—

Balance fostet’s quiet confidence. Without it, i’isl<s are high

and peril seems certain. With it, the path appeat’s wide~, and

reaching gveatet’ goals is achievable in any environment.

From individual annuities to employer-sponsored retirement

programs, to life insurance to asset management— NFS broadly

participates in the fast-growing retirement savings business.

OUR BALANCED PI<ODUCT

)Most important, NFS has established enviable leadership

PORTFOLIO EtJSUKES STEADY,

1

positions in each of these businesses. Individually eachRELIABLE GI<OWTHO

business is a I<ey contributor to growth and earnings.

Col Iectively they amplify the value of the entire company.

At the heart of balance is innovation, the creative thinl<ing

that customizes solutions to reach untapped or under-served

marl<ets. Balance allows ideas to blossom and permits new

investments that strengthen the franchise for the future.

Financial services companies that compete in this marl<et

will be judged by product breadth and earnings stability. Our

varied earnings sources ensure that N FS will progress with

confidence, building on its strong foundation.

—

—

I

Dive~sified distribution is our signature. Because customers

will choose a source of financial products and advice that is

comfortable for them, N FS is dedicated to providing broad

access to al I our retirement savings products.

For customers who depend on a professional advisor, N FS

extends its reach through financial intermediaries— banl<s,

independent b~ol<er-dealers, national and regional brol<erage

firms, third-party administrators and life insurance specialists.

I

DIVERSIFICATION IS A CLEAR

!DVANTAGE. WE DO NOT RELY

ON ANY ONE CHANNEL OR

SINGLE PRODUCER TO FUEL

OUR TREMENDOUS Gl~OWTH. ,

N FS also delivers retirement savings products

through agents and an exclusive sales force that serves

the financial needs of nearly 1 million public-sector

employees who participate in employer-sponsored

retirement programs.

N FS is a strong partne~ leading us to become a preferred

provider among many of our producers and sponsoring organi-

zations. We leverage this preferred access across al I our retirement

products, strengthening relationships and accelerating growth.

There is power in diversity. In harnessing this power, NFS

delivers on its promise of future growth.

–...-

.

To grasp NFS’S growth prospects, it helps to reflect on our

history. Since 1993, sales, earnings and assets have each grown

at a compound annual rate of at least 24 percent.

SUSTAINED GROWTH REQUIRES ‘

CONSTANT INNOVATION,

AGGRESSIVE PURSUIT OF NEW

MARKET OPPORTUNITIES AND

EXPANDING MARKET ACCESS.

NFS DELIVERS ON ALL THREE. ,

This stunning performance has been built on a

generation’s need to save for retirement and on the

popularity of equity-linl<ed products. And we are just

beginning to scratch the surface. The marl<et for long-

term savings products is expected to surge even highe~

as “Baby Boomers” approach their peal< savings years and,

eventual Iy, retirement.

We understand that saving for retirement is about developing

solutions and providing customer value. At NFS, our products and

services help individuals gain control of their retirement security

while offering quality investment choices at competitive prices.

NFS constantly searches for ways to serve new marl<ets and

penetrate existing marl<ets with creative solutions that respond

to particular needs. Our energy mounts, fueling excitement about

new growth opportunities.

Momentum continues to build at NFS.

BALANCE - A BROAD PRODUCT PORTFOUO

Our franchise is a powerful combination of asset accumulation businesses, including individual

annuities, employer-sloonsored t’etivement pt’ograms, Iife insurance and asset management. Together

these businessesproduce strong, predictable earnings and promising growth outlool<s.

In recent years, out’ individual variable annuity business has driven much of our

growth. Ovet’ a five-year period, sales in this business have grown at 25 percent

compounded annual Iy, exceeding the indust~y’s growth for the same period. With

sales of $5.7 billion in 1998, we remain the third-largest provider of individual

variable annuities in the U.S.

IAnnuities can fund tax-qualified individual retirement accounts or may be

I

From left

DimonR.McFerson

Joseph J. Gasper

OUR SUCCESS IS BUILT ON THREE

FUNDAMENTAL STRENGTHS:

A BROAD PRODUCT PORTFOLIO,

A VAST DISTRIBUTION NETWORK,

AND THE ABILITY TO PRODUCE

SUSTAINED GROWTH. WE CALL

THIS BALANCE, DIVERSITY AND

MOMENTUM.

purchased on a non-qualified basis to supplement retirement income. Because annuities are

intended to fund future retirement needs, persistency is general Iy higher than in retail mutual

4

IN THE LATE 1970S, WE CHAMPIONED) LEGISLATION THAT

.*=”

CREATED DEFERRED COMPENSATIOl~ PJLOGRAMS FOR

PUBLIC-SECTOR EMPLOYEES, AND KEvOLUTIo~Iz ED THE

ANNUITY MARKET IN THE 1980s WITH A MULTI-MANAGER

VAKIAIILE ANNUITY CALLED THE 13EST OF AMERICA”.._‘—Q-—

funds, producing more predictable earnings. With industry sales approaching a record $100

billion in 1998, variable annuities ~emain popular. Bt’oad distribution and superior products

equip us for continued growth in this market.

Our public-sector and private pension businesses contribute reliable growth through periodic

payroll deposits. Participants in tax-qualified plans have longer investment horizons, so contributions

are less affected by short-term market turbulence. Nearly 40 percent of our annuity sales are via

payroll-deduction in employer-sponsored retirement plans, lending stability to sales growth.

With endorsements from the National Association of Counties and the U.S. Conference of

Mayors, we are the dominant player in public-sector deferred compensation programs, and a

prominent provider of 401(1<) plans in the private pension market. As more employers adopt

defined contribution plans and employee participation rates rise, we believe these plans will

continue their exciting growth.

Our life insurance business focuses on the rapidly growing variable universal life market

where we have emerged as a top 10 provider. Variable life products are an excellent means

of supplementing retirement income, preserving estate assets or funding COIIege costs, in

addition to providing life protection. With 1998 sales of $316 million, variable life insurance

is our fastest growing product line. Since 1994 OUYfirst-year variable life p~emiums are up

31 percent compounded annually, easily outpacing those of the industry. With a leading

product and preferred distribution, we are confident this steep growth pattern wil I continue.

Innovation is the cornerstone of our success.We worl< with producers and mutual fund partners

to develop or tailor products to meet marl<et needs. Our products have moved toward a menu-

driven approach, allowing customers to choose those features that fit their needs,

Today consumevs want customized solutions, including education and advice, a broad

selection of quality investment choices, greater flexibility, and higher service levels–all at a

competitive price. NFS delive~s solutions.

America’s FUTURE Annuity, a recent addition to The B EST of AM ERICA@ series, sets a

high standard for value. FUTURE features quality investment options from premier asset

management firms but reduces insurance charges, allowing customers’ long-term savings to

worl< harder for them. In its first year, FUTURE garnered sales of more than $2.4 billion,

mal<ing it one of the indfist;y’s fastest grohing variable annuities.

Our latest annuity offering–The BEST of AMERICA CHOICE–can be modified to

include proprietary funds and offers different levels of death benefit protection. We wi II

continue challenging ourselves to develop products that address changing marl<et needs, serve

new customers, or reach untapped marl<ets.

POWERFUL DISTRIBUTION

We have developed a powerful distribution networl< that is simply unmatched. Our aim is. :~g =* y:*:* y#’:. se=

to provide customers with easy access to our products through as many outlets as possible.

We marl<et through financial intermediaries, such as banl<s, financial planners, national

and regional brol<erage fivms, and insuvance agents, and at the worl<place through third-party

~minisfiatot’> and: our c~clusive sales representatives. We also offer Internet and tol l-frees.7

access to policyholder accounts so customers can obtain information and execute transactions.

Our distribution netiorl< has thousands of producers with no single sout’cedominating production.

Moreover, we leverage each channel to sell al I our products, strengthening our ties with producers.=’:~

i’ 1- i ~ g~ ~~’:

MOMENTUM TO SUSTAIN GROWTH

Pursuing new opportunities is critical to sustaining momentum. In 1999 we will invest

resources in strategies that expz~nd our distribution, serve new customer segments, and

capitalize on marl<ets with high growth potential.

National and regional brol<eragefirms offer great opportunities to broaden our marl<et reach. As

the fastest-growing channel in the variable annuity industry, these fi rms offer exciting growth poten-

tial. We believe the strength of our product offerings and salessupport will distinguish us in a crowded

field of competitors. We expect this channel wil I bean important source of future sales growth.

Our GIobal Variable Annuity extends out’ reach to the offshore mai’l<et, tat’geting non-

resident people living in the U.S. We gain access to this mavl<et through our existing banl< and

brol<er-dealer relationships, and we believe this product line has tremendous growth potential.

Strengthening our asset management capabilities will be a priority in 1999. Asset

management is a natural extension of our retirement franchise, enabling us to capture

—

NFS HAS EMER.GED AS A PREMIER PERFORMER

IN THE LIFE INSURANCE ARENA, ACHIEVING

GROWTH RATES AND RETURNS ON EQUITY THAT

ARE AMONG THE INDUST1<Y’S ELITE.

additional assets through OUYannuity and insurance products OYthrough retail mutual fund

sales. Additionally, developing institutional money management sl<ills allows us to leverage our

pveferred access with retit’ement plan sponsors to manage other defined benefit and defined

cont~ibution assets. Asset management pvomises to be a futut’e growth engine, accelerating our

earnings and increasing ~eturn on equity.

IN CLOSING

Our balanced business mix and diversified distribution are great strengths. They are the forces

behind the tremendous momentum building at NFS. To sustain growth, we will continue to diversify

the sourcesof our profitability and expand oui’ marl<et reach with new products and distribution outlets.

As we loo!< forward, we recognize that financial modernization legislation is an inevitable

outcome that we welcome. While this wi II change the competitive nature of the financial services

industry, we stand ready to compete at the highest levels.

We reflect with great pride on our 1998 results and our historic performance. But we are not satis-

fied defining ou~selvessolely on the past. We will continue building on existing strengths, and where

we identify opportunities for growth, we wi II explore thetm agg~essively. Our focus is on the future.

Dimon R. McFei’son / Joseph J. Gasper

Chairman, Chief Executive Officer President, Chief Operating Officer

As consumers demand more choices and better value in retirement savings products,

N FS responds with creative solutions having wide customer appeal.

The unqualified success of America’s FUTURE Annuity, a recent addition to The B EST

of AM ERICA@ series, is proof positive that we understand customer value. In its first year,

sales of FUTURE reached more than $2.4 billion, t’anl<ing it 9th among all variable

annuity contracts. As one of the fastest growing individual variable annuities on vecord, it

has secured N FS’ ranl<ing as the industry’s third largest individual variable annuity

provider. FUTURE is successful simply because it gives customers what they want–more

flexibility, lower insurance charges and a wide array of quality investment options.

The marl<et for individual variable annuities has experienced pt’olific growth.

Increasing consumer awareness of the need to save for retirement, coupled with strong

equity marl<ets, has propelled sales. In 1998, industry sales reached nearly $100 billion,

increasing 19 percent compounded annually since 1994. The future appears even brighter,

as an entire generation seel<sto supplement employer-sponsored pension plans and Social

Security benefits. Baby Boomers choose variable annuities because they offer tax-deferred

accumulation and a guaranteed income source in retirement.

~~s PIONEERED MULTI-MANAGER V

ANNUITIES IN THE 1980s1 AND WE

A}i INNovATOR. OUR PRODUCTS

CUSTOMIZED TO MEET INDIVIDUA1

Much of OUYsuccess in this marl<et is due to our powerful dist~ibution networl<. We

reach customers in many ways–through financial planners[ independent brol<er-dealers,

national and regional. brol<er firms, financial institutions and our own agents. We are the

provider of choice in:the financial planning community and ranl< second in banl< variable

annuity sales. We wi!l continue to broaden thi$ distribution netwo~l< to ailow customers to

do business with us in as many ways as possible.

N FS also has enjoyed great success partnering with brol<erage firms and financial

I

I institutions to create privately labeled variable annuities. These products collectively

SALES1994-1998 CAGR I segmentation and continuous product development. It also requires diligent focus

on expanding distribution. Our latest variable annuity offering–The BEST of AMERICA

CHOICE–will target the regional and national brol<erage channels and certain financial

institutions. We e)cpect that this product will contribute meaningfully to 1999 sales growth.

N FS continues to strengthen its retirement savings franchise, challenging industry

norms and acting on new ideas to increase customer value.

ARIABLE

REMAIN

CAN BE

dcontributed over $1 billion to 1998 sales.

4In total, NFS’ individual variable annuity sales soared to $5.7 billion—

&_ 9 and have increased 25 percent compounded annually since 1994, outpacingE Hw;- 4.-,~.,. Mps*.

E Industrythe industry’s growth rate. Maintaining this velocity requires finer marl<et

NFS IS THE CLEAR LEADER IN EMPLOYER-

SPONSORED RETIREMENT PLANS BECAUSE

WE MAK.E IT EASY FOR GROUPS - LARG12

AND SMALL – TO DO BUSINESS WITH US.

NFS earns its leadership position in employer-sponsored retirement plans by serving the

needs of c1ients. We offer a competitive y priced pacl<age of quality investment choices from

pt’emier money managers, as well as plan administration, marl<eting and education services.

Since 1978, N FS has specialized in meeting the retirement needs of municipal, county,

district and state employees. With plan assets of nearly $16 billion, we are the mat’l<et

leader–serving nearly 1 million participants in more than 7,000 jurisdictions across the U.S.

The National Association of Counties, the U.S. Conference of Mayors, and the National

Education Association each endorse our retirement programs exclusively, giving our 500-

member sales force preferred access to these marl<ets.

To sustain growth in this business, we wil I target larger cases in this marl<et, offering plan

sponsors a broader menu of services, as well as expand our presence in the health care and

higher education marl<ets. We also will focus on increasing participation rates through

education and service technologies, and on providing seamless administration for companion

401(a) employer-contribution programs. Finally, we will augment growth by leveraging our

relationships with plan participants to provide other retirement products, including mutual

funds, annuities and life insurance.

I

I

I

For private-sector employet’s, NFS offers 401(1<) plans through The BEST of AM ERICA@

Gt’oup Pension Sevies. N FS has successfully penetrated the smal 1- to medium-sized case

market, administering more than 17,000 pension plans and ranking third among all 401(1<)

providers in the U.S.

We tap into a netwovk of more than 250 independent pension plan administrators (P PAs)

who market our pension plans and provide [ocal plan design, recovdkeeping and admini-

stration services. This network extends to brokerage firms, financial planners and banks, who

partner with our PPAs for ongoing administrative support. Our technology support allows our

PPAs to provide daily account valuations and statements. We also offer Internet and toll-free

access so plan participants can obtain information and execute various transactions.

Growth prospects in the private sector are strong. In the small-employer 401(1<) market,

both the number of companies adopting new plans and participation Yates are expected to

increase sharply. Innovative programs will also drive further growth. For example, NFS

customizes plans for brokerage and bank partners by adding proprietary fund options to

create “privately labeled” pension plans. To

formed a trust company that wil I offer plan

options and added tt’ust services.

The employer-sponsored retirement plan

A

compete in the large-case pension market, we

sponsors access to more than 200 investment

market is the foundation on which the NFS

retirement franchise was bui It. It continues to provide a solid base for future growth.

I TGC TN --- -—

While N FS built its life business with traditional insurance products, we believe there are

tremendous growth opportunities in variable life products. Low intei’est rates, a strong equity marl<et

and greater undet’standing of the benefits of variable life insurance have driven its explosive growth.

We believe the popularity of variable life insurance will continue, as these products offer

unique advantages – risl< protection, tax-defert’ed accumulation, tax-preferred loans and

withdrawals and professional Iy managecl investment options. Variable Iife insurance is an

excel lent means of supplementing retirement income, preserving estate assets or funding

college costs, in addition to pvoviding life protection.

N FS is capitalizing on this opportunity, developing products that reflect our philosophy of

providing customer value. Next Generations~ our newestaddition to The BEST of AM ERICA@

Life Planning Series, brings added investment options, lower fees and more flexibility. Its

revolutionary design maximizes cash value by significantly reducing insurance charges.

Our growth rate in individual variable life premiums has dramatically outpaced that of the

industry. First-year individual variable life premiums for the industry have climbed 21 percent

compounded annually since 1994 to nearly $5 billion. In the same period, NFS’ first-year

premiums have grown at 31 percent compounded annually, and after including renewal premiums,

increased 41 percent compounded annually. In 1998, our total individual vat’iable life premiums

@

—

VARIABLE LIFE AFJD CORPORATE-OWNED LIFE PRODUCTS

REPRESENT THE FUTuRE oF THE LIFE I~suRA~c E

BUS INESSO PFS 1s U~IQuELy pos ITIo~ED To capitalize

ON THIS GILOWTH7 BuILDI~G o~ ouR sTRE~GTHs ‘0

SERVE CUSTOMERS A~yV~~EREy_ ANY TIME oR A~ypLAcEo.-+ -?-— c:-*.= :.. ——

i

reacheda record $316 million. Today NFS ranl<s among the top 10 providers in this marl<et.

Out’ success reflects the power of out’ broad distribution. Our sales are generated primarily

from independent brol<e~age firms and life insurance producer groups, but financial

institutions and our agency force also contribute meaningfully. In 1999 we plan to expand

our distribution to national brol<erage firms, driving further marl<et share gains.

Last year we entered the corporate-owned life insurance (COLI) marl<et. COLI productsI

Imare used to fund non-qualified benefit programs, including supplemental retirement plans

and post-employment benefits. A broad array of investment options is available, or the

- product may be customized to mirror a client’s 401(1<) plan. This enables l<ey

-=,*. ,=. . executives to defer compensation in excess of qualified limits. The COLI

i

,, \,. ..=>,.. .

H

marl<et promises to be very attractive, as employers continue to seel<ways to

““P. A“.

N FS Industry retain and attract talented professionals. In our first year in this business, we

SALES1994-1998 CAGR I made significant inroads both in product design and in establishing OUrSelVes

as a core provider among producer groups specializing in this marl<et. Our first year sales

were over $90 million, an impressive start.

We established a strong competitive position in the individual and corporate-owned variable

life insurance marl<ets, and these businesses wi II be our growth engines for the next decade.

4

JA STRONG ASSET MANAGEMENT BUSINESS

DIVERSIFIES OUR RETIREMENT FRANCHISE

I ,7BEYOND INSURANCE-RELATED PROIDU(:TS AND

ACCELERATES OUR GROWTH OPPO1{TUNITIES e

With millions of Americans saving for retirement, either through employer-sponsored

pt’og~ams or through retail funds, it is clear there are exciting growth opportunities in asset

management. We ave expanding our capabi Iities in asset management to participate more

ful Iy in this fast-growing marl<et.

Through Nationwide Advisot’y Services, Inc. (NAS), we manage nearly $12 billion in a

family of 17 funds. Our family includes eight retail mutual funds sold through our agents and

exclusive sales force and nine funds available in our annuity, pension and life insurance

products. Of those funds, The Nationwide Fund, with $2.4 billion in assets, has earned

Morningstar’s highest ratings. It has outperformed the S&P 500 index for one-, three-, five-

and 10-year periods–an accomplishment that fewer than 10 percent of all stocl< mutual

funds can boast. Solid experience and sound investment discipline are major reasons for the

success of our entire fund fami [y.

We recently expanded our retail fund offerings by introducing a new product that

pacl<ages 21 mutual funds from four leading fund families. This product simplifies investing

for customers by allowing them to create a diversified portfolio of funds from different

companies, with the convenience of a single account and one consolidated statement.

To improve our competitiveness in employet’-sponsored retirement programs, we acqui red

Mot’ley Financial Services, Inc., a stable-value manager with $8 billion in assets. These

funds provide consistent ~eturns from a diversified pool of Iligh-quality investments without

the marl<et i’isl< associated with other stocl< and bond funds.

In the next several years, we wi 11further enhance our asset management franchise by

developing a broader range of fund offerings, expanding distribution to new intermediaries

and adding professional mutual fund expe~tise.

We plan to enhance our fund offerings through selected acquisitions of small,

institutional investment firms, as well as targeting I<ey portfolio managers with strong

performance records.

Today NAS manages 17 percent of the separate account assets underlying our annuity,

pension and life insurance products. Without compromising our open-architecture philo-

sophy, we see opportunities to leverage our existing distribution to capture additional assets.

We also see exciting opportunities to develop institutional asset management offerings in the

defined benefit and defined contribution marl<ets.

Asset management promises to be a large growth engine, accelerating NFS’ profitabi Iity

and increasing returin on equity. We are aggressively seel(ing to enhance our retirement

franchise through increased participation in this marl<et.

4

.

. ...—-

..+. .