Prudential 2012 Annual Report Download - page 203

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. DERIVATIVE INSTRUMENTS (continued)
Synthetic Guarantees. The Company sells synthetic guaranteed investment contracts, through both full service and investment-only
sales channels, to qualified pension plans. The assets are owned by the trustees of such plans, who invest the assets according to the
contract terms agreed to with the Company. The contracts contain a guarantee of a minimum rate of return on participant balances
supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated withdrawals from the contract. Under
U.S. GAAP, these contracts are accounted for as derivatives and recorded at fair value.
The table below provides a summary of the gross notional amount and fair value of derivatives contracts used 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. 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 and cash collateral held with the same counterparty. This netting impact
results in total derivative assets of $3,075 million and $2,611 million as of December 31, 2012 and 2011, respectively, and total derivative
liabilities of $307 million and $349 million as of December 31, 2012 and 2011, respectively, reflected in the Consolidated Statement of
Financial Position.
December 31, 2012 December 31, 2011
Primary Underlying/
Instrument Type
Notional
Amount
Fair Value Notional
Amount
Fair Value
Assets Liabilities Assets Liabilities
(in millions)
Derivatives Designated as Hedging Instruments:
Interest Rate
Interest Rate Swaps ................................ $ 3,374 $ 26 $ (396) $ 5,048 $ 62 $ (468)
Foreign Currency
Foreign Currency Forwards ......................... 639 1 (35) 753 6 (4)
Currency/Interest Rate
Foreign Currency Swaps ............................ 6,373 128 (342) 4,807 227 (438)
Total Qualifying Hedges ........................... $ 10,386 $ 155 $ (773) $ 10,608 $ 295 $ (910)
Derivatives Not Qualifying as Hedging Instruments:
Interest Rate
Interest Rate Swaps ................................ $108,581 $ 7,779 $(3,301) $ 92,704 $ 8,277 $(3,087)
Interest Rate Futures ............................... 6,749 11 (12) 6,192 10 (9)
Interest Rate Options .............................. 25,250 895 (141) 15,457 1,093 0
Interest Rate Forwards ............................. 660 0 0 2,139 6 0
Foreign Currency
Foreign Currency Forwards ......................... 14,638 371 (397) 16,228 176 (335)
Foreign Currency Options .......................... 92 13 0 98 23 0
Currency/Interest Rate
Foreign Currency Swaps ............................ 5,304 239 (152) 5,390 224 (399)
Credit
Credit Default Swaps .............................. 3,250 19 (84) 3,298 58 (130)
Equity
Equity Futures .................................... 6,518 0 (165) 2,114 149 0
Equity Options ................................... 42,757 603 (40) 14,951 415 (66)
Total Return Swaps ................................ 5,779 8 (158) 6,797 34 (175)
Synthetic GIC’s ...................................... 65,403 6 0 46,844 4 0
Total Non-Qualifying Hedges ...................... $284,981 $ 9,944 $(4,450) $212,212 $10,469 $(4,201)
Total Derivatives(1) .............................. $295,367 $10,099 $(5,223) $222,820 $10,764 $(5,111)
(1) Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $3,438 million
as of December 31, 2012 and a net liability of $3,131 million as of December 31, 2011, included in “Future policy benefits” and “Fixed maturities,
available-for-sale.”
Cash Flow, Fair Value and Net Investment Hedges
The primary derivative instruments used by the Company in its fair value, cash flow, and net investment hedge accounting
relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only 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 fair value, cash flow or net investment hedge accounting relationships.
Prudential Financial, Inc. 2012 Annual Report 201