S&P Affirms Nationwide’s ‘A+’ Ratings after Harleysville Buy

October 11, 2011

Standard & Poor’s Ratings Services has affirmed its ‘A+’ counterparty credit and financial strength ratings on Nationwide Mutual Insurance Co. and its property/casualty affiliates (collectively Nationwide) after the announcement that it would acquire Harleysville. The outlook for the ratings remains stable.

“We affirmed our ratings because we believe the merger enhances Nationwide’s national geographic footprint in the small commercial agency segment and will not materially change the financial profile of Nationwide,” explained credit analyst Timothy Connor.

However, S&P also indicated that in its opinion, “the integration has the potential to impair initiatives to reduce its expense ratio. Nationwide has made significant expense reductions, but not enough to improve its overall expense ratio given lower premium writings that are a result of the competitive environment.”

S&P added that it believes the “property/casualty (P/C) operating performance will continue to be worse than similarly rated peers. Previously, Nationwide had not chosen the riskier strategy of trying to rapidly increase its book to offset its fixed expenses. However, this acquisition is in some ways a rapid-growth approach even though the book should be seasoned through Harleysville.”

The bulletin also pointed out that Nationwide’s capital adequacy, “though still strong for the P/C operations, has declined because of weather-related events in 2011 and the approximately $1 billion deal. However, surplus remains relatively unchanged but will need to support the additional insured exposures from the acquisition. Nationwide Financial Services Inc. and its life insurance affiliates (collectively NFS) produce strong results that provide diversification to help offset this on a group basis.”

S&P said the stable outlook “reflects our expectation that Nationwide will sustain its strong competitive position and business profile in its P/C and life operations. We expect that on an enterprise basis Nationwide will continue to hold very strong capital. We continue to believe the group will augment its efforts to develop a variety of products that it can offer through its diverse distribution system. We also expect that the group will increase sales of its life insurance products through its P/C customers and benefit from additional cost synergies across the enterprise.”

In the future S&P noted that 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 or problems with the integration of the Harleysville acquisition.

“Conversely, though we are unlikely to raise the ratings during the next two years, we could revise our outlook if the group demonstrates strong and consistent operating performance (as measured by the P/C business’s combined ratio and life insurance business’ return on assets), improved expense ratio for P/C, and the integration expenses from the Harleysville acquisition do not hurt results by midyear 2013.”

Source: Standard & Poor’s

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