Properties. - ------- ----------- The Company leases all space used in conducting its operations. The Company shares home office space and other facilities with affiliates in a building owned by Nationwide Mutual Insurance Company. The Company also leases various other branch offices. The terms of these leases are not material to the consolidated financial statements.
Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations. ---------------------- Consolidated Results of Operations
For purposes of this discussion, operating earnings refers to income before Federal income tax expense and cumulative effect of changes in accounting principles. During 1993, the Company adopted Statements of Financial Accounting Standards (SFAS) No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 109 - Accounting for Income Taxes. The impact of adopting these accounting standards was a $5.4 million after-tax benefit in 1993.
During 1995, the Company's reportable segments have been changed to better reflect the way the businesses are managed. Prior year segment results have been restated to reflect these changes. The following is a discussion of each segment's operating performance.
Outlook: Management anticipates continued growth in the long-term savings segment, although growth may be at a slower pace than the past three years. Increased competition from a variety of financial services providers could impact the segment's growth and profitability. In addition, annuities are interest sensitive and changes in interest rates could impact future sales as well as the retention and profitability of in-force contracts. Fluctuations in the bond and stock markets can also impact future sales and profitability in the long-term savings segment.
The life insurance segment includes whole life, universal life, variable universal life and endowment and term life insurance issued to individuals and groups. Life insurance is sold by Nationwide Insurance Enterprise career agents, brokers and financial institutions.
Operating earnings in 1994 were $46 million, an increase of 27% from 1993. An increase in life insurance in-force combined with a decrease in operating expenses accounted for the increase. Of the $7.4 billion increase in life insurance in-force, $3.1 billion is attributable to Employers Life Insurance Company of Wausau, which Nationwide Life Insurance Company acquired effective December 31, 1994.
The accident and health insurance segment sells policies to both individuals and groups. Individual policies include major medical, disability income and medicare supplement. Group policies include major medical, dental and disability income. Accident and health insurance policies are sold by Nationwide Insurance Enterprise career agents, brokers and third party administrators.
Outlook: Management does not anticipate significant growth in group accident and health insurance premiums and could potentially experience a decline. Individual accident and health insurance premiums will likely decrease due to declining sales of major medical policies. Management is evaluating the profitability of the group business and will increase premiums, when appropriate, for cases with adverse claims experience. In addition, management is evaluating the policyholder service functions at Nationwide Life Insurance Company and Employers Life Insurance Company of Wausau and will combine functions where appropriate to increase efficiencies and reduce costs.
Corporate primarily includes investments, and the related investment income, which are not specifically allocated to one of the three operating segments. In addition, realized gains and losses on all general account investments are reported as a component of the Corporate segment.
Operating earnings for 1995 were $140 million, up from $118 million in 1994. The increase is primarily due to realized losses on investments of $16 million in 1994 compared to realized gains of $1 million in 1995.
Operating earnings in 1994 of $118 million were down from $214 million in 1993 primarily due to $114 million of realized gains on investments in 1993 compared to $16 million of realized losses in 1994.
General Account Investments --------------------------- Fixed Maturity Securities: The Company does not invest in lower-quality, higher-risk fixed maturity securities. Non-investment grade securities, all of which are the result of down grading since the time of purchase by the Company, were 2.4% of total fixed maturity securities as of December 31, 1995.
Private placement fixed maturity securities provide certain advantages over public issues and are purchased when possible. As of December 31, 1995, private placement fixed maturity securities were 30% of total fixed maturity securities. While private placement securities are less liquid than public issues, they generally offer higher yields, better call provisions, greater takeover protection, enhanced protective covenants and the potential of specific collateral.
Collateralized mortgage obligations comprise 29% of fixed maturity securities as of December 31, 1995. Of the total collateralized mortgage obligation portfolio as of December 31, 1995, 98.7% was invested in sequential pay, planned amortization and targeted amortization classes.
Realized losses on mortgage loans on real estate were $7.3 million, $20.5 million, and $28.2 million for 1995, 1994 and 1993, respectively. As of December 31, 1995, mortgage loans on real estate considered impaired under SFAS No. 114 - Accounting by Creditors for Impairment of a Loan (as amended by SFAS No. 118 - Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure) were $45 million. Total valuation allowances on mortgage loans on real estate were $50.7 million, or 1.0% of the portfolio, as of December 31, 1995, compared to $47.9 million, or 1.1% of the portfolio, as of December 31, 1994. See note 9 to the consolidated financial statements for disclosures of concentrations of risk by geographic area and borrower.
The Company does not currently have a formal dividend policy. During 1995 and 1993, the Company paid dividends of $7.5 million and $17.8 million, respectively, to Nationwide Corporation. There were no dividend payments in 1994. Management of the Company has not determined if there will be any dividend payments in 1996.
With the contribution of Farmland Life Insurance Company and the purchase of Employers Life Insurance Company of Wausau, all life insurance companies of the Nationwide Insurance Enterprise are subsidiaries of Nationwide Life Insurance Company.
Each insurance company's state of domicile imposes minimum risk-based capital requirements that were developed by the National Association of Insurance Commissioners (NAIC). Risk-based capital evaluates the adequacy of an insurer's statutory capital and surplus in relation to the risks inherent in the insurer's business related to asset quality, asset and liability matching, mortality and morbidity and other business factors. Regulatory compliance is determined based on a ratio of a company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Companies with a ratio below 200% (or below 250% with negative trends) are required to take corrective action steps. As of December 31, 1995, Nationwide Life Insurance Company's risk-based capital ratio was 750%. All insurance subsidiaries of Nationwide Life Insurance Company exceed the minimum risk-based capital requirements.
In addition, Nationwide Life Insurance Company has $120 million of confirmed but unused bank lines of credit which support a $100 million commercial paper borrowing authorization. During 1993, the Company temporarily increased available bank lines of credit to $365 million and borrowed $125 million. In addition, $175 million of short-term securities were issued as repurchase agreements. All amounts were repaid in 1993, with interest expense totaling $1.6 million.
To mitigate the risks that actual withdrawals may exceed anticipated amounts or that rising interest rates may cause a decline in the value of the Company's fixed maturity investments, the Company imposes market value adjustments or surrender charges on the majority of its products and offers products where the investment risk is transferred to the contract holder. As of December 31, 1995, 9% of the Company's annuity contracts were subject to withdrawal without a surrender charge or market value adjustment. In addition, liabilities related to separate accounts, where the investment risk is transferred to the policyholder, comprise 50% of policyholder-related liabilities as of December 31, 1995, compared to 42% as of December 31, 1994.
As described in note 12 to the consolidated financial statements, Nationwide Life Insurance Company's insurance subsidiaries are limited by law in the amount of dividends they can pay. That condition poses no liquidity concerns due to Nationwide Life Insurance Company's significant cash flow from operations and extensive holdings of liquid investments.