Liberty Criticizes Harleysville Merger After Its Bid Said to Be Rejected

Liberty Mutual Holding Co. is asking regulators to scrutinize the sale of Harleysville Mutual Insurance Co. to a competitor after its own bid for the company was rejected, said a person with knowledge of the matter.

The offer was described in a Harleysville regulatory filing last week, with Liberty identified only as “Company B,” said the person, who requested anonymity as the negotiations were private. The insurer turned down the offer, which included a payout of $250 million to its customers, and instead agreed to a sale to Nationwide Mutual Insurance Co. in September with no customer payout.

Weeks later, Liberty told regulators the Nationwide deal may enrich Harleysville executives, who own shares (HGIC) in the insurer’s Nasdaq-listed subsidiary, at the expense of the customers who own the parent company. Mutual insurance companies are owned by their policyholders. Four Harleysville policyholders are suing to block the proposed takeover.

"Policyholders are looking to get a piece of the action, waiting for some kind of payout," said Sachin Shah, a merger arbitrage strategist at Tullett Prebon Plc, who is based in Jersey City, New Jersey.

Outside shareholders stand to get $60 a share, or about $840 million, from Nationwide, more than twice what the stock traded at before Bloomberg News reported the takeover talks.

Harleysville, based in Pennsylvania, said last week that Company B’s offer was $42 a share for the stockholders of Harleysville Group Inc. (HGIC), which together with the payout to policyholders would amount to more than $800 million.

Harleysville Group shares are trading 5.6 percent below the offer price. They fell (HGIC) 1.2 percent to $56.64 yesterday in New York.

Jobs Concern

Harleysville rejected the offer from Company B partly because of concern that the bidder planned to cut jobs and close offices at Harleysville, General Counsel Robert Kauffman said in an interview. The structure of that proposed transaction was more complicated and might have taken longer to complete, he said.

Company B offered payouts to senior executives that would have made its offer “comparable” to what they would get in the Nationwide deal, Kauffman said.

The deal has attracted scrutiny partly because the parent and the subsidiary share the same executives. William Scranton III, a former lieutenant governor, is the chairman of both Harleysville boards. Most of the executives own stock in the publicly traded unit, while none has an economic interest in the parent beyond that of policyholder. The parent owns about 54 percent of the subsidiary’s stock.

Chief Executive Officer Michael Browne, a former insurance commissioner, has stock and options that would be worth about $27.9 million in the sale to Columbus, Ohio-based Nationwide at $60, according to last week’s filing. They would be worth about $13.9 million under the Liberty proposal.

‘Inherent Conflict’

The planned sale to Nationwide involves an “inherent conflict of interest” between Harleysville policyholders and shareholders in its publicly listed subsidiary, Boston-based Liberty said in an Oct. 12 filing with Pennsylvania regulators. Harleysville rejected the assertions in its own filing last month, saying the deal is fair.

Liberty said yesterday in a statement that it stands by its letter to Pennsylvania regulators and that the Nationwide transaction “should receive the appropriate regulatory review.” The insurer declined to comment further.

“We dispute virtually all the contentions” made by Liberty Mutual, Harleysville said in the response filed with the Pennsylvania Insurance Department. Under Pennsylvania law, a board must balance the interests of several constituencies rather than maximize a payout for a company’s policyholders, Kauffman said in the filing.

Customers will gain by being part of a larger mutual company with a better financial-strength rating, Kauffman said in the filing. Two directors of Harleysville Mutual who don’t serve on the subsidiary’s board formed a special committee that approved the deal, and got advice from a separate financial adviser, he said.

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net