Derivative Instruments

6 Months Ended

Jun. 30, 2013

Jun. 30, 2012

Derivative Instruments

Derivative Instruments

5.DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

Interest rate swaps are used by the Company to reduce risks from changes in interest rates, 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 owns or anticipates acquiring or selling. 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.

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 currency swaps and forwards, 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.

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.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 can sell credit protection on an identified name, and in return receive a quarterly premium. With 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. If there is an event of default by the referenced name, 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 orpay the referenced amount less the auction recovery rate. See credit derivatives written section for discussion of guarantees related to credit derivatives written. In addition to selling credit protection, the Company haspurchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company's investment portfolio.

Embedded Derivatives

The Company sells variable annuity products, which may include guaranteed benefit features that are accounted for as embedded derivatives. The Company has reinsurance agreements to transfer the risk related to certain of these benefit features to an affiliate, Pruco Re. The embedded derivatives related to theliving benefit features and the related reinsurance agreements are carried at fair value. 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, as described in Note 4.

The fair value of the living benefit featureembedded derivatives included in "Future policy benefits" was an asset of $366 million and a liability of $1,418 million as of June 30, 2013 and December 31, 2012, respectively. The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re included in "Other liabilities" and "Reinsurance recoverables" was a liabilityof $370 million and an asset of$1,287 million as of June 30, 2013 and December 31, 2012, respectively.

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.

Some of the Company's universal life products contain a no-lapse guarantee provision that is reinsured with an affiliate, UPARC. The reinsurance agreement contains an embedded derivative related to the interest rate risk of the reinsurance contract. Interest sensitivity can result in mark-to-market changes in the value of the underlying contractual guarantees, as well as actual activity related to premium and benefits. See Note 8 for additional information on the agreement with UPARC.

The table below provides a summary of the gross notional amount and fair value of derivatives contractsused 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.

	June 30, 2013							December 31, 2012
			Notional	Gross Fair Value						Notional	Gross Fair Value
			Amount	Assets		Liabilities				Amount	Assets		Liabilities
Primary Underlying			(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Currency Swaps		$	171,034	$	8,114	$	(2,195)		$	145,174	$	4,152	$	(3,904)
Total Qualifying Hedges		$	171,034	$	8,114	$	(2,195)		$	145,174	$	4,152	$	(3,904)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps		$	2,129,400	$	71,893	$	(104,539)		$	1,729,400	$	109,855	$	(22,930)
Currency
Forwards			752		2		-			5,424		48		-
Credit
Credit Default Swaps			14,275		93		(775)			14,275		614		(894)
Currency/Interest Rate
Currency Swaps			84,968		1,800		(890)			62,468		1,516		(2,064)
Equity
Total Return Swaps			336,451		3,725		(1,652)			320,377		762		(6,073)
Equity Options			24,013,015		25,464		(10,392)			24,243,020		70,669		(32,824)
Total Non-Qualifying Hedges			26,578,861		102,977		(118,248)			26,374,964		183,464		(64,785)
Total Derivatives (1)		$	26,749,895	$	111,091	$	(120,443)		$	26,520,138	$	187,616	$	(68,689)

• Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was anasset of $344 million and a liability of $1,441 million as of June 30, 2013 and December 31, 2012, respectively, included in “Future policy benefits” and “Fixed maturities, available-for-sale.”

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (including bifurcated embedded derivatives), and repurchase and reverse repurchase agreements that are offset in the balance sheet, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the balance sheet.

	June 30, 2013
			Gross		Net
	Gross		Amounts		Amounts
	Amounts of		Offset in the		Presented in
	Recognized		Statement of		the Statement		Financial
	Financial		Financial		of Financial		Instruments/		Net
	Instruments		Position		Position		Collateral		Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	110,818	$	(120,443)	$	(9,625)	$	0	$	(9,625)
Securities purchased under agreement to resell		94,856		0		94,856		(94,856)		0
Total Assets	$	205,674	$	(120,443)	$	85,231	$	(94,856)	$	(9,625)
Offsetting of Financial Liabilities:
Derivatives	$	120,443	$	(120,443)	$	0	$	0	$	0
Securities sold under agreement to repurchase		0		0		0		0		0
Total Liabilities	$	120,443	$	(120,443)	$	0	$	0	$	0
	December 31, 2012
			Gross		Net
	Gross		Amounts		Amounts
	Amounts of		Offset in the		Presented in
	Recognized		Statement of		the Statement		Financial
	Financial		Financial		of Financial		Instruments/		Net
	Instruments		Position		Position		Collateral		Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	187,372	$	(68,689)	$	118,683	$	0	$	118,683
Securities purchased under agreement to resell		203,437		0		203,437		(203,437)		0
Total Assets	$	390,809	$	(68,689)	$	322,120	$	(203,437)	$	118,683
Offsetting of Financial Liabilities:
Derivatives	$	68,689	$	(68,689)	$	0	$	0	$	0
Securities sold under agreement to repurchase		0		0		0		0		0
Total Liabilities	$	68,689	$	(68,689)	$	0	$	0	$	0

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company's accounting policy for securities repurchase and resale agreements, see Note 2 to the Company's Consolidated Financial Statements included in its 2012 Annual Report on Form 10-K.

Cash Flow Hedges

The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. Theseinstrumentsareonly 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 cash flow hedge accounting relationships.

The following tables provide 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:

		Three Months Ended June 30, 2013
			Realized Investment Gains/(Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	-	$	240	$	15	$	(489)
	Total cash flow hedges		-		240		15		(489)
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		(85,427)		-		-		-
	Currency		(11)		-		-		-
	Currency/Interest Rate		(296)		-		24		-
	Credit		(149)		-		-		-
	Equity		(11,115)		-		-		-
	Embedded Derivatives		52,683		-		-		-
	Total non-qualifying hedges		(44,315)		-		24		-
	Total	$	(44,315)	$	240	$	39	$	(489)

		Six Months Ended June 30, 2013
			Realized Investment Gains/(Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	-	$	468	$	70	$	5,619
	Total cash flow hedges		-		468		70		5,619
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		(119,795)		-		-		-
	Currency		95		-		-		-
	Currency/Interest Rate		255		-		24		-
	Credit		(670)		-		-		-
	Equity		(65,416)		-		-		-
	Embedded Derivatives		156,468		-		-		-
	Total non-qualifying hedges		(29,063)		-		24		-
	Total	$	(29,063)	$	468	$	94	$	5,619

		Three Months Ended June 30, 2012
			Realized Investment Gains/(Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	4	$	167	$	49	$	3,818
	Total cash flow hedges		4		167		49		3,818
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		48,936		-		-		-
	Currency		180		-		-		-
	Currency/Interest Rate		2,013		-		31		-
	Credit		108		-		-		-
	Equity		4,950		-		-		-
	Embedded Derivatives		(51,729)		-		-		-
	Total non-qualifying hedges		4,458		-		31		-
	Total	$	4,462	$	167	$	80	$	3,818

		Six Months Ended June 30, 2012
			Realized Investment Gains/(Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	4	$	271	$	53	$	1,878
	Total cash flow hedges		4		271		53		1,878
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		28,261		-		-		-
	Currency		15		-		-		-
	Currency/Interest Rate		798		-		22		-
	Credit		(567)		-		-		-
	Equity		(30,018)		-		-		-
	Embedded Derivatives		(12,712)		-		-		-
	Total non-qualifying hedges		(14,223)		-		22		-
	Total	$	(14,219)	$	271	$	75	$	1,878

• Amounts deferred in “Accumulated other comprehensive income (loss).”

For the three and six months ended June 30, 2013the 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.

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

	(in thousands)
Balance, December 31, 2012	$	147
Net deferred gains (losses) on cash flow hedges from January 1 to June 30, 2013		6,140
Amount reclassified into current period earnings		(521)
Balance, June 30, 2013	$	5,766

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by our counterparty to financial derivative transactions.

The Company has credit risk exposure to an affiliate, Prudential Global Funding, LLC(“PGF”), related to its OTC derivative transactions. PGF manages credit risk with external counterparties by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral where appropriate, see Note 8. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

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.

As of June 30, 2013 the Company didnot 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 20 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 Unaudited Interim Consolidated Statements of Equity.

Credit Derivatives

The Company no longer has exposure from credit derivatives where it has written credit protection as of June 30, 2013 and December 31, 2012.

The Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company's investment portfolio. As of June 30, 2013 and December 31, 2012, the Company had $14 million of outstanding notional amounts, reported at fair value as a liability of less than $1 million for both periods.

The Company holds certain externally managed investments in the European market which contain embedded derivatives whose fair values 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” 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 $65 million and $64 million at June 30, 2013andDecember 31, 2012, respectively. The fair value of the embedded derivatives included in “Fixed maturities, available-for-sale”were liabilities of $23 million atJune 30, 2013andDecember 31, 2012.