Fitch Affirms Nationwide Mutual Insurance Group; Outlook Stable

Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of 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’.

Fitch has also affirmed the following ratings of Nationwide Financial Services, Inc. (NFS):

–Issuer Default Rating (IDR) at ‘BBB+’;

–Senior unsecured notes at ‘BBB’;

–Trust preferred securities at ‘BB+’.

The Rating Outlook is Stable for all ratings. (A full rating list follows at the end of this press release).

Today’s rating affirmation reflects Nationwide Mutual’s strong competitive position in personal lines insurance, and a more moderate position in commercial lines insurance, which was enhanced by the merger with Harleysville Mutual Insurance Company (Harleysville) in 2012.

The affirmation also reflects business diversification benefits provided by Nationwide Mutual’s wholly owned Financial Services segment (NFS), which offers a variety of individual protection and asset accumulation products, as well as group products and services. Fitch notes however, that NFS has relatively high exposure to variable annuity products and mortgage-related investments.

The property and casualty (P/C) segment reported a GAAP net operating income of $208 million for the first nine months of 2012, compared with a loss of $221 million for the same period in 2011. NFS segment results declined 16% to $470 million for the first nine months of 2012, after increasing almost 40% for the full year 2011 relative to 2010.

Nationwide Mutual’s statutory combined ratio (including Harleysville) improved to 105.7% for the first nine months of 2012, from 112.6% for the same period in 2011 (excluding Harleysville). Fitch believes the company’s losses related to Superstorm Sandy will not be outsized relative to their industry market share and will be an earnings, not a capital, event for the company. The company paid a record $2.3 billion in weather-related claims in 2011, nearly $1 billion more than in 2010.

Statutory surplus increased 7% to $13.7 billion at Sept. 30, 2012, from $12.8 billion at Dec. 31, 2011, primarily due to the merger with Harleysville. Still, Fitch views Nationwide Mutual’s capitalization as 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 (excluding the carrying value of the life company) estimated at 1.59 times (x) at Sept. 30, 2012 is higher than average.

Fitch considers Nationwide Mutual’s financial leverage to be high relative to its mutual peers. Fitch estimates that consolidated debt-to-capital, including short-term debt and operating debt, declined somewhat from 24.9% at year-end 2011. This was due to the repayment of a $300 million debt maturity in July as well as the 17% increase in policyholders’ equity to $19 billion at Sept. 30, 2012 (including an undisclosed increase from the Harleysville acquisition as well as FAS 115 unrealized bond gains).

At Sept. 30, 2012, long-term debt totaled $4.5 billion, down $471 million from year-end 2011 (including $2.2 billion in surplus notes supporting the P/C operations and $2.3 billion in debt primarily supporting the life insurance operations). The company’s short-term debt levels have periodically also been sizable, but are undisclosed at interim periods.

Key rating triggers for Nationwide’s ratings that could lead to a downgrade include: ongoing poor underwriting profitability that widens from recent performance relative to both mutual company and industry averages; significant deterioration in operating earnings generated by the life and annuity business; weakness in capital strength as measured by Fitch’s capital model, NAIC risk-based capital or unstacked operating leverage greater than 1.75x; and/or consolidated debt-to-capital, including short-term debt and operating debt, of greater than 30%.

Key rating triggers that could lead to an upgrade over the longer term include: a sustained improvement in underwriting performance as measured by a combined ratio under 100% that is nearer to or better than peers; improved catastrophe and overall risk management through difficult underwriting and economic conditions; an improvement in capital strength as measured by Fitch’s capital model or unstacked operating leverage below 1.0x; a material reduction in the consolidated debt-to-capital ratio to below 20%; and a significant reduction in the degree to which NFS’s earnings are leveraged to the equity market.

Fitch has affirmed the following ratings with a Stable Outlook:

Nationwide Mutual Insurance Co.

–IDR at ‘A-‘;

–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.

–IDR at ‘BBB+’;

–5.625% Senior notes due Feb. 13, 2015 at ‘BBB’;

–5.10% Senior notes due Oct. 1, 2015 at ‘BBB’;

–5.375% Senior notes due March 25, 2021 at ‘BBB’;

–7.899% Trust preferred due March 1, 2037 at ‘BB+’.

Nationwide Mutual Insurance Co.

Nationwide Mutual Fire Insurance Co.

Crestbrook Insurance Co.

National Casualty Co.

Nationwide Agribusiness Insurance Co.

Nationwide Insurance Company of America

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 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 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’.

Applicable Criteria and Related Research:

–‘Insurance Rating Methodology’ (Oct. 18, 2012).

Applicable Criteria and Related Research:

Insurance Rating Methodology ¬タヤ Amended