S&P Revises Outlook on Nationwide to Stable; Affirms Ratings

July 18, 2011

Standard & Poor’s Ratings Services has revised its outlook on Nationwide Mutual Insurance Co. (NMIC) and its property/casualty (P/C) affiliates (collectively referred to as Nationwide) to stable from negative.

S&P also revised its outlook on Nationwide Financial Services Inc. and its life insurance affiliates (collectively referred to as NFS) to stable from negative, as well as affirming its ‘A+’ counterparty credit and financial strength ratings on NMIC and all of its core companies, its ‘A’ counterparty credit and financial strength ratings on NMIC’s related entities, and its ‘BBB+’ counterparty credit rating on NFS.

S&P said it “considers Nationwide Life Insurance Co. and its operating companies to be core to the P/C companies under its group methodology criteria. As a result, the ratings and outlook on those companies are the same.”

Credit analyst Tim Connor explained: “We revised the outlook to stable because Nationwide and NFS have continued to benefit from strong competitive positions and franchises in both the personal P/C insurance and retirement savings and life insurance industries.”

S&P said the stable outlook also “reflects the group’s very strong capital adequacy, strong enterprise risk management (ERM) program, and earnings diversification through its life insurance operations.”

As offsetting factors S&P cited “the lower operating earnings in its P/C operation relative to its peers,” explaining that “this is somewhat a function of the NMIC’s unfavorable expense ratio, which is consistently several percentage points higher than its similarly rated peers.

“Nationwide has taken steps to address its uncompetitive expense structure and the company has,” in S&P’s opinion, “the capabilities and track record to concentrate on improving its expense ratio.”

However, S&P also noted that it “considers the company’s expense structure a weakness to the ratings because it could remain a weakness in the group’s operating performance during the next several years as it invests in its infrastructure.

“Further, Nationwide has been unprofitable on an underwriting basis for the past three years, mainly because of the recessionary economy and its susceptibility to natural catastrophes as a large personal lines writer.”

Connor added that the rating agency expects “that the higher-than-expected earnings volatility resulting from weather- and non-weather-related events during the first half of 2011, plus the higher expense ratio, will affect Nationwide’s prospective operating performance and capital generation for full-year 2011.”

S&P said that the “rating affirmations reflect the group’s strong franchise and brand awareness as the sixth largest writer of personal P/C insurance and the leading provider of retirement savings and life insurance in the U.S. This leading position is bolstered by the group’s long-term and successful implementation of a multiple distribution strategy through multiple affiliated and independent channels.”

Connor indicated that S&P believes that management “will be able to maintain and implement this strategy for the foreseeable future, despite the competitive market conditions, because of the group’s ability to create value for customers at multiple life stages. The group’s very strong capital adequacy that is redundant at the rating levels and its strong ERM program are also strengths to the ratings.” S&P stressed that it “considers the ERM program integral to the group’s long-term health and sustainability.”

Equally important is the earnings diversification provided by the life insurance companies, which S&P said “is typically uncorrelated with the group’s main P/C operations. It also generally helps to mitigate some of the volatility associated with catastrophe losses, even though sales and earnings from the life and retirement insurance segments are somewhat tied to the performance of the equity market, which can be volatile.”

In conclusion S&P said it “could lower the ratings if weather-related events, asset fee income, or other items impair the group’s operating earnings; if its capital adequacy deteriorates beyond our expectations; or if we perceive changes to its competitive position.

“Conversely, while it is unlikely that Standard & Poor’s would raise the ratings during the next two years, it could raise them if the group demonstrates strong and consistent operating performance (as measured by the P/C business’ combined ratio and life insurance business’ ROA) and maintains capital adequacy that is supportive of higher ratings.”

Source: Standard & Poor’s

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