Prudential 2012 Annual Report Download - page 217

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
23. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
Guarantees of Asset Values
As of December 31,
2012 2011
(in millions)
Guaranteed value of third parties assets ............................................................ $64,424 $47,017
Fair value of collateral supporting these assets ...................................................... 67,555 49,044
Asset associated with guarantee, carried at fair value ................................................. 5 2
Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed
party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected
on the Company’s balance sheet.
Guarantees of Credit Enhancements
As of December 31,
2012 2011
(in millions)
Guarantees of credit enhancements of debt instruments associated with commercial real estate assets ........... $172 $221
Fair value of properties and associated tax credits that secure the guarantee ............................... 215 290
Accrued liability associated with guarantee ......................................................... 0 0
The Company arranges for credit enhancements of certain debt instruments that provide financing primarily for affordable multi-
family real estate assets, including certain tax-exempt bond financings. The credit enhancements provide assurances to the debt holders as
to the timely payment of amounts due under the debt instruments. The remaining contractual maturities for these guarantees are up to
fifteen years. The Company’s obligations to reimburse required credit enhancement payments are secured by mortgages on the related real
estate. The Company receives certain ongoing fees for providing these enhancement arrangements and anticipates the extinguishment of its
obligation under these enhancements prior to maturity through the aggregation and transfer of its positions to a substitute enhancement
provider.
Indemnification of Serviced Mortgage Loans
As of December 31,
2012 2011
(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company ........... $1,147 $1,088
First-loss exposure portion of above .............................................................. 369 353
Accrued liability associated with guarantees ........................................................ 19 21
As part of the commercial mortgage activities of the Company’s Asset Management segment, the Company provides commercial
mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The
Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the
mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family
mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a
specified percentage share of losses they incur on certain loans serviced by the Company. The Company’s percentage share of losses
incurred generally varies from 2% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the
loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage,
subject to a contractually specified maximum percentage. The Company services $8,428 million of mortgages subject to these loss-sharing
arrangements as of December 31, 2012, all of which are collateralized by first priority liens on the underlying multi-family residential
properties. As of December 31, 2012, these mortgages had an average debt service coverage ratio of 1.83 times and an average loan-to-
value ratio of 63%. The Company’s total share of losses related to indemnifications that were settled was $2 million, $1 million, and $3
million for the years ended December 31, 2012, 2011, and 2010, respectively.
Contingent Consideration
As of December 31,
2012 2011
(in millions)
Maximum potential contingent consideration associated with acquisitions ................................ $52 $57
Prudential Financial, Inc. 2012 Annual Report 215