S&P Affirms Commerce, Mapfre Ratings; Few Concerns Over Merger

October 31, 2007

Standard & Poor’s Ratings Services said today that it 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. (CIC).

Standard & Poor’s also said that the outlook on all these companies remains stable.

The ratings on these companies are unaffected by the proposed acquisition of 100 percent of CGI’s shares by Mapfre S.A. (Mapfre’s core operating entities are Mapfre Empresas Compania de Seguros y Reaseguros S.A. Empresas S.A. and Mapfre Re Compania de Reaseguros S.A., both of which are rated AA/Stable/–.) Mapfre expects to finance the transaction through a combination of new equity, hybrid capital, and the group’s existing resources.

Following the proposed acquisition, Standard & Poor’s said it believes CIC might accelerate its progress in expanding outside Massachusetts through its nonrated subsidiaries American Commerce Insurance Co., Commerce West Insurance Co., and State-Wide Insurance Co. Historically, these companies’ operating performance has been weaker than the performance of the two rated companies, so an expansion of their business will likely add a few points to the consolidated organization’s combined ratio, according to the rating organization.

Operationally, Standard & Poor’s said it does not expect any significant changes to CIC’s management or to the organization’s strategic 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, in particular its extremely strong capitalization, strong competitive position, and strong earnings record.

CIC–along with its nonrated subsidiaries–will likely continue to produce underwriting results and earnings in line with historical five-year averages, the firm predicted. If the group were not to meet this expectation, a revision of the outlook to negative or a downgrade could occur. Standard & Poor’s said it considers a revision of the outlook to positive or an upgrade unlikely over the next year or two.

Standard & Poor’s Ratings Services also said that its ratings and outlook on the Spanish Mapfre insurance group (core operating entities Mapfre Empresas, Compania de Seguros y Reaseguros, S.A. and Mapfre Re Compañía de Reaseguros, S.A. are rated AA/Stable/–) are unaffected by the proposed acquisition.

Standard & Poor’s said it expects that, in conjunction with other recently announced acquisitions, this transaction should enable Mapfre to quickly rebuild its capitalization to the point that consolidated risk-adjusted capital adequacy returns to the high end of the ‘A’ range by the end of 2008. Should this expectation not materialize, or in the event that Standard & Poor’s concerns as expressed above assume greater importance, then this could lead to a negative rating action. A positive rating action is viewed as unlikely over the rating horizon.

Source: Standard & Poor’s
www.standardandpoors.com

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