Prudential Financial Inc. (PRU), the second largest life insurer in the U.S, announced a new share repurchase program, with an authorization to buy back up to $1.0 billion of its outstanding common stock through June 30, 2013.

Prior to this, in June last year, Prudential announced the buyback of up to $1.5 billion of its outstanding common stock through June 30, 2012. The year marked the resumption of its suspended share buyback plan in 2008. Owing to the market conditions in 2007-2008, Prudential suffered huge losses in terms of its investment in subprime securities and decline in stock value. As a result, the company suspended its 2008 stock repurchase program.

However, with a gradual improvement in equity markets and the overall economy, Prudential consequently benefited from growth in its International Insurance businesses and stability in its core U.S. insurance business. Also, strong results of its operations, focus on retirement solutions and asset management, driven by net flows and improving market conditions, favored the company and enabled it to resume its share buyback plan in 2011.

Prudential maintains an exceptional level of balance sheet strength. With an estimated capital of $4-$4.5 billion for fiscal 2012, we think the company is poised to comfortably execute its share buyback activity.

In a separate development, A.M. Best Co. reaffirmed financial strength rating (“FSR”) and issuer credit ratings (“ICR”) of Prudential and its subsidiaries. Accordingly, the company’s ICR of “a-“and all the existing debt ratings have been reiterated. Also, its life and health insurance subsidiaries have witnessed a reaffirmation of their FSR and ICR at “A+” and “aa-“, respectively.

The rating agency takes into account the group’s diversified operations, spanning the United States, Asia, Europe and Latin America. Its broad product portfolio includes life insurance, annuities, mutual funds, pension and retirement related investments, administration and asset management solutions and securities brokerage services. The right mix of businesses with strong fundamentals and superb risk management capabilities have helped the company to strengthen its market position and achieve greater business diversification. The rating agency also acknowledges the company’s solid first quarter earnings, which reflects its strong operating profile.

Prudential’s lower exposure to volatility in equity markets due to a higher mix of variable annuities that automatically rebalance equity market movement also proves to be a positive for the company.

Though the rating agency opines that variable annuity businesses are less rewarding than life insurance businesses, Prudential has had a successful history of managing the annuity business.

The rating agency also acknowledges the fact that the recent acquisition of Star Edison will further strengthen the company’s already established presence in Japan thereby boosting its International business. Japan is the largest business base of Prudential outside the U.S., contributing approximately 40% of its revenues. The company has been operating in the country for over a couple of decades.

Factors, which are likely to thwart Prudential’s ratings include its above-average concentration of investments in subprime residential mortgage-backed securities and its exposure to commercial real estate.

The rating agency also noted the above average use of operating leverage by the company compared with the industry average. Though the company has tried to bring down the total leverage, it stands at an elevated level. The financial leverage component of total leverage, which measures the debt used in total capital, however, is within reasonable limits.

The company’s financial strength and credit ratings, which are intended to measure its ability to meet policyholder obligations, are important factors affecting public confidence in most of Prudential’s products, and consequently, its competitiveness. The ratings affirmation reflects optimism about the company’s future performance.

Peer MetLife Inc., (MET) carries an ICR of “a-“, while its life and health insurance subsidiaries carry an ICR and FSR of “aa-” and “A+”, respectively by A.M. Best.

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