UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2000 Commission File Number 0-16882
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2599931
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
211 Main Street Webster, Massachusetts 01570
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 943-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
As of August 1, 2000, the number of shares outstanding of the
Registrant's common stock (excluding Treasury Shares) was
34,153,952
Page 1 of 32
The Commerce Group, Inc.
Table of Contents
Page No.
Part I - Financial Information
Consolidated Balance Sheets at
June 30, 2000 (Unaudited) and December 31, 1999.......................................... 3
Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 2000 and 1999 (Unaudited)............................ 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (Unaudited)...................................... 5
Consolidated Statements of Cash Flows - Reconciliation of Net Earnings to Net
Cash Provided by Operating Activities for the Six Months Ended June 30, 2000 and 1999
(Unaudited).............................................................................. 6
Notes to Unaudited Consolidated Financial Statements......................................... 7
Management's Discussion and Analysis......................................................... 13
Part II - Other Information
Item 4
Results of Votes of Security Holders..................................................... 31
Item 6
Exhibits and Reports on Form 8-K......................................................... 32
Signature ................................................................................... 32
- - 2 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
June 30, December 31,
2000 1999
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market (cost: $648,794 in 2000 and $661,445 in 1999)............. $ 641,497 $ 647,338
Preferred stocks, at market (cost: $230,378 in 2000 and $230,934 in 1999)............. 210,310 211,049
Common stocks, at market (cost: $393,060 in 2000 and $351,940 in 1999)................ 353,770 301,467
Mortgage loans on real estate and collateral notes receivable (less allowance for
possible loan losses of $964 in 2000 and $2,127 in 1999)............................. 74,104 72,451
Cash and short-term investments........................................................ 3,194 22,535
Other investments (cost: $22,434 in 2000 and $13,130 in 1999).......................... 23,761 14,139
Total investments.................................................................. 1,306,636 1,268,979
Accrued investment income................................................................ 14,703 14,697
Premiums receivable (less allowance for doubtful receivables of $1,447 in 2000 and
$1,452 in 1999)........................................................................ 259,080 195,160
Deferred policy acquisition costs........................................................ 108,595 98,500
Property and equipment, net of accumulated depreciation.................................. 34,560 34,802
Residual market receivable
Losses and loss adjustment expenses.................................................... 117,639 106,576
Unearned premiums...................................................................... 39,877 50,084
Due from reinsurers...................................................................... 63,893 48,365
Current income taxes..................................................................... 1,072 -
Deferred income taxes.................................................................... 38,736 43,051
Non-compete agreement.................................................................... 3,004 3,179
Other assets............................................................................. 8,578 8,079
Total assets....................................................................... $1,996,373 $1,871,472
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment expenses.................................................... $ 707,080 $ 675,188
Unearned premiums...................................................................... 543,942 457,095
Current income taxes................................................................... - 10,839
Deferred income........................................................................ 8,165 7,464
Contingent commissions accrued......................................................... 22,832 33,468
Payable for securities purchased....................................................... 526 1,953
Excess of book value of subsidiary interest over cost.................................. 9,787 10,758
Other liabilities and accrued expenses................................................. 28,646 26,885
Total liabilities.................................................................. 1,320,978 1,223,650
Minority interest........................................................................ 858 1,188
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value; none issued in
2000 and 1999........................................................................ - -
Common stock, authorized 100,000,000 shares at $.50 par value;
38,000,000 shares issued in 2000 and 1999............................................ 19,000 19,000
Paid-in capital........................................................................ 29,621 29,621
Net accumulated other comprehensive loss, net of income tax benefits of
$22,310 in 2000 and $28,467 in 1999.................................................. (41,432) (52,867)
Retained earnings...................................................................... 756,249 734,488
763,438 730,242
Treasury stock 3,846,048 shares in 2000 and 3,640,448 shares in 1999................... (88,901) (83,608)
Total stockholders' equity......................................................... 674,537 646,634
Total liabilities, minority interest and stockholders' equity...................... $1,996,373 $1,871,472
The accompanying notes are an integral part of these consolidated
financial statements.
- - 3 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Six Months Ended June 30, 2000 and 1999
(Thousands of Dollars Except Share and Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenues
Direct premiums written................................... $ 265,724 $ 233,183 $ 572,180 $ 513,135
Assumed premiums.......................................... 18,341 24,416 40,860 47,093
Ceded premiums............................................ (36,340) (31,601) (73,381) (59,711)
Net premiums written.................................... 247,725 225,998 539,659 500,517
Increase in unearned premiums............................. (14,945) (8,572) (79,572) (80,109)
Earned premiums........................................... 232,780 217,426 460,087 420,408
Net investment income..................................... 24,056 22,320 46,888 43,130
Premium finance and service fees.......................... 3,757 3,683 7,549 7,543
Amortization of excess of book value of subsidiary
interest over cost...................................... 847 768 1,695 1,282
Net realized investment gains (losses).................... (386) 6,565 328 6,145
Total revenues........................................ 261,054 250,762 516,547 478,508
Expenses
Losses and loss adjustment expenses....................... 180,224 164,093 352,653 318,508
Policy acquisition costs.................................. 57,385 60,021 115,589 115,897
Total expenses....................................... 237,609 224,114 468,242 434,405
Earnings before income taxes and minority interest... 23,445 26,648 48,305 44,103
Income taxes................................................ 3,721 4,277 7,345 7,039
Net earnings before minority interest................ 19,724 22,371 40,960 37,064
Minority interest in net loss of subsidiary................. 404 421 290 409
NET EARNINGS......................................... $ 20,128 $ 22,792 $ 41,250 $ 37,473
COMPREHENSIVE INCOME................................. $ 27,385 $ 14,633 $ 52,685 $ 9,603
BASIC AND DILUTED NET EARNINGS PER COMMON SHARE...... $ 0.59 $ 0.65 $ 1.21 $ 1.06
CASH DIVIDENDS PAID PER COMMON SHARE................. $ 0.29 $ 0.28 $ .57 $ .55
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING. 34,180,926 34,856,752 34,213,470 35,226,439
The accompanying notes are an integral part of these consolidated
financial statements.
- - 4 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
Cash flows from operating activities:
Premiums collected.................................................... $ 487,535 $ 437,243
Net investment income................................................. 46,882 43,531
Premium finance and service fees received............................. 7,549 7,543
Losses and loss adjustment expenses paid.............................. (339,776) (295,665)
Policy acquisition costs paid......................................... (133,805) (127,690)
Federal income tax payments........................................... (21,098) (11,217)
Net cash provided by operating activities......................... 47,287 53,745
Cash flows from investing activities:
Proceeds from maturity of fixed maturities............................ 10,549 42,604
Proceeds from sale of fixed maturities................................ 51,327 58,409
Proceeds from sale of equity securities............................... 6,397 48,239
Purchase of fixed maturities.......................................... (51,425) (43,320)
Purchase of equity securities......................................... (47,633) (85,474)
Purchase of other investments......................................... (9,304) (3,926)
Purchase of subsidiary, net of cash acquired.......................... - (77,056)
Payments received on mortgage loans and collateral notes receivable... 5,187 7,275
Mortgage loans and collateral notes originated........................ (5,675) (4,037)
Purchase of property and equipment.................................... (1,856) (1,662)
Other proceeds from investing activities.............................. 587 455
Net cash used in investing activities............................. (41,846) (58,493)
Cash flows from financing activities:
Dividends paid to stockholders........................................ (19,489) (19,261)
Purchase of treasury stock............................................ (5,293) (32,607)
Net cash used in financing activities............................. (24,782) (51,868)
Decrease in cash and short-term investments........................... (19,341) (56,616)
Cash and short-term investments at beginning of period................ 22,535 75,912
Cash and short-term investments at the end of period.............. $ 3,194 $ 19,296
The accompanying notes are an integral part of these consolidated
financial statements.
- - 5 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Six Months Ended June 30, 2000 and 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
Cash flows from operating activities:
Net Earnings.......................................................... $ 41,250 $ 37,473
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Premiums receivable................................................. (63,920) (54,302)
Deferred policy acquisition costs................................... (10,095) (9,142)
Residual market receivable.......................................... (856) (3,749)
Due to/from reinsurers.............................................. (15,528) (6,139)
Losses and loss adjustment expenses................................. 31,892 28,780
Unearned premiums................................................... 86,847 76,102
Current income taxes................................................ (11,911) (577)
Deferred income taxes............................................... (1,843) (3,602)
Deferred income..................................................... 701 511
Contingent commissions.............................................. (10,636) (1,550)
Other assets, liabilities and accrued expenses...................... 136 (6,543)
Net realized investment gains....................................... (328) (6,145)
Other - net......................................................... 1,578 2,628
Net cash provided by operating activities.................... $ 47,287 $ 53,745
The accompanying notes are an integral part of these consolidated
financial statements.
- - 6 -
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and
Other Information)
1. The financial information has been prepared on a basis consistent with
the accounting principles reflected in the audited consolidated
financial statements for the year ended December 31, 1999. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the Securities and Exchange
Commission rules and regulations, although the Company believes the
disclosures which have been made are adequate to make the information
presented not misleading.
2. The information furnished includes all adjustments and accruals
consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of results for
the interim periods. Certain previously reported 1999 account balances
have been reclassified to conform to the current period's presentation.
3. This Form 10-Q contains some statements that are not historical facts
and are considered "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve opinions, assumptions and predictions, and no
assurance can be given that the future results will be achieved since
events or results may differ materially as a result of risks facing the
Company. These include, but are not limited to, those risks and
uncertainties in our business that are described in the Company's
Annual Report and other documents filed with the SEC, the possibility
of adverse catastrophe experience and severe weather, adverse impacts
from the Trust Insurance Company insolvency, adverse trends in claim
severity or frequency, adverse state and federal regulation and
legislation, rate making decisions for private passenger automobile
policies in Massachusetts, heightened competition, as well as the
economic, market or regulatory conditions and risks associated with
entry into new markets and diversification.
4. The consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
5. Neither the results for the six months ended June 30, 2000 nor
comparison with the corresponding six months ended June 30, 1999 should
be considered indicative of the results which may be expected for the
year ending December 31, 2000.
6 The Company purchased 205,600 shares of Treasury stock under the
buyback program during the first six months of 2000 increasing the
total shares of Treasury Stock to 3,846,048 at June 30, 2000. At June
30, 2000, the Company has authority to purchase approximately 1.3
million additional shares.
- - 7 -
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and
Other Information)
(Continued)
7. In the first quarter of 2000, the Company entered into a Limited
Partnership Agreement with Conning Partners VI, L.P., a Delaware limited
partnership. This partnership agreement requires a commitment by the
Company to invest $50,000 into the partnership throughout the next five
years as determined by the General Partner. To date the Company has
invested $6,250 into the partnership leaving a balance of funds still
committed but not paid into the partnership of $43,750. The Partnership
was formed to operate as an investment fund principally for the purpose
of making investments primarily in equity, equity-related and other
securities issued in expansion financing, start-ups, buy-outs, and
recapitalization transactions relating to companies in the areas of
insurance, financial services, e-commerce, healthcare and related
businesses, in order to realize long-term capital returns, all as
determined and managed by the General Partner for the benefit of the
Partners.
8. On February 10, 2000 the Massachusetts Division of Insurance placed
Trust Insurance Company ("Trust") in rehabilitation. At December 31,
1999, Trust was the ninth largest writer of private passenger automobile
insurance in Massachusetts, with an approximate 5% market share. On May
10, 2000, the Massachusetts Commissioner of Insurance ("Commissioner")
filed a "Motion for order approving cancellation of policies" with the
Supreme Judicial Court for Suffolk County. This motion indicates that
"there is substantial risk that Trust Insurance may be insolvent" and
further asks the court that Trust's "insurance exposures be promptly
terminated, their liabilities runoff and their true financial condition
thereby determined". Based on this motion, all of Trust's remaining
36,000 homeowner policies and 99,300 personal automobile policies were
set for cancellation effective August 1, 2000 and October 1, 2000,
respectively. On July 27, 2000, the court ruled that Trust is
insolvent. Although the Company is unable to determine the overall
effect that this event may have on the consolidated operating and
financial position of the Company, the Company has established a $3
million valuation allowance reflecting the potential uncollectability of
a portion of the Company's receivables for assumed reinsurance and
subrogation. At this point in time, based on the best available
information, the Company expects to be able to recover 75% of its
affected receivables associated with this insolvency.
9. Effective July 1, 2000, the Company changed its annual occurrence and
aggregate annual reinsurance recovery limits on its quota share
reinsurance treaty, from 350%/450% of ceded quota share premiums,
respectively, to 250%/350% of ceded quota share premiums. This change
was made after consultation with the Company's reinsurers and based upon
recent catastrophe modeling performed on the Company's risks. The
modeling indicated that a lower threshold was warranted. Based on this
change, the Company will have no reinsurance recoveries for a single
event catastrophe in excess of a total loss of approximately $212.5
million. Prior to the change this figure was $297.5 million.
- - 8 -
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and
Other Information)
(continued)
10. Disclosure of Statement of Financial Accounting Standards No. 130 -
Reporting Comprehensive Income:
Six Months Ended
June 30,
2000 1999
Net earnings.......................................... $ 41,250 $ 37,473
Other comprehensive income (loss), net of taxes
(tax benefits):
Change in unrealized gains (losses), net of
income taxes (benefits) of $5,732 in 2000
and ($10,373) in 1999.............................. 10,645 (19,264)
Reclassification adjustment, net of income taxes
(benefits) of $425 in 2000 and ($4,634) in 1999.... 790 (8,606)
Other comprehensive income (loss)..................... 11,435 (27,870)
Comprehensive income.................................. $ 52,685 $ 9,603
Three Months Ended
June 30,
2000 1999
Net earnings.......................................... $ 20,128 $ 22,792
Other comprehensive income (loss), net of taxes
(tax benefits):
Change in unrealized gains (losses), net of
income taxes (benefits) of $3,393 in 2000
and ($105) in 1999................................. 6,302 (195)
Reclassification adjustment, net of income taxes
(benefits) of $1,469 in 2000 and ($4,288) in 1999.. 955 (7,964)
Other comprehensive income (loss)..................... 7,257 (8,159)
Comprehensive income.................................. $ 27,385 $ 14,633
- - 9 -
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and
Other Information)
(continued)
11. Disclosure of Statement of Financial Accounting Standards No. 131 -
Disclosures about Segments of an Enterprise and Related Information:
Earnings Before
Income Taxes and Identifiable
Revenue Minority Interest Assets
Six Months Ended June 30, 2000
Property and casualty insurance
Massachusetts...................... $453,378 $ 43,688 $ 1,682,756
Other than Massachusetts........... 59,024 2,133 234,130
Real estate and commercial lending... 3,701 2,930 74,555
Corporate and other.................. 444 (446) 4,932
Consolidated...................... $516,547 $ 48,305 $ 1,996,373
Six Months Ended June 30, 1999
Property and casualty insurance
Massachusetts...................... $421,259 $ 40,856 $ 1,606,678
Other than Massachusetts........... 53,434 454 241,311
Real estate and commercial lending... 2,672 2,672 70,876
Corporate and other.................. 1,143 121 4,646
Consolidated...................... $478,508 $ 44,103 $ 1,923,511
Earnings Before
Income Taxes and Identifiable
Revenue Minority Interest Assets
Three Months Ended June 30, 2000
Property and casualty insurance
Massachusetts...................... $229,776 $ 23,813 $ 1,682,756
Other than Massachusetts........... 29,335 (1,714) 234,130
Real estate and commercial lending... 1,940 1,940 74,555
Corporate and other.................. 3 (594) 4,932
Consolidated...................... $261,054 $ 23,445 $ 1,996,373
Three Months Ended June 30, 1999
Property and casualty insurance
Massachusetts...................... $218,044 $ 27,235 $ 1,606,678
Other than Massachusetts........... 30,854 (1,557) 241,311
Real estate and commercial lending... 1,319 1,319 70,876
Corporate and other.................. 545 (349) 4,646
Consolidated...................... $250,762 $ 26,648 $ 1,923,511
The acquisition of American Commerce Insurance Company ("American Commerce"),
on January 29, 1999, resulted in an additional property and casualty insurance
segment entitled "Other than Massachusetts" beginning with the first quarter
ended March 31, 1999. The 1999 "Other than Massachusetts" six month numbers
include the five month results of American Commerce.
- - 10 -
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and
Other Information)
(continued)
12. Disclosure of Supplemental Information:
OTHER INFORMATION:
June 30,
2000 1999
Massachusetts policies in force
Private passenger automobile......................... 630,667 606,217
Homeowners........................................... 126,879 122,705
Commercial automobile................................ 15,505 14,317
Three Months Ended
June 30,
2000 1999
OTHER EARNINGS STATEMENT INFORMATION:
Premiums earned by Massachusetts subsidiaries
Private passenger automobile......................... $ 192,566 $ 175,187
Homeowners........................................... $ 4,178 $ 4,101
Commercial automobile................................ $ 9,558 $ 9,618
Other lines.......................................... $ 914 $ 915
Premiums earned by subsidiaries in other states........ $ 25,564 $ 27,605
Total........................................... $ 232,780 $ 217,426
Net investment income, after tax....................... $ 19,968 $ 18,639
Pure loss ratios of Massachusetts subsidiaries
Private passenger automobile......................... 68.2% 69.7%
Homeowners (gross of reinsurance).................... 40.2% 24.1%
Commercial automobile................................ 58.4% 50.8%
Pure loss ratios of subsidiaries in other states...... 64.9% 64.1%
Massachusetts private passenger automobile
exposures written..................................... 206,855 189,433
Massachusetts private passenger automobile
premiums written..................................... $ 200,430 $ 172,966
- - 11 -
The Commerce Group, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Share, Per Share Data, Ratios and
Other Information)
(continued)
12. Disclosure of Supplemental Information (continued):
Six Months Ended
June 30,
2000 1999
OTHER EARNINGS STATEMENT INFORMATION:
Premiums earned by Massachusetts subsidiaries
Private passenger automobile......................... $ 379,251 $ 343,801
Homeowners........................................... $ 8,487 $ 8,252
Commercial automobile................................ $ 18,761 $ 18,794
Other lines.......................................... $ 1,826 $ 1,768
Premiums earned by subsidiaries in other states........ $ 51,762 $ 47,793*
Total........................................... $ 460,087 $ 420,408
Net investment income, after tax....................... $ 38,931 $ 36,882
Pure loss ratios of Massachusetts subsidiaries
Private passenger automobile......................... 68.3% 69.5%
Homeowners (gross of reinsurance).................... 43.5% 35.4%
Commercial automobile................................ 61.8% 62.7%
Pure loss ratios of subsidiaries in other states...... 62.4% 62.1%*
Massachusetts private passenger automobile
exposures written..................................... 486,303 466,153
Massachusetts private passenger automobile
premiums written..................................... $ 446,350 $ 401,516
* Includes five month results of American Commerce since the January 29, 1999
acquisition.
13. Common Stocks
The cost and approximate fair market value of common stocks at June 30,
2000 and December 31, 1999, were as follows:
June 30, 2000 December 31, 1999
Fair Market Fair Market
Cost Value Cost Value
Investments in closed-end
preferred stock mutual funds..... $ 311,517 $ 272,908 $ 267,956 $ 224,120
Investments in other equities...... 81,543 80,862 83,984 77,347
Total common stocks.. $ 393,060 $ 353,770 $ 351,940 $ 301,467
- - 12 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended June 30, 2000 compared to
three months ended June 30, 1999
(Thousands of Dollars Except Per Share Data)
Premiums
The following table compares direct premiums written, net premiums written
and earned premiums for the three months ended June 30, 2000 and 1999:
(Dollars in thousands)
Three Months Ended June 30,
2000 1999 Change % Change
Direct Premiums Written:
Personal Automobile in Massachusetts........ $206,063 $177,453 $ 28,610 16.1%
Personal Automobile in All Other States..... 23,873 23,872 1 -
Commercial Automobile in Massachusetts...... 10,507 8,216 2,291 27.9
Homeowners in Massachusetts................. 16,736 15,998 738 4.6
Homeowners in All Other States.............. 4,351 4,092 259 6.3
Other Lines in Massachusetts................ 4,080 3,476 604 17.4
Other Lines in All Other States............. 114 76 38 50.0
Total Direct Premiums Written............ $265,724 $233,183 $ 32,541 14.0%
Net Premiums Written:
Direct Premiums............................. $265,724 $233,183 $ 32,541 14.0%
Assumed Premiums from C.A.R................. 18,341 24,416 (6,075) (24.9)
Ceded Premiums to C.A.R..................... (17,841) (17,310) (531) 3.1
Ceded Premiums to Other than C.A.R.......... (18,499) (14,291) (4,208) 29.4
Total Net Premiums Written............... $247,725 $225,998 $ 21,727 9.6%
Earned Premiums:
Personal Automobile in Massachusetts........ $173,058 $154,314 $ 18,744 12.1%
Personal Automobile in All Other States..... 24,586 24,134 452 1.9
Commercial Automobile....................... 7,772 7,216 556 7.7
Homeowners in Massachusetts................. 4,177 4,130 47 1.1
Homeowners in All Other States.............. 958 3,382 (2,424) (71.7)
Other Lines in Massachusetts................ 840 844 (4) (0.5)
Other Lines in All Other States............. 19 89 (70) (78.7)
Assumed Premiums from C.A.R................. 21,295 23,246 (1,951) (8.4)
Assumed Premiums from Other than C.A.R...... 75 71 4 5.6
Total Earned Premiums.................... $232,780 $217,426 $ 15,354 7.1%
Earned Premiums in Massachusetts............ $185,847 $166,504 $ 19,343 11.6%
Earned Premiums-Assumed..................... 21,370 23,317 (1,947) (8.4)
Earned Premiums in All Other States......... 25,563 27,605 (2,042) (7.4)
Total Earned Premiums.................... $232,780 $217,426 $ 15,354 7.1%
- - 13 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The $28,610 or 16.1% increase in Massachusetts personal automobile
direct premiums written during the second quarter of 2000 resulted primarily
from increases of 9.2% and 11.2% in the number of Massachusetts personal
automobile exposures for liability and physical damage coverage, respectively,
coupled with increases of 7.9% and 1.3% in the average premium rate per
exposure for Massachusetts personal automobile liability and physical damage
exposures, respectively.
The increase in Massachusetts personal automobile exposures, as depicted
in Note 11 of the Notes to Unaudited Consolidated Financial Statements, is
primarily attributable to increased business resulting from the insolvency of
another Massachusetts insurer. The average premium per exposure percentage
changes for the second quarter of 2000 were primarily the result of rate
modifications in the individual coverage components in the 2000 state mandated
average rate increase, combined with changes in the Company's safe driver rate
deviations. The combination of these factors resulted in a 6.1% increase in
the average personal automobile premium per exposure for the second quarter of
2000 as compared to 8.9% during the second quarter of 1999. Despite the 2000
state mandated average rate increase of only 0.7%, the Company's increase in
the average personal automobile premium per exposure was primarily due to the
above noted changes coupled with the fact that the rate decision does not
anticipate purchases of new automobiles in the year in which the rate decision
applies and the Company's mix of personal automobile business differs from
that of the industry. In 2000, the Company offered its customers safe driver
deviations of 6.0% to drivers with SDIP classifications of Step 9 and 2.0% for
Step 10 (8.0% for Step 9 and 3.0% for Step 10 in 1999).
The AAA affinity group discount for 2000 was established at 6.0% which
was unchanged from 1999. In 2000, for drivers who qualify, the Company's AAA
affinity group discount and safe driver deviations can be combined for up to
an 11.6% reduction (13.5% in 1999) from state mandated rates.
Other states personal automobile direct premiums written increased $1
during the second quarter of 2000 as compared to the same period in 1999.
Personal automobile direct premiums written by American Commerce, located in
Columbus, Ohio, for the second quarter of 2000 decreased $630 or 3.3% to
$18,203 as compared to $18,833 for the same period a year ago. Personal
automobile direct premiums written for Commerce West Insurance Company
("Commerce West"), located in Pleasanton, California, increased $631 or 12.5%
to $5,670 during the second quarter of 2000 as compared to $5,039 during the
same period a year ago. Both American Commerce and Commerce West write
predominantly personal automobile insurance. American Commerce writes
personal automobile insurance in 24 states while Commerce West writes personal
automobile insurance in the state of California. Both companies target
preferred insurance risks, however Commerce West has initiated a non-standard
auto product which is the prime reason for their growth.
Direct premiums written for Massachusetts commercial automobile
insurance increased by $2,291 or 27.9%, due primarily to an increase of
approximately 17.1% in the number of policies written and by a 9.2% increase
in the average commercial automobile premium per policy. The increase is
primarily attributable to increased business resulting from the insolvency of
another Massachusetts insurer mentioned earlier.
Direct premiums written for Massachusetts homeowners insurance
increased by $738, or 4.6% due primarily to a 10.0% increase in the number of
policies written offset by a 5.4% decrease in the average premium per policy.
Other state homeowners insurance written by American Commerce increased $259
or 6.3% to $4,351 primarily as the result of a 5.8% increase in homeowner
policies and a 0.1% increase in the average premium per policy.
- - 14 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The $21,727 or 9.6% increase in net premiums written was due to the
growth in direct premiums written as described above offset primarily by an
increase to premiums ceded to reinsurers other than the Commonwealth
Automobile Reinsurers ("C.A.R.") and by a decrease of premiums assumed from
C.A.R. Premiums ceded to reinsurers other than C.A.R. during the second
quarter of 2000 increased $4,208 or 29.4% as compared to the second quarter of
1999 primarily as a result of American Commerce joining the quota-share
reinsurance program effective January 1, 2000. An unearned premium transfer
of approximately $6.0 million occurred effective January, 2000. Of the
$21,727 increase in net premiums written, $24,725 was associated with
Massachusetts business.
The $15,354 or 7.1% increase in earned premiums during the second
quarter of 2000 as compared to the second quarter of 1999 was primarily
attributable to increases to the average rates per exposure for Massachusetts
personal automobile liability and physical damage, coupled with smaller
increases in exposures written, mentioned previously. This resulted in a
$19,343 or 11.6%, increase for Massachusetts earned premiums. The remaining
components were a $1,951 or 8.4% decrease in earned premiums assumed from
C.A.R., a $4 or 5.6% increase in earned premiums assumed from ANI and Fair
Plan, a $2,245 or 10.1% decrease attributable to American Commerce and an
increase of $203 or 3.8% in earned premiums from Commerce West.
Investment Income
Net investment income is affected primarily by the composition of the
Company's investment portfolio. The following table summarizes the
composition of the Company's investment portfolio, at cost, at June 30, 2000
and 1999:
Investments, at cost June 30,
(Dollars in thousands) % of % of
2000 Invest. 1999 Invest.
Fixed maturities (GNMA & FNMA mortgage-
backed bonds, Corporate bonds, U.S.
Treasury bonds and notes and Tax-
exempt state and municipal bonds)...... $ 648,794 47.3% $ 691,300 52.6%
Preferred stocks......................... 230,378 16.8 224,104 17.1
Investments in closed-end
preferred stock mutual funds........... 311,517 22.7 208,104 15.8
Other equity securities.................. 81,543 6.0 89,469 6.8
Total common stocks.................. 393,060 28.7 297,573 22.6
Total equities....................... 623,438 45.5 521,677 39.7
Mortgages and collateral loans (net of
allowance for possible loan losses).... 74,104 5.4 70,395 5.3
Cash and short-term investments.......... 3,194 0.2 19,296 1.5
Other investments........................ 22,434 1.6 11,294 0.9
Total investments.................... $1,371,964 100.0% $1,313,962 100.0%
The Company's investment strategy is to maximize after-tax investment
income through high quality securities coupled with acquiring equity
investments which may forgo current investment yield in favor of potential
higher yielding future capital appreciation.
- - 15 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
As depicted in the accompanying table, second quarter 2000 net
investment income increased $1,736 or 7.8%, compared to the same period in
1999, principally as a result of an increase in average invested assets (at
cost). Net investment income as a percentage of total average investments was
6.8% in the second quarter of both 2000 and 1999. Net investment income after
tax as a percentage of total average investments was 5.7% and 5.6% in both the
second quarter of 2000 and 1999, respectively.
Investment Return Quarter Ending June 30,
(Dollars in thousands) 2000 1999
Average month-end investments (at cost)... $1,375,137 $1,292,670
Net investment income..................... 24,056 22,320
Net investment income after-tax........... 19,968 18,639
Net investment income as a percentage
of average net investments (at cost).... 7.0% 6.9%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 5.8% 5.8%
Amortization of Excess of Book Value of Subsidiary Interest over Cost
As a result of the acquisition of American Commerce, the amount
representing the excess of the fair value of the net assets acquired over the
purchase price at January 29, 1999 was $16,465. The amount is being amortized
into revenue on a straight-line basis over a five-year period. The amount
amortized into revenue increased $79 or 10.3% in the second quarter of 2000 to
$847 as compared to $768 in the same period in 1999. The increase is
primarily attributable to minor adjustments in the purchase price utilized in
the calculation allowable up to, but not exceeding, one year following the
completion of the acquisition.
Investment Gains and Losses
Net realized investment losses totaled $386 during the second quarter
of 2000 as compared to net realized investment gains of 6,565 during the same
period in 1999. A significant portion of the net realized losses in 2000 was
the result of sales of preferred stocks, non-taxable bonds, and the maturity
of Government National Mortgage Association ("GNMA") mortgage backed bonds
offset by slight gains attributable to mortgage activity. Net realized gains
during the second quarter of 1999 were primarily the result of sales of common
stock, offset by small net realized losses in the sales of non-taxable bonds
and the maturity of GNMA's.
- - 16 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Loss and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") incurred increased $16,131
or 9.8% during the second quarter of 2000 as compared to the same period a
year ago. The increase was attributable to higher incurred losses on
Massachusetts business, which was the direct result of the increased personal
automobile direct premiums earned discussed earlier and increased computer
services expenses offset by a decrease in losses and LAE assumed from C.A.R.
and an increase in reinsurance recoveries. Losses and LAE incurred (on a
statutory basis) as a percentage of insurance premiums earned ("loss ratio")
increased to 77.7% for the second quarter of 2000 compared to 75.6% for the
second quarter of 1999. The slight increase in the loss ratio was primarily
due to an additional $3 million established as a valuation allowance due to
the insolvency of another Massachusetts insurer coinciding with the reduction
in the second quarter 1999 computer services expenses which resulted from the
termination of a contract for software development with an outside vendor.
The ratio of net incurred losses, excluding LAE, to premiums earned ("pure
loss ratio") on Massachusetts personal automobile was 68.2% for the second
quarter of 2000 compared to 69.7% for the same period a year ago. The
commercial automobile pure loss ratio increased to 58.4% during the second
quarter 2000 as compared to 50.8% for the same period a year ago. This
increase was primarily due to worse experience in the business assumed from
C.A.R. during this period. For homeowners (gross of reinsurance), the pure
loss ratio was 34.6% during the second quarter of 2000 as compared to 29.4%
for the same period a year ago. This increase was primarily the result of
fewer redundancies recognized in the liability portion of the homeowner
business. Pure loss ratios of subsidiaries in other states increased to 64.9%
during the second quarter of 2000 as compared to 64.1% for the same period a
year ago.
Policy Acquisition Costs
Policy acquisition costs expensed decreased by $2,636, or 4.4% during
the second quarter of 2000 as compared to the same period a year ago. As a
percentage of net premiums written, underwriting expenses for the insurance
companies (on statutory basis) decreased to 23.7% for the second quarter of
2000 as compared to 25.8% for the same period a year ago. The decrease was
primarily attributable to lower direct commission expense, as a percentage of
net premiums written, associated with a decrease in Massachusetts mandated
minimum commissions and a $3,000 decrease in the provision for accrued
contingent commissions for the second quarter of 2000 as compared to the same
period a year ago.
Income Taxes
The Company's effective tax rate was 15.9% for the second quarter of
2000 as compared to 16.1% for the same period a year ago. In both years the
effective rate was lower than the statutory rate of 35% primarily due to tax-
exempt interest income and the corporate dividends received deduction. The
lower effective tax rate for the second quarter of 2000 was the result of the
tax exempt interest and the dividends received deduction comprising a greater
portion of earnings before taxes.
Minority Interest
As a result of the joint venture with AAA Southern New England ("AAA
SNE") and the acquisition of American Commerce, the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of Commerce
Holdings, Inc. ("Commerce Holdings"), is represented by ownership of 80% of
the outstanding shares of common stock at June 30, 2000. AAA SNE maintains a
20% common stock ownership. The minority interest of $404 included in these
consolidated financial statements for the second quarter of 2000 represents
20% of the net loss during the second quarter for ACIC Holding Co., Inc. which
is calculated after the $2,250 preferred stock dividend was paid to Commerce.
- - 17 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Net Earnings
Net earnings decreased $2,664, or 11.7% to $20,128, during the second
quarter of 2000 as compared to $22,792 for the same period a year ago.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, increased $1,854 or 10.0% to $20,379 ($0.59 per share)
during the second quarter of 2000 as compared to $18,525 ($0.53 per share) for
the same period a year ago, both as a result of the factors previously
mentioned.
- - 18 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Six months ended June 30, 2000 compared to
six months ended June 30, 1999
(Thousands of Dollars Except Per Share Data)
Premiums
The following table compares direct premiums written, net premiums
written and earned premiums for the six months ended June 30, 2000 and 1999:
(Dollars in thousands)
Six Months Ended June 30,
2000 1999 Change % Change
Direct Premiums Written:
Personal Automobile in Massachusetts........ $454,854 $408,438 $ 46,416 11.4%
Personal Automobile in All Other States..... 50,442 43,386 7,056 16.3
Commercial Automobile in Massachusetts...... 22,321 20,083 2,238 11.1
Homeowners in Massachusetts................. 28,944 28,054 890 3.2
Homeowners in All Other States.............. 7,970 6,394 1,576 24.7
Other Lines in Massachusetts................ 7,422 6,638 784 11.8
Other Lines in All Other States............. 227 142 85 59.9
Total Direct Premiums Written............ $572,180 $513,135 $ 59,045 11.5%
Net Premiums Written:
Direct Premiums............................. $572,180 $513,135 $ 59,045 11.5%
Assumed Premiums from C.A.R................. 40,860 47,093 (6,233) (13.2)
Ceded Premiums to C.A.R..................... (35,424) (33,730) (1,694) 5.0
Ceded Premiums to Other than C.A.R.......... (37,957) (25,981) (11,976) 46.1
Total Net Premiums Written............... $539,659 $500,517 $ 39,142 7.8%
Earned Premiums:
Personal Automobile in Massachusetts........ $341,409 $306,083 $ 35,326 11.5%
Personal Automobile in All Other States..... 49,548 42,175 7,373 17.5
Commercial Automobile....................... 15,220 14,409 811 5.6
Homeowners in Massachusetts................. 8,489 8,281 208 2.5
Homeowners in All Other States.............. 2,172 5,529 (3,357) (60.7)
Other Lines in Massachusetts................ 1,682 1,644 38 2.3
Other Lines in All Other States............. 41 89 (48) (53.9)
Assumed Premiums from C.A.R................. 41,382 42,073 (691) (1.6)
Assumed Premiums from Other than C.A.R...... 144 125 19 15.2
Total Earned Premiums.................... $460,087 $420,408 $ 39,679 9.4%
Earned Premiums in Massachusetts............ $366,800 $330,417 $ 36,383 11.0%
Earned Premiums-Assumed..................... 41,526 42,198 (672) (1.6)
Earned Premiums in All Other States......... 51,761 47,793 3,968 8.3
Total Earned Premiums.................... $460,087 $420,408 $ 39,679 9.4%
* Includes five month results of American Commerce since the January 29,
1999 acquisition.
- - 19 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The $46,416 or 11.4% increase in Massachusetts personal automobile
direct premiums written resulted primarily from increases of 4.3% and 6.1%, in
the number of Massachusetts personal automobile exposures for liability and
physical damage coverage, respectively, coupled with increases of 7.9% and
2.6% in the average premium rate per exposure for Massachusetts personal
automobile liability and physical damage exposures, respectively. The
components of these changes were as follows:
% of Company Direct
Coverage Type Premiums Written (1) Rate Change (2)
Liability:
Bodily Injury................. 35.7% 1.3%
Personal Injury Protection.... 6.9 6.9
Property Damage to Others..... 21.2 21.5
Total Liability........... 63.8 7.9
Physical Damage:
Collision..................... 23.9 2.4
Comprehensive................. 12.3 2.8
Total Physical Damage..... 36.2 2.6
Total..................... 100.0% 6.6%
(1) Represents the percentage of the Company's total direct private
passenger automobile premiums written in Massachusetts through June
30, 2000.
(2) Represents the change in the 2000 six month average rate per exposure
from the 1999 six month average rate charged by the Company for
Massachusetts private passenger automobile premiums through June 30
of each year.
The increase in Massachusetts personal automobile exposures, as depicted
in Note 11 of Notes to Unaudited Consolidated Financial Statements, is
primarily attributable to increased business resulting from the insolvency of
another Massachusetts insurer. The above percentage changes for the first six
months of 2000 were primarily the result of rate modifications in the
individual coverage components in the 2000 state mandated average rate
increase, combined with changes in the Company's safe driver rate deviations.
The combination of these factors resulted in a 6.6% increase in the average
personal automobile premium per exposure for the six months of 2000 as
compared to 8.8% during the first six months of 1999. Despite the 2000 state
mandated average rate increase of only 0.7%, the Company's increase in the
average personal automobile premium per exposure was primarily due to the
above noted changes coupled with the fact that the rate decision does not
anticipate purchases of new automobiles in the year in which the rate decision
applies and the Company's mix of personal automobile business differs from
that of the industry. In 2000, the Company offered its customers safe driver
deviations of 6.0% to drivers with SDIP classifications of Step 9 and 2.0% for
Step 10 (8.0% for Step 9 and 3.0% for Step 10 in 1999).
The AAA affinity group discount for 2000 was established at 6.0% which
was unchanged from 1999. In 2000, for drivers who qualify, the Company's AAA
affinity group discount and safe driver deviations can be combined for up to
an 11.6% reduction (13.5% in 1999) from state mandated rates.
- - 20 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The $7,056 or 16.3% increase in other states personal automobile direct
premiums written was primarily attributable to American Commerce whose year to
date 2000 results reflect a full six months as compared to five months in
1999. Personal automobile direct premiums written by American Commerce for
the first six months of 2000 were $38,441 as compared to $32,366 for the five
month period ended June 30, 1999. Personal automobile direct premiums written
for Commerce West increased $981 or 8.9% to $12,001 during the first six
months of 2000 as compared to $11,020 during the same period a year ago. Both
American Commerce and Commerce West write predominantly personal automobile
insurance. American Commerce writes personal automobile insurance in 24
states while Commerce West writes personal automobile insurance in the state
of California. Both companies target preferred insurance risks, however
Commerce West has initiated a non-standard auto product which is the prime
reason for their growth.
Direct premiums written for Massachusetts commercial automobile
insurance increased by $2,238 or 11.1%, due primarily to an increase of
approximately 8.7% in the number of policies written and by a 2.2% increase in
the average commercial automobile premium per policy.
Direct premiums written for Massachusetts homeowners insurance,
increased by $890, or 3.2% due primarily to an 8.3% increase in the number of
policies written offset by a 5.0% decrease in the average premium per policy.
The $1,576 increase in other states homeowners insurance was primarily the
result of American Commerce premiums being written for six months in 2000
versus five months in 1999.
The $39,142 or 7.8% increase in net premiums written was due to the
growth in direct premiums written as described above offset primarily by an
increase to premiums ceded to reinsurers other than the Commonwealth
Automobile Reinsurers ("C.A.R."). Premiums ceded to reinsurers other than
C.A.R. during the first six months of 2000 increased $11,976 or 46.1% as
compared to the first six months of 1999 as a result of American Commerce
joining the quota-share reinsurance program effective January 1, 2000. An
unearned premium transfer of approximately $6.0 million occurred effective
January, 2000.
The $39,679 or 9.4% increase in earned premiums during the six months of
2000 as compared to the first six months of 1999 was primarily attributable to
increases to the average rates per exposure coupled with the increases to
exposures for Massachusetts personal automobile liability and physical damage,
mentioned previously. This resulted in a $36,383 or 11.0%, increase for
Massachusetts earned premiums. The remaining increases were attributable to
$19 or 15.2% increase in earned premiums assumed from ANI and Fair Plan and a
$4,018 or 10.9% increase attributable to American Commerce. The increases
were offset by decreases of $50 or 0.5% in earned premiums from Commerce West.
The increase in earned premiums for American Commerce is primarily
attributable to the six months results in 2000 versus the five month results
in 1999, net of the effects of reinsurance.
- - 21 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Investment Income
Net investment income is affected primarily by the composition of the
Company's investment portfolio. The following table summarizes the
composition of the Company's investment portfolio, at cost, at June 30, 2000
and 1999:
Investments, at cost June 30,
(Dollars in thousands) % of % of
2000 Invest. 1999 Invest.
Fixed maturities (GNMA & FNMA mortgage-
backed bonds, Corporate bonds, U.S.
Treasury bonds and notes and Tax-
exempt state and municipal bonds)...... $ 648,794 47.3% $ 691,300 52.6%
Preferred stocks......................... 230,378 16.8 224,104 17.1
Investments in closed-end
preferred stock mutual funds........... 311,517 22.7 208,104 15.8
Other equity securities.................. 81,543 6.0 89,469 6.8
Total common stocks.................. 393,060 28.7 297,573 22.6
Total equities....................... 623,438 45.5 521,677 39.7
Mortgages and collateral loans (net of
allowance for possible loan losses).... 74,104 5.4 70,395 5.3
Cash and short-term investments.......... 3,194 0.2 19,296 1.5
Other investments........................ 22,434 1.6 11,294 0.9
Total investments.................... $1,371,964 100.0% $1,313,962 100.0%
The Company's investment strategy is to maximize after-tax investment
income through high quality securities coupled with acquiring equity
investments which may forgo current investment yield in favor of potential
higher yielding future capital appreciation.
As depicted in the accompanying table, six month 2000 net investment
income increased $3,758 or 8.7%, compared to the same period in 1999,
principally as a result of an increase in average invested assets (at cost).
Net investment income as a percentage of total average investments was 6.7% in
the first six months of both 2000 and 1999. Net investment income after tax
as a percentage of total average investments was 5.5% in the first six months
of 2000 and 5.6% in the same period of 1999.
Investment Return At June 30,
(Dollars in thousands) 2000 1999
Average month-end investments (at cost).. $1,366,859 $1,267,151
Net investment income.................... 46,888 43,130
Net investment income after-tax.......... 38,931 35,946
Net investment income as a percentage
of average net investments (at cost)... 6.9% 6.8%
Net investment income after-tax as a
percentage of average net
investments (at cost).................. 5.7% 5.7%
- - 22 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Amortization of Excess of Book Value of Subsidiary Interest over Cost
As a result of the acquisition of American Commerce, the amount
representing the excess of the fair value of the net assets acquired over the
purchase price at January 29, 1999 was $16,465. The amount is being
amortized into revenue on a straight-line basis over a five-year period. The
amount amortized into revenue increased $413 or 32.2% in the first six months
of 2000 to $1,695 as compared to the same period in 1999. The increase is
partially attributable to the six months of amortization during the first
half of 2000 versus the five months of amortization during the first half of
1999 and due to minor adjustments in the purchase price utilized in the
calculation allowable up to, but not exceeding, one year following the
completion of the acquisition.
Investment Gains and Losses
Net realized investment gains totaled $328 during the first six months
of 2000 as compared to net realized investment gains of $6,145 during the
same period in 1999. A significant portion of the net realized gains in 2000
was the result of sales of preferred stocks and mortgage activity partially
offset by net realized losses on the sale of non-taxable bonds and on the
maturity of GNMA's. Net realized gains during the six months quarter of 1999
were primarily the result of sales of common stock offset by losses in the
sales of non-taxable bonds, preferred stock, and on the maturity of GNMA's.
Loss and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") incurred increased $34,145
or 10.7% during the first six months of 2000 as compared to the same period a
year ago. The increase was attributable to higher incurred losses on
Massachusetts business, which was the direct result of the increased personal
automobile earned premiums discussed earlier, and increased computer services
expenses offset by a decrease in losses and LAE assumed from C.A.R. Losses
and LAE incurred (on a statutory basis) as a percentage of insurance premiums
earned ("loss ratio") increased to 76.8% for the first six months of 2000
compared to 76.1% for the first six months of 1999. The slight increase in
the loss ratio was primarily due to an additional $3 million established as a
valuation allowance due to the insolvency of another Massachusetts insurer,
contrasted with the reduction in six month 1999 computer services expenses
which resulted from the termination of a contract for software development
with an outside vendor. The ratio of net incurred losses, excluding LAE, to
premiums earned ("pure loss ratio") on Massachusetts personal automobile was
68.3% for the first six months of 2000 compared to 69.5% for the same period
a year ago. This slight decrease was primarily due to additional earned
premium per exposure offset by higher physical damage losses. The commercial
automobile pure loss ratio decreased to 61.8% during the first six months of
2000 as compared to 62.7% for the same period a year ago. For homeowners
(gross of reinsurance), the pure loss ratio was 39.6% during the first six
months of 2000 as compared to 35.4% for the same period a year ago. Pure
loss ratios of subsidiaries in other states increased to 62.4% during the
first six months of 2000 as compared to 62.1% for the same period a year ago.
- - 23 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Policy Acquisition Costs
Policy acquisition costs expensed decreased by $308, or 0.2% during the
first six months of 2000 as compared to the same period a year ago. As a
percentage of net premiums written, underwriting expenses for the insurance
companies (on statutory basis) decreased to 23.1% for the first six months of
2000 as compared to 25.5% for the same period a year ago. The decrease was
primarily attributable to lower direct commission expense, as a percentage of
net premiums written, associated with a decrease in Massachusetts mandated
minimum commissions and a $6,500 decrease in the provision for accrued
contingent commissions for the first six months of 2000 as compared to the
same period a year ago.
Income Taxes
The Company's effective tax rate was 15.2% for the first six months of
2000 as compared to 16.0% for the same period a year ago. In both years the
effective rate was lower than the statutory rate of 35% primarily due to tax-
exempt interest income and the corporate dividends received deduction. The
lower effective tax rate for the first six months of 2000 was the result of
the tax exempt interest and the dividends received deduction comprising a
greater portion of earnings before taxes.
Minority Interest
As a result of the joint venture with AAA Southern New England ("AAA
SNE") and the acquisition of American Commerce, the Company's interest in ACIC
Holding Co., Inc., through Commerce, a wholly-owned subsidiary of Commerce
Holdings, Inc. ("Commerce Holdings"), is represented by ownership of 80% of
the outstanding shares of common stock at June 30, 2000. AAA SNE maintains a
20% common stock ownership. The minority interest of $290 included in these
consolidated financial statements for the first six months of 2000 represents
20% of the net losses for ACIC Holding Co., Inc. which is calculated after the
$4,500 preferred stock dividend was paid to Commerce.
Net Earnings
Net earnings increased $3,777, or 10.1% to $41,250, during the first
six months of 2000 as compared to $37,473 for the same period a year ago.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, increased $7,558, or 22.6% to $41,037 ($1.20 per share)
during the first six months of 2000 as compared to $33,479 ($0.95 per share)
for the same period a year ago, both as a result of the factors previously
mentioned.
- - 24 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Liquidity and Capital Resources
The focus of the discussion of liquidity and capital resources is on
the Consolidated Balance Sheets on page 3 and the Consolidated Statements of
Cash Flows on pages 5 and 6. Stockholders' equity increased by $27,903, or
4.3%, during the first six months of 2000 as compared to December 31, 1999.
The increase resulted from $41,250 in net earnings and by changes in other
comprehensive income, net of income taxes, on fixed maturities and preferred
and common stocks of $11,435, offset by dividends paid to stockholders of
$19,489 and Treasury Stock purchased of $5,293. Total assets at June 30, 2000
increased $124,901, or 6.7% to $1,996,373 as compared to total assets of
$1,871,472 at December 31, 1999. The majority of this growth is reflected in
an increase of invested assets, at market value, of $37,657 or 3.0%, of
$63,920 or 32.8% in premiums receivable, a $10,095 or 10.2% increase in
deferred policy acquisition costs, a $15,528 or 32.1% increase in receivable
from reinsurers offset by a $2,299 or 0.9% decrease in all other assets
combined. The increase to premiums receivable is attributable to increased
Massachusetts business. The increase in invested assets is attributable to
increases to the Company's holdings of closed-end preferred stock mutual funds
as shown in the table below.
The Company's investment portfolio, at market, is shown on the
following table as of June 30, 2000 and December 31, 1999 (for investments, at
cost, refer to the table found on page 14):
June 30, December 31,
Investments, at market % of % of
(Dollars in thousands) 2000 Invest. 1999 Invest.
Fixed maturities (GNMA & FNMA mortgage-
backed bonds Corporate bonds, U.S.
Treasury bonds and notes Tax-
exempt state and municipal bonds).... $ 641,497 49.1% $ 647,338 51.0%
Preferred stocks....................... 210,310 16.1 211,049 16.6
Investment in closed-end
preferred stock mutual funds......... 272,908 20.9 224,120 17.7
Other equity securities................ 80,862 6.2 77,347 6.1
Total common stocks................ 353,770 27.1 301,467 23.8
Total equities..................... 564,080 43.2 512,516 40.4
Mortgages and collateral loans (net of
allowance for possible loan losses).. 74,104 5.7 72,451 5.7
Cash and short-term investments........ 3,194 0.2 22,535 1.8
Other investments...................... 23,761 1.8 14,139 1.1
Total investments.................. $1,306,636 100.0% $1,268,979 100.0%
- - 25 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's fixed maturity portfolio is comprised of GNMAs and FNMA
mortgage backed bonds (12.3%), municipal bonds (78.5%), corporate bonds (8.7%)
and U.S. Treasury bonds (0.5%). As of June 30, 2000, the book value of the
Company's fixed maturity portfolio exceeded its market value by $7,297 ($4,743
after taxes, or $0.14 per share). The cost of the Company's preferred stocks
exceeded market value by $20,068 ($13,044 after taxes, or $0.38 per share).
The cost of the Company's common stocks exceeded market value by $39,290
($25,538 after taxes, or $0.75 per share).
Preferred stocks decreased $739, or 0.4% and common stocks (primarily
composed of closed-end preferred stock mutual funds) increased $52,303, or
17.3%, during the first six months of 2000 primarily as a result of the
Company's investment strategy. The Company's strategy is to maximize after-
tax investment income through high quality securities coupled with acquiring
equity investments which may forego current investment yield in favor of
potential higher yielding capital appreciation in the future.
The Company's liabilities totaled $1,320,978 at June 30, 2000 as
compared to $1,223,650 at December 31, 1999. The $97,328 or 8.0% increase was
comprised of an increase of $31,892 or 4.7% in loss and loss adjustment
expense reserves, an increase of $86,847 or 19.0% in unearned premiums, offset
by a decrease of $10,636 or 31.8 % in contingent commissions accrued, a
decrease of $971, or 9.0% in excess of book value of subsidiary interest over
cost (formerly referred to as Negative Goodwill) associated with the January
29, 1999 acquisition of American Commerce. The net effect of all other
liabilities decreased $9,804 or 20.8%. The significant increase to the
Company's unearned premiums was attributable to the increased Massachusetts
business. The decrease in contingent commissions is primarily due to $17,990
in payments to agents offset by current year accruals.
The primary sources of the Company's liquidity are funds generated from
insurance premiums, net investment income, premium finance and service fees
and the maturing and sale of investments as reflected in the Consolidated
Statements of Cash Flows on pages 5 and 6.
The Company's operating activities provided cash of $47,287 in the
first six months of 2000, as compared to $53,745 during the same period a year
ago. These cash flows were primarily impacted by the fact that while premiums
collected increased $50,292, or 11.5% in the first six months of 2000, losses
and LAE paid increased $44,111, or 14.9% and federal income tax payments
increased $9,881 or 88.1% in the first six months of 2000 as compared to the
same period a year ago. The increase in premiums was primarily the result of
the increases to both liability (4.3%) and physical damage (6.1%) exposures
combined with an average overall rate increase in premium per exposure of
6.6%.
The increase in net losses and LAE paid, which includes the change in
the losses and LAE liability of $31,892, amounted to $44,111 or 14.9%. This
increase resulted primarily from the previously mentioned increase in the
losses and LAE liability, an increase in incurred losses on Massachusetts
business and an increase from Other than Massachusetts business. The increase
in incurred losses on Massachusetts business is primarily attributable to
higher private passenger automobile collision and property damage payments and
slightly higher private passenger automobile bodily injury payments. The
increase in incurred losses on Other than Massachusetts business is primarily
attributable to six months of activity for the period ended June 30, 2000
versus activity for the five months for the period ended June 30, 1999 for
American Commerce.
- - 26 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The net cash flows used in investing activities were primarily the
result of purchases of fixed maturities and equity securities (predominantly
closed-end preferred stock mutual funds), which were offset by proceeds from
the sale and maturity of fixed maturities and equity securities (predominantly
common stocks and preferred stocks). Investing activities were funded by
accumulated cash and cash provided by operating activities during 2000 and
1999.
Cash flows used in financing activities totaled $24,782 during the
first six months of 2000 compared to $51,868 during the same period a year
ago. The 2000 cash flows used in financing activities consisted of $19,489 in
dividends paid to stockholders and $5,293 used to purchase 205,600 shares of
Treasury Stock under the Company's stock buyback programs. The 1999 cash
flows used in financing activities consisted of dividends paid to stockholders
of $19,261 and $32,607 used to purchase 1,185,900 shares of Treasury Stock.
The Company's funds are generally invested in securities with
maturities intended to provide adequate funds to pay claims without the forced
sale of investments. The carrying value (at market) of total investments at
June 30, 2000 was $1,306,636. At June 30, 2000, the Company held cash and
short-term investments of $3,194 (net of outstanding checks of $34,230).
These funds provide sufficient liquidity for the payment of claims and other
short-term cash needs. The Company also relies upon dividends from its
subsidiaries for its cash requirements. Every Massachusetts insurance company
seeking to make any dividend or other distributions to its stockholders may,
within certain limitations, pay such dividends and then file a report with the
Commissioner. Dividends in excess of these limitations are called
extraordinary dividends. An extraordinary dividend is any dividend or other
property, whose fair value together with other dividends or distributions made
within the preceding twelve months exceeds the greater of ten percent of the
insurer's surplus as regards to policyholders as of the end of the preceding
year, or the net income of a non-life insurance company for the preceding
year. No pro-rata distribution of any class of the insurer's own securities
is to be included. No Massachusetts insurance company shall pay an
extraordinary dividend or other extraordinary distribution until thirty days
after the Commissioner has received notice of the intended distribution and
has not objected. No extraordinary dividends were paid in 2000 and 1999.
Periodically, sales have been made from the Company's fixed maturity
investment portfolio to actively manage portfolio risks, including credit-
related concerns, to optimize tax planning and to realize gains. This
practice will continue in the future.
Industry and regulatory guidelines suggest that the ratio of a property
and casualty insurer's annual net premiums written to statutory policyholders'
surplus should not exceed 3.00 to 1.00. The Company's annualized statutory
premiums to surplus ratio was 1.89 to 1.00 and 1.62 to 1.00 for the period
ended June 30, 2000 and 1999, respectively.
In keeping with the Company's long-term growth objective to expand
outside Massachusetts, in 1995 the Company acquired Commerce West, a personal
automobile insurer, located in Pleasanton, California. Most recently, the
Company formed a joint venture (ACIC Holding Co., Inc.) in November 1998, and
acquired, American Commerce located in Columbus, Ohio, in January 1999.
American Commerce writes automobile and homeowners insurance solely through 34
AAA independent insurance agencies in 24 states.
- - 27 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
In early 1999, Commerce, a subsidiary of the Company, invested $90,800
in the joint venture (ACIC Holding Co., Inc.) to fund the American Commerce
acquisition and to capitalize the joint venture that is owned together with
AAA SNE. Of this $90,800, Commerce invested $90,000 in the form of preferred
stock and an additional $800 representing its 80% common stock ownership. The
terms of the preferred stock call for quarterly cash dividends at the rate of
10% per annum. In the event cash dividends cannot be paid, additional
preferred stock will be issued. (Additional preferred stock was issued in the
second quarter of 2000.) AAA SNE invested $200 representing its 20% common
stock ownership. Commerce consolidates ACIC Holding Co., Inc. and it's
wholly-owned subsidiary, American Commerce, for financial reporting and tax
purposes. Since 1995, Commerce has maintained an affinity group marketing
relationship with AAA Insurance Agency, Inc., a subsidiary of AAA SNE. AAA
Insurance Agency, Inc. has been an agent of Commerce since 1985.
Market Risk: Interest Rate Sensitivity and Equity Price Risk
The Company's investment strategy emphasizes investment yield while
maintaining investment quality. The Company's investment objective is to
maintain high quality diversified investments structured to maximize after-tax
investment income while minimizing risk. It is the Company's practice to only
invest in investment grade stock and fixed maturity securities. The Company's
funds are generally invested in securities with maturities intended to provide
adequate funds to pay claims and meet other operating needs without the forced
sale of investments. Periodically, sales have been made from the Company's
fixed maturity portfolio to actively manage portfolio risks, including credit-
related concerns, to optimize tax planning and to realize gains. This
practice will continue in the future.
In conducting investing activities, the Company is subject to, and
assumes, market risk. Market risk is the risk of an adverse financial impact
from changes in interest rates and market prices. The level of risk assumed
by the Company is a function of the Company's overall objectives, liquidity
needs and market volatility.
The Company manages its market risk by focusing on higher quality stock
and fixed income investments, by periodically monitoring the credit strength
of companies in which investments are made, by limiting exposure in any one
investment and by monitoring the quality of the investment portfolio by taking
into account credit ratings assigned by recognized rating organizations.
- - 28 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
As part of its investing activities, the Company assumes positions in
fixed maturity, stock, short-term and cash equivalents markets. The Company
is, therefore, exposed to the impacts of interest rate changes in the market
value of investments. For 1999, the Company's exposure to interest rate
changes and equity price risk has been estimated using sensitivity analysis.
The interest rate impact is defined as the effect of a hypothetical interest
rate change of plus-or-minus 200 basis points on the market value of fixed
maturities and preferred stocks. The equity price risk is defined as a
hypothetical change of plus-or-minus 10% in the fair value of common stocks.
Changes in interest rates would result in unrealized gains or losses in the
market value of the fixed maturity and preferred stock portfolio due to
differences between current market rates and the stated rates for these
investments. Based on the results of the sensitivity analysis at June 30,
2000 and 1999, the Company's estimated market exposure for a 200 basis point
increase (decrease) in interest rates were calculated. A 200 basis point
increase results in a decrease in the market value of the fixed maturities and
preferred stocks of $91,535 and $69,803, respectively. A 200 basis point
decrease results in an increase in the market value of the same securities of
$48,913 and $44,485, respectively. The equity price risk impact at June 30,
2000 and 1999, based upon a 10% increase in the fair value of common stocks,
would be an increase of $35,377 and $29,262, respectively. Based upon a 10%
decrease, common stocks would decrease $35,377 and $29,262, respectively.
Long-term interest rates (30-year Treasury Bond) were 5.88% at June 30, 2000
and 5.99% at June 30, 1999. Long-term interest rates (30-year Treasury Bond)
increased to 6.48% at December 31, 1999 from 5.08% at December 31, 1998.
Stock Buyback and Dividends
The Company purchased 205,600 shares of Treasury Stock under the stock
buyback program during the first six months of 2000 increasing total shares of
Treasury Stock to 3,846,048 at June 30, 2000. At June 30, 2000, the Company
has authority to purchase approximately 1.3 million additional shares.
On June 16, 2000, the Company paid a quarterly dividend of $0.29 to
stockholders of record as of June 2, 2000. The Company increased its
quarterly dividend to stockholders from $0.28 to $0.29 during the second
quarter of 2000.
Recent Accounting Developments
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FASB 133") effective for
financial statements issued for fiscal years beginning after June 15, 1999.
Subsequently, during 1999, FASB issued Financial Accounting Standards No. 137
"Deferral of the Effective Date of FASB Statement 133" ("FASB 137"). The
adoption date was delayed to fiscal years beginning after June 15, 2000. The
Company had no derivative or hedging activity the first quarter of 2000.
- - 29 -
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Effects of Inflation and Recession
The Company generally is unable to recover the costs of inflation in
its personal automobile insurance line since the premiums it charges are
subject to state regulation. The premium rates charged by the Company for
Massachusetts personal automobile insurance are adjusted by the Commissioner
only at annual intervals. Such annual adjustments in Massachusetts premium
rates may lag behind related cost increases. Economic recessions will also
have an impact upon the Company, primarily through the policyholder's
election to decrease non-compulsory coverages afforded by the policy and
decreased driving, each of which tends to decrease claims.
To the extent inflation and economic recession influence yields on
investments, the Company is also affected. As each of these environments
affect current market rates of return, previously committed investments may
rise or decline in value depending on the type and maturity of investment.
Inflation and recession must also be considered by the Company in the
creation and review of loss and LAE reserves since portions of these reserves
are expected to be paid over extended periods of time. The anticipated
effect of economic conditions is implicitly considered when estimating
liabilities for losses and LAE. The importance of continually adjusting
reserves is even more pronounced in periods of changing economic
circumstances.
- - 30 -
The Commerce Group, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
On May 19, 2000, at the Annual Meeting of the stockholders of the Company, the
number of Directors was fixed at 18 and the slate of Directors as presented in
the Annual Proxy was approved. The votes as tabulated by Boston EquiServe,
L.P. were as follows:
<caption<
Total Vote For Total Vote Withheld
Each Director From Each Director
Herman F. Becker 29,837,299 68,153
Joseph A. Borski, Jr. 29,837,599 67,853
Eric G. Butler 29,837,299 68,153
Henry J. Camosse 29,837,291 68,161
Gerald Fels 29,016,311 889,141
David R. Grenon 29,837,599 67,853
Robert W. Harris 29,837,599 67,853
Robert S. Howland 29,837,299 68,153
John J. Kunkel 29,834,234 71,218
Raymond J. Lauring 29,837,299 68,153
Roger E. Lavoie 29,837,299 68,153
Normand R. Marois 29,837,599 67,853
Suryakant M. Patel 29,837,599 67,853
Arthur J. Remillard, Jr. 29,003,328 902,124
Arthur J. Remillard, III 29,830,690 74,762
Regan P. Remillard 29,821,307 84,145
Gurbachan Singh 29,830,599 74,853
John W. Spillane 29,014,411 891,041
- - 31 -
The Commerce Group, Inc. and Subsidiaries
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the second quarter of 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COMMERCE GROUP, INC.
RANDALL V. BECKER
Randall V. Becker
Treasurer and Chief Accounting Officer
- - 32-
The Commerce Group, Inc. and Subsidiaries
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the second quarter of 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COMMERCE GROUP, INC.
Randall V. Becker
Treasurer and Chief Accounting Officer
- - 32 -