Fitch Affirms Ratings for Nationwide Financial Services, Inc.

CHICAGO -- Fitch Ratings affirmed the 'A' issuer default rating and 'A-' senior debt rating of Nationwide Financial Services, Inc. (NFS). In addition, Fitch affirmed the 'AA-' insurer financial strength rating and the 'F1' commercial paper rating of Nationwide Life Insurance Co. (NLIC) and the 'AA-' IFS rating of Nationwide Life Insurance Co. of America. The Rating Outlook is Stable.

NFS is a life insurance holding company that is 63% owned by Nationwide Mutual Insurance Company (Nationwide Mutual), one of the largest property/casualty companies in the U.S. Although not wholly owned, Fitch considers NFS to be a strategic operation for Nationwide Mutual due to NFS' relative capital size and earnings contribution to the overall organization. Importantly, from a rating perspective, Nationwide Mutual, as the larger operation does exert influence on the ratings at NFS.

Fitch's ratings on NFS reflect the company's conservative financial leverage, solid earnings-based interest coverage and a high-quality investment portfolio. Partially offsetting these positives are the effects of intense competition in the company's chosen markets, the sensitivity of the company's results to the equity-market, and the mortgage-backed security (MBS) and commercial mortgage concentration in the investment portfolio.

Fitch believes that NFS uses financial leverage conservatively and that management's long-term financial leverage target of 25% is reasonable for the current ratings. The company's debt plus preferred-to-capital ratio of 20% and its interest and fixed-charge coverage of nearly 8 times (x) are viewed by Fitch as solid and consistent with the rating category.

NLIC has an $800 million commercial paper (CP) program and had $135 million outstanding under the CP program as of Dec. 31, 2005. The CP rating is supported by NLIC's access to a $1 billion revolving bank facility along with its immediate parent NFS and ultimate parent Nationwide Mutual. The facility provides for several and not joint liability, and the available amount of the line is reduced by 50% of any commercial paper issuances outstanding.

NFS' investment portfolio is high quality and has performed well. However, the company has a very large exposure to the real estate market, primarily through commercial mortgages and MBS. Although this investment concentration is a concern, it is somewhat offset by an under-allocation to equity securities.

Variable annuities, which had been the cornerstone of NFS' product offerings, have since deteriorated. NFS ranked 14th in variable annuity sales in 2005, needing to nearly double sales to reclaim a top 10 position. Sales have been disadvantaged by lack of a withdrawal benefit product, however, the company plans to remedy that situation with a new product offering that was introduced in early March. NFS experienced $1.9 billion in negative net flows, i.e. deposits less withdrawals and surrenders, as the aging block of business is more prone to surrender activity.

Fitch has analyzed NFS's capital needs related to its variable annuity business using Fitch's proprietary model. Fitch recognizes that the NAIC risk-based capital ratio for year-end 2005 now includes considerations for variable annuity product risks through the implementation of C-3 Phase II. Fitch believes that the current application of C-3 Phase II does not generate enough required capital to align with Fitch's ratings analysis. As such, Fitch continues to adjust RBC to reflect Fitch's belief that additional capital is required.

At year-end 2005, Nationwide Life reported RBC of 390%. After adjusting total adjusted capital for capital required to support the variable annuity business, Fitch believes that adjusted RBC is in the 360%-370% range. This adjusted level of capital remains very strong for the current rating category and the variance from reported to adjusted RBC is modest relative to peers. Fitch believes that the size of NFS's adjustment for variable annuity risks is modest due to a conservative product mix with only small amounts of living benefits in the current portfolio, the existence of reinsurance on older policy year contracts still on the books and the amount of current reserves held to offset the risks.

The management team at NFS introduced plans for 2006 to invigorate sales through new product offerings and recruiting additional distribution. In addition, the company is petitioning the OTS to become a fully licensed bank, which management believes will dovetail with the needs of existing customers as they reach retirement age. Lastly, the company continues to return excess capital to shareholders through stock repurchases. Fitch will monitor NFS's progress versus these goals to determine if the company is truly recapturing some of its lost competitive position.

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

Nationwide Financial Services Inc.

--Issuer default rating 'A';

--Senior notes $300 million; 8.00%; due March 1, 2027 'A-';

--Senior notes $300 million; 6.25%; due Nov. 15, 2011 'A-';

--Senior notes $300 million; 5.90%; due July 1, 2012 'A-';

--Senior notes $200 million; 5.625%; due Feb. 13, 2015 'A-';

--Senior notes $200 million; 5.10%; due Oct. 1, 2015 'A-';

--Trust preferred $100 million; 7.899%; due March 1, 2037 'BBB+'.

Nationwide Life Insurance Co.

--Insurer financial strength 'AA-';

--Commercial paper 'F1'.

Nationwide Life Insurance Co. of America

--Insurer financial strength 'AA-'.

Nationwide Life Global Funding I

--Program Rating 'AA-';

--USD150,000,000 due April 21, 2006;

--USD350,000,000 3.5% due June 12, 2006;

--USD100,000,000 due Nov. 28, 2006;

--USD250,000,000 due Dec. 12, 2006;

--USD500,000,000 due Feb. 15, 2007;

--USD500,000,000 5.35% due Feb. 15, 2007;

--USD100,000,000 5.35% due May 15, 2007;

--USD150,000,000 2.75% due May 15, 2007;

--USD350,000,000 due June 22, 2007;

--USD300,000,000 due Sept. 28, 2007;

--EUR224,000,000 5.25% due April 4, 2008;

--USD400,000,000 due Sept. 23, 2008;

--USD300,000,000 due Dec. 15, 2008;

--USD200,000,000 due May 19, 2010;

--USD150,000,000 6.25% due June 28, 2011.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.