MetLife 2006 Annual Report Download - page 14

minimum death benefit guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower
than the Company’s long-term expectation. The Company’s practice to determine the impact of gross profits resulting from returns on
separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only
changed when sustained interim deviations are expected. The Company monitors these changes and only changes the assumption when
its long-term expectation changes. The effect of an increase/(decrease) by 100 basis points in the assumed future rate of return is
reasonably likely to result in a decrease/(increase) in the DAC and VOBA balances of approximately $70 million for this factor.
The Company also reviews periodically other long-term assumptions underlying the projections of estimated gross margins and profits.
These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer
business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have
significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA
amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update
causes expected future gross margins and profits to decrease.
Over the past two years, the Company’s most significant assumption updates resulting in a change to expected future gross margins
and profits and the amortization of DAC and VOBA have been updated due to revisions to expected future investment returns, expenses,
in-force or persistency assumptions and policyholder dividends on contracts included within the Individual Business segment. The
Company expects these assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these
assumptions can be offsetting and the Company is unable topredicttheirmovementoroffsettingimpactovertime.
The following chart illustrates the effect on DAC and VOBA within the Company’s Individual segment of changing each of the respective
assumptions during the years ended December 31, 2006 and 2005:
2006 2005
Years Ended
December 31,
(In millions)
Investmentreturn....................................................... $192 $(26)
Expense............................................................. 45 11
In-force/Persistency ..................................................... (7) (33)
Policyholderdividendsandother............................................. (39) (11)
Total ............................................................... $191 $(59)
As of December 31, 2006 and 2005, DAC and VOBA for the Individual segment were $14.0 billion and $13.5 billion, respectively, and
for the total Company were $20.8 billion and $19.7 billion, respectively.
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired. The Company tests goodwill for impairment at least annually or
more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for
conducting an interim test.
Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit”
level. A reporting unit is the operating segment or a business that is one level below the operating segment, if discrete financial information
is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, goodwill within Corporate &
Other is allocated to reporting units within the Company’s business segments. If the carrying value of a reporting unit’s goodwill exceeds its
fair value, the excess is recognized as an impairment and recorded as a charge against net income. The fair values of the reporting units
are determined using a market multiple, a discounted cash flow model, or a cost approach. The critical estimates necessary in determining
fair value are projected earnings, comparative market multiples and the discount rate.
Liability for Future Policy Benefits
The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, traditional
annuities and non-medical health insurance. Generally, amounts are payable over an extended period of time and related liabilities are
calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected premiums. Such
liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards.
Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal,
retirement, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type. These
assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits
are payable. Utilizing these assumptions, liabilities are established on a block of business basis. If experience is less favorable than
assumptions, additional liabilities may be required, resulting in a charge to policyholder benefits and claims.
Liabilities for future policy benefits for disabled lives are estimated using the present value of benefits method and experience
assumptions as to claim terminations, expenses and interest.
Liabilities for unpaid claims and claim expenses for property and casualty insurance are included in future policyholder benefits and
represent the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Other policyholder
funds include claims that have been reported but not settled and claims incurred but not reported on life and non-medical health insurance.
Liabilities for unpaid claims are estimated based upon the Company’s historical experience and other actuarial assumptions that consider
the effects of current developments, anticipated trends and risk management programs. With respect to property and casualty insurance,
such unpaid claims are reduced for anticipated salvage and subrogation. The effects of changes in such estimated liabilities are included in
the results of operations in the period in which the changes occur.
Future policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity contracts and secondary and
paid up guarantees relating to certain life policies are based on estimates of the expected value of benefits in excess of the projected
account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. Liabilities for
universal and variable life secondary guarantees and paid-up guarantees are determined by estimating the expected value of death
benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period
11MetLife, Inc.