Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2003 the Company leased on average approximately 927,139 square feet of office space in the three building home office complex and in other offices in central Ohio. Also, approximately 120,000 square feet and 150,000 square feet of office space is located in Berwyn, Pennsylvania (leased) and Newark, Delaware (owned), respectively. The Company believes that its present facilities are adequate for the anticipated needs of the Company.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.
The most critical estimates include those used in determining DAC for investment products and universal life insurance products, the value of business acquired (VOBA), impairment losses on investments, valuation allowances for mortgage loans on real estate, goodwill, federal income taxes, and pension and other postretirement benefits.
The costs of acquiring 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 have been deferred. DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period.
Due to the magnitude of the DAC balance related to the individual variable annuity business, the sensitivity of the calculation to minor changes in the underlying assumptions and the related volatility that could result in the reported DAC balance without meaningful improvement in its reasonableness, the Company evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. Should the recorded balance of individual variable annuity DAC fall outside of these parameters for a prescribed period of time, or should the recorded balance fall outside of these parameters and the Company determines it is not reasonably possible to get back within this period of time, assumptions are required to be unlocked and the DAC is recalculated using revised best estimate assumptions. Otherwise, individual variable annuity DAC is not unlocked to reflect updated assumptions. In the event individual variable annuity DAC assumptions are unlocked and revised, the Company will continue to use the reversion to the mean process.
The VOBA asset related to investment products and universal life insurance products is also adjusted for the impact of net unrealized gains and losses on securities available-for-sale had such gains and losses been realized and allocated to the product lines, also as described in note 2(b) to the consolidated financial statements included in the F pages of this report, each year, the recoverability of VOBA is evaluated and if the evaluation indicates that the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, is insufficient to recover VOBA, the difference, if any, is charged to expense as accelerated amortization of VOBA.
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 the Company 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 estimated losses incurred as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains or 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.
Significant changes in the factors the Company considers in determining the valuation allowance on mortgage loans on real estate could result in a significant change in the provision for valuation allowance reported in the consolidated financial statements. During the third quarter of 2003, the Company refined its mortgage loan valuation allowance process by incorporating more detailed information in the analysis. This refined estimation process included an analysis by property type of the current composition of the portfolio, historical losses, current market cycles and trends and expected losses incurred at the balance sheet date, but not yet identified by specific loan. As a result, the valuation allowance was reduced by $16.5 million.
periodically, at the reporting unit level, for impairment. The Company conducts annual goodwill impairment testing in the fourth quarter. In addition, at each reporting period, the underlying components of goodwill are evaluated to determine whether conditions exist, which would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Management believes all judgments and assumptions that are made in connection with goodwill impairment testing are reasonable based on the underlying facts and circumstances evaluated. However, variances in actual results from expectations or changes in expectations for future cash flows, revenues and/or earnings could result in significant impairment charges related to goodwill in future periods
The 2003 pension expense for substantially all of the Company’s employees and certain agents totaled $12.3 million. This is an increase of $0.8 million over the 2002 pension expense of $11.5 million. This increase is primarily due to the impact of the inclusion of Nationwide Provident for a full year, low interest rates and the declines in the equity market in 2002. For the Company’s primary pension plan, the discount rate used to value the cash flows was lowered to 6.00% for 2003 expenses from the discount rate of 6.50% for 2002 and the long-term expected return on plan assets assumption was lowered to 7.75% in 2003 from the assumption of 8.25% in 2002.
The 2003 postretirement benefit expense for substantially all of the Company’s employees and in 2003 certain agents totaled $3.3 million, a decrease of $0.4 million from the 2002 postretirement benefit expense of $3.7 million. This decrease is primarily due to reductions in benefits provided by the plan. The discount rate used to value the cash flows was lowered to 6.60% for 2003 expenses from 7.25% in 2002 and the long-term expected return on plan assets assumption was lowered to 7.50% from the 2002 assumption of 7.75%.
In establishing the discount rate and the long-term expected rate of return on plan assets, the Company employs a prospective building block approach. This process is integrated with the determination of other economic assumptions such as salary scale. For a given measurement date, the discount rate is set by reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be settled. For pension benefits, an adjustment is included for plan administration and other expenses likely to be charged by an insurer. Because post-retirement benefit claims include administration expenses, a higher discount rate is utilized. The historic real rate of return for the reference bonds is subtracted from the yield on these bonds to generate an assumed inflation rate. Expected real rate of return on various asset sub-classes developed based on historic risk premiums for those sub-classes. The expected real rates of return, reduced for investment expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target portfolio. This expected real rate of return will vary by plan and will change when the plan’s target investment portfolio changes. The expected long-term rate of return for plan assets is the assumed inflation rate plus the expected real rate of return. This process effectively sets the expected return for the plan’s portfolio at the yield for the reference bond portfolio, adjusted for expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the market do not impact the expected risk premiums. However, as the yield for the reference bonds fluctuates, the assumed inflation rate and the expected long-term rate are adjusted in tandem.
2003 and in the fourth quarter of 2002, respectively. The 7% of growth in total revenues in 2002 from $3.07 billion reported in 2001 was primarily driven by the addition of Nationwide Provident and an increase in net investment income as a result of continued growth in interest spread-based businesses, which offset additional realized losses on investments, hedging instruments and hedged items.
The fluctuations in asset fees reflect changes in total average separate account assets of $289.0 million or 1% and $(6.11) billion or (10)% in 2003 and 2002, respectively. The decrease in average separate account values in 2002 was fueled by market depreciation on investment options underlying variable annuity and investment life insurance products as a result of the sharp declines in the equity markets.
Cost of insurance charges are assessed on the net amount at risk on universal life insurance policies. The net amount at risk is equal to a policy’s death benefit minus the related policyholder account value. The amount charged is based on the insured’s age and other underwriting factors. The increase in cost of insurance charges is due primarily to growth in the net amount at risk related to corporate and individual investment life insurance reflecting the addition of Nationwide Provident, new production and favorable persistency on policies sold in prior periods. The net amount at risk related to corporate and individual investment life insurance grew to $58.53 billion, including $21.30 billion for Nationwide Provident, at the end of 2003 compared to $57.65 billion, including $21.50 billion for Nationwide Provident at the end of 2002 and $32.93 billion at the end of 2001, respectively.
The $17.9 million decline in administrative fees in the year ended December 31, 2003 compared to the same period a year ago is primarily attributable to $3.6 million of fees related to a case that terminated in the first quarter of 2002 and a decrease in the number of individual annuity contracts that charge an annual administrative fee.
Surrender fees increased in 2003 compared to a year ago primarily due to the addition of Nationwide Provident and higher lapse activity in investment life insurance products as a result of the continued uncertainty in the equity markets.
Net investment income includes the investment income earned on investments supporting fixed annuities, the guaranteed fixed option of variable annuities, the medium-term note program, certain life insurance products and invested assets not allocated to product segments, net of related investment expenses. Net investment income totaled $2.23 billion in 2003 compared to $1.92 billion in 2002 and $1.74 billion in 2001, respectively. These increases were primarily due to increased invested assets supporting growth in individual fixed annuities, allocations to the fixed option of variable annuities, the medium-term note program, as well as the acquisition of Nationwide Provident, partially offset by lower yields due to declining market interest rates. General account assets supporting insurance products are closely correlated to the underlying reserves on these products. General account reserves supporting these products grew by $3.71 billion and $10.78 billion in 2003 and 2002, respectively, and totaled $39.99 billion as of December 31, 2003. The growth in general account reserves reflects the addition of Nationwide Provident business and increased customer preference for fixed products in light of continued volatile equity markets.
the fair value of derivatives qualifying as fair value hedges and the recognized change in the fair value of the hedged items, the ineffective, or excluded, portions of cash flow hedges and changes in the fair value of derivatives not designated in hedging relationships.
Other income includes management fees, commissions and other income earned by subsidiaries of the Company that provide administration, marketing and distribution services. Other income includes fees generated from structured products transactions including securitization of low income housing tax credits and commercial mortgage loans. The increase in other income in both 2003 and 2002 reflects an increase in the number of private sector pension plans sold through Nationwide Trust Company, additional structured products transactions, and the addition of Nationwide Provident and TBG Financial, which are included in the Company’s consolidated financial statements beginning October 1, 2002 and May 31, 2002, respectively.
Policyholder dividends on participating policies increased in 2003 and 2002 compared to the previous year due to the addition of Nationwide Provident, which historically sold a significant amount of participating life insurance.
Amortization of DAC decreased by $278.6 million to $399.5 million in 2003 compared to $678.1 million in 2002. The substantial increase in DAC amortization in 2002 reflects an acceleration of DAC amortization recorded in the third quarter of 2002. As part of the regular quarterly analysis of DAC, at the end of the third quarter of 2002, the Company determined that using actual experience to date and assumptions consistent with those used in the second quarter of 2002, its individual variable annuity DAC balance would be outside a pre-set parameter of acceptable results. The Company also determined that it was not reasonably possible that the DAC would return to an amount within the acceptable parameter within a prescribed period of time. Accordingly, the Company unlocked its DAC assumptions for individual variable annuities and reduced the DAC asset to the amount calculated using the revised assumptions. Because the Company unlocked the net separate account growth rate assumption for individual variable annuities for the three-year reversion period, the Company unlocked that assumption for all investment products and variable universal life insurance products to be consistent across product lines.
Therefore, in 2002, the Company recorded an acceleration of DAC amortization totaling $347.1 million, before tax, or $225.6 million, net of $121.5 million of tax benefit, which has been reported in the following segments in the amounts indicated, net of tax: Individual Annuity - $213.4 million, Institutional Products - $7.8 million and Life Insurance - $4.4 million. The acceleration of DAC amortization was the result of unlocking certain assumptions underlying the calculation of DAC for investment products and variable universal life insurance products. The most significant assumption changes were the resetting of the Company’s anchor date for reversion to the mean calculations to September 30, 2002, resetting the assumption for annual net separate account growth to 8 percent during the three-year reversion period for all investment
Other operating expenses increased 23% to $823.7 million in 2003 compared to $670.1 million in 2002. Other operating expenses were $529.0 million in 2001. Excluding the impact of the addition of TBG Financial and Nationwide Provident beginning in 2002, operating expenses increased 8% in 2003 over 2002, reflecting higher employee benefits, pension and insurance costs, partially offset by management’s efforts to manage expenses in response to the challenging market conditions. Also, excluding the impact of the addition of TBG Financial and Nationwide Provident, operating expenses increased 16% in 2002 compared to 2001, reflecting growth in the number of life insurance contracts in-force and the related increase in administrative processing costs. The Company has aggressively managed expenses in light of the challenging equity markets and interest rate environment over the past several years.
Federal income tax expense from continuing operations was $119.4 million representing an effective tax rate of 23.1% for 2003. Federal income tax benefit in 2002 and expense in 2001 was $7.3 million and $143.9 million, respectively, representing effective rates of (5.5)% and 25.3%. The tax benefit of $121.5 million associated with the $347.1 million of accelerated DAC amortization in third quarter 2002 was calculated at the U.S. federal corporate income tax rate of 35%, which substantially impacts what would normally be expected to be reported as effective tax rates. Excluding the accelerated DAC amortization and related tax benefit, the effective tax rate for 2002 was 23.8%. A decrease in pre-tax income, excluding accelerated DAC amortization in 2002, coupled with increases in tax-exempt income and tax credits from affordable housing partnership investments and the elimination of non-deductible goodwill amortization expense in 2002 drove the decrease in effective rates compared to 2001.
The Company 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 also markets group deferred compensation retirement plans to employees of state and local governments for use under IRC Section 457. The Company utilizes its sponsorship by the National Association of Counties, The United States Conference of Mayors and the International Association of Firefighters when marketing IRC Section 457 products.
Sales generated by life insurance specialists declined 24% in 2003 compared to 2002 and were flat in 2002 compared to 2001 due to the current unfavorable environment for COLI and executive deferred compensation programs. The sluggish equity markets in 2002 and 2001, the weak economy, unfavorable press regarding COLI and executive deferred compensation plans, and proposed legislation which could adversely impact the tax benefits of COLI all negatively impacted sales and new business opportunities.
The 22% increase in sales through NRS in 2003 reflects the addition of the State of New York and State of New Mexico plans and increased rollover activity from existing participants’ previous employer sponsored plans into existing accounts, as recent pension reform legislation has expanded the portability of public sector plan assets
Nationwide Provident sales grew significantly due to the acquisition that closed on October 1, 2002.
The Company has three product segments: Individual Annuity, Institutional Products and Life Insurance. In addition, the Company reports certain other revenues and expenses in a Corporate segment.
Excludes net realized gains and losses on investments not related to securitizations, hedging instruments and hedged items, discontinued operations and cumulative effect of adoption of accounting principles.
Premiums on immediate annuities increased by $24.0 million in of 2003 over 2002, following an $8.5 million increase in 2002. The increases reflect increased sales efforts and growth in the number of firms and distributors selling income products.
Other benefits reflect increased GMDB and immediate annuity costs in both 2003 and 2002. GMDB exposure, as measured by the difference between the aggregate account value and death benefit due to the contract holder net of any reinsurance coverage, decreased to $1.00 billion at the end of 2003 from $3.14 billion at the end of 2002. In both 2003 and
2002, as a result of increases in GMDB exposure and claims activity, the Company strengthened reserves by $11.9 million in first quarter 2003, to meet its then estimate of future net claims in excess of fees. The Company’s reserve for GMDB claims totaled $21.8 million and $13.7 million as of December 31, 2003 and 2002, respectively. The growth in other benefits also reflects increased provision for future policy benefits for immediate annuities consistent with the growth in premium income.
Other operating expenses were $194.6 million in 2003, an increase of 4% compared to $188.0 million in 2002 which was a 32% increase over 2001. These increases reflect the addition of Nationwide Provident, growth in the number of contracts in-force, increases in employee benefit, pension and insurance costs, and are partially offset by expense management efforts in response to the challenging equity markets and interest rate environments.
Interest spread income grew 22% in 2003 compared to a 63% increase in 2002. The growth was driven by 42% and 40% increases in average general account assets for these same comparative periods, respectively, the result of growth in the individual fixed annuity business, the addition of Nationwide Provident and increased customer allocations to the guaranteed fixed options of individual variable annuities. Allocations to the guaranteed fixed option related to new domestic individual variable annuity sales during the 2003 totaled 42% compared to 49% in 2002 and 32% in 2001, respectively.
Account values ended 2003 at $49.31 billion, up $8.41 billion from the end of 2002 of $40.90 billion, which was down $1.29 billion from the end of 2001. Nationwide Provident contributed $1.57 billion and $1.58 billion of account values in 2003 and 2002, respectively. Net flows, which consists of deposits less withdrawals, of $1.76 billion and $2.24 billion in 2003 and 2002, respectively, were offset by market appreciation (depreciation) of variable annuities of $6.76 billion and $(4.85) billion in 2003 and 2002, respectively. The decrease in net flows is attributable to the decline in fixed annuity sales combined with an increase in variable annuity surrenders which we attribute primarily to continued losses in the equity markets.
In addition, a number of the Company’s competitors have begun offering variable annuities with more robust living benefits (including income benefits and withdrawal benefits) than what the Company offered. The Company has elected to offer more limited living benefit features that meet the Company’s risk/return profile. During 2003, the Company discontinued offering products with guaranteed minimum income benefits. Also in 2003, the Company began offering products with
Interest spread income is comprised of net investment income less interest credited to policyholder account values. Interest spreads 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.
Interest spread income was $31.2 million higher in 2003 compared to 2002, which was $31.0 million higher than 2001 driven by higher prepayment income and higher average general account values. The increase in average general account values was led by the acquisition of Nationwide Provident, growth in the medium-term note program and an increase in participant allocations to the fixed option of the Company’s retirement plan offerings.
Amortization of DAC and VOBA decreased by $5.7 million to $47.7 million in 2003, compared to $53.4 million in 2002. Excluding the $12.0 million of accelerated DAC amortization in 2002, amortization of DAC and VOBA increased 15% in 2003, following a comparative 13% decrease in 2002. The changes are a reflection of fluctuations in the profitability of the underlying business, which is driven in part by equity market activity.
Institutional Products segment deposits in 2003 of $8.69 billion offset by participant withdrawals and surrenders totaling $6.28 billion generated net flows from participant activity of $2.40 billion, a 68% increase over 2002, which reflected a 19% decrease from 2001 net flows. An increase in deposits to Nationwide employee and agent benefit plans, deferrals into newly acquired plans, rollover activity into existing participant accounts and lower surrender activity drove the, 2003 increase. The decline in 2002 was driven by increased withdrawals from public sector cases increased in early 2002, as participants took advantage of the new portability provisions and rolled over funds to other companies.
Life Insurance segment pre-tax operating earnings increased 15% to $215.2 million in 2003, up from $186.7 million in 2002 while earnings in 2002 declined from $189.7 million in 2001. Excluding $6.8 million accelerated DAC amortization in third quarter 2002, pre-tax operating earnings totaled $193.5 million in 2002. The addition of Nationwide Provident with $68.0 million and $21.6 million in pre-tax operating earnings for 2003 and 2002, respectively, drove the strong earnings growth, which was partially offset by a $5.2 million reduction in second quarter 2003 pre-tax operating earnings as the result of a surrender of a large COLI case. In both 2003 and 2002, increased cost of insurance charges and fee income from TBG Financial were offset by higher policy benefits and operating expenses and DAC and VOBA amortization.
Net investment income increased in both 2003 and 2002, primarily reflecting the growth in fixed annuity business in the past two years and the addition of Nationwide Provident business, which historically sold a significant amount of traditional life insurance business.
Amortization of DAC and VOBA increased $53.7 million in 2003 following a $24.6 million increase in 2002, including $6.8 million of accelerated DAC amortization. The increase primarily reflects the addition of VOBA amortization related to Nationwide Provident business acquired and increased DAC amortization as a result of the surrender of a large COLI case and the near certain lapse of a second large COLI case. In addition, during 2003 mortality experience was more favorable than expected and there was an increase in estimated gross profits on the in-force variable business.
Other operating expenses were $257.9 million in 2003, up 39% from 2002, primarily due to the addition of operating expenses related to TBG Financial and Nationwide Provident in 2003. Excluding Nationwide Provident and TBG Financial, operating expenses increased 4% driven by higher employee benefit, pension and insurance costs, following a 7% increase in 2002. The increase in 2002 is attributable to growth in insurance in-force and higher employee benefit costs.
The Corporate segment consists of net investment income, expenses and interest expense not allocated to the three product segments, advisory services and revenues and expenses of the Company’s broker/dealer subsidiaries and, through 2001, goodwill amortization.
The terms of the senior notes contain various restrictive covenants including limitations on the disposition of subsidiaries. As of December 31, 2003, the Company was in compliance with all such covenants.
State insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of certain prescribed limitations without prior approval. Further discussion about such restrictions and dividend capacity is provided in Note 17 to the consolidated financial statements included in the F pages to this report and are hereby incorporated by reference.
Also available as a source of funds to the Company is a $1.00 billion revolving 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 $1.69 billion and NLIC maintain statutory surplus in excess of $935.0 million. The Company had no amounts outstanding under this agreement as of December 31, 2003. NLIC also has a $500.0 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 $1.00 billion revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had $199.8 million in commercial paper outstanding as of December 31, 2003.
In addition, the Company has a majority owned subsidiary that has available a $10.0 million revolving line of credit. The line is an annually renewable 364-day $10.0 million agreement with a single financial institution. The line of credit is guaranteed by NFS and the line was renewed on September 2003. The Company had $5.5 million outstanding on this line of credit as of December 31, 2003. See also note 8 to the consolidated financial statements included in the F pages of this report.
Also, the Company has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility, which is contingent on the liquidity of the securities lending program. The maximum amount available under the agreement is $100.0 million. The borrowing rate on this program rate is equal to fed funds plus 3 basis points. There were no amounts outstanding under this agreement as of December 31, 2003.
For individual annuity products ($47.52 billion of reserves as of December 31, 2003) the surrender charge is generally calculated as a percentage of the deposits made and is assessed at declining rates during the first seven years after a deposit is made.
As described in note 18 to the consolidated financial statements included in the F pages of this report, the Company acquired Nationwide Provident effective October 1, 2002. The aggregate purchase price was $1.13 billion, which was funded through a combination of the issuance of 31.9 million shares of NFS Class A common stock valued at $843.2 million, the payment of $235.1 million in cash and the issuance of $48.0 million of policy credits. Of the total consideration, $62.4 million was funded by Provident and the remainder was funded with existing resources, including funds raised by the Company in the form of senior debt issued in June 2002. The shares of the Class A common stock issued in this transaction were valued using an average stock price covering the period extending two days before and after the date the consideration elections were closed.
The following table summarizes the Company’s consolidated general account investments by asset category as of each December 31.
The following table lists the ten largest fixed maturity investment holdings by amortized cost for both investment grade and non-investment grade securities as of December 31, 2003:
An analysis of gross unrealized losses on available-for-sale securities by time in an unrealized loss position as of December 31, 2003 and 2002 follows:
The National Association of Insurance Commissioners (NAIC) assigns securities quality ratings and uniform valuations called “NAIC Designations” which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with a designation in class 1 being of the highest quality.
The following table sets forth an analysis of credit quality, as determined by NAIC Designation, of the Company’s general account fixed maturity securities portfolio as of each December 31.
Prepayment/extension risk is an inherent risk of holding MBSs. However, the degree of prepayment/extension risk varies by to the type of MBS held. The Company limits its exposure to prepayments/extension by including less volatile types of MBSs. As of December 31, 2003, $2.40 billion (54.0%) of the carrying value of the general account MBS portfolio was invested in planned amortization class CMOs/REMICs (PACs). PACs are securities whose cash flows are designed to remain constant over a variety of mortgage prepayment environments. Most of the Company’s non-PAC MBSs posses varying degrees of cash flow structure and prepayment/extension risk. The MBS portfolio contains only 4.8% of pure pass-throughs.
The following table sets forth the distribution by investment type of the Company’s general account MBS portfolio as of each December 31.
The Company’s general account asset-backed security (ABS) portfolio includes home equity and credit card backed ABSs, among others. As of December 31, 2003, ABSs were $4.34 billion (14.1%) of the carrying value of the general account fixed maturity securities available-for-sale.
The Company believes that general account ABS portfolio adds diversification, liquidity, credit quality and additional yield to its general account fixed maturity securities portfolio. Life the MBS portfolio, the Company’s objective for the ABS portfolio is to provide reasonable cash flow stability and increased yield.
The Company invests in private placement fixed maturity securities because of the generally higher nominal yield available compared to comparably rated public fixed maturity securities, more restrictive financial and business covenants available in private fixed maturity security loan agreements and stronger prepayment protection. Although private fixed maturity securities are not registered with the Securities and Exchange Commission and generally are less liquid than public fixed maturity securities, restrictive financial and business covenants included in private fixed maturity security loan agreements generally are designed to compensate for the impact of increased liquidity risk. A significant majority of the private fixed maturity securities that the Company holds are participations in issues that are also owned by other investors. In addition, some of the private fixed maturity securities are rated by nationally recognized rating agencies and substantially all have been assigned a rating designation by the NAIC.
As of December 31, 2003, general account mortgage loans were $8.96 billion (20.8%) of the carrying value of consolidated general account invested assets. As of such date, commercial mortgage loans constituted substantially all of total general account mortgage loans. Commitments to fund mortgage loans of $411.4 million were outstanding as of December 31, 2003.
The consolidated financial statements of Nationwide Financial Services, Inc. and Subsidiaries are indexed in Part IV, Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K and included in the F pages of this report.