HK may be Prudential's new HQ

Posted on Feb 27, 2012 by Sergio Ulloa (G+)

Prudential PLC, Britain's largest insurer by market value, has hinted that they may move headquarters from London to Hong Kong in order to escape Europe's upcoming Solvency II capital requirements and focus more on Asian business development. The UK media was abuzz over the weekend on news that Tidjane Thiam, Prudential Chief Executive, had ordered a review of the company's domicile situation, with the possibility of moving to Hong Kong or another Asian location very much on the table. The Times on Sunday first reported that Thiam asked Prudential executives to pursue relocation options in response to the tougher solvency rules being introduced in Europe next January. These new regulations will force European insurers to increase their capital levels and could leave Prudential holding billions of extra pounds in reserve. Prudential, founded in London in 1848, is expected to admit to the domicile review when its annual report is released next week. In a separate company statement posted on Sunday, Prudential confirmed that management regularly reviews a wide range of options designed to better optimize the company's strategic flexibility going forward. "This includes consideration of optimizing the Group's domicile, including as a possible response to an adverse outcome on Solvency II. There continues to be uncertainty in relation to the implementation of Solvency II and implications for the Group's businesses. Clarity on this issue is not expected in the near term," Prudential claimed. The company had previously disavowed any talk of a break-up of its operations as an unnecessary business move that would hurt it's credit rating. The European Union's new collective insurance industry regime, known as the Solvency II Directive, requires that insurance companies hold capital reserves with stricter proportion to their underwritten risks in order to reduce the threat of insolvency and further limit market-wide bankruptcy contagion. This new directive is expected to lead to an increase in capital requirements for many of Europe's largest insurers as it will force these firms to increase their cash holdings against their divisions operating in markets that do not currently have the same rigorous capital standards. Short-term concerns persist amongst industry analysts that the new EU regime might cause insurers to increase their capital position at the expense of tackling new business ventures, which would damage their competitiveness, and indeed Europe's, in the overall international insurance marketplace. The slow-moving implementation of Solvency II, which could be further delayed to 2014, has already proven costly and could also further strain insurers with potentially stricter risk-based capital requirements going forward. The overall cost of introducing Solvency II across Europe is already thought to have exceeded the European Union's initial €3 billion (US$4.75 billion) forecast. Thiam has long been critical of Solvency II and the negative impact it could have on Europe's most prominent insurance companies. At the World Economic Forum in Davos last month, Thiam reportedly asserted that the EU's new capital requirements would force Prudential to dispose of £11 billion (US$17 billion) worth of investments in UK infrastructure projects and would significantly reduce the amount the insurer could lend to banks as well. The rules have also been criticized for the extra costs they will likely impose on European pension annuities. Solvency II poses a significant interruption to Prudential's operations in particular. No decision has been made by EU regulators yet as to whether the United States' capital rules are compatible with Solvency II. A failure to resolve this conflict between US and Euro regulators would force Prudential to significantly increase their reserves, much more so than their UK rivals, and hold billions in excess capital to protect its American life insurance unit Jackson National Life. If however, Prudential decided to instead move its chief headquarters to Hong Kong or elsewhere outside of Europe, only the company's British business arm would be subject to the new Solvency II regulations. The loss of Prudential, a well-regarded 163 year old company with £349.5 billion (US$552.25 billion) of assets under management, would be a symbolic blow to the City of London and its heralded status as the financial center of the international insurance industry. Prudential's shareholders may not share the same sentiment about moving away from home however. Asia has fast become the company's most important geographic market and relocating to Hong Kong would certainly be recognition of the region's large and growing contribution to Prudential's ongoing success. Prudential has been using the cash generated from its legacy UK business to fund expansion efforts in booming Southeast Asian economies over the past decade. The region now accounts for nearly half of Prudential's overall sales, and the company now has secondary stock market listings in both Singapore and Hong Kong. According to Prudential's 2011 1H interim statement, between 60 to 65 percent of profits in the Asia region are coming from the sale of protection products. The bancassurance channel meanwhile accounts for 30 percent of Prudential's combined annual premium across the Asia-Pacific, excluding India. With profits up 17 percent year-on-year to £465 million (US$72.2 million) across the region, Prudential now look forward to doubling their earnings in Asia over the next few years in an attempt to capitalize on the growing demand for insurance and financial service products among the expanding middle class populations in fast-moving Asian economies such as China, Indonesia and Malaysia. Prudential are now confident that the strength of their Asian insurance operations could protect them against the threat of another potential financial crisis in the West. Prudential's decision to review the location of their company headquarters follows similar warnings made by AXA, HSBC and Standard Chartered in the past year. These companies all look to Asia for a significant share of their overall business. The decision to leave the once warm confines of London for the promising Far East now warrants serious consideration. Insurance Company Mentioned Prudential Prudential has been in the insurance and financial services business since 1848. Today they operate throughout the UK, US and Asia offering international health insurance and retirement planning services, supported by 27,000 employees worldwide.