3.	Acquisition of Maybrooke

Effective February 6, 2017, we completed the acquisition of Maybrooke whereby we acquired all of the issued and outstanding capital stock of Maybrooke. The initial purchase price of $235.3 million was paid in cash from funds on hand and available under our credit facility (see Note 7, “Other Indebtedness”). The initial purchase price was subject to post-closing adjustments based on a final calculation of the purchase price, which we delivered to the seller, as required, within 90 days of closing. As of the date of this filing, we are in discussions with the seller to finalize and agree upon certain changes included in the final purchase price calculation. We anticipate resolving this matter by the end of 2017 and do not expect any material adjustments to the purchase price disclosed below.

Through the acquisition of Maybrooke, we acquired Ariel Re, a global underwriter of specialty insurance and reinsurance business written primarily through its Lloyd’s Syndicate 1910. Ariel Re provides Argo Group with a number of strategic advantages, including enhanced scale in its London- and Bermuda-based platforms.

The acquisition is being accounting for in accordance with ASC 805, “Business Combinations.” Purchase accounting, as defined by ASC 805, requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We are in the process of finalizing our determination of fair values, including an independent appraisal of certain assets and liabilities, including intangible assets. Therefore, a preliminary allocation of the purchase price to the acquired assets, liabilities, and intangible assets is presented in the table below:

(in millions)
Assets:
Investments	$	340.7
Cash		130.1
Accrued investment income		0.2
Premiums receivable		157.6
Reinsurance recoverables		80.2
Current income taxes receivable		0.6
Deferred acquisition costs, net		9.8
Ceded unearned premiums		92.6
Other assets		24.0
Total assets		835.8
Liabilities:
Reserves for losses and loss adjustment expenses		197.0
Unearned premiums		152.5
Accrued underwriting expenses		24.9
Ceded reinsurance payable, net		144.2
Junior subordinated debentures		83.6
Deferred tax liabilities		8.1
Other liabilities		33.7
Total liabilities		644.0

Net assets acquired		191.8
Initial purchase price		235.3
Intangible assets	$	43.5

During the second quarter of 2017, we engaged an independent valuation firm and anticipate completing our valuation analysis and closing the fair value measurement period by the end of 2017. The excess of the purchase price over the fair value of the net assets acquired has been preliminarily allocated to intangible assets, which will be specifically identified and quantified by the end of 2017. We did not record amortization expense related to the $43.5 million intangible assets during the six months ended June 30, 2017, as the valuation analysis has not yet been completed. We anticipate recording both amortizable and non-amortizable identifiable intangible assets and goodwill upon the completion of the valuation analyses, including intangible assets relating to the Lloyd’s Syndicate 1910 stamp capacity (non-amortizable), distribution networks (amortizable), and the Ariel Re tradename (amortizable). Goodwill is calculated as the excess of the purchase price over the fair value of the net assets recognized, including identifiable intangible assets.

We recognized approximately $2.5 million of acquisition-related transaction costs in our Consolidated Statements of Income, all of which were recorded during the first quarter of 2017. Of these amounts, $2.2 million were reported in “Underwriting, acquisition and insurance expenses” and $0.3 million in “Interest expense” related to the borrowings under our credit facility to help fund the acquisition. No additional transaction costs were incurred during the three months ended June 30, 2017.

Maybrooke’s Contribution to Argo Group’s Revenue and Income

The following selected financial information summarizes the results of Maybrooke from the date of acquisition that have been included in our Consolidated Statement of Income:

(in millions)

For the Three

Months Ended

June 30, 2017

For the Six

Months Ended

June 30, 2017

Revenues

42.9

66.2

Net income

6.4

13.0

Unaudited Pro forma Results of Operations

The following unaudited pro forma financial information has been provided to present a summary of the combined results of Argo Group’s operations with Maybrooke’s as if the acquisition had occurred on January 1, 2016. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed at the date indicated above, as it may not include all necessary adjustments. Future changes to Maybrooke’s business, such as, but not limited to, the impact from underwriting decisions, changes in risk selection, or retention rates, could result in a material favorable or unfavorable impact on Argo Group’s future results of operations and financial position. The unaudited pro forma results for six months ended June 30, 2017 include favorable development from prior accident years of $6.5 million, including $6.2 million relating to one specific claim in January 2017. In addition, the $2.5 million of nonrecurring transaction costs directly attributable to the acquisition for six months ended June 30, 2017, as disclosed above, have also been removed from the unaudited pro forma results in the table below. The unaudited pro forma results for the three and six months ended June 30, 2016 include the benefits of higher net retention resulting in increased earned premiums and profitability for prior Lloyd’s years of account, partially offset by unfavorable development on claims from prior accident years.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in millions, except per share data)	2017		2016		2017		2016
Pro forma revenues	$	449.5	$	435.3	$	893.2	$	874.5
Pro forma net income		46.2		33.3		93.2		76.7
Pro forma net income per share - basic		1.53		1.10		3.09		2.53
Pro forma net income per share - diluted		1.49		1.08		3.01		2.48