MetLife 2006 Annual Report Download - page 99

adjustment in valuation allowances. Additionally, future events such as changes in tax legislation could have an impact on the provision for
income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial
statements in the year these changes occur.
The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax.
Reinsurance
The Company enters into reinsurance transactions as both a provider and a purchaser of reinsurance for its life and property and
casualty insurance products.
For each of its reinsurance contracts, the Company determines if the contract provides indemnification against loss or liability relating to
insurance risk in accordance with applicable accounting standards. The Company reviews all contractual features, particularly those that
may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any,
between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of
reinsurance at the inception of the contract. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a
component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be
recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new
business, are recorded as ceded (assumed) premiums and ceded (assumed) future policy benefit liabilities are established.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are
recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums and are reflected as a component of premiums and
other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in
proportion to the amount of protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of
reinsurance accounting, amounts paid (received) in excess of (which do not exceed) the related insurance liabilities ceded (assumed)
are recognized immediately as a loss. Any gains on such retroactive contracts are deferred and recorded in other liabilities. The gains are
amortized primarily using the recovery method.
The assumptions used to account for both long and short-duration reinsurance contracts are consistent with those used for the
underlying contracts. Ceded policyholder and contract related liabilities, other than those currently due, are reported gross on the balance
sheet.
Amounts currently recoverable under reinsurance contracts are included in premiums and other receivables and amounts currently
payable are included in other liabilities. Such assets and liabilities relating to reinsurance contracts with the same reinsurer may be
recorded net on the balance sheet, if a right of offset exists within the reinsurance contract.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance contracts and are net of reinsurance
ceded.
If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss
from insurance risk, the Company records the contract as a deposit, net of related expenses. Deposits received are included in other
liabilities and deposits made are included within other assets. As amounts are paid or received, consistent with the underlying contracts,
the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenue or other expenses, as appropriate.
Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through
other revenue or other expenses, as appropriate.
Amounts received from reinsurers for policy administration are reported in other revenues.
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the
underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated
experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed
reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated
in the security impairment process discussed previously.
Separate Accounts
Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any
other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets
exceeds the separate account liabilities. The Company reports separately, as assets and liabilities, investments held in separate accounts
and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are
legally insulated from the Company’s general account liabilities; (iii) investments are directed by the contractholder; and (iv) all investment
performance, net of contract fees and assessments, is passed through to the contractholder. The Company reports separate account
assets meeting such criteria at their fair value. Investment performance (including investment income, net investment gains (losses) and
changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset
within the same line in the consolidated statements of income.
The Company’s revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration
fees, investment management fees and surrender charges. Separate accounts not meeting the above criteria are combined on a
line-by-line basis with the Company’s general account assets, liabilities, revenues and expenses.
Employee Benefit Plans
Certain subsidiaries of the Holding Company (the “Subsidiaries”) sponsor various plans that provide defined benefit pension and other
postretirement benefits covering eligible employees and sales representatives. A December 31 measurement date is used for all of the
Subsidiaries’ defined benefit pension and other postretirement benefit plans.
F-16 MetLife, Inc.
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)