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 March 31, 1997 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, 1997, the number of shares outstanding of
the registrant's common stock (excluding Treasury
Shares) was 36,042,652.
Page 1 of 14
The Commerce Group, Inc.
Table of Contents
Page No.
Part I - Financial Information
Consolidated Balance Sheets at
March 31, 1997 (Unaudited) and December 31,
1996........................................................
3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1997 and 1996
(Unaudited).............................................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996
(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.................................................................
................... 14
Signature.........................................................
..................................................................
... 14
- - 2 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
March 31, December 31,
1997 1996
(Unaudited)
ASSETS
...............................................................
...............................................
Investments:
Fixed maturities, at market (cost: $706,168 in 1997 and
$700,511 in 1996)....................... $ 715,431 $
716,702
Equity securities, at market (cost: $241,276 in 1997 and
$214,406 in 1996)...................... 260,899 233,721
Mortgage loans on real estate and collateral notes
receivable (less allowance for possible loan
losses of $2,895 in 1997 and $2,760 in
1996)...................................................
72,586 74,586
Short-term
investments.......................................................
.................... 155,102 135,899
Other
investments.......................................................
......................... 2,132 2,127
Total
investments.......................................................
..................... 1,206,150 1,163,035
Cash and cash
equivalents.......................................................
................... 11,776 28,191
Accrued investment
income............................................................
.............. 13,332 12,819
Premiums receivable (less allowance for doubtful receivables
of $1,456 in 1997 and $1,500 in 1996). 208,241 158,153
Deferred policy acquisition
costs.............................................................
..... 99,891 82,968
Property and equipment, net of accumulated
depreciation............................................
32,755 32,100
Residual market
receivable........................................................
................. 204,676 195,213
Due from
reinsurers........................................................
........................ 16,970 19,659
Current income
taxes.............................................................
.................. 4,032 -
Other
assets............................................................
........................... 8,854 8,216
Total
assets............................................................
..................... $1,806,677 $1,700,354
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment
expenses..........................................................
.... $ 652,892 $ 649,913
Unearned
premiums..........................................................
...................... 439,900 367,991
Current income
taxes.............................................................
................ - 171
Deferred income
taxes.............................................................
............... 3,314 4,223
Deferred
income............................................................
...................... 7,613 7,974
Contingent commissions
accrued...........................................................
........ 26,606 25,712
Payable to securities
broker............................................................
......... 28,137 -
Other liabilities and accrued
expenses..........................................................
. 58,339 57,331
Total
liabilities.......................................................
..................... 1,216,801 1,113,315
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par
value; none issued in 1997 and 1996.... - -
Common stock, authorized 100,000,000 shares at $.50 par
value;
issued and outstanding 38,000,000 shares in 1997 and
1996...................................... 19,000
19,000
Paid-in
capital...........................................................
....................... 29,621 29,621
Net unrealized gains on investments, net of income taxes of
$10,110 in 1997 and $12,427 in 1996.. 18,776 23,079
Retained
earnings..........................................................
...................... 561,166 553,539
628,563 625,239
Treasury stock 1,957,348 shares in 1997 and 1,937,348
shares in 1996 ........................... (38,687)
(38,200)
Total stockholders'
equity............................................................
....... 589,876 587,039
Total liabilities and stockholders'
equity...................................................
$1,806,677 $1,700,354
The accompanying notes are an integral part of these consolidated
financial statements.
- - 3 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 1997 and 1996
(Thousands of Dollars Except Per Share Data)
(Unaudited)
1997 1996
...............................................................
..........................
Revenues
Earned
premiums..........................................................
. $ 178,003 $ 151,736
Net investment
income.....................................................
19,694 18,958
Premium finance
fees......................................................
1,668 4,019
Net realized investment
losses............................................ (296)
(911)
Total
revenues...................................................
199,069 173,802
Expenses
Losses and loss adjustment
expenses....................................... 135,311
123,122
Policy acquisition
costs..................................................
43,350 33,316
Total
expenses...................................................
178,661 156,438
Earnings before income
taxes..................................... 20,408
17,364
Income
taxes.............................................................
... 3,770 2,771
NET
EARNINGS.....................................................
$ 16,638 $ 14,593
NET EARNINGS PER COMMON
SHARE.................................... $ .46 $
.40
CASH DIVIDENDS PAID PER COMMON
SHARE............................. $ .25 $ .06
Weighted Average Number of Common Shares
Outstanding............. 36,050,874 36,556,902
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, 1997 and 1996
(Thousands of Dollars)
(Unaudited)
1997 1996
Cash flows from operating activities:
Net
earnings..........................................................
............ $ 16,638 $ 14,593
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Premiums
receivable........................................................
..... (50,088) (60,405)
Deferred policy acquisition
costs...............................................
(16,923) (19,996)
Residual market
receivable......................................................
(9,463) 6,404
Due to/from
reinsurers........................................................
.. 2,689 1,676
Losses and loss adjustment
expenses.............................................
2,979 14,703
Unearned
premiums..........................................................
..... 71,909 85,447
Current income
taxes............................................................
(4,203) 4,189
Deferred income
taxes...........................................................
1,408 (2,750)
Deferred
income............................................................
..... (361) 232
Contingent
commissions.......................................................
... 894 (2,039)
Other liabilities and accrued
expenses..........................................
29,145 4,967
Net realized investment
losses..................................................
296 911
Other -
net...............................................................
...... 427 (1,121)
Net cash provided by operating
activities................................ 45,347
46,811
Cash flows from investing activities:
Proceeds from maturity of fixed
maturities.......................................
13,699 10,723
Proceeds from sale of fixed
maturities...........................................
4,130 10,304
Purchase of fixed
maturities.....................................................
(24,422) (66,838)
Purchase of equity
securities.....................................................
(40,566) (40,090)
Proceeds from sale of equity
securities...........................................
14,386 2,028
Net (increase) decrease in short-term
investments................................. (19,203)
30,985
Payments received on mortgage loans and collateral notes
receivable............... 1,893 1,993
Mortgage loans and collateral notes
originated....................................
(586) (2,799)
Mortgages sold to investors on the secondary
market............................... 10
- -
Proceeds from sale of real estate acquired by
foreclosures........................ 1
92
Purchase of property and equipment
...............................................
(1,626) (699)
Proceeds from sale of property and
equipment......................................
20 84
Net cash used in investing
activities....................................
(52,264) (54,217)
Cash flows from financing activities:
Dividends paid to
stockholders....................................................
(9,011) (2,187)
Purchase of treasury
stock........................................................
(487) (7,566)
Net cash used in financing
activities....................................
(9,498) (9,753)
Decrease in cash and cash
equivalents...............................................
(16,415) (17,159)
Cash and cash equivalents at beginning of
period.................................... 28,191
23,836
Cash and cash equivalents at end of
period.......................................... $
11,776 $ 6,677
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,
1996. 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 1996 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, 1997 nor
comparison with the corresponding three months ended March 31,
1996 should be considered indicative of the results which may be
expected for the year ending December 31, 1997.
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, 1997, 1,957,348 shares of Treasury Stock were purchased under
the program, of which 20,000 shares were purchased in 1997.
6. Disclosure of supplemental cash flow information:
Three Months Ended
March 31,
1997 1996
Cash paid during the period for:
Federal and state income taxes
$ 6,611 $ 1,367
State premium and related taxes
of insurance subsidiaries
6,738 6,352
- - 6 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 1997 compared to
three months ended March 31, 1996
Direct premiums written during the first quarter of 1997, increased
$2,608,000 or 1.1% to $ 244,128,000, as compared to the same period in
1996. The increase was primarily attributable to a $4,987,000 increase
in direct premiums written for Massachusetts personal automobile
insurance offset by decreases in other lines of business. The increase
in Massachusetts personal automobile direct premiums written resulted
primarily from an increase of 4.5% in the number of personal automobile
exposures written, offset by a 1.9% decrease in the average 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 effect of the 1997 state mandated
average rate decrease of 6.2%. In January 1997, the Company was
granted, for the 1997 calendar year, 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 $1,666,000 or 11.6%,
primarily due to a decrease of approximately 6.0% in the number of
policies written and a decrease of approximately 5.4% in the average
premium per policy. Direct premiums written for homeowners insurance
decreased by $240,000, or 2.3% due primarily to a 1.1% decrease in the
average premium per policy, as well as a slight decrease in the number
of policies written. Direct premiums written for all other lines
decreased $179,000 or 4.7%.
Net premiums written during the first quarter of 1997 increased
$13,931,000 or 5.9% as compared to 1996. The increase in net premiums
written was primarily due to changes in direct premiums written as
described above, as well as to the effects of reinsurance. Of this,
written premiums assumed from the Commonwealth Automobile Reinsurers
("C.A.R.") increased $3,196,000, or 11.9% and written premiums ceded to
C.A.R. decreased $7,288,000 or 28.7% as compared to the first quarter of
1996, as a result of changes in the industry's and the Company's
utilization of C.A.R. reinsurance.
Earned premiums increased $26,267,000 or 17.3% during the first quarter
of 1997 as compared to the same period in 1996. The increase in earned
premiums was primarily due to the increased direct premiums written from
affinity group marketing programs during the first half of 1996 and also
a result of the changes in direct premiums written and net premiums
written as described above. Earned premiums assumed from C.A.R.
decreased $212,000 or 1.1% during the first quarter of 1997 compared to
the same period in 1996. Earned premiums attributable to Western
Pioneer decreased $81,000 to $6,877,000 for the three months ended March
31, 1997, compared to $6,958,000 for the same period in 1996.
Net investment income increased $736,000, or 3.9%, compared to the first
quarter of 1996, principally as a result of an increase in average
invested assets (at cost) of 5.5% as compared to the first quarter of
1996. Annualized net investment income as a percentage of total average
investments was 6.8% for the three months ended March 31, 1997 as
compared to 6.9% for the same period in 1996.
- - 7 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees decreased $2,351,000, or 58.5% during the first
quarter of 1997 as compared to the same period in 1996. 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 $296,000 during the first quarter
of 1997 as compared to net realized investment losses of $911,000 for
the same period in 1996. The realized losses in the first quarter of
1997 were primarily the result of sales of GNMA's, preferred stocks and
common stocks offset by realized gains on the sales of tax-exempt bonds.
Losses and loss adjustment expenses ("LAE") incurred as a percentage of
insurance premiums earned ("loss ratio") decreased to 75.7% for the
first quarter of 1997 as compared to 81.5% for the same period in 1996.
The ratio of net incurred losses, excluding LAE, to premiums earned
("pure loss ratio") on personal automobile increased slightly to 67.8%
compared to 67.2% in the first quarter of 1996. The commercial
automobile pure loss ratio decreased to 48.5% compared to 70.8% during
the first quarter of 1996. This decrease was primarily due to better
loss experience on business assumed from C.A.R. and better loss
development on voluntary business. For homeowners, the pure loss ratio
decreased to 60.2% compared to 142.2% during the first quarter of 1996.
This decrease was due to milder weather conditions during the first
quarter of 1997 as compared to the severe weather experienced during the
same period in 1996.
Policy acquisition costs increased by 30.1% during the first quarter of
1997 compared to the same period in 1996. The increase in policy
acquisition costs was primarily due to higher volumes of business
written and higher expenses as a percentage of net premiums written. As
a percentage of net premiums written, underwriting expenses (on a
statutory basis) were 24.1% during the first quarter of 1997 as compared
to 22.6% for the same period in 1996. This was primarily due to higher
agent profit sharing commissions resulting from the lower loss ratio, as
well as higher expenses for computer services related to upgrading the
Company's computer system. Agents' profit sharing compensation is based
in part on the underwriting profits of each agency's business written
with the Company.
The Company's effective tax rate was 18.5% for the first three months of
1997 as compared to 16.0% for the same period in 1996. In both years
the effective tax rate was lower than the statutory rate of 35.0%
primarily due to tax-exempt interest income.
Net earnings increased $2,045,000 during the first three months of 1997
as compared to the same period in 1996, as a result of the factors
mentioned above.
- - 8 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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 increased by $2,837,000 or
0.5%, during the first three months of 1997. This increase was the
result of net earnings of $16,638,000 offset by the decrease in net
unrealized gains, net of income taxes, on fixed maturities and equity
securities of $4,303,000, dividends paid to stockholders of $9,011,000,
and treasury stock purchased of $487,000. Total assets at March 31,
1997 increased by $106,323,000 or 6.3%, to $1,806,677,000 as compared to
total assets of $1,700,354,000 at December 31, 1996. The majority of
this growth was reflected in an increase in invested assets of
$43,115,000 or 3.7%, $50,088,000, or 31.7% in premiums receivable,
$16,923,000, or 20.4% in deferred policy acquisition costs, offset by a
decrease in all other assets of $3,803,000. The increase in premiums
receivable was primarily attributable to the seasonality of the policy
effective dates of the Company's business, as well as the increase in
personal automobile business and the elimination of premium finance
fees. The increase in deferred acquisition costs was attributable to
the increase in personal automobile business and factors described
previously.
As of March 31, 1997, the market value of the Company's fixed maturity
portfolio exceeded its book value by $9,263,000 ($6,021,000 after taxes,
or $0.17 per share). At December 31, 1996 the market value of the
Company's fixed maturity portfolio exceeded its book value by
$16,191,000 ($10,524,000 after taxes, or $0.29 per share). The decrease
in unrealized gain on fixed maturities resulted primarily from an
increase in interest rates which adversely impacted market values.
The Company's liabilities totalled $1,216,801,000, at March 31, 1997 as
compared to $1,113,315,000 at December 31, 1996. The $103,486,000 or
9.3% increase was comprised of a $2,979,000 or 0.5% increase in losses
and loss adjustment expenses, an increase of $71,909,000 or 19.5% in
unearned premiums, and a $28,598,000 or 30.0% increase in all other
liabilities. These changes primarily resulted from the seasonality of
the policy effective dates, as well as the increase in personal
automobile direct premiums written, as previously mentioned, combined
with the effect of the mild weather experienced during the first three
months of 1997 on losses and loss adjustment expenses.
The primary sources of the Company's liquidity are funds generated from
insurance premiums, 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 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 1997 has
resulted in a 58.5% decrease in combined premium finance fees and late
payment fees as compared to the same period in 1996.
- - 9 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's operating activities provided net cash of $45,346,000 in
the first three months of 1997 as compared to $46,811,000 in 1996.
These cash flows were primarily impacted by the Company's premium
writings attributable to the affinity group marketing programs mentioned
previously, and lower loss payments due to milder weather conditions.
The net cash flows used in investing activities were primarily the
result of purchases of fixed maturities, equity securities and the net
increase in short-term investments 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 1997
and 1996.
Cash flows used in financing activities totaled $9,498,000 during the
first three months of 1997 compared to $9,753,000 during the same period
in 1996. This is due to dividends paid to stockholders of $0.25 per
share in 1997 ($0.06 per share in 1996) and the purchase of Treasury
Stock under the Company's stock buyback program of 20,000 shares for
$487,000 during the first three months of 1997 compared to 380,315
shares for $7,566,000 during the same period in 1996.
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, 1997, the Company held cash and cash
equivalents of approximately $11,776,000. These funds, coupled with
short-term investments, 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
Massachusetts domestic insurance company seeking to make any dividend or
other distributions to its stockholders must file a report with the
Massachusetts Commissioner of Insurance ("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 Massachusetts 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. No
extraordinary dividends were paid in 1997.
In February 1997, the Company entered into an agreement to invest
$125,000,000 through Salomon Brothers Asset Management, Inc. The Company
intends to purchase short-term securities via this arrangement until
such time that the Company believes longer term investments are
appropriate.
- - 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 1.73 to 1.00 and 1.62 to 1.00
for the twelve months ended March 31, 1997 and 1996, respectively.
Recent Significant Events
Although the Company is not actively pursuing acquisitions, in an effort
to enhance future growth potential, 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.
In January 1997, the Massachusetts Commissioner of Insurance approved an
average 6.2% decrease in personal automobile premiums for 1997. The
1997 decrease was partially driven by corrections to an industry error
impacting prior year rate decisions. The industry error resulted from a
miscalculation of industry expense allowances that had the effect of
overstating rates for 1991 through 1996. Rates for 1997 include an
adjustment to recoup this error from the industry equal to 40% of the
error with 40% reducing 1998 rates and 20% reducing 1999 rates.
Additionally, 1997 rates were decreased as a result of the
reconciliation of the Safe Driver Insurance Plan ("SDIP") which is
designed to be revenue neutral. In most recent years, the SDIP
reconciliation resulted in a deficit which was then added into the rates
for the subsequent years. The 1996 SDIP reconciliation, however,
resulted in a surplus. Fifty percent of this surplus is being used to
decrease rates in both 1997 and 1998.
The Company performed an analysis of the rate decision and has estimated
the impact of the above two items on its results assuming its market
share remains the same as it was at the end of 1996. The earned premium
impact is estimated to be approximately $15.3 million for 1997, $23.0
million for 1998 and $13.5 million for 1999. The earnings per share
after-tax impact resulting from the lower earned premiums for 1997, 1998
and 1999 is estimated to be $0.28, $0.41 and $0.23, respectively. If
the Company's future market share increases (decreases), a larger
(smaller) financial impact would result.
- - 11 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Please note that statements in this Form 10-Q concerning future premium
writings and profit levels look forward in time and involve risks and
uncertainties that may affect the Company's actual results of
operations. Actual results may differ materially from those set forth
in the forward looking statements.
The Automobile Insurers Bureau of Massachusetts ("AIB") has filed an
appeal with the Massachusetts Supreme Judicial Court challenging the
Commissioner's decision to prospectively decrease future rates for the
miscalculation of the industry expense allowance. (The SDIP
reconciliation component is not being challenged.) The AIB's argument
is that, according to statute, there is a prohibition against
retroactive rate making in Massachusetts which effectively bars the
examination of past year's data once all involved parties have agreed to
the rate decision. One insurer has filed a suit with the Massachusetts
Supreme Judicial Court alleging that the prospective nature of the rate
reduction will have an unfair adverse impact on it. This is due to the
fact that the company filing suit believes it should not be adversely
impacted solely because its market share is greater now than during
those years in which the errors occurred. It is not possible to predict
the outcome of these legal actions or the potential effects thereof on
the Company.
In addition, the Massachusetts Association of Insurance Agents ("MAIA")
has also filed a suit with the Massachusetts Supreme Judicial Court with
respect to the Commissioner's ruling on 1997 commissions. The
Commissioner ruled that agents' commissions on the 1997 premiums,
subject to safe driver deviations, will be based on the discounted net
premium amounts. The 1996 commissions were based on premiums that were
"grossed-up" for safe driver deviations. The Commissioner's ruling will
result in agents receiving fewer commission dollars on a per policy
basis. The Company is unable to predict the possible outcome of this
suit at this time.
In January 1997, the Company was notified that its application for a
license in the state of Vermont was approved. Applications for licenses
in the states of Maine and New Hampshire remain pending. Prior to this,
the Company was granted licenses in the states of Connecticut and Rhode
Island. The Company is currently gearing its internal operating systems
to accommodate multiple state operation. The Company expects these
systems to be in place during the later part of 1997 to early 1998.
Therefore, the Company does not expect to begin writing insurance in
those states until that time.
- - 12 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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,
1997, the Company has purchased 1,957,348 shares of Treasury Stock, of
which 20,000 shares were purchased during the first three months of
1997. Additionally, the Company's Employee Stock Ownership Plan has
purchased more than 546,000 shares in open market transactions since the
buyback program was announced, of which 108,400 shares were purchased
during the first three months of 1997 for $2,740,741.
On March 20, 1997, the Company paid a quarterly dividend of $0.25 to
stockholders of record as of March 4, 1997. The Company had previously
increased its quarterly dividend to stockholders from $0.06 to $0.25
during the second quarter of 1996.
Effects of Inflation and Recession
The Company generally is unable to recover the costs of inflation in its
personal automobile insurance line since the premiums it charges are
subject to state regulation. The premium rates charged by the Company
for Massachusetts personal automobile insurance are adjusted by the
Commissioner only at annual intervals. Such annual adjustments in
Massachusetts premium rates may lag behind related cost increases.
Economic recessions will also have an impact upon the Company, primarily
through the policyholder's election to decrease non-compulsory coverages
afforded by the policy and decreased driving, each of which tends to
decrease claims.
To the extent inflation and economic recession influence yields on
investments, the Company is also affected. As each of these
environments affect current market rates of return, previously committed
investments may rise or decline in value depending on the type and
maturity of investment.
Inflation and recession must also be considered by the Company in the
creation and review of loss and LAE reserves since portions of these
reserves are expected to be paid over extended periods of time. The
anticipated effect of economic conditions is implicitly considered when
estimating liabilities for losses and LAE. The importance of
continually adjusting reserves is even more pronounced in periods of
changing economic circumstances.
- - 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 1997.
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
- - 14 -
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 1997.
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
- - 14 -