MetLife 2006 Annual Report Download - page 121

securities; (ix) GICs to synthetically create traditional GICs; (x) credit default swaps and TRRs to synthetically create investments; and
(xi) basis swaps to better match the cash flows of assets and related liabilities.
For the years ended December 31, 2006, 2005 and 2004, the Company recognized as net investment gains (losses), excluding
embedded derivatives, changes in fair value of ($685) million, $299 million and ($194) million, respectively, related to derivatives that do not
qualify for hedge accounting. For the years ended December 31, 2006 and 2005, the Company recorded changes in fair value of
($33) million and $2 million, respectively, as policyholder benefits and claims related to derivatives that do not qualify for hedge accounting.
The Company did not have policyholder benefits and claims related to such derivatives for the year ended December 31, 2004. For the
years ended December 31, 2006 and 2005, the Company recorded changes in fair value of ($40) million and ($38) million, respectively, as
net investment income related to economic hedges of equity method investments in joint ventures that do not qualify for hedge accounting.
The Company had no economic hedges of equity method investment in joint ventures for the year ended December 31, 2004.
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 minimum withdrawal contracts, guaranteed minimum accumulation contracts and
modified coinsurance contracts. The fair value of the Company’s embedded derivative assets was $184 million and $50 million at
December 31, 2006 and 2005, respectively. The fair value of the Company’s embedded derivative liabilities was $84 million and $45 million
at December 31, 2006 and 2005, respectively. The amounts recorded and included in net investment gains (losses) during the years
ended December 31, 2006, 2005 and 2004 were gains (losses) of $209 million, $69 million and $37 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.
The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counter-
parties, 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, 2006 and 2005, the Company was obligated to return cash collateral under its control
of $428 million and $195 million, respectively. 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 sheets. As of
December 31, 2006 and 2005, the Company had also accepted collateral consisting of various securities with a fair market value of
$453 million and $427 million, respectively, which are held in separate custodial accounts. The Company is permitted by contract to sell or
repledge this collateral, but as of December 31, 2006 and 2005, none of the collateral had been sold or repledged.
As of December 31, 2006 and 2005, the Company provided collateral of $80 million and $4 million, respectively, which is included in
fixed maturity securities in the consolidated balance sheets. In addition, the Company has exchange traded futures, which require the
pledging of collateral. As of December 31, 2006 and 2005, the Company pledged collateral of $105 million and $89 million, respectively,
which is included in fixed maturity securities. The counterparties are permitted by contract to sell or repledge this collateral.
F-38 MetLife, Inc.
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)