MetLife 2012 Annual Report Download - page 126

MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable
to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for all three portfolio
segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original
effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral
dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for
all loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment thatis
based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk
characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss.
These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and
loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information
becomes available.
Commercial and Agricultural Mortgage Loan Portfolio Segments
The Company typically uses several years of historical experience in establishing non-specific valuation allowances which captures multiple
economic cycles. For evaluations of commercial loans, in addition to historical experience, management considers factors that include the impact ofa
rapid change to the economy, which may not be reflected in the loan portfolio, and recent loss and recovery trend experience as compared to
historical loss and recovery experience. For evaluations of agricultural loans, in addition to historical experience, management considers factors that
include increased stress in certain sectors, which may be evidenced by higher delinquency rates, or a change in the number of higher risk loans. On
a quarterly basis, management incorporates the impact of these current market events and conditions on historical experience in determining the non-
specific valuation allowance established for each portfolio segment.
All commercial loans are reviewed on an ongoing basis which may include an analysis of the property financial statements and rent roll, lease
rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt service coverage
ratios, and tenant creditworthiness. All agricultural loans are monitored on an ongoing basis. The monitoring process focuses on higher risk loans,
which include those that are classified as restructured, potentially delinquent, delinquent or in foreclosure, as well as loans with higher loan-to-value
ratios and lower debt service coverage ratios. The monitoring process for agricultural loans is generally similar to the commercial loan monitoring
process, with a focus on higher risk loans, including reviews on a geographic and property-type basis. Higher risk loans are reviewed individually on
an ongoing basis for potential credit loss and specific valuation allowances are established using the methodology described above for all loan
portfolio segments. Quarterly, the remaining loans are reviewed on a pool basis by aggregating groups of loans that have similar risk characteristics for
potential credit loss, and non-specific valuation allowances are established as described above using inputs that are unique to each segment of the
loan portfolio.
For commercial loans, the primary credit quality indicator is the debt service coverage ratio, which compares a property’s net operating income to
amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of
experiencing a credit loss. The Company also reviews the loan-to-value ratio of its commercial loan portfolio. Loan-to-value ratios compare the unpaid
principal balance of the loan to the estimated fair value of the underlying collateral. Generally, the higher the loan-to-value ratio, the higher the risk of
experiencing a credit loss. The debt service coverage ratio and loan-to-value ratio, as well as the values utilized in calculating these ratios, are
updated annually, on a rolling basis, with a portion of the loan portfolio updated each quarter.
For agricultural loans, the Company’s primary credit quality indicator is the loan-to-value ratio. The values utilized in calculating this ratio are
developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated. Additionally, the Company focuses the
monitoring process on higher risk loans, including reviews on a geographic and property-type basis.
Residential Mortgage Loan Portfolio Segment
The Company’s residential loan portfolio is comprised primarily of closed end, amortizing residential loans. For evaluations of residential loans, the
key inputs of expected frequency and expected loss reflect current market conditions, with expected frequency adjusted, when appropriate, for
differences from market conditions and the Company’s historical experience. In contrast to the commercial and agricultural loan portfolios, residential
loans are smaller-balance homogeneous loans that are collectively evaluated for impairment. Non-specific valuation allowances are established using
the evaluation framework described above for pools of loans with similar risk characteristics from inputs that are unique to the residential segment of
the loan portfolio. Loan specific valuation allowances are only established on residential loans when they have been restructured and are established
using the methodology described above for all loan portfolio segments.
For residential loans, the Company’s primary credit quality indicator is whether the loan is performing or non-performing. The Company generally
defines non-performing residential loans as those that are 90 or more days past due and/or in non-accrual status which is assessed monthly.
Generally, non-performing residential loans have a higher risk of experiencing a credit loss.
Credit Quality of Commercial Mortgage Loans
Information about the credit quality of commercial mortgage loans held-for-investment is presented below at:
120 MetLife, Inc.