NU Online News Service, July 21, 11:52 a.m.EDT

Negative implications of Nationwide Mutual Insurance Company'splanned acquisition of Harleysville Mutual Insurance Company,including increasing Nationwide's catastrophe exposure, offset thepositives the company will see through improved diversification,according to Moody's Investors Service.

In its Weekly Credit Outlook, Moody's says the combinedcompanies will also create higher under underwriting leverage andincreased operation risk for Nationwide.

“For Nationwide, the acquisition's primary negative effect willbe the increase in business volume that Nationwide's capital basewill need to support,” says Moody's. “We estimate that thetransaction will increase Nationwide's gross premiums by 8 percentand gross loss reserves by 14 percent. Meanwhile, on a pro formabasis, policyholder surplus will increase by only 3 percent to$13.5 billion.

Moody's adds that Harleysville has exposure to significantcatastrophe risk—mainly hurricanes, tornadoes and winterstorms—particularly in the Northeast. “This will add toNationwide's already-high catastrophe exposure,” Moody's says,although the rating agency notes that the risk will be moderated bythe companies' different geographic footprints.

The acquisition offers positives for Nationwide as well, notesMoody's. The addition of Harleysville will provide Nationwide witha strong presence in Mid-Atlantic and Northeastern states, whilealso increasing Nationwide's share of small businesscommercial-lines insurance. The combination will also increaseNationwide's distribution capabilities among independent agents,Moody's says.

Regarding market-share benefits, Moody's says the transactionwill not change Nationwide's rank, but it will move the companyaway from its virtual tie with Progressive into a solid eighthposition among U.S. property and casualty companies.

For Harleysville, “the transaction is credit positive, with fewoffsetting risks,” says Moody's, and the company has been placed onreview for upgrade.