What’s long been one of the most attractive markets for insurers in Asia is turning ugly.

Malaysia will require overseas insurance firms to jettison at least 30 percent of their domestic businesses via strategic stake sales or local initial public offerings by the end of June in order to comply with new foreign ownership rules. Companies from AIA Group Ltd. to Prudential Plc and Japan’s Tokio Marine Holdings Inc. are beginning to feel the heat.

The Southeast Asian nation’s pension giant Employees Provident Fund said earlier this month that it’s in talks to buy a stake in the Malaysian unit of Singapore’s Great Eastern Holdings Ltd., while Britain’s Prudential and Tokio Marine are also in discussions with bankers.

Relinquishing control won’t be a happy situation for many international firms. Although insurance penetration in the nation has remained flat at around 55 percent since 2010, Malaysia’s relatively young population — 66 percent are between the age of 15 and 64 — means that figure is sure to grow. Premiums also tend to be on the high side, with life insurance payments per capita averaging $317 in 2014-2016, according to data from Swiss Re AG. That compares with $212 in Thailand and $157 in China.

The Malaysian business of Great Eastern accounts for about 20 percent of the company’s embedded value, so shedding a minority stake will be a big deal for the unit of Oversea-Chinese Banking Corp. And while Malaysia comprised just 5 percent of AIA’s operating profit after tax in the first half of 2017, it’s the Hong Kong group’s fifth-largest single market.

Foreign insurance firms also have no choice but to sell to local companies, which essentially limits the pool of buyers to four main parties, all of which are deep-pocketed state-owned entities. There’s Employees Provident Fund, Kumpulan Wang Persaraan (Diperbadankan), or KWAP, Permodalan Nasional Bhd. and sovereign wealth fund Khazanah Nasional Bhd.

A better option may be the IPO route, as investors have tended to prize listed insurers over the broader market.

But the recent performance of new share sales in Malaysia isn’t encouraging. While listings in 2016 are up 13.8 percent on average, 2017 debuts are down 2.3 percent even as the FTSE Bursa Malaysia KLCI Index rallied 9.5 percent. Also, considering the likes of Employees Provident Fund and Permodalan Nasional tend to come in as cornerstone investors, it’s unlikely any foreign insurer will have a future without a state partner.

If Malaysian regulators do decide to strictly enforce the 70-30 ownership rule, foreign firms will lose the one market in the region where they could operate with few restrictions.

The only offshore players set to do well from this scenario appear to be the investment bankers. If they aren’t muscled out by CIMB Group Holdings Bhd. and Malayan Banking Bhd., that is.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Bloomberg L.P.

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