Hong Leong Tokio Marine Takaful

Mitsui Sumitomo Insurance, a unit of Japan's largest property-casualty insurance firm MS&AD , said on Wednesday it may buy a stake in Malaysia's Hong Leong Tokio Marine Takaful to tap growing demand for Islamic insurance.

The move comes as its Japanese rival Tokio Marine & Nichido said it is considering selling its 35 percent stake in the Islamic insurer to Hong Leong to end its partnership over strategic differences. Tokio Marine & Nichido is a unit of Tokio Marine Holdings .

Mitsui is keen to buy that stake, which would build up its presence in Malaysia after its insurance alliance with Hong Leong Financial Group worth $480 million last year, a company spokesman said.

The deal could be worth about 1-3 billion yen ($37 million), a source with direct knowledge of the deal said. HLA Holdings Sdn Bhd, which is part of Hong Leong Financial Group, owns the remaining 65 percent of Hong Leong Tokio Marine Takaful, according to the Islamic insurer's website.

Tokio Marine is expected to sell its stake in Hong Leong Tokio Marine to the Malaysian shareholder which would then sell it on to Mitsui Sumitomo, both pending regulatory approval, a source said.

Japan's Nikkei newspaper had earlier reported that Tokio Marine was planning to exit its partnership in Hong Leong Tokio Marine due to differences in business strategy. While Tokio Marine wants to sell a broad lineup of life and non-life insurance, Hong Leong is keen to focus on savings-type policies, the paper said.

Mitsui Sumitomo has been looking to expand its overseas operations by forging tie-ups with peers in emerging markets as Japan's non-life insurance market shrinks.

Mitsui Sumitomo Insurance managing executive officer Masaaki Nishikata told Reuters in September that MS&AD Insurance was in talks to buy into several life insurers in Asia as it aims to tap the region's growing economies.

A unit of Tokio Marine halted talks with Malaysia's PacificMas to buy medical insurance provider Pacific Insurance Bhd last July.

The market for Islamic insurance, or takaful, is expected to grow in tandem with rising demand for ethical investments. Total takaful contributions could reach $7.7 billion a year by 2012, Ernst & Young has forecast. But global takaful contributions are less than 1 percent of the total insurance premium spend annually, industry lawyers Clyde & Co have said.