Mapfre, S.A. (MAP) Earnings Call Transcript & Summary

Good morning, and welcome to MAPFRE's activity presentation for the first half of 2024. This is Leandra Clark, Head of Investor Relations, and we want to thank you all for being here with us today. It is a pleasure to have here with us, Fernando Mata, Vice Chairman and Group CFO; José Luís Jiménez, Deputy CFO; as well as Felipe Navarro, Deputy General Manager in the finance area. As a reminder, we report the IFRS financial information twice a year, and we reported the half year results to the CMB this morning. The information and this activity update is prepared under the accounting policies applicable in each country, unless stated otherwise. At the end of the presentation, we will go through the main IFRS KPIs. [Operator Instructions] Let me turn the call over to Fernando, the floor is yours.

Thank you, Leandra. Good morning, everyone, and thank you all for being here with us. The figures we released this morning confirm the strong trends that we saw in the first quarter which have gained momentum supported by our profitable growth strategy. We're growing strong in almost all markets and continue working to correct imbalances with visible improvements, especially in underperforming businesses. We're leveraging our proven business model with high levels of diversification, and we continue growing in the most profitable segments. LatAm, especially Brazil, continues to be the largest contributor to earnings for the group with EUR 203 million. Regarding Lines business, life and General P&C are showing an excellent performance. There has been a strong turnaround in Motor in North America and across Latin America. However, in Iberia and EMEA, we are still seeing pressure on claims costs, although behavior in recent months suggests that we should begin to see a change in trend. Regarding main regions and business units, Iberia maintains leading market shares in the main line of business with a 37% increase in the result. In North America, the result is up EUR 58 million, thanks to the already implemented technical measures. MAPFRE RE continues to grow its profit, supported by solid business growth and the absence of relevant Nat Cat impacts with increased prudence in our reserves. We're proud to say that all financial KPIs are in line with the target set at the AGM in March. Premiums are up 5.5% or 6% excluding life savings reaching more than EUR 15.1 billion, with solid growth in LatAm, Iberia and North America as well as reinsurance. The net result which stands at EUR 462 million, is up 47%. This strong performance is based on first relevant improvement in Non-Life with a 1.3 point reduction in the combined ratio to 95.7%. Secondary business, especially in LatAm and Iberia, which continues to contribute very positively to profitability. Lastly, the growing contribution of financial income, which for Non-Life reached EUR 401 million, up 11.6% and is also an important driver for the Life business. With the result, we have delivered an ROE of 10.6%, 11.6%, almost 12% excluding the 2023 goodwill write-down. Regarding Solvency II, the ratio was 197.7% at March 2024 and we are no longer including transitional measures. That's all for me. Now I will hand the floor over to José Luís to run us through the main figures.

Thank you, Fernando, and thank you all for being here today. First, I will like to go over the main premium figures. Non-life premiums are up 6.5% to nearly EUR 12 billion, with General P&C up over 4%. Accident & Health 8% and Auto 5.5%. Life premiums are growing around 2% with saving flood after a really strong first half in Iberia last year. Life Protection is growing well over 10% with excellent performance in Mexico. The reinsurance segment is growing close to 9%. As you can see on this chart, our business mix is well diversified with around 79% in Non-life and 21% in Life with important share in high-margin businesses like Life Protection and General P&C. The main figures for region are displayed on this slide, and I will comment on the main trends. In Iberia, net profit stand at EUR 168 million with a return on equity of 13.5%. This includes EUR 21 million for the sale of a property in Madrid due to the regular portfolio rotation. Non-life is up 6.4%, with the strong trends in homeowners, condominiums at health. Life Savings premiums are down to an extraordinary 2023, while Protection is growing around 4%. LatAm continued to generate a large share of profit with EUR 203 million return on equity of 17%. Non-life profitability has improved across the region and the Life business and financial income continue performing very positively. Regarding Brazil, profitability has been exceptional with a return on equity of 23%, and the net result is up to EUR 121 million, including a EUR [ 6 ] million loss from the floods in Rio Grande do Sul. In local currency, premiums are up 1% and in euros, reflect the slight depreciation of the Brazilian real. The Non-life combined ratio is down significantly to 77%, with Motor improving 2.5 points and General P&C at an excellent 68.6%. The Life protection business also had a strong contribution to results. The rest of the countries in LatAm maintained their strong profitability, contributing EUR 82 million. Regarding North America, the net result is up nearly EUR 60 million, reaching EUR 41 million compared to losses of EUR 80 million the previous year. Under working measures and strong tariff increases are the main drivers with premiums up almost 5%, which continue feeding into P&L. The combined ratio is down over 8 points now under 100. In Puerto Rico, premium volume is slightly up with a net profit of nearly EUR 10 million. In EMEA, the losses have improved by EUR 6 million, down to EUR 8 million. In Turkey, financial income is boosting results with a profit of over EUR 50 million. On the other hand, Auto remains challenging in Germany and Italy. In MAPFRE RE, premiums are up 5.5%. The combined ratio is down to 95% supported by tariff, especially for Cat covers. So reminder, this is a traditional formula ratio. Other reinsurers that are now reporting under IFRS may treat reinsurance commission differently, typically posting lower ratios. The flooding in Rio Grande do Sul had a EUR 41 million net impact. There has been no other relevant catastrophic events, but we are seeing an increase in secondary perils. Net profit is nearly EUR 140 million, up 50% and return on equity is over 12%. MAWDY continues growing and post a net result of EUR 3 million. I will also like to comment on 2 specific items. Hyperinflation had a EUR 36 million impact mainly from Argentina and positive tax adjustment from previous year had a EUR 25 million impact. On the right, you can see the combined ratios by segment. General P&C had an extraordinary performance. Premiums are up over 4%, and the combined ratio is down almost 3 points to around 83%. The net result was nearly EUR 189 million, up EUR 54 million. In Brazil, premiums are down 2% with Agro temporary lower due to the subsidy allocation calendar. We expect premiums to catch up during the year. The net result of EUR 70 million reflects a limited impact from Rio Grande do Sul to them. The combined ratio stands at an excellent 68.6%. In Iberia, premiums are up 7%, driven by homeowners and condominiums. The result is up 40% to almost EUR 74 million and the combined ratio is down 8 points to 95%. North America reported a result of EUR 21 million compared to EUR 2 million in 2023 with an excellent combined ratio of 89.7% on the back of tariff adjustments in homeowners. Other LatAm also increased its contribution to results by EUR 70 million. In summary, General P&C, our largest line of business is highly profitable and diversified. In autos, we are starting to see some green shoots in motor with a strong reduction in net losses down from EUR 36 million last year to just EUR 19 million. Iberia is still experience volatility, while tariff increases are gradually feeding into results. The turnaround in the U.S. was noteworthy, with Brazil and North America now reporting profits. Other markets in Latin America are performing quite well, mitigating the complicated situation in Germany and Italy. The group's strategy is to focus on profitable growth. Premiums are up 5.5% with insured units down around 6% as a result of selective underwriting. In Iberia, premiums were up 5.7%. The portfolio stands at around 6 million vehicles, down under 3%. We are focusing more on retail than fleets in line with our risk appetite. There has been a relevant increase in the average premium, around 8.4%, with the market only up 7.8%. We are confident that we are now pricing above expected claim inflation. In North America, premiums grew almost 8% with units down 5.6%. In Brazil, premiums are down 4.4%. The portfolio of vehicles is down 1% where we also have a lower appetite for fleets. The group auto combined ratio was 104.8% improving 1.4 percentage points. Iberia reached 106% in the first half of the year. We are seeing some pressure on claim costs, especially in bodily injury, while material damage claims are very well controlled. Premiums earned are up 4.5%, still below the 6% growth rate and will continue to catch up. In North America, the RAT improved over 7.5 points and so we also continue to come down based on tariff. Just this quarter, we put through an additional 5% increase. Brazil's combined ratio is down 2.5 points to 101.6%. We are committed to continue adjusting pricing as much as necessary while defending our portfolio. Tariff still need to earn through P&L in certain markets. Brazil and the U.S. have already improved, while Spain and EMEA will need some time to reach optimal profitability levels. Data in recent months make us more confident that we are on track. Now we move into the Life business, which is another relevant profit contributor. Direct insurance premiums are up nearly EUR 130 million. Savings is slightly down because of the extraordinary incidents of Iberia in 2023 but it still stands at over EUR 1.5 billion, while Protection is growing over 10%. In Iberia, Life protection is up 4%, outperforming the market with a combined ratio improvement over 1 point to 67.9%. The financial result was strong with net realized gains up from EUR 2 million to EUR 30 million due to the sale of our real estate as well as recurring financial game. In Brazil, Life protection premiums are up over 6% in local currency, and the combined ratio stand at 82.4%, up 2 points, reflecting higher commission, but is still at excellent levels. In the rest of LatAm, Life insurance is up 36%, 35%. Mexico stands out with 60% growth in Life protection. Attributable result for the Life business reached EUR 167 million, up 37%. Now I will hand the floor over to Felipe to discuss the main balance sheet.

Thank you very much, José Luís. On the left of the slide, you can see our capital structure. Shareholders' equity is over EUR 8 billion, quite stable throughout the year. Currency conversion differences have been limited with the U.S. dollar and Latin American currency appreciation offsetting the 10% depreciation of Brazilian real. Leverage is stable at 23%. Regarding investments, the main changes in asset allocation are related to a reduction in government bonds in Brazil for a dividend upstreaming as well as currency depreciation and lower cash and equivalent instruments switching into short duration bonds. Spanish sovereign debt continues to be the largest exposure with EUR 9.5 billion. We have more than EUR 13 billion in assets under management through pension and mutual funds, placing us among the leading nonbank players in Spain. As a reminder, a large share of our EUR 31 billion fixed income portfolio is immunized or matched. So we will focus on the actively managed portfolios, which are in the main contributors to the net income. The euro area portfolios have a market value of over EUR 12 billion. During the year, duration is down and yields are steadily increasing. Yields on Iberia Non-Life and RE continue their upward trend, reaching 2.6% and 2.7%, respectively, with reinvestment rates still above the portfolio yields. The other main markets amounts to around EUR 7.6 billion. We have increased duration by 60 basis points in Brazil and 10 basis points in the U.S., although LatAm is down by 30 basis points. Yields are relatively unchanged in both North America and Northern LatAm. In Brazil, our portfolios are well positioned. Although yields are down by over 1 point. The market yield is of nearly 10% is now well above the current portfolio. Non-Life financial income is up EUR 42 million, growing 12%. Iberia is up mainly due to the real estate gains that we already mentioned. MAPFRE RE and other LATAM will also continue growing when North America and Brazil has been stable. In EMEA, we have been tactically reducing our exposure to euro-denominated investments in Turkey, and we are now investing at higher rates while currency gains are down. We realized EUR 33 million net financial gains over the year, proof of MAPFRE's ability to generate alternative source of income. Here, you can see the main KPIs under IFRS 17 and 9 compared to our local GAAP. Insurance revenue is up over 6%, in line with premium growth, excluding Life savings reaching EUR 12.7 billion. The net result stands at EUR 494 million, up 65% with an ROE of 10.4%. The main differences are related to the discounting impacts as well as changes in the interest rates. The combined ratio was 93.6%, down 2.5 points year-on-year. We are calculating both ratios under the same methodology of treating reinsurance commissions as a lower expense. Shareholders' equities amounts to over EUR 8.5 billion under IFRS and it's relatively stable under both standards. The CSM was EUR 2.5 billion, down over 3%, mainly due to the currency depreciation with EUR 60 million total impact mainly from the real as well as a higher life protection commissions in Brazil. The CSM net of tax and minorities was EUR 1.5 billion, slightly up compared to the year-end. I will now hand the floor to Fernando for a few closing remarks. Fernando?

Thank you, José Luís. Thank you, Felipe, for your quite comprehensive presentations. To wrap up, we have now reported 2 quarters with excellent results that confirm that we are aiming for with our new strategic plan, and all financial KPIs are on track. We continue growing above inflation. Studies are being updated to the new economic context. The group is well focused on profitable growth, concentrated on high-margin businesses. Like, Life Protection and General P&C or other strategic segments I have. We keep selling new premium and revenue records, and this should continue in the second half of the year. Once again, our proven business model based on high level of diversification, both by geographic and product mix allows us to face the challenges from the geopolitical context with a sustainable result. This puts us in a strong position to leverage growth opportunities and overcome any headwinds that come our way. The business is getting back on track in most countries, and we're turning around loss-making segments in the countries that are facing the biggest challenges. We did it already in Brazil, the U.S. is now showing excellent performance, and we're sure in the near future, Iberia will do the same. We're managing our investment portfolio prudently, and as long as market rates stay above portfolio yields, we expect financial income to continue growing in the coming quarters. Finally, our financial strength will continue to underpin future growth and our commitment to value creation for shareholders. Thank you very much for your attention. I will now hand the floor over to Leandra to begin the Q&A session.

Thank you, Fernando. Although most of you are already familiar with the process, just as a reminder, you can use the Q&A tool at the bottom of your screen, and we will organize the questions by topic and answer them as time allows. The first set of the questions that we have are regarding the business in Iberia. We received a question from Santander -- Banco Santander, where they're asking about the strong performance in Iberia Life profitability, especially in Life savings. Any reason, any one-offs, is this sustainable?

Thank you, Juan Pablo. Yes, Life, I think is performing well. And we also expect the Life savings continue to do so on the second half of the year. The reason to say something like this is because there is not too much competition in terms of saving products. And I think that as Insurer, we have an important role to play. So we are working on that, and we expect to launch new products on the coming month.

Thank you. Also just as a reminder, we did have one one-off in the financial income, which mainly affected the Life business, which was EUR 21 million from the sale of real estate for a property in Madrid. If you need further information, it's in the disclosure. We also received another set of questions for the Non-Life business overall, Carlos Peixoto from CaixaBank would like to know about the drivers for the uptick in the P&C combined ratio in Iberia and our outlook for 2025. [ Pat Ojeda ] has a similar question and would like to know the reasons for the different trend in our ratio compared to other market players in particular, in General P&C.

Okay. Carlos, Pat. I mean, the main reasons for this uptick in the general P&C is related with -- mainly with commercial lines that were -- that had an excellent performance during the first quarter. In any case, I mean taking into account this kind of business, I think that we need to look on a half year basis since there could be some volatility and some changes between one quarter and the other. The general trend is still positive, and we think that is going to continue, and it's going to be underpinning the good performance of business in Iberia overall.

There's Pat also has another question regarding the health business. She notes that the seasonal improvement in the health business that we usually see in 2Q has been less than other quarters? Or is there anything we need to comment specifically regarding the health business?

I think that it's mainly come to the same trend as we had in previous years, is showing a better second quarter than the first quarter, and we will continue improving during the year because of the way this business has been accounted and how the premiums are earned by the beginning of the year. So we expect that it's going to continue improving during the rest of the year and we don't see no special threats on this line of business.

Thank you, Felipe. Pat also has one more question on the Spanish business regarding the tax rate in the second quarter stand-alone. The rate in Spain was quite low. Could you explain this, please? And can we extrapolate this to the rest of the year?

I think that we cannot extrapolate this for the rest of the year. This is the -- I mean there was this allocation of this review of the taxes that usually happens in the month of July and happened in the month of June. This is the main -- is just a calendar adequation is just for this year. There is nothing that is going to change the tax rate in Spain and is going to continue quite stable during the rest of the year.

Thank you, Felipe. We can also give you more specific data regarding the tax impacts after the analyst call. We have another question from Carlos Peixoto and actually several analyst regarding the general P&C business in Brazil. David Barma, also and Ivan Bokhmat would like to know if the current levels of profitability are sustainable over the medium term. What would be needed for this to be reversed? And what are the drivers of the outperformance in this line of business in general P&C in agro business in Brazil?

Well, we have to say that the performance of the business in Brazil has been outstanding, and we will keep those levels of profitability that will be great. But it should that at some point, it could deteriorate a bit, but not too much. So we are confident that the levels in Brazil will continue for the time being.

Just for the sake of -- I mean, just repeating something that was already said during the presentation is that there was a certain mismatch or between the moment that different tax -- sorry, the different allowances were made on the Brazil agro business. So we expect that it's going to catch up during the rest of the year. So nothing to be scared of or nothing to be -- and it's nothing to be threatening the increase of the levels of premiums in the business in Brazil for General P&C.

Thank you, Felipe. I think the next question from [ Pat Ojeda ] was asking about the sharp slowdown in the second quarter of -- in premiums. And again, like Felipe said, it was regarding the calendar of subsidy allocation for the Agro business. Thank you. Carlos Peixoto from CaixaBank has a question regarding the auto business in Brazil. He noticed a slight uptick on the quarter and would like to know whether we could expect it to fall below 100% this year. And what is our outlook for 2025?

Well, I would say in the case of Brazil, the combined ratio is very close to 100%. We also bear in mind that rates in Brazil as well are around 10%. This is a rate that we would like to see in the rest of the market as well. But as we are doing in the case of Spain, we are trying to be more selective in -- on the customer base. We are reducing our exposure to fleets and putting more focus on customers. So we expect that, that the ratio will continue improving in the coming quarters as well.

We're going to move on to another business region. We have questions regarding EMEA. Ivan Bokhmat would like -- has commented that the business has turned around quite nicely. Should we assume a positive result moving forward? Or have there been any one-offs in the second quarter?

Well, in the case of EMEA, we have 4 countries. Turkey is performing extremely well. The profit during the first half of the year has been around EUR 50 million. It is true that we have one one-off in the selling of the Life unit in Turkey. But the company is performing extremely well. And once again, I mean, with rates around 50% in our reinvestment, I think the financing contribution is great. So in Turkey, we expect as well that the outlook for the country will improve in the second half of the year. If inflation continues going down, as everybody are seen in the country right now, we see that the performance of the unit will continue. Malta is performing well. I mean selling overall life-saving products. We also spent a better second half of the year with new products on the self. And Italy is performing in line with our expectation. The main issue has been Germany, but we are putting all the focus trying to reduce the combined ratio in autos.

Thank you, José Luís. We have another question moving on to North America. Max from JB Capital would like to know if we could get the 100% combined ratio in North America motor ahead of a 4Q year-end?

Yes, we are working on that to be below 100. Probably we are just around the corner. And if we see the trend continue we have seen in the last months, I'm sure that we will be below 100.

Thank you, José Luís. I think moving on to the next set of questions. Ivan Bokhmat has commented on the impact in the group from the losses from the flooding in Brazil. Given the industry estimate, it seems that we had a low impact. What is our expectation going forward?

I think that we are excellently protected from the direct insurance point of view. I think that we've been booking the maximum loss that we can have from this event that is under EUR 6 million. From the reinsurance perspective, I think that we already been commenting on how is our policy, how retention is limited in this kind of business. And I think that we've been extremely prudent with the reserves that we are putting on this event. And it in any case, it's not higher than EUR 40 million. I think that we are accounting on a EUR 37 million. So I think that we are quite confident that it's going to be a limit that we have -- a limited impact on the numbers of the group. In any case, I think that we can -- we need to continue seeing the development of the claim, but we are quite confident that our reserves are more than enough.

Thank you, Felipe. We have some questions regarding North America and the rest of Latin America especially in the P&C business. Juan Pablo from Banco Santander would like to know what was behind the significant drop in the combined ratio? Was there anything extraordinary? Is the improvement in other LatAm and North America sustainable?

I think that we need to divide this in between the 2 regions. I think that North America is -- has experienced an excellent first half of the year. It was related with main 2 drivers. First one was related with increasing premiums that's what we were doing since last year. And together with this, there was quite a benign weather during this first half of the year. So that put us in a very, very nicely situation for the General P&C and mainly the homeowners business in North America. LatAm is still performing well and moves in swiftly into the profitability for the General P&C and this combined ratio should be totally adequate for the -- for running for this line of business. So nothing extraordinary that we need to mention on the combined ratios in LatAm, North America. Apart from these 2 comments that we've been announcing from since the beginning of the year. I think that what we are doing is that collecting the fruits that we've been planting during last year.

Thank you, Felipe. Going back to Brazil. We received a question from Max at JB Capital regarding if we have any actions in place in order to protect ourselves from future depreciation of the Brazilian real.