Prudential 2011 Annual Report Download - page 237

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
20. FAIR VALUE OF ASSETS AND LIABILITIES (continued)
December 31, 2011, the Company’s adjustment for NPR resulted in a $5,509 million cumulative decrease to the embedded derivative
liability for the Individual Annuities segment, reflecting the additional credit spread over LIBOR rates the Company incorporated into the
discount rate used in the valuations of those embedded derivatives in a liability position. Significant declines in risk-free interest rates and
the impact of account value performance in 2011 drove an increase in the embedded derivative liability associated with the optional living
benefit features of the Company’s variable annuity products as of December 31, 2011. These factors, as well as an overall widening of the
spreads used in valuing NPR, which reflect the financial strength ratings of the Company’s insurance subsidiaries, also drove offsetting
increases in the NPR adjustment. Partially offsetting these items was a $506 million charge relating to a refinement to the calculation of the
NPR that the Company implemented in the fourth quarter of 2011, which incorporates a floor to the illiquidity risk premium reduction at a
percentage of the credit spread.
Transfers between Levels 1 and 2—Periodically there are transfers between Level 1 and Level 2 for foreign common stocks held in
the Company’s Separate Account. In certain periods, an adjustment may be made for the fair value of these assets beyond the quoted
market price to reflect events that occurred between the close of foreign trading markets and the close of U.S. trading markets for that day.
If an adjustment is made in the reporting period, these Separate Accounts are classified as Level 2. When an adjustment is not made, they
are classified as Level 1. This type of adjustment was not made at December 31, 2011 or at December 31, 2010. This adjustment was made
at December 31, 2009, as a result, for the year ended December 31, 2010, $3.4 billion of transfers from Level 2 to Level 1 occurred for
these Separate Account assets on a net basis.
Changes in Level 3 assets and liabilities—The following tables provide a summary of the changes in fair value of Level 3 assets and
liabilities for the year ended December 31, 2011, as well as the portion of gains or losses included in income for the year ended
December 31, 2011 attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2011.
Year Ended December 31, 2011
Fixed
Maturities
Available-
For-Sale-
U.S.
Government
Authorities
Fixed
Maturities
Available-
For-Sale-
Foreign
Government
Bonds
Fixed
Maturities-
Available
For-Sale-
Corporate
Securities
Fixed
Maturities
Available-
For-Sale-
Asset-Backed
Securities
Fixed
Maturities
Available-
For-Sale-
Commercial
Mortgage-
Backed
Securities
Fixed
Maturities
Available-
For-Sale-
Residential
Mortgage-
Backed
Securities
(in millions)
Fair Value, beginning of period ................................. $ 0 $27 $1,187 $1,753 $130 $23
Total gains (losses) (realized/unrealized):
Included in earnings:
Realized investment gains (losses), net ............... 0 0 (31) 38 (41) 0
Asset management fees and other income ............. 0 0 0 0 0 0
Included in other comprehensive income (loss) ............. 0 2 (139) (14) 8 (1)
Net investment income .................................... 0 0 9 24 (1) 0
Purchases .............................................. 66 0 556 1,473 5 1
Sales .................................................. 0 (1) (144) (558) (30) (1)
Issuances ............................................... 0 0 33 0 0 0
Settlements ............................................. 0 0 (387) (373) (36) (5)
Foreign currency translation ................................ 0 0 7 54 8 0
Other(1) ............................................... 0 0 143 502 31 (1)
Transfers into Level 3(2) .................................. 0 0 893 252 76 0
Transfers out of Level 3(2) ................................. 0 (3) (677) (623) (5) 0
Fair Value, end of period ...................................... $66 $25 $1,450 $2,528 $145 $16
Unrealized gains (losses) for the period relating to those Level 3 assets
that were still held at the end of the period(3):
Included in earnings:
Realized investment gains (losses), net ................... $ 0 $ 0 $ (39) $ 7 $ (55) $ 0
Asset management fees and other income ................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Included in other comprehensive income (loss) ................. $ 0 $ 2 $ (63) $ (4) $ 13 $ (1)
Prudential Financial, Inc. 2011 Annual Report 235