Business Combinations

12 Months Ended

Dec. 31, 2020

3. BUSINESS COMBINATION

On December 31, 2020, Ambac completed the acquisition of 80% of the membership interests of Xchange for a purchase price of $81 in cash. Xchange, whose management principals retained the remaining 20% is a property and casualty Managing General Underwriter ("MGU"), specializing in accident and health insurance. Since its inception in 2010, Xchange's business has been supported by major insurers, reinsurers, third party administrators, brokers and producers.

The acquisition has been accounted for as a business combination and advances Ambac's strategy of expanding into the MGU and Managing General Agent ("MGA") sectors. Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company's Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period as defined by ASC 805.

The following table summarizes the consideration paid for Xchange and the estimated fair values of the aggregate assets and liabilities acquired, as well as the fair value of the noncontrolling interest, at the acquisition date:


	Fair Value
Cash	$	2
Restricted cash	4
Intangible assets	36
Goodwill	46
Other assets	8
Total assets acquired	$	96
Other liabilities	8
Total liabilities assumed	8
Less: Redeemable noncontrolling interest	7
Total consideration	$	81

Goodwill was recorded to reflect the excess purchase consideration over net assets acquired and primarily consists of the future economic benefits that we expect to receive as a result of the acquisition, driven by the value of Xchange's potential future distribution and carrier relationships, and synergies with other Ambac business operations. Goodwill that is expected to be deductible for tax purposes amounts to approximately $36.

The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions at the time of acquisition and is subject to updating as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The fair value of the redeemable non-controlling interest of $7 was estimated based on the non-controlling interest’s respective share of Xchange's enterprise value, adjusted for the value of Ambac's call option to purchase, and the minority owners' put

option to sell to Ambac, respectively, the remaining 20% membership interests in Xchange. Please refer to the Noncontrolling Interests section of Note 2. Basis of Presentation and Significant Accounting Policies, for further information regarding the terms of the call and put option, as well as the redeemable noncontrolling interest balance sheet classification.

The following table sets forth the estimated fair values of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition.


	Fair Value		Weighted Average Remaining Useful Life - Years
Distribution relationships	$	33	15.0
Non-compete agreements	1		5.0
Trade name	1		8.0


Total	$	36

The distribution relationships intangible represents existing relationships Xchange maintains with a variety of brokers and distributors across its product lines. It excludes the value of potential future distribution relationships that may be developed, which is included in goodwill. The non-compete agreements intangible relates to agreements entered into with certain key management personnel of Xchange. The trade name intangible represents the rights to the Xchange Group brand name which is well known in the marketplace Xchange competes in.

The overall weighted average useful life of the identified amortizable intangible assets acquired is fourteen years.

As of December 31, 2020, future annual amortization of finite-lived acquired intangible assets for the years 2021 through 2025 and thereafter is estimated to be:


Year	Estimated Expense
2021	$	3
2022	3
2023	3
2024	3
2025	3
Thereafter	22
Total	$	36

Because the acquisition occurred on last day of the reporting period, there were no revenues or earnings of Xchange included in Ambac's Consolidated Statement of Comprehensive Income for the period ended December 31, 2020.

Pro forma information related to the acquisition has not been presented as the impact was not material to the Company’s financial results.