From his vast oval office atop a modern, brown-granite tower, Bae Jung Choong can look out through French windows at Seoul's best-known landmark, the Namdaemun Gate. Built in 1398, the huge portal was originally part of a wall that surrounded the Korean capital and kept out invading armies. Bae, the 57-year-old president and CEO of South Korea's biggest life insurer, Samsung Life Insurance Co., knows something about fending off attacks. Fifteen years ago, as part of a widespread reform effort aimed at modernizing its financial markets, the South Korean government began permitting foreign companies to sell insurance locally. But Bae has successfully fought off intruders.
"We have grown our market share since deregulation began and giant foreign players like AIG, Allianz and Cigna arrived" more than a decade ago, he proudly tells Institutional Investor in a rare interview.
How has the company done it? Simple: By adopting some of its foreign rivals' sales and funding tactics while leveraging the powerful brand name and deep pockets of its giant parent, Samsung Group, the resilient insurer today has 10 million active insurance clients and maintains a roughly 38 percent market share. That's slightly more than it had when the government first allowed foreign insurers to open offices in the Hermit Kingdom and nearly twice the market share of its closest local rival, Kyobo Life Insurance Co. Five foreign firms have thrown in the towel in South Korea's hypercompetitive market, and the remaining ten, despite making some progress, hold a combined market share of just 14 percent. Samsung Life, today the world's 15th-biggest life insurer, with $62 billion in assets, last year generated a record $20.3 billion in revenue and set another corporate best with net income of $826 million.
Samsung has succeeded in part by gradually jettisoning traditional South Korean insurance practices. Cutting its reliance on the time-honored system of peddling insurance through armies of commissioned saleswomen, it has shifted to new distribution outlets like the Internet, direct mail and, more recently, banks. It has diversified its investment portfolio beyond volatile local assets to include $8.5 billion in high-quality U.S. and European bonds, and it has begun to fill out its product line with term and whole life insurance products. "Samsung was willing to spend money on marketing, training, rolling out new products and improving the quality of service," explains Young Choi, an insurance analyst at Standard & Poor's in Tokyo. Until recently, most of Samsung's local rivals didn't have the resources to keep pace.
Says Stuart Solomon, who runs the South Korean unit of U.S.-based MetLife, "In many respects their business models are not very dissimilar from that of the foreign insurers here."
There's one important exception: None of the foreign firms can utilize Samsung's intimidating name. "Brand name and recognition are extremely powerful marketing tools in Korea," notes Solomon. The reputation of the insurer's parent, the massive chaebol Samsung, ranks almost on "a par with Sony and Toyota in the region," says Shauna Li Roolvink, who heads BrandHub, a Singapore-based consulting firm that focuses on Asian companies. In South Korea "no brand comes anywhere near it," she adds, in attracting relatively well heeled customers willing to pay a bit more -- whether it's for stereo equipment or a life insurance policy -- to get what they perceive as added quality, reliability and service.
Now Bae, a low-key 34-year Samsung Life veteran, is eager to move beyond South Korea's borders -- particularly as giant Japanese insurers like Nippon Life Insurance Co. find themselves hamstrung by local economic troubles. "We want to be a regional financial player," says Bae.
Already Asia's fourth-biggest life insurer (the three largest are all based in Japan), Samsung has a small, five-year-old subsidiary in Thailand; later this year it will launch a Chinese life insurance venture. Samsung executives also have their eyes on Southeast Asian markets. They'd like to expand their U.S. investment role, too, with Samsung possibly becoming, like some of its foreign rivals, a source of U.S. project financing and venture capital. Bae wants Samsung's currently negligible foreign business to generate about 10 percent of its total revenue by 2010; he has a longer-term goal of 20 percent. He expects to nearly triple Samsung's overall asset base, to $170 billion, within six years.
To help fund its expansion and burnish its global credentials, Samsung would like to jump-start a long-stalled IPO on the Korea Stock Exchange and raise an estimated $2.5 billion to $3 billion, then offer American depositary receipts in New York. "An IPO is important not only to tap the domestic and overseas capital markets but also to position ourselves in the global marketplace as an expanding life insurance and financial services group," explains Bae, who recently hired Goldman Sachs (Asia) to advise Samsung on the overseas portion of the proposed equity sale.
But Bae and his colleagues are currently stuck in a tense standoff with the government over their IPO plan, filed ten months ago. Political activists and economic reformers insist that Samsung Life and several other local insurers planning IPOs give their policyholders a special dividend or some other payout before any offering. They have been lobbying hard to win the support of the beleaguered administration of President Roh Moo Hyun. "Over the past 40 years, policyholders and the government have shared some of the risks of Korean life insurance firms and therefore have the right to demand some of the rewards," says Kim Hun Soo, a finance professor at Soon Chun Hyang University's business school who is helping to lead the fight.
Samsung and its local rivals argue privately that as joint stock companies -- not mutual insurers -- they can't give policyholders a big payout without digging into their reserves or diluting the interests of shareholders. "Korean life insurers will not be able to list or raise fresh capital if they are forced to distribute shares or cash to their participatory policyholders, because it will destroy the business logic for an IPO," says David Parry, a consultant at London-based market research firm Datamonitor who recently published a study of the South Korean life insurance industry.
The Roh government was elected on a populist platform that included chaebol reform, but it has been beset by political woes ranging from corruption charges to a weak economy to North Korea's persistent nuclear threats. It has yet to act on any of the life insurers' IPO applications. The country's main financial regulator, the Financial Supervisory Service, has missed three self-imposed deadlines for issuing a ruling and now says, vaguely, that it will announce its decision this year.
With its deep pockets, Samsung Life could fund a modest overseas expansion indefinitely without the IPO, but it dearly wants access to global capital markets to fund its longer-term Asian offensive against the likes of American International Group. Caving in to the political activists, however, is considered an unlikely alternative for Bae or most of his major shareholders, which include Samsung Group's chaebol affiliates and other companies controlled by the family of group chairman Lee Kun Hee, the richest man in the country.
Samsung executives won't discuss their plans, but they are expected to take legal action if the government tries to force them to make a big payout to policyholders in return for the right to issue an IPO. Their opponents, meanwhile, say they won't back down.
"This isn't about money," says Kim. "It's about the message we send as a society that it is all right for some shareholders who did not share all the risks to walk away with all the profits of the IPO, depriving policyholders who at one point did share some of the risks."
SAMSUNG LIFE'S ROUTE TO LOCAL DOMINANCE began in harder, simpler times. Its predecessor, family-owned Dongbang Life Insurance Co., was founded in 1957 as the country, then among the poorest in Asia, struggled to rebound from the Korean War. Dongbang was one of a half dozen insurers that started by selling savings-related policies in South Korea's tightly controlled economy. Its small sales force -- Korean war widows who went door-to-door convincing friends, neighbors and relatives to buy policies -- offered insurance and paid a slight rate premium to bank deposits. The appeal was straightforward: "Customers not only got a life policy, they also earned financial security," says Bae. The insurers then lent the money, mostly to government-directed projects or to other chaebol.
In 1963, when Dongbang's founding family got into financial straits, the government arranged the sale of what was then South Korea's second-biggest insurer to the rapidly growing Samsung Group. As South Koreans' prosperity grew steadily through the '60s, '70s and '80s, so did Dongbang's, aided by a steady flow of Samsung investment money. Relatively high long-term interest rates allowed Dongbang and its rivals to invest profitably, and the rapidly growing economy kept churning out new clients. By 1989 Dongbang was the country's biggest insurer, with roughly $17 billion in assets.
That year Samsung decided to put its own name on the firm, a rebranding meant to solidify Samsung Life's market position before South Korea's deregulation of life insurance in 1989. Almost immediately upon deregulation, 30 new insurers, about a dozen of them foreign, began competing with the six incumbents. The locals, including Samsung, were given substantial tax and other advantages over their foreign rivals.
The 1997 Asian financial crisis threw the local market into chaos. Tens of thousands of policyholders were forced to cash in their savings- and investment-based insurance policies, setting off a huge liquidity crunch for poorly capitalized firms. Major chaebol like Daewoo -- which owned just under 30 percent of South Korea's second-largest life insurer, Kyobo -- defaulted on loans, as did many individual borrowers. The decimated local equity and real estate markets further battered insurers' portfolios. The subsequent drop in interest rates hammered the most-leveraged firms.
"When interest rates began to fall in the late 1990s, many companies suffered from negative spread," says Bae. "The mismatch had to be covered by the risk capital, but very few of the life insurers had enough risk capital or internal reserve to survive. Most had no choice: Either fold or be taken over."
Between 1997 and 1999 four life insurers -- BYC Life Insurance Co., Coryo Life Insurance Co., Kukje Life Insurance Co. and Taeyang Life Insurance Co. -- were merged into or sold to other insurers. The government took over Korea Life Insurance and recapitalized it with $1.2 billion. Chosun Life Insurance Co., Dongah Life Insurance Co., Handuk Life Insurance Co., Hankuk Life Insurance Co. and Hansung Life Insurance Co. ended up in the hands of chaebol or banks.
Because of its size and relatively conservative investment portfolio, Samsung was the only big local insurer to survive intact. The company had avoided the worst excesses of its rivals; its portfolio wasn't overly concentrated in high-yield corporate bonds and loans to uncreditworthy individuals. At the time, Samsung maintained about 60 percent of its assets in loans to companies and individuals and 20 percent in local stocks, with the remainder split between real estate and fixed income. By local standards, it was a risk-averse portfolio, and Samsung's client base, attracted in part by the chaebol's financial strength, tended to be wealthier than other firms'. It didn't hurt that parent Samsung, with more than $80 billion in annual revenue at the time, stood ready to help.
The crisis helped Samsung and its local rivals overcome any misgivings they might have had about adopting new practices. Samsung still has 30,000 salespeople (most of them women), but that's considerably fewer than the 50,000 of several years ago. "Now we emphasize other channels, like agencies, bancassurance, Internet and direct marketing as well as professional financial planners who target high-net-worth customers," says Cho Jae Hong, who heads the Samsung Life department that focuses on new distribution channels. About 20 percent of the life insurance policies Samsung writes come in through these new routes, and Cho expects that portion to double in five years. He bases his expectations on such successes as Samsung Life's recent marketing joint venture with Woori Bank, which had sold a stunning 40,000 policies just two months after its launch last August. The results, says Yoon Byung Chul, who heads Woori Financial Group, the holding company for Woori Bank, went "beyond our wildest dreams."
Samsung is also slowly shifting its product mix from its traditional short-term, savings-oriented policies to a Westernized approach that emphasizes longer-term whole life and term policies offering more substantial death benefits. By extending the maturity on its policies, Samsung will have more funds to deploy for longer-term projects. The transition is still in its infancy, however: nearly 70 percent of Samsung's premium income comes from savings policies; in contrast, Western firms reap about 90 percent of their income from term or whole life policies.
"The Asian crisis in a way pushed us faster toward restructuring," says chief investment officer Park Chun Hyeon, who has worked hard to raise the quality of Samsung's portfolio. Since 1998 the portion of bond investments has increased nearly sixfold, to 60 percent of total assets, while the loan portfolio has dropped roughly by half, to a little more than 30 percent. A mere 6 percent of the firm's holdings are in real estate and 4 percent in equities, well below the Financial Supervisory Service's ceiling of 10 percent in real estate and 40 percent in equities. "We'll never go anywhere near that," says Park, who adds that quality is now paramount. "Our policy is not to go below single-A-rated bonds. If a bond in our portfolio is downgraded to below that level, we might be a seller," he says.
THE 1997 CRISIS PROMPTED SAMSUNG TO LOOK beyond the Namdaemun Gate to international capital markets where it could diversify its holdings and more effectively match assets and liabilities. The duration of Samsung Life's policies, most of which have a fixed life, is on average seven to eight years -- difficult to fund in the region's less-liquid, shorter-term fixed-income markets. (The average maturity of the Korean bond market is three years.) As a result, says Park, "We have enlarged our fixed-income portfolio, and because there are bonds in the U.S. and Europe which match our liabilities far better, we have substantially increased our international assets."
Foreign assets have grown steadily, from less than 1 percent of roughly $45 billion in total assets in 1998 to nearly 16 percent, or $9.7 billion, of $62 billion in total assets in 2003. By the end of next year, they could increase to about 18 percent of a still-larger asset base. And if regulators lift the current 20 percent ceiling for foreign assets, Samsung will expand its overseas exposure. "We feel that 25 to 30 percent is the optimum level for a Korean life insurance company," says Park.
Samsung Life maintains a small New York operation whose main objective is to advise Park and his colleagues on new investment opportunities. This group is in a "looking and learning" mode to assess further expansion of its investment activities and has created a roughly $300 million passive U.S. equity portfolio. It is considering project finance and private equity as possible new investment fields. "We will continue to increase the proportion of long-term fixed assets based on a philosophy of asset and liability management and actively explore investment markets and opportunities such as project financing to enhance the investment return," says Park.
AS IT LOOKS TO SELL MORE OF ITS PRODUCTS abroad, Samsung, mindful of Japanese insurers' disastrous experience in the late 1980s and early 1990s, isn't about to splurge on pricey acquisitions, says corporate planning chief Suh Eon Dong. Instead, the insurer will expand carefully, avoiding highly competitive markets like Hong Kong, Malaysia and Singapore, where AIG, Axa Group and other foreign firms are entrenched, and developed markets like Japan and Taiwan, where local incumbents dominate. "In some of the developed markets in Asia, we might have strategic alliances," Suh says.
Mostly, Samsung has targeted less-developed countries. Its five-year-old venture in Thailand, Siam Samsung Life Insurance Co., now has a 1 percent share of the local market and is growing rapidly. In China, where Samsung expects to start operating in the third quarter of this year, the firm has formed a joint venture with Air China Holdings, which owns an airline and is building an investment portfolio that will include financial services such as insurance. China is "huge and untapped," says Bae, who believes that his firm can carve out a niche among the millions of increasingly prosperous Chinese who until recently spent virtually nothing on life insurance.
Further down the road, Samsung is looking at India, Indonesia and Vietnam -- countries with growing savings pools and rising middle classes. Consultant Parry believes that China, India and Indonesia will become prime markets as wealthier citizens begin to put more money aside for insurance and retirement.
Samsung's leaders think the company is in a better position than many of its biggest competitors to seize these opportunities. A robust local market should help propel its overseas efforts: South Korea's insurance business, already the seventh biggest in the world, is growing at an 11 percent annual clip, the fastest rate of any of the world's major economies, according to the Korea Insurance Development Institute. In contrast, Japan's insurance market is growing at a rate of barely 1 percent.
"With most Japanese life insurers still in severe difficulty, large Korean life insurers have the field to themselves as they try to expand and become dominant players in Asia," says Parry.
Although it has twice as much in assets as Samsung, Nippon Life, Asia's biggest life insurer, is growing at just about 1 percent annually, compared with the South Korean company's 11 to 12 percent. Dai-ichi Mutual Life Insurance Co., the region's second-largest insurer, made a small investment in Chinese insurer Ping An Insurance in mid-November but isn't expected to spend lavishly elsewhere. The third member of Japan's big three, Sumitomo Life Insurance Co., has shown little appetite for foreign investment.
Other regional rivals, like Taiwan's Fubon Group (in which Citigroup owns a stake) and Cathay Life Insurance Co., are much smaller than Samsung and operate in slower-growing home markets. Another competitor with regional ambitions, Singapore's Great Eastern Assurance Co., has a respectable foreign business, but it's mostly limited to Malaysia. China Life Insurance Co., the huge mainland insurer whose $3.47 billion global public offering in December was an enormous success, will compete vigorously in its home market but has no plans to expand beyond that.
By focusing on smaller markets outside South Korea, Samsung can also avoid going head-to-head with big international players AIG, Allianz and Axa, which are well entrenched in developed countries, or with Japanese firms on their home turf. "They can make their overseas strategy work" as long as they stick to their plan of building gradually in markets like India and Indonesia, says Lee Moung Mo, a senior analyst at New Jerseybased global insurance research firm A.M. Best Co. Any attempt to compete with a big, established company in a mature market "will probably fail," says Lee.
An IPO, of course, would give Samsung greater name recognition as well as the access to the world's capital markets that most of the Western firms have. It would also give the insurer the currency to make acquisitions. But as a result of a strange turn of history, the odds of an equity offering any time soon remain less than even money.
As deregulation was getting under way in 1990, the Ministry of Finance exempted all South Korean insurers from corporate taxes but said that it expected many of them to go public within a few years. The tax exemption would expire once they were able to tap the public markets. But the deals have repeatedly been delayed, by volatile local markets, performance uncertainties following deregulation, the 1997 financial crisis and, most recently, the dispute over policyholder payments.
The IPO offerings, however, took on new urgency following the 1998 failure of Samsung Group affiliate Samsung Motors (now part of Renault Samsung Motors). Major creditors Korea Development Bank, Seoul Guarantee Insurance Corp. (a government-controlled reinsurance group) and Woori Bank, which were owed more than $2 billion, were given a total of 3.5 million shares of Samsung Life in lieu of repayment. Samsung Group chief Lee, the lenders say, assured creditors that they would be able to sell their shares by the end of 2000, when he expected the company to list. They also say they were told that they would receive a 19 percent annual interest rate on the unpaid balance after 2000. At the end of October, the cumulative interest bill came to about $1.1 billion.
Fed up with the delays, the creditors announced last fall that they planned to sue Samsung Life to recoup their interest unless a firm IPO date was announced. As of early December no suit had been filed.
The lenders are most interested in a quick recovery of their money. "Samsung Life is not a core asset for us," says Woori chief Yoon, whose company could use the money to cope with the country's rising tide of credit card delinquencies. "We lent money to Samsung Motors, and those loans were converted into Samsung Life shares. We'd like to cash out as soon as we can."
At the same time, political activists, many of whom support the Roh government's reform agenda, continue to demand that Samsung Life policyholders get a special payout before any stock sale. Professor Kim, a member of the People's Solidarity for Participatory Democracy, a well-known South Korean democratic rights group, disputes Samsung Life's argument that a joint stock company can't reward policyholders in an IPO. In 1989, notes Kim, the insurer paid out $100 million to policyholders over and above its dividends. This, he says, shows that Samsung does "have some characteristics of mutual companies."
Now Samsung Life, the activists and the banks must wait until the Roh government decides what to do. A spokesman for the regulator that must rule on the application, the Financial Supervisory Service, declined to comment to Institutional Investor about the IPO except to say that the agency is looking "very carefully" at all of the materials submitted by the interested parties. An added complication: Because National Assembly elections take place in April, the government may choose to postpone a decision, avoiding a potentially divisive campaign issue.
Whether it allows Samsung to issue an unrestricted IPO or mandates that payments to policyholders be made, the government faces likely legal challenges.
For its part, deep-pocketed Samsung can afford to wait a while longer, funding its expansion through internal sources. However, says A.M. Best's Lee, "If they want to grow overseas and be a big regional player, they need to do an IPO."
Although he notes that four different South Korean administrations over 13 years have failed to resolve the insurers' IPO issues, Kim hasn't given up hope that a compromise can be reached in the next few months. "All sides want it resolved," he says. But, he adds, it will require "some give-and-take" by all parties to reach an agreement. Samsung officials declined to discuss any specific bargaining points.
Some analysts see the impasse as part of a broader transition in South Korea as the old economy, dominated by the government and chaebol like Samsung Group, gradually modernizes. "Chaebol clout is receding just as the government itself becomes less interventionist," says Dominique Dwor-Frecaut, a regional economist at Barclays Capital Asia in Singapore. Other factions, including professor Kim's activist group, are stepping into the vacuum, creating confusion. "What's needed now are clearly defined rules of the game," she says.
WHILE WAITING FOR THOSE RULES TO BE CLARIFIED, Samsung Life will pursue its international ventures even as it tries to protect its flanks at home. Surging credit card debt and a faltering economy have hit all of South Korea's financial services companies, including life insurers. And foreign rivals continue to challenge Samsung Life.
"Though our business models may be similar, I believe that product, the quality of the sales force and efficiencies in customer service will be key differentiators going forward," says MetLife's Solomon. As his firm and others gain experience in South Korea, they "will be able to introduce a greater number of advanced products that [the foreign firms] are already familiar with" and make additional headway, he says.
Samsung, vows Bae, will fight back, because the "stronger Samsung is in Korea, the better able it will be to eventually expand outside Korea."
Bae envisions a day when the government allows all of Samsung Group's financial services businesses -- including credit cards, general insurance, securities brokerage and installment loans -- to be joined under the Samsung Life banner and offered throughout Asia. That, no doubt, would help Bae far exceed his target of $170 billion in assets by 2010.
"In the future we expect that there will certainly be synergies and that regulators will allow groups like Samsung to realize those synergies in order for us to effectively compete as global financial players," says Bae. An agreement on an IPO would be a good start.