Business Combinations

12 Months Ended

Dec. 31, 2011

Business Combinations

Business Combinations

3. Business Combinations

Accounting Policy

        The AGMH Acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recorded the identifiable assets acquired and liabilities assumed at their fair value at the Acquisition Date. Pre-existing relationships were effectively settled at fair value. The loss upon settlement of pre-existing relationships, along with goodwill impairment and the bargain purchase gain resulting from the difference between the purchase price and the net assets' fair value estimates, was recorded within "Goodwill and settlement of pre-existing relationship" in the consolidated statements of operations at the Acquisition Date.

AGMH Acquisition

        The initial difference between the purchase price of $821.9 million and AGMH's recorded net assets of $2.1 billion was reduced significantly by the recognition of additional liabilities related to AGMH's insured portfolio at fair value, as required by acquisition accounting. The bargain purchase resulted from the unprecedented credit crisis, which resulted in a significant decline in AGMH's franchise value due to material insured losses, ratings downgrades and significant losses at Dexia. Dexia required government intervention in its affairs, resulting in motivation to sell AGMH. In the absence of potential purchasers of AGMH due to the financial crisis, the Company was able to negotiate a bargain purchase price.

        In many cases, determining the fair value of acquired assets and assumed liabilities required the Company to exercise significant judgment. The most significant of these determinations related to the valuation of the acquired financial guaranty direct and ceded contracts. The fair value of a financial guaranty direct contract accounted for as insurance is the estimated premium that a similarly rated hypothetical financial guarantor would demand to assume each policy and not the actual cash flows under the insurance contract. The methodology for determining such value takes into account the rating of the insured obligation, expectation of loss, sector and term. For financial guaranty contracts accounted for as insurance, loss reserves are recognized only to the extent expected losses exceed deferred premium revenue on a contract by contract basis. As the fair value of the deferred premium revenue exceeded the Company's estimate of expected loss for each contract, no loss reserves were recorded at July 1, 2009 for the Acquired Companies' contracts. See Note 5, Financial Guaranty Insurance Contracts.

        Based on the Company's assumptions, the fair value of the Acquired Companies' deferred premium revenue on its insurance contracts was $7.3 billion at July 1, 2009, an amount approximately $1.7 billion greater than the Acquired Companies' gross unearned premium reserve and loss and loss adjustment expense ("LAE") reserve (i.e., "gross stand ready obligations") at June 30, 2009. This indicates that the Acquired Companies' contractual premiums were less than the premiums a market participant of similar credit quality would demand to acquire those contracts at the Acquisition Date. The fair value of the Acquired Companies' ceded contracts at July 1, 2009 was an asset of $1.7 billion and recorded in ceded unearned premium reserve. The fair value of the ceded contracts is in part derived from the fair value of the related direct insurance contracts with an adjustment for the credit quality of each reinsurer.

        The fair value of AGMH's long-term debt was based upon quoted market prices available from third-party brokers as of the Acquisition Date. The fair value of this debt was approximately $0.3 billion lower than its carrying value immediately prior to the AGMH Acquisition. This discount is being amortized into interest expense over the estimated remaining life of the debt.

        Additionally, other acquisition accounting adjustments included (1) the write off of the Acquired Companies' deferred acquisition cost ("DAC") and (2) the consolidation of certain FG VIEs in which the combined variable interest of the Acquired Companies and AG Re resulted in the Company being the primary beneficiary. Effective January 1, 2010, the Company deconsolidated these FG VIEs in accordance with GAAP standard adopted on January 1, 2010 as discussed in Note 8, Consolidation of Variable Interest Entities.

        The following table shows the assets and liabilities of the Acquired Companies after the allocation of the purchase price to the net assets. The bargain purchase gain results from the difference between the purchase price and the net assets' fair value estimates.

Allocation of Purchase Price as of July 1, 2009

	(in millions)
Purchase price:
Cash	$	546.0
Fair value of common shares issued (based upon June 30, 2009 closing price of AGL common shares)		275.9
Total purchase price		821.9
Identifiable assets acquired:
Investments		5,950.1
Cash		87.0
Premiums receivable, net of ceding commissions payable		854.1
Ceded unearned premium reserve		1,727.7
Deferred tax asset, net		888.1
FG VIEs' assets		1,879.4
Other assets		662.6
Total assets		12,049.0
Liabilities assumed:
Unearned premium reserve		7,286.4
Long-term debt		560.6
Credit derivative liabilities		920.0
FG VIEs' liabilities		1,878.6
Other liabilities		348.9
Total liabilities		10,994.5
Net assets		1,054.5
Bargain purchase gain resulting from the AGMH Acquisition	$	232.6

        The Company and the Acquired Companies had a pre-existing reinsurance relationship. The loss relating to this pre-existing relationship resulted from the effective settlement of reinsurance contracts at fair value and the write-off of previously recorded assets and liabilities relating to this relationship recorded in the Company's historical accounts. The Company determined fair value as the difference between contractual premiums and the Company's estimate of current market premiums. The loss related to the contract settlement results from contractual premiums that were less than the Company's estimate of what a market participant would demand currently, estimated in a manner similar to how the value of the Acquired Companies' insurance policies were valued, as well as related acquisition costs described above.

        The Company had existing goodwill on its balance sheet at the date of acquisition relating to a previous acquisition. The Company reassessed the recoverability of the goodwill in the third quarter of 2009 subsequent to the AGMH Acquisition, which provided the Company's largest assumed book of business prior to the acquisition. As a result of the AGMH Acquisition, which significantly diminished the Company's potential near future market for assuming reinsurance, combined with the continued credit crisis, which adversely affected the fair value of the Company's in-force policies, management determined to write off the full carrying value of $85.4 million of goodwill on its books prior to the AGMH Acquisition in the third quarter of 2009. This charge did not have any adverse effect on the Company's debt agreements or its overall compliance with the covenants of its debt agreements.

Components of Goodwill and Settlement of Pre-existing Relationship

	Year Ended December 31, 2009
	(in millions)
Goodwill impairment associated with assumed reinsurance line of business	$	85.4
Gain on bargain purchase of AGMH		(232.6	)
Settlement of pre-existing relationship in conjunction with the AGMH Acquisition		170.5
Goodwill and settlement of pre-existing relationship	$	23.3

        AGMH Acquisition-related expenses were primarily driven by severance paid or accrued to AGM employees and also included various real estate, legal, consulting and relocation fees. Real estate expenses related primarily to consolidation of the Company's New York and London offices. The Company incurred additional acquisition-related expenses in 2010, primarily for consulting services employed as part of the integration process.

AGMH Acquisition-Related Expenses

	Year Ended December 31,
	2010		2009
Severance costs	$	—	$	40.4
Professional services		6.8		32.8
Office consolidation		—		19.1
Total	$	6.8	$	92.3

Pro Forma Condensed Combined Results of Operations

        The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and the Acquired Companies. The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2009, nor is it indicative of the results of operations in future periods.

Pro Forma Condensed Combined Results of Operations (Unaudited)

	Year Ended December 31, 2009
	Revenues		Net Income Attributable to Assured Guaranty Ltd.		Net Income per Basic Share
	(in millions, except per share amounts)
Assured Guaranty as reported	$	917.1	$	86.0	$	0.68
Pro forma combined		2,304.2		812.6		4.19

Acquisition of Municipal and Infrastructure Assurance Corporation

        On January 24, 2012, the Company agreed to acquire Municipal and Infrastructure Assurance Corporation ("MIAC"), which is licensed to provide financial guaranty insurance and reinsurance in 38 U.S. jurisdictions including the District of Columbia. The purchase of MIAC is subject to regulatory approval and is expected to close in the first half of 2012. The Company will pay $91 million in cash for MIAC; at closing, MIAC has cash and short-term investments of approximately $75 million. MIAC has not issued any financial guaranty contracts since its formation. The statutory policyholders' surplus as of September 30, 2011 was $75.1 million.