Prudential 2011 Annual Report Download - page 103

Credit Derivative Exposure to Public Fixed Maturities
In addition to the credit exposure from public fixed maturities noted above, we sell credit derivatives to enhance the return on our
investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments.
In a credit derivative, we sell credit protection on an identified name, and in return receive 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.
The referenced names in the credit derivatives where we have sold credit protection, as well as all the counterparties to these
agreements, are investment grade credit quality and our credit derivatives generally have maturities of ten years or less. Credit derivative
contracts are recorded at fair value with changes in fair value, including the premium received, recorded in “Realized investment gains
(losses), net.” The premium received for the credit derivatives we sell attributable to the Financial Services Businesses was $6 million and
$7 million for the years ended December 31, 2011 and 2010, respectively, and were included in adjusted operating income as an adjustment
to “Realized investment gains (losses), net.”
The following table sets forth our exposure where we have sold credit protection through credit derivatives in the Financial Services
Businesses by NAIC rating of the underlying credits as of the dates indicated.
Credit Derivatives, Sold Protection—Financial Services Businesses
December 31, 2011 December 31, 2010
Single Name Single Name
NAIC Designation Notional Fair Value Notional Fair Value
(in millions)
1 $745 $3 $290 $3
2 25 0 25 0
Subtotal ............................................................. 770 3 315 3
3 through 6 0 0 0 0
Total(1) ......................................................... $770 $3 $315 $3
(1) Excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance and embedded derivatives contained in certain
externally-managed investments in the European market. See Note 21 to the Consolidated Financial Statements for additional information regarding
these derivatives.
The following table sets forth our exposure where we have sold credit protection through credit derivatives in the Closed Block
Business portfolios by NAIC designation of the underlying credits as of the dates indicated.
Credit Derivatives, Sold Protection—Closed Block Business
December 31, 2011 December 31, 2010
Single Name Single Name
NAIC Designation Notional Fair Value Notional Fair Value
(in millions)
1 $50 $0 $5 $0
20000
Subtotal ............................................................. 50 0 5 0
3 through 6 0 0 0 0
Total(1) ......................................................... $50 $0 $5 $0
(1) Excludes embedded derivatives contained in certain externally-managed investments in the European market. See Note 21 to the Consolidated Financial
Statements for additional information regarding these derivatives.
In addition to selling credit protection, we have purchased credit protection using credit derivatives in order to hedge specific credit
exposures in our investment portfolio, including exposures relating to certain guarantees from monoline bond insurers. As of December 31,
2011 and 2010, the Financial Services Businesses had $1.598 billion and $1.785 billion of outstanding notional amounts, reported at fair
value as an asset of $2 million and $2 million, respectively. As of December 31, 2011 and 2010, the Closed Block Business had $381
million and $399 million of outstanding notional amounts, reported at fair value as an asset of less than $1 million and a liability of $1
million, respectively. The premium paid for the credit derivatives we purchase attributable to the Financial Services Businesses was $43
million and $50 million for the years ended December 31, 2011 and 2010, respectively, and was included in adjusted operating income as
an adjustment to “Realized investment gains (losses), net.” See Note 21 to the Consolidated Financial Statements for additional information
regarding credit derivatives and an overall description of our derivative activities.
Prudential Financial, Inc. 2011 Annual Report 101