XML 25 R10.htm IDEA: XBRL DOCUMENT
v3.7.0.1

Business Combinations | 12 Months Ended
--- | ---
Dec. 31, 2016
Business Combinations [Abstract] |
Business Combinations | 3. Business Combinations Insurance Segment On December 24, 2015, the Company completed the acquisitions of 100% of the interest in each of the Insurance Companies, as well as all assets owned by the sellers of the Insurance Companies and their affiliates (the "Seller Parties") that are used exclusively or primarily in the business of the Insurance Companies, subject to certain exceptions. The operations of the Insurance Companies formed the basis of our Insurance segment, and we plan to leverage their existing platform and industry expertise to identify strategic growth opportunities for managing closed blocks of long-term care businesses. This transaction was accounted for as a business acquisition. The aggregate consideration paid in connection with the acquisition of the Insurance Companies and related transactions and agreements was valued at $18.7 million, consisting of $7.1 million of cash, $2.0 million in aggregate principal amount of the Company’s 11.0% Notes, 1,007,422 shares of the Company's common stock and five year warrants to purchase 2,000,000 shares of the Company's common stock at an exercise price of $7.08 per share (subject to customary adjustments for stock splits or similar transactions) exercisable on or after February 3, 2016 (the "Warrants"). Purchase Price Allocation The fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles and residual goodwill are summarized as follows (in thousands):
Purchase price allocation |  |
Fixed maturities, available for sale at fair value |  | $ | 1,230,038 |
Equity securities, available for sale at fair value |  | 35,697 |
Mortgage loans |  | 1,252 |
Policy loans |  | 18,354 |
Other investments |  | 183 |
Cash and cash equivalents |  | 48,525 |
Recoverable from reinsurers |  | 522,790 |
Accrued investment income |  | 14,417 |
Goodwill |  | 47,290 |
Intangibles |  | 4,850 |
Other assets |  | 12,566 |
Total assets acquired |  | 1,935,962 |
Life, accident and health reserves |  | (1,592,722 | )
Annuity reserves |  | (259,675 | )
Value of business acquired |  | (51,584 | )
Deferred tax liability |  | (1,704 | )
Other liabilities |  | (11,540 | )
Total liabilities assumed |  | (1,917,225 | )
Total net assets acquired |  | $ | 18,737 |
The acquisition of the Insurance Companies resulted in goodwill of approximately $47.3 million. Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The Insurance Companies were recognized as a new stand-alone reporting unit. Goodwill is not amortized and is not deductible for tax purposes. The Value of Business Acquired ("VOBA") The VOBA was derived using a “Becker-ized” Present Value of Distributable Earnings (“PVDE”) method. The PVDE was derived using the statutory after tax profits. The VOBA was valued at $51.6 million and is amortized over the anticipated remaining future lifetime of the acquired long-term care blocks of business. VOBA is amortized in relation to the projected future premium of the acquired long-term care blocks of business. Reinsurance Recoverable The reinsurance recoverable balance represents amounts recoverable from third parties. U.S. GAAP requires insurance reserves and reinsurance recoverable balances to be presented on a gross basis, as opposed to US statutory accounting principles, where reserves are presented net of reinsurance. Accordingly, the Company grossed up the fair value of the net insurance contract liability for the amount of reinsurance of approximately $515.9 million, to arrive at a gross insurance liability, and recognized an offsetting reinsurance recoverable amount of approximately $515.9 million. As part of this process, management considered reinsurance counterparty credit risk and considers it to have an immaterial impact on the reinsurance fair value gross-up. To mitigate this risk substantially all reinsurance is ceded to companies with investment grade S&P ratings. Amounts recoverable from reinsurers were estimated in a manner consistent with the liability associated with the reinsured policies and were an estimate of the reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported. Reinsurance recoverable represent expected cash inflows from reinsurers for liabilities ceded and therefore incorporate uncertainties as to the timing and amount of claim payments. Reinsurance recoverable includes the balances due from reinsurers under the terms of the reinsurance agreements for these ceded balances as well as settlement amounts currently due. Contingent Liability Pursuant to the purchase agreement, the Company also agreed to pay to the Seller Parties, on an annual basis with respect to the years 2015 through 2019, the amount, if any, by which the Insurance Companies’ cash flow testing and premium deficiency reserves decrease from the amount of such reserves as of December 31, 2014, up to $13.0 million. The balance is calculated based on the annual fluctuation of the statutory cash flow testing and premium deficiency reserves following each of the Insurance Companies' filings with its domiciliary insurance regulator of its annual statutory statements for each calendar year ending December 31, 2015 through and including December 31, 2019. The Company did not set up a contingent liability at acquisition primarily due to the following factors: (i) reduced confidence that treasury rates will increase to historical averages over the near term; (ii) uncertainty around future operating expenses historically performed by the Seller Parties; and (iii) the increase in the premium deficiency reserve as reported at December 31, 2015 of approximately $8.0 million. Given that the balance is cumulative over the period at issue, a decrease of approximately $8.0 million was required before any obligation existed to the Seller Parties under the earn-out). On February 22, 2017, subsequent to determining the Company’s December 31, 2016 cash flow testing and premium deficiency reserves, but prior to the issuance of this Form 10-K, the Company received a significantly higher rate increase from the TDOI than had been assumed in the cash flow testing performed by the Company. As a result of this rate increase, the probability of a payment to the Seller Parties has increased and the Company has estimated that the fair value of the obligation as of December 31, 2016 is a $11.4 million, which was recorded in the current period earnings and is presented within net loss on contingent consideration line of the consolidate statements of operations. The Company will update this assessment at each reporting period through December 31, 2019 or until the $13.0 million is paid in full. Control Level Risk-Based Capital In connection with the consummation of the acquisition, the Company has agreed with the Ohio Department of Insurance (ODOI) that, for five years following the closing of the transaction, it will contribute to CGI cash or marketable securities acceptable to the ODOI to the extent required for CGI’s total adjusted capital to be not less than 400% of CGI’s authorized control level risk-based capital (each as defined under Ohio law and reported in CGI’s statutory statements filed with the ODOI). Similarly, the Company has agreed with the TDOI that, for five years following the closing of the transaction, it will contribute to UTA cash or other admitted assets acceptable to the TDOI to the extent required for UTA’s total adjusted capital to be not less than 400% of UTA’s authorized control level risk-based capital (each as defined under Texas law and reported in UTA’s statutory statements filed with the TDOI). In connection with the consummation of the acquisition of the Insurance Companies, each of the Insurance Companies also entered into a capital maintenance agreement with Great American Financial Resources, Inc. ("GAFRI" and each such agreement, a “Capital Maintenance Agreement,” and collectively, the “Capital Maintenance Agreements”). Under each Capital Maintenance Agreement, if the applicable Insurance Company's total adjusted capital reported in its annual statutory financial statements is less than 400% of its authorized control level risk-based capital, GAFRI will pay cash or assets to the applicable Insurance Company as required to eliminate such shortfall (after giving effect to any capital contributions made by the Company or its affiliates since the date of the relevant annual statutory statement). GAFRI’s obligation to make such payments is capped at $25.0 million under the Capital Maintenance Agreement with UTA and $10.0 million under the Capital Maintenance Agreement with CGI. Each of the Capital Maintenance Agreements will remain in effect from January 1, 2016 to January 1, 2021, or until payments by GAFRI thereunder equal the maximum amount payable under the applicable agreement. The Company will indemnify GAFRI for the amount of any payments made by it under the Capital Maintenance Agreements. Both agreements survived the redomestication of CGI and merger of UTA and CGI. Other Transaction costs incurred in connection with the acquisition of the Insurance Companies were $0.5 million and are included in selling, general and administrative expenses in the consolidated statements of operations. The acquisition costs are primarily related to legal, accounting and valuation services. The Company recorded net revenue of $2.9 million and net loss of $1.6 million from the Insurance Companies for the years ended December 31, 2015. Pro Forma Adjusted Summary The results of operations for the Insurance Companies have been included in the consolidated financial statements subsequent to their acquisition date. The following schedule presents unaudited consolidated pro forma results of operations data as if the acquisition of the Insurance Companies had occurred on January 1, 2015. This information neither purports to be indicative of the actual results that would have occurred if those acquisitions had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):
|  | Year Ended December 31, 2015
Net revenue |  | $ | 1,243,173 |
Net income from continuing operations |  | $ | 23,026 |
Net loss attributable to HC2 |  | $ | 23,202 |
Per share amounts: |  |
Loss from continuing operations |  | $ | (0.87 | )
Net loss attributable to HC2 |  | $ | (0.87 | )
Construction Segment On October 13, 2016, DBMG has acquired the detailing and Building Information Modeling (“BIM”) management business of PDC Global Pty Ltd. (“PDC”). The new businesses provide steel detailing, BIM modelling and BIM management services for industrial and commercial construction projects in Australia and North America. On November 1, 2016, DBMG acquired BDS VirCon ("BDS"). BDS provides steel detailing, rebar detailing and BIM modelling services for industrial and commercial projects in Australia, New Zealand, North America and Europe. The aggregate fair value of the consideration paid in connection with the acquisition of PDC and BDS was $25.5 million, including $21.4 million in cash. Both transactions were accounted for as business acquisitions. The fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles and residual goodwill are summarized as follows (in thousands):
Purchase price allocation |  |
Cash and cash equivalents |  | $ | 621 |
Accounts receivable, net |  | 5,558 |
Costs and recognized earnings in excess of billings on uncompleted contracts |  | 1,686 |
Property, plant and equipment, net |  | 8,043 |
Goodwill |  | 11,827 |
Intangibles |  | 3,955 |
Other assets |  | 1,209 |
Total assets acquired |  | 32,899 |
Accounts payable and other current liabilities |  | (5,924 | )
Billings in excess of costs and recognized earnings on uncompleted contracts |  | (617 | )
Deferred tax liability |  | (169 | )
Other liabilities |  | (685 | )
Total liabilities assumed |  | (7,395 | )
Total net assets acquired |  | $ | 25,504 |
The preliminary allocation of the fair value of the acquired businesses was based upon a preliminary valuation. Our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period. The primary areas of preliminary allocation of the fair values of consideration transferred that are not yet finalized relate to the fair values of certain tangible and intangible assets acquired and the residual goodwill. We expect to complete the purchase price allocation for fiscal year 2016 acquisitions during fiscal year 2017. Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Among the factors that contributed to goodwill was approximately $2.9 million assigned to the assembled and trained workforce. Goodwill is not amortized and is not deductible for tax purposes. Acquisition costs incurred by DMBG totaled $2.3 million for the year ended December 31, 2016 and are included in selling, general and administrative expenses in the consolidated statements of operations. The acquisition costs are primarily related to legal, accounting and valuation services. PDC's and BDS' results since respective acquisition dates were included in our consolidated statement of operations for the year ended December 31, 2016. Pro forma results of operations for the acquisition of PDC and BDS have not been presented because they are not material to our consolidated results of operations. Energy Segment For the year ended December 31, 2016, ANG completed three acquisitions of twenty-one fueling stations in aggregate. The total fair value of the consideration transferred by ANG in connection with the acquisitions was $42.1 million, comprised of $39.2 million cash and a $2.9 million 4.25% seller note, due in 2022, see Note 13. Long-term Obligations for further details. Both transactions were accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets related to acquired stations and did not meet the definition of a business under ASU 2017-01 For the transaction accounted for as a business combination, the fair value of consideration transferred was allocated among the identified assets acquired, liabilities assumed, intangibles and residual goodwill. For the two transactions accounted for as asset acquisitions the fair value of consideration transferred was allocated based on the relative fair value (in thousands):
Purchase price allocation |  |
Accounts receivable |  | $ | 1,303 |
Property, plant and equipment, net |  | 42,690 |
Goodwill |  | 1,257 |
Intangibles |  | 4,984 |
Other assets |  | 79 |
Total assets acquired |  | 50,313 |
Accounts payable and other current liabilities |  | (856 | )
Deferred tax liability |  | (7,060 | )
Total liabilities assumed |  | (7,916 | )
Bargain purchase gain |  | (340 | )
Total net assets acquired |  | $ | 42,057 |
The preliminary allocation of the fair value of the acquired businesses was based upon a preliminary valuation. Our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period. The primary areas of preliminary allocation of the fair values of consideration transferred that are not yet finalized relate to the fair values of certain property, plant and equipment, deferred tax liability, intangible assets acquired and the residual goodwill. We expect to complete the purchase price allocation for fiscal year 2016 acquisitions during fiscal year 2017. Approximately $5.0 million of the fair value of consideration transferred has been provisionally assigned to customer contracts with an estimated useful life ranging between four and fifteen years. The multi-period excess earnings method was used to assign fair value to the acquired customer contracts. Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Goodwill is not amortized and is not deductible for tax purposes. Results of operations from the acquired stations since acquisition dates have been included in our consolidated statement of operations for the year ended December 31, 2016. Pro forma results of operations for ANG's acquisitions have not been presented because they are not material to our consolidated results of operations. Other Acquisitions During the year ended December 31, 2016 we completed the acquisition of additional interests in and thereby control of NerVve and BeneVir, and acquired a 60% controlling interest in CWind Limited ("CWind") with an obligation to purchase the remaining 40% in equal amounts on September 30, 2016 and September 30, 2017 (based on agreed financial targets). The total consideration transferred for these acquisitions was $14.9 million, including $9.2 million in cash. On November 1, 2016, we completed the renegotiation of the deferred purchase obligation to purchase the outstanding 40% minority interest of CWind. All three transactions were accounted for as business acquisitions. Results of operations from other acquisitions since the respective acquisition dates have been included in our consolidated statement of operations for the year ended December 31, 2016. Pro forma results of operations for other acquisitions have not been presented because they are not material to our consolidated results of operations. We have preliminarily allocated the purchase price of these acquired businesses to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We are in the process of completing the valuation of identifiable intangible assets, fixed assets and debt; therefore, the fair values set forth below are subject to adjustment upon finalization of the valuations. The amounts in respect of these potential adjustments could be significant. We expect to complete the purchase price allocation for fiscal year 2016 acquisitions during fiscal year 2017. The following table summarizes the preliminary allocation of the purchase price to the fair value of identifiable assets acquired, liabilities assumed, intangibles and residual goodwill (in thousands):
Purchase price allocation |  |
Cash and cash equivalents |  | $ | 2,963 |
Restricted cash |  | 3 |
Accounts receivable |  | 6,400 |
Inventory |  | 528 |
Property, plant and equipment, net |  | 29,896 |
Goodwill |  | 5,541 |
Intangibles |  | 7,082 |
Other assets |  | 2,051 |
Total assets acquired |  | 54,464 |
Accounts payable and other current liabilities |  | (11,180 | )
Deferred tax liability |  | (2,819 | )
Long-term obligations |  | (20,813 | )
Other liabilities |  | (3 | )
Noncontrolling interest |  | (815 | )
Total liabilities assumed |  | (35,630 | )
Enterprise value |  | 18,834 |
Less fair value of noncontrolling interest |  | 3,889 |
Total net assets acquired |  | $ | 14,945 |

X
- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1497-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1490-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1392-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1486-128463 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4845-128472 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1500-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1524-128463 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4922-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4934-128472 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=56956791&loc=d3e4926-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=56956515&loc=d3e1383-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 + Details
Name: | us-gaap_BusinessCombinationDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration

X
- References No definition available. + Details
Name: | us-gaap_BusinessCombinationsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration