MADRID, Spain, (A. M. Best via COMTEX) -- Spanish insurer Mapfre has bought up Massachusetts-based insurer Commerce Group for $2.21 billion (1.5 billion euros).

Describing it as "the largest investment in the history of the group," Mapfre said that it intended to fold Commerce, which is the largest writer of private-passenger automobile insurance in Massachusetts, into its U.S. operations, giving it a key boost in the U.S. market.

The Madrid-based company said it will fund the acquisition entirely in cash, via an equity cash raising of 500 million euros, issuing bonds worth 800 million euros and using internal resources for the remaining balance. The shareholders of Commerce will receive $36.70 per share, representing a 22.5% premium over the average share price of the past 30 days.

The deal is subject to regulatory approvals on both sides of the Atlantic and will also require the approval of the owners of at least two-thirds of the common stocks shares of Commerce. However, the board of Mapfre had approved the deal, and the board of Commerce had recommended it.

According to Domingo Sugranyes, vice president of Mapfre, the deal is a good one for both companies. Speaking at a conference call, he said Mapfre had been keen to find a way of deepening its presence in the United States and that the purchase of Commerce was an excellent way of doing this.

Sugranyes said Commerce had a leading position in the Massachusetts property/casualty business, with strong brand recognition, excellent agency relationships, outstanding customer service and what he described as "unsurpassed" economies of scale. In addition, he said the company had a highly experienced management team, which would be retained, with Commerce operations remaining in Massachusetts.

Sugranyes said Mapfre would be able to offer its own experience in dealing with regulatory changes to Commerce, as well as access to its existing operations in the United States. Mapfre owns Mapfre Insurance Company of Florida, New Jersey-based Mapfre Insurance Co., Road America Motor Club, Federal Assist, which provides medical travel assistance, and Mapfre Puerto Rico.

Mapfre would also be able to provide product knowledge across several countries in all property/casualty lines, he said.

The transaction will follow a number of steps. First Mapfre will create a special purpose vehicle and capitalize it with the necessary financial resources required to acquire Commerce. The merger of the SPV and Commerce will then need to be approved by two-thirds majority of Commerce stockholders. The merger will then take place, before the resulting entity goes on to buy back Commerce?s shares.

The deal was announced on the same day that Mapfre unveiled its third-quarter 2007 results. The company said its pretax profits for the first nine months of the year came to 960.4 million euros, up 10.8% on the 866.9 million euros it reported over the same period of 2006. Net profits for the period came to 505.2 million euros. Mapfre said its non-life combined ratio had improved slightly to 92.9 from 94 in the first nine months of 2007.

Following news of the acquisition Oct. 31, Mapfre shares fell 3.57 % to $3.24. Commerce shares jumped 16.81% to $36.35 in midday trading on Oct. 31.

Commerce has been faced with some interesting challenges in recent months. After 30 years of centralized private-passenger auto insurance rate-making, Massachusetts will be phasing this out in favor of managed competition in 2008. As from April 1, 2008, the state will allow Massachusetts personal auto insurers to introduce competitive products (BestWire, July 17, 2007).

Commerce was also hit by the ongoing subprime mortgage crisis that has hit credit markets all over the world, and has announced that it will stop writing mortgage loans (BestWire, Aug. 15, 2007).

Mapfre has had a busy 2007 so far. In the first quarter, the group made several moves to increase its market presence in Spain and abroad through bancassurance agreements. Mapfre also established direct insurance presences in Italy and Turkey, which it also views as potential high-growth markets (BestWire, May 7, 2007).

Commerce Group posted a drop in third-quarter net income to $55.5 million from $56.5 million. Included were realized investment losses of $3.2 million, compared with net gains of $7.8 million last year. Earned premiums fell slightly to $458.1 million from $459.9 million. Massachusetts written premium per vehicle decreased about 8.9% in the third quarter compared with last year, while the number of insured vehicles increased 1.2%. The decline in written premium per vehicle resulted from the state-mandated personal automobile premium rate decrease, which was effective April 1, 2007

Commerce Group currently has a Best?s Financial Strength Rating of A (Superior). Some of Mapfre?s underwriting units currently have Best?s Financial Strength Ratings ranging from A (Superior) to A- (Excellent).

--------------------------------------------------------------------------------------------------

© 2007 The Connors Group, Inc.

Presented by InsuranceHeadlines.com