MetLife 2010 Annual Report Download - page 106

for in its entirety at estimated fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the
economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument,
the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are
carried in the consolidated balance sheets at estimated fair value with the host contract and changes in their estimated fair value are generally
reported in net derivative gains (losses) except for those in policyholder benefits and claims related to ceded reinsurance of guaranteed
minimum income benefits (“GMIBs”). 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 net investment income. 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 net investment income if that contract contains an embedded derivative that requires bifurcation.
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. Cash equivalents are stated at amortized cost, which approximates estimated fair value.
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 $2.4 billion and $1.9 billion at December 31, 2010 and 2009, respectively. Accumulated depreciation and
amortization of property, equipment and leasehold improvements was $1.2 billion and $1.0 billion at December 31, 2010 and 2009,
respectively. Related depreciation and amortization expense was $152 million, $152 million and $150 million for the years ended Decem-
ber 31, 2010, 2009 and 2008, 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 $2.0 billion and $1.7 billion at December 31, 2010 and 2009, respectively. Accumulated amortization of capitalized software was
$1.4 billion and $1.2 billion at December 31, 2010 and 2009, respectively. Related amortization expense was $189 million, $171 million and
$153 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Deferred Policy Acquisition Costs (“DAC”) and Value of Business Acquired (“VOBA”)
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 excess of book value over the estimated fair value of acquired insurance, annuity,
and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities 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, nonperformance risk adjustment 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 consolidated financial statements for reporting purposes.
DAC for credit, 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, accident and health 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, traditional group life insurance, credit insurance, non-medical health insurance, and accident and health
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 within the closed block (dividend paying traditional contracts) 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
F-17MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)