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, 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 November 1, 1996, the number of shares outstanding of the
registrant's common stock (excluding Treasury Shares) was
36,062,652.
Page 1 of 15
<page
The Commerce Group, Inc.
Table of Contents
Page No.
Part I - Financial Information
<TABLE>
<CAPTION>
<S>
<C>
Consolidated Balance Sheets at
September 30, 1996 (Unaudited) and December 31, 1995. 3
Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 1996 and
1995(Unaudited).......................................... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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........................................................ 15
Signature................................................ 15
</TABLE>
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<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
ASSETS
<S>
<C> <C>
Investments:
Fixed maturities, at market (cost: $837,438 in 1996
and $801,308 in 1995)....................... $ 836,723
$ 815,277
Equity securities, at market (cost: $200,373 in 1996
and $140,157 in 1995)...................... 213,641
151,579
Mortgage loans on real estate (less allowance for
possible loan losses of $2,429 in 1996 and
$2,660 in
1995)......................................................
.......................... 73,913 73,783
Collateral notes receivable (less allowance of $600
in 1996 and $513 in 1995).................... 1,498
1,826
Investments in real
estate.....................................................
.................. 46 348
Other
investments................................................
................................ 1,300 1,300
Total
investments................................................
............................ 1,127,121 1,044,113
Cash and cash
equivalents................................................
.......................... 7,444 52,718
Accrued investment
income.....................................................
..................... 14,430 14,633
Premiums receivable (less allowance for doubtful
receivables of $1,300 in 1996 and $1,103 in 1995).
187,707 127,243
Deferred policy acquisition
costs......................................................
............ 90,167 67,160
Property and equipment, net of accumulated
depreciation............................................
31,273 30,981
Residual market
receivable.................................................
........................ 193,420 200,124
Due from
reinsurers.................................................
............................... 19,377 21,897
Deferred income
taxes......................................................
........................ 5,572 1,415
Goodwill...................................................
........................................ 1,267
1,374
Other
assets.....................................................
.................................. 10,401
2,517
Total
assets.....................................................
............................ $1,688,179 $1,564,175
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Losses and loss adjustment
expenses...................................................
........... $ 657,890 $ 618,791
Unearned
premiums...................................................
............................. 407,902 330,454
Current income
taxes......................................................
....................... 1,627 1,180
Deferred
income.....................................................
............................. 8,845 8,954
Contingent commissions
accrued....................................................
............... 21,240 32,550
Payable to securities
broker.....................................................
................ 1,159 1,901
Other liabilities and accrued
expenses...................................................
........ 30,051 20,631
Total
liabilities................................................
............................ 1,128,714 1,014,461
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 $4,394 in 1996 and $8,887 in 1995.... 8,159
16,504
Retained
earnings...................................................
............................. 540,885 508,948
597,665 574,073
Treasury stock 1,937,348 shares in 1996 and
1,263,433 shares in 1995 ...........................
(38,200) (24,359)
Total stockholders'
equity.....................................................
.............. 559,465 549,714
Total liabilities and stockholders'
equity...................................................
$1,688,179 $1,564,175
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<page
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Nine Months Ended September 30, 1996 and 1995
(Thousands of Dollars Except Per Share Data)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
<CAPTION>
1996 1995 1996 1995
<S>
<C> <C> <C> <C>
Revenues
Earned premiums
................................................ $ 172,441
$ 149,716 $ 489,710 $ 437,835
Net investment
income........................................... 19,426
18,445 57,856 53,100
Premium finance
fees............................................ 1,717
4,869 8,001 14,704
Net realized investment gains
(losses).......................... (1,251) 1,229
(2,984) 456
Total
revenues......................................... 192,333
174,259 552,583 506,095
Expenses
Losses and loss adjustment
expenses............................. 116,492 91,534
362,016 271,934
Policy acquisition
costs........................................ 49,315
43,175 126,796 125,237
Total
expenses......................................... 165,807
134,709 488,812 397,171
Earnings before income
taxes........................... 26,526 39,550
63,771 108,924
Income
taxes......................................................
5,090 10,703 11,477 28,519
NET
EARNINGS........................................... $ 21,436
$ 28,847 $ 52,294 $ 80,405
NET EARNINGS PER COMMON
SHARE.......................... $ .59 $ .77
$ 1.44 $ 2.13
CASH DIVIDENDS PAID PER COMMON
SHARE................... $ .25 $ .06 $
.56 $ .17
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING... 36,284,475 37,478,513 36,395,571
37,824,261
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
THE COMMERCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
(Thousands of Dollars)
(Unaudited)
<TABLE>
1996 1995
<CAPTION>
<S>
<C> <C>
Cash flows from operating activities:
Net
earnings.......................................................
............... $ 52,294 $ 80,405
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Premiums
receivable.....................................................
........ (60,464) (39,507)
Deferred policy acquisition
costs...............................................
(23,007) (12,124)
Residual market
receivable.....................................................
. 6,704 6,151
Due to/from
reinsurers.....................................................
..... 2,520 (411)
Losses and loss adjustment
expenses.............................................
39,099 22,033
Unearned
premiums.......................................................
........ 77,448 42,082
Current income
taxes..........................................................
.. 447 (10,980)
Deferred income
taxes..........................................................
. 336 5,751
Deferred
income.........................................................
........ (109) (595)
Contingent
commissions....................................................
...... (11,310) 2,231
Other assets, liabilities and accrued
expenses.................................. 901
4,921
Net realized investment (gains)
losses..........................................
2,984 (456)
Other -
net............................................................
......... 3,256 (1,690)
Net cash provided by operating
activities................................ 91,099
97,811
Cash flows from investing activities:
Proceeds from maturity of fixed
maturities......................................
85,133 19,155
Proceeds from sale of fixed
maturities...........................................
55,938 45,926
Purchase of fixed
maturities.....................................................
(180,151) (93,927)
Purchase of equity
securities.....................................................
(67,404) (32,211)
Proceeds from sale of equity
securities...........................................
7,023 5,091
Payments received on mortgage loans on real
estate............................... 5,982
6,886
Mortgage loans on real estate
originated..........................................
(6,363) (20,127)
Mortgages sold to investors on the secondary
market............................... -
2,361
Payments received on collateral notes
receivable..................................
210 315
Collateral notes receivable
originated............................................
- - (740)
Proceeds from sale of real estate acquired by
foreclosures........................ 92
275
Purchase of property and equipment
...............................................
(2,756) (3,030)
Proceeds from sale of property and
equipment......................................
121 114
Net cash used in investing
activities....................................
(102,175) (69,912)
Cash flows from financing activities:
Dividends paid to
stockholders...................................................
. (20,357) (6,410)
Purchase of treasury
stock........................................................
(13,841) (15,638)
Net cash used in financing
activities....................................
(34,198) (22,048)
(Decrease) increase in cash and cash
equivalents....................................
(45,274) 5,851
Cash and cash equivalents at beginning of
period.................................... 52,718
5,485
Cash and cash equivalents at end of
period.......................................... $
7,444 $ 11,366
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- - 5 -
<page
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 nine months ended September 30,
1996 nor comparison with the corresponding nine months
ended September 30, 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 September 30, 1996, 1,937,348 shares of Treasury Stock
were purchased under the program, of which 673,915 shares
were purchased in 1996.
6. In May 1996, the Board of Directors of the Company voted to
increase its quarterly stockholder dividend from $0.06 per
share to $0.25 per share.
7. Disclosure of supplemental cash flow information:
<TABLE>
Nine Months Ended
September 30,
<CAPTION>
1996 1995
<S>
<C> <C>
Cash paid during the period for:
Federal and state income taxes
$10,742 $35,814
State premium and related taxes
of insurance subsidiaries
15,999 13,397
Non-cash investing and financing activities:
Real estate acquired by foreclosure
74 534
</TABLE>
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<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended September 30, 1996 compared to
three months ended September 30, 1995
Direct premiums written during the third quarter of 1996,
increased $33,507,000 or 24.4% to $171,104,000 , as compared to
the same period in 1995. The increase was primarily attributable
to a $28,062,000 increase in direct premiums written for
Massachusetts personal automobile insurance and an increase of
$5,540,000 which was derived from the Company's California
subsidiary, Western Pioneer Insurance Company ("Western Pioneer").
The increase in Massachusetts personal automobile direct premiums
written resulted primarily from an increase of 38.5% in the number
of personal automobile exposures written, offset by a 9.1%
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 1996 state mandated average 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 $861,000 or 9.9%, due to a decrease of
approximately 3.6% in the number of policies written, with the
remainder due to a decrease in the average commercial automobile
premium per policy. Direct premiums written for homeowners
insurance (excluding Massachusetts Fair Plan) increased by
$613,000, or 4.4% due primarily to a 3.4% increase in the number
of policies written.
Net premiums written during the third quarter of 1996 increased
$34,340,000 or 25.7% 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.") increased $1,089,000 or 4.9% and
written premiums ceded to C.A.R. decreased $688,000 or 3.7% as
compared to the third 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 $22,725,000 or 15.2% during the third
quarter of 1996 as compared to the same period in 1995. The
increase in earned premiums was primarily due to changes in direct
premiums written and net premiums written as described above.
Earned premiums assumed from C.A.R. decreased $520,000, or 2.2%
during the third quarter of 1996 compared to the same period in
1995. Earned premiums attributable to Western Pioneer increased
$4,680,000 to $6,906,000 for the three months ended September 30,
1996, compared to $2,226,000 for the one month ended September 30,
1995. The Company acquired Western Pioneer on August 31, 1995.
Net investment income increased $981,000, or 5.3%, compared to the
third quarter of 1995, principally as a result of an increase in
average invested assets (at cost) of 8.2% as compared to the third
quarter of 1995. Annualized net investment income as a percentage
of total average investments was 7.1% for the three months ended
September 30, 1996 as compared to 7.3% for the same period in
1995.
- - 7 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees decreased $3,152,000, or 64.7% during the
third 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 $1,251,000 during the third
quarter of 1996 as compared to net realized investment gains of
$1,229,000 for the same period in 1995. The realized losses in
the third quarter of 1996 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 incurred as a percentage of
insurance premiums earned ("loss ratio") increased to 67.6% for
the third quarter of 1996 as compared to 61.3% 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 63.1% compared to 57.6% in the third quarter of 1995.
This increase was primarily due to a decrease in the personal
automobile average earned premium rate of approximately 9.5%. The
average rate decrease was due to the effects of affinity group
marketing programs, safe driver rate deviations and the 1996 state
mandated average rate decrease of 4.5%. The commercial automobile
pure loss ratio decreased to 30.4% compared to 46.1% during the
third quarter of 1995. This decrease was primarily due to better
loss experience on business assumed from C.A.R. For homeowners,
the pure loss ratio increased to 44.1% compared to 32.8% during
the third quarter of 1995. This increase was due to more normal
weather conditions during the third quarter of 1996 as compared to
exceptionally mild weather during the same period in 1995.
Policy acquisition costs increased by 14.2% during the third
quarter of 1996 compared to the same period in 1995. The increase
in policy acquisition costs was primarily due to the impact of the
increase in premium volume brought about by the Company's affinity
group marketing programs and safe driver rate deviations.
However, as a percentage of net premiums written, underwriting
expenses (on a statutory basis) were 27.9% during the third
quarter of 1996 as compared to 30.7% for the same period in 1995.
The primary reasons for this decrease are the combination of a
decrease in agents profit sharing compensation resulting from the
impact of higher loss ratios, 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 each agency's business written with the Company.
Net earnings decreased $7,411,000 during the third quarter of 1996
as compared to the same period in 1995, as a result of the factors
discussed above.
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<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Nine months ended September 30, 1996 compared to
Nine months ended September 30, 1995
Direct premiums written during the first nine months of 1996,
increased $96,368,000 or 19.8% to $583,381,000, as compared to the
same period in 1995. The increase was primarily attributable to
an $80,691,000 increase in direct premiums written for
Massachusetts personal automobile insurance and an increase of
$19,598,000 which was derived from the Company's California
subsidiary, Western Pioneer. The increase in Massachusetts
personal automobile direct premiums written resulted primarily
from an increase of 33.5% in the number of personal automobile
exposures written, offset by a 9.8% 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 1996 state mandated average 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
$4,139,000, or 11.6%, due primarily to a decrease of approximately
6.4% in the number of policies written, with the remainder due to
a decrease in the average commercial automobile premium per
policy. Direct premiums written for homeowners insurance
(excluding Massachusetts Fair Plan) increased by $698,000, or 1.9%
due primarily to an increase in the number of policies written.
Net premiums written during the first nine months of 1996
increased $92,438,000 or 19.4% 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 C.A.R.
decreased $2,175,000 or 2.9% and written premiums ceded to C.A.R.
increased $592,000 or 0.9% as compared to the first nine months of
1995, as a result of changes in the industry's and the Company's
utilization of C.A.R. reinsurance.
Earned premiums increased $51,875,000 or 11.8% during the first
nine months of 1996 as compared to the same period in 1995. The
increase in earned premiums was primarily due to changes in direct
premiums written and net premiums written as described above.
Earned premiums assumed from C.A.R. decreased $2,642,000 or 3.7%
during the first nine months of 1996 compared to the same period
in 1995. Earned premiums attributable to Western Pioneer
increased $18,599,000 to $20,825,000 for the nine months ended
September 30, 1996, compared to $2,226,000, for the one month
ended September 30, 1995. The Company acquired Western Pioneer on
August 31, 1995.
Net investment income increased $4,756,000 or 9.0%, compared to
the first nine months of 1995, principally as a result of an
increase in average invested assets (at cost) of 8.8% as compared
to the first nine months of 1995. Annualized net investment
income as a percentage of total average investments was 7.2% for
both the nine months ended September, 1996 and 1995.
- - 9 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Premium finance fees decreased $6,703,000 or 45.6% during the
first nine months 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 $2,984,000 during the first
nine months of 1996 as compared to net realized investment gains
of $456,000 for the same period in 1995. The realized losses in
1996 were primarily the result of sales of GNMA's and preferred
and common stocks during the first nine months of 1996 and the
sales of tax-exempt bonds during the first six months of 1996.
Losses and loss adjustment expenses incurred as a percentage of
insurance premiums earned ("loss ratio") increased to 74.0% for
the first nine months of 1996 as compared to 62.1% 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 65.3% compared to 57.6% in 1995. This increase was
primarily due to the adverse impact of the severe weather
conditions experienced in the northeast, diminished loss reserve
redundancies in the automobile bodily injury area as compared to
previous years, and a decrease in the personal automobile average
earned premium rate of approximately 8%. The average rate
decrease is due to the effects of affinity group marketing
programs, safe driver rate deviations and the 1996 state mandated
average rate decrease of 4.5%. The commercial automobile pure
loss ratio decreased to 49.4% compared to 53.0% during the first
nine months of 1995. For homeowners, the pure loss ratio
increased to 102.2% compared to 45.4% during the first nine months
of 1995. This increase was primarily due to severe weather during
the first half of 1996 as compared to mild weather during the same
period in 1995.
Policy acquisition costs increased by 1.2% during the first nine
months of 1996 compared to the same period in 1995. The increase
in policy acquisition costs was primarily due to the increase in
net premiums written as described previously, offset by 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 25.6% during the first nine
months of 1996 as compared to 28.5% for the same period in 1995.
This decrease was primarily attributable to the reasons as
mentioned above.
- - 10 -
<PAGE>
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The Company's effective tax rate was 18.0% for the first nine
months of 1996 as compared to 26.2% for the same period in 1995.
In both years the effective tax rate was lower than the statutory
rate of 35.0% primarily due to tax-exempt interest income. The
1996 rate was further reduced by the effect of equivalent tax-
exempt interest coupled with reduced underwriting income and
premium finance fees (both taxed at 35%) in the first nine months
of 1996 as compared to the same period in 1995.
Net earnings decreased $28,111,000 during the first nine months 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
increased by $9,751,000 or 1.8%, during the first nine months of
1996. This increase was the result of net earnings of $52,294,000
offset by the decrease in net unrealized gains, net of income
taxes, on fixed maturities and equity securities of $8,345,000,
dividends paid to stockholders of $20,357,000, and treasury stock
purchased of $13,841,000. Total assets at September 30, 1996
increased by $124,004,000, or 7.9%, to $1,688,179,000 as compared
to total assets of $1,564,175,000 at December 31, 1995. The
majority of this growth was reflected in an increase in invested
assets of $83,008,000 or 8.0%, $60,464,000, or 47.5% in premiums
receivable, $23,007,000, or 34.3% in deferred policy acquisition
costs, offset by a decrease in all other assets of $42,475,000.
The increase in premiums receivable was attributable to the
increase in personal automobile business as well as the
elimination of premium finance fees. The increase in deferred
acquisition costs was attributable to the increase in personal
automobile business.
As of September 30, 1996, the book value of the Company's fixed
maturity portfolio exceeded its market value by $715,000 ($465,000
after taxes, or $.01 per share) due to prevailing conditions in
the bond market. 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 $.25 per share).
The Company's liabilities totalled $1,128,714,000, at September
30, 1996 as compared to $1,014,461,000 at December 31, 1995. The
$114,253,000 or 11.3% increase was comprised of a $39,099,000 or
6.3% increase in losses and loss adjustment expenses, an increase
of $77,448,000 or 23.4% in unearned premiums, offset by a
$2,294,000 or 3.5% decrease 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 weather in the northeast
experienced during the first half of 1996.
- - 11 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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 third quarter of 1996 has
resulted in a 45.6% decrease in combined premium finance fees and
late payment fees as compared to the same period in 1995.
The Company's operating activities provided net cash of
$91,099,000 in the first nine months of 1996 as compared to
$97,811,000 in 1995. These cash flows were primarily impacted by
the Company's premium writings attributable to the affinity group
marketing programs mentioned previously, offset by higher loss
payments due to adverse weather conditions.
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 $34,198,000 during
the first nine months of 1996 compared to $22,048,000 during the
same period in 1995. This is due to dividends paid to
stockholders of $.56 per share in 1996 ($.17 per share in 1995)
and the purchase of Treasury Stock under the Company's stock
buyback program of 673,915 shares for $13,842,000 during the first
nine months of 1996 compared to 854,133 shares for $15,638,000
during the same period in 1995.
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, 1996,
the Company held cash and cash equivalents of approximately
$7,444,000. 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 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. The Company did not pay any extraordinary
dividends in 1996.
- - 12 -
<PAGE>
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 1.61 to 1.00
and 1.45 to 1.00 for the twelve months ended September 30, 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.
In August 1996, the Company was notified that its application for
a license in the state of Rhode Island was approved. Also, in
March 1996, the state of Connecticut approved the Company's
license application. 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 third quarter of 1997. Therefore, the Company does not
expect to write insurance in those states until that time.
Additionally, during the third quarter, applications were filed
and are pending in the states of New Hampshire and Maine. In
October 1996, the Company applied for a license in the state of
Vermont, thus completing applications for the five additional New
England states in which it currently does not write business.
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 September 30, 1996, the Company has purchased
1,937,348 shares of Treasury Stock, of which 673,915 shares were
purchased during the first nine months of 1996. Additionally, the
Company's Employee Stock Ownership Plan has purchased more than
263,000 shares in open market transactions since the buyback
program was announced, of which 185,900 shares were purchased
during the first nine months of 1996 for $3,810,000.
On September 19, 1996, the Company paid a quarterly dividend of
$0.25 to stockholders of record as of September 4, 1996. The
Company had previously increased its quarterly dividend to
stockholders from $0.06 to $0.25 during the second quarter of
1996.
- - 13 -
<page
The Commerce Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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.
- - 14 -
<page
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 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
- - 15 -
<page
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 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
- - 15 -
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