OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the two life/health subsidiaries of Nationwide Financial Services, Inc. (NFS): Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company. Additionally, A.M. Best has affirmed the ICR of “a-” of NFS and the debt ratings on the group’s outstanding securities. The outlook for all ratings is negative.
NFS is indirectly owned by Nationwide Mutual Insurance Company (Nationwide Mutual) and Nationwide Mutual Fire Insurance Company, market leaders in the property/casualty industry. All companies are headquartered in Columbus, OH. (Please see below for a detailed listing of the companies and debt ratings.)
The rating affirmations continue to reflect NFS’ diversified revenue stream, extensive brand recognition, leading market position particularly within public sector retirement plans and strong net flows within individual annuities. Furthermore, recent favorable equity market returns and organic earnings growth have improved NFS’ risk-adjusted and absolute capital levels, and its investment portfolio is comfortably in a net unrealized gain position. A.M. Best notes that NFS’ financial leverage and interest coverage remains within guidelines for its current ratings and utilization of operating leverage remains minimal. Although calculated interest coverage is below guidelines, A.M. Best notes the group has more than enough cash coverage at this time. NFS is viewed by A.M. Best as an integral part of Nationwide Mutual’s long-term strategy to serve the insurance and financial services needs of its customers.
Trends in sales and flows in most of NFS’ core segments have been favorable and have benefited from solid results in individual variable annuities and corporate life insurance. Management continues to invest in expanding distribution and product development and is committed to its strategy to further penetrate its property/casualty customer base to achieve growth. Moreover, A.M. Best believes the current capitalization of the life insurance subsidiaries is sound, and will continue to be managed at the enterprise level by Nationwide Mutual. A.M. Best notes NFS’ extensive use of hedging has performed within expectations and provides some protection against material declines in statutory capital from unfavorable equity market performance.
Offsetting rating factors include NFS’ lower sales and net flows within private sector retirement plans, its continued above-average exposure to commercial mortgage loans (as a percentage of statutory capital), as well as its material holdings in both residential and commercial mortgage-backed securities. A.M. Best has observed continued improvement within NFS’ investment portfolio as evidenced by its net unrealized gain position and reduced levels of credit impairments. However, while credit impairments are trending positively, NFS’ asset portfolio still has the potential for some additional losses due to its mortgage-related exposures. Additionally, NFS has experienced lower sales and net flows within private sector retirement plans driven by higher lapses, reduced employee participation and lower 401(k) deferrals—all of which are reflective of the challenging U.S. economy. While operating results are favorable and interest margins are currently healthy, the group has a fair amount of account values subject to interest rate floors. As such, A.M. Best believes spread compression could become an issue for NFS. Equity market risk remains an ongoing risk within the variable annuity product line, although this risk is partially mitigated by effective economic hedging practices and the aforementioned statutory capital hedge program.
A.M. Best believes that NFS is well positioned at its current ratings. Factors that could lead to negative rating actions include significant losses from higher reserve requirements in the legacy variable annuity book,material spread compression in interest sensitive lines of business or a material decline in capital driven by asset impairments. Additionally, future rating actions are likely to be driven by the financial strength of Nationwide Mutual.
The following debt ratings have been affirmed:
Nationwide Financial Services, Inc.—
-- “a-” on $300 million 5.90% senior unsecured notes, due 2012
-- “a-” on $200 million 5.625% senior unsecured notes, due 2015
-- “a-” on $200 million 5.10% senior unsecured notes, due 2015
-- “a-” on $600 million 5.375% senior unsecured notes, due 2021
-- “bbb” on $400 million 6.75% fixed to floating rate junior subordinated notes, due 2037
Nationwide Financial Services Capital Trust—
-- “bbb” on $100 million 7.899% capital securities, due 2037
Nationwide Life Insurance Company—
-- AMB-1 on commercial paper
Nationwide Life Global Funding I —“aa-” program rating
-- “aa-” on all outstanding notes issued under the program
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding BCAR for Life/Health Insurers”; “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; and “A.M. Best’s Ratings & the Treatment of Debt.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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