Prudential 2007 Annual Report Download - page 171

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
19. DERIVATIVE INSTRUMENTS (continued)
Presented below is a roll forward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before
taxes:
(in millions)
Balance, December 31, 2004 .............................................................................. $(210)
Net deferred gains on cash flow hedges from January 1 to December 31, 2005 ....................................... 116
Amount reclassified into current period earnings ............................................................... (28)
Balance, December 31, 2005 .............................................................................. (122)
Net deferred losses on cash flow hedges from January 1 to December 31, 2006 ....................................... (60)
Amount reclassified into current period earnings ............................................................... (9)
Balance, December 31, 2006 .............................................................................. (191)
Net deferred losses on cash flow hedges from January 1 to December 31, 2007 ....................................... (73)
Amount reclassified into current period earnings ............................................................... (3)
Balance, December 31, 2007 .............................................................................. $(267)
It is anticipated that a pre-tax loss of approximately $17 million will be reclassified from “Accumulated other comprehensive income
(loss)” to earnings during the year ended December 31, 2008, offset by amounts pertaining to the hedged items. As of December 31, 2007,
the Company does not have any 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 16 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 Consolidated Statements of Stockholders’ Equity.
For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account
within “Accumulated other comprehensive income (loss)” were gains of $2 million in 2007, losses of $78 million in 2006 and gains of $34
million in 2005.
For the years ended December 31, 2007, 2006 and 2005, there were no derivative reclassifications to earnings due to hedged firm
commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally
specified time period.
Credit Risk
The Company is exposed to credit-related losses in the event of nonperformance by counterparties that is related to the financial
derivative transactions. The Company manages credit risk by entering into derivative transactions with major commercial and investment
banks and other creditworthy counterparties, and by obtaining collateral where appropriate and by limiting its single party credit exposures.
The credit exposure of the Company’s over-the-counter (OTC) derivative transactions is represented by the contracts with a positive
fair value (market value) at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions
pursuant to master agreements that provide for a netting of payments and receipts with a single counterparty (ii) enter into agreements that
allow the use of credit support annexes (CSAs), which are bilateral rating-sensitive agreements that require collateral postings at
established threshold levels. Likewise, the Company effects exchange-traded futures and options transactions through regulated exchanges
and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of nonperformance by counterparties to
such financial instruments.
Prudential Financial 2007 Annual Report 169