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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2006

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 2-64559



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NATIONWIDE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Ohio                                                           |  | 31-4156830                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|One Nationwide Plaza, Columbus, Ohio                           |  | 43215                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

(614) 249-7111

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12 (b) of the Act:

None

Securities registered pursuant to Section 12 (g) of the Act:

None



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ̈No  x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ̈No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ̈

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated
filer  x

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

No established published trading market exists for the registrants common stock, par value $1.00 per share. As of February 26, 2007, 3,814,779 shares of the registrants common stock were outstanding,
all of which are held by Nationwide Financial Services, Inc.

The Registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

FORM 10-K

FOR THE YEAR ENDED
DECEMBER 31, 2006

TABLE OF CONTENTS



|                                                                                                       |  |     
|------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                       | 
|PART I                                                                                                 |  | 1   
|                                                                                                       | 
|ITEM 1 BUSINESS                                                                                        |  | 1   
|                                                                                                       | 
|ITEM 1A RISK FACTORS                                                                                   |  | 6   
|                                                                                                       | 
|ITEM 1B UNRESOLVED STAFF COMMENTS                                                                      |  | 9   
|                                                                                                       | 
|ITEM 2 PROPERTIES                                                                                      |  | 9   
|                                                                                                       | 
|ITEM 3 LEGAL PROCEEDINGS                                                                               |  | 9   
|                                                                                                       | 
|ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             |  | 9   
|                                                                                                       | 
|PART II                                                                                                |  | 10  
|                                                                                                       | 
|ITEM 5 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |  | 10  
|                                                                                                       | 
|ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA                                                            |  | 10  
|                                                                                                       | 
|ITEM 7 MANAGEMENTS NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS                                    |  | 11  
|                                                                                                       | 
|ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  | 44  
|                                                                                                       | 
|ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                        |  | 51  
|                                                                                                       | 
|ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE            |  | 52  
|                                                                                                       | 
|ITEM 9A CONTROLS AND PROCEDURES                                                                        |  | 52  
|                                                                                                       | 
|ITEM 9B OTHER INFORMATION                                                                              |  | 52  
|                                                                                                       | 
|PART III                                                                                               |  | 52  
|                                                                                                       | 
|ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                         |  | 52  
|                                                                                                       | 
|ITEM 11 EXECUTIVE COMPENSATION                                                                         |  | 52  
|                                                                                                       | 
|ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  | 52  
|                                                                                                       | 
|ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                      |  | 52  
|                                                                                                       | 
|ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES                                                         |  | 53  
|                                                                                                       | 
|PART IV                                                                                                |  | 54  
|                                                                                                       | 
|ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                        |  | 54  
|                                                                                                       | 
|CONSOLIDATED FINANCIAL STATEMENTS                                                                      |  |     
|                                                                                                       | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                |  | F-1 
|                                                                                                       | 
|CONSOLIDATED STATEMENTS OF INCOME                                                                      |  | F-2 
|                                                                                                       | 
|CONSOLIDATED BALANCE SHEETS                                                                            |  | F-3 
|                                                                                                       | 
|CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY                                                        |  | F-4 
|                                                                                                       | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                  |  | F-5 
|                                                                                                       | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                             |  | F-6 
|                                                                                                       | 
|SIGNATURES                                                                                             |  | F-52
|                                                                                                       | 
|                                                                                                       |  |     



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##### Table of Contents

PART I

ITEM 1 BUSINESS

Overview

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, 2006 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 sector 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., Nationwide Financial Network (NFN) producers and TBG Insurance Services
Corporation d/b/a TBG Financial (TBG Financial) through its joint venture with MC Insurance Agency Services, LLC d/b/a Mullin Consulting. The Company also distributes products through the agency distribution force of its ultimate majority parent
company, NMIC. The Company believes its broad range of competitive products, strong distributor relationships and diverse distribution network position it to compete effectively in the rapidly growing retirement savings market under various economic
conditions.

Business Segments

Individual
Investments

The Individual Investments segment consists of individual The BEST of AMERICA® and private label deferred variable annuity products, deferred fixed annuity products,
income products and advisory services. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In
addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, 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 primarily includes Internal Revenue Code (IRC) Section 401(k) business, and
the public sector primarily includes IRC Section 457 and Section 401(a) business, both in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only
business.

Individual Protection

The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and bank-owned life insurance (BOLI) products; traditional life insurance products; and universal life insurance products.
Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.



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Corporate and Other

The Corporate and Other segment includes certain structured products business; the medium-term note (MTN) program; net investment income and certain expenses not allocated to other segments; periodic net coupon
settlements on non-qualifying derivatives; interest expense on debt; revenue and expenses of the Companys non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.

Additional information related to the Companys business segments is included in Note 17 to the audited consolidated financial statements included
in the F pages of this report.

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, whereby risks are ceded to a reinsurer
on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a facultative basis, whereby the reinsurers prior approval is required for each risk reinsured. The Company 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 $889.6 million and $909.6 million as of December 31, 2006 and 2005, 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. Certain portions of the Companys variable annuity
guaranteed benefit risks are also reinsured. These treaties reduce the Companys exposure to death benefit and income benefit guarantee risk in the Individual Investments segment. The Company has no other material reinsurance arrangements with
unaffiliated reinsurers.

The Companys only material reinsurance agreements with affiliates are the modified coinsurance agreements
pursuant to which NLIC ceded to other members of Nationwide all of its accident and health insurance business not ceded to unaffiliated reinsurers, as described in Note 13 to the audited consolidated financial statements included in the F pages of
this report.

Ratings

Ratings with
respect to claims-paying ability and financial strength are an important factor in establishing the competitive position of insurance companies. These ratings represent each rating agencys opinion of an insurance companys financial
strength, operating performance, strategic position and ability to meet its obligations to policyholders. They are not evaluations directed toward the protection of investors and are not recommendations to buy, sell or hold securities. Such factors
are of concern to policyholders, agents and intermediaries. Furthermore, rating agencies utilize proprietary capital adequacy models to establish ratings for the Company and certain subsidiaries. The Companys ratings are at risk from changes
in these models and the impact that changes in the underlying business in which it is engaged can have on such models. In an effort to minimize the adverse impact of this risk, the Company maintains regular communications with the rating agencies,
performs evaluations using such capital adequacy models, and considers such models in the design of its products and transactions.

Ratings
are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance products. Rating agencies continually review the financial performance and condition of insurers, including the Company. Any
lowering of the Companys ratings could have a material adverse effect on the Companys ability to market its products and could increase the rate of surrender of the Companys products. Both of these consequences could have a
material adverse effect on the Companys liquidity and, under certain circumstances, net income. NLIC and NLAIC each have financial strength ratings of A+ (Superior) from A.M. Best Company, Inc. (A.M. Best), and their
claims-paying ability/financial strength are rated Aa3 (Excellent) by Moodys Investors Service, Inc. (Moodys) and AA- (Very Strong) by Standard & Poors Rating Services, a division of The McGraw-Hill
Companies, Inc. (S&P). The Companys financial strength is also reflected in the ratings of its commercial paper, which is rated AMB-1 by A.M. Best, P-1 by Moodys and A-1+ by S&P.



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These ratings are subject to periodic review by A.M. Best, Moodys and S&P, and the maintenance
of such ratings cannot be assured. If any rating is reduced from its current level, the Companys financial position and results of operations could be adversely affected.

Competition

The Company competes with many other insurers as well as non-insurance financial
services companies, including banks, broker/dealers and mutual funds, some of whom have greater financial resources, offer alternative products and, with respect to other insurers, have higher ratings than the Company. While no single company
dominates the marketplace, many of the Companys competitors have well-established national reputations and substantially greater financial resources and market share than the Company. Competition in the Companys lines of business
primarily is based on price, product features, commission structure, perceived financial strength, claims-paying ratings, customer and producer service, and name recognition.

Regulation

Regulation at State Level

NLIC and NLAIC, as with other insurance companies, are subject to regulation by the states in which they are domiciled and/or transact business. Most states have enacted legislation that requires
each insurance holding company and each insurance company in an insurance holding company system to register with the insurance regulatory authority of the insurance companys state of domicile and annually furnish financial and other
information concerning the operations of companies within the holding company system that materially affect the operations, management or financial condition of the insurers within such system. Under such laws, a state insurance authority usually
must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company domiciled in its state.

NLIC and NLAIC are subject to the insurance holding company laws in the State of Ohio. Under such laws, all transactions within an insurance holding company system affecting insurers must be fair and equitable, and each insurers
policyholder surplus following any such transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. The State of Ohio insurance holding company laws also require prior notice or regulatory approval of
the change of control of an insurer or its holding company, material intercorporate transfers of assets within the holding company structure and certain other material transactions involving entities within the holding company structure.

NLIC and NLAIC are regulated and supervised in the jurisdictions in which they do business. Among other things, states regulate operating licenses;
agent licenses; advertising and marketing practices; the form and content of insurance policies, including pricing; the type and amount of investments; statutory capital requirements; payment of dividends by insurance company subsidiaries;
assessments by guaranty associations; affiliate transactions; and claims practices. These regulations are primarily intended to protect policyholders rather than shareholders. The Company cannot predict the effect that any proposed or future
legislation may have on the financial condition or results of operations of the Company.

Insurance companies are required to file detailed
annual and quarterly statutory financial statements with state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such agencies at any time. In addition, insurance
regulators periodically examine an insurers financial condition, adherence to statutory accounting practices, and compliance with insurance department rules and regulations. Applicable state insurance laws, rather than federal bankruptcy laws,
apply to the liquidation or restructuring of insurance companies. Changes in regulations, or in the interpretation of existing laws or regulations, may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs
of regulatory compliance by the Companys insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Companys financial position or results of operations.

As part of their routine regulatory oversight process, state insurance departments periodically conduct detailed examinations of the books, records and
accounts of insurance companies domiciled in their states. Such examinations generally are conducted in cooperation with the insurance departments of multiple states under guidelines promulgated by the National Association of Insurance Commissioners
(NAIC). The most recently completed examinations of NLIC and NLAIC were conducted by the Ohio Department of Insurance (ODI) for the five-year period ended December 31, 2001. These examinations did not result in any significant issues or
adjustments. The ODI is currently conducting an examination of NLIC and NLAIC for the five-year period ended December 31, 2006.



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State insurance regulatory authorities regularly make inquiries, hold investigations and administer
market conduct examinations with respect to insurers compliance with applicable insurance laws and regulations. NLIC and NLAIC are currently undergoing regulatory market conduct examinations in four states. NLIC and NLAIC continuously monitor
sales, marketing and advertising practices and related activities of their agents and personnel and provide continuing education and training in an effort to ensure compliance with applicable insurance laws and regulations. There can be no assurance
that any non-compliance with such applicable laws and regulations would not have a material adverse effect on the Company.

In December
2004, the NAIC adopted model legislation implementing new disclosure requirements with respect to compensation of insurance producers. In 2005, related state legislation was adopted in a few states and focused on the producer rather than the
insurance company. Although the Company is not aware of regulatory or legislative developments or proposals regarding producer compensation disclosure that would have a material impact on its operations, the NAIC maintains a task force that will
continue to review producer compensation disclosure requirements, and additional changes that could impact the Company are possible.

Regulation of
Dividends and Other Payments

State insurance laws generally restrict the ability of insurance companies to pay cash dividends and
make other payments in excess of certain prescribed limitations without prior approval. The Company is limited in the amount of shareholder dividends it may pay without prior approval by the ODI. The statutory capital and surplus of NLIC as of
December 31, 2006 and 2005 was $2.68 billion and $2.60 billion, respectively. The statutory net income of NLIC for the years ended December 31, 2006, 2005 and 2004 was $537.5 million, $462.5 million and $317.7 million, respectively. As of
January 1, 2007, based on statutory financial results as of and for the year ended December 31, 2006, NLIC could pay dividends totaling $162.5 million without obtaining prior approval. As of March 1, 2007, NLIC will be able to pay
dividends to NFS totaling $232.5 million upon providing prior notice to the ODI. On February 21, 2007, NLIC declared an ordinary dividend of $232.5 million and an extraordinary dividend of $242.5 million, both payable to NFS in March 2007. NLIC
will provide notice to the ODI of the ordinary dividend and seek prior approval from the ODI of the extraordinary dividend before paying these dividends to NFS.

The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the
amount equal to the Companys unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurers
policyholder surplus must be reasonable in relation to the insurers outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State
of New York that limit the amount of statutory profits on NLICs participating policies (measured before dividends to policyholders) that can inure to the benefit of the Company and its shareholder.

Risk-Based Capital Requirements

In order to
enhance the regulation of insurer solvency, the NAIC has adopted a model law to implement risk-based capital (RBC) requirements for life insurance companies. The requirements are designed to monitor capital adequacy and to raise the level of
protection that statutory surplus provides for policyholders. The model law measures four major areas of risk facing life insurers: (1) the risk of loss from asset defaults and asset value fluctuation; (2) the risk of loss from adverse
mortality (the relative incidence of death in a given time) and morbidity (the relative incidence of disability resulting from disease or physical impairment) experience; (3) the risk of loss from mismatching of asset and liability cash flow
due to changing interest rates; and (4) business risks. Insurers having less statutory surplus than required by the RBC model formula will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.

Based on the formula adopted by the NAIC, the adjusted capital of NLIC and NLAIC as of December 31, 2006 exceeded the levels at which
they would be required to take corrective action.



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Assessments Against and Refunds to Insurers

Insurance guaranty association laws exist in each state, the District of Columbia and the Commonwealth of Puerto Rico. Insurers doing business in any of these jurisdictions can be assessed for
policyholder losses incurred by insolvent insurance companies. The amount and timing of any future assessment on or refund to NLIC and its insurance subsidiaries under these laws cannot be reasonably estimated and are beyond the control of NLIC and
its insurance subsidiaries. A large part of the assessments paid by NLIC and its insurance subsidiaries pursuant to these laws may be used as credits for a portion of NLIC and its insurance subsidiaries premium taxes. For the years ended
December 31, 2006, 2005 and 2004, net premium tax refunds received by the Company were immaterial.

Securities Laws

NLIC and NLAIC, and certain policies and contracts offered by these companies, are subject to regulation under the federal securities laws administered by
the U.S. Securities and Exchange Commission (SEC) and under certain state securities laws. Certain separate accounts of NLIC and NLAIC are registered as investment companies under the Investment Company Act of 1940, as amended (Investment Company
Act). Separate account interests under certain variable annuity contracts and variable insurance policies issued by NLIC and NLAIC are also registered under the Securities Act of 1933, as amended. Certain affiliates of the Company are registered as
broker/dealers under the Securities Exchange Act of 1934, as amended (Securities Exchange Act), and are members of, and subject to regulation by, the National Association of Securities Dealers.

Certain affiliates of the Company are investment advisors registered under the Investment Advisors Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the SEC under the Investment Company Act, and the shares of certain of these entities are qualified for sale in certain states and the District of Columbia. A subsidiary of the Company is registered
with the SEC as a transfer agent. Certain subsidiaries of the Company are also subject to the SECs net capital rules.

All aspects of
the investment advisory activities of NLIC and NLAIC are subject to applicable federal and state laws and regulations in the jurisdictions in which they conduct business. These laws and regulations primarily are intended to benefit investment
advisory clients and investment company shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the transaction of business for failure to comply with such laws and regulations. In
such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the activities in which the investment advisor may engage, suspension or revocation of the investment advisors registration
as an advisor, censure and fines.

ERISA Considerations

On December 13, 1993, the U.S. Supreme Court issued its opinion in John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank,holding that certain assets in excess of amounts necessary to
satisfy guaranteed obligations held by Hancock in its general account under a participating group annuity contract are plan assets and therefore subject to certain fiduciary obligations under the Employee Retirement Income Security Act
of 1974, as amended (ERISA). ERISA requires that fiduciaries perform their duties solely in the interest of ERISA plan participants and beneficiaries, and with the care, skill, prudence and diligence that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Court imposed ERISA fiduciary obligations to the extent that the insurers general account is not reserved to pay benefits
under guaranteed benefit policies (i.e., benefits whose value would not fluctuate in accordance with the insurers investment experience).

The U.S. Secretary of Labor issued final regulations on January 5, 2000, providing guidance for the purpose of determining, in cases where an insurer issues one or more policies backed by the insurers general account to or for
the benefit of an employee benefit plan, which assets of the insurer constitute plan assets for purposes of ERISA and the IRC. The regulations apply only with respect to a policy issued by an insurer to an ERISA plan on or before December 31,
1998. In the case of such a policy, most provisions of the regulations became applicable on July 5, 2001. Generally, where the basis of a claim is that insurance company general account assets constitute plan assets, no person will be liable
under ERISA or the IRC for conduct occurring prior to July 5, 2001. However, certain provisions under the final regulations are applicable as follows: (1) certain contract termination features became applicable on January 5, 2000 if
the insurer engages in certain unilateral actions; and (2) the initial and separate account disclosure provisions became applicable July 5, 2000. New policies issued after December 31, 1998 which are not guaranteed benefit policies
subject the issuer to ERISA fiduciary obligations. Since NLIC issues fixed group annuity contracts that are backed by its general account and used to fund employee benefit plans, NLIC is subject to these requirements.



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Tax Legislation

The American Jobs Creation Act of 2004 modified and codified the rules applicable to nonqualified deferred compensation plans, a market in which the Company provides services and products. The Pension Protection Act
of 2006 imposed new conditions that must be met in order for the death benefits from certain employer-owned life insurance contracts to continue to be received income tax free. In addition, numerous changes were made to simplify the administration
and operation of retirement programs such as individual retirement accounts and IRC Section 401(k) plans. The IRS is expected to release new regulations regarding IRC Section 403(b) retirement arrangements and nonqualified deferred
compensation arrangements in 2007. These legislative and regulatory changes may lessen the competitive advantage of certain of NLICs products compared to other investments. As a result, demand for certain of NLICs products and services
may be negatively impacted.

The U.S. Congress periodically has considered possible legislation that would eliminate many of the tax
benefits currently afforded to annuity products. In November 2005, the Presidents Advisory Panel on Federal Tax Reform issued a report containing proposals, which if enacted as proposed, could materially reduce the tax advantages of purchasing
variable annuity and cash value life insurance products as compared to other investment vehicles. The report included several proposals regarding the creation of tax-advantaged retirement and life savings accounts that were similar to proposals
previously made by the Bush administration. Although the proposals have not been enacted, those proposals, or other similar proposals, could be introduced for enactment in future periods.

Available Information

The Company files
electronically with the SEC its Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and other reports, which are available on the SECs web site (http://www.sec.gov). In addition, all reports filed by the
Company with the SEC may be read and copied at the SECs Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The Company also provides electronic and/or paper copies of these reports, free of charge. Requests for copies should be made to Mark Barnett, Vice President  Investor Relations, One Nationwide Plaza, Columbus, Ohio 43215-2220,
or via telephone at 614-249-8437.

ITEM 1A RISK FACTORS

Changes in general economic and market conditions and interest rates may significantly affect
the value of the Companys investment portfolio.

The Companys investment portfolio primarily consists of fixed-income
securities and mortgage loans on real estate. The market values of these invested assets fluctuate depending on general economic and market conditions and the interest rate environment. For example, if interest rates rise, the investments generally
will decrease in value. If interest rates decline, the investments generally will increase in value with the possible exception of mortgage-backed securities (MBSs), which may decline due to higher prepayments on the mortgages underlying the
securities.

MBSs, including collateralized mortgage obligations (CMOs), are subject to prepayment risks that vary with interest rates,
among other things. During periods of declining interest rates, MBSs generally prepay faster as the underlying mortgages are prepaid and/or refinanced by borrowers in order to take advantage of lower rates. MBSs that have an amortized cost greater
than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of such prepayments. In addition, during such periods, the Company generally will be unable to reinvest the proceeds of any such prepayment at comparable
yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases. MBSs that have an amortized value less than par (i.e., purchased at a discount) may incur a decrease in yield or a loss as a result of
slower prepayments.

There can be no assurance that management will be able to successfully manage the negative impact of interest rate
changes. Additionally, for business, regulatory or other reasons, the Company periodically may elect or be required to sell certain of its invested assets when their fair values are less than their original cost, resulting in realized capital
losses.



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Changes in interest rates and in the financial markets may reduce the Companys interest spread income,
earnings and sales.

The Company is exposed to various interest rate risks. Many of the products contain guarantees that require the
Company to credit at least a minimum rate of interest to policyholders. In addition, for competitive reasons, the Company may at times continue to credit above-minimum interest rates to policyholders despite reductions in prevailing market interest
rates. Current crediting rates for many of the Companys individual annuity products are at or near the contractual minimum rates. Decreases in market interest rates would result in declines in the portfolio yield on investments backing the
Companys individual annuity products. A reduction in interest spread income, the difference between the interest rates that the Company credits policyholders and the yield the Company is able to earn on investments, may reduce earnings. If
policyholders cancel their policies or withdraw the cash values of their policies to seek better investment yields in response to changing interest rates, the Companys revenues are likely to decrease. If market interest rates decline, net
investment income will decrease if higher-yielding fixed-income securities mature or are redeemed and the proceeds must be reinvested in lower-yielding securities.

Volatility in interest rates and equity markets could reduce consumer demand for the Companys products and result in lower sales.

Changes in interest rates may negatively impact the Companys liquidity.

Significant
increases in prevailing interest rates may cause the Companys policyholders to withdraw the cash value of their policies as they seek more attractive returns. If large numbers of policyholders or policyholders with large balances withdraw
their policy values, the Company may be required to borrow funds or liquidate investments to raise the cash necessary to fund their withdrawals. Particularly in periods of volatile interest rates, liquidations can result in capital losses to the
Company. Because volatile interest rates often make fixed-income investments like mortgages and privately placed bonds more difficult to sell, there is also a risk that the Company will find it difficult to raise the cash necessary to fund a very
large amount of withdrawal activity.

A decline in the equity markets can cause the values of the Companys separate account assets to decline,
reduce revenues, increase claims, increase payment obligations under guaranteed contracts and result in the accelerated amortization of deferred policy acquisition costs (DAC).

A significant source of revenues for the Company is derived from asset management fees, which are calculated as a percentage of separate account assets. Gains and losses in the equity markets
will result in corresponding increases or decreases in separate account assets and asset management fee revenue. In addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a
decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC. See Part II, Item 7A  Quantitative and Qualitative Disclosures About Market Risk
 Equity Market Risk for a complete discussion of risk factors related to equity market risk, including guaranteed contracts.

Deviations
from assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts could have a material adverse impact on the Companys consolidated net income.

The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those related to
persistency (how long a contract stays with a company), mortality, morbidity and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ
significantly from those assumed. As such, deviations from one or more of these assumptions could result in material adverse impacts on the Companys consolidated net income.

A decline in the Companys financial strength ratings could adversely affect the Companys operations.

See Part I, Item 1  Business  Ratings for a description of risk factors related to ratings.



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##### Table of Contents

NLIC and NLAIC are subject to extensive regulations designed to benefit or protect policyholders rather than the
Company.

SeePart I, Item 1  Business  Regulation  Regulation at State Level for a general
description of the regulations designed to benefit or protect policyholders. Changes in regulations or in the interpretation of existing laws or regulations may adversely impact pricing, reserve adequacy or exposure to litigation and could increase
the costs of regulatory compliance by the Companys insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Companys financial position or results of operations.

Certain changes in federal laws and regulations may adversely affect the Companys financial position or results of operations.

Although the federal government does not directly regulate the insurance industry, federal legislation, administrative policies and court decisions may
significantly and adversely affect certain areas of the Companys business. In addition to product tax issues, these areas include pension and employee welfare benefit plan regulation, financial services regulation and taxation generally. For
example, the following events could adversely affect the Companys business:



| |  |  | changes in laws such as ERISA, as amended, that apply to group annuities (see Part I, Item 1  Business  Regulation  ERISA
Considerations for a complete discussion of ERISA);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax laws that would reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance
products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | repeal of the federal estate tax;
| | - |  | ---------------------------------



| |  |  | changes in the availability of, or rules concerning the establishment and operation of, Section 401(k), 401(a), 403(b) and 457 plans or individual
retirement accounts;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax laws (see Part I, Item 1  Business  Regulation Tax Legislation for a description of risk factors related to
potential tax legislation); or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax regulations, such as the proposed regulations that would alter the way tax sheltered annuities described in Section 403(b) of the IRC may be
offered and sold.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Litigation or regulatory actions in connection with late trading, market timing, compensation and bidding
arrangements, unsuitable sales and replacements, the use of finite reinsurance and/or other sales practices could have a material adverse effect on the Company.

SeePart I, Item 3  Legal Proceedings for a description of litigation and regulatory actions. These and future litigation matters may negatively affect the Company by resulting in the payment
of substantial awards or settlements, increasing legal and compliance costs, requiring the Company to change certain aspects of its business operations, diverting management attention from other business issues or harming the Companys
reputation with customers.

Certain changes in accounting and/or financial reporting standards issued by the Financial Accounting Standards Board
(FASB), the SEC or other standard-setting bodies could have a material adverse impact on the Companys financial position or results of operations.

The Company is subject to the application of U.S. generally accepted accounting principles (GAAP), which periodically are revised and/or expanded. As such, the Company periodically is required to adopt new or revised
accounting and/or financial reporting standards issued by recognized accounting standard setters or regulators, including the FASB and the SEC. It is possible that future requirements could change the Companys current application of GAAP,
resulting in a material adverse impact on the Companys financial position or results of operations.



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##### Table of Contents

The continued threat of terrorism and ongoing military and other actions may result in decreases in the
Companys consolidated net income, revenue and assets under management and may adversely affect the Companys consolidated investment portfolio.

The continued threat of terrorism within the U.S. and abroad and the ongoing military and other actions and heightened security measures in response to these types of threats may cause significant volatility and
declines in the U.S., European and other securities markets, loss of life, property damage, additional disruptions to commerce and reduced economic activity. Actual terrorist attacks could cause a decrease in the Companys consolidated net
income and/or revenue as a result of decreased economic activity and/or payment of claims. In addition, some of the assets in the Companys investment portfolio may be adversely affected by declines in the securities markets and economic
activity caused by the continued threat of terrorism, ongoing military and other actions and heightened security measures.

The Company
cannot predict at this time whether and the extent to which industry sectors in which the Company maintains investments may suffer losses as a result of potential decreased commercial and economic activity, or how any such decrease might impact the
ability of companies within the affected industry sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.

Although the Company does not believe that the continued threat of terrorist attacks will have any material impact on the Companys financial strength or performance, the Company can offer
no assurances that this threat, future terrorist-like events in the U.S. and abroad or military actions by the U.S. will not have a material adverse effect on the Companys business, financial position or results of operations.

The Company operates in a highly competitive industry, which can significantly impact operating results.

See Part I, Item 1  Business  Competition for a description of competitive factors affecting the Company. The Companys
revenues and profitability could be negatively impacted as a result of competition.

Unauthorized data access and other security breaches could have
an adverse impact on the Companys business and reputation.

Security breaches and other improper accessing of data in the
Companys facilities, networks or databases could result in loss or theft of data and information or systems interruptions that may expose the Company to liability and have an adverse impact on the Companys business. Moreover, any
compromise of the security of the Companys data could harm the Companys reputation and business. There can be no assurances that the Company will be able to implement security measures to prevent such security breaches.

ITEM 1B UNRESOLVED STAFF COMMENTS

None.

ITEM 2 PROPERTIES

Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2005
the Company leased on average approximately 905,000 square feet of office space in the three building home office complex and in other offices in central Ohio. In addition, during 2005 NMIC announced plans to build and occupy a six-story, 130,000
square foot building in Columbus, Ohio. This building is still under construction. The Company expects to lease some of this space from NMIC. The Company believes that its present and planned facilities are adequate for the anticipated needs of the
Company.

ITEM 3 LEGAL PROCEEDINGS

See Note 18 to the audited consolidated financial statements included in the F
pages of this report for a discussion of legal proceedings.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted due to reduced disclosure format.



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##### Table of Contents

PART II

ITEM 5 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established public trading market for NLICs shares of common stock. All 3,814,779 issued and outstanding shares of NLICs common stock are owned by NFS. NLIC did not repurchase any shares of its common stock or sell
any unregistered shares of its common stock during 2006.

NLIC declared and paid to NFS $375.0 million, $185.0 million and $125.0 million
in cash dividends during 2006, 2005 and 2004, respectively. There was no return of capital to NFS during 2006, 2005 and 2004.

NLIC
currently does not have a formal dividend policy.

See Part I, Item 1  Business  Regulation  Regulation of
Dividends and Other Paymentsfor information regarding dividend restrictions.

ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA

Omitted due to reduced disclosure format.



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##### Table of Contents

ITEM 7 MANAGEMENTS NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

TABLE OF CONTENTS



|                                                                      |  |   
|--------------------------------------------------------------------- |  | --
|                                                                      | 
|Forward-Looking Information                                           |  | 12
|                                                                      | 
|Overview                                                              |  | 13
|                                                                      | 
|Critical Accounting Policies and Recently Issued Accounting Standards |  | 14
|                                                                      | 
|Results of Operations                                                 |  | 18
|                                                                      | 
|Sales                                                                 |  | 21
|                                                                      | 
|Business Segments                                                     |  | 26
|                                                                      | 
|Contractual Obligations and Commitments                               |  | 42
|                                                                      | 
|Off-Balance Sheet Transactions                                        |  | 44



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##### Table of Contents

Forward-Looking Information

The information included herein contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of Nationwide Life Insurance Company and subsidiaries (NLIC, or collectively, the Company). Whenever used in this report,
words such as anticipate, estimate, expect, intend, plan, believe, project, target, and other words of similar meaning are intended to identify such
forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such
forward-looking statements include, among others, the following possibilities:



| | (i) | the potential impact on the Companys reported net income and related disclosures that could result from the adoption of certain accounting and/or financial
reporting standards issued by the Financial Accounting Standards Board, the SEC or other standard-setting bodies;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | tax law changes impacting the tax treatment of life insurance and investment products;
| | ---- | --------------------------------------------------------------------------------------



| | (iii) | repeal of the federal estate tax;
| | ----- | ---------------------------------



| | (iv) | heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new
and existing competitors;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial
viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;
| | ---- | -----------------------------------------------------------------------------------------------------------------



| | (vii) | inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance
of the new and/or revised products in the market;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees; an acceleration of the amortization of DAC, a
reduction in separate account assets or a reduction in the demand for the Companys products;
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ix) | reduction in the value of the Companys investment portfolio as a result of changes in interest rates and yields in the market as well as geopolitical
conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Companys investment portfolio specifically;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) | general economic and business conditions which are less favorable than expected;
| | --- | --------------------------------------------------------------------------------



| | (xi) | competitive, regulatory or tax changes that affect the cost of, or demand for, the Companys products;
| | ---- | ------------------------------------------------------------------------------------------------------



| | (xii) | unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
| | ----- | ------------------------------------------------------------------------------------------------------------



| | (xiii) | settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheets;
| | ------ | --------------------------------------------------------------------------------------------------------------



| | (xiv) | deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness, such as Avian Flu), morbidity
and interest rates used in calculating reserve amounts and in pricing the Companys products;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xv) | adverse litigation results and/or resolution of litigation and/or arbitration or investigation results that could result in monetary damages or impact the manner
in which the Company conducts its operations; and
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xvi) | adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from failure to meet privacy
regulations and/or protect the Companys customers confidential information.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Overview

Following is managements narrative analysis of the results of operations of the Company for the
three years ended December 31, 2006. This discussion should be read in conjunction with the audited consolidated financial statements and related notes beginning on page F-1 of this report.

See Part I, Item 1  Business  Overview for a description of the Company and its ownership structure.

Business Segments

Management views the
Companys business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.

The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from continuing
operations before federal income taxes 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 and net realized gains and
losses related to securitizations; and (2) the adjustment to amortization of DAC related to net realized gains and losses.

See
Part I, Item 1  Business  Business Segments for a description of the components of each segment.

The following
table summarizes pre-tax operating earnings by segment for the years ended December 31:



|                       |  |      |       |      |   |        |  |      |  |        |       |  |     
|---------------------- |  | ---- | ----- | ---- | - | ------ |  | ---- |  | ------ | ----- |  | ----
|(dollars in millions)  |  | 2006 |       | 2005 |   | Change |  | 2004 |  | Change
|Individual Investments |  | $    | 202.8 |      | $ | 223.8  |  | (9)% |  | $      | 220.0 |  | 2 % 
|Retirement Plans       |  |      | 138.7 |      |   | 114.3  |  | 21 % |  |        | 125.3 |  | (9)%
|Individual Protection  |  |      | 220.7 |      |   | 192.8  |  | 15 % |  |        | 170.6 |  | 13 %
|Corporate and Other    |  |      | 80.0  |      |   | 80.7   |  | (1)% |  |        | 62.1  |  | 30 %

Revenues and Expenses

The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees, which are earned primarily from separate account
values generated from the sale of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products, which are assessed on the amount of insurance in force in excess
of the related policyholder account value; administrative fees, which include fees charged per contract on a variety of the Companys products and premium loads on universal life insurance products; and surrender fees, which are charged as a
percentage of premiums withdrawn during a specified period for annuity and certain life insurance contracts. Net investment income includes earnings on investments supporting fixed annuities, the MTN program and certain life insurance products, and
earnings on invested assets not allocated to product segments, all net of related investment expenses. Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide
administrative, marketing and distribution services.

Management makes decisions concerning the sale of invested assets based on a variety
of market, business, tax and other factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of available-for-sale securities and other investments, and changes in valuation allowances on
mortgage loans on real estate are reported in realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the
fair values of hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; and periodic net coupon settlements on non-qualifying derivatives.

The Companys primary expenses include interest credited to policyholder account values, life insurance and annuity benefits,
amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed annuities, funding agreements backing the Companys MTN program and certain life insurance products. Life insurance
and annuity benefits include policyholder benefits in excess of policyholder account values for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and
immediate annuities.



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##### Table of Contents

The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given
reporting period vary from managements initial estimates, with a corresponding charge or credit to current period earnings. This process is referred to by the Company as a true-up, which is performed, and the resulting impact
recognized, on a quarterly basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or
credit to earnings if evidence suggests that these future assumptions and estimates should be revised. This process is referred to by the Company as unlocking. The Company regularly monitors its actual experience with factors impacting
its assumptions about future expected gross profits and other relevant internal and external information regarding those assumptions and unlocks as such information and analysis warrants.

Profitability

The Companys
profitability largely depends on its ability to effectively price and manage risk on its various products, administer customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and
distribution of lapses affects surrender charges and impacts DAC amortization assumptions when lapse experience changes significantly.

In
particular, the Companys profitability is driven by fee income on separate account products, general and separate account asset levels, and managements ability to manage interest spread income. While asset fees are largely at guaranteed
annual rates, amounts earned vary directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest
credited to policyholder account values. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates; the
competitive environment; and other factors.

In addition, life insurance profits are significantly impacted by mortality, morbidity and
persistency experience.

Cumulative Effect of Adoption of Accounting Principle

The Company adopted Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP
03-1), effective January 1, 2004, which resulted in a $3.3 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. See Note 3 to the audited consolidated financial statements included in the F pages of
this report for a complete description of SOP 03-1.

Critical Accounting Policies and Recently Issued Accounting Standards

The preparation of financial statements
in accordance with U.S. 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 Companys most critical estimates include those used to determine the following: the balance, recoverability and amortization of DAC for
investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal income tax provision.

Note 2 and Note 3 to the audited consolidated financial statements included in the F pages of this report provide a summary of significant accounting
policies and a discussion of recently issued accounting standards, respectively.

Deferred Policy Acquisition Costs for Investment and Universal Life
Insurance Products

The Company has deferred certain costs of acquiring investment 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 in the year of policy issuance and loss recognition testing at the end of each reporting period.



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##### Table of Contents

For investment and universal life insurance products, DAC is being amortized with interest over the lives
of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized gains and losses less policy benefits and
policy maintenance expenses. The DAC asset related to investment products and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note
2(b) to the audited consolidated financial statements included in the F pages of this report.

The most significant assumptions that are
involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Companys long-term assumption for net separate account performance is currently 8%
growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. This process is referred
to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, and as part of its pre-set
parameters, the Companys reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.

Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal life insurance products and their related amortization patterns. In the event actual experience differs from
assumptions or future assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense, which could be significant. In general, increases in the estimated 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. If DAC assumptions were unlocked and
revised, the Company would continue to use the reversion to the mean process.

For variable annuity products, the DAC balance is sensitive
to the effects of changes in the Companys estimates of gross profits, primarily due to the significant portion of the Companys gross profits that are dependent upon the rate of return on assets held in separate accounts. This rate of
return influences fees earned by the Company from these products and costs incurred by the Company associated with minimum contractual guarantees, as well as other sources of future expected gross profits. As previously stated, the Companys
long-term assumption for net separate account performance is currently 8% growth per year. In its ongoing evaluation of this assumption, the Company monitors its historical experience, market information and other relevant trends. To demonstrate the
sensitivity of both the Companys variable annuity product DAC balance, which was approximately $1.8 billion in aggregate at December 31, 2006, and related amortization, a 1% increase (to 9%) or decrease (to 7%) in the long-term assumption for
net separate account performance would result in an approximately $20 million net increase or net decrease, respectively, in DAC amortization over the following year. These fluctuations are reasonably likely to occur. The information provided above
considers only changes in the assumption for long-term net separate account performance and excludes changes in other assumptions used in the Companys evaluation of DAC.

For other investment 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 true-up and unlocking adjustments are reflected currently in the consolidated statements of income.

Impairment Losses on Investments

Management
regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.



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##### Table of Contents

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.

Significant changes in the factors management considers when evaluating investments for impairment losses, including significant deterioration in the
credit worthiness of individual issuers, could result in a significant change in impairment losses reported in the consolidated financial statements.

Valuation Allowances for Mortgage Loans on Real Estate

The Company provides valuation allowances for impairments of
mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of expected future cash flows
discounted at the loans effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an unallocated allowance for probable
losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments, hedging instruments and hedged items.
Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.

The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by management and reflects managements best estimate of probable credit losses,
including losses incurred at the balance sheet date but not yet identified by specific loan. Managements periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

Significant changes in the factors management considers in determining the valuation allowance for mortgage loans on real estate could result in a
significant change in the valuation allowance reported in the consolidated financial statements.

Future Policy Benefits and Claims

The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including
those related to persistency, mortality, morbidity and interest rates.

The Company calculates its liability for future policy benefits and
claims 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.



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##### Table of Contents

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 and are considered annuity contracts under Ohio insurance laws.

The liability for future policy benefits and claims for traditional life insurance policies was calculated by the net level premium method using interest
rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being experienced at the time the policies were issued.

The liability for future policy benefits for payout annuities was calculated using the present value of future benefits and maintenance costs discounted using interest rates varying generally
from 3.0% to 13.0%.

Federal Income Taxes

Management provides for federal income taxes based on amounts it believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the
realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, management may be required to significantly change the provision for federal income taxes
recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.

The Companys federal income tax returns are routinely audited by the Internal Revenue Service (IRS). 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.



17



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##### Table of Contents

Results of Operations

2006 Compared to 2005

The following table summarizes the Companys consolidated results of operations for the years ended December 31:



|                                                                        |  |      |         |      |   |         |  |      
|----------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | -----
|(dollars in millions)                                                   |  | 2006 |         | 2005 |   | Change 
|Revenues:                                                               |  |      |         |      |   |         |  |      
|Policy charges:                                                         |  |      |         |      |   |         |  |      
|Asset fees                                                              |  | $    | 664.2   |      | $ | 613.2   |  | 8 %  
|Cost of insurance charges                                               |  |      | 282.1   |      |   | 270.5   |  | 4 %  
|Administrative fees                                                     |  |      | 114.6   |      |   | 89.9    |  | 28 % 
|Surrender fees                                                          |  |      | 71.7    |      |   | 81.5    |  | (12)%
|                                                                        |  |      |         |      |   |         |  |      
|Total policy charges                                                    |  |      | 1,132.6 |      |   | 1,055.1 |  | 7 %  
|                                                                        |  |      |         |      |   |         |  |      
|Traditional life insurance and immediate annuity premiums               |  |      | 308.3   |      |   | 260.0   |  | 19 % 
|Net investment income                                                   |  |      | 2,058.5 |      |   | 2,105.2 |  | (2)% 
|Net realized gains on investments, hedging instruments and hedged items |  |      | 7.1     |      |   | 10.6    |  | (33)%
|Other income                                                            |  |      | 0.2     |      |   | 2.2     |  | (91)%
|                                                                        |  |      |         |      |   |         |  |      
|Total revenues                                                          |  |      | 3,506.7 |      |   | 3,433.1 |  | 2 %  
|                                                                        |  |      |         |      |   |         |  |      
|Benefits and expenses:                                                  |  |      |         |      |   |         |  |      
|Interest credited to policyholder account values                        |  |      | 1,330.1 |      |   | 1,331.0 |  |     
|Life insurance and annuity benefits                                     |  |      | 450.3   |      |   | 377.5   |  | 19 % 
|Policyholder dividends on participating policies                        |  |      | 25.6    |      |   | 33.1    |  | (23)%
|Amortization of DAC                                                     |  |      | 450.3   |      |   | 466.3   |  | (3)% 
|Interest expense, primarily with NFS                                    |  |      | 65.5    |      |   | 66.3    |  | (1)% 
|Other operating expenses                                                |  |      | 531.8   |      |   | 538.8   |  | (1)% 
|                                                                        |  |      |         |      |   |         |  |      
|Total benefits and expenses                                             |  |      | 2,853.6 |      |   | 2,813.0 |  | 1 %  
|                                                                        |  |      |         |      |   |         |  |      
|Income from continuing operations before federal income tax expense     |  |      | 653.1   |      |   | 620.1   |  | 5 %  
|Federal income tax expense                                              |  |      | 30.6    |      |   | 95.6    |  | (68)%
|                                                                        |  |      |         |      |   |         |  |      
|Net income                                                              |  | $    | 622.5   |      | $ | 524.5   |  | 19 % 
|                                                                        |  |      |         |      |   |         |  |      

The increase in net income primarily was driven by a tax benefit of $110.9 million recorded during
the second quarter of 2006 compared to tax benefits and recoverables totaling $48.2 million recorded during the third quarter of 2005. In addition, the Company recorded higher income from continuing operations before federal income tax expense
primarily due to increases in policy charges and traditional life insurance and immediate annuity premiums. Higher life insurance and annuity benefits and lower interest spread income partially offset the overall increase in income from continuing
operations before federal income tax expense.

Through June 2006, the Companys federal income tax returns for tax years 2000-2002
were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its best estimate of additional amounts the Company could be required to pay if certain positions it
had taken were challenged and ultimately denied by the IRS with respect to these tax years. These reserves are reviewed regularly and are adjusted as events occur that management believes impacts the Companys 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. A significant component of the Companys tax reserve as of December 31, 2005 was related to the separate account dividends received
reduction (DRD).

In July 2006, the Company reached substantial agreement with the IRS on all open issues for tax years 2000-2002,
including issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD, for all open tax years. As a result of the revised estimate, $110.9 million of
tax reserves were released into earnings during the second quarter of 2006.



18



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##### Table of Contents

During the third quarter of 2006, the Company recorded $7.8 million of net federal income tax expense
adjustments primarily related to differences between the 2005 estimated tax liability and the amounts reported on the Companys 2005 tax returns. During the third quarter of 2005, the Company refined its separate account DRD estimation process.
As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000  2005) that were open at that time. Also in the third quarter of 2005, the
Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax returns. Because of the impact of this activity, along with
the 2006 reserve release described above, the effective tax rates in 2006 and 2005 are not comparable.

Higher policy charges were driven
by increases in asset fees and administrative fees. Asset fees rose due to increases in both average separate account values and the average asset fee rate charged within the Individual Investments segment. The average variable asset fee rate
increased as new business sold with living benefit riders and corresponding higher fee rates influenced the overall average rate. Administrative fees increased primarily in the Retirement Plans segment due to a policy adjustment related to the
surrender of a group fixed annuity contract. See Part II  Item 7  Managements Narrative Analysis of the Results of Operations (MD&A)  Business Segments  Retirement Plans for additional information.

The increase in traditional life insurance and immediate annuity premiums was due to higher interest rates relative to a year ago, which
created a favorable environment for immediate annuity product sales in the Individual Investments segment.

Higher life insurance and
annuity benefits primarily occurred within the Individual Investments segment due to increased immediate annuity benefit reserves, which were driven by growth in sales relative to a year ago and an increasing proportion of business with living
benefit features. This increase is consistent with the corresponding increase in immediate annuity premiums and asset fees described above.

Interest spread income decreased primarily within the Individual Investments and Corporate and Other segments. The decline in Individual Investments was due to a decline in general account assets caused by fixed annuity net outflows and
lower income from mortgage loan prepayment penalties and bond call premiums. Shrinking margins in the MTN program drove the decrease in the Corporate and Other segment.



19



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##### Table of Contents

2005 Compared to 2004

The following table summarizes the Companys consolidated results of operations for the years ended December 31:



|                                                                                 |  |      |         |      |   |         |        |  |      
|-------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                            |  | 2005 |         | 2004 |   |         | Change
|Revenues:                                                                        |  |      |         |      |   |         |        |  |      
|Policy charges:                                                                  |  |      |         |      |   |         |        |  |      
|Asset fees                                                                       |  | $    | 613.2   |      | $ | 588.5   |        |  | 4 %  
|Cost of insurance charges                                                        |  |      | 270.5   |      |   | 259.7   |        |  | 4 %  
|Administrative fees                                                              |  |      | 89.9    |      |   | 91.5    |        |  | (2)% 
|Surrender fees                                                                   |  |      | 81.5    |      |   | 85.5    |        |  | (5)% 
|                                                                                 |  |      |         |      |   |         |        |  |      
|Total policy charges                                                             |  |      | 1,055.1 |      |   | 1,025.2 |        |  | 3 %  
|                                                                                 |  |      |         |      |   |         |        |  |      
|Traditional life insurance and immediate annuity premiums                        |  |      | 260.0   |      |   | 270.4   |        |  | (4)% 
|Net investment income                                                            |  |      | 2,105.2 |      |   | 2,000.5 |        |  | 5 %  
|Net realized gains (losses) on investments, hedging instruments and hedged items |  |      | 10.6    |      |   | (36.4   | )      |  | NM   
|Other income                                                                     |  |      | 2.2     |      |   | 9.8     |        |  | (78)%
|                                                                                 |  |      |         |      |   |         |        |  |      
|Total revenues                                                                   |  |      | 3,433.1 |      |   | 3,269.5 |        |  | 5 %  
|                                                                                 |  |      |         |      |   |         |        |  |      
|Benefits and expenses:                                                           |  |      |         |      |   |         |        |  |      
|Interest credited to policyholder account values                                 |  |      | 1,331.0 |      |   | 1,277.2 |        |  | 4 %  
|Life insurance and annuity benefits                                              |  |      | 377.5   |      |   | 369.2   |        |  | 2 %  
|Policyholder dividends on participating policies                                 |  |      | 33.1    |      |   | 36.2    |        |  | (9)% 
|Amortization of DAC                                                              |  |      | 466.3   |      |   | 410.1   |        |  | 14 % 
|Interest expense, primarily with NFS                                             |  |      | 66.3    |      |   | 59.8    |        |  | 11 % 
|Other operating expenses                                                         |  |      | 538.8   |      |   | 582.0   |        |  | (7)% 
|                                                                                 |  |      |         |      |   |         |        |  |      
|Total benefits and expenses                                                      |  |      | 2,813.0 |      |   | 2,734.5 |        |  | 3 %  
|                                                                                 |  |      |         |      |   |         |        |  |      
|Income from continuing operations before federal income tax expense              |  |      | 620.1   |      |   | 535.0   |        |  | 16 % 
|Federal income tax expense                                                       |  |      | 95.6    |      |   | 120.0   |        |  | (20)%
|                                                                                 |  |      |         |      |   |         |        |  |      
|Income from continuing operations                                                |  |      | 524.5   |      |   | 415.0   |        |  | 26 % 
|Cumulative effect of adoption of accounting principle, net of taxes              |  |      |        |      |   | (3.3    | )      |  | NM   
|                                                                                 |  |      |         |      |   |         |        |  |      
|Net income                                                                       |  | $    | 524.5   |      | $ | 411.7   |        |  | 27 % 
|                                                                                 |  |      |         |      |   |         |        |  |      

Excluding additional federal income tax benefits recorded during the third and fourth quarters of
2005 as discussed below, the increase in net income primarily was driven by additional interest spread income; the recognition of net realized gains on investments, hedging instruments and hedged items in 2005 compared to net losses in 2004; lower
other operating expenses; and higher assets fees. Increased amortization of DAC partially offset the overall improvement.

The increase in
interest spread income was driven by the Corporate and Other and Individual Investments segments. Within Corporate and Other, higher interest spread income was due to increased invested asset levels primarily as a result of higher excess capital and
surplus retained in the Corporate and Other segment and improved earnings from common stock and real estate investments. The increase in interest spread income within the Individual Investments segment primarily resulted from a higher level of
invested assets and lower crediting rates.

The Company recorded net realized gains on investments, hedging instruments and hedged items
during 2005 compared to net realized losses in 2004 primarily due to a significant decline in impairment charges.

The decline in other
operating expenses primarily was due to lower general sales and employee benefit costs.

Asset fees rose primarily due to increases in both
average separate account values and the average asset fee rate charged within the Individual Investments segment.

Higher amortization of
DAC primarily occurred within the Individual Investments segment due to increased variable annuity revenues. Fixed annuity true-ups and unlocking also contributed to the increase.



20



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##### Table of Contents

During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a
result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000  2005) that were open at that time. In addition, the Company recorded $5.6
million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax returns. 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. Therefore, the full year 2005 effective tax rate of 15.4% was lower than the 2004 rate of 22.4%
primarily due to the additional DRD recorded in 2005 compared to 2004.

Sales

The Company regularly monitors and reports a production volume metric titled sales. Sales or
similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.

Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance
companies. Additionally, the Companys definition of sales may differ from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately
drive revenues.

As calculated and analyzed by management, statutory premiums and deposits on individual and group annuities and life
insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services program are adjusted as described below to
arrive at sales.

Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life
insurance premiums determined on a GAAP basis are recognized as revenue when due, as calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity
products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums
collected (cash basis) and deposits received (cash basis) are aggregated and reported as statutory premiums and annuity consideration revenues.

Sales, as reported by the Company, are stated net of internal replacements, which management believes provides a more meaningful disclosure of production in a given period. In addition, the Companys definition of sales excludes
funding agreements issued under the Companys MTN program; asset transfers associated with large case BOLI and large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products
contribute to asset and earnings growth, their production flows potentially can mask trends in the underlying business and thus do not provide meaningful comparisons and analyses.

Management believes that the presentation of sales as measured for management purposes enhances the understanding of the Companys business and helps depict longer-term trends that may not
be apparent in the results of operations due to differences between the timing of sales and revenue recognition.

The Companys
flagship products are marketed under The BEST of AMERICA brand and include individual variable and group annuities, group private sector retirement plans, and variable life insurance. The BEST of AMERICA products allow customers to choose from
investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial services providers that allow those providers to sell products to their
own customer bases under their own brand names.

The Company also markets group deferred compensation retirement plans to employees of
state and local governments for use under IRC Section 457. The Company utilizes its endorsement by the National Association of Counties, The United States Conference of Mayors and The International Association of Firefighters when marketing IRC
Section 457 products.

See Part I, Item 1  Business  Overview for a description of the Companys sales
distribution network.



21



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##### Table of Contents

2006 Compared to 2005

The following table summarizes sales by product and segment for the years ended December 31:



|                                         |  |      |         |      |   |         |  |      
|---------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | -----
|(dollars in millions)                    |  | 2006 |         | 2005 |   | Change 
|Individual Investments                   |  |      |         |      |   |         |  |      
|Individual variable annuities:           |  |      |         |      |   |         |  |      
|The BEST of AMERICA products             |  | $    | 4,390.9 |      | $ | 3,058.8 |  | 44 % 
|Private label annuities                  |  |      | 356.6   |      |   | 346.6   |  | 3 %  
|                                         |  |      |         |      |   |         |  |      
|Total individual variable annuities      |  |      | 4,747.5 |      |   | 3,405.4 |  | 39 % 
|                                         |  |      |         |      |   |         |  |      
|Individual fixed annuities               |  |      | 183.7   |      |   | 180.5   |  | 2 %  
|Income products                          |  |      | 230.7   |      |   | 186.6   |  | 24 % 
|Advisory services program                |  |      | 222.8   |      |   | 231.3   |  | (4)% 
|                                         |  |      |         |      |   |         |  |      
|Total Individual Investments             |  |      | 5,384.7 |      |   | 4,003.8 |  | 35 % 
|                                         |  |      |         |      |   |         |  |      
|Retirement Plans                         |  |      |         |      |   |         |  |      
|Private sector:                          |  |      |         |      |   |         |  |      
|The BEST of AMERICA products             |  |      | 1,230.2 |      |   | 1,371.1 |  | (10)%
|Other                                    |  |      | 69.4    |      |   | 75.8    |  | (8)% 
|                                         |  |      |         |      |   |         |  |      
|Total private sector                     |  |      | 1,299.6 |      |   | 1,446.9 |  | (10)%
|                                         |  |      |         |      |   |         |  |      
|Public sector:                           |  |      |         |      |   |         |  |      
|IRC Section 457 annuities                |  |      | 1,533.3 |      |   | 1,544.8 |  | (1)% 
|                                         |  |      |         |      |   |         |  |      
|Total Retirement Plans                   |  |      | 2,832.9 |      |   | 2,991.7 |  | (5)% 
|                                         |  |      |         |      |   |         |  |      
|Individual Protection                    |  |      |         |      |   |         |  |      
|Corporate-owned life insurance           |  |      | 805.9   |      |   | 657.5   |  | 23 % 
|The BEST of AMERICA variable life series |  |      | 437.3   |      |   | 426.0   |  | 3 %  
|Traditional/universal life insurance     |  |      | 356.7   |      |   | 352.3   |  | 1 %  
|                                         |  |      |         |      |   |         |  |      
|Total Individual Protection              |  |      | 1,599.9 |      |   | 1,435.8 |  | 11 % 
|                                         |  |      |         |      |   |         |  |      
|Total sales                              |  | $    | 9,817.5 |      | $ | 8,431.3 |  | 16 % 
|                                         |  |      |         |      |   |         |  |      

See Part II, Item 7  MD&A Business Segments for an analysis of
sales by product and segment.



22



---

##### Table of Contents

The following table summarizes sales by distribution channel for the years ended December 31:



|                             |  |      |         |      |   |         |  |      
|---------------------------- |  | ---- | ------- | ---- | - | ------- |  | -----
|(dollars in millions)        |  | 2006 |         | 2005 |   | Change 
|Non-affiliated:              |  |      |         |      |   |         |  |      
|Independent broker/dealers   |  | $    | 2,785.7 |      | $ | 2,552.6 |  | 9 %  
|Financial institutions       |  |      | 1,790.6 |      |   | 1,233.9 |  | 45 % 
|Wirehouse and regional firms |  |      | 1,561.3 |      |   | 1,227.7 |  | 27 % 
|Pension plan administrators  |  |      | 344.9   |      |   | 354.0   |  | (3)% 
|Life insurance specialists   |  |      | 580.6   |      |   | 382.4   |  | 52 % 
|                             |  |      |         |      |   |         |  |      
|Total non-affiliated sales   |  |      | 7,063.1 |      |   | 5,750.6 |  | 23 % 
|                             |  |      |         |      |   |         |  |      
|Affiliated:                  |  |      |         |      |   |         |  |      
|NRS                          |  |      | 1,556.3 |      |   | 1,573.2 |  | (1)% 
|Nationwide agents            |  |      | 726.9   |      |   | 691.0   |  | 5 %  
|Mullin TBG                   |  |      | 226.1   |      |   | 275.4   |  | (18)%
|NFN producers                |  |      | 245.1   |      |   | 141.1   |  | 74 % 
|                             |  |      |         |      |   |         |  |      
|Total affiliated sales       |  |      | 2,754.4 |      |   | 2,680.7 |  | 3 %  
|                             |  |      |         |      |   |         |  |      
|Total sales                  |  | $    | 9,817.5 |      | $ | 8,431.3 |  | 16 % 
|                             |  |      |         |      |   |         |  |      

The increase in total sales primarily was driven by strong sales of the recently introduced
Lifetime Income (L.INC) and Capital Preservation Plus Lifetime Income (CPPLI) product riders in the Individual Investments segment. Higher COLI sales in the Individual Protection segment from the addition of a large case during 2006 also contributed
to the overall increase. However, sales in the Retirement Plans segment continued to decline as a result of the movement of pension business to the NFS trust platform. In recent years, an increasing amount of business has been sold through NFS trust
products rather than NLIC group annuity contracts due to NFS significant investment in the development of trust product capabilities not prevalent elsewhere in the market.

Increased sales in the financial institutions, wirehouse and regional firms, and independent broker/dealers channels primarily were generated from strong variable annuity sales, specifically
products offering the L.INC and CPPLI riders as mentioned above.

Sales increased through the life insurance specialists channel due to the
addition of a large case in 2006.

Higher sales in the NFN producers channel were driven by variable annuity and income products.

Lower sales through Mullin TBG reflected the addition of two large COLI cases in the prior year.



23



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##### Table of Contents

2005 Compared to 2004

The following table summarizes sales by product and segment for the years ended December 31:



|                                         |  |      |         |      |   |         |  |      
|---------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | -----
|(dollars in millions)                    |  | 2005 |         | 2004 |   | Change 
|Individual Investments                   |  |      |         |      |   |         |  |      
|Individual variable annuities:           |  |      |         |      |   |         |  |      
|The BEST of AMERICA products             |  | $    | 3,058.8 |      | $ | 3,394.5 |  | (10)%
|Private label annuities                  |  |      | 346.6   |      |   | 449.0   |  | (23)%
|                                         |  |      |         |      |   |         |  |      
|Total individual variable annuities      |  |      | 3,405.4 |      |   | 3,843.5 |  | (11)%
|                                         |  |      |         |      |   |         |  |      
|Individual fixed annuities               |  |      | 180.5   |      |   | 780.2   |  | (77)%
|Income products                          |  |      | 186.6   |      |   | 141.0   |  | 32 % 
|Advisory services program                |  |      | 231.3   |      |   | 181.0   |  | 28 % 
|                                         |  |      |         |      |   |         |  |      
|Total Individual Investments             |  |      | 4,003.8 |      |   | 4,945.7 |  | (19)%
|                                         |  |      |         |      |   |         |  |      
|Retirement Plans                         |  |      |         |      |   |         |  |      
|Private sector:                          |  |      |         |      |   |         |  |      
|The BEST of AMERICA products             |  |      | 1,371.1 |      |   | 1,679.7 |  | (18)%
|Other                                    |  |      | 75.8    |      |   | 28.1    |  | 170 %
|                                         |  |      |         |      |   |         |  |      
|Total private sector                     |  |      | 1,446.9 |      |   | 1,707.8 |  | (15)%
|                                         |  |      |         |      |   |         |  |      
|Public sector:                           |  |      |         |      |   |         |  |      
|IRC Section 457 annuities                |  |      | 1,544.8 |      |   | 1,514.2 |  | 2 %  
|                                         |  |      |         |      |   |         |  |      
|Total Retirement Plans                   |  |      | 2,991.7 |      |   | 3,222.0 |  | (7)% 
|                                         |  |      |         |      |   |         |  |      
|Individual Protection                    |  |      |         |      |   |         |  |      
|Corporate-owned life insurance           |  |      | 657.5   |      |   | 564.5   |  | 16 % 
|The BEST of AMERICA variable life series |  |      | 426.0   |      |   | 439.6   |  | (3)% 
|Traditional/universal life insurance     |  |      | 352.3   |      |   | 342.2   |  | 3 %  
|                                         |  |      |         |      |   |         |  |      
|Total Individual Protection              |  |      | 1,435.8 |      |   | 1,346.3 |  | 7 %  
|                                         |  |      |         |      |   |         |  |      
|Total sales                              |  | $    | 8,431.3 |      | $ | 9,514.0 |  | (11)%
|                                         |  |      |         |      |   |         |  |      

See Part II, Item 7  MD&A  Business Segments for an analysis of sales
by product and segment.



24



---

##### Table of Contents

The following table summarizes sales by distribution channel for the years ended December 31:



|                             |  |      |         |      |   |         |  |      
|---------------------------- |  | ---- | ------- | ---- | - | ------- |  | -----
|(dollars in millions)        |  | 2005 |         | 2004 |   | Change 
|Non-affiliated:              |  |      |         |      |   |         |  |      
|Independent broker/dealers   |  | $    | 2,552.6 |      | $ | 2,887.5 |  | (12)%
|Financial institutions       |  |      | 1,233.9 |      |   | 1,836.8 |  | (33)%
|Wirehouse and regional firms |  |      | 1,227.7 |      |   | 1,462.5 |  | (16)%
|Pension plan administrators  |  |      | 354.0   |      |   | 404.3   |  | (12)%
|Life insurance specialists   |  |      | 382.4   |      |   | 382.8   |  |     
|                             |  |      |         |      |   |         |  |      
|Total non-affiliated sales   |  |      | 5,750.6 |      |   | 6,973.9 |  | (18)%
|                             |  |      |         |      |   |         |  |      
|Affiliated:                  |  |      |         |      |   |         |  |      
|NRS                          |  |      | 1,573.2 |      |   | 1,543.0 |  | 2 %  
|Nationwide agents            |  |      | 691.0   |      |   | 674.1   |  | 3 %  
|Mullin TBG                   |  |      | 275.4   |      |   | 184.2   |  | 50 % 
|NFN producers                |  |      | 141.1   |      |   | 138.8   |  | 2 %  
|                             |  |      |         |      |   |         |  |      
|Total affiliated sales       |  |      | 2,680.7 |      |   | 2,540.1 |  | 6 %  
|                             |  |      |         |      |   |         |  |      
|Total sales                  |  | $    | 8,431.3 |      | $ | 9,514.0 |  | (11)%
|                             |  |      |         |      |   |         |  |      

The decrease in total sales in 2005 primarily was due to lower fixed annuity sales in the
Individual Investments segment related to deliberate actions by the Company as described earlier. In addition, sales in the Retirement Plans segment continued to decline as a result of the movement of pension business to the NFS trust platform. The
overall decline partially was offset by increased COLI sales in the Individual Protection segment.

Sales generated by financial
institutions declined primarily due to both planned reductions and intense competition in fixed annuity sales and the shift of pension business to the trust platform described above. Additionally, this channel has been impacted by wholesaler
turnover.

The decline in sales through independent broker/dealers and wirehouse and regional firms were driven by lower variable annuity
sales and the movement of pension business as mentioned above. However, partially offsetting these declines were advisory services sales that have begun to grow through the independent broker/dealers channel and higher sales of immediate annuities
and fixed life insurance products through the wirehouse and regional firms channel.



25



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##### Table of Contents

Business Segments

Individual Investments

2006 Compared to 2005

The following table summarizes selected financial data for the Companys
Individual Investments segment for the years ended December 31:



|                                                     |  |      |          |      |   |          |  |      
|---------------------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                                |  | 2006 |          | 2005 |   | Change  
|Statements of Income Data                            |  |      |          |      |   |          |  |      
|Revenues:                                            |  |      |          |      |   |          |  |      
|Policy charges:                                      |  |      |          |      |   |          |  |      
|Asset fees                                           |  | $    | 506.0    |      | $ | 455.4    |  | 11 % 
|Administrative fees                                  |  |      | 20.0     |      |   | 15.7     |  | 27 % 
|Surrender fees                                       |  |      | 55.7     |      |   | 61.3     |  | (9)% 
|                                                     |  |      |          |      |   |          |  |      
|Total policy charges                                 |  |      | 581.7    |      |   | 532.4    |  | 9 %  
|Premiums on income products                          |  |      | 142.5    |      |   | 96.7     |  | 47 % 
|Net investment income                                |  |      | 739.5    |      |   | 822.4    |  | (10)%
|Other income                                         |  |      | 2.6      |      |   | 1.3      |  | 100 %
|                                                     |  |      |          |      |   |          |  |      
|Total revenues                                       |  |      | 1,466.3  |      |   | 1,452.8  |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|Benefits and expenses:                               |  |      |          |      |   |          |  |      
|Interest credited to policyholder account values     |  |      | 501.7    |      |   | 557.7    |  | (10)%
|Anuuity benefits and claims                          |  |      | 202.8    |      |   | 149.1    |  | 36 % 
|Amortization of DAC                                  |  |      | 352.7    |      |   | 329.1    |  | 7 %  
|Other operating expenses                             |  |      | 206.3    |      |   | 193.1    |  | 7 %  
|                                                     |  |      |          |      |   |          |  |      
|Total benefits and expenses                          |  |      | 1,263.5  |      |   | 1,229.0  |  | 3 %  
|                                                     |  |      |          |      |   |          |  |      
|Pre-tax operating earnings                           |  | $    | 202.8    |      | $ | 223.8    |  | (9)% 
|                                                     |  |      |          |      |   |          |  |      
|Other Data                                           |  |      |          |      |   |          |  |      
|Sales:                                               |  |      |          |      |   |          |  |      
|Individual variable annuities                        |  | $    | 4,747.5  |      | $ | 3,405.4  |  | 39 % 
|Individual fixed annuities                           |  |      | 183.7    |      |   | 180.5    |  | 2 %  
|Income products                                      |  |      | 230.7    |      |   | 186.6    |  | 24 % 
|Advisory services program                            |  |      | 222.8    |      |   | 231.3    |  | (4)% 
|                                                     |  |      |          |      |   |          |  |      
|Total sales                                          |  | $    | 5,384.7  |      | $ | 4,003.8  |  | 35 % 
|                                                     |  |      |          |      |   |          |  |      
|Average account values:                              |  |      |          |      |   |          |  |      
|General account                                      |  | $    | 13,283.3 |      | $ | 14,501.5 |  | (8)% 
|Separate account                                     |  |      | 36,841.3 |      |   | 34,539.0 |  | 7 %  
|Advisory services program                            |  |      | 508.2    |      |   | 309.3    |  | 64 % 
|                                                     |  |      |          |      |   |          |  |      
|Total average account values                         |  | $    | 50,632.8 |      | $ | 49,349.8 |  | 3 %  
|                                                     |  |      |          |      |   |          |  |      
|Account values as of period end:                     |  |      |          |      |   |          |  |      
|Individual variable annuities                        |  | $    | 43,434.8 |      | $ | 40,343.8 |  | 8 %  
|Individual fixed annuities                           |  |      | 5,909.7  |      |   | 7,354.0  |  | (20)%
|Income products                                      |  |      | 1,984.6  |      |   | 1,857.7  |  | 7 %  
|Advisory services program                            |  |      | 597.1    |      |   | 411.5    |  | 45 % 
|                                                     |  |      |          |      |   |          |  |      
|Total account values                                 |  | $    | 51,926.2 |      | $ | 49,967.0 |  | 4 %  
|                                                     |  |      |          |      |   |          |  |      
|GMDB  Net amount at risk, net of reinsurance        |  | $    | 119.0    |      | $ | 178.4    |  | (33)%
|GMDB  Reserves, net of reinsurance                  |  | $    | 29.3     |      | $ | 26.9     |  | 9 %  
|Pre-tax operating earnings to average account values |  |      | 0.40%    |      |   | 0.45%    |  |      
|                                                     |  |      |          |      |   |          |  |      



26



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##### Table of Contents

The decrease in pre-tax operating earnings was driven by higher annuity benefits and claims, lower
interest spread income, increased amortization of DAC and higher other operating expenses. Increased asset fees and premiums on income products partially offset the overall decrease.

The increase in annuity benefits and claims was driven by increased immediate annuity reserves due to growth in sales relative to a year ago and an increasing proportion of business with living
benefit features. This increase is consistent with the increase in premiums on income products noted below.

The following table summarizes
the interest spread on Individual Investments segment average general account values for the years ended December 31:



|                                                  |  |       |  |      
|------------------------------------------------- |  | ----- |  | -----
|                                                  |  | 2006  |  | 2005 
|Net investment income                             |  | 5.76% |  | 5.85%
|Interest credited                                 |  | 3.78% |  | 3.85%
|                                                  |  |       |  |      
|Interest spread on average general account values |  | 1.98% |  | 2.00%
|                                                  |  |       |  |      

Interest spread income decreased as interest spread margins declined during 2006 to 198 basis
points compared to 200 basis points in 2005. Lower general account assets caused by fixed annuity net outflows drove $15.8 million of the total reduction in interest spread income. In addition, 2006 included only 15 basis points, or $20.3 million,
of income from mortgage loan prepayment penalties and bond call premiums compared to 22 basis points, or $31.4 million, in 2005. For 2007, the Company expects interest spread margins to tighten in this segment and projects full year spreads of 185
to 190 basis points, including a nominal level of prepayment activity.

Amortization of DAC increased primarily due to higher variable
annuity gross profits driven by higher asset levels. Higher gross profits accounted for $20.8 million of the increase compared to 2005.

Other operating expenses increased primarily due to higher sales incentives and employee compensation and benefits.

Approximately
$31 million of the increase in asset fees was due to higher average separate account values. In addition, the average variable asset fee rate increased to 1.37% from 1.32% in the comparable prior year period as new business sold with living benefit
riders and corresponding higher fee rates influenced the overall average rate. This factor contributed approximately $20 million of the overall increase.

The increase in premiums on income products was due to higher interest rates relative to a year ago, which created a favorable environment for immediate annuity product sales. The Federal Funds rate was 5.25% at
December 31, 2006 compared to 4.25% at December 31, 2005.

Higher sales occurred in the variable annuity business driven by the
recently introduced L.INC and CPPLI product riders and a more targeted sales process. Sales of products with the L.INC and CPPLI riders accounted for $886.3 million and $451.9 million, respectively, of the increase in sales compared to 2005.



27



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##### Table of Contents

The following table summarizes selected information about the Companys deferred individual fixed
annuities, including the fixed option of variable annuities, as of December 31, 2006:



|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|------------------------------------------- |  | ------------ | ------- | ---------------------------- | ----- | ------------------------------------- | - | ---------------------------- |  | ------------ |  | ---------------------------- | ------- | ------------ | ----- | ---------------------------- | - | -------- |  | -----
|                                            |  | Ratchet      |         | Reset                        |       | Market valueadjustment (MVA)and other |   | Total                       
|(dollars in millions)                       |  | Accountvalue |         | Weightedaveragecreditingrate |       | Accountvalue                          |   | Weightedaveragecreditingrate |  | Accountvalue |  | Weightedaveragecreditingrate |         | Accountvalue |       | Weightedaveragecreditingrate
|Minimum interest rate of 3.50% or greater   |  | $            |        |                              | N/A   |                                       | $ | 506.2                        |  | 3.46%        |  | $                            |        |              | N/A   |                              | $ | 506.2    |  | 3.46%
|Minimum interest rate of 3.00% to 3.49%     |  |              | 2,130.2 |                              | 4.59% |                                       |   | 4,603.5                      |  | 3.10%        |  |                              |        |              | N/A   |                              |   | 6,733.7  |  | 3.57%
|Minimum interest rate lower than 3.00%      |  |              | 848.3   |                              | 3.32% |                                       |   | 615.2                        |  | 3.59%        |  |                              | 38.3    |              | 3.91% |                              |   | 1,501.8  |  | 3.45%
|MVA with no minimum interest rate guarantee |  |              |        |                              | N/A   |                                       |   |                             |  | N/A          |  |                              | 1,586.9 |              | 2.88% |                              |   | 1,586.9  |  | 2.88%
|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|Total deferred individual fixed annuities   |  | $            | 2,978.5 |                              | 4.23% |                                       | $ | 5,724.9                      |  | 3.18%        |  | $                            | 1,625.2 |              | 2.91% |                              | $ | 10,328.6 |  | 3.44%
|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      



28



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##### Table of Contents

2005 Compared to 2004

The following table summarizes selected financial data for the Companys Individual Investments segment for the years ended December 31:



|                                                     |  |      |          |      |   |          |  |      
|---------------------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                                |  | 2005 |          | 2004 |   | Change  
|Statements of Income Data                            |  |      |          |      |   |          |  |      
|Revenues:                                            |  |      |          |      |   |          |  |      
|Policy charges:                                      |  |      |          |      |   |          |  |      
|Asset fees                                           |  | $    | 455.4    |      | $ | 427.7    |  | 6 %  
|Administrative fees                                  |  |      | 15.7     |      |   | 15.3     |  | 3 %  
|Surrender fees                                       |  |      | 61.3     |      |   | 60.6     |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|Total policy charges                                 |  |      | 532.4    |      |   | 503.6    |  | 6 %  
|Premiums on income products                          |  |      | 96.7     |      |   | 87.5     |  | 11 % 
|Net investment income                                |  |      | 822.4    |      |   | 824.8    |  |     
|Other income                                         |  |      | 1.3      |      |   | 0.6      |  | NM   
|                                                     |  |      |          |      |   |          |  |      
|Total revenues                                       |  |      | 1,452.8  |      |   | 1,416.5  |  | 3 %  
|                                                     |  |      |          |      |   |          |  |      
|Benefits and expenses:                               |  |      |          |      |   |          |  |      
|Interest credited to policyholder account values     |  |      | 557.7    |      |   | 573.5    |  | (3)% 
|Annuity benefits and claims                          |  |      | 149.1    |      |   | 136.9    |  | 9 %  
|Amortization of DAC                                  |  |      | 329.1    |      |   | 276.1    |  | 19 % 
|Other operating expenses                             |  |      | 193.1    |      |   | 210.0    |  | (8)% 
|                                                     |  |      |          |      |   |          |  |      
|Total benefits and expenses                          |  |      | 1,229.0  |      |   | 1,196.5  |  | 3 %  
|                                                     |  |      |          |      |   |          |  |      
|Pre-tax operating earnings                           |  | $    | 223.8    |      | $ | 220.0    |  | 2 %  
|                                                     |  |      |          |      |   |          |  |      
|Other Data                                           |  |      |          |      |   |          |  |      
|Sales:                                               |  |      |          |      |   |          |  |      
|Individual variable annuities                        |  | $    | 3,405.4  |      | $ | 3,843.5  |  | (11)%
|Individual fixed annuities                           |  |      | 180.5    |      |   | 780.2    |  | (77)%
|Income products                                      |  |      | 186.6    |      |   | 141.0    |  | 32 % 
|Advisory services program                            |  |      | 231.3    |      |   | 181.0    |  | 28 % 
|                                                     |  |      |          |      |   |          |  |      
|Total sales                                          |  | $    | 4,003.8  |      | $ | 4,945.7  |  | (19)%
|                                                     |  |      |          |      |   |          |  |      
|Average account values:                              |  |      |          |      |   |          |  |      
|General account                                      |  | $    | 14,501.5 |      | $ | 14,585.9 |  | (1)% 
|Separate account                                     |  |      | 34,539.0 |      |   | 33,030.3 |  | 5 %  
|Advisory services program                            |  |      | 309.3    |      |   | 99.1     |  | NM   
|                                                     |  |      |          |      |   |          |  |      
|Total average account values                         |  | $    | 49,349.8 |      | $ | 47,715.3 |  | 3 %  
|                                                     |  |      |          |      |   |          |  |      
|Account values as of period end:                     |  |      |          |      |   |          |  |      
|Individual variable annuities                        |  | $    | 40,343.8 |      | $ | 39,770.8 |  | 1 %  
|Individual fixed annuities                           |  |      | 7,354.0  |      |   | 7,837.2  |  | (6)% 
|Income products                                      |  |      | 1,857.7  |      |   | 1,775.6  |  | 5 %  
|Advisory services program                            |  |      | 411.5    |      |   | 195.9    |  | NM   
|                                                     |  |      |          |      |   |          |  |      
|Total account values                                 |  | $    | 49,967.0 |      | $ | 49,579.5 |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|GMDB  Net amount at risk, net of reinsurance        |  | $    | 178.4    |      | $ | 296.5    |  | (40)%
|GMDB  Reserves, net of reinsurance                  |  | $    | 26.9     |      | $ | 23.6     |  | 14 % 
|Pre-tax operating earnings to average account values |  |      | 0.45%    |      |   | 0.46%    |  |      
|                                                     |  |      |          |      |   |          |  |      

The slight increase in pre-tax operating earnings primarily was driven by higher asset fees, lower
other operating expenses, additional interest spread income and increased premiums on income products, offset by increases in amortization of DAC and annuity benefits and claims.



29



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##### Table of Contents

Asset fees rose due to both higher average separate account values and a higher average asset fee rate
charged, representing approximately $20 million and $8 million, respectively, of the overall increase. The increase in average separate account values primarily was due to the general upward trend in the equity and fixed income markets offset in
part by withdrawals that exceeded new deposits. The average variable asset fee rate increased from 1.29% to 1.32% as new business sold with living benefit riders influenced the overall average rate.

Other operating expenses decreased primarily due to lower sales incentives driven by reduced fixed annuity production.

The following table summarizes the interest spread on Individual Investments segment average general account values for the years ended December 31:



|                                                  |  |       |  |      
|------------------------------------------------- |  | ----- |  | -----
|                                                  |  | 2005  |  | 2004 
|Net investment income                             |  | 5.85% |  | 5.81%
|Interest credited                                 |  | 3.85% |  | 3.93%
|                                                  |  |       |  |      
|Interest spread on average general account values |  | 2.00% |  | 1.88%
|                                                  |  |       |  |      

Interest spread margins widened during 2005 to 200 basis points compared to 188 basis points in
2004. Included in 2005 were 22 basis points, or $31.4 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 13 basis points, or $18.4 million, in 2004. The higher interest rate environment in 2005 relative to
2004 eased the pressure on margins due to the interest rate floors contained in certain annuity contracts and contributed to increased margins.

The increase in premiums on income products was driven by improving the competitiveness of the Companys immediate annuity products by increasing the fixed purchase rate offered.

Higher amortization of DAC in 2005 compared to 2004 primarily was due to increased variable annuity gross profits driven by favorable market experience and business growth, which resulted in a
$34.7 million true-up of amortization. In addition, increased fixed annuity gross profits, which were driven by higher income from mortgage loan prepayments and bond call premiums as well as increased surrender fees, resulted in a $5.0 million
true-up of amortization. Unlocking within fixed annuities resulted in an additional $13.3 million of increased amortization in 2005 compared to 2004.

The increase in annuity benefits and claims primarily was driven by increased premiums from immediate annuity products and growth in contracts containing guaranteed living benefits.

The decrease in fixed annuity sales was due to the competitive interest rate environment and the Companys exit from the offshore business in the
second quarter of 2005. In addition, the variable annuity line experienced lower sales of The BEST of AMERICA products, especially the MarketFLEX product, consistent with industry-wide declines.

The following table summarizes selected information about the Companys deferred individual fixed annuities, including the fixed option of variable
annuities, as of December 31, 2005:



|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|------------------------------------------- |  | ------------ | ------- | ---------------------------- | ----- | ------------------------------------- | - | ---------------------------- |  | ------------ |  | ---------------------------- | ------- | ------------ | ----- | ---------------------------- | - | -------- |  | -----
|                                            |  | Ratchet      |         | Reset                        |       | Market valueadjustment (MVA) andother |   | Total                       
|(dollars in millions)                       |  | Accountvalue |         | Weightedaveragecreditingrate |       | Accountvalue                          |   | Weightedaveragecreditingrate |  | Accountvalue |  | Weightedaveragecreditingrate |         | Accountvalue |       | Weightedaveragecreditingrate
|Minimum interest rate of 3.50% or greater   |  | $            |        |                              | N/A   |                                       | $ | 1,388.5                      |  | 4.13%        |  | $                            |        |              | N/A   |                              | $ | 1,388.5  |  | 4.13%
|Minimum interest rate of 3.00% to 3.49%     |  |              | 2,976.0 |                              | 4.94% |                                       |   | 5,856.6                      |  | 3.09%        |  |                              |        |              | N/A   |                              |   | 8,832.6  |  | 3.71%
|Minimum interest rate lower than 3.00%      |  |              | 886.4   |                              | 3.26% |                                       |   | 353.5                        |  | 3.10%        |  |                              | 7.9     |              | 3.41% |                              |   | 1,247.8  |  | 3.22%
|MVA with no minimum interest rate guarantee |  |              |        |                              | N/A   |                                       |   |                             |  | N/A          |  |                              | 1,543.8 |              | 3.01% |                              |   | 1,543.8  |  | 3.01%
|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|Total deferred individual fixed annuities   |  | $            | 3,862.4 |                              | 4.55% |                                       | $ | 7,598.6                      |  | 3.28%        |  | $                            | 1,551.7 |              | 3.01% |                              | $ | 13,012.7 |  | 3.63%
|                                            |  |              |         |                              |       |                                       |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      



30



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##### Table of Contents

Retirement Plans

2006 Compared to 2005

The following table summarizes selected financial data for the Companys Retirement Plans
segment for the years ended December 31:



|                                                     |  |      |          |      |   |          |  |      
|---------------------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                                |  | 2006 |          | 2005 |   | Change  
|Statements of Income Data                            |  |      |          |      |   |          |  |      
|Revenues:                                            |  |      |          |      |   |          |  |      
|Policy charges:                                      |  |      |          |      |   |          |  |      
|Asset fees                                           |  | $    | 125.4    |      | $ | 129.5    |  | (3)% 
|Administrative fees                                  |  |      | 30.3     |      |   | 8.0      |  | NM   
|Surrender fees                                       |  |      | 4.5      |      |   | 7.5      |  | (40)%
|                                                     |  |      |          |      |   |          |  |      
|Total policy charges                                 |  |      | 160.2    |      |   | 145.0    |  | 11 % 
|Net investment income                                |  |      | 636.0    |      |   | 643.1    |  | (1)% 
|                                                     |  |      |          |      |   |          |  |      
|Total revenues                                       |  |      | 796.2    |      |   | 788.1    |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|Benefits and expenses:                               |  |      |          |      |   |          |  |      
|Interest credited to policyholder account values     |  |      | 440.5    |      |   | 444.8    |  | (1)% 
|Amortization of DAC                                  |  |      | 37.9     |      |   | 47.2     |  | (20)%
|Other operating expenses                             |  |      | 179.1    |      |   | 181.8    |  | (2)% 
|                                                     |  |      |          |      |   |          |  |      
|Total benefits and expenses                          |  |      | 657.5    |      |   | 673.8    |  | (2)% 
|                                                     |  |      |          |      |   |          |  |      
|Pre-tax operating earnings                           |  | $    | 138.7    |      | $ | 114.3    |  | 21 % 
|                                                     |  |      |          |      |   |          |  |      
|Other Data                                           |  |      |          |      |   |          |  |      
|Sales:                                               |  |      |          |      |   |          |  |      
|Private sector                                       |  | $    | 1,299.6  |      | $ | 1,446.9  |  | (10)%
|Public sector                                        |  |      | 1,533.3  |      |   | 1,544.8  |  | (1)% 
|                                                     |  |      |          |      |   |          |  |      
|Total sales                                          |  | $    | 2,832.9  |      | $ | 2,991.7  |  | (5)% 
|                                                     |  |      |          |      |   |          |  |      
|Average account values:                              |  |      |          |      |   |          |  |      
|General account                                      |  | $    | 10,756.1 |      | $ | 10,519.0 |  | 2 %  
|Separate account                                     |  |      | 17,544.3 |      |   | 18,739.2 |  | (6)% 
|                                                     |  |      |          |      |   |          |  |      
|Total average account values                         |  | $    | 28,300.4 |      | $ | 29,258.2 |  | (3)% 
|                                                     |  |      |          |      |   |          |  |      
|Account values as of period end:                     |  |      |          |      |   |          |  |      
|Private sector                                       |  | $    | 12,542.9 |      | $ | 13,900.9 |  | (10)%
|Public sector                                        |  |      | 15,979.5 |      |   | 15,790.2 |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|Total account values                                 |  | $    | 28,522.4 |      | $ | 29,691.1 |  | (4)% 
|                                                     |  |      |          |      |   |          |  |      
|Pre-tax operating earnings to average account values |  |      | 0.49%    |      |   | 0.39%    |  |      
|                                                     |  |      |          |      |   |          |  |      

The increase in pre-tax operating earnings primarily was driven by higher administrative fees and
lower amortization of DAC.

Higher administrative fees were attributable to the surrender of a group fixed annuity contract in the second
quarter of 2006, which resulted in an $18.6 million policy adjustment.

Amortization of DAC was lower in 2006 primarily due to unlocking in
2005 related to mutual fund revenue assumptions that resulted in higher amortization expense in 2005 compared to favorable true-ups in 2006.



31



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##### Table of Contents

The following table summarizes the interest spread on Retirement Plans segment average general account
values for the years ended December 31:



|                                                  |  |       |  |      
|------------------------------------------------- |  | ----- |  | -----
|                                                  |  | 2006  |  | 2005 
|Net investment income                             |  | 5.91% |  | 6.11%
|Interest credited                                 |  | 4.09% |  | 4.23%
|                                                  |  |       |  |      
|Interest spread on average general account values |  | 1.82% |  | 1.88%
|                                                  |  |       |  |      

Interest spread margins decreased to 182 basis points in 2006 compared to 188 basis points in
2005. Included in the current year were 9 basis points, or $9.9 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 20 basis points, or $21.2 million, in 2005. For the full year 2007, the Company expects
interest spread margins to remain relatively stable in this segment and projects full year spreads of 180 to 185 basis points, including a nominal level of prepayment activity.

Private sector sales decreased due to the declining issuance of group annuity contracts described earlier and the related decrease in recurring flows.



32



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##### Table of Contents

2005 Compared to 2004

The following table summarizes selected financial data for the Companys Retirement Plans segment for the years ended December 31:



|                                                     |  |      |          |      |   |          |  |      
|---------------------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                                |  | 2005 |          | 2004 |   | Change  
|Statements of Income Data                            |  |      |          |      |   |          |  |      
|Revenues:                                            |  |      |          |      |   |          |  |      
|Policy charges:                                      |  |      |          |      |   |          |  |      
|Asset fees                                           |  | $    | 129.5    |      | $ | 137.7    |  | (6)% 
|Administrative fees                                  |  |      | 8.0      |      |   | 8.2      |  | (2)% 
|Surrender fees                                       |  |      | 7.5      |      |   | 11.1     |  | (32)%
|                                                     |  |      |          |      |   |          |  |      
|Total policy charges                                 |  |      | 145.0    |      |   | 157.0    |  | (8)% 
|Net investment income                                |  |      | 643.1    |      |   | 627.9    |  | 2 %  
|                                                     |  |      |          |      |   |          |  |      
|Total revenues                                       |  |      | 788.1    |      |   | 784.9    |  |     
|                                                     |  |      |          |      |   |          |  |      
|Benefits and expenses:                               |  |      |          |      |   |          |  |      
|Interest credited to policyholder account values     |  |      | 444.8    |      |   | 435.5    |  | 2 %  
|Amortization of DAC                                  |  |      | 47.2     |      |   | 39.6     |  | 19 % 
|Other operating expenses                             |  |      | 181.8    |      |   | 184.5    |  | (1)% 
|                                                     |  |      |          |      |   |          |  |      
|Total benefits and expenses                          |  |      | 673.8    |      |   | 659.6    |  | 2 %  
|                                                     |  |      |          |      |   |          |  |      
|Pre-tax operating earnings                           |  | $    | 114.3    |      | $ | 125.3    |  | (9)% 
|                                                     |  |      |          |      |   |          |  |      
|Other Data                                           |  |      |          |      |   |          |  |      
|Sales:                                               |  |      |          |      |   |          |  |      
|Private sector                                       |  | $    | 1,446.9  |      | $ | 1,707.8  |  | (15)%
|Public sector                                        |  |      | 1,544.8  |      |   | 1,514.2  |  | 2 %  
|                                                     |  |      |          |      |   |          |  |      
|Total sales                                          |  | $    | 2,991.7  |      | $ | 3,222.0  |  | (7)% 
|                                                     |  |      |          |      |   |          |  |      
|Average account values:                              |  |      |          |      |   |          |  |      
|General account                                      |  | $    | 10,519.0 |      | $ | 9,773.8  |  | 8 %  
|Separate account                                     |  |      | 18,739.2 |      |   | 19,110.9 |  | (2)% 
|                                                     |  |      |          |      |   |          |  |      
|Total average account values                         |  | $    | 29,258.2 |      | $ | 28,884.7 |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|Account values as of period end:                     |  |      |          |      |   |          |  |      
|Private sector                                       |  | $    | 13,900.9 |      | $ | 14,461.0 |  | (4)% 
|Public sector                                        |  |      | 15,790.2 |      |   | 14,889.2 |  | 6 %  
|                                                     |  |      |          |      |   |          |  |      
|Total account values                                 |  | $    | 29,691.1 |      | $ | 29,350.2 |  | 1 %  
|                                                     |  |      |          |      |   |          |  |      
|Pre-tax operating earnings to average account values |  |      | 0.39%    |      |   | 0.43%    |  |      
|                                                     |  |      |          |      |   |          |  |      

The decrease in pre-tax operating earnings primarily was driven by lower asset fees and higher
amortization of DAC, partially offset by additional interest spread income.

The decline in asset fees was driven by the shift in sales
from group annuity to trust products and continued surrenders of existing group annuity contracts.

The increase in amortization of DAC was
related to changes in private sector amortization assumptions driven by actual experience for the declining block of group annuity business.



33



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##### Table of Contents

The following table summarizes the interest spread on Retirement Plans segment average general account
values for the years ended December 31:



|                                                  |  |       |  |      
|------------------------------------------------- |  | ----- |  | -----
|                                                  |  | 2005  |  | 2004 
|Net investment income                             |  | 6.11% |  | 6.42%
|Interest credited                                 |  | 4.23% |  | 4.46%
|                                                  |  |       |  |      
|Interest spread on average general account values |  | 1.88% |  | 1.96%
|                                                  |  |       |  |      

Interest spread margins decreased to 188 basis points in 2005 compared to 196 basis points in
2004. Included in the current year were 20 basis points, or $21.2 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 18 basis points, or $17.7 million, in 2004. Excluding the impact from prepayment
activity, the decrease in margins was driven by the combination of long-duration higher yielding assets rolling over into lower yielding assets as yields on new cash flows were below the portfolio rate. Overall interest spread income improved due to
growth in general account values, offset in part by the lower interest margins described above.

Private sector sales decreased due to the
declining issuance of group annuity contracts described earlier and the related decrease in recurring flows.



34



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##### Table of Contents

Individual Protection

2006 Compared to 2005

The following table summarizes selected financial data for the Companys Individual Protection
segment for the years ended December 31:



|                                                 |  |      |          |      |   |          |  |      
|------------------------------------------------ |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                            |  | 2006 |          | 2005 |   | Change  
|Statements of Income Data                        |  |      |          |      |   |          |  |      
|Revenues:                                        |  |      |          |      |   |          |  |      
|Policy charges:                                  |  |      |          |      |   |          |  |      
|Asset fees                                       |  | $    | 32.8     |      | $ | 28.3     |  | 16 % 
|Cost of insurance charges                        |  |      | 282.1    |      |   | 270.5    |  | 4 %  
|Administrative fees                              |  |      | 64.3     |      |   | 66.3     |  | (3)% 
|Surrender fees                                   |  |      | 11.5     |      |   | 12.6     |  | (9)% 
|                                                 |  |      |          |      |   |          |  |      
|Total policy charges                             |  |      | 390.7    |      |   | 377.7    |  | 3 %  
|Traditional life insurance premiums              |  |      | 165.8    |      |   | 163.3    |  | 2 %  
|Net investment income                            |  |      | 328.2    |      |   | 332.8    |  | (1)% 
|Other                                            |  |      | 0.3      |      |   |         |  | NM   
|                                                 |  |      |          |      |   |          |  |      
|Total revenues                                   |  |      | 885.0    |      |   | 873.8    |  | 1 %  
|                                                 |  |      |          |      |   |          |  |      
|Benefits and expenses:                           |  |      |          |      |   |          |  |      
|Interest credited to policyholder account values |  |      | 179.2    |      |   | 182.4    |  | (2)% 
|Life insurance benefits                          |  |      | 247.5    |      |   | 228.4    |  | 8 %  
|Policyholder dividends on participating policies |  |      | 25.6     |      |   | 33.1     |  | (23)%
|Amortization of DAC                              |  |      | 69.6     |      |   | 89.0     |  | (22)%
|Other operating expenses                         |  |      | 142.4    |      |   | 148.1    |  | (4)% 
|                                                 |  |      |          |      |   |          |  |      
|Total benefits and expenses                      |  |      | 664.3    |      |   | 681.0    |  | (3)% 
|                                                 |  |      |          |      |   |          |  |      
|Pre-tax operating earnings                       |  | $    | 220.7    |      | $ | 192.8    |  | 15 % 
|                                                 |  |      |          |      |   |          |  |      
|Other Data                                       |  |      |          |      |   |          |  |      
|Sales:                                           |  |      |          |      |   |          |  |      
|Corporate-owned life insurance                   |  | $    | 805.9    |      | $ | 657.5    |  | 23 % 
|The BEST of AMERICA variable life series         |  |      | 437.3    |      |   | 426.0    |  | 3 %  
|Traditional/universal life insurance             |  |      | 356.7    |      |   | 352.3    |  | 1 %  
|                                                 |  |      |          |      |   |          |  |      
|Total sales                                      |  | $    | 1,599.9  |      | $ | 1,435.8  |  | 11 % 
|                                                 |  |      |          |      |   |          |  |      
|Policy reserves as of period end:                |  |      |          |      |   |          |  |      
|Individual investment life insurance             |  | $    | 3,676.4  |      | $ | 3,334.7  |  | 10 % 
|Corporate investment life insurance              |  |      | 8,514.4  |      |   | 6,744.6  |  | 26 % 
|Traditional life insurance                       |  |      | 2,014.3  |      |   | 2,132.7  |  | (6)% 
|Universal life insurance                         |  |      | 1,128.9  |      |   | 1,066.7  |  | 6 %  
|                                                 |  |      |          |      |   |          |  |      
|Total policy reserves                            |  | $    | 15,334.0 |      | $ | 13,278.7 |  | 16 % 
|                                                 |  |      |          |      |   |          |  |      
|Insurance in force as of period end:             |  |      |          |      |   |          |  |      
|Individual investment life insurance             |  | $    | 38,762.0 |      | $ | 37,539.8 |  | 3 %  
|Corporate investment life insurance              |  |      | 24,764.4 |      |   | 23,635.5 |  | 5 %  
|Traditional life insurance                       |  |      | 19,800.9 |      |   | 19,940.9 |  | (1)% 
|Universal life insurance                         |  |      | 9,600.7  |      |   | 8,863.4  |  | 8 %  
|                                                 |  |      |          |      |   |          |  |      
|Total insurance in force                         |  | $    | 92,928.0 |      | $ | 89,979.6 |  | 3 %  
|                                                 |  |      |          |      |   |          |  |      

The increase in pre-tax operating earnings primarily was driven by decreased amortization of DAC,
increased cost of insurance charges and lower policyholder dividends on participating policies, partially offset by higher life insurance benefits.



35



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##### Table of Contents

Amortization of DAC declined primarily due to unlocking related to mortality assumptions within the fixed
life line of business resulting in $17.4 million of lower DAC amortization.

Higher cost of insurance charges were due to increased
business in force combined with the aging of the individual life business block. The aging of a block generally increases cost of insurance charges.

Higher life insurance benefits were due to adverse mortality in both the fixed and investment life businesses, partially offset by a $3.3 million waiver of premium reserve release in fixed life during the first
quarter of 2006. The overall increase in total policyholder benefits was partially offset by lower policyholder dividends on participating policies, primarily driven by a lower current dividend scale.

The increase in sales primarily was attributable to significant COLI production during 2006.



36



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##### Table of Contents

2005 Compared to 2004

The following table summarizes selected financial data for the Companys Individual Protection segment for the years ended December 31:



|                                                 |  |      |          |      |   |          |  |      
|------------------------------------------------ |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                            |  | 2005 |          | 2004 |   | Change  
|Statements of Income Data                        |  |      |          |      |   |          |  |      
|Revenues:                                        |  |      |          |      |   |          |  |      
|Policy charges:                                  |  |      |          |      |   |          |  |      
|Asset fees                                       |  | $    | 28.3     |      | $ | 23.1     |  | 23 % 
|Cost of insurance charges                        |  |      | 270.5    |      |   | 259.7    |  | 4 %  
|Administrative fees                              |  |      | 66.3     |      |   | 68.0     |  | (3)% 
|Surrender fees                                   |  |      | 12.6     |      |   | 13.8     |  | (9)% 
|                                                 |  |      |          |      |   |          |  |      
|Total policy charges                             |  |      | 377.7    |      |   | 364.6    |  | 4 %  
|Traditional life insurance premiums              |  |      | 163.3    |      |   | 182.9    |  | (11)%
|Net investment income                            |  |      | 332.8    |      |   | 327.2    |  | 2 %  
|                                                 |  |      |          |      |   |          |  |      
|Total revenues                                   |  |      | 873.8    |      |   | 874.7    |  |     
|                                                 |  |      |          |      |   |          |  |      
|Benefits and expenses:                           |  |      |          |      |   |          |  |      
|Interest credited to policyholder account values |  |      | 182.4    |      |   | 181.5    |  |     
|Life insurance benefits                          |  |      | 228.4    |      |   | 232.3    |  | (2)% 
|Policyholder dividends on participating policies |  |      | 33.1     |      |   | 36.2     |  | (9)% 
|Amortization of DAC                              |  |      | 89.0     |      |   | 94.4     |  | (6)% 
|Other operating expenses                         |  |      | 148.1    |      |   | 159.7    |  | (7)% 
|                                                 |  |      |          |      |   |          |  |      
|Total benefits and expenses                      |  |      | 681.0    |      |   | 704.1    |  | (3)% 
|                                                 |  |      |          |      |   |          |  |      
|Pre-tax operating earnings                       |  | $    | 192.8    |      | $ | 170.6    |  | 13 % 
|                                                 |  |      |          |      |   |          |  |      
|Other Data                                       |  |      |          |      |   |          |  |      
|Sales:                                           |  |      |          |      |   |          |  |      
|Corporate-owned life insurance                   |  | $    | 657.5    |      | $ | 564.5    |  | 16 % 
|The BEST of AMERICA variable life series         |  |      | 426.0    |      |   | 439.6    |  | (3)% 
|Traditional/universal life insurance             |  |      | 352.3    |      |   | 342.2    |  | 3 %  
|                                                 |  |      |          |      |   |          |  |      
|Total sales                                      |  | $    | 1,435.8  |      | $ | 1,346.3  |  | 7 %  
|                                                 |  |      |          |      |   |          |  |      
|Policy reserves as of period end:                |  |      |          |      |   |          |  |      
|Individual investment life insurance             |  | $    | 3,334.7  |      | $ | 3,056.1  |  | 9 %  
|Corporate investment life insurance              |  |      | 6,744.6  |      |   | 5,444.1  |  | 24 % 
|Traditional life insurance                       |  |      | 2,132.7  |      |   | 2,114.9  |  | 1 %  
|Universal life insurance                         |  |      | 1,066.7  |      |   | 982.7    |  | 9 %  
|                                                 |  |      |          |      |   |          |  |      
|Total policy reserves                            |  | $    | 13,278.7 |      | $ | 11,597.8 |  | 14 % 
|                                                 |  |      |          |      |   |          |  |      
|Insurance in force as of period end:             |  |      |          |      |   |          |  |      
|Individual investment life insurance             |  | $    | 37,539.8 |      | $ | 36,503.3 |  | 3 %  
|Corporate investment life insurance              |  |      | 23,635.5 |      |   | 10,904.1 |  | 117 %
|Traditional life insurance                       |  |      | 19,940.9 |      |   | 21,169.1 |  | (6)% 
|Universal life insurance                         |  |      | 8,863.4  |      |   | 8,324.1  |  | 6 %  
|                                                 |  |      |          |      |   |          |  |      
|Total insurance in force                         |  | $    | 89,979.6 |      | $ | 76,900.6 |  | 17 % 
|                                                 |  |      |          |      |   |          |  |      

Pre-tax operating earnings increased due to lower other operating expenses and higher cost of
insurance charges, partially offset by lower life insurance premiums.



37



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##### Table of Contents

Lower other operating expenses primarily resulted from a decline in certain uncapitalized commissions due
to a shift in mix to products with lower commission rates. Also contributing to the decrease were higher capitalization of certain software charges related to a systems consolidation project with an increase in the amounts eligible to be capitalized
and additional mutual fund expense reimbursements from increased separate account values.

The increase in cost of insurance charges
reflects a growing block of investment and universal life business with increased insurance in force. The aging of the block generally tends to increase the cost of insurance charged.

Life insurance premiums decreased due to lower fixed life sales and the impact of changes in reinsurance coverage from yearly renewable term to coinsurance in the traditional life portfolio.

Sales improved primarily due to higher COLI sales, which were driven by several new large cases that closed during the year and a more
favorable legislative environment.

Corporate and Other

2006 Compared to 2005

The following table summarizes selected financial data for the Companys Corporate and Other
segment for the years ended December 31:



|                                                                               |  |      |         |      |   |         |        |  |      
|------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                          |  | 2006 |         | 2005 |   |         | Change
|Statements of Income Data                                                      |  |      |         |      |   |         |        |  |      
|Operating revenues:                                                            |  |      |         |      |   |         |        |  |      
|Net investment income                                                          |  | $    | 354.8   |      | $ | 307.1   |        |  | 16 % 
|Other income                                                                   |  |      | 3.4     |      |   | 1.8     |        |  | 89 % 
|                                                                               |  |      |         |      |   |         |        |  |      
|Total operating revenues                                                       |  |      | 358.2   |      |   | 308.9   |        |  | 16 % 
|                                                                               |  |      |         |      |   |         |        |  |      
|Benefits and operating expenses:                                               |  |      |         |      |   |         |        |  |      
|Interest credited to policyholder account values                               |  |      | 208.7   |      |   | 146.1   |        |  | 43 % 
|Interest expense on debt                                                       |  |      | 65.5    |      |   | 66.3    |        |  | (1)% 
|Other operating expenses                                                       |  |      | 4.0     |      |   | 15.8    |        |  | (75)%
|                                                                               |  |      |         |      |   |         |        |  |      
|Total benefits and operating expenses                                          |  |      | 278.2   |      |   | 228.2   |        |  | 22 % 
|                                                                               |  |      |         |      |   |         |        |  |      
|Pre-tax operating earnings                                                     |  |      | 80.0    |      |   | 80.7    |        |  | (1)% 
|Net realized gains on investments, hedging instruments and hedged items1       |  |      | 1.0     |      |   | 9.5     |        |  | (90)%
|Adjustment to amortization related to net realized gains and losses            |  |      | 9.9     |      |   | (1.0    | )      |  | NM   
|                                                                               |  |      |         |      |   |         |        |  |      
|Income from continuing operations before federal income taxes                  |  | $    | 90.9    |      | $ | 89.2    |        |  | 2 %  
|                                                                               |  |      |         |      |   |         |        |  |      
|Other Data                                                                     |  |      |         |      |   |         |        |  |      
|Account values as of period end  Funding agreements backing medium-term notes |  | $    | 4,599.5 |      | $ | 3,998.2 |        |  | 15 % 
|                                                                               |  |      |         |      |   |         |        |  |      

---

|1 | Excluding periodic net coupon settlements on non-qualifying derivatives and net realized gains and
losses related to securitizations.
|- | -------------------------------------------------------------------------------------------------------------------------------------

Pre-tax operating earnings were virtually flat as lower other operating expenses were
offset by lower interest spread income.

Lower other operating expenses were driven by lower legal expenses in 2006 due to favorable
developments on several cases.

Interest spread income declined primarily due to lower margins in the MTN program.



38



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##### Table of Contents

The Company recorded lower net realized gains on investments, hedging instruments and hedged items during
2006 compared to 2005 primarily due to an increase in gross losses on sales of fixed maturity securities, partially offset by lower current year impairments as 2005 included significant losses on airline industry holdings.

The following table summarizes net realized gains on investments, hedging instruments and hedged items from continuing operations by source for the years
ended December 31:



|                                                                        |  |      |       |   |      |   |       |  
|----------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                                           |  | 2006 |       |   | 2005 |  
|Total realized gains on sales, net of hedging losses                    |  | $    | 88.8  |   |      | $ | 75.6  |  
|Total realized losses on sales, net of hedging gains                    |  |      | (64.8 | ) |      |   | (22.9 | )
|Total other-than-temporary and other investment impairments             |  |      | (17.1 | ) |      |   | (36.8 | )
|Credit default swaps                                                    |  |      | (1.1  | ) |      |   | (7.5  | )
|Periodic net coupon settlements on non-qualifying derivatives           |  |      | 1.9   |   |      |   | 1.1   |  
|Other derivatives                                                       |  |      | (0.6  | ) |      |   | 1.1   |  
|                                                                        |  |      |       |   |      |   |       |  
|Net realized gains on investments, hedging instruments and hedged items |  | $    | 7.1   |   |      | $ | 10.6  |  
|                                                                        |  |      |       |   |      |   |       |  

The Company has a comprehensive portfolio monitoring process for fixed maturity and equity
securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See Part II, Item 7  MD&A  Critical Accounting Policies and Recently Issued
Accounting Standards  Impairment Losses on Investments for a complete discussion of this process.

2005 Compared to 2004

The following table summarizes selected financial data for the Companys Corporate and Other segment for the years ended December 31:



|                                                                                  |  |      |         |   |      |   |         |        |  |      
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                             |  | 2005 |         |   | 2004 |   |         | Change
|Statements of Income Data                                                         |  |      |         |   |      |   |         |        |  |      
|Operating revenues:                                                               |  |      |         |   |      |   |         |        |  |      
|Net investment income                                                             |  | $    | 307.1   |   |      | $ | 220.6   |        |  | 39 % 
|Other income                                                                      |  |      | 1.8     |   |      |   | 15.8    |        |  | (89)%
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Total operating revenues                                                          |  |      | 308.9   |   |      |   | 236.4   |        |  | 31 % 
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Benefits and operating expenses:                                                  |  |      |         |   |      |   |         |        |  |      
|Interest credited to policyholder account values                                  |  |      | 146.1   |   |      |   | 86.7    |        |  | 69 % 
|Interest expense on debt                                                          |  |      | 66.3    |   |      |   | 59.8    |        |  | 11 % 
|Other operating expenses                                                          |  |      | 15.8    |   |      |   | 27.8    |        |  | (43)%
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Total benefits and operating expenses                                             |  |      | 228.2   |   |      |   | 174.3   |        |  | 31 % 
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Pre-tax operating earnings                                                        |  |      | 80.7    |   |      |   | 62.1    |        |  | 30 % 
|Net realized gains (losses) on investments, hedging instruments and hedged items1 |  |      | 9.5     |   |      |   | (43.0   | )      |  | NM   
|Adjustment to amortization of DAC related to net realized gains and losses        |  |      | (1.0    | ) |      |   |        |        |  | NM   
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations before federal income taxes                     |  | $    | 89.2    |   |      | $ | 19.1    |        |  | NM   
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Other Data                                                                        |  |      |         |   |      |   |         |        |  |      
|Account values as of period end  Funding agreements backing medium-term notes    |  | $    | 3,998.2 |   |      | $ | 4,401.6 |        |  | (9)% 
|                                                                                  |  |      |         |   |      |   |         |        |  |      

---

|1 | Excluding periodic net coupon settlements on non-qualifying derivatives and net realized gains and
losses related to securitizations.
|- | -------------------------------------------------------------------------------------------------------------------------------------



39



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##### Table of Contents

Pre-tax operating earnings increased due to higher interest spread income and lower other expenses,
partially offset by a decline in other income.

Interest spread income rose due to increased invested asset levels as a result of higher
excess capital and surplus retained in this segment and improved earnings from common stock and real estate investments. Lower margins on the MTN program offset some of these improvements.

The decline in other expenses primarily was due to a $7.3 million reclassification of activity related to variable interest entities (VIEs) between other expenses and other income.

Other income declined due to the reclassification described above and a decrease in the number of structured products transactions as margins on these
deals compressed.

The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005 compared to net
realized losses in 2004 primarily due to a significant decline in impairment charges due to a generally improved credit environment.

The
following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from continuing operations by source for the years ended December 31:



|                                                                                 |  |      |       |   |      |   |       |  
|-------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                                                    |  | 2005 |       |   | 2004 |  
|Total realized gains on sales, net of hedging losses                             |  | $    | 75.6  |   |      | $ | 65.0  |  
|Total realized losses on sales, net of hedging gains                             |  |      | (22.9 | ) |      |   | (12.7 | )
|Total other-than-temporary and other investment impairments                      |  |      | (36.8 | ) |      |   | (90.6 | )
|Credit default swaps                                                             |  |      | (7.5  | ) |      |   | 0.3   |  
|Periodic net coupon settlements on non-qualifying derivatives                    |  |      | 1.1   |   |      |   | 6.6   |  
|Other derivatives                                                                |  |      | 1.1   |   |      |   | (5.0  | )
|                                                                                 |  |      |       |   |      |   |       |  
|Net realized gains (losses) on investments, hedging instruments and hedged items |  | $    | 10.6  |   |      | $ | (36.4 | )
|                                                                                 |  |      |       |   |      |   |       |  

The Company has a comprehensive portfolio monitoring process for fixed maturity and equity
securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See Part II, Item 7  MD&A  Critical Accounting Policies and Recently Issued
Accounting Standards  Impairment Losses on Investments for a complete discussion of this process.



40



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##### Table of Contents

The following table summarizes for the year ended December 31, 2006 the Companys largest
aggregate losses on sales and write-downs by issuer, the related circumstances giving rise to the losses and the circumstances that may have affected other material investments held:



|                                                                                                                                                                                                                                                                     |  |                             |       |                |           |       |                          |  |   |                   |   |  |   |       |  |   |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | -------------- | --------- | ----- | ------------------------ |  | - | ----------------- | - |  | - | ----- |  | - | ----
|                                                                                                                                                                                                                                                                     |  | Fair valueat
sale(proceeds) |       | YTDloss onsale |           |       | YTDwrite- downs          |  |   | December 31, 2006
|(in millions)                                                                                                                                                                                                                                                        |  |                             |       |                | Holdings1 |       | Netunrealizedgain (loss)
|A global service company that provides financial guarantee products and specialized financial services to public finance and structured finance clients.                                                                                                             |  | $                           | 20.3  |                | $         | (7.6  | )                        |  | $ |                  |   |  | $ |      |  | $ |    
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|U.S. government agency securities that were sold at a loss in 2006. No impairment is necessary on the remaining holdings.                                                                                                                                            |  |                             | 221.3 |                |           | (4.8  | )                        |  |   |                  |   |  |   | 559.4 |  |   | 44.0
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|U.S. government securities that were sold at a loss in 2006. No impairment is necessary on the remaining holdings.                                                                                                                                                   |  |                             | 118.2 |                |           | (2.4  | )                        |  |   |                  |   |  |   | 123.7 |  |   | 10.0
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|A global service company that provides electronic commerce and payment services for businesses and consumers. The securities were sold during 2006.                                                                                                                  |  |                             | 35.6  |                |           | (1.6  | )                        |  |   |                  |   |  |   |      |  |   |    
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|A global service company that designs, manufactures and distributes permanent merchandising systems and point-of-purchase displays for leading consumer branded cosmetics
companies and mass market retailers. No impairment is necessary on the remaining holdings. |  |                             | 1.0   |                |           |      |                          |  |   | (3.7              | ) |  |   | 1.4   |  |   |    
|                                                                                                                                                                                                                                                                     |  |                             |       |                |           |       |                          |  |   |                   |   |  |   |       |  |   |     
|Total                                                                                                                                                                                                                                                                |  | $                           | 396.4 |                | $         | (16.4 | )                        |  | $ | (3.7              | ) |  | $ | 684.5 |  | $ | 54.0
|                                                                                                                                                                                                                                                                     |  |                             |       |                |           |       |                          |  |   |                   |   |  |   |       |  |   |     

---

|1 | Holdings represent amortized cost of fixed maturity securities and cost of equity securities as of
the date indicated.
|- | ----------------------------------------------------------------------------------------------------------------------

No other issuer had aggregate losses on sales and write-downs greater than 2.0% of the
Companys total gross losses on sales and write-downs on fixed maturity and equity securities.



41



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##### Table of Contents

Contractual Obligations and Commitments

The following table summarizes the Companys contractual
obligations and commitments as of December 31, 2006 expected to be paid in the periods presented. Payment amounts reflect the Companys estimate of undiscounted cash flows related to these obligations and commitments. Balance sheet amounts
were determined in accordance with GAAP and in many cases differ significantly from the summation of undiscounted cash flows. The most significant difference relates to future policy benefits related to life and health insurance, which include
discounting.



|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|------------------------------------------------------- |  | ---------------------- | ------- | ----------------------- | - | --------- |  | ---------------- | ------- | ----- | - | -------- |  | - | -------- |  | - | --------
|                                                        |  | Payments due by period |         | Amount per balancesheet
|(in millions)                                           |  | Less than 1year        |         | 1-3 years               |   | 3-5 years |  | More than 5years |         | Total |  
|Debt1:                                                  |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Short-term                                              |  | $                      | 82.3    |                         | $ |          |  | $                |        |       | $ |         |  | $ | 82.3     |  | $ | 75.2    
|Long-term, payable to NFS                               |  |                        | 53.7    |                         |   | 107.4     |  |                  | 107.4   |       |   | 1,799.7  |  |   | 2,068.2  |  |   | 700.0   
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 136.0   |                         |   | 107.4     |  |                  | 107.4   |       |   | 1,799.7  |  |   | 2,150.5  |  |   | 775.2   
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|License obligation                                      |  |                        | 10.3    |                         |   | 23.8      |  |                  | 17.1    |       |   | 0.7      |  |   | 51.9     |  |   |        
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Purchase and lending commitments:                       |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Fixed maturity securities2                              |  |                        | 53.9    |                         |   |          |  |                  |        |       |   |         |  |   | 53.9     |  |   |        
|Commercial mortgage loans2                              |  |                        | 120.1   |                         |   | 1.8       |  |                  |        |       |   |         |  |   | 121.9    |  |   |        
|Limited partnerships3                                   |  |                        | 91.6    |                         |   |          |  |                  |        |       |   |         |  |   | 91.6     |  |   |        
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 265.6   |                         |   | 1.8       |  |                  |        |       |   |         |  |   | 267.4    |  |   |        
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Future policy benefits and claims4:                     |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Fixed annuities and fixed option of variable annuities5 |  |                        | 1,991.3 |                         |   | 2,754.8   |  |                  | 2,038.4 |       |   | 5,099.8  |  |   | 11,884.3 |  |   | 11,140.5
|Life and health insurance5                              |  |                        | 507.0   |                         |   | 1,242.6   |  |                  | 762.8   |       |   | 7,764.9  |  |   | 10,277.3 |  |   | 5,572.6 
|Single premium immediate annuities6                     |  |                        | 243.9   |                         |   | 453.3     |  |                  | 389.2   |       |   | 1,841.3  |  |   | 2,927.7  |  |   | 1,863.9 
|Group pension deferred fixed annuities7                 |  |                        | 1,429.1 |                         |   | 2,513.0   |  |                  | 2,074.9 |       |   | 8,709.2  |  |   | 14,726.2 |  |   | 10,839.0
|Funding agreements backing MTNs2, 8                     |  |                        | 2,167.0 |                         |   | 1,987.8   |  |                  | 915.4   |       |   | 257.4    |  |   | 5,327.6  |  |   | 4,993.4 
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 6,338.3 |                         |   | 8,951.5   |  |                  | 6,180.7 |       |   | 23,672.6 |  |   | 45,143.1 |  |   | 34,409.4
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Cash and securities collateral9:                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Cash collateral on securities lending                   |  |                        | 802.3   |                         |   |          |  |                  |        |       |   |         |  |   | 802.3    |  |   | 802.3   
|Cash collateral on derivative transactions              |  |                        | 171.0   |                         |   |          |  |                  |        |       |   |         |  |   | 171.0    |  |   | 171.0   
|Securities collateral on securities lending             |  |                        | 778.6   |                         |   |          |  |                  |        |       |   |         |  |   | 778.6    |  |   | 778.6   
|Securities collateral on derivative transactions        |  |                        | 12.8    |                         |   |          |  |                  |        |       |   |         |  |   | 12.8     |  |   | 12.8    
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 1,764.7 |                         |   |          |  |                  |        |       |   |         |  |   | 1,764.7  |  |   | 1,764.7 
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         
|Total                                                   |  | $                      | 8,514.9 |                         | $ | 9,084.5   |  | $                | 6,305.2 |       | $ | 25,473.0 |  | $ | 49,377.6 |  | $ | 36,949.3
|                                                        |  |                        |         |                         |   |           |  |                  |         |       |   |          |  |   |          |  |   |         



42



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##### Table of Contents

---

|1 | No contractual provisions exist that could create, increase or accelerate those obligations
presented. The amount presented includes contractual principal payments and interest based on rates in effect at December 31, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | No contractual provisions exist that could create, accelerate or materially increase those
obligations presented.
|- | -----------------------------------------------------------------------------------------------------------------



|3 | Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the
obligations presented are either date or event specific. The date specific requirement mandates the Company fund a specified amount on a stated date provided there are no defaults under the agreement. The event specific requirement is such that the
Company is obligated to fund a specified amount of its capital commitment when all of the properties in a fund become fully stabilized. The ultimate call date of these commitments may extend beyond one year but have been reflected in payments due in
less than one year due to the call features. The Companys capital typically is called within one to four years, depending on when the events contemplated in the documents transpire.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4 | A significant portion of policy contract benefits and claims to be paid do not have stated
contractual maturity dates and may not result in any ultimate payment obligation. Amounts reported herein represent estimated undiscounted cash flows out of the Companys general account related to death, surrender, annuity and other benefit
payments under policy contracts in force at December 31, 2006. Separate account payments are not reflected herein due to the matched nature of these obligations and because the contract owners maintain the investment risk of such deposits.
Estimated payment amounts reported herein were developed based on review of historical results experienced by the Company and the related contractual provisions. Significant assumptions incorporated in the reported amounts include: future policy
lapse rates (including the impact of customer decisions to make future premium payments to keep the related policies in force), coverage levels remaining unchanged from those provided under contracts in force at December 31, 2006, future
interest crediting rates, and the estimated timing of payments. Actual amounts will vary, potentially by a significant amount, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in
future periods.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5 | Contractual provisions exist which could adjust the amount and/or timing of those obligations
reported. Key assumptions related to payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to and from the fixed and separate accounts of the variable annuities, claim experience with respect to
guarantees, and future interest crediting level. Assumptions for future interest crediting levels have been made based on processes consistent with the Companys past practices, which is at the discretion of the Company, subject to guaranteed
minimum crediting rates in many cases and/or subject to contractually obligated increases for specified periods of time. Many of the contracts with potentially accelerated timing of payments are subject to surrender charges which are generally
calculated as a percentage of deposits made and are assessed at declining rates during the first seven years after a deposit is made. Amounts disclosed herein include an estimate of those accelerated payments, net of applicable surrender charges.
See Note 2(g) to the audited consolidated financial statements included in the F pages of this report for a description of the Companys method for establishing life and annuity reserves in accordance with GAAP. Health reserves are immaterial
and are reflected in the less than one-year column.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6 | Certain assumptions have been made about mortality experience and retirement patterns in the amounts
reported. Actual deaths and retirements may differ significantly from those projected, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of
these contracts that could accelerate those obligations presented. The amounts disclosed herein do not include an estimate of those accelerated payments. Most of the contracts with potentially accelerated timing of payments are subject to surrender
charges which are generally calculated as a percentage of the commuted value of the remaining term certain benefit payments and are assessed at declining rates during the first seven policy years.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7 | Contractual provisions exist that could increase those obligations presented. In developing the
estimates of payments due by period, the Company followed the process for determining future interest crediting rates as described in note 5 above.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8 | See Part II, Item 7  MD&A  Off-Balance Sheet Transactions for a detailed
discussion of the Companys MTN program. The amounts presented include contractual principal and interest based on rates in effect at December 31, 2006.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9 | Since the timing of the return of collateral is uncertain, these obligations have been reflected in
payments due in less than one year.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Off-Balance Sheet Transactions

Under the MTN program, NLIC issues funding agreements to an unconsolidated
third party trust to secure notes issued to investors by the trust. The funding agreements rank pari passuwith all other insurance claims of the issuing company in the event of liquidation and should be treated as annuities under
applicable Ohio insurance law. Therefore, the funding agreement obligations are classified as a component of future policy benefits and claims on the consolidated balance sheets. Because the Company is not the primary beneficiary of, and has no
ownership interest in, or control over, the third party trust that issues the notes, the Company does not include the trust in its consolidated financial statements. Since the notes issued by the trust have a secured interest in the funding
agreements issued by the Company, Moodys and S&P assign the same ratings to the notes and the insurance financial strength of the Company.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Sensitive Financial Instruments

The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well
as variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses on specific interest rate, foreign currency and equity price risks to which the Company is exposed and describes
strategies used to attempt to manage these risks. The discussion is limited to financial instruments subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.

Interest Rate Risk

Fluctuations in interest
rates can impact the Companys earnings, cash flows and the fair value of its assets and liabilities. In a declining interest rate environment, the Company may be required to reinvest the proceeds from maturing and prepaying investments at
rates lower than the overall yield of the portfolio, which could reduce future interest spread income. In addition, minimum guaranteed crediting rates (ranging from 1.5% to 3.5% for a majority of the individual annuity contracts in force) on certain
individual annuity contracts could prevent the Company from lowering its interest crediting rates to levels commensurate with prevailing market interest rates, resulting in a reduction to the Companys interest spread income in the event market
interest rates remain at, or decline from December 31, 2006 levels. The average crediting rate for fixed annuity products during 2006 was 3.78% and 4.09% for the Individual Investments and Retirement Plans segments, respectively (compared to
3.85% and 4.23%, respectively, during 2005), well in excess of the guaranteed rates.

The Company attempts to mitigate this risk by
managing the maturity and interest-rate sensitivities of the assets to be consistent with those of the liabilities. In recent periods, management has taken actions to address low interest rate environments and the resulting impact on interest spread
margins, including reducing commissions on fixed annuity sales, launching new products with new guaranteed rates, discontinuing the sale of its leading annual reset fixed annuities and invoking contractual provisions that limit the amount of
variable annuity deposits allocated to the guaranteed fixed option. In addition, the Company adheres to a strict discipline of setting interest crediting rates on new business at levels adequate to provide returns consistent with management
expectations.

Conversely, a rising interest rate environment could result in a reduction of interest spread income or an increase in
policyholder surrenders. Existing general account investments supporting annuity liabilities had a weighted average maturity of approximately 5.7 years as of December 31, 2006. Therefore, the change in yield of the portfolio will lag changes in
market interest rates. This lag increases if the rate of prepayments of securities slows. To the extent the Company sets renewal rates based on current market rates, this will result in reduced interest spreads. Alternatively, if the Company sets
renewal crediting rates while attempting to maintain a desired spread from the portfolio yield, the rates offered by the Company may be less than new money rates offered by competitors. This difference could result in an increase in surrender
activity by policyholders. If the Company was unable to fund surrenders with its cash flow from operations, the Company might need to sell assets, which likely would have declined in value due to the increase in interest rates. The Company attempts
to mitigate this risk by offering products that assess surrender charges and/or market value adjustments at the time of surrender, and by managing the maturity and interest-rate sensitivities of the assets to approximate those of the liabilities.

Asset/Liability Management Strategies to Manage Interest Rate Risk

The Company employs an asset/liability management approach tailored to the specific requirements of each of its products. Each line of business has an investment policy based on its specific
characteristics. The policy establishes asset maturity and duration, quality and other relevant guidelines.



44



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##### Table of Contents

An underlying pool or pools of investments, including combinations of dedicated and common asset pools,
support each general account line of business. Dedicated pools of assets have been created for certain liabilities or groups of liabilities within most lines and represent the majority of the pools. These pools consist of whole assets purchased
specifically for the underlying line of business. In general, assets placed in any given portfolio remain there until they mature (or are called), but active management of specific securities, sectors and several top-down risks may result in
portfolio turnover or transfers among the various portfolios. The common asset pools are generally maintained on the basis of the desired maturity characteristics of the assets used (e.g., 4 to 7 years weighted average life). The various lines of
business are given ownership percentages of assets acquired by the pools depending on their contribution to the amounts purchased in the pools, in a manner analogous to investment year allocations. This methodology is sometimes referred
to as synthetic segmentation.

Investment strategies are executed by dedicated investment professionals based on the guidance established
for the various pools. To assist them in this regard, they receive periodic projections of investment needs from each lines management team. Line of business management teams, investment portfolio managers and finance professionals
periodically evaluate how well assets purchased and the underlying portfolio match the underlying liabilities for each line. Strategy adjustments are made when needed.

Using this information, in conjunction with each lines investment strategy, actual asset purchases or commitments are made. In addition, plans for future asset purchases are formulated when appropriate. This
process is repeated frequently enough so that invested assets for each line match its investment needs as closely as possible. The primary objectives are to ensure that each lines liabilities are invested in accordance with its investment
strategy and that over or under investment is minimized.

As part of this process, the investment portfolio managers provide each
lines actuaries with forecasts of anticipated rates that the lines future investments are expected to produce. This information, in combination with yields attributable to the lines current investments and its investment
rollovers, gives the line actuaries data to use in computing and declaring interest crediting rates for their lines of business in conjunction with management approval.

There are two approaches to developing investment policies:



| |  |  | For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the Company attempts to manage risk with
a combination cash matching/duration matching strategy. Duration is a measure of the sensitivity of price to changes in interest rates. For a rate movement of 100 basis points the fair value of liabilities with a duration of 5 years would change by
approximately 5%. For this type of liability, the Company generally targets an asset/liability duration mismatch of -0.25 to +0.50 years. In addition, the Company attempts to minimize asset and liability cash flow mismatches, especially over
the first five years. However, the desired degree of cash matching is balanced against the cost of cash matching.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For liabilities where the Company has the right to modify the credited rate and policyholders also have options, the Companys risk management process
includes modeling both the assets and liabilities over multiple stochastic scenarios. The Company considers a range of potential policyholder behavior as well as the specific liability crediting strategy. This analysis, combined with appropriate
risk tolerances, drive the Companys investment policy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Use of Derivatives to Manage Interest Rate Risk

The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be exposed to interest rate
risk due to the mismatch between variable rate liabilities and fixed rate assets. In an effort 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. In an effort 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.



45



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##### Table of Contents

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. In an
effort 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.



46



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##### Table of Contents

Characteristics of Interest Rate Sensitive Financial Instruments

The table below provides information about the Companys financial instruments as of December 31, 2006 that are sensitive to changes in interest
rates. Insurance contracts that subject the Company to significant mortality risk, including life insurance contracts and life-contingent immediate annuities, do not meet the definition of a financial instrument and are not included in the table.



|                                            |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|------------------------------------------- |  | --------------------------------------- | ------- | --------------- | - | --------------- |  | - | ------- | - | ---- | - | ----------- |  | ----- | ------- |  | - | ------- |  | - | -------- |  | - | -------- |  | - | --------
|                                            |  | Estimated year of maturities/repayments |         | 2006 Fair Value |   | 2005 Fair Value
|(in millions)                               |  | 2007                                    |         | 2008            |   | 2009            |  |   | 2010    |   | 2011 |   | There-after |  | Total |         | 
|Assets                                      |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Fixed maturity securities:                  |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Corporate bonds:                            |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 1,940.3 |                 | $ | 1,815.1         |  | $ | 1,559.8 |   |      | $ | 1,568.4     |  | $     | 2,028.5 |  | $ | 5,705.2 |  | $ | 14,617.3 |  | $ | 14,733.7 |  | $ | 16,349.7
|Weighted average interest rate              |  |                                         | 5.90%   |                 |   | 6.00%           |  |   | 6.58%   |   |      |   | 6.10%       |  |       | 6.12%   |  |   | 6.10%   |  |   | 6.12%    |  |   |          |  |   |         
|Mortgage and other asset-backed securities: |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 1,152.4 |                 | $ | 876.2           |  | $ | 766.0   |   |      | $ | 783.6       |  | $     | 794.3   |  | $ | 5,223.3 |  | $ | 9,595.8  |  | $ | 9,508.6  |  | $ | 9,423.3 
|Weighted average interest rate              |  |                                         | 5.72%   |                 |   | 5.32%           |  |   | 5.46%   |   |      |   | 5.43%       |  |       | 5.66%   |  |   | 5.54%   |  |   | 5.54%    |  |   |          |  |   |         
|Other fixed maturity securities:            |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 42.2    |                 | $ | 55.3            |  | $ | 74.3    |   |      | $ | 30.9        |  | $     | 45.1    |  | $ | 736.2   |  | $ | 984.0    |  | $ | 1,033.1  |  | $ | 1,425.1 
|Weighted average interest rate              |  |                                         | 5.30%   |                 |   | 5.12%           |  |   | 5.79%   |   |      |   | 5.21%       |  |       | 5.02%   |  |   | 6.28%   |  |   | 6.05%    |  |   |          |  |   |         
|Mortgage loans on real estate:              |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 181.6   |                 | $ | 264.5           |  | $ | 269.2   |   |      | $ | 391.2       |  | $     | 865.3   |  | $ | 4,871.5 |  | $ | 6,843.3  |  | $ | 8,060.7  |  | $ | 8,503.0 
|Weighted average interest rate              |  |                                         | 6.79%   |                 |   | 6.04%           |  |   | 6.55%   |   |      |   | 6.62%       |  |       | 6.53%   |  |   | 6.11%   |  |   | 6.22%    |  |   |          |  |   |         
|                                            |  |                                         |         |                 |   |                 |  |   |        
|Liabilities                                 |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Individual deferred fixed annuities:        |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 2,251.6 |                 | $ | 1,603.3         |  | $ | 1,257.2 |   |      | $ | 1,080.6     |  | $     | 953.2   |  | $ | 3,894.3 |  | $ | 11,040.2 |  | $ | 9,416.4  |  | $ | 11,296.6
|Weighted average crediting rate             |  |                                         | 3.24%   |                 |   | 3.14%           |  |   | 3.15%   |   |      |   | 3.22%       |  |       | 3.29%   |  |   | 3.30%   |  |   |          |  |   |          |  |   |         
|Group pension deferred fixed annuities:     |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 1,526.4 |                 | $ | 1,325.4         |  | $ | 1,138.7 |   |      | $ | 997.8       |  | $     | 812.8   |  | $ | 5,037.9 |  | $ | 10,839.0 |  | $ | 10,978.0 |  | $ | 10,880.3
|Weighted average crediting rate             |  |                                         | 4.08%   |                 |   | 4.05%           |  |   | 4.04%   |   |      |   | 4.04%       |  |       | 4.04%   |  |   | 4.05%   |  |   |          |  |   |          |  |   |         
|Funding agreements backing MTNs:            |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 2,014.9 |                 | $ | 1,064.6         |  | $ | 775.2   |   |      | $ | 522.2       |  | $     | 357.7   |  | $ |        |  | $ | 4,734.6  |  | $ | 4,611.8  |  | $ | 3,998.3 
|Weighted average crediting rate             |  |                                         | 4.45%   |                 |   | 4.44%           |  |   | 4.30%   |   |      |   | 4.26%       |  |       | 2.59%   |  |   |        |  |   |          |  |   |          |  |   |         
|Immediate annuities:                        |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 247.5   |                 | $ | 220.5           |  | $ | 194.6   |   |      | $ | 165.1       |  | $     | 141.3   |  | $ | 894.9   |  | $ | 1,863.9  |  | $ | 449.0    |  | $ | 432.0   
|Weighted average crediting rate             |  |                                         | 6.63%   |                 |   | 6.68%           |  |   | 6.72    | % |      |   | 6.77%       |  |       | 6.83%   |  |   | 6.88%   |  |   |          |  |   |          |  |   |         
|Short-term debt:                            |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       | 75.2    |                 | $ |                |  | $ |        |   |      | $ |            |  | $     |        |  | $ |        |  | $ | 75.2     |  | $ | 75.2     |  | $ | 242.3   
|Weighted average interest rate              |  |                                         | 5.32%   |                 |   |                |  |   |        |   |      |   |            |  |       |        |  |   |        |  |   | 5.32%    |  |   |          |  |   |         
|Long-term debt:                             |  |                                         |         |                 |   |                 |  |   |         |   |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                   |  | $                                       |        |                 | $ |                |  | $ |        |   |      | $ |            |  | $     |        |  | $ | 700.0   |  | $ | 700.0    |  | $ | 809.3    |  | $ | 822.8   
|Weighted average interest rate              |  |                                         |        |                 |   |                |  |   |        |   |      |   |            |  |       |        |  |   | 7.67%   |  |   | 7.67%    |  |   |          |  |   |         



47



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##### Table of Contents

|                                              |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ------- | --------------- | - | ----- | --------------- | ---- | ------- | ---- | - | ------------ |  | ----- | ------- |  | - | ------- |  | - | ------- |  | - | ----- | - |  | - | ----- | -
|                                              |  | Estimated year of maturities/repayments |         | 2006 Fair Value |   |       | 2005 Fair Value |     
|(in millions, except settlement prices)       |  | 2007                                    |         | 2008            |   | 2009  |                 | 2010 |         | 2011 |   | There- after |  | Total |         | 
|Derivative Financial Instruments              |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Interest rate swaps:                          |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Pay fixed/receive variable:                   |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 273.8   |                 | $ | 413.3 |                 | $    | 563.4   |      | $ | 403.8        |  | $     | 841.3   |  | $ | 549.5   |  | $ | 3,045.1 |  | $ | (95.4 | ) |  | $ | (69.6 | )
|Weighted average pay rate                     |  |                                         | 4.61%   |                 |   | 4.80% |                 |      | 4.96%   |      |   | 4.87%        |  |       | 5.01%   |  |   | 5.16%   |  |   | 4.95%   |  |   |       |   |  |   |       |  
|Weighted average receive rate1                |  |                                         | 5.40%   |                 |   | 5.37% |                 |      | 5.37%   |      |   | 5.43%        |  |       | 5.50%   |  |   | 5.45%   |  |   | 5.43%   |  |   |       |   |  |   |       |  
|Pay fixed/receive variable, forward starting: |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ | 177.9   |  | $ | 177.9   |  | $ | (0.8  | ) |  | $ | (0.2  | )
|Weighted average pay rate                     |  |                                         |        |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   | 5.13%   |  |   | 5.13%   |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         |        |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   | 5.36%   |  |   | 5.36%   |  |   |       |   |  |   |       |  
|Pay variable/receive fixed:                   |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 489.4   |                 | $ | 228.8 |                 | $    |        |      | $ |             |  | $     | 253.8   |  | $ | 36.5    |  | $ | 1,008.5 |  | $ | 214.1 |   |  | $ | 280.4 |  
|Weighted average pay rate1                    |  |                                         | 5.74%   |                 |   | 5.37% |                 |      |        |      |   |             |  |       | 5.88%   |  |   | 6.49%   |  |   | 5.72%   |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         | 4.56%   |                 |   | 5.21% |                 |      |        |      |   |             |  |       | 6.18%   |  |   | 5.33%   |  |   | 5.14%   |  |   |       |   |  |   |       |  
|Pay variable/receive variable:                |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ |        |  | $ |      |   |  | $ | 13.5  |  
|Weighted average pay rate1                    |  |                                         |        |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Weighted average receive rate1                |  |                                         |        |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Pay fixed/receive fixed:                      |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 44.0    |                 | $ | 16.8  |                 | $    | 64.1    |      | $ | 56.8         |  | $     | 67.8    |  | $ | 135.5   |  | $ | 385.0   |  | $ | (46.4 | ) |  | $ | (42.6 | )
|Weighted average pay rate                     |  |                                         | 5.98%   |                 |   | 5.83% |                 |      | 5.73%   |      |   | 3.56%        |  |       | 5.61%   |  |   | 5.10%   |  |   | 5.20%   |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         | 3.34%   |                 |   | 4.04% |                 |      | 4.16%   |      |   | 4.60%        |  |       | 5.28%   |  |   | 6.10%   |  |   | 5.00%   |  |   |       |   |  |   |       |  
|Convertible asset swaps:                      |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ |        |  | $ |      |   |  | $ | 0.2   |  
|Weighted average pay rate                     |  |                                         |        |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         |        |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Credit default swaps sold:                    |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 106.0   |                 | $ | 115.0 |                 | $    | 24.5    |      | $ | 55.0         |  | $     | 16.0    |  | $ | 25.0    |  | $ | 341.5   |  | $ | 2.5   |   |  | $ | 3.0   |  
|Weighted average receive rate                 |  |                                         | 1.00%   |                 |   | 0.57% |                 |      | 0.59%   |      |   | 0.73%        |  |       | 1.76%   |  |   | 0.40%   |  |   | 0.77%   |  |   |       |   |  |   |       |  
|Credit default swaps purchased:               |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 0.5     |                 | $ | 11.5  |                 | $    | 0.8     |      | $ |             |  | $     | 0.5     |  | $ | 22.0    |  | $ | 35.3    |  | $ | (0.2  | ) |  | $ |      |  
|Weighted average pay rate                     |  |                                         | 5.00%   |                 |   | 1.10% |                 |      | 5.00%   |      |   |             |  |       |        |  |   | 0.56%   |  |   | 0.89%   |  |   |       |   |  |   |       |  
|Embedded derivatives:                         |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ | 20.0    |  | $ | 20.0    |  | $ | 54.5  |   |  | $ | 7.2   |  
|Total return swaps2:                          |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 75.0    |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ | 75.0    |  | $ | 0.1   |   |  | $ | 0.1   |  
|Treasury futures:                             |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Short positions:                              |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 4.4     |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ | 4.4     |  | $ |      |   |  | $ |      |  
|Weighted average settlement price             |  |                                         | 106.7   |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   | 106.7   |  |   |       |   |  |   |       |  
|Long positions:                               |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 161.6   |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ | 161.6   |  | $ | (2.1  | ) |  | $ | 0.3   |  
|Weighted average settlement price             |  |                                         | 108.8   |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   | 108.8   |  |   |       |   |  |   |       |  
|Equity futures:                               |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Short positions:                              |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 140.3   |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ | 140.3   |  | $ | (0.2  | ) |  | $ | 1.4   |  
|Weighted average settlement price             |  |                                         | 1,426.4 |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   | 1,426.4 |  |   |       |   |  |   |       |  
|Long positions:                               |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 1.3     |                 | $ |      |                 | $    |        |      | $ |             |  | $     |        |  | $ |        |  | $ | 1.3     |  | $ |      |   |  | $ |      |  
|Weighted average settlement price             |  |                                         | 1,427.1 |                 |   |      |                 |      |        |      |   |             |  |       |        |  |   |        |  |   | 1,427.1 |  |   |       |   |  |   |       |  
|Option contracts                              |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Long positions:                               |  |                                         |         |                 |   |       |                 |      |         |      |   |              |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 88.5    |                 | $ | 11.2  |                 | $    | 92.7    |      | $ | 218.3        |  | $     | 571.1   |  | $ | 602.5   |  | $ | 1,584.3 |  | $ | 70.0  |   |  | $ | 30.8  |  
|Weighted average settlement price             |  |                                         | 1,333.7 |                 |   | 972.7 |                 |      | 1,068.4 |      |   | 1,124.3      |  |       | 1,035.0 |  |   | 1,128.0 |  |   | 1,100.9 |  |   |       |   |  |   |       |  

---

|1 | Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of
December 31, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------



|2 | Total return swaps are based on the Lehman CMBS index.
|- | ------------------------------------------------------



48



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##### Table of Contents

Additional information about the characteristics of the financial instruments and assumptions underlying
the data presented in the table on the proceeding page are as follows:

Mortgage-backed and other asset-backed securities: The year
of maturity is determined based on the terms of the securities and the current rate of prepayment of the underlying pools of mortgages or assets. The Company limits its exposure to prepayments by purchasing less volatile types of MBS and ABS
investments.

Corporate bonds and other fixed maturity securities and mortgage loans on real estate: The maturity year is that of
the security or loan.

Individual deferred fixed annuities:The maturity year is based on the expected date of policyholder
withdrawal, taking into account actual experience, current interest rates and contract terms. Individual deferred fixed annuities are certain individual annuity contracts, which are also subject to surrender charges calculated as a percentage of the
deposits made and assessed at declining rates during the first seven years after a deposit is made. Also included in deferred fixed annuities were $948.3 million of participating group annuity contracts in 2006 ($6.70 billion in 2005). As of
December 31, 2006, individual annuity general account liabilities totaling $5.12 billion ($5.69 billion in 2005) were in contracts where the crediting rate is reset periodically with portions resetting in each calendar quarter, and $795.9
million that reset annually compared to $936.9 million in 2005. Individual fixed annuity policy reserves of $2.29 billion in 2006 ($3.33 billion in 2005) were in contracts that adjust the crediting rate every five years. Individual fixed annuity
policy reserves of $684.0 million in 2006 were in contracts that adjust the crediting rate every three years compared to $926.2 million in 2005. The average crediting rate is calculated as the difference between the projected yield of the assets
backing the liabilities and a targeted interest spread. However, for certain individual annuities the credited rate is also adjusted to partially reflect current new money rates.

Group pension deferred fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and
contract terms. Included were group annuity contracts representing $10.81 billion and $10.84 billion, respectively, of general account liabilities as of December 31, 2006 and 2005, which are generally subject to market value adjustment upon
surrender and which also may be subject to surrender charges. Of the total group annuity liabilities in 2006, $9.76 billion ($9.69 billion in 2005) were in contracts where the crediting rate is reset quarterly, $585.2 million ($616.9 million in
2005) were in contracts that adjust the crediting rate on an annual basis with portions resetting in each calendar quarter, and $484.6 million ($530.3 million in 2005) were in contracts where the crediting rate is reset annually on January 1.

Funding agreements backing MTNs: As of December 31, 2006 and 2005, fixed annuity policy reserves of $4.60 billion and $4.00
billion, respectively, relate to funding agreements issued in conjunction with the Companys MTN program where the crediting rate is either fixed for the term of the contract or variable, based on an underlying index.

Immediate annuities: Non-life contingent contracts in payout status where the Company has guaranteed periodic payments, typically monthly, are
included. The maturity year is based on the term of the contract.

Short-term debt and long-term debt: The maturity year is the
stated maturity date of the obligation.

Derivative financial instruments:The maturity year is based on the term of the related
contract. Interest rate swaps include cross-currency interest rate swaps that eliminate all of the Companys existing asset and liability foreign currency exposure. Cross-currency interest rate swaps in place against each foreign currency
obligation hedge the Company against adverse currency movements with respect to both period interest payments and principal repayment. Underlying details by currency have therefore been omitted. Variable swap rates and settlement prices reflect
rates and prices in effect as of December 31, 2006.

Foreign Currency Risk Management

In conjunction with the Companys MTN program, the Company periodically issues both fixed and variable rate liabilities denominated in foreign
currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange rates and related interest rates. In an effort to manage these risks, the Company enters into cross-currency
interest rate swaps to convert these liabilities to a U.S. dollar rate.



49



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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. In an effort 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.

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

Asset fees calculated as a percentage of the separate account assets are a significant source of revenue to the Company. As of December 31, 2006, approximately 82% of separate account assets
were invested in equity mutual funds (approximately 83% as of December 31, 2005). Gains and losses in the equity markets result in corresponding increases and decreases in the Companys separate account assets and asset fee revenue. In
addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to
accelerate the amortization of DAC.

The Companys long-term assumption for net separate account returns is 8% annual growth. If
equity markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than had the
Companys long-term assumption for net separate account returns been realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would
evaluate its DAC balance and underlying assumptions to determine whether unlocking is appropriate. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting
profitability, including the possibility of unlocking of DAC assumptions.

Many of the Companys individual variable annuity contracts
offer guaranteed minimum death benefit (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 2000, the Company managed this risk primarily by
entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the economic value of the 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 futures are not designated as hedges and, therefore, hedge accounting is not applied. The
Companys economic evaluation of the GMDB obligation is not consistent with current accounting treatment of the GMDB obligation. Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2006.
As of December 31, 2006 and 2005, the net amount at risk was $562.4 million and $1.08 billion before reinsurance, respectively, and $119.0 million and $178.4 million net of reinsurance, respectively. As of December 31, 2006 and 2005, the
Companys reserve for GMDB claims was $29.3 million and $26.9 million, respectively. See Note 3 to the audited consolidated financial statements included in the F pages of this report for discussion of the impact of adopting a new accounting
principle regarding GMDB reserves in 2004.



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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. Subsequent changes in the fair value of the embedded derivative are recognized in earnings. 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. Quarterly, the Company purchases S&P 500 Index put options and over-the-counter basket put options, which are constructed in
order to minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) to the audited consolidated financial statements included in the F pages of this report for discussion of economic hedges. The objective of the GMAB economic
hedge strategy is to manage the exposures with risk beyond a level considered acceptable to the Company. The Company is exposed to equity market risk related to the GMAB feature should the growth in the underlying investments, including any GTO
investment, fail to reach the guaranteed return level. The GMAB embedded derivative is likely to create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in
2006 and 2005. As of December 31, 2006 and 2005, the balance of the GMAB embedded derivative was $116.3 million and $67.9 million, respectively. The increase in the balance of the GMAB embedded derivative was driven by the value of new business
sold during 2006.

Beginning in March 2005, the Company began offering a hybrid GMAB/guaranteed minimum withdrawal benefit (GLWB) through
its 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 will 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 GLWB
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.

In March 2006, the Company added L.INC, a stand-alone GLWB, to compliment CPPLI in its product offerings. This
rider is very similar to the hybrid benefit discussed above. L.INC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age without the liquidity loss associated with
annuitization. The lifetime withdrawal feature also is being economically hedged. Currently, the Company is using S&P 500 Index futures and U.S. Treasury futures to hedge exposure to declining equity and interest rate markets, respectively.
Similar to GMDBs, the Companys economic valuation of the lifetime income obligation is not consistent with the accounting treatment of the obligation. Therefore, hedging activity is likely to create volatility in earnings; however, the
economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006.

Inflation

The rate of inflation did not have a material effect on the revenues or operating results of the Company during 2006, 2005 or 2004.

ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Part IV, Item 15 
Exhibits, Financial Statement Schedules for an index to the Companys audited consolidated financial statements included in the F pages of this report.

Semi-annual and annual reports are sent to contract owners of the variable annuity and life insurance contracts issued through registered separate accounts of the Company.



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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Companys disclosure controls and procedures are effective as of the end of the
period covered by this Annual Report.

Changes in Internal Control Over Financial Reporting

Effective April 1, 2006, the Company implemented a series of new enterprise resource planning (ERP) modules, including a new general ledger and chart
of accounts and new consolidation, reporting and purchasing tools. The introduction of these new ERP modules and the related workflow changes resulted in changes to many of the Companys financial reporting controls and procedures. Such changes
were identified and planned prior to their introduction into the Companys internal controls over financial reporting. Following implementation, these new controls were validated according to the Companys established processes. The
integration of the ERP modules and related workflow changes were substantially completed during 2006. The system changes were undertaken to standardize accounting systems, improve management reporting and consolidate accounting functions for the
Company, its subsidiaries and affiliates, and were not undertaken in response to any actual or perceived significant deficiencies in the Companys internal control over financial reporting.

There have been no changes during the Companys fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.

ITEM 9B OTHER INFORMATION

None.

PART III

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Omitted due to reduced disclosure format.

ITEM 11 EXECUTIVE COMPENSATION

Omitted due to reduced disclosure format.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Omitted due to reduced disclosure format.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Omitted due to reduced
disclosure format.



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##### Table of Contents

ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES

The table below presents fees for services rendered by
KPMG LLP, the Companys independent registered public accounting firm, for the years ended December 31 for the following: (1) the audits of the audited consolidated financial statements for NFS and its subsidiaries, including
consolidated or individual financial statement audits of other NFS subsidiaries, where appropriate, for each of the years ended December 31, 2006 and 2005; (2) the reviews of the consolidated financial statements included in the Quarterly
Reports on Form 10-Q for NFS and NLIC filed during each year indicated; and (3) fees billed for other services rendered by KPMG LLP.



|                    |  |      |           |      |   |          
|------------------- |  | ---- | --------- | ---- | - | ---------
|                    |  | 2006 |           | 2005
|Audit fees          |  | $    | 6,051,200 |      | $ | 5,341,800
|Audit related fees1 |  |      | 1,731,500 |      |   | 844,353  
|Tax fees2           |  |      | 30,000    |      |   | 60,200   
|                    |  |      |           |      |   |          
|Total fees          |  | $    | 7,812,700 |      | $ | 6,246,353
|                    |  |      |           |      |   |          

---

|1 | Audit related fees principally were for reports on internal controls (Statement on Auditing Standards
No. 70, Service Organizations); financial statement audits of employee benefit plans; consultations with management regarding the accounting treatment of transactions or potential impact of rulings prescribed by the SEC, FASB or other
accounting standard setting bodies; and other audit related agreed-upon procedures reports.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Tax fees were for tax consultation regarding federal tax issues resulting from IRS examinations,
assistance with IRS or other taxing authority audits, and activities such as tax planning and preparing tax returns to be filed with various taxing authorities.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

None of the above fees fall under the de minimis exception to the pre-approval rules.

The NLIC Audit Committee (on behalf of the Company and its subsidiaries) has adopted pre-approval policies and procedures for services provided by the independent registered public accounting firm. The Audit Committee approves four
categories of services: audit, audit related, tax and non-audit services. Each year the independent registered public accounting firm submits to the Audit Committee a list of services, and a fee is estimated and presented to the Audit Committee for
approval. The Audit Committee pre-approves both the services and the related fees. Requests for the independent registered public accounting firm to provide any additional services or to increase the budget for approved services during the course of
the year also must be pre-approved by the Audit Committee. Such specific pre-approval may be provided at a meeting of the Audit Committee or between meetings, as necessary, by the Chairman of the Audit Committee to whom pre-approval has been
delegated. The Chairman is directed to update the full Audit Committee at the next Audit Committee meeting for any interim approvals granted. The Audit Committee periodically monitors the services rendered by and actual fees paid to the independent
registered public accounting firm to ensure that such services are within the parameters it pre-approved.



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PART IV

ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES



|                                                                                                                       |  |     
|---------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                       |  | Page
|Consolidated Financial Statements                                                                                      |  |     
|                                                                                                                       | 
|Report of Independent Registered Public Accounting Firm                                                                |  | F-1 
|                                                                                                                       | 
|Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                                 |  | F-2 
|                                                                                                                       | 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                           |  | F-3 
|                                                                                                                       | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and 2004                   |  | F-4 
|                                                                                                                       | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                             |  | F-5 
|                                                                                                                       | 
|Notes to Consolidated Financial Statements                                                                             |  | F-6 
|                                                                                                                       | 
|Financial Statement Schedules                                                                                          |  |     
|                                                                                                                       | 
|Schedule I  Consolidated Summary of Investments  Other Than Investments in Related Parties as of December 31, 2006   |  | F-48
|                                                                                                                       | 
|Schedule III  Supplementary Insurance Information as of December 31, 2006, 2005 and 2004 and for the years then ended |  | F-49
|                                                                                                                       | 
|Schedule IV  Reinsurance as of December 31, 2006, 2005 and 2004 and for the years then ended                          |  | F-50
|                                                                                                                       | 
|Schedule V  Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004                    |  | F-51
|                                                                                                                       | 
|Exhibits                                                                                                               |  | F-53

All other schedules are omitted because they are not applicable or not required, or because the
required information has been included in the audited consolidated financial statements or notes thereto.



54



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and
Shareholder

Nationwide Life Insurance Company:

We have audited the consolidated financial statements of Nationwide Life Insurance Company and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, 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.



|                            
|----------------------------
|/s/ KPMG LLP                
|Columbus, Ohio March 1, 2007



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Consolidated Statements of Income

(in millions)



|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | -
|                                                                                   |  | Years ended December 31, |        
|                                                                                   |  | 2006                     |         | 2005 |   | 2004    | 
|Revenues:                                                                          |  |                          |         |      |   |         |  |   |         |  
|Policy charges                                                                     |  | $                        | 1,132.6 |      | $ | 1,055.1 |  | $ | 1,025.2 |  
|Traditional life insurance and immediate annuity premiums                          |  |                          | 308.3   |      |   | 260.0   |  |   | 270.4   |  
|Net investment income                                                              |  |                          | 2,058.5 |      |   | 2,105.2 |  |   | 2,000.5 |  
|Net realized gains (losses) on investments, hedging instruments and hedged items   |  |                          | 7.1     |      |   | 10.6    |  |   | (36.4   | )
|Other income                                                                       |  |                          | 0.2     |      |   | 2.2     |  |   | 9.8     |  
|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|Total revenues                                                                     |  |                          | 3,506.7 |      |   | 3,433.1 |  |   | 3,269.5 |  
|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|Benefits and expenses:                                                             |  |                          |         |      |   |         |  |   |         |  
|Interest credited to policyholder account values                                   |  |                          | 1,330.1 |      |   | 1,331.0 |  |   | 1,277.2 |  
|Life insurance and annuity benefits                                                |  |                          | 450.3   |      |   | 377.5   |  |   | 369.2   |  
|Policyholder dividends on participating policies                                   |  |                          | 25.6    |      |   | 33.1    |  |   | 36.2    |  
|Amortization of deferred policy acquisition costs                                  |  |                          | 450.3   |      |   | 466.3   |  |   | 410.1   |  
|Interest expense on debt, primarily with Nationwide Financial Services, Inc. (NFS) |  |                          | 65.5    |      |   | 66.3    |  |   | 59.8    |  
|Other operating expenses                                                           |  |                          | 531.8   |      |   | 538.8   |  |   | 582.0   |  
|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|Total benefits and expenses                                                        |  |                          | 2,853.6 |      |   | 2,813.0 |  |   | 2,734.5 |  
|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|Income from continuing operations before federal income tax expense                |  |                          | 653.1   |      |   | 620.1   |  |   | 535.0   |  
|Federal income tax expense                                                         |  |                          | 30.6    |      |   | 95.6    |  |   | 120.0   |  
|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|Income from continuing operations                                                  |  |                          | 622.5   |      |   | 524.5   |  |   | 415.0   |  
|Cumulative effect of adoption of accounting principle, net of taxes                |  |                          |        |      |   |        |  |   | (3.3    | )
|                                                                                   |  |                          |         |      |   |         |  |   |         |  
|Net income                                                                         |  | $                        | 622.5   |      | $ | 524.5   |  | $ | 411.7   |  
|                                                                                   |  |                          |         |      |   |         |  |   |         |  

See accompanying notes to consolidated financial statements.



F-2



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Consolidated Balance Sheets

(in millions, except per share amounts)



|                                                                                         |  |              |           |      |   |          
|---------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                                                         |  | December 31,
|                                                                                         |  | 2006         |           | 2005
|Assets                                                                                   |  |              |           |      |   |          
|Investments:                                                                             |  |              |           |      |   |          
|Securities available-for-sale, at fair value:                                            |  |              |           |      |   |          
|Fixed maturity securities (cost $25,197.2 in 2006; $26,658.9 in 2005)                    |  | $            | 25,275.4  |      | $ | 27,198.1 
|Equity securities (cost $28.5 in 2006; $35.1 in 2005)                                    |  |              | 34.4      |      |   | 42.1     
|Mortgage loans on real estate, net                                                       |  |              | 8,202.2   |      |   | 8,458.9  
|Real estate, net                                                                         |  |              | 54.8      |      |   | 84.9     
|Policy loans                                                                             |  |              | 639.2     |      |   | 604.7    
|Other long-term investments                                                              |  |              | 598.9     |      |   | 641.5    
|Short-term investments, including amounts managed by a related party                     |  |              | 1,722.0   |      |   | 1,596.6  
|                                                                                         |  |              |           |      |   |          
|Total investments                                                                        |  |              | 36,526.9  |      |   | 38,626.8 
|                                                                                         |  |             
|Cash                                                                                     |  |              | 0.5       |      |   | 0.9      
|Accrued investment income                                                                |  |              | 323.6     |      |   | 344.0    
|Deferred policy acquisition costs                                                        |  |              | 3,758.0   |      |   | 3,597.9  
|Other assets                                                                             |  |              | 2,001.5   |      |   | 1,699.1  
|Assets held in separate accounts                                                         |  |              | 67,351.9  |      |   | 62,689.8 
|                                                                                         |  |              |           |      |   |          
|Total assets                                                                             |  | $            | 109,962.4 |      | $ | 106,958.5
|                                                                                         |  |              |           |      |   |          
|Liabilities and Shareholders Equity                                                     |  |              |           |      |   |          
|Liabilities:                                                                             |  |              |           |      |   |          
|Future policy benefits and claims                                                        |  | $            | 34,409.4  |      | $ | 35,941.1 
|Short-term debt                                                                          |  |              | 75.2      |      |   | 242.3    
|Long-term debt, payable to NFS                                                           |  |              | 700.0     |      |   | 700.0    
|Other liabilities                                                                        |  |              | 2,988.1   |      |   | 3,130.1  
|Liabilities related to separate accounts                                                 |  |              | 67,351.9  |      |   | 62,689.8 
|                                                                                         |  |              |           |      |   |          
|Total liabilities                                                                        |  |              | 105,524.6 |      |   | 102,703.3
|                                                                                         |  |              |           |      |   |          
|Shareholders equity:                                                                    |  |              |           |      |   |          
|Common stock, $1 par value; authorized - 5.0 shares; issued and outstanding - 3.8 shares |  |              | 3.8       |      |   | 3.8      
|Additional paid-in capital                                                               |  |              | 274.4     |      |   | 274.4    
|Retained earnings                                                                        |  |              | 4,130.9   |      |   | 3,883.4  
|Accumulated other comprehensive income                                                   |  |              | 28.7      |      |   | 93.6     
|                                                                                         |  |              |           |      |   |          
|Total shareholders equity                                                               |  |              | 4,437.8   |      |   | 4,255.2  
|                                                                                         |  |              |           |      |   |          
|Total liabilities and shareholders equity                                               |  | $            | 109,962.4 |      | $ | 106,958.5
|                                                                                         |  |              |           |      |   |          

See accompanying notes to consolidated financial statements.



F-3



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Consolidated Statements of Shareholders Equity

(in millions)



|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|-------------------------------------- |  | ------------- | --- | ------------------------ | - | ---------------- |  | - | ---------------------------------- | - |  | ------------------------ | ------ | - |  | - | ------- | -
|                                       |  | Capitalshares |     | Additionalpaid-incapital |   | Retainedearnings |  |   | Accumlatedothercomprehensiveincome |   |  | Totalshareholdersequity |       
|Balance as of December 31, 2003        |  | $             | 3.8 |                          | $ | 271.3            |  | $ | 3,257.2                            |   |  | $                        | 467.3  |   |  | $ | 3,999.6 |  
|                                       |  |               |     |                          |  
|Comprehensive income:                  |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Net income                             |  |               |    |                          |   |                 |  |   | 411.7                              |   |  |                          |       |   |  |   | 411.7   |  
|Other comprehensive loss, net of taxes |  |               |    |                          |   |                 |  |   |                                   |   |  |                          | (73.5  | ) |  |   | (73.5   | )
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Total comprehensive income             |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   | 338.2   |  
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Capital contributed by NFS             |  |               |    |                          |   | 3.1              |  |   |                                   |   |  |                          |       |   |  |   | 3.1     |  
|Dividends to NFS                       |  |               |    |                          |   |                 |  |   | (125.0                             | ) |  |                          |       |   |  |   | (125.0  | )
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Balance as of December 31, 2004        |  |               | 3.8 |                          |   | 274.4            |  |   | 3,543.9                            |   |  |                          | 393.8  |   |  |   | 4,215.9 |  
|                                       |  |               |     |                          |  
|Comprehensive income:                  |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Net income                             |  |               |    |                          |   |                 |  |   | 524.5                              |   |  |                          |       |   |  |   | 524.5   |  
|Other comprehensive loss, net of taxes |  |               |    |                          |   |                 |  |   |                                   |   |  |                          | (300.2 | ) |  |   | (300.2  | )
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Total comprehensive income             |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   | 224.3   |  
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Dividends to NFS                       |  |               |    |                          |   |                 |  |   | (185.0                             | ) |  |                          |       |   |  |   | (185.0  | )
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Balance as of December 31, 2005        |  |               | 3.8 |                          |   | 274.4            |  |   | 3,883.4                            |   |  |                          | 93.6   |   |  |   | 4,255.2 |  
|                                       |  |               |     |                          |  
|Comprehensive income:                  |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Net income                             |  |               |    |                          |   |                 |  |   | 622.5                              |   |  |                          |       |   |  |   | 622.5   |  
|Other comprehensive loss, net of taxes |  |               |    |                          |   |                 |  |   |                                   |   |  |                          | (64.9  | ) |  |   | (64.9   | )
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Total comprehensive income             |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   | 557.6   |  
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Dividends to NFS                       |  |               |    |                          |   |                 |  |   | (375.0                             | ) |  |                          |       |   |  |   | (375.0  | )
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  
|Balance as of December 31, 2006        |  | $             | 3.8 |                          | $ | 274.4            |  | $ | 4,130.9                            |   |  | $                        | 28.7   |   |  | $ | 4,437.8 |  
|                                       |  |               |     |                          |   |                  |  |   |                                    |   |  |                          |        |   |  |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Consolidated Statements of Cash Flows

(in millions)



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years ended December 31, |         
|                                                                                  |  | 2006                     |          |   | 2005 |   |          | 2004 | 
|Cash flows from operating activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 622.5    |   |      | $ | 524.5    |      |  | $ | 411.7    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Net realized (gains) losses on investments, hedging instruments and hedged items  |  |                          | (7.1     | ) |      |   | (10.6    | )    |  |   | 36.4     |  
|Interest credited to policyholder account values                                  |  |                          | 1,330.1  |   |      |   | 1,331.0  |      |  |   | 1,277.2  |  
|Capitalization of deferred policy acquisition costs                               |  |                          | (569.6   | ) |      |   | (460.5   | )    |  |   | (496.4   | )
|Amortization of deferred policy acquisition costs                                 |  |                          | 450.3    |   |      |   | 466.3    |      |  |   | 410.1    |  
|Amortization and depreciation                                                     |  |                          | 46.6     |   |      |   | 65.6     |      |  |   | 73.0     |  
|(Increase) decrease in other assets                                               |  |                          | (298.0   | ) |      |   | 591.0    |      |  |   | (303.5   | )
|Increase (decrease) in policy and other liabilities                               |  |                          | 225.7    |   |      |   | (511.1   | )    |  |   | 324.4    |  
|Other, net                                                                        |  |                          | 0.1      |   |      |   | (114.9   | )    |  |   | 1.5      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 1,800.6  |   |      |   | 1,881.3  |      |  |   | 1,734.4  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturity of securities available-for-sale                           |  |                          | 5,128.6  |   |      |   | 4,198.5  |      |  |   | 3,099.4  |  
|Proceeds from sale of securities available-for-sale                               |  |                          | 2,267.3  |   |      |   | 2,619.7  |      |  |   | 2,485.5  |  
|Proceeds from repayments or sales of mortgage loans on real estate                |  |                          | 2,430.8  |   |      |   | 2,854.6  |      |  |   | 1,920.9  |  
|Cost of securities available-for-sale acquired                                    |  |                          | (5,658.9 | ) |      |   | (6,924.1 | )    |  |   | (6,291.4 | )
|Cost of mortgage loans on real estate originated or acquired                      |  |                          | (2,180.4 | ) |      |   | (2,524.9 | )    |  |   | (2,169.9 | )
|Net (increase) decrease in short-term investments                                 |  |                          | (125.4   | ) |      |   | 56.9     |      |  |   | 205.9    |  
|Collateral (paid) received - securities lending, net                              |  |                          | (332.6   | ) |      |   | 36.6     |      |  |   | 89.4     |  
|Other, net                                                                        |  |                          | 52.1     |   |      |   | 121.6    |      |  |   | (357.2   | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                               |  |                          | 1,581.5  |   |      |   | 438.9    |      |  |   | (1,017.4 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net (decrease) increase in short-term debt                                        |  |                          | (167.1   | ) |      |   | 27.3     |      |  |   | 15.2     |  
|Capital contributed by NFS                                                        |  |                          |         |   |      |   |         |      |  |   | 3.1      |  
|Cash dividends paid to NFS                                                        |  |                          | (375.0   | ) |      |   | (185.0   | )    |  |   | (125.0   | )
|Investment and universal life insurance product deposits                          |  |                          | 3,400.8  |   |      |   | 2,845.4  |      |  |   | 3,561.6  |  
|Investment and universal life insurance product withdrawals                       |  |                          | (6,241.2 | ) |      |   | (5,022.5 | )    |  |   | (4,156.5 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                                             |  |                          | (3,382.5 | ) |      |   | (2,334.8 | )    |  |   | (701.6   | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net (decrease) increase in cash                                                   |  |                          | (0.4     | ) |      |   | (14.6    | )    |  |   | 15.4     |  
|Cash, beginning of period                                                         |  |                          | 0.9      |   |      |   | 15.5     |      |  |   | 0.1      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash, end of period                                                               |  | $                        | 0.5      |   |      | $ | 0.9      |      |  | $ | 15.5     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Notes to Consolidated Financial Statements

December 31, 2006, 2005 and 2004



|(1) | Nature of Operations
|--- | --------------------

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, 2006 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 sector 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 d/b/a TBG Financial (TBG Financial) through its joint venture with MC Insurance Agency Services, LLC d/b/a Mullin Consulting. The Company also distributes products through the NMIC agency distribution
force.

As of December 31, 2006 and 2005, the Company did not have a significant concentration of financial instruments
in a single investee, industry or geographic region of the U.S. Also, the Company did not have a concentration of business transactions with a particular customer, lender, distribution source, market or geographic region of the U.S. in which
business is conducted that makes it overly vulnerable to a single event which could cause a severe impact to the Companys financial position.



|(2) | Summary of Significant Accounting Policies
|--- | ------------------------------------------

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 Companys most significant estimates include those used to determine the following: the balance, recoverability and amortization
of deferred policy acquisition (DAC) for investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal
income tax provision. 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. 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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



(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, 2006, 71% of the fair values of fixed maturity securities were obtained from independent pricing services, 20% from the Companys pricing matrices and 9% from other sources compared to 72%, 20% and 8%, respectively, in 2005.

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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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.

The Company grants mainly commercial mortgage loans on real estate to customers throughout the U.S. As of December 31, 2006, the Company had a diversified portfolio with no more than 25.5%
of the mortgage loan portfolio in any geographic region of the U.S. and no more than 2.6% with any one borrower, compared to 23.8% and 1.6%, respectively, as of December 31, 2005. As of December 31, 2006 and 2005, 33.4% and 32.0% of the
carrying value of the Companys commercial mortgage loan portfolio financed retail properties, respectively.

Real
estate to be held and used is carried at cost less accumulated depreciation. Real estate designated as held for disposal is not depreciated and 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.

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.

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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



(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.

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 are 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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



(d) Revenues and Benefits

Investment and Universal Life Insurance Products: Investment products consist primarily of individual and group variable and fixed
deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, COLI, bank-owned life insurance (BOLI) and other interest-sensitive life insurance policies. Revenues for investment products
and universal life insurance products consist of net investment income, asset fees, cost of insurance charges, administrative fees and surrender charges that have been earned and assessed against policy account balances during the period. The timing
of revenue recognition as it relates to fees assessed on investment contracts and universal life contracts is determined based on the nature of such fees. Asset fees, cost of insurance charges and administrative fees are assessed on a daily or
monthly basis and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods
benefited. Surrender charges are recognized upon surrender of a contract in accordance with contractual terms. Policy benefits and claims that are charged to expense include interest credited to policy account values and benefits and claims incurred
in the period in excess of related policy account values.

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 through the provision
for future policy benefits and the deferral and amortization of policy acquisition costs.

(e) Deferred Policy
Acquisition Costs for Investment and Universal Life Insurance Products

The Company has deferred certain costs of
acquiring investment 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 in the year of policy issuance and loss recognition testing at the end of each reporting period.

For investment 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 Standard & Poors (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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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 future assumptions are revised, the Company is required to record an increase or
decrease in DAC amortization expense, which could be significant. In general, increases in the estimated 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. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean process.

For other investment 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 true-up and 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 contracts, which
are riders to existing variable annuity contracts.

(g) Future Policy Benefits and Claims

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 and claims 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 and are
considered annuity contracts under Ohio insurance laws.

The liability for future policy benefits and claims for traditional
life insurance policies was calculated by the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being experienced at the time the
policies were issued.

The liability for future policy benefits for payout annuities was calculated using the present value
of future benefits and maintenance costs discounted using interest rates varying generally from 3.0% to 13.0%.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



(h) Participating Business

Participating business, which refers to policies that participate in profits through policyholder dividends, represented approximately 8%
in 2006 (10% in 2005 and 11% in 2004) of the Companys life insurance in force, 50% of the number of life insurance policies in force in 2006 (52% in 2005 and 55% in 2004) and 5% of life insurance statutory premiums in 2006 (5% in 2005 and 7%
in 2004). 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.

(i) Federal Income Taxes

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. Management evaluates the appropriateness of such reserves quarterly 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 (IRS) 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 2005 and 2004 consolidated financial statements and related notes have been
reclassified to conform to the current presentation.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



|(3) | Recently Issued Accounting Standards
|--- | ------------------------------------

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
Including an amendment of FASB Statements No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASBs long-term measurement objectives for accounting for financial instruments. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value. In addition, SFAS 159 does not establish requirements for recognizing and measuring dividend income, interest income or interest expense, nor does it eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements (SFAS 157), and SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
SFAS 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007. The Company currently is evaluating the impact of adopting SFAS 159.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan)
as an asset or liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an employer to measure the funded status of a plan as of the
date of its year-end balance sheet, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end balance sheet is effective for fiscal years ending after
December 15, 2008. If in the last quarter of the preceding fiscal year an employer enters into a transaction that results in a settlement or experiences an event that causes a curtailment of the plan, the related gain or loss pursuant to
Statement 88 or 106 is required to be recognized in earnings that quarter. The adoption of SFAS 158 did not have a material impact on the Companys financial position or results of operations.

In September 2006, the FASB issued SFAS 157. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities.
SFAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years, with early adoption permitted. SFAS 157 is not expected to have a material impact on the Companys financial position or results of operations upon adoption.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



In September 2006, the United States Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 108 (SAB 108). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires registrants
to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB 108 does
not change the SECs previous guidance in SAB No. 99 on evaluating the materiality of misstatements. A registrant applying the new guidance for the first time that identifies material errors in existence at the beginning of the first
fiscal year ending after November 15, 2006, may correct those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The cumulative effect alternative is available only if the application of the new
guidance results in a conclusion that a material error exists as of the beginning of the first fiscal year ending after November 15, 2006, and those misstatements were determined to be immaterial based on a proper application of the
registrants previous method for quantifying misstatements. Because of the beginning-of-year recognition of the cumulative effect adjustment, misstatements occurring in the year of adoption cannot be included in that adjustment. SAB 108
requires the following disclosures if a cumulative effect adjustment is recorded: the nature and amount of each individual error included in the cumulative effect adjustment; when and how each error arose; and the fact that the errors had previously
been considered immaterial. The cumulative effect adjustment is available only for prior-year uncorrected misstatements. The adjustment should not include amounts related to changes in accounting estimates. SAB 108 did not have a material impact on
the Companys financial position or results of operations upon adoption.

In June 2006, the FASB issued FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company plans to adopt FIN 48 effective January 1, 2007. FIN 48 is not expected to have a material impact on the Companys financial position or results of operations upon adoption.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets(SFAS 156).SFAS 156 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. SFAS 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to
mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under SFAS 156, an entity can elect subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because SFAS 156 permits income statement recognition of the potential offsetting changes in fair value of those servicing assets
and servicing liabilities and derivative instruments in the same accounting period. SFAS 156 is effective for fiscal years beginning after September 15, 2006, with early adoption permitted. The Company plans to adopt SFAS 156 effective
January 1, 2007. SFAS 156 is not expected to have a material impact on the Companys financial position or results of operations upon adoption.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



In February 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 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. In summary, SFAS 155: (1) permits an entity to make an irrevocable election to measure any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation at fair value in its entirety, with changes in fair value recognized in earnings; (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; and (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. The Company elected to early adopt SFAS 155 as of January 1, 2006. On the date of adoption, there was no
impact to the Companys financial position or results of operations.

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 as a result of the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a new 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 is required 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 is not
expected to have a material impact on the Companys financial position and/or results of operations.

In May 2005, the
FASB issued SFAS No. 154, Accounting Changes and Error Corrections(SFAS 154), which replaces Accounting Principles Board Opinion No. 20, Accounting Changes, 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 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. The Company adopted SFAS 154 effective January 1, 2006. SFAS 154 has not had
any impact on the Companys financial position or results of operations since adoption.

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 guaranteed minimum death benefits (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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The following table summarizes the components of cumulative effect adjustments
recorded in the Companys 2004 consolidated statements of income:



(in millions)

January 1, 2004Increase in future policy benefits:Ratchet interest crediting

$
(12.3
)Secondary guarantees - life insurance


(2.4
)GMDB claim reserves


(1.8
)GMIB claim reserves


(1.0
)Subtotal


(17.5
)Adjustment to amortization of deferred policy acquisition costs related to above


12.4Deferred federal income taxes


1.8Cumulative effect of adoption of accounting principle, net of taxes

$
(3.3
)




|(4) | Fair Value of Financial Instruments
|--- | -----------------------------------

The following disclosures summarize the carrying amount and estimated fair value of the Companys financial instruments. Certain assets and liabilities are specifically excluded from the disclosure requirements
for financial instruments.

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 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 these
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).



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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 values of liabilities related to separate accounts are the amounts payable on demand, 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, net of certain surrender charges. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used in this analysis are similar to currently
offered contracts with maturities consistent with those remaining for the contracts being valued.

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.

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.

Other derivatives: The fair values for other derivatives are based on credit event probabilities, equity option index levels and
broker valuations.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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:



2006


2005(in millions)

Carrying value


Estimated fair value


Carrying value


Estimated fair valueAssetsInvestments:Securities available-for-sale:Fixed maturity securities

$
25,275.4


$
25,275.4


$
27,198.1


$
27,198.1Equity securities


34.4



34.4



42.1



42.1Mortgage loans on real estate, net


8,202.2



8,060.7



8,458.9



8,503.0Policy loans


639.2



639.2



604.7



604.7Short-term investments


1,722.0



1,722.0



1,596.6



1,596.6Cash


0.5



0.5



0.9



0.9Assets held in separate accounts


67,351.9



67,351.9



62,689.8



62,689.8LiabilitiesInvestment contracts


(27,124.7
)


(25,455.2
)


(28,698.1
)


(26,607.2
)Policy reserves on life insurance contracts


(7,284.7
)


(7,120.4
)


(7,243.0
)


(7,173.1
)Short-term debt


(75.2
)


(75.2
)


(242.3
)


(242.3
)Long-term debt, payable to NFS


(700.0
)


(809.3
)


(700.0
)


(822.8
)Collateral received  securities lending and derivatives


(986.1
)


(986.1
)


(1,359.1
)


(1,359.1
)Liabilities related to separate accounts


(67,351.9
)


(66,149.8
)


(62,689.8
)


(61,483.5
)Derivative financial instrumentsInterest rate swaps hedging assets


4.2



4.2



3.3



3.3Cross-currency interest rate swaps


66.1



66.1



178.5



178.5Interest rate futures contracts


(2.4
)


(2.4
)


1.6



1.6Other derivatives


128.2



128.2



41.1



41.1




|(5) | Derivative Financial Instruments
|--- | --------------------------------

Qualitative Disclosure

Interest Rate Risk Management

The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be exposed to
interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. In an effort 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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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. In an effort 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. In an effort 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. In an effort 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. In an effort 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.

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

Asset fees calculated as a percentage of the separate account assets are a significant source of
revenue to the Company. As of December 31, 2006, approximately 82% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2005). Gains and losses in the equity markets result in corresponding
increases and decreases in the Companys separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a decrease in asset fee
revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The Companys long-term assumption for net separate account returns is 8% annual
growth. If equity markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than
had the Companys long-term assumption for net separate account returns been realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company
would evaluate its DAC balance and underlying assumptions to determine whether unlocking is appropriate. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting
profitability, including the possibility of unlocking of DAC assumptions.

Many of the Companys individual variable
annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be based on 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 2000, the Company managed this risk primarily by entering into
reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the economic value of the 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 futures are not designated as hedges and, therefore, hedge accounting is not applied. The
Companys economic evaluation of the GMDB obligation is not consistent with current accounting treatment of the GMDB obligation. Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2006.
As of December 31, 2006 and 2005, the net amount at risk was $562.4 million and $1.08 billion before reinsurance, respectively, and $119.0 million and $178.4 million net of reinsurance, respectively. As of December 31, 2006 and 2005, the
Companys reserve for GMDB claims was $29.3 million and $26.9 million, respectively. See Note 3 to the audited consolidated financial statements included in the F pages of this report for discussion of the impact of adopting a new accounting
principle regarding GMDB reserves in 2004.

The Company also offers certain variable annuity products with a guaranteed
minimum accumulation benefit (GMAB) rider. A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contractholder at the
time of issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB. The design of the GMAB rider
limits the risk to the Company in a variety of ways including asset allocation requirements, which serve to reduce the Companys potential exposure to underlying fund 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. Subsequent changes in the fair value of the embedded derivative are recognized in earnings. 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.



F-20



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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. Quarterly, the
Company purchases S&P 500 Index put options and over-the-counter basket put options, which are constructed in order to minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) to the audited consolidated financial
statements included in the F pages of this report for discussion of economic hedges. The objective of the GMAB economic hedge strategy is to manage the exposures with risk beyond a level considered acceptable to the Company. The Company is exposed
to equity market risk related to the GMAB feature should the growth in the underlying investments, including any GTO investment, fail to reach the guaranteed return level. The GMAB embedded derivative is likely to create volatility in earnings;
however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006 and 2005. As of December 31, 2006 and 2005, the balance of the GMAB embedded derivative was $116.3 million and $67.9
million, respectively. The increase in the balance of the GMAB embedded derivative was driven by the value of new business sold during 2006.

Beginning in March 2005, the Company began offering a hybrid GMAB/guaranteed lifetime withdrawal benefit (GLWB) 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 will 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 GLWB 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.

In March 2006, the Company added Lifetime Income (L.INC), a stand-alone GLWB, to compliment CPPLI in its product offerings. This rider is
very similar to the hybrid benefit discussed above. L.INC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age without the liquidity loss associated with annuitization. The
lifetime withdrawal feature also is being economically hedged. Currently, the Company is using S&P 500 Index and U.S. Treasury futures to hedge exposure to declining equity and interest rate markets, respectively. Similar to GMDBs, the
Companys economic valuation of the lifetime income obligation is not consistent with the accounting treatment of the obligation. Therefore, hedging activity is likely to create volatility in earnings; however, the economic hedging program
provides substantial mitigation of this exposure. This volatility was negligible in 2006.

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 cash flows with 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, 2006, 2005 and 2004, a net gain of $2.9 million, a net gain of $4.1 million and a net loss of $11.3 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.



F-21



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



Cash Flow Hedges

For the years ended December 31, 2006, 2005 and 2004, the ineffective portion of cash flow hedges was a net loss of $1.5 million, a
net gain of $3.1 million and a net gain of $1.0 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 $0.8 million in net losses out of AOCI over the next 12-month period.

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.

During 2006, 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, 2006, 2005 and 2004 included a net loss of $0.5 million, a net loss of $9.1 million and a net gain of $8.1 million, respectively, related to other derivative instruments, including embedded derivatives, not designated in hedging
relationships. In addition, the Individual Investments segment included a loss of $11.4 million and a gain of $5.1 million for the years ended December 31, 2006 and 2005, respectively, related to other derivative instruments, including embedded
derivatives, not designated in hedging relationships. For the years ended December 31, 2006, 2005 and 2004, net losses of $10.6 million, $80.7 million and $5.9 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 $14.1 million, $78.3 million and $5.9
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, 2006, 2005 and
2004, respectively.

The following table summarizes the notional amount of derivative financial instruments outstanding as
of December 31:



(in millions)

2006

2005Interest rate swaps:Pay fixed/receive variable rate swaps hedging investments

$
1,930.5

$
2,040.1Pay variable/receive fixed rate swaps hedging investments


60.4


79.2Pay variable/receive fixed rate swaps hedging liabilities





550.0Pay variable/receive variable rate swaps hedging liabilities





30.0Pay fixed/receive variable rate swaps hedging liabilities


1,048.8


170.0Other contracts hedging investments





10.0Cross-currency interest rate swaps:Hedging foreign currency denominated investments


452.9


439.8Hedging foreign currency denominated liabilities


1,137.1


1,312.4Credit default swaps and other non-hedging instruments


478.6


555.3Equity option contracts


1,640.7


774.4Interest rate futures contracts


214.2


120.5Total

$
6,963.2

$
6,081.7




F-22



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



|(6) | Investments
|--- | -----------

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:



(in millions)

Amortizedcost

Grossunrealizedgains

Grossunrealizedlosses

Estimatedfair valueDecember 31, 2006:Fixed maturity securities:U.S. Treasury securities and obligations of U.S. Government corporations

$
123.7

$
11.4

$
1.4

$
133.7Agencies not backed by the full faith and credit of the U. S. Government


559.4


46.2


2.2


603.4Obligations of states and political subdivisions


266.0


0.7


7.2


259.5Debt securities issued by foreign governments


34.9


1.7


0.1


36.5Corporate securitiesPublic


8,602.0


168.8


109.9


8,660.9Private


6,015.4


128.8


71.4


6,072.8Mortgage-backed securities  U.S. Government-backed


6,089.1


21.3


112.8


5,997.6Asset-backed securities


3,506.7


43.3


39.0


3,511.0Total fixed maturity securities


25,197.2


422.2


344.0


25,275.4Equity securities


28.5


6.2


0.3


34.4Total securities available-for-sale

$
25,225.7

$
428.4

$
344.3

$
25,309.8December 31, 2005:Fixed maturity securities:U.S. Treasury securities and obligations of U.S. Government corporations

$
163.8

$
14.3

$
0.6

$
177.5Agencies not backed by the full faith and credit of the U. S. Government


849.7


61.2


6.2


904.7Obligations of states and political subdivisions


300.3


2.4


3.8


298.9Debt securities issued by foreign governments


41.4


2.7


0.1


44.0Corporate securitiesPublic


9,520.0


233.7


106.2


9,647.5Private


6,572.2


195.3


65.3


6,702.2Mortgage-backed securities  U.S. Government-backed


6,048.3


18.1


107.6


5,958.8Asset-backed securities


3,463.2


42.6


41.3


3,464.5Total fixed maturity securities


26,958.9


570.3


331.1


27,198.1Equity securities


35.1


7.0





42.1Total securities available-for-sale

$
26,994.0

$
577.3

$
331.1

$
27,240.2




F-23



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The table below summarizes the amortized cost and estimated fair value of fixed
maturity securities available-for-sale, by maturity, as of December 31, 2006. 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)

Amortizedcost

Estimatedfair valueFixed maturity securities available-for-sale:Due in one year or less

$
1,476.3

$
1,488.2Due after one year through five years


6,350.0


6,406.7Due after five years through ten years


4,697.0


4,722.5Due after ten years


3,078.1


3,149.4Subtotal


15,601.4


15,766.8Mortgage-backed securities  U.S. Government-backed


6,089.1


5,997.6Asset-backed securities


3,506.7


3,511.0Total

$
25,197.2

$
25,275.4


The following table presents the components of net unrealized gains on
securities available-for-sale as of December 31:



(in millions)

2006


2005Net unrealized gains, before adjustments and taxes

$
84.1


$
246.2Adjustment to DAC


83.3



42.4Adjustment to future policy benefits and claims


(83.1
)


(104.6
)Deferred federal income taxes


(29.5
)


(64.4
)Net unrealized gains

$
54.8


$
119.6


The following table presents an analysis of the net decrease in net
unrealized gains on securities available-for-sale before adjustments and taxes for the years ended December 31:



(in millions)

2006


2005


2004Fixed maturity securities

$
(161.0
)

$
(704.1
)

$
(153.3
)Equity securities


(1.1
)


(3.4
)


(1.2
)Net change

$
(162.1
)

$
(707.5
)

$
(154.5
)




F-24



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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:



Less than or equalto one year

More than one year

Total(in millions)

Estimatedfair value

Grossunrealizedlosses

Estimatedfair value

Grossunrealizedlosses

Estimatedfair value

GrossunrealizedlossesDecember 31, 2006:Fixed maturity securities:U.S. Treasury securities and obligations of U.S. Government corporations

$
49.8

$
0.8

$
17.7

$
0.6

$
67.5

$
1.4Agencies not backed by the full faith and credit of the U.S. Government


31.7


0.1


120.3


2.1


152.0


2.2Obligations of states and political subdivisions


82.4


1.0


156.3


6.2


238.7


7.2Debt securities issued by foreign governments


12.8


0.1








12.8


0.1Corporate securitiesPublic


2,445.0


24.3


2,964.6


85.6


5,409.6


109.9Private


1,162.7


13.5


1,872.3


57.9


3,035.0


71.4Mortgage-backed securities  U.S. Government-backed


767.8


6.4


3,809.5


106.4


4,577.3


112.8Asset-backed securities


539.2


4.2


1,336.6


34.8


1,875.8


39.0Total fixed maturity securities


5,091.4


50.4


10,277.3


293.6


15,368.7


344.0Equity securities


0.1





3.4


0.3


3.5


0.3Total

$
5,091.5

$
50.4

$
10,280.7

$
293.9

$
15,372.2

$
344.3% of gross unrealized losses





15%





85%December 31, 2005:Fixed maturity securities:U.S. Treasury securities and obligations of U.S. Government corporations

$
25.1

$
0.5

$
3.7

$
0.1

$
28.8

$
0.6Agencies not backed by the full faith and credit of the U.S. Government


297.0


4.9


42.2


1.3


339.2


6.2Obligations of states and political subdivisions


150.7


3.0


29.7


0.8


180.4


3.8Debt securities issued by foreign governments


7.4


0.1








7.4


0.1Corporate securitiesPublic


3,210.4


63.2


1,088.2


43.0


4,298.6


106.2Private


1,690.3


39.1


672.6


26.2


2,362.9


65.3Mortgage-backed securities  U.S. Government-backed


4,062.8


88.6


632.6


19.0


4,695.4


107.6Asset-backed securities


1,420.7


26.1


432.5


15.2


1,853.2


41.3Total fixed maturity securities


10,864.4


225.5


2,901.5


105.6


13,765.9


331.1Equity securities


3.9











3.9


Total

$
10,868.3

$
225.5

$
2,901.5

$
105.6

$
13,769.8

$
331.1% of gross unrealized losses





68%





32%




F-25



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



Increases in unrealized losses more than one year are primarily due to changes in the
interest rate environment. Those securities are not considered other-than-temporarily impaired because the decline in market value is attributed to changes in interest rates and not credit quality, and because the Company has the ability and intent
to hold those investments until recovery.

Proceeds from the sale of securities available-for-sale during 2006, 2005 and
2004 were $2.27 billion, $2.62 billion and $2.49 billion, respectively. During 2006, gross gains of $61.6 million ($71.9 million and $61.5 million in 2005 and 2004, respectively) and gross losses of $64.1 million ($22.6 million and $8.7 million in
2005 and 2004, respectively) were realized on those sales.

The Company had $5.1 million and $22.2 million of real estate
investments as of December 31, 2006 and 2005, respectively, that were non-income producing during the preceding twelve months.

Real estate held for use is presented at cost less accumulated depreciation of $16.7 million as of December 31, 2006 ($21.5 million as of December 31, 2005). The carrying value of real estate held for sale totaled $42.1 million
and $2.5 million as of December 31, 2006 and 2005, respectively.

The recorded investment of mortgage loans on real
estate considered to be impaired was $17.5 million as of December 31, 2006 ($29.7 million as of December 31, 2005), for which the related valuation allowance was $12.3 million ($7.1 million as of December 31, 2005). 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 2006, the average recorded investment in impaired
mortgage loans on real estate was $3.5 million ($7.4 million in 2005). Interest income on those loans, which is recognized on a cash basis, totaled $1.9 million in 2006 ($2.1 million in 2005).

The following table summarizes activity in the valuation allowance account for mortgage loans on real estate for the years ended
December 31:



(in millions)

2006

2005


2004Allowance, beginning of period

$
31.1

$
33.3


$
29.1Net additions (reductions) to allowance


3.2


(2.2
)


4.2Allowance, end of period

$
34.3

$
31.1


$
33.3


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)

2006


2005


2004Total realized gains on sales, net of hedging losses

$
88.8


$
75.6


$
65.0Total realized losses on sales, net of hedging gains


(64.8
)


(22.9
)


(12.7
)Total other-than-temporary and other investment impairments


(17.1
)


(36.8
)


(90.6
)Credit default swaps


(1.1
)


(7.5
)


0.3Periodic net coupon settlements on non-qualifying derivatives


1.9



1.1



6.6Other derivatives


(0.6
)


1.1



(5.0
)Net realized gains (losses) on investments, hedging instruments and hedged items

$
7.1


$
10.6


$
(36.4
)




F-26



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The following table summarizes net investment income from continuing operations by
investment type for the years ended December 31:



(in millions)

2006


2005


2004Securities available-for-sale:Fixed maturity securities

$
1,419.2


$
1,466.2


$
1,461.9Equity securities


2.6



2.4



1.2Mortgage loans on real estate


535.4



577.3



577.4Real estate


17.0



16.6



17.9Short-term investments


47.3



18.8



8.9Derivatives


(1.9
)


(31.0
)


(94.3
)Other


105.8



112.2



78.4Gross investment income


2,125.4



2,162.5



2,051.4Less investment expenses


66.9



57.3



50.9Net investment income

$
2,058.5


$
2,105.2


$
2,000.5


Fixed maturity securities with an amortized cost of $8.1 million and $16.4
million as of December 31, 2006 and 2005, respectively, were on deposit with various regulatory agencies as required by law.

As of December 31, 2006, the Company had not pledged any fixed maturity securities as collateral to various derivative counterparties compared to $8.5 million as of December 31, 2005.

As of December 31, 2006 and 2005, the Company had received $802.3 million and $1.10 billion, respectively, of cash collateral on
securities lending and $171.0 million and $203.3 million, respectively, of cash for derivative collateral. As of December 31, 2006 and 2005, the Company had not received any non-cash collateral on securities. 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, 2006 and 2005, the Company had loaned securities with a fair value of $778.6 million and $1.07 billion,
respectively. The Company also held $12.8 million and $53.2 million of securities as off-balance sheet collateral on derivative transactions as of December 31, 2006 and 2005, respectively.



|(7) | Variable Annuity Contracts
|--- | --------------------------

The Company issues traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the
contractholder. The Company also issues non-traditional variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contractholders. The Company provides four primary guarantee types under
non-traditional variable annuity contracts: (1) GMDB; (2) GMAB; (3) guaranteed minimum income benefits (GMIB); and (4) a hybrid guarantee with GMAB and GLWB.



F-27



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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 5 for a complete description of the Companys hybrid GMAB/GLWB offered through its CPPLI
contract rider. All GMAB contracts with the hybrid GMAB/GLWB rider are included with GMAB contracts in the following tables.



F-28



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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:



2006

2005(in millions)

Accountvalue

Net amountat risk1

Wtd. avg.attained age

Accountvalue

Net amountat risk1

Wtd. avg.attained ageGMDB:Return of premium

$
9,231.4

$
17.1

60

$
9,260.6

$
32.5

60Reset


17,587.0


24.2

63


16,932.1


58.7

63Ratchet


13,481.0


16.0

66


11,020.6


28.9

65Rollup


538.4


5.7

70


592.1


8.4

69Combo


2,588.7


14.9

68


2,530.6


22.3

68Subtotal


43,426.5


77.9

65


40,336.0


150.8

64Earnings enhancement


477.8


41.1

61


418.5


27.6

61Total - GMDB

$
43,904.3

$
119.0

65

$
40,754.5

$
178.4

63GMAB2:5 Year

$
2,131.1

$
0.1

N/A

$
1,041.8

$
0.5

N/A7 Year


1,865.7


0.1

N/A


1,103.5


0.2

N/A10 Year


784.0




N/A


595.5


0.1

N/ATotal - GMAB

$
4,780.8

$
0.2

N/A

$
2,740.8

$
0.8

N/AGMIB3:Ratchet

$
450.6

$


N/A

$
444.7

$


N/ARollup


1,187.1




N/A


1,189.3




N/ACombo


0.5




N/A


0.5




N/ATotal - GMIB

$
1,638.2

$


N/A

$
1,634.5

$


N/AGLWB:Lifetime Income (L.INC)

$
993.8

$


N/A

$


$


N/ATotal - GLWB

$
993.8

$


N/A

$


$


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/GLWB rider had account values of $2.95 billion and $939.1 million
as of December 31, 2006 and 2005, respectively.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 | The weighted average period remaining until expected annuitization is not meaningful and has not been
presented because there is currently no material GMIB exposure.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-29



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The following table is a rollforward of the liabilities for guarantees on variable
annuity contracts reflected in the Companys general account for the years indicated:



(in millions)

GMDB


GMAB


GMIB

GLWB

TotalBalance as of December 31, 2004

$
23.6


$
20.6


$
0.8

$


$
45.0Expense provision


32.8







0.4





33.2Net claims paid


(29.5
)












(29.5
)Value of new business sold






53.4









53.4Change in fair value






(6.1
)








(6.1
)Balance as of December 31, 2005


26.9



67.9



1.2





96.0Expense provision


32.5










0.3


32.8Net claims paid


(30.1
)












(30.1
)Value of new business sold






95.2









95.2Change in fair value






(46.8
)








(46.8
)Balance as of December 31, 2006

$
29.3


$
116.3


$
1.2

$
0.3

$
147.1


The following table summarizes account balances of contracts with guarantees
that were invested in separate accounts as of December 31:



(in millions)

2006

2005Mutual funds:Bond

$
4,467.3

$
3,857.3Domestic equity


29,808.4


28,011.3International equity


3,420.5


2,161.4Total mutual funds


37,696.2


34,030.0Money market funds


1,414.4


1,350.4Total

$
39,110.6

$
35,380.4


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 its GMDB and
GMIB claim reserve estimates 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 at least 10% in the money to 100% utilization when the contractholder is 90% or more in the money.

In accordance with SOP 03-01, GLWB claim reserves for the L.INC rider are determined each period by estimating the expected value of withdrawal benefits in excess of the projected account balance
and recognizing such potential additional liabilities of the Company as a benefit reserve expense ratably over the accumulation period. The Company periodically evaluates estimates used and adjusts the additional liability balance as appropriate,
with a related charge or credit to life insurance and annuity benefits in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised.



F-30



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The following assumptions and methodology were used to determine the GMDB claim
reserves as of December 31, 2006 and 2005:



| |  |  | 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

4.00%

5.00%

6.00%

7.00%

8.00%

9.50%

10.00%

11.00%

14.00%

14.00%Maximum

4.00%

5.00%

6.00%

7.00%

35.00%

35.00%

23.00%

35.00%

35.00%

23.00%


GMABs and hybrid GMABs/GLWBs 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.



|(8) | Short-Term Debt
|--- | ---------------

The following table summarizes short-term debt as of December 31:



(in millions)

2006

2005$800.0 million commercial paper program

$


$
134.7$350.0 million securities lending program facility


75.2


75.0$250.0 million securities lending program facility





32.6Total short-term debt

$
75.2

$
242.3


The Company has available as a source of funds a $1.00 billion revolving
variable rate credit facility entered into by NFS, NLIC and NMIC with a group of national financial institutions. 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, 2006, the Company and NLIC were in compliance with all covenants. The Company had no amounts outstanding under this agreement as of December 31, 2006 and 2005. 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 no commercial paper outstanding at December 31, 2006 and $134.7 million outstanding at December 31, 2005 at a weighted average effective interest rate of 4.22%.



F-31



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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 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 $75.2 million and $75.0 million
outstanding under this agreement as of December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company had not provided any guarantees on such borrowings, either directly or indirectly.

The Company paid interest on short-term debt totaling $11.7 million, $11.5 million and $3.6 million in 2006, 2005 and 2004, respectively.



|(9) | Long-Term Debt
|--- | --------------

The following table summarizes surplus notes payable to NFS as of December 31:



(in millions)

2006

20058.15% surplus note, due June 27, 2032

$
300.0

$
300.07.50% surplus note, due December 17, 2031


300.0


300.06.75% surplus note, due December 23, 2033


100.0


100.0Total long-term debt

$
700.0

$
700.0


The Company made interest payments to NFS on surplus notes totaling $53.7
million, $53.7 million and $50.7 million in 2006, 2005 and 2004, respectively. Payments of interest and principal under the notes require the prior approval of the Ohio Department of Insurance (ODI).



|(10) | 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.



F-32



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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)

2006


2005Deferred tax assets:Future policy benefits

$
607.8


$
630.5Other


138.6



185.9Gross deferred tax assets


746.4



816.4Less valuation allowance


(7.0
)


(7.0
)Deferred tax assets, net of valuation allowance


739.4



809.4Deferred tax liabilities:Deferred policy acquisition costs


1,022.2



970.5Other


173.9



237.1Gross deferred tax liabilities


1,196.1



1,207.6Net deferred tax liability

$
456.7


$
398.2


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 taxes paid within the statutory carryback period can offset nearly all future
deductible amounts. The valuation allowance was unchanged during 2006, 2005 and 2004.

The Companys current federal
income tax (asset) liability was $(12.6) million and $53.8 million as of December 31, 2006 and 2005, respectively.

Through June 2006, the Companys federal income tax returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its
best estimate of additional amounts the Company could be required to pay if certain positions it had taken were challenged and ultimately denied by the IRS with respect to these tax years. These reserves are reviewed regularly and are adjusted as
events occur that management believes impacts the Companys 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. A significant component of the Companys
tax reserve as of December 31, 2005 was related to the separate account dividends received deduction (DRD).

In July
2006, the Company reached substantial agreement with the IRS on all open issues for tax years 2000-2002, including issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax
positions, including the DRD, for all open tax years. As a result of the revised estimate, $110.9 million of tax reserves were released into earnings during the quarter ended June 30, 2006.

During the third quarter of 2006, the Company recorded $7.8 million of net federal income tax expense adjustments primarily related to
differences between the 2005 estimated tax liability and the amounts reported on the Companys 2005 tax returns.

During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million
related to all tax years (2000  2005) that were open at that time. In addition, the Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on
the Companys 2004 tax returns.



F-33



---

##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The following table summarizes federal income tax expense attributable to income from
continuing operations for the years ended December 31:



(in millions)

2006


2005

2004Current

$
(61.8
)

$
90.6

$
181.5Deferred


92.4



5.0


(61.5
)Federal income tax expense

$
30.6


$
95.6

$
120.0


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:



2006


2005


2004(dollars in millions)

Amount


%


Amount


%


Amount


%Computed (expected) tax expense

$
228.6


35.0


$
217.0


35.0


$
187.2


35.0Tax exempt interest and DRD


(67.5
)

(10.3
)


(107.5
)

(17.3
)


(47.2
)

(8.8
)Reserve release


(110.9
)

(17.0
)












Other, net


(19.6
)

(3.0
)


(13.9
)

(2.3
)


(20.0
)

(3.8
)Total

$
30.6


4.7


$
95.6


15.4


$
120.0


22.4


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. The Jobs Creation Act of 2004 had no other significant impact on the Companys tax position.

Total federal income taxes (refunded) paid were $(4.3) million, $182.2 million and $142.3 million during the years ended December 31,
2006, 2005 and 2004, respectively.



F-34



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



|(11) | Shareholders Equity, Regulatory Risk-Based Capital and Dividend Restrictions
|---- | -----------------------------------------------------------------------------

Regulatory Risk-Based Capital

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.

Dividend Restrictions

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, 2006 and 2005 was
$2.68 billion and $2.60 billion, respectively. The statutory net income of NLIC for the years ended December 31, 2006, 2005 and 2004 was $537.5 million, $462.5 million and $317.7 million, respectively. As of January 1, 2007, based on
statutory financial results as of and for the year ended December 31, 2006, NLIC could pay dividends totaling $162.5 million without obtaining prior approval. As of March 1, 2007, NLIC will be able to pay dividends to NFS totaling $232.5
million upon providing prior notice to the ODI. On February 21, 2007, NLIC declared an ordinary dividend of $232.5 million and an extraordinary dividend of $242.5 million, both payable to NFS in March 2007. NLIC will provide notice to the ODI
of the ordinary dividend and seek prior approval from the ODI of the extraordinary dividend before paying these dividends 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.



F-35



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



Comprehensive Income

The Companys 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, before and after federal income tax benefit (expense), for the years ended December 31:



(in millions)

2006


2005


2004Net unrealized losses on securities available-for-sale arising during the period:Net unrealized losses before adjustments

$
(171.3
)

$
(687.2
)

$
(182.0
)Net adjustment to deferred policy acquisition costs


40.9



187.0



99.1Net adjustment to future policy benefits and claims


21.5



17.0



(11.0
)Related federal income tax benefit


38.1



169.1



33.3Net unrealized losses


(70.8
)


(314.1
)


(60.6
)Reclassification adjustment for net realized losses (gains) on securities available-for-sale realized during the period:Net unrealized losses (gains)


9.2



(20.3
)


27.5Related federal income tax (benefit) expense


(3.2
)


7.1



(9.6
)Net reclassification adjustment


6.0



(13.2
)


17.9Other comprehensive loss on securities available-for-sale


(64.8
)


(327.3
)


(42.7
)Accumulated net holding (losses) gains on cash flow hedges:Unrealized holding (losses) gains


(0.2
)


41.7



(47.4
)Related federal income tax benefit (expense)


0.1



(14.6
)


16.6Other comprehensive (loss) income on cash flow hedges


(0.1
)


27.1



(30.8
)Total other comprehensive loss

$
(64.9
)

$
(300.2
)

$
(73.5
)


Adjustments for net realized gains and losses on the ineffective portion of
cash flow hedges were immaterial during the years ended December 31, 2006, 2005 and 2004.



F-36



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



|(12) | Employee Benefit Plans
|---- | ----------------------

Defined Benefit Plans

The Company and certain affiliated companies participate in a
qualified 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. A
separate non-qualified defined benefit pension plan sponsored by NMIC covers certain executives with at least one year of service. The Companys portion of expense relating to these plans was $19.9 million, $16.6 million and $13.7 million for
the years ended December 31, 2006, 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. The level of contribution required by a qualified
retiree depends on the retirees years of service and date of hire. In general, postretirement benefits are available to full-time employees who are credited with 120 months of retiree life and health service. 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. The Companys portion of expense relating to
these plans was immaterial for the years ended December 31, 2006, 2005 and 2004.

Defined Contribution Plans

NMIC sponsors a defined contribution retirement savings plan 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 $6.6 million, $6.2 million and $5.8 million for the years ended
December 31, 2006, 2005 and 2004, respectively.



|(13) | 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, 2006, 2005 and
2004, the Company made payments to NMIC and NSC totaling $261.7 million, $274.1 million and $194.6 million, respectively.



F-37



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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 $5.48 billion and $6.39 billion as of December 31, 2006 and 2005, respectively. Total revenues from
these contracts were $133.4 million, $136.2 million and $136.5 million for the years ended December 31, 2006, 2005 and 2004, respectively, and include policy charges, net investment income from investments backing the contracts and
administrative fees. Total interest credited to the account balances was $110.7 million, $107.3 million and $107.9 million for the years ended December 31, 2006, 2005 and 2004, 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. For the years ended December 31, 2006, 2005 and 2004, the Company made lease payments to NMIC of $19.3 million, $18.7 million and $18.4 million, respectively.

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, 2006, 2005 and 2004 were $430.8 million, $429.5 million and $335.6 million, respectively, while benefits, claims and expenses ceded during these years were $470.4 million, $398.8 million and $336.0 million, respectively.

Funds of NWD Investment Management, Inc. (NWD), an affiliate, are offered to the Companys customers as investment
options in certain of the Companys products. As of December 31, 2006 and 2005, customer allocations to NWD funds totaled $18.26 billion and $15.70 billion, respectively. For the years ended December 31, 2006, 2005 and 2004, NWD paid
the Company $64.4 million, $51.6 million and $44.5 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 $28.3 million, $26.5 million and $23.2 million for the years ended December 31, 2006, 2005 and 2004, 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, 2006 and 2005, the Company had no outstanding borrowings from affiliated entities under such agreements. During 2006, 2005 and 2004, the most
the Company had outstanding at any given time was $191.5 million, $55.3 million and $227.7 million, respectively, and the amounts the Company incurred for interest expense on intercompany repurchase agreements during these years were immaterial.

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 $601.3 million and $390.9 million as
of December 31, 2006 and 2005, respectively, and are included in short-term investments on the consolidated balance sheets.

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, 2006, 2005 and 2004 were $58.1 million, $59.0
million and $63.1 million, respectively.

During the years ended December 31, 2006 and 2005, the Company did not
purchase any fixed maturity securities available-for-sale from NFN compared to $829.9 million during 2004. NFN recorded gross realized gains of $23.4 million on such transactions during 2004.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 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 $6.9
million, $2.9 million and $2.6 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Historically, the Company has retained funds for certain claim and benefit payments to customers in the form of interest-bearing accounts. During the year ended December 31, 2006, this practice was discontinued. Eligible participant
balances totaling $224.7 million were transferred from the Company to interest-bearing deposit accounts of Nationwide Bank, a wholly-owned subsidiary of NFS, in exchange for cash plus a premium of $0.7 million payable to NFS for the value of the
relationships acquired by Nationwide Bank.

Through September 30, 2002, the Company filed a consolidated federal income
tax return with NMIC, as discussed in more detail in Note 10. Effective October 1, 2002, NLIC began filing a consolidated federal income tax return with NLAIC. Total payments (from) to NMIC were $(15.3) million, $45.0 million and $37.4 million
in the years ended December 31, 2006, 2005 and 2004, respectively. These payments related to tax years prior to deconsolidation.

In 2006, 2005 and 2004, NLIC paid dividends to NFS totaling $375.0 million, $185.0 million and $125.0 million, respectively.



|(14) | Contingencies
|---- | -------------

Legal Matters

The Company is a party to litigation and arbitration proceedings in the ordinary course of
its business. It is often not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some matters, including certain of those
referred to below, are in very preliminary stages, and the Company does not have sufficient information to make an assessment of the plaintiffs claims for liability or damages. In some of the cases seeking to be certified as class actions, the
court has not yet decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive
damages and equitable remedies, which are difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by 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
June 2005, respectively, and no further information requests have been received with respect to these matters.



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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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, funding
agreements issued to back MTN programs, recordkeeping and retention compliance by broker/dealers, and supervision of former registered representatives. 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 certain of these investigations, including those relating to
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 NLIC 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 November 15, 2006, NFS, NLIC and NRS were named in a lawsuit filed in the Untied States District Court for the Southern District of Ohio entitled Kevin Beary, Sheriff of Orange County, Florida, In His Official Capacity,
Individually and On Behalf of All Others Similarly Situated v. Nationwide Life Insurance Co., Nationwide Retirement Solutions, Inc. and Nationwide Financial Services, Inc. The plaintiff seeks to represent a class of all sponsors of 457(b)
deferred compensation plans in the United States that had variable annuity contracts with the defendants at any time during the class period, or in the alternative, all sponsors of 457(b) deferred compensation plans in Florida that had variable
annuity contracts with the defendants during the class period. The Class Period is from January 1, 1996 until the Class Notice is provided. The plaintiff alleges that the defendants breached their fiduciary duties by arranging for and retaining
service payments from certain mutual funds. The complaint seeks an accounting, a declaratory judgment, a permanent injunction and disgorgement or restitution of the service fee payments allegedly received by the defendants, including interest. On
January 25, 2007, NFS, NLIC and NRS filed a motion to dismiss. NFS, NLIC and NRS intend to defend this lawsuit vigorously.

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 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 NLIC for term life insurance policies issued by NLIC during the Class Period that provide for guaranteed maximum premiums, excluding certain specified products. 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 Class Period is from February 10, 1990
through February 2, 2006, the date the class was certified. On January 26, 2007, the plaintiff filed a motion for summary judgment. NLIC continues to defend this lawsuit vigorously.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



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 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 1, 2006, the District Court granted NLICs motion to dismiss the plaintiffs complaint. On November 29, 2006, the plaintiff filed its appellate brief with the Fourth Circuit Court of Appeals contesting
the District Courts dismissal. NLIC continues to defend this lawsuit vigorously.

On January 21, 2004, NLIC,
Nationwide Life Insurance Company of America, NLAIC, NFS and Nationwide Financial Corporation (collectively referred to as the Companies) were 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, the plaintiff alleges that the Companies and/or their affiliated life insurance companies caused the replacement of variable
insurance policies and other financial products issued by United Investors with policies issued by the Companies. 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. On December 30, 2005, the Companies filed a motion for summary judgment. On June 15, 2006, the District Court
granted the Companies motion for summary judgment on all grounds and dismissed the plaintiffs entire case with prejudice. The plaintiff appealed the District Courts decision to the Fifth Circuit Court of Appeals. The appeal has
been fully briefed, and the Companies are awaiting a decision. The Companies continue to defend this lawsuit vigorously.

On
August 15, 2001, NFS and NLIC were named in a lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al
v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. Currently, the plaintiffs fifth amended complaint, filed March 21, 2006, purports to represent a class of qualified retirement plans under ERISA that
purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual
funds. The complaint seeks disgorgement of some or all of the payments allegedly received by NLIC and NFS, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys fees. To date, the District Court has
rejected the plaintiffs request for certification of the alleged class. NFS and NLICs motion to dismiss the plaintiffs fifth amended complaint is currently pending before the court. NFS and NLIC continue to defend this
lawsuit vigorously.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



Tax Matters

The Companys federal income tax returns are routinely audited by the IRS. 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.



|(15) | Guarantees
|---- | ----------

Since 2001, the Company has sold $626.1 million of credit enhanced equity interests in Low-Income-Housing Tax Credit Funds (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, 2006, 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 $1.36 billion. The Company does not anticipate making any payments related to these 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 2006 and 2005, no stabilization collateral amounts were released into income. As of December 31, 2006 and 2005, $2.2 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.



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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



|(16) | Variable Interest Entities
|---- | --------------------------

As of December 31, 2006 and 2005, the Company had relationships with 18 and 19 variable interest entities (VIEs), respectively, each of which the Company was the primary beneficiary. As of December 31, 2006,
each VIE was a conduit that assists the Company in structured products transactions involving the sale of Tax Credit Funds to third party investors for which the Company provides guaranteed returns (see Note 15). The results of operations and
financial position of these VIEs are included along with corresponding minority interest liabilities in the accompanying consolidated financial statements.

VIE net assets were $445.5 million and $440.6 million as of December 31, 2006 and December 31, 2005, respectively. The following table summarizes the components of net assets as of December 31:



(in millions)

2006


2005Mortgage loans on real estate

$



$
31.5Other long-term investments


432.5



478.6Short-term investments


33.7



42.3Other assets


37.8



41.3Short-term debt






(32.6
)Other liabilities


(58.5
)


(120.5
)


The Companys total loss exposure from VIEs of which the Company is the
primary beneficiary was immaterial as of December 31, 2006 and 2005 (except for the impact of guarantees disclosed in Note 15).

In addition to the VIEs described above, the Company holds variable interests, in the form of limited partnerships or similar investments, in Tax Credit Funds of which 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 utilize certain tax credits and realize other tax benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that
qualify as VIEs, but of which the Company is not the primary beneficiary. The total exposure to loss on these VIEs was $68.9 million and $53.9 million as of December 31, 2006 and 2005, respectively.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



|(17) | Segment Information
|---- | -------------------

Management views the Companys business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.

The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by
adjusting income from continuing operations before federal income taxes 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
and net realized gains and losses related to securitizations and (2) 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 features, 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 primarily includes IRC Section 401(k) business, and the public sector primarily includes IRC Section 457 and Section 401(a) business, both in the form of full-service arrangements that provide plan administration and
fixed and variable group annuities as well as administration-only business.

Individual Protection

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 and certain expenses not allocated to other segments; periodic net coupon settlements on
non-qualifying derivatives; 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.



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##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



The following table summarizes the Companys business segment operating results
for the years ended December 31:



(in millions)

IndividualInvestments

RetirementPlans

IndividualProtection

Corporateand Other


Total2006Revenues:Policy charges

$
581.7

$
160.2

$
390.7

$



$
1,132.6Traditional life insurance and immediate annuity premiums


142.5





165.8






308.3Net investment income


739.5


636.0


328.2


354.8



2,058.5Net realized gains on investments, hedging instruments and hedged items1











1.0



1.0Other income


2.6





0.3


3.4



6.3Total revenues


1,466.3


796.2


885.0


359.2



3,506.7Benefits and expenses:Interest credited to policyholder account values


501.7


440.5


179.2


208.7



1,330.1Life insurance and annuity benefits


202.8





247.5






450.3Policyholder dividends on participating policies








25.6






25.6Amortization of DAC


352.7


37.9


69.6


(9.9
)


450.3Interest expense on debt











65.5



65.5Other operating expenses


206.3


179.1


142.4


4.0



531.8Total benefits and expenses


1,263.5


657.5


664.3


268.3



2,853.6Income from continuing operations before federal income tax expense


202.8


138.7


220.7


90.9


$
653.1Net realized gains on investments, hedging instruments and hedged items1











(1.0
)Adjustment to amortization related to net realized gains and losses











(9.9
)Pre-tax operating earnings

$
202.8

$
138.7

$
220.7

$
80.0Assets as of period end

$
55,404.6

$
28,817.2

$
16,948.8

$
8,791.8


$
109,962.4


| | 
| | 

| | 1 | Excluding periodic net coupon settlements on non-qualifying derivatives and net realized gains and
losses related to securitizations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



(in millions)

IndividualInvestments

RetirementPlans

IndividualProtection

Corporateand Other


Total2005Revenues:Policy charges

$
532.4

$
145.0

$
377.7

$



$
1,055.1Traditional life insurance and immediate annuity premiums


96.7





163.3






260.0Net investment income


822.4


642.9


332.8


307.1



2,105.2Net realized gains on investments, hedging instruments and hedged items1











9.5



9.5Other income


1.3


0.2





1.8



3.3Total revenues


1,452.8


788.1


873.8


318.4



3,433.1Benefits and expenses:Interest credited to policyholder account values


557.7


444.8


182.4


146.1



1,331.0Life insurance and annuity benefits


149.1





228.4






377.5Policyholder dividends on participating policies








33.1






33.1Amortization of DAC


329.1


47.2


89.0


1.0



466.3Interest expense on debt











66.3



66.3Other operating expenses


193.1


181.8


148.1


15.8



538.8Total benefits and expenses


1,229.0


673.8


681.0


229.2



2,813.0Income from continuing operations before federal income tax expense


223.8


114.3


192.8


89.2


$
620.1Net realized gains on investments, hedging instruments and hedged items1











(9.5
)Adjustment to amortization of DAC related to net realized gains and losses











1.0Pre-tax operating earnings

$
223.8

$
114.3

$
192.8

$
80.7Assets as of period end

$
52,929.2

$
29,987.2

$
14,728.7

$
9,313.4


$
106,958.5


| | 
| | 

| | 1 | Excluding periodic net coupon settlements on non-qualifying derivatives and net realized gains and
losses related to securitizations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004



(in millions)

IndividualInvestments

RetirementPlans

IndividualProtection

Corporateand Other


Total2004Revenues:Policy charges

$
503.6

$
157.0

$
364.6

$



$
1,025.2Traditional life insurance and immediate annuity premiums


87.5





182.9






270.4Net investment income


824.8


627.9


327.2


220.6



2,000.5Net realized losses on investments, hedging instruments and hedged items1











(43.0
)


(43.0
)Other income


0.6








15.8



16.4Total revenues


1,416.5


784.9


874.7


193.4



3,269.5Benefits and expenses:Interest credited to policyholder account values


573.5


435.5


181.5


86.7



1,277.2Life insurance and annuity benefits


136.9





232.3






369.2Policyholder dividends on participating policies








36.2






36.2Amortization of DAC


276.1


39.6


94.4






410.1Interest expense on debt











59.8



59.8Other operating expenses


210.0


184.5


159.7


27.8



582.0Total benefits and expenses


1,196.5


659.6


704.1


174.3



2,734.5Income from continuing operations before federal income tax expense


220.0


125.3


170.6


19.1


$
535.0Net realized losses on investments, hedging instruments and hedged items1











43.0Pre-tax operating earnings

$
220.0

$
125.3

$
170.6

$
62.1Assets as of period end

$
52,642.5

$
29,668.7

$
12,932.4

$
10,714.3


$
105,957.9


| | 
| | 

| | 1 | Excluding periodic net coupon settlements on non-qualifying derivatives and net realized gains and
losses related to securitizations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



F-47



---

##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Schedule I          Consolidated Summary of Investments  Other Than Investments in
Related Parties

As of December 31, 2006 (in millions)



|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|------------------------------------------------------------------------ |  | -------- | -------- | ----------- | - | --------------------------------------------------- |  | - | -------- | ----
|Column A                                                                 |  | Column B |          | Column C    |   | Column D                                            | 
|Type of investment                                                       |  | Cost     |          | Marketvalue |   | Amount atwhich shownin theconsolidatedbalance sheet | 
|Fixed maturity securities available-for-sale:                            |  |          |          |             |   |                                                     |  |   |          |     
|Bonds:                                                                   |  |          |          |             |   |                                                     |  |   |          |     
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $        | 123.7    |             | $ | 133.7                                               |  | $ | 133.7    |     
|Agencies not backed by the full faith and credit of the U.S. Government  |  |          | 559.4    |             |   | 603.4                                               |  |   | 603.4    |     
|Obligations of states and political subdivisions                         |  |          | 266.0    |             |   | 259.5                                               |  |   | 259.5    |     
|Foreign governments                                                      |  |          | 34.9     |             |   | 36.5                                                |  |   | 36.5     |     
|Public utilities                                                         |  |          | 1,541.9  |             |   | 1,543.5                                             |  |   | 1,543.5  |     
|All other corporate                                                      |  |          | 22,671.3 |             |   | 22,698.8                                            |  |   | 22,698.8 |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total fixed maturity securities available-for-sale                       |  |          | 25,197.2 |             |   | 25,275.4                                            |  |   | 25,275.4 |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Equity securities available-for-sale:                                    |  |          |          |             |   |                                                     |  |   |          |     
|Common stocks:                                                           |  |          |          |             |   |                                                     |  |   |          |     
|Banks, trusts and insurance companies                                    |  |          | 13.3     |             |   | 17.8                                                |  |   | 17.8     |     
|Industrial, miscellaneous and all other                                  |  |          | 7.8      |             |   | 9.1                                                 |  |   | 9.1      |     
|Nonredeemable preferred stocks                                           |  |          | 7.4      |             |   | 7.5                                                 |  |   | 7.5      |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total equity securities available-for-sale                               |  |          | 28.5     |             |   | 34.4                                                |  |   | 34.4     |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Mortgage loans on real estate, net                                       |  |          | 8,222.9  |             |   |                                                     |  |   | 8,202.2  | 1   
|Real estate, net:                                                        |  |          |          |             |   |                                                     |  |   |          |     
|Investment properties                                                    |  |          | 66.3     |             |   |                                                     |  |   | 49.7     | 2   
|Acquired in satisfaction of debt                                         |  |          | 5.2      |             |   |                                                     |  |   | 5.1      | 2   
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total real estate, net                                                   |  |          | 71.5     |             |   |                                                     |  |   | 54.8     |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Policy loans                                                             |  |          | 639.2    |             |   |                                                     |  |   | 639.2    |     
|Other long-term investments                                              |  |          | 677.4    |             |   |                                                     |  |   | 574.9    | 3, 4
|Short-term investments, including amounts managed by a related party     |  |          | 1,722.0  |             |   |                                                     |  |   | 1,722.0  |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total investments                                                        |  | $        | 36,558.7 |             |   |                                                     |  | $ | 36,502.9 |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     

---

|1 | Difference from Column B primarily is attributable to valuation allowances due to impairments on
mortgage loans on real estate (see Note 6 to the audited consolidated financial statements), hedges and commitment hedges on mortgage loans on real estate.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Difference from Column B primarily results from adjustments for accumulated depreciation.
|- | -----------------------------------------------------------------------------------------



|3 | Difference from Column B primarily is due to operating gains and/or losses of investments in limited
partnerships.
|- | ------------------------------------------------------------------------------------------------------------------



|4 | Amount shown does not agree to the audited consolidated balance sheet due to $24.1 million in
unconsolidated related party investments.
|- | ---------------------------------------------------------------------------------------------------------------------------------------

See accompanying report of independent registered public accounting firm.



F-48



---

##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Schedule III        Supplementary Insurance Information

As of December 31, 2006, 2005 and 2004 and for each of the years then ended (in millions)



|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|---------------------- |  | ------------------------------ | ------- | - | ------------------------------------------------------ | - | ----------------------------------------------- |  | - | --------------------------------------- | - | --------------- | - | ----- |  | - | -----
|Column A               |  | Column B                       |         |   | Column C                                               |   | Column D                                        |  |   | Column E                                |   | Column F       
|Year: Segment          |  | Deferredpolicyacquisitioncosts |         |   | Future policybenefits, losses,claims
and loss expenses |   | Unearnedpremiums1                               |  |   | Other policyclaims andbenefits payable1 |   | Premiumrevenue 
|2006                   |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Individual Investments |  | $                              | 1,945.0 |   |                                                        | $ | 13,004.4                                        |  |   |                                         |   |                 |   |       |  | $ | 142.5
|Retirement Plans       |  |                                | 288.6   |   |                                                        |   | 10,839.0                                        |  |   |                                         |   |                 |   |       |  |   |     
|Individual Protection  |  |                                | 1,441.0 |   |                                                        |   | 5,574.1                                         |  |   |                                         |   |                 |   |       |  |   | 165.8
|Corporate and Other    |  |                                | 83.4    |   |                                                        |   | 4,991.9                                         |  |   |                                         |   |                 |   |       |  |   |     
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Total                  |  | $                              | 3,758.0 |   |                                                        | $ | 34,409.4                                        |  |   |                                         |   |                 |   |       |  | $ | 308.3
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|2005                   |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Individual Investments |  | $                              | 1,936.4 |   |                                                        | $ | 14,970.9                                        |  |   |                                         |   |                 |   |       |  | $ | 96.7 
|Retirement Plans       |  |                                | 290.3   |   |                                                        |   | 10,847.3                                        |  |   |                                         |   |                 |   |       |  |   |     
|Individual Protection  |  |                                | 1,328.7 |   |                                                        |   | 5,531.9                                         |  |   |                                         |   |                 |   |       |  |   | 163.3
|Corporate and Other    |  |                                | 42.5    |   |                                                        |   | 4,591.0                                         |  |   |                                         |   |                 |   |       |  |   |     
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Total                  |  | $                              | 3,597.9 |   |                                                        | $ | 35,941.1                                        |  |   |                                         |   |                 |   |       |  | $ | 260.0
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|2004                   |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Individual Investments |  | $                              | 2,015.5 |   |                                                        | $ | 15,500.6                                        |  |   |                                         |   |                 |   |       |  | $ | 87.5 
|Retirement Plans       |  |                                | 301.7   |   |                                                        |   | 10,139.8                                        |  |   |                                         |   |                 |   |       |  |   |     
|Individual Protection  |  |                                | 1,244.1 |   |                                                        |   | 5,430.5                                         |  |   |                                         |   |                 |   |       |  |   | 182.9
|Corporate and Other    |  |                                | (144.7  | ) |                                                        |   | 5,312.2                                         |  |   |                                         |   |                 |   |       |  |   |     
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Total                  |  | $                              | 3,416.6 |   |                                                        | $ | 36,383.1                                        |  |   |                                         |   |                 |   |       |  | $ | 270.4
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|                       |  |                                |         |   |                                                       
|Column A               |  | Column G                       |         |   | Column H                                               |   | Column I                                        |  |   | Column J                                |   | Column K       
|Year: Segment          |  | Netinvestmentincome2           |         |   | Benefits, claims,losses andsettlement expenses         |   | Amortizationof deferred policyacquisition costs |  |   | Other operatingexpenses2                |   | Premiumswritten
|2006                   |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Individual Investments |  | $                              | 739.5   |   |                                                        | $ | 704.5                                           |  | $ | 352.7                                   |   |                 |   | 206.3 |  |   |      
|Retirement Plans       |  |                                | 636.0   |   |                                                        |   | 440.5                                           |  |   | 37.9                                    |   |                 |   | 179.1 |  |   |      
|Individual Protection  |  |                                | 328.2   |   |                                                        |   | 452.3                                           |  |   | 69.6                                    |   |                 |   | 142.4 |  |   |      
|Corporate and Other    |  |                                | 354.8   |   |                                                        |   | 208.7                                           |  |   | (9.9                                    | ) |                 |   | 4.0   |  |   |      
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Total                  |  | $                              | 2,058.5 |   |                                                        | $ | 1,806.0                                         |  | $ | 450.3                                   |   |                 | $ | 531.8 |  |   |      
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|2005                   |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Individual Investments |  | $                              | 822.4   |   |                                                        | $ | 706.8                                           |  | $ | 329.1                                   |   |                 | $ | 193.1 |  |   |      
|Retirement Plans       |  |                                | 642.9   |   |                                                        |   | 444.8                                           |  |   | 47.2                                    |   |                 |   | 181.8 |  |   |      
|Individual Protection  |  |                                | 332.8   |   |                                                        |   | 443.9                                           |  |   | 89.0                                    |   |                 |   | 148.1 |  |   |      
|Corporate and Other    |  |                                | 307.1   |   |                                                        |   | 146.1                                           |  |   | 1.0                                     |   |                 |   | 15.8  |  |   |      
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Total                  |  | $                              | 2,105.2 |   |                                                        | $ | 1,741.6                                         |  | $ | 466.3                                   |   |                 | $ | 538.8 |  |   |      
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|2004                   |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Individual Investments |  | $                              | 824.8   |   |                                                        | $ | 710.4                                           |  | $ | 276.1                                   |   |                 | $ | 210.0 |  |   |      
|Retirement Plans       |  |                                | 627.9   |   |                                                        |   | 435.5                                           |  |   | 39.6                                    |   |                 |   | 184.5 |  |   |      
|Individual Protection  |  |                                | 327.2   |   |                                                        |   | 450.0                                           |  |   | 94.4                                    |   |                 |   | 159.7 |  |   |      
|Corporate and Other    |  |                                | 220.6   |   |                                                        |   | 86.7                                            |  |   |                                        |   |                 |   | 27.8  |  |   |      
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      
|Total                  |  | $                              | 2,000.5 |   |                                                        | $ | 1,682.6                                         |  | $ | 410.1                                   |   |                 | $ | 582.0 |  |   |      
|                       |  |                                |         |   |                                                        |   |                                                 |  |   |                                         |   |                 |   |       |  |   |      

---

|1 | Unearned premiums and other policy claims and benefits payable are included in Column C amounts.
|- | ------------------------------------------------------------------------------------------------



|2 | Allocations of net investment income and certain operating expenses are based on numerous assumptions
and estimates, and reported segment operating results would change if different methods were applied.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-49



---

##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Schedule IV          Reinsurance

As of December 31, 2006, 2005 and 2004 and for each of the years then ended (dollars in millions)



|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|----------------------------- |  | ----------- | --------- | ---------------------- | - | -------------------------- |  | --------- | ---- | -------------------------------- | - | -------- |  | -----
|Column A                      |  | Column B    |           | Column C               |   | Column D                   |  | Column E  |      | Column F                        
|                              |  | Grossamount |           | Ceded toothercompanies |   | Assumedfrom othercompanies |  | Netamount |      | Percentageof amountassumedto net
|2006                          |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Life insurance in force       |  | $           | 151,109.9 |                        | $ | 58,189.8                   |  | $         | 7.9  |                                  | $ | 92,928.0 |  | 0.0% 
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Premiums:                     |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Life insurance1               |  | $           | 336.4     |                        | $ | 28.4                       |  | $         | 0.3  |                                  | $ | 308.3    |  | 0.1% 
|Accident and health insurance |  |             | 388.9     |                        |   | 417.4                      |  |           | 28.5 |                                  |   |         |  | N/A  
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Total                         |  | $           | 725.3     |                        | $ | 445.8                      |  | $         | 28.8 |                                  | $ | 308.3    |  | 9.3% 
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|2005                          |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Life insurance in force       |  | $           | 142,308.1 |                        | $ | 52,339.1                   |  | $         | 10.6 |                                  | $ | 89,979.6 |  | 0.0% 
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Premiums:                     |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Life insurance1               |  | $           | 311.5     |                        | $ | 51.8                       |  | $         | 0.3  |                                  | $ | 260.0    |  | 0.1% 
|Accident and health insurance |  |             | 415.2     |                        |   | 445.1                      |  |           | 29.9 |                                  |   |         |  | N/A  
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Total                         |  | $           | 726.7     |                        | $ | 496.9                      |  | $         | 30.2 |                                  | $ | 260.0    |  | 11.6%
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|2004                          |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Life insurance in force       |  | $           | 123,756.6 |                        | $ | 46,866.2                   |  | $         | 10.2 |                                  | $ | 76,900.6 |  | 0.0% 
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Premiums:                     |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Life insurance1               |  | $           | 300.7     |                        | $ | 30.6                       |  | $         | 0.3  |                                  | $ | 270.4    |  | 0.1% 
|Accident and health insurance |  |             | 312.7     |                        |   | 345.1                      |  |           | 32.4 |                                  |   |         |  | N/A  
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      
|Total                         |  | $           | 613.4     |                        | $ | 375.7                      |  | $         | 32.7 |                                  | $ | 270.4    |  | 12.1%
|                              |  |             |           |                        |   |                            |  |           |      |                                  |   |          |  |      

---

|1 | Primarily represents premiums from traditional life insurance and life-contingent immediate annuities
and excludes deposits on investment products and universal life insurance products.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-50



---

##### Table of Contents

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial
Services, Inc.)

Schedule V        Valuation and Qualifying Accounts

Years ended December 31, 2006, 2005 and 2004 (in millions)



|                                                     |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|---------------------------------------------------- |  | ---------------------------- | ---- | ------------------------------------- | - | ----------------------- |  | ----------- | - | ---------------------- | - | --- |  | - | ----
|Column A                                             |  | Column B                     |      | Column C                              |   | Column D                |  | Column E   
|Description                                          |  | Balance atbeginningof period |      | Charged(credited) tocosts andexpenses |   | Charged tootheraccounts |  | Deductions1 |   | Balance atend ofperiod
|2006                                                 |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|Valuation allowances - mortgage loans on real estate |  | $                            | 31.1 |                                       | $ | 6.0                     |  | $           |  |                        | $ | 2.8 |  | $ | 34.3
|                                                     |  |                              |      |                                       |  
|2005                                                 |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|Valuation allowances - mortgage loans on real estate |  | $                            | 33.3 |                                       | $ | 1.6                     |  | $           |  |                        | $ | 3.8 |  | $ | 31.1
|                                                     |  |                              |      |                                       |  
|2004                                                 |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|Valuation allowances - mortgage loans on real estate |  | $                            | 29.1 |                                       | $ | 7.5                     |  | $           |  |                        | $ | 3.3 |  | $ | 33.3

---

|1 | Amounts represent transfers to real estate owned and recoveries.
|- | ----------------------------------------------------------------



F-51



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |                                                 |  |                                        
|------------------- |  | ----------------------------------------------- |  | ---------------------------------------
|                    | 
|                    |  | NATIONWIDE LIFE INSURANCE COMPANY. (Registrant)
|                    |  |                                                
|Date: March 1, 2007 |  | By                                              |  | /s/ W.G. Jurgensen                     
|                    |  |                                                 |  | W.G. Jurgensen, Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                        |  |  |  |                   |  |  |  |                                                                       |  |  |  |                  
|------------------------------------------------------- |  |  |  | ----------------- |  |  |  | --------------------------------------------------------------------- |  |  |  | -----------------
|                                                        |  |  |  |                   |  | 
|/s/ Arden L. Shisler                                    |  |  |  | February 21, 2007 |  |  |  | /s/ W.G. Jurgensen                                                    |  |  |  | March 1, 2007    
|                                                        |  |  |  |                   |  | 
|Arden L. Shisler, Chairman of the Board                 |  |  |  | Date              |  |  |  | W.G. Jurgensen, Chief Executive Officer and
Director                  |  |  |  | Date             
|                                                        |  |  |  |                   |  | 
|/s/ Joseph A. Alutto                                    |  |  |  | February 21, 2007 |  |  |  | /s/ James G. Brocksmith, Jr.                                          |  |  |  | February 21, 2007
|                                                        |  |  |  |                   |  | 
|Joseph A. Alutto, Director                              |  |  |  | Date              |  |  |  | James G. Brocksmith, Jr., Director                                    |  |  |  | Date             
|                                                        |  |  |  |                   |  | 
|/s/ Keith W. Eckel                                      |  |  |  | February 21, 2007 |  |  |  | /s/ Lydia M. Marshall                                                 |  |  |  | February 21, 2007
|                                                        |  |  |  |                   |  | 
|Keith W. Eckel, Director                                |  |  |  | Date              |  |  |  | Lydia M. Marshall, Director                                           |  |  |  | Date             
|                                                        |  |  |  |                   |  | 
|/s/ Donald L. McWhorter                                 |  |  |  | February 21, 2007 |  |  |  | /s/ David O. Miller                                                   |  |  |  | February 21, 2007
|                                                        |  |  |  |                   |  | 
|Donald L. McWhorter, Director                           |  |  |  | Date              |  |  |  | David O. Miller, Director                                             |  |  |  | Date             
|                                                        |  |  |  |                   |  | 
|/s/ Martha Miller de Lombera                            |  |  |  | February 21, 2007 |  |  |  | /s/ James F. Patterson                                                |  |  |  | February 21, 2007
|                                                        |  |  |  |                   |  | 
|Martha Miller de Lombera, Director                      |  |  |  | Date              |  |  |  | James F. Patterson, Director                                          |  |  |  | Date             
|                                                        |  |  |  |                   |  | 
|/s/ Gerald D. Prothro                                   |  |  |  | February 21, 2007 |  |  |  | /s/ Alex Shumate                                                      |  |  |  | February 21, 2007
|                                                        |  |  |  |                   |  | 
|Gerald D. Prothro, Director                             |  |  |  | Date              |  |  |  | Alex Shumate, Director                                                |  |  |  | Date             
|                                                        |  |  |  |                   |  | 
|/s/ Mark R. Thresher                                    |  |  |  | March 1, 2007     |  |  |  | /s/ Timothy G. Frommeyer                                              |  |  |  | March 1, 2007    
|                                                        |  |  |  |                   |  | 
|Mark R. Thresher, President and Chief Operating
Officer |  |  |  | Date              |  |  |  | Timothy G. Frommeyer, Senior Vice President  Chief
Financial Officer |  |  |  | Date             



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##### Table of Contents

Exhibit Index



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3.1     |  | Amended Articles of Incorporation of Nationwide Life Insurance Company, dated February 3, 2000 (previously filed as Exhibit 3.1 to Form 10-K, Commission File Number 2-64559, filed March 24,
2003, and incorporated herein by reference)                                                                                                                                                                                                         
|        | 
|3.2     |  | Form of Amended and Restated Code of Regulations of Nationwide Life Insurance Company, dated May 7, 2002 (previously filed as Exhibit 3.2 to Form 8-K, Commission File Number 2-64559, filed
December 9, 2004, and incorporated herein by reference)                                                                                                                                                                                              
|        | 
|10.1    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Financial Services, Inc. and any corporation that may hereafter be a subsidiary of Nationwide Financial Services,
Inc. (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                                                                     
|        | 
|10.2    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company and any corporation that may hereafter be a subsidiary of Nationwide Life Insurance Company
(previously filed as Exhibit 10.4 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                                                                         
|        | 
|10.3    |  | Form of Amended and Restated Cost Sharing Agreement among parties named therein (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March 14, 2003, and
incorporated herein by reference)                                                                                                                                                                                                                       
|        | 
|10.4    |  | Amended and Restated Five-Year Credit Agreement, dated May 13, 2005, among Nationwide Financial Services, Inc., Nationwide Life Insurance Company, Nationwide Mutual Insurance Company, the
banks party thereto and Wachovia Bank, National Association, as agent, and Citicorp USA, as syndication agent (previously filed as Exhibit 10.1 to Form 8-K, Commission File Number 1-12785, filed May 19, 2005, and incorporated herein by
reference)
|        | 
|10.5    |  | Form of Lease Agreement between Nationwide Mutual Insurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company and Nationwide Financial Services, Inc.
(previously filed as Exhibit 10.7 to Form S-1/A, Registration Number 333-18531, filed February 25, 1997, and incorporated herein by reference)                                                                                                      
|        | 
|10.6*   |  | General Description of Nationwide Performance Incentive Plan (previously filed as Exhibit 10.9 to Form 10-K, Commission File Number 333-18527, filed March 29, 2001, and incorporated herein by
reference)                                                                                                                                                                                                                                        
|        | 
|10.7*   |  | Form of Amended and Restated Nationwide Office of Investments Incentive Plan dated as of October 7, 2003 (previously filed as Exhibit 10.13 to Form 10-K, Commission File Number 1-12785, filed
March 1, 2005, and incorporated herein by reference)                                                                                                                                                                                              
|        | 
|10.8*   |  | Nationwide Excess Benefit Plan effective as of January 1, 2000 (previously filed as Exhibit 10.14 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by
reference)                                                                                                                                                                                                                                        
|        | 
|10.9*   |  | Nationwide Supplemental Retirement Plan As Amended and Restated effective January 1, 2000 (previously filed as Exhibit 10.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005,
and incorporated herein by reference)                                                                                                                                                                                                              
|        | 
|10.10*  |  | Nationwide Severance Pay Plan effective as of March 1, 2003 (previously filed as Exhibit 10.16 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by
reference)                                                                                                                                                                                                                                           



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                                                                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|10.11*   |  | Nationwide Supplemental Defined Contribution Plan effective as of January 1, 2005 (previously filed as Exhibit 10.17 to Form 10-K, Commission File Number 1-12785,
filed March 1, 2005, and incorporated herein by reference)                                                                                                                              
|         | 
|10.12*   |  | Nationwide Individual Deferred Compensation Plan, as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.18 to Form 10-K, Commission File
Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                     
|         | 
|10.13*   |  | Nationwide Board of Directors Deferred Compensation Plan, as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.19 to Form 10-K, Commission
File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                             
|         | 
|10.14    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life Insurance Company and Nationwide Cash Management Company (previously filed as
Exhibit 10.22 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                           
|         | 
|10.15    |  | Master Repurchase Agreement between Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and Nationwide Mutual Insurance Company and certain of
its Subsidiaries and affiliates (previously filed as Exhibit 10.20 to Form 10-K, Commission File Number 333-18527, filed March 29, 2000, and incorporated herein by reference)
|         | 
|10.16*   |  | Form of Employment Agreement, dated January 1, 2000, between Nationwide Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.25 to Form 10-Q,
Commission File Number 333-18527, filed August 14, 2000, and incorporated herein by reference)                                                                                       
|         | 
|10.16.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.28.1 to Form
10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                            
|         | 
|10.17*   |  | Form of Employment Agreement, dated January 1, 2000, between Nationwide Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit 10.28 to Form 10-Q, Commission
File Number 333-18527, filed August 14, 2000, and incorporated herein by reference)                                                                                         
|         | 
|10.17.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit 10.31.1 to Form
10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                              
|         | 
|10.18*   |  | Form of Employment Agreement between Nationwide Mutual Insurance Company and Robert Rosholt (previously filed as Exhibit 10.30 to Form 10-Q, Commission File Number 1-12785,
filed May 14, 2003, and incorporated herein by reference)                                                                                                                     
|         | 
|10.19*   |  | Form of Employment Agreement, dated May 26, 2000, between Nationwide Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.32 to Form 10-Q, Commission
File Number 333-18527, filed November 13, 2000, and incorporated herein by reference)                                                                                         
|         | 
|10.19.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.34.1 to Form
10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                             
|         | 
|10.20*   |  | Form of Employment Agreement, dated February 25, 2004, between Nationwide Mutual Insurance Company and Terri L. Hill (previously filed as Exhibit 10.1 to Form 10-Q,
Commission File Number 1-12785, filed May 7, 2004, and incorporated here by reference)                                                                                                



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                      
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|10.21*   |  | Form of Employment Agreement, dated January 1, 2004 and fully executed on April 7, 2004, between Nationwide Financial Services, Inc. and Mark R. Thresher
(previously filed as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)
|         | 
|10.22*   |  | Offer Letter for Keith Millner dated November 19, 2004 (previously filed as Exhibit 10.1 to Form 8-K, Commission File Number 1-12785, filed December 3, 2004, and incorporated
herein by reference)                                                                                                  
|         | 
|10.23*   |  | Form of Employment Agreement, dated June 4, 2001, between Nationwide Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.36 to Form 10-Q,
Commission File Number 1-12785, filed August 10, 2001, and incorporated herein by reference)                                    
|         | 
|10.23.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.42.1 to
Form 10-K, Commission File Number 333-18527, filed March 1, 2005, and incorporated herein by reference)                  
|         | 
|10.24*   |  | Employment letter agreement between Nationwide Financial Services, Inc. and John Carter dated October 27, 2005 (previously filed as Exhibit 10.1 Form 10-Q, Commission File
Number 1-12785, filed November 3, 2005, and incorporated herein by reference)                                            
|         | 
|10.25*   |  | Summary of terms of employment of Timothy G. Frommeyer (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and
incorporated herein by reference)                                                                                                 
|         | 
|10.26    |  | Form of Employee Leasing Agreement, dated July 1, 2000, between Nationwide Mutual Insurance Company and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.35
to Form 10-Q, Commission File Number 1-12785, filed May 11, 2001, and incorporated herein by reference)               
|         | 
|10.27    |  | Form of Surplus Note, dated December 17, 2001, between Nationwide Financial Services, Inc. and Nationwide Life Insurance Company (previously filed as Exhibit 10.32 to Form
10-K, Commission File Number 2-64559, filed March 23, 2003, and incorporated herein by reference)                        
|         | 
|10.28    |  | Form of Surplus Note, dated June 26, 2002, between Nationwide Financial Services, Inc. and Nationwide Life Insurance Company (previously filed as Exhibit 10.33 to Form 10-K,
Commission File Number 2-64559, filed March 23, 2003, and incorporated herein by reference)                            
|         | 
|10.29    |  | Form of Surplus Note, dated December 23, 2003, between Nationwide Financial Services, Inc. and Nationwide Life Insurance Company (previously filed as Exhibit 10.34 to Form
10-K, Commission File Number 2-64559, filed March 11, 2004, and incorporated herein by reference)                        
|         | 
|10.30*   |  | Employment Offer Letter Agreement between Nationwide Financial Services, Inc. and Gail Snyder dated November 28, 2005 (previously filed as Exhibit 10.49 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                    
|         | 
|10.31*   |  | Offer Letter for Anne L. Arvia, dated June 30, 2006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated
herein by reference)                                                                                                      
|         | 
|10.32*   |  | Offer Letter for William Jackson, dated August 21, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and
incorporated herein by reference)                                                                                                



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.33* |  | Offer Letter for James Lyski, dated August 30, 3006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                     
|       | 
|10.34* |  | Form of Employment Agreement, dated October 16, 2006, between Nationwide Financial Services, Inc. and James R. Lyski                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|18     |  | Letter regarding change in accounting principle from KPMG LLP (previously filed as Exhibit 18 to Form 10-Q, Commission File Number 1-12785, filed November 12, 2003, and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                            
|       | 
|31.1   |  | Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                              
|       | 
|31.2   |  | Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                        
|       | 
|32.1   |  | Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be
furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference to such filing)       
|       | 
|32.2   |  | Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be
furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall note be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference to such filing)

---

|* | Management Compensatory Plan
|- | ----------------------------

All
other exhibits referenced by Item 601 of Regulation S-K are not required under the related instructions or are inapplicable and therefore have been omitted.



F-56