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, 1995 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 November 1, 1995, the number of shares outstanding of the
registrant's common stock (excluding Treasury Shares) was 37,145,867.
Page 1 of 16
The Commerce Group, Inc.
Table of Contents
Page No.
Part I - Financial Information
Consolidated Balance Sheets at
September 30, 1995 (Unaudited) and December 31, 1994..... 3
Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 1995 and 1994
(Unaudited) ............................................. 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994
(Unaudited)............................................... 5
Notes to Unaudited Consolidated Financial Statements......... 6
Management's Discussion and Analysis......................... 8
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K......................... 16
Signature.................................................... 16
- - - 2 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
September 30, December 31,
1995 1994
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market (cost: $830,825 in 1995 and $801,376 in
1994)....................... $ 825,747
$ 745,010
Equity securities, at market (cost: $130,740 in 1995 and $104,117
in
1994)...................... 138,549
95,230
Mortgage loans on real estate (less allowance for possible loan
losses of
$2,526 in 1995 and
$2,759 in
1994).................................................................
........
... 68,653
57,031
Collateral notes receivable (less allowance of $500 in 1995 and in
1994)......................... 1,984
1,559
Investments in real
estate.................................................................
...
327
216
Total
investments............................................................
........
..... 1,035,260
899,046
Cash and cash
equivalents............................................................
........
... 11,336
5,485
Accrued investment
income.................................................................
......
14,737
13,440
Premiums receivable (less allowance for doubtful receivables of $1,105
in 1995
and $1,120 in 1994). 142,036
102,529
Deferred policy acquisition
costs.................................................................
68,639
56,769
Property and equipment, net of accumulated
depreciation............................................ 31,229
30,610
Due from
reinsurers............................................................
........ 17,303
16,892
Residual market
receivable............................................................
........
. 208,667
214,818
Current income
taxes.................................................................
........
.. 1,163
- - -
Deferred income
taxes.................................................................
........
. 10,157
37,791
Goodwill..............................................................
........
................. 1,409
- - -
Total
assets................................................................
........
..... $1,541,936
$1,377,380
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment
expenses..............................................................
$ 614,406 $ 592,373
Unearned
premiums.......................................................
.......... 356,801 314,719
Current income
taxes...............................................................
........
- - -
9,817
Deferred
income..............................................................
........
...... 9,856
10,451
Contingent commissions
accrued.............................................................
26,681
24,450
Other liabilities and accrued
expenses...........................................................
18,057 11,981
Total
liabilities........................................................
........
..... 1,025,801
963,791
Stockholders' equity
Preferred stock, authorized 5,000,000 shares at $1.00 par value;
none issued
in 1995 and 1994.... -
- - -
Common stock, authorized 100,000,000 shares at $.50 par value;
issued and outstanding 38,000,000 shares in 1995 and
1994...................................... 19,000
19,000
Paid-in
capital.........................................................
............ 29,621 29,621
Net unrealized gains (losses) on investments, net of income taxes
(benefits)
of $956 in 1995
and ($22,839) in 1994....................................
1,775 (42,414)
Retained earnings..........................................
.............. 481,377 407,382
531,773
413,589
Treasury stock, 854,133 shares in 1995 and none in
1994......................................... (15,638)
- - -
Total stockholders'
equity.......................................................
516,135 413,589
Total liabilities and stockholders'
equity...................................................
$1,541,936 $1,377,380
The accompanying notes are an integral part of these consolidated
financial statements.
- 3 -
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 1995 and 1994
(Thousands of Dollars Except Per Share Data)
(Unaudited)
Three Months Ended
Nine Months
Ended
September 30,
September 30,
1995 1994
1995
1994
Revenues
Earned premiums .......................................... $
149,716
$ 149,727 $ 437,835 $
423,867
Net investment income.....................................
18,335
15,826 51,995
44,849
Premium finance fees......................................
4,869
4,814 14,704
14,393
Net realized investment gains.............................
1,229
49 456
45,971
Total revenues...................................
174,149
170,416 504,990
529,080
Expenses
Losses and loss adjustment expenses.......................
91,526
95,859 271,381
287,625
Policy acquisition costs..................................
43,073
38,446 124,685
111,832
Total expenses...................................
134,599
134,305 396,066
399,457
Earnings before income taxes.....................
39,550
36,111 108,924
129,623
Income taxes................................................
10,703
9,772 28,519
37,653
NET EARNINGS..................................... $
28,847
$ 26,339 $ 80,405 $
91,970
NET EARNINGS PER WEIGHTED AVERAGE COMMON SHARE... $
.77
$ .69 $ 2.13 $
2.42
Weighted Average Number of Common Shares Outstanding........
37,478,513
38,000,000 37,824,261
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
Nine Months Ended September 30, 1995 and 1994
(Thousands of Dollars)
(Unaudited)
1995
1994
Cash flows from operating activities:
Net
earnings................................................
...
$ 80,405 $
91,970
Adjustments to reconcile net earnings to net cash provided by
operating
activities:
Premiums
receivable..............................................
(39,507)
(32,175)
Deferred policy acquisition
costs......................................... (11,870)
(14,153)
Residual market
receivable......................................................
6,151
(7,712)
Due to/from
reinsurers.........................................
(411)
(13,133)
Losses and loss adjustment
expenses............................................. 22,033
21,225
Unearned
premiums...............................................................
42,082
66,729
Current income
taxes............................................................
(10,980)
12,860
Deferred income
taxes...........................................................
5,751
(7,848)
Deferred
income.................................................................
(595)
3,560
Other liabilities and accrued
expenses.......................................... 6,898
29,983
Net realized investment
gains................................................... (456)
(45,971)
Other -
net.....................................................................
(1,690)
6,955
Net cash provided by operating
activities................................ 97,811
112,290
Cash flows from investing activities:
Proceeds from maturity of fixed
maturities...................................... 19,155
49,030
Proceeds from sale of fixed
maturities........................................... 45,926
117,950
Purchase of fixed
maturities.....................................................
(93,927)
(316,347)
Purchase of equity
securities.....................................................
(32,211)
(24,986)
Proceeds from sale of equity
securities........................................... 5,091
57,122
Payments received on mortgage loans on real
estate............................... 6,886
6,461
Mortgage loans on real estate
originated.......................................... (20,127)
(12,752)
Mortgages sold to investors in the secondary
market............................... 2,361
8,089
Payments received on collateral notes
receivable.................................. 315
339
Collateral notes receivable
originated............................................ (740)
(145)
Proceeds from sale of real estate acquired by
foreclosures........................ 275
1,508
Purchase of property and equipment
............................................... (3,030)
(4,291)
Proceeds from sale of property and
equipment...................................... 114
228
Net cash used in investing
activities.................................... (69,912)
(117,794)
Cash flows from financing activities:
Dividends paid to
stockholders....................................................
(6,410)
(3,800)
Purchase of treasury
stock........................................................
(15,638)
- - -
Net cash used in financing
activities.................................... (22,048)
(3,800)
Increase (decrease) in cash and cash
equivalents.................................... 5,851
(9,304)
Cash and cash equivalents at beginning of
period.................................... 5,485
13,217
Cash and cash equivalents at end of
period.......................................... $ 11,336 $
3,913
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, 1994. 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 1994 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 nine months ended September 30, 1995 nor
comparison with the corresponding nine months ended September 30,
1994 should be considered indicative of the results which may be
expected for the year ending December 31, 1995.
5. The Company which had announced the proposed acquisition of Western
Pioneer Insurance Company located in Pleasanton, California during the
second quarter, completed the transaction on August 31, 1995. The
Company's long-term growth strategy is to expand outside of
Massachusetts through acquisitions of smaller automobile companies that
are in need of capital, have established management in place and present
significant growth opportunities in their market areas. In addition,
the Company is pursuing licenses in the states of New Hampshire, Rhode
Island and Connecticut through The Commerce Insurance Company.
6. In May 1995, the Board of Directors announced that it had approved a
stock buyback program of up to 3 million shares. As of September 30,
1995, 854,133 shares of Treasury Stock were purchased under the program.
7. Through the third quarter, the Company's primary property & casualty
insurance subsidiary, The Commerce Insurance Company, signed group
marketing agreements with five AAA Automobile Clubs in Massachusetts to
offer a 10% discount on automobile insurance to clubs' members. These
AAA clubs have approximately 1.1 million members who may be eligible for
the discount.
8. During the third quarter, the Company received state regulatory
approval
to eliminate interest based premium finance fees for both new and renewal
personal
automobile insurance policies with effective dates on or after January
1, 1996. These premium finance fees will be phased out in 1996 and be
replaced with a "late payment" fee based system (see Page 13 of Liquidity
and Capital Resources).
- - - 6 -
The Commerce Group, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Cont.
9. Disclosure of supplemental cash flow information:
Nine Months Ended
September 30,
1995 1994
Cash paid during the period for:
Federal and state income taxes $35,814
$32,700
State premium and related taxes
of insurance subsidiaries 13,397
13,997
Non-cash investing and financing activities:
Real estate acquired by foreclosure 534
1,383
- - - 7 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended September 30, 1995 compared to
three months ended September 30, 1994
Direct premiums written during the third quarter of 1995 decreased
$322,000, or 0.2% to $137,597,000, as compared to the same period in 1994.
The decrease was primarily attributable to a $637,000, or 0.6% decrease in
direct premiums written for personal automobile insurance. This decrease in
personal automobile direct premiums written resulted primarily from a 3.0%
decrease in the average personal automobile premium per exposure (each
vehicle insured). This is a direct result of the 6.1% overall average rate
decrease in the industry's 1995 personal automobile premiums approved by
the Massachusetts Commissioner of Insurance ("Commissioner"). In addition,
the number of personal automobile exposures written increased by
approximately 2.4%. Direct premiums written for commercial automobile
insurance decreased by $722,000, or 7.6% due primarily to a 4.9% decrease
in the number of policies written, as well as a 2.7% decrease in the
average commercial automobile premium per policy. Direct premiums written
for homeowners insurance (excluding Massachusetts Fair Plan) increased by
$512,000, or 3.8% due primarily to a 5.6% increase in the average premium
per homeowners policy, offset by a 1.8% decrease in the number of policies
written.
Net premiums written during the third quarter of 1995 increased $2,585,000
or 2.0% as compared to 1994. The increase in net premiums written was due
to the effect of reinsurance, offset by changes in direct premiums written
as described above. Written premiums assumed from the Commonwealth
Automobile Reinsurers ("C.A.R.") decreased $2,750,000 or 11.0% and written
premiums ceded to C.A.R. decreased $5,934,000, or 24.4% as compared to the
third quarter of 1994, as a result of changes in the industry's and the
Company's utilization of C.A.R. reinsurance. Premiums ceded to reinsurers
other than C.A.R. increased $275,000, or 3.6% as compared to the same
period in 1994.
Earned premiums decreased $11,000 during the third quarter of 1995 as
compared to the same period of 1994. Earned premiums assumed from C.A.R.
increased $1,606,000, or 7.1% during the third quarter of 1995 compared to
the same period in 1994. This was offset by a decrease of $1,617,000, or
1.3% in earned premiums on all other business.
Net investment income increased $2,509,000, or 15.9%, compared to the third
quarter of 1994, principally as a result of an increase in average invested
assets (at cost) of 15.4% when compared to the third quarter ended
September, 1994. Annualized net
investment income as a percentage of total average investments was 7.1%
during the three months ended September, 1995 as compared to 7.0% during
the same period in 1994.
- - - 8 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees increased $55,000, or 1.1% during the third quarter of
1995 as compared to the same period in 1994. The increase was primarily
attributable to the net effect of the increase in policies on direct bill
and changes in the direct bill payment program such as decreased down
payment and a longer payment period, offset by a decrease in direct
premiums written.
Net realized investment gains totaled $1,229,000 during the third quarter
of 1995 as compared to net realized gains of $49,000, for the same period
in 1994. The realized gains in the third quarter of 1995 were primarily
the result of sales of tax-exempt bonds.
Losses and loss adjustment expenses incurred as a percentage of insurance
premiums earned ("loss ratio") decreased to 61.3% for the third quarter of
1995 as compared to 64.2% for the same period in 1994. The ratio of net
incurred losses, excluding LAE, to premiums earned ("pure loss ratio") on
personal automobile increased to 57.9% compared to 50.9% in the third
quarter of 1994. This increase was primarily due to adverse loss
experience on personal automobile business assumed from C.A.R. The
commercial automobile pure loss ratio decreased to 46.1% compared to 80.4%
during the third quarter of 1994. This decrease was primarily due to
favorable loss experience in the liability component on the retained
commercial automobile business, as well as improved loss experience on
commercial automobile business assumed from C.A.R. For homeowners, the
pure loss ratio decreased to 32.8% compared to 95.9% during the third
quarter of 1994. This decrease is due to the mild weather during 1995,
compared to the adverse loss experience in both of the liability and
property components, during the same period in 1994.
Policy acquisition costs increased by 12.0% during the third quarter of
1995 compared to the same period in 1994. This increase is primarily due
to the increase in the 1995 commission rate for personal automobile
insurance and additional agents profit sharing compensation. The
Commissioner approved an increase in the 1995 commission rate for personal
automobile to 15.3% compared to 13.5% in 1994.
Net earnings increased $2,508,000 during the third quarter of 1995 as
compared to the same period in 1994, as a result of the factors mentioned
above.
- - - 9 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Nine months ended September 30, 1995 compared to
nine months ended September 30, 1994
Direct premiums written during the first nine months of 1995 decreased
$13,679,000 or 2.7% to $487,013,000, as compared to the same period in
1994. The decrease was primarily attributable to a $14,717,000, or 3.6%
decrease in direct premiums written for personal automobile insurance. This
decrease in personal automobile direct premiums written resulted primarily
from a 3.3% decrease in the average personal automobile premium per
exposure (each vehicle insured). This is a direct result of the 6.1%
overall average rate decrease in the industry's 1995 personal automobile
premiums approved by the Commissioner. In addition, the number of personal
automobile exposures written decreased by approximately 0.3%. Direct
premiums written for commercial automobile insurance decreased by
$1,080,000, or 2.9% due primarily to a 4.4% decrease in the number of
policies written, offset by a 1.5% increase in the average commercial
automobile premium per policy. Direct premiums written for homeowners
insurance (excluding Massachusetts Fair Plan) increased by $941,000, or
2.6% due primarily to a 5.1% increase in the average premium per homeowners
policy, offset by a 2.5% decrease in the number of policies written.
Net premiums written during the first nine months of 1995 increased
$833,000 or 0.2% as compared to 1994. The increase in net premiums written
was due to the effects of reinsurance, offset by changes in direct premiums
written as described above. Written premiums assumed from C.A.R. increased
$2,520,000, or 3.4% and written premiums ceded to C.A.R. decreased
$12,767,000, or 16.4% as compared to the first nine months of 1994, as a
result of changes in the industry's and the Company's utilization of C.A.R.
reinsurance. Premiums ceded to reinsurers other than C.A.R. increased
$774,000, or 3.6% as compared to the same period in 1994.
Earned premiums increased $13,968,000, or 3.3% during the first nine months
of 1995 as compared to the same period of 1994. Earned premiums assumed
from C.A.R. increased $17,336,000, or 32.3% during the first nine months of
1995 compared to the same period in 1994. This was offset by a decrease of
$3,366,000 or 0.9% in earned premiums on all other business.
Net investment income increased $7,146,000, or 15.9%, compared to the first
nine months of 1994, principally as a result of an increase in average
invested assets (at cost) of 15.4% when compared to the nine months ended
September, 1994. Annualized net
investment income as a percentage of total average investments was 6.9%
during the nine months ended September, 1995 as compared to 7.0% during the
same period in 1994.
- - - 10 -
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees increased $311,000, or 2.2% during the first nine
months of 1995 as compared to the same period of 1994. The increase was
primarily attributable to the net effect of the increase in policies on
direct bill and changes in the direct bill payment program, offset by
decreases in direct premiums written and premium finance fees refunded due
to the personal automobile rate decrease.
Net realized investment gains totalled $456,000 during the first nine
months of 1995 as compared to net realized investment gains of $45,971,000
for the same period in 1994. The realized gains in the first nine months
of 1994 were primarily the result of sales of common stocks and tax-exempt
bonds. Net realized gains in 1994 on the sale of common stock amounted to
$36,789,000, while net realized gains on the sale of tax-exempt bonds
amounted to $9,449,000.
Losses and loss adjustment expenses incurred as a percentage of insurance
premiums earned ("loss ratio") decreased to 62.1% for the first nine months
of 1995 as compared to 68.0% for the same period in 1994. The ratio of net
incurred losses, excluding LAE, to premiums earned ("pure loss ratio") on
personal automobile increased to 57.7% compared to 56.0% in the first nine
months of 1994. This increase was primarily due to adverse loss experience
on personal automobile business assumed from C.A.R., offset by improved
loss experience in the liability component of the personal automobile book
of business. The commercial automobile pure loss ratio decreased to 53.0%
compared to 63.1% during the first nine months of 1994. This decrease was
primarily due to favorable loss experience in the liability component on
the retained commercial automobile business, as well as improved loss
experience on commercial automobile business assumed from C.A.R. For
homeowners, the pure loss ratio decreased to 45.4% compared to 104.4%
through the first nine months of 1994. This decrease is due primarily to
the mild weather during the first nine months of 1995, compared to the
adverse weather experienced during the first nine months of 1994.
Policy acquisition costs increased by 11.5% during the first nine months of
1995 compared to the same period in 1994. This increase is primarily due
to the increase in the accrual for agents profit sharing compensation as a
result of the impact of the continued mild weather on the Company's loss
ratio. Agent's profit sharing compensation is based in part on the
underwriting profits of agency business written by the Company. In
addition, the Commissioner approved an increase in the 1995 commission rate
for personal automobile to 15.3% compared to 13.5% in 1994.
While net earnings decreased $11,565,000 during the first nine months of
1995 as compared to the same period in 1994, net earnings exclusive of the
after tax impact of net realized investment gains increased
$18,020,000. These changes were the result of the factors mentioned above.
- - - 11 -
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 $102,546,000, or
24.8%, during the first nine months of 1995. This increase was the result
of net earnings of $80,405,000, the change in net unrealized gains/losses,
net of income tax benefits, on fixed maturities and equity securities of
$44,189,000, offset by dividends paid to stockholders of $6,410,000, and
treasury stock purchased of $15,638,000. Total assets at September 30,
1995 increased by $164,556,000, or 12.0%, to $1,541,936,000 as compared to
total assets of $1,377,380,000 at December 31, 1994. The majority of this
growth is reflected in the decrease in unrealized losses on fixed
maturities and equity securities of $67,984,000, increases of $5,851,000,
or 106.7% in cash and cash equivalents, $39,507,000, or 38.5% in premiums
receivable, $11,870,000, or 20.9% in deferred policy acquisition costs and
by increases in all other assets of $39,344,000.
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.
As of September 30, 1995, the book value of the Company's fixed maturity
portfolio exceeded its market value by $5,078,000 ($3,301,000 after taxes,
or $.09 per share), compared to $56,366,000 ($36,638,000 after taxes, or
$.96 per share) as of December 31, 1994.
Mortgage loans on real estate increased $11,622,000 or 20.4%, during the
first nine months of 1995 compared to a decrease of $4,259,000, or 6.9%
during the same period in 1994. In addition to loans added to the
portfolio, the Company still sells loans without recourse to secondary
market investors.
The Company's liabilities totalled $1,025,801,000 at September 30, 1995 as
compared to $963,791,000 at December 31, 1994. The $62,010,000, or 6.4%,
increase was comprised of a $22,033,000, or 3.7% increase in losses and
loss adjustment expenses, an increase of $42,082,000, or 13.4%, in unearned
premiums, offset by a $2,105,000, or 3.7% decrease in all other
liabilities.
12 -
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. During the third quarter, the Company received state
regulatory approval to eliminate interest based premium finance fees for
both new and
renewal personal automobile insurance policies with effective dates on or
after January 1, 1996. As a result, interest based premium finance fees
will be phased
out in 1996 and be replaced with a "late payment" fee based system. It is
estimated that
the overall impact will result in a 50% reduction in premium finance fee
income in 1996.
The Company's operating activities provided net cash of $97,811,000 in the
first nine months of 1995 as compared to $112,290,000 in 1994. These cash
flows were primarily impacted by the Company's decreased writings
attributable to the personal automobile premium rate decrease mentioned
previously.
The net cash flows used in investing activities were primarily the result
of purchases of fixed maturities, equity securities and mortgage loans,
offset by proceeds from the sale and maturity of fixed maturities.
Investing activities were funded by the cash provided by operating
activities during 1995 and 1994.
Cash flows used in financing activities totaled $22,048,000 during the
first nine months of 1995 compared to $3,800,000 during the same period in
1994. This is primarily due to the purchase of 854,133 shares of Treasury
Stock under the Company's stock buyback program approved by the Board of
Directors during the second quarter.
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 September 30, 1995, the Company held cash and cash
equivalents of approximately $11,336,000. 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.
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 1.45 to 1.00 and 1.86 to 1.00 for the twelve months
ended September 30, 1995 and 1994, respectively.
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The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Recent Significant Events
Most recently, the Company's primary property & casualty insurance
subsidiary The Commerce Insurance Company, signed group marketing
agreements with five AAA Automobile Clubs in Massachusetts to offer a 10%
discount on automobile insurance to the clubs' members. Membership in
these clubs is estimated to represent approximately one-third of the
Massachusetts motoring public, and the Company expects to significantly
increase its Massachusetts private passenger automobile insurance writings
as a result of this program.
The Company, which had announced the acquisition of Western Pioneer
Insurance Company located in Pleasanton, California during the second
quarter, completed the transaction on August 31, 1995. The Company's long
term growth strategy is to expand outside Massachusetts through
acquisitions of smaller automobile companies that are in need of capital,
have established management in place and present significant growth
opportunities in their market areas. In addition, the Company is pursuing
licenses in the states of New Hampshire, Rhode Island and Connecticut.
As of September 30, 1995, the Company purchased 854,133 shares of Treasury
Stock for $15,638,000 under the stock buyback program. The stock buyback
program, which had been approved by the Board of Directors during the
second quarter, authorizes the Company to purchase up to 3 million shares.
Additionally, the Company's Employee Stock Ownership Plan has purchased
more than 200,000 shares in open market transactions since the buyback
program was announced.
Also in the third quarter, the Company received state regulatory approval
regarding the elimination of 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 will be reduced in 1996. It is estimated
that the overall impact will result in a 50% reduction in premium finance
fee income in 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
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.
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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.
Although there are continued indications of recovery, the Company expects
that this economic recovery will be slow, especially in the Northeast
during 1995. Management is of the opinion, however, that this slow
recovery will not have a material effect on future operating results.
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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 third quarter of 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COMMERCE GROUP, INC.
RANDALL V. BECKER __
Randall V. Becker
Treasurer and Chief Accounting Officer
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