Moody’s: Negatives Offset Positives for Nationwide’s Harleysville Acquisition

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

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

In its Weekly Credit Outlook, Moody's says the combined companies will also create higher under underwriting leverage and increased operation risk for Nationwide.

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

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

The acquisition offers positives for Nationwide as well, notes Moody's. The addition of Harleysville will provide Nationwide with a strong presence in Mid-Atlantic and Northeastern states, while also increasing Nationwide's share of small business commercial-lines insurance. The combination will also increase Nationwide's distribution capabilities among independent agents, Moody's says.

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

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