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 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.