Report: Liberty Mutual Failed in Bid to Buy Harleysville

It turns out there was another player in last year’s merger deal between Nationwide Mutual Insurance Co. and Harleysville Mutual Insurance Co.

According to a news report, Liberty Mutual also made an offer last September to buy Harleysville but was rejected in favor of Nationwide.

Bloomberg reported last week that Liberty Mutual had offered $42 a share for stockholders of Harleysville Group, which was lower than Nationwide’s offer of $60-per-share. Still, the Liberty Mutual offer had something that Nationwide didn’t: an incentive to policyholders in the form of a $250 million payout.

These details were included in Harleysville’s Securities and Exchange Commission filing last month. The rival bidder referred to as “Company B” in filings is Liberty Mutual, the report said.

Liberty Mutual declined to comment for this article. Harleysville did not immediately respond to requests for an interview.

The disclosure could add more fuel to the criticism that Harleysville executives and directors stand to gain financially from the Nationwide deal while Harleysville policyholders are left out in the cold.

Liberty Mutual has been critical of the Nationwide/Harleysville merger. The insurer has been asking regulators to scrutinize the deal. Liberty Mutual wrote to regulators that the Nationwide deal may enrich Harleysville executives, who own shares in the publicly traded subsidiary Harleysville Group, at the expense of the policyholders who own the parent mutual company.

“We have significant concerns that the proposed merger of Harleysville Mutual with and into Nationwide Mutual Insurance Company, which was announced on Sept. 29, 2011, may be disadvantageous to the policyholders and members of Harleysville Mutual,” Liberty Mutual wrote in its comment letter to Pennsylvania regulators in October.

“Despite the very significant premium being offered to the public shareholders of Harleysville Group (as well as the officers and directors of Harleysville who own such shares and/or hold stock options in such shares), the merger agreement does not provide for any consideration being paid to the members of Harleysville Mutual in connection with the proposed merger beyond the fact that they will become members of Nationwide.”

“While we acknowledge that it is not unusual for no such consideration to be paid to members in connection with a traditional merger of two mutual insurance companies, the proposed merger differs significantly from such traditional transactions because Harleysville Mutual owns approximately 54 percent of the shares of Harleysville Group, which is currently a publicly traded company and which will become a wholly-owned subsidiary of Nationwide as a result of the subsidiary merger,” Liberty Mutual said in the letter.

So far, several lawsuits have been filed by some Harleysville policyholders in an attempt to block the merger.

“Harleysville is a mutual insurance company with a publicly traded stock subsidiary. And the directors and officers of the mutual are basically the same people who run the stock company,” David Schiff, editor of Schiff’s Insurance Observer, told Insurance Journal. Schiff is an advocate for mutual policyholders.

Harleysville has two sets of board of directors, one for the parent Harleysville Mutual and another for Harleysville Group. But there is a significant overlap. Of Harleysville Mutual’s nine directors, six also sit on the Harleysville Group board. Of Harleysville Group’s eight directors, six are also directors for Harleysville Mutual.

“Directors all own stock in the stock company, so their own financial interest is to do what will make money for the stock company. Even if they do a lousy deal for the mutual but if it’s a better deal for the stock company, they make money for themselves by doing that. It’s a troubling structure,” Schiff said.

“I don’t doubt for a second that if the Harleysville mutual board was a truly independent board of directors, they would never do this deal. They are not independent. They are all conflicted.”

The Harleysville parent company and the subsidiary share the same group of executives. And many executives own stock in Harleysville Group.

Michael Browne, CEO and president of Harleysville Mutual and CEO of Harleysville Group, has stock and options that would be worth almost $28 million with Nationwide’s $60-per-share deal, according to Harleysville’s SEC filings. Those same shares would be worth less under Liberty Mutual’s $42-per-share proposal.

“The best deal for the policyholders wouldn’t have been the best deal for the officers and directors whose interest was getting a lot of money for shareholders because they are also the shareholders in the group. And that’s what they have done — they placed their interest and the shareholders’ interest, in my opinion, far ahead of the policyholders’ interest,” Schiff said.

However, Harleysville has been speaking out to defend its merger agreement with Nationwide. Harleysville said in its filings with Pennsylvania regulators that the merger for which it is seeking the approval of the Pennsylvania insurance department is “a fair and compelling transaction that benefits all of the stakeholders of the Harleysville Mutual and satisfies standards set forth in (Pennsylvania statutes).”

Harleysville said it disputes “virtually all of the contentions” made by Liberty Mutual.

“The principal reason that a business or individual becomes a policyholder of a mutual insurance company is to protect their assets consistent with their economic means,” according to the Harleysville filing last November.

“By virtue of the Harleysville Mutual merger, the Harleysville Mutual policyholders will become policyholders in Nationwide, an insurance company with an approximate $13 billion in group surplus, an A.M. Best rating of A+ and a significantly larger and more diverse product portfolio, all of which will serve to significantly increase the protection afforded to the insured assets of Harleysville Mutual policyholder and thereby enhance the most fundamental benefit derived from mutual insurance company membership.”

The Bloomberg report last week also quoted a senior Harleysville executive who refuted charges that Harleysville executives personally stood to gain more from the Nationwide deal. The rival bid had incentives for Harleysville executives that would have made its offer comparable to what Harleysville executives would get from Nationwide, General Counsel Robert Kauffman was quoted as saying.

The real concern was that the rival bidder had plans to lay off workers and close offices at Harleysville, according to the executive.

(Filings with Pennsylvania regulators can be found at “Harleysville/Nationwide cumulative log” on Commonwealth of Pennsylvania’s website)