Spain's MAPFRE Buys Commerce Group For $2.2B

Spain's largest insurer, MAPFRE S.A., and the Webster, Mass.-based Commerce Group Inc. have signed an agreement for MAPFRE to acquire the auto carrier in a $2.2 billion cash deal, the companies said last week.

MAPFRE said it will purchase 100 percent of Commerce share capital for EUR1.538 billion, or $2.207 billion, making this the largest deal in the history of MAPFRE.

Domingo Sugranyes, MAPFRE vice president, said during a conference call with management that the purchase was part of his company's plan to establish “a presence in the United States with a well-developed plan to address the Hispanic community” and the population as a whole, and to move step by step into other states. Commerce, he said, would serve as a “very solid platform.”

The move comes just a week after German-based reinsurer Munich Re announced its plans to expand its U.S. footprint by acquiring The Midland Company, a Cincinnati-based specialty insurer for $1.3 billion.

Mr. Sugranyes noted that MAPFRE already has a small bilingual operation in Florida that can be used in other states and MAPFRE Re can provide reinsurance solutions for Commerce.

The company, Mr. Sugranyes noted, is investing “when the exchange rate is very favorable.”

As outlined, the agreement will merge Commerce with a U.S. subsidiary of MAPFRE. When completed, Commerce shareholders will receive $36.70 per share, representing a 22.5 percent premium over the average share price of the past 30 days.

In Massachusetts, Commerce is the leading writer of non-life personal insurance lines with a 31.5 percent share of the auto insurance market. Coming regulatory changes in the state may bring in big competitors, but MAPFRE management noted Commerce has already begun to expand its business activities in other states.

Commerce currently operates in 17 states and holds licenses in all 50.

MAPFRE, it was explained, plans to finance the acquisition through an equity capital raising of EUR500 million ($718 million) and the issuance of bonds up to EUR800 million ($1.148 billion), with the balance coming from internal resources.

Javier Fernandez-Cid, MAPFRE director and manager, said the company would hope to close on the deal within four-to-six months.

MAPFRE management said they liked Commerce financials, and in planning the merger working with Commerce executives, there was “a very good synergy,” Mr. Fernandez-Cid related.

Commerce has 1,586 independent and specialized agents and 1,152 brokers. The carrier recorded gross written premiums of $2.0 billion (EUR1.4 billion) and net earnings of $241.5 million (EUR168 million) in 2006.

Its combined ratio of 89 was below the average for U.S. insurers.

Commerce holds a strategic agreement with the American Automobile Association in Massachusetts for exclusive product distribution that was recently renewed for 20 years.

MAPFRE said the transaction will diversify the firm's currency exposure.

The Spanish firm said it will bring to Commerce its expertise in working with varied regulatory systems around the world and skills in auto insurance management.

After the consolidation, MAPFRE's activities in the United States will represent close to 10 percent of the Spanish insurer's total premiums.

MAPFRE said it expects to provide Commerce with additional underwriting ability, experience in developing non-life products, development of integrated and unified information technology, and management control platforms.

The company said it would also add experience in expanding into new business lines and territories and reinsurance solutions for the most appropriate protection of the portfolio.

Commerce has close to 2,200 employees.

MAPFRE, which started U.S. operations in 1993, in addition to its small Florida unit has a presence in New Jersey and Puerto Rico and operates Road America Motor Club roadside assistance operations throughout the country.

MAPFRE has operations in 40 countries and is the leading insurer in Spain. In non-life insurance, the company ranks as the largest group in Latin America and the tenth largest in Europe.

Commerce subsidiaries include The Commerce Insurance Company and Citation Insurance Company in Massachusetts; Commerce West Insurance Company in California; American Commerce Insurance Company in Ohio; and State-Wide Insurance Company in New York.

Standard & Poor's said MAPFRE ratings would be unaffected by the proposed acquisition, but the firm said it had concerns about the immediate strategic fit of Commerce within MAPFRE and the group's ability to replicate the success of the acquired business model outside of its home state of Massachusetts and into new customer groups.

According to statistics published by National Underwriter earlier this year, Commerce Group ranked as the 40th largest U.S. property-casualty insurer based on 2006 net written premiums of $1.8 billion.

In addition, in NU's Profit Leaders ranking, published in December 2006, Commerce Group ranked in the top 25–coming in 18th with a six-year average combined ratio of 94.2 for the years 2000-2005.