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TRANSCRIPT
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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.
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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.
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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
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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
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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
@
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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.
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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.
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