Prudential 2002 Annual Report Download - page 81
Download and view the complete annual report
Please find page 81 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.DAC would not affect our cash flow or liquidity, it would negatively affect our reported earnings and level of
capital under generally accepted accounting principles.
Off-Balance Sheet Arrangements
Guarantees
As discussed under “Liquidity and Capital Resources—Non-Insurance Contractual Obligations” we provide
guarantees incidental to other transactions and services.
We provide a number of guarantees related to sales or transfers of real estate, in which the buyer has
borrowed funds, and we have guaranteed their obligation to their lender. We provide these guarantees to assist
them in obtaining financing for the transaction on more beneficial terms. In some instances, the buyer is an
unconsolidated affiliate, and in other instances the buyer is unaffiliated and we retain no interests in the
transferred asset. Our maximum potential exposure under these guarantees was $774 million as of December 31,
2002. Any payments that may become required by us under these guarantees would either first be reduced by
proceeds received by the creditor on a sale of the assets, or would provide us with rights to obtain the assets.
Other Off-Balance Sheet Arrangements
We do not have retained or contingent interests in assets transferred to unconsolidated entities, or variable
interests in unconsolidated entities or other similar transactions, arrangements or relationships that serve as credit,
liquidity or market risk support, that are reasonably likely to have a material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or our
access to or requirements for capital resources. In addition, we do not have relationships with any unconsolidated
entities that are contractually limited to narrow activities that facilitate our transfer of or access to assets.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management, Market Risk and Derivative Instruments
Risk management includes the identification and measurement of various forms of risk, the establishment of
risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing
returns on the underlying assets or liabilities. We consider risk management an integral part of our core business.
Market risk is the risk of change in the value of financial instruments as a result of absolute or relative
changes in interest rates, foreign currency exchange rates or equity or commodity prices. To varying degrees, the
investment and trading activities supporting all of our products and services generate market risks. The market
risks incurred and our strategies for managing these risks vary by product.
With respect to non-variable life insurance products, fixed rate annuities, the fixed rate options in our
variable life insurance and annuity products, consumer banking products, and other finance businesses, we incur
market risk primarily in the form of interest rate risk. We manage this risk through asset/liability management
strategies that seek to match the interest rate sensitivity of the assets to that of the underlying liabilities. Our
overall objective in these strategies is to limit the net change in value of assets and liabilities arising from interest
rate movements. While it is more difficult to measure the interest sensitivity of our insurance liabilities than that
of the related assets, to the extent that we can measure such sensitivities we believe that interest rate movements
will generate asset value changes that substantially offset changes in the value of the liabilities relating to the
underlying products.
For variable annuities and variable life insurance products, excluding the fixed rate options in these products,
mutual funds and most separate accounts, our main exposure to the market is the risk that asset management fees
decrease as a result of declines in assets under management due to changes in prices of securities. We also run the
risk that asset management fees calculated by reference to performance could be lower. For variable annuity and
variable life insurance products with minimum guaranteed death benefits, we also face the risk that declines in the
value of underlying investments as a result of changes in prices of securities may increase our net exposure to
death benefits under these contracts. We do not believe that these risks add significantly to our overall market
risk.
Growing and Protecting Your Wealth80