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Harleysville Committee Finds Nationwide Merger Should Proceed

Posted on 06 Mar 2012

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A special litigation committee of Harleysville Mutual Insurance Co., majority owner of publicly traded Harleysville Group, concluded that a proposed merger with Nationwide Mutual Insurance should proceed, over the objections of policyholders who contend that a possible competing offer was better for them.

The committee’s report addresses allegations including that the proposed merger of the two property-casualty insurers unfairly enriches executives of Pennsylvania-based Harleysville Group who own stock, at the expense of policyholders in the mutually owned parent company.
In September, Harleysville Group shares surged nearly 90% after Nationwide agreed to buy the company for $840 million, a deal that will expand Nationwide’s property-and-casualty business and distribution lines.

In December, rival Liberty Mutual Holding Co. asked Pennsylvania regulators to scrutinize the proposed transaction; the insurer didn’t identify itself as a potential bidder for Harleysville but people familiar with the matter have said that Liberty had sought to put a deal together but was rebuffed in favor of Nationwide. In regulatory filings, Harleysville has said that a potential bid from “Company B” could have included a payment to policyholders as well as shareholders.

The litigation committee was formed to investigate the claims in numerous lawsuits filed on behalf of policyholders.

The committee concluded, among other things, that Pennsylvania law doesn’t require payment to policyholders in the context of mergers of mutual insurance companies. Even in the context of demutualization, Pennsylvania law merely requires that policyholders receive stock subscription rights as compensation for the extinguishment of their rights as policyholders.

Also, the committee noted that a direct payment to policyholders reduces the insurance company’s surplus–and this would run “directly counter to the policyholders’ primary interest in insurance protection and security that their claims will be paid.”

The committee also noted that the transaction under discussion with Company B would have required a restructuring of Harleysville Mutual, so that it could be absorbed into Company B, which was a “stock based mutual holding company.” Such a restructuring could have required more than a year to accomplish, and “would have entailed risk as to outcome.” The board “acted well within its discretion when it concluded that Company B was not a viable merger partner.” It added that Company B’s rating from A.M. Best was an A rather than Nationwide’s A+.

It also said the Company B proposal involved “cost-saving measures that would have negatively impacted Harleysville’s employees, corporate culture, and other constituents.”