Attached files
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of September 30, 2017 and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017 are based on the historical financial statements of CF Corp. and FGL, as well as the historical combined financial statements of Front Street Re (Cayman) Ltd. and Front Street Re Ltd. (collectively, “FSR”). CF Corp., FGL and FSR shall collectively be referred to herein as the “Combined Company.”
The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combined financial information and related notes have been prepared utilizing period ends that differ by fewer than 93 days, as permitted by Regulation S-X. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and for the nine months ended September 30, 2017 give pro forma effect to the Transactions (described below) as if they had been consummated on January 1, 2016. The unaudited pro forma condensed combined balance sheet as of September 30, 2017 assumes that the Transactions had been consummated on September 30, 2017. These periods are presented on the basis of CF Corp. as the accounting acquirer.
The unaudited pro forma condensed combined balance sheet as of September 30, 2017 has been prepared using and should be read in conjunction with the following:
| · | CF Corp.’s unaudited condensed balance sheet as of September 30, 2017 and the related notes in CF Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, which is incorporated by reference into this Current Report on Form 8-K; |
| · | FGL’s audited consolidated balance sheet as of September 30, 2017 and the related notes in FGL’s Annual Report on Form 10-K for the period ended September 30, 2017, which is incorporated by reference into this Current Report on Form 8-K; and |
| · | FSR’s audited combined balance sheet as of September 30, 2017 and the related notes, which are included elsewhere in this Current Report on Form 8-K. |
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2016 has been prepared using and should be read in conjunction with the following:
| · | CF Corp.’s audited statement of operations for the period from February 26, 2016 (inception) through December 31, 2016 and the related notes in CF Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which is incorporated by reference into this Current Report on Form 8-K; |
| · | FGL’s audited consolidated statement of operations for the year ended September 30, 2016 and the related notes in FGL’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, which is incorporated by reference into this Current Report on Form 8-K; and |
| · | FSR’s audited combined statement of comprehensive loss for the year ended September 30, 2016 and the related notes, which are included elsewhere in this Current Report on Form 8-K. |
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2017 has been prepared using and should be read in conjunction with the following:
| · | CF Corp.’s unaudited condensed statement of operations for the nine months ended September 30, 2017 and the related notes in CF Corp.’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, which are incorporated by reference into this Current Report on Form 8-K; |
| · | FGL’s unaudited condensed consolidated statement of operations for the nine months ended June 30, 2017, derived from the books and records underlying FGL’s audited consolidated statement of operations for the year ended September 30, 2017 and the related notes in FGL’s Annual Report on Form 10-K for the year ended September 30, 2017, which are incorporated by reference into this Current Report on Form 8-K; and |
| · | FSR’s unaudited condensed combined statement of comprehensive loss for the nine months ended June 30, 2017, derived from the books and records underlying FSR’s audited combined statement of comprehensive loss for the year ended September 30, 2017 and the related notes, which are included elsewhere in this Current Report on Form 8-K. |
CF Corp. is a blank check company incorporated on February 26, 2016. CF Corp. consummated its initial public offering of 60,000,000 units for $10.00 per unit on May 25, 2016. On June 29, 2016, CF Corp. consummated the closing of the sale of 9,000,000 additional units pursuant to the exercise in full of the underwriters’ overallotment option. Simultaneously with the closing of the initial public offering, CF Corp. consummated a private placement to the Sponsor of 14,000,000 warrants at a price of $1.00 per warrant, generating gross proceeds of $14 million, and simultaneously with the consummation of the exercise of the overallotment option, CF Corp. consummated a private placement to the Sponsor of an additional 1,800,000 warrants, generating gross proceeds of $1.8 million. Upon the closing of the initial public offering, overallotment option and the private placement, $691 million from the net proceeds thereof was placed in a trust account and invested in a money market fund selected by CF Corp. As a special purpose acquisition company, CF Corp.’s purpose is to effect a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. Effective May 24, 2017, CF Corp., FGL and FSR reached agreements under which CF Corp. would concurrently acquire all of the outstanding equity of the aforementioned entities pursuant to the Merger Agreement and a Share Purchase Agreement (the “Share Purchase Agreement”). On November 30, 2017, CF Corp. completed the business combination and its acquisition of FSR (the “Share Purchase”).
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FGL provides its principal life and annuity products through its insurance subsidiaries, FGLIC and Fidelity & Guaranty Life Insurance Company of New York. FGL’s customers range across a variety of age groups and are concentrated in the middle-income market. FGL’s fixed indexed annuities provide for pre-retirement wealth accumulation and post-retirement income management. FGL’s life insurance provides wealth protection and transfer opportunities through indexed universal life products. Life and annuity products are primarily distributed through independent marketing organizations and independent insurance agents.
FSR provides life and annuity reinsurance services, such as reinsurance on asset intensive, long duration life and annuity liabilities.
CF Corp. acquired FGL in exchange for cash consideration of $31.10 per share of FGL common stock totaling approximately $1.8 billion CF Corp. concurrently acquired FSR for cash consideration of $65 million, subject to certain adjustments. In addition, HRG, FS Holdco, CF Corp. and FGL US Holdings Inc., a Delaware corporation and Parent agreed that FS Holdco may, at its option, cause Parent and FS Holdco to make a joint election under Section 338(h)(10) of the Code with respect to the business combination and the deemed share purchases of FGL’s subsidiaries. If FS Holdco opts to make such an election, it will be required to pay Parent $30 million, plus additional specified amounts determined by reference to FGL’s incremental current tax costs attributable to the election, if any, and Parent will be required to pay FS Holdco additional specified amounts determined by reference to FGL’s incremental current tax savings attributable to the election, if any.
Consideration for the business combination and the Share Purchase were funded through the following sources and transactions (collectively the “Financing” and collectively with the business combination and the Share Purchase, the “Transactions”):
| · | Investments and cash equivalents held in the trust account of up to $694 million related to CF Corp.’s initial public offering of Class A ordinary shares. The proceeds will become available upon consummation of the business combination; |
| · | The sale of 51,000,000 ordinary shares to anchor investors pursuant to the forward purchase agreements, resulting in gross proceeds of $510 million; |
| · | The sale of 36,000,000 ordinary shares pursuant to certain equity commitment letters, resulting in gross proceeds of $360 million; |
| · | The sale of 20,000,000 ordinary shares in connection with the rights of first offer contained in the forward purchase agreements, resulting in gross proceeds of $200 million; and |
| · | The sale of Series A and Series B Redeemable Preferred Shares of CF Corp. and 8,370,000 ordinary shares to GSO and FNF or their respective designees resulting in gross proceeds of $375 million. The preferred shares carry a paid-in-kind dividend option at the Combined Company’s election. The unaudited pro forma condensed combined financial information does not reflect the payment of such in-kind dividends due to management’s discretion on exercising said option. |
The business combination and Share Purchase were accounted for under the scope of ASC 805. Pursuant to ASC 805, CF Corp. was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
| · | CF Corp. paid cash consideration for all of the equity in FGL and FSR; and |
| · | The existing shareholders of CF Corp. and new shareholders in CF Corp. retained all of the voting rights in the Combined Company. |
The evidence discussed above supports the conclusion that CF Corp. is the accounting acquirer in each of the business combination and Share Purchase.
Each of FGL and FSR constitutes a business, with inputs, processes, and outputs. Accordingly, each of the business combination and Share Purchase constitutes the acquisition of a business for purposes of ASC 805, and due to the changes in control from the business combination and Share Purchase, are accounted for using the acquisition method.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2017
| As of September 30, 2017 | Purchase | As
of September 30, 2017 | ||||||||||||||||||||||||||||||
| CF
Corp. (Historical) | FGL (Historical) | FSR (Historical) | Combined | Accounting Adjustments | Intercompany Eliminations (c) | Pro
Forma Adjustments | Combined
Pro Forma | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities, available-for-sale, at fair value | $ | - | $ | 21,154 | $ | - | $ | 21,154 | $ | - | $ | - | $ | - | $ | 21,154 | ||||||||||||||||
| Equity securities, available-for-sale, at fair value | - | 773 | - | 773 | - | - | - | 773 | ||||||||||||||||||||||||
| Derivative investments | - | 413 | - | 413 | - | - | - | 413 | ||||||||||||||||||||||||
| Commercial mortgage loans | - | 547 | - | 547 | 5 | (b) | - | - | 552 | |||||||||||||||||||||||
| Other invested assets | - | 185 | - | 185 | (3 | )(b) | - | - | 182 | |||||||||||||||||||||||
| Related party investments | - | - | 98 | 98 | - | (6 | ) | - | 92 | |||||||||||||||||||||||
| Total investments | - | 23,072 | 98 | 23,170 | 2 | (6 | ) | - | 23,166 | |||||||||||||||||||||||
| Related party loans | - | 71 | - | 71 | - | (71 | ) | - | - | |||||||||||||||||||||||
| Funds withheld receivable | - | - | 1,648 | 1,648 | - | (902 | ) | - | 746 | |||||||||||||||||||||||
| Cash and cash equivalents | - | 885 | 29 | 914 | (1,902 | )(a) | - | 694 | (f) | 958 | ||||||||||||||||||||||
| (2 | )(g) | |||||||||||||||||||||||||||||||
| (25 | )(h) | |||||||||||||||||||||||||||||||
| 362 | (i) | |||||||||||||||||||||||||||||||
| 510 | (j) | |||||||||||||||||||||||||||||||
| 325 | (k) | |||||||||||||||||||||||||||||||
| (45 | )(l) | |||||||||||||||||||||||||||||||
| (61 | )(n) | |||||||||||||||||||||||||||||||
| (12 | )(m) | |||||||||||||||||||||||||||||||
| 200 | (o) | |||||||||||||||||||||||||||||||
| Prepaid expenses | 5 | - | - | 5 | - | - | - | 5 | ||||||||||||||||||||||||
| Accrued investment income | - | 231 | - | 231 | - | - | - | 231 | ||||||||||||||||||||||||
| Reinsurance recoverable | - | 3,375 | - | 3,375 | 40 | (b) | (1,016 | ) | - | 2,399 | ||||||||||||||||||||||
| Intangibles, net | - | 1,129 | - | 1,129 | 253 | (b) | - | - | 1,382 | |||||||||||||||||||||||
| Investments and cash equivalents held in Trust Account | 694 | - | - | 694 | - | - | (694 | )(f) | - | |||||||||||||||||||||||
| Other assets | - | 202 | 27 | 229 | (26 | )(b) | (103 | ) | 3 | (m) | 103 | |||||||||||||||||||||
| Total assets | $ | 699 | $ | 28,965 | $ | 1,802 | $ | 31,466 | $ | (1,633 | ) | $ | (2,098 | ) | $ | 1,255 | $ | 28,990 | ||||||||||||||
| Liabilities and shareholders' equity | ||||||||||||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 20 | $ | - | $ | - | 20 | - | - | (18 | )(n) | 2 | ||||||||||||||||||||
| Accrued commitment fee | 5 | - | - | 5 | - | - | (5 | )(n) | - | |||||||||||||||||||||||
| Due to related parties | 1 | - | - | 1 | - | - | - | 1 | ||||||||||||||||||||||||
| Deferred underwriting commissions and placement agent fees | 45 | - | - | 45 | - | - | (45 | )(l) | - | |||||||||||||||||||||||
| Contractholder funds | - | 20,792 | - | 20,792 | 696 | (b) | - | - | 21,488 | |||||||||||||||||||||||
| Future policy benefits | - | 3,412 | - | 3,412 | - | - | - | 3,412 | ||||||||||||||||||||||||
| Funds witheld for reinsurance liabilities | - | 1,083 | - | 1,083 | - | (1,081 | ) | - | 2 | |||||||||||||||||||||||
| Liability for policy and contract claims | - | 67 | - | 67 | - | - | - | 67 | ||||||||||||||||||||||||
| Insurance reserves | - | - | 1,692 | 1,692 | - | (976 | ) | - | 716 | |||||||||||||||||||||||
| Debt | - | 300 | - | 300 | 9 | (b) | - | (9 | )(m) | 300 | ||||||||||||||||||||||
| Revolving credit facility | - | 105 | - | 105 | - | - | - | 105 | ||||||||||||||||||||||||
| Deferred tax liability, net | - | 62 | - | 62 | (27 | )(d) | - | - | 35 | |||||||||||||||||||||||
| Other liabilities | - | 897 | 6 | 903 | (23 | )(b) | - | (10 | )(h) | 870 | ||||||||||||||||||||||
| Total liabilities | 71 | 26,718 | 1,698 | 28,487 | 655 | (2,057 | ) | (87 | ) | 26,998 | ||||||||||||||||||||||
| Commitments | ||||||||||||||||||||||||||||||||
| Class A ordinary shares subject to possible redemption | 623 | - | - | 623 | - | - | (623 | )(f) | - | |||||||||||||||||||||||
| Shareholders' equity | ||||||||||||||||||||||||||||||||
| Preferred shares | - | - | - | - | - | - | 280 | (i) | 280 | |||||||||||||||||||||||
| Common stock | - | 1 | - | 1 | (1 | )(e) | - | - | - | |||||||||||||||||||||||
| Class A ordinary shares | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Class B ordinary shares | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Additional paid in capital | 23 | 716 | 170 | 909 | (886 | )(e) | - | 623 | (f) | 1,763 | ||||||||||||||||||||||
| 510 | (j) | |||||||||||||||||||||||||||||||
| 325 | (k) | |||||||||||||||||||||||||||||||
| 200 | (o) | |||||||||||||||||||||||||||||||
| 82 | (i) | |||||||||||||||||||||||||||||||
| Retained earnings (accumulated deficit) | (18 | ) | 1,000 | (66 | ) | 916 | 63 | (b) | (41 | ) | (17 | )(g) | (51 | ) | ||||||||||||||||||
| (934 | )(e) | (38 | )(n) | |||||||||||||||||||||||||||||
| Accumulated other comprehensive income | - | 543 | - | 543 | (543 | )(e) | - | - | - | |||||||||||||||||||||||
| Treasury stock | - | (13 | ) | - | (13 | ) | 13 | (e) | - | - | - | |||||||||||||||||||||
| Total shareholders' equity | 5 | 2,247 | 104 | 2,356 | (2,288 | ) | (41 | ) | 1,965 | 1,992 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 699 | $ | 28,965 | $ | 1,802 | $ | 31,466 | $ | (1,633 | ) | $ | (2,098 | ) | $ | 1,255 | $ | 28,990 | ||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
| For
the period from February 26, 2016 (Inception) to December 31, 2016 | For
the Year Ended September 30, 2016 | Purchase | For
the Year Ended December 31, 2016 | |||||||||||||||||||||||||||||
| CF
Corp. (Historical) | FGL (Historical) | FSR (Historical) | Combined | Accounting Adjustments | Intercompany Eliminations (dd) | Pro
Forma Adjustments | Combined
Pro Forma | |||||||||||||||||||||||||
| (in millions, except share and per share data) | ||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| Premiums | $ | - | $ | 70 | $ | - | $ | 70 | $ | - | $ | 3 | $ | - | $ | 73 | ||||||||||||||||
| Net investment income | - | 923 | 2 | 925 | (19 | )(ee) | 61 | - | 967 | |||||||||||||||||||||||
| Net investment gains | - | 19 | 148 | 167 | - | (59 | ) | - | 108 | |||||||||||||||||||||||
| Insurance and investment product fees and other | - | 127 | - | 127 | - | 3 | 8 | (ff) | 138 | |||||||||||||||||||||||
| Total revenues | - | 1,139 | 150 | 1,289 | (19 | ) | 8 | 8 | 1,286 | |||||||||||||||||||||||
| Benefits and expenses: | ||||||||||||||||||||||||||||||||
| Benefits and other changes in policy reserves | - | 791 | 153 | 944 | (45 | )(gg) | (49 | ) | - | 850 | ||||||||||||||||||||||
| Acquisition and operating expenses, net of deferrals | 1 | 119 | 10 | 130 | (2 | )(bb) | - | 41 | (ff) | 169 | ||||||||||||||||||||||
| Amortization of intangibles | - | 54 | - | 54 | 68 | (aa) | - | - | 122 | |||||||||||||||||||||||
| Total benefits and expenses | 1 | 964 | 163 | 1,128 | 21 | (49 | ) | 41 | 1,141 | |||||||||||||||||||||||
| Income (loss) from operations | (1 | ) | 175 | (13 | ) | 161 | (40 | ) | 57 | (33 | ) | 145 | ||||||||||||||||||||
| Interest income | 1 | - | - | 1 | - | - | - | 1 | ||||||||||||||||||||||||
| Interest expense | - | (22 | ) | - | (22 | ) | - | - | - | (22 | ) | |||||||||||||||||||||
| Income (loss) before income taxes | - | 153 | (13 | ) | 140 | (40 | ) | 57 | (33 | ) | 124 | |||||||||||||||||||||
| Income tax (benefit) expense | - | 56 | 6 | 62 | (14 | )(cc) | 21 | (12 | )(cc) | 57 | ||||||||||||||||||||||
| Net income (loss) | $ | - | $ | 97 | $ | (19 | ) | $ | 78 | $ | (26 | ) | $ | 36 | $ | (21 | ) | $ | 67 | |||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||||||||||
| Basic | 18,560,652 | (4) | 214,370,000 | |||||||||||||||||||||||||||||
| Diluted | 18,560,652 | (4) | 214,370,000 | |||||||||||||||||||||||||||||
| Net earnings per share | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.02 | ) | $ | 0.18 | |||||||||||||||||||||||||||
| Diluted | $ | (0.02 | ) | $ | 0.18 | |||||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
| For
the Nine Months Ended September 30, 2017 | For
the Nine Months Ended June 30, 2017 | Purchase | For
the Nine Months Ended September 30, 2017 | |||||||||||||||||||||||||||||
| CF
Corp. (Historical) | FGL (Historical) | FSR (Historical) | Combined | Accounting Adjustments | Intercompany Eliminations (dd) | Pro
Forma Adjustments | Combined
Pro Forma | |||||||||||||||||||||||||
| (in millions, except share and per share data) | ||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| Premiums | $ | - | $ | 26 | $ | - | $ | 26 | $ | - | $ | 1 | $ | - | $ | 27 | ||||||||||||||||
| Net investment income | - | 744 | - | 744 | (14 | )(ee) | 35 | - | 765 | |||||||||||||||||||||||
| Net investment gains | - | 199 | 60 | 259 | - | (33 | ) | - | 226 | |||||||||||||||||||||||
| Insurance and investment product fees and other | - | 125 | - | 125 | - | 2 | 6 | (ff) | 133 | |||||||||||||||||||||||
| Total revenues | - | 1,094 | 60 | 1,154 | (14 | ) | 5 | 6 | 1,151 | |||||||||||||||||||||||
| Benefits and expenses: | ||||||||||||||||||||||||||||||||
| Benefits and other changes in policy reserves | - | 523 | 61 | 584 | (34 | )(gg) | (9 | ) | - | 541 | ||||||||||||||||||||||
| Acquisition and operating expenses, net of deferrals | 20 | 101 | 8 | 129 | (1 | )(bb) | - | 18 | (ff)(hh) | 146 | ||||||||||||||||||||||
| Amortization of intangibles | - | 207 | - | 207 | 25 | (aa) | - | - | 232 | |||||||||||||||||||||||
| Total benefits and expenses | 20 | 831 | 69 | 920 | (10 | ) | (9 | ) | 18 | 919 | ||||||||||||||||||||||
| Income (loss) from operations | (20 | ) | 263 | (9 | ) | 234 | (4 | ) | 14 | (12 | ) | 232 | ||||||||||||||||||||
| Interest income | 3 | - | - | 3 | - | - | - | 3 | ||||||||||||||||||||||||
| Interest expense | - | (18 | ) | - | (18 | ) | - | - | - | (18 | ) | |||||||||||||||||||||
| Income (loss) before income taxes | (17 | ) | 245 | (9 | ) | 219 | (4 | ) | 14 | (12 | ) | 217 | ||||||||||||||||||||
| Income tax (benefit) expense | - | 84 | 2 | 86 | (2 | )(cc) | 5 | (4 | )(cc) | 85 | ||||||||||||||||||||||
| Net income (loss) | $ | (17 | ) | $ | 161 | $ | (11 | ) | $ | 133 | $ | (2 | ) | $ | 9 | $ | (8 | ) | $ | 132 | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||||||||||
| Basic | 20,541,255 | (4) | 214,370,000 | |||||||||||||||||||||||||||||
| Diluted | 20,541,255 | (4) | 214,370,000 | |||||||||||||||||||||||||||||
| Net earnings per share | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.84 | ) | $ | 0.55 | |||||||||||||||||||||||||||
| Diluted | $ | (0.84 | ) | $ | 0.55 | |||||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
| 1. | Description of each of the business combination and Share Purchase and Basis of Presentation |
Description of each of the business combination and Share Purchase
Effective May 24, 2017, CF Corp., FGL and FSR reached agreements under which CF Corp. would concurrently acquire all of the outstanding equity of the aforementioned entities pursuant to the business combination and Share Purchase. On November 30, 2017, CF Corp. completed its acquisitions of FGL and FSR.
FGL provides its principal life and annuity products through its insurance subsidiaries, FGLIC and Fidelity & Guaranty Life Insurance Company of New York. FGL’s customers range across a variety of age groups and are concentrated in the middle-income market. FGL’s fixed indexed annuities provide for pre-retirement wealth accumulation and post-retirement income management. FGL’s life insurance provides wealth protection and transfer opportunities through indexed universal life products. Life and annuity products are primarily distributed through independent marketing organizations and independent insurance agents.
FSR provides life and annuity reinsurance services, such as reinsurance on asset intensive, long duration life and annuity liabilities.
CF Corp. acquired FGL in exchange for cash consideration of $31.10 per share of FGL common stock totaling approximately $1.8 billion. CF Corp. concurrently acquired FSR for cash consideration of $65 million, subject to certain adjustments. In addition, HRG, FS Holdco, CF Corp. and Parent agreed that FS Holdco may, at its option, cause Parent and FS Holdco to make a joint election under Section 338(h)(10) of the Code with respect to the business combination and the deemed share purchases of FGL’s subsidiaries. If FS Holdco opts to make such an election, it will be required to pay Parent $30 million, plus additional specified amounts determined by reference to FGL’s incremental current tax costs attributable to the election, if any, and Parent will be required to pay FS Holdco additional specified amounts determined by reference to FGL’s incremental current tax savings attributable to the election, if any.
Consideration for the business combination and Share Purchase was funded through the following sources and transactions:
| · | Investments and cash equivalents held in the Trust Account of up to $694 million related to CF Corp.’s initial public offering of Class A ordinary shares. The proceeds will become available upon consummation of the business combination; |
| · | The sale of 51,000,000 ordinary shares pursuant to the forward purchase agreements, resulting in gross proceeds of $510 million; |
| · | The sale of 36,000,000 ordinary shares pursuant to certain equity commitment letters, resulting in gross proceeds of $360 million; |
| · | The sale of 20,000,000 ordinary shares in connection with the rights of first offer contained in the forward purchase agreements, resulting in gross proceeds of $200 million; and |
| · | The sale of Series A and Series B Redeemable Preferred Shares of CF Corp. and 8,370,000 common shares to GSO and FNF or their respective designees resulting in gross proceeds of $375 million. The preferred shares carry a paid-in-kind dividend option at the Combined Company’s election. The unaudited pro forma condensed combined financial information does not reflect the payment of such in-kind dividends due to management’s discretion on exercising said option. |
Basis of Presentation
Each of FGL and FSR constitutes a business, with inputs, processes, and outputs. Accordingly, each of the business combination and Share Purchase constitutes the acquisition of a business for purposes of ASC 805, and due to the changes in control from the business combination and Share Purchase, are accounted for using the acquisition method.
Under the acquisition method, the acquisition date fair value of the gross consideration paid by CF Corp. to effect each of the business combination and Share Purchase was allocated to the assets acquired and the liabilities assumed based on their estimated fair values, as described in Note 5 below. Management has made significant estimates and assumptions in determining the preliminary allocation of the gross consideration transferred in the unaudited pro forma condensed combined financial information and in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded, including the determination of any goodwill or bargain purchase gain recorded as a result of the business combination or Share Purchase, may differ materially from the information presented.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the business combination and Share Purchase.
| 6 |
The pro forma adjustments reflecting the consummation of the business combination and Share Purchase are based on certain currently available information and certain assumptions and methodologies that CF Corp. believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments may be revised as additional information becomes available and alternative valuation methodologies are evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. CF Corp. believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the business combination and Share Purchase contemplated based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the business combination and Share Purchase taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the Combined Company. They should be read in conjunction with the historical financial statements and notes thereto of CF Corp., FGL and FSR.
| 2. | Accounting Policies |
Upon consummation of each of the business combination and Share Purchase, CF Corp. will perform a comprehensive review of FGL’s and FSR’s accounting policies. As a result of the review, management may identify differences between the accounting policies of FGL and FSR which, when conformed, could have a material impact on the financial statements of the Combined Company. Based on its initial analysis, management did not identify any differences that would have a material impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.
| 3. | Adjustments to Unaudited Pro Forma Condensed Combined Financial Information |
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Transactions and has been prepared for informational purposes only.
The pro forma combined consolidated provision for income taxes does not necessarily reflect the amounts that would have resulted had the Combined Company filed consolidated income tax returns during the periods presented.
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined consolidated statements of operations are based upon the number of CF Corp.’s shares outstanding, assuming the Transactions occurred on January 1, 2016.
| 7 |
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The purchase accounting adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2017 are as follows:
| (a) | Represents the use of the consideration pursuant to the Merger Agreement and the Share Purchase Agreement to purchase all of the outstanding equity ownership of FGL and FSR. |
| (in millions except share and per share data) | ||||
| Shares of FGL common stock outstanding as of the Merger Agreement | 58,933,415 | |||
| Cash consideration per share to FGL common stockholders | $ | 31.10 | ||
| Estimated cash consideration to FGL common stockholders | $ | 1,833 | ||
| Estimated cash consideration for FGL outstanding stock-based compensation awards | 4 | (1) | ||
| Estimated total consideration for FGL | 1,837 | |||
| Estimated total consideration for FSR | 65 | |||
| Total estimated consideration | $ | 1,902 | ||
| (1) | Excludes amounts paid to redeem certain of FGL’s outstanding unvested stock-based compensation awards as of the date of the Merger Agreement which were determined to relate to post-business combination service periods and will be expensed in CF Corp.’s post-business combination financial statements. Amounts related to FGL’s outstanding unvested stock-based compensation awards were allocated between business combination consideration and post-business combination stock-based compensation expense based on an analysis of the total and remaining service periods related to the settled awards. Amounts related to post-business combination service periods were excluded from the unaudited pro forma condensed combined statements of operations as they were determined not to have a continuing effect. This allocation has been performed assuming the business combination occurred on September 30, 2017 and is expected to change based on the actual business combination date. |
| (b) | Reflects the acquisition method of accounting based on the estimated fair value of the assets and liabilities of FGL and FSR as discussed in Note 5 below. FSR’s assets and liabilities are primarily reported at their fair values and no material adjustments to its tangible net assets have been currently identified. The fair value of assets acquired and liabilities assumed related to FGL and FSR exceeded the attributable consideration related to the business combination and Share Purchase. Therefore, bargain purchase gains of $24 million and $39 million, respectively, have been reflected in the unaudited pro forma condensed combined balance sheet. This gain has been excluded from the unaudited pro forma condensed combined statements of operations as it was determined to not have a continuing effect. Additional information regarding the estimated fair value of identifiable intangible assets acquired and the tax effect of the purchase accounting is discussed below. |
| FGL | FSR | Total | ||||||||||
| (in millions) | ||||||||||||
| Commercial mortgage loans – carrying value | $ | 547 | $ | — | $ | 547 | ||||||
| Commercial mortgage loans – fair value | 552 | — | 552 | |||||||||
| Net purchase accounting adjustment | $ | 5 | $ | — | $ | 5 | ||||||
| Other investments(1) – carrying value | $ | 185 | $ | — | $ | 185 | ||||||
| Other investments – fair value | 182 | — | 182 | |||||||||
| Net purchase accounting adjustment | $ | (3 | ) | $ | — | $ | (3 | ) | ||||
| Reinsurance recoverables – carrying value | $ | 3,375 | — | $ | 3,375 | |||||||
| Reinsurance recoverables – fair value | 3,415 | — | 3,415 | |||||||||
| Net purchase accounting adjustment | $ | 40 | — | $ | 40 | |||||||
| Intangibles, net – carrying value | $ | 1,129 | $ | — | $ | 1,129 | ||||||
| Intangibles, net – fair value | 1,382 | — | 1,382 | |||||||||
| Net purchase accounting adjustment(3) | $ | 253 | $ | — | $ | 253 | ||||||
| Other assets(2) – carrying value | $ | 202 | $ | 27 | $ | 229 | ||||||
| Other assets – fair value | 176 | 27 | 203 | |||||||||
| Net purchase accounting adjustment | $ | (26 | ) | $ | — | $ | (26 | ) | ||||
| Contractholder funds – carrying value | $ | 20,792 | $ | — | $ | 20,792 | ||||||
| Contractholder funds(4) – fair value | 21,488 | — | 21,488 | |||||||||
| Net purchase accounting adjustment | $ | 696 | $ | — | $ | 696 | ||||||
| Debt – carrying value | $ | 300 | $ | — | $ | 300 | ||||||
| Debt – fair value | 309 | — | 309 | |||||||||
| Net purchase accounting adjustment | $ | 9 | $ | — | $ | 9 | ||||||
| Other liabilities – carrying value | $ | 897 | $ | 6 | $ | 903 | ||||||
| Other liabilities – fair value | 874 | 6 | 880 | |||||||||
| Net purchase accounting adjustment(5) | $ | (23 | ) | $ | — | $ | (23 | ) | ||||
| (1) | Related to policy loans held within other investments. |
| 8 |
| (2) | Related to elimination of leasehold improvements and certain fixed assets that are written off due to no ascribed value. |
| (3) | Reflects the elimination of FGL’s historical Deferred Acquisition Cost (“DAC”) ($1.1 billion) balance as well as recognition of new Value of Business Acquired (“VOBA”) resulting from the acquisition ($1.3 billion) and other intangible assets ($71 million) as further described below. The VOBA, when combined with the carrying value of the insurance liabilities, produces a fair value of those liabilities. VOBA is based on actuarially determined projections, by each line of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns and other factors. Actual experience of the purchased business may vary from these projections. VOBA is amortized in relation to estimated gross profits or premiums, depending on product type. For interest-sensitive products, if estimated gross profits differ from expectations, the amortization of VOBA will be adjusted to reflect actual experience. The net adjustment to amortization as a result of eliminating the historical DAC and VOBA is included in adjustment (aa). |
| (4) | Adjustment to record contractholder funds at fair value. |
| (5) | Reflects the elimination of deferred reinsurance revenue. |
| (c) | The following intercompany eliminations between FGL and FSR related to reinsurance ceded by FGL and assumed by FSR upon consolidation by CF Corp. are reflected in these adjustments: |
| (in millions) | ||||
| Assets | ||||
| Related party investments | (6 | ) | ||
| Related party loans | (71 | ) | ||
| Funds withheld receivables | (902 | ) | ||
| Reinsurance recoverables | (1,016 | ) | ||
| Other assets(1) | (103 | ) | ||
| Liabilities | ||||
| Funds withheld for reinsurance liabilities | (1,081 | ) | ||
| Insurance reserves | (976 | ) | ||
| (1) | Reflects elimination of a funds withheld asset embedded derivative resulting from the reinsurance treaty between FGL and FSR. |
| (d) | Represents adjustments to reflect the deferred tax impact of purchase accounting adjustments, resulting in the reversal of FGL’s historical deferred tax liability and the recording of net deferred tax liabilities of $35 million and none for FGL and FSR, respectively, based on a 35% effective tax rate. |
| 9 |
| (e) | Reflects the elimination of FGL’s and FSR’s historical equity accounts. |
| FGL | FSR | Total | ||||||||||
| (in millions) | ||||||||||||
| Common stock | $ | (1 | ) | $ | — | $ | (1 | ) | ||||
| Additional paid-in capital | (716 | ) | (170 | ) | (886 | ) | ||||||
| Retained earnings (accumulated deficit) | (1,000 | ) | 66 | (934 | ) | |||||||
| Accumulated other comprehensive income | (543 | ) | — | (543 | ) | |||||||
| Treasury stock | 13 | — | 13 | |||||||||
| Total adjustment | $ | (2,247 | ) | $ | (104 | ) | $ | (2,351 | ) | |||
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2017 are as follows:
| (f) | Represents the reclassification of $694 million of cash and cash equivalents held in the trust account that becomes available following the business combination. |
| (g) | Reflects the payment of $2 million of cash bonuses payable to certain executives of FGL contingent upon completion of the business combination. Such bonuses have been excluded from the unaudited pro forma condensed combined statements of operations as they do not have a continuing impact on the Combined Company. |
| (h) | Reflects the payment of $25 million related to certain stock-based compensation awards of FGL and FGLH that were accelerated and redeemed pursuant to the business combination. |
| (i) | Reflects the receipt of gross proceeds of $375 million from the sale of preferred shares, and 8,370,000 ordinary shares net of $13 million in transaction costs. |
| (j) | Reflects the receipt of gross proceeds of $510 million from the sale of 51,000,000 ordinary shares and 19,083,335 warrants pursuant to the forward purchase agreements. $20 million of related underwriting discounts and commissions were previously accrued. The payment of such amounts is included in adjustment (l). |
| (k) | Reflects the receipt of gross proceeds of $360 million from the sale of 36,000,000 ordinary shares pursuant to certain equity commitment letters, net of $35 million in transaction costs. |
| (l) | Reflects the payment of $45 million of deferred underwriting commissions and placement agent fees contingent upon completion of the business combination. |
| (m) | Reflects fees of $3 million paid related to the Company’s Senior Unsecured Revolving Credit Agreement and $9 million paid related to the Company’s solicitation of consents from holders of its 6.375% Senior Notes due 2021, which occurred in connection with the business combination. Such expenses were capitalized as components of other assets and against the carrying amount of the Notes, respectively. |
| (n) | Reflects the payment of $61 million of transaction costs incurred in connection with the business combination and Share Purchase, including adjustments to accounts payable and accrued expenses and accrued commitment fee for costs previously accrued, as well as retained earnings for expected to be incurred. |
| (o) | Reflects the receipt of gross proceeds of $200 million from the sale of 20,000,000 ordinary shares in connection with the rights of first offer contained in the forward purchase agreements. $8 million of related underwriting discounts and commissions were previously accrued. The payment of such amounts is included in adjustment (l). |
Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
The purchase accounting and pro forma adjustments included in the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017 are as follows:
| (aa) | Represents the sum of the adjustments to record amortization expense related to identifiable definite lived intangible assets. Such intangibles have been amortized using the straight-line method. |
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| Year Ended December 31, 2016 | Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
| FGL | FSR | Total | FGL | FSR | Total | |||||||||||||||||||
| Historical amortization recognized on DAC and VOBA | $ | 54 | $ | - | $ | 54 | $ | 207 | $ | - | $ | 207 | ||||||||||||
| Amortization after fair value (including VOBA and other intangibles) | 122 | - | 122 | 232 | - | 232 | ||||||||||||||||||
| Amortization expense adjustment for the period | $ | 68 | $ | - | $ | 68 | $ | 25 | $ | - | $ | 25 | ||||||||||||
| (bb) | Represents the elimination of depreciation and amortization expense related to written-off fixed assets and leasehold improvements. |
| (cc) | Represents adjustment to income tax expense as a result of the tax impact on the pro forma adjustments related to purchase accounting and pro forma adjustments based on a statutory tax rate of 35% to compute the income tax expense related to the unaudited pro forma condensed combined statements of operations. |
| Year Ended December 31, 2016 | Nine Months Ended September 30, 2017 | |||||||||||||||
| Purchase Accounting Adjustments | Pro Forma Adjustments | Purchase Accounting Adjustments | Pro Forma Adjustments | |||||||||||||
| Pro forma net income (loss) before income taxes | $ | (40 | ) | $ | (33 | ) | $ | (4 | ) | $ | (12 | ) | ||||
| Effective tax rate | 35 | % | 35 | % | 35 | % | 35 | % | ||||||||
| Income tax (benefit) expense | $ | (14 | ) | $ | (12 | ) | $ | (2 | ) | $ | (4 | ) | ||||
| (dd) | Reflects adjustments to eliminate intercompany transactions between FGL and FSR: |
| Year Ended December 31, 2016 | Nine Months Ended September 30, 2017 | |||||||
| Premiums | 3 | 1 | ||||||
| Net investment income | 61 | 35 | ||||||
| Net investment gains (losses) | (59 | ) | (33 | ) | ||||
| Insurance and investment product fees and other | 3 | 2 | ||||||
| Benefits and other changes in policy reserves | 49 | 9 | ||||||
| Income tax (benefit) expense | (21 | ) | (5 | ) | ||||
| Impact to net income (loss) | 36 | 9 | ||||||
| (ee) | Represents adjustment to net investment income to amortize the fair value adjustment to FGL’s investments. |
| (ff) | Reflects the payment of an investment management fee, calculated as 30 bps of assets under management, from FGLIC to the Investment Manager as well as the payment of an investment administration services fee, calculated as 4 bps of assets under management, from the Investment Manager to FGLIC, in each case pursuant to agreements entered into in connection with the business combination and Share Purchase. The Company and the Investment Manager have agreed that the Investment Manager will forego approximately 30% of the first thirteen months' investment management fee. |
| (gg) | Represents the amortization of contract holder funds resulting from the increase in fair value of reserves upon acquisition of FGL. |
| (hh) | Represents the elimination of $28 million of nonrecurring transaction costs included in the historical statements of operations of CF Corp. and FGL that are directly related to the business combination and Share Purchase. The historical statements of operations of FSR include no such costs. |
| 11 |
| 4. | Earnings per Share |
Represents the net earnings per share calculated using the historical weighted average CF Corp. ordinary shares and the issuance of additional shares in connection with the business combination and Share Purchase, assuming the shares were outstanding since January 1, 2016:
| Combined Pro Forma Basic and Diluted Weighted Average Shares | ||||
| Founders shares | 30,000,000 | |||
| Issued shares as consideration for membership units purchased in IPO | 69,000,000 | |||
| Share purchases pursuant to forward purchase agreements | 51,000,000 | |||
| Share purchases pursuant to the equity commitments | 36,000,000 | |||
| Share purchases by the ROFO participants | 20,000,000 | |||
| Shares issued pursuant to the GSO and FNF Investment Agreement | 8,370,000 | |||
| Pro forma weighted average shares (basic and diluted) | 214,370,000 | |||
| Year Ended December 31, 2016 | Nine Months September 30, | |||||||
| Pro forma net income | 67 | 132 | ||||||
| Preferred share interest | 28 | 14 | ||||||
| Pro forma net income (loss) attributable to common shareholders | 39 | 118 | ||||||
| Basic earnings (loss) per share | $ | 0.18 | $ | 0.55 | ||||
| Diluted earnings (loss) per share | $ | 0.18 | $ | 0.55 | ||||
| 12 |
| 5. | Estimated Fair Value of Assets Acquired and Liabilities Assumed |
The preliminary allocation of the consideration to the tangible and intangible assets acquired and liabilities assumed is based on various preliminary estimates. Since this unaudited pro forma condensed combined financial information has been prepared based on preliminary estimates, the actual amounts recorded for the acquisition, including the determination of any goodwill or bargain purchase gain recorded as a result of the business combination or Share Purchase, may differ from the information presented.
Allocation of consideration
| FGL | FSR | |||||||
| (in millions) | ||||||||
| Fixed maturity securities, available-for-sale | $ | 21,154 | $ | — | ||||
| Equity securities, available-for-sale | 773 | — | ||||||
| Derivative investments | 413 | — | ||||||
| Commercial mortgage loans | 552 | — | ||||||
| Other invested assets | 182 | — | ||||||
| Related party investments | — | 98 | ||||||
| Total investments | 23,074 | 98 | ||||||
| Related party loans | 71 | — | ||||||
| Funds withheld receivable | — | 1,648 | ||||||
| Cash and cash equivalents | 885 | 29 | ||||||
| Accrued investment income | 231 | — | ||||||
| Reinsurance recoverable | 3,415 | — | ||||||
| Intangibles, net | 1,382 | — | ||||||
| Other assets | 176 | 27 | ||||||
| Total identifiable assets acquired | 29,234 | 1,802 | ||||||
| Contractholder funds | (21,488 | ) | — | |||||
| Future policy benefits | (3,412 | ) | — | |||||
| Funds withheld for insurance liabilities | (1,083 | ) | — | |||||
| Liability for policy and contract claims | (67 | ) | — | |||||
| Insurance reserves | — | (1,692 | ) | |||||
| Debt | (309 | ) | — | |||||
| Revolving credit facility | (105 | ) | — | |||||
| Deferred tax liability, net | (35 | ) | — | |||||
| Other liabilities | (874 | ) | (6 | ) | ||||
| Net identifiable liabilities acquired | 1,861 | 104 | ||||||
| Bargain purchase gain(1) | (24 | ) | (39 | ) | ||||
| Total gross consideration | $ | 1,837 | $ | 65 | ||||
| (1) | The fair value of assets acquired and liabilities assumed related to FGL and FSR exceeded the attributable consideration related to the business combination and Share Purchase. Therefore, bargain purchase gains of $24 million and $39 million, respectively, have been reflected in the unaudited pro forma condensed combined balance sheet. This gain has been excluded from the unaudited pro forma condensed combined statements of operations as it was determined to not have a continuing effect. |
| 13 |
Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The distribution network intangible asset represents the value of FGL’s existing distribution network, which was determined using the multi-period excess earnings method based on preliminary forecasts for FGL. The trade name intangible asset represents the Fidelity & Guaranty Life trade name which was valued using the relief-from-royalty method giving consideration to publicly available third-party trade name royalty rates as well as expectations for expected premiums over the anticipated life of the asset. The licenses, which represent FGL’s jurisdictional insurance licenses, were valued using the market approach based on third-party market transactions from which the prices paid for state insurance licenses could be derived. In addition to VOBA recognized on the acquisition ($1.3 billion), described above, the preliminary allocation to other intangible assets is as follows:
Intangible assets
| Fair Value | ||||||||||||||
| FGL | FSR | Total | Useful Life | |||||||||||
| (in millions) | ||||||||||||||
| Distribution channels | $ | 44 | $ | — | $ | 44 | 20 years | |||||||
| Trade names | 20 | — | 20 | 10 years | ||||||||||
| Licenses | 7 | — | 7 | indefinite | ||||||||||
| Total intangible assets | $ | 71 | $ | — | $ | 71 | ||||||||
| 14 |