Best Affirms Nationwide Financial’s Ratings; Comments on Acquisition

March 12, 2008

As indicated in the previous article (See above), A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and the issuer credit ratings (ICR) of “aa-” of the core life/health subsidiaries of Nationwide Financial Services, Inc. (NFS). Nationwide Mutual owns roughly 66 percent of NFS. Best also affirmed the ICR of “a-” of NFS and all debt ratings of NFS and Nationwide Life Insurance.

However, Best said it has “downgraded the FSR’s to ‘A’ (Excellent) from ‘A+’ (Superior) and the ICRs to “a+” from “aa-” for Nationwide Life Insurance Company of America (Berwyn, PA) and Nationwide Life and Annuity Company of America (Newark, DE), which were the former Provident Mutual Life Insurance Company and Provident Mutual Life and Annuity Company of America, respectively.” The outlook for all ratings is stable. (See link below for a detailed listing of the companies and ratings.).

Best said that following its “methodology for rating members of insurance groups, these rating actions reflect the diminished strategic role of these two entities, with minimal amounts of new business expected as NFS has targeted sales primarily through Nationwide Life and Nationwide Life and Annuity Insurance Company.”

Turning to the proposed amalgamation of the companies, Best noted: “On March 10, 2008, NFS announced Nationwide Mutual’ s proposal to acquire by merger all of the outstanding publicly held Class A shares of common stock of NFS for $47.20 per share in cash.” If accepted by NFS, the closure of the transaction would still be subject to various regulatory and shareholder approvals.

According to Best’s analysis, if the deal goes through, “it will likely be somewhat dilutive to NFS’ risk-based capital. However, given that Nationwide Mutual’ s capital management strategy is consistent with that of NFS’,” Best said it “expects that the risk-based capital levels within NFS’ life/health entities would be maintained at levels adequate for their current ratings.

“Additionally, this transaction should result in a clearly aligned organization, particularly in terms of affiliated distribution, as well as limited operational disruptions, which often result from acquisitions, as NFS and Nationwide Mutual are already fairly well integrated organizations.

“These ratings reflect NFS’ established position in multiple product lines, its extensive brand recognition, the continued improvement in its absolute and risk-based capital positions and its broad distribution platform. The ratings also recognize NFS’ diversified business mix, which has consistently generated solid GAAP operating revenues and pre-tax operating earnings. Furthermore, the company has realized strong growth in total account values within its retirement plans segment, primarily driven by its trust and administration only businesses. A.M. Best also notes that NFS maintains moderate financial leverage and coverage ratios, which are within the guidelines for its ratings.

“Offsetting rating factors include NFS’ significant allocation to commercial mortgages, private placement bonds and mortgage-backed securities within its general account investment portfolio, which provides it with somewhat less liquidity relative to similarly-rated peers, as well as NFS’ continuing negative net flows in its variable and fixed annuity lines.”

For a complete listing of Nationwide Financial’ s FSRs, ICRs and debt ratings, go to:

Source: A.M. Best

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