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Nationwide Financial Services, Inc. - Life Insurance -
Category Page
(614)
249-7111
One
Nationwide Plaza
Columbus, OH 43215
Sales
$ 3.9
billion
Business Description
Nationwide Financial Services, Inc. was formed in November 1996 as a
holding company for Nationwide Life Insurance Company (NLIC) and other
companies, including Nationwide Life Insurance Company of America (NLICA, or
Nationwide Provident together with its subsidiaries), which was acquired on
October 1, 2002, that comprise the domestic life insurance and retirement
savings operations of the Nationwide group of companies (Nationwide). NFS is
incorporated in Delaware and maintains its principal executive offices in
Columbus, Ohio. The Company's website is
www.nationwidefinancial.com.
The Company is a leading provider of long-term savings and retirement
products in the United States of America (U.S.). The Company develops and
sells a diverse range of products including individual annuities, Private
and Public Sector pension plans and 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 base include independent
broker/dealers, wirehouse and regional firms, financial institutions,
pension plan administrators, life insurance specialists and certified public
accounting firms. Representatives of the Company who market products
directly to a customer base include Nationwide Retirement Solutions, The
401(k) Company, TBG Financial and Nationwide Provident agents. The Company
also distributes retirement savings products through the agency distribution
force of its ultimate parent company, Nationwide Mutual Insurance Company (NMIC),
(Nationwide agents). The Company believes its diverse range of competitive
product offerings and strong distributor relationships position it to
compete effectively in the rapidly growing retirement savings market under
various economic conditions.
The Company has grown its customer base in recent years as a result of its
long-term investments in developing the distribution channels necessary to
reach its target customers and the products required to meet the demands of
these customers. The Company believes its growth has been enhanced further
by favorable demographic trends and the growing tendency of Americans to
supplement traditional sources of retirement income with self-directed
investments, such as products offered by the Company. From 1997 to 2003, the
Company’s customer funds managed and administered grew from $57.46 billion
to $132.06 billion, a compound annual growth rate of 12.62%.
Business Segments
The Company has three product segments: Individual Annuity, Institutional
Products and Life Insurance.
LIFE
INSURANCE
The Life Insurance segment consists of investment life products, including
both individual variable life and corporate-owned life insurance (COLI)
products, traditional life insurance products, universal life insurance,
Nationwide Provident life insurance products (beginning October 1, 2002) and
TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial), a
leading COLI producer. Effective May 31, 2002, the Company increased its
ownership in TBG Financial to 63%. The results of TBG Financial are included
in the consolidated results of the Company beginning May 31, 2002. Life
insurance products provide a death benefit and generally also allow the
customer to build cash value on a tax-advantaged basis.
The Company distributes its life insurance products through its unaffiliated
distribution channels, Nationwide Provident agents and Nationwide agents.
The Company’s primary target markets for its life insurance products include
customers to whom the accumulation of cash values is important.
Universal Life and Variable Universal Life Insurance Products. The Company
offers universal life insurance and variable universal life insurance
products including both flexible premium and single premium designs. These
products provide life insurance under which the benefits payable upon death
or surrender depend upon the policyholder’s account value. Universal life
insurance provides whole life insurance with flexible premiums and
adjustable death benefits. For universal life insurance, the policyholder’s
account value is credited based on an adjustable rate of return set by the
Company relating to current interest rates. For variable universal life
insurance, the policyholder’s account value is credited with the investment
experience of the mutual funds chosen by the customer. The variable
universal life insurance products also typically include a general account
guaranteed interest investment option. The Company’s variable universal life
insurance products are marketed under the Nationwide Provident brand name
and the Company’s The BEST of AMERICA brand name, which have the same wide
range of investment options as the Company’s variable annuity products.
These products are distributed on an unaffiliated basis by independent
broker/dealers, wirehouse and regional firms and financial institutions, and
on an affiliated basis by Nationwide Provident agents and Nationwide agents.
Traditional Life Insurance Products. The Company offers whole life and term
life insurance. Whole life insurance combines a death benefit with a savings
plan that increases gradually in amount over a period of years. The customer
generally pays a level premium over his or her expected lifetime. Whole life
insurance contracts allow the customer to borrow against the savings and
also has the option of surrendering the policy and receiving the accumulated
cash value rather than the death benefit. Term life insurance provides only
a death benefit without any savings component. Nationwide Provident agents
and Nationwide agents distribute these traditional life insurance products.
COLI and Bank-Owned Life Insurance (BOLI) Products. Corporations purchase
COLI, whereas banks purchase BOLI to fund non-qualified benefit plans.
Corporations or banks may make a single premium payment or a series of
premium payments. For fixed COLI and BOLI products, premium payments are
credited with a guaranteed interest rate that is fixed for a specified
period of time. For variable COLI and BOLI products, the contractholder’s
account value is credited with the investment experience of the mutual funds
selected by the contractholder. COLI and BOLI products are sold through life
insurance specialists, including TBG Financial, a majority owned subsidiary
of NFS.
INDIVIDUAL ANNUITY
The Individual Annuity segment consists of individual The BEST of AMERICA®,
private label and deferred variable annuity products, deferred fixed annuity
products and income products. Also included are Nationwide Provident’s
annuity products,
reflecting business in-force as of the October 1, 2002 acquisition. New
individual annuity business sold by Nationwide Provident agents is in the
form of the Company’s individual The BEST of AMERICA products. 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,
variable annuity contracts provide the customer with access to a wide range
of investment options and asset protection in the event of an untimely
death, while fixed annuity contracts generate a return for the customer at a
specified interest rate fixed for prescribed periods.
In addition, a number of the Company’s competitors offer variable annuities
with more robust living benefits (including income benefits and withdrawal
benefits) than the Company offers. The Company has elected to offer more
limited living benefit features that meet the Company’s risk/return profile.
During 2003, the Company discontinued offering products with guaranteed
minimum income benefits. Also in 2003, the Company began offering products
with guaranteed minimum accumulation benefits. See note 7 to the
consolidated financial statements included in the F pages of this report for
the additional discussion.
The Company is one of the leaders in the development and sale of individual
annuities. As of December 31, 2003, the Company was the 9th largest writer
of individual variable annuity contracts in the U.S., according to The
Variable Annuity Research & Data Service (VARDS). The Company was ranked 8th
in 2002 and 4th in 2001. The Company believes that demographic trends and
shifts in attitudes toward retirement savings will continue to support
increased consumer demand for its individual annuity products. The Company
also believes that it possesses distinct competitive advantages in the
market for variable annuities. Some of the Company’s most important
advantages include its innovative product offerings and strong relationships
with independent well-known fund managers. The Company’s principal annuity
product series, The BEST of AMERICA, allows the customer to choose from over
60 investment options, which includes funds managed by many of the premier
U.S. mutual fund managers. The Company also sells individual fixed
annuities, primarily through the financial institutions channel. According
to The Kehrer Report, as of December 31, 2003, the Company was the 5th
largest provider of individual fixed annuities in financial institutions.
The Company markets its individual annuity products through a broad spectrum
of distribution channels, including independent broker/dealers, wirehouse
and regional firms, financial institutions, pension plan administrators,
Nationwide Retirement Solutions, Nationwide Provident agents and Nationwide
agents. The Company seeks to capture a growing share of individual annuity
sales in these channels by working closely with its investment managers and
product distributors to adapt the Company’s products and services to changes
in the retail and institutional marketplace in order to enhance its leading
position in the market for variable annuities. The Company is following a
strategy of extending The BEST of AMERICA brand name to more of its products
and distribution channels in an effort to build upon its brand name
recognition.
The Company believes that the variable annuity business is attractive
because it generates fee income. In addition, because the investment risk on
variable annuities is borne principally by the customer and not the Company,
the variable annuity business requires significantly less capital support
than fixed annuity and traditional life insurance products. The Company
receives income from variable annuity contracts primarily in the form of
asset fees. Most of the Company’s variable annuity products provide for a
contingent deferred sales charge, also known as a “surrender charge” or
“back-end load,” that is assessed against premium withdrawals in excess of
specified amounts made during a specified period, usually the first seven
years of the contract. Surrender charges are intended to protect the Company
from withdrawals early in the contract period, before the Company has had
the opportunity to recover its sales expenses. Generally, surrender charges
on individual variable annuity products are 7% of deposits withdrawn during
the first year, scaling ratably to 0% for the eighth year and beyond. All of
the Company’s individual variable annuity products include guaranteed
minimum death benefit (GMDB) features. The GMDB generally provides a benefit
if the annuitant dies and the policyholder contract value is less than a
specified amount, which may be based on the premiums paid less amounts
withdrawn or a policyholder contract value on a specified anniversary date.
See note 7 to the consolidated financial statements included in the F pages
of this report for additional discussion of the GMDB types offered by the
Company.
The Company’s variable annuity products consist almost entirely of flexible
premium deferred variable annuity (FPVA) contracts. Such contracts are
savings vehicles in which the customer makes a single deposit or series of
deposits. The customer has the flexibility to invest in mutual funds managed
by independent investment managers, including an affiliate of the Company.
Deposit intervals and amounts are flexible and therefore, subject to
variability. The value of a variable annuity fluctuates in accordance with
the investment experience of the mutual funds chosen by the customer. The
customer is permitted to withdrawal all or part of the accumulated value of
the annuity, less any applicable surrender charges. As specified in the FPVA
contract, the customer generally can elect from a number of payment options
that provide either a fixed or variable stream of benefit payment.
Fixed options are available to customers who purchase certain of the
Company’s variable annuities by designation of some or all of their deposits
to such options. A fixed option offers the customer a guarantee of principal
and a guaranteed interest rate for a specified period of time. Such
contracts have no maturity date and remain in-force until the customer
elects to take the proceeds of the annuity as a single payment or as a
specified income stream for life or for a fixed number of years.
Fixed annuity products are marketed to individuals who choose to allocate
long-term savings to products that provide a guarantee of principal, a
stable net asset value and a guarantee of the interest rate to be credited
to the principal amount for a specified period of time. The Company’s
individual fixed annuity products are distributed through its unaffiliated
and affiliated channels and include single premium deferred annuity (SPDA)
contracts, flexible premium deferred annuity (FPDA) contracts and single
premium immediate annuity (SPIA) contracts. The Company invests fixed
annuity customer deposits at its discretion in its general account
investment portfolio, while variable annuity customer deposits are invested
in mutual funds as directed by the customer and are held in the Company’s
separate account. Unlike variable annuity assets that are held in the
Company’s separate account, the Company bears the investment risk on assets
held in its general account. The Company attempts to earn a spread by
investing a customer’s deposits for higher yields than the interest rate it
credits to the customer’s fixed annuity contract.
During 2003, the average crediting rate on contracts (including the fixed
option under the Company’s variable contracts) in the Individual Annuity
segment was 4.31%.
The Company offers individual variable annuities under The BEST of AMERICA
brand name. The Company also markets individual variable annuities as
“private label” products.
Individual The BEST of AMERICA Products. The Company’s principal individual
FPVA contracts are sold under the brand name The BEST of AMERICA, but the
Company offers additional FPVA contracts under different names. The BEST of
AMERICA brand name individual variable annuities, which includes the fixed
option of individual variable annuities, accounted for $4.07 billion (61%)
of the Company’s Individual Annuity segment sales in 2003 and $31.06 billion
(63%) of the Company’s Individual Annuity segment account values as of
year-end. During 2003, the Company launched a series of new products
designed to allow for greater specialization of product design by
distribution channel. New liquidity options are designed to meet the needs
of annuity buyers who prefer surrender charges that terminate in fewer than
the standard seven to eight years. In addition, these products include a
greater array of death and living benefit options, including Capital
Preservation Plus, a guaranteed minimum accumulation benefit that assures a
return of invested principal over periods of five to ten years. As of
December 31, 2003, Capital Preservation Plus option account values totaled
$248.8 million. Effective in 2003, guaranteed minimum income benefits are no
longer offered on new business. America’s Marketflex Annuity, a specialty
variable annuity offering tactical asset allocation services, attracted
consumer interest in 2003 with sales of $321.0 million. All of the products
generate asset fees and may also generate administration fees for the
Company.
Private Label Individual Variable Annuities. These products accounted for
$659.3 million (10%) of the Company’s Individual Annuity segment sales in
2003 and $7.12 billion (14%) of the Company’s Individual Annuity segment
account values as of year-end. The Company has developed several private
label variable annuity products in conjunction with other financial
intermediaries. The products allow financial intermediaries to market
products with substantially the same features as the Company’s brand name
products to their own customer bases under their own brand names. The
Company believes these private label products strengthen the Company’s ties
to certain significant distributors of the Company’s products. These
contracts generate asset fees and may also generate administration fees for
the Company.
Individual Deferred Fixed Annuity Contracts. Deferred fixed annuities
consist of SPDA and FPDA contracts. Total deferred fixed annuities accounted
for $1.83 billion (27%) of the Company’s Individual Annuity segment sales in
2003 and $8.63 billion (18%) of the Company’s Individual Annuity segment
account values as of year-end. SPDA and FPDA contracts are distributed
primarily through broker/dealers, financial institutions and Nationwide
agents. SPDA contracts are savings vehicles in which the customer makes a
single deposit with the Company. The Company guarantees the customer’s
principal and credits the customer’s account with earnings at an interest
rate that is stated and fixed for an initial period, typically at least one
year and subject to minimum crediting rates generally ranging from 1.5% to
3.5%. The Company also offers SPDA contracts where the interest rate is
guaranteed for a specific number of years, typically five, where the
interest rate increased by 15 basis points in years two through five.
Thereafter, the Company resets, typically annually, the interest rate
credited to the contract based upon market and other conditions. SPDA
contracts have no maturity date and remain in-force until the customer
elects to take the proceeds of the annuity as a single payment or as a
specified income for life or for a fixed number of years. FPDA contracts are
typically marketed to teachers and employees of tax-exempt organizations as
tax-qualified retirement programs. Under these contracts, the Company
accepts a single deposit or a series of deposits. Deposits at intervals and
amounts are flexible and therefore, subject to variability. FPDA contracts
contain substantially the same guarantee of principal and interest rate
terms included in the Company’s SPDA contracts. No front-end sales charges
are imposed on SPDA and FPDA contracts. However, all such contracts provide
for the imposition of certain surrender charges, which are assessed against
premium withdrawals in excess of specified amounts and which occur during
the surrender charge period. The surrender charges are usually set within
the range of 0% to 7% and typically decline from year to year, disappearing
after seven contract years.
Individual Single Premium Immediate Annuity Contracts. The Company offers
both fixed and variable SPIA contracts. SPIA contracts accounted for $135.0
million (2%) of the Company’s Individual Annuity segment sales in 2003 and
$1.79 billion (4%) of the Company’s Individual Annuity account segment
values as of year-end. The Company’s SPIA contracts are offered through its
affiliated and unaffiliated distribution channels and are offered as either
direct purchases or as fixed annuity options under the Company’s various
individual and group annuity contracts. SPIAs are annuities that require a
one-time deposit in exchange for guaranteed, periodic annuity benefit
payments, often for the contract holder’s lifetime. Persons at or near
retirement age who desire a steady stream of future income often purchase
SPIA contracts.
INSTITUTIONAL PRODUCTS
The Institutional Products segment is comprised of the Company’s Private and
Public Sector group retirement plans, medium-term note program and
structured products initiatives. The Private Sector includes the 401(k)
business generated through variable and fixed group annuities, Nationwide
Trust Company, FSB (Nationwide Trust Company) and The 401(k) Company. The
Public Sector includes the Internal Revenue Code (IRC) Section 457 business
in the form of fixed and variable annuities as well as administration-only
business.
Institutional products are generally offered as variable or fixed group
annuities to employers for use in employee benefit programs and are
distributed through unaffiliated and affiliated channels, as well as through
Nationwide agents. In recent years, an increasing amount of business has
been sold through the Company’s trust product, rather than group annuity
products, which has been an attractive product in the marketplace. Also, the
Company’s distribution for the pensions business has shifted from pension
plan administrators to an increasing amount written by independent
broker/dealers and other intermediaries.
The Company’s variable group annuity contracts provide the individual
participants the ability to invest in mutual funds managed by independent
investment managers and an affiliate of NMIC. Deposit intervals and amounts
are flexible and therefore, subject to variability. The value a variable
group annuity fluctuates in accordance with the investment experience of the
mutual funds chosen by the participants. The participants are permitted to
withdraw all or part of the accumulated value of the annuity only in
accordance with IRS regulations or be subject to a tax penalty. As specified
in the FPVA contract, participants generally can elect from a number of
payment options that provide either fixed or variable benefit payments. The
Company receives income from variable group group annuity contracts
primarily in the form of asset and administration fees. In addition, most of
the Company’s variable annuity products provide for a contingent deferred
sales charge, also known as a “surrender charge” or “back-end load,” that is
assessed against premium withdrawals in excess of specified amounts made
during a specified period, usually the first seven years of the contract.
Surrender charges are intended to protect the Company from withdrawals early
in the contract period, before the Company has had the opportunity to
recover its sales expenses.
The Company’s fixed group annuity contracts provide the individual
participants a guarantee of principal and a guaranteed interest rate for a
specified period of time. The Company attempts to earn a spread by investing
participants’ deposits for higher yields than the interest rate credited to
the participants’ account value.
During 2003, the average crediting rate on fixed group annuity contracts
(including the fixed option under the Company’s variable group contracts) in
the Institutional Products segment was 3.71%.
The Company markets employer-sponsored group annuities to both public sector
employees for use in connection with plans described under Section 457 of
the IRC and to private sector employees for use in connection with IRC
Section 401(k) plans. These private sector employer-sponsored group
annuities are marketed under several brand names, including The BEST of
AMERICA Group Pension Series.
The BEST of AMERICA Group Pension Series. These products are offered as
group annuity contracts as well as trust products by Nationwide Trust
Company. The Best of America group annuity products accounted for $2.03
billion (24%) of the Company’s Institutional Products segment sales in 2003
and $9.82 billion (14%) of the Company’s Institutional Products account
values as of year-end, while the trust products accounted for $2.11 billion
(25%) of sales in 2003 and $6.21 billion (9%) of account values as of
year-end. The BEST of AMERICA group products are typically offered only on a
tax-qualified basis. These products may be structured with a variety of
features that may be arranged in over 600 combinations of front-end loads,
back-end loads and asset-based fees.
Section 457 Group Annuity Contracts. These group annuity contracts accounted
for $1.44 billion (17%) of the Company’s Institutional Products segment
sales in 2003 and $13.91 billion (20%) of the Company’s Institutional
Products segment account values as of year-end. The Company offers a variety
of group variable annuity contracts that are designed primarily for use in
conjunction with plans described under IRC Section 457. Section 457 permits
employees of state and local governments to defer a certain portion of their
annual income and invest such income on a tax-deferred basis. These
contracts typically generate an annual asset fee and may also generate
annual administration fees for the Company.
Administration-Only Contracts. The Company offers administration and
record-keeping services to IRC Section 457 plans outside of a group annuity
contract. These contracts accounted for $1.74 billion (21%) of the Company’s
Institutional Products segment sales in 2003 and $20.63 billion (30%) of the
Company’s Institutional Products segment account values as of year-end. In
the past two years, the Company has experienced a shift in product mix from
group annuity contracts to more administration-only cases. The Company
generally collects a fee calculated as a percentage of plan assets.
Nationwide Provident Group Annuities. Nationwide Provident sells Selector+
Group Variable Annuities, which accounted for $366.4 million (4%) of
Institutional Products segment sales in 2003 and provide a diversified
investment menu of “All Pro” separate accounts. The All Pro series of
separate accounts is a series of multi-managed, style-specific separate
accounts developed in conjunction with Wilshire Associates, Inc. The All Pro
series of separate accounts are used in the STAR Program to develop asset
allocation models. The STAR Program was developed to address the needs of
plan sponsors making investment decisions to meet the stated objectives of
their plan. The Selector+ Group Variable Annuity is only available for
qualified retirement plans and has the flexibility to enable producers to
choose from asset-based fees, deposit-based fees or a combination of both.
Medium-Term Note Program. The Company’s medium-term note program represents
sales of funding agreements that secure notes issued through an unrelated
third party trust. This program was launched in July 1999 as a means to
expand spread-based product offerings. Sales of funding agreements totaled
$725.0 million in 2003 and accounted for $4.61 billion (7%) of the Company’s
Institutional Products segment account values as of year-end. Sales under
the Company’s medium-term note program are not included in the Company’s
sales data, as they do not produce steady production flow that lends itself
to meaningful comparisons.
Structured Products. Structured products transactions include structuring,
selling and managing investment programs, including securitizations. The
Company utilizes structuring technology to optimize portfolio management
decisions, generate income and increase assets under management. Structured
product transactions completed by the Company to date include a
collateralized bond obligation, commercial mortgage loan securitizations and
low income housing tax credit syndications.
ticker: NFS
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