On June 5, Mapfre announced that it had completed its acquisition of Commerce Group, a U.S.-based insurer. The deal was first announced last October. Mapfre, Spain’s largest insurance company, will pay $2.21 billion for Commerce. It is the largest investment in the company’s 75-year history, and it is a key step in the company’s international expansion.


Shareholders of Commerce will receive $36.70 per share. Mapfre has assured everyone that it will maintain the U.S. company’s current managerial team, and that it foresees no personnel changes. The company’s 2,400 employees will continue to have all of their rights within the Spanish company. The headquarters of Commerce will remain in Webster, Mass., and the company will continue its operations in the geographical areas where it currently has a presence. The company will also consider gradually expanding into other U.S. states.


A Smart Acquisition


Mauro F. Guillén, director of the Lauder Institute at Wharton, is convinced that the deal is “a good opportunity” for Mapfre to acquire a spot in the U.S. insurance market “at a time when the U.S. is open to investment because of its trade deficit…. It is a fragmented market in which a good insurance firm, such as this Spanish one, can be a winner. Acquiring the Commerce Group is the right thing to do. The euro makes it a good deal.”


For Manuel Romera, director of the IE Business School’s finance department, this is “a very good time” to enter the U.S. market and complete an acquisition. He points out “the benefits of making acquisitions in the U.S. market now that the euro is strong versus the dollar” and emphasizes that “because of the delicate financial condition of the U.S. these days, companies can enter this sector at prices that are real bargains.” In addition, Mapfre could use “its considerable cash” for making acquisitions. Romera believes that the arrival of Mapfre in the U.S. serves to “demonstrate its strong financial and commercial capacity.”


One proof of its sound financial condition is that Standard & Poor’s (S&P) and A.M. Best have maintained their ratings on Mapfre even after its acquisition of Commerce Group’s shares.


Commerce Group is the twentieth-largest U.S. auto insurance group, with about $1.9 billion in premiums in 2007. In Massachusetts, Commerce is the largest insurance company outside the life insurance sector. The company also has subsidiaries in California, Ohio and New York. In an effort to carry out its plan to expand outside its state of origin, Commerce has licenses to operate in all 50 U.S. states.


“The acquisition of Commerce is not only the largest deal in the history of [Mapfre]; it also fits perfectly into its growth strategy and its desire to become a global insurer,” says José Manuel Martínez, president of Mapfre, in an announcement to Spain’s CNMV, the national stock market commission, which regulates the Spanish exchange. In addition, he notes, this acquisition “represents a key step in its international expansion and its commitment to the U.S. market…. The commitment, strength and independence of Commerce’s network of agents have been decisive factors in making this acquisition.”


The Strategy to Follow


When it comes to Commerce, Romera stresses its “experience in the non-life sector of the business;” its “great financial and commercial skills and its “good positioning” for reaching the entire U.S. market. Guillén believes that Commerce can help “teach the Spanish insurer [Mapfre] about this market” so that further down the road, “if everything goes well, it [Mapfre] can plan for an additional acquisition in a couple of years….The U.S. is a very big market and you have to move ahead little by little.”


What strategy must Mapfre pursue in the U.S. market? One of the factors that can help the insurer is the strong growth of the Latino community in that country. “Commerce operates in 17 states, and not only among its Latino population. It would be a mistake to concentrate on that segment of the population. Mapfre has a lot of other markets where it can grow without needing to present itself as a Spanish-speaking company,” states Guillén. For his part, Romera believes that Mapfre “wants to profit from the Latino population but it also wants to get into the Anglo-Saxon [English-speaking] world of insurance, and demonstrate its efficiency.”


Beyond the challenge of strategic planning, analysts believe that Mapfre will face some problems in the U.S. market. “It is a big market, with a different regulator in each of the 50 states, and it is passing through a delicate period because of the subprime crisis. But it is also a great opportunity for the future. There is no such thing as a profitable business that does not involve risks,” says Guillén.   In the high-risk insurance sector, he notes the problems the American International Group (AIG) is now experiencing. For the first quarter of this year, AIG announced losses of $7.8 billion compared with profits of $4.3 billion during the first quarter of 2007.


Romera believes that Mapfre “will find that the U.S. market is extremely professional” because the “insurance culture is highly developed” there. He notes that other companies in the U.S. market are more focused on long-term insurance products, so Mapfre “must move toward short-term products, such as auto insurance.” Romera, who specializes in finance, also believes that moving into southern U.S. states in the future “could provide an opportunity [for Mapfre] to expand its presence in other markets such as Mexico, where it could enjoy some very attractive synergies, as well as [new opportunities to] build up its businesses in other countries such as Chile.”


Strength in Latin America


Mapfre already expects to undertake a significant expansion in Latin America. According to the Mapfre Foundation, which is sponsored by the Spanish insurer, Mapfre occupies the third spot in this region, with a market share of 4.5%. AIG ranks second. Mapfre gained two tenths of a point of market share last year thanks to the strong growth of its life insurance business in Brazil and the strength of its non-life products in Argentina and Mexico. Bradesco, the Brazilian insurer, once again took top spot [in Latin America] with a market share of 7.9%, five tenths of a percent higher than a year earlier.


Looking at sectors, Mapfre is the largest non-life insurer in Latin America, with a market share of 6.2%. Its life insurance products rank eleventh, with a 2.3% share of the market. At the end of 2007, Mapfre had more than 12,400 employees in the region. It also had a network of 32,000 agents and about 2,000 offices in the region. It has one of the most extensive networks of any financial service company in Latin America.


Mapfre’s expansion in South America is not slowing down. On June 11, the company announced that its subsidiary, Mapfre América, purchased 60% of Atlas, an Ecuadorian insurance company. The company will integrate its operations with those in Ecuador and the new Latin American company will be known as Mapfre Atlas. With this deal, Mapfre strengthens its position in Ecuador, where it began operations in 2007 by establishing a branch in Quito.


Last June, Manuel Martínez announced that Mapfre’s profits for 2008 could grow at a double-digit rate that would be significantly higher than last year. In 2007, Mapfre’s profits grew by 20% to €731 million ($1,135,000). Its forecasts now call for total revenues of about €17.2 billion, up almost 18% from last year.


As for further acquisitions, Martínez notes that if an opportunity presented itself, Mapfre could study it because it has enough liquidity to do that. “Mapfre has the opportunity to buy,” he says. However, it would have to be a deal that is “strategically extremely clear.” He suggests that it would be “normal” if the company made no further purchases over the next two years so it could focus on integrating its latest acquisitions, including Commerce. Martínez stresses that the company is interested in developing its direct insurance business in China, and that it is analyzing various alternatives with different institutions.


“Little by little, Mapfre is becoming a large insurance multinational,” says Guillén. “It has a presence in 43 countries, and is a very solid company.” Along the same lines, Romera maintains that Mapfre is “a magnificent insurance company with a business that is perfectly defined, a very broad and professional sales network and great skill at building loyalty among its customers.” In addition, Mapfre “has a very good [financial] rating, which it can use during this delicate period that the sector is going through.”