Prudential 2001 Annual Report Download - page 131

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
13. Stockholders’ Equity (continued)
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. In connection with the demutualization,
unassigned surplus was reduced to zero, thereby limiting Prudential Insurance’s ability to pay a dividend in 2002
primarily to the amount of its statutory net gain from operations, not including realized investment gains, for the
period from December 18, 2001 through December 31, 2001. In addition, Prudential Insurance must obtain prior
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 or its net gain from operations for the twelve month
period ending on the preceding December 31.
The laws regulating dividends of Prudential Financial’s other insurance subsidiaries domiciled in other states are
similar, but not identical, to New Jersey’s. In addition, the net capital rules to which the broker-dealer subsidiaries
are subject may limit their ability to pay dividends to Prudential Financial. The laws of foreign countries may also
limit the ability of our 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. Dividends declared and paid on the Common Stock do not depend upon and are not affected by the
financial performance of the Closed Block Business, unless the Closed Block Business is in financial distress.
Dividends declared and paid on the Common Stock are not affected by decisions with respect to dividend payments
on the Class B Stock except as indicated in the following paragraph. 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 that period, then cash dividends
cannot be paid on the Common Stock with respect to such period.
Stock Conversion Rights of the Class B Stock
Prudential Financial may, at its option, at any time, exchange all outstanding shares of Class B Stock into such
number of shares of Common Stock as have an aggregate average market value equal to 120% of the appraised fair
market value of the outstanding shares of Class B Stock.
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, beginning in the year 2016, and (2) at any
time in the event that (a) the Class B Stock will no longer be treated as equity of Prudential Financial for federal
income tax purposes or (b) the New Jersey Department of Banking and Insurance amends, alters, changes or
modifies 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; provided, however, that in no event may a
holder of Class B Stock convert shares of Class B Stock to the extent such holder immediately upon such
Prudential Financial 2001 Annual Report 129