Samsung Group's Governance Structure Could Be Affected
As Samsung Electronics vice chairman Lee Jae-yong has become the largest shareholder of Samsung Life Insurance, attention is focusing on the amendment bill to the Insurance Business Act now pending at the National Assembly.
The passage of the bill can not only undermine Samsung Group's governance structure but set off management instability at the nation's largest life insurer and impact the capital market.
Proposed by Rep. Park Yong-jin and Rep. Lee Yong-woo of the Democratic Party, the bill aims to change the evaluation criterion for the value of an insurer’s shareholdings in other companies from acquisition costs to current prices.
The bill is intended to protect an insurance company from the management crisis in an affiliate in advance by limiting the amount of shares the insurance company can hold in other companies.
Under the current Insurance Business Act, insurers are allowed to hold their affiliates' stocks and bonds up to 3 percent of their total assets. As of the end of 2020, Samsung Life Insurance’s total assets amounted to 336 trillion won, including a 8.51 percent stake (58,157,148 shares) in Samsung Electronics.
When Samsung Life Insurance acquired the stake in Samsung Electronics in the 1980s, it was valued at 540 billion won. But the stake’s current value based on the closing price of Samsung Electronics on May 3 (81,200 won) is around 41 trillion won. If the amendment bill is passed, Samsung Life Insurance will have to sell 31 trillion won worth of Samsung Electronics shares in excess of 3 percent (10 trillion won).
Insurance industry watchers say that the fair value approach makes an insurer’s asset management more complicated as their asset value becomes subject to fluctuations in the prices of the stocks they hold.
Korea and Japan are the only two countries in the world that regulate a company’s investment in affiliates. In Japan, a company’s stakes in subsidiaries or related companies are assessed based on acquisition prices while other securities it holds are assessed on a lower amount between acquisition costs and current prices.