Nationwide and Harleysville Insurance Agree to Merger; Analysts Respond

September 29, 2011

Nationwide Mutual Insurance Co. and Harleysville Insurance announced on Thursday, Sept. 29, that they have agreed to a merger.

Nationwide Mutual will acquire Harleysville Group for $760 million. Nationwide Mutual will pay $60 a share in cash for Harleysville, nearly a 100 percent premium to the stock’s Wednesday close.

Harleysville Mutual policyholders will become policyholders and members of Nationwide Mutual.

The combined organization will have an estimated net surplus of more than $13.5 billion and over $16 billion in annual direct written premiums.

The companies said the combination will expand Nationwide’s distribution footprint, increase its property/casualty commercial lines business and provide a broader product portfolio for agents and customers.

They said the deal will open up new opportunities for their independent agency partners, some of whom have expressed concern over the possible merger, as well as for Nationwide’s exclusive agents.

“With Harleysville’s expertise in commercial lines and Nationwide’s complementary geographic distribution, there will be a substantial opportunity to increase market share, while also providing our combined agents and customers access to a broader portfolio of insurance, financial and banking products,” said Steve Rasmussen, chief executive officer of Nationwide.

Michael Browne, president and chief executive officer of Harleysville, said the deal will enable his company to expand its business for its independent agency partners and to enter important new markets from a position of strength.

“We are proud of our 96-year history and the longstanding success we and our independent agencies have enjoyed as a result of our partnership with one another. We remain committed to our trusted independent agency partners and to the independent agency system,” said Browne. “I am confident that the combined organization will allow us to deliver the best products and services available to grow our independent agents’ books of business with us more effectively and efficiently.”

Rasmussen said the transaction accelerates a strategy making it easy for agents and customers to do business with Nationwide however they desire. “Nationwide has invested heavily in independent agent distribution, beginning with our acquisition of Allied Insurance in 1998,” said Rasmussen in a statement. “While the Harleysville transactions would expand our independent agency distribution nationally, Nationwide also maintains a strong commitment to its exclusive agency partners. We’re committed to making strategic investments in all of our distribution channels as each is vital and contributes to our mission.”

Under the terms of the agreement, Harleysville Mutual would merge into Nationwide Mutual and Harleysville Group, Harleysville Mutual’s publicly traded subsidiary, would be merged with a newly formed subsidiary of Nationwide Mutual. Each public stockholder of Harleysville Group would receive $60.00 per share in cash. Upon closing, Harleysville Group would be a wholly owned subsidiary of Nationwide.

Through the combination, Harleysville will join Nationwide’s property/casualty independent agency business unit under the Harleysville brand. In addition, Harleysville’s current headquarters in Harleysville, Penn., will serve as an integral part of the combined company’s national, independent agency-based platform. Browne will become president and chief operating officer of the Harleysville company.

The announcement confirms earlier reports that talks were underway between the two insurers.

The transactions are subject to customary closing conditions, including, among others, 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. The transactions are expected to close in early 2012.

In connection with the merger of Harleysville Group, Harleysville Mutual has entered into a voting agreement with Nationwide Mutual under which it has agreed to vote its 54-percent interest in Harleysville Group in favor of the merger.

Paying 2.1 times GAAP Book Value

Nationwide is paying a healthy premium for Harleysville, an analyst said.

Nationwide is paying $60 per share. “Based on 2011 second-quarter data, this represents 2.1 times GAAP book value and 1.8 times statutory surplus,” according to RBC Capital Markets analyst Mark Dwelle.

This price represents a healthy premium, and is more representative of the types of deals reached near the top of the market in 2006-2007, when Liberty Mutual bought Safeco for 1.8 times book value and Ohio Casualty for about 1.6 times book value, analyst Dwelle stated in his research note.

Given the premium paid, the friendly nature of the offer and the type of deal (all cash), “we don’t anticipate any major roadblocks to closing, which management believes will happen in early 2012.”

Also, Dwelle noted, Harleysville Group is 55-percent owned by Harleysville Mutual, “which would make it almost impossible for Harleysville Group Inc. shareholders to block the deal. We don’t see any regulatory or anti-trust roadblocks, either, as Harleysville is a clean property and is not big enough to trigger anti-trust concerns. Other companies which have similar geographic footprints and business mix include Selective Insurance and The Hanover Group,” the analyst said.

“The only other observations we would have, is that if a buyer is willing to pay two times book for a slightly above average small cap regional insurer, it should make investors take a fresh look at properties like Chubb, Travelers and ACE, all of which are substantially more profitable and in the case of Travelers and Chubb are trading well below book value, approximately 80 percent and 85 percent, respectively. The valuation tends to highlight the exceptionally low valuations which prevail across the group.”

Analyst Sees “Good Strategic Fit”

Moody’s Investors Service’s senior credit officer Paul Bauer told Insurance Journal that Harleysville is a good fit for Nationwide.

“Harleysville brings geographic footprint for Nationwide, a much stronger northeast presence,” he said. “The companies are saying Harleysville would be combined with what’s now the Allied portion of Nationwide, which is their independent agency business. Allied has more of a middle of the country and West Coast geographic spread. So you combine the east coast with the middle and west, and it will help geographic diversification.”

“Based on what Nationwide has said, they plan to keep the Harleysville brand name and keep a lot of the current Harleysville structure. So it’s more of a case of setting operations alongside each other,” analyst Bauer said. “It also helps product diversification because Harleysville has more of a commercial book of business than Nationwide. So we think both of those factors are positive.”

But he added there is one negative aspect for Nationwide: Harleysville’s catastrophe exposure. “The negative is that it does add more overall risk to the Nationwide organization. Harleysville has a fair amount of catastrophe exposure to northeast weather events. Nationwide would essentially be taking on more risk with roughly the same amount of capital to support it. But we think it’s a modest negative. The acquisition does make sense strategically.” He said Moody’s is keeping Nationwide ratings at A1 with a stable outlook.

There is some pent-up demand for mergers and acquisitions, analyst Bauer added. “You do have a large number of medium-sized insurance companies out there, and this is a business where scale is important. So in the long run, you are likely to see more consolidation.”

But one big barrier has been that many companies are trading where stock values are closer to, or even below, book value. So it’s difficult to put a deal together, especially if the company that wants to do the acquisition has stock that’s trading close to or below book value, the analyst said. “It’s difficult to put an attractive-enough deal out there. The Nationwide deal is unique because they are a mutual company. They don’t necessarily have to worry about restrictions they might have based on what their stock is doing. So that has helped Nationwide put a deal together. Most of the companies out there are not mutual companies.”

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