Prudential 2005 Annual Report Download - page 160

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
The Company also has other commitments, some of which are contingent upon events or circumstances not under the
Company’s control, including those at the discretion of the Company’s counterparty. These other commitments amounted to $6,430
million at December 31, 2005. Reflected in these other commitments are $6,333 million of commitments to purchase or fund
investments, including $4,937 million that the Company anticipates will be funded from the assets of its separate accounts.
In the course of the Company’s business, it provides certain guarantees and indemnities to third parties pursuant to which it
may be contingently required to make payments now or in the future.
A number of guarantees provided by the Company relate to real estate investments, in which the investor has borrowed funds,
and the Company has guaranteed their obligation to their lender. In some cases, the investor is an affiliate, and in other cases the
unaffiliated investor purchases the real estate investment from the Company. The Company provides these guarantees to assist them
in obtaining financing for the transaction on more beneficial terms. The Company’s maximum potential exposure under these
guarantees was $1,735 million at December 31, 2005. Any payments that may become required of the Company under these
guarantees would either first be reduced by proceeds received by the creditor on a sale of the assets, or would provide the Company
with rights to obtain the assets. These guarantees expire at various times over the next 10 years. At December 31, 2005, no amounts
were accrued as a result of the Company’s assessment that it is unlikely payments will be required.
As discussed in Note 19, the Company writes credit default swaps requiring payment of principal due in exchange for the
referenced credits, depending on the nature or occurrence of specified credit events for the referenced entities. In the event of a
specified credit event, the Company’s maximum amount at risk, assuming the value of the referenced credits become worthless, is
$1,626 million at December 31, 2005. The credit default swaps generally have maturities of five years or less.
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, at fair value, in accordance with SFAS No. 133. At
December 31, 2005, such contracts in force carried a total guaranteed value of $2,157 million.
The Company’s commercial mortgage operations arrange for credit enhancements of certain debt instruments that provide
financing for commercial 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. At December 31, 2005, such
enhancement arrangements total $126 million, with remaining contractual maturities of up to 15 years. The Company’s obligations
to reimburse required payments are secured by mortgages on the related real estate, which properties are valued at $162 million at
December 31, 2005. 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. At December 31, 2005, the Company has accrued liabilities of $4 million representing unearned
fees on these arrangements.
In connection with certain acquisitions, the Company has agreed to pay additional consideration in future periods, based upon
the attainment by the acquired entity of defined operating objectives. In accordance with U.S. GAAP, the Company does not accrue
contingent consideration obligations prior to the attainment of the objectives. At December 31, 2005, maximum potential future
consideration pursuant to such arrangements, to be resolved over the following four years, is $269 million. Any such payments
would result in increases in intangible assets, including goodwill.
The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided
indemnities and guarantees related to acquisitions, dispositions, investments or other transactions that are triggered by, among other
things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to
various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum
potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Since
certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under
these guarantees. At December 31, 2005, the Company has accrued liabilities of $17 million associated with all other financial
guarantees and indemnity arrangements, which does not include retained liabilities associated with sold businesses.
Contingent Liabilities
As discussed in Note 3, in the fourth quarter of 2003, the Company sold its property and casualty insurance companies that
operated nationally in 48 states outside of New Jersey, and the District of Columbia, to Liberty Mutual. In connection with that sale,
the Company reinsured Liberty Mutual for certain losses including: any adverse loss development on losses occurring prior to the
sale that arise from insurance contracts generated through certain “discontinued” distribution channels or due to certain loss events;
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