(Bloomberg) – Insurers around the world have been affected by the evaporation of investment returns, but those in South Korea have been particularly hard hit. Consider the following: The country’s second largest life insurer became a penny stock this month.
Hanwha Life Insurance Co. fell 66% last year, and its shares were worth around 71 cents on March 23. The book value is only 0.1 times, a fraction of the average of 0.8 for European insurers or 0.9 among US colleagues, according to data from Bloomberg.
The recent slump in the South Korean won – a cloud on Hanwha’s tactic of investing heavily overseas – has put the pain over an existing condition. Two decades ago, Hanwha and his colleagues sold a large number of long-term fixed-income products to private investors, the maintenance of which is now proving to be expensive.
These legacy liabilities from the late 1990s to 2001, with an average annual return of 6%, account for approximately 40% of Korean insurers’ products, according to opposition regulator Kim Sung-won’s financial regulator. In view of the worst market crisis in the world since the global financial crisis, this is putting a considerable strain on Hanwha.
Hanwha has invested 29% of its 121 trillion won ($ 100 billion) in assets outside of South Korea, which are the highest in the industry and close to the maximum allowable 30%. That didn’t work out so well. The company reported a net loss of 39.7 billion won in the fourth quarter, the worst in nine years.
“The reason why Hanwha is particularly worse than its competitors is that it has recently increased its foreign investment and made more foreign currency hedging losses,” said Im Joon-hwan, a senior research fellow at the Korea Insurance Research Institute. “It is not cheap for Korean insurers to hedge against currencies in the country’s foreign exchange market. It is not easy to find talent with good hedging skills.”
As with insurers everywhere, Korean companies have been asked to find long-term assets that match their long-term liabilities while still offering a reasonable nominal return.
Hanwha said in its 2019 financial report released earlier this month that it is working to minimize the risk of mismatch between its insurance products and its investment portfolios. The company increases long-term assets such as Korean government bonds and manages the sale of products with variable interest rates. There is also a risk management committee that oversees an asset liability management strategy, the report said.
The Bank of Korea’s move this month to cut rates to a record low of 0.75% and introduce a version of quantitative easing threatens to make this management all the more difficult.
Lack of assets
Especially when, according to the latest data from the Treasury, only government bonds worth around $ 175 billion with a term of more than 10 years are outstanding in South Korea. That’s not much for a $ 1 trillion insurance industry that competes with pension funds and foreign investors for fixed-term assets.
Another major hurdle is a change in global accounting standards (IFRS 17) that will come into force in 2023, requiring all insurers to measure liabilities at current interest rates rather than initial interest rates. In this low interest rate environment, this means higher liabilities.
“You may have to issue large numbers of new shares to comply with the new IFRS 17 accounting standards,” said Choi Kwang-wook, chief executive officer of J & J Investments Co., Seoul. “I’m bearish on Korean insurer stocks, especially life insurers.”
As if they needed another headache, insurers also have to deal with indebted Korean households that are increasingly saving on insurance. The Korea Insurance Research Institute expects sales of new life insurance products to decline for the fourth consecutive year in 2020.
For some market watchers and local media, Hanwha and his colleagues’ problems are reminiscent of a crisis in neighboring Japan two decades ago. Seven Japanese life insurers went bankrupt after struggling to pay guaranteed returns on policies sold years ago.
“The extremely low price-book ratios – almost zero – mean that investors consider Korean insurers to be worthless,” said Im.
(Updates with relocation in the second paragraph)
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