What are the two classes of common stock and how do they differ?

The publicly traded Common Stock (NYSE: PRU) reflects the performance of the Financial Services Businesses. The Class B Stock, issued in a private placement to two AIG subsidiaries and Pacific Life, reflects the performance of the Closed Block Business and does not trade on any exchange. Dividends on the Class B Stock are payable at least equal to the lesser of a $19.25 million Target Dividend Amount or CB Distributable Cash Flow. Although the classes track separate businesses, there is no legal separation between them, and holders of each class are subject to all risks of an investment in the Company.

What drove the change in Financial Services Businesses earnings in 2006?

Income from continuing operations before extraordinary gain and cumulative effect attributable to the Financial Services Businesses was $3.1 billion, declining slightly from 2005. Growth in International Insurance, improved investment results, higher asset-based fees including the Allstate business, and higher earnings from the Wachovia Securities joint venture were offset by lower net realized investment gains and higher general and administrative expenses. The 2005 results included a $720 million income tax benefit from the IRS examination of 1997 to 2001 returns that did not recur in 2006.

How much did Closed Block Business income decline in 2006?

Closed Block Business income from continuing operations before income taxes was $403 million in 2006, down $79 million from $482 million in 2005. Net income attributable to the Class B Stock was $284 million, or $108.00 per share, compared with $321 million, or $119.50 per share, in 2005. The decline reflected lower net realized investment gains, partially offset by lower dividends to policyholders.

What are the main litigation and regulatory exposures disclosed?

The filing describes several matters, including Azar v. Prudential Insurance, a New Mexico class action over modal premium disclosure in which the court indicated it would enter liability judgment for the New Mexico class; the Lederman litigation in New Jersey state court; the December 2006 settlement of the New York Attorney General investigation involving a $2.5 million penalty and a $16.5 million policyholder fund; and In re Initial Public Offering Securities Litigation. Management believes the ultimate outcome should not have a material adverse effect on financial position, but notes that results of operations in a particular period could be materially affected.

What were the principal sources of cash for Prudential Financial parent company in 2006?

Sources totaled $8.73 billion and included dividends and returns of capital from subsidiaries of $3.225 billion, including $2.097 billion from Prudential Insurance; proceeds from the issuance of $2.0 billion of floating rate convertible senior notes; net proceeds from long-term debt of $919 million; and a $531 million federal tax refund. Major uses included $2.512 billion for share repurchases, a $2.673 billion net intercompany loan payment, $845 million of capital contributions to subsidiaries, and $440 million of shareholder dividends.

PRU 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Prudential Financial, Inc. ended 2006 with approximately $616 billion^a of assets under management and operates in the United States, Asia, Europe and Latin America through its Financial Services Businesses and its Closed Block Business.

Net income for 2006 was $3.428 billion^b, compared with $3.540 billion in 2005, and income from continuing operations before income taxes was $4.403 billion. Total assets were $454.3 billion and stockholders' equity was $22.9 billion at December 31, 2006. Results for the Financial Services Businesses were $3.144 billion of net income, while the Closed Block Business contributed $284 million.

Diluted net income per share of Common Stock was $6.50^c, compared with $6.34 in 2005. The company's 2006 capital deployment included repurchases of 32.4 million shares of Common Stock for $2.5 billion, a 22% increase in the annual Common Stock dividend to $0.95 per share, and the acquisition of the variable annuity business of The Allstate Corporation for $635 million of total consideration. The board authorized up to $3.0 billion of share repurchases for 2007.

Income from the Financial Services Businesses was $3.1 billion^d, slightly below 2005, reflecting a $720 million tax benefit recognized in 2005 that did not recur. Growth in International Insurance, higher asset-based fees and improved investment results were offset by lower realized investment gains and higher general and administrative expenses. Investors should note the structure of the company: the Common Stock reflects the Financial Services Businesses, while the non-traded Class B Stock reflects the Closed Block Business, and there is no legal separation between the two.

The filing also discloses ongoing regulatory and litigation matters, including the December 2006 resolution of the New York Attorney General investigation, the August 2006 market timing settlements totaling $600 million, and pending class actions. Management believes the ultimate outcome of pending litigation should not have a material adverse effect on financial position.

02—Key points

Key Highlights

Net income of $3.428 billion in 2006 versus $3.540 billion in 2005; diluted net income per Common Stock share of $6.50 versus $6.34
Total assets of $454.3 billion and stockholders' equity of $22.9 billion as of December 31, 2006
Share repurchases of 32.4 million Common Stock shares for $2.5 billion in 2006; board authorized up to $3.0 billion of repurchases for 2007
Annual Common Stock dividend raised 22% to $0.95 per share
Acquired Allstate's variable annuity business on June 1, 2006 for $635 million of total consideration, adding $16.3 billion of account values
Financial Services Businesses net income of $3.144 billion; Closed Block Business net income of $284 million
Market timing settlements paid $270 million into a Fair Fund and $330 million in fines and penalties in August 2006

03—Questions

Frequently Asked Questions

What are the two classes of common stock and how do they differ?
The publicly traded Common Stock (NYSE: PRU) reflects the performance of the Financial Services Businesses. The Class B Stock, issued in a private placement to two AIG subsidiaries and Pacific Life, reflects the performance of the Closed Block Business and does not trade on any exchange. Dividends on the Class B Stock are payable at least equal to the lesser of a $19.25 million Target Dividend Amount or CB Distributable Cash Flow. Although the classes track separate businesses, there is no legal separation between them, and holders of each class are subject to all risks of an investment in the Company.
What drove the change in Financial Services Businesses earnings in 2006?
Income from continuing operations before extraordinary gain and cumulative effect attributable to the Financial Services Businesses was $3.1 billion, declining slightly from 2005. Growth in International Insurance, improved investment results, higher asset-based fees including the Allstate business, and higher earnings from the Wachovia Securities joint venture were offset by lower net realized investment gains and higher general and administrative expenses. The 2005 results included a $720 million income tax benefit from the IRS examination of 1997 to 2001 returns that did not recur in 2006.
How much did Closed Block Business income decline in 2006?
Closed Block Business income from continuing operations before income taxes was $403 million in 2006, down $79 million from $482 million in 2005. Net income attributable to the Class B Stock was $284 million, or $108.00 per share, compared with $321 million, or $119.50 per share, in 2005. The decline reflected lower net realized investment gains, partially offset by lower dividends to policyholders.
What are the main litigation and regulatory exposures disclosed?
The filing describes several matters, including Azar v. Prudential Insurance, a New Mexico class action over modal premium disclosure in which the court indicated it would enter liability judgment for the New Mexico class; the Lederman litigation in New Jersey state court; the December 2006 settlement of the New York Attorney General investigation involving a $2.5 million penalty and a $16.5 million policyholder fund; and In re Initial Public Offering Securities Litigation. Management believes the ultimate outcome should not have a material adverse effect on financial position, but notes that results of operations in a particular period could be materially affected.
What were the principal sources of cash for Prudential Financial parent company in 2006?
Sources totaled $8.73 billion and included dividends and returns of capital from subsidiaries of $3.225 billion, including $2.097 billion from Prudential Insurance; proceeds from the issuance of $2.0 billion of floating rate convertible senior notes; net proceeds from long-term debt of $919 million; and a $531 million federal tax refund. Major uses included $2.512 billion for share repurchases, a $2.673 billion net intercompany loan payment, $845 million of capital contributions to subsidiaries, and $440 million of shareholder dividends.

04—Continue

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