By Kim Tae-gyu
The price-to-book ratio (PBR) is one of basic things that economic writers should learn soon after entering the high-minded but low-paying business of journalism.
It refers to a financial ratio, which compares a company's present market price to its book value. A corporation's PBR is its market capitalization divided by its book value from the balance sheet.
The ratio shows what a company would be worth if it is closed and liquidated right away. If its PBR is exactly 1, that means its stocks are traded to the cash that can be recouped when its inventory and properties are sold off and its debts are repaid.
Theoretically, PBR should be higher than 1 because companies typically make profits to raise its value. If PBR is lower than 1, shareholders would be better off by simply shutting down and liquidating their enterprises.
However, that is not always the case. Some companies face PBRs lower than 1 for quite a long time. Even the average PBR of Korea's listed companies fell far below 1 in the aftermath of the global financial crisis in the late 2000s.
The PBR tends to rebound to beyond 1 because it shows the intrinsic corporate value. But there is an exception of the Korean life insurance industry where all players face very low PBRs.
Currently, four life insurers are listed in the Seoul bourse ― Samsung Life, Hanwha Life, Tong Yang Life and Mirae Asset Life. The PBR of business bellwether Samsung is just above 0.7 while those of the other three players are less than 0.55.
This raise questions why their shareholders don't just liquidate the firms, the way to double their values of their shares.
The answer is not certain but for some reason, shareholders of local life insurers keep their underrated companies afloat.
The low share prices are understandable because local life insurers are set to embrace the International Financial Reporting Standard 17 in 2021 under which their values would be substantially depreciated.
If the low interest rates continue affected by the record low key rate of 1.25 percent, they would be in big troubles due to its fixed rate guaranteed products with rates higher than 6 percent.
Then, most of Korean life insurers would see their risk-based capital (RBC) ratio, a statutory measure of their financial strength, to fall below 100 percent, which means they do not have sufficient capital on hand to cover its risks.
The financial regulator requires insurers to keep the ratio at least 150 percent while recommending them to raise it to above 200 percent, the levels required to be considered well capitalized.
In consideration of such problems of the future, investors seemingly rate the value of life insurers in pessimistic ways.
One mystery is ING Life, which seeks a bourse debut this year.
Its RBC ratio is higher than 300 percent and unlike its peers, the ratio would rise to above 500 percent this July after the regulatory change in durations of assets and capital.
The Seoul-based insurer offers 40 percent of its share under the assumption that its market capitalization would be somewhere between 2.58 trillion won and 3.28 trillion won.
That means that its PBR would be 0.72, which is lower than that of Samsung. It appears to be too small for a company that nets approximately 300 billion won ($27 million) in profits every year and boasts of its unparalleled financial strength.
It remains to be seen how the market would respond to the initial public offering of the healthy outfit.
The price-to-book ratio (PBR) is one of basic things that economic writers should learn soon after entering the high-minded but low-paying business of journalism.
It refers to a financial ratio, which compares a company's present market price to its book value. A corporation's PBR is its market capitalization divided by its book value from the balance sheet.
The ratio shows what a company would be worth if it is closed and liquidated right away. If its PBR is exactly 1, that means its stocks are traded to the cash that can be recouped when its inventory and properties are sold off and its debts are repaid.
Theoretically, PBR should be higher than 1 because companies typically make profits to raise its value. If PBR is lower than 1, shareholders would be better off by simply shutting down and liquidating their enterprises.
However, that is not always the case. Some companies face PBRs lower than 1 for quite a long time. Even the average PBR of Korea's listed companies fell far below 1 in the aftermath of the global financial crisis in the late 2000s.
The PBR tends to rebound to beyond 1 because it shows the intrinsic corporate value. But there is an exception of the Korean life insurance industry where all players face very low PBRs.
Currently, four life insurers are listed in the Seoul bourse ― Samsung Life, Hanwha Life, Tong Yang Life and Mirae Asset Life. The PBR of business bellwether Samsung is just above 0.7 while those of the other three players are less than 0.55.
This raise questions why their shareholders don't just liquidate the firms, the way to double their values of their shares.
The answer is not certain but for some reason, shareholders of local life insurers keep their underrated companies afloat.
The low share prices are understandable because local life insurers are set to embrace the International Financial Reporting Standard 17 in 2021 under which their values would be substantially depreciated.
If the low interest rates continue affected by the record low key rate of 1.25 percent, they would be in big troubles due to its fixed rate guaranteed products with rates higher than 6 percent.
Then, most of Korean life insurers would see their risk-based capital (RBC) ratio, a statutory measure of their financial strength, to fall below 100 percent, which means they do not have sufficient capital on hand to cover its risks.
The financial regulator requires insurers to keep the ratio at least 150 percent while recommending them to raise it to above 200 percent, the levels required to be considered well capitalized.
In consideration of such problems of the future, investors seemingly rate the value of life insurers in pessimistic ways.
One mystery is ING Life, which seeks a bourse debut this year.
Its RBC ratio is higher than 300 percent and unlike its peers, the ratio would rise to above 500 percent this July after the regulatory change in durations of assets and capital.
The Seoul-based insurer offers 40 percent of its share under the assumption that its market capitalization would be somewhere between 2.58 trillion won and 3.28 trillion won.
That means that its PBR would be 0.72, which is lower than that of Samsung. It appears to be too small for a company that nets approximately 300 billion won ($27 million) in profits every year and boasts of its unparalleled financial strength.
It remains to be seen how the market would respond to the initial public offering of the healthy outfit.
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