Strong Capital Base And Diversification Will Support Future Success In Insurance Sector

Key Takeaways

• Strategic focus on profitable growth and diversification could positively influence future earnings and earnings stability.
  
• Enhancements in profitability, especially in Motor business and strong capital structure, support potential revenue and margin growth.
  
• Currency depreciation and challenging economic conditions in key markets threaten Mapfre's profitability, with potential impacts on net margins, revenues, and client retention.

Catalysts

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

• The strategic plan for 2024 to 2026 focuses on profitable growth, technical excellence, and diversification, which is likely to impact future earnings positively.
  
• Measures implemented to enhance profitability in the Motor business, especially in North America and Lat Am, and ongoing improvements in Iberia are expected to boost net margins in the coming quarters.
  
• The absence of significant catastrophic events, combined with ongoing improvements in non-life technical profitability and a solid reinsurance result, suggests enhanced future earnings stability.
  
• A strong capital base with a solvency ratio of 202% and robust cash flow generation underpin the company's ability to invest in growth opportunities, potentially increasing future revenues.
  
• Sustained dividend payouts and growing asset management business could improve shareholder returns and EPS, assuming continued financial performance improvement.

Mapfre Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mapfre's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 3.4% in 3 years time.
• Analysts expect earnings to reach €1.0 billion (and earnings per share of €0.33) by about February 2028, up from €967.5 million 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 10.5x on those 2028 earnings, up from 8.3x today. This future PE is lower than the current PE for the GB Insurance industry at 13.8x.
• 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 7.95%, as per the Simply Wall St company report.

Mapfre Future Earnings Per Share Growth

Risks

• The depreciation of most Latin American currencies negatively impacted growth rates, which could continue to affect revenue as Latin America remains a significant market for the company.
  
• A €90 million impairment of goodwill in Verti Germany and previous write-downs suggest potential challenges and risks in the German market, potentially impacting net margins and overall profitability.
  
• The auto insurance business, particularly in Iberia and Germany, is facing a challenging environment with stricter underwriting needed, possible continued loss of clients, and increased costs from bodily injury claims that could affect net earnings and combined ratios.
  
• Currency depreciation, particularly the Brazilian real and other Latin American currencies, has impacted various financial metrics and could continue to do so, affecting net profits and revenue realization when converted to euros.
  
• Economic conditions in EMEA countries, including Turkey with its volatile auto business, may present challenges, affecting the overall profitability and financial results of Mapfre's EMEA operations.

Valuation

• The analysts have a consensus price target of €2.793 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 €3.2, and the most bearish reporting a price target of just €2.15.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €30.5 billion, earnings will come to €1.0 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of €2.61, the analyst price target of €2.79 is 6.6% higher. 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.