"Our long-term commitment to the dividend is irrefutable"
Felipe Navarro, Director of Capital Markets and Finance at MAPFRE, sits down with Estrategias de Inversión to provide an introduction to and presentation of the company.
- Which are your next potential markets or most attractive markets in the coming years?
Our international presence or MAPFRE’s footprint on the world will not change significantly in the short to medium term. We are a company whose headquarters are in Spain and we would like to continue our growth in the Spanish market. We have major growth potential. What makes us stand out right now is our ability to grow in Latin America, a market with enormous potential and especially when bearing in mind our very important presence in the Brazilian market, where we have perhaps the best banking-insurance partner, Banco do Brasil, given its degree of capillarity and market penetration, which means we are just as present throughout Brazil as we are in Spain.
The US has been one of our main markets and continues to be an important market; however, there our geographic footprint is narrower. Our main presence is in New England, in Massachusetts, which is the state where we have the biggest market share, more than 20% in the car market and more than 14.5% in the home market, which makes us the leaders in that market.
In the short and medium term, our geographic potential is in Iberia and Latin America, in particular Brazil, on account of its potential.
We cannot forget about our presence in the reinsurance industry either. MAPFRE RE is one of our main strong points. We made a capital increase last year of 250 million euros at MAPFRE RE, while it also retained another 50 million for distribution to the Group, which makes it a relatively large reinsurer.
- Will this division serve as a lever in the coming years? How much growth do you expect to see from this new lever?
In 2021 and 2022, MAPFRE RE experienced double-digit growth, 10% and 15% respectively. From 2023 onward, our premium growth is likely to be somewhat smaller. But that is not due to the volume of business that the company is doing, rather with the way in which the reinsurance business is moving. Insurance companies are retaining more risk and only assigning risks above a certain volume. Therefore, MAPFRE RE is expected to see a slowdown in premiums; however, that does not mean that it will see a decrease in insured volume or in results, which we hope will be a little better than those seen by the Group in the long term.
- How will catastrophes such as droughts, earthquakes, natural disasters, etc. affect MAPFRE RE?
MAPFRE RE is in the business of major natural disasters. The earthquake in Turkey has perhaps been one of the biggest losses, in terms of retained losses for the Group, in MAPFRE's history and despite that, MAPFRE RE has managed to deliver more than decent results in the first half of the year, contributing more than €120M to the Group's profits.
The season for catastrophic events usually falls between May and November, when the hurricane and typhoon season ends. For now, in the first half of the year, things have gone quite well, and in the second half of the year, we are finding that the major hurricanes have diverted their course, with none of them having hit the areas where we have insurance activity with force.
In Europe, major disasters such as the Moroccan earthquake or major floods have not had a material impact on the company. As MAPFRE RE’s exposure is worldwide, it may have been slightly more affected by the hailstorms in Italy and Germany, which were quite significant. In terms of the agricultural business in Brazil, we have had a very good year, with no major problems.
- What impact do hyper inflation and the credit reinsurance business have?
MAPFRE is exposed to hyperinflation in Argentina, Turkey and Venezuela and to mitigate its effects and protect ourselves, what we do is invest in hard currency. This means making our investments in dollars or in euros in the case of Turkey to mitigate the impact. As a result, when a disaster arrives, the effect of hyperinflation will be tempered.
Regarding the impact of the interest rate hikes, insurance companies always function better with higher interest rates. This means that between the time at which we deposit the premium and the moment at which the claim is filed, we can benefit from these rates to continue with our financial undertakings and obtain an additional return on investments.
MAPFRE's balance sheet is significant, we have approximately 42 billion euros invested in the market, we are the size of a medium-sized bank in Spain and that means that we have strong exposure to interest rates. This allows us to offer life-savings insurance products that clients can take out. From a balance sheet perspective, our investments go down as the price of bonds goes down. However, we tend to hold our investments to maturity. Our balance sheet is very stable in terms of investments and insurance companies generate cash for their investments.
The motors business is a little more complicated, as different detrimental impacts come into play. The use of cars dropped during COVID and insurers either extended coverage or offered major discounts. We find ourselves in a situation where bond management assets now have a duration of 3.5/4 years and therefore the portfolio matures every 4 years and we reinvest bonds with greater returns.
In markets as developed as Spain and the US, these are “normal” rates; however, when talking about our positions in LATAM markets, that rate of reinvestment can come to around 9% in Brazil right now, offering us some financial flexibility, a certain amount of stability and a long-term vision.
Our exposure in the Credit and Surety business is limited. It is a business that benefits from economic cycles. During periods of economic slowdown and rising rates, this insurance comes into play. Credit and surety insurance companies fundamentally ensure that economic transactions reach completion and can also have a positive result.
- With the sudden rise in interest rates, do you contemplate any type of systemic risk that will see impact insurance deployed or an escalation of default and risk?
Our exposure to interest rates is fundamentally in the life-savings business. They are not affected by defaults as they do not entail lending. The market risks at present involve the possibility of a massive bailout of investments. We are a very conservative company, the Spanish business is very conservative, so there is no major risk for insurers.
- With the current inflation, are you managing to transfer this increase to premiums?
Inflation mainly affects two businesses: motors and health. In the health sector, all premiums are renewed; we need a very long-term forecast of price increases. What's more, medical benefits have their own inflationary characteristics, meaning it has been tough going during COVID. We have combined ratios of almost 100% or just below, allowing us to turn a technical profit in this business and in the medium term, a tariff that is quite low. Following COVID, the use of vehicles resumed very quickly and in addition to the period you have to wait to renew portfolios, we saw double-digit inflation in the main markets in the world. It is much more difficult to pass on inflation prices that are much higher than what we were foreseeing shortly before in the motors business. Customers are also reducing coverage, given the aging of the vehicle fleet. As a result, we are seeing a change in the make-up of our portfolio, although we are seeing that it is tremendously resilient. Our portfolio losses are very small, meaning we are renewing the policies of a lot of customers and we are less involved in snatching customers from other insurers.
- How are you growing insurance banking in Spain and in LATAM, with an office network, agents, online?
The MAPFRE network is one of the MAPFRE Group’s largest assets, both in Spain and in many other countries, although in a very different way because insurance is not distributed in the same way across all countries.
In Spain, you have to bear in mind that MAPFRE has the potential to be the country’s second biggest financial network, with more than 3,000 offices, distributed across Spain and with a very high degree of penetration. This means, first of all, that we have a tremendously stable distribution base, a reach across Spain that cannot be compared to any other institution. Our penetration in major cities is a little lower than that of our competitors, although it does provide us with much more stable portfolio movement and stability. Our network of agents allows us to distribute not only mandatory businesses, but also allows us to distribute health, home and SME businesses, where sometimes we are the only ones there. We also participate in agricultural insurance, providing us with a tremendously stable customer base.
We have a banking insurance agreement in place with Santander for the distribution of car insurance, which is seeing significant growth. We also have a life insurance distribution agreement with Bankinter that has also worked very well for a long time. The bancassurance business provides access to insurance that is much more closely linked to customer portfolios.
In Latin America, we have a similar distribution network, with dedicated agents, although we also distribute through brokers and then through banking insurance. Our biggest bancassurance agreement in place at present is with Banco do Brasil making us the market leader in the agriculture distribution business. In the rest of LATAM, we try to replicate our Spanish business model.
We also distribute our insurance online, with specific companies or through the MAPFRE website, which is an access point that sees double-digit growth every year and that works quite well.
- Will electric car insurance affect you looking ahead?
Rather than affecting us, it represents an opportunity. MAPFRE is committed to combining business development with environmental protection in its strategy. We are making huge efforts to insure these vehicles, to study them, to understand the repairability of these vehicles, to understand the behavior of the drivers of these new vehicles. It is a market with huge potential.
- In terms of new products, what do you have to say about pet insurance, for example?
Pet insurance is a necessary type of insurance for civil liability needs in terms of any damages that may be caused to others. Pets are increasingly part of the family's daily life, which makes this very important. MAPFRE forms part of people's lives, at each and every point where there may be an insurance need, and pets are one of these needs. The regulations regarding the need or obligation for pet insurance have not yet been developed, but we believe this represents a future opportunity, to accompany our clients when it becomes mandatory.
- And do you see any investment opportunities at a corporate level? Or is growth solely organic?
At present, we are only focused on organic growth. MAPFRE is always open to considering small or medium-scale transactions in its different markets. Our business model is quite clear. We are in the countries where we want to be. If we can gain a much better market share at an organic level, then inorganic growth must be for niche reasons.
- Asset management: what is MAPFRE’s approach to this, what is the status of the agreement with Abante and what future plans does MAPFRE have for this business?
Our agreement with Abante works and it works well. The growth that Abante has seen in recent years is spectacular and our strategy with Abante is to hold a minority stake.
Our Asset Management business has enormous potential, both in asset management and distribution with MAPFRE AM, and in wealth advice with MAPFRE Gestión Patrimonial. We have a presence in Europe, distributing funds from Luxembourg and Paris, through a boutique manager that we control there specializing in ESG investment: Le Financiere Responsable. And we are more than capable of making the leap across the Atlantic and creating investment vehicles in Latin America.
- What is the Group’s growth objective?
The growth rate we set out in our most recent strategic plan was 6% for the three-year period. During the first year of the plan, we smashed that 6% target with double-digit figures; in the second year, we have seen strong growth and that is why we have increased the target for the coming two years to growth of around 5/6%. We are prudent about our objectives. Although there are MAPFRE business lines that are seeing double-digit growth, others, such as motors, are simply trying to return to profitability. In the medium term, we need to see reasonable growth at MAPFRE.
In terms of solvency, Solvency II in June stood at 197.3%, down on year-end 2022, with a target of 200% +/-25%. The question is, if you do not reach this targe
- Will the dividend be at risk?
Our solvency margin is mainly reliant on two factors. On the one hand, the capital base. Our shareholders' equity at year-end 2022 was affected by the revaluation of the markets. Therefore, the reinvestment and recovery of the bonds will help us recover our capital base.
In turn, our solvency margin is also affected by our growth. The more insurance we sell, the more of our capital we will consume. In any case, MAPFRE has a very broad objective, between 175% and 225%. At the worst point, in March 2020, our solvency margin remained above 177%; while the financial markets, bonds, real-estate investments, everything was going down, we managed to remain at 177%. Our performance, measured every six months remains stable, despite the fact that we are seeing record revenue growth across the Group.
When compared to Non-Life companies, which is MAPFRE's main business, our solvency is much higher than our competitors. We only maintain these solvency appetites to maintain our rating and for MAPFRE RE to be able to participate in the insurance programs organized by very solvent large companies. We invest in capital to insure the best risks.
MAPFRE’s dividend is a stable dividend. We have only dipped beneath the 14.5-cents per share mark in 2020 and more because of the instructions from supervisors as a gesture to the rest of the market than anything else, since we had profits and enough capital to continue distributing dividends at the same level as beforehand. Our long-term commitment to the dividend is irrefutable.
- In terms of new technologies, what efforts is MAPFRE making?
MAPFRE has been analyzing and managing data for a long time. The analysis capacity of AI and in particular, generative AI, is going to result in major changes, in particular in terms of our prediction capacity. We are working on it. MAPFRE has two main focuses when it comes to innovation. The strategic focus, particularly linked to the business, which we manage with our day to day, small constant changes; and then the disruptive focus, open innovation, associated with external groups. This is conditioned by MAPFRE's own investments in Open Innovation or connected to our participation in start-ups or other types of companies. We are working in both fields.
- In terms of the trading of securities on the market and their liquidity, with 70% in the hands of the foundation, are you considering some kind of package on the market to promote the liquidity of securities?
There is no change in strategy. The Foundation has traditionally held 60% to 70% depending on the circumstances. Our level of liquidity is by no means low, bearing in mind our free float. Our trading of shares has dropped in recent times, but it remains a niche value.
- Two challenges facing the sector:
The demographic challenge We have to understand and live with an increasingly older society. How to age actively. Insurance companies have a lot of work to do in this area. The other is directly related to the market and technology. All these technological changes are going to provide insurers with new opportunities to do things differently, better and, most importantly, much more efficiently.
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