* Deal to help MSI cement its position in Southeast Asia
* Mitsui Sumitomo, Fairfax to also explore global partnership
* First Capital is Singapore's No.1 property and casualty insurer
* Japanese firms have been paying top dollar to boost growth (Adds deal milestone, valuation, context of Japanese takeovers)
SINGAPORE, Aug 24 (Reuters) - Mitsui Sumitomo Insurance Company (MSI) is buying Singapore's First Capital Insurance for $1.6 billion from Canada's Fairfax Financial Holdings, in the biggest takeover by a Japanese insurer in populous Southeast Asia.
Starved of growth in their ageing home market, Japanese insurance firms have been aggressively expanding globally. In the last two years, the insurers have struck multibillion dollar deals, especially in the United States.
MSI, the core firm of MS&AD Insurance Group Holdings , is paying 3.3 times book value for First Capital, the largest property and casualty insurer in Singapore. The deal will help MSI, which operates in all 10 markets of the Association of Southeast Asian Nations, cement its position as the No. 1 in the region.
With the acquisition, "we can expect new business opportunities in the local corporate and retail market in Singapore as well as other Asian countries", MSI said in a statement on Thursday.
The purchase is a pricey one, though, with property and casualty insurance companies globally listed under the Thomson Reuters classification trading at an average 1.65 times book. MS&AD Insurance Group's shares fell 1 percent to a three-month closing low, underperforming Japan's main index which was down 0.4 percent.
Japan's cashed-up insurers have been paying top dollar as they seek to spur growth and overcome negative interest rates, fewer lucrative investment options and a fast-maturing market at home.
First Capital, which too has a regional presence, writes both personal and commercial lines of insurance across various classes such as property, fire, marine hull, motor and personal accident. It has maintained high profitability with a five-year average combined ratio of 76 percent, according to MSI.
One source familiar with the matter said that MSI was quick to pounce on the deal and get into advanced discussions with Fairfax after the Canadian group began to sound out parties keen to buy First Capital.
"Japanese insurers are very keen to expand further in Southeast Asia but it's becoming tough to get quality and large business in these markets," said the person who was not authorised to speak to the media
In 2015, MS&AD announced a $5.3 billion acquisition of Britain's Amlin PLC, an underwriter in the Lloyd's of London specialist insurance market.
MSI and Fairfax will also explore a broad global partnership in various areas, including reinsurance relationships, both companies said in separate statements on Thursday.
Fairfax said the all-cash purchase will result in a realized net investment gain of approximately $900 million after tax.
The deal is subject to regulatory approvals and is expected to close in late 2017 or early next year.
Citigroup advised MSI on the deal while Bank of America Merrill Lynch was the financial adviser to Fairfax. (Reporting by Anshuman Daga in SINGAPORE and Kanishka Singh in BENGALURU; Editing by Edwina Gibbs and Muralikumar Anantharaman)