Management’s discussion and analysis of financial condition and results of operations of Nationwide Financial Services, Inc. and its subsidiaries (NFS or collectively, the Company) for the three years ended December 31, 2003 follows. This discussion should be read in conjunction with the consolidated financial statements and related notes beginning on page of this report.
The Company 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 included as realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in
Sales, as reported by the Company, are stated net of internal replacements, which in the Company’s opinion 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 medium-term note program; large case bank-owned life insurance (BOLI); large case pension plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products
The Individual Annuity segment consists of individual The BEST of AMERICA and private label deferred variable annuity products, deferred fixed annuity products and income products. Also included in this segment are Nationwide Provident’s individual annuity products, reflecting business in-force on the date of acquisition, October 1, 2002. New business sold by Nationwide Provident producers is in the form of the Company’s individual The BEST of AMERICA and deferred fixed annuity products. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, variable annuity contracts provide the customer with access to a wide range of investment options and asset protection in the event of an untimely death, while fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.
Pre-tax operating earnings totaled $189.7 million in 2003, compared to loss of $118.9 million in 2002 and earnings of $227.2 million in 2001. Excluding $328.3 million of accelerated DAC amortization in 2002, pre-tax operating earnings totaled $209.4 million. Excluding the accelerated DAC amortization, the lower 2003 earnings were primarily driven by lower policy charges and higher policy benefits primarily related to GMDB expenses, partially offset by an increase in interest spread income. Excluding the accelerated DAC amortization, the lower 2002 earnings compared to 2001 were driven by lower policy charges and higher policy benefits and operating expenses, offset by growth in interest spread income.
Pre-tax operating earnings to average account values was 43 basis points, 51 basis points (excluding the accelerated DAC amortization), and 55 basis points in 2003, 2002 and 2001, respectively. The declines reflect lower policy charges, higher policy benefits, and in 2003, lower interest spread margins.
The following table summarizes selected financial data for the Company’s Corporate segment for the years indicated.
The increase in other operating expenses in 2003 is primarily related to commission expense related to certain of the Company’s non-insurance subsidiaries. The increase in other operating expenses in 2002 is primarily related to the inclusion of Nationwide Provident non-insurance subsidiaries beginning October 1, 2002, and increased litigation costs on existing cases.