COMMERCE GROUP INC /MA, ARS, 1996-04-15

COMMERCE GROUP INC /MA
ARS, 1996-04-15
FIRE, MARINE & CASUALTY INSURANCE

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1995
annual
report

The
CGI

The Commerce Group, Inc.
211 Main Street, Webster, Massachusetts 01570
<PAGE>

<TABLE>
<CAPTION>
INDEX TO 1995 ANNUAL REPORT

Page
<S> <C>
Financial Highlights............................................ AR-1
Letter to Stockholders.......................................... AR-2

Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... AR-4

Common Stock Price and Dividend Information..................... AR-13

Report of Management............................................ AR-14

Report of Independent Accountants............................... AR-15

Consolidated Balance Sheets at December 31, 1995 and 1994....... AR-16

Consolidated Statements of Earnings for the Years Ended
December 31, 1995, 1994 and 1993............................... AR-17

Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993......................... AR-18

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993............................... AR-19

Notes to Consolidated Financial Statements...................... AR-20

Selected Consolidated Financial Data............................ AR-37

Management's Discussion of Supplemental Information on
Insurance Operations........................................... AR-38

Directors....................................................... AR-43

Officers........................................................ AR-45

Stockholder Information......................................... AR-46

</TABLE>

<PAGE>

FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Amounts)

1995 1994 1993

<S> <C> <C> <C>
Net premiums written........................... $ 603,421 $ 589,197 $ 563,416

Earned premiums................................ $ 592,590 $ 572,053 $ 548,560
Net investment income.......................... 71,313 62,901 53,068
Premium finance fees........................... 19,420 18,497 16,666
Net realized investment gains.................. 712 45,612 7,506
Total revenues........................... $ 684,035 $ 699,063 $ 625,800

Earnings before income taxes................... $ 149,742 $ 171,988 $ 101,646
Income taxes................................... 39,541 49,405 26,330
Net earnings............................. $ 110,201 $ 122,583 $ 75,316

Net earnings per common share.................. $ 2.93 $ 3.23 $ 1.98
Weighted average number of common shares
outstanding.................................. 37,632,236 38,000,000 38,000,000

Total investments.............................. $1,042,813 $ 899,046 $ 859,717
Total assets................................... 1,554,744 1,377,380 1,290,013
Total liabilities.............................. 1,005,030 963,791 906,665
Total stockholders' equity..................... 549,714 413,589 383,348
Total stockholders' equity per share........... 14.96 10.88 10.09

Certain Statutory Financial Ratios (Unaudited):
Loss ratio................................... 62.0% 64.6% 68.0%
Underwriting expense ratio................... 29.0 27.1 25.7
Combined ratio........................... 91.0% 91.7% 93.7%

Net premiums written to policyholders'
surplus.................................... 137.1% 168.5% 197.9%
</TABLE>

AR-1
<PAGE>

THE COMMERCE GROUP, INC.

March 25, 1996

To Our Stockholders:

In 1995, your Company experienced satisfactory financial results for the
20th consecutive year. From the very first day the funding of The Commerce
Insurance Company was accomplished (April 3, 1972), through December 31, 1995,
we have achieved underwriting profit of $187.12 million on total written
premium of $4.52 billion. This underwriting profit represents 4.1% of total
written premium.

Your Company's common stock became listed on the New York Stock Exchange
("NYSE") on March 31, 1995 under the symbol "CGI". The Company expects that
listing on the NYSE will provide broader exposure and visibility in the
financial community as it pursues business expansion opportunities beyond
Massachusetts. In its continuing effort to pursue these opportunities, your
company completed the acquisition of Western Pioneer Insurance Company,
located in Pleasanton, California, on August 31, 1995. You'll be interested
to know that Western Pioneer is licensed in California and primarily writes
personal automobile insurance.

Your Company has continued to grow and prosper. The Commerce Insurance
Company is the largest writer of Massachusetts private passenger automobile
insurance, as well as the second largest writer of Massachusetts homeowners
insurance. Written premium, earned premium, investment income, total assets,
total liabilities, as well as stockholders' equity, are all at new highs. For
those of you who are interested in the details, I draw your attention to the
pages in this report labeled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Behind these numbers is an
extremely dedicated group of people, including those of Western Pioneer: our
Policyholders (represented by over 605,000 policies in force); Agents (720);
Employees (1,202); Officers (33); Directors (19); and of course, our
Stockholders (over 3,500, not including our Employee Stock Ownership Plan
participants who now number 1,406).

Property-liability insurance remains a good business to be in--and The
Commerce Group, Inc. will continue its efforts to be one of the most
profitable long-term players. Your Company's management continues to believe
that owners' interests are its primary constituency.

Our sincere thanks to those who have helped in this building process--
especially our Agents, Employees, Officers and Board of Directors.

Your comments or questions regarding this report, or The Commerce Group,
Inc. affairs in general, are solicited as always, at any time.

Arthur J. Remillard, Jr.
President

Caring in everything we do.

AR-2
<PAGE>

The bar graph on page AR-3 illustrates the Company's annual equity per share
value on December 31, over the most recent fifteen year period. The X axis
lists the years beginning with 1981 through 1995. The Y axis lists the dollar
values starting at $0.00 and increasing in one dollar increments to $16.00.
The graph begins with an equity per share value in 1981 of $0.31; it continues
with an equity per share value in 1982 of $0.38, 1983 of $0.50, 1984 of $0.67,
1985 of $0.81, 1986 of $0.95, 1987 of $1.40, 1988 of $1.95, 1989 of $2.53,
1990 of $3.36, 1991 of $4.80, 1992 of $7.42, 1993 of $10.09, 1994 of $10.88,
and concluding with an equity per share value in 1995 of $14.96.

AR-3
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Thousands of Dollars Except Per Share Data)

General

The Company, through The Commerce Insurance Company ("Commerce") and
Citation Insurance Company ("Citation"), wholly-owned subsidiaries of Commerce
Holdings, Inc. ("CHI") which is a wholly-owned subsidiary of the Company, has
been the largest writer of personal property and casualty insurance in
Massachusetts in terms of market share of direct premiums written since 1990.
In addition, for the first time in its history, the Company wrote insurance
outside the State of Massachusetts as the Company completed the acquisition of
Western Pioneer Insurance Company ("Western Pioneer"), a personal automobile
insurer located in Pleasanton, California, on August 31, 1995. Western
Pioneer's results, for the four months ended December 31, 1995, are reflected
in this Annual Report.

During 1995, direct written premiums totalled $626,666, a 0.3% increase
over 1994. Direct written premiums in Massachusetts amounted to $619,039 in
1995 while California direct written premiums amounted to $7,627. Of the
total direct written premiums, direct personal automobile premiums written
during 1995 totalled $514,637, or an increase of 0.5% over 1994, and direct
homeowners insurance premiums written totalled $50,256, or an increase of 2.5%
over 1994. The Company is also the fourth largest writer of commercial
automobile insurance in Massachusetts based on direct premiums written.
During 1995, direct commercial automobile premiums written totalled $45,184, a
2.7% decrease compared to 1994.

Personal automobile insurance is subject to extensive regulation in
Massachusetts. Massachusetts requires that every owner of a registered
automobile maintain certain minimum automobile insurance coverages and, with
very limited exceptions, automobile insurers operating within the state are
required by law to issue a policy to any applicant seeking to obtain such
coverages. Marketing and underwriting strategies for companies operating in
the state are limited by maximum automobile premium rates and minimum agency
commission levels for personal automobile insurance which are mandated by the
Massachusetts Commissioner of Insurance ("Commissioner"). In Massachusetts,
accident rates, bodily injury claims, and medical care costs are among the
highest in the nation. Additionally, traffic density, as defined by vehicle
miles divided by highway miles, is among the highest in the nation. As a
result, automobile premium rates in Massachusetts are also among the highest
in the nation.

During the three-year period from 1993 to 1995, Massachusetts personal
automobile insurance premium rates decreased an average of 1.1% per year. The
Commissioner approved an average 4.5% decrease in personal automobile
premiums for 1996, the second decrease in two years, as 1995 average rates
were cut by 6.1%. According to the Commissioner's office, the current rate
decrease was the result of a continuing effort to reduce drunken driving;
hospital cost increases having been brought under control by "managed care";
and a reduction in automobile insurance fraud through the industry-funded
Insurance Fraud Bureau.

The Company's performance in its personal and commercial automobile
insurance lines is integrally tied to its participation in the Commonwealth
Automobile Reinsurers ("C.A.R."). All companies writing automobile insurance
in Massachusetts share in the underwriting results of C.A.R. business for
their respective product line or lines. Since its inception, C.A.R. has
annually generated multi-million dollar underwriting losses in both its
personal and commercial automobile pools. A company's proportionate share of
the C.A.R. personal or commercial deficit (its participation ratio) is based
upon its market share of the automobile risks for the particular pool,
adjusted by a utilization formula such that, in general, its participation
ratio is disproportionately and adversely affected if its relative use of
C.A.R. exceeds that of the industry, and favorably affected if its relative
use of C.A.R. is less than that of the industry. Automobile insurers attempt
to develop and implement underwriting strategies that will minimize their
relative share of the C.A.R. deficit while maintaining acceptable loss ratios
on risks not insured through C.A.R.

AR-4
<PAGE>

Significant changes in the utilization of the C.A.R. private passenger
pooling mechanism are not expected for 1996, as the various C.A.R.
participation formula changes have been fully implemented since 1993, and the
marketplace is expected to make minor yearly adjustments to find the optimum
balance between voluntary and ceded writings.

Starting in 1991, and concluding in 1995, reforms were implemented into
the C.A.R. commercial automobile pooling mechanism. The primary change was
the gradual phase-in of a C.A.R. commercial utilization-based participation
formula, so as to reduce the percentage of commercial business being ceded to
C.A.R. The percentage of commercial premiums ceded to C.A.R. by the industry
has decreased (from 56% in 1990 to approximately 37% in 1995, as estimated by
the Company). This also resulted in significant decreases in the percentage
of commercial automobile business ceded to C.A.R. by the Company, from 68% in
1990 to approximately 35% in 1995. Continued industry-wide gradual decreases
in the percentage of ceded commercial premiums are expected for 1996, as
companies look to increase their voluntary retention levels.

Another of the recent changes implemented by C.A.R. impacted the
definition of commercial business, and the size of the commercial market. In
1994, C.A.R. recategorized private passenger motorcycles and miscellaneous
class vehicles as personal automobile business. They had previously been
classified as commercial automobile business. This transfer affected
approximately $30 million of business industry-wide, resulting in a decrease
in the commercial writings of all companies and an offsetting increase in the
personal writings of all companies. The impact on the Company in 1994 was to
shift approximately $5.6 million from commercial automobile to personal
automobile. The Company intends to continue to respond to the incentives and
disincentives provided by C.A.R. rules, by further adjusting the percentage of
personal and commercial business ceded to C.A.R. in 1996.

The Company introduced a commercial automobile program through Citation
in 1993, to provide a separate rating tier for preferred commercial automobile
business. Approximately 17% of the commercial automobile premium produced by
its voluntary agents in 1995 was written by Citation. The Company expects
that this secondary rating tier will continue to assist the Company in
retaining its better commercial automobile accounts, while also further
increasing the percentage of commercial automobile business that can be
retained voluntarily by the Company in 1996 and beyond.

During 1995, the Company continued to actively pursue Group Marketing
programs. The primary purpose of group marketing programs is to provide
participating groups with a convenient means of purchasing automobile
insurance through associations and employee groups. Billing is through either
payroll deduction or direct billing. Emphasis is placed on writing larger
groups, although accounts with as few as 25 participants are considered.
Groups of 100 or more participants could be eligible for a rate deviation. In
general, the Company looks for groups with mature/stable membership, favorable
driving records, and below average turnover ratios. The sponsoring entities
must be in sound financial condition and have stable employment or membership.
Participants who leave the sponsoring group during the term of the policy are
allowed to maintain the policy until expiration. At expiration, a regular
Commerce policy may be issued at the insured's option.

During the latter part of 1995, Commerce, the Company's primary property
and casualty insurance subsidiary, signed group marketing agreements with the
five American Automobile Association Clubs of Massachusetts ("AAA Clubs")
offering 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 in
1996 as a result of this program.

AR-5
<PAGE>

Underwriting profit margins are reflected by the extent to which the
combined ratio is less than 100%. This ratio is considered the best simple
index of current underwriting performance of an insurer. During the five year
period ended December 31, 1995 (1995 Industry Data is estimated by A.M. Best),
the property and casualty industry's combined ratio (as reported by A.M.
Best), after payment of dividends to policyholders, has ranged from a low of
106.9% in 1993 to a high of 115.8% in 1992 (including the impact of Hurricane
Andrew) on a statutory accounting principles basis. During this same period
of time, the Company's combined ratio has consistently remained below the
industry average, ranging from as low as 91.0% in 1995 to a high of 94.3% in
1992. On an average basis, the Company's combined ratio was 92.5% for the
five year period ended December 31, 1995 compared to an industry average of
109.4%. Data for the property and casualty insurance industry generally may
not be directly comparable to Company data. This is due to the fact that the
Company conducts its business primarily in Massachusetts and may not write all
the same lines or concentrations of business as the property and casualty
industry as a whole.

The Company's total revenues were supplemented in fiscal 1995, 1994 and
1993 by net investment income of $71,313, $62,901 and $53,068, respectively.
Additionally, the Company had realized investment gains in 1995, 1994 and 1993
of $712, $45,612 and $7,506, respectively.

Regulatory Matters

Automobile insurance reform continues to be debated in the Massachusetts
Legislature. New regulations and legislation are often proposed with the goal
of reducing the need for premium increases. It is not possible to predict the
outcome of any such legislative activity or the potential effects thereof on
the Company.

According to the Commissioner, a significant factor in reducing the 1996
personal automobile insurance premium rate by an average of 4.5% was a result
of insurers paying out less claims due to fewer traffic accidents. This
reduction can be attributed to the cooperative effort between insurers, agents
and Massachusetts drivers in communicating the importance of observing traffic
laws, adhering to the state mandated seat belt law and detecting fraud.

In 1995, the Company received approval to offer 10 percent group
discounts to members of the AAA Clubs as previously described. 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 in
1996 as a result of this program.

Also in 1995, the Company received state regulatory approval to
eliminate 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 revenues
will be reduced in 1996.

In January, 1996, the Company was granted approval to offer their
customers safe driver deviations of 10 percent to drivers with Safe Driver
Insurance Plan ("SDIP") classifications of either Step 9 or 10. These are the
two best driver SDIP classifications in Massachusetts, representing drivers
with no accidents and not more than one minor violation in the last six years.
For drivers that qualify, both group automobile discounts and SDIP deviations
can be combined for up to a 19% reduction from the state mandated rates.

AR-6
<PAGE>

Although the U.S. federal government does not directly regulate the
insurance industry, federal initiatives often have an impact on the business.
Congress and certain federal agencies are investigating the current condition
of the insurance industry (encompassing both life and health and property and
casualty insurance) in the United States in order to decide whether some form
of federal role in the regulation of insurance companies would be appropriate.
Congress is continuing to conduct a variety of hearings relating, in general,
to the solvency of insurers and federal legislation has been proposed from
time to time on this and other subjects. The Company is unable to predict
whether or in what form initiatives will be implemented and what the possible
effects on the Company would be.

Congressional initiatives directed at repeal of the McCarran-Ferguson
Act (which exempts the "business of insurance" from certain federal laws,
including antitrust laws, to the extent it is subject to state regulation) and
judicial decisions narrowing the definition of "business of insurance" for
McCarran-Ferguson Act purposes may limit the ability of insurance and
reinsurance companies in general to share information with respect to rate-
setting, underwriting and claims management practices. It is not possible to
predict the outcome of any such congressional activity or the potential
effects thereof on the Company.

Beginning in 1994 and continuing through 1995, there was increased
debate in the U.S. Congress regarding reforms to the Superfund law, the
federal mechanism designed to clean-up toxic waste sites, as well as the
nation's environmental and pollution policy in general. Management believes
the outcome of the Superfund debate will not significantly affect the Company.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Direct premiums written during 1995 increased $1,643, or 0.3% to
$626,666 as compared to 1994. The increase was primarily attributable to a
$2,612, or 0.5% increase in direct premiums written for personal automobile
insurance to $514,637. This increase resulted from direct premiums written of
$7,592, for the four months ended December 31, 1995 from Western Pioneer,
offset by a decrease in personal automobile direct written premiums by
Commerce of $4,980, or 1.0%, compared to 1994. This decrease resulted
primarily from a 3.6% decrease in the average personal automobile premium per
exposure (each vehicle insured). This was a direct result of the impact on
Commerce's business of the 6.1% overall average rate decrease in the
Massachusetts insurance industry's 1995 personal automobile premiums approved
by the Commissioner. This was partially offset by a 2.6% increase in the
number of personal automobile exposures written. Direct premiums written for
commercial automobile insurance decreased by $1,251, or 2.7% due primarily to
a 4.9% decrease in the number of policies written, partially offset by a 2.2%
increase in the average commercial automobile premium per policy. Direct
premiums written for homeowners insurance [excluding Massachusetts Property
Insurance Underwriting Association ("Massachusetts Fair Plan")] increased by
$1,021, or 2.2% due primarily to a 4.6% increase in the average premium per
homeowners policy, partially offset by a 2.4% decrease in the number of
policies written.

Net premiums written during 1995 increased $14,224, or 2.4% as compared
to 1994. The increase in net premiums written was due to the growth in direct
premiums written as described above, as well as to the effects of reinsurance.
Written premiums assumed from C.A.R. decreased $1,536, or 1.6% and written
premiums ceded to C.A.R. decreased $17,769, or 17.7% as compared to 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 $3,652,
or 12.6% as compared to 1994.

Earned premiums increased $20,537, or 3.6% during 1995 as compared to
1994. Motor vehicle premiums earned increased $17,959, or 3.4% compared to
1994 including earned premiums assumed from C.A.R. which increased $12,777, or
16.4%. Earned premiums also increased $2,578, or 6.3% on all other business.

AR-7
<PAGE>

Net investment income increased $8,412, or 13.4%, compared to 1994,
principally as a result of an increase in average invested assets (at cost) of
12.0% when compared to the year ended 1994. Net investment income as a
percentage of total average investments was 7.2% in 1995 compared to 7.0% in
1994.

Premium finance fees increased $923, or 5.0%, to $19,420 in 1995
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, offset by decreases in direct premiums
written and premium finance fees refunded due to the personal automobile rate
decrease.

Gross realized gains and losses on fixed maturity investments amounted
to $2,389 and $1,912, respectively, for the year ended December 31, 1995
compared to gross realized gains and losses on fixed maturity investments of
$9,696 and $2,310, respectively, for the year ended December 31, 1994. Gross
realized gains and losses on equity security investments amounted to $984 and
$579, respectively, for the year ended December 31, 1995 compared to gross
realized gains and losses on equity security investments of $36,845 and $73,
respectively, for the year ended December 31, 1994. Net realized investment
gains totalled $712 during 1995 as compared to $45,612 for the same period in
1994. The realized gains in 1995 were primarily the result of sales of
municipal bonds and preferred stocks, offset by realized losses on sales of
GNMA's and common stocks. Included in the net realized gains for 1994 was
$34,287 realized on the sale of common stock in three New England area bank
holding companies. These bank holding companies were acquired by other banks
in 1994. Also included were realized losses on mortgage activity of $215 in
1995 compared to $1,203 in 1994.

Gross unrealized gains and losses on fixed maturity investments totalled
$18,626 and $4,657, respectively, at December 31, 1995 compared to gross
unrealized gains and losses on fixed maturity investments of $1,233 and
$57,599, respectively, at December 31, 1994. The unrealized gain on fixed
maturities was the result of a decline in interest rates during 1995 favorably
impacting market values. Gross unrealized gains and losses on equity security
investments totaled $13,430 and $2,008, respectively, at December 31, 1995
compared to gross unrealized gains and losses on equity investments of $2,287
and $11,174, respectively, at December 31, 1994. The increase in unrealized
gain on equity investments was primarily due to the performance of the stock
market coupled with declining interest rates during 1995 favorably impacting
the market values of common stocks.

Losses and loss adjustment expenses ("LAE") incurred as a percentage of
insurance premiums earned ("loss ratio") was 62.0% in 1995 compared to 64.6%
in 1994. The ratio of net incurred losses, excluding LAE, to premiums earned
("pure loss ratio") on personal automobile increased to 56.6% compared to
54.3% in 1994. This increase was primarily due to adverse loss experience on
personal automobile business assumed from C.A.R., partially offset by improved
loss experience in the liability component of the personal automobile book of
business. The commercial automobile pure loss ratio decreased to 57.4%
compared to 58.4% in 1994. This decrease was primarily due to improved loss
experience on commercial automobile business assumed from C.A.R. For
homeowners, the pure loss ratio decreased to 49.6% compared to 91.8% in 1994.
This decrease was due primarily to the relatively mild weather during 1995,
compared to the adverse weather experienced during 1994, especially during the
first quarter of 1994.

Policy acquisition costs increased by 5.9% in 1995, compared to 1994.
This increase was due to an increase in the accrual for agents profit sharing
compensation as a result of the impact of the mild weather during 1995 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, which also had the
effect of increasing policy acquisition costs.

AR-8
<PAGE>

The Company's effective tax rate was 26.4% and 28.7% for the years ended
December 31, 1995 and 1994, respectively. In both years the effective rate
was lower than the statutory rate of 35% primarily due to tax-exempt interest
income. The lower 1995 effective tax rate was due to the higher amount of
tax-exempt interest income coupled with lower capital gains in 1995 versus
1994.

While net earnings decreased $12,382, during 1995 as compared to 1994,
net earnings exclusive of the after tax impact of net realized investment
gains increased $16,803. These changes were the result of the factors
previously mentioned.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1993

Direct premiums written during 1994 increased $23,734, or 4.0% to
$625,023 as compared to 1993. The increase was primarily attributable to a
$26,057, or 5.4% increase in direct premiums written for personal automobile
insurance to $512,025. This increase in personal automobile direct premiums
written resulted from a 1.8% increase in the average personal automobile
premium exposure (each vehicle insured). In addition, the number of personal
automobile exposures written increased by 2.4%. The shifting of motorcycle
premiums from the commercial automobile to the personal automobile category
resulted in an increase of 1.2% in personal automobile premiums written in
1994. Direct premiums written for commercial automobile insurance decreased
by $4,960, or 9.7% which was primarily attributable to the re-categorization
by C.A.R. of private passenger motorcycles and miscellaneous vehicles from
commercial automobile business to private passenger automobile business, as
mentioned earlier. Direct premiums written for homeowners insurance
(excluding Massachusetts Fair Plan)increased by $2,385, or 5.3% due primarily
to a 5.9% increase in the average premium per policy.

Net premiums written during 1994 increased $25,781, or 4.6% as compared
to 1993. The increase in net premiums written was primarily due to the growth
in direct premiums written as described above. Written premiums assumed from
C.A.R. increased $27,451, or 41.4%, resulting from increases in overall
industry cessions to C.A.R. over the prior year. The Company's C.A.R. cession
strategy resulted in an increase of $25,090, or 33.3% in written premium ceded
to C.A.R., as compared to the same period last year. Premiums ceded to
reinsurers other than C.A.R. increased $323, or 1.1% as compared to 1993.

Earned premiums increased $23,493, or 4.3%, during 1994 as compared to
1993. Motor vehicle premiums earned increased $35,200, or 7.1% which was
offset by decreases in all other lines of business of $11,707, or 22.3%,
primarily due to earned premiums ceded to reinsurers other than C.A.R.

Net investment income increased $9,833, or 18.5%, compared to 1993,
principally as a result of the following investment portfolio changes (at
cost) since December 31, 1993: a 28.8% increase in fixed maturities;
principally consisting of an increase over 1993 of $129,718, or 30.8%, in tax-
exempt bonds; an increase of $49,644, or 24.7% in GNMA's offset by a decrease
of $1,004, or 1.0% in equity securities. Net investment income as a
percentage of total average investments was 7.0% in 1994 compared to 7.2% in
1993.

Premium finance fees increased $1,831, or 11.0% to $18,497 in 1994
compared to the same period in 1993. The increase was primarily attributable
to the increase in direct premiums written, a shifting of premiums receivable
from agency bill to direct bill and changes in the direct bill payment
program.

AR-9
<PAGE>

Gross realized gains and losses on fixed maturity investments amounted
to $9,696 and $2,310, respectively, for the year ended December 31, 1994
compared to gross realized gains and losses on fixed maturity investments of
$7,214 and $2,166, respectively, for the year ended December 31, 1993. Gross
realized gains and losses on equity security investments amounted to $36,845
and $73, respectively, for the year ended December 31, 1994 compared to gross
realized gains and losses on equity security investments of $3,796 and $18,
respectively, for the year ended December 31, 1993. Net realized investment
gains totalled $45,612 during 1994 as compared to $7,506 for the same period
in 1993. The realized gains in 1994 were primarily the result of sales of
common stocks and tax-exempt bonds, offset by realized losses on GNMA's.
Included in the net realized gains was $34,287 realized on the sale of common
stock in three New England area bank holding companies. These bank holding
companies were acquired by other banks in 1994. Also included were realized
losses on mortgage activity of $1,203 in 1994 compared to $2,538 in 1993.

Gross unrealized gains and losses on fixed maturity investments totalled
$1,233 and $57,599, respectively, at December 31, 1994 compared to gross
unrealized gains and losses on fixed maturity investments of $29,685 and
$2,208, respectively, at December 31, 1993. The unrealized loss on fixed
maturities was the result of increases in interest rates during 1994 adversely
impacting market values. Gross unrealized gains and losses on equity security
investments totalled $2,287 and $11,174, respectively, at December 31, 1994
compared to gross unrealized gains and losses on equity investments of $41,613
and $813, respectively, at December 31, 1993. The unrealized loss on equity
investments was the result of increases in interest rates during 1994
adversely impacting the market values of preferred stocks.

Losses and loss adjustment expenses incurred as a percentage of
insurance premiums earned was 64.6% in 1994 compared to 68.0% in 1993. The
Pure Loss Ratio on personal automobile decreased to 54.3% compared to 59.2% in
1993. This decrease was primarily due to improved loss experience in the
liability component of the personal automobile book of business. The
commercial automobile pure loss ratio decreased to 58.4% compared to 63.6% in
1993. This decrease was primarily due to better loss experience on business
assumed from C.A.R. For homeowners, the pure loss ratio increased to 95.4%
compared to 68.9% in 1993. This increase is due to adverse weather,
especially during the first quarter of 1994.

Policy acquisition costs increased by 4.8% in 1994, compared to 1993.
This increase is primarily attributable to the growth in direct premiums
written. As a percentage of net premiums written, underwriting expenses (on a
statutory basis) were 27.1% in 1994, compared to 25.7% in 1993.

The Company's effective tax rate was 28.7% and 25.9% for the years ended
December 31, 1994 and 1993, respectively. In both years the effective rate
was lower than the statutory rate of 35% primarily due to tax-exempt interest
income. The increase in the 1994 effective tax rate was due to the tax impact
of net realized gains.

Net earnings increased $47,267, or 62.8% compared to 1993, as a result
of the factors previously discussed.

Liquidity and Capital Resources

The focus of the discussion of liquidity and capital resources is on the
Consolidated Balance Sheets on page AR-16 and the Consolidated Statements of
Cash Flows on page AR-19. Stockholders' equity increased by $136,125, or
32.9%, in 1995 as compared to 1994. Growth stemmed from $110,201 in net
earnings combined with the change in net unrealized gains, net of income
taxes, on fixed maturities and equity securities of $58,918, partially offset
by dividends paid to stockholders of $8,635 and Treasury Stock purchased of
$24,359. Total assets at December 31, 1995 increased by $177,364, or 12.9%,
to $1,554,744 as compared to total assets of $1,377,380 at December 31, 1994.
The increase in total assets was primarily due to cash provided by operations
and the increase in unrealized gains resulting from the increased market value
of the investment portfolio. The majority of this growth was reflected in an
increase of $143,767 or 16.0% in invested assets, and $24,714, or 24.1% in
premiums receivable.

AR-10
<PAGE>

The Company's fixed maturity portfolio is comprised of GNMA's (27.2%)
and municipal bonds (72.8%). Of the Company's bonds, 100.0% are rated in
either of the two highest quality categories provided by the National
Association of Insurance Commissioners.

Mortgage loans on real estate, originated by the Company's subsidiary
Bay Finance Company, Inc. ("Bay Finance"), increased $16,752, or 29.4% during
1995 compared to a decrease of $4,568, or 7.4% in 1994. The increase in
mortgage loans held in 1995 was primarily attributable to an improved market,
lower interest rates, and a greater consumer demand for mortgage loans. In
addition, the Company chose to invest in additional loans for its portfolio.
These loans are being serviced by the Company and may be sold to secondary
market investors at a later date should favorable market conditions exist.

In October, 1995, the Company announced that, in order to focus
resources more directly on the Company's main line of business, private
passenger automobile insurance, the operations of Bay Finance would be
substantially reduced. Effective January 1, 1996, Bay Finance is no longer
actively orginating mortgage loans as it previously did through the use of
outside originators and extensive regional marketing. As a result, Bay
Finance's staffing levels have been reduced by approximately 70% with the
remaining employees focusing on servicing the Company's existing mortgage
portfolio. Bay Finance has retained its lending licenses and will continue to
make a small number of various types of mortgage loans.

The Company's liabilities totalled $1,005,030 at December 31, 1995 as
compared to $963,791 at December 31, 1994. The $41,239, or 4.3%, increase was
comprised primarily of a $26,418, or 4.5%, increase in losses and loss
adjustment expense reserves and an increase of $15,735, or 5.0%, in unearned
premiums, offset by a decrease of $914, or 1.6% in all other liabilities. The
primary reason for the changes in these liabilities during 1995 was the
increased level of personal automobile insurance business written by the
Company and assumed from C.A.R, as well as the acquisition of Western Pioneer.

The primary sources of the Company's liquidity are funds generated from
insurance premiums, premium finance fees, net investment income and maturing
of investments as reflected in the Consolidated Statements of Cash Flows on
page AR-19.

The Company's operating activities provided cash of $135,335 in 1995 as
compared to $137,592 in 1994. These cash flows were primarily impacted by the
fact that net premiums written increased only 2.4% in 1995 as compared to a
1994 increase of 4.6%, losses and LAE incurred decreased 0.6% in 1995 as
compared to 1.3% in 1994 and policy acquisition costs increased 5.9% in 1995
as compared to 4.5% in 1994. The cash flows used in investing activities were
primarily the result of purchases of fixed maturities and equity securities.
Investing and financing activities were funded by the cash provided by
operating activities.

Cash flows used in financing activities totalled $32,994 in 1995
compared to $5,700 in 1994. The increase was primarily attributable to
Treasury Stock purchases of $24,359.

The Company's funds are generally invested in securities with maturities
intended to provide adequate funds to pay claims without the forced sale of
investments. The carrying value (at market) of total investments at December
31, 1995 was $1,042,813. At December 31, 1995, the Company held cash and cash
equivalents of $52,718. 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 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 Massachusetts 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 1995, 1994 and 1993.

AR-11
<PAGE>

Periodically, sales have been made from the Company's fixed maturity
investment portfolio to actively manage portfolio risks, including credit-
related concerns, to optimize tax planning and to realize gains. This
practice will continue in the future.

In an effort to enhance future growth potential, the Company continues
to monitor acquisition opportunities with regard to smaller automobile
insurance companies that are in need of capital, have established management
in place and present significant growth opportunities in their market areas.
On August 31, 1995, the Company completed the acquisition of Western Pioneer
Insurance Company, a personal automobile insurer, located in Pleasanton,
California.

The Company's long term growth objective is to expand its writings
outside Massachusetts. To achieve this objective, the Company has
strategically targeted several states contiguous to Massachusetts and is
currently pursuing licenses in the states of New Hampshire and Rhode Island.
In March 1996, the Company was notified that its application for a license in
the state of Connecticut was approved.

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 1.37 to 1.00 and 1.69 to 1.00 for the years ended December
31, 1995 and 1994, respectively.

Recent Accounting Developments

During 1995, the AICPA issued SOP 94-6, "Disclosure of Certain
Significant Risks and Uncertainties", which the Company adopted. This
statement is effective for fiscal years ending after December 15, 1995 and
requires all non-governmental entities preparing financial statements in
accordance with generally accepted accounting principles ("GAAP") to include
financial statement disclosures describing the nature of the entity
operations, the use of estimates in the financial statements, certain
significant estimates, and vulnerability due to certain concentrations. The
adoption of this statement did not have a material impact on the Consolidated
Financial Statements.

The financial instruments that potentially subject the Company to credit
risk consist primarily of premium receivables, investments, and mortgage loans
on real estate. Concentrations of credit risk with respect to premiums
receivable result from the fact that the Company's policyholders are
concentrated primarily in one geographic area, as the Company, the largest
writer of personal automobile insurance in the state of Massachusetts, writes
primarily in Massachusetts. The Company's strategy is to expand its customer
base to other geographic areas beyond Massachusetts.

All investment transactions have credit exposure to the extent that a
counterparty may default on an obligation to the Company. Credit risk is a
consequence of carrying investment positions. To manage credit risk, the
Company focuses on higher quality fixed-income securities, reviews the credit
strength of all companies which it invests in, limits its exposure in any one
investment and monitors the portfolio quality, taking into account credit
ratings assigned by recognized statistical rating organizations.

The Company has mortgage loans on real estate primarily in the state of
Massachusetts. The Company controls credit risk through credit approvals,
credit limits and monoriting procedures. The Company performs in-depth credit
evaluations on all new customers. Bad debt expenses have not been material in
recent years.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

AR-12
<PAGE>

During 1994 the Financial Accounting Standards Board issued SFAS 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." This statement requires companies to disclose certain
qualitative and quantitative information for which derivative financial
instruments are held or issued. During 1995 and 1994 the Company neither held
or issued such investments; therefore, the adoption of this statement did not
have a material impact on the Consolidated Financial Statements.

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.

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.

COMMON STOCK PRICE AND DIVIDEND INFORMATION

On March 31, 1995, the Company's common stock began trading on the NYSE
under the symbol "CGI". Previously, the Company's common stock was traded on
NASDAQ under the symbol "COMG". The high, low and close prices for shares of
the Company's common stock for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
High Low Close High Low Close
<S> <C> <C> <C> <C> <C> <C>
First Quarter........... $17 $14-3/4 $16-3/4 $22-3/4 $13-1/4 $13-1/4
Second Quarter.......... 17-7/8 16-1/4 17-7/8 17 13-1/4 17
Third Quarter........... 19-7/8 16-3/4 19-5/8 18-1/4 15-3/4 16-1/2
Fourth Quarter.......... 21-7/8 19-1/2 20-5/8 17-1/4 14-1/2 16-11/16
</TABLE>
As of March 1, 1996, there were 1,414 stockholders of record of the
Company's Common Stock, not including stock held in "Street Name" or held in
accounts for participants of the Company's Employee Stock Ownership Plan
("E.S.O.P.").

For each of the last three quarters of 1994 and the first quarter of
1995, the Board of Directors of the Company voted to declare a dividend of
$.05 per share. The dividend declared on May 20, 1994, was the first
stockholder cash dividend in the Company's history. On May 19, 1995, the
Board of Directors of the Company, voted to increase the quarterly stockholder
dividend by 20% to $.06 per share, and announced the approval of a stock
buyback program of up to three million shares. Through December 31, 1995, the
Company had purchased 1,263,433 shares of Treasury Stock under this program.

AR-13
<PAGE>

REPORT OF MANAGEMENT

The management of the Company is responsible for the consolidated
financial statements and all other information presented in this Annual
Report. The financial statements have been prepared in conformity with
generally accepted accounting principles determined by management to be
appropriate in the circumstances and include amounts based on management's
informed estimates and judgments. Financial information presented elsewhere
in this Annual Report is consistent with the financial statements. The
appropriateness of data underlying such financial information is monitored
through internal accounting controls, an internal audit department,
independent accountants and the Board of Directors through its audit
committee.

The Company maintains a system of internal accounting controls designed
to provide reasonable assurance to management and the Board of Directors that
assets are safeguarded and that transactions are executed in accordance with
management's authorization and recorded properly. The system of internal
accounting controls is supported by the selection and training of qualified
personnel combined with the appropriate division of responsibilities.

Management recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. Management encourages open
communication within the Company and requires the confidential treatment of
proprietary information and compliance with all domestic laws, including those
relating to financial disclosure.

The 1995 consolidated financial statements were audited by the Company's
independent accountants, Coopers & Lybrand L.L.P., in accordance with
generally accepted auditing standards. Management has made available to
Coopers & Lybrand L.L.P., all the Company's financial records and related
data, as well as the minutes of stockholders' and directors' meetings.
Furthermore, management believes that all representations made to Coopers &
Lybrand L.L.P., during its audit were valid and appropriate.

AR-14
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
The Commerce Group, Inc.

We have audited the accompanying consolidated balance sheets of The
Commerce Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Commerce Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND
L.L.P.

Boston, Massachusetts
January 25, 1996

AR-15
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands of Dollars Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994
ASSETS
<S> <C> <C>
Investments (notes A2, A3 and B)
Fixed maturities, at market (cost: $801,308 in 1995 and $801,376
in 1994).......................................................... $ 815,277 $ 745,010
Equity securities, at market (cost: $140,157 in 1995 and $104,117
in 1994).......................................................... 151,579 95,230
Mortgage loans on real estate (less allowance for possible loan
losses of $2,660 in 1995 and $2,824 in 1994)...................... 73,783 57,031
Collateral notes receivable (less allowances of $513 in 1995
and $500 in 1994)................................................. 1,826 1,559
Investments in real estate......................................... 348 216
Total investments.............................................. 1,042,813 899,046

Cash and cash equivalents (note A4).................................. 52,718 5,485
Accrued investment income............................................ 14,633 13,440
Premiums receivable (less allowance for doubtful receivables of
$1,103 in 1995 and $1,120 in 1994).................................. 127,243 102,529
Deferred policy acquisition costs (notes A5 and C)................... 61,546 56,769
Property and equipment, net of accumulated depreciation
(notes A6 and D)..................................................... 30,981 30,610
Residual market receivable (note F).................................. 200,124 214,818
Due from reinsurers (note F)......................................... 21,897 16,892
Deferred income taxes (notes A10 and G).............................. 1,415 37,791
Goodwill (note A7)................................................... 1,374 -
Total assets................................................... $1,554,744 $1,377,380
</TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities
Losses and loss adjustment expenses (notes A8, E and F)............ $ 618,791 $ 592,373
Unearned premiums (note A9)........................................ 330,454 314,719
Current income taxes (notes A10 and G)............................. 1,180 9,817
Deferred income (notes A11 and F).................................. 8,954 10,451
Contingent commissions accrued..................................... 32,550 24,450
Other liabilities and accrued expenses............................. 13,101 11,981
Total liabilities.............................................. 1,005,030 963,791

Stockholders' Equity (notes B, J, K and L)
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 fixed maturities and equity
securities, net of income taxes (benefits) of $8,887 in 1995
and ($22,839) in 1994............................................. 16,504 (42,414)
Retained earnings.................................................. 508,948 407,382
574,073 413,589
Treasury Stock, 1,263,433 shares in 1995 and 0 shares in 1994, at
cost (note A13)................................................... (24,359) -

Total stockholders' equity..................................... 549,714 413,589

Total liabilities and stockholders' equity..................... $1,554,744 $1,377,380
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

AR-16
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31,
(Thousands of Dollars Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenues
Earned premiums (notes A9 and F)..................... $ 592,590 $ 572,053 $ 548,560
Net investment income (note B)....................... 71,313 62,901 53,068
Premium finance fees................................. 19,420 18,497 16,666
Net realized investment gains (note B)............... 712 45,612 7,506
Total revenues.................................. 684,035 699,063 625,800

Expenses
Losses and loss adjustment expenses
(notes A8, E and F)................................. 367,552 369,660 373,959
Policy acquisition costs (notes A5 and C)............ 166,741 157,415 150,195
Total expenses.................................. 534,293 527,075 524,154

Earnings before income taxes.................... 149,742 171,988 101,646

Income taxes (notes A10 and G)......................... 39,541 49,405 26,330

NET EARNINGS.................................... $ 110,201 $ 122,583 $ 75,316

NET EARNINGS PER COMMON SHARE (primary and
fully diluted) (note A12)...................... $ 2.93 $ 3.23 $ 1.98

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING............................. 37,632,236 38,000,000 38,000,000
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

AR-17
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>

Net
Common Paid-in Unrealized Retained Treasury
Stock Capital Gains/Losses Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992.... $19,000 $29,621 $ 18,129 $215,183 $ 0 $281,933

Net earnings................ 75,316 75,316
Change in unrealized gains,
net of taxes............... 26,099 26,099

Balance December 31, 1993.... 19,000 29,621 44,228 290,499 0 383,348

Net earnings................ 122,583 122,583
Change in unrealized gains
(losses), net of taxes..... (86,642) (86,642)
Stockholder dividends....... (5,700) (5,700)

Balance December 31, 1994.... 19,000 29,621 (42,414) 407,382 0 413,589

Net earnings................ 110,201 110,201
Change in unrealized gains
(losses) net of taxes...... 58,918 58,918
Stockholder dividends (8,635) (8,635)
Treasury stock purchased.... (24,359) (24,359)

Balance December 31, 1995.... $19,000 $29,621 $ 16,504 $508,948 $(24,359) $549,714
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

AR-18
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>

1995 1994 1993

<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 110,201 $ 122,583 $ 75,316
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Premiums receivable..................................... (24,714) (7,267) (26,538)
Deferred policy acquisition costs....................... (4,777) (6,676) 5,349
Residual market receivable.............................. 14,694 5,494 54,114
Due to/from reinsurers.................................. (5,005) (4,024) (10,739)
Losses and loss adjustment expenses..................... 26,418 24,576 71,997
Unearned premiums....................................... 15,735 31,193 18,959
Current income taxes.................................... (8,637) 6,256 (5,761)
Deferred income taxes................................... 4,651 (4,878) 10,440
Deferred income......................................... (1,497) 3,100 (1,033)
Contingent commissions.................................. 8,100 2,724 3,348
Other liabilities and accrued expenses.................. (254) 3,150 (7,566)
Net realized investment gains........................... (712) (45,612) (7,506)
Other-net............................................... 1,132 6,973 (7,745)
Net cash provided by operating activities............. 135,335 137,592 172,635

Cash flows from investing activities:
Proceeds from maturity of fixed maturities................ 28,479 55,671 65,673
Proceeds from sale of fixed maturities.................... 72,287 123,127 89,936
Purchase of fixed maturities.............................. (100,689) (351,260) (268,838)
Purchase of equity securities............................. (50,418) (26,155) (85,092)
Proceeds from sale of equity securities................... 14,784 59,722 11,165
Payments received on mortgage loans on real estate........ 9,433 8,140 12,545
Mortgage loans on real estate originated.................. (27,927) (16,366) (36,236)
Mortgages sold to investors in the secondary market....... 2,287 10,725 27,791
Payments received on collateral notes receivable.......... 459 384 189
Collateral notes receivable originated.................... (740) (196) (381)
Purchase and construction of real estate development
assets................................................... - - (108)
Proceeds from sale of real estate development assets...... - - 278
Proceeds from sale of real estate acquired by
foreclosures............................................. 318 2,120 653
Purchase of property and equipment........................ (3,664) (5,786) (1,872)
Proceeds from sale of property and equipment.............. 283 250 66
Net cash used in investing activities................. (55,108) (139,624) (184,231)

Cash flows from financing activities:
Dividends paid to stockholders............................ (8,635) (5,700) -
Purchase of treasury stock................................ (24,359) - -
Net cash used in financing activities................. (32,994) (5,700) -

Increase (decrease) in cash and cash equivalents............ 47,233 (7,732) (11,596)
Cash and cash equivalents at beginning of year.............. 5,485 13,217 24,813
Cash and cash equivalents at end of year.................... $ 52,718 $ 5,485 $ 13,217
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

AR-19
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies

1. Basis of Presentation

The consolidated financial statements of The Commerce Group, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles ("GAAP").

The consolidated financial statements include The Commerce Group, Inc.,
and its wholly-owned subsidiaries, Bay Finance Company, Inc., Clark-Prout
Insurance Agency, Inc. and Commerce Holdings, Inc. ("CHI"). The Commerce
Insurance Company ("Commerce") and Citation Insurance Company ("Citation") are
wholly-owned subsidiaries of Commerce Holdings, Inc. Western Pioneer
Insurance Company ("Western Pioneer") is a wholly-owned subsidiary of The
Commerce Insurance Company. All intercompany transactions and balances have
been eliminated in consolidation. Certain prior year account balances have
been reclassified to conform to 1995 presentation.

The insurance subsidiaries, Commerce, Citation and Western Pioneer
prepare statutory financial statements in accordance with accounting practices
prescribed by the National Association of Insurance Commissioners ("NAIC"),
the Commonwealth of Massachusetts, and the State of California.

2. Investments

Investments in fixed maturities, which include bonds and redeemable
preferred stocks, and investments in equity securities, which include common
and non-redeemable preferred stocks, are carried at fair market value.
Unrealized investment gains and losses on equity securities and fixed
maturities, to the extent that there is no permanent impairment of value, are
credited or charged directly to stockholders' equity, net of any tax effect.
When investment securities are sold, the realized gain or loss is determined
based upon specific identification. Fair market value of fixed maturities and
equity securities is based on quoted market prices. For other securities held
as investments, fair market value equals quoted market price, if available.
If a quoted market price is not available, fair market value is estimated
using quoted market prices for similar securities. The Company has not
invested more than 8% in any one state or political subdivision. The Company
classifies debt and equity securities as available for sale, which are valued
at fair market value. Net unrealized gains or losses on fixed maturity
securities which are classified as available for sale are excluded from
earnings and reported as a separate component of stockholders' equity until
realized.

AR-20
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies - (continued)

The Company has mortgage loans on real estate primarily in the state of
Massachusetts. The Company controls credit risk through credit approvals,
credit limits and monitoring procedures. The Company performs in-depth credit
evaluations on all new customers. Bad debt expenses have not been material in
recent years.

Mortgage loans on real estate and collateral notes receivable are stated
at the amount of unpaid principal, less an allowance for possible loan losses.
The Company originated mortgages primarily on properties located in
Massachusetts. The adequacy of the allowance for possible loan losses is
evaluated on a regular basis by management. Factors considered in evaluating
the adequacy of the allowance include previous loss experience, current
economic conditions and their effect on borrowers and the performance of
individual loans in relation to contract terms. The provision for possible
loan losses charged to operating expenses is based upon management's judgment
of the amount necessary to maintain the allowance at a level adequate to
absorb possible losses. Loan losses are charged against the allowance when
management believes the collectibility of the principal is unlikely and
recoveries are credited to the allowance when received.

Interest on mortgage loans is included in income as earned based upon
rates applied to principal amounts outstanding. Accrual of interest on
mortgage loans is discontinued either when reasonable doubt exists as to the
full, timely collection of interest or principal, or when a loan becomes
contractually past due more than ninety days. When a loan is placed on
nonaccrual status, all unpaid interest previously accrued is reversed against
current period earnings.

3. Investments in Real Estate

Investments in real estate is primarily comprised of properties acquired
through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. The foreclosed assets are held for sale and are carried at the
lower of fair value minus estimated cost to sell, or cost. Loan losses
arising from the acquisition of such properties are charged against the
allowance for possible loan losses. Any subsequent provisions to reduce the
carrying value are charged to current period earnings as realized. Gains and
losses upon disposition are reflected in earnings as realized. Carrying value
approximates fair value.

4. Cash and Cash Equivalents

Cash and cash equivalents include cash currently on hand and short-term
investments with original maturities, when purchased, of three months or less.
The carrying amount approximates fair value.

5. Deferred Policy Acquisition Costs

Policy acquisition costs relating to unearned premiums, consisting of
commissions, taxes and other underwriting expenses incurred at the policy
issuance, are deferred and amortized over the period in which the related
premiums are earned, the amount being reduced by any potential premium
deficiency. If any potential premium deficiency exists, it represents future
estimated losses, loss adjustment expenses and amortization of deferred
acquisition costs in excess of the related unearned premiums. There was no
premium deficiency in 1995, 1994 and 1993. In determining whether a premium
deficiency exists, the Company considers anticipated investment income on
unearned premiums.

AR-21
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies - (continued)

6. Property and Equipment

Property and equipment are stated at cost and are depreciated on the
straight line method over the estimated useful lives of the assets using the
following rates:
<TABLE>
<CAPTION>
Percent
Asset Classification Per Annum
<S> <C>
Buildings....................................... 2.5
Building improvements (prior to 1992)........... 2.5
Building improvements (1992 and subsequent)..... 5.0
Equipment and office furniture.................. 10.0
EDP equipment and copiers....................... 20.0
Automobiles..................................... 33.3
</TABLE>
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the related property and
accumulated depreciation accounts and any resulting gain or loss is credited
or charged to income.

7. Amortization of Goodwill

Goodwill, which represents the excess of the costs of purchased
companies over the fair value of their net assets at dates of acquisition, is
being amortized on the straight-line method over 10 years.

8. Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses ("LAE")
represents the accumulation of individual case estimates for reported losses
and estimates for incurred but not reported ("IBNR") losses and loss
adjustment expenses. Assumed losses and loss adjustment expenses are recorded
as reported by the ceding organization with additional adjustments for IBNR.
The liability for losses and loss adjustment expenses is intended to cover the
ultimate net cost of all losses and loss adjustment expenses incurred through
the balance sheet date. Liability estimates are continually reviewed and
updated, and therefore, the ultimate liability may be more or less than the
current estimate. The effects of changes in the estimates are included in the
results of operations in the period in which the estimates are revised.

9. Unearned Premiums

Insurance premiums are recognized as income ratably over the terms of
the policies. Unearned premiums are determined by prorating policy premiums
on a daily basis over the terms of the policies.

10. Income Taxes

The Company uses an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than changes in the tax
law or rates, unless enacted. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

11. Deferred Income

Income consisting of expense reimbursements which include servicing
carrier fees from Commonwealth Automobile Reinsurers ("C.A.R."), a state-
mandated reinsurance mechanism, on policies written for C.A.R., is deferred
and amortized over the term of the related insurance policies (see note F).

AR-22
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE A-Summary of Significant Accounting Policies - (continued)

12. Net Earnings Per Common Share

Net earnings per common share is computed by dividing net earnings by
the weighted average number of common shares outstanding. The weighted
average number of common shares outstanding for the years ended December 31,
1995, 1994 and 1993 was 37,632,236, 38,000,000 and 38,000,000, respectively.

13. Treasury Stock

On May 19, 1995, the Board of Directors of the Company, announced the
approval of a stock buyback program of up to three million shares. Through
December 31, 1995, the Company had purchased 1,263,433 shares of Treasury
Stock under this program.

NOTE B-Investments and Investment Income

1. Fixed Maturities

The amortized cost and estimated fair market values of investments in
fixed maturities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
At December 31, 1995:
GNMA mortgage-backed bonds...... $220,589 $ 2,422 $ (1,638) $221,373
Obligations of states and
political subdivisions......... 580,719 16,204 (3,019) 593,904
Totals..................... $801,308 $ 18,626 $ (4,657) $815,277

At December 31, 1994:
GNMA mortgage-backed bonds...... $250,507 $ 51 $(17,271) $233,287
Obligations of states and
political subdivisions......... 550,869 1,182 (40,328) 511,723
Totals..................... $801,376 $ 1,233 $(57,599) $745,010
</TABLE>

Proceeds from sales of investments in fixed maturities, gross gains, and
gross losses realized on those sales were as follows:

<TABLE>
<CAPTION>
Proceeds Gross Gross
From Realized Realized
Sales Gains Losses
<S> <C> <C> <C>
For the year ended December 31, 1995:
GNMA mortgage-backed bonds......................... $ - $ - $ -
Obligations of states and political subdivisions... 72,287 2,340 (695)
Totals........................................ $ 72,287 $ 2,340 $ (695)

For the year ended December 31, 1994:
GNMA mortgage-backed bonds......................... $ - $ - $ -
Obligations of states and political subdivisions... 123,127 9,509 (58)
Totals........................................ $123,127 $ 9,509 $ (58)

For the year ended December 31, 1993:
GNMA mortgage-backed bonds......................... $ - $ - $ -
Obligations of states and political subdivisions... 89,936 3,842 -
Totals........................................ $ 89,936 $ 3,842 $ -
</TABLE>

AR-23
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

The amortized cost and approximate fair market value of fixed maturities
at December 31, 1995 and 1994, by contractual maturity, are as follows:

<TABLE>
<CAPTION>
1995 1994
Fair Fair
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Obligations of states and political subdivisions:
Due in one year or less.......................... $ - $ - $ 100 $ 100
Due after one year through five years............ 1,130 1,149 25 26
Due after five years through ten years........... 19,956 20,183 3,568 3,493
Due after ten years.............................. 559,633 572,572 547,176 508,104
580,719 593,904 550,869 511,723

GNMA mortgage-backed bonds....................... 220,589 221,373 250,507 233,287
Total fixed maturities........................... $801,308 $815,277 $801,376 $745,010
</TABLE>
Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.

2. Equity Securities

The cost and approximate fair market value of equity securities at
December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
Fair Fair
Market Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Non-redeemable preferred stocks............. $111,597 $111,220 $ 96,074 $ 85,574
Common stocks............................... 28,560 40,359 8,043 9,656
$140,157 $151,579 $104,117 $ 95,230
</TABLE>
3. Mortgage Loans on Real Estate

At December 31, 1995 and 1994, mortgage loans on real estate consisted
of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Residential (1st Mortgages)............ $59,575 $41,690
Residential (2nd Mortgages)............ 847 1,037
Commercial (1st Mortgages)............. 15,804 16,871
Commercial (2nd Mortgages)............. 217 257
76,443 59,855
Allowance for possible loan losses..... 2,660 2,824
Mortgage loans on real estate...... $73,783 $57,031
</TABLE>

AR-24
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

Fair value of the Company's mortgage loans on real estate is estimated
by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit and for the same
remaining maturities. The future cash flows associated with certain non-
performing loans are estimated based on expected payments from borrowers
either through work out arrangements or the disposition of collateral. The
fair value of mortgage loans on real estate at December 31, 1995 and 1994,
prior to the allowance for possible loan losses, was $78,599 and $60,837,
respectively, which was estimated by discounting the future cash flows of the
mortgages.

Fair value of collateral notes receivable at December 31, 1995 and 1994,
prior to allowances, was $2,601 and $2,243, respectively, which was estimated
by discounting the future cash flows of the collateral notes.

At December 31, 1995 and 1994, mortgage loans which were on nonaccrual
status were $2,727 and $2,395, respectively. The reduction in interest income
associated with nonaccrual loans was $287, $223 and $396 for the years ended
December 31, 1995, 1994 and 1993, respectively.

The Company originates and services residential and commercial mortgages
primarily in Massachusetts and generally its exposure is 80% or less of the
appraised value of any collateralized real property. The ability and
willingness of residential and commercial borrowers to honor their repayment
commitments is generally dependent upon the level of overall economic activity
and real estate values.

A summary of the changes in the allowance for possible mortgage loan
losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance, beginning of year.............. $ 2,824 $ 3,099 $ 3,362
Provision for possible loan losses.... (164) (232) 2,275
Loans charged off..................... - (43) (2,538)
Balance, end of year.................... $ 2,660 $ 2,824 $ 3,099
</TABLE>
The following table describes mortgage principal balances by maturity
and discloses over 90 days past due and foreclosure information:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Fixed Rate Mortgages Maturing:
One year or less...................... $ 512 $ 307 $ -
More than one year to five years...... 640 412 1,451
Over five years....................... 46,307 29,859 29,837
Total Fixed Mortgages............ $47,459 $30,578 $31,288

Adjustable Rate Mortgages Maturing:
One year or less.................. $ - $ - $ -
More than one year to five years.. 79 183 297
Over five years................... 28,905 29,029 33,113
Total Adjustable Mortgages... $28,984 $29,212 $33,410

Past due over 90 days............... $ 2,727 $ 2,395 $ 3,629

Mortgages in Foreclosure............ $ 795 $ 700 $ 1,536
</TABLE>

AR-25
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE B-Investments and Investment Income - (continued)

4. Net Investment Income

The components of net investment income were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Interest and dividends on fixed maturities... $56,467 $50,000 $42,516
Dividends on equity securities............... 8,486 7,426 4,285
Interest on short-term investments........... 2,466 1,629 958
Interest on mortgage loans................... 6,141 6,097 6,585
Other........................................ 478 208 664
Total investment income............. 74,038 65,360 55,008
Investment expenses.......................... 2,725 2,459 1,940
Net investment income............... $71,313 $62,901 $53,068
</TABLE>
5. Net Realized and Unrealized Investment Gains (Losses)

Net realized investment gains and the net increases (decreases) in
unrealized investment gains or losses, less applicable income tax expense,
were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
Net realized investment gains:
<S> <C> <C> <C>
Fixed maturities............................. $ 477 $ 7,386 $ 5,049
Equity securities............................ 405 38,845 5,074
Other........................................ (170) (619) (2,617)
Total.................................... $ 712 $ 45,612 $ 7,506

Net increase (decrease) in unrealized gains (losses):
Fixed maturities............................. $ 70,335 $(83,843) $ 27,477
Equity securities............................ 20,308 (49,687) 13,199
Related tax benefit (expense)................ (31,725) 46,888 (14,577)
Total.................................... $ 58,918 $(86,642) $ 26,099
</TABLE>

A summary of accumulated unrealized gains and losses on equity
securities and fixed maturity investments in 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Unrealized gains.................. $ 32,056 $ 3,520 $71,298
Unrealized losses................. (6,665) (68,773) (3,021)
Tax benefit (expense)............. (8,887) 22,839 (24,049)
Net unrealized gains
(losses)................... $ 16,504 $(42,414) $44,228
</TABLE>
NOTE C-Deferred Policy Acquisition Costs

Policy acquisition costs incurred and amortized to income are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance, beginning of year........ $ 56,769 $ 50,093 $ 55,442
Costs deferred during the year.... 171,518 164,091 144,846
Amortization charged to expense... (166,741) (157,415) (150,195)
Balance, end of year.............. $ 61,546 $ 56,769 $ 50,093
</TABLE>

AR-26
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE D-Property and Equipment

A summary of property and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Buildings................................. $27,077 $23,566
Equipment and office furniture............ 21,436 19,346
Building improvements..................... 623 587
49,136 43,499
Less accumulated depreciation....... 18,953 16,184
30,183 27,315
Land...................................... 798 798
Construction in progress.................. - 2,497
$30,981 $30,610
</TABLE>
Depreciation expenses incurred were $3,151, $3,093 and $2,935 for the
years ended December 31, 1995, 1994 and 1993, respectively. Depreciation
expense is allocated between losses and loss adjustment expenses and policy
cquistion costs.

NOTE E-Losses and Loss Adjustment Expenses

Liabilities for unpaid losses and loss adjustment expenses at December
31, consist of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Direct and assumed business............... $662,591 $630,357
Salvage and subrogation recoverable....... (43,800) (37,984)
$618,791 $592,373
</TABLE>
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses, insurers
establish reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE. Quarterly, the
Company reviews these reserves internally. Regulations of the Division of
Insurance require the Company to obtain annually a certification from either a
qualified actuary or an approved loss reserve specialist that its loss and LAE
reserves are reasonable.

When a claim is reported to the Company, its claims personnel establish
a "case reserve" for the estimated amount of the ultimate payment. The amount
of the reserve is primarily based upon a case-by-case evaluation of the type
of claim involved, the circumstances surrounding each claim and the policy
provisions relating to the type of loss. The estimate reflects the informed
judgment of such personnel based on general insurance reserving practices and
on the experience and knowledge of the claims person. During the loss
adjustment period, these estimates are revised as deemed necessary by the
Company's claims department based on subsequent developments and periodic
reviews of the cases.

In accordance with industry practice, the Company also maintains
reserves for estimated IBNR. IBNR reserves are determined on the basis of
historical information and the experience of the Company. Adjustments to IBNR
are made periodically to take into account changes in the volume of business
written, claims frequency and severity, the mix of business, claims processing
and other items that can be expected to affect the Company's liability for
losses and LAE over time.

AR-27
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE E-Losses and Loss Adjustment Expenses - (continued)

When reviewing reserves, the Company analyzes historical data and
estimates the impact of various factors such as (i) per claim information,
(ii) the historical loss experience of the Company and industry and (iii)
legislative enactments, judicial decisions, legal developments in the
imposition of damages, changes in political attitudes and trends in general
economic conditions, including the effects of inflation. This process assumes
that past experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for predicting future events.
There is no precise method, however, for subsequently evaluating the impact of
any specific factor on the adequacy of reserves, because the eventual
development of reserves is affected by many factors.

By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and LAE. After taking into account all relevant
factors, management believes that the provision for losses and LAE at December
31, 1995 is adequate to cover the ultimate net cost of losses and claims
incurred as of that date. The ultimate liability may be greater or lower than
reserves. Establishment of appropriate reserves is an inherently uncertain
process, and there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience. The Company
does not discount to present value that portion of its loss reserves expected
to be paid in future periods.

Included in the loss reserve methodologies described above, are
liabilities for unpaid claims and claim adjustment expenses for environmental
related claims such as oil spills and lead paint. Reserves have been
established to cover these claims for both known and unknown losses. Because
of the Company's limited exposure to these types of claims, management
believes they will not have a material impact on the consolidated financial
position of the Company. Loss reserves on environmental related claims
amounted to $10,708 and $11,151 in 1995 and 1994, respectively.

The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance
deductions from all reinsurers including C.A.R., as shown in the Company's
consolidated financial statements for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses, beginning of year......................... $448,331 $415,613 $316,261

Incurred losses and loss adjustment expenses:
Provision for insured events of the current year.. 442,027 435,713 412,369
Decrease in provision for insured events of
prior years...................................... (74,475) (66,053) (38,410)
Total incurred losses and loss adjustment
expenses....................................... 367,552 369,660 373,959

Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year............. 184,182 188,002 165,102
Losses and loss adjustment expenses attributable
to insured events of prior years.................. 145,028 148,940 109,505
Total payments.................................. 329,210 336,942 274,607

Loss and loss adjustment expense reserves prior to
effect of ceded reinsurance recoverable............. 486,673 448,331 415,613
Ceded reinsurance recoverable........................ 132,118 144,042 152,184
Reserves for losses and loss adjustment expenses
at the end of year per financial statements......... $618,791 $592,373 $567,797
</TABLE>
AR-28
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE E-Losses and Loss Adjustment Expenses - (continued)

The decrease in provision for insured events of prior years, as a
percentage of beginning reserves, was higher for the year ended December 31,
1995 and 1994 compared to 1993, primarily due to favorable loss development
experienced by the Company, along with favorable development of reserves
assumed from C.A.R. The decrease in provision for insured events of prior
years, as a percentage of beginning reserves, was lower for the year ended
December 31, 1993 primarily due to adverse development of a 1987 claim which
was reserved for in 1993 substantially in excess of policy limits, a one-half
percentage point increase in the reserve for LAE, partially offset by
favorable loss development experienced by C.A.R. The Company's loss and LAE
reserves reflects its share of the aggregate loss and LAE reserves of all
Servicing Carriers.

The Company is a defendant in various legal actions arising from the
normal course of its business. These proceedings are considered to be
ordinary and incidental to operations or without foundation in fact.
Management is of the opinion that these actions will not have a material
adverse effect on the consolidated financial statements of the Company.

NOTE F-Reinsurance Activity

The Company has reinsurance contracts for casualty and catastrophe
coverages. These reinsurance arrangements minimize the Company's losses
arising from large risks and protect the Company against numerous losses from
a single occurrence or event. The Company also has a combined quota share and
excess loss reinsurance contract on its other than automobile property
business.

From the inception, on September 30, 1993, through the third quarter of
1995, the Company's combined property quota share and excess loss reinsurance
contract was written with five domestic reinsurance companies. Under the
quota share portion of the arrangements, the reinsurers indemnified the
Company for 36% of the loss and LAE, and paid a commission allowance based on
the ratio of losses incurred to premiums earned. In exchange, the Company
paid to the reinsurers 40% of the net premium pertaining to the related
business. The maximum per occurrence loss reimbursement was $40.0 million and
the maximum annual aggregate occurrence loss reimbursement was $60.0 million.
Under the excess loss reinsurance portion of the arrangements, the Company
reinsured each risk, retaining $125 and reinsuring 100% of the next $875.

Effective September 30, 1995, the Company increased its coverage under
the combined property quota share and excess loss reinsurance contract. The
contract is now written with six domestic reinsurance companies. Under the
quota share portion of the arrangements, the reinsurers indemnify the Company
for 45% of the loss and LAE, and pay a commission allowance based on the ratio
of losses incurred to premiums earned. In exchange, the Company pays to the
reinsurers 49% of the net premium pertaining to the related business. The
maximum per occurrence loss reimbursement is $50.0 million and the maximum
annual aggregate occurrence loss reimbursement is $75.0 million. Under the
excess loss reinsurance portion of the arrangements, the Company reinsures
each risk, retaining $125 and reinsuring 100% of the next $875. This
reinsurance contract is continuous, cancelable quarterly with ninety days
notice.

Effective March 1, 1995, through February 29, 1996, the Company had
catastrophe reinsurance coverage for that portion of the loss not covered
under the property quota share arrangement. Catastrophe reinsurance coverage
was in force for approximately 88.0% of the amounts incurred for all property
claims arising from a single event or occurrence up to a maximum loss of
$100.0 million, after first subtracting property quota share losses. Coverage
under the catastrophe program was as follows: a net retention of $5.0 million;
50.0% of the next $5.0 million; and, 95.0% of the next $90.0 million.
Including the Company's retention, total catastrophe coverage is $100.0
million. This coverage was placed with a number of reinsurers, both foreign
and domestic.

AR-29
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE F-Reinsurance Activity - (continued)

Effective March 1, 1996, the Company's catastrophe reinsurance program
has been tailored in conjunction with the property quota share arrangement to
provide catastrophe reinsurance protection at varying levels of losses. The
table below provides information depicting the approximate combined recoveries
of all property reinsurance programs (catastrophe and quota share) at various
loss scenarios if a catastrophe were to strike:
<TABLE>
<CAPTION>
Net Loss
Total Reinsurance Retained by
Loss Recovery the Company
<S> <C> <C>
$ 25,000 $ 11,300 $13,700
50,000 35,000 15,000
75,000 58,800 16,200
100,000 82,500 17,500
125,000 105,000 20,000
150,000 110,000 40,000
</TABLE>
The Company will have no reinsurance recoveries for total loss amounts
in excess of $150.0 million.

Effective January 1, 1995, casualty reinsurance is on an excess of loss
basis for any one event or occurrence with a maximum recovery of $4.0 million
over a net retention of $1.0 million. This coverage is placed with Swiss
Reinsurance America Corporation, formerly North American Reinsurance
Corporation (rated A by A.M. Best).

Effective January 1, 1995, all personal and commercial liability
umbrella policies are reinsured on a 95% quota share basis in regard to limits
up to $1.0 million and 100% quota share basis for limits in excess of $1.0
million but not exceeding $5.0 million. This coverage is placed with American
Reinsurance Corporation (rated A+ by A.M. Best).

C.A.R., a state-mandated reinsurance mechanism, enables the Company and
approximately 47 other writers of automobile insurance in Massachusetts
("Servicing Carriers") to reinsure any automobile risk that the insurer
perceives to be underpriced at the premium level permitted by the
Massachusetts Insurance Commissioner (the "Commissioner"). Servicing Carriers,
which are responsible for over 99.0% of total direct premiums written for
personal automobile insurance in Massachusetts, are required to offer
automobile insurance coverage to all eligible applicants pursuant to "take-
all-comers" regulations, but may reinsure undesirable business with C.A.R.

The Company pays to C.A.R. all of the premiums generated by the policies
it has ceded and C.A.R. reimburses the Company for all losses incurred on
account of ceded policies. In addition, the Company receives a fee for
servicing ceded policies based on the expense structure established by C.A.R.
For the years ended December 31, 1995, 1994 and 1993, these servicing fees
amounted to $21,669, $14,282 and $16,395, respectively.

C.A.R. has annually generated multi-million dollar underwriting losses
in both the personal and commercial pools since its inception. The Company is
required to share in the underwriting results of C.A.R. business for its
respective product lines. Under current regulations, the Company's share of
C.A.R. personal or commercial deficit is based upon its market share for
retained automobile risks for the particular pool, adjusted by a "utilization"
concept, such that, in general, the Company is disproportionately and
adversely affected if its relative use of C.A.R. reinsurance exceeds that of
the industry, and favorably affected if its relative use of C.A.R. reinsurance
is less than that of the industry. During 1995, 1994 and 1993, the Company's
net participation in the C.A.R. personal automobile pool approximated 16.0%,
16.0% and 14.3%, respectively.

AR-30
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE F-Reinsurance Activity - (continued)

Written premiums, earned premiums, losses incurred and the liabilities
for unearned premiums, unpaid losses ceded to and assumed from C.A.R. and
other receivables from C.A.R. were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
Ceded Assumed Ceded Assumed Ceded Assumed
<S> <C> <C> <C> <C> <C> <C>
Income Statement
Written premiums... $ 82,814 $ 92,249 $100,583 $ 93,785 $ 75,285 $ 66,334
Earned premiums.... 92,664 90,609 87,585 77,832 81,335 72,356
Losses incurred.... 75,475 87,786 81,217 63,842 72,235 66,575

Balance Sheet
Unearned premiums.. $ 39,158 $ 45,446 $ 49,008 $ 43,806 $ 36,010 $ 27,853
Unpaid losses...... 126,555 110,003 138,356 95,290 149,470 88,179
Other receivables
from C.A.R........ 34,411 N/A 27,454 N/A 34,832 N/A
Residual Market
Receivable......... 200,124 N/A 214,818 N/A 220,312 N/A
</TABLE>
In accordance with SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts", the company must
present assets and liabilities gross of reinsurance. The Residual Market
Receivable represents the gross amount of reinsurance recoverable from C.A.R.
including unpaid losses, unearned premiums, paid losses recoverable and unpaid
ceded and assumed premiums.

The current C.A.R. utilization-based participation ratio has been in
place for the personal automobile market since 1993. During 1995, 1994 and
1993, the Company's amount of personal automobile risks it reinsured through
C.A.R. approximated 11.0%, 14.0% and 9.0%, respectively.

Earned premiums and losses and loss adjustment expenses are stated in
the accompanying consolidated financial statements after deductions for ceded
reinsurance. Those deductions for reinsurance other than C.A.R. are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Earned premiums ceded.......................... $28,056 $28,278 $18,855
Losses and loss adjustment expenses ceded...... 21,454 17,936 5,120
</TABLE>
The Company, as primary insurer, would be required to pay losses in
their entirety in the event that the reinsurers were unable to discharge their
obligations under the reinsurance agreements.

NOTE G-Income Taxes

The Company and its subsidiaries file a consolidated federal income tax
return.

The Federal income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current...................... $34,891 $54,181 $32,106
Deferred..................... 4,650 (4,776) (5,776)
$39,541 $49,405 $26,330
</TABLE>
AR-31
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE G-Income Taxes - (continued)

Deferred taxes arise from temporary differences in the bases of assets
and liabilities for tax and financial statement purposes. The sources of
these differences and the related tax effects consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Deferred policy acquisition costs.................. $ 5,087 $ (1,683) $(1,317)
Unearned premiums.................................. (1,560) (488) (1,481)
Salvage and subrogation recoverable................ 151 356 454
Discounting of loss reserves....................... (370) (983) (5,464)
Tax depreciation in excess of book depreciation.... 205 108 211
Book value rights/book value awards/stock
appreciation rights............................... 334 773 (34)
Bad debt expense................................... 92 145 416
Deferred items not included above.................. 237 (3,327) 595
Call option liability.............................. - 329 1,003
Other.............................................. 474 (6) (159)
Deferred income tax (benefit)................ 4,650 (4,776) (5,776)
Change in unrealized gains (losses)................ 31,726 (46,888) 14,577
Change in deferred tax liability(asset)...... $ 36,376 $(51,664) $ 8,801
</TABLE>
Realization of the deferred tax asset is dependent on generating
sufficient taxable income in future years. Although realization is not
assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced. Deferred tax assets were comprised of
the following components at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred policy acquisition costs.............................. $ 18,513 $ 13,426
Unearned premiums.............................................. (16,235) (14,675)
Salvage and subrogation recoverable............................ 1,982 1,831
Discounting of loss reserves................................... (20,846) (20,476)
Tax depreciation in excess of book depreciation................ 2,513 2,308
Book value rights/book value awards/stock appreciation rights.. 1,601 1,267
Bad debt allowances............................................ (1,032) (1,124)
Unrealized gains (losses)...................................... 8,887 (22,839)
Deferred items not included above.............................. 2,550 2,313
Other.......................................................... 652 178
Deferred tax asset....................................... $ (1,415) $(37,791)
</TABLE>
Federal income tax on income is less than the amount computed by
applying the statutory rate of 35% for the years ended 1995, 1994 and 1993 for
the following reasons:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate.. $52,410 35.0% $60,196 35.0% $35,576 35.0%
Tax exempt interest.... (11,067) (7.4) (8,836) (5.2) (8,271) (8.1)
Other.................. (1,802) (1.2) (1,955) (1.1) (975) (1.0)
Tax at effective rate.. $39,541 26.4% $49,405 28.7% $26,330 25.9%
</TABLE>

AR-32
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE H-Related Party Transactions

One Director of the Company was a principal of several independent
insurance agencies which are licensed to write various lines of insurance
on behalf of the Company. This Director sold these agencies during 1994.
The agencies received a standard commission for the premiums written in an
amount determined by the Company on a competitive basis. Total commissions
paid to the agencies during the year ended December 31, 1994, were $1,010.
The Company also purchased certain insurance coverages through one of the
agencies and paid premiums for these policies of $217 in 1994.

Two Directors of the Company are trustees of a real estate trust
which had mortgage loans with the Company. These mortgage loans had an
aggregate outstanding principal balance of $226 at December 31, 1993 and
were collateralized by real estate. These loans were paid in full in
January 1994.

During 1992, the Company insured a mortgage note in the principal
amount of $28,750 issued by a corporation to a bank. Two directors of the
Company, were, with others, guarantors of this note. The Company's
liability under this insurance policy, which expired on October 15, 1995,
was $12,000. For this insurance, the Company received the full premium of
$1,080 in 1992.

The Company has made loans to insurance agencies with which the
Company transacts business on a regular basis. At December 31, 1995,
thirteen of these loans which had an aggregate outstanding principal
balance of $2,138 were collateralized by the assets of the agencies. At
December 31, 1994, fifteen of these loans which had an aggregate
outstanding principal balance of $2,059 were collateralized by the assets
of the agencies. Mortgage loans to agents collateralized by real estate
had an aggregate outstanding balance of $323 and $1,729 at December 31,
1995 and 1994, respectively.

NOTE I-Employee Stock Ownership Plan

The Company offers an Employee Stock Ownership Plan ("E.S.O.P.") for
the benefit of substantially all employees, including those of the
Company's subsidiaries. The Plan is noncontributory on the part of
participants and contributions are made at the discretion of the Board of
Directors. The Company is under no obligation to make contributions or
maintain the Plan for any length of time, and may completely discontinue or
terminate the Plan at any time without liability.

Contributions by the Company and subsidiaries to the Plan for the
years ending December 31, 1995, 1994 and 1993 were $5,729, $5,430 and
$5,169, respectively.

NOTE J-Stockholders' Equity

Book Value Rights, Book Value Awards and Stock Appreciation Rights Program

The Board of Directors authorized a Book Value Rights Program which
provided for the payment of awards in cash to key employees based upon
increases in the book value of the Company at the end of the program
period, which is December 31st of the third year after the rights have been
granted. The Board of Directors authorized advance payments of $1,888 in
December, 1995 applicable to Book Value Rights maturing in 1996, $1,929 in
December, 1994 applicable to Book Value Rights maturing in 1995 and 1996
and $5,566 in December, 1993 applicable to Book Value Rights maturing in
1994 and 1995. Rights issued relating to the program based upon increases
in book value totalled 1,300,664 in 1993. Expenses relating to this Book
Value Rights Program were $3,738, $4,579 and $5,423 in 1995, 1994 and 1993,
respectively.

AR-33
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars Except Per Share Data)

NOTE J-Stockholders' Equity - (continued)

The Management Incentive Plan approved by the Company's stockholders
in May, 1994 provides for the award of up to 2,500,000 shares of common
stock or equivalent units (subject to anti-dilution adjustments) in the
form of incentive stock options, non-qualified stock options, book value
awards, stock appreciation rights, restricted stock and performance stock
units. All directors, officers and other senior management employees of
the Company or any of its subsidiaries are eligible to participate in this
Management Incentive Plan. Book value awards issued relating to this Plan
totalled 605,924 and 375,104 in 1995 and 1994, respectively. Stock
appreciation rights issued also relating to this Plan totalled 680,006 and
668,257 in 1995 and 1994, respectively. Expenses relating to book value
awards and stock appreciation rights were $714 and $366, respectively, in
1995.

Stock Dividend

On December 4, 1993, the Company effected a 2 for 1 common stock
split in the form of a stock dividend, resulting in the issuance of
19,000,000 additional shares of common stock and the transfer of $10,400
from retained earnings.

NOTE K-Net Capital Requirements

The insurance companies included in the consolidated financial
statements are subject to the financial capacity guidelines established by
their respective state Divisions of Insurance. Every Massachusetts
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 Massachusetts 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 1995, 1994 and 1993.

In September 1993, ownership of both Commerce and Citation was
transferred to CHI, a subsidiary of the Company. To the extent Commerce
and Citation are restricted from paying dividends to CHI, CHI will be
limited in its ability to pay dividends to the Company. On this basis, the
Company's ability to pay dividends to its stockholders is limited. During
1995, Commerce and Citation paid $29,845 and $4,950 in dividends,
respectively, to CHI; CHI then paid $34,650 to the Company in March 1995.
During 1994, Commerce and Citation paid $23,500 and $1,100 in dividends,
respectively, to CHI; CHI then paid $23,625 to the Company in March 1994.

The Board of Directors of the Company voted to declare four quarterly
dividends to stockholders of record totaling $.23 in 1995. On May 19,
1995, the Board voted to increase the quarterly stockholder dividend by 20%
to $.06 per share to stockholders of record on June 2, 1995. Prior to that
declaration, the Company had paid quarterly dividends of $.05 per share
dating back to May 20, 1994 when the Board voted to declare the first cash
dividend in the Company's history to stockholders of record on June 3,
1994.

At the same May 19, 1995 meeting, the Board of Directors of the
Company authorized a stock buyback program of up to three million shares of
The Commerce Group, Inc. Common Stock. Through December 31, 1995, the
Company had purchased 1,263,433 shares of Treasury Stock under this
program.

AR-34
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars)

NOTE L-Statutory Balances

Following is a GAAP to Statutory reconciliation for both earnings and
policyholders surplus for the combined operations of Commerce and Citation:
<TABLE>
<CAPTION>
1995 1994 1993
Earnings Equity Earnings Equity Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
GAAP.............................. $110,450 $512,875 $113,892 $378,301 $79,837 $351,631
Deferred income taxes............. 4,152 (2,650) (10,051) (38,180) (2,916) 13,668
Deferred acquisition costs........ (6,034) (61,546) (6,676) (56,769) 5,349 (50,093)
Bonds-book versus market.......... - (14,432) - 56,366 - (27,556)
Preferred stock-market versus
book............................. - (1,607) - (1,081) - (585)
Deferred income................... (1,496) 6,766 4,321 11,575 (1,033) 7,254
Statutory reserve over statement
reserves......................... - (1,940) - (437) - (3,688)
Non-admitted assets............... - - - - - (6,000)
Goodwill in subsidiary............ (97) 2,806 - - - -
Difference in GAAP to statutory
net income in subsidiary......... (74) - - - - -
Other............................. (4) (162) - - 87 -
(3,553) (72,765) (12,406) (28,526) 1,487 (67,000)
Statutory......................... 106,897 440,110 101,486 349,775 81,324 284,631

Less subsidiary net loss from
January 1, 1995 through
August 30, 1995.................. 429 - - - - -

Adjusted statutory................ $107,326 $440,110 $101,486 $349,775 $81,324 $284,631
</TABLE>
NOTE M-Segment Information

Selected information by industry segment for 1995, 1994 and 1993 is summarized
as follows:
<TABLE>
<CAPTION>
Earnings Before Identifiable
Revenue Income Taxes Assets
<S> <C> <C> <C>
1995
Property and casualty insurance............ $677,057 $151,832 $1,472,363
Real estate and commercial lending......... 6,967 4,670 81,662
Corporate and other........................ 11 (6,760) 719
Consolidated........................... $684,035 $149,742 $1,554,744

1994
Property and casualty insurance............ $690,844 $172,434 $1,312,262
Real estate and commercial lending......... 4,228 4,643 65,757
Corporate and other........................ 3,991 (5,089) (639)
Consolidated........................... $699,063 $171,988 $1,377,380

1993
Property and casualty insurance............ $617,389 $101,325 $1,213,736
Real estate and commercial lending......... 5,317 5,559 64,755
Corporate and other........................ 3,094 (5,238) 11,522
Consolidated........................... $625,800 $101,646 $1,290,013
</TABLE>

AR-35
<PAGE>

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(Thousands of Dollars Except Per Share Data)

NOTE N-Supplement to Consolidated Statements of Cash Flows

Disclosure of cash flow information:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash paid during the year for:
Federal and state income taxes........................ $43,658 $48,140 $36,158
State premium and related taxes of insurance
subsidiaries......................................... 15,592 15,517 14,503
</TABLE>
During the years ended December 31, 1995, 1994 and 1993, the Company
acquired property through foreclosure of mortgages held with remaining
principle balances at the time of foreclosure of $641, $1,930 and $2,013,
respectively.

NOTE O-Insolvency Fund Assessments

As provided in the statutes, insurance companies which write business in
Massachusetts are assessed for losses attributable to the insolvency of other
insurance companies by the Massachusetts Insurers Insolvency Fund
("M.I.I.F."). From its inception, on August 2, 1972 through December 31,
1995, the M.I.I.F. has approved assessments totaling $130,888, of which the
Company's share was approximately $7,081 before taxes, and $4,667 after taxes.
It is anticipated that there will be additional assessments from time to time
relating to various insolvencies. By statute, no insurer may be assessed in
any year an amount greater than two percent of that insurer's net direct
written premiums for the calendar year preceding the assessment. Although the
timing and amounts of any such assessments are not known, management is of the
opinion that such assessments will not have a material effect on the
consolidated financial position of the Company. The Company's policy is to
record these assessments as assessed. According to statute, the assessed
insurance companies have the right to recoup amounts paid to the M.I.I.F.,
over a reasonable length of time, through premium rates approved by the
Commissioner. The Company's policy is to record the recovery of the assessed
amounts as received. Assessments by the M.I.I.F. for the years ended December
31, 1995, 1994 and 1993 were $338, $331 and $0, respectively.

NOTE P-Quarterly Results of Operations (Unaudited)

An unaudited summary of the Company's 1995 quarterly performance is as
follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Total revenues................................. $164,462 $167,374 $174,259 $177,940
Net earnings................................... 22,271 29,287 28,847 29,796
Net earnings per weighted average common
share (primary and fully diluted)............ 0.59 0.77 0.77 0.80
</TABLE>
NOTE Q-Subsequent Events

In January, 1996, the Company was granted approval to offer their
customers safe driver deviations of 10 percent to drivers with SDIP
classifications of either Step 9 or 10. These are the two best driver SDIP
classifications in Massachusetts, representing drivers with no accidents or
not more than one minor violation in the last six years.

AR-36
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below should be read
in conjunction with the consolidated financial statements of the Company and
the notes thereto. This financial data has been extracted from financial
statements audited by Coopers & Lybrand L.L.P. All dollar amounts set forth
in the following tables are in thousands except per share data.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Net premiums written........... $ 603,421 $ 589,197 $ 563,416 $ 508,847 $ 310,999
Increase in unearned premiums.. (10,831) (17,144) (14,856) (98,353) (30,193)
Earned premiums................ 592,590 572,053 548,560 410,494 280,806
Net investment income.......... 71,313 62,901 53,068 39,223 31,951
Premium finance fees........... 19,420 18,497 16,666 13,916 11,346
Net realized investment gains.. 712 45,612 7,506 1,537 3,153
Total revenues............ 684,035 699,063 625,800 465,170 327,256

Losses and loss adjustment
expenses...................... 367,552 369,660 373,959 271,789 173,384
Policy acquisition costs....... 166,741 157,415 150,195 117,833 78,813
Total expenses............ 534,293 527,075 524,154 389,622 252,197

Other income
Withdrawing companies'
settlements................... - - - 43,168 -
Earnings before income taxes... 149,742 171,988 101,646 118,716 75,059
Income taxes................... 39,541 49,405 26,330 34,411 22,645
Net earnings.............. $ 110,201 $ 122,583 $ 75,316 $ 84,305 $ 52,414

Per Share Data:
Net earnings per share.... $ 2.93 $ 3.23 $ 1.98 $ 2.23 $ 1.38

Weighted average number of
shares outstanding.............. 37,632,236 38,000,000 38,000,000 37,852,108 38,077,972
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments.............. $1,042,813 $ 899,046 $ 859,717 $ 633,470 $ 438,385
Premiums receivable............ 127,243 102,529 95,262 68,724 58,068
Total assets................... 1,554,744 1,377,380 1,290,013 1,096,450 851,039
Unpaid losses and loss
adjustment expenses........... 618,791 592,373 567,797 495,800 439,551
Unearned premiums.............. 330,454 314,719 283,526 264,567 192,785
Stockholders' equity........... 549,714 413,589 383,348 281,933 181,474
Stockholders' equity per share 14.96 10.88 10.09 7.42 4.80
</TABLE>

AR-37
<PAGE>

MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS
(Thousands of Dollars)

The following exhibits depict the progress of the insurance operations
of the Company over the past fifteen years. For these years of operation, net
premiums written amounted to $3,372,275. During this period, the average
underwriting ratios (on a statutory basis) were 66.1% for losses and loss
expenses and 27.3% for underwriting expenses resulting in an average combined
ratio of 93.4%. Total net investment income amounted to $471,383 or 14.0% of
net premiums written. Net realized gains were $73,077. Stockholders' equity
was $6,542 at the beginning of 1981 and $485,725, at the end of 1995,
resulting in an average annual increase of 34.5%. The progress of the
insurance operations during the most recent five year period, compared to the
two previous five year periods, can best be illustrated by the following
comparison:
<TABLE>
<CAPTION>
5 Year Period

1991-95 1986-90 1981-85
<S> <C> <C> <C>
Direct premiums written............................ $2,808,253 $1,412,076 $233,920

Net premiums written............................... 2,575,880 645,173 151,222

Net investment income.............................. 339,642 108,901 22,840

Net realized gains................................. 65,682 6,598 797

Stockholders' equity at end of period.............. 485,725 124,166 27,797

Underwriting ratios: (Statutory Basis)
Losses and loss expenses to premiums earned...... 64.7% 70.8% 70.2%

Underwriting expenses to net premiums written.... 27.8 24.8 28.9
Combined ratio............................... 92.5% 95.6% 99.1%

Increase in Stockholders' Equity................... 291.2% 346.7% 324.9%
</TABLE>

The insurance operations of the Company include the operating results of
Commerce, its subsidiary company Western Pioneer and Citation. Citation
commenced business in 1981 as a wholly-owned subsidiary of Commerce. On
December 31, 1989 the ownership of Citation was transferred to The Commerce
Group, Inc. Capital stock, paid-in capital and retained earnings of Commerce
and Citation as of January 1, 1989 were combined due to the effect of the
transfer in ownership of Citation to The Commerce Group, Inc. on December 31,
1989. In September 1993, ownership of both Commerce and Citation was
transferred to CHI, a subsidiary of The Commerce Group, Inc. Commerce
acquired Western Pioneer on August 31, 1995. The combined balance sheets of
these insurance subsidiaries appear on pages AR-39 and AR-40. The combined
statements of earnings of insurance operations appear on pages AR-41 and AR-
42.

AR-38
<PAGE>

MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991

ASSETS
<S> <C> <C> <C> <C> <C>
Cash and short-term investments...... $ 52,361 $ 4,560 $ 12,615 $ 25,809 $ 11,190
Bonds, at market (at amortized cost
prior to 1993)...................... 815,277 745,010 649,491 505,565 329,935
Preferred stocks, at market (at
amortized cost prior to 1993)....... 111,220 85,574 80,059 2,261 869
Common stocks, at market............. 40,359 9,656 47,462 43,545 30,055
Mortgage loans on real estate........ 31,404 35,715 42,042 60,697 66,122
Investments in real estate........... 348 118 - - -
Premium balances receivable.......... 126,090 101,529 94,333 67,876 55,510
Investment income receivable......... 14,387 13,285 10,205 9,710 6,063
Residual market receivable........... 200,124 214,818 220,312 274,426 277,196
Reinsurance receivable............... 21,897 16,892 12,868 365 -
Deferred acquisition costs........... 61,546 56,769 50,093 55,442 33,981
Current income taxes................. - - - - -
Deferred income taxes................ 2,100 38,180 - - 883
Real estate, furniture and equipment. 24,294 25,128 22,371 23,183 24,163
Total assets.................. $1,501,407 $1,347,234 $1,241,851 $1,068,879 $835,967

LIABILITIES

Unpaid losses and loss expenses...... $ 618,791 $ 592,373 $ 567,797 $ 495,800 $439,551
Unearned premiums.................... 330,454 314,719 283,526 264,567 192,785
Notes payable........................ - - - - -
Deferred income...................... 8,954 10,451 7,351 8,384 12,918
Accounts payable, accrued and other
liabilities......................... 28,737 41,136 13,010 20,863 7,677
Current income taxes................. 1,596 10,254 4,867 9,249 5,811
Deferred income taxes................ - - 13,669 4,400 -
Total liabilities............. 988,532 968,933 890,220 803,263 658,742

STOCKHOLDERS' EQUITY

Capital stock........................ 3,450 3,450 3,450 3,450 3,450
Paid-in capital...................... 23,700 23,700 8,700 8,700 8,700
Retained earnings
Balance, January 1................. 351,151 339,481 253,466 165,075 112,016
Net earnings....................... 110,450 113,892 79,837 91,980 55,214
Unrealized gains (losses) on
investments....................... 58,919 (77,622) 21,928 9,811 2,545
Dividends paid..................... (34,795) (24,600) (15,750) (13,400) (4,700)
Balance, December 31................. 485,725 351,151 339,481 253,466 165,075
Total stockholders' equity.... 512,875 378,301 351,631 265,616 177,225
$1,501,407 $1,347,234 $1,241,851 $1,068,879 $835,967
</TABLE>

AR-39
<PAGE>

MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

COMBINED BALANCE SHEETS OF INSURANCE SUBSIDIARIES
December 31,
(Thousands of Dollars)

<TABLE>
<CAPTION>
1990 1989 1988 1987 1986 1985 1984 1983 1982 1981

ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 38,654 $ 84,308 $ 60,885 $ 21,051 $ 10,048 $ 11,802 $ 7,953 $ 3,864 $ 6,557 $ 4,496

242,735 153,621 133,867 116,220 88,755 56,985 34,422 22,352 14,054 11,878

1,010 1,324 1,606 2,295 6,755 9,956 10,837 7,986 4,759 4,059
4,869 2,900 1,921 1,438 149 134 1,494 1,540 1,507 1,042
56,124 52,244 42,882 15,931 - - 7,825 5,860 3,555 2,517
- - - - - - - - - -
57,733 56,713 33,727 19,329 11,817 8,194 6,028 5,430 2,810 1,295
4,235 3,093 2,889 2,370 2,485 1,722 1,286 887 523 381
290,440 268,951 198,177 132,725 87,178 50,327 29,187 20,513 13,000 9,513
- - - - - - - - - -
27,273 22,702 15,699 10,898 7,129 5,417 3,968 3,057 1,731 919
- 341 266 - 2,209 1,294 - - 260 -
1,666 - - - - - - - - -
25,046 23,118 9,684 8,356 7,370 5,648 3,136 2,799 2,590 1,887
$749,785 $669,315 $501,603 $330,613 $223,895 $151,479 $106,136 $74,288 $51,346 $37,987
LIABILITIES

$403,752 $345,020 $270,628 $169,539 $113,513 $ 71,525 $ 44,425 $32,860 $23,154 $17,028
175,334 174,345 118,079 84,876 55,378 36,024 23,585 14,190 9,496 5,856
1,662 1,837 2,013 2,204 3,772 4,140 2,858 1,313 1,388 3,262
20,264 23,689 23,307 11,058 7,503 4,208 3,173 1,658 1,302 701

21,065 27,513 19,350 14,532 8,532 4,162 4,479 2,482 2,731 1,911
3,542 - - 470 - - 418 1,487 - 67
- 1,623 1,021 1,853 3,736 3,623 2,610 2,079 1,582 778
625,619 574,027 434,398 284,532 192,434 123,682 81,548 56,069 39,653 29,603

STOCKHOLDERS' EQUITY

3,450 3,450 2,350 2,350 2,350 2,350 2,350 2,250 2,000 1,700
8,700 8,700 6,500 6,500 6,500 6,500 6,500 5,500 4,000 2,600

83,138 62,877 37,231 22,611 18,947 15,738 10,469 5,693 4,084 2,992
32,414 21,966 21,837 15,614 4,362 4,025 6,033 5,213 1,819 1,538

(86) 645 321 (54) 7 (158) (179) 63 198 (74)
(3,450) (2,350) (1,034) (940) (705) (658) (585) (500) (408) (372)
112,016 83,138 58,355 37,231 22,611 18,947 15,738 10,469 5,693 4,084
124,166 95,288 67,205 46,081 31,461 27,797 24,588 18,219 11,693 8,384
$749,785 $669,315 $501,603 $330,613 $223,895 $151,479 $106,136 $74,288 $51,346 $37,987
</TABLE>

AR-40
<PAGE>

MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF EARNINGS OF INSURANCE OPERATIONS
Year Ended December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Underwriting
Direct premiums written.............. $626,666 $625,023 $601,289 $525,495 $429,780

Net premiums written................. $603,421 $589,197 $563,416 $508,847 $310,999
Increase in unearned premiums........ 10,831 17,144 14,856 98,353 30,193
Earned premiums.................. 592,590 572,053 548,560 410,494 280,806

Expenses
Losses and loss expenses............. 367,258 369,764 373,243 271,848 173,901
Underwriting expenses................ 173,248 162,446 147,290 138,669 85,655
(Increase) decrease in deferred
acquisition costs................... (5,723) (5,420) 1,796 (21,462) (6,708)
Total expenses................... 534,783 526,790 522,329 389,055 252,848
Underwriting income (loss)............. 57,807 45,263 26,231 21,439 27,958
Net investment income.................. 91,609 81,434 69,354 53,419 43,826
Net realized investment gains (losses). 720 32,025 13,040 12,368 7,529
Earnings before Federal income
taxes and withdrawing companies'
settlements...................... 150,136 158,722 108,625 87,226 79,313

Other income
Withdrawing companies' settlements... - - - 43,168 -
Earnings before Federal income taxes... 150,136 158,722 108,625 130,394 79,313
Federal income taxes (benefits)........ 39,686 44,830 28,788 38,414 24,099
Earnings before cumulative effect of
change in accounting principle........ 110,450 113,892 79,837 91,980 55,214
Cumulative effect on prior years (to
December 31, 1986) of changing to
different method of accounting for
income taxes.......................... - - - - -
NET EARNINGS..................... $110,450 $113,892 $ 79,837 $ 91,980 $ 55,214

Underwriting ratios: (Statutory basis)
Losses and loss expenses to
premiums earned..................... 62.0% 64.6% 68.0% 66.2% 61.9%
Underwriting expenses to net
premiums written.................... 29.0 27.1 25.7 28.1 30.0
Combined ratio................... 91.0% 91.7% 93.7% 94.3% 91.9%
Underwriting profit (loss)....... 9.0% 8.3% 6.3% 5.7% 8.1%
</TABLE>

AR-41
<PAGE>

MANAGEMENT'S DISCUSSION OF THE SUPPLEMENTAL INFORMATION
ON INSURANCE OPERATIONS (continued)

THE COMMERCE GROUP, INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF EARNINGS OF INSURANCE OPERATIONS
Year Ended December 31,
(Thousands of Dollars)
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986 1985 1984 1983 1982 1981

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$401,077 $366,492 $306,469 $206,231 $131,807 $ 85,000 $65,699 $37,318 $26,854 $19,049

$219,936 $140,313 $124,923 $ 99,193 $ 60,808 $ 49,229 $33,943 $25,817 $25,056 $17,177
34,692 12,655 9,678 13,428 6,775 6,392 2,137 2,258 1,902 1,573
185,244 127,658 115,245 85,765 54,033 42,837 31,806 23,559 23,154 15,604

125,219 88,564 80,203 65,299 44,205 33,548 19,567 15,242 15,923 10,535
55,551 44,181 33,115 25,882 18,460 15,177 11,241 6,532 9,000 6,108

(4,571) (7,003) (4,801) (3,769) (1,712) (1,448) (911) (1,327) (811) (335)
176,199 125,742 108,517 87,412 60,953 47,277 29,897 20,447 24,112 16,308
9,045 1,916 6,728 (1,647) (6,920) (4,440) 1,909 3,112 (958) (704)
36,052 29,351 20,591 13,917 8,990 7,366 6,008 4,147 3,036 2,283
74 618 2,298 3,423 185 336 (108) 314 158 97
45,171 31,885 29,617 15,693 2,255 3,262 7,809 7,573 2,236 1,676

- - - - - - - - - -
45,171 31,885 29,617 15,693 2,255 3,262 7,809 7,573 2,236 1,676
12,757 9,919 7,780 2,987 (2,107) (763) 1,776 2,360 417 138

32,414 21,966 21,837 12,706 4,362 4,025 6,033 5,213 1,819 1,538

- - - 2,908 - - - - - -
$ 32,414 $ 21,966 $ 21,837 $ 15,614 $ 4,362 $ 4,025 $ 6,033 $ 5,213 $ 1,819 $ 1,538

65.7% 68.0% 69.5% 79.4% 83.5% 79.7% 63.6% 63.8% 69.8% 68.3%

26.7 26.3 22.0 22.5 24.4 28.1 27.8 23.9 33.5 34.4
92.4% 94.3% 91.5% 101.9% 107.9% 107.8% 91.4% 87.7% 103.3% 102.7%
7.6% 5.7% 8.5% (1.9%) (7.9%) (7.8%) 8.6% 12.3% (3.3%) (2.7%)
</TABLE>

AR-42
<PAGE>

THE COMMERCE GROUP, INC.

DIRECTORS

Herman F. Becker......................... President and owner, Sterling Realty
and Huguenot Development Corporation

Joseph A. Borski, Jr..................... Self-employed Certified Public
Accountant

Eric G. Butler........................... Retired Vice President-General
Claims Manager of Commerce and
Citation

Henry J. Camosse......................... Retired President, Henry Camosse &
Son Co., Inc., a building and masonry
supplies company

Gerald Fels.............................. Executive Vice President and Chief
Financial Officer of the Company

David R. Grenon.......................... Assistant Clerk and Chairman of the
Advisory Board
of The Protector Group Insurance
Agency, Inc., a
property and casualty insurance
agency.

Robert W. Harris......................... Retired Treasurer, H.C. Bartlett
Insurance Agency, Inc.

Robert S. Howland........................ Retired Clerk, H.C. Bartlett
Insurance Agency, Inc.

John J. Kunkel........................... Retired President and Treasurer,
Kunkel Buick and
GMC Truck, retired Treasurer, Kunkel
Bus Company

Raymond J. Lauring....................... Retired President, Lauring
Construction Company

Roger E. Lavoie.......................... Retired President and Treasurer,
Lavoie Toyota- Dodge, Inc.

Normand R. Marois........................ Chairman of the Board, Marois Bros.,
Inc., a contracting firm

Suryakant M. Patel....................... Physician specializing in internal
medicine

Arthur J. Remillard, Jr.................. President, Chief Executive Officer,
and Chairman
of the Board of the Company

Arthur J. Remillard, III................. Senior Vice President and Assistant
Clerk of
the Company, Senior Vice President
of Commerce
and Citation in charge of
Policyholder Benefits

Regan P. Remillard....................... Senior Vice President - General
Counsel
of the Company, President and
Secretary of
Western Pioneer Insurance Company

Antranig A. Sahagian..................... Retired Owner, A. Sahagian Service
Center

Gurbachan Singh.......................... Physician specializing in general
surgery

John W. Spillane......................... Clerk of the Company and practicing
attorney

AR-43
<PAGE>

DIRECTORS OF
COMMERCE HOLDINGS, INC.
The Commerce Insurance Company
Western Pioneer Insurance Company
Citation Insurance Company

Arthur J. Remillard, Jr................ President, Chief Executive Officer
and Chairman
of the Board

Gerald Fels............................ Executive Vice President and Cheif
Financial
Officer

Arthur J. Remillard, III (1)........... Senior Vice President and Clerk

Regan P. Remillard..................... Senior Vice President - General
Counsel, President and Secretary of
Western Pioneer Insurance Company

David R. Grenon (1).................... Assistant Clerk and Chairman of the
Advisory
Board of The Protector Group
Insurance Agency

John M. Nelson (1)..................... Chairman and Chief Executive Officer
of Wyman-
Gordan Company

Suryakant M. Patel (1)................. Physician specializing in internal
medicine

William G. Pike (1).................... Executive Vice President and Chief
Financial
Officer of Granite State Bankshares,
Inc.

DIRECTORS OF
BAY FINANCE COMPANY, INC.

Arthur J. Remillard, Jr................ President and Chairman of the Board

Gerald Fels............................ Executive Vice President and Chief
Financial
Officer

John W. Spillane....................... Clerk and practicing attorney

Arthur J. Remillard, III............... Assistant Clerk

Regan P. Remillard..................... Senior Vice President

DIRECTORS OF
CLARK-PROUT INSURANCE AGENCY, INC.

Arthur J. Remillard, Jr................ President and Chairman of the Board

Gerald Fels............................ Executive Vice President and Chief
Financial
Officer

John W. Spillane....................... Clerk

Arthur J. Remillard, III............... Assistant Clerk

Elizabeth M. Edwards................... Vice President

(1) Commerce Holdings, Inc., The Commerce Insurance Company and Citation
Insurance Company
only.

AR-44
<PAGE>

THE COMMERCE GROUP, INC.

Commerce Holdings, Inc.
The Commerce Insurance Company
Citation Insurance Company
Bay Finance Company, Inc.
Clark-Prout Insurance Agency, Inc.

OFFICERS OF
THE COMMERCE GROUP, INC.

President, Chief Executive Officer and Chairman of the Board... Arthur J.
Remillard, Jr.
Executive Vice President and Chief Financial Officer........... Gerald Fels
Senior Vice President and Assistant Clerk...................... Arthur J.
Remillard, III
Senior Vice President and General Counsel...................... Regan P.
Remillard
Senior Vice President.......................................... Mary M.
Fontaine
Clerk.......................................................... John W.
Spillane
Treasurer and Chief Accounting Officer......................... Randall V.
Becker
Assistant Treasurer............................................ Thomas A.
Gaylord
Assistant Vice President....................................... Robert E.
McKenna

* Officers of Subsidiaries

President, Chief Executive Officer and Chairman of the Board... Arthur J.
Remillard, Jr.

Executive Vice President and Chief Financial Officer........... Gerald Fels

Senior Vice Presidents......................................... David H.
Cochrane
Mary M.
Fontaine
Robert E.
Longo
Arthur J.
Remillard, III
Joyce B.
Virostek

Senior Vice President and General Counsel...................... Regan P.
Remillard

Vice Presidents................................................ Peter J.
Dignan
Elizabeth M.
Edwards
Mark W.
Rayla
Angelos
Spetseris
Henry R.
Whittier, Jr.

Assistant Vice Presidents..............Burton C. Aaronson Ronald J.
Lareau
Robert M. Blackmer Karen A.
Lussier
Stephen R. Clark Donald G.
MacLean
Raymond J. DeSantis Robert E.
McKenna
Warren S. Ehrlich Robert L.
Mooney
John V. Kelly Kenneth E.
Morrison
Michael J.
Richards

Treasurer and Chief Accounting Officer........................ Randall V.
Becker

Assistant Treasurer............................................ Thomas A.
Gaylord

* Officers often hold positions with several operating subsidiaries. The
titles listed
represent their primary office as of March 8, 1996.

AR-45
<PAGE>

Officers of Western Pioneer Insurance

President and Secretary........................................ Regan P.
Remillard
Chief Financial Officer........................................ Albert E.
Peters
Vice President................................................. Michael J.
Marsh
Assistant Vice President....................................... Robert M.
Keppel
Treasurer and Controller....................................... Joan M.
Kelly

Stockholder Information

Annual Meeting

The annual meeting of stockholders will be held at 9:00 a.m. on Friday, May
17, 1996 at the Company's Claims Building, 11 Gore Road (Route 16), Webster,
MA.

Form 10-K

Stockholders interested in the detailed information contained in the Company's
annual report on Form 10-K, as filed with the Securities and Exchange
Commission, may obtain a copy without charge, by writing to the Assistant to
the President at 211 Main Street, Webster, MA 01570.

Transfer Agent

The Commerce Group, Inc.
c/o The First National Bank of Boston
Boston EquiServe, L.P.
Investor Relations
Mail Stop: 45-02-09
P.O. Box 644
Boston, MA 02102-0644
(617) 575-3100

Executive Offices

211 Main Street
Webster, MA 01570
(508) 943-9000

Trading of Common Stock

The Company's Common Stock began trading on the NYSE on March 31, 1995 under
the symbol "CGI". Prior to that, the Company's Common Stock was traded on
Nasdaq under the symbol "COMG".

Independent Accountants

Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
(617) 478-5000

AR-46
<PAGE>