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Japan-Update

SoftBank to follow Buffett playbook with insurance investment

Minority stake would provide source of capital for bolder buys

SoftBank Group Chairman Masayoshi Son.

TOKYO -- SoftBank Group's plans to invest in a Swiss reinsurer suggests that the Japanese information technology heavyweight has taken a page out of Warren Buffett's playbook in its search for reliable revenues to fund riskier acquisitions.

The Tokyo-based group centering on a mobile phone carrier is in talks to buy up to one-third of outstanding shares in Swiss Re at a price that could top $10 billion. The insurer revealed in early February that preliminary talks were underway.

Which entity in the SoftBank sphere will do the investing is still under discussion. The company has created a $100 billion investment vehicle with several partners. But this fund invests primarily in high-tech fields such as automated driving. For SoftBank to secure a stable source of cash to supplement its core mobile phone operations, the parent itself would need to put up the money for Swiss Re. 

Raking in investment capital from the insurance sector has proven a winning strategy for Berkshire Hathaway, the investment empire run by Buffett, which counts auto insurer Geico among its core assets. The fact that insurance subscribers pay premiums up front and file claims later gives insurers plenty of excess cash -- their "float" -- to invest in the meantime. Berkshire's float came to a whopping $110 billion or so in the year 2017.

SoftBank's trademark investment strategy, centered on aggressive acquisitions of companies that Chairman Masayoshi Son believes hold promise, could not be more different from Berkshire's cautious and conservative approach. Yet Swiss Re could go far in offsetting the risk and financial strain that path entails. The insurer's dividend payouts came to $1.8 billion in 2017, and its operating cash flow has averaged around $3.9 billion over the past five years.

If SoftBank were to take up to a one-third stake in Swiss Re, making the insurer an affiliate, the Japanese company could receive dividends equal to around 60 billion yen ($566 million). Were the insurer to become a consolidated subsidiary, SoftBank could count Swiss Re's substantial cash flow as its own.

At present, SoftBank's outlays on acquisitions and other investments exceed its operating cash flow, forcing the company to close the gap with loans. This is not cheap, given SoftBank's relatively low credit rating and rising interest rates around the world. Taking on more insurance assets would go far in easing that cash crunch.

Swiss Re could also yield synergies with SoftBank's holdings in the financial technology field. The Japanese company holds stakes in China's ZhongAn Online Property and Casualty Insurance, which sells policies through the internet, and American renters' and homeowners' insurance startup Lemonade. Pooling these companies' data on global risks for comprehensive analysis could give SoftBank a significant edge in efforts to apply cutting-edge technologies to the insurance sector.

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