Financial Sector Reorganization
The structural reform of the financial subsidiaries of the Samsung Group has been put to the test, as the revision bill to the Insurance Business Act, which is called the detonator for Samsung’s financial affiliates, is about to pass the National Assembly amid the acceleration of the structural reform and stake rearrangement of the financial affiliates.
Once the revision bill is passed, Samsung Life Insurance has to sell its Samsung Electronics shares, and then the Samsung Group will take various measures to defend the electronics company. In this case, conversion to a holding company, which has been officially denied by Samsung, is a likely scenario. Closer collaboration among the banking subsidiaries through share ownership reorganization and the separation of banking and commerce in the group are likely to follow, too.
Industry insiders are predicting that Samsung Life Insurance will buy the 37.5 percent Samsung Card shares owned by Samsung Electronics, while continuing to purchase the shares of Samsung Fire & Marine Insurance and the credit card company if necessary. Signs are shown as well that the banking subsidiaries are drawing a big picture of organizational restructuring.
According to the current Insurance Business Act, the upper limit applied to an insurer’s ownership of marketable securities in its largest stockholder or affiliate is set to 3 percent of the total asset based on the acquisition value at the time of the purchase of the marketable securities. In the amendment, the acquisition value is replaced with market price and the stake exceeding the upper limit has to be disposed of. If it is passed as it is, Samsung Life Insurance has to sell most of its 18 trillion won (US$17.7 billion) worth of shares in the group, including those of Samsung Electronics worth 14 trillion won (US$13.7 billion), within a grace period of five years.
One of the problems is that the protection of Samsung Electronics could be tough in this case. Samsung Life Insurance is the largest stockholder of the electronics company with a share ratio of 7.6 percent. Excluding that, the Samsung Group’s shareholding percentage in it drops to as low as slightly over 7 percent, 4 percent owned by Samsung C&T and 3 percent or so by chairman Lee Kun-hee. This is why such scenarios are mentioned as the equity spinoff of Samsung Electronics for a merger with Samsung Everland and potentially with tentatively-named Samsung C&T Holdings.
In this case, Samsung Life Insurance has to take the form of an intermediate financial holding company. However, no legislation has been made to permit the introduction of that type of holding company, and the share sale is likely to pose a significant challenge, while controversies surrounding a special favor add difficulty to such conversions.
In the meantime, it is also expected that the revision bill will be altered at least to some extent because Samsung will not look on the passage of the original amendment and the National Assembly is pressed for time ahead of the by-elections scheduled for late July. The grace period could be extended as a compromise, too.
In April this year, Samsung Life Insurance and Samsung Securities acquired 100 percent of the shares of Samsung Asset Management and Samsung Futures, respectively. Structural reshaping is sure to follow once the stock acquisition processes are wrapped up soon. It is in this vein that Samsung Life Insurance is currently mulling over combining the investment division of the real estate business unit with Samsung SRA Asset Management, which is a fully-owned subsidiary engaged in real estate asset management, in a bid to improve the efficiency of investment. Similar moves can be witnessed between Samsung Life Insurance and Samsung Asset Management and between Samsung Securities and Samsung Futures.
The reshaping of the shareholding structure is expected to speed up due to the worsening health conditions of the chairman, too. Samsung Life Insurance holds a 34.4 percent stake in Samsung Card, 10.4 percent of Samsung Fire & Marine Insurance, and 11.1 percent in Samsung Securities as of now. If the group adopts a holding company system, the life insurance arm becomes an intermediate financial holding company and has to meet certain requirements for affiliate incorporation - possession of at least 30 percent of the shares in a listed one, and at least 50 percent in a non-listed one, to be exact.
However, it is too early to determine whether or not Samsung Life Insurance will continue stock purchases, with the Samsung Group officially denying conversion to a holding company. Nonetheless, the company may begin to dispose of its shares in Samsung Electronics and buy those in the financial arm at the same time upon the passage of the bill.