Prudential 2012 Annual Report Download - page 165

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
15. EQUITY (continued)
Holders of Class B Stock will be permitted to convert their shares of Class B Stock into such number of shares of Common Stock as have
an aggregate average market value equal to 100% of the appraised fair market value of the outstanding shares of Class B Stock (1) in the holder’s
sole discretion, in the year 2016 or at any time thereafter, and (2) at any time in the event that (a) the Class B Stock is no longer treated as equity
of Prudential Financial for federal income tax purposes or (b) the New Jersey Department of Banking and Insurance changes the regulation of the
Closed Block, the Closed Block Business, the Class B Stock or the IHC debt in a manner that materially adversely affects the “CB Distributable
Cash Flow” (described below); provided, however, that a holder of Class B Stock may not convert its shares if such holder would become, upon
such conversion, the beneficial owner (as defined under the Securities Exchange Act of 1934) of over 9.9% of the total outstanding voting power
of Prudential Financial’s voting securities. In the event a holder of shares of Class B Stock requests to convert shares pursuant to clause (2)(a) in
the preceding sentence, Prudential Financial may elect, instead of effecting such conversion, to increase the Target Dividend Amount from
$9.625 to $12.6875 per share per annum, retroactively from the time of issuance of the Class B Stock.
Preferred Stock
As of December 31, 2012 and 2011, the Company had no preferred stock outstanding. The Company previously maintained a
shareholder rights plan; however, the rights plan expired on December 18, 2011.
Dividends
The declaration and payment of dividends on the Common Stock is limited by New Jersey corporate law, pursuant to which Prudential
Financial cannot pay a Common Stock dividend if, after giving effect to that dividend, either (a) the Company would be unable to pay its
debts as they become due in the usual course of its business or (b) the Company’s total assets would be less than its liabilities. This limitation
is applied both as if the Financial Services Businesses were a separate corporation and on a consolidated basis after taking into account
dividends on the Class B Stock. In addition, the terms of the Company’s outstanding junior subordinated debt include a “dividend stopper”
provision that restricts the payment of dividends on the Common Stock and Class B Stock if interest payments are not made on the junior
subordinated debt. The terms of the Class B Stock also restrict dividends on the Common Stock in certain circumstances as described below.
Notwithstanding the above limitations, dividends on the Common Stock will primarily depend upon the financial condition, results of
operations, cash requirements, future prospects and other factors relating to the Financial Services Businesses, including cash available to
Prudential Financial, the parent holding company. The principal sources of funds available to Prudential Financial are dividends and returns
of capital from its subsidiaries, repayments of operating loans from its subsidiaries and cash and short-term investments. The primary uses
of funds at Prudential Financial include servicing its debt, operating expenses, capital contributions and loans to subsidiaries, the payment
of declared shareholder dividends and repurchases of outstanding shares of Common Stock if executed under Board authority. As of
December 31, 2012, Prudential Financial had cash and short term investments, excluding amounts held in an intercompany liquidity
account, of $5,427 million.
The majority of the Company’s subsidiaries are subject to comprehensive regulation, including limitations on their payment of
dividends and other transfers of funds to Prudential Financial.
With respect to Prudential Insurance, the Company’s primary domestic insurance subsidiary, New Jersey insurance law provides that,
except in the case of extraordinary dividends (as described below), all dividends or other distributions paid by Prudential Insurance may be
paid only from unassigned surplus, as determined pursuant to statutory accounting principles, less cumulative unrealized investment gains
and losses and revaluation of assets as of the prior calendar year-end. As of December 31, 2012, Prudential Insurance’s unassigned surplus
was $5,668 million, and it recorded applicable adjustments for cumulative unrealized investment gains of $2,669 million. Prudential
Insurance must give prior notification to the New Jersey Department of Banking and Insurance (the “Department”) of its intent to pay any
such dividend or distribution. Also, if any dividend, together with other dividends or distributions made within the preceding twelve
months, exceeds the greater of (i) 10% of Prudential Insurance’s statutory surplus as of the preceding December 31 ($870 million as of
December 31, 2012) or (ii) its statutory net gain from operations excluding realized investment gains and losses for the twelve-month
period ending on the preceding December 31 ($893 million for the year ended December 31, 2012), the dividend is considered to be an
“extraordinary dividend” and requires the prior approval of the Department. Under New Jersey insurance law, Prudential Insurance is
permitted to pay a dividend of $893 million in 2013 without prior approval of the Department.
The laws regulating dividends of the states where the Company’s other domestic insurance subsidiaries are domiciled are similar, but
not identical, to New Jersey’s. Prudential Annuities Life Assurance Corporation (“PALAC”), another domestic insurance subsidiary of
Prudential Financial that is domiciled in Connecticut, is permitted to pay a dividend of $41 million in 2013 with prior notification to the
Connecticut Department of Insurance.
The Company’s international insurance operations are subject to dividend restrictions from the regulatory authorities in the
jurisdictions in which they operate. With respect to The Prudential Life Insurance Company Ltd. (“Prudential of Japan”) and Gibraltar Life,
the Company’s most significant international insurance subsidiaries, both of which are domiciled in Japan, Japan insurance law provides
that common stock dividends may be paid in an amount of up to 83% of prior fiscal year statutory after-tax earnings, after certain reserving
thresholds are met, including providing for policyholder dividends. If statutory retained earnings exceed 100% of statutory paid-in-capital,
100% of prior year statutory after-tax earnings may be paid, after reserving thresholds are met. Dividends in excess of these amounts and
other forms of capital distribution require the prior approval of the Japan Financial Services Agency (“FSA”). Additionally, Prudential of
Japan and Gibraltar Life must give prior notification to the FSA of their intent to pay any dividend or distribution. In 2012, Prudential of
Japan paid a dividend of ¥18.4 billion, or $224 million, which was ultimately paid to Prudential Financial. Prudential of Japan has met the
statutory retained earnings level necessary to dividend up to 100% of prior year statutory after-tax earnings. Prudential of Japan’s and
Gibraltar Life’s current regulatory fiscal year will end March 31, 2013, at which time the common stock dividend amount permitted to be
paid without prior approval from the FSA will be determinable. Although Gibraltar Life may be able to pay common stock dividends under
applicable legal and regulatory restrictions, Gibraltar Life does not anticipate paying common stock dividends for several years as it
anticipates returning capital through other means, such as the repayment of subordinated debt or preferred stock obligations held by
Prudential Financial or affiliates. The prior approval of the FSA is required for such capital distributions.
Prudential Financial, Inc. 2012 Annual Report 163