Insurance legislation could affect Samsung's corporate structure

Samsung Life Insurance can thank the National Assembly for its rollercoaster week in the stock market.

The life insurance company, with a market capitalization of 13 trillion won ($11 billion), enjoyed four consecutive trading days of stock increases last week, rising by 45 percent before finishing the week with a 9 percent drop on Friday.

The sharp fluctuation was attributed to recent legislation dubbed the “Samsung Life Insurance bill.”

Reps. Park Yong-jin and Lee Yong-woo of the Democratic Party (DP) have both recently introduced legislation to reform the life insurance industry.

By law, financial companies are restricted from investing more than their total assets as a preemptive risk management policy to protect money deposited or invested by ordinary customers.

But that calculation is currently made based on the value of the stocks or other investments when they were first purchased by the insurance companies. The reform bills seek to evaluate the value of the stocks that the insurers have in other companies based on their current value.

For other financial companies, the rule was changed during the late 1990s. The only exception has been insurance companies.

If the legislation passes, which is likely given the DP's majority in the National Assembly, it will be the first policy change for insurance companies since 1962.

It would also force Samsung Life Insurance to sell its stocks in Samsung Electronics under the 3 percent rule. Under the asset management standard applied to insurance companies, the insurer can’t own stakes in another company exceeding 3 percent of its total assets.

In the case of Samsung Life Insurance, it owns 581.5 million shares in Samsung Electronics.

Under the current system, the total value of the stakes that Samsung Life Insurance owns in Samsung Electronics amounts to roughly 544 billion won, as the company first purchased the stakes at 1,000 won per share.

Since Samsung Life Insurance's total assets amount to 230 trillion won, the shares it owns in Samsung Electronics only account for 0.23 percent of its total assets, well below the 3 percent rule.

But if Samsung Electronics’ shares are evaluated by their current market value, the holdings would be worth 58,000 won per share, or roughly 29.5 trillion won as of Friday — which is equivalent to 12.8 percent of the life insurer’s total assets.

If Samsung Life Insurance has to sell an amount exceeding the 3 percent rule, the company would be able to pocket 17 trillion won from the sales, after taxes.

Brokers widely expect Samsung Life Insurance to use the profit made from the sales as its dividend source. But there is growing expectation that Samsung Life Insurance’s own shares may be raised by the changes.

Lim Hee-yeon,a Shinhan Investment analyst, raised the target of Samsung Life Insurance’s stock value from 71,900 to 90,000 won, citing investors’ expectations that Samsung Life Insurance’s shares will be reevaluated.

The reform bill could also bring about major shifts in the governance of Samsung Group.

Samsung Life Insurance is the largest shareholder of Samsung Electronics, aside from the national pension fund. The life insurer holds a 8.5 percent stake of Samsung Electronics.

The pension fund owns 11 percent.

Some market experts speculate that Samsung C&T could buy up Samsung Life Insurance's shares in Samsung Electronics to defend the current governance structure.

Samsung C&T is currently the largest shareholder of Samsung Biologics, whose market capitalization currently amounts to about 53 trillion won. Samsung C&T owns a 43.44 percent stake in the bio firm.

Samsung C&T could sell its Samsung Electronics’ shares to other Samsung Group affiliates.

Not only would it secure the finances it would need, but it would also minimize the impact on the market.

“We don’t think it is appropriate to comment on the issue, as it is still being discussed at the National Assembly,” Samsung Life Insurance CFO Yoo Ho-seok said during a recent conference call.

This is not the first time lawmakers have tried to pass the reform bill.

While there were several attempts, they all failed to reach the floor of the National Assembly.

The financial authority, meanwhile, has remained cautious over the issue.

Arguing in favor of keeping the current system, insurance companies have said that unlike any other industry, the investments that they make are long-term.

Samsung Life Insurance isn’t the only insurer that will have to sell off its stakes in Samsung Electronics, as Samsung Fire and Marine would also be forced to sell all but 3 percent of its total assets.

If the bill is passed, the non-life insurer would only be able to keep around 2 trillion won worth of its Samsung Electronics’ shares, out of the 5.3 trillion won that it currently owns.

BY AHN HYO-SUNG, LEE HO-JEONG [lee.hojeong@joongang.co.kr]