2023-04-23 11:40:00 ET
Summary
- Mapfre is a Spanish insurance company focusing on the non-life segment and increasing exposure to the reinsurance market.
- The company offers excellent exposure to Mexico and South American markets.
- The dividend is pretty attractive, despite the 70% payout ratio. 30% of the earnings are retained to strengthen the balance sheet.
Introduction
Mapfre ( OTCPK:MPFRF ) ( OTCPK:MPFRY ) is a Spanish insurance company with a focus on non-life insurance which accounted for approximately 80% of the total amount of premiums in 2022.
As a Spanish company with a strong focus on Spain accounting for just over 30% of the premiums and Brazil (roughly 20%), the investment portfolio mainly consists of debt securities exposed to those two jurisdictions and unfortunately the increasing interest rates have had a negative impact on the market value of the bonds in the investment portfolio.
Despite this, Mapfre remains an interesting vehicle to gain exposure to the South American non-life insurance market as the company generated in excess of 9B EUR in insurance revenue from the LATAM, Mexico and the Middle-American states.
Mapfre’s primary listing is in Madrid where the stock is trading with MAP as its ticker symbol . The average daily volume in Spain is 3.7M shares for a monetary value of approximately 7M EUR. As Mapfre trades in Euro and reports its financial results in Euro, I will use the EUR as base currency throughout this article. The company has 3.08B shares outstanding, resulting in a market capitalization of roughly 5.8B EUR based on the current share price of 1.88 EUR.
The company was profitable in 2022 but the equity value on the balance sheet decreased
Before digging a bit deeper into Mapfre’s investment portfolio, I wanted to have a closer look at its actual financial performance as the company’s earnings obviously act as a first buffer to mitigate the impact from the mark-to-market losses in the bond portfolio.
As you can see below, Mapfre generated just over 23.5B EUR in revenue from the insurance business , which included a 1.74B EUR in positive FX changes which appears to have been added to the revenue rather than calculating the net impact of FX changes and deduct it as a finance expense.
The net insurance result was 1.54B EUR (see below). And as mentioned, the insurance expenses include 1.68B EUR in negative FX changes so the net FX income was less than 60M EUR (compared to 54M EUR in 2021) which means this represented less than 5% of the net insurance result.
And after deducting the other operating expenses and taxes (see below), the net income in 2022 came in at 1.084B EUR.
Of that result, about 442M EUR was attributable to non-controlling interests while the 642M EUR in net income attributable to the shareholders of Mapfre represented an EPS of 0.21 EUR per share. That’s lower than the 2021 EPS of 0.25 EUR per share, but on an adjusted basis, the attributable result was approximately 723M EUR excluding the impact of extraordinary events.
As of the end of 2022, Mapfre’s balance sheet contained almost 60B EUR in assets, down from almost 64B EUR as of the end of 2021. The investment portfolio saw its value decrease from in excess of 39.2B EUR to less than 35B EUR as the insurance company saw the value of its portfolio of securities available for sale decrease by almost 4B EUR. The impact of higher interest rate on the portfolio of securities held to maturity and the trading portfolio remained relatively limited but the value of these positions was down by more than 10% anyway. These paper losses are not included in the income statement but are part of the comprehensive income statement.
The vast majority of the income portfolio obviously consists of fixed income assets.
The vast majority of the securities have a credit rating of A and above: This represents in excess of 60% of the portfolio. And as Spain is a core market for Mapfre, it doesn’t come as a surprise to see the exposure to Spain in its fixed income portfolio is relatively high as almost 10.5B EUR of the 27.2B EUR portfolio is invested in Spanish government and corporate debt.
It will be pretty interesting to see how the fair value of the fixed income portfolio evolves in the first quarter of this year, but considering the yield on Spanish government bonds on a five-year and 10-year basis slightly decreased in the first quarter of the year, I’m relatively confident to see the total value of the investment portfolio remaining flat (of course this doesn’t take any unexpected sales or monetization decisions into account).
This indicates Mapfre remains well on track to successfully complete its 2022-2024 strategic plan . Interestingly, the company is guiding for a Return on Equity of 9%-10% throughout these three years (excluding non-recurring items and catastrophic events) while maintaining a healthy solvency ratio of 175-225%.
Considering the current equity value attributable to the shareholders of Mapfre stood at 7.3B EUR at the end of 2022 (and assuming this will increase to 7.5B EUR by 2024 as the company retains a healthy portion of its earnings), applying a 9M ROE would indicate the net attributable income should come in at around 675M EUR or 22 cents per share. At 10%, the EPS would exceed 24 cents. Those results are pretty much in line with the 2022 results so we shouldn’t expect any huge swings (other than of course the potential impact of non-recurring items on the reported EPS). The payout ratio based on the 2022 results was approximately 70% as the company settled on a dividend of 14.5 cents per share (paid in two tranches). This represents a dividend yield of almost 8% based on the current share price. The standard dividend tax rate in Spain is 19%.
It also means approximately 30% of the earnings (roughly 200M EUR) is retained on the balance sheet. This will help absorb the impact of some of the unrealized losses on the investment portfolio and smoothen out the impact on the book value which stood at 2.37 EUR per share at the end of last year.
Investment thesis
While additional changes and fluctuations in the fair value of the investment portfolio may for sure occur (depending on additional rent hikes having an impact on the secondary bond markets), the current discount to the book value of in excess of 20% makes Mapfre pretty attractive. Let’s also not forget the company will likely retain an additional 500M EUR in earnings in the 2023-2024 period and that will act as a buffer.
That being said, the balance sheet also contains some goodwill and other intangible assets, and the tangible book value per share is just around 1.50 EUR per share. Based on the TBV, the stock is not exceptionally cheap but given the strong market position of Mapfre in Spain and Brazil and the exposure to several emerging markets, the premium to the TBV is not unreasonable as the intangible assets for sure have value.
I currently have no position in Mapfre but I like the exposure to the South American growth markets, the current earnings and book value multiple and the generous dividend of almost 8%.
For further details see:
Mapfre: A Spanish Insurance Company With A 7.8% Yield