MetLife 2011 Annual Report Download - page 16

In addition, the application of acquisition accounting requires the use of estimation techniques in determining the estimated fair values of assets
acquired and liabilities assumed — the most significant of which relate to aforementioned critical accounting estimates. In applying the Company’s
accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of
these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s
business and operations. Actual results could differ from these estimates.
Estimated Fair Value of Investments
In determining the estimated fair value of fixed maturity securities, equity securities, trading and other securities, short-term investments, cash
equivalents, mortgage loans and MSRs, various methodologies, assumptions and inputs are utilized.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation
methodologies, giving priority to observable inputs. The market standard valuation methodologies utilized include: discounted cash flow methodologies,
matrix pricing or other similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates,
credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated
duration and management’s assumptions regarding liquidity and estimated future cash flows. Accordingly, the estimated fair values are based on
available market information and management’s judgments about financial instruments.
The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are
inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such observable inputs include
benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the
market.
When observable inputs are not available, the market standard valuation methodologies for determining the estimated fair value of certain types of
securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are
not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based
in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs
are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing
such securities.
The estimated fair value of residential mortgage loans held-for-sale and securitized reverse residential mortgage loans is determined based on
observable pricing for securities backed by similar types of loans, adjusted to convert the securities prices to loan prices, or from independent broker
quotations, which is intended to approximate the amounts that would be received from third parties. Certain other mortgage loans that were previously
designated as held-for-investment, but now are designated as held-for-sale, are recorded at the lower of amortized cost or estimated fair value, or for
collateral dependent loans, estimated fair value of the collateral less expected disposition costs determined on an individual loan basis. For these loans,
estimated fair value is determined using independent broker quotations, or values provided by independent valuation specialists, or when the loan isin
foreclosure or otherwise collateral dependent, the estimated fair value of the underlying collateral is estimated using internal models.
The estimated fair value of MSRs is principally determined through the use of internal discounted cash flow models which utilize various
assumptions. Valuation inputs and assumptions include generally observable items such as type and age of loan, loan interest rates, current market
interest rates, and certain unobservable inputs, including assumptions regarding estimates of discount rates, loan prepayments and servicing costs, all
of which are sensitive to changing markets conditions. The use of different valuation assumptions and inputs, as well as assumptions relating to the
collection of expected cash flows, may have a material effect on the estimated fair values of MSRs.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity.
The Company’s ability to sell securities, or the price ultimately realized for these securities, depends upon the demand and liquidity in the market and
increases the use of judgment in determining the estimated fair value of certain securities.
See Note 5 of the Notes to the Consolidated Financial Statements for additional information regarding the estimated fair value of investments.
Investment Impairments
One of the significant estimates related to available-for-sale securities is the evaluation of investments for impairments. The assessment of whether
impairments have occurred is based on our case-by-case evaluation of the underlying reasons for the decline in estimated fair value. The Company’s
review of its fixed maturity and equity securities for impairment includes an analysis of gross unrealized losses by three categories of severity and/or age
of gross unrealized loss. An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the ability of the
issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows or the ability
to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for
certain equity securities, greater weight and consideration are given by the Company to a decline in estimated fair value and the likelihood such
estimated fair value decline will recover.
Additionally, we consider a wide range of factors about the security issuer and use our best judgment in evaluating the cause of the decline in the
estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in our evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation
process include, but are not limited to:
(i) the length of time and the extent to which the estimated fair value has been below cost or amortized cost;
(ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties;
(iii) the potential for impairments in an entire industry sector or sub-sector;
(iv) the potential for impairments in certain economically depressed geographic locations;
(v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has
exhausted natural resources;
(vi) with respect to fixed maturity securities, whether the Company has the intent to sell or will more likely than not be required to sell a
particular security before recovery of the decline in estimated fair value below amortized cost;
(vii) with respect to equity securities, whether the Company’s ability and intent to hold a particular security for a period of time sufficient to allow
for the recovery of its estimated fair value to an amount at least equal to its cost;
(viii) with respect to structured securities, changes in forecasted cash flows after considering the quality of underlying collateral; expected
prepayment speeds; current and forecasted loss severity; consideration of the payment terms of the underlying assets backing a particular
security; and the payment priority within the tranche structure of the security; and
(ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
12 MetLife, Inc.