ACQUISITION

3 Months Ended

Mar. 31, 2012

ACQUISITION

ACQUISITION

6. ACQUISITION

On April 28, 2011, we acquired 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 a leading writer of contractor license bonds in the Northwest.

During the second quarter of 2011, 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 January 1, 2012 and its assets and liabilities as of March 31, 2012. Comparative period information presenting results of operations and assets and liabilities for the quarter ended March 31, 2011 does not include amounts attributable to CBIC.

Goodwill of $20.4 million, representing the difference between the purchase consideration and the fair value of assets acquired less liabilities assumed, was recorded.  In addition, $14.5 million of separately identifiable intangible assets resulting from the valuations of trade name, insurance licenses, acquired software and agency-related relationships have been recognized ($13.6 million net of related amortization as of March 31, 2012).  The valuation of insurance policies in force, including the value of business acquired (VOBA), was $10.8 million at acquisition.  VOBA is included within deferred policy acquisition costs on our consolidated balance sheet.  This asset is amortized as the corresponding unearned premium (UEP) acquired ($29.5 million) is earned as revenue.  As of March 31, 2012, nearly 91 percent of the UEP acquired had been earned as revenue.  As a result, a similar percentage of VOBA was amortized to expense.  At March 31, 2012, $2.7 million of the UEP acquired remained, as does $1.3 million of VOBA.  In accordance with GAAP, fair value accounting effects may be adjusted up to one year from the acquisition date upon finalization of the valuation process.  However, we concluded our valuation process in the fourth quarter of 2011.

During the first quarter of 2012, CBIC contributed $13.8 million of gross premiums written ($49.8 million since acquisition on April 28, 2011).  Premium of $8.9 million impacted the casualty segment with the remaining $4.9 million attributable to the surety segment.  CBIC contributed pretax earnings of $0.5 million, which included an underwriting loss of $0.5 million and net investment income of $1.0 million.