MetLife 2003 Annual Report Download - page 53

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METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Business
‘‘MetLife’’ or the ‘‘Company’’ refers to MetLife, Inc., a Delaware corporation (the ‘‘Holding Company’’), and its subsidiaries, including Metropolitan Life
Insurance Company (‘‘Metropolitan Life’’) is a leading provider of insurance and other financial services to a broad spectrum of individual and institutional
customers. The Company offers life insurance, annuities, automobile and homeowners insurance and mutual funds to individuals, as well as group
insurance, reinsurance and retirement and savings products and services to corporations and other institutions.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of (i) the Holding Company and its subsidiaries: (ii) partnerships and joint
ventures in which the Company has a majority voting interest; and (iii) variable interest entities (‘‘VIEs’’) created or acquired on or after February 1, 2003 of
which the Company is deemed to be the primary beneficiary. Closed block assets, liabilities, revenues and expenses are combined on a line by line basis
with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 6. Intercompany
accounts and transactions have been eliminated.
The Company uses the equity method of accounting for investments in real estate joint ventures and other limited partnership interests in which it
has more than a minor equity interest or more than minor influence over the partnership’s operations, but does not have a controlling interest. The
Company uses the cost method of accounting for interests in which it has a minor equity investment and virtually no influence over the partnership’s
operations.
Minority interest related to consolidated entities included in other liabilities was $950 million and $491 million at December 31, 2003 and 2002,
respectively. This increase was the direct result of the change in MetLife’s ownership of RGA to approximately 52% in 2003 compared to 59% in 2002.
Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform with the 2003 presentation.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and
assumptions that affect amounts reported in the consolidated financial statements. The critical accounting policies, estimates and related judgments
underlying the Company’s consolidated financial statements are summarized below. In applying these policies, management makes subjective and
complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments
are common in the insurance and financial services industries; others are specific to the Company’s businesses and operations.
Investments
The Company’s principal investments are in fixed maturities, mortgage loans and real estate, all of which are exposed to three primary sources of
investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and
income, as well as the determination of fair values. The assessment of whether impairments have occurred is based on management’s case-by-case
evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors about the security issuer and uses its
best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery.
Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Considerations used by the Company in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the
market value has been below cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the
potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic
locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has
exhausted natural resources; (vi) unfavorable changes in forecasted cash flows on asset-backed securities; and (vii) other subjective factors, including
concentrations and information obtained from regulators and rating agencies. In addition, the earnings on certain investments are dependent upon market
conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. The determination
of fair values in the absence of quoted market values is based on: (i) valuation methodologies; (ii) securities the Company deems to be comparable; and
(iii) assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the
estimated fair value amounts. In addition, the Company enters into certain structured investment transactions, real estate joint ventures and limited
partnerships for which the Company may be deemed to be the primary beneficiary and, therefore, may be required to consolidate such investments. The
accounting rules for the determination of the primary beneficiary are complex and require evaluation of the contractual rights and obligations associated
with each party involved in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to
each party.
Derivatives
The Company enters into freestanding derivative transactions primarily to manage the risk associated with variability in cash flows or changes in fair
values related to the Company’s financial assets and liabilities or to changing fair values. The Company also uses derivative instruments to hedge its
currency exposure associated with net investments in certain foreign operations. The Company also purchases investment securities, issues certain
insurance policies and engages in certain reinsurance contracts that embed derivatives. The associated financial statement risk is the volatility in net
income which can result from (i) changes in fair value of derivatives not qualifying as accounting hedges; (ii) ineffectiveness of designated hedges; and
(iii) counterparty default. In addition, there is a risk that embedded derivatives requiring bifurcation are not identified and reported at fair value in the
consolidated financial statements. Accounting for derivatives is complex, as evidenced by significant authoritative interpretations of the primary
accounting standards which continue to evolve, as well as the significant judgments and estimates involved in determining fair value in the absence of
quoted market values. These estimates are based on valuation methodologies and assumptions deemed appropriate in the circumstances. Such
assumptions include estimated volatility and interest rates used in the determination of fair value where quoted market values are not available. The use of
different assumptions may have a material effect on the estimated fair value amounts.
MetLife, Inc.
F-8