Prudential (PRU) saw robust business growth in the third quarter, and we are planning to increase our fair value estimate to reflect our forecast for higher long-term growth and profitability for the U.K. insurer.
In recent years, the firm, through its U.S. subsidiary Jackson National Life, had expanded rapidly on its variable annuity sales, taking market share from the likes of MetLife and Prudential Financial, as those two U.S. insurers continued to rein in capital market risk. However, more recently, Prudential has sought to reduce sales of these annuities, which typically offer customers guaranteed benefits.
In the third quarter, sales of variable annuities with guaranteed benefits fell 13% from the second quarter. The drop was not a big surprise to us, and we welcome the move as we think Prudential is taking a more prudent approach to maintaining an appropriate balance of revenue streams and matching the firm’s risk appetite. That said, the U.S. remains a growth driver for the firm, with Jackson’s new business profit rising 16% through the first nine months, thanks to the positive impact on product enhancement and pricing actions, which more than offset the negative effect of the low interest rate environment.
In the U.K., sales of individual annuities continued to feel the negative impact of the U.K. budget bill, which removes the requirement of converting pension money to annuities. As a result, third-quarter U.K. individual annuity sales fell 47% from the same quarter in 2013. This follows a 43% year-over-year sales drop in the second quarter. While we expect annuity sales to continue to shrink in the near term, we think the budget bill has created new opportunities for the firm, especially in alternative retirement solutions, with posted a 120% growth in the quarter.
Prudential's outward-looking strategy has helped the U.K. insurer grow its premium income at an industry-leading pace in the post-financial crisis era. The company has benefited the most from the growth of its Asian operations, where the growing affluence of middle income families in the region has increased demand for insurance and annuity products. It has also helped that Jackson National Life, the firm's U.S.-based operations, is facing a far less competitive market for its variable annuity business, as other firms in the region, notably MetLife and Prudential Financial (the U.S. company, not related to Prudential), have been pulling back from the market.
While we believe that Prudential will continue to benefit from its strategy in Asia, we don't expect growth to be maintained at the breakneck pace we've seen the past few years. Southeast Asia remains the most attractive market for Prudential, as the whole region is experiencing accelerated urbanization and growth, which increases disposable income and helps create a previously non-existent base of customers looking for insurance products.
