A.M. Best Affirms Financial Strength and Debt Ratings of Nationwide Group, Nationwide Financial Services and Its Subsidiaries.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Oct. 18, 2002

A.M. Best Co. has affirmed the financial strength and debt ratings of Nationwide Financial Services, Inc. (NFS) (Columbus, OH) and its two main operating insurance subsidiaries, Nationwide Life Insurance Company (NLIC) and Nationwide Life and Annuity Insurance Company (NLAIC).

The outlook has been changed to negative from stable.

A.M. Best has also affirmed the financial strength rating of the Nationwide Group (property/casualty) (Nationwide) and the debt ratings on Nationwide Mutual Insurance Company's surplus notes with a negative outlook. In addition, A.M. Best has affirmed the financial strength ratings of Nationwide Indemnity Company and Nationwide Insurance Company of Florida with stable outlooks.

The financial strength ratings of Nationwide Life Insurance Company of America (NLICA) (formerly Provident Mutual Life Insurance Company) and its subsidiary, Nationwide Life and Annuity Company of America (NLACA) (formerly ProvidentMutual Life and Annuity Company), have been affirmed and removed from under review with developing implications following the completion of NFS's sponsored demutualization of the company. The outlook is stable. (See complete listing of financial strength and debt ratings at the end of this release.) A.M. Best believes NLICA's affiliation with NFS has favorable strategic merits for both organizations.

The ratings recognize NFS's favorable business profile that is underpinned by balanced revenue streams, strong and diversified distribution, sound earnings capabilities and high overall investment quality. It also reflects the franchise value associated with being a 63%-owned subsidiary of Nationwide Group, a major U.S. insurance organization.

Offsetting these strengths is A.M. Best's view that NLIC and NLAIC have weakened their risk-based capital positions as a result of recent years' robust growth and more efficient capital management practices. A.M. Best now views these entities as more aggressively capitalized than similarly-rated peers. Additionally, NFS, like many U.S. life insurers, faces a highly competitive market in several of its core products and is dealing with operational and investment challenges arising from the prolonged equity market downturn, low interest rate environment and overall U.S. economic weakness. These challenges, combined with the company's prominent position in the U.S. variable annuity market, have heightened the likelihood that NFS will need to adjust deferred acquisition cost (DAC) balances carried on its balance sheet (GAAP basis) and further increase variable annuity guaranteed minimum death benefit (GMDB) reserves at its operating subsidiaries (statutory basis).

NFS, the life insurance arm of the Nationwide Group, enjoys a solid position as a provider of life insurance, annuities and retirement plans to retail and institutional markets. NFS's ongoing initiative to increase its distribution capabilities has enabled it to successfully address shifts in consumer demand while maintaining reasonable sales momentum in a difficult environment. NFS should benefit as NLICA's solid presence in individual life insurance-- particularly variable life--adds critical mass to NFS's operations, and its annuity products complement NFS's existing portfolio. Additionally, the transaction strengthens NFS's sales capabilities by bringing more than 600 career agents to NFS's distribution system. A.M. Best also expects that NLICA will be able to leverage NFS's products and brand across its various distribution channels.

NFS's historically sound operating performance has been affected by recent years' stock market cyclicality and the economic downturn. Earnings are expected to come under further near-term pressure, but A.M. Best expects long-term profitability to remain acceptable. A.M. Best believes NLIC's risk-based capital adequacy has become stretched as the company's ability to self-fund its growth and pay shareholder dividends has not kept pace with its needs. Should NLIC not significantly improve its capital position over the near term, a ratings downgrade is likely. NFS's debt usage has doubled in two years to $1.2 billion, but planned ongoing financial leverage in the 20%-25% range is acceptable. GAAP interest coverage, while likely to decline, also should remain favorable.

The rating for Nationwide's property and casualty group recognizes its strong capitalization, brand name recognition, market leadership within the property/casualty industry and recent improvement in core operating results. The negative outlook reflects above average investment leverage due to common stock and affiliated holdings, as well as Nationwide's historical operating performance through 2001 that caused a decline in policyholder's surplus.

The rating of NLICA reflects its solid position in the variable life insurance market, conservative investment posture, excellent capitalization and strong distribution system. The rating also acknowledges the operational diversification of the company and its subsidiary, NLACA, through its career agency distribution, personal producing general agent distribution and its broker/dealer network.

For a complete listing of Nationwide's debt and financial strength ratings, please visit http://www.ambest.com/press/nationwide3.pdf.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.