8.	DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

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.

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 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. 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.

Embedded Derivatives

The Company has sold variable annuity contracts that include certain optional living benefit features that are treated as embedded derivatives. The Company has affiliated reinsurance agreements with Pruco Reinsurance, Ltd. ("Pruco Re") and The Prudential Insurance Company of America to transfer the risk related to certain of these embedded derivatives. The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value. Mark-to-market changes in the fair value of the underlying contractual guarantees are determined using valuation models as described in Note 7, and are recorded in "Realized investment gains/(losses), net."

The fair value of the living benefit feature embedded derivatives included in "Future policy benefits" was a liability of $1,874 million as of September 30, 2011 and liability of $164 million as of December 31, 2010. The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re included in "Reinsurance Recoverable" was an asset of $1,838 million as of September 30, 2011 and an asset of $187 million as of December 31, 2010.

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.

The table below provides a summary of the gross notional amount and fair value of derivatives contracts, excluding embedded derivatives which are recorded with the associated host, by the primary underlying. Many derivative instruments contain multiple underlyings.


	September 30, 2011							December 31, 2010
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities			Notional Amount		Assets		Liabilities
	(in thousands)
Qualifying Hedge Relationships
Currency/Interest Rate	$	36,071	$	262	$	(1,603	)	$	36,072	$	152	$	(2,606	)

Total Qualifying Hedge Relationships	$	36,071	$	262	$	(1,603	)	$	36,072	$	152	$	(2,606	)

Non-qualifying Hedge Relationships
Interest Rate	$	1,827,950	$	162,994	$	(12,801	)	$	913,700	$	56,896	$	(6,727	)
Credit		399,050		2,284		(2,178	)		350,050		2,810		(3,104	)
Currency/Interest Rate		58,150		2,542		(3,922	)		60,439		1,622		(6,829	)
Equity		13,162,374		96,931		(60,736	)		10,374,514		30,278		(21,492	)

Total Non-Qualifying Hedge Relationships	$	15,447,524	$	264,751	$	(79,637	)	$	11,698,703	$	91,606	$	(38,152	)

Total Derivatives (1)	$	15,483,595	$	265,013	$	(81,240	)	$	11,734,775	$	91,758	$	(40,758	)

(1)

Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a liability of $1,877.4 million as of September 30, 2011 and a liability of $166.8 million as of December 31, 2010 included in "Future policy benefits" and "Fixed maturities available for sale."

Cash Flow Hedges

The Company uses currency swaps in its cash flow hedge accounting relationships. This instrument is only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, and equity or embedded derivatives in any of its cash flow 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:


	Three Months Ended September 30,
	2011			2010
	(in thousands)
Qualifying
Cash Flow Hedges
Currency/Interest Rate
Net investment income	$	(31	)	$	19
Other income		23			(23	)
Accumulated other comprehensive income (loss) (1)		2,860			(3,255	)

Total cash flow hedges	$	2,852		$	(3,259	)

Non-qualifying hedges
Realized investment gains (losses), net
Interest Rate	$	88,278		$	32,143
Currency/Interest Rate		5,251			(4,544	)
Credit		544			847
Equity		22,293			(11,653	)
Embedded Derivatives (2)		(69,635	)		(21,040	)

Total non-qualifying hedges	$	46,731		$	(4,247	)

Total Derivative Impact	$	49,583		$	(7,506	)

(1)	Amounts deferred in Equity

(2)	Primarily includes the following: 1) mark-to-market on embedded derivatives of $1,778.9 million; 2) fees ceded of $65.8 million; offset by 3) change in reinsurance recoverable of $1,719.5 million; and 4) fees attributed to embedded derivative of $56.1 million as of September 30, 2011.


	Nine Months Ended September 30,
	2011			2010
	(in thousands)
Qualifying
Cash Flow Hedges
Currency/Interest Rate
Net investment income	$	(70	)	$	43
Other income		(28	)		1
Accumulated other comprehensive income (loss) (1)		1,122			(1,064	)

Total cash flow hedges	$	1,024		$	(1,020	)

Non-qualifying hedges
Realized investment gains (losses), net
Interest Rate	$	103,706		$	91,995
Currency/Interest Rate		2,456			2,866
Credit		1,155			625
Equity		8,377			6,995

Embedded Derivatives (2)		(91,243	)		(59,843	)

Total non-qualifying hedges	$	24,451		$	42,638

Total Derivative Impact	$	25,475		$	41,618

(1)	Amounts deferred in Equity

(2)	Primarily includes the following: 1) mark-to-market on embedded derivatives of $1,710.2 million; 2) fees ceded of $190.9 million; offset by 3) change in reinsurance recoverable of $1,651.4 million; and 4) fees attributed to embedded derivative of $167.2 million as of September 30, 2011.

For the three and nine months ended September 30, 2011 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.

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


	(in thousands)
Balance, December 31, 2010	$	(2,462	)
Net deferred gains on cash flow hedges from January 1 to September 30, 2011		1,024
Amount reclassified into current period earnings		98

Balance, September 30, 2011	$	(1,340	)

As of September 30, 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 6 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 Statements of Equity.

Credit Derivatives Written

The following tables set forth the Company's exposure from credit derivatives where the Company has written credit protection, excluding embedded derivatives contained in externally-managed investments in European markets, by NAIC rating of the underlying credits as of the dates indicated.


NAIC Designation (1)	Rating Agency Equivalent	September 30, 2011
		Single Name
		Notional		Fair Value
		(in thousands)
1	Aaa, Aa, A	$	344,000	$	1,622
2	Baa		25,000		240

	Subtotal Investment Grade		369,000		1,862

3	Ba		—		—
4	B		—		—
5	C and Lower		—		—
6	In or near default		—		—

	Subtotal Below Investment Grade		—		—

	Total	$	369,000	$	1,862

(1)	First-to-default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket. However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.


NAIC Designation (1)	Rating Agency Equivalent	December 31, 2010
		Single Name
		Notional		Fair Value
		(in thousands)
1	Aaa, Aa, A	$	290,000	$	2,297
2	Baa		25,000		374

	Subtotal Investment Grade		315,000		2,671

3	Ba		—		—
4	B		—		—
5	C and Lower		—		—
6	In or near default		—		—

	Subtotal Below Investment Grade		—		—

	Total	$	315,000	$	2,671

(1)	First-to-default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket. However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.

The following table sets forth the composition of the Company's credit derivatives where it has written credit protection, excluding embedded derivatives contained in externally-managed investments in European markets, by industry category as of the dates indicated.


	September 30, 2011				December 31, 2010
Industry	Notional		Fair Value		Notional		Fair Value
	(in thousands)
Corporate Securities:
Manufacturing	$	40,000	$	146	$	40,000	$	249
Finance		54,000		250		—		—
Food/Beverage		55,000		354		55,000		479
Aerospace/Defense		50,000		223		50,000		345
Chemical		40,000		251		40,000		468
Other		130,000		638		130,000		1,130

Total Credit Derivatives	$	369,000	$	1,862	$	315,000	$	2,671

The Company writes credit derivatives under which the Company is obligated to pay a related party counterparty the referenced amount of the contract and receive in return the defaulted security or similar security. The Company's maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is $369 million notional of credit default swap ("CDS") selling protection at September 30, 2011. These credit derivatives generally have maturities of 10 years or less.

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 Stockholders' 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 $7 million and $8 million at September 30, 2011 and December 31, 2010, respectively.

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. As of September 30, 2011 and December 31, 2010 the Company had $30 million and $35 million, respectively, of outstanding notional amounts reported at fair value as a liability of $1.8 million and fair value as an asset of $3.0 million, respectively.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions. Generally, the credit exposure of the Company's OTC derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date after taking into consideration the existence of netting agreements.

The Company has credit risk exposure to an affiliate, Prudential Global Funding, LLC related to its over-the-counter derivative transactions. Prudential Global Funding, LLC 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 5.

Under fair value measurements, the Company incorporates the market's perceptions 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.