Many Asian insurance companies—battered by losses in their real estate, stock, and bond portfolios— have come to realize that they need Western investment. Most of them also understand that they need Western know-how. Yet the total transaction value of the mergers and acquisitions consummated in Hong Kong, South Korea, Taiwan, and Thailand came to only about $200 million in 1998 and to $700 million in 1999, just a fraction of the $2.3 billion and $5.6 billion value of the bank mergers consummated in those years.

Nonetheless, pressure is building rapidly because many Asian insurance regulators—urged on by Western governments and sobered by overall portfolio losses ranging from about 11 percent in Taiwan to nearly 21 percent in Korea—are relaxing restrictions on foreign ownership. As a result, we estimate, an additional $42 billion in life premiums is now available to foreign insurers (Exhibit 1).

Yet lax regulation of Asian insurance companies and their poor accounting practices make it difficult to assess their financial condition, and therefore their true value, and this has deterred potential investors and acquirers. Moreover, the Asian insurance players who are leaders in their markets have no interest in selling, although they are about to heat up the M&A game as acquirers. Meanwhile, even some companies that are technically insolvent have not yet come under pressure from their shareholders or regulators to sell, because they still enjoy positive cash flows. This, however, is likely to change quickly, for Hong Kong, Korea, Malaysia, Singapore, and other countries are instituting more transparent accounting and business conduct rules, and market saturation and more intense international competition are slowing the growth of premiums.

Two categories of insurance company are available now. The first consists of companies that not only are insolvent but also have short-term cash flow problems. Such companies face regulatory pressure to raise capital or sell, but nobody wants to buy them without government guarantees covering bad debt. The second category of available companies comprises low-skilled but viable businesses whose managers and shareholders recognize the competitive need to upgrade rapidly.

How can troubled companies that are under no immediate pressure to sell be induced to do so? First, it is necessary to understand the predicament of their owners, who are for the most part families. In Taiwan, for example, family-owned companies control 77 percent of property-and-casualty insurance premiums. Such a company typically constitutes the majority of the family’s wealth and often represents years, or even generations, of dedication and toil. A seller wants to feel that the company will be in safe hands, maintain its ties to the community, protect the existing workforce as far as possible, and, perhaps, offer the family’s next generation a role. M&A negotiations therefore involve efforts to ascertain the buyer’s trustworthiness and take longer than those in the West. Western buyers, mostly interested in the financials, cut themselves out of this essential trust-building process by letting their bankers handle the negotiations.

Our preliminary analysis suggests that as a result of the Asian financial crisis, companies in the two most distressed, and thus most available, categories control around 30 percent of total life premiums, up from around 15 percent. In all, perhaps 18 to 20 companies in four markets—Korea, Hong Kong, Taiwan, and Thailand—are now in a must-sell position. In these four markets, the number of insurers that may be looking for minority partners has increased to about 22 companies, representing 39 percent of premiums.

Winning majority control of many of these companies is often very risky, very expensive, or simply impossible. Therefore, buyers must view the investment process as a gradual, long-term evolution toward majority control. Several leading acquirers—including AXA and GE Capital—have proceeded cleverly by obtaining parts rather than entire assets of insurance businesses and then gradually raising their stakes. GE Capital, for instance, formed a joint venture with Japan’s Toho Life to manage the marketing and servicing of new policies. (Toho continued to service the old ones, guaranteed by Japan’s government.) AIG raised its stake in Nanshan, a leading Taiwanese life insurer, over many years and is now making similar moves in Indonesia. Only companies with strong Asian management teams and a long-term commitment to the region are likely to succeed.

Whether Western companies acquire all or part of Asian insurers, the transfer of skills should be a well-thought-out aspect of any deal. Asians trail their Western counterparts in almost every area: product design and underwriting as well as agent, risk, and investment management. They will be needing these skills and exercising them far longer than they will be needing Western capital.