Improved Underwriting In Iberia And LATAM Will Drive Success

Key Takeaways

• Strategic improvements in core regions and technical management enhancements could boost net margins and profitability.
  
• Growth in LATAM and RE divisions with underwriting discipline promises sustainable revenue and earnings, despite currency and claim volatility.
  
• Exchange rate volatility, economic instability, and exposure to natural disasters and geopolitical shifts threaten Mapfre's profitability and revenue growth.

Catalysts

Engages in the investment, insurance, property, financial, and services businesses in Spain.

• MAPFRE's strategic plan implementation is on track across core businesses, with ongoing improvements in technical management leading to better combined ratios in regions like Iberia, which could drive higher net margins and profitability.
  
• Solid growth and profitability in the LATAM region, supported by highly profitable Life business, improved Non-Life results, and financial income tailwinds, are expected to enhance revenue and earnings despite currency volatility.
  
• North America reported historical first-quarter profits, attributed to underwriting improvements, tariff increases, and solid Motor and Property & Casualty profitability, indicating potential earnings improvement.
  
• MAPFRE RE continues to benefit from a cautious approach to underwriting and diversification, showing resilience even amidst large claims, which suggests sustainable revenue and profit growth potential if major losses are controlled.
  
• Embedded value growth in regions like Iberia and LATAM, alongside a strong capital base and high solvency ratio, indicates the potential for future earnings growth, capital deployment, and shareholder returns through dividends or strategic investments.

Mapfre Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mapfre's revenue will grow by 1.6% annually over the next 3 years.
• Analysts are assuming Mapfre's profit margins will remain the same at 3.5% over the next 3 years.
• Analysts expect earnings to reach €1.1 billion (and earnings per share of €0.34) by about May 2028, up from €1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 9.4x today. This future PE is lower than the current PE for the GB Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Mapfre Future Earnings Per Share Growth

Risks

• Exchange rate volatility, particularly in Latin American currencies like the Brazilian real and Mexican peso, poses a risk to MAPFRE's revenue and profit conversion when translating financial results into Euros.
  
• Hyperinflationary environments in certain LATAM markets create operational challenges and can impact profitability and earnings stability.
  
• Large claims from natural catastrophes, such as the California wildfires, highlight the exposure of MAPFRE RE to unpredictable losses, which can significantly affect net margins and earnings.
  
• Currency depreciation and high-interest rates in Brazil affect premium volumes and can lead to increased combined ratios, impacting overall profitability and earnings.
  
• The evolving geopolitical landscape, including potential trade barriers and recession risks, adds uncertainty and could impact MAPFRE’s revenue growth and investment returns.

Valuation

• The analysts have a consensus price target of €2.91 for Mapfre based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €3.8, and the most bearish reporting a price target of just €2.23.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €30.9 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €3.13, the analyst price target of €2.91 is 7.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.