MetLife 2011 Annual Report Download - page 66

The table below presents the estimated fair value of the derivatives hedging guarantees accounted for as embedded derivatives:
Primary Underlying
Risk Exposure Instrument Type
December 31,
2011 2010
Notional
Amount
Estimated Fair Value Notional
Amount
Estimated Fair Value
Assets Liabilities Assets Liabilities
(In millions)
Interest rate Interest rate swaps .................................... $22,719 $1,869 $598 $13,762 $ 401 $ 193
Interest rate futures .................................... 11,126 17 16 5,822 32 10
Interest rate options .................................... 11,372 567 6 614 15 —
Foreign currency Foreign currency forwards ............................... 2,311 41 4 2,320 46 1
Foreign currency futures ................................ 177 — — — — —
Equity market Equity futures ......................................... 4,916 15 10 6,959 17 9
Equity options ........................................ 16,367 3,239 177 32,942 1,720 1,196
Variance swaps ....................................... 18,402 390 75 17,635 190 118
Total rate of return swaps ............................... 1,274 8 31 1,547 — —
Total .............................................. $88,664 $6,146 $917 $81,601 $2,421 $1,527
Included in net derivative gains (losses) for the years ended December 31, 2011 and 2010 were gains (losses) of $3.2 billion and $113 million
related to the change in estimated fair value of the above derivatives. Additionally, included in net derivative gains (losses) for the years ended
December 31, 2011 and 2010 were gains (losses) of $26 million and ($35) million, respectively, related to ceded reinsurance.
Guarantees, including portions thereof, have liabilities established that are included in future policy benefits. Guarantees accounted for in this manner
include GMDBs, the life-contingent portion of certain GMWB, and the portion of GMIB that require annuitization. These liabilities are accrued over the life
of the contract in proportion to actual and future expected policy assessments based on the level of guaranteed minimum benefits generated using
multiple scenarios of separate account returns. The scenarios use best estimate assumptions consistent with those used to amortize deferred
acquisition costs. When current estimates of future benefits exceed those previously projected or when current estimates of future assessments are
lower than those previously projected, liabilities will increase, resulting in a current period charge to net income. The opposite result occurs when the
current estimates of future benefits are lower than that previously projected or when current estimates of future assessments exceed those previously
projected. At each reporting period, the Company updates the actual amount of business remaining in-force, which impacts expected future
assessments and the projection of estimated future benefits resulting in a current period charge or increase to earnings.
The table below contains the carrying value for guarantees included in future policy benefits at:
December 31,
2011 2010
(In millions)
U.S. Business:
Guaranteed minimum death benefit ............................................................. $ 260 $167
Guaranteed minimum income benefit ........................................................... 723 507
International:
Guaranteed minimum death benefit ............................................................. 118 66
Guaranteed minimum income benefit ........................................................... 149 116
Total ................................................................................... $1,250 $856
Included in policyholder benefits and claims for the year ended December 31, 2011 is a charge of $394 million and for the year ended
December 31, 2010 is a charge of $302 million, related to the respective change in liabilities for the above guarantees.
The carrying amount of guarantees accounted for as insurance liabilities can change significantly during periods of sizable and sustained shifts in
equity market performance, increased equity volatility, or changes in interest rates. The Company uses reinsurance in combination with derivative
instruments to mitigate the liability exposure, risk of loss and the volatility of net income associated with these liabilities. Derivative instruments used are
primarily equity futures, treasury futures and interest rate swaps.
Included in policyholder benefits and claims associated with the hedging of the guarantees in future policy benefits for the year ended December 31,
2011 and 2010 were gains (losses) of $86 million and $8 million, respectively, related to reinsurance agreements containing embedded derivatives
carried at estimated fair value and gains (losses) of ($87) million and ($275) million, respectively, related to freestanding derivatives.
While the Company believes that the hedging strategies employed for guarantees included in both PABs and in future policy benefits, as well as
other management actions, have mitigated the risks related to these benefits, the Company remains liable for the guaranteed benefits in the event that
reinsurers or derivative counterparties are unable or unwilling to pay. Certain of the Company’s reinsurance agreements and most derivative positions
are collateralized and derivatives positions are subject to master netting agreements, both of which, significantly reduces the exposure to counterparty
risk. In addition, the Company is subject to the risk that hedging and other management procedures prove ineffective or that unanticipated policyholder
behavior or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques
employed. Lastly, because the valuation of the guarantees accounted for as embedded derivatives includes an adjustment for nonperformance risk that
is not hedged, changes in the nonperformance risk may result in significant volatility in net income.
Other Policy-related Balances
Other policy-related balances include policy and contract claims, unearned revenue liabilities, premiums received in advance, policyholder dividends
due and unpaid, and policyholder dividends left on deposit. See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for additional
information.
62 MetLife, Inc.