MetLife 2008 Annual Report Download - page 25

Net Investment Income
Net investment income decreased by $1,767 million, or 10%, to $16,296 million for the year ended December 31, 2008 from
$18,063 million for the comparable 2007 period. Management attributes $3,141 million of this change to a decrease in yields, partially
offset by an increase of $1,374 million due to growth in average invested assets. Average invested assets are calculated on cost basis
without unrealized gains and losses. The decrease in net investment income attributable to lower yields was primarily due to lower returns
on other limited partnership interests, real estate joint ventures, short-term investments, fixed maturity securities, and mortgage loans,
partially offset by improved securities lending results. Management anticipates that the significant volatility in the equity, real estate and
credit markets will continue in 2009 which could continue to impact net investment income and yields on other limited partnership interests
and real estate joint ventures. The decrease in net investment income attributable to lower yields was partially offset by increased net
investment income attributable to an increase in average invested assets on an amortized cost basis, primarily within short-term
investments, mortgage loans, other limited partnership interests, and real estate joint ventures.
Interest Margin
Interest margin, which represents the difference between interest earned and interest credited to policyholder account balances
decreased in the Individual segment for the year ended December 31, 2008 as compared to the prior year. The decrease in interest margin
within the Individual segment was primarily attributable to a decline in net investment income due to lower returns on other limited
partnership interests, real estate joint ventures, other invested assets including derivatives, and short term investments, all of which were
partially offset by higher securities lending results. Interest margins decreased in the retirement & savings and non-medical health & other
businesses, but increased within the group life business, all within the Institutional segment. Interest earned approximates net investment
income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts
and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder
benefits and claims, and the amount credited to policyholder account balances for investment-type products, recorded in interest credited
to policyholder account balances. Interest credited on insurance products reflects the current period impact of the interest rate
assumptions established at issuance or acquisition. Interest credited to policyholder account balances is subject to contractual terms,
including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements and may reflect
actions by management to respond to competitive pressures and, therefore, generally does not introduce volatility in expense.
Net Investment Gains (Losses)
Net investment losses decreased by $2,390 million to a gain of $1,812 million for the year ended December 31, 2008 from a loss of
$578 million for the comparable 2007 period. The decrease in net investment losses is due to an increase in gains on derivatives partially
offset by losses primarily on fixed maturity and equity securities. Derivative gains were driven by gains on freestanding derivatives that were
partially offset by losses on embedded derivatives primarily associated with variable annuity riders. Gains on freestanding derivatives
increased by $6,499 million and were primarily driven by: i) gains on certain interest rate swaps, floors, and swaptions which were
economic hedges of certain investment assets and liabilities, ii) gains from foreign currency derivatives primarily due to the U.S. dollar
strengthening as well as, iii) gains primarily from equity options, financial futures and interest rate swaps hedging the embedded
derivatives. The gains on these equity options, financial futures, and interest rate swaps substantially offset the change in the underlying
embedded derivative liability that is hedged by these derivatives. Losses on the embedded derivatives increased by $2,329 million and
were driven by declining interest rates and poor equity market performance throughout the year. These embedded derivative losses include
a $2,994 million gain resulting from the effect of the widening of the Company’s own credit spread which is required to be used in the
valuation of these variable annuity rider embedded derivatives under SFAS 157 which became effective January 1, 2008. The remaining
change in net investment losses of $1,780 million is principally attributable to an increase in losses on fixed maturity and equity securities,
and, to a lesser degree, an increase in losses on mortgage and consumer loans and other limited partnership interests offset by an
increase in foreign currency transaction gains. The increase in losses on fixed maturity and equity securities is primarily attributable to an
increase in impairments associated with financial services industry holdings which experienced losses as a result of bankruptcies, FDIC
receivership, and federal government assisted capital infusion transactions in the third and fourth quarters of 2008. Losses on fixed
maturity and equity securities were also driven by an increase in credit related impairments on communication and consumer sector
security holdings, losses on asset-backed securities as well as an increase in losses on fixed maturity security holdings where the
Company either lacked the intent to hold, or due to extensive credit widening, the Company was uncertain of its intent to hold these fixed
maturity securities for a period of time sufficient to allow recovery of the market value decline.
Underwriting
Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity
or other insurance costs, less claims incurred, and the change in insurance-related liabilities. Underwriting results are significantly
influenced by mortality, morbidity or other insurance-related experience trends, as well as the reinsurance activity related to certain blocks
of business. Consequently, results can fluctuate from year to year. Underwriting results, including catastrophes, in the Auto & Home
segment were unfavorable for the year ended December 31, 2008, as the combined ratio, including catastrophes, increased to 91.2%
from 88.4% for the year ended December 31, 2007. Underwriting results, excluding catastrophes, in the Auto & Home segment were
favorable for the year ended December 31, 2008, as the combined ratio, excluding catastrophes, decreased to 83.1% from 86.3% for the
year ended December 31, 2007. Underwriting results were less favorable in the non-medical health & other, retirement & savings and
group life businesses in the Institutional segment. Underwriting results were unfavorable in the life products in the Individual segment.
Other Expenses
Other expenses increased by $1,495 million, or 14%, to $11,924 million for the year ended December 31, 2008 from $10,429 million
for the comparable 2007 period.
22 MetLife, Inc.