Ruling Party Proposes 'Samsung Life Insurance Act'... Samsung Life Insurance and Samsung Fire & Marine Insurance in Deep Deliberation

Proposed Amendment to the Insurance Business Act... Affiliate Shares Valued at 'Market Price'
Samsung Financial Affiliates Likely to Sell Samsung Electronics Shares

[Asia Economy Reporter Oh Hyung-gil] There is intense public interest in whether Samsung Life Insurance and Samsung Fire & Marine Insurance will sell their shares in Samsung Electronics. As the possibility of a change in the largest shareholder of Samsung Electronics, the top company by market capitalization in Korea, has been raised, the stock prices of the two companies have surged by more than 20%.

First, attention is focused on the National Assembly.

Democratic Party lawmakers Park Yong-jin and Lee Yong-woo each introduced a bill to amend the Insurance Business Act, known as the 'Samsung Life Insurance Act,' in mid-June, which was submitted to the National Assembly's Political Affairs Committee and discussed at the full committee meeting on the 29th of last month.

Currently, the Insurance Business Act limits the holding of a single stock to 3% of total assets, based on acquisition cost.

The amendment aims to change this to market value. This is intended to prevent corporate risks from affecting the management environment of insurance companies and policyholders when insurers hold large amounts of affiliate stocks?in other words, it serves the purpose of 'separation of finance and industry.'

In the 19th National Assembly in 2014, former Democratic Party lawmaker Kim Ki-sik first proposed an amendment to the Insurance Business Act to change the evaluation standard of insurers' equity holdings from cost to market value. Similar bills were introduced by lawmakers Lee Jong-gul and Park Yong-jin in the 20th National Assembly but were discarded at the end of the session due to opposition from the opposition party.

However, with the ruling party holding an overwhelming majority in the 21st National Assembly, the bill is expected to pass.

If the Samsung Life Insurance Act is enacted, the two companies are estimated to have to sell Samsung Electronics shares worth around 23 trillion won.

As of the end of March, Samsung Life Insurance and Samsung Fire & Marine Insurance had total assets of 309 trillion won and 86 trillion won, respectively, and the value of Samsung Electronics shares they currently hold (based on closing price on the 13th) amounts to 29.4368 trillion won (9.5%) and 5.2393 trillion won (6.2%), respectively.

[Image source=Yonhap News]

Expectations for Shareholder Dividends Rise for Samsung Life and Fire & Marine

Kim Do-ha, a researcher at Cape Investment & Securities, explained in a report on the 14th, "If Samsung Life Insurance sells all its Samsung Electronics common shares, the disposal gain would reach about 29.3 trillion won. After distribution to policyholders with dividend contracts and corporate tax, the shareholders' share is estimated at 17 trillion won for a lump-sum sale and 18.6 trillion won for a five-year phased sale."

Samsung Life Insurance's stock closed at 71,900 won on the 13th, soaring 21.04% compared to the previous trading day. This is the highest daily return since Samsung Life Insurance entered the stock market.

This phenomenon is interpreted as arising from the possibility of dividends due to the sale of Samsung Electronics shares.

Jeong Tae-jun, a researcher at Yuanta Securities, said, "Even assuming Samsung Life Insurance holds only 3% of Samsung Electronics shares, as of the 13th, the value of the stake is about 10.5 trillion won. Considering that the company's market capitalization on the same day was only 14.4 trillion won, there is ample room for the value of Samsung Electronics shares to be further reflected in the company's stock price."

Researcher Kim predicted that if dividends from the sale of shares become a reality, their scale will be determined while maintaining the RBC ratio. He added, "Whether shareholder returns will be made from the disposal gains is uncertain. Theoretically, since a decrease in the solvency margin base is expected due to the transfer of funds from stocks to other assets, dividends would be possible as long as the RBC ratio is maintained."

Core Samsung Group Governance Structure 'Shaken'

Samsung Life Insurance stated in its first-half earnings announcement on the 13th regarding the amendment to the Insurance Business Act, "We are monitoring the situation in the National Assembly, and no decisions have been made."

A Samsung Life Insurance official added, "The recent sharp rise in stock price partly reflects the market's reaction to the ongoing discussions on the Insurance Business Act amendment. Regardless of any developments, the principle of making decisions to enhance shareholder value remains unchanged."

Both Samsung Life Insurance and the group as a whole appear to be taking a cautious stance on the sale of shares.

Considering that the core governance structure of Samsung Group follows the chain 'Owner family → Samsung C&T → Samsung Life Insurance → Samsung Electronics,' the amendment to the Insurance Business Act is seen as a significant variable that could affect the control of the group head, Vice Chairman Lee Jae-yong.

To maintain the governance structure, one option is for Samsung C&T to buy some Samsung Electronics shares from the insurance affiliates, but it is widely believed that securing funds for this will not be easy. There is also a scenario that Samsung C&T will secure funds by selling its stake in Samsung Biologics and then purchase Samsung Electronics shares held by Samsung Life Insurance and Samsung Fire & Marine Insurance.