EX-99.4 29 a09-17603_1ex99d4.htm PRO FORMA FINANCIAL INFORMTION

Exhibit 99.4

 

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

 

Capitalized terms used herein without definition shall have the respective meanings given such terms in the Current Report on Form 8-K to which this financial information filed as an exhibit.

 

The following unaudited pro forma combined condensed financial statements of Assured have been prepared to assist you in your analysis of the financial effects of the Acquisition. The unaudited pro forma combined condensed financial statements were prepared using the historical consolidated financial statements of Assured and FSAH. This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and accompanying notes of Assured and FSAH.

 

The accompanying unaudited pro forma combined condensed financial statements give effect to the transfer by FSAH to Dexia Holdings of the stock of FSAH’s financial products subsidiaries (the “Financial Products Companies”), including the GIC Issuers, FSAM and FSA Global, as well as the transfer of the remaining liquidity and credit risk of the GIC operations to Dexia, which we refer to in the following tables as the “FP Business Distribution,” and the Acquisition, using a purchase price of $546.0 million in cash and the issuance of 22,283,950 Assured common shares, using the purchase method of accounting. The pro forma adjustments related to the Acquisition are preliminary and do not reflect the final allocation of the excess of the purchase price over the net book value of the assets of FSAH, as the process to assign a fair value to the various tangible and intangible assets acquired has not been completed. Final adjustments are likely to result in a materially different purchase price adjustment, debt components and allocation of the purchase price, which will affect the value assigned to the tangible or intangible assets and amount of interest expense and depreciation and amortization expense recorded in the statement of operations. The effect of the changes to the statements of operations will depend on the final purchase price, the nature and amount of debt issued and assumed and the nature and amount of the final purchase price allocation and could be material.

 

Assured and FSAH are in the process of reviewing their accounting and reporting policies and, as a result of this review, it may be necessary to adjust FSAH’s financial statements to conform to the accounting policies of Assured. While some adjustments have been included in the unaudited pro forma combined condensed financial information included in this prospectus supplement, further adjustments may be necessary upon completion of this review. Final determination of financial statement presentation will be completed upon consummation of the Acquisition. Additionally, the historical financial statements and the pro forma adjustments were prepared under US GAAP. Effective January 1, 2009, Assured and FSAH adopted FAS No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“FAS 163”), which significantly changed the accounting for financial guaranty insurance.

 

The pro forma financials do not reflect revenue opportunities and cost savings that we expect to realize after the Acquisition. We cannot assure you with respect to the estimated revenue opportunities and operating cost savings that are expected to be realized as a result of the Acquisition. The pro forma financial information also does not reflect non-recurring charges related to integration activity or exit costs that may be incurred by Assured or FSAH in connection with the Acquisition.

 

The unaudited pro forma combined condensed balance sheet assumes that the transactions of FSAH took place on March 31, 2009. The unaudited pro forma combined condensed statements of operations for the year ended December 31, 2008 and the three months ended March 31, 2009 assume that the transaction took place the first day of the period presented (i.e., January 1, 2008). Reclassifications have been made to the statements of operations of FSAH to conform it to Assured’s financial statement classifications.

 

The pro forma financial information is based on the estimates and assumptions set forth in the notes to such information. The pro forma financial information is preliminary and is being furnished solely for information purposes and, therefore, is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the dates or periods indicated, nor is it necessarily indicative of the results of operations or financial position that may occur in the future.

 

1


 

Assured Guaranty Ltd. and Subsidiaries

Unaudited Pro Forma Combined Condensed Balance Sheet

As of March 31, 2009

(dollars in thousands)

 

 

 

Assured
As
Reported

 

FSA
As
Reported

 

Pro Forma
Adjustments
for
Carve Out of
Financial
Products
Segment

 

Notes

 

Pro Forma
Adjustments
For
Acquisition

 

Notes

 

Pro Forma
Combined

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General investment portfolio, available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities, at fair value

 

$

3,176,178

 

$

5,383,175

 

$

—

 

 

 

$

—

 

 

 

$

8,559,353

 

Equity securities, at fair value

 

—

 

573

 

—

 

 

 

—

 

 

 

573

 

Short-term investments, at cost which approximates fair value

 

616,834

 

488,561

 

—

 

 

 

—

 

 

 

1,105,395

 

Financial products segment investment portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities, at fair value

 

—

 

796,129

 

(796,129

)

(1

)

—

 

 

 

—

 

Short-term investments, at cost which approximates fair value

 

—

 

8,910

 

(8,910

)

(1

)

—

 

 

 

—

 

Trading portfolio at fair value

 

—

 

—

 

—

 

 

 

—

 

 

 

—

 

Assets acquired in refinancing transactions

 

—

 

182,812

 

—

 

 

 

—

 

 

 

182,812

 

Total investments

 

3,793,012

 

6,860,160

 

(805,039

)

 

 

—

 

 

 

9,848,133

 

Cash and cash equivalents

 

19,328

 

55,280

 

—

 

 

 

70,021

 

(10

)

144,629

 

Deferred acquisition costs

 

382,525

 

297,562

 

—

 

 

 

(297,562

)

(3

)

382,525

 

Note receivable from affiliate

 

—

 

13,576,303

 

(13,576,303

)

(1

)

—

 

 

 

—

 

Prepaid reinsurance premiums

 

23,655

 

1,385,908

 

—

 

 

 

(406,086

)

(2

)

1,003,476

 

Premium receivable

 

748,414

 

815,819

 

—

 

 

 

—

 

 

 

1,564,233

 

Reinsurance recoverable on ceded losses

 

7,763

 

325,812

 

—

 

 

 

(7,192

)

(2

)

326,383

 

Credit derivative assets

 

149,798

 

126,385

 

—

 

 

 

—

 

 

 

276,183

 

Deferred income taxes

 

117,560

 

580,900

 

31,443

 

(1

)

487,516

 

(11

)

1,217,419

 

VIE assets

 

—

 

—

 

—

 

 

 

1,147,605

 

(5

)

1,147,605

 

Other assets

 

346,273

 

867,200

 

(432,301

)

 

 

—

 

 

 

781,172

 

Total assets

 

$

5,588,328

 

$

24,891,329

 

$

(14,782,200

)

 

 

$

994,302

 

 

 

$

16,691,759

 

 

2


 

 

 

Assured
As
Reported

 

FSA
As
Reported

 

Pro Forma
Adjustments
for
Carve Out of
Financial
Products
Segment

 

Notes

 

Pro Forma
Adjustments
For
Acquisition

 

Notes

 

Pro Forma
Combined

 

Liabilities and
shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned premium reserves

 

$

2,153,312

 

$

3,991,368

 

$

—

 

 

 

$

(406,086

)

(2

)

$

7,465,338

 

 

 

 

 

 

 

 

 

 

 

1,726,744

 

(6

)

 

 

Reserves for losses and loss adjustment expenses

 

222,555

 

2,017,675

 

—

 

(1

)

(7,192

)

(2

)

2,233,038

 

Senior Notes/Notes Payable

 

197,452

 

430,000

 

—

 

 

 

(391,403

)

 

 

236,049

 

Series A Enhanced Junior Subordinated Debentures

 

149,774

 

300,000

 

—

 

 

 

(240,000

)

 

 

209,774

 

Goodwill

 

—

 

—

 

—

 

 

 

113,625

 

(8

)

—

 

 

 

 

 

 

 

 

 

 

 

(113,625

)

(9

)

 

 

Credit derivative liabilities

 

706,768

 

816,633

 

—

 

 

 

—

 

 

 

1,523,401

 

Financial products segment debt

 

—

 

14,180,258

 

(14,180,258

)

(1

)

—

 

 

 

—

 

VIE liabilities

 

—

 

—

 

—

 

 

 

1,147,605

 

(5

)

1,147,605

 

Mandatory Convertible Equity Units

 

—

 

—

 

—

 

 

 

170,100

 

(10

)

170,100

 

Other liabilities and minority interest

 

132,874

 

873,365

 

(160,796

)

(1

)

 

 

 

 

845,443

 

Total liabilities

 

3,562,735

 

22,609,299

 

(14,341,054

)

 

 

1,999,768

 

 

 

13,830,748

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

901

 

335

 

—

 

 

 

(335

)

(7

)

1,567

 

 

 

 

 

 

 

 

 

 

 

666

 

(10

)

 

 

Additional paid-in capital

 

1,284,093

 

9,365,755

 

(7,754,971

)

(1

)

(1,610,784

)

(7

)

2,005,220

 

 

 

 

 

 

 

 

 

 

 

721,127

 

(10

)

 

 

Retained earnings

 

738,831

 

(7,089,937

)

7,316,746

 

(1

)

(226,809

)

(7

)

852,456

 

 

 

 

 

 

 

 

 

 

 

113,625

 

(9

)

 

 

Purchase price

 

—

 

—

 

—

 

 

 

—

 

 

 

—

 

Non-controlling interest

 

—

 

250

 

(250

)

(1

)

—

 

 

 

—

 

Accumulated other comprehensive income (loss)

 

1,768

 

6,712

 

(2,671

)

(1

)

(4,041

)

(7

)

1,768

 

Deferred equity compensation

 

—

 

13,052

 

—

 

 

 

(13,052

)

(7

)

—

 

Less treasury stock at cost

 

—

 

(14,137

)

—

 

 

 

14,137

 

(7

)

—

 

Total shareholders’ equity

 

2,025,593

 

2,282,030

 

(441,146

)

 

 

(1,005,466

)

 

 

2,861,011

 

Total liabilities and shareholders’ equity

 

$

5,588,328

 

$

24,891,329

 

$

(14,782,200

)

 

 

$

994,302

 

 

 

$

16,691,759

 

 

See accompanying notes to unaudited pro forma combined condensed financial statements, including Note 2 for an explanation of the preliminary pro forma adjustments.

 

3


 

Assured Guaranty Ltd. and Subsidiaries

Unaudited Pro Forma Combined Condensed Statements of Operations

For the Year Ended December 31, 2008

(dollars in thousands, except per share amounts)

 

 

 

Assured
As
Reported

 

FSAH
As Reported

 

Pro Forma
Adjustments
for
Carve Out of
Financial
Products
Segment

 

Notes

 

Pro Forma
Adjustments
For
Acquisition

 

Notes

 

Pro Forma
Combined

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

261,398

 

$

376,573

 

$

—

 

 

 

$

158,700

 

(b

)

$

796,671

 

Net investment income

 

162,558

 

264,181

 

—

 

 

 

—

 

 

 

426,739

 

Net realized investment losses

 

(69,801

)

(6,669

)

—

 

 

 

—

 

 

 

(76,470

)

Change in fair value of credit derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains and other settlements on credit derivatives

 

117,589

 

126,891

 

—

 

 

 

—

 

 

 

244,480

 

Unrealized gains (losses) on credit derivatives

 

38,034

 

(744,963

)

—

 

 

 

—

 

 

 

(706,929

)

Net change in fair value of credit derivatives

 

155,623

 

(618,072

)

—

 

 

 

—

 

 

 

(462,449

)

Net interest income from financial products segment

 

—

 

647,366

 

(647,366

)

(a

)

—

 

 

 

—

 

Net realized (losses) gains from financial products segment

 

—

 

(8,644,183

)

8,644,183

 

(a

)

—

 

 

 

—

 

Net realized and unrealized gains (losses) on derivative instruments

 

—

 

1,424,522

 

(1,424,237

)

(a

)

—

 

 

 

285

 

Net unrealized gains (losses) on financial instruments at fair value

 

—

 

130,363

 

(47,563

)

(a

)

—

 

 

 

82,800

 

Income from assets acquired in refinancing transactions

 

—

 

11,154

 

—

 

 

 

—

 

 

 

11,154

 

Other income

 

43,410

 

(16,199

)

69

 

(a

)

—

 

 

 

27,280

 

Total revenues

 

553,188

 

(6,430,964

)

6,525,086

 

 

 

158,700

 

 

 

806,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

265,762

 

1,877,699

 

—

 

 

 

—

 

 

 

2,143,461

 

Profit commission expense

 

1,336

 

—

 

—

 

 

 

—

 

 

 

1,336

 

Acquisition costs

 

61,249

 

65,700

 

—

 

 

 

(65,700

)

 

 

61,249

 

Other operating expenses

 

83,493

 

98,871

 

(43,241

)

(a

)

—

 

 

 

139,123

 

Foreign exchange losses (gains) from financial products segment

 

—

 

1,652

 

(1,652

)

(a

)

—

 

 

 

—

 

Interest expense

 

23,283

 

46,335

 

12,120

 

(a

)

6,314

 

(c

)

105,302

 

 

 

 

 

 

 

 

 

 

 

17,250

 

(e

)

 

 

Net interest expense from financial products segment

 

—

 

794,308

 

(794,308

)

(a

)

—

 

 

 

—

 

Other expense

 

5,734

 

—

 

—

 

 

 

—

 

 

 

5,734

 

Total expenses

 

440,857

 

2,884,565

 

(827,081

)

 

 

(42,136

)

 

 

2,456,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision (benefit) for income taxes

 

112,331

 

(9,315,529

)

7,352,167

 

 

 

200,836

 

 

 

(1,650,195

)

Provision (benefit) for income taxes

 

43,448

 

(872,359

)

182,688

 

(a

)

70,292

 

 

 

(575,931

)

Net (loss)

 

$

68,883

 

$

(8,443,170

)

$

7,169,479

 

 

 

$

130,543

 

 

 

$

(1,074,265

)

Net loss per diluted share

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(7.18

)

 

See accompanying notes to unaudited pro forma combined condensed financial statements, including Note 2 for an explanation of the preliminary pro forma adjustments.

 

4


 

Assured Guaranty Ltd. and Subsidiaries

Unaudited Pro Forma Combined Condensed Statements of Operations

For the Quarter Ended March 31, 2009

(dollars in thousands, except per share amounts)

 

 

 

Assured
As
Reported

 

FSA
As Reported

 

Pro Forma
Adjustments
for
Carve Out
of
Financial
Products
Segment

 

Notes

 

Pro Forma
Adjustments
For
Acquisition

 

Notes

 

Pro Forma
Combined

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

148,446

 

$

78,523

 

$

—

 

 

 

$

36,663

 

(b

)

$

263,632

 

Net investment income

 

43,601

 

62,117

 

—

 

 

 

—

 

 

 

105,718

 

Net realized investment losses

 

(17,110

)

(5,922

)

—

 

 

 

—

 

 

 

(23,032

)

Change in fair value of credit derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains and other settlements on credit derivatives

 

20,579

 

(45,754

)

—

 

 

 

—

 

 

 

(25,175

)

Unrealized (losses) gains on credit derivatives

 

26,982

 

573,194

 

—

 

 

 

—

 

 

 

600,176

 

Net change in fair value of credit derivatives

 

47,561

 

527,440

 

—

 

 

 

—

 

 

 

575,001

 

Net interest income from financial products segment

 

—

 

34,355

 

(34,355

)

(a

)

—

 

 

 

—

 

Net realized gains (losses) from financial products segment

 

—

 

(278,359

)

278,359

 

(a

)

—

 

 

 

—

 

Interest income on note receivable from affiliate

 

—

 

35,447

 

(35,447

)

(a

)

—

 

 

 

—

 

Net realized and unrealized gains (losses) on derivative instruments

 

—

 

(180,483

)

180,479

 

(a

)

—

 

 

 

(4

)

Net unrealized gains (losses) on financial instruments at fair value

 

—

 

425,356

 

(386,637

)

(a

)

—

 

 

 

38,719

 

Income from assets acquired in refinancing transactions

 

—

 

2,172

 

—

 

 

 

—

 

 

 

2,172

 

Other income

 

20,568

 

(14,743

)

—

 

 

 

—

 

 

 

5,825

 

Total revenues

 

243,066

 

685,903

 

2,399

 

 

 

36,663

 

 

 

968,031

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

79,754

 

350,858

 

—

 

 

 

—

 

 

 

430,612

 

Profit commission expense

 

255

 

—

 

—

 

 

 

—

 

 

 

255

 

Acquisition costs

 

23,421

 

8,999

 

—

 

 

 

(8,999

)

(f

)

23,421

 

Other operating expenses

 

32,318

 

37,435

 

(8,319

)

(a

)

—

 

 

 

61,434

 

Foreign exchange (gains) losses from financial products segment

 

—

 

(16,588

)

16,588

 

(a

)

—

 

 

 

—

 

Interest expense

 

5,821

 

12,510

 

1,603

 

(a

)

1,579

 

(c

)

25,825

 

 

 

 

 

 

 

 

 

 

 

4,313

 

(e

)

 

 

Net interest expense from financial products segment

 

—

 

127,422

 

(127,422

)

(a

)

—

 

 

 

—

 

Other expense

 

1,400

 

—

 

—

 

 

 

—

 

 

 

1,400

 

Total expenses

 

142,969

 

520,636

 

(117,550

)

 

 

(3,108

)

 

 

542,947

 

(Loss) income before (benefit) provision for income taxes

 

100,097

 

165,267

 

119,949

 

 

 

39,771

 

 

 

425,084

 

(Benefit) provision for income taxes

 

14,608

 

153,722

 

5,913

 

(a

)

13,920

 

(d

)

188,163

 

Net income

 

$

85,489

 

$

11,545

 

$

114,036

 

 

 

$

25,851

 

 

 

$

236,921

 

Net income per diluted share

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1.56

 

 

See accompanying notes to unaudited pro forma combined condensed financial statements, including Note 2 for an explanation of the preliminary pro forma adjustments.

 

5


 

Assured Guaranty Ltd.

Notes to Unaudited Pro Forma Combined Condensed Financial Statements

 

Note 1—Basis of Pro Forma Presentation

 

The unaudited pro forma combined condensed balance sheet data shows the estimated effects of the Acquisition as if it had occurred on March 31, 2009. The unaudited pro forma combined condensed statements of operations data for the year ended December 31, 2008 and the three months ended March 31, 2009 show the estimated effects of the Acquisition as if it had occurred on the first day of the periods presented (i.e., January 1, 2008).

 

The Carve Out of Financial Products Segment and Adjustments For Acquisition columns represent adjustments to present the historic consolidated financial statements of Assured and FSAH to conform to the preliminary presentation of such information for the combined entity as discussed below. For purposes of identifying the transactions that give rise to the changes on the financial statements, numerical references are provided to reflect where balances have been adjusted.

 

Assured and FSAH are in the process of reviewing their accounting and reporting policies and, as a result of this review, it may be necessary to adjust FSAH’s financial statements to conform to the accounting policies of Assured. While some adjustments have been included in the unaudited pro forma combined condensed financial information included in this prospectus supplement, further adjustments may be necessary upon completion of this review. Final determination of financial statement presentation will be completed upon consummation of the Acquisition. Additionally, the historical financial statements and the pro forma adjustments were prepared under US GAAP. Effective January 1, 2009, Assured and FSAH adopted FAS 163, which significantly changed the accounting for financial guaranty insurance.

 

Historically, Assured and FSAH engaged in reinsurance transactions together. The effects of material intercompany transactions have been eliminated from the accompanying unaudited pro forma combined financial information.

 

The pro forma adjustments reflect the payment of $546.0 million in cash and issuance of 22,283,950 Assured common shares to Dexia Holdings. The pro forma adjustments assume funds for the $546.0 million cash payment were obtained from the issuance of an additional 44,275,000 Assured common shares to the public at a purchase price of $11.00 per share, the public offering price set forth on the cover page of this prospectus supplement, and the issuance of $172.5 million of equity units.

 

The Acquisition will be accounted for using the purchase method of accounting effective on January 1, 2009 in accordance with FAS No. 141, Business Combinations, as revised in 2007 (“FAS 141R”). Assured will be the acquiring entity for financial reporting purposes. Under the purchase method of accounting, the acquisition price will be allocated to the tangible and intangible assets and liabilities assumed of the acquired entity based on their estimated fair values, with any excess being recognized as goodwill and any deficit being recognized as an extraordinary gain to net income in the first reporting period after the deal closes. Costs of the Acquisition are expensed in the period in which the expenses are incurred.

 

In addition, as explained in more detail in the accompanying notes to the unaudited pro forma combined condensed financial statements, the resulting extraordinary gain reflected in the unaudited pro forma combined condensed financial statements is subject to adjustment. The adjustments included in these unaudited pro forma combined condensed financial statements are preliminary and may be revised. Based on the preliminary adjustments and allocation of purchase price, the fair value of FSAH’s pro forma net assets at March 31, 2009 exceeds the purchase price by $113.6 million. This results in negative goodwill. Any negative goodwill will be recognized as an extraordinary gain in the combined results of operations in the first reporting period subsequent to consummation of the Acquisition. After completing a fair value analysis of FSAH’s assets and liabilities as of the closing

 

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date, the final allocation of negative goodwill to nonfinancial assets and the amount of the extraordinary gain will be determined. The final purchase price allocation and purchase accounting adjustments may be materially different from the unaudited pro forma adjustments presented in the document.

 

Note 2—Unaudited Pro Forma Adjustments

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

Carve Out of Financial Products Segment

 

(1)                                 Adjustment to carve out amounts attributable to the Financial Products Companies from consolidated FSAH balances. Under the Purchase Agreement, we have agreed to acquire FSAH. Assured is not acquiring the Financial Products Companies. Assured expects FSAH to distribute certain of the Financial Products Companies to Dexia Holdings or one of its affiliates. Under the Purchase Agreement, Assured and Dexia Holdings have agreed to negotiate a number of agreements pursuant to which Dexia Holdings would guarantee or otherwise take responsibility for the assets and liabilities of the financial products business. This pro forma adjustment shows the estimated effects of these agreements, which will be entered into at the closing of the Acquisition.

 

Adjustments for Acquisition

 

(2)                                 Adjustment to eliminate amounts attributable to reinsurance activity between Assured and FSAH entities.

 

(3)                                 Adjustment to write off FSAH deferred acquisition costs as part of purchase GAAP accounting.

 

(4)                                 Adjustment to record the debt Assured acquired from FSAH at fair value. Refer to Note 11 of the notes to FSAH’s consolidated financial statements for the year ended December 31, 2008 for a description of the material terms related to this debt, which have been incorporated by reference into this prospectus supplement. The debt matures beginning in 2036 with the final obligation maturing in 2103. The coupon rates are considerably lower than the rates that would apply to comparable debt issued today. Accordingly, the adjustment reflects the changes in credit spreads from when the debt was originally entered into and current credit spreads in the market.

 

(5)                                 Adjustment to reflect assets and liabilities of variable interest entities at their carrying values that will need to be consolidated pursuant to the guidance of FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities” (“FIN 46R”). This adjustment is based on Assured’s preliminary evaluation of variable interest entities whereby the combined variable interest of FSAH and Assured would lead us to conclude that the combined entity is the primary beneficiary as defined by FIN 46R and, therefore, that we would need to consolidate these entities.

 

(6)                                 Adjustment to record at fair value FSAH’s unearned premium reserves. Adjustment reflects the amount that a financial guaranty insurance company with a similar credit rating would require to assume the policies for which FSAH has already been paid premiums in full (typically referred to as up-front policies). The adjustment reflects our best estimate of current upfront premiums that a financial guarantor would require based on the nature of the policies in force. The adjustment reflects estimated costs of capital based on rating agency capital charges, expenses based on our historical experience and a risk premium that reflects the risk of loss associated with the policies.

 

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Additionally, FSAH’s subsidiaries have policies for which they are contractually entitled to receive premiums and, in the event of default of an insured obligation, obligated to pay claims in the future. These policies are typically referred to as installment policies. Similar to the adjustment for upfront policies discussed above, this adjustment also reflects the net fair value of expected future premiums, net of estimated costs of capital, related expenses and a risk premium based on the risk of insurance losses. The net cash flows are discounted at a risk-free rate. We have estimated future premiums based on expected maturities, which are typically shorter than contractual maturities. Costs of capital are based on rating agency capital charges for the nature of the business insured. Expenses are based on our historical experience. Risk premiums are based on loss scenarios determined based on Company estimates.

 

Based on our assumptions, FSAH’s existing installment contracts result in an additional liability measured at fair value on March 31, 2009 indicating the FSAH’s contractual premiums are less than the premiums a market participant of similar credit quality would demand at March 31, 2009. We have included this additional liability in our adjustment to unearned premium reserves.

 

(7)                                 Adjustment to eliminate historic balances attributable to FSAH common stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, deferred equity compensation and treasury stock.

 

(8)                                 Adjustment to record negative goodwill based on the excess of the fair value of FSAH’s net assets compared to the purchase price paid based on our preliminary assessment. The fair value of FSAH’s pro forma net assets at March 31, 2009 exceeds the purchase price by $113.6 million. After completing a fair value analysis of FSAH’s assets and liabilities as of the closing date, the final allocation of negative goodwill to non-financial assets and the amount of the extraordinary gain will be determined. The final purchase accounting adjustments may be materially different from the unaudited pro forma adjustments presented in this document.

 

(9)                                 Adjustment to recognize an extraordinary gain for the negative goodwill in pro forma adjustment Note 8, above. This extraordinary gain would be recognized in the combined results of operations in the first reporting period subsequent to consummation of the Acquisition.

 

(10)                           Adjustment to reflect the effects of the offering of Assured’s common shares to finance the Acquisition. The pro forma adjustments reflect a payment of $546.0 million in cash and the issuance of 22,283,950 Assured common shares directly to Dexia Holdings. The funds for the $546.0 million payment were assumed to be obtained from the issuance of an additional 44,275,000 Assured common shares to the public at $11.00 per share plus the issuance of $172.5 million of equity units. Transaction costs are estimated to be $43.5 million.

 

(11)                           Adjustment to tax effect of purchase GAAP accounting entries. Adjustment assumes a 35% tax rate.

 

Unaudited Pro Forma Combined Condensed Statements of Operations

 

Carve Out of Financial Products Segment

 

(a)                                 Adjustment to carve out amounts attributable to the Financial Products Companies from consolidated FSAH balances.

 

Pro Forma Adjustments

 

(b)                                 Adjustment to record incremental net earned premium attributable to the effects of balance sheet pro forma adjustment Note 6, above. Adjustment assumes that the pro forma adjustment

 

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amounts will be earned in proportion to FSAH’s projected earned premium amounts under its current earnings methodology. Projected earned premium calculated under FAS 163 is not currently available.

 

(c)                                  Adjustment to record incremental interest expense attributable to the effects of balance sheet pro forma adjustment Note 4, above. Adjustment assumes incremental expense will be recognized straight line over the contractual life of the debt.

 

(d)                                 Adjustment to tax effect of pro forma adjustments. Adjustment assumes a 35% tax rate for all adjustments.

 

(e)                                  Adjustment to reflect interest expense on $172.5 million of equity units. Interest expense based on the company’s estimated cost to issue 3-year debt, which is estimated to be 10%. The difference between this estimated cost and the actual coupon on these equity units of 8.50%, results in a credit to the company’s additional paid-in capital.

 

(f)                                    Adjustment to eliminate FSA’s deferred acquisition cost amortization as a result of write-off of deferred acquisition costs as part of purchase GAAP accounting, see note 3 above.

 

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