Prudential 2003 Annual Report Download - page 89

contingent consideration obligations prior to the attainment of the objectives. As of December 31, 2003, maximum
potential future consideration pursuant to such arrangements, to be resolved over the following six years, is $269
million. Any such payments would result in increases in intangible assets, including goodwill.
See “—Off-Balance Sheet Arrangements—Guarantees” below for a discussion of financial guarantees.
The following table summarizes the expirations of the contractual commitments discussed above as of
December 31, 2003.
Expirations by Period
Total
Less than
1 Year
1–3
Years
4–5
Years
More than
5 Years
(in millions)
Commitments to originate commercial mortgage loans .............................. $1,282 $ 941 $ 122 $219 $ —
Commitments for home equity and other lines of credit .............................. 818 40 173 14 591
Other commitments .......................................................... 2,964 1,453 1,068 335 108
Contingent consideration ...................................................... 269 — 142 89 38
Financial guarantees ......................................................... 916 196 222 90 408
Total .................................................................. $6,249 $2,630 $1,727 $747 $1,145
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 $7.8 billion and $7.0 billion as of December 31,
2003 and 2002, respectively. As of December 31, 2003, approximately 49% of our total DAC relates to our Individual
Life and Annuities segment, approximately 35% relates to our International Insurance 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. An accelerated write-off of DAC would negatively affect our
reported earnings and level of capital under generally accepted accounting principles.
Off-Balance Sheet Arrangements
Guarantees
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.
A number of guarantees provided by the Company relate to real estate investments, in which the unconsolidated
investor has borrowed funds, and we have guaranteed their obligation to their lender. In some cases, the investor is an
affiliate, and in other cases an unaffiliated investor purchases the real estate investment from us. We provide these
Prudential Financial 2003 Annual Report 87