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, 2001 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, 2001, the number of shares outstanding of the
Registrant's common stock (excluding Treasury Shares) was
33,753,352

Page 1 of 34
<page>

The Commerce Group, Inc.

Table of Contents

<table>
<caption>
Page No.

Part I - Financial Information
<s> <c>
Consolidated Balance Sheets at
June 30, 2001 (Unaudited) and December 31, 2000.................... 3

Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 2001 and 2000 (Unaudited)...... 4

Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (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, 2001 and 2000 (Unaudited)........................... 6

Notes to Unaudited Consolidated Financial Statements................... 7

Management's Discussion and Analysis................................... 15

Part II - Other Information

Item 4
Results of Votes of Security Holders............................... 33

Item 6
Exhibits and Reports on Form 8-K................................... 34

Signature.............................................................. 34
</table>

- - 2 -
<page>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)

<table>
<caption>
June 30, December 31,
2001 2000
(Unaudited)
ASSETS
<s> <c> <c>
Investments:
Fixed maturities, at market (cost: $638,457 in 2001 and $665,881 in 2000)............. $ 647,067 $ 669,935
Preferred stocks, at market (cost: $270,224 in 2001 and $215,823 in 2000)............. 259,214 200,083
Common stocks, at market (cost: $87,703 in 2001 and $87,704 in 2000).................. 116,953 115,827
Preferred stock mutual funds, at equity (cost: $285,148 in 2001 and $327,980 in 2000). 297,553 337,733
Mortgage loans on real estate and collateral notes receivable (less allowance for
possible loan losses of $754 in 2001 and $858 in 2000)............................... 46,937 51,661
Cash and cash equivalents.............................................................. 92,840 70,521
Other investments (cost: $24,818 in 2001 and $25,475 in 2000).......................... 16,814 26,802
Total investments.................................................................. 1,477,378 1,472,562

Accrued investment income................................................................ 18,952 18,218
Premiums receivable (less allowance for doubtful receivables of $1,485 in 2001 and
$1,487 in 2000)........................................................................ 276,567 230,580
Deferred policy acquisition costs........................................................ 120,662 111,305
Property and equipment, net of accumulated depreciation.................................. 36,141 34,823
Residual market receivable
Losses and loss adjustment expenses.................................................... 84,734 82,450
Unearned premiums...................................................................... 40,728 44,791
Due from reinsurers...................................................................... 66,767 61,554
Deferred income taxes.................................................................... 12,409 12,041
Receivable for securities sold........................................................... 1,613 -
Non-compete agreement.................................................................... 2,654 2,829
Other assets............................................................................. 7,086 4,461

Total assets....................................................................... $2,145,691 $2,075,614
<caption>

LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
Liabilities
Unpaid losses and loss adjustment expenses............................................. $ 674,234 $ 674,140
Unearned premiums...................................................................... 586,969 519,885
Current income taxes................................................................... 3,573 13,988
Deferred income........................................................................ 6,633 7,703
Contingent commissions accrued......................................................... 23,234 35,346
Payable for securities purchased....................................................... 39 524
Excess of book value of subsidiary interest over cost.................................. 7,075 8,431
Other liabilities and accrued expenses................................................. 32,790 32,648

Total liabilities.................................................................. 1,334,547 1,292,665

Minority interest........................................................................ 650 1,068

Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value; none issued in
2001 and 2000........................................................................ - -
Common stock, authorized 100,000,000 shares at $.50 par value;
38,000,000 shares issued in 2001 and 2000............................................ 19,000 19,000
Paid-in capital........................................................................ 29,621 29,621
Net accumulated other comprehensive income, net of income taxes of
$9,444 in 2001 and $6,371 in 2000.................................................... 17,538 11,833
Retained earnings...................................................................... 843,436 820,528
909,595 880,982

Treasury stock 4,246,648 shares in 2001 and 2000....................................... (99,101) (99,101)
Total stockholders' equity......................................................... 810,494 781,881

Total liabilities, minority interest and stockholders' equity...................... $2,145,691 $2,075,614
</table>

The accompanying notes are an integral part of these consolidated
financial statements.

- - 3 -
<page>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

Three and Six Months Ended June 30, 2001 and 2000
(Thousands of Dollars Except Per Share Data)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
<s> <c> <c> <c> <c>
Revenues
Direct premiums written................................... $ 281,890 $ 265,724 $ 607,488 $ 572,180
Assumed premiums.......................................... 21,613 18,341 38,040 40,860
Ceded premiums............................................ (38,627) (36,340) (71,480) (73,381)
Net premiums written.................................. 264,876 247,725 574,048 539,659

Increase in unearned premiums............................. (10,013) (14,945) (65,752) (79,572)
Earned premiums........................................... 254,863 232,780 508,296 460,087

Net investment income..................................... 25,441 24,056 50,479 46,888
Premium finance and service fees.......................... 4,308 3,757 8,616 7,549
Amortization of excess of book value of subsidiary
interest over cost...................................... 847 848 1,694 1,695
Net realized investment gains (losses).................... 3,857 (10,167) (6,341) (3,047)

Total revenues....................................... 289,316 251,274 562,744 513,172

Expenses
Losses and loss adjustment expenses....................... 187,926 180,224 383,304 352,653
Policy acquisition costs.................................. 65,467 57,385 126,598 115,589

Total expenses....................................... 253,393 237,609 509,902 468,242

Earnings before income taxes and minority interest... 35,923 13,665 52,842 44,930

Income taxes (benefits)..................................... 7,737 (541) 10,257 4,542

Net earnings before minority interest................ 28,186 14,206 42,585 40,388

Minority interest in net loss of subsidiary................. 14 440 237 222

NET EARNINGS......................................... $ 28,200 $ 14,646 $ 42,822 $ 40,610

COMPREHENSIVE INCOME................................. $ 39,508 $ 19,028 $ 48,527 $ 48,709

NET EARNINGS PER COMMON SHARE:
BASIC.............................................. $ 0.84 $ 0.43 $ 1.27 $ 1.19
DILUTED............................................ $ 0.83 $ 0.43 $ 1.27 $ 1.19

CASH DIVIDENDS PAID PER COMMON SHARE................. $ 0.30 $ 0.29 $ 0.59 $ .57

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC.............................................. 33,753,352 34,180,926 33,753,352 34,213,470
DILUTED............................................ 34,066,145 34,180,926 33,828,816 34,213,470
</table>

The accompanying notes are an integral part of these consolidated
financial statements.

- - 4 -
<page>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2001 and 2000
(Thousands of Dollars)
(Unaudited)

<table>
<caption>
2001 2000
<s> <c> <c>
Cash flows from operating activities:
Premiums collected.................................................... $ 533,612 $487,535
Net investment income received........................................ 49,174 46,884
Premium finance and service fees received............................. 8,616 7,549
Losses and loss adjustment expenses paid.............................. (391,421) (340,258)
Policy acquisition costs paid......................................... (150,122) (134,090)
Federal income tax payments........................................... (24,113) (20,329)

Net cash provided by operating activities......................... 25,746 47,291

Cash flows from investing activities:
Proceeds from maturity of fixed maturities............................ 11,032 10,549
Proceeds from sale of fixed maturities................................ 27,122 51,327
Proceeds from sale of equity securities............................... 16,229 6,393
Net cash proceeds from sale of preferred stock mutual funds........... 2,945 -
Proceeds from sale of other investments............................... 657 -
Purchase of fixed maturities.......................................... (11,680) (51,425)
Purchase of equity securities......................................... (20,865) (10,825)
Purchase of preferred stock mutual funds.............................. (11,401) (36,808)
Purchase of other investments......................................... - (9,304)
Payments received on mortgage loans and collateral notes receivable... 5,912 5,187
Mortgage loans and collateral notes originated........................ (1,084) (5,675)
Purchase of property and equipment.................................... (3,065) (1,856)
Other proceeds from investing activities.............................. 685 587

Net cash provided (used) in investing activities.................. 16,487 (41,850)

Cash flows from financing activities:
Dividends paid to stockholders........................................ (19,914) (19,489)
Purchase of treasury stock............................................ - (5,293)

Net cash used in financing activities............................. (19,914) (24,782)

Increase (decrease) in cash and cash equivalents...................... 22,319 (19,341)
Cash and cash equivalents at beginning of period...................... 70,521 22,535

Cash and cash equivalents at the end of period.................... $ 92,840 $ 3,194
</table>

The accompanying notes are an integral part of these consolidated
financial statements.

- - 5 -
<page>

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, 2001 and 2000
(Thousands of Dollars)
(Unaudited)

2001 2000
<s> <c> <c>
Cash flows from operating activities:
Net Earnings.......................................................... $ 42,822 $ 40,610
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Premiums receivable................................................. (45,987) (63,920)
Deferred policy acquisition costs................................... (9,357) (10,095)
Residual market receivable.......................................... 1,779 (856)
Due to/from reinsurers.............................................. (5,213) (15,528)
Losses and loss adjustment expenses................................. 94 31,771
Unearned premiums................................................... 67,084 86,847
Current income taxes................................................ (10,415) (11,911)
Deferred income taxes............................................... (3,441) (3,876)
Deferred income..................................................... (1,070) 701
Contingent commissions.............................................. (12,112) (10,636)
Other assets, liabilities and accrued expenses...................... (3,840) 411
Net realized investment losses...................................... 6,341 3,049
Other - net......................................................... (939) 724

Net cash provided by operating activities.................... $ 25,746 $ 47,291
</table>

The accompanying notes are an integral part of these consolidated
financial statements.

- - 6 -
<page>

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, 2000. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States, 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 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 2000 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 Forms
10-K and
10-Q, Schedules 13D and 13G, and other documents filed with the SEC, the
possibility of adverse catastrophe experience and severe weather,
adverse trends in claim severity or frequency, adverse state and federal
regulation and legislation, interest rate risk, rate making decisions
for private passenger automobile policies in Massachusetts, potential
rate filings outside of Massachusetts, heightened competition, as well
as 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, 2001 nor
comparison with the corresponding six months ended June 30, 2000 should
be considered indicative of the results which may be expected for the
year ending December 31, 2001.

6. The Company did not purchase additional shares of Treasury stock under
the buyback program during the first six months of 2001, (205,600 shares
were purchased during the first six months of 2000). The Company
currently holds 4,246,648 shares of Treasury Stock. At June 30, 2001,
the Company has the ability to purchase approximately 900,000 additional
shares of Treasury stock under the current Board of Directors'
authorization.

- - 7 -
<page>

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. 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 indicated 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 was
insolvent and was subsequently placed into liquidation on August 2,
2000. The Company experienced an increase in new business primarily in
the third and fourth quarter of 2000 as a result of this event. In the
latter part of 2000, another Massachusetts insurance company, New
England Fidelity Insurance Company, was ordered into liquidation by the
Commissioner. This company was the twenty-second largest writer in
Massachusetts based on year-end 1999 writings and was approximately one-
sixth the size of Trust. The Company experienced an increase in
Massachusetts personal automobile business in the first six months of
2001 primarily as a result of agreeing to write the majority of the New
England Fidelity business effective January 1, 2001.

8. During 2001, as required by the Emerging Issues Task Force ("EITF") D-
46, the Company amended its policy in regard to its investments in
venture capital fund limited partnerships. EITF D-46 requires companies
who own more than a 5% share of a limited partnership to account for
these investments on an equity basis. The operating results of these
venture capital fund limited partnerships have been reflected in
realized gains and losses. Prior to this change, the operating results
were not material and were therefore reflected in accumulated
comprehensive income and loss.

9. Beginning in the first quarter of 2001, the Company, in the 2001 and
prior years' results, classified its undistributed equity in the
earnings and losses on investments in closed-end preferred stock mutual
funds in net realized investment gains and losses. For the year ended
2000, the undistributed equity in the earnings and losses of these funds
was reported in net investment income. Previously the Company did not
include the undistributed equity in its quarterly or annual filings.
The Company believes this new classification better presents the
undistributed equity component of these funds. These investments are
valued at original cost plus the cumulative undistributed equity in
earnings and losses of the funds and adjusted over time by the premium
or discount at the time of purchase to the applicable underlying net
asset value of the funds.

- - 8 -
<page>

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:
<table>
<caption>
Six Months Ended
June 30,
2001 2000
<s> <c> <c>
Net earnings.......................................... $ 42,822 $ 40,610
Other comprehensive income, net of taxes:
Change in unrealized gains, net of
income taxes of $3,028 in 2001
and $3,936 in 2000................................. 5,624 7,309
Reclassification adjustment, net of income taxes
of $44 in 2001 and $425 in 2000................... 81 790
Other comprehensive income............................ 5,705 8,099
Comprehensive income.................................. $ 48,527 $ 48,709

Three Months Ended
June 30,
2001 2000
<s> <c> <c>
Net earnings.......................................... $ 28,200 $ 14,646
Other comprehensive income, net of taxes:
Change in unrealized gains, net of
income taxes of $5,874 in 2001
and $1,846 in 2000................................. 10,909 3,427
Reclassification adjustment, net of income taxes
of $215 in 2001 and $514 in 2000.................. 399 955
Other comprehensive income............................ 11,308 4,382
Comprehensive income.................................. $ 39,508 $ 19,028
</table>

- - 9 -
<page>

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:
<table>
<caption>
Earnings Before
Income Taxes and Identifiable
Revenue Minority Interest Assets

Six Months Ended June 30, 2001
<s> <c> <c> <c>
Property and casualty insurance
Massachusetts...................... $493,588 $ 50,961 $ 1,853,474
Other than Massachusetts........... 65,525 1,376 239,236
Real estate and commercial lending... 1,933 1,933 47,798
Corporate and other.................. 1,698 (1,428) 5,183
Consolidated...................... $562,744 $ 52,842 $ 2,145,691

Six Months Ended June 30, 2000

Property and casualty insurance
Massachusetts...................... $449,980 $ 40,895 $ 1,685,900
Other than Massachusetts........... 57,194 1,848 230,498
Real estate and commercial lending... 4,270 4,270 74,854
Corporate and other.................. 1,728 (2,083) 7,698
Consolidated...................... $513,172 $ 44,930 $ 1,998,950

<caption>
Earnings Before
Income Taxes and Identifiable
Revenue Minority Interest Assets

Three Months Ended June 30, 2001
<s> <c> <c> <c>
Property and casualty insurance
Massachusetts...................... $252,918 $ 34,850 $ 1,853,474
Other than Massachusetts........... 34,511 1,108 239,236
Real estate and commercial lending... 1,036 1,036 47,798
Corporate and other.................. 851 (1,071) 5,183
Consolidated...................... $289,316 $ 35,923 $ 2,145,691

Three Months Ended June 30, 2000

Property and casualty insurance
Massachusetts...................... $219,069 $ 12,782 $ 1,685,900
Other than Massachusetts........... 28,179 (1,880) 230,498
Real estate and commercial lending... 3,178 3,178 74,854
Corporate and other.................. 848 (415) 7,698
Consolidated...................... $251,274 $ 13,665 $ 1,998,950
</table>

- - 10 -
<page>

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:
<table>
<caption>
OTHER INFORMATION:
June 30,
2001 2000
<s> <c> <c>
Massachusetts policies in force
Private passenger automobile......................... 672,414 630,667
Homeowners........................................... 142,954 126,879
Commercial automobile................................ 17,193 15,505

<caption>
OTHER EARNINGS STATEMENT INFORMATION:
Three Months Ended
June 30,
2001 2000
<s> <c> <c>
Premiums earned by Massachusetts subsidiaries
Private passenger automobile....................... $ 207,459 $ 192,566
Homeowners......................................... 4,675 4,178
Commercial automobile.............................. 12,457 9,558
Other lines........................................ 592 914
Premiums earned by subsidiaries in other states...... 29,680 25,564
Total......................................... $ 254,863 $ 232,780

Net investment income, after tax..................... $ 20,519 $ 19,967

Pure loss ratios of Massachusetts subsidiaries
Private passenger automobile....................... 64.5% 68.2%
Homeowners (gross of reinsurance).................. 45.3% 40.2%
Commercial automobile.............................. 57.7% 58.4%
Pure loss ratios of subsidiaries in other states..... 66.0% 64.9%

Massachusetts private passenger automobile
exposures written................................... 213,623 206,855

Massachusetts private passenger automobile direct
premiums written................................... $ 209,966 $ 206,063
</table>

- - 11 -
<page>

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):

<table>
<caption>
OTHER EARNINGS STATEMENT INFORMATION:
Six Months Ended
June 30,
2001 2000
<s> <c> <c>
Premiums earned by Massachusetts subsidiaries
Private passenger automobile......................... $ 416,074 $ 379,249
Homeowners........................................... 9,312 8,489
Commercial automobile................................ 23,606 18,762
Other lines.......................................... 1,627 1,826
Premiums earned by subsidiaries in other states........ 57,677 51,761
Total........................................... $ 508,296 $ 460,087

Net investment income, after tax....................... $ 40,754 $ 38,931

Pure loss ratios of Massachusetts subsidiaries
Private passenger automobile......................... 65.6% 68.3%
Homeowners (gross of reinsurance).................... 51.1% 43.5%
Commercial automobile................................ 65.7% 61.8%
Pure loss ratios of subsidiaries in other states....... 65.6% 62.4%

Massachusetts private passenger automobile
exposures written..................................... 509,619 486,303

Massachusetts private passenger automobile direct
premiums written..................................... $ 466,756 $ 454,854
</table>

Additional supplemental financial information is available on the
Company's website at http://www.commerceinsurance.com, under the "Links"
section of the "News & Investors" tab.

- - 12 -
<page>

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)

13. Closed-end Preferred Stock Mutual Funds

The following table reflects the shares held, percentage of ownership,
carrying value at equity, book value, market value, and value of shares at net
asset value, by fund for the six months ended June 30, 2001 and the year ended
December 31, 2000:
<table>
<caption>

(Dollars in Thousands, Except Share Amounts)

At June 30, 2001

Fund Carrying Quoted Value of
Fund Shares % of Value Book Market Shares at Net
Symbol (1) Held Ownership at Equity Value Value Asset Value
<s> <c> <c> <c> <c> <c> <c>
PGD 2,086,900 25.0% $ 26,324 $ 22,257 $ 26,295 $ 29,091
PPF 2,365,200 32.6% 29,331 26,192 28,737 30,866
PDF 4,638,800 31.0% 45,422 41,966 42,120 46,620
PDT 4,962,200 33.1% 59,781 53,542 54,584 61,630
DIV 3,435,000 34.7% 50,606 47,576 50,838 52,762
PFD 2,981,500 30.3% 41,575 44,803 40,549 41,622
PFO 4,040,643 36.2% 44,514 48,812 43,114 44,811
Total $297,553 $285,148 $286,237 $307,402

At December 31, 2000

Fund Carrying Quoted Value of
Fund Shares % of Value Book Market Shares at Net
Symbol (1) Held Ownership at Equity Value Value Asset Value
<s> <c> <c> <c> <c> <c> <c>
PGD 1,877,300 22.5% $ 23,478 $ 19,666 $ 22,528 $ 26,695
PPF 2,352,900 32.4% 28,322 26,048 25,882 30,470
PDF 4,638,800 31.0% 46,003 41,966 40,589 47,594
PDT 4,925,100 32.8% 60,453 53,144 52,021 63,091
DIV 3,080,500 31.2% 46,314 42,500 40,239 48,918
PDI 5,253,400 48.5% 52,207 52,583 52,534 54,110
PFD 2,981,500 30.3% 39,834 44,803 36,151 40,012
PFO 3,892,543 34.9% 41,122 47,270 40,385 41,533
Total $337,733 $327,980 $310,329 $352,423
</table>
(1) John Hancock Patriot Global Dividend Fund ("PGD"), John Hancock Patriot
Preferred Dividend Fund, ("PPF"), John Hancock Patriot Premium Dividend I
Fund ("PDF"), John Hancock Patriot Premium Dividend II Fund ("PDT"), John
Hancock Patriot Select Dividend Fund ("DIV"), Putnam Dividend Income Fund
("PDI"), Preferred Income Fund ("PFD"), Preferred Income Opportunity Fund
("PFO").

The difference between the carrying value at equity and the value of
shares at net asset value is negative goodwill created at the time of
purchase of the shares. Negative goodwill is being amortized into investment
income over various periods ranging from 1.25 years to 4 years based on the
turnover ratios of the funds.

- - 13 -
<page>

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)

13. Closed-end Preferred Stock Mutual Funds (continued)

On May 22, 2001 a settlement of the lawsuit the Company initiated with
the PDI Trustees was reached. Under the settlement, the Company's share in
PDI was liquidated and the Company received the proportional shares of
preferred stocks and cash that made up the fund. This preferred stock along
with the Company's proportional share of cash were placed in a newly created
Trust called LIQ Special Trust, ("the Trust"). The Trust was created by, and
as a wholly-owned subsidiary of, PDI. The Trust was conveyed to the Company
as part of the settlement. The initial value of the Trust was $54,836 which
was made up of $51,891 in preferred stocks and $2,945 in cash. The Company's
cost in PDI was $54,233, which resulted in a realized gain of $603. The
carrying value of PDI on May 22, 2001 was $52,534. The difference between
the cost and carrying value of $1,699 represented $1,513, which remained as
unamortized goodwill and $186, which represented the equity in earnings for
PDI for the period May 1, 2001 through May 22, 2001. These amounts were
realized as gains at the time of liquidation.

At June 30, 2001 the Trust was consolidated into the Company's financial
statements and equated to a value of $55,536. The majority of the Trust's
value was $52,591 in preferred stocks and $3,069 in cash and short-term
investments.

14. Earnings Per Share

Earnings per diluted common share is based on the weighted average
number of diluted common shares outstanding during each period. The
Company's only potentially dilutive instruments are stock options
outstanding, and dilution from these is not significant.

15. Subsequent Events

In late July, the Company received notice from the Massachusetts
Teachers Association (MTA) that the MTA is terminating its agency
relationship with the Company and has withdrawn their endorsement, effective
January 1, 2002, of the personal automobile group-marketing plan made
available to members of the MTA by The Commerce Insurance Company. Commerce
expects that approximately $16.7 million of premiums written will not be
renewed as a result of this.

- - 14 -
<page>

MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended June 30, 2001 compared to
three months ended June 30, 2000
(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, 2001 and 2000:
<table>
<caption>
(Dollars in thousands)
Three Months Ended June 30,
2001 2000 Change % Change
<s> <c> <c> <c> <c>
Direct Premiums Written:
Personal Automobile in Massachusetts........ $209,966 $206,063 $ 3,903 1.9%
Personal Automobile in all other states..... 28,924 23,873 5,051 21.2
Commercial Automobile in Massachusetts...... 14,770 10,507 4,263 40.6
Homeowners in Massachusetts................. 18,583 16,736 1,847 11.0
Homeowners in all other states.............. 4,840 4,351 489 11.2
Other Lines in Massachusetts................ 4,477 4,080 397 9.7
Other Lines in all other states............. 330 114 216 189.5
Total Direct Premiums Written............ $281,890 $265,724 $ 16,166 6.1%

Net Premiums Written:
Personal Automobile in Massachusetts........ $212,269 $206,522 $ 5,747 2.8%
Personal Automobile in all other states..... 28,911 23,856 5,055 21.2
Commercial Automobile in Massachusetts...... 16,398 10,429 5,969 57.2
Homeowners in Massachusetts................. 5,146 4,678 468 10.0
Homeowners in all other states.............. 1,191 1,056 135 12.8
Other lines in Massachusetts................ 762 1,128 (366) (32.4)
Other lines in all other states............. 199 56 143 255.4
Total Net Premiums Written............... $264,876 $247,725 $ 17,151 6.9%

Earned Premiums:
Personal Automobile in Massachusetts........ $191,808 $173,058 $ 18,750 10.8%
Personal Automobile in all other states..... 28,445 24,586 3,859 15.7
Commercial Automobile in Massachusetts...... 10,192 7,772 2,420 31.1
Homeowners in Massachusetts................. 4,675 4,177 498 11.9
Homeowners in all other states.............. 1,043 958 85 8.9
Other Lines in Massachusetts................ 530 840 (310) (36.9)
Other Lines in all other states............. 192 19 173 910.5
Assumed Premiums from C.A.R................. 17,916 21,295 (3,379) (15.9)
Assumed Premiums from other than C.A.R...... 62 75 (13) (17.3)
Total Earned Premiums.................... $254,863 $232,780 $ 22,083 9.5%

Earned Premiums in Massachusetts............ $207,205 $185,847 $ 21,358 11.5
Earned Premiums-Assumed..................... 17,978 21,370 (3,392) (15.9)
Earned Premiums in all other states......... 29,680 25,563 4,117 16.1
Total Earned Premiums.................... $254,863 $232,780 $ 22,083 9.5%
</table>

The $3,903 or 1.9% increase in Massachusetts personal automobile direct
premiums written during the second quarter of 2001 resulted primarily from
increases of 3.3% and 5.3% in the number of Massachusetts personal automobile
exposures for liability and physical damage coverage, respectively, offset by
decreases of 2.8% and 1.9% in the average written premium rate per exposure
for Massachusetts personal automobile liability and physical damage exposures,
respectively.

- - 15 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

The average written premium per exposure percentage decreases for the
second quarter of 2001 were primarily the result of rate modifications in the
individual coverage components in the 2001 state mandated average rate
decrease, offset by decreases in the Company's safe driver rate deviations.
The combination of these factors resulted in a 1.7% decrease in the average
personal automobile premium per exposure for the second quarter of 2001 as
compared to an increase of 6.1% during the second quarter of 2000. Despite
the 2001 state mandated average rate decrease of 8.3%, the Company's smaller
decrease 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.

The accompanying table depicts the AAA Affinity Group Discount, SDIP
Deviations and their combined reduction from Massachusetts average mandated
rates:
<table>
<caption>

AAA Affinity Group Discount and SDIP Deviations* 2001 2000
<s> <c> <c>
AAA Affinity Group Discount..................................... 6% 6%
SDIP Step 9 Deviation........................................... 2% 6%
SDIP Step 10 Deviation.......................................... 0% 2%

Combined AAA Affinity Group Discount and Step 9 Deviation....... 7.9% 11.6%
Combined AAA Affinity Group Discount and Step 10 Deviation...... 6.0% 7.9%
</table>
* For policies with effective dates as of January 1, 2001 and 2000 or
thereafter, respectively.

Other states personal automobile direct premiums written increased $5,051
or 21.2% during the second quarter of 2001 as compared to the same period in
2000, however an overall depressed rate environment resulted in diminished
underwriting profits. The Company is in the process of evaluating a number of
its other than Massachusetts state rating structures, has filed for increases
in several states and will seek additional rate increases where appropriate.
Personal automobile direct premiums written by American Commerce Insurance
Company ("American Commerce"), located in Columbus, Ohio, for the second
quarter of 2001 increased $1,309 or 7.2% to $19,512 as compared to $18,203 for
the same period a year ago, due primarily to book rollovers of business from
existing agents. Personal automobile direct premiums written for Commerce
West Insurance Company ("Commerce West"), located in Pleasanton, California,
increased $3,742 or 66.0% to $9,412 during the second quarter of 2001 as
compared to $5,670 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 23 states while Commerce West
writes personal automobile insurance in the states of California and Oregon.
Both companies target preferred insurance risks, however Commerce West has
recently initiated a non-standard auto product, which is the primary reason
for their growth.

Direct premiums written for Massachusetts commercial automobile insurance
increased by $4,263 or 40.6%, due primarily to an increase of approximately
9.3% in the number of policies written and a 25.6% increase in the average
commercial automobile premium per policy. The increase in premium per policy
was attributable to a hardening of the commercial automobile market, primarily
in larger commercial accounts. The Company continued to experience a
significant increase in accounts with premiums in excess of $50. In addition,
rates for other voluntary commercial automobile policies have increased
moderately combined with an approximate 10% increase in rates for policies
written through Commonwealth Automobile Reinsurers ("C.A.R."). The increased
business was attributable to the Company's initiative to expand writings.

- - 16 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Direct premiums written for Massachusetts homeowners insurance increased
by $1,847 or 11.0% due primarily to a 6.0% increase in the number of policies
written coupled with a 5.0% increase in the average premium per policy. The
increase in business was primarily due to additional business from former
Trust agents and business formerly written by New England Fidelity Insurance
Company, which was declared insolvent in 2000. Other states homeowners
insurance written by American Commerce increased $489 or 11.2% to $4,840, due
primarily to book rollovers of business from existing agents.

The $17,151 or 6.9% increase in net premiums written was primarily due to
the growth in direct premiums written as described above and by an increase of
premiums assumed from the Commonwealth Automobile Reinsurers ("C.A.R.")
coupled with a slight decrease in premiums ceded to C.A.R. offset by an
increase to premiums ceded to reinsurers other than C.A.R. Premiums ceded to
reinsurers other than C.A.R., during the second quarter of 2001, increased
$2,059 or 11.1% as compared to the second quarter of 2000 primarily as a
result of the effect from the 75% quota share treaty on the increased business
in homeowners previously mentioned. Of the $17,151 increase in net premiums
written, $11,818 was associated with Massachusetts business, $3,887 was
attributable to increased writings for Commerce West due to the increase in
non-standard business previously mentioned, with the remainder attributable to
American Commerce.

The $22,083 or 9.5% increase in total earned premiums during the second
quarter of 2001 as compared to the second quarter of 2000 was primarily
attributable to increases in Massachusetts personal automobile liability and
physical damage exposures, coupled with an increase in earned premium per
exposure. The increase in earned premium per exposure occurs (versus a
decrease in written premium per exposure) because of the time lag it takes to
earn the premium once it is written. This primarily related to an increase in
written premium in the third and fourth quarter of last year. This resulted
in an $18,750 or 10.8% increase for Massachusetts personal automobile earned
premiums.

Investment Income

<table>
<caption>
Investments, at cost June 30,
(Dollars in thousands) % of % of
2001 Invest. 2000 Invest.
<s> <c> <c> <c> <c>
Fixed maturities (GNMA & FNMA mortgage-
backed bonds, corporate bonds, U.S.
Treasury bonds and notes and tax-
exempt state and municipal bonds)...... $ 638,457 44.2% $ 648,794 47.3%

Preferred stocks......................... 270,224 18.7 230,378 16.8
Common stocks............................ 87,703 6.1 81,542 6.0
Closed-end preferred stock mutual funds.. 285,148 19.7 311,518 22.7

Mortgages and collateral loans (net of
allowance for possible loan losses).... 46,937 3.2 74,104 5.4
Cash and short-term investments.......... 92,840 6.4 3,194 0.2
Other investments........................ 24,818 1.7 22,434 1.6
Total investments.................... $1,446,127 100.0% $1,371,964 100.0%
</table>

The Company's investment strategy is to maximize after-tax investment
income through investing in high quality securities coupled with acquiring
equity investments, which may forgo current investment yield in favor of
potential higher yielding capital appreciation in the future.
- - 17 -
<page>

The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

As depicted in the accompanying table, second quarter 2001 net investment
income increased $1,387 or 5.8%, compared to the same period in 2000,
principally as a result of an increase in average invested assets (at cost),
offset by a slight decrease in yield. The decrease in yield is primarily due
to lower short-term yields and higher yielding securities being called while
the Company maintains a short (liquid) position. The Company continues to
monitor interest rates on long-term securities and intends to maintain its
short position until such time as the Company believes long-term rates have
appropriately firmed. Net investment income as a percentage of total average
investments was 6.8% in the second quarter of 2001 compared to 7.0% for the
same period in 2000. Net investment income after tax as a percentage of total
average investments was 5.5% and 5.8% in the second quarter of 2001 and 2000,
respectively.
<table>
<caption>
Investment Return Quarter Ending June 30,
(Dollars in thousands) 2001 2000
<s> <c> <c>
Average month-end investments (at cost)... $1,495,471 $1,375,137
Net investment income..................... 25,441 24,056
Net investment income after-tax........... 20,519 19,967
Net investment income as a percentage
of average net investments (at cost).... 6.8% 7.0%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 5.5% 5.8%
</table>
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, 2000 was $16,947. The amount is being amortized
into revenue on a straight-line basis over a five-year period. The amount
amortized into revenue was $847 and $848 for the second quarter of 2001 and
2000, respectively.

Investment Gains and Losses

Net realized investment gains totaled $3,857 during the second quarter of
2001 as compared to net realized investment losses of $10,167 during the same
period in 2000. Of the net realized gains during the second quarter of 2001,
$1,562 in realized losses was recognized as a result of the Company's
investments in certain venture capital fund limited partnerships. In 2001,
the Company began to account for these investments on an equity basis. The
equity in the operating results of these funds has been reflected in realized
losses. Prior to this change, the operating results were not material and
were therefore reflected in accumulated comprehensive income and loss.

Also during the second quarter of 2001, the undistributed operating
results of closed-end preferred stock mutual funds have been reflected in
realized gains and losses. Prior period results, previously reflected in
investment income, have been reclassified to realized gains and losses to
conform with current period presentation. During the second quarter of 2001
and 2000, the Company reflected realized gains and losses of $5,984 and
$9,781, respectively, as a result of this change.

Net realized gains and losses by category for the quarter ended June 30,
are as follows:
<table>
<caption
June 30, June 30,
2001 2000
<s> <c> <c>
Closed-end preferred stock mutual funds.......... $ 5,984 $ (9,781)
Venture capital fund investments................. (1,562) 460
Bonds............................................ 374 (1,428)
Common and preferred stocks...................... (989) (8)
Other............................................ 140 590
Net realized investment gains (losses)...... $ 3,857 $(10,167)
</table>
- - 18 -
<page>

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 $7,702 or
4.3% during the second quarter of 2001 as compared to the same period a year
ago. Massachusetts operations experienced improved underwriting results
primarily due to lower bodily injury losses and lower Massachusetts residual
market losses. These improvements were offset by increased losses in the
homeowners property business and in personal automobile physical damage due to
more adverse weather conditions compared to last year. Losses and LAE
incurred (on a statutory basis) as a percentage of insurance premiums earned
("loss ratio") decreased to 73.5% for the second quarter of 2001 compared to
77.7% for the second quarter of 2000. The ratio of net incurred losses,
excluding LAE, to premiums earned ("pure loss ratio") on Massachusetts
personal automobile was 64.5% for the second quarter of 2001 compared to 68.2%
for the same period a year ago. In addition to the information noted above,
the pure loss ratio decreased due to an increase of 2.2% in earned premium per
earned exposure. The commercial automobile pure loss ratio decreased to 57.7%
during the second quarter of 2001 as compared to 58.4% for the same period a
year ago. For Massachusetts homeowners (gross of reinsurance), the pure loss
ratio was 45.3% during the second quarter of 2001 as compared to 40.2% for the
same period a year ago. This increase was primarily the result of more claims
for Massachusetts homeowner business due to worse weather conditions during
the second quarter of 2001. Pure loss ratios of subsidiaries in other states
increased to 66.0% during the second quarter of 2001 as compared to 64.9% for
the same period a year ago. This increase was due primarily to increases in
personal automobile physical damage claims. The loss ratio (on a statutory
basis) for Commerce West and American Commerce was 88.9% and 78.6%,
respectively, for the second quarter of 2001, compared to 75.9% and 93.3%,
respectively, for the second quarter of 2000. The increase in the loss ratio
for Commerce West was primarily attributable to a substantial increase in non-
standard automobile writings with loss ratios that are significantly higher
than their regular business. The decrease in the loss ratio for American
Commerce was primarily due to pension expense in 2000 from the termination of
their pension plan affecting only the statutory loss ratio.

Policy Acquisition Costs

Policy acquisition costs expensed increased by $8,082 or 14.1% during the
second quarter of 2001 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) increased to 24.8% for the second quarter of
2001 as compared to 23.7% for the same period a year ago. The increase, as
compared to the same period a year ago, was primarily attributable to slightly
higher direct commission expense for Massachusetts mandated minimum
commissions coupled with higher contingent commission accruals. The
underwriting expense ratio (on a statutory basis) for Commerce West and
American Commerce was 32.6% and 30.8%, respectively, for the second quarter of
2001, compared to 35.1% and 29.5%, respectively, for the same period a year
ago. The decrease in the Commerce West ratio was primarily a function of
premium writings increasing at a faster pace than expenses.

Income Taxes

The Company's effective tax rate was 21.5% for the second quarter of 2001
as compared to (4.0%) 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
higher effective tax rate for the second quarter of 2001 was the result of
realized investment gains in the second quarter as compared to realized
investment losses in the prior year second quarter, coupled with the tax-
exempt interest and the dividends received deduction comprising a lesser
portion of earnings before taxes. The second quarter 2000 tax rate was
primarily impacted by net realized investment losses from preferred stock
mutual funds coupled with higher underwriting losses.
- - 19 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

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 ACIC Holding Co., Inc. common stock at June 30,
2001. AAA SNE maintains a 20% common stock ownership. The minority interest
in net loss of subsidiary of $14 included in these consolidated financial
statements for the second quarter of 2001 represents 20% of the net loss
during the second quarter for ACIC Holding Co., Inc. which is calculated after
the $2,428 preferred stock dividend paid to Commerce. This compares to the
minority interest in net losses of subsidiary of $440 after $2,250 in
preferred stock dividend paid to Commerce in the second quarter of 2000.

Net Earnings

Net earnings increased $13,554 or 92.5% to $28,200 during the second
quarter of 2001 as compared to $14,646 for the same period a year ago.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, increased $6,201 or 30.4% to $26,580 ($0.79 per share)
during the second quarter of 2001 as compared to $20,379 ($0.59 per share) for
the same period a year ago, both as a result of the factors previously
mentioned.

- - 20 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Six months ended June 30, 2001 compared to
six months ended June 30, 2000
(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, 2001 and 2000:

(Dollars in thousands)
<table>
<caption>
Six Months Ended June 30,
2001 2000 Change % Change
<s> <c> <c> <c> <c>
Direct Premiums Written:
Personal Automobile in Massachusetts....... $466,756 $454,854 $ 11,902 2.6%
Personal Automobile in all other states.... 60,623 50,442 10,181 20.2
Commercial Automobile in Massachusetts..... 30,069 22,321 7,748 34.7
Homeowners in Massachusetts................ 32,143 28,944 3,199 11.1
Homeowners in all other states............. 8,836 7,970 866 10.9
Other Lines in Massachusetts............... 8,398 7,422 976 13.2
Other Lines in all other states............ 663 227 436 192.1
Total Direct Premiums Written........... $607,488 $572,180 $ 35,308 6.2%

Net Premiums Written:
Personal Automobile in Massachusetts....... $469,234 $460,172 $ 9,062 2.0%
Personal Automobile in all other states.... 60,594 50,715 9,879 19.5
Commercial Automobile in Massachusetts..... 30,702 22,203 8,499 38.3
Homeowners in Massachusetts................ 9,090 8,216 874 10.6
Homeowners in all other states............. 2,172 (3,721) 5,893 (158.4)
Other lines in Massachusetts............... 1,848 2,060 (212) (10.3)
Other lines in all other states............ 408 14 394 2814.3
Total Net Premiums Written.............. $574,048 $539,659 $ 34,389 6.4%

Earned Premiums:
Personal Automobile in Massachusetts....... $383,776 $341,409 $ 42,367 12.4%
Personal Automobile in all other states.... 55,339 49,548 5,791 11.7
Commercial Automobile in Massachusetts..... 19,634 15,220 4,414 29.0
Homeowners in Massachusetts................ 9,312 8,489 823 9.7
Homeowners in all other states............. 2,050 2,172 (122) (5.6)
Other Lines in Massachusetts............... 1,485 1,682 (197) (11.7)
Other Lines in all other states............ 288 41 247 602.4
Assumed Premiums from C.A.R................ 36,270 41,382 (5,112) (12.4)
Assumed Premiums from other than C.A.R..... 142 144 (2) (1.4)
Total Earned Premiums................... $508,296 $460,087 $ 48,209 10.5%

Earned Premiums in Massachusetts........... $414,207 $366,800 $ 47,407 12.9
Earned Premiums-Assumed.................... 36,412 41,526 (5,114) (12.3)
Earned Premiums in all other states........ 57,677 51,761 5,916 11.4
Total Earned Premiums................... $508,296 $460,087 $ 48,209 10.5%
</table>

- - 21 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

The $11,902 or 2.6% increase in Massachusetts personal automobile direct
premiums written during the first six months of 2001 resulted primarily from
increases of 4.8% and 6.3% in the number of Massachusetts personal automobile
exposures for liability and physical damage coverage, respectively, offset by
decreases of 2.7% and 2.8% in the average written premium rate per exposure
for Massachusetts personal automobile liability and physical damage exposures,
respectively.

The average written premium per exposure percentage decreases for the
first six months of 2001 were primarily the result of rate modifications in
the individual coverage components in the 2001 state mandated average rate
decrease, offset by decreases in the Company's safe driver rate deviations.
The combination of these factors resulted in a 2.7% decrease in the average
personal automobile premium per exposure for the first six months of 2001 as
compared to an increase of 6.0% during the first six months of 2000. Despite
the 2001 state mandated average rate decrease of 8.3%, the Company's smaller
decrease 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.

The accompanying table depicts the AAA Affinity Group Discount, SDIP
Deviations and their combined reduction from Massachusetts average mandated
rates:

<table>
<caption>
AAA Affinity Group Discount and SDIP Deviation* 2001 2000
<s> <c> <c>
AAA Affinity Group Discount..................................... 6% 6%
SDIP Step 9 Deviation........................................... 2% 6%
SDIP Step 10 Deviation.......................................... 0% 2%

Other states personal automobile direct premiums written increased
$10,181 or 20.2% during the first six months of 2001 as compared to the same
period in 2000, however, an overall depressed rate environment resulted in
diminished underwriting profits. The Company is in the process of evaluating
a number of its other than Massachusetts state rating structures, has filed
for increases in several states and will seek additional rate increases where
appropriate. Personal automobile direct premiums written by American Commerce
Insurance Company ("American Commerce"), located in Columbus, Ohio, for the
first six months of 2001 increased $2,720 or 7.1% to $41,161 as compared to
$38,441 for the same period a year ago due primarily to book rollovers of
business from existing agents. Personal automobile direct premiums written
for Commerce West Insurance Company ("Commerce West"), located in Pleasanton,
California, increased $7,461 or 65.1% to $19,462 during the first six months
of 2001 as compared to $12,001 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 23
states while Commerce West writes personal automobile insurance in the states
of California and Oregon. Both companies target preferred insurance risks,
however Commerce West has recently initiated a non-standard auto product,
which is the primary reason for their growth.

- - 22 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Direct premiums written for Massachusetts commercial automobile insurance
increased by $7,748 or 34.7%, due primarily to an increase of approximately
7.2% in the number of policies written and by a 25.6% increase in the average
commercial automobile premium per policy. The increase in premium per policy
was attributable to a hardening of the commercial automobile market, primarily
in larger commercial accounts. The Company experienced a significant increase
in accounts with premiums in excess of $50. In addition, rates for other
voluntary commercial automobile policies have increased moderately combined
with an approximate 10% increase in rates for policies written through
Commonwealth Automobile Reinsurers ("C.A.R."). The increased business was
attributable to the Company's initiative to expand writings.

Direct premiums written for Massachusetts homeowners insurance increased
by $3,199 or 11.1% due primarily to a 7.0% increase in the number of policies
written coupled with a 3.9% increase in the average premium per policy. The
increase in business was primarily due to additional business from former
Trust agents and business formerly written by New England Fidelity Insurance
Company, which was declared insolvent in 2000. Other states homeowners
insurance written by American Commerce increased $866 or 10.9% to $8,836 due
primarily to book rollovers of business from existing agents.

The $34,389 or 6.4% increase in net premiums written was primarily due to
the growth in direct premiums written as described above and by a decrease in
premiums ceded to the Commonwealth Automobile Reinsurers ("C.A.R.") coupled
with a decrease to premiums ceded to reinsurers other than C.A.R. offset by a
decrease of premiums assumed from C.A.R. Premiums ceded to reinsurers other
than C.A.R., during the first six months of 2001, decreased $1,157 or 3.0% as
compared to the first six months of 2000 primarily as a result of American
Commerce joining the quota-share reinsurance program effective January 1,
2000. An unearned premium transfer of $6,033 occurred effective January 1,
2000. Of the $34,389 increase in net premiums written, $18,223 was associated
with Massachusetts business, and $7,749 was attributable to increased writings
for Commerce West due to the increase in non-standard business previously
mentioned. The balance of the increase was primarily attributable to American
Commerce's unearned premium transfer mentioned earlier.

The $48,209 or 10.5% increase in total earned premiums during the first
six months of 2001 as compared to the first six months of 2000 was primarily
attributable to increases in Massachusetts personal automobile liability and
physical damage exposures, coupled with an increase in earned premium per
exposure. The increase in earned premium per exposure occurs (versus a
decrease in written premium per exposure) because of the time lag it takes to
earn the premium once it is written. Overall, this resulted in a $42,367 or
12.4% increase for Massachusetts personal automobile earned premium.

- - 23 -
<page>

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, 2001
and 2000 (the Company's investment portfolio, at market and equity is shown in
the table found on page 26):
<table>
<caption>
Investments, at cost June 30,
(Dollars in thousands) % of % of
2001 Invest. 2000 Invest.
<s> <c> <c> <c> <c>
Fixed maturities (GNMA & FNMA mortgage-
backed bonds, corporate bonds, U.S.
Treasury bonds and notes and tax-
exempt state and municipal bonds)..... $ 638,457 44.2% $ 648,794 47.3%

Preferred stocks........................ 270,224 18.7 230,378 16.8
Common stocks........................... 87,703 6.1 81,542 6.0
Closed-end preferred stock mutual funds 285,148 19.7 311,518 22.7

Mortgages and collateral loans (net of
allowance for possible loan losses)... 46,937 3.2 74,104 5.4
Cash and short-term investments......... 92,840 6.4 3,194 0.2
Other investments....................... 24,818 1.7 22,434 1.6
Total investments................... $1,446,127 100.0% $1,371,967 100.0%
</table>
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 capital appreciation in the future.

As depicted in the accompanying table, six month 2001 net investment
income increased $3,591 or 7.7%, compared to the same period in 2000,
principally as a result of an increase in average invested assets (at cost),
offset by a slight decrease in yield. The decrease in yield is primarily due
to lower short-term yields and higher yielding securities being called while
the Company maintains a short (liquid) position. The Company continues to
monitor interest rates on long-term securities and intends to maintain its
short position until such time as the Company believes long-term rates have
appropriately firmed. Net investment income as a percentage of total average
investments was 6.7% in 2001 compared to 6.9% for the first six months of
2000. Net investment income after tax as a percentage of total average
investments was 5.4% and 5.7% for the first six months of 2001 and 2000,
respectively.
<table>
<caption>
Investment Return At June 30,
(Dollars in thousands) 2001 2000
<s> <c> >c>
Average month-end investments (at cost)... $1,499,429 $1,366,859
Net investment income..................... 50,479 46,888
Net investment income after-tax........... 40,754 38,931
Net investment income as a percentage
of average net investments (at cost).... 6.7% 6.9%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 5.4% 5.7%
</table>
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, 2000 was $16,947. The amount is being amortized
into revenue on a straight-line basis over a five-year period. The amount
amortized into revenue in 2001 and 2000 was $1,694 and $1,695, respectively.

- - 24 -
<page>

The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Investment Gains and Losses

Net realized investment losses totaled $6,341 during the first six months
of 2001 as compared to $3,047 during the same period in 2000. Of the net
realized losses during 2001, $8,016 was a result of the Company's investments
in certain venture capital fund limited partnerships. These venture capital
funds primarily provide seed capital for start-up companies with emerging high
technology initiatives in the financial services industry. In 2001, the
Company began to account for these investments on an equity basis. The equity
in the operating results of these funds have been reflected in realized
losses. Prior to this change, the operating results were not material and
were therefore reflected in accumulated comprehensive income and loss.

Also during 2001, the undistributed operating results of closed-end
preferred stock mutual funds have been reflected in realized gains and losses.
Prior period results, previously reflected in investment income, have been
reclassified to realized gains and losses to conform with current period
presentation. During the first six months of 2001 and 2000, the Company
reflected realized gains and losses of $2,653 and $3,377, respectively, as a
result of this change.

Net realized gains and losses by category as of June 30, are as follows:
<table>
<caption>
June 30, June 30,
2001 2000
<s> <c> <c>
Closed-end preferred stock mutual funds............ $ 2,653 $ (3,377)
Venture capital fund investments................... (8,016) 460
Bonds.............................................. 108 (1,685)
Common and preferred stocks........................ (1,038) 755
Other.............................................. (48) 800
Net realized investment losses................ $ (6,341) $ (3,047)
</table>
Loss and Loss Adjustment Expenses

Losses and loss adjustment expenses ("LAE") incurred increased $30,651 or
8.7% during the first six months of 2001 as compared to the same period a year
ago. Massachusetts operations experienced improved underwriting results
primarily due to lower bodily injury losses and lower Massachusetts residual
market losses. These improvements were offset by increased losses in the
homeowners property business and in personal automobile physical damage due to
more severe weather conditions compared to last year. Losses and LAE incurred
(on a statutory basis) as a percentage of insurance premiums earned ("loss
ratio") decreased to 75.3% for the first six months of 2001 compared to 76.8%
for the first six months of 2000. The ratio of net incurred losses, excluding
LAE, to premiums earned ("pure loss ratio") on Massachusetts personal
automobile was 65.6% for the first six months of 2001 compared to 68.3% for
the same period a year ago. In addition to the information noted above, the
pure loss ratio decreased due to an increase of 3.2% in earned premium per
earned exposure. The commercial automobile pure loss ratio increased to 65.7%
during the first six months of 2001 as compared to 61.8% for the same period a
year ago. This increase was primarily due to higher physical damage losses
coupled with worse experience in the business assumed from C.A.R. during this
period. For Massachusetts homeowners (gross of reinsurance), the pure loss
ratio was 51.1% during the first six months of 2001 as compared to 43.5% for
the same period a year ago. This increase was primarily the result of more
claims for Massachusetts homeowner business due to unfavorable weather
conditions during the first six months of 2001. Pure loss ratios of
subsidiaries in other states increased to 65.6% during the first six months of
2001 as compared to 62.4% for the same period a year ago. This increase was
due primarily to increases in personal automobile physical damage claims. The
loss ratio (on a statutory basis) for Commerce West and American Commerce was
84.2% and 80.1%, respectively, for the first six months of 2001, compared to
69.0% and 84.5%, respectively, for the first six months of 2000. The increase
in the loss ratio for Commerce West was primarily attributable to a
substantial increase in non-standard automobile writings with loss ratios that
are significantly higher than their regular business.

- - 25 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Policy Acquisition Costs

Policy acquisition costs expensed increased by $11,009 or 9.5% during the
first six months of 2001 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) increased to 23.8% for the first six months of
2001 as compared to 23.1% for the same period a year ago. The increase, as
compared to the same period a year ago, was primarily attributable to slightly
higher direct commission expense for Massachusetts mandated minimum
commissions coupled with higher contingent commission accruals. The
underwriting expense ratio (on a statutory basis) for Commerce West and
American Commerce was 31.6% and 29.3%, respectively, for the first six months
of 2001, compared to 36.0% and 28.5%, respectively, for the same period a year
ago.

Income Taxes

The Company's effective tax rate was 19.4% for the first six months of
2001 as compared to 10.1% 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
higher effective tax rate for the first six months of 2001 was the result of
realized investment gains in the current year as compared to realized
investment losses in the prior year, coupled with the tax-exempt interest and
the dividends received deduction comprising a lesser portion of earnings
before taxes. The 2000 tax rate was primarily impacted by net realized
investment losses from preferred stock mutual funds coupled with higher
underwriting losses.

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 ACIC Holding Co., Inc. common stock at June 30,
2001. AAA SNE maintains a 20% common stock ownership. The minority interest
in net loss of subsidiary of $237 included in these consolidated financial
statements for the first six months of 2001 represents 20% of the net loss
during the first six months for ACIC Holding Co., Inc. which is calculated
after the $4,856 preferred stock dividend paid to Commerce. This compares to
the minority interest in net losses of subsidiary of $222 after $4,500 in
preferred stock dividend paid to Commerce in the first six months of 2000.

Net Earnings

Net earnings increased $2,212 or 5.4% to $42,822 during the first six
months of 2001 as compared to $40,610 for the same period a year ago.
Operating earnings, which exclude the after-tax impact of net realized
investment gains, increased $6,023, or 14.7% to $47,060 ($1.39 per share)
during the first six months of 2001 as compared to $41,037 ($1.20 per share)
for the same period a year ago, both as a result of the factors previously
mentioned.

- - 26 -
<page>

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 $28,613 during the
first six months of 2001 as compared to December 31, 2000. The increase
resulted from $42,822 in net earnings coupled with changes in other
comprehensive income, net of income tax benefits, on fixed maturities and
preferred and common stocks of $5,705, offset by dividends paid to
stockholders of $19,914. Total assets at June 30, 2001 increased $70,077 or
3.4% to $2,145,691 as compared to total assets of $2,075,614 at December 31,
2000. This growth is reflected in an increase of $45,987 or 19.9% in premiums
receivable, a $9,357 or 8.4 % increase in deferred policy acquisition costs, a
$5,213 or 8.5% increase in receivable from reinsurers a $4,816 or 0.3%
increase to invested assets, at market value and equity, and by a $4,704 or
2.4% increase in all other assets combined. The increase to premiums
receivable is attributable to increased Massachusetts business coupled with
the seasonality of the policy effective dates of the Company's business.

The Company's investment portfolio, at market and equity, is shown below
as of June 30, 2001 and December 31, 2000 (for investments, at cost, refer to
the table found on pages 16 and 23):
<table>
<caption>
June 30, December 31,
Investments, at market and equity % of % of
(Dollars in thousands) 2001 Invest. 2000 Invest.
<s> <c> <c> <c> <c>
Fixed maturities (GNMA & FNMA mortgage-
backed bonds Corporate bonds, U.S.
Treasury bonds and notes Tax-
exempt state and municipal bonds).... $ 647,067 43.8% $ 669,935 45.5%

Preferred stocks....................... 259,214 17.6 200,083 13.6
Common stocks.......................... 116,953 7.9 115,827 7.9
Equity in closed-end
preferred stock mutual funds......... 297,553 20.1 337,733 22.9

Mortgages and collateral loans (net of
allowance for possible loan losses).. 46,937 3.2 51,661 3.5
Cash and cash equivalents.............. 92,840 6.3 70,521 4.8
Other investments...................... 16,814 1.1 26,802 1.8
Total investments.................. $1,477,378 100.0% $1,472,562 100.0%
</table>

The Company's fixed maturity portfolio is comprised of GNMAs and FNMA
mortgage backed bonds (8.8%), municipal bonds (69.8%), corporate bonds
(20.9%) and U.S. Treasury bonds (0.5%). As of June 30, 2001, the market
value of the Company's fixed maturity portfolio exceeded its book value by
$8,610 ($5,592 after taxes, or $0.17 per share). The cost of the Company's
preferred stocks exceeded market value by $11,010 ($7,157 after taxes, or
$0.21 per share). The market value of the Company's common stocks exceeded
cost by $29,250 ($19,013 after taxes, or $0.56 per share).

- - 27 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Preferred stocks increased $59,131 or 29.6% and common stocks increased
$1,126 or 1.0%, during the first six months of 2001. Preferred stock mutual
funds at equity, decreased $40,180 or 11.9% during the first six months of
2001. The majority of the increase in preferred stocks and the corresponding
decrease in preferred stock mutual funds were primarily the result of the
newly created Trust offset by the PDI liquidation, mentioned, previously.
Other invested assets at equity, primarily comprised of the Conning Limited
Partnership, decreased $9,988 or 37.3% during the first six months of 2001.
The Company's strategy continues to focus on maximizing after-tax investment
income through investing in 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 $1,334,547 at June 30, 2001 as
compared to $1,292,665 at December 31, 2000. The $41,882 or 3.2% increase
was comprised of an increase of $67,084 or 12.9% in unearned premiums, offset
by a decrease of $12,112 or 34.3% in contingent commissions accrued, a
decrease of $10,415 or 74.5% in current income taxes and a decrease of $1,356
or 16.1% in excess of book value of subsidiary interest over cost. The
significant increase to the Company's unearned premiums was attributable to
the increased business in the latter part of 2000 and the first six months of
2001, coupled with seasonality of the policy effective dates of the Company's
business.
Liabilities for unpaid losses and loss adjustment expenses at June 30,
2001 and December 31, 2000 consist of:
<table>
<caption>
June 30, December 31,
2001 2000
<s> <c> <c>
Net voluntary unpaid losses and LAE reserves............. $557,829 $544,585
Voluntary salvage and subrogation recoverable............ (75,662) (65,505)
Assumed unpaid loss and LAE reserves from C.A.R.......... 119,979 127,631
Assumed salvage and subrogation recoverable from C.A.R... (20,844) (20,844)
Total voluntary and assumed unpaid loss and LAE reserves 581,302 585,867
Adjustment for ceded unpaid loss and LAE reserves........ 101,932 97,273
Adjustment for ceded salvage and subrogation recoverable. (9,000) (9,000)
Total unpaid loss and LAE reserves...................... $674,234 $674,140
</table>
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 $25,746 in
the first six months of 2001, as compared to $47,291 during the same
period a year ago. These cash flows were primarily impacted by the
fact that while premiums collected increased $46,077 or 9.5% in the
first six months of 2001, losses and LAE paid increased $51,163 or
15.0%, policy acquisition costs paid increased $16,032 or 12.0%, and
federal income tax payments increased $3,784 or 16.6% in the first six
months of 2001 as compared to the same period a year ago. The
increase in losses and LAE paid were primarily attributable to
increased business, coupled with adverse weather conditions in the
first six months of 2001 as compared to the same period last year.
The increase in policy acquisition costs relates primarily to
increased business. The increase in federal tax payments relates to
income earned in the fourth quarter of 2000 being significantly higher
than the same period in 1999. Premium finance and service fees
increased 14.1% as compared to the same period a year ago, primarily
as a result of increased business.

- - 28 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

For the first six months of 2001 net cash flows in investing
activities provided cash of $16,487, as compared to net cash flows
using cash of $41,850 for the same period in 2000. The majority of
the $58,337 difference was a $39,745 decrease in purchases of fixed
maturities, a $25,407 decrease in the purchase of preferred stock
mutual funds, a $9,836 increase from proceeds from sale of equity
securities, and a $9,304 decrease in purchases of other invested
assets, offset by a $23,722 decrease in proceeds from sales and
maturities of fixed maturities, and a $10,040 increase in purchase of
equity securities. The $2,945 increase in net cash proceeds from sale
of preferred stock mutual funds was the direct result of the PDI
Liquidation mentioned previously, and consisted of $54,836 for the
disposal of the PDI mutual fund, offset by preferred stocks acquired
of $51,891 for the newly created Trust mentioned previously.
Investing activities were funded by accumulated cash and cash provided
by operating activities during 2001 and 2000.

Cash flows used in financing activities totaled $19,914 during
the first six months of 2001 compared to $24,782 during the same
period a year ago. The 2001 cash flows used in financing activities
consisted entirely of dividends paid to stockholders. The 2000 cash
flows used in financing activities consisted of dividends paid to
stockholders of $19,489 and $5,293 used to purchase 205,600 shares of
Treasury Stock under the Company's stock buyback programs.

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 and
equity) of total investments at June 30, 2001 was $1,477,378. At June
30, 2001, the Company held cash and cash equivalents of $92,840.
These funds provide sufficient liquidity for the payment of claims and
other short-term cash needs. The Company continues to monitor
interest rates on long-term securities and intends to maintain its
short position until such time as the Company believes long-term rates
have appropriately firmed. 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. No
extraordinary dividends were paid in 2001 or 2000. Similar laws exist
in California and Ohio. No extraordinary dividend was paid by
American Commerce in 2001 or 2000 and no dividends were paid by
Commerce West since its acquisition.

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 1.55 to
1.00 and 1.89 to 1.00 for the period ended June 30, 2001 and 2000,
respectively.

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 continues to focus on maximizing after-tax investment income
through investing in high quality diversified investments structured
to maximize after-tax investment income while minimizing risk. 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.

- - 29 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

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
equity 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. Although the Company has
significant holdings of various closed-end preferred stock mutual
funds, these funds are comprised primarily of preferred stocks traded
on national stock exchanges, thus limiting exposure to any one
investment.

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 2001,
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, 2001 and 2000, 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 $84,833 and $91,535, respectively. A 200 basis point
decrease results in an increase in the market value of the same
securities of $52,310 and $48,913, respectively. The equity price
risk impact at June 30, 2001, based upon a 10% increase in the fair
value of common stocks and preferred stock mutual funds, would be an
increase of $11,695 and $30,740 respectively. Based upon a 10%
decrease, common stocks and preferred stock mutual funds would
decrease $11,695 and $30,740 respectively. Long-term interest rates
(30-year Treasury Bond) were 5.74% at June 30, 2001 and 5.88% at June
30, 2000. Long-term interest rates (30-year Treasury Bond) decreased
to 5.46% at December 31, 2000 from 6.48% at December 31, 1999.

Stock Buyback and Dividends

The Company did not purchase shares of Treasury Stock under the
stock buyback program during the first six months of 2001. At June
30, 2001, the Company has the ability to purchase approximately
900,000 additional shares of Treasury stock under the current Board of
Directors authorization.

On June 15, 2001, the Company paid a quarterly dividend of $0.30
to stockholders of record as of June 1, 2001. The Company increased
its quarterly dividend to stockholders from $0.29 to $0.30 during the
second quarter of 2001.

- - 30 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Recent Accounting Developments

The NAIC revised the Accounting Practices and Procedures Manual
in a process referred to as Codification. The revised manual became
effective January 1, 2001 for all insurance companies. The
domiciliary states of the Company's insurance subsidiaries have
adopted the provisions of the revised manual. The revised manual has
changed certain prescribed statutory accounting practices and will
result in changes to the accounting practices that the Company's
insurance subsidiaries use to prepare their statutory-basis financial
statements. The impact of these changes to the Company's insurance
subsidiaries statutory-basis capital and surplus as of January 1, 2001
did not have a significant detrimental effect.

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS" 133"), "Accounting for Certain Derivative
Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"),
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at fair value. SFAS 138 amended Statement of Financial
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133." The provisions of SFAS 133 require adoption
for fiscal year beginning after June 15, 2000. The Company had no
derivative or hedging activity in 2001, 2000, or 1999.

In September 2000, the FASB issued Statement of Financial
Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaced Statement of Financial Accounting Standards No. 125
("SFAS 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The Statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards
are based on consistent application of a "financial components"
approach that focuses on control. Under that approach, after a
transfer of financial assets, a company recognizes the financial and
servicing assets it controls and the liabilities it has incurred, does
not recognize financial assets when control has been surrendered, and
does not recognize liabilities when extinguished. The Statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
March 31, 2001. Adoption of SFAS 140 is not expected to have a
material impact on the Company's consolidated financial statements.

In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations," and No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that all business
combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also clarifies the criteria to recognize
intangible assets separately from goodwill. SFAS No. 142 requires
that goodwill and intangible assets deemed to have indefinite lives no
longer be amortized to earnings, but instead be reviewed at least
annually for impairment. Other intangible assets will continue to be
amortized over their useful lives.

- - 31 -
<page>

The Commerce Group, Inc. and Subsidiaries

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

SFAS No. 141 requires that the purchase method of accounting be
used for business combinations initiated after June 30, 2001. SFAS
No. 142 will be effective January 1, 2002. The Company is currently
evaluating the impact of adopting the provisions of SFAS No. 142 on
earnings and financial position for the year ended December 31, 2002.
During 2002, the Company will perform the first of the required
impairment tests of goodwill and of indefinite lived intangible assets
as of January 1, 2001 based on the guidance in SFAS 142 and has not
yet determined what the effect of these tests will be, however,
management believes this will not have a detrimental effect on the
earnings and financial position of the Company.

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. Additionally, the premium
rates charged by the Company for personal automobile insurance are
adjusted by the Commissioner only at annual intervals. Such annual
adjustments in 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.

- - 32 -
<page>

The Commerce Group, Inc. and Subsidiaries

PART II - OTHER INFORMATION

Item 4. RESULTS OF VOTES OF SECURITY HOLDERS

On May 18, 2001, 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:

<table>
<caption>
Total Vote For Total Vote Withheld
Each Director From Each Director
<s> <c> <c>
Herman F. Becker 30,513,467 520,154
Joseph A. Borski, Jr. 30,961,355 72,266
Eric G. Butler 30,155,739 877,882
Henry J. Camosse 30,923,070 110,551
Gerald Fels 27,995,131 3,038,490
David R. Grenon 30,962,965 70,656
Robert W. Harris 30,961,155 72,466
Robert S. Howland 30,960,855 72,766
John J. Kunkel 30,960,855 72,766
Raymond J. Lauring 30,960,855 72,766
Roger E. Lavoie 30,251,039 782,582
Normand R. Marois 30,961,355 72,266
Suryakant M. Patel 30,961,765 71,856
Arthur J. Remillard, Jr. 30,664,605 369,016
Arthur J. Remillard, III 29,372,341 1,661,280
Regan P. Remillard 30,958,999 74,622
Gurbachan Singh 30,959,626 73,995
John W. Spillane 30,502,867 530,754
</table>

- - 33 -
<page>

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 2001.

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

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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 2001.

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

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