value and opportunity

Thursday’s post about Mapfre outlined the general idea behind the investment.

With this post I want to add some more details to the case

Time horizon & type of investment

Just to make it clear: I do not expect a quick solution to the EUR problems. So the time horizon for this investment should be at least 2-3 years (or even 3-5 years). The type of investment is what I would call a “sum of part” value investment with a contrarian aspect for the Spanish business

Insurance valuation

Some investors use “tangible book” as most appropriate vluation basis, for instance Bruce Berkowitz in his AIG case.

In my opinion “tangible book value” is only a very very crude meassure. The big problem with Insurance companies is the fact that not only the value of the assets are hard to value but also liabilities, esp. insurance reserves are by no means “fixed”.

Currently, this is most obvious for life insurance contracts with guarantees, where under normal GAAP, liabilities remain “at cost” whereas assets are marked to market. This had the perverse effect that after the big decline in interest rates, life insurers showed nice profits on their bond holdings, but the liabilities are severly under water. As the “gearing” of reserves to quity in life insurance is usually around 20 times, one can easily calculate how quickly any “tangible book” disappears if reserves would be marked to market.

With insurance, it is a little bit like cable television (and my unsuccessful Kabel Deutschland short): If no one cares (and especially the regulator), you can run the business without “real capital”.

Coming back to “tangible book”: Real mtm tangible book would be a helpful measure, but even industry or company insiders are not able to calculate this. So one should better take accounting tangible book value for insurers with extreme care…..

Spain is not Greece ?

A few quick thoughts: In my opinion, Spain is not Greece because of 3 major structural issues:

A) Spain didn’t have a spending problem before the crisis hit. So their problems are clearly a result of the crisis, not a structural (and maybe cultural) deficiency like in Greece.

B) Again, I would like to link to Ibex Salad which gives a more balanced outside view on what is happening in Spain. In my opinion, especially the developments in regard to exports show that a lot of positive things are happening in SPain below the “surface”. This will take time but it is not so hopeless like in Greece.

c) And one should not forget that Spain is the country with the highest population growth rate in Western Europe (apart from Luxembourg).

Capital increase

As one commentator rightly pointed out, MAPFRE did several right issues in the last few years:

2011: 77.2 mn shares at 2.466
2010. 94.4 mn shares at 2.008
11/2009: 63.63 mn shares at 2.58
03/2009: 124.8 mn shares at 1.41
11/2008 68.6 m shares at 2.21

One could indeed ask why they pay relatively high dividends and in parallel issue new stock. This is surely one of the reasons which negatively impacted the shares in the past. The only “excuse” is that they really managed to grow in this period while many others had to increase capital just to maintain their business.

Overall investment case:

Just in order to illustrate the “drivers” of Mapfre’s valuation a little bit better, I created a quick and dirty valuation metrics to show what impacts I expect both, for the Spanish and the International business:

	Spain
LatAm/Int		bad	status quo	Good
	bad	1.56	2.08	2.59
	Status quo	2.51	3.03	3.55
	Good	3.44	3.96	4.47

What this should show is that the developement in Spain is less relevant than the international developement. If LatAm continuous to perform well, the MArgin of Safety is quite high, no matter what happens in Spain.

EDIT: For some reason, the price of Mapfre now jumped at over 1,67. So I only got 1/5 of my planned allocation so far. Based on my learning experience with April SA, i will not increase my 1.50 EUR limit.