Sony Financial: free of activists, void of strategy

Sony Financial, now a fully consolidated subsidiary of Sony Group, participated in the Investor Day last week, and revealed….not much. After Sony showed Third Point’s Dan Loeb the proverbial middle finger last year, as it proceeded to acquire outstanding shares and delist Sony Financial, instead of spinning it off as the activist investor demanded (also see our: The Battle for Sony Financial Holdings), one would be forgiven for expecting a thorough medium-term plan to be revealed. Alas, to save you much head-scratching, here is the punch line from the presentation:

How these targets are going to be achieved remains a mystery (cost of capital across Sony Group was quoted at 6%, so an ROE of 8% would be acceptable). Unless you count “We are going to raise the top line and keep costs under control by increasing productivity through digitalization and providing more value to customers. We are also going to change our product mix, hire more life planners (client service representatives), and close a number of our branches.” as a sufficient explanation. Hold on — you caught me there , I made that up— Sony Financial is already a digital business, they cannot close branches to reduce costs.

Past performance provides a pretty clear picture as to why Sony Financial drew interest from activist investors. While the top line has grown over 50% since FY15, expenses have grown likewise, leaving the operating income unchanged. To re-emphasize this point: historically, Sony Financial does not have any operating leverage. Its business is largely life insurance, distributed by so-called “life planners”, of which the company intends to hire more over the next few years to increase the top line. A business that only scales by adding client service representatives is, well, not scalable.

So while the top line might well continue to grow, the additional expense for personnel, and the cost of digitalization will eat into the margins. That leaves the adjustment in the product mix as a lever, which several analysts sought clarification on during the Q&A session, to no avail.

Now that Sony Financial is a fully owned subsidiary, one would expect certain synergies with the other business lines, e.g. leveraging the advanced technology available in Sony Group. That indeed appears to be the single bet in driving productivity. Conversely, how Sony Financial will add value to the group remained unanswered. Selling life insurance to PlayStation gamers is unlikely to be the answer. We will remain curious.

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