Prudential 2005 Annual Report Download - page 131

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
13. STOCKHOLDERS’ EQUITY (continued)
Dividends
The principal sources of funds available to Prudential Financial, the parent holding company, to meet its obligations, including
the payment of shareholder dividends, debt service, capital contributions and obligations to subsidiaries, and operating expenses, are
dividends, returns of capital, interest income from its subsidiaries and cash and short-term investments. The regulated insurance and
various other subsidiaries are subject to regulatory limitations on their payment of dividends and other transfers of funds to
Prudential Financial. Pursuant to Gibraltar Life’s reorganization, in addition to regulatory restrictions, there are certain restrictions
that preclude Gibraltar Life from paying dividends to Prudential Financial in the near term.
New Jersey insurance law provides that dividends or distributions may be declared or paid by Prudential Insurance without
prior regulatory approval only from unassigned surplus, as determined pursuant to statutory accounting principles, less unrealized
capital gains and certain other adjustments. Unassigned surplus of Prudential Insurance was $2,703 million at December 31, 2005.
There were applicable adjustments for unrealized gains of $252 million at December 31, 2005. In addition, Prudential Insurance
must obtain non-disapproval from the New Jersey insurance regulator before paying a dividend if the dividend, together with other
dividends or distributions made within the preceding twelve months, would exceed the greater of 10% of Prudential Insurance’s
surplus as of the preceding December 31 ($7.1 billion as of December 31, 2005) or its net gain from operations for the twelve
month period ending on the preceding December 31, excluding realized capital gains and losses ($1.8 billion for the year ended
December 31, 2005).
The laws regulating dividends of Prudential Financial’s other insurance subsidiaries domiciled in other states are similar, but
not identical, to New Jersey’s. The laws of foreign countries may also limit the ability of the Company’s insurance and other
subsidiaries organized in those countries to pay dividends to Prudential Financial.
The declaration and payment of dividends on the Common Stock depends primarily upon the financial condition, results of
operations, cash requirements, future prospects and other factors relating to the Financial Services Businesses. Furthermore,
dividends on the Common Stock are limited to both the amount that is legally available for payment under New Jersey corporate
law if the Financial Services Businesses were treated as a separate corporation thereunder and the amount that is legally available
for payment under New Jersey corporate law on a consolidated basis after taking into account dividends on the Class B Stock.
The declaration and payment of dividends on the Class B Stock depends upon the financial performance of the Closed Block
Business and, as the Closed Block matures, the holders of the Class B Stock will receive the surplus of the Closed Block Business
no longer required to support the Closed Block for regulatory purposes. Dividends on the Class B Stock are payable in an aggregate
amount per year at least equal to the lesser of (1) a Target Dividend Amount of $19.25 million or (2) the CB Distributable Cash
Flow for such year, which is a measure of the net cash flows of the Closed Block Business. Notwithstanding this formula, as with
any common stock, Prudential Financial will retain the flexibility to suspend dividends on the Class B Stock; however, if CB
Distributable Cash Flow exists and Prudential Financial chooses not to pay dividends on the Class B Stock in an aggregate amount
at least equal to the lesser of the CB Distributable Cash Flow or the Target Dividend Amount for any period, then cash dividends
cannot be paid on the Common Stock with respect to such period.
Preferred Stock
Prudential Financial adopted a shareholder rights plan (the “rights plan”) under which each outstanding share of Common
Stock is coupled with a shareholder right. The rights plan is not applicable to any Class B Stock. Each right initially entitles the
holder to purchase one one-thousandth of a share of a series of Prudential Financial preferred stock upon payment of the exercise
price. At the time of the demutualization, the Board of Directors of Prudential Financial determined that the initial exercise price per
right is $110, subject to adjustment from time to time as provided in the rights plan. There was no preferred stock outstanding at
December 31, 2005 and 2004.
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