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 September 30, 2002 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 November 1, 2002, the number of shares outstanding of the
Registrant's common stock (excluding Treasury Shares) was
32,434,721
Page 1 of 30
<page>
The Commerce Group, Inc.
Table of Contents
<table>
<caption>
Page No.
Part I - Financial Information
<s> <c>
Consolidated Balance Sheets at
September 30, 2002 (Unaudited) and December 31, 2001............... 3
Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 (Unaudited).......... 5
Consolidated Statements of Cash Flows - Reconciliation of Net Earnings
to Net Cash Provided by Operating Activities for the Nine Months
Ended September 30, 2002 and 2001 (Unaudited)...................... 6
Notes to Unaudited Consolidated Financial Statements................... 7
Management's Discussion and Analysis................................... 13
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K................................... 25
Signature.............................................................. 26
Certifications......................................................... 27
</table>
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<page>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<table>
<caption>
September 30, December 31,
2002 2001
(Unaudited)
ASSETS
Investments:
<s> <c> <c>
Fixed maturities, at market (cost: $716,076 in 2002 and $618,775 in 2001)............. $ 726,169 $ 626,482
Preferred stocks, at market (cost: $305,468 in 2002 and $256,582 in 2001)............. 305,782 248,101
Common stocks, at market (cost: $85,701 in 2002 and $87,704 in 2001).................. 92,219 107,458
Preferred stock mutual funds, at equity (cost: $294,079 in 2002 and $294,948 in 2001). 282,257 309,282
Mortgage loans on real estate and collateral notes receivable (less allowance for
possible loan losses of $632 in 2002 and $660 in 2001)............................... 31,586 39,505
Cash and cash equivalents.............................................................. 80,829 148,630
Other investments (cost: $37,399 in 2002 and $28,291 in 2001).......................... 24,937 18,743
Total investments.................................................................. 1,543,779 1,498,201
Accrued investment income................................................................ 14,426 15,539
Premiums receivable (less allowance for doubtful receivables of $1,761 in 2002 and
$1,565 in 2001)........................................................................ 341,050 246,221
Deferred policy acquisition costs........................................................ 142,627 116,557
Property and equipment, net of accumulated depreciation.................................. 50,282 40,014
Residual market receivable
Losses and loss adjustment expenses.................................................... 92,815 81,433
Unearned premiums...................................................................... 60,025 44,399
Due from reinsurers...................................................................... 88,153 70,450
Current income taxes..................................................................... 3,942 -
Deferred income taxes.................................................................... 26,600 16,993
Receivable for investments sold.......................................................... 227 838
Other assets............................................................................. 14,485 9,437
Total assets....................................................................... $2,378,411 $2,140,082
<caption>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
<s> <c> <c>
Unpaid losses and loss adjustment expenses............................................. $ 774,083 $ 681,624
Unearned premiums...................................................................... 722,056 563,456
Current income taxes................................................................... - 2,735
Deferred income........................................................................ 8,271 7,015
Contingent commissions accrued......................................................... 29,104 29,724
Excess of book value of subsidiary interest over cost.................................. - 5,719
Other liabilities and accrued expenses................................................. 43,623 37,535
Total liabilities.................................................................. 1,577,137 1,327,808
Minority interest........................................................................ 4,385 -
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value; none issued in
2002 and 2001........................................................................ - -
Common stock, authorized 100,000,000 shares at $.50 par value;
38,255,713 shares issued in 2002 and 38,000,000 in 2001.............................. 19,128 19,000
Paid-in capital........................................................................ 36,994 29,621
Net accumulated other comprehensive income, net of income taxes of
$5,926 in 2002 and $6,674 in 2001.................................................... 11,007 12,394
Retained earnings...................................................................... 887,451 873,671
954,580 934,686
Treasury stock 5,784,992 shares in 2002 and 4,869,548 in 2001.......................... (157,691) (122,412)
Total stockholders' equity......................................................... 796,889 812,274
Total liabilities, minority interest and stockholders' equity...................... $2,378,411 $2,140,082
The accompanying notes are an integral part of these consolidated financial statements.
</table>
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<page>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 2002 and 2001
(Thousands of Dollars Except Per Share Data)
(Unaudited)
<table>
<caption>
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
<s> <c> <c> <c> <c>
Revenues
Direct premiums written................................... $ 356,483 $ 290,088 $1,088,412 $ 897,576
Assumed premiums.......................................... 19,985 20,981 79,038 59,021
Ceded premiums............................................ (52,275) (41,885) (141,220) (113,365)
Net premiums written.................................. 324,193 269,184 1,026,230 843,232
Increase in unearned premiums............................. (15,108) (1,374) (139,971) (67,126)
Earned premiums........................................... 309,085 267,810 886,259 776,106
Net investment income..................................... 23,864 24,274 71,655 74,753
Premium finance and service fees.......................... 5,722 4,644 15,719 13,260
Amortization of excess of book value of subsidiary
interest over cost...................................... - 848 - 2,542
Net realized investment losses............................ (13,430) (2,934) (48,422) (9,275)
Other income.............................................. 2,500 - 9,500 -
Total revenues....................................... 327,741 294,642 934,711 857,386
Expenses
Losses and loss adjustment expenses....................... 234,608 199,445 672,104 582,749
Policy acquisition costs.................................. 73,648 70,322 213,955 196,920
Total expenses....................................... 308,256 269,767 886,059 779,669
Earnings before income taxes, change in accounting
principle and minority interest.................... 19,485 24,875 48,652 77,717
Income tax.................................................. 10,602 3,362 15,998 13,619
Change in accounting principle.............................. - - 11,237 -
Net earnings before minority interest................ 8,883 21,513 43,891 64,098
Minority interest in net (earnings) loss of subsidiary...... (1) 626 162 863
NET EARNINGS......................................... $ 8,882 $ 22,139 $ 44,053 $ 64,961
COMPREHENSIVE INCOME (LOSS).......................... $ (6,171) $ 19,823 $ 42,666 $ 68,350
NET EARNINGS PER COMMON SHARE:
BASIC.............................................. $ .27 $ 0.66 $ 1.34 $ 1.93
DILUTED............................................ $ .27 $ 0.65 $ 1.33 $ 1.92
CASH DIVIDENDS PAID PER COMMON SHARE................. $ 0.31 $ 0.30 $ 0.92 $ .89
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC.............................................. 32,732,502 33,650,563 32,926,712 33,718,712
DILUTED............................................ 32,983,276 33,918,388 33,228,089 33,871,028
The accompanying notes are an integral part of these consolidated financial statements.
</table>
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<page>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Thousands of Dollars Except Per Share Data)
(Unaudited)
<table>
<caption>
2002 2001
<s> <c> <c>
Cash flows from operating activities:
Premiums collected.................................................... $ 927,651 $789,798
Net investment income received........................................ 70,223 75,614
Premium finance and service fees received............................. 15,719 13,260
Losses and loss adjustment expenses paid.............................. (593,062) (570,998)
Policy acquisition costs paid......................................... (239,405) (210,987)
Federal income tax payments........................................... (31,534) (24,080)
Other income.......................................................... 9,500 -
Net cash provided by operating activities......................... 159,092 72,607
Cash flows from investing activities:
Proceeds from maturity of fixed maturities............................ 30,348 16,169
Proceeds from sale of fixed maturities................................ 87,767 77,657
Proceeds from sale of equity securities............................... 19,417 34,844
Proceeds from sale of preferred stock mutual funds.................... 6,367 3,080
Proceeds from sale of other investments............................... 1,902 2,679
Payments received on mortgage loans and collateral notes receivable... 9,619 10,921
Purchase of fixed maturities.......................................... (216,306) (13,993)
Purchase of equity securities......................................... (75,507) (28,984)
Purchase of preferred stock mutual funds.............................. (5,800) (14,195)
Purchase of other investments......................................... (10,263) (1,013)
Mortgage loans and collateral notes originated........................ (1,671) (1,649)
Purchase of property and equipment.................................... (15,350) (8,168)
Other investing activities............................................ 635 829
Net cash (used in) provided by investing activities............... (168,842) 78,177
Cash flows from financing activities:
Dividends paid to stockholders........................................ (30,273) (29,986)
Purchase of treasury stock............................................ (35,279) (13,588)
Capital stock issued.................................................. 7,501 -
Net cash used in financing activities............................. (58,051) (43,574)
(Decrease) increase in cash and cash equivalents...................... (67,801) 107,210
Cash and cash equivalents at beginning of period...................... 148,630 70,521
Cash and cash equivalents at the end of period.................... $ 80,829 $177,731
The accompanying notes are an integral part of these consolidated financial statements.
</table>
- - 5 -
<page>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reconciliation of Net Earnings to Net Cash Provided
by Operating Activities
Nine Months Ended September 30, 2002 and 2001
(Thousands of Dollars)
(Unaudited)
<table>
<caption>
2002 2001
<s> <c> <c>
Cash flows from operating activities:
Net earnings........................................................ $ 44,053 $ 64,961
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Premiums receivable............................................... (94,829) (54,624)
Deferred policy acquisition costs................................. (26,070) (9,453)
Residual market receivable........................................ (27,008) (1,239)
Due to/from reinsurers............................................ (17,703) (9,602)
Losses and loss adjustment expenses............................... 92,459 14,040
Unearned premiums................................................. 158,600 73,659
Current income taxes.............................................. (6,677) (5,207)
Deferred income taxes............................................. (8,859) (5,255)
Deferred income................................................... 1,256 (763)
Contingent commissions............................................ (620) (8,090)
Other assets, liabilities and accrued expenses.................... 507 3,577
Net realized investment losses.................................... 48,422 9,275
Change in accounting principle.................................... (11,237) -
Minority interest................................................. 4,385 (1,068)
Other - net....................................................... 2,413 2,396
Net cash provided by operating activities.................. $159,092 $ 72,607
The accompanying notes are an integral part of these consolidated financial statements.
</table>
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<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 accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain previously reported 2001 account
balances have been reclassified to conform to the current period's
presentation. Results for the three and nine-month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2001 and quarterly report on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002.
2. 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, some of which
are beyond the control of the Company, that are described in the Company's
Forms 10-K and 10-Q, Schedules 13D and 13G, and other documents filed with the
SEC, including the possibility of adverse catastrophe experience and severe
weather, adverse trends in claim severity or frequency, adverse state and
federal regulation and legislation, adverse state judicial decisions,
litigation risks, interest rate risk, rate making decisions for private
passenger automobile policies in Massachusetts, potential rate filings,
adverse impacts related to consolidation activities, heightened competition,
as well as economic, market or regulatory conditions and risks associated with
entry into new markets and diversification.
3. Legal Proceedings - As is common with property and casualty insurance
companies, the Company is a defendant in various legal actions arising from
the normal course of its business, including claims based on Massachusetts
Chapters 176D and 93A. Similar provisions exist in other states where the
Company does business. These proceedings are considered to be ordinary to
operations or without foundation in fact. Management is of the opinion that
these actions will not have a material adverse effect on the consolidated
financial position of the Company.
The Company previously disclosed in its Annual Report on Form 10-K for
the year ended December 31, 2001 that a purported class action lawsuit was
pending in Massachusetts state court against The Commerce Insurance Company
("Commerce"). The lawsuit, titled "Elena Given, individually and as a
representative of all persons similarly situated v. The Commerce Insurance
Company," alleges damages as a result of the alleged inherent diminished value
to vehicles that are involved in accidents. In April 2002, the trial judge in
that case entered partial summary judgment for the plaintiff on the issue of
whether the Massachusetts automobile policy covers her claim, ruling that the
plaintiff would be entitled to reimbursement under the policy if the plaintiff
were able both to prove that her vehicle suffered "inherent diminished value"
in the accident and to quantify the amount of such diminution in value.
- - 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)
Subsequently, the Massachusetts Division of Insurance issued an Advisory
Ruling in which it stated, among other things, its position that the policy
does not cover claims for "inherent diminished value." In July of 2002, the
trial judge allowed for limited additional discovery in the case, stayed the
trial, and granted the Company's motion to have the appellate court review
the issue of whether the Massachusetts automobile policy provides coverage
for inherent diminished value. During the third quarter of 2002, the Company
applied for direct appellate review of this issue by the Supreme Judicial
Court of Massachusetts ("SJC"), and this application was granted. The
parties are in the process of submitting briefs on this issue to the SJC.
Oral arguments have not yet been scheduled. The Company will continue to
vigorously contest the plaintiff's claim for diminished value coverage,
relying in part on the Advisory Ruling, and also intends to vigorously
contest any effort to certify the class. As previously mentioned in the Form
10-K Filing, the Company is unable to estimate the potential exposure of this
purported class action lawsuit.
4. Disclosure of Statement of Financial Accounting Standards No. 130 -
Reporting Comprehensive Income:
<table>
<caption>
Three Months Ended
September 30,
2002 2001
<s> <c> <c>
Net earnings.......................................... $ 8,882 $ 22,139
Other comprehensive income (loss), net of taxes
(benefits):
Change in unrealized losses, net of income tax
benefits of $8,010 in 2002 and $1,852 in 2001..... (14,876) (3,440)
Reclassification adjustment, net of income taxes
(benefit) of ($95) in 2002 and $605 in 2001........ (177) 1,124
Other comprehensive loss.............................. (15,053) (2,316)
Comprehensive (loss) income........................... $ (6,171) $ 19,823
<caption>
Nine Months Ended
September 30,
2002 2001
<s> <c> <c>
Net earnings.......................................... $ 44,053 $ 64,961
Other comprehensive income (loss), net of taxes
(benefits):
Change in unrealized gains (losses), net of income
taxes (benefits) of ($766) in 2002 and $1,176 in
2001.............................................. (1,422) 2,184
Reclassification adjustment, net of income taxes
of $19 in 2002 and $649 in 2001.................... 35 1,205
Other comprehensive (loss) income..................... (1,387) 3,389
Comprehensive income.................................. $ 42,666 $ 68,350
</table>
- - 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)
5. 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
Three Months Ended September 30, 2002
<s> <c> <c> <c>
Property and casualty insurance
Massachusetts...................... $284,310 $ 18,116 $ 2,069,735
Other than Massachusetts........... 42,680 16 266,990
Real estate and commercial lending... 740 625 32,394
Corporate and other.................. 11 728 9,292
Consolidated...................... $327,741 $ 19,485 $ 2,378,411
Three Months Ended September 30, 2001
Property and casualty insurance
Massachusetts...................... $258,783 $ 28,633 $ 1,883,802
Other than Massachusetts........... 34,180 (4,259) 245,367
Real estate and commercial lending... 829 829 44,294
Corporate and other.................. 850 (328) 4,440
Consolidated...................... $294,642 $ 24,875 $ 2,177,903
<caption>
Earnings Before
Income Taxes and Identifiable
Revenue Minority Interest Assets
Nine Months Ended September 30, 2002
<s> <c> <c> <c>
Property and casualty insurance
Massachusetts...................... $813,829 $ 57,516 $ 2,069,735
Other than Massachusetts........... 118,542 (7,473) 266,990
Real estate and commercial lending... 2,329 1,925 32,394
Corporate and other.................. 11 (3,316) 9,292
Consolidated...................... $934,711 $ 48,652 $ 2,378,411
Nine Months Ended September 30, 2001
Property and casualty insurance
Massachusetts...................... $752,371 $ 79,594 $ 1,883,802
Other than Massachusetts........... 99,705 (2,883) 245,367
Real estate and commercial lending... 2,762 2,762 44,294
Corporate and other.................. 2,548 (1,756) 4,440
Consolidated...................... $857,386 $ 77,717 $ 2,177,903
6. Liabilities for unpaid losses and loss adjustment expenses at September
30, 2002 and December 31, 2001 consist of:
<caption>
September 30, December 31,
2002 2001
<s> <c> <c>
Net voluntary unpaid losses and LAE reserves............. $629,015 $558,635
Voluntary salvage and subrogation recoverable............ (82,335) (73,393)
Assumed unpaid loss and LAE reserves from CAR............ 137,072 125,787
Assumed salvage and subrogation recoverable from CAR..... (20,695) (20,695)
Total voluntary and assumed unpaid loss and LAE reserves 663,057 590,334
Adjustment for ceded unpaid loss and LAE reserves........ 120,026 100,290
Adjustment for ceded salvage and subrogation recoverable. (9,000) (9,000)
Total unpaid loss and LAE reserves...................... $774,083 $681,624
</table>
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<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. Disclosure of Supplemental Information:
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.
8. Earnings Per Share
Net earnings per basic common share are computed by dividing net
earnings by the weighted average number of basic common shares outstanding.
The weighted average number of basic common shares outstanding for the nine
months ended September 30, 2002 and 2001 were 32,926,712 and 33,718,712,
respectively. Weighted average number of basic common shares outstanding is
determined by taking the average of the following calculation for a specified
period of time: The daily amount of (1) the total issued outstanding common
shares minus (2) the total Treasury Stock purchased.
Earnings per diluted common share are based on the weighted average
number of diluted common shares outstanding during each period. The weighted
average number of diluted common shares outstanding for the nine months ended
September 30, 2002 and 2001 were 33,228,089 and 33,871,028, respectively. The
Company's only potentially dilutive instruments are stock options outstanding.
9. Transfer of Business from Berkshire Mutual Insurance Company and
MassWest Insurance Company
The Company entered into an agreement on September 28, 2001, with
Berkshire Mutual Insurance Company ("Berkshire") for the transfer of
Massachusetts personal automobile business written by Berkshire to Commerce,
effective January 1, 2002, as mentioned in the 2001 10K filing. In
consideration of offering to write the business from Berkshire, Commerce
received $7.0 million or $0.14 per share (diluted) in early 2002 that was
recognized as Other Income during the first quarter.
The Company entered into an agreement on July 15, 2002, with MassWest
Insurance Company ("MassWest") for the transfer of Massachusetts personal
automobile business written by MassWest to Commerce, effective November 1,
2002. Under terms of the agreement, Commerce shall offer agency contracts to
independent agencies that represent MassWest for personal automobile insurance
in Massachusetts. This will allow agents of MassWest the opportunity to offer
Commerce automobile insurance policies to their customers, who are currently
insured by MassWest, beginning with policies that renew after that date.
Commerce will assume all of MassWest's obligations for future policy years
beyond 2002 under the Massachusetts residual market system, commonly known as
CAR (Commonwealth Automobile Reinsurers), and received consideration of $2.5
million, or $0.05 per share (diluted), from MassWest, which was recognized as
other income during the third quarter.
10. Contingency Related to CAR
Member companies of CAR have joint and several liabilities for the
obligations of CAR. If one member of CAR fails to pay its assessments, the
remaining members of CAR will be required to pay the pro-rata share of the
member who fails to pay its obligations. At the present time, the Company is
not aware of any CAR member company who has failed to meet their obligations.
In a letter to the Massachusetts Insurance Commissioner (the
"Commissioner") dated June 25, 2002, the Massachusetts Attorney General
reported that, based on his examination of available information, he "believes
that the CAR plan for providing access to insurance in the residual market
does not comply with the CAR enabling statute, and must be changed to produce
a fair and equitable market". The Attorney General's letter describes several
factors that he believes support his findings and which he believes should be
corrected in order to comply with Massachusetts law governing CAR The
Attorney General's letter calls on the Commissioner to work with him to
address these issues. It is uncertain whether and to what extent the issues
raised by the Attorney General will be addressed by the Commissioner. We
cannot be certain whether changes, if any, would have an adverse material
impact on the Company.
- - 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)
11. 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 at September 30, 2002 and December 31, 2001:
<table>
<caption>
September 30, 2002
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 2,561,000 30.7% $ 29,964 $ 28,244 $ 29,964 $ 29,964
PPF 2,373,800 32.7% 28,129 26,298 29,435 28,129
PDF 4,696,100 31.3% 38,978 42,489 42,969 38,978
PDT 5,506,500 36.7% 56,827 59,507 54,680 56,827
DIV 3,635,600 36.8% 46,172 50,492 49,408 46,172
PFD 2,799,500 28.5% 39,669 41,883 43,056 39,669
PFO 3,756,043 33.7% 42,518 45,166 46,575 42,518
Total $282,257 $294,079 $296,087 $282,257
<caption>
December 31, 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 2,361,500 28.3% $ 30,225 $ 25,713 $ 29,873 $ 32,258
PPF 2,370,400 32.7% 30,168 26,256 29,275 31,076
PDF 4,685,500 31.3% 44,900 42,400 45,121 45,731
PDT 5,289,700 35.3% 63,035 57,175 58,451 64,111
DIV 3,579,500 36.2% 51,991 49,687 52,798 53,335
PFD 2,981,500 30.3% 42,904 44,803 43,828 42,904
PFO 4,050,043 36.3% 46,059 48,914 47,993 46,251
Total $309,282 $294,948 $307,339 $315,666
</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"), Preferred Income Fund ("PFD"), Preferred
Income Opportunity Fund ("PFO").
- - 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. Change in Accounting Principle
As mentioned in the 2001 Form 10-K, March 31, 2002 and June 30, 2002 Form
10-Q filings, due to the effect of a change in accounting principle related to
SFAS No. 142, the Company recorded income in the first quarter of 2002, net of
taxes, of $11,237 or $0.34 per share (diluted). This amount represented the
remaining unamortized negative goodwill related to preferred stock mutual
funds and the remaining excess of book value of subsidiary interest over cost
relating to the 1999 acquisition of American Commerce Insurance Company.
Negative goodwill and the excess of book value of subsidiary interest over
cost occurred in these acquisitions because the underlying value of the assets
purchased exceeded the purchase price. The subsequent recognition of income
that occurred as these items were eliminated was not a taxable event but
instead became part of the basis of the acquired asset.
13. Reinsurance Agreement
Effective July 1, 2002, the Company entered into a retrocessional
reinsurance agreement with one of its quota-share reinsurers who maintains a
one third participation in the Company's 75% quota-share treaty. For a
premium paid to the Company, the Company will indemnify the reinsurer if the
reinsurer incurs a loss for a single event or occurrence over a certain
threshold. Losses assumed by the reinsurer must first exceed $15,000 before a
reimbursement will be made, by the Company, to the reinsurer. The Company's
exposure to the reinsurer under this agreement is for a maximum of $35,000.
The threshold translates into a $60,000 total loss event or occurrence to the
Company, $15,000 of which represents the reinsurers 25% portion of the quota-
share treaty, before the reinsurer would receive any benefit.
Also, effective July 1, 2002, the Company amended its quota-share
reinsurance program in the event of terrorist acts. The maximum reimbursement
to the Company from its quota-share reinsurers will be limited to $50,000 in
the event of certain defined terrorist acts. The Company believes its
exposure in excess of this limit to be very remote based upon the types of
coverage offered by the Company. The Company's main area of business is in
the personal lines market and it has no single retained exposure in excess of
$1,000.
14. Subsequent Event
During the fourth quarter of 2002 and subsequent to the Company's October
24th earnings release, the Company received notice of an assessment from the
Massachusetts Insurers Insolvency Fund amounting to $4,496. This amount will
be expensed and paid in the fourth quarter of 2002. The Company accrues
assessments as soon as it can reasonably estimate its amount. As of September
30, 2002, the Company was unable to reasonably estimate this assessment and is
unable to determine if additional assessments are likely.
- - 12 -
<page>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended September 30, 2002 compared to
three months ended September 30, 2001
(Thousands of Dollars Except Per Share Data)
General
The Commerce Group, Inc. (the "Company"), was incorporated in 1976. The
Company is engaged in providing personal and commercial property and casualty
insurance primarily in Massachusetts through its principal subsidiary, The
Commerce Insurance Company ("Commerce"), which was incorporated in 1971 and
began writing business in 1972. The Company's predominant insurance line is
motor vehicle insurance, primarily covering Massachusetts personal auto-
mobiles. The Company also offers commercial automobile, homeowners, inland
marine, fire, general liability, commercial multi-peril and umbrella insurance
policies. The Company also writes insurance in California and Oregon through
Commerce West Insurance Company ("Commerce West"), primarily a personal
automobile insurer located in Pleasanton, California. Additionally, the
Company writes insurance through American Commerce Insurance Company
("American Commerce"), located in Columbus, Ohio. American Commerce is a
wholly-owned subsidiary of ACIC Holding Co., Inc. with policies in 25 states
and licenses in several others.
Premiums
The following table compares direct premiums written, net premiums
written and earned premiums for the three months ended September 30, 2002 and
2001:
<table>
<caption>
Three Months Ended September 30,
2002 2001 Change % Change
Direct Premiums Written:
<s> <c> <c> <c> <c>
Personal Automobile in Massachusetts........ $254,327 $213,511 $ 40,816 19.1%
Personal Automobile in all other states..... 41,899 30,251 11,648 38.5
Commercial Automobile in Massachusetts...... 17,338 13,640 3,698 27.1
Commercial Automobile in all other states... 1,574 647 927 143.3
Homeowners in Massachusetts................. 27,057 22,017 5,040 22.9
Homeowners in all other states.............. 7,688 5,099 2,589 50.8
Other lines in Massachusetts................ 6,390 4,735 1,655 35.0
Other lines in all other states............. 210 188 22 11.7
Total Direct Premiums Written............ $356,483 $290,088 $ 66,395 22.9%
Net Premiums Written:
Personal Automobile in Massachusetts........ $252,355 $215,251 $ 37,104 17.2%
Personal Automobile in all other states..... 41,878 30,234 11,644 38.5
Commercial Automobile in Massachusetts...... 16,952 14,720 2,232 15.2
Commercial Automobile in all other states... 1,522 636 886 139.3
Homeowners in Massachusetts................. 7,691 6,022 1,669 27.7
Homeowners in all other states.............. 1,858 1,254 604 48.2
Other lines in Massachusetts................ 1,873 1,020 853 83.6
Other lines in all other states............. 64 47 17 36.2
Total Net Premiums Written............... $324,193 $269,184 $ 55,009 20.4%
Earned Premiums:
Personal Automobile in Massachusetts........ $225,455 $197,222 $ 28,233 14.3%
Personal Automobile in all other states..... 38,002 29,771 8,231 27.6
Commercial Automobile in Massachusetts...... 14,342 11,331 3,011 26.6
Commercial Automobile in all other states... 906 182 724 397.8
Homeowners in Massachusetts................. 5,821 4,871 950 19.5
Homeowners in all other states.............. 1,459 1,094 365 33.4
Other lines in Massachusetts................ 1,384 801 583 72.8
Other lines in all other states............. 55 40 15 37.5
Assumed Premiums from CAR................... 21,218 22,444 (1,226) (5.5)
Assumed Premiums from other than CAR........ 443 54 389 720.4
Total Earned Premiums.................... $309,085 $267,810 $ 41,275 15.4%
Earned Premiums in Massachusetts............ $247,002 $214,225 $ 32,777 15.3%
Earned Premiums-Assumed..................... 21,661 22,498 (837) (3.7)
Earned Premiums in all other states......... 40,422 31,087 9,335 30.0
Total Earned Premiums.................... $309,085 $267,810 $ 41,275 15.4%
</table>
- - 13 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
The $40,816, or 19.1% increase, in Massachusetts personal automobile
direct premiums written during the third quarter of 2002 resulted primarily
from a 5.3% increase in average written premium per written exposure coupled
with a 12.7% increase in the number of exposures written. Approximately half
of the growth in new business was driven by increases from existing agents
and half from agents previously representing other companies (Horace Mann
Insurance Company and Berkshire) that have ceased writing personal automobile
business in Massachusetts. The increase in other than Massachusetts personal
automobile and homeowners business was primarily attributable to book
transfers in various states. Additionally, the increase in homeowners in
other states is impacted by contraction of authority to write homeowner
business by competitors.
The Company's increase in Massachusetts commercial automobile premium is
directly related to an effort to increase writings in this line of business.
The Company's increase in Massachusetts homeowner premium is primarily
related to an increased number of agents, fewer carriers writing homeowner
business, the Company's pricing position in the marketplace and agents
writing more homeowner business to achieve a homeowner discount for their
customer when the Company also insures the customer's automobile.
The $41,275, or 15.4% increase, in total earned premiums during the
third quarter of 2002 as compared to the third quarter of 2001 was primarily
attributable to increases in personal automobile business.
Investment Income
Net investment income is affected by the composition of the Company's
investment portfolio and yields on those investments. The following table
summarizes the composition of the Company's investment portfolio, at cost, at
September 30, 2002 and 2001:
<table>
<caption>
September 30,
% of % of
2002 Invest. 2001 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).... $ 716,076 46.1% $ 585,211 39.9%
Preferred stocks....................... 305,468 19.7 259,164 17.7
Common stocks.......................... 85,701 5.5 87,703 6.0
Preferred stock mutual funds........... 294,079 19.0 287,942 19.7
Mortgages and collateral loans......... 32,218 2.1 43,247 3.0
Cash and cash equivalents.............. 80,829 5.2 177,731 12.1
Other investments...................... 37,399 2.4 24,286 1.6
Total investments.................. $1,551,770 100.0% $1,465,284 100.0%
</table>
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 forgo current investment yield in
favor of potential higher yielding capital appreciation in the future.
- - 14 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
As depicted in the following table, third quarter 2002 net investment
income decreased $410, or 1.7%, compared to the same period in 2001,
principally as a result of a decrease in yield offset by an increase in
average invested assets at cost. The decrease in yield is primarily due to
lower short-term yields coupled with an environment of lower long-term yields
and higher yielding investment securities being called. The Company
continues to monitor interest rates on long-term securities and intends to
maintain its relatively high cash position until such time as the Company
believes long-term rates have appropriately firmed. During the third quarter
the Company purchased approximately $124 million of FNMA securities. The
Company believes the FNMAs will have a duration of less than three years.
This will allow the Company to achieve higher yields until longer term
investments are acquired. Net investment income as a percentage of total
average investments was 6.0% in the third quarter of 2002 compared to 6.4%
for the same period in 2001. After tax net investment income as a percentage
of total average investments was 4.9% and 5.1% in the third quarter of 2002
and 2001, respectively.
<table>
<caption>
Investment Return Three Months Ending September 30,
2002 2001
<s> <c> <c>
Average month-end investments (at cost)... $1,579,774 $1,507,813
Net investment income..................... 23,864 24,274
Net investment income after-tax........... 19,323 19,390
Net investment income as a percentage
of average net investments (at cost).... 6.0% 6.4%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 4.9% 5.1%
</table>
Investment Gains and (Losses)
Net realized investment losses totaled $13,430 or $0.52 per diluted
share, during the third quarter of 2002 as compared to realized investment
losses of $2,934, or $0.04 per diluted share, during the same period in 2001
as detailed below. Included in the third quarter 2002 per share amount is a
$0.16 charge due to the write-off of a deferred tax asset previously
established for realized investment losses.
Net realized gains (losses) by category for the three months ended
September 30, are as follows:
<table>
<caption>
2002 2001
<s> <c> <c>
* Preferred stock mutual funds.................... $(13,513) $ (1,677)
Bonds........................................... (406) (1,345)
Common and preferred stocks..................... (146) (1,196)
Other investments - venture capital funds....... 807 1,392
Other........................................... (172) (108)
Net realized investment losses.............. $(13,430) $ (2,934)
</table>
*The three months ended September 2001 amount includes $1,789 relating to the
amortization of negative goodwill, at the time of purchase, of these
securities.
The 2002 realized losses were primarily impacted by declines in the
market values of utility common stocks held by preferred stock mutual funds
totaling $14,028. There were no write-downs for other than temporary declines
in the market value of investments during the third quarter of 2002, however
there is a potential that the Company will have to write-down securities
deemed to have other than temporary declines in market value during the fourth
quarter of 2002. At September 30, 2002, the Company has investments which
will meet the criteria for other than temporary decline in market value if
their market value remains at their current level for one more quarter. It is
estimated that these potential charges could amount to $10.0 to $15.0 million
in the fourth quarter if the market values of these securities do not recover
by year end.
- - 15 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses incurred (on a statutory basis) as a
percentage of insurance premiums earned ("loss ratio") increased to 76.3% for
the third quarter of 2002 compared to 74.5% for the third quarter of 2001.
The Company experienced: (1) higher private passenger automobile losses from
the Commonwealth Automobile Reinsurers ("CAR") as a result of increased
participation from CAR and higher CAR loss ratios; (2) an increase in personal
automobile bodily injury claim frequency compared to last year which was
somewhat offset by a lower physical damage claim frequency, and better
experience in the Massachusetts commercial automobile and homeowner lines.
Policy Acquisition Costs
As a percentage of net premiums written, underwriting expenses for the
insurance companies (on a statutory basis) decreased to 23.6% for the third
quarter of 2002 as compared to 25.3% for the same period a year ago. The
improvement was primarily due to a lower mandated Massachusetts personal
automobile commission rate and other lower general underwriting expenses.
Combined Ratios
The combined ratio of losses and expenses (on a statutory basis) was
99.9% in the third quarter of 2002 compared with 99.8% for the same period a
year ago. This resulted in an underwriting profit percentage for the third
quarter of 2002 of 0.1% as compared to a profit of 0.2% for the third quarter
of 2001.
Income Taxes
The effective tax rate for the three months ended September 30, 2002 was
54.4% as compared to 13.5% for the three months ended September 30, 2001. The
factor primarily impacting the 2002 tax provision was the write-off of a
deferred tax asset of $5.4 million previously established for realized
investment losses.
Net Earnings
During the third quarter of 2002 the company recorded net earnings of
$8,882 as compared to net earnings of $22,139 for the same period of 2001 for
reasons mentioned previously.
Pro-Forma Operating Earnings
Pro forma operating earnings represent net earnings adjusted for certain
items the Company believes are not indicative of operating results. Pro forma
operating earnings, which consist of net earnings exclusive of the after-tax
impact of net realized investment losses, were $25,984 or $0.79 per share
(diluted) in the third quarter of 2002, compared to $23,419 or $0.69 per share
(diluted) in the third quarter of 2001.
<table>
<caption>
September 30, September 30,
2002 2001
<s> <c> <c>
Pro-Forma Operating Earnings:
Net Earnings........................................ $ 8,882 $ 22,139
Less Net Realized Investment Losses, Net of Tax
Benefit........................................... 17,102* 1,280
Pro-Forma Operating Earnings...................... $ 25,984 $ 23,419
Pro Forma Operating Earnings Per Share (Diluted):
Net Earnings Share.................................. $ 0.27 $ 0.65
Less Per Share Net Realized Investment Losses,
Net of Tax Benefit................................ 0.52 0.04
Pro-Forma Operating Earnings Per Share............ $ 0.79 $ 0.69
</table>
*The actual tax benefit of the realized investment loss portion is lower than
the calculated statutory rate of 35%. This is primarily due to the write-off
of a $5.4 million deferred tax asset previously established for realized
investment losses and the non-deductible capital loss recognized for financial
statement purposes ineligible for tax purposes.
- - 16 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
Nine months ended September 30, 2002 compared to
nine months ended September 30, 2001
(Thousands of Dollars Except Per Share Data)
Premiums
The following table compares direct premiums written, net premiums
written and earned premiums for the nine months ended September 30, 2002 and
2001:
<table>
<caption>
Nine Months Ended September 30,
2002 2001 Change % Change
<s> <c> <c> <c> <c>
Direct Premiums Written:
Personal Automobile in Massachusetts........ $ 812,637 $680,267 $132,370 19.5%
Personal Automobile in all other states..... 113,245 90,874 22,371 24.6
Commercial Automobile in Massachusetts...... 56,139 43,709 12,430 28.4
Commercial Automobile in all other states... 3,566 993 2,573 259.1
Homeowners in Massachusetts................. 64,743 54,160 10,583 19.5
Homeowners in all other states.............. 20,228 13,935 6,293 45.2
Other lines in Massachusetts................ 17,296 13,133 4,163 31.7
Other lines in all other states............. 558 505 53 10.5
Total Direct Premiums Written............ $1,088,412 $897,576 $190,836 21.3%
Net Premiums Written:
Personal Automobile in Massachusetts........ $ 821,413 $684,485 $136,928 20.0%
Personal Automobile in all other states..... 113,192 90,828 22,364 24.6
Commercial Automobile in Massachusetts...... 59,739 45,422 14,317 31.5
Commercial Automobile in all other states... 3,452 973 2,479 254.8
Homeowners in Massachusetts................. 18,474 15,112 3,362 22.2
Homeowners in all other states.............. 4,878 3,426 1,452 42.4
Other lines in Massachusetts................ 4,911 2,868 2,043 71.2
Other lines in all other states............. 171 118 53 44.9
Total Net Premiums Written............... $1,026,230 $843,232 $182,998 21.7%
Earned Premiums:
Personal Automobile in Massachusetts........ $ 642,640 $580,998 $ 61,642 10.6%
Personal Automobile in all other states..... 105,817 85,110 20,707 24.3
Commercial Automobile in Massachusetts...... 40,579 30,965 9,614 31.0
Commercial Automobile in all other states... 1,987 394 1,593 404.3
Homeowners in Massachusetts................. 16,513 14,183 2,330 16.4
Homeowners in all other states.............. 3,882 3,144 738 23.5
Other lines in Massachusetts................ 4,793 2,286 2,507 109.7
Other lines in all other states............. 148 116 32 27.6
Assumed Premiums from CAR................... 69,264 58,714 10,550 18.0
Assumed Premiums from other than CAR........ 636 196 440 224.5
Total Earned Premiums.................... $ 886,259 $776,106 $110,153 14.2%
Earned Premiums in Massachusetts............ $ 704,525 $628,432 $ 76,093 12.1%
Earned Premiums-Assumed..................... 69,900 58,910 10,990 18.7
Earned Premiums in all other states......... 111,834 88,764 23,070 26.0
Total Earned Premiums.................... $ 886,259 $776,106 $110,153 14.2%
</table>
- - 17 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
The $132,370, or 19.5% increase, in Massachusetts personal automobile
direct premiums written during the first nine months of 2002 resulted
primarily from a 5.5% increase in average written premium per written exposure
coupled with a 12.8% increase in the number of exposures written. As a
comparison to the prior year, in 2002 the Company ceased writing business with
an agent that produced approximately $14.0 million in personal automobile
premiums through September 30, 2001. Approximately half of the growth in new
business was driven by increases from existing agents and half from agents
previously representing other companies (Horace Mann Insurance Company and
Berkshire) that have ceased writing personal automobile business in
Massachusetts. The increase in other than Massachusetts personal automobile
and homeowners business was primarily attributable to book transfers in
various states. Additionally, the increase in homeowners in other states is
impacted by contraction of authority to write homeowner business by
competitors.
The Company's increase in Massachusetts commercial automobile premium is
directly related to an effort to increase writings in this line of business.
The Company's increase in Massachusetts homeowner premium is primarily related
to an increased number of agents, fewer carriers writing homeowner business,
the Company's pricing position in the marketplace and agents writing more
homeowner business to achieve a homeowner discount for their customers when
the Company also insures the customers automobile.
The $110,153, or 14.2% increase, in total earned premiums during the
first nine months of 2002 as compared to the first nine months of 2001 was
primarily attributable to increases in personal automobile business, coupled
with an increase in business assumed from CAR, which was the result of
increased market share and increased business written through CAR by the
industry.
Investment Income
Net investment income and yields on those investments is affected by the
composition of the Company's investment portfolio and yields on those
investments. The following table summarizes the composition of the Company's
investment portfolio, at cost, at September 30, 2002 and 2001:
<table>
<caption>
September 30,
% of % of
2002 Invest. 2001 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)...... $ 716,076 46.1% $ 585,211 39.9%
Preferred stocks......................... 305,468 19.7 259,164 17.7
Common stocks............................ 85,701 5.5 87,703 6.0
Preferred stock mutual funds............. 294,079 19.0 287,942 19.7
Mortgages and collateral loans........... 32,218 2.1 43,247 3.0
Cash and cash equivalents................ 80,829 5.2 177,731 12.1
Other investments........................ 37,399 2.4 24,286 1.6
Total investments.................... $1,551,770 100.0% $1,465,284 100.0%
</table>
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 forgo current investment yield in
favor of potential higher yielding capital appreciation in the future.
- - 18 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
As depicted in the following table, nine month 2002 net investment income
decreased $3,098 or 4.1%, compared to the same period in 2001, principally as
a result of a decrease in yield offset by an increase in average invested
assets at cost. The decrease in yield is primarily due to lower short-term
yields, coupled with an environment of lower long-term yields and higher
yielding investment securities being called. The Company continues to monitor
interest rates on long-term securities and intends to maintain its relatively
high cash position until such time as the Company believes long-term rates
have appropriately firmed. During the third quarter the Company purchased
approximately $124 million of FNMA securities. The Company believes the FNMAs
will have a duration of less than three years. This will allow the Company to
achieve higher yields until longer term investments are acquired. Net
investment income as a percentage of total average investments was 6.1% in the
first nine months ended September 30, 2002 compared to 6.6% for the same
period in 2001. After tax net investment income as a percentage of total
average investments was 4.9% and 5.3% in the first nine months of 2002 and
2001, respectively.
<table>
<caption>
Investment Return Nine Months Ending September 30,
2002 2001
<s> <c> <c>
Average month-end investments (at cost)... $1,566,003 $1,503,942
Net investment income..................... 71,655 74,753
Net investment income after-tax........... 56,934 60,144
Net investment income as a percentage
of average net investments (at cost).... 6.1% 6.6%
Net investment income after-tax as a
percentage of average net
investments (at cost)................... 4.9% 5.3%
</table>
Investment Gains and (Losses)
Net realized investment losses totaled $48,422, or $1.27 per diluted
share, during the first nine months of 2002 as compared to $9,275, or $0.16
per diluted share during the same period in 2001 as detailed below. Included
in the 2002 nine months per share amount is an $0.11 charge due to the write-
off of a deferred tax asset previously established for realized investment
losses.
Net realized gains (losses) by category for the nine months ended
September 30, are as follows:
<table>
<caption>
2002 2001
<s> <c> <c>
* Preferred stock mutual funds.................... $(32,538) $ 976
Bonds........................................... (3,945) (1,237)
Common and preferred stocks..................... (9,512) (2,234)
Other investments - venture capital funds....... (2,167) (6,624)
Other........................................... (260) (156)
Net realized investment losses.............. $(48,422) $ (9,275)
</table>
*The 2001 amount includes $1,458 relating to the amortization of negative
goodwill, at the time of purchase, of these securities.
The 2002 realized losses were primarily impacted by declines in market
values of utility common stocks held by preferred stock mutual funds totaling
$33,575 and other than temporary declines in market values of investments of
$11,734. At September 30, 2002, the Company has investments which will meet
the criteria for other than temporary decline in market value if their market
value remains at their current level for one more quarter. It is estimated
that these potential charges could amount to $10.0 to $15.0 million in the
fourth quarter if the market values of these securities do not recover by year
end.
- - 19 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses incurred (on a statutory basis) as a
percentage of insurance premiums earned ("loss ratio") increased slightly to
75.9% for the first nine months of 2002 compared to 75.0% for the first nine
months of 2001. The Company experienced an improvement in its voluntary loss
ratio, however this was offset by: (1) higher private passenger automobile
losses from CAR as a result of increased participation from CAR and higher
CAR loss ratios. The estimated impact of the additional 2002 CAR losses
decreased earnings by approximately $0.20 per diluted share. The Company
anticipates similar results from CAR for the remainder of the year, (2) an
increase in personal automobile bodily injury claim frequency compared to
last year which was somewhat offset by a lower physical damage claim
frequency and better experience in the Massachusetts commercial automobile
line.
Policy Acquisition Costs
As a percentage of net premiums written, underwriting expenses for the
insurance companies (on a statutory basis) decreased to 22.9% for the first
nine months of 2002 as compared to 24.1% for the same period a year ago. The
improvement was primarily due to a lower mandated Massachusetts personal
automobile commission rate and lower general underwriting expenses.
Combined Ratios
The combined ratio of losses and expenses (on a statutory basis) was
98.8% in the first nine months of 2002 compared with 99.1% for the same
period a year ago. This resulted in an underwriting profit percentage for
the first nine months of 2002 of 1.2% as compared to 0.9% for the first nine
months of 2001.
Income Taxes
The effective tax rate was 32.9% for the nine months ended September 30,
2002 as compared to 17.5% for the same period in 2001. In 2002, the
effective tax rate was impacted by the write-off of a deferred tax asset of
$5.4 million previously established for realized investment losses and the
non-deductible capital loss recognized for financial statement purposes
ineligible for tax purposes offset by tax-exempt interest income and the
corporate dividends received deduction. In 2001, the effective rate was
lower than the statutory rate of 35% primarily due to tax-exempt interest
income and the corporate dividends received deduction.
Minority Interest
Effective January 1, 2002, the ownership interests in ACIC Holding Co.,
Inc. ("AHC") were recapitalized. At December 31, 2001 Commerce maintained an
80% common stock interest and AAA Southern New England ("AAA SNE") maintained
a 20% common stock interest in AHC. Additionally, all AHC preferred stock
was owned by Commerce. The recapitalization resulted in redeeming of all the
AHC preferred stock by Commerce in exchange for 3,000 additional shares of
AHC common stock. This resulted in Commerce increasing its AHC common stock
interest to 95% with AAA SNE holding a 5% AHC common stock interest, with no
preferred stock outstanding. The recapitalization also resulted in the
creation of $4.5 million in minority interest for AAA SNE.
Change in Accounting Principle
As mentioned in the 2001 Form 10-K, and March 31, 2002 Form 10-Q
filings, due to the effect of a change in accounting principle related to
SFAS No. 142, the Company recorded income in the first quarter of 2002, net
of taxes, of $11,237 or $0.34 per share (diluted). This amount represents
the remaining unamortized negative goodwill related to preferred stock mutual
funds and the remaining excess of book value of subsidiary interest over cost
relating to the 1999 acquisition of American Commerce Insurance Company.
Negative goodwill and the excess of book value of subsidiary interest over
cost occurred in these acquisitions because the underlying value of the
assets purchased exceeded the purchase price. The subsequent recognition of
income that occurred as these items were eliminated was not a taxable event
but instead became part of the basis of the acquired asset.
- - 20 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
Net Earnings
Net earnings decreased $20,908, or 32.2%, to $44,053 during the first
nine months of 2002 as compared to $64,961 for the same period a year ago for
the reasons mentioned previously.
Pro-Forma Operating Earnings
Pro forma operating earnings represent net earnings adjusted for certain
items the Company believes are not indicative of operating results. Pro forma
operating earnings, which consist of net earnings exclusive of the after-tax
impact of net realized investment losses and the income effect of a required
change in accounting principle, were $75,166, or $2.26 per share (diluted), in
the first nine months of 2002, compared to $70,479, or $2.08 per share
(diluted), in the first nine months of 2001.
<table>
<caption>
September 30, September 30,
2002 2001
Pro-Forma Operating Earnings:
<s> <c> <c>
Net Earnings........................................ $ 44,053 $ 64,961
Less Net Realized Investment Losses, Net of Tax
Benefit........................................... 42,350* 5,518
Less Change in Accounting Principle................. (11,237) -
Pro-Forma Operating Earnings...................... $ 75,166 $ 70,479
Pro Forma Operating Earnings Per Share (Diluted):
Net Earnings Share................................... $ 1.33 $ 1.92
Less Per Share Net Realized Investment Losses,
Net of Tax Benefit................................ 1.27 0.16
Less Per Share Change in Accounting Principle....... (0.34) -
Pro-Forma Operating Earnings Per Share............ $ 2.26 $ 2.08
</table>
*The actual tax benefit of the realized investment loss portion is lower than
the calculated statutory rate of 35%. This is primarily due to the write-off
of a $5.4 million deferred tax asset previously established for realized
investment losses and the non-deductible capital loss recognized for financial
statement purposes ineligible for tax purposes.
- - 21 -
<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 decreased by $15,385 during the
first nine months of 2002 as compared to December 31, 2001. The decrease
resulted from a decrease in other comprehensive income, net of income taxes,
on fixed maturities and preferred and common stocks of $1,387 coupled with
dividends paid to stockholders of $30,273 and treasury stock purchases of
$35,279, offset by net earnings of $44,053 and a $7,501 increase which
resulted from the issuance of capital stock. Total assets at September 30,
2002 increased $238,329 or 11.1% to $2,378,411 as compared to total assets of
$2,140,082 at December 31, 2001. The major components of this growth are an
increase of $94,829 or 38.5% in premiums receivable, coupled with a $45,578 or
3.0% increase to invested assets, at market value and equity and a $26,070 or
22.4% increase in deferred policy acquisition costs. The increase in premiums
receivable is primarily attributable to increased Massachusetts business
coupled with the seasonality of the policy effective dates of the Company's
business.
The Company's liabilities totaled $1,577,137 at September 30, 2002 as
compared to $1,327,808 at December 31, 2001. The $249,329 or 18.8% increase
was primarily comprised of increases in unpaid losses and loss adjustment
expenses and unearned premiums. These increases were attributable to the
increased business mentioned previously.
The primary sources of the Company's liquidity are funds generated from
insurance premiums net of loss and acquisition costs, 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 $159,092 in the first
nine months of 2002, as compared to $72,607 during the same period a year ago,
representing an increase of $86,485 or 119.1%. The primary reason for this
increase is that the increase in premiums collected outpaced the increase in
loss and policy acquisition payments. Additionally, premium finance and
service fees collected increased $2,459 or 18.5% primarily as the result of
increased business and a service fee increase on Massachusetts new and renewal
business from three dollars to four dollars per installment payment, for
policies with effective dates of July 1 and forward.
For the first nine months of 2002 net cash flows from investing
activities used cash of $168,842 as compared to net cash flows provided by
investing activities of $78,177 for the same period in 2001. The majority of
the $247,019 difference was a $202,313 increase in purchases of fixed
maturities coupled with a $46,523 increase in purchases of equity securities
offset by a $24,289 increase in proceeds from fixed maturities. Investing
activities were funded by accumulated cash and cash provided by operating
activities during 2002 and 2001. As previously mentioned the Company began
investing some of its excess cash in short duration FNMA securities late in
the third quarter of 2002.
Cash flows used in financing activities totaled $58,051 during the first
nine months of 2002 compared to $43,574 during the same period a year ago.
The 2002 cash flows used in financing activities consisted of dividends paid
to stockholders of $30,273, coupled with $35,279 used to purchase 915,444
shares of treasury stock under the Company's stock buyback program, offset by
$7,501 which resulted from the issuance of capital stock related to exercises
of stock options. The 2001 cash flows used in financing activities consisted
of dividends paid to stockholders of $29,986 and $13,588 used to purchase
362,900 shares of treasury stock under the company's stock buy-program.
- - 22 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
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 September 30, 2002 was $1,543,779. At September 30, 2002, the Company held
cash and cash equivalents of $80,829. 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 relatively high cash position until such time as the
Company believes long-term rates have appropriately firmed.
Effective July 1, 2002, the Company entered into a retrocessional
reinsurance agreement with one of its quota-share reinsurers who maintains a
one-third participation in the Company's 75% quota-share treaty. For a
premium paid to the Company, the Company will indemnify the reinsurer if the
reinsurer incurs a loss for a single event or occurrence over a certain
threshold. Losses assumed by the reinsurer must first exceed $15,000 before a
reimbursement will be made, by the Company, to the reinsurer. The Company's
exposure to the reinsurer under this agreement is for a maximum of $35,000.
The threshold translates into a $60,000 total loss event or occurrence to the
Company, $15,000 of which represents the reinsurers 25% portion of the quota-
share treaty, before the reinsurer would receive any benefit.
Also, effective July 1, 2002, the Company amended its quota-share
reinsurance program in the event of terrorist acts. The maximum reimbursement
to the Company from its quota-share reinsurers will be limited to $50,000 in
the event of certain defined terrorist acts. The Company believes its
exposure in excess of this limit to be very remote based upon the types of
coverage offered by the Company. The Company's main area of business is in
the personal lines market and it has no single retained exposure in excess of
$1,000.
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 1.91 to 1.00 and 1.55 to 1.00 for the period
ended September 30, 2002 and 2001, 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.
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 and
common stocks traded on national stock exchanges, thus limiting exposure to
any one investment.
- - 23 -
<page>
The Commerce Group, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
The Company's exposure to interest rate changes at September 30, 2002 was
estimated as follows: A 200 basis point increase results in a $77,369
decrease in the market value of the fixed maturities and preferred stocks. A
200 basis point decrease results in a $48,546 increase in the market value of
the same securities.
Stock Buyback and Dividends
The Company purchased 915,444 shares of Treasury stock under the buyback
program through September 30, 2002 at an average cost of $38.54. At September
30, 2002, the Company had the authority to purchase approximately 1,358,000
additional shares of common stock under the current Board of Directors' stock
re-purchase authorization.
On September 21, 2002, the Company paid a quarterly dividend of $0.31 to
stockholders of record as of September 1, 2002. The Company increased its
quarterly dividend to stockholders from $0.30 to $0.31 during the second
quarter.
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 may 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.
Evaluation of Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the
Exchange Act) as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the evaluation date,
our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the evaluation date.
Additional Financial Information Available on Company Website
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.
- - 24 -
<page>
The Commerce Group, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - On August 13, 2002, the Company filed a form 8-K. The
purpose was to voluntarily comply with the June 27, 2002 Order of the
Securities and Exchange Commission regarding CEO and CFO Sworn Statements.
(b) Exhibit 10.24 - Reinsurance Agreement with Employers Reinsurance
Corporation
- - 25 -
<page>
The Commerce Group, Inc. and Subsidiaries
STATEMENT UNDER SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of The Commerce Group, Inc. (the "Company")
hereby certifies that, as of the date of this statement, the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 2002 (the
"Report") fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of and for the three and nine-month
periods ended September 30, 2002.
The purpose of this statement is solely to comply with Title 18, Chapter
63, Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
Date: November 13, 2002 /S/ ARTHUR J. REMILLARD, JR.
Arthur J. Remillard, Jr.
Chief Executive Officer
The undersigned officer of The Commerce Group, Inc. (the "Company")
hereby certifies that, as of the date of this statement, the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 2002 (the
"Report") fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of and for the three and nine-month
periods ended September 30, 2002.
The purpose of this statement is solely to comply with Title 18, Chapter
63, Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
Date: November 13, 2002 GERALD FELS
/S/ Gerald Fels
Chief Financial Officer
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
/S/ Randall V. Becker
Treasurer and
Chief Accounting Officer
- - 26 -
<page>
CERTIFICATIONS
I, Arthur J. Remillard, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Commerce
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/S/ ARTHUR J. REMILLARD, JR.
Arthur J. Remillard, Jr.
Chief Executive Officer
- - 27 -
<page>
CERTIFICATIONS
I, Gerald Fels, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Commerce
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/S/ GERALD FELS
Gerald Fels
Chief Financial Officer
- - 28 -
<page>
EMPLOYERS REINSURANCE CORPORATION Exhibit 10.24
Retrocession Agreement
between
Employers Reinsurance Corporation
Overland Park, KS
(hereafter referred to as the "Corporation")
as the Reinsured
And
Commerce Insurance Company
Webster, MA
(hereafter referred to as "Commerce")
as the Retrocessionaire
With respect to the Corporation's liability as reinsurer of
Commerce Insurance Company and/or
Citation Insurance Company and/or
American Commerce Insurance Company
Type: First Specific Excess Property Catastrophe Retrocession
Term: Commencing at 12:01 am, July 15, 2002 and ending at 12:01 am, July 1,
2003 as respects occurrences on or after the effective date and prior to the
termination date.
Business Covered: The Property portion of the Corporation's 25% participation
(being 25% part of 75%) in the Combination Property and Liability Quota Share
Agreement issued to Commerce (hereafter referred to as the "Original
Agreement"), but only in respect of policies in force at the inception hereof
or issued or renewed thereafter and classified in the Original Agreement as
Fire, Allied Lines, Inland Marine, Homeowners (Section I only), Commercial
Multiple Peril (Section I only) and Earthquake.
Territory: The territorial limits of the Agreement shall be identical with
those of the Original Agreement.
Retention and Limit: No claim shall be made under this retrocession agreement
unless the Corporation shall have first sustained under the Original
Agreement, by reason of any one loss occurrence, and Ultimate Net Loss in
excess of $15,000,000. The Retrocessionaire shall then be liable for 95% of
the Ultimate Net Loss in excess of $15,000,000 each occurrence, with the limit
of liability to the Retrocessionaire being 95% of $35,000,000 any one loss
occurrence, and 95% of $70,000,000 in the aggregate for all loss occurrences
during the period of the Agreement.
Retrocession Premium:
* 6.23% of subject Gross Net Written Premium, subject to a minimum
premiums of $1,150,000.
* The deposit premium shall be $1,437,500 payable in four equal
installments each due on July 15, 2002, October 1, 2002, January 1,
2003 and April 1, 2003.
* The Corporation shall be entitled to one full reinstatement of the
limits hereunder at 100% additional premium as to time; pro rata as to
the amount reinstated.
* The term "Gross Net Written Premium" shall mean the Gross Written
Premium on business ceded to the Original Agreement. 84% of such
premium shall be considered subject premium to the Agreement.
* The estimated subject premium for the period is $23,100,000.
- - 29 -
<page>
Definition of Loss Occurrence: To follow the Original Agreement.
Other terms and Conditions: To follow the Original Agreement, or as mutually
agreed.
Signed Participation: 100% Date:
By
For Commerce Insurance Company
Accepted: Date:
By
For Employers Reinsurance Corporation
- - 30 -
<page>