MetLife 2008 Annual Report Download - page 172

Embedded Derivatives
The Company has certain embedded derivatives that are required to be separated from their host contracts and accounted for as
derivatives. These host contracts principally include: variable annuities with guaranteed minimum withdrawal, guaranteed minimum
accumulation and certain guaranteed minimum income riders; ceded reinsurance contracts related to guaranteed minimum accumulation
and certain guaranteed minimum income riders; and guaranteed investment contracts with equity or bond indexed crediting rates.
The following table presents the estimated fair value of the Company’s embedded derivatives at:
2008 2007
December 31,
(In millions)
Net embedded derivatives within asset host contracts:
Cededguaranteedminimumbenefitriders....................................... $ 205 $ 6
Calloptionsinequitysecurities.............................................. (173) (16)
Netembeddedderivativeswithinassethostcontracts.............................. $ 32 $(10)
Net embedded derivatives within liability host contracts:
Directguaranteedminimumbenefitriders ....................................... $3,134 $284
Other .............................................................. (83) 52
Netembeddedderivativeswithinliabilityhostcontracts............................. $3,051 $336
The following table presents changes in the estimated fair value related to embedded derivatives:
2008 2007 2006
Years Ended December 31,
(In millions)
Net investment gains (losses)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,650) $(321) $202
Policyholderbenefitsandclaims ................................... $ 182 $ — $ —
(1) Effective January 1, 2008, upon adoption of SFAS 157, the valuation of the Company’s guaranteed minimum benefit riders includes an
adjustment for the Company’s own credit. Included in net investment gains (losses) for the year ended December 31, 2008 are gains of
$2,994 million in connection with this adjustment.
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 net positive estimated fair value
of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received
pursuant to credit support annexes.
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. See Note 24 for a description of the impact of credit risk on the valuation
of derivative instruments.
The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection
with its derivative instruments. At December 31, 2008 and 2007, the Company was obligated to return cash collateral under its control of
$7,758 million and $833 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents or in short-term
investments and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the
consolidated balance sheets. At December 31, 2008 and 2007, the Company had also accepted collateral consisting of various securities
with a fair market value of $1,249 million and $678 million, respectively, which are held in separate custodial accounts. The Company is
permitted by contract to sell or repledge this collateral, but at December 31, 2008, none of the collateral had been sold or repledged.
At December 31, 2008 and 2007, the Company provided securities collateral for various arrangements in connection with derivative
instruments of $776 million and $162 million, respectively, which is included in fixed maturity securities. The counterparties are permitted
by contract to sell or repledge this collateral. In addition, the Company has exchange-traded futures, which require the pledging of
collateral. At December 31, 2008 and 2007, the Company pledged securities collateral for exchange-traded futures of $282 million and
$167 million, respectively, which is included in fixed maturity securities. The counterparties are permitted by contract to sell or repledge this
collateral. At December 31, 2008 and 2007, the Company provided cash collateral for exchange-traded futures of $686 million and
$102 million, respectively, which is included in premiums and other receivables.
In connection with synthetically created investment transactions and credit default swaps held in relation to the trading portfolio, the
Company writes credit default swaps for which it receives a premium to insure credit risk. If a credit event, as defined by the contract,
occurs generally the contract will require the Company to pay the counterparty the specified swap notional amount in exchange for the
delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced
credit obligations is zero, was $1,875 million at December 31, 2008. The Company can terminate these contracts at any time through cash
F-49MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)