The insurers’ 30% dilemma
IF it happens, the corporate exercises involving three large life insurance companies operating in Malaysia would be the biggest deals this year.
AIA Bhd, Prudential Assurance Malaysia Bhd and Great Eastern Life Assurance (M) Bhd are estimated to control 67% of the life insurance business. All three are wholly owned by their foreign-based parent companies at the moment.
Bank Negara has made it clear that it wants insurers to reduce their stake to 70%, paving the way for 30% of the equity to be divested to domestic funds and investors.
The central bank’s coercion of the insurers goes back to a 2009 ruling under the Financial Services Act (FSA). Bank Negara says the insurance companies are well aware about the requirement to diversify a 30% stake.
Towards this end, so far only Prudential seems to be serious in shedding a 30% stake. The potential buyer in a deal reported to be worth RM1.2bil to RM1.5bil is the Retirement Fund Inc.
The Employees Provident Fund is said to be a potential suitor should Great Eastern divest a 30% stake. According to CIMB Research, a 30% stake in Great Eastern is estimated at RM2.2bil.
It is perplexing why the insurance companies have not divested their 30% stakes, considering that the deadline is June this year.
Would they do so this time around and within the deadline?
And would their decision to divest a 30% stake depend on the outcome of AIA?
While there are reports of Prudential and Great Eastern being in talks to sell their 30% stakes to local institutional funds, Hong Kong-listed AIA Group has come out to say that it is not looking to reduce its stake.
AIA has stated that it wants to own as much as it can in any market it operates in.
The question is, if AIA does not divest its stake, then would Prudential and Great Eastern be compelled to sell a 30% stake?
Do note that there are exemptions to the standard rules in the local banking sector. For example, certain individuals are allowed to maintain their significant stakes in local banks, although going by the FSA, individuals cannot own more than 5%.
There is also the issue of valuation. It is noteworthy that the 70% foreign ownership cap on foreign insurers was issued back in 2009.
The valuations the insurance companies command are much higher than they were eight years ago. Domestic institutional funds would have to fork out quite a bit for a 30% stake in the insurers.
Is it worth forking out billions for a 30% stake, considering that the financial services sector is changing due to financial technology products?
A mitigating point for prospective suitors is that there is still ample room for growth due to Malaysia’s relatively young population. Some reports have it that the country’s life insurance penetration rate has been stagnating at 55% since 2010.
Bank Negara’s target is a 75% penetration rate.
With the deadline of shareholding ruling drawing closer and after more than nine years of extension, will the long-talked-about divestment by the three large life insurance companies happen?
At the end of the day, the insurers cannot be forced to go into a deal. But for a price, anybody would consider selling a piece of the cake.
And that price can be hefty. Already, research houses are predicting an additional RM20bil in market capitalisation being added to Bursa Malaysia should the three insurers be listed.
This article first appeared in StarBiz Premium.