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Acquisition | 9 Months Ended
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Sep. 30, 2018
Acquisition [Abstract] |
Acquisitions | 3. Acquisition ﻿ As previously announced, on May 1, 2018, we completed the acquisition of 100% of the capital stock of Liberty Life, which operates a group benefits business (“Liberty Group Business”) and individual life and individual and group annuity business (the “Liberty Life Business”), from Liberty Mutual Insurance Company in a transaction accounted for under the acquisition method of accounting pursuant to Business Combinations Topic 805 (“Topic 805”). The acquisition enables us to increase our market share within the group protection marketplace. ﻿ In connection with the acquisition and pursuant to the Master Transaction Agreement (“MTA”), dated January 18, 2018, which was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 22, 2018, Liberty Life sold the Liberty Life Business on May 1, 2018, by entering into reinsurance agreements and related ancillary documents (including administrative services agreements and transition services agreements) with Protective Life Insurance Company and its wholly-owned subsidiary, Protective Life and Annuity Insurance Company (together with Protective Life Insurance Company, “Protective”), providing for the reinsurance and administration of the Liberty Life Business. ﻿ Liberty Life’s excess capital of $1.8 billion was paid to Liberty Mutual Insurance Company through an extraordinary dividend at the acquisition date. We paid $1.5 billion of cash to Liberty Mutual Insurance Company to acquire the Liberty Group Business. ﻿ ﻿ We recognized $10 million and $60 million of acquisition-related costs, pre-tax, for the three and nine months ended September 30, 2018, respectively. These costs are included in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). The acquisition date fair values of certain assets and liabilities, including future contract benefits, intangible assets and related weighted average expected lives, commercial mortgage loans, reinsurance recoverables and deferred income taxes, are provisional and subject to revision within one year of the acquisition date. Under the terms of the MTA, a final balance sheet will be agreed upon at a later date. As such, our estimates of fair values are pending finalization, which may result in adjustments to goodwill. The following table presents the preliminary fair values (in millions) of the net assets acquired related to the Liberty Group Business as of the acquisition date: ﻿
﻿ |  |  |
﻿ |  |  |
﻿ | Preliminary |
﻿ | Fair Value |
﻿Assets |  |  |
﻿Investments | $ | 2,493 |
﻿Mortgage loans on real estate |  | 658 |
﻿Cash and invested cash |  | 107 |
﻿Reinsurance recoverables |  | 76 |
﻿Premiums and fees receivable |  | 83 |
﻿Accrued investment income |  | 24 |
﻿Other intangible assets acquired |  | 640 |
﻿Other assets acquired |  | 142 |
﻿Separate account assets |  | 99 |
﻿Total assets acquired | $ | 4,322 |
﻿ |  |  |
﻿Liabilities |  |  |
﻿Future contract benefits | $ | 2,930 |
﻿Other contract holder funds |  | 46 |
﻿Other liabilities acquired |  | 120 |
﻿Separate account liabilities |  | 99 |
﻿Total liabilities assumed | $ | 3,195 |
﻿ |  |  |
﻿Net identifiable assets acquired | $ | 1,127 |
﻿Goodwill |  | 390 |
﻿Net assets acquired | $ | 1,517 |
﻿ Identifiable Intangible Assets ﻿ The following table presents the fair value of identifiable intangible assets acquired (dollars in millions): ﻿
﻿ |  |  |  |  |
﻿ |  |  |  |  |
﻿ |  |  |  | Weighted- |
﻿ |  |  |  | Average |
﻿ |  |  |  | Amortization |
﻿ | Fair Value |  | Period |
﻿Value of customer relationships acquired | $ | 576 |  | 20 |
﻿Value of distribution agreements |  | 31 |  | 13 |
﻿Value of business acquired |  | 30 |  | 3 |
﻿Insurance licenses |  | 3 |  | N/A |
﻿Total identifiable intangible assets | $ | 640 |  |  |
﻿ The value of customer relationships acquired (“VOCRA”) and value of distribution agreements (“VODA”), included in other assets on our Consolidated Balance Sheets, reflects the estimated fair value of the customer relationships acquired and distribution agreements of the Liberty Group Business as of May 1, 2018. The value of the identifiable intangible assets was estimated using a discounted cash flow method. Significant inputs to the valuation models include estimates of expected premiums, persistency rates, investment returns, claim costs, expenses and discount rates based on a weighted average cost of capital. Similar to other specifically identifiable intangible assets, the carrying values of VOCRA and VODA will be amortized using a straight-line method and reviewed at least annually for indicators of impairment in value that are other-than-temporary. ﻿ For information on value of business acquired (“VOBA”), see Notes 1 and 8 in our 2017 Form 10-K. ﻿ The value of insurance licenses was estimated using the comparable transaction method under the market approach based on arms-length transactions in which certificate authority companies with life and health insurance licenses were purchased. The value of insurance licenses has an indefinite useful life. Goodwill ﻿ Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from assets acquired and liabilities assumed that could not be individually identified. The goodwill recorded as part of the acquisition includes the expected synergies and other benefits that management believes will result from the acquisition, including an increase in distribution strength. The goodwill resulting from the acquisition was allocated to the Group Protection segment. The goodwill is not expected to be deductible for income tax purposes. For more information on goodwill, see Notes 1 and 10 in our 2017 Form 10-K. ﻿ Future Contract Benefits ﻿ Unpaid claims acquired reflected within future contract benefits were recorded at estimated fair value. The reserve discount rate was based on the investment yield of the assets acquired with adjustments for risk margin. The actuarial classifications and methodologies were adjusted to be consistent with our accounting policies and reserve methodologies. ﻿ Financial Information ﻿ Since the acquisition date of May 1, 2018, the revenues and net income of the business acquired have been included in our Consolidated Statements of Comprehensive Income (Loss) in the Group Protection segment and were $929 million and $26 million, respectively. ﻿ The following unaudited pro forma condensed consolidated results of operations of the Company assume that the acquisition of Liberty Life was completed on January 1, 2017 (in millions): ﻿
﻿ |  |  |  |  |  |  |  |  |  |  |  |
﻿ |  |  |  |  |  |  |  |  |  |  |  |
﻿ | For the Three |  | For the Nine |
﻿ | Months Ended |  | Months Ended |
﻿ | September 30, |  | September 30, |
﻿ | 2018 |  | 2017 |  | 2018 |  | 2017 |
﻿Revenue | $ | 4,263 |  | $ | 3,989 |  | $ | 12,632 |  | $ | 12,030 |
﻿ |  |  |  |  |  |  |  |  |  |  |  |
﻿Net income |  | 497 |  |  | 396 |  |  | 1,287 |  |  | 1,201 |
﻿ Pro forma adjustments include the revenue and net income of the acquired business for each period as well as amortization of identifiable intangible assets acquired and the fair value adjustment to acquired insurance reserves and investments. Other pro forma adjustments include the incremental increase to interest expense attributable to financing the acquisition; and the impact of reflecting acquisition and integration costs and investment expenses directly attributable to the business combination in 2017 instead of in 2018. Pro forma adjustments do not include retrospective adjustments to defer and amortize acquisition costs as would be recorded under our accounting policy. ﻿ Reinsurance ﻿ Pursuant to the reinsurance agreements, we sold the Liberty Life Business to Protective for a ceding commission of $423 million. Our amounts recoverable from reinsurers increased significantly to $18.3 billion as of September 30, 2018, from $4.9 billion as of December 31, 2017, primarily as a result of this reinsurance transaction. As such, Protective now represents our largest reinsurance exposure. As we are not relieved of our liability, the liabilities and obligations associated with the reinsured policies remain on our Consolidated Balance Sheets with a corresponding reinsurance recoverable from Protective. To support its obligations under the reinsurance agreements, Protective has established trust accounts for our benefit that fully collateralize the related reinsurance recoverable. We recorded a deferred tax asset attributed to a tax loss carryforward arising from the reinsurance transaction with Protective.

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- 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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