Prudential 2003 Annual Report Download - page 90

guarantees to assist them in obtaining financing for the transaction on more beneficial terms. Our maximum potential
exposure under these guarantees was $880 million as of December 31, 2003. Any payments that may become required
of 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. As of December 31, 2003 no amounts were accrued as a result of
our assessment that it is unlikely that payments will be required.
We are subject to other financial guarantees and indemnity arrangements, including those related to business that
have been sold. Some of these guarantees may extend far into the future and are subject to caps aggregating to $36
million. In other limited cases, the amount that can be claimed from us or the time in which these claims may be
presented to us are not limited. As of December 31, 2003, we have accrued liabilities of $11 million associated with all
other financial guarantees and indemnity arrangements, which does not include liabilities we retained associated with
sold businesses.
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 we believe 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 and other 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 these
death and other benefits under these contracts. See “Management’s Discussion and Analysis of Financial Condition
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