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 March 31, 1996
Commission File Number 0-16882
THE COMMERCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2599931
(State or other (IRS Employer
jurisdiction Identification
of Incorporation) 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 May 1, 1996, the number of shares outstanding of the
registrant's common stock (excluding Treasury Shares) was
36,356,252.
Page 1 of 13
The Commerce Group, Inc.
Table of Contents
Page No.
Part I - Financial Information
Consolidated Balance Sheets at
March 31, 1996 (Unaudited) and December 31, 1995
.......................................................... 3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1996 and 1995
(Unaudited)................................................ 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and
1995(Unaudited)................................................. 5
Notes to Unaudited Consolidated Financial
Statements............................................................. 6
Management's Discussion and
Analysis.....................................................................
............... 7
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-
K............................................................................
.......... 13
Signature................................................................
................................................................ 13
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THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
March 31, December 31,
1996 1995
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market (cost: $845,765 in 1996 and $801,308 in 1995)....................... $ 843,749 $ 815,277
Equity securities, at market (cost: $178,224 in 1996 and $140,157 in 1995)...................... 188,181 151,579
Mortgage loans on real estate (less allowance for possible loan losses of $2,524 in 1996 and
$2,660 in 1995)................................................................................ 74,418 73,783
Collateral notes receivable (less allowance of $513 in 1996 and 1995)............................ 1,711 1,826
Investments in real estate....................................................................... - 348
Total investments............................................................................ 1,108,059 1,042,813
Cash and cash equivalents.......................................................................... 27,803 75,906
Accrued investment income.......................................................................... 14,763 14,633
Premiums receivable (less allowance for doubtful receivables of $1,102 in 1996 and $1,103 in 1995). 187,648 127,243
Deferred policy acquisition costs.................................................................. 87,156 67,160
Property and equipment, net of accumulated depreciation............................................ 30,855 30,981
Residual market receivable......................................................................... 193,720 200,124
Due from reinsurers................................................................................ 20,221 21,897
Deferred income taxes.............................................................................. 10,272 1,415
Goodwill........................................................................................... 1,338 1,374
Total assets................................................................................. $1,681,835 $1,583,546
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment expenses.............................................................. $ 633,494 $ 618,791
Unearned premiums................................................................................ 415,901 330,454
Current income taxes............................................................................. 5,369 1,180
Deferred income.................................................................................. 9,186 8,954
Contingent commissions accrued................................................................... 30,511 32,550
Other liabilities and accrued expenses........................................................... 44,162 41,903
Total liabilities............................................................................ 1,138,623 1,033,832
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value; none issued in 1996 and 1995.... - -
Common stock, authorized 100,000,000 shares at $.50 par value;
issued and outstanding 38,000,000 shares in 1996 and 1995...................................... 19,000 19,000
Paid-in capital.................................................................................. 29,621 29,621
Net unrealized gains on investments, net of income taxes of $2,779 in 1996 and $8,887 in 1995.... 5,162 16,504
Retained earnings................................................................................ 521,354 508,948
575,137 574,073
Treasury stock 1,643,748 shares in 1996 and 1,263,433 shares in 1995 ........................... (31,925) (24,359)
Total stockholders' equity................................................................... 543,212 549,714
Total liabilities and stockholders' equity................................................... $1,681,835 $1,583,546
The accompanying notes are an integral part of these consolidated financial
statements.
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THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 1996 and 1995
(Thousands of Dollars Except Per Share Data)
(Unaudited)
1996 1995
Revenues
Earned premiums ............................................................. $ 151,736 $ 142,414
Net investment income........................................................ 18,958 17,405
Premium finance fees......................................................... 4,019 4,959
Net realized investment losses............................................... (911) (316)
Total revenues...................................................... 173,802 164,462
Expenses
Losses and loss adjustment expenses.......................................... 123,122 94,673
Policy acquisition costs..................................................... 33,316 40,274
Total expenses...................................................... 156,438 134,947
Earnings before income taxes........................................ 17,364 29,515
Income taxes................................................................... 2,771 7,244
NET EARNINGS........................................................ $ 14,593 $ 22,271
NET EARNINGS PER COMMON SHARE....................................... $ .40 $ .59
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................ 36,556,902 38,000,000
The accompanying notes are an integral part of these consolidated
financial statements.
- - 4 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995
(Thousands of Dollars)
(Unaudited)
1996 1995
Cash flows from operating activities:
Net earnings...................................................................... $ 14,593 $ 22,271
Adjustments to reconcile net earnings to net cash provided by operating activities:
Premiums receivable............................................................. (60,405) (38,310)
Deferred policy acquisition costs............................................... (19,996) (13,603)
Residual market receivable...................................................... 6,404 (10,274)
Due to/from reinsurers.......................................................... 1,676 480
Losses and loss adjustment expenses............................................. 14,703 9,492
Unearned premiums............................................................... 85,447 61,660
Current income taxes............................................................ 4,189 641
Deferred income taxes........................................................... (2,750) (916)
Deferred income................................................................. 232 972
Other liabilities and accrued expenses.......................................... 256 5,683
Net realized investment losses.................................................. 911 316
Other - net..................................................................... 1,592 670
Net cash provided by operating activities................................ 46,852 39,082
Cash flows from investing activities:
Proceeds from maturity of fixed maturities...................................... 10,723 4,388
Proceeds from sale of fixed maturities........................................... 10,304 8,145
Purchase of fixed maturities..................................................... (66,838) (9,404)
Purchase of equity securities..................................................... (40,090) -
Proceeds from sale of equity securities........................................... 2,028 59
Payments received on mortgage loans on real estate............................... 1,909 1,111
Mortgage loans on real estate originated.......................................... (2,799) (1,850)
Payments received on collateral notes receivable.................................. 84 113
Collateral notes receivable originated............................................ - (240)
Proceeds from sale of real estate acquired by foreclosures........................ 92 84
Purchase of property and equipment ............................................... (699) (1,722)
Proceeds from sale of property and equipment...................................... 84 57
Net cash provided by (used in) investing activities...................... (85,202) 741
Cash flows from financing activities:
Dividends paid to stockholders.................................................... (2,187) (1,900)
Purchase of treasury stock........................................................ (7,566) -
Net cash used in financing activities.................................... (9,753) (1,900)
Increase (decrease) in cash and cash equivalents.................................... (48,103) 37,923
Cash and cash equivalents at beginning of period.................................... 75,906 25,294
Cash and cash equivalents at end of period.......................................... $ 27,803 $ 63,217
The accompanying notes are an integral part of these consolidated
financial statements.
- - 5 -
The Commerce Group, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, 1995. Certain information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations, although the
Company believes the disclosures which have been made are
adequate to make the information presented not misleading.
2. The information furnished includes all adjustments and
accruals consisting only of normal recurring adjustments
which are, in the opinion of management, necessary for a
fair presentation of results for the interim periods.
Certain 1995 account balances have been reclassified to
conform to the current year's presentation.
3. 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.
4. Neither the results for the three months ended March 31,
1996 nor comparison with the corresponding three months
ended March 31, 1995 should be considered indicative of the
results which may be expected for the year ending December
31, 1996.
5. In May 1995, the Board of Directors announced that it had
approved a stock buyback program of up to 3 million shares.
As of March 31, 1996, 1,643,748 shares of Treasury Stock
were purchased under the program.
6. Disclosure of supplemental cash flow information:
Three Months Ended
March 31,
1996 1995
Cash paid during the period for:
Federal and state income taxes $ 1,367 $ 7,527
State premium and related taxes
of insurance subsidiaries 6,352 6,142
Non-cash investing and financing activities:
Real estate acquired by foreclosure - 534
- - 6 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 1996 compared to
three months ended March 31, 1995
Direct premiums written during the first quarter of 1996,
increased $33,664,000 or 16.2% to $241,520,000, as compared to
the same period in 1995. The increase was primarily attributable
to a $28,670,000 or 16.2% increase in direct premiums written for
personal automobile insurance of which $7,479,000 was derived
from the Company's California subsidiary, Western Pioneer
Insurance Company. This increase in personal automobile direct
premiums written resulted primarily from an increase of 30.6% in
the number of Massachusetts personal automobile exposures
written, offset by a 14.4% decrease in the average Massachusetts
personal automobile premium per exposure (each vehicle insured).
This was primarily the result of the Company's affinity group
marketing programs, safe driver rate deviations and the 1996
state mandated rate decrease of 4.5%. In January 1996, the
Company was granted approval to offer their customers safe driver
deviations of 10%. For drivers who qualify, both group discount
and safe driver deviations can be combined for up to a 19%
reduction from state mandated rates. Direct premiums written for
commercial automobile insurance decreased by $2,027,000, or
12.4%, due primarily to a 7.6% decrease in the number of policies
written, as well as a 4.8% decrease in the average commercial
automobile premium per policy. Direct premiums written for
homeowners insurance (excluding Massachusetts Fair Plan)
decreased by $70,000, or 0.7% due primarily to a 2.6% decrease in
the number of policies written, offset by an increase in the
average premium per policy of approximately 1.9%.
Net premiums written during the first quarter of 1996 increased
$32,353,000 or 15.9% as compared to 1995. The increase in net
premiums written was primarily due to changes in direct premiums
written as described above, offset by the effect of reinsurance.
Additionally, written premiums assumed from the Commonwealth
Automobile Reinsurers ("C.A.R.") decreased $2,659,000 or 9.0% and
written premiums ceded to C.A.R. decreased $320,000, or 1.2% as
compared to the first quarter of 1995, as a result of changes in
the industry's and the Company's utilization of C.A.R.
reinsurance.
Earned premiums increased $9,322,000 or 6.5% during the first
quarter of 1996 as compared to the same period of 1995. Earned
premiums assumed from C.A.R. decreased $3,048,000, or 13.5%
during the first quarter of 1996 compared to the same period in
1995. This was offset by an increase of $12,370,000, or 10.3% in
earned premiums on all other business of which $6,958,000 was
attributable to Western Pioneer.
Net investment income increased $1,553,000, or 8.9%, compared to
the first quarter of 1995, principally as a result of an increase
in average invested assets (at cost) of 7.9% as compared to the
first quarter of 1995. Annualized net investment income as a
percentage of total average investments was 7.3% during the three
months ended March, 1996 as compared to 7.2% during the same
period in 1995.
- - 7 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees decreased $940,000, or 19.0% during the
first quarter of 1996 as compared to the same period in 1995.
The decrease was primarily attributable to a change from interest
based finance fees to a "late payment" fee based system for
personal automobile policies with effective dates of January 1,
1996 and forward. The change was in response to competitive
forces that occurred in the Massachusetts marketplace.
Net realized investment losses totaled $911,000 during the first
quarter of 1996 as compared to $316,000 for the same period in
1995. The realized losses in the first quarter of 1996 were
primarily the result of sales of GNMA's and tax-exempt bonds.
Losses and loss adjustment expenses incurred as a percentage of
insurance premiums earned ("loss ratio") increased to 81.5% for
the first quarter of 1996 as compared to 66.4% for the same
period in 1995. The ratio of net incurred losses, excluding LAE,
to premiums earned ("pure loss ratio") on personal automobile
increased to 67.2% compared to 60.7% in the first quarter of
1995. This increase was primarily due to the adverse impact of
the severe winter weather conditions experienced in the northeast
coupled with a decrease in the personal automobile average
premium rate. The average rate decrease was due to the effects
of affinity group marketing programs, safe driver rate deviations
and the 1996 state mandated rate decrease of 4.5%. The
commercial automobile pure loss ratio increased to 70.8% compared
to 55.0% during the first quarter of 1995. This increase was
primarily due to adverse loss experience in the liability
component on the retained commercial automobile business, as well
as adverse loss experience on commercial automobile business
assumed from C.A.R. For homeowners, the pure loss ratio
increased to 142.2% compared to 67.2% during the first quarter of
1995. This increase was due to severe weather during the first
quarter of 1996 as compared to mild weather during the same
period in 1995.
Policy acquisition costs decreased by 17.3% during the first
quarter of 1996 compared to the same period in 1995. The
decrease in policy acquisition costs was primarily due to a
decrease in agents profit sharing compensation resulting from the
impact of adverse weather conditions on the Company's loss ratio,
a decrease in the state mandated Massachusetts personal
automobile commission rates and the impact of affinity group
marketing service fee income. Agents' profit sharing
compensation is based in part on the underwriting profits of
agency business written with the Company. As a percentage of net
premiums written, underwriting expenses (on a statutory basis)
were 22.6% during the first quarter of 1996 as compared to 26.0%
for the same period in 1995. This decrease was primarily
attributable to the reasons as mentioned above.
- - 8 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's effective tax rate was 16.0% for the first quarter
of 1996 as compared to 24.5% for the same period in 1995. In
both years the effective tax rate was lower than the statutory
rate of 35% primarily due to tax-exempt interest income. The
1996 rate was further reduced by the effect of equivalent tax-
exempt interest in the first quarter of 1996 as compared to the
same period in 1995 coupled with reduced earnings in the first
quarter of 1996 (taxed at the 35% rate) as compared to the same
period in 1995.
Net earnings decreased $7,678,000 during the first quarter of
1996 as compared to the same period in 1995, as a result of the
factors mentioned above.
Liquidity and Capital Resources
The focus of the discussion of liquidity and capital resources is
the Consolidated Balance Sheets on page 3 and the Consolidated
Statements of Cash Flows on page 5. Stockholders' equity
decreased by $6,502,000, or 1.2%, during the first three months
of 1996. This decrease was the result of net earnings of
$14,593,000, offset by the decrease in net unrealized gains, net
of income taxes, on fixed maturities and equity securities of
$11,342,000, dividends paid to stockholders of $2,187,000, and
treasury stock purchased of $7,566,000. Total assets at March
31, 1996 increased by $98,289,000, or 6.2%, to $1,681,835,000 as
compared to total assets of $1,583,546,000 at December 31, 1995.
The majority of this growth was reflected in an increase in
invested assets of $65,246,000 or 6.3%, $60,405,000 or 47.5% in
premiums receivable, $19,996,000, or 29.8% in deferred policy
acquisition costs, offset by a decrease in all other assets of
$47,358,000.
As of March 31, 1996, the book value of the Company's fixed
maturity portfolio exceeded its market value by $2,016,000
($1,310,000 after taxes, or $.04 per share). At December 31,
1995 the market value of the Company's fixed maturity portfolio
exceeded its book value by $13,969,000 ($9,080,000 after taxes,
or $.24 per share).
The Company's liabilities totalled $1,138,623,000 at March 31,
1996 as compared to $1,033,832,000 at December 31, 1995. The
$104,791,000 or 10.1% increase was comprised of a $14,703,000 or
2.4% increase in losses and loss adjustment expenses, an increase
of $85,447,000 or 25.9% in unearned premiums, and by a $4,641,000
or 5.5% increase in all other liabilities. These changes
primarily resulted from the increase in personal automobile
direct premiums written, as previously mentioned, coupled with
the adverse impact of severe winter weather in the northeast.
- - 9 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The primary sources of the Company's liquidity are funds
generated from insurance premiums, premium finance fees, net
investment income and maturing investments as reflected in the
Consolidated Statements of Cash Flows on page 5. In response to
the changing competitive forces in the marketplace, the Company
has eliminated interest based premium finance fees for both new
and renewal personal automobile insurance policies with effective
dates on or after January 1, 1996 and replaced it with a "late
payment" fee based system. The impact of this change through the
first quarter of 1996 has resulted in a 19.0% decrease in premium
finance fees as compared to the same period in 1995.
The Company's operating activities provided net cash of $
46,852,000 in the first three months of 1996 as compared to
$39,082,000 in 1995. These cash flows were primarily impacted by
the Company's premium writings attributable to the affinity group
marketing programs mentioned previously.
The net cash flows used in investing activities were primarily
the result of purchases of fixed maturities and equity securities
offset by proceeds from the sale and maturity of fixed
maturities. Investing activities were funded by accumulated cash
and cash provided by operating activities during 1996 and 1995.
Cash flows used in financing activities totaled $9,753,000 during
the first three months of 1996 compared to $1,900,000 during the
same period in 1995. This is primarily due to the purchase of
380,315 shares of Treasury Stock under the Company's stock
buyback program.
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. At March 31, 1996, the
Company held cash and cash equivalents of approximately
$27,803,000. These funds provide sufficient liquidity for the
payment of claims and other short-term cash needs. The Company
relies upon dividends from its subsidiaries for its cash
requirements. Every domestic insurance company seeking to make
any dividend or other distributions to its stockholders must file
a report with the Commissioner. An extraordinary dividend is any
dividend or other property, whose fair value together with other
dividends or distributions made within the preceding twelve
months exceeds the greater of ten percent of the insurer's
surplus as regards policyholders as of the end of the preceding
year, or the net income of a non-life insurance company for the
preceding year. No pro-rata distribution of any class of the
insurer's own securities is to be included. No domestic
insurance company shall pay an extraordinary dividend or other
extraordinary distribution until thirty days after the
Commissioner has received notice of the intended distribution and
has not objected.
- - 10 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Periodically, sales have been made from the Company's fixed
maturity investment portfolio to actively manage portfolio risks,
including credit-related concerns and matching of asset and
liability cash flows, 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 written premiums to
statutory policyholders' surplus should not exceed 3.00 to 1.00.
The Company's statutory premiums to surplus ratio was 1.62 to
1.00 and 1.77 to 1.00 for the twelve months ended March 31, 1996
and 1995, respectively.
Recent Significant Events
The Company continues to monitor acquisition opportunities
consistent with a long term growth strategy to expand outside
Massachusetts through acquisitions of smaller automobile
insurance companies that are in need of capital, have established
management in place and present significant growth opportunities
in their market areas. The Company continues its pursuit of
licenses in the states of New Hampshire and Rhode Island. In
March 1996, the Company was notified that its application for a
license in the state of Connecticut was approved, effective May
1, 1996.
The Company began a stock buyback program during the second
quarter of 1995. The program, which was approved by the Board of
Directors on May 19, 1995, authorizes the Company to purchase up
to 3 million shares of Treasury Stock. Since the inception of
the program through March 31, 1996, the Company has purchased
1,643,748 shares of Treasury Stock, of which, 380,315 shares were
purchased during the first quarter of 1996. Additionally, the
Company's Employee Stock Ownership Plan has purchased more than
225,000 shares in open market transactions since the buyback
program was announced.
Also in the first quarter, the Company began eliminating interest
based premium finance fees on new and renewal personal automobile
insurance policies with effective dates on or after January 1,
1996. As a result, premium finance fees as a source of the
Company's liquidity has decreased $940,000 or 19.0%.
Effects of Inflation and Recession
The Company generally is unable to recover the costs of inflation
in its personal automobile insurance line since the premiums it
charges are subject to state regulation. The premium rates
charged by the Company for 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.
- - 11 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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.
- - 12 -
The Commerce Group, Inc.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the first quarter of 1996.
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
- - 13 -
The Commerce Group, Inc.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K - none filed during the first quarter of 1996.
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
- - 13 -