Edgar Filing: Global Indemnity plc

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 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.:

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

As of November 4, 2011, the registrant had outstanding 18,381,059 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 September 30, 2011 (Unaudited) and December 31, 2010		3
	Consolidated Statements of Operations Quarters and Nine Months Ended September 30, 2011 (Unaudited) and September 30, 2010 (Unaudited)		4
	Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended September 30, 2011 (Unaudited) and September 30, 2010 (Unaudited)		5
	Consolidated Statements of Changes in Shareholders’ Equity As of September 30, 2011 (Unaudited) and December 31, 2010		6
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2011 (Unaudited) and September 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		62

Item 4.	Controls and Procedures		63

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		64

Item 1A.	Risk Factors		64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64

Item 5.	Other Information		64

Item 6.	Exhibits		64

Signature			66

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;

7)	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., (formerly known as 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, casualty, 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) September 30, 2011			December 31, 2010
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: $1,370,288 and $1,393,655)	$	1,406,342		$	1,444,392
Equity securities:
Available for sale, at fair value (cost: $154,110 and $121,604)		146,067			147,526
Other invested assets
Available for sale, at fair value (cost: $14,150 and $4,255)		16,169			4,268
Securities classified as trading, at fair value (cost: $0 and $1,112)		—			1,112

Total investments		1,568,578			1,597,298

Cash and cash equivalents		93,281			119,888
Premiums receivable, net		60,268			56,657
Reinsurance receivables		303,950			422,844
Deferred federal income taxes		20,173			6,926
Deferred acquisition costs		28,753			35,344
Intangible assets		18,798			19,082
Goodwill		4,820			4,820
Prepaid reinsurance premiums		7,762			11,104
Receivable for securities sold		4,388			—
Other assets		22,118			20,720

Total assets	$	2,132,889		$	2,294,683


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	971,222		$	1,052,743
Unearned premiums		135,866			135,872
Ceded balances payable		8,539			12,376
Contingent commissions		5,693			9,260
Payable for securities purchased		—			4,768
Federal income taxes payable		1,993			55
Notes and debentures payable		103,071			121,285
Other liabilities		29,018			29,655

Total liabilities		1,255,402			1,366,014


Commitments and contingencies (Note 11)		—			—

Shareholders’ equity:
Ordinary shares, $0.0001 par value, 900,000,000 ordinary shares authorized; Class A ordinary shares issued: 21,414,007 and 21,340,821, respectively; Class A ordinary shares outstanding: 18,365,802 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		621,442			622,725
Accumulated other comprehensive income, net of taxes		23,500			57,211
Retained earnings		333,621			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		877,487			928,669


Total liabilities and shareholders’ equity	$	2,132,889		$	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 September 30,						(Unaudited) Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues:

Gross premiums written	$	73,092		$	86,235		$	255,720		$	271,138


Net premiums written	$	64,934		$	73,206		$	234,449		$	234,210


Net premiums earned	$	77,090		$	70,089		$	231,114		$	215,579
Net investment income		12,880			14,089			41,224			42,609
Net realized investment gains:
Other-than-temporary impairment losses on investments		(1,824	)		(15	)		(3,730	)		(467	)
Other-than-temporary impairment losses on investments recognized in other comprehensive income		—			—			—			43
Other net realized investment gains		3,112			1,833			25,401			22,043

Total net realized investment gains		1,288			1,818			21,671			21,619
Other income		167			173			11,999			515

Total revenues		91,425			86,169			306,008			280,322

Losses and Expenses:
Net losses and loss adjustment expenses		86,234			29,789			206,329			104,253
Acquisition costs and other underwriting expenses		34,597			28,541			94,646			87,697
Corporate and other operating expenses		2,862			5,106			10,329			15,065
Interest expense		1,525			1,825			5,020			5,397

Income (loss) before income taxes		(33,793	)		20,908			(10,316	)		67,910
Income tax expense		454			1,146			5,758			4,706

Income (loss) before equity in net income (loss) of partnerships		(34,247	)		19,762			(16,074	)		63,204
Equity in net income (loss) of partnerships, net of taxes		—			—			53			(29	)

Net income (loss)	$	(34,247	)	$	19,762		$	(16,021	)	$	63,175


Per share data ₍₁₎:

Net income (loss)
Basic	$	(1.13	)	$	0.65		$	(0.53	)	$	2.09


Diluted	$	(1.13	)	$	0.65		$	(0.53	)	$	2.09


Weighted-average number of shares outstanding
Basic		30,338,010			30,273,757			30,320,538			30,222,074


Diluted		30,352,850			30,308,489			30,341,713			30,245,890

(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 September 30,						(Unaudited) Nine Months Ended September 30,
	2011			2010			2011			2010

Net income (loss)	$	(34,247	)	$	19,762		$	(16,021	)	$	63,175


Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses) arising during period		(28,475	)		19,607			(18,072	)		29,728
Portion of other-than-temporary impairment losses (gains) recognized in other comprehensive income (loss), net of taxes		(16	)		23			(26	)		135
Recognition of previously unrealized holding gains		(594	)		(1,272	)		(15,559	)		(16,066	)
Unrealized foreign currency translation gains (losses)		(54	)		175			(54	)		(43	)

Other comprehensive income (loss), net of taxes		(29,139	)		18,533			(33,711	)		13,754


Comprehensive income (loss), net of taxes	$	(63,386	)	$	38,295		$	(49,732	)	$	76,929

See accompanying notes to consolidated financial statements.

GLOBAL INDEMNITY PLC

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)


	(Unaudited) Nine Months Ended September 30, 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		33,511			20,828
Ordinary shares issued to directors		39,675			76,648

Number at end of period		21,414,007			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		(1,283	)		3,252

Balance at end of period	$	621,442		$	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		(33,633	)		8,703
Change in other-than-temporary impairment losses (gains) recognized in other comprehensive income (loss), net of taxes		(24	)		70
Unrealized foreign currency translation losses		(54	)		(43	)

Other comprehensive income (loss)		(33,711	)		8,730

Balance at end of period	$	23,500		$	57,211


Retained earnings:
Balance at beginning of period	$	349,642		$	264,739
Net income (loss)		(16,021	)		84,903

Balance at end of period	$	333,621		$	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	$	877,487		$	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) Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(16,021	)	$	63,175
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Amortization of trust preferred securities issuance costs		59			62
Amortization and depreciation		1,556			1,825
Restricted stock expense		(1,177	)		2,713
Deferred federal income taxes		(341	)		3,560
Amortization of bond premium and discount, net		4,234			2,579
Net realized investment gains		(21,671	)		(21,619	)
Equity in net (income) loss of partnerships		(53	)		29
Changes in:
Premiums receivable, net		(3,611	)		1,111
Reinsurance receivables		118,894			80,240
Unpaid losses and loss adjustment expenses		(81,521	)		(137,278	)
Unearned premiums		(6	)		14,151
Ceded balances payable		(3,837	)		(10,834	)
Other assets and liabilities, net		(3,370	)		(8,464	)
Contingent commissions		(3,567	)		(4,449	)
Federal income taxes payable		1,939			(4,264	)
Deferred acquisition costs		6,591			(2,911	)
Prepaid reinsurance premiums		3,342			4,482

Net cash provided by (used for) operating activities		1,440			(15,892	)


Cash flows from investing activities:
Proceeds from sale of fixed maturities		604,606			560,306
Proceeds from sale of stocks		78,491			30,442
Proceeds from maturity of fixed maturities		37,900			36,245
Proceeds from sale of other invested assets		1,348			68
Purchases of fixed maturities		(621,350	)		(595,832	)
Purchases of stocks		(100,505	)		(91,417	)
Purchases of other invested assets		(10,050	)		—
Acquisition of business, net of cash acquired		—			(14,970	)

Net cash used for investing activities		(9,560	)		(75,158	)


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		(18,214	)		(213	)

Net cash used for financing activities		(18,487	)		(597	)


Effect of exchange rates on cash and cash equivalents		—			(43	)


Net change in cash and cash equivalents		(26,607	)		(91,690	)
Cash and cash equivalents at beginning of period		119,888			186,087

Cash and cash equivalents at end of period	$	93,281		$	94,397

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 3 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 nine months ended September 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.	Premium Deficiency

The Company recognizes a premium deficiency if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium after consideration of investment income. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

During the quarter and nine months ended September 30, 2011, the Company incurred a pre-tax premium deficiency charge of $10.5 million, or $0.35 per diluted share, and $11.0 million, or $0.36 per diluted share, respectively. There were no premium deficiency charges incurred during the quarter or nine months ended September 30, 2010.

The charge of $10.5 million incurred during the quarter ended September 30, 2011 consisted of $7.6 million charged to our U.S. Insurance Operations and $2.9 million charged to our Reinsurance Operations. The $7.6 million charge to our U.S. Insurance Operations consisted of $3.7 million recorded to acquisition costs and other underwriting expenses and $3.9 million recorded to loss and loss adjustment expenses. The $2.9 million charge to our Reinsurance Operations was recorded to acquisition costs and other underwriting expenses.

The charge of $11.0 million incurred during the nine months ended September 30, 2011 consisted of $7.6 million charged to our U.S. Insurance Operations and $3.3 million charged to our Reinsurance Operations. The $7.6 million charge to our U.S. Insurance Operations consisted of $3.7 million recorded to acquisition costs and other underwriting expenses and $3.9 million recorded to loss and loss adjustment expenses. The $3.3 million charge to our Reinsurance Operations was recorded to acquisition costs and other underwriting expenses.

As a result of these charges, the Company reduced deferred acquisition costs during the quarter and nine months ended September 30, 2011 by $6.6 million and $7.0 million, respectively. Additionally, the Company accrued a premium deficiency reserve of $3.9 million included in loss and loss adjustment expense reserves during the quarter and nine months ended September 30, 2011.

3.	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.”

4.	Profit Enhancement Initiative

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 September 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		(1,022	)		(597	)		—			(492	)		(2,111	)
Non-cash adjustments		—			(64	)		—			—			(64	)

Liability at September 30, 2011	$	107		$	871		$	—		$	—		$	978

There were charges incurred related to the Profit Enhancement Initiative in our statement of operations for the nine months ending September 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 ended September 30, 2011, or the quarter or nine months ending September 30, 2010.

5.	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.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 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 September 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 September 30, 2011
Fixed maturities:
U.S. treasury and agency obligations	$	123,210	$	8,261	$	(3	)	$	131,468	$	—
Obligations of states and political subdivisions		210,532		8,158		(75	)		218,615		—
Mortgage-backed securities		288,698		9,851		(337	)		298,212		(15	)
Asset-backed securities		100,368		2,426		(39	)		102,755		(33	)
Commercial mortgage-backed securities		34,677		38		(144	)		34,571		—
Corporate bonds and loans		559,339		14,537		(7,937	)		565,939		(134	)
Foreign corporate bonds		53,464		1,450		(132	)		54,782		—

Total fixed maturities		1,370,288		44,721		(8,667	)		1,406,342		(182	)
Common stock		154,110		7,739		(15,782	)		146,067		—
Other invested assets		14,150		3,071		(1,052	)		16,169		—

Total	$	1,538,548	$	55,531	$	(25,501	)	$	1,568,578	$	(182	)

(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 3% and 8% of shareholders’ equity as of September 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 4% and 2% of shareholders’ equity at September 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 September 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	$	70,950	$	71,837
Due after one year through five years		650,117		671,162
Due after five years through ten years		182,007		182,367
Due after ten years through fifteen years		10,221		11,641
Due after fifteen years		33,250		33,797
Mortgaged-backed securities		288,698		298,212
Asset-backed securities		100,368		102,755
Commercial mortgage-backed securities		34,677		34,571

	$	1,370,288	$	1,406,342

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of September 30, 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	$	2,244	$	(3	)	$	—	$	—		$	2,244	$	(3	)
Obligations of states and political subdivisions		1,792		(9	)		6,845		(66	)		8,637		(75	)
Mortgage-backed securities		27,856		(319	)		521		(18	)		28,377		(337	)
Asset-backed securities		2,009		(6	)		707		(33	)		2,716		(39	)
Commercial mortgage-backed securities		20,731		(69	)		10,071		(75	)		30,802		(144	)
Corporate bonds and loans		221,625		(7,919	)		830		(18	)		222,455		(7,937	)
Foreign corporate bonds		7,488		(132	)		—		—			7,488		(132	)

Total fixed maturities		283,745		(8,457	)		18,974		(210	)		302,719		(8,667	)
Common stock		125,505		(15,423	)		932		(359	)		126,437		(15,782	)
Other invested assets		8,948		(1,052	)		—		—			8,948		(1,052	)

Total	$	418,198	$	(24,932	)	$	19,906	$	(569	)	$	438,104	$	(25,501	)

(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)

Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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.

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:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

U.S. treasury and agency obligations – As of September 30, 2011, gross unrealized losses related to U.S. treasury and agency obligations were $0.003 million. All unrealized losses have been in an unrealized loss position for less than twelve months. All of these securities are rated AA+. 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 September 30, 2011, gross unrealized losses related to obligations of states and political subdivisions were $0.075 million. Of this amount, $0.066 million has been in an unrealized loss position for twelve months or greater. These securities are rated A- or higher. 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 September 30, 2011, gross unrealized losses related to mortgage-backed securities were $0.337 million. Of this amount, $0.018 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 September 30, 2011, gross unrealized losses related to asset-backed securities were $0.039 million. Of this amount, $0.033 million has been in an unrealized loss position for twelve months or greater. These securities are rated A- or higher. The weighted average credit enhancement for the Company’s asset-backed portfolio is 34.9. 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 September 30, 2011, gross unrealized losses related to CMBS were $0.144 million. Of this amount, $0.075 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 AAA. The weighted average credit enhancement for the Company’s CMBS portfolio is 27.2. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principle losses. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on the Company’s investment manager’s internally generated set of assumptions that reflect their expectation for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) occupancies are projected to drop; (2) capitalization rates vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value was stressed by using projected property performance and projected capitalization rates. Term risk is triggered if projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards.

Corporate bonds and loans – As of September 30, 2011, gross unrealized losses related to corporate bonds and loans were $7.937 million. Of this amount, $0.018 million has been in an unrealized loss position for twelve months

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Foreign bonds – As of September 30, 2011, gross unrealized losses related to foreign bonds were $0.132 million. All unrealized losses have been in an unrealized loss position for less than twelve months. These securities are rated A- or higher. The Company’s investment manager maintains financial models for the Company’s bond issuers. These models include a projection of each issuer’s future financial performance including prospective debt servicing capabilities and capital structure composition. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection.

Common stocks – As of September 30, 2011, gross unrealized losses related to common stock were $15.782 million. Of this amount, $0.359 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.

Other Investments – As of September 30, 2011, gross unrealized losses related to other investments were $1.052 million. All unrealized losses have been in an unrealized loss position for less than twelve months.

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


(Dollars in thousands)	Quarters Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Fixed maturities:
OTTI losses, gross	$	1,002	$	15	$	1,002	$	121
Portion of loss recognized in other comprehensive income (pre-tax)		—		—		—		(43	)

Net impairment losses on fixed maturities recognized in earnings		1,002		15		1,002		78
Common stock		822		—		2,728		346

Total	$	1,824	$	15	$	3,730	$	424

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


(Dollars in thousands)	Quarters Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010

Balance at beginning of period	$	86	$	113	$	115		$	50
Additions where no OTTI was previously recorded		—		—		—			47
Additions where an OTTI was previously recorded		—		15		—			31
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	$	128	$	86		$	128

Accumulated Other Comprehensive Income

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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


(Dollars in thousands)	September 30, 2011			December 31, 2010

Net unrealized gains (losses) from:
Fixed maturities	$	36,054		$	50,737
Preferred stock		—			1,322
Common stock		(8,043	)		24,600
Mutual Fund		(1,052	)		—
Partnerships < 3% owned		3,071			13
Deferred federal income taxes		(6,530	)		(19,461	)


Accumulated other comprehensive income	$	23,500		$	57,211

Net Realized Investment Gains

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


	Quarters Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2011		2010		2011		2010

Fixed maturities	$	562	$	846	$	11,178	$	16,225
Convertibles		—		—		—		3
Common stock		726		972		8,947		5,391
Preferred stock		—		—		1,546		—

Total	$	1,288	$	1,818	$	21,671	$	21,619

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


	Nine Months Ended September 30,
(Dollars in thousands)	2011		2010

Fixed maturities	$	604,606	$	560,306
Equity securities		78,491		30,442

Net Investment Income

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


	Quarters Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2011			2010			2011			2010

Fixed maturities	$	13,153		$	14,885		$	42,031		$	45,597
Preferred and common stocks		914			613			2,645			1,419
Cash and cash equivalents		10			32			56			141
Other invested assets		—			—			—			4

Total investment income		14,077			15,530			44,732			47,161
Investment expense		(1,197	)		(1,441	)		(3,508	)		(4,552	)

Net investment income	$	12,880		$	14,089		$	41,224		$	42,609

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)


	Quarters Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2011			2010			2011			2010

Net investment income	$	11,106		$	12,039		$	35,749		$	36,109


Net realized investment gains		594			1,272			15,559			16,066
Net equity in net income (loss) of partnership		—			—			53			(29	)
Net unrealized investment gains (losses)		(29,139	)		18,358			(33,711	)		13,797

Net investment gains (losses)		(28,545	)		19,630			(18,099	)		29,834


Total investment return	$	(17,439	)	$	31,669		$	17,650		$	65,943


Total investment return % ₍₁₎		(1.0	%)		1.9	%		1.0	%		3.9	%


Average investment portfolio ₍₂₎	$	1,698,039		$	1,686,638		$	1,689,333		$	1,696,376

(1)

Not annualized.

(2)

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

Insurance Enhanced Municipal Bonds

As of September 30, 2011, the Company held insurance enhanced municipal bonds of approximately $89.3 million, which represented approximately 5.4% of the Company’s total cash and invested assets. These securities had an average rating of “AA.” Approximately $36.3 million of these bonds are pre-refunded with U.S. treasury securities, of which $25.1 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 $53.0 million of insurance enhanced municipal bonds, $21.2 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

AA	$	11,075	$	812
A		10,115		19,353
BBB		—		1,025

Total	$	21,190	$	21,190

A summary of the Company’s insurance enhanced municipal bonds that are backed by financial guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, as of September 30, 2011, is as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)


(Dollars in thousands) Financial Guarantor	Total		Pre-refunded Securities		Government Guaranteed Securities		Exposure Net of Pre-refunded & Government Guaranteed Securities

Ambac Financial Group	$	7,017	$	3,015	$	—	$	4,002
Financial Guaranty Insurance Company		1,231		1,231		—		—
Assured Guaranty Insurance Group		34,354		11,958		—		22,396
Municipal Bond Insurance Association		30,983		8,315		—		22,668
Federal Housing Association		513		—		513		—
Government National Housing Association		2,962		620		2,342		—
Permanent School Fund Guaranty		1,151		—		1,151		—

Total backed by financial guarantors		78,211		25,139		4,006		49,066
Other credit enhanced municipal bonds		11,111		11,111		—		—

Total	$	89,322	$	36,250	$	4,006	$	49,066

In addition to the $89.3 million of insurance enhanced municipal bonds, the Company also held insurance enhanced asset-backed and credit securities with a market value of approximately $31.0 million, which represented approximately 1.9% of the Company’s total cash and invested assets. The financial guarantors of the Company’s $31.0 million of insurance enhanced asset-backed and credit securities include Financial Guaranty Insurance Company ($0.7 million), Municipal Bond Insurance Association ($12.5 million), Ambac ($2.5 million), Assured Guaranty Insurance Group ($10.1 million), and Other ($5.2 million).

The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at September 30, 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 September 30, 2011 and December 31, 2010:


	Estimated Fair Value
(Dollars in thousands)	September 30, 2011		December 31, 2010

On deposit with governmental authorities	$	44,164	$	43,656
Intercompany trusts held for the benefit of U.S. policyholders		541,668		609,242
Held in trust pursuant to third party requirements		98,122		68,900
Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders		6,055		5,871

Total	$	690,009	$	727,669

6.	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 nine months ended September 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 September 30,				Nine Months Ended September 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.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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.

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 September 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.

		$0,000,000		$0,000,000		$0,000,000		$0,000,000
As of September 30, 2011	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total

Fixed maturities:
U.S. treasury and agency obligations	$	90,579	$	40,889	$	—	$	131,468
Obligations of states and political subdivisions		—		218,615		—		218,615
Mortgage-backed securities		—		298,212		—		298,212
Commercial mortgage-backed securities		—		34,571		—		34,571
Asset-backed securities		—		102,755		—		102,755
Corporate bonds and loans		—		565,939		—		565,939
Foreign corporate bonds		—		54,782		—		54,782

Total fixed maturities		90,579		1,315,763		—		1,406,342
Common shares		146,067		—		—		146,067
Other invested assets		—		—		16,169		16,169

Total invested assets	$	236,646	$	1,315,763	$	16,169	$	1,568,578

		$0,000,000		$0,000,000		$0,000,000		$0,000,000
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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

		$0,000,000		$0,000,000		$0,000,000		$0,000,000
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

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

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

There were no significant transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2011 or 2010.

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


Quarter Ended September 30, 2011 (Dollars in thousands)	Other Invested Assets

Beginning balance at July 1, 2011	$	17,579
Total losses (realized / unrealized):
Included in accumulated other comprehensive income		(1,434	)
Purchases		24

Ending balance at September 30, 2011	$	16,169


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


Nine Months Ended September 30, 2011 (Dollars in thousands)	Other Invested Assets

Beginning balance at January 1, 2011	$	5,380
Total losses (realized / unrealized):
Included in equity in net income of partnership		81
Included in accumulated other comprehensive income		2,006
Purchases		10,049
Sales		(1,347	)

Ending balance at September 30, 2011	$	16,169


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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The $16.2 million is comprised of $7.2 million related to investments in limited partnerships and $9.0 million related to an investment in a mutual fund. The $7.2 million related to investments in limited partnerships was comprised of securities for which the Company does not have the ability to see the underlying valuations. 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 $9.0 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 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 nine months ended September 30, 2010:


Quarter Ended September 30, 2010 (Dollars in thousands)	Other Invested Assets

Beginning balance at July 1, 2010	$	6,490
Total losses (realized / unrealized):
Included in accumulated other comprehensive income		(1,275	)

Ending balance at September 30, 2010	$	5,215


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


Nine Months Ended September 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		(2,672	)
Distribution		(68	)

Ending balance at September 30, 2010	$	5,215


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

The $5.2 million is related to investments in limited partnerships. Of the investments in limited partnerships, $4.1 million was comprised of securities for which the Company does not have the ability to see the underlying valuations. 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 September 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 September 30, 2011.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)


(Dollars in thousands)	Fair Value		Future Funding Commitments

Equity Fund, LP ₍₁₎	$	7,221	$	2,520
Real Estate Fund, LP ₍₂₎		—		—
Mutual Fund ₍₃₎		8,948		—


Total	$	16,169	$	2,520

(1)

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

(2)

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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

•

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 guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:

•

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

•

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

During the quarter and nine months ended September 30, 2011, the Company did not consider it necessary to adjust quotes or prices obtained from the pricing vendors.

7.	Reinsurance

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

The Company had the following reinsurance balances as of September 30, 2011 and December 31, 2010:


(Dollars in thousands)	September 30, 2011			December 31, 2010

Reinsurance receivables	$	303,950		$	422,844
Collateral securing reinsurance receivables		(178,916	)		(289,284	)

Reinsurance receivables, net of collateral	$	125,034		$	133,560


Allowance for uncollectible reinsurance receivables	$	9,693		$	12,742
Prepaid reinsurance premiums		7,762			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.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 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. This treaty will expire on November 30, 2011.

There were no other significant changes to any of the Company’s other reinsurance treaties during the quarter and nine months ended September 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.

8.	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, on an interim basis, 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. The expected 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 actual income taxes on net realized gains and losses, discrete items and limited partnership distributions. For the quarter and nine months ended September 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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 nine months ended September 30, 2011 and 2010 were as follows:

		$000000000			$000000000		$000000000			$000000000
Quarter Ended September 30, 2011: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries		Eliminations			Total

Revenues:
Gross premiums written	$	42,603		$	55,262	$	(24,773	)	$	73,092


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


Net premiums earned	$	51,075		$	26,015	$	—		$	77,090
Net investment income		10,602			6,926		(4,648	)		12,880
Net realized investment gains (losses)		(762	)		2,050		—			1,288
Other income		—			167		—			167

Total revenues		60,915			35,158		(4,648	)		91,425
Losses and Expenses:
Net losses and loss adjustment expenses		76,539			9,695		—			86,234
Acquisition costs and other underwriting expenses		21,812			12,785		—			34,597
Corporate and other operating expenses		1,585			1,277		—			2,862
Interest expense		—			6,173		(4,648	)		1,525

Income (loss) before income taxes	$	(39,021	)	$	5,228	$	—		$	(33,793	)

		$000000000		$000000000		$000000000			$000000000

Quarter Ended September 30, 2010: (Dollars in thousands)	Non-U.S. Subsidiaries		U.S. Subsidiaries		Eliminations			Total

Revenues:
Gross premiums written	$	47,586	$	66,213	$	(27,564	)	$	86,235


Net premiums written	$	47,586	$	25,620	$	—		$	73,206


Net premiums earned	$	47,225	$	22,864	$	—		$	70,089
Net investment income		11,089		7,648		(4,648	)		14,089
Net realized investment gains		258		1,560		—			1,818
Other income		—		173		—			173

Total revenues		58,572		32,245		(4,648	)		86,169
Losses and Expenses:
Net losses and loss adjustment expenses		24,412		5,377		—			29,789
Acquisition costs and other underwriting expenses		17,243		11,298		—			28,541
Corporate and other operating expenses		2,802		2,304		—			5,106
Interest expense		—		6,473		(4,648	)		1,825

Income before income taxes	$	14,115	$	6,793	$	—		$	20,908

		$000000000			$000000000		$000000000			$000000000

Nine Months Ended September 30, 2011: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries		Eliminations			Total

Revenues:
Gross premiums written	$	158,058		$	182,102	$	(84,440	)	$	255,720


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


Net premiums earned	$	151,538		$	79,576	$	—		$	231,114
Net investment income		33,548			21,469		(13,793	)		41,224
Net realized investment gains		5,024			16,647		—			21,671
Other income		—			11,999		—			11,999

Total revenues		190,110			129,691		(13,793	)		306,008
Losses and Expenses:
Net losses and loss adjustment expenses		156,075			50,254		—			206,329
Acquisition costs and other underwriting expenses		60,562			34,084		—			94,646
Corporate and other operating expenses		7,035			3,294		—			10,329
Interest expense		—			18,813		(13,793	)		5,020

Income (loss) before income taxes	$	(33,562	)	$	23,246	$	—		$	(10,316	)

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

		$000000000		$000000000		$000000000			$000000000
Nine Months Ended September 30, 2010: (Dollars in thousands)	Non-U.S. Subsidiaries		U.S. Subsidiaries		Eliminations			Total

Revenues:
Gross premiums written	$	165,372	$	181,815	$	(76,049	)	$	271,138


Net premiums written	$	164,588	$	69,622	$	—		$	234,210


Net premiums earned	$	145,724	$	69,855	$	—		$	215,579
Net investment income		32,760		23,641		(13,792	)		42,609
Net realized investment gains		5,754		15,865		—			21,619
Other income		—		515		—			515

Total revenues		184,238		109,876		(13,792	)		280,322
Losses and Expenses:
Net losses and loss adjustment expenses		76,485		27,768		—			104,253
Acquisition costs and other underwriting expenses		56,292		31,405		—			87,697
Corporate and other operating expenses		7,795		7,270		—			15,065
Interest expense		—		19,189		(13,792	)		5,397

Income before income taxes	$	43,666	$	24,244	$	—		$	67,910

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


	Quarters Ended September 30,
(Dollars in thousands)	2011						2010
	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income

Expected tax provision at weighted average rate	$	1,845			(5.5	%)	$	2,379			11.4	%
Adjustments:
Tax exempt interest		(478	)		1.4			(504	)		(2.4	)
Dividend exclusion		(173	)		0.5			(123	)		(0.6	)
Effective tax rate adjustment		—			—			150			0.7
Other		(740	)		2.3			(756	)		(3.6	)

Income tax expense	$	454			(1.3	%)	$	1,146			5.5	%

The effective income tax rate for the quarter ended September 30, 2011 was (1.3%), compared to an effective income tax rate of 5.5% for the quarter ended September 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 September 30, 2011 as compared with an estimated annual effective rate during the quarter ended September 30, 2010. The effective rate differed from the weighted average expected income tax expense rate of (5.5%) for the quarter ended September 30, 2011 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 11.4% for the quarter ended September 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.


	Nine Months Ended September 30,
(Dollars in thousands)	2011						2010
	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income

Expected tax provision at weighted average rate	$	8,481			(82.2	%)	$	8,564			12.6	%
Adjustments:
Tax exempt interest		(1,498	)		14.5			(1,488	)		(2.2	)
Dividend exclusion		(540	)		5.2			(286	)		(0.4	)
Effective tax rate adjustment		—			—			(1,376	)		(2.0	)
Other		(685	)		6.7			(708	)		(1.1	)

Income tax expense	$	5,758			(55.8	%)	$	4,706			6.9	%

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The weighted average expected tax provision was $8.5 million and $8.6 million for the nine months ended September 30, 2011 and 2010, respectively. Although the Company incurred a pre-tax loss in 2011, our U.S. Insurance Operations segment recognized $23.2 million of income. U.S. Insurance Operations income includes $16.6 million of realized gains and $11.5 million related to a litigation settlement with AON. The income generated in the U.S. is the primary driver of the weighted average expected income tax expense of $8.5 million. The effective rate differed from the weighted average expected tax provision in 2011 and 2010 primarily due to the impact of tax-exempt interest and dividends.

The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2008.

The alternative minimum tax credit carryforward was $5.6 million as of September 30, 2011 and $6.5 million as of 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 $0.3 million as of September 30, 2011 and $0.7 million as of 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 September 30, 2011, the Company has recorded $0.03 million in liabilities for tax-related interest and penalties on its consolidated balance sheet.

9.	Liability for Unpaid Losses and Loss Adjustment Expenses

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

		$0,000		$0,000			$0,000			$0,000
	Quarters Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2011		2010			2011			2010

Balance at beginning of period	$	975,192	$	1,168,759		$	1,052,743		$	1,257,744
Less: Ceded reinsurance receivables		320,127		466,955			407,197			514,467

Net balance at beginning of period		655,065		701,804			645,546			743,277

Incurred losses and loss adjustment expenses related to:
Current year		83,665		44,852			214,403			137,972
Prior years		2,569		(15,063	)		(8,074	)		(33,719	)

Total incurred losses and loss adjustment expenses		86,234		29,789			206,329			104,253

Paid losses and loss adjustment expenses related to:

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

		$0,000		$0,000		$0,000		$0,000
Current year		26,124		14,664		53,145		29,877
Prior years		38,367		41,650		121,922		142,366

Total paid losses and loss adjustment expenses		64,491		56,314		175,067		172,243


Net balance at end of period		676,808		675,287		676,808		675,287
Plus: Ceded reinsurance receivables		294,414		445,175		294,414		445,175


Balance at end of period	$	971,222	$	1,120,462	$	971,222	$	1,120,462

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

In the third quarter of 2011, the Company increased its prior accident year loss reserves by $2.6 million, which consisted mainly of a $3.3 million increase in auto liability lines, a $0.5 million increase in professional liability lines, and a $0.3 million increase in all other lines, offset partially by a $1.1 million reduction in general liability lines and a $0.5 million reduction in property lines:

•

Auto liability: The $3.3 million increase primarily related to increases in our Reinsurance Operations. This consisted of a $3.8 million increase to accident year 2010 resulting from further unexpected development on non-standard auto treaties which were not renewed in 2011. This was partially offset by a $1.2 million decrease in accident year 2009. Our Insurance Operations also saw an increase of $0.7 million in accident years 2009 and 2010 due to recent unfavorable development on a few large claims.

•

Professional liability: The $0.5 million increase consisted of increases of $2.5 million primarily related to accident years 2009 and 2010 primarily due to unfavorable development in certain product classes. We are addressing profitability concerns by exiting certain classes of business which have proven to be unprofitable. This was offset by a decrease of $2.0 million related to all other prior accident years.

•

General liability: The $1.1 million reduction primarily consisted of reductions of $2.1 million related to our Insurance Operations. This amount included an $8.2 million reduction in accident years 2008 and prior due to continued favorable emergence. Incurred losses in these years have developed at a rate lower than the Company’s historical averages. We also decreased our reinsurance allowance by $0.9 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 $6.9 million in accident years 2009 and 2010 related to loss emergence in one of our classes of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. We are addressing profitability concerns by exiting certain classes of business that have proven to be unprofitable. At our Reinsurance Operations we increased our general liability reserves by $1.1 million, which primarily related to accident years 2009 and 2010. These changes related to higher than expected loss emergence.

•

Property: The $0.5 million reduction primarily related to accident year 2010 and is primarily related to favorable loss emergence on a worldwide catastrophe treaty in our Reinsurance Operations.

In the third quarter of 2010, the Company reduced its prior accident year loss reserves by $15.1 million, which consisted of a $14.2 million reduction in general liability lines, a $1.6 million reduction in property lines, and a $1.3 million reduction in umbrella lines, offset by a $1.7 million increase in commercial auto lines and a $0.1 million increase in professional liability lines:

•

General liability: The $14.2 million reduction primarily consisted of reductions of $16.3 million related to accident years 2004 through 2009 due to lower than anticipated frequency and severity. Incurred losses for these segments have developed at a rate lower than the Company’s historical averages. This reduction was offset by a net increase of $2.1 million related to accident years 2003 and prior primarily due to increases in expected unallocated loss adjustment expenses, as well as, higher than expected claim frequency and severity.

•

Property: The $1.6 million reduction primarily consisted of net reductions of $1.7 million related to

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

accident years 2009, 2008, and 2006 and prior due to decreases in expected unallocated loss adjustment expenses and lower than anticipated severity. This reduction was offset by an increase of $0.1 million related to accident year 2007.

•

Umbrella: The $1.3 million reduction primarily consisted of net reductions of $1.5 million related to accident years 2009 and 2007 and prior due to lower 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. This reduction was offset by an increase of $0.2 million related to accident year 2008 due to an increase in severity.

•

Commercial auto: The $1.7 million increase consisted of an increase of $1.9 million related to accident year 2009 due to increased frequency on two non-standard auto treaties. This increase was offset by net reductions of $0.2 million related to accident years 2008 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company’s prior projections.

•

Professional liability: The $0.1 million increase primarily consisted of an increase of $1.9 million related to accident years 2007 and 2009 where the Company experienced higher than expected claim frequency and severity. This increase was offset by a reduction of $1.8 million related to accident years 2008 and 2006 and prior driven by lower than expected paid and incurred activity during the quarter.

In the nine months ended September 30, 2011, the Company reduced its prior accident year loss reserves by $8.1 million, which consisted mainly of a $15.9 million reduction in general liability lines, a $1.1 million reduction in umbrella lines, and a $1.0 million reduction in property lines, offset by a $4.7 million increase in auto liability lines, a $4.4 million increase in professional liability lines and a $0.9 million increase in workers’ compensation lines:

•

General liability: The $15.9 million reduction primarily consisted of reductions of $21.3 million related to our Insurance Operations. This amount included a $31.0 million reduction in accident years 2008 and prior due to continued favorable emergence. Incurred losses have developed at a rate lower than the Company’s historical averages. We also decreased our reinsurance allowance by $3.1 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 $12.8 million in accident years 2009 and 2010 primarily driven by loss emergence in one of our classes of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. We are addressing profitability concerns by exiting certain classes of business that have proven to be unprofitable. At our Reinsurance Operations we increased our general liability reserves by $5.5 million in accident years 2009 and 2010 due to loss emergence that was greater than expected.

•

Umbrella: The $1.1 million reduction primarily related to 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 $1.0 million reduction primarily related to a $1.8 million decrease in our Insurance Operations primarily related to accident years 2009 and 2010 related to anticipated subrogation on a large equine mortality claim as well as favorable development on prior year catastrophe claims. This was offset by a $0.7 million increase related to accident year 2010 in our Reinsurance Operations due to loss emergence on a worldwide catastrophe treaty.

•

Auto liability: The $4.7 million increase primarily consisted of an increase of $1.2 million in our Insurance Operations related to accident years 2009 and 2010 due to higher than expected severity. There was also a $3.5 million increase in our Reinsurance Operations primarily related to a $4.0 million increase to accident year 2010 resulting from greater severity on non-standard auto treaties which were not renewed in 2011. This was offset by a decrease of $0.5 million in accident year 2009.

•

Professional liability: The $4.4 million increase was primarily related to our Insurance Operations and primarily consisted of increases of $15.1 million related to accident years 1998, 2009 and 2010, offset partially by decreases of $10.8 million related to all other accident years. In 2011, we exited certain classes of business 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.

•

Workers’ compensation: The $0.9 million increase primarily related to accident years 2009 and 2010 in

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

our Reinsurance Operations and is the result of expected losses recorded on adjustment premiums recorded in 2011.

In the nine months ended September 30, 2010, the Company reduced its prior accident year loss reserves by $33.7 million, which consisted of a $26.9 million reduction in general liability lines, a $3.7 million reduction in umbrella lines, a $2.9 million reduction in professional liability lines, and a $1.9 million reduction in property lines, offset by a $1.5 million increase in commercial auto lines:

•

General liability: The $26.9 million reduction primarily consisted of net reductions of $30.2 million related to accident years 2002 through 2009 due to severity that was lower than originally anticipated. Incurred losses for these years have developed at a rate lower than the Company’s historical averages. This reduction was partially offset by a net increase of $3.3 million related to accident years 2001 and prior where the Company experienced higher than expected claim frequency and severity.

•

Umbrella: The $3.7 million reduction primarily consisted of net reductions related to accident years 2009 and prior primarily due to lower 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.

•

Professional liability: The $2.9 million reduction primarily consisted of net reductions of $6.1 million related to accident years 2008 and prior due to severity that was lower than originally anticipated, partially offset by an increase of $3.2 million related to accident year 2009 where the Company experienced higher than expected claim frequency and severity.

•

Property: The $1.9 million reduction primarily consisted of net reductions of $2.4 million related to accident years 2008 and prior primarily due to lower than anticipated severity. This reduction was offset by an increase of $0.5 million to accident year 2009 that was driven by higher than expected claim frequency and severity.

•

Commercial auto: The $1.5 million increase primarily consisted of a net increase of $2.1 million related to accident years 2008 and 2009 where losses were higher than anticipated. This increase was offset by net reductions of $0.6 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.

10.

Related Party Transactions

Fox Paine & Company

As of September 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 $0.3 million in each of the quarters ended September 30, 2011 and 2010 and $1.1 million in each of the nine months ended September 30, 2011 and 2010 as part of the annual management fee that is paid to Fox Paine & Company.

At September 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 September 30, 2011 and December 31, 2010, respectively. At September 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 nine months ended September 30, 2011 and 2010, respectively. There were no

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

distributions received from the limited partnership during the quarters ended September 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. immediately prior to the effective date of our re-domestication to Ireland (See Note 3 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 nine months ended September 30, 2010, the Company incurred $0.1 million and $0.2 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 September 30,				Nine Months Ended September 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 quarter and nine months ended September 30, 2011 and 2010, the Company paid $0.1 million and $0.2 million, respectively, 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.

11.

Commitments and Contingencies

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company purchases insurance and reinsurance 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

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 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.

12.

Share-Based Compensation Plans

During the nine months ended September 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 September 30, 2011.

During the quarter and nine months ended September 30, 2011, the Company granted an aggregate of 12,864 and 39,675 fully vested Class A ordinary shares, respectively, subject to certain restrictions, at a weighted average grant date value of $22.31 and $21.52 per share, respectively, to non-employee directors of the Company under the Plan.

During the quarter and nine months ended September 30, 2011, the Company granted 300,000 Time-Based Options under the Plan. The Time-Based Options vest in 33% increments over a three-year period and expire ten years after the grant date.

13.

Earnings Per Share

Earnings per share have been computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the period. 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 3 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, except per share data)	Quarters Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2011			2010		2011			2010

Net income (loss)	$	(34,247	)	$	19,762	$	(16,021	)	$	63,175


Basic earnings per share:
Weighted average shares outstanding - basic		30,338,010			30,273,757		30,320,538			30,222,074


Net income (loss) per share	$	(1.13	)	$	0.65	$	(0.53	)	$	2.09


Diluted earnings per share:
Weighted average shares outstanding - diluted		30,352,850			30,308,489		30,341,713			30,245,890

Net income (loss) per share	$	(1.13	)	$	0.65	$	(0.53	)	$	2.09

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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


	Quarters Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010

Weighted average shares for basic earnings per share		30,338,010		30,273,757		30,320,538		30,222,074
Non-vested restricted stock		14,824		34,732		12,399		23,816
Options		16		—		8,776		—


Weighted average shares for diluted earnings per share		30,352,850		30,308,489		30,341,713		30,245,890

The weighted average shares outstanding used to determine dilutive earnings per share for the quarters ended September 30, 2011 and 2010 do not include 465,775 and 341,809 shares, respectively, which were deemed to be anti-dilutive. The weighted average shares outstanding used to determine dilutive earnings per share for the nine months ended September 30, 2011 and 2010 do not include 450,232 and 352,309 shares, respectively, which were deemed to be anti-dilutive.

14.

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 nine months ended September 30, 2011 and 2010.


Quarter Ended September 30, 2011: (Dollars in thousands)	Insurance Operations₍₁₎			Reinsurance Operations₍₂₎			Total

Revenues:
Gross premiums written	$	55,260		$	17,832		$	73,092


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


Net premiums earned	$	54,063		$	23,027		$	77,090
Other income		167			—			167

Total revenues		54,230			23,027			77,257
Losses and Expenses:
Net losses and loss adjustment expenses		58,174			28,060			86,234
Acquisition costs and other underwriting expenses		24,998	⁽³⁾		9,599			34,597

Loss from segments	$	(28,942	)	$	(14,632	)		(43.574	)

Unallocated Items:
Net investment income								12,880
Net realized investment gains								1,288
Corporate and other operating expenses								(2,862	)
Interest expense								(1,525	)

Loss before income taxes								(33,793	)
Income tax expense								454

Net loss							$	(34,247	)


Total assets	$	1,474,174		$	658,715	⁽⁴⁾	$	2,132,889

(1)

Includes business ceded to Reinsurance Operations.

GLOBAL INDEMNITY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

(2)

External business only, excluding business assumed from Insurance Operations.

(3)

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

(4)

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


Quarter Ended September 30, 2010: (Dollars in thousands)	Insurance Operations₍₁₎			Reinsurance Operations₍₂₎			Total

Revenues:
Gross premiums written	$	66,213		$	20,022		$	86,235


Net premiums written	$	53,185		$	20,021		$	73,206


Net premiums earned	$	47,932		$	22,157		$	70,089
Other income		173			—			173

Total revenues		48,105			22,157			70,262
Losses and Expenses:
Net losses and loss adjustment expenses		13,584			16,205			29,789
Acquisition costs and other underwriting expenses		22,556	⁽³⁾		5,985			28,541

Income (loss) from segments	$	11,965		$	(33	)		11,932

Unallocated Items:
Net investment income								14,089
Net realized investment gains								1,818
Corporate and other operating expenses								(5,106	)
Interest expense								(1,825	)

Income before income taxes								20,908
Income tax expense								1,146

Net income							$	19,762


Total assets	$	1,698,557		$	654,472	⁽⁴⁾	$	2,353,029

(1)

Includes business ceded to Reinsurance Operations.

(2)

External business only, excluding business assumed from Insurance Operations.

(3)

Includes federal excise tax of $251 relating to cessions from Insurance Operations to Reinsurance Operations.

(4)

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


Nine Months Ended September 30, 2011: (Dollars in thousands)	Insurance Operations₍₁₎			Reinsurance Operations₍₂₎			Total

Revenues:
Gross premiums written	$	182,102		$	73,618		$	255,720


Net premiums written	$	161,333		$	73,116		$	234,449


Net premiums earned	$	165,354		$	65,760		$	231,114
Other income		11,999			—			11,999

Total revenues		177,353			65,760			243,113
Losses and Expenses:
Net losses and loss adjustment expenses		135,217			71,112			206,329
Acquisition costs and other underwriting expenses		73,581	⁽³⁾		21,065			94,646

Loss from segments	$	(31,445	)	$	(26,417	)		(57,862	)

Unallocated Items:
Net investment income								41,224
Net realized investment gains								21,671
Corporate and other operating expenses								(10,329	)
Interest expense								(5,020	)

Loss before income taxes								(10,316	)
Income tax expense								5,758

Loss before equity in net income of partnership								(16,074	)
Equity in net income of partnership, net of tax								53

Net loss							$	(16,021	)


Total assets	$	1,474,174

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company