NOTE 2. MERGER AND BUSINESS COMBINATIONS

The Hartford

On August 22, 2018, our Company entered into the Merger Agreement with The Hartford, where subject to the terms and conditions set forth therein, our Company will merge with an existing subsidiary of The Hartford, with our Company surviving as a wholly owned subsidiary of The Hartford. Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $70.00 in cash per common share (the “Merger Consideration”). The Merger is expected to close in the first half of 2019, subject to the receipt of regulatory approvals and other customary closing conditions.

The Merger Agreement contains various covenants of our Company and The Hartford. These covenants include interim operating covenants that, subject to certain exceptions, (i) require the Company to (1) conduct its business in all material respects in the ordinary course of business consistent with past practice, (2) use reasonable best efforts to preserve substantially intact, consistent with past practice, the Company’s business organization and (3) preserve, consistent with past practice, existing relations and goodwill with customers, producers, reinsurance providers, governmental authorities and other persons with whom the Company or its subsidiaries have significant business relationships, and (ii) restrict the Company’s ability to take certain actions prior to the effective time of the Merger without The Hartford’s consent (such consent, in certain cases, not to be unreasonably withheld, conditioned or delayed), which include, subject to certain exceptions, issuing additional common shares, incurring additional indebtedness, selling or purchasing material assets, making unbudgeted capital expenditures, making loans or investments (or disposing of investments) not permitted by the Company’s investment guidelines, increasing compensation other than in ordinary course, making material changes to accounting, underwriting, or reserving practices, making material tax elections, settling material litigation, or entering into, modifying or terminating material contracts.

BDM and ASCO

During the second quarter of 2018, our Company established a wholly owned subsidiary, Navigators Holdings (Europe) NV, which on June 7, 2018 (the “acquisition date”), acquired a 100% ownership interest in BDM, ASCO, and a wholly-owned subsidiary of ASCO, Canal Re S.A., a reinsurance company licensed under the laws of the Grand Duchy of Luxembourg (“Canal Re”). The acquisition of all three of these entities will be referred to as the “Acquisition” and the group of companies will be referred to as the Navigators Insurance Company Europe Group (the “NICE Group”). The Acquisition was undertaken as part of our Company’s strategy of expanding to more brokers and insureds across Europe and reinforces our Company’s presence in the European Union’s single market. We anticipate that this will enable our Company to better serve its European clients after Brexit, and will also provide an opportunity to reach a wider European audience.

Our Company paid a purchase price of EUR 35.0 million in cash at the acquisition date (which was approximately $40.5 million based on the exchange rate as of the acquisition date). Additionally, our Company will be reimbursed up to EUR 5.0 million (which is approximately $5.8 million based on the exchange rate as of the acquisition date) in the event of adverse development of claims incurred prior to December 31, 2016 as measured on December 31, 2019. This reimbursement was valued at $nil as of the acquisition date and September 30, 2018.

The purchase price was allocated to the assets acquired and liabilities assumed of the NICE Group, based on estimated fair values as of the acquisition date and our Company recognized goodwill of $12.7 million.

Our Company identified finite lived intangible assets of $6.5 million, including customer relationships, the value of business acquired (“VOBA”), broker networks, and a trade name. These finite lived intangible assets will be amortized over a weighted average period of 9 years.

Our Company identified indefinite lived intangible assets of $2.5 million, related to ASCO’s European licenses.

The fair value of the assets acquired and liabilities assumed and the allocation of the purchase price on the acquisition date are summarized in the table below:

amounts in thousands
Consideration paid	$	40,492

Assets
Investments		45,182
Cash and Cash Equivalents		18,109
Prepaid Reinsurance Premiums		2,701
Reinsurance Recoverables on Paid Losses		1,311
Reinsurance Recoverables on Unpaid Losses and LAE		15,769
Other Assets		19,943

Fair Value of Identifiable Intangible Assets		9,000

Total Assets Acquired	$	112,015

Liabilities
Reserves for Losses and LAE		31,928
Unearned Premiums		11,139
Deferred Income Tax		8,947
Accounts Payable and Other Liabilities		32,212
Total Liabilities Assumed	$	84,226

Goodwill	$	12,703

Significant Fair Value Adjustments were as follows:

•

Fair Value of Finite and Indefinite-Lived Intangibles – To establish the fair value of identifiable intangible assets related to customer relationships, licenses, value of business acquired, broker networks, and trade name.

•

Fair Value of Property – To adjust the carrying value of real estate property to reflect fair value.

•

Fair Value of Software – To establish the fair value of internal use software systems.

•

Deferred Income Tax – To reflect the deferred tax impact on the fair value adjustments.

•

Goodwill – To establish the fair value of goodwill related to the Acquisition.

During the three months ended September 30, 2018, as part of our business combination accounting within the measurement period, the Company recorded an adjustment to the fair value of the customer relationships intangible asset. As a result, the Fair Value of Identifiable Intangible Assets decreased by $1.4 million and Goodwill increased by $1.4 million from the amounts initially recorded at June 30, 2018. Refer to Note 6. Goodwill and Intangible Assets for further information.

The business combination accounting is subject to change if additional information that existed as of the balance sheet date, but was not available, later becomes available within the measurement period, which cannot exceed twelve months from the acquisition date. The acquisition date fair values of the assets acquired and liabilities assumed, including Reserves for Losses and LAE, Deferred Income Tax and Identifiable Intangible Assets, as well as the related estimated useful lives, are provisional and may be subject to adjustments, which may impact the amounts recorded for assets acquired and liabilities assumed as well as the goodwill.

Since the acquisition date, total NICE Group Revenues and Net Income (Loss) of $6.6 million and $(0.1) million, respectively, have been included in our Company’s Consolidated Statements of Income (Loss).