Nationwide Calls Harleysville Deal ‘Fair and Compelling’

Nationwide is brushing off Liberty Mutual’s allegation that Nationwide’s pending acquisition of Harleysville Mutual would unfairly benefit subsidiary Harleysville Group’s stock shareholders at the expense of Harleysville Mutual policyholders.

In particular, Liberty Mutual noted in its comment letter to the Pennsylvania Insurance Department last October that Harleysville Mutual executives, who have stakes in subsidiary Harleysville Group’s stock, stand to make personal profits from the deal.

Liberty Mutual was reportedly also a serious contender to acquire Harleysville. According to a recent Bloomberg report, Liberty Mutual was the other, failed bidder to make a deal with Harleysville Mutual.

Liberty Mutual’s objection to the Nationwide/Harleysville deal has caught the attention of Pennsylvania regulators, who have now retained an external advisory firm, Boenning & Scattergood, to provide an independent assessment of the merits of the proposed combination — with particular focus on the interests of Harleysville Mutual’s policyholders.

The merger was originally expected to close in early 2012 but is now expected by the companies’ managements to close during the second quarter of 2012, pending approvals from stockholders of Harleysville Group; policyholders of Harleysville Mutual and Nationwide Mutual, the Pennsylvania Insurance Department, the Ohio Department of Insurance, and various other regulatory bodies.

But Nationwide tells Insurance Journal that “We believe the proposed combination of the two companies benefits all stakeholders and is a fair and compelling transaction. The combination creates a stronger insurance market with more choices for customers.”

“Nationwide remains fully committed to the proposed merger with Harleysville Mutual,” said Joe Case, a spokesman for Nationwide.

“With all due respect to our colleagues at Liberty Mutual, we believe that their letter dated Oct. 12, 2011, is inaccurate in many respects and mistakenly characterizes the combination,” he added.

He said that Nationwide, like Harleysville, has filed an official response letter with the Pennsylvania Insurance Department that details the insurer’s position.

Nationwide spokesman Case continued: “The benefits of the proposed merger to Harleysville policyholders are significant and traditional for a merger of two mutual insurance companies.”

“Regarding the fairness of the proposed transaction, Nationwide believes the interests of the Harleysville Group stockholders differ significantly from the interests of Harleysville Mutual policyholders.”

He said Harleysville Group stockholders have a financial interest based on their investment in the company. Stockholders of Harleysville Group are receiving cash because their interest in the company will cease (unlike that of the mutual policyholders) and they will have no interest in the surviving mutual insurance company after the merger.

Harleysville Mutual policyholders are different because they have an ongoing interest after the transaction, the Nationwide spokesman said. Where a stockholder invested to seek a financial return, policyholders participate in the interest of gaining protection.

Rather than a cash dividend, these policyholders will benefit by becoming policyholders and members of Nationwide, a substantially stronger and more broadly diversified company with higher ratings. Harleysville policyholders will also benefit from Nationwide’s more complete line of products and its national service support, he said.

The official closing date is expected sometime in the first half of 2012, subject to regulatory approvals. “Nationwide continues to cooperate with regulators as they review the proposed merger. We consider the hiring of an outside firm to review the proposal routine and appropriate,” Nationwide’s Case said.

Moody’s Investors Service noted in its report last week that the Pennsylvania Insurance Department has hired an outside firm, Boenning & Scattergood in West Conshohocken, Penn., for an independent assessment of the merits of the merger, a move that is at least partly triggered by Liberty Mutual’s strong objection to the deal.

“It appears that among the considerations given by the Pennsylvania Insurance Department in seeking an outside assessment was a public complaint filed with the Department by a subsidiary of Liberty Mutual,” according to the Moody’s report.

However, the Pennsylvania Insurance Department told Insurance Journal that hiring an outside firm for an independent evaluation of a pending deal is nothing unusual. Retaining an outside firm does not suggest there are any problems or obstacles, according to the department.

Boenning & Scattergood is expected to deliver a preliminary draft of its findings by March 31 and a final report by May 31. Consequently, Moody’s says it expects that the closing of the transaction, should it proceed, will be no earlier than the second quarter of 2012.

Harleysville underwrites small and middle market commercial and personal lines insurance through independent agents, primarily in the eastern and mid-western regions of the United States.

The Moody’s report noted that Harleysville Group is a publicly-traded holding company that is 54 percent owned by Harleysville Mutual. For the first nine months of 2011, Harleysville Group reported net earned premiums of $602 million and net loss of $18 million. As of September 30, 2011 shareholders’ equity was $752 million.