Softbank & Swiss Re – is Masa Son just losing it ?

As I have covered Softbank just recently (part 1, part 2 ) and as I consider Insurance companies to be somehow in my circle of competence, the news that Softbank wants to acquire 30% of Swiss Re for 10 bn USD of course sparked my interest.

The big question of course is: Why on earth would Masa Son do that ?

Looking at his vision statements, his vision is a connected world via the internet of things, lots of robots, smart AIs and a lot of computing power. So he is buying chip makers (ARM; Nvidia), data companies like Uber, mobile phone companies, robotic companies etc. So far so good, somehow this could fit together.

But a Reinsurance company ? WTF is that ?

There  is a lot of speculation why he does that. This is from the Bloomberg article above:

With the cost of debt rising, it makes sense to buy into steady cash-generating businesses that can finance future acquisitions. SoftBank has almost $50 billion in debt coming due over the next six months, according to data compiled by Bloomberg — in no small part due to Son’s purchase of Sprint Corp., the weakest of the giant U.S. wireless carriers.

 Swiss Re has net debt levels that even cash-rich Berkshire can only envy.
 By buying into the 155-year-old reinsurer, SoftBank would get access to the Swiss firm’s “float,” or the money held by insurers to pay claims. That can be used to buy stocks, bonds and other assets.

To put it bluntly: This is complete Bullxxxx. First of all, buying 30% of a regulated Swiss Reinsurance company doesn’t give you any access at all. But even if he would buy 100% of Swiss Re, “doing the Buffett” is not so easy. Anyone who has only a little grasp of how a Non-American insurance company works knows that doing what Buffett is doing with Berkshire is impossible to do with a European or Swiss regulated company, Regulators just wouldn’t allow it. Full stop.

Another Bloomberg article speculated about this motive:

“Reinsurance, especially through a high-class outfit like Swiss Re, is attractive for several reasons,” David Havens, an analyst at Imperial Capital, said in a note to clients. Higher interest rates could help boost earnings, the industry is generally uncorrelated to others, and “Swiss Re is a gem of a company with top-flight management, generally solid results, a strong balance sheet and global diversification.”

Again, there are easier ways to bet on rising interest rates. A life insurance company for instance would provide much better leverage to a rise in interest rate than a reinsurance company which normal has a pretty low-interest rate duration mismatch. And rising inflation is a huge issue for any Reinsurance company.

An even weirder reason is given in the next paragraph:

Son, 60, has made hundreds of investments since he founded SoftBank in 1981 and during the dot-com bubble was briefly the world’s richest man. The most successful of those transactions was an investment in Alibaba Group Holding that started with $20 million in 2000. SoftBank’s stake is now worth almost 15 trillion yen ($140 billion), one of the most lucrative venture investments of all time.

The company may try to offer Swiss Re’s insurance products directly to consumers, including to people who drive for Uber Technologies Inc. or utilize office space from WeWork Cos., two of its investments, according to the Wall Street Journal, which reported the discussions earlier.

For christ’s sake, which consumer needs a reinsurance contract ? A Reinsurance company as a B2B pure play and Swiss Re sold its primary insurance business mayn years ago. The don’t have any consumer products. Their business is to make Insurance companies look good by doing complicated stuff that looks like risk transfer but in reality isn’t.

The FT says the following about the motivation for the deal:

Some analysts said the deal could help SoftBank hedge against the risks posed by its diverse operations. That includes Mr Son’s ambitious plans for a north-east Asian energy “super grid” that will aim to connect the electricity networks of South Korea, China, Japan, Mongolia and Russia. Oliver Matthew, CLSA analyst, said the pan-Asian super grid “would certainly be a big customer for insurance and reinsurance”. CLSA estimates that if SoftBank acquired one-third of Swiss Re for $10bn, it also could reap dividends of $500m once profitability rebound

So I am not sure how a Reinsurance stock provides any kind of hedge for investing into the Uber of Dog walking. The “energy super grid” argument looks even more stupid. And buying Swiss Re for the dividend yield ? Unlikely.

A Swiss article speculates that Softbank buys Swiss Re because “they have a lot of data and could become a Reinsuretech company”. This is another bullshit argument that you can hear often theses days: Big companies that claim that because of their data, they are actually a SomethingTech company.

Knowing the reinsurance business which in its core is an archaic, paper based business founded on personal relationships and annual wine and dine meetings in Monte Carlo, the reinsurance business is as close to a tech company as my local bakery. I

n my opinion, especially the Reinsurance business has some structural issues, among others the fact that their function of risk pooling becomes less and less relevant, as the primary insurers becaome bigger and bigger and better diversified.

The truth:

The truth is: No one knows why Softbank is doing this but the newspaper have to write something. Maybe even Masa Son doesn’t know himself ? I would not be surprised.

My speculation is that is not any kind of genius move but a combination of too much money to invest and an urge to build some kind of conglomerate empire.

Or he juat lost control or became insane (or both).

What’s clear in my opinion is that Son is not an expert in insurance, despite having bought into two online plyers recently.

We will see how this ends but with this Softbank goes off my watch list and will never got on again.

 

 

 

 

 

 

 

 

 

 

 

25 comments

    • LOL
      WiWo recommends a short certificate on Softbank in their latest issue and say they need reinsurance for themselves.

    • SwissRe 2017 results: poor performance(!), they increase the dividend (!!) and announce another share buy-back plan (!!!). While it is true that SwissRe’s solvency position largely allows for that… it seems not the smart move in a bad year… My only explanation is: they want to push the share-price higher in order to maximise profit in case of any potential Softbank deal. In poker terminology that would be called “BLUFF”.

  • I love your way to take clearly decisions. It shows me how individual value investing is. Especialy
    in a world that try to make al equal.

  • Thanks for your insights.

  • Maybe on e clarifying remark: Within the Reinsurance industry, Swiss re is clearly one of the better players. But that does not make this deal better from Softbank’s perspective.

    Look for instacne at GE: A long time ago they thought that adding Insurance companies to their protfolios is a good idea. They still suffer from this decision many decades later:
    https://www.bloomberg.com/news/articles/2018-01-16/ge-to-take-6-2-billion-charge-after-insurance-portfolio-review

    • Value Investigator

      The question could also be turned around: why would Swiss Re be interested in such a deal structure. Why should Softbank not simply accumulate a 30% stake on the open market?

      „Swiss Re wird kaum einen Grossinvestor an Bord holen wollen, der lediglich finanzielle Interessen verfolgt. Man würde langjährige Grossaktionäre kopfscheu machen, wenn sich plötzlich Softbank eine derart dicke Scheibe abschneiden würde. Erst im vergangenen Jahr begrüsste Swiss Re mit der Versicherungsgruppe Mitsui, Sumitomo, Aioi, Dowa Japaner als Grossaktionäre. Da kamen aber zwei Partner zusammen, um im gemeinsamen Interesse kapitalintensive Lebensversicherungen besser zu bewirtschaften und zu wachsen. Swiss Re holte vor Jahren Buffett an Bord, weil es damals ein Kapitalproblem gab. Wenn es nun um einen allfälligen Einstieg der Softbank geht, muss etwas anderes dahinterstecken, denn Swiss Re schwimmt im Geld.“
      https://www.google.de/amp/s/www.nzz.ch/amp/meinung/swiss-re-kaum-offen-fuer-passiven-investor-ld.1355603

      I am sure we will get more than a hint directly from the companies when the deal is through.

      There is a saying that the best way to predict the future is to work on it. Without doubt, Son is a very effective dealmaker and he is pursuing his vision without taking a breath.

      I do not think that there has been anything comparable in history to the type of corporate structure that Son is building. With its 20%-30% stakes, Softbank has something to say anywhere, in many cases they will trigger cooperation.

      I am not sure if a comparison to classical industrial conglomerates is the right approach. The globalized tech world, where innovation spreads much quicker is different.

      Either Son is a genius or not. So far, he is. And the current discount to the sum of the parts is enough of a margin of safety to me.

      • Maybe just one remark here: Conglomerates that hold 20-30% stakes are not a Softbank invention. This is actually like almost every Japanese and Korean Conglomerate looks like. Nothing genius here, rather exactly the good old “Zaibatsu” or “Chaebol”. Works well in good times, less well in bad times.

        • Value Investigator

          Yes, industrial or financial conglomerates operating at a local level. But not industry leaders of the tech industry operating at global level and definitely not at Softbank`s scale. So, not really the same.

          What comes closest is probably Softbanks “Netbatsu” of the dotcom bubble area. Of this area, Alibaba and Yahoo Japan survived, so I would still call it a success. The difference this time is that Son meanwhile focuses on industry leaders at a later stage which requires more money. But the chance of success is also higher, especially if there are synergy effects between the startups that can push each other.

          Clearly, not every investment of Softbank will be a hit. However, new Googles will emerge and if Son just finds one, it will be a game changer at Softbank`s current price level. But of course this company and its investment style is not for everybody.

        • Hmm, Toyota and Samsung are not exactly operating at a local level. But i wish you good luck with Masa Son. The good thing anout stock investing is that there are many ways to succeed.

  • Hi!

    Sorry for going offtopic here. I just took a look at Admiral, and I think the current share price looks very attractive. What’s your thoughts, are you buying or is the position too large for you to increase?

    – P/E below 18 despite very strong balance sheet, >50% ROE, international businesses still largely unprofitable and an estimated 10-15% long term growth rate?
    – Moat: low cost advantage
    – Excellent culture & historical capital allocation

    You know the story. I guess the market is worried about the CEO change as well. Do you know if the new CEO (and the rest of the management team) holds substantial shares? I’ve only peeked at the company since a few years ago.

    Thanks for an excellent blog.

  • “Their business is to make Insurance companies look good by doing complicated stuff that looks like risk transfer but in reality isn’t.” If I’m ceding my premiums collected to a reinsurer and they’ll accept the liability those premiums represent, that sounds like a risk transfer…

    What is it otherwise?

    • Well, the real juicy Reinsurance deals are arbitraging different Solvency systems without transferring any risk. Have you ever wondered why the tiny Island of Bermuda has so many Reinsurance subsidiaries ?

      • Do you have any recommendations on books / articles / company reports one should read to get a deeper understanding of the reinsurance industry?

        • Start with Warren Buffetts annual reports 😉

          Other than that read the company reports of the “Big” guys. There is also some literature on the “lloyds of London scandal”.

  • Value Investigator

    “My speculation is that is not any kind of genius move but a combination of too much money to invest and an urge to build some kind of conglomerate empire.”

    Hm, just because you do not see the vision doesn`t mean there isn`t any.

    Contrary to your description of the reinsurance business as an “archaic, paper based business founded on personal relationships and annual wine and dine meetings in Monte Carlo, the reinsurance business is as close to a tech company as my local bakery”, this industry leader (not Softbank`s first one) has some 400 researchers and is building digital tools. The CEO is repositioning the company as a “knowledge company”, with the idea that you go to them because of their knowledge as much as their capital.
    https://www.ft.com/content/7ed1956c-fb3d-11e6-96f8-3700c5664d30

    Even if you do not share Masa`s vision of the information revolution, I see some potential short term synergies. From the same article above:

    “One area, however, where Swiss Re is sceptical about business opportunities is in insuring against cyber risks — where it believes the economic costs of future attacks are too uncertain. Mr Mumenthaler said he was concerned about “accumulation” risks — the danger that for example a virus attack causes catastrophic damage simultaneously across a number of countries or companies, with incalculable losses for Swiss Re.”

    It is not hard to imagine how the world`s leading reinsurer may finally also cover this area, when you combine it with the edge that Softbank is likely to have in this area because of Arm, that has focused a lot on IT-security since beeing bought by Softbank.

    Whether or not “data is the new oil”, but there is definitely some likelihood that Son is creating something special here, where the whole is more than just the some of its parts. It is striking how many founders/CEOs of Softbank`s acquisitions emphasize the advantages that Softbank brings to the table beyond cash infusion.

    Seperately from that, at a PE of 11 and a dividend yield of 5.3%, Swiss RE is definitely not expensive.

    I also disagree with your speculation that Softbank does this because it has too much money. This will not be bought from the vision fund. Instead it is pretty obvious that the proceeds from the domestic telco IPO will be used. A move that by the way will finally enable a separation of Softbank`s telco-investors from Softbank`s tech investors. So Softbank is exchanging one cash cow for another. The dividend yields of both companies are highly stable and above Softbank`s cost of debt. The added benefit is more diversification and the “knowledge” that Swiss RE brings to the table.

    • thanks for the extensive comment. Yes, Swiss Re has a lot of researchers. Last time they made such an effort was in 2006/2007 where they wanted to become an investment bank. I actually visited them at that time in London (“Swiss Re New Markets”) and the story was exactly the same as now, just with “Tech” replaced by “financial markets” when financial markets were still cool. We all know how that episode ended. They only survived because of Uncle Warren.

      I cannot forecast the future but the current effort to look like a tech company” looks very similar to that effort 10-12 years ago. Mayb they are successful this time ? And from my own experience I remain of the opinion that Reinsurance is “archaic” and most of the money is made by doing regulatory arbitrage, especially in the case of Swiss Re after having long dinners and drinking lots of wine.

      • so it may be true the rumour that Swiss Re has one of the best cellars in Zurich ! 😉

        • The Restaurant in their “Client & Visitor Conference Center” is excellent. As well as the lake view from the guest rooms. Best of all, everything is for free for “important” visitors 😉

        • Indeed. Luxury for free… and in one of the most expensive cities in the planet (!!). No surprise then that clients ‘feel special’ and become prone to do business with the good old SR ! x-)

    • SwissRe is trying to develop brandless (direct) insurance offering through digital channels (codename iptiQ), however it is uncertain whether they will actually succeed… time will tell. SwissRe reinsurance products are not spoken in the Bloomberg article, but they clearly mention “insurance products”

      With some insider knowledge (and I guess V&O has it as well) I can confirm that the company has 400 researchers some of them brilliant. However it has 20x as much other people operating very much old-style, as V&O very well described… If you believe this 5% can change the behaviour of the remaining 95%, then good luck! Reality has tought me otherwise…

      V&O rightly spots the issue of increasing diversification of growing insurers, which jeopardizes the business model of reinsurers…. It is then pretty obvious that reinsurers have to change their USP (else it would be a SP alone)… If Swiss Re tries to refocus on a knowledge&capital company, that’s ok, maybe they succeed it, but maybe they do this because they have nothing better to offer. Swiss Re’s mantra about the “Zillion Protection Gap” is repetitive propaganda… How much of that have they bridged in the past? and how much of that can they convert in value in the future? Reminds me of “Qu’ils mangent de la brioche” by Marie Antoniette… (the wise readers will understand what I mean).

      My view is that SoftBank bet on SwissRe is to profit from its reputation and a swiss stamp, buffetology delirium by Masa SON, the fact that SwissRe is not expensive (however it is neither cheap!!),… and maybe Masa SON likes to enjoy regular holidays at SwissRe CGD’s luxury resort. Note as well the failed adventures on European Reinsurers by other nippon conglomerates (latest casualty was SOMPO Canopius, and MS Amlin did not fare much better).

      Maybe the explanation is rather simple: Masa SON is the japanese version of Trump…

    • “Hm, just because you do not see the vision doesn`t mean there isn`t any.”
      But it is a perfectl legit reason stop watching them.
      If you dont understand a company, you better should not buy it, as otherwise you would be gambling instead of intelligent investing.

      “I also disagree with your speculation that Softbank does this because it has too much money. This will not be bought from the vision fund.”
      Oh, some of the economically most stupid decisions derived of having more money than really good ideas.
      “Stupid german money” got its fame for a reason.
      I still long for a proof that investors of the vision fund are especially smart and not “only” very rich.

  • “No one knows why Softbank is doing this but the newspaper have to write something.”

    Very well said. Also, it seems that as long as the hero is riding high, the ink is spelled on worshipping and justifying the hero’s actions regardless how silly. Once they have fallen, the critical articles will come out

  • Congrats to your decision!
    It is probably not now, but there will be a time to press a short on Softbank.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s