Rating Firms Mull Nationwide Bid To Take NFS Private

Rating agencies are evaluating yesterday's announcement that Nationwide Mutual Insurance Company has offered to take Nationwide Financial Services private by purchasing all its listed shares for $2.2 billion.

Columbus, Ohio-based NFS said it has appointed a special committee to respond to the offer of $47.20 per share for 46.7 million shares of the company's Class "A" common stock.

Nationwide Mutual already owns all Class "B" common shares, representing a 66.3 percent ownership in NFS and 95.2 percent of the combined voting power of the shareholders of NFS.

Standard & Poor's Corp., New York, placed NFS ratings on Credit Watch with negative implications. The rating action reflects the lower financial strength rating of the acquirer, as well as uncertainty regarding the potential effect on NFS' capitalization, according to S&P.

The core life operating companies of NFS are rated "double-A-minus." These include Nationwide Life Insurance Co., Nationwide Life & Annuity Ins. Co., Nationwide Life Ins. Co. of America, and Nationwide Life & Annuity Co. of America. Nationwide Mutual, the potential acquirer, is rated "A-plus."

Following an evaluation, the ratings could be lowered a notch. However, S&P left open the possibility that NFS' ratings could be affirmed if NFS and its subsidiaries exhibit superior business and operating characteristics and are sufficiently independent if the parent group exhibits difficulties.

Among the factors that will need to be examined will be to "fully understand the impact on capitalization and the strategic plans for the business," according to Matt Carroll, S&P associate director.

Although there has always been access to NMIC's distribution force, that access could be formalized, said Kevin Ahern, S&P senior director. That would give NFS additional distribution to its independent producer channel, he explained.

Mr. Ahern said that while it is premature to comment on whether NMIC's offer is in part due to a better use of capital, it is likely that the company considered that when reaching its decision to make the offer.

He also said that in terms of enterprise risk management, a well-diversified company could limit catastrophe exposure for NMIC through a combination that would diversify risks.

S&P's Mr. Carroll said that it is expected that NFS would retain its Securities and Exchange Commission registration which would allow it to issue debt securities through the market. However, he noted that the life companies are very well capitalized.

On Feb. 7, 2008, in its fourth-quarter 2007 results announcement, NFS company said it had repurchased 647,000 shares of its Class-A common stock in the open market for a total of $29 million at an average price per share of $44.91.

Both S&P analysts say that meeting with management will offer the rating agency more clarification on the direction of the ratings.

Moody's Investors Service, New York, affirmed the "Aa3" insurance financial strength ratings of NFS and the ratings of NMIC.

The rating agency noted that the transaction is expected to be paid entirely from internal funds.

A statement prepared by Laura Bazer, a Moody's vice president and senior credit officer, said the stock purchase would reduce capital levels at both Nationwide Life and Nationwide Mutual.

Moody's said the rating agency anticipates that capital adequacy would remain "superior" in the "Aaa-range" even after payment of statutory dividends.

From an operational perspective, according to the announcement, the company could focus on "policyholder needs" and "potentially benefit from greater cross-selling opportunities." However, Moody's also said that it remains "circumspect" on the latter point given the competitive nature of the life and retirement services market.

Moody's notes the loss of access to the equity market but also says that potentially, capital could flow more freely between the life and property-casualty units.

Fitch Ratings, Chicago, said that pending additional analysis, it is maintaining its ratings on Nationwide Mutual Ins. Co., Nationwide Life Ins. Co. and Nationwide Life Ins. Co. of America.

An initial analysis, according to a statement, indicates that the purchase of "the outstanding publicly held shares will significantly reduce the capital of the organization but capital adequacy is estimated to remain within thresholds commensurate with the current rating level."