Derivative Instruments

12 Months Ended

Dec. 31, 2014

Derivative Instruments

Derivative Instruments

11.DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts 

Interest rate swaps are used by the Company toreduce 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 counterparties 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.

Total return swaps are contracts whereby the Company agrees with counterparties to exchange, at specified intervals, the difference between the return on an asset (or market index) and LIBOR based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.

Foreign Exchange Contracts

Currency derivatives, including 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 counterparties 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, and in return receives 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 or pay the referenced amount less the auction recovery rate. See credit derivatives 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.

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 affiliates, Pruco Re and The Prudential Insurance Company of America (“Prudential Insurance”). The embedded derivatives related to the living 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 10.

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives which are recorded with the associated host. Many derivative instruments contain multipleunderlyings. 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, cash collateral held with the same counterparty, and non-performance risk.

	December 31, 2014						December 31, 2013
			Gross Fair Value						Gross Fair Value
Primary Underlying	Notional		Assets		Liabilities		Notional		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Currency/Interest Rate	$	83,412	$	5,555	$	(654)	$	72,747	$	940	$	(4,635)
Total Qualifying Hedges	$	83,412	$	5,555	$	(654)	$	72,747	$	940	$	(4,635)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	1,902,750	$	92,507	$	(18,480)	$	1,533,750	$	59,872	$	(80,601)
Interest Rate Options		100,000		10,736		-		100,000		6,534		-
Currency/Interest Rate
Foreign Currency Swaps		57,011		4,363		(5)		55,919		19		(1,349)
Credit
Credit Default Swaps		1,200		-		(43)		6,050		-		(115)
Equity
Total Return Swaps		220,986		1,937		-		219,896		-		(4,712)
Equity Options		6,842,242		3,748		(2,067)		13,170,805		6,170		(3,168)
Total Non-Qualifying Hedges	$	9,124,189	$	113,291	$	(20,595)	$	15,086,420	$	72,595	$	(89,945)
Total Derivatives (1)	$	9,207,601	$	118,846	$	(21,249)	$	15,158,667	$	73,535	$	(94,580)

(1) Excludes embedded derivatives which contain multiple underlyings. The fair value of the embedded derivatives related to the living benefit feature was a liability of $3,112 million and $778 million as of December 31, 2014 and December 31, 2013, respectively, included in “Future policy benefits.” The fair value of the embedded derivatives related to the reinsurance of certain of these benefits to Pruco Re and Prudential Insurance included in "Reinsurance recoverables" was an asset of $2,996 million and $748 million as of December 31, 2014 and December 31, 2013, respectively.

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (including bifurcated embedded derivatives)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.

	December 31, 2014
			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(1)		Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	118,846	$	(24,288)	$	94,558	$	(82,602)	$	11,956
Offsetting of Financial Liabilities:
Derivatives	$	21,249	$	(21,249)	$	-	$	-	$	-
	December 31, 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(1)		Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	73,535	$	(73,535)	$	-	$	-	$	-
Offsetting of Financial Liabilities:
Derivatives	$	94,580	$	(72,822)	$	21,758	$	(21,758)	$	-

(1) Amounts exclude the excess of collateral received/pledged from/to the counterparty. Prior period has been revised to conform to current period presentation.

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below.

Cash Flow Hedges

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

		Year Ended December 31, 2014
			Realized Investment Gains (Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income (Loss)(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	-	$	14	$	134	$	8,492
	Total cash flow hedges		-		14		134		8,492
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		123,327		-		-		-
	Currency/Interest Rate		5,934		-		143		-
	Credit		(14)		-		-		-
	Equity		(23,811)		-		-		-
	Embedded Derivatives		(113,549)		-		-		-
	Total non-qualifying hedges		(8,113)		-		143		-
Total		$	(8,113)	$	14	$	277	$	8,492
		Year Ended December 31, 2013
			Realized Investment Gains (Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income (Loss)(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	-	$	(89)	$	(7)	$	(585)
	Total cash flow hedges		-		(89)		(7)		(585)
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		(116,025)		-		-		-
	Currency/Interest Rate		(204)		-		24		-
	Credit		(103)		-		-		-
	Equity		(79,498)		-		-		-
	Embedded Derivatives		1,775		-		-		-
	Total non-qualifying hedges		(194,055)		-		24		-
Total		$	(194,055)	$	(89)	$	17	$	(585)
		Year Ended December 31, 2012
			Realized Investment Gains (Losses)		Net Investment Income		Other Income		Accumulated Other Comprehensive Income (Loss)(1)
		(in thousands)
Derivatives Designated as Hedging Instruments:
Cash flow hedges
	Currency/Interest Rate	$	-	$	(116)	$	14	$	(2,106)
	Total cash flow hedges		-		(116)		14		(2,106)
Derivatives Not Qualifying as Hedging Instruments:
	Interest Rate		5,030		-		-		-
	Currency		(15)		-		-		-
	Currency/Interest Rate		(1,368)		-		(17)		-
	Credit		143		-		-		-
	Equity		(56,158)		-		-		-
	Embedded Derivatives		(55,295)		-		-		-
	Total non-qualifying hedges		(107,663)		-		(17)		-
Total		$	(107,663)	$	(116)	$	(3)	$	(2,106)

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

For the years endedDecember 31, 2014, 2013 and 2012,the ineffective portion of derivatives accounted for using hedge accounting wasnot material to the Company's results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecastedtransaction 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, 2011	$	(962)
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2012		(2,207)
Amount reclassified into current period earnings		101
Balance, December 31, 2012		(3,068)
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2013		(680)
Amount reclassified into current period earnings		95
Balance, December 31, 2013		(3,653)
Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2014		8,640
Amount reclassified into current period earnings		(148)
Balance, December 31, 2014	$	4,839

As of December 31, 2014 and 2013, the Company did 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 theStatements of Equity.

Credit Derivatives

The Company no longer has exposure from credit derivatives where it has written credit protection as of December 31, 2014 and December 31, 2013.

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, 2014 and December 31, 2013, the Company had $1 million and $6 millionof outstanding notional amounts, respectively, reported at fair value as a liability of less than $1 million for both periods.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by itscounterpartyto 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, such as cash and securities, when appropriate.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.