MetLife 2011 Annual Report Download - page 103

MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
stated at the lower of depreciated cost or estimated fair value less expected disposition costs. Real estate is not depreciated while it is classified
as held-for-sale. The Company periodically reviews its properties held-for-investment for impairment and tests properties for recoverability
whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable and the carrying value of the
property exceeds its estimated fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to
their estimated fair value, with the impairment loss included in net investment gains (losses). Impairment losses are based upon the estimated fair
value of real estate, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with
the underlying risks. Real estate acquired upon foreclosure is recorded at the lower of estimated fair value or the carrying value of the mortgage
loan at the date of foreclosure.
Real Estate Joint Ventures and Other Limited Partnership Interests. The Company uses the equity method of accounting for investments in
real estate joint ventures and other limited partnership interests consisting of leveraged buy-out funds, hedge funds and other private equity
funds in which it has more than a minor ownership interest or more than a minor influence over the joint venture’s or partnership’s operations, but
does not have a controlling interest and is not the primary beneficiary. The equity method is also used for such investments in which the
Company has more than a minor influence or more than a 20% interest. Generally, the Company records its share of earnings using a three-
month lag methodology for instances where the timely financial information is not available and the contractual agreements provide for the
delivery of the investees’ financial information after the end of the Company’s reporting period. The Company uses the cost method of
accounting for investments in real estate joint ventures and other limited partnership interests in which it has a minor equity investment and
virtually no influence over the joint venture’s or the partnership’s operations. Based on the nature and structure of these investments, they do not
meet the characteristics of an equity security. The Company reports the distributions from real estate joint ventures and other limited partnership
interests accounted for under the cost method and equity in earnings from real estate joint ventures and other limited partnership interests
accounted for under the equity method in net investment income. In addition to the investees performing regular evaluations for the impairment of
underlying investments, the Company routinely evaluates its investments in real estate joint ventures and other limited partnerships for
impairments. The Company considers its cost method investments for OTTI when the carrying value of real estate joint ventures and other limited
partnership interests exceeds the net asset value (“NAV”). The Company takes into consideration the severity and duration of this excess when
deciding if the cost method investment is other-than-temporarily impaired. For equity method investees, the Company considers financial and
other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital
commitments, in determining whether an impairment has occurred. When an OTTI is deemed to have occurred, the Company records a realized
capital loss within net investment gains (losses) to record the investment at its estimated fair value.
Short-term Investments. Short-term investments include securities and other investments with remaining maturities of one year or less, but
greater than three months, at the time of purchase and are stated at estimated fair value or amortized cost, which approximates estimated fair
value.
Other Invested Assets. Other invested assets consist principally of freestanding derivatives with positive estimated fair values, leveraged
leases, investments in insurance enterprise joint ventures, tax credit partnerships, funding agreements, mortgage servicing rights (“MSRs”) and
funds withheld.
Freestanding derivatives with positive estimated fair values are described in “—Derivative Financial Instruments” below.
Leveraged leases are recorded net of non-recourse debt. The Company recognizes income on the leveraged leases by applying the
leveraged lease’s estimated rate of return to the net investment in the lease. The Company regularly reviews residual values and impairs them to
expected values.
Joint venture investments represent the Company’s investments in entities that engage in insurance underwriting activities and are accounted
for under the equity method.
Tax credit partnerships are established for the purpose of investing in low-income housing and other social causes, where the primary return
on investment is in the form of income tax credits and are accounted for under the equity method or under the effective yield method. The
Company reports the equity in earnings of joint venture investments and tax credit partnerships in net investment income.
Funding agreements represent arrangements where the Company has long-term interest bearing amounts on deposit with third parties and
are generally stated at amortized cost.
MSRs are measured at estimated fair value and are either acquired or are generated from the sale of originated residential mortgage loans
where the servicing rights are retained by the Company. Changes in estimated fair value of MSRs are reported in other revenues in the period in
which the change occurs.
Funds withheld represent a receivable for amounts contractually withheld by ceding companies in accordance with reinsurance agreements.
The Company recognizes interest on funds withheld at rates defined by the terms of the agreement which may be contractually specified or
directly related to the underlying investments and records it in net investment income.
Investments Risks and Uncertainties. The Company’s investments are exposed to four primary sources of risk: credit, interest rate, liquidity risk, and
market valuation. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair
values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of impairments, the recognition of income
on certain investments and the potential consolidation of VIEs. The use of different methodologies, assumptions and inputs relating to these financial
statement risks may have a material effect on the amounts presented within the consolidated financial statements.
When available, the estimated fair value of the Company’s fixed maturity and equity securities are based on quoted prices in active markets that are
readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not
involve management judgment.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation
methodologies as described in “— Fair Value” below and in Note 5. Such estimated fair values are based on available market information and
management’s judgments about financial instruments. The observable and unobservable inputs used in the standard market valuation methodologies
are described in Note 5.
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