MetLife 2008 Annual Report Download - page 116

account balances related to certain investment type contracts, and net embedded derivatives within liability host contracts which have the
same type of interest rate exposure (medium- and long-term interest rates) as fixed maturity securities. The Company employs product
design, pricing and asset/liability management strategies to reduce the adverse effects of interest rate movements. Product design and
pricing strategies include the use of surrender charges or restrictions on withdrawals in some products and the ability to reset credited
rates for certain products. Asset/liability management strategies include the use of derivatives and duration mismatch limits. See “Risk
Factors — Changes in Market Interest Rates May Significantly Affect Our Profitability” in MetLife, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2008.
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 and equity securities, mortgage and consumer loans, and certain
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 principal currencies that create foreign
currency exchange risk in the Company’s liabilities are the British pound, the Euro, the Canadian dollar and the Swiss franc. Selectively, the
Company uses U.S. dollar assets to support certain long duration foreign currency liabilities. Through its investments in foreign subsidiaries
and joint ventures, the Company is primarily exposed to the Mexican peso, the Japanese yen, the South Korean won, the Canadian dollar,
the British pound, the Chilean peso, the Australian dollar, the Argentine peso and the Hong Kong dollar. In addition to hedging with foreign
currency swaps, forwards and options, in some countries, local surplus is held entirely or in part in U.S. dollar assets which further
minimizes exposure to foreign currency exchange rate fluctuation risk. The Company has matched much of its foreign currency liabilities in
its foreign subsidiaries with their respective foreign currency assets, thereby reducing its risk to foreign currency exchange rate fluctuation.
Equity Prices. The Company has exposure to equity prices through certain liabilities that involve long-term guarantees on equity
performance such as variable annuities with guaranteed minimum benefit riders, certain policyholder account balances along with
investments in equity securities. We manage this risk on an integrated basis with other risks through our asset/liability management
strategies including the dynamic hedging of certain variable annuity riders. The Company also manages equity price risk incurred in its
investment portfolio through the use of derivatives. Equity exposures associated with other limited partnership interests are excluded from
this section as they are not considered financial instruments under generally accepted accounting principles.
Management of Market Risk Exposures
The Company uses a variety of strategies to manage interest rate, foreign currency exchange rate and equity price risk, including the
use of derivative instruments.
Interest Rate Risk Management. To manage interest rate risk, the Company analyzes interest rate risk using various models, including
multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivative
instruments. 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. The New York State Insurance Department 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 asset portfolio has a duration target
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, derivatives or curve mismatch strategies.
Foreign Currency Exchange Rate Risk Management. Foreign currency exchange rate risk is assumed primarily in three ways:
investments in foreign subsidiaries, purchases of foreign currency denominated investments in the investment portfolio and the sale
of certain insurance products.
• The Company’s Treasury Department is responsible for managing the exposure to investments in foreign subsidiaries. Limits to
exposures are established and monitored by the Treasury Department and managed by the Investment Department.
• The Investment Department is responsible for managing the exposure to foreign currency investments. Exposure limits to unhedged
foreign currency investments are incorporated into the standing authorizations granted to management by the Board of Directors and
are reported to the Board of Directors on a periodic basis.
• The lines of business are responsible for establishing limits and managing any foreign exchange rate exposure caused by the sale or
issuance of insurance products.
MetLife uses foreign currency swaps and forwards to hedge its foreign currency denominated fixed income investments, its equity
exposure in subsidiaries and its foreign currency exposures caused by the sale of insurance products.
113MetLife, Inc.