Insurers the world over have been walloped by evaporating funding returns, however these in South Korea have been hit notably exhausting. Simply take into account this: The nation’s second-largest life insurer turned a penny inventory final week.
Hanwha Life Insurance coverage Co. has fallen 64% over the previous 12 months, and its shares touched the equal of about 71 cents on March 23. Its price-to-book worth is simply 0.1 occasions, a fraction the 0.eight common for European insurers or 0.9 amongst U.S. counterparts, in accordance with knowledge compiled by Bloomberg.
The most recent hunch in markets, which has seen the South Korean gained tumble — casting a cloud on Hanwha’s tactic of investing closely abroad — has layered ache on high of a pre-existing situation. Hanwha, together with its friends, bought a welter of long-term, fixed-rate merchandise to retail buyers 20 years in the past that at the moment are proving pricey to take care of.
These legacy liabilities from the late 1990s to 2001, providing common annual returns of 6%, signify about 40% of Korean insurers’ merchandise, in accordance with Monetary Supervisory Service knowledge obtained by opposition lawmaker Kim Sung-won. That’s placing a significant squeeze on Hanwha amid the world’s worst market rout because the international monetary disaster.
Hanwha has invested 29% of its whole 121 trillion gained ($100 billion) in belongings exterior of South Korea, essentially the most within the trade and near the 30% most allowed. That hasn’t work out so nicely. It posted a web lack of 39.7 billion gained for the fourth quarter, the worst in 9 years.
“The explanation why Hanwha is especially worse than its rivals is that it not too long ago elevated abroad investments and made extra losses in hedging for foreign-currency” threat, stated Im Joon-hwan, senior analysis fellow at Korea Insurance coverage Analysis Institute. “It’s not low-cost for Korean insurers to hedge on currencies within the nation’s foreign-currency market. It’s not simple to search out expertise with good hedging expertise.”
As with insurers all over the place, Korean companies have been challenged to search out long-maturity belongings that match their prolonged liabilities, but nonetheless present a good nominal return.
Hanwha stated in its monetary report on 2019, launched earlier this month, that it’s working to attenuate dangers from a mis-match between its insurance coverage merchandise and its funding portfolios. It’s boosting longer-term belongings equivalent to Korean authorities bonds and managing gross sales of merchandise with floating charges, the corporate stated. It additionally has a risk-management committee that oversees a method for asset-liability administration, the report stated.
The Financial institution of Korea’s transfer this month to chop its benchmark rate of interest to a report low of 0.75%, and undertake a model of quantitative easing, threatens to make that administration all of the tougher.
Notably when South Korea solely has about $175 billion of presidency bonds excellent with maturities of greater than 10 years, in accordance with the newest Finance Ministry knowledge. That’s not a lot for a $1 trillion insurance coverage trade competing with pension funds and international buyers for belongings with length.
One other main hurdle is a change in international accounting guidelines, often called IFRS 17, that can come into impact in 2023 and requires all insurers to worth liabilities at present rates of interest somewhat than preliminary charges. On this low-rate setting, meaning increased liabilities.
“They might need to problem new shares in a big scale to adjust to the brand new accounting rule of IFRS 17,” stated Choi Kwang-wook, chief govt officer at J&J Investments Co. in Seoul. “I’m bearish on Korean insurers’ shares, particularly life insurers.”
As in the event that they wanted one other headache, insurers are additionally having to deal with indebted Korean households more and more scrimping on insurance coverage. The Korea Insurance coverage Analysis Institute sees gross sales of latest life insurance coverage merchandise dropping for a fourth straight 12 months in 2020.
For some market watchers, and native media, the troubles of Hanwha and its friends are harking back to a disaster in neighboring Japan 20 years again. Seven Japanese life insurers ended up going bust after struggling to pay assured returns on insurance policies bought years earlier than.
“The extraordinarily low price-book ratios — virtually zero — imply buyers suppose Korean insurers” are successfully nugatory, in accordance with Im.
— With help by Kyungji Cho