Prudential reported to have paved takeover way with the regulator

The group is thought to have agreed to set up a 1bn backstop fund to meet the Financial Services Authority's concerns about the adequacy of its capital reserves following the acquisition of AIA, the Asian arm of United States insurer AIG.

It is expected to outline the terms of the agreement today. Such a fund would enable it to continue with the $35.5bn (24bn) deal, according to a Sunday newspaper.

Prudential surprised the markets last week when it cancelled plans to give shareholders details of its record $21bn (14.2bn) fundraising to finance the move following objections from the FSA.

Details of the FSA's concerns have not been made public, but Prudential said they centred on the capital position of the enlarged business.

The insurer is understood to have dubbed the 1bn backstop fund "Armageddon money", as it would be used to cope with a one-in-100-year economic downturn.

The FSA is understood to have been concerned about how easy it would be under local regulations in Asia to get money out of AIA's businesses in Asia and back to the UK if the money were to be needed.

Prudential is also thought to have agreed to alter the details of its rights issue to fund the takeover in order to placate the FSA.

But there is speculation that the agreement with the FSA may have come too late and that shareholders, who were already unhappy with the takeover, may refuse to back it.

Shareholders have voiced concerns about the size of the deal and how easy it would be to integrate the two companies, and they are also unhappy about the money they are being asked to stump up to finance it.

As well as raising 14.2bn from shareholders, the group plans to fund the rest of the deal through issuing debt and selling a stake of around 11 per cent of the enlarged company to AIA shareholders.

Prudential shareholders had been due to vote on the takeover on May 27, but it is thought this is now likely to have been postponed.

A Prudential spokesman declined to comment on the report.

Meanwhile, another Sunday newspaper reported that four leading Prudential shareholders said they now expected the rights issue to fail and that the group's chief executive Tidjane Thiam would be called on to resign.

Prudential has said that, despite the setback with the FSA, it still expects still expects the transaction for AIA to occur during the third quarter of 2010.

If the takeover were to go ahead, it would make Prudential the biggest insurer in Asia, but if it were to fail there is speculation the group could be taken over or broken up.