Merger with Nationwide Mutual after consideration of <strong>the</strong> impact of <strong>the</strong> P<strong>are</strong>nt Merger on HarleysvilleMutual and its constituencies, including policyholders, agents, credi<strong>to</strong>rs, employees, and <strong>the</strong>communities in which Harleysville’s facilities <strong>are</strong> located. The Company’s board of direc<strong>to</strong>rs deemed itadvisable and in <strong>the</strong> best interests of <strong>the</strong> Company’s s<strong>to</strong>ckholders <strong>to</strong> effect <strong>the</strong> Merger of Merger Subwith and in<strong>to</strong> <strong>the</strong> Company.At <strong>the</strong> joint <strong>meeting</strong> of <strong>the</strong> Boards on September 28, 2011, each of <strong>the</strong> Boards approved <strong>the</strong>Merger Agreement and <strong>the</strong> transactions contemplated <strong>the</strong>reby, including <strong>the</strong> Mergers. HarleysvilleMutual’s board of direc<strong>to</strong>rs also approved <strong>the</strong> Voting Agreement, pursuant <strong>to</strong> which it agreed <strong>to</strong> voteits sh<strong>are</strong>s of <strong>the</strong> Company in favor of <strong>the</strong> Merger. The Company’s board of direc<strong>to</strong>rs also approved <strong>the</strong>Voting Agreement, <strong>the</strong>reby making Section 203 (Business Combinations with Interested S<strong>to</strong>ckholders)of <strong>the</strong> Delaw<strong>are</strong> General Corporation Law inapplicable <strong>to</strong> <strong>the</strong> Merger.In evaluating <strong>the</strong> Mergers, <strong>the</strong> Company’s board of direc<strong>to</strong>rs and Harleysville Mutual’s board ofdirec<strong>to</strong>rs, acting with <strong>the</strong> advice and assistance of <strong>the</strong>ir respective financial and legal advisors,independently considered a number of fac<strong>to</strong>rs, including <strong>the</strong> following fac<strong>to</strong>rs:The Company’s and Harleysville Mutual’s Reasons for <strong>the</strong> Mergers• Potential for Growth. Nationwide Mutual has shown that selling insurance through independentagents can not only work, but such a means of distribution can substantially increase <strong>the</strong> amoun<strong>to</strong>f insurance sold. From 1998 (when Nationwide Mutual acquired Allied Insurance) until 2011,Nationwide Mutual has grown <strong>the</strong> Allied business from 22 <strong>to</strong> 33 states and has more thantripled its direct written premium from approximately $900 million <strong>to</strong> approximately $3.4 billion.• Harleysville’s Business and Prospects. The Boards considered, on a his<strong>to</strong>rical and prospectivebasis, Harleysville’s business, financial condition, results of operations and book value, includingtrends in <strong>the</strong> insurance industry, underwriting performance, and return on equity.• The Impact of Difficult Economic Conditions. The Boards considered <strong>the</strong> prospect of Harleysvilleremaining independent in light of current difficult economic conditions in <strong>the</strong> United States. TheBoards considered that economic conditions, among o<strong>the</strong>r fac<strong>to</strong>rs, have resulted in declines andlosses in <strong>the</strong> insurance industry and that <strong>the</strong> longstanding so-called ‘‘soft market’’ may continue,which would impede Harleysville’s growth. In particular, <strong>the</strong> Boards considered <strong>the</strong> currentvolatile state of <strong>the</strong> economy and general uncertainty surrounding forecasted economicconditions, in <strong>the</strong> short term and in <strong>the</strong> long term, both globally and within <strong>the</strong> insuranceindustry, and concluded that <strong>the</strong> Mergers represent a more favorable option <strong>to</strong> Harleysville thancontinuing <strong>to</strong> operate on a standalone basis.• The Thorough Process Followed in Evaluating Strategic Alternatives and <strong>the</strong> Low Likelihood that aThird Party Would Propose an Acquisition which would result in greater value for Harleysville. TheBoards oversaw a process of reviewing strategic alternatives, with <strong>the</strong> advice and assistance ofCredit Suisse, which is an internationally recognized investment banking firm and is regularlyengaged in <strong>the</strong> valuation of businesses and securities in connection with, among o<strong>the</strong>r matters,mergers and acquisitions, including transactions in <strong>the</strong> insurance industry, and a managementteam with considerable experience and expertise in <strong>the</strong> industry. The Boards, management andCredit Suisse discussed which third parties would most likely be both interested in acquiringHarleysville and qualified <strong>to</strong> do so from a financial, strategic, and knowledge standpoint. TheBoards ultimately concluded that none of those third parties were likely <strong>to</strong> make an offer onbetter terms than <strong>the</strong> Mergers or with lower execution risk.• The High Likelihood that <strong>the</strong> Transaction with Nationwide Mutual will be completed. The Boardsconsidered Nationwide Mutual’s particularly strong financial condition, <strong>the</strong> extensive amount ofdue diligence performed by Nationwide Mutual, and <strong>the</strong> relatively limited conditions <strong>to</strong> <strong>the</strong>40
closing of <strong>the</strong> Mergers, including that Nationwide Mutual would not require a financingcondition, and determined that, in <strong>the</strong>ir judgment, <strong>the</strong>re is a high likelihood that <strong>the</strong> Mergerswill be completed.• The Reputation and Business Practices of Nationwide Mutual. The Boards recognized that, relative<strong>to</strong> o<strong>the</strong>r potential purchasers for Harleysville, Nationwide Mutual has a corporate culture andbusiness practices highly compatible with those of Harleysville.• The Nationwide Mutual and Harleysville businesses <strong>are</strong> complementary, not competitive. The Boardsrecognized that Nationwide Mutual’s existing insurance business is complimentary <strong>to</strong> and notcompetitive with Harleysville’s operations, and vice versa, and a combination with NationwideMutual could potentially grow Harleysville’s brands.• Nationwide Mutual’s Intentions for <strong>the</strong> Operations of Harleysville. The Boards consideredNationwide Mutual’s commitments with respect <strong>to</strong> Harleysville’s business, operations, brand,employees and community which included <strong>the</strong> following:• for two years following <strong>the</strong> closing of <strong>the</strong> Mergers, not making major operational changes inHarleysville East (as such term is defined in <strong>the</strong> Merger Agreement) <strong>to</strong> core businessfunctions of Harleysville’s property and casualty business;• for two years following <strong>the</strong> closing of <strong>the</strong> Mergers, continuing <strong>to</strong> utilize in Harleysville East<strong>the</strong> Harleysville brand with respect <strong>to</strong> certain lines of property and casualty insurance andinsurance products;• for two years following <strong>the</strong> closing of <strong>the</strong> Mergers, substantially maintaining or exceeding<strong>the</strong> overall number of employees, as of <strong>the</strong> date of <strong>the</strong> Merger Agreement, at <strong>the</strong>Company’s headquarters and not causing a reduction in force <strong>to</strong> occur at <strong>the</strong> Worcester,Massachusetts location;• for two years following <strong>the</strong> closing of <strong>the</strong> Mergers, substantially maintaining or improvingphilanthropic and charitable contribution activities consistent with past practice sinceSeptember 30, 2010;• taking certain actions with respect <strong>to</strong> integrating Harleysville’s employees with NationwideMutual’s employee benefit plans; and• paying <strong>the</strong> unpaid portion of <strong>the</strong> 2011 target incentive compensation <strong>to</strong> each eligibleemployee of Harleysville and retaining and paying retention bonuses <strong>to</strong> certain executiveofficers of Harleysville.• The Terms of <strong>the</strong> Merger Agreement. The Boards considered all of <strong>the</strong> terms and conditions of <strong>the</strong>Merger Agreement, including among o<strong>the</strong>r things, <strong>the</strong> representations, warranties, covenants andagreements of <strong>the</strong> parties, <strong>the</strong> conditions <strong>to</strong> closing, <strong>the</strong> form of <strong>the</strong> consideration for <strong>the</strong>Mergers and <strong>the</strong> structure of <strong>the</strong> termination rights, and <strong>the</strong> fact that <strong>the</strong> Merger Agreementwas agreed <strong>to</strong> after an arm’s-length negotiation.• The Advice of Financial Advisors. The Boards considered <strong>the</strong> respective opinions of Griffin andKBW with respect <strong>to</strong> <strong>the</strong> fairness of <strong>the</strong> Mergers, as well as <strong>the</strong> views of Credit Suisse regarding<strong>the</strong> Mergers, including <strong>the</strong> view of Credit Suisse that, subject <strong>to</strong> cus<strong>to</strong>mary assumptions,qualifications and o<strong>the</strong>r matters described in its presentation <strong>to</strong> <strong>the</strong> Boards, <strong>the</strong> Mergersappe<strong>are</strong>d <strong>to</strong> Credit Suisse <strong>to</strong> be consistent with <strong>the</strong> financial aspects of <strong>the</strong> objectives of <strong>the</strong>Boards that had been articulated <strong>to</strong> Credit Suisse.41
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e made pursuant to existing contrac
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No Solicitations by the CompanyUnde
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defined in the Merger Agreement) to
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• between the date of the Merger
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Termination Fee if the Mergers Are
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MARKET PRICE OF THE SHARES OF THE C
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SHAREHOLDINGS OF DIRECTORS AND MANA
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If you have questions about the Spe
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TABLE OF CONTENTSARTICLE I DEFINITI
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Section 7.12 Retention of Executive
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membership interests, by contract,
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‘‘Delaware Certificate of Merge
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avoidance of doubt, Harleysville De
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‘‘IRCA’’ means the Immigrat
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‘‘Order’’ means an order, i
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corporation) of which is beneficial
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Nationwide Mutual and will have the
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Section 3.2 HGI Stock Options and R
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(e) Promptly following the date tha
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have been made available to Nationw
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execution and delivery of this Agre
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Person the right to enjoin or resci
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listing on any list maintained by a
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accordance with their terms. Harley
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facility or assigned risk pool. To
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Section 4.20 Intellectual Property.
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ARTICLE VREPRESENTATIONS AND WARRAN
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are set forth in Section 5.2(b) of
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development involving a prospective
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(b) Except as set forth in Section
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extent that it is a party thereto,
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Section 5.15 Cancellations. Except
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(d) Except as set forth in Section
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agreements, information on the basi
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Section 5.21 Rating Agencies. Excep
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Agreement, the Mergers, the Voting
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Agreement with and the approval of
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Producers wrote, sold or produced s
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(o) Brokers or Finders. No broker,
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ARTICLE VIICOVENANTSSection 7.1 Har
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(i) Except as set forth in Section
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(w) Neither of the Harleysville Par
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Notwithstanding anything to the con
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(c) the receipt by such Party of an
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of any nature whatsoever and, speci
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Section 8.2 Stockholder Meeting and
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Section 9.2 Conditions to Obligatio
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(c) by any of the Harleysville Part
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or related to the authorization, pr
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allow the other Parties a reasonabl
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IN WITNESS WHEREOF, Nationwide Mutu
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In connection with this opinion, we
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APPENDIX CGENERAL CORPORATION LAW O
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either notice that such notice has