Prudential 2002 Annual Report Download - page 80
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Please find page 80 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.amounts will only be partially drawn down based on overall customer usage patterns and, therefore, do not
necessarily represent future cash requirements. We evaluate each credit decision on such commitments at least
annually and have the ability to cancel or suspend such lines at our option. The total commitments for home
equity lines of credit and other lines of credit were $2.0 billion, of which $815 million remains available as of
December 31, 2002.
We also have other commitments, which primarily include commitments to originate and sell mortgage loans
and commitments to fund investments in private placement securities and limited partnerships. These
commitments amounted to $2.2 billion as of December 31, 2002.
In connection with certain acquisitions, we agreed to pay additional consideration in future periods, based
upon the attainment by the acquired entity of defined operating objectives. In accordance with SFAS No. 141,
“Business Combinations,” we do not accrue contingent consideration obligations prior to the attainment of the
objectives. At December 31, 2002, maximum potential future consideration pursuant to such arrangements, to be
resolved over the following six years, is $266 million. Any such payments would result in increases in goodwill.
We provide financial guarantees incidental to other transactions. These credit-related financial instruments
have off-balance sheet credit risk because only their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is fulfilled or expires. These instruments can extend
for several years and expirations are not concentrated in any single period. We seek to control credit risk
associated with these instruments by limiting credit, maintaining collateral where customary and appropriate and
performing other monitoring procedures. As of December 31, 2002, financial guarantees were $841 million.
The following table presents the expirations of the contractual commitments discussed above as of December
31, 2002.
Expirations by Year
Total 2003
2004
and
2005
2006
and
2007
2008
and
After
(in millions)
Commitments for home equity and other lines of credit ................................. $ 815 $ 39 $175 $ 12 $ 589
Othercommitments ............................................................. 2,224 1,032 417 413 362
Contingent consideration ......................................................... 266 20 132 83 31
Financial guarantees ............................................................. 841 51 269 72 449
Total ..................................................................... $4,146 $1,142 $993 $580 $1,431
Deferred Policy Acquisition Costs
We capitalize costs that vary with and are related primarily to the production of new insurance and annuity
business. These costs include commissions, costs to issue and underwrite the policies and certain variable field
office expenses. The capitalized amounts are known as deferred policy acquisition costs, or DAC. Our total DAC,
including the impact of unrealized investment gains and losses, amounted to $7.031 billion and $6.868 billion as
of December 31, 2002 and 2001, respectively. Approximately 51% of our total DAC as of December 31, 2002
relates to our Individual Life and Annuities segment, and approximately 16% relates to our Closed Block
Business.
If we were to experience a significant decrease in asset values or increase in lapse or surrender rates on
policies for which we amortize DAC based on estimated gross margins or gross profits, such as participating and
variable life insurance, we would expect acceleration of the write-off of DAC for the affected blocks of policies.
Additionally, for all policies on which we have outstanding DAC, we would be required to evaluate whether this
experience called into question our ability to recover all or a portion of the DAC, and we would be required to
write off some or all of the DAC if we concluded that we could not recover it. While an accelerated write-off of
Prudential Financial 2002 Annual Report 79