Fitch Ratings has affirmed the Spanish insurer Mapfre SA (Mapfre) and its core operating subsidiaries’ Insurer Financial Strength (IFS) ratings at ‘A+’ and Mapfre’s (the holding company) Long-term Issuer Default Rating (IDR) at ‘A-‘. At the same time, Fitch has upgraded Mapfre’s US subsidiaries (MUSA) to IFS ‘A+’ from ‘A’. The Outlooks are Stable. A full rating breakdown is at the end of this comment.
The affirmation of Mapfre’s ratings reflect the group’s solid and resilient credit profile amid challenging operating and investment conditions, particularly in Spain. Offsetting this, Mapfre’s exposure to euro zone sovereign credit risk and hence to the risk that potential investment losses could impair the group’s strong capital adequacy and ultimately weaken Mapfre’s credit profile.
Mapfre’s ratings are affected by the uncertainty over the macroeconomic implications of euro zone sovereign credit risk. Mapfre has a strong franchise in Spain and Latin America and profitable, albeit volatile in some lines of business, underwriting performance. Mapfre’s capital position, as measured by Fitch, is robust. However, the quality of capital is negatively impacted by the amount of goodwill and commercial real estate on balance sheet. The regulatory solvency position is also strong. Fitch’s calculated financial leverage was 21% at end-2010, which the agency views as commensurate with the rating.
While geographical diversification in terms of both products and invested assets makes the group’s credit profile relatively resilient to a potential severe deterioration in Spain’s sovereign rating (‘AA+’/Negative), 60% (EUR7.4bn) of its sovereign fixed income portfolio is invested in Spanish bonds. Spanish sovereign debt continues to trade at high credit spreads against German Bunds, due to the market’s perception of increased credit risk. Fitch believes a prolonged period of wide credit spreads could exert pressure on Mapfre’s strong capital adequacy.
In Fitch’s view, Mapfre benefits from good financial flexibility. The company’s dividend reinvestment plan has historically been successful with high subscription rates and no financial debt matures before 2013. However, the redemption of EUR275m senior debt in July without refinancing signalled that it could be more difficult to raise fresh funds at a price commensurate with the group’s credit fundamentals through debt markets if needed.
The upgrade of MUSA reflects an updated analysis under Fitch’s ‘Approach to Rating Insurance Groups’. Given MUSA’s small size and lower level of synergistic relationship with core members of the Mapfre organisation, Fitch views its strategic importance to Mapfre as “Important”. Mapfre has made branding and organisational changes since MUSA was purchased in 2008, which advance its demonstration of “willingness to provide support” in Fitch’s view. Furthermore, because the standalone IFS ratings of MUSA’s operating companies are currently ‘A’, or one notch lower than the group rating, they qualify for uplift to the group rating of ‘A+’ under Fitch’s group ratings criteria. Fitch expects that MUSA’s IFS ratings would move in step with Mapfre’s, until the divergence between the standalone ratings increased to greater than two notches.
Given the exposure to euro zone credit risk, Fitch does not anticipate an upgrade of Mapfre’s ratings in the short to medium term. However, rating drivers that could trigger an upgrade are maintaining group capitalisation at high levels (e.g. regulatory solvency I ratio no lower than 275%), combined ratio net of catastrophe related losses below 96% and steady or reducing debt leverage.
Mapfre’s ratings could be downgraded if the Spanish sovereign rating was downgraded by more than three notches from the current ‘AA+’. In addition, if the exposure to the Spanish insurance market or sovereign debt were to result in material underwriting and investment losses, Mapfre’s ratings could also be downgraded.
Mapfre is the largest insurer in Spain, with around a 15% share of the total insurance market by gross written premiums (GWP). It also has substantial operations in Latin America, with a market share of approximately 8% in the countries in which it operates. Overall, it has a presence in 43 countries across the world, a diversified business book and strong growth potential, especially in developing markets. At H111, the group had EUR8,967m of shareholders’ equity including minorities (a 15% increase over H110), a reported return on equity of 14.5% (14.6%) and GWP of EUR9.7bn (EUR9.1bn).
Source : Fitch Ratings Press Release
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