MetLife 2010 Annual Report Download - page 80

the use of surrender charges or restrictions on withdrawals in some products and the ability to reset credited rates for certain products. ALM
strategies include the use of derivatives and duration mismatch limits. See “Risk Factors — Changes in Market Interest Rates May
Significantly Affect Our Profitability.”
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 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 Japanese yen and the Canadian dollar. The principal currencies that create foreign currency risk in the
Company’s liabilities are the British pound, the Euro 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, the Polish zloty, the Euro and the Hong Kong dollar. In addition to hedging with foreign currency swaps, forwards and
options, local surplus in some countries 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. See “Risk Factors — Fluctuations in Foreign
Currency Exchange Rates Could Negatively Affect Our Profitability.”
Equity Market. The Company has exposure to equity market risk through certain liabilities that involve long-term guarantees on equity
performance such as net embedded derivatives on variable annuities with guaranteed minimum benefits, certain policyholder account
balances along with investments in equity securities. We manage this risk on an integrated basis with other risks through our ALM strategies
including the dynamic hedging of certain variable annuity guarantee benefits. The Company also manages equity market risk exposure 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 GAAP.
Management of Market Risk Exposures
The Company uses a variety of strategies to manage interest rate, foreign currency exchange rate and equity market 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 ALM 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 business 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 charac-
teristics 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: invest-
ments 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.
Equity Market Risk Management. Equity market risk exposure through the issuance of variable annuities is managed by the Company’s
Asset/Liability Management Unit in partnership with the Investment Department. Equity market risk is realized through its investment in equity
securities and is managed by its Investment Department. MetLife uses derivatives to hedge its equity exposure both in certain liability
guarantees such as variable annuities with guaranteed minimum benefit and equity securities. These derivatives include exchange-traded
equity futures, equity index options contracts and equity variance swaps. The Company also employs reinsurance to manage these
exposures.
Hedging Activities. MetLife uses derivative contracts primarily to hedge a wide range of risks including interest rate risk, foreign currency
risk, and equity risk. Derivative hedges are designed to reduce risk on an economic basis while considering their impact on accounting results
and GAAP and Statutory capital. The construction of the Company’s derivative hedge programs vary depending on the type of risk being
77MetLife, Inc.