UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-12785

LOGO

NATIONWIDE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware		31-1486870
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


One Nationwide Plaza, Columbus, Ohio		43215
(Address of principal executive offices)		(Zip Code)

(614) 249-7111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

No established published trading market exists for the registrant’s common stock, par value $0.01 per share. As of ~~July~~November 313, 2009, the registrant had 100 shares of its common stock outstanding.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~JUNE~~SEPTEMBER 30, 2009

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		1
	ITEM 1 Condensed Consolidated Financial Statements	1
	ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	6468
	ITEM 3 Quantitative and Qualitative Disclosures About Market Risk	~~110~~113
	ITEM 4 Controls and Procedures	~~110~~113
PART II – OTHER INFORMATION		~~110~~113
	ITEM 1 Legal Proceedings	~~110~~113
	ITEM 1A Risk Factors	~~110~~114
	ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds	~~110~~114
	ITEM 3 Defaults Upon Senior Securities	~~110~~114
	ITEM 4 Submission of Matters to a Vote of Security Holders	~~110~~114
	ITEM 5 Other Information	~~111~~114
	ITEM 6 Exhibits	~~111~~114
SIGNATURE		~~112~~115

PART I – FINANCIAL INFORMATION

ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of (Loss) Income

(Unaudited)

(in millions)

	Three months endedJune 30,						Six months endedJune 30,
	Three months endedSeptember 30,						Nine months endedSeptember 30,
	2009			2008			2009			2008
Revenues:
Policy charges	$	~~319~~310.47		$	~~354~~336.48		$	~~605~~916.74		$	~~699~~1,036.53
Premiums		~~127~~119.86			~~105~~89.28			~~245~~365.95			~~214~~304.31
Net investment income		~~514~~513.53			~~511~~480.58			~~999~~1,512.25			1,~~031~~511.08
Net realized investment gains (losses)		139.5			61.6			504.7			(48.9	)
Net realized investment (losses) gains		(138.4	)		(158.5	)		366.3			(207.4	)
Other-than-temporary impairment losses (consisting of $50.2 and $733.9 of total other-than-temporary impairment losses, net of $11.3 and $368.0 recognized in other comprehensive income, for the three and six months ended June 30, 2009, respectively)		(38.9	)		(95.5	)		(365.9	)		(183.9	)
Other-than-temporary impairment losses (consisting of $185.0 and $918.9 of total other-than-temporary impairment losses, net of $36.0 and $404.0 recognized in other comprehensive income, for the three and nine months ended September 30, 2009, respectively)		(149.0	)		(396.6	)		(514.9	)		(580.5	)
Other income		~~104~~118.36			~~143~~132.3			~~202~~321.73			~~284~~417.81
Total revenues		~~1,166~~774.68			~~1,080~~484.56			2,~~192~~967.31			12,~~996~~481.84
Benefits and expenses:
Interest credited to policyholder accounts		~~293~~284.54			~~294~~300.15			~~577~~861.15			~~606~~907.72
Benefits and claims		~~137~~158.98			~~178~~183.7			~~460~~619.64			~~362~~545.29
Policyholder dividends		2322.54			2423.47			4467.93			4872.30
Amortization of deferred policy acquisition costs		~~159~~97.06			~~169~~224.58			~~462~~559.06			~~235~~460.97
Amortization of value of business acquired and other intangible assets		2112.30			49.16			2840.3			1322.39
Interest expense		25.87			2526.91			5177.85			5379.67
Other operating expenses		~~244~~261.03			~~273~~254.53			~~498~~759.58			~~544~~798.25
Total benefits and expenses		~~905~~862.02			~~970~~1,022.27			2,~~123~~985.24			12,~~864~~886.29
Income from continuing operations before federal income tax expense		261.6			110.3			69.1			132.6
Loss from continuing operations before federal income tax benefit		(87.4	)		(538.1	)		(18.3	)		(405.5	)
Federal income tax expense (benefit)		69.6			36.4			(4.5	)		25.6
Federal income tax benefit		(56.5	)		(191.7	)		(61.0	)		(166.1	)
Income from continuing operations		192.0			73.9			73.6			107.0
(Loss) income from continuing operations		(30.9	)		(346.4	)		42.7			(239.4	)
Discontinued operations, net of taxes		—			(09.72	)		—			0(9.20	)
Net income		192.0			73.2			73.6			107.2
Net (loss) income		(30.9	)		(355.6	)		42.7			(248.4	)
Less: Net loss attributable to noncontrolling interest		13.87			129.2			2438.85			2231.79
Net income attributable to NFS	$	205.8		$	85.4		$	98.4		$	129.9
Net (loss) income attributable to NFS	$	(17.2	)	$	(346.4	)	$	81.2		$	(216.5	)

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in millions, except for share and per share amounts)

	June 30,2009			December 31,2008
	September 30,2009			December 31,2008
	(Unaudited)
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (amortized cost $27,596.9 and $25,825.7)	$	25,696.6		$	23,069.7
Fixed maturity securities (amortized cost $27,439.4 and $25,825.7)	$	27,125.1		$	23,069.7
Equity securities (amortized cost $50.1 and $68.7)		51.7			60.7
Equity securities (cost $56.2 and $68.7)		60.5			60.7
Mortgage loans on real estate, net		7,~~514~~294.31			7,888.2
Short-term investments, including amounts managed by a related party		1,~~703~~780.17			3,055.0
Other investments		21,~~061~~960.39			2,146.3
Total investments		3738,~~027~~221.03			36,219.9
Cash and cash equivalents		7784.54			165.5
Accrued investment income		~~385~~419.59			352.1
Deferred policy acquisition costs		43,~~060~~766.59			4,523.8
Value of business acquired		~~316~~289.49			334.0
Goodwill		246.5			246.5
Other assets		2,~~991~~654.46			3,790.1
Separate account assets		5056,~~930~~471.18			48,840.7
Total assets	$	96102,~~034~~155.93		$	94,472.6
Liabilities and Shareholder’s Equity
Liabilities:
Future policy benefits and claims	$	34,~~618~~056.05		$	35,720.0
Short-term debt		~~384~~563.15			295.7
Long-term debt		1,726.19			1,725.9
Other liabilities		4,~~182~~415.98			4,415.5
Separate account liabilities		5056,~~930~~471.18			48,840.7
Total liabilities		9197,~~841~~234.25			90,997.8
Shareholder’s equity:
Common stock ($0.01 par value; authorized, issued and outstanding - 100 and 0)		—			—
Common stock ($0.01 par value; authorized - 100 and 0 shares; issued - 100 and 0 shares; outstanding - 100 and 0 shares)		—			—
Class A common stock ($0.01 par value; authorized - 0 and 750,000,000 shares; issued - 0 and 72,100,000 shares; outstanding - 0 and 46,300,000 shares)		—			0.7
Class B common stock ($0.01 par value; authorized - 0 and 750,000,000 shares; issued and outstanding - 0 and 91,800,000 shares)		—			1.0
Additional paid-in capital		1,824.7			1,807.1
Retained earnings		2,~~970~~952.39			3,884.0
Accumulated other comprehensive loss		(~~992~~233.14	)		(1,370.8	)
Treasury stock, at cost (0 and 25,800,000 shares)		—			(1,262.5	)
Other, net		—			(1.3	)
Total shareholder’s equity		34,~~802~~544.92			3,058.2
Noncontrolling interest		~~390~~376.86			416.6
Total equity		4,~~193~~920.78			3,474.8
Total liabilities and equity	$	96102,~~034~~155.93		$	94,472.6

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Equity

~~Six~~Nine Months Ended ~~June~~September 30, 2009 and 2008

(Unaudited)

(in millions)

	Commonstock		Class Acommonstock			Class Bcommonstock			Additionalpaid-incapital		Retainedearnings			~~Accumulatedothercomprehensiveloss~~Accumulatedothercomprehensiveincome (loss)			Treasurystock			Other,net			Totalshareholder’sequity			Non-controllinginterest			Totalequity
Balance as of December 31, 2007	$	—	$	0.7		$	1.0		$	1,782.4	$	4,853.0		$	(81.5	)	$	(1,229.6	)	$	(1.4	)	$	5,324.6		$	467.6		$	5,792.2
Cash dividends declared		—		—			—			—		(80120.0	)		—			—			—			(80120.0	)		—			(80120.0	)
Common shares repurchased under announced program		—		—			—			—		—			—			(32.9	)		—			(32.9	)		—			(32.9	)
Stock options exercised		—		—			—			710.8		—			—			—			—			710.8			—			710.8
Member contributions to noncontrolling interest		—		—			—			—		—			—			—			—			—			1215.62			1215.62
Other, net		—		—			—			6.8.4		—			—			—			0.1			68.95			(0.63	)		78.52
Comprehensive loss:
Net income (loss)		—		—			—			—		129.9			—			—			—			129.9			(22.7	)		107.2
Net loss		—		—			—			—		(216.5	)		—			—			—			(216.5	)		(31.9	)		(248.4	)
Other comprehensive loss, net of taxes		—		—			—			—		—			(~~443~~762.79	)		—			—			(~~443~~762.79	)		—			(~~443~~762.79	)
Total comprehensive loss																								(~~313~~979.84	)		(2231.79	)		(~~336~~1,011.53	)
Balance as of June 30, 2008	$	—	$	0.7		$	1.0		$	1,797.0	$	4,902.9		$	(525.2	)	$	(1,262.5	)	$	(1.3	)	$	4,912.6		$	458.1		$	5,370.7
Balance as of September 30, 2008	$	—	$	0.7		$	1.0		$	1,801.6	$	4,516.5		$	(844.4	)	$	(1,262.5	)	$	(1.3	)	$	4,211.6		$	450.6		$	4,662.2
Balance as of December 31, 2008	$	—	$	0.7		$	1.0		$	1,807.1	$	3,884.0		$	(1,370.8	)	$	(1,262.5	)	$	(1.3	)	$	3,058.2		$	416.6		$	3,474.8
Cumulative effect of adoption of accounting principle, net of taxes		—		—			—			—		249.7			(249.7	)		—			—			—			—			—
Cumulative effect of change in accounting principle, net of taxes		—		—			—			—		249.7			(249.7	)		—			—			—			—			—
Retirement of shares (see Note 2)		—		(0.7	)		(1.0	)		1.4		(1,262.2	)		—			1,262.5			—			—			—			—
Other, net		—		—			—			16.2		0.42			—			—			1.3			17.97			(1.05	)		16.92
Comprehensive gain (loss):
Net income (loss)		—		—			—			—		9881.42			—			—			—			9881.42			(2438.85	)		7342.67
Other comprehensive gain, net of taxes		—		—			—			—		—			~~628~~1,387.41			—			—			~~628~~1,387.41			—			~~628~~1,387.41
Total comprehensive gain (loss)																								~~726~~1,468.83			(2438.85	)		~~702~~1,429.08
Balance as of June 30, 2009	$	—	$	—		$	—		$	1,824.7	$	2,970.3		$	(992.1	)	$	—		$	—		$	3,802.9		$	390.8		$	4,193.7
Balance as of September 30, 2009	$	—	$	—		$	—		$	1,824.7	$	2,952.9		$	(233.4	)	$	—		$	—		$	4,544.2		$	376.6		$	4,920.8

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)

	Six months endedJune 30,
	Nine months endedSeptember 30,
	2009			2008
Cash flows from operating activities:
Net income attributable to NFS	$	98.4		$	129.9
Net income (loss)	$	42.7		$	(248.4	)
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized investment (gains) losses		(~~504~~366.73	)		48207.94
Other-than-temporary impairment losses		~~365~~514.9			~~183~~580.95
Interest credited to policyholder accounts		~~577~~861.15			~~606~~907.72
Capitalization of deferred policy acquisition costs		(~~255~~376.89	)		(~~312~~441.62	)
Amortization of deferred policy acquisition costs		~~462~~559.06			~~235~~460.97
Amortization and depreciation		3642.62			2439.19
Decrease (increase) in other assets		516.0			(21.8	)
Increase in other assets		(44.7	)		(259.4	)
Decrease in policy and other liabilities		(1,~~329~~392.9	)		(~~796~~845.54	)
Decrease in derivative assets		406.2			47.1
Decrease (increase) in derivative assets		527.8			(19.9	)
Increase in derivative liabilities		13.4			45.1
Increase (decrease) in derivative liabilities		37.4			(2.5	)
Other, net		3693.73			~~(28~~8.72	)
Net cash provided by operating activities		~~421~~498.96			~~162~~387.01
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale		23,~~390~~364.10			3,~~062~~367.60
Proceeds from sale of securities available-for-sale		34,~~101~~282.43			13,~~327~~735.9
Proceeds from repayments or sales of mortgage loans on real estate		~~375~~568.49			~~557~~746.81
Cost of securities available-for-sale acquired		(79,~~227~~376.57	)		(46,~~486~~676.60	)
Cost of mortgage loans on real estate originated or acquired		(~~130~~144.19	)		(~~200~~388.53	)
Net decrease in short-term investments		1,352.0			157.8
Net decrease (increase) in short-term investments		1,274.4			(22.0	)
Collateral paid, net		(~~492~~563.53	)		(~~162~~221.26	)
Other, net		48133.52			3(110.96	)
Net cash (used in) provided by investing activities		(~~582~~462.71	)		~~260~~430.75
Cash flows from financing activities:
Net increase in short-term debt		88267.48			~~103~~27.23
Net proceeds from issuance of long-term debt		—			95155.02
Cash dividends paid		—			(76116.1	)
Investment and universal life insurance product deposits and other additions		2,~~243~~929.49			12,~~335~~288.64
Investment and universal life insurance product withdrawals and other deductions		(23,~~435~~683.7	)		(23,~~230~~858.26	)
Common shares repurchased under announced program		—			(32.9	)
Net increase in customer bank deposits		~~182~~359.98			~~229~~583.65
Other, net		(68.26	)		~~260~~207.40
Net cash provided by (used in) financing activities		72.8			(315.4	)
Net cash used in financing activities		(117.6	)		(746.2	)
Net (decrease) increase in cash and cash equivalents		(8881.01	)		~~107~~71.34
Cash and cash equivalents, beginning of period		165.5			73.6
Cash and cash equivalents, end of period	$	7784.54		$	~~180~~145.90

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~June~~September 30, 2009 and 2008

(1)

Basis of Presentation

The accompanying condensed consolidated financial statements of Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, the Company) have been prepared in accordance with U.S. generally accepted accounting principles (~~U.S.~~ GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete ~~financial~~ financial statements. The financial information included herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of financial position and results of of operations. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2008 included in the Company’s 2008 Annual Report on Form 10-K.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.

Certain items in the condensed consolidated financial statements and related notes have been reclassified to conform to the current presentation.

The Company evaluated subsequent events through ~~July 31~~November 3, 2009, the date the condensed consolidated financial statements were filed with the United States Securities and Exchange Commission (SEC).

(2)

Merger Transaction

On January 1, 2009, all of the outstanding Class A common stock of ~~the~~NFS ~~Company~~ not owned by Nationwide Corporation ~~was~~were acquired for $52.25 per share in cash by Nationwide Corporation through a merger of the Company with NWM Merger Sub., Inc., a wholly-owned subsidiary of Nationwide Corporation. On that date, all 100 shares of NWM Merger Sub’s issued and outstanding common stock became the issued and outstanding common stock of ~~the~~NFS ~~Company~~ and all such shares are held by Nationwide Corporation. The newly issued and outstanding shares of common stock of ~~the~~NFS ~~Company~~ were recorded as an addition to common stock at a par value of $0.01 per share.

Upon closing of the merger transaction, ~~the~~NFS ~~Company~~ retired its shares of Class A common stock, Class B common stock and treasury stock. In accordance with applicable accounting guidance, the previously existing balances of Class A common stock of $0.7 million and Class B common stock of $1.0 million were reclassified to additional-paid in capital. Additionally, the previously existing treasury stock balance of $1.26 billion was reclassified to retained earnings for the amount of excess of purchase price over par value and the par value was reclassified to additional-paid in capital.

(3)

Summary of Significant Accounting Policies

A complete summary of the Company’s significant accounting policies is included in Note 2 to the audited consolidated financial statements included in the Company’s 2008 Annual Report on Form 10-K. There have been no material changes to these policies since December 31, 2008 except as noted below.

(a)

Valuation of Investments, Investment Income and Realized Gains and Losses

As a result of the Company’s adoption of ~~FSP~~guidance ~~FAS~~impacting ~~115-2~~Financial ~~and~~Accounting ~~FAS~~Standards ~~124-2,~~Board ~~Recognition~~(FASB) ~~and~~Accounting Standards ~~Presentation~~Codification of(ASC) ~~Other~~320-~~Than-Temporary Impairments~~10, ~~(FSP~~Investments ~~FAS~~– ~~115-2~~Debt and ~~SFAS~~Equity ~~124-2)~~Securities, in the first quarter of 2009, for all debt securities evaluated for other-than-temporary impairment (for which the Company does not have the intent to sell and it is not more likely than not that it will be required to sell the security before the recovery of its amortized cost basis), the Company considers the timing and amount of the cash flows. The Company evaluates its intent to sell on an individual security basis.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Additionally, debt securities that become other-than-temporarily impaired (where the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost) are bifurcated with the credit portion of the impairment loss being recognized in earnings and the non-credit loss portion of the impairment being recognized in a separate component of other comprehensive income, net of applicable taxes and other offsets.

The Company’s practice is to disclose as part of the separate component of accumulated other comprehensive income both the non-credit portion of the other-than-temporary impairment recognized in other comprehensive income and any subsequent changes in the fair value of those debt securities.

(b)

Share-Based Payments

As part of the merger transaction, all outstanding stock options were cancelled on January 1, 2009 in exchange for $52.25 per option, less exercise price, for all options with an exercise price not in excess of $52.25. The total unrecognized share-based payment cost related to nonvested stock options of $2.5 million, net of taxes, was recognized on the merger date.

Deferred stock units (DSUs) were available through the Director Stock Retainer Plan for payment to non-management directors of all or a portion of their annual retainer. At the date of the merger transaction, there were approximately 41,000 DSUs outstanding. As part of the merger transaction, each DSU was cancelled and converted into the right to receive $52.25 in cash and credited to a deferral account for each director. The liability for the outstanding DSUs was transferred to Nationwide Mutual Insurance Company (NMIC) and treated as a capital contribution in the first quarter of 2009 and will be paid in cash to the non-management directors in a future period.

(4)

Recently Issued Accounting Standards

In ~~June~~September 2009, the ~~Financial Accounting Standards Board (~~FASB) issued ~~Statement~~guidance ofunder ~~Financial~~FASB ~~Accounting~~ASC ~~Standard (SFAS) No. 168~~820-10, ~~The~~Fair ~~FASB~~Value ~~Accounting~~Measurements ~~Standards Codification™~~ and ~~the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No~~Disclosures. ~~162~~ ~~(SFAS~~This ~~168).~~guidance ~~SFAS~~applies ~~168~~to ~~establishes~~measuring the ~~FASB~~fair ~~Accounting~~value ~~Standards Codification™ (Codification) as the single source~~ of ~~authoritative~~investments ~~U.S.~~in investment ~~GAAP~~companies ~~recognized~~that bydo ~~the FASB~~not tohave bea ~~applied~~readily bydeterminable ~~nongovernmental~~fair ~~entities.~~value ~~Rules~~ and ~~interpretive~~calculate ~~releases~~net ofasset ~~the~~values ~~SEC~~(NAV) ~~under~~consistent ~~authority~~with ofthe ~~federal~~American ~~securities~~Institute ~~laws are also sources~~ of ~~authoritative~~Certified ~~U.S.~~Public ~~GAAP~~Accountants ~~for~~Audit ~~SEC registrants. SFAS 168~~ and ~~the~~Accounting ~~Codification~~Guide, ~~are~~which ~~effective~~generally ~~for~~requires these ~~financial~~investments ~~statements~~to ~~issued~~be ~~for~~measured ~~interim~~at ~~and~~fair ~~annual~~value. ~~periods~~For ~~ending~~these ~~after September 15~~investments, ~~2009.~~this ~~When~~update ~~effective~~allows, ~~the~~as ~~Codification~~a ~~will~~practical ~~supersede~~expedient, ~~all~~the ~~existing~~use ~~non-SEC~~of ~~accounting~~NAV ~~and~~as ~~reporting standards. All other non-grandfathered non-SEC accounting literature not included in~~ the ~~Codification~~basis ~~will~~to ~~become~~estimate ~~non-authoritative.~~fair ~~Following~~value ~~SFAS~~as ~~168,~~long ~~the~~as ~~FASB~~it ~~will~~is not ~~issue~~probable, ~~new~~as ~~standards~~of in the ~~form~~measurement ~~of Statements~~date, ~~FASB~~that ~~Staff~~the ~~Positions~~investment ~~(FSP),~~will orbe sold ~~Emerging~~and ~~Issues~~NAV ~~Task~~is ~~Force~~not ~~(EITF) Abstracts. Instead,~~ the ~~FASB~~ ~~will~~value ~~issue~~that ~~Accounting Standards Updates, which~~ will ~~serve~~be ~~only~~used ~~to:~~in ~~(a) update~~ the ~~Codification;~~sale. ~~(b) provide~~This ~~background~~guidance ~~information~~is ~~about~~effective ~~the~~for ~~guidance;~~interim and ~~(c) provide~~annual ~~the~~periods ~~bases~~ending ~~for~~after ~~conclusions~~December on15, ~~the~~2009 ~~change(s)~~with inearly ~~the Codification~~adoption permitted. The Company will adopt ~~SFAS~~this ~~168~~guidance effective ~~September 30, 2009. The adoption of SFAS 168 will not have an impact on~~ the ~~Company’s~~period ~~consolidated~~ending December ~~financial~~31, ~~statements~~2009 ~~but~~and ~~will~~is ~~alter~~currently ~~the~~evaluating ~~references to accounting literature within~~ the ~~consolidated~~impact ~~financial~~of ~~statements~~adoption.

In ~~June~~August 2009, the FASB issued ~~SFAS~~guidance under ~~No. 167,~~FASB ~~Amendments~~ASC to820-10, ~~FASB Interpretation~~Fair ~~No. 46(R)~~Value ~~(SFAS~~Measurements ~~167)~~and Disclosures. ~~SFAS~~This ~~167~~guidance ~~changes~~clarifies how the ~~consolidation~~fair ~~guidance~~value ~~applicable~~of to a ~~variable~~liability ~~interest~~should ~~entity~~be ~~(VIE)~~determined. It ~~also~~reiterates ~~amends~~that ~~the~~fair ~~guidance~~value ~~governing the determination of whether an enterprise~~ is the ~~VIE’s~~price ~~primary beneficiary~~that ~~(the~~would ~~reporting~~be ~~entity~~paid ~~that~~to ~~must~~transfer ~~consolidate~~ the ~~VIE)~~liability byin ~~requiring~~an orderly atransaction ~~qualitative~~between ~~analysis~~market ~~rather~~participants ~~than~~at athe ~~quantitative~~measurement ~~analysis~~date. ~~The~~It ~~qualitative~~notes ~~analysis~~that ~~will include, among other things, consideration of who has~~ the ~~power~~liability toshould ~~direct~~reflect the ~~activities~~ ~~of the entity that most significantly impact the entity~~company’s ~~economic~~nonperformance ~~performance~~ and ~~who~~credit ~~has~~risk ~~the~~and ~~obligation~~should tonot ~~absorb~~reflect ~~losses~~restrictions oron the ~~right~~transfer ~~to receive benefits~~ of the ~~VIE that could potentially be significant to the VIE~~liability. ~~SFAS~~To ~~167 also~~determine ~~requires~~the ~~continuous~~exit ~~reassessment~~price, ~~of whether an enterprise is~~ the ~~primary~~guidance ~~beneficiary~~permits ofcompanies ato ~~VIE.~~look ~~Before~~to ~~this~~the ~~standard,~~identical ~~FASB~~liability ~~Interpretation~~traded ~~No. 46(R)~~as ~~required reconsideration of whether~~ an ~~enterprise~~asset, ~~was~~similar ~~the~~liabilities ~~primary~~traded ~~beneficiary~~as ofassets, aor ~~VIE~~another ~~only~~valuation ~~when specific~~technique ~~events~~to ~~had~~measure ~~occurred.~~the ~~SFAS~~price ~~167~~the ~~also~~company ~~requires~~would ~~enhanced~~pay ~~disclosures~~to ~~about~~transfer anthe ~~enterprise’s involvement with a VIE~~liability. ~~SFAS~~This guidance ~~167~~ is effective for ~~fiscal~~the ~~and~~first ~~interim~~ reporting ~~periods~~period beginning after ~~November 15, 2009~~issuance. The Company will adopt ~~SFAS~~this ~~167~~guidance effective ~~January~~the reporting period ending December 131, ~~2010.~~2009 ~~The~~and ~~Company~~is currently is evaluating the ~~provisions of SFAS 167 to determine the~~ impact of adoption ~~on its consolidated financial statements~~.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

In June 2009, the FASB issued guidance under FASB ASC 105, Generally Accepted Accounting Principles (Statement of Financial Accounting Standard (SFAS) No. ~~166~~168, The FASB Accounting ~~for~~Standards ~~Transfers~~CodificationTM and the Hierarchy of ~~Financial~~ ~~Assets~~Generally Accepted Accounting Principles – ana ~~amendment~~replacement of FASB Statement No. ~~140~~ 162(SFAS ~~166~~168)). ~~SFAS~~This ~~166~~guidance ~~eliminates~~establishes the ~~concept~~FASB ofASC aas ~~qualifying~~the ~~special-purpose~~single ~~entity~~source ~~(QSPE)~~of ~~from~~authoritative ~~SFAS~~U.S. ~~140~~GAAP ~~and~~recognized ~~clarifies~~by ~~and amends~~ the ~~derecognition~~FASB ~~criteria for a transfer~~ to be ~~accounted~~ ~~for~~applied asby anongovernmental ~~sale~~entities. Rules and interpretive ~~the~~releases ~~unit~~ of ~~account~~the ~~eligible~~SEC ~~for~~under ~~sale~~authority ~~accounting.~~of ~~Additionally,~~federal ~~SFAS~~securities ~~166~~laws ~~requires~~are aalso ~~transferor~~sources toof ~~initially~~authoritative ~~measure~~U.S. ~~and~~GAAP ~~recognize~~for ~~all~~SEC ~~assets~~registrants. ~~obtained~~SFAS ~~(including~~168 ~~a transferor’s beneficial interest)~~ and ~~liabilities incurred~~the asASC aare ~~result~~effective offor ~~a transfer of~~ financial ~~assets~~statements ~~accounted~~issued for asinterim aand ~~sale~~annual atperiods ~~fair~~ending after ~~value. Additionally~~September 15, on2009. ~~and~~The ~~after~~ASC ~~the~~supersedes ~~effective~~all ~~date~~ existing ~~QSPEs~~non-SEC ~~(as~~accounting ~~defined~~and ~~under~~reporting ~~previous~~standards. ~~accounting~~All ~~standards)~~other ~~must~~non-grandfathered, benon-SEC ~~evaluated~~accounting ~~for~~literature ~~consolidation~~not included in ~~accordance~~ ~~with~~ the ~~applicable~~ASC ~~consolidation~~have ~~guidance~~become non-authoritative. Following SFAS ~~166~~168, ~~also~~the ~~establishes~~FASB will ~~new~~no ~~requirements~~longer ~~for~~issue ~~reporting~~new astandards ~~transfer~~in ofthe aform ~~portion~~ of aStatements, ~~financial~~FSPs, ~~asset~~or asEITF ~~a sale~~Abstracts. ~~SFAS~~Instead, ~~166~~the ~~requires~~FASB ~~enhanced~~will ~~disclosures~~issue ~~about,~~Accounting ~~among~~Standards ~~other things~~Updates, ~~a transferor’s~~which ~~continuing~~will ~~involvement~~serve ~~with~~only ~~transfers~~to ofupdate ~~financial~~the ~~assets accounted for as sales~~ASC, ~~the~~provide ~~risks~~background ~~inherent~~information inabout the ~~transferred financial assets that have been retained~~guidance, and provide the ~~nature~~bases ~~and~~for ~~financial~~conclusions ~~effect of restrictions~~ on the ~~transferor’~~ change(s) ~~assets that continue to be reported~~ in the ~~consolidated~~ASC. ~~balance~~The ~~sheets.~~Company adopted SFAS ~~166~~168 is effective ~~for fiscal and interim reporting periods beginning after November~~September 1530, 2009. The ~~Company~~adoption ~~will~~of ~~adopt~~this ~~SFAS~~guidance ~~166~~will ~~effective January 1,~~not ~~2010.~~have ~~The~~an ~~Company~~impact ~~currently~~on ~~is evaluating~~ the ~~provisions~~Company’s ofconsolidated ~~SFAS~~financial ~~166~~statements tobut ~~determine~~will alter the references ~~impact~~to ofaccounting ~~adoption~~literature onwithin ~~its~~the consolidated financial statements.

In ~~May~~June 2009, the FASB issued guidance under SFAS No. ~~165~~167, ~~Subsequent~~Amendments ~~Events~~to FASB Interpretation No. 46(R), (SFAS ~~165~~167). ~~SFAS~~This ~~165~~guidance ~~establishes~~changes ~~general~~the ~~standards~~consolidation ofguidance ~~accounting~~applicable ~~for~~to ~~and~~a ~~disclosure~~variable interest entity (VIE). It also amends the guidance governing the determination of ~~events~~whether an entity is the VIE’s primary beneficiary (the reporting entity that ~~occur~~must ~~after~~consolidate the ~~balance sheet~~VIE) ~~date~~by ~~but~~requiring ~~before~~a ~~financial~~qualitative ~~statements~~analysis ~~are~~rather ~~issued~~than a quantitative analysis. InThe ~~particular~~qualitative analysis will include, ~~SFAS~~among other ~~165~~things, ~~sets~~consideration ~~forth~~of who has the ~~period~~power ~~after~~to direct the ~~balance~~activities ~~sheet~~of ~~date~~the ~~during~~entity ~~which~~that ~~management~~most ofsignificantly aimpact ~~reporting~~the entity’s ~~should~~economic ~~evaluate~~performance ~~events~~and who has the obligation to absorb losses or ~~transactions~~the ~~that~~right ~~may~~to ~~occur~~receive ~~for~~benefits ~~potential~~of the VIE ~~recognition~~that orcould ~~disclosure,~~potentially be significant to the ~~circumstances~~VIE. ~~under~~This ~~which~~guidance analso ~~entity~~requires ~~should~~continuous ~~recognize~~reassessment ~~events~~of orwhether ~~transactions~~an ~~occurring~~enterprise ~~after~~is the ~~balance~~primary ~~sheet~~beneficiary ~~date~~of ina ~~its~~VIE. ~~financial~~Before ~~statements~~this guidance, ~~and~~FASB ~~the~~Interpretation ~~disclosures~~No. 46(R) required reconsideration of whether an ~~entity~~enterprise ~~should~~was ~~make~~the ~~about~~primary ~~events~~beneficiary orof ~~transactions that~~a ~~occurred~~VIE ~~after~~only ~~the~~when ~~balance~~specific ~~sheet~~events ~~date~~had occurred. SFAS ~~165~~167 also requires enhanced disclosures about an enterprise’s involvement with a VIE. This guidance is effective for fiscal ~~years~~ and interim reporting periods ~~ending~~beginning after ~~June~~November 15, 2009. The Company ~~adopted~~will ~~SFAS~~adopt ~~165~~this guidance effective ~~June~~January 301, ~~2009~~2010. The ~~adoption~~Company ofcurrently ~~this~~is ~~standard~~evaluating ~~did not have a material impact on~~ the ~~consolidated~~provisions ~~financial statements~~ of ~~the~~this ~~Company.~~guidance ~~See~~to ~~Note~~determine ~~1 for~~ the ~~date~~impact ~~through~~of ~~which~~adoption ~~the~~on ~~Company~~its consolidated ~~evaluated~~financial ~~subsequent events~~statements.

In ~~April~~June 2009, the FASB issued ~~FSP~~guidance ~~FAS~~under ~~115-2~~SFAS ~~and~~No. 166, Accounting ~~FAS~~for ~~124-2~~Transfers of Financial Assets – an amendment of FASB Statement No. 140 ~~FSP~~(SFAS ~~FAS~~166). ~~115~~This guidance eliminates the concept of a qualifying special-2purpose entity (QSPE) from SFAS No. 140 and ~~FAS~~clarifies ~~124-2~~and ~~provides~~amends ~~guidance~~the derecognition ~~designed~~criteria for a transfer to ~~create~~be ~~greater~~accounted ~~clarity~~for as a sale and ~~consistency~~the inunit ~~accounting~~of account eligible for sale accounting. Additionally, SFAS 166 requires a transferor to initially measure and ~~presenting~~recognize ~~impairment~~all ~~losses~~assets onobtained ~~debt~~(including a transferor’s beneficial interest) and ~~equity~~liabilities ~~securities.~~incurred ~~FSP~~as ~~FAS~~a ~~115-2~~result ~~and~~of ~~FAS~~a ~~124-2~~transfer isof ~~effective~~financial assets accounted for ~~interim~~as ~~and~~a ~~annual~~sale ~~periods~~at ~~ending~~fair ~~after~~value. ~~June 15~~Additionally, ~~2009~~on and after the effective date, ~~with~~existing ~~early~~QSPEs ~~adoption~~(as ~~permitted~~defined under previous accounting standards) must be evaluated for ~~interim~~consolidation ~~and~~in ~~annual~~accordance ~~periods~~with ~~ending~~the ~~after~~applicable ~~March 15,~~consolidation ~~2009~~guidance. AsThis ofguidance ~~the~~also ~~beginning~~establishes new requirements for reporting a transfer of ~~the interim~~a ~~period~~portion of ~~adoption,~~a ~~FSP~~financial ~~FAS~~asset ~~115-2~~as ~~and~~a ~~FAS~~sale. ~~124-2~~This guidance requires enhanced adisclosures ~~cumulative-effect~~about, ~~adjustment~~among toother ~~reclassify~~things, ~~the~~a ~~non-credit~~transferor’s ~~component~~continuing ofinvolvement ~~previously~~with ~~recognized~~transfers ~~other-than-temporary~~of ~~impairment~~financial ~~losses~~assets ~~from~~accounted ~~retained~~for ~~earnings~~as tosales, ~~other~~the ~~comprehensive income.~~risks ~~The~~inherent ~~Company~~in ~~elected~~the totransferred ~~early~~financial ~~adopt~~assets ~~FSP~~that ~~FAS~~have ~~115-2~~been retained, and ~~FAS~~the ~~124-2~~nature asand financial effect of restrictions on the ~~period~~transferor’s ~~ending~~assets ~~March 31,~~that ~~2009~~continue to be reported in the consolidated balance sheets. ~~The~~This ~~adoption~~guidance ofis ~~FSP~~effective ~~FAS~~for ~~115-2~~fiscal and ~~FAS~~interim ~~124-2~~reporting ~~resulted~~periods inbeginning aafter ~~cumulative-effect~~November 15, ~~adjustment~~2009. ofThe ~~$249.7~~Company will ~~million,~~adopt ~~net~~this ofguidance ~~taxes~~effective January 1, as2010. ~~an adjustment~~The toCompany ~~the~~currently ~~opening~~is ~~balance~~evaluating the provisions of ~~retained~~the ~~earnings~~guidance ~~with~~to adetermine ~~corresponding~~the ~~adjustment~~impact toof ~~accumulated~~adoption ~~other~~on ~~comprehensive~~its ~~income~~consolidated ~~(AOCI)~~financial statements.

In ~~April~~May 2009, the FASB issued ~~FSP~~guidance ~~FAS~~under ~~157-4~~FASB ASC 855, ~~Determining~~Subsequent ~~Fair~~Events, ~~Value~~(SFAS ~~When~~No. 165, ~~the~~Subsequent Events). ~~Volume~~This ~~and~~guidance ~~Level~~establishes general standards of ~~Activity~~accounting for and disclosure of events that occur after the ~~Asset~~balance orsheet ~~Liability~~date ~~Have~~but ~~Significantly~~before ~~Decreased~~financial ~~and~~statements ~~Identifying~~are ~~Transactions~~issued. ~~That~~In ~~Are~~particular, ~~Not~~this ~~Orderly~~guidance sets forth the period after the ~~(FSP~~balance ~~FAS~~sheet ~~157-4).~~date ~~FSP~~during ~~FAS~~which ~~157-4~~management ~~provides~~of ~~guidelines~~a reporting entity should evaluate events or transactions that may occur for ~~making~~potential ~~fair~~recognition ~~value~~or ~~measurements~~disclosure, ~~more~~the ~~consistent~~circumstances ~~with~~under which an entity should recognize events or transactions occurring after the ~~principles~~balance ~~presented~~sheet date in ~~SFAS~~its ~~No. 157~~financial statements, ~~Fair~~and ~~Value~~the ~~Measurements~~disclosures ~~(SFAS~~an ~~157).~~entity ~~FSP~~should ~~FAS~~make ~~157-4~~about events or transactions that occurred after the balance sheet date. This guidance is effective for ~~interim~~fiscal years and ~~annual~~ interim periods ending after June 15, 2009. The Company adopted this guidance effective June 30, ~~with~~2009. ~~early~~The adoption ~~permitted~~of ~~for~~this ~~interim~~guidance ~~and~~did ~~annual~~not ~~periods~~have ~~ending~~a ~~after~~material ~~March 15,~~impact ~~2009~~on the consolidated financial statements of the Company. The Company ~~elected~~evaluated tosubsequent ~~early~~events ~~adopt~~through November ~~FSP~~3, ~~FAS~~2009 ~~157-4~~the asdate ofthat the ~~period~~condensed ~~ending~~consolidated ~~March 31,~~financial ~~2009~~statements were issued. See Note 1 for required disclosure.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments (SFAS 107), to require disclosures about fair value of financial instruments within the scope of SFAS 107 for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009, with early adoption permitted for interim periods ending after March 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 for the period ending June 30, 2009 and included the required disclosures in Note 5.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

In ~~November~~April ~~2008~~2009, the FASB ~~Board~~issued ~~ratified~~guidance ~~the~~under ~~EITF~~FASB ~~consensus~~ASC ~~EITF 08-7~~320, ~~Accounting~~ ~~for~~Investments ~~Defensive~~– ~~Intangible~~Debt ~~Assets~~and Equity Securities, (~~EITF~~FASB ~~08-7~~Staff Position (FSP). ~~EITF~~Financial 08Accounting Standard (FAS) 115-72 ~~requires~~and ~~defensive~~FAS ~~intangible~~124-2, ~~assets~~Recognition ~~acquired~~and inPresentation aof ~~business~~Other-Than-Temporary ~~combination~~Impairments). orThis ~~asset~~guidance ~~acquisition~~is designed to becreate greater ~~accounted~~clarity ~~for~~and asconsistency ain ~~separate~~accounting ~~unit~~for and presentation of ~~accounting~~impairment losses on debt and equity securities. InThis ~~doing~~guidance ~~so,~~is ~~the~~effective ~~asset~~for ~~should~~interim ~~not~~and ~~be included~~annual asperiods ~~part~~ending ofafter ~~the~~June 15, ~~cost~~2009 ofwith anearly ~~entity’s~~adoption ~~existing~~permitted. ~~intangible~~As ~~asset(s)~~of ~~because~~the beginning of the ~~defensive~~interim ~~intangible~~period ~~asset~~of isadoption, ~~separately~~this ~~identifiable.~~guidance ~~EITF~~requires 08a cumulative-7effect isadjustment ~~effective~~to ~~for~~reclassify ~~intangible~~the ~~assets~~non-credit ~~acquired~~component onof orpreviously ~~after~~recognized ~~the~~other-than-temporary ~~beginning~~impairment oflosses ~~the~~from ~~first~~retained ~~annual reporting~~earnings ~~period~~to the beginning onbalance of oraccumulated ~~after~~other ~~December 15,~~comprehensive ~~2008~~income (AOCI). The Company adopted ~~EITF~~this ~~08-7~~guidance ~~effective~~as of January 1, 2009. OnThe ~~the~~adoption ~~date~~ of ~~adoption,~~FSP ~~there~~FAS ~~was~~115-2 noand ~~impact~~FAS to124-2 ~~the~~resulted ~~Company’s~~in ~~financial~~a ~~position~~cumulative-effect oradjustment ~~results~~ of ~~operations~~$249.7 ~~The~~million, ~~Company~~net of taxes, as an adjustment ~~will~~to ~~apply~~the ~~EITF~~opening ~~08-7~~balance ~~prospectively~~of ~~for~~retained ~~intangible~~earnings ~~assets~~with ~~acquired~~a oncorresponding oradjustment ~~after~~to ~~January 1,~~the ~~2009~~opening balance of AOCI.

In April ~~November 2008~~2009, the FASB ~~Board~~issued ~~ratified~~guidance ~~the~~under ~~EITF’s~~FASB ~~consensus~~ASC ~~EITF 08~~820-610, ~~Equity~~Fair ~~Method~~Value ~~Investment~~Measurements ~~Accounting~~and ~~Considerations~~Disclosures, (~~EITF~~FSP ~~08-6).~~FAS ~~EITF 08~~157-64, ~~clarifies~~Determining ~~how~~Fair toValue ~~account~~When ~~for~~the ~~certain~~Volume ~~transactions~~ and ~~impairment~~Level considerations involving equity method investments. Specifically, EITF 08-6 notes: 1) an entity shall measure its equity method investment initially at cost; 2) an equity method investor is required to recognize other-than-temporary impairments of anActivity ~~equity~~for ~~method~~the ~~investment~~Asset ~~in accordance~~or ~~with~~Liability ~~paragraph~~Have ~~19(h)~~Significantly ofDecreased ~~APB 18~~ and Identifying anTransactions ~~equity~~That ~~method~~Are ~~investor~~Not ~~shall not separately test an investee’s underlying indefinite-lived intangible asset(s~~Orderly). ~~for~~This ~~impairment;~~guidance ~~and~~provides 3)guidelines ~~an equity method investor shall account~~ for amaking ~~share~~fair ~~issuance by~~value anmeasurements ~~investee~~more asconsistent ifwith the ~~investor~~principles ~~had~~presented ~~sold~~in ~~a proportionate share of its investment and any gain or loss to~~ the ~~investor~~previous ~~resulting~~standard ~~from~~SFAS anNo. 157, ~~investee’s~~Fair ~~share~~Value ~~issuance~~Measurements, ~~shall be recognized in earnings~~(SFAS 157). This ~~EITF~~guidance is effective onfor ainterim ~~prospective~~and ~~basis in~~annual ~~fiscal~~periods ~~years~~ending ~~beginning on or~~ after ~~December~~June 15, ~~2008,~~2009 ~~and~~with ~~interim~~early ~~periods~~adoption ~~within those fiscal years~~permitted. The Company ~~adopted~~elected ~~EITF~~to ~~08-6~~early ~~effective~~adopt ~~January 1,~~FSP ~~2009.~~FAS On157-4 ~~the~~as ~~date~~ of ~~adoption, there was no impact to~~ the ~~Company’s~~period ~~financial position~~ending orMarch 31, ~~results of operations~~2009. ~~The Company will apply EITF 08-6 prospectively as is required.~~

In April ~~2008~~2009, the FASB issued ~~FSP~~guidance ~~FAS~~under ~~142~~FASB ASC 825-310, ~~Determination~~Financial ofInstruments ~~the Useful Life of Intangible Assets~~ (FSP FAS ~~142~~107-~~3).~~1 ~~FSP~~and ~~FAS~~Accounting Principles ~~142-3~~Bulletin ~~amends~~(APB) ~~the~~28-1, ~~factors~~Interim ~~that~~Disclosures ~~should~~about beFair ~~considered~~Value inof ~~developing~~Financial ~~renewal~~Instruments). orThe ~~extension~~guidance ~~assumptions~~amended ~~used~~FASB toStatement ~~determine the useful life of a recognized intangible asset under SFAS~~ No. ~~142~~107, ~~Goodwill~~Disclosures ~~and~~about ~~Other~~Fair ~~Intangible~~Value ~~Assets~~of Financial Instruments (SFAS ~~142~~107)., ~~FSP~~to ~~FAS~~require ~~142-3~~disclosures about isfair ~~effective~~value ~~for~~of financial ~~statements~~instruments ~~issued~~within ~~for~~the ~~fiscal~~scope ~~years~~of ~~and~~SFAS ~~interim~~107 ~~periods~~for ~~beginning~~interim ~~after~~reporting ~~December 15,~~periods ~~2008.~~of ~~The amended~~publicly ~~factors~~traded ~~that~~companies ~~should~~as bewell ~~considered~~as in ~~developing~~annual ~~renewal~~financial orstatements. ~~extension~~The ~~assumptions~~guidance ~~used~~is toeffective ~~determine~~for ~~the~~interim ~~useful~~periods ~~life~~ending ofafter aJune 15, 2009, ~~recognized~~with ~~intangible~~early ~~asset~~adoption ~~under~~permitted ~~SFAS~~for ~~142~~interim ~~are~~periods toending ~~be applied prospectively to intangible assets acquired~~ after ~~the effective~~March 15, ~~date~~2009. The Company adopted ~~FSP~~this ~~142-3~~guidance ~~effective~~for ~~January 1, 2009. On~~ the ~~date~~period ofending ~~adoption~~June 30, ~~there~~2009 ~~was~~and noincluded ~~impact to~~ the ~~Company’s~~required ~~financial~~disclosures ~~position~~in orNote ~~results of operations~~5. ~~The Company will apply FSP FAS 142-3 prospectively to intangible assets acquired after January 1, 2009.~~

In ~~March~~November 2008, the FASB issued ~~SFAS~~guidance ~~No. 161,~~under ~~Disclosures about~~FASB ~~Derivative~~ASC ~~Instruments and Hedging Activities~~350-30, anIntangibles ~~amendment~~– ofGoodwill ~~FASB Statement No. 133 (SFAS 161). SFAS 161 amends~~ and ~~expands~~Other, ~~the~~General Intangibles ~~disclosure~~Other ~~requirements~~than ofGoodwill ~~SFAS~~(EITF ~~No. 133~~08-7, Accounting for ~~Derivative~~Defensive ~~Instruments~~Intangible ~~and Hedging~~Assets). ~~Activities,~~This ~~(SFAS~~guidance ~~133)~~requires ~~with~~defensive ~~the~~intangible ~~intent~~assets toacquired ~~provide~~in ~~users~~a ofbusiness ~~financial~~combination ~~statements~~or ~~with~~asset anacquisition ~~enhanced~~to ~~understanding~~be ofaccounted ~~how~~for ~~and~~as ~~why~~a anseparate ~~entity~~unit ~~uses~~of accounting. ~~derivative~~In ~~instruments~~doing so, ~~how~~the ~~derivative~~asset ~~instruments~~should ~~and~~not ~~related~~be ~~hedged~~included ~~items~~as ~~are~~part ~~accounted~~of ~~for under~~the ~~SFAS~~cost ~~133~~of ~~and~~an ~~its~~entity’s ~~related~~existing ~~interpretations,~~intangible ~~and~~asset(s) ~~how~~because ~~derivative~~the ~~instruments~~defensive ~~and~~intangible ~~related~~asset ~~hedged~~is ~~items~~separately ~~affect~~identifiable. anThis ~~entity’s~~guidance ~~financial~~is ~~position,~~effective ~~financial~~for ~~performance~~intangible ~~and~~assets acquired ~~cash~~on ~~flows.~~or ~~SFAS~~after ~~161~~the ~~requires~~beginning ~~qualitative~~of ~~disclosures~~the ~~about~~first ~~objectives~~annual ~~and strategies~~reporting ~~for~~period ~~using~~beginning ~~derivatives,~~on ~~quantitative~~or ~~disclosures~~after ~~about~~December 15, ~~derivative~~2008. ~~instrument~~The ~~fair~~Company ~~values~~adopted ~~and~~this ~~related~~guidance ~~gains~~effective ~~and losses~~January 1, ~~and~~2009. ~~disclosures~~On ~~about~~the ~~credit-risk-related~~date ~~contingent~~of ~~features~~adoption, inthere ~~derivative~~was ~~agreements.~~no ~~SFAS~~impact ~~161~~to ~~is effective for~~the Company’s financial ~~statements~~position ~~issued~~or ~~for~~results ~~fiscal~~of ~~years~~operations. ~~and~~The ~~interim~~Company ~~periods~~will ~~beginning~~apply ~~after~~this ~~November 15,~~guidance ~~2008.~~prospectively ~~The~~for ~~Company~~intangible ~~adopted~~assets ~~SFAS~~acquired ~~161~~on ~~effective~~or ~~March~~after January 311, 2009.

In ~~February~~November 2008, the FASB issued ~~FSP~~guidance ~~FAS~~under ~~157~~FASB ASC 323-210, ~~Effective~~Investments ~~Date~~– ofEquity ~~FASB~~Method ~~Statement~~and ~~No. 157~~Joint Ventures (~~FSP~~EITF ~~FAS 157~~08-26, Equity Method Investment Accounting Considerations). This ~~FSP~~guidance ~~delays~~clarifies ~~the~~how ~~effective~~to ~~date~~account offor ~~SFAS~~certain ~~157~~transactions ~~for~~and ~~nonfinancial~~impairment ~~assets~~considerations ~~and~~involving equity method investments. Specifically, this guidance notes: 1) an entity shall measure its equity method investment ~~liabilities~~initially ~~until~~at ~~fiscal~~cost; ~~years~~2) an equity method investor is required to recognize other-than-temporary impairments of an equity method investment in accordance with paragraph 35-32A and ~~interim~~an ~~periods~~equity ~~beginning~~method ~~after~~investor ~~November 15,~~shall ~~2008.~~not ~~FSP~~separately ~~FAS~~test ~~157~~an investee’s underlying indefinite-2lived ~~applies~~intangible toasset(s) ~~nonfinancial~~for ~~assets~~impairment; and ~~liabilities,~~3) ~~except~~an equity method investor shall account for ~~items~~a ~~recognized~~share orissuance ~~disclosed~~by atan ~~fair~~investee ~~value~~as inif the ~~Company~~investor had sold a proportionate share of its investment and any gain or loss to the investor resulting from an investee’s ~~financial statements~~share issuance shall be recognized in earnings. This guidance is effective on a ~~recurring~~prospective basis ~~(at~~in ~~least~~fiscal ~~annually)~~years beginning on or after December 15, 2008, and isinterim ~~effective~~periods ~~upon~~within ~~issuance.~~those fiscal years. The Company adopted ~~FSP~~this ~~FAS~~guidance ~~157-2~~prospectively ~~effective~~beginning January 1, 2009. On the date of adoption, there was no impact to the Company’s financial position or results of operations.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

In ~~December~~April ~~2007~~2008, the FASB issued ~~SFAS~~guidance ~~No. 141~~under ~~(revised~~FASB ~~2007),~~ASC ~~Business~~350-30, ~~Combinations~~General ~~(SFAS~~Intangibles ~~141(R)),~~other ~~which~~than ~~replaces SFAS No. 141~~Goodwill, ~~Business Combinations~~ (~~SFAS~~FSP ~~141).~~FAS ~~The~~142-3, ~~objective~~“Determination of ~~SFAS 141(R) is to improve~~ the ~~relevance,~~Useful ~~representational~~Life ~~faithfulness, and comparability~~ of ~~the~~Intangible ~~information a reporting entity provides in its financial reports about a business combination and its effects~~Assets”). ~~Accordingly,~~This ~~SFAS~~guidance ~~141(R)~~amends ~~establishes principles and requirements for how~~ the ~~acquirer:~~factors 1)that ~~recognizes~~should ~~and~~be ~~measures~~considered in ~~its~~developing ~~financial~~renewal ~~statements~~or ~~the identifiable~~extension ~~assets~~assumptions ~~acquired,~~used ~~the~~to determine ~~liabilities assumed, and any noncontrolling interest in~~ the ~~acquiree;~~useful 2)life ~~recognizes~~of ~~and~~a ~~measures~~recognized ~~the~~intangible ~~goodwill~~asset ~~acquired~~under inprevious ~~the~~SFAS ~~business~~No. 142, ~~combination~~Goodwill orand aOther ~~gain~~Intangible ~~from~~Assets a(SFAS ~~bargain purchase; and 3~~142). ~~determines~~FASB ~~what information~~ASC to350-30 ~~disclose~~is toeffective ~~enable~~for ~~users of the~~ financial statements toissued ~~evaluate~~for ~~the~~fiscal ~~nature~~years and ~~financial~~interim ~~effects~~periods beginning ofafter ~~the~~December 15, ~~business combination~~2008. ~~SFAS~~The ~~141(R)~~amended ~~applies~~factors tothat ~~all~~should ~~transactions~~be orconsidered ~~other events~~ in ~~which~~developing anrenewal ~~entity obtains control of one~~ or ~~more businesses~~extension ~~and~~assumptions ~~retains~~used ~~the~~to ~~fundamental~~determine ~~requirements in SFAS 141 that~~ the ~~acquisition~~useful ~~method~~life of ~~accounting~~a berecognized ~~used~~intangible ~~for~~asset ~~all~~under ~~business~~SFAS ~~combinations~~142 ~~and~~are ~~for an acquirer~~ to be ~~identified~~applied ~~for~~prospectively ~~each business combination. SFAS 141(R) defines the acquirer as~~to ~~the~~intangible ~~entity~~assets ~~that~~acquired ~~obtains~~after ~~control of one or more businesses in~~ the ~~business~~effective ~~combination and establishes the acquisition~~ date ~~as the date the acquirer achieves control~~. ~~SFAS~~The ~~141(R)~~Company isadopted ~~applicable~~this ~~prospectively~~guidance toeffective ~~business~~January 1, ~~combinations~~2009. ~~for~~On ~~which~~ the ~~acquisition~~ date ~~is on or after the beginning~~ of ~~the first annual reporting period beginning on or after December 15~~adoption, ~~2008.~~there ~~Earlier~~was ~~application~~no isimpact ~~prohibited.~~to ~~The~~the Company’s ~~adopted~~financial ~~SFAS~~position ~~141(R)~~or ~~effective~~results ~~January 1,~~of ~~2009~~operations. The Company will apply ~~SFAS~~this ~~141(R)~~guidance prospectively to ~~any~~intangible ~~business~~assets ~~combination~~acquired ~~on or~~ after January 1, 2009.

In ~~April~~March ~~2009~~2008, the ~~FASB~~ FASB issued ~~FSP~~guidance ~~FAS~~under ~~141R-1,~~FASB ~~Accounting~~ASC ~~for~~815, ~~Assets~~Derivatives ~~Acquired~~ and ~~Liabilities~~Hedging, ~~Assumed in a Business Combination That Arise from Contingencies~~ (~~FSP~~SFAS ~~FAS 141R-1)~~No. ~~FSP FAS 141R-1 amends the guidance of FAS 141R related to contingencies. First~~ 161, ~~FSP~~Disclosures ~~FAS 141R-1~~about ~~requires~~Derivative ~~the~~Instruments ~~acquirer~~and toHedging ~~recognize the contingency at fair value~~Activities, atan ~~the~~amendment ~~acquisition date, if the acquisition-date fair value~~ of ~~that~~FASB ~~asset~~Statement ~~or liability can be determined during the measurement period~~No. 133). ~~Second,~~This ifguidance ~~the~~amends ~~first criteria is not~~and ~~applicable~~expands as the ~~fair~~disclosure ~~value~~requirements of ~~the~~previous ~~asset~~SFAS orNo. 133, ~~liability~~Accounting ~~cannot~~for beDerivative ~~determined~~Instruments ~~during~~and ~~the~~Hedging ~~measurement~~Activities ~~period~~(SFAS 133), ~~then~~with the ~~contingency~~intent ~~shall~~to beprovide ~~recognized~~users ifof ~~both~~financial A)statements ~~Information~~with ~~available~~an ~~before~~enhanced ~~the~~understanding ~~end~~ of ~~the~~how ~~measurement~~and ~~period indicates it is probable an~~why ~~asset~~an ~~existed~~entity oruses aderivative ~~liability~~instruments, ~~had~~how ~~been~~derivative ~~incurred~~instruments atand ~~the~~related ~~acquisition~~hedged ~~date~~items ~~and~~are B)accounted ~~the~~for ~~amount~~under ofFASB ~~the~~ASC ~~asset~~815, orand ~~liability~~how ~~can~~derivative beinstruments ~~reasonably~~and ~~estimated.~~related Ifhedged ~~neither~~items ofaffect ~~these~~an ~~acquisition~~entity’s ~~date~~financial ~~recognition criterion apply~~position, ~~the acquirer shall not recognize an~~financial ~~asset~~performance orand ~~liability~~cash ~~as of the acquisition date~~flows. InThis ~~periods~~guidance ~~after~~requires ~~the~~qualitative ~~acquisition~~disclosures ~~date,~~about ~~the~~objectives ~~acquirer~~and ~~shall~~strategies ~~account~~ for anusing ~~asset~~derivatives, orquantitative adisclosures ~~liability~~about ~~arising~~derivative ~~from~~instrument afair ~~contingency~~values ~~that~~and ~~does~~related ~~not~~gains ~~meet~~and ~~the~~losses, ~~recognition~~and ~~criteria~~disclosures atabout credit-risk-related ~~the~~contingent ~~acquisition~~features ~~date~~ in ~~accordance with~~derivative ~~other~~agreements. ~~applicable~~This ~~GAAP,~~guidance ~~including~~is ~~Statement~~effective ~~5, Accounting~~ for ~~Contingencies,~~financial asstatements ~~appropriate.~~issued ~~The~~for ~~Company~~fiscal ~~will~~years ~~apply~~and ~~SFAS~~interim ~~141R-1~~periods ~~prospectively~~beginning toafter ~~any~~November 15, ~~business~~2008. ~~combination~~The onCompany oradopted ~~after~~this guidance effective January 1, 2009.

In ~~December~~February ~~2007~~2008, the FASB issued ~~SFAS~~guidance ~~No. 160,~~under ~~Noncontrolling~~FASB ~~Interests~~ASC ~~in Consolidated Financial Statements~~820, anFair ~~Amendment~~Value Measurements ofand ~~ARB No. 51~~Disclosures, (~~SFAS~~FSP ~~160).~~FAS ~~The objective of SFAS 160 is to improve the relevance~~157-2, ~~comparability,~~Effective ~~and~~Date ~~transparency~~ of ~~the~~FASB ~~financial~~Statement information a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also amends certain consolidation procedures prescribed by Accounting Research Bulletin No. ~~51,~~157). ~~Consolidated Financial~~This ~~Statements,~~guidance ~~for~~delayed ~~consistency with~~ the ~~requirements~~effective date of SFAS ~~141R.~~157 ~~SFAS~~for ~~160~~nonfinancial isassets ~~effective~~and ~~for~~liabilities until fiscal years, and interim periods ~~within those fiscal years,~~ beginning ~~on or~~ after ~~December~~November 15, 2008. ~~Earlier~~FASB ~~adoption~~ASC is820 ~~prohibited.~~applies ~~The Company~~to ~~adopted~~nonfinancial ~~SFAS~~assets ~~160~~and ~~effective January 1~~liabilities, ~~2009.~~except ~~The~~for ~~required~~items ~~presentation~~recognized ofor ~~noncontrolling~~disclosed ~~interests~~at isfair ~~reflected~~value in the ~~consolidated~~Company’s financial statements. Ason a ~~result~~recurring ofbasis ~~the~~(at ~~adoption~~least ~~of SFAS 160~~annually), ~~the~~and ~~Company~~is ~~reclassified~~effective upon ~~$416~~issuance.6 ~~million from~~The ~~other~~Company ~~liabilities~~adopted tothis ~~equity~~guidance aseffective ~~of December~~January 311, ~~2008,~~2009. ~~representing~~On the ~~noncontrolling~~date ~~interest~~ of ~~low-income-housing~~adoption, ~~tax~~there ~~credit~~was ~~funds~~no ~~(LIHTC~~impact ~~Funds).~~to ~~See Note 13 for further discussion on~~ the ~~LIHTC~~Company’s ~~Funds.~~financial ~~The~~position ~~accounting requirements of SFAS 160 will be applied to any acquisitions~~ or ~~dispositions~~results of ~~noncontrolling interests on or after January 1, 2009~~operations.

In December 2007, the FASB issued guidance under FASB ASC 805, Business Combinations, (SFAS No. 141 (revised 2007), Business Combinations, (SFAS 141R) which replaced SFAS No. 141, Business Combinations (SFAS 141)). The objective of this guidance is to improve the relevance, representational faithfulness, and comparability of the information a reporting entity provides in its financial reports about a business combination and its effects. Accordingly, this guidance establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This guidance applies to all transactions or other events in which an entity obtains control of one or more businesses and retains the fundamental requirements in the previous SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. This guidance defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date the acquirer achieves control. This guidance is applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The Company adopted this guidance effective January 1, 2009. The Company will apply this guidance prospectively to any business combination on or after January 1, 2009.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

In April 2009, the FASB issued guidance under FASB ASC 805-20, Business Combinations – Identifiable Assets and Liabilities, and Any Noncontrolling Interest, (FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies). This guidance amends the guidance of previous SFAS 141R related to contingencies. First, this guidance requires the acquirer to recognize the contingency at fair value, at the acquisition date, if the acquisition-date fair value of that asset or liability can be determined during the measurement period. Second, if the first criteria is not applicable as the fair value of the asset or liability cannot be determined during the measurement period, then the contingency shall be recognized if both (a) information available before the end of the measurement period indicates it is probable an asset existed or a liability had been incurred at the acquisition date and (b) the amount of the asset or liability can be reasonably estimated. If neither of these acquisition date recognition criterion apply, the acquirer shall not recognize an asset or liability as of the acquisition date. In periods after the acquisition date, the acquirer shall account for an asset or a liability arising from a contingency that does not meet the recognition criteria at the acquisition date in accordance with other applicable GAAP, including FASB ASC 450, Contingencies, as appropriate. The Company will apply this guidance prospectively to any business combination on or after January 1, 2009.

In December 2007, the FASB issued guidance under FASB ASC 810, Consolidation, (SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51). The objective of this guidance is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance also amends certain consolidation procedures prescribed by previous Accounting Research Bulletin No. 51, Consolidated Financial Statements, for consistency with the requirements of previous SFAS No. 141 (revised 2007). This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company adopted this guidance effective January 1, 2009. The required presentation of noncontrolling interests is reflected in the consolidated financial statements. As a result of the adoption of SFAS 160, the Company reclassified $416.6 million from other liabilities to equity as of December 31, 2008, representing the noncontrolling interest of low-income-housing tax credit funds (LIHTC Funds). See Note 15 for further discussion on the LIHTC Funds. The accounting requirements of SFAS 160 will be applied to any transactions involving noncontrolling interests on or after January 1, 2009.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

September 30, 2009 and 2008

(5)

Fair Value Measurements

Fair Value Option

~~The~~Effective ~~Company adopted SFAS 159, The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115 (SFAS 159), effective~~ January 1, 2008, ~~and~~the Company elected fair value treatment for commercial mortgage loans held for sale. Accordingly, the Company now records in earnings all market fluctuations associated with this portfolio. The Company previously recorded such loans at the lower of cost or market value. Balances for these loans ~~will~~are be measured at fair value ~~prospectively~~ with unrealized gains and losses included as a component of net realized investment gains and losses. The Company will assess the fair value option election for new financial assets or liabilities on a prospective basis.

Fair Value Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company categorizes its financial instruments into a three level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.

The Company categorizes financial assets and liabilities recorded at fair value in the condensed consolidated balance sheets as follows:

• Level 1 – Unadjusted quoted prices accessible in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities utilizing Level 1 valuations generally include U.S. Treasury and agency securities, certain residential mortgage-backed securities, equity securities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.

• Level 2 – Unadjusted quoted prices for similar assets or liabilities in active markets or inputs (other than quoted prices) that are observable or that are derived principally from or corroborated by observable market data through correlation or other means. The types of assets and liabilities utilizing Level 2 valuations generally include certain U.S. Government agency securities, municipal bonds, certain residential mortgage-backed securities, certain commercial mortgage-backed securities, certain collateralized debt obligations, certain other asset-backed securities (ABSs), certain corporate debt, certain private placement investments, certain mutual fund holdings, and certain derivatives, including certain cross-currency interest rate swaps and credit default swaps.

• Level 3 – Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate about the assumptions market participants would use at the measurement date in pricing the asset or liability. Consideration is given to the risk inherent in both the method of valuation and the valuation inputs. Generally, the types of assets and liabilities utilizing Level 3 valuations are certain residential mortgage-backed securities, certain commercial mortgage-backed securities, certain collateralized debt obligations, certain other ABSs, certain corporate debt, certain private placement investments, certain mutual fund holdings and certain derivatives, including embedded derivatives associated with living benefit contracts.

10For certain residential mortgage-backed securities backed by Prime, Sub-prime and Alt-A collateral, which are included in Level 3 financial assets, the Company utilizes internal pricing models to assist in determining the estimated fair values. As of December 31, 2008, these investments were priced solely with the assistance of independent pricing services. As a result of low levels of activity in these markets during the first three quarters of 2009, management believes that prices were no longer representative of the investments’ fair value, which is the price that would be received upon the sale of the investment in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. The Company believes that a weighting of internal pricing models and independent pricing services represents a better estimate of the investments’ fair value and complies with FASB ASC 820, Fair Value Measurements and Disclosures.

Therefore, management determined that the use of multiple valuation techniques, considering both an income approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs and a market approach that observes quotes provided by independent pricing services produces a result more representative of an investment’s fair value.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Certain residential mortgage-backed securities backed by Prime, Sub-prime and Alt-A collateral, which are included in Level 3 financial assets, utilize internal pricing models to assist in determining the estimated fair values. As of December 31, 2008, these investments were priced solely with the assistance of independent pricing services. As a result of continued declines in the level of activity in these markets during the first and second quarters of 2009, in accordance with FSP FAS 157-4, management believes that prices were no longer representative of the investments’ fair value, which is the price that would be received upon the sale of the investment in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. The Company believes that a weighting of internal pricing models and independent pricing services represents a better estimate of the investments’ fair value and complies with FSP FAS 157-4.

The income approach incorporates cash flows for each investment adjusted for expected losses in different interest rate and housing scenarios. The adjusted cash flows are then discounted using a risk premium that market participants would demand because of the risk in the cash flows. The risk premium is reflective of an orderly transaction between market participants at the measurement date under current market conditions and includes items such as liquidity and structure risk. The income approach also includes a weighting of external third party values. As sufficient information is often not available to conclude whether such prices are based on orderly transactions, this weighting methodology is designed to incorporate external prices into the Company’s internal valuation process.

In addition to weighting external prices in developing the internal values, the Company further calibrates those values to market indications through ~~obtaining~~ pricing determined from two independent pricing services (the market approach). The Company calibrates the prices obtained from the independent pricing services and the price developed internally by utilizing the median value to determine the estimated fair value.

In addition, certain of the Company’s investments in corporate debt securities, mortgage-backed securities and other asset-backed securities were valued with the assistance of independent pricing services and non-binding broker quotes. The Company’s policy is to use the pricing obtained from our primary independent pricing service even in cases where a price is obtained from both an independent pricing service and a broker. In the event that pricing information is not available from an independent pricing service, non-binding broker quotes are used to assist in the valuation of the investments. In many cases, only one broker quote is available. The Company’s policy is generally not to adjust the values obtained from brokers.

Broker quotes are considered unobservable inputs as only one broker quote is ordinarily obtained, the investment is not traded on an exchange, the pricing is not available to other entities and the transaction volume in the same or similar investments has decreased such that generally only one quotation is available. As the brokers often do not provide the necessary transparency into their quotes and methodologies, the Company periodically performs reviews and tests to ensure that quotes are a reasonable estimate of the investments’ fair value.

For investments valued with the assistance of independent pricing services, the Company obtained the pricing ~~service~~services’s methodologies and classified these investments accordingly in the fair value hierarchy. The Company periodically reviews and tests the pricing and related methodologies obtained from these independent pricing services against secondary sources to ensure that management can validate the investment’s fair value and related categorization. If large variances are observed between the price obtained from the independent pricing ~~service~~ services and secondary sources, the Company analyzes the causes driving the variance and resolves any differences.

As of ~~June~~ September 30, 2009, 66% of the prices of fixed maturity securities were valued with the assistance of independent pricing services, 10% were valued with the assistance of the Company’s pricing matrices, 4% were valued with the assistance of broker quotes, 17% were valued with the assistance of the Company’s internal pricing processes and 3% were valued from other sources compared to 80%, 11%, 4%, 4% and 1%, respectively, as of December 31, 2008.

1112

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of ~~June~~September 30, 2009:

(in millions)	Level 1			~~Level 2~~	Level 2			~~Level 3~~	Level 3			~~Total~~	Total
Assets
Investments:
Securities available-for-sale:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	~~589~~689.73		$	~~4.2~~$	4.5		$	—$	1.8		$	~~593.9~~$	695.6
Obligations of states and political subdivisions		—			~~313.1~~	388.7			—	—			~~313.1~~	388.7
Debt securities issued by foreign governments		—			~~72.0~~	77.5			—	—			~~72.0~~	77.5
Corporate securities		1.9			~~14,234.0~~	14,691.7			~~1,234.2~~	1,467.1			~~15,470.1~~	16,160.7
Residential mortgage-backed securities		1,~~513~~981.26			~~2,908.1~~	2,875.4			~~3,021.5~~	2,998.6			~~7,442.8~~	7,855.6
Commercial mortgage-backed securities		—			~~918.4~~	821.5			~~114.8~~	334.3			~~1,033.2~~	1,155.8
Collateralized debt obligations		—			~~85.9~~	110.6			~~235.4~~	239.4			~~321.3~~	350.0
Other asset-backed securities		—			~~317.5~~	284.9			~~132.7~~	156.3			~~450.2~~	441.2
Total fixed maturity securities		2,~~104~~672.8			~~18,853.2~~	19,254.8			~~4,738.6~~	5,197.5			~~25,696.6~~	27,125.1
Equity securities		912.05			~~30.9~~	31.5			~~11.8~~	16.5			~~51.7~~	60.5
Total securities available-for-sale		2,~~113~~685.83			~~18,884.1~~	19,286.3			~~4,750.4~~	5,214.0			~~25,748.3~~	27,185.6
Trading assets		—			~~14.6~~	8.2			~~39.8~~	28.2			~~54.4~~	36.4
Mortgage loans held for sale1		—			—	—			~~63.0~~	53.3			~~63.0~~	53.3
Short-term investments		81120.61			~~1,621.5~~	1,660.6			—	—			~~1,703.1~~	1,780.7
Total investments		2,~~195~~805.4			~~20,520.2~~	20,955.1			~~4,853.2~~	5,295.5			~~27,568.8~~	29,056.0
Cash and cash equivalents		7784.54			—	—			—	—			~~77.5~~	84.4
Derivative assets2		~~18.9~~—			~~469.9~~	477.8			~~473.9~~	391.9			~~962.7~~	869.7
Separate account assets3,5		1011,~~268~~496.01			~~38,482.6~~	43,587.8			~~2,179.5~~	1,387.9			~~50,930.1~~	56,471.8
Total assets	$	1214,~~559~~385.89		$	~~59,472.7~~$	65,020.7		$	~~7,506.6~~$	7,075.3		$	~~79,539.1~~$	86,481.9
Liabilities
Future policy benefits and claims4	$	—		$	—$	—		$	~~(780.1~~$	)(521.8	)	$	~~(780.1~~$	)(521.8	)
Derivative liabilities2		—(20.1	)		~~(377.9~~	)(397.5	)		~~(9.5~~	)(5.9	)		~~(387.4~~	)(423.5	)
Total liabilities	$	—(20.1	)	$	~~(377.9~~$	)(397.5	)	$	~~(789.6~~$	)(527.7	)	$	~~(1,167.5~~$	)(945.3	)

1 ~~Carried~~Elected atto ~~fair~~be ~~value~~carried asat ~~elected~~fair ~~under SFAS 159~~value.

Comprised of interest rate swaps, cross-currency interest rate swaps, credit default swaps, other non-hedging derivative instruments, equity option contracts and interest rate futures contracts.

Comprised of public, privately registered and non-registered mutual funds and investments in securities.

4 Related to embedded derivatives associated with living benefit contracts. The Company’s guaranteed minimum accumulation benefits (GMABs), guaranteed lifetime withdrawal benefits (GLWBs) and hybrid GMABs/GLWBs are considered embedded derivatives ~~under~~requiring ~~accounting guidance, resulting in~~ the related liabilities ~~being~~to be separated from the host insurance product and recognized at fair value, with changes in fair value reported in earnings. This balance also includes embedded derivatives associated with fixed equity-indexed annuities (EIA) of $44.6 million that provide for interest earnings that are linked to the performance of specified equity market indices.

⁵

The fair value of separate account liabilities is set to equal the fair value of separate account assets.

1213

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:


(in millions)	Level 1			Level 2			Level 3			Total
Assets
Investments:
Securities available-for-sale:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	627.3		$	4.3		$	1.9		$	633.5
Obligations of states and political subdivisions		—			262.4			—			262.4
Debt securities issued by foreign governments		—			55.5			—			55.5
Corporate securities		2.0			11,263.6			1,330.1			12,595.7
Residential mortgage-backed securities		1,775.5			2,723.2			3,099.2			7,597.9
Commercial mortgage-backed securities		—			752.2			263.4			1,015.6
Collateralized debt obligations		—			73.0			250.4			323.4
Other asset-backed securities		—			473.9			111.8			585.7

Total fixed maturity securities		2,404.8			15,608.1			5,056.8			23,069.7
Equity securities		1.4			34.9			24.4			60.7

Total securities available-for-sale		2,406.2			15,643.0			5,081.2			23,130.4
Trading assets		0.2			21.7			44.2			66.1
Mortgage loans held for sale¹		—			—			124.5			124.5
Short-term investments		165.4			2,889.6			—			3,055.0

Total investments		2,571.8			18,554.3			5,249.9			26,376.0

Cash and cash equivalents		165.5			—			—			165.5
Derivative assets²		—			708.5			597.6			1,306.1
Separate account assets^3,5		9,975.7			36,723.2			2,141.8			48,840.7

Total assets	$	12,713.0		$	55,986.0		$	7,989.3		$	76,688.3

Liabilities
Future policy benefits and claims⁴	$	—		$	—		$	(1,739.7	)	$	(1,739.7	)
Derivative liabilities²		(6.0	)		(385.9	)		(4.2	)		(396.1	)

Total liabilities	$	(6.0	)	$	(385.9	)	$	(1,743.9	)	$	(2,135.8	)

1 ~~Carried~~Elected atto ~~fair~~be ~~value~~carried asat ~~elected~~fair ~~under SFAS 159~~value.

Comprised of interest rate swaps, cross-currency interest rate swaps, credit default swaps, other non-hedging derivative instruments, equity option contracts and interest rate futures contracts.

Comprised of public, privately registered and non-registered mutual funds and investments in securities.

4 Related to embedded derivatives associated with living benefit contracts. The Company’s GMABs, GLWBs and hybrid GMABs/GMWBs are considered embedded derivatives ~~under~~requiring ~~accounting guidance, resulting in~~ the related liabilities ~~being~~to be separated from the host insurance product and recognized at fair value, with changes in fair value reported in earnings. This balance also includes embedded derivatives associated with fixed EIAs of $41.7 million that provide for interest earnings that are linked to the performance of specified equity market indices.

⁵

The fair value of separate account liabilities is set to equal the fair value of separate account assets.

1314

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following tables summarize financial instruments for which the Company used significant unobservable inputs (Level 3) to determine fair value measurements for the three and ~~six~~nine months periods ended ~~June~~September 30, 2009:

(in millions)	Balanceas ~~ofMarch~~ofJune 3130,2009			Net investmentgains (losses)						Purchases,issuances,sales andsettlements			Transfersin toLevel 3		Transfersout ofLevel 3			Balanceas ~~ofJune~~ofSeptember 30,2009			Change inunrealizedgains(losses) ininearningsdue ~~earningsdue~~ toassets stillheld
				In earnings(realizedandunrealized)1			In OCI(unrealized)2
Assets
Investments:
Securities available-for-sale3:
Fixed maturity securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	~~1.8~~—		$	—		$	—0.1		$	—		$	—1.7	$	~~(1.8~~—	)	$	—1.8		$	—
Corporate securities		1,~~416~~234.12			(218.15	)		~~110~~197.49			(41169.3	)		~~101~~332.97		(~~350~~109.89	)		1,~~234~~467.21			—
Residential mortgage-backed securities		3,~~166~~021.45			23(61.62	)		~~(34~~257.65	)		(~~133~~219.82	)		—		~~(0.1~~—	)		32,~~021~~998.56			—
Commercial mortgage-backed securities		~~239~~114.58			—(13.3	)		2178.86			(0.17	)		5155.82		(~~152~~0.23	)		~~114~~334.83			—
Collateralized debt obligations		~~163~~235.54			(~~15.~~9.0	)		7726.09			(51.06	)		~~15.8~~—		—(15.5	)		~~235~~239.4			—
Other asset-backed securities		~~130~~132.27			—0.3			811.30			(29.19	)		122.62		~~(5.3~~—	)		~~132~~156.73			—
Total fixed maturity securities		54,~~117~~738.56			5(101.67	)		~~182~~572.90			(~~182~~397.35	)		~~125~~511.18		(~~510~~125.27	)		45,~~738~~197.65			—
Equity securities		811.28			—1.4			1(0.61	)		23.04			—		—			1116.85			—
Total securities available-for-sale		54,~~125~~750.74			5(100.63	)		~~184~~571.59			(~~180~~394.31	)		~~125~~511.18		(~~510~~125.27	)		45,~~750~~214.40			—
Trading assets		4339.68			(02.56	)		—			(37.0	)		~~4.6~~—		(42.90	)		3928.82			03.2
Mortgage loans held for sale		6563.90			(24.86	)		—			(014.13	)		—		—			6353.03			(24.83	)
Total investments		54,~~235~~853.2			2(98.3	)		~~184~~571.59			(~~183~~415.4	)		~~129~~511.78		(~~515~~127.17	)		45,~~853~~295.25			(27.65	)
Derivative assets		~~672~~473.69			(~~213~~109.76	)		—			1527.06			—		—			~~473~~391.9			(~~213~~107.26	)
Separate account assets4,6		2,~~177~~179.05			(2298.82	)		—			(49.81	)		110.4		(1484.37	)		21,~~179~~387.59			(0294.96	)
Total assets	$	87,~~084~~506.86		$	(~~214~~506.21	)	$	~~184~~571.59		$	(~~173~~396.29	)	$	~~141~~512.12	$	(~~516~~612.4	)	$	7,~~506~~075.63		$	(~~216~~394.7	)
Liabilities
Future policy benefits and claims5	$	(~~1,476~~780.71	)	$	~~699~~260.2		$	—		$	(21.69	)	$	—	$	—		$	(~~780~~521.18	)	$	~~699~~260.2
Derivative liabilities		(9.5	)		—3.6			—			—			—		—			(9.5.9	)		—3.6
Total liabilities	$	(~~1,486~~789.26	)	$	~~699~~263.28		$	—		$	(21.69	)	$	—	$	—		$	(~~789~~527.67	)	$	~~699~~263.28

Includes gains and losses on sales of financial instruments, changes in market value of certain instruments and other-than-temporary impairments. The net unrealized loss on separate account assets is attributable to contractholders and, therefore, is not included in the Company’s earnings.

Includes changes in market value of certain instruments.

3 Includes ~~non-investment~~certain ~~grade~~ collateralized mortgage obligations, residential mortgage-backed securities, commercial mortgage-backed securities, other ABSs, certain broker or internally priced securities and securities that are at or near default based on designations assigned by the National Association of Insurance Commissioners (NAIC) (see Note 7 for a discussion of NAIC designations). Equity securities represent holdings in non-registered mutual funds with significant unobservable inputs.

⁴

Comprised of non-registered mutual funds with significant unobservable and/or liquidity restrictions. The net unrealized investment loss on these non-registered mutual funds is attributable to contractholders and, therefore, is not included in the Company’s earnings.

1415

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

5 Relates to GMAB, GLWB and hybrid GMAB/GLWB embedded derivatives associated with contracts with living benefit riders. This balance also ~~included~~includes embedded derivatives associated with EIAs. Related derivatives are internally valued. The valuation of guaranteed minimum benefit embedded derivatives is based on capital market and actuarial ~~risk~~ assumptions, including risk margin considerations reflecting policyholder behavior. The Company uses both observable and unobservable inputs, such as published swap rates and historical volatilities as well as implied volatilities, in its capital market assumptions. Actuarial assumptions, including lapse behavior and mortality rates, are either based on annuity experience or pricing assumptions if experience has not yet developed.

⁶

The value of separate account liabilities is set to equal the fair value of separate account assets.

(in millions)	~~Balanceas ofDecember 31,2008~~			Net investmentgains (losses)						Purchases,issuances,sales andsettlements			Transfersin toLevel 3		Transfersout ofLevel 3			Balanceas ~~ofJune~~ofSeptember 30,2009			Change inunrealizedgains(losses) inearningsdue toassets stillheld
				In earnings(realizedandunrealized)1			In OCI(unrealized)2
	Balanceas ofDecember 31,2008			In earnings(realizedandunrealized)1			In OCI(unrealized)2
Assets
Investments:
Securities available-for-sale3:
Fixed maturity securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	1.9		$	—		$	—		$	—		$	—	$	(1.9	)	$	—		$	—
U.S. Treasury securities and obligations of U.S.
Corporate securities		1,330.1			(39.9	)		28.7			(86.0	)		280.7		(279.4	)		1,234.2			—
Government corporations and agencies	$	1.9		$	—		$	—		$	(0.1	)	$	—	$	—		$	1.8		$	—
Residential mortgage-backed securities		3,099.2			(47.1	)		193.0			(222.8	)		0.9		(1.7	)		3,021.5			—
Corporate securities		1,330.1			(65.1	)		247.1			(297.3	)		411.4		(159.1	)		1,467.1			—
Commercial mortgage-backed securities		263.4			(3.5	)		19.7			(0.4	)		5.9		(170.3	)		114.8			—
Residential mortgage-backed securities		3,099.2			(108.3	)		450.5			(442.0	)		0.9		(1.7	)		2,998.6			—
Collateralized debt obligations		250.4			(38.3	)		31.2			(7.9	)		—		—			235.4			—
Commercial mortgage-backed securities		263.4			(19.0	)		105.1			(1.7	)		89.0		(102.5	)		334.3			—
Other asset-backed securities		111.8			(1.1	)		10.5			3.0			13.3		(4.8	)		132.7			—
Collateralized debt obligations		250.4			(44.9	)		56.6			(6.9	)		—		(15.8	)		239.4			—
Total fixed maturity securities		5,056.8			(129.9	)		283.1			(314.1	)		300.8		(458.1	)		4,738.6			—
Other asset-backed securities		111.8			(14.5	)		24.2			(9.0	)		48.6		(4.8	)		156.3			—
Equity securities		24.4			—			1.4			2.3			—		(16.3	)		11.8			—
Total fixed maturity securities		5,056.8			(251.8	)		883.5			(757.0	)		549.9		(283.9	)		5,197.5			—
Total securities available-for-sale		5,081.2			(129.9	)		284.5			(311.8	)		300.8		(474.4	)		4,750.4			—
Equity securities		24.4			1.4			1.3			5.7			—		(16.3	)		16.5			—
Trading assets		44.2			(2.4	)		—			(6.8	)		4.8		—			39.8			(1.7	)
Total securities available-for-sale		5,081.2			(250.4	)		884.8			(751.3	)		549.9		(300.2	)		5,214.0			—
Mortgage loans held for sale		124.5			(12.2	)		—			(49.3	)		—		—			63.0			(6.8	)
Trading assets		44.2			(2.3	)		—			(18.7	)		5.0		—			28.2			4.1
Total investments		5,249.9			(144.5	)		284.5			(367.9	)		305.6		(474.4	)		4,853.2			(8.5	)
Mortgage loans held for sale		124.5			(4.5	)		—			(66.7	)		—		—			53.3			0.6
Derivative assets		597.6			(142.8	)		(12.0	)		31.1			—		—			473.9			(142.6	)
Total investments		5,249.9			(257.2	)		884.8			(836.7	)		554.9		(300.2	)		5,295.5			4.7
Separate account assets4,6		2,141.8			36.3			—			(10.0	)		13.3		(1.9	)		2,179.5			37.5
Derivative assets		597.6			(252.3	)		(12.0	)		58.6			—		—			391.9			(250.2	)
Total assets	$	7,989.3		$	(251.0	)	$	272.5		$	(346.8	)	$	318.9	$	(476.3	)	$	7,506.6		$	(113.6	)
Separate account assets4,6		2,141.8			(189.1	)		—			(15.2	)		16.6		(566.2	)		1,387.9			(182.6	)
Total assets	$	7,989.3		$	(698.6	)	$	872.8		$	(793.3	)	$	571.5	$	(866.4	)	$	7,075.3		$	(428.1	)
Liabilities
Future policy benefits and claims5	$	(1,739.7	)	$	~~964~~1,224.46		$	—		$	(46.87	)	$	—	$	—		$	(~~780~~521.18	)	$	~~964~~1,224.46
Derivative liabilities		(4.2	)		(51.37	)		—			—			—		—			(9.5.9	)		(51.37	)
Total liabilities	$	(1,743.9	)	$	~~959.~~1,222.9		$	—		$	(46.87	)	$	—	$	—		$	(~~789~~527.67	)	$	~~959.~~1,222.9

Includes gains and losses on sales of financial instruments, changes in market value of certain instruments and other-than-temporary impairments. The net unrealized gain on separate account assets is attributable to contractholders and, therefore, is not included in the Company’s earnings.

Includes changes in market value of certain instruments.

316 Includes non-investment grade collateralized mortgage obligations, residential mortgage-backed securities, commercial mortgage-backed securities, other ABSs, certain broker or internally priced securities and securities that are at or near default based on designations assigned by the National Association of Insurance Commissioners (NAIC) (see Note 7 for a discussion of NAIC designations). Equity securities represent holdings in non-registered mutual funds with significant unobservable inputs.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Includes certain collateralized mortgage obligations, residential mortgage-backed securities, commercial mortgage-backed securities, other ABSs, certain broker or internally priced securities and securities that are at or near default based on designations assigned by the National Association of Insurance Commissioners (NAIC) (see Note 7 for a discussion of NAIC designations). Equity securities represent holdings in non-registered mutual funds with significant unobservable inputs.

⁴

⁶

The value of separate account liabilities is set to equal the fair value of separate account assets.

1617

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(in millions)	Balanceas ~~ofMarch~~ofJune 3130,2008			Net investmentgains (losses)						Purchases,issuances,sales andsettlements			Transfersin ~~(out)~~toLevel ~~ofLevel~~ 3			Transfersout ofLevel 3	~~Balanceas ofJune 30,2008~~			Balance as ofSeptember 30,2008	~~Change inunrealizedgains(losses) in earningsdue toassets stillheld~~			Change inunrealizedgains(losses) inearningsdue toassets stillheld
				In earnings(realizedandunrealized)1			In OCI(unrealized)2
Assets
Investments:
Securities available-for-sale3:
Fixed maturity securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	1.5		$	—		$	—0.3		$	—		$	—		$	$—	~~1.5~~		$	$1.8	—		$	—
Corporate securities		1,~~686~~604.46			(1073.45	)		(4086.70	)		(~~144~~56.48	)		~~113~~404.64			(114.1	~~1,604.5~~)			1,678.6	—			—
Residential mortgage-backed securities		~~126~~223.72			(4634.59	)		375.26			9.(8.0	)		9665.0			(99.8	~~223.2~~)			151.1	—			—
Commercial mortgage-backed securities		3428.13			~~(0.6~~—	)		(0.72	)		(21.82	)		~~(1.7~~—	)		(4.9	~~28.3~~)			22.4	—			—
Collateralized debt obligations		~~611~~563.37			(22150.98	)		~~(22~~86.86	)		7(40.89	)		~~(9.~~6.7	)		(7.7	~~563.8~~)			457.6	—			—
Other asset-backed securities		~~174~~156.05			(0.5	)		(63.10	)		~~(31~~1.78	)		~~20.8~~—			(31.4	~~156.5~~)			123.4	—			—
Total fixed maturity securities		2,~~634~~577.08			(80259.97	)		~~(33~~3.17	)		(~~161~~105.31	)		~~219~~476.1			(257.9	~~2,577.8~~)			2,434.9	—			—
Equity securities		58.1			—(51.5	)		—2.3			123.23			150.87			—	~~8.1~~			32.9	—			—
Total securities available-for-sale		2,~~639~~585.19			(80311.92	)		~~(33~~6.10	)		(~~160~~81.18	)		~~220~~526.98			(257.9	~~2,585.9~~)			2,467.8	—			—
Trading assets		2017.91			(31.32	)		—			(07.4	)		—13.6			—	~~17.2~~			36.9	~~(3.4~~	)		(1.2	)
Mortgage loans held for sale		90.67			0(22.28	)		—			(074.10	)		—			—	~~90.7~~			141.9	~~0.2~~			(22.8	)
Short-term investments		773.2			—			0.3			—			(773.5	)			—				—
Total investments		2,693.7			(335.2	)		6.0			(0.4	)		540.4			(257.9	)			2,646.6				(24.0	)
Total investments		3,523.8			(84.0	)		(32.8	)		(160.6	)		(552.6	)			2,693.8				(3.2	)
Derivative assets		229.7			88.1			7.1			(21.0	)		—			—				303.9				76.5
Derivative assets		231.0			(43.6	)		(2.0	)		44.3			—				229.7				(41.1	)
Separate account assets4,6		572.8			(210.2	)		—			—			4.6			(3.3	)			363.9				(209.1	)
Separate account assets4		1,715.5			(68.7	)		—			(234.8	)		(839.2	)			572.8				(60.0	)
Total assets	$	3,496.2		$	(457.3	)	$	13.1		$	(21.4	)	$	545.0		$	(261.2	)		$	3,314.4			$	(156.6	)
Total assets	$	5,470.3		$	(196.3	)	$	(34.8	)	$	(351.1	)	$	(1,391.8	)		$	3,496.3			$	(104.3	)
Liabilities
Liabilities
Future policy benefits and claims5	$	(222.0	)	$	(285.5	)	$	—		$	(2.3	)	$	—		$	—			$	(509.8	)		$	(285.5	)
Future policy benefits and claims5	$	(324.6	)	$	104.3		$	—		$	(1.7	)	$	—			$	(222.0	)		$	104.3
Derivative liabilities		(25.3	)		13.5			—			—			—			—				(11.8	)			13.5
Derivative liabilities		(20.2	)		(10.7	)		—			5.6			—				(25.3	)			(5.1	)
Total liabilities	$	(247.3	)	$	(272.0	)	$	—		$	(2.3	)	$	—		$	—			$	(521.6	)		$	(272.0	)
Total liabilities	$	(344.8	)	$	93.6		$	—		$	3.9		$	—			$	(247.3	)		$	99.2

Includes changes in market value of certain instruments.

⁴

1718

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

⁶

The value of separate account liabilities is set to equal the fair value of separate account assets.

				Net investmentgains (losses)						Purchases,issuances,sales andsettlements			Transfersin (out) ofLevel 3				Balanceas ofJune 30,2008				Change inunrealizedgains(losses) inearningsdue toassets stillheld
(in millions)	Balanceas ofDecember 31,2007			Net investment gains(losses)						Purchases,issuances,sales andsettlements			Transfersin toLevel 3			Transfersout ofLevel 3				Balanceas ofSeptember 30,2008				Change inunrealizedgains(losses) inearningsdue toassets stillheld
(in millions)	Balanceas ofDecember 31,2007			In earnings(realizedandunrealized)1			In OCI(unrealized)2
				In earnings(realizedandunrealized)1			In OCI(unrealized)2
Assets
Investments:
Securities available-for-sale3:
Fixed maturity securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	1.6		$	—		$	—0.3		$	(0.1	)	$	—		$	$—	~~1.5~~		$	$1.8	—		$	—
Corporate securities		1,520.2			(2695.21	)		(74170.01	)		(~~194~~197.63	)		~~379~~794.06			(173.7	~~1,604.4~~)			1,678.6	—			—
Residential mortgage-backed securities		195.5			(6589.1	)		(121.86	)		0(6.53	)		~~105~~120.23			(67.7	~~223.3~~)			151.1	—			—
Commercial mortgage-backed securities		87.6			(50.24	)		20.2			(78.94	)		~~(48.4~~—	)		(56.6	~~28.3~~)			22.4	—			—
Collaterialized debt obligations		532.6			(50.4	)		(97.9	)		30.5			149.0				563.8				2.5
Collateralized debt obligations		532.6			(203.7	)		(10.2	)		(9.2	)		189.1			(41.0	)			457.6				—
Other asset-backed securities		122.3			(01.50	)		(1417.50	)		(4541.38	)		9482.52			(21.3	~~156.5~~)			123.4	—			—
Total fixed maturity securities		2,459.8			(~~147~~389.43	)		(~~197~~198.04	)		(~~216~~263.91	)		~~679~~1,186.32			(360.3	~~2,577.8~~)			2,434.9	~~2.5~~			—
Equity securities		1.4			—(50.6	)		(04.84	)		326.47			459.18			—	~~8.1~~			32.9	—			—
Total securities available-for-sale		2,461.2			(~~147~~439.49	)		(~~197~~202.8	)		(~~213~~236.54	)		~~683~~1,246.40			(360.3	~~2,585.9~~)			2,467.8	~~2.5~~			—
Trading assets		15.4			(4.25	)		—			526.90			—			—	~~17.1~~			36.9	~~(4.2~~	)		(4.5	)
Mortgage loans held for sale		86.1			(932.20	)		—			1387.8			—			—	~~90.7~~			141.9	~~(9.2~~	)		(32.0	)
Short-term investments		476.7			—			—			—			~~(476.7~~—	)		(476.7	—)			—	—			—
Total investments		3,039.4			(~~160~~476.84	)		(~~197~~202.8	)		(~~193~~122.86	)		~~206~~1,246.70			(837.0	~~2,693.7~~)			2,646.6	~~(10.9~~	)		(36.5	)
Derivative assets		166.6			1799.60			18.23			4430.30			—			—	~~229.7~~			303.9	~~20.1~~			96.6
Separate account assets4		2,258.6			(667.4	)		—			534.0			(1,552.4	)			572.8				(658.5	)
Separate account assets4,6		2,258.6			(875.3	)		—			766.4			9.5			(1,795.3	)			363.9				(862.0	)
Total assets	$	5,464.6		$	(~~810~~1,252.67	)	$	(~~196~~194.65	)	$	~~384~~673.58		$	(1,~~345~~255.75	)	$	$(2,632.3	~~3,496.2~~)		$	$3,314.4	~~(649.3~~	)	$	(801.9	)
Liabilities
Future policy benefits and claims5	$	(128.9	)	$	(89374.59	)	$	—		$	(3.6.0	)	$	—		$	$—	~~(222.0~~	)	$	$(509.8	~~(89.5~~)	)	$	(374.9	)
Derivative liabilities		(16.3	)		~~(14~~5.64	)		—			5(0.69	)		—			—	~~(25.3~~	)		(11.8	~~(9.1~~)	)		4.3
Total liabilities	$	(145.2	)	$	(~~104~~369.15	)	$	—		$	2(6.09	)	$	—		$	$—	~~(247.3~~	)	$	$(521.6	~~(98.6~~)	)	$	(370.6	)

Includes changes in market value of certain instruments.

1819

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

⁴

⁶

The value of separate account liabilities is set to equal the fair value of separate account assets.

Transfers

The Company reviews its fair value hierarchy classifications quarterly. Changes in observability of significant valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levels of financial assets and liabilities. These reclassifications will be reported as transfers in/out of Level 3 atin the beginning of the period in which the change occurs. During the first ~~and~~three ~~second~~ quarters of 2009, transfers into Level 3 were driven by investments in corporate securities and ~~residential~~commercial mortgage-backed securities, primarily due to ratings downgrades, as well as changes in pricing sources from corporate pricing matrix based to utilizing broker quotes or internal valuation techniques. During the first ~~and~~three ~~second~~ quarters of 2009, additional observable inputs were obtained on assets previously considered Level 3, which led to transfers out of Level 3.

Fair Value on a Nonrecurring Basis

In the ~~second~~third quarter of 2009, certain mortgage loans on real estate held for investment were measured at the estimated fair value of the collateral on a non-recurring basis in periods subsequent to initial recognition due to these loans having specific reserves applied to them during the period. The application of these specific reserves adjusts the amortized cost basis of the loan to the estimated fair value, ~~which is based on the present value~~ of ~~expected future cash flows discounted at~~ the ~~loan’s effective market interest rate~~collateral. The estimated fair value of ~~these~~ ~~Level~~the 3collateral ~~loans~~ was $4123.84 million as of ~~June~~September 30, 2009.

Financial Instruments Not Carried at Fair Value

~~SFAS~~In ~~107~~estimating ~~requires additional disclosures of~~ fair value ~~information~~for ofits ~~financial instruments. The following includes~~ disclosures for ~~the other~~ financial instruments not carried at fair value (and not included in the fair value disclosures above), ~~SFAS~~the ~~157~~Company ~~disclosure.~~used the following methods and assumptions:

InMortgage ~~estimating~~loans on real estate held for investment, net: The fair ~~value~~ values of mortgage loans held for ~~its~~investment ~~SFAS~~on ~~107~~real ~~disclosures,~~estate are estimated using discounted cash flow analyses based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the ~~Company~~calculations. ~~used~~As commercial mortgage loans held for sale are included in the ~~following~~above ~~methods~~fair ~~and~~value ~~assumptions:~~disclosure, they are excluded from financial instruments not carried at fair value in the table below.

Mortgage loans on real estate held for investment, net: The fair values of mortgage loans held for investment on real estate are estimated using discounted cash flow analyses based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. As commercial mortgage loans held for sale are included in the above SFAS 157 disclosure, they are excluded from financial instruments not carried at fair value in the table below.

Policy loans: The carrying amount reported in the consolidated balance sheets approximates fair value.

Customer bank loans: The loan portfolio includes adjustable and fixed-rate loans. For fixed-rate loans, the fair value is estimated using discounted cash flow analyses and other valuation techniques. To calculate discounted cash flows, the loans are aggregated into pools of similar types and expected repayment terms. The expected cash flows of loans considers historical prepayment experience and are discounted based on an appropriate treasury yield curve plus an estimated spread for credit losses. The fair value of adjustable rate loans is assumed to be equal to their carrying value.

1920

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

~~historical~~Customer ~~prepayment~~bank ~~experience~~deposits: ~~and~~The ~~are~~fair ~~discounted~~value ~~based~~of ondemand andeposits, savings ~~appropriate~~accounts ~~treasury~~and ~~yield~~money ~~curve~~market ~~plus~~deposits anis ~~estimated~~equal ~~spread~~to ~~for~~the ~~credit~~amount ~~losses~~payable on demand. The fair value of ~~adjustable~~ fixed-rate ~~loans~~certificates of deposit is ~~assumed~~estimated toby bediscounting ~~equal~~the tocontractual ~~their~~cash ~~carrying~~flows ~~value~~using current market rates of instruments with similar remaining maturities.

Customer bank deposits: The fair value of demand deposits, savings accounts and money market deposits is equal to the amount payable on demand at period end. The fair value of fixed-rate certificates of deposit is estimated by discounting the contractual cash flows using current market rates of instruments with similar remaining maturities.

Investment contracts: The fair values of the Company’s liabilities under investment type contracts are based on one of two methods. For investment contracts without defined maturities, fair value is the amount payable on demand, net of certain surrender charges. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used in this analysis are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued.

Short-term debt: The carrying amount reported in the consolidated balance sheets approximates fair value.

Long-term debt: The fair values for senior notes are based on quoted market prices. The fair values of the junior subordinated debentures issued to a related party are based on quoted market prices of the capital securities of Nationwide Financial Services Capital Trust I, which approximate the fair value of this obligation.

The following table summarizes the carrying values and estimated fair values of financial instruments subject to disclosure requirements as of the dates indicated:

	June 30, 2009						December 31, 2008
	September 30, 2009						December 31, 2008
(in millions)	Carryingvalue			Estimatedfair value			Carryingvalue			Estimatedfair value
Assets
Assets:
Investments:
Mortgage loans on real estate held for investment, net	$	7,451.3		$	6,214.7	1	$	7,763.7		$	6,845.6
Mortgage loans on real estate, net	$	7,240.8		$	6,188.8	1	$	7,763.7		$	6,845.6
Policy loans		1,~~067~~040.85			1,~~067~~040.85			1,095.6			1,095.6
Customer bank loans		~~619~~659.26			~~624~~668.21			470.4			483.5
Liabilities:
Customer bank deposits		(12,~~946~~123.43	)		(12,~~957~~134.86	)		(1,763.5	)		(1,779.8	)
Investment contracts		(2419,~~360~~379.2	)		(19,~~511~~412.75	)		(2520,~~663~~093.62	)		(19,621.5	)
Short-term debt		(~~384~~563.15	)		(~~384~~563.15	)		(295.7	)		(295.7	)
Long-term debt		(1,726.19	)		(1,~~461~~565.02	)		(1,725.9	)		(1,336.5	)

1 Includes $4123.84 million of mortgage loans held for investment valued at fair value on a nonrecurring basis.

2021

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(6)

Derivative Financial Instruments

Qualitative Disclosures

~~SFAS~~The ~~133~~Company ~~requires~~is ~~companies~~required to recognize all of its derivative instruments as either assets or liabilities at fair value. The accounting for changes in the fair value (e.g., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship.

For derivative instruments that are designated and qualify as a cash flow hedge (e.g., hedging the exposure to variability in expected future cash flows that is attributable to interest rate risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction impacts earnings (e.g., interest income on a floating rate asset). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (ineffectiveness), or components of fair value that are excluded from the assessment of effectiveness, are recognized in the condensed consolidated statements of income during the current period.

For derivative instruments that are designated and qualify as a fair value hedge (e.g., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the hedged item are both recognized in net realized investment gains and losses.

For derivative instruments that are not designated as a hedging instrument, the gain or loss on the derivative instrument is recognized in net realized investment gains and losses.

The Company periodically evaluates the risks within the derivative portfolios due to credit exposure. When evaluating this risk, the Company considers several factors which include, but are not limited to, the counterparty risk associated with derivative receivables, the Company’s own credit as it relates to derivative payables, the collateral thresholds associated with each counterparty, and changes in relevant market data in order to gain insight into the probability of default by the counterparty. In addition, the effect that the Company’s exposure to credit risk could have on the effectiveness of the Company’s hedging relationships is considered. As of ~~June~~September 30, 2009, the impact of the exposure to credit risk on both the fair value measurement of derivative assets and liabilities and the effectiveness of the Company’s hedging relationships was immaterial.

As of ~~June~~September 30, 2009 and December 31, 2008, the Company had received $~~706~~582.73 million and $1.02 billion, respectively, of cash for derivative collateral, which is in turn invested in short-term investments. The Company also held $2933.39 million and $35.4 million of securities as off-balance sheet collateral on derivative transactions as of ~~June~~September 30, 2009 and December 31, 2008, respectively. As of ~~June~~September 30, 2009 and December 31, 2008, the Company had pledged fixed maturity securities with a fair value of $5247.0 6 million and $24.5 million, respectively, as collateral to various derivative counterparties. There are no contingent features associated with the Company’s derivative instruments which would require additional collateral to be pledged to counterparties.

The Company is exposed to certain other risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk, equity risk and credit risk.

Derivatives Qualifying for Hedge Accounting – Interest Rate Risk Management

The Company periodically purchases variable rate investments (e.g., commercial mortgage loans and corporate bonds). As a result, the Company is exposed to variability in cash flows and investment income due to changes in interest rates. Such variability poses risks to the Company when the assets are funded with fixed rate liabilities. In an effort to manage this risk, the Company may enter into receive fixed/pay variable interest rate swaps.

2122

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The variable interest paid on the swap is intended to match the variable interest received on the investment, resulting in the Company receiving the fixed interest payments on the swap. The net receipt of a fixed rate will offset the fixed rate paid on the liability. These interest rate swaps are designated as a hedging ~~instrument~~instruments in a cash flow hedging ~~relationship~~relationships.

The Company periodically participates in a U.S. denominated medium-term note (MTN) program. Under this program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. The proceeds from these funding agreements are generally used to purchase fixed rate assets (generally available-for-sale corporate orbonds, available-for-sale private placement bonds or held for investment commercial mortgage loans). In a rising interest rate environment, the Company is exposed to narrowing margins as interest expense will increase while interest income remains constant. To manage this risk, the Company has entered into pay fixed/receive variable interest rate swaps. The interest rate swap agreement utilized by the Company effectively modifies its exposure to interest rate risk by converting the Company’s floating rate ~~medium~~funding ~~term~~agreements ~~notes~~associated with the MTN program to a fixed rate, thus reducing the impact of interest rate changes on future interest expense. These interest rate swaps are designated as hedging ~~instrument~~instruments in a cash flow hedging ~~relationship~~relationships.

The Company also periodically enters into fixed rate commercial mortgage loan and private placement commitments or commitments to purchase fixed rate assets (generally available-for-sale corporate orbonds, available-for-sale private placement bonds and held for investment commercial mortgage loans). The Company is exposed to declining values of the assets due to rising interest rates. In an effort to manage this risk, the Company enters into short U.S. Treasury futures and/or interest rate swaps. As interest rates change, the increase or decrease in the value of the derivative instrument will offset the changes in value of the asset (relative to interest rates). These futures and swaps are designated as hedging instruments in a fair value hedging ~~relationship~~relationships.

Derivatives Qualifying for Hedge Accounting – Foreign Currency Risk Management

The Company purchases foreign-denominated fixed rate assets and the associated investment income is exposed to changes in the exchange rates of the foreign currencies. To manage this risk, the Company has entered into pay fixed foreign currency/receive fixed U.S. cross-currency swaps. As foreign exchange rates change, the increase or decrease in the cash flows of the derivative instrument will offset the changes in the functional-currency equivalent cash flows of the asset. These cross-currency swaps are designated as a hedging ~~instrument~~instruments in a cash flow hedging ~~relationship~~relationships.

The Company also purchases foreign-denominated fixed rate assets, funded with proceeds from funding agreements under a variable rate U.S.-denominated MTN program. The value of these investments is exposed to both changes in the exchange rates of the foreign currencies and changes in interest rates. To manage this risk, the Company has entered into pay fixed foreign currency/receive variable U.S. cross-currency interest rate swaps. As foreign exchange rates and interest rates change, the increase or decrease in the value of the derivative instrument will offset the changes in the asset’s value (relative to foreign currency and interest rate changes). These cross-currency interest rate swaps are designated as a hedging ~~instrument~~instruments in a fair value hedging ~~relationship~~relationships.

In addition, the Company periodically participates in a fixed rate foreign denominated MTN program. Under this program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust, and the value of these liabilities is exposed to both changes in the exchange rates of the foreign currencies and changes in interest rates. To manage this risk, the Company has entered into receive fixed foreign currency/pay variable U.S. cross-currency interest rate swaps. As foreign exchange rates and interest rates change, the increase or decrease in the value of the derivative instrument will offset the changes in the liability’s value (relative to foreign currency and interest rate changes). These cross-currency interest rate swaps are designated as a hedging ~~instrument~~instruments in a fair value hedging ~~relationship~~relationships.

Derivatives Not Qualifying for Hedge Accounting – Interest Rate Risk Management

The Company enters into commercial mortgage loan commitments that are held for sale, which exposes the Company to changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to the loans being funded. In an effort to manage this risk, the Company enters into short U.S. Treasury futures and/or pay fixed interest rate swaps during the commitment period. If interest rates rise or fall, the gains or losses on short U.S. Treasury futures will offset the change in fair value of the commitment attributable to the change in interest rates.

2223

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The Company may use pay fixed, /receive variable interest rate swaps to hedge the value of a portfolio of fixed-rate assets, relative to changes in interest rates. The interest rate swaps mitigate the risk of a loss of value due to increasing interest rates, with the fluctuations in the fair values of the derivatives ~~offsetting~~ offsetting changes in the fair values of the portfolios resulting from changes in interest rates.

The Company offers a variety of variable annuity programs with a guaranteed minimum balance or guaranteed withdrawal benefits, and options are utilized to economically hedge a portion of these products. See Derivatives Not Qualifying for Hedge Accounting – Equity Market Risk Management below for further explanation. As interest rates are a component of the option’s value, the effectiveness of economically hedging the annuity products may be adversely affected by changes in interest rates. The Company enters into interest rate swaps to mitigate this risk. The fluctuation in the fair values of the derivatives offsets the changes in the fair values of the options resulting from changes in interest rates.

The Company periodically enters into basis swaps (receive one variable rate/pay another variable rate) to better match the cash flows received from the specific variable-rate investments with the variable rate paid on a group of liabilities. While the pay-side terms of the basis swap will be consistent with the terms of the asset, the Company is not able to match the receive-side terms of the derivative to a specific liability. Therefore, basis swaps do not receive hedge accounting treatment.

Derivatives Not Qualifying for Hedge Accounting – Foreign Currency Risk Management

The Company periodically participates in a variable rate foreign denominated MTN program. Under this program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. As such, the cash flows related to these MTNs are exposed to changes in the exchange rates of the foreign currencies. Because the Company desires to retain the variable interest rate, it has entered into receive variable foreign currency/pay variable U.S. dollar cross-currency basis swaps. The basis swap converts the debt instrument to a U.S. dollar variable rate, thereby eliminating foreign exchange risk. While the receive-side terms of the basis swap will be consistent with the terms of the liability, the Company is not able to match the pay-side terms of the derivative to a specific asset. Therefore, these basis swaps do not receive hedge accounting treatment.

Derivatives Not Qualifying for Hedge Accounting – Equity Market Risk Management

The Company offers a variety of variable annuity programs with a guaranteed minimum balance or guaranteed withdrawal benefits. The contractholders may elect to invest in equity funds. Adverse changes in the equity markets expose the ~~company~~Company to losses if the changes result in contractholder’s account balances falling below the guaranteed minimum. To mitigate a portion of ~~this~~the risk associated with these liabilities, the Company enters into equity index futures and options. The changes in value of the futures and options will offset a portion of the changes in the annuity accounts relative to changes in the equity market.

The Company offers a variety of variable annuity programs with a guaranteed minimum balance or guaranteed withdrawal benefits, where the contractholder elects to invest in funds with a foreign equity index. Adverse changes in the foreign equity index expose the Company to losses if the change results in contractholder’s account balances falling below the guaranteed minimum. To mitigate this risk, the Company enters into total return swaps, where the Company pays the total return on the foreign index and receives one-month U.S. London Interbank Offered Rate (LIBOR). The changes in cash flows of the total return swap will offset a portion of the changes in the annuity accounts relative to changes in the foreign index.

The Company’s living benefit riders represent an embedded derivative in a variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivatives are carried at fair value. Subsequent changes in the fair value of the embedded derivatives are recognized in earnings as a component of net realized investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions. Projections of cash flows inherent in the valuation of the embedded derivative incorporate numerous assumptions including, but not limited to, expectations of contractholder persistency, contractholder withdrawal patterns, risk neutral market returns, correlations of market returns and market return volatility. The Company does not expect any meaningful level of claims under the living benefit features for several years and believes the impact of claims is expected to be mitigated by its economic hedging program.

2324

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Derivatives Not Qualifying for Hedge Accounting – Credit Risk

The Company enters into two distinct types of credit derivative contracts (or credit default swaps) which allows the Company to either sell or buy credit protection on a specific creditor or credit index.

The Company sells credit default protection to counterparties on selected debt instruments with specific creditor or credit index exposure and combines the credit default swap with selected assets the Company owns to enhance spreads. These selected assets may have sufficient duration for the related liability, but do not earn a sufficient credit spread. When the Company sells these instruments, it receives periodic premium payments similar to the risk premium received on an equivalent maturity bond from the same creditor. In return, the Company agrees to provide for losses if a credit event occurs during the lifetime of the contract, by buying a pre-determined cash bond from the counterparty at face value. In such a contract, a credit event will be defined in the trade settlement documentation and may include, but is not limited to, creditor bankruptcy or restructuring. The combined credit default swap and investments provide cash flows with the duration and credit spread targeted by the Company.

The Company also has purchased credit default protection on selected debt instruments exposed to short-term credit concerns, or because the combination of the corporate bond and purchased default protection provides sufficient spread and duration targeted by the Company.

Quantitative Disclosures

The following table presents the fair value of derivative instruments, location of the related instruments in the condensed consolidated balance sheets and the related notional amounts of the derivative instruments as of ~~June~~September 30, 2009:

Derivative assets

Derivative liabilities

(in millions)

Balance sheetlocation

Fair value

Notional

Balance sheetlocation

Fair value

Notional

Derivatives designated as hedging instruments:

Interest rate contracts

Other assets

4.5

9385.0

Other liabilities

8682.62

1,~~440~~331.72

Currency/interest rate swaps

Other assets

3536.97

~~114~~94.5

Other liabilities

3341.69

~~224~~230.26

Total derivatives designated as hedging instruments

4041.42

~~207~~179.5

~~120~~124.21

1,~~664~~561.98

Derivatives not designated as hedging instruments:

Interest rate contracts

Other assets

~~366~~434.50

56,~~586~~878.26

Other liabilities

~~189~~261.81

35,~~577~~133.21

Currency/interest rate swaps

Other assets

560.82

~~209~~1.64

Other liabilities

~~56.9~~—

~~209.6~~—

Credit default swaps

Other assets

0.79

~~101~~54.42

Other liabilities

7.6.9

~~150~~81.65

Total return swaps

Other assets

51.5

~~190~~60.0

Other liabilities

35.4

~~271~~401.0

Equity contracts

Other assets

~~492~~391.89

32,~~456~~473.82

Other liabilities

—20.1

41,171.4

Embedded derivatives on guaranteed benefit annuity programs

N/A

—

Future policybenefits and claims

~~780~~521.18

—N/A

Other embedded derivatives

N/A

—

Other liabilities

9.5.9

—N/A

Total derivatives not designated as hedging instruments

~~922~~828.35

9,~~544~~467.04

~~1,047~~821.32

46,~~212~~787.80

Total derivatives

~~962~~869.7

9,~~751~~646.59

~~1,167~~945.53

58,~~877~~348.78

2425

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table presents the gains (losses) for derivative instruments designated and qualifying as hedging instruments in fair value hedges ~~under SFAS 133~~ and the location of these instruments in the condensed consolidated financial statements for the periods indicated:

(in millions)	Location of gain (loss) recognized onderivatives	Amount ofgain (loss)recognized onderivatives 1
Three months ended June 30, 2009:
Three months ended September 30, 2009:
Derivatives in fair value hedging relationships:
Interest rate contracts	Net realized investment gains (losses)	$	~~15.~~(2.4	)
Currency/interest rate swap	Net realized investment gains (losses)		(50.15	)
Total		$	~~10.~~(1.9	)
Underlying hedged items in fair value hedge relationships:
Interest rate contracts	Net realized investment gains (losses)	$	(142.92	)
Currency/interest rate swap	Net realized investment gains (losses)		4(0.45	)
Total		$	(102.57	)
Six months ended June 30, 2009:
Nine months ended September 30, 2009:
Derivatives in fair value hedging relationships:
Interest rate contracts	Net realized investment gains (losses)	$	2018.51
Currency/interest rate swap	Net realized investment gains (losses)		(43.16	)
Total		$	1614.45
Underlying hedged items in fair value hedge relationships:
Interest rate contracts	Net realized investment gains (losses)	$	(2427.80	)
Currency/interest rate swap	Net realized investment gains (losses)		3.50
Total		$	(2124.30	)

251 Includes gains and losses recognized on terminating or unwinding fair value hedging relationships.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table presents the gains (losses) for derivative instruments designated and qualifying as hedging instruments in cash flow hedges ~~under SFAS 133~~ and the location of these instruments in the condensed consolidated financial statements for the periods indicated:

(in millions)	Amount ofgain (loss)recognizedin OCI onderivatives			Location of gain (loss) ~~reclassified~~reclassifiedfrom ~~from~~ AOCI into income1	Amount ofgain (loss)~~reclassifiedfrom~~reclassifiedfromAOCI ~~AOCIinto income3~~intoincome3			Location of gain (loss) recognized inincome on derivatives2	Amount ofrealized gain(loss)recognized inincome onderivatives2,3
Three months ended June 30, 2009:
Three months ended September 30, 2009:
Derivatives in cash flow hedging relationships:
Interest rate contracts	$	32.62		Interest credited to policyholder accounts	$	(1.2	)	Net realized investment gains (losses)	$	—
Currency/interest rate swap		(21.79	)	Net realized investment gains (losses)		~~(10.9~~—	)	Net realized investment gains (losses)		(0.73	)
Currency		(156.57	)	Net realized investment gains (losses)		—0.1		Net realized investment gains (losses)		~~(3.3~~—	)
Total	$	(~~14.~~6.4	)		$	(121.1	)		$	(4.0.3	)
Six months ended June 30, 2009:
Nine months ended September 30, 2009:
Derivatives in cash flow hedging relationships:
Interest rate contracts	$	68.35		Interest credited to policyholder accounts	$	(23.46	)	Net realized investment gains (losses)	$	—
Currency/interest rate swap		(24.21	)	Net realized investment gains (losses)		(10.9	)	Net realized investment gains (losses)		(01.92	)
Currency		(1016.29	)	Net realized investment gains (losses)		—0.1		Net realized investment gains (losses)		(2.9	)
Other embedded derivatives		(12.0	)	N/A		—		N/A		—
Total	$	(1824.15	)		$	(1314.34	)		$	(34.81	)

Effective portion.

Ineffective portion and amounts excluded from the measurement of ineffectiveness.

Excludes periodic settlements in interest rate contracts.

2627

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table presents the gains (losses) for derivative instruments not designated and qualifying as hedging instruments ~~under SFAS 133~~ and the location of these instruments in the condensed consolidated financial statements for the periods indicated:

(in millions)	Location of gain (loss) in income onderivatives	Amount ofrealized gain(loss) recognizedin income onderivatives1
Three months ended June 30, 2009:
Three months ended September 30, 2009:
Derivatives not designated as hedging instruments:
Interest rate contracts	Net realized investment gains (losses)	$	(12.40	)
Currency/interest rate swaps	Net realized investment gains (losses)		(0.51	)
Credit default swaps	Net realized investment gains (losses)		91.52
Equity total return swaps	Net realized investment gains (losses)		~~18.~~(6.0	)
Equity contracts	Net realized investment gains (losses)		(~~498~~325.0	)
Embedded derivatives on guaranteed benefit annuity programs	Net realized investment gains (losses)		~~696~~263.18
Other embedded derivatives	Net realized investment gains (losses)		04.10
Total		$	~~225~~(64.41	)
Six months ended June 30, 2009:
Nine months ended September 30, 2009:
Derivatives not designated as hedging instruments:
Interest rate contracts	Net realized investment gains (losses)	$	(~~191~~193.9	)
Currency/interest rate swaps	Net realized investment gains (losses)		3.43
Credit default swaps	Net realized investment gains (losses)		23.57
Equity total return swaps	Net realized investment gains (losses)		1610.6
Equity contracts	Net realized investment gains (losses)		(~~267~~592.6	)
Embedded derivatives on guaranteed benefit annuity programs	Net realized investment gains (losses)		~~957.~~1,220.9
Other embedded derivatives	Net realized investment gains (losses)		(51.3	)
Total		$	~~514~~450.87

1 Excludes ~~$(109.2) million and $(42.7) million, respectively, of~~ net interest settlements ~~and~~in ~~$14.7~~interest ~~million~~rate contracts and ~~$26.1 million, respectively, of~~ other revenue on embedded derivatives on guaranteed benefit annuity programs ~~that are also recorded in net realized investment gains (losses)~~.

27In addition to the net realized investment gains (losses) listed in the previous tables, $(89.6) million and $(132.3) million, respectively, of net interest settlements on all derivative instruments and $15.6 million and $41.7 million, respectively, of other revenue on embedded derivatives on guaranteed benefit annuity programs are also recorded in net realized investment gains (losses) for the three and nine months ended September 30, 2009.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Credit Derivatives

The Company had exposure to credit protection contracts for the periods ended ~~June~~September 30, 2009 and December 31, 2008. The Company had experienced no losses on credit protection contracts as of ~~June~~September 30, 2009 and 2008. The following table presents the Company’s outstanding exposure to credit protection contracts, all of which are related to corporate debt instruments, as of the dates indicated, by contract maturity and industry exposure:

	Less than or equalto one year					Oneto three years					Threeto five years					Total
(in millions)	Maximumpotentialrisk		~~Estimatedfairvalue~~Estimatedfair value			Maximumpotentialrisk		Estimatedfairvalue			Maximumpotentialrisk		Estimatedfairvalue			Maximumpotentialrisk		Estimatedfairvalue
June 30, 2009:
September 30, 2009:
Single sector exposure:
Consumer goods	$	—	$	—		$	~~6.0~~—	$	~~(0.8~~—	)	$	—	$	—		$	~~6.0~~—	$	~~(0.8~~—	)
Financial		2035.0		(45.29	)		159.0		(10.42	)		~~3.0~~—		~~(0.3~~—	)		3844.0		(56.91	)
Oil & gas pipelines		15.0		~~(0.1~~—	)		—		—			—		—			15.0		~~(0.1~~—	)
Services		—		—			—		—			35.0		(0.27	)		35.0		(0.27	)
Utilities		~~4.5~~—		—			—		—			—		—			~~4.5~~—		—
Total single sector exposure		3950.50		(45.39	)		219.0		(20.2	)		3835.0		(0.57	)		9894.50		(75.04	)
Index exposure:
Corporate bonds		—		—			—		—			~~111.8~~—		~~0.1~~—			~~111.8~~—		~~0.1~~—
Total index exposure		—		—			—		—			~~111.8~~—		~~0.1~~—			~~111.8~~—		~~0.1~~—
Total	$	3950.50	$	(45.39	)	$	219.0	$	(20.2	)	$	~~149~~35.80	$	(0.47	)	$	~~210~~94.30	$	(65.94	)
December 31, 2008:
Single sector exposure:
Consumer goods	$	—	$	—		$	6.0	$	(0.8	)	$	—	$	—		$	6.0	$	(0.8	)
Financial		—		—			35.0		(5.8	)		13.0		(0.5	)		48.0		(6.3	)
Oil & gas pipelines		10.0		—			15.0		(0.8	)		—		—			25.0		(0.8	)
Services		—		—			—		—			35.0		(3.0	)		35.0		(3.0	)
Utilities		4.5		—			—		—			—		—			4.5		—
Total single sector exposure		14.5		—			56.0		(7.4	)		48.0		(3.5	)		118.5		(10.9	)
Index exposure:
Corporate bonds		—		—			—		—			110.9		(0.3	)		110.9		(0.3	)
Total index exposure		—		—			—		—			110.9		(0.3	)		110.9		(0.3	)
Total	$	14.5	$	—		$	56.0	$	(7.4	)	$	158.9	$	(3.8	)	$	229.4	$	(11.2	)

2829

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(7)

Investments

Fixed Maturity Securities and Equity Securities Available-for-Sale

The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale as of the dates indicated:

(in millions)	Amortizedcost		Grossunrealizedgains		Grossunrealizedlosses		Estimatedfair value
June 30, 2009:
September 30, 2009:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	~~100~~182.53	$	1719.69	$	—	$	~~118~~202.12
U.S. Government agencies		~~418~~422.94		5971.70		~~2.8~~—		~~475~~493.84
Obligations of states and political subdivisions		~~315~~382.72		614.1		8.7.6		~~313~~388.17
Debt securities issued by foreign governments		70.0		27.65		~~0.6~~—		7277.05
Corporate securities
Public		1110,~~045~~890.07		~~348~~669.01		~~498~~205.58		1011,~~894~~354.50
Private		4,~~867~~707.73		52209.96		~~345~~110.02		4,~~575~~806.67
Residential mortgage-backed securities		8,~~277~~379.28		~~133~~183.13		~~967~~707.5		7,~~442~~855.86
Commercial mortgage-backed securities		1,~~440~~380.3		19.10		~~408~~233.25		1,~~033~~155.28
Collateralized debt obligations		~~558~~550.56		1013.10		~~247~~213.36		~~321~~350.30
Other asset-backed securities		~~503~~473.18		510.14		5843.0		~~450~~441.2
Total fixed maturity securities		27,~~596~~439.94		~~636~~1,206.39		21,~~536~~521.62		2527,~~696~~125.61
Equity securities		5056.12		35.07		1.4		5160.75
Total securities available-for-sale	$	27,~~647~~495.06	$	~~639~~1,212.36	$	21,~~538~~522.06	$	2527,~~748~~185.36
December 31, 2008:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
U.S. Treasury securities and obligations of U.S. Government corporations	$	94.3	$	25.4	$	—	$	119.7
Government corporations	$	94.3	$	25.4	$	—	$	119.7
U.S. Government agencies		420.5		93.3		—		513.8
Obligations of states and political subdivisions		271.3		1.6		10.5		262.4
Debt securities issued by foreign governments		50.1		5.4		—		55.5
Corporate securities
Public		8,881.9		109.9		1,040.7		7,951.1
Private		5,002.8		45.2		403.4		4,644.6
Residential mortgage-backed securities		8,369.1		109.8		881.0		7,597.9
Commercial mortgage-backed securities		1,488.9		0.6		473.9		1,015.6
Collateralized debt obligations		557.7		6.4		240.7		323.4
Other asset-backed securities		689.1		3.6		107.0		585.7
Total fixed maturity securities		25,825.7		401.2		3,157.2		23,069.7
Equity securities		68.7		0.8		8.8		60.7
Total securities available-for-sale	$	25,894.4	$	402.0	$	3,166.0	$	23,130.4

2930

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The market value of the Company’s general account investments may fluctuate significantly in response to changes in interest rates, investment quality ratings and credit spreads. The Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. The Company may realize investment losses to the extent its liquidity needs require the disposition of general account fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments.

For securities available-for-sale as of the dates indicated, the following table summarizes the Company’s gross unrealized losses based on the amount of time each type of security has been in an unrealized loss position:

	Less than or equalto one year					More than one year					Total
(in millions, except number of securities)	Estimatedfair value		Grossunrealizedlosses		Numberofsecurities	Estimatedfair value		Grossunrealizedlosses		Numberofsecurities	Estimatedfair value		Grossunrealizedlosses		Numberofsecurities
June 30, 2009:
September 30, 2009:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	1.3	$	—	1	$	—	$	—	—	$	1.3	$	—	1
Obligations of states and political subdivisions	$	12.0	$	0.4	3	$	82.3	$	7.2	13	$	94.3	$	7.6	16
U.S. Government agencies		54.2		2.7	5		2.1		0.1	1		56.3		2.8	6
Obligations of states and political subdivisions		93.8		4.8	31		30.9		3.9	12		124.7		8.7	43
Debt securities issued by foreign governments		25.5		0.5	3		1.1		0.1	1		26.6		0.6	4
Corporate securities
Public		~~2,664~~707.91		~~302~~26.82	~~440~~153		1,~~113~~363.64		~~195~~179.76	~~220~~237		32,~~778~~070.5		~~498~~205.58	~~660~~390
Private		~~2,140~~248.34		~~224~~15.04	~~200~~48		~~904.~~1,123.9		~~121~~94.08	9689		31,~~044~~372.43		~~345~~110.02	~~296~~137
Residential mortgage-backed securities		~~1,313~~438.94		~~220~~86.92	~~168~~63		2,~~256~~704.28		~~746~~621.63	~~327~~386		3,~~570~~143.12		~~967~~707.5	~~495~~449
Commercial mortgage-backed securities		~~569~~11.91		~~188~~0.12	872		~~430~~834.86		~~220~~233.13	90119		~~1,000~~845.7		~~408~~233.25	~~177~~121
Collateralized debt obligations		~~158~~85.97		6538.56	1720		~~114~~221.12		~~181~~175.80	4340		~~273~~306.09		~~247~~213.36	60
Other asset-backed securities		~~168~~5.35		160.57	3211		~~188~~241.4		4142.53	2434		~~356~~246.79		5843.0	5645
Total fixed maturity securities		71,~~191~~508.02		~~1,025~~167.87	~~984~~300		56,~~041~~571.36		1,~~510~~353.85	~~814~~918		128,~~232~~079.38		21,~~536~~521.62	1,~~798~~218
Equity securities		119.82		10.38	8228		02.15		0.16	558		11.97		1.4	8786
Total	$	71,~~202~~517.84	$	~~1,027~~168.15	~~1,066~~328	$	56,~~041~~574.41	$	1,~~510~~354.91	~~819~~976	$	128,~~244~~091.25	$	21,~~538~~522.06	1,~~885~~304
December 31, 2008:
Fixed maturity securities:
Obligations of states and political subdivisions	$	127.6	$	6.1	71	$	33.4	$	4.4	15	$	161.0	$	10.5	86
Corporate securities
Public		4,109.4		676.9	692		1,350.3		363.8	289		5,459.7		1,040.7	981
Private		2,259.4		282.1	231		999.1		121.3	105		3,258.5		403.4	336
Residential mortgage-backed securities		1,093.1		199.8	158		2,305.4		681.2	327		3,398.5		881.0	485
Commercial mortgage-backed securities		592.0		209.0	99		410.9		264.9	96		1,002.9		473.9	195
Collateralized debt obligations		151.0		100.8	24		122.6		139.9	36		273.6		240.7	60
Other asset-backed securities		333.8		43.2	38		228.7		63.8	26		562.5		107.0	64
Total fixed maturity securities		8,666.3		1,517.9	1,313		5,450.4		1,639.3	894	$	14,116.7	$	3,157.2	2,207
Equity securities		19.2		8.6	81		3.4		0.2	6		22.6		8.8	87
Total	$	8,685.5	$	1,526.5	1,394	$	5,453.8	$	1,639.5	900	$	14,139.3	$	3,166.0	2,294

3031

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The weighted estimated fair value to amortized cost for non-investment grade fixed maturity securities that have an estimated fair value of less than 80% and have been in an unrealized loss position for more than one year was ~~55% and~~ 64% as of ~~June~~September 30, 2009 and December 31, 2008, respectively.

The table below summarizes the amortized cost and estimated fair value of fixed maturity securities available-for-sale, by maturity, as of ~~June~~ September 30, 2009. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(in millions)	Amortizedcost		Estimatedfair value
Fixed maturity securities available-for-sale:
Due in one year or less	$	1,~~102~~060.3	$	1,~~087~~073.63
Due after one year through five years		7,~~780~~214.89		7,~~634~~471.75
Due after five years through ten years		45,~~770~~205.69		45,~~806~~529.41
Due after ten years		3,~~164~~173.18		23,~~920~~248.46
Subtotal		16,~~817~~654.89		1617,~~449~~322.15
Residential mortgage-backed securities		8,~~277~~379.28		7,~~442~~855.86
Commercial mortgage-backed securities		1,~~440~~380.3		1,~~033~~155.28
Collateralized debt obligations		~~558~~550.56		~~321~~350.30
Other asset-backed securities		~~503~~473.18		~~450~~441.2
Total	$	27,~~596~~439.94	$	2527,~~696~~125.61

The NAIC assigns securities quality ratings and uniform valuations (called NAIC designations), which are used by insurers when preparing their annual statements. For most securities, NAIC ratings are derived from ratings received from nationally recognized rating agencies. The NAIC also assigns ratings to securities that do not receive public ratings. The designations assigned by the NAIC range from class 1 (highest quality) to class 6 (lowest quality). Of the Company’s general account fixed maturity securities, 9190% and 93% were in the two highest NAIC designations as of ~~June~~September 30, 2009 and December 31, 2008, respectively.

The following table shows the equivalent ratings between the NAIC and nationally recognized rating agencies and summarizes the credit quality, as determined by NAIC Designation, of the Company’s general account fixed maturity securities portfolio as of the dates indicated:

(in millions)		~~June~~September 30, 2009				December 31, 2008
NAIC designation1	Rating agency equivalent ~~designation2~~designation	Amortizedcost		Estimatedfair value		Amortizedcost		Estimatedfair value
1	AAA/AA/A	$	17,~~308~~154.72	$	1617,~~581~~341.36	$	17,087.2	$	15,612.2
2	BBB		7,~~171~~073.78		67,~~770~~126.35		6,633.9		5,821.6
3	BB		1,~~343~~265.49		1,~~053~~106.1		1,233.3		990.0
4	B		~~865~~781.39		~~662~~657.20		571.4		397.2
5	CCC and lower		~~658~~793.50		~~438~~569.8		190.5		148.2
6	In or near default		~~249~~370.36		~~190~~324.91		109.4		100.5
	Total	$	27,~~596~~439.94	$	2527,~~696~~125.61	$	25,825.7	$	23,069.7

NAIC designations are assigned at least annually. Some designations for securities shown have been assigned to securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories.

232 ~~Predominant rating based on a weighted average of ratings by Moody’s and S&P.~~

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Other-Than-Temporary Impairment Evaluations

When evaluating whether a residential mortgage-backed security, commercial mortgage-backed security, collateralized debt obligation and other asset-backed securities are other-than-temporarily impaired, the Company examines characteristics of the underlying collateral, such as delinquency and default rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, the quality of any credit guarantors, the Company’s intent to sell the security and whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis.

In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. A similar analysis is performed to evaluate U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, obligations of states and political subdivisions, and debt securities issued by foreign governments.

For all debt securities evaluated for other-than-temporary impairment (for which the Company does not have the intent to sell and it is not more likely than not that it will be required to sell the security before the recovery of its amortized cost basis), the Company considers the timing and amount of the cash flows. The Company evaluates its intent to sell on an individual security basis.

To the extent that the present value of the cash flows generated by a security is less than the amortized cost, or the reference amount if the security is accounted for under ~~EITF~~FASB ~~No. 99~~ASC 325-2040, ~~Recognition of Interest Income and Impairment on Purchased and Retained~~ Beneficial Interests in Securitized Financial Assets, ~~as amended by FSP EITF 99-20-1 (EITF 99-20),~~ an other-than-temporary impairment is recognized through earnings. It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.

Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time and the Company’s ability and intent to hold the security to recovery.

~~The~~Under ~~Company~~the ~~evaluates~~current other ~~asset~~-~~backed~~than temporary impairment model, which was amended by the FASB and adopted by the Company in the first quarter of 2009, debt securities ~~for~~that become other-than-~~temporary~~temporarily ~~impairment~~impaired (where bythe ~~examining~~Company ~~similar~~does ~~characteristics~~not ~~referenced~~intend to sell the security and it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost) are bifurcated with the credit portion of the ~~above~~impairment ~~for~~loss ~~residual~~being ~~mortgage~~recognized in earnings and the non-~~backed~~credit ~~securities~~loss portion of the impairment being recognized in a separate component of other comprehensive income, ~~commercial~~net ~~mortgage-backed~~of ~~securities~~applicable taxes and ~~collateralized~~other ~~debt~~offsets. ~~obligations~~For securities that are other-than-temporarily impaired, a discussion of the valuation of the credit loss portion that is recognized in earnings is provided, as applicable in the respective section of this footnote.

~~The~~33 Company also evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, obligations of states and political subdivisions, and debt securities issued by foreign governments for other-than-temporary impairment by examining similar characteristics referenced above for corporate debt securities.

As a result of the Company’s adoption of FSP FAS 115-2 and FAS 124-2 in the first quarter of 2009, securities that become other-than-temporarily impaired (where the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost) are bifurcated with the credit portion of the impairment loss being recognized in earnings and the non-credit loss portion of the impairment being recognized in other comprehensive income, net of applicable taxes and other offsets. For securities that are other-than-temporarily impaired, a discussion of the valuation of the credit loss portion that is recognized in earnings is provided, as applicable in the respective section of this footnote.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Corporate Securities

Corporate debt securities include conventional bonds, private placement fixed maturity securities, syndicated corporate bank loans and hybrid securities with both debt and equity-like features. For these corporate securities, the following table summarizes, as of the dates indicated, the Company’s gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):

	Period of time for which unrealized loss has existed
	Investment Grade						Non-Investment Grade						Total
Ratio of estimated fair value to amortized cost	Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total
June 30, 2009:
September 30, 2009:
99.9% - 80.0%	$	~~198~~15.41	$	83126.51	$	~~281~~141.92	$	4021.24	$	3349.50	$	7370.74	$	~~238~~36.65	$	~~117~~175.01	$	~~355~~211.6
79.9% - 50.0%		~~200~~1.61		8170.03		~~281~~71.64		803.17		8728.8		~~167~~32.95		~~280~~4.78		~~168~~99.81		~~449~~103.59
Below 50.0%		~~0.5~~—		~~22.1~~—		~~22.6~~—		7.0.3		80.82		150.85		70.53		300.92		380.45
Total	$	~~399~~16.52	$	~~186~~196.64	$	~~586~~212.16	$	~~127~~25.34	$	~~130~~78.10	$	~~257~~103.4	$	~~526~~41.86	$	~~316~~274.74	$	~~843~~316.50
December 31, 2008:
99.9% - 80.0%	$	355.6	$	116.9	$	472.5	$	31.0	$	23.4	$	54.4	$	386.6	$	140.3	$	526.9
79.9% - 50.0%		327.5		124.3		451.8		118.4		126.0		244.4		445.9		250.3		696.2
Below 50.0%		79.3		41.5		120.8		47.2		53.0		100.2		126.5		94.5		221.0
Total	$	762.4	$	282.7	$	1,045.1	$	196.6	$	202.4	$	399.0	$	959.0	$	485.1	$	1,444.1

Judgments regarding whether a corporate debt security is other-than-temporarily impaired include analyzing the issuer’s financial condition. An analysis of the issuer’s financial condition includes whether there has been a decline in the overall value of the issuer or its ability to service the specific security. The total enterprise value of the company issuing the security is determined through asset coverage, cash flow multiples, or other industry standards. Several factors assessed when determining the enterprise value include, but are not limited to, credit quality ratings, cash flow sustainability, liquidity, strength, industry, and market position. Sources of information include, but are not limited to, management projections, independent consultants, street research, peer analysis, and internal analysis.

If the company has concerns regarding the viability of the issuer or its ability to service the specific security after this analysis, a recovery value analysis is prepared to determine if the recovery value has declined below the amortized cost of the security. The recovery value is combined with the estimated timing to recovery, any other applicable cash flows that are expected and the security’s effective yield to arrive at the expected present value of cash flows. If a recovery estimate is not feasible, then the market’s view of cash flows implied by the current fair value, market discount rates, and effective yield are the primary factors used to estimate recovery.

The Company held hybrid securities issued by institutions in the financial sector with both debt and equity-like features, classified as corporate fixed maturity securities, with estimated fair values of $~~621~~650.39 million and $661.2 million, and gross unrealized losses of $~~224~~133.25 million and $379.9 million, as of ~~June~~September 30, 2009 and December 31, 2008, respectively. Of these ~~securities in an~~ unrealized ~~loss~~losses ~~position~~ as of ~~June~~September 30, 2009, $~~105~~128.31 million, or 2096%, were in an unrealized loss position for more than one year compared to $106.3 million, or 18%, as of December 31, 2008. The Company evaluates such securities for other-than-temporary impairment using the criteria of either a debt or an equity security depending on the facts and circumstances of the individual issuer and security.

3334

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The Company invests in private placement fixed maturity securities because of the generally higher nominal yield available compared to comparably rated public fixed maturity securities, more restrictive financial and business covenants available in private fixed maturity security loan agreements, and stronger prepayment protection. Although private placement fixed maturity securities are not registered with the SEC and generally are less liquid than public fixed maturity securities, restrictive financial and business covenants included in private placement fixed maturity security loan agreements generally are designed to compensate for the impact of increased liquidity risk. A significant portion of the private placement fixed maturity securities that the Company holds are participations in issues that are also owned by other investors. In addition, some of these securities are rated by nationally recognized rating agencies, and substantially all have been assigned a rating designation by the NAIC, as shown in a previous table in this footnote summarizing the credit quality of the Company’s general account fixed maturity securities portfolio.

Residential Mortgage-Backed Securities

Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans. The following tables summarize the distribution by collateral classification of the Company’s general account residential mortgage-backed securities as of dates indicated:

	As of June 30, 2009					As of December 31, 2008
	As of September 30, 2009					As of December 31, 2008
in millions	Amortizedcost		Estimatedfair value		% ofestimatedfair valuetotal	Amortizedcost		Estimatedfair value		% ofestimatedfair valuetotal
Government agency	$	4,~~127~~697.62	$	4,~~247~~868.13	5761.19%	$	4,297.1	$	4,387.3	57.8%
Prime		1,~~338~~184.94		1,~~076~~009.7	1412.59%		1,396.3		1,085.3	14.3%
Alt-A		1,~~986~~892.98		1,~~438~~483.37	1918.39%		1,871.3		1,469.5	19.3%
Sub-prime		~~633~~601.37		~~492~~491.63	6.63%		678.6		530.5	7.0%
Other residential mortgage collateral		~~190~~3.57		~~188~~2.16	~~2.5%~~—		125.8		125.3	1.6%
Total	$	8,~~277~~379.28	$	7,~~442~~855.86	100.0%	$	8,369.1	$	7,597.9	100.0%

The Company considers Alt-A collateral to be mortgages whose underwriting standards do not qualify the mortgage for regular conforming or jumbo loan programs. Typical underwriting characteristics that cause a mortgage to fall into the Alt-A classification may include, but are not limited to, inadequate loan documentation of a borrower’s financial information, debt-to-income ratios above normal lending limits, loan-to-value ratios above normal lending limits that do not have primary mortgage insurance, a borrower who is a temporary resident, and loans securing non-conforming types of real estate. Alt-A mortgages are generally issued to borrowers having higher Fair Isaac Credit Organization (FICO) scores, and the lender typically issues a slightly higher interest rate for such mortgages.

The Company considers Sub-prime collateral to be mortgages that are first or second lien mortgage loans issued to Sub-prime borrowers, as demonstrated by recent delinquent rent or housing payments or substandard FICO scores. Second-lien mortgage loans are also considered Sub-prime. The Company considers Prime collateral to be mortgages whose underwriting standards do qualify the mortgage for regular conforming or jumbo loan programs. In addition, government agency collateral is considered to be mortgages securitized by government agencies both implicitly and explicitly backed by the full faith and credit of the U.S. Government.

3435

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

For residential mortgage-backed securities, the following table summarizes as of the dates indicated the Company’s gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):

	Period of time for which unrealized loss has existed
	Investment Grade						Non-Investment Grade						Total
Ratio of estimated fair value to amortized cost	Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total
June 30, 2009:
September 30, 2009:
99.9% - 80.0%	$	616.97	$	~~132~~145.42	$	~~194~~151.39	$	89.72	$	2050.23	$	2859.95	$	7015.69	$	~~152~~195.65	$	~~223~~211.24
79.9% - 50.0%		395.20		~~286~~167.29		~~325~~172.49		9830.98		~~160~~206.60		~~259~~236.58		~~138~~35.18		~~446~~373.89		~~584~~409.97
Below 50.0%		~~1.7~~—		4013.48		4213.18		1034.5		~~106~~38.81		~~117~~72.36		1234.25		~~147~~51.29		~~159~~86.4
Total	$	~~102~~11.87	$	~~459~~326.09	$	~~561~~338.86	$	~~118~~74.15	$	~~287~~294.64	$	~~405~~368.79	$	~~220~~86.92	$	~~746~~621.63	$	~~967~~707.5
December 31, 2008:
99.9% - 80.0%	$	55.2	$	129.0	$	184.2	$	6.0	$	10.3	$	16.3	$	61.2	$	139.3	$	200.5
79.9% - 50.0%		91.7		442.5		534.2		21.5		22.2		43.7		113.2		464.7		577.9
Below 50.0%		13.0		74.4		87.4		12.4		2.8		15.2		25.4		77.2		102.6
Total	$	159.9	$	645.9	$	805.8	$	39.9	$	35.3	$	75.2	$	199.8	$	681.2	$	881.0

The Company evaluates its residential mortgage-backed securities for other-than-temporary impairment using multiple inputs. Loan level defaults are estimated using an option pricing approach in which the probability of borrower default increases as home equity declines. Other factors which influence the probability of default are debt-servicing, missed refinancing opportunities and geography. Loan level characteristics such as issuer, FICO, payment terms, level of documentation, residency type, dwelling type and loan purpose are also utilized in the model along with historical performance, to estimate or measure the loan’s propensity to default. Additionally, the model takes into account loan age, seasonality, payment changes and exposure to refinancing as additional drivers of default. For transactions where loan level data is not available, the model uses a proxy based on the collateral characteristics. Loss severity in the model is a function of multiple factors, including but not limited to, the unpaid balance, interest rate, mortgage insurance ratios, assessed property value at origination, change in property valuation and loan-to-value ratio at origination. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the residential mortgage-backed security held by the Company.

As of ~~June~~ September 30, 2009, 3726.4% and 7666.3% of securities containing Alt-A and Sub-prime collateral, respectively, were rated AA or better. In addition, 6968.1% and 8081.1% of Alt-A and Sub-prime collateral, respectively, was originated in 2005 or earlier.

3536

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Commercial Mortgage-Backed Securities

The Company owns and manages commercial mortgage-backed securities, which are trust certificates or bonds offered to investors that are collateralized by a pool of commercial mortgage loans from which the principal and interest paid on those mortgages flows to investors. These investments in commercial mortgage-backed securities are generally characterized by securities that are collateralized by static, heterogeneous pools of mortgages on commercial real estate properties. Deals are generally diversified across property types, geography, borrowers, tenants, loan size, coupon and vintages. For commercial mortgage-backed securities, the following tables summarize, as of the dates, indicated, the Company’s gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):

	Period of time for which unrealized loss has existed
	Investment Grade						Non-Investment Grade						Total
Ratio of estimated fair value to amortized cost	Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total
June 30, 2009:
September 30, 2009:
99.9% - 80.0%	$	330.72	$	1948.85	$	5348.57	$	—	$	—	$	—	$	330.72	$	1948.85	$	5348.57
79.9% - 50.0%		~~129.7~~—		6199.08		~~190~~99.78		—		—6.3		—6.3		~~129.7~~—		61106.01		~~190~~106.71
Below 50.0%		~~24.7~~—		~~139~~73.39		~~164~~73.09		—		—4.8		—4.8		~~24.7~~—		~~139~~78.37		~~164~~78.07
Total	$	~~188~~0.12	$	~~220~~222.12	$	~~408~~222.24	$	—	$	—11.1	$	—11.1	$	~~188~~0.12	$	~~220~~233.13	$	~~408~~233.25
December 31, 2008:
99.9% - 80.0%	$	19.8	$	36.6	$	56.4	$	—	$	—	$	—	$	19.8	$	36.6	$	56.4
79.9% - 50.0%		148.3		40.9		189.2		—		—		—		148.3		40.9		189.2
Below 50.0%		40.9		187.4		228.3		—		—		—		40.9		187.4		228.3
Total	$	209.0	$	264.9	$	473.9	$	—	$	—	$	—	$	209.0	$	264.9	$	473.9

Commercial mortgage-backed securities’ cash flows are generated by an industry standard ~~platform~~fixed ~~for~~income ~~the~~analytics ~~commercial~~system ~~mortgage-backed~~built ~~securities’~~for ~~secondary~~asset ~~market~~backed securities. In addition, a third party default model is generally utilized within this service to apply loan specific probability of default, ~~prepayment speed,~~ refinance risk ~~and~~ and loss severity ratios to generate cash flows. Default and prepayment assumptions are deal specific and include, but are not limited to, delinquency ~~history~~, property type, loan size, debt service coverage ratio, loan to value ratios and loan age.

3637

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Collateralized Debt Obligations

Collateralized debt obligations are asset-backed securities whose value is derived from a portfolio of corporate credit. For collateralized debt obligations, the following tables summarize, as of the dates indicated, the Company’s gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):

	Period of time for which unrealized loss has existed
	Investment Grade						Non-Investment Grade						Total
Ratio of estimated fair value to amortized cost	Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total		Lessthan orequal toone year		Morethanoneyear		Total
June 30, 2009:
September 30, 2009:
99.9% - 80.0%	$	6.1.4	$	12.37	$	7.4.1	$	10.96	$	~~3.2~~—	$	50.16	$	82.0	$	42.57	$	124.57
79.9% - 50.0%		311.63		543.59		3745.12		312.16		1050.39		1363.45		3413.79		1594.8		50108.57
Below 50.0%		~~16.4~~—		5415.76		7115.16		622.47		~~106~~61.89		~~113~~84.26		22.87		~~161~~77.5		~~184~~100.32
Total	$	542.17	$	6162.52	$	~~115~~64.69	$	1135.49	$	~~120~~112.38	$	~~131~~148.7	$	6538.56	$	~~181~~175.80	$	~~247~~213.36
December 31, 2008:
99.9% - 80.0%	$	7.0	$	0.2	$	7.2	$	0.1	$	0.6	$	0.7	$	7.1	$	0.8	$	7.9
79.9% - 50.0%		25.8		37.2		63.0		—		—		—		25.8		37.2		63.0
Below 50.0%		66.5		99.8		166.3		1.4		2.1		3.5		67.9		101.9		169.8
Total	$	99.3	$	137.2	$	236.5	$	1.5	$	2.7	$	4.2	$	100.8	$	139.9	$	240.7

To generate the expected cash flows, agency ratings of the underlying corporate securities were used to develop default probabilities. Historical and forecasted loss severities were then applied to develop the expected losses within the security’s collateral pool. An independent data provider is then used to model each security’s structure and waterfall to determine cash flows at the security level. If a recovery estimate is not feasible, then the market’s view of cash flows implied by the current fair value, market discount rates, and effective yield are the primary factors used to estimate recovery.

Within the collateralized debt obligations security type are Pooled Trust Preferreds. Pooled Trust Preferreds are collateralized debt obligations where the collateral is regional bank and insurance company trust preferred securities. All banks in the pools were screened using data provided by U.S. Bank Rating service. The rating service score is a combination of the bank’s liquidity, asset quality, capital adequacy and profitability. The results of the analysis, as well as management’s evaluation of the results and broker research, are used to generate default rates which are modeled to create cash flows from the entire collateral pool underlying each pooled trust preferred security. An independent data provider is then used to model each security’s structure and waterfall to determine cash flows at the security level.

3738

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Unrealized Gains and Losses

The following table presents the components of net unrealized losses on securities available-for-sale, as of the dates indicated:

(in millions)	~~June~~September 30,2009			December 31,2008
Net unrealized losses, before adjustments and taxes	$	(~~1,898~~310.70	)	$	(2,764.0	)
Change in fair value attributable to fixed maturity securities designated in fair value hedging relationships		(4340.58	)		(57.7	)
Total net unrealized losses, before adjustments and taxes		(~~1,942~~350.28	)		(2,821.7	)
Adjustment to deferred policy acquisition costs		~~356~~39.8			615.9
Adjustment to value of business acquired		180.49			9.6
Adjustment to future policy benefits and claims		4937.93			46.9
Adjustment to policyholder dividend obligation		31(24.05	)		74.9
Deferred federal income tax benefit		~~520~~104.21			726.1
Net unrealized losses	$	(~~965~~193.92	)	$	(1,348.3	)

The following table presents an analysis of the net change in net unrealized gains (losses) ~~gains~~ on securities available-for-sale before adjustments and taxes for the periods indicated:

	Three months endedJune 30,					Six months endedJune 30,
	Three months endedSeptember 30,					Nine months endedSeptember 30,
(in millions)	2009		2008			~~20091~~2009 1		2008
Fixed maturity securities	$	1,~~076~~585.39	$	(~~484~~751.39	)	$	~~855~~2,441.7	$	(~~875~~1,627.21	)
Equity securities		32.97		(42.14	)		912.63		(119.84	)
Net decrease (increase)	$	1,~~080~~588.26	$	(~~488~~749.45	)	$	~~865~~2,454.30	$	(~~887~~1,636.05	)

1 Includes the $384.2 million cumulative ~~adoption~~effect of a change in accounting principle as of January 1, 2009 for the adoption of ~~FSP~~guidance ~~FAS~~impacting ~~115~~FASB ASC 320-210, Investments – Debt and ~~FAS~~Equity ~~124-2~~Securities.

~~The~~39 following table summarizes the Company’s accumulated other comprehensive losses recognized on debt securities which have credit losses in earnings, based on the adoption of FSP FAS 115-2 and FAS 124-2 before federal income tax benefit, for the periods indicated:

(in millions)	Total
Three months ended June 30, 2009:
Unrealized losses as of April 1, 2009	$	(573.6	)
Net unrealized gains in the period		122.3
Total	$	(451.3	)
Six months ended June 30, 2009:
Cumulative adoption of accounting principle as of January 1, 2009	$	(384.2	)
Net unrealized losses in the period		(67.1	)
Total	$	(451.3	)

The Company’s practice is to disclose in the table above both the non-credit portion of the other-than-temporary impairment recognized in other comprehensive income and any subsequent changes in the fair value of those debt securities.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table summarizes the Company’s accumulated other comprehensive losses recognized on debt securities which have credit losses in earnings, based on the adoption of guidance impacting FASB ASC 320-10, Investments – Debt and Equity Securities before federal income tax benefit, for the periods indicated:


(in millions)
Three months ended September 30, 2009:
Unrealized losses as of July 1, 2009	$	(451.3	)
Net unrealized gains in the period		82.5

Total ¹	$	(368.8	)

Nine months ended September 30, 2009:
Cumulative adoption of accounting principle as of January 1, 2009	$	(384.2	)
Net unrealized gains in the period		15.4

Total ²	$	(368.8	)

Includes $36.0 million of other-than-temporary impairment losses recognized in other comprehensive income for the three months ended September 30, 2009.

Includes $404.0 million of other-than-temporary impairment losses recognized in other comprehensive income for the nine months ended September 30, 2009.

Mortgage Loans on Real Estate, Securitization and Real Estate

AsThe Company provides valuation allowances for impairments of ~~June 30,~~mortgage ~~2009~~loans ~~and~~on ~~December 31,~~real ~~2008,~~estate ~~the~~based ~~carrying~~on ~~value~~a ofreview ~~commercial~~by ~~mortgage~~portfolio managers. Mortgage loans on real estate are considered ~~specifically~~ impaired ~~was~~when, ~~$46.5~~based ~~million~~on ~~and~~current ~~$39.9~~information ~~million,~~and ~~respectively~~events, ~~for~~it ~~which~~is aprobable ~~$22.0~~that ~~million~~the ~~and~~Company ~~$14.4~~will ~~million~~be ~~valuation~~unable ~~allowance~~to ~~had~~collect ~~been~~all ~~established,~~amounts ~~respectively.~~due Noaccording ~~valuation~~to ~~allowance~~the ~~exists~~contractual ~~for~~terms ~~collateral~~of ~~dependent~~the ~~commercial~~loan ~~mortgage~~agreement. When ~~loans~~management determines that a loan is impaired, a provision for ~~which~~loss is established equal to either the ~~fair~~difference between the carrying value ofand the ~~collateral~~present isvalue ~~estimated~~of toexpected befuture ~~greater~~cash ~~than~~flows discounted at the ~~carrying~~loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

In addition to the valuation allowance on specific loans, the Company maintains an allowance not yet specifically identified by loan for probable losses inherent in the loan portfolio as of the balance sheet date. The valuation allowance account for mortgage loans on real estate reflects management’s best estimate of probable credit losses, including losses incurred at the balance sheet date but not yet identified by specific loan. Management’s periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

Changes in the valuation allowance are generally recorded in net realized investment gains and losses, while loan-specific reserves are included in other-than-temporary impairment losses.

As of September 30, 2009 and December 31, 2008, the carrying value of commercial mortgage loans on real estate considered specifically reserved was $26.7 million and $39.9 million, respectively, for which a $10.7 million and $14.4 million specific reserve had been established, respectively. No specific reserve exists for collateral dependent commercial mortgage loans for which the fair value of the collateral is estimated to be greater than the carrying value.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

September 30, 2009 and 2008

The following table summarizes activity in the valuation allowance account for mortgage loans on real estate as of the dates indicated:

(in millions)	~~June~~September 30,2009		December 31,2008
Allowance, beginning of period	$	42.4	$	24.8
Net change in allowance		11.54		17.6
Allowance, end of period	$	53.98	$	42.4

The Company has securitized commercial mortgage loans on real estate to third parties. The Company, as the transferor, has continuing involvement in these loans which consists of receiving servicing fees on loans which the Company has transferred.

The Company did not participate in any securitization arrangements during the ~~six~~nine months ended ~~June~~September 30, 2009 and the year ended December 31, 2008. The Company received $0.34 million, during the ~~periods~~nine months ended ~~June~~September 30, 2009 and 2008, in servicing fees related to financial assets where there is a continuing involvement from the securitization of commercial mortgage loans on real estate.

The Company provided a representations and warranties letter to the transferee for each securitization arrangement. If it is found that the Company made a misrepresentation, it could be required to provide financial support to the transferee or its beneficial interest holders. For the ~~six~~nine months ended ~~June~~ September 30, 2009 and the year ended December 31, 2008, the Company was not required to provide any financial or other support that it was not previously contractually required to provide to the transferee or its beneficial interest holders.

Real estate held for use was $9.5.2 million and $9.8 million as of ~~June~~September 30, 2009 and December 31, 2008, respectively. These assets are carried at cost less accumulated depreciation, which was $2.56 million and $2.1 million as of ~~June~~September 30, 2009 and December 31, 2008, respectively. The carrying value of real estate held for sale was $7.1 million and $6.8 million as of ~~June~~September 30, 2009 and December 31, 2008, respectively.

Securities Lending

The Company, through an agent, lends certain portfolio holdings and in turn receives cash collateral with the objective of increasing the yield on its investments. The cash collateral is invested in high-quality, short-term and long-term investments. The Company’s policy requires the maintenance of collateral of a minimum of 102% of the fair value of the securities loaned. Net returns on the investments, after payment of a rebate to the borrower, are shared between the Company and its agent. Both the borrower and the Company can request or return the loaned securities at any time. The Company maintains ownership of the loaned securities at all times and is entitled to receive from the borrower any payments for interest or dividends received on such securities during the loan term. In 2008 and 2009, the Company recognized loaned securities as part of its investments available-for-sale. The Company also recognizes the short-term and other long-term investments acquired with the cash collateral and its obligation to return such collateral to the borrower in short-term and other long-term investments and other liabilities, respectively.

As of ~~June~~ September 30, 2009 and December 31, 2008, the Company had received $~~243~~296.07 million and $419.9 million, respectively, of cash collateral on securities lending. The Company had not received any non-cash collateral on securities lending as of ~~June~~ September 30, 2009 and December 31, 2008. As of ~~June~~September 30, 2009 and December 31, 2008, the Company had loaned securities with a fair value of $~~236~~285.81 million and $407.1 million, respectively.

39Assets on Deposit, Held in Trust and Pledged as Collateral

Fixed maturity securities with an amortized cost of $21.0 million and $28.0 million were on deposit with various regulatory agencies as required by law as of September 30, 2009 and December 31, 2008 respectively. Additionally, fixed maturity securities with an amortized cost of $916.8 million and $838.3 million were pledged to secure public deposits, repurchase agreements, borrowings from the Federal Home Loan Bank and for other purposes as required or permitted by law. These securities continue to be included in fixed maturity securities on the condensed consolidated balance sheets.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Assets on Deposit, Held in Trust and Pledged as Collateral

Fixed maturity securities with an amortized cost of $22.1 million and $28.0 million were on deposit with various regulatory agencies as required by law as of June 30, 2009 and December 31, 2008 respectively. Additionally, fixed maturity securities with an amortized cost of $842.0 million and $838.3 million were pledged to secure public deposits, repurchase agreements, borrowings from the Federal Home Loan Bank and for other purposes as required or permitted by law. These securities continue to be included in fixed maturity securities on the condensed consolidated balance sheets.

Net Investment Income

The following table summarizes net investment income from continuing operations by investment type for the periods indicated:

	Three months endedJune 30,						Six months endedJune 30,
	Three months endedSeptember 30,						Nine months endedSeptember 30,
(in millions)	2009			2008			2009			2008
Securities available-for-sale:
Fixed maturity securities	$	~~399~~402.63		$	~~383~~381.0		$	~~772.~~1,174.4		$	~~780~~1,161.3
Equity securities		0.74			1.54			1.37			34.37
Trading assets		13.62			2.47			37.80			36.85
Mortgage loans on real estate		~~114~~108.59			~~123~~122.96			~~230~~339.98			~~254~~377.73
Short-term investments		21.05			45.02			46.94			813.13
Other		119.09			11(18.24	)		1424.32			11(6.7	)
Gross investment income		~~529~~526.42			~~526~~494.05			1,~~027~~553.35			1,~~061~~556.94
Less: investment expenses		1412.9			1413.57			2841.10			3044.96
Net investment income	$	~~514~~513.53		$	~~511~~480.58		$	~~999~~1,512.25		$	1,~~031~~511.08
Net Realized Investment Gains and Losses The following table summarizes net realized investment gains (losses) from continuing operations by source for the periods indicated:
Net Realized Investment Gains and Losses The following table summarizes net realized investment (losses) gains from continuing operations by source for the periods indicated:
	Three months endedJune 30,						Six months endedJune 30,
	Three months endedSeptember 30,						Nine months endedSeptember 30,
(in millions)	2009			2008			2009			2008
Total realized gains on sales	$	6436.68		$	2116.06		$	~~116~~153.97		$	2340.74
Total realized losses on sales		(4836.3	)		(1165.27	)		(96133.81	)		(37103.97	)
Net realized gains (losses) on terminations of hedging instruments		2.7			(6.6	)		1.9			(9.8	)
Net realized (losses) gains on terminations of hedging instruments		(5.7	)		2.1			(3.8	)		(7.7	)
Credit default swaps		91.93			(26.02	)		34.03			(612.24	)
Derivatives and embedded derivatives associated with living benefit contracts		36(4.25	)		57(103.17	)		~~401~~396.49			(17121.74	)
Derivatives associated with death benefit contracts		(~~131~~87.67	)		—			(48136.74	)		—
Other derivatives		~~198~~(46.23	)		8(3.91	)		~~120~~74.41			41.54
Trading asset valuation gain (loss)		104.58			(97.61	)		813.97			(916.67	)
Total realized gains (losses) before adjustments		142.2			57.6			507.0			(53.0	)
Total realized (losses) gains before adjustments		(137.6	)		(167.1	)		369.4			(220.1	)
Amounts credited to policyholder dividend obligation		(20.78	)		38.76			(2.3.1	)		312.51
Other		—			~~0.3~~—			—			0.6
Net realized investment gains (losses)	$	139.5		$	61.6		$	504.7		$	(48.9	)
Net realized investment (losses) gains	$	(138.4	)	$	(158.5	)	$	366.3		$	(207.4	)

40Proceeds from the sale of securities available-for-sale during the nine months ended September 30, 2009 and 2008 were $4.28 billion and $3.74 billion, respectively. During the nine months ended September 30, 2009 and 2008, gross gains of $147.9 million and $35.6 million, respectively, and gross losses of $59.2 million and $46.1 million, respectively, were realized on those sales.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

Proceeds from the sale of securities available-for-sale during the six months ended June 30, 2009 and 2008 were $3.10 billion and $1.33 billion, respectively. During the six months ended June 30, 2009 and 2008, gross gains of $113.0 million and $19.2 million, respectively, and gross losses of $42.0 million and $15.4 million, respectively, were realized on those sales.

Other-Than-Temporary and Other Investment Impairment Losses

The following tables summarize other-than-temporary impairments for the periods indicated:

(in millions)	Gross		Includedin OCI			Net
Three months ended June 30, 2009:
Three months ended September 30, 2009:
Fixed maturity securities1	$	14170.54	$	(1136.30	)	$	3134.24
Equity securities		—		—			—
Mortgage loans		3112.5		—			3112.5
Other		4.2.1		—			4.2.1
Other-than-temporary impairment losses	$	50.2	$	(11.3	)	$	38.9
Total other-than-temporary impairment losses	$	185.0	$	(36.0	)	$	149.0
						Totalimpairments
Three months ended June 30, 2008:
Three months ended September 30, 2008:
Fixed maturity securities1						$	95331.2
Mortgage loans							0.2
Equity securities							57.2
Other							0.1
Mortgage loans							4.6
Other-than-temporary impairment losses						$	95.5
Other							3.6
Total other-than-temporary impairment losses						$	396.6

1 Declines in the creditworthiness of the issuer of hybrid securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment. For the three months ended ~~June~~September 30, 2009, the Company recognized $217.96 million in other-than-temporary impairments related to these securities compared to ~~none~~$55.9 million for the three months ended ~~June~~September 30, 2008.

4143

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(in millions)	Gross		Includedin OCI			Net
Six months ended June 30, 2009:
Nine months ended September 30, 2009:
Fixed maturity securities1	$	~~688~~859.93	$	(~~368~~404.0	)	$	~~320~~455.93
Equity securities		7.1		—			7.1
Mortgage loans		3346.72		—			3346.72
Other		46.23		—			46.23
Other-than-temporary impairment losses	$	733.9	$	(368.0	)	$	365.9
Total other-than-temporary impairment losses	$	918.9	$	(404.0	)	$	514.9
						Totalimpairments
Six months ended June 30, 2008:
Nine months ended September 30, 2008:
Fixed maturity securities1						$	~~183~~514.68
Mortgage loans							0.2
Equity securities							57.2
Other							0.1
Mortgage loans							4.8
Other-than-temporary impairment losses						$	183.9
Other							3.7
Total other-than-temporary impairment losses						$	580.5

1 Declines in the creditworthiness of the issuer of hybrid securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment. For the ~~six~~nine months ended ~~June~~September 30, 2009, the Company recognized $~~150~~167.06 million in other-than-temporary impairments related to these securities compared to ~~none~~$70.6 million for the ~~six~~nine months ended ~~June~~September 30, 2008.

4244

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the other-than-temporary-impairment losses on debt securities held as of ~~June~~September 30, 2009 that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the security prior to recovery of the amortized cost basis and for which the non-credit portion of the loss is included in other comprehensive income:

(in millions)
Three months ended June 30, 2009:
Three months ended September 30, 2009:
Cumulative credit loss as of April 1, 20091	$	612.5
Cumulative credit loss as of July 1, 20091	$	493.5
New credit losses		2523.15
Incremental credit losses2		26.7
Subtotal		~~640~~523.37
Less:
Losses related to securities included in the beginning balance sold or paid down during the period		(~~127~~42.10	)
Losses related to securities included in the beginning balance for which there was a change in intent3		(194.7	)
Increases in cash flows expected to be collected for securities included in the beginning balance		—
Cumulative credit loss as of June 30, 20091	$	493.5
Cumulative credit loss as of September 30, 20091	$	477.0
(in millions)
Nine months ended September 30, 2009:
Six months ended June 30, 2009:
Cumulative credit loss as of January 1, 20091	$	507.5
New credit losses		~~139~~162.16
Incremental credit losses2		5157.18
Subtotal		~~697~~727.79
Less:
Losses related to securities included in the beginning balance sold or paid down during the period		(~~157~~199.7	)
Losses related to securities included in the beginning balance for which there was a change in intent3		(4651.52	)
Increases in cash flows expected to be collected for securities included in the beginning balance		—
Cumulative credit loss as of June 30, 20091	$	493.5
Cumulative credit loss as of September 30, 20091	$	477.0

The cumulative credit loss amount excludes other-than-temporary-impairment losses on securities held as of the periods indicated that the Company intends to sell or it is more likely than not that the Company will be required to sell the security before the recovery of the amortized cost basis.

On securities included in the beginning balance.

3 Securities for which an other-than-temporary impairment loss was previously recorded that the Company now intends to sell or is more likely ~~that~~than not it will be required to sell before recovery of the amortized cost basis and has transferred the portion of loss previously recorded in other comprehensive income to earnings during the period. Also includes hybrid securities that had previously been evaluated for other-than-temporary impairment based on the criteria as a debt security, but in the current period are evaluated as an equity security due to declines in the creditworthiness of the issuer.

4345

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(8)

Deferred Policy Acquisition Costs

During the second quarter of 2009, the Company conducted its annual comprehensive review of model assumptions used to project DAC and other related balances, including sales inducement assets, VOBA, and unearned revenue ~~reserves,~~ ~~and guaranteed minimum death and income benefit~~ reserves. The review covered all assumptions including mortality, lapses, expenses and general and separate account returns. As a result of this review, certain assumptions were unlocked (DAC unlock). The unlocked assumptions primarily related to lower expected investment spreads and separate account returns across all segments. The pre-tax positive (negative) impact on the Company’s assets and liabilities as a result of the unlocking of these assumptions during the second quarter of 2009 was as follows:

(in millions)	DAC			VOBA			UnearnedRevenueReserves		SalesInducementAssets			Total
Segment:
Individual Investments	$	(15.2	)	$	—		$	—	$	(0.5	)	$	(15.7	)
Retirement Plans		(8.2	)		—			—		—			(8.2	)
Individual Protection		(43.9	)		(13.2	)		10.9		—			(46.2	)
Total	$	(67.3	)	$	(13.2	)	$	10.9	$	(0.5	)	$	(70.1	)
At the end of the second quarter of 2008, the Company determined as part of its comprehensive annual study of assumptions that certain assumptions should be unlocked. The unlocked assumptions primarily related to lapse and spread assumptions in the Individual Investments segment, the assumed growth rate on deposits per contract in the Retirement Plans segment, and mortality and lapse assumptions in the Individual Protection segment. The pre-tax positive (negative) impact on the Company’s assets and liabilities as a result of the unlocking of these assumptions during the second quarter 2008 was as follows:

(in millions)	DAC			VOBA			UnearnedRevenueReserves		SalesInducementAssets			Total
Segment:
Individual Investments	$	(8.8	)	$	(2.6	)	$	—	$	(0.6	)	$	(12.0	)
Retirement Plans		(2.3	)		—			—		—			(2.3	)
Individual Protection		(2.8	)		7.5			3.2		—			7.9
Total	$	(13.9	)	$	4.9		$	3.2	$	(0.6	)	$	(6.4	)

During the third quarter of 2008, the Company’s recorded balance of individual variable annuity DAC fell outside the Company’s preset parameters for the prescribed period, which primarily was driven by unfavorable market performance compared to the assumed net separate account returns. Accordingly, the Company recalculated DAC using revised best estimate assumptions, which resulted in a decrease in DAC and an increase in DAC amortization and other related balances totaling $177.2 million pre-tax in the Individual Investments segment.

~~The~~At ~~following~~the ~~table~~end ~~presents~~of athe ~~reconciliation~~second quarter of ~~DAC~~2008, the Company determined as part of its comprehensive annual study of assumptions that certain assumptions should be unlocked. The unlocked assumptions primarily related to lapse and spread assumptions in the ~~dates~~Individual Investments segment, the assumed growth rate on deposits per contract in the Retirement Plans ~~indicated:~~segment, and mortality and lapse assumptions in the Individual Protection segment.

(in millions)	June 30,2009			June 30,2008
Balance at beginning of period	$	4,523.8		$	4,095.6
Capitalization of DAC		255.8			312.6
Amortization of DAC, excluding unlocks		(394.7	)		(222.0	)
Amortization of DAC related to unlocks		(67.3	)		(13.9	)
Adjustments to DAC related to unrealized gains and losses on securities available-for-sale and other		(257.1	)		195.3
Balance at end of period	$	4,060.5		$	4,367.6

The pre-tax positive (negative) impact on the Company’s assets and liabilities as a result of the unlocking of assumptions during the nine months ended September 30, 2008 was as follows:



(in millions)	DAC			VOBA			Unearned Revenue Reserves		Sales Inducement Assets			Total
Segment:
Individual Investments	$	(186.0	)	$	(2.6	)	$	—	$	(0.6	)	$	(189.2	)
Retirement Plans		(2.3	)		—			—		—			(2.3	)
Individual Protection		(2.8	)		7.5			3.2		—			7.9

Total	$	(191.1	)	$	4.9		$	3.2	$	(0.6	)	$	(183.6	)

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

~~(9)~~The ~~Variable~~following ~~Annuity~~table ~~Contracts~~presents a reconciliation of DAC as of the dates indicated:


(in millions)	2009			2008
Balance at January 1,	$	4,523.8		$	4,095.6
Capitalization of DAC		376.9			441.2
Amortization of DAC, excluding unlocks		(492.3	)		(269.6	)
Amortization of DAC related to unlocks		(67.3	)		(191.1	)
Adjustments to DAC related to unrealized gains and losses on securities available-for-sale and other		(574.2	)		352.2

Balance at September 30,	$	3,766.9		$	4,428.3

(9)

Variable Contracts

The Company issues traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. The Company also issues non-traditional variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contractholders. The Company provides five primary guarantee types under non-traditional variable annuity contracts: (1) guaranteed minimum death benefits (GMDB); (2) GMAB; (3) guaranteed minimum income benefits (GMIB); (4) GLWB; and (5) a hybrid guarantee with GMAB and GLWB.

The GMDB provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivor’s death. The Company has offered six primary GMDB types:

•

Return of premium – provides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net premiums.” There are two variations of this benefit: in general, there is no lock-in age for this benefit, however, for some contracts the GMDB reverts to the account value at a specified age, typically age 75.

•

Reset – provides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to lock-in age) account value adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for others the GMDB reverts to the account value at age 75, 85, 86 or 90.

•

Ratchet – provides the greater of a return of premium death benefit or the highest specified “anniversary” account value (prior to age 86) adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: monthaversary – evaluated monthly; annual – evaluated annually; and five-year – evaluated every fifth year.

•

Rollup – provides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated at generally 5% simple interest up to the earlier of age 86 or 200% of adjusted premiums. There are two variations of this benefit: for certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to the account value at age 75.

•

Combo – provides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either age 81 or 86.

•

Earnings enhancement – provides an enhancement to the death benefit that is a specified percentage of the adjusted earnings accumulated on the contract at the date of death. There are two versions of this benefit: (1) the benefit expires at age 86, and a credit of 4% of account value is deposited into the contract; or (2) the benefit does not have an end age, but has a cap on the payout and is paid upon the first death in a spousal situation. Both benefits have age limitations. This benefit is paid in addition to any other death benefits paid under the contract.

4547

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The GMAB, offered in the Company’s Capital Preservation Plus contract rider, is a living benefit that provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10 years) selected by the contractholder at the issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified time period, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.

The GLWB, offered in the Company’s Lifetime Income rider (L.inc), is a living benefit that provides for enhanced retirement income security without the liquidity loss associated with annuitization. The withdrawal rates vary based on the age when withdrawals begin and are applied to a benefit base to determine the guaranteed lifetime income amount available to a contractholder. The benefit base is equal to the variable annuity premium at contract issuance and may increase as a result of a ratchet feature that is driven by account performance and a roll-up feature that is driven by policy duration.

The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB types are:

•

Ratchet – provides an annuitization value equal to the greater of account value, net premiums or the highest one-year anniversary account value (prior to age 86) adjusted for withdrawals.

•

Rollup – provides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated at 5% compound interest up to the earlier of age 86 or 200% of adjusted premiums.

•

Combo – provides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB benefit.

See Note 5 to the audited consolidated financial statements included in the Company’s 2008 Annual Report on Form 10-K for a complete description of the Company’s hybrid GMAB/GLWB offered through its Capital Preservation Plus Lifetime Income contract rider. All GMAB contracts with the hybrid GMAB/GLWB rider are included with GMAB ~~contracts~~ contracts in the following tables. In January 2009, the Company decided to simplify its living benefit guarantees and only offer L. inc on new sales.

4648

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table summarizes the account values and net amount at risk, net of reinsurance, for variable annuity contracts with guarantees invested in both general and separate accounts as of the dates indicated (note that one contract may contain multiple guarantees):

	June 30, 2009									December 31, 2008
	September 30, 2009									December 31, 2008
(in millions)	Generalaccountvalue		Separateaccountvalue		Totalaccountvalue		Net amountat risk1		Wtd. avg.attainedage	Generalaccountvalue		Separateaccountvalue		Totalaccountvalue		Net amountat risk1		Wtd. avg.attainedage
GMDB:
Return of premium	$	~~847~~782.3	$	5,~~043~~665.82	$	56,~~891~~447.15	$	~~311~~135.48	61	$	912.1	$	5,082.2	$	5,994.3	$	440.6	60
Reset		1,~~931~~753.76		1011,~~661~~975.73		1213,~~593~~728.49		1,~~986~~141.24	64		2,282.3		10,259.8		12,542.1		2,477.7	64
Ratchet		1,~~477~~310.0		1113,~~614~~168.9		1314,~~091~~478.9		32,~~186~~107.0	67		1,877.7		10,545.7		12,423.4		3,775.3	67
Rollup		4644.40		~~230~~254.46		~~276~~298.86		2419.42	7273		48.5		241.9		290.4		25.9	72
Combo		~~264~~246.76		1,~~391~~540.37		1,~~656~~787.03		~~537~~376.06	69		306.0		1,398.1		1,704.1		621.2	69
Subtotal		4,~~567~~136.15		2832,~~942~~604.17		3336,~~509~~741.2		63,~~045~~780.0	65		5,426.6		27,527.7		32,954.3		7,340.7	65
Earnings enhancement		1617.50		~~327~~360.64		~~344~~377.14		917.41	64		28.1		305.4		333.5		7.2	63
Total - GMDB	$	4,~~583~~153.65	$	2932,~~269~~965.71	$	3337,~~853~~118.36	$	63,~~054~~797.41	65	$	5,454.7	$	27,833.1	$	33,287.8	$	7,347.9	65
GMAB2:
5 Year	$	207.52	$	23,~~905~~060.15	$	23,~~925~~067.67	$	~~406~~218.69	N/A	$	607.0	$	2,260.6	$	2,867.6	$	499.0	N/A
7 Year		139.85		2,~~306~~512.82		2,~~320~~521.67		~~403~~222.08	N/A		451.6		1,814.3		2,265.9		482.9	N/A
10 Year		32.38		~~680~~750.23		~~683~~753.51		~~110~~50.63	N/A		80.2		597.7		677.9		132.2	N/A
Total - GMAB	$	3719.65	$	56,~~892~~323.10	$	56,~~929~~342.75	$	~~920~~492.20	N/A	$	1,138.8	$	4,672.6	$	5,811.4	$	1,114.1	N/A
GMIB3:
Ratchet	$	1615.18	$	~~224~~244.98	$	~~241~~260.06	$	20.94	N/A	$	16.2	$	228.5	$	244.7	$	5.6	N/A
Rollup		4849.80		~~596~~638.9		~~645~~687.79		10.25	N/A		47.1		612.4		659.5		1.3	N/A
Combo		—		0.1		0.1		—	N/A		—		0.1		0.1		—	N/A
Total - GMIB	$	64.98	$	~~821~~883.98	$	~~886~~948.86	$	40.19	N/A	$	63.3	$	841.0	$	904.3	$	6.9	N/A
GLWB:
L.inc	$	~~240~~229.58	$	45,~~729~~998.56	$	46,~~970~~228.04	$	~~237~~138.41	N/A	$	72.4	$	3,248.4	$	3,320.8	$	571.5	N/A
Portfolio income insurance		—		4.2		4.2		—	N/A		—		—		—		—	N/A
Total - GLWB	$	229.8	$	6,002.8	$	6,232.6	$	138.1	N/A	$	72.4	$	3,248.4	$	3,320.8	$	571.5	N/A

Net amount at risk is calculated on a seriatim basis and equals the respective guaranteed benefit less the account value (or zero if the account value exceeds the guaranteed benefit). As it relates to GMIB, net amount at risk is calculated as if all policies were eligible to annuitize immediately, although all GMIB options have a waiting period of at least 7 years from issuance.

2 GMAB contracts with the hybrid GMAB/GLWB rider had account values of $45.8427 billion and $4.59 billion as of ~~June~~September 30, 2009 and December 31, 2008, respectively.

The weighted average period remaining until expected annuitization is not meaningful and has not been presented because there is currently no material GMIB exposure.

Net amount at risk is highly sensitive to changes in financial market movements. See Note 6 for a discussion of the Company’s risk management practices with respect to declining financial market exposure.

4749

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following table summarizes account balances of variable annuity contracts that were invested in separate accounts as of the dates indicated:

(in millions)	~~June~~September 30,2009		December 31,2008
Mutual funds:
Bond	$	4,~~366~~694.19	$	4,370.3
Domestic equity		2023,~~303~~443.98		18,676.2
International equity		2,~~553~~983.5		2,421.4
Total mutual funds		2731,~~223~~122.52		25,467.9
Money market funds		1,~~807~~579.18		2,146.4
Total	$	2932,~~030~~702.60	$	27,614.3
The following table summarizes the reserve balances, net of reinsurance, for variable annuity contracts with guarantees as of the dates indicated:
(in millions)	~~June~~September 30,2009		December 31,2008
GMAB	$	~~553~~353.95	$	998.1
GMWB		~~187~~123.16		699.9
GMDB		~~148~~78.69		193.4
GMIB		43.2		5.5

The Company’s living benefit riders represent an embedded derivative in a variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivatives are carried at fair value. Subsequent changes in the fair value of the embedded derivatives are recognized in earnings as a component of net realized investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions. Projections of cash flows inherent in the valuation of the embedded derivative incorporate numerous assumptions including, but not limited to, expectations of contractholder persistency, contractholder withdrawal patterns, risk neutral market returns, correlations of market returns and market return volatility. As of ~~June~~September 30, 2009 and December 31, 2008, the net balance of the embedded derivatives for living benefits was a liability of $~~741~~477.01 million and a liability of $1.70 billion, respectively.

The Company’s incurred and paid amounts for living benefit features were immaterial for the three and nine ~~six~~ months ended ~~June~~September 30, 2009 and 2008. The Company does not expect any meaningful level of claims under the living benefit features for several years and believes the impact of claims is expected to be mitigated by its economic hedging program.

During the ~~six~~nine months ended ~~June~~September 30, 2009, the Company recorded net realized investment gains on living benefit embedded derivatives and related economic hedging gains of $~~401~~396.49 million. These gains were comprised of $~~983~~1.426 ~~million~~billion of net realized investment gains on living benefit embedded derivatives and $~~582~~865.08 million of related economic hedging losses. The net realized investment gains on living benefit embedded derivatives primarily resulted from higher interest rates, lower volatility assumptions and an increase to the nonperformance component of the discount rate. The net realized investment gains on embedded derivatives increased amortization of DAC by $~~277~~321.27 million in the current year ~~quarter~~, which is included in the Corporate and Other segment.

4850

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The Company’s GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments. GMIB claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total assessments. The Company regularly evaluates its GMDB and GMIB claim reserve estimates and adjusts the additional liability balances as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the calculation of GMIB claim reserves assumes benefit utilization ranges from a low of 3% when the contractholder’s annuitization value is at least 10% in the money to 100% utilization when the contractholder is 90% or more in the money.

The Company’s incurred and paid amounts for GMDBs, net of reinsurance, were $1725.05 million and $41113.91 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $28.76 million and $715.0 6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008, respectively.

The following assumptions and methodology were used to determine the GMDB claim reserves as of ~~June~~September 30, 2009 and December 31, 2008:

• Data used was based on a combination of historical numbers and future projections generally involving 250 and 50 probabilistically generated economic scenarios as of ~~June~~September 30, 2009 and December 31, 2008, respectively

• Mean gross equity performance – 10.4% and 8.1% as of ~~June~~September 30, 2009 and December 31, 2008, respectively

• Equity volatility – 18.0% and 18.7% as of ~~June~~September 30, 2009 and December 31, 2008, respectively

• Mortality – 91% of Annuity 2000 Basic table for males, 101% for females as of ~~June~~September 30, 2009; and 100% of Annuity 2000 tables as of December 31, 2008

•

Asset fees – equivalent to mutual fund and product loads

•

Discount rate – approximately 7.0%

Lapse rate assumptions vary by duration as shown below for the periods indicated:

June 30, 2009 Duration (years)	1	2	3	4	5	6	7	8	9	10+
September 30, 2009 Duration (years)	1	2	3	4	5	6	7	8	9	10+
Minimum	1.000%	2.000%	2.505%	3.000%	5.000%	6.000%	7.000%	7.000%	10.000%	10.000%
Maximum	6.000%	15.000%	12.000%	12.000%	35.000%	40.000%	18.505%	32.505%	32.505%	18.505%
December 31, 2008 Duration (years)	1	2	3	4	5	6	7	8	9	10+
Minimum	1.000%	2.000%	2.000%	3.000%	4.505%	6.000%	7.000%	7.000%	11.505%	11.505%
Maximum	1.505%	2.505%	4.000%	4.505%	40.000%	41.505%	21.505%	35.000%	35.000%	18.505%

The Company’s incurred and paid amounts for GMIBs were immaterial for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008.

The Company did not transfer assets from the general account to the separate account for any of its variable annuity contracts during the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008.

4951

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

~~(10)~~The ~~Federal~~following ~~Income~~table ~~Taxes~~summarizes account balances of variable universal life insurance contracts that were invested in separate accounts as of the dates indicated:

During the second quarter of 2009, the Company recorded ($5.8) million of net federal income tax expense adjustments primarily related to differences between the 2008 estimated tax liability and the amounts expected to be reported on the Company’s 2008 tax returns when filed. These changes in estimates primarily were driven by the Company’s separate account dividends received deduction (DRD) and foreign tax credit.


(in millions)	September 30, 2009		December 31, 2008
Mutual funds:
Bond	$	453.4	$	412.7
Domestic equity		2,912.2		2,459.5
International equity		404.7		334.6

Total mutual funds		3,770.3		3,206.8
Money market funds		249.6		295.0

Total	$	4,019.9	$	3,501.8

~~Total~~(10) ~~federal~~Short-Term income tax expense differs from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before federal income tax expense as follows for the periods indicated: Debt

	Three months ended June 30,
	2009					2008
(dollars in millions)	Amount			%		Amount			%
Computed (expected) tax expense	$	91.6		35.0		$	42.9		35.0
DRD		(20.0	)	(7.6	)		(1.2	)	(1.0	)
Other, net		(2.0	)	(0.8	)		(5.3	)	(4.3	)
Total	$	69.6		26.6		$	36.4		29.7
	Six months ended June 30,
	2009					2008
(dollars in millions)	Amount			%		Amount			%
Computed (expected) tax expense	$	24.2		35.0		$	54.4		35.0
DRD		(33.2	)	(48.0	)		(20.7	)	(13.3	)
Other, net		4.5		6.5			(8.1	)	(5.2	)
Total	$	(4.5	)	(6.5	)	$	25.6		16.5

The following table summarizes short-term debt as of the dates indicated:


(in millions)	September 30, 2009		December 31, 2008
$550.0 million repurchase-based advance agreement	$	413.5	$	46.0
$800.0 million commercial paper program		150.0		149.9
$350.0 million securities lending program facility		—		99.8

Total short-term debt	$	563.5	$	295.7

The Company also has a wholly-owned banking subsidiary with the ability to borrow from a single financial institution under a $250.0 million line of credit agreement and $550.0 million repurchase-based advance agreement. The borrowings are collateralized by investments owned by the subsidiary and are included in the consolidated balance sheets. The available portion of the credit facilities is limited by the collateral value of loans or securities pledged. The subsidiary had $413.5 million and $46.0 million outstanding under the $550.0 million repurchase-based advance agreement as of September 30, 2009 and December 31, 2008, respectively. On October 1, 2009, the subsidiary made a $342.5 million payment on the outstanding balance of the repurchase-based advance agreement. The subsidiary had no amounts outstanding under the $250.0 million line of credit agreement at September 30, 2009 and December 31, 2008. As of September 30, 2009, the total additional collateralized borrowing capacity under these agreements was $195.1 million.

NLIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S. London Interbank Offered Rate (LIBOR). On July 31, 2009, NLIC paid down the $99.7 million principal balance on the securities lending program facility. NLIC had no amounts outstanding under this agreement as of September 30, 2009 compared to $99.8 million as of December 31, 2008.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(11) ~~Shareholder’s~~Federal ~~Equity~~Income ~~and Dividend Restrictions~~Taxes

During the first nine months of 2009, the Company recorded ($5.0) million of net federal income tax expense adjustments primarily related to differences between the 2008 estimated tax liability and the amounts reported on the Company’s 2008 tax returns. These changes in estimates primarily were driven by the Company’s separate account dividends received deduction (DRD) and foreign tax credit.

Total federal income tax benefit differs from the amount computed by applying the U.S. federal income tax rate to (loss) income from continuing operations before federal income tax benefit as follows for the periods indicated:


	Three months ended September 30,
	2009				2008
(dollars in millions)	Amount			%	Amount			%
Computed (expected) tax benefit	$	(30.6	)	35.0%	$	(188.3	)	35.0 %
DRD		(11.1	)	12.7%		(6.3	)	1.2 %
Other, net		(14.8	)	16.9%		2.9		(0.6)%

Total	$	(56.5	)	64.6%	$	(191.7	)	35.6 %


	Nine months ended September 30,
	2009				2008
(dollars in millions)	Amount			%	Amount			%
Computed (expected) tax benefit	$	(6.4	)	35.0%	$	(141.9	)	35.0 %
DRD		(44.3	)	242.0%		(27.0	)	6.7 %
Other, net		(10.3	)	56.3%		2.8		(0.7)%

Total	$	(61.0	)	333.3%	$	(166.1	)	41.0 %

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

September 30, 2009 and 2008

(12)

Shareholder’s Equity and Dividend Restrictions

Comprehensive Gain (Loss)

The Company’s other comprehensive income and loss includes net income (loss) and certain items that are reported directly within separate components of shareholder’s equity that are not recorded in net income.

The following table summarizes the Company’s other comprehensive gain (loss), before and after federal income tax benefit, for the periods indicated:

	Three months endedJune 30,						Six months endedJune 30,
	Three months endedSeptember 30,						Nine months endedSeptember 30,
(in millions)	2009			2008			2009			2008
Net unrealized gains (losses) on securities available-for-sale arising during the period:
Net unrealized gains (losses) before adjustments	$	~~992~~1,393.28		$	(~~547~~1,149.37	)	$	12,~~063~~457.20		$	(12,~~094~~244.74	)
Net non-credit gains (losses)		122.3			—			(67.1	)		—
Net non-credit gains		82.5			—			15.4			—
Net adjustment to deferred policy acquisition costs		(~~201~~317.60	)		~~109~~156.42			(~~259~~576.1	)		~~194~~350.46
Net adjustment to value of business acquired		14(17.85	)		20.58			(8.87	)		12.75
Net adjustment to future policy benefits and claims		19(12.96	)		5625.59			3(9.06	)		2551.10
Net adjustment to policyholder dividend obligation		(6355.75	)		2735.71			(4399.94	)		2964.56
Related federal income tax (expense) benefit		(~~309~~375.48	)		~~123~~325.64			(~~246~~622.75	)		~~296~~621.15
Net unrealized gains (losses)		~~574~~697.59			(~~227~~606.63	)		~~458~~1,156.21			(~~547~~1,154.92	)
Reclassification adjustment for net realized (gains) losses on securities available-for-sale realized during the period:
Reclassification adjustment for net realized losses on securities available-for-sale realized during the period:
Net unrealized (gains) losses		(29.8	)		91.4			267.6			178.5
Net unrealized losses		115.1			403.9			382.7			582.4
Related federal income tax expense (benefit)		10.4			(32.0	)		(93.7	)		(62.5	)
Related federal income tax benefit		(40.3	)		(141.3	)		(134.0	)		(203.8	)
Net reclassification adjustment		~~(19~~74.48	)		59262.46			~~173~~248.97			~~116~~378.06
Other comprehensive gain (loss) on securities available-for-sale		~~555~~772.17			(~~168~~343.27	)		~~632.~~1,404.8			(~~431~~775.96	)
Accumulated net holding (losses) gains on cash flow hedges:
Unrealized holding (losses) gains		(2.5.2	)		2537.10			(410.80	)		~~(17~~19.91	)
Related federal income tax benefit (expense)		01.9			(813.80	)		13.76			(6.37	)
Other comprehensive (loss) income on cash flow hedges		(13.63	)		1624.30			(36.14	)		~~(11~~12.64	)
Other unrealized (losses) gains:
Net unrealized (losses) gains		(016.16	)		70.97			(017.95	)		1213.85
Related federal income tax benefit (expense)		—5.9			(20.82	)		06.32			(4.57	)
Other net unrealized (losses) gains		(010.17	)		50.15			(011.63	)		8.38
Unrecognized amounts on pension plans:
Net unrecognized amounts		—			—			—			(13.1	)
Related federal income tax benefit		—			—			—			4.6
Other comprehensive loss on unrecognized pension amounts		—			—			—			(8.5	)
Total other comprehensive gain (loss)	$	~~553~~758.47		$	(~~146~~319.82	)	$	~~628~~1,387.41		$	(~~443~~762.79	)

5154

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The adjustments to DAC and VOBA represent the changes in amortization of DAC and VOBA that would have been required as a charge or credit to operations had such unrealized amounts been realized and allocated to the product lines. The adjustment to future policy benefits and claims represents the increase in policy reserves from using a discount rate that would have been required had such unrealized amounts been realized and the proceeds reinvested at then current market interest rates, which were lower than the then current effective portfolio rate.

The adoption of ~~FSP~~guidance ~~FAS~~impacting ~~115~~FASB ASC 320-210, ~~and~~Investments ~~FAS~~– ~~124-2~~Debt and Equity Securities resulted in a cumulative-effect adjustment of $249.7 million, net of taxes, to reclassify the non-credit component of previously recognized other-than-temporary impairment losses from the beginning balance of retained earnings to AOCI.

Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008.

Dividend Restrictions

As an insurance holding company, NFS’ ability to meet debt service obligations and pay operating expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, Nationwide Life Insurance Company (NLIC). The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt service obligations and pay operating expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of Ohio insurance laws require Ohio-domiciled life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding 12 months, exceeds the greater of (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLIC’s statutory capital and surplus as of December 31, 2008 was $2.26 billion and statutory net loss for the year ended December 31, 2008 was $898.3 million. As of ~~July~~September 3130, 2009, NLIC was able to pay dividends to NFS totaling $219.3 million upon providing prior notice to the Ohio Department of Insurance (ODI). The benefits from the use of permitted practices approved by the ODI may not be considered when determining capital and surplus available for dividends. See Note 15 to the audited consolidated financial statements included in the Company’s 2008 Annual Report on Form 10-K for further discussion.

The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Company’s unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurer’s policyholder surplus must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of New York that limit the amount of statutory profits on NLIC’s participating policies (measured before dividends to policyholders) available for the benefit of the Company and its shareholders.

The ability of Nationwide Life Insurance Company of America (NLICA) to pay dividends to NFS is subject to regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws, unless the Pennsylvania Insurance Department either approves or does not disapprove payment within 30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed the greater of (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLICA’s statutory capital and surplus as of December 31, 2008 was $488.4 million and statutory net income for the year ended December 31, 2008 was $27.8 million. As of ~~July~~September 3130, 2009, NLICA could not pay dividends to NFS without obtaining prior approval.

NFS currently does not expect such ~~regulator~~regulatory requirements to impair the ability of its insurance company subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.

5255

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(1213) ~~Contingencies~~Related Party Transactions

During the nine months ended September 30, 2009, NLIC sold, at fair value, commercial mortgage loans with a carrying value of $273.2 million to NMIC. The sale resulted in a net realized loss of $33.5 million to the Company.

During the nine months ended September 30, 2009, NLIC sold private equity investments to NMIC for $61.0 million, including the one private equity investment that is considered a VIE (See Note 15). The private equity investments were carried and sold at fair value. No gain or loss was recognized on the sale.

(14)

Contingencies

Legal Matters

The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is often not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some matters, including certain of those referred to below, are in very preliminary stages, and the Company does not have sufficient information to make an assessment of the plaintiffs’ claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, which are difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by management, that the outcomes of such pending investigations and legal proceedings are likely to have a material adverse effect on the Company’s consolidated financial position. However, given the large and/or indeterminate amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Company’s consolidated financial position or results of operations in a particular period.

In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits relating to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements against life insurers other than the Company.

The financial services industry, including mutual fund, variable annuity, retirement plan, life insurance and distribution companies, has also been the subject of increasing scrutiny on a broad range of issues by regulators, legislators and the media over the past few years. Numerous regulatory agencies, including the SEC, the Financial Industry Regulatory Authority and the New York State Attorney General, have commenced industry-wide investigations on such issues as late trading and market timing in connection with mutual funds and variable insurance contracts, and have commenced enforcement actions against some mutual fund and life insurance companies on those issues. The Company has responded to information requests and/or subpoenas from the SEC in 2003 and the New York State Attorney General in 2005 in connection with investigations regarding market timing in certain mutual funds offered in insurance products sponsored by the Company. The Company is not aware of any further action on these matters.

In addition, state and federal regulators and other governmental bodies have commenced investigations, proceedings or inquiries relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are compensation and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, fee arrangements in retirement plans, the use of side agreements and finite reinsurance agreements, funding agreements issued to back MTN programs, recordkeeping and retention compliance by broker/dealers, and supervision of former registered representatives. Related investigations, proceedings or inquiries may be commenced in the future. The Company and/or its affiliates have been contacted by, self reported or received subpoenas from state and federal regulatory agencies and other governmental bodies, state securities law regulators and state attorneys general for information relating to certain of these investigations, including those relating to compensation, revenue sharing and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, fee arrangements in retirement plans, the use of side agreements and finite reinsurance agreements, and funding agreements backing the NLIC MTN program. The Company is cooperating with regulators in connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass NMIC’s operations.

A56 promotional and marketing arrangement associated with the Company’s offering of a retirement plan product and related services in Alabama is under investigation by the Alabama Attorney General, which assumed the investigation from the Alabama Securities Commission. The Company currently expects that any damages paid to settle this matter will not have a material adverse impact on its consolidated financial position. It is not possible to predict what effect, if any, the outcome of this investigation may have on the Company’s retirement plan operations with respect to promotional and marketing arrangements in general in the future.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

A promotional and marketing arrangement associated with the Company’s offering of a retirement plan product and related services in Alabama is under investigation by the Alabama Attorney General, which assumed the investigation from the Alabama Securities Commission. The Company currently expects that any damages paid to settle this matter will not have a material adverse impact on its consolidated financial position. It is not possible to predict what effect, if any, the outcome of this investigation may have on the Company’s retirement plan operations with respect to promotional and marketing arrangements in general in the future.

These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide legislation, rules and regulations that could significantly affect the financial services industry, including mutual fund, retirement plan, life insurance and annuity companies. These proceedings also could affect the outcome of one or more of the Company’s litigation matters. There can be no assurance that any such litigation or regulatory actions will not have a material adverse effect on the Company’s consolidated financial position or results of operations in the future.

~~NFS~~On September 10, ~~NMIC~~2009, Nationwide ~~Mutual~~Retirement ~~Fire~~Solutions, ~~Insurance~~Inc. ~~Company~~ (~~NMFIC~~NRS), ~~Nationwide~~was ~~Corporation~~named ~~and~~in ~~the directors~~a oflawsuit ~~NFS~~filed ~~have~~in ~~been~~the ~~named~~Circuit asCourt ~~defendants~~for inMontgomery ~~several~~County, ~~class~~Alabama ~~actions~~entitled ~~brought~~Twanna byBrown, ~~NFS~~Individually ~~shareholders.~~and ~~These~~on ~~lawsuits~~behalf ~~arose~~of ~~following~~all ~~the~~other ~~announcement~~persons ofin ~~the~~Alabama ~~joint~~who ~~offer~~are similarly ~~by NMIC~~situated, ~~NMFIC~~v ~~and~~ Nationwide ~~Corporation~~Retirement toSolutions, ~~acquire~~Inc., ~~all~~Alabama ofState ~~the~~Employees ~~outstanding shares~~Association, ofPEBCO, ~~NFS’~~Inc., ~~Class A~~Edwin ~~common~~“Mac” ~~stock.~~McArthur, ~~The~~Steve ~~defendants~~Walkley, ~~deny~~Glenn ~~any~~Parker, ~~and~~Ulysses ~~all~~Lavender, ~~allegations~~Diana ofMcLain, ~~wrongdoing~~Randy Hebson, and ~~have~~Robert ~~defended~~Wagstaff; ~~these~~and Unknown ~~lawsuits~~Defendants ~~vigorously~~A-Z. OnThe ~~August 6~~complaint, ~~2008~~in Count One, ~~NFS~~alleges ~~and~~that ~~NMIC,~~beginning ~~NMFIC~~in ~~and~~the ~~Nationwide~~year ~~Corporation~~2000, ~~announced~~the ~~that~~defendants, ~~they~~including ~~had entered~~NRS, ~~into~~were participants in a ~~definitive~~Civil ~~agreement~~Conspiracy. ~~for~~In Count One, the ~~acquisition~~plaintiff ofseeks ~~all~~to ofrecover ~~the~~actual ~~outstanding~~damages ~~shares~~and ofsuch ~~NFS’~~punitive damages ~~Class A~~as ~~common~~the ~~stock~~jury ~~for~~may ~~$52~~find to be appropriate.25 ~~per~~In ~~share~~Counts byTwo ~~Nationwide~~and ~~Corporation~~Three, ~~subject~~although toNRS ~~the~~is ~~satisfaction~~not ofnamed, ~~specific~~it ~~closing~~is ~~conditions. Simultaneously,~~alleged that the ~~plaintiffs~~remaining defendants breached their fiduciary duty and ~~defendants~~seeks ~~entered~~declaratory ~~into~~and ainjunctive ~~memorandum~~relief ofwith ~~understanding~~respect ~~for~~to the ~~settlement~~alleged breaches of ~~these~~fiduciary ~~lawsuits~~duty. ~~The~~Plaintiff ~~memorandum~~seeks ofto ~~understanding~~recover ~~provides~~actual damages, ~~among~~forfeiture of all other ~~things,~~payments ~~for~~and/or ~~the~~salaries ~~settlement~~found ofby the ~~lawsuits~~jury ~~and~~to ~~release~~be of the ~~defendants~~ ~~and,~~fruit inof ~~exchange~~such ~~for~~other ~~the~~payments, ~~release~~punitive ~~and~~damages, ~~without~~costs ~~admitting~~and ~~any~~attorney’s ~~wrongdoing,~~fees ~~defendant~~and ~~NMIC~~a ~~shall~~finding ~~acknowledge~~ that the individual ~~pending~~defendants ~~lawsuits~~have ~~were~~breached atheir ~~factor,~~fiduciary ~~among~~duties ~~others,~~and ~~that~~by ~~led~~a itpermanent toinjunction ~~offer~~removing anthem ~~increased~~from ~~share~~their ~~price~~respective offices in the ~~transaction.~~Alabama ~~NMIC~~State ~~shall agree~~Employees toAssociation ~~pay~~(ASEA) ~~plaintiffs’~~and ~~attorneys’~~PEBCO. ~~fees~~Also ~~and~~on ~~the~~September 10, ~~costs~~2009, ofa ~~notifying~~similar ~~the~~lawsuit ~~class~~was filed ~~members~~by of the ~~settlement.~~same ~~The~~plaintiff ~~memorandum~~as ofa ~~understanding~~Complaint isin ~~conditioned~~Intervention ~~upon~~in ~~court~~a ~~approval~~case ofalready ~~the~~pending ~~proposed~~in ~~settlement. The court held~~ the ~~fairness~~Circuit ~~hearing~~Court for ~~approval~~ ofMontgomery ~~the~~County, ~~proposed~~captioned ~~settlement~~Nationwide onRetirement ~~June 23~~Solutions, ~~2009~~Inc. ~~The~~v. ~~lawsuits~~Alabama ~~are~~State ~~pending~~Personnel inBoard, ~~multiple~~PEBCO, ~~jurisdictions~~Inc., and ~~allege~~Alabama ~~that~~State Employees ~~the~~Association. ~~offer~~In ~~price was inadequate, that~~ the ~~process~~Complaint ~~for~~in ~~reviewing~~Intervention, ~~the~~Plaintiff ~~offer~~added ~~was~~Edwin ~~procedurally~~J. ~~unfair~~“Mac” ~~and~~McArthur, ~~that~~Steve ~~the~~Walkley, ~~defendants have~~Glenn ~~breached~~Parker, ~~their~~Ulysses ~~fiduciary~~Lavender, ~~duties~~Diana toMcLain, ~~the~~Randy ~~holders~~Hebson ofand ~~the~~Robert ~~NFS~~Wagstaff ~~Class A~~as ~~common~~Third-Party/Crossclaim ~~stock~~Defendants. ~~NFS~~The Company ~~continues~~intends to defend these ~~lawsuits~~cases vigorously.

~~On November 20~~NFS, ~~2007~~NMIC, ~~NLIC and~~ Nationwide ~~Retirement~~Mutual ~~Solutions,~~Fire ~~Inc.~~Insurance Company (~~NRS~~NMFIC), Nationwide ~~were~~Corporation ~~named~~and inthe adirectors ~~lawsuit~~of ~~filed~~NFS inhave ~~the~~been ~~Circuit~~named ~~Court~~as ofdefendants ~~Jefferson~~in ~~County,~~several ~~Alabama~~class ~~entitled~~actions ~~Ruth~~brought A.by ~~Gwin~~NFS ~~and Sandra H~~shareholders. ~~Turner,~~These ~~and~~lawsuits ~~a class~~arose offollowing ~~similarly~~the ~~situated~~announcement ~~individuals~~of vthe ~~Nationwide~~joint ~~Life~~offer ~~Insurance~~by ~~Company~~NMIC, ~~Nationwide~~NMFIC ~~Retirement~~and ~~Solutions,~~Nationwide ~~Inc.,~~Corporation ~~Alabama~~to acquire ~~State~~all ~~Employees~~of ~~Association,~~the ~~PEBCO,~~outstanding ~~Inc.~~shares ~~and~~of ~~Fictitious~~NFS’ ~~Defendants~~ Class A tocommon Zstock. OnThe ~~December 2,~~defendants ~~2008,~~deny ~~the~~any ~~plaintiffs~~and ~~filed an~~all ~~amended~~allegations ~~complaint.~~of ~~The~~wrongdoing ~~plaintiffs~~and ~~claim~~have todefended ~~represent~~these alawsuits ~~class~~vigorously. ofOn ~~all~~August 6, ~~participants~~2008, inNFS ~~the~~and ~~Alabama~~NMIC, ~~State~~NMFIC ~~Employees~~and ~~Association~~Nationwide Corporation ~~(ASEA)~~announced ~~Plan,~~that ~~excluding~~they ~~members~~had ofentered ~~the~~into ~~Deferred~~a ~~Compensation~~definitive ~~Committee,~~agreement ~~members~~for of the ~~Board~~acquisition of ~~Control,~~all ~~ASEA’s directors,~~of ~~officers~~the ~~and~~outstanding ~~board~~shares ~~members,~~of ~~and PEBCO~~NFS’s ~~directors,~~Class A ~~officers~~common ~~and~~stock ~~board~~for ~~members~~$52.25 ~~The~~per ~~class~~share ~~period~~by isNationwide ~~from November 20~~Corporation, ~~2001,~~subject to the ~~date~~satisfaction of specific ~~trial~~closing conditions. ~~In the amended class action complaint~~Simultaneously, the plaintiffs ~~allege breach of fiduciary duty, wantonness~~ and ~~breach~~defendants ofentered ~~contract.~~into ~~The amended class action complaint seeks~~ a ~~declaratory~~memorandum ~~judgment,~~of anunderstanding ~~injunction,~~for anthe ~~appointment~~settlement of anthese ~~independent~~lawsuits. ~~fiduciary~~The tomemorandum ~~protect Plan participants, disgorgement~~ of ~~amounts~~understanding ~~paid~~provides, ~~reformation~~among ofother ~~Plan documents~~things, ~~compensatory~~for ~~damages~~the ~~and~~settlement ~~punitive~~of ~~damages,~~the lawsuits ~~plus interest, attorneys’ fees~~ and ~~costs~~release ~~and~~of ~~such~~the ~~other~~defendants ~~equitable~~ and, ~~legal~~in ~~relief~~exchange tofor ~~which~~the ~~plaintiffs~~release and ~~class~~without ~~members~~admitting ~~may~~any bewrongdoing, ~~entitled.~~defendant ~~Also,~~NMIC onshall ~~December 2,~~acknowledge ~~2008,~~that the ~~plaintiffs~~pending ~~filed a~~lawsuits ~~motion~~were ~~for~~a ~~preliminary~~factor, ~~injunction~~among ~~seeking~~others, anthat ~~order~~led ~~requiring~~it ~~periodic payments made by NRS and/or NLIC~~ to ~~ASEA~~offer oran ~~PEBCO~~increased toshare beprice ~~held~~ in ~~a trust account for~~ the ~~benefit of Plan participants~~transaction. ~~This~~NMIC ~~motion~~shall ~~was~~agree ~~denied~~to onpay ~~April 25,~~plaintiffs’ ~~2009.~~attorneys’ ~~On December 4,~~fees ~~2008, the Alabama State Personnel Board~~ and the ~~State~~costs of ~~Alabama~~notifying ~~by, and through~~ the ~~State~~class ~~Personnel~~members ~~Board,~~of ~~filed~~the asettlement. ~~motion~~The tomemorandum ~~intervene~~of ~~and~~understanding ais ~~complaint~~conditioned inupon ~~intervention.~~court Onapproval ~~December 16,~~of ~~2008,~~ the ~~Companies~~proposed ~~filed their Answer~~settlement. OnThe court ~~February 4,~~held ~~2009,~~ the ~~court~~fairness ~~provisionally~~hearing ~~agreed~~for toapproval ~~add the State~~ of ~~Alabama, by and through~~ the ~~State~~proposed ~~Personnel~~settlement ~~Board~~on ~~as a party. On April~~June 2823, 2009,. ~~the~~The court ~~denied~~approved the ~~plaintiffs’~~class ~~motion~~settlement, ~~for~~certified ~~preliminary~~the ~~injunction. On July 1~~class, ~~2009,~~ ~~the~~awarded ~~Alabama~~attorneys’ ~~State~~fees ~~Personnel Board~~ and ~~the~~costs, ~~State of Alabama by~~ and ~~through~~dismissed the ~~Alabama~~case ~~Personnel~~on ~~Board~~August 19, ~~filed a Notice of Withdrawal of Motion to Intervene~~2009. ~~NRS and NLIC continue to defend this case vigorously.~~

5457

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

On November 20, 2007, NLIC and NRS were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama entitled Ruth A. Gwin and Sandra H. Turner, and a class of similarly situated individuals v Nationwide Life Insurance Company, Nationwide Retirement Solutions, Inc., Alabama State Employees Association, PEBCO, Inc. and Fictitious Defendants A to Z. On December 2, 2008, the plaintiffs filed an amended complaint. The plaintiffs claim to represent a class of all participants in the ASEA Plan, excluding members of the Deferred Compensation Committee, members of the Board of Control, ASEA’s directors, officers and board members, and PEBCO’s directors, officers and board members. The class period is from November 20, 2001, to the date of trial. In the amended class action complaint, the plaintiffs allege breach of fiduciary duty, wantonness and breach of contract. The amended class action complaint seeks a declaratory judgment, an injunction, an appointment of an independent fiduciary to protect Plan participants, disgorgement of amounts paid, reformation of Plan documents, compensatory damages and punitive damages, plus interest, attorneys’ fees and costs and such other equitable and legal relief to which plaintiffs and class members may be entitled. Also, on December 2, 2008, the plaintiffs filed a motion for preliminary injunction seeking an order requiring periodic payments made by NRS and/or NLIC to ASEA or PEBCO to be held in a trust account for the benefit of Plan participants. This motion was denied on April 25, 2009. On December 4, 2008, the Alabama State Personnel Board and the State of Alabama by, and through the State Personnel Board, filed a motion to intervene and a complaint in intervention. On December 16, 2008, the Companies filed their Answer. On February 4, 2009, the court provisionally agreed to add the State of Alabama, by and through the State Personnel Board as a party. On April 28, 2009, the court denied the plaintiffs’ motion for preliminary injunction. On July 1, 2009, the Alabama State Personnel Board and the State of Alabama by and through the Alabama Personnel Board filed a Notice of Withdrawal of Motion to Intervene. NRS and NLIC continue to defend this case vigorously.

On July 11, 2007, NLIC was named in a lawsuit filed in the United States District Court for the Western District of Washington at Tacoma entitled Jerre Daniels-Hall and David Hamblen, Individually and on behalf of All Others Similarly Situated v. National Education Association, NEA Member Benefits Corporation, Nationwide Life Insurance Company, Security Benefit Life Insurance Company, Security Benefit Group, Inc., Security Distributors, Inc., et. al. The plaintiffs seek to represent a class of all current or former National Education Association (NEA) members who participated in the NEA Valuebuilder 403(b) program at any time between January 1, 1991 and the present (and their heirs and/or beneficiaries). The plaintiffs allege that the defendants violated the Employee Retirement Income Security Act of 1974, as amended (ERISA) by failing to prudently and loyally manage plan assets, by failing to provide complete and accurate information, by engaging in prohibited transactions, and by breaching their fiduciary duties when they failed to prevent other fiduciaries from breaching their fiduciary duties. The complaint seeks to have the defendants restore all losses to the plan, restoration of plan assets and profits to participants, disgorgement of endorsement fees, disgorgement of service fee payments, disgorgement of excessive fees charged to plan participants, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. On May 23, 2008, the Court granted the defendants’ motion to dismiss. On June 19, 2008, the plaintiffs filed a notice of appeal. On July 10, 2009, the Court of Appeals heard oral argument. NLIC continues to defend this lawsuit vigorously.

On November 15, 2006, NFS, NLIC and NRS were named in a lawsuit filed in the United States District Court for the Southern District of Ohio entitled Kevin Beary, Sheriff of Orange County, Florida, In His Official Capacity, Individually and On Behalf of All Others Similarly Situated v. Nationwide Life Insurance Co., Nationwide Retirement Solutions, Inc. and Nationwide Financial Services, Inc. The plaintiff seeks to represent a class of all sponsors of 457(b) deferred compensation plans in the United States that had variable annuity contracts with the defendants at any time during the class period, or in the alternative, all sponsors of 457(b) deferred compensation plans in Florida that had variable annuity contracts with the defendants during the class period. The class period is from January 1, 1996 until the class notice is provided. The plaintiff alleges that the defendants breached their fiduciary duties by arranging for and retaining service payments from certain mutual funds. The complaint seeks an accounting, a declaratory judgment, a permanent injunction and disgorgement or restitution of the service fee payments allegedly received by the defendants, including interest. On January 25, 2007, NFS, NLIC and NRS filed a motion to dismiss. On September 17, 2007, the Court granted the motion to dismiss. On October 1, 2007, the plaintiff filed a motion to vacate judgment and for leave to file an amended complaint. On September 15, 2008, the Court denied the plaintiffs’ motion to vacate judgment and for leave to file an amended complaint. On October 15, 2008, the plaintiffs filed a notice of appeal~~, and on March 27, 2009 the plaintiffs filed their brief~~. On ~~May~~October 1513, 2009, the ~~Companies~~6th ~~filed~~Circuit ~~their~~Court ~~brief.~~of OnAppeals ~~June 19,~~heard ~~2009,~~oral ~~the plaintiffs filed their reply brief~~argument. NFS, NLIC and NRS continue to defend this lawsuit vigorously.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

September 30, 2009 and 2008

On February 11, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin County, Ohio entitled Michael Carr v. Nationwide Life Insurance Company. The complaint seeks recovery for breach of contract, fraud by omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified compensatory damages, disgorgement of all amounts in excess of the guaranteed maximum premium and attorneys’ fees. On February 2, 2006, the court granted the plaintiff’s motion for class certification on the breach of contract and unjust enrichment claims. The court certified a class consisting of all residents of the United States and the Virgin Islands who, during the class period, paid premiums on a modal basis to NLIC for term life insurance policies issued by NLIC during the class period that provide for guaranteed maximum premiums, excluding certain specified products. Excluded from the class are NLIC; any parent, subsidiary or affiliate of NLIC; all employees, officers and directors of NLIC; and any justice, judge or magistrate judge of the State of Ohio who may hear the case. The class period is from February 10, 1990 through February 2, 2006, the date the class was certified. On January 26, 2007, the plaintiff filed a motion for summary judgment. On April 30, 2007, NLIC filed a motion for summary judgment. On February 4, 2008, the Court granted the class’s motion for summary judgment on the breach of contract claims arising from the term policies in 43 of 51 jurisdictions. The Court granted NLIC’s motion for summary judgment on the breach of contract claims on all decreasing term policies. On November 7, 2008, the parties reached settlement on this case. On June 5, 2009, the court approved the settlement.

55On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. On December 27, 2004, the case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding entitled In Re Mutual Funds Investment Litigation. In response, on May 13, 2005, the plaintiff filed the first amended complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The first amended complaint purports to disclaim, with respect to market timing or stale price trading in NLIC’s annuities sub-accounts, any allegation based on NLIC’s untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any class member’s purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who, prior to NLIC’s untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The first amended complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or class member, including all compensatory damages and costs. On June 1, 2006, the District Court granted NLIC’s motion to dismiss the plaintiff’s complaint. On January 30, 2009, the United States Court of Appeals for the Fourth Circuit affirmed that dismissal. On April 30, 2009, plaintiffs filed an appeal with the U.S. Supreme Court. On October 5, 2009, the U. S. Supreme Court denied the plaintiffs’ Motion for Certiori.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. On December 27, 2004, the case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding entitled In Re Mutual Funds Investment Litigation. In response, on May 13, 2005, the plaintiff filed the first amended complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The first amended complaint purports to disclaim, with respect to market timing or stale price trading in NLIC’s annuities sub-accounts, any allegation based on NLIC’s untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any class member’s purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who, prior to NLIC’s untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The first amended complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or class member, including all compensatory damages and costs. On June 1, 2006, the District Court granted NLIC’s motion to dismiss the plaintiff’s complaint. On January 30, 2009, the United States Court of Appeals for the Fourth Circuit affirmed that dismissal. On April 30, 2009, plaintiffs filed an appeal with the U.S. Supreme Court. NLIC continues to defend this lawsuit vigorously.

On August 15, 2001, NFS and NLIC were named in a lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. Currently, the plaintiffs’ fifth amended complaint, filed March 21, 2006, purports to represent a class of qualified retirement plans under ERISA that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments allegedly received by NFS and NLIC, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. To date, the District Court has rejected the plaintiffs’ request for certification of the alleged class. On September 25, 2007, NFS’ and NLIC’s motion to dismiss the plaintiffs’ fifth amended complaint was denied. On October 12, 2007, NFS and NLIC filed their answer to the plaintiffs’ fifth amended complaint and amended counterclaims. On November 1, 2007, the plaintiffs filed a motion to dismiss NFS’ and NLIC’s amended counterclaims. On November 15, 2007, the plaintiffs filed a motion for class certification. On February 8, 2008, the Court denied the plaintiffs’ motion to dismiss the amended counterclaim, with the exception that it was tentatively granting the plaintiffs’ motion to dismiss with respect to NFS’ and NLIC’s claim that it could recover any “disgorgement remedy” from plan sponsors. On April 25, 2008, NFS and NLIC filed their opposition to the plaintiffs’ motion for class certification. On September 29, 2008, the plaintiffs filed their reply to NFS’ and NLIC’s opposition to class certification. On February 27, 2009, the Court heard oral argument on the plaintiffs’ motion for class certification. NFS and NLIC continue to defend this lawsuit vigorously.

Tax Matters

Management has established tax reserves in accordance with current accounting guidance, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/ or nondeductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from Internal Revenue Service (IRS) examinations and other tax-related matters for all open tax years.

56The separate account dividends received deduction (DRD) is a significant component of the Company’s federal income tax provision. On August 16, 2007, the IRS issued Revenue Ruling 2007-54. This ruling took a position with respect to the DRD that could have significantly reduced the Company’s DRD. The Company believes that the position taken by the IRS in the ruling was contrary to existing law and the relevant legislative history.

In Revenue Ruling 2007-61, released September 25, 2007, the IRS and the U.S. Department of the Treasury suspended Revenue Ruling 2007-54 and informed taxpayers of their intention to address certain issues in connection with the DRD in future tax regulations. Final tax regulations could impact the Company’s DRD in periods subsequent to their effective date.

The IRS recently completed an audit of the Company’s tax years 2003 through 2005. As a result of this audit, the Company received a Revenue Agent’s Report (RAR) and 30-Day Letter (requiring payment of additional tax due or the preparation of protest to start the appeals process) from the IRS during July 2009. The RAR includes an adjustment to reduce the Company’s DRD for the above tax years resulting in additional tax due of $151.0 million. The Company plans to appeal this issue and believes that it will ultimately prevail based on technical merits.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

~~The separate account dividends received deduction~~ (~~DRD~~15) isVariable aInterest significant component of the Company’s federal income tax provision. On August 16, 2007, the IRS issued Revenue Ruling 2007-54. This ruling took a position with respect to the DRD that could have significantly reduced the Company’s DRD. The Company believes that the position taken by the IRS in the ruling was contrary to existing law and the relevant legislative history. Entities

In ~~Revenue~~ ~~Ruling~~the ~~2007-61,~~normal ~~released~~course ~~September 25,~~of ~~2007~~business, the ~~IRS~~Company ~~and~~has ~~the~~relationships ~~U.S.~~with ~~Department~~variable ofinterest ~~the~~entities ~~Treasury~~(VIEs). ~~suspended~~The ~~Revenue~~Company’s ~~Ruling~~VIEs ~~2007-54~~are ~~and~~conduits ~~informed~~that ~~taxpayers~~assist ofthe ~~their~~Company ~~intention to address certain issues~~ in ~~connection~~structured ~~with~~products transactions involving the ~~DRD~~sale inof ~~future~~low-income-housing tax ~~regulations.~~ ~~Final~~credit ~~tax~~funds ~~regulations~~(LIHTC ~~could~~Funds) ~~impact~~to ~~the~~third ~~Company’s~~party ~~DRD~~investors, inother ~~periods~~structured ~~subsequent~~product toissuances, ~~their~~and ~~effective~~private ~~date~~equity investments.

The IRS recently completed an audit of the Company’s tax years 2003 through 2005. As a result of this audit, the Company received a Revenue Agent’s Report (RAR) and 30-Day Letter (requiring payment of additional tax due or the preparation of protest to start the appeals process) from the IRS during July 2009. The RAR includes an adjustment to reduce the Company’s DRD for the above tax years resulting in additional tax due of $151 million. The Company plans to appeal this issue and believes that it will ultimately prevail based on technical merits.

(13) Variable Interest Entities

In the normal course of business, the Company has relationships with VIEs. The Company’s VIEs are conduits that assist the Company in structured products transactions involving the sale of LIHTC Funds to third party investors, other structured product issuances, and private equity investments.

The Company considers many factors when determining whether it is (or is not) the primary beneficiary of a VIE. There is a review of the entity’s contract and other deal related information, such as 1) the entity’s equity investment at risk, decision-making abilities, obligations to absorb economic risks and right to receive economic rewards of the entity, 2) whether the contractual or ownership interest in the entity changes with the change in fair value of the entity, and 3) the extent to which, through the variable interest, the Company shares in the entity’s expected losses and residual returns.

The Company was not required to provide financial or other support outside previous contractual requirements to any VIE.

LIHTC Funds

The Company provides guarantees to limited partners related to the amount of tax credits that will be generated by the funds. The results of operations and financial position of each VIE of which the Company is the primary beneficiary are consolidated along with corresponding noncontrolling interest in the accompanying ~~condensed~~ consolidated financial statements.

The Company had relationships with 19 LIHTC Funds that are considered VIEs as of ~~June~~September 30, 2009 and December 31, 2008, where the Company was the primary beneficiary. Net assets of these consolidated VIEs were $~~390~~376.86 million and $416.0 million as of ~~June~~September 30, 2009 and December 31, 2008, respectively. The following table summarizes the components of net assets as of the dates indicated:

(in millions)	~~June~~September 30,2009			December 31,2008
Other long-term investments	$	~~348~~336.70		$	371.1
Short-term investments		1816.36			20.9
Other assets		3938.12			41.6
Other liabilities		(1514.32	)		(17.6	)

The Company’s total loss exposure from consolidated VIEs was immaterial as of ~~June~~September 30, 2009 and December 31, 2008 (except for the impact of guarantees disclosed in Note 20 to the audited consolidated financial statements included in the Company’s 2008 Annual Report on Form 10-K). Creditors (or beneficial interest holders) of the consolidated VIEs have no recourse to the general credit of the Company.

57These LIHTC Funds are financed through the sale of these funds into the secondary market. The proceeds from these sales are used to participate in low-income housing projects that provide tax benefits to the investors.

In addition to the consolidated VIEs described above, the Company holds variable interests in other LIHTC Funds that qualify as VIEs where the Company is not the primary beneficiary. The carrying amount of these unconsolidated VIEs was $114.4 million and $156.3 million as of September 30, 2009 and December 31, 2008, respectively. The total exposure to loss on these unconsolidated VIEs was $127.5 million and $179.6 million as of September 30, 2009 and December 31, 2008, respectively. The total exposure to loss is determined by adding any unfunded commitments to the carrying amount of the VIEs.

Structured Products

The Company had a relationship with one structured product investment that is considered a VIE as of September 30, 2009 and December 31, 2008, where the Company was the primary beneficiary. Net assets of this consolidated VIE were $6.7 million and $8.9 million as of September 30, 2009 and December 31, 2008, respectively. Creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the Company. There are no arrangements that would require the Company to provide financial support to the VIE.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

~~These~~The ~~LIHTC~~Company ~~Funds~~was invested in 7 and 12 structured product investments that are ~~financed~~considered ~~through~~VIEs as of September 30, 2009 and December 31, 2008, respectively, where the ~~sale~~Company ofis ~~these~~not ~~funds~~the ~~into~~primary beneficiary. These structured products are in the ~~secondary~~form of synthetic collateralized debt obligations and collateralized ~~market~~lease obligations. The ~~proceeds~~carrying ~~from~~amount on these ~~sales~~unconsolidated ~~are~~VIEs ~~used~~was to$30.0 ~~participate~~million inand ~~low-income~~$17.8 ~~housing~~million ~~projects~~as ~~that~~of ~~provide~~September 30, ~~tax~~2009 ~~benefits~~and December 31, 2008, respectively. The total exposure to loss on these unconsolidated VIEs is determined to be the ~~investors~~carrying amount of the VIEs.

In addition to the consolidated VIEs described above, the Company holds variable interests in other LIHTC Funds that qualify as VIEs where the Company is not the primary beneficiary. The carrying amount of these unconsolidated VIEs was $119.3 million and $156.3 million as of June 30, 2009 and December 31, 2008, respectively. The total exposure to loss on these unconsolidated VIEs was $134.5 million and $179.6 million as of June 30, 2009 and December 31, 2008, respectively. The total exposure to loss is determined by adding any unfunded commitments to the carrying amount of the VIEs.

Structured Products

The Company had a relationship with one structured product investment that is considered a VIE as of June 30, 2009 and December 31, 2008, where the Company was the primary beneficiary. Net assets of this consolidated VIE were $5.6 million and $8.9 million as of June 30, 2009 and December 31, 2008, respectively. Creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the Company. There are no arrangements that would require the Company to provide financial support to the VIE.

The Company was invested in 8 and 12 structured product investments that are considered VIEs as of June 30, 2009 and December 31, 2008, respectively, where the Company is not the primary beneficiary. These structured products are in the form of synthetic collateralized debt obligations and collateralized lease obligations. The carrying amount on these unconsolidated VIEs was $19.1 million and $17.8 million as of June 30, 2009 and December 31, 2008, respectively. The total exposure to loss on these unconsolidated VIEs is determined to be the carrying amount of the VIEs.

Private Equity Investments

The Company had a relationship with one private equity investment that is considered a VIE as of ~~June 30, 2009 and~~ December 31, 2008, where the Company was the primary beneficiary. ~~Net~~On ~~assets of this consolidated VIE were $14.1 million and $18.6 million as of June~~September 30, 2009 ~~and December 31~~, ~~2008,~~NLIC ~~respectively.~~sold ~~Creditors~~this ~~(or~~private ~~beneficial~~equity ~~interest~~investment ~~holders)~~to ofNMIC, ~~the~~which ~~consolidated~~had ~~VIE~~net ~~have~~assets ~~no recourse to the general credit~~ of ~~the Company~~$14.1 ~~There are no arrangements that would require the Company to provide financial support to the VIE~~million.

As of ~~June~~September 30, 2009 ~~and December 31~~, ~~2008,~~ the Company does not have any private equity investments considered to be a VIE where the Company is not the primary beneficiary.

5862

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

(1416) Segment Information

Management views the Company’s business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.

The primary segment profitability measure that management uses is pre-tax operating earnings (loss), which is calculated by adjusting income from continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized investment gains and losses, except for operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, net realized gains and losses related to hedges on GMDB contracts and securitizations); (2) other-than-temporary impairment losses; (3) the adjustment to amortization of DAC and VOBA related to net realized investment gains and losses; and (4) net loss attributable to noncontrolling interest.

Individual Investments

The Individual Investments segment consists of individual The BEST of AMERICA^® and private label deferred variable annuity products, deferred fixed annuity products, income products and investment advisory services. 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, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

Retirement Plans

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector primarily includes Internal Revenue Code (IRC) Section 401 fixed and variable group annuity business generated through NLIC and trust and custodial services through Nationwide Trust Company, FSB a division of Nationwide Bank. Also included in the private sector is Registered Investment Advisors Services, Inc. d/b/a RIA Services Inc., which facilitates professional money management of participant assets by registered investment advisors. The public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business.

Individual Protection

The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and BOLI products; traditional life insurance products; and universal life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

Corporate and Other

The Corporate and Other segment includes the MTN program; the retail operations of Nationwide Bank; structured products business; revenues and expenses of the Company’s retail asset management and non-insurance subsidiaries not reported in other segments; non-operating realized gains and losses, including mark-to-market adjustments on embedded derivatives, net of economic hedges, related to products with living benefits; and other revenues and expenses not allocated to other segments.

5963

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following tables summarize the Company’s business segment operating results for the periods indicated:

	Three months ended June 30, 2009
	Three months ended September 30, 2009
(in millions)	IndividualInvestments			RetirementPlans		IndividualProtection		Corporateand Other			Total
Revenues:
Policy charges	$	~~124~~136.04		$	2818.80	$	~~166~~156.63	$	—		$	~~319~~310.47
Premiums		5245.38			—		7573.58		—			~~127~~119.86
Net investment income		~~144~~150.3			~~175~~169.85		~~125~~121.42		6972.03			~~514~~513.53
Non-operating net realized investment gains1		—			—		—		258.0			258.0
Non-operating net realized investment losses1		—			—		—		(53.9	)		(53.9	)
Other-than-temporary impairment losses		—			—		—		(38149.90	)		(38149.90	)
Other income2		(~~127~~80.46	)		7180.82		0.5		4034.90			~~(14~~34.21	)
Total revenues		~~193~~251.29			~~276~~267.47		~~368~~351.08		~~329~~(96.06	)		~~1,166~~774.68
Benefits and expenses:
Interest credited to policyholder accounts		97104.89			~~113~~103.36		5249.36		3026.13			~~293~~284.54
Benefits and claims		~~(12~~24.68	)		—		~~147~~133.71		20.89			~~137~~158.98
Policyholder dividends		—			—		2322.54		—			2322.54
Amortization of DAC		5350.35			168.96		6734.91		204.94			~~159~~97.06
Amortization of VOBA and other intangible assets		0.3			0.75		209.0		02.32			2112.30
Interest expense		—			—		—		25.87			25.87
Other operating expenses		44.56			96103.72		4447.02		5866.83			~~244~~261.03
Total benefits and expenses		~~183~~225.31			~~227~~215.69		~~355~~295.4		~~138~~125.78			~~905~~862.02
Income from continuing operations before federal income tax expense		9.9			48.8		12.6		190.3		$	261.6
Income (loss) from continuing operations before federal income tax expense (benefit)		26.8			51.8		56.4		(222.4	)	$	(87.4	)
Less: non-operating net realized investment gains1		—			—		—		(258.0	)
Less: non-operating net realized investment losses1		—			—		—		53.9
Less: non-operating other-than-temporary impairment losses		—			—		—		38149.90
Less: adjustment to amortization related to net realized investment gains and losses		—			—		—		234.85
Less: net loss attributable to noncontrolling interest		—			—		—		13.87
Pre-tax operating earnings	$	9.9		$	48.8	$	12.6	$	8.8
Pre-tax operating earnings (loss)	$	26.8		$	51.8	$	56.4	$	(1.3	)

1 Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to hedges on GMDB contracts and securitizations).

Includes operating items discussed above.

6064

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

	Three months ended June 30, 2008
	Three months ended September 30, 2008
(in millions)	IndividualInvestments			~~RetirementPlans~~	RetirementPlans		~~IndividualProtection~~	IndividualProtection		Corporateand Other			Total
Revenues:
Policy charges	$	~~163~~155.26		$	~~33.4~~$	29.3	$	~~157.8~~$	151.9	$	—		$	~~354~~336.48
Premiums		3020.02			—	—		~~75.2~~	69.6		—			~~105~~89.28
Net investment income		~~129~~131.95			~~160.3~~	163.9		~~120.8~~	123.9		~~100~~61.5			~~511~~480.58
Non-operating net realized investment gains1		—			—			—			65.7			65.7
Non-operating net realized investment losses1		—				—			—		(137.3	)		(137.3	)
Other-than-temporary impairments losses		—			—	—		—	—		(95396.56	)		(95396.56	)
Other income2		7.2			~~87.3~~	81.8		~~0.9~~	0.9		4321.82			~~139~~111.21
Total revenues		~~330~~314.35			~~281.0~~	275.0		~~354.7~~	346.3		~~114~~(451.52	)		~~1,080~~484.56
Benefits and expenses:
Interest credited to policyholder accounts		9293.43			~~106.5~~	110.6		~~48.3~~	50.1		46.95			~~294~~300.15
Benefits and claims		5770.34			—	1.1		~~121.4~~	116.6		—(4.4	)		~~178~~183.7
Policyholder dividends		—			—	—		~~24.4~~	23.7		—			2423.47
Amortization of DAC		82226.03			~~12.0~~	9.1		~~41.2~~	33.5		34(44.31	)		~~169~~224.58
Amortization of VOBA and other intangible assets		30.45			~~0.4~~	0.5		~~(0.1~~	)8.2		0.4			49.16
Interest expense		—			—	—		—	—		2526.91			2526.91
Other operating expenses		4744.57			~~106.5~~	98.4		~~41.1~~	42.0		7869.42			~~273~~254.53
Total benefits and expenses		~~282~~435.62			~~225.4~~	219.7		~~276.3~~	274.1		~~185~~93.97			~~970~~1,022.27
Income (loss) from continuing operations before federal income tax expense		47.7			55.6			78.4			(71.4	)	$	110.3
(Loss) income from continuing operations before federal income tax (benefit) expense		(120.7	)			55.3			72.2		(544.9	)	$	(538.1	)
Less: non-operating net realized investment gains1		—			—			—			(65.7	)
Less: non-operating net realized investment losses1		—				—			—		137.3
Less: non-operating other-than-temporary impairment losses		—			—	—		—	—		95396.56
Less: adjustment to amortization related to net realized investment gains and losses		—			—	—		—	—		34(48.36	)
Less: net loss attributable to noncontrolling interest		—			—	—		—	—		129.2
Pre-tax operating earnings	$	47.7		$	55.6		$	78.4		$	4.9
Pre-tax operating (loss) earnings	$	(120.7	)		$	55.3		$	72.2	$	(50.4	)

Includes operating items discussed above.

6165

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

The following tables summarize the Company’s business segment operating results for the periods indicated:

	Six months ended June 30, 2009
	Nine months ended September 30, 2009
(in millions)	IndividualInvestments			RetirementPlans		IndividualProtection		Corporateand Other			Total
Revenues:
Policy charges	$	~~238~~374.26		$	4967.1	$	~~318~~474.47	$	—		$	~~605~~916.74
Premiums		93139.53			—		~~152~~226.42		—			~~245~~365.95
Net investment income		~~267~~417.14			~~337~~506.27		~~245~~367.80		~~149~~221.14			~~999~~1,512.25
Non-operating net realized investment gains1		—			—		—		~~546~~492.67			~~546~~492.67
Other-than-temporary impairment losses		—			—		—		(~~365~~514.9	)		(~~365~~514.9	)
Other income2		(40121.84	)		~~137~~217.57		1.05		6397.1			~~160~~194.89
Total revenues		~~558~~809.09			~~523~~791.85		~~717~~1,069.64		~~392~~296.93			2,~~192~~967.31
Benefits and expenses:
Interest credited to policyholder accounts		~~191~~296.98			~~218~~322.51		~~101~~151.95		6491.81			~~577~~861.15
Benefits and claims		~~149~~174.86			—		~~284~~417.89		26.09			~~460~~619.64
Policyholder dividends		—			—		4467.93		—			4467.93
Amortization of DAC		97147.49			2433.62		93127.78		~~246~~250.37			~~462~~559.06
Amortization of VOBA and other intangible assets		0.47			01.94		2635.3		02.79			2840.3
Interest expense		—			—		—		5177.85			5177.85
Other operating expenses		91136.84			~~197~~300.79		92139.46		~~116~~182.69			~~498~~759.58
Total benefits and expenses		~~531~~756.34			~~441~~657.76		~~644~~939.04		~~506~~632.20			2,~~123~~985.24
Income (loss) from continuing operations before federal income tax expense (benefit)		2653.75			82133.19		73130.60		(~~113~~335.37	)	$	69(18.13	)
Less: non-operating net realized investment gains1		—			—		—		(~~546~~492.67	)
Less: non-operating other-than-temporary impairment losses		—			—		—		~~365~~514.9
Less: adjustment to amortization related to net realized investment gains and losses		—			—		—		~~273~~278.61
Less: net loss attributable to noncontrolling interest		—			—		—		2438.85
Pre-tax operating earnings	$	2653.75		$	82133.19	$	73130.60	$	43.41

Includes operating items discussed above.

6266

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

~~June~~September 30, 2009 and 2008

	Six months ended June 30, 2008
	Nine months ended September 30, 2008
(in millions)	IndividualInvestments			~~RetirementPlans~~	RetirementPlans		~~IndividualProtection~~	IndividualProtection		~~Corporateand Other~~	Corporateand Other			~~Total~~	Total
Revenues:
Policy charges	$	~~323~~479.95		$	~~66.4~~$	95.7	$	~~309.2~~$	461.1	$	—$	—		$	~~699.5~~$	1,036.3
Premiums		6484.13			—	—		~~150.2~~	219.8		—	—			~~214.3~~	304.1
Net investment income		~~266~~398.94			~~322.0~~	485.9		~~238.3~~	362.2		~~203.8~~	265.3			~~1,031.0~~	1,511.8
Non-operating net realized investment losses1		—			—	—		—	—		~~(28.0~~	)(165.3	)		~~(28.0~~	)(165.3	)
Other-than-temporary impairments losses		—			—	—		—	—		~~(183.9~~	)(580.5	)		~~(183.9~~	)(580.5	)
Other income2		1421.24			~~171.7~~	253.5		~~1.6~~	2.5		~~76.4~~	97.6			~~263.9~~	375.0
Total revenues		~~669~~983.16			~~560.1~~	835.1		~~699.3~~	1,045.6		~~68.3~~	(382.9	)		~~1,996.8~~	2,481.4
Benefits and expenses:
Interest credited to policyholder accounts		~~188~~281.47			~~214.1~~	324.7		~~95.9~~	146.0		~~108.3~~	154.8			~~606.7~~	907.2
Benefits and claims		~~111~~182.82			—	1.1		~~250.4~~	367.0		—	(4.4	)		~~362.2~~	545.9
Policyholder dividends		—			—	—		~~48.3~~	72.0		—	—			~~48.3~~	72.0
Amortization of DAC		~~159~~386.70			~~22.1~~	31.2		~~67.3~~	100.8		~~(13.2~~	)(57.3	)		~~235.9~~	460.7
Amortization of VOBA and other intangible assets		4.27			~~1.0~~	1.5		~~7.2~~	15.4		~~0.9~~	1.3			~~13.3~~	22.9
Interest expense		—			—	—		—	—		~~53.6~~	79.7			~~53.6~~	79.7
Other operating expenses		94139.85			~~213.4~~	311.8		~~86.9~~	128.9		~~149.1~~	218.3			~~544.2~~	798.5
Total benefits and expenses		~~558~~994.91			~~450.6~~	670.3		~~556.0~~	830.1		~~298.7~~	392.4			~~1,864.2~~	2,886.9
Income (loss) from continuing operations before federal income tax expense		110.2			109.5			143.3			(230.4	)		$	132.6
(Loss) income from continuing operations before federal income tax (benefit) expense		(10.5	)			164.8			215.5			(775.3	)		$	(405.5	)
Less: non-operating net realized investment losses1		—			—	—		—	—		~~28.0~~	165.3
Less: non-operating other-than-temporary impairment losses		—			—	—		—	—		~~183.9~~	580.5
Less: adjustment to amortization related to net realized investment gains and losses		—			—			—			(13.2	)
Less: adjustment to amortization related to net realized gains and losses		—				—			—			(61.8	)
Less: net loss attributable to noncontrolling interest		—			—	—		—	—		~~22.7~~	31.9
Pre-tax operating earnings (loss)	$	110.2		$	109.5		$	143.3		$	(9.0	)
Pre-tax operating (loss) earnings	$	(10.5	)		$	164.8		$	215.5		$	(59.4	)

Includes operating items discussed above.

6367

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

FORWARD-LOOKING INFORMATION		6569
OVERVIEW		6670
CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS		7175
RESULTS OF OPERATIONS		7478
SALES		78
NEW AND RENEWAL PRODUCTION PREMIUMS AND DEPOSITS		82
BUSINESS SEGMENTS		8385
LIQUIDITY AND CAPITAL RESOURCES		99101
CONTRACTUAL OBLIGATIONS AND COMMITMENTS		~~101~~103
OFF-BALANCE SHEET TRANSACTIONS		~~101~~103
INVESTMENTS		~~102~~104

6468

Forward-Looking Information

The information included herein contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, the Company). Whenever used in this report, words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “project,” “target” and other words of similar meaning are intended to identify such forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:

(i)

NFS’ primary reliance, as a holding company, on dividends from its subsidiaries to meet debt service obligations and the applicable regulatory restrictions on the ability of NFS’ subsidiaries to pay such dividends;

(ii) the potential impact on the Company’s reported net (loss) income and related disclosures that could result from the adoption of certain accounting and/or financial reporting standards issued by the Financial Accounting Standards Board, the United States Securities and Exchange Commission (SEC) or other standard-setting bodies;

(iii)

tax law changes impacting the tax treatment of life insurance and investment products;

(iv)

modification of the federal estate tax;

(v)

heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors;

(vi)

adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;

(vii)

failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;

(viii)

inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance of the new and/or revised products in the market;

(ix)

changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees, an acceleration of the amortization of deferred policy acquisition costs (DAC) and/or value of business acquired (VOBA), a reduction in separate account assets or a reduction in the demand for the Company’s products; increased liabilities related to living benefits and death benefit guarantees;

(x)

reduction in the value of the Company’s investment portfolio as a result of changes in interest rates, yields and liquidity in the market as well as geopolitical conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Company’s investment portfolio specifically; corresponding impact on the ultimate realizability of deferred tax assets;

(xi)

general economic and business conditions which are less favorable than expected;

(xii)

competitive, regulatory or tax changes that affect the cost of, or demand for, the Company’s products;

(xiii)

unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

(xiv)

settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheets;

(xv)

deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness), morbidity and interest rates used in calculating reserve amounts and in pricing the Company’s products;

(xvi) adverse litigation results and/or resolution of litigation and/or arbitration or investigation results that could result in monetary damages or impact the manner in which the Company conducts its operations; ~~and~~

(xvii) ~~adverse~~the ~~consequences, including financial and reputation costs, regulatory problems and~~ potential ~~loss~~impact of ~~customers~~industry ~~resulting~~developments ~~from~~relating ~~failure~~ to ~~meet~~contract ~~privacy~~and ~~regulations~~fee ~~and/or~~transparency ~~protect~~on the ~~Company’s~~Retirement ~~customers’~~Plans ~~confidential~~segment; ~~information.~~and

65(xviii) adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from failure to meet privacy regulations and/or protect the Company’s customers’ confidential information.

Overview

The following analysis of condensed consolidated results of operations and financial condition of the Company should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere herein.

NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies. This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and subsidiaries, including the affiliated distribution network.

The Company is a leading provider of long-term savings and retirement products in the United States of America. The Company develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and investment advisory services. The Company also provides a wide range of banking products and services through Nationwide Bank and mutual funds through Nationwide Funds Group (NFG).

The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance specialists. Representatives of the Company that market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; and NFG. The Company also distributes retirement savings products through the agency distribution force of its ultimate parent company, Nationwide Mutual Insurance Company (NMIC).

On January 1, 2009, all of the outstanding Class A common stock of ~~the Company~~ NFS not owned by Nationwide Corporation was acquired for $52.25 per share in cash by Nationwide Corporation through a merger of ~~the~~NFS ~~Company~~ with NWM Merger Sub., Inc., a wholly-owned subsidiary of Nationwide Corporation. On that date, all 100 shares of NWM Merger Sub’s issued and outstanding common stock became the issued and outstanding common stock of ~~the~~NFS ~~Company~~ and all such shares are held by Nationwide Corporation. The newly issued and outstanding shares of common stock of ~~the~~NFS ~~Company~~ were recorded as an addition to common stock at a par value of $0.01 per share.

Business Segments

See Part 1 – Financial Information, Item 1 – Condensed Consolidated Financial Statements, Note 1416 – Segment Information for a discussion of reportable segments, including the components of each segment.

The following table summarizes pre-tax operating earnings (loss) by segment for the periods indicated:

	Three months ended June 30,							Six months ended June 30,
	Three months ended September 30,									Nine months ended September 30,
(in millions)	2009			~~2008~~	2008		~~Change~~	~~2009~~Change		2009	~~2008~~		2008		~~Change~~	Change
Individual Investments	$	926.98		$	~~47.7~~$	(120.7	~~(79~~)%	$NM	~~26.7~~	$	$53.5	~~110.2~~	$	(10.5	~~(76~~)%	NM
Retirement Plans		4851.8			~~55.6~~	55.3	~~(12)%~~	(6)%	~~82.1~~		133.9	~~109.5~~		164.8	~~(25)%~~	(19)%
Individual Protection		1256.64			~~78.4~~	72.2	~~(84)%~~	(22)%	~~73.6~~		130.0	~~143.3~~		215.5	~~(49)%~~	(40)%
Corporate and Other		8(1.83	)		~~4.9~~	(50.4	~~80 %~~)	(97)%	~~4.4~~		3.1	~~(9.0~~	)	(59.4	NM)	NM

Revenues and Expenses

The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on all life insurance products except traditional, which are assessed on the amount of insurance in force in excess of the related policyholder account value; administrative fees, which include fees charged per contract on a variety of the Company’s products and premium loads on universal life insurance products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period for annuity and certain life insurance contracts. Net investment income includes earnings on investments supporting fixed annuities, the medium-term notes (MTN) program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment expenses. Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administrative, marketing, distribution and retail asset management services.

6670

Management 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 reported in net realized investment gains and losses. Also included in net realized investment gains and losses are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment, the mark-to-market of embedded derivatives, net of economic hedges; and periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment. All charges related to other-than-temporary impairments of available-for-sale securities and other investments are reported in other-than-temporary impairments losses.

The Company’s primary expenses include interest credited to policyholder accounts, life insurance and annuity benefits, amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed annuities, funding agreements backing the MTN program and certain life insurance products. Life insurance and annuity benefits include policyholder benefits in excess of policyholder accounts for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.

The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from management’s initial estimates, with a corresponding charge or credit to current period earnings. This process is referred to by the Company as a “true-up”, which generally is performed, and the resulting impact recognized, on a quarterly basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or credit to earnings if evidence suggests that these future assumptions and estimates should be revised. The Company refers to this process as “unlocking”, which generally is performed on an annual basis with any corresponding charge or credit reflected in the second quarter. In addition, the Company regularly monitors its actual experience and evaluates relevant internal and external information impacting its assumptions and may unlock more frequently than annually if such information and analysis warrants.

Profitability

The Company’s profitability largely depends on its ability to effectively price and manage risk on its various products, administer customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and distribution of lapses affect surrender charges and impact DAC amortization assumptions when lapse experience changes significantly.

In particular, the Company’s profitability is driven by fee income on separate account products, general and separate account asset levels, and management’s ability to manage interest spread income. While asset fees are largely at guaranteed annual rates, amounts earned vary directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to policyholder accounts. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates and the level of invested assets; the competitive environment; and other factors.

In addition, life insurance profits are significantly impacted by mortality, morbidity and persistency experience. Asset impairments and the tax position of the Company also impact profitability.

Discontinued Operations

During 2008, the Company completed the sale of its interest in TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial) for $41.3 million in cash and potential additional consideration in the form of an earnout provision. Accordingly, the results of operations of TBG Financial are reflected as discontinued operations in the condensed consolidated statements of income for 2008.

~~Fair Value~~71 ~~Measurements~~

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement The Company uses various methods including market, income and cost approaches. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

~~The~~Fair ~~Company~~Value ~~categorized~~Measurements its financial instruments based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.

The Company categorized its financial instruments based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for

identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.

The Company categorizes financial assets and liabilities recorded at fair value in the condensed consolidated balance sheets as Level 1, Level 2 or Level 3 depending on the observability of inputs used to measure fair value.

Investments

For fixed maturity and marketable equity securities for which active market quotations generally are available, the Company generally uses independent pricing services to assist in determining the fair value measurement. For certain fixed maturity securities not priced by independent services (e.g., private placement securities without quoted market prices), an internally developed pricing model or “corporate pricing matrix” is most often used. The corporate pricing matrix is developed by obtaining private spreads versus the U.S. Treasury yield for corporate securities with varying weighted average lives and bond ratings. The weighted average life and bond rating of a particular fixed maturity security to be priced using the corporate matrix are important inputs into the model and are used to determine a corresponding spread that is added to the U.S. Treasury yield to create an estimated market yield for that bond. The estimated market yield and other relevant factors are then used to estimate the fair value of the particular fixed maturity security. The Company also utilizes broker quotes to assist in pricing securities or to validate modeled prices.

Pricing services, broker quotes and internal valuations are also considered in valuing securities when the volume and level of activity for such assets have significantly decreased (e.g., when the markets for those securities are considered inactive).

As of ~~June~~September 30, 2009, 66% of the prices of fixed maturity securities were valued with the assistance of independent pricing services, 10% were valued with the assistance of the Company’s pricing matrices, 4% were valued with the assistance of broker quotes, 17% were valued with the assistance of the Company’s internal pricing processes and 3% were valued from other sources compared to 80%, 11%, 4%, 4% and 1%, respectively, as of December 31, 2008.

Available-for-sale securities valued using significant Level 3 inputs include investments in markets which the Company considers inactive; the Company’s non-~~investment~~Agency ~~grade~~ holdings in residential mortgage-backed securities, certain commercial mortgage-backed securities, collateralized debt obligations and other asset-backed securities; certain broker-quoted or internally priced securities; and securities that are at or near default based on designations assigned by the NAIC. As of ~~June~~September 30, 2009, Level 3 investments comprised 18% of total investments measured at fair value compared to 20% as of December 31, 2008.

Inactive Markets

Recent market conditions have led to illiquidity in certain markets for financial instruments, causing the Company to consider such markets inactive. Examples of the criterion used by the Company to determine that a market is inactive include, but are not limited to, few recent transactions, price quotations are not based on current information, price quotations vary substantially either over time or among market makers, indexes previously highly correlated have become uncorrelated, significant increase in implied liquidity risk premiums, wide bid-ask spreads, significant decline or absence of a market for new issuances, and little information is released publicly.

As72 of June 30, 2009 and December 31, 2008, the Company had investments in markets that it considered inactive with an amortized cost of $4.58 billion and $4.87 billion, respectively, and an estimated fair value of $3.32 billion and $3.56 billion, respectively, which represents 13% and 15% of the estimated fair value of all fixed maturity securities available-for-sale as of June 30, 2009 and December 31, 2008, respectively. Of these investments in markets that are considered inactive, 91% were priced using a weighting of internal pricing models and independent pricing services, 3% were valued with the assistance of independent pricing services, and 6% were priced using a weighting of broker quotes and internal pricing models to determine the estimated fair values as of June 30, 2009, in comparison to 0%, 94%, and 6%, respectively, as of December 31, 2008.

~~Certain~~As ~~residential~~of ~~mortgage-backed~~September 30, ~~securities~~2009 ~~backed~~and byDecember 31, ~~Prime~~2008, ~~Sub-prime~~the ~~and~~Company ~~Alt-A~~had ~~collateral,~~investments ~~which are~~in ~~included~~markets inthat ~~Level~~it 3considered ~~financial~~inactive ~~assets,~~with ~~utilize~~an ~~internal~~amortized ~~pricing~~cost ~~models~~of to$4.55 ~~assist~~billion inand ~~determining~~$4.87 ~~the~~billion, respectively, and an estimated fair ~~values~~value of $3.53 Asbillion ofand ~~December~~$3.56 31billion, ~~2008~~respectively, ~~these~~which ~~investments~~represents ~~were~~13% ~~priced~~and ~~solely~~15% ~~with~~of the ~~assistance~~estimated fair value of all ~~independent~~fixed ~~pricing~~maturity ~~services.~~securities Asavailable-for-sale aas ~~result~~ of ~~continued~~September 30, ~~declines~~2009 inand ~~the~~December 31, ~~level~~2008, ofrespectively. ~~activity~~Of in these ~~markets~~investments ~~during~~in ~~the~~markets ~~first~~that ~~and~~are ~~second~~considered ~~quarters of 2009~~inactive, ~~management~~85% ~~believes~~were ~~that~~priced ~~prices~~using ~~were~~a noweighting ~~longer~~of ~~representative~~internal ofpricing ~~the~~models ~~investments’~~and independent ~~fair~~pricing ~~value~~services, ~~which~~9% iswere ~~the~~valued ~~price~~with ~~that would be received upon~~ the ~~sale~~assistance of ~~the~~independent ~~investment~~pricing inservices, anand ~~orderly~~6% ~~transaction~~were ~~(that~~priced ~~is,~~using ~~not~~ a ~~forced~~weighting ~~liquidation~~of orbroker ~~distressed~~quotes ~~sale)~~and ~~between~~internal ~~market~~pricing ~~participants~~models atto determine the ~~measurement~~est

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