MetLife 2007 Annual Report Download - page 110

Future policy benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions
as to claim terminations, expenses and interest. Interest rates used in establishing such liabilities range from 3% to 8% for domestic
business and 2% to 10% for international business.
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. 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, 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.
The Company establishes 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 as follows:
• Annuity guaranteed minimum death benefit (“GMDB”) liabilities are determined by estimating the expected value of death benefits in
excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected
assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or
credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The
assumptions used in estimating the GMDB liabilities are consistent with those used for amortizing DAC, and are thus subject to
the same variability and risk. The assumptions of investment performance and volatility are consistent with the historical experience of
the Standard & Poor’s 500 Index (“S&P”). The benefits used in calculating the liabilities are based on the average benefits payable
over a range of scenarios.
• Guaranteed minimum income benefit (“GMIB”) liabilities are determined by estimating the expected value of the income benefits in
excess of the projected account balance at any future date of annuitization and recognizing the excess ratably over the accumulation
period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability
balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions
should be revised. The assumptions used for estimating the GMIB liabilities are consistent with those used for estimating the GMDB
liabilities. In addition, the calculation of guaranteed annuitization benefit liabilities incorporates an assumption for the percentage of
the potential annuitizations that maybeelectedbythecontractholder.
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 based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability
balances, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions
should be revised. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for
amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility for variable
products are consistent with historical S&P experience. The benefits used in calculating the liabilities are based on the average benefits
payable over a range of scenarios.
The Company establishes policyholder account balances for guaranteed minimum benefit riders relating to certain variable annuity
products as follows:
• Guaranteed minimum withdrawal benefit riders (“GMWB”) guarantee the contractholder a return of their purchase payment via partial
withdrawals, even if the account value is reduced to zero, provided that the contractholder’s cumulative withdrawals in a contract
year do not exceed a certain limit. The initial guaranteed withdrawal amount is equal to the initial benefit base as defined in the
contract (typically, the initial purchase payments plus applicable bonus amounts). The GMWB is an embedded derivative, which is
measured at fair value separately from the host variable annuity product.
• Guaranteed minimum accumulation benefit riders (“GMAB”) provide the contractholder, after a specified period of time determined at
the time of issuance of the variable annuity contract, with a minimum accumulation of their purchase payments even if the account
value is reduced to zero. The initial guaranteed accumulation amount is equal to the initial benefit base as defined in the contract
(typically, the initial purchase payments plus applicable bonus amounts). The GMAB is also an embedded derivative, which is
measured at fair value separately from the host variable annuity product.
• For both GMWB and GMAB, the initial benefit base is increased by additional purchase payments made within a certain time period
and decreases by benefits paid and/or withdrawal amounts. After a specified period of time, the benefit base may also increase as a
result of an optional reset as defined in the contract.
The fair values of the GMWB and GMAB riders are calculated based on actuarial and capital market assumptions related to the
projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations
concerning policyholder behavior. In measuring the fair value of GMWBs and GMABs, the Company attributes a portion of the fees
collected from the policyholder equal to the present value of expected future guaranteed minimum withdrawal and accumulation benefits
(at inception). The changes in fair value are reported in net investment gains (losses). Any additional fees represent “excess” fees and are
reported in universal life and investment-type product policy fees. These riders may be more costly than expected in volatile or declining
markets, causing an increase in liabilities for future policy benefits, negatively affecting net income.
The Company periodically reviews its estimates of actuarial liabilities for future policy benefits and compares them with its actual
experience. Differences between actual experience and the assumptions used in pricing these policies, guarantees and riders and in the
establishment of the related liabilities result in variances in profit and could result in losses. The effects of changes in such estimated
liabilities are included in the results of operations in the period in which the changes occur.
Policyholder account balances relate to investment-type contracts and universal life-type policies. Investment-type contracts principally
include traditional individual fixed annuities in the accumulation phase and non-variable group annuity contracts. Policyholder account
balances are equal to (i) policy account values, which consist of an accumulation of gross premium payments; (ii) credited interest, ranging
F-14 MetLife, Inc.
MetLife, Inc.
Notes to Consolidated Financial Statements — (Continued)