Edgar Filing: Global Indemnity plc

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Global Indemnity PLC Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

001-34809

Commission File Number

GLOBAL INDEMNITY PLC

(Exact name of registrant as specified in its charter)

Ireland

98-0664891

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

ARTHUR COX BUILDING

EARLSFORT TERRACE

DUBLIN 2

IRELAND

(Address of principal executive office, including zip code)

353 (0) 1 618 0517

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 8, 2012, the registrant had outstanding 13,131,438 A Ordinary Shares and 12,061,370 B Ordinary Shares.

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	Page

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements:		2
Consolidated Balance Sheets As of September 30, 2012 (Unaudited) and December 31, 2011		2
Consolidated Statements of Operations Quarters and Nine Months Ended September 30, 2012 (Unaudited) and September 30, 2011 (Unaudited)		3
Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended September 30, 2012 (Unaudited) and September 30, 2011 (Unaudited)		4
Consolidated Statements of Changes in Shareholders’ Equity As of September 30, 2012 (Unaudited) and December 31, 2011		5
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2012 (Unaudited) and September 30, 2011 (Unaudited)		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3. Quantitative and Qualitative Disclosures about Market Risk		63
Item 4. Controls and Procedures		64

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		65
Item 1A. Risk Factors		65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
Item 3. Defaults Upon Senior Securities		65
Item 4. Mine Safety Disclosures		65
Item 5. Other Information		66
Item 6. Exhibits		66
Signature		67

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBAL INDEMNITY PLC

Consolidated Balance Sheets

(In thousands, except share amounts)


	(Unaudited) September 30, 2012			December 31, 2011
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: $1,212,179 and $1,258,533)	$	1,259,845		$	1,296,885
Equity securities:
Available for sale, at fair value (cost: $165,095 and $155,390)		194,553			168,361
Other invested assets:
Available for sale, at fair value (cost: $3,049 and $4,150)		2,937			6,617

Total investments		1,457,335			1,471,863

Cash and cash equivalents		108,490			175,860
Premiums receivable, net		42,439			47,844
Reinsurance receivables		273,993			287,986
Federal income taxes receivable		8,600			2,223
Deferred federal income taxes		5,352			14,642
Deferred acquisition costs		19,438			21,564
Intangible assets		18,431			18,704
Goodwill		4,820			4,820
Prepaid reinsurance premiums		6,390			6,555
Receivable for securities sold		—			1,484
Other assets		19,059			19,371

Total assets	$	1,964,347		$	2,072,916

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	923,778		$	971,377
Unearned premiums		99,087			114,041
Ceded balances payable		3,050			8,887
Contingent commissions		7,843			7,473
Payable for securities purchased		16,089			—
Notes and debentures payable		84,929			103,000
Other liabilities		22,184			29,075

Total liabilities		1,156,960			1,233,853

Commitments and contingencies (Note 11)		—			—

Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; A ordinary shares issued: 16,208,439 and 21,429,683, respectively; A ordinary shares outstanding: 13,151,919 and 16,810,678, respectively; B ordinary shares issued and outstanding: 12,061,370 and 12,061,370, respectively		3			3
Additional paid-in capital		514,124			621,917
Accumulated other comprehensive income, net of taxes		56,667			40,174
Retained earnings		337,792			307,413
A ordinary shares in treasury, at cost: 3,056,520 and 4,619,005 shares, respectively		(101,199	)		(130,444	)

Total shareholders’ equity		807,387			839,063

Total liabilities and shareholders’ equity	$	1,964,347		$	2,072,916

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Operations

(In thousands, except shares and per share data)


	(Unaudited) Quarters Ended September 30,						(Unaudited) Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues:
Gross premiums written	$	56,949		$	73,092		$	182,339		$	255,720

Net premiums written	$	51,455		$	64,934		$	162,871		$	234,449

Net premiums earned	$	55,329		$	77,090		$	177,658		$	231,114
Net investment income		14,777			12,880			37,265			41,224
Net realized investment gains:
Other than temporary impairment losses on investments		(189	)		(1,824	)		(3,808	)		(3,730	)
Other than temporary impairment losses on investments recognized in other comprehensive income		—			—			541			—
Other net realized investment gains		3,400			3,112			10,180			25,401

Total net realized investment gains		3,211			1,288			6,913			21,671
Other income (loss)		101			372			(291	)		12,539

Total revenues		73,418			91,630			221,545			306,548

Losses and Expenses:
Net losses and loss adjustment expenses		35,407			86,234			113,574			206,329
Acquisition costs and other underwriting expenses		23,223			33,327			70,150			92,810
Corporate and other operating expenses		2,039			3,067			6,863			10,869
Interest expense		1,265			1,525			4,213			5,020

Income (loss) before income taxes		11,484			(32,523	)		26,745			(8,480	)
Income tax expense (benefit)		1,571			899			(3,634	)		6,401

Income (loss) before equity in net income of partnerships		9,913			(33,422	)		30,379			(14,881	)
Equity in net income of partnerships, net of taxes		—			—			—			53

Net income (loss)	$	9,913		$	(33,422	)	$	30,379		$	(14,828	)

Per share data:
Net income (loss)
Basic	$	0.39		$	(1.10	)	$	1.11		$	(0.49	)

Diluted	$	0.39		$	(1.10	)	$	1.11		$	(0.49	)

Weighted-average number of shares outstanding
Basic		25,391,885			30,338,010			27,263,275			30,320,538

Diluted		25,412,586			30,352,850			27,280,612			30,341,713

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Comprehensive Income

(In thousands)


	(Unaudited) Quarters Ended September 30,					(Unaudited) Nine Months Ended September 30,
	2012		2011			2012			2011
Net income (loss)	$	9,913	$	(33,422	)	$	30,379		$	(14,828	)

Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses) arising during period		4,851		(28,475	)		11,505			(18,072	)
Portion of other than temporary impairment losses recognized in other comprehensive income (loss), net of taxes		1		(16	)		(538	)		(26	)
Recognition of previously unrealized holding (gains) losses		2,177		(594	)		5,408			(15,559	)
Unrealized foreign currency translation gains (losses)		197		(54	)		118			(54	)

Other comprehensive income (loss), net of taxes		7,226		(29,139	)		16,493			(33,711	)

Comprehensive income (loss), net of taxes	$	17,139	$	(62,561	)	$	46,872		$	(48,539	)

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)


	(Unaudited) Nine Months Ended September 30, 2012			Year Ended December 31, 2011
Number of A ordinary shares issued:
Number at beginning of period		21,429,683			21,340,821
Ordinary shares issued under share incentive plans		29,675			47,682
Ordinary shares issued to directors		—			41,180
Ordinary shares retired		(5,250,919	)		—

Number at end of period		16,208,439			21,429,683

Number of B ordinary shares issued:
Number at beginning and end of period		12,061,370			12,061,370

Par value of A ordinary shares:
Balance at beginning and end of period	$	2		$	2

Par value of B ordinary shares:
Balance at beginning and end of period	$	1		$	1

Additional paid-in capital:
Balance at beginning of period	$	621,917		$	622,725
Share compensation plans		1,834			(808	)
A ordinary shares retired		(109,627	)		—

Balance at end of period	$	514,124		$	621,917

Accumulated other comprehensive income, net of deferred income tax:
Balance at beginning of period	$	40,174		$	57,211
Other comprehensive income (loss):
Change in unrealized holding gains (losses) during the period		16,389			(17,008	)
Change in other than temporary impairment losses recognized in other comprehensive income (loss), net of taxes		(14	)		(29	)
Unrealized foreign currency translation gains		118			—

Other comprehensive income (loss)		16,493			(17,037	)

Balance at end of period	$	56,667		$	40,174

Retained earnings:
Balance at beginning of period	$	307,413		$	349,642
Cumulative effect adjustment resulting from adoption of new accounting guidance		—			(3,900	)
Net income (loss)		30,379			(38,329	)

Balance at end of period	$	337,792		$	307,413

Number of Treasury Shares:
Number at beginning of period		4,619,005			3,040,277
A ordinary shares purchased		3,688,434			1,578,728
A ordinary shares retired		(5,250,919	)		—

Number at end of period		3,056,520			4,619,005

Treasury Shares, at cost:
Balance at beginning of period	$	(130,444	)	$	(100,912	)
A ordinary shares purchased, at cost		(80,382	)		(29,532	)
A ordinary shares retired		109,627			—

Balance at end of period	$	(101,199	)	$	(130,444	)

Total shareholders’ equity	$	807,387		$	839,063

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited) Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	30,379		$	(14,828	)
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Amortization of trust preferred securities issuance costs		47			59
Amortization and depreciation		1,341			1,556
Restricted stock and stock option expense		1,878			(1,177	)
Deferred federal income taxes		2,531			302
Amortization of bond premium and discount, net		5,250			4,234
Net realized investment gains		(6,913	)		(21,671	)
Equity in income of partnerships		—			(53	)
Changes in:
Premiums receivable, net		5,405			(3,611	)
Reinsurance receivables		13,993			118,894
Unpaid losses and loss adjustment expenses		(47,599	)		(81,521	)
Unearned premiums		(14,954	)		(6	)
Ceded balances payable		(5,837	)		(3,837	)
Other assets and liabilities, net		(7,708	)		(3,370	)
Contingent commissions		370			(3,567	)
Federal income tax receivable/payable		(6,377	)		1,939
Deferred acquisition costs, net		2,126			4,755
Prepaid reinsurance premiums		165			3,342

Net cash provided by (used for) operating activities		(25,903	)		1,440

Cash flows from investing activities:
Proceeds from sale of fixed maturities		380,713			604,606
Proceeds from sale of equity securities		40,299			78,491
Proceeds from maturity of fixed maturities		46,620			37,900
Proceeds from sale of other invested assets		1,114			1,348
Purchases of fixed maturities		(366,706	)		(621,350	)
Purchases of equity securities		(45,041	)		(100,505	)
Purchases of other invested assets		(13	)		(10,050	)

Net cash provided by (used for) investing activities		56,986			(9,560	)

Cash flows from financing activities:
Tax expense associated with share-based compensation plans		—			(106	)
Purchases of A ordinary shares		(80,382	)		(167	)
Principal payments of term debt		(18,071	)		(18,214	)

Net cash used for financing activities		(98,453	)		(18,487	)

Net change in cash and cash equivalents		(67,370	)		(26,607	)
Cash and cash equivalents at beginning of period		175,860			119,888

Cash and cash equivalents at end of period	$	108,490		$	93,281

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Principles of Consolidation and Basis of Presentation

Global Indemnity plc (“Global Indemnity” or “the Company”) was incorporated on March 9, 2010 and is domiciled in Ireland. Global Indemnity replaced the Company’s predecessor, United America Indemnity, Ltd., as the ultimate parent company as a result of a re-domestication transaction. United America Indemnity, Ltd. was incorporated on August 26, 2003, and is domiciled in the Cayman Islands. United America Indemnity, Ltd. is a subsidiary of the Company and an Irish tax resident. The Company’s A ordinary shares are publicly traded on the NASDAQ Global Select Market. On July 6, 2010, the Company changed its trading symbol on the NASDAQ Global Select Market from “INDM” to “GBLI.”

The Company manages its business through two business segments: Insurance Operations, which includes the operations of United National Insurance Company, Diamond State Insurance Company, United National Casualty Insurance Company, United National Specialty Insurance Company, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, United America Insurance Services, LLC, and J.H. Ferguson & Associates, LLC, and Reinsurance Operations, which includes the operations of Wind River Reinsurance Company, Ltd. (“Wind River Reinsurance”).

The interim consolidated financial statements are unaudited, but have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differs in certain respects from those principles followed in reports to insurance regulatory authorities. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters and nine months ended September 30, 2012 and 2011 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2011 Annual Report on Form 10-K.

The consolidated financial statements include the accounts of Global Indemnity and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company’s wholly owned business trust subsidiaries, United National Group Capital Trust I and United National Group Capital Statutory Trust II, are not consolidated pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. The Company’s business trust subsidiaries have issued $30.0 million in floating rate capital securities (“Trust Preferred Securities”) and $0.9 million of floating rate common securities. The sole assets of the Company’s business trust subsidiaries are $30.9 million of junior subordinated debentures issued by the Company, which have the same terms with respect to maturity, payments, and distributions as the Trust Preferred Securities and the floating rate common securities.

Effective January 1, 2012, the Company adopted new accounting guidance that modified the definition of costs that can be capitalized in the acquisition of new and renewal business for insurance companies. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. This guidance was adopted retrospectively and has been applied to all prior period information contained in these consolidated financial statements. For further information please see Note 2.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

2. Change in Accounting Principle

In October, 2010, the FASB issued new accounting guidance that modified the definition of costs that can be capitalized in the acquisition of new and renewal business for insurance companies. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. The Company adopted this guidance retrospectively effective January 1, 2012 and has adjusted all prior period information contained in these consolidated financial statements.

The Company’s deferrable costs include: incremental direct costs of contract acquisition, primarily commissions and premium taxes, the portion of an employee’s total compensation attributable to successful acquisition or renewal of insurance and reinsurance contracts and other costs directly related to acquisition activities that would not have been incurred had the contract not been acquired. These costs are deferred and amortized ratably over the period in which the related premiums are earned.

In accordance with accounting guidance for insurance enterprises, the method followed in computing such amounts limits them to their estimated realizable value that gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. A premium deficiency shall be recognized if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.

The effect of adoption of this guidance on the consolidated balance sheet as of December 31, 2011 was as follows:


Balance Sheet (Dollars in thousands)	December 31, 2011
Balance Sheet (Dollars in thousands)	As Previously Reported		As Currently Reported
Deferred acquisition costs	$	25,565	$	21,564
Deferred federal income taxes		13,242		14,642
Total assets		2,075,517		2,072,916

Retained earnings		310,014		307,413
Total shareholders’ equity		841,664		839,063
Total liabilities and shareholders’ equity		2,075,517		2,072,916

The effect of adoption of this guidance on the consolidated income statement for the quarter and nine months ended September 30, 2011 was as follows:


Income Statement (Dollars in thousands, except per share data)	Quarter Ended September 30, 2011						Nine Months Ended September 30, 2011
	As Previously Reported			As Currently Reported			As Previously Reported			As Currently Reported
Acquisition costs and other underwriting expenses	$	34,597		$	33,327		$	94,646		$	92,810
Loss before income taxes		(33,793	)		(32,523	)		(10,316	)		(8,480	)
Income tax expense		454			899			5,758			6,401
Net loss		(34,247	)		(33,422	)		(16,021	)		(14,828	)
Net loss per share—basic	$	(1.13	)	$	(1.10	)	$	(0.53	)	$	(0.49	)

Net loss per share—diluted	$	(1.13	)	$	(1.10	)	$	(0.53	)	$	(0.49	)

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The effect of adoption of this guidance on the consolidated statement of cash flows for the nine months ended September 30, 2011 was as follows:


Statement of Cash Flows (Dollars in thousands)	Nine Months Ended September 30, 2011
Statement of Cash Flows (Dollars in thousands)	As Previously Reported			As Currently Reported
Net loss	$	(16,021	)	$	(14,828	)
Deferred federal income taxes		(341	)		302
Change in deferred acquisition costs		6,591			4,755

3. Profit Enhancement Initiative

On November 2, 2010, the Company committed to a Profit Enhancement Initiative with respect to its Insurance Operations. The plan was initiated on November 4, 2010, and is part of the Company’s efforts to streamline its operations in response to the continuing impact of the domestic recession as well as the competitive landscape within the excess and surplus lines market. This initiative was intended to enhance profitability and earnings by aligning corporate overhead costs with changes in the Company’s business. In the fourth quarter of 2010, the Company reduced its U.S. based census by approximately 25%, closed underperforming U.S. facilities, and supplemented staffing in Bermuda and in Ireland. All action items relating to this initiative were implemented by December 31, 2010.

The total cost of implementing this initiative was recorded in the Company’s consolidated statements of operations within its Insurance Operations segment in the fourth quarter of 2010. Components of the initiative included: (1) employee termination and severance charges of $1.71 million; (2) expenses of $1.53 million relating to discontinuing use of leased office space, net of expected sub-lease income; (3) restructuring expenses of $0.63 million for related asset and leasehold improvement impairments; and (4) expenses of $2.91 million relating to the curtailment of the Company’s workers’ compensation product initiative, consisting of a minimum ceded premium charge of $1.48 million on its workers’ compensation reinsurance treaty and $1.43 million in asset impairments.

In December of 2011 the Company incurred additional costs related to streamlining its operations in response to the continued competitive landscape within the excess and surplus lines market. These charges were recorded within the Company’s consolidated statement of operations in the fourth quarter of 2011 and impacted both its Insurance Operations as well as its Reinsurance Operations. All action items related to the reorganization were implemented by December 31, 2011.

Components of the reorganization included (1) employee termination and severance charges of $0.79 million; (2) charges of $0.84 million related to discontinuing use of leased office space, net of expected sub-lease income; and (3) fixed asset and leasehold improvement impairments of $1.17 million. Of the $2.79 million in additional charges incurred, $2.03 million were recorded within the Company’s Insurance Operations segment and $0.76 million were recorded within the Company’s Reinsurance Operations segment.

The following table summarizes charges incurred by expense type and the remaining liability as of September 30, 2012, December 31, 2011 and December 31, 2010:


(Dollars in thousands)	Employee Termination			Operating Leases			Asset Impairments			Workers’ Compensation			Total
Charges incurred in 2010	$	1,711		$	1,532		$	631		$	2,907		$	6,781
Cash payments for 2010 actions		(758	)		—			—			(985	)		(1,743	)
Non-cash adjustments for 2010 actions		176			—			(631	)		(1,430	)		(1,885	)

Liability at December 31, 2010	$	1,129		$	1,532		$	—		$	492		$	3,153
Cash payments for 2010 actions		(1,129	)		(805	)		—			(492	)		(2,426	)
Non-cash adjustments for 2010 actions		—			259			—			—			259
Additional charges incurred in 2011		785			842			1,165			—			2,792
Non-cash adjustments for 2011 actions		—			—			(1,165	)		—			(1,165	)

Liability at December 31, 2011	$	785		$	1,828		$	—		$	—		$	2,613
Cash payments for 2010 actions		—			(319	)		—			—			(319	)
Cash payments for 2011 actions		(621	)		(260	)		—			—			(881	)
Non-cash adjustments for 2011 actions		—			(182	)								(182	)

Liability at September 30, 2012	$	164		$	1,067		$	—		$	—		$	1,231

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

There was a reduction in expense of $0.18 million related to the Profit Enhancement Initiative resulting from a revision of expected sub-lease income included in the statement of operations within the “Acquisition costs and other underwriting expenses” line item for the quarter and nine months ended September 30, 2012. There was a reduction in expense of $0.064 million related to the Profit Enhancement Initiative resulting from a revision of expected sub-lease income included in the statement of operations within the “Corporate and other operating expenses” line item for the nine months ended September 30, 2011. There were no charges incurred related to the Profit Enhancement Initiative during the quarter ended September 30, 2011.

4. Investments

The Company’s investments in fixed maturities and common stock are classified as available for sale and are carried at their fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values of the Company’s available for sale portfolio, excluding the limited partnership interest, are determined on the basis of quoted market prices where available. If quoted market prices are not available, the Company uses third party pricing services to assist in determining fair value. In many instances, these services examine the pricing of similar instruments to estimate fair value. The Company purchases bonds with the expectation of holding them to their maturity; however, changes to the portfolio are sometimes required to assure it is appropriately matched to liabilities. In addition, changes in financial market conditions and tax considerations may cause the Company to sell an investment before it matures. Corporate loans have stated maturities; however, they generally do not reach their final maturity due to borrowers refinancing. The difference between amortized cost and fair value of the Company’s available for sale investments, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for the credit loss component of impairments deemed to be other than temporary.

The Company’s investments in other invested assets are comprised of limited liability partnership interests and are carried at their fair value. The change in the difference between amortized cost and the fair value of the partnership interests, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary.

The amortized cost and estimated fair value of investments were as follows as of September 30, 2012 and December 31, 2011:


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other than temporary impairments recognized in AOCI (1)
As of September 30, 2012
Fixed maturities:
U.S. treasury and agency obligations	$	102,267	$	7,192	$	—		$	109,459	$	—
Obligations of states and political subdivisions		195,060		7,729		(33	)		202,756		—
Mortgage-backed securities		263,406		10,162		(18	)		273,550		(9	)
Asset-backed securities		106,513		2,312		(9	)		108,816		(25	)
Commercial mortgage-backed securities		12,621		84		(39	)		12,666		—
Corporate bonds and loans		478,536		18,421		(190	)		496,767		—
Foreign corporate bonds		53,776		2,055		—			55,831		—

Total fixed maturities		1,212,179		47,955		(289	)		1,259,845		(34	)
Common stock		165,095		32,840		(3,382	)		194,553		—
Other invested assets		3,049		—		(112	)		2,937		—

Total	$	1,380,323	$	80,795	$	(3,783	)	$	1,457,335	$	(34	)

(1)

Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (“AOCI”).

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other than temporary impairments recognized in AOCI (1)
As of December 31, 2011
Fixed maturities:
U.S. treasury and agency obligations	$	123,089	$	8,201	$	(1	)	$	131,289	$	—
Obligations of states and political subdivisions		198,374		7,822		(63	)		206,133		—
Mortgage-backed securities		259,935		9,283		(228	)		268,990		(13	)
Asset-backed securities		94,096		1,931		(63	)		95,964		(32	)
Commercial mortgage-backed securities		29,975		66		(72	)		29,969		—
Corporate bonds and loans		510,580		14,317		(3,696	)		521,201		(134	)
Foreign corporate bonds		42,484		994		(139	)		43,339		—

Total fixed maturities		1,258,533		42,614		(4,262	)		1,296,885		(179	)
Common stock		155,390		19,436		(6,465	)		168,361		—
Other invested assets		4,150		2,467		—			6,617		—

Total	$	1,418,073	$	64,517	$	(10,727	)	$	1,471,863	$	(179	)

(1)

Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (“AOCI”).

Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 4% of shareholders’ equity at September 30, 2012 or December 31, 2011.

The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at September 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	97,197	$	98,377
Due after one year through five years		563,927		591,407
Due after five years through ten years		125,672		130,332
Due after ten years through fifteen years		9,609		11,099
Due after fifteen years		33,234		33,598
Mortgage-backed securities		263,406		273,550
Asset-backed securities		106,513		108,816
Commercial mortgage-backed securities		12,621		12,666

Total	$	1,212,179	$	1,259,845

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of September 30, 2012:


	Less than 12 months					12 months or longer (1)					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities:
Obligations of states and political subdivisions	$	6,556	$	(8	)	$	1,932	$	(25	)	$	8,488	$	(33	)
Mortgage-backed securities		22		(1	)		672		(17	)		694		(18	)
Asset-backed securities		7,392		(3	)		457		(6	)		7,849		(9	)
Commercial mortgage-backed securities		4,067		(39	)		—		—			4,067		(39	)
Corporate bonds and loans		7,924		(101	)		4,985		(89	)		12,909		(190	)

Total fixed maturities		25,961		(152	)		8,046		(137	)		34,007		(289	)
Common stock		16,301		(1,803	)		6,746		(1,579	)		23,047		(3,382	)
Other invested assets		2,937		(112	)		—		—			2,937		(112	)

Total	$	45,199	$	(2,067	)	$	14,792	$	(1,716	)	$	59,991	$	(3,783	)

(1)

Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not impaired.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Less than 12 months					12 months or longer (1)					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. treasury and agency obligations	$	2,246	$	(1	)	$	—	$	—		$	2,246	$	(1	)
Obligations of states and political subdivisions		—		—			6,843		(63	)		6,843		(63	)
Mortgage-backed securities		15,041		(210	)		751		(18	)		15,792		(228	)
Asset-backed securities		13,622		(33	)		657		(30	)		14,279		(63	)
Commercial mortgage-backed securities		9,967		(38	)		8,869		(34	)		18,836		(72	)
Corporate bonds and loans		103,432		(3,301	)		8,436		(395	)		111,868		(3,696	)
Foreign corporate bonds		5,429		(139	)		—		—			5,429		(139	)

Total fixed maturities		149,737		(3,722	)		25,556		(540	)		175,293		(4,262	)
Common stock		44,859		(6,402	)		303		(63	)		45,162		(6,465	)

Total	$	194,596	$	(10,124	)	$	25,859	$	(603	)	$	220,455	$	(10,727	)

(1)

The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each fixed maturity security in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that a credit loss is likely are subjected to further analysis through discounted cash flow testing to estimate the credit loss to be recognized in earnings, if any. The specific methodologies and significant assumptions used by asset class are discussed below. Upon identification of such securities and periodically thereafter, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities and the magnitude and length of time that the fair value of such securities is below cost.

For fixed maturities, the factors considered in reaching the conclusion that a decline below cost is other than temporary include, among others, whether:

(1)

the issuer is in financial distress;

(2)

the investment is secured;

(3)

a significant credit rating action occurred;

(4)

scheduled interest payments were delayed or missed;

(5)

changes in laws or regulations have affected an issuer or industry;

(6)

the investment has an unrealized loss and was identified by the Company’s investment manager as an investment to be sold before recovery or maturity; and

(7)

the investment failed cash flow projection testing to determine if anticipated principal and interest payments will be realized.

According to accounting guidance, for debt securities in an unrealized loss position, the Company is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met, the Company must recognize an other than temporary impairment with the entire unrealized loss being recorded through earnings. For debt securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other than temporary. If the impairment is deemed to be other than temporary, the Company must separate the other than temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors, such as changes in interest rates. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other than temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses is recorded in other comprehensive income, net of taxes.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For equity securities, management carefully reviews all securities with unrealized losses to determine if a security should be impaired and further focuses on securities that have either:

(1)

persisted with unrealized losses for more than twelve consecutive months or

(2)

the value of the investment has been 20% or more below cost for six continuous months or more.

The amount of any write-down, including those that are deemed to be other than temporary, is included in earnings as a realized loss in the period in which the impairment arose.

The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:

U.S. treasury and agency obligations —As of September 30, 2012, the Company did not have any gross unrealized losses related to U.S. treasury and agency obligations. The Company’s investment manager conducts extensive macroeconomic and market analysis which are driven by moderate interest rate anticipation, yield curve management, and security selection.

Obligations of states and political subdivisions —As of September 30, 2012, gross unrealized losses related to obligations of states and political subdivisions were $0.033 million. Of this amount, $0.025 million have been in an unrealized loss position for twelve months or greater and are rated AA+ or higher. The Company’s investment manager considers all factors that influence performance of the municipal bond market, including investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The manager relies on the output of its fixed income credit analysts, including dedicated municipal bond analysts. The dedicated municipal analysts perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies.

Mortgage-backed securities (“MBS”) —As of September 30, 2012, gross unrealized losses related to mortgage-backed securities were $0.018 million. Of this amount, $0.017 million have been in an unrealized loss position for twelve months or greater. All of the securities in an unrealized loss position for twelve months or greater are rated BBB or higher. The Company’s investment manager models each mortgage-backed security to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. The Company’s investment manager first projects HPI at the national level, then at the zip code level based on the historical relationship between the individual zip code HPI and the national HPI, using inputs from its macroeconomic team, mortgage portfolio management team, and structured analyst team. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan modification history, and the application of roll rate adjustments.

Asset-backed securities (“ABS”)—As of September 30, 2012, gross unrealized losses related to asset-backed securities were $0.009 million. Of this amount, $0.006 million have been in an unrealized loss position for twelve months or greater and are rated A- or higher. The weighted average credit enhancement for the Company’s asset-backed portfolio is 33.2. The Company’s investment manager analyzes every ABS transaction on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, their analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The Company’s investment manager projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses that the deal will incur a dollar of loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Commercial mortgage-backed securities (“CMBS”)—As of September 30, 2012, gross unrealized losses related to CMBS were $0.039 million. All securities have been in an unrealized loss position for less than twelve months. The weighted average credit enhancement for the Company’s CMBS portfolio is 24.8. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principle losses. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on the Company’s investment manager’s internally generated set of assumptions that reflect their expectation for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) occupancies are projected to drop; (2) capitalization rates vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value was stressed by using projected property performance and projected capitalization rates. Term risk is triggered if projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards.

Corporate bonds and loans—As of September 30, 2012, gross unrealized losses related to corporate bonds and loans were $0.19 million. Of this amount, $0.089 million have been in an unrealized loss position for twelve months or greater. The Company’s investment manager’s analysis for this sector includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Foreign bonds—As of September 30, 2012, the Company did not have any gross unrealized losses related to foreign bonds. The Company’s investment manager maintains financial models for the Company’s bond issuers. These models include a projection of each issuer’s future financial performance including prospective debt servicing capabilities and capital structure composition. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection.

Common stocks—As of September 30, 2012, gross unrealized losses related to common stock were $3.382 million. Of this amount, $1.579 million have been in an unrealized loss position for twelve months or greater. To determine if an other than temporary impairment of an equity security has occurred, the Company considers, among other things, the severity and duration of the decline in fair value of the equity security. The Company also examines other factors to determine if the equity security could recover its value in a reasonable period of time.

Other invested assets—As of September 30, 2012, gross unrealized losses related to other invested assets were $0.112 million. All securities have been in an unrealized loss position for less than twelve months.

The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the quarters and nine months ended September 30, 2012 and 2011:


(Dollars in thousands)	Quarters Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Fixed maturities:
OTTI losses, gross	$		(14)	$	(1,002	)	$	(1,073	)	$	(1,002	)
Portion of loss recognized in other comprehensive income (pre-tax)		—			—			541			—

Net impairment losses on fixed maturities recognized in earnings		(14	)		(1,002	)		(532	)		(1,002	)
Common stock		(175	)		(822	)		(2,735	)		(2,728	)

Total	$	(189	)	$	(1,824	)	$	(3,267	)	$	(3,730	)

The following table is an analysis of the credit losses recognized in earnings on debt securities held by the Company for the quarters and nine months ended September 30, 2012 and 2011 for which a portion of the OTTI loss was recognized in other comprehensive income.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


(Dollars in thousands)	Quarters Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2012		2011		2012			2011
Balance at beginning of period	$	86	$	86	$	86		$	115
Additions where no OTTI was previously recorded		—		—		55			—
Additions where an OTTI was previously recorded		—		—		—			—
Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery		—		—		—			—
Reductions reflecting increases in expected cash flows to be collected		—		—		—			—
Reductions for securities sold during the period		—		—		(55	)		(29	)

Balance at end of period	$	86	$	86	$	86		$	86

Accumulated Other Comprehensive Income, Net of Tax

Accumulated other comprehensive income as of September 30, 2012 and December 31, 2011 was as follows:


(Dollars in thousands)	September 30, 2012			December 31, 2011
Net unrealized gains (losses) from:
Fixed maturities	$	47,666		$	38,352
Common stock		29,458			12,971
Partnerships		(112	)		2,467
Deferred federal income taxes		(20,345	)		(13,616	)


Accumulated other comprehensive income, net of tax	$	56,667		$	40,174

Net Realized Investment Gains

The components of net realized investment gains for the quarters and nine months ended September 30, 2012 and 2011 were as follows:


	Quarters Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
Fixed maturities:
Gross realized gains	$	827		$	2,176		$	3,523		$	12,969
Gross realized losses		(31	)		(1,614	)		(1,573	)		(1,791	)

Net realized gains		796			562			1,950			11,178

Common stock:
Gross realized gains		3,333			3,486			8,724			14,122
Gross realized losses		(918	)		(2,760	)		(3,761	)		(5,175	)

Net realized gains		2,415			726			4,963			8,947

Other invested assets:
Gross realized gains		—			—			—			1,546
Gross realized losses		—			—			—			—

Net realized gains		—			—			—			1,546

Total net realized investment gains	$	3,211		$	1,288		$	6,913		$	21,671

The proceeds from sales of available-for-sale securities resulting in net realized investment gains (losses) for the nine months ended September 30, 2012 and 2011 were as follows:


	Nine Months Ended September 30,
(Dollars in thousands)	2012		2011
Fixed maturities	$	380,713	$	604,606
Equity securities		40,299		78,491
Other invested assets		1,114		1,348

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Net Investment Income

The sources of net investment income for the quarters and nine months ended September 30, 2012 and 2011 were as follows:


	Quarters Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
Fixed maturities	$	10,320		$	13,153		$	32,146		$	42,031
Equity securities		1,174			914			3,885			2,645
Cash and cash equivalents		13			10			99			56
Other invested assets		4,330			—			4,486			—

Total investment income		15,837			14,077			40,616			44,732
Investment expense		(1,060	)		(1,197	)		(3,351	)		(3,508	)

Net investment income	$	14,777		$	12,880		$	37,265		$	41,224

The Company’s total investment return on a pre-tax basis for the quarters and nine months ended September 30, 2012 and 2011 was as follows:


	Quarters Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
Net investment income	$	14,777		$	12,880		$	37,265		$	41,224

Net realized investment gains		3,211			1,288			6,913			21,671
Net equity in net income of partnership		—			—			—			53
Net unrealized investment gains (losses)		11,388			(39,848	)		23,222			(46,642	)

Net investment return		14,599			(38,560	)		30,135			(24,918	)

Total investment return	$	29,376		$	(25,680	)	$	67,400		$	16,306

Total investment return % (1)		1.9	%		(1.5	%)		4.2	%		1.0	%

Average investment portfolio (2)	$	1,556,450		$	1,698,039		$	1,599,472		$	1,689,333

(1)

Not annualized.

(2)

Average of total cash and invested assets, net of receivable/payable for securities purchased and sold, as of the beginning and ending of the period.

Insurance Enhanced Municipal Bonds

As of September 30, 2012, the Company held insurance enhanced municipal bonds of approximately $63.3 million, which represented approximately 4.1% of the Company’s total cash and invested assets, net of payable/receivable for securities purchased and sold. These securities had an average rating of “AA.” Approximately $18.9 million of these bonds are pre-refunded with U.S. treasury securities, of which $12.9 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. Of the remaining $44.4 million of insurance enhanced municipal bonds, $23.7 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.


(Dollars in thousands)	Ratings with Insurance		Ratings without Insurance
Rating
AAA	$	8,901	$	—
AA		5,572		8,901
A		9,274		14,846
BBB		—		—

Total	$	23,747	$	23,747

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

A summary of the Company’s insurance enhanced municipal bonds that are backed by financial guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, as of September 30, 2012, is as follows:


(Dollars in thousands) Financial Guarantor	Total		Pre-refunded Securities		Government Guaranteed Securities		Exposure Net of Pre-refunded & Government Guaranteed Securities
Ambac Financial Group	$	3,402	$	2,296	$	—	$	1,106
Financial Guaranty Insurance Company		219		219		—		—
Assured Guaranty Insurance Group		18,740		2,020		—		16,720
Municipal Bond Insurance Association		23,339		7,947		—		15,392
Government National Housing Association		2,335		403		1,932		—
Permanent School Fund Guaranty		8,901		—		8,901		—

Total backed by financial guarantors		56,936		12,885		10,833		33,218
Other credit enhanced municipal bonds		6,378		6,000		—		378

Total	$	63,314	$	18,885	$	10,833	$	33,596

In addition to the $63.3 million of insurance enhanced municipal bonds, the Company also held insurance enhanced asset-backed and credit securities with a market value of approximately $21.8 million, which represented approximately 1.4% of the Company’s total cash and invested assets, net of payable/receivable for securities purchased and sold. The financial guarantors of the Company’s $21.8 million of insurance enhanced asset-backed and credit securities include Ambac ($2.1 million), Financial Guaranty Insurance Company ($0.4 million), Assured Guaranty Insurance Group ($9.3 million), Municipal Bond Insurance Association ($4.7 million), and Other ($5.3 million).

The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at September 30, 2012.

Bonds Held on Deposit

Certain cash balances, cash equivalents, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements or were held in trust pursuant to intercompany reinsurance agreements. The estimated fair values of bonds available for sale and on deposit or held in trust were as follows as of September 30, 2012 and December 31, 2011:


	Estimated Fair Value
(Dollars in thousands)	September 30, 2012		December 31, 2011
On deposit with governmental authorities	$	43,072	$	43,830
Intercompany trusts held for the benefit of U.S. policyholders		572,550		545,230
Held in trust pursuant to third party requirements		85,589		82,577
Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders		6,309		6,125

Total	$	707,520	$	677,762

5. Fair Value Measurements

The Company elected to apply the fair value option within its limited partnership investment portfolio to an investment where the Company previously owned more than a 3% interest. The fair value of this investment was $1.1 million as of December 31, 2010. In February, 2011, the Company liquidated its remaining interest in this limited partnership.

The fair value option was not elected for the Company’s investments in limited partnerships with less than a 3% ownership interest.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.

The Company’s invested assets are carried at their fair value and are categorized based upon a fair value hierarchy:

•

Level 1—inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company can access at the measurement date.

•

Level 2—inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.

•

Level 3—inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for invested assets within the Level 3 category presented in the tables below may include changes in fair value that are attributed to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The following table presents information about the Company’s invested assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.


As of September 30, 2012	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. treasury and agency obligations	$	89,529	$	19,930	$	—	$	109,459
Obligations of states and political subdivisions		—		202,756		—		202,756
Mortgage-backed securities		—		273,550		—		273,550
Asset-backed securities		—		108,816		—		108,816
Commercial mortgage-backed securities		—		12,666		—		12,666
Corporate bonds and loans		—		496,767		—		496,767
Foreign corporate bonds		—		55,831		—		55,831

Total fixed maturities		89,529		1,170,316		—		1,259,845
Common stock		194,553		—		—		194,553
Other invested assets		—		—		2,937		2,937

Total invested assets	$	284,082	$	1,170,316	$	2,937	$	1,457,335


As of December 31, 2011	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. treasury and agency obligations	$	90,602	$	40,687	$	—	$	131,289
Obligations of states and political subdivisions		—		206,133		—		206,133
Mortgage-backed securities		—		268,990		—		268,990
Asset-backed securities		—		95,964		—		95,964
Commercial mortgage-backed securities		—		29,969		—		29,969
Corporate bonds and loans		—		521,201		—		521,201
Foreign corporate bonds		—		43,339		—		43,339

Total fixed maturities		90,602		1,206,283		—		1,296,885
Common stock		168,361		—		—		168,361
Other invested assets		—		—		6,617		6,617

Total invested assets	$	258,963	$	1,206,283	$	6,617	$	1,471,863

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.

The securities classified as Level 2 in the above table consist primarily of fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. For corporate loans, price quotes from multiple dealers along with recent reported trades for identical or similar securities are used to develop prices.

There were no significant transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2012 or 2011.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and nine months ended September 30, 2012:


Quarter Ended September 30, 2012 (Dollars in thousands)	Other Invested Assets
Beginning balance at July 1, 2012	$	8,590
Total gains (losses) (realized / unrealized):
Included in equity in net income of partnership		—
Included in accumulated other comprehensive income (loss) (1)		(4,546	)
Purchases		7
Sales		(1,114	)

Ending balance at September 30, 2012	$	2,937

Gains for 2012 included in earnings attributable to the change in unrealized losses related to assets still held at September 30, 2012	$	—

(1)

The Company received a $4.3 million distribution on a limited partnership investment during the quarter ended September 30, 2012, which was recognized in investment income and reduced accumulated other comprehensive income.


Nine Months Ended September 30, 2012 (Dollars in thousands)	Other Invested Assets
Beginning balance at January 1, 2012	$	6,617
Total gains (losses) (realized / unrealized):
Included in equity in net income of partnership		—
Included in accumulated other comprehensive income (loss) (2)		(2,579	)
Purchases		13
Sales		(1,114	)

Ending balance at September 30, 2012	$	2,937

Gains for 2012 included in earnings attributable to the change in unrealized losses related to assets still held at September 30, 2012	$	—

(2)

The Company received a $4.3 million distribution on a limited partnership investment during the nine months ended September 30, 2012, which was recognized in investment income and reduced accumulated other comprehensive income.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The investments classified as Level 3 in the above table relate to investments in limited partnerships who have invested primarily in publicly traded companies. However, not all of the partnerships’ investments are publicly traded, nor does the Company have access to daily valuations, therefore the estimated fair values of these limited partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships. Material assumptions and factors utilized in pricing these investments include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the previous pricing period.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and nine months ended September 30, 2011:


Quarter Ended September 30, 2011 (Dollars in thousands)	Other Invested Assets
Beginning balance at July 1, 2011	$	17,579
Total gains (losses) (realized / unrealized):
Included in equity in net income of partnership		—
Included in accumulated other comprehensive income (loss)		(1,434	)
Purchases		24
Sales		—

Ending balance at September 30, 2011	$	16,169

Gains for 2011 included in earnings attributable to the change in unrealized losses related to assets still held at September 30, 2011	$	—


Nine Months Ended September 30, 2011 (Dollars in thousands)	Other Invested Assets
Beginning balance at January 1, 2011	$	5,380
Total gains (realized / unrealized):
Included in equity in net income of partnership		81
Included in accumulated other comprehensive income (loss)		2,006
Purchases		10,049
Sales		(1,347	)

Ending balance at September 30, 2011	$	16,169

Gains for 2011 included in earnings attributable to the change in unrealized losses related to assets still held at September 30, 2011	$	—

The $16.2 million is comprised of $7.2 million related to investments in limited partnerships and $9.0 million related to an investment in a mutual fund. The $7.2 million related to investments in limited partnerships for which there is no readily available independent market price. The estimated fair values of these limited partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships. Material assumptions and factors utilized in pricing these investments include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the previous pricing period. The Company’s investment in a mutual fund of $9.0 million was measured utilizing the fund’s net asset value. The net asset value of the fund was based on the actual market price of the assets of the portfolio, including accrued income less liabilities and provisions for accrued expenses. The fund was comprised primarily of foreign equities. However, since the Company does not have the ability to see the invested asset composition of the mutual fund on a daily basis, this investment was classified within the Level 3 category.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Fair Value of Alternative Investments

Included in “Other invested assets” in the fair value hierarchy at September 30, 2012 are limited liability partnerships measured at fair value. The following table provides the fair value and future funding commitments related to these investments at September 30, 2012.


(Dollars in thousands)	Fair Value		Future Funding Commitments
Equity Fund, LP (1)	$	2,937	$	2,507
Real Estate Fund, LP (2)		—		—


Total	$	2,937	$	2,507

(1)

This limited partnership invests in companies from various business sectors whereby the partnership has acquired control of the operating business as a lead or organizing investor. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner.

(2)

This limited partnership invests in real estate assets through a combination of direct or indirect investments in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company continues to hold an investment in this limited partnership and has written the fair value down to zero.

Pricing

The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships. One vendor provides prices for equity securities and select fixed maturity categories including: corporate loans, commercial mortgage backed securities, high yield, investment grade, short term securities, and international fixed income securities, if any. A second vendor provides prices for other fixed maturity categories including: ABS, collateralized mortgage obligations (“CMO”), and municipals. A third vendor provides prices for the remaining fixed maturity categories including MBS and treasuries.

The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:

•

Equity prices are received from all primary and secondary exchanges.

•

Corporate bonds are individually evaluated on a nominal spread, discount margin, or an option adjusted spread basis depending on how the market trades a security or sector. Spreads are updated each day and compared with those from the broker/dealer community and contributing firms. Issues are generally benchmarked off of the U.S. treasuries or LIBOR.

•

Agencies are individually evaluated on an option adjusted spread basis or a nominal spread for non-callable issues.

•

For CMOs, which are categorized with mortgage-backed securities in the tables listed above, volatility-driven and ratings based multi-dimensional spread tables or an option-adjusted spread model and prepayment model is used. For ABSs, multi-dimensional, collateral specific spread / prepayment speed tables are utilized. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate security set-up, prepayment speeds, cash flows, and treasury swap curves and spread adjustments.

•

For municipals, a series of matrices are used to evaluate securities within this asset class. The evaluated pricing models for this asset class incorporate security set-up, sector curves, yield to worst, ratings updates, and adjustments for material events notices.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

•

U.S. Treasuries are priced on the bid side by a market maker.

•

For MBSs, the pricing vendor utilizes a matrix model correlation to a forward MBS trade or benchmarking to value a security.

•

Corporate loans are priced using averages of bids and offers obtained from the broker/dealer community involved in trading such loans.

The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:

•

Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security’s market value may have changed.

•

Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.

During the quarter and nine months ended September 30, 2012, the Company has not adjusted quotes or prices obtained from the pricing vendors.

6. Reinsurance

The Company cedes risk to unrelated reinsurers on a pro rata (“quota share”) and excess of loss basis in the ordinary course of business to limit its net loss exposure on insurance contracts. Reinsurance ceded arrangements do not discharge the Company of primary liability. Moreover, reinsurers may fail to pay the Company due to a lack of reinsurer liquidity, perceived improper underwriting, losses for risks that are excluded from reinsurance coverage and other similar factors, all of which could adversely affect the Company’s financial results.

The Company had the following reinsurance balances as of September 30, 2012 and December 31, 2011:


(Dollars in thousands)	September 30, 2012			December 31, 2011
Reinsurance receivables	$	273,993		$	287,986
Collateral securing reinsurance receivables		(167,623	)		(169,002	)

Reinsurance receivables, net of collateral	$	106,370		$	118,984

Allowance for uncollectible reinsurance receivables	$	9,310		$	10,021
Prepaid reinsurance premiums		6,390			6,555

The Company regularly evaluates retention levels to ensure that the ultimate reinsurance cessions are aligned with corporate risk tolerance and capital levels. The Company’s Insurance Operations’ primary reinsurance treaties are as follows:

Property Catastrophe Excess of Loss—The Company’s current property writings create exposure to catastrophic events. To protect against these exposures, the Company purchases a property catastrophe treaty. Effective June 1, 2012, the Company renewed its property catastrophe excess of loss treaty which provides occurrence coverage for losses of $80.0 million in excess of $20.0 million. At this renewal, the Company retained 50% of the $20 million in excess of $20 million layer, and 20% of the $50 million in excess of $40 million layer. This treaty provides for one

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

full reinstatement of coverage at 100% additional premium as to time and pro rata as to amount of limit reinstated. This replaces the treaty that expired on May 31, 2012, which provided occurrence coverage for 100% of losses of $80.0 million in excess of $20.0 million.

Property Per Risk Excess of Loss—Effective January 1, 2012, the Company renewed its property per risk excess of loss treaty which provides coverage of $13.0 million per risk in excess of $2.0 million per risk. This replaces the treaty that expired December 31, 2011, which provided identical coverage. The renewal treaty provides coverage in two layers: $3.0 million per risk in excess of $2.0 million per risk, and $10.0 million per risk in excess of $5.0 million per risk. The first layer is split into two sections, each subject to a $3.0 million limit of liability for all risks involved in one loss occurrence, and the second layer is subject to a $10.0 million limit for all risks involved in one loss occurrence.

Professional Liability Excess of Loss—Effective April 30, 2011, the Company’s professional liability excess of loss treaty was terminated. This treaty provided coverage of $4.0 million per policy/occurrence in excess of $1.0 million per policy/occurrence. Effective May 1, 2011, the professional liability exposure was added to the casualty excess of loss treaty.

Casualty and Professional Liability Excess of Loss—Effective May 1, 2012, the Company renewed its casualty and professional liability excess of loss treaty. The casualty section provides coverage for $2.0 million per occurrence in excess of $1.0 million per occurrence for general liability and auto liability. The professional liability section provides coverage of $4.0 million per policy/occurrence in excess of $1.0 million per policy/occurrence. For both sections, allocated loss adjustment expenses are included within limits. The casualty and professional liability treaty that expired April 30, 2012 provided identical coverage.

Casualty Clash Excess of Loss—Effective May 1, 2012, the Company renewed its casualty clash excess of loss treaty which provides coverage of $10.0 million per occurrence in excess of $3.0 million per occurrence, subject to a $20.0 million limit for all loss occurrences. The casualty clash treaty that expired April 30, 2012 provided identical coverage.

Marine Excess of Loss—Effective May 24, 2010, the Company entered into a marine excess of loss treaty which provides coverage in three layers for $13.0 million per occurrence in excess of $2.0 million per occurrence. The first layer of $3.0 million in excess of $2.0 million, and the second layer of $5.0 million in excess of $5.0 million, provides for two full reinstatements of coverage at 100% additional premium. The third layer of $5.0 million in excess of $10.0 million provides for one full reinstatement of coverage at 100% additional premium. This treaty expired on November 30, 2011 and was not renewed.

To the extent that there may be an increase or decrease in catastrophe or casualty clash exposure in the future, the Company may increase or decrease its reinsurance protection for these exposures commensurately. There were no significant changes to any of the Company’s Insurance Operations’ reinsurance treaties during the quarter ended September 30, 2012.

7. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 0.0% in Gibraltar, 28.8% in the Duchy of Luxembourg, and 25.0% on non-trading income and 12.5% on trading income in the Republic of Ireland. For 2012, the statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense. Total estimated annual income tax expense is divided by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. The expected annual income tax rate is applied against interim pre-tax income, excluding net realized gains and losses and discrete items such as limited partnership distributions, and then that amount is added to income taxes on net realized gains and losses, discrete items and limited partnership distributions. On an interim basis in 2011, the Company recorded the actual income tax provision in lieu of using the estimated effective income tax rate due to wide variability in the expected annual effective income tax rate across several similar pre-tax income scenarios.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the results of the quota share and stop-loss agreements between Wind River Reinsurance and the Insurance Operations, for the quarters and nine months ended September 30, 2012 and 2011 were as follows:


Quarter Ended September 30, 2012: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	29,595		$	51,205		$	(23,851	)	$	56,949

Net premiums written	$	29,595		$	21,860		$	—		$	51,455

Net premiums earned	$	34,198		$	21,131		$	—		$	55,329
Net investment income		13,687			5,726			(4,636	)		14,777
Net realized investment gains		584			2,627			—			3,211
Other income (loss)		(21	)		122			—			101

Total revenues		48,448			29,606			(4,636	)		73,418
Losses and Expenses:
Net losses and loss adjustment expenses		20,672			14,735			—			35,407
Acquisition costs and other underwriting expenses		13,927			9,296			—			23,223
Corporate and other operating expenses		216			1,823			—			2,039
Interest expense		—			5,901			(4,636	)		1,265

Income (loss) before income taxes	$	13,633		$	(2,149	)	$	—		$	11,484


Quarter Ended September 30, 2011: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	42,603		$	55,262	$	(24,773	)	$	73,092

Net premiums written	$	42,603		$	22,331	$	—		$	64,934

Net premiums earned	$	51,075		$	26,015	$	—		$	77,090
Net investment income		10,602			6,926		(4,648	)		12,880
Net realized investment gains (losses)		(762	)		2,050		—			1,288
Other income		202			170		—			372

Total revenues		61,117			35,161		(4,648	)		91,630
Losses and Expenses:
Net losses and loss adjustment expenses		76,539			9,695		—			86,234
Acquisition costs and other underwriting expenses		21,812			11,515		—			33,327
Corporate and other operating expenses		1,788			1,279		—			3,067
Interest expense		—			6,173		(4,648	)		1,525

Income (loss) before income taxes	$	(39,022	)	$	6,499	$	—		$	(32,523	)


Nine Months Ended September 30, 2012: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	100,183		$	151,411		$	(69,255	)	$	182,339

Net premiums written	$	99,635		$	63,236		$	—		$	162,871


Net premiums earned	$	113,039		$	64,619		$	—		$	177,658
Net investment income		32,745			18,326			(13,806	)		37,265
Net realized investment gains		915			5,998			—			6,913
Other income (loss)		(726	)		435			—			(291	)

Total revenues		145,973			89,378			(13,806	)		221,545
Losses and Expenses:
Net losses and loss adjustment expenses		70,955			42,619			—			113,574
Acquisition costs and other underwriting expenses		43,502			26,648			—			70,150
Corporate and other operating expenses		3,190			3,673			—			6,863
Interest expense		—			18,019			(13,806	)		4,213

Income (loss) before income taxes	$	28,326		$	(1,581	)	$	—		$	26,745

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Nine Months Ended September 30, 2011: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	158,058		$	182,102	$	(84,440	)	$	255,720

Net premiums written	$	157,556		$	76,893	$	—		$	234,449

Net premiums earned	$	151,538		$	79,576	$	—		$	231,114
Net investment income		33,548			21,469		(13,793	)		41,224
Net realized investment gains		5,024			16,647		—			21,671
Other income		538			12,001		—			12,539

Total revenues		190,648			129,693		(13,793	)		306,548
Losses and Expenses:
Net losses and loss adjustment expenses		156,075			50,254		—			206,329
Acquisition costs and other underwriting expenses		60,562			32,248		—			92,810
Corporate and other operating expenses		7,573			3,296		—			10,869
Interest expense		—			18,813		(13,793	)		5,020

Income (loss) before income taxes	$	(33,562	)	$	25,082	$	—		$	(8,480	)

The following table summarizes the Company’s U.S. federal and foreign current income tax expense for each of the quarters and nine months ending September 30, 2012 and 2011:


	Quarters Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2012		2011		2012			2011
Non-U.S. current income tax expense (benefit)	$	34	$	15	$	(594	)	$	344
U.S. federal current income tax expense (benefit)		1,131		482		(5,560	)		5,756

Total current income tax expense (benefit)		1,165		497		(6,154	)		6,100

The following tables summarize the differences between the tax provisions under accounting guidance applicable to interim financial statement periods and the expected tax provision at the weighted average tax rate:


	Quarters Ended September 30,
(Dollars in thousands)	2012						2011
	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average rate	$	(719	)		(6.3	%)	$	2,290			(7.0	%)
Adjustments:
Tax exempt interest		(359	)		(3.1	%)		(478	)		1.5	%
Dividend exclusion		(275	)		(2.4	%)		(173	)		0.5	%
Effective tax rate adjustment		3,287			28.6	%		—			—
Other		(363	)		(3.1	%)		(740	)		2.2	%

Income tax expense	$	1,571			13.7	%	$	899			(2.8	%)

The effective income tax rate for the quarter ended September 30, 2012 was 13.7%, compared to an effective income tax rate of (2.8%) for the quarter ended September 30, 2011. The increase in the effective tax rate is primarily due to the fact that the Company recorded its actual year-to-date tax provision during the quarter ended September 30, 2011 in lieu of using the estimated effective income tax rate due to wide variability in the expected annual effective income tax rate across several similar pre-tax income scenarios, as compared with an estimated annual effective rate during the quarter ended September 30, 2012. Any difference between the actual tax rate on an interim basis compared to the expected annual tax is reflected in the effective tax rate adjustment. The Company decreased its projected annual expected tax benefit during the third quarter of 2012, which resulted in a large cumulative effective tax rate adjustment during the third quarter. The effective rate differed from the weighted average expected income tax benefit rate of 6.3% for the quarter ended September 30, 2012 due to the fact that the Company records income tax expense in an interim basis using the projected annual effective tax rate, net of tax-exempt interest and dividends. The effective rate differed from the weighted average expected income tax rate of (7.0%) for the quarter ended September 30, 2011 due to the impact of tax-exempt interest and dividends.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	Nine Months Ended September 30,
(Dollars in thousands)	2012						2011
(Dollars in thousands)	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average rate	$	(440	)		(1.6	%)	$	9,124			(107.6	%)
Adjustments:
Tax exempt interest		(1,138	)		(4.3	%)		(1,498	)		17.7	%
Dividend exclusion		(807	)		(3.0	%)		(540	)		6.4	%
Effective tax rate adjustment		(888	)		(3.3	%)		—			—
Other		(361	)		(1.4	%)		(685	)		8.0	%

Income tax expense (benefit)	$	(3,634	)		(13.6	%)	$	6,401			(75.5	%)

The effective income tax benefit rate for the nine months ended September 30, 2012 was (13.6%), compared to an effective income tax expense rate of (75.5%) for the nine months ended September 30, 2011. The decrease in the effective tax rate is primarily due to a decrease in income in taxable jurisdictions in 2012 when compared to 2011. The Company realized income of $25.1 million in taxable jurisdictions for the nine months ended September 30, 2011 compared with losses of $1.6 million in taxable jurisdictions for the nine months ended September 30, 2012. Any difference between the actual tax rate on an interim basis compared to the expected annual tax is reflected in the effective tax rate adjustment. The effective rate differed from the weighted average expected income tax benefit rate of (1.6%) for the nine months ended September 30, 2012 due to fact that the Company records income tax expense in an interim basis using the projected annual effective tax rate, net of tax-exempt interest and dividends. The effective rate differed from the weighted average expected income tax expense rate of (107.6%) for the nine months ended September 30, 2011 due to the impact of tax-exempt interest and dividends.

The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2009.

The Company had an alternative minimum tax credit carry forward of $6.3 million as of September 30, 2012 and $6.0 million as of December 31, 2011, which can be carried forward indefinitely.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only recognizes those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company did not have any unrecognized tax benefits as of September 30, 2012. The Company had $0.3 million in unrecognized tax benefits as of December 31, 2011.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2012, the Company did not record any liabilities for tax-related interest and penalties on its consolidated balance sheet.

8. Liability for Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay claims and related settlement expenses and the impact of the Company’s reinsurance coverage with respect to insured events. Estimating the ultimate claims liability of the Company is a complex and judgmental process because the amounts are based on management’s informed estimates and judgments using data currently available. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid losses and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as industry data and legal, social, and economic developments. As additional experience and data become available, the Company’s estimate for the liability for unpaid losses and loss adjustment expenses is revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded with respect to unpaid losses and loss adjustment expenses at September 30, 2012, the related adjustments could have a material impact on the Company’s future results of operations.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:


	Quarters Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2012			2011		2012			2011
Balance at beginning of period	$	941,283		$	975,192	$	971,377		$	1,052,743
Less: Ceded reinsurance receivables		274,178			320,127		283,652			407,197

Net balance at beginning of period		667,105			655,065		687,725			645,546

Incurred losses and loss adjustment expenses related to:
Current year		36,096			83,665		116,381			214,403
Prior years		(689	)		2,569		(2,807	)		(8,074	)

Total incurred losses and loss adjustment expenses		35,407			86,234		113,574			206,329

Paid losses and loss adjustment expenses related to:
Current year		15,488			26,124		34,740			53,145
Prior years		32,389			38,367		111,923			121,922

Total paid losses and loss adjustment expenses		47,877			64,491		146,663			175,067

Net balance at end of period		654,637			676,808		654,637			676,808
Plus: Ceded reinsurance receivables		269,141			294,414		269,141			294,414

Balance at end of period	$	923,778		$	971,222	$	923,778		$	971,222

When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.

In the third quarter of 2012, the Company reduced its prior accident year loss reserves by $0.7 million, which consisted of a $1.4 million decrease related to Insurance Operations and a $0.7 million increase related to Reinsurance Operations.

The $1.4 million decrease related to Insurance Operations primarily consisted of the following:

•

Professional liability: A $1.9 million reduction primarily related to accident years 2004 through 2011 driven by continued favorable development on lawyer, real estate and allied health and social services exposures.

•

Auto liability: A $0.5 million increase mainly driven by continued loss emergence in accident year 2011.

•

General liability: A $0.1 million decrease primarily consisting of favorable emergence on small business binding and casualty brokerage exposures, offset by increases to construction defect reserves.

The $0.7 million increase related to Reinsurance Operations primarily consisted of an increase in auto liability lines primarily related to accident years 2009 and 2010 and was driven by increased frequency and severity.

In the third quarter of 2011, the Company increased its prior accident year loss reserves by $2.6 million, which consisted of a $0.8 million decrease related to Insurance Operations and a $3.4 million increase related to Reinsurance Operations.

The $0.8 million decrease related to Insurance Operations primarily consisted of the following:

•

General liability: A $2.1 million reduction mainly consisting of reductions of $8.2 million in accident years 2008 and prior due to continued favorable emergence. Incurred losses for these years have developed at a rate lower than the Company’s historical averages. The Company also decreased its reinsurance allowance by $0.9 million in this line due to changes in its reinsurance exposure on specifically identified

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

claims and general decreases in ceded reserves. Offsetting these decreases were increases of $6.9 million in accident years 2009 and 2010 related to loss emergence in a specific class of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. The Company has addressed profitability concerns by exiting certain unprofitable classes of business within this line.

•

Auto liability: A $0.7 million increase primarily related to accident years 2009 and 2010 due to recent unfavorable development on a few large claims.

•

Professional liability: A $0.4 million increase mainly consisting of increases of $2.5 million related to accident years 2009 and 2010 due to unfavorable development in certain product classes. The Company has addressed profitability concerns by exiting certain classes of business which have proven to be unprofitable. This was offset by a decrease of $2.1 million related to all other prior accident years.

The $3.4 million increase related to Reinsurance Operations primarily consisted of the following:

•

Auto liability: A $2.6 million increase primarily related to a $3.8 million increase to accident year 2010 resulting from further unexpected development on non-standard auto treaties which were not renewed in 2011. This was partially offset by a $1.2 million decrease in accident year 2009.

•

General liability: A $1.1 million increase related to accident years 2009 and 2010. This change related to higher than expected loss emergence.

•

Property: A $0.4 million decrease related to accident year 2010 related to favorable loss emergence on a worldwide catastrophe treaty.

In the first nine months of 2012, the Company reduced its prior accident year loss reserves by $2.8 million, which consisted of a $3.6 million decrease related to Insurance Operations and a $0.8 million increase related to Reinsurance Operations.

The $3.6 million decrease related to Insurance Operations primarily consisted of the following:

•

General liability: A $3.2 million reduction primarily due to favorable emergence in accident years 2008 and prior on small business binding and casualty brokerage exposures. Partially offsetting these reductions were increases to construction defect reserves. The Company also decreased its reinsurance allowance by $0.3 million in this line due to changes in its reinsurance exposure on specifically identified claims and general decreases in ceded reserves.

•

Professional liability: A $2.2 million reduction primarily related to accident years 2004 through 2011 driven by continued favorable development on lawyer, real estate and allied health and social services exposures.

•

Umbrella: A $0.4 million reduction primarily related to accident years 2008 and prior due to continued favorable emergence. Umbrella coverage typically attaches to other coverage lines, so these net decreases follow the decreases in general and professional liability above.

•

Property: A $0.8 million increase primarily related to accident year 2011 due to greater than expected loss emergence on a large sinkhole claim.

•

Marine: A $0.8 million increase primarily related to accident year 2011 due to greater than expected loss emergence on hull claims and protection and indemnity claims.

•

Auto liability: A $0.5 million increase primarily driven by continued loss emergence in accident year 2011.

The $0.8 million increase related to Reinsurance Operations primarily consisted of a $0.7 million increase in auto liability lines primarily related to accident year 2009 and was driven by increased frequency and severity.

In the first nine months of 2011, the Company reduced its prior accident year loss reserves by $8.1 million, which consisted of an $18.6 million decrease related to Insurance Operations and a $10.5 million increase related to Reinsurance Operations.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The $18.6 million decrease related to Insurance Operations primarily consisted of the following:

•

General liability: A $21.3 million reduction mainly consisting of reductions of $31.0 million in accident years 2008 and prior due to continued favorable emergence. Incurred losses for these years have developed at a rate lower than the Company’s historical averages. The Company also decreased its reinsurance allowance by $3.1 million in this line due to changes in its reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $12.8 million in accident years 2009 and 2010 driven by loss emergence as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. The Company has addressed profitability concerns by exiting certain classes of business within this line.

•

Property: A $1.8 million reduction primarily related to accident years 2009 and 2010 related to anticipated subrogation on a large equine mortality claim as well as favorable development on prior year catastrophe claims.

•

Umbrella: A $1.1 million reduction primarily related to accident years 2010 and prior due to continued favorable emergence. Umbrella coverage typically attaches to other coverage lines, so these net decreases follow the decreases in general liability above.

•

Professional liability: A $4.3 million increase consisting of increases of $15.1 million related to accident years 1998, 2009 and 2010, offset partially by decreases of $10.8 million related to all other accident years. In 2011, the Company exited certain professional liability classes where the volume of premium was low and loss volatility was high. The Company is focused on writing business where it expects to realize profit that meets return on investment thresholds.

•

Auto liability: A $1.2 million increase primarily related to accident years 2009 and 2010 due to higher than expected severity.

The $10.5 million increase related to Reinsurance Operations primarily consisted of the following:

•

General liability: A $5.4 million increase related to accident years 2009 and 2010 due to loss emergence that was greater than expected.

•

Auto liability: A $3.5 million increase primarily related to a $4.0 million increase to accident year 2010 resulting from further unexpected development on non-standard auto treaties which were not renewed in 2011. This was partially offset by a decrease of $0.5 million in accident year 2009.

•

Property: A $0.8 million increase primarily related to accident year 2010 related to loss emergence on a worldwide catastrophe treaty.

•

Workers’ compensation: A $0.8 million increase related to accident years 2009 and 2010 and is the result of expected losses recorded on adjustment premiums recorded in 2011.

9. Shareholders’ Equity

Repurchases of the Company’s A ordinary shares

On September 15, 2011, the Company announced that its Board of Directors authorized the Company to repurchase up to $100.0 million of its A ordinary shares through a share repurchase program. As part of the Company’s repurchase program, on May 9, 2012, the Company announced a self tender offer pursuant to which the Company may repurchase up to $61.0 million of its A ordinary shares. On June 14, 2012, the Company accepted for purchase 2,913,464 of its A ordinary shares at a price of $21.75 per share for a total cost of $63.4 million, excluding fees and expenses related to the tender offer. The Company funded the purchase of the shares using cash on hand. Included within the A ordinary shares accepted for purchase were 122,578 A ordinary shares that Global Indemnity elected to purchase pursuant to its option to increase the size of the tender offer by up to 2.0% of the outstanding A ordinary shares. Including the tender offer share repurchases, the Company has completed its $100.0 million share repurchase program.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

On August 28, 2012, the Company authorized the repurchase of up to $25.0 million additional A ordinary shares. Through September 30, 2012, 265,789 shares were repurchased for $5.5 million under the authorization at an average purchase price of $20.70 per share. The timing and amount of the remaining repurchase transactions, if any, under this authorization will depend upon market conditions as well as other factors. The authorization does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time.

All shares repurchased under the repurchase program and additional authorization have been retired. The excess cost of the repurchased shares over their par value was classified to additional paid in capital as of September 30, 2012.

The following table provides information with respect to the A ordinary shares that were surrendered or repurchased during the quarter ended September 30, 2012:


Period (1)	Total Number of Shares Purchased			Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (2)
July 1 – 31, 2012		—		$	—		—	$	—
August 1 – 31, 2012		—		$	—		—	$	25,000,000
September 1 – 30, 2012		265,789	(3)	$	20.70		265,789	$	19,503,588

Total		265,789		$	20.70		265,789		N/A

(1)

Based on settlement date.

(2)

Approximate dollar value of shares is as of the last date of the applicable month.

(3)

Purchased as part of the repurchase authorization announced in August 2012.

Through November 9, 2012, an additional 20,000 shares were repurchased as part of the share repurchase authorization. Including these purchases, a total of 285,789 shares were repurchased under the authorization at an average purchase price of $20.79 per share.

There were no shares repurchased during the quarter ended September 30, 2011.

10. Related Party Transactions

Fox Paine & Company, LLC

As of September 30, 2012, Fox Paine & Company, LLC (“Fox Paine”) beneficially owned shares having approximately 93.0% of the Company’s total outstanding voting power. Fox Paine can nominate a certain number of Directors, dependent on Fox Paine’s percentage ownership of voting shares in the Company, for so long as Fox Paine holds an aggregate of 25% or more of the voting power in the Company. Fox Paine controls the election of all of the Company’s Directors due to its controlling share ownership. The Company’s Chairman is a member of Fox Paine. The Company relies on Fox Paine to provide management services and other services related to the operations of the Company.

As of September 30, 2012 and December 31, 2011, Wind River Reinsurance was a limited partner in Fox Paine Capital Fund, II, which is managed by Fox Paine. This investment was originally made by United National Insurance Company in June, 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine of Wind River Investment Corporation, which was the predecessor holding company for United National Insurance Company. The Company’s investment in this limited partnership was valued at $2.9 million and $6.6 million as of September 30, 2012 and December 31, 2011, respectively. A distribution of $5.4 million was received from the limited partnership during the quarter and nine months ended September 30, 2012. As of September 30, 2012, the Company had an unfunded capital commitment of $2.5 million to the partnership. There were no distributions received from the limited partnership during the quarter and nine months ended September 30, 2011.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company incurred management fees of $0.3 million in each of the quarters ended September 30, 2012 and 2011 and $1.1 million in each of the nine months ended September 30, 2012 and 2011 as part of the annual management fee that is paid to Fox Paine.

Frank Crystal & Company

During each of the quarters ended September 30, 2012 and 2011, the Company paid $0.1 million in brokerage fees to Frank Crystal & Company, an insurance broker. During each of the nine months ended September 30, 2012 and 2011, the Company paid $0.2 million in brokerage fees to Frank Crystal & Company. James W. Crystal, the chairman and chief executive officer of Frank Crystal & Company, is a member of the Company’s Board of Directors.

11. Commitments and Contingencies

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company purchases insurance and reinsurance coverage for risks in amounts that it considers adequate. However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations, cash flows, or financial condition.

There is a greater potential for disputes with reinsurers who are in runoff. Some of the Company’s reinsurers’ have operations that are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.

On December 4, 2008, a federal jury in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) returned a $24.0 million verdict in favor of United National Insurance Company, an indirect wholly owned subsidiary of the Company, against AON Corp., an insurance and reinsurance broker. On July 24, 2009, a federal judge from the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) upheld that jury verdict. In doing so, the U.S. District Judge increased the verdict to $32.2 million by adding more than $8.2 million in prejudgment interest. AON filed its Notice of Appeal and a Bond in the amount of $33.0 million. Oral arguments were heard by the Appellate Court on October 26, 2010. In January, 2011, the Company settled with AON for $16.3 million. The Company realized approximately $7.5 million in 2011, net of income taxes and attorney’s fees.

12. Share-Based Compensation Plans

During the nine months ended September 30, 2012 and 2011, the Company granted 29,675 and 65,481 A ordinary shares, respectively, at a weighted average grant date value of $18.60 and $21.44 per share, respectively, to key employees of the Company under the Global Indemnity plc Share Incentive Plan (the “Plan”). All of the shares granted in 2012 were subject to certain restrictions. Of the shares granted in 2011, 54,233 were subject to certain restrictions and 11,248 vested immediately. The Company did not grant any shares to key employees during the quarters ended September 30, 2012 and 2011.

During the nine months ended September 30, 2012 and 2011, the Company granted an aggregate of 39,622 and 39,675 fully vested A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $19.83 and $21.52 per share, respectively, to non-employee directors of the Company under the Plan.

During the quarters ended September 30, 2012 and 2011, the Company granted an aggregate of 11,487 and 12,864 fully vested A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $20.25 and $22.31 per share, respectively, to non-employee directors of the Company under the Plan.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

During the quarter and nine months ended September 30, 2011, the Company granted 300,000 Time-Based Options under the Plan. The Time-Based Options vest in 33% increments over a three-year period and expire ten years after the grant date. There were no options granted under the Plan during the quarter or nine months ended September 30, 2012.

13. Earnings Per Share

Earnings per share have been computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share:


	Quarters Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2012		2011			2012		2011
Net income (loss)	$	9,913	$	(33,422	)	$	30,379	$	(14,828	)

Basic earnings per share:
Weighted average shares outstanding—basic		25,391,885		30,338,010			27,263,275		30,320,538

Net income (loss) per share	$	0.39	$	(1.10	)	$	1.11	$	(0.49	)

Diluted earnings per share:
Weighted average shares outstanding—diluted		25,412,586		30,352,850			27,280,612		30,341,713

Net income (loss) per share	$	0.39	$	(1.10	)	$	1.11	$	(0.49	)

A reconciliation of weighted average shares for basic earnings per share to weighted average shares for diluted earnings per share is as follows:


	Quarters Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Weighted average shares for basic earnings per share		25,391,885		30,338,010		27,263,275		30,320,538
Non-vested restricted stock		12,092		14,824		17,318		12,399
Options		8,609		16		19		8,776

Weighted average shares for diluted earnings per share		25,412,586		30,352,850		27,280,612		30,341,713

The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended September 30, 2012 and 2011 do not include 546,482 and 465,775 shares, respectively, which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the nine months ended September 30, 2012 and 2011 do not include 565,775 and 450,232 shares, respectively, which were deemed to be anti-dilutive.

14. Segment Information

Management uses underwriting income as the main measure of segment performance. The Company calculates underwriting income by subtracting net losses and loss adjustment expenses and acquisition costs and other underwriting expenses from net premiums earned and other income (loss).

The Insurance Operations and Reinsurance Operations segments follow the same accounting policies used for the Company’s consolidated financial statements. For further disclosure regarding the Company’s accounting policies, please see Note 5 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2011 Annual Report on Form 10-K.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following are tabulations of business segment information for the quarters and nine months ended September 30, 2012 and 2011.


Quarter Ended September 30, 2012: (Dollars in thousands)	Insurance Operations (1)			Reinsurance Operations (2)			Total
Revenues:
Gross premiums written	$	51,205		$	5,744		$	56,949

Net premiums written	$	45,710		$	5,745		$	51,455

Net premiums earned	$	44,252		$	11,077		$	55,329
Other income (loss)		122			(21	)		101

Total revenues		44,374			11,056			55,430
Losses and Expenses:
Net losses and loss adjustment expenses		30,949			4,458			35,407
Acquisition costs and other underwriting expenses		19,525	(3)		3,698			23,223

Income (loss) from segments	$	(6,100	)	$	2,900			(3,200	)

Unallocated Items:
Net investment income								14,777
Net realized investment gains								3,211
Corporate and other operating expenses								(2,039	)
Interest expense								(1,265	)

Income before income taxes								11,484
Income tax expense								(1,571	)

Net income							$	9,913

Total assets	$	1,336,680		$	627,667	(4)	$	1,964,347

(1)

Includes business ceded to Reinsurance Operations.

(2)

External business only, excluding business assumed from Insurance Operations.

(3)	Includes federal excise tax of $231 relating to cessions from Insurance Operations to Reinsurance Operations.

(4)

Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.


Quarter Ended September 30, 2011: (Dollars in thousands)	Insurance Operations (1)			Reinsurance Operations (2)			Total
Revenues:
Gross premiums written	$	55,260		$	17,832		$	73,092

Net premiums written	$	47,102		$	17,832		$	64,934

Net premiums earned	$	54,063		$	23,027		$	77,090
Other income		169			203			372

Total revenues		54,232			23,230			77,462
Losses and Expenses:
Net losses and loss adjustment expenses		58,174			28,060			86,234
Acquisition costs and other underwriting expenses		23,728	(3)		9,599			33,327

Loss from segments	$	(27,670	)	$	(14,429	)		(42,099	)

Unallocated Items:
Net investment income								12,880
Net realized investment gains								1,288
Corporate and other operating expenses								(3,067	)
Interest expense								(1,525	)

Loss before income taxes								(32,523	)
Income tax expense								(899	)

Net loss							$	(33,422	)

Total assets	$	1,471,467		$	658,715	(4)	$	2,130,182

(1)

Includes business ceded to Reinsurance Operations.

(2)

External business only, excluding business assumed from Insurance Operations.

(3)

Includes federal excise tax of $281 relating to cessions from Insurance Operations to Reinsurance Operations.

(4)

Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Nine Months Ended September 30, 2012: (Dollars in thousands)	Insurance Operations (1)		Reinsurance Operations (2)			Total
Revenues:
Gross premiums written	$	151,410	$	30,929		$	182,339

Net premiums written	$	132,490	$	30,381		$	162,871

Net premiums earned	$	135,256	$	42,402		$	177,658
Other income (loss)		435		(726	)		(291	)

Total revenues		135,691

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company