MetLife 2010 Annual Report Download - page 110

margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market
participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium
persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment.
These guaranteed minimum benefits may be more costly than expected in volatile or declining equity markets. Market conditions
including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates, changes in
nonperformance risk, variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital
market inputs may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
The Company periodically reviews its estimates of actuarial liabilities for future policy benefits and compares them with its actual
experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, and in the
establishment of the related liabilities result in variances in profit and could result in losses. The effects of changes in such estimated
liabilities are included in the results of operations in the period in which the changes occur.
Policyholder account balances relate to investment-type contracts, universal life-type policies and certain guaranteed minimum benefits.
Investment-type contracts principally include traditional individual fixed annuities in the accumulation phase and non-variable group annuity
contracts. Policyholder account balances for these contracts are equal to (i) policy account values, which consist of an accumulation of gross
premium payments and investment performance; (ii) credited interest, ranging from 1% to 17% for domestic business and 1% to 38% for
international business, less expenses, mortality charges and withdrawals; and (iii) fair value adjustments relating to business combinations.
Other Policy-Related Balances
Other policy-related balances include policy and contract claims, unearned revenue liabilities, premiums received in advance, negative
VOBA, policyholder dividends due and unpaid and policyholder dividends left on deposit.
The liability for policy and contract claims generally relates to incurred but not reported death, disability, long-term care and dental claims,
as well as claims which have been reported but not yet settled. The liability for these claims is based on the Company’s estimated ultimate
cost of settling all claims. The Company derives estimates for the development of incurred but not reported claims principally from actuarial
analyses of historical patterns of claims and claims development for each line of business. The methods used to determine these estimates
are continually reviewed. Adjustments resulting from this continuous review process and differences between estimates and payments for
claims are recognized in policyholder benefits and claims expense in the period in which the estimates are changed or payments are made.
The unearned revenue liability relates to universal life-type and investment-type products and represents policy charges for services to be
provided in future periods. The charges are deferred as unearned revenue and amortized using the product’s estimated gross profits and
margins, similar to DAC. Such amortization is recorded in universal life and investment-type product policy fees.
The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premium received in
advance and applies the cash received to premiums when due.
For certain acquired blocks of business, the estimated fair value of the in-force contract obligations exceeded the book value of assumed
in-force insurance policy liabilities, resulting in negative VOBA, which is presented separately from VOBA as an additional insurance liability.
The fair value of the in-force contract obligations is based on actuarial determined projections by each block of business. Negative VOBA is
amortized over the policy period in proportion to the approximate consumption of losses included in the liability usually expressed in terms of
insurance in-force or account value. Such amortization is recorded as a contra-expense in other expenses in the consolidated statements of
operations.
Also included in other policy-related balances are policyholder dividends due and unpaid on participating policies and policyholder
dividends left on deposit. Such liabilities are presented at amounts contractually due to policyholders.
Recognition of Insurance Revenue and Related Benefits
Premiums related to traditional life and annuity policies with life contingencies and long-duration accident and health and credit insurance
policies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided against such revenues to
recognize profits over the estimated lives of the policies. When premiums are due over a significantly shorter period than the period over which
benefits are provided, any excess profit is deferred and recognized into operations in a constant relationship to insurance in-force or, for
annuities, the amount of expected future policy benefit payments.
Premiums related to short-duration non-medical health and disability contracts are recognized on a pro rata basis over the applicable
contract term.
Deposits related to universal life-type and investment-type products are credited to policyholder account balances. Revenues from such
contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges and
are recorded in universal life and investment-type product policy fees in the period in which services are provided. Amounts that are charged
to operations include interest credited and benefit claims incurred in excess of related policyholder account balances.
Premiums related to property and casualty contracts are recognized as revenue on a pro rata basis over the applicable contract term.
Unearned premiums, representing the portion of premium written relating to the unexpired coverage, are included in future policy benefits.
Premiums, policy fees, policyholder benefits and expenses are presented net of reinsurance.
The portion of fees allocated to embedded derivatives described previously is recognized within net derivative gains (losses) as part of the
estimated fair value of embedded derivatives.
Other Revenues
Other revenues include, in addition to items described elsewhere herein, advisory fees, broker-dealer commissions and fees and
administrative service fees. Such fees and commissions are recognized in the period in which services are performed. Other revenues also
include changes in account value relating to corporate-owned life insurance (“COLI”). Under certain COLI contracts, if the Company reports
certain unlikely adverse results in its consolidated financial statements, withdrawals would not be immediately available and would be subject
to market value adjustment, which could result in a reduction of the account value.
F-21MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)