Harleysville story updated to include second quarter earnings information in 8th paragraph.

NEW YORK ( TheStreet) -- Rumor has it traders betting on the price of buyouts aren't always good at guessing. It turns out those rumours are true.

When Bloomberg News first reported the on Sept. 22nd that home and auto insurer Nationwide Mutual Insurance Co. was considering purchasing rival commercial insurer Harleysville Group ( HGIC) last Friday shares rose over 20% to $31.23.

Today, when Nationwide announced its purchase of the Pennsylvania- based company for $60 a share in cash, shares spiked 85%.

The deal values the total 27.2 million outstanding shares of the business insurance specialist at over $1.6 billion. According to the announcement, the purchase is expected to close in 2012.

Columbus, Ohio- based Nationwide, one of the ten largest insurance companies in the U.S., is buying Harleysville to diversify its business into commercial property and casualty businesses, while growing its regional sales force. Nationwide is privately held.

Harleysville is a specialist insurance provider for small and mid-sized businesses in the Northeast, Southeast and Midwest. The company has just over $1.1 billion in premiums written, according to its website.

"With Harleysville's expertise in commercial lines and Nationwide's complementary geographic distribution, there will be a substantial opportunity to increase market share, while also providing our combined agents and customers access to a broader portfolio of insurance, financial and banking products," said Steve Rasmussen, Chief Executive of Nationwide in a statement announcing the deal.

According to company filings, Harleysville's net income was $66.9 million on revenue of $986.3 in 2010, after going through the recession without reporting any losses. In its most recent quarter ended in June 30th, Harleysville reported its first net loss since the fourth quarter of 2003. It had a net loss of $11.3 million and an operating loss of $25.4 million. The loss was a result of a year over year 5.3% fall in quarterly revenue and a 15% increase in operating expense.

In an earnings call with analysts after quartetly results were announced, Harleysville Chief Executive Michael Browne said, "The weather in the second quarter truly was unprecedented, causing us to experience a level of catastrophe storm activity and weather-related losses we've never seen before. Thanks to the strength of our balance sheet, these record losses did not have a material impact on our financial position." He added, "tornadoes played a significant role in those losses" and cited the Joplin, Missouri tornado and the overall six EF5 tornadoes that have made this year the deadliest since the 1950s.

Calls and emails to spokespeople at Harleysville and Nationwide seeking comment went unanswered.

Harleysville group, a unit of Harleysville Mutual Insurance company founded in 1915 in Harleysville, Pennsylvania to insure newly invented Ford ( F) sedans from theft, has 1,300 agencies across 32 states to distribute insurance products. Of the strategy to buy an independent insurance distributer, Nationwide CEO Rasmussen said in the announcement, "Nationwide has invested heavily in independent agent distribution, beginning with our acquisition of Allied Insurance in 1998."

On news of the cash acquisition, Moody's ( MCO) affirmed Nationwide's insurance affiliate's ratings at A1.

-- Written by Antoine Gara in New York