MetLife 2010 Annual Report Download - page 101

generally made through structured notes and similar instruments (collectively, “Structured Investment Transactions”). The Company
has not guaranteed the performance, liquidity or obligations of the SPEs and its exposure to loss is limited to its carrying value of the
beneficial interests in the SPEs. The Company does not consolidate such SPEs as it has determined it is not the primary beneficiary.
These Structured Investment Transactions are included in fixed maturity securities and their investment income is generally recognized
using the retrospective interest method. Impairments of these investments are included in net investment gains (losses). In addition,
the Company has invested in certain structured transactions that are VIEs. These structured transactions include reinsurance trusts,
asset-backed securitizations, hybrid securities, real estate joint ventures, other limited partnership interests, and limited liability
companies. The Company consolidates those VIEs for which it is deemed to be the primary beneficiary. The Company reconsiders
whether it is the primary beneficiary for investments designated as VIEs on a quarterly basis.
Trading and Other Securities. Trading and other securities are stated at estimated fair value. Trading and other securities include
investments that are actively purchased and sold (“Actively Traded Securities”). These Actively Traded Securities are principally fixed
maturity securities. Short sale agreement liabilities related to Actively Traded Securities, included in other liabilities, are also stated at
estimated fair value. Trading and other securities also includes securities for which the FVO has been elected (“FVO Securities”). FVO
Securities include certain fixed maturity and equity securities held-for-investment by the general account to support asset and liability
matching strategies for certain insurance products. FVO Securities also include contractholder-directed investments supporting unit-
linked variable annuity type liabilities which do not qualify for presentation and reporting as separate account summary total assets and
liabilities. These investments are primarily mutual funds and, to a lesser extent, fixed maturity and equity securities, short-term
investments and cash and cash equivalents. The investment returns on these investments inure to contractholders and are offset by a
corresponding change in policyholder account balances through interest credited to policyholder account balances. Changes in
estimated fair value of such trading and other securities subsequent to purchase are included in net investment income. FVO
Securities also include securities held by consolidated securitization entities (“CSEs”) (former qualifying special purpose entities
(“QSPEs”)) with changes in estimated fair value subsequent to consolidation included in net investment gains (losses). Interest and
dividends related to all trading and other securities are included in net investment income.
Securities Lending. Securities loaned transactions, whereby blocks of securities, which are included in fixed maturity securities
and short-term investments, are loaned to third parties, are treated as financing arrangements and the associated liability is recorded
at the amount of cash received. At the inception of a loan, the Company obtains collateral, generally cash, in an amount at least equal to
102% of the estimated fair value of the securities loaned and maintains it at a level greater than or equal to 100% for the duration of the
loan. The Company monitors the estimated fair value of the securities loaned on a daily basis with additional collateral obtained as
necessary. Substantially all of the Company’s securities loaned transactions are with brokerage firms and commercial banks. Income
and expenses associated with securities loaned transactions are reported as investment income and investment expense, respec-
tively, within net investment income.
Mortgage Loans — Mortgage Loans Held-For-Investment. For the purposes of determining valuation allowances the Company
disaggregates its mortgage loan investments into three portfolio segments: (1) commercial, (2) agricultural, and (3) residential. The
accounting and valuation allowance policies that are applicable to all portfolio segments are presented below, followed by the policies
applicable to both commercial and agricultural loans, which are very similar, as well as policies applicable to residential loans.
Commercial, Agricultural and Residential Mortgage Loans — Mortgage loans held-for-investment are stated at unpaid principal
balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of valuation allowances. Interest
income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and
discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment
fees are reported in net investment income. Interest ceases to accrue when collection of interest is not considered probable and/or
when interest or principal payments are past due as follows: commercial — 60 days; and agricultural and residential — 90 days,
unless, in the case of a residential loan, it is both well-secured and in the process of collection. When a loan is placed on non-
accrual status, uncollected past due interest is charged-off against net investment income. Generally, the accrual of interest
income resumes after all delinquent amounts are paid and management believes all future principal and interest payments will be
collected. Cash receipts on non-accruing loans are recorded in accordance with the loan agreement as a reduction of principal
and/or interest income. Charge-offs occur upon the realization of a credit loss, typically through foreclosure or after a decision is
made to sell a loan, or for residential loans when, after considering the individual consumer’s financial status, management believes
that uncollectability is other-than-temporary. Gain or loss upon charge-off is recorded, net of previously established valuation
allowances, in net investment gains (losses). Cash recoveries on principal amounts previously charged-off are generally recorded
as an increase to the valuation allowance, unless the valuation allowance adequately provides for expected credit losses; then the
recovery is recorded in net investment gains (losses). Gains and losses from sales of loans and increases or decreases to valuation
allowances are recorded in net investment gains (losses).
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the
Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Specific valuation allowances
are established using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the
present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the
loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable
market price. A common evaluation framework is used for establishing non-specific valuation allowances for all loan portfolio
segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that
is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with
similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company
expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the
F-12 MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)