Prudential 2006 Annual Report Download - page 178

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
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, 2006, the Company has accrued liabilities of $8 million associated with all
other financial guarantees and indemnity arrangements, which does not include retained liabilities associated with sold businesses.
Contingent Liabilities
In 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 and stop-loss protection on losses
occurring after the sale and arising from those same distribution channels of up to $95 million, in excess of related premiums and
other adjustments. The reinsurance covering the losses associated with the discontinued distribution channels will be settled based
upon loss experience through December 31, 2008, with a provision that profits on the insurance business from these channels will
be shared, with Liberty Mutual receiving up to $20 million of the first $50 million.
On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and
other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this
review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or
amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers
remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be
materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon
the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with
these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on
the Company’s financial position.
Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions
include proceedings relating to aspects of our businesses and operations that are specific to the Company and proceedings that are typical
of the businesses in which the Company operates, including in both cases businesses that have either been divested or placed in wind-down
status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the
plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages.
Insurance and Annuities
In August 2000, plaintiffs filed a purported national class action in the District Court of Valencia County, New Mexico, Azar,
et al. v. Prudential Insurance, based upon the alleged failure to adequately disclose the increased costs associated with payment of
life insurance premiums on a “modal” basis, i.e., more frequently than once a year. Similar actions have been filed in New Mexico
against over a dozen other insurance companies. The complaint asserts claims for breach of the common law duty to disclose
material information, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, unjust enrichment and
fraudulent concealment and seeks injunctive relief, compensatory and punitive damages, both in unspecified amounts, restitution,
treble damages, interest, costs and attorneys’ fees. In March 2001, the court entered an order granting partial summary judgment to
plaintiffs as to liability. In January 2003, the New Mexico Court of Appeals reversed this finding and dismissed the claims for
breach of the covenant of good faith and fair dealing and breach of fiduciary duty. The case was remanded to the trial court and in
November 2004, it held that, as to the named plaintiffs, the non-disclosure was material. In July 2005, the court certified a class of
New Mexico only policyholders denying plaintiffs’ motion to include purchasers from 35 additional states. In September 2005,
plaintiffs sought to amend the court’s order on class certification with respect to eight additional states. In March 2006, the court
reiterated its denial of a multi-state class and maintained the certification of a class of New Mexico resident purchasers of Prudential
life insurance. The court also indicated it would enter judgment on liability against Prudential for the New Mexico class.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
176