presents an analysis of the net (decrease) increase in net unrealized gains on securities available-for-sale
before adjustments and taxes for the years ended December 31:
s
(in millions \ 2005 2004 2003
Fixed maturity securities S (704.1 ) $ (153.3) $ 61.9
Equity securities (3.4) (1.2) 12.4
Net charuze S 1707.51 $ 054.5\ $ 74.3
F-25
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes by time the gross unrealized losses on securities available-far-sale in an unrealized loss
position as of the dates indicated:
Less tban or equal More
to one year than one year Total
Gross Gross Gross
Estimated unrealized Estimated unrealized Estimated unrealized
(in millions) fair value losses fair value losses fair value losses
December 31, 2005,
Fixed maturity secwities:
U.S. Treasury securities Wld
obligations of U.S. Government
corporations $ 25.1 $ 0.5 $ 3.7 $ 0.1 $ 28.8 $ 0.6
Agencies not backed by the full faith
Wld credit of the U.S. Government 297.0 4.9 42.2 1.3 339.2 6.2
Obligations of stales Wld
political subdivisions 1SO.7 3.0 29.7 0.8 180.4 3.8
Debt securities issued by foreign
governments 7.4 0.1 7.4 0.1
Corporate securities
Public 3,210.4 63.2 1,088.2 43.0 4,298.6 106.2
Private 1,690.3 39.1 672.6 26.2 2,362.9 65.3
Mortgage-backed securities - U.S.
Government-backed 4,062.8 88.6 632.6 19.0 4,695.4 107.6
Asset-backed securities 1,420.7 26.1 432.5 15.2 1,853.2 41.3
Total fixed maturity securities 10,864.4 225.5 2,901.5 105.6 13,765.9 331.1
Equity securities 3.9 3.9
Total $ 10.868.3 $ 225.5 $ 2,901.5 $ 105.6 $ 13.769.8 $ 331.1
% of gross unrealized losses 680/. 32%
December 31, 2004:
Fixed maturity securities:
U.S. Treasury securities Wld
obligations of U.S. Government
corporations $ 5.7 $ 0.1 $ 0.2 $ $ 5.9 $ 0.1
Agencies not backed by the full faith
Wld credit of the U.S. Government 179.9 1.0 179.9 1.0
Obligations of states Wld
political subdivisions 68.6 0.5 52.7 2.2 121.3 2.7
Debt securities issued by foreign
governments 7.5 0.1 7.5 0.1
Corporate securities
Public 1,522.3 17.9 291.5 8.5 1,813.8 26.4
Private 994.2 16.3 184.2 7.8 1,178.4 24.1
Mortgage-backed securities - U.S.
Government-backed 1,271.5 10.5 225.1 5.8 1,496.6 16.3
Asset-backed securities 728.0 15.4 229.3 10.9 957.3 26.3
Total fixed maturity securities 4,770.2 61.7 990.5 35.3 5,760.7 97.0
Equity secwities 0.7 0.1 0.7 0.1
Total $ 4,770.9 $ 61.8 $ 990.5 $ 35.3 $ 5,761.4 $ 97.1
% of gross unrealized losses 64.0% 36.0'10
F-26
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
Proceeds from the sale of securities available-for-sale during 2005, 2004 and 2003 were $2.62 billion, $2.49 billion and $2.22
billion, respectively. During 2005, gross gains of $71.9 million ($61.5 million and $104.0 million in 2004 and 2003,
respectively) and gross losses of $22.6 million ($8.7 million and $27.6 million in 2004 and 2003, respectively) were realized
on those sales.
The Company had $22.2 million and $18.0 million of real estate investments as of December 31, 2005 and 2004, respectively,
that were non-income producing during the preceding twelve months.
Real estate is presented at cost less accumulated depreciation of $21.5 million as of December 31, 2005 ($20.9 million as of
December 31, 2004). The carrying value of real estate held for disposal totaled $2.5 million and $2.8 million as of December
31, 2005 and 2004, respectively.
The recorded investment of mortgage loans on real estate considered to be impaired was $29.7 million as of December 31,
2005 ($30.0 million as of December 31, 2004), for which the related valuation allowance was $7.1 million ($7.6 million as of
December 31, 2004). Impaired mortgage loans with no valuation allowance are a result of collateral dependent loans where
the fair value of the collateral is estimated to be greater than the recorded investment of the loan. During 2005, the average
recorded investment in impaired mortgage loans on real estate was $7.4 million ($10.0 million in 2004). Interest income
recognized on those loans, which is recognized on a cash basis, totaled $2.1 million in 2005 ($1.6 million in 2004).
The following table summarizes activity in the valuation allowance account for mortgage loans on real estate for the years
ended December 31 :
(in millions) 2005 2004 2003
Allowance, beginning of period $ 33.3 $ 29.1 $ 43.4
Net additions (reductions) char~ed (credited) to allowance (2.2) 4.2 (14.3)
Allowance. end of Deriod $ 31.1 $ 33.3 $ 29.1
During the third quarter of 2003, the Company refmed its analysis of the overall performance of the mortgage loan portfolio
and related allowance for mortgage loan losses. This analysis included an evaluation of the current composition of the
portfolio, historical losses by property type, current economic conditions and probable losses inherent in the loan portfolio as
of the balance sheet date, but not yet identified by specific loan. As a result of the analysis, the total valuation allowance was
reduced by $12.1 million.
F-27
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 3 I, 2005, 2004 and 2003
The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from
continuing operations by source for the years ended December 31:
(in millions) 2005 2004 2003
Realized gains on sales, net of hedging losses:
Fixed rmturity securities available-for-sa1e $ 65.3 $ 57.5 $ 98.5
Hedging losses on fixed rmturity sales (6.8) (15.2) (42.4)
Equity securities available-for-sale 6.6 4.0 5.5
Mortgage loans on real estate 10.7 10.7 3.0
Mortgage loan hedging losses (3.3) (4.0) (2.4)
Real estate 2.1 3.7 4.2
Other 1.0 8.3
Total realized ~ on sales, net of~ losses 75.6 65.0 66.4
Realized losses on sales, net of hedging gains:
Fixed rmturity securities available-for-sa1e (22.5) (7.8) (27.2)
Hedging gains on fixed rmturity sales 3.9 3.7 9.2
Equity securities available-for-sa1e (0.1) (0.9) (0.4)
Mortgage loans on real estate (10.4) (6.8) (5.0)
Mortgage loan hedging gains 7.8 2.2 0.5
Real estate (1.2) (0.3)
Other (1.6) (1.9) (2.0)
Total realized losses on sales, net of~inR ~ns (22.9) (12. 7) (25.2)
Other-than-te~ and other investment inlJainnents:
Fixed rmturity securities available-for-sa1e (28.1) (79.7) (159.4)
Equity securities available-for-sa1e (0.9) (0.6) (8.0)
Mortgage loans on real estate, including valuation allO\WDCC (4.5) (7.1) 11.7
Real estate (0.1) (3.2) (0.8)
Other (3.2)
Total other-than-terrcx>rarY and other investment iJI1lI1irments (36.8) (90.6) (156.5)
Credit default swaps (7.5) 0.3 13.3
Periodic net coupon settlerrents on llOIHJualifYing derivatives 1.1 6.6 15.6
Other derivatives 1.1 (5.0) 1.2
Net realized gains (losses) on invesb.lC..tS, hedging
instnJments and ~ed items $ 10.6 $ (36.4) $ (85.2)
F-28
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 200S, 2004 and 2003
The following table summarizes net investment income from continuing operations by investment type for the years ended
December 31 :
(in rtiJlicn;)
zoos
2004
2003
Securities awilabl~for-sa1e:
FJXCd Jl1lltrity secuities
Equity secuities
Mlrtgage loans on real estate
Real estate
Sh:rt-tenn ~I~b
IRrivatives
Oher
Quss inveslm:nl irrare
Less inveslm:nl expemes
Net inveslm:nl irrare
$
1,466.2 $ 1,461.9 $ 1,453.1
2.4 12 1.4
m.3 577.4 579.7
16.6 17.9 21.7
18.8 8.9 9.3
(31.0) (94.3) (1072)
112.2 78.4 64.8
2,162.5 2,051.4 2,022.8
57.3 50.9 49.7
2,1tlS.2 $ 2,000.5 $ 1,973.1
$
Fixed maturity securities with an amortized cost of $16.4 million and $52.3 million as of December 31, 2005 and 2004,
respectively, were on deposit with various regulatory agencies as required by law.
As of December 31, 2005 and 2004, the Company had pledged fixed maturity securities with a fair value of $8.6 million and
$51.4 million, respectively, as collateral to various derivative counterparties.
As of December 31, 2005 and 2004, the Company had received $1.10 billion and $874.2 million, respectively, of cash
collateral on securities lending and $203.3 million and $415.7 million, respectively, of cash for derivative collateral. As of
December 31, 2005, the Company had not received any non-cash collateral on securities lending compared to $191.8 million
received at December 31, 2004. Both the cash and non-cash collateral amounts are included in short-term investments with a
corresponding liability recorded in other liabilities. As of December 31, 2005 and 2004, the Company had loaned securities
with a fair value of$1.07 billion and $1.04 billion, respectively. The Company also held $53.2 million and $222.5 million of
securities as off-balance sheet collateral on derivative transactions as of December 31, 2005 and 2004, respectively.
(8) Variable Annuity Contracts
The Company issues traditional 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
issues non-traditional variable annuity contracts in which the Company provides various forms of guarantees to benefit the
related contractholders. The Company provides four primary guarantee types under non-traditional variable annuity contracts:
(I) GMDB; (2) GMAB; (3) GMIB; and (4) a hybrid guarantee with GMAB and GMWB.
F-29
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The GMDB provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death
benefit will be paid upon death of the first spouse. The survivor has the option to teooinate the contract or continue it and
have the death benefit paid into the contract and a second death benefit paid upon the survivor's death. The Company has
offered six primary GMDB types:
. Return of premium - provides the greater of account value or total deposits made to the contract less any partial
withdrawals and assessments, which is referred to as "net premiums." There are two variations of this benefit. In
general, there is no lock in age for this benefit. However, for some contracts the GMDB reverts to the account value
at a specified age, typically age 75.
. Reset - provides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to
lock-in age) account value adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for
others the GMDB reverts to the account value at age 75, 85, 86 or 90.
. Ratchet - provides the greater of a return of premium death benefit or the highest specified "anniversary" account
value (prior to age 86) adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference
based on the definition of anniversary: monthaversary - evaluated monthly; annual - evaluated annually; and five-
year - evaluated every fifth year.
. Rollup - provides the greater of a return of premium death benefit or premiums adjusted for withdrawals
accumulated at generally 5% simple interest up to the earlier of age 86 or 200% of adjusted premiums. There are two
variations of this benefit. For certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to
the account value at age 75.
. Combo - provides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either
age 81 or 86.
. Earnings enhancement - provides an enhancement to the death benefit that is a specified percentage of the adjusted
earnings accumulated on the contract at the date of death. There are two versions of this benefit: (1) the benefit
expires at age 86, and a credit of 4% of account value is deposited into the contract; and (2) the benefit does not have
an end age, but has a cap on the payout and is paid upon the first death in a spousal situation. Both benefits have age
limitations. This benefit is paid in addition to any other death benefits paid under the contract.
The GMAB, offered in the Company's Capital Preservation Plus (CPP) contract rider, is a living benefit that provides the
contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period oftime
(5, 7 or 10 years) selected by the contractholder at the issuance of the variable annuity contract. In some cases, the
contractholder also has the option, after a specified period oftime, to drop the rider and continue the variable annuity contract
without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed teoo options or adherence to
limitations required by an approved asset allocation strategy.
The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB types are:
. Ratcbet - provides an annuitization value equal to the greater of account value, net premiums or the highest one-year
anniversary account value (prior to age 86) adjusted for withdrawals.
. Rollup - provides an annuitization value equal to the greater of account value and premiums adjusted for
withdrawals accumulated at 5% compound interest up to the earlier of age 86 or 200% of adjusted premiums.
. Combo - provides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB
benefit.
See Note 4 for a complete description of the Company's hybrid GMAB/GMWB offered through its CPPLI contract rider. All
GMAB contracts with the hybrid GMAB/GMWB rider are included with GMAB contracts in the following tables.
F-30
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes the account values and net amount at risk, net of reinsurance, for variable annuity contracts
with guarantees invested in both general and separate accounts as of December 31:
200s 2004
Account Net aRlOunt Wid. avg. Accowrt Net amount Wtd. avg.
(in millions) value at risk' attained axe value at risk' attained age
GMDB:
Return of premiwn $ 9,260.6 $ 32.5 60 $ 9,675.4 $ 54.1 59
Reset 16,932.1 58.7 63 17,315.9 153.2 62
Ratchet 11,020.6 28.9 65 9,621.0 42.3 64
Rollup 592.1 8.4 69 638.6 9.7 68
Combo 2,530.6 22.3 68 2,519.9 19.2 67
Subtotal 40,336.0 ISO.8 64 39,770.8 278.5 62
~s enhancement 418.5 27.6 61 310.1 18.0 60
Total - GMDB $ 40.754.5 $ 178.4 63 $ 40,080.9 $ 296.5 62
GMAB':
5 Year $ 1,041.8 $ 0.5 N/A $ 460.6 $ 0.1 N/A
7 Year 1,103.5 0.2 N/A 568.4 N/A
10 Year 595.5 0.1 N/A 304.0 N/A
Total - GMAB $ 2,740.8 $ 0.8 N/A $ 1,333.0 $ 0.1 N/A
GMIu>:
Ratchet $ 444.7 $ N/A $ 437.7 $ N/A
Rollup 1,189.3 N/A 1,188.2 N/A
Combo 0.5 N/A 1.0 N/A
Total - GMlB $ 1,634.5 $ N/A $ 1,626.9 $ N/A
, Net amount at risk is calculated on a seriatwn basis and equals the respective guaranteed benefit less the account value (or
zero if the account value exceeds the guaranteed benefit). As it relates to GMIB, net amount at risk is calculated as if all
policies were eligible to annuitize immediately, although all GMIB options have a waiting period of at least 7 years from
issuance, with the earliest annuitizations beginning in 2006.
2 GMAB contracts with the hybrid GMAB/GMWB rider had account values of $939. I million as of December 31, 2005.
3 The weighted average period remaining until expected annuitization is not meaningful and has not been presented because
there is currently no material GMIB exposure.
F-31
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table is a rollforward of the liabilities for guarantees on variable annuity contracts reflected in the Company's
general account for the years indicated:
(in millions) GMDB GMAB GMIB Total
Balance as of December 31, 2003 $ 21.8 $ 4.3 $ $ 26.1
Expense provision 25.0 0.8 25.8
Net claims paid (23.2) (23.2)
Value of new business sold 24.7 24.7
Chanj(e in fair value (8.4) (8.4)
Balance as of December 31, 2004 23.6 20.6 0.8 45.0
Expense provision 32.8 0.4 33.2
Net claims paid (29.5) (29.5)
Value of new business sold 53.4 53.4
Chanj(e in fair value (6.1) (6.1)
Balance as of December 3 I, 2005 $ 26.9 $ 67.9 $ 1.2 $ 96.0
The following table summarizes account balances of contracts with guarantees that were invested in separate accounts as of
December 31:
(in millions) 200s 2004
Mutual fimds:
Bond S 3,857.3 $ 4,136.8
Domestic equity 28,011.3 27,402.4
International equity 2,161.4 1,831.3
Total mutual fimds 34,030.0 33,370.5
Money market fimds 1,350.4 1,313.6
Total S 35,380.4 $ 34,684.1
The Company's GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that
trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments.
GMIB claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the
projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based
on total assessments. The Company regularly evaluates GMDB and GMIB claim reserve estimates used and adjusts the
additional liability balances as appropriate, with a related charge or credit to other benefits and claims in the period of
evaluation if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in
calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the
calculation of GMIB claim reserves assumes benefit utilization ranges from a low of 3% when the contractholder's
annuitization value is 10% in the money to 100% utilization when the eontractholder is 90% in the money.
F-32
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 2005, 2004 and 2003
The following assumptions and methodology were used to determine the GMDB claim reserves as of December 31, 2005 and
December 31, 2004 (except where noted otherwise):
. Data used was based on a combination of historical numbers and future projections involving 50 probabilistically
generated economic scenarios
. Mean gross equity performance - 8.1 %
. Equity volatility - 18.7%
. Mortality - 100% of Annuity 2000 table
. Asset fees - equivalent to mutual fund and product loads
. Discount rate - 8.0%
Lapse rate assumptions vary by duration as shown below:
Duration (years) 1 2 3 4 5 6 7 8 9 101-
Minimum 4.50"10 5.50"10 6.50"10 8.50"10 10.50"10 10.50"10 10.50"10 17.50"/. 17.50"10 17.50"1.
Maximum 4.50"10 8.50"10 11.50"10 17.50"10 22.50"10 22.50"/. 22.50"10 22.50"10 22.50"10 19.50"/.
GMABs and hybrid GMABs/GMWBs are considered embedded derivatives under current accounting guidance, resulting in
the related liabilities being separated from the host insurance product and recognized at fair value, with changes in fair value
reported in earnings, and therefore, excluded from the SOP 03-1 policy benefits.
(9) Short-Term Debt
The following table summarizes short-term debt as of December 31:
(in millions)
200s
2004
$800.0 million commercial paper program
$350.0 million securities lending program facility
$250.0 million securities lending program facility
Total short-term debt
$
$
134.7
47.7
32.6
215.0
134.7
75.0
32.6
Z42.3
$
$
The Company has available as a source of funds a $1.00 billion revolving credit facility entered into by NFS, NLlC and
NMIC with a group of national financial institutions. Previously, the facility consisted of a 364-day agreement and a five-year
agreement. In May 2005, the 364-day agreement was terminated, and the five-year agreement was amended and restated for a
new five-year term. The facility provides for several and not joint liability with respect to any amount drawn by any party.
The facility provides covenants, including, but not limited to, requirements that the Company maintain consolidated tangible
net worth, as defined, in excess of $2.60 billion and that NLlC maintain statutory surplus, as defined, in excess of $1.67
billion. As of December 31, 2005 and 2004, the Company and NLlC were in compliance with all covenants. The Company
had no amounts outstanding under this agreement as of December 31, 2005 and 2004. NLlC also has an $800.0 million
commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding
under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion revolving credit
facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLlC had $134.7 million in
commercial paper outstanding as of December 31, 2005 and 2004 at a weighted average effective interest rate of 4.22% in
2005 and 2.14% in 2004.
F-33
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, Z005, Z004 and Z003
NLIC 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. This is an uncommitted facility, which is 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 $350.0 million. The borrowing
rate on this program is equal to one-month U.S. LIBOR. NLIC had $75.0 million and $47.7 million outstanding under this
agreement as of December 31, 2005 and 2004, respectively. As of December 31, 2005, the Company has not provided any
guarantees on such borrowings, either directly or indirectly.
In addition to the agreement described above, NMIC 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. This is an uncommitted facility, which is
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. Because NLIC has a variable interest in the
profits from the securitization of these loans and is the primary beneficiary of this arrangement, NLIC consolidates the assets
and liabilities associated with these loans and the corresponding borrowings in accordance with current accounting guidance.
The maximum amount available under the agreement is $250.0 million. The borrowing rate on this program is equal to one-
month U.S. LIBOR. NMIC had $32.6 million outstanding under this agreement as of December 31, 2005 and 2004. As of
December 31, 2005, the Company has not provided any guarantees on such borrowings, either directly or indirectly.
The Company paid interest on short-term debt totaling $11.5 million, $3.6 million and $1.3 million in 2005, 2004 and 2003,
respectively, including less than $0.1 million to NFS during each year.
(10) Long-Term Debt
The following table summarizes surplus notes payable to NFS as of December 31;
(in millions) ZOO5 2004
8.15% surplus note, due June 27, 2032 $ 300.0 $ 300.0
7.50"10 surplus note, due December 17,2031 300.0 300.0
6.75% surplus note, due December 23, 2033 100.0 100.0
Total long-term debt $ 700.0 $ 700.0
The Company made interest payments to NFS on surplus notes totaling $53.7 million in 2005, $50.7 million in 2004 and
$47.1 million in 2003. Payments of interest and principal under the notes require the prior approval of the Ohio Department
ofInsurance (001).
(11) Federal Income Taxes
Through September 30, 2002, the Company filed a consolidated federal income tax return with NMIC, the ultimate majority
shareholder of NFS. Effective October I, 2002, Nationwide Corporation's ownership in NFS decreased from 79.8% to
63.0%. Therefore, NFS and its subsidiaries, including the Company, no longer qualify to be included in the NMIC
consolidated federal income tax return. The members of the NMIC consolidated federal income tax return group participated
in a tax sharing arrangement, which provided, in effect, for each member to bear essentially the same federal income tax
liability as if separate tax returns were filed.
Under Internal Revenue Code (IRe) regulations, NFS and its subsidiaries cannot file a life/non-life consolidated federal
income tax return until five full years following NFS' departure from the NMIC consolidated federal income tax return group.
Therefore, NFS and its direct non-life insurance company subsidiaries will file a consolidated federal income tax return; NLIC
and NLAIC will file a consolidated federal income tax return; and the direct non-life insurance companies under NLIC will
file separate federal income tax returns, until 2008, when NFS will become eligible to file a single life/non-life consolidated
federal income tax return with all of its subsidiaries.
F-34
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes the tax effects of temporary differences that give rise to significant components of the net
deferred tax liability as of December 31;
(in millions) 2005 2004
Deferred tax assets:
Future policy benefits $ 630.5 $ 715.5
Other 185.9 ]17.0
Gross deferred tax assets 816.4 832.5
Less valuation allowance (7.0) (7.0)
Deferred tax assets, net of valuation allowance 809.4 825.5
Deferred tax liabilities:
Fixed maturity securities 65.1 318.2
Equity securities and other investments 23.8 20.9
Derivatives 31.8 31.2
Deferred policy acquisition costs 970.5 908.1
Other 116.4 101.9
Gross deferred tax liabilities 1.207.6 1,380.3
Net deferred tax liabilitv $ 398.2 $ 554.8
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
of the total gross deferred tax assets will not be realized. Future taxable amounts or recovery of federal income tax paid
within the statutory carryback period can offset nearly all future deductible amounts. The valuation allowance was unchanged
during 2005, 2004 and 2003.
The Company's current federal income tax liability was $53.8 million and $145.3 million as of December 31, 2005 and 2004,
respectively.
During the third quarter of 2005, the Company refined its separate account dividends received deduction (DRD) estimation
process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the
amount of $42.6 million related to all open tax years (2000 - 2005). In addition, the Company recorded $5.6 million of net
benefit adjustments in the third quarter of 2005, primarily related to differences between the estimated tax liability and the
amounts reported on the Company's tax returns and revised estimates of perrnanent income tax deductions expected to be
generated in 2005. During the fourth quarter of 2005, the Company revised the estimate for the separate account DRD and
recorded an additional federal income tax benefit of$8.0 million based on additional inforrnation available at year end.
The following table summarizes federal income tax expense attributable to income from continuing operations for the years
ended December 3] ;
(in millions) 2005 2004 2003
Current $ 90.6 $ ]81.5 $ 106.7
Deferred 5.0 (61.5) (] 0.5)
Federal income tax eXDense $ 95.6 $ 120.0 $ 96.2
F-35
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
Total federal income tax expense differs from the amount computed by applying the U.S. federal income tax rate to income
from continuing operations before federal income taxes as follows for the years ended December 31:
2005 2004 2oo3
(dollars in millions) Amount % AmOlDlt % Ammmt %
Cmnputed (expected) tax expense $ 217.0 35.0 $ 187.2 35.0 $ 152.0 35.0
Tax exempt interest and dividends received deduction (107.5) (17.3) (47.2) (8.8) (45.7) (10.5)
Income tax credi18 (16.3) (2.6) (9.7) (1.8) (10.8) (2.5)
Release of Phase III tax liability (5.1) (1.0)
Other, net 2.4 0.3 (5.2) (1.0) 0.7 0.1
Total $ 95.6 15.4 $ 120.0 22.4 $ 96.2 22.1
The Jobs Creation Act of 2004 suspends policyholder surplus accounts (PSA) during 2005 and 2006 and provides that direct
and indirect distributions from the PSA during any taxable year beginning after 2004 and before 2007 be treated as zero.
Because NLIC had the ability and intent to distribute this PSA balance to i18 shareholder during the noted period, the potential
tax liability was eliminated as of December 31,2004 (see "Release of Phase III tax liability" above). The Jobs Creation Act
of 2004 had no other significant impact on the Company's tax position.
Total federal income tax paid was $182.2 million, $142.3 million and $176.2 million during the years ended December 31,
2005,2004 and 2003, respectively.
(12) Shareholders' Equity, Regulatory Risk-Based Capital, Retained Earnings and Dividend Restrictions
The State of Ohio, where NLIC and NLAIC are domiciled, imposes minimum risk-based capital requirements that were
developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that
are applied to fmancial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of total adjusted capital, as defmed by the NAIC, to authorized control level risk-based capital, as
defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which
requires specified corrective action. NLIC and NLAIC each exceeded the minimum risk-based capital requiremen18 for all
periods presented herein.
State insurance laws generally restrict the ability of insurance companies to pay cash dividends and make other paymen18 in
excess of certain prescribed limitations without prior approval. The Company is limited in the amount of shareholder
dividends it may pay without prior approval by the OD!. The statutory capital and surplus ofNLIC as of December 31, 2005
and 2004 was $2.60 billion and $2.39 billion, respectively. The statutory net income of NLIC for the years ended December
31,2005,2004 and 2003 was $462.5 million, $317.7 million and $444.4 million, respectively. As of January 1,2006, based
on statutory financial resul18 as of and for the year ended December 31, 2005, NLIC could pay dividends totaling $277.5
million without obtaining prior approval. On February 22, 2006, NLIC declared a $70.0 million dividend to NFS. In
addition, the payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of
New York that limit the amount of statutory profi18 on NLIC's participating policies (measured before dividends to
policyholders) that can inure to the benefit of the Company and its shareholder.
The Company currently does not expect such regulatory requirements to impair its ability to pay future operating expenses,
interest and shareholder dividends.
F-36
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
(13) Comprehensive Income
Comprehensive income includes net income and certain items that are reported directly within separate components of
shareholder's equity that are not recorded in net income (other comprehensive income or loss). The following table
summarizes the Company's other comprehensive (loss) income, before and after federal income tax benefit (expense), for the
years ended December 31:
(in millions)
2005
2004
2003
Net unrealized (losses) gains on seewities available-for-sale
arising dwing the period:
Net unrealized (losses) gains before adjustments $ (687.2) $ (182.0) $ (16.7)
Net adjustment to deferred policy acquisition costs 187.0 99.1 56.9
Net adjustment to future policy benefits and claims 17.0 (11.0) 22.6
Related federal income tax benefit (expense) 169.1 33.3 (22.4)
Net unrealized (losses) gains (314.1) (60.6) 40.4
Reclassification adjustment for net realized (gains) losses on seewities
available-for-sale realized dwing the period:
Net unrealized (gains) losses (20.3) 27.5 91.0
Related federal income tax expense (benefit) 7.1 (9.6) (31.8)
Net reclassification adjustment (13.2) 17.9 592
Other comprehensive (loss) income on seewities available-for-sale (327.3) (42.7) 99.6
Accunwlated net holding gains (losses) on cash flow hedges:
Unrealized holding gains (losses) 41.7 (47.4) (40.9)
Related federal income tax (expense) benefit (14.6) 16.6 14.3
Other comprehensive income (loss) on cash flow hed~es 27.1 (30.8) (26.6)
Total other comorehensive (loss) income $ (300.2) $ (73.5) $ 73.0
Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the years
ended December 31, 2005, 2004 and 2003.
F-37
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 20OS, 2004 and 2003
(14) Employee Benefit Plans
Defined Benefit Plans
The Company and certain affiliated companies participate in a defined benefit pension plan sponsored by NMIC. This plan
covers all employees of participating companies who have completed at least one year of service. Plan contributions are
invested in a group annuity contract issued by NLIC. All participants are eligible for benefits based on an account balance
feature. Participants last hired before 2002 are eligible for benefits based on the highest average annual salary of a specified
number of consecutive years of the last ten years of service, if sucb benefits are of greater value than the account balance
feature. The Company funds pension costs accrued for direct employees plus an allocation of pension costs accrued for
employees of affiliates whose work benefits the Company.
The Company's portion of pension expense for this plan for the years ended December 31, 2005, 2004 and 2003 was $16.6
million, $13.7 million and $13.2 million, respectively. The Company recorded prepaid pension assets of$38.1 million and
$14.6 million as of December 31, 2005 and 2004, respectively.
In addition to the NMIC pension plan, the Company and certain affiliated companies participate in life and health care defined
benefit plans sponsored by NMIC for qualifying retirees. Postretirement life and health care benefits are contributory and
generally are available to full-time employees, hired prior to June I, 2000, who have attained age 55 and have accumulated 15
years of service with the Company after reaching age 40. Postretirement health care benefit contributions are adjusted
annually and contain cost-sharing features such as deductibles and coinsurance. In addition, there are caps on the Company's
portion of the per-participant cost of the postretirement health care benefits. The Company's policy is to fund the cost of
health care benefits in amounts determined at the discretion of management. Plan assets are invested primarily in group
annuity contracts issued by NLIC.
Two significant plan changes were enacted to the postretirement benefit plans at December 31, 2002. The first involved the
postretirement medical plan, which was revised to reflect the current expectation that there will be no further increases in the
benefit cap after 2006. Prior to 2007, it is assumed that the pre-65 benefit caps will increase by 3% per year, at whicb time the
cap will be frozen. The second involved the postretirement death benefit plan, which was revised to reflect that all employer
subsidies will be phased out beginning in 2007. The 2007 subsidy is assumed to be 2/3 of the current subsidy, and tbe 2008
subsidy is assumed to be 1/3 of the current amount. There is no employer subsidized benefit assumed after 2008.
The Company's accrued postretirement benefit expense as of December 31, 2005 and 2004 was $47.6 million and $49.3
million, respectively. The net periodic benefit (income) cost for the postretirement benefit plans as a whole was $(0.1)
million, $0.3 million and $1.1 million for 2005, 2004 and 2003, respectively.
F-38
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31,2005,2004 and 2003
The following table summarizes information regarding the funded status of the NMIC pension plan as a whole and the NMIC
postretirement benefit plans as a whole (all of which are U.S. plans), including amounts not related to the Company, as of the
years ended December 31 :
Pension benefits Postretirement benefits
(in millions) 2005 2004 2005 2004
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,733.1 $ 2,457.0 $ 291.9 S 306.8
Service cost 133.5 121.8 9.7 9.2
Interest cost 134.9 134.0 16.0 17.5
Participant contributions 6.5 4.1
Plan amendment (13.3)
Actuarial loss (gain) 261.6 125.7 3.0 (10.1)
Benefits paid (117.3) (105.4) (25.9) (22.3)
Benefit obli~ion at end of year 3,145.8 2,733.1 301.2 291.9
Change in plan assets:
Fair value of plan assets at beginning of year 2,454.3 2,242.4 135.6 127.5
Actual return on plan assets 184.1 187.3 6.3 6.2
Employer contributions I 249.8 130.0 19.1 20.1
Participant contributions 6.5 4.1
Benefits paid' (117.3) (105.4) (25.9) (22.3)
Fair value of plan assets at end of year 2,770.9 2,454.3 141.6 135.6
Funded status (374.9) (278.8) (159.6) (156.3)
Unrecognized prior service cost 21.4 25.8 (88.3) (103.0)
Unrecognized net loss 544.6 298.2 52.1 48.0
UDI'CCOWlized net asset at transition (1.2)
Prenaid (accrued) benefit cost. net $ 191.1 $ 44.0 $ It 95.8) S (211.~
Accumulated benefit obli2alion $ 2.510.3 S 2.271.6
, Employer contributions and benefits paid include only those amounts contributed directly to or paid directly from plan
assets.
In 2004, the postretirement medical plan was amended to re!lect the provisions of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Medicare Act), which was signed into law on December 8, 2003. The
amendment integrates prescription drug benefits with the coverage provisions provided in the Medicare Act. The impact of
the amendment is re!lected in the accumulated postretirement benefit obligations beginning December 31, 2004. The expense
impact of the amendment was a $2.0 million decrease for 2005 for the plan as a whole.
The effect of a I % increase or decrease in the assumed health care cost trend rate on the accumulated postretirement benefit
obligation was SO. I million and $1.7 million at December 31, 2005 and 2004, respectively, for the plan as a whole.
NMIC and all participating employers, including the Company, expect to contribute $120.0 million to the pension plan and
S20.0 million to the postretirement benefit plan in 2006.
F-39
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes benefits expected to be paid in each of the next five fiscal years and in the aggregate for the
five fiscal years thereafter:
Pension Postretirement
(in millions) benefits benefits
2006 $ 115.7 $ 20.7
2007 117.8 20.5
2008 120.2 19.8
2009 127.0 19.3
2010 133.8 19.9
2011-2015 817.1 11 1.6
The following table summarizes the weighted average assumptions used to calculate the benefit obligation and funded status
of the NM1C pension plan as a whole and the NMIC postretirement benefit plans as a whole as of the December 31
measurement date for all plans:
Pension benefits
2005 2004
Postretirement benefits
2005 2004
Discount rate
Rate of increase in future compensation levels
Assumed health care cost trend rate:
Initial rate
Ultimate rate
Declining period
I The 2005 initial rate was 9.00% for participants over age 65, with an ultimate rate of 5.5%, and the 2004 initial rate was
11.00% for participants over age 65, with an ultimate rate of5.70%.
The NMIC pension plan employs a total return investment approach using a mix of equities and fixed income investments to
maximize the long-term return on plan assets in exchange for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status and corporate fmancial condition. The plan requires investment in
a group armuity contract backed by fixed investments with an interest rate guarantee to match liabilities for specific classes of
retirees. On a periodic basis, the portfolio is analyzed to establish the optimal mix of assets based on current market
conditions given the risk tolerance. In the most recent study, asset sub-classes were considered in debt securities (diversified
U.S. investment grade bonds, diversified high-yield U.S. securities, international fixed income, emerging markets and
commercial mortgage loans) and equity investments (domestic equities, private equities, international equities, emerging
market equities and real estate investments). Each asset sub-class chosen contains a diversified blend of securities from that
sub-class. Investment mix is measured and monitored continually through regular investment reviews, armual liability
measurements and periodic asset/liability studies.
F-40
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes the asset allocation for the NMIC pension plan as a whole at the end of 2005 and 2004 and
the target allocation for 2006, by asset category:
Asset CaIel\Ory
Pertell_ of plan assel5
200S 2004
Target
allocation __
2006
Equity securities
Debt securities
Real estate
Total
500/.
50%
48%
52%
40 - 65%
25 -50''10
0- Hl'1o
100%
I()()%
The NMIC postretirement benetit plans employ a total return investment approach using a mix of equities and tixed income
investments to maximize the long-term return on plan assets in exchange for a prudent level of risk. Risk tolerance is
established through careful consideration of plan liabilities, plan funded status and corporate fmancial condition. Plan
investments for retiree life insurance benetits generally include a retiree life insurance contract issued by NLIC. For retiree
medical liabilities, plan investments include both a group annuity contract issued by NLIC backed by tixed investments with
an interest rate guarantee and a separate account invested in diversitied U.S. equities. Investment mix is measured and
monitored continually through regular investment reviews, annual liability measurements and periodic assetlliability studies.
The following table summarizes the asset allocation for the NMIC postretirement benetit plans as a whole at the end of 2005
and 2004 and the target allocation for 2006, by asset category:
Asset Catellorv
Pc_nta", of plan assets
200S 2004
Target
allocation percenla2e
2006
Equity securities
Debt securities
Other
Total
60%
37%
3%
100%
60"10
35%
5%
I()()%
50 - 80%
20 - 50%
0-10%
The following table summarizes the components of net periodic benetit cost for the NMIC pension plan as a whole, including
amounts not related to the Company, for the years ended December 31 :
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Amortization of prior service cost
Amortization of unrecognized net losses
Amortization ofunreco2llized transition cost
Net Deriodic benetit cost
s
2005 2004 2003
133.5 S 121.8 S 104.0
134.9 134.0 131.7
(172.6) (167.7) (156.7)
0.1
4.5 4.5 4.5
3.6
(1.2) (1.3) (1.3)
102.7 S 91.3 S 82.3
(in millions)
s
F-41
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes the weighted average assumptions used to calculate net periodic benefit cost, set at the
beginning of each year, for the NMlC pension plan as a whole:
200s 2004 2003
Discowtl rate 5.00% 5.50% 6.00%
Rate ofincrease in future compensation levels 3.50% 4.00% 4.50'10
Expected IllIIR-term rate of return on plan assets 6.75% 7.25% 7.75%
The NMIC pension plan employs a prospective building block approach in determining the expected long-term rate of return
on plan assets. This process is integrated with the determination of other economic assumptions such as discount rate and
salary scale. Historical markets are studied, and long-term historical relationships between equities and fixed income
investments are preserved consistent with the widely accepted capital market principle that assets with higher volatility
generate a greater return over the long run (called a risk premium). Historical risk premiums are used to develop expected real
rates of retum for each asset sub-class. The expected real rates of return, reduced for investment expenses, are applied to the
target allocation of each asset sub-class to produce an expected real rate of return for the target portfolio. This expected real
rate of return will vary by plan and will change when the plan's target investment portfolio changes. Current market factors
such as inflation and interest rates are incorporated into the process. For a given measurement date, the discount rate is set by
reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be
settled. The historical real rate of return is subtracted from these bonds to generate an assumed inflation rate. The expected
long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This process
effectively sets the expected return for the plan's portfolio at the yield for the reference bond portfolio, adjusted for expected
risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the
market do not impact the expected risk premiums. However, as the yield for the reference bond fluctuates, the assumed
inflation rate and the expected long-term rate are adjusted in tandem.
Effective December 31, 2005, the historical risk premiums and expected real rates of return were re-evaluated affecting
December 31, 2005 benefit obligations and 2006 costs. For benefits obligations, a lower real rate of return on corporate bonds
led to a higher implied inflation rate and a higher rate of future compensation increase, which was 4.25% at December 31,
2005.
The following table summarizes the components of net periodic benefit cost for the NMIC postretirement benefit plans as a
whole, including amounts not related to the Company, for the years ended December 31:
!in millions)
2005
2004
2003
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized net losses
Net amortization and deferral
Net oeriodic benefit cost
$
9.7 $
16.0
(8.7)
1.4
(14.8)
3.6 $
9.2 $
17.5
(8.9)
9.9
19.5
(8.0)
$
(12.1)
5.7 $
(9.9)
11.5
F-42
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Serviees, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes the weighted average assumptions used to calculate the Company's net periodic benefit cost,
set at the beginning of each year, for the postretirement benefit plan as a whole:
2005 2004 2003
Discount rate 5.70% 6.10% 6.60%
Expected long-term rate of return on plan assets 6.50% 7.00% 7.50%
Assumed health care cost trend rate:
Initial rate 10.00% ' 11.00%' 11.30%'
Ultimate rate 5.20%' 5.20%' 5.70%'
Declining period 10 Years II Years 11 Years
, The initial rate was 11.00% for participants over 65, with an ultimate rate of 5.70%, the 2004 initial rate was 11.00% for
participants over age 65, with an ultimate rate of 5.70%, and the 2003 initial rate was 12.00% for participants over age 65,
with an ultimate rate of 5.60%.
Defined Contribution Plans
The Company and certain affiliated companies sponsor defined contribution retirement savings plans covering substantially
all employees of the Company. Employees may make salary deferral contributions of up to 80%. Salary deferrals of up to
6% are subject to a 50% Company match. The Company's expense for contributions to these plans was $6.2 million, $5.8
million and $5.5 million for 2005,2004 and 2003, respectively.
(15) Related Party Transactions
The Company has entered into significant, recurring transactions and agreements with NMIC, other affiliates and subsidiaries
as a part of its ongoing operations. These include annuity and life insurance contracts, office space leases, and agreements
related to reinsurance, cost sharing, administrative services, marketing, intercompany loans, intercompany repurchases, cash
management services and software licensing. Measures used to allocate expenses among companies include individual
employee estimates of time spent, special cost studies, the number of full-time employees, commission expense and other
methods agreed to by the participating companies and that are within industry guidelines and practices. In addition,
Nationwide Services Company, LLC (NSC), a subsidiary of NMIC, provides computer, telephone, mail, employee benefits
administration and other services to NMIC and certain of its direct and indirect subsidiaries, including the Company, based on
specified rates for units of service consumed. For the years ended December 31, 2005, 2004 and 2003, the Company made
payments to NMIC and NSC totaling $274.1 million, $194.6 million and $170.4 million, respectively. The Company does not
believe that expenses recognized under these agreements are materially different than expenses that would have been
recognized had the Company operated on a stand-alone basis.
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 $6.39 billion and
$5.75 billion as of December 31, 2005 and 2004, respectively. Total revenues from these contracts were $136.2 million,
$136.5 million and $138.9 million for the years ended December 31, 2005, 2004 and 2003, respectively, and include policy
charges, net investment income from investments backing the contracts and administrative fees. Total interest credited to the
account balances was $107.3 million, $107.9 million and $111.8 million for the years ended December 31, 2005, 2004 and
2003, respectively. The terms of these contracts are consistent in all material respects with what the Company otTers to
unaffiliated parties who are similarly situated.
The Company leases office space from NMIC and certain of its subsidiaries. For the years ended December 31, 2005, 2004
and 2003, the Company made lease payments to NMIC and its subsidiaries of$18.7 million, $18.4 million and $17.5 million,
respectively.
F-43
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned suhsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 200S, 2004 and 2003
NLIC has a reinsurance agreement with NMIC whereby all ofNLIC's accident and health business not ceded to unaffiliated
reinsurers is ceded to NMIC on a modified coinsurance basis. Either party may terminate the agreement on January I of any
year with prior notice. Under a modified coinsurance agreement, the ceding company retains invested assets, and investment
earnings are paid to the reinsurer. Under the terms of NLIC's agreements, the investment risk associated with changes in
interest rates is borne by the reinsurer. The ceding of risk does not discharge the original insurer from its primary obligation
to the policyholder. The Company believes that the terms of the modified coinsurance agreements are consistent in all
material respects with what the Company could have obtained with unaffiliated parties. Revenues ceded to NMIC for the
years ended December 31, 2005, 2004 and 2003 were $429.5 million, $335.6 million and $286.7 million, respectively, while
benefits, claims and expenses ceded during these years were $398.8 million, $336.0 million and $247.5 million, respectively.
Funds of Gartmore Global Investments, Inc. (GGI), an affiliate, are offered to the Company's customers as investment options
in certain of the Company's products. As of December 31, 2005 and 2004, customer allocations to GGI funds totaled $15.70
billion and $14.06 billion, respectively. For the years ended December 31, 2005, 2004 and 2003, GGI paid the Company
$51.6 million, $44.5 million and $38.6 million, respectively, for the distribution and servicing of these funds.
Under a marketing agreement with NMIC, NLIC makes payments to cover a portion of the agent marketing allowance that is
paid to Nationwide agents. These costs cover product development and promotion, sales literature, rent and similar items.
Payments under this agreement totaled $26.5 million, $23.2 million and $24.8 million for the years ended December 31, 2005,
2004 and 2003, 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 at the original sales
price plus interest. As of December 31, 2005 and 2004, the Company had no borrowings from affiliated entities under such
agreements. During 2005, 2004 and 2003, the most the Company had outstanding at any given time was $55.3 million,
$227.7 million and $126.0 million, respectively, and the amounts the Company incurred for interest expense on intercompany
repurchase agreements during these years were immaterial. The Company believes that the terms of the repurchase
agreements are materially consistent with what the Company could have obtained from unaffiliated parties.
The Company and various affiliates entered into agreements with Nationwide Cash Management Company (NCMC), an
affiliate, under which NCMC acts as a common agent in handling the purchase and sale of short-term securities for the
respective accounts of the participants. Amounts on deposit with NCMC for the benefit of the Company were $390.6 million
and $498.4 million as of December 31, 2005 and 2004, respectively, and are included in short-term investments on the
consolidated balance sheets. For the years ended December 31, 2005, 2004 and 2003, the Company paid NCMC fees totaling
less than $0.1 million under this agreement.
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, 2005, 2004 and 2003 were $59.0 million, $63.1 million and
$62.0 million, respectively.
During the year ended December 31,2005, the Company did not purchase any fixed maturity securities available-for-sale
from NFN compared to $829.9 million purchased during 2004. NFN recorded gross realized gains of $23.4 million on such
transactions during 2004.
An affiliate of the Company is currently developing a browser-based policy administration and online brokerage software
application for defined benefit plans. In connection with the development of this application, the Company made net
payments, which were expensed, to that affiliate related to development totaling $2.9 million, $2.6 million and $0.7 million
for the years ended December 31, 2005, 2004 and 2003, respectively.
Through September 30, 2002, the Company filed a consolidated federal income tax return with NMIC, as discussed in more
detail in Note II. Effective October I, 2002, NLIC began filing a consolidated federal income tax return with NLAIC. Total
payments to NMIC were $45.0 million, $37.4 million and $2.4 million in the years ended December 31,2005,2004 and 2003,
respectively. These payments related to tax years prior to deconsolidation.
F-44
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
In the first quarter of2003, NLlC received a $200.0 million capital contribution from NFS for general corporate purposes.
On February 22, 20M, NLlC declared a $70.0 million dividend to NFS. In 2005, 2004 and 2003, NLlC paid dividends to
NFS totaling $185.0 million, $125.0 million and $60.0 million, respectively. During 2003, NLlC returned capital totaling
$100.0 million to NFS.
See Note 10 for information on surplus notes payable from NLlC to NFS. In addition, the Company made interest payments
on unsecured notes to NFS totaling less than $0.1 million in 2005, 2004 and 2003. As of December 31, 2005, there were no
outstanding balances on unsecured notes to NFS.
(16) Contingencies
Legal Mailers
The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is not possible to
determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of
potential losses. Some of the matters, including certain of those referred to below, are in very preliminary stages, and the
Company does not have sufficient information to make an assessment of plaintiffs' claims for liability or damages. In some of
the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event
of certification) the size of the class and class period. In many of the cases, plaintiffs are seeking undefined amounts of
damages or other relief, including punitive damages and equitable remedies, that are difficult to quantify and cannot be
defined based on the information currently available. The Company does not believe, based on information currently known
by the Company's management, that the outcomes of such pending investigations and legal proceedings are likely to have a
material adverse effect on the Company's consolidated financial position. However, given the large and/or indeterminate
amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in
certain matters could have a material adverse effect on the Company's consolidated financial results in a particular quarterly
or annual period.
In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits relating
to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards
or settlements against life insurers other than the Company.
The fmancial services industry, including mutual fund, variable annuity, life insurance and distribution companies, has also
been the subject of increasing scrutiny by regulators, legislators and the media over the past few years. Numerous regulatory
agencies, including the SEC, the National Association of Securities Dealers and the New York State Attorney General, have
commenced industry-wide investigations regarding late trading and market timing in connection with mutual funds and
variable insurance contracts, and have commenced enforcement actions against some mutual fund and life insurance
companies on those issues. The Company has been contacted by or received subpoenas from the SEC and the New York
State Attorney General, who are investigating market timing in certain mutual funds offered in insurance products sponsored
by the Company. The Company has cooperated with these investigations. Information requests from the New York State
Attorney General and the SEC with respect to investigations into late trading and market timing were last responded to by the
Company and its affiliates in December 2003 and April 2005, respectively, and no further information requests have been
received with respect to these matters.
F-45
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decemher 31, 200S, 2004 and 2003
In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and
bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of
insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are
compensation and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their
affiliates, the use of side agreements and finite reinsurance agreements, and funding agreements issued to back MTN
programs. Related investigations and proceedings may be commenced in the future. The Company andlor its affiliates have
been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state
attorneys general for information relating to these investigations into compensation, revenue sharing and bidding
arrangements, anti-competitive activities, unsuitable sales or replacement practices, the use of side agreements and fmite
reinsurance agreements, and funding agreements backing the MTN program. The Company is cooperating with regulators in
connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries
encompass NMIC's operations.
These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide
legislation, rules and regulations that could significantly affect the financial services industry, including life insurance and
annuity companies. These proceedings also could affect the outcome of one or more of the Company's litigation matters.
There can be no assurance that any such litigation or regulatory actions will not have a material adverse effect on the
Company in the future.
On February I I, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin County, Ohio
entitled Michael Carr v. Nationwide Life Insurance Company. The complaint seeks recovery for breach of contract, fraud by
omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified
compensatory damages, disgorgement of all amounts in excess of the guaranteed maximum annual premium and attorneys'
fees. On February 2, 2006, the court granted the plaintiff's motion for class certification on the breach of contract and unjust
enrichment claims. The court certified a class consisting of all residents of the United States who, during the class period
from February 10, 1995 through February 2, 2006, purchased life insurance policies from NLIC that provided for guaranteed
maximum premiums and who paid premiums on a modal basis to NLIC. Excluded from the class are NLIC; any parent,
subsidiary or affiliate ofNLIC; all employees, officers and directors ofNLIC; and any justice, judge or magistrate judge of the
State of Ohio who may hear the case. The case is currently set for trial on April 10, 2006. NLIC intends to defend this
lawsuit vigorously.
On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County,
Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District
Court for the Southern District of Illinois on June I, 2004. On December 27, 2004, the case was transferred to the United
States District Court for the District of Maryland and included in the multi-district proceeding there entitled In Re Mutual
Funds Investment Litigation. In response, on May 13, 2005, the plaintiff filed a First Amended Complaint purporting to
represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance
product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that
experienced market timing or stale price trading activity. The First Amended Complaint purports to disclaim, with respect to
market timing or stale price trading in NLIC's annuities sub-accounts, any allegation based on NLIC's untrue statement,
failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any
class member's purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the
alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have
made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or
deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who,
prior to NLIC's untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or
contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested
in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The First
Amended Complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or
class member, including all compensatory damages and costs. On June 24, 2005, NLIC filed a motion to dismiss the First
Amended Complaint. The plaintiff has opposed that motion. NLIC intends to defend this lawsuit vigorously.
F-46
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem ber 31, 2005, 2004 and 2003
On January 21, 2004, the Company was named in a lawsuit filed in the United States District Court for the Northern District
of Mississippi entitled United Investors Life Insurance Company v. NatioffWide Life Insurance Company and/or NatioffWide
Life Insurance Company of America and/or NalioffWide Life and Annuity Insurance Company and/or NalioffWide Life and
Annuity Company of America and/or Nalionwide Financial Services, Inc. and/or NalioffWide Financial Corporalion, and John
Does A-Z. In its complaint, plaintiff United Investors alleges that the Company and/or its affiliated life insurance companies
caused the replacement of variable insurance policies and other financial products issued by United Investors with policies
issued by the Nationwide defendants. The plaintiff raises claims for: (I) violations of the Federal Lanham Act, and common
law unfair competition and defamation; (2) tortious interference with the plaintiff's contractual relationship with Waddell &
Reed, Inc. and/or its affiliates, Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc. and W&R Insurance
Agency, Inc., or with the plaintiff's contractual relationships with its variable policyholders; (3) civil conspiracy; and (4)
breach of fiduciary duty. The complaint seeks compensatory damages, punitive damages, pre- and post-judgment interest, a
full accounting, a constructive trust, and costs and disbursements, including attorneys' fees. The Company filed a motion to
dismiss the complaint on June 1,2004. On February 8, 2005 the court denied the motion to dismiss. On March 23, 2005, the
Company filed its answer, and on December 30, 2005, the Company filed a motion for summary judgment. The Company
intends to defend this lawsuit vigorously.
On October 3 I, 2003, NLIC and NLAIC were named in a lawsuit seeking class action status filed in the United States District
Court for the District of Arizona entitled Roberl Helman el al v. NatioffWide Life Insurance Company el al. The suit
challenges the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans. On April
8, 2004, the plaintiff filed an amended class action complaint on behalf of all persons who purchased an individual variable
deferred annuity contract or a certificate to a group variable annuity contract issued by NLIC or NLAIC which were allegedly
used to fund certain tax-deferred retirement plans. The amended class action complaint seeks unspecified compensatory
damages. NLIC and NLAIC filed a motion to dismiss the complaint on May 24, 2004. On July 27, 2004, the court granted
the motion to dismiss. The plaintiff has appealed that dismissal to the United States Court of Appeals for the Ninth Circuit.
NLIC and NLAIC intend to defend this lawsuit vigorously.
On August 15, 200 I, the Company was named in a lawsuit filed in the United States District Court for the District of
Connecticut entitled Lou Haddock, as lruslee of Ihe Flyle Tool & Die, Incorporaled Deferred Compensalion Plan, el al v.
Nalionwide Financial Services, Inc. and Nalionwide Life Insurance Company. The plaintiffs first amended their complaint on
September 5, 200 I to include class action allegations and have subsequently amended their complaint three times. As
amended, in the current complaint the plaintiffs seek to represent a class of ERJSA qualified retirement plans that purchased
variable annuities from NLIC. The plaintiffs allege that they invested ERJSA plan assets in their variable annuity contracts
and that the Company breached ERJSA fiduciary duties by allegedly accepting service payments from certain mutual funds.
The complaint seeks disgorgement of some or all ofthe payments allegedly received by the Company, other unspecified relief
for restitution, declaratory and injunctive relief, and attorneys' fees. On December 13, 2001, the plaintiffs filed a motion for
class certification. The plaintiffs filed a supplement to that motion on September 19, 2003. The Company opposed that
motion on December 24, 2003. On July 6, 2004, the Company filed a Revised Memorandum in Support of Summary
Judgment. The Company's motion for summary judgment was denied with respect to all claims on February 24, 2006. The
Company intends to defend this lawsuit vigorously.
Tax Mailers
The Company's federal income tax returns are routinely audited by the IRS, and the Company is currently under examination
for the 2000-2002 tax years. Management has established tax reserves representing its best estimate of additional amounts it
may be required to pay if certain tax positions it has taken are challenged and ultimately denied by the IRS. These reserves
are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such
as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial agreement on the deductibility/non-
deductibility 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. Management believes its tax reserves
reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open
tax years.
F-47
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services,lnc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
A significant component of the tax reserve is related to the separate account ORD. The Company has not reached any final
agreements with the IRS with respect to the ORD, and there can be no assurance that any such agreements will be reached.
However, resolution of the separate account ORD and/or other identified issues could result in a potentially significant
adjustment to the Company's future results of operations.
(17) Securitization Transactions
Since 2001, the Company has sold $626.1 million of credit enhanced equity interests in Tax Credit Funds to unrelated third
parties. The Company has guaranteed cumulative after-tax yields to the third party investors ranging from 3.75% to 5.25%
over periods ending between 2002 and 2022. As of December 31, 2005, the Company held guarantee reserves totaling $6.3
million on these transactions. 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, then the Company must fund any shortfall, which is mitigated by
stabilization collateral set aside by the Company at the inception of the transactions. The maximum amount of undiscounted
future payments that the Company could be required to pay the investors under the terms of the guarantees is $1.54 billion.
The Company does not anticipate making any payments related to the guarantees.
At the time of the sales, $5.9 million of net sale proceeds were set aside as collateral for certain properties owned by the Tax
Credit Funds that had not met all of the criteria necessary to generate tax credits. Such criteria include completion of
construction and the leasing of each unit to a qualified tenant, among others. Properties meeting the necessary criteria are
considered to have "stabilized." The properties are evaluated regularly, and the collateral is released when stabilized. During
2005, no stabilization collateral amounts were released into income, compared to $0.1 million released in 2004. As of
December 31, 2005 and 2004, $2.2 million and $1.4 million of stabilization collateral was unrecognized and recorded as a
reserve, respectively.
To the extent there are cash deficits in any specific property owned by the Tax Credit Funds, property reserves, property
operating guarantees and reserves held by the Tax Credit Funds are exhausted before the Company is required to perform
under its guarantees. To the extent the Company is ever required to perform under its guarantees, it may recover any such
funding out of the cash flow distributed from the sale of the underlying properties of the Tax Credit Funds. This cash flow
distribution would be paid to the Company prior to any cash flow distributions to unrelated third party investors.
(18) Variable Interest Entities
As of December 31, 2005 and 2004, the Company had relationships with 19 and 14 VIEs, respectively, where the Company
was the primary beneficiary. Each of these VIEs is a conduit that assists the Company in structured products transactions.
One of the VIEs is used in the securitization of mortgage loans, while the others are involved in the sale of Tax Credit Funds
to third party investors where the Company provides guaranteed returns (see Note 17). The results of operations and [mancial
position of these VIEs are included along with corresponding minority interest liabilities in the accompanying consolidated
financial statements.
F-48
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 200S, 2004 and 2003
The net assets of these VIEs totaled $440.6 million and $366.4 million as of December 31, 2005 and December 31, 2004,
respectively. The following table summarizes the components of net assets as of the dates indicated:
lin millions)
December 31,
2005
December 31,
2004
$
$
32.1
401.2
31.7
50.3
32.6
116.3
Mortgage loans on real estate
Other long-term investments
Short-term investments
Other assets
Short-term debt
Other liabilities
31.5
478.6
42.3
41.3
32.6
120.5
The total exposure to loss on these VIEs where the Company is the primary beneficiary was immaterial as of December 31,
2005 and December 31, 2004. For the mortgage loan VIE, to which the short-term debt relates, the creditors have no recourse
against the Company in the event of default by the VIE.
In addition to the VIEs described above, the Company holds variable interests, in the form of limited partnerships or similar
investments, in a number of Tax Credit Funds where the Company is not the primary beneficiary. These investments have
been held by the Company for periods of I to 10 years and allow the Company to experience certain tax credits and other tax
benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that
qualify as VIEs, but for which the Company is not the primary beneficiary. The total exposure to loss on these VIEs was
$53.9 million and $36.3 million as of December 31, 2005 and 2004, respectively.
(19) Segment Information
Management of the Company views its business primarily based on the underlying products, and this is the basis used for
defining its reportable segments. The Company reports four segments: Individual Investments, Retirement Plans, Individual
Protection, and Corporate and Other.
The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by
adjusting income from continuing operations before federal income taxes and the cumulative effect of adoption of accounting
principles to exclude: (1) net realized gains and losses on investments, hedging instruments and hedged items, except for
periodic net coupon settlements on non-qualifying derivatives; (2) net realized gains and losses related to securitizations; and
(3) the adjustment to amortization ofDAC related to net realized gains and losses.
Individual Investments
The Individual Investments segment consists of individual The BEST of AMERICAiXl and private label deferred variable
annuity products, deferred fixed annuity products, income products and advisory services. Individual 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, individual variable annuity contracts provide the customer
with access to a wide range of investment options and asset protection in the event of an untimely death, while individual fixed
annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.
Retirement Plans
The Retirement Plans segment is comprised of the Company's private and public sector retirement plans business. The private
sector includes IRC Section 401(k) business, and the public sector includes IRC Section 457 and Section 40 I (a) business, both
in the form of fixed and variable group annuities.
F-49
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned suhsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Decem her 31, 2005, 2004 and 2003
Individual Protection
The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and
BOLl products; traditional life insurance products; and universal life insurance products. Life insurance products provide a
death benefit and generally allow the customer to build cash value on a tax-advantaged basis.
Corporate and Other
The Corporate and Other segment includes certain structured products business; the MTN program; net investment income not
allocated to product segments; periodic net coupon settlements on non-qualil)dng derivatives; unallocated expenses; interest
expense on debt; revenue and expenses of the Company's non-insurance subsidiaries not reported in other segments; and net
realized gains and losses related to securitizations.
F-50
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wbolly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
The following table summarizes the Company's business segment operating results for the years ended December 31:
Individual Retirement Individual Corporate
(in millions) Investments Plans Protection and Otber Total
2005
Revenues:
Policy charges S 532.4 S 145.0 S 377.7 S S 1,055.1
Life insurance premiums 96.7 163.3 2fiO.0
Net investment income 822.4 642.9 332.8 307.1 2,105.2
Net realized gains on investments, hedging
instruments and hedged iterm' 9.5 9.5
Other 1.3 0.2 1.8 3.3
Total revenues 1,452.8 788.1 873.8 318.4 3,433.1
Benefits and expenses:
Interest credited to policyholder account values 557.7 444.8 182.4 146.1 1,331.0
Other benefIts and claims 149.1 228.4 377.5
Policyholder dividends on participating policies 33.1 33.1
Amortization ofDAC 329.1 47.2 89.0 1.0 466.3
Interest expense on debt 66.3 66.3
Other operating expenses 193.1 181.8 148.1 15.8 538.8
Total benefIts and expenses 1,229.0 673.8 681.0 229.2 2,813.0
Income from continuing operations before
federal income tax expense 223.8 114.3 192.8 89.2 S 620.1
Net realized gains on inves1rnents, hedging
instnments and hedged iteml' (9.5)
Adjustment to amortization ofDAC related to net
realized gains 1.0
~tax olJCl81ing earnings S 223.8 S 114.3 S 192.8 S SO.7
Asse1s as of period cod S 52,929.2 S 29,987.2 S 14,728.7 S 9,313.4 S 106,958.5
1 Excluding periodic net coupon settlements on non-qualifying derivatives.
F-51
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
lndilidual Retirement lndilidual Corporate
In",stments Plans Protection and Other Total
2004
RewDues:
Policy charges $ 503.6 $ ]57.0 $ 364.6 $ $ 1,025.2
Life insurance premiums 87.5 ]82.9 270.4
Net investment income 824.8 627.9 327.2 220.6 2,000.5
Net realized losses on investments, hedging
instruments and hedged itel1l'l I (43.0) (43.0)
Other 0.6 15.8 16.4
Total revenues ],416.5 784.9 874.7 193.4 3,269.5
Benefits and expenses:
Interest credited to policyholder account values 573.5 435.5 181.5 86.7 1,277.2
Other benefits and clam 136.9 232.3 369.2
Policyholder dividends on participating policies 36.2 36.2
Amortization ofDAC 276.1 39.6 94.4 410.1
Interest e"Pense on debt 59.8 59.8
Other operating e"Penses 210.0 184.5 ]59.7 27.8 582.0
Total benefits and e"Penses ],196.5 659.6 704.] 174.3 2,734.5
Income from continuing operations before
federal income tax e"Pense 220.0 125.3 170.6 19.] $ 535.0
Net realized losses on investments, hedging
instruments and hedged itel1l'l I 43.0
Pre.taxoperatin2 eamin2s $ 220.0 $ 125.3 $ 170.6 $ 62.]
Assets as of period end $ 52,642.5 $ 29,668.7 $ 12,932.4 $ 10,714.3 $ 105,957.9
I Excluding periodic net coupon settlements on non-qualiJying derivatives.
F-52
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
Individual Retirement Individual Corporate
(in millions) Investments Plans Protection and Other Total
2003
Revenues:
Policy charges $ 427.9 $ 150.0 $ 346.2 $ $ 924.1
Life insurance premiums 89.8 190.0 279.8
Net investment income 807.9 6402 324.3 200.7 1,973.1
Net realized losses on investments, hedging
instruments and hedged items I (100.8) (100.8)
Other 28.4 28.4
Total revenues 1,325.6 7902 860.5 128.3 3,104.6
Benefits and expenses:
Interest credited to policyholder account values 602.5 443.2 185.6 77.9 1,309.2
Other benefits and claim; 155.5 224.5 380.0
Policyholder dividends on participating policies 41.2 41.2
Arrorti2ation ofDAC 228.4 45.6 101.9 375.9
Interest expense on debt 48.4 48.4
Other operating expenses 172.9 178.9 157.3 6.4 515.5
Total benefits and expenses 1,159.3 667.7 710.5 132.7 2,670.2
Income (loss) from continuing operations before
federal income lax expense 166.3 122.5 150.0 (4.4) $ 434.4
Net realized losses on investments, hedging
instruments and hedged iterm' 100.8
Pre-tax opel1llintz eaminl!S $ 166.3 $ 122.5 $ 150.0 $ 96.4
Assets as of period end $ 49,419.2 $ 29,226.9 $ 11,286.6 $ 10,695.0 $ 100,627.7
, Excluding periodic net coupon settlements on non-qualifying derivatives.
F-53
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule I
Consolidated Summary of Investments - Other Than Investments in Related Parties
As of December 31,2005 (in millions)
Column A
Column B
Column C
Tvne of investment
Cost
Market
value
Column D
Amount at
which shnwn
in the
consolidated
balance sheet
Fixed maturity securities available-for-saIe:
Bonds:
U.S. Treaswy securities and obligations of U.S. Government
corporations
Agencies not backed by the full faith and credit of the U.S.
Government
Obligations of states and political subdivisions
Foreign govellUllellls
Public utilities
All other corporate
Total fixed maturity securities available-for-sale
Equity securities available-for-saIe:
Common stocks:
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Nonredeemable preferred stocks
Total equity securities available-for-sale
Mortgage loans on real estate, net
Real estate, net:
Investment properties
Acquired in satisfaction of debt
Total real estate, net
Policy loans
Other long-term investments
Short-term investments, including amounts lDlIIIlllled by a related party
Total investments
Difference from Column B primarily is due to valuation allowances due to impairments on mortgage loans on real estate
(see Note 7 to the audited consolidated financial statements), hedges and commitment hedges on mortgage loans on real
estate.
2 Difference from Column B primarily results from adjustments for accumulated depreciation.
3 Difference from Column B primarily is due to operating gains and/or losses of investments in limited partnerships.
4 Amount shown does not agree to the audited consolidated balance sheet due to $26.2 million in unconsolidated related
party investments.
See accompanying report of independent registered public accounting firm.
F-54
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned suhsidiary of Nationwide Financial Services, Inc.)
Schedule III Supplementary Insurance Information
As of December 31, 2005, 2004 and 2003 and for each of the years then ended (in millions)
Column A Column 8 Column C Column D Column E Columa F
Deferred Futu... policy
policy benefits, lones, Other policy
acquisition claims and Unearned claims and Premium
Year. Segment costs loss expenses . I benefits payable'
premiums revenue
2005: Individuallnvestments $ 1,936.4 $ 14,970.9 $ %.7
Retirement Plans 290.3 10,847.3
Individual Protection 1,328.7 5,53t.9 163.3
Corporate and Other 42.5 4,591.0
Total $ 3.597.9 $ 35.941.1 $ 260.0
2004: Individuallnvesbnents $ 2,015.5 $ 15.500.6 $ 87.5
Retirement Plans 301.7 10,139.8
Individual Protection 1,244.1 5,430.5 182.9
Corporate and Other (144.7) 5,312.2
Total $ 3.416.6 $ 36,383.1 $ 270.4
2003: Individual Invesbnents $ 1,984.0 $ 15,127.3 $ 89.8
Retirement Plans 301.1 9,501.7
Individual Protection 1,174.9 5,157.8 190.0
Corporate and Other (240.7) 5,592.3
Total $ 3.219.3 $ 35.379. I $ 279.8
Column A Column G Column H Column I Column J Column K
Net Benefits, claims, Amortization Other
investment ...... Ind of deferred policy operating Premiums
Year: Segment . 2 2
Income settlement expenses acquisition costs expenses written
2005: Individual Invesbnents $ 822.4 $ 706,8 $ 329.1 193.1
Retirement Plans 642.9 444.8 47.2 181.8
Individual Protection 332.8 443,9 89.0 148.1
Corporate and Other 307.1 146.1 1.0 15.8
Total $ 2.105.2 $ 1.741.6 $ 466.3 $ 538.8
2004: Individual Invesbnents $ 824.8 $ 710.4 $ 276.t $ 210.0
Retirement Plans 627.9 435.5 39.6 184.5
Individual Protection 327.2 450.0 94.4 159.7
Corporate and Other 220.6 86.7 27.8
Total $ 2.000.5 $ 1.682.6 $ 410.1 $ 582.0
2003: Individual Investments $ 807.9 $ 758.0 $ 228.4 $ 172.9
Retirement Plans 640.2 443.2 45.6 178.9
Individual Protection 324.3 451.3 101.9 157.3
Corporate and Other 200.7 77.9 6.4
Total $ 1.973.1 $ 1.730.4 $ 375.9 $ 515.5
Unearned premiums and other policy claims and benefits payable are included in Column C amounts.
2 Allocations of net investment income and certain operating expenses are based on numerous assumptions and estimates,
and reported segment operating results would change if different methods were applied.
See accompanying report of independent registered public accounting firm.
F-SS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services,lnc.)
Schedule IV Reinsurance
As of Dee ember 31, 2005, 2004 and 2003 and for each ofthe years then ended (dollars in millions)
CoIwm A Column B Colwm C Colwm D CoIwm E Column F
Pen:entage
Ceded to Assumed of amount
Grnss other from other Net assumed
amount companies COIIIIl8Dies allllluot to net
ZOOS
Ufe imurance in foree S 142,622.2 S 52,339.1 S 10.6 S 90,293.7 0.0%
Premium;:
Ufe imurance I S 311.5 S 51.8 $ 0.3 $ 260.0 0.1%
Accident and health imurance 415.2 445.1 29.9 N1A
Total $ 726.7 $ 496.9 $ 30.2 $ 260.0 11.6"1.
2004
Ufe imurance in foree $ 123.750.2 $ 46.866.2 $ 10.2 $ 76.894.2 0.0%
Premium;:
Life imurance I $ 300.7 $ 30.6 $ 0.3 $ 270.4 0.1%
Accident and health imurance 312.7 345.1 32.4 NlA
Total $ 613.4 $ 375.7 $ 32.7 $ 270.4 12.1%
2003
Ufe imurance in foree $ 118,953.] $ 43,124.3 $ 13.0 $ 75,841.8 0,0"10
Premium;:
Ufe imurance I $ 298.3 $ 18.7 $ 0.3 $ 279.8 0.1%
Accident and health imurance 291.8 295,2 3.4 NlA
Total $ 590.1 $ 313,9 $ 3.7 $ 279.8 1.3%
Primarily represents premiums from traditional life insurance and life-contingent immediate annuities and excludes
deposits on investment products and universal life insurance products.
See accompanying report of independent registered public accounting fIrm.
F-56
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule V Valuation and Qualifying Accounts
Years ended December 31, 2005, 2004 and 2003 (in millions)
Column A Column B Column C Column D Column E
Charged
Balance at (credited) to <lunged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions' period
2005
Valuation aJlO\WDCCS - m:n1gage loans
on real estate $ 33.3 $ 1.6 $ $ 3.8 $ 31.1
2004
Valuation a110\WDCCS - m:n1gage loans
on real estate $ 29.1 $ 7.5 $ $ 3.3 $ 33.3
2003
Valuation a110\WDCCS - mortgage loans
on real estate $ 43.4 $ (10.5) 2 $ $ 3.8 $ 29.1
1 Amounts represent transfers to real estate owned and recoveries.
2 Amount includes a $12.1 million reduction ofthe allowance due to revision of the calculation methodology.
See accompanying report of independent registered public accounting firm.
F-57