Prudential is under mounting pressure to slash the value of its Taiwanese life insurance business by up to £700m when it unveils full-year results next month.
It comes as the company prepares to announce a radical restructuring of its UK business which will see a sharp cut the number of products sold by the underperforming operation. This could lead to hundreds of job losses.
News of the UK shake-up, which follows a strategic review, is not expected to spare the insurer from tough questions about its Taiwanese business, where it has a huge number of life insurance policies that offer guaranteed returns of up to 7 per cent.
Because Taiwanese interest rates are only 2.75 per cent, the country's government bonds do not yield enough to cover the cost of the guarantees, sparking pressure on the company to write down the value of the operation. At those interest rates Prudential's Taiwanese business is worth £700m less than it is valued on the company's books.
Last week ING, the Dutch financial services group, recognised the problem and took a €1.5bn hit to the value of its Taiwanese business, action which Prudential has so far shied away from taking.
The UK life insurer's valuation of its Taiwanese business is based on an assumption that rates will rise to as much as 5.25 per cent within the next eight years.
However, analysts said they believe these assumptions are far too optimistic and that Prudential should follow ING's lead.
In its results statement ING said it was taking the step "mainly due to a decrease in the long-term risk-free interest rates in Taiwan from 5.75 per cent to 3.93 per cent to bring them more into line with market rates".
One analyst, who asked not to be named, said: "ING has faced up to the issue, and that will increase the pressure on Prudential to do the same. Their assumptions are way too optimistic."
Prudential has been in Taiwan since 1999 when its chief executive Mark Tucker, then head of Asia, bought a 74 per cent stake in Chinfon Life Insurance, one of the country's top 10 life insurance companies.
At the time interest rates in the country meant the yield on Taiwanese government bonds were more than enough to cover the cost of the guarantees. However, they have fallen sharply since then and have failed to recover at a level sufficient to meet Prudential's assumptions.
Guarantees have haunted the life insurance industry since the late 1990s and have caused huge pain to a number of companies. The most notable disaster was the near collapse of Equitable Life. Several European insurers suffered badly in the stock market crash in the early part of the decade which left them struggling to meet guarantees attached to life polices on the continent.
Prudential's decision to restructure rather than sell its UK business follows persistent speculation about a disposal. In December The Independent revealed that this was an unlikely option because it had decided to reheat plans to unlock billions of pounds in unclaimed so-called "orphan" assets locked up in its UK life insurance fund.
Prudential is actively seeking a "policyholder advocate" to allow it to go ahead with the plans, which could result in substantial windfalls to policyholders. The requirement to hire such an advocate was brought in after proposals by France's AXA - the last insurer to divide its UK orphan assets - sparked a battle with consumer groups.
Prudential refused the comment saying it was in a "closed period" preventing it from talking about its finances until 15 March, when its results will be unveiled.Reuse content