The Prudential Series Fund

Pruco Life Insurance Company
Notes to Consolidated Financial Statements
11. DERIVATIVE INSTRUMENTS (continued)
The Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of
the contract and receive in return the defaulted security or similar security. The Company’s maximum amount at risk under these
credit derivatives, assuming the value of the underlying referenced securities become worthless, is $104 million at December 31,
2008. These credit derivatives generally have maturities of five years or less.
The Company holds certain externally managed investments in the European market which contain embedded derivatives whose
fair value are primarily driven by changes in credit spreads. These investments are medium term notes that are collateralized by
investment portfolios primarily consisting of investment grade European fixed income securities, including corporate bonds and
asset-backed securities, and derivatives, as well as varying degrees of leverage. The notes have a stated coupon and provide a
return based on the performance of the underlying portfolios and the level of leverage. The Company invests in these notes to
earn a coupon through maturity, consistent with its investment purpose for other debt securities. The notes are accounted for
under U.S. GAAP as available for sale fixed maturity securities with bifurcated embedded derivatives (total return swaps).
Changes in the value of the fixed maturity securities are reported in Stockholders’ Equity under the heading ―Accumulated Other
Comprehensive Income‖ and changes in the market value of the embedded total return swaps are included in current period
earnings in ―Realized investment gains (losses), net.‖ The Company’s maximum exposure to loss from these interests was $63
million and $109 million at December 31, 2008 and 2007, respectively.
Credit Risk
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial derivative
transactions. Substantially all of the Company’s over-the-counter derivative contracts are transacted with an affiliate. In
instances where the Company transacts with unaffiliated counterparties, the Company manages credit risk by entering into
derivative transactions with major international financial institutions and other creditworthy counterparties, and by obtaining
collateral where appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic
management review.
The credit exposure of the Company’s over-the-counter derivative transactions is represented by the contracts with a positive fair
value (market value) at the reporting date. The Company effects exchange-traded futures 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.
12. COMMITMENTS, CONTINGENCIES AND LITIGATION AND REGULATORY MATTERS
Commitments
The Company has made commitments to fund $19 million of commercial loans in 2008. The Company also made commitments
to purchase or fund investments, mostly private fixed maturities, of $33 million in 2008.
Contingencies
On an ongoing basis, our internal supervisory and control functions review the quality of our sales, marketing, administration and
servicing, and other customer interface procedures and practices and may recommend modifications or enhancements. From time
to time, this review process results in the discovery of administration, servicing or other errors, including errors relating to the
timing or amount of payments or contract values due to customers. In these cases, we offer customers appropriate remediation
and may incur charges and expenses, including the costs of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be
materially affected as a result of payments in connection with the matters discussed above depending, in part, upon the results of
operations or cash flow for such period. Management believes, however, that the ultimate payments in connection with these
matters should not have a material adverse effect on the Company’s financial position.
Litigation and Regulatory Proceedings
The Company is subject to legal and regulatory actions in the ordinary course of its businesses, including class action lawsuits.
Legal and regulatory actions may include proceedings relating to aspects of the businesses and operations that are specific to the
Company and that are typical of the businesses in which the Company operates. Class action and individual lawsuits may involve
a variety of issues and/or allegations, which include sales practices, underwriting practices, claims payment and procedures,
premium charges, policy servicing and breach of fiduciary duties to customers. The Company may also be subject to litigation
arising out of its general business activities, such as investments and third party contracts. In certain of these matters, plaintiffs
may seek large and/or indeterminate amounts, including punitive or exemplary damages.
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