MetLife 2005 Annual Report Download - page 94

METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides the settlement payments recorded in income for the:
Years Ended
December 31,
2005 2004 2003
(In millions)
Qualifying hedges:
Net investment income *************************************************************************** $ 42 $(147) $(63)
Interest credited to policyholder account balances **************************************************** 17 45 —
Other expenses ********************************************************************************* (8) — —
Non-qualifying hedges:
Net investment gains (losses)********************************************************************** 86 51 84
Total***************************************************************************************** $137 $ (51) $ 21
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of SFAS 133: (i) interest rate
swaps to convert fixed rate investments to floating rate investments; (ii) foreign currency swaps to hedge the foreign currency fair value exposure of
foreign currency denominated investments and liabilities; and (iii) interest rate futures to hedge against changes in value of fixed rate securities.
The Company recognized net investment gains (losses) representing the ineffective portion of all fair value hedges as follows:
Years Ended December 31,
2005 2004 2003
(In millions)
Changes in the fair value of derivatives *************************************************************** $(118) $ 62 $(191)
Changes in the fair value of the items hedged ********************************************************* 115 (48) 159
Net ineffectiveness of fair value hedging activities******************************************************* $ (3) $ 14 $ (32)
All components of each derivative’s gain or loss were included in the assessment of hedge ineffectiveness. There were no instances in which the
Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges, when they have met the requirements of SFAS 133: (i) interest rate
swaps to convert floating rate investments to fixed rate investments; (ii) interest rate swaps to convert floating rate liabilities into fixed rate liabilities;
(iii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments and liabilities; (iv) interest rate
futures to hedge against changes in value of securities to be acquired; (v) interest rate futures to hedge against changes in interest rates on liabilities to be
issued; and (vi) financial forwards to buy and sell securities.
For the years ended December 31, 2005, 2004 and 2003, the Company recognized net investment gains (losses) of ($25) million, ($45) million, and
($68) million, respectively, which represented the ineffective portion of all cash flow hedges. All components of each derivative’s gains or loss were
included in the assessment of hedge ineffectiveness. In certain instances, the Company discontinued cash flow hedge accounting because the
forecasted transactions did not occur on the anticipated date or in the additional time period permitted by SFAS 133. The net amounts reclassified into
net investment gains (losses) for the years ended December 31, 2005, 2004 and 2003 related to such discontinued cash flow hedges were losses of
$42 million, $51 million and $0 million, respectively. There were no hedged forecasted transactions, other than the receipt or payment of variable interest
payments.
Presented below is a roll forward of the components of other comprehensive income (loss), before income taxes, related to cash flow hedges:
Years Ended December 31,
2005 2004 2003
(In millions)
Other comprehensive income (loss) balance at the beginning of the year********************************** $(456) $(417) $ (24)
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges ***** 270 (97) (399)
Amounts reclassified to net investment gains (losses) ************************************************** 44 63 12
Amounts reclassified to net investment income ******************************************************* 222
Amortization of transition adjustment **************************************************************** (2) (7) (8)
Other comprehensive income (losses) balance at the end of the year ************************************ $(142) $(456) $(417)
At December 31, 2005, approximately $23 million of the deferred net loss on derivatives accumulated in other comprehensive income (loss) is
expected to be reclassified to earnings during the year ending December 31, 2006.
Hedges of Net Investments in Foreign Operations
The Company uses forward exchange contracts, foreign currency swaps and options to hedge portions of its net investment in foreign operations
against adverse movements in exchange rates. The Company measures ineffectiveness on the forward exchange contracts based upon the change in
forward rates. There was no ineffectiveness recorded in 2005, 2004 or 2003.
The Company’s consolidated statements of stockholders’ equity for the years ended December 31, 2005, 2004 and 2003 include losses of
$115 million, $47 million and $10 million, respectively, related to foreign currency contracts used to hedge its net investments in foreign operations. At
December 31, 2005 and 2004, the cumulative foreign currency translation loss recorded in AOCI related to these hedges was approximately
$172 million and $57 million, respectively. When substantially all of the net investments in foreign operations are sold or liquidated, the amounts in AOCI
MetLife, Inc.
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