MetLife 2010 Annual Report Download - page 107

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
the expected future gross margins are above the previously estimated expected future gross margins. Each period, the Company also
reviews the estimated gross margins for each block of business to determine the recoverability of DAC and VOBA balances.
The Company amortizes DAC and VOBA related to fixed and variable universal life contracts and fixed and variable deferred annuity
contracts over the estimated lives of the contracts in proportion to actual and expected future gross profits. The amortization includes interest
based on rates in effect at inception or acquisition of the contracts. The amount of future gross profits is dependent principally upon returns in
excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, expenses to administer the business,
creditworthiness of reinsurance counterparties, the effect of any hedges used and certain economic variables, such as inflation. Of these
factors, the Company anticipates that investment returns, expenses and persistency are reasonably likely to impact significantly the rate of
DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that
period. When the actual gross profits change from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-
estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits 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 profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of
business remaining in-force, which impacts expected future gross profits. When expected future gross profits 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
the expected future gross profits are above the previously estimated expected future gross profits. Each period, the Company also reviews
the estimated gross profits for each block of business to determine the recoverability of DAC and VOBA balances.
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account
balances on such contracts each reporting period which can result in significant fluctuations in amortization of DAC and VOBA. Returns that
are higher than the Company’s long-term expectation produce higher account balances, which increases the Company’s future fee
expectations and decreases future benefit payment expectations on minimum death and living benefit guarantees, resulting in higher
expected future gross profits. The opposite result occurs when returns are lower than the Company’s long-term expectation. The Company’s
practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long-term appreciation in equity
markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. The Company
monitors these events and only changes the assumption when its long-term expectation changes.
The Company also periodically reviews other long-term assumptions underlying the projections of estimated gross margins and profits.
These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency and expenses to administer
business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have
significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA
amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update
causes expected future gross margins and profits to decrease.
Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of a contract for a new
contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If such modification, referred to
as an internal replacement, substantially changes the contract, the associated DAC or VOBA is written off immediately through income and
any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the
contract, the DAC or VOBA amortization on the original contract will continue and any acquisition costs associated with the related
modification are expensed.
Sales Inducements
The Company generally has two different types of sales inducements which are included in other assets: (i) the policyholder receives a
bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s
deposit; and (ii) the policyholder receives a higher interest rate using a dollar cost averaging method than would have been received based on
the normal general account interest rate credited. The Company defers sales inducements and amortizes them over the life of the policy using
the same methodology and assumptions used to amortize DAC. The amortization of sales inducements is included in policyholder benefits
and claims. Each year, or more frequently if circumstances indicate a potentially significant recoverability issue exists, the Company reviews
the deferred sales inducements to determine the recoverability of these balances.
Value of Distribution Agreements and Customer Relationships Acquired
Value of distribution agreements (“VODA”) is reported in other assets and represents the present value of expected future profits
associated with the expected future business derived from the distribution agreements. Value of customer relationships acquired (“VOCRA”)
is also reported in other assets and represents the present value of the expected future profits associated with the expected future business
acquired through existing customers of the acquired company or business. The VODA and VOCRA associated with past acquisitions are
amortized over useful lives ranging from 10 to 40 years and such amortization is included in other expenses. Each year, or more frequently if
circumstances indicate a potentially significant recoverability issue exists, the Company reviews VODA and VOCRA to determine the
recoverability of these balances.
Goodwill
Goodwill is the excess of cost over the estimated fair value of net assets acquired which represents the future economic benefits arising
from such net assets acquired that could not be individually identified. Goodwill is not amortized but is tested for impairment at least annually
or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for
conducting an interim test. The Company performs its annual goodwill impairment testing during the third quarter of each year based upon
F-18 MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)