ACQUISITION

6 Months Ended

Jun. 30, 2011

ACQUISITION

ACQUISITION

6. ACQUISITION

On April 28, 2011, we closed the previously announced purchase of Contractors Bonding and Insurance Company (CBIC) through an acquisition of its holding company, Data and Staff Service Co., for $135.9 million in cash.  Prior to the acquisition, CBIC was a privately held, Seattle-based insurance company specializing in surety bonds and related niche property and casualty insurance products.  The company serves over 30,000 contractors and over 4,000 insurance agents and brokers nationwide.  CBIC operates 13 regional branch offices and is considered a leading writer of contractor license bonds in the Northwest.

During the quarter, we began our integration of CBIC operations and personnel into the normal operations of our company and our fair value analysis on CBIC’s opening balance sheet.  The unaudited condensed consolidated interim financial statements include CBIC’s results of operations from April 28, 2011 and its assets and liabilities as of June 30, 2011.

Goodwill of $19.7 million, representing the difference between the purchase consideration and the fair value of assets acquired less liabilities assumed, was recorded.  In addition, $10.6 million of separately identifiable intangible assets resulting from the valuations of trade name, insurance licenses and acquired software have been recognized.  The valuation of insurance policies in force, including the value of business acquired (VOBA), acquired agency-related relationships, and the related tax impacts are still being evaluated.  Our preliminary estimate of VOBA is included within deferred policy acquisition costs.  In accordance with GAAP, purchase accounting effects may be adjusted up to one year from the acquisition date upon finalization of the valuation process.

During the second quarter of 2011, CBIC contributed $10.3 million of gross premiums written.  Premium of $5.8 million impacted the casualty segment with the remaining $4.5 million going to the surety segment.  CBIC was break-even overall for the quarter, contributing an underwriting loss of $0.2 million and net investment income of $0.3 million in the quarter.  The relatively low net investment income is due to CBIC’s lower yielding bonds with higher credit quality and shorter duration characteristics.  In addition, many of the CBIC bonds were acquired in an unrealized gain position and the accounting treatment calls for amortization of this premium back to par, which further reduced income.  As of June 30, 2011, approximately 60% of the acquired bond portfolio and 24% of the acquired equity portfolio have been sold and reinvested in higher-yielding securities.