Prudential 2005 Annual Report Download - page 67

Restrictions on Dividends and Returns of Capital from Subsidiaries
Our insurance and various other companies are subject to regulatory limitations on the payment of dividends and other transfers of
funds to affiliates. With respect to Prudential Insurance, New Jersey insurance law provides that, except in the case of extraordinary
dividends or distributions, all dividends or distributions paid by Prudential Insurance may be declared or paid only from unassigned
surplus, as determined pursuant to statutory accounting principles, less unrealized investment gains and revaluation of assets. As of
December 31, 2005 and 2004, Prudential Insurance’s unassigned surplus was $2.703 billion and $3.327 billion, respectively. Prudential
Insurance recorded applicable adjustments for unrealized investment gains of $252 million and $824 million, as of December 31, 2005 and
2004, respectively. Prudential Insurance must also notify the New Jersey Department of Banking and Insurance of its intent to pay a
dividend. If the dividend, together with other dividends or distributions made within the preceding twelve months, would exceed a
specified statutory limit, Prudential Insurance must also obtain the prior non-disapproval of the Department. The current statutory
limitation applicable to New Jersey life insurers generally is the greater of 10% of the prior calendar year’s statutory surplus, $7.1 billion as
of December 31, 2005, or the prior calendar year’s statutory net gain from operations excluding realized investment gains and losses, $1.8
billion for the year ended December 31, 2005. In addition to these regulatory limitations, the terms of the IHC debt contain restrictions
potentially limiting dividends by Prudential Insurance applicable to the Financial Services Businesses in the event the Closed Block
Business is in financial distress and under other circumstances.
The laws regulating dividends of the other states and foreign jurisdictions where our other insurance companies are domiciled are
similar, but not identical, to New Jersey’s. Pursuant to Gibraltar Life’s reorganization, in addition to regulatory restrictions, there are
certain restrictions on Gibraltar Life’s ability to pay dividends to Prudential Financial. There are also regulatory restrictions on the payment
of dividends by The Prudential Life Insurance Company, Ltd., or Prudential of Japan. We anticipate that it will be several years before
these restrictions will allow Gibraltar Life to pay dividends. Prudential of Japan may be able to begin paying dividends in the next two
years. The ability of our asset management subsidiaries, and the majority of our other operating subsidiaries, to pay dividends is largely
unrestricted.
Tax Settlement
As a result of the completion of a review of tax issues by the Joint Committee on Taxation of the United States Congress relating to an
examination by the Internal Revenue Service, or IRS, of our consolidated federal income tax returns for the 1997 to 2001 periods, we
expect to receive a cash refund during calendar year 2006 of approximately $570 million from the IRS. The refund will be distributed to the
subsidiaries to which it relates, and will be subject to those restrictions on dividends and transfers to affiliates, discussed above, applicable
to those subsidiaries.
Alternative Sources of Liquidity
Prudential Financial, the parent holding company, maintains an intercompany liquidity account that is designed to maximize the use of
cash by facilitating the lending and borrowing of funds between the parent holding company and its affiliates on a daily basis. Depending
on the overall availability of cash, the parent holding company invests excess cash on a short-term basis or borrows funds in the capital
markets. It also has access to bank facilities. See “—Lines of Credit and Other Credit Facilities.”
Liquidity of Subsidiaries
Domestic Insurance Subsidiaries
General Liquidity
Liquidity refers to a company’s ability to generate sufficient cash flows to meet the needs of its operations. We manage the liquidity of
our domestic insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity
is provided by a variety of sources, as described more fully below, including portfolios of liquid assets. The investment portfolios of our
domestic and foreign insurance operations are integral to the overall liquidity of those operations. We segment our investment portfolios
and employ an asset/liability management approach specific to the requirements of our product lines. This enhances the discipline applied
in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique
characteristics of the product liabilities. A projection process for cash flows from operations serves to ensure sufficient liquidity to meet
projected cash outflows, including claims.
Liquidity is measured against internally developed benchmarks that take into account the characteristics of the asset portfolio. The
results are affected substantially by the overall quality of our investments.
Cash Flow
The principal sources of liquidity of Prudential Insurance and our other domestic insurance subsidiaries are premiums and annuity
considerations, investment and fee income and investment maturities and sales associated with our insurance, annuities and guaranteed
products operations. The principal uses of that liquidity include benefits, claims, dividends paid to policyholders, and payments to
policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include
commissions, general and administrative expenses, purchases of investments, and payments in connection with financing activities.
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