ACQUISITION

9 Months Ended

Sep. 30, 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 12 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 for the nine-month period ended September 30, 2012 and its assets and liabilities as of September 30, 2012. Comparative period information includes results of operations for the five-month period subsequent to acquisition and assets and liabilities as of September 30, 2011.

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 ($13.2 million net of related amortization as of September 30, 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 September 30, 2012, 95 percent of the UEP acquired had been earned as revenue.  As a result, a similar percentage of VOBA was amortized to expense.  At September 30, 2012, $1.5 million of the UEP acquired remained, as does $0.8 million of VOBA.

During the third quarter of 2012, CBIC contributed $14.4 million of gross premiums written. Premiums of $8.4 million impacted the casualty segment with the remaining $6.0 million attributable to the surety segment.  CBIC contributed pretax earnings of $5.1 million, which included underwriting income of $4.1 million and net investment income of $1.0 million. Results included favorable reserve development on prior years’ loss reserves which totaled $4.2 million.  For the nine months ended September 30, 2012, CBIC generated an underwriting income of $8.9 million and net investment income of $3.1 million.