MetLife 2005 Annual Report Download - page 57

ments, and prepayment restrictions and related fees on mortgage loans and consistent monitoring of the pricing of the Company’s products in order to
better match the duration of the assets and the liabilities they support.
Equity market prices. The Company’s investments in equity securities expose it to changes in equity prices, as do certain liabilities that involve
long-term guarantees on equity performance. It manages this risk on an integrated basis with other risks through its asset/liability management strategies.
The Company also manages equity market price risk through industry and issuer diversification, asset allocation techniques and the use of derivatives.
Foreign currency exchange rates. The Company’s exposure to fluctuations in foreign currency exchange rates against the U.S. dollar results from
its holdings in non-U.S. dollar denominated fixed maturity securities, equity securities and liabilities, as well as through its investments in foreign
subsidiaries. The principal currencies that create foreign currency exchange rate risk in the Company’s investment portfolios are the Euro, the Canadian
dollar and the British pound. The Company mitigates the majority of its fixed maturities’ foreign currency exchange rate risk through the utilization of foreign
currency swaps and forward contracts. Through its investments in foreign subsidiaries, the Company is primarily exposed to the Canadian dollar, the
Mexican peso, the Australian dollar, the Argentinean peso, the South Korean won, the Chilean peso, the Taiwanese dollar and the Japanese Yen. The
Company has matched substantially all of its foreign currency liabilities in its foreign subsidiaries with their respective foreign currency assets, thereby
reducing its risk to currency exchange rate fluctuation. Selectively, the Company uses U.S. dollar assets to support certain long duration foreign currency
liabilities. Additionally, in some countries, local surplus is held entirely or in part in U.S. dollar assets which further minimizes exposure to exchange rate
fluctuation risk.
Risk Management
Corporate risk management. MetLife has established several financial and non-financial senior management committees as part of its risk
management process. These committees manage capital and risk positions, approve asset/liability management strategies and establish appropriate
corporate business standards.
MetLife also has a separate Corporate Risk Management Department, which is responsible for risk throughout MetLife and reports to MetLife’s Chief
Financial Officer. The Corporate Risk Management Department’s primary responsibilities consist of:
)implementing a board of directors-approved corporate risk framework, which outlines the Company’s approach for managing risk on an
enterprise-wide basis;
)developing policies and procedures for managing, measuring and monitoring those risks identified in the corporate risk framework;
)establishing appropriate corporate risk tolerance levels;
)deploying capital on an economic capital basis; and
)reporting on a periodic basis to the Governance Committee of the Holding Company’s board of directors and various financial and non-financial
senior management committees.
Asset/liability management. The Company actively manages its assets using an approach that balances quality, diversification, asset/liability
matching, liquidity and investment return. The goals of the investment process are to optimize, net of income taxes, risk-adjusted investment income and
risk-adjusted total return while ensuring that the assets and liabilities are managed on a cash flow and duration basis. The asset/liability management
process is the shared responsibility of the Portfolio Management Unit, the Business Finance Asset/Liability Management Unit, and the operating business
segments under the supervision of the various product line specific ALM Committees. The ALM Committees’ duties include reviewing and approving
target portfolios on a periodic basis, establishing investment guidelines and limits and providing oversight of the asset/liability management process. The
portfolio managers and asset sector specialists, who have responsibility on a day-to-day basis for risk management of their respective investing activities,
implement the goals and objectives established by the ALM Committees.
Each of MetLife’s business segments has an asset/liability officer who works with portfolio managers in the investment department to monitor
investment, product pricing, hedge strategy and liability management issues. MetLife establishes target asset portfolios for each major insurance product,
which represent the investment strategies used to profitably fund its liabilities within acceptable levels of risk. These strategies include objectives for
effective duration, yield curve sensitivity, convexity, liquidity, asset sector concentration and credit quality.
To manage interest rate risk, the Company performs periodic projections of asset and liability cash flows to evaluate the potential sensitivity of its
securities investments and liabilities to interest rate movements. These projections involve evaluating the potential gain or loss on most of the Company’s
in-force business under various increasing and decreasing interest rate environments. New York State Department of Insurance regulations require that
MetLife perform some of these analyses annually as part of MetLife’s review of the sufficiency of its regulatory reserves. For several of its legal entities, the
Company maintains segmented operating and surplus asset portfolios for the purpose of asset/liability management and the allocation of investment
income to product lines. For each segment, invested assets greater than or equal to the GAAP liabilities less the DAC asset and any non-invested assets
allocated to the segment are maintained, with any excess swept to the surplus segment. The operating segments may reflect differences in legal entity,
statutory line of business and any product market characteristic which may drive a distinct investment strategy with respect to duration, liquidity or credit
quality of the invested assets. Certain smaller entities make use of unsegmented general accounts for which the investment strategy reflects the
aggregate characteristics of liabilities in those entities. The Company measures relative sensitivities of the value of its assets and liabilities to changes in
key assumptions utilizing Company models. These models reflect specific product characteristics and include assumptions based on current and
anticipated experience regarding lapse, mortality and interest crediting rates. In addition, these models include asset cash flow projections reflecting
interest payments, sinking fund payments, principal payments, bond calls, mortgage prepayments and defaults.
Common industry metrics, such as duration and convexity, are also used to measure the relative sensitivity of assets and liability values to changes
in interest rates. In computing the duration of liabilities, consideration is given to all policyholder guarantees and to how the Company intends to set
indeterminate policy elements such as interest credits or dividends. Each operating asset segment has a duration constraint based on the liability duration
and the investment objectives of that portfolio. Where a liability cash flow may exceed the maturity of available assets, as is the case with certain
retirement and non-medical health products, the Company may support such liabilities with equity investments or curve mismatch strategies.
Hedging activities. To reduce interest rate risk, MetLife’s risk management strategies incorporate the use of various interest rate derivatives to adjust
the overall duration and cash flow profile of its invested asset portfolios to better match the duration and cash flow profile of its liabilities. Such instruments
include financial futures, financial forwards, interest rate and credit default swaps, caps, floors and options. MetLife also uses foreign currency swaps and
MetLife, Inc.
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