MetLife 2005 Annual Report Download - page 95

METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
are reclassified to the consolidated statements of income, while a pro rata portion will be reclassified upon partial sale of the net investments in foreign
operations.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company enters into the following derivatives that do not qualify for hedge accounting under SFAS 133 or for purposes other than hedging:
(i) interest rate swaps, purchased caps and floors, and interest rate futures to minimize its exposure to interest rate volatility; (ii) foreign currency forwards,
swaps and option contracts to minimize its exposure to adverse movements in exchange rates; (iii) swaptions to sell embedded call options in fixed rate
liabilities; (iv) credit default swaps to minimize its exposure to adverse movements in credit; (v) credit default swaps to diversify its credit risk exposure in
certain portfolios; (vi) equity futures, equity index options, interest rate futures and equity variance swaps to economically hedge liabilities embedded in
certain variable annuity products; (vii) swap spread locks to hedge invested assets against the risk of changes in credit spreads; (viii) financial forwards to
buy and sell securities; (ix) synthetic GICs to synthetically create traditional GICs; (x) RSATs and TRRs to synthetically create investments; and (xi) basis
swaps to better match the cash flows from assets and related liabilities.
Effective at the date of acquisition, the Travelers’ derivative positions which previously qualified for hedge accounting were dedesignated in
accordance with SFAS 133. Such derivative positions were not redesignated and were included with the Company’s other nonqualifying derivative
positions from the date of acquisition through December 31, 2005.
For the years ended December 31, 2005, 2004 and 2003, the Company recognized as net investment gains (losses) changes in fair value of
$368 million, ($157) million and ($114) million, respectively, related to derivatives that do not qualify for hedge accounting. For the year ended
December 31, 2005, the Company recorded changes in fair value of ($2) million, as interest credited to policyholder account balances related to
derivatives that do not qualify for hedge accounting. The Company did not have interest credited to policyholder account balances related to such
derivatives for the years ended December 31, 2004 and 2003. For the year ended December 31, 2005, the Company recorded changes in fair value of
($38) million, as net investment income related to derivatives that do not qualify for hedge accounting. The Company did not have net investment income
related to such derivatives for the years ended December 31, 2004 and 2003.
Embedded Derivatives
The Company has certain embedded derivatives which are required to be separated from their host contracts and accounted for as derivatives.
These host contracts include guaranteed rate of return contracts, guaranteed minimum withdrawal, accumulation, and interest benefit contracts, and
modified coinsurance contracts. The fair value of the Company’s embedded derivative assets was $50 million and $46 million at December 31, 2005
and 2004, respectively. The fair value of the Company’s embedded derivative liabilities was $45 million and $26 million at December 31, 2005 and 2004,
respectively. The amounts recorded in net investment gains (losses) during the years ended December 31, 2005, 2004 and 2003 were gains of
$69 million, $37 million and $19 million, respectively.
Credit Risk
The Company may be exposed to credit related losses in the event of nonperformance by counterparties to derivative financial instruments.
Generally, the current credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date. The credit exposure of the
Company’s derivative transactions is represented by the fair value of contracts with a net positive fair value at the reporting date.
As noted above, the Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy
counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one
counterparty to another at each due date and upon termination. Because exchange traded futures are effected through regulated exchanges, and
positions are marked to market on a daily basis, the Company has minimal exposure to credit related losses in the event of nonperformance by
counterparties to such derivative instruments.
The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative
instruments. As of December 31, 2005, the Company was obligated to return cash collateral under its control of $195 million. This unrestricted cash
collateral is included in cash and cash equivalents and the obligation to return it is included in payables for collateral under securities loaned and other
transactions in the consolidated balance sheet. As of December 31, 2005, the Company had also accepted collateral consisting of various securities
with a fair market value of $427 million, which is held in separate custodial accounts. Such collateral is included in other assets and the obligation to
return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheet. The Company is permitted
by contract to sell or repledge this collateral, but as of December 31, 2005, none of the collateral had been sold or repledged.
As of December 31, 2005, the Company provided collateral of $4 million, which is included in other assets in the consolidated balance sheet. The
counterparties are permitted by contract to sell or repledge this collateral.
The Company did not have any cash or other collateral related to derivative instruments at December 31, 2004.
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