S&P Revises Nationwide Outlook to Stable

April 1, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on Nationwide Mutual Insurance Co. (NMIC) and its affiliates (collectively referred to as Nationwide) to stable from negative.

S&P also affirmed its ‘A+’ counterparty credit and financial strength ratings on all the Nationwide companies except for Scottsdale Insurance Co. and its affiliates, which, it explained “have ‘A’ counterparty credit and financial strength ratings.”

It also assigned its ‘A-‘ rating to NMIC’s new issue of $300 million, noting that it could be increased to up to $400 million, of surplus notes maturing in 2034.

“The ratings reflect Nationwide’s strong franchise in the personal property/casualty insurance sector and improving underwriting results,” said S&P. “Partially offsetting these strengths is Nationwide’s capitalization, which despite significant improvement in 2003 remains weak for the current rating level. Factors adversely affecting the quality of capital include Nationwide’s high level of equity investments, exposure to property catastrophe losses, and the potential for adverse development of asbestos reserves.”

The rating agency said the “outlook revision reflects the significant improvement in Nationwide’s earnings and capitalization in 2003 and the expectation that strong underwriting results will continue in 2004. These earnings should allow the capital adequacy of the organization to be restored to a level that is more commensurate with the ratings.”

It also cited a number of “Major Rating Factors, ” including Nationwide’s position as the “sixth-largest writer of automobile insurance and the fourth-largest homeowners insurer in the U.S. based on direct premiums written in the first nine months of 2003.”

Additional factors S&P considered were:
— Improving underwriting results. Underwriting results for NMIC improved to $450 million in 2003 from $42 million in 2002 Indemnity Co. (NIC).
— High exposure to equities. Standard & Poor’s considers Nationwide’s asset allocation profile to be more aggressive than industry norms.
— Weak, though improving, capital adequacy. Surplus rebounded by $1.55 billion in 2003 to $7.16 billion, reversing four consecutive years of surplus declines.
— Property catastrophe exposure. As the fourth-largest writer of homeowners insurance in the U.S., Nationwide has a substantial exposure to losses arising from natural catastrophes. However, the company has only a limited amount of reinsurance protection for property catastrophe losses. The company is fully responsible for the first $750 million of loss per occurrence plus any losses in excess of $1.05 billion. Nationwide’s reinsurers pay 95 percent of any losses between $750 million and $1.05 billion. The company has a $400 million contingent surplus note facility that can be exercised in the event of a large catastrophe loss.
— Asbestos liability. Notwithstanding the $183 million of strengthening for asbestos exposure undertaken by Nationwide in 2003, Standard & Poor’s believes the influx of new claimants and poor outlook for a legislative solution call into question the adequacy of asbestos reserves for both Nationwide and the industry at large.
— Relatively strong financial flexibility. As a mutual insurer, the company’s primary source of external capital is issuing surplus notes. Financial leverage at year-end 2003 was conservative at 24.6 percent.

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