MetLife 2003 Annual Report Download - page 55

METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
temporary. These adjustments are recorded as investment losses. Investment gains and losses on sales of securities are determined on a specific
identification basis. All security transactions are recorded on a trade date basis.
Mortgage loans on real estate are stated at amortized cost, net of valuation allowances. Valuation allowances are established for the excess carrying
value of the mortgage loan over its estimated fair value when it is probable that, based upon current information and events, the Company will be unable
to collect all amounts due under the contractual terms of the loan agreement. Such valuation allowances are based upon the present value of expected
future cash flows discounted at the loan’s original effective interest rate or the collateral value if the loan is collateral dependent. The Company also
establishes allowances for loan loss when a loss contingency exists for pools of loans with similar characteristics based on property types and loan to
value risk factors. A loss contingency exists when the likelihood that a future event will occur is probable based on past events. Changes in valuation
allowances are included in net investment gains and losses. Interest income earned on impaired loans is accrued on the principal amount of the loan
based on the loan’s contractual interest rate. However, interest ceases to be accrued for loans on which interest is generally more than 60 days past due
and/or where the collection of interest is not considered probable. Cash receipts on impaired loans are recorded as a reduction of the recorded
investment.
Real estate held-for-investment, including related improvements, is stated at cost less accumulated depreciation. Depreciation is provided on a
straight-line basis over the estimated useful life of the asset (typically 20 to 40 years). Once the Company identifies a property that is expected to be sold
within one year and commences a firm plan for marketing the property, in accordance with SFAS 144, the Company, if applicable, classifies the property
as held-for-sale and reports the related net investment income and any resulting investment gains and losses as discontinued operations. Real estate
held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs. Real estate is not depreciated while it is classified as
held-for-sale. Cost of real estate held-for-investment is adjusted for impairment whenever events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable. Impaired real estate is written down to estimated fair value with the impairment loss being included in net
investment gains and losses. Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present
value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate acquired upon
foreclosure of commercial and agricultural mortgage loans is recorded at the lower of estimated fair value or the carrying value of the mortgage loan at the
date of foreclosure.
Policy loans are stated at unpaid principal balances.
Short-term investments are stated at amortized cost, which approximates fair value.
Other invested assets consist principally of leveraged leases and funds withheld at interest. The leveraged leases are recorded net of non-recourse
debt. The Company participates in lease transactions which are diversified by industry, asset type and geographic area. The Company regularly reviews
residual values and impairs residuals to expected values as needed. Funds withheld represent amounts contractually withheld by ceding companies in
accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance
basis, assets supporting the reinsured policies and equal to the net statutory reserves are withheld and continue to be legally owned by the ceding
companies. Other invested assets also includes the fair value of embedded derivatives related to funds withheld and modified coinsurance contracts.
The Company recognizes interest on funds withheld in accordance with the treaty terms as investment income is earned on the assets supporting the
reinsured policies.
Structured Investment Transactions
The Company participates in structured investment transactions, primarily asset securitizations and structured notes. These transactions enhance
the Company’s total return of the investment portfolio principally by generating management fee income on asset securitizations and by providing equity-
based returns on debt securities through structured notes and similar instruments.
The Company sponsors financial asset securitizations of high yield debt securities, investment grade bonds and structured finance securities and
also is the collateral manager and a beneficial interest holder in such transactions. As the collateral manager, the Company earns management fees on
the outstanding securitized asset balance, which are recorded in income as earned. When the Company transfers assets to a bankruptcy-remote special
purpose entity (‘‘SPE’’) and surrenders control over the transferred assets, the transaction is accounted for as a sale. Gains or losses on securitizations
are determined with reference to the carrying amount of the financial assets transferred, which is allocated to the assets sold and the beneficial interests
retained based on relative fair values at the date of transfer. Beneficial interests in securitizations are carried at fair value in fixed maturities. Income on
these beneficial interests is recognized using the prospective method in accordance with Emerging Issues Task Force (‘‘EITF’’) Issue No. 99-20,
Recognition of Interest Income and Impairment on Certain Investments (‘‘EITF 99-20’’). The SPEs used to securitize assets are not consolidated by the
Company because the Company has determined that it is not the primary beneficiary of these entities based on the framework provided in FASB
Interpretation No. 46 (revised December 31, 2003), Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51 (‘‘FIN 46(r)’’). Prior to the
adoption of FIN 46(r), such SPEs were not consolidated because they did not meet the criteria for consolidation under previous accounting guidance.
The Company purchases or receives beneficial interests in SPEs, which generally acquire financial assets, including corporate equities, debt
securities and purchased options. The Company has not guaranteed the performance, liquidity or obligations of the SPEs and the Company’s exposure
to loss is limited to its carrying value of the beneficial interests in the SPEs. The Company uses the beneficial interests as part of its risk management
strategy, including asset-liability management. These SPEs are not consolidated by the Company because the Company has determined that it is not the
primary beneficiary of these entities based on the framework provided in FIN 46(r). Prior to the adoption of FIN 46(r), such SPEs were not consolidated
because they did not meet the criteria for consolidation under previous accounting guidance. These beneficial interests are generally structured notes, as
defined by EITF Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes, which are included in fixed
maturities, and their income is recognized using the retrospective interest method or the level yield method, as appropriate. Impairments of these
beneficial interests are included in net investment gains and losses.
Derivative Financial Instruments
The Company uses derivative instruments to manage risk through one of five principal risk management strategies, the hedging of: (i) liabilities;
(ii) invested assets; (iii) portfolios of assets or liabilities; (iv) net investments in certain foreign operations; and (v) firm commitments and forecasted
transactions. Additionally, the Company enters into income generation and replication derivative transactions as permitted by its insurance subsidiaries’
MetLife, Inc.
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