[Why&Next] Prerequisites for Samsung Fire & Marine Insurance to Succeed in 'Value Up'

Samsung Fire & Marine Insurance has sparked intense industry interest by announcing a value-up (corporate value enhancement) plan, becoming the first listed domestic insurance company to do so. This plan could serve as a milestone for shareholder return strategies among large insurers that have posted strong performances since the adoption of International Financial Reporting Standard 17 (IFRS17). However, it is analyzed that Samsung Fire & Marine Insurance will need to overcome various obstacles to properly implement its value-up plan of achieving a 50% shareholder return ratio by 2028.

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According to financial authorities on the 5th, Samsung Fire & Marine Insurance announced on the 31st of last month through a value-up disclosure that it has set target levels for the Solvency Capital Requirement ratio (K-ICS, K-Insurance Capital Standard) and Return on Equity (ROE) at 220% and 11-13%, respectively, and plans to gradually increase the shareholder return ratio to 50% by 2028. The company also intends to gradually reduce its current treasury stock holdings of 15.93% to below 5%.

It is analyzed that Samsung Fire & Marine Insurance unveiled the value-up card ahead of its year-end financial results announcement because of its solid performance. The company's net profit increased from 800 billion KRW in 2020 to 1.8 trillion KRW in 2023, the first year of IFRS17 adoption. The cumulative net profit up to the third quarter of last year was 1.8665 trillion KRW, already surpassing the 2023 full-year results. Samsung Fire & Marine Insurance estimated that its net profit for last year reached a record high of 2.1 trillion KRW with the announcement of this value-up plan.

While earnings per share (EPS) increased along with profits, the shareholder return ratio actually declined. EPS is calculated by dividing net profit by the number of issued shares and indicates the portion of earnings attributable to shareholders. The shareholder return ratio is the proportion of net profit spent on dividends and treasury stock repurchases. A higher ratio means the company has distributed more profits to shareholders. Samsung Fire & Marine Insurance's EPS steadily rose from 17,643 KRW in 2020 to an estimated 48,700 KRW last year. In contrast, the shareholder return ratio fell from 49.6% in 2020 to 37.4% in 2023 and is expected to be around 39% last year. This has been the reason shareholders have been demanding an increase in the shareholder return ratio.

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Samsung Fire & Marine Insurance identified K-ICS and ROE as the key indicators to lead this value-up. K-ICS is a capital soundness indicator that shows whether an insurer can pay claims to policyholders on time. Samsung Fire & Marine Insurance's estimated K-ICS at the end of last year was 265%, far exceeding the financial authorities' recommended level of 150%. The company aims to manage K-ICS at a mid-to-long-term level of around 220% while maintaining ROE at 11-13% to improve capital efficiency. This means that the company plans to actively utilize the funds it had conservatively accumulated in reserves to increase profits and distribute them to shareholders.

However, Samsung Fire & Marine Insurance's value-up plan is not expected to proceed smoothly. A prerequisite for achieving the value-up targets is stable performance, but the insurance industry environment this year is challenging. The auto insurance market, where Samsung Fire & Marine Insurance holds the largest market share, is facing worsening loss ratios due to continuous pressure from financial authorities to lower premiums and rising auto repair costs. The company's cumulative auto insurance loss ratio last year was 83.2%, up 2.8 percentage points from 80.4% the previous year. The loss ratio is the ratio of claims paid to premiums received. The industry considers a loss ratio above 82% as crossing the breakeven point. Samsung Fire & Marine Insurance also reduced auto insurance premiums by 1% this year as part of its commitment to cooperative finance. Additionally, the company must compete fiercely with life and non-life insurers in the health insurance sector.

External conditions are also unfavorable due to the trend of base interest rate cuts and the inauguration of the Trump administration's second term. When interest rates fall, the discount rate applied to insurers' liabilities decreases, causing liabilities to grow faster than assets and resulting in a decline in K-ICS. The industry estimates that a 1 percentage point drop in the base interest rate could reduce non-life insurers' K-ICS by 30 percentage points. Insurers collect premiums from customers and invest in domestic and foreign bonds to grow assets. However, since the Trump administration's inauguration, financial market uncertainty has increased, and investment performance is expected to be challenging this year. A representative from the Financial Market Analysis Office of the Korea Insurance Research Institute said, "Due to the slowdown in economic growth and falling interest rates, the insurance industry is expected to experience deterioration in growth, profitability, and soundness this year," adding, "Institutional improvements related to product structure and accounting systems, which were major tasks of the Insurance Reform Committee, will broadly affect premiums, liability valuation, and net profits."

Another hurdle Samsung Fire & Marine Insurance must pass to fully realize its value-up plan is, ironically, Samsung Life Insurance, the eldest sibling of the same Samsung Financial Group. According to Samsung Fire & Marine Insurance's value-up plan, it must dispose of at least 10% of its currently held treasury stock by 2028. The problem is that if Samsung Fire & Marine Insurance cancels treasury stock, Samsung Life's stake in Samsung Fire & Marine Insurance (14.98%) could increase.

The Insurance Business Act prohibits insurers from holding more than 15% of another company's shares. If the stake exceeds 15%, the Financial Services Commission must conduct a subsidiary inclusion review, and the company must be included as a subsidiary. The Fair Trade Commission's corporate merger review is also required. The securities industry expects that if Samsung Fire & Marine Insurance reduces its treasury stock ratio to 5%, Samsung Life's stake will rise to 16.93%.

If Samsung Life disposes of its Samsung Fire & Marine Insurance shares to keep its stake below 15% during the gradual cancellation of treasury stock, the subsidiary inclusion issue will be resolved. However, in this case, the potential for a stock price decline due to overhang (potential sell-off volume) arises, which could render Samsung Fire & Marine Insurance's treasury stock cancellation efforts futile.

It is understood that Samsung Life is currently communicating and coordinating with financial authorities regarding the subsidiary inclusion of Samsung Fire & Marine Insurance. A Samsung Life official stated, "The subsidiary inclusion of Samsung Fire & Marine Insurance is currently under review and has not been finalized," adding, "We expect more specific discussions during the earnings conference call scheduled for the 20th." Samsung Fire & Marine Insurance said in a conference call with analysts following the value-up disclosure, "Subsidiary inclusion of Samsung Life was not a consideration for us, and the report was submitted purely in response to the value-up policy," adding, "We do not know whether Samsung Life will apply for subsidiary inclusion approval."

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