SEOUL (BLOOMBERG) - Insurers the world over have been walloped by evaporating investment returns, but those in South Korea have been hit particularly hard. Just consider this: The nation's second-largest life insurer became a penny stock this month.

Hanwha Life Insurance Co has fallen 64 per cent over the past year, and its shares touched the equivalent of about 71 cents on March 23. 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 latest slump in markets, which has seen the South Korean won tumble - 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 per cent, represent about 40 per cent 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 per cent of its total 121 trillion won (S$141 billion) in assets outside of South Korea, the most in the industry and close to the 30 per cent maximum allowed. That hasn't work out so well. It posted a net loss of 39.7 billion won 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 Im Joon-hwan, senior research fellow at Korea Insurance Research Institute. "It's not cheap for Korean insurers to hedge on currencies in the nation's foreign-currency market. It's not easy to find talent with good hedging skills."

RISK PANEL

As with insurers everywhere, Korean firms have been challenged to find long-maturity assets that match their lengthy liabilities, yet still provide a decent nominal return.

Hanwha said in its financial report on 2019, released earlier this month, that it's working to minimize risks from a mis-match between its insurance products and its investment portfolios. It's boosting longer-term assets such as Korean government bonds and managing sales of products with floating rates, the company said. It also has a risk-management committee that oversees a strategy for asset-liability management, the report said.

The Bank of Korea's move this month to cut its benchmark interest rate to a record low of 0.75 per cent, and adopt a version of quantitative easing, threatens to make that management all the harder.

ASSET SHORTAGE

Particularly when South Korea only has about US$175 billion of government bonds outstanding with maturities of more than 10 years, according to the latest Finance Ministry data. That's not much for a US$1 trillion insurance industry competing with pension funds and foreign investors for assets with duration.

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, chief executive officer at J&J Investments Co in Seoul. "I'm bearish on Korean insurers' stocks, especially life insurers."

As if they needed another headache, 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.

For some market watchers, and local media, the troubles of Hanwha and its peers are reminiscent of a crisis in neighboring Japan two decades back. Seven Japanese life insurers ended up going bust after struggling to pay guaranteed returns on policies sold years before.

"The extremely low price-book ratios - almost zero - mean investors think Korean insurers" are effectively worthless, according to Im.