S&P Ups Harleysville’s Outlook; Affirms Ratings on Nationwide Deal

October 7, 2011

Standard & Poor’s Ratings Services has affirmed its ‘A-‘ counterparty credit and financial strength ratings on Harleysville Mutual Ins. Co. and its affiliates, as well as the counterparty credit rating on Harleysville Group Inc. (HGI), and has revised its outlook on all of the ratings to positive from stable.

“The rating actions follow the announcement by Harleysville that the company will merge with Nationwide Mutual Ins. Co. and Harleysville Group Inc. will merge into a newly formed subsidiary of Nationwide Mutual,” explained credit analyst Sid Ghosh. The transaction is subject to shareholder and regulatory approvals and is expected to close in early 2012.

S&P noted that under the merger agreement, the “public shareholders of HGI who own 46 percent of HGI’s shares will receive $60 per share in cash from Nationwide.” The report also pointed out that Harleysville “continues to have a strong competitive position in selected states in the Northeast and Mid-Atlantic regions, and had very strong capital adequacy and conservative financial leverage as of June 30, 2011.”

However, S&P also observed that the “group’s operating performance significantly deteriorated in the first half of 2011. The group has reported a statutory pretax loss of $27 million as of June 30, 2011, compared with a pretax profit of $44 million for the same period in 2010. Harleysville’s consolidated statutory combined ratio deteriorated to 117.4 percent as of June 30, 2011, compared with 105.1 percent for the same period in 2010. Catastrophe losses adversely affected the current year results by 9.5 percentage points compared with 6.8 percentage points for the same period in 2010.”

S&P explained that it had revised the outlook to positive “based on our expectation that we will raise the rating on Harleysville Mutual Ins. Co. to ‘A+’ and subsequently withdraw the rating upon the successful close of the merger. We will likely raise the ratings on HGI’s operating insurance companies to ‘A’ based on our view that these companies will be what we consider strategically important to Nationwide Mutual Ins. Co.(FSR: A+/Stable/–) at the close of the merger deal as per our group rating methodology criteria.

“Additionally, we expect to raise the counterparty credit rating on HGI to ‘BBB’ at the close of the merger, based upon a standard three-notch differential between the rating on the holding company and the operating company.

“However, if the merger is not completed as announced, we would likely affirm all the ratings and revise the outlook to stable, all else being equal.”

S&P added that it believes Harleysville will “maintain a strong competitive position and very strong capital adequacy for the next 6 to 12 months. However, Harleysville’s operating earnings will likely be negative for full-year 2011 based upon its reported results through June 30, 2011, and expected third-quarter catastrophe losses. Net investment income in 2011, though remaining strong, will not be enough to offset underwriting losses for the full year.

“Assuming no further catastrophe losses for the remainder of this year, Harleysville’s statutory combined ratio is expected be 115 percent-119 percent and should improve to about 103-104 percent in 2012, assuming 3 points for catastrophe losses and no material prior year reserve developments.”

Source: Standard & Poor’s

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