Fitch Affirms Nationwide Mutual’s Ratings; Outlook Revised to Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings on Nationwide Mutual Insurance Company (NMIC) and its related intercompany pool members (collectively, Nationwide Mutual), as well as Nationwide Life Insurance Company (NLIC), at 'A'. In addition, Fitch has affirmed the ratings on NMIC's outstanding surplus notes at 'BBB', and the rating on the senior unsecured debt of Nationwide Financial Services, Inc. (NFS) at 'BBB'. A full list of rating actions is at the end of this release. The Rating Outlook is revised to Stable from Negative.

Nationwide Mutual Insurance Group (Nationwide) maintains a solid competitive position in both personal lines and commercial insurance, ranking among the 10 largest U.S. insurers by premium. The company offers automobile and homeowners insurance in the personal lines segment and standard liability and excess and surplus lines coverage in its commercial segment. Further diversification is added through Nationwide's wholly owned life insurance operation, NFS, which offers a broad range of individual protection and asset accumulation products, as well as group products and services. Fitch considers NFS to be core to the overall Nationwide Mutual organization.

Underwriting performance within the property and casualty operations improved during the first nine months of 2010, but remains challenged with an accident year combined ratio of 103.2%, compared to a 104.8% ratio for the full year 2009. Calendar year combined ratios were 100.0% through nine months of 2010 and 103.9% for full year 2009, benefiting from favorable reserve development of 3.2 percentage points and 0.9 percentage points, respectively.

While account value-driven fees are recovering within the life insurance and annuity operations, and interest spreads have held up reasonably well, ongoing losses in the company's asset portfolio continue to pressure statutory earnings.

Concern regarding Nationwide's balance sheet has moderated as surplus increased and investment values recovered. Statutory surplus reached $12.8 billion as of Sept. 30, 2010, up from a recent low of $9.8 billion following the privatization of NFS in January 2009, but still remains below 2007's peak of $13.6 billion.

Nationwide Mutual's capitalization remains worse than most peer companies. Specifically, the quality of capital is diminished by a high percentage of surplus notes in the capital structure and unstacked operating leverage (measured as the ratio between net premiums and statutory surplus less the carrying value of NFS) is higher than average at 1.5 times (x).

The risk-adjusted capitalization of the life insurance and annuity operations is generally considered by Fitch to be strong relative to its peers. At year-end 2009, the company reported a consolidated risk-based capital (RBC) ratio of 490% of the company action level, and Fitch estimates that RBC was above 500% at Sept. 30, 2010. Fitch notes that NFS has relatively high exposure to variable annuity products and mortgage related investments as well as a small but rapidly growing bank subsidiary.

Results from Fitch's stress testing of Nationwide's investment portfolio were better than the industry average. Further, gross unrealized losses in the bond portfolio as of Sept. 30, 2010 were modest at less than 2% of statutory surplus.

Fitch has assigned ratings to four subsidiaries that are part of its intercompany reinsurance program.

Fitch has withdrawn one subsidiary rating because it is not part of the intercompany reinsurance program. This rating is no longer considered by Fitch to be relevant to the agency's coverage.

Key rating drivers for Nationwide's ratings that could lead to an upgrade include:

--Growth in surplus leading to an improved capitalization profile along with underwriting results consistent with industry averages.

--A material reduction in overall financial leverage.

--A reduction in the degree to which NFS' earnings are leveraged to the equity market, thereby adding further stability to the company's earnings stream and profitability.

Key rating drivers for Nationwide's ratings that could lead to a downgrade include:

--A prolonged decline in underwriting profitability that is inconsistent with industry averages or is driven by an effort to grow market share during soft pricing conditions.

--Substantial adverse reserve development relative to peers and industry averages. Fitch expects Nationwide to maintain the current asbestos-related reserve profile exemplified by a three-year average survival ratio of 12x, only modest adverse reserve development and near breakeven results from Nationwide Indemnity, which houses the asbestos exposure.

--Significant deterioration in capital strength as measured by Fitch's capital model, NAIC risk-based capital and traditional operating leverage.

--Increases in financial leverage of NFS' and/or the broader Nationwide Mutual enterprise.

Fitch has affirmed the following ratings:

Nationwide Mutual Insurance Co.

--8.25% surplus notes due Dec. 1, 2031 at 'BBB';

--7.875% surplus notes due April 1, 2033 at 'BBB';

--6.60% surplus notes due April 15, 2034 at 'BBB';

--5.81% surplus notes due Dec. 15, 2024 at 'BBB';

--9.375% surplus notes due Aug. 15, 2039 at 'BBB'.

Nationwide Financial Services Inc.

--Senior notes $300 million; 6.25%; due Nov. 15, 2011 at 'BBB';

--Senior notes $300 million; 5.90%; due July 1, 2012 at 'BBB';

--Senior notes $200 million; 5.625%; due Feb. 13, 2015 at 'BBB';

--Senior notes $200 million; 5.10%; due Oct. 1, 2015 at 'BBB';

--Trust preferred $100 million; 7.899%; due March 1, 2037 at 'BBB-'.

Fitch has assigned the following ratings with a Stable Outlook:

Crestbrook Insurance Co.

National Casualty Co.

Nationwide Agribusiness Insurance Co.

Nationwide Insurance Company of America

--Insurer Financial Strength (IFS) at 'A'.

Fitch has withdrawn the following rating:

Freedom Specialty Insurance Co.

--IFS at 'A'.

Fitch affirmed the following with a Stable Outlook:

Nationwide Mutual Insurance Co.

--Issuer Default Rating (IDR) at 'A-'

Nationwide Mutual Insurance Co.

Nationwide Mutual Fire Insurance Co.

Scottsdale Insurance Co.

Farmland Mutual Insurance Co.

Colonial County Mutual Insurance Company

Nationwide Assurance Company

Nationwide General Insurance Company

Nationwide Lloyds

Nationwide Property & Casualty Insurance Company

Titan Indemnity Company

Titan Insurance Company

Victoria Automobile Insurance Company

Victoria Fire & Casualty Insurance Company

Victoria Select Insurance Company

Victoria Specialty insurance Company

Scottsdale Indemnity Company

Scottsdale Surplus Lines Insurance Company

Western heritage Insurance Company

Allied Property & Casualty Insurance Company

AMCO Insurance Company

Depositors Insurance Company

Nationwide Affinity Company

--IFS at 'A';

Nationwide Financial Services Inc.

--IDR at 'BBB+';

Nationwide Life Insurance Co.

--IFS at 'A';

--Short-term IDR at 'F1'

--Short-term IFS at 'F1'

--Commercial paper at 'F1'.

Nationwide Life Global Funding I

--Program rating at 'A'.

Additional information is available at 'www.fitchratings.com'. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Aug.13, 2010);

--'Rating Hybrid Securities' (Dec. 29, 2009);

--'Non-Life Insurance Rating Methodology' (March 24, 2010);

--'Life Insurance Rating Methodology' (March 24, 2010);

--'Fitch's Approach to Rating Insurance Groups' (March 24, 2010);

--'Insurance Industry: Global Notching Methodology and Recovery Analysis' (Dec. 29, 2009);

--'Short-Term Ratings Criteria for Corporate Finance' (Nov. 2, 2010).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

Non-Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369

Rating Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285

Insurance Industry: Global Notching Methodology and Recovery Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493114

Fitch???s Approach to Rating Insurance Groups

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506368

Short-Term Ratings for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

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Fitch Ratings
Primary Analysts:Douglas M. Pawlowski, +1-312-368-2054
CFA (Property and Casualty)
Senior Director
Fitch, Inc.
70 West Madison St.
Chicago, IL 60602
orBradley S. Ellis, +1-312-368-2089
CFA (Nationwide Financial Services)
Director
or
Secondary AnalystMartha M. Butler, CFA, +1-312-368-3191
Senior Director
or
Committee ChairpersonJeff Mohrenweiser, +1-312-368-3182
Senior Director
or
Media Relations:Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com

Source: Fitch Ratings