* Acquisition to boost AIA's Malaysia ranking to No. 1
* ING's first deal in Asia asset sell-off
* AIA to fund purchase with internal reserves and debt
* AIA reports 22 pct rise in new business in Q3
(Adds AIA, analyst comments, details)
By Denny Thomas and Sara Webb
HONG KONG/AMSTERDAM, Oct 11 (Reuters) - Pan Asian insurer AIA Group Ltd has agreed to buy ING's Malaysian insurance operations for $1.73 billion in cash, handing the Dutch financial services firm its first deal in a nine-month drive to sell off Asian assets.
The sale of the Malaysian unit is expected to be followed soon by the divestment of ING's Japan, South Korea, Hong Kong and Thailand units, as the bailed-out Dutch financial firm offloads assets to repay 10 billion euros ($12.9 billion) in state aid received during the 2008 financial crisis.
For AIA, the purchase of the Malaysian operations marks its second M&A deal in less than a month, and gives it a leading position in the fast growing Southeast Asian economy.
AIA was spun out of U.S. insurer AIG in 2010 through a $20.5 billion IPO, and Hong Kong-based CEO Mark Tucker has been re-building the business after it lost agents and market share amid AIG's near collapse during the financial crisis.
"It's a good deal and they are paying up to buy a good quality business and to expand into a rapidly growing market," said Credit Suisse analyst Arjan van Veen, describing ING's Malaysian business as the "jewel in the crown".
AIA said it was paying a multiple of about 1.8 times embedded value for the Malaysian business, compared with AIA's own multiple of 1.5 times. Van Veen said the deal should add 5 percent to AIA's earnings per share.
Embedded value is a measure commonly used to gauge the value of insurance companies and includes the present value of future profit from long-term insurance contracts.
The deal, which confirmed a report by Reuters on Wednesday, marks ING's first sale after it announced plans to auction its Asian insurance operations in January as part of a global asset sell-off programme.
ING originally wanted to sell its entire Asia insurance operation, with a book value of 6.1 billion euros, to one buyer but said it was willing to split up the business if it could raise more money that way.
"Today's announcement is the first major step in the divestment of our Asian insurance and investment management businesses and shows that ING continues to make steady progress in the restructuring of our company," said Jan Hommen, chief executive, in a statement.
STRONG DEMAND FOR SOUTHEAST ASIA
ING's Southeast Asian operations attracted bidding interest due to the region's rapid growth potential. Life premiums in Malaysia are forecast to grow at 5.5 percent next year, compared with a world average of 3.7 percent, according to Swiss Re estimates.
The race to buy ING's Japan, Hong Kong and much smaller Thailand operations is still on, with Canada's Manulife Financial Corp and Hong Kong business tycoon Richard Li in the running, a source told Reuters earlier.
KB Financial Group is in advanced talks to buy ING's South Korean operations, sources have told Reuters.
AIA said the Malaysian deal, which is subject to regulatory approval, would boost its ranking in Malaysia to No. 1 by total premiums.
"ING's business in Malaysia represents an excellent strategic fit with AIA where we already have a well-established and strong business and the ability to integrate ING's businesses with our own," AIA CEO Tucker said in a statement.
The deal would also strengthen AIA's bank distribution channel, an area analysts believe AIA needs to beef up. The acquisition will be funded through internal cash resources and debt financing, the statement said.
AIA also announced a 22 percent rise in its value of new business to $300 million.
Last month, AIA agreed to buy British insurer Aviva Plc's
Sri Lankan operations for $109 million. .
ING's Malaysia business sells life, general, and Islamic insurance products and has about 1,200 employees and over 1.6 million customers.
ING said it expects a net gain of about 780 million euros from the transaction, which is expected to close in the first quarter 2013.
AIA was advised by Deutsche Bank and Morgan Stanley, while Goldman Sachs and J.P. Morgan advised ING. Debevoise & Plimpton is AIA's financial adviser.
($1 = 0.7751 euros)
(Additional reporting by Saeed Azhar and Clare Baldwin; Editing by Gary Hill, Carol Bishopric, Michael Flaherty and Richard Pullin)
Keywords: ING AIA/MALAYSIA