value and opportunity

Mapfre SA is THE Spanish Insurance company.

The stock used to be a “star performer” in the past, but suffered from the PIIGS crisis and is now back at 2009 lows:

As many financial companies based in the PIIGS countries, the stock looks relatively cheap:

Market Cap: 4.6 bn EUR
P/E trailing 5.4
P/B 0.65 (Tangible 2x)
P/S 0.2
Dividend Yield 10.4%

Well known problems include:
– ~50% of the premium income is from Spain (market leader with 20% market share)
– of course large PIIGS exposure (~8 bn EUR in Spanish Govies alone)
– Tangible book still lower then stock price (Tangible book is the main criteria used by many insurance investors like Berkowitz)
– Spain is “toast” anyway (current genreally accepted wisdom)
– Troubled bank Bankia is 15% shareholder of Mapfre (and cooperation partner)
– Mapfre has a majority shareholder, take over is highly unlikely

However if one looks more closely at Mapfre, some very interesting points can be identified:

+ Mapfre is mostly a Property and Casualty insurer, which means that the underlying insurance business is not directly affected from the financial crisis

An interesting fact about motor insurance and crisis: When times are bad, people tend to drive less miles with their car and use public transport more often or stay at home. This means that fewer accidents happen and insurers have to pay less claims. A pretty countercyclical business.”

+ Mapfre has something, most other insures don’t: Strong growth !!! Even in the first 6 months 2012, premiums increased more than 10% yoy, despite decreases in the Spanish home market

+ this leads us to the second point: Mapfre’s Business is increasingly international. In the first 6 months in 2011, the split of Spain/Non-spain was 50/50, it is now 30% Spain and 70% international.

+ Mapfre is market leader or in the top 3 in most Latin american countries, most notable they have 20% market share in Brazil and 10% in Mexico.

+ using market multiples, the Brazilian and Mexican subsidiary could be worth more than Mapfre’s market cap

Margin of Safety ?

The big question for anyone who wants to be a “Value Investor” is the question: Is there a margin of safety, or more precise, if there is a haircut in Spain, will I lose money ?

In my opinion, the possibility to lose money PERMANENTLY is relatively small even in a haircut scenario medium and long term due to the following facts:

1. Mapfre is the Spanish market leader an Insurance regulation is complex. So if Spain would really haircut its bonds, I would assume that the regulation would be adjusted so that Mapfre will not need to use a lot of new capital. So dilution risk is relatively low comapred to banks.

2. In contrast to the banks, an insurer is normally not forced to sell “underwater” assets, as the policy holders cannot easily demand their money back.

3. Even in the case of a capital requirement, Mapfre could sell minority shares in its LatAm subsidiaries to rich locals (Carlos Slim anyone ?) and easily raise money, one needs only to look at EDP from Portugal.

4. Especially in its home market and in its major LatAm operation, Mapfre has a strong “Moat” due to established sales channels and economics of scale

So yes, this will definitely be a very volatile future for Mapfre, but I am pretty sure that they will survive even a Spanish Haircut despite the relatively high “gearing” towards Spanish Sovereign bonds.

One of the short term risks will be that they might cut their very generous dividend at some point in time like Telefonica, but as in the case of Telefonica, this might be already included in the current stock price.

Sum of part Valuation:

I will do this very “quick and dirty”, just to show the potential:

Spanish business:

There is one “pure play” Spanish competitor with a similar business mix, Grupo Catalana Occidente (ISIN ES0116920333). Their comps look as follows:

P/S 0.4
P/B 1.0
P/E trailing 6.4

If we use P/S as the simplest multiple, Mapfre’s domestic business based on 2011 premiums of 7.8 bn EUR would be worth 3.1 bn EUR
International business:

For Brazil, Mexico Chile and Colombia (the most attractive LatAm countries) , I would use a P/S multiple of 1.0, for all the other Lat Ams a multiple of 0.5 which results in 5.9 bn EUR market value of the LatAm ops.

For 2 bn “international” premiums (US, Turkey, Portugal) I would use a 0.4 premium multiple, adding a further 0.8 bn EUR

From the 4.2 bn other international businesses, I would value the attractive Assistance business with a multiple of 1, the rest with a 0.4 multiple. This adds another 2 bn .

This results in a total sum of part value (before liabilities) of 11.8 bn EUR. I have identified around 2.5 bn EUR financial liabilities at a quick glance, so this would result in a business value of 9.3 bn EUR or ~3.20 EUR per share based on current multiples for the Spanish business, without taking into account market leadership etc.

LT2 Bond

As an alternative to the stock, Mapfre has also an interesting LT2 bond outstanding (ISIN ES0224244063). The bond has a 30 NC 10 structure, which means that for the first 10 years since issuance (until 2017) it pays a fixed coupon and then changes into a floating rate.

LT2 means that coupons could be deferred but are cumulative.

The bond has a 5.921% fixed coupon and trades around 60%, which would translate into a 19% yield p.a. if Mapfre calls in 2017. YTM would be 9.4%.

Summary:

MApfre SA is an interesting way to speculate on a Spanish recovery. The long term Margin of Safety comes from the value of the LatAm business which is profitable and still growing strongly. Although it is not likely at the moment, a sale or spin off of the LatAm subsidiaries could unlock the “real” value of the stock.

As the stock will be very volatile going forward, I will “scale in” for the portfolio over the next 10 days up to an 2.5% position (0.25% per day) with a limit of 1.50 EUR per share.