MetLife 2009 Annual Report Download - page 100

reported in net investment gains (losses) except for those in policyholder benefits and claims related to ceded reinsurance of guaranteed
minimum income benefits. If the Company is unable to properly identify and measure an embedded derivative for separation from its host
contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the
current period in net investment gains (losses) or in policyholder benefits and claims. Additionally, the Company may elect to carry an entire
contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment
gains (losses) or in policyholder benefits and claims if that contract contains an embedded derivative that requires bifurcation. There is a risk
that embedded derivatives requiring bifurcation may not be identified and reported at estimated fair value in the consolidated financial
statements and that their related changes in estimated fair value could materially affect reported net income.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of
purchase to be cash equivalents.
Property, Equipment, Leasehold Improvements and Computer Software
Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation
and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, as appropriate. The
estimated life for company occupied real estate property is generally 40 years. Estimated lives generally range from five to ten years for
leasehold improvements and three to seven years for all other property and equipment. The cost basis of the property, equipment and
leasehold improvements was $1.9 billion and $1.8 billion at December 31, 2009 and 2008, respectively. Accumulated depreciation and
amortization of property, equipment and leasehold improvements was $1,046 million and $926 million at December 31, 2009 and 2008,
respectively. Related depreciation and amortization expense was $152 million, $150 million and $132 million for the years ended Decem-
ber 31, 2009, 2008 and 2007, respectively.
Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well
as certain internal and external costs incurred to develop internal-use computer software during the application development stage, are
capitalized. Such costs are amortized generally over a four-year period using the straight-line method. The cost basis of computer software
was $1.7 billion and $1.5 billion at December 31, 2009 and 2008, respectively. Accumulated amortization of capitalized software was
$1.2 billion and $1.0 billion at December 31, 2009 and 2008, respectively. Related amortization expense was $171 million, $153 million and
$121 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Deferred Policy Acquisition Costs and Value of Business Acquired
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that vary with and relate to
the production of new business are deferred as DAC. Such costs consist principally of commissions and agency and policy issuance
expenses. VOBA is an intangible asset that represents the present value of future profits embedded in acquired insurance annuity and
investment — type contracts. VOBA is based on actuarially determined projections, by each block of business, of future policy and contract
charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns and other
factors. Actual experience on the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon
the future profitability of the related business. DAC and VOBA are aggregated in the financial statements for reporting purposes.
DAC for property and casualty insurance contracts, which is primarily composed of commissions and certain underwriting expenses, is
amortized on a pro rata basis over the applicable contract term or reinsurance treaty.
DAC and VOBA on life insurance or investment-type contracts are amortized in proportion to gross premiums, gross margins or gross
profits, depending on the type of contract as described below.
The Company amortizes DAC and VOBA related to non-participating and non-dividend-paying traditional contracts (term insurance, non-
participating whole life insurance, non-medical health insurance and traditional group life insurance) over the entire premium paying period in
proportion to the present value of actual historic and expected future gross premiums. The present value of expected premiums is based
upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency and investment returns at policy issuance,
or policy acquisition, as it relates to VOBA, that include provisions for adverse deviation and are consistent with the assumptions used to
calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA
balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy
issuance or acquisition is caused only by variability in premium volumes.
The Company amortizes DAC and VOBA related to participating, dividend-paying traditional contracts over the estimated lives of the
contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or
acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales,
mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables,
such as inflation. For participating contracts (dividend paying traditional contracts within the closed block) future gross margins are also
dependent upon changes in the policyholder dividend obligation. Of these factors, the Company anticipates that investment returns,
expenses, persistency and other factor changes as well as policyholder dividend scales are reasonably likely to impact significantly the rate of
DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that
period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-
estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously
estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when
the actual gross margins are below the previously estimated gross margins. Each reporting period, the Company also updates the actual
amount of business in-force, which impacts expected future gross margins. When expected future gross margins are below those previously
estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when
F-16 MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)