The Company’s ability to meet the indicated outlook and expectations is subject to the factors described in the introduction section immediately above. Following the end of each quarter, the Company has a “quiet period” when it no longer publishes or updates its current expectations and forecasts and Company representatives will not comment concerning the Company’s financial results or expectations. The quiet period will extend until the day when the Company’s next earnings release is published. Prior to the start of the next quiet period (April 9, 2002), investors can continue to rely on the earnings release and web site as still being the Company’s current expectations on matters covered, unless the Company publishes a notice stating otherwise.
See note 2 to the consolidated financial statements, included in the F pages of this report, for a discussion of the Company’s significant accounting policies, including recently issued accounting pronouncements.
Account balances ended 2001 at $42.19 billion, down $1.51 billion from the end of 2000 of $43.69 billion, which was down slightly from the end of 1999. Net flows, which consists of deposits less withdrawals, of $3.38 billion and $2.51 billion in 2001 and 2000, respectively, were offset by market depreciation of variable annuities of $4.52 billion and $1.45 billion in 2001 and 2000, respectively. Sales of fixed annuities were $2.03 billion in 2001, up 207% from 2000. The decline in the equity markets fueled interest in fixed annuity sales across the industry. The Company has been able to generate sales growth in excess of industry rates due to a focus, beginning in the second half of 2000, on expanding the number of banks that sell the Company’s fixed products. Sales of variable annuities were $5.59 billion in 2001, down 16% from 2000. Variable annuity sales in 2000 were up 11% over 1999. Declining equity markets have reduced consumer demand for variable annuities. Sales of a proprietary variable annuity by Waddell & Reed Financial, Inc. of nearly $1.00 billion in 2001 provided growth in the brokerage channel, partially offsetting declines in the independent broker/dealer and financial institutions channels. According to The Variable Annuity Research & Data Service (VARDS), the Company was ranked 4th in total variable annuity sales in 2001 and 2000.
The decrease in pre-tax operating income to average account balances in 2001 and 2000 is primarily a result of lower interest spreads on average general account reserves and the Company not being able to reduce its operating expenses as quickly and in proportion to the decrease in policy charges due to declining equity markets in 2001. In 2000, additional DAC amortization as a result of increased surrender activity decreased pre-tax operating income to average account balances.
Pre-tax operating income for the Asset Management segment was $12.7 million in 2001 compared to $4.5 million in 2000 and $22.9 million in 1999. Growth in operating revenues, driven by asset growth from net flows into equity and money market funds and lower expenses boosted earnings for the year. Revenues increased 5% to $125.0 million in 2001 compared to $119.4 million a year ago. In 2000, revenues grew 10% from $108.6 million in 1999. Revenue growth reflects an increase in assets under management combined with a mid-year 1999 increase in fees charged on certain products. Earnings were impacted by continued investments to expand the product portfolio and the retail and institutional distribution capabilities. Operating expenses increased $29.2 million in 2000 as the Company added six new managers to the investment team, enhanced its research capabilities and implemented a rigorous review process to ensure that funds adhere to their mandates. Additional strategic investments in several internet distribution and venture capital initiatives increased operating expenses by $7.1 million, $6.5 million, and $1.0 million in 2001, 2000, and 1999, respectively. Expense reductions were implemented in 2001 in response to the declining and volatile equity markets.
In an effort to continue to leverage investment expertise, the Company’s structured products group structured and executed two transactions in 2001. In the first quarter, the Company structured and launched a $315 million collateralized bond obligation (CBO), generating $1.6 million of operating income for 2001. In the fourth quarter, the Company structured and launched its first commercial mortgage loan securitization, adding $1.9 million of operating income in 2001.
The Company files a consolidated federal tax return with NMIC, as described in note 2(i) to the consolidated financial statements included in the F pages of this report. Total payments (from) to NMIC were $(48.7) million, $64.5 million and $2.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.
spent, special cost studies, salary expense, commission expense and other methods agreed to by the participating companies that are within industry guidelines and practices. In addition, Nationwide Services Company, 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, 2001, 2000 and 1999, the Company made payments to NMIC and Nationwide Services Company totaling $145.6 million, $156.6 million and $132.3 million, respectively. The Company does not believe that expenses recognized under these agreements are materially different than expenses that would have been recognized had the Company operated on a stand-alone basis.
Under the medium-term note program, the Company issues funding agreements, which are insurance obligations, to an unrelated third party trust to secure notes issued to investors by the trust. The funding agreements are recorded as a component of future policy benefits and claims on the Company’s consolidated balance sheets. Because the Company 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 and therefore, such notes are not reflected in the consolidated financial statements of the Company. As the notes issued by the trust have a secured interest in the funding agreement issued by the Company, Moody’s and S&P assign the same ratings to the notes as the insurance financial strength of the Company.