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

Good afternoon. Welcome to MAPFRE's earnings call for the September 2024 results. This is Leandra Clark, Head of Investor Relations at MAPFRE. Joining us today are key members of our management team. Fernando Mata, CFO and Third Vice Chairman; José Luís Jiménez, Deputy CFO; and Felipe Navarro, Deputy General Manager of the finance area and Treasurer. We appreciate you joining us for today's call. We will provide an overview of our financial performance for the third quarter and business trends. And after, we will open the floor for Q&A. You can use the Ask A Question link at any point during the call. I will now hand the floor over to Fernando Mata.

Good morning, everyone. Thank you, Leandra. Thank you all for joining us today. I'm pleased to present our results for the third quarter. Net income is up 39% and stands at EUR 654 million after a EUR 90 million impairment of goodwill in VERTI Germany. Without this effect, we will have posted an excellent EUR 744 million for the first 9 months over EUR 280 million in the third quarter and an adjusted ROE of 12%. Growth remains strong, although we're facing a drag from currencies, and tariffs are normalizing in some markets. Premiums are up 4.6% and 6% at constant exchange rates. Profitability was driven by improvements in technical management across all markets. The balance sheet is stronger both on the asset side with the goodwill write-down as well as the liability side with an even more prudent approach to reserving. The write-down of the VERTI Germany goodwill, 70% of its book value, was a result of the challenging situation in Motor in Germany and Verti's lack of diversification. MAPFRE continuously monitors and reviews the goodwill of its different operations, driving down over EUR 800 million through P&L or reserves over the last 6 years. Our balance sheet is now much stronger with only EUR 1.2 billion of goodwill remaining, of which EUR 600 million is from the U.S. business and EUR 400 million from Spanish life and bancassurance businesses. We're confident in the future of the German business, and we will further invest in its digital capabilities. A EUR 30 million capital increase was approved by the Board and will be dedicated to IT as well as strengthening the capital base. Non-Life continues to improve with a combined ratio of 94.8%, 92.9% in the third quarter. General P&C contributed the most to this reduction in the absence of relevant cat events. In addition, there was a significant contribution from recurring financial results. Our capital base remains strong with shareholders' equity up 4.5% to over EUR 8.4 billion and the Solvency II ratio at 197% at June. These robust results have allowed us to increase the interim dividend to EUR 0.065 per share, representing an increase of over 8% compared to last year. Our diversified business model allows us to leverage the most profitable segments. Life and General P&C lines are performing exceptionally well. We have seen a significant turnaround in the Motor segment in North America and across Lat Am. In Iberia, recent figures are showing the change in trend, although not as fast as expected, and the business is clearly on the right path. In EMEA, we are still facing pressure on claims costs in Germany, which was mitigated by the significant improvement in Turkey. In Iberia, profit is up 15.5% to EUR 283 million, over 30% when excluding extraordinary impacts. In North America, results have improved by EUR 89 million on the back of technical measures. Lat Am, including Brazil, remains the largest contributor to the group's profit, providing EUR 305 million, a nearly 8% increase, with technical improvements as well as strong contribution from financial income. Lastly, our Insurance and Global Risk business delivered a solid result of EUR 207 million, up 9%, supported by premium growth and the absence of significant NatCat impacts. Now I will hand the floor over to José Luís to walk us through the main figures.

Thank you, Fernando. As Fernando mentioned it, premiums are up 4.6%, supported by the Non-Life tariff updates and the positive performance of the Life business, but with headwinds from the Brazilian real and other Latin American currencies. The U.S. dollar is also slightly down. By market, Iberia, Lat Am and Reinsurance continue performing positively. Non-Life premiums, which are 80% of our business, are growing at 4.3%, and reaching nearly EUR 17 billion. There is noteworthy performance in the Accident & Health line, plus 6.4%, and a significant improvement in Auto, plus 4.4%. The General P&C business is up 1.1% due to the slowdown of agri in Brazil and the depreciation of the real. The Life business, which is 20% of premiums has grown by 5.6%. In Life Savings, premiums are up 8.2% supported by Iberia and Other Lat Am. Life Protection is up 6.8% with notable growth in Mexico and Spain. At constant exchange rates, premiums are up 6.1% with Non-Life and Life up 5. 7% And 7.3%, respectively. I will now discuss the key trends by region. In Iberia, net profit has reached EUR 283 million, up 50% with an ROE of 13%. Last year's results included a net impact of EUR 46.5 million due to the arbitration following the breakup of the alliance with Bankia as well as higher net realized gains. Excluding these extraordinary impacts, profit growth was more than 30%. Non-Life premiums have grown over 6% driven by homeowners, condominiums and health. Life premiums are up 6% with a recovery in savings and solid trends in protection. Lat Am continues to be a significant contributor to profit, generating EUR 305 million with an ROE of slightly under 18%. Non-Life profitability has improved across the region and both the Life business and financial income are performing very well. In Brazil, we continue to see exceptional profitability with an ROE of 24%, and the net result has risen to EUR 188 million, despite the drag from the Brazilian real. The Non-Life combined ratio improved nearly 4 points to 74% with improvements in General P&C and Motor. Life protection has also made a strong contribution to these figures. The rest of Lat Am continued to show strong profitability, contributing EUR 118 million with improvements in technical results in most markets and tailwinds from financial income. North America, the net result was EUR 71 million, up nearly EUR 90 million, compared to losses the previous year. This is driven by underwriting measures and significant tariff increases which will continue to positively impact our P&L. The combined ratio has decreased by over 8 points, now at 98.5%. In Puerto Rico, net profit was nearly EUR 15 million. In EMEA, Turkey posted a profit of EUR 24 million, with a strong improvement in the combined ratio, down over 13 points and high financial income. The auto sector remained challenging in Germany and Italy, bringing the losses in the region to around EUR 19 million but showing a EUR 12 million improvement compared to last year. Net profit at MAPFRE RE is excellent, up over 9% to EUR 207 million. The combined ratio remained stable at 95.5%. The most significant happened in the third quarter were the storms in Europe with no other major catastrophes. However, we continue to reinforce our prudence in reserve due to the ongoing rise in secondary perils and the recurrence of cat events due to an atypical hurricane season. This reserving exercise added 1.5 points to the combined ratio. MAWDY continues to grow, posting a net result of EUR 5 million. I would like to address 2 specific items. First, the positive tax adjustment had a EUR 35 million impact; and second, the EUR 90 million goodwill write-down for the VERTI Germany is recorded in the holding and adjustment line. Last year, in the same line, was the EUR 75 million from the write-down of the U.S. business. On the right, you can see the combined ratios by segment. General P&C, our main line of business, both by premiums as well as profit, has delivered outstanding performance. Premiums are up over 1% and the combined ratio has improved 6 points to 81%. The net result stands at EUR 307 million, a EUR 136 million increase. In Brazil, premiums have decreased by 7% with nearly 6 points from currency depreciation and the rest, due to the slowdown in agriculture issuance as a result of the high interest rate environment. The net result is EUR 170 million and the combined ratio remained excellent at 65% with no relevant events during the quarter. In Iberia, premiums have risen by 6.6% fueled by ongoing tariff adjustment in homeowners and condominiums. The result has more than doubled to EUR 121 million. The combined ratio has improved by nearly 5 points to 93.4%. It has been a benign year so far regarding weather as more events were covered by the Spanish consortium compared to last year. In North America, the net result reached EUR 37 million compared to breakeven in 2023 with an excellent combined ratio of 85% supported by tariff adjustment in homeowners and benign weather. Other Lat Am has also increased its contribution to the result by nearly EUR 40 million. In summary, General P&C continues to be highly profitable and diversified. The third quarter results for the Motor segment confirmed the trend seen in previous quarters, already reaching breakeven during the last 3 months. At the group level, the average premium is increasing more than 11%. Premiums are up 4.4% with some drag from currencies, especially in Lat Am. And insured units are down by nearly 7% due to selective underwriting. The losses year-on-year have been reduced by more than EUR 25 million to EUR 17 million, with a combined ratio around 104%. This reflects an outstanding turnaround in North America, while Brazil and the rest of Latin America are operating at combined ratios near 100% or below, which is satisfactory given the interest rate environments in this market. The profit contribution from Motor in Brazil and Other Lat Am has exceeded EUR 30 million. In Iberia, premiums have increased by 6%. Our portfolio is down 3.2%. We are focusing more on retail in line with our risk appetite. And half of the portfolio reduction during 2024 is due to the fleet premium. The average premium has risen by over 9%, outpacing the market, 7.2% increase. We are confident that the pricing is now ahead of expected claims inflation. The combined ratio improved nearly 2 points during the third quarter, reaching 102%. This was slightly higher than we were expecting in order to achieve the 100% for the second half of this year that we have guided in June. However, the trend is clearly positive, and further improvements will be visible in the coming months. In North America, premiums are up 6% with units down 5.5%. In local currency, the average premium is up nearly 12%. During 2024, we have [ failed ] over 11 increases, including the most recent one, that will come through in December. This adjustment, together with prior year hikes, which will continue to feed into P&L and improve the combined ratio. In 2025, rate hikes will converge with expected claims inflation. The combined ratio is down to over 6 points, reaching 100.8% in September and close to 100% in the third quarter, which was excellent considering the mileage and frequency increase during the summer months. The turnaround has been noteworthy with a net profit of EUR 28 million, improving over EUR 50 million compared to 2023. In Brazil, premiums are down 7.6%, around 2% in local currency. The vehicle portfolio is relatively flat year-on-year as the fleet premium has already been executed. In Brazil, the combined ratio has decreased 1.7 points to 101.1%. In conclusion, Lat Am and North America are already consolidating profitability trends, while Iberia is on the right path, and we expect the strong third quarter reduction in the combined ratio to continue in future quarters. The Life business remained a key driver of profitability. Direct instrument premiums are up 7.5%. Both savings and protection have contributed significantly, growing nearly 8% and 7%, respectively, especially in Lat Am and Iberia. In Iberia, Life Protection premiums up 4.3%, outpacing the market with a combined ratio standing under 68%. The financial result was strong with net realized gains up from EUR 1.6 million to EUR 31.1 million, supported by real estate sales, mainly in the second quarter. In Brazil, Life Protection premiums are down 1%, but growing almost 5% in local currency. There is some slowdown in investment on lending in the economy due to the recent rate hikes. This is a very profitable business, and the combined ratio stands at an excellent 84%, although up 4.5 points due to higher acquisition expenses. Across the rest of Lat Am, volumes are up by over 30%. Mexico is noteworthy growing 49% in Life Protection. The attributable result for the Life business has reached over EUR 233 million, in line with the previous year. And now I will hand over to Felipe to discuss the main balance sheet items.

Thank you very much, José Luís. . Shareholders' equity stands strong at over EUR 8.4 billion, up 4.5% on the back of the excellent result achieved in this third quarter. The strong revaluation of the investment portfolio has partially mitigated the negative currency conversion differences from the depreciation of the Brazilian real and the Mexican peso, 11.6% and 14.5%, respectively. Net unrealized losses in the portfolio were reduced by EUR 194 million in the year. Leverage remained stable at 22%, reflecting our disciplined approach to capital and debt management. At the beginning of the month, we renegotiated and renewed our revolving credit facility, which was set to mature in February next year, reducing from EUR 1 billion to EUR 500 million with identical conditions as the previous one. The cost is linked to the fulfillment of ESG targets. Asset allocation has been relatively stable during the year, increasing corporate bonds and reducing govies. The reduction in government was mainly due to Brazil as a result of the dividend upstreaming and currency depreciation. The Spanish govy remains our largest exposure with EUR 9.7 billion. Our portfolio is defensive and well diversified. Falling yields have reduced the unrealized losses in our portfolio giving us more flexibility. We have over EUR 13 billion in third-party assets, making us one of the leading nonbank players in Spain with an exceptional increase in pension funds this year, up 7%. Our EUR 45 billion investment portfolio, together with the AM business, brings total assets under management to nearly EUR 59 billion, up 3%. On the right, you can see our main fixed income portfolios. As a reminder, a large portion is immunized or matched. I will focus on the actively managed portfolios, which are the main profit contributors. Regarding the euro area, yields are up over 25 basis points during the year in MAPFRE RE and 10 to 15 basis points in Iberia. If we exclude linkers, yields are even 20 basis points higher. All portfolio yields are still significantly below current market levels. In other markets, yields are up nearly 30 basis points in Other Lat Am and over 10 basis points in North America. In Brazil, they are down around 90 basis points during the year, but with a high portfolio yield, over 9%, and 30 basis points improvement in the quarter due to rate hikes, which are expected to continue next year. Duration was stable during the quarter. These growing portfolio yields are contributing to financial income. The EUR 576 million contribution to Non-Life, excluding goodwill write-downs, increased 1.7%. Iberia is up 14% despite lower realized gains. MAPFRE RE continues to grow, while North America has been stable. In Brazil, financial income is down over 5% due to currency depreciation. In EMEA, financial income is sharply down compared to 2023 as there were high ForEx differences due to the lira depreciation in the second half of last year. The financial result is expected to remain stable due to high interest rates. There were over EUR 34 million of net financial gains between Life and Non-Life portfolios, proof of MAPFRE'S ability to generate alternative sources of income. I will now hand the floor over to Fernando to make a few closing remarks.

Thank you, Felipe. MAPFRE's Board of Directors approved a EUR 0.065 interim dividend for 2024, 8% higher than last year, to be paid on November 29. This was the second increase in the year, bringing total dividends paid to EUR 0.155, over EUR 477 million fully in cash. This is the highest dividend paid in the calendar year ever. During the last 5 years, MAPFRE has paid out more than EUR 2.2 billion to our shareholders. The average dividend yield for 2024 was 6.6% and close to 8% over the last 6 years. To wrap up, we have now reported 3 quarters in a row of excellent results, confirming the success of our new strategic plan. Financial targets are on track, although we are seeing a slowdown in growth in some markets due to the normalization of tariff increases and currency movements. The adjusted ROE was 12% compared to a target range of 10% to 11%. The combined ratio was 94.8% compared to a target of 95% to 96%. Premium growth, excluding life savings, was 4.2% and 5.8% at constant exchange rates, in line with the target. These already strong figures will continue to be supported by the ongoing recovery of the Auto business, especially in Spain and the U.S., as well as the already sound contributions from Latin America and reinsurance. Furthermore, financial income should continue to support results. The interim dividend announced this morning is proof of these solid results, our confidence in the future and our commitment to shareholders. Thank you for your attention. I will now hand the floor over to Leandra to begin the Q&A session.

Thank you, Fernando. As a reminder, you can use the Q&A tool at the bottom of your screen. We will organize questions as usual by topic, and the IR team will be available for any pending questions after the call. So now let's start with the first question. The first question comes from Juan Pablo at Banco Santander regarding investment income. He says the accounting yield has increased quarter-on-quarter and would like to know how we see this evolving in a lower rate environment in Europe and the U.S.

Thank you. Regarding the accounting yield, I think we still have some margin to improve. If you look at the book yield of our portfolio on the market deal, there is some, I would say, trend that we would like to cover. So we expect that to equally increase in the coming quarters, perhaps not as much as it did in the past but still, we have some marginal money overall to continue improving on the account side. Regarding the interest rates, probably we don't have this view. I think that interest rates in Europe should stay probably in levels of around 3%, 3.5%. So that's, I would say, for insurers and especially for us, these are very good news.

Thank you, José Luís. The next question comes from David Barma at Bank of America. He would like to know what we've done to strengthen the balance sheet in the quarter, referring both the reinsurance business as well as the Spanish business?

Okay. Thank you, David, for your question. Well, we have done probably two things. One, on MAPFRE RE, we have increased 1.5% combined ratio, the reserve. And this is due because on the NatCat, we are below budget. But on the secondary perils, we are slightly up compared to budget. This is something that we are seeing on a regular basis that the secondary perils are growing. So in terms of prudent, we have to decide to increase. The other point is related to the Spanish auto insurance, where we have increased around 1 percentage point of combined ratio in order to cover the cost of the bodily injury claims.

If I may add, in order to clarify the impact of MAPFRE RE, it was approximately EUR 50 million gross basis, I mean before taxes and minority, and is equivalent to 1.5% impact on the combined ratio, the net combined ratio. Is that right, Felipe?

No, no, it's correct. And just I mean, in fact, it was a twofold effect on this reinforcement of the balance sheet, as José Luís and Fernando have already mentioned, and it was quite accurate and correct. It was the reinforcement of the reserves. And as well, there was this write-down of the goodwill that makes our balance sheet more clear, more accurate and more adequate to the business that we are underwriting right now.

Thank you, Felipe. Thank you, José Luís. I think we're going to continue on the reinsurance business. We have another question from several analysts, both at Bank of America, JB Capital and Sabadell. They would like to know how active is the fourth quarter so far at MAPFRE RE from a NatCat perspective. They make reference to the Hurricane Milton as well as French floods. And how do we see this market developing in pricing?

Well, in terms of pricing, we have just come from the last meeting of reinsurance. I think prices will stay flat or probably slightly up. It will depend on the regions. On those regions where they had I would say, severe NatCat events, probably prices could increase. But on those parts of the world where there were no major catastrophes, probably they will keep as they are. But from our side, and regarding the evidence that you had mentioned before, I think for us, as we say, we are below budget. We have no big impacts, and these are secondary events for us.

For the fourth quarter, I mean, there's no major event that is being reflected in our accounts on top of the ones that you were mentioning, but none of them has a significant impact. As we were mentioning before, I mean, there was this reinforcement of the reserves of MAPFRE RE. And this is coming mainly from a NatCat season that was below what we expected and how the evolution of the secondary perils is slightly above the budget. So all in all, the trend is quite positive. And as we said, MAPFRE RE is keeping a very, very prudent approach on the reserving. So this 1.5 percentage points on the combined ratio are going to be enough for these events for the moment.

Thank you. We had just a few more questions regarding just a little more color on if we are within the NatCat budget for the year overall and if we could remind them how much is the total NatCat budget.

Okay. As I just said, for the moment, and as far as we know, no major impacts from the hurricanes or even the floods that we saw in Europe during this year. And what we can say is that, once again, what we are seeing as the evolution of the reserves is that we should be on the high side of the margin. So if we should be reserving up to a 90% of confidence level, we are right now at this level already. And we are going to continue taking this approach. But for the moment, as I said, nothing significant that we should mention as NatCat events. So for the moment, we are quite well.

If I may add as well, and I will qualify both as a midsized event, one was the heavy rains in the south of Brazil that was already reported in the second quarter. And in the third quarter, the only perhaps remarkable, but it's a midsized event, obviously, it was the heavy rains as well in Western Europe. But both similar events. And regarding NatCat in the U.S., both the most relevant, Helene and also Milton. For MAPFRE exposures, we will be in the high single-digit, frankly talking. So fortunately, we avoid this season. This is still 1 month ahead. I mean the Atlantic Basin is quiet, but it is still 1 month, November. Fortunately, this year, has been practically a year with nothing regarding large NatCat events.

We're going to move on to the Iberia business. The first question is regarding the Life business in Iberia. It comes from Maks at JB Capital. What is the reason for such a boost to like savings premiums in Iberia in the third quarter of 2024? Do you expect this growth to continue in coming quarters?

Yes. Thank you. I mean the growth in the Life business was related to what we call medium [ bidder ]. So we were very active in providing savings solutions to our customer base. Probably, we have less competition from banks right now. So we want to set up this opportunity in order to offer competitive price to our customers. Also, we had as well some corporate pensions. We were very competitive as well on that business line. And this is a trend that we trust will continue in coming quarters.

Thank you, José Luís. We've also received some questions from David Barma at Bank of America, continuing with Iberia. Regarding the General P&C line, that had an excellent third quarter with an 86% combined ratio compared to the mid-90s in all the recent quarters. Was this due just to a lack of bad weather? Or is there anything else we need to flag?

Nothing to flag, to be honest, the only thing that probably this year, we have more events related to the consortium compared to previous years, but nothing significant and probably this will continue.

Thank you, José Luís. Moving on to Motor in the Iberia business. Our first question is from Maks at JB Capital. He would like to know our expectations for the evolution of the Motor portfolio in Iberia. And both Maks and David Barma from Bank of America would like to know whether this acceleration in average Motor premiums will continue or if the price increases will revert in line with inflation to protect our portfolio?

Okay. Some words regarding the Auto business in Spain. I would say frequency is still moderate. But also, we have seen an increase in gas consumption as well as low fatalities have risen during the year. We see that the small claims decreasing. Meanwhile, several claims involving bodily injuries are up. So these are the trends that we are seeing right now. And bodily injury claims, which accounts for around 30% of total claim costs will continue to have an impact in the combined ratio. So for this reason, I wouldn't say that we will reduce tariff. We will continue with the current trend, trying to adjust the tariff to the cost. And I see as well that the competition remains high and moving in the same direction. It's important to say that we are confident that the 4-point reduction in the combined ratio between Q2 and Q3 is proof that we are taking the right measures and going in the right direction. So probably, we will continue in the same line.

Thank you, José Luís. We have another question in the same line from Juan Pablo at Santander, and he would like to know if we confirm the 100% combined ratio guidance for Motor in Iberia for the second half of 2024. Or are we seeing anything that could change our outlook?

We are working hard to achieve that goal. If it happens in November, December or January, obviously, it doesn't matter. The important thing here is the trend, and the trend is quite positive to achieve the goal.

Thank you, José Luís. We also have another follow-up question in Iberia regarding the previous question in General P&C is, do we expect the current level to be a normalized level going forward? Or was this last quarter in General P&C in Iberia an exceptionally good quarter?