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The merger of insurer Nationwide Mutual with regional carrier Harleysville Mutual is all about growth, not only for the companies but also for their independent agents, according to the CEOs of the two insurers.
Harleysville is a “perfect match” for his company, said Steve Rasmussen, chief executive officer of Nationwide Mutual, which he said has been looking to expand into the Northeast, add to its independent agency distribution channel, and gain accounts in commercial lines — all three of which Harleysville brings to the table.
For Harleysville, the merger is an opportunity to grow by expanding where Nationwide is strong, which is in the West and Midwest and in personal lines, and by giving its independent agency force access to a fuller menu of products, according to Michael Browne, president and chief executive officer of the Pennsylvania-based regional carrier.
Nationwide Mutual announced this week that it will acquire Harleysville Group for about $760 million. Nationwide Mutual will pay $60 a share in cash for Harleysville.
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.
Harleysville will continue to operate as an independent agency company under Nationwide, with Browne at Harleysville’s helm, out of the Harleysville, Penn. office. Nationwide Mutual’s headquarters is in Columbus, Ohio.
In an interview with Insurance Journal, both CEOs stressed that the merger is an opportunity for independent agencies and that they do not see major cuts in either their agency forces or in the number of company personnel. Rasmussen said the companies’ footprints are so different that there are only about 100 agencies for the two insurers that are in the same areas.
“Frankly, we want to continue with all of our agency partners. We’re not looking to cut back. Actually, we’re looking for more,” said Rasmussen. “And I suspect that’ll be the case following this discussion, because each organization, frankly, has relationships with larger agencies that they may be able to assist each other in building relationships across the two. So, this is all about adding and all about growth.”
Nationwide Mutual is known for its personal lines and Main Street commercial lines business in the West and Midwest, whereas Harleysville is known in the Northeast and Middle Atlantic states, with about 75 percent of its business in commercial lines.
“We have been looking for some time to find an effective way to get into the Northeast, which we do not have any presence in, to really give us a national footprint,” the Nationwide CEO said. “We were looking for a relationship that had commercial expertise that Harleysville has. In the end, Harleysville became the really perfect match for us, in terms of getting us that significant Northeast footprint and also knowledge and expertise in the commercial arena. Both of those help or objective of getting our independent agency brands, particularly what I’ll call a retail independent agency brand of Allied, and now Harleysville, a national scope to put us out there.”
Rasmussen said Nationwide is often only looked at as a personal lines exclusive agency company and is not typically recognized as an independent agency company, or even as a multiple channel company, but in fact its independent agency division (including Allied, Scottsdale, Titan and Nationwide Agribusiness) produces one-third of its business.
Nationwide has about 4,500 independent agents, which is about the same number of exclusive agents that it has, according to Rasmussen. Its independent agents are primarily with its Allied Insurance affiliate.
Browne said this is a “great opportunity” for Harleysville to grow, something he said the insurer has not been able to do very easily.
“[I]f you look at out record over the last, really since I’ve been CEO [2004], we’ve had a great run. Our operating return on equity has been double digits. But we’ve had trouble growing,” Browne said. “Part of that is the recession, part of that is the commercial lines fell off market. But this is an opportunity for us to grow. I think it’s a very exciting opportunity and I think that as our independent agents learn about this, they’re going to be very excited, too.”
The merger appears to be a great opportunity for Browne, too. Reuters reported that as of the company’s last proxy filing, Browne owned 2.5 percent of Harleysville Group’s shares, worth about $18.6 million Thursday, based on the stock’s one-day gain. The proxy said Browne also had vested but unexercised options on 443,005 shares — potentially $12.2 million more if the options had been exercised before the deal, according to Reuters.
Browne is a former Pennsylvania insurance commissioner and practicing attorney.
Rasmussen was elected CEO of Nationwide in 2009. Prior to that, he was president and chief operating officer of P/C operations for Nationwide from 2003 to 2009. He previously served as president and chief operating officer of Allied Insurance and held the same positions with CalFarm Insurance, an affiliated company.
Rasmussen told Insurance Journal that as independent agencies themselves consolidate and grow larger, they need a national carrier to work with them.
“It becomes ever more important for all of us in dealing with our independent agency partners who continue to consolidate. Really, you need a national footprint to be able to meet their needs more over time. This national footprint, really gives us the horsepower to compete with anybody in the independent agency ranks,” Rasmussen said.
Browne said that even mid-sized agencies would benefit from the additional products including financial services and agribusiness coverages that they will have access to through the Nationwide.
“We’re going to become more important to them because of everything we can provide to them,” Browne said.
Rasmussen said Nationwide, while it is pigeonholed as an exclusive agency company, believes the future is in multiple distribution channels.
“When you really think about where the product portfolios are headed today, there’s no question that personal lines is heading more towards direct and that’s just been a reality over the past five plus years,” he said “The other side of the coin is the independent agency ranks continues to secure their foothold in the commercial portfolios. We actually want to be across all those product lines and so we really need to be in the locations where we can get the best in breed.
“It’s not that our exclusive agents don’t sell some commercial, but that’s not where they do their best work. We certainly have some good exclusive agents that do. But we also know that if we’re going to be a national player in commercial lines, we have to have strong relationships with independent agencies. That was the reason the Allied organization was brought into play and the same reason that we’re working with the Harleysville folks.”
Independent agents are a part of the Harleysville tradition and the merger has some of those agents worried. So what does a CEO of a traditional independent agency company tell its agents about joining with a company that is not known for its independent agency distribution?
According to Browne, “You just tell them the truth and the truth is very simple, which is that we’re going to continue to remain inexorably committed to our independent agents,” said Browne. “We’re not diluting our commitment in any way. We’re partnering with Allied, which is a premier, independent agency company, and we’re creating one of the most formidable independent agency companies in the United States. So this is a great message.”
Rasmussen, too, sought to reassure independent agents, pointing to the experience at independent agency insurer Allied, which Nationwide bought in 1998.
“They’re [Allied] totally committed and that’s where they’re at is with their independent agency partners. And that commitment and the financial resources of Nationwide have ended up in Allied, since 1998, growing by three and a half times what they were at the time of the acquisition. They went from just under $1 billion in premiums to now $3.5 plus billion in premiums. That was a great outcome for the independent agency ranks to have the financial resources and capabilities of Nationwide behind the channel,” he said.
Rasmussen said the company would continue to operate its distribution channels as separate entities. It now keeps its independent agency distribution separate from its financial services and exclusive agency divisions.
Also, while Allied and Harleysville will be separate companies, they will borrow from each other.
“Will we bring over products and capabilities from Harleysville into Allied or vice versa? Absolutely, we will. We want to keep those independent agency channels working together and so it is all about bringing capabilities together, not necessarily needing to contract back and forth,” Rasmussen said.
The companies may also be able to take advantage of each other’s technology strengths. Nationwide and Allied may be able to use some of Harleysville’s technology in commercial lines, while Harleysville may benefit from some of Allied’s technology in the personal lines business, according to Rasmussen.
The deal should not affect Nationwide’s surplus lines operations or distribution. Nationwide’s surplus lines carrier, Scottsdale Insurance, has direct relationships with some of the largest national retail brokers but Rasmussen said Scottsdale would continue working through wholesalers on other excess and surplus lines business.
The two would not say who approached whom about a merger or how long talks have been going on other than to say they have been going on ‘a while.’
Browne did say that he thought it was “unfortunate” that the news of the merger talks was leaked before the companies had an opportunity to speak with their agents and employees.
The merger is getting mostly favorable reviews from analysts.
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,” Bauer said.
Bauer said Moody’s is keeping Nationwide ratings at A1 with a stable outlook.
There is some pent-up demand for mergers and acquisitions, he 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,” he said.
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.”
Another analyst noted that Nationwide is paying a healthy premium for Harleysville at $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.
He said this price is 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.
Given the premium paid, the friendly nature of the offer and the type of deal (all cash), Dwelle wrote that there should not be 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.
Dwelle said the deal might encourage investors to take a look at some other insurers.
“[I]f 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,” Dwelle wrote.
A.M. Best Co. placed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of Harleysville Insurance under review with positive implications.
A.M. Best Co. also left unchanged the financial strength rating of A+ (Superior) and issuer credit ratings of “aa-” of Nationwide Group.