This
supplement updates certain information contained in your prospectus.
Please read
it and keep it with your prospectus for future
reference.
1.
Effective June 9, 2006, the following underlying mutual funds will be
available
as investment options in your contract:
AIM
Variable Insurance Funds - AIM V.I. Global Health Care Fund: Series I
Shares
AIM
Variable Insurance Funds- AIM V.I. Real Estate Fund: Series I
Shares
Fidelity
Variable Insurance Products Fund II - VIP Contrafund® Portfolio: Service Class
2
Neuberger
Berman Advisers Management Trust - AMT Partners Portfolio: I
Class
PIMCO
Variable Insurance Trust -Real Return Portfolio: Administrative
Class
PIMCO
Variable Insurance Trust -Total Return Portfolio: Administrative
Class
Royce
Capital Fund - Royce Micro-Cap Portfolio
SBL
Fund
- Series D (Global Series)
SBL
Fund
- Series J (Mid Cap Growth Series)
SBL
Fund
- Series N (Managed Asset Allocation Series)
SBL
Fund
- Series O (Equity Income Series)
SBL
Fund
- Series P (High Yield Series)
SBL
Fund
- Series Q (Small Cap Value Series)
SBL
Fund
- Series V (Mid Cap Value Series)
SBL
Fund
- Series X (Small Cap Growth Series)
SBL
Fund
- Series Y (Select 25 Series)
2.
Effective June 9, 2006, “Appendix A: Available Sub-Accounts” is amended to
include the following:
AIM
Variable Insurance Funds - AIM V.I. Global Health Care Fund: Series I
Shares
Investment
Adviser:
AIM
Advisors, Inc.
Investment
Objective:
Capital
growth.
AIM
Variable Insurance Funds- AIM V.I. Real Estate Fund: Series I
Shares
Investment
Adviser:
AIM
Advisors, Inc.
Investment
Objective:
High
total return.
Fidelity
Variable Insurance Products Fund II - VIP Contrafund® Portfolio: Service Class
2
Investment
Adviser:
Fidelity
Management & Research Company
Sub-adviser:
FMR
Co., Inc.
Investment
Objective:
Long-term
capital appreciation.
Neuberger
Berman Advisers Management Trust - AMT Partners Portfolio: I
Class
Investment
Adviser:
Neuberger
Berman Management Inc.
Investment
Objective:
Capital
growth.
PIMCO
Variable Insurance Trust -Real Return Portfolio: Administrative
Class
Investment
Adviser:
Pacific
Investment Management Company LLC
Investment
Objective:
Maximum
real return consistent with preservation of real capital and
prudent
investment management.
PIMCO
Variable Insurance Trust -Total Return Portfolio: Administrative
Class
Investment
Adviser:
Pacific
Investment Management Company LLC
Investment
Objective:
Maximum
total return consistent with preservation of capital and prudent
investment management.
Royce
Capital Fund - Royce Micro-Cap Portfolio
Investment
Adviser:
Royce
& Associates, LLC
Investment
Objective:
Long-term
capital growth.
SBL
Fund - Series D (Global Series)
Investment
Adviser:
Security
Management Company, LLC
Sub-adviser:
OppenheimerFunds,
Inc.
Investment
Objective:
Long-term
capital growth.
SBL
Fund - Series J (Mid Cap Growth Series)
Investment
Adviser:
Security
Management Company, LLC
Investment
Objective:
Capital
appreciation.
SBL
Fund - Series N (Managed Asset Allocation Series)
Investment
Adviser:
Security
Management Company, LLC
Sub-adviser:
T.
Rowe Price Associates, Inc.
Investment
Objective:
High
level of total return.
SBL
Fund - Series O (Equity Income Series)
Investment
Adviser:
Security
Management Company, LLC
Sub-adviser:
T.
Rowe Price Associates, Inc.
Investment
Objective:
Substantial
dividend income and capital
appreciation.
SBL
Fund - Series P (High Yield Series)
Investment
Adviser:
Security
Management Company, LLC
Investment
Objective:
High
current income and capital appreciation as a secondary
objective.
SBL
Fund - Series Q (Small Cap Value Series)
Investment
Adviser:
Security
Management Company, LLC
Sub-adviser:
Wells
Capital Management Incorporated
Investment
Objective:
Capital
growth.
SBL
Fund - Series V (Mid Cap Value Series)
Investment
Adviser:
Security
Management Company, LLC
Investment
Objective:
Long-term
growth of capital.
SBL
Fund - Series X (Small Cap Growth Series)
Investment
Adviser:
Security
Management Company, LLC
Sub-adviser:
RS
Investment Management, L.P.
Investment
Objective:
Long-term
growth of capital.
SBL
Fund - Series Y (Select 25 Series)
Investment
Adviser:
Security
Management Company, LLC
Investment
Objective:
Long-term
growth of capital.
3.
Effective
June 9, 2006, “Appendix B: Condensed Financial Information” is amended to
include the following after the first
paragraph:
The
AIM
Variable Insurance Funds- AIM V.I. Global Health Care Fund: Series I Shares,
AIM
Variable Insurance Funds- AIM V.I. Real Estate Fund: Series I Shares, Fidelity
Variable Insurance Products Fund II - VIP Contrafund® Portfolio: Service Class
2, Neuberger Berman Advisers Management Trust - AMT Partners Portfolio:
I Class,
PIMCO Variable Insurance Trust -Real Return Portfolio: Administrative Class,
PIMCO Variable Insurance Trust -Total Return Portfolio: Administrative
Class,
Royce Capital Fund - Royce Micro-Cap Portfolio, SBL Fund - Series D (Global
Series), SBL Fund - Series J (Mid Cap Growth Series), SBL Fund - Series
N
(Managed Asset Allocation Series), SBL Fund - Series O (Equity Income Series),
SBL Fund - Series P (High Yield Series), SBL Fund - Series Q (Small Cap
Value
Series), SBL Fund - Series V (Mid Cap Value Series), SBL Fund - Series
X (Small
Cap Growth Series) and SBL Fund - Series Y (Select 25 Series) were added
to the
variable account effective June 9, 2006. Therefore, no Condensed Financial
Information is available.
4.
On
July 3, 2006, the AIM V.I. Real Estate Fund: Series I Shares will
change
its name and investment objective to the
following:
AIM
Variable Insurance Funds- AIM V.I. Global Real Estate Fund: Series I
Shares
Investment
Adviser:
AIM
Advisors, Inc.
Investment
Objective:
High
total return through growth of capital and current
income.
This
prospectus contains basic information you should understand about
the
contracts before investing - the annuity contract is the legally
binding
instrument governing the relationship between you and Nationwide
should
you choose to invest. Please read this prospectus carefully and keep
it
for future reference.
The
Statement of Additional Information (dated May 1, 2006) which contains
additional information about the contracts and the variable account,
has
been filed with the Securities and Exchange Commission ("SEC") and
is
incorporated herein by reference. The table of contents for the Statement
of Additional Information is on page 25. For general information
or to
obtain free copies of the Statement of Additional Information call
1-800-NEA-VALU (800-632-8258) or write:
The
Statement of Additional Information and other material incorporated
by
reference can be found on the SEC website at: www.sec.gov.
Information about this and other Valuebuilder products can be found
at
www.neamb.com.
Before
investing, understand that annuities and/or life insurance products
are
not insured by the FDIC, NCUSIF, or any other Federal government
agency,
and are not deposits or obligations of, guaranteed by, or insured
by the
depository institution where offered or any of its affiliates. Annuities
that involve investment risk may lose value. These
securities have not been approved or disapproved by the SEC, nor
has the
SEC passed upon the accuracy or adequacy of the prospectus. Any
representation to the contrary is a criminal offense.
The
following is a list of the underlying mutual funds available under the contract.
AIM
Variable Insurance Funds
·
AIM
V.I. Capital Appreciation Fund: Series I
Shares
·
AIM
V.I. International Growth Fund: Series I Shares
Dreyfus
Variable Investment Fund - Appreciation Portfolio: Initial
Shares
·
Dreyfus
Variable Investment Fund - Developing Leaders Portfolio: Initial
Shares
·
Dreyfus
Variable Investment Fund - Quality Bond Portfolio: Initial
Shares*
Fidelity
Variable Insurance Products Fund
·
VIP
Equity-Income Portfolio: Initial
Class*
·
VIP
High Income Portfolio: Initial
Class*
Franklin
Templeton Variable Insurance Products Trust
·
Templeton
Foreign Securities Fund: Class 1
Gartmore
Variable Insurance Trust ("GVIT")
·
Federated
GVIT High Income Bond Fund: Class I*
·
Gartmore
GVIT Government Bond Fund: Class I
·
Gartmore
GVIT Money Market Fund: Class I
·
Gartmore
GVIT Nationwide® Fund: Class I
Janus
Aspen Series
· International
Growth Portfolio: Service Shares
Neuberger
Berman Advisers Management Trust
· AMT
Balanced Portfolio: I Class
Wells
Fargo Variable Trust
· Wells
Fargo Advantage VT Opportunity Fund:
Investor
Class
The
following underlying mutual fund is only available with contracts for which
good
order applications were received before September 27,1999.
American
Century Variable Portfolios, Inc.
· American
Century VP Capital Appreciation Fund:
Class I
*These
underlying mutual funds may invest in lower quality debt securities commonly
referred to as junk bonds.
Purchase
payments not invested in the underlying mutual fund options of the Nationwide
Multi-Flex Variable Account ("variable account") may be allocated to the fixed
account.
Accumulation
unit-
An
accounting unit of measure used to calculate the contract value allocated to
the
variable account before the annuitization date.
Annuitization
date-
The
date on which annuity payments begin.
Annuity
commencement date-
The
date on which annuity payments are scheduled to begin. This date may be changed
by the contract owner with Nationwide’s consent.
Annuity
unit-
An
accounting unit of measure used to calculate the variable payment annuity
payments.
Contract
value-
The
total of all accumulation units in a contract plus any amount held in the fixed
account.
Contract
year-
Each
year the contract is in force beginning with the date the contract is
issued.
ERISA-
The
Employee Retirement Income Security Act of 1974, as amended.
FDIC-
Federal
Deposit Insurance Corporation.
Fixed
account- An
investment option that is funded by the general account of
Nationwide.
General
account-
All
assets of Nationwide other than those of the variable account or in other
separate accounts that have been or may be established by
Nationwide.
Individual
Retirement Account- An
account that qualifies for favorable tax treatment under Section 408(a) of
the
Internal Revenue Code, but does not include Roth IRAs.
Individual
Retirement Annuity-
An
annuity contract that qualifies for favorable tax treatment under Section 408(b)
of the Internal Revenue Code, but does not include Roth IRAs.
Nationwide-
Nationwide Life Insurance Company.
NCUSIF-
Nationwide Credit Union Share Insurance Fund.
Non-Qualified
Contract-
A
contract which does not qualify for favorable tax treatment as a Qualified
Plan,
Individual Retirement Annuity, Roth IRA, SEP IRA, or Tax Sheltered
Annuity.
Qualified
Plans-
Retirement plans which receive favorable tax treatment under Section 401 of
the
Internal Revenue Code.
Roth
IRA- An
annuity contract which qualifies for favorable tax treatment under Section
408A
of the Internal Revenue Code.
SEC-
Securities and Exchange Commission.
SEP
IRA- An
annuity contract which qualifies for favorable tax treatment under Section
408(k) of the Internal Revenue Code.
Sub-accounts-
Divisions of the variable account to which accumulation units and annuity units
are separately maintained - each sub-account corresponds to a single underlying
mutual fund.
Tax
Sheltered Annuity-
An
annuity that qualifies for favorable tax treatment under Section 403(b) of
the
Internal Revenue Code.
Valuation
period-
Each
day the New York Stock Exchange is open for business.
Variable
account-
Nationwide Multi-Flex Variable Account, a separate account of Nationwide that
contains variable account allocations. The variable account is divided into
sub-accounts, each of which invests in shares of a separate underlying mutual
fund.
The
following tables describe the fees and expenses that a contract owner will
pay
when buying, owning, or surrendering the contract.
The
first
table describes the fees and expenses a contract owner will pay at the time
the
contract is purchased, surrendered, or when cash value is transferred between
investment options.
Maximum
Contingent Deferred Sales Charge
("CDSC") (as a percentage of purchase payments
surrendered)
7%1
Maximum
Loan Processing Fee
$252
Maximum
Premium Tax Charge (as
a percentage of purchase payments)
5%3
The
next
table describes the fees and expenses that a contract owner will pay
periodically during the life of the contract (not including underlying mutual
fund fees and expenses).
Variable
Account Annual Expenses
(annualized rate of total variable account charges as a percentage
of the
daily net assets)8
For
contracts issued on or after the later of November 3, 1997 or the
date on
which state insurance authorities approve applicable contract
modifications:
Actuarial
Risk Fee
1.30%
For
contracts issued prior to November 3, 1997 or on a date prior to
which
state insurance authorities approve applicable contract
modifications:
Mortality
and Expense Risk Charge
1.25%
Administration
Charge
0.05%
Total
Variable Account Annual Expenses
1.30%
________________________________
1 Range
of
CDSC over time:
Number
of Completed Years from Date of Purchase Payment
0
1
2
3
4
5
6
7
CDSC
Percentage
7%
6%
5%
4%
3%
2%
1%
0%
Starting
with the second contract year, the contract owner may withdraw without a
CDSC
the greater of:
any
amount withdrawn to meet minimum distribution requirements under
the
Internal Revenue Code.
This
free
withdrawal privilege is non-cumulative. Free amounts not taken during any
given
contract year cannot be taken as free amounts in a subsequent contract year.
The
Internal Revenue Code may impose restrictions on surrenders from contracts
issued as Tax Sheltered Annuities.
2
Nationwide may assess a loan processing fee at the time each new loan is
processed. Currently, Nationwide does not assess a loan processing fee. Loans
are only available for contracts issued as Tax Sheltered Annuities or contracts
issued to fund Qualified Plans. Loans are not available in all states. In
addition, some states may not permit Nationwide to assess a loan processing
fee.
3 Nationwide
will charge between 0% and 5% of purchase payments for premium taxes levied
by
state or other government entities.
4 The
loan
interest rate is determined, based on market conditions, at the time of loan
appliation or issuance. The loan balance in the collateral fixed account
is
credited with interest at 2.25% less than the loan interest rate. Thus, the
net
loan interest charge is an annual rate of 2.25%, which is applied against
the
outstanding loan balance.
5
The
Contract Maintenance Charge is deducted annually from all contracts on each
contract anniversary and upon a full surrender of the contract.
6
Nationwide may assess a contract exchange fee upon exchange of the contract
for
another Nationwide contract.
7
Nationwide may assess a school district processing fee to reimburse it for
charges assessed to Nationwide by individual school districts for the processing
of employee payroll deductions.
8
These
charges apply only to sub-account allocations. They do not apply to allocations
made to the fixed account. They are charged on a daily basis at the annualized
rate noted above.
The
next
table shows the minimum and maximum total operating expenses as of December31,2005 charged by the underlying mutual funds periodically during the life of
the
contract. More detail concerning each underlying mutual fund’s fees and
expenses, including waivers and reimbursements, is contained in the prospectus
for each underlying mutual fund.
Total
Annual Underlying Mutual Fund Operating Expenses
Minimum
Maximum
(expenses
that are deducted from underlying mutual fund assets, including management
fees, distribution (12b-1) fees, and other expenses, as a percentage
of
average underlying mutual fund assets)
0.27%
1.46%
The
minimum and maximum underlying mutual fund operating expenses indicated above
do
not reflect voluntary or contractual reimbursements and/or waivers applied
to
some underlying mutual funds. Therefore, actual expenses could be lower. Refer
to the underlying mutual fund prospectuses for specific expense
information.
This
Example is intended to help contract owners compare the cost of investing in
the
contract with the cost of investing in other variable annuity contracts. These
costs include contract owner transaction expenses, contract fees, variable
account annual expenses, and underlying mutual fund fees and expenses. The
example does not reflect premium taxes which, if reflected, would result in
higher expenses.
The
Example assumes:
·
a
$10,000 investment in the contract for the time periods
indicated;
·
a
5% return each year;
·
a
$30 Contract Maintenance Charge expressed as a percentage of the
average
account size; and
·
the
maximum and the minimum fees and expenses of any of the underlying
mutual
funds;
·
the
CDSC schedule; and
·
the
total variable account charges associated with the contract
(1.30%).
The
Example does not reflect the Maximum Contract Exchange Fee or the Maximum School
District Processing Fee.
The
contracts described in this prospectus are flexible purchase payment contracts.
The contracts may be issued as either individual or group contracts. In those
states where contracts are issued as group contracts, references throughout
this
prospectus to "contract(s)" will also mean "certificate(s)" and references
to
"contract owner" will mean "participant" unless otherwise indicated in the
plan.
The
annuity described in this prospectus is intended to provide benefits to a single
individual and his/her beneficiaries. It is not intended to be
used:
·
by
institutional investors;
·
in
connection with other Nationwide contracts that have the same annuitant;
or
·
in
connection with other Nationwide contracts that have different annuitants,
but the same contract owner.
6
By
providing these annuity benefits, Nationwide assumes certain risks. If
Nationwide determines that the risks it intended to assume in issuing the
contract have been altered by misusing the contract as described above,
Nationwide reserves the right to take any action it deems necessary to reduce
or
eliminate the altered risk, including, but not limited to, rescinding the
contract and returning the contract value (less any applicable Contingent
Deferred Sales Charge and/or market value adjustment). Nationwide also reserves
the right to take any action it deems necessary to reduce or eliminate altered
risk resulting from materially false, misleading, incomplete or otherwise
deficient information provided by the contract owner.
Charges
and Expenses
For
contracts issued before November 3, 1997 or in states which have not approved
applicable contract modifications, Nationwide will deduct:
a)
a
mortality and expense risk charge equal to an annualized rate of
1.25% of
the daily net assets of the variable account;
and
b)
an
administration charge equal to an annualized rate of 0.05% of the
daily
net assets of the variable account.
For
contracts issued on or after the later of November 3, 1997 or the date state
insurance authorities approve corresponding contract modifications, Nationwide
will deduct an actuarial risk fee equal to an annualized rate of 1.30% of the
daily net assets of the variable account for actuarial risks assumed by
Nationwide (see "Variable Account Charges for Contracts Issued On or After
November 3, 1997").
A
maximum
annual contract maintenance charge of $30 is assessed against each contract
on
the contract anniversary. This charge reimburses Nationwide for administrative
expenses related to contract issuance and maintenance (see "Contract Maintenance
Charge"). Nationwide will waive the contract maintenance charge
for:
(1)
Tax
Sheltered Annuities issued on or after the later of May 1, 1997,
or the
date state insurance authorities in states having a Unified Billing
Authority approve corresponding contract modifications;
or
(2)
contracts
issued to fund Qualified Plans (as defined by Section 401(k) of the
Internal Revenue Code) on or after the later of November 3, 1997,
or the
date on which state insurance authorities approve applicable contract
modifications.
Nationwide
does not deduct a sales charge from purchase payments upon deposit into the
contract. However, Nationwide may deduct a CDSC if any amount is withdrawn
from
the contract. This CDSC reimburses Nationwide for sales expenses. The amount
of
the CDSC will not exceed 7% of purchase payments surrendered.
Annuity
Payments
Annuity
payments begin on the annuitization date and will be based on the annuity
payment option chosen prior to annuitization. Annuity payments will generally
be
received within 7 to 10 days after each annuity payment date.
Taxation
How
the
contracts are taxed depends on the type of contract issued and the purpose
for
which the contract is purchased. Nationwide will charge against the contract
any
premium taxes levied by any governmental authority (see "Federal Tax
Considerations" in Appendix C and "Premium Taxes").
Ten
Day Free Look
Contract
owners may return the contract for any reason within ten days of receipt and
Nationwide will refund the contract value or the amount required by law (see
"Right to Revoke").
Financial
statements for the variable account and the consolidated financial statements
for Nationwide are located in the Statement of Additional Information. A current
Statement of Additional Information may be obtained without charge by contacting
the NEA Valuebuilder Program at the telephone number listed on page 1 of this
prospectus.
The
value
of an accumulation unit is determined on the basis of changes in the per share
value of the underlying mutual funds and variable account charges which may
vary
from contract to contract (for more information on the calculation of
accumulation unit values, see "Determining Variable Account Value - Valuing
an
Accumulation Unit"). Please refer to Appendix B for information regarding
accumulation units.
Nationwide
is a stock life insurance company organized under Ohio law in March, 1929.
Nationwide is a member of the Nationwide group of companies with its home office
at One Nationwide Plaza, Columbus, Ohio43215. Nationwide is a provider of
life
insurance, annuities and retirement products. It is admitted to do business
in
all states, the District of Columbia and Puerto Rico.
Nationwide
is a member of the Nationwide group of companies. Nationwide Mutual Insurance
Company and Nationwide Mutual Fire Insurance Company (the "Companies") are
the
ultimate controlling persons of the Nationwide group of companies. The Companies
were organized under Ohio law in December 1925 and 1933 respectively. The
Companies engage in a general insurance and reinsurance business, except life
insurance.
Security
Distributors, Inc.
The
contracts are distributed by the general distributor, Security Distributors,
Inc. ("SDI"), One Security Benefit Place, Topeka, Kansas66636-0001. SDI is
registered as a broker/dealer with the NASD and is a wholly-owned subsidiary
of
Security Benefit Group, Inc., a financial services holding company wholly owned
by Security Benefit Life Insurance Company.
Nationwide
Multi-Flex Variable Account is a variable account that invests in the underlying
mutual funds listed in Appendix A. Nationwide established the variable account
on October 7, 1981, pursuant to Ohio law. Although the variable account is
registered with the SEC as a unit investment trust pursuant to the Investment
Company Act of 1940 ("1940 Act"), the SEC does not supervise the management
of
Nationwide or the variable account.
Income,
gains, and losses credited to, or charged against, the variable account reflect
the variable account’s own investment experience and not the investment
experience of Nationwide’s other assets. The variable account’s assets are held
separately from Nationwide’s assets and are not chargeable with liabilities
incurred in any other business of Nationwide. Nationwide is obligated to pay
all
amounts promised to contract owners under the contracts.
The
variable account is divided into sub-accounts, each corresponding to a single
underlying mutual fund. Nationwide uses the assets of each sub-account to buy
shares of the underlying mutual funds based on contract owner
instructions.
Each
underlying mutual fund’s prospectus contains more detailed information about
that fund. Prospectuses for the underlying mutual funds should be read in
conjunction with this prospectus.
Underlying
mutual funds in the variable account are NOT publicly traded mutual funds.
They
are
only available as investment options in variable life insurance policies or
variable annuity contracts issued by life insurance companies, or in some cases,
through participation in certain qualified pension or retirement
plans.
The
investment advisers of the underlying mutual funds may manage publicly traded
mutual funds with similar names and investment objectives. However, the
underlying mutual funds are NOT directly related to any publicly traded mutual
fund. Contract owners should not compare the performance of a publicly traded
fund with the performance of underlying mutual funds participating in the
variable account. The performance of the underlying mutual funds could differ
substantially from that of any publicly traded funds.
The
particular underlying mutual funds available under the contract may change
from
time to time. Specifically, underlying mutual funds or underlying mutual fund
share classes that are currently available may be removed or closed off to
future investment. New underlying mutual funds or new share classes of currently
available underlying mutual funds may be added. Contract owners will receive
notice of any such changes that affect their contract. Additionally, not all
of
the underlying mutual funds are available in every state.
Voting
Rights
Contract
owners who have allocated assets to the underlying mutual funds are entitled
to
certain voting rights. Nationwide will vote contract owner shares at special
shareholder meetings based on contract owner instructions. However, if the
law
changes and Nationwide is allowed to vote in its own right, it may elect to
do
so.
Contract
owners with voting interests in an underlying mutual fund will be notified
of
issues requiring the shareholders’ vote as soon as possible before the
shareholder meeting. Notification will contain proxy materials and a form with
which to give Nationwide voting instructions. Nationwide will vote shares for
which no instructions are received in the same proportion as those that are
received.
The
number of shares which a contract owner may vote is determined by dividing
the
cash value of the amount they have allocated to an underlying mutual fund by
the
net asset value of that underlying mutual fund. Nationwide will designate a
date
for this determination not more than 90 days before the shareholder
meeting.
Material
Conflicts
The
underlying mutual funds may be offered through separate accounts of other
insurance companies, as well as through other separate accounts of Nationwide.
Nationwide does not anticipate any disadvantages to this. However, it is
possible that a conflict may arise between the interests of the variable account
and one or more of the other separate accounts in which these underlying mutual
funds participate.
Material
conflicts may occur due to a change in law affecting the operations of variable
life insurance policies and variable annuity contracts, or differences in the
voting instructions of the contract owners and those of other companies. If
a
material conflict occurs, Nationwide will take whatever steps are necessary
to
protect contract owners and variable annuity payees, including withdrawal of
the
variable account from participation in the underlying mutual fund(s) involved
in
the conflict.
Substitution
of Securities
Nationwide
may substitute, eliminate, or combine shares of another underlying mutual fund
for shares already purchased or to be purchased in the future if either of
the
following occurs:
1)
shares
of a current underlying mutual fund are no longer available for
investment; or
2)
further
investment in an underlying mutual fund is
inappropriate.
No
substitution, elimination, or combination of shares may take place without
the
prior approval of the SEC.
The
Fixed Account
The
fixed
account is an investment option that is funded by assets of Nationwide’s general
account. The general account contains all of Nationwide’s assets other than
those in this and other Nationwide separate accounts and is used to support
Nationwide’s annuity and insurance obligations.
The
general account is not subject to the same laws as the variable account and
the
SEC has not reviewed material in this prospectus relating to the fixed account.
8
Purchase
payments will be allocated to the fixed account by election of the contract
owner. Nationwide reserves the right to limit or refuse purchase payments
allocated to the fixed account at its sole discretion. Nationwide reserves
the
right to refuse transfers into the fixed account if the fixed account value
is
(or would be after the transfer) equal to or greater than 25% of the contract
value at the time the transfer is requested. Generally, Nationwide will invoke
this right when interest rates are low by historical standards.
The
investment income earned by the fixed account will be allocated to the contracts
at varying guaranteed interest rate(s) depending on the following categories
of
fixed account allocations:
·
New
Money Rate - The
rate credited on the fixed account allocation when the contract is
purchased or when subsequent purchase payments are made. Subsequent
purchase payments may receive different New
MoneyRates
than the rate when the contract was issued, since the New
MoneyRate
is
subject to change based on market
conditions.
·
Variable
Account to Fixed Rate - Allocations
transferred from any of the underlying mutual funds in the variable
account to the fixed account may receive a different rate. The rate
may be
lower than the New
MoneyRate.
There may be limits on the amount and frequency of movements from
the
variable account to the fixed
account.
·
Renewal
Rate -
The rate available for maturing fixed account allocations that are
entering a new guarantee period. The contract owner will be notified
of
this rate in a letter issued with the quarterly statements when any
of the
money in the contract owner’s fixed account matures. At that time, the
contract owner will have an opportunity to leave the money in the
fixed
account and receive the Renewal
Rate
or
the contract owner can move the money to any of the underlying mutual
fund
options.
·
Dollar
Cost Averaging -
From time to time, Nationwide may offer a more favorable rate for
an
initial purchase payment into a new contract when used in conjunction
with
a dollar cost averaging program.
All
of
these rates are subject to change on a daily basis; however, once applied to
the
fixed account, the interest rates are guaranteed until the end of the calendar
quarter during which the 12 month anniversary of the fixed account allocation
occurs.
Credited
interest rates are annualized rates - the effective yield of interest over
a
one-year period. Interest is credited to each contract on a daily basis. As
a
result, the credited interest rate is compounded daily to achieve the stated
effective yield.
The
guaranteed rate for any purchase payment will be effective for not less than
twelve months. Nationwide guarantees that the rate will not be less than the
minimum interest rate required by applicable state law.
Any
interest in excess of the minimum interest rate required by applicable state
law
will be credited to fixed account allocations at Nationwide’s sole discretion.
The contract owner assumes the risk that interest credited to fixed account
allocations may not exceed the minimum interest rate required by applicable
state law for any given year.
Nationwide
guarantees that the fixed account contract value will not be less than the
amount of the purchase payments allocated to the fixed account, plus interest
credited as described above, less any applicable charges including
CDSC.
Variable
annuities are complex investment products with unique benefits and advantages
that may be particularly useful in meeting long-term savings and retirement
needs. There are costs and charges associated with these benefits and advantages
- costs and charges that are different, or do not exist at all, within other
investment products. With
help from financial consultants and advisers, investors are encouraged to
compare and contrast the costs and benefits of the variable annuity described
in
this prospectus against those of other investment products, especially other
variable annuity and variable life insurance products offered by Nationwide
and
its affiliates.
Nationwide
offers a wide array of such products, many with different charges, benefit
features and underlying investment options. This process of comparison and
analysis should aid in determining whether the purchase of the contract
described in this prospectus is consistent with your investment objectives,
risk
tolerance, investment time horizon, marital status, tax situation and other
personal characteristics and needs. Not all benefits, programs, features and
investment options described in this prospectus are available or approved for
use in every state.
In
order
to comply with the USA Patriot Act and rules promulgated thereunder, Nationwide
will implement procedures designed to prevent contracts described in this
prospectus from being used to facilitate money laundering or the financing
of
terrorist activities.
These
contracts are offered to customers of various financial institutions and
brokerage firms. The individual financial institution or brokerage firm may
limit the availability of certain features or optional benefits in accordance
with their internal policies. No financial institution or brokerage firm is
responsible for the guarantees under the contracts. Guarantees
under the contracts are the sole responsibility of Nationwide.
In
general, deferred variable annuities are long-term investments; they are not
intended as short-term investments. Accordingly, Nationwide has designed the
contract to offer features, pricing, and investment options that encourage
long-term
ownership. It is very important that contract owners and prospective contract
owners understand all the costs associated with owning a contract, and if and
how those costs change during the lifetime of the contract. Contract and
optional charges may not be the same in later contract years as they are in
early contract years. The various contract and optional benefit charges are
assessed in order to compensate Nationwide for administrative services,
distribution and operational expenses, and assumed actuarial risks associated
with the contract.
9
Following
is a discussion of some relevant factors that may be of particular interest
to
prospective investors.
Distribution,
Promotional and Sales Expenses
Nationwide
pays commissions to the firms that sell the contracts. The maximum gross
commission that Nationwide will pay on the sale of the contracts is 9.2% of
purchase payments. Note that the individual registered representatives typically
receive only a portion of this amount; the remainder is retained by the firm.
Nationwide may also, instead of a premium-based commission, pay an asset-based
commission (sometimes referred to as "trails" or "residuals"), or a combination
of the two.
In
addition to or partially in lieu of commission, Nationwide may also pay the
selling firms a marketing allowance, which is based on the firm’s ability and
demonstrated willingness to promote and market Nationwide's products. How any
marketing allowance is spent is determined by the firm, but generally will
be
used to finance firm activities that may contribute to the promotion and
marketing of Nationwide's products. For more information on the exact
compensation arrangement associated with this contract, please consult your
registered representative.
Underlying
Mutual Funds
The
underlying mutual funds incur expense each time they sell, administer, or redeem
their shares. The variable account (established and administered by Nationwide)
aggregates all contract owner purchase, redemption, and transfer requests and
submits one net purchase/redemption request to the underlying mutual fund each
day. Thus, from the underlying mutual fund's standpoint, the variable account
is
a single shareholder. When the variable account aggregates transactions, the
underlying mutual fund is relieved of incurring the expense of processing
individual transactions. The expense is incurred by Nationwide.
Nationwide
also pays the costs of selling the contract (as discussed above), which benefits
the underlying mutual funds by providing contract owners with access to the
sub-accounts that correspond to the underlying mutual funds.
The
underlying mutual funds understand and acknowledge the value of these services
provided by Nationwide. Accordingly, the underlying mutual funds pay Nationwide
(or Nationwide affiliates) a fee for some of the distribution and operational
services that Nationwide provides (and related costs incurred). These payments
may be made pursuant to an underlying mutual fund's 12b-1 plan, in which case
they are deducted from underlying mutual fund assets. Alternatively, such
payments may be made pursuant to service/administration or other similar
agreements between Nationwide (or a Nationwide affiliate) and the underlying
mutual fund's adviser (or its affiliates), in which case payments are typically
made from assets outside of the underlying mutual fund assets. In some cases,
however, payments received may derive from sub-transfer agent fees or fees
taken
pursuant to administrative service plans adopted by the underlying mutual
fund.
Nationwide
took into consideration the anticipated payments from underlying mutual funds
when it determined the charges that would be assessed under the contract.
Without these payments, contract charges would be higher. Only those underlying
mutual funds that agree to pay Nationwide a fee will be offered in the contract.
Profitability
Nationwide
does consider profitability when determining the charges in the contract. In
early contract years, Nationwide does not anticipate earning a profit, since
that is a time when administrative and distribution expenses are typically
higher. Nationwide does, however, anticipate earning a profit in later contract
years. In general, Nationwide's profit will be greater the higher the investment
return and the longer the contract is held.
On
each
contract anniversary (and upon a full surrender of the contract), Nationwide
will deduct a contract maintenance charge of $30 to reimburse it for
administrative expenses relating to the issuance and maintenance of the
contract.
For
Tax
Sheltered Annuities issued on or after the later of May 1, 1997, or the date
on
which state insurance authorities approve applicable contract modifications,
Nationwide will waive the contract maintenance charge for contracts issued
in
states that use a unified billing authority program (or any similar program)
to
process purchase payments.
Nationwide
will also waive the contract maintenance charge for Qualified Plans (as defined
by Section 401(k) of the Internal Revenue Code) issued on or after the later
of
November 3, 1997, or the date state insurance authorities approve applicable
contract modifications.
The
deduction of the contract maintenance charge will be taken proportionately
from
each sub-account and the fixed account based on the value in each option as
compared to the total contract value.
Nationwide
will not increase the contract maintenance charge. Nationwide will not reduce
or
eliminate the contract maintenance charge where it would be discriminatory
or
unlawful.
Contingent
Deferred Sales Charge
No
sales
charge deduction is made from the purchase payments when amounts are deposited
into the contracts. However, if any part of the contract is surrendered,
Nationwide will deduct a CDSC. The CDSC will not exceed 7% of the purchase
payments surrendered.
The
CDSC is calculated by multiplying the applicable CDSC percentage (noted below)
by the amount of purchase payments surrendered.
For
purposes of calculating the CDSC, surrenders are considered to come first from
the oldest purchase payment made to the contract, then the next oldest purchase
payment, and so forth. Earnings are not subject to the CDSC, but may not be
distributed prior to the distribution of all purchase payments. (For tax
purposes, a surrender is usually treated as a withdrawal of earnings
first.)
10
The
CDSC
applies as follows:
Number
of Completed Years from Date of Purchase Payment
CDSC
Percentage
0
7%
1
6%
2
5%
3
4%
4
3%
5
2%
6
1%
7
0%
The
CDSC
is used to cover sales expenses, including commissions, production of sales
material, and other promotional expenses. If expenses are greater than the
CDSC,
the shortfall will be made up from Nationwide’s general account, which may
indirectly include portions of the Contract Maintenance Charge and the Mortality
and Expense Risk Charge or, if applicable, the Actuarial Risk Fee, since
Nationwide may generate a profit from these charges.
Contract
owners taking withdrawals before age 59½ may be subject to a 10% tax penalty. In
addition, all or a portion of the withdrawal may be subject to federal income
taxes (see "Non-Qualified Contracts - Natural Persons as Contract
Owners").
Waiver
of Contingent Deferred Sales Charge
Beginning
with the second contract year, the contract owner may withdraw without a CDSC
the greater of:
(a)
10%
of each purchase payment; or
(b)
any
amount withdrawn to meet minimum distribution requirements under
the
Internal Revenue Code.
This
CDSC-free privilege is non-cumulative. Free amounts not taken during any given
contract year cannot be taken as free amounts in a subsequent contract
year.
In
addition, no CDSC will be deducted:
(1)
upon
the annuitization of contracts which have been in force for at least
two
years;
(2)
upon
payment of a death benefit; or
(3)
from
any values which have been held under a contract for at least 7
years.
For
Tax
Sheltered Annuities, Qualified Contracts and SEP IRAs, Nationwide will waive
the
CDSC when:
·
the
plan participant has participated in the contract for 10 years of
active
deferrals;
·
the
plan participant dies;
·
the
plan participant experiences a hardship (as provided in Internal
Revenue
Code Section 403(b) and as defined by Internal Revenue Code Section
401(k)), provided that any hardship surrender may not include any
income
from salary reduction
contributions;
·
the
plan participant annuitizes after completing 2 years in the
contract;
·
the
plan participant separates from service (as defined in Internal Revenue
Code Section 401(k)(2)(B)) and has participated in the contract for
5
years; or
·
the
plan participant becomes disabled (within the meaning of Internal
Revenue
Code Section 72(m)(7)).
No
CDSC
applies to transfers among sub-accounts or between or among the fixed account
and/or the variable account.
The
CDSC
will not be eliminated if to do so would be unfairly discriminatory or
prohibited by state law.
This
contract is not designed for and does not support active trading strategies.
In
order to protect investors in this contract that do not utilize such strategies,
Nationwide may initiate certain exchange offers intended to provide contract
owners that meet certain criteria with an alternate variable annuity designed
to
accommodate active trading. If this contract is exchanged as part of an exchange
offer, the exchange will be made on the basis of the relative net asset values
of the exchanged contract. Furthermore, no CDSC will be assessed on the
exchanged assets and Nationwide will "tack" the contract’s CDSC schedule onto
the new contract. This means that the CDSC schedule will not start anew on
the
exchanged assets in the new contract; rather, the CDSC schedule from the
exchanged contract will be applied to the exchanged assets both in terms of
percentages and the number of completed contract years. This enables the
contract owner to exchange into the new contract without having to start a
new
CDSC schedule on exchanged assets. However, if subsequent purchase payments
are
made to the new contract, they will be subject to any applicable CDSC schedule
that is part of the new contract.
Variable
Account Charges for Contracts Issued Before November 3, 1997 (or Before the
Date
State Insurance Authorities Approve applicable Contract
Modifications)
Mortality
and Expense Risk Charges
Nationwide
deducts a Mortality and Expense Risk Charge from the variable account. This
amount is computed on a daily basis and is equal to an annual rate of 1.25%
of
the daily net assets of the variable account.
The
Mortality Risk Charge (0.80%) compensates Nationwide for guaranteeing the
annuity rate of the contracts. This guarantee ensures that the annuity rates
will not change regardless of the death rates of annuity payees or the general
population.
The
Expense Risk Charge (0.45%) compensates Nationwide for guaranteeing that
administration charges will not increase regardless of actual expenses.
If
the
Mortality and Expense Risk Charge is insufficient to cover actual expenses,
the
loss is borne by Nationwide. Nationwide may realize a profit from this
charge.
Administration
Charge
Nationwide
deducts an Administration Charge from the variable account. This amount is
computed on a daily basis and is equal to an annual rate of 0.05% of the daily
net assets of the variable account.
11
The
Administration Charge compensates Nationwide for administrative
expenses.
If
this
charge is insufficient to cover actual expenses, the loss is borne by
Nationwide.
Variable
Account Charges for Contracts Issued On or After November 3, 1997 (or the Date
on which State Insurance Authorities Approve applicable Contract
Modifications)
Actuarial
Risk Fee
Nationwide
deducts an Actuarial Risk Fee from the variable account. This amount is computed
on a daily basis and is equal to an annual rate of 1.30% of the daily net assets
of the variable account.
The
Actuarial Risk Fee compensates Nationwide for actuarial risks, including
administration expenses relating to contract issuance and maintenance, and
mortality risk expenses. Nationwide may realize a profit from this
charge.
School
District Processing Fee
For
contracts issued on or after the later of November 3, 1997 or the date state
insurance authorities approve applicable contract modifications, Nationwide
may
charge against the contract any charges assessed to Nationwide by individual
school districts for the processing of employee payroll deductions.
This
charge will not exceed the greater of $30 or 0.40% of the contract value. This
charge will never exceed the exact amount billed to Nationwide by school
districts for this service.
Nationwide
will deduct these charges from the contract:
on
any other date Nationwide becomes subject to these charges.
Nationwide
will determine the method that will be used to recoup these expenses. It will
be
at Nationwide’s sole discretion and may be changed without notice to contract
owners.
If
a
contract owner chooses to exchange the contract for another Nationwide contract
(or a contract of any of its affiliates), Nationwide will make a determination
as to the eligibility of such an exchange. In making the determination,
Nationwide will apply its rules and regulations, which may include assessing
a
reasonable processing fee for the exchange. This fee will never exceed $40.
The
contract exchange fee will be in addition to any contract maintenance charge
that may be applicable.
Premium
Taxes
Nationwide
will charge against the contract value any premium taxes levied by a state
or
other government entity. Premium tax rates currently range from 0% to 5.0%.
This
range is subject to change. The method used to assess premium tax will be
determined by Nationwide at its sole discretion in compliance with state
law.
If
applicable, Nationwide will deduct premium taxes from the contract either at:
The
contract owner has all rights under the contract. Purchasers
who name someone other than themselves as the contract owner will have no rights
under the contract.
Contract
owners of Non-Qualified Contracts may name a new contract owner at any time
before the annuitization date. Any change of contract owner automatically
revokes any prior contract owner designation. Changes in contract ownership
may
result in federal income taxation and may be subject to state and federal gift
taxes.
A
change
in contract ownership must be submitted in writing and recorded at Nationwide’s
home office. Once recorded, the change will be effective as of the date signed.
However, the change will not affect any payments made or actions taken by
Nationwide before it was recorded.
The
contract owner may also request a change in the annuitant, contingent annuitant,
contingent owner, beneficiary, or contingent beneficiary before the
annuitization date. These changes must be:
received
at Nationwide’s home office before the annuitization
date.
Nationwide
must review and approve any change requests. If the contract owner is not a
natural person and there is a change of the annuitant, distributions will be
made as if the contract owner died at the time of the change.
On
the
annuitization date, the annuitant will become the contract owner.
Contingent
Ownership
The
contingent owner is entitled to certain benefits under the contract if a
contract owner who is not
the
annuitant dies before the annuitization date.
The
contract owner may name or change a contingent owner at any time before the
annuitization date. To change the contingent owner, a written request must
be
submitted to Nationwide. Once Nationwide has recorded the change, it will be
effective as of the date it was signed, whether or not the contract owner was
living at the time it was recorded. The change will not affect any action taken
by Nationwide before the change was recorded.
12
Annuitant
The
annuitant is the person who will receive annuity payments and upon whose
continuation of life any annuity payment involving life contingencies depends.
This person must be age 78 or younger at the time of contract issuance, unless
Nationwide approves a request for an annuitant of greater age. The annuitant
may
be changed before the annuitization date with Nationwide’s consent.
Beneficiary
and Contingent Beneficiary
The
beneficiary is the person who is entitled to the death benefit if the annuitant
dies before the annuitization date. The contract owner can name more than one
beneficiary. Multiple beneficiaries will share the death benefit equally, unless
otherwise specified.
The
contract owner may change the beneficiary or contingent beneficiary during
the
annuitant’s lifetime by submitting a written request to Nationwide. Once
recorded, the change
will be effective as of the date the request was signed, whether or not the
annuitant was living at the time it was recorded. The change will not affect
any
action taken by Nationwide before the change was recorded.
Initial
purchase payments allocated to sub-accounts will be priced at the accumulation
unit value determined no later than 2 business days after receipt of an order
to
purchase if the application and all necessary information are complete. If
the
application is not complete, Nationwide may retain a purchase payment for up
to
5 business days while attempting to complete it. If the application is not
completed within 5 business days, the prospective purchaser will be informed
of
the reason for the delay. The purchase payment will be returned unless the
prospective purchaser specifically allows Nationwide to hold the purchase
payment until the application is completed.
Subsequent
purchase payments will be priced based on the next available accumulation unit
value after the payment is received.The
cumulative total of all purchase payments under contracts issued by Nationwide
on the life of any one annuitant cannot exceed $1,000,000 without Nationwide’s
prior consent.
Purchase
payments will not be priced when the New York Stock Exchange is closed or on
the
following nationally recognized holidays:
· New
Year’s Day
· Independence
Day
· Martin
Luther King, Jr. Day
· Labor
Day
· Presidents’
Day
· Thanksgiving
· Good
Friday
· Christmas
· Memorial
Day
Nationwide
also will not price purchase payments if:
(1)
trading
on the New York Stock Exchange is
restricted;
(2)
an
emergency exists making disposal or valuation of securities held
in the
variable account impracticable; or
(3)
the
SEC, by order, permits a suspension or postponement for the protection
of
security holders.
Rules
and
regulations of the SEC will govern as to when the conditions described in (2)
and (3) exist. If Nationwide is closed on days when the New York Stock Exchange
is open, contract value may be affected since the contract owner will not have
access to their account.
Allocation
of Purchase Payments
Nationwide
allocates purchase payments to sub-accounts and/or the fixed account as
instructed by the contract owner. Shares of the underlying mutual funds
allocated to the sub-accounts are purchased at net asset value, then converted
into accumulation units. Nationwide reserves the right to limit or refuse
purchase payments allocated to the fixed account at its sole
discretion.
Contract
owners can change allocations or make exchanges among the sub-accounts and
the
fixed account. However, no change may be made that would result in an amount
less than 1% of the purchase payments being allocated to any sub-account.
Certain transactions may be subject to conditions imposed by the underlying
mutual funds, as well as those set forth in the contract.
the
value of amounts allocated to the sub-accounts of the variable account;
and
(2)
amounts
allocated to the fixed account.
If
part
or all of the contract value is surrendered, or charges are assessed against
the
contract value, Nationwide will deduct a proportionate amount from each
sub-account and the fixed account based on current cash
values.
Determining
Variable Account Value - Valuing an Accumulation Unit
Purchase
payments or transfers allocated to sub-accounts are accounted for in
accumulation units. Accumulation unit values (for each sub-account) are
determined by calculating the net investment factor for the underlying mutual
funds for the current valuation period and multiplying that result with the
accumulation unit values determined on the previous valuation period.
Nationwide
uses the net investment factor as a way to calculate the investment performance
of a sub-account from valuation period to valuation period. For each
sub-account, the net investment factor shows the investment performance of
the
13
underlying
mutual fund in which a particular sub-account invests, including the charges
assessed against that sub-account for a valuation period.
The
net
investment factor for any particular sub-account is determined by dividing
(a)
by (b), and then subtracting (c) from the result, where:
(a)
is
the sum of:
(1)
the
net asset value of the underlying mutual fund as of the end of the
current
valuation period; and
(2)
the
per share amount of any dividend or income distributions made by
the
underlying mutual fund (if the date of the dividend or income distribution
occurs during the current valuation
period).
(b)
is
the net asset value of the underlying mutual fund determined as of
the end
of the preceding valuation period.
(c)
is
a factor representing the daily variable account charges. The factor
is
equal to an annual rate of 1.30% of the daily net assets of the variable
account.
Based
on
the change in the net investment factor, the value of an accumulation unit
may
increase or decrease. Changes in the net investment factor may not be directly
proportional to changes in the net asset value of the underlying mutual fund
shares because of the deduction of variable account charges.
Though
the number of accumulation units will not change as a result of investment
experience, the value of an accumulation unit may increase or decrease from
valuation period to valuation period.
Determining
Fixed Account Value
Nationwide
determines the value of the fixed account by:
(1)
adding
all amounts allocated to the fixed account, minus amounts previously
transferred or withdrawn; and
(2)
adding
any interest earned on the amounts
allocated.
Transfers
Transfers
from the Fixed Account to the Variable Account
Contract
owners may request to have fixed account allocations transferred to the variable
account only upon reaching the end of an interest rate guarantee period.
Normally, Nationwide will permit 100% of such fixed account allocations to
be
transferred to the variable account; however Nationwide may, under certain
economic conditions and at its discretion, limit the maximum transferable
amount. Under no circumstances will the maximum transferable amount be less
than
10% of the fixed account allocation reaching the end of an interest rate
guarantee period. Transfers of the fixed account allocations must be made within
45 days after reaching the end of an interest rate guarantee
period.
Contract
owners who use dollar cost averaging may transfer from the fixed account to
the
variable account under the terms of that program (see "Dollar Cost
Averaging").
Transfers
to the Fixed Account
Contract
owners may request to have variable account allocations transferred to the
fixed
account at any time. Normally, Nationwide will not restrict transfers from
the
variable account to the fixed account; however, Nationwide may establish a
maximum transfer limit from the variable account to the fixed account. Except
as
noted below, the transfer limit will not be less than 10% of the current value
of the variable account at the time the transfer is requested. Nationwide also
reserves the right to refuse transfers to the fixed account if the fixed account
value is (or
would
be after the transfer) equal
to
or greater than 25% of the contract value at the time transfer is requested.
Generally, Nationwide will invoke this right when rates are low by historical
standards.
Transfers
Among Sub-Accounts
Contracts
owners may request to have allocations transferred among the sub-accounts once
per valuation period.
Transfers
After Annuitization
After
annuitization, transfers may only be made on the anniversary of the
annuitization date.
Transfer
Requests
Contract
owners may submit transfer requests in writing, over the telephone, or via
the
internet. Nationwide will use reasonable procedures to confirm that instructions
are genuine and will not be liable for following instructions that it reasonably
determined to be genuine. Nationwide may restrict or withdraw the telephone
and/or internet transfer privilege at any time.
Generally,
sub-account transfers will receive the accumulation unit value next determined
after the transfer request is received. However, if a contract that is limited
to submitting transfer requests via U.S. mail submits a transfer request via
the
internet or telephone pursuant to Nationwide's one-day delay policy, the
transfer will be executed on the next business day after the exchange request
is
received by Nationwide (see "Managers
of Multiple Contracts").
Interest
Rate Guarantee Period
The
interest rate guarantee period is the period of time that the fixed account
interest rate is guaranteed to remain the same. Within 45 days of the end of
an
interest rate guarantee period, transfers may be made from the fixed account
to
the variable account. Nationwide will determine the amount that may be
transferred and will declare this amount at the end of the
guarantee
period. This amount will not be less than 10% of the amount in the fixed account
that is maturing.
For
new
purchase payments allocated to the fixed account, or transfers to the fixed
account from the variable account, this period begins on the date of deposit
or
transfer and ends on the one year anniversary of the deposit or transfer. The
guaranteed interest rate period may last for up to 3 months beyond the 1 year
anniversary because guaranteed terms end on the last day of a calendar
quarter.
14
During
an
interest rate guarantee period, transfers cannot be made from the fixed account,
and amounts transferred to the fixed account must remain on
deposit.
Transfer
Restrictions
Neither
the contracts described in this prospectus nor the underlying mutual funds
are
designed to support active trading strategies that require frequent movement
between or among sub-accounts (sometimes referred to as "market-timing" or
"short-term trading"). A contract owner who intends to use an active trading
strategy should consult his/her registered representative and request
information on other Nationwide variable annuity contracts that offer underlying
mutual funds that are designed specifically to support active trading
strategies.
Nationwide
discourages (and will take action to deter) short-term trading in this contract
because the frequent movement between or among sub-accounts may negatively
impact other investors in the contract. Short-term trading can result
in:
· the
dilution of the value of the investors’ interests in the underlying mutual
fund;
· underlying
mutual fund managers taking actions that negatively impact performance (keeping
a larger portion of the underlying mutual fund assets in cash or liquidating
investments prematurely in order to support redemption requests); and/or
· increased
administrative costs due to frequent purchases and redemptions.
To
protect investors in this contract from the negative impact of these practices,
Nationwide has implemented, or reserves the right to implement, several
processes and/or restrictions aimed at eliminating the negative impact of active
trading strategies. Nationwide makes no assurance that all the risks associated
with short-term trading will be completely eliminated by these processes and/or
restrictions.
U.S.
Mail Restrictions
Nationwide
monitors transfer activity in order to identify those who may be engaged in
harmful trading practices. Transaction reports are produced and examined.
Generally, a contract may appear on these reports if the contract owner (or
a
third party acting on their behalf) engages in a certain number of "transfer
events" in a given period. A "transfer event" is any transfer, or combination
of
transfers, occurring on a given trading day (valuation period). For example,
if
a contract owner executes multiple transfers involving 10 underlying mutual
funds in one day, this counts as one transfer event. A single transfer occurring
on a given trading day and involving only 2 underlying mutual funds (or one
underlying mutual fund if the transfer is made to or from the fixed account)
will also count as one transfer event.
As
a
result of this monitoring process, Nationwide may restrict the method of
communication by which transfer orders will be accepted. In general, Nationwide
will adhere to the following guidelines:
Trading
Behavior
Nationwide's
Response
6
or more transfer events in one calendar quarter
Nationwide
will mail a letter to the contract owner notifying them that:
(1) they
have been identified as engaging in harmful trading practices; and
(2) if
their transfer events exceed 11 in 2 consecutive calendar quarters
or 20
in one calendar year, the contract owner will be limited to submitting
transfer requests via U.S. mail.
More
than 11 transfer events in 2 consecutive calendar quarters
OR
More
than 20 transfer events in one calendar year
Nationwide
will automatically limit the contract owner to submitting transfer
requests via U.S. mail.
Each
January 1st,
Nationwide will start the monitoring anew, so that each contract starts with
0
transfer events each January 1. See, however, the "Other Restrictions" provision
below.
Some
investment advisers/representatives manage the assets of multiple Nationwide
contracts pursuant to trading authority granted or conveyed by multiple contract
owners. These multi-contract advisers will generally be required by Nationwide
to submit all transfer requests via U.S. mail.
Nationwide
may, as an administrative practice, implement a "one-day delay" program for
these multi-contract advisers, which they can use in addition to or in lieu
of
submitting transfer requests via U.S. mail. The one-day delay option permits
multi-contract advisers to continue to submit transfer requests via the internet
or telephone. However, transfer requests submitted by multi-contract advisers
via the internet or telephone will not receive the next available accumulation
unit value. Rather, they will receive the accumulation unit value that is
calculated on the following business day. Transfer requests submitted under
the
one-day delay program are irrevocable. Multi-contract advisers will receive
advance notice of being subject to the one-day delay
program.
Other
Restrictions
Nationwide
reserves the right to refuse or limit transfer requests, or take any other
action it deems necessary, in order to protect contract owners, annuitants,
and
beneficiaries from the negative investment results that may result from
short-term trading or other harmful investment practices employed by some
contract owners (or third parties acting on their behalf). In particular,
trading strategies designed to avoid or take advantage of Nationwide's
monitoring procedures (and other measures aimed at curbing harmful trading
practices) that are
15
nevertheless
determined by Nationwide to constitute harmful trading practices, may be
restricted.
Any
restrictions that Nationwide implements will be applied consistently and
uniformly.
Contract
owners have a ten day "free look" to examine the contract. The contract may
be
returned to Nationwide’s home office for any reason within ten days of receipt
and Nationwide will refund the contract value or another amount required by
law.
The refunded contract value will reflect the deduction of any contract charges,
unless otherwise required by law. All IRA, SEP IRA and Roth IRA refunds will
be
a return of purchase payments. State and/or federal law may provide additional
free look privileges.
Liability
of the variable account under this provision is limited to the contract value
in
each sub-account on the date of revocation. Any additional amounts refunded
to
the contract owner will be paid by Nationwide.
Contract
owners may surrender some or all of their contract value before the earlier
of
the annuitization date or the annuitant’s death. Surrender requests must be in
writing and Nationwide may require additional information. When taking a full
surrender, the contract must accompany the written request. Nationwide may
require a signature guarantee.
Nationwide
will pay any amounts surrendered from the sub-accounts within 7 days (see,
“Lump
Sum Payments”). However, Nationwide may suspend or postpone payment when it is
unable to price a purchase payment or transfer.Surrenders from the contract
may
be subject to federal income tax and/or a penalty tax. See "Federal Income
Taxes" in Appendix C.
Partial
Surrenders (Partial Redemptions)
Nationwide
will surrender accumulation units from the sub-accounts and an amount from
the
fixed account. The amount withdrawn from each investment option will be in
proportion to the value in each option at the time of the surrender
request.
A
CDSC
may apply. The contract owner may direct Nationwide to deduct the CDSC from
either:
(a)
the
amount requested; or
(b)
the
contract value remaining after the contract owner has received the
amount
requested.
If
the
contract owner does not make a specific election, any applicable CDSC will
be
taken from the contract value remaining after the contract owner has received
the amount requested.
Partial
Surrenders to Pay Investment Advisory Fees
Some
contract owners utilize an investment advisor(s) to manage their assets, for
which the investment advisor assesses a fee. Investment advisors are not
endorsed or affiliated with Nationwide and Nationwide makes no representation
as
to their qualifications. The fees for these investment advisory services are
specified in the respective account agreements and are separate from and in
addition to the contract fees and expenses described in this prospectus. Some
contract owners authorize their investment advisor to take a partial
surrender(s) from the contract in order to collect investment advisory fees.
Surrenders taken from this contract to pay advisory or investment management
fees are subject to the CDSC provisions of the contract and may be subject
to
income tax and/or tax penalties.
Full
Surrenders (Full Redemptions)
The
contract value upon full surrender may be more or less than the total of all
purchase payments made to the contract. The contract value will reflect:
the
investment performance of the underlying mutual funds;
and
·
amounts
allocated to the fixed account and any interest
credited.
A
CDSC
may apply.
Nationwide
is required by state law to reserve the right to postpone payment of assets
in
the fixed account for a period of up to six months from the date of the
surrender request.
Surrenders
Under a Qualified Plan or Tax Sheltered Annuity
Contract
owners of a Qualified Plan or Tax Sheltered Annuity may surrender part or all
of
their contract value before the earlier of the annuitization date or the
annuitant’s death, except as provided below:
(A)
Contract
value attributable to contributions made under a qualified cash or
deferred arrangement (within the meaning of Internal Revenue Code
Section
402(g)(3)(A)), a salary reduction agreement (within the meaning of
Internal Revenue Code Section 402(g)(3)(C)), or transfers from a
Custodial
Account (described in Section 403(b)(7) of the Internal Revenue Code),
may
be surrendered only:
(1)
when
the contract owner reaches age 59½, separates from service, dies, or
becomes disabled (within the meaning of Internal Revenue Code Section
72(m)(7)); or
(2)
in
the case of hardship (as defined for purposes of Internal Revenue
Code
Section 401(k)), provided that any such hardship surrender may
not
include any income earned on salary reduction
contributions.
(B)
The
surrender limitations described in Section A also apply
to:
(1)
salary
reduction contributions to Tax Sheltered Annuities made for plan
years
beginning after December 31, 1988;
16
(2)
earnings
credited to such contracts after the last plan year beginning before
January 1, 1989, on amounts attributable to salary reduction
contributions; and
(3)
all
amounts transferred from 403(b)(7) custodial accounts (except that
earnings and employer contributions as of December 31, 1988 in such
custodial accounts may be withdrawn in the case of
hardship).
(C)
Any
distribution other than the above, including a ten day free look
cancellation of the contract (when available) may result in taxes,
penalties, and/or retroactive disqualification of a Qualified Contract
or
Tax Sheltered Annuity.
In
order
to prevent disqualification of a Tax Sheltered Annuity after a ten day free
look
cancellation, Nationwide will transfer the proceeds to another Tax Sheltered
Annuity upon proper direction by the contract owner.
These
provisions explain Nationwide's understanding of current withdrawal
restrictions. These restrictions may change.
Distributions
pursuant to Qualified Domestic Relations Orders will not violate the
restrictions stated above.
When
the
contract is issued to fund a Qualified Plan, plan terms and the Internal Revenue
Code may modify these surrender provisions.
Surrenders
Under a Texas Optional Retirement Program
Redemption
restrictions apply to contracts issued under the Texas Optional Retirement
Program.
The
Texas
Attorney General has ruled that participants in contracts issued under the
Texas
Optional Retirement Program may only take withdrawals if:
·
the
participant dies;
·
the
participant retires;
·
the
participant terminates employment due to total disability;
or
·
the
participant that works in a Texas public institution of higher education
terminates employment.
Due
to
the restrictions described above, a participant under this plan will not be
able
to withdraw cash values from the contract unless one of the applicable
conditions is met. However, contract value may be transferred to other carriers,
subject to any CDSC.
Nationwide
issues this contract to participants in the Texas Optional Retirement Program
in
reliance upon and in compliance with Rule 6c-7 of the Investment Company Act
of
1940.
The
loan
privilege is only
available to owners of Qualified Contracts and Tax Sheltered Annuities. These
contract owners can take loans from the contract value beginning 30 days after
the contract is issued up to the annuitization date. Loans are subject to the
terms of the contract, the plan, and the Internal Revenue Code. Nationwide
may
modify the terms of a loan to comply with changes in applicable
law.
Minimum
and Maximum Loan Amounts
Contract
owners may borrow a minimum of $1,000, unless Nationwide is required by law
to
allow a lesser minimum amount. Each loan must individually satisfy the contract
minimum amount.
Nationwide
will calculate the maximum nontaxable
loan
amount based upon information provided by the participant or the employer.
Loans
may be taxable if a participant has additional loans from other plans. The
total
of all outstanding loans must not exceed the following limits:
up
to 80% of contract value (not more than $10,000)
$20,000
and over
up
to 50% of contract value (not more than $50,000*)
ERISA
Plans
All
up
to 50% of contract value (not more than $50,000*)
*The
$50,000 limits will be reduced by the highest outstanding balance owed during
the previous 12 months.
For
salary reduction Tax Sheltered Annuities, loans may be secured only by the
contract value.
Maximum
Loan Processing Fee
Nationwide
may charge a loan processing fee at the time each new loan is processed. The
loan processing fee, if assessed, will not exceed $25 per loan processed. This
fee compensates Nationwide for expenses related to administering and processing
loans.
The
fee
is taken from the sub-accounts and the fixed account in proportion to the
contract value at the time the loan is processed.
How
Loan Requests are Processed
All
loans
are made from the collateral fixed account. Nationwide transfers accumulation
units in proportion to the assets in each sub-account to the collateral fixed
account until the requested amount is reached. If there are not enough
accumulation units available in the contract to reach the requested loan amount,
Nationwide next transfers contract value from the fixed account. No CDSC will
be
deducted on transfers related to loan processing.
Interest
The
outstanding loan balance in the collateral fixed account is credited with
interest until the loan is repaid in full. The interest rate will be 2.25%
less
than the loan interest rate fixed by Nationwide. The interest rate is guaranteed
never to fall below the minimum interest rate required by applicable state
law.
Specific
loan terms are disclosed at the time of loan application or
issuance.
17
Loan
Repayment
Loans
must be repaid in five years. However, if the loan is used to purchase the
contract owner’s principal residence, the contract owner has 15 years to repay
the loan.
Contract
owners must identify loan repayments as loan repayments or they will be treated
as purchase payments and will not reduce the outstanding loan. Payments must
be
substantially level and made at
least
quarterly.
Loan
repayments will consist of principal and interest in amounts set forth in the
loan agreement. Repayments are allocated to the sub-accounts in accordance
with
the contract, unless Nationwide and the contract owner have agreed to amend
the
contract at a later date on a case by case basis.
Distributions
and Annuity Payments
Distributions
made from the contract while a loan is outstanding will be reduced by the amount
of the outstanding loan plus accrued interest if:
Nationwide
reserves the right to restrict any transfer of the contract while the loan
is
outstanding.
Grace
Period and Loan Default
If
a loan
payment is not made when due, interest will continue to accrue. A grace period
may be available (please refer to the terms of the loan agreement). If a loan
payment is not made by the end of the applicable grace period, the entire
loan
will be
treated as a deemed distribution and will be taxable to the borrower. This
deemed distribution may also be subject to an early withdrawal tax penalty
by
the Internal Revenue Service.
After
default, interest will continue to accrue on the loan. Defaulted amounts, plus
interest, are deducted from the contract value when the participant is eligible
for a distribution of at least that amount. Additional loans are not available
while a previous loan is in default.
Contract
rights are personal to the contract owner and may not be assigned without
Nationwide’s written consent.
A
Non-Qualified Contract owner may assign some or all rights under the contract.
An assignment must occur before annuitization while the annuitant is alive.
Once
proper notice of assignment is recorded by Nationwide’s home office, the
assignment will become effective as of the date the written request was signed.
IRAs,
Roth IRAs, SEP IRAs, Qualified Contracts and Tax Sheltered Annuities may not
be
assigned, pledged or otherwise transferred except where allowed by
law.
Nationwide
is not responsible for the validity or tax consequences of any assignment.
Nationwide is not liable for any payment or settlement made before the
assignment is recorded. Assignments will not be recorded until Nationwide
receives sufficient direction from the contract owner and the assignee regarding
the proper allocation of contract rights.
Amounts
pledged or assigned will be treated as distributions and will be included in
gross income to the extent that the cash value exceeds the investment in the
contract for the taxable year in which it was pledged or assigned. Amounts
assigned may be subject to a tax penalty equal to 10% of the amount included
in
gross income.
Assignment
of the entire contract value may cause the portion of the contract value
exceeding the total investment in the contract and previously taxed amounts
to
be included in gross income for federal income tax purposes each year that
the
assignment is in effect.
Asset
Rebalancing is the automatic reallocation of contract values to the sub-accounts
on a predetermined percentage basis. Asset Rebalancing is not available for
assets held in the fixed account. Each Asset Rebalancing reallocation is
considered a transfer event. Requests for Asset Rebalancing must be on a
Nationwide form. Once Asset Rebalancing is elected, it will only be terminated
upon specific instruction from the contract owner; manual transfers will not
automatically terminate the program.
Asset
Rebalancing occurs every three months or on another frequency if permitted
by
Nationwide. If the last day of the three-month period falls on a Saturday,
Sunday, recognized holiday, or any other day when the New York Stock Exchange
is
closed, Asset Rebalancing will occur on the next business day. Asset Rebalancing
may be subject to employer limitations or restrictions for contracts issued
to a
Qualified Plan or Tax Sheltered Annuity plan. Contract owners should consult
a
financial adviser to discuss the use of Asset Rebalancing.
Nationwide
reserves the right to stop establishing new Asset Rebalancing programs.
Nationwide also reserves the right to assess a processing fee for this
service.
Dollar
Cost Averaging
Dollar
Cost Averaging is a long-term transfer program that allows you to make regular,
level investments over time. It involves the automatic transfer of a specified
amount from the
fixed
account and certain sub-accounts into other sub-accounts. Contract owners may
participate in this program if their contract value is $5,000 or more.
Nationwide does not guarantee that this program will result in profit or protect
contract owners from loss.
Contract
owners direct Nationwide to automatically transfer specified amounts from the
fixed account, Fidelity Variable Insurance Products Fund - VIP High Income
Portfolio: Initial Class, GVIT - Gartmore GVIT Government Bond Fund: Class
I,
GVIT - Federated GVIT High Income Bond Fund:
18
Class
I,
and GVIT - Gartmore GVIT Money Market Fund: Class I to any other underlying
mutual fund. Dollar Cost Averaging transfers may not be directed to the fixed
account.
Transfers
occur monthly or on another frequency if permitted by Nationwide. Dollar Cost
Averaging transfers are not considered transfer events. Nationwide will process
transfers until either the value in the originating investment option is
exhausted, or the contract owner instructs Nationwide in writing to stop the
transfers.
Nationwide
reserves the right to stop establishing new dollar cost averaging programs.
Nationwide also reserves the right to assess a processing fee for this
service.
Dollar
Cost Averaging from the Fixed Account
Transfers
from the fixed account must be equal to or less than 1/30th
of the
fixed account value at the time the program is requested. A Dollar Cost
averaging program which transfers amounts from the fixed account to the variable
account is not the same as an Enhanced Rate Dollar Cost Averaging program.
Contract owners that wish to utilize dollar cost averaging from the fixed
account should first inquire whether any Enhanced Rate Dollar Cost Averaging
programs are available.
Enhanced
Rate Dollar Cost Averaging
Nationwide
may, from time to time, offer Enhanced Rate Dollar Cost Averaging programs.
Only
new purchase payments to the contract are eligible to participate in this
program. Nationwide reserves the right to require a minimum balance to establish
the Enhanced Rate Dollar Cost Averaging Program. Dollar Cost Averaging transfers
for this program may only be made from the fixed account. Such Enhanced Rate
Dollar Cost Averaging programs allow the contract owner to earn a higher rate
of
interest on assets in the fixed account than would normally be credited when
not
participating in the program. Each enhanced interest rate is guaranteed for
as
long as the corresponding program is in effect. Nationwide will process
transfers until either amounts in the enhanced rate fixed account are exhausted,
or the contract owner instructs Nationwide in writing to stop the transfers.
For
this program only,
when a
written request to discontinue transfers is received, Nationwide will
automatically transfer the remaining amount in the enhanced rate fixed account
to the money market sub-account.
Systematic
Withdrawals
Systematic
withdrawals allow contract owners to receive a specified amount (of at least
$100) on a monthly, quarterly, semi-annual, or annual basis. Requests for
systematic withdrawals and requests to discontinue systematic withdrawals must
be in writing.
The
withdrawals will be taken from the sub-accounts and the fixed account
proportionately unless Nationwide is instructed otherwise.
Nationwide
will withhold federal income taxes from systematic withdrawals unless otherwise
instructed by the contract owner. The Internal Revenue Service may impose a
10%
penalty tax if the contract owner is under age 59½ unless the contract owner has
made an irrevocable election of distributions of substantially equal
payments.
If
the
contract owner takes systematic withdrawals, the maximum amount that can be
withdrawn annually without a CDSC is the greater of:
(1)
10%
of all purchase payments made to the contract as of the withdrawal
date;
or
(2)
an
amount withdrawn to meet minimum distribution requirements under
the
Internal Revenue Code.
The
CDSC-free withdrawal privilege for systematic withdrawals is non-cumulative.
Free amounts not taken during any contract year cannot be taken as free amounts
in a subsequent contract year.
Nationwide
reserves the right to stop establishing new systematic withdrawal programs.
Nationwide also reserves the right to assess a processing fee for this service.
Systematic withdrawals are not available before the end of the ten-day free
look
period (see "Right to Revoke").
Lump
Sum Payments
When
death benefit proceeds or amounts due upon full surrender are paid out in a
lump
sum, Nationwide may transfer such amounts to its general account or to an
affiliate. Unless Nationwide is instructed otherwise, or if prohibited by state
law, a draftbook or checkbook will be issued to the beneficiary or the contract
owner or other person entitled to the payments.
The
recipient of the draft or checkbook may write drafts or checks, including
writing
one draft or check for the full amount of the account balance, or may leave
the
balance in the account where it will earn interest until such time as a draft
or
check is written. Interest is credited at a rate determined periodically by,
and
at the sole discretion of, Nationwide or its affiliate, if applicable.
For
federal income tax purposes, the lump sum payment will be deemed received
upon the
date of the transfer of the money to the general account or the affiliate,
whichever is applicable. The interest will be taxable in the tax year that
it is
credited.
The
annuity commencement date is the date on which annuity payments are scheduled
to
begin. The contract owner may change the annuity commencement date before
annuitization. This change must be in writing and approved by
Nationwide.
The
annuitization date is the date that annuity payments begin. The annuitization
date will be the first day of a calendar month unless otherwise agreed. The
annuitization date must be at least 2 years after the contract is issued, but
may not be later than either:
the
age (or date) specified by state law, where
applicable.
If
the
contract is issued to fund a Tax Sheltered Annuity, annuitization may occur
during the first 2 years subject to Nationwide’s approval.
19
The
Internal Revenue Code may require that distributions be made prior to the
annuitization dates specified above (see "Required Distributions" in Appendix
C).
Annuitization
Annuitization
is the period during which annuity payments are received. It is irrevocable
once
payments have begun. Upon arrival of the annuitization date, the annuitant
must
choose:
(1)
an
annuity payment option; and
(2)
either
a fixed payment annuity, variable payment annuity, or an available
combination.
Nationwide
guarantees that each payment under a fixed payment annuity will be the same
throughout annuitization. Under a variable payment annuity, the amount of each
payment will vary with the performance of the underlying mutual funds chosen
by
the contract owner.
Fixed
Payment Annuity
A
fixed
payment annuity is an annuity where the amount of the annuity payment remains
level.
The
first
payment under a fixed payment annuity is determined on the annuitization date
based on the annuitant’s age (in accordance with the contract) by:
(1)
deducting
applicable premium taxes from the total contract value;
then
(2)
applying
the contract value amount specified by the contract owner to the
fixed
payment annuity table for the annuity payment option elected.
Subsequent
payments will remain level unless the annuity payment option elected provides
otherwise. Nationwide does not credit discretionary interest during
annuitization.
VariablePayment
Annuity
A
variable payment annuity is an annuity where the amount of the annuity payments
will vary depending on the performance of the underlying mutual funds
selected.
The
first
payment under a variable payment annuity is determined on the annuitization
date
based on the annuitant’s age (in accordance with the contract) by:
(1)
deducting
applicable premium taxes from the total contract value;
then
(2)
applying
the contract value amount specified by the contract owner to the
variable
payment annuity table for the annuity payment option elected.
The
dollar amount of the first payment is converted into a set number of annuity
units that will represent each monthly payment. This is done by dividing the
dollar amount of the first payment by the value of an annuity unit as of the
annuitization date. This number of annuity units remains fixed during
annuitization. After annuitization, transfers among sub-accounts may only be
made on the anniversary of the annuitization date.
The
second and subsequent payments are determined by multiplying the fixed number
of
annuity units by the annuity unit value for the valuation period in which the
payment is due. The amount of the second and subsequent payments will vary
with
the performance of the selected underlying mutual funds. Nationwide guarantees
that variations in mortality experience from assumptions used to calculate
the
first payment will not affect the dollar amount of the second and subsequent
payments.
Value
of an Annuity Unit
Annuity
unit values for sub-accounts are determined by:
(1)
multiplying
the annuity unit value for the immediately preceding valuation period
by
the net investment factor for the subsequent valuation period (see
"Determining the Contract Value"); and
then
(2)
multiplying
the result from (1) by an interest factor to neutralize the assumed
investment rate of 3.5% per year built into the purchase rate basis
for
variable payment annuities.
Assumed
Investment Rate
An
assumed investment rate is the percentage rate of return assumed to determine
the amount of the first payment under a variable payment annuity. Nationwide
uses the assumed investment rate of 3.5% to calculate the first annuity payment
and to calculate the investment performance of an underlying mutual fund in
order to determine subsequent payments under a variable payment annuity. An
assumed investment rate is the percentage rate of return required to maintain
level variable annuity payments. Subsequent variable annuity payments may be
more or less than the first payment based on whether actual investment
performance of the underlying mutual funds is higher or lower than the assumed
investment rate of 3.5%.
Exchanges
among Underlying Mutual Funds
Exchanges
among underlying mutual funds during annuitization must be requested in writing.
Exchanges will occur on each anniversary of the annuitization date.
Frequency
and Amount of Annuity Payments
Payments
are made based on the annuity payment option selected, unless:
·
the
amount to be distributed is less than $500, in which case Nationwide
may
make one lump sum payment of the contract value;
or
·
an
annuity payment would be less than $20, in which case Nationwide
can
change the frequency of payments to intervals that will result in
payments
of at least $20. Payments will be made at least
annually.
Annuity
payments will generally be received within 7 to 10 days after each annuity
payment date.
Annuity
Payment Options
Contract
owners must elect an annuity payment option before the annuitization date.
Once
elected or assumed, the annuity payment option may not be changed. The annuity
payment options are:
(1)
Life
Annuity -
An
annuity payable periodically, but at least annually, for the lifetime of
the
annuitant. Payments
20
will
end upon the annuitant’s death. For example, if the annuitant dies before the
second annuity payment date, the annuitant will receive only one annuity
payment. The annuitant will only receive two annuity payments if he or she
dies
before the third annuity payment date, and so on
(2)
Joint
and Survivor Annuity -
An
annuity payable periodically, but at least annually, during the joint
lifetimes of the annuitant and a designated second individual. If
one of
these parties dies, payments will continue for the lifetime of the
survivor. As is the case under option 1, there is no guaranteed number
of
payments. Payments end upon the death of the last surviving party,
regardless of the number of payments
received.
(3)
Life
Annuity with 120 or 240 Monthly Payments Guaranteed
-
An
annuity payable monthly during the lifetime of the annuitant. If
the
annuitant dies before all of the guaranteed payments have been made,
payments will continue to the end of the guaranteed period and will
be
paid to a designee chosen by the annuitant at the time the annuity
payment
option was elected.
The
designee may elect to receive the present value of the remaining guaranteed
payments in a lump sum. The present value will be computed as of the date
Nationwide receives the notice of the annuitant’s death.
Not
all
of the annuity payment options may be available in all states. Contract owners
may request other options before the annuitization date. These options are
subject to Nationwide’s approval.
No
distribution for Non-Qualified Contracts will be made until an annuity payment
option has been elected. Qualified Contracts, IRAs, SEP IRAs and Tax Sheltered
Annuities are subject to the "minimum distribution" requirements set forth
in
the plan, contract, and the Internal Revenue Code.
If
the
contract owner who is not the annuitant dies before the annuitization date,
the
contingent owner becomes the contract owner. If no contingent owner is named,
the annuitant becomes the contract owner, unless the contract owner at the
time
of application, named his or her estate to receive the contract.
If
the
contract owner and annuitant are the same, and the contract owner/annuitant
dies
before the annuitization date, the contingent owner will not have any rights
in
the contract unless the contingent owner is also the beneficiary.
Distributions
under Non-Qualified Contracts will be made pursuant to the "Required
Distributions for Non-Qualified Contracts" provision in Appendix C.
If
the
annuitant who is not the contract owner dies before the annuitization date,
a
death benefit is payable to the beneficiary unless a contingent annuitant is
named. If a contingent annuitant is named, the contingent annuitant becomes
the
annuitant and no death benefit is payable.
If
no
beneficiaries survive the annuitant, the contingent beneficiary(ies) receives
the death benefit. Contingent beneficiaries will share the death benefit
equally, unless otherwise specified.
If
no
beneficiaries or contingent beneficiaries survive the annuitant, the contract
owner or the last surviving contract owner’s estate will receive the death
benefit.
If
the
annuitant dies after the annuitization date, any benefit that may be payable
will be paid according to the selected annuity payment option.
If
a
contract owner who is also the annuitant dies before the annuitization date,
a
death benefit is payable according to the "Death of the Annuitant -
Non-Qualified Contracts" provision.
If
the
contract owner/annuitant dies after the annuitization date, any benefit that
may
be payable will be paid according to the selected annuity payment
option.
How
the Death Benefit Value is Determined
The
beneficiary may elect to receive the death benefit:
(1)
in
a lump sum;
(2)
as
an annuity; or
(3)
in
any other manner permitted by law and approved by Nationwide.
If
the
recipient of the death benefit does not elect the form in which to receive
the
death benefit payment, Nationwide will pay the death benefit in a lump sum.
Please
refer to the “Lump Sum Payments” subsection of “Contract Owner Services” for
more information.
The
death
benefit value is determined as of the date Nationwide receives:
(1)
proper
proof of the annuitant’s death;
(2)
an
election specifying the distribution method;
and
(3)
any
state required form(s).
Contract
value will continue to be allocated according to the most recent allocation
instructions until the death benefit is paid.
If
the
contract has multiple beneficiaries entitled to receive a portion of the death
benefit, the contract value will continue
to be allocated according to the most recent allocation instructions until
the
first beneficiary is paid. After the first beneficiary is paid, the remaining
contract value will be allocated to the available money market sub-account
until
instructions are received from the remaining beneficiary(ies).
Death
Benefit Payment
Nationwide
will pay (or will begin to pay) the death benefit upon receiving proof of death
and the instructions as to the payment of the death benefit.
For
contracts issued on or after the later of November 3, 1997, or the date on
which
state insurance authorities approve applicable contract modifications, if the
annuitant dies before the first day of the calendar month following his or
her
75th birthday, the death benefit will be the greatest of:
the
total of all purchase payments, less an adjustment for amounts
surrendered; or
(3)
the
highest contract value as of the most recent five year contract
anniversary before the annuitant’s 75th birthday, less an adjustment for
amounts surrendered, plus purchase payments received after that five
year
contract anniversary.
The
adjustment for amounts surrendered will reduce items (2) and (3) above in the
same proportion that the contract value was reduced on the date(s) of the
partial surrenders.
For
contracts issued before November 3, 1997 or before the date on which state
insurance authorities approve applicable contract modifications, if the
annuitant dies before the first day of the calendar month following his or
her
75th birthday, the death benefit will be the greater of:
(1)
the
total of all purchase payments, increased at an annual rate of 5%
simple
interest from the date of each purchase payment for each full year
the
payment has been in force, less any amounts surrendered; or
Insurance
regulations in the states of New York and North Carolina prohibit the death
benefit described immediately above. For contracts issued in the states of
New
York and North Carolina, the death benefit will be the greater of:
(1)
the
sum of all purchase payments, less any amounts previously surrendered;
or
For
Tax Sheltered Annuities issued on or after the later of May 1, 1997, or the
date
on which state insurance authorities approve applicable contract modifications
and before May 1, 1998, or the date insurance authorities approve applicable
contract modifications, in states that use a Unified Billing Authority to
process purchase payments, the death benefit will be the greater
of:
(1)
the
total of all purchase payments, less any amounts surrendered; or
For
Tax Sheltered Annuities issued on or after May 1, 1998, or the date on which
insurance authorities approve applicable contract modifications in states that
use a Unified Billing Authority to process purchase payments, the death benefit
will be the greater of;
(1)
the
total of all purchase payments, less an adjustment for amounts
surrendered; or
The
adjustment for amounts surrendered will reduce item (1) above in the same
proportion that the contract value was reduced on the date(s) of the partial
surrender(s).
For
all
contracts issued, if the annuitant dies after the first day of the calendar
month following his or her 75th birthday and before the annuitization date,
the
death benefit will equal the contract value.
If
the
annuitant dies after the annuitization date, payment will be determined
according to the selected annuity payment option.
Nationwide
will mail contract owners statements and reports. Therefore, contract owners
should promptly notify Nationwide of any address change.
These
mailings will contain:
·
statements
showing the contract’s quarterly
activity;
·
confirmation
statements showing transactions that affect the contract's value.
Confirmation statements will not be sent for recurring transactions
(i.e.,
dollar cost averaging or salary reduction programs). Instead, confirmation
of recurring transactions will appear in the contract’s quarterly
statements; and
·
semi-annual
and annual reports of allocated underlying mutual
funds.
Contract
owners should review statements and confirmations carefully. All errors or
corrections must be reported to Nationwide immediately to assure proper
crediting to the contract. Unless Nationwide is notified within 30 days of
receipt of the statement, Nationwide will assume statements and confirmation
statements are correct.
IMPORTANT
NOTICE REGARDING DELIVERY OF
SECURITY
HOLDER DOCUMENTS
When
multiple copies of the same disclosure document(s), such as prospectuses,
supplements, proxy statements and semi-annual and annual reports are required
to
be mailed to multiple contract owners in the same household, Nationwide will
mail only one copy of each document, unless notified otherwise by the contract
owner(s). Household delivery will continue for the life of the contracts. Please
call 1-866-223-0303 to resume regular delivery. Please allow 30 days for regular
delivery to resume.
Legal
Proceedings
Nationwide
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 Nationwide 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. Nationwide
does
not believe, based on information
22
currently
known by Nationwide’s management, that the outcomes of such pending
investigations and legal proceedings are likely to have a material adverse
effect on Nationwide’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 Nationwide’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 Nationwide.
The
financial 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. Nationwide 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 Nationwide. Nationwide 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 Nationwide and its affiliates in December 2003 and
April 2005, respectively, and no further information requests have been received
with respect to these matters.
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 Nationwide’s MTN
programs. Related investigations and proceedings may be commenced in the future.
Nationwide 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
Nationwide’s MTN program. Nationwide is cooperating with regulators in
connection with these inquiries and will cooperate with Nationwide Mutual
Insurance Company (NMIC), Nationwide’s ultimate parent, 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 Nationwide’s litigation matters. There can be no assurance that any such
litigation or regulatory actions will not have a material adverse effect on
Nationwide in the future.
On
February 11, 2005, Nationwide 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 and the
Virgin Islands who, during the Class Period paid premiums on a modal basis
to
Nationwide for term life insurance policies issued by Nationwide during the
Class Period which provide for guaranteed maximum premiums, excluding products
NWLA-224 (and all state variations thereof), Life 4608 (and all state variations
thereof), and policy forms Life 4219, Life 4290, and Life 3617.
Excluded
from the class are: Nationwide; any parent, subsidiary or affiliate of
Nationwide; all employees, officers and directors of Nationwide; and any
justice, judge or magistrate judge of the State of Ohio who may hear the case.
The
Class
Period is from February 10, 1990, through the date the Class is certified.
Nationwide
intends to defend this lawsuit vigorously.
On
April13, 2004, Nationwide was named in a class action lawsuit filed in Circuit Court,
Third Judicial Circuit, Madison County, Illinois, entitled Woodbury
v. Nationwide Life Insurance Company.
Nationwide 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 Nationwide annuity or insurance product)
units of any Nationwide 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 Nationwide’s annuities
sub-accounts, any allegation based on Nationwide’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
Nationwide
23
annuities
or units in annuities sub-accounts. The plaintiff claims, in the alternative,
that if Nationwide 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 Nationwide’s untrue
statement, omission of material fact, use or employment of any manipulative
or
deceptive device or contrivance, held (through their ownership of an Nationwide
annuity or insurance product) units of any Nationwide 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,
Nationwide filed a motion to dismiss the First Amended Complaint. The plaintiff
has opposed that motion. Nationwide intends to defend this lawsuit vigorously.
On
January 21, 2004, Nationwide 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. Nationwide Life Insurance Company and/or
Nationwide Life Insurance Company of America and/or Nationwide Life and Annuity
Insurance Company and/or Nationwide Life and Annuity Company of America and/or
Nationwide Financial Services, Inc. and/or Nationwide Financial Corporation,
and
John Does A-Z. In
its
complaint, plaintiff United Investors alleges that Nationwide 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: (1)
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. Nationwide 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, Nationwide filed its answer, and on December30,2005, Nationwide filed a motion for summary judgment. Nationwide intends to
defend this lawsuit vigorously.
On
October 31, 2003, Nationwide and Nationwide Life and Annuity Insurance Company
(NLAIC) were named in a lawsuit seeking class action status filed in the
United
States District Court for the District of Arizona entitled Robert
Helman et al v. Nationwide Life Insurance Company et 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 Nationwide or NLAIC which were allegedly
used to fund certain tax-deferred retirement plans. The amended class action
complaint seeks unspecified compensatory damages. Nationwide 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. Nationwide and NLAIC
intend to defend this lawsuit vigorously.
On
August15, 2001, Nationwide was named in a lawsuit filed in the United States District
Court for the District of Connecticut entitled Lou
Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred
Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide
Life Insurance Company.
The
plaintiffs first amended their complaint on September 5, 2001 to include class
action allegations and have subsequently amended their complaint four times.
As
amended, in the current complaint, filed March 21, 2006, the plaintiffs seek
to
represent a class of ERISA qualified retirement plans that purchased variable
annuities from Nationwide. The plaintiffs allege that they invested ERISA plan
assets in their variable annuity contracts and that Nationwide breached ERISA
fiduciary duties by allegedly accepting service payments from certain mutual
funds. The complaint seeks disgorgement of some or all of the payments allegedly
received by Nationwide, 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. Nationwide opposed that motion on December24, 2003. On July 6, 2004, Nationwide filed a Revised Memorandum in Support
of
Summary Judgment. On February 24, 2006, Nationwide’s motion for summary judgment
was denied. On March 7, 2006, the plaintiff’s motion for class certification was
denied without prejudice. Nationwide intends to defend this lawsuit vigorously.
The
general distributor, SDI, is not engaged in any litigation of any material
nature.
Advertising
Money
Market Yields
Nationwide
may advertise the "yield" and "effective yield" for the money market
sub-account. Yield and effective yield are annualized, which means that it
is
assumed that the underlying mutual fund generates the same level of net income
throughout a year.
Yield
is
a measure of the net dividend and interest income earned over a specific
seven-day period (which period will be stated in the advertisement) expressed
as
a percentage of the offering price of the underlying mutual fund’s units. The
effective yield is calculated similarly, but reflects assumed compounding,
calculated under rules prescribed by the SEC. Thus, effective yield will be
slightly higher than yield, due to the compounding.
24
Historical
Performance of the Sub-Accounts
Nationwide
will advertise historical performance of the sub-accounts in accordance with
SEC
prescribed calculations. Performance information is annualized. However, if
a
sub-account has been available in the variable account for less than one year,
the performance information for that sub-account is not annualized. Performance
information is based on historical earnings and is not intended to predict
or
project future results.
Standardized
performance will reflect the maximum variable account charges possible under
the
contract, the Contract Maintenance Charge and the CDSC schedule.
Non-standardized performance, which will be accompanied by standardized
performance, will reflect other expense structures contemplated under the
contract. The expense assumptions will be stated in the
advertisement.
The
underlying mutual funds listed below are designed primarily as investments
for
variable annuity contracts and variable life insurance policies issued by
insurance companies. There is no guarantee that the investment objectives will
be met.
Please
refer to the prospectus for each underlying mutual fund for more detailed
information
AIM
Variable Insurance Funds - AIM V.I. Capital Appreciation Fund: Series I
Shares
Investment
Adviser:
AIM
Advisors, Inc.
Investment
Objective:
Growth
of capital.
AIM
Variable Insurance Funds - AIM V.I. International Growth Fund: Series I
Shares
Investment
Adviser:
AIM
Advisors, Inc.
Investment
Objective:
Long-term
growth of capital.
American
Century Variable Portfolios, Inc. - American Century VP Balanced Fund: Class
I
Investment
Adviser:
American
Century Investment Management, Inc.
Investment
Objective:
Long-term
capital growth and income.
American
Century Variable Portfolios, Inc. - American Century VP Capital Appreciation
Fund: Class I
This
underlying mutual fund is only available in contracts for which good order
applications were received before September 27, 1999.
Investment
Adviser:
American
Century Investment Management, Inc.
Investment
Objective:
Capital
growth.
American
Century Variable Portfolios, Inc. - American Century VP Income & Growth
Fund: Class I
The
following tables reflect accumulation unit values for the units of the
sub-accounts. As used in this appendix, the term "Period" is defined as a
complete calendar year, unless otherwise noted. Those Periods with an asterisk
(*) reflect accumulation unit information for a partial year only.
Sub-Accounts
Accumulation
Unit Value at Beginning of Period
Accumulation
Unit Value at End of Period
Percentage
Change in Accumulation Unit Value
Number
of Accumulation Units at End of Period
Period
AIM
Variable Insurance Funds - AIM V.I. Capital Appreciation Fund: Series
I
Shares - Q/NQ
10.676868
11.469653
7.43%
6,623
2005
10.145261
10.676868
5.24%
4,575
2004
7.936045
10.145261
27.84%
8,471
2003
10.629714
7.936045
-25.34%
5,920
2002
14.039112
10.629714
-24.28%
6,381
2001
15.964823
14.039112
-12.06%
489,105
2000
11.184821
15.964823
42.74%
177,522
1999
9.498576
11.184821
17.75%
80,661
1998
10.000000
9.498576
-5.01%
2,692
1997*
AIM
Variable Insurance Funds - AIM V.I. International Growth Fund: Series
I
Shares - Q/NQ
12.302542
14.320119
16.40%
476
2005
10.051603
12.302542
22.39%
419
2004
7.890688
10.051603
27.39%
589
2003
9.480766
7.890688
-16.77%
137
2002
12.562930
9.480766
-24.53%
64
2001
17.293870
12.562930
-27.36%
60,445
2000
11.300603
17.293870
53.03%
18,221
1999
9.913890
11.300603
13.99%
12,288
1998
10.000000
9.913890
-0.86%
591
1997*
American
Century Variable Portfolios, Inc. - American Century VP Balanced
Fund:
Class I -Q/NQ
11.036175
11.430683
3.57%
4,800
2005
10.185550
11.036175
8.35%
1,645
2004
8.638585
10.185550
17.91%
2,500
2003
9.677376
8.638585
-10.73%
3,317
2002
10.165458
9.677376
-4.80%
1,187
2001
10.579044
10.165458
-3.91%
345,957
2000
10.000000
10.579044
5.79%
3,482
1999*
American
Century Variable Portfolios, Inc. - American Century VP Capital
Appreciation Fund: Class I - Q/NQ
17.448933
21.022816
20.48%
4,300
2005
16.432489
17.448933
6.19%
3,566
2004
13.819339
16.432489
18.91%
4,043
2003
17.768711
13.819339
-22.23%
3,504
2002
25.029137
17.768711
-29.01%
4,124
2001
23.256156
25.029137
7.62%
631,044
2000
14.321327
23.256156
62.39%
1,434,464
1999
14.829811
14.321327
-3.43%
1,703,940
1998
15.531281
14.829811
-4.52%
2,180,179
1997
28
Sub-Accounts
Accumulation
Unit Value at Beginning of Period
Accumulation
Unit Value at End of Period
Percentage
Change in Accumulation Unit Value
Number
of Accumulation Units at End of Period
Period
American
Century Variable Portfolios, Inc. - American Century VP Income &
Growth Fund: Class I - Q/NQ
The
contracts described in this prospectus are classified according to the tax
treatment to which they are subject under the Internal Revenue Code. The
following is general description of the various types of contracts. Eligibility
requirements, tax benefits (if any), limitations, and other features of these
contracts will differ depending on the type of contract.
Individual
Retirement Annuities ("IRAs")
IRAs
are
contracts that satisfy the provisions of Section 408(b) of the Internal Revenue
Code, including the following requirements:
if
the contract owner is younger than age 50, the annual premium cannot
exceed $4,000; if the contract owner is age 50 or older, the annual
premium cannot exceed $4,500 (although rollovers of greater amounts
from
qualified plans, Tax Sheltered Annuities and other IRAs can be
received);
·
certain
minimum distribution requirements must be satisfied after the owner
attains the age of 70½;
·
the
entire interest of the owner in the contract is nonforfeitable; and
·
after
the death of the owner, additional distribution requirements may
be
imposed to ensure distribution of the entire balance in the contract
within the statutory period of
time.
Depending
on the circumstance of the owner, all or a portion of the contributions made
to
the account may be deducted for federal income tax purposes.
Failure
to make the mandatory distributions can result in an additional penalty tax
of
50% of the excess of the amount required to be distributed over the amount
that
was actually distributed.
IRAs
may
receive rollover contributions from Individual Retirement Accounts, other
Individual Retirement Annuities, Tax Sheltered Annuities, certain 457
governmental plans and qualified retirement plans (including 401(k)
plans).
When
the
owner of an IRA attains the age of 70½, the Internal Revenue Code requires that
certain minimum distributions be made. In addition, upon the death of the owner
of an IRA, mandatory distribution requirements are imposed by the Internal
Revenue Code to ensure distribution of the entire contract value within the
required statutory period. Due to recent changes in Treasury Regulations, the
amount used to compute the mandatory distributions may exceed the contract
value.
For
further details regarding IRAs, please refer to the disclosure statement that
should have been received when the IRA was established.
A
Non-Qualified Contract is a contract that does not qualify for certain tax
benefits under the Internal Revenue Code, and which is not an IRA, a Roth IRA,
a
SEP IRA or Tax Sheltered Annuity.
Upon
the
death of the owner of a Non-Qualified Contract, mandatory distribution
requirements are imposed to ensure distribution of the entire balance in the
contract within a required period.
Non-Qualified
Contracts that are owned by natural persons can defer the incidence of taxation
on the income earned in the contract until it is distributed or deemed to be
distributed. Non-Qualified contracts that are owned by nonnatural persons,
such
as trusts, corporations and partnerships are generally subject to current income
tax on the gain earned inside the contract, unless the nonnatural person owns
the contract as an “agent” of a natural person.
Qualified
Plans
Contracts
that are owned by Qualified Plans are not intended to confer tax benefits on
the
beneficiaries of the plan; they are used as investment vehicles for the plan.
The income tax consequences to the beneficiary of a Qualified Plan are
controlled by the operation of the plan, not by operation of the assets in
which
the plan invests.
Beneficiaries
of Qualified Plans should contact their employer and/or trustee of the plan
to
obtain and review the plan, trust, summary plan description and other documents
for the tax and other consequences of being a participant in a qualified
plan.
Roth
IRAs
Roth
IRA
contracts are contracts that satisfy the provisions of Section 408A of the
Internal Revenue Code, including the following requirements:
if
the contract owner is younger than age 50, the annual premium cannot
exceed $4,000; if the contract owner is age 50 or older, the annual
premium cannot exceed $4,500 (although rollovers of greater amounts
from
other Roth IRAs and IRAs can be
received);
·
the
entire interest of the owner in the contract is nonforfeitable; and
·
after
the death of the owner, certain distribution requirements may be
imposed
to ensure distribution of the entire balance in the contract within
the
statutory period of time.
A
Roth
IRA can receive a rollover from a IRA; however, the amount rolled over from
the
IRA to the Roth IRA is required to be included in the owner's federal gross
income at the time of the rollover, and will be subject to federal income
tax.
34
There
are
income limitations on eligibility to participate in a Roth IRA and additional
income limitations for eligibility to roll over amounts from an IRA to a Roth
IRA.
Upon
the
death of the owner of a Roth IRA, mandatory distribution requirements are
imposed by the Internal Revenue Code to ensure distribution of the entire
contract value within the required statutory period.
For
further details regarding Roth IRAs, please refer to the disclosure statement
provided when the Roth IRA was established.
Simplified
Employee Pension IRAs ("SEP IRAs")
A
SEP IRA
is a written plan established by an employer for the benefit of employees which
permits the employer to make contributions to an IRA established for the benefit
of each employee.
An
employee may make deductible contributions to a SEP IRA in the same way, and
with the same restrictions and limitations, as an IRA. In addition, the employer
may make contributions to the SEP IRA, subject to dollar and percentage
limitations imposed by both the Internal Revenue Code and the written
plan.
A
SEP IRA
plan established by an employer must satisfy:
·
minimum
participation rules;
·
top-heavy
contribution rules;
·
nondiscriminatory
allocation rules; and
·
requirements
regarding a written allocation formula.
In
addition, the plan cannot restrict withdrawals of non-elective contributions,
and must restrict withdrawals of elective contributions before March
15th
of
the
following year.
When
the
owner of SEP IRA attains the age of 70½, the Internal Revenue Code requires that
certain minimum distributions be made. In addition, upon the death of the owner
of a SEP IRA, mandatory distribution requirements are imposed by the Internal
Revenue Code to ensure distribution of the entire contract value within the
required statutory period. Due to recent changes in Treasury Regulations, the
amount used to compute the mandatory distributions may exceed the contract
value.
Tax
Sheltered Annuities
Certain
tax-exempt organizations (described in section 501(c)(3) of the Internal Revenue
Code) and public school systems may establish a plan under which annuity
contracts can be purchased for their employees. These annuity contracts are
often referred to as Tax Sheltered Annuities.
Purchase
payments made to Tax Sheltered Annuities are excludible from the income of
the
employee, up to statutory maximum amounts. These amounts should be set forth
in
the plan adopted by the employer.
Tax
Sheltered Annuities may receive rollover contributions from Individual
Retirement Accounts, IRAs, other Tax Sheltered Annuities, certain 457
governmental plans, and qualified retirement plans (including 401(k)
plans).
The
owner's interest in the contract is nonforfeitable (except for failure to pay
premiums) and cannot be transferred. Certain minimum distribution requirements
must be satisfied after the owner attains the age of 70½, and after the death of
the owner, additional distribution requirements may be imposed to ensure
distribution of the entire balance in the contract within the statutory period
of time.
When
the
owner of a Tax Sheltered Annuity attains the age of 70½, the Internal Revenue
Code requires that certain minimum distributions be made. In addition, upon
the
death of the owner of a Tax Sheltered Annuity, mandatory distribution
requirements are imposed by the Internal Revenue Code to ensure distribution
of
the entire contract value within the required statutory period. Due to recent
changes in Treasury Regulations, the amount used to compute the mandatory
distributions may exceed the contract value.
Federal
Tax Considerations
Federal
Income Taxes
The
tax
consequences of purchasing a contract described in this prospectus will depend
on:
the
purposes for which the contract is purchased;
and
·
the
personal circumstances of individual investors having interests in
the
contracts.
Existing
tax rules are subject to change, and may affect individuals differently
depending on their situation. Nationwide does not guarantee the tax status
of
any contracts or any transactions involving the contracts.
Representatives
of the Internal Revenue Service have informally suggested, from time to time,
that the number of underlying mutual funds available or the number of transfer
opportunities available under a variable product may be relevant in determining
whether the product qualifies for the desired tax treatment. In 2003, the
Internal Revenue Service issued formal guidance, in Revenue Ruling 2003-91,
that
indicates that if the number of underlying mutual funds available in a variable
insurance product does not exceed 20, the number of underlying mutual funds
alone would not cause the contract to not qualify for the desired tax treatment.
The Internal Revenue Service has also indicated that exceeding 20 investment
options may be considered a factor, along with other factors including the
number of transfer opportunities available under the contract, when determining
whether the contract qualifies for the desired tax treatment. The revenue ruling
did not indicate the actual number of underlying mutual funds that would cause
the contract to not provide the desired tax treatment. Should the U.S. Secretary
of the Treasury issue additional rules or regulations limiting the number of
underlying mutual funds, transfers between underlying mutual funds, exchanges
of
underlying mutual funds or changes in investment objectives of underlying mutual
funds such that the contract would no longer qualify for tax deferred treatment
under Section 72 of the Internal Revenue Code, Nationwide will take whatever
steps are available to remain in compliance.
35
If
the
contract is purchased as an investment of certain retirement plans (such as
qualified retirement plans, Individual Retirement Accounts, and custodial
accounts as described in Sections 401, 408(a), and 403(b)(7) of the Internal
Revenue Code), the tax advantages enjoyed by the contract owner and/or annuitant
may relate to participation in the plan rather than ownership of the annuity
contract. Such plans are permitted to purchase investments other than annuities
and retain tax-deferred status.
The
following is a brief summary of some of the federal income tax considerations
related to the contracts. In addition to the federal income tax, distributions
from annuity contracts may be subject to state and local income taxes. The
tax
rules across all states and localities are not uniform and therefore will not
be
discussed in this prospectus. Tax rules that may apply to contracts issued
in
U.S. territories such as Puerto Rico and Guam are also not discussed. Nothing
in
this prospectus should be considered to be tax advice. Contract owners and
prospective contract owners should consult a financial consultant, tax advisor
or legal counsel to discuss the taxation and use of the contracts.
IRAs
and SEP IRAs
Distributions
from IRAs and SEP IRAs are generally taxed as ordinary income when received.
If
any of the amount contributed to the IRA was nondeductible for federal income
tax purposes, then a portion of each distribution is excludable from income.
If
distributions of income from an IRA are made prior to the date that the owner
attains the age of 59½ years, the income is subject to the regular income tax
and an additional penalty tax of 10% is generally applicable. The 10% penalty
tax can be avoided if the distribution is:
·
made
to a beneficiary on or after the death of the owner;
·
attributable
to the owner becoming disabled (as defined in the Internal Revenue
Code);
·
part
of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of
the
owner, or the joint lives (or joint life expectancies) of the owner
and
his or her designated beneficiary;
·
used
for qualified higher education expenses; or
·
used
for expenses attributable to the purchase of a home for a qualified
first-time buyer.
If
the
contract owner dies before the contract is completely distributed, the balance
will be included in the contract owner’s gross estate for tax
purposes.
Roth
IRAs
Distributions
of earnings from Roth IRAs are taxable or nontaxable depending upon whether
they
are "qualified distributions" or "non-qualified distributions." A "qualified
distribution" is one that satisfies the five-year rule and meets one of the
following requirements:
·
it
is made on or after the date on which the contract owner attains
age
59½;
·
it
is made to a beneficiary (or the contract owner’s estate) on or after the
death of the contract owner;
·
it
is attributable to the contract owner’s disability; or
·
it
is used for expenses attributable to the purchase of a home for a
qualified first-time buyer.
The
five
year rule generally is satisfied if the distribution is not made within the
five
year period beginning with the first taxable year in which a contribution is
made to any Roth IRA established for the owner.
A
qualified distribution is not includible in gross income for federal income
tax
purposes.
A
non-qualified distribution is not includible in gross income to the extent
that
the distribution, when added to all previous distributions, does not exceed
the
total amount of contributions made to the Roth IRA. Any non-qualified
distribution in excess of the total contributions is includible in the contract
owner’s gross income as ordinary income in the year that it is distributed to
the contract owner.
Special
rules apply for Roth IRAs that have proceeds received from a IRA prior to
January 1, 1999 if the owner elected the special 4-year income averaging
provisions that were in effect for 1998.
If
non-qualified distributions of income from a Roth IRA are made prior to the
date
that the owner attains the age of 59½ years, the income is subject to both the
regular income tax and an additional penalty tax of 10%. The penalty tax can
be
avoided if the distribution is:
·
made
to a beneficiary on or after the death of the owner;
·
attributable
to the owner becoming disabled (as defined in the Internal Revenue
Code);
·
part
of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of
the
owner, or the joint lives (or joint life expectancies) of the owner
and
his or her designated beneficiary;
·
for
qualified higher education expenses; or
·
used
for expenses attributable to the purchase of a home for a qualified
first-time buyer.
If
the
contract owner dies before the contract is completely distributed, the balance
will be included in the contract owner’s gross estate for tax
purposes.
Tax
Sheltered Annuities
Distributions
from Tax Sheltered Annuities are generally taxed when received. A portion of
each distribution is excludable from income based on a formula established
pursuant to the Internal Revenue Code. The formula excludes from income the
amount invested in the contract divided by the number of anticipated payments
until the full investment in the contract is recovered. Thereafter all
distributions are fully taxable.
If
a
distribution of income is made from a Tax Sheltered Annuity prior to the date
that the owner attains the age of 59½ years, the income is subject to both the
regular income tax and
36
an
additional penalty tax of 10%. The penalty tax can be avoided if the
distribution is:
·
made
to a beneficiary on or after the death of the owner;
·
attributable
to the owner becoming disabled (as defined in the Internal Revenue
Code);
·
part
of a series of substantially equal periodic payments made not less
frequently than annually made for the life (or life expectancy) of
the
owner, or the joint lives (or joint life expectancies) of the owner
and
his or her designated beneficiary;
or
·
made
to the owner after separation from service with his or her employer
after
age 55.
If
the
contract owner dies before the contract is completely distributed, the balance
will be included in the contract owner’s gross estate for tax
purposes.
Generally,
the income earned inside a Non-Qualified Annuity Contract that is owned by
a
natural person is not taxable until it is distributed from the
contract.
Distributions
before the annuitization date are taxable to the contract owner to the extent
that the cash value of the contract exceeds the contract owner’s investment at
the time of the distribution. Distributions, for this purpose, include partial
surrenders, any portion of the contract that is assigned or pledged, amounts
borrowed from the contract, or any portion of the contract that is transferred
by gift. For these purposes, a transfer by gift may occur upon annuitization
if
the contract owner and the annuitant are not the same individual.
With
respect to annuity distributions on or after the annuitization date, a portion
of each annuity payment is excludable from taxable income. The amount excludable
is based on the ratio between the contract owner’s investment in the contract
and the expected return on the contract. Once the entire investment in the
contract is recovered, all distributions are fully includable in income. The
maximum amount excludable from income is the investment in the contract. If
the
annuitant dies before the entire investment in the contract has been excluded
from income, and as a result of the annuitant's death no more payments are
due
under the contract, then the unrecovered investment in the contract may be
deducted on his or her final tax return.
In
determining the taxable amount of a distribution, all annuity contracts issued
after October 21, 1988 by the same company to the same contract owner during
the
same calendar year will be treated as one annuity contract.
A
special
rule applies to distributions from contracts that have investments that were
made prior to August 14, 1982. For those contracts, distributions that are
made
prior to the annuitization date are treated first as a recovery of the
investment in the contract as of that date. A distribution in excess of the
amount of the investment in the contract as of August 14, 1982, will be treated
as taxable income.
The
Internal Revenue Code imposes a penalty tax if a distribution is made before
the
contract owner reaches age 59½. The amount of the penalty is 10% of the portion
of any distribution that is includible in gross income. The penalty tax does
not
apply if the distribution is:
the
result of a contract owner’s disability, (as defined in the Internal
Revenue Code);
·
one
of a series of substantially equal periodic payments made over the
life
(or life expectancy) of the contract owner or the joint lives (or
joint
life expectancies) of the contract owner and the beneficiary selected
by
the contract owner to receive payment under the annuity payment option
selected by the contract owner; or
·
is
allocable to an investment in the contract before August 14, 1982.
If
the
contract owner dies before the contract is completely distributed, the balance
will be included in the contract owner’s gross estate for tax
purposes.
The
previous discussion related to the taxation of Non-Qualified Contracts owned
by
individuals. Different rules (the so-called "non-natural persons" rules) apply
if the contract owner is not a natural person.
Generally,
contracts owned by corporations, partnerships, trusts, and similar entities
are
not treated as annuity contracts under the Internal Revenue Code. Therefore,
income earned under a Non-Qualified Contract that is owned by a non-natural
person is taxed as ordinary income during the taxable year that it is earned.
Taxation is not deferred, even if the income is not distributed out of the
contract. The income is taxable as ordinary income, not capital
gain.
The
non-natural person rules do not apply to all entity-owned contracts. For purpose
of the rule that annuity contracts that are owned by non-natural persons are
not
treated as annuity contracts for insurance purposes, a contract that is owned
by
a non-naturalperson
as an agent of an individual
is
treated as owned by the individual. This would cause the contract to be treated
as an annuity under the Internal Revenue Code, allowing tax deferral. However,
this exception does not apply when the non-natural person is an employer that
holds the contract under a non-qualified deferred compensation arrangement
for
one or more employees.
The
non-natural person rules also do not apply to contracts that are:
·
acquired
by the estate of a decedent by reason of the death of the decedent;
·
issued
in connection with certain qualified retirement plans and individual
retirement plans;
·
purchased
by an employer upon the termination of certain qualified retirement
plans;
or
37
·
immediate
annuities within the meaning of Section 72(u) of the Internal Revenue
Code.
If
the
annuitant dies before the contract is completely distributed, the balance may
be
included in the annuitant’s gross estate for tax purposes, depending on the
obligations that the non-natural owner may have owed to the
annuitant.
Withholding
Pre-death
distributions from the contracts are subject to federal income tax. Nationwide
will withhold the tax from the distributions unless the contract owner requests
otherwise. If the distribution is from a Tax Sheltered Annuity, it will be
subject to mandatory 20% withholding that cannot be waived, unless:
·
the
distribution is made directly to another Tax Sheltered Annuity or
an IRA;
or
·
the
distribution satisfies the minimum distribution requirements imposed
by
the Internal Revenue Code.
In
addition, under some circumstances, the Internal Revenue Code will not permit
contract owners to waive withholding. Such circumstances include:
·
if
the payee does not provide Nationwide with a taxpayer identification
number; or
·
if
Nationwide receives notice from the Internal Revenue Services that
the
taxpayer identification number furnished by the payee is
incorrect.
If
a
contract owner is prohibited from waiving withholding, as described above,
the
distribution will be subject to mandatory back-up withholding. The mandatory
back-up withholding rate is established by Section 3406 of the Internal Revenue
Code and is applied against the amount of income that is
distributed.
Non-Resident
Aliens
Generally,
a pre-death distribution from a contract to a non-resident alien is subject
to
federal income tax at a rate of 30% of the amount of income that is distributed.
Nationwide is required to withhold this amount and send it to the Internal
Revenue Service. Some distributions to non-resident aliens may be subject to
a
lower (or no) tax if a treaty applies. In order to obtain the benefits of such
a
treaty, the non-resident alien must:
(1)
provide
Nationwide with proof of residency and citizenship (in accordance
with
Internal Revenue Service requirements);
and
(2)
provide
Nationwide with an individual taxpayer identification
number.
If
the
non-resident alien does not meet the above conditions, Nationwide will withhold
30% of income from the distribution.
Another
way to avoid the 30% withholding is for the non-resident alien to provide
Nationwide with sufficient evidence that:
(1)
the
distribution is connected to the non-resident alien’s conduct of business
in the United States; and
(2)
the
distribution is not includible in the non-resident alien’s gross income
for United States federal income tax
purposes.
Note
that
these distributions would be subject to the same withholding rules that are
applicable to payments to United States persons, including back-up withholding,
which is currently at a rate of 28%, if a correct taxpayer identification number
is not provided.
Federal
Estate, Gift and Generation Skipping Transfer Taxes
The
following transfers may be considered a gift for federal gift tax
purposes:
·
a
transfer of the contract from one contract owner to another; or
·
a
distribution to someone other than a contract
owner.
Upon
the
contract owner’s death, the value of the contract may be subject to estate
taxes, even if all or a portion of the value is also subject to federal income
taxes.
Section
2612 of the Internal Revenue Code may require Nationwide to determine whether
a
death benefit or other distribution is a "direct skip" and the amount of the
resulting generation skipping transfer tax, if any. A direct skip is when
property is transferred to, or a death benefit or other distribution is made
to:
a)
an
individual who is two or more generations younger than the contract
owner;
or
b)
certain
trusts, as described in Section 2613 of the Internal Revenue Code
(generally, trusts that have no beneficiaries who are not 2 or more
generations younger than the contract owner).
If
the
contract owner is not an individual, then for this purpose only,
"contract owner" refers to any person:
·
who
would be required to include the contract, death benefit, distribution,
or
other payment in his or her federal gross estate at his or her death;
or
·
who
is required to report the transfer of the contract, death benefit,
distribution, or other payment for federal gift tax
purposes.
If
a
transfer is a direct skip, Nationwide will deduct the amount of the transfer
tax
from the death benefit, distribution or other payment, and remit it directly
to
the Internal Revenue Service.
Charge
for Tax
Nationwide
is not required to maintain a capital gain reserve liability on Non-Qualified
Contracts. If tax laws change requiring a reserve, Nationwide may implement
and
adjust a tax charge.
Diversification
Internal
Revenue Code Section 817(h) contains rules on diversification requirements
for
variable annuity contracts. A
38
variable
annuity contract that does not meet these diversification requirements will
not
be treated as an annuity, unless:
·
the
failure to diversify was
accidental;
·
the
failure is corrected; and
· a
fine is
paid to the Internal Revenue Service.
The
amount of the fine will be the amount of tax that would have been paid by the
contract owner if the income, for the period the contract was not diversified,
had been received by the contract owner.
If
the
violation is not corrected, the contract owner will be considered the owner
of
the underlying securities and will be taxed on the earnings of his or her
contract. Nationwide believes that the investments underlying this contract
meet
these diversification requirements.
Tax
Changes
The
foregoing tax information is based on Nationwide’s understanding of federal tax
laws. It is NOT intended as tax advice. All
information is subject to change without notice.
You
should consult with your personal tax and/or financial adviser for more
information.
In
2001,
the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted.
EGTRRA made numerous changes to the Internal Revenue Code, including the
following:
·
generally
lowering federal income tax rates;
·
increasing
the amounts that may be contributed to various retirement plans,
such as
IRAs, Tax Sheltered Annuities and Qualified
Plans;
·
increasing
the portability of various retirement plans by permitting IRAs, Tax
Sheltered Annuities, Qualified Plans and certain governmental 457
plans to
"roll" money from one plan to
another;
·
eliminating
and/or reducing the highest federal estate tax
rates;
·
increasing
the estate tax credit; and
·
for
persons dying after 2009, repealing the estate
tax.
All
of
the changes resulting from EGTRRA are scheduled to "sunset," or become
ineffective, after December 31, 2010 unless they are extended by additional
legislation. If changes resulting from EGTRRA are not extended, beginning
January 1, 2011, the Internal Revenue Code will be restored to its pre-EGTRRA
form. This creates uncertainty as to future tax requirements and implications.
Please consult a qualified tax or financial adviser for further information
relating to EGTRRA and other tax issues.
Required
Distributions
Any
distribution paid that is NOT due to payment of the death benefit may be subject
to a CDSC.
The
Internal Revenue Code requires that certain distributions be made from the
contracts issued in conjunction with this prospectus. Following is an overview
of the required distribution rules applicable to each type of contract. Please
consult a qualified tax or financial adviser for more specific required
distribution information.
Required
Distributions - General Information
In
general, a beneficiary is an entity or person that the contract owner designates
to receive death proceeds upon the contract owner’s death. The distribution
rules in the Internal Revenue Code make a distinction between "beneficiary"
and
"designated beneficiary" when determining the life expectancy that may be used
for payments that are made from IRAs, SEP IRAs, Roth IRAs and Tax Sheltered
Annuities after the death of the annuitant, or that are made from Non-Qualified
Contracts after the death of the contract owner. A designated beneficiary is
a
natural
person who
is
designated by the contract owner as the beneficiary under the contract.
Non-natural beneficiaries (e.g. charities or certain trusts) are not designated
beneficiaries for the purpose of required distributions and the life expectancy
of such a beneficiary is zero.
Life
expectancies and joint life expectancies will be determined in accordance with
the relevant guidance provided by the Internal Revenue Service and the Treasury
Department, including but not limited to Treasury Regulation 1.72-9 and Treasury
Regulation 1.401(a)(9)-5.
Required
distributions paid upon the death of the contract owner are paid to the
beneficiary or beneficiaries stipulated by the contract owner. How quickly
the
distributions must be made may be determined with respect to the life
expectancies of the beneficiaries. For Non-Qualified Contracts, the
beneficiaries used in the determination of the distribution period are those
in
effect on the date of the contract owner’s death. For contracts other than
Non-Qualified Contracts, the beneficiaries used in the determination of the
distribution period do not have to be determined until December 31 of the year
following the contract owner’s death. If there is more than one beneficiary, the
life expectancy of the beneficiary with the shortest life expectancy is used
to
determine the distribution period. Any beneficiary that is not a designated
beneficiary has a life expectancy of zero.
Required
Distributions for Non-Qualified Contracts
Internal
Revenue Code Section 72(s) requires Nationwide to make certain distributions
when a contract owner dies. The following distributions will be made in
accordance with the following requirements:
(1)
If
any contract owner dies on or after the annuitization date and before
the
entire interest in the contract has been distributed, then the remaining
interest must be distributed at least as rapidly as the distribution
method in effect on the contract owner's
death.
(2)
If
any contract owner dies before the annuitization date, then the entire
interest in the contract (consisting of either the death benefit
or the
contract value reduced by charges set forth elsewhere in the contract)
will be distributed within 5 years of the contract owner’s death, provided
however:
39
(a)
any
interest payable to or for the benefit of a designated beneficiary
may be
distributed over the life of the designated beneficiary or over a
period
not longer than the life expectancy of the designated beneficiary.
Payments must begin within one year of the contract owner's death
unless
otherwise permitted by federal income tax regulations;
and
(b)
if
the designated beneficiary is the surviving spouse of the deceased
contract owner, the spouse can choose to become the contract owner
instead
of receiving a death benefit. Any distributions required under these
distribution rules will be made upon that spouse’s death.
In
the
event that the contract owner is not
a
natural person (e.g., a trust or corporation), for purposes of these
distribution provisions:
(a)
the
death of the annuitant will be treated as the death of a contract
owner;
(b)
any
change of annuitant will be treated as the death of a contract owner;
and
(c)
in
either case, the appropriate distribution will be made upon the death
or
change, as the case may be.
These
distribution provisions do not apply to any contract exempt from Section 72(s)
of the Internal Revenue Code by reason of Section 72(s)(5) or any other law
or
rule.
Required
Distributions for Tax Sheltered Annuities, IRAs, SEP IRAs and Roth
IRAs
Distributions
from a Tax Sheltered Annuity, IRA or SEP IRA must begin no later than April
1 of
the calendar year following the calendar year in which the contract
owner
reaches
age 70½. Distributions
may be
paid in a lump sum or in substantially equal payments over:
(a)
the
life of the contract owner or the joint lives of the contract owner
and
the contract owner’s designated beneficiary;
or
(b)
a
period not longer than the period determined under the table in Treasury
Regulation 1.401(a)(9)-5, which is the deemed joint life expectancy
of the
contract owner and a person 10 years younger than the contract owner.
If
the designated beneficiary is the spouse of the contract owner, the
period
may not exceed the longer of the period determined under such table
or the
joint life expectancy of the contract owner and the contract owner’s
spouse, determined in accordance with Treasury Regulation 1.72-9,
or such
additional guidance as may be provided pursuant to Treasury Regulation
1.401(a)(9)-5.
For
Tax
Sheltered Annuities, required distributions do not have to be withdrawn from
this contract if they are being withdrawn from another Tax Sheltered Annuity
of
the contract owner.
For
IRAs
and SEP IRAs, required distributions do not have to be withdrawn from this
contract if they are being withdrawn from another IRA or SEP IRA of the contract
owner.
If
the
contract owner’s entire interest in a Tax Sheltered Annuity, IRA or SEP IRA will
be distributed in equal or substantially equal payments over a period described
in (a) or (b) above, the payments must begin on or before the required beginning
date. The required beginning date is April 1 of the calendar year following
the
calendar year in which the contract owner reaches age 70½. The rules for Roth
IRAs do not require distributions to begin during the contract owner’s lifetime,
therefore, the required beginning date is not applicable to Roth
IRAs.
Due
to
recent changes in Treasury Regulations, the amount used to compute the minimum
distribution requirement may exceed the contract value.
If
the
contract owner dies before the required beginning date (in the case of a Tax
Sheltered Annuity, IRA or SEP IRA) or before the entire contract value is
distributed (in the case of Roth IRAs), any remaining interest in the contract
must be distributed over a period not exceeding the applicable distribution
period, which is determined as follows:
(a)
if
the designated beneficiary is the contract owner’s spouse, the applicable
distribution period is the surviving spouse’s remaining life expectancy
using the surviving spouse’s birthday for each distribution calendar year
after the calendar year of the contract owner’s death. For calendar years
after the death of the contract owner’s surviving spouse, the applicable
distribution period is the spouse’s remaining life expectancy using the
spouse’s age in the calendar year of the spouse’s death, reduced by one
for each calendar year that elapsed since the calendar year immediately
following the calendar year of the spouse’s death;
(b)
if
the designated beneficiary is not the contract owner’s surviving spouse,
the applicable distribution period is the designated beneficiary’s
remaining life expectancy using the designated beneficiary’s birthday in
the calendar year immediately following the calendar year of the
contract
owner’s death, reduced by one for each calendar year that elapsed
thereafter; and
(c)
if
there is no designated beneficiary, the entire balance of the contract
must be distributed by December 31 of the fifth year following the
contract owner’s death.
If
the
contract owner dies on or after the required beginning date, the interest in
the
Tax Sheltered Annuity, IRA or SEP IRA must be distributed over a period not
exceeding the applicable distribution period, which is determined as
follows:
(a) if
the
designated beneficiary is the contract owner’s spouse, the applicable
distribution period is the surviving spouse’s remaining life expectancy using
the surviving spouse’s birthday for each
distribution calendar year after the calendar year of the contract owner’s
death. For calendar years after the death of the contract owner’s surviving
spouse, the applicable distribution period is the spouse’s remaining life
expectancy using the spouse’s age in
the
calendar year of the spouse’s death, reduced by one for each calendar year that
elapsed since the calendar year immediately following the calendar year of
the
spouse’s death;
40
(b)
if
the designated beneficiary is not the contract owner’s surviving spouse,
the applicable distribution period is the designated beneficiary’s
remaining life expectancy using the designated beneficiary’s birthday in
the calendar year immediately following the calendar year of the
contract
owner’s death, reduced by one for each calendar year that elapsed
thereafter; and
(c)
if
there is no designated beneficiary, the applicable distribution period
is
the contract owner’s remaining life expectancy using the contract owner’s
birthday in the calendar year of the contract owner’s death, reduced by
one for each year thereafter.
If
distribution requirements are not met, a penalty tax of 50% is levied on the
difference between the amount that should have been distributed for that year
and the amount that actually was distributed for that year.
For
IRAs
and SEP IRAs, all or a portion of each distribution will be included in the
recipient’s gross income and taxed at ordinary income tax rates. The portion of
a distribution which is taxable is based on the ratio between the amount by
which non-deductible purchase payments exceed prior non-taxable distributions
and total account balances at the time of the distribution. The owner of an
IRA
or SEP IRA must annually report the amount of non-deductible purchase payments,
the amount of any distribution, the amount by which non-deductible purchase
payments for all years exceed non taxable distributions for all years, and
the
total balance of all IRAs or SEP IRAs.
Distributions
from Roth IRAs may be either taxable or nontaxable, depending upon whether
they
are "qualified distributions" or "non-qualified distributions" (see "Federal
Tax
Considerations").
through
its Nationwide Multi-Flex Variable Account
This
Statement of Additional Information is not a prospectus. It contains information
in addition to and more detailed than set forth in the prospectus and should
be
read in conjunction with the prospectus dated May 1, 2006. The prospectus may
be
obtained from NEA Valuebuilder Program, One Security Benefit Place, Topeka,
Kansas66636-0001, or calling 1-800-632-8258.
Table
of Contents of Statement of Additional
Information
Nationwide
Multi-Flex Variable Account is a separate investment account of Nationwide
Life
Insurance Company ("Nationwide"). Nationwide is a member of the Nationwide
group
of companies. All of Nationwide's common stock is owned by Nationwide Financial
Services, Inc. ("NFS"), a holding company. NFS has two classes of common stock
outstanding with different voting rights enabling Nationwide Corporation (the
holder of all of the outstanding Class B Common Stock) to control NFS.
Nationwide Corporation is a holding company, as well. All of its common stock
is
held by Nationwide Mutual Insurance Company (95.2%) and Nationwide Mutual Fire
Insurance Company (4.8%), the ultimate controlling persons of the Nationwide
group of companies. The Nationwide group of companies is one of America's
largest insurance and financial services family of companies, with combined
assets of over $158 billion as of December 31, 2005.
Nationwide,
which has responsibility for administration of the contracts and the variable
account, maintains records of the name, address, taxpayer identification number,
and other pertinent information for each contract owner and the number and
type
of contract issued to each such contract owner and records with respect to
the
contract value of each contract.
The
custodian of the assets of the variable account is Nationwide. Nationwide will
maintain a record of all purchases and redemptions of shares of the underlying
mutual fund options. Nationwide, or affiliates of Nationwide, may have entered
into agreements with either the investment adviser or distributor for several
of
the underlying mutual funds. The agreements relate to administrative services
furnished by Nationwide or an affiliate of Nationwide. Some of the services
provided include distribution of underlying fund prospectuses, semi-annual
and
annual fund reports, proxy materials and fund communications, as well as
maintaining the websites and voice response systems necessary for contract
owners to execute trades in the funds. Nationwide also acts as a limited agent
for the fund for purposes of accepting the trades. For these services the funds
agree to pay Nationwide an annual fee based on the average aggregate net assets
of the variable account (and other separate accounts of Nationwide or life
insurance company subsidiaries of Nationwide) invested in the particular fund.
Nationwide
takes these anticipated fee payments into consideration when it determines
the
charges that will be assessed under the contracts. Without these payments,
contract charges would be higher. Only those underlying mutual funds that agree
to pay Nationwide a fee will be offered in the contract. Generally, Nationwide
expects to receive somewhere between 0.10% to 0.45% (an annualized rate of
the
daily net assets of the variable account) from the funds it offers in the
contracts. What is actually received depends upon many factors, including but
not limited to the type of fund (i.e., money market funds generally pay less
revenue than other fund types) and the actual services rendered to the fund
company. Nationwide does not consider these fee payments when determining fund
availability associated with any of the optional benefits offered in the
contract.
Distribution,
Promotional, and Sales Expenses
In
addition to or partially in lieu of commission, Nationwide may pay the selling
firms a marketing allowance, which is based on the firm’s ability and
demonstrated willingness to promote and market Nationwide's products. How any
marketing allowance is spent is determined by the firm, but generally will
be
used to finance firm activities, such as training and education, that may
contribute to the promotion and marketing of Nationwide's products. Nationwide
makes certain assumptions about the amount of marketing allowance it will pay
and takes these assumptions into consideration when it determines the charges
that will be assessed under the contracts. For the contracts described in the
prospectus, Nationwide assumed 0.00% (of the daily net assets of the variable
account) for marketing allowance when determining the charges for the contracts.
The actual amount of the marketing allowance may be higher or lower than this
assumption. If the actual amount of marketing allowance paid is more than what
was assumed, Nationwide will fund the difference. Nationwide generally does
not
profit from any excess marketing allowance if the amount assumed was higher
than
what
is
actually
paid. Any excess would be spent on additional marketing for the contracts.
For
more information about marketing allowance or how a particular selling firm
uses
marketing allowances, please consult with your registered
representative.
Independent
Registered Public Accounting Firm
The
financial statements of Nationwide Multi-Flex Variable Account and the
consolidated financials statements of Nationwide Life Insurance Company and
subsidiaries for the periods indicated have been included herein in reliance
upon the reports of KPMG LLP, independent registered public accounting firm,
appearing elsewhere herein, and upon the authority of said firm as experts
in
accounting and auditing. The
audit
report of KPMG LLP covering the December 31, 2005 consolidated financial
statements of Nationwide Life Insurance Company and subsidiaries contains an
explanatory paragraph that states that Nationwide Life Insurance Company and
subsidiaries 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 and for Separate Accounts,
in 2004.
KPMG LLP is located at 191 West Nationwide Blvd., Columbus, Ohio43215.
The
contracts will be sold by licensed insurance agents in the states where the
contracts may be lawfully sold. Such agents will be registered representatives
of broker-dealers registered under the Securities Exchange Act of 1934 who
are
members of the National Association of Securities Dealers, Inc.
("NASD").
Effective
November 10, 2000, the contracts, which are offered continuously, are
distributed by Security Distributors, Inc. ("SDI"), One Security Benefit Place,
Topeka, Kansas66636 - 0001. Prior to November 14, 2000, the contracts were
distributed by Nationwide Investment Services Corporation ("NISC"), One
Nationwide Plaza, Columbus, Ohio43215, a wholly owned subsidiary of Nationwide.
During the fiscal years ended December 31, 2005, 2004, and 2003, no underwriting
commissions were paid by Nationwide to SDI.
See
"Frequency and Amount of Annuity Payments" located in the
prospectus.
Report
of Independent Registered Public
Accounting Firm
The
Board of Directors of Nationwide Life
Insurance Company and
Contract
Owners of
Nationwide Multi-Flex Variable Account:
We
have audited the
accompanying statement of assets, liabilities and contract owners’ equity of
Nationwide Multi-Flex Variable Account (comprised of the sub-accounts listed
in
note 1(b)) (collectively, “the Account”) as of December 31, 2005, and the
related statements of operations and changes in contract owners’ equity, and the
financial highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Account’s
management. Our responsibility is to express an opinion on these financial
statements and financial highlights 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 financial statements and financial
highlights are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 2005, by correspondence with the transfer agents of the
underlying mutual funds. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the
financial statements and financial highlights referred to above present fairly,
in all material respects, the financial position of the Account as of
December 31, 2005, and the results of its operations, changes in contract
owners’ equity, and financial highlights for each of the periods indicated
herein, in conformity with U.S. generally accepted accounting principles.
Background
and Summary of Significant Accounting
Policies
(a)
Organization
and Nature of Operations
The
Nationwide Multi-Flex
Variable Account (the Account) was established pursuant to a resolution of
the
Board of Directors of Nationwide Life Insurance Company (the Company) on
October 7, 1981. The Account is registered as a unit investment trust under
the Investment Company Act of 1940.
The
Company offers tax
qualified and non-tax qualified Individual Deferred Variable annuity Contracts
through the Account. The primary distributions for the contracts is through
Company agents and an affiliated sales organization; however, other distributors
may be utilized.
Effective
July 1,2000, the Company entered into a reinsurance agreement with Security Benefit
Life Insurance Company (SBL) to sell, transfer and cede on an indemnity basis
all of its obligations in connection with annuity contracts issued pursuant
to
the NEA Valuebuilder Annuity program (Program). Under the agreement, the Company
continued to provide administrative and support services for contracts issued
under the Program until September 2001. Thereafter, SBL assumed full
responsibility for servicing the contracts and receives all fees and charges
of
the contracts. The Company is paid a Supplemental Capital Charge by SBL to
meet
the capital needs of the reinsured contracts. The ceding of risk does not
discharge the Company from its primary obligation, including regulatory record
keeping and reporting, to the contract owners of the Account.
Only
contracts without a
front-end sales charge, but with a contingent deferred sales charge and certain
other fees, are offered for purchase. See note 2 for a discussion of contract
expenses. With certain exceptions, contract owners in either the accumulation
or
payout phase may invest in any of the following:
Portfolios
of the AIM Variable Insurance
Funds, Inc. (AIM VIF);
AIM
VIF – Capital
Appreciation Fund – Series I Shares (AIMCapAp)
AIM
VIF –
International Growth Fund – Series I Shares (AIMIntGr)
Portfolios
of the American Century Variable
Portfolios, Inc. (American Century VP);
American
Century VP –
Balanced Fund – Class I (ACVPBal)
American
Century VP –
Capital Appreciation Fund – Class I (ACVPCapAp)
American
Century VP –
Income & Growth Fund – Class I (ACVPIncGr)
Dreyfus
Socially Responsible Growth Fund,
Inc., The (DrySRGro)
Dreyfus
Stock Index Fund, Inc. – Initial
Shares (DryStkIx)
Portfolios
of the Dreyfus Variable Investment
Fund (Dreyfus VIF);
Gartmore
GVIT
Federated High Income Bond Fund – Class I (GVITFHiInc)
Gartmore
GVIT
Government Bond Fund – Class I (GVITGvtBd)
Gartmore
GVIT Growth
Fund – Class I (GVITGrowth)
Gartmore
GVIT Money
Market Fund – Class I (GVITMyMkt)
Gartmore
GVIT
Nationwide®
Fund – Class I (GVITNWFund)
Portfolios
of the Janus Aspen Series (Janus
AS);
Janus
AS –
International Growth Portfolio – Institutional Shares (JanIntGr)
Portfolios
of the Neuberger Berman Advisers
Management Trust (Neuberger Berman AMT);
Neuberger
Berman AMT –
Balanced Portfolio®–
I
Class (NBAMTBal)
Portfolios
of the Wells Fargo Advantage
Variable Trust;
Wells
Fargo Advantage
Variable Trust Opportunity Fund (WFTrustOp)
(formerly
Strong
Opportunity Fund II, Inc. – Investor Class)
At
December 31, 2005,
contract owners were invested in all of the above funds. The contract owners’
equity is affected by the investment results of each fund, equity transactions
by contract owners and certain contract expenses (see note 2). The accompanying
financial statements include only contract owners’ purchase payments pertaining
to the variable portions of their contracts and exclude any purchase payments
for fixed dollar benefits, the latter being included in the accounts of the
Company.
A
contract owner may
choose from among a number of different underlying mutual fund options. The
underlying mutual fund options are not available to the general public directly.
The underlying mutual funds are available as investment options in variable
life
insurance policies or variable annuity contracts issued by life insurance
companies or, in some cases, through participation in certain qualified pension
or retirement plans.
Some
of the underlying
mutual funds have been established by investment advisers which manage publicly
traded mutual funds having similar names and investment objectives. While some
of the underlying mutual funds may be similar to, and may in fact be modeled
after, publicly traded mutual funds, the underlying mutual funds are not
otherwise directly related to any publicly traded mutual fund. Consequently,
the
investment performance of publicly traded mutual funds and any corresponding
underlying mutual funds may differ substantially.
(c)
Security
Valuation, Transactions and Related Investment Income
Investments
in underlying
mutual funds are valued based on the closing net asset value per share at
December 31, 2005 of such funds, which value their investment securities at
fair value. The cost of investments sold is determined on the specific
identification basis. Investment transactions are accounted for on the trade
date (date the order to buy or sell is executed) and dividends (which include
capital gain distributions) are accrued as of the ex-dividend date and are
reinvested in the underlying mutual funds.
(d)
Federal
Income Taxes
Operations
of the Account
form a part of, and are taxed with, operations of the Company which is taxed
as
a life insurance company under the Internal Revenue Code.
The
Company does not
provide for income taxes within the Account. Taxes are the responsibility of
the
contract owner upon termination or withdrawal.
(e)
Use
of
Estimates in the Preparation of Financial Statements
The
preparation of
financial statements in conformity with U.S. generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities, if any, at the date of the financial statements and
the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(Continued)
NATIONWIDE MULTI-FLEX
VARIABLE ACCOUNT (NOTES TO
FINANCIAL STATEMENTS, Continued)
(f)
Calculation
of Annuity
Reserves
Annuity
reserves are
computed for contracts in the variable payout stage according to industry
standard mortality tables. The assumed investment return is 3.5% unless the
annuitant elects otherwise, in which case the rate may vary from 3.5% to 7%,
as
regulated by the laws of the respective states. The mortality risk is fully
borne by the Company and may result in additional amounts being transferred
into
the Account by the Company to cover greater longevity of annuitants than
expected. Conversely, if reserves exceed amounts required, transfers may be
made
to the Company.
(2)
Expenses
The
Company does not
deduct a sales charge from purchase payments received from the contract owners.
However, if any part of the contract value of such contracts is surrendered,
the
Company will, with certain exceptions, deduct from a contract owners’ contract
value a contingent deferred sales charge. For contracts issued prior to
February 1, 1989, the contingent deferred sales charge will be equal to 5%
of the lesser of the total of all purchase payments or the amount surrendered.
For contracts issued on or after February 1, 1989, the Company will deduct
a contingent deferred sales charge not to exceed 7% of purchase payments
surrendered. This charge declines 1% per year. After the purchase payment
has been held in the contract for 7 years the charge is 0%. No sales charges
are
deducted on redemptions used to purchase units in the fixed investment options
of the Company.
The
following contract
charges are deducted by the Company: (a) an annual contract maintenance
charge of up to $30, dependent upon contract type and issue date, which is
satisfied by surrendering units; and (b) a mortality and expense risk
charge and an administration charge assessed through the daily unit value
calculation equal to an annualized rate of 1.25% and 0.05%, respectively; for
NEA Valuebuilder Annuity contracts issued before November 3, 1997, or in
states which have not approved the applicable contract modifications, a
mortality and expense risk charge and an administrative charge assessed through
the daily unit value calculation equal to an annualized rate of 1.25% and .05%,
respectively; for NEA Valuebuilder Annuity contracts issued on or after the
later of November 3, 1997, or the date on which state insurance authorities
approve corresponding contract modifications, an a ctuarial risk charge assessed
through the daily unit value calculation equal to an annualized rate of 1.30%.
(3)
Related
Party
Transactions
The
Company performs
various services on behalf of the Mutual Fund Companies in which the Account
invests and may receive fees for the services performed. These services include,
among other things, shareholder communications, preparation, postage, fund
transfer agency and various other record keeping and customer service functions.
These fees are paid to an affiliate of the Company.
Contract
owners may, with
certain restrictions, transfer their assets between the Account and a fixed
dollar contract (fixed account) maintained in the accounts of the Company.
The
fixed account assets are not reflected in the accompanying financial statements.
In addition, the Account portion of contract owner loans is transferred to
the
accounts of the Company for administration and collection. Loan repayments
are
transferred to the Account at the direction of the contract owner. For the
years
ended December 31, 2005 and 2004, total transfers to the Account from the
fixed account were $372,119 and $1,373,145, respectively, and total transfers
from the Account to the fixed account were $958,945 and $1,876,522,
respectively. Transfers from the Account to the fixed account, and transfers
to
the Account from the fixed account are included in transfers between funds
(including fixed account), net, on the accompanying Statements of Changes in
Contract Owners’ Equity.
(Continued)
NATIONWIDE MULTI-FLEX
VARIABLE ACCOUNT (NOTES TO
FINANCIAL STATEMENTS, Continued)
(4)
Financial
Highlights
The
following is a summary
of units, unit fair values and contract owners’ equity outstanding for variable
annuity contracts as of the end of the periods indicated, and the contract
expense rate, investment income ratio and total return for each of the periods
in the five-year period ended December 31, 2005. The Account includes
contracts administered by Security Benefit Life Insurance Company under a
reinsurance agreement discussed in note 1. The mutual fund and product options
of the contracts so administered are identified by those unit fair values
presented below using two decimal places.
This
represents the annual contract expense rate of the variable account
for
the period indicated and includes only those expenses that are charged
through a reduction in the unit values. Excluded are expenses of the
underlying mutual funds and charges made directly to contract owner
accounts through the redemption of units.
**
This
represents the dividends for the period indicated, excluding distributions
of capital gains, received by the subaccount from the underlying mutual
fund, net of management fees assessed by the fund manager, divided
by
average net assets. The ratios exclude those expenses, such as mortality
and expense charges, that result in direct reductions to the
contractholder accounts either through reductions in unit values or
redemption of units. The recognition of investment income by the
subaccount is affected by the timing of the declaration of dividends
by
the underlying fund in which the subaccounts invest.
***
This
represents the total return for the period indicated and includes a
deduction only for expenses assessed through the daily unit value
calculation. The total return does not include any expenses assessed
through the redemption of units; inclusion of these expenses in the
calculation would result in a reduction in the total return presented.
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 financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based
on our
audits.
We
conducted our audits in
accordance with the standards of the Public Company Accounting Oversight
Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, 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 and for Separate Accounts, in 2004.
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 of NLIC’s common stock are owned by Nationwide Financial
Services, Inc. (NFS), a holding company formed by Nationwide Corporation
(Nationwide Corp.), a majority-owned subsidiary of NMIC.
Wholly-owned
subsidiaries of NLIC as of December 31, 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 of long-term savings and retirement products in the United
States of America (U.S.). The Company develops and sells a diverse range
of
products including individual annuities, private and public 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, financial institutions,
wirehouse and regional firms, pension plan administrators, and life insurance
specialists. Representatives of affiliates who market products directly to
a
customer base include Nationwide Retirement Solutions, Inc. (NRS), 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 financial
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 determine 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 of NLIC 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
(b)
Valuation of Investments,
Investment Income and Related Gains and Losses
The
Company is
required to classify its fixed maturity securities and marketable equity
securities as held-to-maturity, available-for-sale or trading. All fixed
maturity and marketable equity securities are classified as available-for-sale.
Available-for-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 of fixed 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 financial 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
of
bond 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 AOCI 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 (BOLI) and other interest-sensitive life insurance policies. Revenues
for investment products and universal life insurance products consist of
net
investment income, asset fees, cost of insurance charges, administrative
fees
and surrender charges that have been earned and assessed against policy account
balances during the period. The timing of revenue recognition as it relates
to
fees assessed on investment contracts and universal life contracts is determined
based on the nature of such fees. Asset fees, cost of insurance charges and
administrative fees are assessed on a daily or monthly basis and recognized
as
revenue when assessed and earned. Certain amounts assessed that represent
compensation for services to be provided in future periods are reported as
unearned revenue and recognized in income over the periods benefited. Surrender
charges are recognized upon surrender of a contract in accordance with
contractual terms. Policy benefits and claims that are charged to expense
include interest credited to policy account values and benefits and claims
incurred in the period in excess of related policy account values.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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, term life insurance
and
certain annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits and expenses
are
associated with earned premiums so that profits are recognized over the life
of
the contract. This association is accomplished by the provision for future
policy benefits and the deferral and amortization of policy acquisition costs.
(e)
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 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 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 Accounts
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:
(1) 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%. 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
The
Company
provides for federal income taxes based on amounts the Company believes it
ultimately will owe. Inherent in the provision for federal income taxes are
estimates regarding the deductibility of certain items and the realization
of
certain tax credits. In the event the ultimate deductibility of certain items
or
the realization of certain tax credits differs from estimates, the Company
may
be required to 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 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 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 financial 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, Accounting for
Certain Hybrid Financial Instruments (SFAS 155). SFAS 155 amends SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS
140). SFAS 155 also resolves issues addressed in SFAS 133 Implementation
Issue
No. D1, Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets. The following is a summary of SFAS No. 155:
(1) 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 SFAS 133; (3) establishes a requirement to
evaluate interests in securitized financial 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. SFAS 155 is effective for all financial instruments acquired
or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 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 SFAS 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, SFAS 155
could
have a material impact on the Company’s financial position and/or results of
operations once adopted.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 05-1
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 FASB.
SOP 05-1 defines 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 1,2007. 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
FASB issued Statement of Financial Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections (SFAS 154), which replaces
Accounting Principles Board (APB) Opinion No. 20, Accounting Changes
(APB 20), and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 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. SFAS 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, SFAS 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, SFAS 154 requires that the new
accounting principle be applied as if it were adopted prospectively from
the
earliest date practicable. SFAS 154 carries forward without change the guidance
contained in APB 20 for reporting the correction of an error in previously
issued financial 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 15, 2005, with earlier adoption permitted. The
Company will adopt SFAS 154 effective January 1, 2006. SFAS 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 FASB issued for comment FASB Staff Position (FSP)
EITF Issue 03-1-a, which was intended to provide guidance related to the
application of paragraph 16 of EITF 03-1, and proposed FSP EITF Issue 03-1-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 FASB
issued FSP EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
At
its
June 29, 2005 meeting, the FASB decided not to provide additional guidance
on the meaning of other-than-temporary impairment. Instead, the FASB decided
to
issue proposed FSP EITF 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP
supersedes EITF 03-1 and EITF Topic No. D-44, Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
Cost
Exceeds Fair Value (EITF Topic D-44). The final FSP, retitled FSP FAS 115-1,
The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain
Investments (FSP FAS 115-1), was issued on November 3, 2005 and
replaces the guidance set forth in paragraphs 10-18 of EITF 03-1 with references
to existing other-than-temporary impairment guidance. FSP FAS 115-1 codifies
the
guidance set forth in EITF Topic D-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 FASB decided that FSP FAS 115-1 would be
applied prospectively effective for periods beginning after December 15,2005. 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. 115, Accounting for Certain Investments in Debt and Equity
Securities, and United States Securities and Exchange Commission Staff
Accounting Bulletin No. 59, Accounting for 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 115-1, the adoption of FSP FAS 115-1 had no impact on the Company’s
financial 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
GMDB. SOP 03-1 requires companies to evaluate the significance of a GMDB
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 1, 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:
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/Regulatory
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.
Financial
Instruments with Off-Balance Sheet Risk: The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business
through
management of its investment portfolio. These financial instruments include
commitments to extend credit in the form of loans. These instruments involve,
to
varying degrees, elements of credit risk in excess of amounts recognized
in the
consolidated balance sheets.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 and/or an increase
in
guaranteed contract claims, which may require the Company to accelerate the
amortization of DAC.
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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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: (1) 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 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.
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 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 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
withdrawal benefit (GMWB) through its Capital Preservation Plus Lifetime
Income
(CPPLI) 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 any one 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 with a particular customer,
lender, distribution source, market or geographic region of the U.S. in which
business is conducted that makes it overly vulnerable to a single event which
could cause a severe impact to the Company’s financial position.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 any one 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 NLIC 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 of fair 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 available-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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
Policy
reserves on life insurance contracts: Included are disclosures for
individual life insurance, COLI, BOLI, 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 financial
instruments subject to disclosure requirements and policy reserves on life
insurance contracts as of December 31:
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 (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 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
of the 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 better 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 of the 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 of the 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
The
following
table summarizes the amortized cost, gross unrealized gains and losses, and
estimated fair values of securities available-for-sale as of the dates
indicated:
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)
Amortized cost
Estimated fair
value
Fixed
maturity securities
available-for-sale:
Due
in one year or
less
$
1,902.1
$
1,909.1
Due
after one year through
five years
6,212.8
6,285.3
Due
after five years through
ten years
6,160.3
6,246.3
Due
after ten
years
3,172.2
3,334.1
Subtotal
17,447.4
17,774.8
Mortgage-backed
securities –
U.S. Government-backed
6,048.3
5,958.8
Asset-backed
securities
3,463.2
3,464.5
Total
$
26,958.9
$
27,198.1
The
following
table presents the components of net unrealized gains on securities
available-for-sale as of December 31:
(in
millions)
2005
2004
Net
unrealized gains, before
adjustments and taxes
$
246.2
$
953.7
Adjustment
to
DAC
42.4
(144.6
)
Adjustment
to future policy
benefits and claims
(104.6
)
(121.6
)
Deferred
federal income
taxes
(64.4
)
(240.6
)
Net
unrealized
gains
$
119.6
$
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:
(in
millions)
2005
2004
2003
Fixed
maturity
securities
$
(704.1
)
$
(153.3
)
$
61.9
Equity
securities
(3.4
)
(1.2
)
12.4
Net
change
$
(707.5
)
$
(154.5
)
$
74.3
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
The
following
table summarizes by time the gross unrealized losses on securities
available-for-sale in an unrealized loss position as of the dates indicated:
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)
charged (credited) to allowance
(2.2
)
4.2
(14.3
)
Allowance,
end of
period
$
31.1
$
33.3
$
29.1
During
the third
quarter of 2003, the Company refined 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
maturity securities
available-for-sale
$
65.3
$
57.5
$
98.5
Hedging
losses on fixed
maturity 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 gains on sales,
net of hedging losses
75.6
65.0
66.4
Realized
losses on sales, net
of hedging gains:
Fixed
maturity securities
available-for-sale
(22.5
)
(7.8
)
(27.2
)
Hedging
gains on fixed
maturity sales
3.9
3.7
9.2
Equity
securities
available-for-sale
(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 hedging gains
(22.9
)
(12.7
)
(25.2
)
Other-than-temporary
and other
investment impairments:
Fixed
maturity securities
available-for-sale
(28.1
)
(79.7
)
(159.4
)
Equity
securities
available-for-sale
(0.9
)
(0.6
)
(8.0
)
Mortgage
loans on real estate,
including valuation allowance adjustment
(4.5
)
(7.1
)
11.7
Real
estate
(0.1
)
(3.2
)
(0.8
)
Other
(3.2
)
—
—
Total
other-than-temporary and
other investment impairments
(36.8
)
(90.6
)
(156.5
)
Credit
default
swaps
(7.5
)
0.3
13.3
Periodic
net coupon
settlements on non-qualifying derivatives
1.1
6.6
15.6
Other
derivatives
1.1
(5.0
)
1.2
Net
realized gains (losses) on
investments, hedging instruments and hedged items
$
10.6
$
(36.4
)
$
(85.2
)
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
The
following
table summarizes net investment income from continuing operations by investment
type for the years ended December 31:
(in
millions)
2005
2004
2003
Securities
available-for-sale:
Fixed
maturity
securities
$
1,466.2
$
1,461.9
$
1,453.1
Equity
securities
2.4
1.2
1.4
Mortgage
loans on real
estate
577.3
577.4
579.7
Real
estate
16.6
17.9
21.7
Short-term
investments
18.8
8.9
9.3
Derivatives
(31.0
)
(94.3
)
(107.2
)
Other
112.2
78.4
64.8
Gross
investment
income
2,162.5
2,051.4
2,022.8
Less
investment
expenses
57.3
50.9
49.7
Net
investment
income
$
2,105.2
$
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.
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:
(1) GMDB; (2) GMAB; (3) GMIB; and (4) a hybrid guarantee
with GMAB and GMWB.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 terminate the contract or continue it and
have
the death benefit paid into the contract and a second death benefit paid
upon
the survivor’s death. The 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
of
time (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 of time, to drop the rider and continue
the
variable annuity contract without the GMAB. In general, the GMAB requires
a
minimum allocation to guaranteed term options or adherence to limitations
required by an approved asset allocation strategy.
The
GMIB is a
living benefit that provides the contractholder with a guaranteed annuitization
value. The GMIB types are:
•
Ratchet–
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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
2005
2004
(in
millions)
Account
value
Net amount at
risk1
Wtd. avg. attained age
Account value
Net amount at
risk1
Wtd. avg. attained age
GMDB:
Return
of
premium
$
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
150.8
64
39,770.8
278.5
62
Earnings
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
GMAB2:
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
GMIB3:
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
- GMIB
$
1,634.5
$
—
N/A
$
1,626.9
$
—
N/A
1
Net
amount at risk is calculated on a seriatum 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 $939.1 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
The
following
table summarizes account balances of contracts with guarantees that were
invested in separate accounts as of December 31:
(in
millions)
2005
2004
Mutual
funds:
Bond
$
3,857.3
$
4,136.8
Domestic
equity
28,011.3
27,402.4
International
equity
2,161.4
1,831.3
Total
mutual
funds
34,030.0
33,370.5
Money
market
funds
1,350.4
1,313.6
Total
$
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 contractholder is
90% in
the money.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
10+
Minimum
4.50%
5.50%
6.50%
8.50%
10.50%
10.50%
10.50%
17.50%
17.50%
17.50%
Maximum
4.50%
8.50%
11.50%
17.50%
22.50%
22.50%
22.50%
22.50%
22.50%
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)
2005
2004
$800.0
million commercial
paper program
$
134.7
$
134.7
$350.0
million securities
lending program facility
75.0
47.7
$250.0
million securities
lending program facility
32.6
32.6
Total
short-term
debt
$
242.3
$
215.0
The
Company has
available as a source of funds a $1.00 billion revolving credit facility
entered
into by NFS, NLIC 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 NLIC maintain statutory surplus,
as
defined, in excess of $1.67 billion. As of December 31, 2005 and 2004, the
Company and NLIC were in compliance with all covenants. The Company had no
amounts outstanding under this agreement as of December 31, 2005 and 2004.
NLIC 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. NLIC 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
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 of Insurance
(ODI).
(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 1, 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 (IRC) 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
117.0
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
liability
$
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
permanent 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 information available at year end.
The
following
table summarizes federal income tax expense attributable to income from
continuing operations for the years ended December 31:
(in
millions)
2005
2004
2003
Current
$
90.6
$
181.5
$
106.7
Deferred
5.0
(61.5
)
(10.5
)
Federal
income tax
expense
$
95.6
$
120.0
$
96.2
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
2003
(dollars
in
millions)
Amount
%
Amount
%
Amount
%
Computed
(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
credits
(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
its
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 financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by a ratio of total adjusted
capital, as defined by the NAIC, to authorized control level 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 requirements
for all periods presented herein.
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 ODI. The statutory capital and surplus
of
NLIC 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. 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 profits 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 securities available-for-sale arising during 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 securities available-for-sale
realized
during 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
59.2
Other
comprehensive (loss)
income on securities available-for-sale
(327.3
)
(42.7
)
99.6
Accumulated
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 hedges
27.1
(30.8
)
(26.6
)
Total
other comprehensive
(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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
such
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 1,2000, 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 which 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 the 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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
$
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
obligation 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
contributions1
249.8
130.0
19.1
20.1
Participant
contributions
—
—
6.5
4.1
Benefits
paid1
(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
Unrecognized
net asset at
transition
—
(1.2
)
—
—
Prepaid
(accrued) benefit
cost, net
$
191.1
$
44.0
$
(195.8
)
$
(211.3
)
Accumulated
benefit
obligation
$
2,510.3
$
2,271.6
1
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 reflect 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 reflected 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
1% increase or decrease in the assumed health care cost trend rate on the
accumulated postretirement benefit obligation was $0.1 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 $20.0 million to the postretirement benefit
plan
in 2006.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
(in
millions)
Pension
benefits
Postretirement
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
111.6
The
following
table summarizes the weighted average assumptions used to calculate the benefit
obligation and funded status of the NMIC 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
Postretirement benefits
2005
2004
2005
2004
Discount
rate
4.75%
5.00%
5.45%
5.70%
Rate
of increase in future
compensation levels
4.25%
3.50%
—
—
Assumed
health care cost trend
rate:
Initial
rate
—
—
9.00%
10.00%
1
Ultimate
rate
—
—
5.50%
5.20%
1
Declining
period
—
—
7 Years
10 Years
1
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 of 5.70%.
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
financial condition. The plan requires investment in a group annuity 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, annual liability measurements
and periodic asset/liability studies.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
Percentage of plan assets
Target allocation percentage
Asset
Category
2005
2004
2006
Equity
securities
50%
48%
40 - 65%
Debt
securities
50%
52%
25 - 50%
Real
estate
—
—
0 - 10%
Total
100%
100%
The
NMIC
postretirement benefit plans employ 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 financial condition. Plan investments for retiree life
insurance benefits 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 fixed investments with an interest
rate guarantee and a separate account invested in diversified U.S. equities.
Investment mix is measured and monitored continually through regular investment
reviews, annual liability measurements and periodic asset/liability studies.
The
following
table summarizes the asset allocation for the NMIC postretirement benefit
plans
as a whole at the end of 2005 and 2004 and the target allocation for 2006,
by
asset category:
Percentage of plan assets
Target allocation percentage
Asset
Category
2005
2004
2006
Equity
securities
60%
60%
50 - 80%
Debt
securities
37%
35%
20 - 50%
Other
3%
5%
0 - 10%
Total
100%
100%
The
following
table summarizes the components of net periodic benefit cost for the NMIC
pension plan as a whole, including amounts not related to the Company, for
the
years ended December 31:
(in
millions)
2005
2004
2003
Service
cost
$
133.5
$
121.8
$
104.0
Interest
cost
134.9
134.0
131.7
Expected
return on plan
assets
(172.6
)
(167.7
)
(156.7
)
Recognized
net actuarial
loss
—
—
0.1
Amortization
of prior service
cost
4.5
4.5
4.5
Amortization
of unrecognized
net losses
3.6
—
—
Amortization
of unrecognized
transition cost
(1.2
)
(1.3
)
(1.3
)
Net
periodic benefit
cost
$
102.7
$
91.3
$
82.3
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
The
following
table summarizes the weighted average assumptions used to calculate net periodic
benefit cost, set at the beginning of each year, for the NMIC pension plan
as a
whole:
2005
2004
2003
Discount
rate
5.00%
5.50%
6.00%
Rate
of increase in future
compensation levels
3.50%
4.00%
4.50%
Expected
long-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 return 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
$
9.7
$
9.2
$
9.9
Interest
cost
16.0
17.5
19.5
Expected
return on plan
assets
(8.7
)
(8.9
)
(8.0
)
Amortization
of unrecognized
net losses
1.4
—
—
Net
amortization and
deferral
(14.8
)
(12.1
)
(9.9
)
Net
periodic benefit
cost
$
3.6
$
5.7
$
11.5
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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%1
11.00%1
11.30%1
Ultimate
rate
5.20%1
5.20%1
5.70%1
Declining
period
10 Years
11 Years
11 Years
1
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 offers 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
NLIC
has a
reinsurance agreement with NMIC whereby all of NLIC’s accident and health
business not ceded to unaffiliated reinsurers is ceded to NMIC on a modified
coinsurance basis. Either party may terminate the agreement on January 1 of
any year with prior notice. Under a modified coinsurance agreement, the ceding
company retains invested assets, and investment earnings are paid to the
reinsurer. Under the terms of NLIC’s agreements, the investment risk associated
with changes in interest rates is borne by the reinsurer. The ceding of risk
does not discharge the original insurer from its primary obligation to the
policyholder. The Company believes that the terms of the modified coinsurance
agreements are consistent in all material respects with what the Company
could
have obtained with unaffiliated parties. Revenues ceded to NMIC for the years
ended December 31, 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 11. Effective
October 1, 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
In
the first
quarter of 2003, NLIC received a $200.0 million capital contribution from
NFS
for general corporate purposes.
On
February 22, 2006, NLIC declared a $70.0 million dividend to NFS. In 2005,
2004 and 2003, NLIC paid dividends to NFS totaling $185.0 million, $125.0
million and $60.0 million, respectively. During 2003, NLIC returned capital
totaling $100.0 million to NFS.
See
Note 10 for
information on surplus notes payable from NLIC 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
Matters
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
financial
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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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 11, 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 of
NLIC;
all employees, officers and directors of NLIC; 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 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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. Nationwide Life Insurance
Company
and/or Nationwide Life Insurance Company of America and/or Nationwide Life
and
Annuity Insurance Company and/or Nationwide Life and Annuity Company of America
and/or Nationwide Financial Services, Inc. and/or Nationwide Financial
Corporation, 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: (1) 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 31, 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 Robert Helman et al v. Nationwide Life Insurance Company et
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, 2001, the Company was named in a lawsuit filed in the United
States District Court for the District of Connecticut entitled Lou Haddock,
as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation
Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance
Company. The plaintiffs first amended their complaint on September 5,2001 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 NLIC. 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 of the 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
Matters
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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
A
significant
component of the tax reserve is related to the separate account DRD. The
Company
has not reached any final agreements with the IRS with respect to the DRD,
and
there can be no assurance that any such agreements will be reached. However,
resolution of the separate account DRD 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 financial position of these VIEs are included along with
corresponding minority interest liabilities in the accompanying consolidated
financial statements.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
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:
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 1 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 of DAC related to
net realized gains and losses.
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 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
The
Individual
Protection segment consists of investment life insurance products, including
individual variable, COLI and BOLI products; traditional life insurance
products; and universal life insurance products. Life insurance products
provide
a death benefit and generally allow the customer to build cash value on a
tax-advantaged basis.
Corporate
and Other
The
Corporate
and Other segment includes certain structured products business; the 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.
NATIONWIDE
LIFE INSURANCE
COMPANY AND SUBSIDIARIES
(a
wholly-owned subsidiary
of Nationwide Financial Services, Inc.)
Notes
to Consolidated
Financial Statements, Continued
**Filed
previously in connection with this registration statement Post-Effective
Amendment No. 30 (SEC File No. 2-75174) and hereby incorporated by
reference.
***Filed
previously in connection with this
registration statement Post-Effective Amendment No. 37 (SEC File No. 2-75174)
and hereby incorporated by reference.
Item
25.
Directors
and Officers of the Depositor
Chairman
of the Board
Arden
L. Shisler
Chief
Executive Officer and Director
W.
G. Jurgensen
President
and Chief Operating Officer
Mark
R. Thresher
Executive
Vice President and Chief Legal and Governance Officer
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
1717
Advisory Services, Inc.
Pennsylvania
The
company was formerly registered as an investment advisor and is currently
inactive.
1717
Brokerage Services, Inc.
Pennsylvania
The
company is registered as a broker-dealer.
1717
Capital Management Company*
Pennsylvania
The
company is registered as a broker-dealer and investment
advisor.
1717
Insurance Agency of Massachusetts, Inc.
Massachusetts
The
company is established to grant proper licensing to the Nationwide
Life
Insurance Company of America affiliates in
Massachusetts.
1717
Insurance Agency of Texas, Inc.
Texas
The
company is established to grant proper licensing to the Nationwide
Life
Insurance Company of America affiliates in Texas.
401(k)
Investment Advisors, Inc.
Texas
The
company is an investment advisor registered with the State of
Texas.
401(k)
Investment Services, Inc.*
Texas
The
company is a broker-dealer registered with the National Association
of
Securities Dealers, Inc.
AGMC
Reinsurance, Ltd.
Turks
& Caicos Islands
The
company is in the business of reinsurance of mortgage guaranty
risks.
AID
Finance Services, Inc.
Iowa
The
company operates as a holding company.
ALLIED
Document Solutions, Inc.
Iowa
The
company provides general printing services to its affiliated companies
as
well as to unaffiliated companies.
ALLIED
General Agency Company
Iowa
The
company acts as a general agent and surplus lines broker for property
and
casualty insurance products.
ALLIED
Group, Inc.
Iowa
The
company is a property and casualty insurance holding
company.
ALLIED
Group Insurance Marketing
Company
Iowa
The
company engages in the direct marketing of property and casualty
insurance
products.
ALLIED
Property and Casualty Insurance Company
Iowa
The
company underwrites general property and casualty
insurance.
Allied
Texas Agency, Inc.
Texas
The
company acts as a managing general agent to place personal and commercial
automobile insurance with Colonial County Mutual Insurance Company
for the
independent agency companies.
Allnations,
Inc.
Ohio
The
company engages in promoting, extending, and strengthening cooperative
insurance organizations throughout the world.
AMCO
Insurance Company
Iowa
The
company underwrites general property and casualty
insurance.
American
Marine Underwriters, Inc.
Florida
The
company is an underwriting manager for ocean cargo and hull
insurance.
Asset
Management Holdings plc*
England
and Wales
The
company is a holding company of a group engaged in the management
of
pension fund assets, unit trusts and other collective investment
schemes,
investment trusts and portfolios for corporate clients.
Audenstar
Limited
England
and Wales
The
company is an investment holding company.
BlueSpark,
LLC
Ohio
The
company is currently inactive.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Cal-Ag
Insurance Services, Inc.
California
The
company is an insurance agency.
CalFarm
Insurance Agency
California
The
company is an insurance agency.
Capital
Pro Holding, Inc.
Delaware
The
company operates as a holding company and is currently
inactive.
Capital
Professional Advisors, Inc.
Delaware
The
company is currently inactive.
Cap
Pro Advisory Services, Inc.
Delaware
The
company is currently inactive.
Cap
Pro Brokerage Services, Inc.
Delaware
The
company is currently inactive.
Cap
Pro Insurance Agency Services, Inc.
Delaware
The
company is currently inactive.
Colonial
County Mutual Insurance Company*
Texas
The
company underwrites non-standard automobile and motorcycle insurance
and
other various commercial liability coverages in Texas.
Corviant
Corporation
Delaware
The
purpose of the company is to create a captive distribution network
through
which affiliates can sell multi-manager investment products, insurance
products and sophisticated estate planning services.
The
company is an Ohio-based multi-line insurance corporation that is
authorized to write personal, automobile, homeowners and commercial
insurance.
Damian
Securities Limited*
England
and Wales
The
company is engaged in investment holding.
Depositors
Insurance Company
Iowa
The
company underwrites general property and casualty
insurance.
Discover
Insurance Agency, LLC
California
The
company is currently inactive.
Discover
Insurance Agency of Texas, LLC
Texas
The
company is currently inactive.
DVM
Insurance Agency, Inc.
California
This
company places pet insurance business not written by Veterinary Pet
Insurance Company outside of California with National Casualty
Company.
Europewide
Life SA (f.k.a. CLARIENT Life Insurance SA)*
Luxembourg
The
company writes life insurance including coinsurance and
reinsurance.
F&B,
Inc.
Iowa
The
company is an insurance agency that places business not written by
Farmland Mutual Insurance Company and its affiliates with other
carriers.
Farmland
Mutual Insurance Company
Iowa
The
company provides property and casualty insurance primarily to agricultural
businesses.
Fenplace
Limited
England
and Wales
The
company is dormant within the meaning of Section 249AA of the Companies
Act of 1985 of England and Wales.
Financial
Horizons Distributors Agency of Alabama, Inc.
Alabama
The
company is an insurance agency marketing life insurance and annuity
products through financial institutions.
Financial
Horizons Distributors Agency of Ohio, Inc.
Ohio
The
company is an insurance agency marketing life insurance and annuity
products through financial institutions.
Financial
Horizons Distributors Agency of Texas, Inc.
Texas
The
company is an insurance agency marketing life insurance and annuity
products through financial institutions.
Financial
Settlement Services Agency, Inc.
Ohio
The
company is an insurance agency in the business of selling structured
settlement products.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
FutureHealth
Corporation
Maryland
The
company is a wholly-owned subsidiary of FutureHealth Holding Company,
which provides population health management.
FutureHealth
Holding Company
Maryland
The
company provides population health management.
FutureHealth
Technologies Corporation
Maryland
The
company is a wholly-owned subsidiary of FutureHealth Holding Company,
which provides population health management.
Gardiner
Point Hospitality LLC
Ohio
The
company holds the assets of a hotel in foreclosure.
Gartmore
1990 Limited
England
and Wales
This
company is currently in Members' Voluntary Liquidation.
Gartmore
1990 Trustee Limited
England
and Wales
This
company is currently in Members' Voluntary Liquidation.
Gartmore
Capital Management Limited*
England
and Wales
The
company acts as a holding company for Gartmore US Limited and has
applied
to cancel its registration with the United Kingdom Financial Services
Authority.
Gartmore
Distribution Services, Inc.*
Delaware
The
company is a limited purpose broker-dealer.
Gartmore
Emerging Managers, LLC
Delaware
The
company acquires and holds interests in registered investment advisors
and
provides investment management services.
Gartmore
Fund Managers International Limited
Jersey,
Channel Islands
The
company is currently in Liquidation.
Gartmore
Fund Managers Limited*
England
and Wales
The
company is engaged in authorized unit trust management and OEIC
management. It is also the authorized Corporate Director of the Gartmore
OEIC Funds. The company is authorized and regulated by the United
Kingdom
Financial Services Authority.
Gartmore
Global Asset Management, Inc.
Delaware
The
company operates as a holding company.
Gartmore
Global Asset Management Trust*
Delaware
The
company acts as a holding company for the Gartmore group of companies
and
as a registered investment advisor for registered investment
companies.
Gartmore
Global Investments, Inc.*
Delaware
The
company acts as a holding company and provides other business services
for
the Gartmore group of companies.
Gartmore
Global Partners*
Delaware
The
partnership is engaged in investment management. The company is authorized
and regulated by the Securities and Exchange Commission and the United
Kingdom Financial Services Authority.
Gartmore
Global Ventures, Inc.
Delaware
The
company acts as a holding company for subsidiaries in the Nationwide
group
of companies.
Gartmore
Group Limited*
England
and Wales
The
company is a holding company for a group engaged in the management
of
pension fund assets, unit trusts and other collective investment
schemes,
hedge funds, investment trusts, and portfolios for corporate
clients.
Gartmore
Indosuez UK Recovery Fund (G.P.) Limited
England
and Wales
The
company is currently in Members' Voluntary
Dissolution.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Gartmore
Investment Limited*
England
and Wales
The
company is engaged in investment management and advisory services
to
pension funds, unit trusts and other collective investment schemes,
hedge
funds, investment trusts and portfolios for corporate or other
institutional clients. The company is authorized and regulated by
the
Securities and Exchange Commission and the United Kingdom Financial
Services Authority.
Gartmore
Investment Management plc*
England
and Wales
The
company is an investment holding company and provides services to
other
companies within the Gartmore group of companies in the United
Kingdom.
Gartmore
Investment Services GmbH
Germany
The
company is engaged in marketing support for subsidiaries of the Gartmore
group of companies.
Gartmore
Investment Services Limited*
England
and Wales
The
company is engaged in investment holding for subsidiaries of the
Gartmore
group of companies.
Gartmore
Investor Services, Inc.
Ohio
The
company provides transfer and dividend disbursing agent services
to
various mutual fund entities.
Gartmore
Japan Limited* (n.k.a. Gartmore Investment Japan Limited)
Japan
The
company is the renamed survivor entity of the merger of Gartmore
Investment Management Japan Limited and Gartmore NC Investment Trust
Management Company Ltd. The company is engaged in the business of
investment management. The company is authorized and regulated by
the
Japan Financial Services Authority.
Gartmore
Managers (Jersey) Limited
Jersey,
Channel Islands
The
company is currently in Liquidation.
Gartmore
Morley & Associates, Inc.
Oregon
The
company brokers or places book-value maintenance agreements (wrap
contracts) and guaranteed investment contracts for collective investment
trusts and accounts.
Gartmore
Morley Capital Management, Inc.
Oregon
The
company is an investment advisor and stable value money
manager.
Gartmore
Morley Financial Services, Inc.
Oregon
The
company is a holding company.
Gartmore
Mutual Fund Capital Trust
Delaware
The
trust acts as a registered investment advisor.
Gartmore
No. 1 General Partner, Limited
Scotland
The
company is a general partner in a number of Scottish Limited Partnerships
that act as a general partner in private equity investment
vehicles.
Gartmore
No. 2 General Partner, Limited*
Scotland
The
company is a general partner in a number of Scottish Limited Partnerships
that act as a general partner in private equity investment
vehicles.
Gartmore
No. 3 General Partner GP Limited
Scotland
The
company is a general partner in a Scottish Limited Partnership acting
as a
general partner in a private equity investment vehicle.
Gartmore
No. 3 General Partner ILP Limited
Scotland
The
company is a general partner in a Scottish Limited Partnership acting
as a
general partner in a private equity investment vehicle.
Gartmore
Nominees Limited
England
and Wales
The
company acts as a nominee. The company is dormant within the meaning
of
Section 249AA of the Companies Act of 1985 of England and
Wales.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Gartmore
Pension Trustees, Limited
England
and Wales
The
company acts as the corporate trustee of the Gartmore pension scheme
and
is dormant within the meaning of Section 249AA of the Companies Act
of
1985 of England and Wales.
Gartmore
Riverview, LLC*
Delaware
The
company provides customized solutions in the form of expert advice
and
investment management services to a limited number of institutional
investors through construction of hedge fund and alternative asset
portfolios and their integration into the entire asset allocation
framework.
Gartmore
Riverview II, LLC
Delaware
The
company is a holding company for Gartmore Riverview,
LLC.
Gartmore
Riverview Polyphony LLC*
Delaware
The
company invests in limited partnerships and other entities and retains
managers to invest, reinvest and trade in securities and other financial
instruments.
Gartmore
S.A. Capital Trust
Delaware
The
trust acts as a registered investment advisor.
Gartmore
Securities Limited*
England
and Wales
The
company is engaged in investment holding and is a partner in Gartmore
Global Partners.
Gartmore
Separate Accounts, LLC
Delaware
The
company acts as an investment advisor registered with the Securities
and
Exchange Commission.
Gartmore
Services Limited
Jersey,
Channel Islands
The
company provides services to the Gartmore group of
companies.
Gartmore
Trust Company
Oregon
The
company is an Oregon state bank with trust power.
Gartmore
U.S. Limited*
England
and Wales
The
company is a joint partner in Gartmore Global Partners.
Gates,
McDonald & Company*
Ohio
The
company provides services to employers for managing workers' compensation
matters and employee benefits costs.
Gates,
McDonald & Company of New York, Inc.
New
York
The
company provides workers' compensation and self-insured claims
administration services to employers with exposure in New
York.
GatesMcDonald
DTAO, LLC
Ohio
The
company provides disability tax reporting services.
GatesMcDonald
DTC, LLC
Ohio
The
company provides disability tax reporting services.
GatesMcDonald
Health Plus Inc.
Ohio
The
company provides medical management and cost containment services
to
employers.
GGI
MGT LLC
Delaware
The
company is a passive investment holder in Newhouse Special Situations
Fund
I, LLC for the purpose of allocation of earnings to Gartmore management
team as it relates to the ownership and management of Newhouse Special
Situations Fund I, LLC.
G.I.L.
Nominees Limited
England
and Wales
The
company acts as a nominee. The company is dormant within the meaning
of
Section 249AA of the Companies Act of 1985 of England and
Wales.
Insurance
Intermediaries, Inc.
Ohio
The
company is an insurance agency and provides commercial property and
casualty brokerage services.
Life
REO Holdings, LLC
Ohio
The
company serves as a holding company for foreclosure
entities.
Lone
Star General Agency, Inc.
Texas
The
company acts as general agent to market non-standard automobile and
motorcycle insurance for Colonial County Mutual Insurance
Company.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
MedProSolutions,
Inc.
Massachusetts
The
company provides third-party administration services for workers'
compensation, automobile injury and disability claims.
National
Casualty Company
Wisconsin
The
company underwrites various property and casualty coverage, as well
as
individual and group accident and health insurance.
National
Casualty Company of America, Ltd.
England
This
is a limited liability company organized for profit under the Companies
Act of 1948 of England for the purpose of carrying on the business
of
insurance, reinsurance, indemnity, and guarantee of various kinds.
This
company is currently inactive.
Nationwide
Advantage Mortgage Company*
Iowa
The
company makes residential mortgage loans.
Nationwide
Affinity Insurance Company of America*
Kansas
The
company is a shell insurer with no active policies or
liabilities.
Nationwide
Affordable Housing, LLC
Ohio
The
company invests in multi-family housing projects throughout the
U.S.
Nationwide
Agribusiness Insurance Company
Iowa
The
company provides property and casualty insurance primarily to agricultural
businesses.
Nationwide
Arena, LLC*
Ohio
The
purpose of the company is to develop Nationwide Arena and to engage
in
related development activity.
Nationwide
Asset Management Holdings, Limited*
England
and Wales
The
company is a holding company for a group engaged in the management
of
pension fund assets, unit trusts and other collective investment
schemes,
hedge funds, investment trusts and portfolios for corporate
clients.
Nationwide
Assurance Company
Wisconsin
The
company underwrites non-standard automobile and motorcycle
insurance.
Nationwide
Atlantic Insurance Company
Ohio
The
company writes personal lines residential property insurance in the
State
of Florida.
Nationwide
Capital Mortgage, LLC
Ohio
This
company is a holding company that funds/owns commercial mortgage
loans on
an interim basis, hedges the loans during the ownership period, and
then
sells the loans as part of a securitization to generate
profit.
Nationwide
Cash Management Company*
Ohio
The
company buys and sells investment securities of a short-term nature
as
agent for other corporations, foundations, and insurance company
separate
accounts.
Nationwide
Community Development Corporation, LLC
Ohio
The
company holds investments in low-income housing funds.
Nationwide
Corporation
Ohio
The
company acts primarily as a holding company for entities affiliated
with
Nationwide Mutual Insurance Company and Nationwide Mutual Fire Insurance
Company.
The
company's purpose is to provide a mechanism for the purchase of group
liability insurance for insurance agents operating
nationwide.
Nationwide
Financial Assignment Company
Ohio
The
company acts as an administrator of structured
settlements.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Nationwide
Financial Institution Distributors Agency, Inc.
Delaware
The
company is an insurance agency.
Nationwide
Financial Institution Distributors Agency, Inc. of New
Mexico
New
Mexico
The
company is an insurance agency.
Nationwide
Financial Institution Distributors Insurance Agency, Inc. of
Massachusetts
Massachusetts
The
company is an insurance agency.
Nationwide
Financial Services Capital Trust
Delaware
The
trust's sole purpose is to issue and sell certain securities representing
individual beneficial interests in the assets of the
trust.
Nationwide
Financial Services, Inc.*
Delaware
The
company acts primarily as a holding company for companies within
the
Nationwide organization that offer or distribute long-term savings
and
retirement products.
Nationwide
Financial Sp. Zo.o
Poland
The
company provides distribution services for its affiliate Nationwide
Towarzystwo Ubezpieczen na Zycie S.A. in Poland.
Nationwide
Financial Structured Products, LLC
Ohio
The
company captures and reports the results of the structured products
business unit.
Nationwide
Foundation*
Ohio
The
company contributes to non-profit activities and
projects.
Nationwide
General Insurance Company
Ohio
The
company transacts a general insurance business, except life insurance,
and
primarily provides automobile and fire insurance to select
customers.
Nationwide
Global Finance, LLC
Ohio
The
company acts as a support company for Nationwide Global Holdings,
Inc. in
its international capitalization efforts.
Nationwide
Global Funds
Luxembourg
This
company issues shares of mutual funds.
Nationwide
Global Holdings, Inc.*
Ohio
The
company is a holding company for the international operations of
Nationwide.
Nationwide
Global Holdings-NGH Brasil Participacoes, Ltda.
Brazil
The
company acts as a holding company for subsidiaries of the Nationwide
group
of companies.
Nationwide
Global Services EIG*
Luxembourg
The
company provides shared services to PanEuroLife, Europewide Life
SA,
Europewide Financial S.A. (f.k.a. Dancia Life S.A.) and Nationwide
Global
Holdings, Inc.
Nationwide
Health and Productivity Company
Ohio
The
company is a holding company for the health and productivity operations
of
Nationwide.
Nationwide
Indemnity Company*
Ohio
The
company is involved in the reinsurance business by assuming business
from
Nationwide Mutual Insurance Company and other insurers within the
Nationwide Insurance organization.
Nationwide
Insurance Company of America
Wisconsin
The
company is an independent agency personal lines underwriter of property
and casualty insurance.
Nationwide
Insurance Company of
Florida*
Ohio
The
company transacts general insurance business except life
insurance.
Nationwide
Insurance Management Services, Inc.
Ohio
The
company is currently inactive.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Nationwide
International Underwriters
California
The
company is a special risk, excess and surplus lines underwriting
manager.
Nationwide
Investment Services Corporation**
Oklahoma
This
is a limited broker-dealer company doing business in the deferred
compensation market and acts as an investment advisor.
Nationwide
Life and Annuity Company of America**
Delaware
The
company provides individual life insurance products.
Nationwide
Life and Annuity Insurance Company**
Ohio
The
company engages in underwriting life insurance and granting, purchasing,
and disposing of annuities.
Nationwide
Life Insurance Company*
Ohio
The
company provides individual life insurance, group life and health
insurance, fixed and variable annuity products, and other life insurance
products.
Nationwide
Life Insurance Company of America*
Pennsylvania
The
company provides individual life insurance and group annuity
products.
Nationwide
Life Insurance Company of Delaware*
Delaware
The
company insures against personal injury, disability or death resulting
from traveling, sickness or other general accidents, and every type
of
insurance appertaining thereto.
Nationwide
Lloyds
Texas
The
company markets commercial property insurance in Texas.
Nationwide
Management Systems, Inc.
Ohio
The
company offers a preferred provider organization and other related
products and services.
Nationwide
Marítima Vida E Previdência SA* (n.k.a. Vida Seguradora
SA)
Brazil
The
company operates as a licensed insurance company in the categories
of life
and unrestricted private pension plans in Brazil.
Nationwide
Mutual Capital, LLC
Ohio
The
company acts as a private equity fund investing in companies for
investment purposes and to create strategic opportunities for
Nationwide.
Nationwide
Mutual Capital I, LLC*
Delaware
The
business of the company is to achieve long term capital appreciation
through a portfolio of primarily domestic equity investments in financial
service and related companies.
Nationwide
Mutual Fire Insurance Company
Ohio
The
company engages in a general insurance and reinsurance business,
except
life insurance.
Nationwide
Mutual Insurance Company*
Ohio
The
company engages in a general insurance and reinsurance business,
except
life insurance.
Nationwide
Private Equity Fund, LLC
Ohio
The
company invests
in
private equity funds.
Nationwide
Properties, Ltd.
Ohio
The
company is engaged in the business of developing, owning and operating
real estate and real estate investments.
Nationwide
Property and Casualty Insurance Company
Ohio
The
company engages in a general insurance business, except life
insurance.
Nationwide
Property Protection Services, LLC
Ohio
The
company provides alarm systems and security guard
services.
Nationwide
Provident Holding Company*
Pennsylvania
The
company is a holding company for non-insurance
subsidiaries.
Nationwide
Realty Investors, Ltd.*
Ohio
The
company is engaged in the business of developing, owning and operating
real estate and real estate
investment.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Nationwide
Retirement Solutions, Inc.*
Delaware
The
company markets and administers deferred compensation plans for public
employees.
Nationwide
Retirement Solutions, Inc. of Arizona
Arizona
The
company markets and administers deferred compensation plans for public
employees.
Nationwide
Retirement Solutions, Inc. of Ohio
Ohio
The
company provides retirement products, marketing and education and
administration to public employees.
Nationwide
Retirement Solutions, Inc. of Texas
Texas
The
company markets and administers deferred compensation plans for public
employees.
Nationwide
Retirement Solutions, Insurance Agency, Inc.
Massachusetts
The
company markets and administers deferred compensation plans for public
employees.
Nationwide
Securities, Inc.*
Ohio
The
company is a registered broker-dealer and provides investment management
and administrative services.
Nationwide
Services Company, LLC
Ohio
The
company performs shared services functions for the Nationwide
organization.
Nationwide
Services Sp. Zo.o.
Poland
The
company provides services to Nationwide Global Holdings, Inc. in
Poland.
Nationwide
Trust Company, FSB
United
States
This
is a federal savings bank chartered by the Office of Thrift Supervision
in
the United States Department of the Treasury to exercise custody
and
fiduciary powers.
Nationwide
UK Holding Company, Limited*
England
and Wales
The
company is a holding company for a group engaged in the management
of
pension fund assets, unit trusts and other collective investment
schemes,
hedge funds, investment trusts and portfolios for corporate
clients.
Newhouse
Capital Partners, LLC
Delaware
The
company invests in financial services companies that specialize in
e-commerce and promote distribution of financial
services.
Newhouse
Special Situations Fund I, LLC
Delaware
The
company owns and manages contributed securities in order to achieve
long-term capital appreciation from the contributed securities and
through
investments in a portfolio of other equity investments in financial
service and other related companies.
NF
Reinsurance Ltd.*
Bermuda
The
company serves as a captive reinsurer for Nationwide Life Insurance
Company’s universal life, term life and annuity
business.
NFS
Distributors, Inc.
Delaware
The
company acts primarily as a holding company for Nationwide Financial
Services, Inc.'s distribution companies.
NGH
Luxembourg S.a.r.L.*
Luxembourg
The
company acts primarily as a holding company for the European operations
of
Nationwide Global Holdings, Inc.
NGH
Netherlands B.V.
Netherlands
The
company acts as a holding company for other Nationwide overseas
companies.
NGH
UK, Ltd.*
United
Kingdom
The
company functions as a support company for other Nationwide overseas
companies.
North
Front Pass-Through Trust
Delaware
The
trust issued and sold $4,000,000 aggregate face amount of CSN Pass-Through
Securities to certain unrelated Initial Purchasers.
NorthPointe
Capital LLC
Delaware
The
company acts as a registered investment
advisor.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
PanEuroLife*
Luxembourg
The
company provides individual life insurance, primarily in the United
Kingdom, Belgium and France.
Pension
Associates, Inc.
Wisconsin
The
company provides pension plan administration and record keeping services,
and pension plan and compensation consulting.
Premier
Agency, Inc.
Iowa
This
company is an insurance agency.
Provestco,
Inc.
Delaware
The
company serves as a general partner in certain real estate limited
partnerships invested in by Nationwide Life Insurance Company of
America.
Quick
Sure Auto Agency, Inc.
Texas
The
company is an insurance agency and operates as an employee agent
"storefront" for Titan Insurance Services.
RCMD
Financial Services, Inc.
Delaware
The
company is a holding company.
Registered
Investment Advisors Services, Inc.
Texas
The
company facilitates third-party money management services for plan
providers.
Retention
Alternatives, Ltd.
*
Bermuda
The
company is a captive insurer and writes first dollar insurance policies
in
workers’ compensation, general liability and automobile liability for its
affiliates in the United States.
Riverview
International Group, Inc.
Delaware
The
company is a holding company for Gartmore Riverview I,
LLC.
RP&C
International, Inc.
Ohio
The
company is an investment-banking firm that provides specialist advisory
services and innovative financial solutions to public and private
companies internationally.
Scottsdale
Indemnity Company
Ohio
The
company is engaged in a general insurance business, except life
insurance.
Scottsdale
Insurance Company
Ohio
The
company primarily provides excess and surplus lines of property and
casualty insurance.
Scottsdale
Surplus Lines Insurance Company
Arizona
The
company provides excess and surplus lines coverage on a non-admitted
basis.
The
company holds an investment in a leased airplane and maintains an
operating agreement with Flight Options.
TBG
Danco Insurance Company
California
The
corporation provides life insurance and individual executive estate
planning.
TBG
Financial & Insurance Services Corporation*
California
The
company consults with corporate clients and financial institutions
on the
development and implementation of proprietary and/or private placement
insurance products for the financing of executive benefit programs
and
individual executive's estate planning requirements. As a broker
dealer,
TBG Financial & Insurance Services Corporation provides access to
institutional insurance investment
products.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
TBG
Financial & Insurance Services Corporation of Hawaii
Hawaii
The
corporation consults with corporate clients and financial institutions
on
the development and implementation of proprietary, private placement
and
institutional insurance products.
TBG
Insurance Services Corporation*
Delaware
The
company markets and administers executive benefit
plans.
THI
Holdings (Delaware), Inc.*
Delaware
The
company acts as a holding company for certain subsidiaries of the
Nationwide group of companies.
The
401(k) Companies, Inc.
Texas
The
company acts as a holding company for certain subsidiaries of the
Nationwide group of companies.
The
401(k) Company
Texas
The
company is a third-party administrator providing record-keeping services
for 401(k) plans.
Titan
Auto Agency, Inc. (d.b.a. Arlans Agency)
Michigan
The
company is an insurance agency that primarily sells non-standard
automobile insurance for Titan Insurance Company in
Michigan.
Titan
Auto Insurance of Pennsylvania, Inc.
Pennsylvania
The
company is an insurance agency that operates as an employee agent
"storefront" for Titan Indemnity Company in Pennsylvania. The company
is
currently inactive.
Titan
Auto Insurance of New Mexico, Inc.
New
Mexico
The
company is an insurance agency that operates as an employee agent
"storefront" for Titan Indemnity Company in New Mexico.
Titan
Holdings Service Corporation
Texas
The
company acts as a holding company specifically for Titan corporate
employees.
Titan
Indemnity Company
Texas
The
company is a multi-line insurance company and is operating primarily
as a
property and casualty insurance company.
Titan
Insurance Company
Michigan
This
is a property and casualty insurance company.
Titan
Insurance Services, Inc.
Texas
The
company is a Texas grandfathered managing general
agency.
Titan
National Auto Call Center, Inc.
Texas
The
company is licensed as an insurance agency that operates as an employee
agent "call center" for Titan Indemnity Company.
VertBois,
SA*
Luxembourg
The
company acts as a real property holding company.
Veterinary
Pet Insurance Company*
California
The
company provides pet insurance.
Victoria
Automobile Insurance Company
Ohio
The
company is a property and casualty insurance company.
Victoria
Financial Corporation
Delaware
The
company acts as a holding company specifically for corporate employees
of
the Victoria group of companies.
Victoria
Fire & Casualty Company
Ohio
The
company is a property and casualty insurance company.
Victoria
Insurance Agency, Inc.
Ohio
The
company is an insurance agency that acts as a broker for independent
agents appointed with the Victoria companies in the State of
Ohio.
Victoria
National Insurance Company
Ohio
The
company is a property and casualty insurance company.
Victoria
Select Insurance Company
Ohio
The
company is a property and casualty insurance
company.
COMPANY
STATE/COUNTRY
OF ORGANIZATION
NO.
VOTING SECURITIES (see attached chart unless otherwise
indicated)
PRINCIPAL
BUSINESS
Victoria
Specialty Insurance Company
Ohio
The
company is a property and casualty insurance company.
VPI
Services, Inc.
California
The
company operates as a nationwide pet registry service for holders
of
Veterinary Pet Insurance Company policies, including pet indemnification
and lost pet recovery program.
Washington
Square Administrative Services, Inc.
Pennsylvania
The
company provides administrative services to Nationwide Life and Annuity
Company of America.
Western
Heritage Insurance Company
Arizona
The
company underwrites excess and surplus lines of property and casualty
insurance.
Whitehall
Holdings, Inc.
Texas
The
company acts as a holding company for the Titan group of
agencies.
W.I.
of Florida (d.b.a. Titan Auto Insurance)
Florida
The
company is an insurance agency and operates as an employee agent
"storefront" for Titan Indemnity Company in Florida.
William
J. Lynch and Associates, Inc.
California
The
company specializes in the analysis and funding of corporate benefit
liabilities.
Provision
is made in Nationwide’s Amended and Restated Code of Regulations and expressly
authorized by the General Corporation Law of the State of Ohio, for
indemnification by Nationwide of any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
by
reason of the fact that such person is or was a director, officer or employee
of
Nationwide, against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person
in
connection with such action, suit or proceeding, to the extent and under the
circumstances permitted by the General Corporation Law of the State of
Ohio.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
("Act") may be permitted to directors, officers or persons controlling
Nationwide pursuant to the foregoing provisions, Nationwide has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
Item
29. Principal
Underwriter
(a)
Security
Distributors, Inc. ("SDI"), a subsidiary of Security Benefit Corporation,
serves as principal underwriter and general distributor for contracts
issued by the following separate investment accounts of Nationwide
Life
Insurance Company:
Nationwide
Multi-Flex Variable Account
Nationwide
Variable Account-9
SDI
also
acts as principal underwriter and general distributor for contracts issued
by
the following separate investment accounts of Security Benefit Life Insurance
Company:
SBL
Variable Annuity Account I
SBL
Variable Annuity Account III
SBL
Variable Annuity Account IV
SBL
Variable Life Insurance Account Varilife
Security
Varilife Separate Account
SBL
Variable Annuity Account VIII
Variable
Annuity Account XI
Variable
Annuity Account XIV
Variable
Annuity Account XVII
Parkstone
Variable Annuity Separate Account
T.
Rowe
Price Variable Annuity Account
And
of
First Security Benefit Life Insurance and Annuity Company of New
York:
Variable
Annuity Account A
Variable
Annuity Account B
SDI
also
acts as principal underwriter for the following management investment companies
for which Security Management Company, LLC, an affiliate of Security Benefit
Life Insurance Company, acts as investment adviser:
Security
Equity Fund
Security
Income Fund
Security
Large Cap Value Fund
Security
Municipal Bond Fund
SBL
Fund
Security
Mid Cap Growth Fund
(b)
Directors
and Officers of SDI:
Gregory
J. Garvin, President and Director
James
R.
Schmank, Director
Amy
J.
Lee, Secretary
Brenda
M.
Harwood, Vice President, Treasurer and Director
Frank
Memmo, Director
Richard
J. Wells, Director
SDI's
principal business address is One Security Benefit Place, Topeka, Kansas66636-0001.
File
a post-effective amendment to this registration statement as frequently
as
is necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for so long
as
payments under the variable annuity contracts may be
accepted;
(b)
Include
either (1) as part of any application to purchase a contract offered
by
the prospectus, a space that an applicant can check to request a
Statement
of Additional Information, or (2) a post card or similar written
communication affixed to or included in the prospectus that the applicant
can remove to send for a Statement of Additional Information;
and
(c)
Deliver
any Statement of Additional Information and any financial statements
required to be made available under this form promptly upon written
or
oral request.
The
Registrant represents that any of the contracts which are issued pursuant to
Section 403(b) of the Internal Revenue Code are issued by Nationwide through
the
Registrant in reliance upon, and in compliance with a no-action letter issued
by
the staff of the Securities and Exchange Commission to the American Council
of
Life Insurance (publicly available November 28, 1988) permitting withdrawal
restrictions to the extent necessary to comply with Section 403(b)(11) of the
Internal Revenue Code.
Nationwide
represents that the fees and charges deducted under the contract in the
aggregate are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by Nationwide.
SIGNATURES
As
required by the Securities Act of 1933, and the Investment Company Act of
1940,
the Registrant, NATIONWIDE MULTIFLEX VARIABLE ACCOUNT certifies that it meets
the requirements of the Securities Act Rule 485(b) for effectiveness of the
Registration Statement and has caused this Registration Statement to be signed
on its behalf in the City of Columbus, and State of Ohio, on this 24th day
of
May, 2006.
NATIONWIDE
MULTI-FLEX VARIABLE ACCOUNT
(Registrant)
NATIONWIDE
LIFE INSURANCE COMPANY
(Depositor)
By
/s/ PAIGE
L. RYAN
Paige
L.
Ryan
As
required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the 24th day
of May, 2006.
W.
G. JURGENSEN
W.
G. Jurgensen, Director and Chief Executive Officer
