July 16, 2012 By: Robert Magyar in Examiner.com
This past Friday, Nationwide Insurance issued a release stating, “Nationwide's personal and commercial lines insurance policies were not designed to provide coverage for any fracking-related risks.” The release further stated, “From an underwriting standpoint, we do not have a comfort level with the unique risks associated with the fracking process to provide coverage at a reasonable price."
While shale gas industry front groups immediately downplayed the Nationwide release, the full implications of the company’s ongoing policy regarding hydraulic fracking might become significant for its policy holders in Pennsylvania and nearby New York State and Ohio, all current hot spots for the drilling industry.
According to the company’s web site, Nationwide is the number one U.S. insurance company in underwriting farming property and second in writing homeowner policies in Ohio, the shale gas industry’s new drilling hotspot. Its corporate headquarters is located in Columbus, Ohio, not far from the recent increased drilling activity in the Ohio Utica wet shale gas region. It ranks 5th in the entire country for homeowner’s insurance and is a major insurer in Pennsylvania. Its public announcement on fracking comes within weeks of yet another drilling boom by the industry, this time in eastern Ohio.
Nationwide Insurance has long been a provider of record in the farmers’ insurance segment of the country. According to the International Risk Management Institute, Inc. (IRMI), “These policies, sometimes referred to as farm insurance, provide homeowners, commercial property, and commercial liability coverage. The unique combination of commercial and personal coverage is necessary because it is typical for farms to have both residential and commercial characteristics. Coverage can apply to farms or ranches. These types of policies typically pertain to family and individually operated farms, not large commercial or corporate farming operations.”
Its a safe bet to say the vast majority of Pennsylvania Marcellus shale gas leases have been written on lands comprised of small farming properties.
Nationwide actually began as the Ohio Farm Bureau Federation in 1925 given its roots in the greater northeast farming communities. It is often a member of many local state farm bureaus. Its been well positioned for decades to fully understand risk mitigation in this market segment.
Nationwide recently acquired Harleysville Mutual Insurance Company which will become part of Nationwide’s property and casualty independent agency business unit under the Harleysville brand. In addition, Harleysville’s current headquarters in Harleysville, PA, will serve as an integral part of the combined company’s national, independent agency-based platform with Michael Browne, the former President and Chief Executive Officer of Harleysville, remaining as Nationwide’s head of this new business. This further defines Nationwide’s market share in Pennsylvania, the vast amount which is covered by the Marcellus shale formation.
The company’s release turns out to be yet another surprise to Pennsylvania Marcellus land owners already baffled by the drilling industry’s quick shift from “dry shale gas” to “wet oil infused shale” drilling activities. It comes on top of the confusion of who in the state does enjoy or is shut out of Pennsylvania Act 13 Impact fees. Nationwide’s release also comes at a time when industry leader Chesapeake Energy is under Department of Justice investigation for possible price fixing of land leases with EnCana Corporation of Canada.
According to the Associated Press’ Mary Esch, Simon Lomax, the research director for Energy In Depth, a known oil and gas industry front group, said insurers don't sell products specific to individual steps of the oil and gas development process. "But practical implications aside, the fact that the company would send out a statement this reckless, and this uninformed, should tell us a lot,”
However Lomax's statement fails to take into account the thousands of Nationwide customers who may have purchased farm and homeowners insurance perhaps unaware of the company’s position and related policy disclosures on fracking when they may have signed land lease royalty agreements with shale gas companies. The drillers themselves may or may have not disclosed such prohibitions of a major insurer to the potential lessor however most likley they were and remain under no legal obligation to do so.
Or that a major shale industry front group would characterize Nationwide Insurance, a multi-billion dollar insurer of record since 1925 as, “reckless” or "uninformed". Given the vast and complex federal and state regulations which governs the insurance industry, Nationwide is most likely one of the more conservative firms with an army of analysts, acturaries and lawyers all highly skilled in risk management and mitigation. Such skill sets speak to their ability to have survived and prospered for the better part of 90 years.
Typical of the shale gas industry’s highly defensive position, Lomax issued the strange additional personal statement, "For starters, it tells me that I won't be buying home and car insurance from this company."
For 2011, Nationwide lost an estimated $200 million in operating profit due to severe weather related damage claims. Yet it remains in superior financial shape with billions in proven net assets, something a good number of companies comprising the shale gas industry are currently struggling to prove to the investment community.
No doubt Nationwide's position on the risks of hydraulic fracking will be closely watched by other insurance majors. At a time when many insurers are facing increased payouts due to weather related damage, it will interesting to watch how the industry evolves on the fracking risk mitigation issue.
Despite the ongoing claims anything and everything shale gas is all good by the industry, month over month, the evidence seems to be continuing to stack up to the contrary.
Disclaimer: The writer holds no investments in any U.S. securities in any company involved in shale gas development and is not a member of any enviromental group or any anti-fracking group. In addition, the writer does not have any financial arrangements with any entity or individual listed in this article.
To see Nationwide's statement, go to: http://www.nationwide.com/newsroom/071312-FrackingStatement.jsp