Derivative Instruments

12 Months Ended

Dec. 31, 2011

Derivative Instruments

Derivative Instruments

21. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies used in a non-dealer or broker capacity

Interest Rate Contracts

Interest rate swaps are used by the Company to manage interest rate exposures arising from mismatches between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it anticipates acquiring and other anticipated transactions and commitments. Swaps may be attributed to specific assets or liabilities or may be used on a portfolio basis. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date.

Exchange-traded futures and options are used by the Company to reduce risks from changes in interest rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, and to hedge against changes in the value of securities it owns or anticipates acquiring or selling. In exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the values of which are determined by the values of underlying referenced investments, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures and options with regulated futures commission's merchants who are members of a trading exchange.

Equity Contracts

Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range. These hedges do not qualify for hedge accounting.

Foreign Exchange Contracts

Currency derivatives, including exchange-traded currency futures and options, currency forwards and currency swaps, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell. The Company also uses currency forwards to hedge the currency risk associated with net investments in foreign operations and anticipated earnings of its foreign operations.

 Under currency forwards, the Company agrees with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. As noted above, the Company uses currency forwards to mitigate the impact of changes in currency exchange rates on U.S. dollar equivalent earnings generated by certain of its non-U.S. businesses, primarily its international insurance and investments operations. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated. These earnings hedges do not qualify for hedge accounting.

 Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.

Credit Contracts

 Credit derivatives are used by the Company to enhance the return on the Company's investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments. With credit derivatives the Company sells credit protection on an identified name, or a basket of names in a first to default structure, and in return receives a quarterly premium. With single name credit default derivatives, this premium or credit spread generally corresponds to the difference between the yield on the referenced name's public fixed maturity cash instruments and swap rates, at the time the agreement is executed. With first to default baskets, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket. If there is an event of default by the referenced name or one of the referenced names in a basket, as defined by the agreement, then the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced defaulted security or similar security. See credit derivatives written section for discussion of guarantees related to credit derivatives written. In addition to selling credit protection the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company's investment portfolio.

Other Contracts

TBAs. The Company uses “to be announced” (“TBA”) forward contracts to gain exposure to the investment risk and return of mortgage-backed securities. TBA transactions can help the Company to achieve better diversification and to enhance the return on its investment portfolio. TBAs can provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual mortgage-backed pools. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. Additionally, pursuant to the Company's mortgage dollar roll program, TBAs or mortgage-backed securities are transferred to counterparties with a corresponding agreement to repurchase them at a future date.  These transactions do not qualify as secured borrowings and are accounted for as derivatives.

Loan Commitments. In its mortgage operations, the Company enters into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. The determination of the fair value of loan commitments accounted for as derivatives considers various factors including, among others, terms of the related loan, the intended exit strategy for the loans based upon either securitization valuation models or investor purchase commitments, prevailing interest rates, origination income or expense, and the value of service rights. Loan commitments that relate to the origination of mortgage loans that will be held for investment are not accounted for as derivatives and accordingly are not recognized in the Company's financial statements. See Note 15 for a further discussion of these loan commitments.

Embedded Derivatives. The Company sells variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models. The Company maintains a portfolio of derivative instruments that is intended to economically hedge the risks related to the above products' features. The derivatives may include, but are not limited to equity options, total return swaps, interest rate swap options, caps, floors, and other instruments. In addition, some variable annuity products feature an automatic rebalancing element to minimize risks inherent in the Company's guarantees which reduces the need for hedges.

The Company invests in fixed maturities that, in addition to a stated coupon, provide a return based upon the results of an underlying portfolio of fixed income investments and related investment activity. The Company accounts for these investments as available-for-sale fixed maturities containing embedded derivatives. Such embedded derivatives are marked to market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio.

Synthetic Guarantees. The Company sells fee-based synthetic guaranteed investment contracts which include investment-only, stable value contracts, to qualified pension plans. The assets are owned by the trustees of such plans, who invest the assets under the terms of investment guidelines agreed to with the Company. The contracts contain a guarantee of a minimum rate of return on participant balances supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated plan cash flow requirements. These contracts are accounted for as derivatives, recorded at fair value and classified as interest rate derivatives.

The table below provides a summary of the gross notional amount and fair value of derivatives contracts used in a non-dealer or broker capacity, excluding embedded derivatives which are recorded with the associated host, by the primary underlying. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral held with the same counterparty. This netting impact results in total derivative assets of $2,611 million and $1,975 million as of December 31, 2011 and December 31, 2010, respectively, and total derivative liabilities of $349 million and $1,136 million as of December 31, 2011 and December 31, 2010, respectively, reflected in the Consolidated Statement of Financial Position.

			December 31, 2011						December 31, 2010
Primary Underlying/			Notional	Fair Value					Notional	Fair Value
Instrument Type			Amount	Assets		Liabilities			Amount	Assets		Liabilities
		(in millions)
Qualifying Hedges:
Interest Rate
Interest Rate Swaps		$	5,048	$	62	$	(468)	$	6,436	$	109	$	(428)
Foreign Currency
Foreign Currency Forwards			753		6		(4)		1,087		25		(6)
Currency/Interest Rate
Foreign Currency Swaps			4,807		227		(438)		3,521		83		(449)
Total Qualifying Hedges		$	10,608	$	295	$	(910)	$	11,044	$	217	$	(883)
Non-Qualifying Hedges:
Interest Rate
Interest Rate Swaps		$	107,560	$	9,357	$	(3,084)	$	93,033	$	3,712	$	(2,102)
Interest Rate Futures			6,192		10		(9)		6,834		17		(18)
Interest Rate Options			601		13		(3)		655		15		(3)
Interest Rate Forwards			2,139		6		0		159		0		0
Synthetic GIC's			46,844		4		0		24,019		2		(1)
Foreign Currency
Foreign Currency Forwards			16,228		176		(335)		10,645		219		(396)
Foreign Currency Options			98		23		0		0		0		0
Currency/Interest Rate
Foreign Currency Swaps			5,390		224		(399)		5,047		192		(381)
Credit
Credit Default Swaps			3,298		58		(130)		3,004		91		(114)
Equity
Equity Futures			2		149		0		1		1		0
Equity Options			14,951		415		(66)		22,622		527		(23)
Total Return Swaps			6,797		34		(175)		3,381		0		(152)
Total Non-Qualifying Hedges		$	210,100	$	10,469	$	(4,201)	$	169,400	$	4,776	$	(3,190)
	Total Derivatives (1)	$	220,708	$	10,764	$	(5,111)	$	180,444	$	4,993	$	(4,073)

• Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of$3,131million as of December 31, 2011 and a net liability of $70million as of December 31, 2010, included in “Future policy benefits” and “Fixed maturities, available-for-sale.”

Cash Flow, Fair Value and Net Investment Hedges

The primary derivative instruments used by the Company in its fair value, cash flow, and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.

The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship:

				Year Ended December 31, 2011
												Interest
												Credited		Accumulated
				Realized		Net						To Policyholders'		Other
				Investment		Investment		Other		Interest		Account		Comprehensive
				Gains/(Losses)		Income		Income		Expense		Balances		Income(1)
					(in millions)
Qualifying Hedges
Fair value hedges
	Interest Rate			$	(122)	$	(113)	$	0	$	8	$	56	$	0
	Currency				28		(5)		0		0		0		0
	Total fair value hedges				(94)		(118)		0		8		56		0
Cash flow hedges
	Interest Rate				0		0		0		(19)		(1)		(4)
	Currency/Interest Rate				0		(14)		22		0		0		180
	Total cash flow hedges				0		(14)		22		(19)		(1)		176
Net investment hedges
	Currency(2)				(9)		0		6		0		0		(6)
	Currency/Interest Rate				0		0		0		0		0		(23)
		Total net investment hedges			(9)		0		6		0		0		(29)
Non- qualifying hedges
	Interest Rate				5,133		0		0		0		0		0
	Currency				125		0		0		0		0		0
	Currency/Interest Rate				(4)		0		0		0		0		0
	Credit				(38)		0		0		0		0		0
	Equity				(318)		0		0		0		0		0
	Embedded Derivatives				(2,579)		0		0		0		0		0
	Total non-qualifying hedges				2,319		0		0		0		0		0
Total				$	2,216	$	(132)	$	28	$	(11)	$	55	$	147
				Year Ended December 31, 2010
												Interest
												Credited		Accumulated
				Realized		Net						To Policyholders'		Other
				Investment		Investment		Other		Interest		Account		Comprehensive
				Gains/(Losses)		Income		Income		Expense		Balances		Income(1)
					(in millions)
Qualifying Hedges
Fair value hedges
	Interest Rate			$	(71)	$	(148)	$	0	$	15	$	68	$	0
	Currency				100		(5)		0		0		0		0
	Total fair value hedges				29		(153)		0		15		68		0
Cash flow hedges
	Interest Rate				0		0		0		(19)		(3)		(12)
	Currency/Interest Rate				0		(9)		10		0		0		68
	Total cash flow hedges				0		(9)		10		(19)		(3)		56
Net investment hedges
	Currency(2)				0		0		0		0		0		(71)
	Currency/Interest Rate				0		0		0		0		0		(129)
	Total net investment hedges				0		0		0		0		0		(200)
Non- qualifying hedges
	Interest Rate				1,952		0		0		0		0		0
	Currency				(205)		0		0		0		0		0
	Currency/Interest Rate				(17)		0		0		0		0		0
	Credit				(101)		0		0		0		0		0
	Equity				(1,115)		0		0		0		0		0
	Embedded Derivatives				637		0		0		0		0		0
	Total non-qualifying hedges				1,151		0		0		0		0		0
Total				$	1,180	$	(162)	$	10	$	(4)	$	65	$	(144)
				Year Ended December 31, 2009
												Interest
												Credited		Accumulated
				Realized		Net						To Policyholders'		Other
				Investment		Investment		Other		Interest		Account		Comprehensive
				Gains/(Losses)		Income		Income		Expense		Balances		Income(1)
					(in millions)
Qualifying Hedges
Fair value hedges
	Interest Rate			$	338	$	(158)	$	0	$	5	$	70	$	0
	Currency				8		0		2		0		0		0
	Total fair value hedges				346		(158)		2		5		70		0
Cash flow hedges
	Interest Rate				0		0		0		(17)		(7)		61
	Currency/Interest Rate				0		(9)		20		0		0		(151)
	Total cash flow hedges				0		(9)		20		(17)		(7)		(90)
Net investment hedges
	Currency(2)				36		0		0		0		0		(80)
	Currency/Interest Rate				0		0		0		0		0		(61)
			Total net investment hedges		36		0		0		0		0		(141)
Non- qualifying hedges
	Interest Rate				(2,086)		0		0		0		0		0
	Currency				(89)		0		0		0		0		0
	Currency/Interest Rate				(212)		0		0		0		0		0
	Credit				72		0		0		0		0		0
	Equity				(1,376)		0		0		0		0		0
	Embedded Derivatives				3,531		0		0		0		0		0
	Total non-qualifying hedges				(160)		0		0		0		0		0
Total				$	222	$	(167)	$	22	$	(12)	$	63	$	(231)

• Amounts deferred in “Accumulated other comprehensive income (loss).”
• Relates to the sale of equity method investments.

For theyearsendedDecember 31, 2011, 2010 and 2009,the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company's results of operations and there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

Presented below is a roll forward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:

	(in millions)
Balance, December 31, 2008	$	(227)
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2009		(132)
Amount reclassified into current period earnings		42
Balance, December 31, 2009		(317)
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2010		30
Amount reclassified into current period earnings		26
Balance, December 31, 2010		(261)
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2011		147
Amount reclassified into current period earnings		28
Balance, December 31, 2011	$	(86)

Using December 31, 2011 values, it is anticipated that a pre-tax loss of approximately $15 million will be reclassified from “Accumulated other comprehensive income (loss)” to earnings during the subsequent twelve months ending December 31, 2012, offset by amounts pertaining to the hedged items. As of December 31, 2011, the Company does not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 19 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Consolidated Statements of Equity.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss)” were $(102) million in 2011, $(73) million in 2010 and $127 million in 2009.

Credit Derivatives Written

The following table sets forth the Company's exposure from credit derivatives where the Company has written credit protection, by NAIC rating of the underlying credits as of December 31, 2011 and 2010.The Company's maximum amount at risk under these credit derivatives listed below assumes the value of the underlying referenced securities become worthless. These credit derivatives generally have maturities of less than 10 years. The table excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance and embedded derivatives contained in externally-managed investments in the European market.

	December 31, 2011				December 31, 2010
	Single Name				Single Name
NAIC Designation	Notional		Fair Value		Notional		Fair value
	(in millions)
1	$	795	$	3	$	295	$	3
2		25		0		25		0
Subtotal		820		3		320		3
3		0		0		0		0
4		0		0		0		0
5		0		0		0		0
6		0		0		0		0
Subtotal		0		0		0		0
Total	$	820	$	3	$	320	$	3

The following table sets forth the composition of the Company's credit derivatives where the Company has written credit protectionby industry category as of the dates indicated.

		December 31, 2011				December 31, 2010
Industry		Notional		Fair Value		Notional		Fair Value
		(in millions)
Corporate Securities:
	Manufacturing	$	40	$	0	$	40	$	0
	Utilities		0		0		0		0
	Finance		500		1		0		0
	Services		25		1		25		0
	Energy		20		0		20		0
	Transportation		25		0		25		0
	Retail and Wholesale		20		0		20		0
	Food/Beverage		55		1		55		1
	Aerospace/Defense		50		0		50		0
	Chemical		40		0		40		1
	Other		45		0		45		1
Total Credit Derivatives		$	820	$	3	$	320	$	3

The Company entered into a credit derivative that will require the Company to make certain payments in the event of deterioration in the value of the surplus notes issued by a subsidiary of Prudential Insurance. The notional of this credit derivative is $500 million and the fair value as of December 31, 2011 and 2010 was a liability of $77 million and $26 million, respectively. No collateral was pledged in either period.

The Company holds certain externally-managed investments in the European market which contain embedded derivatives whose fair value are primarily driven by changes in credit spreads. These investments are medium-term notes that are collateralized by investment portfolios primarily consisting of investment grade European fixed income securities, including corporate bonds and asset-backed securities, and derivatives, as well as varying degrees of leverage. The notes have a stated coupon and provide a return based on the performance of the underlying portfolios and the level of leverage. The Company invests in these notes to earn a coupon through maturity, consistent with its investment purpose for other debt securities. The notes are accounted for under U.S. GAAP as available-for-sale fixed maturity securities with bifurcated embedded derivatives (total return swaps). Changes in the value of the fixed maturity securities are reported in Equity under the heading “Accumulated Other Comprehensive Income (Loss)” and changes in the market value of the embedded total return swaps are included in current period earnings in “Realized investment gains (losses), net.” The Company's maximum exposure to loss from these investments was $664 million and $754 million at December 31, 2011 and 2010, respectively.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company's investment portfolio. As of December 31, 2011 and2010, the Company had $1.978billion and $2.184 billion of outstanding notional amounts, respectively, reported at fair value as an assetof$2million and an asset of less than $1million, respectively.

Types of Derivative Instruments and Derivative Strategies used in a dealer or broker capacity

Futures, forwards and options contracts, and swap agreements, were also used in a derivative dealer or broker capacity in the Company's commodities operations, prior to the sale of this business to Jeffries on July 1, 2011, to facilitate transactions of clients, hedge proprietary trading activities and as a means of risk management. These derivatives allowed the Company to structure transactions to manage its exposure to commodities and securities prices, foreign exchange rates and interest rates. Risk exposures were managed through diversification, by controlling position sizes and by entering into offsetting positions.

The fair value of the Company's derivative contracts used in a derivative dealer or broker capacity were reported on a net-by-counterparty basis in the Company's Consolidated Statements of Financial Position when management believes a legal right of setoff exists under an enforceable netting agreement.

Realized and unrealized gains and losses from marking-to-market the derivatives used in proprietary positions were recognized on a trade date basis and reported in “Income from discontinued operations, net of taxes. The pre-tax amounts reported in “Income (loss) from discontinued operations, net of taxes” for these derivatives were gains of $63 million for 2011 and $97 million for 2010.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions. The Company manages credit risk by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral where appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

The credit exposure of the Company's over-the-counter (OTC) derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions pursuant to master agreements that provide for a netting of payments and receipts with a single counterparty (ii) enter into agreements that allow the use of credit support annexes (CSAs), which are bilateral rating-sensitive agreements that require collateral postings at established threshold levels. Likewise, the Company effects exchange-traded futures and options transactions through regulated exchanges and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of non-performance by counterparties to such financial instruments.

Under fair value measurements, the Company incorporates the market's perception of its own and the counterparty's non-performance risk in determining the fair value of the portion of its OTC derivative assets and liabilities that are uncollateralized. Credit spreads are applied to the derivative fair values on a net basis by counterparty. To reflect the Company's own credit spread a proxy based on relevant debt spreads is applied to OTC derivative net liability positions. Similarly, the Company's counterparty's credit spread is applied to OTC derivative net asset positions.

Certain of the Company's derivative agreements with some of its counterparties contain credit-risk related triggers. If the Company's credit rating were to fall below a certain level, the counterparties to the derivative instruments could request termination at the then fair value of the derivative or demand immediate full collateralization on derivative instruments in net liability positions. If a downgrade occurred and the derivative positions were terminated, the Company anticipates it would be able to replace the derivative positions with other counterparties in the normal course of business. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position were $148 million as of December 31, 2011. In the normal course of business the Company has posted collateral related to these instruments of $132 million as of December 31, 2011. If the credit-risk-related contingent features underlying these agreements had been triggered on December 31, 2011, the Company estimates that it would be required to post a maximum of $16 million of additional collateral to its counterparties.