Prudential 2006 Annual Report Download - page 75

Sources of Capital
Prudential Financial is a holding company whose principal asset is its investments in subsidiaries. Prudential Financial’s capitalization
and use of financial leverage are consistent with its ratings targets. Our long-term senior debt rating targets for Prudential Financial are “A”
for Standard & Poor’s Rating Services, or S&P, Moody’s Investors Service, Inc., or Moody’s, and Fitch Ratings Ltd., or Fitch, and “a” for
A.M. Best Company, or A.M. Best. We seek to capitalize all of our subsidiaries and businesses in accordance with their ratings targets. Our
financial strength rating targets for our domestic life insurance companies are “AA/Aa/AA” for S&P, Moody’s and Fitch, respectively, and
“A+” for A.M. Best. The primary components of capitalization for the Financial Services Businesses consist of the equity we attribute to
the Financial Services Businesses (excluding accumulated other comprehensive income related to unrealized gains and losses on
investments and pension and postretirement benefits) and outstanding capital debt of the Financial Services Businesses, as discussed below
under “—Financing Activities.” Based on these components, the capital position of the Financial Services Businesses as of December 31,
2006 was as follows:
December 31, 2006
(in millions)
Attributed equity (excluding unrealized gains and losses on investments and pension/postretirement benefits) .................... $21,306
Capital debt(1) ............................................................................................... 4,377
Total capital ................................................................................................. $25,683
(1) Our capital debt to total capital ratio was 17.0% as of December 31, 2006.
As shown in the table above, as of December 31, 2006, the Financial Services Businesses had approximately $25.7 billion in capital,
all of which was available to support the aggregate capital requirements of its three divisions and its Corporate and Other operations. Based
on our assessments of these businesses and operations, we believe that this level of capital exceeds the amount required to support current
business risks by at least $2.0 billion as of December 31, 2006. Although some of these resources are in our regulated subsidiaries, and
their availability may be subject to prior regulatory notice, approval or non-disapproval, we believe these resources give us substantial
financial flexibility.
We believe migrating toward a capital structure comprised of 70% attributed equity, 20% capital debt and 10% hybrid equity
securities is consistent with our ratings objectives for Prudential Financial, and would support the issuance of approximately $4.5 billion of
additional capital debt and hybrid equity securities. This capital structure assumes that the hybrid equity securities we issue achieve 75%
equity credit, with the remaining 25% treated as capital debt, and that market conditions exist which make hybrid equity securities a cost
effective source of capital.
The Risk Based Capital, or RBC, ratio is the primary measure by which we evaluate the capital adequacy of Prudential Insurance,
which includes businesses in both the Financial Services Businesses and the Closed Block Business. We manage Prudential Insurance’s
RBC ratio to a level consistent with our ratings targets. RBC is determined by statutory formulas that consider risks related to the type and
quality of the invested assets, insurance-related risks associated with Prudential Insurance’s products, interest rate risks and general
business risks. The RBC ratio calculations are intended to assist insurance regulators in measuring the adequacy of Prudential Insurance’s
statutory capitalization.
In the second quarter of 2006, Prudential Insurance declared an ordinary dividend of $1.081 billion and an additional extraordinary
dividend of $764 million to Prudential Holdings, LLC, or Prudential Holdings. Prudential Holdings then distributed $1.597 billion of those
dividends to Prudential Financial, which excludes the portion of the dividends allocated to the Closed Block Business. Also in the second
quarter of 2006, American Skandia Life Assurance Corporation paid an extraordinary distribution of $150 million to American Skandia,
which American Skandia subsequently paid as a dividend to Prudential Financial. In the third quarter of 2006, Prudential Insurance
declared an extraordinary dividend of $500 million to Prudential Holdings, which was subsequently distributed to Prudential Financial.
Uses of Capital
Share Repurchases. During the year ended December 31, 2006, we repurchased 32.4 million shares of our Common Stock at a total
cost of $2.5 billion.
In November 2006, Prudential Financial’s Board of Directors authorized the Company to repurchase up to $3.0 billion of its
outstanding Common Stock in calendar year 2007. The timing and amount of any repurchases under this authorization will be determined
by management based upon market conditions and other considerations, and the repurchases may be effected in the open market, through
derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c)
of the Exchange Act. The 2007 stock repurchase program supersedes all previous repurchase programs.
Demutualization Consideration. For the year ended December 31, 2006, Prudential Financial paid $108 million in demutualization
consideration to eligible policyholders whom we have located since the time of demutualization and to governmental authorities in respect
of other eligible policyholders whom we continue to be unable to locate. We remain obligated to disburse $95 million of demutualization
consideration to the states if we are unable to establish contact with eligible policyholders within time periods prescribed by state
unclaimed property laws. These laws historically required remittance after periods ranging from three to seven years, but many states have
enacted laws that reduce these holding periods to accelerate the reporting of unclaimed demutualization property.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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