The pending acquisition of NBIC Holdings Inc. is "strategically important" for Heritage Insurance Holdings Inc. and allowing its purchase by one of Heritage's peers would have put the company at "a significant disadvantage," Heritage Chairman and CEO Bruce Lucas said.
Heritage identified two strategic acquisitions when it shifted to strategic M&A in 2014 — Zephyr Insurance Co. Inc. and Narragansett Bay Insurance Co. parent NBIC, Lucas said on a call to discuss earnings and the pending transaction.
"We believe there were no other attractive acquisitions outside of Florida that would create a diversification in the synergies of these two organizations," Lucas said in his opening remarks.
Heritage acquired Zephyr in 2015, but had been interested in NBIC since 2014. "While we believe Zephyr has been a home run for the company, we expect NBIC to be a grand slam," Lucas said. NBIC has more than $300 million of personal lines gross written premium in New York, New Jersey, Connecticut, Rhode Island and Massachusetts, as of June 30, he noted.
The transaction is estimated to result in significant reinsurance and expense synergies with a run rate of approximately $25 million annually. It will take Heritage at least two years to fully achieve this run rate due to multiyear reinsurance contracts at NBIC, Lucas said. Upon closing, Heritage expects 2018 net operating income on a consolidated basis to increase by approximately 50% to more than $70 million on an after-tax basis. These estimates take into consideration all debt service related to the transaction.
The combined organization is expected to increase Heritage's gross written premium by 50% to more than $900 million annually. The combined company is projected to generate approximately 55% of revenue from Florida and 45% of revenue from other states.
Heritage expects to finance the deal with a combination of cash on hand; debt, which may include a convertible bond; and approximately $40 million in Heritage common stock. If funded in part with a convertible bond, the company will repurchase its common stock appropriately to minimize the impact of the convertible bond on its share price and to negate a large portion of the dilution caused by issuing $40 million of Heritage equity to the sellers.