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Acquisition | 9 Months Ended
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Sep. 30, 2015
Acquisition | 2. Acquisition On January 1, 2015, Global Indemnity Group, Inc., a subsidiary of the Company, acquired 100% of the voting equity interest of American Reliable Insurance Company (“American Reliable”) from American Bankers Insurance Group, Inc. by paying $113.7 million in cash and assuming $283.3 million of customary insurance related liabilities, obligations, and mandates. Per the American Reliable Stock Purchase Agreement “Stock Purchase Agreement”), the ultimate purchase price is subject to (i) accounting procedures that were performed in 2015 to determine GAAP book value and (ii) indemnification on future development on recorded loss and loss adjustment expenses as of December 31, 2014. In accordance with the Stock Purchase Agreement, on the third calendar year following the calendar year of the closing, if loss and loss adjustment expenses for accident years 2014 and prior are lower than recorded unpaid loss and loss adjustment expenses as of December 31, 2014, Global Indemnity Group, Inc. will pay the variance to American Bankers Group, Inc. Conversely, if loss and loss adjustment expenses for accident years 2014 and prior exceed recorded unpaid loss and loss adjustment expenses as of December 31, 2014, American Bankers Group, Inc. will pay the variance to Global Indemnity Group, Inc. The Company’s current estimate of the purchase price, based on available financial information, is approximately $99.8 million. The results of American Reliable’s operations have been included in the Company’s consolidated financial statements since the date of the acquisition on January 1, 2015. The purchase of American Reliable expanded Global Indemnity’s product offerings. American Reliable is a specialty company that distributes personal lines products written on an admitted basis that are unusual and harder to place. It complements Global Indemnity’s existing US Insurance Operations that primarily distribute commercial lines products on an excess and surplus lines basis. American Reliable is domiciled in Arizona and as such is subject to its state insurance department regulations. For the quarter and nine months ended September 30, 2015, American Reliable had total revenues of $63.5 million and $196.1 million, respectively, and pre-tax loss of $11.2 million and $8.5 million, respectively. These amounts are included in the Company’s results of operations for the quarter and nine months ended September 30, 2015. The following table presents the Company’s unaudited pro forma consolidated results of operations for the quarters and nine months ended September 30, 2015 and 2014 as if the acquisition had occurred on January 1, 2014 instead of January 1, 2015.
|  | Pro Forma |
|  | Quarters Ended September 30, |  |  | Nine Months Ended September 30, |
(Dollars in thousands except per share data) |  | 2015 |  |  | 2014 |  |  | 2015 |  |  | 2014 |
Total Revenue |  | $ | 124,060 |  |  | $ | 141,902 |  |  | $ | 402,347 |  |  | $ | 462,164 |
Net Income (Loss) |  | $ | (3,746 | ) |  | $ | 13,782 |  |  | $ | 19,560 |  |  | $ | 57,224 |
Net Income (Loss) per share (diluted) |  | $ | ( 0.15 | ) |  | $ | 0.54 |  |  | $ | 0.76 |  |  | $ | 2.24 |
The pro forma results were calculated by applying the Company’s accounting policies and adjusting the result of American Reliable to reflect (i) impact of intercompany reinsurance with Global Indemnity Reinsurance Company, Ltd. (“Global Indemnity Reinsurance”), (ii) the impact on interest expense resulting from changes to the Company’s capital structure in connection with the acquisition, (iii) impact on investment income from the acquisition date adjustments to fair value of investments, (iv) impact on underwriting expenses from the acquisition date adjustments to fair value of deferred acquisition costs and intangible assets, (v) impact of excluding transaction costs related to the acquisition and (vi) the tax effects of the above adjustments. The pro forma results do not include any anticipated cost synergies or other effects of the integration of American Reliable. Such pro forma amounts are not indicative of the results that actually would have occurred had the acquisition been completed on January 1, 2014, nor are they indicative of the future operating results of the combined company. The Company is still in the process of valuing the assets acquired and liabilities assumed. As a result, the allocation of the acquisition consideration is subject to change. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition as of September 30, 2015 compared to June 30, 2015 along with changes in estimates made during the quarter.
|  | As of |  |  |  |
(Dollars in thousands) |  | September 30, 2015 |  |  | June 30, 2015 |  |  | Change |
ASSETS: |  |  |  |  |  |  |  |  |  |  |  |
Investments |  | $ | 226,458 |  |  | $ | 226,458 |  |  | $ | — |
Cash and cash equivalents |  |  | 21,360 |  |  |  | 21,360 |  |  |  | — |
Premiums receivables, net |  |  | 25,941 |  |  |  | 25,941 |  |  |  | — |
Accounts receivable |  |  | 11,311 |  |  |  | 17,129 |  |  |  | (5,818 | )
Reinsurance receivables |  |  | 13,842 |  |  |  | 12,723 |  |  |  | 1,119 |
Prepaid reinsurance premiums |  |  | 43,506 |  |  |  | 43,506 |  |  |  | — |
Intangible assets |  |  | 32,000 |  |  |  | 32,000 |  |  |  | — |
Deferred federal income taxes |  |  | 1,139 |  |  |  | 1,246 |  |  |  | (107 | )
Other assets |  |  | 6,550 |  |  |  | 6,550 |  |  |  | — |
Total assets |  |  | 382,107 |  |  |  | 386,913 |  |  |  | (4,806 | )
LIABILITIES: |  |  |  |  |  |  |  |  |  |  |  |
Unearned premiums |  |  | 172,234 |  |  |  | 172,234 |  |  |  | — |
Unpaid losses and loss adjustment expenses |  |  | 89,489 |  |  |  | 88,370 |  |  |  | 1,119 |
Reinsurance balances payable |  |  | 13,219 |  |  |  | 13,219 |  |  |  | — |
Contingent commissions |  |  | 3,876 |  |  |  | 3,876 |  |  |  | — |
Other liabilities |  |  | 5,608 |  |  |  | 5,685 |  |  |  | (77 | )
Total liabilities |  |  | 284,426 |  |  |  | 283,384 |  |  |  | 1,042 |
Estimated fair value of net assets acquired |  |  | 97,681 |  |  |  | 103,529 |  |  |  | (5,848 | )
Purchase price |  |  | 99,797 |  |  |  | 105,843 |  |  |  | 6,046 |
Goodwill |  | $ | 2,116 |  |  | $ | 2,314 |  |  | $ | (198 | )
Pursuant to the Stock Purchase Agreement, the Company and American Bankers Group, Inc. have performed procedures to finalize the closing balance sheet for purposes of determining the purchase price. However, the Company and American Bankers Group, Inc. were unable to come to an agreement on the carrying value of unpaid loss and loss adjustment expense reserves. As a result, the Company entered into a dispute resolution with American Bankers Group, Inc. for the carried amount of unpaid loss and loss adjustment reserves as of the acquisition date. This dispute resolution is consistent with the Stock Purchase Agreement that includes indemnification to both the Company and American Bankers Group, Inc. on future development on recorded loss and loss adjustment expenses as of December 31, 2014. On the third calendar year following the acquisition date of January 1, 2015, if loss and loss adjustment expenses for accident years 2014 and prior are lower than recorded unpaid loss and loss adjustment expenses as of December 31, 2014, Global Indemnity Group, Inc. will pay the variance plus interest of 5% compounding semi-annually to American Bankers Group, Inc. Conversely, if loss and loss adjustment expenses for accident years 2014 and prior exceed recorded unpaid loss and loss adjustment expenses as of December 31, 2014, American Bankers Group, Inc. will pay the variance plus interest of 5% compounding semi-annually to Global Indemnity Group, Inc. As a result of the structure of this dispute resolution on unpaid loss and loss adjustment expenses, American Reliable’s accounts receivable declined by $5.8 million for amounts due from American Bankers Group, Inc. and Global Indemnity Group, Inc.’s accounts receivable due from American Bankers Group, Inc. increased by $6.5 million. This consolidated net increase in accounts receivable due from American Bankers Group, Inc. of $0.7 million is related to accrued interest on the anticipated indemnification of unpaid loss and loss adjustment expense reserves. The transaction is being accounted for using the purchase method of accounting. The assets and liabilities acquired by the Company were adjusted to estimated fair value. The $2.1 million excess of cash and acquisition cost over the estimated fair value of assets acquired was recognized as goodwill. Under the purchase method of accounting, goodwill is not amortized but is tested for impairment at least annually. Goodwill of $2.1 million, arising from the acquisition, consists largely of the synergies and economies of scales expected from combining the operations of Global Indemnity and American Reliable. The Company has determined that the goodwill of $2.1 million will be assigned to the Personal Lines segment. There is no tax goodwill. An identification and valuation of intangible assets was performed that resulted in the recognition of intangible assets of $32.0 million with values assigned as follows:
(Dollars in thousands) Description |  | Useful Life |  | Amount |
State insurance licenses |  | Indefinite |  | $ | 5,000 |
Value of business acquired |  | < 1 year |  |  | 25,500 |
Agent relationships |  | 10 years |  |  | 900 |
Trade name |  | 7 - 8 years |  |  | 600 |
|  |  |  | $ | 32,000 |
Intangible assets arising from the acquisition will be deductible for income tax purposes over 15 years. The following table presents details of the Company’s intangible assets arising from the American Reliable acquisition as of September 30, 2015:
(Dollars in thousands) Description |  | Useful Life |  | Cost |  |  | Accumulated Amortization |  |  | Net Value |
State insurance licenses |  | Indefinite |  | $ | 5,000 |  |  | $ | — |  |  | $ | 5,000 |
Value of business acquired |  | < 1 year |  |  | 25,500 |  |  |  | 22,823 |  |  |  | 2,677 |
Agent relationships |  | 10 years |  |  | 900 |  |  |  | 67 |  |  |  | 833 |
Trade name |  | 7 - 8 years |  |  | 600 |  |  |  | 64 |  |  |  | 536 |
|  |  |  | $ | 32,000 |  |  | $ | 22,954 |  |  | $ | 9,046 |
Amortization related to the Company’s definite lived intangible assets resulting from American Reliable acquisition was $4.1 million and $23.0 million for the quarter and nine months ended September 30, 2015. The Company expects that amortization expense for the next five years related to the American Reliable acquisition will be as follows:
(Dollars in thousands) |  |  |
October 1, 2015 to September 30, 2016 |  | $ | 2,853 |
October 1, 2016 to September 30, 2017 |  |  | 176 |
October 1, 2017 to September 30, 2018 |  |  | 176 |
October 1, 2018 to September 30, 2019 |  |  | 176 |
October 1, 2019 to September 30, 2020 |  |  | 176 |
The fair value, gross contractual amounts due, and contractual cash flows not expected to be collected of acquired receivables are as follows:
(Dollars in thousands) |  | Fair Value |  |  | Gross Contractual Amounts Due |  |  | Contractual cash flows not expected to be collected |
Premium receivables |  | $ | 25,941 |  |  | $ | 26,896 |  |  | $ | 955 |
Accounts receivable |  |  | 11,311 |  |  |  | 11,311 |  |  |  | — |
Reinsurance receivables |  |  | 12,723 |  |  |  | 12,723 |  |  |  | — |
In connection with the acquisition, the Company agreed to pay to Fox Paine & Company, LLC (“Fox Paine”) an investment banking fee of 3% of the amount paid plus the additional capital required to operate American Reliable on a standalone basis and a $1.5 million investment advisory fee, which in the aggregate, totaled $6.5 million. This amount is included in corporate and other operating expenses on the Company’s Consolidated Statements of Operations during the nine months ended September 30, 2015. As payment for these fees, 267,702 A ordinary shares of Global Indemnity were issued under the Global Indemnity plc Share Incentive Plan in May, 2015. These shares will be registered but cannot be sold until the earlier of five years or a change of control. See Note 12 for additional information on the Global Indemnity plc Share Incentive Plan. Additional costs, mainly professional fees, of $5.1 million were incurred in connection with the acquisition of American Reliable. Of this amount, $3.3 million was recorded as corporate and other operating expenses on the Company’s Consolidated Statements of Operations during the year ended December 31, 2014 and $1.8 million was recorded as corporate and other operating expenses on the Company’s Consolidated Statements of Operation during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, the Company paid approximately $1.6 million in employee compensation related cost, which were related to periods prior to the Acquisition. These costs were accrued by American Reliable and were included in the fair value of net assets acquired by Global Indemnity Group, Inc. on January 1, 2015. Geographic Concentration The following table sets forth the geographic distribution of American Reliable’s gross premiums written, excluding business that is ceded under a 100% quota share reinsurance agreement to American Bankers Insurance Company of Florida, for the year ended December 31, 2014:
|  | Year Ended December 31, 2014 |
(Dollars in thousands) |  | Amount |  |  | Percent |
Texas |  | $ | 32,760 |  |  |  | 12.3 | %
California |  |  | 25,556 |  |  |  | 9.6 |
North Carolina |  |  | 23,040 |  |  |  | 8.7 |
Arizona |  |  | 17,722 |  |  |  | 6.7 |
Louisiana |  |  | 17,522 |  |  |  | 6.6 |
New York |  |  | 13,408 |  |  |  | 5.0 |
Florida |  |  | 12,361 |  |  |  | 4.6 |
Oklahoma |  |  | 9,977 |  |  |  | 3.7 |
Georgia |  |  | 8,768 |  |  |  | 3.3 |
New Jersey |  |  | 6,925 |  |  |  | 2.6 |
Subtotal |  |  | 168,039 |  |  |  | 63.1 |
All other states |  |  | 98,264 |  |  |  | 36.9 |
Total |  | $ | 266,303 |  |  |  | 100.0 | %
Marketing and Distribution American Reliable distributes its insurance products primarily through a group of approximately 290 general and specialty agents and 332 retail agents in Arizona and New Mexico. Of the Company’s non-affiliated general and specialty agents, the top five accounted for 23.9% of American Reliable’s gross premiums written for the year ended December 31, 2014. One agency represented 6.8% of American Reliable’s gross premiums written for the year ended December 31, 2014. There is no agency which accounted for more than 10.0% of American Reliable’s revenue for the year ended December 31, 2014. Dividend Limitations The maximum amount of dividends, which can be paid by Arizona domiciled insurance companies without prior approval of the Insurance Commissioner, is subject to certain regulatory restrictions relating to statutory surplus. Specifically, an insurance company may pay dividends equal to the lesser of net income or 10% of its statutory surplus without specific approval from the Insurance Commissioner. At December 31, 2014, the maximum dividend, which may be distributed without approval in 2015, is zero. Dividends in excess of this amount are considered extraordinary. Reinsurance As a result of the acquisition, the following reinsurance treaties were entered into: Earthquake Property Catastrophe Excess of Loss – Effective January 1, 2015, the Company purchased an earthquake property catastrophe excess of loss treaty which provides occurrence coverage for earthquake catastrophe losses of $30 million in excess of $5 million for American Reliable property business. This treaty provides for one full reinstatement of coverage at 100% additional premium as to time and pro rata as to amount of limit reinstated. This treaty was cancelled on May 31, 2015 and rolled into a new combined master catastrophe treaty which was effective June 1, 2015. American Reliable Property Per Risk Excess of Loss – Effective January 1, 2015, American Reliable renewed its property per risk excess of loss treaty covering business underwritten by American Reliable. This treaty provides coverage in two layers: $1 million per risk in excess of $1 million per risk, and $3 million per risk in excess of $2 million per risk. The first layer is subject to a $2 million limit of liability for all risks involved in one loss occurrence, and the second layer is subject to a $6 million limit for all risks involved in one loss occurrence. 100% Ceded Quota Share to American Bankers – Effective December 1, 2014, American Reliable entered into four treaties to cede 100% of its liabilities related to certain businesses to American Bankers Insurance Company that were not included in the acquisition of American Reliable. For the quarter and nine months ended September 30, 2015, American Reliable recorded ceded written premiums of $18.7 million and $41.7 million, respectively, and ceded earned premiums of $13.3 million and $50.8 million, respectively, to American Bankers Insurance Company. 100% Assumed Quota Share from American Bankers – Effective December 1, 2014, American Reliable entered into two treaties to assume 100% of its liabilities from various insurers owned by Assurant, Inc. for business included in the acquisition but not written directly by American Reliable. For the quarter and nine months ended September 30, 2015, American Reliable recorded assumed written premiums of $21.4 million and $69.3 million, respectively, and assumed earned premiums of $22.8 million and $69.8 million, respectively, from insurance companies owned by Assurant, Inc. The effect of reinsurance on premiums written and earned by American Reliable is as follows:
(Dollars in thousands) |  | Written |  |  | Earned |
For the quarter ended September 30, 2015: |  |  |  |  |  |  |  |
Direct business |  | $ | 65,824 |  |  | $ | 57,825 |
Reinsurance assumed |  |  | 21,525 |  |  |  | 22,927 |
Reinsurance ceded |  |  | 24,047 |  |  |  | 18,620 |
Net premiums |  | $ | 63,302 |  |  | $ | 62,132 |
(Dollars in thousands) |  | Written |  |  | Earned |
For the nine months ended September 30, 2015: |  |  |  |  |  |  |  |
Direct business |  | $ | 179,979 |  |  | $ | 182,851 |
Reinsurance assumed |  |  | 69,585 |  |  |  | 70,120 |
Reinsurance ceded |  |  | 52,779 |  |  |  | 61,499 |
Net premiums |  | $ | 196,785 |  |  | $ | 191,472 |
Commitments As a result of the acquisition, the Company assumed operating leases related to the operations of American Reliable. Rental expense under these operating leases was $0.3 million and $0.8 million for the quarter and nine months ended September 30, 2015, respectively. At September 30, 2015, future minimum cash payments under non-cancelable operating leases related to the operations of American Reliable were as follows:
(Dollars in thousands) |  |  |
October 1, 2015 to September 30, 2016 |  | $ | 1,032 |
October 1, 2016 to September 30, 2017 |  |  | 941 |
October 1, 2017 to September 30, 2018 |  |  | 937 |
October 1, 2018 to September 30, 2019 |  |  | 143 |
Total |  | $ | 3,053 |
At the time of the acquisition, one of the Company’s policy administration systems was under development. In April, 2015, the Company entered into an agreement with an unrelated third party to build out a rate, quote, bind and issue application for the Company’s agriculture products. This project has an estimated cost of approximately $2.6 million plus reimbursable travel and related expenses.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1497-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1490-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1392-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1486-128463 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4845-128472 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1500-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1524-128463 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4922-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4934-128472 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4926-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1383-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 + Details
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