Spain’s Mapfre Sees Commerce as Portal to Expansion in U.S.

November 18, 2007

Insurer likes Hispanic market potential as well as solid performance of Mass. personal lines insurer

The potential of the Hispanic insurance market is one of the factors attracting Spanish insurer Mapfre to its acquisition of the Webster, Mass.-based personal lines writer Commerce Group.

Mapfre officials calculate that about 14 percent, or some 22 million, of Commerce’s customer base in its 17 states of operation is Hispanic. Drawing from their experience in Europe, Latin America and Puerto Rico, Mapfre officials said they want to grow Commerce’s business in other states beyond Massachusetts by in part targeting the Hispanic community with specific products. Mapfre already has a small Spanish-speaking team in Florida, they noted.

In a conference call with analysts the day after Mapfre announced plans for the $2.2 billion acquisition, Mapfre Vice President Domingo Sugranyes and other executives said they are primarily attracted to Commerce as a solid platform for building a U.S. presence due to the U.S. insurer’s “consistently recorded growing profits and above industry average returns” based on positive underwriting results and low operating costs.

Mapfre officials said they expect the $2.2 billion cash acquisition to become immediately profitable to shareholders after it closes, which should be second quarter 2008.

Commerce will be merged with a U.S. subsidiary of Mapfre. They said they would retain the Commerce management team and the headquarters in Mass.

Commerce is ranked as the 20th largest personal automobile insurance group in the country by A.M. Best Co. It recorded gross written premiums of $1.963 billion and net earnings of $241.5 million in 2006, with a combined ratio below the U.S. average (89.1%).

Commerce has a total of 1,586 independent agents and 1,152 brokers and 2,200 employees.

Commerce’s subsidiaries include The Commerce Insurance Co. and Citation Insurance Co. in Massachusetts, Commerce West Insurance Co. in California, American Commerce Insurance Co. in Ohio, and State-Wide Insurance Co. in New York.

About 80 percent of Commerce’s business is in Massachusetts, New Hampshire and Rhode Island where it has operated for years, while another 15 percent is in California, Arizona, Oregon and other Western states. More recently, it has been expanding into New York, New Jersey, Connecticut, Pennsylvania and several Midwest states. It holds licenses in all 50 states and operates in 17 of them.

Commerce is a leading writer in Massachusetts, where it holds a 31.5 percent market share in personal automobile insurance.

In Massachusetts and other states, Commerce has relationships with affiliates of the American Automobile Association (AAA) under which it sells auto coverage to members. Mapfre executives indicated they see great potential in this distribution strategy.

Mapfre officials acknowledged that regulatory changes occurring in Massachusetts, which is moving from a system of state-set auto insurance prices to one allowing insurers more flexibility starting next April, could attract new competitors in this key market. But they expressed confidence that Commerce will continue to succeed in Massachusetts, where its market share (31.5%) is more than double that of its nearest rival, Safety Insurance (11.2%).

Mapfre officials said the portion of Commerce’s business outside of Massachusetts is important to it as it seeks to achieve organic growth in the U.S. The planned transaction also widens the international geographical coverage of its businesses; reinforces its distribution network and management capabilities in the U.S.; and diversifies its currency exposure.

Mapfre S.A. has more than 250 companies and principally operates in Spain, Europe and Latin America. This is the largest investment in its history.

After the consolidation of Commerce’s businesses, Mapfre’s activities in the U.S. will represent close to 10 percent of the total premiums of Mapfre.

Mapfre started operations in the U.S. in 1993 and is currently operating in Florida, New Jersey and Puerto Rico.

The acquisition is subject to regulatory and Commerce shareholder approvals.

Rating Agencies

Following the announcement, Standard & Poor’s Ratings Services affirmed its ‘BBB’ counterparty credit rating on Commerce Group Inc. and its ‘A’ counterparty credit and financial strength ratings on CGI’s insurance operating companies: Commerce Insurance Co. and Citation Insurance Co.

Standard & Poor’s also said that the outlook on all these companies remains stable. It said it believes Commerce might accelerate its expansion outside Massachusetts. Operationally, Standard & Poor’s said it does not expect any significant changes to management or to the organization’s focus of diversifying its products and geographical concentration.

“We do have some concerns about the proposed transaction,” noted Standard & Poor’s credit analyst Tom E. Thun. “These relate to the limited immediate strategic fit of Commerce within Mapfre. In addition, we believe the accelerated replication of CIC’s business model outside of its home state of Massachusetts and into new customer groups— particularly in respect of its affinity relationship with AAA—will be challenging.”

However, these concerns are offset by Standard & Poor’s view of Commerce’s strong capitalization, strong competitive position, and strong earnings record.

Fitch Ratings placed Commerce Group, Inc. ratings and subsidiaries on positive watch. Fitch said its decision “reflects potential benefits derived from the companies becoming a part of a much larger, multinational organization with a strong commitment to increase its presence in the U.S. market.” However, Fitch did add that it “has concerns about the execution and operational risks associated with the transaction.”

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