Fitch Affirms Nationwide Mutual's IFS & Surplus Notes Rtgs.

CHICAGO -- Fitch Ratings has affirmed the 'AA-' insurer financial strength ratings on Nationwide Mutual Insurance Company (NMIC) and its related intercompany pool members (collectively, Nationwide Mutual). In addition, Fitch has assigned an 'A+' long-term rating to NMIC and has affirmed the 'A' ratings on NMIC's outstanding surplus notes. The Rating Outlook is Stable.

Fitch's rating actions reflect Nationwide Mutual's strong competitive position in key business lines, conservative investment portfolio, and large absolute earnings base.

Partially offsetting these positives is Nationwide Mutual's capitalization, which Fitch views as comparatively weak for the rating category, especially in light of the company's potential exposure to adverse reserve development from asbestos-related claims and from continuing business lines. Fitch also believes that the quality of Nationwide's surplus is adversely affected by its concentrated investment in affiliated companies, primarily Nationwide Financial Services, Inc. (NFS).

Fitch considers Nationwide Mutual a leading personal lines insurer in the U.S., where, based on 2003 net premiums written, the company ranked as the sixth largest overall insurer and the fourth largest personal lines writer. The company also has a strong competitive position in the surplus lines market and it ranked as the 13th largest commercial lines writer in the U.S., based on 2003 net premiums written.

Fitch believes that Nationwide Mutual utilizes a moderate amount of financial leverage, calculating its debt (which includes prepaid forward contracts and surplus notes) to statutory capital at June 30, 2004 at approximately 21%. Fitch estimates the company's annual interest requirements at approximately $110 million and expects near-term operating earnings-based interest coverage to be in a range of 7 times (x)-12x.

Fitch notes that by annualizing Nationwide Mutual's first half 2004 operating results (statutory basis) and overlaying the company's $850 million of third quarter 2004 hurricane-related losses on those annualized results, it estimates the company's operating-earnings-based interest coverage at a solid 9x.

Fitch's Stable Rating Outlook reflects its belief that Nationwide Mutual's near-term earnings trends will continue to be generally favorable and that the company's operating leverage will remain materially unchanged as surplus growth keeps pace with premium growth.

Fitch's Stable Rating Outlook also incorporates a moderate amount of potential adverse prior accident-year reserve development related to both asbestos-related reserves and reserves for continuing business lines. Fitch notes that Nationwide Mutual's asbestos-related reserves' three-year survival ratio was only 8.9x at year-end 2003, significantly below Fitch's 17.5x target.

Additionally, Fitch notes that its analysis of Nationwide Mutual's Schedule P data projects deficiencies in several key lines. On a combined statutory basis, Nationwide Mutual incurred $437 million of adverse one-year reserve development in 2003, and from 1999-2003, the company's one-year adverse reserve development averaged $228 million.

The following ratings are affirmed with a Stable Rating Outlook by Fitch:

Nationwide Mutual Insurance Co.

-- Insurer financial strength affirmed at 'AA-';

-- Long-term ratings assigned 'A+'.

Nationwide Mutual Fire Insurance Co.

-- Insurer financial strength affirmed at 'AA-'.

Scottsdale Insurance Co.

-- Insurer financial strength affirmed at 'AA-'.

Farmland Mutual Insurance Co.

-- Insurer financial strength affirmed at 'AA-'.

Nationwide Mutual Insurance Co.

-- 8.25% surplus notes due Nov. 30, 2031 affirmed at 'A';

-- 7.88% surplus notes due March 25, 2033 affirmed at 'A';

-- 6.60% surplus notes due April 15, 2034 affirmed at 'A'.