MetLife 2010 Annual Report Download - page 108

data as of the close of the second quarter. Goodwill associated with a business acquisition is not tested for impairment during the year the
business is acquired unless there is a significant identified impairment event.
Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit”
level. A reporting unit is the operating segment or a business one level below the operating segment, if discrete financial information is
prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, a significant portion of goodwill
within Banking, Corporate & Other is allocated to reporting units within the Company’s segments.
For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, there might be an
indication of impairment. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill
that would be determined in a business acquisition. The excess of the carrying value of goodwill over the implied fair value of goodwill would
be recognized as an impairment and recorded as a charge against net income.
In performing the Company’s goodwill impairment tests, the estimated fair values of the reporting units are first determined using a market
multiple approach. When further corroboration is required, the Company uses a discounted cash flow approach. For reporting units which are
particularly sensitive to market assumptions, such as the retirement products and individual life reporting units, the Company may use
additional valuation methodologies to estimate the reporting units’ fair values.
The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected
earnings, current book value (with and without accumulated other comprehensive income), the level of economic capital required to support
the mix of business, long-term growth rates, comparative market multiples, the account value of in-force business, projections of new and
renewal business, as well as margins on such business, the level of interest rates, credit spreads, equity market levels and the discount rate
that the Company believes is appropriate for the respective reporting unit. The estimated fair values of the retirement products and individual
life reporting units are particularly sensitive to the equity market levels.
When testing goodwill for impairment, the Company also considers its market capitalization in relation to the aggregate estimated fair value
of its reporting units.
The Company applies significant judgment when determining the estimated fair value of the Company’s reporting units and when
assessing the relationship of market capitalization to the aggregate estimated fair value of its reporting units. The valuation methodologies
utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and
represent only management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions
upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Declines in the estimated fair value
of the Company’s reporting units could result in goodwill impairments in future periods which could materially adversely affect the Company’s
results of operations or financial position.
During the 2010 impairment tests of goodwill, the Company concluded that the fair values of all reporting units were in excess of their
carrying values and, therefore, goodwill was not impaired. On an ongoing basis, the Company evaluates potential triggering events that may
affect the estimated fair value of the Company’s reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse
market conditions for certain reporting units may have a significant impact on the estimated fair value of these reporting units and could result
in future impairments of goodwill.
See Note 7 for further consideration of goodwill impairment testing during 2010.
Liability for Future Policy Benefits and Policyholder Account Balances
The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, traditional annuities,
certain accident and health, and non-medical health insurance. Generally, amounts are payable over an extended period of time and related
liabilities are calculated as the present value of future expected benefits to be paid reduced by the present value of future expected premiums.
Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards.
Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal,
retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to
the respective product type and geographical area. These assumptions are established at the time the policy is issued and are intended to
estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block of
business basis.
Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (i) net level premium reserves
for death and endowment policy benefits (calculated based upon the non-forfeiture interest rate, ranging from 3% to 7% for domestic
business and 1% to 12% for international business, and mortality rates guaranteed in calculating the cash surrender values described in such
contracts); and (ii) the liability for terminal dividends for domestic business.
Participating business represented approximately 6% of the Company’s life insurance in-force at both December 31, 2010 and 2009.
Participating policies represented approximately 26%, 28% and 27% of gross life insurance premiums for the years ended December 31,
2010, 2009 and 2008, respectively.
Future policy benefit liabilities for non-participating traditional lifeinsurancepoliciesareequaltotheaggregateofthepresentvalueof
expected future benefit payments and related expenses less the present value of expected future net premiums. Assumptions as to mortality
and persistency are based upon the Company’s experience when the basis of the liability is established. Interest rate assumptions for the
aggregate future policy benefit liabilities range from 3% to 8% for domestic business and 1% to 12% for international business.
Future policy benefit liabilities for individual and group traditional fixed annuities after annuitization are equal to the present value of
expected future payments. Interest rate assumptions used in establishing such liabilities range from 2% to 11% for domestic business and 3%
to 12% for international business.
Future policy benefit liabilities for non-medical health insurance, primarily related to domestic business, are calculated using the net level
premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rate
assumptions used in establishing such liabilities range from 4% to 7%.
F-19MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)