Hanwha Life Insurance, South Korea’s second largest life insurer, became a penny stock this month, reported Bloomberg.
The company’s share price has fallen 64% over the past year, and its shares touched the equivalent of about 71 cents on 23 March. Its price-to-book value is just 0.1 times, a fraction the 0.8 average for European insurers or 0.9 among US counterparts, according to data compiled by Bloomberg. “The extremely low price-book ratios — almost zero — mean investors think Korean insurers” are effectively worthless, according to Im Joon-hwan, senior research fellow at Korea Insurance Research Institute (KIRI).
The latest slump in markets, casting a cloud on Hanwha’s tactic of investing heavily overseas, has layered pain on top of a pre-existing condition. Hanwha, along with its peers, sold a welter of long-term, fixed-rate products to retail investors two decades ago that are now proving costly to maintain.
Those legacy liabilities from the late 1990s to 2001, offering average annual returns of 6%, represent about 40% of Korean insurers’ products, according to Financial Supervisory Service data obtained by opposition lawmaker Kim Sung-won. That’s putting a major squeeze on Hanwha amid the world’s worst market rout since the global financial crisis.
Hanwha has invested 29% of its total KRW121tn ($100n) in assets outside of South Korea, the most in the industry and close to the 30% maximum allowed. That hasn’t work out so well. It posted a net loss of KRW39.7bn for the fourth quarter, the worst in nine years.
“The reason why Hanwha is particularly worse than its rivals is that it recently increased overseas investments and made more losses in hedging for foreign-currency” risk, said KIRI’s Im.
Another major hurdle is a change in global accounting rules, known as IFRS 17, that will come into effect in 2023 and requires all insurers to value liabilities at current interest rates rather than initial rates. In this low-rate environment, that means higher liabilities.
“They may have to issue new shares in a large scale to comply with the new accounting rule of IFRS 17,” said Choi Kwang-wook, CEO at J&J Investments in Seoul.
Insurers are also having to cope with indebted Korean households increasingly scrimping on insurance. The Korea Insurance Research Institute sees sales of new life insurance products dropping for a fourth straight year in 2020.