Prudential 2006 Annual Report Download - page 84

Off-Balance Sheet Arrangements
Guarantees
In the course of our business, we provide certain guarantees and indemnities to third parties pursuant to which we may be contingently
required to make payments now or in the future.
A number of guarantees provided by us relate to real estate investments, in which the 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 the unaffiliated investor purchases
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 $1.815 billion as of December 31, 2006. 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 generally expire at various times over the next 10 years. As of
December 31, 2006, no amounts were accrued as a result of our assessment that it is unlikely payments will be required.
We write credit derivatives under which we are obligated to pay the counterparty the referenced amount of the contract and receive in
return the defaulted security or similar security. Our maximum amount at risk under these credit derivatives, assuming the value of the
underlying securities become worthless, is $1.618 billion at December 31, 2006. These credit derivatives 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, 2006, such
contracts in force carried a total guaranteed value of $2.400 billion.
We 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, 2006, such enhancement arrangements total $131 million, with remaining contractual
maturities of up to 13 years. Our obligation to reimburse required payments are secured by mortgages on the related real estate, which
properties are valued at $179 million as of December 31, 2006. 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, 2006, we have accrued liabilities of $1 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, 2006, maximum potential future consideration pursuant to such arrangements, to be
resolved over the following three years, is $185 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 and 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, 2006, we have accrued liabilities of $8 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, 2006, we had
outstanding commercial mortgage loan commitments with borrowers of $1.977 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, 2006, $471 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 $8.095 billion as of December 31, 2006. Reflected in these
other commitments are $7.850 billion of commitments to purchase or fund investments, including $5.823 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.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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