Heritage expansion continues with U.S. northeast acquisition

Heritage Insurance Holdings, Inc. is continuing its expansion with a foray into the U.S. northeastern states of New York, New Jersey, Connecticut, Rhode Island and Massachusetts thanks to the acquisition of Narragansett Bay Insurance Company (NBIC), a specialty homeowners insurer.

Just in the last week Heritage announced that its Heritage Property & Casualty Insurance subsidiary had underwritten its first policy in the state of Alabama, taking the number of U.S. states it underwrites in to five and expanding the area that its reinsurance and catastrophe bond arrangements could be required to protect it in.

Now, the announced planned acquisition of Narragansett Bay Insurance Company (NBIC) will more than double the number of U.S. states Heritage underwrites in, all of which are areas where there is property catastrophe exposure from U.S. wind and hurricane risks.

Heritage has a significant reinsurance arrangement which includes catastrophe bonds $737.5 million of in-force catastrophe bonds, and these cat bonds all have the flexibility for their covered area to be expanded at a bond reset.

So at the next reset Heritage could include some level of coverage for the new states it operates in under its own Heritage PCI brand, but also under the soon to be acquired NBIC brand as well, as the latest Citrus Re cat bonds terms allow for the addition of risks from another underwriting brand at a reset.

Heritage will acquire NBIC parent NBIC Holdings, Inc. for an acquisition price of $250 million.

It intends to finance the deal with $210 million in cash and $40 million of the Company’s common stock, but it’s become apparent that Heritage is planning to finance part of the cash portion with a new $125 million issuance of convertible debt notes, that the company announced were priced yesterday.

At this stage it’s not clear whether any of the ILS fund managers that invest in insurer private debt will back this note issuance from Heritage, although ILS funds were behind a previous Heritage debt issue.

The combination of Heritage and NBIC will create a $900 million of premium insurer, operating in a total of 12 states. That’s a significant size increase for Heritage which will help the company increase its footprint significantly and likely increase its need for reinsurance and possibly ILS backing as well.

Bruce Lucas, the Company’s Chairman and CEO, commented on the deal; “We are very excited to join forces with NBIC, a seasoned company with a strong track record and talented management team.  Completing this acquisition is the next critical step in executing our geographic diversification strategy.  Post-transaction, we expect approximately 45% of our revenue to be generated outside of Florida, and Florida Tri-County personal lines policies will represent only approximately 7% of all total insured value, further hedging against assignment of benefits volatility.

“We will also look to capitalize on the opportunity to expand the commercial residential expertise we have cultivated in our current markets to the Northeast.  In 2018, we expect an approximately 50% increase in gross premiums written and net income as a result of the transaction.  The new products, partnerships and bundled products that we will gain from the NBIC business make this transformative acquisition an important step in our continued growth. We look forward to working with NBIC’s employees and agents for years to come.”

This accelerates the pace of Heritage’s expansion considerably and means additional opportunity for reinsurance firms and providers of collateralized reinsurance capacity, as well as catastrophe bond and perhaps insurance private debt investors, to support this growth.

Heritage said in a presentation to its investors on the acquisition that it expects to achieve “meaningful reinsurance and operating synergies” with an anticipated circa “$22.5 million in run-rate reinsurance synergies,” once NBIC’s current multi-year arrangements expire in 2019.

NBIC currently has comprehensive catastrophe reinsurance program, the presentation said, using a panel of highly-rated reinsurers, the largest of which include Swiss Re, Validus Re and Endurance Specialty.

Combining the two companies reinsurance programs will have benefits for Heritage as well, given the diversification it will achieve as northeastern U.S. wind risk is less correlated with Florida and southeastern. Also the winter storm exposure the NBIC portfolio has adds another diversifying element to the overall portfolio.

Heritage said that its own reinsurance program has been structured in such a way that it will be relatively easy to absorb NBIC’s risk with only minimal incremental coverage increase required.