KDIC divests Hanwha Life block

Government agency removes Korean insurer's share price overhang at a time when the domestic interest rate cycle shows no sign of turning.

The Korea Deposit Insurance Corporation (KDIC) removed some of the share price overhang from Hanwha Life on Wednesday after completing a long-anticipated 2% stock divestment.

The South Korean government agency raised Won133.4 billion ($118 million) from the sale, which reduced its stake in the life insurance company to 22.8% from 24.8%.

The accelereted 17.37 million-share sale was marketed at a fixed price of Won7,680, representing a 3.6% discount to the stock's Won7,970 close. NH Investment & Securities and UBS were joint bookrunners.

Although relative small, the Hanwha Life deal puts a welcome marker in the sand at a time when block trades are sparse in Asia, with many companies still in the year-end blackout period.

The deal had been sitting in the pipeline for a while and was launched without a pricing range because the issuer had a clear pricing threshold, according to a source close to the deal. He added that it was marketed on a best-efforts basis with no investors brought over the wall prior to launch.

Just under 30 accounts joined the order book by the time it closed at 6pm Hong Kong time.

Unusually for a Korean deal, foreign funds accounted for more demand than local ones. The final order book had a split of roughly 75% foreign institutions and 25% local ones. 

"There was a good mix of existing and new accounts," the source close to the deal said. "There were some long-only accounts but the book was led by hedge funds, making a call on the near-term bottom in the Korean insurance sector and taking a risk view."

The deal represented 21.4 days trading volume.

Share buybacks

Hanwha Life's shares have been on a rising trend since the middle of June, adding more than 26% in the intervening period. Year-to-date, however, they are down 3.9% compared with a 5.8% rise in the country's benchmark Kospi index. On Wednesday they rose 1.53%. 

At current price levels, shares in Hanwha Life are trading at 0.8 times on a forward price to book basis and 0.71 times forward embedded value. This is in line with fellow Korean life insurer Samsung Life and slightly above Tong Yang Life's 0.7 times forward-price-to-book ratio. 

Hanwha Life's senior management have said that they want to lift the company's price-to-book ratio back up to 1.0 and last month signalled that they intended to extend a share buyback programme. The company's previous share buyback scheme, entailing 3% of outstanding share capital, was completed in January. 

The company's fourth-quarter results published on Feb. 25 showed net earnings of Won31 billion, well below analysts's expectations for a Won58 billion profit.

Management said that was partly because of the need for larger reserves against variable policies, which accounted for Won130 billion, and one-off staff restructuring costs of Won120 billion. But they added that the resultant cost savings should benefit future earnings to the tune of Won83 billion per year.

The core underwriting business also continued to improve, with new business from protection-type products up 7% year-on-year. 

Rate cycle

Some analysts have said that the Hanwha Life share price is likely to be bolstered by an increase in the dividend payout ratio from 28.2% to the mid-30s. This move had been expected as a means to help shareholder Hanwha Corp finance its acquisition of Samsung Techwin.

However, more meaningful share price growth needs a turn in the country's interest rate cycle, which would boost the sector's net investment spreads and embedded value.

The Bank of Korea has been loosening policy since 2012 and last week surprised the market with another 25 basis point cut in the key repurchase rate to 1.75%.

That followed a lowering of the central bank's annual GDP forecast from 3.9% to 3.4%. The Bank of Korea's inflation projections were also cut from 2.4% to 1.9%. 

Benchmark 10-year Korean government bond yields currently stand at 2.287%, down from just under 3.7% in November 2013 and far below the 5.98% level they reached in 2008. 

¬ Haymarket Media Limited. All rights reserved.

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