Nationwide's Capital Concerns S&P, Moody's

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By Michael Ha

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NU Online News Service, March 25, 11:29 a.m.EST?Standard & Poor's Ratings Services and Moody'sInvestors Service, despite questioning Nationwide Mutual InsuranceCo. surplus levels, both announced strong ratings for a $300million surplus notes issue from the insurer.

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The notes, due in 2033, were assigned an "A-minus" rating fromS&P and an "A2" rating by Moody's. However, both S&P andMoody's expressed concerns about Nationwide's capital adequacy anddeclining surplus, which shrank by $690 million to some $6.8billion last year.

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Matthew Coyle, a credit analyst at the New York-based S&P,said the notes' rating reflects Nationwide's strong franchise inthe personal property-casualty insurance sector and improvingunderwriting results.

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But on the other hand, Mr. Coyle added, these strengths arepartially offset by the company's weakened capital position, causedby its above-average exposure to equities as well as the potentialfor adverse development of asbestos reserves.

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Currently, Columbus, Ohio-based Nationwide has an "A-plus"financial strength rating with a "negative" outlook fromS&P.

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"On March 17, 2003, Standard & Poor's affirmed its ratingson Nationwide, but revised the outlook to 'negative,'" Mr. Coylenoted. The revision reflected the deterioration in Nationwide'scapital adequacy throughout 2002 and earlier this year, hesaid.

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Mr. Coyle added the continued weakness in U.S. equity marketswas the major reason behind the capital decline, because Nationwidehas historically had a higher-than-average exposure toequities.

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S&P also noted that further rating actions for Nationwidewould be decided by the company's ability to restore its capitaladequacy.

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"If the company can successfully restore the capital adequacy ofthe organization while simultaneously improving underwritingresults, the ratings would be affirmed and the outlook would berevised to 'stable,'" Mr. Coyle stated.

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"Conversely, the inability to improve both underwriting resultsand/or the capital adequacy of the organization could result in adowngrade of the company."

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Moody's Investors Service, which currently has an "Aa3" ratingfor Nationwide and its leading intercompany pool members, offered asimilar analysis for the company's outlook.

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The New York-based rating agency said its "A2" surplus notesrating reflects the company's strong market position in personalinsurance lines, as well as the company's still-strong balancesheet, its conservative capital structure and its improvingoperating results.

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But, Moody's pointed out, these strengths are offset by thecompany's high exposure to equity markets, continuing exposure toenvironmental and asbestos claims, and exposure to naturalcatastrophes.

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The rating agency also observed that levels of statutory surplusat the company fell by some $1.9 billion over the past three years."The concern with this decline in surplus is tempered by the factthat the group's economic capital position is enhanced by itemsexcluded under statutory accounting principles," Moody'sstated.

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"Nonetheless, the company's high exposure to equity marketvolatility could potentially limit its operating and financialflexibility as it increases the company's vulnerability tocatastrophes," it said.

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Nationwide Mutual Group is one of the largest p-c insurers inthe United States. Last year, the company's ongoing p-c operationsposted a net income of $389 million.

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