MetLife 2009 Annual Report Download - page 103

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:
• 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 (“S&P”)
500 Index. The benefit assumptions 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 may be elected by the contractholder. Certain GMIBs have settlement features that result in a portion of that
guarantee being accounted for as an embedded derivative and are recorded in policyholder account balances as described below.
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 benefits relating to certain variable annuity products as
follows:
• Guaranteed minimum withdrawal benefits (“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
estimated fair value separately from the host variable annuity product.
• Guaranteed minimum accumulation benefits (“GMAB”) and settlement features in certain GMIB described above 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 an embedded derivative, which is measured at estimated fair value separately from the host variable annuity product.
For GMWB, GMAB and certain GMIB, 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.
GMWB, GMAB and certain GMIB are accounted for as embedded derivatives with changes in estimated fair value reported in net
investment gains (losses).
At inception of the GMWB, GMAB and certain GMIB contracts, the Company attributes to the embedded derivative a portion of the
projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any
additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
The fair values for these embedded derivatives are then estimated based on the present value of projected future benefits minus the
present value of projected future fees. The projections of future benefits and future fees require capital market and actuarial assumptions
including expectations concerning policyholder behavior. A risk neutral valuation methodology is used under which the cash flows from the
guarantees are projected under multiple capital market scenarios using observable risk free rates. Beginning in 2008, the valuation of these
embedded derivatives includes an adjustment for the Company’s own credit and risk margins for non-capital market inputs. The Company’s
own credit adjustment is determined taking into consideration publicly available information relating to the Company’s debt, as well as its
claims paying ability. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional
compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as
annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant
management judgment.
These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to,
changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in the Company’s own credit
standing; and variations in actuarial assumptions regarding policyholder behavior, and risk margins related to non-capital market inputs may
result in significant fluctuations in the estimated fair value of the guarantees that could materially affect 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 and guarantees, and in the
F-19MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)