MetLife 2009 Annual Report Download - page 99

claims for economic hedges of variable annuity guarantees included in future policy benefits, (ii) in net investment income for economic
hedges of equity method investments in joint ventures, or for all derivatives held in relation to the trading portfolios, (iii) in other revenues for
derivatives held in connection with the Company’s mortgage banking activities and (iv) in other expenses for economic hedges of foreign
currency exposure related to the Company’s international subsidiaries. The fluctuations in estimated fair value of derivatives which have not
been designated for hedge accounting can result in significant volatility in net income.
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management
objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge as either (i) a hedge of the estimated fair
value of a recognized asset or liability (“fair value hedge”); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability (“cash flow hedge”); or (iii) a hedge of a net investment in a foreign operation. In this
documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item
and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the
method which will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly
effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically
throughout the life of the designated hedging relationship. Assessments of hedge effectiveness and measurements of ineffectiveness are
also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net
income.
The accounting for derivatives is complex and interpretations of the primary accounting guidance continue to evolve in practice.
Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting
treatment under such accounting guidance. If it was determined that hedge accounting designations were not appropriately applied,
reported net income could be materially affected. Differences in judgment as to the availability and application of hedge accounting
designations and the appropriate accounting treatment may result in a differing impact in the consolidated financial statements of the
Company from that previously reported.
Under a fair value hedge, changes in the estimated fair value of the hedging derivative, including amounts measured as ineffectiveness,
and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported within net investment
gains (losses). The estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the
consolidated statement of operations within interest income or interest expense to match the location of the hedged item. However, accruals
that are not scheduled to settle until maturity are included in the estimated fair value of derivatives in the consolidated balance sheets.
Under a cash flow hedge, changes in the estimated fair value of the hedging derivative measured as effective are reported within other
comprehensive income (loss), a separate component of stockholders’ equity and the deferred gains or losses on the derivative are
reclassified into the consolidated statement of operations when the Company’s earnings are affected by the variability in cash flows of the
hedged item. Changes in the estimated fair value of the hedging instrument measured as ineffectiveness are reported within net investment
gains (losses). The estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the
consolidated statement of operations within interest income or interest expense to match the location of the hedged item. However, accruals
that are not scheduled to settle until maturity are included in the estimated fair value of derivatives in the consolidated balance sheets.
In a hedge of a net investment in a foreign operation, changes in the estimated fair value of the hedging derivative that are measured as
effective are reported within other comprehensive income (loss) consistent with the translation adjustment for the hedged net investment in
the foreign operation. Changes in the estimated fair value of the hedging instrument measured as ineffectiveness are reported within net
investment gains (losses).
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in
offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it
is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the
estimated fair value or cash flows of a hedged item, the derivative continues to be carried in the consolidated balance sheets at its estimated
fair value, with changes in estimated fair value recognized currently in net investment gains (losses). The carrying value of the hedged
recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the
cumulative adjustment to its carrying value is amortized into incomeovertheremaininglifeofthehedgeditem.Providedthehedged
forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in other comprehensive
income (loss) related to discontinued cash flow hedges are released into the consolidated statement of operations when the Company’s
earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated
date or within two months of that date, the derivative continues to be carried in the consolidated balance sheets at its estimated fair value, with
changes in estimated fair value recognized currently in net investment gains (losses). Deferred gains and losses of a derivative recorded in
other comprehensive income (loss) pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are
recognized immediately in net investment gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value in the consolidated
balance sheets, with changes in its estimated fair value recognized in the current period as net investment gains (losses).
The Company is also a party to financial instruments that contain terms which are deemed to be embedded derivatives. The Company
assesses each identified embedded derivative to determine whether it is required to be bifurcated. If the instrument would not be accounted
for in its entirety at estimated fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the
economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument,
the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are
carried in the consolidated balance sheets at estimated fair value with the host contract and changes in their estimated fair value are generally
F-15MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)