Amendment of Insurance Business Act Reemerging

Democratic Party of Korea lawmaker Park Yong-jin asked the National Policy Committee of the National Assembly on Nov. 7 to help revise the Insurance Business Act. Ruling and opposition party lawmakers in the committee are discussing whether to handle the matter at their meeting scheduled for next week.

With this issue reemerging in five years, Samsung Electronics is facing another crisis. If the act is revised and the National Assembly passes it, Samsung Life Insurance and Samsung Fire & Marine Insurance must sell 25 trillion won of Samsung Electronics shares, which may seriously affect the governance structure of Samsung Electronics.

The revision is to calculate insurers’ stock and bond holdings on a market value instead of acquisition cost basis. According to the current law, an insurer’s major shareholder and subsidiary shareholding must not exceed 3 percent of its total assets. Samsung Life Insurance’s total assets are approximately 310 trillion won, meaning its certain shareholding must not exceed 9 trillion won or so.

On an acquisition cost basis, Samsung Life Insurance’s ownership ratio in Samsung Electronics is less than 3 percent. The calculation reference year in this case is 1980, when the Samsung Electronics stock price was 1,072 won per share. When this price is applied, Samsung Life Insurance’s current shareholding in Samsung Electronics is 544.4 billion won or so.

On a market value basis, however, the amount and ownership ratio are approximately 30 trillion won and more than 8.5 percent, respectively. In this case, the insurance company must sell more than 21 trillion won of Samsung Electronics shares. The amount increases to 25 trillion won or so when Samsung Fire & Marine Insurance, which owns 1.49 percent of Samsung Electronics, is included in the calculation.

This large-scale stock selling is likely to have a serious impact on the governance structure, in which chairman Lee Jae-yong owns 17.97 percent of Samsung C&T as the largest shareholder, his family’s ownership in Samsung C&T is 31.31 percent, Samsung C&T governs Samsung Life Insurance, and Samsung Life Insurance governs Samsung Electronics. If the two insurance companies’ ownership ratio in Samsung Electronics falls to 3 percent from the current level of 10 percent, that of the largest shareholder and affiliated persons will fall from 20.75 percent to 13 percent or so.

“Samsung Group may opt for a Samsung Electronics spin-off to respond to the act and retain control of Samsung Electronics,” said an industry source, adding, “One possible scenario is that the investment company of Samsung Electronics after the spin-off acquires 10.22 percent of the Samsung Electronics operating company from Samsung Life Insurance and Samsung Fire & Marine Insurance and Samsung C&T acquires the insurance companies’ shares in the investment company so that Samsung C&T governs, through investment in kind, the investment company governing the operating company.”

According to experts, turning Samsung C&T into a holding company is unlikely. “For Samsung C&T to become a holding company, its Samsung Electronics ownership ratio must be raised to at least 30 percent, which requires 68 trillion won,” one of them explained, adding, “The company needs to sell construction arm or Samsung Biologics shares to prepare this money and this is unlikely.”