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Nationwide Says Provident Mutual Deal Will Build Distribution Clout

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“We want to be a powerhouse in distribution,” said Joseph Gasper, president and chief operating officer of Nationwide Financial Services, during an interview in which he discussed his company’s announcement that it would acquire Provident Mutual Life Insurance Company for $1.56 billion.

Provident Mutual Life, based in Berwyn, Pa., will be acquired following a demutualization sponsored by Columbus, Ohio-based Nationwide Financial, the holding company for Nationwide Life Insurance Company, the sixth largest life insurer measured by admitted assets.

Gasper says Nationwide Financial has products including variable and fixed annuities, 401(k) and payroll deduction, and distribution including wirehouses, regional brokers, financial planners and a property-casualty agency force.

But what it did not have until the Provident deal was announced, he says, is a stable of career life insurance agents. The acquisition will add 768 career agents to Nationwide’s distribution operations, Gasper says.

It also adds Provident Mutual’s 1,100 independent agents and its affiliated broker-dealer, 1717 Capital Management Company, to Nationwide’s distribution arm, Gasper says. The financial services concern currently has four broker-dealer units tied to businesses including its 401(k) and mutual fund operations.

Gasper expanded on comments made during a call with analysts in which fixed annuities and distribution were cited as areas of potential future acquisitions.

Nationwide Financial, according to Gasper, is interested in emerging distribution arms such as public accounting firms that offer financial planning services and distribution in the 401(k) business.

Gasper says the wealth accumulation business is the “hot spot of financial services” and that a skilled agency force will be important in instructing customers who will be living longer and need to ensure adequate retirement incomes for longer periods of time.

Analysts praised the transaction and the capabilities it will add to Nationwide’s ability to meet customers’ saving needs.

Andrew Kligerman, an insurance analyst with Bear Stearns in New York, told NU the transaction is “quite a solid deal.” Kligerman cited the extensive distribution and product clout the combined entity would possess and the potential for increased sales that Nationwide’s brand name recognition will bring. “I can only see this as a positive.”

Kligerman estimates long-term compound annual earnings-per-share growth of 12% and average return on equity of 15% in line with its peers’ 12% ROE.

Standard & Poor’s Corp. and Moody’s Investors Service, both in New York, also weighed in on the deal.

S&P placed its ratings of Nationwide Financial and related entities on CreditWatch with negative implications. However, it placed its ratings of Provident Mutual Life & Annuity Company of America and Provident Mutual Life Insurance Company on CreditWatch with positive implications because of the benefits of ownership by Nationwide.

S&P expressed concern over the potential risk associated with combining the product and distribution capabilities of each organization as well as the ability to navigate a demutualization while maintaining a strong franchise.

Moody’s affirmed the credit ratings of Nationwide Mutual Insurance Company and its affiliates and placed the ratings of Provident Mutual and its wholly owned subsidiary, Provident Mutual Life and Annuity Company of America, on review for an upgrade.

The transaction would be funded by floating an additional 26 million shares of Nationwide stock, as well as debt and capital from Provident. At a price of $44.96, the share price Nationwide opened at on Aug. 8 shortly after the announcement, funds raised from the additional common shares would total $1.168 billion. The difference in the purchase price would be funded by approximately $160 million of capital from Provident Mutual and $220 million in debt. The transaction will reduce the ownership stake of Nationwide Mutual Insurance Company, Nationwide Financial’s parent, to 68% from 81.3%.

During the conference call, management said the price of 14.5 times the price-to-earnings multiple was a fair price for Provident Mutual and comparable to the prices of other recent acquisitions. Swiss Re, for example, is paying a 13.3 P/E multiple for its recently announced acquisition of Lincoln Re, a unit of Lincoln National Corp. in Philadelphia (see NU, Aug. 6).

In addition to policyholder approval, Provident Mutual must also get the nod from regulators.

Rosanne Placey, a spokeswoman for the Pennsylvania insurance department, said Provident has not yet filed a plan with the department and declined comment on how it will be received. However, Placey did say it will be the first sponsored demutualization and the first life insurance demutualization out of a total of 13 conversions the department has seen since a 1996 law went into effect.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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