MetLife 2012 Annual Report Download - page 94

MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated in the
consolidated financial statements for reporting purposes.
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 potential recoverability issue exists, the Company reviews deferred sales inducements to determine the
recoverability of the asset.
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 business
combinations 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 possible impairment exists, the Company reviews VODA and VOCRA to determine whether the asset is impaired.
For certain acquired blocks of business, the estimated fair value of the in-force contract obligations exceeded the book value of assumed in-force
insurance policy liabilities, resulting in negative VOBA, which is presented separately from VOBA as an additional insurance liability. The fair value of the
in-force contract obligations is based on projections by each block of business. Negative VOBA is amortized over the policy period in proportion to the
approximate consumption of losses included in the liability usually expressed in terms of insurance in-force or account value. Such amortization is
recorded as a contra-expense in other expenses.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to
insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s
obligations as the primary insurer. The Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which
the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the
amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception
of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on
a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received)
on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums and
ceded (assumed) future policy benefit liabilities are established.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as
ceded (assumed) premiums and ceded (assumed) unearned premiums and are reflected as a component of premiums, reinsurance and other
receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the
amount of insurance protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of reinsurance accounting,
amounts paid (received) in excess of the related insurance liabilities ceded (assumed) are recognized immediately as a loss and are reported in the
appropriate line item within the statement of operations. Any gain on such retroactive agreement is deferred and is amortized as part of DAC, primarily
using the recovery method.
Ceded policyholder and contract related liabilities, other than those currently due, are reported gross on the balance sheet.
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables and amounts currently
payable are included in other liabilities. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the
balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under
the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable
balances are stated net of allowances for uncollectible reinsurance.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance agreements and are net of reinsurance ceded.
Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIB, a portion of the directly written GMIB is
accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are
included in premiums, reinsurance and other receivables with changes in estimated fair value reported in policyholder benefits and claims.
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from
insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in other liabilities and
deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying
contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate.
Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other
revenues or other expenses, as appropriate.
Investments
Net Investment Income
Income on investments is reported within net investment income, unless otherwise stated herein.
88 MetLife, Inc.