MetLife 2011 Annual Report Download - page 120

MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The value of VODA and VOCRA, included in other assets, reflects the estimated fair value of ALICO’s distribution agreements and customer
relationships acquired at November 1, 2010 and will be amortized over the useful lives. Each year the Company reviews VODA and VOCRA to
determine the recoverability of these balances.
The use of discount rates was necessary to establish the fair value of VOBA and the identifiable intangibles. In selecting the appropriate discount
rates, management considered its weighted average cost of capital, as well as the weighted average cost of capital required by market participants. The
fair value of acquired liabilities was determined using risk free rates adjusted for a nonperformance risk premium. The nonperformance adjustment was
determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife Inc.’s debt, including related
credit default swaps. These observable spreads were then adjusted to reflect the priority of these liabilities, the claims paying ability of the insurance
subsidiaries compared to MetLife, Inc. and, as necessary, the relative credit spreads of the liabilities’ currencies of denomination as compared to USD
spreads.
The fair values of business acquired, distribution agreements and customer relationships and the weighted average amortization periods were as
follows as of November 1, 2010:
November 1, 2010 Weighted Average Amortization Period
(In millions) (In years)
VOBA .................................................................... $9,210 8.2
VODA and VOCRA .......................................................... 341 10.3
Total value of amortizable intangible assets acquired .............................. $9,551 8.6
Negative VOBA
For certain acquired blocks of business, the estimated fair value of acquired liabilities exceeded the initial policy reserves assumed at the Acquisition
Date, resulting in negative VOBA of $4.4 billion recorded at the Acquisition Date. Negative VOBA is recorded in other policy-related balances. See Note
8. The following summarizes the major blocks of business, all included within the Japan segment, for which negative VOBA was recorded and
describes why the fair value of the liabilities associated with these blocks of business exceeded the initial policy reserves assumed:
‰Fixed Annuities – This block of business provides a fixed rate of return to the policyholders. A decrease in market interest rates since the time of
issuance was the primary driver that resulted in the fair value of the liabilities associated with this block being significantly greater than the initial
policy reserves assumed at the Acquisition Date.
‰Interest Sensitive Whole Life and Retirement Savings Products – These contracts contain guaranteed minimum benefit features. The recorded
reserves for these guarantees increase ratably over the life of the policies in relation to future gross revenues. In contrast, the fair value of the
guaranteed minimum benefit component of the initial policy reserves assumed represents the amount that would be required to be transferred to a
market participant to assume the full liability at the acquisition date, implicitly incorporating market participant views as to all expected future cash
flows. This results in a fair value significantly in excess of the initial guaranteed minimum benefit liability assumed at the Acquisition Date.
Trademark Assets
In connection with the Acquisition, the Company recognized $47 million in trademark assets recorded in other assets. The fair value of the trademark
assets will be recognized ratably over their expected useful lives which is generally between five to 10 years.
Indemnification Assets and Contingent Consideration
The stock purchase agreement dated as of March 7, 2010, as amended by and among MetLife, Inc., AIG and AM Holdings (formerly known as
ALICO Holdings LLC) (the “Stock Purchase Agreement”) and related agreements include indemnification provisions that allocate the risk of losses arising
out of contingencies or other uncertainties that existed as of the Acquisition Date in accordance with the terms, and subject to the limitations and
procedures, provided by such provisions. As applicable, the Company recognizes an indemnification asset at the same time that it recognizes the
indemnified item, measured on the same basis as the indemnified item. The Company recognized the following indemnification assets and
contingencies as of the Acquisition Date in accordance with the indemnification provisions of the Stock Purchase Agreement and related agreements:
Investments — The Company established indemnification assets for the fair value of amounts expected to be recovered from defaults of
certain fixed maturity securities, CMBS and mortgage loans. These indemnification assets were included in other invested assets at
December 31, 2011 and 2010.
Litigation — The Company established indemnification assets associated with certain settlements expected to be made in connection with
the suspension of withdrawals from certain unit-linked funds offered to certain policyholders. These indemnification assets were included in other
assets at December 31, 2011 and 2010.
Section 338 Election — See Note 1.
The Company recognized an aggregate amount of $574 million for indemnification assets as of the Acquisition Date in accordance with the
indemnification provisions of the Stock Purchase Agreement and related agreements.
Contingent Consideration —The Company has guaranteed that the fair value of a fund of assets backing certain U.K. unit-linked contracts will have
a value of at least £1 per unit on July 1, 2012. If the shortfall between the aggregate guaranteed amount and the fair value of the fund exceeds
£106 million (as adjusted for withdrawals), AIG will pay the difference to the Company and, conversely, if the shortfall at July 1, 2012 is less than
£106 million, the Company will pay the difference to AIG. The Company believes that the fair value of the fund will equal or exceed the aggregate
guaranteed amount by July 1, 2012. The contingent consideration liability was $109 million at December 31, 2011 and $88 million at the Acquisition
Date. The increase in the contingent consideration liability amount from the Acquisition Date to December 31, 2011 was recorded in net derivative gains
(losses) in the consolidated statement of operations.
Branch Restructuring
On March 4, 2010, American Life entered into a closing agreement (the “Closing Agreement”) with the Commissioner of the Internal Revenue
Service (“IRS”) with respect to a U.S. withholding tax issue arising as a result of payments made by its foreign branches. The Closing Agreement
116 MetLife, Inc.