The appeal of Asia’s growing middle class and rising personal income pushed insurance takeovers in the region to a record $30.5 billion last year, according to S&P Capital IQ, a data compiler. At least $5 billion more are in the pipeline and that’s good news for bankers, lawyers and shareholders such as Malaysia’s AMMB Holdings Bhd (AMMB.KL: Quote, Profile, Research, Stock Buzz), which is shedding its life insurance unit.

For buyers, soaring valuations and increased competition from foreign newcomers present a tough choice — either pay through the nose for a scarce, fast-growing business or wait for prices to settle and potentially lose out to nimbler rivals.

There are signs that at least some potential buyers, like South Korea’s Samsung Life Insurance Co (032830.KS: Quote, Profile, Research, Stock Buzz), are getting spooked by higher deal valuations. Price to book value (P/B) ratios — a key metric for valuing banks and insurers — for Asian deals have risen on average by 13 percent between 2005 to 2012, while the same multiples across the world have shrunk.

“These deals have definitely gotten more expensive,” said Manulife’s Financial Corp (MFC.TO: Quote, Profile, Research, Stock Buzz) Asia Chief Marketing Officer Philip Hampden-Smith, showing that even company executives are raising their eyebrows at how far some buyers are willing to go.

“You’ve got to have financial discipline — a deal is only worth so much,” he added.

Asian insurers trade at a median P/B ratio of 1.73, according to Thomson Reuters data, nearly double their peers in the United States and Europe. Some recent deals were struck at nearly twice the median P/B ratio of Asian companies.

Just 5.8 percent of Asia’s population is insured, compared with 8.1 percent in the United States, and that is set to drive insurance premium sales in emerging Asia at nearly three times the growth in industrialized nations, Swiss Re says.

GET IN LINE

Some companies, like ING Groep NV (ING.AS: Quote, Profile, Research, Stock Buzz), have been forced to sell assets to pay back government bail-out money, while others like Aviva Plc (AV.L: Quote, Profile, Research, Stock Buzz) are retreating from the region to focus on their home markets. Some are simply cashing out, riding the boom.

When India’s Punjab National Bank (PNBK.NS: Quote, Profile, Research, Stock Buzz) launched its recently completed life insurance joint venture with MetLife Inc (MET.N: Quote, Profile, Research, Stock Buzz), more than 40 companies showed up to the auction.

The sale of ING’s Asia insurance and asset management units last March attracted no less than 17 suitors.

That is an extraordinary number of bidders in a region where even just two or three buyers can create a competitive auction.

Also unusual is the terms being commanded by sellers in certain deals.

Malaysia’s CIMB Group Holdings Bhd (CIMB.KL: Quote, Profile, Research, Stock Buzz) boldly demanded a 1.8 billion ringgit ($591 million) floor price from the final bidders for its insurance joint venture, two people familiar with the matter told Reuters.

Not bad for a simple, old industry that even some executives say is boring.

Canadian insurer Sun Life Financial Inc (SLF.TO: Quote, Profile, Research, Stock Buzz) and Malaysian sovereign wealth fund Khazanah Nasional Bhd KHAZA.UL paid a P/B ratio of 3.2 for Aviva-CIMB insurance venture. That is 85 percent higher than the median P/B ratio for Asian insurers now, according to Thomson Reuters data.

CIMB did not offer an immediate comment.

Insurance executives will long remember the whopping 9.3 P/B that Japan’s MS&AD Insurance Group Holdings Inc (8725.T: Quote, Profile, Research, Stock Buzz) paid in 2011 for a 50 percent stake in Indonesian conglomerate PT Asuransi Jiwa Sinarmas’ insurance unit.

PT Bank Negara Indonesia Persero Tbk PT (BNI) (BBNI.JK: Quote, Profile, Research, Stock Buzz) Chief Executive Gatot Mudiantoro Suwondo now expects similar multiples for the bank’s planned sale of a stake in its life insurance unit.

“Valuations of recent deals are definitely more reliant on the future value the target companies can generate,” said Peter Enns, Goldman Sachs & Co’s (GS.N: Quote, Profile, Research, Stock Buzz) head of Financial Institutions Group in Asia Pacific ex-Japan. “People view these businesses as very strategic (investments) that can deliver good future growth.”

TIPPING POINT?

Enns warned that a major change in interest rates and a meaningful slowdown in regional GDP growth would impact how these businesses are valued and affect their prospects.

Some suitors are turning cautious. Samsung Life and Japan’s Tokio Marine Holdings Inc 8799.T are among the companies shying away from the BNI auction on fears of overpaying, people familiar with the matter said.

Khazanah recently dropped from the race to buy a minority stake in unlisted Thai Life Insurance Co, a person familiar with the matter said. The auction attracted KKR & Co LP (KKR.N: Quote, Profile, Research, Stock Buzz) among others.

Even so, plenty of potential buyers are still willing to stomach the high valuations.

Last year Prudential Plc’s (PRU.L: Quote, Profile, Research, Stock Buzz) $590 million deal to buy Thai Thanachart Bank PLC’s TCAPBK.UL insurance unit translated into a P/B multiple of 5.8 for fiscal 2012, a person with direct knowledge of the matter told Reuters.

In part, higher valuations are supported by extended bank distribution deals. In 2010, Prudential struck a 12 year distribution deal with Singapore’s United Overseas Bank Ltd (UOBH.SI: Quote, Profile, Research, Stock Buzz), while it secured a 15-year deal with Thanachart. Sun Life and Khazanah signed a 20-year deal.

James Ankers, co-head of Financial Institutions in Asia at Rothschild, expects the active insurance M&A cycle to continue in markets such as Indonesia, even as it reaches a peak in Malaysia.

“But we expect high deal valuations for quality assets to remain,” he added.

(Additional reporting by Saeed Azhar in SINGAPORE, Joyce Lee in SEOUL, Taiga Uranaka in TOKYO and Yantoultra Ngui in KUALA LUMPUR; Reporting by Denny Thomas and Clare Baldwin; Editing by Michael Flaherty and Stephen Coates)

Tough curbs by the United States and Europe to force Tehran
to end its nuclear programme have more than halved Iran’s oil
exports over the past year, as an EU ban on insurers aiding
transport of its crude left buyers unable to find coverage.

Now the focus is shifting to refineries that process the
oil, as insurers worry about running afoul of the sanctions.

Refiners operating without insurance pose huge financial
risks to their owners. Indian insurers have already taken a
tough stance, warning that they would not be able to pay claims
at plants processing Iranian crude.

A similar move is underway in South Korea, the
fourth-biggest buyer of Iranian crude, worth about half a
billion dollars each month.

Hyundai Oilbank, one of South Korea’s two refiners of
Iranian crude, struggled to find reinsurers willing to renew its
coverage late last year, a person with direct knowledge of the
matter said.

“It’s not a problem of a higher price. Even if the
reinsurers get a higher premium for covering Iranian crude, the
policy is forbidden,” the person said, adding that the world’s
two biggest reinsurers, Munich Re and Swiss Re, did not want to
cover Iranian crude for fear of breaching the sanctions.

The person is an employee of reinsurer Korean Re, and did
not want to be identified.

Reinsurers back insurance companies, and without the former,
the insurance industry can’t function. Wariness by reinsurers in
both Europe and the United States, who dominate the global
market, was among the chief reasons why India’s insurers have
said they may not be able to provide coverage.

Refiners in India, which is Iran’s second-biggest crude
buyer, said last month that they would halt imports if they were
unable to find a solution.

SK ENERGY CONTRACTS DUE IN JULY

Insurance contracts for South Korea’s other major Iranian
crude oil refiner, SK Energy, come due in July, said the Korean
Re employee.

Most Iranian crude flows to Asia, with China, India, Japan
and South Korea the biggest buyers. It was not immediately clear
how China’s insurers and reinsurers are treating the sanctions
in relation to refiners.

Responding to a Reuters query about what China would do if
global reinsurers stopped covering refineries processing Iranian
crude, Foreign Ministry spokesman Hong Lei said China’s economic
development required it to keep normal energy ties with Iran.

“This cooperation is transparent,” Hong said. “Such
cooperation is also not in violation of the relevant resolutions
of the United Nation’s Security Council and does not hurt the
interests of the international community.”

State-backed reinsurer China Re was not immediately
available for comment.

Last year, when sanctions wiped out tanker insurance, it
forced a temporary halt to imports in Japan and South Korea. To
get around the ban, South Korea and China asked Iranian tankers
covered by Iranian insurance to deliver the oil. India provided
partial insurance and allowed Iran to deliver, and Japan
provided a sovereign guarantee.

The countries were still paying nearly $3.5 billion to Iran
each month for oil at the time.

A decision by global reinsurers to stop covering refineries
processing Iranian crude could wipe out that remaining trade.

REINSURERS’ DECISION

Iran’s remaining oil exports depend in large part on the $50
billion global reinsurance industry, which underlies all
insurance policies, including those of oil refineries.

Domestic insurers typically write policies but they rely on
the financial support of a handful of global reinsurers,
particularly for large policies such as those for refineries.

Eight of the ten largest reinsurers in the world are based
in the European Union or the United States, according to
insurance ratings agency A.M. Best.

Those reinsurers, especially those in Europe, are becoming
increasingly concerned about EU sanctions that expressly
prohibit “directly or indirectly…insurance and re-insurance
related to the import, purchase or transport of crude oil and
petroleum products of Iranian origin.”

In an e-mail reply to Reuters’ questions, the world’s
largest reinsurer, Munich Re, said Iranian crude was deemed such
until it had been subjected to “material, economically justified
processing in a third country”, and it was necessary for
insurers to check if it was being processed to bypass sanctions.

“In many cases [these checks] will certainly prompt insurers
to refuse cover due to apprehension about breaching the
sanctions,” Munich Re said.

Munich Re declined to comment on Hyundai Oilbank and did not
directly address whether it would cover refineries processing
Iranian crude.

Swiss Re, the world’s second-largest reinsurer, declined
comment.

Insurance contracts for refineries typically come up for
renewal each year. Korean Re has begun asking multinational
insurers to clarify how they will treat Iranian crude in
refineries, the employee said.

Roughly half of the reinsurers Korean Re speaks to will
cover Iranian crude in refineries; the rest refuse, citing
sanctions, the Korean Re employee said.

“It’s a gray area. It is really ambiguous.”

TOUGH TO ENFORCE

Whether refineries fall under the sanctions may be a moot
point as the rules will be difficult to enforce, said a Japanese
insurance executive, who recently negotiated refinery policies
with European reinsurers ahead of April 1 renewals.

Refineries process crude from many countries and aren’t
required to disclose the origin of the crude they process, said
the source, who spoke on condition of anonymity.

Furthermore, once Iranian oil is imported, its ownership
transfers to the refinery, the source added.

The local government in Shanghai said the Huhuai market for live birds had been shut down and 20,536 birds had been culled after authorities detected the H7N9 virus from samples of pigeons in the market. Other live poultry markets in the city will be closed down from Saturday, it said.

China’s eastern Jiangsu province said two new H7N9 bird flu cases have been confirmed on Friday, bringing the total number of reported infections nationwide to 16.

At least four of the dead are in Shanghai, a city of 23 million people and the showpiece of China’s vibrant economy.

The latest death was of a 64-year-old man in Zhejiang province, state news agency Xinhua said on Friday, adding that none of the 55 people who had close contact with him had shown symptoms of infection.

Shanghai authorities stressed the H7N9 virus remained responsive to the drug Tamiflu and those who were diagnosed early could be cured.

“We currently have enough reserves of Tamiflu to meet with the current outbreak,” Wu Fan, director of the Shanghai Center for Disease Control & Prevention, told a news conference.

Tamiflu is made by Roche Holding AG (ROG.VX: Quote, Profile, Research).

Airline shares tumbled in European markets on fears the outbreak could become widespread. The STOXX Europe 600 travel and leisure sector index fell by 3.5 percent.

In Hong Kong, the overall index closed at a four-month low, led by falls in airline shares over fears of diminished demand for air travel. Air China (0753.HK: Quote, Profile, Research) slumped 9.8 percent, its worst single-day loss in nearly four years.

In Shanghai, the rising death toll prompted some residents to stay away from markets with live chickens and ducks.

“I’m only getting my groceries at the large supermarkets now because I don’t think it is safe to visit the wet markets anymore,” said 38-year-old Shao Linxia, adding she had also stopped buying poultry since news of the bird flu surfaced.

“We all remember SARS and how quickly it could spread, so we are obviously worried.”

SHADOW OF SARS

The 2002-2003 epidemic of Severe Acute Respiratory Syndrome (SARS) started in China and killed about one-tenth of the 8,000 it infected.

Still, there were few signs of panic in Shanghai with shops remaining open, and the strain does not appear to be transmitted from human to human.

“We have 14 cases in a large geographical area, we have no sign of any epidemiological linkage between the confirmed cases and we have no sign of sustained human-to-human transmission,” said World Health Organization spokesman Gregory Hartl before the two new cases were confirmed.

“The 400 contacts are being followed up to see if any of them do have the virus, have had it from someone else,” he told a news briefing in Geneva.

But Hong Kong authorities were taking extra precautions.

Additional staff would be deployed at immigration points to make random temperature checks of visitors in addition to the infrared full-body scanners already in place, Ko Wing-man, Hong Kong’s food and health secretary, told reporters.

Vietnam banned imports of Chinese poultry.

In Japan, airports have put up posters at entry points warning all passengers from China to seek medical attention if they have flu-like symptoms.

In the United States, the White House said it was monitoring the situation and the Centers for Disease Control and Prevention said it had started work on a vaccine if it was needed. It would take five to six months to begin commercial production.

The U.S. Food and Drug Administration (FDA), which regulates medicines, said it was working closely with international and national health authorities.

“As part of the larger (U.S.) government response, FDA would also work with drug and vaccine developers to expedite development and availability of any potentially effective vaccines,” a spokeswoman said.

With the fear that a SARS-like epidemic could re-emerge, China said it was pulling out the stops to combat the virus.

“(China) will strengthen its leadership in combating the virus … and coordinate and deploy the entire nation’s health system to combat the virus,” the Health Ministry said in a statement on its website (www.moh.gov.cn).

WHO CENTRES ANALYSING SAMPLES

The virus has been shared with WHO collaborating centres in Atlanta, Beijing, London, Melbourne and Tokyo, and these groups are analysing samples to identify the best candidate to be used for the manufacture of vaccine – if it becomes necessary.

Any decision to mass-produce vaccines against H7N9 flu will not be taken lightly, since it will mean sacrificing production of seasonal shots.

That could mean shortages of vaccine against the normal seasonal flu which, while not serious for most people, still costs thousands of lives.

Sanofi Pasteur (SASY.PA: Quote, Profile, Research), the world’s largest flu vaccine manufacturer, said it was in continuous contact with the WHO through the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), but it was too soon to know the significance of the Chinese cases.

Other leading flu vaccine makers include GlaxoSmithKline(GSK.L: Quote, Profile, Research) and NovartisNOVN.VX..

A spokesman for Swiss drugmaker Novartis said the firm was closely monitoring the virus and had begun initial preparations for developing a vaccine should one become necessary.

Preliminary test results suggest the new flu strain responds to treatment with Roche’s Tamiflu and GSK’s Relenza, according to the WHO.

Experts said more needed to done to determine the level of risk from the bird flu strain.

“H7s are viruses that mutate often so it could disappear as a result of mutation or it could become much more aggressive, so it is important to study every one of the viruses that we isolate in humans and in animals,” Alex Thiermann, special advisor to the World Animal Health Organisation’s (OIE) director general, told Reuters.

(Additional reporting by Chen Yixin in SHANGHAI, Ben Blanchard in BEIJING, Grace Li in HONG KONG, Sybille de La Hamaide in PARIS,; Olivier Fabre in TOKYO, Stephanie Nebehay in GENEVA, Kate Kelland and Ben Hirschler in LONDON, Toni Clarke in WASHINGTON and Julie Steenhuysen in CHICAGO; Editing by Raju Gopalakrishnan and Mike Collett-White)

All of the 14 reported infections from the H7N9 bird flu strain have been in eastern China and at least four of the six dead are in the financial hub of Shanghai, a city of 20 million people.

The strain does not appear to be transmitted from human to human but authorities in Hong Kong raised a preliminary alert and said they were taking precautions at the airport. Vietnam banned imports of Chinese poultry.

In Japan, airports have put up posters at entry points warning all passengers from China to seek medical attention if they have flu-like symptoms.

A total of 14 people in China have been confirmed to have contracted H7N9, all in the east of the country. One of the cases was a four-year-old child, who was recovering, the official Xinhua news agency said.

Hong Kong authorities said six people had died.

Authorities in Shanghai also discovered the H7N9 virus in a pigeon sample taken from a traditional wholesale market, Xinhua added, believed to be the first time the virus has been discovered in an animal in China since the outbreak began.

In the United States, the White House said it was monitoring the situation and the Centers for Disease Control and Prevention (CDC) said it had started work on a vaccine if it was needed. It would take five to six months to begin commercial production.

But the groundwork is being laid.

The virus has been shared with World Health Organization (WHO) collaborating centers in Atlanta, Beijing, London, Melbourne and Tokyo, and these groups are analyzing samples to identify the best candidate to be used for the manufacture of vaccine – if it becomes necessary.

Any decision to mass-produce vaccines against H7N9 flu will not be taken lightly, since it will mean sacrificing production of seasonal shots.

That could mean shortages of vaccine against the normal seasonal flu which, while not serious for most people, still costs thousands of lives.

Sanofi Pasteur, the world’s largest flu vaccine manufacturer, said it was in continuous contact with the WHO through the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), but it was too soon to know the significance of the Chinese cases.

Other leading flu vaccine makers include GlaxoSmithKline and Novartis

Preliminary test results suggest the new flu strain responds to treatment with Roche’s drug Tamiflu and GSK’s Relenza, according to the WHO.

SHADOW OF SARS

With the fear that a SARS-like epidemic could re-emerge, China said it was pulling out the stops to combat the virus.

“(China) will strengthen its leadership in combating the virus … and coordinate and deploy the entire nation’s health system to combat the virus,” the Health Ministry said in a statement on its website (www.moh.gov.cn).

In 2003, authorities initially tried to cover up an epidemic of Severe Acute Respiratory Syndrome (SARS), which emerged in China and killed about 10 percent of the 8,000 people it infected worldwide.

China “will continue to openly and transparently maintain communication and information channels with the World Health Organization and relevant countries and regions, and strengthen monitoring and preventative measures”, the ministry said.

Other strains of bird flu, such as H5N1, have been circulating for many years and can be transmitted from bird to bird, and bird to human, but not generally from human to human.

So far, this lack of human-to-human transmission also appears to be a feature of the H7N9 strain.

“The gene sequences confirm that this is an avian virus, and that it is a low pathogenic form (meaning it is likely to cause mild disease in birds),” said Wendy Barclay, a flu virologist at Britain’s Imperial College London.

“But what the sequences also reveal is that there are some mammalian adapting mutations in some of the genes.”

Regions near the affected zone have begun taking precautions.

In Hong Kong, authorities activated the preliminary “Alert Response Level” under a preparedness plan for an influenza pandemic, which calls for close monitoring of chicken farms, vaccination, culling drills, and a suspension of imports of live birds from the mainland.

All passengers on flights in and out of Hong Kong were being asked to notify flight attendants or airport staff if they were feeling unwell.

Vietnam said it had banned poultry imports from China, citing the risk from H7N9.

(Additional reporting by Ben Blanchard in BEIJING; Olivier Fabre in TOKYO, Hanoi newsroom; Kate Kelland in LONDON and Julie Steenhuysen in CHICAGO; Writing by Raju Gopalakrishnan)

Emory Williams Jr said Caterpillar had conducted extensive
due diligence before its takeover of Hong Kong-listed ERA Mining
Machinery Ltd last June, adding that he was seeking further
details from the company, the world’s largest maker of tractors
and excavators.

“We were shocked and dismayed to learn, from press reports,
about the very significant goodwill impairment that Caterpillar
is taking in relation to the acquisition of ERA’s subsidiary
Siwei,” Emory Williams Jr said in a statement.

Caterpillar said on Jan. 18 that it would write off most of
the $654 million it paid for ERA after uncovering “deliberate,
multi-year, coordinated accounting misconduct” at its subsidiary
Zhengzhou Siwei.

“We cooperated very closely with the Caterpillar team during
their extensive due diligence,” Williams said, adding that he
and John Lee — the English name used by fellow ERA director Li
Rubo — had taken the company’s fiduciary and reporting
responsibilities very seriously prior to its acquisition.

No-one from Caterpillar was immediately available for
comment.

Caterpillar is due to report earnings in the United States
later on Monday, with the Siwei writedown expected to wipe out
more than half its earnings for the fourth quarter of 2012.

Williams is a Beijing-based U.S. businessman. He is a former
chairman of the American Chamber of Commerce in China and the
son of a former Sears Bank and Trust Co. chairman and chief
executive.

Li, his long-time business associate, is a graduate of the
South Dakota School of Mines and a former Chinese government
official.

Monday’s statement was the first comment by any of ERA’s
former directors or major shareholders since Caterpillar’s
statement 10 days ago.

INVENTORY ISSUES

ERA had absorbed Siwei through a reverse takeover in 2010,
a corporate manoeuvre that has become controversial in the
United States following a series of accounting scandals
involving small Chinese companies listed there.

Announcing the writedown, Caterpillar said an internal
investigation had uncovered improper accounting of inventories,
revenue recognition and cost allocation at Siwei, designed to
overstate the profitability of the business in the years before
it bought it.

Williams said the former ERA directors had contacted
Caterpillar senior management last week to ask for further
details.

“To date we have received no response and are now taking
advice on how best to respond to the situation in a manner which
is constructive for all parties involved,” he said.

“We are absolutely committed to providing a comprehensive
response to any information Caterpillar shares with us.”

Caterpillar said it found discrepancies in November between
the inventory on the books of Siwei, which makes hydraulic
supports for coal mines, and its actual physical inventory,
triggering the internal probe.

The company blamed “several senior managers” whose
misconduct it said began some years before it acquired Siwei.
Caterpillar did not identify the senior managers. It said it
believed its due diligence process was “rigorous and robust”.

Citigroup Inc and law firm Freshfields Bruckhaus Deringer
LLP served as financial and legal advisers to Caterpillar on the
transaction. Blackstone and DLA Piper acted as ERA’s financial
and legal advisers.

A source directly involved with the Caterpillar deal
previously told Reuters that RSM Nelson Wheeler was ERA’s
auditor, while Deloitte and Ernst & Young acted on Caterpillar’s
side. None of the auditors has commented.

The transactions, while not illegal, should have sounded warnings about the company’s finances when the U.S. firm came calling last year, corporate governance experts said.

The world’s largest maker of tractors and excavators said last week it was writing off most of the $654 million value of its purchase of ERA Mining Machinery Ltd after uncovering “deliberate, multi-year, coordinated accounting misconduct” at its subsidiary Zhengzhou Siwei.

Caterpillar said an internal investigation had uncovered improper accounting of inventories, revenue recognition and cost allocation at Siwei, designed to overstate the profitability of the business in the years before it bought it.

Corporate disclosures from ERA filed prior to the takeover show some unusual transactions, including directors lending the company cash at relatively high interest rates and asset-shuffling between Siwei and related parties.

Investors and corporate governance experts say these were potential red flags that should have prompted Caterpillar and its team of lawyers, accountants and bankers to ask some searching questions before pulling the trigger on the deal.

“Every time there’s a horror story like this, it acts as a damn good wake-up call that you need to look carefully before you do a deal,” said David Holloway, senior managing director at FTI consulting and an expert in investigation of business fraud.

Caterpillar declined to comment on the ERA directors’ loans and did not respond to a request for comment on Siwei’s operations. ERA directors could not be reached for comment.

A source directly involved with the Caterpillar deal said RSM Nelson Wheeler was ERA’s auditor, while Deloitte and Ernst & Young acted on Caterpillar’s side. RSM did not respond to calls and emails and Deloitte and E&Y declined to comment.

One of the directors who lent the company money was Beijing-based U.S. businessman Emory Williams Jr, a former chairman of the American Chamber of Commerce in China and son of a former Sears Bank and Trust Co. chairman and chief executive.

A second was Li Rubo, a graduate of the South Dakota School of Mines and former Chinese government official. There are no allegations of illegality against any of ERA’s directors.

A security guard at Siwei’s six-storey, glass-fronted headquarters on the outskirts of Zhengzhou, eastern China, stopped a Reuters reporter from entering the campus, saying senior managers were all in Beijing for meetings.

Reuters’ efforts to contact ERA chairman Williams, Li and other directors and major shareholders at listed addresses in Hong Kong, Beijing, Shanghai and Zhengzhou and by telephone and email were also unsuccessful.

RED FLAGS

One concern about ERA should have been why the Hong Kong-listed company needed to borrow more than $9.5 million from four directors — who earned nearly $500,000 in interest — at loan rates that were among the most expensive on its balance sheet.

“It wouldn’t necessarily mean there are cash flow problems but it would be a massive red flag”, because it would call into question whether the financing was in the company’s best interests, a U.S. lawyer experienced with China transactions, commenting on condition of anonymity, wrote in an email.

The personal loans are detailed in regulatory filings made to the U.S. Securities and Exchange Commission prior to ERA’s takeover by Caterpillar in June last year.

“While company loans to directors are a governance no-no, the opposite is more of a grey area,” said Jamie Allen, secretary general of the Asian Corporate Governance Association, in an emailed response to a Reuters’ question.

“Is the interest rate fair and at arm’s length? Why didn’t the company go to a bank?” Allen said he had not studied the ERA deal in detail, but these would have been important questions to ask.

David Webb, a shareholder activist and member of the Hong Kong Securities and Futures Commission’s Takeover and Mergers Panel, said local listing rules allowed directors to lend money to companies at normal commercial terms, provided the loan was not securitized, although it was not a common practice.

“Presumably the board would have looked at alternative sources of funding,” he said.

In one example, in April 2010, Williams and Li lent $6.4 million to pay down loans of nearly $20 million, mostly funded by a U.S. private equity firm, that were used to acquire Siwei, and for working capital, according to the filings.

Williams and Li made the loan at an interest rate of 8 percent per year, compounded annually. In a letter from the board at the time of ERA’s reverse merger, the directors, who did not yet include Williams and Li, called the loans “fair and reasonable” and “justifiable”.

ERA’s loans with commercial banks at the time were at interest rates ranging from 4.9 percent to 7.4 percent.

REVERSE TAKEOVER

At the time of the Caterpillar takeover, ERA was listed in the Growth Enterprise Market (GEM) of the Hong Kong stock exchange, which is designed to accommodate companies with a higher risk profile.

ERA had absorbed Siwei through a reverse takeover in 2010, a corporate maneuver that has become controversial in the United States following a series of accounting scandals involving small Chinese companies listed there.

Caterpillar said it found discrepancies in November between the inventory on the books of Siwei, which makes hydraulic supports for coal mines, and its actual physical inventory, triggering the probe.

The company blamed “several senior managers” whose misconduct it said began some years before it acquired Siwei. Caterpillar did not identify the senior managers.

Corporate filings show that the amount of money Siwei was owed by its customers had grown 58 percent a year since 2008, overtaking total sales in 2011, and that some 90 percent of those debts were overdue when Caterpillar launched its bid.

John Hempton, a prominent hedge fund manager with Sydney-based Bronte Capital, said 20 minutes research into ERA was enough to convince him to short Caterpillar’s shares after he heard it was buying the Chinese company.

Hempton found what he considered a problem with ERA’s receivables — it often took 180 days to collect payment, twice the industry average. “This was something that should have been spotted in only a few minutes,” he said.

Caterpillar declined to comment further on whether its examination of ERA’s accounts had been sufficiently thorough, although last week it said it believed its due diligence process was “rigorous and robust”.

ASSET SHUFFLING

Williams and Li also helped finance the 2007 purchase of Zhengzhou Siwei with a $2.95 million interest-free loan, according to ERA’s reverse takeover prospectus. Li helped fund his part of the loan by borrowing $2.565 million from another company where both he and Williams were directors.

Records from around that time show some unusual transfers of company assets at Zhengzhou Siwei.

In one instance, Siwei disposed of an industrial tank-making business valued at nearly $5 million at “nil consideration” to a company in which a Siwei director and former substantial shareholder had taken a majority stake four months earlier.

The company said the assets were loss-making, but continued to purchase millions of dollars worth of equipment and services from the same firm between 2007 and 2009, paying an average of 2 percent to 4 percent above the market rate for the “better quality services provided”, according to regulatory filings.

Efforts to contact those involved were unsuccessful.

In another case, Siwei transferred a 7.5 percent stake in a mining equipment firm to one of its partners — a company linked to one of China’s biggest weapons manufacturers — to offset “trade payables”, an accounting term that usually refers to liabilities owed to suppliers and could suggest Siwei was having trouble paying its bills.

A director surnamed Wang reached by telephone at the head office of the former partner, Shaanxi Dynamic, said her company had severed ties with Siwei a few years ago.

David Smith, head of corporate governance for Asia at fund manger Aberdeen, said shuffling of assets between related entities was not uncommon in China and could be legitimate.

“It’s not necessarily a red flag, but it’s a catalyst that would have us look into the matter in quite a lot of detail to understand why it is happening,” he said. “Our concern would be value leaving the company as a result of the swapping.”

(Additional reporting by John Ruwitch in Zhengzhou, China, Michael Flaherty, Denny Thomas, Stephen Aldred and Lawrence White in Hong Kong, Lucy Hornby and Michael Martina in Beijing and Ernest Scheyder and Jennifer Ablan in New York; Writing by Alex Richardson; Editing by Ian Geoghegan)

The failure of the deal would be a blow to HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) and an embarrassment to the various parties involved in a corporate deal that was set to be Asia’s second-largest last year.

The China Insurance Regulatory Commission (CIRC) is likely to veto the deal due to a lack of funding, the South China Morning Post and The Wall Street Journal both said on Wednesday.

Reuters on Tuesday said that the deal was in jeopardy after state-backed China Development Bank had expressed concerns over its financing. According to the story, CDB’s reluctance emerged after media reports late in December that said CP Group’s payment for the deal came from outside sources.

A $1.9 billion payment by CP subsidiaries was made on December 7 as a first installment for the deal, with the shares then transferred to CP Group, according to HSBC. Payment for the remaining amount was due after regulatory approval, which had a deadline of February 1.

CDB originally agreed to back the remaining purchase, though HSBC did not disclose the size of the loan. CDB withdrawing from the process would be a major setback for the sale, but would not necessarily kill the agreement if another funding source could be found before that deadline.

A CIRC rejection, however, would stop the second installment and effectively end the deal.

A CIRC official told Reuters on Wednesday that there is no final outcome yet on a decision.

A spokesman for Ping An said the sale was moving ahead with normal approval procedures, while HSBC declined to comment.

Doubts over the deal’s closing surfaced after the respected Chinese magazine Caixin Century Weekly reported late last month that CP Group received funding for the first payment from outside sources, naming Chinese businessman Xiao Jianhua as being among the backers.

CP Group said in a statement in December after the Caixin report that the acquisition of the Ping An shares had been legally conducted by four wholly-owned subsidiaries using “legal capital from the Charoen Pokphand Group and its subsidiaries.”

A representative at a law firm representing Xiao referred Reuters to a previous statement from him denying any involvement in the CP-HSBC deal.

(Additional reporting by Lawrence White Xie Heng and Bi Xiaowen; Editing by Michael Flaherty and Greg Mahlich)

The failure of the deal would be a blow to HSBC
and an embarrassment to the various parties involved
in a corporate deal that was set to be Asia’s second-largest
last year.

The China Insurance Regulatory Commission (CIRC) is likely
to veto the deal due to a lack of funding, the South China
Morning Post and The Wall Street Journal both said on Wednesday.

Reuters on Tuesday said that the deal was in jeopardy after
state-backed China Development Bank had expressed concerns over
its financing. According to the story, CDB’s reluctance emerged
after media reports late in December that said CP Group’s
payment for the deal came from outside sources.

A $1.9 billion payment by CP subsidiaries was made on Dec. 7
as a first instalment for the deal, with the shares then
transferred to CP Group, according to HSBC. Payment for the
remaining amount was due after regulatory approval, which had a
deadline of Feb. 1.

CDB originally agreed to back the remaining purchase, though
HSBC did not disclose the size of the loan. CDB withdrawing from
the process would be a major setback for the sale, but would not
necessarily kill the agreement if another funding source could
be found before that deadline.

A CIRC rejection, however, would stop the second instalment
and effectively end the deal.

A CIRC official told Reuters on Wednesday that there is no
final outcome yet on a decision.

A spokesman for Ping An said the sale was moving ahead with
normal approval procedures, while HSBC declined to comment.

Doubts over the deal’s closing surfaced after the respected
Chinese magazine Caixin Century Weekly reported late last month
that CP Group received funding for the first payment from
outside sources, naming Chinese businessman Xiao Jianhua as
being among the backers.

CP Group said in a statement in December after the Caixin
report that the acquisition of the Ping An shares had been
legally conducted by four wholly-owned subsidiaries using “legal
capital from the Charoen Pokphand Group and its subsidiaries.”

A representative at a law firm representing Xiao referred
Reuters to a previous statement from him denying any involvement
in the CP-HSBC deal.

The collapse of the deal, Asia’s second-biggest M&A transaction announced last year, would be a huge blow for HSBC Holdings Plc (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz). The bank said in December it stood to reap a post-tax gain of $2.6 billion from the sale that forms part of its plan to rid itself of non-core assets.

“Indeed, there are some problems,” said one of the sources, referring to CDB’s role in the sale. The sources were not authorized to speak publicly on the matter.

Late last year, HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) agreed to sell its 15.6 percent stake in Ping An Insurance (Group) Co of China Ltd (601318.SS: Quote, Profile, Research, Stock Buzz) to CP for HK$59 per share. The bank said in a December 5 statement the sale of its stake in the world’s second-largest life insurer by market value would be completed in two stages.

About one-fifth of the holding was to be transferred to the Thais on December 7.

CP, controlled by Thailand’s richest man Dhanin Chearavanont, said it will purchase the shares through four British Virgin Islands companies – All Gain Trading Ltd, Bloom Fortune Group Ltd, Business Fortune Holdings Ltd and Easy Boom Developments Ltd – which it said are fully-owned subsidiaries.

The rest of the purchase is financed by the Hong Kong branch of CDB, and is subject to approval by the China Insurance Regulatory Commission (CIRC), HSBC said at the time.

Late last month, media reports in China and Hong Kong said the first CP payment came from funding sources not directly tied to the Thai conglomerate, as opposed to wholly-owned CP subsidiaries as agreed previously.

If CDB decides to withdraw its funding support for the deal, CP would have to scramble to find another large lender to back the acquisition quickly following the CIRC approval due February 1.

CP, whose core food businesses are poultry and animal feed, HSBC (0005.HK: Quote, Profile, Research, Stock Buzz) and Ping An (2318.HK: Quote, Profile, Research, Stock Buzz) declined to comment.

Ping An’s Shanghai-listed shares dropped 3.73 percent to 45.47 yuan in mid-afternoon trading on Tuesday, while its Hong Kong shares fell 4.37 percent to HK$67.90.

INTERESTS IN CHINA

Dhanin – worth $9 billion according to Forbes magazine – already has major business interests in China ranging from agriculture to retail to auto manufacturing.

CP was the first multinational to invest in China’s agri-business in 1979, and under Beijing’s latest five-year plan, it was tasked with helping to modernize the Chinese farm sector. It also operates Lotus supermarkets in Shanghai, according to the company’s website.

The Ping An sale, given its size, is an important and sensitive deal for HSBC, which spent $1.7 billion building its stake in the Chinese insurer between 2002 and 2005.

On Tuesday, the South China Morning Post said CDB is reconsidering its decision to back the CP-Ping An deal, citing people familiar with the situation.

CDB’s concern stems from the various media reports that trace CP’s first payment for the deal to outside sources, the Post reported.

Ping An has seized headlines since late last year, following a series of reports by the New York Times.

One report in October, citing corporate and regulatory records, said the family of China’s outgoing Premier Wen Jiabao had amassed $2.7 billion in wealth at one point, the biggest source of which came through stakes in Ping An.

Wen, who went on a state-visit to Thailand at the end of November, is due to step down as premier in March.

(Additional reporting by Zhao Hongmei, Coco Li, Bi Xiaowen, Khettiya Jittapong, Stephen Aldred, Lawrence White, Clement Tan; Editing by Michael Flaherty and Ryan Woo)

PICC started meeting institutional investors in Hong Kong on Thursday to gauge demand for the initial public offering, braving a slump this year in equity deals.

People’s Insurance Company of China Group (PICC), one of the country’s largest insurers, is also holding discussions with French reinsurer Scor (SCOR.PA: Quote, Profile, Research, Stock Buzz), China Life Insurance Co Ltd (2628.HK: Quote, Profile, Research, Stock Buzz) (601628.SS: Quote, Profile, Research, Stock Buzz) and Chinese state utility State Grid Corp STGRD.UL among others for cornerstone stakes, Thomson Reuters publication IFR reported, citing sources.

About 50 percent of the IPO is covered by commitments from cornerstone investors, including financial institutions, Chinese corporates and other strategic investors, sources with direct knowledge of the plans said.

Cornerstone investments in IPOs, unique to Asia, aim to bolster confidence in an offer with commitments by established investors and institutions to buy large, fixed stakes that they agree not to sell until the end of an established lock-up period.

PICC will offer 6.9 billion new shares in the IPO, equivalent to a 16.7 percent stake in the company, said a source with direct knowledge of the plans who was not authorized to speak publicly on the matter and declined to be named.

IPO issuance in Hong Kong has plunged more than 80 percent so far this year, with volumes likely to shrink to their lowest since 2008 as investors shun new deals because of volatility caused by Europe’s debt troubles.

“It is definitely not the best time to come to market, but capital has been a pressing issue for the group for some time,” said Stanley Tsai, an insurance analyst in Hong Kong. “The group will need capital urgently to support its growth ambitions, particularly on the life side.”

“The company will have to price the IPO at a considerable discount to peers in order to generate enough interest from institutional investors,” he added.

LARGE CLIENT BASE

The IPO would be the biggest in Hong Kong since the $20.5 billion listing of AIA Group Ltd (1299.HK: Quote, Profile, Research, Stock Buzz) in October 2010.

The company will start taking orders from investors during a roadshow due to start on November 22, with pricing of the IPO expected on November 29, the source said.

China Life and State Grid did not return e-mail or phone requests for comment on the PICC deal, while Scor could not be reached for comment, IFR said. AIG’s Hong Kong spokesman had no immediate comment.

PICC, the biggest property and casualty insurer in China and the fifth-largest life and health insurer, had planned to go public in a dual Shanghai and Hong Kong offering worth up to $6 billion. It decided to move ahead with a Hong Kong listing first after the Shanghai portion of the deal failed to gain approval from Chinese regulators, who are concerned about weak stock market conditions on the mainland.

Founded in 1949, PICC is China’s first nationwide insurer and has 2.42 million institutional insurance clients and about 130 million individual insurance customers, exceeding the entire population of Japan.

The company is controlled by China’s Ministry of Finance, with an 88.7 percent stake, while the National Social Security Fund holds the remaining 11.3 percent.

PICC’s revenue grew at an average annual rate of 22.5 percent from 2009 to 2011, reaching 236.3 billion yuan ($37.96 billion) in 2011 and 136.2 billion yuan in the six months ended in June 2012, according to its preliminary prospectus.

The company posted net profits of 7.9 billion yuan in 2011 and 7.14 billion yuan in the six months to June.

PICC hired a record 17 banks to help underwrite the IPO. The company is the parent of China’s largest property insurer, Hong Kong-listed PICC Property & Casualty Co (2328.HK: Quote, Profile, Research, Stock Buzz).

China International Capital Corp (CICC), Credit Suisse Group AG (CSGN.VX: Quote, Profile, Research, Stock Buzz), Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) and HSBC Holdings Plc (HSBA.L: Quote, Profile, Research, Stock Buzz) won mandates as sponsors of the deal. The list of banks also acting as bookrunners includes Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), as well Chinese firms such as ABC International and BOC International.

($1 = 6.2252 Chinese yuan)

(Additional reporting by Fiona Lau and Jing Song of IFR; Editing by Denny Thomas and Edmund Klamann)