MetLife 2011 Annual Report Download - page 108

MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 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 operating
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.
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 impacton
the estimated fair value of these reporting units and could result in future impairments of goodwill.
See Note 7 for discussion of goodwill impairment testing during 2011.
Liability for Future Policy Benefits and PABs
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. For long duration insurance contracts, assumptions such as
mortality, morbidity and interest rates are “locked in” upon the issuance of new business. However, significant adverse changes in experience on such
contracts may require us to establish premium deficiency reserves. Such reserves are determined based on assumptions at the time the premium
deficiency reserve is established and do not include a provision for adverse deviation.
Premium deficiency reserves may also be established for short duration contracts to provide for expected future losses. These reserves on short
duration contracts are based on actuarial estimates of the amount of loss inherent in that period, including losses incurred for which claims have not
been reported. The provisions for unreported claims are calculated using studies that measure the historical length of time between the incurred dateof
a claim and its eventual reporting to the company. Anticipated investment income is considered in the calculation of premium deficiency losses for short
duration contracts.
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 18% 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, 2011 and 2010. Participating
policies represented approximately 21%, 26% and 28% of gross life insurance premiums for the years ended December 31, 2011, 2010 and 2009,
respectively.
Future policy benefit liabilities for non-participating traditional life insurance policies are equal to the aggregate of the present value of 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 2% to 10% for domestic business and 1% to 14% 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 2% to 12% for international
business.
104 MetLife, Inc.