MetLife 2010 Annual Report Download - page 104

similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates, credit standing
of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated
duration and management’s assumptions regarding liquidity and estimated future cash flows. Accordingly, the estimated fair values are
based on available market information and management’s judgments about financial instruments.
The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price
transparency are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such
observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and
observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation methodologies for determining the estimated fair value of certain
types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated
fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These
unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market
activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent
with what other market participants would use when pricing such securities.
The estimated fair value of residential mortgage loans held-for-sale is determined based on observable pricing of residential mortgage
loans held-for-sale with similar characteristics, or observable pricing for securities backed by similar types of loans, adjusted to convert the
securities prices to loan prices. Generally, quoted market prices are not available. When observable pricing for similar loans, or securities that
are backed by similar loans, are not available, the estimated fair values of residential mortgage loans held-for-sale are determined using
independent broker quotations, which is intended to approximate the amounts that would be received from third parties. Certain other
mortgage loans have also been designated as held-for-sale which are recorded at the lower of amortized cost or estimated fair value less
expected disposition costs determined on an individual loan basis. For these loans, estimated fair value is determined using independent
broker quotations or, when the loan is in foreclosure or otherwise determined to be collateral dependent, the estimated fair value of the
underlying collateral estimated using internal models.
The estimated fair value of MSRs is principally determined through the use of internal discounted cash flow models which utilize various
assumptions. Valuation inputs and assumptions include generally observable items such as type and age of loan, loan interest rates, current
market interest rates, and certain unobservable inputs, including assumptions regarding estimates of discount rates, loan prepayments and
servicing costs, all of which are sensitive to changing market conditions. The use of different valuation assumptions and inputs, as well as
assumptions relating to the collection of expected cash flows, may have a material effect on the estimated fair values of MSRs.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset
liquidity. The Company’s ability to sell securities, or the price ultimately realized for these securities, depends upon the demand and liquidity in
the market and increases the use of judgment in determining the estimated fair value of certain securities.
The determination of the amount of allowances and impairments, as applicable, is described previously by investment type. The
determination of such allowances and impairments is highly subjective and is based upon the Company’s periodic evaluation and
assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as
conditions change and new information becomes available.
The recognition of income on certain investments (e.g. loan-backed securities, including mortgage-backed and ABS, certain structured
investment transactions, trading and other securities) is dependent upon market conditions, which could result in prepayments and changes
in amounts to be earned.
The accounting guidance for the determination of when an entity is a VIE and when to consolidate a VIE is complex and requires significant
management judgment. The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and
obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and
expected residual returns and the allocation of such estimates to each party involved in the entity. The Company generally uses a qualitative
approach to determine whether it is the primary beneficiary.
For most VIEs, the entity that has both the ability to direct the most significant activities of the VIE and the obligation to absorb losses or
receive benefits that could be significant to the VIE is considered the primary beneficiary. However, for VIEs that are investment companies or
apply measurement principles consistent with those utilized by investment companies, the primary beneficiary is based on a risks and
rewards model and is defined as the entity that will absorb a majority of a VIE’s expected losses, receive a majority of a VIE’s expected residual
returns if no single entity absorbs a majority of expected losses, or both. The Company reassesses its involvementwithVIEsonaquarterly
basis. The use of different methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect
on the amounts presented within the consolidated financial statements.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest rates, foreign currency exchange rates, credit spreads,
and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter market. The Company uses a
variety of derivatives, including swaps, forwards, futures and option contracts, to manage various risks relating to its ongoing business. To a
lesser extent, the Company uses credit derivatives, such as credit default swaps, to synthetically replicate investment risks and returns which
are not readily available in the cash market. The Company also purchases certain securities, issues certain insurance policies and investment
contracts and engages in certain reinsurance contracts that have embedded derivatives.
Freestanding derivatives are carried on the Company’s consolidated balance sheets either as assets within other invested assets or as
liabilities within other liabilities at estimated fair value as determined through the use of quoted market prices for exchange-traded derivatives
and interest rate forwards to sell certain to-be-announced securities or through the use of pricing models for over-the-counter derivatives.
The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies
and inputs that are assumed to be consistent with what other market participants would use when pricing the instruments. Derivative
F-15MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)