Samsung Electronics' announcement that it will retire treasury shares after next year... why Samsung Life breathed a sigh of relief

Samsung Life Insurance is considering a sigh of relief following Samsung Electronics' recent decision to postpone shareholder return decisions until after next year. It appears the life insurer found itself in a situation akin to a fisherman's net. According to Samsung Life's second-quarter report and company explanation, if Samsung Electronics sold a portion of its shares, a significant portion - around 30% - of the profits would amount to the dividend payout to policyholders of Samsung Life Insurance's deposit insurance scheme.

Despite Samsung Electronics' efforts to secure shares through this sale, the company has not previously paid out profits to deposit insurance policyholders. Samsung Electronics' planned share sale in March to meet the 10% cap under the Financial Services and Market Act (the so-called '금산법') resulted in the company estimating a cash inflow of 1.176 trillion won, but only around 4 trillion won is expected to come from dividends to policyholders.

This lack of dividends stems from Samsung Life's history of offering deposit insurance at a 7% annual return. While the asset management portion of this product promises a return, any surplus goes to Samsung Life, while any shortfall is covered by the insurer's own capital. The product's performance has been declining since the external currency crisis, with lower interest rates making it difficult for the insurer to meet its promised 7% return.

In recent years, Samsung Life has needed to make up for the promised 7% return through what's known as 'reverse gearing,' resulting in an estimated 1.2 trillion won in earnings. To pay dividends to policyholders, Samsung Life would need to generate profits large enough to offset these reverse gearing earnings, which has not been the case.

It is highly likely that Samsung Life will not distribute any substantial dividends this year. The profits from Samsung Electronics' share sale, estimated at around 4 trillion won, plus any cash dividends planned for the end of the year, would amount to approximately 1.2 trillion won. If the reverse gearing size this year is similar to last year's (1.2 trillion won), then there's a high likelihood that Samsung Life will either not distribute dividends or distribute them in small amounts.

One interpretation of Samsung Life's decision to postpone shareholder returns until next year is that the company is benefiting from the move. If Samsung Electronics were to conduct more extensive shareholder return measures this year, it would have had to pay out even more to Samsung Life. With the financial services cap in place, Samsung Electronics would need to sell more shares, and the resulting profits would have been sufficient to cover the reverse gearing earnings.

Samsung Life officials stated, "For now, we cannot definitively say whether dividends will be paid this year."