Analysts have mixed feelings about Spanish insurance group Mapfre’s restructuring proposal. They recognise that the change could benefit the company, but they also see some potential drawbacks.
Mapfre announced proposals to overhaul its corporate structure on May 30. Under the existing structure, only part of the overall group is directly controlled by Corporación Mapfre, the group’s listed entity. The motor insurance business and several other firms are controlled by mutual entity Mapfre Mutualidad, the group’s ultimate parent, and so are effectively invisible to investors in Corporación Mapfre.
Under the proposals, control of all the group’s units will be transferred to Corporación Mapfre, and Mapfre Mutualidad will be dissolved. The motor business will move to a new subsidiary called Mapfre Automóviles, which will ultimately report to Corporación Mapfre.
The group’s ultimate holding company will be Fundación Mapfre, a charitable foundation through which the Mapfre group invests in social and non-profit projects. An intermediate holding company, Cartera Mapfre, will sit between Fundación Mapfre and Corporación Mapfre. The listed entity will change its name to Mapfre SA from Corporación Mapfre.
The reorganization is awaiting approval from the mutual members and regulators. The firm hopes to complete the change by the end of this year and start 2007 with the new structure.
The company believes the change will simplify its structure and allow investors to understand it better. This could make it easier for Mapfre to raise capital. “Corporación Mapfre, the listed entity, only includes part of the business, and therefore there is a limitation in the way the market understands and values Mapfre,” says Domingo Sugranyes Bickel, executive v.p. of Corporación Mapfre. “With the new structure we hope that problem will disappear and that our ability to raise more capital or debt if necessary will be strongly improved.”
But some warn there could be risks as well as rewards from the restructuring, and so it is unclear how it will pan out for the firm. “We don’t know if it is going to be positive or negative,” says one analyst, who asked not to be named. “There are certain technical positives and certain negatives,” he says.
A big change will be the inclusion of Mapfre Mutualidad’s motor book with the rest of the group’s insurance business. On one hand, this is positive, says the analyst, because the motor book has been profitable and produced good returns on equity. On the other hand, motor business in Spain has become extremely competitive and prices are falling, so the business may not stay so attractive.
Sugranyes Bickel acknowledges the troubles in the motor market, but that they will not pose a big problem for his company. “The cycle for motor business in Spain is now at a point where there is price competition, whereas three years ago prices were going up and everybody was making a technical profit. But the cycle will change quickly,” he says.
He adds that Mapfre’s low cost base will help it weather the effects of price cutting. He says the firm’s cost ratio is five percentage points lower than the market average.
