Prudential is more likely than other European insurers to change its domicile to escape new capital standards because it faces a potentially big hit if it stays, and has a natural alternative home in Hong Kong, analysts said on Monday.
London-based Prudential, Britain's biggest insurer with a market value of 18.4 billion pounds, said on Sunday it might relocate in the event of an adverse outcome from the European Union's proposed Solvency II capital regime for insurers.
If it is a straight toss-up between raising billions to comply with Solvency II, or going through the redomiciling process, it is probably easier and cheaper to redomicile, Investec analyst Kevin Ryan said.
Solvency II could force Prudential to hold extra capital against its American business, Jackson National Life, if European regulators decide U.S. capital standards for insurers are less exacting than Europe's.
The company, which operates in Asia, Britain and the U.S., could avoid this surcharge by moving its headquarters outside the EU, leaving just its British subsidiary under the jurisdiction of Solvency II.
The extra capital requirement would be waived if U.S. regulations were considered to be on a par with Solvency II, due to come into force in 2014. No decision has been made as to whether U.S. rules are equivalent.
There has long been speculation that Prudential could move to Hong Kong, regardless of Solvency II, in recognition of its growing focus on Asia, which accounts for 45 percent of sales.
This figure is expected to rise as the insurer keeps investing heavily in the fast-growing region using cash from its mature British operation.
There are a number of strong arguments for a relocation from London to Hong Kong given the shape of the business, said Panmure Gordon analyst Barrie Cornes.
Prudential listed its shares in Hong Kong and Singapore in 2010 during a failed attempt to buy local rival AIA, a deal that would have doubled its Asian footprint.
A move to Hong Kong could be accompanied by a break-up of the insurer, advocated by some analysts who say the combined standalone value of its units exceeds that of the whole group.
It's difficult to see too many negatives (from redomiciling) said Jeffries International analyst James Shuck.
Prudential is mainly U.S. and Asia now, and I don't think moving head office really changes that.
The only other European insurer to say publicly it might relocate to avoid Solvency II is Netherlands-based Aegon, which relies on its U.S.-based Transamerica unit for about 80 percent of earnings.
Yet an eastwards move by Prudential could face resistance from shareholders, some of whom may be prevented by fund rules from owning shares in Asian companies, analysts said.
Prudential would also face intense lobbying from a British government anxious to retain corporate tax revenue and sensitive to accusations that regulation is driving banks and insurers overseas, undermining London's status as a global financial centre.
There is no doubt that other jurisdictions, and Hong Kong in particular, are becoming more attractive in this respect and are beginning to represent a serious alternative to London, said Tim Kirk, head of financial services at accountants BDO.
Prudential will not be the only firm considering whether to relocate its headquarters outside the UK.
Leading London-based banks HSBC, Standard Chartered and Barclays have threatened to quit Britain because of mounting regulatory costs.
Prudential declined to comment.
Shares in the insurer closed 0.3 percent lower, underperforming the Stoxx 600 European insurance share index. The stock is up 10 percent since the start of the year, lagging a 12 percent rise for the index.
(Editing by David Hulmes and Jon Loades-Carter)