Mapfre Financial Review PDF

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In the course you will need to do an evaluation of a company based on comparables, this is an example of a paper that took 15/15 ...

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MAPFRE SA. ANALYSTS RECOMANDATIONS In order to make recommendations to the shareholders who are owning MAPFRE’s shares, we have calculated the expected share price using different types of multiples evaluation- P/E, EV/EBITDA, EV/SALES. With the purpose of assessing the most accurate share price, we have taken in consideration both MAPFRE and its competitors’ multiples, According to the closing share price on November 19 th 2018, which is 2.53€ and the expected price that has been calculated by the analysts, the recommendation to the shareholders is to sell the shares that they own. In fact, it can be observed how the shares are sold at premium, which means that the share price exceeds its fair value2.44€: hence, shareholders profit would amount to 0.09€ per share sold. Furthermore, as it can be seen in the graph, the share price’s trend does not follow a clear tendency, and it cannot be assumed if it is going to increase or drop, even though the overall price has been subjected to a decrease of 7.3%, during 2018. Therefore, it is preferable and more profitable to sell the shares as soon as possible, because of this both volatile and decreasing trend, in order not to reduce gain from the sale of such shares.

COMPANY DESCRIPTION MAPFRE, S.A. is a Spanish insurance company, based in Majadahonda, Madrid. It is the leading insurance company in Spain and the largest non-life insurance in Latin America. Through its subsidiaries, MAPFRE provides customers with property/casualty (especially auto) coverage, life insurance and reinsurance. The firm does business primarily in its home country of Spain, where it is a top insurer, and in about 45 other nations, including many in North and South America. Individual and group offerings include funeral, home, medical, and agricultural insurance. It additionally provides financial services such as investment and pension funds. The Company's activities are divided into four business units: Insurance, Assistance, Reinsurance and Global Risks. The Insurance line offers insurance policies, including life, accident, health, property and casualty and automotive insurance, among others. The Assistance line focuses on developing assistance services for insurance products, including road and travel assistance. The Reinsurance line is responsible for reinsurance activities. The Global Risks line offers integrated insurance services, such as risk prevention and protection, audit and control, for business customers. In addition, the Company is active in the management of pension funds, retirement plans and investment funds, as well as the provision of healthcare services in Spain. In 2017, they started a new sustainable campaign, that will have 12 months duration, and throughout which they will share information, videos, sustainable habits and volunteering activities with people, so they can discover them and participate in them.

INSUR AN CE SECTOR The insurance sector is made up of companies that offer risk management in the form of insurance contracts. The basic concept of insurance is that one party, the insurer, will guarantee payment for an uncertain future event. Meanwhile, another party, the insured or the policyholder, pays a smaller premium to the insurer in exchange for that protection on that uncertain future occurrence. The insurance market can be divided into two main types: Life insurance and General insurance (Non-Life). The first one is a written contract between the insured and the insurer, that provides for the payment of the insured sum on the date of the maturity of the contract or on the unfortunate death of the insured. The second provides payments depending on the loss from a particular financial event.

Overall sector In 2017, two significant events impacted the performance of the main insurance groups operating in Europe. Interest rates remained low and this is continuing to weigh heavily on the Life savings and traditional annuities businesses, while also affecting the return on investment. Meanwhile, a number of severe natural disasters across various regions had a sizable impact on the income statement of the Non-Life segment. The 15 largest insurance groups in Europe measured by premium volume earned 579.6 billion euros between them in 2017, revealing a slight year-on-year increase of 0.8%. As happened in 2016, the Non-Life segment of these groups generally outperformed the Life segment in terms of premium income as the global economy continued to recover. French group AXA continues to top the ranking with a premium volume of 92.05 billion euros, down 2.3% year on year as the growth reported in its Transversal & Central Holdings segment failed to offset the slowdown observed across its other business lines. A total of ten groups reported growth in their premium income. Of these, three reported growth of around 6%, namely BNP Paribas Cardif (10.2%), Talanx (6.3%) and Prudential (5.9%). Trailing these were MAPFRE (2.9%), Poste Vita (2.3%), CNP (1.9%), Aviva (1.8%), Allianz (1.3%), Ergo (0.9%) and CovHa (0.4%). All other groups reported lower premium income than in 2016.

Non-life sector The 15 largest European insurance groups operating within the Non-Life segment wrote 255.4 billion euros in premiums in 2017, up 1.7% year on year. Allianz tops the ranking in the Non-Life segment, with a premium volume of 52.26 billion euros, followed by AXA, Zurich and Generali. These four groups amass 46% of total premiums between them. The first change in the ranking can be seen in the fifth and sixth-placed groups, with Talanx now moving up to fifth and MAPFRE dropping to sixth.

Life sector In 2017, the Life segment turned in a mixed bag of results across the different markets. While growth was down in developed markets, there were mixed results across emerging markets: Growth was up in Eastern Europe, but slowed in Latin America, while emerging Asian countries reported two-digit growth, with China leading the way. Combined premium volume at the 15 largest European Life insurers featured in this report amounted to 370.5 billion euros in 2017, showing a slight year-on-year increase of 0.4%. The Axa group remains in first place, with a premium volume of 57.08 billion euros, down 2.7% on 2016. Growth in the United States and in the international operations segment was wiped out by negative growth in Europe and Asia, especially Japan.

COMPRABLE’ S MULTIPLES

In order to estimate the market price of the stock in the Insurance sector, a valuation based on multiples has been done among different companies which operate in this area. The following values express the ratios, which have been used below for the valuation, of the four comparable firms of MAPFRE.

AX A

BNP PARIBAS

BR ADESCO

METLIFE

P/E RATIO

9.89

10.29

3.65

11.91

EV/EBITDA

5.68

4.86

3.93

11.94

EV/SALES

0.45

1.47

0.88

0.83

Some adjustments: in order to calculate the P/E ratio for each company it has been decided to take the share price at the end of the 2017, in order to have a homogenous estimate of values.

Competitive companies are chosen within the same industry, with closest market capitalization. First of all, AXA’s choice as first comparable company is due to the fact that it ranks 1 st among European Insurance firms by premium volume. we had chosen AXA as first comparable company. Therefore, it is important to have a benchmark in a higher position than MAPFRE’s one in order to see which are the main differences between the two of them and, by making a comparison, try to understand how to make improvements in some business areas. Afterwards, a European Insurance Company which has a lower raking than MAPFRE has been chosen: BNP Paribas Cardif. This company occupies the 12 th, whereas MAPFRE ranks 10th.Thereafter, MAPFRE’s benchmark includes Bradesco, the first South American Insurance company in the ranking by premium volume. In this case, it is important to take in consideration a company in a different market area, in which MAPFRE operates as well. MAPFRE is the third one, so it is important to make a comparison with a company with a higher ranking position, but also with one whose performances are lower, such as Metlife – that ranks 7 th.

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MAP FRE’S MULTIPLES The following values represent the historical multiples of MAPFRE in the last four years. 2017 P/E EV/EBITDA EV/SALES

2016

2015

2014

11.65

11.6

10.05

10.41

8.92

7.55

7.97

7.16

0.58

0.60

0.54

0.59

DIFFERENT TYPES OF VALUATION WITH MULTIP LES Going ahead, the average of the comparables’ multiples has been calculated by doing a simple average in order to calculate the benchmark, excluding in the average P/E the outlier value of Bradesco (3,65) and in the average EV/EBITDA the outlier value of METLIFE (11,94).

BEN CHMARK AVERAGE P/E AVERAGE EV/EBITDA AVERAGE EV/SALES

10.93

10.41

7.90

4.80

0.58

0.90

Therefore, in order to calculate the average stock prices, the methods of the multiples have been used taking the previous values- both MAPFRE and benchmark’s ones. In order to get the expected values below, it has been used the EPS, EBITDA, Debt, Cash and Sales of MAPFRE at the end or gained in 2017.

BENCHMARK

VALUATION USING P/E VALUATION USING EV/EBITDA VALUATION USING EV/SALES

3

2.51€

2.40€

2.18€

0.66€

2.67€

5.12€

In the end, the four average values between the previous six (2.52€; 2.18€; 2.67€, 2.40€), excluding the outliers 0.66$ and 5,12$, has been taken in order to calculate the final average stock price, which is 2.44€.

FINAL CONSIDERATIONS AND BUSINESS ANALYSIS As the report shows, the trends of the different ratios for MAPFRE has been increasing during the year, and in 2017 it seems that the company, looking also at comparables, has performed well. The P/E ratio measures the market price of a company’s stock relative to its corporate earnings, which can then be compared with other companies. The intuition behind its use is that when you buy a stock, you are in a sense buying the rights to the firm’s future earnings. As the report shows, the average P/E of the comparable companies is 10.41. The P/E ratio of MAPFRE is 10.93, according to its 2017 data. If a P/E ratio is greater than the Benchmark, it means that investors are paying a higher price compared to the actual earnings. A high P/E depends on positive investors’ expectations on the future company earnings. This is connected to an increase in share price. Moreover, since the MAPFRE’s P/E ratio is not extremely higher compared to the Benchmark, it means that the share price is almost fair compared to the earnings that the investors were expected. The EV/EBITDA ratio is greater than the average of comparable firms’: it shows that investors have overvalued a bit MAPFRE. As it can be observed in the upper graph, MAPFRE’s average EV/EBITDA over the 2014-2017 period is 7.90, whereas benchmark’s average multiple is 4.80. Such comparison reflects a healthy situation for both MAPFRE and its benchmark, even though the former’s performances are generally decreasing during the last four years (in 2014, MAPFRE’s EV/EBITDA was 7.16). For these reasons, it can be assumed that MAPFRE’s efficiency - in terms of EBITDA - is lower than its comparables firms. At the end, EV/Sales ratio comparison indicates that MAPFRE has high sales relative to its value and also that the investors believe that sales of the benchmark will rise more than the MAPFRE’s ones. Because of the fact that MAPFRE operates in the Insurance sector it should be taken into consideration also external factors, especially natural ones. Moreover, this sector can be seen as very connected to external factors: in fact, prices are very volatile and difficult to forecast, for this reason there is a low growth expectation of insurance companies stocks prices.

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SOURCES MAPFRE’s information: - http://www.hoovers.com/company-information/cs/companyprofile.MAPFRE_sa.6cd1d80316cf9129.html - https://noticias.MAPFRE.com/en/MAPFRE-uns-sustainable-development-goals/ - https://www.mckinsey.com/industries/financial-services/our-insights/evolving-insurance-coststructures Insurance sector information: - https://www.MAPFRE.com/corporate/ Axa’s Values:  https://www.axa.com/en/newsroom/publications/2017-annual-report  https://www.axa.com/en/investor/axa-share-performances#anchor=market-data&tab=shareperformance Bradesco’s values:  https://www.gurufocus.com/term/ev/BBD/Enterprise-Value/Bank-Bradesco-SA  Annual report 2017 BNP Paribas’ values:  https://invest.bnpparibas.com/en/about-bnp-paribas Metlife’s value:  EPS: https://investor.metlife.com/static-files/9ec0e335-c838-47f1-b211-2748efad14a4  Share price: https://finance.yahoo.com/quote/MET/history/  EV https://investor.metlife.com/static-files/9ec0e335-c838-47f1-b211-2748efad14a4  Market cap: https://www.macrotrends.net/stocks/charts/MET/metlife/market-cap.  revenues : https://investor.metlife.com/static-files/9ec0e335-c838-47f1-b211-2748efad14a4  EBITDA: https://investor.metlife.com/static-files/9ec0e335-c838-47f1-b211-2748efad14a4 MAPFRE’s value:  Annual report 2017 on MAPFRE.com  https://www.MAPFRE.com/corporate/institutional-investors/shareholder-space/financial-newsletter/shareperformance.jsp

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