Prudential 2007 Annual Report Download - page 182

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
The Company arranges 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, 2007, such enhancement arrangements total $154 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 $190 million at December 31, 2007. 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, 2007, the Company has
accrued liabilities of $2 million representing unearned fees on these arrangements.
In connection with its commercial mortgage operation, the Company provides commercial mortgage origination, underwriting and
servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify certain
of these government sponsored entities for a portion of the credit risk associated with the mortgages it services through these relationships.
The Company’s percentage share of losses incurred generally varies from 2% to 20% of the unpaid principal balance, based on the program
and the severity of the loss. The unpaid principal balance of mortgages subject to these arrangements as of December 31, 2007 were $5,576
million, all of which are collateralized by first liens on the underlying commercial properties. As of December 31, 2007, the Company has
established a liability of $11 million related to these indemnifications.
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, 2007, maximum potential future consideration pursuant
to such arrangements, to be resolved over the following two years, is $61 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 and 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, 2007, the
Company has accrued liabilities of $7 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.
180 Prudential Financial 2007 Annual Report