Edgar Filing: 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 June 30, 2011

¨	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.:

Large accelerated filer ¨; Accelerated filer x; Non-accelerated filer ¨; Smaller reporting company ¨

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 August 3, 2011, the registrant had outstanding 18,365,849 Class A Ordinary Shares and 12,061,370 Class B Ordinary Shares.

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets As of June 30, 2011 (Unaudited) and December 31, 2010		3

	Consolidated Statements of Operations Quarters and Six Months Ended June 30, 2011 (Unaudited) and June 30, 2010 (Unaudited)		4

	Consolidated Statements of Comprehensive Income Quarters and Six Months Ended June 30, 2011 (Unaudited) and June 30, 2010 (Unaudited)		5

	Consolidated Statements of Changes in Shareholders’ Equity As of June 30, 2011 (Unaudited) and December 31, 2010		6

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 (Unaudited) and June 30, 2010 (Unaudited)		7

	Notes to Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		61

Item 4.	Controls and Procedures		61

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		63

Item 1A.	Risk Factors		63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63

Item 5.	Other Information		64

Item 6.	Exhibits		64

Signatures			65

As used in this quarterly report, unless the context requires otherwise:

1)	“Global Indemnity” refers to Global Indemnity plc, an exempted company incorporated with limited liability under the laws of Ireland, and its U.S. and Non-U.S. Subsidiaries;

2)	“we,” “us,” “our,” and the “Company” refer to Global Indemnity and its subsidiaries or, prior to July 2, 2010, to United America Indemnity;

3)	“ordinary shares” refers to Global Indemnity Class A and Class B ordinary shares, or, prior to July 2, 2010, to United America Indemnity Class A and Class B common shares;

4)	“United America Indemnity” refers to United America Indemnity, Ltd., a Cayman Islands exempted company that, on July 2, 2010, became a direct, wholly-owned subsidiary of Global Indemnity plc, and its subsidiaries;

5)	our “U.S. Subsidiaries” refers to Global Indemnity Group, Global Indemnity Group Services, LLC, AIS, Penn-America Group, Inc., and our Insurance Operations;

our “United States Based Insurance Operations” and “Insurance Operations” refer to the insurance and related operations conducted by the U.S. Insurance Companies, American Insurance Adjustment Agency, Inc., Collectibles Insurance Services, LLC, United America Insurance Services, LLC, and J.H. Ferguson & Associates, LLC;

our “U.S. Insurance Companies” refers to the insurance and related operations conducted by 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 and Penn-Patriot Insurance Company;

8)	our “Non-U.S. Subsidiaries” refers to Global Indemnity Services Ltd., Global Indemnity (Gibraltar) Ltd., Global Indemnity (Cayman) Ltd., Global Indemnity (Luxembourg) Ltd., Wind River Reinsurance, the Luxembourg Companies, and U.A.I. (Ireland) Ltd.;

9)	“Wind River Reinsurance” refers to Wind River Reinsurance Company, Ltd.;

10)	the “Luxembourg Companies” refers to U.A.I. (Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II S.à r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I. (Luxembourg) Investment S.à r.l., and Wind River (Luxembourg) S.à r.l.;

11)	“AIS” refers to American Insurance Service, Inc.;

12)

our “Predecessor Insurance Operations” refers to Wind River Investment Corporation, which was dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance Company, which was dissolved on March 24, 2008, United National Insurance Company, Diamond State Insurance Company, United National Casualty Insurance Company, United National Specialty Insurance Company, and J.H. Ferguson & Associates, LLC;

13)	our “International Reinsurance Operations” and “Reinsurance Operations” refer to the reinsurance and related operations of Wind River Reinsurance;

14)	“Global Indemnity Group” refers to Global Indemnity Group, Inc., (fka United America Indemnity Group, Inc.);

15)	“Penn-America” refers to our product classification that includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority;

16)	“United National” refers to our product classification that includes property, general liability, and professional liability lines products distributed through program administrators with specific binding authority;

17)	“Diamond State” refers to our product classification that includes property, casualty, and professional liability lines products distributed through wholesale brokers and program administrators with specific binding authority;

18)

the “Statutory Trusts” refers to United National Group Capital Trust I, United National Group Capital Statutory Trust II, Penn-America Statutory Trust I, whose registration was cancelled effective January 15, 2008, and Penn-America Statutory Trust II, whose registration was cancelled effective February 2, 2009;

19)	“Fox Paine & Company” refers to Fox Paine & Company, LLC and affiliated investment funds;

20)	“GAAP” refers to accounting principles generally accepted in the United States of America; and

21)	“$” or “dollars” refers to U.S. dollars.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBAL INDEMNITY PLC

Consolidated Balance Sheets

(In thousands, except share amounts)


	(Unaudited) June 30, 2011			December 31, 2010
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: $1,414,780 and $1,393,655)	$	1,460,218		$	1,444,392
Equity securities:
Available for sale, at fair value (cost: $129,239 and $121,604)		150,226			147,526
Other invested assets
Available for sale, at fair value (cost: $14,126 and $4,255)		17,579			4,268
Securities classified as trading, at fair value (cost: $0 and $1,112)		—			1,112

Total investments		1,628,023			1,597,298

Cash and cash equivalents		106,344			119,888
Premiums receivable, net		68,481			56,657
Reinsurance receivables		332,242			422,844
Deferred federal income taxes		9,414			6,926
Deferred acquisition costs		38,768			35,344
Intangible assets		18,893			19,082
Goodwill		4,820			4,820
Prepaid reinsurance premiums		8,842			11,104
Other assets		22,804			20,720

Total assets	$	2,238,631		$	2,294,683

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	975,196		$	1,052,743
Unearned premiums		149,104			135,872
Ceded balances payable		6,118			12,376
Contingent commissions		4,944			9,260
Payable for securities purchased		4,536			4,768
Federal income taxes payable		1,559			55
Notes and debentures payable		121,142			121,285
Other liabilities		32,850			29,655

Total liabilities		1,295,449			1,366,014

Commitments and contingencies (Note 10)		—			—

Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; Class A ordinary shares issued: 21,401,190 and 21,340,821, respectively; Class A ordinary shares outstanding: 18,352,985 and 18,300,544, respectively; Class B ordinary shares issued and outstanding: 12,061,370 and 12,061,370, respectively		3			3
Additional paid-in capital		623,751			622,725
Accumulated other comprehensive income, net of taxes		52,639			57,211
Retained earnings		367,868			349,642
Class A ordinary shares in treasury, at cost: 3,048,205 and 3,040,277 shares, respectively		(101,079	)		(100,912	)

Total shareholders’ equity		943,182			928,669

Total liabilities and shareholders’ equity	$	2,238,631		$	2,294,683

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 June 30,						(Unaudited) Six Months Ended June 30,
	2011			2010			2011			2010
Revenues:

Gross premiums written	$	94,962		$	92,050		$	182,628		$	184,903

Net premiums written	$	86,407		$	79,523		$	169,515		$	161,004

Net premiums earned	$	78,055		$	74,702		$	154,024		$	145,490
Net investment income		13,930			13,941			28,344			28,520
Net realized investment gains:
Other-than-temporary impairment losses on investments		(1,353	)		(363	)		(1,906	)		(452	)
Other-than-temporary impairment losses on investments recognized in other comprehensive income		—			(4	)		—			43
Other net realized investment gains		9,739			5,964			22,289			20,210

Total net realized investment gains		8,386			5,597			20,383			19,801
Other income		163			342			11,832			342

Total revenues		100,534			94,582			214,583			194,153

Losses and Expenses:
Net losses and loss adjustment expenses		61,753			32,675			120,095			74,464
Acquisition costs and other underwriting expenses		30,197			29,008			60,049			59,156
Corporate and other operating expenses		4,687			5,063			7,467			9,959
Interest expense		1,743			1,833			3,495			3,572

Income before income taxes		2,154			26,003			23,477			47,002
Income tax expense (benefit)		(2,287	)		1,491			5,304			3,560

Income before equity in net income (loss) of partnerships		4,441			24,512			18,173			43,442
Equity in net income (loss) of partnerships, net of taxes		—			—			53			(29	)

Net income	$	4,441		$	24,512		$	18,226		$	43,413

Per share data (1):

Net income
Basic	$	0.15		$	0.81		$	0.60		$	1.44

Diluted	$	0.15		$	0.81		$	0.60		$	1.44

Weighted-average number of shares outstanding
Basic		30,321,909			30,206,970			30,311,658			30,195,806

Diluted		30,367,556			30,233,002			30,349,985			30,216,324

(1)	Shares outstanding and per share amounts for 2010 have been retrospectively restated to reflect the 1-for-2 stock exchange effective July 2, 2010 when the Company completed its re-domestication to Ireland.

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Comprehensive Income

(In thousands)


	(Unaudited) Quarters Ended June 30,						(Unaudited) Six Months Ended June 30,
	2011			2010			2011			2010
Net income	$	4,441		$	24,512		$	18,226		$	43,413

Other comprehensive loss, net of taxes:
Unrealized holding gains arising during period		3,068			143			10,403			10,121
Portion of other-than-temporary impairment losses recognized in other comprehensive loss, net of taxes		(6	)		113			(10	)		112
Recognition of previously unrealized holding gains		(6,210	)		(3,801	)		(14,965	)		(14,794	)
Unrealized foreign currency translation losses		—			(105	)		—			(218	)

Other comprehensive loss, net of taxes		(3,148	)		(3,650	)		(4,572	)		(4,779	)

Comprehensive income, net of taxes	$	1,293		$	20,862		$	13,654		$	38,634

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)


	(Unaudited) Six Months Ended June 30, 2011			Year Ended December 31, 2010
Number of Class A ordinary shares issued:
Number at beginning of period		21,340,821			21,243,345
Ordinary shares issued under share incentive plans		33,558			20,828
Ordinary shares issued to directors		26,811			76,648

Number at end of period		21,401,190			21,340,821

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

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

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

Additional paid-in capital:
Balance at beginning of period	$	622,725		$	619,473
Share compensation plans		1,026			3,252

Balance at end of period	$	623,751		$	622,725

Accumulated other comprehensive income, net of deferred income tax:
Balance at beginning of period	$	57,211		$	48,481
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period		(4,564	)		8,703
Change in other-than-temporary impairment losses recognized in other comprehensive income, net of taxes		(8	)		70
Unrealized foreign currency translation losses		—			(43	)

Other comprehensive income (loss)		(4,572	)		8,730

Balance at end of period	$	52,639		$	57,211

Retained earnings:
Balance at beginning of period	$	349,642		$	264,739
Net income		18,226			84,903

Balance at end of period	$	367,868		$	349,642

Number of Treasury Shares:
Number at beginning of period		3,040,277			3,028,106
Class A ordinary shares purchased		7,928			12,171

Number at end of period		3,048,205			3,040,277

Treasury Shares, at cost:
Balance at beginning of period	$	(100,912	)	$	(100,720	)
Class A ordinary shares purchased, at cost		(167	)		(192	)

Balance at end of period	$	(101,079	)	$	(100,912	)

Total shareholders’ equity	$	943,182		$	928,669

Share amounts for 2010 have been retrospectively restated to reflect the 1-for-2 stock exchange

effective July 2, 2010 when the Company completed its re-domestication to Ireland.

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited) Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net income	$	18,226		$	43,413
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of trust preferred securities issuance costs		41			41
Amortization and depreciation		1,041			1,190
Restricted stock expense		1,132			2,042
Deferred federal income taxes		(299	)		74
Amortization of bond premium and discount, net		2,321			1,610
Net realized investment gains		(20,383	)		(19,801	)
Equity in net (income) loss of partnerships		(53	)		29
Changes in:
Premiums receivable, net		(11,824	)		(772	)
Reinsurance receivables		90,602			57,715
Unpaid losses and loss adjustment expenses		(77,547	)		(88,982	)
Unearned premiums		13,232			10,696
Ceded balances payable		(6,258	)		(11,240	)
Other assets and liabilities, net		215			(8,749	)
Contingent commissions		(4,316	)		(5,242	)
Federal income taxes payable		1,504			(274	)
Deferred acquisition costs		(3,424	)		(1,543	)
Prepaid reinsurance premiums		2,262			4,819

Net cash provided by (used for) operating activities		6,472			(14,974	)

Cash flows from investing activities:
Proceeds from sale of fixed maturities		459,364			476,634
Proceeds from sale of stocks		50,055			20,330
Proceeds from maturity of fixed maturities		31,670			27,075
Proceeds from sale of other invested assets		1,348			68
Purchases of fixed maturities		(504,088	)		(522,948	)
Purchases of stocks		(47,923	)		(51,461	)
Purchases of other invested assets		(10,026	)		—
Acquisition of business, net of cash acquired		—			(14,970	)

Net cash used for investing activities		(19,600	)		(65,272	)

Cash flows from financing activities:
Tax expense associated with share-based compensation plans		(106	)		(221	)
Purchases of Class A ordinary shares		(167	)		(163	)
Principal payments of term debt		(143	)		(142	)

Net cash used for financing activities		(416	)		(526	)

Effect of exchange rates on cash and cash equivalents		—			(218	)

Net change in cash and cash equivalents		(13,544	)		(80,990	)
Cash and cash equivalents at beginning of period		119,888			186,087

Cash and cash equivalents at end of period	$	106,344		$	105,097

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. See Note 2 below for details regarding the re-domestication. United America Indemnity, Ltd. was incorporated on August 26, 2003, and is domiciled in the Cayman Islands. United America Indemnity, Ltd. is now a subsidiary of the Company and an Irish tax resident. The Company’s Class 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 interim consolidated financial statements are unaudited, but have been prepared in conformity with 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 six months ended June 30, 2011 and 2010 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 2010 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 (“UNG Trust I”) and United National Group Capital Statutory Trust II (“UNG Trust II”), are not consolidated pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “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.

2. Redomestication

In February 2010, the Company’s Board of Directors approved a plan for the Company to re-domesticate from the Cayman Islands to Ireland. At a special shareholders meeting held on May 27, 2010, the Company’s shareholders voted in favor of completing the re-domestication proposal pursuant to which all United America Indemnity, Ltd. ordinary shares would be cancelled and all holders of such shares would receive ordinary shares of Global Indemnity plc, a newly formed Irish company that was incorporated on March 9, 2010, on a one-for-two basis (two United America Indemnity, Ltd. shares exchanged for one Global Indemnity plc share). The re-domestication transaction was completed on July 2, 2010, following approval from the Grand Court of the Cayman Islands, at which time Global Indemnity plc replaced United America Indemnity, Ltd. as the ultimate parent company, and United America Indemnity, Ltd. became a wholly-owned subsidiary of Global Indemnity plc. Shares of United America Indemnity, Ltd. previously traded on the NASDAQ Global Select Market under the symbol “INDM.” Shares of the Irish company, Global Indemnity plc, began trading on the NASDAQ Global Select Market on July 6, 2010 under the symbol “GBLI.”

3. Profit Enhancement Initiative

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

On November 2, 2010, we committed to a Profit Enhancement Initiative with respect to our U.S. Insurance Operations. The plan was initiated on November 4, 2010, and is part of our efforts to streamline our 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 is intended to enhance profitability and earnings by aligning corporate overhead costs with changes in our 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 our consolidated statements of operations within our 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 our workers’ compensation product initiative, consisting of a minimum ceded premium charge of $1.48 million on our workers’ compensation reinsurance treaty and $1.43 million in asset impairments.

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


(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		176			—			(631	)		(1,430	)		(1,885	)

Liability at December 31, 2010	$	1,129		$	1,532		$	—		$	492		$	3,153
Cash payments in 2011 for 2010 actions		(803	)		(431	)		—			(492	)		(1,726	)
Non-cash adjustments		—			(64	)		—			—			(64	)

Liability at June 30, 2011	$	326		$	1,037		$	—		$	—		$	1,363

There were charges incurred related to the Profit Enhancement Initiative in our statement of operations for the quarter and six months ending June 30, 2011 of ($0.064) million which was included in the “Corporate and other operating expenses” line item. There were no charges incurred related to the Profit Enhancement Initiative in our statement of operations for the quarter or six months ending June 30, 2010.

4. Investments

The Company’s investments in fixed maturities, preferred stock, 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, excluding the Company’s convertible bond and convertible preferred stock portfolios, 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 difference between amortized cost and fair value of the convertible bonds and convertible preferred stocks is included in income.

The Company’s investments in other invested assets are comprised of limited liability partnership interests and a mutual fund. Partnership interests where we owned more than 3% at any time are carried at their fair value. The

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

change in the difference between amortized cost and fair value of partnership interests of 3% ownership or greater, net of the effect of deferred income taxes, is reflected in income. The mutual fund and partnership interests of less than 3% ownership are carried at their fair value. The change in the difference between amortized cost and the fair value of the mutual fund and partnership interests of less than 3% ownership, 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 June 30, 2011 and December 31, 2010:


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other than temporary impairments recognized in AOCI (1)
As of June 30, 2011
Fixed maturities:
U.S. treasury and agency obligations	$	116,805	$	5,990	$	(191	)	$	122,604	$	—
Obligations of states and political subdivisions		225,788		7,513		(193	)		233,108		—
Mortgage-backed securities		321,501		10,122		(463	)		331,160		(16	)
Asset-backed securities		115,579		2,554		(38	)		118,095		(36	)
Commercial mortgage-backed securities		38,003		44		(72	)		37,975		—
Corporate bonds and loans		542,331		18,684		(845	)		560,170		(134	)
Foreign corporate bonds		54,773		2,357		(24	)		57,106		—

Total fixed maturities		1,414,780		47,264		(1,826	)		1,460,218		(186	)
Common stock		129,239		23,181		(2,194	)		150,226		—
Other invested assets		14,126		3,453		—			17,579		—

Total	$	1,558,145	$	73,898	$	(4,020	)	$	1,628,023	$	(186	)

(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”).


(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, 2010
Fixed maturities:
U.S. treasury and agency obligations	$	192,746	$	9,948	$	(4	)	$	202,690	$	—
Obligations of states and political subdivisions		239,872		5,756		(616	)		245,012		—
Mortgage-backed securities		239,265		9,864		(49	)		249,080		(19	)
Asset-backed securities		112,626		2,548		(75	)		115,099		(41	)
Commercial mortgage-backed securities		38,963		9		(239	)		38,733		—
Corporate bonds and loans		511,754		21,594		(564	)		532,784		(134	)
Foreign corporate bonds		58,429		2,570		(5	)		60,994		—

Total fixed maturities		1,393,655		52,289		(1,552	)		1,444,392		(194	)
Common stock		120,674		25,300		(700	)		145,274		—
Preferred stock		930		1,322		—			2,252		—
Other invested assets		5,367		13		—			5,380		—

Total	$	1,520,626	$	78,924	$	(2,252	)	$	1,597,298	$	(194	)

(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”).

The Company held a mortgage-backed security (“MBS”) issued by Government National Mortgage Association (“GNMA”) which represented approximately 4% and 8% of shareholders’ equity as of June 30, 2011 and December 31, 2010, respectively. Excluding U.S. treasuries, agency bonds, and the MBS issued by GNMA, the Company did not hold any debt or equity investments in a single issuer that was in excess of 3.0% and 2.0% of shareholders’ equity at June 30, 2011 and December 31, 2010, respectively.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at June 30, 2011, 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	$	63,267	$	64,375
Due after one year through five years		631,479		657,437
Due after five years through ten years		192,196		197,114
Due after ten years through fifteen years		16,343		17,210
Due after fifteen years		36,412		36,852
Mortgaged-backed securities		321,501		331,160
Asset-backed securities		115,579		118,095
Commercial mortgage-backed securities		38,003		37,975

	$	1,414,780	$	1,460,218

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 June 30, 2011:


	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	$	21,354	$	(191	)	$	—	$	—		$	21,354	$	(191	)
Obligations of states and political subdivisions		8,895		(84	)		4,379		(109	)		13,274		(193	)
Mortgage-backed securities		69,788		(444	)		541		(19	)		70,329		(463	)
Asset-backed securities		—		—			766		(38	)		766		(38	)
Commercial mortgage-backed securities		17,836		(72	)		—		—			17,836		(72	)
Corporate bonds and loans		74,684		(842	)		546		(3	)		75,230		(845	)
Foreign corporate bonds		4,211		(24	)		—		—			4,211		(24	)

Total fixed maturities		196,768		(1,657	)		6,232		(169	)		203,000		(1,826	)
Common stock		23,721		(1,946	)		832		(248	)		24,553		(2,194	)

Total	$	220,489	$	(3,603	)	$	7,064	$	(417	)	$	227,553	$	(4,020	)

(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.


	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	$	1,015	$	(4	)	$	—	$	—		$	1,015	$	(4	)
Obligations of states and political subdivisions		38,601		(553	)		1,651		(63	)		40,252		(616	)
Mortgage-backed securities		2,298		(29	)		561		(20	)		2,859		(49	)
Asset-backed securities		7,021		(17	)		880		(58	)		7,901		(75	)
Commercial mortgage-backed securities		32,889		(239	)		—		—			32,889		(239	)
Corporate bonds and loans		35,063		(559	)		1,014		(5	)		36,077		(564	)
Foreign corporate bonds		1,990		(5	)		—		—			1,990		(5	)

Total fixed maturities		118,877		(1,406	)		4,106		(146	)		122,983		(1,552	)
Common stock		12,580		(700	)		—		—			12,580		(700	)

Total	$	131,457	$	(2,106	)	$	4,106	$	(146	)	$	135,563	$	(2,252	)

(1)

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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 the Company 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 are recorded in other comprehensive income, net of taxes.

For equity securities, management carefully reviews all securities with unrealized losses and further focuses on securities that have either:

(1)

persisted 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 to determine if the security should be impaired.

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 June 30, 2011, gross unrealized losses related to U.S. treasury and agency obligations were $0.19 million. All unrealized losses have been in an unrealized loss position for less than

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

twelve months. All of these securities are rated AAA. The Company’s investment manager’s analysis for this sector includes on-site visits and meetings with officials in addition to the standard rigorous analysis that determines the financial condition of the issuer.

Obligations of states and political subdivisions – As of June 30, 2011, gross unrealized losses related to obligations of states and political subdivisions were $0.19 million. Of this amount, $0.11 million has been in an unrealized loss position for twelve months or greater. These securities are rated investment grade. The Company’s investment manager’s analysis for this sector includes on-site visits and meetings with officials in addition to the standard rigorous analysis that determines the financial condition of the issuer.

Mortgage-backed securities – As of June 30, 2011, gross unrealized losses related to mortgage-backed securities were $0.46 million. Of this amount, $0.02 million has 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 AA+. 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 Metropolitan Statistical Area (“MSA”) level based on the historical relationship between the individual MSA 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 content 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.

Asset-backed securities (“ABS”) – As of June 30, 2011, gross unrealized losses related to asset-backed securities were $0.04 million. All unrealized losses have been in an unrealized loss position for twelve months or greater. These securities are rated investment grade. The weighted average credit enhancement for the Company’s asset-backed portfolio is 32.1. 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.

Commercial mortgage-backed securities (“CMBS”) – As of June 30, 2011, gross unrealized losses related to CMBS were $0.07 million. All unrealized losses have been in an unrealized loss position for less than twelve months. All of these securities are rated AAA. The weighted average credit enhancement for the Company’s CMBS portfolio is 27.1. 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 June 30, 2011, gross unrealized losses related to corporate bonds and loans were $0.85 million. Of this amount, $0.003 million has 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 below investment grade. 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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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 June 30, 2011, gross unrealized losses related to foreign bonds were $0.02 million. All unrealized losses have been in an unrealized loss position for less than twelve months. These securities are rated A. 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 June 30, 2011, gross unrealized losses related to common stock were $2.19 million. Of this amount, $0.25 million has 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.

The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the quarters and six months ended June 30, 2011 and 2010:


	Quarters Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2011		2010		2011		2010
Fixed maturities:
OTTI losses, gross	$	—	$	17	$	—	$	106
Portion of loss recognized in other comprehensive income (pre-tax)		—		4		—		(43	)

Net impairment losses on fixed maturities recognized in earnings		—		21		—		63
Common stock		1,353		346		1,906		346

Total	$	1,353	$	367	$	1,906	$	409

The following table is an analysis of the credit losses recognized in earnings on debt securities held by the Company for the quarters and six months ended June 30, 2011 and 2010 for which a portion of the OTTI loss was recognized in other comprehensive income.


	Quarters Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2011		2010		2011			2010
Balance at beginning of period	$	86	$	92	$	115		$	50
Additions where no OTTI was previously recorded		—		16		—			47
Additions where an OTTI was previously recorded		—		5		—			16
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		—		—		(29	)		—

Balance at end of period	$	86	$	113	$	86		$	113

Accumulated Other Comprehensive Income

Accumulated other comprehensive income as of June 30, 2011 and December 31, 2010 was as follows:


(Dollars in thousands)	June 30, 2011		December 31, 2010
Net unrealized gains from:
Fixed maturities	$	45,438	$	50,737

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Preferred stock		—			1,322
Common stock		20,987			24,600
Mutual Fund		394			—
Partnerships < 3% owned		3,059			13
Deferred taxes		(17,239	)		(19,461	)


Accumulated other comprehensive income	$	52,639		$	57,211

Net Realized Investment Gains

The components of net realized investment gains for the quarters and six months ended June 30, 2011 and 2010 were as follows:


	Quarters Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2011		2010		2011		2010
Fixed maturities	$	4,901	$	3,688	$	10,616	$	15,379
Convertibles		—		—		—		3
Common stock		1,939		1,909		8,221		4,419
Preferred stock		1,546		—		1,546		—

Total	$	8,386	$	5,597	$	20,383	$	19,801

The proceeds from sales of available-for-sale securities resulting in net realized investment gains for the six months ended June 30, 2011 and 2010 were as follows:


	Six Months Ended June 30,
(Dollars in thousands)	2011		2010
Fixed maturities	$	459,364	$	476,634
Equity securities		50,055		20,330

Net Investment Income

The sources of net investment income for the quarters and six months ended June 30, 2011 and 2010 were as follows:


	Quarters Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Fixed maturities	$	14,195		$	15,133		$	28,878		$	30,713
Preferred and common stocks		954			445			1,731			806
Cash and cash equivalents		29			31			46			108
Other invested assets		—			4			—			4

Total investment income		15,178			15,613			30,655			31,631
Investment expense		(1,248	)		(1,672	)		(2,311	)		(3,111	)

Net investment income	$	13,930		$	13,941		$	28,344		$	28,520

The Company’s total investment return on an after-tax basis for the quarters and six months ended June 30, 2011 and 2010 were as follows:


	Quarters Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Net investment income	$	12,107		$	11,784		$	24,643		$	24,070


Net realized investment gains		6,210			3,801			14,965			14,794
Net equity in net income (loss) of partnership		—			—			53			(29	)
Net unrealized investment losses		(3,148	)		(3,544	)		(4,572	)		(4,561	)

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)



Net investment gains		3,062			257			10,446			10,204


Total investment return	$	15,169		$	12,041		$	35,089		$	34,274


Total investment return % (1)		0.9	%		0.7	%		2.0	%		2.0	%


Average investment portfolio (2)	$	1,729,099		$	1,684,833		$	1,721,125		$	1,684,318

(1)

Not annualized.

(2)

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

Subprime and Alt-A Investments

The Company had approximately $2.8 million and $3.0 million worth of investment exposure through subprime and Alt-A investments as of June 30, 2011 and December 31, 2010, respectively. An Alt-A investment is one which is backed by a loan that contains limited documentation. As of June 30, 2011, approximately $0.2 million of those investments were rated AAA by Standard & Poor’s, $0.3 million were rated BBB- to AA, and $2.3 million were rated below investment grade. As of December 31, 2010, approximately $0.2 million of those investments were rated AAA by Standard & Poor’s, $0.2 million were rated BBB- to AA, and $2.6 million were rated below investment grade. There were no impairments on these investments during the quarter or six months ended June 30, 2011 and $0.04 million of impairments on these investments during the year ended December 31, 2010.

Insurance Enhanced Municipal Bonds

As of June 30, 2011, the Company held insurance enhanced municipal bonds of approximately $101.2 million, which represented approximately 5.9% of the Company’s total cash and invested assets. These securities had an average rating of “AA.” Approximately $43.0 million of these bonds are pre-refunded with U.S. treasury securities, of which $31.1 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 $58.2 million of insurance enhanced municipal bonds, $25.1 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		Ratings without
Rating	Insurance		Insurance
AAA	$	2,771	$	—
AA		9,181		3,632
A		13,163		20,458
BBB		—		1,025

Total	$	25,115	$	25,115

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 June 30, 2011, 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	$	8,780	$	3,194	$	—	$	5,586
Financial Guaranty Insurance Company		2,271		2,271		—		—
Financial Security Assurance, Inc.		37,556		13,960		—		23,596
Municipal Bond Insurance Association		33,596		10,944		—		22,652
Federal Housing Association		2,259		—		2,259		—
Government National Housing Association		3,650		778		2,872		—
Permanent School Fund Guaranty		1,254		—		1,254		—

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Total backed by financial guarantors		89,366		31,147		6,385		51,834
Other credit enhanced municipal bonds		11,845		11,845		—		—

Total	$	101,211	$	42,992	$	6,385	$	51,834

In addition to the $101.2 million of insurance enhanced municipal bonds, the Company also held insurance enhanced asset-backed and credit securities with a market value of approximately $32.8 million, which represented approximately 1.9% of the Company’s total cash and invested assets. The financial guarantors of the Company’s $32.8 million of insurance enhanced asset-backed and credit securities include Financial Guaranty Insurance Company ($0.8 million), Municipal Bond Insurance Association ($13.3 million), Ambac ($2.6 million), Financial Security Assurance, Inc. ($5.0 million), Assured Guaranty Insurance Group ($5.8 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 June 30, 2011.

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 cash, cash equivalents, and bonds available for sale and on deposit or held in trust were as follows as of June 30, 2011 and December 31, 2010:


	Estimated Fair Value
(Dollars in thousands)	June 30, 2011		December 31, 2010
On deposit with governmental authorities	$	43,908	$	43,656
Intercompany trusts held for the benefit of U.S. policyholders		601,115		609,242
Held in trust pursuant to third party requirements		94,547		68,900
Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders		6,063		5,871

Total	$	745,633	$	727,669

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.

During the quarters and six months ended June 30, 2011 and 2010, the Company recognized the following gains (losses), net of taxes, due to changes in the value of these investments.


	Quarter Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2011		2010		2011		2010
Limited partnership > 3% ownership	$	—	$	—	$	53	$	(29	)

These gains (losses) are reflected on the consolidated statement of operations as equity in net income (loss) of partnerships, net of taxes.

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

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.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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 has the ability to access at the measurement date.

•

Level 2 – inputs utilize other than quoted prices included in Level 1 that are observable for the 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 tables present information about the Company’s invested assets measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.


As of June 30, 2011	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. treasury and agency obligations	$	78,218	$	44,386	$	—	$	122,604
Obligations of states and political subdivisions		—		233,108		—		233,108
Mortgage-backed securities		—		331,160		—		331,160
Commercial mortgage-backed securities		—		37,975		—		37,975
Asset-backed securities		—		118,095		—		118,095
Corporate bonds and loans		—		560,170		—		560,170
Foreign corporate bonds		—		57,106		—		57,106

Total fixed maturities		78,218		1,382,000		—		1,460,218
Common shares		150,226		—		—		150,226
Other invested assets		—		—		17,579		17,579

Total invested assets	$	228,444	$	1,382,000	$	17,579	$	1,628,023


As of December 31, 2010	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. treasury and agency obligations	$	89,187	$	113,503	$	—	$	202,690
Obligations of states and political subdivisions		—		245,012		—		245,012
Mortgage-backed securities		—		249,080		—		249,080
Commercial mortgage-backed securities		—		38,733		—		38,733
Asset-backed securities		—		115,099		—		115,099
Corporate bonds and loans		—		532,784		—		532,784
Foreign corporate bonds		—		60,994		—		60,994

Total fixed maturities		89,187		1,355,205		—		1,444,392
Preferred shares		—		2,252		—		2,252
Common shares		145,274		—		—		145,274
Other invested assets		—		—		5,380		5,380

Total invested assets	$	234,461	$	1,357,457	$	5,380	$	1,597,298

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 six months ended June 30, 2011 or 2010.

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


Quarter Ended June 30, 2011 (Dollars in thousands)	Other Invested Assets
Beginning balance at April 1, 2011	$	16,724
Total gains (realized / unrealized):
Included in accumulated other comprehensive income		855

Ending balance at June 30, 2011	$	17,579


Net unrealized losses included in net income for the period related to assets still held at June 30, 2011	$	—


Six Months Ended June 30, 2011 (Dollars in thousands)	Other Invested Assets
Beginning balance at January 1, 2011	$	5,380
Total losses (realized / unrealized):
Included in equity in net income of partnership		81
Included in accumulated other comprehensive income Purchases		3,440 10,025
Sales		(1,347	)

Ending balance at June 30, 2011	$	17,579


Net unrealized losses included in net income for the period related to assets still held at June 30, 2011	$	—

The $17.6 million is comprised of $7.2 million related to investments in limited partnerships and $10.4 million related to an investment in a mutual fund. The $7.2 million related to investments in limited partnerships was comprised of securities for which there is no readily available independent market price. The estimated fair value of these limited partnerships is measured utilizing the Company’s net asset value as a practical expedient for each limited partnership. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. The Company’s investment in a mutual fund of $10.4 million is measured utilizing the fund’s net asset value. The net asset value of the fund is based on the actual market price of the assets of the portfolio, including accrued income less liabilities and provisions for accrued expenses. The fund is comprised primarily of

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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 has been classified within the Level 3 category.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and six months ended June 30, 2010:


Quarter Ended June 30, 2010 (Dollars in thousands)	Other Invested Assets
Beginning balance at April 1, 2010	$	6,548
Total losses (realized / unrealized):
Included in accumulated other comprehensive income		(58	)

Ending balance at June 30, 2010	$	6,490


Net unrealized losses included in net income for the period related to assets still held at June 30, 2010	$	—


Six Months Ended June 30, 2010 (Dollars in thousands)	Other Invested Assets
Beginning balance at January 1, 2010	$	7,999
Total losses (realized / unrealized):
Included in equity in net loss of partnership		(44	)
Included in accumulated other comprehensive income		(1,397	)
Distribution		(68	)

Ending balance at June 30, 2010	$	6,490


Net unrealized losses included in net income for the period related to assets still held at June 30, 2010	$	(44	)

The $6.5 million is related to investments in limited partnerships. Of the investments in limited partnerships, $5.4 million was comprised of securities for which there is no readily available independent market price. The estimated fair value of these limited partnerships is measured utilizing the Company’s net asset value as a practical expedient for each limited partnership. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. Of our investments in limited partnerships, $1.1 million was related to a limited partnership which holds convertible preferred securities of a privately held company. In February, 2011, the Company’s remaining interest of $1.1 million was liquidated.

Fair Value of Alternative Investments

Included in “Other invested assets” in the fair value hierarchy at June 30, 2011 are limited liability partnerships and a mutual fund measured at fair value. The following table provides the fair value and future funding commitments related to these investments at June 30, 2011.


(Dollars in thousands)	Fair Value		Future Funding Commitments
Equity Fund, LP (1)	$	7,185	$	2,544
Real Estate Fund, LP (2)		—		—
Mutual Fund (3)		10,394		—


Total	$	17,579	$	2,544

(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.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

(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 in 2010.

(3)

This is an open-ended unincorporated mutual investment fund which seeks to generate attractive long term total returns by investing in companies which benefit from increasing levels of domestic consumption expenditure in the Asia ex Japan region. Investments will primarily be in equity securities within the consumer staples, consumer discretionary and healthcare sectors in the Asia ex Japan region; however, the approach is unconstrained and may opportunistically invest in any sector. The Company may request to redeem units of the portfolio. However, depending on the size of the redemption request, certain restrictions may apply.

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: asset backed securities (“ABS”), collateralized mortgage obligations (“CMO”), and municipals. A third vendor provides prices for the remaining fixed maturity categories including mortgage backed securities (“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 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.

•

For CMOs, which are categorized with mortgage-backed securities in the tables listed above, a volatility-driven, multi-dimensional single cash flow stream model or option-adjusted spread model is used. For ABSs, a single expected cash flow stream model is 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, 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.

•

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

•

For MBSs, the pricing vendor utilizes a matrix model correlation to TBA (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 the most recent accounting

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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 six months ended June 30, 2011, the Company has not needed to adjust 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 June 30, 2011 and December 31, 2010:


(Dollars in thousands)	June 30, 2011			December 31, 2010
Reinsurance receivables	$	332,242		$	422,844
Collateral securing reinsurance receivables		(184,605	)		(289,284	)

Reinsurance receivables, net of collateral	$	147,637		$	133,560


Allowance for uncollectible reinsurance receivables	$	10,566		$	12,742
Prepaid reinsurance premiums		8,842			11,104

The Company regularly evaluates retention levels and reinsurance limits to ensure that net retained losses are aligned with corporate risk tolerance and capital levels. The Company’s U.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, 2011, 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. This treaty provides for one 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, 2011, which provided occurrence coverage for losses of $75.0 million in excess of $15.0 million.

Property Per Risk Excess of Loss – Effective January 1, 2011, 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, 2010, which provided coverage of $14.0 million per risk in excess of $1.0 million per risk. 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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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, 2011, the Company renewed its casualty excess of loss treaty and added the professional liability exposure as a separate section to the 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. Allocated loss adjustment expenses are included within limits. The stand-alone casualty treaty that expired April 30, 2011 provided identical coverage. The professional liability section provides coverage of $4.0 million per policy/occurrence in excess of $1.0 million per policy/occurrence.

Casualty Clash Excess of Loss – Effective January 1, 2011, 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. This replaces the treaty that expired December 31, 2010, which provided identical coverage.

Property Quota Share – Effective January 1, 2010, the Company renewed its 40% quota share treaty related to the Penn-America property line of business. This treaty covers premiums earned in 2010 on policies written in 2009 and 2010. During 2010, the Company ceded $14.1 million of earned premium. This treaty expired on December 31, 2010 and was not renewed.

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.

There were no other significant changes to any of the Company’s other reinsurance treaties during the quarter and six months ended June 30, 2011. 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.

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, 28.59% in the Grand Duchy of Luxembourg, and 25.0% on non-trading income and 12.5% on trading income in the Republic of Ireland. For 2010, 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 was divided by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

On an interim basis, the expected 2010 annual income tax rate was applied against interim pre-tax income, excluding net realized gains and losses and limited partnership distributions, and then adding that amount to income taxes on net realized gains and losses, discrete items and limited partnership distributions. For the quarter and year to date ended June 30, 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. The Company’s income before income taxes from the Non-U.S. Subsidiaries and U.S. Subsidiaries, including the results of the quota share agreement between Wind River Reinsurance and the Insurance Operations, for the quarters and six months ended June 30, 2011 and 2010 were as follows:


Quarter Ended June 30, 2011: (Dollars in thousands)	Non-U.S. Subsidiaries		U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	56,758	$	70,373	$	(32,169	)	$	94,962


Net premiums written	$	56,758	$	29,649	$	—		$	86,407


Net premiums earned	$	50,837	$	27,218	$	—		$	78,055
Net investment income		11,297		7,230		(4,597	)		13,930
Net realized investment gains		2,371		6,015		—			8,386
Other income		—		163		—			163

Total revenues		64,505		40,626		(4,597	)		100,534
Losses and Expenses:
Net losses and loss adjustment expenses		38,685		23,068		—			61,753
Acquisition costs and other underwriting expenses		20,013		10,184		—			30,197
Corporate and other operating expenses		3,687		1,000		—			4,687
Interest expense		—		6,340		(4,597	)		1,743

Income before income taxes	$	2,120	$	34	$	—		$	2,154


Quarter Ended June 30, 2010: (Dollars in thousands)	Non-U.S. Subsidiaries		U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	56,139	$	61,532	$	(25,621	)	$	92,050


Net premiums written	$	56,132	$	23,391	$	—		$	79,523


Net premiums earned	$	51,458	$	23,244	$	—		$	74,702
Net investment income		10,810		7,728		(4,597	)		13,941
Net realized investment gains		465		5,132		—			5,597
Other income		—		342		—			342

Total revenues		62,733		36,446		(4,597	)		94,582
Losses and Expenses:
Net losses and loss adjustment expenses		26,119		6,556		—			32,675
Acquisition costs and other underwriting expenses		18,674		10,334		—			29,008
Corporate and other operating expenses		2,825		2,238		—			5,063
Interest expense		—		6,430		(4,597	)		1,833

Income before income taxes	$	15,115	$	10,888	$	—		$	26,003


Six Months Ended June 30, 2011: (Dollars in thousands)	Non-U.S. Subsidiaries		U.S. Subsidiaries		Eliminations			Total
Revenues:

Gross premiums written	$	115,455	$	126,840	$	(59,667	)	$	182,628


Net premiums written	$	114,953	$	54,562	$	—		$	169,515

Net premiums earned	$	100,463	$	53,561	$	—		$	154,024
Net investment income		22,946		14,543		(9,145	)		28,344
Net realized investment gains		5,786		14,597		—			20,383
Other income		—		11,832		—			11,832

Total revenues		129,195		94,533		(9,145	)		214,583
Losses and Expenses:

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Net losses and loss adjustment expenses		79,536		40,559		—			120,095
Acquisition costs and other underwriting expenses		38,750		21,299		—			60,049
Corporate and other operating expenses		5,450		2,017		—			7,467
Interest expense		—		12,640		(9,145	)		3,495

Income before income taxes	$	5,459	$	18,018	$	—		$	23,477


Six Months Ended June 30, 2010: (Dollars in thousands)	Non-U.S. Subsidiaries		U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	117,785	$	115,603	$	(48,485	)	$	184,903


Net premiums written	$	116,999	$	44,005	$	—		$	161,004


Net premiums earned	$	98,499	$	46,991	$	—		$	145,490
Net investment income		21,671		15,993		(9,144	)		28,520
Net realized investment gains		5,496		14,305		—			19,801
Other income		—		342		—			342

Total revenues		125,666		77,631		(9,144	)		194,153
Losses and Expenses:
Net losses and loss adjustment expenses		52,073		22,391		—			74,464
Acquisition costs and other underwriting expenses		39,049		20,107		—			59,156
Corporate and other operating expenses		4,993		4,966		—			9,959
Interest expense		—		12,716		(9,144	)		3,572

Income before income taxes	$	29,551	$	17,451	$	—		$	47,002

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 June 30,
	2011						2010
(Dollars in thousands)	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average rate	$	83			3.8	%	$	3,811			14.7	%
Adjustments:
Tax exempt interest		(496	)		(23.0	)		(465	)		(1.8	)
Dividend exclusion		(210	)		(9.7	)		(84	)		(0.3	)
Effective tax rate adjustment		(1,698	)		(78.8	)		(1,804	)		(6.9	)
Other		34			1.5			33			—

Income tax expense	$	(2,287	)		(106.2	%)	$	1,491			5.7	%

The effective income tax benefit rate for the quarter ended June 30, 2011 was 106.2%, compared to an effective income tax rate of 5.7% for the quarter ended June 30, 2010. Due to potential volatility in the 2011 expected effective tax rate, the Company recorded its actual year-to-date tax provision during the quarter ended June 30, 2011 as compared with an estimated annual effective rate during the quarter ended June 30, 2010. The effective rate differed from the weighted average expected income tax expense rate of 3.8% for the quarter ended June 30, 2011 due to changes in the expected full year effective tax rate from the first quarter of 2011 and tax-exempt interest and dividends. The effective rate differed from the weighted average expected income tax expense rate of 14.7% for the quarter ended June 30, 2010 primarily due to the fact that the Company recorded income tax expense during interim periods using an expected annual effective tax rate, net of tax-exempt interest and dividends.


	Six Months Ended June 30,
	2011						2010
(Dollars in thousands)	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average rate	$	6,636			28.3	%	$	6,185			13.2	%
Adjustments:
Tax exempt interest		(1,020	)		(4.3	)		(984	)		(2.1	)
Dividend exclusion		(367	)		(1.6	)		(163	)		(0.3	)
Effective tax rate adjustment		—			—			(1,526	)		(3.2	)
Other		55			0.2			48			—

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Income tax expense	$	5,304	22.6	%	$	3,560	7.6	%

The effective income tax expense rate for the six months ended June 30, 2011 was 22.6%, compared to 7.6% for the six months ended June 30, 2010. The increase in the effective tax rate is primarily due to the Company’s settlement with AON as noted in our 2010 Form 10-K. Excluding realized gains and the AON settlement, the Company’s effective tax benefit is 49.4%. The effective rate differed from the weighted average expected income tax expense rate of 28.3% for the six months ended June 30, 2011 primarily due to the fact that the Company records income tax expense net of tax-exempt interest and dividends. The effective rate differed from the weighted average expected income tax expense rate of 13.2% for the six months ended June 30, 2010 primarily due to the fact that the Company records interim income tax expense using an expected annual effective tax rate, net 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 2007.

The alternative minimum tax credit carryforward was $6.5 million as of June 30, 2011 and December 31, 2010, respectively.

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’s unrecognized tax benefits were $0.7 million as of June 30, 2011 and December 31, 2010. If recognized, the gross unrecognized tax benefits could lower the effective income tax rate in any future period.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2011, the Company has recorded $0.1 million in 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 June 30, 2011, the related adjustments could have a material impact on the Company’s future results of operations.

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


	Quarters Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Balance at beginning of period	$	1,035,088		$	1,232,640		$	1,052,743		$	1,257,741
Less: Ceded reinsurance receivables		375,846			503,415			407,195			514,467

Net balance at beginning of period		659,242			729,225			645,548			743,274

Incurred losses and loss adjustment expenses related to:
Current year		67,097			48,493			130,738			93,120
Prior years		(5,344	)		(15,818	)		(10,643	)		(18,656	)

Total incurred losses and loss adjustment expenses		61,753			32,675			120,095			74,464


Paid losses and loss adjustment expenses related to:

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Current year		21,898		9,966		27,021		15,212
Prior years		44,030		50,124		83,555		100,716

Total paid losses and loss adjustment expenses		65,928		60,090		110,576		115,928


Net balance at end of period		655,067		701,810		655,067		701,810
Plus: Ceded reinsurance receivables		320,129		466,949		320,129		466,949


Balance at end of period	$	975,196	$	1,168,759	$	975,196	$	1,168,759

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 second quarter of 2011, the Company reduced its prior accident year loss reserves by $5.3 million, which consisted mainly of a $9.8 million reduction in general liability lines, a $0.8 million reduction in umbrella lines, offset partially by a $4.2 million increase in professional liability lines, a $0.7 million increase in auto liability lines, and a $0.3 million increase in property lines:

•

General liability: The $9.8 million reduction primarily consisted of reductions of $12.2 million related to our Insurance Operations. This amount included a $16.5 million reduction in accident years 2008 and prior due to continued favorable emergence in our Penn-America and United National business. Incurred losses for these business units have developed at a rate lower than the Company’s historical averages. We also decreased our reinsurance allowance by $2.2 million in this line due to changes in our reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $6.5 million in accident years 2009 and 2010 related to loss emergence in our Casualty Brokerage unit as well as a net increase of $2.4 million related to our Reinsurance Operations due to loss emergence on our Marine treaties. We have addressed pricing and underwriting controls to improve profitability in the Casualty Brokerage general liability line. Gross premiums written in the Casualty Brokerage general liability line were $8.7 million and $13.4 million in the quarter and six months ended June 30, 2011, respectively, compared to $4.1 million and $6.7 million in the quarter and six months ended June 30, 2010, respectively.

•

Umbrella: The $0.8 million reduction primarily related to all accident years 2010 and prior in our Insurance Operations primarily 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: The $4.2 million increase related to increases in our Insurance Operations of $9.3 million in accident years 1998, 2009 and 2010, offset partially by decreases of $5.1 million related to all other accident years. In 2011, we exited certain professional liability classes where the volume of premium was low and loss volatility was high. We are focused on writing business where we expect to realize profit that meets our return on investment thresholds. As a result of these actions, the quarter and six months ended June 30, 2011 gross written premiums in this line were $2.1 million and $4.4 million, respectively, compared with $4.4 million and $8.7 million, respectively, for the quarter and six months ended June 30, 2010.

•

Auto liability: The $0.7 million increase primarily consisted of an increase of $0.3 million related to accident years 2009 and 2010 in our Reinsurance Operations related to a non-standard auto treaty which was not renewed in 2011.

•

Property: The $0.3 million increase primarily related to a $1.2 million increase on accident year 2010 in our Reinsurance Operations and is due to loss emergence on a worldwide catastrophe treaty. This was offset by a $0.8 million reduction in accident years 2008 through 2010 in our Insurance Operations due to favorable emergence on recent property losses.

In the second quarter of 2010, the Company reduced its prior accident year loss reserves by $15.8 million. The reduction consisted of a $10.7 million reduction in general liability lines, a $2.5 million reduction in professional liability lines, a $2.4 million reduction in umbrella lines, and a $0.2 million reduction in auto liability lines:

•

General liability: The $10.7 million reduction is primarily related to accident years 2006 through 2009 in

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

our Insurance Operations due to less than anticipated severity. Incurred losses for these segments have developed at a rate lower than the Company’s historical averages.

•

Professional liability: The $2.5 million reduction was entirely in our Insurance Operations and primarily consisted of net reductions of $4.0 million related to accident years 2008 and prior, driven by lower than expected paid and incurred activity during the quarter. This reduction was offset by an increase of $1.5 million related to accident year 2009 where the Company experienced higher than expected claim frequency and severity.

•

Umbrella: The $2.4 million reduction was entirely in our Insurance Operations and primarily consisted of net reductions to accident years 2009 and prior primarily due to less than anticipated severity. As these accident years have matured, more weight has been given to experience based methods which continue to develop favorably compared to the Company’s initial indications.

•

Auto liability: The $0.2 million reduction was entirely in our Insurance Operations and primarily consisted of net reductions of $0.4 million related to accident years 2007 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company’s prior projections. This reduction was offset by an increase of $0.2 million to accident year 2009 where losses on the Company’s commercial auto product were higher than anticipated.

In the six months ended June 30, 2011, the Company reduced its prior accident year loss reserves by $10.6 million, which consisted mainly of a $14.8 million reduction in general liability lines, a $1.3 million reduction in umbrella lines, and a $0.6 million reduction in property lines, offset by a $3.9 million increase in professional liability lines, a $1.4 million increase in auto liability lines and a $0.9 million increase in workers’ compensation lines:

•

General liability: The $14.8 million reduction primarily consisted of reductions of $19.1 million related to our Insurance Operations. This amount included a $22.8 million reduction in accident years 2008 and prior due to continued favorable emergence in our Penn-America and United National business. Incurred losses for these business units have developed at a rate lower than the Company’s historical averages. We also decreased our reinsurance allowance by $2.2 million in this line due to changes in our reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $5.9 million in accident years 2009 and 2010 related to loss emergence in our Casualty Brokerage unit as well as a net increase of $4.4 million related to our Reinsurance Operations in accident year 2010 due to loss emergence on our Marine treaties.

•

Umbrella: The $1.3 million reduction primarily related to all accident years 2010 and prior in our Insurance Operations primarily due to continued favorable emergence. Umbrella coverage typically attaches to other coverage lines, so these net decreases follow the decreases in general liability above.

•

Property: The $0.6 million reduction primarily related to a $1.4 million decrease to accident year 2009 in our Insurance Operations related to anticipated subrogation on a large equine mortality claim. This was offset by a $1.1 million increase related to accident year 2010 in our Reinsurance Operations due to loss emergence on a worldwide catastrophe treaty.

•

Professional liability: The $3.9 million increase was entirely in our Insurance Operations and primarily consisted of increases of $12.4 million related to accident years 1998, 2009 and 2010, offset partially by decreases of $8.4 million related to all other accident years. The increases in the 2009 and 2010 accident years are primarily due to loss emergence in our Casualty Brokerage unit, while the decreases to the 2008 and prior accident years are due to continued favorable emergence.

•

Auto liability: The $1.4 million increase primarily consisted of an increase of $0.9 million related to accident years 2009 and 2010 in our Reinsurance Operations related to greater severity on a non-standard auto treaty which was not renewed in 2011.

•

Workers’ compensation: The $0.9 million increase primarily related to accident years 2009 and 2010 in our Reinsurance Operations is the result of expected losses recorded on adjustment premiums recorded in 2011.

In the six months ended June 30, 2010, the Company reduced its prior accident year loss reserves by $18.7 million. The reduction consisted of a $12.7 million reduction in general liability lines, a $3.1 million reduction in professional liability lines, a $2.4 million reduction in umbrella lines, a $0.3 million reduction in property lines, and

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

a $0.2 million reduction in auto liability lines:

•

General liability: The $12.7 million reduction was entirely in our Insurance Operations and primarily consisted of net reductions related to accident years 2009 and prior primarily due to less than anticipated severity. Incurred losses have developed at a rate lower than the Company’s historical averages.

•

Professional liability: The $3.1 million reduction was entirely in our Insurance Operations and primarily consisted of net reductions of $4.6 million related to accident years 2008 and prior due to lower severity than originally anticipated, partially offset by a $1.5 million increase related to accident year 2009 where the Company experienced higher than expected claim frequency and severity.

•

Umbrella: The $2.4 million reduction was entirely in our Insurance Operations and primarily consisted of net reductions related to accident years 2009 and prior primarily due to less than anticipated severity. As these accident years have matured, more weight has been given to experience based methods which continue to develop favorably compared to the Company’s initial indications.

•

Property: The $0.3 million reduction primarily consisted of net reductions in our Reinsurance Operations of $0.8 million due to a 2009 reinsurance treaty which experienced lower than expected loss severity. This was offset by net increases of $0.5 million in our Insurance Operations consisting of an increase of $2.1 million primarily related to accident year 2009 that was driven by higher than expected claim frequency and severity, partially offset by net reductions of $1.6 million primarily related to accident years 2008 and prior due to lower than anticipated severity. These reductions were driven by incurred loss emergence during the period that was lower than our historical averages.

•

Auto liability: The $0.2 million reduction primarily consisted of net reductions of $0.4 million related to accident years 2007 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company’s prior projections. This reduction was offset by an increase of $0.2 million to accident year 2009 where losses on the Company’s commercial auto product were higher than anticipated.

9. Related Party Transactions

Fox Paine & Company

As of June 30, 2011, Fox Paine & Company beneficially owned shares having approximately 89.5% of the Company’s total outstanding voting power. Fox Paine & Company can nominate a certain number of Directors, dependent on Fox Paine & Company’s percentage ownership of voting shares in the Company, for so long as Fox Paine & Company hold an aggregate of 25% or more of the voting power in the Company. Fox Paine & Company controls the election of all of our Directors due to its controlling share ownership. The Company’s Chairman is a member of Fox Paine & Company. The Company relies on Fox Paine & Company to provide management services and other services related to the operations of the Company.

The Company incurred management fees of $0.4 million in each of the quarters ended June 30, 2011 and 2010 and $0.8 million in each of the six months ended June 30, 2011 and 2010 as part of the annual management fee that is paid to Fox Paine & Company.

At June 30, 2011 and December 31, 2010, Wind River Reinsurance was a limited partner in Fox Paine Capital Fund, II, which is managed by Fox Paine & Company. This investment was originally made by United National Insurance Company in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine & Company of Wind River Investment Corporation, the holding company for the Company’s Predecessor Insurance Operations. The Company’s investment in this limited partnership was valued at $7.2 million and $4.3 million at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011, the Company had an unfunded capital commitment of $2.5 million to the partnership. Distributions of $0.15 million and $0.07 million were received from the limited partnership during the six months ended June 30, 2011 and 2010, respectively. There were no distributions received from the limited partnership during the quarters ended June 30, 2011 and 2010.

On July 2, 2010, United America Indemnity, Ltd. entered into an agreement to indemnify the affected indirect owners of the affiliates of Fox Paine & Company that were shareholders of United America Indemnity, Ltd.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

immediately prior to the effective date of our re-domestication to Ireland (See Note 2 for details). The agreement indemnifies them for any tax cost (including interest on tax and penalties, if any) of any triggering event and such affected indirect owners will pay us an amount equal to any tax benefits, if any, realized by them as a result of a triggering event for which they were indemnified, provided that the indirect owners will not be required to pay any amount of tax benefits in excess of the tax costs for which we have indemnified them. A sale or other disposition by these indirect owners of our ordinary shares will not constitute a triggering event for this purpose. In addition, the indemnification agreement provides that, under certain circumstances, in the event the conversion of Global Indemnity plc’s Class B ordinary shares to Class A ordinary shares or a sale or other disposition of Global Indemnity plc’s Class B ordinary shares is subject to Irish stamp duty, we will indemnify such affiliates of Fox Paine & Company and their transferees against such Irish stamp duty.

Cozen O’Connor

During the quarter and six months ended June 30, 2011, the Company did not incur any costs for legal services rendered by Cozen O’Connor. During the quarter and six months ended June 30, 2010, the Company incurred $0.03 million and $0.07 million, respectively, for legal services rendered by Cozen O’Connor. Stephen A. Cozen, the chairman of Cozen O’Connor, was a member of the Company’s Board of Directors until his retirement effective December 31, 2010.

Validus Reinsurance, Ltd.

Validus is a participant in a quota share retrocession agreement with Wind River Reinsurance. The Company estimated that the following written premium and losses related to the quota share retrocession agreement have been assumed by Validus from Wind River Reinsurance:


	Quarter Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2011		2010		2011			2010
Ceded written premium	$	—	$	—	$	(76	)	$	(2,401	)
Ceded losses		—		—		54			644

Edward J. Noonan, the chairman and chief executive officer of Validus, was a member of the Company’s Board of Directors until June 1, 2007, when he resigned from the Company’s Board. Validus remains a related party since the current quota share retrocession agreement between Validus and Wind River Reinsurance was put in place during the period when Mr. Noonan was a member of the Company’s Board of Directors.

Frank Crystal & Company

During each of the six months ended June 30, 2011 and 2010, the Company paid $0.1 million in brokerage fees to Frank Crystal & Company, an insurance broker. James W. Crystal, the chairman and chief executive officer of Frank Crystal & Company, became a member of the Company’s Board of Directors effective July 6, 2010.

10. 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 policies covering such 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 the Company’s business, results of operations, cash flows, or financial condition.

There is a greater potential for disputes with reinsurers who are in a runoff of their reinsurance operations. Some of

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

the Company’s reinsurers’ reinsurance operations 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 (“United National”), 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, we settled with AON for $16.3 million. We realized approximately $7.5 million, net of income taxes and attorney’s fees.

11. Share-Based Compensation Plans

During the six months ended June 30, 2011, the Company granted 65,481 Class A ordinary shares at a weighted average grant date value of $21.44 per share, to key employees of the Company under the Global Indemnity plc Share Incentive Plan (the “Plan”). Of those shares, 54,233 were subject to certain restrictions and 11,248 vested immediately. The Company did not grant any shares to employees during the quarter ended June 30, 2011.

During the quarter and six months ended June 30, 2011, the Company granted an aggregate of 12,640 and 26,811 fully vested Class A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $21.50 and $21.14 per share, respectively, to non-employee directors of the Company under the Plan.

12. 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. All share counts and corresponding per share market prices for 2010 have been adjusted to reflect the one-for-two stock exchange of Global Indemnity plc shares for United America Indemnity, Ltd. shares as part of the re-domestication to Ireland. See Note 2 above for more information regarding the re-domestication.

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


(Dollars in thousands,	Quarters Ended June 30,				Six Months Ended June 30,
except per share data)	2011		2010		2011		2010
Net income	$	4,441	$	24,512	$	18,226	$	43,413


Basic earnings per share:
Weighted average shares outstanding—basic		30,321,909		30,206,970		30,311,658		30,195,806


Net income per share	$	0.15	$	0.81	$	0.60	$	1.44

Diluted earnings per share:
Weighted average shares outstanding—diluted		30,367,556		30,233,002		30,349,985		30,216,324


Net income per share	$	0.15	$	0.81	$	0.60	$	1.44

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 June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Weighted average shares for basic earnings per share		30,321,909		30,206,970		30,311,658		30,195,806
Non-vested restricted stock		36,618		26,029		29,407		20,518
Options		9,029		3		8,920		—

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Weighted average shares for diluted earnings per share	30,367,556	30,233,002	30,349,985	30,216,324

The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended June 30, 2011 and 2010 do not include 306,118 and 385,854 shares, respectively, which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the six months ended June 30, 2011 and 2010 do not include 308,139 and 403,736 shares, respectively, which were deemed to be anti-dilutive.

13. Segment Information

The Company manages its business through two business segments: Insurance Operations, which includes the operations of the U.S. Insurance Companies, and Reinsurance Operations, which includes the operations of Wind River Reinsurance.

The Insurance Operations segment and the Reinsurance Operations segment 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 4 of the notes to the consolidated financial statements in Item 8 of Part II of the Company’s 2010 Annual Report on Form 10-K.

The following are tabulations of business segment information for the quarters and six months ended June 30, 2011 and 2010.


Quarter Ended June 30, 2011: (Dollars in thousands)	Insurance Operations (1)			Reinsurance Operations (2)			Total
Revenues:
Gross premiums written	$	70,375		$	24,587		$	94,962

Net premiums written	$	61,820		$	24,587		$	86,407

Net premiums earned	$	56,505		$	21,550		$	78,055
Other income		163			—			163

Total revenues		56,668			21,550			78,218
Losses and Expenses:
Net losses and loss adjustment expenses		44,243			17,510			61,753
Acquisition costs and other underwriting expenses		23,405	(3)		6,792			30,197

Loss from segments	$	(10,980	)	$	(2,752	)		(13,732	)

Unallocated Items:
Net investment income								13,930
Net realized investment gains								8,386
Corporate and other operating expenses								(4,687	)
Interest expense								(1,743	)

Income before income taxes								2,154
Income tax benefit								(2,287	)

Net income							$	4,441


Total assets	$	1,566,975		$	671,656	(4)	$	2,238,631

(1)

Includes business ceded to Reinsurance Operations.

(2)

External business only, excluding business assumed from Insurance Operations.

(3)

Includes federal excise tax of $293 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 June 30, 2010: (Dollars in thousands)	Insurance Operations (1)		Reinsurance Operations (2)		Total
Revenues:
Gross premiums written	$	61,531	$	30,519	$	92,050

Net premiums written	$	49,011	$	30,512	$	79,523

Net premiums earned	$	48,736	$	25,966	$	74,702

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Other income		342			—			342

Total revenues		49,078			25,966			75,044
Losses and Expenses:
Net losses and loss adjustment expenses		16,284			16,391			32,675
Acquisition costs and other underwriting expenses		22,419	(3)		6,589			29,008

Income from segments	$	10,375		$	2,986			13,361

Unallocated Items:
Net investment income								13,941
Net realized investment gains								5,597
Corporate and other operating expenses								(5,063	)
Interest expense								(1,833	)

Income before income taxes								26,003
Income tax expense								1,491

Net income							$	24,512


Total assets	$	1,714,076		$	642,141	(4)	$	2,356,217

(1)

Includes business ceded to Reinsurance Operations.

(2)

External business only, excluding business assumed from Insurance Operations.

(3)

Includes federal excise tax of $264 relating to cessions from Insurance Operations to Reinsurance Operations.

(4)

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


Six Months Ended June 30, 2011: (Dollars in thousands)	Insurance Operations (1)			Reinsurance Operations (2)			Total
Revenues:
Gross premiums written	$	126,842		$	55,786		$	182,628

Net premiums written	$	114,231		$	55,284		$	169,515

Net premiums earned	$	111,291		$	42,733		$	154,024
Other income		11,832			—			11,832

Total revenues		123,123			42,733			165,856
Losses and Expenses:
Net losses and loss adjustment expenses		77,043			43,052			120,095
Acquisition costs and other underwriting expenses		48,583	(3)		11,466			60,049

Loss from segments	$	(2,503	)	$	(11,785	)		(14,288	)

Unallocated Items:
Net investment income								28,344
Net realized investment gains								20,383
Corporate and other operating expenses								(7,467	)
Interest expense								(3,495	)

Income before income taxes								23,477
Income tax expense								5,304

Income before equity in net income of partnership								18,173
Equity in net income of partnership, net of tax								53

Net income							$	18,226


Total assets	$	1,566,975		$	671,656	(4)	$	2,238,631

(1)

Includes business ceded to Reinsurance Operations.

(2)

External business only, excluding business assumed from Insurance Operations.

(3)

Includes federal excise tax of $577 relating to cessions from Insurance Operations to Reinsurance Operations.

(4)

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


Six Months Ended June 30, 2010: (Dollars in thousands)	Insurance Operations (1)		Reinsurance Operations (2)		Total
Revenues:
Gross premiums written	$	115,602	$	69,301	$	184,903

Net premiums written	$	92,489	$	68,515	$	161,004

Net premiums earned	$	98,480	$	47,010	$	145,490
Other income		342		—		342

Total revenues		98,822		47,010		145,832

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


Losses and Expenses:
Net losses and loss adjustment expenses		45,998			28,466	74,464
Acquisition costs and other underwriting expenses		45,119	(3)		14,037	59,156

Income from segments	$	7,705		$	4,507	12,212

Unallocated Items:
Net investment income						28,520
Net realized investment gains						19,801
Corporate and other operating expenses						(9,959	)
Interest expense						(3,572	)

Income before income taxes						47,002
Income tax expense						3,560

Income before equity in net loss of partnership						43,442
Equity in net loss of partnership, net of tax

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