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Insurers face 'war stories' on Asian M&A front lines

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Insurers face 'war stories' on Asian M&A front lines

WhileM&A activity among Asian insurers shows promise as local regulators pressfor higher capital adequacy levels and foreign firms seek market access,cementing deals will require both flexibility by acquirers and a more realisticvaluations by sellers, according to industry executives speaking at a conferenceheld by Asia Insurance Review in Singapore.

Highercapital requirements are forcing many license holders from family-run firms inAsia to consider selling, said Patrick Hanna, financial services partner atErnst & Young, during a panel discussion.

Asnew operational standards pushed by regulators compel such firms to seek globalfirms' management expertise, Hanna noted that issues such as regulation canmake buying an insurer in an Asian country "a bit tricky"for global firms looking to gain regional exposure.

Asan example, Hanna said some global insurers that have set up back offices inone country to serve the region have found out after an M&A deal thatregulators will not allow data centers and IT services from abroad, delayingintegration and cost savings that were key to the transaction.

JohnSpence, regional head of M&A and strategy for Generali Asia, dubbed suchscenarios as "war stories" on the M&A front in Asia. Suchscenarios involve regulations in India that mandate global insurers to take on local partners andrules in Vietnam that limit management control over insurers that are alreadystruggling to reach profitability.

Spencesaid such scenarios make M&A less compelling, despite the strategicrationale of such deals appearing solid in the long run.

Thedynamics of M&A among Asian insurers are also driven by the investment criteriaused by boards and credit committees at global insurers, said Anna Tipping, apartner at law firm Norton Rose Fulbright.

"Sometimesheadquarters don't appreciate the need for flexibility," Tipping said,noting that regulations can and have changed during deal talks.

Even in Thailand, where the scope for M&A is ripe because of the increasedcapital requirements, the presence of a military-backed government adds toconcerns over regulatory change if a transition is made to open elections, saidAaron Le Marquer, a partner at Tilleke & Gibbins.

"Thisis a significant consideration," Le Marquer said of the , adding that "artificialstability" curbs M&A interest.

Standard& Poor's Ratings Services said it expects the global insurance industry to continueconsolidating in 2016, albeit slower than in 2015, when M&A in the sectoraccounted for nearly US$150 billion. Some of that activity will be driven bycash-rich firms from China and Japan, as well as sovereign wealth funds, thereport added.