Opportunist or visionary?

Swiss Re Doesn't Get the Hype About SoftBank

Bridging the world of reinsurance and technology is harder than it looks.
Photographer: Kiyoshi Ota/Bloomberg
At Closing, May 18th
94.22 CHF

Who wouldn't want the attention of a billionaire like Masayoshi Son? The SoftBank founder is Japan's third-richest man, with interests from ride-hailing app Uber to shared-office firm WeWork. So when he was reported to be eyeing a 25 percent stake in Swiss Re AG, investors leapt at the idea of a tech tie-up and the possibility of fresh funds at a difficult time for the re-insurance industry.

The problem is that Swiss Re's management is finding the attention more trouble than it's worth. CEO Christian Mumenthaler, who back in February seemed to like the idea of an "anchor" shareholder, poured cold water on the SoftBank hype on Wednesday.

SoftBank, Hard Fall

Swiss Re's share price has taken a hit from conflicting signals over what exactly Son's plans might be

Source: Bloomberg

He said Son's stake would likely be much smaller, probably less than 10 percent, and that as a result the billionaire's ability to steer Swiss Re -- and profit directly from its steady cash flows -- would be next to nil.

On one level, it's worth taking these comments with a pinch of salt because they're likely part of a negotiation. Swiss Re is, understandably, trying to manage shareholder expectations. Issuing new stock to Son to give him a 25 percent stake would have diluted current shareholders, and risked fueling continued speculation of an eventual bid for the whole company. But if Son were to buy a 10 percent stake, currently valued at about $3.4 billion, from current shareholders that would defuse at least the worry about dilution.

Yet Mumenthaler's comments also offer a valuable reminder that any deal would be as much about opportunism as it would be about strategic logic or easy synergies.

Bridging the worlds of technology and insurance is harder than it looks. SoftBank may plan to invest in 1,000 companies over the next decade, but that doesn't mean all of them can be forced to work with Swiss Re, which will rightly want to avoid being seen as an exclusive supplier for Son. And even if Son's stable of firms may have all sorts of data to help Swiss Re adapt to a world where computers are in charge, it's all at too nascent a stage to claim there's a large-scale, disruptive business model on offer.

The idea that Swiss Re could become an extension of Son's investment kitty, similar to Berkshire Hathaway's importance as a cash float for Warren Buffett, looks less than convincing given he wouldn't have control of the re-insurer.

Representation on the board and a minority stake could still bring influence -- but any future investment plans would need to make sense strategically and financially for all shareholders, not just Son. Just look at how veteran deal-maker Vincent Bollore has struggled to succeed in fitting a stake in Telecom Italia SpA into his broader media empire, Vivendi SA.

An Entry Point

Swiss Re has persistently traded at a slight price-to-book discount to peers for months

Source: Bloomberg

This looks more like a case of "Masa" knowing a good trade when he sees one. Swiss Re has a tendency to attract anchor investors when it's going through a bad patch. Buffett reaped a bumper profit during the crisis when he lent Swiss Re billions at a rate of 12 percent through convertible bonds.

A Bad Year

Natural disasters ate into Swiss Re's bottom line last year, and the industry is getting more competitive

Source: Bloomberg

Those days are obviously long gone, but Swiss Re is still reeling from $4.7 billion of natural-catastrophe claims in 2017 and the industry is getting more competitive. The stock has traded below book value for months, unlike its peers. You don't have to be a wealthy tech visionary to see an entry point, with any long-term partnerships as a welcome bonus. If Son really wants to bring Swiss Re fully within the SoftBank fold, he will need to spend a lot more than $3.4 billion.

(Corrects figure for natural-catastrophe claims in final paragraph.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at llaurent2@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.