Mapfre Re upgraded to 'A+' by S&P
S&P Global Ratings (S&P) has raised the long-term issuer credit and insurer financial strength ratings on Spain-based Mapfre group's core operating entity Mapfre Re from ‘A’ to ‘A+’. At the same time, S&P raised the long-term issuer credit rating on the group's holding company Mapfre to ‘A-’ from ‘BBB+’. The outlook on both entities is stable.
S&P also raised issue ratings on Mapfre's senior unsecured debt to 'A-' from 'BBB+' and the issue ratings on the group's subordinated debt to 'BBB' from 'BBB-'.
“We raised the ratings because we think Mapfre's implementation of its strategic plan has enhanced underlying profitability of its underperforming lines, mainly in Brazil and the United States, adding diversity to the group's overall earnings,” said S&P. “Despite a decline in the group's net results by €65.9 million to €462.9 million so far in 2019, we believe that underlying profits improved because Mapfre has taken advantage of stronger diversification of earnings.
“We understand that the reported deterioration in net earnings is driven by one-off losses from the write-down of goodwill in its assistance operations, and we do not anticipate those losses will repeat in the coming years. We expect that the group will continue to enforce profitability in underperforming lines and countries, generating an annual net profit (after minorities) of about €700 million supported by a group combined ratio at around 97 percent and a return on equity of about 8 percent over the next two years.”
S&P said Mapfre has been able to demonstrate its capacity to build global business outside of Spain mainly through its reinsurance business, as well as in Brazil and the US. The stringent implementation of profitability measures led to a reported combined ratio of 91.1 percent in Brazil and 99.7 percent in North America in the first nine months of 2019 compared with a five-year average of about 95 percent in Brazil and 104 percent in North America. As a consequence, so far in 2019, the group's reported combined ratio has improved to 96.4 percent, compared with 98.1 percent in the same period of 2018.
The group is the second-largest insurer in its domestic market in terms of premiums, holding leading positions in both property/casualty (P/C) and life insurance. It also ranks second in Brazilian P/C through its joint venture with Banco do Brasil, one of Brazil's largest banks that serves more than 66 million clients. Mapfre Group generated €2.4 billion from external reinsurance in 2018 (65 percent of its gross inward reinsurance premiums), accounting for over 10 percent of the group's business and providing a significant source of profit diversification. However, compared with higher-rated peers, Mapfre is less diversified in life insurance. Additionally, a larger share of its business is generated in emerging markets, which are potentially more volatile than mature markets.
The group has a solid consolidated capital position with a Solvency II ratio (excluding transitional measures) of 183 percent based on June 2019 figures.
“Additionally, we expect capital adequacy to remain solid, at our 'A' confidence level according to S&P Global Ratings' risk-based capital model,” said S&P. “In our opinion, Mapfre will continue to generate sufficient retained earnings to compensate for the rise in capital requirements deriving from both organic growth and small bolt-on acquisitions.
Mapfre Group's international diversification makes it resilient to a hypothetical domestic sovereign stress situation. As a result, under our criteria, we can rate the core operating entities of the Mapfre group above the Spanish sovereign long-term rating by a maximum of three notches, reflecting our view of Mapfre Group's moderate to high sensitivity to country risk.
“The stable outlook is based on our expectation that the group will remain focused on profitable growth in 2020-2022, maintaining a leading position in its main markets, without earnings being impacted by further material one-off losses. We also expect that the group will keep its capital position comfortably at the 'A' level, according to our capital model, backed by sound earnings of about €700 million and supporting Mapfre's growth and dividend targets.”
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