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Mapfre fears are overdone, claims Nomura

Despite the strong performance of its share price this year, Spanish (re)insurer Mapfre could enjoy a further re-rating once investors realise the strength of its growing international book and as the firm continues to successfully sell-off non-core assets.

This was the conclusion from analysts at Nomura, who pointed out last week that the (re)insurer is well-positioned to benefit from the fast-growing economies of Latin America.

Gross written premiums (GWP) from Spain accounted for just a third of its overall business last year compared to half in 2008, while its proportionate share of Latin American business has gone in the opposite direction.

And this trend is expected to continue, according to Nomura analyst Michael Klien. "Mapfre is no longer just a Spanish domestic insurer," he commented.

Its pivot towards the New World will earn the group a compound annual growth rate of 10 percent between 2013 and 2016, Nomura said.

Mapfre is already a leader in the Latin American P&C markets and is also second largest writer of life business. The (re)insurer's total premiums are second only to Brazilian insurer Bradesco Seguros, Nomura noted.

The bancassurance deal it agreed in 2010 with Banco do Brasil grants it access to over 5,200 of the bank's branches. The insurer has a further 2,000 branches in the region.

These links to the market should boost Latin American GWP from EUR8.6bn last year to over EUR13bn in 2016, Nomura forecasts.

Net profits from its Latin American arm, Mapfre America, should rise by 15 percent a year on average between 2013 and 2016, Nomura said, reaching EUR390mn in 2016.

Peru and Brazil account for the largest growth in its non-life premiums. Peru's share of Latin American premiums more than doubled to 15 percent between 2006 and 2011 while Brazil's share swelled two-and-a-half times to 15 percent in the same period.

Only El Salvador and Paraguay's market share is higher at just over 15 percent and 23 percent respectively.

Nomura noted that Mapfre is still highly exposed to Spanish sovereign debt, which is subject to downgrade if the nation's fortunes worsen, and debt from the country's ailing financial institutions.

As of Q1 2013, its exposures to Spanish debt and financial firms' debt stood at EUR9.9bn and EUR5.5bn respectively.

But the bulk of its assets - 57 percent of sovereign debt and 53 percent of financial firms' debt - are matched by life liabilities, analysis shows.

Moreover, a 10 percent reduction in the debt exposure would only result in a 10 percent decrease in net asset value, owing to policyholders' sharing and tax benefits. In such a scenario, shareholders' exposure would be reduced by two-thirds, Nomura said.

The bank's analysts acknowledged concerns about the high levels of goodwill and intangible assets on Mapfre's balance sheet, which stood at EUR2.2bn and EUR2.3bn respectively last quarter.

But they noted that these were matched against minority equity and earn-out liabilities.

The debt to equity ratio was also at a "reasonable" level at 18 percent in 2012.

Since mid-2010, when investors started to fear the real possibility that a southern European country would default, Mapfre's share price has effectively mirrored that of Spanish sovereign debt (see chart).

The negative correlation between spreads of Spanish credit default swaps and Mapfre's shares has been consistently high, reaching -0.9 at the end of 2010, September 2012 and March 2013.

Nevertheless, uncertainties remain around the sale of the 15 percent stake in Mapfre owned by the Spanish bank Bankia, as well as Mapfre's potential acquisition of a stake in the insurer Aseval.

But Nomura said these uncertainties should be ironed out in due course.

Bankia needs to sell its Mapfre stake by 2017, but Nomura expects this to occur much sooner.

"This should end overhang concerns and could be the catalyst for a further re-rating," Klien predicted.

Moreover, Mapfre's stock trades at a price-to-net asset value ratio of 1.2x for a 16 percent return, compared with 1.3x for 13 percent for the sector, he pointed out.

Nomura has a target price of EUR3.40, against a current price of EUR2.81 (2pm CET, 28 May).

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