MetLife 2011 Annual Report Download - page 107

MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 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 acquired (“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 acquired as part of a business combination. 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 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.
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