Prudential 2005 Annual Report Download - page 74

the real estate investment from us. We provide these guarantees to assist the investor in obtaining financing for the transaction on more
beneficial terms. Our maximum potential exposure under these guarantees was $1.735 billion as of December 31, 2005. 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. These guarantees expire at various times over the next 10 years. As of December 31,
2005, no amounts were accrued as a result of our assessment that it is unlikely payments will be required.
We write 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, our maximum amount at risk,
assuming the value of the referenced credits become worthless, is $1.626 billion as of 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. As of December 31, 2005, such
contracts in force carried a total guaranteed value of $2.157 billion.
Our 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. As of December 31, 2005, such enhancement arrangements
total $126 million, with remaining contractual maturities of up to 15 years. Our obligation to reimburse required payments are secured by
mortgages on the related real estate, which properties are valued at $162 million as of December 31, 2005. We receive certain ongoing fees
for providing these enhancement arrangements and anticipate the extinguishment of our obligation under these enhancements prior to
maturity through the aggregation and transfer of our positions to a substitute enhancement provider. As of December 31, 2005, we have
accrued liabilities of $4 million representing unearned fees on these arrangements.
In connection with certain acquisitions, we agreed to pay additional consideration in future periods, based upon the attainment by the
acquired entity of defined operating objectives. In accordance with GAAP, we do not accrue contingent consideration obligations prior to
the attainment of the objectives. As of 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.
We are also subject to other financial guarantees and indemnity arrangements. We have 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 us. 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. As of December 31, 2005, we have accrued liabilities of
$17 million associated with all other financial guarantees and indemnity arrangements, which does not include retained liabilities
associated with sold businesses.
Other Contingent Commitments
In connection with our commercial mortgage operations, we originate commercial mortgage loans. As of December 31, 2005, we had
outstanding commercial mortgage loan commitments with borrowers of $1.874 billion. In certain of these transactions, we prearrange that
we will sell the loan to an investor after we fund the loan. As of December 31, 2005, $511 million of our commitments to originate
commercial mortgage loans are subject to such arrangements.
We also have other commitments, some of which are contingent upon events or circumstances not under our control, including those
at the discretion of our counterparties. These other commitments amounted to $6.430 billion as of December 31, 2005. Reflected in these
other commitments are $6.333 billion of commitments to purchase or fund investments, including $4.937 billion that we anticipate will be
funded from the assets of our separate accounts.
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 associated
assets.
Deferred Policy Acquisition Costs
We capitalize costs that vary with and are related primarily to the acquisition of new and renewal insurance and annuities contracts.
The 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 the unrealized investment gains
Prudential Financial 2005 Annual Report72