Enterprise Risk Management at Nationwide September 18, 2008 Al Schulman, Vice President-Enterprise Risk Management

The Nationwide View Nationwide Vision Requirements Risk classification Identification and assessment Risk appetite / limits Significant Risks… …are clearly understood,… Metrics Reporting Training and communications Clear roles and authority Tools Controls / transfer / financing …proactively managed… Standard language Reporting Independent assurance and oversight …and consistently monitored by Nationwide…. … in the context of achieving our business objectives and strategy… Link to strategy / planning Risk-adjusted performance metrics September 11, 2008

Nationwide ERM Framework Risk Governance Planning Execution Evaluation Infrastructure, Communication & External Environment September 11, 2008

Nationwide ERM Framework Legal, Regulatory, & Compliance Insurance Operational Strategic Market Credit Measure Analyze Manage Monitor Identify EXECUTE Objectives Aggregation Framework Feedback Strategic Planning Capital Allocation Risk Capacity, Appetite & Limits PLAN Risk Adjusted Performance Capital Adequacy Risk Modeling EVALUATE Risk Governance & Culture Risk Policies Roles & Authorities GOVERNANCE Internal Risk Management Partnerships Training & Communications Communication Rating Agencies & Regulators Competitors & Best Practices Customers Counterparties External Environment ERM Tools Common Language Risk Classification Framework Infrastructure September 11, 2008

Risk Governance Guiding Principles Business areas retain accountability for managing their own risks Enterprise perspective Proactive rather than reactive Independent assurance (e.g., Independent Audit) Clearly assigned responsible / accountable parties Transparency of accountability, communication, decision making, and information flows Regular re-evaluation to ensure appropriate evolution Key points: Three independent groups (risk taking businesses and functions, risk oversight policy/analysis, and independent assurance) September 11, 2008

Nationwide ERM Framework Legal, Regulatory, & Compliance Insurance Operational Strategic Market Credit Measure Analyze Manage Monitor Identify EXECUTE Objectives Aggregation Framework Feedback Strategic Planning Capital Allocation Risk Capacity, Appetite & Limits PLAN Risk Adjusted Performance Capital Adequacy Risk Modeling EVALUATE Risk Governance & Culture Risk Policies Roles & Authorities GOVERNANCE Internal Risk Management Partnerships Training & Communications Communication Rating Agencies & Regulators Competitors & Best Practices Customers Counterparties External Environment ERM Tools Common Language Risk Classification Framework Infrastructure September 11, 2008

Core Framework Components The three components of the framework are Risk Capacity, Appetite, and Limits, all of which are logically aligned to achieve a common long-term goal: maximization of economic value subject to risk tolerances. Capacity Capacity represents the maximum amount of risk that can be supported by the company, expressed as an aggregate capital dollar amount Risk Capacity is determined considering the following: Available capital Ability to raise capital (access to capital markets) Earnings strength and stability, including planned growth in capital over time Appetite Amount of risk that management and the Board are willing to take, given available risk capacity, our risk preferences, and our strategic business objectives Risk Appetite serves as an overall guide to resource and capital allocation Business strategy should be aligned with risk appetite Limits Allocation of Appetite to individual risk types, business units, and additional dimensionality (or combinations thereof) based upon capital requirements relative to potential returns and risk concentrations Serve to effectively control our significant risks within the context of our overall risk appetite Should be expressed in specific metrics appropriate for a given risk Should reflect enterprise Risk Preferences and align to support strategic plans and capital allocation Should be set at a level which may be periodically tested (i.e., limits should be established at levels that may be exceeded at times) September 11, 2008

Risk Capacity, Appetite, and Limits Framework: Conceptual Model Nationwide’s risk Capacity, Appetite, and Limits framework expresses tolerance for losses: for three different loss magnitudes (severity) considering likelihood over both a one and three year horizon (probability) reflecting both rating agency and economic measures of risk and capital Capital Volatility Severe Downgrade Insolvency “Gradually leaking hull” “Hole in the side of the ship” “Ship sinks” What is the acceptable probability of… …having capital adequacy decline over three years? …dropping below a minimum acceptable rating level in a single year? …becoming insolvent in a single year? Examples of risk events: High inflation environment (multi-year) High trade combined ratio + high growth environment Large catastrophe Severe equity market decline Large catastrophe Severe operational / continuity event Severity Severity Severity - Loss Magnitude + September 11, 2008

Capital Required for Ratings Targets Risk Capacity, Appetite, and Limits Framework: Appetite Quantification and Dashboard A dashboard is utilized to reflect a chosen risk appetite and exposure levels relative to the chosen appetite. The example below is illustrative. Capital Volatility Severe Downgrade Insolvency Model Economic Rating Agency Rating Agency Economic Rating Agency Horizon Multi-year Multi-year Single year Single year Static Loss Severity Required loss severity ($) periodically calculated for each dimension considering capital and risk profile. Tolerance Capital Required for Ratings Targets <X% X-Y% >Y% <X% X-Y% >Y% X% Modeled Probability Z% Z% Z% ≤X% AA- AA3 A+ Within Tolerance Warning Level Appetite Violation September 11, 2008

Risk Capacity, Appetite, and Limits Framework: CAL Risk Modeling Tools Nationwide’s CAL framework calculations use two principal risk modeling tools: Enterprise Required Economic Capital (REC) model Dynamic Financial Analysis (DFA) model Tool for measuring economic capital adequacy 1 year view of risk “Extreme Tail” focused REC used in determining Risk Adjusted Return on Capital (RAROC) Statutory, GAAP, and economic views Multi-year view of risk More centrally focused Robust stochastic economic simulation capabilities Enables more “complete” view of risk (central vs. tail, 1 year vs. 4, Economic vs. Statutory vs. GAAP, etc.) Periodic calibration exercises to test models, assumptions, sensitivity, etc. September 11, 2008

Nationwide ERM Framework Legal, Regulatory, & Compliance Insurance Operational Strategic Market Credit Measure Analyze Manage Monitor Identify EXECUTE Objectives Aggregation Framework Feedback Strategic Planning Capital Allocation Risk Capacity, Appetite & Limits PLAN Risk Adjusted Performance Capital Adequacy Risk Modeling EVALUATE Risk Governance & Culture Risk Policies Roles & Authorities GOVERNANCE Internal Risk Management Partnerships Training & Communications Communication Rating Agencies & Regulators Competitors & Best Practices Customers Counterparties External Environment ERM Tools Common Language Risk Classification Framework Infrastructure September 11, 2008

Nationwide Risk Management Cycle There are five elements of best practice risk management execution Measure Analyze Manage Monitor Identify What risks exist? How much is at risk? What do we want to do with the risk? Do something about it Did the management strategy work? Identify potential risk events Investigate emerging risks Classify risk events Gather actual loss data Document Contributing Factors, Controls and Key Risk Indicators Consider possible impacts Uncover possible gaps Etc. Measure direct exposure Consult experts Benchmark industry performance Run potential loss models Measure actual impact Perform scenario analysis Gather anecdotal facts regarding risk exposure Etc. Compare to risk preferences Look at aggregate measures Prioritize against other risks Create strategies and recommendations for risk management actions (terminate, treat, tolerate, transfer) Get feedback and appropriate approvals from risk owners and oversight committees Etc. Implement recommended actions Execute projects Improve / add internal controls Change policies and procedures Make investments Sell assets Acquire hedges Acquire reinsurance Do nothing Etc. Ensure actions took place Compare current results with previous results Compare current results with expected results Generate and distribute reports Etc. Data Information Action September 11, 2008

Nationwide ERM Framework Legal, Regulatory, & Compliance Insurance Operational Strategic Market Credit Measure Analyze Manage Monitor Identify EXECUTE Objectives Aggregation Framework Feedback Strategic Planning Capital Allocation Risk Capacity, Appetite & Limits PLAN Risk Adjusted Performance Capital Adequacy Risk Modeling EVALUATE Risk Governance & Culture Risk Policies Roles & Authorities GOVERNANCE Internal Risk Management Partnerships Training & Communications Communication Rating Agencies & Regulators Competitors & Best Practices Customers Counterparties External Environment ERM Tools Common Language Risk Classification Framework Infrastructure September 11, 2008

Correlations, Dependencies Risk Diversification Credit Market Product Strategic Legal & Reg. Operational 1. Characterize the risk distributions 2. Combine distributions Correlations, Dependencies EL Solvency Standard Economic Capital 3. Measure required capital 4. Attribute capital to products and business units September 11, 2008

RAROC Overview Total Return Required Economic Capital (REC) RAROC = Risk Adjusted Return on Capital - Economic view of capital adequacy and risk adjusted returns RAROC = How much are we earning on the capital that we have committed to our businesses? How much capital is needed to protect us to a given solvency standard (AA)? CAPITAL PRODUCTIVITY CAPITAL ADEQUACY Compare RAROC with Hurdle Rate (Cost of Capital) Compare Required Economic Capital with Available Economic Capital Total Return Required Economic Capital (REC) Return Metric considers unrealized gains and losses Hurdle rate is 11% - could move down in 9-10% range depending on outcome of COC work Target TCRs being set differential hurdle rates September 11, 2008

Enterprise Capital and RAROC Applications Capital adequacy Including future Rating Agency capital adequacy determination Performance measurement & Incentive compensation Strategic planning & Capital allocation Product Structure & Pricing Risk Transfer Expense Allocation September 11, 2008

Nationwide ERM Framework Legal, Regulatory, & Compliance Insurance Operational Strategic Market Credit Measure Analyze Manage Monitor Identify EXECUTE Objectives Aggregation Framework Feedback Strategic Planning Capital Allocation Risk Capacity, Appetite & Limits PLAN Risk Adjusted Performance Capital Adequacy Risk Modeling EVALUATE Risk Governance & Culture Risk Policies Roles & Authorities GOVERNANCE Internal Risk Management Partnerships Training & Communications Communication Rating Agencies & Regulators Competitors & Best Practices Customers Counterparties External Environment ERM Tools Common Language Risk Classification Framework Infrastructure September 11, 2008

ERM Tool – Ops Risk Information Architecture Common Information Architecture Common Dimensional Hierarchies (Classification and Aggregation) Common Metrics Definitions Common Reporting Common Workflow Shared Risk and Control Data Shared Mitigation Activity Data Shared Internal and External Loss Data Compliance HR Privacy Internal Audits IT Security / Continuity Management September 11, 2008

Nationwide ERM Framework Legal, Regulatory, & Compliance Insurance Operational Strategic Market Credit Measure Analyze Manage Monitor Identify EXECUTE Objectives Aggregation Framework Feedback Strategic Planning Capital Allocation Risk Capacity, Appetite & Limits PLAN Risk Adjusted Performance Capital Adequacy Risk Modeling EVALUATE Risk Governance & Culture Risk Policies Roles & Authorities GOVERNANCE Internal Risk Management Partnerships Training & Communications Communication Rating Agencies & Regulators Competitors & Best Practices Customers Counterparties External Environment ERM Tools Common Language Risk Classification Framework Infrastructure September 11, 2008

Strategic Asset Allocation Process September 11, 2008

Total P&C Efficient Frontier September 11, 2008

Total P&C Efficient Frontier September 11, 2008

Asset/Liability Interaction Think of liabilities as negative assets Expected duration based on historical payout patterns Actual duration includes systematic and idiosyncratic volatility Inflation sensitivity Residual volatility Claims practices Mix of coverages/perils Litigation practices Impact on efficient frontier driven by several characteristics Inflation sensitivity and responsiveness Payout pattern (expected duration) Volatility of duration September 11, 2008

Inflation and Economic Value Avail. Econ. Capital (end year 4) Average inflation (years 1-4) In low inflation environments erosion of AEC is driven by catastrophe risk Nationwide is able to increase premia to keep up with inflation changes Nationwide not able to reset premia significantly enough to protect AEC in high inflation or inflation changing regimes September 11, 2008

Asset/Liability Management – Inflation Modeling Investment portfolio optimization requires a defined view of inflation sensitivity and responsiveness with respect to reserves and new business Generally, losses have a low correlation with inflation, but a high sensitivity to inflation Key questions: Inflation Modeling What is expected inflation over the model horizon? What is inflation volatility over the model horizon? Liability modeling How sensitive are your reserves to inflation? New losses? If less than fully sensitive, why? How does expected inflation change when actual inflation occurs? How quickly does pricing react to a change in expected inflation? September 11, 2008

US CPI and CORE CPI inflation US Inflation History US CPI and CORE CPI inflation 2 September 11, 2008

Enterprise Risk Management – Role of Actuaries ERM provides actuaries with an opportunity to use their understanding of the business and its risks to increase their strategic role within the organization Data provider Limited – Reserves, ultimate losses Expanded – Payout patterns, volatility assumptions, correlations Subject matter expert Risk model developer/owner Risk management partner If the actuarial profession doesn’t step up to the challenge of ERM, others will. Who understands the business better than you? September 11, 2008