INSURERS the world over have been walloped by evaporating funding returns, however these in South Korea have been hit notably laborious. Simply think about this: The nation’s second-largest life insurer turned a penny inventory this month.
Hanwha Life Insurance coverage Co. has fallen 64% over the previous yr, and its shares touched the equal of about 71 cents on March 23. Its price-to-book worth is simply 0.1 instances, a fraction the 0.eight common for European insurers or 0.9 amongst U.S. counterparts, in keeping with knowledge compiled by Bloomberg.
The newest hunch in markets, which has seen the South Korean received tumble — casting a cloud on Hanwha’s tactic of investing closely abroad — has layered ache on prime of a pre-existing situation. Hanwha, together with its friends, bought a welter of long-term, fixed-rate merchandise to retail traders 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%, characterize about 40% of Korean insurers’ merchandise, in keeping 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 received ($100 billion) in property exterior of South Korea, probably the most within the trade and near the 30% most allowed. That hasn’t work out so properly. It posted a web lack of 39.7 billion received for the fourth quarter, the worst in 9 years.
“The rationale why Hanwha is especially worse than its rivals is that it just lately elevated abroad investments and made extra losses in hedging for foreign-currency” threat, mentioned 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 straightforward to search out expertise with good hedging abilities.” Threat Panel As with insurers in all places, Korean companies have been challenged to search out long-maturity property that match their prolonged liabilities, but nonetheless present an honest nominal return.
Hanwha mentioned 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 property resembling Korean authorities bonds and managing gross sales of merchandise with floating charges, the corporate mentioned. It additionally has a risk-management committee that oversees a technique for asset-liability administration, the report mentioned.
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.
Asset Scarcity Notably when South Korea solely has about $175 billion of presidency bonds excellent with maturities of greater than 10 years, in keeping with the newest Finance Ministry knowledge. That’s not a lot for a $1 trillion insurance coverage trade competing with pension funds and overseas traders for property with length.
One other main hurdle is a change in international accounting guidelines, referred to as IFRS 17, that can come into impact in 2023 and requires all insurers to worth liabilities at present rates of interest relatively than preliminary charges. On this low-rate surroundings, 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,” mentioned 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 yr in 2020.
For some market watchers, and native media, the troubles of Hanwha and its friends are paying homage 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 traders assume Korean insurers” are successfully nugatory, in keeping with Im.
(Updates inventory transfer in second paragraph) 2020 Bloomberg L.P.